<PAGE> 1
UNITED STATES
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 September 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)
<TABLE>
<S> <C>
State of Delaware 04-2980402
----------------------------------------------- ------------------------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
5619 DTC Parkway
Englewood, Colorado 80111
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (303) 267-5500
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 - 100 shares.
<PAGE> 2
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
Pacific VII Cable
(note 2) (note 2)
------------- ------------
September 30, December 31,
1996 1995
------------- ------------
amounts in thousands
<S> <C> (C)
Assets
- ------
Cash $ 42,184 | 2,294
|
Trade and other receivables, net 17,432 | 14,333
|
Prepaids 8,839 | 3,342
|
Property and equipment, at cost: |
Land 6,445 | 5,470
Distribution systems 310,178 | 549,553
Support equipment and buildings 195,045 | 192,305
---------- | ---------
511,668 | 747,328
Less accumulated depreciation 6,239 | 327,684
---------- | ---------
505,429 | 419,644
---------- | ---------
|
Franchise costs 2,825,388 | 718,636
Less accumulated amortization 11,375 | 157,407
---------- | ---------
2,814,013 | 561,229
---------- | ---------
|
Other assets, at cost, net of amortization (note 1) 63,469 | 65,971
---------- | ---------
|
$3,451,366 | 1,066,813
========== | =========
Liabilities and Common Stockholder's Equity |
- ------------------------------------------- |
|
Accounts payable and accrued expenses $ 35,804 | 70,099
|
Debt (note 7) 1,324,999 | 57,000
|
Deferred income taxes 1,055,692 | 72,953
|
Other liabilities 4,445 | 9,654
---------- | ---------
|
Total liabilities 2,420,940 | 209,706
---------- | ---------
|
Exchangeable Preferred Stock (note 9) 631,011 | --
|
Common stockholder's equity: |
Class A common stock, $1 par value. |
Authorized 6,257,961 shares; |
no shares issued and outstanding -- | --
Class B common stock, $.01, par value. |
Authorized 100 shares; |
issued and outstanding 100 shares -- | --
Additional paid-in capital 344,786 | --
Accumulated deficit (901) | --
Viacom Inc. ("Viacom") equity investment -- | 857,107
---------- | ---------
343,885 | 857,107
Due to TCI Communications, Inc. ("TCIC") 55,530 | --
---------- | ---------
|
Total common stockholder's equity 399,415 | 857,107
---------- | ---------
Commitments (note 11) |
$3,451,366 | 1,066,813
========== | =========
</TABLE>
See accompanying notes to financial statements.
I-1
<PAGE> 3
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Pacific VII Cable
(note 2) (note 2)
------------- ----------------------------------
Two months One month Three months
ended ended ended
September 30, July 31, September 30,
1996 1996 1995
------------- ---------- -------------
amounts in thousands
<S> <C> <C> <C>
Revenue $ 83,252 | 42,769 118,108
|
Operating costs and expenses: |
Operating (note 10) 27,344 | 16,639 42,674
Selling, general and administrative (note 10) 22,611 | 11,159 32,182
Depreciation (note 4) 6,239 | 5,949 15,978
Amortization 11,375 | 1,555 4,659
-------- | ------ -------
67,569 | 35,302 95,493
-------- | ------ -------
|
Operating income 15,683 | 7,467 22,615
|
Other income (expense): |
Interest expense (note 10) (16,744) | (6,905) (12,996)
Interest income -- | 2,214 --
Other, net (506) | 359 (10)
-------- | ------ -------
(17,250) | (4,332) (13,006)
-------- | ------ -------
|
Earnings (loss) before income taxes (1,567) | 3,135 9,609
|
Income tax benefit (expense) (note 8) 666 | (1,279) (5,366)
-------- | ------ -------
|
Net earnings (loss) (901) | 1,856 4,243
| ====== =======
|
Dividend requirement on Exchangeable Preferred Stock (5,214) |
-------- |
|
Net loss attributable to common stockholder $ (6,115) |
======== |
</TABLE>
See accompanying notes to financial statements.
I-2
<PAGE> 4
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Pacific VII Cable
(note 2) (note 2)
------------- ------------------------------------
Two months Seven months Nine months
ended ended ended
September 30, July 31, September 30,
1996 1996 1995
------------- ------------ -------------
amounts in thousands
<S> <C> <C> <C>
Revenue $ 83,252 | 293,299 346,427
|
Operating costs and expenses: |
Operating (note 10) 27,344 | 108,652 126,253
Selling, general and administrative (note 10) 22,611 | 80,801 94,653
Depreciation (note 4) 6,239 | 40,681 47,185
Amortization 11,375 | 10,899 14,002
-------- | ------- -------
67,569 | 241,033 282,093
-------- | ------- -------
|
Operating income 15,683 | 52,266 64,334
|
Other income (expense): |
Interest expense (note 10) (16,744) | (30,908) (37,928)
Interest income -- | 2,214 --
Gain on sale of marketable securities held as |
available-for-sale -- | -- 26,902
Other, net (506) | 520 207
-------- | ------- -------
(17,250) | (28,174) (10,819)
-------- | ------- -------
|
Earnings (loss) before income taxes (1,567) | 24,092 53,515
|
Income tax benefit (expense) (note 8) 666 | (13,432) (25,661)
-------- | ------- -------
|
Net earnings (loss) (901) | 10,660 27,854
| ======= =======
|
Dividend requirement on Exchangeable Preferred |
Stock (5,214) |
-------- |
|
Net loss attributable to common stockholder $ (6,115) |
======== |
</TABLE>
See accompanying notes to financial statements.
