UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A No. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2000
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
United 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 May 8, 2000
the Company had 17,810,299 shares of common stock outstanding.
<PAGE>
<TABLE>
<CAPTION>
United Australia/Pacific, Inc.
TABLE OF CONTENTS
Page
Number
------
PART I - FINANCIAL INFORMATION
------------------------------
<S> <C>
Item 1 - Financial Statements
------
Condensed Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 (Unaudited)............. 2
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2000
and 1999 (Unaudited)................................................................................. 3
Condensed Consolidated Statement of Stockholders' Deficit for the Three Months Ended March 31, 2000
(Unaudited).......................................................................................... 4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 and
1999 (Unaudited).................................................................................... 5
Notes to Condensed Consolidated Financial Statements (Unaudited)........................................ 6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations............... 16
------
Item 3 - Quantitative and Qualitative Disclosure about Market Risk........................................... 22
------
PART II - OTHER INFORMATION
---------------------------
Item 6 - Exhibits and Reports on Form 8-K.................................................................... 24
------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
UNITED AUSTRALIA/PACIFIC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in thousands, except share and per share amounts)
(Unaudited)
As of As of
March 31, December 31,
2000 1999
--------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................................... $ 5,068 $ 6,028
Short-term liquid investments....................................................................... 231,775 269,393
Subscriber receivables, net......................................................................... 7,981 8,177
Related party receivables........................................................................... 2,390 1,645
Other receivables................................................................................... 2,853 6,196
Stock subscription receivable....................................................................... 101,645 -
Inventory........................................................................................... 13,615 14,193
Prepaids and other current assets................................................................... 4,235 5,146
-------- ----------
Total current assets........................................................................... 369,562 310,778
Investments in and advances to affiliated companies, accounted for under the equity method, net....... 28,757 28,546
Property, plant and equipment, net of accumulated depreciation of $267,378 and $261,891,
respectively........................................................................................ 206,152 219,394
Goodwill and other intangible assets, net of accumulated amortization of $25,047 and $23,536,
respectively........................................................................................ 81,878 91,346
Deferred financing costs, net of accumulated amortization of $5,270 and $4,427, respectively.......... 14,783 16,377
Other non-current assets, net......................................................................... 3,041 150
-------- --------
Total assets................................................................................... $704,173 $666,591
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.................................................................................... $ 9,376 $ 16,463
Accrued liabilities................................................................................. 31,181 32,151
Construction payables............................................................................... 3,670 4,370
Current portion of due to parent.................................................................... 13,547 12,754
Current portion of notes payable.................................................................... 3,004 -
Current portion of other long-term debt............................................................. 1,011 1,500
-------- --------
Total current liabilities...................................................................... 61,789 67,238
Due to parent......................................................................................... 8,904 9,621
Senior discount notes................................................................................. 421,895 407,945
Other long-term debt.................................................................................. 260,357 261,151
Deferred tax liability................................................................................ 938 1,014
Other long-term liabilities........................................................................... 1,388 456
-------- --------
Total liabilities.............................................................................. 755,271 747,425
-------- --------
Minority interest in subsidiary....................................................................... 119,626 95,820
-------- --------
Stockholders' 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, 17,810,299 shares issued and
outstanding....................................................................................... 178 178
Additional paid-in capital.......................................................................... 306,640 306,616
Deferred compensation............................................................................... (18,160) (19,859)
Accumulated deficit................................................................................. (421,202) (440,649)
Other cumulative comprehensive loss................................................................. (38,180) (22,940)
-------- --------
Total stockholders' deficit.................................................................... (170,724) (176,654)
-------- --------
Total liabilities and stockholders' deficit.................................................... $704,173 $666,591
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
UNITED AUSTRALIA/PACIFIC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Stated in thousands, except share and per share amounts)
(Unaudited)
For the Three Months Ended
March 31,
-----------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Revenue..................................................................................... $ 46,344 $ 30,432
System operating expense, including related party expense of $600 and $1,393,
respectively.............................................................................. (35,617) (23,233)
System selling, general and administrative expense.......................................... (14,776) (10,653)
Corporate general and administrative expense, including management fees and allocated
expense from related party of $236 and $1,008, respectively............................... (2,719) (1,029)
Depreciation and amortization............................................................... (30,027) (24,461)
---------- ----------
Operating loss...................................................................... (36,795) (28,944)
Gain on issuance of common equity securities by subsidiary.................................. 61,172 -
Interest income............................................................................. 3,148 33
Interest expense............................................................................ (19,299) (14,922)
Other expense, net.......................................................................... (182) (330)
---------- ----------
Income (loss) before income taxes and other items.................................... 8,044 (44,163)
Income tax expense.......................................................................... (75) -
Minority interest in subsidiary............................................................. 12,059 -
Share in results of affiliated companies, net............................................... (581) (3,372)
---------- ----------
Net income (loss).................................................................... $ 19,447 $ (47,535)
========== ==========
Foreign currency translation adjustments.................................................... $ (15,240) $ 1,258
========== ==========
Comprehensive income (loss).......................................................... $ 4,207 $ (46,277)
========== ==========
Net income (loss) per common share:
Basic net income (loss).............................................................. $ 1.09 $ (2.67)
========== ==========
Diluted net income (loss)............................................................ $ 1.06 $ (2.67)
========== ==========
Weighted-average number of common shares outstanding:
Basic................................................................................ 17,810,299 17,810,249
========== ==========
Diluted.............................................................................. 18,298,249 17,810,249
========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
UNITED AUSTRALIA/PACIFIC, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(Stated in thousands, except share amounts)
(Unaudited)
Other
Common Stock Additional Cumulative
-------------------- Paid-In Deferred Accumulated Comprehensive
Shares Amount Capital Compensation Deficit Loss(1) Total
---------- -------- ---------- ------------ ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1999............. 17,810,299 $178 $306,616 $(19,859) $(440,649) $(22,940) $(176,654)
Cash contributions from parent.......... - - 24 - - - 24
Amortization of deferred compensation... - - - 1,699 - - 1,699
Net income.............................. - - - - 19,447 - 19,447
Change in cumulative translation
adjustments........................... - - - - - (15,240) (15,240)
========== ==== ======== ======== ========= ======== =========
Balances, March 31, 2000................ 17,810,299 $178 $306,640 $(18,160) $(421,202) $(38,180) $(170,724)
========== ==== ======== ======== ========= ======== =========
(1) As of March 31, 2000, Other Cumulative Comprehensive Loss represents foreign currency translation adjustments only.
