Item 1. Business. - ------ --------
(a) General Development of Business -------------------------------
American Cable TV Investors 5, Ltd. ("ACT 5" or the "Partnership") is a Colorado limited partnership that was formed in December of 1986 for the purpose of acquiring, developing and operating cable television systems. The Partnership's general partner is IR-TCI Partners V, L.P. ("IR-TCI" or the "General Partner"), a Colorado limited partnership. At December 31, 1998, the general partner of IR-TCI was TCI Ventures Five, Inc. ("TCIV 5"), a subsidiary of TCI Cablevision Associates, Inc. ("Cablevision"). The limited partner of IR- TCI is Cablevision Equities VI, a limited partnership whose partners are certain former officers and key employees of the predecessor of Cablevision. Cablevision is an indirect subsidiary of Tele-Communications, Inc. ("TCI") and is the managing agent of the Partnership. Prior to its January 17, 1996 withdrawal, Integrated Cable Corp. V ("ICC"), an indirect subsidiary of Presidio Capital Corp. ("Presidio") also served as a general partner of IR-TCI. In accordance with the terms of the IR-TCI limited partnership agreement, TCIV 5 elected to continue the business of IR-TCI. The withdrawal of ICC has not had and is not expected to have a material effect on the Partnership's results of operations or financial condition.
TCI and AT&T have agreed to a merger (the "Merger") in which TCI will become a wholly-owned subsidiary of AT&T. In anticipation of the Merger, TCI announced that it will restructure certain of its subsidiaries, including the merger of its subsidiary, TCI Communications, Inc. ("TCIC") into TCI. The Merger is not expected to have a material effect on the Partnership's results of operations or financial condition.
In its public offering that was conducted from May of 1987 to February of 1989, the Partnership sold 200,005 limited partnership units at a price of $500 per unit ("Unit").
The Partnership had a 40% ownership interest in Newport News Cablevision Associates, L.P., and its subsidiary Newport News Cablevision, Ltd. (collectively, "Newport News"). Newport News owned and operated the cable system located in and around Newport News, Virginia (the "Newport News System"). American Cable TV Investors 4, Ltd., an affiliate, owned the 60% majority interest in Newport News. The Newport News System was sold to an unaffiliated third party for cash proceeds of $121,886,000 on January 1, 1996 (the "Newport News Sale"). The Partnership's share of the cash proceeds from the sale of the Newport News System was used to fund a distribution to ACT 5's limited partners ("Limited Partners") of $165 per Unit in 1996.
During 1997, ACT 5 sold three of its cable television systems in three separate transactions. The cable television systems were located in and around (i) Shelbyville and Manchester, Tennessee (the "Southern Tennessee System"), (ii) St. Mary's County, Maryland (the "St. Mary's System") and (iii) Lower Delaware (the "Lower Delaware System") (collectively, the "1997 Sales Transactions"). The 1997 Sales Transactions were approved by the Limited Partners at a special meeting that occurred on March 26, 1997. The Partnership's share of the cash proceeds from the 1997 Sales Transactions was used to fund a distribution to the Limited Partners of $370 per Unit in 1997.
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Pursuant to the asset purchase agreement for the sale of the Southern Tennessee System (the "Southern Tennessee Sale"), $494,000 of such sales price was placed in escrow (the "Southern Tennessee Escrow") and was subject to indemnifiable claims made by the purchaser of the Southern Tennessee System, Rifkin Acquisition Partners, L.L.L.P. ("Rifkin"), through March 31, 1998. Prior to March 31, 1998, Rifkin filed a claim against the Southern Tennessee Escrow relating to a class action lawsuit filed by a customer challenging late fee charges with respect to the Southern Tennessee System. Such claim has had and will continue to have the effect of delaying the release of the Southern Tennessee Escrow. In addition, any judgment against the Southern Tennessee System may have the effect of reducing the amount of the Southern Tennessee Escrow ultimately released to ACT 5. Such claim could prevent the release of some or all of the Southern Tennessee Escrow to ACT 5.
On August 12, 1998, the Partnership entered into an agreement that provides for the sale of its cable television system located in and around Riverside, California ("Riverside" or the "Riverside System") to Century Communications Corp. ("Century"), an unaffiliated third party, for a cash sales price of $33,000,000, subject to certain adjustments (the "Riverside Sale"). On January 1, 1999, Century assigned its interest in the Riverside Sale to Century Valley Cable Corp. ("Century Sub"), a wholly-owned subsidiary of Century. Pursuant to the asset purchase agreement for the Riverside Sale, $1,500,000 of such sales price will be subject to indemnifiable claims for 180 days following consummation of the Riverside Sale.
The Riverside Sale was approved by the Limited Partners at a special meeting that occurred on December 11, 1998. Subject to the receipt of regulatory approvals and satisfaction or waiver of customary conditions to closing, consummation of the Riverside Sale is expected to occur during the second quarter of 1999.
In the event that the Riverside Sale is consummated, of which there can be no assurance, the Partnership will have sold all of its assets (other than cash and funds held in escrow) and, pursuant to the Partnership's limited partnership agreement, will ultimately be dissolved and terminated. Assuming the Riverside Sale and the dissolution and liquidation of the Partnership had occurred on December 31, 1998, the Partnership estimates that the pro forma distribution to Limited Partners would have been $228 per $500 Unit. The Partnership anticipates that an initial distribution will be made to its partners as soon as practicable after the date of the closing of the Riverside Sale. It is expected that a final liquidating distribution will be made as soon as practicable after all funds held in escrow have been released to the Partnership, subject to the receipt of any indemnifiable claims. No assurance can be given as to the timing or amount of such distributions.
In the event that the Riverside Sale is not consummated, it is currently the General Partner's intention to seek a substitute buyer for the Riverside System. There is no assurance that the General Partner could arrange for a substitute sale transaction for the Riverside System at an appropriate price or on terms acceptable to the Partnership. If the General Partner's efforts in arranging a substitute sale transaction prove to be unsuccessful, the General Partner would continue to operate the Riverside System.
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In August 1998, TCIC and Century signed a definitive agreement to establish a joint venture that will combine multiple cable television systems in Southern California (the "Joint Venture"). Among those systems to be contributed to the Joint Venture by TCIC is the cable television system serving customers in Redlands, California (the "Redlands System"). The Riverside System currently utilizes office facilities, personnel and certain cable distribution assets (including the headend) of the Redlands System. In the event the Riverside Sale is consummated, the Riverside System is among those systems to be contributed to the Joint Venture by Century. TCIC will have a 25% interest in the Joint Venture, which will be managed by Century. In the event that the Joint Venture is consummated prior to the Riverside Sale, or the Joint Venture is consummated and the Riverside Sale is not consummated, Cablevision will continue to manage the Riverside System. The Partnership has agreed that in the event the Joint Venture is consummated prior to the Riverside Sale, Cablevision may engage the Joint Venture to perform all or some portion of the day-to-day management of the Riverside System.
Certain statements in this Annual Report on Form 10-K constitute forward- looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, some of the statements contained under the caption Business and Management's Discussion and Analysis of Financial Condition ----------------------------------------------------------- and Results of Operations are forward-looking. Such forward-looking statements - ------------------------- involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Partnership or industry results, to differ materially from future results, performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include, among others: general economic and business conditions and industry trends; the regulatory and competitive environment of the industries in which the Partnership operates; uncertainties inherent in new business strategies; uncertainties inherent in the changeover to the year 2000, including the Partnership's projected state of readiness, the projected cost of remediation, the expected date of completion of each program or phase, the projected worst case scenarios, and the expected contingency plans associated with such worst case scenarios; new product launches and development plans; rapid technological changes, the acquisition, development and/or financing of telecommunications networks and services; the development and provision of programming for new television and telecommunications technologies; future financial performance, including availability, terms and deployment of capital; the ability of vendors to deliver required equipment, software and services; availability of qualified personnel; changes in, or failure or inability to comply with, government regulations, including, without limitation, regulations of the Federal Communications Commission ("FCC"), and adverse outcomes from regulatory proceedings; changes in the nature of key strategic relationships with partners and joint venturers; competitor responses to the Partnership's products and services and the overall market acceptance of such products and services; and other factors. These forward-looking statements (and such risks, uncertainties and other factors) speak only as of the date of this Report, and the Partnership expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in the Partnership's expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based. Any statement contained within Management's Discussion and Analysis of Financial Condition and Results of Operations on this Form 10-K related to year 2000 are hereby denominated as "Year 2000 Statements" within the meaning of the Year 2000 Information and Readiness Disclosure Act.
(b) Financial Information about Industry Segments ---------------------------------------------
The Partnership operates in the cable television industry.
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(c) Narrative Description of Business ---------------------------------
CABLE TELEVISION INDUSTRY -------------------------
General. Cable television systems receive video, audio and data signals transmitted by nearby television and radio broadcast stations, terrestrial microwave relay services and communications satellites. Such signals are then amplified and distributed by coaxial cable and optical fiber to the premises of customers who pay a fee for the service. In many cases, cable television systems also originate and distribute local programming.
Compressed digital video technology converts on average as many as twelve analog signals (now used to transmit video and voice) into a digital format and compresses such signals (which is accomplished primarily by eliminating the redundancies in television imagery) into the space normally occupied by one analog signal. The digitally compressed signal is uplinked to a satellite, which retransmits the signal to a customer's satellite dish or to a cable system's headend to be distributed, via optical fiber and coaxial cable, to the customer's home. At the home, a set-top video terminal converts the digital signal back into analog channels that can be viewed on a normal television set. In this regard, Riverside introduced digital video services in 1997. The primary capital cost of digital video services is the purchase and installation of digital set-top devices. Accordingly, the capital costs incurred will be dependent upon the number of digital set top devices required. The Riverside System had approximately 1,500 subscribers to digital video services at December 31, 1998. The Riverside System incurred approximately $419,000 in capital costs during 1998 related to the introduction of digital video services.
Service Charges. The Riverside System offers a limited "basic service" ("Basic-TV")(comprised of 24 channels featuring local broadcast signals and public, educational and governmental access channels) and an "expanded" tier (comprised of 30 channels featuring specialized programming services, in such areas as health, family entertainment, religion, news, weather, public affairs, education, shopping, sports and music). The monthly service fee for basic service generally ranges from $10.00 to $11.00 and the monthly service fee for the expanded tier ranges from $16.00 to $17.00. Customers may also elect to subscribe to digital video services comprised of 36 channels featuring additional specialized programming and premium services for an additional $10.00 monthly fee. The Riverside System also offers "premium services" (referred to in the cable television industry as "Pay-TV" and "pay-per-view") to its customers. Such services consist principally of feature films as well as live and taped sports events, concerts and other programming. The Riverside System offers Pay-TV services for a monthly fee generally ranging from $9.00 to $10.00 per service, except for certain movie or sports services (such as various regional sports networks and certain pay-TV channels) offered at $1.00 to $2.00 per month, pay-per-view movies offered separately at $3.00 per movie and certain pay-per-view events offered separately at $10.00 to $50.00 per event. Charges are usually discounted when multiple Pay-TV services are ordered.
As further enhancements to their cable services, customers may generally rent converters and/or remote control devices for a monthly charge ranging from $0.10 to $5.00 each, as well as purchase a channel guide for a monthly charge ranging from $1.50 to $2.00. Also, a nonrecurring installation charge (which is limited by the FCC's rules which regulate hourly service charges for each individual cable system) of up to $39.00 is usually charged.
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Monthly fees for Basic-TV and Pay-TV services to commercial customers vary depending on the nature and type of service. Except under the terms of certain contracts to provide service to commercial accounts, customers are free to discontinue service at any time without penalty.
The Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") and the Telecommunications Act of 1996 (the "1996 Telecom Act" and together with the 1992 Cable Act, the "Cable Acts") established rules under which the Riverside System's basic service and expanded tier service rates and equipment and installation charges are regulated if a complaint is filed or if the appropriate franchise authority is certified. For additional information see Regulation and Legislation below.
Programming. The Riverside System purchases substantially all of its basic and premium programming for its cable systems from Satellite Services, Inc. ("SSI"), a subsidiary of TCI. Pursuant to license agreements entered into by SSI with certain program suppliers, the Riverside System and other affiliates of TCI are permitted to obtain programming directly from SSI at what may be more favorable rates than those available directly to the Riverside System. The Riverside System will continue to purchase substantially all of its programming from SSI, so long as the Riverside System continues to qualify under SSI's affiliation agreements.
Local Franchises. Cable television systems generally are constructed and operated under the authority of nonexclusive permits or "franchises" granted by local and/or state governmental authorities. Federal law, including the Cable Communications Policy Act of 1984 (the "1984 Cable Act") and the 1992 Cable Act, limits the power of the franchising authorities to impose certain conditions upon cable television operators as a condition of the granting or renewal of a franchise.
