<PAGE>
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 March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 1-9554
TCI PACIFIC COMMUNICATIONS, INC.
--------------------------------
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
State of Delaware 04-2980402
- ---------------------------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5619 DTC Parkway
Englewood, Colorado 80111
- ---------------------------------------------------- -------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (303) 267-5500
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
------ ------
All of the Registrant's common stock is owned by TCI Communications,
Inc. The number of shares outstanding of the Registrant's common stock as of
April 30, 1998 was:
Class B Common Stock - 100 shares.
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of TCI Communications, Inc.)
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- -------------
amounts in thousands
<S> <C> <C>
Assets
- ------
Cash $ 715 2,966
Trade and other receivables, net 8,782 11,936
Prepaid expenses 4,935 4,892
Property and equipment, at cost:
Land 5,803 5,803
Distribution systems 413,306 397,142
Support equipment and buildings 43,422 42,217
----------- ----------
462,531 445,162
Less accumulated depreciation 61,894 50,843
----------- ----------
400,637 394,319
----------- ----------
Franchise costs 3,035,012 3,035,057
Less accumulated amortization 126,566 107,582
----------- ----------
2,908,446 2,927,475
----------- ----------
Other assets, at cost, net of amortization 16,246 16,614
----------- ----------
$ 3,339,761 3,358,202
=========== ==========
Liabilities and Common Stockholder's Equity
- -------------------------------------------
Accounts payable $ 2,948 3,609
Accrued interest 7,290 177
Accrued expenses and subscriber advance payments 23,855 23,762
Debt (note 4) 898,977 952,348
Deferred income taxes 1,056,245 1,061,649
Other liabilities 413 413
----------- ----------
Total liabilities 1,989,728 2,041,958
----------- ----------
Exchangeable Preferred Stock (note 5) 629,739 629,739
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, issued and
outstanding 100 shares -- --
Additional paid-in capital 297,809 305,694
Accumulated deficit (11,217) (8,104)
----------- ----------
286,592 297,590
Due to TCI Communications, Inc. ("TCIC") (note 6) 433,702 388,915
----------- ----------
Total common stockholder's equity 720,294 686,505
----------- ----------
Commitments and contingencies (note 7)
$ 3,339,761 3,358,202
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
I-1
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of TCI Communications, Inc.)
Consolidated Statements of Operations
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------------------------------
1998 1997
---------------------- ---------------------
amounts in thousands
<S> <C> <C>
Revenue $ 128,303 124,952
Operating costs and expenses:
Operating:
Programming (primarily from related parties - note 6) 35,564 32,806
Other operating 11,836 9,714
Selling, general and administrative:
Related party (note 6) 6,822 7,215
Other 24,443 20,199
Depreciation 11,046 12,322
Amortization 19,381 19,340
--------- ---------
109,092 101,596
--------- ---------
Operating income 19,211 23,356
Other income (expense):
Interest expense:
Related party (note 6) (8,659) (5,771)
Other (15,487) (20,778)
Interest income:
Related party (note 6) 1,374 1,242
Other -- 405
Other, net (331) --
--------- ---------
(23,103) (24,902)
--------- ---------
Loss before income taxes (3,892) (1,546)
Income tax benefit 779 71
--------- ---------
Net loss (3,113) (1,475)
Dividend requirement on Exchangeable Preferred
Stock (7,885) (7,635)
--------- ---------
Net loss attributable to common
stockholder $ (10,998) (9,110)
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
I-2
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of TCI Communications, Inc.)
Consolidated Statement of Common Stockholder's Equity
Three months ended March 31, 1998
(unaudited)
<TABLE>
<CAPTION>
Common stock Additional
-------------------- paid-in Accumulated Due to Total
Class A Class B capital deficit TCIC equity
------- ------- ---------- ----------- ------- --------
amounts in thousands
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $ -- -- 305,694 (8,104) 388,915 686,505
Net loss -- -- -- (3,113) -- (3,113)
Accreted dividends on Exchangeable Preferred
Stock -- -- (7,885) -- -- (7,885)
Change in amounts due to TCIC -- -- -- -- 44,787 44,787
------- ------- -------- -------- -------- --------
Balance at March 31, 1998 $ -- -- 297,809 (11,217) 433,702 720,294
======= ======= ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
I-3
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of TCI Communications, Inc.)
