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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _____ to _____
Commission File No. 0-16784
AMERICAN CABLE TV INVESTORS 5, LTD.
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(Exact name of Registrant as specified in its charter)
State of Colorado 84-1048934
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
5619 DTC Parkway
Englewood, Colorado 80111
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 267-5500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
200,005 Limited Partnership Units Sold to Investors at $500 per Unit
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 of the Securities Exchange Act of 1934
during the preceding 12 months; and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant. N/A
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AMERICAN CABLE TV INVESTORS 5, LTD.
1996 ANNUAL REPORT ON FORM 10-K
Table of Contents
Page
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PART I
Item 1. Business...................................................... I-1
Item 2. Properties.................................................... I-17
Item 3. Legal Proceedings............................................. I-17
Item 4. Submission of Matters to a Vote of Security Holders........... I-17
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters.................................. II-1
Item 6. Selected Financial Data....................................... II-2
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... II-3
Item 8. Financial Statements and Supplementary Data................... II-12
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................... II-12
PART III
Item 10. Directors and Executive Officers of the Registrant............ III-1
Item 11. Executive Compensation........................................ III-2
Item 12. Security Ownership of Certain Beneficial Owners
and Management............................................... III-2
Item 13. Certain Relationships and Related Transactions................ III-3
PART IV
Item 14. Exhibits, Financial Statements and Financial Statement
Schedules, and Reports on Form 8-K........................... IV-1
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PART I.
Item 1. Business.
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(a) General Development of Business
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American Cable TV Investors 5, Ltd. (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, 1996, 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 withdrawal by letter dated January 17, 1996,
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 has 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 at a price of
$500 per unit ("Unit").
At December 31, 1996, the Partnership owned four cable television
systems that were located in and around (i) Shelbyville and Manchester,
Tennessee ("Southern Tennessee" or the "Southern Tennessee System"), (ii)
Riverside, California ("Riverside" or the "Riverside System"), (iii) St. Mary's
County, Maryland ("St. Mary's" or the "St. Mary's System") and (iv) Lower
Delaware ("Lower Delaware" or the "Lower Delaware System"). The Partnership
also 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. ("ACT 4"), 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"). On March
29, 1996 the Partnership's share of the cash proceeds from the sale of the
Newport News System was used to fund a distribution to Limited Partners of $165
per Unit. See "Management's Discussion and Analysis of Financial Condition and
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Results of Operations - General - Partnership's Cable Systems" for certain
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financial and statistical data of the Partnership's cable television systems.
The Partnership is a party to three separate agreements for the sale
of the Southern Tennessee, St. Mary's and Lower Delaware Systems (collectively,
the "Proposed Asset Sales").
One agreement, dated November 27, 1996, provides for the sale of the
St. Mary's System to an unaffiliated third party for a cash sales price of
$30,637,000, subject to certain adjustments (the "St. Mary's Sale"). Pursuant
to the asset purchase agreement for the St. Mary's Sale, $766,000 of such sales
price has been placed in escrow as a deposit and will be subject to
indemnifiable claims for one year following consummation of the St. Mary's Sale.
I-1
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Another agreement dated November 29, 1996, provides for the sale of
the Southern Tennessee System to an unaffiliated third party for a cash sales
price of $19,750,000, subject to certain adjustments (the "Southern Tennessee
Sale"). Pursuant to the asset purchase agreement for the Southern Tennessee
Sale, $494,000 of such sales price has been placed in escrow as a deposit and
will be subject to indemnifiable claims for one year following consummation of
the Southern Tennessee Sale.
The other agreement, dated December 24, 1996, provides for the sale of
the Lower Delaware System to an unaffiliated third party for a cash sales price
of $43,100,000, subject to certain adjustments (the "Lower Delaware Sale").
Pursuant to the asset purchase agreement for the lower Delaware Sale, $1,078,000
of such sales price has been placed in escrow as a deposit and will be subject
to indemnifiable claims for one year following consummation of the Lower
Delaware Sale.
All of the Proposed Asset Sales were approved by the Partnership's
limited partners (the "Limited Partners") at a special meeting that occurred on
March 26, 1997. Subject to the receipt of regulatory approvals and other
closing conditions, consummation of the Proposed Asset Sales is expected to
occur during the second quarter of 1997. However, there is no assurance that
the Proposed Asset Sales will be consummated.
The Partnership has been marketing and continues to market for sale
the Riverside System. There is no assurance that the Partnership can arrange
for a sale of the Riverside System at an appropriate price or on terms
acceptable to the Partnership. If the Partnership is unable to arrange for a
sale of the Riverside System at an appropriate price or on terms acceptable to
the Partnership, the Partnership will continue to operate the Riverside System.
Although no assurance can be given, the Partnership currently anticipates that
any cash proceeds from the Proposed Asset Sales will not be used to fund the
Riverside System's capital expenditures or liquidity requirements. Any sale of
the Riverside System would be subject to Limited Partner approval.
I-2
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Assuming all of the Proposed Asset Sales had occurred on December 31,
1996 and that no amounts were used to fund capital expenditures or the liquidity
requirements of the Riverside System, it is estimated that the pro forma
distribution per Unit (the "Pro Forma Distribution Per Unit") would have been
$378. There is no assurance that any of the Proposed Asset Sales will be
consummated. The Partnership is unable to predict the amount that Limited
Partners would receive upon a sale of the Riverside System. The Pro Forma
Distribution Per Unit, which is based upon the Partnership's historical
financial position at December 31, 1996, does not reflect any contingent
liabilities that might arise subsequent to the date of this Annual Report on
Form 10-K, and is based on various assumptions with respect to transaction
related costs (including the payment of estimated disposition fees to
Cablevision of $2,805,000), sales price adjustments and other matters. As such,
the actual amounts distributed to Limited Partners may vary from the Pro Forma
Distribution Per Unit. As described below, the amount by which the Pro Forma
Distribution Per Unit would be reduced if one or more of the Proposed Asset
Sales does not close is dependent upon future events and circumstances. In the
event that any of the Proposed Asset Sales are not consummated, it is currently
the Partnership's intention to seek a substitute buyer for such system(s)
("Substitute Sales Transaction(s)"). There is no assurance that the Partnership
could arrange for a Substitute Sales Transaction(s) at an appropriate price or
on terms acceptable to the Partnership. If the Partnership's efforts in
arranging a Substitute Sales Transaction(s) prove to be unsuccessful, the
Partnership would evaluate market, competitive, regulatory, financial and other
conditions (relating to the cable television industry generally and to the
system(s) specifically) in order to determine whether it would be in the best
interest of the Partnership to use all or a portion of the available net cash
proceeds (after repaying debt as required by the terms of the Partnership's bank
credit facility and repaying any amounts due to TCI Communications, Inc., a
subsidiary of TCI, and its affiliates ("TCIC")) from any of the consummated
Proposed Asset Sales to fund all or a portion of any remaining cable television
system's(s') liquidity requirements, including non-discretionary capital
expenditures and necessary maintenance costs as well as the cost of implementing
technological advancements or improvements. Accordingly, the failure to
consummate one or more of the Proposed Asset Sales could delay and would reduce
the Pro Forma Distribution Per Unit. The Partnership anticipates that any
distributions to partners would be made as soon as practicable after the date of
the last closing of the Proposed Asset Sales. However, there is no assurance as
to the timing or amount of any such distributions. See note 2 to the
accompanying financial statements.
I-3
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(b) Financial Information about Industry Segments
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The Partnership operates in the cable television industry.
(c) Narrative Description of Business
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CABLE TELEVISION INDUSTRY
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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 currently converts as many as ten
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 sends the signal back down 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.
Currently, none of the Partnership's cable television systems offer such
service. However, the Riverside System is currently exploring the use of digital
compression technology. The Riverside System currently offers up to 61 channels
to its subscribers. Digital compression technology would offer subscribers the
opportunity to receive additional channels by leasing a digital set-top
converter box and purchasing available digital programming packages. Because
Riverside does not have available channel bandwith to support digital
compression technology, it is anticipated that the system would use six of its
current channels for digital compression technology. Accordingly, subscribers
who choose not to lease a digital set-top converter box and purchase available
digital programming packages would lose the ability to receive six channels
which they may currently receive such as pay-per-view channels and certain movie
channels. The competitive environment in the Riverside System could make
implementation of digital compression technology in the Riverside System
necessary. See "Competition."
Service Charges. The Partnership offers a limited "basic service"
(primarily comprised of local broadcast signals and public, educational and
governmental access channels) and an "expanded" tier (primarily comprised of
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 $9.00 to
$19.00 and the monthly service fee for the "expanded" tier ranges from $6.00 to
$13.00. The Partnership 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 monthly fee for Pay-TV
services generally ranges from $10.00 to $13.00 per service, except for certain
(i) movie or sports services (such as various regional sports networks and
certain pay-TV channels) offered separately at $1.00 to $5.00 per month, (ii)
pay-per-view movies, which are offered separately at $3.00 per movie and (iii)
pay-per-view events, which are 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 $60.00 is usually charged.
Monthly fees for basic 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. As noted below, the
Partnership's service offerings and rates were affected by rate regulations
issued by the Federal Communications Commission ("FCC") in 1993 and 1994. See
"Regulation and Legislation" below.
I-4
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Programming. The Partnership 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 Partnership 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 Partnership. The
Partnership will continue to purchase substantially all of its programming from
SSI, so long as the Partnership 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 Cable
Television Consumer Protection and Competition Act of 1992 (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.
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 subscribers; 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
Partnership's franchises also typically provide for periodic payments of fees,
generally 5% of revenue, to the governmental authority granting the franchise.
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. The Partnership's franchises have expiration dates
which range from 1997 to 2026 (2001 to 2006 for Riverside). Approximately 60%
of the Partnership's subscribers (83% of Riverside's subscribers) are served
pursuant to franchise agreements that have expiration dates that fall within
the next five years. See "Management's Discussion and Analysis of Financial
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Condition and Results of Operations - General - Regulation."
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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.
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 renewal when the operator's past performance
and proposal for future performance meet the standards established by the 1984
Cable Act. The Partnership believes that its cable television systems generally
have operated in a manner which satisfies such standards and allows for the
renewal of such franchises; however, there is no assurance that the franchises
for such systems will be successfully renewed as they expire.
