<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
F O R M 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----- -----
Commission File Number 1-9554
TCI PACIFIC COMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
State of Delaware 04-2980402
- -------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5619 DTC Parkway
Englewood, Colorado 80111
- ------------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 267-5500
Viacom International, Inc. -- 1515 Broadway, New York, New York 10036
---------------------------------------------------------------------
(Former name and address of Registrant)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes No X
----- -----
All of the Registrant's common stock is owned by TCI Communications, Inc.
The number of shares outstanding of the Registrant's common stock as of July
31, 1996 was:
Class B Common Stock - 1,000 shares.
<PAGE> 2
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly, VIACOM INTERNATIONAL, INC.)
(see note 1)
Combined Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ -----------------
Assets amounts in thousands
------
<S> <C> <C>
Cash $ 4,283 2,294
Trade and other receivables, net 11,233 14,333
Property and equipment, at cost:
Land 6,443 5,470
Distribution systems 591,348 549,553
Support equipment and buildings 195,022 192,305
---------- ---------
792,813 747,328
Less accumulated depreciation 355,547 327,684
---------- ---------
437,266 419,644
---------- ---------
Franchise costs 718,928 718,636
Less accumulated amortization 166,710 157,407
---------- ---------
552,218 561,229
---------- ---------
Other assets, at cost, net of amortization (note 7) 70,089 69,313
---------- ---------
$1,075,089 1,066,813
========== =========
Liabilities and Viacom Equity Investment
----------------------------------------
Accounts payable $ 33,218 28,380
Accrued expenses 42,326 40,242
Debt (note 4) 57,000 57,000
Deferred income taxes 77,507 72,953
Other liabilities 10,593 11,131
---------- ---------
Total liabilities 220,664 209,706
Viacom equity investment (notes 3 and 5) 854,445 857,107
---------- ---------
Commitments and contingencies (note 7)
$1,075,089 1,066,813
========== =========
</TABLE>
See accompanying notes to combined financial statements.
I-1
<PAGE> 3
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly, VIACOM INTERNATIONAL, INC.)
(see note 1)
Combined Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months Six months
ended ended
June 30, June 30,
------------------------------- --------------------------------
1996 1995 1996 1995
------------ ------------ -------- --------
amounts in thousands
<S> <C> <C> <C> <C>
Revenue $119,626 109,702 236,225 215,574
Operating costs and expenses:
Operating (note 6) 51,625 47,770 103,355 94,149
Selling, general and administrative 23,310 20,936 47,546 42,275
(note 6)
Depreciation and amortization 22,162 20,536 43,969 40,449
-------- --------- -------- --------
97,097 89,242 194,870 176,873
-------- --------- -------- --------
Operating income 22,529 20,460 41,355 38,701
Other income (expense):
Interest expense (note 6) (12,045) (12,875) (24,003) (24,932)
Gain on sale of marketable securities
available-for-sale -- -- -- 26,902
Other, net 2,024 1,448 3,605 3,235
-------- --------- -------- --------
(10,021) (11,427) (20,398) 5,205
-------- --------- -------- --------
Earnings before income taxes 12,508 9,033 20,957 43,906
Income tax expense (note 5) (7,094) (5,056) (12,153) (20,295)
-------- --------- -------- --------
Net earnings $ 5,414 3,977 8,804 23,611
======== ========= ======== ========
</TABLE>
See accompanying notes to combined financial statements.
I-2
<PAGE> 4
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly, VIACOM INTERNATIONAL, INC.)
(see note 1)
Combined Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------------
1996 1995
------ ------
amounts in thousands
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 8,804 23,611
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 43,969 40,449
Gain on sale of marketable securities
available-for-sale -- (26,902)
Deferred income tax benefit 4,554 2,255
Other noncash charges (credits) 712 (1,056)
Changes in operating assets and liabilities:
Change in receivables 3,100 4,084
Change in accruals and payables 6,922 5,014
--------- --------
Net cash provided by operating activities 68,061 47,455
--------- --------
Cash flows from investing activities:
Capital expended for property and equipment (52,398) (56,695)
Cash proceeds from disposition of assets -- 27,001
Other investing activities (2,208) (5,123)
--------- --------
Net cash used in investing activities (54,606) (34,817)
--------- --------
Cash flows from financing activities -
Distributions to Viacom, Inc. (11,466) (13,060)
--------- --------
Net increase (decrease) in cash 1,989 (422)
Cash at beginning of period 2,294 3,011
--------- --------
Cash at end of period $ 4,283 2,589
========= ========
</TABLE>
See accompanying notes to combined financial statements.