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------------------------
1998 1997
-------------------- ---------------------
amounts in thousands
(see note 2)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,113) (1,475)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 30,427 31,662
Deferred income tax benefit (5,404) (2,608)
Changes in operating assets and liabilities:
Change in receivables 3,154 4,283
Change in prepaid expenses (43) 2,189
Change in accruals and payables 6,545 (8,619)
--------- --------
Net cash provided by operating
activities 31,566 25,432
--------- --------
Cash flows from investing activities:
Capital expended for property and equipment (17,330) (6,108)
Other investing activities (18) 109
Cash paid for acquisitions -- (35,323)
Decrease in restricted cash -- 33,664
--------- --------
Net cash used in investing
activities (17,348) (7,658)
--------- --------
Cash flows from financing activities:
Repayments of debt (53,371) (110,000)
Change in amounts due to TCIC 44,787 97,993
Payment of preferred stock dividends (7,885) (7,885)
Change in cash overdraft -- 2,118
--------- --------
Net cash used in financing
activities (16,469) (17,774)
--------- --------
Net decrease in cash (2,251) --
Cash at beginning of period 2,966 --
--------- --------
Cash at end of period $ 715 --
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
I-4
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of TCI Communications, Inc.)
Notes to Consolidated Financial Statements
March 31, 1998
(unaudited)
(1) Basis of Presentation
---------------------
The accompanying consolidated financial statements include the accounts of
TCI Pacific Communications, Inc. ("Pacific" or the "Company") and those of
all investments of more than 50% in subsidiaries in which the Company has
significant control. All significant intercompany accounts and transactions
have been eliminated in consolidation. TCIC owns 100% of the common stock
of Pacific, and Tele-Communications, Inc. ("TCI") owns 100% of the common
stock of TCIC.
Pacific, through its subsidiaries and affiliates, is principally engaged in
the construction, acquisition, ownership and operation of cable television
systems. At March 31, 1998, 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.
Tele-Communications, Inc. common stock, par value $1.00 per share, is
comprised of six series: Tele-Communications, Inc. Series A TCI Group
Common Stock ("TCI Group Series A Stock") and Tele-Communications, Inc.
Series B TCI Group Common Stock (collectively, "TCI Group Stock"), Tele-
Communications, Inc. Series A Liberty Media Group Common Stock and Tele-
Communications, Inc. Series B Liberty Media Group Common Stock
(collectively, "Liberty Group Stock"), Tele-Communications, Inc. Series A
TCI Ventures Group Common Stock and Tele-Communications, Inc. Series B TCI
Ventures Group Common Stock (collectively, "TCI Ventures Group Stock").
The Liberty Group Stock is intended to reflect the separate performance of
the "Liberty Media Group," which is comprised of TCI's assets which produce
and distribute programming services. The TCI Ventures Group Stock is
intended to reflect the separate performance of the "TCI Ventures Group,"
which is comprised of TCI's principal international assets and businesses
and substantially all of TCI's non-cable and non-programming assets. The
TCI Group Stock is intended to reflect the separate performance of TCI and
its subsidiaries and assets not attributed to Liberty Media Group or TCI
Ventures Group. Such subsidiaries and assets are referred to as "TCI Group"
and are comprised primarily of TCI's domestic cable and communications
business. Pacific is attributed to the TCI Group.
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 combined financial
statements and notes thereto contained in Pacific's Annual Report on Form
10-K for the year ended December 31, 1997.
(continued)
I-5
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of TCI Communications, Inc.)
Notes to Consolidated Financial Statements
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 1998
presentation.
