1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
F O R M 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 1-9554
TCI PACIFIC COMMUNICATIONS, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
State of Delaware 04-2980402
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5619 DTC Parkway
Englewood, Colorado 80111
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 267-5500
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
----- -----
All of the Registrant's common stock is owned by TCI Communications,
Inc. The number of shares outstanding of the Registrant's common stock as of
July 31, 1997 was:
Class A Common Stock - 0 shares.
Class B Common Stock - 100 shares.
2
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Consolidated Balance Sheets
(unaudited)
June 30, December 31,
1997 1996
--------------- ---------------
Assets amounts in thousands
- ------
Restricted cash (note 1) $ -- 33,664
Trade and other receivables, net 16,077 18,986
Prepaid expenses 1,954 6,144
Property and equipment, at cost:
Land 5,807 5,795
Distribution systems 367,945 348,949
Support equipment and buildings 35,948 35,812
--------------- ---------------
409,700 390,556
Less accumulated depreciation 33,120 11,373
--------------- ---------------
376,580 379,183
--------------- ---------------
Franchise costs 3,042,372 3,015,246
Less accumulated amortization 68,680 30,773
--------------- ---------------
2,973,692 2,984,473
--------------- ---------------
Other assets, at cost, net of amortization 17,311 18,111
--------------- ---------------
$ 3,385,614 3,440,561
=============== ===============
Liabilities and Common Stockholder's Equity
- --------------------------------------------
Cash overdraft $ 18,201 9,736
Accounts payable 2,708 3,490
Accrued expenses:
Accrued franchise fees 6,510 8,663
Accrued property tax expense 2,104 2,549
Accrued programming expense 523 2,331
Other 10,261 16,465
--------------- ---------------
19,398 30,008
--------------- ---------------
Subscriber advance payments 2,779 2,727
Debt (note 5) 966,529 1,151,884
Deferred income taxes 1,057,124 1,073,340
Other liabilities 413 380
--------------- ---------------
Total liabilities 2,067,152 2,271,565
--------------- ---------------
Exchangeable Preferred Stock (notes 1 and 6) 629,739 629,801
Common stockholder's equity:
Class A common stock, $1 par value.
Authorized 6,257,961 shares;
no shares issued and outstanding -- --
Class B common stock, $.01, par value.
Authorized 100 shares;
issued and outstanding 100 shares -- --
Additional paid-in capital 322,180 336,921
Accumulated deficit -- (2,452)
--------------- ---------------
322,180 334,469
Due to TCI Communications, Inc. ("TCIC") (note 7) 366,543 204,726
--------------- ---------------
Total common stockholder's equity 688,723 539,195
--------------- ---------------
Commitments (note 8) $ 3,385,614 3,440,561
=============== ===============
See accompanying notes to financial statements.
I-1
3
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Statements of Operations
(unaudited)
Pacific VII Cable
(note 2) (note 2)
------------------- ------------------
Three months Three months
ended ended
June 30, June 30,
1997 1996
------------------- ------------------
amounts in thousands
Revenue $ 127,443 | 121,348
|
Operating costs and expenses: |
Operating (note 7) 43,984 | 45,954
Selling, general and administrative (note 7) 23,991 | 28,926
Depreciation 9,520 | 17,675
Amortization 18,914 | 4,541
------------------- | ------------------
96,409 | 97,096
------------------- | -------------------
|
Operating income 31,034 | 24,252
|
Other income (expense): |
Interest expense: |
TCIC (note 7) (5,639) | (11,512)
Other (19,048) | (533)
------------------- | ------------------
(24,687) | (12,045)
Other, net (50) | 301
------------------- | ------------------
(24,737) | (11,744)
------------------- | ------------------
|
Earnings before income taxes 6,297 | 12,508
|
Income tax expense (1,654) | (7,094)
------------------- | ------------------
|
Net earnings 4,643 | 5,414
| ==================
|
Dividend requirement on Exchangeable |
Preferred Stock (7,822) |
------------------- |
|
Net loss attributable to common |
stockholder $ (3,179) |
=================== |
See accompanying notes to financial statements.
