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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____ to ____
Commission File Number 1-9554
TCI PACIFIC COMMUNICATIONS, INC.
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(Exact name of Registrant as specified in its charter)
State of Delaware 04-2980402
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(State or other jurisdiction of (I.R.S.Employer Identification No.)
incorporation or organization)
5619 DTC Parkway
Englewood, Colorado 80111
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 267-5500
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
5% Class A Senior Cumulative Exchangeable Preferred Stock
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
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. _____
The aggregate market value of the 5% Class A Senior Cumulative
Exchangeable Preferred Stock held by nonaffiliates of TCI Pacific
Communications, Inc., computed by reference to the last sales price of such
stock, as of the close of trading on January 30, 1998, was $1,011,055,000.
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
January 30, 1998, was:
Class B common stock - 100 shares.
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TCI PACIFIC COMMUNICATIONS, INC.
1997 ANNUAL REPORT ON FORM 10-K
Table of Contents
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PART I Page
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Item 1. Business........................................... I-1
Item 2. Properties......................................... I-15
Item 3. Legal Proceedings.................................. I-15
Item 4. Submission of Matters to a Vote of Security Holders I-15
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PART II
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Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters...................... II-1
Item 6. Selected Financial Data........................... II-2
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. II-3
Item 8. Financial Statements and Supplementary Data....... II-10
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure........... II-10
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PART III
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Item 10. Directors and Executive Officers of the Registrant III-1
Item 11. Executive Compensation............................ III-3
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................... III-4
Item 13. Certain Relationships and Related Transactions.... III-13
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.............................. IV-1
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PART I.
Item 1. Business.
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(a) General Development of Business
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TCI Pacific Communications, Inc. (together with its consolidated
subsidiaries, "Pacific" or the "Company") (formerly, Viacom International Inc.),
through its subsidiaries and affiliates, is principally engaged in the
construction, acquisition, ownership, and operation of cable television systems.
The Company is a Delaware corporation and was incorporated on June 2, 1987.
Certain statements in this Annual Report on Form 10-K constitute forward-
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. In particular, some of the statements contained under the
captions "BUSINESS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS," are forward-looking. Such forward-looking
statements involve known and unknown risks, uncertainties and other important
factors that could cause the actual results, performance or achievements of the
Company (or entities in which the Company has interests), or industry results,
to differ materially from future results, performance or achievements expressed
or implied by such forward-looking statements. Such risks, uncertainties and
other factors include, among others: general economic and business conditions
and industry trends; the regulatory and competitive environment of the
industries in which the Company and the entities in which the Company has
interests operate; uncertainties inherent in new business strategies, new
product launches and development plans; rapid technological changes, the
acquisition, development and/or financing of telecommunications networks and
services; the development and provision of programming for new television and
telecommunications technologies; future financial performance, including
availability, terms and deployment of capital; the ability of vendors to deliver
required equipment, software and services; availability of qualified personnel;
changes in, or failure or inability to comply with, government regulations,
including, without limitation, regulations of the Federal Communications
Commission ("FCC"), and adverse outcomes from regulatory proceedings; changes in
the nature of key strategic relationships with partners and joint venturers;
competitor responses to the Company's products and services, and the products
and services of the entities in which the Company has interests, and the overall
market acceptance of such products and services; and other factors. These
forward-looking statements (and such risks, uncertainties and other factors)
speak only as of the date of this Report, and the Company expressly disclaims
any obligation or undertaking to disseminate any updates or revisions to any
forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto or any other change in events,
conditions or circumstances on which any such statement is based.
I-1
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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 Viacom International Services Inc. ("New
VII"), a wholly-owned subsidiary of VII Cable, entered into certain agreements
with Tele-Communications, Inc. ("TCI") and TCI Communications, Inc. ("TCIC"), a
subsidiary of TCI, providing for, among other things, the conveyance of Viacom
International Inc.'s non-cable assets and liabilities to New VII, the
distribution of all of the common stock of New VII to Viacom (the "First
Distribution"), the Exchange Offer (as defined below) and the issuance to TCIC
of all of the Class B common stock of VII Cable. On June 24, 1996, Viacom
commenced an exchange offer (the "Exchange Offer") pursuant to which Viacom
shareholders 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. and the shares of Class A
common stock of VII Cable were converted into 6,257,961 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.
Following the Exchange Offer, Pacific retained cable assets with a value at
closing of approximately $2.326 billion and the obligation to repay the Credit
Agreement. Neither Viacom nor VII Cable has any obligation with respect to
repayment of the Credit Agreement. For additional discussion of the
Acquisition, see note 1 to the financial statements included in Part II of this
report.
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 for VII Cable's Nashville cable system. During the
third quarter of 1996, TCIC acquired a 49% limited partnership in IMP. 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.
(b) Financial Information about Industry Segments
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The Company operates in the cable and communications services industry.
(c) Narrative Description of Business
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General. Cable television systems receive video, audio and data signals
transmitted by nearby television and radio broadcast stations, terrestrial
microwave relay services and communications satellites. Such signals are then
amplified and distributed by coaxial cable and optical fiber to the premises of
customers who pay a fee for the service. In many cases, cable television
systems also originate and distribute local programming.
I-2
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At December 31, 1997, approximately 86% of the Company's cable television
systems had bandwidth capacities ranging from 450 megahertz to 750 megahertz.
The Company's cable television systems generally carry up to 78 analog channels.
Compressed digital video technology converts on average as many as twelve analog
signals (now used to transmit video and voice) into a digital format and
compresses such signals (which is accomplished primarily by eliminating the
redundancies in television imagery) into the space normally occupied by one
analog signal. The digitally compressed signal is uplinked to a satellite,
which sends the signal back down to a customer's satellite dish or to a cable
system's headend to be distributed, via optical fiber and coaxial cable, to the
customer's home. At the home, a set-top video terminal converts the digital
signal back into analog channels that can be viewed on a normal television set.
The Company began offering digital cable television service to selected
markets in 1997. In February 1998, the Company initiated broader marketing
efforts that are intended to result in an increase in the number of additional
digital cable television customers by the end of 1998. Such marketing efforts
will encompass multi-media, product enhancements, sales promotions and sales
incentives.
Service Charges. The Company offers a limited "basic service" ("Basic-TV")
(primarily comprised of local broadcast signals and public, educational and
governmental access channels ("PEG")) and an "expanded" tier (primarily
comprised of specialized programming services, in such areas as health, family
entertainment, religion, news, weather, public affairs, education, shopping,
sports and music). The monthly fee for basic service generally ranges from
$10.00 to $12.00, and the monthly service fee for the expanded tier generally
ranges from $13.00 to $17.00. The Company offers "premium services" (referred
to in the cable television industry as "Pay-TV" and "pay-per-view") to its
customers. Such services consist principally of feature films, as well as live
and taped sports events, concerts and other programming. The Company offers
Pay-TV services for a monthly fee generally ranging from $9.00 to $13.00 per
service, except for certain movie or sports services (such as various regional
sports networks and certain Pay-TV channels) offered at $1.00 to $8.00 per
month, pay-per-view movies offered separately at $3.00 to $4.00 per movie and
certain pay-per-view events offered separately at $6.00 to $50.00 per event.
Charges are usually discounted when multiple Pay-TV services are ordered.
Customers may also elect to subscribe to digital video services comprised of up
to 36 video and 10 audio channels featuring additional specialized programming
and premium services at an average incremental monthly charge of $10.
As further enhancements to their cable services, customers may generally
rent converters or converters with remote control devices for a monthly charge
ranging from $0.30 to $5.00 each, as well as purchase a channel guide for a
monthly charge ranging from $1.00 to $2.00. Also a nonrecurring installation
charge (which is limited by the FCC's rules which regulate hourly service
charges for each individual cable system) ranging from $25.00 to $45.00 is
usually charged.
Monthly fees for Basic TV and Pay-TV services to commercial customers vary
widely depending on the nature and type of service. Except under the terms of
certain contracts to provide service to commercial accounts, customers are free
to discontinue service at any time without penalty.
I-3
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The Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act") and the Telecommunications Act of 1996 (the "1996 Telecom Act"
and together with the 1992 Cable Act, the "Cable Acts") established rules under
which the Company's basic service and expanded tier service rates and equipment
and installation charges are regulated if a complaint is filed or if the
appropriate franchise authority is certified. For additional information see
Regulation and Legislation below.
Customer Data. At December 31, 1997, Pacific operates its cable television
systems 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. Basic-TV and
Pay-TV cable customers served by Pacific are summarized as follows (amounts in
thousands, except percentages):
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December 31,
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1997 1996 1995 1994 1993
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Estimated homes passed 1,902 1,813 1,790 1,758 1,730
Basic-TV customers 1,183 1,168 1,180 1,139 1,094
Basic-TV penetration (1) 62% 64% 66% 65% 63%
</TABLE>
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(1) Calculated by dividing the number of basic customers by the number of
estimated homes passed.
Local Franchises. Cable television systems generally are constructed and
operated under the authority of nonexclusive permits or "franchises" granted by
local and/or state governmental authorities. Federal law, including the Cable
Communications Policy Act of 1984 (the "1984 Cable Act") and the 1992 Cable Act
limits the power of the franchising authorities to impose certain conditions
upon cable television operators as a condition of the granting or renewal of a
franchise.
Franchises contain varying provisions relating to construction and
operation of cable television systems, such as time limitations on commencement
and/or completion of construction; quality of service, including (in certain
circumstances) requirements as to the number of channels and broad categories of
programming offered to customers; rate regulation; provision of service to
certain institutions; provision of channels for public access and commercial
leased-use; and maintenance of insurance and/or indemnity bonds. The Company's
franchises also typically provide for periodic payments of fees, not to exceed
5% of revenue, to the governmental authority granting the franchise.
Additionally, many franchises require payments to the franchising authority for
the funding of PEG channels. Franchises usually require the consent of the
franchising authority prior to a transfer of the franchise or a transfer or
change in ownership or operating control of the franchisee.
I-4
<PAGE>
Subject to applicable law, a franchise may be terminated prior to its
expiration date if the cable television operator fails to comply with the
material terms and conditions thereof. Under the 1984 Cable Act, if a franchise
is lawfully terminated, and if the franchising authority acquires ownership of
the cable television system or effects a transfer of ownership to a third party,
such acquisition or transfer must be at an equitable price or, in the case of a
franchise existing on the effective date of the 1984 Cable Act, at a price
determined in accordance with the terms of the franchise, if any.
In connection with a renewal of a franchise, the franchising authority may
require the cable operator to comply with different and more stringent
conditions than those originally imposed, subject to the provisions of the 1984
Cable Act and other applicable federal, state and local law. The 1984 Cable
Act, as supplemented by the renewal provisions of the 1992 Cable Act,
establishes an orderly process for franchise renewal which protects cable
operators against unfair denials of renewals when the operator's past
performance and proposal for future performance meet the standards established
by the 1984 Cable Act. The Company believes that its cable television systems
generally have been operated in a manner which satisfies such standards and
allows for the renewal of such franchises; however, there can be no assurance
that the franchises for such systems will be successfully renewed as they
expire.
Most of the Company's present franchises had initial terms of approximately
10 to 15 years. The duration of the Company's outstanding franchises presently
varies from a period of months to an indefinite period of time. Approximately
16 percent of the franchises held by the Company, involving approximately 90,000
basic customers, expire within the next five years.
Competition. Cable television competes for customers in local markets with
other providers of entertainment, news and information. The competitors in
these markets include broadcast television and radio, newspapers, magazines and
other printed material, motion picture theatres, video cassettes and other
sources of information and entertainment including directly competitive cable
television operations and Internet service providers. The Cable Acts are
designed to increase competition in the cable television industry. See
Regulation and Legislation below.
There are alternative methods of distributing the same or similar video
programming offered by cable television systems. Further, these technologies
have been encouraged by the United States Congress ("Congress") and the FCC to
offer services in direct competition with existing cable systems.
DBS. During 1997, the Company continued to experience a competitive impact
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from medium power and high power direct broadcast satellites ("DBS") that use
high frequencies to transmit signals that can be received by dish antennas
("HSDs") much smaller in size than traditional HSDs. PRIMESTAR Partners, L.P.
distributes a multi-channel programming service via a medium power
communications satellite to HSDs of approximately 27 inches to 36 inches in
diameter. DirecTv, Inc., United States Satellite Broadcasting Corporation and
EchoStar Communications Corp. ("EchoStar"), transmit from high power satellites
and generally use smaller dishes to receive their signals. DBS operators have
the right to distribute substantially all of the significant cable television
programming services currently carried by cable television systems. Estimated
DBS customers nationwide increased from approximately 2.2 million at the end of
1995 to approximately 6.2 million at the end of 1997, and the Company expects
that competition from DBS will continue to increase.
I-5
<PAGE>
DBS has advantages as an alternative means of distributing video signals to
the home. Among the advantages are that the capital investment for the
satellite and uplinking segment of a DBS system (although initially high) is
fixed and does not increase with the number of customers receiving satellite
transmissions; that DBS is not currently subject to local regulation of service
and prices or required to pay franchise fees; and that the capital costs for the
ground segment of a DBS system (the reception equipment) are directly related
to, and limited by, the number of service customers.
The primary disadvantage of DBS is its inability to provide local broadcast
television stations to customers in their local market. However, EchoStar and
other potential DBS providers have announced their intention to retransmit local
broadcast television stations back into a customer's local market. Both
Congress and the U.S. Copyright Office are currently reviewing proposals to
allow such transmission and it is possible that in the near future, DBS systems
will be retransmitting local television broadcast signals back into local
television markets. Additional DBS disadvantages presently include a limited
ability to tailor the programming package to the interests of different
geographic markets; signal reception being subject to line-of-sight angles; and
technology which requires a customer to rent or own one set-top box (which is
significantly more expensive than a cable converter) for each television on
which they wish to view DBS programming.
Although the effect of competition from these DBS services cannot be
specifically predicted, it is clear there has been significant growth in DBS
customers and the Company assumes that such DBS competition will be substantial
in the near future as developments in technology continue to increase satellite
transmitter power and decrease the cost and size of equipment needed to receive
these transmissions and enable DBS to overcome the aforementioned disadvantages.
Furthermore, the extensive national advertising of DBS programming packages,
including certain sports packages not currently available on cable television
systems, will likely continue the growth in DBS customers.
Telephony Company Entry. The 1996 Telecom Act eliminated the statutory and
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regulatory restrictions that prevented local telephone companies from competing
with cable operators for the provision of video services by any means. See
Regulation and Legislation below. The 1996 Telecom Act allows local telephone
companies, including the regional bell operating companies ("RBOCs"), to compete
with cable television operators both inside and outside their telephone service
areas. The Company expects that it will face substantial competition from
telephone companies for the provision of video services, whether it is through
wireless cable, or through upgraded telephone networks. The Company assumes
that all major telephone companies have already entered or may enter the
business of providing video services. The Company is aware that telephone
companies have already built, or are in the process of building, competing cable
system facilities in a number of the Company's franchise areas. Most major
telephone companies have greater financial resources than the Company, and the
1992 Cable Act ensures that telephone company providers of video services will
have access to acquiring all of the significant cable television programming
services. The specific manner in which telephone company provision of video
services will be regulated is described under Regulation and Legislation below.
Although long distance telephone companies are not prohibited from
providing video services, they have historically not been providers of such
services in competition with cable systems. However, such companies may prove
to be a source of competition in the future. The long distance companies are
expected to expand into local markets with local telephone and other offerings
(including video services) in competition with the RBOCs.
I-6
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Utility Company Entry. The 1996 Telecom Act eliminates certain federal
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restrictions on utility holding companies and thus frees all utility companies
to provide cable television services. The Company expects this could result in
another source of competition in the delivery of video services. The Company is
aware of at least one example in which a local power utility entered into a
partnership with an experienced cable television and open video system company
and proposes to provide video and telecommunications services throughout the
Washington, D.C. metropolitan market.