(2) Supplemental Disclosure to Statements of Cash Flows
---------------------------------------------------
Cash paid for interest was $17,033,000 and $24,469,000 for the three months
ended March 31, 1998 and 1997, respectively. Also during these periods,
cash paid for income taxes was not material.
(3) Acquisition
-----------
In January 1997, Pacific used restricted cash obtained in a 1996 exchange
of cable television systems with a related party (the "Exchange Cash") to
purchase a cable system serving approximately 20,000 subscribers in and
around Boulder County, Colorado (the "Boulder Acquisition").
(4) Debt
----
At March 31, 1998, Pacific's $1.4 billion credit agreement (the "Credit
Agreement") consisted of a $350 million term loan (the "Term Loan") which
is due December 31, 2004 and a $1.05 billion revolving commitment loan (the
"Revolving Loan") which provides for semi-annual escalating commitment
reductions from June 30, 1998 through September 30, 2004. The Term Loan
and the Revolving Loan provide for quarterly interest payments at variable
rates (6.8% and 6.4% respectively, at March 31, 1998) based upon the
Company's debt to cash flow ratio (as defined in the Credit Agreement).
The Credit Agreement contains restrictive covenants which require, among
other things, the maintenance of specified cash flow and financial ratios
and include certain limitations of indebtedness, investments, guarantees,
dispositions, stock repurchases and dividend payments. In addition, the
Revolving Loan requires a commitment fee ranging from 1/4% to 3/8% per
annum to be paid quarterly on the average unborrowed portion of the total
amount available for borrowing. At March 31, 1998, the unborrowed portion
of the Revolving Loan was $503 million.
(continued)
I-6
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of TCI Communications, Inc.)
Notes to Consolidated Financial Statements
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 March 31, 1998.
In accordance with the terms of the Credit Agreement, Pacific has entered
into an interest rate exchange agreement (the "Interest Rate Swap") with
TCIC pursuant to which Pacific will pay a fixed interest rate of 7.5% on a
notional amount of $600 million. The terms of the Interest Rate Swap
become effective only if the one month London Interbank Offered Rate
("LIBOR") 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 March 31, 1998, 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
are being amortized over the terms of the Credit Agreement.
(5) 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 (the "Exchangeable
Preferred Stock") with a stated value of $100 per share.
The Exchangeable Preferred Stock is exchangeable, at the option of the
holder commencing after the fifth anniversary of the date of issuance, for
shares of TCI Group Series A Stock at an exchange rate of 5.447 shares of
TCI Group Series A Stock for each share of Exchangeable Preferred Stock
exchanged. The Exchangeable Preferred Stock is subject to redemption, at
the option of Pacific, on or after the fifteenth day following the fifth
anniversary of the date of issuance, initially at a redemption price of
$102.50 per share and thereafter at prices declining ratably annually to
$100 per share on and after the eighth anniversary of the date of issuance,
plus accrued and unpaid dividends to the date of redemption. The
Exchangeable Preferred Stock is also subject to mandatory redemption on the
tenth anniversary of the date of issuance for $100 per share plus accrued
and unpaid dividends. Amounts payable by the Company in satisfaction of
its dividend, optional redemption and mandatory redemption obligations with
respect to the Exchangeable Preferred Stock may be made in cash or, at the
election of the Company, in shares of TCI Group Series A Stock, or in any
combination of the foregoing. If payments are made in shares of TCI Group
Series A Stock, Pacific will discount the market value of such stock by 5%
in determining the number of shares required to be issued to satisfy such
payments.
(6) 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 $34,384,000 and $28,564,000 during the three months
ended March 31, 1998 and 1997, respectively.
(continued)
I-7
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of TCI Communications, Inc.)
