<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(MARK ONE)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
-------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________ to ______________________
Commission File Number 0-14505
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Enstar Income Program II-2, L.P.
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(Exact name of Registrant as specified in its charter)
Georgia 58-1628872
- ------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10900 Wilshire Boulevard - 15th Floor
Los Angeles, California 90024
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 824-9990
--------------------
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Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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<PAGE> 2
PART I - FINANCIAL INFORMATION
ENSTAR INCOME PROGRAM II-2, L.P.
CONDENSED BALANCE SHEETS
================================
<TABLE>
<CAPTION>
December 31, March 31,
1997* 1998
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 3,078,800 $ 3,287,600
Accounts receivable, less allowance of $12,500 and
$4,400 for possible losses 54,300 32,700
Prepaid expenses and other assets 190,500 217,500
Property, plant and equipment, less accumulated
depreciation and amortization of $7,567,400 and $7,694,100 3,040,000 2,959,800
Franchise cost, net of accumulated
amortization of $1,174,800 and $1,200,700 271,700 245,800
Deferred charges, net 14,100 12,800
----------- -----------
$ 6,649,400 $ 6,756,200
=========== ===========
LIABILITIES AND PARTNERSHIP CAPITAL
-----------------------------------
LIABILITIES:
Accounts payable $ 466,000 $ 279,400
Due to affiliates 228,000 225,200
----------- -----------
TOTAL LIABILITIES 694,000 504,600
----------- -----------
COMMITMENTS AND CONTINGENCIES
PARTNERSHIP CAPITAL (DEFICIT):
General partners (14,200) (11,200)
Limited partners 5,969,600 6,262,800
----------- -----------
TOTAL PARTNERSHIP CAPITAL 5,955,400 6,251,600
----------- -----------
$ 6,649,400 $ 6,756,200
=========== ===========
</TABLE>
*As presented in the audited financial statements.
See accompanying notes to condensed financial statements.
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<PAGE> 3
ENSTAR INCOME PROGRAM II-2, L.P.
CONDENSED STATEMENTS OF OPERATIONS
==================================
<TABLE>
<CAPTION>
Unaudited
----------------------------
Three months ended
March 31,
----------------------------
1997 1998
--------- ---------
<S> <C> <C>
REVENUES $ 939,800 $ 996,200
--------- ---------
OPERATING EXPENSES:
Service costs 289,300 311,000
General and administrative expenses 75,600 120,000
General Partner management fees
and reimbursed expenses 127,000 138,500
Depreciation and amortization 187,400 165,100
--------- ---------
679,300 734,600
--------- ---------
OPERATING INCOME 260,500 261,600
--------- ---------
OTHER INCOME (EXPENSE):
Interest income 25,100 37,800
Interest expense (8,100) (3,200)
--------- ---------
17,000 34,600
--------- ---------
NET INCOME $ 277,500 $ 296,200
========= =========
Net income allocated to General Partners $ 2,800 $ 3,000
========= =========
Net income allocated to Limited Partners $ 274,700 $ 293,200
========= =========
NET INCOME PER UNIT OF LIMITED
PARTNERSHIP INTEREST $ 9.19 $ 9.81
========= =========
AVERAGE LIMITED PARTNERSHIP
UNITS OUTSTANDING DURING PERIOD 29,880 29,880
========= =========
</TABLE>
See accompanying notes to condensed financial statements.
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<PAGE> 4
ENSTAR INCOME PROGRAM II-2, L.P.
