UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 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 No. 333-05017
UIH Australia/Pacific, Inc.
(Exact name of Registrant as specified in its charter)
State of Colorado 84-1341958
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4643 South Ulster Street, #1300
Denver, Colorado 80237
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (303) 770-4001
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
--- ---
The Company has no publicly-traded shares of capital stock. As of August
13, 1998, the Company had 13,864,941 shares of common stock outstanding.
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UIH AUSTRALIA/PACIFIC, INC.
TABLE OF CONTENTS
Page
Number
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PART I - FINANCIAL INFORMATION
------------------------------
Item 1 - Financial Statements
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<S> <C>
Condensed Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997 (Unaudited).............. 2
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 1998
and 1997 (Unaudited)................................................................................. 3
Condensed Consolidated Statement of Stockholder's Deficit for the Six Months Ended June 30, 1998
(Unaudited).......................................................................................... 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1998 and 1997
(Unaudited)......................................................................................... 5
Notes to Condensed Consolidated Financial Statements (Unaudited)........................................ 6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations............... 13
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PART II - OTHER INFORMATION
---------------------------
Item 5 - Other Information................................................................................... 19
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Item 6 - Exhibits and Reports on Form 8-K.................................................................... 19
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UIH AUSTRALIA/PACIFIC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in thousands, except share and per share amounts)
(Unaudited)
As of As of
June 30, December 31,
1998 1997
-------- -------------
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents........................................................ $ 4,118 $ 12,344
Restricted cash.................................................................. 258 420
Short-term investments........................................................... -- 12,325
Subscriber receivables........................................................... 3,567 2,548
Related party receivables........................................................ 1,329 1,942
Other receivables................................................................ 1,592 1,220
Prepaids......................................................................... 1,958 1,468
Other current assets............................................................. 568 717
-------- --------
Total current assets......................................................... 13,390 32,984
Property, plant and equipment, net of accumulated depreciation of $115,280 and
$78,179, respectively............................................................ 163,434 183,101
License fees, net of accumulated amortization of $4,449 and $3,773, respectively.... 4,641 5,691
Goodwill, net of accumulated amortization of $10,010 and $8,044, respectively....... 42,139 43,017
Deferred financing costs, net of accumulated amortization of $2,243 and $1,306,
respectively..................................................................... 12,258 13,393
Other non-current assets, net....................................................... 25 846
-------- --------
Total assets................................................................. $235,887 $279,032
======== ========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities
Accounts payable and accrued liabilities, including related party payables of
$3,999 and $1,596, respectively................................................ $ 26,519 $ 25,023
Construction payables............................................................ 1,916 6,008
Related party note payable....................................................... 4,999 4,999
Current portion of long-term debt................................................ 2,615 1,825
-------- --------
Total current liabilities.................................................... 36,049 37,855
Due to parent....................................................................... 7,320 5,394
Senior discount notes and other debt................................................ 407,314 387,094
Other long-term liabilities......................................................... 1,493 1,426
-------- --------
Total liabilities............................................................ 452,176 431,769
-------- --------
Minority interest in subsidiary..................................................... 11,813 11,416
-------- --------
Stockholder's deficit
Preferred stock, $0.01 par value, 1,000,000 shares authorized, none issued and
outstanding.................................................................... -- --
Common stock, $0.01 par value, 30,000,000 shares authorized, 13,864,941 shares
issued and outstanding......................................................... 139 139
Additional paid-in capital....................................................... 175,498 139,621
Cumulative translation adjustments............................................... (30,847) (28,964)
Accumulated deficit.............................................................. (372,892) (274,949)
-------- --------
Total stockholder's deficit.................................................. (228,102) (164,153)
-------- --------
Total liabilities and stockholder's deficit.................................. $235,887 $279,032
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
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2
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UIH AUSTRALIA/PACIFIC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Stated in thousands, except share and per share amounts)
(Unaudited)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
--------------------------- -------------------------
1998 1997 1998 1997
--------- ---------- -------- -------
<S> <C> <C> <C> <C>
Service and other revenue............................. $ 20,570 $ 16,219 $ 41,178 $ 30,711
System operating expense, including related party
expense of $1,185, $919, $2,232 and $1,321,
respectively....................................... (19,021) (11,807) (32,607) (21,869)
System selling, general and administrative expense.... (12,864) (11,771) (24,064) (22,805)
Corporate general and administrative expense,
including related party expense of $1,987, $197,
$4,347 and $385, respectively...................... (2,064) (293) (4,528) (576)
Depreciation and amortization......................... (23,930) (18,431) (51,891) (35,736)
---------- --------- ---------- ----------
Net operating loss............................. (37,309) (26,083) (71,912) (50,275)
Equity in income (losses) of affiliated companies,
net................................................ 955 (1,077) 470 (1,443)
Interest income, including related party income of
$155, $268, $309 and $533, respectively............ 222 331 560 812
Interest expense, including related party expense of
$462, $316, $932 and $611, respectively............ (14,423) (10,109) (27,721) (18,995)
Other expense, net.................................... (811) (549) (1,405) (767)
---------- ---------- ---------- ----------
Net loss before minority interest.............. (51,366) (37,487) (100,008) (70,668)
Minority interest in subsidiary....................... 1,140 -- 2,065 --
---------- ---------- ---------- ----------
Net loss....................................... $ (50,226) $ (37,487) $ (97,943) $ (70,668)
========== ========== ========== ==========
Basic and diluted loss per common share............... $ (3.62) $ (2.70) $ (7.06) $ (5.10)
========== ========== ========== ==========
Weighted-average number of common shares
outstanding........................................ 13,864,941 13,864,941 13,864,941 13,864,941
========== ========== ========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
3
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UIH AUSTRALIA/PACIFIC, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S DEFICIT
(Stated in thousands, except share amounts)
(Unaudited)
Common Stock Additional Cumulative
--------------------- Paid-In Translation Accumulated
Shares Amount Capital Adjustments Deficit Total
-------- -------- ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1998........... 13,864,941 $139 $139,621 $(28,964) $(274,949) $(164,153)
Capital contributions from parent... -- -- 35,877 -- -- 35,877
Change in cumulative translation
adjustments...................... -- -- -- (1,883) -- (1,883)
Net loss............................ -- -- -- -- (97,943) (97,943)
---------- ---- -------- -------- --------- ---------
Balances, June 30, 1998............. 13,864,941 $139 $175,498 $(30,847) $(372,892) $(228,102)
========== ==== ======== ======== ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
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4
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UIH AUSTRALIA/PACIFIC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in thousands)
(Unaudited)
For the Six Months Ended
June 30,