Notes to Consolidated Financial Statements
Effective August 1, 1996, TCI began to provide certain administrative and
other services to Pacific pursuant to a services agreement entered into
among TCI, TCIC and Pacific (the "Services Agreement"). The Services
Agreement provides that, for so long as TCI continues to beneficially own
shares of Pacific's common stock representing at least a majority in voting
power of the outstanding shares of capital stock of Pacific entitled to
vote generally in the election of directors, TCI will continue to provide
in the same manner, and on the same basis as is generally provided from
time to time to other participating TCI subsidiaries, benefits and
administrative services to Pacific's employees. In this regard, Pacific is
allocated that portion of TCI's compensation expense attributable to
benefits extended to employees of Pacific.
Pursuant to the Services Agreement, Pacific reimburses TCI for all direct
expenses incurred by TCI in providing services and a pro rata share of all
indirect expenses incurred by TCI in connection with the rendering of such
general and administrative services, including a pro rata share of the
salary and other compensation of TCI employees performing services for
Pacific and general overhead expenses. Charges for expenses incurred in
connection with the Services Agreement were $6,822,000 and $7,215,000
during the three months ended March 31, 1998 and 1997, respectively. The
obligations of TCI to provide services under the Services Agreement (other
than TCI's obligation to allow Pacific's employees to participate in TCI's
employee benefit plans) will continue in effect until terminated by any
party to the Services Agreement at any time on not less than 60 days
notice.
Due to TCIC's ownership of 100% of the common stockholder's equity of
Pacific, the amounts due to TCIC have been classified as a component of
common stockholder's equity in the accompanying consolidated balance
sheets. Such amounts are due on demand and accrue interest at variable
rates. Pacific recorded $8,659,000 and $5,771,000 of interest expense for
the three months ended March 31, 1998 and 1997, respectively, related to
the intercompany amounts due to TCIC.
In 1996, Pacific transferred (the "Transfer") its investment in TCG San
Francisco and TCG Seattle to TCI Development Corporation, a subsidiary of
TCI, in exchange for a $47,300,000 note receivable. Such note bears
interest at 10.5% per annum and is included as a reduction of the amount
due to TCIC. No gain or loss was recognized in connection with the
Transfer. During the three months ended March 31, 1998 and 1997, interest
income related to the note receivable aggregated $1,374,000 and $1,242,000,
respectively.
(continued)
I-8
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of TCI Communications, Inc.)
Notes to Consolidated Financial Statements
(7) Commitments and Contingencies
-----------------------------
On October 5, 1992, the United States Congress enacted the Cable Television
Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"). In
1993 and 1994, the Federal Communications Commission (the "FCC") adopted
certain rate regulations required by the 1992 Cable Act and imposed a
moratorium on certain rate increases. As a result of such actions,
Pacific's basic and tier service rates and its equipment and installation
charges (the "Regulated Services") are subject to the jurisdiction of local
franchising authorities and the FCC. Basic and tier service rates are
evaluated against competitive benchmark rates as published by the FCC, and
equipment and installation charges are based on actual costs. Any rates
for Regulated Services that exceeded the benchmarks were reduced as
required by the 1993 and 1994 rate regulations. The rate regulations do
not apply to the relatively few systems which are subject to "effective
competition" or to services offered on an individual service basis, such as
premium movie and pay-per-view services.
Pacific believes that it has complied in all material respects with the
provisions of the 1992 Cable Act, including its rate setting provisions.
However, Pacific's rates for Regulated Services are subject to review by
the FCC, if a complaint is filed by a customer, or the appropriate
franchise authority, if such authority has been certified by the FCC to
regulate rates. 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.
Pacific has contingent liabilities related to legal proceedings and other
matters arising in the ordinary course of business. Although it is
reasonably possible that Pacific may be required to make payments upon
conclusion of such matters, an estimate of any loss or range of loss cannot
be made. In the opinion of management, it is expected that amounts, if
any, which may be required to satisfy such contingencies will not have a
material effect upon the Company's financial condition.
(continued)
I-9
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of TCI Communications, Inc.)
Notes to Consolidated Financial Statements
During the three months ended March 31, 1998, the Company continued its
enterprise-wide comprehensive review of its computer systems and related
software to ensure systems properly recognize the year 2000 and continue to
process business information. The systems being evaluated include all
internal use software and devices and those systems and devices that manage
the distribution of the Company's products. The Company is utilizing both
internal and external resources to identify, correct or reprogram, and test
systems for year 2000 readiness.