I-3
<PAGE> 5
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Statement of Common Stockholder's Equity
(unaudited)
<TABLE>
<CAPTION>
Common stock Additional Viacom
---------------- paid-in Accumulated equity Due to Total
Class A Class B capital deficit investment TCIC equity
------- ------- ---------- ----------- ---------- ------ ----------
amounts in thousands
<S> <C> <C> <C> <C> <C> <C> <C>
VII Cable (note 2)
- ------------------
Balance at January 1, 1996 $-- -- -- -- 857,107 -- 857,107
Net earnings 10,660 -- 10,660
Net distributions from Viacom -- -- -- -- 4,163 -- 4,163
Allocated interest from Viacom -- -- -- -- 28,140 -- 28,140
Allocated overhead from Viacom -- -- -- -- 5,750 -- 5,750
Income tax allocation from Viacom -- -- -- -- 10,873 -- 10,873
Salaries and benefits payments
allocated by Viacom -- -- -- -- 7,569 -- 7,569
Other -- -- -- -- (11) -- (11)
Transfer of cash and net liabilities
in connection with the First
Distribution (note 1) -- -- -- -- (1,678,760) -- (1,678,760)
Costs incurred by TCIC to obtain
Credit Agreement allocated to
VII Cable (note 1) -- -- -- -- -- 12,673 12,673
--- -- ------- ---- ---------- ------ ----------
Balance at July 31, 1996 $-- -- -- -- (754,509) 12,673 (741,836)
=== == ======= ==== ========== ====== ==========
_____________________________________________________________________________________________________________________________
Pacific (note 2)
- ----------------
Initial capitalization $-- -- 350,000 -- -- 35,293 385,293
Net loss -- -- -- (901) -- -- (901)
Accreted dividends on Exchangeable
Preferred Stock -- -- (5,214) -- -- -- (5,214)
Allocation of programming charges
from TCIC -- -- -- -- -- 18,308 18,308
Allocation of expenses in connection
with the Services Agreement (note 10) -- -- -- -- -- 1,993 1,993
Intercompany income tax allocation -- -- -- -- -- 775 775
Net cash transfers to TCIC -- -- -- -- -- (839) (839)
--- -- ------- ---- ---------- ------ ----------
Balance at September 30, 1996 $-- -- 344,786 (901) -- 55,530 399,415
=== == ======= ==== ========== ====== ==========
</TABLE>
See accompanying notes to financial statements.
I-4
<PAGE> 6
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Pacific VII Cable
(note 2) (note 2)
------------- -----------------------------------
Two months Seven months Nine months
ended ended ended
September 30, July 31, September 30,
1996 1996 1995
------------- ------------ -------------
<S> <C> <C> <C>
amounts in thousands
(see notes 2 and 5)
Cash flows from operating activities:
Net earnings (loss) $ (901) | 10,660 27,854
Adjustments to reconcile net earnings (loss) to net cash |
provided by operating activities: |
Depreciation and amortization 17,614 | 51,580 61,187
Gain on sale of marketable securities held as |
available-for-sale -- | -- (26,902)
Intercompany income tax allocation 775 | -- --
Deferred income tax expense (benefit) (1,441) | 2,559 2,911
Other noncash credits -- | (35) (129)
Changes in operating assets and liabilities: |
Change in receivables (7,769) | 1,215 (890)
Change in accruals and payables 3,050 | 6,288 1,801
Change in prepaids (6,572) | 141 (1,297)
-------- | ---------- -------
|
Net cash provided by operating activities 4,756 | 72,408 64,535
-------- | ---------- -------
|
Cash flows from investing activities: |
Capital expended for property and equipment (2,626) | (68,581) (85,824)
Cash proceeds from disposition of assets -- | 81 27,001
Other investing activities 4,860 | (4,364) (12,522)
-------- | ---------- -------
|
Net cash provided by (used in) investing |
activities 2,234 | (72,864) (71,345)
-------- | ---------- -------
|
Cash flows from financing activities: |
Borrowings of debt -- | 1,700,000 --
Repayments of debt (25,001) | (57,000) --
Change in cash transfers from TCIC (839) | -- --
Allocated charges from TCIC 20,301 | -- --
Transfer of cash to New VII as part of First Distribution |
(note 1) -- | (1,701,112) --
Change in cash transfers from Viacom, Inc. -- | 4,163 6,074
Allocated charges from Viacom -- | 52,321 --
-------- | ---------- -------
|
Net cash provided by (used in) financing |
activities (5,539) | (1,628) 6,074
-------- | ---------- -------
|
Net increase (decrease) in cash 1,451 | (2,084) (736)
|
Cash at beginning of period 40,733 | 2,294 3,011
-------- | ---------- -------
|
Cash at end of period $ 42,184 | 210 2,275
======== | ========== =======
</TABLE>
See accompanying notes to financial statements.
I-5
<PAGE> 7
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly, VIACOM INTERNATIONAL, INC.)
Notes to Financial Statements
September 30, 1996
(unaudited)
(1) Acquisition and Related Transactions
On July 24, 1995, 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 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 had the option to
exchange shares of Viacom Class A or Class B Common Stock ("Viacom
Common Stock") for a total of 6,257,961 shares of VII Cable Class A
Common Stock. The Exchange Offer expired on July 22, 1996 with a final
exchange ratio of 0.4075 shares of VII Cable Class A Common Stock for
each share of Viacom Common Stock accepted for exchange.