--------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.............................................................................. $(97,943) $(70,668)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization...................................................... 51,891 35,736
Equity in (income) losses of affiliated companies, net............................. (470) 1,443
Allocation of expense accounted for as capital contributions by parent............. 3,932 --
Minority interest share of losses.................................................. (2,065) --
Accretion of interest on senior discount notes and amortization of
deferred financing costs......................................................... 23,786 17,948
Increase in subscriber receivables................................................. (1,201) (326)
Increase in related party receivables.............................................. (315) (425)
Increase in other assets........................................................... (2,326) (2,103)
Increase in related party payables................................................. 5,632 2,966
Increase in accounts payable, accrued liabilities and other........................ 1,292 6,903
-------- --------
Net cash flows from operating activities.............................................. (17,787) (8,526)
-------- --------
Cash flows from investing activities:
Purchase of short-term investments.................................................... -- (3,663)
Proceeds from sale of short-term investments.......................................... 12,325 22,303
Restricted cash released.............................................................. 127 --
Investments in and advances to affiliated companies and other investments............. (343) (1,138)
Purchase of property, plant and equipment............................................. (37,757) (41,776)
Decrease in construction payables..................................................... (3,912) (28,163)
-------- --------
Net cash flows from investing activities.............................................. (29,560) (52,437)
-------- --------
Cash flows from financing activities:
Capital contributions from parent..................................................... 31,945 --
Cash contributed from minority interest partner....................................... 3,533 --
Borrowing on related party payables to parent......................................... -- 11,633
Deferred financing costs.............................................................. -- (1,502)
Borrowing on other debt............................................................... 2,779 39,286
Payment on capital leases and other debt.............................................. (323) (777)
-------- --------
Net cash flows from financing activities.............................................. 37,934 48,640
-------- --------
Effect of exchange rates on cash...................................................... 1,187 (38)
-------- --------
Decrease in cash and cash equivalents................................................. (8,226) (12,361)
Cash and cash equivalents, beginning of period........................................ 12,344 19,220
-------- --------
Cash and cash equivalents, end of period.............................................. $ 4,118 $ 6,859
======== ========
Non-cash investing and financing activities:
Decrease in unrealized loss on investment.......................................... $ -- $ (295)
======== ========
Assets acquired with capital leases................................................ $ 194 $ --
======== ========
Supplemental cash flow disclosures:
Cash received for interest......................................................... $ 259 $ 329
======== ========
Cash paid for interest............................................................. $ 2,512 $ 205
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
5
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UIH AUSTRALIA/PACIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1998
(Monetary amounts stated in thousands)
(Unaudited)
1. ORGANIZATION AND NATURE OF OPERATIONS
UIH Australia/Pacific, Inc. (the "Company"), a wholly-owned subsidiary of
UIH Asia/Pacific Communications, Inc. ("UAP"), which is in turn an indirect
98%-owned subsidiary of United International Holdings, Inc. ("UIH"), was formed
on October 14, 1994, for the purpose of developing, acquiring and managing
foreign multi-channel television, programming and telephony operations.
The following chart presents a summary of the Company's significant
investments in multi-channel television, programming and telephony operations as
of June 30, 1998.
********************************************************
* UIH *
********************************************************
*
100% *
*
********************************************************
* United International Properties, Inc. ("UIPI") *
********************************************************
*
98% *
*
********************************************************
* UAP *
********************************************************
*
100% *
*
********************************************************
* The Company *
********************************************************
*
*
*
********************************************************
* AUSTRALIA: *
* CTV Pty Limited ("CTV") and STV Pty Limited *
* ("STV")(collectively, "Austar")(1) 100% *
* Austar Satellite Pty Limited *
* ("Austar Satellite") 100% *
* United Wireless Pty Limited *
* ("United Wireless") 100% *
* XYZ Entertainment Pty Limited *
* ("XYZ Entertainment") 25% *
* NEW ZEALAND: *
* Saturn Communications Limited ("Saturn") 65% *
* TAHITI: *
* Telefenua S.A. ("Telefenua")(2) 90% *
********************************************************
(1) The Company holds an effective 100% economic interest in Austar
through a combination of ordinary shares and convertible debentures.
(2) The Company owns an effective 90% economic interest in Telefenua. The
Company's economic interest will decrease to 75% and 64% once it has
received a 20% and 40% internal rate of return on its investment in
Tahiti, respectively.
LIQUIDITY AND CAPITAL RESOURCES
A substantial portion of the Company's investments to date relate to its
investment in Austar, which is comprised primarily of multi-channel multi-point
distribution systems ("MMDS") and direct-to-home ("DTH") satellite operations.
The Company has essentially completed the construction and deployment of
Austar's entire MMDS network infrastructure and has incurred certain other
significant expenditures, such as Austar's National Customer Service Center,
which contemplates provision of MMDS and DTH services to a substantially larger
customer base than currently exists. If additional capital financings are not
available to continue to connect new customers at Austar, the Company's revenues
will decline and the current net operating loss will increase over time due to
customer disconnections, which are normally experienced in connection with
multi-channel television operations. In order to expand the customer base of
Austar and build-out the Company's other projects, the Company will need a
significant amount of additional capital, which is not currently available.
6
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UIH AUSTRALIA/PACIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of June 30, 1998, the Company had a net working capital deficit of
$13,661, excluding related party payables of $8,998, which are primarily due to
UIH. Due to the nature of the operation, the Company is able to slow the rate of
subscriber connections at Austar and network construction at the Company's other
projects to adjust to the level of funding sources that are available. The
Company believes it can, if necessary, substantially reduce the capital required
at Austar as the majority of future capital expenditures will be for subscriber
installation and premises equipment, which are controllable by the Company based
upon the rate of new subscriber connections. However, the Company needs to
continue the present rate of new subscriber connections to offset current churn
rates at Austar. The Company is currently in the process of seeking additional
sources of funds, which could include private equity, bank and/or public debt
and the sale of certain non-strategic assets. The Company may or may not be
successful in completing all or any of such financings. The Company believes,
however, that committed financial support from UIH combined with, if necessary,
reductions in the Company's planned capital expenditures, are sufficient to
sustain its operations through at least mid-1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
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 and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and all subsidiaries where it exercises majority control and owns a
majority economic interest. Austar, Saturn, Telefenua and United Wireless were
consolidated for all periods presented. In November 1997, the Company formed
Austar Satellite and began consolidating its operations. All significant
intercompany accounts and transactions have been eliminated in consolidation.
In management's opinion, all adjustments (of a normal recurring nature)
have been made which are necessary to present fairly the financial position of
the Company as of June 30, 1998 and the results of its operations for the three
and six months ended June 30, 1998 and 1997. For a more complete understanding
of the Company's financial position and results of its operations, see the
consolidated financial statements of the Company included in the Company's
annual report on Form 10-K for the year ended December 31, 1997.