I-3
<PAGE> 5
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly, VIACOM INTERNATIONAL, INC.)
Notes to Combined Financial Statements
June 30, 1996
(unaudited)
(1) Basis of Presentation
On July 24, 1995, Viacom Inc. ("Viacom"), Viacom International Inc.
July 24, 1995, Viacom Inc. ("Viacom"), Viacom International Inc.
(after giving effect to the First Distribution as defined below, "VII
Cable"), a wholly owned subsidiary of Viacom, and Viacom
International Services Inc. ("New VII"), a wholly owned subsidiary of
VII Cable, entered into certain agreements (the "Transaction
Agreements") with Tele-Communications, Inc. ("TCI") and TCI
Communications, Inc. ("TCIC"), a subsidiary of TCI, providing for, among
other things, the conveyance of Viacom International Inc.'s non-cable
assets and liabilities to New VII, the distribution of all of the common
stock of New VII to Viacom (the "First Distribution"), the Exchange
Offer (as defined below) and the issuance to TCIC of all of the Class B
Common Stock of VII Cable.
On June 24, 1996, Viacom commenced an exchange offer (the "Exchange
Offer") pursuant to which Viacom shareholders could exchange shares of
Viacom Class A or Class B Common Stock for shares of VII Cable Class A
Common Stock. Prior to the consummation of the Exchange Offer, Viacom
International Inc. entered into a $1.7 billion credit agreement (the
"Credit Agreement"). Proceeds from such credit agreement were
transferred by Viacom International Inc. to New VII as part of the First
Distribution. Immediately following the consummation of the Exchange
Offer on July 31, 1996, TCIC through a capital contribution of $350
million in cash, purchased all of the shares of Class B Common Stock of
VII Cable (the "Acquisition"). At that time, the shares of Class A
Common Stock of VII Cable issued in the Exchange Offer converted into
shares of 5% Class A Senior Cumulative Redeemable Exchangeable Preferred
Stock (the "Exchangeable Preferred Stock") of VII Cable with a stated
value of $100 per share (the "Stated Value"), and VII Cable was renamed
TCI Pacific Communications, Inc. When used in these financial
statements "VII Cable" refers to the period prior to the Acquisition,
"Pacific" refers to the period subsequent to the Acquisition and the
"Company" refers to all periods.
(continued)
I-4
<PAGE> 6
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly, VIACOM INTERNATIONAL, INC.)
Notes to Combined Financial Statements
The terms of the Exchangeable Preferred Stock, including its dividend,
redemption and exchange features, were designed to cause the Exchangeable
Preferred Stock, in the opinion of two investment banks, to initially trade
at the Stated Value. The Exchangeable Preferred Stock is exchangeable, at
the option of the holder commencing after the fifth anniversary of the date
of issuance, for shares of Tele-Communications, Inc. Series A TCI Group
Stock ("Series A TCI Group Stock") at an initial exchange rate of 4.81
shares of Series A TCI Group Stock for each share of Exchangeable Preferred
Stock exchanged. The Exchangeable Preferred Stock is subject to redemption,
at the option of the Company, after the fifth anniversary of the date of
issuance, initially at a redemption price of $102.50 per share and
thereafter at prices declining ratably annually to $100 per share on and
after the eighth anniversary of the date of issuance, plus accrued and
unpaid dividends to the date of redemption. The Exchangeable Preferred
Stock is also subject to mandatory redemption on the tenth anniversary of
the date of issuance at a price equal to the Stated Value per share plus
accrued and unpaid dividends. Amounts payable by the Company in satisfaction
of its optional or mandatory redemption obligations with respect to the
Exchangeable Preferred Stock may be made in cash or, at the election of the
Company, in shares of Series A TCI Group Stock, or in any
combination of the foregoing.
The accompanying combined financial statements and related notes reflect the
carve-out historical results of operations and financial position of the
cable television business of Viacom. These combined financial statements
are not necessarily indicative of results that would have occurred if VII
Cable had been a separate stand-alone entity during the periods presented or
of future results of Pacific.
The accompanying interim combined financial statements are unaudited but, in
the opinion of management, reflect all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the results for
such periods. The results of operations for any interim period are not
necessarily indicative of results for the full year. These combined
financial statements should be read in conjunction with VII Cable's combined
financial statements and notes thereto for the year ended December 31, 1995.