I-5
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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. Both the 1992 Cable Act and the recently enacted
Telecommunications Act of 1996 (the "1996 Telecom Act") are designed to increase
competition in the cable television industry. See "Regulation and
Legislation."
There are alternative methods of distributing the same or similar
video programming offered by cable television systems. Further, these
technologies have been encouraged by Congress and the FCC to offer services in
direct competition with existing cable systems.
DBS. During 1996, the Partnership has experienced a competitive
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impact from medium power and higher power direct broadcast satellites ("DBS")
that use high frequencies to transmit signals that can be received by dish
antennas much smaller in size than traditional home satellite dishes ("HSDs").
Primestar Partners, L.P. broadcasts a multi-channel programming service via a
medium power communications satellite to HSDs of approximately 3 feet in
diameter. DirecTv, Inc., United States Satellite Broadcasting, and EchoStar
Communications Corp. ("EchoStar") transmit from high power satellites and
generally use smaller dishes to receive their signals. Alphastar, Inc. began
offering medium power service in the second quarter of 1996. On February 24,
1997, News Corp. and EchoStar announced that News Corp. will acquire a 50%
interest in EchoStar and that the companies will combine their DBS businesses
into a new company, which will operate under the name Sky. The two companies
contend that Sky, which is scheduled to launch in early 1998, will offer 500
channels of digital television, Internet services and local broadcast network
television signals, capable of reaching more than 50% of all television
households upon the launch of Sky and 75% of all television households by the
end of 1998. DBS operators have the right to distribute substantially all of
the significant cable television programming services currently carried by cable
television systems. Estimated DBS customers nationwide increased from 2.2
million at the end of 1995 to approximately 4.4 million at the end of 1996, and
the Partnership expects that competition from DBS will continue to grow.
DBS has advantages and disadvantages as an alternative means of
distributing video signals to the home. Among the advantages are that the
capital investment (although initially high) for the satellite and uplinking
segment of a DBS system is fixed and does not increase with the number of
subscribers receiving satellite transmissions; that DBS is not currently subject
to local regulation of service and prices or required to pay franchise fees; and
that the capital costs for the ground segment of a DBS system (the reception
equipment) are directly related to, and limited by, the number of service
subscribers. DBS's disadvantages presently include limited ability to tailor
the programming package to the interests of different geographic markets, such
as providing local news, other local origination services and local broadcast
stations; signal reception being subject to line of sight angles; and
technology which requires a customer to rent or own one set-top box (which is
currently significantly more expensive than a cable converter) for each
television on which they wish to view DBS programming.
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Although the effect of competition from these DBS services cannot be
specifically predicted, it is clear there has been significant growth in DBS
subscribers, 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. Further, the extensive national advertising of
DBS programming packages, including certain sports packages not currently
available on cable television systems, will likely continue the rapid growth in
DBS subscribers. DBS services are now available within all areas served by the
Partnership's cable television systems. See "Management's Discussion and
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Analysis of Financial Condition and Results of Operations - General -
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Competition."
Telephone Company Entry. The 1996 Telecom Act eliminated the
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statutory and regulatory restrictions that prevented telephone companies from
competing with cable operators for the provision of video services by any means.
See "Regulation and Legislation." 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 it will face substantial competition from
telephone companies for the provision of video services, whether it is through
the provision of wireless cable, or through the provision of upgraded telephone
networks. The Partnership assumes that all major telephone companies have
already entered or soon will enter the business of providing video services.
The Partnership is aware that one regional bell operating company has completed
installation of a fiber optic network within Lower Delaware's franchise areas.
The 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. The specific manner in which telephone company
provision of video services will be regulated is described under "Regulation and
Legislation."
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 competition in the delivery of video services.
Although long distance telephone companies had no legal prohibition on
the provision of video services, they have historically not been providers of
such services in competition with cable systems. However, such companies may
prove to be a source of competition in the future. The long distance companies
are expected to expand into local markets with local telephone and other
offerings (including video services) in competition with the regional bell
operating companies.
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MMDS/LMDS. Another alternative method of distribution is multi-
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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 systems can 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. The FCC has taken a series of actions intended to facilitate the
development of wireless cable systems as alternative means of distributing
video programming, including reallocating the use of certain frequencies to
these services and expanding the permissible use of certain channels reserved
for educational purposes. The FCC's actions enable a single entity to develop
an MMDS system with a potential of up to 35 channels, and thus compete more
effectively with cable television. Developments in digital compression
technology will significantly increase the number of channels that can be made
available from MMDS. Further, in 1995, several large telephone companies
acquired significant ownership in numerous MMDS companies (including the MMDS
operator that competes with Riverside). This infusion of money into the MMDS
industry was expected to accelerate its growth and its competitive impact.
However, in 1996 telephone company support of MMDS appeared to diminish as both
Bell Atlantic Corporation and NYNEX Corporation suspended their investments in
two major MMDS companies. For a discussion of the competitive effects of MMDS
operators on the Partnership, see "Regulation and Legislation - Cable Rate
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Regulation" and "Management's Discussion and Analysis of Financial Condition and
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Results of Operations - General - Competition and - Partnership's Cable
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Systems." 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 subscriber'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.
I-8
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Within the cable television industry, cable operators may compete with
other cable operators or others seeking franchises for competing cable
television systems at any time during the terms of existing franchises or upon
expiration of such franchises in expectation that the existing franchise will
not be renewed. The 1992 Cable Act promotes the granting of competitive
franchises. An increasing number of cities are exploring the feasibility of
owning their own cable systems in a manner similar to city-provided utility
services.
Private Cable. The Partnership also competes with Master Antenna
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Television ("MATV") systems and Satellite MATV ("SMATV") systems, which provide
multi-channel 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 is now considering new rules that would restrict
or eliminate the ability of cable operators to maintain ownership of cable
wiring inside multi-unit buildings, thereby potentially making it less expensive
for SMATV competitors to reach those customers.
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 that compete with all of the
Partnership's cable television systems, and the MMDS operator that competes with
Riverside, the Partnership has no basis upon which to estimate the number of
cable television companies and other entities with which it 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.
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The Partnership believes that, in the near term, the most effective
method to maintain the competitive position of its cable television systems
would be to deploy digital compression technology for premium services, while
retaining traditional analog service for basic services. This could be done in
those cable television systems which have available channel bandwith or if the
existing programming was digitized. Digital compression technology would
increase channel capacity and improve picture quality. Enhanced programming
could also be added to existing service by means of DBS. Such an approach would
probably be considered for those cable television systems which do not have
available channel bandwith but suffer from competitive threats in their service
area. Alternatively, the Partnership could replace coaxial trunk cable with
optical fiber and deploy digital compression technology in its cable television
systems. The cost of replacing coaxial trunk cable with optical fiber could be
significant. The Partnership is currently considering the deployment of digital
compression technology in the Riverside System but 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. Riverside uses a
headend of an affiliated cable television system. Accordingly, Riverside
could not proceed with the implementation of digital compression technology
unless such affiliated cable television system also implemented digital
compression technology. The Partnership would not proceed with the
implementation of any technological advancements or improvements without first
conducting additional analysis of the economic feasibility of such advancements
and improvements on a system-by-system basis. The Partnership has not
considered any advancements or improvements for the St. Mary's, Lower Delaware
and Southern Tennessee Systems due to the Proposed Asset Sales. However, in the
event that any of the Proposed Asset Sales are not consummated, the Partnership
would evaluate the need for advancements or improvements for that system(s).
The Partnership believes that its evaluation of the need for advancements or
improvements would focus primarily on whether a reasonable return could be
earned on the capital invested in any such improvements and the period of time
required to achieve such a return.
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. 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 Company's operations. This section briefly summarizes key
laws and regulations currently affecting the growth and operation of the
Partnership's cable systems.
I-10
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Cable Rate Regulation. The 1992 Cable Act imposed extensive rate
----------------------
regulation on the cable television industry. All cable systems are subject to
rate regulation, 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 local population subscribes to basic service) or the presence
(measured collectively as 50% availability, 15% subscriber 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.
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 public, educational and government ("PEG") access
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.
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 subscribers 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.
Under the FCC's rate regulations, the Partnership was required to
reduce its BST and CPST rates in 1993 and 1994, and has since had its rate
increases 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. It 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, although complaints about predatory
pricing still may be made to the FCC.
I-11
<PAGE>
The MMDS operator that is providing competing video services within
certain of Riverside's service areas was acquired by the local exchange carrier
in July 1995. The FCC will be conducting a rulemaking to clarify the statutory
language with respect to the expanded definition of "effective competition." If
the FCC rules were to indicate that the MMDS operator provides "effective
competition" to Riverside, the Partnership would take the appropriate steps to
attempt to deregulate Riverside's service rates. Even if Riverside's rates were
to be deregulated, the Partnership believes that competitive and other factors
may limit Riverside's ability to increase its service rates.
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 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. Review of the FCC's
initial interconnection order is now pending before the Eighth Circuit Court of
Appeals.
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 regional bell
operating companies, 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 providing video programming to
customers will be regulated as a traditional cable operator (subject to local
franchising and federal regulatory requirements), unless the LEC elects to
provide its programming via an "open video system" ("OVS"). LECs providing
service through an OVS can proceed without a traditional cable franchise,
although an OVS operator will be subject to general rights-of-way management
regulations and can be required to pay franchise fees to the extent it provides
cable services. 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.
I-12
<PAGE>
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
between cable operators and LECs in the same market. The 1996 Telecom Act
provides a few limited exceptions to this buyout prohibition. The "rural
exemption" permits buyouts where the purchased system serves an area with fewer
than 35,000 inhabitants outside an urban area, and the cable system plus any
other system in which the LEC has an interest do not represent 10% or more of
the LEC's telephone service area. The 1996 Telecom Act also provides the FCC
with the power to grant waivers of the buyout prohibition in cases where: (1)
the cable operator or LEC would be subject to undue economic distress; (2) the
system or facilities would not be economically viable; or (3) the
anticompetitive effects of the proposed transaction are clearly outweighed by
the effect of the transaction in meeting community needs. The LFA must approve
any such waiver.
Electric Utility Entry Into Telecommunications/Cable Television. The
---------------------------------------------------------------
1996 Telecom Act provides that registered utility holding companies and
subsidiaries may provide telecommunications services (including cable
television) 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.