Prior to the consummation of the Exchange Offer on July 31, 1996,
Viacom International Inc. entered into a $1.7 billion credit agreement
(the "Credit Agreement"). Proceeds from the 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, VII Cable was
renamed TCI Pacific Communications, Inc. (together with its
consolidated subsidiaries, "Pacific") and the shares of Class A Common
Stock of VII Cable were converted into shares of a cumulative
redeemable exchangeable preferred stock (the "Exchangeable Preferred
Stock"). Proceeds from the $350 million capital contribution were used
to repay a portion of the Credit Agreement.
On October 13, 1995, TCIC (as buyer) and Prime Cable of Fort Bend,
L.P. and Prime Cable Income Partners, L.P. (as sellers) executed
asset and stock purchase and sale agreements (the "Houston Purchase
Agreements") providing for the sale of certain cable television
systems serving the greater Houston Metropolitan Area for a total base
purchase price of $301 million, subject to adjustments. On December
18, 1995, TCIC assigned all of its rights, remedies, title and
interest in, to and under the Houston Purchase Agreements to a
majority-owned investee of InterMedia Capital Partners IV, L.P.
("IMP"). On May 8, 1996, IMP consummated the transactions under the
Houston Purchase Agreements. In connection with the Acquisition, IMP's
majority-owned investee swapped its Houston cable systems plus cash
amounting to $36,633,000 for VII Cable's Nashville cable system (the
"Exchange").
(continued)
I-6
<PAGE> 8
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly, VIACOM INTERNATIONAL, INC.)
Notes to Financial Statements
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
July 31, 1996 VII Cable had paid $44,083,000 related to real and
personal property taxes which were, along with any potential future
liability, transferred to New VII on July 31, 1996 as part of the
First Distribution.
During January 1995, VII Cable entered into an agreement to sell its
40% partnership interest in Prime Sports Northwest Network ("Prime
Sports") to a subsidiary of TCI, Liberty Media Corporation, for sales
proceeds of $9 million. VII Cable's equity investment in Prime Sports,
included in other assets, was transferred to New VII on July 31, 1996,
as part of the First Distribution.
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.
(2) Basis of Presentation
In the accompanying financial statements and in the following text,
references are made to VII Cable and Pacific. The periods through July
31, 1996 reflect the carve-out historical results of operations and
financial position of the cable television business of Viacom and are
referred to as "VII Cable". The financial statements for periods
subsequent to July 31, 1996 reflect the consolidated results of
operations and financial condition of Pacific and are referred to as
"Pacific". The "Company" refers to both Pacific and its predecessor
entity, VII Cable.
The accompanying financial statements include the accounts of the
Company and all investments of more than 50% in subsidiaries in which
the Company has significant control. All intercompany transactions
have been eliminated for all periods presented.
(continued)
I-7
<PAGE> 9
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly, VIACOM INTERNATIONAL, INC.)
Notes to Financial Statements
The following table represents the summary balance sheet of VII Cable
at July 31, 1996 prior to the consummation of the Exchange Offer and
the Acquisition and the opening summary balance sheet of Pacific
subsequent to the consummation of the Exchange Offer and the
Acquisition (amounts in thousands):
<TABLE>
<CAPTION>
VII
Cable Pacific
------------ ---------
<S> <C> <C>
Assets
------
Cash, receivables and prepaids $ 16,465 53,200
Property and equipment, net 447,435 509,042
Franchise costs and other assets 586,798 2,888,735
------------ ---------
$ 1,050,698 3,450,977
============ =========
Liabilities and Equity
----------------------
Payables and accruals $ 30,899 32,754
Debt 1,700,000 1,350,000
Deferred income taxes 59,411 1,057,133
Other liabilities 2,224 --
------------ ---------
Total liabilities 1,792,534 2,439,887
------------ ---------
Exchangeable Preferred Stock -- 625,797
Equity (741,836) 385,293
------------ ---------
$ 1,050,698 3,450,977
============ =========
</TABLE>
The following reflects the recapitalization of equity resulting from
the Exchange Offer and the Acquisition (amounts in thousands):
<TABLE>
<S> <C>
Viacom negative equity investment in VII Cable exchanged with
Viacom shareholders for shares of VII Cable Class A Common
Stock $ (741,836)
Capital contribution by TCIC for shares of VII Cable Class B
Common Stock 350,000
Conversion of shares of VII Cable Class A Common Stock into
shares of Exchangeable Preferred Stock (625,797)
Amounts due to TCIC assumed in the Exchange 22,620
Elimination of historical equity of VII Cable, excluding amounts
due to TCIC 1,380,306
-----------
Initial common stockholder's equity of Pacific subsequent to the
Exchange Offer and the Acquisition $ 385,293
===========
</TABLE>
(continued)
I-8
<PAGE> 10
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly, VIACOM INTERNATIONAL, INC.)
Notes to Financial Statements
The allocation of the purchase price to Pacific's tangible and
intangible assets is based upon preliminary estimates and will be
adjusted upon final receipt of appraisal.
(3) General
The accompanying interim 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 financial statements should be read in conjunction with VII
Cable's combined financial statements and notes thereto for the year
ended December 31, 1995.
(4) Summary of Significant Accounting Policies
Receivables
Receivables are reflected net of an allowance for doubtful accounts.
Such allowance at September 30, 1996 and December 31, 1995 was not
material.