As of March 31, 1998, the Company had inventoried substantially all of its
cable systems and began its assessment of the systems that will require
remediation or replacement. Inventoried systems include the Company's
financial systems and related software, its business systems, data and
voice networks, engineering systems and facilities and related software
supporting the distribution of the Company's products and other equipment
and systems potentially impacted by the year 2000. Additionally, the
Company continued to have formal communications with its principal vendors
to determine their year 2000 readiness.
The Company completed a preliminary assessment of its systems and related
software that support the Company's financial applications. For those
financial systems and software which will continue to be utilized by the
Company beyond the year 1999, the Company has tentatively concluded that
such systems are capable of recognizing the year 2000 and therefore will
not require material remediation or replacement. One of the Company's
financial applications is externally managed by a third party vendor and
such financial application will be replaced with software provided by such
vendor. No assurances can be given that as the Company completes its year
2000 assessment, additional internally managed systems will not be
identified as requiring remediation or replacement. The Company has
completed an initial assessment of its business systems, including
networks, engineering systems, facilities and related software supporting
the distribution of the Company's products and has tentatively concluded
that certain portions of those systems will require remediation or
replacement. Although no assurance can be given, management of the Company
anticipates that such systems will be remediated or replaced prior to the
year 2000.
Significant third party vendors whose systems are critical to the Company's
cable operations have been identified and/or surveyed and confirmations
from such parties have been received indicating that they are either year
2000 ready or have plans in place to ensure readiness. Management of the
Company intends to have further communication with primary vendors
identified as having systems that are not year 2000 compliant to assess
those vendors' plans for remediating their own year 2000 issues and
to assess the impact on the Company if such vendors fail to remediate their
year 2000 issues.
(continued)
I-10
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of TCI Communications, Inc.)
Notes to Consolidated Financial Statements
The Company's assessment of the impact of the year 2000 date change should
be complete by the end of 1998. The Company continues to evaluate the level
of validation it will require of third party vendors to ensure their year
2000 readiness. Management of the Company has not yet determined the cost
associated with its year 2000 readiness efforts and the related potential
impact on the Company's results of operations. Amounts expended to date
have not been material, although there can be no assurance that costs
ultimately required to be paid to ensure the Company's year 2000 readiness
will not have an adverse effect on the Company's financial position.
Additionally, there can be no assurance that the Company's systems or the
systems of other companies on which the Company relies will be converted in
time or that any such failure to convert by the Company or other companies
will not have an adverse effect on its financial position.
I-11
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of TCI Communications, Inc.)
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, 1997. 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 consolidated financial statements included herein.
Certain statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. In particular, some of the statements contained
under this caption are forward-looking. Such forward-looking statements involve
known and unknown risks, uncertainties and other important factors that could
cause the actual results, performance or achievements of the Company (or
entities in which the Company has interests), or industry results, to differ
materially from future results, performance or achievements expressed or implied
by such forward-looking statements. Such risks, uncertainties and other factors
include, among others: general economic and business conditions and industry
trends; the regulatory and competitive environment of the industries in which
the Company, and the entities in which the Company has interests, operate;
uncertainties inherent in new business strategies, new product launches and
development plans; rapid technological changes; the acquisition, development
and/or financing of telecommunications networks and services; the development
and provision of programming for new television and telecommunications
technologies; future financial performance, including availability, terms and
deployment of capital; the ability of vendors to deliver required equipment,
software and services; availability of qualified personnel; changes in, or
failure or inability to comply with, government regulations, including, without
limitation, regulations of the FCC, and adverse outcomes from regulatory
proceedings; changes in the nature of key strategic relationships with partners
and joint venturers; competitor responses to the Company's products and
services, and the products and services of the entities in which the Company has
interests, and the overall market acceptance of such products and services; and
other factors. These forward-looking statements (and such risks, uncertainties
and other factors) speak only as of the date of this Report, and the Company
expressly disclaims any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement contained herein, to reflect any
change in the Company's expectations with regard thereto, or any other change in
events, conditions or circumstances on which any such statement is based.