MMDS/LMDS. Another alternative method of distribution is multi-channel
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multi-point distribution systems ("MMDS"), which deliver programming services
over microwave channels received by customers with special antennas. MMDS
systems are less capital intensive, are not required to obtain local franchises
or pay franchise fees, and are subject to fewer regulatory requirements than
cable television systems. The 1992 Cable Act also ensures that MMDS operators
have the opportunity to acquire all significant cable television programming
services. Although there are relatively few MMDS systems in the United States
currently in operation, virtually all markets have been licensed or tentatively
licensed. The FCC has taken a series of actions intended to facilitate the
development of wireless cable systems as an alternative means of distributing
video programming, including reallocating the use of certain frequencies to
these services and expanding the permissible use of certain channels reserved
for educational purposes. The FCC's actions enable a single entity to develop
an MMDS system with a potential of up to 35 analog channels, and thus compete
more effectively with cable television. Developments in digital compression
technology will significantly increase the number of channels that can be made
available from MMDS. Finally, an emerging technology, local multipoint
distribution services ("LMDS"), could also pose a significant threat to the
cable television industry, if and when it becomes established. LMDS, sometimes
referred to as cellular television, could have the capability of delivering more
than 100 channels of video programming to a customer's home. The potential
impact of LMDS is difficult to assess due to the recent development of the
technology and the absence of any current fully-operational LMDS systems.
Cable System Overbuilds. During 1997, there has been a significant
------------------------
increase in the number of cities that have constructed their own cable
television systems in a manner similar to city-provided utility services. These
systems typically will compete directly with the existing cable operator without
the burdens of franchise fees or other local regulation. Although the total
number of municipal overbuild cable systems remains relatively small, 1997 would
indicate an increasing trend in cities authorizing such direct municipal
competition with cable operators. Within the cable television industry, cable
operators may compete with other cable operators or others seeking franchises
for competing cable television systems at any time during the terms of existing
franchises or upon expiration of such franchises in expectation that the
existing franchise will not be renewed. The 1992 Cable Act promotes the
granting of competitive franchises.
Private Cable. The Company also competes with Master Antenna Television
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("MATV") systems and Satellite MATV ("SMATV") systems, which provide multi-
channel program services directly to hotel, motel, apartment, condominium and
similar multi-unit complexes within a cable television system's franchise area,
generally free of any regulation by state and local governmental authorities.
Further, the FCC in 1997, adopted new rules that restrict the ability of cable
operators to maintain ownership of cable wiring inside multi-unit buildings,
thereby making it less expensive for SMATV competitors to reach those customers.
See Regulation and Legislation below.
I-7
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In addition to competition for customers, the cable television industry
competes with broadcast television, radio, the print media and other sources of
information and entertainment for advertising revenue. As the cable television
industry has developed additional programming, its advertising revenue has
increased. Cable operators sell advertising spots primarily to local and
regional advertisers.
The Company has no basis upon which to estimate the number of cable
television companies and other entities with which it competes or may
potentially compete. The full extent to which other media or home delivery
services will compete with cable television systems may not be known for some
time and there can be no assurance that existing, proposed or as yet undeveloped
technologies will not become dominant in the future.
Regulation and Legislation. The operation of cable television systems is
extensively regulated by the FCC, some state governments and most local
governments. On February 8, 1996, the President signed into law the 1996
Telecom Act. This new law alters the regulatory structure governing the
nation's telecommunications providers. It removes barriers to competition in
both the cable television market and the local telephone market. Among other
things, it reduces the scope of cable rate regulation.
The 1996 Telecom Act requires the FCC to implement numerous rulemakings,
the final outcome of which cannot yet be determined. Moreover, Congress and the
FCC have frequently revisited the subject of cable television regulation and may
do so again. Future legislative and regulatory changes could adversely affect
the Company's operations. This section briefly summarizes key laws and
regulations currently affecting the growth and operation of the Company's cable
systems.
Cable Rate Regulation. The 1992 Cable Act imposed extensive rate
---------------------
regulation on the cable television industry. All cable systems are subject to
rate regulation of their basic and upper tier programming services, as well as
their provision of customer equipment used to receive basic tier services,
unless they face "effective competition" in their local franchise area. Under
the 1992 Cable Act, the incumbent cable operator can demonstrate effective
competition by showing either low penetration (less than 30% of the occupied
households in the franchise area subscribe to basic service), or the presence
(measured collectively as 50% availability, 15% customer penetration) of other
multichannel video programming distributors ("MVPDs"). The 1996 Telecom Act
expands the existing definition of effective competition to create a special
test for a competing MVPD (other than a DBS distributor) affiliated with a
local exchange carrier ("LEC"). There is no penetration minimum for a LEC
affiliate to qualify as an effective competitor, but it must offer comparable
programming services in the franchise area.
I-8
<PAGE>
Although the FCC establishes all cable rate rules, local government units
(commonly referred to as local franchising authorities or "LFAs") are primarily
responsible for administering the regulation of the lowest level of cable -- the
basic service tier ("BST"), which typically contains local broadcast stations
and PEG channels. Before an LFA begins BST rate regulation, it must certify to
the FCC that it will follow applicable federal rules, and many LFAs have
voluntarily declined to exercise this authority. LFAs also have primary
responsibility for regulating cable equipment rates. Under federal law, charges
for various types of cable equipment must be unbundled from each other and from
monthly charges for programming services, and priced no higher than the
operator's actual cost, plus an 11.25% rate of return.
The FCC itself directly administers rate regulation of any cable
programming service tiers ("CPST"), which typically contain satellite-delivered
programming. Under the 1996 Telecom Act, the FCC can regulate CPST rates only
if an LFA first receives at least two complaints from local customers within 90
days of a CPST rate increase and then files a formal complaint with the FCC.
When new CPST rate complaints are filed, the FCC now considers only whether the
incremental increase is justified and will not reduce the previously established
CPST rate.
Under the FCC's rate regulations, the Company was required to reduce its
BST and CPST rates in 1993 and 1994, and has since had its rate increases
governed by a complicated price structure that allows for the recovery of
inflation and certain increased costs, as well as providing some incentive for
expanding channel carriage. The FCC has modified its rate adjustment
regulations to allow for annual rate increases and to minimize previous problems
associated with delays in implementing rate increases. Operators also have the
opportunity of bypassing this "benchmark" structure in favor of traditional
cost-of-service regulation in cases where the latter methodology appears
favorable. However, the FCC significantly limited the inclusion in the rate
base of acquisition costs in excess of the historical cost of tangible assets.
As a result, the Company pursued cost of service justifications in only a few
cases. Premium cable services offered on a per channel or per program basis
remain unregulated, as do affirmatively marketed packages consisting entirely of
new programming product.
The 1996 Telecom Act sunsets FCC regulation of CPST rates for all systems
(regardless of size) on March 31, 1999. However, certain members of Congress
and FCC officials have called for the delay of this regulatory sunset and
further have urged more rigorous rate regulation (including limits on
programming cost pass-throughs to cable customers) until a greater degree of
competition to incumbent cable operators has developed. On February 25, 1998,
legislation was introduced in the Congress which if enacted would repeal the
statutory "sunset" and extend FCC regulation of CPST rates beyond March 31,
1999. The 1996 Telecom Act also relaxes existing uniform rate requirements by
specifying that uniform rate requirements do not apply where the operator faces
effective competition, and by exempting bulk discounts to multiple dwelling
units ("MDUs"), although complaints about predatory pricing in MDUs still may be
made to the FCC.
I-9
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Cable Entry Into Telecommunications. The 1996 Telecom Act provides that no
-----------------------------------
state or local laws or regulations may prohibit or have the effect of
prohibiting any entity from providing any interstate or intrastate
telecommunications service. States are authorized, however, to impose
"competitively neutral" requirements regarding universal service, public safety
and welfare, service quality, and consumer protection. State and local
governments also retain their authority to manage the public rights-of-way.
Although the 1996 Telecom Act clarifies that traditional cable franchise fees
may be based only on revenues related to the provision of cable television
services, it also provides that LFAs may require reasonable, competitively
neutral compensation for management of the public rights-of-way when cable
operators provide telecommunications service. The 1996 Telecom Act prohibits
LFAs from requiring cable operators to provide telecommunications service or
facilities as a condition of a franchise grant, renewal or transfer, except that
LFAs can seek "institutional networks" as part of such franchise negotiations.
The favorable pole attachment rates afforded cable operators under federal law
can be increased by utility companies owning the poles during a five year phase-
in period beginning in 2001, if the cable operator provides telecommunications
service, as well as cable service, over its plant.
Cable entry into telecommunications will be affected by the regulatory
landscape now being fashioned by the FCC and state regulators. One critical
component of the 1996 Telecom Act intended to facilitate the entry of new
telecommunications providers (including cable operators) is the interconnection
obligation imposed on all telecommunications carriers. In July 1997, the Eighth
Circuit Court of Appeals vacated certain aspects of the FCC's initial
interconnection order, and that decision is now pending before the Supreme
Court. However, the underlying statutory obligation of local telephone
companies to interconnect with competitors remains in place.
Telephone Company Entry Into Cable Television. The 1996 Telecom Act allows
---------------------------------------------
telephone companies to compete directly with cable operators by repealing the
historic telephone company/cable company cross-ownership ban and the FCC's video
dialtone regulations. This will allow LECs, including the RBOCs, to compete
with cable operators both inside and outside their telephone service areas.
Because of their resources, LECs could be formidable competitors to traditional
cable operators, and certain LECs have begun offering cable service.
Under the 1996 Telecom Act, a LEC providing video programming to customers
will be regulated as a traditional cable operator (subject to local franchising
and federal regulatory requirements), unless the LEC elects to provide its
programming via an "open video system" ("OVS"). LECs providing service through
an OVS can proceed without a traditional cable franchise, although an OVS
operator will be subject to general rights-of-way management regulations and can
be required to pay franchise fees to the extent it provides cable services. To
be eligible for OVS status, the LEC itself cannot occupy more than one-third of
the system's activated channels when demand for channels exceeds supply. Nor
can it discriminate among programmers or establish unreasonable rates, terms or
conditions for service.
I-10
<PAGE>
Although LECs and cable operators can now expand their offerings across
traditional service boundaries, the general prohibitions remain on LEC buyouts
(i.e., any ownership interest exceeding 10 percent) of co-located cable systems,
cable operator buyouts of co-located LEC systems, and joint ventures among cable
operators and LECs in the same market. The 1996 Telecom Act provides a few
limited exceptions to this buyout prohibition. The "rural exemption" permits
buyouts where the purchased system serves an area with fewer than 35,000
inhabitants outside an urban area, and the cable system plus any other system in
which the LEC has an interest do not represent 10% or more of the LEC's
telephone service area. The 1996 Telecom Act also provides the FCC with the
power to grant waivers of the buyout prohibition in cases where: (1) the cable
operator or LEC would be subject to undue economic distress; (2) the system or
facilities would not be economically viable; or (3) the anticompetitive effects
of the proposed transaction are clearly outweighed by the effect of the
transaction in meeting community needs. The LFA must approve any such waiver.
Electric Utility Entry Into Telecommunications/Cable Television. The 1996
---------------------------------------------------------------
Telecom Act provides that registered utility holding companies and subsidiaries
may provide telecommunications services, information services, and other
services or products subject to the jurisdiction of the FCC, notwithstanding the
Public Utilities Holding Company Act. Electric utilities must establish
separate subsidiaries, known as "exempt telecommunications companies" and must
apply to the FCC for operating authority. Again, because of their resources,
electric utilities could be formidable competitors to traditional cable systems.
Additional Ownership Restrictions. Pursuant to the 1992 Cable Act, the FCC
---------------------------------
adopted regulations establishing a 30% limit on the number of homes nationwide
that a cable operator may reach through cable systems in which it holds an
attributable interest with an increase to 35% if the additional cable systems
are minority controlled. The FCC stayed the effectiveness of its ownership
limits pending the appeal of a September 16, 1993 decision by the United States
District Court for the District of Columbia which, among other things, found
unconstitutional the provision of the 1992 Cable Act requiring the FCC to
establish such ownership limits. If the ownership limits are determined on
appeal to be constitutional, they may affect TCIC's, and subsequently Pacific's,
ability to acquire attributable interests in additional cable systems. The FCC
is currently conducting a reconsideration of its national customer limit rules,
and it is possible the FCC will revise both the national customer reach
percentage limitation and/or the manner in which it attributes ownership to a
cable operator. Either of these revisions, which are expected to be completed
in 1998, could adversely affect various joint ventures, partnerships and equity
ownership arrangements announced by the Company in 1997 in the Company's effort
to reduce the number of cable systems over which it has control and management
responsibility.
The FCC also adopted regulations limiting carriage by a cable operator of
national programming services in which that operator holds an attributable
interest (using the same attribution standards as were adopted for its limits on
the number of homes nationwide that a cable operator may reach through its cable
systems) to 40% of the activated channels on each of the cable operator's
systems. The rules provide for the use of two additional channels or a 45%
limit, whichever is greater, provided that the additional channels carry
minority controlled programming services. The regulations also grandfather
existing carriage arrangements which exceed the channel limits, but require new
channel capacity to be devoted to unaffiliated programming services until the
system achieves compliance with the regulations. These channel occupancy limits
apply only up to 75 activated channels on the cable system, and the rules do not
apply to local or regional programming services.
I-11
<PAGE>
The 1996 Telecom Act eliminates statutory restrictions on broadcast/cable
cross-ownership (including broadcast network/cable restrictions), but leaves in
place existing FCC regulations prohibiting local cross-ownership between
television stations and cable systems. The 1996 Telecom Act also eliminates the
three year holding period required under the 1992 Cable Act's "anti-trafficking"
provision. The 1996 Telecom Act leaves in place existing restrictions on cable
cross-ownership with SMATV and MMDS facilities, but lifts those restrictions
where the cable operator is subject to effective competition. In January 1995,
however, the FCC adopted regulations which permit cable operators to own and
operate SMATV systems within their franchise area, provided that such operation
is consistent with local cable franchise requirements.
Must Carry/Retransmission Consent. The 1992 Cable Act contains broadcast
---------------------------------
signal carriage requirements that allow local commercial television broadcast
stations to elect once every three years between requiring a cable system to
carry the station ("must carry") or negotiating for payments for granting
permission to the cable operator to carry the station ("retransmission
consent"). Less popular stations typically elect must carry, and more popular
stations typically elect retransmission consent. Must carry requests can dilute
the appeal of a cable system's programming offerings, and retransmission consent
demands may require substantial payments or other concessions (e.g. a
requirement that the cable system also carry the local broadcaster's affiliated
cable programming service). Either option has a potentially adverse effect on
the Company's business. The burden associated with must-carry obligations could
dramatically increase if television broadcast stations proceed with planned
conversions to digital transmissions and if the FCC determines that cable
systems must carry all analog and digital signals transmitted by the television
stations. Additionally, cable systems are required to obtain retransmission
consent for all "distant" commercial television stations (except for certain
commercial satellite-delivered independent "superstations" such as WGN).
Access Channels. LFAs can include franchise provisions requiring cable
---------------
operators to set aside certain channels for PEG programming. Federal law also
requires a cable system with 36 or more channels to designate a portion of its
activated channel capacity (either 10% or 15%) for commercial leased access by
unaffiliated third parties. The FCC has adopted rules regulating the terms,
conditions and maximum rates a cable operator may charge for use of this
designated channel capacity, but use of commercial leased access channels has
been relatively limited. In February of 1997, the FCC released revised rules
which mandated a modest rate reduction which has made commercial leased access a
more attractive option for third party programmers, particular for part-time
leased access carriage. Further, a group of commercial leased access users has
challenged the FCC's February 1997 order as failing to reduce commercial leased
access rates by an appropriate amount. If this pending court challenge is
successful, the FCC will be forced to undertake a further rulemaking which could
result in significantly reduced commercial leased access rates thereby
encouraging a much more significant increase in the use of commercial leased
access channels.