INVESTMENTS IN AND ADVANCES TO AN AFFILIATED COMPANY, ACCOUNTED FOR UNDER THE
EQUITY METHOD
The Company accounts for its investment in XYZ Entertainment under the
equity method of accounting. Under this method, the investment, originally
recorded at cost, is adjusted to recognize the Company's proportionate share of
net earnings or losses of the affiliate, limited to the extent of the Company's
investment in and advances to the affiliate, including any debt guarantees or
other contractual funding commitments. The Company's proportionate share of net
earnings or losses of XYZ Entertainment includes the amortization of the excess
of its cost over its percentage interest in XYZ Entertainment's net tangible
assets.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Additions, replacements
and major improvements are capitalized, and costs for normal repair and
maintenance of property, plant and equipment are charged to expense as incurred.
With respect to the Company's MMDS and DTH operations, all subscriber equipment
and capitalized installation labor are depreciated using the straight-line
method over estimated useful lives of three years. Upon disconnection of a MMDS
or DTH subscriber, the remaining book value of the subscriber equipment,
excluding converters which are recovered upon disconnection, and the capitalized
labor are written off and accounted for as additional depreciation expense. MMDS
distribution facilities and cable distribution networks are depreciated using
the straight-line method over estimated useful lives of five to ten years.
With respect to the Company's cable distribution networks, initial
subscriber installation costs are capitalized and depreciated over a period no
longer than the depreciation period used for cable television plant and/or the
term of the license agreement. All installation fees and related costs with
respect to reconnects are recognized in the period in which the reconnection
occurs.
7
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UIH AUSTRALIA/PACIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Office equipment, furniture and fixtures, buildings and leasehold
improvements are depreciated using the straight-line method over estimated
useful lives of three to ten years.
Assets acquired under capital leases are included in property, plant and
equipment. The initial amount of the leased asset and corresponding lease
liability are recorded at the present value of future minimum lease payments.
Leased assets are amortized over the life of the relevant lease.
COMPREHENSIVE LOSS
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), which requires that an enterprise (i) classify items of other
comprehensive income (loss) by their nature in a financial statement and (ii)
display the accumulated balance of other comprehensive income (loss) separately
from retained earnings and additional paid-in capital in the equity section of a
statement of financial position. The Company adopted SFAS 130 effective January
1, 1998. For the three and six months ended June 30, 1998 and 1997, the
Company's only components of other comprehensive income (loss) were the changes
in cumulative translation adjustments and the change in unrealized loss on
investment (see Note 7).
FOREIGN OPERATIONS
The functional currency for the Company's foreign operations is the
applicable local currency for each affiliate company. Assets and liabilities of
foreign subsidiaries are translated at the exchange rate in effect at
period-end, and the statements of operations are translated at the average
exchange rates during the period. Exchange rate fluctuations on translating
foreign currency financial statements into U.S. dollars that result in
unrealized gains or losses are referred to as translation adjustments.
Cumulative translation adjustments are recorded as a separate component of
stockholder's deficit.
Transactions denominated in currencies other than the local currency are
recorded based on exchange rates at the time such transactions arise. Subsequent
changes in exchange rates result in transaction gains and losses which are
reflected in income as unrealized (based on period-end translations) or realized
upon settlement of the transactions.
Cash flows from the Company's operations in foreign countries are
translated based on their reporting currencies. As a result, amounts related to
assets and liabilities reported on the condensed consolidated statements of cash
flows will not agree to changes in the corresponding balances on the condensed
consolidated balance sheets. The effects of exchange rate changes on cash
balances held in foreign currencies are reported as a separate line below cash
flows from financing activities.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
3. JOINT VENTURE
In May 1998, Australis Media Limited ("Australis"), a major supplier of
programming to Austar, was placed into receivership in Australia. As a result of
the receivership and the subsequent termination of various agreements on May 20,
21 and 22, 1998, Australis ceased to be a provider of programming and signal to
Austar.
On May 19, 1998, Austar entered into a 50/50 joint venture with Optus
Vision Pty Limited ("Optus") for the ownership and operation of a satellite
distribution platform. As of May 21, 1998, this platform was fully operational.
In addition, Austar has signed agreements with Foxtel Management Pty Limited
("Foxtel") under which it will be provided with several channels currently
carried by Austar, including the eight-channel programming package which is the
most widely-distributed programming package in Australia (the "Core Package").
These developments have caused only minor disruptions or changes in service to
Austar's existing customer base.
Also as of May 19, 1998, Austar was granted additional programming rights
by Optus which would permit the carriage of certain channels of programming not
previously available to Austar. The specific packages of service to be offered
by Austar pursuant to these arrangements have not yet been concluded, and Austar
was not carrying any of Optus' programming as of June 30, 1998.
Under the terms of the senior syndicated term debt facility in the amount
of Australian $("A$")200,000 ($123,877 as of June 30, 1998) (the "Austar Bank
8
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UIH AUSTRALIA/PACIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Facility"), the termination of Austar's franchise agreements with Australis is
an event of default if (i) the termination is initiated by Austar, (ii) the
termination is not rectified within seven days and (iii) the termination would
likely have a material adverse effect on Austar. Austar received the advance
consent of the lenders under the Austar Bank Facility to terminate its franchise
agreement with Australis, and such banks have not given notice that a
termination would constitute a material adverse effect. Austar believes that,
based upon its successful migration to the signal platform and programming
agreements described above, there will be no such material adverse effect.
4. INVESTMENTS IN AND ADVANCES TO AN AFFILIATED COMPANY, ACCOUNTED FOR UNDER THE
EQUITY METHOD
<TABLE>
<CAPTION>
Investments in Cumulative Equity Cumulative
and Advances to in Losses of Translation
Affiliated Company Affiliated Company Adjustments Total
------------------ ------------------ ----------- -----
<S> <C> <C> <C> <C>
As of:
June 30, 1998.................... $18,140 $(18,250) $110 $ --
======= ======== ==== ====
December 31, 1997................ $18,610(1) $(18,720) $110 $ --
======= ======== ==== ====
</TABLE>
(1) Includes an accrued funding obligation of $406 at December 31, 1997.
The Company does not have a contractual funding obligation to XYZ
Entertainment; however, the Company would face significant and
punitive dilution if it did not make the requested fundings.