I-12
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of TCI Communications, Inc.)
Year 2000
---------
During the three months ended March 31, 1998, the Company continued its
enterprise-wide comprehensive review of its computer systems and related
software to ensure systems properly recognize the year 2000 and continue to
process business information. The systems being evaluated include all internal
use software and devices and those systems and devices that manage the
distribution of the Company's products. The Company is utilizing both internal
and external resources to identify, correct or reprogram, and test systems for
year 2000 readiness.
As of March 31, 1998, the Company had inventoried substantially all of its
cable systems and began its assessment of the systems that will require
remediation or replacement. Inventoried systems include the Company's financial
systems and related software, its business systems, data and voice networks,
engineering systems and facilities and related software supporting the
distribution of the Company's products and other equipment and systems
potentially impacted by the year 2000. Additionally, the Company continued to
have formal communications with its principal vendors to determine their year
2000 readiness.
The Company completed a preliminary assessment of its systems and related
software that support the Company's financial applications. For those financial
systems and software which will continue to be utilized by the Company beyond
the year 1999, the Company has tentatively concluded that such systems are
capable of recognizing the year 2000 and therefore will not require material
remediation or replacement. One of the Company's financial applications is
externally managed by a third party vendor and such financial application will
be replaced with software provided by such vendor. No assurances can be given
that as the Company completes its year 2000 assessment, additional internally
managed systems will not be identified as requiring remediation or replacement.
The Company has completed an initial assessment of its business systems,
including networks, engineering systems, facilities and related software
supporting the distribution of the Company's products and has tentatively
concluded that certain portions of those systems will require remediation or
replacement. Although no assurance can be given, management of the Company
anticipates that such systems will be remediated or replaced prior to the year
2000.
Significant third party vendors whose systems are critical to the Company's
cable operations have been identified and/or surveyed and confirmations from
such parties have been received indicating that they are either year 2000 ready
or have plans in place to ensure readiness. Management of the Company intends
to have further communication with primary vendors identified as having systems
that are not year 2000 compliant to assess those vendors' plans for remediating
their own year 2000 issues and to assess the impact on the Company if such
vendors fail to remediate their year 2000 issues.
I-13
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of TCI Communications, Inc.)
The Company's assessment of the impact of the year 2000 date change should
be complete by the end of 1998. The Company continues to evaluate the level of
validation it will require of third party vendors to ensure their year 2000
readiness. Management of the Company has not yet determined the cost associated
with its year 2000 readiness efforts and the related potential impact on the
Company's results of operations. Amounts expended to date have not been
material, although there can be no assurance that costs ultimately required to
be paid to ensure the Company's year 2000 readiness will not have an adverse
effect on the Company's financial position. Additionally, there can be no
assurance that the Company's systems or the systems of other companies on which
the Company relies will be converted in time or that any such failure to convert
by the Company or other companies will not have an adverse effect on its
financial position.
Material Changes in Results of Operations
-----------------------------------------
The operation of Pacific's cable television systems is regulated at the
federal, state and local levels. The 1992 Cable Act and the Telecommunications
Act of 1996 (the "Cable Acts") established rules under which Pacific's basic
and tier service rates and its equipment and installation charges are regulated
if a complaint is filed by a customer or if the appropriate franchise authority
is certified by the FCC to regulate rates.
During the three months ended March 31, 1998, 77% of Pacific's revenue was
derived from Regulated Services. As noted above, any increases in rates charged
for Regulated Services are regulated by the Cable Acts. Moreover, competitive
factors may limit Pacific's ability to increase its service rates.