"Anti-Buy Through" Provisions. Federal law requires each cable system to
-----------------------------
permit customers to purchase premium or pay-per-view video programming offered
by the operator on a per-channel or a per-program basis without the necessity of
subscribing to any tier of service (other than the basic service tier) unless
the system's lack of addressable converter boxes or other technological
limitations does not permit it to do so. The statutory exemption for cable
systems that do not have the technological capability to comply expires in
October 2002, but the FCC may extend that period if deemed necessary.
I-12
<PAGE>
Access to Programming. To spur the development of independent cable
---------------------
programmers and competition to incumbent cable operators, the 1992 Cable Act
imposed restrictions on the dealings between cable operators and cable
programmers. Of special significance from a competitive business posture, the
1992 Cable Act precludes satellite video programmers affiliated with cable
operators from favoring cable operators over competing multichannel video
programming distributors (such as DBS and MMDS distributors). This provision
limits the ability of vertically integrated satellite cable programmers to offer
exclusive programming arrangements to the Company. Recently, both Congress and
the FCC have considered proposals that would expand the program access rights of
cable's competitors, including the possibility of subjecting video programmers
who are not affiliated with cable operators to all program access requirements.
Inside Wiring. In a 1997 Order, the FCC established rules that require an
-------------
incumbent cable operator upon expiration or termination of a MDU service
contract to sell, abandon, or remove "home run" wiring that was installed by the
cable operator in a MDU building. These inside wiring rules will assist
building owners in their attempts to replace existing cable operators with new
video programming providers who may be willing to pay the building owner a
higher fee. Additionally, the FCC has proposed abrogating all exclusive MDU
contracts held by cable operators, but at the same time allowing competitors to
cable to enter into exclusive MDU service contracts.
Other FCC Regulations. In addition to the FCC regulations noted above,
---------------------
there are other FCC regulations covering such areas as equal employment
opportunity, customer privacy, programming practices (including, among other
things, syndicated program exclusivity, network program nonduplication, local
sports blackouts, indecent programming, lottery programming, political
programming, sponsorship identification, and children's programming
advertisements), registration of cable systems and facilities licensing,
maintenance of various records and public inspection files, frequency usage,
lockbox availability, antenna structure notification, tower marking and
lighting, consumer protection and customer service standards, technical
standards, and consumer electronics equipment compatibility. FCC requirements
imposed in 1997 for Emergency Alert Systems and for hearing-impaired Closed
Captioning on programming will result in new and potentially singificant costs
for the Company. The FCC has the authority to enforce its regulations through
the imposition of substantial fines, the issuance of cease and desist orders
and/or the imposition of other administrative sanctions, such as the revocation
of FCC licenses needed to operate certain transmission facilities used in
connection with cable operations.
The FCC is currently considering whether cable customers should be
permitted to purchase cable converters from third party vendors. If the FCC
concludes that third party sale of converters is required, and does not make
appropriate allowances for signal piracy concerns, it may become more difficult
for cable operators to combat theft of service.
Internet Service Regulation. TCI began offering high-speed internet
---------------------------
service to customers in 1997. At this time, there is no significant federal or
local regulation of cable system delivery of internet services. However, as the
cable industry's delivery of internet services develops, it is possible that
greater federal and/or local regulation could be imposed.
I-13
<PAGE>
Copyright. Cable television systems are subject to federal copyright
---------
licensing covering carriage of television and radio broadcast signals. In
exchange for filing certain reports and contributing a percentage of their
revenue to a federal copyright royalty pool (such percentage varies depending on
the size of the system and the number of distant broadcast television signals
carried), cable operators can obtain blanket permission to retransmit
copyrighted material on broadcast signals. The possible modification or
elimination of this compulsory copyright license is subject to continuing review
and could adversely affect the Company's ability to obtain desired broadcast
programming. In addition, the cable industry pays music licensing fees to
Broadcast Music, Inc. and is negotiating a similar arrangement with the American
Society of Composers, Authors and Publishers. Copyright clearances for
nonbroadcast programming services are arranged through private negotiations.
State and Local Regulation. Cable television systems generally are
--------------------------
operated pursuant to nonexclusive franchises granted by a municipality or other
state or local government entity. The 1996 Telecom Act clarified that the need
for an entity providing cable services to obtain a local franchise depends
solely on whether the entity crosses public rights of way. Federal law now
prohibits franchise authorities from granting exclusive franchises or from
unreasonably refusing to award additional franchises covering an existing cable
system's service area. Cable franchises generally are granted for fixed terms
and in many cases are terminable if the franchisee fails to comply with material
provisions. Non-compliance by the cable operator with franchise provisions may
also result in monetary penalties.
The terms and conditions of franchises vary materially from jurisdiction to
jurisdiction. Each franchise generally contains provisions governing cable
operations, service rates, franchise fees, system construction and maintenance
obligations, system channel capacity, design and technical performance, customer
service standards, and indemnification protections. A number of states subject
cable television systems to the jurisdiction of centralized state governmental
agencies, some of which impose regulation of a character similar to that of a
public utility. Although LFAs have considerable discretion in establishing
franchise terms, there are certain federal limitations. For example, LFAs
cannot insist on franchise fees exceeding 5% of the system's gross revenue,
cannot dictate the particular technology used by the system, and cannot specify
video programming other than identifying broad categories of programming.
Federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the franchise authority may seek to impose new and more onerous
requirements such as significant upgrades in facilities and services or
increased franchise fees and funding for PEG channels as a condition of renewal.
Similarly, if a franchise authority's consent is required for the purchase or
sale of a cable system or franchise, such authority may attempt to impose more
burdensome or onerous franchise requirements in connection with a request for
consent. Historically, franchises have been renewed for cable operators that
have provided satisfactory services and have complied with the terms of their
franchises.
Proposed Changes in Regulation. The regulation of cable television systems
at the federal, state and local levels is subject to the political process and
has been in constant flux over the past decade. Material changes in the law and
regulatory requirements must be anticipated and there can be no assurance that
the Company's business will not be affected adversely by future legislation, new
regulation or deregulation.
I-14
<PAGE>
General
-------
Legislative, administrative and/or judicial action may change all or
portions of the foregoing statements relating to competition and regulation.
The Company has not expended material amounts during the last three fiscal
years on research and development activities.
There is no one customer or affiliated group of customers to whom sales are
made in an amount which exceeds 10% of the Company's consolidated revenue.
Compliance with federal, state and local provisions which have been enacted
or adopted regulating the discharge of material into the environment or
otherwise relating to the protection of the environment has had no material
effect upon the capital expenditures, results of operations or competitive
position of the Company.
At December 31, 1997, the Company had approximately 2,100 employees, most
of which were located at the Company's various facilities in the communities in
which the Company owns and/or operates cable television systems.
(d) Financial Information about Foreign & Domestic Operations and Export Sales
--------------------------------------------------------------------------
The Company has neither material foreign operations nor export sales.
Item 2. Properties.
- ------ ----------
The Company leases most of its local operating offices, and owns many of
its headend and antenna sites. Its physical cable television properties consist
of system components, motor vehicles, miscellaneous hardware, spare parts and
other components.
The Company's cable television facilities are, in the opinion of
management, suitable and adequate by industry standards. Physical properties of
the Company are not held subject to any major encumbrance.
Item 3. Legal Proceedings.
- ------ -----------------
Late Fee Litigation. Certain systems owned or operated by the Company are
-------------------
involved in a number of purported and certified class actions in various
jurisdictions concerning late fee charges and practices. Certain cable systems
directly or indirectly owned or managed by the Company charge late fees to
subscribers who do not pay their cable bills on time. These late fee cases
challenge the amount of the late fees and the practices under which they are
imposed. The Plaintiffs raise claims under state consumer protection statutes,
other state statutes, and the common law. Plaintiffs generally allege that the
late fees charged by various cable systems are not reasonably related to the
costs incurred by the cable systems as a result of the late payment. Plaintiffs
seek to require cable systems to reduce their late fees on a prospective basis
and to provide compensation for alleged excessive late fee charges for past
periods. These cases are at various stages of the litigation process. Based upon
the facts available management believes that, although no assurances can be
given as to the outcome of these actions, the ultimate disposition of these
matters should not have a material adverse effect upon the financial condition
of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
None.
I-15
<PAGE>
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- ------ ---------------------------------------------------------------------
All of TCI Pacific Communications, Inc.'s (together with its consolidated
subsidiaries, "Pacific" or the "Company") common stock is owned by TCI
Communications, Inc. ("TCIC"). The Company has not paid cash dividends on its
common stock and has no present intention of so doing. Payment of cash
dividends, if any, in the future will be determined by the board of directors in
light of the Company's earnings, financial condition and other relevant
considerations. The Company is a holding company and its assets consist almost
entirely of investments in its subsidiaries. As a holding company, the
Company's ability to pay dividends on any classes of its stock is dependent on
the earnings of, or other funds available to, the Company's subsidiaries and the
distribution or other payment of such earnings or other funds to the Company in
the form of dividends, loans or other advances, payment or reimbursement of
management fees and expenses and repayment of loans and advances from the
Company.
II-1
<PAGE>
Item 6. Selected Financial Data.
- ------ -----------------------
The following tables present selected information relating to the financial
condition and results of operations of Pacific and its predecessor Viacom
International Inc. (after giving effect to the First Distribution, as defined in
Item 7, "VII Cable") for the past five years. The following data should be read
in conjunction with TCI Pacific Communications, Inc.'s consolidated financial
statements. The selected information of VII Cable for periods prior to July 31,
1996 reflects the carve-out historical results of operations and financial
position of VII Cable's cable television distribution business and is not
necessarily indicative of results of operations or financial position that would
have occurred if such business had been a separate stand-alone entity during the
periods presented.
<TABLE>
<CAPTION>
Pacific VII Cable
--------------------------------------- -------------------------------------------
December 31, December 31,
--------------------------------------- -------------------------------------------
1997 1996 1995 1994 1993
------------------- ------------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
amounts in thousands
Summary Balance Sheet Data: |
- -------------------------- |
|
Property and equipment, net $ 394,319 379,183 | 419,644 365,032 326,080
|
Franchise costs, net $2,927,475 2,984,473 | 561,229 578,072 593,749
|
Total assets $3,358,202 3,440,561 | 1,066,813 1,040,434 966,249
|
Debt $ 952,348 1,151,884 | 57,000 57,000 57,000
|
Exchangeable preferred stock $ 629,739 629,801 | -- -- --
|
Common stockholder's equity $ 686,505 539,195 | 857,107 823,940 765,531
</TABLE>
<TABLE>
<CAPTION>
Pacific VII Cable
---------------------------- -------------------------------------------
Five months Seven months
Year ended ended ended Years ended December 31,
December 31, December 31, July 31, ----------------------------
1997 1996 1996 1995 1994 1993
------------- ------------- ------------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
amounts in thousands
Summary Statement of |
- -------------------- |
Operations Data: |
- ---------------- |
|
Revenue $508,803 215,550 | 280,630 448,206 408,801 414,786
|
Operating income $ 92,817 37,802 | 52,266 86,862 61,744 83,815
|
Interest expense $(97,778) (43,566) | (30,908) (48,524) (38,050) (33,417)
|
Net earnings (loss) $ (5,652) (2,452) | 10,660 33,714 9,146 97,391
|
Dividend requirement on |
exchangeable preferred stock $(31,227) (13,079) | -- -- -- --
-------- ------- | ------- ------- ------- -------
Net earnings (loss) |
attributable to common |
stockholder $(36,879) (15,531) | 10,660 33,714 9,146 97,391
======== ======= | ======= ======= ======= =======
</TABLE>
II-2
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------ -----------------------------------------------------------------------
of Operations.
--------------
General
- -------
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 Viacom International Services Inc. ("New VII"),
a wholly owned subsidiary of VII Cable, entered into certain 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. 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. Following the Exchange Offer, Pacific retained cable
assets with a value at closing of approximately $2.326 billion and the
obligation to repay the Credit Agreement. Neither Viacom nor VII Cable has any
obligation with respect to repayment of the Credit Agreement. For additional
discussion of the Acquisition, see note 1 to the accompanying consolidated
financial statements.
On May 8, 1996, a subsidiary of InterMedia Capital Partners IV, L.P.
("IMP") consummated certain 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. In connection
with the Acquisition, IMP exchanged its Houston cable system 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.
During the third quarter of 1996, TCIC acquired a 49% limited partnership
in IMP. 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 (the "Boulder Acquisition").
(continued)
II-3
<PAGE>
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 Common Stock (the "TCI
Group Series A Stock") at an exchange rate of 5.447 shares of TCI Group Series A
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 TCI Group Series A Stock, or in
any combination of the foregoing. If payments are made in shares of TCI Group
Series A 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.
Accounting Standards
--------------------
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130"), which is effective for fiscal years beginning after December 15, 1997.
SFAS 130 establishes standards for reporting and displaying of comprehensive
income and its components in the financial statements. It does not, however,
require a specific format for the statement, but requires the Company to display
an amount representing total comprehensive income for the period in that
financial statement. The Company is in the process of determining its preferred
format. SFAS 130 is effective for fiscal years beginning after December 15,
1997.
Year 2000
---------
During 1997, the Company began a comprehensive review of its computer
systems and related software to ensure systems properly recognize the year 2000
and continue to process business information. The systems being evaluated
include all internal use software and devices and those systems and devices that
manage the distribution of the Company's products. Additionally, the Company
has initiated a program of communications with its significant suppliers to
determine the readiness of these third parties and the impact on the Company if
those third parties fail to remediate their own year 2000 issues.
(continued)
II-4
<PAGE>
Over the past two years, the Company began an effort to convert a
substantial portion of its financial applications to commercial products which
are anticipated to be year 2000 ready, or to outsource portions of its financial
applications to third party vendors who are expected to be year 2000 ready.
Notwithstanding such effort, the Company is in the process of finalizing its
assessment of the impact of year 2000. The Company is utilizing both internal
and external resources to identify, correct or reprogram, and test systems for
year 2000 readiness. To date, the Company has inventoried substantially all of
its cable systems and is currently evaluating the results of such inventory. The
Company expects that it will have to modify or replace certain portions of its
cable distribution plant, although the Company has not yet completed its
assessment. Confirmations have been received from certain primary suppliers
indicating they are either year 2000 ready or have plans in place to ensure
readiness. As part of the Company's assessment of its year 2000 issue, it is
evaluating the level of validation it will require of third parties to ensure
their year 2000 readiness. The Company's manual assessment of the year 2000 date
change should be complete by mid-1998.
Management of the Company has not yet assessed the cost associated with its
year 2000 readiness efforts and the related potential impact on the Company's
net earnings. Amounts expended to date have not been material, although there
can be no assurance that costs ultimately required to be paid to ensure the
Company's year 2000 readiness will not have an adverse effect on the Company's
financial position. Additionally, there can be no assurance that the systems of
the Company's suppliers will be converted in time or that any such failure to
convert by such third parties will not have an adverse effect on the Company's
financial position.
Summary of Operations
- ---------------------
Due to the consummation of the Acquisition, the Company's 1996 statement of
operations includes information reflecting the five month period ended December
31, 1996 (the "Five 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, 1997 and 1996, the Five Month Period has
been combined with the Seven Month Period for purposes of the following
discussion and analysis.
The operation of Pacific's cable television systems is regulated at the
federal, state and local levels. The Cable Communications Policy Act of 1984,
the Cable Television Consumer Protection and Competition Act of 1992 and the
Telecommunications Act of 1996 (collectively, the "Cable Acts") established
rules under which Pacific's basic and tier service rates and its equipment and
installation charges (the "Regulated Services") are regulated if a complaint is
filed by a customer or if the appropriate franchise authority is certified by
the Federal Communications Commission to regulate rates. At December 31, 1997,
approximately 62% of Pacific's basic customers were served by cable television
systems that were subject to such rate regulation.
