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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File No. 0-16784
AMERICAN CABLE TV INVESTORS 5, LTD.
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
State of Colorado 84-1048934
- --------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9197 South Peoria Street
Englewood, Colorado 80112
- --------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (720) 875-4000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
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PART I - FINANCIAL INFORMATION
AMERICAN CABLE TV INVESTORS 5, LTD.
(A Colorado Limited Partnership)
Balance Sheet
(unaudited)
(see note 2)
March 31, December 31,
1999 1998
---------------- ----------------
Assets amounts in thousands
Cash and cash equivalents (note 4) $ 15,729 16,134
Trade and other receivables, net of allowance for doubtful accounts 473 381
Property and equipment:
Distribution systems 18,905 18,610
Support equipment and buildings 1,478 1,473
---------------- ----------------
20,383 20,083
Less accumulated depreciation 12,669 12,269
---------------- ----------------
7,714 7,814
---------------- ----------------
Franchise costs and other intangibles 24,649 24,649
Less accumulated amortization 19,596 19,052
---------------- ----------------
5,053 5,597
---------------- ----------------
Funds held in escrow (note 6) 494 494
Other assets, net of accumulated amortization 63 81
---------------- ----------------
$ 29,526 30,501
================ ================
Liabilities and Partners' Equity
Accounts payable and accrued liabilities $ 231 275
Other liabilities 628 639
Amounts due to related parties (note 5) 399 1,140
---------------- ----------------
Total liabilities 1,258 2,054
---------------- ----------------
Partners' equity (deficit):
General partner (3,019) (3,017)
Limited partners 31,287 31,464
---------------- ----------------
Total partners' equity 28,268 28,447
---------------- ----------------
Commitments and contingencies (notes 2, 6 and 7)
$ 29,526 30,501
================ ================
See accompanying notes to financial statements.
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AMERICAN CABLE TV INVESTORS 5, LTD.
(A Colorado Limited Partnership)
Statements of Operations
(unaudited)
(see note 2)
Three months ended
March 31,
-----------------------------
1999 1998
------------ ------------
amounts in thousands,
except unit amounts
Revenue $ 2,527 2,309
Operating costs and expenses:
Programming (primarily from
related parties - note 5) 611 558
Operating (including allocations
from related parties - note 5) 283 237
Selling, general and administrative (including charges from related
parties - note 5) 1,057 811
Depreciation and amortization 944 1,026
------------ ------------
Total operating expenses 2,895 2,632
------------ ------------
Operating loss (368) (323)
Other income (expense):
Interest income 189 120
Write-off of deferred loan costs -- (202)
------------ ------------
Net loss $ (179) (405)
============ ============
Net loss per limited partnership unit ("Unit") (note 3) $ (0.89) (2.00)
============ ============
Limited partnership units outstanding 200,005 200,005
============ ============
See accompanying notes to financial statements.
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AMERICAN CABLE TV INVESTORS 5, LTD.
(A Colorado Limited Partnership)
Statement of Partners' Equity
Three months ended March 31, 1999
(unaudited)
(see note 2)
General Limited
partner partners Total
--------------- --------------- ---------------
amounts in thousands
Balance at January 1, 1999 $ (3,017) 31,464 28,447
Net loss (2) (177) (179)
--------------- --------------- ---------------
Balance at March 31, 1999 $ (3,019) 31,287 28,268
=============== =============== ===============
See accompanying notes to financial statements.
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AMERICAN CABLE TV INVESTORS 5, LTD.
(A Colorado Limited Partnership)
Statements of Cash Flows
(unaudited)
(see note 2)
Three months ended
March 31,
-----------------------------
1999 1998
------------- -------------
amounts in thousands
(see note 4)
Cash flows from operating activities:
Net loss $ (179) (405)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 944 1,026
Write-off of deferred loan costs -- 202
Changes in operating assets and liabilities:
Net change in receivables and other assets (74) 137
Net change in accounts payable and accrued liabilities, other
liabilities and amounts due to related parties (796) (8,445)
------------- -------------
Net cash used in operating activities (105) (7,485)
------------- -------------
Cash flows from investing activities:
Capital expended for property and equipment (300) (53)
Other investing activities -- (11)
------------- -------------
Net cash used in investing activities (300) (64)
------------- -------------
Cash flows from financing activities -- --
------------- -------------
Net change in cash and cash
equivalents (405) (7,549)
Cash and cash equivalents:
Beginning of period 16,134 17,711
------------- -------------
End of period $ 15,729 10,162
============= =============
See accompanying notes to financial statements.