The Company, through its subsidiaries and affiliates, is principally engaged
in the construction, acquisition, ownership, and operation of cable
television systems. The Company operates its cable television systems in
five geographic regions in the United States.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
Certain amounts have been reclassified for comparability with the 1996
presentation.
(continued)
I-5
<PAGE> 7
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly, VIACOM INTERNATIONAL, INC.)
Notes to Combined Financial Statements
(2) Summary of Significant Accounting Policies
Principles of Combination
The combined financial statements included the accounts of VII Cable
and all investments of more than 50% in subsidiaries in which VII
Cable has significant control. All significant intercompany
transactions with combined entities have been eliminated.
Receivables
Receivables are reflected net of an allowance for doubtful accounts.
Such allowance at June 30, 1996 and December 31, 1995 was not
material.
Property and Equipment
Property and equipment, including construction in progress, is stated
at cost. Inventory, which consists primarily of construction
material, is recorded at the lower of weighted average cost or market.
Construction in progress and inventory are included in distribution
systems. VII Cable capitalizes interest costs associated with certain
qualifying assets. The total amount of interest costs capitalized was
not material during 1996 or 1995. Repairs and maintenance are charged
to operations, and renewals and additions are capitalized. Upon the
normal retirement of distribution system components, the cost is
charged to accumulated depreciation with no effect on net earnings.
For all other retirements, the cost and accumulated depreciation are
removed from the accounts and any resulting gain or loss is
recognized.
Depreciation expense is computed on a straight-line method over
estimated useful lives of 9-15 years for distribution systems and 4-30
years for support equipment and buildings.
Intangibles
Intangible assets primarily consist of the cost of acquired businesses
in excess of the fair value of tangible assets and liabilities
acquired. Such assets are amortized on a straight-line basis over
estimated useful lives of up to 40 years. In addition, VII Cable has
franchise rights to operate cable television systems in various towns
and political subdivisions within its service areas. The cost of
successful franchise applications are capitalized and amortized over
the life of the related franchise agreement. Franchise lives
generally range from 10 to 15 years with various dates of expiration.
Financial Instruments
VII Cable's most significant financial instruments are debt and
marketable securities available-for-sale. The carrying value of its
debt instruments approximates fair value.
Investments classified as available-for-sale are carried at fair value
and unrealized holding gains and losses during the period are recorded
as a component of equity. During February 1995, VII Cable sold its
marketable securities available-for-sale, resulting in a pre-tax gain
of $26,902,000.
(continued)
I-6
<PAGE> 8
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly, VIACOM INTERNATIONAL, INC.)
Notes to Combined Financial Statements
Recent Accounting Pronouncements
During 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121 ("SFAS 121"). "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," which VII Cable adopted in 1996. SFAS 121
establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles and goodwill related to those
assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. VII Cable's adoption of
SFAS 121 did not have an effect on VII Cable's combined financial
position or results of operations.
(3) Viacom Equity Investment
An analysis of the Viacom equity investment activity is as follows
(amounts in thousands):
<TABLE>
<S> <C>
Balance as of December 31, 1995 $857,107
Net earnings 8,804
Net distributions to Viacom (11,466)
--------
Balance as of June 30, 1996 $854,445
========
</TABLE>
Prior to the Acquisition, Viacom funded the working capital
requirements of its businesses based upon a centralized cash management
system. Viacom equity investment includes accumulated equity as well as
any payables and receivables due to/ from Viacom resulting from cash
transfers.
(4) Debt
During 1994, Viacom International Inc. and certain of its subsidiaries
(the "Subsidiary Borrowers") entered into a $311 million credit
agreement (the "Viacom Credit Agreement"), of which $57 million was
entered into by Viacom Cablevision of Dayton Inc. ("Dayton"), which is
included in the combined financial statements for VII Cable. As a
result of the transactions described in note 1, New VII assumed
Dayton's obligation under the Viacom Credit Agreement.
In connection with the Acquisition described in note 1, the Company
borrowed $1,350 million pursuant to the Credit Agreement. The Credit
Agreement consists of a $350 million term loan (the "Term Loan") which
is due December 31, 2004 and a $1,050 million revolving commitment
loan (the "Revolving Loan") that provides for semi-annual escalating
commitment reductions from June 30, 1998 through September 30, 2004.
