<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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
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
October 31, 1997 was:
Class A Common Stock - 0 shares.
Class B Common Stock - 100 shares.
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- --------------
Assets amounts in thousands
- ------
<S> <C> <C>
Cash $ 311 --
Restricted cash (note 1) -- 33,664
Trade and other receivables, net 5,366 18,986
Prepaid expenses 5,037 6,144
Property and equipment, at cost:
Land 5,798 5,795
Distribution systems 380,755 348,949
Support equipment and buildings 36,784 35,812
---------- ---------
423,337 390,556
Less accumulated depreciation 43,682 11,373
---------- ---------
379,655 379,183
---------- ---------
Franchise costs 3,041,289 3,015,246
Less accumulated amortization 88,744 30,773
---------- ---------
2,952,545 2,984,473
---------- ---------
Other assets, at cost, net of amortization 16,909 18,111
---------- ---------
$3,359,823 3,440,561
========== =========
Liabilities and Common Stockholder's Equity
- -------------------------------------------
Cash overdraft $ -- 9,736
Accounts payable 3,283 3,490
Accrued expenses:
Accrued franchise fees 7,159 8,663
Accrued property tax expense 1,952 2,549
Accrued payroll 2,391 1,559
Other 9,781 17,237
---------- ---------
21,283 30,008
---------- ---------
Subscriber advance payments 2,197 2,727
Debt (note 5) 951,216 1,151,884
Deferred income taxes 1,042,563 1,073,340
Other liabilities 413 380
---------- ---------
Total liabilities 2,020,955 2,271,565
---------- ---------
Exchangeable Preferred Stock (notes 1 and 6) 629,676 629,801
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 313,641 336,921
Accumulated deficit (1,433) (2,452)
---------- ---------
312,208 334,469
Due to TCI Communications, Inc. ("TCIC") (note 7)
396,984 204,726
---------- ---------
Total common stockholder's equity 709,192 539,195
---------- ---------
Commitments (note 8)
$3,359,823 3,440,561
========== =========
</TABLE>
See accompanying notes to financial statements.
I-1
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Statements of Operations
(unaudited)
Pacific Pacific VII Cable
(note 2) (note 2) (note 2)
------------ ----------- ---------
Three months Two months One month
ended ended ended
September 30, September 30, July 31,
1997 1996 1996
------------ ----------- ---------
amounts in thousands
Revenue $127,888 82,008 | 40,961
|
Operating costs and expenses: |
Operating (note 7) 45,359 30,703 | 16,639
Selling, general and administrative |
(note 7) 31,657 18,008 | 9,351
Depreciation 10,656 6,239 | 5,687
Amortization 20,460 11,375 | 1,817
-------- ------- | ------
108,132 66,325 | 33,494
-------- ------- | ------
|
Operating income 19,756 15,683 | 7,467
|
Other income (expense): |
Interest expense: |
Related party (note 7) (6,708) (16,744) | (6,905)
Other (17,272) -- | --
Interest income -- -- | 2,214
Other, net 4 (506) | 359
-------- ------- | ------
(23,976) (17,250) | (4,332)
-------- ------- | ------
|
Earnings (loss) before income taxes (4,220) (1,567) | 3,135
|
Income tax benefit (expense) 2,071 666 | (1,279)
-------- ------- | ------
|
Net earnings (loss) (2,149) (901) | 1,856
| ======
|
Dividend requirement on Exchangeable |
Preferred Stock (7,823) (5,214) |
-------- ------- |
|
Net loss attributable to common |
stockholder $ (9,972) (6,115) |
======== =======
See accompanying notes to financial statements.