The Riverside System's franchises contain varying provisions relating to construction and operation of cable television systems, such as time limitations on commencement and/or completion of construction; quality of service, including (in certain circumstances) requirements as to the number of channels and broad categories of programming offered to customers; rate regulation; provision of service to certain institutions; provision of channels for public access and commercial leased-use; and maintenance of insurance and/or indemnity bonds. The Riverside System's franchises also typically provide for periodic payments of fees, generally 5% of revenue, to the governmental authority granting the franchise. Additionally, many franchises require payments to the franchising authority for the funding of public, educational and governmental ("PEG") access channels. Franchises usually require the consent of the franchising authority prior to a transfer of the franchise or a transfer or change in ownership or operating control of the franchisee.
Subject to applicable law, a franchise may be terminated prior to its expiration date if the cable television operator fails to comply with the material terms and conditions thereof. Under the 1984 Cable Act, if a franchise is lawfully terminated, and if the franchising authority acquires ownership of the cable television system or effects a transfer of ownership to a third party, such acquisition or transfer must be at an equitable price, or in the case of a franchise existing on the effective date of the 1984 Cable Act, at a price determined in accordance with the terms of the franchise, if any.
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In connection with a renewal of a franchise, the franchising authority may require the cable operator to comply with different and more stringent conditions than those originally imposed, subject to the provisions of the 1984 Cable Act and other applicable federal, state and local law. The 1984 Cable Act, as supplemented by the renewal provisions of the 1992 Cable Act, establishes an orderly process for franchise renewal which protects cable operators against unfair denials of renewals when the operator's past performance and proposal for future performance meet the standards established by the 1984 Cable Act. The Partnership believes that the Riverside System generally has operated in a manner which satisfies such standards and allows for the renewal of such franchises; however, there can be no assurance that the franchises for the Riverside System will be successfully renewed as they expire.
The Riverside System's franchises have expiration dates which range from 2001 to 2006. Approximately 84% of the Riverside System's customers are served pursuant to franchise agreements that have expiration dates that fall within the next five years.
Competition. Cable television competes for customers in local markets with other providers of entertainment, news and information. The competitors in these markets include broadcast television and radio, newspapers, magazines and other printed material, motion picture theaters, video cassettes and other sources of information and entertainment including directly competitive cable television operations and internet service providers. The Cable Acts are designed to increase competition in the cable television industry. See Regulation and Legislation below.
There are alternative methods of distributing the same or similar video programming offered by cable television systems. Further, these technologies have been encouraged by the United States Congress ("Congress") and the FCC to offer services in direct competition with existing cable systems.
DBS. Direct broadcast satellite ("DBS") has emerged as the most significant competition to cable television systems. Earlier "direct-to-home" satellite services required the subscriber to purchase a large and expensive "dish" antenna, but newer medium and high powered alternatives currently allow the subscriber to receive digital services directly via satellite using a relatively small dish. Moreover, video compression technology allows DBS providers to offer more than 100 digital channels, thereby surpassing the typical cable system. DBS providers offer most of the same programming as cable television, but also offer certain sports packages not currently available through cable television systems. DBS currently faces technical and legal obstacles to providing popular local broadcast signals, although at least one DBS provider is now attempting to provide this programming in certain major markets, and Congress and the FCC are considering proposals that would remove existing legal obstacles. The DBS industry has grown rapidly over the last several years and now serves approximately 9 million subscribers nationwide. Recently announced mergers could strengthen the surviving DBS companies.
Although the effect of competition from these DBS services cannot be specifically predicted, it is clear there has been significant growth in DBS customers, and the Partnership assumes that such DBS competition will be substantial in the near future as developments in technology continue to increase satellite transmitter power and decrease the cost and size of equipment needed to receive these transmissions and enable DBS to overcome the aforementioned disadvantages. Furthermore, the extensive national advertising of DBS programming packages, including certain sports packages not currently available on cable television systems, will likely continue the growth in DBS customers. DBS services are available within the franchise areas served by the Riverside System. See Management's Discussion and Analysis of Financial ------------------------------------------------- Condition and Results of Operations - General - Competition. - ---------------------------------------------
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Telephone Company Entry. The 1996 Telecom Act eliminated the statutory and ------------------------ regulatory restrictions that prevented local telephone companies from competing with cable operators for the provision of video services by any means. See Regulation and Legislation below. The 1996 Telecom Act allows local telephone companies, including the regional bell operating companies ("RBOCs"), to compete with cable television operators both inside and outside their telephone service areas. The Partnership expects that the Riverside System could face competition from telephone companies for the provision of video services, whether it is through wireless cable, or through upgraded telephone networks. The Partnership assumes that all major telephone companies have already entered or may enter the business of providing video services. The 1992 Cable Act ensures that telephone company providers of video services will have access to acquiring all of the significant cable television programming services. The specific manner in which telephone company provision of video services will be regulated is described under Regulation and Legislation below.
Utility Company Entry. The 1996 Telecom Act eliminates certain federal --------------------- restrictions on utility holding companies and thus frees all utility companies to provide cable television services. Riverside could face competition from utility companies in the delivery of video services.
MMDS/LMDS. Another alternative method of distribution is multi-channel multi- ---------- point distribution systems ("MMDS"), which deliver programming services over microwave channels received by customers with special antennas. MMDS systems are less capital intensive, are not required to obtain local franchises or pay franchise fees, and are subject to fewer regulatory requirements than cable television systems. The 1992 Cable Act also ensures that MMDS operators have the opportunity to acquire all significant cable television programming services. Although there are relatively few MMDS systems in the United States currently in operation, virtually all markets have been licensed or tentatively licensed. Developments in digital compression technology will significantly increase the number of channels that can be made available from MMDS. Since 1992, most of Riverside's service areas have been subject to competition from a MMDS operator. See Management's Discussion and Analysis of Financial Condition and Results of Operations General - Competition. -------
Finally, an emerging technology, local multipoint distribution services ("LMDS"), could also pose a significant threat to the cable television industry, if and when it becomes established. LMDS, sometimes referred to as cellular television, could have the capability of delivering more than 100 channels of video programming to a customer's home. The potential impact of LMDS is difficult to assess due to the recent development of the technology and the absence of any current fully-operational LMDS systems.
Cable System Overbuilds. Cable operators may compete with other cable ------------------------ operators or new entities seeking franchises for competing cable television systems at any time during the terms of existing franchises. The 1992 Cable Act promotes the granting of competitive franchises and the Riverside System operates under non-exclusive franchises. Recently, there has been a significant increase in the number of cities that have constructed their own cable television systems in a manner similar to city-provided utility services. These systems typically will compete directly with the existing cable operator without the burdens of franchise fees or other local regulation. Although the total number of municipal overbuild cable systems remains relatively small, recent developments would indicate an increasing trend in cities authorizing such direct municipal competition with cable operators.
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Private Cable. Cable operators also compete with Satellite Master Antenna -------------- Television ("SMATV") systems, which provide multichannel program services directly to hotel, motel, apartment, condominium and similar multi-unit complexes within a cable television system's franchise area, generally free of any regulation by state and local governmental authorities. Further, the FCC in 1997, adopted new rules that restrict the ability of cable operators to maintain ownership of cable wiring inside multi-unit buildings, thereby making it less expensive for SMATV competitors to reach those customers. See Regulations and Legislation below. Further, the FCC in 1998 ruled that private cable operators can lease video distribution capacity from local telephone companies and, thereby, distribute cable programming services over the public rights-of-way without obtaining a franchise. This could provide a significant regulatory advantage for private cable operators in the future.
In addition to competition for customers, the cable television industry competes with broadcast television, radio, the print media and other sources of information and entertainment for advertising revenue. As the cable television industry has developed additional programming, its advertising revenue has increased. Cable operators sell advertising spots primarily to local and regional advertisers.
With the exception of the DBS operators and a MMDS operator that compete with the Riverside System, the Partnership has no basis upon which to estimate the number of cable television companies and other entities with which the Riverside System competes or may potentially compete. The full extent to which other media or home delivery services will compete with cable television systems may not be known for some time and there can be no assurance that existing, proposed, or as yet undeveloped technologies will not become dominant in the future.
Regulation and Legislation. The operation of cable television systems is extensively regulated by the FCC, some state governments and most local governments. On February 8, 1996, the President signed into law the 1996 Telecom Act. This new law alters the regulatory structure governing the nation's telecommunications providers, including the Partnership. It removes barriers to competition in both the cable television market and the local telephone market. Among other things, it reduces the scope of cable rate regulation.
The 1996 Telecom Act requires the FCC to implement numerous rulemakings, the final outcome of which cannot yet be determined due to court challenges. Moreover, Congress and the FCC have frequently revisited the subject of cable television regulation and may do so again. Future legislative and regulatory changes could adversely affect the Riverside System's operations. This section briefly summarizes key laws and regulations currently affecting the growth and operation of the Riverside System.
Cable Rate Regulation. The 1992 Cable Act imposed extensive rate --------------------- regulation on the cable television industry. All cable systems are subject to rate regulation of their basic and upper tier programming services, as well as their provision of customer equipment used to receive basic tier services, unless they face "effective competition" in their local franchise area. Under the 1992 Cable Act, the incumbent cable operator can demonstrate effective competition by showing either low penetration (less than 30% of the occupied households in the franchise area subscribe to basic service), or the presence (measured collectively as 50% availability, 15% customer penetration) of other multichannel video programming distributors ("MVPDs"). The 1996 Telecom Act expands the existing definition of effective competition to create a special test for a competing MVPD (other than a DBS distributor) affiliated with a local exchange carrier ("LEC"). There is no penetration minimum for a LEC affiliate to qualify as an effective competitor, but it must offer comparable programming services in the franchise area.
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Although the FCC establishes all cable rate rules, local government units (commonly referred to as local franchising authorities or "LFAs") are primarily responsible for administering the regulation of the lowest level of cable -- the basic service tier ("BST"), which typically contains local broadcast stations and PEG channels. Before an LFA begins BST rate regulation, it must certify to the FCC that it will follow applicable federal rules, and many LFAs have voluntarily declined to exercise this authority. LFAs also have primary responsibility for regulating cable equipment rates. Under federal law, charges for various types of cable equipment must be unbundled from each other and from monthly charges for programming services, and priced no higher than the operator's actual cost, plus an 11.25% rate of return.
The FCC itself directly administers rate regulation of any cable programming service tiers ("CPST"), which typically contain satellite-delivered programming. Under the 1996 Telecom Act, the FCC can regulate CPST rates only if an LFA first receives at least two complaints from local customers within 90 days of a CPST rate increase and then files a formal complaint with the FCC. When new CPST rate complaints are filed, the FCC now considers only whether the incremental increase is justified and will not reduce the previously established CPST rate. At December 31, 1998, none of the Riverside System's franchise areas were subject to such rate regulation. However, future events could occur that could cause one or more of the Riverside System's franchise areas to be subject to rate regulation.
Under the FCC's rate regulations, rate increases are governed by a complicated price structure that allows for the recovery of inflation and certain increased costs, as well as providing some incentive for expanding channel carriage. The FCC has modified its rate adjustment regulations to allow for annual rate increases and to minimize previous problems associated with delays in implementing rate increases. Operators also have the opportunity of bypassing this "benchmark" structure in favor of traditional cost-of-service regulation in cases where the latter methodology appears favorable. However, the FCC significantly limited the inclusion in the rate base of acquisition costs in excess of the historical cost of tangible assets. Premium cable services offered on a per channel or per program basis remain unregulated, as do affirmatively marketed packages consisting entirely of new programming product.
The 1996 Telecom Act sunsets FCC regulation of CPST rates for all systems (regardless of size) on March 31, 1999. However, certain members of Congress and FCC officials have called for the delay of this regulatory sunset and further have urged more rigorous rate regulation (including limits on programming cost pass-throughs to cable customers) until a greater degree of competition to incumbent cable operators has developed. The 1996 Telecom Act also relaxes existing uniform rate requirements by specifying that uniform rate requirements do not apply where the operator faces effective competition, and by exempting bulk discounts to multiple dwelling units ("MDUs"), although complaints about predatory pricing in MDUs still may be made to the FCC.
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Cable Entry Into Telecommunications. The 1996 Telecom Act provides that no ----------------------------------- state or local laws or regulations may prohibit or have the effect of prohibiting any entity from providing any interstate or intrastate telecommunications service. States are authorized, however, to impose "competitively neutral" requirements regarding universal service, public safety and welfare, service quality, and consumer protection. State and local governments also retain their authority to manage the public rights-of-way. Although the 1996 Telecom Act clarifies that traditional cable franchise fees may be based only on revenues related to the provision of cable television services, it also provides that LFAs may require reasonable, competitively neutral compensation for management of the public rights-of-way when cable operators provide telecommunications service. The 1996 Telecom Act prohibits LFAs from requiring cable operators to provide telecommunications service or facilities as a condition of a franchise grant, renewal, or transfer, except that LFAs argue they can seek "institutional networks" as part of such franchise negotiations. The favorable pole attachment rates afforded cable operators under federal law can be increased by utility companies owning the poles during a five year phase-in period beginning in 2001, if the cable operator provides telecommunications service, as well as cable service, over its plant.