Revenue
-------
Revenue increased $3,351,000 or 3% for the three months ended March 31,
1998, as compared to the corresponding prior year period. Revenue from Pacific's
customers accounted for 1% of such increase, primarily as a result of a 3%
increase in basic revenue, partially offset by a 2% decrease in premium revenue.
Advertising sales accounted for the remaining increase in revenue. Pacific
experienced a 2% increase in its average basic rate, a 1% increase in the number
of average basic customers, a 15% decrease in its average premium rate and a 1%
increase in the number of average premium subscriptions during the first quarter
of 1998, as compared to the corresponding prior year period.
Operating Costs and Expenses
----------------------------
Operating expenses increased $4,880,000 or 11% for the three months ended
March 31, 1998, as compared to the corresponding prior year period. Programming
expenses accounted for the majority of such increase. The Company cannot
determine whether and to what extent increases in the cost of programming will
affect its future operating costs. However, due to TCI Group's obligations
under a 25 year affiliation agreement with Encore Media Group LLC, a subsidiary
of TCI that is a member of the Liberty Media Group, it is anticipated that the
Company's programming costs with respect to the "STARZ!" and "Encore" premium
services will increase in 1998 and future periods. See note 6 to the
accompanying consolidated financial statements. The remaining increase in
operating expenses is due to an increase in operating labor costs related to the
hiring of additional installers as part of the Company's efforts to increase
digital cable television customers during 1998.
I-14
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of TCI Communications, Inc.)
Material Changes in Results of Operations (continued):
------------------------------------------------------
Selling, general and administrative expenses increased $3,851,000 or 14%
for the three months ended March 31, 1998, as compared to the corresponding
prior year period. Such increase is primarily attributable to an increase in
labor costs associated with administrative support for the Company's efforts to
increase digital cable television customers and increases in other individually
insignificant items, partially offset by a decrease in expenses incurred in
connection with the Services Agreement. See note 6 to the accompanying
consolidated financial statements for additional information regarding the
Services Agreement.
Depreciation expense decreased $1,276,000 or 10% for the three months ended
March 31, 1998, as compared to the corresponding period of 1997. Exclusive of
certain 1996 depreciation expense that was included in the amount reported for
the three months ended March 31, 1997, depreciation expense increased $1,564,000
or 16% during the three months ended March 31, 1998. Such increase is primarily
attributable to capital expenditures.
Other Income and Expenses
-------------------------
Interest expense decreased $2,403,000 or 9% during the three months ended
March 31, 1998, as compared to the corresponding period of 1997. Such decrease
is primarily the result of lower average debt balances due to partial repayments
of amounts owed under the Credit Agreement. Pacific's weighted average interest
rate on borrowings was 6.6% and 7.4% during the three months ended March 31,
1998 and 1997, respectively.
Interest income decreased $273,000 or 17% during the three months ended
March 31, 1998, as compared to the corresponding period of 1997. Such decrease
is the result of a lower average restricted cash balance due to the use of the
Exchange Cash in January 1997 for the Boulder 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. The payable or receivable
arising from the intercompany income tax allocation is recorded as an increase
or decrease in amounts due to TCIC.
Net Loss
--------
As a result of the above-described fluctuations in the Company's results of
operations, Pacific's net loss (before preferred stock dividend requirements) of
$3,113,000 for the three months ended March 31, 1998 changed by $1,638,000 as
compared to Pacific's net loss (before preferred stock dividend requirements) of
$1,475,000 for the three months ended March 31, 1997.
I-15
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of TCI Communications, Inc.)
Material Changes in Financial Condition
---------------------------------------
At March 31, 1998, the unborrowed portion of the Revolving Loan was $503
million. Although Pacific was in compliance with the restrictive covenants
contained in the Credit Agreement at said date, additional borrowings under the
Credit Agreement are subject to Pacific's continuing compliance with the
restrictive covenants after giving effect to such additional borrowings. Such
restrictive covenants require, among other things, the maintenance of certain
earnings, specified cash flow and financial ratios (primarily the ratios of cash
flow to total debt and cash flow to debt service, as defined), and include
certain limitations on indebtedness, investments, guarantees, dispositions,
stock repurchases and/or dividend payments. See note 4 to the accompanying
consolidated financial statements for additional information regarding the
material terms of the Credit Agreement.