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
As of As of
June 30, December 31,
1998 1997
--------- -----------
<S> <C> <C>
Subscriber premises equipment and converters............................... $ 165,853 $160,413
MMDS distribution facilities............................................... 54,290 55,093
Cable distribution networks................................................ 26,644 16,770
Office equipment, furniture and fixtures................................... 12,671 10,813
Buildings and leasehold improvements....................................... 6,366 5,647
Other...................................................................... 12,890 12,544
--------- --------
278,714 261,280
Accumulated depreciation............................................. (115,280) (78,179)
--------- --------
Net property, plant and equipment.................................... $ 163,434 $183,101
========= ========
</TABLE>
6. SENIOR DISCOUNT NOTES AND OTHER DEBT
<TABLE>
<CAPTION>
As of As of
June 30, December 31,
1998 1997
-------- ------------
<S> <C> <C>
May 1996 Notes (as defined below), net of unamortized discount............ $299,652 $278,662
September 1997 Notes (as defined below), net of unamortized discount....... 32,257 30,461
Austar Bank Facility....................................................... 68,132 71,531
Vendor financed equipment at Saturn........................................ 5,881 3,730
Capitalized lease obligations.............................................. 3,010 3,441
Mortgage note, interest at 7.548%, 7-year term............................. 997 1,094
-------- --------
409,929 388,919
Less current portion................................................. (2,615) (1,825)
-------- --------
$407,314 $387,094
======== ========
</TABLE>
MAY 1996 14% SENIOR DISCOUNT NOTES
The Company's 14% senior notes that were issued in May 1996 at a discount
from their principal amount of $443,000 (the "May 1996 Notes") had an accreted
value of $299,652 as of June 30, 1998. On and after May 15, 2001, cash interest
will accrue and will be payable semi-annually on each May 15 and November 15,
commencing November 15, 2001. The May 1996 Notes are due May 15, 2006. Effective
May 16, 1997, the interest rate on these notes increased by an additional 0.75%
per annum to 14.75%, until such time as the Company consummates an issuance of
9
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UIH AUSTRALIA/PACIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
its capital stock resulting in gross proceeds to the Company of at least $70,000
(an "Equity Sale"). Due to this increase in the interest rates, the May 1996
Notes will accrete to a principal amount of $455,574 if an Equity Sale is not
consummated prior to May 15, 2001, the date cash interest begins to accrue.
SEPTEMBER 1997 14% SENIOR DISCOUNT NOTES
The Company's 14% senior notes that were issued in September 1997 at a
discount from their principal amount of $45,000 (the "September 1997 Notes") had
an accreted value of $32,257 as of June 30, 1998. On and after May 15, 2001,
cash interest will accrue and will be payable semi-annually on each May 15 and
November 15, commencing November 15, 2001. The September 1997 Notes are due May
15, 2006. Effective September 23, 1997, the interest rate on these notes
increased by an additional 0.75% per annum to 14.75%, until such time as the
Company consummates an Equity Sale. Due to this increase in interest rates, the
September 1997 Notes will accrete to a principal amount of $46,277 if an Equity
Sale is not consummated prior to May 15, 2001, the date cash interest begins to
accrue.
AUSTAR BANK FACILITY
In July 1997, Austar secured the Austar Bank Facility to fund Austar's
subscriber acquisition and working capital needs. The Austar Bank Facility
consists of three sub-facilities: (i) A$50,000 revolving working capital
facility, (ii) A$60,000 cash advance facility and (iii) A$90,000 term loan
facility. This term loan facility will be available to the extent that any
drawdown, if added to the existing aggregate outstanding balance under
sub-facilities (i) and (ii), would not exceed five times annualized cash flows
(as defined), and upon Austar having achieved and maintained total subscribers
of at least 200,000. All of Austar's assets are pledged as collateral for the
Austar Bank Facility. In addition, pursuant to the Austar Bank Facility, Austar
cannot pay any dividends, interest or fees under its technical assistance
agreements prior to December 31, 2000. Subsequent to December 31, 2000, Austar
will be permitted to make these types of payments, subject to certain debt to
cash flow ratios. As of June 30, 1998, Austar had drawn the entire amount of the
working capital facility and the cash advance facility totaling A$110,000
($68,132 converted using the June 30, 1998 exchange rate). The working capital
facility is fully repayable on June 30, 2000. The cash advance facility is fully
repayable pursuant to an amortization schedule beginning December 31, 2000 and
ending June 30, 2004. Although management does not expect to meet the
requirements for drawing down the term loan facility during 1998, they have
engaged the lender under the Austar Bank Facility in a discussion regarding an
amendment to the Austar Bank Facility. If approved, such an amendment would
allow Austar to draw all or a portion of the A$90,000 term loan facility in
advance of the time period currently envisioned. There can be no assurance,
however, that such an amendment will ultimately be approved.
7. COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- ------------------------
1998 1997 1998 1997
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss.......................................... $(50,226) $(37,487) $(97,943) $(70,668)
Other comprehensive loss
Change in cumulative translation adjustments.... (3,994) (2,382) (1,883) (3,393)
Change in unrealized loss on investment......... -- (561) -- (295)
-------- -------- -------- -------
Total comprehensive loss.................... $(54,220) $(40,430) $(99,826) $(74,356)
======== ======== ======== ========
</TABLE>
8. RELATED PARTY
Effective May 1, 1996, the Company and UIH Management, Inc. ("UIH
Management"), an indirect wholly-owned subsidiary of UIH, executed a 10-year
management services agreement (the "Management Agreement"), pursuant to which
UIH Management performed certain administrative, accounting, financial reporting
and other services for the Company, which has no separate employees of its own.
Pursuant to the Management Agreement, the management fee was $750 for the first
year of such agreement (beginning May 1, 1996), and it increases on each
anniversary date of the Management Agreement by 8% per year. Effective March 31,
1997, UIH Management assigned its rights and obligations under the Management
Agreement to UAP, the Company's immediate parent, and extended the agreement for
20 years from that date (the "UAP Management Agreement"). In addition, the
Company reimburses UAP or UIH for any out-of-pocket expenses including travel,
lodging and entertainment expenses, incurred by UAP or UIH on behalf of the
Company. In December 1997, UIH began allocating corporate general and
administrative expense to the Company in the form of capital contributions,
based on increased activity at the operating system level. Management believes
that this method of allocating costs is reasonable.
10
<PAGE>
UIH AUSTRALIA/PACIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Austar, Saturn, Telefenua and United Wireless are also parties to technical
service agreements with UAP whereby such operating companies pay to UAP fees
based on their respective gross revenues. In addition, UIH has appointed certain
of its employees to serve in senior management positions at the operating
systems. The operating systems reimburse UIH for certain direct costs incurred
by UIH, including salaries and benefits relating to these senior management
positions.
As of June 30, 1998, UIPI, the immediate parent of UAP, had loaned $4,999
to UIH Australia/Pacific Finance, Inc., a wholly-owned subsidiary of the
Company. This loan accrues interest at 15% per annum and is due on demand. In
addition, for the six months ended June 30, 1998, UAP invested $31,945 into the
Company in the form of capital contributions.