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AMERICAN CABLE TV INVESTORS 5, LTD.
(A Colorado Limited Partnership)
Notes to Financial Statements
March 31, 1999
(unaudited)
(1) Basis of Financial Statement Preparation
The accompanying financial statements of American Cable TV Investors
5, Ltd. ("ACT 5" or the "Partnership") are unaudited. In the opinion
of management, all adjustments (consisting only of normal recurring
accruals) have been made which are necessary to present fairly the
financial position of the Partnership as of March 31, 1999 and its
results of operations for the three months ended March 31, 1999 and
1998. The results of operations for any interim period are not
necessarily indicative of the results for the entire year.
These financial statements should be read in conjunction with the
financial statements and related notes thereto included in the
Partnership's December 31, 1998 Annual Report on Form 10-K.
The Partnership's general partner is IR-TCI Partners V, L.P. ("IR-TCI"
or the "General Partner"), a Colorado limited partnership. The general
partner of IR-TCI is TCI Ventures Five, Inc., 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.
On March 9, 1999, AT&T Corp. ("AT&T") acquired TCI in a merger (the
"AT&T Merger"). In the AT&T Merger, TCI became a subsidiary of AT&T.
Immediately prior to the AT&T Merger, TCI restructured its ownership
of certain of its subsidiaries, including the merger of its
subsidiary, TCI Communications, Inc. ("TCIC") into TCI. The AT&T
Merger is not expected to have a material effect on the Partnership's
results of operations or financial condition.
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.
Certain prior period amounts have been reclassified for comparability
with the 1999 presentation.
(continued)
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AMERICAN CABLE TV INVESTORS 5, LTD.
(A Colorado Limited Partnership)
Notes to Financial Statements
(2) Pending Asset Sale
On August 12, 1998, the Partnership entered into an agreement that
provides for the sale of its remaining 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"). 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. 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.
The Riverside Sale was approved by the Partnership's limited partners
("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 March
31, 1999, the Partnership estimates that the pro forma distribution to
Limited Partners would have been $229 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)
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AMERICAN CABLE TV INVESTORS 5, LTD.
(A Colorado Limited Partnership)
Notes to Financial Statements
In August 1998, TCI 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 TCI 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. TCI 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.
(3) Allocation of Net Earnings and Net Losses
Net earnings and net losses shall be allocated 99% to the 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
distributions have been made which 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.
Net loss per Unit is calculated by dividing net loss attributable to
the Limited Partners by the number of Units outstanding during each
period.
(4) Supplemental Disclosure of Cash Flow Information
The Partnership considers investments with original maturities of
three months or less to be cash equivalents. At March 31, 1999,
$15,218,000 of the Partnership's cash and cash equivalents was
invested in money market funds.
(continued)
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AMERICAN CABLE TV INVESTORS 5, LTD.
(A Colorado Limited Partnership)
Notes to Financial Statements
(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 $609,000 and $553,000 for the three months ended March 31,
1999 and 1998, 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.
Such fees amounted to $152,000 and $134,000 for the three months ended
March 31, 1999 and 1998, respectively.
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 $67,000 and $33,000 for the three months ended March 31, 1999 and
1998, respectively.
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 three months ended
March 31, 1999 and 1998, Riverside's operating and administrative
salaries and expenses amounted to $600,000 and $583,000, respectively.
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 charges.
(continued)
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AMERICAN CABLE TV INVESTORS 5, LTD.
(A Colorado Limited Partnership)
Notes to Financial Statements
(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.
On April 1, 1997, the Partnership sold its cable television system
located in and around Shelbyville and Manchester, Tennessee (the
"Southern Tennessee System") to Rifkin Acquisition Partners, L.L.L.P.
