UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A No. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1999
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.
(formerly known as 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The Company has no publicly-trading shares of capital stock. As of March 24,
2000, the Company had 17,810,299 shares of common stock outstanding.
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UNITED AUSTRALIA/PACIFIC, INC.
1999 ANNUAL REPORT ON FORM 10-K
Table of Contents
Page
Number
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PART I
<S> <C> <C>
Item 1. Business.................................................................................... 2
Item 2. Properties.................................................................................. 15
Item 3. Legal Proceedings........................................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders......................................... 15
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................... 16
Item 6. Selected Financial Data..................................................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................. 23
Item 8. Financial Statements and Supplementary Data................................................. 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........ 26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................. 50
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
-----------------
(a) GENERAL DEVELOPMENT OF BUSINESS
-------------------------------
United Australia/Pacific, Inc. (the "Company" or "United A/P") (formerly known
as UIH Australia/Pacific, Inc.) is a leading provider of pay television services
in Australia and pay television and telecommunications services in New Zealand.
We own 69.1% of the ordinary shares of Austar United Communications Limited
("Austar United"), which completed its initial public offering on the Australian
Stock Exchange in July 1999 (the "Austar United IPO"). Substantially all of our
operations are conducted through Austar United.
Through our Australian operating company Austar Entertainment Pty Limited
("Austar"), we are the second largest pay television operator in Australia and
the largest operator in its market of regional Australia. Austar's service area
comprises approximately 2.1 million homes outside of the major capital cities
and represents one-third of Australia's total homes. Austar United's 50.0% owned
XYZ Entertainment Pty Limited ("XYZ Entertainment") is the exclusive owner
and/or distributor of five key programming channels in Australia to Austar and
Foxtel. These are the two largest pay television operators whose combined
subscriber bases represent approximately 80.0% of all pay television subscribers
in Australia. Austar United's wholly-owned subsidiary, Saturn Communications
Limited ("Saturn") is the only provider of integrated telephone, pay television
and Internet services in New Zealand over one network. In February 2000, Austar
United agreed to form a 50/50 joint venture between Saturn and the New Zealand
operations of Telstra Corporation Limited, Australia's leading
telecommunications company. The joint venture will be called Telstra Saturn
Limited ("TSL").
We are a Colorado corporation and a majority-owned subsidiary of United
Asia/Pacific Communications, Inc. ("UAP") (formerly known as UIH Asia/Pacific
Communications, Inc.), which is an indirect wholly-owned subsidiary of
UnitedGlobalCom, Inc. (together with all of its subsidiaries other than the
Company and its subsidiaries, "United") (formerly known as United International
Holdings, Inc.). We were formed on October 14, 1994. Immediately prior to the
May 1996 offering of our 14.0% senior discount notes due 2006 (the "May 1996
Notes"), certain subsidiaries of United that held interests in Australia and New
Zealand were merged with and into the Company. The Company, through these
predecessors, commenced operations in January 1994 when United began its
development-related activities in the Asia/Pacific region.
HISTORY OF ACQUISITIONS
In 1994, we acquired, through directly and indirectly held interests, an
effective 50.0% economic interest in Austar. In December 1995, we acquired an
additional interest from other shareholders of Austar, thereby increasing our
total economic interest in Austar to 90.0%. In May 1996, as a result of
additional equity contributions, our economic interest in Austar was increased
to 94.0%, which was subsequently increased to 96.0%. In October 1996, we
acquired the remaining 4.0% economic interest in Austar. In July 1998, Austar
acquired certain Australian pay television assets of East Coast Television Pty
Limited ("ECT"), an affiliate of Century Communications Corporation ("Century"),
for $6.2 million of United's newly-created Series B Convertible Preferred Stock
("Series B Preferred Stock"). ECT's subscription television business includes
subscribers and certain microwave multi-point distribution system ("MMDS")
licenses and transmission equipment serving the areas in and around Newcastle,
Gossford, Wollongong and Tasmania.
In July 1994, we acquired a 50.0% interest in Saturn, which at the time owned
only a small cable television system outside of Wellington. In July 1996, we
acquired the remaining 50.0% interest in Saturn in exchange for a 2.6% interest
in the Company, which was exchanged for a 2.0% interest in UAP in May 1997. In
July 1997, SaskTel Holdings (New Zealand) Inc. ("SaskTel") purchased a 35.0%
equity interest in Saturn by investing approximately New Zealand $("NZ$")29.9
($19.6) million for its shares (the "Saturn Transaction"). In July 1999, this
35.0% was repurchased from SaskTel in exchange for 13,659,594 shares in Austar
United in connection with the Austar United IPO. In February 2000, Austar United
agreed to form TSL, a 50/50 joint venture between Saturn and the New Zealand
operations of Telstra.
In October 1994, the Company and Century formed XYZ Entertainment, each
retaining a 50.0% interest. In June 1995, the Company and Century formed the
50/50 joint venture Century United Programming Ventures Pty Limited ("CUPV") to
hold our respective investments in XYZ Entertainment. In September 1995, a 50.0%
interest in XYZ Entertainment was sold to a third party, thereby diluting our
indirect interest in XYZ Entertainment to 25.0%. In September 1998, UAP acquired
the assets in CUPV (25.0% interest) held by Century.
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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 our
interest in XYZ Entertainment to 50.0%. Based on the carrying value of our
investment in United Austar, Inc., we recognized a gain of $22.3 million from
the resulting step-up in the carrying amount of our investment in United Austar,
Inc., in accordance with SAB 51.
In June 1999, we and our subsidiaries contributed our interests in Austar, XYZ
Entertainment and Saturn to Austar United in exchange for new shares issued by
Austar United. On July 27, 1999, Austar United successfully completed the Austar
United IPO selling 103.5 million shares on the Australian Stock Exchange,
raising gross and net proceeds in Australian dollars ("A$")4.70 ($3.03) per
share of A$486.5 ($313.6) million and A$453.6 ($292.8) million, respectively.
Austar United's IPO reduced our ownership interest in Austar United from 91.7%
to approximately 69.2%. Subsequent stock option exercises reduced our ownership
interest to 69.1% as of December 31, 1999. Including all vested stock options
granted to employees, our ownership interest in Austar United on a fully diluted
basis is approximately 67.5% at December 31, 1999.
RELATIONSHIP WITH UNITED
We are an indirect, wholly-owned subsidiary of United, a global broadband
communications provider of video, voice and data services with operations in
over 20 countries throughout the world. In addition to the Company, United's
operations include its interest in United Pan-Europe Communications N.V.
("UPC"), one of the largest pay television operators in Europe, as well as its
other investments in Europe, Asia and Latin America. As of December 31, 1999,
United's networks reached almost 17.0 million homes and served 7.2 million video
subscribers, 0.3 million telephony access lines and 0.1 million broadband data
accounts.
ORGANIZATION OF COMPANY
The following chart summarizes our organizational structure. The interests
indicated below are summaries of our approximate direct and indirect economic
interests in our principal businesses.
***********************************************************
* *
* United Australia/Pacific, Inc. *
* *
***********************************************************
*
91.7% *
***********************************************************
* *
* United Austar, Inc. (1) *
* *
***********************************************************
*
75.4% *
***********************************************************
* *
* Austar United Communications Limited *
* ("Austar United") *
* *
***********************************************************
*
*
********************************************************************************
* Operating System Principal Business Ownership *
* ---------------- ------------------ --------- *
* *
* Austar Regional Australia 100.0% *
* MMDS and DTH multi-channel systems *
* *
* Saturn Greater Wellington, New Zealand area 100.0% *
* Wireline Cable/Telephony System *
* *
* XYZ Entertainment Australian Programming 50.0% *
* *
********************************************************************************
(1) United Austar, Inc. is a holding company for our investment in Austar
United Communications Limited.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
---------------------------------------------
We operate in the pay television and telecommunications industry through
investing in, acquiring and managing pay television, telephony and programming
operations. Our reportable segments are both by line of business (pay television
3
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and telephony) and by the primary countries in which we operate - Australia and
New Zealand. For additional information applicable to this Item, see Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 14 to the consolidated financial statements contained in
Item 8 "Financial Statements and Supplementary Data."
(c) NARRATIVE DESCRIPTION OF BUSINESS
---------------------------------
OVERVIEW
We believe that we are well-positioned to capitalize on the rapidly increasing
demand for pay television and telephony services in Australia and New Zealand.
As of December 31, 1999, our pay television operating systems had an aggregate
of approximately 2.2 million television homes serviceable and approximately 0.4
million subscribers, compared to approximately 2.1 million television homes
serviceable and approximately 0.3 million subscribers as of December 31, 1998
(with a substantial majority of such growth resulting from Austar's expansion).
During this same period, programming subscribers of XYZ Entertainment increased
to approximately 0.9 million at December 31, 1999 from approximately 0.7 million
at December 31, 1998.
While we expect that a substantial portion of our expected growth will come from
the continued development of Austar, we are also anticipating significant growth
by our New Zealand pay television and telecommunications business which we
believe has attractive growth prospects. With the formation of TSL, the joint
venture between Telstra and Saturn, there are plans to create a state-of-the-art
national broadband network which will include a submarine fiber backbone linking
Auckland, Wellington and Christchurch during the next five years.
The following table sets forth certain unaudited operating data:
<TABLE>
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As of December 31, 1999
----------------------------------------------------------------------
Net
Television Basic Economic
Homes in Homes Subscribers/ Basic Ownership
Service Area Passed Lines Penetration Interest
------------ --------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Pay television:
Austar................................... 2,085,000 2,083,108 381,763 18.3% 69.1%
Saturn................................... 141,000 87,029 16,723 19.2% 69.1%
--------- --------- ---------
Total................................. 2,226,000 2,170,137 398,486
--------- --------- ---------
Telephony:
Saturn................................... 141,000 87,029 24,678 28.4% 69.1%
--------- --------- ---------
Programming:
XYZ Entertainment........................ N/A N/A 934,000 (1) N/A 34.6%
--------- --------- ---------
Data:
Saturn (2)............................... 141,000 87,029 6,772 7.8% 69.1%
--------- ---------- ---------
As of December 31, 1998
----------------------------------------------------------------------
Net
Television Basic Economic
Homes in Homes Subscribers/ Basic Ownership
Service Area Passed Lines Penetration Interest
------------- ---------- ------------- ----------- ---------
Pay television:
Austar................................... 2,085,000 2,083,108 288,721 13.9% 100.0%
Saturn................................... 141,000 41,914 6,010 14.3% 65.0%
--------- --------- ---------
Total................................. 2,226,000 2,125,022 294,731
--------- --------- ---------
Telephony:
Saturn.................................. 141,000 37,292 7,360 19.7% 65.0%
--------- --------- ---------
Programming:
XYZ Entertainment....................... N/A N/A 694,600 (1) N/A 25.0%
--------- --------- ---------
</TABLE>
(1) This figure represents the total estimated subscribers to the
five-channel XYZ Entertainment package.