Included in the amount due to parent is the following:
<TABLE>
<CAPTION>
As of As of
June 30, December 31,
1998 1997
-------- ------------
<S> <C> <C>
Austar technical assistance agreement obligations....................... $ 5,015 $ 2,629
Telefenua technical assistance agreement obligations.................... 2,894 2,659
Saturn technical assistance agreement obligations....................... 716 406
United Wireless technical assistance agreement obligations.............. 549 487
Payable to parent for management fees, interest and invoices paid by UIH
on the Company's behalf............................................... 1,477 723
Other................................................................... 668 86
------- -------
11,319 6,990
Less current portion................................................ (3,999) (1,596)
------- -------
$ 7,320 $ 5,394
======= =======
</TABLE>
9. SEGMENT INFORMATION
The Company's reportable segments are the various countries in which it
operates multi-channel television, programming and/or telephony operations.
These reportable segments are managed separately because each country presents
different marketing strategies and technology issues as well as distinct
economic climates and regulatory constraints. The Company has selected the
following reportable segments: (i) Australia, including the Company's
investments in Austar, Austar Satellite and United Wireless, (ii) New Zealand,
including the Company's investment in Saturn, (iii) Tahiti, including the
Company's investment in Telefenua and (iv) Corporate, including various holding
companies and consolidating eliminations.
<TABLE>
<CAPTION>
As of and for the Three Months Ended
June 30, 1998
-----------------------------------------------------------------------
Australia New Zealand Tahiti Corporate Total
--------- ----------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Service and other revenue................... $ 19,218 $ 260 $ 1,122 $ (30) $ 20,570
Net loss.................................... $(34,469) $(2,202) $ (666) $(12,889) $(50,226)
Total assets................................ $176,037 $46,179 $10,560 $ 3,111 $235,887
For the Three Months Ended
June 30, 1997
-----------------------------------------------------------------------
Australia New Zealand Tahiti Corporate Total
--------- ----------- -------- ---------- ---------
Service and other revenue................... $ 15,162 $ 98 $ 959 $ -- $ 16,219
Net loss.................................... $(23,793) $(2,485) $ (923) $(10,286) $(37,487)
For the Six Months Ended
June 30, 1998
-----------------------------------------------------------------------
Australia New Zealand Tahiti Corporate Total
--------- ----------- -------- --------- ---------
Service and other revenue................... $ 38,534 $ 415 $ 2,259 $ (30) $ 41,178
Net loss.................................... $(65,465) $(4,007) $(1,273) $(27,198) $(97,943)
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended
June 30, 1997
-----------------------------------------------------------------------
Australia New Zealand Tahiti Corporate Total
--------- ----------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Service and other revenue................... $ 28,655 $ 181 $ 1,875 $ -- $ 30,711
Net loss.................................... $(45,512) $(4,181) $(1,460) $(19,515) $(70,668)
</TABLE>
10. SUBSEQUENT EVENT
On July 9, 1998, Austar acquired certain Australian pay television assets
of East Coast Television Pty Limited ("ECT"), an affiliate of Century
Communications Corp. ("Century"), and related assets for approximately $6,100 of
UIH's newly-created Series B Convertible Preferred Stock. ECT's subscription
television business includes subscribers and certain MMDS licenses and
transmission equipment serving the areas in and around Newcastle, Gossford,
Wollongong and Tasmania.
12
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
condensed consolidated financial statements and related notes thereto included
elsewhere herein. Such condensed consolidated financial statements provide
additional information regarding the Company's financial activities and
condition.
The Company conducts no operations other than through its operating
companies in which it holds varying interests. Because the operating companies
have not yet achieved the expected subscriber penetration levels anticipated
with mature operating systems, the Company believes that its historical results
of operations discussed herein are not indicative of future results of its
operations.
The Company has no employees of its own. UAP, the Company's parent,
provides various management, financial reporting, accounting and other services
for the Company pursuant to the terms of the UAP Management Agreement. Austar,
Saturn, Telefenua and United Wireless are also parties to technical service
agreements with UAP for which such operating companies pay to UAP fees based on
their respective gross revenues.
FORWARD-LOOKING STATEMENTS
Certain statements in this Report may constitute "forward-looking
statements" within the meaning of the federal securities laws. Such
forward-looking statements may include, among other things, statements
concerning the Company's plans, objectives and future economic prospects,
expectations, beliefs, future plans and strategies, anticipated events or trends
and similar expressions concerning matters that are not historical facts. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, changes in
television viewing preferences and habits by subscribers and potential
subscribers, their acceptance of new technology, programming alternatives and
new services offered by the Company, the Company's ability to secure adequate
capital to fund system growth and development, risks inherent in investment and
operations in foreign countries, changes in government regulation, and other
factors referenced in this Report.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company had invested a total of approximately
$450.9 million in its projects as outlined below:
As of
June 30,
1998
--------------
(In thousands)
Austar........................................... $375,606(1)(2)
Saturn........................................... 35,171(1)(3)
Telefenua........................................ 16,738
XYZ Entertainment................................ 14,433
United Wireless.................................. 8,950
--------
Total....................................... $450,898
========
(1) Does not include amounts contributed to Austar (approximately
$11.0 million) and Saturn (approximately $2.9 million) by
shareholders other than the Company, which amounts were
contributed by such shareholders prior to the acquisition of their
respective interests by the Company.
(2) Includes A$110.0 million ($83.9 million converted using the
exchange rate on each funding date) of amounts borrowed under the
Austar Bank Facility and $28.8 million paid by the Company to
increase its economic interest in Austar to approximately 100%.
Does not include the $29.8 million of non-cash issuance of
preferred stock by UIH to increase its economic interest in Austar
to 90% in December 1995.
(3) Does not include the $7.8 million of common stock exchanged for
shares of the Company to increase the Company's interest in Saturn
to 100% effective July 1996 or the $19.6 million invested by
another shareholder for its 35% interest in Saturn in July 1997.
13
<PAGE>
AUSTAR
The Company expects the need for additional funding for Austar in
the future. The amount of capital needed is dependent primarily upon
three factors: (i) the number of new subscribers added; (ii) the level
of churn, that is, the level of existing subscribers who disconnect
from Austar's service; and (iii) the mix of DTH satellite compared to
MMDS installations. Substantially all fixed costs required to operate
Austar's service have already been incurred. The average cost to
install a subscriber includes variables such as equipment, marketing
and sales costs, and installation fees. The average cost of a
subscriber who disconnects is reduced by the recovery of certain
equipment (principally converters), and is further reduced if a new
subscriber is installed in a previously disconnected home. Austar plans
to continue to expand and add subscribers; however, the timing of such
expansion and the funds required for such expansion are largely
variable. Based upon current plans and budgeted churn, Austar will
require approximately $50-$60 million to continue on its current
expansion path for the period from July 1, 1998 to December 31, 1998
and approximately $50-$75 million for similar expansion plans for 1999.