STATEMENTS OF CASH FLOWS
================================
<TABLE>
<CAPTION>
Unaudited
--------------------------------
Three months ended
March 31,
--------------------------------
1997 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 277,500 $ 296,200
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 187,400 165,100
Amortization of deferred loan costs 13,900 --
Increase (decrease) from changes in:
Accounts receivable, prepaid expenses and other assets (11,600) (5,400)
Accounts payable and due to affiliates 16,400 (189,400)
----------- -----------
Net cash provided by operating activities 483,600 266,500
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (113,300) (54,400)
Increase in intangible assets (3,800) (3,300)
----------- -----------
Net cash used in investing activities (117,100) (57,700)
----------- -----------
INCREASE IN CASH AND CASH EQUIVALENTS 366,500 208,800
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 1,968,100 3,078,800
----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 2,334,600 $ 3,287,600
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
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<PAGE> 5
ENSTAR INCOME PROGRAM II-2, L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS
=======================================
1. INTERIM FINANCIAL STATEMENTS
The accompanying condensed interim financial statements for the
three months ended March 31, 1998 and 1997 are unaudited. These condensed
interim financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Partnership's latest
Annual Report on Form 10-K. In the opinion of management, such statements
reflect all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the results of such periods. The results of
operations for the three months ended March 31, 1998 are not necessarily
indicative of results for the entire year.
2. TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES
The Partnership has a management and service agreement with a wholly
owned subsidiary of the Corporate General Partner (the "Manager") for a monthly
management fee of 5% of revenues, excluding revenues from the sale of cable
television systems or franchises. Management fee expense approximated $49,800
for the three months ended March 31, 1998.
In addition to the monthly management fee described above, the
Partnership reimburses the Manager for direct expenses incurred on behalf of the
Partnership and for the Partnership's allocable share of operational costs
associated with services provided by the Manager. All cable television
properties managed by the Corporate General Partner and its subsidiary are
charged a proportionate share of these expenses. The Corporate General Partner
has contracted with Falcon Holding Group, L.P. ("FHGLP"), an affiliated
partnership, to provide corporate management services for the Partnership.
Corporate office allocations and district office expenses are charged to the
properties served based primarily on the respective percentage of basic
subscribers or homes passed (dwelling units within a system) within the
designated service areas. The total amount charged to the Partnership for these
services approximated $88,700 for the three months ended March 31, 1998.
Management fees and reimbursed expenses due the Corporate General Partner are
non-interest bearing.
The Partnership also receives certain system operating management
services from an affiliate of the Corporate General Partner in addition to the
Manager due to the fact that there are no such employees directly employed by
one of the Partnership's cable systems. The Partnership reimburses the affiliate
for its allocable share of the affiliate's operational costs. The total amount
charged to the Partnership for these costs approximated $19,300 for the three
months ended March 31, 1998. No management fee is payable to the affiliate by
the Partnership and there is no duplication of reimbursed expenses and costs
paid to the Manager.
Certain programming services have been purchased through an
affiliate of the Partnership. In turn, the affiliate charges the Partnership for
these costs based on an estimate of what the Corporate General Partner could
negotiate for such programming services for the 15 partnerships managed by the
Corporate General Partner as a group. The Partnership recorded programming fee
expense of $215,500 for the three months ended March 31, 1998. Programming fees
are included in service costs in the statements of operations.
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<PAGE> 6
ENSTAR INCOME PROGRAM II-2, L.P.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(CONTINUED)
=======================================
3. EARNINGS PER UNIT OF LIMITED PARTNERSHIP INTEREST
Earnings and losses per unit of limited partnership interest is
based on the average number of units outstanding during the periods presented.
For this purpose, earnings and losses have been allocated 99% to the Limited
Partners and 1% to the General Partners. The General Partners do not own units
of partnership interest in the Partnership, but rather hold a participation
interest in the income, losses and distributions of the Partnership.