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 ("attributable" for these purposes is defined as
a 5% or greater ownership interest or the existence of any common directors),
with an increase to 35% if the additional cable systems are minority controlled.
However, 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. If the ownership limits are determined on appeal to be constitutional,
they may affect the Partnership's ability to acquire interests in additional
cable systems.
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 first 75 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. Channels beyond the first 75
activated channels are not subject to such limitations, and the rules do not
apply to local or regional programming services.
I-13
<PAGE>
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 also eliminates the three year holding period required under the 1992 Cable
Act's "anti-trafficking" provision. 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. Either
option has a potentially adverse affect on the Partnership's business.
Additionally, cable systems are required to obtain retransmission consent for
all "distant" commercial television stations (except for commercial satellite-
delivered independent "superstations" such as WTBS). The constitutionality of
the must carry requirements has been challenged and is awaiting a decision from
the U.S. Supreme Court.
Access Channels. LFAs can include franchise provisions requiring
---------------
cable operators to set aside certain channels for public, educational and
governmental access programming. Federal law also requires a cable system with
36 or more channels to designate a portion of its 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 and
could make commercial leased access a more attractive option for third party
programmers.
"Anti-Buy Through" Provisions. Federal law requires each cable system
-----------------------------
to permit subscribers to purchase 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 December 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
Act precludes video programmers affiliated with cable companies from favoring
cable operators over competitors and requires such programmers to sell their
programming to other multichannel video distributors (such as DBS and MMDS).
This provision limits the ability of vertically integrated cable programmers to
offer exclusive programming arrangements to the Partnership.
I-14
<PAGE>
Other FCC Regulations. In addition to the FCC regulations noted
---------------------
above, there are other FCC regulations covering such areas as equal employment
opportunity, subscriber 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 is
expected to impose new Emergency Alert System requirements on cable operators in
1997. 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.
Two pending FCC proceedings of particular competitive concern involve
inside wiring and navigational devices. The former FCC proceeding is
considering ownership of cable wiring located inside multiple dwelling unit
("MDU") complexes. If the FCC concludes that such wiring belongs to, or can be
unilaterally acquired by, the MDU owner, it will become easier for MDU owners to
terminate service from the incumbent cable operator in favor of a new entrant.
The latter FCC proceeding is considering whether cable customers should be
permitted to purchase cable converters from third party vendors. If the FCC
concludes that such distribution is required, and does not make appropriate
allowances for signal piracy concerns, it may become 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
revenues 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 Partnership'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.
I-15
<PAGE>
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 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
-------
The Partnership has not expended material amounts on research and
development during the past fiscal year. Construction and maintenance materials
are available and acquired from a number of suppliers and are not deemed to be
in short supply.
Legislative, administrative and/or judicial action may alter portions
of the foregoing statements relating to competition and regulation.
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, 1996, 155 individuals were employed at the
Partnership's cable systems.
(d) Financial Information about Foreign and Domestic Operations and
---------------------------------------------------------------
Export Sales
------------
The Partnership has neither foreign operations nor export sales.
I-16
<PAGE>
Item 2. Properties.
- ------ ----------
At December 31, 1996, the Partnership's physical cable television
properties, which are located in Tennessee, California, Maryland and Delaware
consisted 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 an affiliated cable
television system. See note 5 to the accompanying financial statements.
The Partnership believes that its properties are suitable and adequate by
industry standards. However, in the event that the Proposed Asset Sales are not
consummated, the Partnership could be placed at a competitive disadvantage if it
were not to implement certain technological improvements to its cable television
systems. This is particularly true of the cable television systems operated by
Lower Delaware and St. Mary's, which systems (i) offer significantly fewer
channels, (ii) have experienced higher maintenance costs and (iii) provide a
lower quality picture than is currently attainable by state-of-the-art cable
television systems and DBS. 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 1996, $5.7 million in capital expenditures were made to improve and
expand the Partnership's cable systems. See "Management's Discussion and
----------------------------
Analysis of Financial Condition and Results of Operations - Liquidity and
- -------------------------------------------------------------------------
Capital Resources."
- -------------------
Item 3. Legal Proceedings.
- ------ -----------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
None.
I-17
<PAGE>
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- ------ ---------------------------------------------------------------------
In its public offering that was conducted from May of 1987 to February
of 1989, the Partnership sold 200,005 Units to the public at a price of $500 per
Unit. At December 31, 1996, there were approximately 12,800 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, 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.
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 has
entered into three separate agreements for the sale of the Southern Tennessee,
St. Mary's and Lower Delaware Systems. For a discussion of the potential use of
any proceeds from such proposed sales, see "Business -General Development of
---------------------------------
Business."
- --------
II-1
<PAGE>
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, 1996
are summarized as follows (such information should be read in conjunction with
the Partnership's financial statements included elsewhere herein):
<TABLE>
<CAPTION>
SUMMARY BALANCE SHEET DATA:
- ---------------------------
December 31,
-----------------------------------------
1996 1995 1994 1993 1992
------- ------ ------ ------- -------
amounts in thousands
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 4,729 2,132 599 384 579
Property and equipment, net $38,732 39,794 39,588 41,034 41,755
Franchise costs and other
intangibles, net $28,877 37,050 45,398 53,951 63,186
Total assets $73,209 79,936 86,563 96,572 106,875
Debt $ 7,500 8,700 13,800 18,700 22,700
Partners' equity $60,137 57,840 64,004 70,400 76,736
Units outstanding 200 200 200 200 200
</TABLE>
SUMMARY STATEMENT OF OPERATIONS DATA:
- ------------------------------------
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------
1996 1995 1994 1993 1992 (1)
------- ------- ------- ------- -----
amounts in thousands, except per Unit amounts
<S> <C> <C> <C> <C> <C>
Revenue $28,108 26,196 24,393 23,358 17,065
Operating loss $(4,556) (4,867) (5,213) (5,011) (3,049)
Interest expense $ (302) (925) (989) (1,001) (665)
Interest income $ 494 81 -- -- 703
Share of earnings (losses) of
Newport News $39,995 (652) (194) (324) (736)
Net earnings (loss) $35,631 (6,164) (6,396) (6,336) (3,747)
Net earnings (loss) per Unit $176.37 (30.51) (31.66) (31.36) (18.55)
- -------------------------
</TABLE>
(1) The Partnership acquired the St. Mary's and Lower Delaware Systems in 1992.
Accordingly, the summary statement of operations data for the year ended
December 31, 1992 includes the operating results of St. Mary's for seven
months and Lower Delaware for six months.
II-2
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------ ---------------------------------------------------------------
Results of Operations.
---------------------
General
-------
Asset Sales. On January 1, 1996, Newport News sold the Newport News
System to Cox Communications Rhode Island, Inc. (formerly Cox Cable Hampton
Roads, Inc. ("Cox)), 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.
In connection with the January 1996 Newport News Sale, Newport News
used most of the net cash proceeds to (i) repay bank debt and related accrued
interest of $24,306,000, (ii) pay disposition fees of $3,668,000 to Cablevision
and (iii) make distributions to the Partnership and ACT 4 of $35,789,000 and
$53,684,000, respectively. 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 is a party to three separate agreements for the sale
of its Southern Tennessee, St. Mary's and Lower Delaware Systems. One
agreement, dated November 27, 1996, provides for the sale of the St. Mary's
System to an unaffiliated third party for a cash sales price of $30,636,900,
subject to certain adjustments. Another agreement, dated November 29, 1996,
provides for the sale of the Southern Tennessee System to an unaffiliated third
party for a cash sales price of $19,750,000, subject to certain adjustments.
The other agreement, dated December 24, 1996, provides for the sale of the Lower
Delaware System to an unaffiliated third party for a cash sales price of
$43,100,000, subject to certain adjustments. Pursuant to the asset purchase
agreements for the St. Mary's, Southern Tennessee and Lower Delaware Sales,
$766,000, $494,000 and $l,078,000, respectively, of such sales price have been
placed in escrow as a deposit and will remain in escrow to satisfy any
indemnification claims for one year following consummation of the sale.
All of the Proposed Asset Sales were approved by the Limited Partners
at a special meeting that occurred on March 26, 1997. Subject to the receipt of
regulatory approvals and other closing conditions, consummation of the Proposed
Asset Sales is expected to occur during the second quarter of 1997. However,
there is no assurance that the Proposed Asset Sales will be consummated.
The Partnership has been marketing and continues to market for sale
the Riverside System. There is no assurance that the Partnership can arrange
for a sale of the Riverside System at an appropriate price or on terms
acceptable to the Partnership. If the Partnership is unable to arrange for a
sale of the Riverside System at an appropriate price or on terms acceptable to
the Partnership, the Partnership will continue to operate the Riverside System.
Although no assurance can be given, the Partnership currently anticipates that
any cash proceeds from the Proposed Asset Sales will not be used to fund the
Riverside System's capital expenditures or liquidity requirements.
II-3
<PAGE>
Assuming all of the Proposed Asset Sales had occurred on December 31,
1996 and that no amounts were used to fund capital expenditures or the liquidity
requirements of the Riverside System, it is estimated that the Pro Forma
Distribution Per Unit would have been $378. The Partnership is unable to
predict the amount that Limited Partners would receive upon a sale of the
Partnership's remaining cable television system, the Riverside System. There is
no assurance that any of the Proposed Asset Sales will be consummated. The Pro
Forma Distribution Per Unit, which is based upon the Partnership's historical
financial position at December 31, 1996, does not reflect any contingent
liabilities that might arise subsequent to the date of this Annual Report on
Form 10-K, and is based on various assumptions with respect to transaction
related costs (including the payment of estimated disposition fees to
Cablevision of $2,805,000), sales price adjustments and other matters. As such,
the actual amounts distributed to Limited Partners may vary from the Pro Forma
Distribution Per Unit. As described below, the amount by which the Pro Forma
Distribution Per Unit would be reduced if one or more of the Proposed Asset
Sales does not close is dependent upon future events and circumstances. In the
event that any of the Proposed Asset Sales are not consummated, it is currently
the Partnership's intention to seek a substitute buyer for such system(s).