(2) Saturn launched data services in late 1998.
4
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AUSTAR (AUSTRALIA)
Austar is the largest provider of pay television services in regional Australia
with a service area encompassing approximately 2.1 million homes, or
approximately one-third of Australia's total homes. Austar is the only pay
television provider in substantially all of its service areas. Due to the low
housing densities that characterize Austar's service area, Austar primarily
employs digital direct-to-home ("DTH") satellite and wireless cable technologies
to deliver its service. These technologies have enabled Austar to deploy its
services quickly and achieve rapid subscriber growth.
As of December 31, 1999, Austar had launched service in all of its metropolitan
and non-metropolitan markets. The following table sets forth the summary
operating statistics in Austar's markets:
<TABLE>
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As of December 31,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Homes in service area:
Metropolitan homes........................... 1,527,000 1,527,000 1,103,000
Non-metropolitan homes....................... 558,000 558,000 532,000
--------- --------- ---------
Total...................................... 2,085,000 2,085,000 1,635,000
========= ========= =========
Net annual gain in basic subscribers........... 93,042 92,516 92,758
Total basic subscribers........................ 381,763 288,721 196,205
</TABLE>
DISTRIBUTION SYSTEMS. Austar uses both digital DTH and wireless cable
distribution technologies in certain cities with more than 20,000 homes. In its
other service areas (except Darwin), Austar distributes its service exclusively
utilizing digital DTH. At present, approximately 72.0% of Austar's subscribers
are serviced by digital DTH, while 25.0% receive service via wireless cable.
Austar constructs and owns the MMDS transmission facilities and installs and
retains ownership of all customer premises equipment for both its DTH and
wireless cable customers.
In addition to digital DTH and wireless cable, Austar is constructing a cable
network in Darwin, a market containing approximately 29,000 serviceable homes.
Darwin is outside the satellite's footprint and dense vegetation makes wireless
cable service impractical. As of December 31, 1999, this system passed
approximately 23,000 homes and had a penetration rate of approximately 33.3%.
PROGRAMMING AND PRICING. Austar offers the widest range of programming available
in Australia. Its favorable programming agreements allow Austar to establish
different service levels of tiers at multiple price points. Austar began tiering
its program offerings in October 1998. By tiering its services, Austar permits
its subscribers to select programming that is customized to their interests,
which we believe is a valuable tool in ensuring our product meets customer value
expectations. Tiering also provides customers with a lower-priced basic service
that both enhances sales opportunities and helps reduce the level of customer
churn.
5
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<TABLE>
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Basic Package:
Channel Programming Genre
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<S> <C>
Fox Sports................................... Sports
Fox Sports Two............................... Sports, including Rugby League games
TV-1......................................... General entertainment
Discovery Channel............................ Documentary, adventure, history and lifestyle
Nickelodeon/Nick at Nite..................... Children's and family entertainment
arena........................................ General entertainment
Channel [V].................................. Music video
The Lifestyle Channel........................ Personal and home improvement
thecomedychannel............................. Comedy
Weather 21................................... Weather
BBC World (1)................................ International news
CNBC......................................... International financial news
CNN International............................ International news
Sky Racing................................... Live racing
National Geographic (2)...................... Documentary
TNT(1) (3)................................... Library movies
Cartoon Network (2) (3)...................... Cartoons
CMT.......................................... Country music videos
TVSN (1)..................................... Shopping
Digital Radio (1)............................ 12 digital radio channels
----------------
(1) Not available to wireless cable subscribers.
(2) Limited viewing hours for wireless cable subscribers.
(3) These two networks share the same channel on digital DTH.
Austar Deluxe(1):
Channel Programming Genre
------- -----------------
Fx (2)....................................... General entertainment
Fox8 (2)..................................... General entertainment
UKTV......................................... English general entertainment
Hallmark..................................... Made for TV movies
ESPN......................................... Sports
C7 Sports.................................... Sports, including Australian Football League
---------
(1) Digital DTH and cable only.
(2) Not available to cable subscribers in Darwin.
Movies:
Channel Programming Genre
------- -----------------
Showtime (1)................................. Recent release movies
Encore (1)................................... Library movies
Movie One (2)................................ Recent release movies
Movie Extra (2)(3)........................... Recent release movies
Movie Greats (2)(3).......................... Library movies
---------
(1) Columbia, Universal, Paramount and Fox Studios.
(2) Disney, MGM Warner, Dreamworks and Village Roadshow Studies.
(3) Not available for wireless cable.
</TABLE>
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At December 31, 1999, Austar's pricing was:
MMDS DTH
A$ A$
------ -------
Basic Service................................. 31.95 35.95
Movie Network (1)............................. 10.95 10.95
Showtime and Encore (1)....................... 10.95 10.95
Movie One .................................... 8.95 8.95
C7 Sports .................................... 6.95 6.95
World Movies (2).............................. 6.95 6.95
Adults Only (Pay per Night)................... 6.95 6.95
Main Event (Pay-per-View) (3)................. varies per event
---------
(1) Subscribers have the choice of either Showtime and Encore or Movie
Network.
(2) Not available to all wireless cable subscribers.
(3) Main Event available to digital DTH subscribers but only certain
events are available to wireless cable subscribers.
PROGRAMMING AGREEMENTS. Austar's programming agreement with Foxtel provides it
with the exclusive rights to distribute Showtime, Encore and TV-1 via digital
DTH and wireless cable throughout Austar's service area until December 2006. In
addition, Austar has an agreement with a News Corporation Limited subsidiary
pursuant to which Austar has the exclusive right to distribute Fox Sports and
Fox Sports Two over the same technologies throughout Austar's service area until
2006. Austar's programming agreement for C7 Sports provides Austar with
non-exclusive Australian Football League ("AFL") coverage. Austar has also
entered into an agreement with C&W Optus that provides Austar with non-exclusive
distribution rights for the three C&W Optus movie channels, Movie Network, Movie
Greats and Movie Extra, until December 2006. Austar has another agreement with
C&W Optus giving it rights to distribute additional C&W Optus programming.
Austar has exclusive rights in its service area to distribute via DTH and
wireless cable five channels of programming supplied by XYZ Entertainment:
Discovery Channel, Nickelodeon, The Lifestyle Channel, Channel [V] and arena.
Austar also obtains at competitive price levels additional programming from a
number of independent sources, including Time Warner, ESPN, Seven Network,
National Geographic, CMT and Sky Racing. Weather 21, the Adults Only channel and
certain pay-per-view events are sourced from entities in which we have an
interest.
Austar's rights to distribute certain programming are dependent on its
supplier's ability to provide such programming to Austar. In the event that any
of Austar's programming suppliers are unable to supply programming to Austar, we
are confident that we will be able to secure alternative sources of programming.
MARKETING, BILLING AND CUSTOMER SUPPORT. Austar has focused its marketing and
sales efforts to support a strategy of rapid penetration of its markets.
Austar's comprehensive marketing and sales organization consists of
approximately 250 direct sales representatives and over 250 national customer
service and telemarketing personnel at Austar's National Customer Operations
Center ("NCOC"). These sales channels are supported by an integrated marketing
program of television, radio and print advertising and extensive use of direct
mail.
Austar's 25 offices, located throughout its operating area, serve its customers
in surrounding areas and provide Austar with a local presence. These offices
perform several key functions, including responding to customer inquires,
booking installations, providing customer maintenance services, collecting
subscription fees, liaising with installation contractors and marketing Austar's
services.
Austar uses contractors to install reception equipment at the customer premises.
We believe Austar achieves significant savings through the outsourcing of these
services. Austar has established installation guidelines, quality assurance
standards and training seminars for installation contractors. In addition,
Austar's own installation teams perform quality assurance checks on its
contractors, as well as conduct difficult installations and installations at
multiple dwelling units.
The NCOC, which services all of Austar's subscribers, is a technologically
advanced, scalable, fully integrated subscriber facility that features
sophisticated subscriber management software, an automated response unit and
predictive dialer technology. It also manages Austar's digital virtual private
network. Incoming calls from Austar's service area are directed to the NCOC
where customer service representatives provide sales and service information.
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The NCOC's on-site customer service professionals undergo training in all
aspects of customer support to efficiently process installation orders, handle
customer inquiries including programming and technical questions and implement
Austar's customer retention program, which includes contacting customers
immediately after installation to ensure satisfaction and monitoring
cancellation requests.
Billing services are also handled through the NCOC. Austar bills for its
services in advance on a monthly basis. Customers have several methods by which
they can pay including direct debit from their bank account, automatic credit
card billing, in person at one of Austar's local offices or at the post office,
or by mail. Austar has implemented a number of procedures for managing customers
with delinquent accounts.
Austar's monthly churn averaged 2.9% during 1999, 3.9% during 1998 and 4.2%
during 1997. Austar believes that this ratio is likely to continue to decline in
the future, although there can be no such assurances. Factors which Austar
believes will contribute to the decline in customer churn include: the continued
enhancement of the price value relationship as more content is added and the
existing content improves, the tiering of services and tailoring packages to
customers, a further reduction in the level of product sampling in a maturing
market, the introduction in 1998 of annual and six-month subscriber contracts
and improved customer communications combined with loyalty programs.
COMPETITION. Austar is the sole provider of pay television services in
substantially all of its service area. Its only major pay television competitor
is Foxtel, which operates a cable system in a segment of Austar's 116,000-home
Gold Coast service area. As of December 31, 1999, Austar had approximately
24,200 subscribers in the Gold Coast. Austar also experiences limited
competition from free-to-air channels.
We do not believe that Austar's market generally has sufficient housing density
to justify the construction of competitive cable systems. The majority of
Austar's market consists of small cities and towns with less than 20,000 homes
and relatively low household densities of 25 to 75 homes per square kilometer as
compared to 100 to 130 homes per square kilometer in Australia's largest cities.
While we believe that household densities could support wireline cable
construction in areas representing approximately 20.0% of Austar's total homes
passed, the small size of these markets reduces the attractiveness of such
construction. Furthermore, Austar holds the exclusive satellite and wireless
cable distribution rights to key sports, movie and other programming for its
service area, thus limiting the programming that a satellite or wireless cable
competitor could offer in Austar's service area.
NEW BUSINESS OPPORTUNITIES. Austar is pursing new business opportunities in
three main areas (i) provision of high-speed Internet/data services, (ii)
provision of interactive television services and (iii) resale of mobile
telephony services.