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
UNITED AUSTRALIA/PACIFIC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in thousands)
(Unaudited)
For the Three Months Ended
March 31,
--------------------------------
2000 1999
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................................................... $19,447 $(47,535)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Gain on issuance of common equity securities by subsidiary.................................... (61,172) -
Share in results of affiliated companies, net................................................. (1,508) 1,777
Minority interest in subsidiaries............................................................. (12,059) -
Depreciation and amortization................................................................. 30,027 24,461
Allocation of expense accounted for as capital contributions by parent........................ - 789
Stock-based compensation expense.............................................................. 2,459 -
Accretion of interest on senior notes and amortization of deferred financing costs............ 15,010 12,731
Increase in receivables, net.................................................................. (1,303) (974)
(Increase) decrease in other assets........................................................... (2,210) 2,135
Increase (decrease) in accounts payable, accrued liabilities and other........................ 1,373 (5,612)
------- --------
Net cash flows from operating activities........................................................ (9,936) (12,228)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term liquid investments....................................................... (489,594) (1,066)
Sale of short-term liquid investments........................................................... 507,753 1,060
Investments in and advances to affiliated companies and acquisition of assets................... (2,578) (5,177)
Distribution received from affiliated company................................................... 1,576 -
Capital expenditures............................................................................ (29,201) (22,064)
Other........................................................................................... (387) 852
------- --------
Net cash flows from investing activities........................................................ (12,431) (26,395)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash contributed from parent..................................................................... 23 19,230
Proceeds from issuance of common stock in connection with subsidiary option plan................. 537 -
Borrowings on the New Austar Bank Facility and Saturn Bank Facility.............................. 18,162 18,941
Borrowings on other debt, net.................................................................... 3,113 37
------- --------
Net cash flows from financing activities......................................................... 21,835 38,208
------- --------
EFFECT OF EXCHANGE RATES ON CASH................................................................. (428) 406
------- --------
DECREASE IN CASH AND CASH EQUIVALENTS............................................................ (960) (9)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD................................................... 6,028 181
------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD......................................................... $ 5,068 $ 172
======= ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest........................................................................... $ 2,027 $ 2,311
======= ========
Cash received for interest....................................................................... $ 6,018 $ 8
======= ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
5
<PAGE>
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 2000
(Unaudited)
1. ORGANIZATION AND NATURE OF OPERATIONS
United Australia/Pacific, Inc. (the "Company" or "United A/P") a majority-owned
subsidiary of United Asia/Pacific Communications, Inc. ("UAP"), which is in turn
an indirect wholly-owned subsidiary of UnitedGlobalCom, Inc. ("United"), was
formed on October 14, 1994, for the purpose of developing, acquiring and
managing foreign pay television, programming and telephone operations.
The following chart presents a summary of the Company's ownership structure and
its significant investments in multi-channel television, programming and
telephone operations as of March 31, 2000.
***********************************************************
* *
* United *
* *
***********************************************************
*
100% *
***********************************************************
* *
* United International Properties, Inc. ("UIPI") *
* *
***********************************************************
*
100% *
***********************************************************
* *
* UAP *
* *
***********************************************************
*
100% *
***********************************************************
* *
* The Company *
* *
***********************************************************
*
91.7% *
***********************************************************
* *
* United Austar, Inc. (1) *
* *
***********************************************************
*
72.3% *
***********************************************************
* Austar United Communications Limited *
* ("Austar United") *
* *
***********************************************************
*
*
***********************************************************
* *
*Australia: *
* Austar Entertainment Pty Limited ("Austar") 100.0% *
* XYZ Entertainment Pty Limited ("XYZ *
* Entertainment") 50.0% *
*New Zealand: *
* Saturn Communications Limited ("Saturn") 100.0% *
* *
***********************************************************
(1) United Austar, Inc. is a holding company for United A/P's
investment in Austar United Communications Limited.
6
<PAGE>
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States ("U.S. GAAP") 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 interim condensed consolidated financial statements are
unaudited and include the accounts of the Company and all subsidiaries where the
Company exercises a controlling financial interest through the ownership of a
majority voting interest. On July 27, 1999, Austar United acquired from the
minority shareholder of Saturn ("SaskTel") its 35.0% interest in Saturn in
exchange for 13,659,574 of Austar United's shares, thereby increasing Austar
United's ownership interest in Saturn from 65.0% to 100%. As a result, Saturn is
consolidated in these financial statements for the three months ended March 31,
2000. During the first quarter 1999, the Company accounted for its investment in
Saturn under the equity method in order to comply with the consensus guidance of
the Emerging Issues Task Force regarding Issue 96-16 ("EITF 96-16"), and related
rules of the Securities and Exchange Commission ("SEC"), because SaskTel had
participating approval or veto rights with respect to certain significant
decisions of Saturn in the ordinary course of business. All significant
intercompany accounts and transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS AND SHORT-TERM LIQUID INVESTMENTS
Cash and cash equivalents include cash and investments with original maturities
of less than three months. Short-term liquid investments include certificates of
deposit, commercial paper and government securities which have original
maturities greater than three months but less than twelve months. Short-term
liquid investments are classified as available-for-sale and are reported at fair
market value.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or
market.
INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES, ACCOUNTED FOR UNDER THE
EQUITY METHOD
For those investments in unconsolidated subsidiaries and companies in which the
Company's voting interest is 20.0% to 50.0%, the Company's investments are held
through a combination of voting common stock, preferred stock, debentures or
convertible debt and/or the Company exerts significant influence through board
representation and management authority, the equity method of accounting is
used. 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 funding
commitments. The Company's proportionate share of net earnings or losses of
affiliates includes the amortization of the excess of its cost over its
proportionate interest in each affiliate's net tangible assets.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Additions, replacements,
installation costs and major improvements are capitalized, and costs for normal
repair and maintenance of property, plant and equipment are charged to expense
as incurred. Upon disconnection of a multi-channel multi-point distribution
system ("MMDS") or direct-to-home ("DTH") subscriber, the remaining book value
of the subscriber equipment, excluding converters which are recovered upon
disconnection, and the unamortized portion of capitalized labor are written off
and accounted for as additional depreciation expense. Depreciation is calculated
using the straight-line method over the estimated economic life of the asset.
7
<PAGE>
The economic lives of property, plant and equipment at acquisition are as
follows:
Subscriber premises equipment and converters.......... 3-10 years
MMDS/DTH distribution facilities...................... 5-10 years
Cable distribution networks........................... 5-10 years
Office equipment, furniture and fixtures.............. 3-10 years
Buildings and leasehold improvements.................. 3-10 years
Other................................................. 3-10 years
GOODWILL AND OTHER INTANGIBLE ASSETS
The excess of investments in consolidated subsidiaries over the net tangible
asset value at acquisition is amortized using the straight-line method over 15
years. The acquisition of MMDS licenses has been recorded at fair market value,
and amortization expense is computed using the straight-line method over the
term of the license, up to a maximum of 15 years.
RECOVERABILITY AMOUNTS OF TANGIBLE AND INTANGIBLE ASSETS
The Company evaluates the carrying value of all tangible and intangible assets
whenever events or circumstances indicate the carrying value of assets may
exceed their recoverable amounts. An impairment loss is recognized when the
estimated future cash flows (undiscounted and without interest) expected to
result from the use of an asset are less than the carrying amount of the asset.