The Term Loan and the Revolving Loan provide for quarterly interest
payments at variable rates based upon the Company's debt to cash flow
ratio (as defined the Credit Agreement). The Credit Agreement
contains restrictive covenants which require, among other things, the
maintenance of specified cash flow and financial ratios and include
certain limitations of indebtedness, investments, guarantees,
dispositions, stock repurchases and dividend payments. In addition,
the Revolving Loan requires a commitment fee to be paid quarterly on
the average unborrowed portion of the total amount available for
borrowings.
(continued)
I-7
<PAGE> 9
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly, VIACOM INTERNATIONAL, INC.)
Notes to Combined Financial Statements
(5) Income Taxes
Viacom International Inc. has been included in consolidated federal,
state and local income tax returns filed by Viacom. However, the tax
expense reflected in the accompanying combined statements of
operations and tax liabilities reflected in the accompanying combined
balance sheets have been prepared on a separate return basis as though
VII Cable had filed stand-alone income tax returns. The current
income tax liabilities for the periods presented have been satisfied
by Viacom. These amounts have been reflected in Viacom equity
investment in the accompanying combined balance sheets. In connection
with the transactions described in note 1, Viacom agreed to indemnify
VII Cable against income tax assessments, if any, arising from
federal, state or local tax audits for periods in which VII Cable was
a member of Viacom's consolidated tax group.
(6) Related Party Transactions
TCI will provide certain facilities, services and personnel to
Pacific. The scope of the facilities, personnel and services to
Pacific and the respective charges payable in respect thereof are set
forth in a services agreement to be entered into among TCI, TCIC and
Pacific (the "Services Agreement"). Pursuant to the Services
Agreement, TCI will provide to Pacific administrative and operational
services necessary for the conduct of its business, including, but not
limited to, such services as are generally performed by TCI's
accounting, finance, corporate, legal and tax departments. In
addition, TCI will make available to Pacific such general overall
management services and strategic planning services as TCI and Pacific
shall agree, and shall provide Pacific with such access to and
assistance from TCI engineering and construction groups and TCI's
programming and technology/venture personnel as Pacific may from time
to time request.
The Services Agreement will also provide that, for so long as TCI
continues to beneficially own shares of Pacific's common stock
representing at least a majority in voting power of the outstanding
shares of capital stock of Pacific entitled to vote generally in the
election of directors, TCI will continue to provide in the same
manner, and on the same basis as is generally provided from time to
time to other participating TCI subsidiaries, benefits and
administrative services to Pacific's employees. In this regard,
Pacific will be allocated that portion of TCI's compensation expense
attributable to benefits extended to employees of Pacific.
Pursuant to the Services Agreement, Pacific will from time to time
reimburse TCI for all direct expenses incurred by them in providing
such services and a pro rata share of all indirect expenses incurred
by them in connection with the rendering of such services, including a
pro rata share of the salary and other compensation of TCI employees
performing services for Pacific and general overhead expenses. The
obligations of TCI to provide services under the Services Agreement
(other than TCI's obligation to allow Pacific's employees to
participate in TCI's employee benefit plans) will continue in effect
until terminated by any party to the Services Agreement at any time on
not less than 60 days' notice.
(continued)
I-8
<PAGE> 10
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly, VIACOM INTERNATIONAL, INC.)
Notes to Combined Financial Statements
An indirect wholly owned subsidiary of TCI purchases programming
services from program suppliers and then makes such services available
to TCI's subsidiaries and certain of its affiliates at such subsidiary's
cost and, in some circumstances, an administrative fee. It is
anticipated that the cable systems owned and operated by Pacific will
purchase programming from such subsidiary at such subsidiary's cost.
Prior to the Acquisition, Viacom provided VII Cable with certain
general services, including insurance, legal, financial and other
corporate functions. Charges for these services have been made based
on the average of certain specified ratios of revenues, earnings from
operations and net assets. Management believes that the methodologies
used to allocate these charges are reasonable. The charges for such
services were $4,838,000 and $4,100,000 for the six months ended June
30, 1996 and 1995, respectively.
In addition to the interest expense recorded by VII Cable on borrowing
under the credit agreement described in note 3, Viacom allocated
interest expense of $22,933,000 and $23,899,000 for the six months
ended June 30, 1996 and 1995, respectively. Such allocated interest
expense is related to Viacom corporate debt and is allocated to VII
Cable on the basis of a percentage of VII Cable's average net assets to
Viacom's average net assets.