I-2
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Statements of Operations
(unaudited)
Pacific Pacific VII Cable
(note 2) (note 2) (note 2)
------------ ----------- ---------
Nine months Two months Seven months
ended ended ended
September 30, September 30, July 31,
1997 1996 1996
------------- ------------- ----------
amounts in thousands
Revenue $380,283 82,008 | 280,630
|
Operating costs and expenses: |
Operating (note 7) 131,863 30,703 | 108,652
Selling, general and administrative |
(note 7) 83,062 18,008 | 68,132
Depreciation 32,498 6,239 | 40,681
Amortization 58,714 11,375 | 10,899
-------- ------- | -------
306,137 66,325 | 228,364
-------- ------- | -------
|
Operating income 74,146 15,683 | 52,266
|
Other income (expense): |
Interest expense: |
Related party (note 7) (16,876) (16,744) | (30,908)
Other (57,098) -- | --
Interest income 405 -- | 2,214
Other, net (46) (506) | 520
-------- ------- | -------
(73,615) (17,250) | (28,174)
-------- ------- | -------
|
Earnings (loss) before income taxes 531 (1,567) | 24,092
|
Income tax benefit (expense) 488 666 | (13,432)
-------- ------- | -------
|
Net earnings (loss) 1,019 (901) | 10,660
| =======
Dividend requirement on Exchangeable |
Preferred Stock (23,280) (5,214) |
-------- -------
Net loss attributable to common
stockholder $(22,261) (6,115)
======== =======
See accompanying notes to financial statements.
I-3
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Consolidated Statement of Common Stockholder's Equity
(unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
------------------ paid-in Accumulated Due to Total
Class A Class B capital deficit TCIC equity
------- ------- ---------- ----------- ------- -------
amounts in thousands
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ -- -- 336,921 (2,452) 204,726 539,195
Net earnings -- -- -- 1,019 -- 1,019
Accreted dividends on Exchangeable
Preferred Stock -- -- (23,280) -- -- (23,280)
Allocation of programming charges from
TCIC (note 7) -- -- -- -- 92,111 92,111
Allocation of expenses in connection with
the Services Agreement (note 7) -- -- -- -- 11,421 11,421
Intercompany income tax allocation -- -- -- -- 30,263 30,263
Net cash transfers from TCIC -- -- -- -- 58,463 58,463
------- ------- ---------- ----------- ------- -------
Balance at September 30, 1997 $ -- -- 313,641 (1,433) 396,984 709,192
======= ======= ========== =========== ======= =======
</TABLE>
See accompanying notes to financial statements.
I-4
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Statements of Cash Flows
(unaudited)
Pacific Pacific VII Cable
(note 2) (note 2) (note 2)
------------ ----------- ----------
Nine months Two months Seven months
ended ended ended
September 30, September 30, July 31,
1997 1996 1996
------------- ------------- ----------
amounts in thousands
(see note 3)
Cash flows from operating activities:
Net earnings (loss) $ 1,019 (901) | 10,660
Adjustments to reconcile net |
earnings (loss) to net cash provided by |
operating activities: |
Depreciation and amortization 91,212 17,614 | 51,580
Intercompany tax allocation 30,263 775 | --
Deferred income tax expense |
(benefit) (30,777) (1,441) | 2,559
Other noncash credits -- -- | (35)
Changes in operating assets |
and liabilities: |
Change in receivables 13,620 (7,769) | 1,215
Change in accruals and |
payables (9,462) 3,050 | 6,288
Change in prepaid expenses 1,107 (6,572) | 141
--------- ------- | -------
|
Net cash provided by |
operating activities 96,982 4,756 | 72,408
--------- ------- | -------
Cash flows from investing activities: |
Capital expended for property and |
equipment (27,108) (2,626) | (68,581)
Cash paid for acquisitions (35,191) -- | --
Decrease in restricted cash 33,664 -- | --
Cash proceeds from disposition of |
assets -- -- | 81
Other investing activities 3,110 4,860 | (4,364)
--------- ------- | -------
|
Net cash provided by (used in) |
investing activities (25,525) 2,234 | (72,864)
--------- ------- | -------
|
Cash flows from financing activities: |
Change in cash overdraft (9,736) -- | --
Borrowings of debt -- -- | 1,700,000
Repayments of debt (200,000) (25,001) | (57,000)
Payment of preferred stock dividends (23,405) -- | --
Net cash transfers from TCIC 161,995 (839) | --
Allocated charges from TCIC -- 20,301 | --
Transfer of cash to Viacom International |
Services Inc. ("New VII") as |
part of First Distribution -- -- |(1,701,112)
Change in cash transfers from |
Viacom, Inc. -- -- | 4,163
Allocated charges from Viacom, Inc. -- -- | 52,321
--------- ------- | ---------
|
Net cash used in financing |
activities (71,146) (5,539) | (1,628)
--------- ------- | ---------
|
Net increase (decrease) |
in cash 311 1,451 | (2,084)
|
Cash at beginning of period -- 40,733 | 2,294
--------- ------- | ---------
|
Cash at end of period $ 311 42,184 | 210
========= ======= =========
See accompanying notes to financial statements.