During the year ended December 31, 1997, 75% of Pacific's revenue was
derived from Regulated Services. As noted above, any increases in rates charged
for Regulated Services are regulated by the Cable Acts. Moreover, competitive
factors may limit Pacific's ability to increase its service rates.
(continued)
II-5
<PAGE>
Revenue increased $12,623,000 or 3% and $47,974,000 or 11% for the years
ended December 31, 1997 and 1996, respectively, as compared to the prior year.
Exclusive of the effects of the Boulder Acquisition, 1997 revenue increased
$5,898,000 or 1%. Such 1997 increase is due to the effect of increases in
advertising sales and other operating revenue, partially offset by a decrease in
the average premium rate. Pacific experienced a 2% increase in its average
basic rate, a 7% decrease in its average premium rate and a 2% decrease in the
number of average premium customers during 1997. The number of average basic
subscribers remained relatively constant during 1997.
The 1996 increase is primarily attributable to a 2% increase in average
basic customers and a 12% increase in the average basic rate, partially offset
by a 15% decrease in the average premium rate. Pacific's basic and premium
customers decreased 1% and 2% respectively from December 31, 1995 to December
31, 1996.
Operating expenses decreased $6,349,000 or 3% and increased $12,647,000 or
7% during the years ended December 31, 1997 and 1996, respectively, as compared
to the prior year. Exclusive of the effects of the Boulder Acquisition, 1997
expenses decreased $9,181,000 or 5%. Such 1997 change is due to decreases in
individually insignificant items partially offset by an increase in programming
costs. Pacific, a member of TCI's domestic distribution and communications
group ("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 July 1997 affiliation agreement with Encore
Media Group, another subsidiary of TCI, it is anticipated that the Company's
programming costs with respect to the "STARZ!" and "Encore" premium services
will increase in 1998 and future periods. The 1996 increase is due to increases
in costs related to customer growth, increased programming fees and increased
channel capacity.
Selling, general and administrative expenses ("SG&A") decreased $8,801,000
or 7% and increased $17,872,000 or 16% during the years ended December 31, 1997
and 1996, respectively, as compared to the prior year. Exclusive of the effects
of the Boulder Acquisition, 1997 expenses decreased $10,094,000 or 8%. Such
1997 change is the net effect of a reduction in salaries and related payroll
expenses due to work force reductions in the fourth quarter of 1996, partially
offset by increases in other individually insignificant items. The 1996
increase reflects programming launch incentives received in 1995 but not in
1996, and higher overhead allocations in 1996.
Effective August 1, 1996, TCI began to provide certain administrative and
other services to Pacific pursuant to a services agreement entered into among
TCI, TCIC and Pacific (the "Services Agreement").
The Services Agreement 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.
(continued)
II-6
<PAGE>
Pursuant to the Services Agreement, Pacific reimburses TCI for all direct
expenses incurred by TCI in providing general and administrative services and a
pro rata share of all indirect expenses incurred by TCI in connection with the
rendering of 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 $32,446,000 and $13,712,000 during the year ended
December 31, 1997 and the Five Month Period, respectively, and are included in
SG&A 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 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 and $13,492,000 for the Seven
Month Period and the year ended December 31, 1995, respectively, and are
included in SG&A in the accompanying financial statements.
Depreciation expense decreased $10,147,000 or 19% and $9,846,000 or 16% for
the years ended December 31, 1997 and 1996, respectively, as compared to the
prior year. Such decreases are attributable to lower average depreciable
balances of property and equipment during 1997 and 1996. Such decreases
resulted from a July 1996 decrease in property and equipment due to the
application of purchase accounting in connection with the Acquisition, which
more than offset increases in property and equipment due to capital expenditures
of $48,873,000 and $28,331,000 during the year ended December 31, 1997 and the
Five Month Period, respectively.
Amortization expense increased $35,171,000 or 82% and $24,095,000 or 129%
for the years ended December 31, 1997 and 1996, respectively, as compared to the
prior year. Such increases are attributable to increased franchise costs
resulting from the Acquisition.
Other Income and Expense
------------------------
Interest expense increased $23,304,000 or 31% and $25,950,000 or 53% for
the years ended December 31, 1997 and 1996, respectively, as compared to the
prior year. Such increases are due to interest related to the $1.7 billion
Credit Agreement entered into prior to consummation of the Exchange Offer and
interest charges resulting from amounts due to TCIC. 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.
Prior to the Acquisition 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.
(continued)
II-7
<PAGE>
Subsequent to the Acquisition, Pacific has been 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 income 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 income tax allocation is
recorded as an increase or decrease in amounts due to TCIC. For additional
information concerning the Company's income taxes, see note 10 to the
accompanying financial statements.
As a result of the above described fluctuations in the Company's results of
operations, (i) the Company's net loss (before preferred stock requirements) of
$5,652,000 for the year ended December 31, 1997 changed by $13,860,000 as
compared to the Company's net earnings (before preferred stock requirements) of
$8,208,000 for the year ended December 31, 1996, and (ii) the Company's net
earnings (before preferred stock requirements) of $8,208,000 for the year ended
December 31, 1996 decreased by $25,506,000, as compared to the Company's net
earnings of $33,714,000 for the year ended December 31, 1995.
Inflation did not have a significant impact on the Company's results of
operations during the three year period ended December 31, 1997.
Liquidity and Capital Resources
- -------------------------------
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 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 contemplated by the Houston
Purchase Agreements. In connection with the Acquisition, IMP exchanged its
Houston cable systems plus cash amounting to $36,633,000 for VII Cable's
Nashville cable system.
In accordance with the terms of the Credit Agreement, Pacific has entered
into an interest rate exchange agreement (the "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 December 31, 1997, the terms of the
Interest Rate Swap had not become effective. Further, the Company is not
currently exposed to material near-term losses in future earnings, fair values
or cash flows resulting from derivative financial instruments. See note 4 to
the accompanying financial statements for additional information regarding the
Interest Rate Swap.
The Company's debt ($952,348,000 at December 31,1997) and amounts owed to
TCIC ($388,915,000 at December 31, 1997) bear interest at variable rates.
Accordingly, in an environment of rising interest rates, the Company expects
that it would experience an increase in interest expense. However any such
increase would be somewhat mitigated by the above-described Interest Rate Swap.
(continued)
II-8
<PAGE>
At December 31, 1997, the Company had $450 million in unused availability
under the Credit Agreement. Although the Company was in compliance with the
restrictive covenants contained in the Credit Agreement at said date, additional
borrowings under the Credit Agreement are subject to the Company's continuing
compliance with such restrictive covenants (which relate primarily to the
maintenance of certain ratios of cash flow to total debt and cash flow to debt
service, as defined in the credit facilities) after giving effect to such
additional borrowings. See note 7 to the accompanying financial statements for
additional information regarding the material terms of the Credit Agreement.
Approximately 16 percent of the franchises held by the Company, involving
approximately 90,000 basic customers, expire within five years. In connection
with a renewal of a franchise, the franchising authority may require the cable
operator to comply with different and more stringent conditions than those
originally imposed, subject to applicable federal, state and local law. Such
law establishes an orderly process for franchise renewal which protects cable
operators against unfair denials of renewals when the operator's past
performance and proposal for future performance meet established standards. The
Company believes that its cable television systems generally have been operated
in a manner which satisfies such standards and allows for the renewal of such
franchises; however, there can be no assurance that the franchises for such
systems will be successfully renewed as they expire.
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)($214,064,000 and $82,445,000 for the year ended December 31,
1997 and the Five Month Period, respectively) to interest expense ($97,778,000
and $43,566,000 for the year ended December 31, 1997 and the Five Month Period,
respectively), is determined by reference to the statements of operations. The
Company's interest coverage ratio was 219% and 189% for the year ended December
31, 1997 and the Five Month Period, respectively. 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 ($115,535,000 and $31,594,000 for the year
ended December 31, 1997 and the Five Month Period, respectively) 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
statements of cash flows included in the accompanying financial statements.
(continued)
II-9
<PAGE>
Amounts expended by Pacific for its investing activities exceeded net cash
provided by operating activities during the years ended December 31, 1996 and
1995. However, during the year ended December 31, 1997, Pacific's net cash
provided by operating activities exceeded amounts expended by its investing
activities. The amount of capital expended by the Company for property and
equipment was $48,873,000 during 1997, as compared to $96,912,000 and
$117,966,000 during 1996 and 1995, respectively. In light of Pacific's plans to
upgrade the capacity of its cable distribution systems, and its plans to
increase the number of customers to digital video services, Pacific anticipates
that its annual capital expenditures during the next several years will exceed
the amount expended during 1997. In this regard, Pacific estimates that it will
expend $150 million to $160 million over the next three years to expand the
capacity of its cable distribution systems. Pacific expects that the actual
amount of capital that will be required in connection with its plans to increase
the number of customers to video digital services will be significant. However,
Pacific cannot reasonably estimate such actual capital requirement since such
actual capital requirement is dependent upon the extent of any customer
increases and the average installed per-unit cost of digital set-top devices.
The Company's management believes that net cash provided by operating
activities and available capacity pursuant to the Credit Agreement, and advances
from TCIC, as required, will provide adequate sources of short-term and long-
term liquidity in the future.
Item 8. Financial Statements and Supplementary Data.
- ------ -------------------------------------------
The consolidated financial statements of TCI Pacific Communications, Inc.
are filed under this Item, beginning on Page II-11. All financial statement
schedules are omitted as they are not required or are not applicable.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------ ---------------------------------------------------------------
Financial Disclosure.
--------------------
None.
II-10
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Stockholders
TCI Pacific Communications, Inc.:
We have audited the accompanying consolidated balance sheets of TCI Pacific
Communications, Inc. and subsidiaries (a subsidiary of TCI Communications, Inc.)
as of December 31, 1997 and 1996, and the related statements of operations,
common stockholder's equity, and cash flows for the year ended December 31, 1997
and the five months ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TCI Pacific Communications,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for the year ended December 31, 1997 and the
five months ended December 31, 1996, in conformity with generally accepted
accounting principles.
As discussed in note 1 to the aforementioned financial statements, effective
August 1, 1996, TCI Communications, Inc. acquired all of the outstanding stock
of Viacom International, Inc., which was renamed TCI Pacific Communications,
Inc., in a business combination accounted for as a purchase. As a result of the
acquisition, the 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.
KPMG Peat Marwick LLP
Denver, Colorado
March 20, 1998
II-11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors and Stockholders
of TCI Pacific Communications, Inc.
(the "Company", formerly VII Cable):
In our opinion, the combined statements of operations, of common
stockholder's equity and of cash flows for the seven months ended July 31, 1996
and the year ended December 31, 1995 present fairly, in all material respects,
the results of operations and cash flows of VII Cable (as defined in note 1 to
the financial statements) for the seven months ended July 31, 1996 and the year
ended December 31, 1995, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above. We have not audited the combined financial statements of VII Cable for
any period subsequent to July 31, 1996.
PRICE WATERHOUSE LLP
New York, New York
October 18, 1996
II-12
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ----------
Assets amounts in thousands
- ------
<S> <C> <C>
Cash $ 2,966 --
Restricted cash (note 1) -- 33,664
Trade and other receivables, net 11,936 18,986
Prepaid expenses 4,892 6,144
Property and equipment, at cost:
Land 5,803 5,795
Distribution systems 397,142 348,949
Support equipment and buildings 42,217 35,812
---------- ---------
445,162 390,556
Less accumulated depreciation 50,843 11,373
---------- ---------
394,319 379,183
---------- ---------
Franchise costs 3,035,057 3,015,246
Less accumulated amortization 107,582 30,773
---------- ---------
2,927,475 2,984,473
---------- ---------
Other assets, at cost, net of amortization 16,614 18,111
---------- ---------
$3,358,202 3,440,561
========== =========
Liabilities and Common Stockholder's Equity
- -------------------------------------------
Cash overdraft $ -- 9,736
Accounts payable 3,609 3,490
Accrued expenses:
Accrued franchise fees 7,891 8,663
Accrued property tax expenses 3,119 2,549
Accrued programming expenses 1,323 2,331
Other 8,936 16,465
---------- ---------
21,269 30,008
Subscriber advance payments 2,670 2,727
Debt (note 7) 952,348 1,151,884
Deferred income taxes (note 10) 1,061,649 1,073,340
Other liabilities 413 380
---------- ---------
Total liabilities 2,041,958 2,271,565
---------- ---------
Exchangeable Preferred Stock (notes 1 and 8) 629,739 629,801
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 305,694 336,921
Accumulated deficit (8,104) (2,452)
---------- ---------
297,590 334,469
Due to TCI Communications, Inc. ("TCIC") (note 11) 388,915 204,726
---------- ---------
Total common stockholder's equity 686,505 539,195
---------- ---------
Commitments (note 12)
$3,358,202 3,440,561
========== =========
</TABLE>
See accompanying notes to financial statements.
II-13
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Statements of Operations
<TABLE>
<CAPTION>
Pacific VII Cable
(note 2) (note 2)
---------------------------- ----------------------------
Five months Seven months
Year ended ended ended Year ended
December 31, December 31, July 31, December 31,
1997 1996 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
amounts in thousands
Revenue $508,803 215,550 | 280,630 448,206
|
Operating costs and expenses: |
Operating (note 11) 176,819 74,516 | 108,652 170,521
Selling, general and administrative |
(note 11) 117,920 58,589 | 68,132 108,849
Depreciation 43,299 12,765 | 40,681 63,292
Amortization 77,948 31,878 | 10,899 18,682
-------- ------- | ------- -------
415,986 177,748 | 228,364 361,344
-------- ------- | ------- -------
|
Operating income 92,817 37,802 | 52,266 86,862
|
Other income (expense): |
Interest expense: |
Related party (note 11) (23,819) (3,079) | (30,908) (48,524)
Other (73,959) (40,487) | -- --
Interest income 405 450 | 2,214 --
Gain on sale of marketable |
securities held as |
available-for-sale -- -- | -- 26,902
Other, net (211) (1,312) | 520 1,293
-------- ------- | ------- -------
(97,584) (44,428) | (28,174) (20,329)
-------- ------- | ------- -------
|
Earnings (loss) before income |
taxes (4,767) (6,626) | 24,092 66,533
|
Income tax benefit (expense) |
(note 10) (885) 4,174 | (13,432) (32,819)
-------- ------- | ------- -------
|
Net earnings (loss) (5,652) (2,452) | 10,660 33,714
| ======= =======
|
Dividend requirement on |
Exchangeable Preferred Stock (31,227) (13,079) |
-------- ------- |
|
Net loss attributable to common |
stockholder $(36,879) (15,531) |
======== ======= |
</TABLE>
See accompanying notes to financial statements.
II-14
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Statement of Common Stockholder's Equity
<TABLE>
<CAPTION>
Common stock Additional Viacom Total
----------------- paid-in Accumulated equity Due to equity
Class A Class B capital deficit investment TCIC (deficit)
------- ------- ---------- ----------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
amounts in thousands
VII Cable (note 2)
- ------------------
Balance at January 1, 1995 $ -- -- -- -- 823,940 -- 823,940
Net earnings -- -- -- -- 33,714 -- 33,714
Cash distributions to Viacom, Inc.