There is no assurance that the Partnership could arrange for a Substitute Sales
Transaction(s) at an appropriate price or on terms acceptable to the
Partnership. If the Partnership's efforts in arranging a Substitute Sales
Transaction(s) prove to be unsuccessful, the Partnership would evaluate market,
competitive, regulatory, financial and other conditions (relating to the cable
television industry generally and to the system(s) specifically) in order to
determine whether it would be in the best interest of the Partnership to use all
or a portion of the available net cash proceeds (after repaying debt as required
by the terms of the Partnership's bank credit facility and repaying any amounts
due to TCIC) from any of the consummated Proposed Asset Sales to fund all or a
portion of any remaining cable television system's(s') liquidity requirements,
including non-discretionary capital expenditures and necessary maintenance costs
as well as the cost of implementing technological advancements or improvements.
Accordingly, the failure to consummate one or more of the Proposed Asset Sales
could delay and would reduce the Pro Forma Distribution Per Unit. The
Partnership anticipates that any distributions to partners would be made as soon
as practicable after the date of the last closing of the Proposed Asset Sales.
However, there is no assurance as to the timing or amount of any such
distributions.
II-4
<PAGE>
Regulation. The operation of the Partnership's cable television
systems is regulated at the federal, state and local levels. The 1992 Cable
Act and the Telecommunications Act of 1996 (together with the 1992 Cable Act,
the "Cable Acts") established rules under which the Partnership's 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. At December 31, 1996, approximately 60% of the
Partnership's basic customers were served by cable television systems that were
subject to such rate regulation.
During the year ended December 31, 1996, approximately 70% of the
Partnership's revenue was derived from Regulated Services. As noted above, any
increases in rates charged for Regulated Services are regulated by the Cable
Acts. Moreover, competitive factors may limit the Partnership's ability to
increase its service rates.
Competition. Since 1992, most of Riverside's service areas have been
subject to competition from an MMDS operator (the "California MMDS Operator").
The Partnership believes that the California MMDS Operator's service is
available to over 50% of the households in Riverside's service areas and that
the California MMDS Operator does not presently serve more than 15% of the
households in any given franchise area. Although the above-described competition
has resulted in a loss of subscribers in Riverside's service area, the
Partnership is currently unable to predict the extent of such 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 Partnership's Cable Systems below. See also "Business - Narrative
Description of Business - Competition." --------------------
- -----------------------
In addition to MMDS, the Partnership competes with other distributors
of the same or similar video programming as that offered by its cable systems.
During 1996, the Partnership has experienced a competitive impact from DBS
providers. The PRIMESTAR Partners L.P. broadcasts a multi-channel programming
service via a medium power communications satellite to HSDs of approximately 3
feet in diameter. DirecTv, Inc., United States Satellite Broadcasting
Corporation and EchoStar transmit from high power satellites and generally use
smaller dishes to receive their signals. Alphastar, Inc. began offering medium
power service in the second quarter of 1996. On February 24, 1997, News Corp.
and EchoStar announced that News Corp. will acquire a 50% interest in EchoStar
and that the companies will combine their DBS businesses into a new company,
which will operate under the name Sky. The two companies contend that Sky,
which is scheduled to launch in early 1998, will offer 500 channels of digital
television, Internet services and local broadcast network television signals,
capable of reaching more than 50% of all television householders upon the launch
of Sky and 75% of all television households by the end of 1998. DBS operators
have the right to distribute substantially all of the significant cable
television programming services currently carried by cable systems. Estimated
DBS customers nationwide increased from approximately 2.2 million at the end of
1995 to approximately 4.4 million at the end of 1996, and the Partnership
expects that competition from DBS will continue to grow. DBS Service is now
available within the service areas of all of the Partnership's cable television
systems. However, the Partnership is unable to predict what effect such
competition will have on the Partnership's financial condition or results of
operations.
II-5
<PAGE>
Notwithstanding the existence of the above-described competition, the
Partnership currently believes that none of its cable television systems are
subject to "effective competition" as defined in the 1992 Cable Act. In the
event that any provider of video programming were to provide service to more
than 15% (and be available to more than 50%) of the households in a given
franchise area, such franchise area would be subject to "effective competition"
and accordingly, would not be subject to rate regulation under the 1992 Cable
Act. The 1996 Telecom Act expands the definition of effective competition to
include any franchise area where a local exchange carrier (or affiliate)
provides video programming services to subscribers by any means other than
through direct broadcast satellite. There is no penetration minimum for the
local exchange carrier to qualify as an effective competitor, but it must
provide "comparable" programming services (12 channels including one broadcast)
in the franchise area. The California MMDS Operator was acquired by the local
exchange carrier in July 1995. The FCC will be conducting a rulemaking to
clarify the statutory language with respect to the expanded definition of
"effective competition." If the FCC rules were to indicate that the California
MMDS Operator provides "effective competition" to Riverside, the Partnership
would take the appropriate steps to attempt to deregulate Riverside's service
rates. Even if Riverside's rates were to be deregulated, the Partnership
believes that competitive and other factors may limit Riverside's ability to
increase its service rates.
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 regional bell
operating companies, to compete with cable television operators both inside and
outside their telephone service areas. The Partnership expects that it will
face substantial competition from telephone companies for the provision of video
services. The Partnership assumes that all major telephone companies have
already entered or soon will enter the business of providing video services.
The 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. The specific manner in which telephone company
provision of video services will be regulated is described in "Business -
----------
Narrative Description of Business - Regulation and Legislation." 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. The Partnership is
aware that one regional bell operating company has completed installation of a
fiber optic network within Lower Delaware's franchise areas. Based on the
foregoing, the Partnership continues to believe that its cable systems 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.
II-6
<PAGE>
As further described under "Business - Narrative Description of
-----------------------------------
Business," the Partnership's cable television systems are 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 its financial condition and results of operations, the Partnership does
believe that the continued evolution of such factors could place the Partnership
at a competitive disadvantage if it were not to implement certain technological
improvements to its cable television systems. The Partnership believes that, in
the near term, the most effective method to maintain the competitive position of
its cable television systems would be to deploy digital compression technology
for premium services, while retaining traditional analog service for basic
services. This could be done in those cable television systems which have
available channel bandwith or if the existing programming was digitized.
Digital compression technology would increase channel capacity and improve
picture quality. Enhanced programming could also be added to existing service
by means of DBS. Such an approach would probably be considered for those cable
television systems which do not have available channel bandwith but suffer from
competitive threats in their service area. Alternatively, the Partnership could
replace coaxial trunk cable with optical fiber and deploy digital compression
technology in its cable television systems. The cost of replacing coaxial trunk
cable with optical fiber could be significant. Due to the competitive
environment within Riverside's service area, the Partnership is currently
considering the deployment of digital compression technology in the Riverside
System but 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. Riverside uses a headend of an affiliated cable
television system. Accordingly, Riverside could not proceed with the
implementation of digital compression technology unless such affiliated cable
television system also implemented digital compression technology. The
Partnership would not proceed with the implementation of any technological
advancements or improvements without first conducting additional analysis of the
economic feasibility of such advancements and improvements on a system-by-system
basis. The Partnership has not considered any advancements or improvements for
the St. Mary's, Lower Delaware and Southern Tennessee Systems due to the
Proposed Asset Sales. However, in the event that any of the Proposed Asset
Sales are not consummated, the Partnership would evaluate the need for
advancements or improvements for that system(s). The Partnership believes that
its evaluation of the need for advancements or improvements would focus
primarily on whether a reasonable return could be earned on the capital invested
in any such improvements and the period of time required to achieve such a
return. See "Liquidity and Capital Resources" below.
-------------------------------
II-7
<PAGE>
Partnership's Cable Systems. The following table sets forth
information for the Partnership's cable systems for the periods indicated
(amounts in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------
Basic Subscribers 1996 1995 1994
----------------- -------- ------ ------
<S> <C> <C> <C>
Southern Tennessee 11.4 10.9 10.8
Riverside (1) 19.1 18.9 18.9
St. Mary's 18.8 17.3 17.1
Lower Delaware (2) 28.1 25.9 25.7
------- ------ ------
77.4 73.0 72.5
======= ====== ======
Premium Subscriptions (3)
-------------------------
Southern Tennessee 8.2 7.9 7.5
Riverside (1) 22.0 22.6 30.0
St. Mary's 22.6 18.3 13.6
Lower Delaware (2) 22.3 18.5 11.9
------- ------ ------
75.1 67.3 63.0
======= ====== ======
December 31,
------------------------
Total Assets 1996 1995 1994
------------ ------- ------ ------
Southern Tennessee $ 6,014 6,690 7,607
Riverside 19,490 23,285 25,868
St. Mary's 24,498 23,390 23,836
Lower Delaware (2) 22,426 25,791 27,972
------- ------ ------
$72,428 79,156 85,283
======= ====== ======
Years ended December 31,
------------------------
Revenue (4) 1996 1995 1994
----------- ------- ------ ------
Southern Tennessee $ 3,868 3,759 3,451
Riverside (1) 8,388 8,207 7,512
St. Mary's 6,855 6,161 5,771
Lower Delaware (2) 8,997 8,069 7,659
------- ------ ------
$28,108 26,196 24,393
======= ====== ======
- -------------------------
</TABLE>
(1) As described under "General-Competition" above, Riverside is
-------
subject to competition from the California MMDS Operator.
Additionally, the economy within Riverside's service areas has been
adversely affected by military base closures and downsizings. From
December 31, 1996 to March 26, 1997, Riverside experienced a decrease
of approximately 300 and 2,000 basic subscribers and premium
subscriptions, respectively. The decrease in basic subscribers is
primarily attributable to competitive factors and the decrease in
premium subscriptions is primarily the result of a rate increase in
premium subscriptions during the first quarter of 1997. The
Partnership is unable to predict the extent of such effect at this
time on its financial condition and results of operations.
(2) Lower Delaware's basic subscribers and premium subscriptions are
subject to seasonal fluctuations and generally are higher from May
through October as compared to November through April.
II-8
<PAGE>
(3) 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. The 7,800 or 12% increase in the
Partnership's 1996 premium subscriptions is comprised of a 4,300
increase in STARZ! subscriptions, a 2,900 increase in "ENCORE"
subscriptions and a 600 increase in traditional premium subscriptions.