Austar launched high-speed and traditional Internet access services in markets
in early 2000. These services were delivered using both digital DTH and wireless
cable technologies. Austar will benefit from United's experience in rolling out
Internet/data services. In particular, Austar intends to use chello broadband,
UPC's Internet portal and content service, to support the deployment of its
Internet/data offerings to its service area. Austar's initial tests of these
high-speed services provided customers with downstream transmission speeds (from
the Internet to the subscriber) that were much faster than traditional dial-up
modems. We believe that the provision of Internet/data services represents a
significant market opportunity due to the combination of substantial consumer
demand for Internet access, the limited capacity of the public switched
telephone network in regional Australia and the lack of a broadband alternative.
Austar has licensed its operating system for digital set-top boxes with Open TV,
Inc. The Open TV operating system enables Austar to introduce an enhanced
electronic programming guide, interactive television applications and
transactional services such as home banking and other electronic commerce. The
introduction of these services should continue to help Austar realize its
objectives of increasing revenue and decreasing churn. Moreover, these services
should also generate incremental revenues with minimal capital expenditures
because these applications utilize existing customer premise equipment.
Austar is also currently evaluating mobile technology resale opportunities for
Austar.
MANAGEMENT AND EMPLOYEES. Austar's senior management includes five United
employees. As of December 31, 1999, Austar had approximately 1,008 employees.
Substantially all of Austar's employees are parties to an "award" governing the
minimum conditions of their employment including probationary periods of
employment, rights upon termination, vacation, overtime and dispute resolution.
8
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SATURN (NEW ZEALAND)
Saturn is the only provider of integrated telephone, pay television and Internet
services in New Zealand. These services are currently provided in the greater
Wellington area over a hybrid fiber cable ("HFC") network with an overlay of
traditional telephone lines. Austar United owns 100% of Saturn, which launched
pay television service in 1996 on the initial portions of its network.
Wellington, which encompasses 141,000 homes, is New Zealand's capital and second
largest city. As of December 31, 1999, Saturn's network had 87,029 serviceable
homes for pay television, telephony and data. As of that date, Saturn had 16,723
cable television subscribers (19.2% penetration), 24,678 residential and
business telephone lines (28.4% penetration) and 6,772 Internet/data subscribers
(7.8% penetration).
In April 1998, Saturn launched a bundle of telephony and pay television services
to both residential and business markets, including enhanced switch-based
services. In mid-1998, Saturn launched Internet/data services via cable modems
to the business market and began offering residential dial-up Internet/data
services in November 1998. Saturn plans to expand into other major New Zealand
markets.
In February 2000, Austar United agreed to form TSL, a 50/50 joint venture
between Saturn and Telstra's New Zealand operation. TSL plans to create a
state-of-the-art national broadband network which will include a submarine fiber
backbone linking Auckland, Wellington and Christchurch during the next five
years.
TELEPHONY SERVICES. Saturn offers full-feature local and long distance telephony
service and is the only full service telephony provider competing with Telecom
New Zealand ("Telecom"), the incumbent telephony provider.
Residential Services:
---------------------
Local access
Domestic and international long distance
Full suite of switch-based features (e.g., voicemail, call waiting,
last number dialed, etc.)
Traditional dial-up Internet access
High speed cable modem service
Business Telephony Services:
----------------------------
Local access
Domestic and international long distance service Full suite of
switch-based features Centrex services High speed cable modem service
Saturn has an interconnect agreement with Telcom, pursuant to which the parties
permit calls originating on one party's system to be terminated on the other
system.
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PAY TELEVISION SERVICES. Saturn's programming strategy is to offer a wide
variety of high-quality channels at competitive prices. Saturn provides its
customers both pay television and free-to-air channels. Saturn is currently
offering a single tier of service consisting of 30 channels. Saturn's standard
pay television package currently consists of the following channels:
<TABLE>
<CAPTION>
Channel Programming Genre
------- -----------------
<S> <C>
TVI, TV2, TV3, TV4.................... General entertainment (retransmitted)
ONTV.................................. Saturn community channel
BBC World............................. World news
CNBC.................................. World financial news
CNN International..................... World news
MCM................................... Music video
Discovery............................. Science and nature
National Geographic................... Culture and nature
Animal Planet......................... Animal entertainment
TNT................................... Classic movies
Cartoon Network....................... Children's cartoon programming
Trackside............................. TAB racing
Kidzone............................... Local children's programming
Weather Channel....................... Live weather from NZ MetService
Program Guide......................... Programming line-up
FTV................................... Fashion TV
CMTV.................................. Country music video
Elijah Television..................... Non-denominational religious programming
Worldnet.............................. U.S. information service news and science
Saturn SportsNet...................... Local/international sports
The Golf Channel...................... 24 hours of golf events/news
Saturn Showcase....................... Saturn programming channels (split screen)
Saturn Home Cinema Preview Channel.... Pay-per-view movie previews
Saturn Montage Channel................ A montage of Saturn's channels
Saturn on Screen Guide................ An on-screen channel guide
Prime Channel......................... General entertainment (retransmitted)
BBC World Service..................... BBC World Service radio
</TABLE>
In addition, Saturn offers 21 channels of pay-per-view movies pursuant to
distribution agreements with Hollywood Studios, including Warner Bros.,
Twentieth Century Fox, Universal Studios and Columbia TriStar. Eighteen of these
channels, branded "Saturn Home Cinema," feature general new release and library
movies with programming provided by four leading Hollywood studios. The most
popular movies are scheduled as "near video on demand" with frequent starting
times (generally every 15 or 30 minutes) over multiple channels. The three
remaining channels are adult movie channels and are available to hotels and
motels only. The pay-per-view movies are priced comparable to home video rental
rates. Saturn has been achieving pay-per-view buy rates of 100%, i.e. an average
of at least one pay-per-view buy per subscriber per month. Saturn is exploring
the possibility of expanding its pay-per-view offerings to include sporting
events and adult movies for its residential customers.
Saturn is currently negotiating with a number of programming providers to expand
its channel offerings. Saturn believes that its relationship with United, Austar
and XYZ Entertainment provides it with a competitive advantage in obtaining a
wide array of quality programming at attractive prices.
10
<PAGE>
INTERNET/DATA SERVICES. Currently, Saturn offers both traditional dial-up and
high speed cable modem-based Internet access to its business and residential
customers. Saturn provides a platform for ISPs to offer Internet/data services
to both Saturn subscribers and non-subscribers in the Wellington region. We
believe that the provision of Internet/data services represents significant
revenue potential. Saturn receives a monthly fee for reselling Internet access
from ISPs and is also able to offer these Internet/data services as part of a
more attractive bundle of services for Saturn customers. This increases both the
take-up rate for all of Saturn's services and the take-up rate for second phone
lines, thereby generating incremental revenue for Saturn. It also ensures that
Saturn's customers will use Saturn's telephony network for their data traffic.
Approximately 35.0% of Saturn's new customers subscribe to an Internet/data
services package.
PRICING. With its unique bundle of services, Saturn can offer a number of
attractive multiple service bundles, ranging from an entry level package of
cable television service, plus local telephone access and free local calls, for
NZ$29.95 per month to a package of two telephone lines (free local calls), cable
television service and unlimited internet usage for NZ$99.95 per month. Saturn
is able to offer a savings of 30.0% based on a customer buying the services
separately from multiple providers. These bundles are proving a very effective
means to drive penetration and increase revenue per home. Sky TV ("Sky"),
Saturn's primary competitor, charges subscribers a monthly rate of approximately
NZ$56 for five channels of UHF programming with a one-time installation fee of
NZ$29 per subscriber. Sky's digital satellite service is more expensive and has
an installation fee of NZ$350. Saturn's residential and business telephony
services are priced 10.0% to 15.0% below Telecom's standard rates even though
Telecom is offering range discounts. We believe that Saturn's internet rates are
some of the most price competitive in the country.
MARKETING; CUSTOMER SUPPORT. Saturn's marketing strategy uses promotion
techniques proven in existing subscription television markets such as the U.S.
and Europe, including direct sales campaigns (door-to-door selling), direct mail
and telemarketing supported by a mass media brand awareness program. Saturn
already enjoys very high and positive brand awareness in the market. There is
considerable interest in purchasing its products and services. Direct sales have
proven to be the most effective technique in other new build markets,
particularly in areas where pay television is in its introductory stage. Each of
these techniques aims to communicate the selling points of the telephone
service, cable television and internet services and in particular the advantages
of purchasing multiple services from one provider. Homes were released for
marketing on a node by node basis as construction was completed, which allowed
for a very targeted marketing program tailored to the unique demographic profile
of the territory and enabled Saturn to capitalize on the product awareness
resulting from its construction efforts. Saturn's sales strategy is designed to
include an emphasis on the bundled offering and to capitalize on the value,
quality and customer service advantages associated with a one-stop service
provider. Saturn has established a national customer services center at its
corporate headquarters in Wellington. The call management technology employed by
Saturn is scaleable and can be configured to support a national network
expansion. In addition, Saturn is currently developing a sophisticated marketing
database to assist the sales force in a targeted sales approach in future
marketing campaigns.
COMPETITION. Saturn's major telephony competitor is Telecom, New Zealand's
largest telecommunications service provider with nearly a 100% share of local
loop revenues, 75.0% of national and international toll revenues and 90.0% of
cellular revenues. During 1996 and 1997, Telecom constructed an HFC network to
70,000 homes in various parts of New Zealand and began offering a pay TV
service. In 1998, Telecom discontinued its pay television service and Telecom
now appears to be pursuing an asymmetrical digital subscriber line ("ADSL")
strategy for high speed internet access.
There are currently four broadcast networks in New Zealand as well as several
other free-to-air regional channels. The largest provider of subscription
television services in New Zealand is Sky, which operates a five-channel
encrypted UHF subscription television service and has recently launched a
20-channel digital satellite service. Although Sky offers a popular sports
channel on an exclusive basis, we believe Sky does not currently offer value and
programming diversity or television/telephony bundling that Saturn offers.
MANAGEMENT AND EMPLOYEES. United has appointed four of its employees to
management positions at Saturn, including Saturn's chief executive officer. As
of December 3l, 1999, Saturn had approximately 260 employees. Substantially all
of Saturn's employees are parties to a collective employment contract governing
certain conditions of their employment including probationary periods of
employment, termination, redundancy, overtime, holidays, leave and dispute
resolution.
11
<PAGE>
XYZ ENTERTAINMENT (AUSTRALIAN PROGRAMMING)
Austar United and Foxtel each own 50.0% of XYZ Entertainment, a programming
venture that purchases, produces, edits, packages and transmits programming for
the Australian pay television market. XYZ Entertainment currently supplies five
channels of programming (the "XYZ Channels") in key genres to Austar and Foxtel,
Australia's two largest pay television operators, for distribution to their
subscribers. XYZ Entertainment collects a monthly fee per subscriber. As of
December 31, 1999, XYZ Entertainment provided programming for approximately
934,000 subscribers.