("Viacom") -- -- -- -- (505,265) -- (505,265)
Cash distributions from Viacom -- -- -- -- 409,264 -- 409,264
Allocated charges from Viacom -- -- -- -- 110,602 -- 110,602
Unrealized holding gains on available-
for-sale securities, net of tax -- -- -- -- (15,148) -- (15,148)
------- ------- ---------- ----------- ---------- ------ ----------
Balance at December 31, 1995 -- -- -- -- 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
Viacom International Inc. (note 1) -- -- -- -- -- 12,673 12,673
------- ------- ---------- ----------- ---------- ------ ----------
Balance at July 31, 1996 $ -- -- -- -- (754,509) 12,673 (741,836)
======= ======= ========== =========== ========== ====== ==========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(continued)
II-15
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Statement of Common Stockholder's Equity, continued
<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>
Pacific (note 2)
- ----------------
Initial capitalization $ -- -- 350,000 -- 35,293 385,293
Net loss -- -- -- (2,452) -- (2,452)
Accreted dividends on Exchangeable Preferred
Stock -- -- (13,079) -- -- (13,079)
Allocation of programming charges from TCIC
(note 11) -- -- -- -- 44,532 44,532
Transfer of investment to TCIC (note 11) -- -- -- -- (47,300) (47,300)
Allocation of expenses in connection with the
Services Agreement (note 11) -- -- -- -- 7,982 7,982
Intercompany income tax allocation (note 10) -- -- -- -- 25,531 25,531
Net cash transfers from TCIC -- -- -- -- 138,688 138,688
------- ------- ---------- ----------- ------- -------
Balance at December 31, 1996 -- -- 336,921 (2,452) 204,726 539,195
Net loss -- -- -- (5,652) -- (5,652)
Accreted dividends on Exchangeable Preferred
Stock -- -- (31,227) -- -- (31,227)
Allocation of programming charges from TCIC
(note 11) -- -- -- -- 124,054 124,054
Allocation of expenses in connection with the
Services Agreement (note 11) -- -- -- -- 17,602 17,602
Intercompany income tax allocation (note 10) -- -- -- -- 12,507 12,507
Net cash transfers from TCIC -- -- -- -- 30,026 30,026
------- ------- ---------- ----------- ------- -------
Balance at December 31, 1997 $ -- -- 305,694 (8,104) 388,915 686,505
======= ======= ========== =========== ======= =======
</TABLE>
See accompanying notes to financial statements.
II-16
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Statements of Cash Flows
<TABLE>
<CAPTION>
Pacific VII Cable
(note 2) (note 2)
---------------------------- ----------------------------
Five months Seven months
Year ended ended ended Year ended
December 31, December 31, July 31, December 31,
1997 1996 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
amounts in thousands
(see notes 5 and 6)
Cash flows from operating activities: |
Net earnings (loss) $ (5,652) (2,452) | 10,660 33,714
Adjustments to reconcile net earnings (loss) to |
net cash provided by operating activities: |
Depreciation and amortization 121,247 44,643 | 51,580 81,974
Intercompany income tax allocation 12,507 25,531 | 9,283 25,894
Gain on sale of marketable securities held as |
available-for-sale -- -- | -- (26,902)
Deferred income tax expense (benefit) (12,192) (29,705) | 2,559 2,754
Other noncash credits -- -- | (35) (60)
Changes in operating assets and liabilities: |
Change in receivables 7,050 (9,351) | 1,215 (1,678)
Change in accruals and payables (8,677) 6,805 | 6,288 (242)
Change in prepaids 1,252 (3,877) | 141 (277)
--------- -------- | ---------- --------
Net cash provided by operating activities 115,535 31,594 | 81,691 115,177
--------- -------- | ---------- --------
|
Cash flows from investing activities: |
Capital expended for property and equipment (48,873) (28,331) | (68,581) (117,966)
Cash paid for acquisitions (35,154) (3,486) | -- --
Decrease in restricted cash 33,664 2,969 | -- --
Cash proceeds from disposition of assets -- -- | 81 27,001
Other investing activities 7,137 (2,057) | (4,364) (13,636)
--------- -------- | ---------- --------
|
Net cash used in investing activities (43,226) (30,905) | (72,864) (104,601)
--------- -------- | ---------- --------
Cash flows from financing activities: |
Change in cash overdraft (9,736) 9,736 | -- --
Borrowings of debt -- 1,884 | 1,700,000 --
Repayments of debt (200,000) (200,000) | (57,000) --
Payment of preferred stock dividends (31,289) (9,074) | -- --
Net cash transfers from TCIC 171,682 191,202 | -- --
Transfer of cash to Viacom International |
Services Inc. ("New VII") as part of First |
Distribution (note 1) -- -- | (1,701,112) --
Change in cash transfers from Viacom -- -- | 4,163 (96,001)
Allocated charges from Viacom -- -- | 43,038 84,708
--------- -------- | ---------- --------
Net cash provided by (used in) financing activities (69,343) (6,252) | (10,911) (11,293)
--------- -------- | ---------- --------
|
Net increase (decrease) in cash 2,966 (5,563) | (2,084) (717)
|
Cash at beginning of period -- 5,563 | 2,294 3,011
--------- -------- | ---------- --------
|
Cash at end of period $ 2,966 -- | 210 2,294
========= ======== | ========== ========
</TABLE>
See accompanying notes to financial statements.
II-17
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1997, 1996 and 1995
(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 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").
The Exchange Cash was escrowed for cable system acquisitions. During the
third quarter of 1996, TCIC acquired a 49% limited partnership interest in
IMP. 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)
II-18
<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. At December 31, 1997, 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 common stock, par value $1.00 per share, is comprised of six series:
Tele-Communications, Inc. Series A TCI Group Common Stock ("TCI Group
Series A Stock") and Tele-Communications, Inc. Series B TCI Group Common
Stock (collectively, "TCI Group Stock"), Tele-Communications, Inc. Series A
Liberty Media Group Common Stock and Tele-Communications, Inc. Series B
Liberty Media Group Common Stock (collectively, "Liberty Group Stock"),
Tele-Communications, Inc. Series A TCI Ventures Group Common Stock and
Tele-Communications, Inc. Series B TCI Ventures Group Common Stock
(collectively, "TCI Ventures Group Stock").
The Liberty Group Stock is intended to reflect the separate performance of
the "Liberty Media Group," which is comprised of TCI's assets which produce
and distribute programming services. The TCI Ventures Group 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 assets. The
TCI Group Stock is intended to reflect the separate performance of TCI and
its subsidiaries and assets not attributed to Liberty Media Group or TCI
Ventures Group. Such subsidiaries and assets are referred to as "TCI Group"
and are comprised primarily of TCI's domestic cable and communications
business. Pacific is a member of the TCI Group.
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. 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.
(continued)
II-19
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
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, the Acquisition, and the Exchange
(amounts in thousands):
<TABLE>
<CAPTION>
VII
Cable Pacific
---------- ----------
<S> <C> <C>
Assets
------
Cash, receivables and prepaids $ 16,465 17,466
Restricted cash -- 36,633
Property and equipment, net 447,435 362,726
Franchise costs and other assets 586,798 3,076,729
---------- ---------
$1,050,698 3,493,554
========== =========
Liabilities and Equity
----------------------
Payables and accruals $ 30,899 29,420
Debt 1,700,000 1,350,000
Deferred income taxes 59,411 1,103,045
Other liabilities 2,224 --
---------- ---------
Total liabilities 1,792,534 2,482,465
---------- ---------
Exchangeable Preferred Stock -- 625,796
Due to TCIC 12,673 35,293
Equity (deficit) (754,509) 350,000
---------- ---------
$1,050,698 3,493,554
========== =========
</TABLE>
The accompanying financial statements include the accounts of the Company
and its subsidiaries.
(continued)
II-20
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
The following reflects the recapitalization of equity resulting from the
Exchange Offer, the Acquisition and the Exchange (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 (625,796)
Amounts due to TCIC assumed in the Exchange 22,620
Elimination of historical equity of VII Cable, excluding
amounts due to TCIC 1,380,305
----------
Initial common stockholder's equity of Pacific subsequent to
the Exchange Offer, the Acquisition and the Exchange $ 385,293
==========
</TABLE>
(3) Summary of Significant Accounting Policies
------------------------------------------
Receivables
-----------
Receivables are reflected net of an allowance for doubtful accounts. Such
allowance at December 31, 1997 and 1996 was not material.
Property and Equipment
----------------------
Property and equipment is stated at cost, including acquisition costs
allocated to tangible assets acquired based upon estimated fair market
value. 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 year ended December 31, 1997 and the five
months ended December 31, 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.
(continued)
II-21
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
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.
Franchise Costs
---------------
Subsequent to the Acquisition, franchise costs consist primarily of the
difference between TCIC's allocated historical cost of acquiring VII Cable
and amounts allocated to the tangible assets. Prior to the Acquisition,
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 negotiating and renewing franchise
agreements are amortized on a straight line basis over the life of the
franchise, generally 10 to 20 years. Costs incurred by VII Cable prior to
the Acquisition in obtaining franchises were being amortized on a straight-
line basis over the life of the franchise, generally 10 to 25 years.
Impairment of Long-Lived Assets
-------------------------------
The Company periodically reviews the carrying amounts of property, plant
and equipment and its identifiable intangible assets to determine whether
current events or circumstances warrant adjustments to such carrying
amounts. If an impairment adjustment is deemed necessary, such loss is
measured by the amount that the carrying value of such assets exceeds their
fair value. Considerable management judgment is necessary to estimate the
fair value of assets, accordingly, actual results could vary significantly
from such estimates. Assets to be disposed of are carried at the lower of
their financial statement carrying amount or fair value less costs to sell.
Revenue Recognition
-------------------
Cable revenue for customer fees, equipment rental, advertising, pay-per-
view programming and revenue sharing agreements is recognized in the period
that services are delivered. Installation revenue is recognized in the
period the installation services are provided to the extent of direct
selling costs. Any remaining amount is deferred and recognized over the
estimated average period that customers are expected to remain connected to
the cable television system.
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)
II-22
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
Reclassifications
-----------------
Certain amounts have been reclassified for comparability with the 1997
presentation.
(4) 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, amounts receivable or payable
under the Interest Rate Swap are recognized as adjustments 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 or the remaining term of such related debt, whichever is
shorter. Pacific does not use the Interest Rate Swap for trading purposes.
(5) Supplemental Disclosure to Statements of Cash Flows Relating to the
-------------------------------------------------------------------
Exchange Offer, Acquisition, and the Exchange
---------------------------------------------
amounts in thousands
Cash of VII Cable at July 31, 1996 $ 210
Net cash received in the Acquisition and
Exchange forworking capital
adjustments 5,353
-------
Cash of Pacific upon consummation of
Exchange Offer and Acquisition $ 5,563
=======
Restricted Exchange Cash $36,633
=======
(6) Supplemental Disclosure to Statements of Cash Flows
---------------------------------------------------
Cash paid for interest was $97,841,000 for the year ended December 31, 1997
and $40,163,000 for the five months ended December 31, 1996. Pacific's
intercompany income tax allocation from TCIC has been treated as a non-cash
item for purposes of the accompanying statements of cash flows.
Accordingly, cash paid for income taxes was not material for the year ended
December 31, 1997 or the five months ended December 31, 1996. Prior to the
Acquisition, interest and income taxes were settled through the Viacom
intercompany account. See notes 10 and 11.
(continued)
II-23
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Pacific VII Cable
----------------------------- ------------------------------
Five months Seven months
Year ended ended ended Year ended
December 31, December 31, July 31, December 31,
1997 1996 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
amounts in thousands
|
Accreted preferred stock dividends $ 31,227 13,079 | -- --
============ ============ | ============ ============
|
Exchange of investment for |
intercompany note |
receivable (note 11) $ -- 47,300 | -- --
============ ============ | ============ ============
|
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 |
(note 2) $ -- -- | 12,673 --
============ ============ | ============ ============
</TABLE>
(7) Debt
----
In connection with the Transaction Agreements described in note 1, Viacom
International Inc. borrowed $1.7 billion pursuant to the Credit Agreement.
A $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. Following the Exchange
Offer, Pacific retained the obligation to repay the Credit Agreement.
At December 31, 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 (7.4% and
7.1% respectively, at December 31, 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 1/4% to 3/8% per annum to be paid quarterly
on the average unborrowed portion of the total amount available for
borrowing. At December 31, 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 December 31, 1997.
(continued)
II-24
<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 December 31, 1997, the terms of the Interest Rate
Swap have not become effective.
During 1994, Viacom International Inc. and certain of its subsidiaries
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 of VII Cable. The Viacom Credit 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.
Additionally, in connection with the Credit Agreement, TCIC incurred
commitment fees of approximately $13 million which have been deferred and
will be amortized over the terms of the agreement.
Annual maturities of debt for each of the next five years are as follows
(amounts in thousands):
1998 $ 894
1999 769
2000 679
2001 6
2002 175,000
(8) 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)
II-25
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
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 TCI Group Series A Stock at an exchange rate of 5.447 shares of
TCI Group Series A 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 TCI Group Series A Stock, or in any
combination of the foregoing. If payments are made in shares of TCI Group
Series A 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.
The 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 of Directors
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 events 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.
(continued)
II-26
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
(9) Pension Plans and Other Employee Benefits
-----------------------------------------
TCI has several employee stock purchase plans to provide employees an
opportunity to create a retirement fund, including ownership interests in
TCI. The primary employee stock purchase plan provides for employees to
contribute up to 10% of their compensation to a trust for investment in
several diversified investment choices, including investment in TCI common
stock. TCI, by annual resolution of the Board of Directors, generally
contributes up to 100% of the amount contributed by employees. Such TCI
contribution is invested in TCI Group Stock, Liberty Group Stock and TCI
Ventures Group Stock. Amounts contributed by TCI on behalf of Pacific
employees are allocated to Pacific pursuant to the Services Agreement
described in note 11.
Prior to the Acquisition, VII Cable employees were covered by Viacom's
pension plan. Retirement benefits were based principally on years of
service and salary. Viacom allocated charges for pension expense of
$1,774,000 and $1,134,000 for the seven months ended July 31, 1996 and the
year ended December 31, 1995, respectively. The obligation for pension
benefits earned prior to the consummation of the Exchange Offer was
retained by Viacom.
(10) Income Taxes
------------
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 and the year ended December 31, 1995 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)
II-27
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
Income tax benefit (expense) consists of:
Current Deferred Total
--------- -------- -------
amounts in thousands
Pacific
-------
Year ended December 31, 1997:
Intercompany tax allocation $(12,507) -- (12,507)
Federal -- 10,598 10,598
State and local (570) 1,594 1,024
-------- ------ -------
$(13,077) 12,192 (885)
======== ====== =======
Five months ended December 31, 1996:
Intercompany tax allocation $(25,531) -- (25,531)
Federal -- 25,822 25,822
State and local -- 3,883 3,883
-------- ------ -------
$(25,531) 29,705 4,174
======== ====== =======
- --------------------------------------------------------------------------------
VII Cable
---------
Seven months ended July 31, 1996:
Intercompany tax allocation $ (9,283) (2,342) (11,625)
State and local (1,590) (217) (1,807)
-------- ------ -------
$(10,873) (2,559) (13,432)
======== ====== =======
Year ended December 31, 1995:
Intercompany tax allocation $(25,894) (2,516) (28,410)
State and local (4,171) (238) (4,409)
-------- ------ -------
$(30,065) (2,754) (32,819)
======== ====== =======
(continued)
II-28
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
Income tax benefit (expense) differs from the amounts computed by applying
the federal income tax rate of 35% as a result of the following:
<TABLE>
<CAPTION>
Pacific VII Cable
--------------------------- ---------------------------
Year Five months
ended ended Seven months Years ended
December 31, December 31, ended December 31,
1997 1996 July 31, 1996 1995
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
amounts in thousands
Computed "expected" tax
benefit (expense) $ 1,668 2,319 | (8,432) (23,287)
Amortization not |
deductible for tax |
purposes (3,149) (1,053) | (3,590) (6,328)
State and local income |
taxes, net of federal |
income tax benefit 665 2,945 | (1,253) (2,931)
Other, net (69) (37) | (157) (273)
------- ------ | ------- -------
$ (885) 4,174 | (13,432) (32,819)
======= ====== | ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
December 31,
1997 1996
---------- ---------
<S> <C> <C>
amounts in thousands
Deferred tax assets:
Investments due principally to differences in
basis $ 2,168 1,004
Other 306 800
---------- ---------
Net deferred tax assets 2,474 1,804
---------- ---------
Deferred tax liabilities:
Property and equipment, principally due to
differences in basis and depreciation 72,915 26,457
Franchise costs, principally due to differences
in basis and amortization 991,208 1,048,687
---------- ---------
Total gross deferred tax liabilities 1,064,123 1,075,144
---------- ---------
Net deferred tax liability $1,061,649 1,073,340
========== =========
</TABLE>
(continued)
II-29
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
(11) 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 $124,054,000 during the year ended December 31, 1997 and
$44,532,000 during the five months ended December 31, 1996 and are included
in operating expenses in the accompanying financial statements.