I-5
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
September 30, 1997
(unaudited)
(1) Acquisition and Related Transactions
------------------------------------
On 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 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 5% Class A Senior Cumulative 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 subsidiary of InterMedia Capital Partners IV, L.P. ("IMP").
On May 8, 1996, IMP consummated the transactions contemplated by the
Houston Purchase Agreements. In connection with the Acquisition, IMP
exchanged its Houston cable systems plus cash amounting to $36,633,000 (the
"Exchange Cash") for VII Cable's Nashville cable system. The Exchange Cash
was escrowed for cable system acquisitions. In January 1997, Pacific used
the Exchange Cash to purchase a cable system serving approximately 20,000
subscribers in and around Boulder County, Colorado.
(continued)
I-6
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
(2) Basis of Presentation
---------------------
Pacific, through its subsidiaries and affiliates, is principally engaged in
the construction, acquisition, ownership, and operation of cable television
systems. Pacific operates its cable television systems primarily in the
following six geographic markets: the San Francisco and Northern California
area; Salem, Oregon; the Seattle, Washington and Greater Puget Sound area;
Houston, Texas; Boulder County, Colorado; and Dayton, Ohio.
TCI's Common Stock, par value $1.00 per share, is comprised of six series:
Tele-Commmunications, Inc. Series A TCI Group Common Stock ("Series A TCI
Group Common Stock") and Tele-Communications, Inc. Series B TCI Group
Common Stock (collectively the "TCI Group Common Stock"), Tele-
Communications, Inc. Series A Liberty Media Group Common Stock and Tele-
Communications, Inc. Series B Liberty Media Group Common Stock
(collectively, the "Liberty Media Group Common Stock"). Tele-
Communications, Inc. Series A TCI Ventures Group Common Stock and Tele-
Communications, Inc. Series B TCI Ventures Group Common Stock
(collectively, the "TCI Ventures Group Common Stock").
The TCI Group Common Stock is intended to reflect the separate performance
of the TCI Group, which is comprised of TCI's domestic distribution and
communications businesses (other than the investments attributed to the TCI
Ventures Group), and any other businesses and assets of TCI not attributed
to either the Liberty Media Group or the TCI Ventures Group. The Liberty
Media Group Common Stock is intended to reflect the separate performance of
the Liberty Media Group, which is comprised of TCI's businesses, and
investments in entities, that are engaged in the production, acquisition
and distribution through all available formats and media of branded
entertainment, educational and informational programming and software,
including multimedia products, and its investments in entities engaged in
electronic retailing, direct marketing, advertising sale relating to
programming services, infomercials and transactions processing, and the
operation of UHF television stations. The TCI Ventures Group Common Stock
is intended to reflect the separate performance of the TCI Ventures Group,
which is comprised of TCI's principal international assets and businesses
and substantially all of TCI's non-cable and non-programming domestic
assets and businesses. Pacific is a member of the TCI Group.
In the accompanying financial statements and in the following text,
references are made to VII Cable and Pacific. The period for the seven
months ended July 31, 1996 reflects the carve-out historical results of
operations of the cable television business of Viacom and is referred to as
"VII Cable." The financial statements as of December 31, 1996 and
September 30, 1997 and for the two months and nine months ended September
30, 1997 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.