Cable entry into telecommunications will be affected by the regulatory landscape now being fashioned by the FCC and state regulators. One critical component of the 1996 Telecom Act intended to facilitate the entry of new telecommunications providers (including cable operators) is the interconnection obligation imposed on all telecommunications carriers. This requires, for example, that the incumbant local telephone company must allow new competing telecommunications providers to connect to the local telephone distribution system. In a January 1999 decision, the Supreme Court upheld the FCC's fundamental interconnection requirements. However, the court ordered the FCC to reconsider to what extent the local telephone company must make available for resale separate components of its local telephone system.
Telephone Company Entry Into Cable Television. The 1996 Telecom Act allows --------------------------------------------- telephone companies to compete directly with cable operators by repealing the historic telephone company/cable company cross-ownership ban and the FCC's video dialtone regulations. This will allow LECs, including the RBOCs, to compete with cable operators both inside and outside their telephone service areas. Because of their resources, LECs could be formidable competitors to traditional cable operators, and certain LECs have begun offering cable service.
Under the 1996 Telecom Act, a LEC or other entity providing video programming to customers will be regulated as a traditional cable operator (subject to local franchising and federal regulatory requirements), unless it elects to provide its programming via an "open video system" ("OVS"). It was anticipated that the primary benefit of using an OVS regulatory model was to avoid the need to obtain a local franchise prior to providing services. However, a January 1999 federal court of appeals decision held that OVS providers can be required to obtain such a franchise. To be eligible for OVS status, the LEC itself cannot occupy more than one-third of the system's activated channels when demand for channels exceeds supply. Nor can it discriminate among programmers or establish unreasonable rates, terms or conditions for service.
Although LECs and cable operators can now expand their offerings across traditional service boundaries, the general prohibitions remain on LEC buyouts (i.e., any ownership interest exceeding 10 percent) of co-located cable systems, cable operator buyouts of co-located LEC systems, and joint ventures among cable operators and LECs in the same market. The 1996 Telecom Act provides a few limited exceptions to this buyout prohibition.
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Electric Utility Entry Into Telecommunications/Cable Television. The 1996 --------------------------------------------------------------- Telecom Act provides that registered utility holding companies and subsidiaries may provide telecommunications services, information services, and other services or products subject to the jurisdiction of the FCC notwithstanding the Public Utilities Holding Company Act. Electric utilities must establish separate subsidiaries, known as "exempt telecommunications companies," and must apply to the FCC for operating authority. Again, because of their resources, electric utilities could be formidable competitors to traditional cable systems. At December 31, 1998, no electric utilities were in competition with the Riverside System.
Additional Ownership Restrictions. Pursuant to the 1992 Cable Act, the FCC --------------------------------- adopted regulations establishing a 30% limit on the number of homes nationwide that a cable operator may reach through cable systems in which it holds an attributable interest with an increase to 35% if the additional cable systems are minority controlled. The FCC stayed the effectiveness of its ownership limits pending the appeal of a September 16, 1993 decision by the United States District Court for the District of Columbia which, among other things, found unconstitutional the provision of the 1992 Cable Act requiring the FCC to establish such ownership limits.
The FCC also adopted regulations limiting carriage by a cable operator of national programming services in which that operator holds an attributable interest (using the same attribution standards as were adopted for its limits on the number of homes nationwide that a cable operator may reach through its cable systems) to 40% of the activated channels on each of the cable operator's systems. The rules provide for the use of two additional channels or a 45% limit, whichever is greater, provided that the additional channels carry minority controlled programming services. The regulations also grandfather existing carriage arrangements which exceed the channel limits, but require new channel capacity to be devoted to unaffiliated programming services until the system achieves compliance with the regulations. These channel occupancy limits apply only up to 75 activated channels on the cable system, and the rules do not apply to local or regional programming services.
The 1996 Telecom Act eliminates statutory restrictions on broadcast/cable cross-ownership (including broadcast network/cable restrictions), but leaves in place existing FCC regulations prohibiting local cross-ownership between television stations and cable systems. The 1996 Telecom Act leaves in place existing restrictions on cable cross-ownership with SMATV and MMDS facilities, but lifts those restrictions where the cable operator is subject to effective competition. In January 1995, however, the FCC adopted regulations which permit cable operators to own and operate SMATV systems within their franchise area, provided that such operation is consistent with local cable franchise requirements.
Must Carry/Retransmission Consent. The 1992 Cable Act contains broadcast --------------------------------- signal carriage requirements that allow local commercial television broadcast stations to elect once every three years between requiring a cable system to carry the station ("must carry") or negotiating for payments for granting permission to the cable operator to carry the station ("retransmission consent"). Less popular stations typically elect must carry, and more popular stations typically elect retransmission consent. Must carry requests can dilute the appeal of a cable system's programming offerings, and retransmission consent demands may require substantial payments or other concessions (e.g. a requirement that the cable system also carry the local broadcaster's affiliated cable programming service). Either option has a potentially adverse effect on the Riverside System's business. The burden associated with must-carry obligations could dramatically increase if television broadcast stations proceed with planned conversions to digital transmissions and if the FCC determines in a pending rulemaking that cable systems must carry all analog and digital signals transmitted by the television stations.
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Access Channels. LFAs can include franchise provisions requiring cable --------------- operators to set aside certain channels for PEG access programming. Federal law also requires a cable system with 36 or more channels to designate a portion of its activated channel capacity (either 10% or 15%) for commercial leased access by unaffiliated third parties. The FCC has adopted rules regulating the terms, conditions and maximum rates a cable operator may charge for use of this designated channel capacity, but use of commercial leased access channels has been relatively limited. In February of 1997, the FCC released revised rules which mandate a modest rate reduction that has made commercial leased access a more attractive option for third party programmers, particularly for part-time leased access carriage.
"Anti-Buy Through" Provisions. Federal law requires each cable system to ----------------------------- permit customers to purchase premium or pay-per-view video programming offered by the operator on a per-channel or a per-program basis without the necessity of subscribing to any tier of service (other than the basic service tier) unless the system's lack of addressable converter boxes or other technological limitations does not permit it to do so. The statutory exemption for cable systems that do not have the technological capability to comply expires in October 2002, but the FCC may extend that period if deemed necessary.
Access to Programming. To spur the development of independent cable --------------------- programmers and competition to incumbent cable operators, the 1992 Cable Act imposed restrictions on the dealings between cable operators and cable programmers. Of special significance from a competitive business posture, the 1992 Cable Act precludes satellite video programmers affiliated with cable operators from favoring cable operators over competing multichannel video programming distributors (such as DBS and MMDS distributors). This provision limits the ability of vertically integrated satellite cable programmers to offer exclusive programming arrangements to the Partnership. Recently, both Congress and the FCC have considered proposals that would expand the program access rights of cable's competitors, including the possibility of subjecting both terrestrially delivered video programming and video programmers who are not affiliated with cable operators to all program access requirements.
Inside Wiring. In a 1997 Order, the FCC established rules that require an ------------- incumbent cable operator upon expiration or termination of a MDU service contract to sell, abandon, or remove "home run" wiring that was installed by the cable operator in a MDU. These inside wiring rules will assist building owners in their attempts to replace existing cable operators with new video programming providers who are willing to pay the building owner a higher fee. Additionally, the FCC has proposed abrogating all exclusive MDU contracts held by cable operators, but at the same time allowing competitors to cable to enter into exclusive MDU service contracts.
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Other FCC Regulations. In addition to the FCC regulations noted above, --------------------- there are other FCC regulations covering such areas as equal employment opportunity, customer privacy, programming practices (including, among other things, syndicated program exclusivity, network program nonduplication, local sports blackouts, indecent programming, lottery programming, political programming, sponsorship identification, and children's programming advertisements), registration of cable systems and facilities licensing, maintenance of various records and public inspection files, frequency usage, lockbox availability, antenna structure notification, tower marking and lighting, consumer protection and customer service standards, technical standards, and consumer electronics equipment compatibility. The FCC has the authority to enforce its regulations through the imposition of substantial fines, the issuance of cease and desist orders and/or the imposition of other administrative sanctions, such as the revocation of FCC licenses needed to operate certain transmission facilities used in connection with cable operations.
The FCC recently completed a rulemaking designed to encourage and facilitate third-party sale of cable converters to cable customers. Specifically, the FCC requires cable operators to segregate security functions of set top boxes from all other functions by July 1, 2000. Additionally, as of January 1, 2005, cable operators can no longer lease or sell converter set top boxes that have integrated security and navigation functions. The result of this rulemaking is that cable subscribers will not necessarily obtain their set top boxes from the cable operator, but, instead, may purchase such set top boxes from third-party vendors. Such third-party sales of previously unmodified cable set top boxes could make it more difficult for cable operators to combat theft of service.
Copyright. Cable television systems are subject to federal copyright --------- licensing covering carriage of television and radio broadcast signals. In exchange for filing certain reports and contributing a percentage of their revenue to a federal copyright royalty pool (such percentage varies depending on the size of the system and the number of distant broadcast television signals carried), cable operators can obtain blanket permission to retransmit copyrighted material on broadcast signals. The possible modification or elimination of this compulsory copyright license is subject to continuing review and could adversely affect the Riverside System's ability to obtain desired broadcast programming. In addition, the cable industry pays music licensing fees to Broadcast Music, Inc. and is negotiating a similar arrangement with the American Society of Composers, Authors and Publishers. Copyright clearances for nonbroadcast programming services are arranged through private negotiations.
State and Local Regulation. Cable television systems generally are -------------------------- operated pursuant to nonexclusive franchises granted by a municipality or other state or local government entity. The 1996 Telecom Act clarified that the need for an entity providing cable services to obtain a local franchise depends solely on whether the entity crosses public rights of way. Federal law now prohibits franchise authorities from granting exclusive franchises or from unreasonably refusing to award additional franchises covering an existing cable system's service area. Cable franchises generally are granted for fixed terms and in many cases are terminable if the franchisee fails to comply with material provisions. Non-compliance by the cable operator with franchise provisions may also result in monetary penalties.
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The terms and conditions of franchises vary materially from jurisdiction to jurisdiction. Each franchise generally contains provisions governing cable operations, service rates, franchise fees, system construction and maintenance obligations, system channel capacity, design and technical performance, customer service standards, and indemnification protections. A number of states subject cable television systems to the jurisdiction of centralized state governmental agencies, some of which impose regulation of a character similar to that of a public utility. Although LFAs have considerable discretion in establishing franchise terms, there are certain federal limitations. For example, LFAs cannot insist on franchise fees exceeding 5% of the system's gross revenue, cannot dictate the particular technology used by the system, and cannot specify video programming other than identifying broad categories of programming.
Federal law contains renewal procedures designed to protect incumbent franchisees against arbitrary denials of renewal. Even if a franchise is renewed, the franchise authority may seek to impose new and more onerous requirements such as significant upgrades in facilities and services or increased franchise fees and funding for PEG channels as a condition of renewal. Similarly, if a franchise authority's consent is required for the purchase or sale of a cable system or franchise, such authority may attempt to impose more burdensome or onerous franchise requirements in connection with a request for consent. Historically, franchises have been renewed for cable operators that have provided satisfactory services and have complied with the terms of their franchises.
Proposed Changes in Regulation. The regulation of cable television systems at the federal, state and local levels is subject to the political process and has been in constant flux over the past decade. Material changes in the law and regulatory requirements must be anticipated and there can be no assurance that the Partnership's business will not be affected adversely by future legislation, new regulation or deregulation.
General -------
Legislative, administrative and/or judicial action may alter portions of the foregoing statements relating to competition and regulation.
The Partnership has not expended material amounts during the last three years on research and development activities. Construction and maintenance materials are available and acquired from a number of suppliers and are not deemed to be in short supply.
There is no customer or affiliated group of customers to whom sales are made in an amount which exceeds 10% of the Partnership's revenue.
Compliance with federal, state, and local provisions which have been enacted or adopted regulating the discharge of material into the environment or otherwise relating to the protection of the environment has had no material effect upon the capital expenditures, earnings or competitive position of the Partnership.
At December 31, 1998, 53 individuals were employed at the Riverside System. The Riverside System shares office personnel with the Redlands System.
(d) Financial Information about Foreign and Domestic Operations and Export ---------------------------------------------------------------------- Sales -----
The Partnership has neither foreign operations nor export sales.
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Item 2.
Item 2. Properties. - ------ ----------
At December 31, 1998, the Riverside System's physical cable television properties, which are located in California, consist of cable system components, motor vehicles, miscellaneous hardware, spare parts, and other components. Riverside uses office facilities and certain cable distribution assets (including the headend) of the Redlands System. See Business - General -------- ------- Development of Business and note 5 to the accompanying financial statements. - -----------------------
Riverside's cable television facilities are, in the opinion of management, suitable and adequate by industry standards. However, for information concerning the economic feasibility of implementing technological improvements, see Management's Discussion and Analysis of Financial Condition and Results of -------------------------------------------------------------------------- Operations - General - Competition. See also Business - Narrative Description of - -------------------- ----------------------------------- Business - General and - Competition. - --------
During 1998, $1.1 million in capital expenditures were made to improve and expand the Riverside System, of which $419,000 relates to digital video services. See Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations - Liquidity and Capital Resources. - -------------------------------------------------------
Item 3.