Measurement of an impairment loss is based on fair value of the asset if the
asset is expected to be held and used, which would generally be computed using
discounted cash flows. Measurement of an impairment loss for an asset held for
sale would be based on fair market value less estimated costs to sell.
DEFERRED FINANCING COSTS
Costs to obtain debt financing are capitalized and amortized over the life of
the debt facility using the effective interest method.
REVENUE RECOGNITION
Revenue is primarily derived from the sale of multi-channel cable television
services to subscribers and is recognized in the period the related services are
provided. Initial installation fees are recognized as revenue in the period in
which the installation occurs, to the extent installation fees are equal to or
less than direct selling costs, which are expensed. To the extent installation
fees exceed direct selling costs, the excess fees are deferred and amortized
over the average contract period. All installation fees and related costs with
respect to reconnections and disconnections are recognized in the period in
which the reconnection or disconnection occurs because reconnection fees are
charged at a level equal to or less than related reconnection costs.
STOCK-BASED COMPENSATION
Stock-based compensation is recognized using the intrinsic value method for the
Austar United stock option plan, which results in compensation expense for the
difference between the grant price and the fair market value of Austar United's
common stock at each new measurement date for options granted prior to July 27,
1999. With respect to this plan, the rights conveyed to employees are the
substantive equivalents to stock appreciation rights.
STAFF ACCOUNTING BULLETIN NO. 51 ("SAB 51") ACCOUNTING POLICY
Gains realized as a result of stock issuances by the Company's subsidiaries are
recorded in the statement of operations, except for any transactions which must
be credited directly to equity in accordance with the provisions of SAB 51.
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
"Basic net income (loss) per share" is determined by dividing net income (loss)
available to common stockholders by the weighted-average number of common shares
outstanding during each period. "Diluted net income (loss) per share" includes
the effects of potentially issueable common stock, but only if dilutive. The
Company's warrants (see Note 7) are included in the Company's diluted net income
(loss) per share amounts for first quarter 1999 and 2000.
8
<PAGE>
FOREIGN OPERATIONS AND FOREIGN EXCHANGE RATE RISK
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 exchange rates 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 stockholders' deficit and are included in
other cumulative comprehensive income (loss).
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 functional currencies. As a result, amounts related to assets and
liabilities reported in the consolidated statements of cash flows will not agree
to changes in the corresponding balances in the consolidated balance sheets. The
effects of exchange rate changes on cash balances held in foreign currencies are
reported as a separate line item below cash flows from financing activities.
Certain of the Company's foreign operating companies have notes payable and
notes receivable that are denominated in a currency other than their own
functional currency. In general, the Company and the operating companies do not
execute hedge transactions to reduce the Company's exposure to foreign currency
exchange rate risks. Accordingly, the Company may experience economic loss and a
negative impact on earnings and equity with respect to its holdings solely as a
result of foreign currency exchange rate fluctuations.
NEW ACCOUNTING PRINCIPLES
The Financial Accounting Standards Board ("FASB") recently issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which requires that companies recognize
all derivatives as either assets or liabilities in the balance sheet at fair
value. Under SFAS 133, accounting for changes in fair market value of a
derivative depends on its intended use and designation. SFAS 133 is effective
for fiscal years beginning after June 15, 2000. The Company is currently
assessing the effect of this new standard.
In December 1999, the staff of the SEC issued Staff Accounting Bulletin No. 101
("SAB 101") "Views on Selected Revenue Recognition Issues" which provides the
staff's views in applying U.S. GAAP to selected revenue recognition issues. SAB
101 is effective second quarter 2000. The Company is currently assessing the
effect of SAB 101.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the current
year presentation.
RESTATEMENT
In June 1999, the 25.0% interest in XYZ Entertainment held by UAP was exchanged
for an 8.3% direct ownership interest in United Austar, Inc., increasing the
Company's interest in XYZ Entertainment to 50.0%. This transaction was
previously accounted for as a contribution of capital rather than a sale of
subsidiary stock. Net income as restated decreased to $19.4 million from $22.6
million as previously reported for the three months ended March 31, 2000. Basic
net income per share as restated decreased to $1.09 from $1.27 as previously
reported for the three months ended March 31, 2000. Diluted net income per share
as restated decreased to $1.06 from $1.23 as previously reported for the three
months ended March 31, 2000.
3. ACQUISITIONS AND OTHER
SECONDARY OFFERING. On March 29, 2000, Austar United sold 20.0 million shares on
the Australian Stock Exchange (the "Secondary Offering") at Australian dollars
("A$") 8.50 ($5.20) per share for gross and net proceeds of A$170.0 ($104.0)
million and A$167.5 ($102.4) million, respectively to be received in April 2000.
Based on the carrying value of the Company's investment in Austar United as of
March 29, 2000, the Company recognized a gain of $61.2 million resulting from
the step-up in the carrying amount of the Company's investment in Austar United,
in accordance with SAB 51. No deferred taxes were recorded related to this gain
due to the Company's intent on holding its investment in Austar United
indefinitely.
9
<PAGE>
Austar United's initial public offering ("Austar United IPO") in July 1999
reduced the Company's ownership interest from 91.7% to approximately 69.2%.
Subsequent stock option exercises and the Secondary Offering reduced the
Company's ownership interest to 66.3% as of March 31, 2000. Including all vested
stock options granted to employees, the Company's ownership interest in Austar
United on a fully diluted basis was approximately 64.5% at March 31, 2000.
ACQUISITION. Effective January 20, 2000, Austar United acquired a 50.0% interest
in Massive Media Pty Limited ("Massive Media") which owns 100% of Massive
Interactive Pty Limited and 75.0% of Massive Technologies Pty Limited for A$4.4
($3.0) million including A$0.6 ($0.4) million in Austar United shares and A$3.8
($2.6) million in cash.
4. INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES, ACCOUNTED FOR UNDER
THE EQUITY METHOD
<TABLE>
<CAPTION>
As of March 31, 2000
-------------------------------------------------------------------------------------
Investments in Cumulative Share Cumulative
and Advances to Dividends in Results of Translation
Affiliated Companies Received Affiliated Companies Adjustments Total
-------------------- --------- -------------------- ----------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
XYZ Entertainment................... $44,306 $(1,576) $(17,520) $ 692 $25,902
Other............................... 2,929 - 34 (108) 2,855
------- ------- -------- ------ -------
Total........................... $47,235 $(1,576) $(17,486) $ 584 $28,757
======= ======= ======== ====== =======
As of December 31, 1999
---------------------------------------------------------------------------
Investments in Cumulative Share Cumulative
and Advances to in Results of Translation
Affiliated Companies Affiliated Companies Adjustments Total
--------------------- -------------------- ----------- ------------
(In thousands)
XYZ Entertainment.................. $44,306 $(18,564) $2,804 $28,546
------- -------- ------ -------
Total.......................... $44,306 $(18,564) $2,804 $28,546
======= ======== ====== =======
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
As of As of
March 31, December 31,
2000 1999
---------- ------------
(In thousands)
<S> <C> <C>
Subscriber premises equipment and converters.............................. $266,926 $276,725
MMDS/DTH distribution facilities.......................................... 60,776 64,373
Cable distribution networks............................................... 89,844 91,298
Office equipment, furniture and fixtures.................................. 30,226 23,111
Buildings and leasehold improvements...................................... 5,647 5,645
Other..................................................................... 20,111 20,133
-------- --------
473,530 481,285
Accumulated depreciation............................................... (267,378) (261,891)
-------- --------
Net property, plant and equipment...................................... $206,152 $219,394
======== ========
</TABLE>
6. GOODWILL AND OTHER INTANGIBLE ASSETS
<TABLE>
<CAPTION>
As of As of
March 31, December 31,
2000 1999
---------- ------------
(In thousands)
<S> <C> <C>
Austar United............................................................. $106,925 $114,882
Accumulated amortization............................................... (25,047) (23,536)
-------- --------
Net goodwill and other intangible assets............................... $ 81,878 $ 91,346
========= ========
</TABLE>
10
<PAGE>
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. SENIOR DISCOUNT NOTES
<TABLE>
<CAPTION>
As of As of
March 31, December 31,
2000 1999
---------- ------------
(In thousands)
<S> <C> <C>
May 1996 Notes ........................................................... $381,992 $369,111
September 1997 Notes ..................................................... 39,903 38,834
-------- --------
Total senior discount notes............................................ $421,895 $407,945
======== ========
</TABLE>
MAY 1996 NOTES
The 14.0% senior notes, which the Company issued in May 1996 at a discount from
their principal amount of $443.0 million (the "May 1996 Notes"), had an accreted
value of $382.0 million as of March 31, 2000. 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%. On October 14, 1998, the Company
consummated an equity sale resulting in gross proceeds to the Company of $70.0
million which reduced the interest rate from 14.75% to 14.0% per annum. Due to
the increase in the interest rate effective May 16, 1997 until consummation of
the equity sale, the May 1996 Notes will accrete to a principal amount of $447.4
million on May 15, 2001, the date cash interest begins to accrue.
SEPTEMBER 1997 NOTES
The 14.0% senior notes, which the Company issued in September 1997 at a discount
from their principal amount of $45.0 million (the "September 1997 Notes"), had
an accreted value of $39.9 million as of March 31, 2000. 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%. On October 14, 1998, the
Company consummated an equity sale, reducing the interest rate from 14.75% to
14.0% per annum. Due to the increase in the interest rate effective September
23, 1997 until consummation of the equity sale, the September 1997 Notes will
accrete to a principal amount of $45.4 million on May 15, 2001, the date cash
interest begins to accrue.
On November 17, 1997, pursuant to the terms of the indentures governing the May
1996 Notes and the September 1997 Notes (collectively, the "Notes"), the Company
issued warrants to purchase 488,000 shares of its common stock, which
represented 3.4% of the Company's common stock at that time. The warrants are
exercisable at a price of $10.45 per share which would result in gross proceeds
of approximately $5.1 million upon exercise. The warrants are exercisable
through May 15, 2006. The warrants were valued at $3.7 million and have been
reflected as an additional discount to the Notes on a pro-rata basis and as an
increase in additional paid-in capital. Warrants to acquire 50 shares were
exercised November 24, 1999.
8. OTHER LONG-TERM DEBT
<TABLE>
<CAPTION>
As of As of
March 31, December 31,
2000 1999
---------- ------------
(In thousands)
<S> <C> <C>
New Austar Bank Facility.................................................. $201,530 $202,703
Saturn Bank Facility...................................................... 56,943 57,685
Capitalized leases and other.............................................. 2,895 2,263
-------- --------
261,368 262,651
Less current portion................................................... (1,011) (1,500)
-------- --------
Total other long-term debt............................................. $260,357 $261,151
========= ========
</TABLE>
11
<PAGE>
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NEW AUSTAR BANK FACILITY
On April 23, 1999, Austar executed a new syndicated senior secured debt facility
(the "New Austar Bank Facility") for A$400.0 million to refinance the A$200.0
million existing bank facility and to fund Austar's subscriber acquisition and
working capital needs. The New Austar Bank Facility consists of two
sub-facilities: (i) A$200.0 million amortizing term facility ("Tranche 1") and
(ii) A$200.0 million cash advance facility ("Tranche 2"). Tranche 1 was used to
refinance the existing bank facility, and Tranche 2 is available upon the
contribution of additional equity on a 2:1 debt-to-equity basis. As of March 31,
2000, Austar had drawn A$332.0 ($201.5) million on the New Austar Bank Facility.
All of Austar's assets are pledged as collateral for this facility. In addition,
pursuant to this facility, Austar cannot pay any dividends, interest or fees
under its technical assistance agreements without the consent of the majority
banks. The New Austar Bank Facility bears interest at the professional market
rate in Australia plus a margin ranging from 1.75% to 2.25% based upon certain
debt to cash flow ratios. The New Austar Bank Facility is fully repayable
pursuant to an amortization schedule beginning December 31, 2002 and ending
March 31, 2006.
SATURN BANK FACILITY
On July 15, 1999, Saturn closed a syndicated senior debt facility (the "Saturn
Bank Facility") in the amount of New Zealand dollars ("NZ$")125.0 ($62.2)
million to fund the completion of Saturn's network. As of March 31, 2000, Saturn
had drawn NZ$115.0 ($56.9) million against the facility and expects to draw down
the remaining balance by the end of fourth quarter 2000. The interest rate on
the debt facility is 2.75% over the current base rate upon draw down and has
averaged approximately 8.1%. The Saturn Bank Facility is repayable over a five
year period beginning fourth quarter 2001.
OTHER FINANCIAL INSTRUMENTS
Interest rate swap agreements are used by the Company from time to time, to
manage interest rate risk on its floating rate debt facilities. Interest rate
swaps are entered into depending on the Company's assessment of the market, and
generally are used to convert the floating rate debt to fixed rate debt.
Interest differentials paid or received under these swap agreements are
recognized over the life of the contracts as adjustments to the effective yield
of the underlying debt, and related amounts payable to, or receivable from, the
counterparties are included in the consolidated balance sheet. Currently, the
Company has four interest rate swaps to manage interest rate exposure on the New
Austar Bank Facility. Two of these swap agreements expire in 2002 and
effectively convert an aggregate principal amount of A$50.0 ($30.4) million of
variable rate, long-term debt into fixed rate borrowings. The other two swap
agreements expire in 2004 and convert an aggregate principal amount of A$100.0
($60.7) million of variable rate, long-term debt into fixed rate borrowings. As
of March 31, 2000, the weighted-average fixed rate under these agreements was
5.7% compared to a weighted-average variable rate on the New Austar Bank
Facility of approximately 5.5%.