Long-Lived Assets
(a) Property and Equipment
Property and equipment is stated at cost, including
acquisition costs allocated to tangible assets acquired.
Construction costs, including interest during construction and
applicable overhead, are capitalized. Interest capitalized was
not material during any of the periods presented.
Depreciation expense during the two months ended September 30,
1996 is computed on a straight-line basis over estimated
useful lives of 3 to 15 years for distribution systems and 3
to 40 years for support equipment and buildings. Depreciation
expense during periods prior to August 1, 1996 is computed on
a straight-line basis over estimated useful lives of 9 to 15
years for distribution systems and 4 to 30 years for support
equipment and buildings.
Repairs and maintenance are charged to operations, and
renewals and additions are capitalized. At the time of
ordinary retirements, sales or other dispositions of property,
the original cost and cost of removal of such property are
charged to accumulated depreciation, and salvage, if any, is
credited thereto. Gains or losses are only recognized in
connection with the sales of properties in their entirety.
(continued)
I-9
<PAGE> 11
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly, VIACOM INTERNATIONAL, INC.)
Notes to Financial Statements
(b) Franchise Costs
Franchise costs substantially consist of the difference between
TCIC's allocated historical cost of acquiring VII Cable and
amounts allocated to the tangible assets. At December 31, 1995,
franchise costs of VII Cable substantially consisted of the
difference between the cost of acquired businesses and amounts
allocated to their tangible assets.
Franchise costs are generally amortized on a straight-line
basis over 40 years. Costs incurred by the Company in
obtaining franchises are being amortized on a straight-line
basis over the life of the franchise, generally 10 to 20
years.
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. VII Cable adopted Statement No .121 effective January 1,
1996. Such adoption did not have an effect on the financial position
or results of operations of VII Cable. Subsequent to the Acquisition,
Pacific utilizes the following methodology to assess the impact of
Statement No. 121.
Pursuant to Statement No. 121, Pacific 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. Pacific 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"). Pacific deems Assets to be impaired if
Pacific is unable to recover the carrying value of such 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 impaired, the loss is measured as the
amount by which the carrying amount of the Assets exceeds their fair
value. Pacific 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.
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.
(continued)
I-10
<PAGE> 12
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly, VIACOM INTERNATIONAL, INC.)
Notes to Financial Statements
Reclassification
Certain amounts have been reclassified for comparability with the 1996
presentation.
(5) Supplemental Disclosure to Statements of Cash Flows Relating to the
Exchange Offer and Acquisition
<TABLE>
<S> <C>
(amounts in thousands)
Cash of VII Cable at July 31, 1996 $ 210
Cash received in Exchange 36,633
Net cash received in the Acquisition and Exchange for
working capital adjustments 3,890
----------
Cash of Pacific upon consummation of Exchange Offer
and Acquisition $ 40,733
==========
</TABLE>
(6) Supplemental Disclosure to Statements of Cash Flows
Cash paid for interest was $16,111,000 for the two months ended
September 30, 1996. Cash paid for income taxes was not material for
the two months ended September 30, 1996. See Statement of Common
Stockholder's Equity for period prior to the Acquisition.
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Two months Seven months Nine months
ended ended ended
September 30, July 31, September 30,
1996 1996 1995
------------- ------------ -------------
<S> <C> <C> <C>
Accrued preferred stock dividends $ 5,214 | -- --
=========== | ====== ===========
|
Transfer of liabilities, net of assets |
under First Distribution (note 1) $ -- | 22,352 --
=========== | ====== ===========
|
Costs incurred by TCIC to obtain Credit |
Agreement allocated to VII Cable $ -- | 12,673 --
=========== | ====== ===========
</TABLE>
(continued)
I-11
<PAGE> 13
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly, VIACOM INTERNATIONAL, INC.)
Notes to Financial Statements
(7) Debt
In connection with the Transaction Agreements described in Note 1,
Viacom International, Inc. borrowed $1.7 billion pursuant to the
Credit Agreement. The Credit Agreement consists of $350 million and
$300 million term loans which are due December 31, 2004 and September
30, 2004, respectively, and a $1.05 billion revolving commitment loan
(the "Revolving Loan") that provides for semi-annual escalating
commitment reductions from June 30, 1998 through September 30, 2004.
The $300 million term loan and $50 million of the Revolving Loan were
repaid on July 31, 1996 with the proceeds from the TCIC capital
contribution described in note 1. The remaining term loan and the
Revolving Loan provide for quarterly interest payments at variable
rates (7.4% and 7.1% respectively, at September 30, 1996) 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 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 borrowing.
Based on current rates available for debt of the same maturity, the
Company believes that the fair value of Pacific's debt is
approximately equal to its carrying value at September 30, 1996.
In accordance with the terms of the Credit Agreement, Pacific has
entered into an interest rate exchange agreement (the "Exchange
Agreement") with TCIC pursuant to which Pacific will pay a fixed
interest rate of 7.5% on a notional amount of $600 million. The terms
of the Exchange Agreement become effective only if the one month LIBOR
rate exceeds 6.5% for five consecutive days within the two-year
observation period, as defined by the Exchange Agreement (the
"Trigger"). In the event the Trigger occurs, the terms of the
agreement become effective until August 1, 2001. As of September 30,
1996, the terms of the Exchange Agreement have not become effective.