Each of the XYZ Channels is separately managed as to product design and content
strategy by Austar United or one of XYZ Entertainment's licensors or joint
venture partners. The five channels are:
<TABLE>
<CAPTION>
Channel Programming Genre
------- -----------------
<S> <C>
arena........................................ Drama, comedy, general entertainment,
programming and library movies
Channel [V].................................. Music video with local presenters
Discovery Channel............................ Documentary, adventure, history and lifestyle
The Lifestyle Channel........................ Personal and home improvements
Nickelodeon/Nick at Nite..................... Children's educational, entertainment and
cartoons/family-oriented drama and
entertainment
</TABLE>
MARKETING AND DISTRIBUTION. XYZ Entertainment's goal is to acquire quality
programming that will engender viewer loyalty. XYZ Entertainment focuses its
marketing efforts on creating, building and supporting channel identification
and brand awareness. The XYZ Channels also work closely with their distributors
on cooperative marketing efforts.
XYZ Entertainment has granted a subsidiary of Austar United the exclusive right
to distribute the XYZ Channels. This subsidiary in turn distributes them to
Austar and Foxtel pursuant to contracts with terms ranging from eight to 25
years for delivery through DTH, wireless cable and cable to their respective
subscribers bases. As a result, the XYZ Channels are available to the majority
of Australia's approximately six million television households. In particular,
the cable carriage agreement with Foxtel, which expires in 2020, requires Foxtel
to carry the XYZ Channels on its basic package and provides for minimum
subscriber guarantees. C&W Optus also has an agreement for the DTH and wireless
cable distribution of the XYZ Channels outside of Austar's service area,
although C&W Optus has not committed to a commercial roll-out of DTH or wireless
cable services.
PRODUCTION AND ACQUISITION OF PROGRAMMING. XYZ Entertainment produces or
licenses programming from a wide array of suppliers for its channels. As the
first Australian pay television programming provider, XYZ Entertainment has long
standing relationships with international content providers, as well as
Australian programming producers and on-air personalities. We believe that this
provides XYZ Entertainment with a significant competitive advantage in acquiring
and producing new programming for the Australian pay television market.
In July 1995, XYZ Entertainment and Discovery Asia executed a 12-year exclusive
carriage agreement whereby a localized version of the Discovery Channel replaced
the existing documentary channel developed by XYZ Entertainment. We believe that
this arrangement allows XYZ Entertainment to offer subscribers higher quality
programming at a lower cost to XYZ Entertainment.
XYZ Entertainment and Nickelodeon, a division of Viacom, have established a
50/50 Australian joint venture that produces and distributes an Australian
version of Nickelodeon/Nick at Nite, which began distribution in October 1995.
This channel contains both locally produced and internationally-sourced
programming. XYZ Entertainment pays the joint venture a monthly per subscriber
license distribution fee and profits of the joint venture are shared equally by
Nickelodeon and XYZ Entertainment.
Since March 1997, XYZ Entertainment has produced a music video channel, Channel
[V]. Under a long term agreement with Channel [V] Music Networks, a joint
venture between Star TV and several record companies including BMG, EMI, Sony
and Warner Music, XYZ Entertainment can use the Channel [V] trademark,
promotional materials and management and has access to Channel [V]'s favorable
12
<PAGE>
record programming arrangements. A significant portion of the content for
Channel [V] is produced locally, some of which is distributed internationally to
other Channel [V] Music Network channels.
XYZ Entertainment produces promotional materials and acquires programming for
arena and The Lifestyle Channel at prices its management considers to be
favorable. XYZ Entertainment is pursuing supply agreements and potential joint
venture arrangements with a number of other international programming suppliers.
We believe there is a sufficient supply of programming available to XYZ
Entertainment at competitive rates.
EMPLOYEES. As of December 31, 1999, XYZ Entertainment had 85 employees.
AUSTRALIA: OTHER PROGRAMMING INTERESTS
Content Co. was formed in August 1998 as a joint venture among Austar, Optus and
Foxtel. Content Co. produces Adults Only, a pay-per-night adult channel, and
Main Event, a pay-per-view event channel, for the joint venture parties.
Weather 21, 100% owned by Austar United, is a Sydney-based public relations and
media company which produces Weather 21 in its own production studio. Weather
21, launched in January 1999, provides 24 hour weather coverage and is currently
offered exclusively to Austar subscribers in the basic package.
AUSTRALIA: MOBILE WIRELESS DATA - UNITED WIRELESS PTY LIMITED
Austar United owns United Wireless, which operates a nationally linked public
packet-switched mobile wireless data network in Australia. United Wireless
primarily targets the transportation industry, which uses its services for fleet
management requirements, and the utility, fire and vending industries, which use
its services for fixed telemetry applications, including remote monitoring and
reading of meters, fire panels, vending machines and other similar applications.
Telstra is the only other operator of a packet-switched data network in
Australia, offering the DataTAC network. DataTAC focuses on electronic funds
transfer at point of sales ("EFTPOS") as its core business and does not compete
with United Wireless in its core transportation market or in its telemetry
markets.
TECHNOLOGIES EMPLOYED BY THE COMPANY
We currently use three principal transmission technologies in the deployment of
our pay television services in Australia and New Zealand. These technologies are
as follows: (i) MMDS or wireless cable, (ii) DTH satellite broadcast services
and (iii) wireline cable or CATV, the technology with which pay television
services are most frequently delivered in the United States. We have carefully
evaluated the characteristics of the markets in which we are currently operating
or planning to operate pay television systems and have chosen what we believe to
be the most appropriate transmission technology for each. While these
transmission technologies are, in general, similar with respect to picture
quality, all such technologies offer improved picture quality compared to what
has historically been offered by over-the-air broadcasters.
MMDS is a microwave distribution system for which frequency bands are utilized
for transmission of the programming services. MMDS signals originate from a
head-end facility, which receives satellite-delivered programming services and
delivers such programming via an encoded microwave signal from transmitters
located on a tower or on top of a building to a small receiving antenna located
at a subscriber's premises, where the microwave signals are decoded. MMDS
transmission requires a clear line-of-sight because microwave frequencies will
not pass through obstructions; however, many signal blockages can be overcome
through the use of low power signal repeaters which retransmit an otherwise
blocked signal over a limited area. The initial construction costs of MMDS
generally are significantly lower than a wireline cable or DTH system. We are
using MMDS transmission technology in Australia, where housing density and
topography make MMDS the most cost effective technology.
DTH transmits encoded signals directly from a satellite to a subscriber's
premises, where it is decoded. Currently in Australia, all DTH subscription
television services are transmitted via the Optus Network Satellite using High
Performance Beams ("HP Beams") covering certain geographic areas (commonly
referred to as a satellite "footprint"). All of Austar's franchise areas are
within the Optus Network Satellite footprint. Since this signal will be
transmitted at a high power level and frequency utilizing MPEG II digital
technology, its reception can be accomplished with a relatively small (26-35
inch) dish mounted on a rooftop or in the yard for the households located within
13
<PAGE>
the innermost satellite transmission footprint and with a slightly larger (35-47
inch) dish for the households located outside the innermost footprint. Austar is
using DTH transmission technology for homes in its MMDS markets that are not
reachable by its MMDS signals as well as for homes in its franchise areas where
household densities do not support the construction of MMDS systems.
A wireline cable television system is a network of coaxial or fiber-optic
transmission cables through which programming is transmitted to a subscriber's
premises from the system's head-end facility, which receives satellite and
tape-delivered programming. Wireline cable television offers a wide bandwidth
that generally allows the transmission of a larger number of channels than MMDS.
When constructed with a HFC network, as we are doing in New Zealand, the
system's infrastructure can be used to deliver telephony and data services. The
primary disadvantages of a wireline cable network are the higher costs of
construction, especially in areas of low housing density, and the length of time
required to construct the network. We are constructing wireline cable systems in
New Zealand and, due to topography and housing densities, are constructing a
wireline cable system in one market in Australia.
REGULATION
AUSTRALIA. The provision of subscription television services in Australia is
regulated by the Australian federal government under various Commonwealth
statutes. In addition, State and Territory laws, including environmental and
consumer contract legislation, may impact the construction and maintenance of a
transmission system for subscription television services, the content of those
services, as well as on various aspects of the subscription television business
itself.
The Australia Broadcasting Services Act of 1992 ("BSA") regulates the ownership
and operation of all categories of television and radio services in Australia
including wireline cable, DTH, MMDS or any other means of transmission. The BSA
regulates subscription television broadcasting services by requiring each
service to have an individual license. Companies associated with Austar hold
approximately 150 television broadcasting licenses. Each license is issued
subject to certain conditions. The government may vary or revoke license
conditions or may, by written notice, specify additional conditions.
Foreign ownership of "company interests" of pay television broadcasting licenses
is limited to 20.0% by a single foreign person and an aggregate of 35.0% by all
foreign persons. The BSA licenses used for distributing Austar's pay television
services are held by Australian companies for the purposes of the BSA.
EMPLOYEES
The Company has no employees. Certain management, technical, administrative,
accounting, tax, legal, financial reporting and other services for the Company
are currently provided by United and UAP pursuant to the terms of a management
agreement. In addition, United supplies certain employees to Austar United,
Austar and Saturn pursuant to a secondment agreement. See Item 13 "Certain
Relationships and Related Transactions."
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
----------------------------------------------------------------------------
For information applicable to this Item, see the notes to the consolidated
financial statements contained in Item 8 "Financial Statements and Supplementary
Data."
14
<PAGE>
ITEM 2. PROPERTIES
-------------------
Our executive offices are located in Denver, Colorado, in space leased by United
and provided to the Company through the UAP Management Agreement as described in
Item 13 "Certain Relationships and Related Transactions." In management's
opinion, these facilities are sufficient to meet the current and foreseeable
future needs of its operating companies.
Austar leases office space in Sydney for its administrative offices and has
established four regional offices in leased space in certain areas where it has
launched service. Austar also leases locations for smaller local offices in most
of its markets to handle local customer maintenance, marketing and installation.
In addition, Austar leases facilities to house the head-end facility and
transmitter tower in each of its markets. The NCOC is located in leased
facilities in the Gold Coast. Generally, these Austar facilities are leased with
terms of three to six years, with renewal options in many instances. Austar
believes that its leased facilities are sufficient for its foreseeable needs and
that it has access to a sufficient supply of additional facilities in its
various markets, should it require more space.
Saturn owns a headend/switching and operations facility in Petone, located north
of Wellington. Saturn also leases office and warehouse facilities for its
headquarters in Petone. This lease expires in 2001 with a six-year renewal
option; however, there are plans to move in May 2000.