Item 3. Legal Proceedings. - ------ -----------------
Late Fee Litigation. On February 17, 1999, in the Circuit Court for the ------------------- fourteenth judicial district at Manchester, Coffee County, Tennessee, the Partnership was named in a certified class action entitled Johnny Clouse v. ---------------- American Cable TV Investors 5 Ltd., et al concerning late fee charges and - ----------------------------------------- practices. The Partnership's Southern Tennessee System charged late fees to customers who did not pay their cable bills on time. This late fee case challenges the amount of the late fees and the practices under which they were imposed. The Plaintiff raises claims under state consumer protection statutes, other state statutes, and the common law. The plaintiff generally alleges that the late fees charged by the cable system were not reasonably related to the costs incurred by the cable systems as a result of the late payment. The plaintiff seeks to require the cable system (which the Partnership sold on April 1, 1997) to reduce its late fees on a prospective basis and to provide compensation for alleged excessive late fee charges for past periods. Based upon the facts available, management believes that, although no assurances can be given as to the outcome of this action, the ultimate disposition of this matter will not have a material adverse effect upon the financial condition of the Partnership.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders. - ------- ---------------------------------------------------
At a special meeting of the Limited Partners held on December 11, 1998, the following matters were voted upon and approved by the Limited Partners:
Resolution 1. Consent to the sale of the Riverside System to Century or one of Century's affiliates by 97% of the votes cast at such meeting (133,862 for; 895 against; 2,742 abstained).
Resolution 2. Consent to the sale of the Riverside System in any substitute sales transaction (in the event that the foregoing sale does not close) by 94% of the votes cast at such meeting (129,780 for; 3,363 against; 4,356 abstained).
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PART II.
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. - ------ ---------------------------------------------------------------------
In its public offering that was conducted from May 1987 to February 1989, the Partnership sold 200,005 Units to the public at a price of $500 per Unit. At December 31, 1998, there were approximately 11,900 Unit holders.
Although the Units are freely transferable, no public trading market for the Units exists. To the extent that an informal or secondary market exists, the Limited Partners may only be able to sell Units at a substantial discount from the Units' proportionate share of the estimated market value of the underlying net assets of the Partnership.
As of February 27, 1998, ACT 5 had processed requests in 1998 for the transfer of Units representing 5% of the total Units. In order to maintain ACT 5's partnership status for federal income tax purposes, no more than 5% of the Units can be transferred in any one tax year. Accordingly, ACT 5 did not process any additional requests for the transfer of Units during 1998. ACT 5 began accepting transfers for the 1999 tax year effective January 1, 1999.
The Partnership used most of its share of the net proceeds from the Newport News Sale to make distributions in 1996 to Presidio, TCIV 5 and the Limited Partners of $67,000, $266,000 and $33,001,000 ($165 per Unit for Limited Partners of record as of January 1, 1996), respectively. The Partnership used most of the net proceeds from the sale of the Southern Tennessee, St. Mary's and Lower Delaware Systems to make distributions in 1997 to Presidio, TCIV 5 and the Limited Partners of $149,000, $598,000 and $74,002,000 ($370 per Unit for Limited Partners of record as of July 1, 1997), respectively.
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Item 6.
Item 6. Selected Financial Data. - ------ -----------------------
Selected financial data related to the Partnership's financial condition and results of operations for the five years ended December 31, 1998 are summarized as follows (such information should be read in conjunction with the Partnership's financial statements included elsewhere herein):
SUMMARY BALANCE SHEET DATA: - --------------------------
SUMMARY STATEMENT OF OPERATIONS DATA: - ------------------------------------
- -------------------------
(1) The December 31, 1997 summary balance sheet data and summary statement of operations data reflect the effects of the 1997 Sales Transactions. As a result of the 1997 Sales Transactions, the Partnership's statement of operations for the year ended December 31, 1997 includes (i) three months of operating results for the Southern Tennessee and St. Mary's Systems, (ii) six months of operating results for the Lower Delaware System and (iii) twelve months of operating results for the Riverside System. See Management's Discussion and Analysis of Financial Condition and Results of -------------------------------------------------------------------------- Operations - General. --------------------
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Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results - ------ ----------------------------------------------------------------------- of Operations. - -------------
General -------
AT&T Merger. TCI and AT&T have agreed to a merger, in which TCI will become a wholly-owned subsidiary of AT&T. In anticipation of the Merger, TCI announced that it will restructure certain of its subsidiaries, including the merger of TCIC into TCI. The Merger is not expected to have a material effect on the Partnership's results of operations or financial condition.
Asset Sales. On January 1, 1996, Newport News sold the Newport News System to Cox Communications Rhode Island, Inc., an unaffiliated third party, for cash proceeds of $121,886,000. The Partnership had a 40% ownership interest in Newport News. Accordingly, during 1996 the Partnership received $35,789,000 of the net cash proceeds (after satisfaction of Newport News' transaction costs and liabilities) from the Newport News Sale. The Partnership used most of its share of the net proceeds from the Newport News Sale to make distributions in 1996 to Presidio, TCIV 5 and the Limited Partners of $67,000, $266,000 and $33,001,000 ($165 per Unit for Limited Partners of record as of January 1, 1996), respectively.
On April 1, 1997, the Partnership sold the Southern Tennessee System to Rifkin for an adjusted sales price of $19,647,000. Pursuant to the asset purchase agreement for the Southern Tennessee Sale, $494,000 of such sales price was placed in escrow and was subject to indemnifiable claims made by Rifkin through March 31, 1998. Prior to March 31, 1998, Rifkin filed a claim against the Southern Tennessee Escrow relating to a class action lawsuit filed by a customer challenging late fee charges with respect to the Southern Tennessee System. Such claim has had and will continue to have the effect of delaying the release of the Southern Tennessee Escrow. In addition, any judgment against the Southern Tennessee System may have the effect of reducing the amount of the Southern Tennessee Escrow ultimately released to ACT 5. Such claim could prevent the release of some or all of the Southern Tennessee Escrow to ACT 5.
On April 16, 1997, the Partnership sold the St. Mary's System to Gans Multimedia Partnership ("Gans"), an unaffiliated third party, for an adjusted sales price of $30,547,000 (the "St. Mary's Sale"). Pursuant to the asset purchase agreement for the St. Mary's Sale, $766,000 of such sales price was placed in escrow (the "St. Mary's Escrow") and was subject to indemnifiable claims made by Gans through April 15, 1998. The St. Mary's Escrow was released to ACT 5 during the second quarter of 1998. ACT 5 received interest of $39,000 in conjunction with the release of the St. Mary's Escrow.
On June 24, 1997, the Partnership sold the Lower Delaware System to Mediacom Delaware LLC ("Mediacom"), an unaffiliated third party, for an adjusted sales price of $42,191,000 (the "Lower Delaware Sale"). Pursuant to the asset purchase agreement for the Lower Delaware Sale, $1,077,000 of such sales price was placed in escrow (the "Lower Delaware Escrow") and was subject to indemnifiable claims made by Mediacom through June 23, 1998. The Lower Delaware Escrow was released to ACT 5 during the third quarter of 1998. ACT 5 received interest of $57,000 in conjunction with the release of the Lower Delaware Escrow.
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The 1997 Sales Transactions were approved by the Limited Partners at a special meeting that occurred on March 26, 1997. The Partnership used proceeds from the 1997 Sales Transactions to pay disposition fees of $2,778,000 to Cablevision, repay debt and related accrued interest of $8,652,000, and make distributions to its General and Limited Partners of $747,000 and $74,002,000 ($370 per Unit for Limited Partners of record as of July 1, 1997), respectively.
On August 12, 1998, the Partnership entered into an agreement that provides for the sale of the Riverside System to Century, an unaffiliated third party, for a cash sales price of $33,000,000, subject to certain adjustments. On January 1, 1999, Century assigned its interest in the Riverside Sale to Century Sub. Pursuant to the asset purchase agreement for the Riverside Sale, $1,500,000 of such sales price will be subject to indemnifiable claims for 180 days following consummation of the Riverside Sale.
The Riverside Sale was approved by the Limited Partners at a special meeting that occurred on December 11, 1998. Subject to the receipt of regulatory approvals and satisfaction or waiver of customary conditions to closing, consummation of the Riverside Sale is expected to occur during the second quarter of 1999.
In the event that the Riverside Sale is consummated, of which there can be no assurance, the Partnership will have sold all of its assets (other than cash and funds held in escrow) and, pursuant to the Partnership's limited partnership agreement, will ultimately be dissolved and terminated. Assuming the Riverside Sale and the dissolution and liquidation of the Partnership had occurred on December 31, 1998, the Partnership estimates that the pro forma distribution to Limited Partners would have been $228 per $500 Unit. The Partnership anticipates that an initial distribution will be made to its partners as soon as practicable after the date of the closing of the Riverside Sale. It is expected that a final liquidating distribution will be made as soon as practicable after all funds held in escrow have been released to the Partnership, subject to the receipt of any indemnifiable claims. No assurance can be given as to the timing or amount of such distributions.
In the event that the Riverside Sale is not consummated, it is currently the General Partner's intention to seek a substitute buyer for the Riverside System. There is no assurance that the General Partner could arrange for a substitute sale transaction for the Riverside System at an appropriate price or on terms acceptable to the Partnership. If the General Partner's efforts in arranging a substitute sale transaction prove to be unsuccessful, the General Partner would continue to operate the Riverside System.
In August 1998, TCIC and Century signed a definitive agreement to establish a joint venture that will combine multiple cable television systems in Southern California. Among those systems to be contributed to the Joint Venture by TCIC is the Redlands System. The Riverside System currently utilizes office facilities, personnel and certain cable distribution assets (including the headend) of the Redlands System. In the event the Riverside Sale is consummated, the Riverside System is among those systems to be contributed to the Joint Venture by Century. TCIC will have a 25% interest in the Joint Venture, which will be managed by Century. In the event that the Joint Venture is consummated prior to the Riverside Sale, or the Joint Venture is consummated and the Riverside Sale is not consummated, Cablevision will continue to manage the Riverside System. The Partnership has agreed that in the event the Joint Venture is consummated prior to the Riverside Sale, Cablevision may engage the Joint Venture to perform all or some portion of the day-to-day management of the Riverside System.
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Regulation. The operation of the Riverside System is regulated at the federal, state and local levels. The 1992 Cable Act and the 1996 Telecom Act established rules under which the Riverside System's regulated basic and tier service rates and its equipment and installation charges (the "Regulated Services") are regulated if a complaint is filed or if the appropriate franchise authority is certified. Under the 1996 Telecom Act, regulation of tier service is scheduled to sunset on March 31, 1999. At December 31, 1998, none of the Riverside System's franchise areas were subject to such rate regulation. However, future events could occur that could cause one or more of the Riverside System's franchise areas to be subject to rate regulation.
During the year ended December 31, 1998, approximately 69% of the Riverside System's revenue was derived from Regulated Services. As noted above, any increases in rates charged for such services are subject to regulation by the Cable Acts. Moreover, competitive factors may limit Riverside's ability to increase its service rates.
Competition. Since 1992, most of Riverside's service areas have been subject to competition from a MMDS operator (the "California MMDS Operator"). Although the California MMDS Operator has generated increased competition in Riverside's service area, the Partnership is currently unable to predict the extent of the competitive effect at this time on the Partnership's financial condition or results of operations. For additional information concerning the revenue and subscriber bases of Riverside, see The Riverside System below. See also
Business - Narrative Description of Business - Competition. - --------------------------------------------
In addition to MMDS, Riverside competes with other distributors of the same or similar video programming as that offered by its cable system. DBS has emerged as significant competition to cable television systems. As described under Business - Narrative Description of Business - Competition, DBS service is - -------------------------------------------- available within the franchise areas serviced by the Riverside System. However, the Partnership is unable to predict what effect such competition will have on Riverside's financial condition or results of operations.
The 1996 Telecom Act eliminated the statutory and regulatory restrictions that prevented telephone companies from competing with cable operators for the provision of video services by any means. See Business - Narrative Description -------------------------------- of Business - Regulation and Legislation. The 1996 Telecom Act allows local - ----------- telephone companies, including the RBOCs, to compete with cable television operators both inside and outside their telephone service areas. The Partnership expects that the Riverside System will face substantial competition from telephone companies for the provision of video services, whether it is through wireless cable, or through upgraded telephone networks. The Partnership assumes that all major telephone companies have already entered or may enter the business of providing video services. Most major telephone companies have greater financial resources than the Partnership, and the 1992 Cable Act ensures that telephone company providers of video services will have access to acquiring all of the significant cable television programming services. Additionally, the 1996 Telecom Act eliminates certain federal restrictions on utility holding companies and thus frees all utility companies to provide cable television services. The Partnership expects this could result in another source of significant competition in the delivery of video services. Based on the foregoing, the Partnership continues to believe that the Riverside System could experience competition from alternative providers of video programming services in the future. The Partnership presently cannot predict the effect that any such competition might have on its financial condition or results of operations.
