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 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____ to ____
Commission File 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 X No
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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 31, 1997, was $584,337,000.
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
31, 1997, was:
Class B common stock - 100 shares.
TCI PACIFIC COMMUNICATIONS, INC.
1996 ANNUAL REPORT ON FORM 10-K
Table of Contents
Page
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PART I
Item 1. Business........................................... I- 1
Item 2. Properties......................................... I-13
Item 3. Legal Proceedings.................................. I-13
Item 4. Submission of Matters to a Vote of Security Holders I-13
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters........................ II-1
Item 6. Selected Financial Data............................ II-2
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............... II-3
Item 8. Financial Statements and Supplementary Data........ II-8
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............ II-8
PART III
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-3
Item 13. Certain Relationships and Related Transactions..... III-9
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K............................... IV-1
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.
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.
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 (the
"Exchange").
(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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I-1
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.
At December 31, 1996, approximately 85% of the Company's cable television
systems had bandwidth capacities ranging from 400 megahertz to 750 megahertz,
which generally permit a cable system to carry from 54 to 112 analog channels,
respectively. Compressed digital video technology converts on average as many as
fourteen 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. TCIC conducted a beta test of its digital cable television
service in late 1996 and began offering such service to paying customers in
January, 1997. Pacific will be included in TCIC's digital rollout to the extent
Pacific's cable systems have the desired technological and market
characteristics.
Imedia, a small high technology firm, has developed a technology which
represents a significant advancement in increasing the number of digital
television programs delivered over a single satellite transponder or channel on
a cable system. Without requiring any change in fielded digital receiving
equipment in either the cable system headend or the customer's home, and without
requiring significant upgrades to the existing cable plant, the introduction of
Imedia's StatMux\TM\ technology significantly increases the transportation
capacity of the operator's system. The Company anticipates that it will
incorporate such technology with its digital service in strategic cable systems
during 1997.
Service Charges. The Company offers a limited "basic service" ("Basic TV")
(primarily comprised of local broadcast signals and public, educational and
governmental access channels) and an "expanded" tier (primarily comprised of
specialized programming services, in such areas as health, family entertainment,
religion, news, weather, public affairs, education, shopping, sports and music).
The monthly fee for "basic service" generally ranges from $9.00 to $13.00, and
the monthly service fee for the "expanded" tier generally ranges from $13.00 to
$18.00. 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 $5.00 per month, pay-per-view
movies offered separately generally at $4.00 per movie and certain pay-per-view
events offered separately at $10.00 to $50.00 per event. Charges are usually
discounted when multiple Pay-TV services are ordered.
As further enhancements to their cable services, customers may generally
rent converters and/or remote control devices for a monthly charge ranging from
$0.10 to $5.00 each, as well as purchase a channel guide for a monthly charge
ranging from $1.00 to $2.00. Also a nonrecurring installation charge (which is
limited by the Federal Communications Commission's ("FCC") rules which regulate
hourly service charges for each individual cable system) of up to $60.00 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-2
As noted below, the Company's service offerings and rates were affected by
rate regulations issued by the FCC in 1993 and 1994. See Regulation and
Legislation below.
Customer Data. Pacific operates its cable television systems in the
following five geographic markets: The San Francisco and Northern California
area; Salem, Oregon; the Seattle, Washington and Greater Puget Sound area;
Houston, Texas and Dayton, Ohio. Basic and Pay-TV cable customers served by
Pacific and its consolidated subsidiaries are summarized as follows (amounts in
thousands, except percentages):
December 31,
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1996 1995 1994 1993 1992(1)
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Estimated homes passed 1,813 1,790 1,758 1,730 1,698
Basic customers 1,168 1,180 1,139 1,094 1,069
Basic penetration (2) 64% 66% 65% 63% 63%
Pay-TV subscriptions (3) 901 921 875 718 753
Pay-TV penetration (4) 77% 78% 77% 66% 70%
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(1) Adjusted to eliminate the impact of certain dispositions in January,
1993.
(2) Calculated by dividing the number of basic customers by the number of
estimated homes passed.
(3) A basic customer may subscribe to one or more Pay-TV services and the
number of Pay-TV subscriptions reflected represents the total number of
such subscriptions to Pay-TV services.
(4) Calculated by dividing the number of Pay-TV subscriptions by the number
of basic customers.
Local Franchises. Cable television systems generally are constructed and
operated under the authority of nonexclusive permits or "franchises" granted by
local and/or state governmental authorities. Federal law, including the Cable
Communications Policy Act of 1984 (the "1984 Cable Act") and the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992 Cable
Act"), limits the power of the franchising authorities to impose certain
conditions upon cable television operators as a condition of the granting or
renewal of a franchise.
Franchises contain varying provisions relating to construction and
operation of cable television systems, such as time limitations on commencement
and/or completion of construction; quality of service, including (in certain
circumstances) requirements as to the number of channels and broad categories of
programming offered to subscribers; rate regulation; provision of service to
certain institutions; provision of channels for public access and commercial
leased-use; and maintenance of insurance and/or indemnity bonds. The Company's
franchises also typically provide for periodic payments of fees, not to exceed
5% of revenue, to the governmental authority granting the franchise. Franchises
usually require the consent of the franchising authority prior to a transfer of
the franchise or a transfer or change in ownership or operating control of the
franchisee.
I-3
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
13 of the Company's franchises expire within the next five years. This
represents approximately sixteen percent of the franchises held by the Company
and involves approximately 90,000 basic subscribers.
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. Both the 1992 Cable Act
and the Telecommunications Act of 1996 ("1996 Telecom Act") 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 Congress and the FCC to offer services in direct
competition with existing cable systems.
I-4
DBS. During 1996, the Company has experienced a competitive impact from
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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. The partners in PRIMESTAR Partners
L.P. distribute a multi-channel programming service via a medium power
communications satellite to HSDs of approximately 3 feet in diameter. DirecTv,
Inc., United States Satellite Broadcasting Corporation and EchoStar
Communications Corp. ("EchoStar"), transmit from high power satellites and
generally use smaller dishes to receive their signals. Alphastar, Inc. began
offering medium power service in the second quarter of 1996. On February 24,
1997, News Corporation Limited ("News Corp.") and Echostar announced that News
Corp. will acquire a 50% interest in Echostar and that the companies will
combine their DBS businesses into a new company which will operate under the
name Sky. The two companies contend that Sky, which is scheduled to launch in
early 1998, will offer 500 channels of digital television, Internet services and
local broadcast network television signals, capable of reaching more than 50% of
all television households upon launch of Sky and 75% of all television
households by the end of 1998. DBS operators have the right to distribute
substantially all of the significant cable television programming services
currently carried by cable television systems. Estimated DBS customers
nationwide increased from approximately 2.2 million at the end of 1995 to
approximately 4.4 million at the end of 1996, and the Company expects that
competition from DBS will continue to increase.
DBS has advantages and disadvantages as an alternative means of
distributing video signals to the home. Among the advantages are that the
capital investment (although initially high) for the satellite and uplinking
segment of a DBS system is fixed and does not increase with the number of
subscribers receiving satellite transmissions; that DBS is not currently subject
to local regulation of service and prices or required to pay franchise fees; and
that the capital costs for the ground segment of a DBS system (the reception
equipment) are directly related to, and limited by, the number of service
subscribers. DBS's disadvantages presently include limited ability to tailor
the programming package to the interests of different geographic markets, such
as providing local news, other local origination services and local broadcast
stations; signal reception being subject to line of sight angles; and technology
which requires a customer to rent or own one set-top box (which is 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
subscribers 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. Further, 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
subscribers.
I-5
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 section. 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 soon will enter the
business of providing video services. 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. Additionally, the 1996
Telecom Act eliminates certain federal restrictions on utility holding companies
and thus frees all utility companies to provide cable television services. The
Company expects this could result in another source of significant competition
in the delivery of video services.
Although long distance telephone companies had no legal prohibition on the
provision of video services, they have historically not been providers of such
services in competition with cable systems. However, such companies may prove
to be a source of competition in the future. The long distance companies are
expected to expand into local markets with local telephone and other offerings
(including video services) in competition with the RBOCs.
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. Further, in 1995, several large telephone companies
acquired significant ownership in numerous MMDS companies. This infusion of
money into the MMDS industry was expected to accelerate its growth and its
competitive impact. However, in 1996 telephone company support of MMDS appeared
to diminish as both Bell Atlantic Corporation and NYNEX Corporation suspended
their investments in two major MMDS companies. 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.
I-6
Within the cable television industry, cable operators may compete with
other cable operators or others seeking franchises for competing cable
television systems at any time during the terms of existing franchises or upon
expiration of such franchises in expectation that the existing franchise will
not be renewed. The 1992 Cable Act promotes the granting of competitive
franchises. An increasing number of cities are exploring the feasibility of
owning their own cable systems in a manner similar to city-provided utility
services.
Private Cable. The 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 is now considering new rules that would restrict or eliminate
the ability of cable operators to maintain ownership of cable wiring inside
multi-unit buildings, thereby potentially making it less expensive for SMATV
competitors to reach those customers.
In addition to competition for customers, the cable television industry
competes with broadcast television, radio, the print media and other sources of
information and entertainment for advertising revenue. As the cable television
industry has developed additional programming, its advertising revenue has
increased. Cable operators sell advertising spots primarily to local and
regional advertisers.
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. There are a large number of individual and multiple system
cable television operators in the United States but, measured by the number of
basic customers, the Company is the largest provider of cable television
services.
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.
I-7
Cable Rate Regulation. The 1992 Cable Act imposed extensive rate
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regulation on the cable television industry. All cable systems are subject to
rate regulation, unless they face "effective competition" in their local
franchise area. Under the 1992 Cable Act, the incumbent cable operator can
demonstrate "effective competition" by showing either low penetration (less than
30% of the local population subscribes to basic service) or the presence
(measured collectively as 50% availability, 15% subscriber penetration) of other
multichannel video programming distributors ("MVPDs"). The 1996 Telecom Act
expands the existing definition of "effective competition" to create a special
test for a competing MVPD (other than a DBS distributor) affiliated with a local
exchange carrier ("LEC"). There is no penetration minimum for a LEC affiliate to
qualify as an effective competitor, but it must offer comparable programming
services in the franchise area.
Although the FCC establishes all cable rate rules, local government units
(commonly referred to as local franchising authorities or "LFAs") are primarily
responsible for administering the regulation of the lowest level of cable -- the
basic service tier ("BST"), which typically contains local broadcast stations
and public, educational and government ("PEG") access channels. Before an LFA
begins BST rate regulation, it must certify to the FCC that it will follow
applicable federal rules, and many LFAs have voluntarily declined to exercise
this authority. LFAs also have primary responsibility for regulating cable
equipment rates. Under federal law, charges for various types of cable
equipment must be unbundled from each other and from monthly charges for
programming services.
The FCC itself directly administers rate regulation of any cable
programming service tiers ("CPST"), which typically contain satellite-delivered
programming. Under the 1996 Telecom Act, the FCC can regulate CPST rates only if
an LFA first receives at least two complaints from local subscribers within 90
days of a CPST rate increase and then files a formal complaint with the FCC.
When new CPST rate complaints are filed, the FCC now considers only whether the
incremental increase is justified and will not reduce the previously established
CPST rate.
Under the FCC's rate regulations, the 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. It also relaxes existing uniform rate
requirements by specifying that uniform rate requirements do not apply where the
operator faces "effective competition," and by exempting bulk discounts to
multiple dwelling units, although complaints about predatory pricing still may
be made to the FCC.
I-8
Cable Entry Into Telecommunications. The 1996 Telecom Act provides that no
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state or local laws or regulations may prohibit or have the effect of
prohibiting any entity from providing any interstate or intrastate
telecommunications service. States are authorized, however, to impose
"competitively neutral" requirements regarding universal service, public safety
and welfare, service quality, and consumer protection. State and local
governments also retain their authority to manage the public rights-of-way.