(continued)
I-7
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
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 significant intercompany transactions have
been eliminated for all periods presented. As a result of the Acquisition,
which was accounted for as a purchase, the consolidated financial
information for the periods after the Acquisition is presented on a
different cost basis than that for the periods before the Acquisition and
therefore is not comparable.
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 Pacific's financial
statements and notes thereto contained in Pacific's annual report on Form
10-K for the year ended December 31, 1996.
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 1997
presentation.
(3) Derivative Financial Instruments
--------------------------------
The Company has entered into a fixed interest rate exchange agreement
("Interest Rate Swap") which it uses to manage interest rate risk arising
from the Company's financial liabilities. Such Interest Rate Swap is
accounted for as a hedge; and accordingly, any amounts receivable or
payable under the Interest Rate Swap are recognized as an adjustment to
interest expense. Any gain or loss on early termination of the Interest
Rate Swap is included in the carrying amount of the related debt and
amortized as yield adjustments over the remaining term of the derivative
financial instrument.
(4) Supplemental Disclosure to Statements of Cash Flows
---------------------------------------------------
Cash paid for interest was $74,012,000 for the nine months ended
September 30, 1997. Cash paid for income taxes was not material for the
nine months ended September 30, 1997.
(continued)
I-8
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
Prior to the Acquisition, interest and income taxes were settled through
the intercompany account. See note 7 for discussion of such charges.
Significant noncash investing and financing activities are as follows:
Nine months Two months Seven months
ended ended ended
September 30, September 30, July 31,
1997 1996 1996
------------- ------------- ------------
amounts in thousands
Accrued preferred stock |
dividends $23,280 5,214 | --
========= ======= | ======
|
The Company's transactions (other than intercompany income tax allocations
between TCIC and Pacific) effected through Pacific's intercompany account
with TCIC have been treated as constructive cash receipts and payments for
purposes of the accompanying statements of cash flows.
(5) Debt
----
In connection with the Transaction Agreements described in note 1, Viacom
International Inc. borrowed $1.7 billion pursuant to the Credit Agreement.
The $300 million term loan and $50 million of the $1.05 billion revolving
commitment loan (the "Revolving Loan") were repaid with the proceeds from
the TCIC capital contribution described in note 1. At September 30, 1997,
the Credit Agreement consisted of a $350 million term loan (the "Term
Loan") which is due December 31, 2004 and the Revolving Loan which 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 (7.2% and 6.8% respectively,
at September 30, 1997) 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 ranging from 3/8% to 1/2% per annum to be paid quarterly on the average
unborrowed portion of the total amount available for borrowing. At
September 30, 1997, the unborrowed portion of the revolving loan was $450
million.
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, 1997.
(continued)
I-9
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
In accordance with the terms of the Credit Agreement, Pacific has entered
into an Interest Rate Swap 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 Interest Rate Swap 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 Interest Rate Swap (the "Trigger"). In the event
the Trigger occurs, the terms of the agreement become effective until
August 1, 2001. As of September 30, 1997, the terms of the Interest Rate
Swap have not become effective.
(6) 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).
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 Common Stock at an exchange rate of 5.447
shares of Series A TCI Group Common 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
Common Stock, or in any combination of the foregoing. If payments are made
in shares of Series A TCI Group Common Stock, Pacific will discount the
market value of such stock by 5% in determining the number of shares
required to be issued to satisfy such payments.
(7) Related Party Transactions
--------------------------
Due to TCIC's ownership of 100% of the common equity of Pacific, the
amounts due to TCIC have been classified as a component of common
stockholder's equity in the accompanying consolidated balance sheets. Such
amounts are due on demand and accrue interest at variable rates.
Pacific purchases, at TCIC's cost, certain pay television and other
programming through a certain indirect subsidiary of TCIC. Charges for such
programming were $92,111,000 during the nine months ended September 30,
1997 and are included in operating expenses in the accompanying financial
statements.