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As further described under Business - Narrative Description of Business, the -------------------------------------------- Riverside System is presently operating in an external environment that is characterized by rapidly changing competitive, regulatory, technological and economic factors. Although the Partnership generally is unable to predict the effect that such changing factors might have on Riverside's financial condition and results of operations, the Partnership does believe that the continued evolution of such factors could place Riverside at a competitive disadvantage if it were not to implement certain technological improvements. In this regard, Riverside introduced digital video services during 1997. The primary capital cost of digital video services is the purchase and installation of digital set- top devices. Accordingly, the capital costs incurred will be dependent upon the number of digital set-top devices required. The Riverside System had approximately 1,500 subscribers to digital video services at December 31, 1998. The Riverside System incurred approximately $419,000 in capital costs in 1998 related to the introduction of digital video services. The Riverside System aplans to increase the number of subscribers to digital video services.
The Partnership has no specific plans with respect to more extensive advancements or improvements that would involve the replacement of coaxial trunk cable with fiber optic cable. The Partnership would not proceed with the implementation of any significant technological advancements or improvements without first conducting additional analysis of the economic feasibility of such advancements and improvements. See Liquidity and Capital Resources below. -------------------------------
The Riverside System. The following table sets forth information for the Riverside System for the periods indicated (amounts in thousands):
- -------------------------
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/1/ From December 31, 1997 to December 31, 1998, Riverside experienced an increase of 700 basic subscribers and 600 premium subscriptions. The increase in premium subscriptions is comprised of a 400 subscription increase in STARZ! subscriptions and a 300 subscription increase in "ENCORE" subscriptions, partially offset by a 100 subscription decrease in traditional premium subscriptions. From December 31, 1996 to December 31, 1997, Riverside experienced a decrease of 2,100 premium subscriptions and 200 basic subscribers. The decrease in premium subscriptions is comprised of a 1,900 subscription decrease in traditional premium subscriptions and a 400 subscription decrease in "ENCORE" subscriptions, partially offset by a 200 subscription increase in STARZ! subscriptions. The monthly charge for "ENCORE" and STARZ!, which are indirectly owned by TCI, generally ranges from $1.00 to $7.00, as compared to $9.00 to $10.00 for other premium services. As described under General - Competition above, Riverside is subject ------- to competition from the California MMDS Operator and DBS providers. The Partnership currently is unable to predict the future effect of such competition on Riverside's financial condition and results of operations.
/2/ A basic subscriber may subscribe to one or more premium services and the number of premium services reflected represents the total number of such subscriptions. In addition to competition, fluctuations in premium subscriptions may also result from the timing of promotional campaigns that involve the packaging of premium services at a lower per-unit price than would otherwise be paid if such services were purchased separately. As such packaged prices expire, Riverside typically experiences reductions in the number of its premium subscriptions.
/3/ For additional information concerning Riverside's revenue, see
Material Changes in Results of Operations below. -----------------------------------------
/4/ Operating income before depreciation, amortization and management fees ("Operating Cash Flow") is a measure of value and borrowing capacity within the cable television industry. Changes in Operating Cash Flow result from the net effect of the revenue and expense variances discussed in Material Changes in Results of Operations below. The ----------------------------------------- amounts reflected in the table do not include allocations of certain indirect expenses of the Partnership and are not intended to be a substitute for a measure of performance prepared in accordance with generally accepted accounting principles and should not be relied upon as such.
On August 12, 1998, the Partnership entered into an agreement that provides for the sale of the Riverside System. The Riverside Sale was approved by the Limited Partners at a special meeting that occurred on December 11, 1998. Subject to the receipt of regulatory approvals and satisfaction or waiver of customary conditions to closing, consummation of the Riverside Sale is expected to occur during the second quarter of 1999. There is no assurance that that the Riverside Sale will be consummated. For additional information concerning the Riverside Sale, see Asset Sales above.
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Year 2000. In addition to the property and equipment owned by the Riverside System, certain office facilities, personnel, and cable distribution assets of the Redlands System, and certain software and equipment of TCI are utilized by the Riverside System (collectively, the "Riverside/Redlands Systems"). Accordingly, the assessment and remediation of ACT 5's year 2000 issues are dependent upon the assessment and remediation by TCI of certain of its own year 2000 issues and the year 2000 issues of the Riverside/Redlands Systems.
During 1998, TCI, in its capacity as the ultimate parent of the managing agent of ACT 5, continued its comprehensive effort to assess and remediate the Riverside/Redlands Systems' computer and other systems and related software and equipment to ensure such systems, software and equipment recognize, process and store information in the year 2000 and beyond. TCI's year 2000 remediation efforts include an assessment of the Riverside/Redlands Systems' most critical systems, such as customer service and billing systems, headends and other cable plant, business support operations, and other equipment and facilities. TCI also continued its efforts to verify the year 2000 readiness of ACT 5's important suppliers and vendors.
ACT 5's year 2000 remediation efforts are being managed by the year 2000 Program Management Office ("PMO") of TCI. The PMO is responsible for overseeing, coordinating and reporting on ACT 5's year 2000 remediation efforts. At December 31, 1998, it was comprised of a 119-member, full-time staff, accountable to executive management of TCI. As described above, AT&T and TCI have agreed to a merger. Although no assurance can be given, management of TCI does not anticipate that such merger will have a detrimental impact on the Riverside/Redlands Systems year 2000 assessment and remediation efforts.
The PMO has defined a four-phase approach to determining the year 2000 readiness of the Riverside/Redlands Systems' computer and other systems, software and equipment. Such approach is intended to provide a detailed method for tracking the evaluation, repair and testing of such critical systems, software and equipment. Phase 1, Assessment, involves the inventory of all critical systems, software and equipment and the identification of any year 2000 issues. Phase 1 also includes the preparation of the workplans needed for remediation. Phase 2, Remediation, involves repairing, upgrading and/or replacing any non-compliant critical equipment and systems. Phase 3, Testing, involves testing such critical systems, software, and equipment for year 2000 readiness, or in certain cases, relying on test results provided to TCI. Phase 4, Implementation, involves placing compliant systems, software and equipment into production or service.
Management believes that the progress of remediation of the Riverside/Redlands Systems closely follows that of TCIC as a whole, and that the phase completion data set forth below for TCIC may be considered to be a useful guide for estimating the Riverside/Redlands Systems' phase completion and ultimately the progress of remediating potential year 2000 issues impacting ACT 5's operations.
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At December 31, 1998, TCIC's overall progress by phase was as follows:
- ------------------------------
* The percentages set forth above were calculated by dividing the number of year 2000 projects that have completed a given phase by the total number of year 2000 projects.
The completion dates set forth above are based on TCIC's current expectations. However, due to the uncertainties inherent in year 2000 remediation, no assurances can be given as to whether such projects will be completed on such dates.
TCI is completing an inventory of critical systems with embedded technologies that impact ACT 5's operations and is currently determining the correct remediation approach. The embedded technologies assessments are expected to be complete by April of 1999.
During 1998, TCI continued its survey of significant third-party vendors and suppliers whose systems, services or products are important to ACT 5's operations (e.g., the suppliers of set-top devices and the provider of ACT 5's billing services). The year 2000 readiness of these providers is critical to continued provision of cable services by ACT 5. TCI has received information that critical systems, services or products supplied to ACT 5 by third parties are either year 2000 ready or are expected to be year 2000 ready by mid-1999.
In addition to the survey process described above, TCI has identified ACT 5's most critical supplier/vendor relationships and has instituted a verification process to determine such vendors' year 2000 readiness. Such verification may include reviewing the vendors' test and other data and engaging in regular conferences with the vendors' year 2000 team. TCI is also requiring testing to validate the year 2000 compliance of certain critical products and services.
Year 2000 expenses and capital expenditures incurred during the year ended December 31, 1998 were not material. Although no assurance can be given, management of ACT 5 currently expects total estimated costs associated with year 2000 remediation efforts to be approximately $200,000. Such amount is exclusive of replacement costs associated with noncompliant information technology ("IT") systems incurred by TCI on behalf of ACT 5. Additionally, ACT 5 is not deferring any planned IT projects due to year 2000 remediation costs.
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The failure to correct a material year 2000 problem in the Redlands System could result in an interruption of ACT 5's provision of cable service through the Riverside System. Management believes that TCI's year 2000 efforts in the Riverside/Redlands Systems will significantly reduce ACT 5's risks associated with the changeover to the year 2000. TCI has implemented certain enterprise- wide contingency plans to minimize the effect of potential year 2000 related disruptions. The risks and the uncertainties discussed below and the associated contingency plans relate to systems, software, equipment, and services that TCI has deemed critical in regard to customer service, business operations, financial impact or safety.
The failure of addressable controllers contained in the Riverside/Redlands Systems' headend could disrupt the delivery of premium services to customers and could necessitate crediting customers for failure to receive such premium services. In this unlikely event, management expects that it will identify and transmit the lowest cost programming tier. Unless other contingency plans are developed with the programmers, premium and adult content channels would not likely be transmitted until the addressable controller had been repaired.
Customer service networks and/or automated voice response systems failure could prevent access to customer account information, hamper installation scheduling and disable the processing of pay-per-view requests. ACT 5 plans to have its customer service representatives answer telephone calls from customers in the event of outages and expects to retrieve needed customer information manually from the billing service provider.
A failure of the services provided by billing systems service providers could result in a loss of customer records which could result in a disruption in the ability to bill customers for a protracted period. ACT 5 plans to have electronic backup records of its customer billing information prepared prior to the year 2000 to allow for data recovery. In addition, ACT 5 continues to monitor the year 2000 readiness of its key customer billing suppliers.
Advertising revenue could be adversely affected by the failure of certain equipment which could impede or prevent the insertion of advertising spots in ACT 5's programming. ACT 5 anticipates that it can minimize the effect of this situation by having the dates manually reset each day until the equipment has been repaired.
Security and fire protection systems failure could leave facilities vulnerable to intrusion and fire. ACT 5 expects to have such systems returned to normal functioning by turning the power off and then on again ("power off/on"). ACT 5 also plans to have additional security staff on site and plans to implement a backup plan for communicating with local fire and police departments. Also, certain personal computers interface with and control elevators, escalators, wireless systems, public access systems and certain telephony systems. In the event such computers cease operating, conducting a power off/on is expected to resume normal functioning. If a power off/on does not resume normal functioning, management expects to resolve the problem by resetting the computer to a pre-designated date which precedes the year 2000.
In the event that the local public utility cannot supply power, TCI expects to supply power for a limited time to the Riverside/Redlands Systems' cable headend and office sites through backup generators.
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The financial impact of any or all of the above worst-case scenarios on ACT 5 has not been and cannot be estimated by ACT 5 due to the numerous uncertainties and variables associated with such scenarios.
ACT 5 does not presently anticipate that there will be material losses from any claims of breach of contract due to year 2000 issues.
Results of Operations ---------------------
Material Changes in Results of Operations -----------------------------------------
The decreases in the Partnership's revenue and operating costs and expenses for the year ended December 31, 1998, as compared to the corresponding prior year period, resulted primarily from the impact of the 1997 Sales Transactions. See General above. -------
Revenue decreased $6,713,000 or 41% and $11,853,000 or 42% during the years ended December 31, 1998 and 1997, respectively, as compared to the corresponding prior year periods. Such decreases are primarily attributable to the timing of the 1997 Sales Transactions. Revenue for Riverside increased $910,000 or 11% for the year ended December 31, 1998, as compared to the corresponding prior year period. Revenue from Riverside's customers accounted for $557,000 of such increase, due to the net effect of a $659,000 increase in basic revenue, a $98,000 increase in revenue from digital products and a $200,000 decrease in traditional premium revenue. Riverside experienced a 7% increase in its average basic rate, a 2% increase in the average number of basic customers, a 5% decrease in its average rate for traditional premium services, and a 2% decrease in the average number of traditional premium subscriptions during the year ended December 31, 1998, as compared to the corresponding prior year period. Advertising sales increased $270,000 and other revenue accounted for the remaining increase in revenue. Revenue for Riverside increased $244,000 or 3% during the year ended December 31, 1997, as compared to the corresponding prior year period. Such increase is attributable to a 3% increase in the weighted average rate received for Regulated Services during 1997. Basic customers for Riverside remained relatively consistent from 1996 to 1997. Premium revenue for Riverside was consistent from 1996 to 1997 as the 10% decrease in premium customers was offset by an increase in the weighted average rate received for premium services. For additional information, see General - The Riverside System ------- and General - Regulation above. -------
Programming expense decreased $1,445,000 or 39% and $2,148,000 or 37% for the years ended December 31, 1998 and 1997, respectively, as compared to the corresponding prior year periods. Such decreases are primarily attributable to the timing of the 1997 Sales Transactions. Programming expense for Riverside increased $116,000 or 6% and $196,000 or 10% during the years ended December 31, 1998 and 1997, respectively, as compared to the corresponding prior year periods. Such increases are primarily attributable to higher programming rates. The Partnership anticipates that Riverside's programming costs will increase in future periods.