I-2
4
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Statements of Operations
(unaudited)
Pacific VII Cable
(note 2) (note 2)
------------------- -------------------
Six months Six months
ended ended
June 30, June 30,
1997 1996
------------------- -------------------
amounts in thousands
Revenue 252,395 | 239,669
|
Operating costs and expenses: |
Operating (note 7) 86,504 | 92,013
Selling, general and administrative (note 7) 51,405 | 58,781
Depreciation 21,842 | 34,994
Amortization 38,254 | 9,082
------------------- | -------------------
198,005 | 194,870
------------------- | -------------------
|
Operating income 54,390 | 44,799
|
Other income (expense): |
Interest expense: |
TCIC (note 7) (10,168) | (22,933)
Other (39,826) | (1,070)
------------------- | -------------------
(49,994) | (24,003)
Interest income 405 | --
Other, net (50) | 161
------------------- | ------------------
(49,639) | (23,842)
------------------- | ------------------
|
Earnings before income taxes 4,751 | 20,957
|
Income tax expense (1,583) | (12,153)
------------------- | ------------------
|
Net earnings 3,168 | 8,804
| ==================
|
Dividend requirement on Exchangeable |
Preferred Stock (15,457) |
------------------- |
|
Net loss attributable to common |
stockholder (12,289) |
=================== |
See accompanying notes to financial statements.
I-3
5
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Statement of Common Stockholder's Equity
(unaudited)
Common stock Additional
-------------------- paid-in Accumulated Due to Total
Class A Class B capital deficit TCIC equity
--------- ------- --------- --------- --------- ---------
amounts in thousands
Balance at January 1, 1997 $ -- -- 336,921 (2,452) 204,726 539,195
Net earnings -- -- -- 3,168 -- 3,168
Accreted dividends on Exchangeable Preferred
Stock -- -- (14,741) (716) -- (15,457)
Allocation of programming charges from TCIC
(note 7) -- -- -- -- 60,457 60,457
Allocation of expenses in connection with the
Services Agreement (note 7) -- -- -- -- 6,659 6,659
Intercompany income tax allocation -- -- -- -- 17,773 17,773
Net cash transfers from TCIC -- -- -- -- 76,928 76,928
--------- ------- --------- --------- --------- ---------
Balance at June 30, 1997 $ -- -- 322,180 -- 366,543 688,723
========= ======= ========= ========= ========= =========
See accompanying notes to financial statements.
I-4
6
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(see notes 1 and 2)
Statements of Cash Flows
(unaudited)
Pacific VII Cable
(note 2) (note 2)
------------- -------------
Six months Six months
ended ended
June 30, June 30,
1997 1996
------------- -------------
amounts in thousands
(see note 3)
Cash flows from operating activities:
Net earnings $ 3,168 | 8,804
Adjustments to reconcile net earnings to net cash provided by |
operating activities: |
Depreciation and amortization 60,096 | 44,076
Intercompany tax allocation 17,773 | --
Deferred income tax expense (benefit) (16,216) | 4,554
Other noncash credits -- | 62
Changes in operating assets and liabilities: |
Change in receivables 2,909 | 3,100
Change in accruals and payables (11,340) | 6,922
Change in prepaid expenses 4,190 | 1,356
------------- | -------------
|
Net cash provided by operating activities 60,580 | 68,874
------------- | -------------
|
Cash flows from investing activities: |
Capital expended for property and equipment (12,556) | (52,398)
Cash paid for acquisitions (35,210) | --
Other investing activities 1,532 | (3,021)
------------- | -------------
|
Net cash used in investing activities (46,234) | (55,419)
------------- | -------------
|
Cash flows from financing activities: |
Change in cash overdraft 8,465 | --
Repayments of debt (185,000) | --
Payment of preferred stock dividends (15,519) | --
Net cash transfers from TCIC 144,044 | --
Change in cash transfers from Viacom, Inc. -- | (11,466)
------------- | -------------
|
Net cash used in financing activities (48,010) | (11,466)
------------- | -------------
|
Net increase (decrease) in cash (33,664) | 1,989
|
Cash at beginning of period 33,664 | 2,294
------------- | -------------
|
Cash at end of period $ -- | 4,283
============= | =============
See accompanying notes to financial statements.