Although the 1996 Telecom Act clarifies that traditional cable franchise fees
may be based only on revenues related to the provision of cable television
services, it also provides that LFAs may require reasonable, competitively
neutral compensation for management of the public rights-of-way when cable
operators provide telecommunications service. The 1996 Telecom Act prohibits
LFAs from requiring cable operators to provide telecommunications service or
facilities as a condition of a franchise grant, renewal or transfer, except that
LFAs can seek "institutional networks" as part of such franchise negotiations.
The favorable pole attachment rates afforded cable operators under federal law
can be increased by utility companies owning the poles during a five year phase
in period beginning in 2001, if the cable operator provides telecommunications
service, as well as cable service, over its plant.
Cable entry into telecommunications will be affected by the regulatory
landscape now being fashioned by the FCC and state regulators. One critical
component of the 1996 Telecom Act intended to facilitate the entry of new
telecommunications providers (including cable operators) is the interconnection
obligation imposed on all telecommunications carriers. Review of the FCC's
initial interconnection order is now pending before the Eighth Circuit Court of
Appeals.
Telephone Company Entry Into Cable Television. The 1996 Telecom Act allows
---------------------------------------------
telephone companies to compete directly with cable operators by repealing the
historic telephone company/cable company cross-ownership ban and the FCC's video
dialtone regulations. This will allow LECs, including the 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.
Although LECs and cable operators can now expand their offerings across
traditional service boundaries, the general prohibitions remain on LEC buyouts
(i.e., any ownership interest exceeding 10 percent) of co-located cable systems,
cable operator buyouts of co-located LEC systems, and joint ventures between
cable operators and LECs in the same market. The 1996 Telecom Act provides a
few limited exceptions to this buyout prohibition. The "rural exemption"
permits buyouts where the purchased system serves an area with fewer than 35,000
inhabitants outside an urban area, and the cable system plus any other system in
which the LEC has an interest do not represent 10% or more of the LEC's
telephone service area. The 1996 Telecom Act also provides the FCC with the
power to grant waivers of the buyout prohibition in cases where: (1) the cable
operator or LEC would be subject to undue economic distress; (2) the system or
facilities would not be economically viable; or (3) the anticompetitive effects
of the proposed transaction are clearly outweighed by the effect of the
transaction in meeting community needs. The LFA must approve any such waiver.
I-9
Electric Utility Entry Into Telecommunications/Cable Television. The 1996
---------------------------------------------------------------
Telecom Act provides that registered utility holding companies and subsidiaries
may provide telecommunications services (including cable television)
notwithstanding the Public Utilities Holding Company Act. Electric utilities
must establish separate subsidiaries, known as "exempt telecommunications
companies" and must apply to the FCC for operating authority. Again, because of
their resources, electric utilities could be formidable competitors to
traditional cable systems.
Additional Ownership Restrictions. Pursuant to the 1992 Cable Act, the FCC
---------------------------------
adopted regulations establishing a 30% limit on the number of homes nationwide
that a cable operator may reach through cable systems in which it holds an
attributable interest (attributable for these purposes is defined as a 5% or
greater ownership interest or the existence of any common directors), with an
increase to 35% if the additional cable systems are minority controlled.
However, the FCC stayed the effectiveness of its ownership limits pending the
appeal of a September 16, 1993 decision by the United States District Court for
the District of Columbia which, among other things, found unconstitutional the
provision of the 1992 Cable Act requiring the FCC to establish such ownership
limits. If the ownership limits are determined on appeal to be constitutional,
they may affect TCIC's, and subsequently Pacific's, ability to acquire interests
in additional cable systems.
The FCC also adopted regulations limiting carriage by a cable operator of
national programming services in which that operator holds an attributable
interest (using the same attribution standards as were adopted for its limits on
the number of homes nationwide that a cable operator may reach through its cable
systems) to 40% of the first 75 activated channels on each of the cable
operator's systems. The rules provide for the use of two additional channels or
a 45% limit, whichever is greater, provided that the additional channels carry
minority controlled programming services. The regulations also grandfather
existing carriage arrangements which exceed the channel limits, but require new
channel capacity to be devoted to unaffiliated programming services until the
system achieves compliance with the regulations. Channels beyond the first 75
activated channels are not subject to such limitations, and the rules do not
apply to local or regional programming services.
The 1996 Telecom Act eliminates statutory restrictions on broadcast/cable
cross-ownership (including broadcast network/cable restrictions), but leaves in
place existing FCC regulations prohibiting local cross-ownership between
television stations and cable systems. The 1996 Telecom Act also eliminates the
three year holding period required under the 1992 Cable Act's "anti-trafficking"
provision. The 1996 Telecom Act leaves in place existing restrictions on cable
cross-ownership with SMATV and MMDS facilities, but lifts those restrictions
where the cable operator is subject to effective competition. In January 1995,
however, the FCC adopted regulations which permit cable operators to own and
operate SMATV systems within their franchise area, provided that such operation
is consistent with local cable franchise requirements.
Must Carry/Retransmission Consent. The 1992 Cable Act contains broadcast
---------------------------------
signal carriage requirements that allow local commercial television broadcast
stations to elect once every three years between requiring a cable system to
carry the station ("must carry") or negotiating for payments for granting
permission to the cable operator to carry the station ("retransmission
consent"). Less popular stations typically elect "must carry," and more popular
stations typically elect "retransmission consent." Must carry requests can
dilute the appeal of a cable system's programming offerings, and retransmission
consent demands may require substantial payments or other concessions. Either
option has a potentially adverse affect on the Company's business.
Additionally, cable systems are required to obtain retransmission consent for
all "distant" commercial television stations (except for commercial satellite-
delivered independent "superstations" such as WTBS). The constitutionality of
the must carry requirements has been challenged and is awaiting a decision from
the U.S. Supreme Court.
I-10
Access Channels. LFAs can include franchise provisions requiring cable
---------------
operators to set aside certain channels for public, educational and governmental
access programming. Federal law also requires a cable system with 36 or more
channels to designate a portion of its channel capacity (either 10% or 15%) for
commercial leased access by unaffiliated third parties. The FCC has adopted
rules regulating the terms, conditions and maximum rates a cable operator may
charge for use of this designated channel capacity, but use of commercial leased
access channels has been relatively limited. In February of 1997, the FCC
released revised rules which mandate a modest rate reduction and could make
commercial leased access a more attractive option for third party programmers.
"Anti-Buy Through" Provisions. Federal law requires each cable system to
-----------------------------
permit subscribers to purchase 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
December 2002, but the FCC may extend that period if deemed necessary.
Access to Programming. To spur the development of independent cable
---------------------
programmers and competition to incumbent cable operators, the 1992 Cable Act
imposed restrictions on the dealings between cable operators and cable
programmers. Of special significance from a competitive business posture, the
1992 Cable Act precludes video programmers affiliated with cable companies from
favoring cable operators over competitors and requires such programmers to sell
their programming to other multichannel video distributors (such as DBS and
MMDS). This provision limits the ability of vertically integrated cable
programmers to offer exclusive programming arrangements to the Company.
Other FCC Regulations. In addition to the FCC regulations noted above,
---------------------
there are other FCC regulations covering such areas as equal employment
opportunity, subscriber privacy, programming practices (including, among other
things, syndicated program exclusivity, network program nonduplication, local
sports blackouts, indecent programming, lottery programming, political
programming, sponsorship identification, and children's programming
advertisements), registration of cable systems and facilities licensing,
maintenance of various records and public inspection files, frequency usage,
lockbox availability, antenna structure notification, tower marking and
lighting, consumer protection and customer service standards, technical
standards, and consumer electronics equipment compatibility. The FCC is expected
to impose new Emergency Alert System requirements on cable operators in 1997.
The FCC has the authority to enforce its regulations through the imposition of
substantial fines, the issuance of cease and desist orders and/or the imposition
of other administrative sanctions, such as the revocation of FCC licenses needed
to operate certain transmission facilities used in connection with cable
operations.
Two pending FCC proceedings of particular competitive concern involve
inside wiring and navigational devices or converter boxes. The former FCC
proceeding is considering ownership of cable wiring located inside multiple
dwelling unit ("MDU") complexes. If the FCC concludes that such wiring belongs
to, or can be unilaterally acquired by the MDU owner, it will become easier for
MDU owners to terminate service from the incumbent cable operator in favor of a
new entrant. The latter FCC proceeding is considering whether cable customers
should be permitted to purchase cable converters from third party vendors. If
the FCC concludes that 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.
I-11
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 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-12
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, 1996, the Company had approximately 1,900 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 head-end 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.
- ------ -----------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------ ---------------------------------------------------
None.
I-13
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. Certain of the Company's subsidiaries are subject to loan agreements
that prohibit or limit the transfer of funds by such subsidiaries to the Company
in the form of dividends, loans, or advances, and require that such
subsidiaries' indebtedness to the Company be subordinate to the indebtedness
under such loan agreements. The amount of net assets of subsidiaries subject to
such restrictions exceeds the Company's consolidated net assets.
II-1
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.
VII Cable
Pacific ------------------------------------------
------------- December 31,
December 31, ------------------------------------------
1996 1995 1994 1993 1992
------------- ---------- ---------- -------- --------
amounts in thousands
Summary Balance Sheet Data:
- ---------------------------
Property and equipment, net $ 379,183 419,644 365,032 326,080 287,219
Franchise costs, net $2,984,473 561,229 578,072 593,749 636,132
Total assets $3,440,561 1,066,813 1,040,434 966,249 961,285
Debt $1,151,884 57,000 57,000 57,000 106,000
Exchangeable preferred stock $ 629,801 -- -- -- --
Common stockholder's equity $ 539,195 857,107 823,940 765,531 753,929
Pacific VII Cable
------------ -------------------------------------------------------
Five months Seven months
ended ended Years ended December 31,
December 31, July 31, -----------------------------------------
1996 1996 1995 1994 1993 1992
------------ ------------ --------- --------- ------- -------
amounts in thousands
Summary Statement of Operations Data:
- ------------------------------------
Revenue $215,550 280,630 448,206 408,801 414,786 410,129
Operating income $ 37,802 52,266 86,862 61,744 83,815 97,518
Interest expense $(43,566) (30,908) (48,524) (38,050) (33,417) (49,769)
Net earnings (loss) $ (2,452) 10,660 33,714 9,146 97,391 25,793
Dividend requirement on
exchangeable preferred stock
$(13,079) -- -- -- -- --
-------- --------- --------- --------- ------- -------
Net earnings (loss)
attributable to common stockholder $(15,531) 10,660 33,714 9,146 97,391 25,793
======== ========== ========= ========= ======= =======
II-2
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.
The Exchangeable Preferred Stock is exchangeable, at the option of the
holder commencing after the fifth anniversary of the date of issuance, for
shares of Series A TCI Group Stock at an exchange rate of 5.447 shares of Series
A TCI Group Stock for each share of Exchangeable Preferred Stock exchanged. The
Exchangeable Preferred Stock is subject to redemption, at the option of Pacific,
on or after the fifteenth day following the fifth anniversary of the date of
issuance, initially at a redemption price of $102.50 per share and thereafter at
prices declining ratably annually to $100 per share on and after the eighth
anniversary of the date of issuance, plus accrued and unpaid dividends to the
date of redemption. The Exchangeable Preferred Stock is also subject to
mandatory redemption on the tenth anniversary of the date of issuance for $100
per share plus accrued and unpaid dividends. Amounts payable by the Company in
satisfaction of its dividend, optional redemption and mandatory redemption
obligations with respect to the Exchangeable Preferred Stock may be made in cash
or, at the election of the Company, in shares of Series A TCI Group Stock, or in
any combination of the foregoing. If payments are made in shares of Series A TCI
Group Stock, 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.
(continued)
II-3
Summary of Operations
- ---------------------
1996 vs. 1995
- -------------
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, 1996 and 1995, the Five Month Period has
been combined with the Seven Month Period for purposes of the following
discussion and analysis.
On October 5, 1992, Congress enacted the Cable Television Consumer
Protection and Competition Act of 1992 (the "1992 Cable Act"). In 1993 and
1994, the Federal Communications Commission ("FCC") adopted certain rate
regulations required by the 1992 Cable Act and imposed a moratorium on certain
rate increases. As a result of such actions, Pacific's basic and tier service
rates and its equipment and installation charges (the "Regulated Services") are
subject to the jurisdiction of local franchising authorities and the FCC. The
regulations established benchmark rates in 1993, which were further reduced in
1994, to which the rates charged by cable operators for Regulated Services were
required to conform.