II-11
Operating expenses decreased $654,000 or 39% and $1,274,000 or 43% for the years ended December 31, 1998 and 1997, respectively, as compared to the corresponding prior year periods. Such decreases are primarily attributable to the timing of the 1997 Sales Transactions. Operating expenses for Riverside increased $294,000 or 40% and decreased $51,000 or 6% for the years ended December 31, 1998 and 1997, respectively, as compared to the corresponding prior year periods. The 1998 increase is primarily due to increased labor costs related to the hiring of additional operating personnel in conjunction with Riverside's efforts to increase the number of customers who subscribe to digital video services. The 1997 decrease is attributable to reductions in payroll expenses and other cost-cutting measures implemented at the end of 1996.
Selling, general and administrative ("SG&A") expenses decreased $2,741,000 or 44% and $2,702,000 or 30% during the years ended December 31, 1998 and 1997, respectively, as compared to the corresponding prior year periods. Such decreases are primarily attributable to the timing of the 1997 Sales Transactions. Exclusive of the effects of the 1997 Sales Transactions, SG&A expenses for the Partnership increased $323,000 or 10% and decreased $399,000 or 11% for the years ended December 31, 1998 and 1997, respectively, as compared to the corresponding prior year periods. The 1998 increase is due to increased costs relating to costs associated with the Riverside Sale and the launch of digital products. The 1997 decrease is primarily attributable to reductions in payroll expenses and other cost-cutting measures implemented at the end of 1996.
Depreciation and amortization decreased $3,181,000 or 45% and $7,933,000 or 53% during the years ended December 31, 1998 and 1997, respectively, as compared to the corresponding prior year periods. Depreciation and amortization for Riverside increased $126,000 or 4% and decreased $237,000 or 6% for the years ended December 31, 1998 and 1997, respectively, as compared to the corresponding prior year periods. The 1998 increase is primarily attributable to capital expenditures. The 1997 decrease is primarily attributable to certain of Riverside's assets becoming fully depreciated during the last half of 1996.
Other Income (Expense) ----------------------
The Partnership's interest expense decreased $135,000 or 100% and $167,000 or 55% during the years ended December 31, 1998 and 1997, respectively, as compared to the corresponding prior year periods. Such decreases are due to the Partnership's use of cash proceeds from the Southern Tennessee Sale to repay all amounts outstanding under the bank credit facility and to terminate such facility during 1997.
Interest income decreased $1,195,000 or 61% and increased $1,453,000 or 294% during the years ended December 31, 1998 and 1997, respectively, as compared to the corresponding prior year periods. The decrease in 1998 is due to a decrease in the average balance of the Partnership's cash and cash equivalents, primarily due to the distribution of cash proceeds related to the 1997 Sales Transactions during the third quarter of 1997. The 1997 increase is due to increases in the balances of the Partnership's interest-bearing assets resulting primarily from the receipt of cash proceeds related to the 1997 Sales Transactions.
During the first quarter of 1998, the Partnership expensed $202,000 of deferred loan costs that were related to debt that was repaid in 1997.
The Partnership recorded a gain from the 1997 Sales Transactions of $44,093,000 during the year ended December 31, 1997.
II-12
The Partnership's share of Newport News' earnings aggregated $39,995,000 for the year ended December 31, 1996. As described in notes 2 and 4 to the accompanying financial statements of the Partnership, Newport News was liquidated in 1996.
Inflation did not have a significant impact on the Partnership's financial condition or results of operations during the three-year period ended December 31, 1998.
Liquidity and Capital Resources -------------------------------
As previously described under General - Asset Sales, the Partnership entered ------- into an agreement that provides for the sale of the Riverside System. In the event that the Riverside Sale is consummated, the Partnership anticipates that it would use all or a portion of the available net cash proceeds to satisfy its liabilities, including any amounts due to related parties, and make distributions to the Partnership's partners.
In the event that the Riverside Sale is consummated, of which there can be no assurance, the Partnership will have sold all of its assets (other than cash and funds held in escrow) and, pursuant to the Partnership's limited partnership agreement, will ultimately be dissolved and terminated. Assuming the Riverside Sale and the dissolution and liquidation of the Partnership had occurred on December 31, 1998, the Partnership estimates that the pro forma distribution to Limited Partners would have been $228 per $500 Unit. The Partnership anticipates that an initial distribution will be made to its partners as soon as practicable after the date of the closing of the Riverside Sale. It is expected that a final liquidating distribution will be made as soon as practicable after all funds held in escrow have been released to the Partnership, subject to the receipt of any indemnifiable claims. No assurance can be given as to the timing or amount of such distributions.
As previously described under General - Asset Sales, pursuant to the 1997 ------- Sales Transactions, $2,337,000 of the combined sales price of the 1997 Sales Transactions was placed in escrow and was subject to indemnifiable claims for up to one year following consummation of the applicable 1997 Sales Transactions. The St. Mary's Escrow was released to ACT 5 during the second quarter of 1998 and the Lower Delaware Escrow was released to ACT 5 during the third quarter of 1998. Prior to its release, Rifkin filed a claim against the Southern Tennessee Escrow relating to a class action lawsuit filed by a customer challenging late fee charges with respect to the Southern Tennessee System. Such claim has had and will continue to have the effect of delaying the release of the Southern Tennessee Escrow. In addition, any judgment against the Southern Tennessee System may have the effect of reducing the amount of the Southern Tennessee Escrow ultimately released to ACT 5.
The Partnership's other liabilities represent unclaimed distribution checks to certain Limited Partners which were written on a bank account which was subsequently closed. Such checks will either be reissued to such Limited Partners or released to the respective state of such Limited Partners' last known residence upon dissolution of the Partnership.
During the year ended December 31, 1998, the Partnership used cash on hand and cash provided by investing activities of $266,000 and $838,000, respectively, to fund operating activities of $1,104,000. See the Partnership's statements of cash flows included in the accompanying financial statements.
II-13
The Partnership estimates that during 1999 it will spend approximately $1.4 million for capital expenditures related to Riverside, of which $928,000 relates to digital video services. The estimated digital video services capital expenditures are based upon the achievement of a target level of new customers to such services, and therefore the estimate of capital expenditures will fluctuate based on the actual number of new customers which subscribe to digital video services. Additionally, such estimated amounts assume a full year of capital expenditures for Riverside and that no significant technological improvements will be implemented to the Riverside System. See related discussion under General - Competition and General - Asset Sales. During the ------- ------- year ended December 31, 1998, the Partnership expended $1.1 million for capital expenditures of which $419,000 related to digital video services.
The Partnership anticipates that cash on hand, cash provided by Riverside's operating activities and any cash released from the Southern Tennessee Escrow will be sufficient to fund estimated capital expenditures (exclusive of any significant technological improvements, as described under General - ------- Competition), and meet its other liquidity requirements.
Item 8.
Item 8. Financial Statements and Supplementary Data. - ------ -------------------------------------------
The financial statements of the Partnership are filed under this item beginning on Page II-15. All financial statement schedules are omitted as they are not required or are not applicable.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and - ------ --------------------------------------------------------------- Financial Disclosure. --------------------
None.
II-14
Independent Auditors' Report ----------------------------
The Partners American Cable TV Investors 5, Ltd.:
We have audited the accompanying balance sheets of American Cable TV Investors 5, Ltd. (a Colorado limited partnership) as of December 31, 1998 and 1997, and the related statements of operations, partners' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Cable TV Investors 5, Ltd. as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles.
KPMG LLP
Denver Colorado February 24, 1999
II-15
AMERICAN CABLE TV INVESTORS 5, LTD. (A Colorado Limited Partnership)
Balance Sheets
December 31, 1998 and 1997
(See note 2)
(continued)
II-16
AMERICAN CABLE TV INVESTORS 5, LTD. (A Colorado Limited Partnership)
Balance Sheets, continued
(See note 2)
See accompanying notes to financial statements.
II-17
AMERICAN CABLE TV INVESTORS 5, LTD. (A Colorado Limited Partnership)
Statements of Operations
Years ended December 31, 1998, 1997 and 1996
(See note 2)
See accompanying notes to financial statements.
II-18
AMERICAN CABLE TV INVESTORS 5, LTD. (A Colorado Limited Partnership)
Statements of Partners' Equity
Years ended December 31, 1998, 1997 and 1996
(See note 2)
See accompanying notes to financial statements.
II-19
AMERICAN CABLE TV INVESTORS 5, LTD. (A Colorado Limited Partnership)
Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
(See note 2)
(continued)
II-20
AMERICAN CABLE TV INVESTORS 5, LTD. (A Colorado Limited Partnership)
Statements of Cash Flows, continued
Years ended December 31, 1998, 1997 and 1996
(See note 2)
See accompanying notes to financial statements.
II-21
AMERICAN CABLE TV INVESTORS 5, LTD. (A Colorado Limited Partnership)
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(1) Summary of Significant Accounting Policies ------------------------------------------
Organization ------------
American Cable TV Investors 5, Ltd. ("ACT 5" or the "Partnership") is a Colorado limited partnership that was formed in December of 1986 for the purpose of acquiring, developing, and operating cable television systems. The Partnership had a 40% ownership interest in Newport News, which also was formed in 1986 for the purpose of acquiring, developing and operating a cable television system located in and around Newport News, Virginia (the "Newport News System"). American Cable TV Investors 4, Ltd. ("ACT 4"), an affiliate, owned the 60% majority interest in Newport News. As a result of the sale of the Newport News System on January 1, 1996, Newport News was liquidated in 1996. See note 2.
The Partnership's general partner is IR-TCI Partners V, L.P. ("IR-TCI" or the "General Partner"), a Colorado limited partnership. At December 31, 1998, the general partner of IR-TCI was TCI Ventures Five, Inc. ("TCIV 5"), a subsidiary of TCI Cablevision Associates, Inc. ("Cablevision"). The limited partner of IR-TCI is Cablevision Equities VI, a limited partnership whose partners are certain former officers and key employees of the predecessor of Cablevision. Cablevision is an indirect subsidiary of Tele- Communications, Inc. ("TCI") and is the managing agent of the Partnership. Prior to its January 17, 1996 withdrawal, Integrated Cable Corp. V ("ICC"), an indirect subsidiary of Presidio Capital Corp. ("Presidio"), also served as a general partner of IR-TCI. In accordance with the terms of the IR-TCI limited partnership agreement, TCIV 5 elected to continue the business of IR-TCI. The withdrawal of ICC has not had and is not expected to have a material effect on the Partnership's results of operations or financial condition.
In its public offering that was conducted from May of 1987 to February of 1989, the Partnership sold 200,005 limited partnership units to the public resulting in gross proceeds of $100,002,500.
TCI and AT&T have agreed to a merger (the "Merger"), in which TCI will become a wholly-owned subsidiary of AT&T. In anticipation of the Merger, TCI announced that it will restructure certain of its subsidiaries, including the merger of its subsidiary, TCI Communications, Inc. ("TCIC") into TCI. The Merger is not expected to have a material effect on the Partnership's results of operations or financial condition.
(continued)
II-22
AMERICAN CABLE TV INVESTORS 5, LTD. (A Colorado Limited Partnership)
Notes to Financial Statements
Allocation of Net Earnings and Net Losses -----------------------------------------
Net earnings and net losses shall be allocated 99% to ACT 5's limited partners ("Limited Partners") and 1% to the General Partner and distributions of Cash from Operations, Sales or Refinancings (all as defined in the Partnership's limited partnership agreement) shall be distributed 99% to the Limited Partners and 1% to the General Partner until cumulative distributions to the Limited Partners equal the Limited Partners' aggregate contributions ("Payback"), plus 6% per annum. After the Limited Partners have received distributions equal to Payback plus 6% per annum, the allocations of net earnings, net losses and credits, and distributions of Cash from Operations, Sales or Refinancings shall be 25% to the General Partner and 75% to the Limited Partners. Although ACT 5's September 1997 distributions of proceeds from the sales of certain of its cable television systems allowed Limited Partners to achieve Payback, Limited Partners have not yet received a 6% return on their aggregate contributions. Accordingly, amounts will continue to be allocated 99% to the Limited Partners and 1% to the General Partner until such 6% return has been achieved. See note 2.
Cash and Cash Equivalents -------------------------
Cash and cash equivalents consist of investments which are readily convertible into cash and have maturities of three months or less at the time of acquisition.
At December 31, 1998 and 1997, $15,761,000 and $10,353,000 of the Partnership's cash and cash equivalents were invested in money market funds, respectively. The Partnership is exposed to credit loss in the event of non-performance by the other parties to such financial instruments. However, the Partnership does not anticipate non-performance by the other parties.
Cash paid by the Partnership for interest was none, $152,000 and $332,000 during the years ended December 31, 1998, 1997 and 1996, respectively.
Property and Equipment ----------------------
Property and equipment is stated at cost, which includes an allocation of the acquisition costs of cable television systems. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from 3 to 20 years.