I-5
7
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
June 30, 1997
(unaudited)
(1) Acquisition and Related Transactions
On July 24, 1995, Viacom, Inc. ("Viacom"), Viacom International Inc.
(after giving effect to the First Distribution as defined below, "VII
Cable "), a wholly-owned subsidiary of Viacom, and Viacom
International Services Inc. ("New VII"), a wholly-owned subsidiary of
VII Cable, entered into certain agreements (the "Transaction
Agreements") with Tele- Communications, Inc. ("TCI") and TCIC, a
subsidiary of TCI, providing for, among other things, the conveyance
of Viacom International Inc.'s non-cable assets and liabilities to New
VII, the distribution of all of the common stock of New VII to Viacom
(the "First Distribution"), the Exchange Offer (as defined below) and
the issuance to TCIC of all of the Class B Common Stock of VII Cable.
On June 24, 1996, Viacom commenced an exchange offer (the "Exchange
Offer") pursuant to which Viacom shareholders had the option to
exchange shares of Viacom Class A or Class B Common Stock ("Viacom
Common Stock") for a total of 6,257,961 shares of VII Cable Class A
Common Stock. The Exchange Offer expired on July 22, 1996 with a
final exchange ratio of 0.4075 shares of VII Cable Class A Common
Stock for each share of Viacom Common Stock accepted for exchange.
Prior to the consummation of the Exchange Offer on July 31, 1996,
Viacom International Inc. entered into a $1.7 billion credit agreement
(the "Credit Agreement"). Proceeds from the Credit Agreement were
transferred by Viacom International Inc. to New VII as part of the
First Distribution. Immediately following the consummation of the
Exchange Offer, on July 31, 1996, TCIC, through a capital contribution
of $350 million in cash, purchased all of the shares of Class B Common
Stock of VII Cable (the "Acquisition"). At that time, VII Cable was
renamed TCI Pacific Communications, Inc. (together with its
consolidated subsidiaries, "Pacific") and the shares of Class A Common
Stock of VII Cable were converted into shares of 5% Class A Senior
Cumulative Exchangeable Preferred Stock (the "Exchangeable Preferred
Stock"). Proceeds from the $350 million capital contribution were
used to repay a portion of the Credit Agreement.
On October 13, 1995, TCIC (as buyer) and Prime Cable of Fort Bend,
L.P. and Prime Cable Income Partners, L.P. (as sellers) executed asset
and stock purchase and sale agreements (the "Houston Purchase
Agreements") providing for the sale of certain cable television
systems serving the greater Houston Metropolitan Area for a total base
purchase price of $301 million, subject to adjustments. On December
18, 1995, TCIC assigned all of its rights, remedies, title and
interest in, to and under the Houston Purchase Agreements to a
subsidiary of InterMedia Capital Partners IV, L.P. ("IMP"). On May 8,
1996, IMP consummated the transactions contemplated by the Houston
Purchase Agreements. In connection with the Acquisition, IMP
exchanged its Houston cable systems plus cash amounting to $36,633,000
(the "Exchange Cash") for VII Cable's Nashville cable system. The
Exchange Cash was escrowed for cable system acquisitions. In January
1997, Pacific used the Exchange Cash to purchase a cable system
serving approximately 20,000 subscribers in and around Boulder County,
Colorado.
(continued)
I-6
8
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
Pacific, through its subsidiaries and affiliates, is principally
engaged in the construction, acquisition, ownership, and operation of
cable television systems. Pacific operates its cable television
systems primarily in the following six geographic markets: the San
Francisco and Northern California area; Salem, Oregon; the Seattle,
Washington and Greater Puget Sound area; Houston, Texas; Boulder
County, Colorado; and Dayton, Ohio.
(2) Basis of Presentation
In the accompanying financial statements and in the following text,
references are made to VII Cable and Pacific. The period for the six
months ended June 30, 1996 reflects the carve-out historical results
of operations of the cable television business of Viacom and is
referred to as "VII Cable." The financial statements as of December
31, 1996 and June 30, 1997 and for the six months ended June 30, 1997
reflect the consolidated results of operations and financial condition
of Pacific and are referred to as "Pacific." The "Company" refers to
both Pacific and its predecessor entity, VII Cable.