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<PAGE> 7
ENSTAR INCOME PROGRAM II-2, L.P.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The Cable Television Consumer Protection and Competition Act of 1992
(the "1992 Cable Act") required the Federal Communications Commission ("FCC")
to, among other things, implement extensive regulation of the rates charged by
cable television systems for basic and programming service tiers, installation,
and customer premises equipment leasing. Compliance with those rate regulations
has had a negative impact on the Partnership's revenues and cash flow. The
Telecommunications Act of 1996 (the "1996 Telecom Act") substantially changed
the competitive and regulatory environment for cable television and
telecommunications service providers. Among other changes, the 1996 Telecom Act
provides that the regulation of cable programming service tier ("CPST") rates
will be terminated on March 31, 1999. Because cable service rate increases have
continued to outpace inflation under the FCC's existing regulations, the
Partnership expects Congress and the FCC to explore additional methods of
regulating cable service rate increases, including deferral or repeal of the
March 31, 1999 termination of CPST rate regulation. There can be no assurance as
to what, if any, further action may be taken by the FCC, Congress or any other
regulatory authority or court, or the effect thereof on the Partnership's
business. Accordingly, the Partnership's historical financial results as
described below are not necessarily indicative of future performance.
This Report includes certain forward looking statements regarding,
among other things, future results of operations, regulatory requirements,
competition, capital needs and general business conditions applicable to the
Partnership. Such forward looking statements involve risks and uncertainties
including, without limitation, the uncertainty of legislative and regulatory
changes and the rapid developments in the competitive environment facing cable
television operators such as the Partnership. In addition to the information
provided herein, reference is made to the Partnership's Annual Report on Form
10-K for the year ended December 31, 1997 for additional information regarding
such matters and the effect thereof on the Partnership's business.
RESULTS OF OPERATIONS
The Partnership's revenues increased from $939,800 to $996,200, or
by 6.0%, for the three months ended March 31, 1998 as compared to the
corresponding period of 1997. Of the $56,400 increase, $49,300 was due to
increases in regulated service rates that were implemented by the Partnership in
1997 and $7,100 was due to increases in other revenue producing items. As of
March 31, 1998, the Partnership had approximately 9,000 basic subscribers and
2,000 premium service units.
Service costs increased from $289,300 to $311,000, or by 7.5%, for
the three months ended March 31, 1998 as compared to the corresponding period of
1997. Service costs represent costs directly attributable to providing cable
services to customers. The increase was primarily due to higher programming fees
and decreased capitalization of labor and overhead costs resulting from
reductions in rebuild construction activity in the Jerseyville franchise during
the first three months of 1998. Programming fees increased primarily as a result
of higher rates charged by program suppliers.
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<PAGE> 8
ENSTAR INCOME PROGRAM II-2, L.P.
RESULTS OF OPERATIONS (CONTINUED)
General and administrative expenses increased from $75,600 to
$120,000, or by 58.7%, for the three months ended March 31, 1998 as compared to
the corresponding period of 1997. Increases in marketing costs, professional
fees and bad debt expense, and decreases in capitalization of labor and overhead
costs accounted for the majority of the increase.
Management fees and reimbursed expenses increased from $127,000 to
$138,500, or by 9.1%, for the three months ended March 31, 1998 as compared to
1997. Management fees increased in direct relation to increased revenues as
described above. Reimbursed expenses increased primarily due to higher allocated
personnel costs due to staff additions and wage increases.
Operating income before income taxes, depreciation and amortization
(EBITDA) is a commonly used financial analysis tool for measuring and comparing
cable television companies in several areas, such as liquidity, operating
performance and leverage. EBITDA as a percentage of revenues decreased from
47.7% to 42.8% during the three months ended March 31, 1998 as compared to the
corresponding period in 1997. The decrease was primarily due to increases in
programming fees and decreases in capitalization of labor and overhead costs as
described above. EBITDA decreased from $447,900 to $426,700, or by 4.7%, during
the three months ended March 31, 1998 compared to the corresponding period in
1997. EBITDA should be considered in addition to and not as a substitute for net
income and cash flows determined in accordance with generally accepted
accounting principles as an indicator of financial performance and liquidity.
Depreciation and amortization expense decreased from $187,400 to
$165,100, or by 11.9%, for the three months ended March 31, 1998 as compared to
the corresponding quarter in 1997 due to certain plant assets becoming fully
depreciated in 1997.