Pacific believes that it has complied, in all material respects, with the
provisions of the 1992 Cable Act, including its rate setting provisions.
However, the Company's rates for Regulated Services are subject to review by the
FCC, if a complaint has been filed, or by the appropriate franchise authority,
if such authority has been certified. If, as a result of the review process, a
system cannot substantiate its rates, it could be required to retroactively
reduce its rates to the appropriate benchmark and refund the excess portion of
rates received. Any refunds of the excess portion of tier service rates would be
retroactive to the date of complaint. Any refunds of the excess portion of all
other Regulated Service rates would be retroactive to one year prior to the
implementation of the rate reductions.
On February 8, 1996, the Telecommunications Act of 1996 (the "1996 Telecom
Act") was signed into law. Because the 1996 Telecom Act does not deregulate
cable programming service tier rates until 1999 (and basic service tier rates
will remain regulated thereafter), the Company believes that the 1993 and 1994
rate regulations have had and will continue to have a material adverse effect on
its results of operations.
Revenue increased 11% for the year ended December 31, 1996, as compared to
1995. Such 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. Average premium subscribers were
comparable from 1995 to 1996. Total revenue per basic customer per month
increased 9% to $35.05 for the year ended December 31, 1996 from $32.17 for the
year ended December 31, 1995. As of December 31, 1996, Pacific served
approximately 1,168,000 basic customers subscribing to approximately 901,000
premium units, representing a 1% and 2% decrease, respectively, since December
31, 1995.
Operating expenses increased 7% for the year ended December 31, 1996, as
compared to 1995. Such increase is due to increases in costs related to
customer growth, increased programming fees and increased channel capacity.
Selling, general and administrative ("SG&A") expenses increased 16% for the
year ended December 31, 1996, as compared to 1995. Such increase reflects
programming launch incentives received in 1995 but not in 1996, and higher
overhead allocations in 1996.
(continued)
II-4
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 for the seven month period and are
included in SG&A.
Effective August 1, 1996, TCI provides certain facilities, services and
personnel to Pacific. The scope of the facilities, personnel and services to
Pacific and the respective charges payable in respect thereof are set forth in a
services agreement entered into among TCI, TCIC and Pacific ("Services
Agreement"). Pursuant to the Services Agreement, TCI provides to Pacific
administrative and operational services necessary for the conduct of its
business, including, but not limited to, such services as are generally
performed by TCI's accounting, finance, corporate, legal and tax departments.
In addition, TCI makes available to Pacific such general overall management
services and strategic planning services as TCI and Pacific have agreed, and
provides Pacific with such access to and assistance from TCI engineering and
construction groups and TCI's programming and technology/venture personnel at
Pacific's request.
The Services Agreement also provides that, for so long as TCI continues to
beneficially own shares of Pacific's common stock representing at least a
majority in voting power of the outstanding shares of capital stock of Pacific
entitled to vote generally in the election of directors, TCI will continue to
provide in the same manner, and on the same basis as is generally provided from
time to time to other participating TCI subsidiaries, benefits and
administrative services to Pacific's employees.
In this regard, Pacific is allocated that portion of TCI's compensation
expense attributable to benefits extended to employees of Pacific. Pursuant to
the Services Agreement, Pacific reimburses TCI for all direct expenses incurred
by them in providing such services and a pro rata share of all indirect expenses
incurred by them in connection with the rendering of such services, including a
pro rata share of the salary and other compensation of TCI employees performing
services for Pacific and general overhead expenses. Charges for expenses
incurred in connection with the Services Agreement were $7,982,000 during the
five month period and are included in SG&A. See note 11 to the accompanying
financial statements.
Depreciation expense decreased 16% for the year ended December 31, 1996, as
compared to 1995. Such decrease is attributable to the consummation of the
Acquisition, in which Pacific recorded property and equipment at estimated fair
market value which was less than VII Cable's historical cost, offset by an
increase in depreciation due to $96,912,000 in capital expenditures during 1996.
Amortization expense increased 129% for the year ended December 31, 1996,
as compared to 1995. Such increase is attributable to increased franchise costs
resulting from the Acquisition.
Other Income and Expense
------------------------
Interest expense increased 53% for the year ended December 31, 1996, as
compared to 1995. Such increase is due to interest related to the $1.7 billion
Credit Agreement entered into prior to consummation of the Exchange Offer.
Interest expense for periods prior to the Acquisition reflects amounts recorded
by VII Cable on borrowings under a credit agreement and amounts allocated by
Viacom to VII Cable based on a percentage of VII Cable's average net assets to
Viacom's average net assets.
(continued)
II-5
VII Cable was included in the consolidated Federal, state and local income
tax returns filed by Viacom. However, the income tax provision was prepared on
a separate return basis as though VII Cable filed stand-alone income tax
returns. The effective tax rates of 53% and 49% for the years ended December
31, 1996 and 1995, respectively, were both adversely affected by the
amortization of acquisition costs which are not deductible for tax purposes.
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.
The Company's net earnings (before preferred stock dividend requirements)
of $8,208,000 for the year ended December 31, 1996 represents a decrease of
$25,506,000 as compared to 1995. Such reduction primarily represents an
increase of interest expense of $25,950,000 in 1996 and the recognition in 1995
of a gain on sale of marketable equity securities held as available for sale
($26,902,000) offset by a decrease in income tax expense of $23,561,000.
Additionally, net earnings were reduced by the increase in amortization expense
less the decrease in depreciation expense attributable to the consummation of
the Acquisition.
1995 vs. 1994
- -------------
Revenue increased 10% from 1994 to 1995. The increase in revenue reflects
a 4% and 13% increase in average basic and premium customers, respectively, and
a 5% increase in average basic rates, partially offset by a 7% decrease in the
average premium rate. Total revenue per basic customer per month increased 6%
to $32.17 for 1995 from $30.49 for 1994. As of December 31, 1995, VII Cable
served approximately 1,180,000 basic customers subscribing to approximately
921,000 premium units, representing a 4% and 5% increase, respectively, since
December 31, 1994.
Operating expenses increased 13% principally reflecting an increase in
programming and other costs related to customer growth, increased programming
fees and increased channel capacity.
SG&A decreased 9% for the year ended December 31, 1995, as compared to
1994. Such decrease reflects lower overhead allocations in 1995 and programming
launch incentives received in 1995.
Prior to the Acquisition, Viacom provided VII Cable with certain general
services, including insurance, legal, financial and other corporate functions.
Charges for these services were based on the average of certain specified ratios
of revenue, operating income and net assets of VII Cable in relation to Viacom.
The charges for such services were $13,492,000 and $16,849,000 for 1995 and
1994, respectively, representing a 20% decrease, and are included in SG&A.
Other Income and Expense
------------------------
Interest expense increased 28% from 1994 to 1995. Interest expense
reflects amounts recorded by VII Cable on borrowings under a credit agreement
and amounts allocated by Viacom of $46,363,000 and $35,681,000 for 1995 and
1994, respectively. Viacom allocated interest expense to VII Cable based on a
percentage of VII Cable's average net assets to Viacom's average net assets.
(continued)
II-6
In 1995, VII Cable recognized a pre-tax gain of $26,902,000 from the sale
of marketable securities.
VII Cable was included in the consolidated federal, state and local income
tax returns filed by Viacom. However, the income tax provision was prepared on
a separate return basis as though VII Cable filed stand-alone income tax
returns. The annual effective tax rate of 49% for 1995 was adversely affected
by the amortization of acquisition costs which are not deductible for tax
purposes.
VII Cable's net earnings of $33,714,000 for the year ended December 31,
1995 represents an increase of $24,568,000 as compared to 1994. Such reduction
primarily represents an increase in average basic and primary customers and the
recognition of a gain on the sale of marketable equity securities offset by
increases in interest expense of $10,474,000 and income tax expense of
$14,838,000.
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 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 July 1991, VII Cable received reassessments from ten California
counties of its real and personal property, related to a June 1987 acquisition,
which could result in substantially higher California property tax liabilities.
VII Cable is appealing the reassessments. At July 31, 1996 VII Cable had paid
$44,083,000 related to real and personal property taxes which have, along with
any potential future liability related to periods prior to July 31, 1996,
transferred to New VII on July 31, 1996 as part of the First Distribution and
any potential future liability was conveyed to Viacom effective July 31, 1996.
The Company's business requires significant capital expenditures to
maintain, upgrade, rebuild and expand its cable television systems.
Historically, VII Cable's cash requirements were funded by VII Cable's operating
activities and through intercompany advances from Viacom, as needed. During the
fourth quarter of 1996, Pacific reevaluated its capital expenditure strategy
and currently anticipates that it will spend significantly less for property and
equipment in 1997 than it has in the past. Accordingly, 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
services of short-term and long-term liquidity in the future.
In accordance with the terms of the Credit Agreement, Pacific has entered
into an interest rate exchange agreement (the "Exchange Agreement") with TCIC
pursuant to which Pacific will pay a fixed interest rate of 7.5% on a notional
amount of $600 million. The terms of the Exchange Agreement become effective
only if the one month LIBOR rate exceeds 6.5% for five consecutive days within
the two-year observation period, as defined by the Exchange Agreement (the
"Trigger"). In the event the Trigger occurs, the terms of the agreement become
effective until August 1, 2001. As of December 31, 1996, the terms of the
Exchange Agreement have not become effective.
At December 31, 1996, the Company had $250,000,000 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 consolidated financial
statements for additional information regarding the material terms of the Credit
Agreement.
(continued)
II-7
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
13 of the Company's franchises expire within the next five years. This
represents approximately sixteen percent of the franchises held by the Company
and involves approximately 90,000 basic subscribers.
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)($82,445,000 for the five months ended December 31, 1996) to
interest expense ($43,566,000 for the five months ended December 31, 1996), is
determined by reference to the statements of operations. The Company's interest
coverage ratio was 189% for the five months ended December 31, 1996. Management
of the Company believes that the foregoing interest coverage ratio is adequate
in light of the consistency and nonseasonal nature of its cable television
operations. Operating Cash Flow is a measure of value and borrowing capacity
within the cable television industry and is not intended to be a substitute for
cash flows provided by operating activities, a measure of performance prepared
in accordance with generally accepted accounting principles, and should not be
relied upon as such. Operating Cash Flow, as defined, does not take into
consideration substantial costs of doing business, such as interest expense, and
should not be considered in isolation to other measures of performance.
Another measure of liquidity is net cash provided by operating activities,
as reflected in the accompanying consolidated statements of cash flows. Net
cash provided by operating activities ($6,063,000 for the five months ended
December 31, 1996) reflects net cash from the operations of the Company
available for the Company's liquidity needs after taking into consideration the
aforementioned additional substantial costs of doing business not reflected in
Operating Cash Flow. See the Company's consolidated statements of cash flows
included in the accompanying financial statements.
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-9. The financial statement
schedules required by Regulation S-X are filed under Item 14 of this Annual
Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------ ---------------------------------------------------------------
Financial Disclosure.
--------------------
None.
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Stockholders
TCI Pacific Communications, Inc.:
We have audited the accompanying consolidated balance sheet of TCI Pacific
Communications, Inc. and subsidiaries (a subsidiary of TCI Communications, Inc.)
as of December 31, 1996, and the related consolidated statements of operations,
common stockholder's equity, and cash flows for the five months ended December
31, 1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated 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, 1996, and the results
of their operations and their cash flows for the five months ended December 31,
1996, in conformity with generally accepted accounting principles.
As discussed in note 1 to the consolidated 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 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.
KPMG Peat Marwick LLP
Denver, Colorado
March 24, 1997
II-9
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
October 18, 1996
The Board of Directors and Stockholders
of TCI Pacific Communications, Inc.
(the "Company", formerly VII Cable):
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations, of common stockholder's equity and of cash
flows present fairly, in all material respects, the financial position of VII
Cable (as defined in note 1 to the financial statements) at December 31, 1995,
and the results of its operations and its cash flows for the seven months ended
July 31, 1996 and each of the two years in the period 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 disclosure 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.