The 4,300 or 7% increase in the Partnership's 1995 premium
subscriptions is comprised of a 2,500 increase in "ENCORE"
subscriptions, a 5,100 increase in STARZ! subscriptions and a 3,300
decrease in traditional premium subscriptions. Increases in the
Partnership's traditional premium services are generally the result of
promotional campaigns that involve the packaging of traditional
premium services at a lower per unit price than would otherwise be
paid if such services were purchased separately. As such packaged
prices expire, the Partnership typically experiences reductions in the
number of its traditional premium subscriptions. The monthly charge
for "ENCORE" and STARZ!, which are indirectly owned by TCI, generally
ranges from $1.00 to $5.00, as compared to $10.00 to $13.00 for
traditional premium services.
(4) For additional information concerning the Partnership's revenue,
see "General - Regulation" above and "Results of Operations" below.
------- ---------------------
Operating income before depreciation, amortization and management fees
("Operating Cash Flow") is a measure of value and borrowing capacity within the
cable television industry. The Partnership's Operating Cash Flow increased 7%
from $11,274,000 in 1995 to $12,048,000 in 1996. See "Results of Operations -
-----------------------
Operating Loss - 1996 Compared to 1995" below. During the year ended December
- ---------------------------------------
31, 1996, Lower Delaware, St. Mary's, Riverside and Southern Tennessee
contributed $4,968,000 (41%), $2,971,000 (25%), $3,009,000 (25%) and $2,067,000
(17%), respectively, to the aggregate Operating Cash Flow of the Partnership.
The foregoing amounts 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 December 31, 1996, Southern Tennessee, Riverside, St. Mary's and
Lower Delaware passed approximately 14,500, 31,300, 26,800, and 35,200 homes,
respectively.
Results of Operations
---------------------
Operating Loss - 1996 Compared to 1995
--------------------------------------
The 7% increase in revenue from 1995 to 1996 resulted primarily from
(i) a 4% increase in the weighted average rate received for Regulated Services
(see related discussion below), (ii) a 4% increase in the average number of
basic subscribers, and (iii) a 9% increase in average premium subscriptions. The
increase in the weighted average rate received for Regulated Services is
attributable to the implementation of rate increases in 1996. The increase in
the average number of premium subscriptions was partially offset by decreases
in the average monthly price received for each premium subscription. During the
first quarter of 1997, the Riverside System increased its rates for premium
subscriptions which resulted in a decrease in the number of premium
subscriptions. See "General - Partnership's Cable Systems" above.
-------
II-9
<PAGE>
Programming expense increased 20% during 1996 as compared to 1995.
Such increase is primarily attributable to higher programming rates and an
increase in the average number of basic subscribers and premium subscriptions as
noted above. The Partnership cannot determine whether and to what extent
increases in the cost of programming will affect its future operating costs.
However, such programming costs have increased at a greater percent than
increases in revenue from Regulated Services. The Partnership's cable
television systems increased their rates for Regulated Services in 1996.
Selling, general and administrative ("SG&A") expenses increased 3%
from 1995 to 1996. Such increase is primarily the result of (i) higher labor
costs and (ii) increased franchise fees (which are calculated as a percentage of
revenue). Such increases were partially offset by a decrease in insurance costs
of $455,000 which related to the over accrual of premiums in prior years.
Depreciation expense increased 8% during 1996, as compared to 1995.
Such increase is consistent with the increase in the average balance of the
Partnership's property and equipment.
Operating Loss - 1995 Compared to 1994
--------------------------------------
The 7% increase in revenue from 1994 to 1995 resulted primarily from a
3% increase in the average number of basic subscribers and a 21% increase in
average premium subscriptions. See "General - Partnership's Cable Systems"
-------
above. The increase in the average number of premium subscriptions was
partially offset by decreases in the average monthly price received for each
premium subscription.
Programming expenses increased 14% during 1995 as compared to 1994.
Such increase is primarily attributable to higher programming rates and an
increase in the average number of premium subscriptions and basic subscribers.
The majority of the 10% increase in operating expenses from 1994 to
1995 is attributable to increased labor costs.
Depreciation expense increased 6% during 1995, as compared to 1994.
Such increase is consistent with the increase in the average balance of the
Partnership's property and equipment.
Other Income (Expense)
----------------------
Interest expense decreased $623,000 from 1995 to 1996 and was
relatively constant from 1994 to 1995. The decrease in interest expense in 1996
is due to a lower average outstanding principal balance and slightly lower
interest rates. During 1995, the positive effect of a lower average outstanding
principal balance was offset by higher interest rates.
Interest income increased $413,000 and $81,000 during the years ended
December 31, 1996 and 1995, respectively, as compared to the corresponding prior
year periods. Such changes are primarily due to changes in the weighted average
balance of cash and cash equivalents.
Other income in 1995 represents a refund of a portion of the state
sales and use tax that was paid by the Partnership in connection with the 1992
acquisitions of St. Mary's and Lower Delaware.
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, 1996.
II-10
<PAGE>
Liquidity and Capital Resources
-------------------------------
As previously described under "General - Asset Sales," the Partnership
-------
is party to three separate agreements for the sale of three of its cable
television systems.
The Partnership's sources of liquidity are cash generated from the
operations of its cable television systems, bank borrowings and cash and cash
equivalents on hand. These sources of liquidity are used to service debt and
fund capital expenditures. If any of the Proposed Asset Sales are consummated,
ACT 5 would experience corresponding reductions in its borrowing capacity and
cash generated from operations. For additional information concerning the
potential effects of the Proposed Asset Sales on the Partnership's liquidity and
capital resources, see "General - Partnership's Cable Systems" above.
-------
During the year ended December 31, 1996, the Partnership used cash
provided by operating and investing activities of $6.0 million and $30.2
million, respectively, to fund financing activities and an increase in cash and
cash equivalent balances of $33.6 million and $2.6 million, respectively. See
the Partnership's statements of cash flows included in the accompanying
financial statements.
In the event that any of the Proposed Asset Sales are consummated, the
Partnership anticipates that it would use all or a portion of the available net
cash proceeds to (i) repay amounts outstanding under the Partnership's bank
credit facility (as required by the terms of such bank credit facility), (ii)
repay any amounts due TCIC, (iii) fund all or a portion of any remaining cable
television system's(s') liquidity requirements and (iv) make distributions to
the Partnership's partners.
The Partnership's bank credit facility provides for a revolving line
of credit which is reduced quarterly through December 31, 1999. At December 31,
1996, $7,500,000 of the facility was unused. Although the Partnership was in
compliance with the facility's restrictive covenants at December 31, 1996,
additional borrowings under the facility are subject to the Partnership's
continuing compliance with such restrictive covenants (which include the
maintenance of certain ratios of total debt to cash flow and cash flow to debt
service, as defined). See note 3 to the accompanying financial statements.
The Partnership's bank credit facility was amended as of December 22,
1995 to permit the Partnership to distribute up to $33,700,000 of the
Partnership's share of proceeds from the Newport News Sale to the Partnership's
partners. The Partnership received its share of the net proceeds from the
Newport News Sale in 1996, and most of such net proceeds were used to fund
distributions to the Partnership's partners. See "General - Asset Sales."
-------
The Partnership estimates that during 1997 it will spend approximately
$3.1 million for capital expenditures (of which approximately $440,000,
$240,000, $970,000 and $1,450,000 relate to Riverside, Southern Tennessee, Lower
Delaware, and St. Mary's, respectively). Such estimated capital expenditures
assume (i) a full year of capital expenditures for each of the Partnership's
cable television systems and (ii) that no technological improvements will be
implemented to any of the Partnership's cable television systems other than the
possible deployment of digital compression technology at the Riverside System.
The Partnership expects that capital expenditures would be reduced in the event
that any of the Proposed Asset Sales are consummated.
The Partnership anticipates that its sources of liquidity will be
sufficient to fund estimated capital expenditures (exclusive of any significant
technological improvements, as described under "General - Competition"),
-------
service outstanding debt and meet its other liquidity requirements.
II-11
<PAGE>
Item 8. Financial Statements and Supplementary Data.
- ------ -------------------------------------------
The financial statements of the Partnership are filed under this item
beginning on Page II-13. All financial statement schedules are omitted as they
are not required or are not applicable.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------ ---------------------------------------------------------------
Financial Disclosure.
--------------------
None.
II-12
<PAGE>
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, 1996 and 1995, and
the related statements of operations, partners' equity (deficit), and cash flows
for each of the years in the three-year period ended December 31, 1996. 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, 1996 and 1995, and the results of its operations and its
cash flows for each of the years in the three-year period ended December 31,
1996, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Denver Colorado
March 14, 1997, except as to the ninth
paragraph of note 2, which is as of
March 26, 1997
II-13
<PAGE>
AMERICAN CABLE TV INVESTORS 5, LTD.
(A Colorado Limited Partnership)
Balance Sheets
December 31, 1996 and 1995
(see note 2)
<TABLE>
<CAPTION>
Assets 1996 1995
- ------ -------- --------
amounts in thousands
<S> <C> <C>
Cash and cash equivalents $ 4,729 2,132
Trade and other receivables 541 514
Less allowance for doubtful
receivables 61 63
------- ------
480 451
------- ------
Prepaid expenses 93 124
Property and equipment:
Land 39 39
Cable distribution systems 62,216 57,340
Support equipment and buildings 4,876 4,418
------- ------
67,131 61,797
Less accumulated depreciation 28,399 22,003
------- ------
38,732 39,794
------- ------
Franchise costs and other intangibles 75,688 75,688
Less accumulated amortization 46,811 38,638
------- ------
28,877 37,050
------- ------
Other assets, net of accumulated
amortization 298 385
------- ------
$73,209 79,936
======= ======
</TABLE>
(continued)
II-14
<PAGE>
AMERICAN CABLE TV INVESTORS 5, LTD.
(A Colorado Limited Partnership)
Balance Sheets, continued
(see note 2)
<TABLE>
<CAPTION>
1996 1995
------- ------
Liabilities and Partners' Equity amounts in thousands
- --------------------------------
<S> <C> <C>
Cash overdraft $1,710 794
Accounts payable 162 127
Accrued expenses:
Franchise fees 618 523
Other 616 1,159
------- ------
1,234 1,682
------- ------
Subscriber advance payments and
converter deposits 1,015 1,323
Amounts due to related parties (note 5) 1,451 5,264
Debt (note 3) 7,500 8,700
Negative investment in Newport News
Cablevision Associates, L.P. ("Newport
News") (notes 2 and 4) -- 4,206
------- ------
Total liabilities 13,072 22,096
------- ------
Partners' equity (deficit):
General partner (2,701) (2,724)
Limited partners 62,838 60,564
------- ------
Total partners' equity 60,137 57,840
------- ------
Commitments and contingencies (notes 5 and 6) $73,209 79,936
======= ======
</TABLE>
See accompanying notes to financial statements.