Effective August 1, 1996, TCI began to provide certain administrative and
other services to Pacific pursuant to a services agreement entered into
among TCI, TCIC and Pacific (the "Services Agreement").
The Services Agreement 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 TCI in providing services and a pro rata share of all
indirect expenses incurred by TCI in connection with the rendering of such
general and administrative 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 $32,446,000 during the year
ended December 31, 1997 and $13,712,000 during the five months ended
December 31, 1996. Such charges 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 based on the average of certain
specified ratios of revenue, operating income and net assets of VII Cable
in relation to Viacom. Management believes that the methodologies used to
allocate these charges were reasonable. The charges for such services were
$5,750,000 and $13,492,000 for the seven months ended July 31, 1996 and the
year ended December 31, 1995, respectively, and are included in selling,
general and administrative expenses in the accompanying financial
statements.
(continued)
II-30
<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 and
$30,694,000 for the seven months ended July 31, 1996 and the year ended
December 31, 1995, respectively. In addition, cooperative advertising
expenses charged to affiliated companies were $364,000 and $1,350,000 for
the seven months ended July 31, 1996 and the year ended December 31, 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
$46,363,000 during the seven months ended July 31, 1996 and the year ended
December 31, 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.
Due to TCIC's ownership of 100% of the common stockholder's 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 recorded $23,819,000 and $3,079,000 of interest expense for
the year ended December 31, 1997 and the five months ended December 31,
1996, respectively, related to the intercompany amounts due to TCIC.
In 1996, Pacific transferred (the "Transfer") its investment in TCG San
Francisco and TCG Seattle to TCI Development Corporation, a subsidiary of
TCI, in exchange for a $47,300,000 note receivable. Such note bears
interest at 10.5% per annum and is included as a reduction of the amount
due to TCIC. No gain or loss was recognized in connection with the
Transfer. During the year ended December 31, 1997 interest income related
to the note receivable aggregated $5,035,000 and is included net of
intercompany interest expense. Interest income related to the note
receivable was not material for the five months ended December 31, 1996.
(12) 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 $8,045,000, $2,771,000,
$4,454,000 and $7,704,000 during the year ended December 31, 1997, the five
months ended December 31, 1996, the seven months ended July 31, 1996 and
the year ended December 31, 1995, respectively.
(continued)
II-31
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
It is expected that, in the normal course of business, expiring leases will
be renewed or replaced by leases on other properties; thus, it is
anticipated that future minimum lease commitments will not be less than the
amount shown for 1997.
The Company is a party to affiliation agreements with several of its
programming suppliers. Pursuant to these agreements, the Company is
committed to carry such suppliers programming on its cable systems.
Several of these agreements provide for penalties and charges in the event
the programming is not carried or not delivered to contractually specified
numbers of subscribers.
During 1997, the Company began a comprehensive review of its computer
systems and related software to ensure systems properly recognize the year
2000 and continue to process business information. The systems being
evaluated include all internal use software and devices and those systems
and devices that manage the distribution of the Company's products.
Additionally, the Company has initiated a program of communications with
all of its significant suppliers to determine the readiness of these third
parties and the impact on the Company if those third parties fail to
remediate their own year 2000 issues.
Over the past two years, the Company began an effort to convert a
substantial portion of its financial applications to commercial products
which are anticipated to be year 2000 ready, or to outsource portions of
its financial applications to third party vendors who are expected to be
year 2000 ready. Notwithstanding such effort, the Company is in the process
of finalizing its assessment of the impact of year 2000. The Company is
utilizing both internal and external resources to identify, correct or
reprogram, and test systems for year 2000 readiness. To date, the Company
has inventoried substantially all of its cable systems and is currently
evaluating the results of such inventory. The Company expects that it will
have to modify or replace certain portions of its cable distribution plant,
although the Company has not yet completed its assessment. Confirmations
have been received from certain primary suppliers indicating they are
either year 2000 ready or have plans in place to ensure readiness. As part
of the Company's assessment of its year 2000 issue, it is evaluating the
level of validation it will require of third parties to ensure their year
2000 readiness. The Company's manual assessment of the year 2000 date
change should be complete by mid-1998.
(continued)
II-32
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
Management of the Company has not yet assessed the cost associated with its
year 2000 readiness efforts and the related potential impact on the
Company's net earnings. Amounts expended to date have not been material,
although there can be no assurance that costs ultimately required to be
paid to ensure the Company's year 2000 readiness will not have an adverse
effect on the Company's financial position. Additionally, there can be no
assurance that the systems of the Company's suppliers will be converted in
time or that any such failure to convert by such third parties will not
have an adverse effect on the Company's financial position.
(13) Quarterly Financial Information (Unaudited)
-------------------------------------------
Pacific
-------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
amounts in thousands
1997
- ----
Revenue $124,952 127,443 127,888 128,520
Operating income $ 23,356 31,034 19,756 18,671
Net earnings (loss) $ (1,475) 4,643 (2,149) (6,671)
<TABLE>
<CAPTION>
VII Cable Pacific
------------------------------- ------------------------
1 month 2 months
1st 2nd ended ended 4th
Quarter Quarter July 31 September 30 Quarter
------- ------- ------- ------------ -------
amounts in thousands
1996 |
- ---- |
<S> <C> <C> <C> | <C> <C>
Revenue $118,321 121,348 40,961 | 82,008 133,542
|
Operating income $ 20,547 24,251 7,468 | 15,683 22,119
|
Net earnings (loss) $ 3,390 5,414 1,856 | (901) (1,551)
</TABLE>
II-33
<PAGE>
PART III.
Item 10. Directors and Executive Officers of the Registrant.
- -------- --------------------------------------------------
The following lists the directors and executive officers of TCI Pacific
Communications, Inc. ("Pacific"), their birth dates, a description of their
business experience and the positions held with Pacific as of February 28, 1998.
Officers are appointed for an indefinite time, serving at the pleasure of the
Board of Directors.
<TABLE>
<CAPTION>
Name Positions
- --------------------- -------------------------------------------------------------------
<S> <C>
Donne F. Fisher Has served as a director of Pacific since July 1996. Mr. Fisher
Born May 24, 1938 was an Executive Vice President of Tele-Communications, Inc.
("TCI") from January 1994 through January 1, 1996. On January 1,
1996, Mr. Fisher resigned his position as an Executive Vice
President of TCI and has been providing consulting services to TCI
since January 1996. Mr. Fisher served as an Executive Vice
President of TCI Communications, Inc., a subsidiary of TCI and
predecessor company of TCI ("TCIC"), from December 1991 to October
1994. Mr. Fisher has served as a director of TCI since June 1994,
has served as a director of TCIC since 1980, and has served as a
director of TCI Music, Inc., a subsidiary of TCI ("TCI Music"),
since January 1997. Mr. Fisher is also a director of General
Communication, Inc.
Leo J. Hindery, Jr. Has served as the President and Chief Executive Officer of Pacific,
Born October 31, 1947 and as a director of Pacific, since September 1997. Mr. Hindery
has served as the President and Chief Operating Officer of TCI
since March 1997 and as a director of TCI since May 1997. Mr.
Hindery has served as the President and Chief Executive Officer of
TCIC since March 1997. Mr. Hindery has served as a director of
TCIC since March 1997, and has served as the Chairman of the Board
and a director of TCI Music since January 1997. In addition, Mr.
Hindery is the President, the Chief Executive Officer and/or a
director of many of TCI's subsidiaries. Mr. Hindery was previously
founder, Managing General Partner and Chief Executive Officer of
InterMedia Partners, a cable TV operator, and its affiliated
entities from 1988 to March 1997. Mr. Hindery is a director of
United Video Satellite Group, Inc. and At Home Corporation, both of
which are majority-owned subsidiaries of TCI. Mr. Hindery is also
a director of Cablevision Systems Corporation ("CSC") and TCI
Satellite Entertainment, Inc.
Jerome H. Kern Has served as a director of Pacific since February 1998. Mr. Kern
Born June 1, 1937 has been special counsel since July 1996, and was a senior partner
from September 1992 to July 1996, with the law firm of Baker &
Botts, L.L.P. Mr. Kern has served as a director of TCI since June
1994 and as a director of Tele-Communications International, Inc.,
a subsidiary of TCI ("TINTA"), since May 1995.
</TABLE>
III-1
<PAGE>
<TABLE>
<CAPTION>
Name Positions
- ------------------------ -------------------------------------------------------------------
<S> <C>
John C. Malone Has served as a director of Pacific since July 1996. Dr. Malone
Born March 7, 1941 has served as the Chief Executive Officer of TCI since January
1994, and as the Chairman of the Board of TCI since November 1996.
Dr. Malone served as the President of TCI from January 1994 to
March 1997, as the Chief Executive Officer of TCIC from March 1992
to October 1994 and as the President of TCIC from 1973 to October
1994. Dr. Malone is the Chairman of the Board and a director of
TINTA and a director of TCI, TCIC, TCI Satellite Entertainment,
Inc., and At Home Corporation, all of which are majority-owned
subsidiaries of TCI. Dr. Malone is also a director of BET
Holdings, Inc., Lenfest Communications, Inc., The Bank of New York,
and CSC.
Gary K. Bracken Has served as a Senior Vice President of Pacific since July 1996.
Born July 29, 1939 Mr. Bracken has served as the Controller of TCIC since 1969 and as
an Executive Vice President of TCIC since December 1997. From
December 1991 to December 1997, Mr. Bracken served as a Senior Vice
President of TCIC.
Stephen M. Brett Has served as a Senior Vice President and the Secretary of Pacific
Born September 20, 1940 since July 1996. Mr. Brett has served as an Executive Vice
President, the General Counsel and the Secretary of TCI since
January 1994, as an Executive Vice President of TCIC since October
1997, and as the General Counsel and Secretary of TCIC since
December 1991. From December 1991 to October 1997, Mr. Brett
served as a Senior Vice President of TCIC. Mr. Brett is a Vice
President and the Secretary of most of TCI's subsidiaries.
Marvin L. Jones Has served as an Executive Vice President and the Chief Operating
Born September 11, 1937 Officer of Pacific since April 1997. Mr. Jones has served as an
Executive Vice President and the Chief Operating Officer of TCIC,
and a director of TCIC, since October 1997. From November 1996 to
October 1997, Mr. Jones served as the President of one of TCI's
three cable units. Mr. Jones was a consultant to the cable
television industry from December 1991 to October 1996. Mr. Jones
is a Vice President or the President of various subsidiaries of TCI.
Bernard W. Schotters, II Has served as a Senior Vice President and the Treasurer of Pacific
Born November 25, 1944 since July 1996. Mr. Schotters has served as a Senior Vice
President and the Treasurer of TCI since October 1997, and has
served as an Executive Vice President of TCIC since December 1997.
From December 1991 to December 1997, Mr. Schotters served as the
Senior Vice President-Finance of TCIC. Mr. Schotters has served as
the Treasurer of TCIC since December 1991. Mr. Schotters is a Vice
President and the Treasurer of most of TCI's subsidiaries.
</TABLE>
III-2
<PAGE>
Other
- -----
There are no family relations, of first cousin or closer, among Pacific's
directors or executive officers, by blood, marriage or adoption.
During the past five years, neither the above executive officers nor any
director of Pacific has had any involvement in such legal proceedings as would
be material to an evaluation of his or her ability or integrity.
Section 16(a) Beneficial Ownership Reporting Compliance
- -------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
Pacific's officers and directors, and persons who own more than 10% of a
registered class of Pacific's equity securities, to file reports of ownership
and changes in ownership with the Securities and Exchange Commission ("SEC").
Officers, directors and greater-than-ten-percent shareholders are required by
SEC regulation to furnish Pacific with copies of all Section 16(a) forms they
file.
Based solely on Pacific's review of the copies of such Section 16(a) forms
and amendments thereto received, or written representations that no reporting
was required, Pacific believes that, during the year ended December 31, 1997,
its officers, directors and greater-than-ten-percent beneficial owners complied
with all Section 16(a) filing requirements.
Item 11. Executive Compensation.
- ------- ----------------------
Each of the directors and executive officers of Pacific is serving in such
capacity at the request of, and in his capacity as an officer of, TCI or its
subsidiaries. Such officers are compensated by TCI for their services to TCI and
its subsidiaries, including Pacific, and will not receive any additional
compensation from Pacific or otherwise for their services to Pacific. Pacific
will not reimburse TCI for any compensation paid by TCI to its officers and
directors. Instead, Pacific is allocated a comprehensive fee for all services
provided.
There are no arrangements whereby any of Pacific's directors received
compensation for services as a director during 1997.
Pacific has no separate compensation committee and compensation decisions
relative to Pacific are determined by TCI's compensation committee. The members
of TCI's compensation committee are Messrs. John W. Gallivan, Paul A. Gould and
Kim Magness, all directors of TCI. Messrs. Gallivan, Gould and Magness are not,
and have not been, officers of Pacific or TCI or their respective subsidiaries.
III-3
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- ------- --------------------------------------------------------------
Background of Stock Adjustments. TCI has issued Tele-Communications, Inc.
-------------------------------
Series A TCI Group Common Stock, par value $1.00 per share (the "TCI Group
Series A Stock"), and Tele-Communications, Inc. Series B TCI Group Common Stock,
par value $1.00 per share (the "TCI Group Series B Stock"), Tele-Communications,
Inc. Series A Liberty Media Group Common Stock, par value $1.00 per share (the
"Liberty Group Series A Stock"), and Tele-Communications, Inc. Series B Liberty
Media Group Common Stock, par value $1.00 per share (the "Liberty Group Series B
Stock" and together with the Liberty Group Series A Stock, the "Liberty Media
Group Common Stock"), and in September 1997, TCI issued Tele-Communications,
Inc. Series A TCI Ventures Group Common Stock, par value $1.00 per share (the
"Ventures Group Series A Stock"), and Tele-Communications, Inc. Series B TCI
Ventures Group Common Stock, par value $1.00 per share (the "Ventures Group
Series B Stock" and together with the Ventures Group Series A Stock, the
"Ventures Group Common Stock").
Effective February 6, 1998, TCI issued a stock dividend to holders of
Liberty Media Group Common Stock consisting of one share of Liberty Group Series
A Stock for every two shares of Liberty Group Series A Stock held and one share
of Liberty Group Series B Stock for every two shares of Liberty Group Series B
Stock held (the "Liberty Stock Dividend"). In addition, TCI issued a stock
dividend to holders of Ventures Group Common Stock consisting of one share of
Ventures Group Series A Stock for each share of Ventures Group Series A Stock
held and one share of Ventures Group Series B Stock for each share of Ventures
Group Series B Stock held (the "Ventures Stock Dividend" and together with the
Liberty Stock Dividend, the "1998 Stock Dividends"). As a result of the 1998
Stock Dividends, the number of shares underlying the options granted to purchase
Liberty Group Series A Stock, Ventures Group Series A Stock, and Ventures Group
Series B Stock, respectively, and the respective exercise prices of such options
have been adjusted.
(a) Security Ownership of Certain Beneficial Owners. On December 31, 1997,
-----------------------------------------------
TCIC directly owned all of the 100 outstanding shares of the Pacific Class B
Common Stock, par value $0.01 per share ("Class B Stock"). Pacific has also
authorized 6,257,961 shares of its Class A Common Stock, par value $100 per
share ("Class A Stock"), none of which are issued and outstanding. TCIC's
executive offices are located at 5619 DTC Parkway, Englewood, Colorado 80111.
Additionally, Pacific has authorized and issued 6,257,961 shares of Class A
Senior Cumulative Exchangeable Preferred Stock, par value $100 per share (the
"Exchangeable Preferred Stock"). So far as is known to Pacific, no person owns
beneficially more than 5% of the Exchangeable Preferred Stock.