Our audits of the combined financial statements of VII Cable also included
an audit of the Financial Statement Schedule on page IV-9 for the seven months
ended July 31, 1996 and each of the two years in the period ended December 31,
1995. In our opinion, the Financial Statement Schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related combined financial statements.
PRICE WATERHOUSE LLP
New York, New York
October 18, 1996
II-10
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Balance Sheet
Pacific VII Cable
(note 2) (note 2)
------------- -------------
December 31, December 31,
1996 1995
------------- -------------
Assets amounts in thousands
- ------
Cash $ -- 2,294
Restricted cash (Note 1) 33,664 --
Trade and other receivables, net 18,986 14,333
Prepaids 6,144 3,342
Property and equipment, at cost:
Land 5,795 5,470
Distribution systems 348,949 549,553
Support equipment and buildings 35,812 192,305
---------- ---------
390,556 747,328
Less accumulated depreciation 11,373 327,684
---------- ---------
379,183 419,644
---------- ---------
Franchise costs 3,015,246 718,636
Less accumulated amortization 30,773 157,407
---------- ---------
2,984,473 561,229
---------- ---------
Other assets, at cost, net of
amortization (note 1) 18,111 65,971
---------- ---------
$3,440,561 1,066,813
Liabilities and Common ========== =========
Stockholder's Equity
- -----------------------
Cash overdraft $ 9,736 --
Accounts payable 3,490 28,380
Accrued expenses (note 6) 30,008 37,686
Subscriber advance payments 2,727 2,556
Debt (note 7) 1,151,884 57,000
Deferred income taxes (note 10) 1,073,340 72,953
Other liabilities 380 11,131
---------- ---------
Total liabilities 2,271,565 209,706
---------- ---------
Exchangeable preferred stock
(note 8) 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 336,921 --
Accumulated deficit (2,452) --
Viacom Inc. ("Viacom") equity
investment -- 857,107
---------- ---------
334,469 857,107
Due to TCI Communications, Inc.
("TCIC") 204,726 --
---------- ---------
Total common stockholder's
equity 539,195 857,107
---------- ---------
Commitments (note 12)
$3,440,561 1,066,813
========== =========
See accompanying notes to financial statements.
II-11
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Statements of Operations
Pacific VII Cable
(note 2) (note 2)
------------- ---------------------------------
Five months Seven months Years ended
ended ended December 31,
December 31, July 31, ------------------
1996 1996 1995 1994
------------- ------------- -------- --------
amounts in thousands
Revenue $215,550 280,630 448,206 408,801
Operating costs and expenses:
Operating (note 11) 74,516 108,652 170,521 151,084
Selling, general and
administrative (note 11) 58,589 68,132 108,849 119,577
Depreciation (note 3) 12,765 40,681 63,292 57,879
Amortization 31,878 10,899 18,682 18,517
-------- ------- ------- -------
177,748 228,364 361,344 347,057
-------- ------- ------- -------
Operating income 37,802 52,266 86,862 61,744
Other income (expense):
Interest expense (note 11) (43,566) (30,908) (48,524) (38,050)
Interest income 450 2,214 -- --
Gain on sale of marketable securities
held as available-for-sale -- -- 26,902 --
Other, net (1,312) 520 1,293 3,433
-------- ------- ------- -------
(44,428) (28,174) (20,329) (34,617)
-------- ------- ------- -------
Earnings (loss) before income
taxes (6,626) 24,092 66,533 27,127
Income tax benefit (expense) (note 10) 4,174 (13,432) (32,819) (17,981)
-------- ------- ------- -------
Net earnings (loss) (2,452) 10,660 33,714 9,146
======== ======= ======= =======
Dividend requirement on Exchangeable
Preferred Stock (13,079)
--------
Net loss attributable to
common stockholder $(15,531)
========
See accompanying notes to financial statements.
II-12
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Statement of Common Stockholder's Equity
Common stock Additional Viacom Total
---------------------- paid-in Accumulated equity Due to equity
Class A Class B capital deficit investment TCIC (deficit)
------------ ------- ----------- ----------- ---------- ------ ----------
amounts in thousands
VII Cable (note 2)
- ------------------
Balance at January 1, 1994 $ -- -- -- -- 765,531 -- 765,531
Net earnings -- -- -- -- 9,146 -- 9,146
Cash distributions to Viacom -- -- -- -- (434,002) -- (434,002)
Cash distributions from Viacom -- -- -- -- 392,896 -- 392,896
Allocated charges from Viacom -- -- -- -- 75,221 -- 75,221
Unrealized holding gains on
available-for-sale securities, net
of tax -- -- -- -- 15,148 -- 15,148
---- ---- ------ ---- ---------- ------ ----------
Balance at December 31, 1994 -- -- -- -- 823,940 -- 823,940
Net earnings -- -- -- -- 33,714 -- 33,714
Cash distributions to 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
VII Cable (note 1) -- -- -- -- -- 12,673 12,673
---- ---- ------ ---- ---------- ------ ----------
Balance at July 31, 1996 $ -- -- -- -- (754,509) 12,673 (741,836)
==== ==== ======= ==== ========== ====== ==========
(continued)
II-13
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Statement of Common Stockholder's Equity
Common stock Additional Viacom Total
-------------------- paid-in Accumulated equity Due to equity
Class A Class B capital deficit investment TCIC (deficit)
------- ------- ---------- ----------- ---------- ------ ---------
amounts in thousands
- -------------------------------------------------------------------------------------------------------------------------------
Pacific (note 2)
- ----------------
Initial capitalization $ -- -- 350,000 -- -- 35,293 385,293
Net earnings (loss) -- -- -- (2,452) -- -- (2,452)
Accreted dividends on Exchangeable
Preferred Stock -- -- (13,079) -- -- -- (13,079)
Allocation of programming charges
from TCIC -- -- -- -- -- 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 -- -- -- -- -- 4,174 4,174
Net cash transfers from TCIC -- -- -- -- -- 160,045 160,045
------------ ------- ----------- --------- ---------- -------- --------
Balance at December 31, 1996 $ -- -- 336,921 (2,452) -- 204,726 539,195
============ ======= =========== ========= ========== ======== ========
See Accompanying Notes to Financial Statements.
II-14
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Statements of Cash Flows
Pacific VII Cable
(note 2) (note 2)
------------- -----------------------------------
Five months Seven months Years ended
ended ended December 31,
December 31, July 31, --------------------
1996 1996 1995 1994
------------- ------------- --------- ---------
amounts in thousands
(see notes 2 and 4)
Cash flows from operating activities:
Net earnings (loss) $ (2,452) 10,660 33,714 9,146
Adjustments to reconcile net
earnings (loss) to net cash
provided by operating
activities:
Depreciation and
amortization 44,643 51,580 81,974 76,396
Gain on sale of marketable
securities held as
available-for-sale -- -- (26,902) --
Deferred income tax
expense (benefit) (29,705) 2,559 2,783 8,793
Other noncash credits -- (35) (89) (2,242)
Changes in operating
assets and liabilities:
Change in receivables (9,351) 1,215 (1,678) (4,315)
Change in accruals
and payables 6,805 6,288 (242) (1,085)
Change in prepaids (3,877) 141 (277) (950)
--------- ---------- -------- --------
Net cash provided
by operating
activities 6,063 72,408 89,283 85,743
--------- ---------- -------- --------
Cash flows from investing activities:
Capital expended for property
and equipment (28,331) (68,581) (117,966) (99,198)
Cash paid for acquisitions (3,486) -- -- --
Cash proceeds from disposition of
assets -- 81 27,001 1,430
Other investing activities (2,057) (4,364) (13,636) (20,931)
--------- ---------- -------- --------
Net cash used in
investing activities (33,874) (72,864) (104,601) (118,699)
--------- ---------- -------- --------
Cash flows from financing activities:
Change in cash overdraft 9,736 -- -- --
Borrowings of debt 1,884 1,700,000 -- --
Repayments of debt (200,000) (57,000) -- --
Payment of preferred stock dividends (9,074) -- -- --
Net cash transfers from TCIC 216,733 -- -- --
Transfer of cash to New VII
as part of First -- (1,701,112) -- --
Distribution (note 1)
Change in cash transfers from
Viacom, Inc. -- 4,163 (96,001) (41,106)
Allocated charges from Viacom -- 52,321 110,602 75,221
--------- ---------- -------- --------
Net cash provided
(used) by financing
activities 19,279 (1,628) 14,601 34,115
--------- ---------- -------- --------
Net increase (decrease)
in cash (8,532) (2,084) (717) 1,159
Cash at beginning
of period 42,196 2,294 3,011 1,852
--------- ---------- -------- --------
Cash at end of period $ 33,664 210 2,294 3,011
========= ========== ======== ========
See accompanying notes to financial statements.
II-15
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
December 31, 1996, 1995 and 1994
(1) Acquisition and Related Transactions
------------------------------------
On July 24, 1995, Viacom Inc. ("Viacom"), Viacom International Inc. (after
giving effect to the First Distribution, as defined below, "VII Cable"), a
wholly owned subsidiary of Viacom, and Viacom International Services Inc.
("New VII"), a wholly owned subsidiary of VII Cable, entered into certain
agreements (the "Transaction Agreements") with Tele-Communications, Inc.
("TCI") and TCI Communications, Inc. ("TCIC"), a subsidiary of TCI,
providing for, among other things, the conveyance of Viacom International
Inc.'s non-cable assets and liabilities to New VII, the distribution of all
of the common stock of New VII to Viacom (the "First Distribution"), the
Exchange Offer (as defined below) and the issuance to TCIC of all of the
Class B Common Stock of VII Cable. On June 24, 1996, Viacom commenced an
exchange offer (the "Exchange Offer") pursuant to which Viacom shareholders
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 for
VII Cable's Nashville cable system (the "Exchange"), which amount has been
Escrowed for future cable system acquisitions.
(continued)
II-16
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Notes to Financial Statements
VII Cable's equity investment in Prime Sports Northwest Network, included
in other assets at December 31, 1995, was transferred to New VII on July
31, 1996, as part of the First Distribution.
Pacific, through its subsidiaries and affiliates, is principally engaged in
the construction, acquisition, ownership, and operation of cable television
systems. Pacific operates its cable television systems in the following
five geographic markets: the San Francisco and Northern California area;
Salem, Oregon; the Seattle, Washington and Greater Puget Sound area;
Houston, Texas and Dayton, Ohio.
(2) Basis of Presentation
---------------------
In the accompanying financial statements and in the following text,
references are made to VII Cable and Pacific. The periods through July 31,
1996 reflect the carve-out historical results of operations and financial
position of the cable television business of Viacom and are referred to as
"VII Cable". The financial statements for periods subsequent to July 31,
1996 reflect the consolidated results of operations and financial condition
of Pacific and are referred to as "Pacific". The "Company" refers to both
Pacific and its predecessor entity, VII Cable.
The accompanying financial statements include the accounts of the Company
and all investments of more than 50% in subsidiaries in which the Company
has significant control. All significant intercompany transactions have
been eliminated for all periods presented. As a result of the Acquisition,
which was accounted for as a purchase, the consolidated financial
information for the periods after the Acquisition is presented on a
different cost basis than that for the periods before the Acquisition and,
therefore, is not comparable.
The 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):
VII
Cable Pacific
------------ ---------
Assets
------
Cash, receivables and
prepaids $ 16,465 54,099
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
========== =========
(continued)
II-17
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Notes to Financial Statements
The following reflects the recapitalization of equity resulting from the
Exchange Offer, the Acquisition and the Exchange (amounts in thousands):
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 and the
Acquisition $ 385,293
==========
(3) Summary of Significant Accounting Policies
------------------------------------------
Receivables
-----------
Receivables are reflected net of an allowance for doubtful accounts. Such
allowance at December 31, 1996 and 1995 was not material.
Long-Lived Assets
-----------------
(a) Property and Equipment
----------------------
Property and equipment is stated at cost, including acquisition costs
allocated to tangible assets acquired 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 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-18
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
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.