XYZ Entertainment currently uses a portion of Foxtel's broadcasting facilities
located in Sydney. XYZ Entertainment pays its proportionate share of Foxtel's
leasing costs (based on space utilized). We believe this arrangement results in
operational cost savings. XYZ Entertainment believes its facilities are
sufficient for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
--------------------------
We are not a party to any material legal proceedings, nor are we currently aware
of any threatened material legal proceedings. From time to time, we may become
involved in litigation relating to claims arising from operations in the normal
course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------
On August 27, 1999, the sole stockholder of the Company approved an amendment to
the Company's articles of incorporation to change the name of the corporation to
United Australia/Pacific, Inc.
15
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
--------------------------------------------------------------------------------
The common stock of the Company is not publicly traded. The Company has paid no
cash dividends since formation. The Company is a holding company with no
independent operations of its own and, as such, its ability to pay cash
dividends is dependent upon distributions from its operating companies. Such
distributions are limited by contractual or other obligations of such operating
companies. In addition, the ability of the operating companies to distribute
funds may be limited by the current or future regulations of the countries in
which they are located.
Austar United's ordinary shares are traded on the Australian Stock Exchange
under the symbol "AUN". The following table shows the range of high and low
sales prices reported on the Australian Stock Exchange, since Austar United's
IPO in July 1999.
High Low
---- ---
Year ended December 31, 1999:
Third Quarter (from July 1999)...................... A$5.51 A$4.46
Fourth Quarter...................................... A$6.70 A$4.35
ITEM 6. SELECTED FINANCIAL DATA
--------------------------------
The following selected consolidated financial data as of and for the years ended
December 31, 1999, 1998, 1997, 1996 and 1995 have been derived from the
Company's audited consolidated financial statements. The data set forth below is
qualified by reference to and should be read in conjunction with the Company's
audited consolidated financial statements including the notes and Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------ ------------- -------------
Statement of Operations Data: (In thousands, except share and per share amounts)
<S> <C> <C> <C> <C> <C>
Revenue................................................. $ 150,752 $ 89,819 $ 68,961 $ 24,977 $ 1,883
System operating expense................................ (112,498) (71,149) (52,703) (22,865) (3,230)
System selling, general and administrative expense...... (49,501) (49,738) (50,006) (32,665) (2,482)
Corporate general and administrative expense............ (26,847) (5,696) (3,306) (1,376) (920)
Depreciation and amortization........................... (104,720) (97,140) (80,802) (36,269) (1,003)
Gain on issuance of common equity securities
by subsidiary......................................... 248,758 - - - -
Interest expense and other, net......................... (71,153) (62,088) (48,810) (16,560) 4,898
Income tax expense...................................... (993) - - - -
Share in results of affiliated companies, net........... (11,614) (10,299) (2,408) (5,414) (16,379)
Minority interest in subsidiary......................... 18,407 - 1,018 2,186 -
---------- ---------- ---------- ---------- ----------
Net income (loss)....................................... $ 40,591 $ (206,291) $ (168,056) $ (87,986) $ (17,233)
========== ========== ========== ========== ==========
Basic net income (loss) per common share................ $ 2.28 $ (14.02) $ (12.12) $ (6.44) $ (1.28)
========== ========== ========== ========== ==========
Basic weighted-average number of shares outstanding.... 17,810,254 14,718,857 13,864,941 13,670,832 13,504,453
========== ========== ========== ========== ==========
Diluted net income (loss) per common share.............. $ 2.23 $ (14.02) $ (12.12) $ (6.44) $ (1.28)
========== ========== ========== ========== ==========
Diluted weighted-average number of shares outstanding... 18,199,726 14,718,857 13,864,941 13,670,832 13,504,453
========== ========== ========== ========== ==========
Other Data:
Capital expenditures.................................... $ 117,819 $ 71,466 $ 101,135 $ 187,100 $ 7,648
As of December 31,
-------------------------------------------------------------------
1999 1998 1997 1996 1995
------------- ------------- ------------ ------------- ------------
Balance Sheet Data: (In thousands)
Cash, cash equivalents, restricted cash and
short-term liquid investments......................... $ 275,421 $ 944 $ 25,089 $ 37,860 $ 8,730
Property, plant and equipment, net...................... $ 219,394 $ 110,351 $ 183,101 $ 193,170 $ 27,630
Total assets............................................ $ 666,591 $ 216,032 $ 279,032 $ 319,323 $ 99,295
Senior discount notes and other long-term debt.......... $ 669,096 $ 424,726 $ 387,094 $ 250,057 $ 742
Total liabilities....................................... $ 747,425 $ 510,661 $ 431,769 $ 315,276 $ 21,714
Total stockholders' (deficit) equity.................... $ (176,654) $ (294,629) $ (164,153) $ 4,047 $ 75,066
</TABLE>
16
<PAGE>
ITEM 7. 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 covers the years ended December 31, 1999, 1998 and 1997
and should be read in conjunction with the Company's condensed consolidated
financial statements and related notes thereto included elsewhere herein. Such
consolidated financial statements provide additional information regarding the
Company's financial activities and condition.
We have no employees of our own. UAP, our parent, provides various management,
financial reporting, accounting and other services for us pursuant to the terms
of the UAP Management Agreement. Until June 24, 1999, Austar and Saturn were
also parties to technical service agreements with UAP for which such operating
companies paid to UAP fees based on their respective gross revenues. Effective
June 24, 1999, these technical service agreements with UAP were assigned to
Austar United and a management agreement between United and Austar United was
executed pursuant to which United performs certain technical and consulting
services in return for a monthly fee.
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 December 31, 1999, through Austar United we held (i) an effective 69.1%
economic interest in Austar, (ii) a 69.1% interest in Saturn and (iii) a 34.6%
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 reduced our ownership interest to 69.1% as of
December 31, 1999 (67.5% 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. We previously consolidated the operations of Saturn from July 1,
1996 through January 1, 1998. Prior to that time, we accounted for our
investment in Saturn under the equity method. We discontinued consolidating the
results of operations of Saturn effective January 1, 1998 and returned to the
equity method of accounting through July 1999 to comply with the consensus
guidance of the Emerging Issues Task Force regarding Issue 96-16 ("EITF 96-16"),
and related rules of the SEC, because SaskTel had participating approval or veto
rights with respect to certain significant decisions of Saturn in the ordinary
course of business.
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. See Item 13 "Certain Relationships and
Related Transactions."
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, 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, the operating
subsidiary bank borrowings or amounts contributed in either cash or stock to
acquire additional economic interests.
<TABLE>
<CAPTION>
As of
December 31,
Sources of Fundings: 1999
-------------
(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....................................... 7,063
--------
Total....................................................... $466,291
========
As of
December 31,
Uses of Fundings: 1999
-------------
(In thousands)
Austar (1)....................................................... $349,429
Saturn........................................................... 44,612
XYZ Entertainment................................................ 16,481
Other (2)........................................................ 55,769
--------
Total....................................................... $466,291
========
</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 are responsible for our proportionate share of capital requirements of the
operating companies. We have funded our proportionate share to date with capital
contributions by United through UAP and proceeds from private debt offerings and
have reduced our proportionate share to date with subsidiary bank debt and
strategic partner contributions. We do not expect to contribute additional
capital to Austar United for its on-going operating and development
requirements, as future funding will come from the Australian IPO proceeds, the
New Austar Bank Facility, the Saturn Bank Facility and operating cash flow.
We had $275.4 million of cash, cash equivalents and short-term liquid
investments on hand as of December 31, 1999. On July 27, 1999, we successfully
completed the Austar United IPO selling 103.5 million shares on the Australian
Stock Exchange, raising gross and net proceeds at A$4.70 ($3.03) per share of
A$486.5 ($313.6) million and A$453.6 ($292.8) million, respectively. These
proceeds, in addition to borrowing capacity on the New Austar Bank Facility and
Saturn Bank Facility, will be used to expand Austar United's customer base,
complete the build-out of its network and introduce new services such as
telephony and Internet/data.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999
Cash and cash equivalents increased $5.8 million from $0.2 million as of
December 31, 1998 to $6.0 million as of December 31, 1999. Principal sources of
cash during the year ended December 31, 1999 included proceeds from the Austar
United IPO of $292.8 million, borrowings on the New Austar Bank Facility and the
Saturn Bank Facility of $229.9 million, cash contributions from parent of $29.7
million and other investing and financing sources totaling $3.1 million.
During the year ended December 31, 1999, cash was used principally for purchases
of short-term liquid investments of $266.4 million, payment of the Austar Bank
Facility of $129.1 million, purchases of property, plant and equipment totaling
$117.8 million to continue new subscriber connections at Austar and the
build-out of existing projects, the funding of operating activities of $18.9
million, deferred financing costs of $8.0 million, investments in and advances
to affiliated companies of $5.2 million and other uses totaling $4.3 million.
18
<PAGE>
YEAR ENDED DECEMBER 31, 1998
Cash and cash equivalents decreased $12.1 million from $12.3 million as of
December 31, 1997 to $0.2 million as of December 31, 1998. Principal sources of
cash during the year ended December 31, 1998 included cash contributions from
parent of $58.9 million, borrowings on the Austar Bank Facility of $39.5
million, proceeds from the sale of short-term investments of $12.3 million and
other sources totaling $0.3 million.
During the year ended December 31, 1998, cash was used principally for the
purchase of property, plant and equipment totaling $71.5 million to continue new
subscriber connections and the build-out of existing projects, the funding of
operating activities of $23.8 million, investments in affiliated companies and
acquisition of assets of $11.4 million, the deconsolidation of Saturn of $9.9
million, the payment of capital leases and other debt of $3.3 million and other
investing and financing uses of $3.2 million.
YEAR ENDED DECEMBER 31, 1997
Cash and cash equivalents decreased $6.9 million from $19.2 million as of
December 31, 1996 to $12.3 million as of December 31, 1997. Principal sources of
cash during the year ended December 31, 1997 included borrowings on the Austar
Bank Facility of $85.2 million, gross proceeds from the issuance of the
September 1997 Notes of $29.9 million, the purchase of a 35.0% interest in
Saturn by SaskTel for $19.6 million, borrowings from parent of $10.0 million,
cash contributions from parent of $7.9 million and net proceeds from the net
decrease in short-term investments of $6.3 million.
During the year ended December 31, 1997, cash was used principally for the
purchase of property, plant and equipment of $101.1 million to continue the
build-out of existing projects, primarily at Austar, a decrease in construction
payables of $29.6 million, investments in our affiliated companies of $3.3
million, deferred financing costs and other uses totaling $6.9 million and the
funding of operating activities of $24.9 million during the year.