Repairs and maintenance are charged to operations, and renewals and additions, including labor and overhead related to installations and interest costs related to construction, are capitalized. Capitalized interest costs were not significant in any of the periods presented in the accompanying financial statements.
(continued)
II-23
AMERICAN CABLE TV INVESTORS 5, LTD. (A Colorado Limited Partnership)
Notes to Financial Statements
At the time of ordinary retirements, sales, or other dispositions of part of a cable television system, the depreciated cost and cost of removal of such property are charged to accumulated depreciation, and salvage value, if any, is credited thereto. The net book value of assets retired or disposed of as a result of major rebuilds and lost converters is charged to depreciation expense in the period of disposition. Gains or losses are only recognized in connection with the disposition of properties in their entirety.
Franchise Costs and Other Intangibles -------------------------------------
Franchise costs represent the difference between the acquisition cost of a cable television system and amounts allocated to the tangible assets. Franchise costs are amortized using the straight-line method over the remaining terms of the franchise agreements at the time of acquisition, which ranged from 3 to 15 years. Other intangibles, which were fully amortized in 1998, were amortized using the straight-line method over the estimated lives of the assets, which ranged from 4 to 8 years.
Impairment of Long-Lived Assets -------------------------------
The Partnership periodically reviews the carrying amounts of property, plant and equipment and its intangible assets to determine whether current events or circumstances warrant adjustments to such carrying amounts. If an impairment adjustment is deemed necessary, such loss is measured by the amount that the carrying value of such assets exceeds their fair value. Considerable management judgment is necessary to estimate the fair value of assets, accordingly, actual results could vary significantly from such estimates.
Other Assets ------------
Other assets are amortized using the straight-line method over the estimated lives of the assets.
Revenue Recognition -------------------
Revenue for customer fees, equipment rental, advertising, pay-per-view programming and revenue sharing agreements is recognized in the period that services are delivered. Installation revenue is recognized in the period the installation services are provided to the extent of direct selling costs. Any remaining amount is deferred and recognized over the estimated average period that subscribers are expected to remain connected to the system.
Net Earnings (Loss) Per Unit ----------------------------
Net earnings (loss) per Unit is calculated by dividing net earnings (loss) attributable to the Limited Partners by the number of Units outstanding during the period. The number of Units outstanding for each of the years in the three-year period ended December 31, 1998 was 200,005.
(continued)
II-24
AMERICAN CABLE TV INVESTORS 5, LTD. (A Colorado Limited Partnership)
Notes to Financial Statements
Income Taxes ------------
No provision has been made for income tax expense or benefit in the accompanying financial statements as the earnings or losses of the Partnership are reported in the respective income tax returns of the partners.
The Partnership had taxable earnings of $1.0 million, $40.2 million and $42.0 million for the years ended December 31, 1998, 1997 and 1996, respectively.
As of February 27, 1998, ACT 5 had processed requests in 1998 for the transfer of Units representing 5% of the total Units. In order to maintain ACT 5's partnership status for federal income tax purposes, no more than 5% of the Units can be transferred in any one tax year. Accordingly, ACT 5 did not process any additional requests for the transfer of Units during 1998. ACT 5 began accepting transfers for the 1999 tax year effective January 1, 1999.
Estimates ---------
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications -----------------
Certain amounts have been reclassified for comparability with the 1998 presentation.
(2) Asset Sales -----------
On January 1, 1996, Newport News sold the Newport News System to Cox Communications Rhode Island, Inc., an unaffiliated third party, for cash proceeds of $121,886,000 (the "Newport News Sale"). The Partnership had a 40% ownership interest in Newport News. Accordingly, during 1996 the Partnership received $35,789,000 of the net cash proceeds (after satisfaction of Newport News' transaction costs and liabilities) from the Newport News Sale. The Partnership used most of its share of the net proceeds from the Newport News Sale to make distributions in 1996 to Presidio, TCIV 5 and Limited Partners of $67,000, $266,000 and $33,001,000 ($165 per Unit for Limited Partners of record as of January 1, 1996), respectively.
(continued)
II-25
AMERICAN CABLE TV INVESTORS 5, LTD. (A Colorado Limited Partnership)
Notes to Financial Statements
On April 1, 1997, the Partnership sold the cable television system in and around Shelbyville and Manchester, Tennessee (the "Southern Tennessee System" or "Southern Tennessee") to Rifkin Acquisition Partners, L.L.L.P. ("Rifkin"), an unaffiliated third party, for an adjusted sales price of $19,647,000 (the "Southern Tennessee Sale"). Pursuant to the asset purchase agreement for the Southern Tennessee Sale, $494,000 of such sales price was placed in escrow (the "Southern Tennessee Escrow") and was subject to indemnifiable claims by Rifkin through March 31, 1998. Prior to March 31, 1998, Rifkin filed a claim against the Southern Tennessee Escrow relating to a class action lawsuit filed by a customer challenging late fee charges with respect to the Southern Tennessee System. Such claim has had and will continue to have the effect of delaying the release of the Southern Tennessee Escrow. In addition, any judgment against the Southern Tennessee System may have the effect of reducing the amount of the Southern Tennessee Escrow ultimately released to ACT 5. Such claim could prevent the release of some or all of the Southern Tennessee Escrow to ACT 5.
On April 16, 1997, the Partnership sold the cable television system located in and around St. Mary's County, Maryland ("St. Mary's") to Gans Multimedia Partnership ("Gans"), an unaffiliated third party, for an adjusted sales price of $30,547,000 (the "St. Mary's Sale"). Pursuant to the asset purchase agreement for the St. Mary's Sale, $766,000 of such sales price was placed in escrow (the "St. Mary's Escrow") and was subject to indemnifiable claims by Gans through April 15, 1998. The St. Mary's Escrow was released to ACT 5 during the second quarter of 1998. ACT 5 received interest of $39,000 in conjunction with the release of the St. Mary's Escrow.
On June 24, 1997, the Partnership sold the cable television system located in and around Lower Delaware ("Lower Delaware") to Mediacom Delaware LLC ("Mediacom"), an unaffiliated third party, for an adjusted sales price of $42,191,000 (the "Lower Delaware Sale"). Pursuant to the asset purchase agreement for the Lower Delaware Sale, $1,077,000 of such sales price was placed in escrow (the "Lower Delaware Escrow") and was subject to indemnifiable claims by Mediacom through June 23, 1998. The Lower Delaware Escrow was released to ACT 5 during the third quarter of 1998. ACT 5 received interest of $57,000 in conjunction with the release of the Lower Delaware Escrow.
The Southern Tennessee Sale, St. Mary's Sale and the Lower Delaware Sale are collectively referred to herein as the "1997 Sales Transactions." The 1997 Sales Transactions were approved by the Limited Partners at a special meeting that occurred on March 26, 1997.
The Partnership used proceeds from the 1997 Sales Transactions to pay disposition fees of $2,778,000 to Cablevision, repay debt and related accrued interest of $8,652,000, and make distributions to its General and Limited Partners during the third quarter of 1997 of $747,000 and $74,002,000 ($370 per Unit for Limited Partners of record as of July 1, 1997), respectively. See note 5.
(continued)
II-26
AMERICAN CABLE TV INVESTORS 5, LTD. (A Colorado Limited Partnership)
Notes to Financial Statements
On August 12, 1998, the Partnership entered into an agreement that provides for the sale of its cable television system located in and around Riverside, California ("Riverside" or the "Riverside System") to Century Communications Corp. ("Century"), an unaffiliated third party, for a cash sales price of $33,000,000, subject to certain adjustments (the "Riverside Sale"). On January 1, 1999, Century assigned its interest in the Riverside Sale to Century Valley Cable Corp., a wholly-owned subsidiary of Century. Pursuant to the asset purchase agreement, $1,500,000 of such sales price will be subject to indemnifiable claims for 180 days following consummation of the Riverside Sale.
The Riverside Sale was approved by the Limited Partners at a special meeting that occurred on December 11, 1998. Subject to the receipt of regulatory approvals and satisfaction or waiver of customary conditions to closing, consummation of the Riverside Sale is expected to occur during the second quarter of 1999.
In the event that the Riverside Sale is consummated, of which there can be no assurance, the Partnership will have sold all of its assets (other than cash and funds held in escrow) and, pursuant to the Partnership's limited partnership agreement, will ultimately be dissolved and terminated. Assuming the Riverside Sale and the dissolution and liquidation of the Partnership had occurred on December 31, 1998, the Partnership estimates that the pro forma distribution to Limited Partners would have been $228 per $500 Unit. The Partnership anticipates that an initial distribution will be made to its partners as soon as practicable after the date of the closing of the Riverside Sale. It is expected that a final liquidating distribution will be made as soon as practicable after all funds held in escrow have been released to the Partnership, subject to the receipt of any indemnifiable claims. No assurance can be given as to the timing or amount of such distributions.
In the event that the Riverside Sale is not consummated, it is currently the General Partner's intention to seek a substitute buyer for the Riverside System. There is no assurance that the General Partner could arrange for a substitute sale transaction for the Riverside System at an appropriate price or on terms acceptable to the Partnership. If the General Partner's efforts in arranging a substitute sale transaction prove to be unsuccessful, the General Partner would continue to operate the Riverside System.
(continued)
II-27
AMERICAN CABLE TV INVESTORS 5, LTD. (A Colorado Limited Partnership)
Notes to Financial Statements
In August 1998, TCIC and Century signed a definitive agreement to establish a joint venture that will combine multiple cable television systems in Southern California (the "Joint Venture"). Among those systems to be contributed to the Joint Venture by TCIC is the cable television system serving customers in Redlands, California (the "Redlands System"). The Riverside System currently utilizes office facilities, personnel and certain cable distribution assets (including the headend) of the Redlands System. In the event the Riverside Sale is consummated, the Riverside System is among those systems to be contributed to the Joint Venture by Century. TCIC will have a 25% interest in the Joint Venture, which will be managed by Century. In the event that the Joint Venture is consummated prior to the Riverside Sale, or the Joint Venture is consummated and the Riverside Sale is not consummated, Cablevision will continue to manage the Riverside System. The Partnership has agreed that in the event the Joint Venture is consummated prior to the Riverside Sale, Cablevision may engage the Joint Venture to perform all or some portion of the day-to-day management of the Riverside System. See note 1.
Riverside's total assets were $13,873,000 and $16,841,000 as of December 31, 1998 and 1997, respectively. The following table sets forth the revenue for each of the Partnership's cable television systems (amounts in thousands):
(3) Debt ----
During the year ended December 31, 1997, the Partnership used cash proceeds from the Southern Tennessee Sale to repay all amounts outstanding under the bank credit facility. In connection with such repayment, the Partnership also terminated the bank credit facility.
(4) Investment in Newport News --------------------------
Net earnings and net losses of Newport News were allocated and distributions were made to the Partnership and ACT 4 in the ratio of their respective ownership interests. Newport News was sold on January 1, 1996 for cash proceeds of $121,886,000. As a result of the Newport News Sale, Newport News was liquidated in 1996. See note 2.
(continued)
II-28
AMERICAN CABLE TV INVESTORS 5, LTD. (A Colorado Limited Partnership)
Notes to Financial Statements
Newport News Cablevision Associates, L.P. -----------------------------------------
Condensed Consolidated Statement of Operations
(5) Transactions with Related Parties ---------------------------------
The Partnership purchases programming services from affiliates of TCI. The charges, which generally approximate such TCI affiliates' cost and are based upon the number of customers served by the Partnership, aggregated $2,201,000, $3,647,000 and $5,576,000 in 1998, 1997 and 1996, respectively.
The Partnership has a management agreement with Cablevision whereby Cablevision is responsible for performing all services necessary for the management of the Partnership's cable television systems. As compensation for these services, the Partnership pays a management fee equal to 6% of gross revenue, as defined in the management agreement (through January 17, 1996, 5-1/2% to Cablevision and 1/2% to Presidio Cable IV Corp., a subsidiary of Presidio). Such fees amounted to $573,000, $975,000 and $1,672,000 during the years ended December 31, 1998, 1997 and 1996, respectively. As a result of ICC's withdrawal as a general partner on January 17, 1996, Cablevision has received the entire 6% management fee since January 17, 1996. See note 1.
The Partnership also reimburses Cablevision for direct out-of-pocket and indirect expenses allocable to the Partnership and for certain personnel employed on a full- or part-time basis to perform accounting, marketing, technical, or other services. Such reimbursements amounted to $207,000, $297,000 and $487,000 in 1998, 1997 and 1996, respectively.
(continued)
II-29
AMERICAN CABLE TV INVESTORS 5, LTD. (A Colorado Limited Partnership)
Notes to Financial Statements
Riverside shares office facilities, personnel and certain distribution assets with the Redlands System. As a result, the majority of Riverside's operating and administrative salaries and expenses are charged to Riverside based upon Riverside's estimated utilization of such office facilities and personnel. During the years ended December 31, 1998, 1997 and 1996, Riverside's operating and administrative salaries and expenses aggregated $2,402,000, $2,216,000 and $2,350,000, respectively.