Operating income remained relatively unchanged, increasing from
$260,500 to $261,600, or by less than one percent, for the three months ended
March 31, 1998 as compared to the corresponding period in 1997.
Interest income increased from $25,100 to $37,800, or by 50.6%, for
the three months ended March 31, 1998 as compared to 1997, primarily due to
higher average cash balances available for investment.
Interest expense decreased from $8,100 to $3,200, or by 60.5%, for
the three months ended March 31, 1998 as compared to the corresponding period in
1997, due to the repayment of the Partnership's note payable in August 1996. The
Partnership fully amortized the related deferred loan costs to interest expense
in the first three months of 1997.
Due to the factors described above, the Partnership's net income
increased from $277,500 to $296,200, or by 6.7%, for the three months ended
March 31, 1998 as compared to the corresponding quarter in 1997.
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<PAGE> 9
ENSTAR INCOME PROGRAM II-2, L.P.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's primary objective, having invested its net
offering proceeds in cable systems, is to distribute to its partners all
available cash flow from operations and proceeds from the sale of cable systems,
if any, after providing for expenses, debt service and capital requirements
relating to the expansion, improvement and upgrade of its cable systems.
At March 31, 1998, the Partnership had no debt outstanding. The
Partnership relies upon the availability of cash generated from operations to
fund its ongoing expenses and capital requirements. The Partnership is required
to rebuild its Jerseyville, Illinois cable system at an estimated total cost of
approximately $260,500 under a provision of its franchise agreement. The
Partnership is also rebuilding portions of its cable systems in surrounding
communities at an estimated additional cost of approximately $1,801,900.
Construction began in the second quarter of 1996 and is expected to be completed
in 1998. Capital expenditures related to the Jerseyville rebuild approximated
$85,000 as of December 31, 1997. Other rebuild costs amounted to $1,776,000 as
of December 31, 1997. Additional construction expenditures of $201,400 are
projected for 1998, including approximately $175,500 for the required rebuild in
Jerseyville. Total rebuild expenditures in the first three months of 1998 were
approximately $16,000. Expenditures of $138,200 are budgeted to upgrade
additional equipment in 1998. Such expenditures approximated $38,000 in the
three months ended March 31, 1998. Additionally, the Partnership is required to
upgrade its cable plant in Malden, Missouri at an estimated cost of
approximately $2,100,000, the start of which is dependent upon obtaining an
extension of the franchise agreement for that system.
Management believes that cash flow from operations will be adequate
to meet the Partnership's current liquidity requirements, including the funding
for capital expenditures discussed above. However, as a result of such liquidity
requirements, management has concluded that it is not prudent for the
Partnership to resume paying distributions at this time.
Beginning in August 1997, the Partnership elected to self-insure its
cable distribution plant and subscriber connections against property damage as
well as possible business interruptions caused by such damage. The decision to
self-insure was made due to significant increases in the cost of insurance
coverage and decreases in the amount of insurance coverage available.
While the Partnership has made the election to self-insure for these
risks based upon a comparison of historical damage sustained over the past five
years with the cost and amount of insurance currently available, there can be no
assurance that future self-insured losses will not exceed prior costs of
maintaining insurance for these risks. Approximately 71% of the Partnership's
subscribers are served by its system in Hillsboro, Illinois and neighboring
communities. Significant damage to the system due to seasonal weather conditions
or other events could have a material adverse effect on the Partnership's
liquidity and cash flows. The Partnership continues to purchase insurance
coverage in amounts its management views as appropriate for all other property,
liability, automobile, workers' compensation and other types of insurable risks.
The "Year 2000" issue refers to certain contingencies that could
result from computer programs being written using two digits rather than four to
define the year. Many existing computer systems, including certain of the
Partnership's computer systems, process transactions based on two digits for the
year of the transaction
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<PAGE> 10
ENSTAR INCOME PROGRAM II-2, L.P.