VII Cable, through the normal course of business, was involved in
transactions with companies owned by or affiliated with Viacom. VII
Cable has agreements to distribute television programs of such
companies, including Showtime Networks Inc., MTV Networks, Comedy
Central and USA Networks. The agreements require VII Cable to pay
license fees based upon the number of customers receiving the service.
Affiliate license fees incurred under these agreements were $16,846,000
and $14,583,000 for the six months ended June 30, 1996 and 1995,
respectively. In addition, cooperative advertising expenses charged to
affiliated companies were $168,000 and $545,000 for the six months
ended June 30, 1996 and 1995, respectively.
(7) Commitments and Contingencies
During July 1991, VII Cable received reassessments from ten California
counties of its real and personal property, related to a June 1987
acquisition, which could result in substantially higher California
property tax liabilities. VII Cable is appealing the reassessments. At
June 30, 1996 and December 31, 1995, VII Cable had paid $43,913,000 and
$43,245,000, respectively, of real and personal property taxes which
have been recorded as an excess property tax receivable included in
other assets. In connection with the transactions described in note 1,
such other assets and any potential future liability were conveyed to
Viacom effective July 31, 1996.
The Company is involved in various claims and lawsuits arising in the
ordinary course of business, none of which, in the opinion of
management, will have a material adverse effect on the Company's
financial position or results of operations.
In the ordinary course of business, the Company enters into long-term
affiliation agreements with programming services which require that the
Company continues to carry and pay for programming and meet certain
performance requirements.
I-9
<PAGE> 11
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly, VIACOM INTERNATIONAL, INC.)
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
On July 24, 1995, Viacom, Viacom International Inc. and Viacom
International Services Inc., entered into the Transaction Agreements with TCI
and TCIC, providing for, among other things, the conveyance of Viacom
International Inc.'s non-cable assets and liabilities to New VII, the
distribution of all of the common stock of New VII to Viacom, the Exchange
Offer and the issuance to TCIC of all of the Class B Common Stock of VII Cable.
On June 24, 1996, Viacom commenced the Exchange Offer pursuant to
which Viacom shareholders could exchange shares of Viacom Class A or Class B
Common Stock for shares of VII Cable Class A Common Stock. Prior to the
consummation of the Exchange Offer, Viacom International Inc. entered into the
Credit Agreement. Proceeds from such credit agreement were transferred by
Viacom International Inc. to New VII as part of the First Distribution.
Immediately following the consummation of the Exchange Offer on July 31, 1996,
TCIC through a capital contribution of $350 million in cash, purchased all of
the shares of Class B Common Stock of VII Cable. At that time, the shares of
Class A Common Stock of VII Cable issued in the Exchange Offer converted into
shares of 5% Class A Senior Cumulative Redeemable Exchangeable Preferred Stock
of VII Cable with a stated value of $100 per share, and VII Cable was renamed
TCI Pacific Communications, Inc.
The terms of the Exchangeable Preferred Stock, including its dividend,
redemption and exchange features, were designed to cause the Exchangeable
Preferred Stock, in the opinion of two investment banks, to initially trade at
the Stated Value. The Exchangeable Preferred Stock is exchangeable, at the
option of the holder commencing after the fifth anniversary of the date of
issuance, for shares of Series A TCI Group Stock. The Exchangeable Preferred
Stock is subject to redemption, at the option of the Company, after the fifth
anniversary of the date of issuance. The Exchangeable Preferred Stock is also
subject to mandatory redemption on the tenth anniversary of the date of
issuance at a price equal to the Stated Value per share plus accrued and unpaid
dividends. Amounts payable by the Company in satisfaction of its optional or
mandatory redemption obligations with respect to the Exchangeable Preferred
Stock may be made in cash or, at the election of the Company, in shares of
Series A TCI Group Stock, or in any combination of the foregoing. See note 1
to the accompanying combined financial statements.
The following discussion of financial condition and results of
operations and the accompanying combined financial statements and related notes
reflect the carve-out historical results of operations and financial position
of the cable television business of Viacom. These combined financial
statements are not necessarily indicative of results that would have occurred
if VII Cable had been a separate stand-alone entity during the periods
presented or of future results of Pacific.