In addition, the Company has an interest rate swap to manage its exposure on the
Saturn Bank Facility which effectively converts an aggregate principal amount of
NZ$75.0 ($37.1) million of variable rate, long-term debt into fixed rate
borrowings. The interest rate swap includes an increasing fixed rate with an
additional margin which is expected to decline as the debt to EBITDA ratio
declines. As of March 31, 2000, the average fixed rate under the agreement was
6.3% compared to a weighted-average variable rate of 5.2%.
Fair values of the interest rate swap agreements are based on the estimated
amounts that the Company would receive or pay to terminate the agreements at the
reporting date, taking into account current interest rates and the current
creditworthiness of the counterparties.
9. RELATED PARTY
Effective May 1, 1996, the Company and United Management, Inc. ("United
Management"), an indirect wholly-owned subsidiary of United, executed a 10-year
management services agreement (the "Management Agreement"), pursuant to which
United Management performs 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 $0.75
million for the first year of such agreement (beginning May 1, 1996), and it
increases on each anniversary date of the Management Agreement by 8.0% per year.
Effective March 31, 1997, United 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 United for any
out-of-pocket expenses including travel, lodging and entertainment expenses,
incurred by UAP or United on behalf of the Company. In December 1997, United
12
<PAGE>
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
began allocating corporate general and administrative expense to the Company in
the form of deemed capital contributions, based on increased activity at the
operating system level. This allocation was discontinued as of January 1, 2000.
For the three months ended March 31, 2000 and 1999, the Company recorded $0.2
million in management fees and $1.0 million, respectively, in corporate general
and administrative expense allocated from United and management fees due from
the Company to UAP.
Effective June 24, 1999, United and Austar United executed a management services
agreement pursuant to which United performs certain technical and consulting
services in return for a monthly management fee. The monthly fee payable by
Austar United to United in 2000 is $0.2 million per month. This amount may be
adjusted before January 1 of each year by the board of directors of United but
may not increase by more than 15.0% in any one year. This agreement also
requires that Austar United reimburse United for all direct and other expenses
reasonably incurred by United on behalf of Austar United. The agreement will
continue through December 31, 2010.
Austar and Saturn were parties to technical assistance agreements with UAP
whereby such operating companies paid to UAP fees based on their respective
gross revenues. The operating systems reimbursed United for certain direct costs
incurred by United, including salaries and benefits relating to senior
management positions, pursuant to the terms of the technical assistance
agreements. First quarter 1999, the Company recorded $1.4 million in related
party management fees under these agreements. Effective June 24, 1999, the
rights under these management fee agreements were assigned to Austar United as
part of the restructuring associated with the Austar United IPO. Accordingly,
the related party management fees recorded first quarter 2000 were eliminated
during the Austar United consolidation.
Included in the amount due to parent is the following:
<TABLE>
<CAPTION>
As of As of
March 31, December 31,
2000 1999
---------- ------------
(In thousands)
<S> <C> <C>
United A/P................................................................ $ 2,213 $ 1,977
Austar United technical assistance agreement obligations, including
management fees of $1,800 and $1,200, respectively....................... 4,893 2,874
Austar technical assistance agreement obligations, including deferred
management fees of $8,765 and $9,472, respectively (1)................... 12,852 13,889
Saturn technical assistance agreement obligations, including deferred
management fees of $139 and $149, respectively........................... 1,684 1,820
Other..................................................................... 809 1,815
------- -------
22,451 22,375
Less current portion................................................. (13,547) (12,754)
------- -------
Total due to parent.................................................. $ 8,904 $ 9,621
======= =======
</TABLE>
(1) Austar United and UAP have the option of converting these management
fees into equity.
13
<PAGE>
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. SEGMENT INFORMATION
The Company's segment information is as follows:
<TABLE>
<CAPTION>
As of As of
March 31, December 31,
For the Three Months Ended March 31, 2000 2000 1999
-------------------------------------------------------------- ---------- ------------
Multi-channel Internet Total Total
Television Telephone Data Other Total Assets Assets
------------- ----------- ---------- ---------- ---------- ---------- ------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Australia................... $40,849 $ - $ 8 $ 599 $41,456 $570,843 $563,627
New Zealand................. 844 3,166 878 - 4,888 106,980 76,139
Other....................... - - - - - 26,350 26,825
------- ------- ------- ------- ------- -------- --------
Total..................... $41,693 $ 3,166 $ 886 $ 599 $46,344 $704,173 $666,591
======= ======= ======= ======= ======= ======== ========
Adjusted EBITDA: (1)
Australia................... $ 1,192 $ (37) $(1,721) $(1,777) $(2,343)
New Zealand................. (253) (357) 248 (1,344) (1,706)
Other....................... - - - (260) (260)
------- ------- ------- ------- =======
Total..................... $ 939 $ (394) $(1,473) $(3,381) $(4,309)
======= ======= ======= ======= =======
For the Three Months Ended March 31, 1999
-----------------------------------------
Multi-channel
Television Other Total
---------------- --------- -----------
(In thousands)
Revenue:
Australia.................. $30,432 $ - $30,432
New Zealand................ - - -
Other...................... - - -
------- ------- -------
Total.................... $30,432 $ - $30,432
======= ======= =======
Adjusted EBITDA: (1)
Australia.................. $(3,454) $ - $(3,454)
Other...................... - (1,029) (1,029)
------- ------- -------
Total................... $(3,454) $(1,029) $(4,483)
======= ======= =======
(1) Adjusted EBITDA" represents net operating earnings before depreciation,
amortization and stock-based compensation charges. Industry analysts
generally consider Adjusted EBITDA to be a helpful way to measure the
performance of cable television operations and communications companies.
Management believes Adjusted EBITDA helps investors to assess the cash flow
from operations from period to period and thus, to value the Company's
business. Adjusted EBITDA should not, however, be considered a replacement
for net income, cash flows or for any other measure of performance or
liquidity under U.S. GAAP, or as an indicator of a company's operating
performance. The Company's presentation of Adjusted EBITDA may not be
comparable to statistics with a similar name reported by other companies.
Not all companies and analysts calculate EBITDA in the same manner.
14
<PAGE>
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Adjusted EBITDA reconciles to the consolidated statement of operations as
follows:
<CAPTION>
For the Three Months Ended
March 31,
---------------------------
2000 1999
---------- ----------
(In thousands)
<S> <C> <C>
Net operating loss....................................................... $(36,795) $(28,944)
Depreciation and amortization............................................ 30,027 24,461
Non-cash stock-based compensation expense................................ 2,459 -
-------- --------
Consolidated Adjusted EBITDA........................................ $ (4,309) $ (4,483)
======== ========
</TABLE>
12. SUBSEQUENT EVENTS
On April 6, 2000, Austar United closed an agreement with Telstra Corporation
Limited ("Telstra") the largest telecommunications company in Australia, to form
a 50/50 joint venture between Saturn and Telstra's New Zealand operation which
will be called Telstra Saturn Limited ("TSL").
In April 2000, Saturn purchased Paradise Net Limited an Internet Service
Provider ("ISP") that has 33,000 subscribers, primarily residential, throughout
New Zealand for approximately NZ$20.0 ($9.9) million.