The accompanying financial statements include the accounts of the
Company and all investments of more than 50% in subsidiaries in which
the Company has significant control. All significant intercompany
transactions have been eliminated for all periods presented. As a
result of the Acquisition, which was accounted for as a purchase, the
consolidated financial information for the periods after the
Acquisition is presented on a different cost basis than that for the
periods before the Acquisition and therefore is not comparable.
The accompanying interim financial statements are unaudited but, in
the opinion of management, reflect all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of the
results for such periods. The results of operations for any interim
period are not necessarily indicative of results for the full year.
These financial statements should be read in conjunction with
Pacific's financial statements and notes thereto contained in
Pacific's annual report on Form 10-K for the year ended December 31,
1996.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Certain amounts have been reclassified for comparability with the 1997
presentation.
(continued)
I-7
9
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
(3) Derivative Financial Instruments
The Company has entered into a fixed interest rate exchange agreement
("Interest Rate Swap") which it uses to manage interest rate risk
arising from the Company's financial liabilities. Such Interest Rate
Swap is accounted for as a hedge; and accordingly, any amounts
receivable or payable under the Interest Rate Swap are recognized as an
adjustment to interest expense. Any gain or loss on early termination
of the Interest Rate Swap is included in the carrying amount of the
related debt and amortized as yield adjustments over the remaining term
of the derivative financial instrument.
(4) Supplemental Disclosure to Statements of Cash Flows
Cash paid for interest was $50,043,000 for the six months ended June
30, 1997. Cash paid for income taxes was not material for the six
months ended June 30, 1997.
Prior to the Acquisition, interest and income taxes were settled
through the intercompany account. See note 7 for discussion of these
charges.
Significant noncash investing and financing activities are as follows:
Six months Six months
ended ended
June 30, June 30,
1997 1996
-------------- ----------------
amounts in thousands
Accrued preferred stock dividends $ 15,457 | --
============== | ================
Following the Acquisition, transactions (other than intercompany
income tax allocations) effected through Pacific's inter- company
account with TCIC have been treated as constructive cash receipts and
payments for purposes of the accompanying statements of cash flows.
(continued)
I-8
10
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
(5) Debt
In connection with the Transaction Agreements described in note 1,
Viacom International Inc. borrowed $1.7 billion pursuant to the Credit
Agreement, $350 million of which was repaid with the proceeds from the
TCIC capital contribution described in note 1. At June 30, 1997, the
Credit Agreement consists of a $300 million term loan (the "Term
Loan") which is due December 31, 2004 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 Term Loan and the Revolving Loan provide for quarterly
interest payments at variable rates (7.2% and 6.8% respectively, at
June 30, 1997) based upon the Company's debt to cash flow ratio (as
defined in the Credit Agreement). The Credit Agreement contains
restrictive covenants which require, among other things, the
maintenance of specified cash flow and financial ratios and include
certain limitations of indebtedness, investments, guarantees,
dispositions, stock repurchases and dividend payments. In addition,
the Revolving Loan requires a commitment fee ranging from 3/8% to 1/2%
per annum to be paid quarterly on the average unborrowed portion of
the total amount available for borrowing. At June 30, 1997, the
unborrowed portion of the revolving loan was $435 million.
Based on current rates available for debt of the same maturity, the
Company believes that the fair value of Pacific's debt is
approximately equal to its carrying value at June 30, 1997.
In accordance with the terms of the Credit Agreement, Pacific has
entered into an Interest Rate Swap with TCIC pursuant to which Pacific
will pay a fixed interest rate of 7.5% on a notional amount of $600
million. The terms of the Interest Rate Swap become effective only if
the one month LIBOR rate exceeds 6.5% for five consecutive days within
the two-year observation period, as defined by the Interest Rate Swap
(the "Trigger"). In the event the Trigger occurs, the terms of the
agreement become effective until August 1, 2001. As of June 30, 1997,
the terms of the Interest Rate Swap have not become effective.
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.