The sources of funds for such expansion may include the raising of
private or public equity, continued investment by UIH, the drawdown of
the remaining amount ($55.7 million converted using the June 30, 1998
exchange rate) under the Austar Bank Facility (assuming that certain
financial ratios are met, which ratios are not currently being met, or
assuming that the Austar Bank Facility is amended to loosen such
covenants) or the sale of non-strategic assets. The Company may or may
not be successful in completing all or any of such financings. The
Company believes, however, that committed financial support from UIH
combined with, if necessary, reductions in the Company's planned
capital expenditures, are sufficient to sustain its operations through
at least mid-1999.
SATURN
The Company expects the need for additional funding for Saturn in
the future. Saturn's capital needs include capital for the completion
of the network required by Saturn to offer cable television and
telephony services and the capital required to install customers.
Management currently estimates that the Company's portion of the total
funding required for Saturn is approximately $45-$50 million for the
period from July 1, 1998 until Saturn has sufficient cash flows from
operations to cover such needs, although there can be no assurances
that further additional capital will not be required. Of this amount,
approximately $30-$35 million is required as a fixed cost to complete
the construction of the network, and the remainder is required as a
result of the installation of customers. The sources of funds for such
expansion may include the raising of private or public equity,
continued investment by UIH, the raising of equipment and/or bank
financing (where the Company has already commenced discussions with
several potential lenders) or the sale of non-strategic assets. The
Company may or may not be successful in completing all or any of such
financings. The Company believes, however, that committed financial
support from UIH combined with, if necessary, reductions in the
Company's planned capital expenditures, are sufficient to sustain its
operations through at least mid-1999.
OTHER
The Company expects that the aggregate future funding requirements
for Telefenua, XYZ Entertainment and United Wireless are less than $5.0
million.
The indentures governing UIH's senior secured discount notes due February
2008 and the Company's May 1996 Notes and September 1997 Notes (collectively,
the "Notes") place restrictions on the Company and its restricted subsidiaries
with respect to incurring additional debt. The Company and all of the operating
companies are currently restricted under the UIH indentures. The Company, Austar
and Telefenua are restricted under the Company's indentures. The restrictions
imposed by the UIH indentures will be eliminated upon the retirement of UIH's
notes at their maturity in February 2008, and the restrictions imposed by the
Company's indentures will be eliminated upon the retirement of the Company's
Notes at their maturity in May 2006. In addition, pursuant to the Austar Bank
Facility, Austar cannot pay any dividends, interest on debentures and
subordinated debt, or fees under its technical assistance agreements prior to
December 31, 2000. Subsequent to December 31, 2000, Austar will be permitted to
make these types of payments, subject to certain debt to cash flow ratios.
On November 17, 1997, pursuant to the terms of the indentures governing the
Notes, the Company issued warrants to purchase a total of 488,000 shares of its
common stock, which represented 3.4% of its common stock. The warrants are
exercisable at a price of $10.45 per share which would result in gross proceeds
of approximately $5.1 million, if exercised. The warrants are exercisable
through May 15, 2006.
14
<PAGE>
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
The Company incurred a net loss during the six months ended June 30, 1998
of $97.9 million, which included non-cash items such as depreciation and
amortization expense totaling $51.9 million and accretion of interest on the
Notes and amortization of deferred financing costs totaling $23.8 million.
Cash and cash equivalents decreased $8.2 million from $12.3 million as of
December 31, 1997 to $4.1 million as of June 30, 1998. Principal sources of cash
during the six months ended June 30, 1998 included cash contributions from
parent of $32.0 million, proceeds from the sale of short-term investments of
$12.3 million, cash contributions from the minority interest partner of $3.5
million, borrowing on other debt of $2.8 million and exchange rate effects on
cash and other sources totaling $1.3 million.
During the six months ended June 30, 1998, cash was used principally for
purchases of property, plant and equipment totaling $37.8 million to continue
new subscriber connections at Austar and the build-out of existing projects,
primarily Saturn, the funding of operating activities of $17.8 million, a
decrease in construction payables of $3.9 million and the payment on capital
leases and other investing and financing uses of $0.6 million.
FOR THE SIX MONTHS ENDED JUNE 30, 1997
The Company incurred a net loss during the six months ended June 30, 1997
of $70.7 million, which included non-cash items such as depreciation and
amortization expense totaling $35.7 million and accretion of interest on the
Notes and amortization of deferred financing costs totaling $17.9 million.
Cash and cash equivalents decreased $12.3 million from $19.2 million as of
December 31, 1996 to $6.9 million as of June 30, 1997. Principal sources of cash
during the six months ended June 30, 1997 included borrowings from Austar's
interim financing facility of $39.3 million, net proceeds from the net decrease
in short-term investments of $18.6 million and borrowings from parent of $11.6
million.
During the six months ended June 30, 1997, cash was used principally for a
decrease in construction payables of $28.2 million, the purchase of property,
plant and equipment of $41.8 million to construct Austar's and Telefenua's
systems, the funding of operating activities of $8.5 million and the payment of
deferred financing costs as well as other investing and financing uses totaling
$3.3 million.
RESULTS OF OPERATIONS
EXCHANGE RATES. The Company translates revenue and expense from its foreign
subsidiaries using the weighted-average exchange rates during the period.
However, for ease of presentation, the spot rates for the countries in the
Australia/Pacific region are shown below for the Australian dollar, the New
Zealand dollar and the French Pacific franc, respectively, per one U.S. dollar.
<TABLE>
<CAPTION>
Australia New Zealand Tahiti
--------- ----------- ------
<S> <C> <C> <C>
June 30, 1998................... 1.6145 1.9290 110.375
December 31, 1997............... 1.5378 1.7161 109.690
June 30, 1997................... 1.3266 1.4697 107.285
</TABLE>
SERVICE AND OTHER REVENUE. The Company's service and other revenue increased
$4.4 million and $10.5 million for the three and six months ended June 30, 1998,
respectively, compared to the amounts for the corresponding periods in the prior
year as follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1998 1997 1998 1997
-------- ------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Austar......................................... $19,147 $15,055 $38,346 $28,524
Saturn ........................................ 260 98 415 181
Telefenua...................................... 1,122 959 2,259 1,875
United Wireless................................ 41 107 158 131
------- ------- ------- -------
Total service and other revenue......... $20,570 $16,219 $41,178 $30,711
======= ======= ======= =======
</TABLE>
15
<PAGE>
AUSTAR
Service and other revenue for Austar increased $4.0 million, or
26.5%, from $15.1 million for the three months ended June 30, 1997 to
$19.1 million for the three months ended June 30, 1998. Service and
other revenue for Austar increased $9.8 million, or 34.4%, from $28.5
million for the six months ended June 30, 1997 to $38.3 million for the
six months ended June 30, 1998. These increases were primarily due to
subscriber growth (215,275 at June 30, 1998 compared to 149,495 at June
30, 1997) as Austar continues to roll-out its services. These increases
occurred despite the negative impact of $4.3 million due to fluctuation
in the exchange rates between the three months ended June 30, 1998 and
1997 and the negative impact of $7.5 million due to fluctuation in the
exchange rates between the six months ended June 30, 1998 and 1997.