(continued)
I-10
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
Effective August 1, 1996, TCI began to provide certain facilities, services
and personnel to Pacific. The scope of the facilities, personnel and
services provided 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,
TCIC 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 TCIC's accounting, finance,
corporate, legal and tax departments. In addition, TCIC makes available to
Pacific such general overall management services and strategic planning
services as TCIC and Pacific have agreed, and provides Pacific with such
access to and assistance from TCIC engineering and construction groups and
TCIC's programming and technology/venture personnel at Pacific's request.
The Services Agreement also provides that, for so long as TCIC 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, TCIC will
continue to provide in the same manner, and on the same basis as is
generally provided from time to time to other participating TCIC
subsidiaries, benefits and administrative services to Pacific's employees.
In this regard, Pacific is allocated that portion of TCIC's compensation
expense attributable to benefits extended to employees of Pacific.
Pursuant to the Services Agreement, Pacific reimburses TCIC for all direct
expenses incurred by TCIC in providing such services and a pro rata share
of all indirect expenses incurred by TCIC in connection with the rendering
of such services, including a pro rata share of the salary and other
compensation of TCIC employees performing services for Pacific and general
overhead expenses. Charges for expenses incurred in connection with the
Services Agreement were $11,421,000 during the nine months ended September
30, 1997 and $1,993,000 during the two months ended September 30, 1996.
Such changes are included in selling, general and administrative expenses
in the accompanying financial statements. The obligations of TCIC to
provide services under the Services Agreement (other than TCIC's obligation
to allow Pacific's employees to participate in TCIC'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 for
the seven months ended July 31, 1996, and are included in selling, general
and administrative expenses in the accompanying financial statements.
(continued)
I-11
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
Prior to the Acquisition, VII Cable, in 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 for the
seven months ended July 31, 1996. In addition, cooperative advertising
expenses charged to affiliated companies were $364,000 for the seven months
ended July 31, 1996.
Viacom allocated to VII Cable interest expense of $26,019,000 during the
seven months ended July 31, 1996. 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.
Prior to the Acquisition, VII Cable was included in the consolidated
federal income tax returns of Viacom. Tax expense for the seven months
ended July 31, 1996 reflected in the accompanying statements of operations
has 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. 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 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.
(continued)
I-12
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
A tax sharing agreement (the "Old Tax Sharing Agreement") among TCI, TCIC
and certain subsidiaries of TCI was implemented effective July 1, 1995. The
Old Tax Sharing Agreement formalized certain of the elements of a pre-
existing tax sharing arrangement and contains additional provisions
regarding the allocation of certain consolidated income tax attributes and
the settlement procedures with respect to the intercompany allocation of
current tax attributes. Under the Old Tax Sharing Agreement, TCIC was
responsible to TCI for its share of consolidated income tax liabilities
(computed as if TCI were not liable for the alternative minimum tax)
determined in accordance with the Old Tax Sharing Agreement, and TCI was
responsible to TCIC to the extent that the income tax attributes generated
by TCIC and its subsidiaries were utilized by TCI to reduce its
consolidated income tax liabilities (computed as if TCI were not liable for
the alternative minimum tax). The tax liabilities and benefits of such
entities so determined are charged or credited to an intercompany account
between TCI and TCIC. Such intercompany account is required to be settled
only upon the date that an entity ceases to be a member of TCI's
consolidated group for federal income tax purposes. Under the Old Tax
Sharing Agreement, TCI retains the burden of any alternative minimum tax
and has the right to receive the tax benefits from an alternative minimum
tax credit attributable to any tax period beginning on or after August 1,
1996 and ending on or before October 1, 1997.