ACT 5 is obligated to pay a disposition fee to Cablevision equal to 3% of the gross proceeds from the sale of any cable television system owned by ACT 5. This fee is due and payable at the time the cable television system is sold if the consideration received is greater than its adjusted cost, as defined in ACT 5's limited partnership agreement. In connection with the 1997 Sales Transactions, disposition fees of $2,778,000 were paid to Cablevision.
Amounts due to related parties, which represent non-interest-bearing payables to TCI and its affiliates, consist of the net effect of cash advances and certain intercompany expense allocations.
Amounts due from related parties bear interest at variable rates (5.0% at December 31, 1998). Interest earned on amounts due from TCI and its affiliates was $120,000 during the year ended December 31, 1998, and was not significant for the years ended December 31, 1997 and 1996.
(6) Commitments and Contingencies -----------------------------
ACT 5 has contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible that ACT 5 may be required to make payments upon conclusion of such matters, an estimate of any loss or range of loss cannot be made. In the opinion of management, it is expected that amounts, if any, which may be required to satisfy such contingencies will not have a material effect upon the Partnership's financial condition.
The Partnership leases certain property and equipment under operating leases. The Partnership's lease expense aggregated $146,000, $344,000 and $539,000 in 1998, 1997 and 1996, respectively, including $4,000, $82,000 and $199,000 paid under pole rental agreements which are terminable on short notice by either party. Riverside's lease expense aggregated $146,000, $214,000 and $187,000 in 1998, 1997 and 1996, respectively, including $4,000, $19,000 and $25,000 paid under pole rental agreements in 1998, 1997 and 1996, respectively. Management expects that in the normal course of business, Riverside's leases that expire will be renewed or replaced by other leases.
(continued)
II-30
AMERICAN CABLE TV INVESTORS 5, LTD. (A Colorado Limited Partnership)
Notes to Financial Statements
(7) Year 2000 Costs - --- ---------------
In addition to the property and equipment owned by the Riverside System, certain office facilities, personnel, and cable distribution assets of the Redlands System, and certain software and equipment of TCI are utilized by the Riverside System (collectively, the "Riverside/Redlands Systems"). Accordingly, the assessment and remediation of ACT 5's year 2000 issues are dependent upon the assessment and remediation by TCI of certain of its own year 2000 issues and the year 2000 issues of the Riverside/Redlands Systems.
During 1998, TCI, in its capacity as the ultimate parent of the managing agent of ACT 5, continued its comprehensive effort to assess and remediate the Riverside/Redlands Systems' computer and other systems and related software and equipment to ensure such systems, software and equipment recognize, process and store information in the year 2000 and beyond. TCI's year 2000 remediation efforts include an assessment of the Riverside/Redlands Systems' most critical systems, such as customer service and billing systems, headends and other cable plant, business support operations, and other equipment and facilities. TCI also continued its efforts to verify the year 2000 readiness of ACT 5's important suppliers and vendors.
ACT 5's year 2000 remediation efforts are being managed by the year 2000 Program Management Office ("PMO") of TCI. The PMO is responsible for overseeing, coordinating and reporting on ACT 5's year 2000 remediation efforts. As described in note 1, AT&T and TCI have agreed to a merger. Although no assurance can be given, management of TCI does not anticipate that such merger will have a detrimental impact on the Riverside/Redlands Systems' year 2000 assessment and remediation efforts.
(continued)
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AMERICAN CABLE TV INVESTORS 5, LTD. (A Colorado Limited Partnership)
Notes to Financial Statements
During 1998, TCI continued its survey of significant third-party vendors and suppliers whose systems, services or products are important to ACT 5's operations (e.g., the suppliers of set-top devices and the provider of ACT 5's billing services). The year 2000 readiness of these providers is critical to continued provision of cable services by ACT 5.
In addition to the survey process described above, TCI has identified ACT 5's most critical supplier/vendor relationships and has instituted a verification process to determine such vendors' year 2000 readiness. Such verification may include reviewing the vendors' test and other data and engaging in regular conferences with the vendors' year 2000 team. TCI is also requiring testing to validate the year 2000 compliance of certain critical products and services.
(continued)
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AMERICAN CABLE TV INVESTORS 5, LTD. (A Colorado Limited Partnership)
Notes to Financial Statements
Year 2000 expenses and capital expenditures incurred during the year ended December 31, 1998 were not material. Although no assurance can be given, management of ACT 5 currently expects total estimated costs associated with year 2000 remediation efforts to be approximately $200,000. Such amount is exclusive of replacement costs associated with noncompliant information technology ("IT") systems incurred by TCI on behalf of ACT 5. Additionally, ACT 5 is not deferring any planned IT projects due to year 2000 remediation costs.
The failure to correct a material year 2000 problem in the Redlands System could result in an interruption of ACT 5's provision of cable service through the Riverside System. There can be no assurance that ACT 5's systems, the Riverside/Redlands Systems, or the systems of other companies on which ACT 5 relies will be converted in time or that any such failure to convert by ACT 5 or other companies will not have a material adverse effect on its financial position, results of operations, or cash flows.
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PART III.
Item 10.
Item 10. Directors and Executive Officers of the Registrant. - -------- --------------------------------------------------
As the Partnership has no directors or officers of its own, all of the Partnership's major decisions are made by IR-TCI whose general partner is TCIV 5. Until its withdrawal by letter dated January 17, 1996, ICC was also a general partner of the General Partner.
The Partnership has entered into a management agreement with Cablevision, pursuant to which Cablevision is responsible for managing the day-to-day operations of the Partnership's cable television systems.
As of February 1, 1999, the following executive officers and directors of TCIV 5 operate IR-TCI:
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(1) Directors of TCIV 5 serve until their successors are appointed and qualified.
There are no family relations, of first cousin or closer, among the individuals named above, by blood, marriage or adoption.
During the past five years, none of the persons named above has had any involvement in such legal proceedings as would be material to an evaluation of that person's ability or integrity, except as noted above.
Pursuant to section 16(a) of the Securities Exchange Act of 1934, as amended, the officers and directors of the General Partner are required to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the "Commission"). Officers and directors are required by regulation of the Commission to furnish the Partnership with copies of all Section 16(a) forms filed.
Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons that no Forms 5 were required for those persons, the Partnership believes that, during the fiscal year ended December 31, 1998, all applicable filing requirements were complied with.
Item 11.
Item 11. Executive Compensation. - -------- ----------------------
The Partnership pays no direct compensation to the individuals named above, but instead pays for their services through management and other fees paid to Cablevision. See Certain Relationships and Related Transactions below. ----------------------------------------------
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Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management. - -------- --------------------------------------------------------------
No General or Limited Partner of the Partnership owns more than 5% of the Units.
None of the individuals referred to in Item 10 above owns (i) any Units of the Partnership or (ii) more than 1% of the outstanding shares of TCI, the ultimate parent and owner, directly or indirectly, of all of the voting stock of TCIV 5.
Item 13.
Item 13. Certain Relationships and Related Transactions. - -------- ----------------------------------------------
The Partnership purchases programming services from affiliates of TCI. In 1998, the charges, which generally approximate such TCI affiliates' cost and are based upon the number of subscribers served by the Partnership, aggregated $2,201,000.
Under a management agreement with Cablevision, the Partnership is charged a management fee of 6% of gross revenue, as defined in the management agreement. Such fees aggregated $573,000 in 1998. Cablevision is also reimbursed for direct out-of-pocket and indirect expenses allocable to the Partnership, and for certain personnel employed on a full- or part-time basis to perform accounting, marketing, technical, or other services. Such reimbursements aggregated $207,000 in 1998.
Riverside shares office facilities, personnel and certain distribution assets with the Redlands System. As a result, the majority of Riverside's operating and administrative salaries and expenses are allocated based upon Riverside's estimated utilization of such office facilities and personnel. During the year ended December 31, 1998, Riverside's operating and administrative salaries and expenses aggregated $2,402,000.
At December 31, 1998, the Partnership owed $1,140,000 to TCI and its affiliates. Such amounts are non-interest-bearing and consist of the net effect of cash advances and certain intercompany expense allocations.
Amounts due from related parties bear interest at variable rates (5.0% at December 31, 1998). Interest earned on amounts due from TCI and its affiliates was $120,000 during the year ended December 31, 1998.
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PART IV.
Item 14.
Item 14. Exhibits, Financial Statements and Financial Statement Schedules - -------- ---------------------------------------------------------------- and Reports on Form 8-K. ------------------------
IV-1
(a) (3) Exhibits --------
The following exhibits are filed herewith or incorporated by reference herein (according to the number assigned to them in Item 601 of Regulation S-K), as noted:
3 - Articles of Incorporation and Bylaws:
Limited Partnership Agreement, incorporated by reference to Exhibit A to Prospectus filed pursuant to Rule 424(b) as part of Registration Statement 33-12064.
Limited Partnership Agreement of General Partner, incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1987 (Commission File Number 0-16784).
10 - Material Contracts:
Management Agreement between Cablevision and the Partnership, incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1987 (Commission File Number 0-16784).
Acquisition and Disposition Services Agreement between Cablevision and the Partnership, incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1987 (Commission File Number 0-16784).
Consulting Agreement, re: the Partnership between Cablevision and Presidio, incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1987 (Commission File Number 0- 16784).
Asset Purchase Agreement by and between American Cable TV Investors 5, Ltd. and Gans Multimedia Partnership dated as of November 27, 1996, incorporated by reference to the Partnership's Current Report on Form 8-K filed February 11, 1997.
Asset Purchase Agreement by and between American Cable TV Investors 5, Ltd. and Rifkin Acquisition Partners, L.L.L.P. dated as of November 29, 1996, incorporated by reference to the Partnership's Current Report on Form 8-K filed February 11, 1997.
Asset Purchase Agreement by and between American Cable TV Investors 5, Ltd. and Mediacom LLC dated as of December 24, 1996, incorporated by reference to the Partnership's Current Report on Form 8-K filed February 11, 1997.
Asset Purchase Agreement by and between American Cable TV Investors 5, Ltd. and Century Communications Corp. dated as of August 12, 1998, incorporated by reference to the Partnership's Current Report on Form 8-K filed August 27, 1998.
First Amendment, dated as of November 11, 1998, to Asset Purchase Agreement dated as of August 12, 1998, by and among American Cable TV Investors 5, Ltd. And Century Communications Corp.
IV-2
27 - Financial Data Schedule.
(b) Reports on Form 8-K filed during the quarter ended December 31, 1998:
None.
IV-3
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Partnership has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AMERICAN CABLE TV INVESTORS 5, LTD., A Colorado Limited Partnership By: IR-TCI PARTNERS V, L.P., Its General Partner
By: TCI VENTURES FIVE, INC., Its General Partner
By: /s/William R. Fitzgerald March 5, 1999 ------------------------ William R. Fitzgerald President and Director - TCI Ventures Five, Inc. (Principal Executive Officer)
Pursuant to the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Partnership and in the capacities and on the dates indicated:
IV-4
IV-5
AMERICAN CABLE TV INVESTORS 5, LTD.
EXHIBIT INDEX -------------
The following exhibits are filed herewith or incorporated by reference (according to the number assigned to them in Item 601 of Regulation S-K), as noted:
3 - Articles of Incorporation and Bylaws:
Limited Partnership Agreement, incorporated by reference to Exhibit A to Prospectus filed pursuant to Rule 424(b) as part of Registration Statement 33-12064.
Limited Partnership Agreement of General Partner, incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1987 (Commission File Number 0-16784).
10 - Material Contracts:
Management Agreement between Cablevision and the Partnership, incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1987 (Commission File Number 0-16784).
Acquisition and Disposition Services Agreement between Cablevision and the Partnership, incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1987 (Commission File Number 0-16784).
Consulting Agreement, re: the Partnership between Cablevision and Presidio, incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1987 (Commission File Number 0- 16784).
Asset Purchase Agreement by and between American Cable TV Investors 5 Ltd. and Gans Multimedia Partnership dated as of November 27, 1996, incorporated by reference to the Partnership's Current Report on Form 8-K filed February 11, 1997.
Asset Purchase Agreement by and between American Cable TV Investors 5 Ltd. and Rifkin Acquisition Partners, L.L.L.P. dated as of November 29, 1996, incorporated by reference to the Partnership's Current Report on Form 8-K filed February 11, 1997.
Asset Purchase Agreement by and between American Cable TV Investors 5, Ltd. and Mediacom LLC dated as of December 24, 1996, incorporated by reference to the Partnership's Current Report on Form 8-K filed February 11, 1997.
Asset Purchase Agreement by and between American Cable TV Investors 5, Ltd. and Century Communications Corp. dated as of August 12, 1998, incorporated by reference to the Partnership's Current Report on Form 8-K filed August 27, 1998.
First Amendment, dated as of November 11, 1998, to Asset Purchase Agreement dated as of August 12, 1998, by and among American Cable TV Investors 5, Ltd. And Century Communications Corp.
27 - Financial Data Schedule.