(6) Exchangeable Preferred Stock
The Company is authorized to issue and has issued 6,257,961 shares of
5% Class A Senior Cumulative Exchangeable Preferred Stock with a
stated value of $100 per share in connection with the Acquisition (see
note 1).
(continued)
I-9
11
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
The Exchangeable Preferred Stock is exchangeable, at the option of the
holder commencing after the fifth anniversary of the date of issuance,
for shares of 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.
(7) Related Party Transactions
Due to TCIC's ownership of 100% of the common equity of Pacific, the
amounts due to TCIC have been classified as a component of common
stockholder's equity in the accompanying consolidated balance sheets.
Such amounts are due on demand and accrue interest at variable rates.
Pacific purchases, at TCIC's cost, certain pay television and other
programming through a certain indirect subsidiary of TCIC. Charges
for such programming were $60,457,000 during the six months ended June
30, 1997 and are included in operating expenses in the accompanying
financial statements.
Effective August 1, 1996, TCI began to provide certain facilities,
services and personnel to Pacific. The scope of the facilities,
personnel and services provided to Pacific and the respective charges
payable in respect thereof are set forth in a services agreement
entered into among TCI, TCIC and Pacific (the "Services Agreement").
Pursuant to the Services Agreement, TCIC provides to Pacific
administrative and operational services necessary for the conduct of
its business, including, but not limited to, such services as are
generally performed by TCIC's accounting, finance, corporate, legal
and tax departments. In addition, TCIC makes available to Pacific
such general overall management services and strategic planning
services as TCIC and Pacific have agreed, and provides Pacific with
such access to and assistance from TCIC engineering and construction
groups and TCIC's programming and technology/venture personnel at
Pacific's request.
The Services Agreement also provides that, for so long as TCIC
continues to beneficially own shares of Pacific's common stock
representing at least a majority in voting power of the outstanding
shares of capital stock of Pacific entitled to vote generally in the
election of directors, TCIC will continue to provide in the same
manner, and on the same basis as is generally provided from time to
time to other participating TCIC subsidiaries, benefits and
administrative services to Pacific's employees. In this regard,
Pacific is allocated that portion of TCIC's compensation expense
attributable to benefits extended to employees of Pacific.
(continued)
I-10
12
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
Notes to Financial Statements
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 $6,659,000
during the six months ended June 30, 1997, 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 $4,838,000 for the six months ended
June 30, 1996, 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 $16,846,000 for the six months ended
June 30, 1996. In addition, cooperative advertising expenses charged
to affiliated companies were $168,000 for the six months ended June
30, 1996.
Viacom allocated to VII Cable interest expense of $22,933,000 during
the six months ended June 30, 1996. Such allocated interest expense
is related to Viacom corporate debt and was allocated to VII Cable on
the basis of a percentage of VII Cable's average net assets to
Viacom's average net assets.
Subsequent to the Acquisition, Pacific has been included in the
consolidated federal income tax return of TCI. Income tax expense or
benefit for Pacific is based on those items in the consolidated
calculation applicable to Pacific. Intercompany 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.
(8) Commitments
The Company leases business offices, has entered into pole rental
agreements and uses certain equipment under lease arrangements.
Rental expense under such arrangements amounted to $3,372,000 and
$3,993,000 during the six months ended June 30, 1997 and 1996,
respectively.
I-11
13
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction
with the Company's Management's Discussion and Analysis of Financial Condition
and Results of Operations included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1996. The following discussion focuses on
material changes in the trends, risks and uncertainties affecting the Company's
results of operations and financial condition. Reference should also be made
to the Company's financial statements included herein.
(1) Material changes in financial condition:
On July 24, 1995, Viacom, VII Cable, a wholly owned subsidiary of
Viacom, and New VII, a wholly owned subsidiary of VII Cable, entered into the
Transaction Agreements with TCI and TCIC, providing for, among other things,
the conveyance of Viacom International Inc.'s non-cable assets and liabilities
to New VII, the First Distribution, the Exchange Offer and the issuance to TCIC
of all of the Class B Common Stock of VII Cable. On June 24, 1996, Viacom
commenced the Exchange Offer pursuant to which Viacom shareholders had the
option to exchange shares of Viacom Class A or Class B Common Stock for a total
of 6,257,961 shares of VII Cable Class A Common Stock. The Exchange Offer
expired on July 22, 1996 with a final exchange ratio of 0.4075 shares of VII
Cable Class A Common Stock for each share of Viacom Common Stock accepted for
exchange.