Effective October 1, 1997, (the "Effective Date"), the Old Tax Sharing
Agreement was replaced by a new tax sharing agreement, as amended by the
First Amendment thereto (the "New Tax Sharing Agreement"), which governs
the allocation and sharing of income taxes by the TCI Group, the Liberty
Media Group and the TCI Ventures Group (each a "Group"). The Company and
its subsidiaries are members of the TCI Group for purposes of the New Tax
Sharing Agreement. Effective for periods on and after the Effective Date,
federal income taxes will be computed based upon the type of tax paid by
TCI (on a regular tax or alternative minimum tax basis) on a separate basis
for each Group. Based upon these separate calculations, an allocation of
tax liabilities and benefits will be made such that each Group will be
required to make cash payments to TCI based on its allocable share of TCI's
consolidated federal income tax liabilities (on a regular tax or
alternative minimum tax basis, as applicable) attributable to such Group
and actually used by TCI in reducing its consolidated federal income tax
liability. Tax attributes and tax basis in assets would be inventoried and
tracked for ultimate credit to or charge against each Group. Similarly, in
each taxable period that TCI pays alternative minimum tax, the federal
income tax benefits of each Group, computed as if such Group were subject
to regular tax, would be inventoried and tracked for payment to or payment
by each Group in years that TCI utilizes the alternative minimum tax credit
associated with such taxable period. The Group generating the utilized tax
benefits would receive a cash payment only if, and when, the unutilized
taxable losses of the other Group are actually utilized. If the unutilized
taxable losses expire without ever being utilized, the Group generating the
utilized tax benefits will never receive payment for such benefits.
Pursuant to the New Tax Sharing Agreement, state and local income taxes are
calculated on a separate return basis for each Group (applying provisions
of state and local tax law and related regulations as if the Group were a
separate unitary or combined group for tax purposes), and TCI's combined or
unitary tax liability is allocated among the Groups based upon such
separate calculation.
(continued)
I-13
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
Notwithstanding the foregoing, items of income, gain, loss, deduction or
credit resulting from certain specified transactions that are consummated
after the Effective Date pursuant to a letter of intent or agreement that
was entered into prior to the Effective Date will be shared and allocated
pursuant to the terms of the Old Tax Sharing Agreement as amended.
(8) 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 $6,202,000 and $5,524,000
during the nine months ended September 30, 1997 and 1996, respectively.
I-14
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
- ---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
The following discussion and analysis should be read in conjunction with
the Company's Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1996. The following discussion focuses on material
changes in the trends, risks and uncertainties affecting the Company's results
of operations and financial condition. Reference should also be made to the
Company's financial statements included herein.
(1) Material changes in financial condition:
----------------------------------------
On July 24, 1995, Viacom, VII Cable, and New VII 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 Inc. entered into 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. 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 5% Class A
Senior Cumulative Exchangeable Preferred Stock. Proceeds from the $350 million
capital contribution were used to repay a portion of the Credit Agreement.
On May 8, 1996, IMP consummated the transactions contemplated by the
Houston Purchase Agreements. In connection with the Acquisition, IMP exchanged
its Houston cable system plus cash amounting to $36,633,000 for VII Cable's
Nashville cable system. The Exchange Cash was escrowed for cable system
acquisitions. In January 1997, the Company used the Exchange Cash to purchase a
cable system serving approximately 20,000 subscribers in and around Boulder
County, Colorado. See note 1 to the accompanying financial statements for
additional discussion of the Acquisition and the Houston Purchase Agreements.
(continued)
I-15
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
----------------------------------------------------
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 Common Stock at an exchange rate of 5.447 shares of
Series A TCI Group Common 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
Common Stock, or in any combination of the foregoing. If payments are made in
shares of Series A TCI Group Common Stock, Pacific will discount the market
value of such stock by 5% in determining the number of shares required to be
issued to satisfy such payments.
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 and amortization) ($165,358,000 for the
nine months ended September 30, 1997) to interest expense ($73,974,000 for the
nine months ended September 30, 1997), is determined by reference to the
statements of operations. The Company's interest coverage ratio was 224% for the
nine months ended September 30, 1997. Management of the Company believes that
such interest coverage ratio is adequate in light of the relative predictability
of its cable television operations and the Company's interest expense. However,
the Company's current intent is to reduce its outstanding indebtedness such that
its interest coverage ratio could be increased. There is no assurance that the
Company will be able to achieve such objective. 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 statements of cash flows. Net cash provided by
operating activities ($96,982,000 for the nine months ended September 30, 1997)
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.