RESULTS OF OPERATIONS
SELECTED SYSTEM OPERATING DATA. The following table displays selected system
operating data in Austar's local currency and U.S. dollar:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------
1999 1998 1997
------------- ------------- -------------
(In thousands)
<S> <C> <C> <C>
Austar (A$):
Revenue......................................... 220,493 136,072 86,470
Adjusted EBITDA (1)............................. (11,946) (37,981) (26,027)
Austar (US$):
Revenue......................................... 142,452 85,199 63,848
Adjusted EBITDA (1)............................. (7,687) (23,129) (19,220)
</TABLE>
(1) "Adjusted EBITDA" represents net operating earnings before
depreciation, amortization, non-cash general and administrative
expense allocated from parent 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. We believe Adjusted EBITDA helps investors
to assess the cash flow from operations from period to period and
thus, to value our 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. Our 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.
EXCHANGE RATES. We translate revenue and expense from our foreign subsidiaries
using the weighted-average exchange rates during the period. However, for ease
of presentation, the spot rates are shown below for the Australian and New
Zealand dollar per one U.S. dollar.
Australian New Zealand
Dollars Dollars
------------ -----------
December 31, 1999..................... 1.5244 1.9124
December 31, 1998..................... 1.6332 1.8939
December 31, 1997..................... 1.5378 1.7161
19
<PAGE>
REVENUE. Our revenue increased $60.9 million and $20.9 million for the years
ended December 31, 1999 and 1998, respectively, compared to the corresponding
amounts in the prior year as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------
1999 1998 1997
------------- -------------- -------------
(In thousands)
<S> <C> <C> <C>
Australia............................................. $144,632 $ 86,408 $64,370
New Zealand........................................... 6,120 - 473
Other................................................. - 3,411 4,118
-------- -------- --------
Total revenue...................................... $150,752 $ 89,819 $ 68,961
======== ======== ========
</TABLE>
AUSTAR
Revenue for Austar increased $57.3 million, or 67.3%, from $85.2 million for the
year ended December 31, 1998 to $142.5 million for the year ended December 31,
1999, including a positive impact of $4.3 million due to exchange rate
fluctuations. On a functional currency basis, Austar's revenue increased A$84.4
million, from A$136.1 million for the year ended December 31, 1998 to A$220.5
million for the year ended December 31, 1999, a 62.0% increase. This increase
was primarily due to subscriber growth (381,763 at December 31, 1999, compared
to 288,721 at December 31, 1998) and increased average monthly revenue per
subscriber as Austar continues to expand the content of its television service.
The average monthly revenue per subscriber increased A$6.71 ($4.40) from an
average per subscriber of A$47.00 ($30.83) for the year ended December 31, 1998
to an average of A$53.71 ($35.23) per subscriber for the year ended December 31,
1999, a 14.3% increase.
Revenue for Austar increased $21.4 million, or 33.5%, from $63.8 million for the
year ended December 31, 1997 to $85.2 million for the year ended December 31,
1998, despite a negative impact of $15.0 million due to exchange rate
fluctuations. On a functional currency basis, Austar's revenue increased A$49.6
million, from A$86.5 million for the year ended December 31, 1997 to A$136.1
million for the year ended December 31, 1998, a 57.3% increase. This increase
was primarily due to subscriber growth (288,721 at December 31, 1998 compared to
196,205 at December 31, 1997) as Austar continues to roll-out its services.
ADJUSTED EBITDA. Adjusted EBITDA increased $20.1 million and $3.9 million for
the years ended December 31, 1999 and 1998, respectively, compared to the
corresponding amounts in the prior year as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------
1999 1998 1997
------------- -------------- -------------
(In thousands)
<S> <C> <C> <C>
Australia............................................. $ (4,742) $ (27,065) $ (24,082)
New Zealand........................................... (2,125) - (6,688)
Other................................................. (169) (101) (254)
-------- --------- ---------
Total Adjusted EBITDA.............................. $ (7,036) $ (27,166) $ (31,024)
======== ========= =========
</TABLE>
AUSTAR
Austar's Adjusted EBITDA loss improved by $15.4 million, or 66.7%, from negative
$23.1 million for the year ended December 31, 1998 to negative $7.7 million for
the year ended December 31, 1999, including a negative impact of $0.2 million
due to exchange rate fluctuations. On a functional currency basis, Austar's
Adjusted EBITDA loss improved by A$26.1 million from negative A$38.0 million for
the year ended December 31, 1998 to negative A$11.9 million for the year ended
December 31, 1999, a 68.7% improvement. This improvement in Adjusted EBITDA loss
for the comparable periods from year to year was primarily due to Austar
achieving incremental sales growth while keeping certain costs fixed, such as
the NCOC, corporate management staff and media-related marketing costs.
Austar's Adjusted EBITDA loss increased $3.9 million, or 20.3%, from negative
$19.2 million for the year ended December 31, 1997 to negative $23.1 million for
the year ended December 31, 1998, including a positive impact of $4.8 million
due to exchange rate fluctuations. On a functional currency basis, Austar's
Adjusted EBITDA loss increased A$12.0 million from negative A$26.0 million for
the year ended December 31, 1997 to negative A$38.0 million for the year ended
20
<PAGE>
December 31, 1998, a 46.2% increase. Although revenue increased compared to the
same periods in the prior year, increases in operating expense and selling,
general and administrative expense outpaced the revenue increase, primarily due
to higher short-term programming costs in connection with the receivership of
Australis, Austar's previous programming supplier, and the subsequent May 1998
joint venture with Optus Vision, as well as increases in salaries and benefits
for additional personnel necessary to support the growth of Austar's NCOC.
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSE. Our corporate general and
administrative expense increased $21.1 million, or 370.2%, from $5.7 million for
the year ended December 31, 1998 to $26.8 million for the year ended December
31, 1999. This increase was primarily attributable to a stock-based compensation
charge of $22.5 million from the Austar United Plan for the twelve months ended
December 31, 1999. There was no stock-based compensation charge in 1998.
Our corporate general and administrative expense increased $2.4 million, or
72.7%, from $3.3 million for the year ended December 31, 1997 to $5.7 million
for the year ended December 31, 1998. This increase was primarily due to an
increase in the allocation of United's corporate general and administrative
expenses to us, based on increased activity at the operating system level.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
$7.6 million and $16.3 million for the years ended December 31, 1999 and 1998,
respectively, compared to the corresponding amounts in the prior years.
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------
1999 1998 1997
------------- -------------- -------------
(In thousands)
<S> <C> <C> <C>
Austar................................................ $ 97,620 $ 95,403 $ 76,913
Saturn................................................ 5,266 - 2,033
Other................................................. 1,834 1,737 1,856
-------- -------- --------
Total depreciation and amortization................ $104,720 $ 97,140 $ 80,802
======== ======== ========
</TABLE>
AUSTAR
Depreciation and amortization expense for Austar increased $2.2 million, or
2.3%, from $95.4 million for the year ended December 31, 1998 to $97.6 million
for the year ended December 31, 1999, including a negative impact of $2.8
million due to exchange rate fluctuations. On a functional currency basis,
Austar's depreciation and amortization expense increased A$3.9 million, from
A$143.0 million for the year ended December 31, 1998 to A$146.9 million for the
year ended December 31, 1999, a 2.7% increase.
Depreciation and amortization expense for Austar increased $18.5 million, or
24.1% from $76.9 million for the year ended December 31, 1997 to $95.4 million
for the year ended December 31, 1998, including a positive impact of $15.2
million due to exchange rate fluctuations. On a functional currency basis,
Austar's depreciation and amortization expense increased A$43.4 million, from
A$99.6 million for the year ended December 31, 1997 to A$143.0 million for the
year ended December 31, 1998, a 43.6% increase. This increase was primarily due
to the larger fixed asset base due to the significant deployment of operating
assets to meet subscriber growth as well as increases related to subscriber
disconnects.
GAIN ON ISSUANCE OF COMMON EQUITY SECURITIES BY SUBSIDIARY. A gain of $248.8
million on the issuance of common equity securities was recorded for 1999.
RESTRUCTURING OF ASSETS. In June 1999, the 25.0% interest in XYZ Entertainment
held by UAP was exchanged for an 8.3% ownership interest in United Austar, Inc.
increasing our interest in XYZ Entertainment to 50.0%. Based on the carrying
value of our investment in United Austar, Inc., we recognized a gain of $22.3
million from the resulting step-up in the carrying amount of our investment in
United Austar, Inc., in accordance with SAB 51.
INITIAL PUBLIC OFFERING. On July 27, 1999, Austar United successfully completed
the Austar United IPO selling 103.5 million shares on the Australian Stock
Exchange raising gross and net proceeds at A$4.70 ($3.03) per share of A$486.5
($313.6) million and A$453.6 ($292.8) million, respectively. Based on the
carrying value of our investment in Austar United as of July 27, 1999, we
recognized a gain of $226.5 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.
21
<PAGE>
INTEREST INCOME. Interest income increased $6.1 million from $0.2 million for
the year ended December 31, 1998 to $6.3 million for the year ended December 31,
1999. The increase was attributable to the increase in short-term liquid
investment balances due to the Austar United IPO.
Interest income, including related party income, decreased $1.4 million, or
87.5%, from $1.6 million for the year ended December 31, 1997 to $0.2 million
for the year ended December 31, 1998. This decrease was primarily due to reduced
short-term liquid investment balances related to the funding of our investments
in affiliated companies.
INTEREST EXPENSE. Interest expense, including related party expense, increased
$12.8 million, or 22.6%, from $56.7 million for the year ended December 31, 1998
to $69.5 million for the year ended December 31, 1999. This increase was
primarily due to interest expense related to the Austar Bank Facility which was
$7.5 million in 1998 compared to $16.8 million in 1999.
Interest expense, including related party expense, increased $12.7 million, or
28.9%, from $44.0 million for the year ended December 31, 1997 to $56.7 million
for the year ended December 31, 1998. This increase was primarily due to
continued accretion on the May 1996 Notes and the 14.0% senior notes issued in
September 1997 (the "September 1997 Notes") (collectively, the "Notes") at
14.75% during most of 1998 compared to 14.0% for 1997. In addition, interest
expense related to the Austar Bank Facility, which was secured in July 1997, was
$7.5 million in 1998 compared to $4.0 million in 1997.
MINORITY INTEREST IN SUBSIDIARY. The minority interests' share of losses was
$18.4 million for the year ended December 31, 1999. Austar United's IPO (July
1999) reduced our ownership to 69.1% as of December 31, 1999. For accounting
purposes, we continue to consolidate 100% of the results of operations of Austar
United, then deduct the minority interests' share of losses before arriving at
net income.
SHARE IN RESULTS OF AFFILIATED COMPANIES. Our share in results of affiliated
companies totaled a loss of $11.6 million, $10.3 million and $2.4 million for
the years ended December 31, 1999, 1998 and 1997, respectively, as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------
1999 1998 1997
------------- -------------- -------------
(In thousands)
<S> <C> <C> <C>
XYZ Entertainment (1)................................. $ (5,290) $ 55 $ (2,408)
Saturn (2)............................................ (6,324) (10,354) -
-------- -------- --------
Total share in results of affiliated companies..... $(11,614) $(10,299) $ (2,408)
======== ======== ========
</TABLE>
(1) In September 1998, UAP acquired an additional 25.0% interest in XYZ
Entertainment which was exchanged for an 8.3% direct ownership
interest in United Austar, Inc. in June 1999, increasing our ownership
to 50.0%.