Prior to the consummation of the Exchange Offer on July 31, 1996,
Viacom International Inc. entered into the Credit Agreement. Proceeds from the
Credit Agreement were transferred by Viacom International Inc. to New VII as
part of the First Distribution. Immediately following the consummation of the
Exchange Offer, on July 31, 1996, TCIC, through a capital contribution of $350
million in cash, purchased all of the shares of Class B Common Stock of VII
Cable. At that time, VII Cable was renamed TCI Pacific Communications, Inc.
and the shares of Class A Common Stock of VII Cable were converted into shares
of 5% Class A Senior Cumulative Exchangeable Preferred Stock. Proceeds from
the $350 million capital contribution were used to repay a portion of the
Credit Agreement.
On October 13, 1995, TCIC (as buyer) and Prime Cable of Fort Bend,
L.P. and Prime Cable Income Partners, L.P. (as sellers) executed the Houston
Purchase Agreements providing for the sale of certain cable television systems
serving the greater Houston Metropolitan Area for a total base purchase price
of $301 million, subject to adjustments. On December 18, 1995, TCIC assigned
all of its rights, remedies, title and interest in, to and under the Houston
Purchase Agreements to IMP. On May 8, 1996, IMP consummated the transactions
contemplated by the Houston Purchase Agreements. In connection with the
Acquisition, IMP exchanged its Houston cable system plus cash amounting to
$36,633,000 for VII Cable's Nashville cable system. The Exchange Cash was
escrowed for cable system acquisitions. In January 1997, the Company used the
Exchange Cash to purchase a cable system serving approximately 20,000
subscribers in and around Boulder County, Colorado.
(continued)
I-12
14
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
The Exchangeable Preferred Stock is exchangeable, at the option of the
holder commencing after the fifth anniversary of the date of issuance, for
shares of Series A TCI Group 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.
One measure of liquidity is commonly referred to as "interest
coverage". Interest coverage, which is measured by the ratio of Operating Cash
Flow (operating income before depreciation and amortization) ($114,486,000 for
the six months ended June 30, 1997) to interest expense ($49,994,000 for the
six months ended June 30, 1997), is determined by reference to the statements
of operations. The Company's interest coverage ratio was 229% for the six
months ended June 30, 1997. Management of the Company believes that the
foregoing interest coverage ratio is adequate in light of the relative
predictability of its cable television operations and the Company's interest
expense. However, the Company's current intent is to reduce its outstanding
indebtedness such that its interest coverage ratio could be increased. There
is no assurance that the Company will be able to achieve such objective.
Operating Cash Flow is a measure of value and borrowing capacity within the
cable television industry and is not intended to be a substitute for cash flows
provided by operating activities, a measure of performance prepared in
accordance with generally accepted accounting principles, and should not be
relied upon as such. Operating Cash Flow, as defined, does not take into
consideration substantial costs of doing business, such as interest expense,
and should not be considered in isolation to other measures of performance.
Another measure of liquidity is net cash provided by operating
activities, as reflected in the accompanying statements of cash flows. Net
cash provided by operating activities ($60,580,000 for the six months ended
June 30, 1997) reflects net cash from the operations of the Company available
for the Company's liquidity needs after taking into consideration the
aforementioned additional substantial costs of doing business not reflected in
Operating Cash Flow. Management believes that net cash provided by operating
activities, the available credit under the Revolving Loan, and advances from
TCIC, if necessary, will provide adequate sources of short-term and long-term
liquidity in the future. See the Company's statements of cash flows included
in the accompanying financial statements.
(continued)
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15
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(1) Material changes in financial condition (continued):
In connection with the Transaction Agreements described in note 1,
Viacom International Inc. borrowed $1.7 billion pursuant to the Credit
Agreement, $350 million of which was repaid with the proceeds from the TCIC
capital contribution described in note 1. At June 30, 1997, the Credit
Agreement consists of a $300 million term loan which is due December 31, 2004
and a $1.05 billion revolving commitment loan that provides for semi-annual
escalating commitment reductions from June 30, 1998 through September 30, 2004.