In April 2000, Austar United purchased Artson Pty Limited an ISP that trades
under the name "On the Net" for A$6.0 ($3.5) million and operates on the Gold
Coast in Queensland.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed consolidated
financial statements and related notes thereto included elsewhere herein. Such
condensed consolidated financial statements provide additional information
regarding our financial activities and condition. 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 our 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 entities in which the Company has
interests), 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, our ability to secure adequate capital to
fund system growth and development, risks inherent in investment and operations
in foreign countries, changes in government regulation, changes in the nature of
key strategic relationships with partners and joint venturers, and other factors
referenced in this report. These forward-looking statements speak only as of the
date of this report, and we expressly disclaim 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.
INTRODUCTION
As of March 31, 2000, through Austar United we held (i) an effective 66.3%
economic interest in Austar, (ii) a 66.3% interest in Saturn and (iii) a 33.1%
interest in XYZ Entertainment. We decreased our interest in Austar United from
91.7% to approximately 69.2% in connection with the July 1999 Austar United IPO.
Subsequent stock option exercises and the Secondary Offering in March 2000
reduced our ownership interest to 72.3% as of March 31, 2000 (64.5% on a fully
diluted basis after vested employee options).
Immediately prior to the Austar United IPO, Austar United issued 13,659,574
shares of Austar United to SaskTel for SaskTel's 35.0% interest in Saturn. As a
result, Saturn has been consolidated in our financial statements effective
August 1, 1999. Prior to that time, we accounted for our investment in Saturn
under the equity method.
UAP, the Company's parent, provides various management, technical,
administrative, accounting, financial reporting, tax, legal and other services
for the Company pursuant to the terms of a management agreement between UAP and
the Company. Effective June 24, 1999, UAP assigned its rights and
responsibilities under the various technical assistance agreements with the
operating systems to Austar United.
16
<PAGE>
SUMMARY OPERATING DATA
The following tables set forth certain unaudited operating data:
<TABLE>
<CAPTION>
As of March 31, 2000
----------------------------------------------------------------------
Television Basic Economic
Homes in Homes Subscribers/ Basic Ownership
Service Area Passed Lines Penetration Interest
------------ --------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Multi-channel TV subscribers:
Austar......................................... 2,085,000 2,083,108 389,816 18.7% 66.3%
Saturn......................................... 141,000 87,319 17,811 20.4% 66.3%
--------- --------- -------
Total..................................... 2,226,000 2,170,427 407,627
--------- --------- -------
Telephone lines:
Saturn......................................... 141,000 95,397 28,095 29.5% 66.3%
--------- --------- -------
Programming subscribers:
XYZ Entertainment.............................. N/A N/A 963,000(1) N/A 33.1%
--------- --------- -------
Data subscribers:
Saturn (2)..................................... 141,000 95,397 8,485 8.9% 66.3%
--------- --------- -------
As of March 31, 1999
----------------------------------------------------------------------
Television Basic Economic
Homes in Homes Subscribers/ Basic Ownership
Service Area Passed Lines Penetration Interest
------------ --------- ------------- ------------ ---------
Multi-channel TV subscribers:
Austar......................................... 2,085,000 2,083,108 311,119 14.9% 100.0%
Saturn......................................... 141,000 56,249 7,570 13.5% 65.0%
--------- --------- -------
Total..................................... 2,226,000 2,139,357 318,689
--------- --------- -------
Telephone lines:
Saturn......................................... 141,000 53,257 14,902 28.0% 65.0%
--------- --------- -------
Programming subscribers:
XYZ Entertainment.............................. N/A N/A 750,400(1) N/A 25.0%
--------- --------- -------
Data subscribers:
Saturn......................................... 141,000 53,257 900 1.7% 65.0%
--------- --------- -------
</TABLE>
(1) This figure represents the total estimated subscribers to the five-channel
XYZ Entertainment package.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, we had invested approximately $466.3 million in our
projects. These fundings do not include amounts contributed by shareholders
other than the Company, proceeds from the Australian IPO or Secondary Offering,
the operating subsidiary bank borrowings or amounts contributed in either cash
or stock to acquire additional economic interests.
<TABLE>
<CAPTION>
As of
March 31,
Sources of Fundings: 2000
-----------
(In thousands)
<S> <C>
Senior discount notes proceeds, net of offering costs........................... $244,652
Cash contributions and other equity from parent (1) (2)......................... 214,576
Cash received for interest...................................................... 7,083
--------
Total...................................................................... $466,311
========
As of
December 31,
Uses of Fundings: 1999
------------
(In thousands)
Austar (1)...................................................................... $349,429
Saturn.......................................................................... 44,612
XYZ Entertainment............................................................... 16,481
Other (2)....................................................................... 55,789
--------
Total...................................................................... $466,311
========
</TABLE>
(1) Includes issuance/use of $29.8 million and $6.2 million in United
convertible preferred stock in 1995 and 1998, respectively, to acquire
additional economic interests in Australia.
(2) Includes $17.2 million paid by United to purchase 2.0% of UAP from
Kiwi Cable in December 1999.
We had $236.8 million of cash, cash equivalents and short-term liquid
investments on hand as of March 31, 2000. On March 29, 2000, we priced the
Secondary Offering of 20.0 million shares at A$8.50 ($5.20) per share for gross
and net proceeds (to be received in April 2000) of A$170.0 ($104.0) million and
A$167.5 ($102.4) million, respectively. These proceeds, in addition to borrowing
capacity on the New Austar Bank Facility and Saturn Bank Facility and the
proceeds from the Austar United IPO, will be used to expand Austar United's
customer base, complete the build-out of its network and introduce new services
such as telephone and Internet/data.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
Cash and cash equivalents decreased $0.9 million from $6.0 million as of
December 31, 1999 to $5.1 million as of March 31, 2000. Principal sources of
cash during the three months ended March 31, 2000 included the sale of
short-term liquid investments of $507.8 million, borrowings on the Austar and
Saturn Bank Facilities of $18.2 million, borrowings on other debt of $3.1
million, distribution from affiliated company of $1.6 million and other sources
totaling $0.5 million.
During the three months ended March 31, 2000, cash was used principally for the
purchase of short-term liquid investments of $489.6 million, the purchases of
property, plant and equipment totaling $29.2 million as Austar and Saturn
continue to expand their businesses into the data market, the funding of
operating activities of $9.9 million and investments in and advances to
affiliated companies of $2.6 million and other uses totaling $0.8 million.
FOR THE THREE MONTHS ENDED MARCH 31, 1999
Cash and cash equivalents remained the same at $0.2 million as of March 31, 1999
and December 31, 1998. Principal sources of cash during the three months ended
March 31, 1999 included cash contributions from parent of $19.2 million,
borrowings on other debt of $18.9 million and other sources totaling $2.4
million.