(b) Franchise Costs
---------------
Franchise costs consist of the difference between TCIC's allocated
historical cost of acquiring VII Cable and amounts allocated to the
tangible assets. At December 31, 1995, franchise costs of VII Cable
substantially consisted of the difference between the cost of acquired
businesses and amounts allocated to their tangible assets.
Franchise costs are generally amortized on a straight-line basis over
40 years. Costs incurred by VII Cable prior to the Acquisition in
obtaining franchises are being amortized on a straight-line basis over
the life of the franchise, generally 10 to 25 years.
In March of 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("Statement
No. 121"), effective for fiscal years beginning after December 15, 1995.
Statement No. 121 requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. Statement No. 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. VII
Cable adopted Statement No .121 effective January 1, 1996. Such adoption
did not have an effect on the financial position or results of operations
of VII Cable.
Subsequent to the Acquisition and pursuant to Statement No. 121, Pacific
periodically reviews the carrying amount of its long-lived assets,
franchise costs and certain other assets to determine whether current
events or circumstances warrant adjustments to such carrying amounts.
Pacific considers historical and expected future net operating losses to be
its primary indicators of potential impairment. Assets are grouped and
evaluated for impairment at the lowest level for which there are
identifiable cash flows that are largely independent of the cash flows of
other groups of assets ("Assets"). Pacific deems Assets to be impaired if
Pacific is unable to recover the carrying value of such Assets over their
expected remaining useful life through a forecast of undiscounted future
operating cash flows directly related to the Assets. If Assets are deemed
to be impaired, the loss is measured as the amount by which the carrying
amount of the Assets exceeds their fair value. Pacific generally measures
fair value by considering sales prices for similar assets or by discounting
estimated future cash flows. Considerable management judgment is necessary
to estimate discounted future cash flows. Accordingly, actual results
could vary significantly from such estimates.
(continued)
II-19
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Notes to Financial Statements
Estimates
---------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from
those estimates.
Reclassifications
-----------------
Certain amounts have been reclassified for comparability with the 1996
presentation.
(4) 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
Cash received in Exchange 36,633
Net cash received in the
Acquisition and
Exchange for working
capital adjustments 5,353
-------
Cash of Pacific upon
consummation of Exchange
Offer, Acquisition, and
the Exchange $42,196
=======
(5) Supplemental Disclosure to Statements of Cash Flows
---------------------------------------------------
Cash paid for interest was $40,163,000 for the five months ended December
31, 1996. Cash paid for income taxes was not material for the five months
ended December 31, 1996. See statement of common stockholder's equity for
periods prior to the Acquisition as amounts due for interest and taxes were
settled through the Viacom intercompany account.
Prior to the Acquisition, interest and income taxes were settled through
the intercompany account. See notes 10 and 11 for discussion of these
charges.
(continued)
II-20
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Notes to Financial Statements
Significant noncash investing and financing activities are as follows:
Pacific VII Cable
---------------- ----------------------------------
Five months Seven months Years ended
ended ended December 31,
December 31, July 31, ---------------------
1996 1996 1995 1994
---------------- ------------ ----------- ----------
amounts in thousands
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 $ -- 12,673 -- --
======= ======= ======= =======
(6) Accrued Expenses
----------------
Accrued expenses are comprised of
the following:
December 31,
--------------------
1996 1995
---------- --------
amounts in thousands
Accrued franchise fees $ 8,663 6,707
Accrued property tax expenses 2,549 1,532
Accrued programming expenses 2,331 8,729
Other 16,465 20,718
--------- --------
$ 30,008 37,686
========= ========
(continued)
II-21
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Notes to Financial Statements
(7) Debt
----
In connection with the Transaction Agreements described in note 1, Viacom
International Inc. borrowed $1.7 billion pursuant to the Credit Agreement.
The Credit Agreement consisted of $350 million and $300 million term loans
which are due December 31, 2004 and September 30, 2004, respectively, and a
$1.05 billion revolving commitment loan (the "Revolving Loan") that
provides for semi-annual escalating commitment reductions from June 30,
1998 through September 30, 2004. The $300 million term loan and $50
million of the Revolving Loan were repaid on July 31, 1996 with the
proceeds from the TCIC capital contribution described in note 1. The
remaining term loan and the Revolving Loan provide for quarterly interest
payments at variable rates (7.7% and 7.3% respectively, at December 31,
1996) based upon the Company's debt to cash flow ratio (as defined in the
Credit Agreement). The Credit Agreement contains restrictive covenants
which require, among other things, the maintenance of specified cash flow
and financial ratios and include certain limitations of indebtedness,
investments, guarantees, dispositions, stock repurchases and dividend
payments. In addition, the Revolving Loan requires a commitment fee
ranging from 3/8% to 1/2% per annum to be paid quarterly on the average
unborrowed portion of the total amount available for borrowing. At
December 31, 1996, the unborrowed portion of the Revolving Loan was
$250,000,000.
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, 1996.
In accordance with the terms of the Credit Agreement, Pacific has entered
into an interest rate exchange agreement (the "Exchange Agreement") with
TCIC pursuant to which Pacific will pay a fixed interest rate of 7.5% on a
notional amount of $600 million. The terms of the Exchange Agreement
become effective only if the one month LIBOR rate exceeds 6.5% for five
consecutive days within the two-year observation period, as defined by the
Exchange Agreement (the "Trigger"). In the event the Trigger occurs, the
terms of the agreement become effective until August 1, 2001. As of
December 31, 1996, the terms of the Exchange Agreement 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 for 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.
(continued)
II-22
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Notes to Financial Statements
Annual maturities of debt for each of the next five years are as follows
(amounts in thousands):
1997 $ 409
1998 409
1999 409
2000 25,409
2001 150,247
(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).
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
("Series A TCI Group Stock") at an exchange rate of 5.447 shares of Series
A TCI Group Stock for each share of Exchangeable Preferred Stock exchanged.
The Exchangeable Preferred Stock is subject to redemption, at the option of
Pacific, on or after the fifteenth day following the fifth anniversary of
the date of issuance, initially at a redemption price of $102.50 per share
and thereafter at prices declining ratably annually to $100 per share on
and after the eighth anniversary of the date of issuance, plus accrued and
unpaid dividends to the date of redemption. The Exchangeable Preferred
Stock is also subject to mandatory redemption on the tenth anniversary of
the date of issuance for $100 per share plus accrued and unpaid dividends.
Amounts payable by the Company in satisfaction of its dividend, optional
redemption and mandatory redemption obligations with respect to the
Exchangeable Preferred Stock may be made in cash or, at the election of the
Company, in shares of Series A TCI Group Stock, or in any combination of
the foregoing. If payments are made in shares of Series A TCI Group Stock,
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.
(continued)
II-23
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Notes to Financial Statements
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 event specified in this clause
(ii) the affirmative vote or consent of at least 66 2/3% of shares of
Exchangeable Preferred Stock then outstanding, voting or consenting, as the
case may be, separately as one class, would be required.
(9) Pension Plans and Other Employee Benefits
-----------------------------------------
TCI has several employee stock purchase plans (the "Plans") to provide
employees an opportunity for ownership in TCI and to create a retirement
fund. Terms of the Plans generally provide for employees to contribute up
to 10% of their compensation to a trust for 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. 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, $1,134,000 and $1,574,000 for the seven months ended July 31,
1996 and the years ended December 31, 1995 and 1994, respectively. The
obligation for pension benefits earned prior to the consummation of the
Exchange Offer was retained by Viacom.
(continued)
II-24
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Notes to Financial Statements
(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 years ended December 31, 1995 and 1994
reflected in the accompanying statements of operations and tax liabilities
reflected in the accompanying December 31, 1995 balance sheet have been
prepared on a separate return basis as though VII Cable had filed stand-
alone income tax returns. The current income tax liabilities for such
periods have been satisfied by Viacom. These amounts have been reflected
in Viacom equity investment in the accompanying December 31, 1995 combined
balance sheet. In connection with the transactions described in note 1,
Viacom agreed to indemnify VII Cable against income tax assessments, if
any, arising from Federal, state or local tax audits for periods in which
VII Cable was a member of Viacom's consolidated tax group.
Subsequent to the Acquisition, Pacific is included in the consolidated
Federal income tax return of TCI. Income tax expense or benefit for
Pacific is based on those items in the consolidated calculation applicable
to Pacific. Intercompany tax allocation represents an apportionment of tax
expense or benefit (other than deferred taxes) among the subsidiaries of
TCI in relation to their respective amounts of taxable earnings or losses.
The payable or receivable arising from the intercompany tax allocation is
recorded as an increase or decrease in amounts due to TCIC.
TCIC and TCI are parties to a tax sharing agreement (the "Tax Sharing
Agreement") which contains provisions regarding the allocation of certain
consolidated income tax attributes and the settlement procedures with
respect to the intercompany allocation of current tax attributes. The Tax
Sharing Agreement encompasses U.S. federal, state, local and foreign tax
consequences and relies upon the U.S. Internal Revenue Code of 1986 as
amended, and any applicable state, local and foreign tax law and related
regulations. Beginning on the July 1, 1995 effective date, TCIC is
responsible to TCI for its share of current consolidated income tax
liabilities. TCI is responsible to TCIC to the extent that TCIC's income
tax attributes generated after the effective date are utilized by TCI to
reduce its consolidated income tax liabilities. Accordingly, all tax
attributes generated by TCIC's operations after the effective date
including, but not limited to, net operating losses, tax credits, deferred
intercompany gains, and the tax basis of assets are inventoried and tracked
for the entities comprising TCIC.
(continued)
II-25
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Notes to Financial Statements
Income tax benefit (expense) consists of:
Current Deferred Total
------- -------- -----
amounts in thousands
Pacific
-------
Five months ended December 31, 1996:
Intercompany tax allocation $(25,531) 25,822 291
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)
======== ====== =======
Year ended December 31, 1994:
Intercompany tax allocation $ (6,018) (8,835) (14,853)
State and local (2,868) (260) (3,128)
-------- ------ -------
$ (8,886) (9,095) (17,981)
======== ====== =======
Income tax benefit (expense) differs from the amounts computed by
applying the Federal income tax rate of 35% as a result of the following:
Pacific VII Cable
------------------ ----------------------------------
Years ended
Five months Seven months December 31,
ended ended ------------------
December 31, 1996 July 31, 1996 1995 1994
------------------ -------------- -------- --------
amounts in thousands
Computed "expected" tax benefit (expense) $ 2,319 (8,432) (23,287) (9,494)
Amortization not deductible for tax purposes (1,053) (3,590) (6,328) (6,145)
State and local income taxes, net of Federal income tax benefit 2,945 (1,253) (2,931) (2,136)
Other, net (37) (157) (273) (206)
------ ------- ------- -------
$ 4,174 (13,432) (32,819) (17,981)
====== ======= ======= =======
(continued)
II-26
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Notes to Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995 are presented below:
Pacific VII Cable
------------- ------------
December 31, December 31,
1996 1995
------------- ------------
amounts in thousands
Deferred tax assets:
Investments in affiliates, due principally to
differences in basis $ 1,004 --
Other 800 835
---------- ----------
Net deferred tax
assets 1,804 835
---------- ----------
Deferred tax liabilities:
Property and equipment, principally due to
differences in basis and depreciation 26,457 60,558
Franchise costs, principally due to
differences in basis and amortization 1,048,687 --
Property taxes -- 13,230
---------- ----------
Total gross deferred tax liabilities 1,075,144 73,788
---------- ----------
Net deferred tax liability $1,073,340 72,953
========== ==========
The tax attributes disclosed above are those determined pursuant to the
Tax Sharing Agreement.
(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 $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, TCIC provides certain facilities, services and
personnel to Pacific. The scope of the facilities, personnel and services
to Pacific and the respective charges payable in respect thereof are set
forth in a services agreement entered into among TCI, TCIC and Pacific (the
"Services Agreement"). Pursuant to the Services Agreement, TCIC provides
to Pacific administrative and operational services necessary for the
conduct of its business, including, but not limited to, such services as
are generally performed by TCIC's accounting, finance, corporate, legal and
tax departments. In addition, TCIC makes available to Pacific such general
overall management services and strategic planning services as TCIC and
Pacific have agreed, and provides Pacific with such access to and
assistance from TCIC engineering and construction groups and TCIC's
programming and technology/venture personnel at Pacific's request.