("Rifkin"), an unaffiliated third party, for an adjusted sales price
of $19,647,000. Pursuant to the asset purchase agreement, $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.
(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 the three months ended March 31, 1999, 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 March 31, 1999, it was comprised of a
230-member, full-time staff, accountable to executive management of
TCI.
(continued)
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AMERICAN CABLE TV INVESTORS 5, LTD.
(A Colorado Limited Partnership)
Notes to Financial Statements
During the three months ended March 31, 1999, 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.
Year 2000 expenses and capital expenditures incurred during the three
months ended March 31, 1999 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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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the Partnership's Management's Discussion and Analysis of Financial
Condition and Results of Operations included in the Partnership's Annual Report
on Form 10-K for the year ended December 31, 1998. The following discussion
focuses on material changes in the trends, risks and uncertainties affecting
the Partnership's results of operations and financial condition. Reference
should also be made to the Partnership's financial statements included herein.
Certain statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. 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 in this Form 10-Q related to year 2000 are hereby denominated as
"Year 2000 Statements" within the meaning of the Year 2000 Information and
Readiness Disclosure Act.
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AT&T Merger
On March 9, 1999, AT&T acquired TCI in a merger. In the AT&T Merger,
TCI became a subsidiary of AT&T. Immediately prior to the AT&T Merger, TCI
restructured its ownership of certain of its subsidiaries, including the merger
of its subsidiary, TCIC into TCI. The AT&T Merger is not expected to have a
material effect on the Partnership's results of operations or financial
condition.
Pending Asset Sale
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.
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. On January 1, 1999, Century assigned its
interest in the Riverside Sale to Century Sub.
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 March 31, 1999, the Partnership estimates that the pro forma
distribution to Limited Partners would have been $229 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, TCI 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 TCI 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. TCI 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 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 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. The FCC's authority to regulate any cable programming
service tier ("CPST") expired on March 31, 1999. At March 31, 1999, 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 three months ended March 31, 1999, approximately 33% of the
Riverside System's revenue was derived from Regulated Services (exclusive of
CPST). 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 multi-channel multi-point distribution system ("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 customer bases of
Riverside, see The Riverside System below.
In addition to MMDS, Riverside competes with other distributors of the
same or similar video programming as that offered by its cable system. Direct
broadcast satellite ("DBS") has emerged as significant competition to cable
television systems. 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. The 1996 Telecom
Act allows local telephone companies, including the regional bell operating
companies, 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. 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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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 is providing digital video services.
The primary capital cost of digital video services is the purchase and
installation of digital set-top devices. Accordingly, the capital costs
incurred is dependent upon the number of digital set-top devices required. The
Riverside System had approximately 1,900 subscribers to digital video services
at March 31, 1999. Capital costs incurred by the Riverside System during the
three months ended March 31, 1999 related to digital video services were not
significant. The Riverside System plans 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.
The Riverside System
The following table sets forth information for the Riverside System
for the periods indicated (amounts in thousands):
March 31, March 31,
1999 1998
----------- ----------
Basic Customers (1) 19.8 19.0
Premium Subscriptions (1)(2) 20.1 20.6
Three months ended
March 31,
----------------------------------
1999 1998
----------- ----------
Revenue (3) $ 2,527 2,309
=========== ==========
Operating Cash Flow (4) $ 958 948
=========== ==========
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(1) From March 31, 1998 to March 31, 1999, Riverside experienced
an increase of 800 basic customers and a decrease of 500
premium subscriptions. Such decrease in premium subscriptions
is comprised of a 500 subscription decrease in traditional
premium subscriptions. The Partnership maintained a
relatively consistent number of "STARZ!" and "ENCORE"
subscriptions during this period. 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
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 customer 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.
At March 31, 1999 and 1998, the Riverside System passed approximately
31,800 and 31,500 homes, respectively.