18
<PAGE>
During the three months ended March 31, 1999, cash was used principally for
purchases of property, plant and equipment totaling $22.0 million to continue
new subscriber connections at Austar and the build-out of existing projects, the
funding of operating activities of $12.2 million, investments in and advances to
affiliated companies of $5.2 million and other uses of $1.1 million.
RESULTS OF OPERATIONS
EXCHANGE RATES. We translate revenue and expense from our foreign subsidiaries
using the weighted-average exchange rates during the period. These rates and the
spot rates for the end of each period are listed below.
Australian
Dollars
----------
For the three months ended March 31, 2000............. 1.5898
For the three months ended March 31, 1999............. 1.5729
Spot rate as of March 31, 2000........................ 1.6474
Spot rate as of December 31, 1999..................... 1.5244
REVENUE. Our revenue increased $15.9 million for the three months ended March
31, 2000 compared to the amount for the corresponding period in the prior year
as follows:
For the Three Months Ended
March 31,
---------------------------
2000 1999
---------- ----------
(In thousands)
Austar United................................ $46,344 $30,432
------- -------
Total revenue........................... $46,344 $30,432
======= =======
AUSTAR UNITED
Revenue for Austar United increased $15.9 million, or 52.3%, from $30.4 million
for the three months ended March 31, 1999 to $46.3 million for the three months
ended March 31, 2000. On a functional currency basis, Austar United's revenue
increased A$25.4 million, from A$47.9 million for the three months ended March
31, 1999 to A$73.3 million for the three months ended March 31, 2000, a 53.0%
increase. The increase in multi-channel television revenue of approximately
$11.3 million was primarily due to Austar's subscriber growth (389,816 at March
31, 2000 compared to 311,119 at March 31, 1999) as well as growth in premium
tiers, resulting in an average revenue per subscriber of A$53.42 ($33.60) for
the three months ended March 31, 2000 compared to A$50.46 ($31.74) for the same
period in the prior year. The remaining increase of approximately $4.6 million
in telephone and other revenue was primarily due to the consolidation of Saturn
beginning August 1, 1999.
ADJUSTED EBITDA. Adjusted EBITDA loss decreased $0.2 million for the three
months ended March 31, 2000 compared to the corresponding amount in the prior
year as follows:
For the Three Months Ended
March 31,
---------------------------
2000 1999
---------- ----------
(In thousands)
Austar United................................ $(4,049) $(3,454)
Other........................................ (260) (1,029)
------- -------
Total Adjusted EBITDA................... $(4,309) $(4,483)
======= =======
19
<PAGE>
AUSTAR UNITED
Austar United's Adjusted EBITDA loss increased by $0.5 million, or 14.3%, from
negative $3.5 million for the three months ended March 31, 1999 to negative $4.0
million for the three months ended March 31, 2000. On a functional currency
basis, Austar United's Adjusted EBITDA loss increased by A$1.1 million, or
20.4%, from negative A$5.4 million for the three months ended March 31, 1999 to
negative A$6.5 million for the three months ended March 31, 2000. The
multi-channel television Adjusted EBITDA improved by $4.4 million from year to
year due to Austar achieving incremental sales growth while keeping certain
costs fixed, such as the national customer operations center, corporate
management staff and media-related marketing costs. This improvement was offset
by increased expenses related to the Internet data businesses and the
consolidation of Saturn beginning August 1, 1999.
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSE. Our corporate general and
administrative expense increased $1.7 million from $1.0 million for the three
months ended March 31, 1999 to $2.7 million for the three months ended March 31,
2000. This increase was primarily attributable to a stock-based compensation
charge of $2.5 million from the Austar United stock option plan established in
June 1999 ("Austar United Plan") for the three months ended March 31, 2000.
There was no stock-based compensation charge in first quarter 1999.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
$5.5 million for the three months ended March 31, 2000 compared to the amount
for the corresponding period in the prior year as follow:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
---------------------------
2000 1999
---------- ----------
(In thousands)
<S> <C> <C>
Austar United....................................... $30,027 $24,461
------- -------
Total depreciation and amortization expense.... $30,027 $24,461
======= =======
</TABLE>
AUSTAR UNITED
Depreciation and amortization expense for Austar United increased $5.5 million,
or 22.4%, from $24.5 million for the three months ended March 31, 1999 to $30.0
million for the three months ended March 31, 2000. On a functional currency
basis, Austar United's depreciation and amortization expense increased A$10.4
million, from A$37.1 million for the three months ended March 31, 1999 to A$47.5
million for the three months ended March 31, 2000, a 28.0% increase. The U.S.
dollar increase was negatively impacted by $0.2 million due to fluctuation in
exchange rates between the three months ended March 31, 2000 and 1999. This
increase is due to the consolidation of Saturn as of August 1, 1999.
GAIN ON ISSUANCE OF COMMON EQUITY SECURITIES BY SUBSIDIARY. On March 29, 2000,
Austar United successfully completed the Secondary Offering selling 20.0 million
shares on the Australian Stock Exchange raising gross and net proceeds at A$8.50
($5.20) per share of A$170.0 ($104.0) million and A$167.5 ($102.4) million,
respectively. Based on the carrying value of our investment in Austar United as
of March 29, 2000, we recognized a gain of $61.2 million from the resulting
step-up in the carrying amount of our investment in Austar United, in accordance
with SAB 51. No deferred taxes were recorded related to this gain due to our
intent on holding our investment in Austar United indefinitely.
INTEREST INCOME. Interest income increased $3.1 million from nil for the three
months ended March 31, 1999 to $3.1 million for the three months ended March 31,
2000. The increase was attributable to the increase in short-term liquid
investment balances due to the Austar United IPO.
INTEREST EXPENSE. Interest expense increased $4.4 million for the three months
ended March 31, 2000 compared to the amounts for the corresponding period in the
prior year. This increase was primarily due to increased interest expense
related to the Austar Bank Facility of $4.9 million and $2.6 million for the
three months ended March 31, 2000 and 1999, respectively due to higher loan
balances in 2000 and the consolidation of Saturn.
MINORITY INTEREST IN SUBSIDIARY. The minority interests' share of losses was
$12.1 million for the three months ended March 31, 2000. Austar United's IPO
(July 1999) and its Secondary Offering (March 2000) reduced our ownership to
66.3% as of March 31, 2000. For accounting purposes, we continue to consolidate
100% of the results of operations of Austar United, then deduct the minority
interests' share of income (losses) before arriving at net income (loss).
20
<PAGE>
SHARE IN RESULTS OF AFFILIATED COMPANIES. Our share in results of affiliated
companies totaled a loss of $0.6 million and $3.4 million for the three months
ended March 31, 2000 and 1999, respectively, as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
---------------------------
2000 1999
---------- ----------
(In thousands)
<S> <C> <C>
XYZ Entertainment...................................... $(615) $(1,402)
Saturn (1)............................................. - (1,970)
Other.................................................. 34 -
----- -------
Total share in results of affiliated companies.... $(581) $(3,372)
===== =======
</TABLE>
(1) During first quarter 1999, the equity method of accounting was used to
account for Saturn's results due to certain minority shareholder
rights. Effective August 1, 1999, we increased our ownership to 100%
and began consolidating its results of operations.