Management believes that net cash provided by operating activities, the
available credit under the Revolving Loan, and advances from TCIC, if necessary,
will provide adequate sources of short-term and long-term liquidity in the
future. See the Company's statements of cash flows included in the accompanying
financial statements.
(continued)
I-16
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
----------------------------------------------------
At September 30, 1997, the Credit Agreement consists of a $350 million term
loan which is due December 31, 2004 and a $1.05 billion revolving commitment
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 (7.2% and 6.8%
respectively, at September 30, 1997) 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
ranging from 3/8% to 1/2% per annum to be paid quarterly on the average
unborrowed portion of the total amount available for borrowing. At September 30,
1997, the unborrowed portion of the revolving loan was $450 million.
At September 30, 1997, all of Pacific's debt bore interest at variable
interest rates. Accordingly, in an environment of rising interest rates, the
Company could experience an increase in its interest expense. In order to
diminish its exposure to such interest expense increases, and in accordance with
the terms of the Credit Agreement, Pacific has entered into an Interest Rate
Swap 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 Interest Rate Swap 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 Interest Rate
Swap. In the event the Trigger occurs, the terms of the agreement become
effective until August 1, 2001. As of September 30, 1997, the terms of the
Interest Rate Swap had not become effective.
(2) Material changes in results of operations:
-----------------------------------------
Revenue
-------
Due to the consummation of the Acquisition, the Company's 1996 statement of
operations includes information reflecting the two month period ended September
30, 1996 (the "Two Month Period") and the seven month period ended July 31, 1996
(the "Seven Month Period"). In order to provide a meaningful basis for comparing
the years ended December 31, 1996 and 1995, the Two Month Period has been
combined with the Seven Month Period for purposes of the following discussion
and analysis.
The operation of the Company's cable television systems is regulated at the
federal, state and local levels. The Cable Television Consumer Protection and
Competition Act of 1992 and the Telecommunications Act of 1996 (collectively,
the "Cable Acts") established rules under which the Company's basic and tier
service rates and its equipment and installation charges (the "Regulated
Services") are regulated if a complaint is filed or if the appropriate franchise
authority is certified.
During the nine months ended September 30, 1997, 75% of the Company's
revenue was derived from Regulated Services. As noted above, any increase in
rates charged for Regulated Services are regulated by the Cable Acts. Moreover,
competitive factors may limit the Company's ability to increase its service
rates.
(continued)
I-17
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(2) Material changes in results of operations (continued):
-----------------------------------------------------
Revenue increased 5% for the nine months ended September 30, 1997, as
compared to the corresponding period of 1996. The majority of such increase is
attributable to a 7% increase in the average primary rate, partially offset by a
4% decrease in the average premium rate. As of September 30, 1997, Pacific
served approximately 1,167,000 basic customers subscribing to approximately
855,000 premium units. Exclusive of subscribers gained in the acquisition of the
cable system in and around Boulder County, Colorado, basic customers and premium
units decreased 2% and 7%, respectively, since December 31, 1996. In addition,
advertising sales accounted for the remaining increase in revenue.
Operating Costs and Expenses
- ----------------------------
Operating expenses decreased 5% for the nine months ended September 30,
1997, as compared to the corresponding period in 1996. Such decrease is due to
efficiencies realized as a result of the Acquisition offset by an increase in
programming costs. Pacific, as a member of the TCI Group, cannot determine
whether and to what extent increases in the cost of programming will affect its
future operating costs. However, due to TCI Group's obligations under a 25-year
affiliation agreement with an affiliate, it is anticipated that TCI Group's
programming costs with respect to STARZ!, a first-run premium movie programming
service, and Encore, a premium movie programming service airing movies from the
1960s, 1970s and 1980s, will increase in 1998 and future periods.