III-4
<PAGE>
The 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 Board of Directors 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 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 events
specified in this clause (ii) the affirmative vote or consent of at least 66
2/3% of the shares of Exchangeable Preferred Stock then outstanding, voting or
consenting, as the case may be, separately as one class, would be required.
III-5
<PAGE>
(b) Security Ownership of Management. The following table sets forth, as of
--------------------------------
December 31, 1997, information with respect to the beneficial ownership of
the Exchangeable Preferred Stock. In addition, the table sets forth
information with respect to the beneficial ownership of (a) the following
securities of TCIC: (i) Class A Common Stock (the "TCIC Class A Stock"),
(ii) Class B Common Stock (the "TCIC Class B Stock"), and (iii) Cumulative
Exchangeable Preferred Stock, Series A (the "TCIC Series A Preferred
Stock"), and (b) the following securities of TCI: (i) TCI Group Series A
Stock, (ii) TCI Group Series B Stock, (iii) Liberty Group Series A Stock,
(iv) Liberty Group Series B Stock, (v) Ventures Group Series A Stock, (vi)
Ventures Group Series B Stock, (vii) Class B 6% Cumulative Redeemable
Exchangeable Junior Preferred Stock (the "TCI Class B Preferred Stock"),
(viii) Convertible Preferred Stock, Series C-TCI Group (the "TCOMA Series C
Preferred Stock"), (ix) Convertible Preferred Stock, Series C-Liberty Media
Group (the "LBTYA Series C Preferred Stock"), (x) Redeemable Convertible
TCI Group Preferred Stock, Series G (the "TCI Series G Preferred Stock"),
and (xi) Redeemable Convertible Liberty Media Group Preferred Stock, Series
H (the "TCI Series H Preferred Stock"). The information in the table and
the footnotes is dated as of December 31, 1997, but has been restated to
reflect the 1998 Stock Dividends described above under "-Background of
-------------
Stock Adjustments". The table indicates securities beneficially owned by
-----------------
each director of Pacific and by the directors and all executive officers of
Pacific as a group. Shares issuable upon exercise of options or conversion
of convertible securities and upon vesting of restricted shares are deemed
to be outstanding for the purpose of computing the percentage ownership and
overall voting power of persons beneficially owning such securities, but
have not been deemed to be outstanding for the purpose of computing the
percentage ownership or overall voting power of any other person. Voting
power in the table is computed with respect to a general election of
directors of TCI with the TCI Group Series A Stock, Liberty Group Series A
Stock, Ventures Group Series A Stock, TCI Group Series B Stock, Liberty
Group Series B Stock, Ventures Group Series B Stock, TCI Class B Preferred
Stock, TCOMA Series C Preferred Stock, LBTYA Series C Preferred Stock, TCI
Series G Preferred Stock, and TCI Series H Preferred Stock voting together
as one class. The number of shares of TCI Group Series A Stock, Liberty
Group Series A Stock, and Ventures Group Series A Stock in the table
includes interests of the directors and named executive officers and of
members of the group of directors and executive officers in shares held for
their respective accounts by the trustee of the TCI 401(k) Stock Plan prior
to the amendments to such Plan effective in January 1998 (the "TCI Stock
Plan"). So far as is known to Pacific, the persons indicated below have
sole voting and investment power with respect to the shares indicated as
owned by them, except as otherwise stated in the notes to the table and
except for the shares held for the benefit of such persons by the trustee
of the pre-amended TCI Stock Plan, which shares are voted at the discretion
of the trustee.
III-6
<PAGE>
<TABLE>
<CAPTION>
Name of Amount and Nature Percent Voting
Beneficial Owner Title of Class of Beneficial Ownership of Class(1) Power(1)
- ----------------- -------------- ----------------------- ---------- -------
<S> <C> <C> <C> <C>
Donne F. Fisher Exchangable Preferred -- -- --
TCI Group Series A 433,732 (2) * *
TCI Group Series B 183,012 *
Liberty Group Series A 381,838 (2) *
Liberty Group Series B 93,402 *
Ventures Group Series A 306,184 (2) *
Ventures Group Series B 268,738 *
TCI Class B Preferred 4,299 (3) *
Leo J. Hindery, Jr. Exchangable Preferred -- -- --
TCI Group Series A 1,924,534 (4) * 1.60%
TCI Group Series B 1,684,775 (5) 3.49%
Liberty Group Series A 1,125,000 (4) *
Ventures Group Series A 1,550,932 (4) *
Ventures Group Series B 1,721,360 (5) 3.89%
Jerome H. Kern Exchangable Preferred -- -- --
TCI Group Series A 2,230,746 (6) * *
Liberty Group Series A 1,546,292 (6) *
Ventures Group Series A 1,324,876 (6) *
John C. Malone Exchangable Preferred -- -- --
TCI Group Series A 1,512,864 (7) * 48.68%
TCI Group Series B 54,128,186 (5)(8)(9)(10) 84.47%
Liberty Group Series A 1,229,469 (7)(8) *
Liberty Group Series B 27,233,811 (8)(9)(10) 85.96%
Ventures Group Series A 1,299,932 (7) *
Ventures Group Series B 45,239,888 (5)(7)(8)(9)(10) 93.16%
TCI Class B Preferred 273,600 (8) 17.62%
All directors and
executive
officers as a
group
(8 persons) Exchangable Preferred -- -- --
TCI Group Series A 7,860,054 (11) 1.69% 49.23%
TCI Group Series B 54,313,242 (5)(8)(9)(10) 84.76%
Liberty Group Series A 5,333,897 (8)(11) 1.68%
Liberty Group Series B 27,328,981 (8)(9)(10) 86.26%
Ventures Group Series A 5,849,826 (11) 1.58%
Ventures Group Series B 45,513,970 (5)(8)(9)(10) 93.73%
TCI Class B Preferred 279,731 (8) 18.02%
</TABLE>
_________________________
* Less than one percent.
III-7
<PAGE>
(1) The figures for the percent of class and voting power calculations for
Pacific are based on 100 shares of Class B Stock and 6,257,961 shares of
Exchangeable Preferred Stock outstanding on December 31, 1997. The figures
for the percent of class and voting power calculations for TCIC are based
on 811,655 shares of TCIC Class A Stock, 94,447 shares of TCIC Class B
Stock, and 4,600,000 shares of TCIC Series A Preferred Stock outstanding on
December 31, 1997. In addition, the figures for the percent of class and
voting power calculations for TCI are based on 458,473,123 shares of TCI
Group Series A Stock, 48,230,923 shares of TCI Group Series B Stock,
313,225,982 shares of Liberty Group Series A Stock, 31,681,124 shares of
Liberty Group Series B Stock, 365,719,524 shares of Ventures Group Series A
Stock, 44,228,902 shares of Ventures Group Series B Stock, 1,552,490 shares
of TCI Class B Preferred Stock, 70,575 shares of TCOMA Series C Preferred
Stock, 70,575 shares of LBTYA Series C Preferred Stock, 6,567,344 shares of
TCI Series G Preferred Stock, and 6,567,894 shares of TCI Series H
Preferred Stock outstanding on December 31, 1997 (in each case after
elimination of shares of TCI held by subsidiaries of TCI). The
aforementioned share numbers for the TCI stock have been adjusted for the
1998 Stock Dividends. In addition, such share numbers have been adjusted
for the February 9, 1998 transactions with the Magness Group (as discussed
in note 9 below). As a result of such February 9, 1998 transactions, the
following adjustments to the December 31, 1997, outstanding share numbers
have been made: (i) a reduction of 10,201,040 shares in the outstanding
number of TCI Group Series A Stock, (ii) an increase of 10,017,145 shares
in the outstanding number of TCI Group Series B Stock, (iii) a reduction of
11,666,508 shares in the outstanding number of Ventures Group Series A
Stock, and (iv) an increase of 12,034,298 shares in the outstanding number
of Ventures Group Series B Stock.
(2) Assumes the exercise in full of the following: (a) stock options granted in
tandem with stock appreciation rights in November 1994 to acquire 140,000
shares of TCI Group Series A Stock, 112,500 shares of Liberty Group Series
A Stock and 120,000 Ventures Group Series A Stock, of which options to
acquire 84,000, 67,500, and 72,000, respectively, of such shares are
currently exercisable; and (b) stock options granted in January 1996,
pursuant to TCI's 1994 Nonemployee Director Stock Option Plan (the "TCI
Director Stock Option Plan"), to acquire 50,000 shares of TCI Group Series
A Stock and 28,125 shares of Liberty Group Series A Stock, of which options
to acquire 10,000 and 5,625, respectively, of such shares are currently
exercisable.
(3) Includes 210 shares of TCI Class B Preferred Stock held by Mr. Fisher's
wife.
(4) Assumes the exercise in full of the following: (a) stock options granted in
tandem with stock appreciation rights in February 1997 to acquire 700,000
shares of TCI Group Series A Stock, 375,000 shares of Liberty Group Series
A Stock and 600,000 shares of Ventures Group Series A Stock, none of which
options are exercisable until February 7, 1998; and (b) stock options
granted in tandem with stock appreciation rights in July 1997 to acquire
1,050,000 shares of TCI Group Series A Stock, 750,000 shares of Liberty
Group Series A Stock and 900,000 shares of Ventures Group Series A Stock,
none of which options are exercisable until July 23, 1998. Also includes
174,534 shares of restricted TCI Group Series A Stock and 50,932 shares of
restricted Ventures Group Series A Stock. Such shares vest as to 50% in
July 2001 and as to the remaining 50% in July 2002.
III-8
<PAGE>
(5) Includes 1,684,775 shares of TCI Group Series B Stock and 1,721,360 shares
of Ventures Group Series B Stock held by trusts to which Mr. Hindery is the
trustee and over which Dr. Malone has the power to vote such shares. Dr.
Malone also has a right of first refusal with respect to any proposed
transfer of such shares. Such right of first refusal may be exercised by
Dr. Malone either by the payment of cash or, subject to certain exceptions,
by the exchanging of shares of TCI Group Series A Stock for such TCI Group
Series B Stock or Ventures Group Series A Stock for such Ventures Group
Series B Stock. If not exercised by Dr. Malone, the right of first refusal
may be exercised by TCI.
(6) Assumes the exercise in full of the following: (a) stock options granted in
November 1994, pursuant to the TCI Director Stock Option Plan, to acquire
50,000 shares of TCI Group Series A Stock and 28,125 shares of Liberty
Group Series A Stock, of which options to acquire 30,000 and 16,875,
respectively, of such shares are currently exercisable; (b) stock options
granted in tandem with stock appreciation rights in December 1995 to
acquire 350,000 shares of TCI Group Series A Stock, 281,250 shares of
Liberty Group Series A Stock and 300,000 shares of Ventures Group Series A
Stock, of which options to acquire 140,000, 112,500 and 120,000,
respectively, of such shares are currently exercisable; (c) stock options
granted in tandem with stock appreciation rights in July 1997 to acquire
1,050,000 shares of TCI Group Series A Stock, 843,750 shares of Liberty
Group Series A Stock and 900,000 shares of Ventures Group Series A Stock,
none of which options are exercisable until July 23, 1998; and (d) stock
options granted in tandem with stock appreciation rights in December 1997
to acquire 500,000 shares of TCI Group Series A Stock and 250,000 shares of
Liberty Group Series A Stock, none of which options are exercisable until
December 29, 1998. Also includes 163,620 shares of restricted TCI Group
Series A Stock and 72,760 shares of restricted Ventures Group Series A
Stock. Such shares vest as to 50% in July 2001 and as to the remaining 50%
in July 2002.
(7) Assumes the exercise in full of the following: (a) stock options granted in
tandem with stock appreciation rights in November 1992 to acquire 700,000
shares of TCI Group Series A Stock, 562,500 shares of Liberty Group Series
A Stock and 600,000 shares of Ventures Group Series A Stock, all of which
options are currently exercisable; (b) stock options granted in tandem with
stock appreciation rights in December 1995 to acquire 700,000 shares of TCI
Group Series A Stock, 562,500 shares of Liberty Group Series A Stock and
600,000 shares of Ventures Group Series A Stock, of which options to
acquire 280,000, 225,000, and 240,000, respectively, of such shares are
currently exercisable; and (c) stock options granted in tandem with stock
appreciation rights in December 1997 to acquire 2,800,000 shares of
Ventures Group Series B Stock, none of which options are exercisable until
December 16, 1998, and which grant is subject to TCI stockholder approval.
(8) Includes 776,380 shares of TCI Group Series B Stock, 12,726 shares of
Liberty Group Series A Stock, 439,875 shares of Liberty Group Series B
Stock, 793,240 shares of Ventures Group Series B Stock and 6,900 shares of
TCI Class B Preferred Stock held by Dr. Malone's wife, Mrs. Leslie Malone,
as to which Dr. Malone has disclaimed beneficial ownership.
III-9
<PAGE>
(9) Pursuant to a letter agreement dated June 17, 1988, the late Mr. Bob
Magness and Kearns-Tribune Corporation each granted Dr. Malone certain
rights with respect to the then Class B Common Stock of TCI owned by them.
Dr. Malone agreed with TCI to forego the exercise of such rights in
connection with a June 16, 1997 transaction whereby the Estate of Bob
Magness sold 30,545,864 shares of TCI Group Series B Stock to TCI in
exchange for an equal number of shares of TCI Group Series A Stock. In
consideration thereof, TCI granted Dr. Malone the right to acquire, at any
time and from time to time prior to June 30, 1999 (the "Malone Right"), up
to 30,545,864 shares of TCI Group Series B Stock for either (or any
combination of): (i) shares of TCI Group Series A Stock on a one-for-one
basis or (ii) cash based on the closing sales price of the TCI Group Series
B Stock on the National Market tier of the Nasdaq Stock Market for a
specified period prior to the acquisition of such shares by Dr. Malone (the
"TCI-Estates Agreement"). Effective February 9, 1998, however, a portion
of the Malone Right under the TCI-Estates Agreement has been unwound
leaving 14,511,570 shares of TCI Group Series B Stock subject to the Malone
Right, which may be exercised on a proportionate basis by Dr. Malone and
the beneficiaries of the Estate of Bob Magness (the "Magness Group") as to
12,406,238 shares of the 14,511,570 shares subject to the Malone Right. At
this time, Dr. Malone's proportionate share of the Malone Right is
6,809,537, Kim Magness' proportionate share (by means of his role as co-
personal representative of the Estate of Bob Magness, as personal
representative of the Estate of Betsy Magness and individually) is
5,460,148, and Gary Magness' proportionate share (by means of his role as
co-personal representative of the Estate of Bob Magness and individually)
is 4,171,825. (As co-personal representatives of the Estate of Bob
Magness, the 4,035,271 shares of TCI Group Series B Stock attributable to
the Estate of Bob Magness' proportionate right in the Malone Right, have
been attributed in full to each of Kim and Gary Magness.) The Malone Right
may be exercised at any time prior to June 30, 1999. If the Magness Group
or any member thereof declines to participate in the Malone Right, Dr.
Malone may acquire all such shares.
In connection with the foregoing changes to the TCI-Estates Agreement, on
February 9, 1998, Dr. Malone and his spouse (the "Malone Group") and the
Magness Group entered into a Stockholders' Agreement pursuant to which the
parties agreed to consult with each other on any matter coming to a vote of
TCI stockholders; provided, however, that in the event of a disagreement,
the shares of TCI Group Series B Stock, Liberty Group Series B Stock and
Ventures Group Series B Stock held by the Malone Group and the Magness
Group will be voted in the manner directed by Dr. Malone pursuant to an
irrevocable proxy given by the Magness Group.
As a result of the February 1998 transactions, Dr. Malone's beneficial
ownership of TCI common stock includes the following shares held by the
Magness Group: 16,365,681 shares of TCI Group Series B Stock, 14,292,719
shares of Liberty Group Series B Stock, and 18,684,034 shares of Ventures
Group Series B Stock. In addition, all of the shares subject to the Malone
Right have been included in Dr. Malone's beneficial stock ownership
information.