II-15
<PAGE>
AMERICAN CABLE TV INVESTORS 5, LTD.
(A Colorado Limited Partnership)
Statements of Operations
Years ended December 31, 1996, 1995 and 1994
(see note 2)
<TABLE>
<CAPTION>
1996 1995 1994
--------- ------------ -----------
amounts in thousands,
except per unit amounts
<S> <C> <C> <C>
Revenue $28,108 26,196 24,393
Operating costs and expenses:
Programming (primarily from
related parties - note 5) 5,812 4,859 4,258
Operating (including
allocations from related
parties - note 5) 2,955 2,922 2,668
Selling, general and
administrative (including
charges and allocations from
related parties - note 5) 8,965 8,678 8,197
Depreciation 6,672 6,157 5,831
Amortization 8,260 8,447 8,652
------- ------ ------
Total operating expenses 32,664 31,063 29,606
------- ------ ------
Operating loss (4,556) (4,867) (5,213)
Other income (expense):
Interest expense (302) (925) (989)
Interest income 494 81 --
Other income -- 199 --
Share of earnings (losses) of
Newport News (note 4) 39,995 (652) (194)
------- ------ ------
40,187 (1,297) (1,183)
------- ------ ------
Net earnings (loss) $35,631 (6,164) (6,396)
------- ====== ======
Net earnings (loss) per limited
partnership unit $176.37 (30.51) (31.66)
======= ====== ======
</TABLE>
See accompanying notes to financial statements.
II-16
<PAGE>
AMERICAN CABLE TV INVESTORS 5, LTD.
(A Colorado Limited Partnership)
Statements of Partners' Equity (Deficit)
Years ended December 31, 1996, 1995 and 1994
(see note 2)
<TABLE>
<CAPTION>
General Limited
partner partners Total
--------- ----------- ---------
amounts in thousands
<S> <C> <C> <C>
Balance at January 1, 1994 $(2,598) 72,998 70,400
Net loss (64) (6,332) (6,396)
------- ------- -------
Balance at December 31, 1994 (2,662) 66,666 64,004
Net loss (62) (6,102) (6,164)
------- ------- -------
Balance at December 31, 1995 (2,724) 60,564 57,840
Distribution (note 2) (333) (33,001) (33,334)
Net earnings 356 35,275 35,631
------- ------- -------
Balance at December 31, 1996 $(2,701) 62,838 60,137
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
II-17
<PAGE>
AMERICAN CABLE TV INVESTORS 5, LTD.
(A Colorado Limited Partnership)
Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
(see note 2)
<TABLE>
<CAPTION>
1996 1995 1994
--------- ---------- ----------
amounts in thousands
(see note 1)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 35,631 (6,164) (6,396)
Adjustments to reconcile net
earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 14,932 14,604 14,483
Share of (earnings) losses of
Newport News (39,995) 652 194
Changes in operating assets
and liabilities:
Decrease (increase) in:
Receivables (29) (32) 145
Other assets and
prepaid expenses 31 (48) (18)
Increase (decrease) in:
Accounts payable 35 38 (19)
Accrued expenses (448) 94 197
Subscriber advance
payments and
converter deposits (308) (60) 355
Amounts due to
related parties (3,813) 3,152 560
-------- ------ -------
Net cash provided
by operating
activities 6,036 12,236 9,501
-------- ------ -------
Cash flows from investing activities:
Capital expended for property
and equipment (5,673) (6,563) (4,399)
Distribution from Newport News 35,789 -- --
Other investing activities 63 166 13
-------- ------ -------
Net cash provided
by (used in)
investing
activities 30,179 (6,397) (4,386)
-------- ------ -------
Cash flows from financing activities:
Borrowings of debt 6,500 -- 5,100
Repayments of debt (7,700) (5,100) (10,000)
Distributions to partners (33,334) -- --
Change in cash overdraft 916 794 --
-------- ------ -------
Net cash used in
financing activities (33,618) (4,306) (4,900)
-------- ------ -------
Net increase in
cash and cash
equivalents 2,597 1,533 215
Cash and cash
equivalents:
Beginning of year 2,132 599 384
-------- ------ -------
End of year $ 4,729 2,132 599
======== ====== =======
</TABLE>
See accompanying notes to financial statements.
II-18
<PAGE>
AMERICAN CABLE TV INVESTORS 5, LTD.
(A Colorado Limited Partnership)
Notes to Financial Statements
December 31, 1996, 1995 and 1994
(1) Summary of Significant Accounting Policies
------------------------------------------
Organization
------------
American Cable TV Investors 5, Ltd. is a Colorado limited partnership
(the "Partnership" or "ACT 5") 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"),
a Colorado limited partnership. At December 31, 1996, 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 indirectly owned by Tele-Communications, Inc.
("TCI") and is the managing agent of the Partnership. Prior to its
January 17, 1996 withdrawal, Integrated Cable Corp. ("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 has 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 ("Units")
to the public resulting in gross proceeds of $100,002,500.
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.
Statement of Cash Flows
-----------------------
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.
(continued)
II-19
<PAGE>
AMERICAN CABLE TV INVESTORS 5, LTD.
(A Colorado Limited Partnership)
Notes to Financial Statements
Cash paid by the Partnership for interest was $332,000, $808,000 and
$925,000 during the years ended December 31, 1996, 1995 and 1994,
respectively.
Long-Lived Assets
-----------------
(a) 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 interest costs related to construction, are
capitalized. Capitalized interest costs were not significant in any
of the periods presented in the accompanying 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.
(b) Franchise Costs and Other Intangibles
-------------------------------------
Franchise costs and other intangibles, net of accumulated
amortization, are comprised of the following:
December 31,
-------------------
1996 1995
-------- ---------
amounts in thousands
Franchise costs $28,570 35,851
Other intangibles 307 1,199
------- ------
$28,877 37,050
======= ======
Franchise costs and other intangibles 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 are amortized using the straight-line method
over the estimated lives of the assets, which range from 4 to 8 years.
(continued)
II-20
<PAGE>
AMERICAN CABLE TV INVESTORS 5, LTD.
(A Colorado Limited Partnership)
Notes to Financial Statements
In March of 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, Accounting for The
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("Statement No. 121"), effective for fiscal years beginning after December
15, 1995. Statement No. 121 requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement No. 121 also
addresses the accounting for long-lived assets that are expected to be
disposed of. The Partnership adopted Statement No. 121 effective January
1, 1996. Statement No. 121 did not have a significant impact on the
financial statements of the Partnership. In accordance with Statement No.
121, the Partnership periodically reviews the carrying amount of its long-
lived assets, franchise costs and certain other assets to determine whether
current events or circumstances warrant adjustments to such carrying
amounts. The Partnership considers historical and expected future net
operating losses to be its primary indicators of potential impairment.
Assets are grouped and evaluated for impairment at the lowest level for
which there are identifiable cash flows that are largely independent of the
cash flows of other groups of assets ("Assets"). The Partnership deems
Assets to be impaired if the Partnership is unable to recover the carrying
value of its Assets over their expected remaining useful life through a
forecast of undiscounted future operating cash flows directly related to
the Assets. If Assets are deemed to be impaired, the loss is measured as
the amount by which the carrying amount of the Assets exceeds their fair
values. The Partnership generally measures fair value by considering sales
prices for similar assets or by discounting estimated future cash flows.
Considerable management judgment is necessary to estimate discounted future
cash flows. 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.
Negative Investment in Newport News
-----------------------------------
The Partnership used the equity method to account for its 40%
ownership interest in Newport News. Under this method, the investment,
originally recorded at cost, was adjusted to recognize the Partnership's
share of the net earnings or net losses of Newport News as they occurred
and distributions as they were received. See notes 2 and 4.
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, 1996 was 200,005.
(continued)
II-21
<PAGE>
AMERICAN CABLE TV INVESTORS 5, LTD.
(A Colorado Limited Partnership)
Notes to Financial Statements
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.
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 (losses) of $42.0 million, $(2.7
million) and $(3.9 million) for the years ended December 31, 1996, 1995 and
1994, respectively.
Reclassifications
-----------------
Certain prior period amounts have been reclassified for comparability
with the 1996 presentation.
(2) Asset Sales
-----------
On January 1, 1996, Newport News sold the Newport News System to Cox
Communications Rhode Island, Inc. (formerly Cox Cable Hampton Roads, Inc.
("Cox")), 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. On March 29,
1996 the Partnership's share of the cash proceeds from the sale of the
Newport News System was used to fund a distribution to Limited Partners of
$165 per Unit.
(continued)
II-22
<PAGE>
AMERICAN CABLE TV INVESTORS 5, LTD.
(A Colorado Limited Partnership)
Notes to Financial Statements
In connection with the Newport News Sale, Newport News used most of the net cash
proceeds to (i) repay bank debt and related accrued interest of $24,306,000,
(ii) pay disposition fees of $3,668,000 to Cablevision and (iii) make
distributions to the Partnership and ACT 4 of $35,789,000 and $53,684,000,
respectively. 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 owns four cable television systems that are located in and
around (i) Shelbyville and Manchester, Tennessee ("Southern Tennessee" or the
"Southern Tennessee System"), (ii) Riverside, California ("Riverside" or the
"Riverside System"), (iii) St. Mary's County, Maryland ("St. Mary's" or the "St.
Mary's System") and (iv) Lower Delaware ("Lower Delaware" or the "Lower Delaware
System").