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) ($49,638,000 and
$55,018,000 during the three months ended March 31, 1998 and 1997, respectively)
to interest expense ($24,146,000 and $26,549,000 for the three months ended
March 31, 1998 and 1997, respectively), is determined by reference to the
consolidated statements of operations. The Company's interest coverage ratio
was 206% and 207% during the three months ended March 31, 1998 and 1997,
respectively. 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 interest expense. However, the Company's current
intent is to continue 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. In the event the Company is
unable to achieve such objective, management believes that net cash provided by
operating activities, available capacity pursuant to the Credit Agreement and
advances from TCIC, as required, will provide adequate sources of short-term and
long-term liquidity in the future. See the Company's combined statements of
cash flows included in the accompanying consolidated financial statements.
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 ($31,566,000 and $25,432,000 during the
three months ended March 31, 1998 and 1997, respectively) generally 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.
I-16
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of TCI Communications, Inc.)
Material Changes in Financial Condition (continued):
----------------------------------------------------
The amount of capital expended by the Company for property and equipment
was $17,330,000 and $6,108,000 during the three months ended March 31, 1998 and
1997 and $35,154,000 during the year ended December 31, 1997, respectively. In
light of the Company's plans to upgrade the capacity of its cable distribution
systems, and its plans to increase the number of customers who subscribe to
digital video services, the Company anticipates that its annual capital
expenditures during the next several years will significantly exceed the amount
expended during 1997. In this regard, the Company estimates that it will expend
approximately $150 million to $160 million over the next three years to expand
the capacity of its cable distribution systems. The Company expects that the
actual amount of capital that will be required in connection with its plans to
increase the number of digital video service customers will be significant.
However, the Company cannot reasonably estimate such actual capital requirement
since such actual capital requirement is dependent upon the extent of any
customer increases and the average installed per-unit cost of digital set-top
devices.
In accordance with the terms of the Credit Agreement, Pacific has entered
into the Interest Rate Swap with TCIC pursuant to which Pacific will pay a fixed
interest rate of 7.5% on a notional amount of $600 million. The terms of the
Interest Rate Swap become effective only if the one month LIBOR rate exceeds
6.5% for five consecutive days within the two-year observation period. In the
event the Trigger occurs, the terms of the agreement become effective until
August 1, 2001. As of March 31, 1998, the terms of the Interest Rate Swap had
not become effective. Further, the Company is not currently exposed to material
near-term losses in future earnings, fair values or cash flows resulting from
derivative financial instruments.
The Company's debt ($898,977,000 at March 31, 1998) and amounts owed to
TCIC ($433,702,000 at March 31, 1998) bear interest at variable rates.
Accordingly, in an environment of rising interest rates, the Company expects
that it would experience an increase in interest expense. However any such
increase would be somewhat mitigated by the above-described Interest Rate Swap.
I-17
<PAGE>
TCI PACIFIC COMMUNICATIONS, INC. AND SUBSIDIARIES
(A Subsidiary of TCI Communications, Inc.)
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 March 31,
1998:
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TCI PACIFIC COMMUNICATIONS, INC.
Date: May 11, 1998 By: /s/ Stephen M. Brett
----------------------------------
Stephen M. Brett
Senior Vice President
and Secretary
Date: May 11, 1998 By: /s/ Bernard W. Schotters
----------------------------------
Bernard W. Schotters
Senior Vice President and
Treasurer
(Principal Financial Officer)
Date: May 11, 1998 By: /s/ Gary K. Bracken
----------------------------------
Gary K. Bracken
Senior Vice President
(Principal Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS INCLUDED IN TCI PACIFIC COMMUNICATIONS, INC.'S QUARTERLY REPORT ON
FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 715
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<RECEIVABLES> 8,782
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