(10) Dr. and Mrs. Malone's shares of TCI Group Series B Stock, Liberty Group
Series B Stock and Ventures Group Series B Stock (collectively, the "Series
B Stock") are subject to the terms of a Call Agreement dated as of February
9, 1998, among Dr. and Mrs. Malone and TCI. Such Call Agreement provides
TCI the right to acquire all of the shares of Series B Stock owned by Dr.
and Mrs. Malone upon Dr. Malone's death or a contemplated sale of such
Series B Stock to third parties at prices determined in accordance with the
Call Agreement. Such Call Agreement also prohibits Dr. and Mrs. Malone
from disposing of their Series B Stock, except for certain exempt transfers
(such as transfers to related parties or to the Magness Group or public
sales of up to an aggregate of 5% of their Series B Stock).
III-10
<PAGE>
(11) Certain executive officers and directors of Pacific (4 persons, including
Dr. Malone) hold options, which were granted in tandem with stock
appreciation rights in November 1992, to acquire an aggregate of 756,500
shares of TCI Group Series A Stock, 703,124 shares of Liberty Group Series
A Stock, and 654,000 shares of Ventures Group Series A Stock. All of such
options are currently exercisable.
Additionally, certain executive officers (3 persons) hold stock options
granted in tandem with stock appreciation rights in October 1993 to acquire
an aggregate of 65,625 shares of TCI Group Series A Stock, 140,624 shares
of Liberty Group Series A Stock, and 56,250 shares of Ventures Group Series
A Stock. All of such options are currently exercisable.
Also, certain executive officers and directors (4 persons, including Mr.
Fisher) hold stock options, which were granted in tandem with stock
appreciation rights in November 1994, to acquire an aggregate of 350,000
shares of TCI Group Series A Stock, 281,250 shares of Liberty Group Series
A Stock, and 300,000 shares of Ventures Group Series A Stock. Options to
acquire 210,000, 168,750, and 180,000, respectively of such shares are
currently exercisable.
Mr. Kern holds a stock option, which was granted in November 1994, pursuant
to the TCI Director Stock Option Plan, to acquire 50,000 shares of TCI
Group Series A Common Stock and 28,125 shares of Liberty Group Series A
Common Stock. Options to acquire 30,000 and 16,875, respectively, are
currently exercisable.
Additionally, certain executive officers and directors (5 persons,
including Mr. Kern and Dr. Malone) hold stock options, which were granted
in tandem with stock appreciation rights in December 1995, to acquire an
aggregate of 1,487,500 shares of TCI Group Series A Stock, 1,012,500 shares
of Liberty Group Series A Stock and 1,275,000 shares of Ventures Group
Series A Stock. Options to acquire 595,000, 405,000, and 510,000,
respectively, of such shares are currently exercisable.
Additionally, certain executive officers and directors (6 persons,
including Messrs. Hindery and Kern) hold stock options, which were granted,
in tandem with stock appreciation rights in July 1997, to acquire an
aggregate of 2,592,500 shares of TCI Group Series A Stock, 1,793,751 shares
of Liberty Group Series A Stock and 2,145,000 shares of Ventures Group
Series A Stock. None of these options are exercisable until July 23, 1998.
Additionally, certain executive officers hold an aggregate of 60,266 shares
of restricted TCI Group Series A Stock, 22,500 shares of restricted Liberty
Group Series A Stock and 29,468 shares of restricted Ventures Group Series
A Stock. Such shares vest 50% in December 1999 and the remaining 50% in
December 2000.
Mr. Fisher holds a stock option, which was granted in January 1996,
pursuant to the TCI Director Stock Option Plan, to acquire 50,000 shares of
TCI Group Series A Common Stock and 28,125 shares of Liberty Group Series A
Common Stock. Options to acquire 10,000 and 5,625, respectively, are
currently exercisable.
Mr. Hindery holds a stock option, which was granted in tandem with stock
appreciation rights in February 1997, to acquire 700,000 shares of TCI
Group Series A Stock, 375,000 shares of Liberty Group Series A Stock and
600,000 shares of Ventures Group Series A Stock. None of these options are
exercisable until February 7, 1998.
III-11
<PAGE>
A certain executive officer holds a stock option, which was granted in
tandem with stock appreciation rights in May 1997, to acquire 157,500
shares of TCI Group Series A Stock and 135,000 shares of Ventures Group
Series A Stock. None of these options are exercisable until May 15, 1998.
Also, Messrs. Hindery and Kern hold an aggregate of 338,154 shares of
restricted TCI Group Series A Stock and 123,692 shares of restricted
Ventures Group Series A Stock. Such shares vest as to 50% in July 2001 and
as to the remaining 50% in July 2002.
Additionally, Mr. Kern holds a stock option, which was granted in tandem
with stock appreciation rights in December 1997, to acquire 500,000 shares
of TCI Group Series A Stock and 250,000 shares of Liberty Group Series A
Stock. None of these options are exercisable until December 29, 1998.
All of the aforementioned options with tandem stock appreciation rights,
options and restricted stock are reflected in this table assuming the
exercise or vesting in full of such securities.
No equity securities in any subsidiary of Pacific, other than directors'
qualifying shares, are owned by any of Pacific's executive officers or
directors.
(12) Dr. Malone holds a stock option, which was granted in tandem with stock
appreciation rights in December 1997, to acquire 2,800,000 shares of
Ventures Group Series B Stock. Such grant is subject to TCI stockholder
approval. None of these options are exercisable until December 16, 1998.
Such options are reflected in this table assuming the exercise or vesting
in full of such securities.
(c) Change of Control. Pacific knows of no arrangements, including any
-----------------
pledge by any person of securities of Pacific, the operation of which may at a
subsequent date result in a change in control of Pacific.
III-12
<PAGE>
Item 13. Certain Relationships and Related Transactions.
- ------- ----------------------------------------------
(a) Transactions with Management and Others.
---------------------------------------
Pacific purchases, at TCIC's cost, certain pay television and other
programming through an indirect subsidiary of TCIC. Charges for such programming
were $124,054,000 during the year ended December 31, 1997, and are included in
operating expenses in the accompanying financial statements.
TCI provides certain administrative and other services to Pacific pursuant
to a services agreement effective August 1, 1996, entered into among TCI, TCIC,
and Pacific (the "Services Agreement"). The Services Agreement 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 TCI in providing such services and a pro rata share of all
indirect expenses incurred by TCI 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 $32,446,000
during the year ended December 31, 1997, 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 upon at least 60 days' notice.
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 income 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 income tax allocation is recorded as an increase or decrease in
amounts due to TCIC. During the year ended December 31, 1997, Pacific was
allocated an intercompany income tax expense of $12,507,000.
Pacific recorded $23,819,000 of interest expense for the year ended
December 31, 1997, related to an intercompany amount due to TCIC.
In 1996, Pacific transferred its investment in TCG San Francisco and TCG
Seattle to TCI Development Corporation, a subsidiary of TCI, in exchange for a
$47,300,000 note receivable. Such note bears interest at 10.5% per annum and is
included as a reduction of the amount due to TCIC in the accompanying financial
statements. No gain or loss was recognized in connection with such transfer.
During the year ended December 31, 1997, interest income related to the note
receivable aggregated $5,035,000.
Pacific believes that the foregoing business dealings with TCI, TCIC and
any of their respective subsidiaries during 1997 have been based upon terms no
less advantageous to Pacific than those which would have been available in
dealing with unaffiliated persons.
III-13
<PAGE>
(b) Certain Business Relationships
------------------------------
Jerome H. Kern, a director of Pacific, is special counsel with the law firm
of Baker & Botts, L.L.P., the principal outside counsel for Pacific and TCI.
Fees paid to Baker & Botts, L.L.P. by TCI and its consolidated subsidiaries
(including Pacific) did not exceed five percent of such firm's gross revenues
for the 1997 fiscal year.
(c) Indebtedness of Management
--------------------------
None.
III-14
<PAGE>
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
- ------- ----------------------------------------------------------------
(a) (1) Financial Statements
Included in Part II of this Report: Page No.
--------
Independent Auditors' Reports II-11
Consolidated Balance Sheets,
December 31, 1997 and 1996 II-13
Statements of Operations,
Year ended December 31, 1997, five months
ended December 31, 1996, seven months
ended July 31, 1996, year ended
December 31, 1995 II-14
Statements of Common Stockholder's Equity,
Year ended December 31, 1997, five months
ended December 31, 1996, seven months
ended July 31, 1996, year ended
December 31, 1995 II-15 to II-16
Statements of Cash Flows,
Year ended December 31, 1997, five months
ended December 31, 1996, seven months
ended July 31, 1996, year ended
December 31, 1995 II-17
Notes to Financial Statements,
December 31, 1997, 1996 and 1995 II-18 to II-33
(a) (2) Financial Statement Schedules
-----------------------------
Included in Part IV of this Report:
Financial Statement Schedules required to be filed:
All schedules have been omitted because they are not applicable, or the
required information is set forth in the financial statements or notes thereto.
IV-1
<PAGE>
(a) (3) Exhibits
--------
Listed below are the exhibits which are filed as a part of this Report
(according to the number assigned to them in Item 601 of Regulation S-K):
3 - Articles of Incorporation and Bylaws:
3.1 Restated Certificate of Incorporation, dated as of July 31, 1996.
Incorporated herein by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 (Commission File No.
1-9554).
3.2 Bylaws, adopted as of July 31, 1996.
Incorporated herein by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 (Commission File No.
1-9554).
10 - Material Contracts:
10.1 Parents Agreement, dated as of July 24, 1995, among Viacom, Inc., Tele-
Communications, Inc. and TCI Communications, Inc.
Subscription Agreement, dated as of July 24, 1995, among Viacom
International, Inc., Tele-Communications, Inc. and TCI Communications,
Inc.
Implementation Agreement, dated as of July 24, 1995, between Viacom
International, Inc. and Viacom International Services, Inc.
Incorporated herein by reference to Tele-Communications, Inc.'s
Current Report on Form 8-K, dated July 26, 1995 (Commission File
No. 0-20421).
10.2 Services Agreement, dated as of July 31, 1996, between Tele-
Communications, Inc., TCI Communications, Inc. and TCI Pacific
Communications, Inc.
Incorporated herein by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 (Commission File
No. 1-9554).
21 - Subsidiaries of TCI Pacific Communications, Inc.
27 - Financial data schedule
(b) Reports on Form 8-K filed during the quarter ended December 31, 1997:
None.
IV-2
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/Leo J. Hindery, Jr.
-----------------------
Leo J. Hindery, Jr.
President and Chief Executive
Officer
Dated: March 20, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ John C. Malone Director March 20, 1998
- ---------------------------------
John C. Malone
/s/ Leo J. Hindery, Jr. Director, President and Chief March 20, 1998
- --------------------------------- Executive Officer
Leo J. Hindery, Jr.
/s/ Donne F. Fisher Director March 20, 1998
- ---------------------------------
Donne F. Fisher
/s/ Jerome H. Kern Director March 20, 1998
- ---------------------------------
Jerome H. Kern
/s/ Marvin L. Jones Executive Vice President and March 20, 1998
- --------------------------------- Chief Operating Officer
Marvin L. Jones
/s/ Stephen M. Brett Senior Vice President March 20, 1998
- --------------------------------- and Secretary
Stephen M. Brett
/s/ Bernard W. Schotters Senior Vice President March 20, 1998
- --------------------------------- Treasurer (Principal Financial
Bernard W. Schotters Officer)
/s/ Gary K. Bracken Senior Vice President March 20, 1998
- --------------------------------- (Principal Accounting Officer)
Gary K. Bracken
</TABLE>
IV-3
<PAGE>
EXHIBIT INDEX
Listed below are the exhibits which are filed as a part of this Report
(according to the number assigned to them in Item 601 of Regulation S-K):
3 - Articles of Incorporation and Bylaws:
3.1 Restated Certificate of Incorporation, dated as of July 31, 1996.
Incorporated herein by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996 (Commission
File No. 1-9554).
3.2 Bylaws, adopted as of July 31, 1996.
Incorporated herein by reference to the Company's Annual Report on
Form 10-K for the year ended December 31, 1996 (Commission File
No. 1-9554).
10 - Material Contracts:
10.1 Parents Agreement, dated as of July 24, 1995, among Viacom, Inc.,
Tele-Communications, Inc. and TCI Communications, Inc.
Subscription Agreement, dated as of July 24, 1995, among Viacom
International, Inc., Tele-Communications, Inc. and TCI
Communications, Inc.
Implementation Agreement, dated as of July 24, 1995, between Viacom
International, Inc. and Viacom International Services, Inc.
Incorporated herein by reference to Tele-Communications, Inc.'s
Current Report on Form 8-K, dated July 26, 1995 (Commission
File No. 0-20421).
10.2 Services Agreement, dated as of July 31, 1996, between
Tele-Communicatons, In., TCI Communications, Inc. and TCI Pacific
Communications, Inc.
Incorporated herein by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996 (Commission
File No. 1-9554).
21 - Subsidiaries of TCI Pacific Communications, Inc.
27 - Financial data schedule
<PAGE>
EXHIBIT 21
----------
A table of the subsidiaries of TCI Pacific Communications, Inc. as of December
31, 1997, is set forth below, indicating as to each the state or the
jurisdiction of incorporation or organization and the names under which such
subsidiaries do business (Trade Names.) Subsidiaries not included in the table
are inactive or, considered in the aggregate as a single subsidiary, would not
constitute a significant subsidiary.
STATE OR
--------
JURISDICTION
------------
OF
--
INCORPORATION
-------------
OR
--
SUBSIDIARY ORGANIZATION TRADE NAMES
- ---------- ------------ -----------
TCI Pacific Communications, Inc. DE TCI Media Services
TCI Pacific, Inc. DE
Tele-Vue Systems, Inc. WA TCI of Washington
TCI of Houston
Broadview Television Company WA
Cable TV of Marin, Inc. CA
Cable TV Puget Sound, Inc. WA
Channel 3 Everett, Inc. WA
Clear View Cable Systems, Inc. CA
Community Telecable of Bellevue, Inc. WA TCI of Washington
Community Telecable of Seattle, Inc. WA
Com-Cable TV, Inc. DE
H-C-G Cablevision, Inc. CA
TCI VCI, Inc. CA
Contra Costa Cable Co. WA
Crockett Cable System, Inc. WA
Everett Cablevision, Inc. WA TCI of Washington
Far-West Communications, Inc. OR TCI of Oregon
Portland Cable Advertising, L.P. [lp] DE
Marin Cable Television, Inc. CA
Prime Cable II System, Inc. TX
NTT, Inc. TX
Southwestern Satellite, Inc. TX
TCI of Dayton, Inc. DE
TCI Telecom, Inc. DE
Television Signal Corporation CA
United Community Antenna System, Inc. WA TCI of Washington
Vista Television, Inc. WA TCI of Washington
TCI Bay Interconnect, Inc. CA
Pacific Area Interconnect [gp] CA
Northwest Cable Advertising [gp] NY
TCI of Northern California, Inc. CA
TCI TVC, Inc. CA
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,966
<SECURITIES> 0
<RECEIVABLES> 11,936
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 445,162
<DEPRECIATION> 50,843
<TOTAL-ASSETS> 3,358,202
<CURRENT-LIABILITIES> 0
<BONDS> 952,348
629,739
0
<COMMON> 0
<OTHER-SE> 686,505
<TOTAL-LIABILITY-AND-EQUITY> 3,358,202
<SALES> 0
<TOTAL-REVENUES> 508,803
<CGS> 0
<TOTAL-COSTS> 176,819
<OTHER-EXPENSES> 121,247
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97,778
<INCOME-PRETAX> (4,767)
<INCOME-TAX> 885
<INCOME-CONTINUING> (5,652)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,652)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