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"). Such
borrowings by Dayton were included in the combined financial
statements for VII Cable. The agreement stipulated that, should Dayton
cease to be a wholly owned subsidiary of Viacom or VII Cable, the $57
million of borrowings would become due and payable on the date on
which Dayton ceased to be such a wholly owned subsidiary. As a result
of the transactions described in note 1, VII Cable repaid Dayton's
obligation under the Viacom Credit Agreement on July 31, 1996, prior
to the First Distribution.
(continued)
I-12
<PAGE> 14
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly, VIACOM INTERNATIONAL, INC.)
Notes to Financial Statements
(8) Income Taxes
Prior to the Acquisition, VII Cable was included in the consolidated
Federal income tax returns of Viacom. Tax expense for the one month
and the seven months ended July 31, 1996 and the nine months ended
September 30, 1995 reflected in the accompanying statements of
operations and tax liabilities reflected in the accompanying December
31, 1995 balance sheet 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 such periods have been satisfied by
Viacom. These amounts have been reflected in Viacom equity investment
in the accompanying December 31, 1995 combined balance sheet. 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.
Subsequent to the Acquisition, Pacific is included in the consolidated
Federal income tax return of TCI. Income tax expense or benefit for
Pacific is based on those items in the consolidated calculation
applicable to Pacific. Intercompany tax allocation represents an
apportionment of tax expense or benefit (other than deferred income
taxes) among the subsidiaries of TCI in relation to their respective
amounts of taxable earnings or losses. The payable or receivable
arising from the intercompany tax allocation is recorded as an
increase or decrease in amounts due to TCIC.
TCIC and TCI are parties to a tax sharing agreement (the "Tax Sharing
Agreement") which contains provisions regarding the allocation of
certain consolidated income tax attributes and the settlement
procedures with respect to the intercompany allocation of current tax
attributes. The Tax Sharing Agreement encompasses U.S. Federal,
state, local and foreign tax consequences and relies upon the U.S.
Internal Revenue Code of 1986 as amended, and any applicable state,
local and foreign tax law and related regulations. Beginning on the
July 1, 1995 effective date, TCIC is responsible to TCI for its share
of current consolidated income tax liabilities. TCI is responsible to
TCIC to the extent that TCIC's income tax attributes generated after
the effective date are utilized by TCI to reduce its consolidated
income tax liabilities. Accordingly, all tax attributes generated by
TCIC's operations after the effective date including, but not limited
to, net operating losses, tax credits, deferred intercompany gains,
and the tax basis of assets are inventoried and tracked for the
entities comprising TCIC.
The primary components of the deferred tax liabilities at September
30, 1996 represent the excess fair values of franchise costs and
property and equipment over the corresponding tax bases.
(9) Exchangeable Preferred Stock
The Company is authorized to issue and has issued 6,257,961 shares of
5% Class A Senior Cumulative Exchangeable Preferred Stock with a
stated value of $100 per share in connection with the Acquisition (see
note 1).
(continued)
I-13
<PAGE> 15
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly, VIACOM INTERNATIONAL, INC.)
Notes to Financial Statements
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 Pacific, on or after the fifteenth day
following 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 for $100 per share plus accrued and unpaid dividends.
Amounts payable by the Company in satisfaction of its dividend,
optional redemption and 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. If payments are made in shares of
Series A TCI Group Stock, VII Cable will discount the market value of
such stock by 5% in determining the number of shares required to be
issued to satisfy such payments.
Exchangeable Preferred Stock does not entitle its holders to voting
rights with respect to general corporate matters, except as provided
by law and except (i) if dividends on the Exchangeable Preferred Stock
are in arrears and unpaid for at least six quarterly dividend periods,
in which case the number of directors constituting the Pacific Board
will, without further action, be increased by two to permit the
holders of the shares of Exchangeable Preferred Stock, voting
separately as a class (with the holders of all other shares of parity
stock upon which like voting rights have been conferred and are
exercisable) to elect by a plurality vote two directors, until such
time as all dividends in arrears on the Exchangeable Preferred Stock
are paid in full or (ii) if Pacific seeks to (a) amend, alter or
repeal (by merger or otherwise) any provision of the Amended and
Restated Certificate of Incorporation so as to affect adversely the
specified rights, preferences, privileges or voting rights of holders
of shares of the Exchangeable Preferred Stock, (b) issue additional
shares of Exchangeable Preferred Stock, (c) create or issue any class
or series of senior stock or (d) effect any reclassification of the
Exchangeable Preferred Stock (other than a reclassification that
solely seeks to change the designation of the Exchangeable Preferred
Stock and does not adversely affect the powers, preferences or rights
of the holders of shares of Exchangeable Preferred Stock outstanding
immediately prior to such reclassification), in each of which event
specified in this clause (ii) the affirmative vote or consent of at
least 66 2/3% of shares of Exchangeable Preferred Stock then
outstanding, voting or consenting, as the case may be, separately as
one class, would be required.
(10) Related Party Transactions
Pacific purchases, at TCIC's cost, certain pay television and other
programming through a certain indirect subsidiary of TCIC. Charges for
such programming were $18,308,000 during the two months ended
September 30, 1996 and are included in operating expenses in the
accompanying financial statements.
(continued)
I-14
<PAGE> 16
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly, VIACOM INTERNATIONAL, INC.)
Notes to Financial Statements
Effective August 1, 1996, TCI provides 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 entered into among TCI,
TCIC and Pacific (the "Services Agreement"). Pursuant to the Services
Agreement, TCI provides 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 makes available to Pacific such general overall
management services and strategic planning services as TCI and Pacific
have agreed, and provides Pacific with such access to and assistance
from TCI engineering and construction groups and TCI's programming and
technology/venture personnel at Pacific's request.