SYSTEM OPERATING EXPENSE. System operating expense increased $7.2 million and
$10.7 million for the three and six months ended June 30, 1998, respectively,
compared to the amounts for the corresponding periods in the prior year as
follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- ------------------------
1998 1997 1998 1997
-------- --------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Austar ........................................ $15,450 $ 9,999 $25,641 $18,466
Saturn ........................................ 1,593 932 2,856 1,659
Austar Satellite............................... 1,075 -- 2,283 --
Telefenua...................................... 581 459 1,142 885
United Wireless................................ 322 417 685 859
------- ------- ------- -------
Total system operating expense.......... $19,021 $11,807 $32,607 $21,869
======= ======= ======= =======
</TABLE>
AUSTAR
Operating expense for Austar increased $5.5 million, or 55.0%, from
$10.0 million for the three months ended June 30, 1997 to $15.5 million
for the three months ended June 30, 1998. Operating expense for Austar
increased $7.1 million, or 38.4%, from $18.5 million for the six months
ended June 30, 1997 to $25.6 million for the six months ended June 30,
1998. These increases were primarily due to an increase in satellite
programming costs resulting from the May 1998 agreements with Foxtel and
Optus to obtain additional programming rights in connection with the
receivership of Australis as well as additional satellite platform costs
associated with the May 1998 joint venture with Optus (see Note 3). The
Company expects that the restructuring of programming costs for certain
channels will result in somewhat higher costs in the short-term for
these channels which will be offset by lower costs in the long-term when
compared to Austar's previous agreements with Australis. The remainder
of the increase between periods was due to an increase in salaries and
benefits related to the additional personnel necessary to support
Austar's launch of local and state offices in its markets and an
increase in customer subscriber management expenses related to volume
increases in telephone, billing and collection costs. These increases
were positively impacted by $3.6 million due to fluctuation in the
exchange rates between the three months ended June 30, 1998 and 1997 and
positively impacted by $5.3 million due to fluctuation in the exchange
rates between the six months ended June 30, 1998 and 1997.
During the three months ended June 30, 1998, Austar incurred
one-time charges of $1.4 million as a result of the receivership of
Australis and the subsequent termination of various agreements and
incurred additional programming expense of $2.0 million related to its
new programming agreements and $0.7 million related to the operation of
the joint venture with Optus.
Austar expects operating expense as a percentage of service revenue
to decline in future periods because a significant portion of Austar's
distribution facilities and network costs, such as local and state
office staffing levels, operating costs and wireless license costs, have
already been incurred and are fixed in relation to changes in subscriber
volumes. Other system operating expense, such as certain costs related
to programming and subscriber management expense, will vary in direct
proportion to the number of subscribers.
16
<PAGE>
SATURN
For the three months ended June 30, 1998, the Company reported
system operating expense from Saturn of $1.6 million, an increase of
$0.7 million, or 77.8%, compared with system operating expense of $0.9
million for the corresponding period in 1997. For the six months ended
June 30, 1998, the Company reported system operating expense from Saturn
of $2.9 million, an increase of $1.2 million, or 70.6%, compared with
system operating expense of $1.7 million for the corresponding period in
1997. These increases were primarily due to an increase in programming
costs related to the launch of additional sports programs during 1998
and an increase in personnel expenses in order to support Saturn's
build-out of its hybrid fiber coaxial network in the Wellington area.
These increases were positively impacted by $0.3 million due to
fluctuation in the exchange rates between the three months ended June
30, 1998 and 1997 and positively impacted by $0.6 million due to
fluctuation in the exchange rates between the six months ended June 30,
1998 and 1997.
AUSTAR SATELLITE
In September 1997, the Company commenced transponder fee payments
for a satellite service fee of approximately $0.4 million per month as
part of its five-year agreement with Optus Networks Pty Limited. In May
1998, Austar Satellite began billing the joint venture between Austar
and Optus for the transponder rental. The Company eliminates all
related party accounts in consolidation.
SYSTEM SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. System selling, general and
administrative expense increased $1.1 million and $1.3 million for the three and
six months ended June 30, 1998, respectively, compared to the amounts for the
corresponding periods in the prior year as follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- ------------------------
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Austar ........................................ $10,740 $10,083 $20,313 $19,609
Saturn ........................................ 1,313 746 2,141 1,396
Telefenua...................................... 584 538 1,101 1,011
United Wireless................................ 227 404 509 789
------- ------- ------- -------
Total system selling, general and
administrative expense................ $12,864 $11,771 $24,064 $22,805
======= ======= ======= =======
</TABLE>
SATURN
System selling, general and administrative expense increased $0.6
million, or 85.7%, from $0.7 million for the three months ended June
30, 1997 to $1.3 million for the three months ended June 30, 1998.
System selling, general and administrative expense increased $0.7
million, or 50.0%, from $1.4 million for the six months ended June 30,
1997 to $2.1 million for the six months ended June 30, 1998. These
increases were primarily due to increases in marketing and promotion
costs as well as additional personnel costs related to the April 1998
launch of Saturn's telephony services. These increases were positively
impacted by $0.3 million due to fluctuation in the exchange rates
between the three months ended June 30, 1998 and 1997 and positively
impacted by $0.5 million due to fluctuation in the exchange rates
between the six months ended June 30, 1998 and 1997.
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSE. Corporate general and
administrative expense increased $1.8 million and $3.9 million for the three and
six months ended June 30, 1998, respectively, compared to the amounts for the
corresponding periods in the prior year. These increases were primarily due to
an increase in the allocation of UIH corporate general and administrative
expense to the Company in the form of capital contributions, based on increased
activity at the operating system level. Management believes that this method of
allocating costs is reasonable.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense
increased $5.5 million and $16.2 million for the three and six months ended June
30, 1998, respectively, compared to the amounts for the corresponding periods in
the prior year as follows:
17
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1998 1997 1998 1997
--------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Austar ........................................ $21,354 $17,206 $48,235 $33,709
Saturn ........................................ 706 501 1,258 896
Austar Satellite............................... 1,365 -- 1,365 --
Telefenua...................................... 351 551 720 791
United Wireless................................ 154 173 313 340
------- ------- ------- -------
Total depreciation and amortization
expense............................... $23,930 $18,431 $51,891 $35,736
======= ======= ======= =======
</TABLE>
AUSTAR
Depreciation and amortization expense from Austar increased $4.2
million, or 24.4%, from $17.2 million for the three months ended June
30, 1997 to $21.4 million for the three months ended June 30, 1998.