The Term Loan and the Revolving Loan provide for quarterly interest payments at
variable rates (7.2% and 6.8% respectively, at June 30, 1997) based upon the
Company's debt to cash flow ratio (as defined in the Credit Agreement). The
Credit Agreement contains restrictive covenants which require, among other
things, the maintenance of specified cash flow and financial ratios and include
certain limitations of indebtedness, investments, guarantees, dispositions,
stock repurchases and dividend payments. In addition, the Revolving Loan
requires a commitment fee ranging from 3/8% to 1/2% per annum to be paid
quarterly on the average unborrowed portion of the total amount available for
borrowing. At June 30, 1997, the unborrowed portion of the revolving loan was
$435 million.
At June 30, 1997, all of the Pacific's debt bore interest at variable
interest rates. Accordingly in an environment of rising interest rates, the
Company could experience an increase in its interest expense. In order to
diminish its exposure to such interest expense increases, and in accordance with
the terms of the Credit Agreement and to diminish its exposure to extreme
increases in variable interest rates, Pacific has entered into an Interest Rate
Swap with TCIC pursuant to which Pacific will pay a fixed interest rate of 7.5%
on a notional amount of $600 million. The terms of the Interest Rate Swap
become effective only if the one month LIBOR rate exceeds 6.5% for five
consecutive days within the two-year observation period, as defined by the
Interest Rate Swap. In the event the Trigger occurs, the terms of the agreement
become effective until August 1, 2001. As of June 30, 1997, the terms of the
Interest Rate Swap had not become effective.
(2) Material changes in results of operations:
Revenue
The operation of the Company's cable television systems is regulated
at the federal, state and local levels. The Cable Television Consumer
Protection and Competition Act of 1992 and the Telecommunications Act of 1996
(collectively, the "Cable Acts") established rules under which the Company's
basis and tier service rates and its equipment and installation charges (the
"Regulated Services") are regulated if a complaint is filed or if the
appropriate franchise authority is certified.
During the six months ended June 30, 1997, 76% of the Company's
revenue was derived from Regulated Services. As noted above, any increase in
rates charged for Regulated Services are regulated by the Cable Acts.
Moreover, competitive factors may limit the Company's ability to increase its
service rates.
Revenue increased approximately 5% for the six months ended June 30,
1997, as compared to the corresponding period of 1996. The increase is
primarily attributable to a 9% increase in the average primary rate and a 4%
increase in the average premium rate. As of June 30, 1997, Pacific served
approximately 1,172,000 basic customers subscribing to approximately 843,000
premium units. Exclusive of subscribers gained in the acquisition of the cable
system in and around Boulder County, Colorado, this represents a 1% and 8%
decrease in basic customers and premium units, respectively, since December 31,
1996.
(continued)
I-14
16
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(2) Material changes in results of operations (continued):
Operating Costs and Expenses
Operating expenses decreased 6% for the six months ended June 30,
1997, as compared to the corresponding period in 1996. Such decrease is due to
efficiencies realized as a result of the Acquisition offset by an increase in
programming costs.
Selling, general and administrative ("SG&A") expenses decreased 13%
for the six months ended June 30, 1997, as compared to the corresponding period
in 1996. The majority of this decrease is due to lower salaries and related
expenses due to a reduction in work force in December of 1996.
Prior to the Acquisition, Viacom provided VII Cable with certain
general services, including insurance, legal, financial and other corporate
functions. Charges for these services were based on the average of certain
specified ratios of revenue, operating income and net assets of VII Cable in
relation to Viacom. The charges for such services were $4,838,000 for the six
month period and are included in SG&A.
Effective August 1, 1996, TCI began to provide certain facilities,
services and personnel to Pacific. The scope of the facilities, personnel and
services to Pacific and the respective charges payable in respect thereof are
set forth in the Services Agreement. Pursuant to the Services Agreement, TCI
provides to Pacific administrative and operational services necessary for the
conduct of its business, including, but not limited to, such services as are
generally performed by TCI's accounting, finance, corporate, legal and tax
departments. In addition, TCI makes available to Pacific such general overall
management services and strategic planning services as TCI and Pacific have
agreed, and provides Pacific with such access to and assistance from TCI
engineering and construction groups and TCI's programming and
technology/venture personnel at Pacific's request.