The Services Agreement also provides 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 is allocated that portion of TCI's compensation expense
attributable to benefits extended to employees of Pacific.
Pursuant to the Services Agreement, Pacific reimburses 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. Charges for expenses incurred
in connection with the Services Agreement were $1,993,000 during the
two months ended September 30, 1996, and are included in selling,
general and administrative expenses in the accompanying financial
statements. 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.
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 made primarily
based on the average of certain specified ratios of revenues,
operating income and net assets. Management believes that the
methodologies used to allocate these charges were reasonable. The
charges for such services were $5,750,000 and $5,996,000 for the seven
months ended July 31, 1996 and the nine months ended September 30,
1995, respectively, and are included in selling, general and
administrative expenses in the accompanying financial statements.
(continued)
I-15
<PAGE> 17
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly, VIACOM INTERNATIONAL, INC.)
Notes to Financial Statements
Prior to the Acquisition, VII Cable, through the normal course of
business, was involved in transactions with companies owned by or
affiliated with Viacom. VII Cable had agreements to distribute
television programs of such companies, including Showtime Networks
Inc., MTV Networks, Comedy Central and USA Networks. The agreements
required VII Cable to pay license fees based upon the number of
customers receiving the service. Affiliate license fees incurred and
paid under these agreements were $19,858,000 and $25,401,000 for the
seven months ended July 31, 1996 and the nine months ended September
30, 1995, respectively. In addition, cooperative advertising expenses
charged to affiliated companies were $364,000 and $779,000 for the
seven months ended July 31, 1996 and the nine months ended September
30, 1995, respectively.
In addition to the interest expense recorded by VII Cable on
borrowings under the Viacom Credit Agreement and the Credit Agreement
described in note 7, Viacom allocated to VII Cable interest expense of
$26,019,000 and $36,322,000 during the seven months ended July 31,
1996 and the nine months ended September 30, 1995, respectively. Such
allocated interest expense is related to Viacom corporate debt and was
allocated to VII Cable on the basis of a percentage of VII Cable's
average net assets to Viacom's average net assets.
(11) Commitments
The Company leases business offices, has entered into pole rental
agreements and uses certain equipment under lease arrangements.
Rental expense under such arrangements amounted to $1,070,000 and
$4,454,000 during the two months ended September 30, 1996 and the
seven months ended July 31, 1996, respectively.
I-16
<PAGE> 18
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, VII Cable, a wholly owned subsidiary of
Viacom, and New VII, a wholly owned subsidiary of VII Cable, 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 First Distribution, 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 had the
option to exchange shares of Viacom Class A or Class B Common Stock for a total
of 6,257,961 shares of VII Cable Class A Common Stock. The Exchange Offer
expired on July 22, 1996 with a final exchange ratio of 0.4075 shares of VII
Cable Class A Common Stock for each share of Viacom Common Stock accepted for
exchange.
Prior to the consummation of the Exchange Offer on July 31, 1996,
Viacom International entered into a $1.7 billion credit agreement. Proceeds
from the 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, VII Cable was renamed TCI Pacific Communications,
Inc. and the shares of Class A Common Stock of VII Cable were converted into
shares of Exchangeable Preferred Stock having an annual dividend of 5% of the
stated value. Proceeds from the $350 million capital contribution were used to
repay a portion of the Credit Agreement.
On October 13, 1995, TCIC (as buyer) and Prime Cable of Fort Bend,
L.P. and Prime Cable Income Partners, L.P. (as sellers) executed the Houston
Purchase Agreements providing for the sale of certain cable television systems
serving the greater Houston Metropolitan Area for a total base purchase price
of $301 million, subject to adjustments. On December 18, 1995, TCIC assigned
all of its rights, remedies, title and interest in, to and under the Houston
Purchase Agreements to IMP. On May 8, 1996, IMP consummated the transactions
under the Houston Purchase Agreements. In connection with the Acquisition,
IMP's majority-owned investee swapped its Houston cable system plus cash
amounting to $36,633,000 for VII Cable's Nashville cable system. As of July
31, 1996 the Nashville cable system served approximately 152,000 subscribers
and the Houston cable system served approximately 130,000 subscribers.
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 July 31, 1996 VII Cable had paid
$44,083,000 related to real and personal property taxes which have, along with
any potential future liability, been transferred to New VII on July 31, 1996 as
part of the First Distribution and any potential future liability were conveyed
to Viacom effective July 31, 1996.
(continued)
I-17
<PAGE> 19
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly, VIACOM INTERNATIONAL, INC.)
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 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 Pacific, on or after the fifteenth day following 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 for $100 per share plus accrued and unpaid dividends. Amounts payable
by the Company in satisfaction of its dividend, optional redemption and
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. If payments
are made in shares of Series A TCI Group Stock, VII Cable will discount the
market value of such stock by 5% in determining the number of shares required
to be issued to satisfy such payments.
During January 1995, VII Cable entered into an agreement to sell its
40% partnership interest in Prime Sports Northwest Network ("Prime Sports") to
a subsidiary of TCI, Liberty Media Corporation ("Liberty"), for sales proceeds
of $9 million. VII Cable's equity investment in Prime Sports was transferred
to New VII on July 31, 1996, as part of the First Distribution.