The Company owns and operates cable television systems in five
geographic regions in the United States. Substantially all of the Company's
revenue is earned from subscriber fees for primary (i.e., non-premium) and
premium subscription services, the rental of converters and remote control
devices, and installation fees. Additional revenue is derived from the sale of
advertising, pay-per-view programming fees, payments received related to
products sold through home shopping services and leasing of fiber optic
capacity in three of the Company's franchise areas to partnerships (in which
the Company has an equity interest) engaged in the provision of competitive
access telephone services.
(continued)
I-10
<PAGE> 12
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly, VIACOM INTERNATIONAL, INC.)
Recent federal laws and regulations, including the decision to
reregulate certain aspects of the cable television distribution industry, have
affected the Company's ability to increase rates for certain subscriber
services or restructure its rates for certain services. These reregulation
activities are designed to reduce customer rates and limit future rate
increases for non-premium program services.
(1) Material Changes in Financial Condition:
In connection with the Acquisition described in note 1, the Company
borrowed $1,350 million pursuant to the Credit Agreement. The Credit Agreement
consists of the $350 million Term Loan which is due December 13, 2004 and the
$1,050 million Revolving Loan that provides for semi-annual escalating
commitment reductions from June 30, 1998 through September 30, 2004. The Term
Loan and the Revolving Loan provide for quarterly interest payments at variable
rates based upon the Company's debt to cash flow ratio (as defined in the
Credit Agreement). The Credit Agreement contains restrictive covenants which
require, among other things, the maintenance of specified cash flow and
financial ratios and include certain limitations on indebtedness, investments,
guarantees, dispositions, stock repurchases and dividend payments.
Additionally, the Company's business requires significant capital
expenditures to maintain, upgrade, rebuild and expand its cable television
systems. VII Cable's cash requirements have been funded by VII Cable's
operating activities and historically, as needed, through intercompany advances
from Viacom. On a pro forma basis for 1995, VII Cable's cash flow would have
been insufficient to meet its anticipated cash requirements (including capital
expenditures, capital contributions to joint ventures, payments of interest and
principal on the Credit Agreement and dividends payable on the Exchangeable
Preferred Stock). VII Cable would expect any remaining insufficiency to be
addressed by borrowings of up to $50 million under the revolving credit portion
of the Credit Agreement and thereafter through intercompany advances, as
required, from TCI.
The Company is involved in various claims and lawsuits arising in the
ordinary course of business, none of which, in the opinion of management, will
have a material adverse effect on the Company's financial position or results
of operations.
The Company's current franchises expire on various dates through 2017.
VII Cable has never had a franchise revoked and, to date, all of VII Cable's
franchises have been renewed or extended at or prior to their scheduled
expirations. The Company has no reason to believe that its franchises will not
be renewed.
The Company's cable systems currently compete for viewers with, or
face potential competition from, other distribution systems which deliver
programming by microwave transmission (through multichannel multipoint
distribution systems and satellite master antenna television systems or
directly to subscribers via either direct broadcast satellite or TV-receive
only technology.
In the ordinary course of business, the Company enters into long-term
affiliation agreements with programming services which require that the Company
continue to carry and pay for programming and meet certain performance
requirements.
(continued)
I-11
<PAGE> 13
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly, VIACOM INTERNATIONAL, INC.)
(1) Material Changes in Financial Condition (continued):
Net cash flow from operating activities increased 43% to $68.1 million
for the six months ended June 30, 1996 from $47.5 million for the six months
ended June 30, 1995, primarily reflecting the lower provision for income taxes
for second quarter 1996 due to the second quarter 1995 gain on the sale of
marketable securities and increased operating income in the second quarter of
1996. Investing activities primarily reflect capital expenditures and in
second quarter 1995 proceeds from the sale of marketable securities. Net cash
flow from financing activities reflect Viacom's funding of VII Cable's working
capital requirements, net of amount allocated to VII Cable from Viacom,
including amounts for interest, certain administrative services and salaries
and benefits. See the accompanying combined statements of cash flows.
(2) Material Changes in Results of Operations:
Revenue increased 9% and 10% for the three months and six months ended
June 30, 1996, respectively, as compared to the corresponding periods in 1995.
The three month increase is primarily attributable to 3.2% and 2.1% increases
in average primary customers and premium units, respectively, and a 6.6%
increase in the average primary rate, partially offset by a 1.0% decrease in
the average premium rate.
The six month increase in revenue is primarily due to 3.2% and 3.6%
increases in average primary customers and premium units, respectively, and a
6.3% increase in the average primary rate, partially offset by a 2.3% decrease
in the average premium rate. In addition, pay-per-revenue increased $3 million
or 44.5% during the six months ended June 30, 1996, as compared to the same
period in 1995.