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
the Riverside Sale will be consummated. See Pending Asset Sale 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/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 the three months ended March 31, 1999, 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 PMO of TCI. The PMO is responsible for overseeing, coordinating and
reporting on ACT 5's year 2000 remediation efforts. At March 31, 1999, it was
comprised of a 230-member, full-time staff, accountable to executive management
of TCI. 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 TCI as a whole, and that the
phase completion data set forth below for TCI 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 March 31, 1999, TCI's overall progress by phase was as follows:
Percentage of Year 2000 Expected Completion Date
Phase Projects Completed by Phase* -All Year 2000 Projects
- ----- ---------------------------- -----------------------
Phase 1-Assessment 85% May 1999
Phase 2-Remediation 48% July 1999
Phase 3-Testing 34% September 1999
Phase 4-Implementation 21% October 1999
- ---------------------
*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 TCI'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 May of 1999.
During the three months ended March 31, 1999, 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 three
months ended March 31, 1999 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 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.
Material Changes in Results of Operations
Revenue increased $218,000 or 9% for the three months ended March 31,
1999, as compared to the corresponding prior year period. Such increase in
revenue is primarily attributable to a $142,000 increase in basic revenue, a
$62,000 increase in pay-per-view revenue and an increase in equipment rental
revenue. Riverside experienced a 6% increase in its average basic rate and a 4%
increase in the number of average basic customers during the three months ended
March 31, 1999, as compared to the corresponding prior year period. Revenue from
premium services was relatively constant during the three month periods ended
March 31, 1999 and 1998. For additional information, see The Riverside System
and Regulation above.
Programming expense increased $53,000 or 9% for the three months ended
March 31, 1999, as compared to the corresponding prior year period. Such
increase is due to higher programming rates. It is anticipated that the
Partnership's programming costs will continue to increase in future periods.
Operating expenses increased $46,000 or 19% for the three months ended
March 31, 1999, as compared to the corresponding prior year period. Such
increase is due to increased labor costs associated with the deployment of
digital video services during the second quarter of 1998.
Selling, general and administrative expenses increased $246,000 or 30%
for the three months ended March 31, 1999, as compared to the corresponding
prior year period. Such increase is due primarily to increased costs associated
with the deployment of digital products during the second quarter of 1998,
additional expenses related to the mailing of information to Limited Partners
during the first quarter of 1999 and increased billing service fees.
Depreciation and amortization expense decreased $82,000 or 8% for the
three months ended March 31, 1999, as compared to the corresponding prior year
period. Amortization expense for the 1998 period includes $92,000 attributable
to the year ended December 31, 1997. Exclusive of such amount, depreciation and
amortization was relatively constant during the three month periods ended March
31, 1999 and 1998.
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Other Income and Expense
Interest income increased $69,000 or 58% for the three months ended
March 31, 1999, as compared to the corresponding prior year period. Such
increase is primarily due to a higher average cash and cash equivalent balance.
The increase in the average cash and cash equivalent balance is primarily the
result of the release to the Partnership of funds held in escrow during 1998.
During the first quarter of 1998, the Partnership wrote off $202,000
of deferred loan costs that were related to debt that was repaid in 1997.
Material Changes in Financial Condition
As previously described under Pending Asset Sale, 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 March 31, 1999, the Partnership estimates that the pro forma
distribution to Limited Partners would have been $229 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.
Prior to the release of the Southern Tennessee Escrow, Rifkin filed a
claim against such 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 three months ended March 31, 1999, the Partnership used
cash on hand to fund operating and investing activities of $105,000 and
$300,000, respectively. See the Partnership's statements of cash flows included
in the accompanying financial statements.
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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 Competition and The Riverside System.
The Partnership anticipates that cash on hand will be sufficient to
fund estimated capital expenditures (exclusive of any significant technological
improvements, as described under Competition), and to meet its other liquidity
requirements.
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AMERICAN CABLE TV INVESTORS 5, LTD.
(A Colorado Limited Partnership)
PART II - OTHER INFORMATION
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(27) Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended March 31,
1999:
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
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.,
A General Partner
Date: May 13, 1999 By: /s/ Ann M. Koets
----------------------------
Ann M. Koets
Vice President
(Chief Accounting Officer)
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EXHIBIT INDEX
The following exhibits are filed herewith or are incorporated by reference
herein (according to the number assigned to them in Item 601 of Regulation S-K)
as noted:
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
(27) American Cable TV Investors 5, LTD. Financial Data Schedule.