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 "basic service" (primarily comprised
of local broadcast signals and public, educational and governmental access
channels), from 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), and from
"premium service" (primarily comprised of feature films as well as live and
taped sports events, concerts and other programming), the rental of converters
and remote control devices and installation fees. Additional revenue is
generated 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.
The Company's business requires significant capital expenditures to
maintain, upgrade, rebuild and expand its cable television systems.
Historically, VII Cable's cash requirements were funded by VII Cable's
operating activities and through intercompany advances from Viacom, as needed.
In general, management believes that net cash provided by operating activities,
the ability to obtain additional financing, available capacity pursuant to the
Credit Agreement, and advances from TCIC, as required, will provide adequate
services of short-term and long-term liquidity in the future.
(continued)
I-18
<PAGE> 20
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly, VIACOM INTERNATIONAL, INC.)
(1) Material changes in financial condition (continued):
One measure of liquidity is commonly referred to as "interest
coverage". Interest coverage, which is measured by the ratio of Operating Cash
Flow (operating income before depreciation, amortization and other non-cash
operating credits or charges)($33,297,000 for the two months ended September
30, 1996) to interest expense ($16,744,000 for the two months ended September
30, 1996), is determined by reference to the statements of operations. The
Company's interest coverage ratio was 1.99% for the two months ended September
30, 1996. Management of the Company believes that the foregoing interest
coverage ratio is adequate in light of the consistency and nonseasonal nature
of its cable television operations. Operating Cash Flow is a measure of value
and borrowing capacity within the cable television industry and is not intended
to be a substitute for cash flows provided by operating activities, a measure
of performance prepared in accordance with generally accepted accounting
principles, and should not be relied upon as such. Operating Cash Flow, as
defined, does not take into consideration substantial costs of doing business,
such as interest expense, and should not be considered in isolation to other
measures of performance.
Another measure of liquidity is net cash provided by operating
activities, as reflected in the accompanying consolidated statements of cash
flows. Net cash provided by operating activities ($4,756,000 for the two
months ended September 30, 1996) reflects net cash from the operations of the
Company available for the Company's liquidity needs after taking into
consideration the aforementioned additional substantial costs of doing business
not reflected in Operating Cash Flow. See the Company's consolidated statements
of cash flows included in the accompanying financial statements.
(2) Material changes in results of operations:
Due to the consummation of the Acquisition, the Company's 1996
statements of operations include information reflecting the two month period
ended September 30, 1996 (the "Two Month Period") the seven month period ended
July 31, 1996 (the "Seven Month Period") and the one month period ended July
31, 1996 (the "One Month Period"). In order to provide a meaningful basis for
comparing the nine and three months ended September 30, 1996 and 1995, the Two
Month Period has been combined with the One Month Period and the Seven Month
Period, respectively, for purposes of the following discussion and analysis.
Revenue
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"). In 1993 and
1994, the FCC adopted certain rate regulations required by the 1992 Cable Act
and imposed a moratorium on certain rate increases. As a result of such
actions, Pacific's basic and tier service rates and its equipment and
installation charges (the "Regulated Services") are subject to the jurisdiction
of local franchising authorities and the FCC. The regulations established
bench mark rates in 1993, which were further reduced in 1994, to which the
rates charged by cable operators for Regulated Services were required to
conform.
(continued)
I-19
<PAGE> 21
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly, VIACOM INTERNATIONAL, INC.)
(2) Material changes in results of operations (continued):
Pacific believes that it has complied, in all material respects, with
the provisions of the 1992 Cable Act, including its rate setting provisions.
However, the Company's rates for Regulated Services are subject to review by
the FCC, if a complaint has been filed, or by the appropriate franchise
authority, if such authority has been certified. If, as a result of the review
process, a system cannot substantiate its rates, it could be required to
retroactively reduce its rates to the appropriate benchmark and refund the
excess portion of rates received. Any refunds of the excess portion of tier
service rates would be retroactive to the date of complaint. Any refunds of
the excess portion of all other Regulated Service rates would be retroactive to
one year prior to the implementation of the rate reductions.
On February 8, 1996, the Telecommunications Act of 1996 (the "1996
Telecom Act") was signed into law. Because the 1996 Telecom Act does not
deregulate cable programming service tier rates until 1999 (and basic service
tier rates will remain regulated thereafter), the Company believes that the
1993 and 1994 rate regulations have had and will continue to have a material
adverse effect on its results of operations.
Revenue increased approximately 7% and 9% for the three months and
nine months ended September 30, 1996 respectively, as compared to the
corresponding periods of 1995. The three month increase is primarily
attributable to a 1% increase in average primary customers and a 9% increase in
the average primary rate, partially offset by a 4% decrease in average premium
units and a 4% decrease in the average premium rate. The nine month increase
in revenue is primarily due to a 2% increase in average primary customers and a
9% increase in the average primary rate, partially offset by a 2% decrease in
premium units and a 3% decrease in the average premium rate. In addition,
pay-per-view revenue increased $2 million or 19% during the nine months ended
September 30, 1996 as compared to the same period in 1995.
Operating Costs and Expenses
Operating expenses increased 3% and 8% for the three months and nine
months ended September 30, 1996, respectively, as compared to the corresponding
periods in 1995. Such increases are due to increases in costs related to
customer growth, increased programming fees and increased channel capacity.
Selling, general and administrative ("SG&A") expenses increased 5% and
9% for the three months and nine months ended September 30, 1996, respectively,
as compared to the corresponding periods in 1995. Such increases reflect
programming launch incentives received in 1995 but not in 1996, and higher
overhead allocations in 1996.