(continued)
II-27
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Notes to Financial Statements
The Services Agreement also provides that, for so long as TCIC continues
to beneficially own shares of Pacific's common stock representing at least
a majority in voting power of the outstanding shares of capital stock of
Pacific entitled to vote generally in the election of directors, TCIC will
continue to provide in the same manner, and on the same basis as is
generally provided from time to time to other participating TCIC
subsidiaries, benefits and administrative services to Pacific's employees.
In this regard, Pacific is allocated that portion of TCIC's compensation
expense attributable to benefits extended to employees of Pacific.
Pursuant to the Services Agreement, Pacific reimburses TCIC for all
direct expenses incurred by TCIC in providing such services and a pro rata
share of all indirect expenses incurred by TCIC in connection with the
rendering of such services, including a pro rata share of the salary and
other compensation of TCIC employees performing services for Pacific and
general overhead expenses. Charges for expenses incurred in connection
with the Services Agreement were $7,982,000 during the five months ended
December 31, 1996, and are included in selling, general and administrative
expenses in the accompanying financial statements. The obligations of TCIC
to provide services under the Services Agreement (other than TCIC's
obligation to allow Pacific's employees to participate in TCIC's employee
benefit plans) will continue in effect until terminated by any party to the
Services Agreement at any time on not less than 60 days' notice.
Prior to the Acquisition, Viacom provided VII Cable with certain general
services, including insurance, legal, financial and other corporate
functions. Charges for these services were made primarily based on the
average of certain specified ratios of revenues, operating income and net
assets. Management believes that the methodologies used to allocate these
charges were reasonable. The charges for such services were $5,750,000,
$13,492,000 and $16,849,000 for the seven months ended July 31, 1996 and
the years ended December 31, 1995 and 1994, respectively, and are included
in selling, general and administrative expenses in the accompanying
financial statements.
Prior to the Acquisition, VII Cable, through the normal course of
business, was involved in transactions with companies owned by or
affiliated with Viacom. VII Cable had agreements to distribute television
programs of such companies, including Showtime Networks Inc., MTV Networks,
Comedy Central and USA Networks. The agreements required VII Cable to pay
license fees based upon the number of customers receiving the service.
Affiliate license fees incurred and paid under these agreements were
$19,858,000, $30,694,000 and $28,582,000 for the seven months ended July
31, 1996 and the years ended December 31, 1995 and 1994, respectively. In
addition, cooperative advertising expenses charged to affiliated companies
were $364,000, $1,350,000 and $1,181,000 for the seven months ended July
31, 1996 and the years ended December 31, 1995 and 1994, respectively.
(continued)
II-28
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Notes to Financial Statements
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,
$46,363,000 and $35,681,000 during the seven months ended July 31, 1996 and
the years ended December 31, 1995 and 1994, 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.
Pacific recorded $3,079,000 of interest expense for the five months ended
December 31, 1996 related to debt payable 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. No gain or loss was recognized in
connection with the Transfer.
(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 $2,771,000, $4,454,000,
$7,704,000 and $7,670,000 during the five months ended December 31, 1996,
the seven months ended July 31, 1996 and the years ended December 31, 1995
and 1994, respectively.
Future minimum lease payments under noncancellable operating leases for
each of the next five years are summarized as follows (amounts in
thousands):
Years ending
December 31,
------------
1997 $1,675
1998 1,085
1999 805
2000 620
2001 427
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.
During July 1991, VII Cable received reassessments from ten California
counties of its real and personal property, related to a June 1987
acquisition, which could result in substantially higher California property
tax liabilities. VII Cable is appealing the reassessments. At July 31,
1996, VII Cable had paid $44,083,000 related to real and personal property
taxes which were, along with any potential future liability related to
periods prior to July 31, 1996, transferred to New VII on July 31, 1996 as
part of the First Distribution.
(continued)
II-29
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Notes to Financial Statements
In the ordinary course of business, VII Cable entered into long-term
affiliation agreements with programming services which required that VII
Cable carry and pay for programming and meet certain performance
requirements.
(13) Quarterly Financial Information (Unaudited)
-------------------------------------------
VII Cable Pacific
------------------------- ----------------------
1 month 2 months
1st 2nd ended ended 4th
Quarter Quarter July 31 September 30 Quarter
------- ------- ------- ------------ -------
amounts in thousands
1996
----
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)
VII Cable
----------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
amounts in thousands
1995
----
Revenue 107,381 111,211 119,617 109,997
Operating income 19,750 21,969 24,124 21,019
Net earnings (loss) 19,634 3,977 4,243 5,860
II-30
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" or the "Company"), their birth dates, a
description of their business experience and positions held with the Company as
of March 12, 1997. All officers are appointed for an indefinite term, serving
at the pleasure of the Board of Directors.
Name Positions
- --------------------------- ---------------------------------------------------
Leo J. Hindery, Jr. President and director of Pacific since March
Born October 31, 1947 1997. In March of 1997, Mr. Hindery joined
Tele-Communications, Inc. ("TCI") as its
President. Mr. Hindery was previously founder,
Managing General Partner and Chief Executive
Officer of InterMedia Partners and its affiliated
entities since 1988. Mr. Hindery was also named
President and a director of TCI Communications,
Inc. ("TCIC") in March of 1997.
John C. Malone Director of Pacific since July, 1996. Director of
Born March 7, 1941 TCIC since 1973; Chief Executive Officer of TCIC
from March of 1992 to October of 1994 and
President of TCIC from 1973 to October of 1994;
TCI director since June of 1994; Chairman of the
Board of TCI from November of 1996; Chief
Executive Officer of TCI since January of 1994;
President of TCI from January 1994 through March
of 1997; is President and a director of many of
TCI's subsidiaries; also a director of BET
Holdings, Inc., The Bank of New York and TCI
Satellite Entertainment, Inc. Chairman of the
Board and a director of Tele-Communications
International, Inc. ("International") since May
1995.
Donne F. Fisher Director of Pacific since July, 1996. Director of
Born May 24, 1938 TCIC since 1980 and of TCI since June of 1994.
Executive Vice President of TCIC from December of
1991 to October of 1994; was previously Senior
Vice President of TCIC since 1982 and Treasurer
since 1970; Executive Vice President of TCI from
January of 1994 through January 1, 1996. On
January 1, 1996, Mr. Fisher resigned his position
of Executive Vice President of TCI; Mr. Fisher
has provided consulting services to TCI since
January, 1996; also a director of General
Communication, Inc., DMX Inc. and United Video
Satellite Group, Inc.
Brendan R. Clouston Senior Vice President and Chief Financial Officer
Born April 28, 1953 of Pacific from March 1997. Previously a director
and President of Pacific from July, 1996 to March
of 1997. Senior Vice President and Chief
Financial Officer of TCIC from March 1997;
President and Chief Executive Officer of TCIC from
October of 1994 to March of 1997; Executive Vice
President and Chief Operating Officer of TCIC from
March of 1992 to October of 1994; previously
Senior Vice President of TCIC since December of
1991; Executive Vice President of TCI since
January of 1994; named Chief Financial Officer of
TCI in March 1997.
(continued)
III-1
Name Positions
- --------------------------- ---------------------------------------------------
Stephen M. Brett Senior Vice President and Secretary of Pacific
Born September 20, 1940 since July, 1996. Appointed Senior Vice President
and General Counsel of TCIC as of December of
1991. Executive Vice President, General Counsel
and Secretary of TCI since January of 1994. Vice
President and Secretary and a director of most of
TCI's subsidiaries.
Gary K. Bracken Senior Vice President of Pacific since July, 1996.
Born July 29, 1939 Controller of TCIC since 1969. Appointed Senior
Vice President of TCIC in December of 1991. Was
named Vice President and Principal Accounting
Officer of TCIC in 1982.
Bernard W. Schotters Senior Vice President and Treasurer of Pacific
Born November 25, 1944 since July, 1996. Appointed Senior Vice
President-Finance and Treasurer of TCIC in
December of 1991. Was appointed Vice
President-Finance of TCIC in 1984. Vice President
and Treasurer of most of TCI's subsidiaries.
Mr. Barry P. Marshall was Executive Vice President of Pacific since July,
1996. Mr. Marshall was Executive Vice President and Chief Operating Officer of
TCIC from October of 1994 through March, 1997. In March of 1997, Mr. Marshall
resigned his positions with the Company. Mr. Marshall was Executive Vice
President and Chief Operating Officer of TCI Cable Management Corporation,
TCIC's primary operating subsidiary, from March of 1992 through January 1, 1994,
where he directly oversaw all of TCIC's regional operating divisions. From
March of 1986 to March of 1992, was Vice President and Chief Operating Officer
of TCIC's largest regional operating division.
During the past five years, none of the above persons have had any
involvement in such legal proceedings as would be material to an evaluation of
his ability or integrity.
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
Pacific's officers and directors, and persons who own more than ten percent 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 review of the copies of such Forms 3, 4 and 5 and
amendments thereto furnished to Pacific with respect to its most recent fiscal
year, or written representations that no Forms 5 were required, Pacific believes
that, during the year ended December 31, 1996, none of the Section 16(a) filing
requirements applicable to its officers, directors and greater than ten-percent
beneficial owners were filed. However, Messrs. Hindery, Malone, Fisher,
Clouston, Brett, Bracken and Schotters each filed one report subsequent to
December 31, 1996 reflecting no ownership interest in the Company. Mr. Marshall
did not file a report with respect to his ownership in the Company prior to his
resignation. The Company believes, however, that Mr. Marshall had no ownership
interest in the Company.
III-2
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 the Company, and will not receive any additional
compensation from the Company or otherwise for their services to the Company.
The Company will not reimburse TCI for any compensation paid by TCI to its
officers and directors but instead is allocated a comprehensive management fee
for all services provided.
There are no arrangements whereby any of Pacific's directors received
compensation for services as a director during 1996.
The members of TCI's compensation committee are Messrs. Robert A. Naify,
John W. Gallivan and Paul A Gould, all directors of TCI. Pacific has no
separate compensation committee, and compensation decisions relative to Pacific
are determined by TCI's compensation committee.
Dr. Malone is a director of Pacific and is Chairman of the Board and a
member of the compensation committee of International.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- ------- --------------------------------------------------------------
(a) Security ownership of certain beneficial owners. TCI Pacific
-----------------------------------------------
Communications, Inc. has authorized 6,257,961 shares of Class A common stock
("Class A Stock"), none of which is issued and outstanding. Pacific has
authorized 100 shares of Class B common stock ("Class B Stock"), all of which
was held by TCI Communications, Inc. at January 31, 1997. Additionally, Pacific
has authorized and has issued 6,257,961 shares of 5% Class A Senior Cumulative
Exchangeable Preferred Stock (the "Exchangeable Preferred Stock"). So far as is
known to the Company, no person owns beneficially more than 5% of the
Exchangeable Preferred Stock.
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 will, without further action, be
increased by two to permit the holders of the shares of Exchangeable Preferred
Stock, voting separately as a class (with the holders of all other shares of
parity stock upon which like voting rights have been conferred and are
exercisable) to elect by a plurality vote two directors, until such time as all
dividends in arrears on the Exchangeable Preferred Stock are paid in full or
(ii) if Pacific seeks to (a) amend, alter or repeal (by merger or otherwise) any
provision of the Amended and Restated Certificate of Incorporation so as to
affect adversely the specified rights, preferences, privileges or voting rights
of holders of shares of the Exchangeable Preferred Stock, (b) issue additional
shares of Exchangeable Preferred Stock, (c) create or issue any class or series
of senior stock or (d) effect any reclassification of the Exchangeable Preferred
Stock (other than a reclassification that solely seeks to change the designation
of the Exchangeable Preferred Stock and does not adversely affect the powers,
preferences or rights of the holders of shares of Exchangeable Preferred Stock
outstanding immediately prior to such reclassification), in each of which event
specified in this clause (ii) the affirmative vote or consent of at least 66
2/3% of shares of Exchangeable Preferred Stock then outstanding, voting or
consenting, as the case may be, separately as one class, would be required.