The following table sets forth the assets and revenue for each of the
Partnership's cable television systems:
December 31,
------------------------
Total Assets 1996 1995
- ------------ ------------ ----------
Southern Tennessee $ 6,014 6,690
Riverside 19,490 23,285
St. Mary's 24,498 23,390
Lower Delaware 22,426 25,791
------- ------
$72,428 79,156
======= ======
Years ended December 31,
------------------------
Revenue 1996 1995 1994
- ------- ------- ------- ------
Southern Tennessee $ 3,868 3,759 3,451
Riverside 8,388 8,207 7,512
St. Mary's 6,855 6,161 5,771
Lower Delaware 8,997 8,069 7,659
------- ------- ------
$28,108 26,196 24,393
======= ======= ======
The Partnership is a party to three separate agreements for the sale of the
Southern Tennessee, St. Mary's and Lower Delaware Systems (collectively, the
"Proposed Asset Sales").
One agreement, dated November 27, 1996, provides for the sale of the St. Mary's
System to an unaffiliated third party for a cash sales price of $30,637,000,
subject to certain adjustments (the "St. Mary's Sale"). Pursuant to the asset
purchase agreement for the St. Mary's Sale, $766,000 of such sales price has
been placed in escrow as a deposit and will be subject to indemnifiable claims
for one year following consummation of the St. Mary's Sale.
(continued)
II-23
<PAGE>
AMERICAN CABLE TV INVESTORS 5, LTD.
(A Colorado Limited Partnership)
Notes to Financial Statements
Another agreement, dated November 29, 1996, provides for the sale of
the Southern Tennessee System to an unaffiliated third party for a cash
sales price of $19,750,000, subject to certain adjustments (the "Southern
Tennessee Sale"). Pursuant to the asset purchase agreement for the
Southern Tennessee Sale, $494,000 of such sales price has been placed in
escrow as a deposit and will be subject to indemnifiable claims for one
year following consummation of the Southern Tennessee Sale.
The other agreement, dated December 24, 1996, provides for the sale of
the Lower Delaware System to an unaffiliated third party for a cash sales
price of $43,100,000, subject to certain adjustments (the "Lower Delaware
Sale"). Pursuant to the asset purchase agreement for the Lower Delaware
Sale, $1,078,000 of such sales price has been placed in escrow as a deposit
and will be subject to indemnifiable claims for one year following
consummation of the Lower Delaware Sale.
All of the Proposed Asset Sales were approved by the Partnership's
limited partners (the "Limited Partners") at a special meeting that
occurred on March 26, 1997. Subject to the receipt of regulatory approvals
and other closing conditions, consummation of the Proposed Asset Sales is
expected to occur during the second quarter of 1997. However, there is no
assurance that the Proposed Asset Sales will be consummated.
The Partnership has been marketing and continues to market for sale
the Riverside System. There is no assurance that the Partnership can
arrange for a sale of the Riverside System at an appropriate price or on
terms acceptable to the Partnership. If the Partnership is unable to
arrange for a sale of the Riverside System at an appropriate price or on
terms acceptable to the Partnership, the Partnership will continue to
operate the Riverside System. Although no assurance can be given, the
Partnership currently anticipates that any cash proceeds from the Proposed
Asset Sales will not be used to fund the Riverside System's capital
expenditures or liquidity requirements. Any sale of the Riverside System
would be subject to Limited Partner approval.
(continued)
II-24
<PAGE>
AMERICAN CABLE TV INVESTORS 5, LTD.
(A Colorado Limited Partnership)
Notes to Financial Statements
Assuming all of the Proposed Asset Sales had occurred on December 31, 1996 and
that no amounts were used to fund capital expenditures or the liquidity
requirements of the Riverside System, it is estimated that the pro forma
distribution per Unit (the "Pro Forma Distribution Per Unit") would have been
$378. The Partnership is unable to predict the amount that Limited Partners
would receive upon a sale of the Partnership's remaining cable television
system, the Riverside System. There is no assurance that any of the Proposed
Asset Sales will be consummated. The Pro Forma Distribution Per Unit, which is
based upon the Partnership's historical financial position at December 31, 1996,
does not reflect any contingent liabilities that might arise subsequent to the
date of this Annual Report on Form 10-K, and is based on various assumptions
with respect to transaction related costs (including the payment of estimated
disposition fees to Cablevision of $2,805,000), sales price adjustments and
other matters. As such, the actual amounts distributed to Limited Partners may
vary from the Pro Forma Distribution Per Unit. As described below, the amount by
which the Pro Forma Distribution Per Unit would be reduced if one or more of the
Proposed Asset Sales does not close is dependent upon future events and
circumstances. In the event that any of the Proposed Asset Sales are not
consummated, it is currently the Partnership's intention to seek a substitute
buyer for such system(s) ("Substitute Sales Transaction(s)"). There is no
assurance that the partnership could arrange for a Substitute Sales
Transaction(s) at an appropriate price or on terms acceptable to the
Partnership. If the Partnership's efforts in arranging a Substitute Sales
Transaction(s) prove to be unsuccessful, the Partnership would evaluate market,
competitive, regulatory, financial and other conditions (relating to the cable
television industry generally and to the system(s) specifically) in order to
determine whether it would be in the best interest of the Partnership to use all
or a portion of the available net cash proceeds (after repaying debt as required
by the terms of the Partnership's bank credit facility and repaying any amounts
due to TCI Communications, Inc., a subsidiary of TCI, and its affiliates
("TCIC")) from any of the consummated Proposed Asset Sales to fund all or a
portion of any remaining cable television system's(s') liquidity requirements,
including non-discretionary capital expenditures and necessary maintenance costs
as well as the cost of implementing technological advancements or improvements.
Accordingly, the failure to consummate one or more of the Proposed Asset Sales
could delay and would reduce the Pro Forma Distribution Per Unit. The
Partnership anticipates that any distributions to partners would be made as soon
as practicable after the date of the last closing of the Proposed Asset Sales.
However, there is no assurance as to the timing or amount of any such
distributions.
(continued)
II-25
<PAGE>
AMERICAN CABLE TV INVESTORS 5, LTD.
(A Colorado Limited Partnership)
Notes to Financial Statements
(3) Debt
----
The Partnership's bank credit facility, as amended, provides for a
revolving line of credit of $15,000,000 at December 31, 1996. Such
revolving line of credit is reduced quarterly beginning March 31, 1998
through December 31, 1999. Interest is paid quarterly at variable rates
(6.5% at December 31, 1996). The agreement, which is secured by
substantially all of the Partnership's assets, contains several covenants
whereby the Partnership agrees to the maintenance of certain operating cash
flow ratios and limitations on other indebtedness and distributions. The
Partnership anticipates that it would use net cash proceeds from the
consummation of any of the Proposed Asset Sales to repay amounts
outstanding under the Partnership's bank credit facility (as required by
the terms of such bank credit facility). The Partnership's bank credit
facility was amended as of December 22, 1995 to permit the Partnership to
distribute up to $33,700,000 of the Partnership's share of proceeds from
the Newport News Sale to the Partnership's partners. See note 2.
In addition, the Partnership is required to pay an annual commitment
fee of 3/8%, payable quarterly, of the unborrowed funds ($7.5 million at
December 31, 1996), and a quarterly agent's fee. Such fees were not
significant during the years ended December 31, 1996, 1995 and 1994.
The principal maturities of the Partnership's bank credit facility for
years after December 31, 1996 are as follows (amounts in thousands):
1997 $ --
1998 --
1999 7,500
------
$7,500
======
(continued)
II-26
<PAGE>
AMERICAN CABLE TV INVESTORS 5, LTD.
(A Colorado Limited Partnership)
Notes to Financial Statements
(4) Negative 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 notes 1 and 2. Condensed
consolidated balance sheets and condensed consolidated statements of
operations for Newport News are as follows:
Newport News Cablevision Associates, L.P.
-----------------------------------------
Condensed Consolidated Balance Sheets
December 31,
---------------------
1996 1995
------ ------
Assets amounts in thousands
- ------
Cash and receivables $ -- 1,425
Property and equipment,
net of accumulated depreciation -- 17,089
Franchise costs and other intangibles,
net of accumulated amortization -- 1,105
Other assets, net -- 277
------ -------
$ -- 19,896
====== =======
Liabilities and Partners' Deficit
- ---------------------------------
Payables, accruals and other liabilities $ -- 2,457
Amounts due to related parties -- 3,698
Debt -- 24,255
------ -------
Total liabilities -- 30,410
------ -------
Partners' deficit:
ACT 4 -- (6,308)
ACT 5 -- (4,206)
------ -------
Total partners' deficit -- (10,514)
------ -------
$ -- 19,896
====== =======
(continued)
II-27
<PAGE>
AMERICAN CABLE TV INVESTORS 5, LTD.
(A Colorado Limited Partnership)
Notes to Financial Statements
Newport News Cablevision Associates, L.P.
-----------------------------------------
Condensed Consolidated Statements of Operations
Years ended December 31,
--------------------------------
1996 1995 1994
---------- --------- ---------
amounts in thousands
Revenue $ -- 21,130 20,373
Programming, operating, selling,
general and administrative expenses (53) (13,255) (11,336)
Depreciation and amortization -- (7,377) (7,418)
------- ------- -------
Operating income (53) 498 1,619
Gain on sale of assets, net of $510,000
of costs and expenses in 1996 related
to 1995 operations 99,700 -- --
Interest income 350 27 28
Interest expense and other, net (10) (2,154) (2,132)
------- ------- -------
Net earnings (loss) $99,987 (1,629) (485)
======= ======= =======
(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 subscribers served by the Partnership, aggregated
$5,576,000, $4,425,000 and $4,097,000 in 1996, 1995 and 1994, 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 (5-1/2% to
Cablevision and, through January 17, 1996, 1/2% to Presidio Cable IV Corp.
("PCC"), a subsidiary of Presidio). Such fees aggregated $1,672,000,
$1,537,000 and $1,443,000 during the years ended December 31, 1996, 1995
and 1994, 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
$487,000, $476,000 and $443,000 in 1996, 1995 and 1994, respectively.
(continued)
II-28
<PAGE>
AMERICAN CABLE TV INVESTORS 5, LTD.
(A Colorado Limited Partnership)
Notes to Financial Statements
Riverside uses office facilities, personnel and certain distribution
assets (including a headend) of an affiliated cable television 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 years ended December 31,
1996, 1995 and 1994, Riverside's operating and administrative salaries and
expenses aggregated $2,511,000, $2,492,000 and $2,479,000, respectively.
Newport News was obligated to pay a disposition fee to Cablevision of
3% of the gross proceeds from the sale of any cable television system. The
Partnership's share of the disposition fee paid by Newport News in
connection with the Newport News Sale was $1,467,000. See note 2.