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
(for example, "98" for 1998). These computer systems may not operate effectively
when the last two digits become "00," as will occur on January 1, 2000.
The Corporate General Partner has commenced an assessment of the
Partnership's Year 2000 business risks and its exposure to computer systems, to
operating equipment which is date sensitive and to the interface systems of its
vendors and service providers. Based on a preliminary study, the Corporate
General Partner has concluded that certain of the Partnership's information
systems were not Year 2000 compliant and has elected to replace such software
and hardware with Year 2000 compliant applications and equipment, although the
decision to replace major portions of such software and hardware had previously
been made without regard to the Year 2000 issue. The Corporate General Partner
expects to install substantially all of the new systems in 1998, with the
remaining systems to be installed in the first half of 1999. The total
anticipated cost, including replacement software and hardware, will be borne by
FHGLP.
In addition to evaluating internal systems, the Corporate General
Partner has also initiated communications with third party vendors and service
suppliers to determine the extent to which the Partnership's interface systems
are vulnerable should those third parties fail to solve their own Year 2000
problems on a timely basis. There can be no assurance that the systems of other
companies on which the Partnership's systems rely will be timely converted and
that the failure to do so would not have an adverse impact on the Partnership's
systems. The Corporate General Partner continues to closely monitor Year 2000
developments with vendors and service suppliers.
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
Operating activities provided $217,100 less cash in the three months
ended March 31, 1998 than in 1997. The Partnership used $205,800 more cash to
pay liabilities owed to affiliates and third-party creditors in the first three
months of 1998 than in the comparable quarter of 1997 due to differences in the
timing of payments. Changes in accounts receivable, prepaid expenses and other
assets provided $6,200 more cash in the first three months of 1998 due to
differences in the timing of receivable collections and in the payment of
prepaid expenses.
Investing activities used $59,300 less cash in the three months
ended March 31, 1998 than in the corresponding quarter of 1997, primarily due to
a $58,900 decrease in expenditures for tangible assets.
INFLATION
Certain of the Partnership's expenses, such as those for wages and
benefits, equipment repair and replacement, and billing and marketing generally
increase with inflation. However, the Partnership does not believe that its
financial results have been, or will be, adversely affected by inflation in a
material way, provided that Partnership is able to increase its service rates
periodically, of which there can be no assurance.
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<PAGE> 11
ENSTAR INCOME PROGRAM II-2, L.P.
PART II. OTHER INFORMATION
ITEMS 1-5. Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) None
(b) No reports on Form 8-K were filed during the quarter
for which this report is filed.
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENSTAR INCOME PROGRAM II-2, L.P.
a GEORGIA LIMITED PARTNERSHIP
-----------------------------
(Registrant)
By: ENSTAR COMMUNICATIONS CORPORATION
General Partner
Date: May 14, 1998 By: /s/ Michael K. Menerey
--------------------------------
Michael K. Menerey,
Executive Vice President,
Chief Financial Officer and
Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT MARCH 31, 1998, AND THE STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,287,600
<SECURITIES> 0
<RECEIVABLES> 37,100
<ALLOWANCES> 4,400
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 10,653,900
<DEPRECIATION> 7,694,100
<TOTAL-ASSETS> 6,756,200
<CURRENT-LIABILITIES> 504,600
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,756,200
<SALES> 0
<TOTAL-REVENUES> 996,200
<CGS> 0
<TOTAL-COSTS> 734,600
<OTHER-EXPENSES> (37,800)
<LOSS-PROVISION> 17,400
<INTEREST-EXPENSE> 3,200
<INCOME-PRETAX> 296,200
<INCOME-TAX> 0
<INCOME-CONTINUING> 296,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 296,200
<EPS-PRIMARY> 9.81
<EPS-DILUTED> 0
</TABLE>