The Services Agreement also provides that, for so long as TCI
continues to beneficially own shares of Pacific's common stock representing at
least a majority in voting power of the outstanding shares of capital stock of
Pacific entitled to vote generally in the election of directors, TCI will
continue to provide in the same manner, and on the same basis as is generally
provided from time to time to other participating TCI subsidiaries, benefits
and administrative services to Pacific's employees.
In this regard, Pacific is allocated that portion of TCI's
compensation expense attributable to benefits extended to employees of Pacific.
Pursuant to the Services Agreement, Pacific reimburses TCI for all direct
expenses incurred by TCI employees in providing such services and a pro rata
share of all indirect expenses incurred by such TCI employees in connection
with the rendering of such services, including a pro rata share of the salary
and other compensation of TCI employees performing services for Pacific and
general overhead expenses. Charges for expenses incurred in connection with
the Services Agreement were $6,659,000 during the six month period and are
included in SG&A. See note 7 to the accompanying financial statements.
Depreciation expense decreased 38% for the six months ended June 30,
1997, as compared to the corresponding period in 1996. Such decrease is
attributable to the consummation of the Acquisition, in which Pacific recorded
property and equipment at fair market value which was less than VII Cable's
historical cost, offset by an increase in depreciation due to capital
expenditures. Depreciation expense for the 1997 period includes $2,840,000
attributable to the five-month period ended December 31, 1996.
(continued)
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TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(2) Material changes in results of operations (continued):
Amortization expense increased 321% for the six months ended June 30,
1997, as compared to the corresponding period in 1996. Such increases are
attributable to increased franchise costs as a result of the Acquisition.
Other Income and Expense and Net Loss
Interest expense increased 108% for the six months ended June 30,
1997, as compared to the corresponding period in 1996. Such increase is due to
interest related to the $1.7 billion Credit Agreement entered into prior to
consummation of the Exchange Offer. Interest expense for periods prior to the
Acquisition reflects amounts recorded by VII Cable on borrowings under a credit
agreement and amounts allocated by Viacom to VII Cable based on a percentage of
VII Cable's average net assets to Viacom's average net assets.
VII Cable was included in the consolidated federal, state and local
income tax returns filed by Viacom. However, the income tax provision was
prepared on a separate return basis as though VII Cable filed stand-alone
income tax returns.
Subsequent to the Acquisition, Pacific has been included in the
consolidated federal income tax return of TCI. Income tax expense or benefit
for Pacific 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 $3,168,000 for the six months ended June 30, 1997 represents a
decrease of $5,636,000 as compared to the corresponding period of 1996. Such
reduction primarily represents an increase in interest expense in 1997
partially offset by an increase in operating income and a decrease in income
tax expense.
I-16
18
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibit and Reports on Form 8-K.
(a) Exhibit -
(27) TCI Pacific Communications, Inc. Financial Data
Schedule
(b) Reports on Form 8-K filed during the quarter ended June 30,
1997:
Date of Items
Report Reported Financial Statements Filed
------- -------- --------------------------
June 25, 1997 Items 4 and 7 None.
II-1
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TCI PACIFIC COMMUNICATIONS, INC.
Date: August 13, 1997 By: /s/ Stephen M. Brett
-----------------------------------
Stephen M. Brett
Senior Vice President
and Secretary
Date: August 13, 1997 By: /s/ Bernard W. Schotters
-----------------------------------
Bernard W. Schotters
Senior Vice President and
Treasurer
(Principal Financial Officer)
Date: August 13, 1997 By: /s/ Gary K. Bracken
-----------------------------------
Gary K. Bracken
Senior Vice President
(Principal Accounting Officer)
II-2
20
EXHIBIT INDEX
The following exhibits are filed herewith or are incorporated by reference
herein (according to the number assigned to them in Item 601 of Regulation S-K)
as noted:
(27) TCI Pacific Communications, Inc. Financial Data Schedule