Depreciation and amortization expense from Austar increased $14.5
million, or 43.0%, from $33.7 million for the six months ended June 30,
1997 to $48.2 million for the six months ended June 30, 1998. These
increases were primarily due to the larger fixed asset base due to the
significant deployment of operating assets to meet subscriber growth as
well as an increase in depreciation expense related to subscriber
disconnects. These increases were positively impacted by $4.4 million
due to fluctuation in the exchange rates between the three months ended
June 30, 1998 and 1997 and positively impacted by $8.7 million due to
fluctuation in the exchange rates between the six months ended June 30,
1998 and 1997.
INTEREST EXPENSE. Interest expense increased $4.3 million and $8.7 million for
the three and six months ended June 30, 1998, respectively, compared to the
amounts for the corresponding periods in the prior year. These increases were
primarily due to the new accretion of interest on the September 1997 Notes as
well as continued accretion on the May 1996 Notes at 14.75% compared to 14% in
the prior year interim period. In addition, interest expense related to the
Austar Bank Facility, which was secured in July 1997, was $2.2 million and $3.7
million for the three and six months ended June 30, 1998, respectively.
YEAR 2000 CONVERSION
UIH has established a task force to coordinate the identification,
evaluation and implementation of changes to computer systems and applications
necessary to achieve the Company's goal of a Year 2000 date conversion which
would minimize the effect on customers and avoid disruption to business
operations. The highest priority for compliance is being given to service
delivery systems, targeting customer care and field headend devices. The Company
is also focusing on field equipment, hardware and software tools, programming
and outside forces that may affect the Company's operations, including the
Company's vendors, banks and utility companies. The task force's analysis of the
Year 2000 threat is on-going and will be continuously updated throughout 1998
and 1999 as necessary.
To date, the task force has authored and distributed an inventory package
to the Company's regional systems to identify all business and computer
applications, so the task force can identify potential compliance problems. The
task force is currently compiling a database of information based upon these
responses, which is expected to be completed by September 30, 1998. To the
extent problems are identified, the task force plans to implement corrective
procedures where necessary, then test the applications for Year 2000 compliance.
Each system is responsible for inquiring of their vendors and the other entities
with which they do business as to such entities' Year 2000 compliance status.
The total cost of compliance and its effect on the Company's future results of
operations and liquidity is being studied by the task force. Based on the
preliminary data provided by the systems and at the corporate level, the Company
believes that the known Year 2000 issues can be remedied without a material
financial impact on the Company. There can be no assurance, however, as to the
total cost to the Company for complete compliance until all of the data has been
gathered. The Company expects to complete this entire project by June 30, 1999.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 5 - OTHER INFORMATION
SUMMARY OPERATING DATA
The following tables set forth certain unaudited operating data:
<TABLE>
<CAPTION>
As of
June 30, 1998
---------------------------------------------------------------------------
Television
Homes in Economic
Service Homes Basic Basic Ownership
Operating System Area Serviceable Subscribers Penetration Interest
---------------- ---------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Austar............................. 1,635,000 1,632,691 215,275 13.2% 100%(1)
Saturn (2)......................... 141,000 36,613 3,635 9.9% 65%
Telefenua.......................... 31,000 20,128 6,120 30.4% 90%(3)
XYZ Entertainment.................. N/A(4) N/A 543,564(5) N/A 25%
--------- --------- -------
Total........................ 1,807,000 1,689,432 768,594
========= ========= =======
</TABLE>
<TABLE>
<CAPTION>
As of
March 31, 1998
---------------------------------------------------------------------------
Television
Homes in Economic
Service Homes Basic Basic Ownership
Operating System Area Serviceable Subscribers Penetration Interest
---------------- ---------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Austar............................. 1,635,000 1,589,000 199,955 12.6% 100%(1)
Saturn............................. 141,000 23,780 3,245 13.6% 65%
Telefenua.......................... 31,000 20,128 6,104 30.3% 90%(3)
XYZ Entertainment.................. N/A(4) N/A 577,476(5) N/A 25%
--------- --------- -------
Total........................ 1,807,000 1,632,908 786,780
========= ========= =======
</TABLE>
(1) The Company holds an effective 100% interest in Austar through a
combination of ordinary shares and convertible debentures.
(2) In April 1998, Saturn launched business and residential telephony services
in the Wellington, New Zealand area. As of June 30, 1998, Saturn had 7,709
homes connectable, 950 residential telephony subscribers and 73 business
telephony subscribers.
(3) The Company holds an effective 90% economic interest in Telefenua. The
Company's economic interest will decrease to 75% and 64% once it has
received a 20% and 40% internal rate of return on its investment in Tahiti,
respectively.
(4) The Company expects that XYZ Entertainment's programming package will be
marketed to virtually all of Australia's 6.5 million television households
by Australian multi-channel television providers.
(5) This figure represents the total estimated subscribers to the eight-channel
Core Package to which XYZ Entertainment supplies four channels. In
addition, XYZ Entertainment launched a fifth channel, the Lifestyle
Channel, on September 1, 1997.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter.
None.
19
<PAGE>
SIGNATURE
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.
UIH AUSTRALIA/PACIFIC, INC.
Date: August 13, 1998
-----------------------------------------------------------
By: /S/ J. Timothy Bryan
-----------------------------------------------------------
J. Timothy Bryan
Chief Financial Officer and Treasurer
(A Duly Authorized Officer and Principal Financial Officer)
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UIH
AUSTRALIA/PACIFIC, INC.'S FORM 10-Q FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
IS QUALIFIED IN ITS ENTIRETY TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,118
<SECURITIES> 0
<RECEIVABLES> 3,567
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,390
<PP&E> 278,714
<DEPRECIATION> 115,280
<TOTAL-ASSETS> 235,887
<CURRENT-LIABILITIES> 36,049
<BONDS> 407,314
0
0
<COMMON> 139
<OTHER-SE> (197,394)
<TOTAL-LIABILITY-AND-EQUITY> 235,887
<SALES> 0
<TOTAL-REVENUES> 41,178
<CGS> 0
<TOTAL-COSTS> 32,607
<OTHER-EXPENSES> 51,891
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,721
<INCOME-PRETAX> (97,943)
<INCOME-TAX> 0
<INCOME-CONTINUING> (97,943)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (97,943)
<EPS-PRIMARY> (7.06)
<EPS-DILUTED> (7.06)
</TABLE>