Selling, general and administrative ("SG&A") expenses increased 16% and
decreased 4% for the three and nine months ended September 30, 1997,
respectively, as compared to the corresponding period in 1996. The increase
during the three-month period is due to an increase in overhead allocated to
Pacific and other individually insignificant items.
Prior to the Acquisition, Viacom provided VII Cable with certain general
and administrative services, including insurance, legal, financial and other
corporate functions. Charges for such services were based on the average of
certain specified ratios of revenue, operating income and net assets of VII
Cable in relation to Viacom. The charges for such services were $5,750,000 for
the seven month period and are included in SG&A.
Effective August 1, 1996, and 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, TCI will provide 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 TCI employees in providing
such services and a pro rata share of all indirect expenses incurred by such TCI
employees 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 $11,421,000 during the
nine months ended September 30, 1997 and $1,993,000 during the two months ended
September 30, 1996 and are included in SG&A. See note 7 to the accompanying
financial statements.
(continued)
I-18
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
Depreciation expense decreased 31% for the nine months ended September 30,
1997, as compared to the corresponding period in 1996. Such decrease is
attributable to the consummation of the Acquisition, in which Pacific recorded
property and equipment at fair market value which was less than VII Cable's
historical cost. Such reduction was partially offset by an increase in
depreciation due to capital expenditures. Depreciation expense for the 1997
period includes $2,840,000 attributable to the five-month period ended December
31, 1996.
Amortization expense increased 164% for the nine months ended September 30,
1997, as compared to the corresponding period in 1996. Such increases are
attributable to increased franchise costs as a result of the Acquisition.
Other Income and Expense and Net Loss
- -------------------------------------
Interest expense increased 55% for the nine months ended September 30,
1997, as compared to the corresponding period in 1996. Such increase is 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 the
Acquisition reflects amounts recorded by VII Cable on borrowings under a 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.
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.
Subsequent to the Acquisition, Pacific has been included in the
consolidated federal income tax return of TCI. Income tax expense or benefit for
Pacific was calculated pursuant to the Old Tax Sharing Agreement through
September 30, 1997. Effective October 1, 1997, Pacific's income tax provision
will be calculated in accordance with the New Tax Sharing Agreement. See note 7
to the accompanying financial statements.
As a result of the above-described fluctuations in Pacific's results of
operations, the Company's net earnings (before preferred stock dividend
requirements) of $1,019,000 for the nine months ended September 30, 1997
decreased by $8,740,000 as compared to the corresponding period of 1996.
I-19
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
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, 1997:
None.
II-1
<PAGE>
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: November 13, 1997 By: /s/ Stephen M. Brett
--------------------------------
Stephen M. Brett
Senior Vice President
and Secretary
Date: November 13, 1997 By: /s/ Bernard W. Schotters
--------------------------------
Bernard W. Schotters
Senior Vice President and
Treasurer
(Principal Financial Officer)
Date: November 13, 1997 By: /s/ Gary K. Bracken
--------------------------------
Gary K. Bracken
Senior Vice President
(Principal Accounting Officer)
II-2
<PAGE>
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>
<PAGE>
<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 PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 311
<SECURITIES> 0
<RECEIVABLES> 5,366
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 423,337
<DEPRECIATION> 43,682
<TOTAL-ASSETS> 3,359,823
<CURRENT-LIABILITIES> 0
<BONDS> 951,216
629,676
0
<COMMON> 0
<OTHER-SE> 709,192
<TOTAL-LIABILITY-AND-EQUITY> 3,359,823
<SALES> 0
<TOTAL-REVENUES> 380,283
<CGS> 0
<TOTAL-COSTS> 131,863
<OTHER-EXPENSES> 91,212
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 73,974
<INCOME-PRETAX> 531
<INCOME-TAX> (488)
<INCOME-CONTINUING> 1,019
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,019
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