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.
(continued)
I-20
<PAGE> 22
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly, VIACOM INTERNATIONAL, INC.)
(2) Material changes in results of operations (continued):
Effective August 1, 1996, TCI provides 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 entered into among TCI, TCIC and Pacific Services
Agreement. Pursuant to the Services Agreement, TCI provides 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 makes available to Pacific such general overall management
services and strategic planning services as TCI and Pacific have agreed, and
provides Pacific with such access to and assistance from TCI engineering and
construction groups and TCI's programming and technology/venture personnel at
Pacific's request.
The Services Agreement also provides 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 is allocated that portion of TCI's
compensation expense attributable to benefits extended to employees of Pacific.
Pursuant to the Services Agreement, Pacific reimburses 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.
See note 10 to the accompanying combined financial statements.
Depreciation expense decreased 24% and 1% for the three months and
nine months ended September 30, 1996, respectively, as compared to the
corresponding periods in 1995. Such decreases are attributable to the
consummation of the Acquisition, in which Pacific recorded property and
equipment at VII Cable's net book value (subject to adjustment based upon final
determination of the purchase price allocation), offset by an increase in
depreciation due to $103,349,000 in capital expenditures incurred since
September 30, 1995.
Amortization expense increased 178% and 59% for the three months and
nine months ended September 30, 1996, respectively, as compared to the
corresponding periods in 1995. Such increases are attributable to increased
franchise costs as a result of the Acquisition (subject to adjustment based
upon final determination of the purchase price allocation).
Other Income (Expense) and Net Loss
Interest expense increased $10,653,000 and $9,724,000 for the three
months and nine months ended September 30, 1996, respectively, as compared to
the corresponding periods in 1995. Such increases are due to interest related
to the $1.7 billion Credit Agreement entered into prior to consummation of the
Exchange Offer. Interest expense for periods prior to borrowings under the
Credit Agreement reflects amounts recorded by VII Cable on borrowings by Dayton
under the Viacom Credit Agreement and amounts allocated by Viacom to VII Cable
based on a percentage of VII Cable's average net assets to Viacom's average net
assets.
(continued)
I-21
<PAGE> 23
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(formerly, VIACOM INTERNATIONAL, INC.)
(2) Material changes in results of operations (continued):
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 57% and 48% for the nine months
ended September 30, 1996 and 1995, respectively, were both adversely affected
by the amortization of acquisition costs which are not deductible for tax
purposes.
The Company's net earnings (before preferred stock dividend
requirements) of $9,759,000 for the nine months ended September 30, 1996
represents a decrease of $18,095,000 as compared to the corresponding period of
1995. Such reduction primarily represents an increase of interest expense of
$9,724,000 in 1996 and the recognition in 1995 of a gain on sale of marketable
equity securities held as available for sale ($26,902,000) offset by a decrease
in income tax expense of $12,895,000.
The Company's net earnings (before preferred stock dividend
requirements) of $955,000 for the three months ended September 30, 1996
represents a decrease of $3,288,000 as compared to the corresponding period of
1995. Such reduction primarily represents an increase in interest expense of
$10,653,000 in 1996 offset by a decrease in income tax expense of $4,753,000.
I-22
<PAGE> 24
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
September 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 September
30, 1996:
None.
II-1
<PAGE> 25
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.
<TABLE>
<S> <C> <C>
TCI PACIFIC COMMUNICATIONS, INC.
Date: November 14, 1996 By: /s/ BRENDAN R. CLOUSTON
---------------------------------
Brendan R. Clouston
President
Date: November 14, 1996 By: /s/ BERNARD W. SCHOTTERS
---------------------------------
Bernard W. Schotters
Senior Vice President and
Treasurer
(Principal Financial Officer)
Date: November 14, 1996 By: /s/ GARY K. BRACKEN
---------------------------------
Gary K. Bracken
Senior Vice President
(Principal Accounting Officer)
</TABLE>
II-2
<PAGE> 26
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 NINE MONTHS ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. THE SUMMARY FINANCIAL
INFORMATION FOR THE SEVEN MONTH PERIOD ENDED JULY 31, 1996 IS FOR VII CABLE
PRIOR TO THE ACQUISITION. THE SUMMARY FINANCIAL INFORMATION FOR THE TWO MONTH
PERIOD ENDED SEPTEMBER 30, 1996 IS FOR TCI PACIFIC COMMUNICATIONS, INC.
SUBSEQUENT TO THE ACQUISITION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 7-MOS 2-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 AUG-01-1996
<PERIOD-END> JUL-31-1996 SEP-30-1996
<CASH> 0 42,184
<SECURITIES> 0 0
<RECEIVABLES> 0 17,432
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 0 511,668
<DEPRECIATION> 0 6,239
<TOTAL-ASSETS> 0 3,451,366
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 1,324,999
0 631,011
0 0
<COMMON> 0 0
<OTHER-SE> 0 399,415
<TOTAL-LIABILITY-AND-EQUITY> 0 3,451,366
<SALES> 0 0
<TOTAL-REVENUES> 293,299 83,252
<CGS> 0 0
<TOTAL-COSTS> 108,652 27,344
<OTHER-EXPENSES> 51,580 17,614
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 30,908 16,744
<INCOME-PRETAX> 24,092 (1,567)
<INCOME-TAX> 13,432 (666)
<INCOME-CONTINUING> 10,660 (901)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 10,660 (901)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