(continued)
III-3
(b) Security ownership of management. The following table sets forth, as
--------------------------------
of January 31, 1996, information with respect to the ownership of Pacific's
issued equity securities (Class B Stock and Exchangeable Preferred Stock),
ownership of TCIC's equity securities (TCIC Class A common stock ("TCIC Class A
Stock"), TCIC Class B common stock ("TCIC Class B Stock") and TCIC Cumulative
Exchangeable Preferred Stock, Series A ("TCIC Series A Preferred Stock")) and
ownership of TCI's equity securities (Tele-Communications, Inc. Series A TCI
Group common stock ("TCI Group Series A Stock"), Tele-Communications, Inc.
Series B TCI Group common stock ("TCI Group Series B Stock"), Tele-
Communications, Inc. Series A Liberty Media Group common stock ("Liberty Group
Series A Stock"), Tele-Communications, Inc. Series B Liberty Media Group common
stock ("Liberty Group Series B Stock"), Class B 6% Cumulative Redeemable
Exchangeable Junior Preferred Stock ("Class B Preferred Stock"), Convertible
Preferred Stock, Series C ("Series C Preferred Stock"), Redeemable Convertible
TCI Group Preferred Stock, Series G ("Series G Preferred Stock") and Redeemable
Convertible Liberty Media Group Preferred Stock, Series H ("Series H Preferred
Stock")), by all directors of Pacific, and by all executive officers and
directors of Pacific as a group. Shares issuable upon exercise or vesting of
convertible securities or 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. The number of TCI Group Series A
Stock, TCI Group Series B Stock, Liberty Group Series A Stock and Liberty Group
Series B Stock in the table include interests of the named directors or of
members of the group of directors and executive officers in shares held by the
trustee of TCI's Employee Stock Purchase Plan ("ESPP") and shares held by the
trustee of United Artists Entertainment, Inc.'s Employee Stock Ownership Plan
for their respective accounts. 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 by the trustee of TCI's ESPP for the benefit of
such person, which shares are voted at the discretion of the trustee.
(continued)
III-4
Name of Amount and Nature Percent Voting
Title of Class Beneficial Owner of Beneficial Ownership of Class(1) Power(1)
-------------- ---------------- ----------------------- ----------- --------
Class B John C. Malone -- -- --
Exchangeable
Pref. -- --
TCIC Class A -- -- --
TCIC Class B -- --
TCIC Series A
Pref. -- --
TCI Group
Series A 2,172,711 (2) * 16.9%
TCI Group
Series B 25,287,083 (3)(4) 29.9%
Liberty Group
Series A 3,929,209 (2) 1.7%
Liberty Group
Series B 6,349,270 (3)(4) 30.0%
Class B Pref. 306,000 (3) 18.9%
Series C Pref. -- --
Series G Pref. -- --
Series H Pref. -- --
Class B Donne F. Fisher, -- -- --
Exchangeable individually and
Pref. as co-personal -- --
TCIC Class A representative of -- -- --
TCIC Class B the Estate of -- --
TCIC Series A Bob Magness
Pref. -- --
TCI Group
Series A 4,110,680 (5)(6) * 20.8%
TCI Group
Series B 31,034,936 (5) 36.7%
Liberty Group
Series A 5,423,725 (5)(6) 2.4%
Liberty Group
Series B 7,758,734 (5) 36.6%
Class B Pref. 129,299 (5) 8.0%
Series C Pref. -- --
Series G Pref. -- --
Series H Pref. -- --
(continued)
III-5
Name of Amount and Nature Percent Voting
Title of Class Beneficial Owner of Beneficial Ownership of Class(1) Power(1)
-------------- ---------------- ----------------------- ----------- --------
Class B Brendan R. Clouston -- -- --
Exchangeable
Pref. -- --
TCIC Class A -- -- --
TCIC Class B -- --
TCIC Series A
Pref. -- --
TCI Group
Series A 1,986,496 (7) * *
TCI Group
Series B 230 *
Liberty Group
Series A 332,462 (7) *
Liberty Group
Series B 57 *
Class B Pref. -- *
Series C Pref. -- --
Series G Pref. -- --
Series H Pref. -- --
Class B All directors and -- -- --
Exchangeable executive officers
Pref. as a group -- --
TCIC Class A (7 persons) -- -- --
TCIC Class B -- --
TCIC Series A
Pref. -- --
TCI Group
Series A 10,770,725 (5)(8) 1.8% 37.8%
TCI Group
Series B 56,326,965 (3)(4)(5) 66.5%
Liberty Group
Series A 10,454,690 (3)(5)(8) 4.5%
Liberty Group
Series B 14,109,240 (3)(4)(5) 66.6%
Class B Pref. 437,131 (3)(5) 27.0%
Series C Pref. -- --
Series G Pref. -- --
Series H Pref. -- --
- -------------------------
* Less than one percent.
(1) Based on 100 shares of Class B Stock, 6,257,961 shares of Exchangeable
Preferred Stock, 811,655 shares of TCIC Class A Stock, 94,447 shares of
TCIC Class B Stock, 4,600,000 shares of TCIC Series A Preferred Stock,
597,497,573 shares of TCI Group Series A Stock (after elimination of shares
of TCI held by subsidiaries of TCI), 84,647,065 shares of TCI Group Series
B Stock, 228,558,926 shares of Liberty Group Series A Stock, 21,187,969
shares of Liberty Group Series B Stock, 1,620,026 shares of Class B
Preferred Stock, 70,575 shares of Series C Preferred Stock, 6,693,177
shares of Series G Preferred Stock and 6,693,177 shares of Series H
Preferred Stock outstanding on January 31, 1996.
(continued)
III-6
(2) Assumes the exercise in full of stock options granted in tandem with stock
appreciation rights in November of 1992 to acquire 1,000,000 shares of TCI
Group Series A Stock and 375,000 shares of Liberty Group Series A Stock.
Options to acquire 800,000 and 300,000 shares of TCI Group Series A Stock
and Liberty Group Series A Stock, respectively, are currently exercisable.
Additionally assumes the exercise in full of stock options granted in
tandem with stock appreciation rights in December of 1995 to acquire
1,000,000 shares of TCI Group Series A Stock and 375,000 shares of Liberty
Group Series A Stock. Options to acquire 200,000 shares of TCI Group
Series A Stock and 75,000 shares of Liberty Group Series A Stock are
currently exercisable.
(3) Includes 1,173,000 shares of TCI Group Series B Stock, 146,625 shares of
Liberty Group Series A Stock, 293,250 shares of Liberty Group Series B
Stock and 6,900 shares of Class B Preferred Stock held by Dr. Malone's
wife, Mrs. Leslie Malone, but Dr. Malone has disclaimed any beneficial
ownership of such shares.
(4) Pursuant to a letter agreement, dated June 17, 1988, the late Mr. Bob
Magness and Kearns - Tribune Corporation each agreed with Dr. Malone that
prior to making a disposition of a significant portion of their respective
holdings of TCI Group Series B Stock or Liberty Group Series B Stock, he or
it would first offer Dr. Malone the opportunity to purchase such shares.
(5) Mr. Fisher, as co-personal representative of the Estate of Bob Magness, is
deemed the beneficial owner of all shares of TCI Group Series A Stock, TCI
Group Series B Stock, Liberty Group Series A Stock Liberty Group Series B
Stock and Class B Preferred Stock held of record by the Estate of Bob
Magness. The number of shares held by Mr. Fisher includes 1,524,315 shares
of TCI Group Series A Stock, 30,785,864 shares of TCI Group Series B Stock,
4,419,304 shares of Liberty Group Series A Stock, 7,696,466 shares of
Liberty Group Series B Stock and 125,000 shares of Class B Preferred Stock
of which Mr. Fisher is deemed beneficial owner as co-personal
representative. Additionally, assumes the exercise in full by the Estate
of Bob Magness of stock options granted in tandem with stock appreciation
rights to Mr. Bob Magness in November of 1992 to acquire 1,000,000 shares
of TCI Group Series A Stock and 375,000 shares of Liberty Group Series A
Stock. Additionally assumes the exercise in full by the Estate of Bob
Magness of stock options granted in tandem with stock appreciation rights
to Mr. Bob Magness in December of 1995 to acquire 1,000,000 shares of
Series A Stock and 375,000 shares of Liberty Series A Stock. All such
options are currently exercisable.
(6) Assumes the exercise in full of stock options granted in tandem with stock
appreciation rights to Mr. Fisher in November of 1994 to acquire 200,000
shares of TCI Group Series A Stock and 75,000 shares Liberty Group Series A
Stock. Options to acquire 80,000 shares of TCI Group Series A Stock and
30,000 shares of Liberty Group Series A Stock are currently exercisable.
Additionally assumes the exercise in full of options granted to Mr. Fisher
in January 1996, pursuant to the Director Stock Option Plan, to acquire
50,000 shares of TCI Group Series A Stock and 18,750 shares of Liberty
Group Series A Stock. Options to acquire 10,000 shares of Series A Stock
and 3,750 shares of Liberty Series A Stock are currently exercisable.
(continued)
III-7
(7) Assumes the exercise in full of stock options granted in tandem with stock
appreciation rights in November of 1992 to acquire 300,000 shares of TCI
Group Series A Stock and 112,500 shares of Liberty Group Series A Stock.
Options to acquire 200,000 shares of TCI Group Series A Stock and 75,000
shares of Liberty Group Series A Stock are currently exercisable.
Additionally assumes the exercise in full of stock options granted in
tandem with stock appreciation rights in November of 1993 to acquire
375,000 shares of TCI Group Series A Stock and 140,625 shares of Liberty
Group Series A Stock. Options to acquire 250,000 shares of TCI Group
Series A Stock and 93,750 shares of Liberty Group Series A Stock are
currently exercisable. Also assumes the exercise in full of stock options
granted in tandem with stock appreciation rights in November of 1994 to
acquire 200,000 shares of TCI Group Series A Stock and 75,000 shares of
Liberty Group Series A Stock. Options to acquire 80,000 shares of TCI
Group Series A Stock and 30,000 shares of Liberty Group Series A Stock are
currently exercisable. Assumes the exercise in full of stock options
granted in tandem with stock appreciation rights in December of 1995 to
purchase 1,000,000 shares of TCI Group Series A Stock. Options to acquire
200,000 shares of TCI Group Series A Stock are currently exercisable.
Additionally assumes the vesting in full of 100,000 shares of TCI Group
Series A restricted stock. None of the stock is currently vested.
(8) Certain executive officers and directors of Pacific (6 persons, including
Messrs. Malone and Clouston) hold options which were granted in tandem with
stock appreciation rights in November of 1992, to acquire an aggregate of
1,750,000 shares of Series A Stock and an aggregate of 656,250 shares of
Liberty Series A Stock at adjusted purchase prices of $10.75 per share and
$11.16 per share, respectively. Options to acquire 1,360,000 shares of
Series A Stock and 510,000 shares of Liberty Series A Stock are currently
exercisable.
Additionally, certain executive officers (5 persons including Mr. Clouston)
hold stock options granted in tandem with stock appreciation rights in
October and November of 1993 to acquire an aggregate of 825,000 shares of
Series A Stock and an aggregate of 309,375 shares of Liberty Series A Stock
at adjusted purchase prices of $10.75 per share and $11.16 per share,
respectively. Options to acquire 587,500 shares of Series A Stock and
220,313 shares of Liberty Series A Stock are currently exercisable.
Also, certain executive officers and directors (6 persons including Messrs.
Clouston and Fisher) hold stock options which were granted in tandem with
stock appreciation rights in November of 1994 to acquire an aggregate of
800,000 shares of Series A Stock and an aggregate of 300,000 shares of
Liberty Series A Stock at adjusted purchase prices of $14.19 per share and
$14.67 per share, respectively. Options to acquire 320,000 shares of
Series A Stock and 120,000 shares of Liberty Series A Stock are currently
exercisable.
Additionally, certain executive officers and directors (6 persons,
including Messrs. Malone and Clouston) hold stock options which were
granted, in tandem with stock appreciation rights in December of 1995 to
acquire an aggregate of 2,700,000 shares of Series A Stock at an adjusted
purchase price of $14.62 per share. Options to acquire 540,000 shares of
TCI Group Series A Stock are currently exercisable.