(2) Effective January 1, 1998, we discontinued consolidating the results
of operations of Saturn and returned to the equity method of
accounting due to certain minority shareholder's rights. Effective
August 1, 1999, we increased our ownership interest in Saturn to 100%
and began consolidating its results of operations.
PROVISION FOR LOSSES ON MARKETABLE EQUITY SECURITIES AND INVESTMENT RELATED
COSTS. The provision for losses on marketable equity securities and investment
related costs consists of our write-off of various non-strategic investments.
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 generally accepted accounting principles to selected
revenue recognition issues. SAB 101 is effective second quarter 2000. The
Company is currently assessing the effect of SAB 101.
22
<PAGE>
YEAR 2000 CONVERSION
Our pay television, programming and telephony operations are heavily dependent
upon computer systems and other technological devices with embedded chips. Such
computer systems and other technological devices did not experience any problems
related to recognizing dates of January 2000 and thereafter. In all material
respects, our pay television systems, telephony systems and programming services
continued to operate during the period December 31, 1999 to March 30, 2000.
YEAR 2000 PROGRAM. In response to possible Year 2000 problems, the Board of
Directors of United established a Task Force to assess the impact that potential
Year 2000 problems might have on company-wide operations, including the Company
and its operating companies, and to implement necessary changes to address such
problems. The Task Force reported directly to the United Board. In creating a
program to minimize Year 2000 problems, the Task Force identified certain
critical operations of our business. These critical operations were identified
as service delivery systems, field and headend devices, customer service and
billing systems and corporate management and administrative operations (e.g.,
cash flow, accounts payable and accounts receivable, payroll and building
operations).
The Task Force established a three-phase program to address potential Year 2000
problems:
(a) Identification Phase: identify and evaluate computer systems and other
devices (e.g., headend devices, switches and set top boxes) on a
system by system basis for Year 2000 compliance.
(b) Implementation Phase: establish a database and evaluate the
information obtained in the Identification Phase, determine
priorities, implement corrective procedures, define costs and ensure
adequate funding.
(c) Testing Phase: test the corrective procedures to verify that all
material compliance problems will operate on and after January 1,
2000, and develop, as necessary, contingency plans for material
operations.
The Task Force completed these Phases on substantially all critical operations
prior to year-end 1999. As a result, we believe all material corporate
operations are in compliance for Year 2000 and do not require material
remediation or replacement. During the period December 31, 1999 to March 30,
2000, our worldwide operations continued to function in the ordinary course in
all material respects. We experienced no material business interruptions or
material problems with respect to our operations arising from Year 2000 issues.
We know of no remaining contingencies.
The independent consultants retained to assist with our operations in New
Zealand completed their work in 1999 as well.
THIRD PARTY DEPENDENCIES. Although we believed our largest Year 2000 risk was
our dependency upon third-party products, we experienced no Year 2000 issues as
a result of such dependency. To our knowledge, no further significant
contingencies exist based on our dependency upon third party products. We
cannot, however, give any assurance concerning compliance of our equipment
because our responses from third-party vendors have been limited and cannot be
independently verified.
COSTS OF COMPLIANCE. The Task Force is not able to determine the full cost of
its Year 2000 program and its related impact on our financial condition. In the
course of our business, we have made substantial capital adjustments over the
past few years in improving our systems, primarily for reasons other than Year
2000. Because these upgrades also resulted in Year 2000 compliance, replacement
and remediation costs have been low. Therefore, the Task Force's estimate of the
cost of the Year 2000 program at $1.5 million remains unchanged. Included in
such costs is approximately $0.1 million spent on upgrading our billing systems
for Year 2000. The Task Force accelerated these expenditures to 1999 to insure
Year 2000 compliance; otherwise these costs would have been incurred over
approximately two to three years. Such costs do not, however, include internal
costs because we did not separately track the internal costs incurred for the
Year 2000 program. The costs incurred for Year 2000 compliance issues did not
have a material financial impact on the Company. We anticipate no additional
significant expenditures for the Year 2000 program.
ITEM 7A. 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
23
<PAGE>
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 affiliate, XYZ
Entertainment.
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 December 31, 1999
-----------------------------
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.......................... $407,945 $414,008
Average interest rate................................... 14.0% 13.7%
Variable rate NZ$ denominated Saturn Bank Facility........ $ 57,685 $ 57,685
Average interest rate................................... 8.6% 8.6%
Variable rate A$ denominated New Austar Bank Facility..... $202,703 $202,703
Average interest rate................................... 7.6% 7.6%
</TABLE>
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 December 31, 1999
------------------------------------------------------------------------------
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...... $ - $ - $ - $ - $ - $407,945 $407,945
Variable rate NZ$ denominated Saturn
Bank Facility....................... $ - $577 $ 4,615 $ 8,307 $11,537 $ 32,649 $ 57,685
Variable rate A$ denominated New
Austar Bank Facility................ $ - $ - $ 9,184 $50,512 $80,687 $ 62,320 $202,703
</TABLE>
24
<PAGE>
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 ($32.8) 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
($65.6) million of variable rate, long-term debt into fixed rate borrowings. As
of December 31, 1999, the weighted-average fixed rate under these agreements was
8.0% compared to a weighted-average variable rate of 7.6%. As a result of these
swap agreements, interest expense was increased by approximately A$0.9 ($0.6)
million during 1999.
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 ($31.7) 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 December 31, 1999, the average fixed rate under the agreement
was 9.3% compared to a weighted-average variable rate of 8.6%. As a result of
this swap agreement, interest expense was increased by approximately NZ$0.4
($0.2) million during 1999.
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.
The table below provides information about our interest rate swaps. The table
presents notional amounts and weighted-average interest rates by expected
(contractual) maturity dates. Notional amounts are used to calculate the
contractual payments to be exchanged under the contract. The information is
presented in U.S. dollar equivalents (in thousands), which is our reporting
currency. The instrument's actual cash flows are denominated in Australian and
New Zealand dollars.
<TABLE>
<CAPTION> As of December 31, 1999
------------------------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter Total
------- -------- -------- -------- -------- ----------- ----------
(U.S. dollars, in thousands, except interest rates)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Rate Swaps:
Variable to fixed (New Austar Bank Facility)... $ - $ - $32,800 $ - $65,600 $ - $98,400
Average pay rate %........................... 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
Average receive rate %....................... 7.6% 7.6% 7.6% 7.6% 7.6% 7.6%
Variable to fixed (Saturn Bank Facility)....... $ - $ - $ - $ - $ - $31,688 $31,688
Average pay rate %........................... 9.1% 10.2% 10.2% 9.7% 9.9% 9.7%
Average receive rate %....................... 8.6% 8.6% 8.6% 8.6% 8.6% 8.6%
</TABLE>
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------
The consolidated financial statements of the Company are filed under this Item
as follows:
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C> <C> <C> <C> <C>
UNITED AUSTRALIA/PACIFIC, INC.
Report of Independent Public Accountants................................................................. 27
Consolidated Balance Sheets as of December 31, 1999 and 1998............................................. 28
Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997............... 29
Consolidated Statements of Stockholders' Deficit for the Years Ended December 31, 1999,
1998 and 1997.......................................................................................... 30
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997............... 31
Notes to Consolidated Financial Statements............................................................... 33
</TABLE>
The financial statement schedules required by Regulation S-X are filed under
Item 14 "Exhibits, Financial Statement Schedules and Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
--------------------------------------------------------------------------------
None.
26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To United Australia/Pacific, Inc.:
We have audited the accompanying consolidated balance sheets of United
Australia/Pacific, Inc. (formerly UIH Australia/Pacific, Inc.) (a Colorado
corporation and majority-owned subsidiary of United Asia/Pacific Communications,
Inc.) and subsidiaries as of December 31, 1999 (as restated - see Note 2) and
1998 and the related consolidated statements of operations, stockholders'
deficit and cash flows for the years ended December 31, 1999 (as restated - see
Note 2), 1998 and 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform these
audits to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of United
Australia/Pacific, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the results of their operations and their cash flows for the years ended
December 31, 1999, 1998 and 1997 in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Denver, Colorado
March 29, 2000 (except with respect
to the matter discussed in Note 2,
as to which the date is August 14,
2000).
27
<PAGE>
<TABLE>
<CAPTION>
UNITED AUSTRALIA/PACIFIC, INC.