21
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
------------------------------------------------------------------
INVESTMENT PORTFOLIO
We do not use derivative financial instruments in our non-trading investment
portfolio. We place our cash and cash equivalent investments in highly liquid
instruments that meet high credit quality standards with original maturities at
the date of purchase of less than three months. We also place our short-term
investments in liquid instruments that meet high credit quality standards with
original maturities at the date of purchase of between three and twelve months.
We also limit the amount of credit exposure to any one issue, issuer or type of
instrument. These investments are subject to interest rate risk and will fall in
value if market interest rates increase, however, we do not expect any material
loss with respect to our investment portfolio.
IMPACT OF FOREIGN CURRENCY RATE CHANGES
We are exposed to foreign exchange rate fluctuations related to the operating
subsidiaries' monetary assets and liabilities and the financial results of
foreign subsidiaries when their respective financial statements are translated
into U.S. dollars during consolidation. Our exposure to foreign exchange rate
fluctuations also arises from intercompany charges such as the cost of
equipment, management fees and certain other charges. These intercompany
accounts are predominantly denominated in the functional currency of the foreign
subsidiary.
The operating companies' monetary assets and liabilities are subject to foreign
currency exchange risk as certain equipment purchases and payments for certain
operating expenses, such as programming expenses, are denominated in currencies
other than their own functional currency. In addition, certain of the operating
companies have notes payable and notes receivable which are denominated in a
currency other than their own functional currency. Foreign currency rate changes
also affect our share in results of our unconsolidated affiliates.
In general, the Company and the operating companies do not execute hedge
transactions to reduce our exposure to foreign currency exchange rate risk.
Accordingly, we may experience economic loss and a negative impact on earnings
and equity with respect to our holdings solely as a result of foreign currency
exchange rate fluctuations.
The countries in which the operating companies now conduct business generally do
not restrict the removal or conversion of local or foreign currency, however,
there is no assurance this situation will continue. We may also acquire
interests in companies that operate in countries where the removal or conversion
of currency is restricted.
INTEREST RATE SENSITIVITY
The table below provides information about our primary debt obligations. The
information is presented in U.S. dollar equivalents, which is our reporting
currency. The instrument's actual cash flows are denominated in both U.S.
dollars (the Notes), Australian dollars (New Austar Bank Facility) and New
Zealand dollars (Saturn Bank Facility).
<TABLE>
<CAPTION>
As of March 31, 2000
-------------------------------
Book Value Fair Value
------------- -----------
(U.S. dollars, in thousands, except interest rates)
<S> <C> <C>
Long-term and short-term debt:
Fixed rate USD denominated Notes........................... $421,895 $452,205
Average interest rate................................... 14.0% 12.1%
Variable rate NZ$ denominated Saturn Bank Facility......... $ 56,943 $ 56,943
Average interest rate................................... 7.4% 7.4%
Variable rate A$ denominated New Austar Bank Facility...... $201,530 $201,530
Average interest rate................................... 7.9% 7.9%
</TABLE>
22
<PAGE>
The table below presents principal cash flows and related weighted-average
interest rates by expected maturity dates for our debt obligations. The
information is presented in U.S. dollar equivalents, which is our reporting
currency. The instrument's actual cash flows are denominated in both U.S.
dollars (the Notes), Australian dollars (New Austar Bank Facility) and New
Zealand dollars (Saturn Bank Facility).
<TABLE>
<CAPTION>
As of March 31, 2000
------------------------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter Total
------- -------- -------- -------- -------- ----------- ----------
(U.S. dollars, in thousands, except interest rates)
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term and short-term debt:
Fixed rate USD denominated Notes............ $ - $ - $ - $ - $ - $421,895 $421,895
Variable rate NZ$ denominated Saturn
Bank Facility............................. $ - $569 $4,555 $ 8,200 $11,389 $ 32,230 $ 56,943
Variable rate A$ denominated New
Austar Bank Facility...................... $ - $ - $7,054 $93,330 $89,319 $ 11,827 $201,530
</TABLE>
We use interest rate swap agreements from time to time, to manage interest rate
risk on our floating rate debt facilities. Interest rate swaps are entered into
depending on our assessment of the market, and generally are used to convert the
floating rate debt to fixed rate debt. Interest differentials paid or received
under these swap agreements are recognized over the life of the contracts as
adjustments to the effective yield of the underlying debt, and related amounts
payable to, or receivable from, the counterparties are included in the
consolidated balance sheet.
Currently, we have four interest rate swaps to manage interest rate exposure on
the New Austar Bank Facility. Two of these swap agreements expire in 2002 and
effectively convert an aggregate principal amount of A$50.0 ($30.4) million of
variable rate, long-term debt into fixed rate borrowings. The other two swap
agreements expire in 2004 and convert an aggregate principal amount of A$100.0
($60.7) million of variable rate, long-term debt into fixed rate borrowings. As
of March 31, 2000, the weighted-average fixed rate under these agreements was
5.7% compared to a weighted-average variable rate of 5.5%.
In addition, we have an interest rate swap to manage our exposure on the Saturn
Bank Facility which effectively converts an aggregate principal amount of
NZ$60.6 ($30.1) million of variable rate, long-term debt into fixed rate
borrowings. The interest rate swap includes an increasing fixed rate with an
additional margin which is expected to decline as the debt to EBITDA ratio
declines. As of March 31, 2000, the average fixed rate under the agreement was
6.3% compared to a weighted-average variable rate of 5.2%.
Fair values of the interest rate swap agreements are based on the estimated
amounts that we would receive or pay to terminate the agreements at the
reporting date, taking into account current interest rates and the current
creditworthiness of the counterparties.
23
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------
(a) Exhibits
10.1 Shareholders Agreement dated April 6, 2000, among Telstra
Corporation Limited ("TCL"), Telstra Holdings Pty Limited
("THPL"), Austar United Communications Limited ("AUCL"),
Saturn Holdings Company Pty Ltd. ("Saturn NZ") and Saturn
Communications Limited ("Saturn"). (1)
10.2 Merger Agreement dated April 6, 2000, between THPL and
Saturn. (1)
10.3 Warranty Agreement dated April 6, 2000, between TCL and
AUCL. (1)
10.4 Offer to Acquire Shares dated April 6, 2000, between Saturn
and THPL. (1)
27.1 Financial Data Schedule
(1) Incorporated by reference from United A/P's Quarterly
Report on Form 10-Q dated May 15, 2000.
(b) Reports on Form 8-K filed during the quarter.
None.
24
<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.
United Australia/Pacific, Inc.
Date: August 14, 2000
--------------------------------------
By: /s/ Valerie L. Cover
--------------------------------------
Valerie L. Cover
Controller
(A Duly Authorized Officer and Principal Financial Officer)
25