ACT 5 is also 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. To the
extent ACT 5 at its termination has not made distributions to the Limited
Partners equal to Payback, the net disposition fees received by Cablevision
will be returned to ACT 5 to the extent necessary to allow ACT 5 to make
distributions equal to Payback. In the event that the disposition fees
refunded by Cablevision are insufficient to provide Payback, Cablevision
will not be obligated to make up the deficiency. See notes 1 and 2.
Amounts due to related parties, which represent non-interest-bearing
payables to TCIC, consist of the net effect of cash advances and certain
intercompany expense allocations.
(6) Commitments
-----------
The Partnership leases certain property and equipment under operating
leases. Lease expense aggregated $539,000, $502,000, and $559,000 in 1996,
1995 and 1994, respectively, including $199,000, $252,000 and $245,000 paid
under pole rental agreements which are terminable on short notice by either
party.
Management expects that in the normal course of business, leases that
expire will be renewed or replaced by other leases. So long as the
Partnership continues to own its cable television systems, the
Partnership's commitments are not expected to decrease. See note 2.
II-29
<PAGE>
PART III.
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 January 31, 1997, the following executive officers and directors
of TCIV 5 operate IR-TCI:
Name Position
---- --------
Marvin Jones (1)(2) Director and President of TCIV 5
- ---------------- since March 1996. President of one
Born September 11, 1937 of the cable groups of TCIC since
November 1, 1996. Mr. Jones has
performed consulting services in the
cable television industry since December
1991.
Stephen M. Brett (2) Director of TCIV 5 since August 1995.
- -------------------- Vice President and Secretary of
Born September 30, 1940 Cablevision and TCIV 5 since March
1992. Executive Vice President and
Secretary of TCIC since January of
1994; appointed TCIC Senior Vice
President and General Counsel as of
December 1991.
Arthur C. Belanger (2) Director of TCIV 5 since June 25,
- ---------------------- 1996. Prior to his retirement in
Born November 23, 1925 January 1992, Mr. Belanger was
Executive Vice President and Chief
Operating Officer of United Artists
Communications, Inc.
Paul F. Schonewolf (2) Director of TCIV 5 since June 25,
- ---------------------- 1996. Mr. Schonewolf is the President
Born February 9, 1937 of Hamilton County/Gore Mt. Cable TV,
Inc., a cable company serving six
upstate New York communities. From
1987 to 1993 he was President of
Schomann Entertainment Corp., which
owned and operated cable television
companies in New York, Vermont, New
Hampshire and Pennsylvania. From
1986 to 1994 he was President of PFS
Communications, a consulting company
serving the cable television industry.
Gary K. Bracken Vice President and Controller of
- --------------- Cablevision and TCIV 5 since March
Born July 29, 1939 1992. Mr. Bracken has been
Controller of TCIC since 1969.
Appointed TCIC Senior Vice President
in December 1991. Was named Vice
President and Principal Accounting
Officer of TCIC in 1982.
III-1
<PAGE>
Name Position
---- --------
Bernard W. Schotters Vice President and Treasurer of
- -------------------- Cablevision and TCIV 5 since March
Born September 25, 1944 1992. Appointed TCIC Senior Vice
President-Finance and Treasurer in
December 1991. Was appointed TCIC
Vice President of Finance in 1984.
(1) Mr. Jones was appointed TCIC Executive Vice President and Chief
Operating Officer in 1997.
(2) 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 Partners 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, 1996, all applicable filing requirements were complied
with.
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 and PCC. See "Certain Relationships and Related
---------------------------------
Transactions" below.
- -------------
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.
III-2
<PAGE>
Item 13. Certain Relationships and Related Transactions.
- -------- ----------------------------------------------
The Partnership purchases programming services from affiliates of TCI.
In 1996, the charges, which generally approximate such TCI affiliates' cost and
are based upon the number of subscribers served by the Partnership, aggregated
$5,576,000.
Under a management agreement with Cablevision, the Partnership is
charged a management fee of 6% of gross revenue, as defined in the management
agreement (5-1/2% to Cablevision and, through January 17, 1996, 1/2% to PCC).
Such fees aggregated $1,672,000 in 1996. Since ICC's withdrawal as general
partner on January 17, 1996, Cablevision has received the entire 6% management
fee. 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 $487,000 in 1996.
Riverside uses office facilities, personnel and certain distribution
assets (including a headend) of an affiliated cable television 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, 1996,
Riverside's operating and administrative salaries and expenses aggregated
$2,511,000.
Newport News was obligated to pay a disposition fee to Cablevision of
3% of the gross proceeds from the sale of any cable television system. The
Partnership's share of the disposition fee paid by Newport News in connection
with the Newport News Sale was $1,467,000. See note 2 to the accompanying
financial statements.
ACT 5 is also 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 limited partnership agreement. To the extent ACT 5 at its
termination has not made distributions to the limited partners equal to Payback,
the net disposition fees received by Cablevision will be returned to ACT 5 to
the extent necessary to allow ACT 5 to make distributions equal to Payback. In
the event that the disposition fees refunded by Cablevision are insufficient to
provide Payback, Cablevision will not be obligated to make up the deficiency.
See notes 1 and 2 to the accompanying financial statements.
At December 31, 1996, the Partnership owed $1,586,000 to TCIC and its
affiliates. Such amounts are non-interest-bearing and consist of the net effect
of cash advances and certain intercompany expense allocations.
III-3
<PAGE>
PART IV.
Item 14. Exhibits, Financial Statements and Financial Statement Schedules
- -------- ----------------------------------------------------------------
and Reports on Form 8-K.
-----------------------
(a) (1) Financial Statements Page
-------------------- ----
Included in Part II of this Report:
Independent Auditors' Report II-13
Balance Sheets, December 31, 1996 and 1995 II-14
Statements of Operations,
Years ended December 31, 1996, 1995 and 1994 II-16
Statements of Partners' Equity (Deficit),
Years ended December 31, 1996, 1995 and 1994 II-17
Statements of Cash Flows,
Years ended December 31, 1996, 1995 and 1994 II-18
Notes to Financial Statements,
December 31, 1996, 1995 and 1994 II-19
(a) (2) Financial Statement Schedules
-----------------------------
All schedules are omitted as they are not required or are not
applicable.
IV-1
<PAGE>
(a) (3) Exhibits
--------
The following exhibits are 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).
Joint Venture Agreement, dated as of December 9, 1986, by and between
the Partnership and American Cable TV Investors 4, Ltd., (ACT 4),
relating to Newport News, Virginia cable system, incorporated by
reference to ACT 4's (Commission File Number 0-15745) Annual Report on
Form 10-K for the year ended December 31, 1986.
Limited Partnership Agreement of Newport News Cablevision Associates,
L.P., dated as of December 9, 1986, by and between the Partnership and
ACT 4, incorporated by reference to ACT 4's (Commission File Number 0-
15745) Annual Report on Form 10-K for the year ended December 31,
1986.
Limited Partnership Agreement of Newport News Cablevision, Ltd., dated
as of December 9, 1986, by and between the Partnership and ACT 4,
incorporated by reference to ACT 4's (Commission File Number 0-15745)
Annual Report on Form 10-K for the year ended December 31, 1986.
Revolving Credit Agreement dated as of June 30, 1992 among American
Cable TV Investors 5, Ltd., as the Borrower, various financial
institutions as the Lenders, and Continental Bank, N.A. and
Nationsbank of Texas, N.A., as the Co-agents for the Lenders,
incorporated by reference to the Partnership's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1992 (Commission File
No. 0-16784).
(continued)
IV-2
<PAGE>
Asset Purchase Agreement by and between Newport News Cablevision, Ltd.
and Cox Cable Hampton Roads, Inc. (now known as Cox Communications
Rhode Island, Inc.) dated as of November 8, 1994, incorporated by
reference to ACT 4's Current Report on Form 8-K dated February 27,
1995 (Commission File No. 0-15745).
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.
27 Financial Data Schedule.
(b) Reports on Form 8-K filed during the quarter ended December 31, 1996:
None.
IV-3
<PAGE>
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/Marvin Jones March 28, 1997
------------------------
Marvin Jones
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:
<TABLE>
Signature Date
--------- ----
<S> <C>
/s/ Marvin Jones March 28, 1997
-------------------------
Marvin Jones
President and Director -
TCI Ventures Five, Inc.
(Principal Executive
Officer)
/s/ Bernard W. Schotters March 28, 1997
-------------------------
Bernard W. Schotters
Vice President and Treasurer -
TCI Ventures Five, Inc.
(Chief Financial Officer)
/s/ Gary K. Bracken March 28, 1997
-------------------------
Gary K. Bracken
Vice President and Controller - TCI
Ventures Five, Inc.
(Principal Accounting Officer)
/s/ Stephen M. Brett March 28, 1997
-------------------------
Stephen M. Brett
Vice President and Secretary and
Director - TCI Ventures Five, Inc.
</TABLE>
IV-4
<PAGE>
Signatures Date
---------- ----
/s/ Arthur C. Belanger March 28, 1997
----------------------------------
Director - TCI Ventures Five, Inc.
/s/ Paul F. Schonewolf March 28, 1997
----------------------------------
Director - TCI Ventures Five, Inc.
IV-5
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,729
<SECURITIES> 0
<RECEIVABLES> 541
<ALLOWANCES> 61
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 67,131
<DEPRECIATION> 28,399
<TOTAL-ASSETS> 73,209
<CURRENT-LIABILITIES> 0
<BONDS> 7,500
0
0
<COMMON> 0
<OTHER-SE> 60,137
<TOTAL-LIABILITY-AND-EQUITY> 73,209
<SALES> 0
<TOTAL-REVENUES> 28,108
<CGS> 0
<TOTAL-COSTS> 8,767
<OTHER-EXPENSES> 14,932
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 302
<INCOME-PRETAX> 35,631
<INCOME-TAX> 0
<INCOME-CONTINUING> 35,631
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,631
<EPS-PRIMARY> 176.37<F1>
<EPS-DILUTED> 0
<FN>
<F1>EPS-PRIMARY REPRESENTS NET EARNINGS PER LIMITED PARTNERSHIP UNIT.
</FN>
</TABLE>