(continued)
III-8
Additionally, certain executive officers and directors (2 persons including
Dr. Malone) hold stock options which were granted, in tandem with stock
appreciation rights in December of 1995 to acquire an aggregate of 487,500
shares of Liberty Series A Stock at an adjusted purchase price of $16.00
per share. Options to acquire 97,500 shares of Liberty Group Series A
Stock are currently exercisable.
Also, certain executive officers (5 persons, including Mr. Clouston) hold
an aggregate of 190,000 shares of Series A restricted stock. None of the
shares are currently vested. One executive officer holds 15,000 shares of
Liberty Group restricted stock. None of the shares are currently vested.
Also, Mr. Fisher holds an option to purchase 50,000 shares of Series A
Stock and 18,750 shares of Liberty Series A Stock at purchase prices of
$16.99 per share and $16.83 per share, respectively. Options to purchase
10,000 shares of Series A Stock and 3,750 shares of Liberty Series A Stock
are currently exercisable.
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 the Company, other than
directors' qualifying shares, are owned by any of the Company's executive
officers or directors.
(c) Change of control. The Company knows of no arrangements, including any
-----------------
pledge by any person of securities of the Company, the operation of which may at
a subsequent date result in a change in control of the Company.
Item 13. Certain Relationships and Related Transactions.
- ------- ----------------------------------------------
(a) Transactions with management and others.
---------------------------------------
A consolidated subsidiary of Liberty, Home Shopping Network, Inc. pays a
commission to Pacific for merchandise sales to customers who are subscribers of
Pacific's cable systems. Aggregate commissions to Pacific were $812,000 for the
year ended December 31, 1996.
Pacific purchases, at TCIC's cost, certain pay television and other
programming through a certain indirect subsidiary of TCIC. Charges for such
programming were $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, TCIC provides certain facilities, services and
personnel to Pacific. The scope of the facilities, personnel and services to
Pacific and the respective charges payable in respect thereof are set forth in a
services agreement entered into among TCI, TCIC, and Pacific (the "Services
Agreement"). Pursuant to the Services Agreement, TCIC provides to Pacific
administrative and operational services necessary for the conduct of its
business, including, but not limited to, such services as are generally
performed by TCIC's accounting, finance, corporate, legal and tax departments.
In addition, TCIC makes available to Pacific such general overall management
services and strategic planning services as TCIC and Pacific have agreed, and
provides Pacific with such access to and assistance from TCIC engineering and
construction groups and TCIC's programming and technology/venture personnel at
Pacific's request.
III-9
The Services Agreement also provides that, for so long as TCIC continues to
beneficially own shares of Pacific's common stock representing at least a
majority in voting power of the outstanding shares of capital stock of Pacific
entitled to vote generally in the election of directors, TCIC will continue to
provide in the same manner, and on the same basis as is generally provided from
time to time to other participating TCIC subsidiaries, benefits and
administrative services to Pacific's employees. In this regard, Pacific is
allocated that portion of TCIC's compensation expense attributable to benefits
extended to employees of Pacific.
Pursuant to the Services Agreement, Pacific reimburses TCIC for all direct
expenses incurred by TCIC in providing such services and a pro rata share of all
indirect expenses incurred by TCIC in connection with the rendering of such
services, including a pro rata share of the salary and other compensation of
TCIC employees performing services for Pacific and general overhead expenses.
Charges for expenses incurred in connection with the Services Agreement were
$7,982,000 during the five months ended December 31, 1996, and are included in
selling, general and administrative expenses in the accompanying financial
statements. The obligations of TCIC to provide services under the Services
Agreement (other than TCIC's obligation to allow Pacific's employees to
participate in TCIC's employee benefit plans) will continue in effect until
terminated by any party to the Services Agreement at any time on not less than
60 days' notice.
Prior to the Acquisition, Viacom Inc. ("Viacom") provided Viacom
International Inc. ("VII Cable") with certain general services, including
insurance, legal, financial and other corporate functions. Charges for these
services were made primarily based on the average of certain specified ratios of
revenues, operating income and net assets. Management believes that the
methodologies used to allocate these charges were reasonable. The charges for
such services were $5,750,000, $13,492,000 and $16,849,000 for the seven months
ended July 31, 1996 and the years ended December 31, 1995 and 1994,
respectively, and are included in selling, general and administrative expenses
in the accompanying financial statements.
Prior to the Acquisition, VII Cable, through the normal course of business,
was involved in transactions with companies owned by or affiliated with Viacom.
VII Cable had agreements to distribute television programs of such companies,
including Showtime Networks Inc., MTV Networks, Comedy Central and USA Networks.
The agreements required VII Cable to pay license fees based upon the number of
customers receiving the service. Affiliate license fees incurred and paid under
these agreements were $19,858,000, $30,694,000 and $28,582,000 for the seven
months ended July 31, 1996 and the years ended December 31, 1995 and 1994,
respectively. In addition, cooperative advertising expenses charged to
affiliated companies were $364,000, $1,350,000 and $1,181,000 for the seven
months ended July 31, 1996 and the years ended December 31, 1995 and 1994,
respectively.
In addition to the interest expense recorded by Viacom International Inc.
on borrowings under a $311 million credit agreement and a $1.7 billion credit
agreement, Viacom allocated to VII Cable interest expense of $26,019,000,
$46,363,000 and $35,681,000 during the seven months ended July 31, 1996 and the
years ended December 31, 1995 and 1994, 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.
Pacific recorded $3,079,000 of interest expense for the five months ended
December 31, 1996 related to debt payable 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. No gain or loss was recognized in connection with the Transfer.
III-10
The Company believes that the foregoing business dealings with
management during 1996 were based upon terms no less advantageous to Pacific
than those which would be available in dealing with unaffiliated persons.
(b) Certain business relationships
------------------------------
See Item 13(a) above.
(c) Indebtness of management
------------------------
None.
III-11
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' Report II-9
Balance Sheets,
December 31, 1996 and 1995 II-11
Statements of Operations,
Five months ended December 31, 1996,
seven months ended July 31, 1996,
years ended December 31, 1995 and 1994 II-12
Statements of Common Stockholder's Equity,
Five months ended December 31, 1996,
seven months ended July 31, 1996,
years ended December 31, 1995 and 1994 II-13 to II-14
Statements of Cash Flows,
Five months ended December 31, 1996,
seven months ended July 31, 1996,
years ended December 31, 1995 and 1994 II-15
Notes to Financial Statements,
December 31, 1996, 1995 and 1994 II-16 to II-30
IV-1
(a) (2) Financial Statement Schedules
-----------------------------
Included in Part IV of this Report:
Financial Statement Schedules required to be filed: Page No.
--------
Independent Auditors' Report IV-5
Schedule I - Condensed Information as to the
Financial Position of the Registrant, December 31, 1996
Condensed Information as to the Operations
and Cash Flows of the Registrant, Five months ended
December 31, 1996 IV-6 to IV-8
Schedule II - Valuation and Qualifying Accounts,
Five months ended December 31, 1996,
seven months ended July 31, 1996, years ended
December 31, 1995 and 1994 IV-9
IV-2
(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.
3.2 Bylaws, adopted as of July 31, 1996.
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.
21 - Subsidiaries of TCI Pacific Communications, Inc.
27 - Financial data schedule
IV-3
(b) Reports on Form 8-K filed during the quarter ended December 31, 1996:
None.
IV-4
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Stockholders
TCI Pacific Communications, Inc.:
Under date of March 24, 1997, we reported on the consolidated balance sheet of
TCI Pacific Communications, Inc. and subsidiaries (a subsidiary of TCI
Communications, Inc.) as of December 31, 1996, and the related consolidated
statements of operations, common stockholder's equity, and cash flows for the
five months ended December 31, 1996, which are included in the December 31, 1996
annual report on Form 10-K. In connection with our audit of the aforementioned
consolidated financial statements, we also audited the related consolidated
financial statement schedules, Schedule I as and for the five months ended
December 31, 1996 and Schedule II for the five months ended December 31, 1996,
as listed in the accompanying index. These financial statement schedules are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statement schedules based on our audit.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Denver, Colorado
March 24, 1997
IV-5
Schedule I
----------
Page 1 of 3
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Condensed Information as to the
Financial Position of the Registrant
December 31, 1996
(amounts in thousands)
Assets
- ------
Restricted cash 33,664
Investments in and advances to consolidated
susidiaries - eliminated upon consolidation $1,135,332
----------
1,168,996
==========
Common Stockholder's equity
- --------------------------
Exchangeable preferred stock 629,801
Common stockholder's equity (see detail on
page II-11) 539,195
----------
$1,168,996
==========
IV-6
Schedule I
----------
Page 2 of 3
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Condensed Information as to the
Operations of the Registrant
Five months ended December 31, 1996
(amounts in thousands)
Selling, general and administrative expenses $ (12)
-------
Loss from operations before share of losses
of consolidated subsidiaries (12)
Share of losses of consolidated subsidiaries (2,440)
-------
Net loss $(2,452)
=======
Dividend requirement on
exchangeable preferred stock (13,079)
-------
Net loss attributable to common
stockholder $(15,531)
========
IV-7
Schedule I
----------
Page 3 of 3
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Condensed Information as to
Cash Flows of the Registrant
Five months ended December 31, 1996
(amounts in thousands)
Cash flows from operating activities:
Loss before share of losses of consolidated
subsidiaries $(12)
----
Net cash used in operating activities (12)
----
Cash flows from investing activities:
Reduction in investments in and advances
to consolidated subsidiaries,
net 6,117
------
Net cash provided by investing activities 6,117
------
Cash flows from financing activities:
Payment of preferred stock dividends (9,074)
------
Net cash used in financing activities (9,074)
------
Decrease in cash (2,969)
Cash at beginning of year 36,633
------
Cash at end of year $33,664
======
See also note 4 to the consolidated financial statements.
IV-8
Schedule II
-----------
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Valuation and Qualifying Accounts
Five months ended December 31, 1996,
seven months ended July 31, 1996,
years ended December 31, 1995 and 1994
Additions Deductions
---------- ----------
Balance at Charged to Write-offs Balance
beginning profit net of at end
Description of year and loss recoveries of year
- ----------- ---------- ---------- ---------- -------
amounts in thousands
Pacific
- -------
Five months ended December 31, 1996:
Allowance for doubtful
receivables - trade $1,826 3,240 3,011 2,055
====== ===== ===== =====
- ------------------------------------------------------------------------------------
VII Cable
- ---------
Seven months ended July 31, 1996:
Allowance for doubtful
receivables - trade $1,689 4,653 4,516 1,826
====== ===== ===== =====
Year ended December 31, 1995:
Allowance for doubtful
receivables - trade $1,251 7,362 6,924 1,689
====== ===== ===== =====
Year ended December 31, 1994:
Allowance for doubtful
receivables - trade $1,791 6,178 6,718 1,251
====== ===== ===== =====
IV-9
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
Dated: March 28, 1997
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.
Signature Title Date
--------- ----- ----
/s/ John C. Malone Director March 28, 1997
- -------------------------
John C. Malone
/s/ Leo J. Hindery, Jr. President and Director March 28, 1997
- -------------------------
Leo J. Hindery, Jr.
/s/ Donne F. Fisher Director March 28, 1997
- -------------------------
Donne F. Fisher
/s/ Stephen M. Brett Senior Vice President March 28, 1997
- ------------------------- and Secretary
Stephen M. Brett
/s/ Brendan R. Clouston Senior Vice President and March 28, 1997
- ------------------------- Chief Financial Officer
Brendan R. Clouston (Principal Financial Officer)
/s/ Gary K. Bracken Senior Vice President March 28, 1997
- ------------------------- (Principal Accounting Officer)
Gary K. Bracken
IV-10
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 - Articles of Incorporation and Bylaws:
3.1 Restated Certificate of Incorporation, dated as of July 31, 1996.
3.2 Bylaws, adopted as of July 31, 1996.
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.
21 - Subsidiaries of TCI Pacific Communications, Inc.
27 - Financial data schedule