Operating expenses increased 8% and 10% for the three months and six
months ended June 30, 1996, respectively, as compared to the corresponding
periods in 1995. Such increases are consistent with the increases in revenue
described above and principally reflect an increase in programming and other
costs related to customer growth, increased programming fees and increased
channel capacity.
Selling, general and administrative ("SG&A") expenses increased 11%
and 12% for the three months and six months ended June 30, 1996, respectively,
as compared to the corresponding periods in 1995. Such increases principally
reflect higher overhead allocations and the absence of programming launch
incentives in 1996. As a percentage of revenue, SG&A expenses were relatively
comparable from the 1995 periods to the 1996 periods.
As of June 30, 1996, VII Cable served approximately 1,196,000 primary
customers subscribing to approximately 930,000 premium units, representing a
3.2% and 1.7% increase, respectively, since June 30, 1995.
Prior to the Acquisition, Viacom provided VII Cable with certain
general services, including insurance, legal, financial and other corporate
functions. Charges for these services were based on the average of certain
specified ratios of revenue, operating income and net assets of VII Cable in
relation to Viacom. See note 6 to the accompanying combined financial
statements.
The Company anticipates that its depreciation and amortization will
increase significantly as a result of the Acquisition and the resulting
addition to franchise costs after the allocation of the $1.7 billion purchase
price to the Company's assets and liabilities based on their respective fair
market values.
(continued)
I-12
<PAGE> 14
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly, VIACOM INTERNATIONAL, INC.)
(2) Material Changes in Results of Operations (continued):
Interest expense decreased slightly during the three months and six
months ended June 30, 1996, as compared to 1995. Interest expense reflects
amounts recorded by VII Cable on borrowings under a credit agreement and
amounts allocated by Viacom. Viacom allocated interest expense to VII Cable
based on a percentage of VII Cable's average net assets to Viacom's average net
assets. Interest expense is expected to increase significantly following
consummation of the Acquisition as a result of the borrowings under the Credit
Agreement.
VII Cable was included in the consolidated federal, state and local
income tax returns filed by Viacom. However, the income tax provision was
prepared on a separate return basis as though VII Cable filed stand-alone
income tax returns. The effective tax rates of 58% and 46% for the six months
ended June 30, 1996 and 1995, respectively, were both adversely affected by the
amortization of acquisition costs which are not deductible for tax purposes.
I-13
<PAGE> 15
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly, VIACOM INTERNATIONAL, INC.)
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
There were no new material legal proceedings or material developments in
previously reported legal proceedings during the quarter ended June 30,
1996 to which TCI Pacific Communications, Inc. or any of its consolidated
subsidiaries is a party or of which any of its property is the subject.
Item 6. Exhibit and Reports on Form 8-K.
(a) Exhibit -
(27) TCI Pacific Communications, Inc. Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended June 30, 1996:
None.
II-1
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TCI PACIFIC COMMUNICATIONS, INC.
Date: September 12, 1996 By: /s/ Brendan R. Clouston
---------------------------------
Brendan R. Clouston
President
Date: September 12, 1996 By: /s/ Bernard W. Schotters
---------------------------------
Bernard W. Schotters
Senior Vice President and
Treasurer
(Principal Financial Officer)
II-2
<PAGE> 17
EXHIBIT INDEX
The following exhibits are filed herewith or are incorporated by reference
herein (according to the number assigned to them in Item 601 of Regulation S-K)
as noted:
(27) TCI Pacific Communications, Inc. Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS INCLUDED IN TCI PACIFIC COMMUNICATIONS, INC.'S QUARTERLY REPORT ON
FORM 10-Q FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 4,283
<SECURITIES> 0
<RECEIVABLES> 11,233
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 792,813
<DEPRECIATION> 355,547
<TOTAL-ASSETS> 1,075,089
<CURRENT-LIABILITIES> 0
<BONDS> 57,000
<COMMON> 0
0
0
<OTHER-SE> 854,445
<TOTAL-LIABILITY-AND-EQUITY> 1,075,089
<SALES> 0
<TOTAL-REVENUES> 236,225
<CGS> 0
<TOTAL-COSTS> 103,355
<OTHER-EXPENSES> 43,969
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,003
<INCOME-PRETAX> 20,957
<INCOME-TAX> 12,153
<INCOME-CONTINUING> 8,804
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,804
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