CONSOLIDATED BALANCE SHEETS
(Stated in thousands, except share and per share amounts)
As of December 31,
------------------------
1999 1998
--------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................................................. $ 6,028 $ 181
Short-term liquid investments.......................................................................... 269,393 763
Subscriber receivables, net............................................................................ 8,177 6,322
Related party receivables.............................................................................. 1,645 746
Other receivables...................................................................................... 6,196 736
Inventory.............................................................................................. 14,193 12,617
Prepaids and other current assets...................................................................... 5,146 4,615
--------- ---------
Total current assets............................................................................ 310,778 25,980
Investments in and advances to affiliated companies, accounted for under the equity method, net.......... 28,546 24,597
Property, plant and equipment, net of accumulated depreciation of $261,891 and $147,511, respectively.... 219,394 110,351
Goodwill and other intangible assets, net of accumulated amortization of $23,536 and $17,512,
respectively........................................................................................... 91,346 42,559
Deferred financing costs, net of accumulated amortization of $4,427 and $3,237, respectively............. 16,377 11,675
Other non-current assets, net............................................................................ 150 870
--------- ---------
Total assets................................................................................... $ 666,591 $ 216,032
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable....................................................................................... $ 16,463 $ 5,426
Accrued liabilities.................................................................................... 32,151 28,522
Construction payables.................................................................................. 4,370 1,076
Current portion of due to parent....................................................................... 12,754 3,665
Current portion of notes payable....................................................................... - 36,738
Current portion of other long-term debt................................................................ 1,500 2,189
--------- ---------
Total current liabilities....................................................................... 67,238 77,616
Due to parent............................................................................................ 9,621 6,578
Senior discount notes.................................................................................... 407,945 356,640
Other long-term debt..................................................................................... 261,151 68,086
Deferred tax liability................................................................................... 1,014 -
Other long-term liabilities.............................................................................. 456 1,741
--------- ---------
Total liabilities............................................................................... 747,425 510,661
--------- ---------
Minority interest in subsidiary.......................................................................... 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 and 17,810,249 shares
issued and outstanding, respectively................................................................. 178 178
Additional paid-in capital............................................................................. 306,616 215,624
Deferred compensation.................................................................................. (19,859) -
Accumulated deficit.................................................................................... (440,649) (481,240)
Other cumulative comprehensive loss.................................................................... (22,940) (29,191)
--------- ---------
Total stockholders' deficit..................................................................... (176,654) (294,629)
--------- ---------
Commitments and contingencies (Notes 15 and 16)
Total liabilities and stockholders' deficit..................................................... $ 666,591 $ 216,032
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
UNITED AUSTRALIA/PACIFIC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Stated in thousands, except share and per share amounts)
For the Years Ended December 31,
------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenue............................................................................... $ 150,752 $ 89,819 $ 68,961
System operating expense, including related party expense of
$4,381, $4,124 and $3,291, respectively............................................. (112,498) (71,149) (52,703)
System selling, general and administrative expense.................................... (49,501) (49,738) (50,006)
Corporate general and administrative expense, including management fees and
allocated expense from related party of $21,767, $5,475 and $2,739, respectively.... (26,847) (5,696) (3,306)
Depreciation and amortization......................................................... (104,720) (97,140) (80,802)
---------- ---------- ----------
Operating loss............................................................... (142,814) (133,904) (117,856)
Gain on issuance of common equity securities by subsidiary............................ 248,758 - -
Interest income, including related party income of $0, $0 and $425, respectively...... 6,253 207 1,569
Interest expense, including related party expense of $0, $1,079 and $1,730,
respectively........................................................................ (69,470) (56,705) (43,994)
Provision for losses on marketable equity securities and investment related costs..... (4,949) (4,462) (4,784)
Other expense, net.................................................................... (2,987) (1,128) (1,601)
---------- ---------- ----------
Income (loss) before income taxes and other items............................ 34,791 (195,992) (166,666)
Income tax expense.................................................................... (993) - -
Minority interest in subsidiary....................................................... 18,407 - 1,018
Share in results of affiliated companies, net......................................... (11,614) (10,299) (2,408)
---------- ---------- ----------
Net income (loss)............................................................ $ 40,591 $ (206,291) $ (168,056)
========== ========== ==========
Foreign currency translation adjustments.............................................. $ 6,251 $ (227) $ (30,831)
Unrealized gains on securities:
Reclassification adjustment for losses included in net income (loss)................ - - 3,412
---------- ---------- ----------
Comprehensive income (loss).................................................. $ 46,842 $ (206,518) $ (195,475)
========== ========== ==========
Net income (loss) per common share:
Basic net income (loss)...................................................... $ 2.28 $ (14.02) $ (12.12)
========== ========== ==========
Diluted net income (loss).................................................... $ 2.23 $ (14.02) $ (12.12)
========== ========== ==========
Weighted-average number of common shares outstanding:
Basic........................................................................ 17,810,254 14,718,857 13,864,941
========== ========== ==========
Diluted...................................................................... 18,199,726 14,718,857 13,864,941
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
UNITED AUSTRALIA/PACIFIC, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(Stated in thousands, except share amounts)
Other
Cumulative
Common Stock Additional Comprehensive
-------------------- Paid-In Deferred Accumulated Income
Shares Amount Capital Compensation Deficit (Loss)(1) Total
---------- -------- ---------- ------------ ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1997............... 13,864,941 $ 139 $112,346 $ - $(106,893) $ (1,545) $ 4,047
Cash contributions from parent.......... - - 7,863 - - - 7,863
Non-cash contributions from parent...... - - 9,749 - - - 9,749
Gain on sale of stock by New
Zealand subsidiary..................... - - 5,985 - - - 5,985
Issuance of warrants to purchase
common stock.......................... - - 3,678 - - - 3,678
Net loss................................ - - - - (168,056) - (168,056)
Provision for loss on marketable
equity securities, net................ - - - - - 3,412 3,412
Change in cumulative translation
adjustments........................... - - - - - (30,831) (30,831)
----------- ----- -------- -------- --------- -------- ---------
Balances, December 31, 1997............. 13,864,941 139 139,621 - (274,949) (28,964) (164,153)
Cash contributions from parent.......... - - 58,947 - - - 58,947
Non-cash contributions from parent...... - - 17,095 - - - 17,095
Issuance of capital stock to parent
related to cumulative cash capital
contributions......................... 3,945,308 39 (39) - - - -
Net loss................................ - - - - (206,291) - (206,291)
Change in cumulative translation
adjustments........................... - - - - - (227) (227)
---------- ----- -------- -------- --------- -------- ---------
Balances, December 31, 1998............. 17,810,249 178 215,624 - (481,240) (29,191) (294,629)
Cash contributions from parent.......... - - 29,659 - - - 29,659
Non-cash contributions from parent...... - - 20,449 - - - 20,449
Equity transactions of subsidiary....... - - 40,883 (40,883) - - -
Amortization of deferred compensation... - - - 21,024 - - 21,024
Warrants exercised...................... 50 - 1 - - - 1
Net income.............................. - - - - 40,591 - 40,591
Change in cumulative translation
adjustments........................... - - - - - 6,251 6,251
---------- ----- -------- -------- --------- -------- ---------
Balances, December 31, 1999............. 17,810,299 $ 178 $306,616 $(19,859) $(440,649) $(22,940) $(176,654)
========== ===== ======== ======== ========= ======== =========
(1) As of January 1, 1997, the components of Other Cumulative Comprehensive Income (Loss) include $1,867 and $(3,412) for foreign
currency translation adjustments and unrealized loss on investment, respectively. Beginning December 31, 1997, Other Cumulative
Comprehensive Income (Loss) represents foreign currency translation adjustments only.
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
UNITED AUSTRALIA/PACIFIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in thousands)
For the Years Ended December 31,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................................................... $ 40,591 $(206,291) $(168,056)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Gain on issuance of common equity securities by subsidiary............................. (248,758) - -
Share in results of affiliated companies, net.......................................... 6,351 10,299 2,408
Minority interest...................................................................... (18,407) - (1,018)
Depreciation and amortization.......................................................... 104,720 97,140 80,802
Allocation of expense accounted for as capital contributions by parent................. 3,216 4,622 1,949
Stock-based compensation expense....................................................... 22,540 - -
Provision for losses on marketable equity securities and investment related costs...... 4,949 4,462 4,784
Accretion of interest on senior notes and amortization of deferred financing costs..... 56,069 49,508 38,747
Increase in receivables, net........................................................... (1,107) (2,757) (1,691)
Decrease (increase) in other assets.................................................... (4,890) (5,719) 68
Increase in accounts payable, accrued liabilities and other............................ 15,870 24,894 17,100
-------- --------- ---------
Net cash flows from operating activities.................................................. (18,856) (23,842) (24,907)
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term liquid investments................................................. (266,378) (763) (15,988)
Sale of short-term liquid investments..................................................... 1,676 12,325 22,303
Restricted cash released (deposited)...................................................... 91 - (420)
Investments in and advances to affiliated companies and acquisition of assets............. (5,177) (11,389) (3,272)
Consolidation (deconsolidation) of New Zealand subsidiary................................. 613 (9,881) -
Capital expenditures...................................................................... (117,819) (71,466) (101,135)
Decrease in construction payables......................................................... (1,416) (2,007) (29,621)
-------- --------- ---------
Net cash flows from investing activities.................................................. (388,410) (83,181) (128,133)
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash contributed from parent.............................................................. 29,659 58,947 7,863
Cash contributed from minority interest partner........................................... - - 19,566
Proceeds from issuance of common stock by subsidiary, net................................. 292,784 - -
Proceeds from issuance of common stock in connection with subsidiary option plan.......... 807 - -
Warrants exercised........................................................................ 1 - -
Borrowings on the New Austar Bank Facility and Saturn Bank Facility....................... 229,928 39,519 85,210
Payment of the Austar Bank Facility....................................................... (129,149) - -
Proceeds from offering of senior discount notes........................................... - - 29,925
Borrowings on related party payable to parent............................................. - - 9,998
Deferred debt financing costs............................................................. (8,014) (473) (5,643)
Payment of capital leases and other debt.................................................. (927) (3,326) (490)
-------- --------- ---------
Net cash flows from financing activities.................................................. 415,089 94,667 146,429
-------- --------- ---------
EFFECT OF EXCHANGE RATES ON CASH.......................................................... (1,976) 193 (265)
-------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.......................................... 5,847 (12,163) (6,876)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............................................ 181 12,344 19,220
-------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................................................. $ 6,028 $ 181 $ 12,344
======== ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
UNITED AUSTRALIA/PACIFIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in thousands)
For the Years Ended December 31,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Non-cash capital contributions from parent................................................ $ 17,233 $ 12,473 $ 7,800
======== ========= =========
Gain on issuance of shares by New Zealand subsidiary...................................... $ - $ - $ 5,985
======== ========= =========
Non-cash issuance of warrants to purchase common stock.................................... $ - $ - $ 3,678
======== ========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest.................................................................... $ 11,977 $ 5,323 $ 1,239
======== ========= =========
Cash received for interest................................................................ $ 2,747 $ 144 $ 796
======== ========= =========
CONSOLIDATION/DECONSOLIDATION OF NEW ZEALAND SUBSIDIARY:
Working capital........................................................................... $ 10,162 $ 4,159 $ -
Property, plant and equipment............................................................. (80,656) (26,484) -
Elimination of investment in Saturn....................................................... 21,974 - -
Goodwill and other assets................................................................. (5,737) (2,805) -
Notes payable and other debt.............................................................. 54,870 3,833 -
Minority interest......................................................................... - 11,416 -
-------- --------- ---------
Total cash received (relinquished)........................................................ $ 613 $ (9,881) $ -
======== ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
32
<PAGE>
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
United Australia/Pacific, Inc. (the "Company" or "United A/P") (formerly known
as UIH Australia/Pacific, Inc.) a majority-owned subsidiary of United
Asia/Pacific Communications, Inc. ( "UAP ") (formerly known as UIH Asia/Pacific
Communications, Inc.), which is in turn an indirect wholly-owned subsidiary of
UnitedGlobalCom, Inc. ( "United ") (formerly known as United International
Holdings, Inc.), was formed on October 14, 1994, for the purpose of developing,
acquiring and managing foreign pay television, programming and telephony
operations.
The following chart presents a summary of the Company's ownership structure and
its significant investments in multi-channel television, programming and
telephony operations as of December 31, 1999.
***********************************************************
* *
* United *
* *
***********************************************************
*
100% *
***********************************************************
* *
* United International Properties, Inc. ("UIPI") *
* *
***********************************************************
*
100% *
***********************************************************
* *
* UAP *
* *
***********************************************************
*
100% *
***********************************************************
* *
* The Company *
* *
***********************************************************
*
91.7% *
***********************************************************
* *
* United Austar, Inc. (1) *
* *
***********************************************************
*
75.4% *
***********************************************************
* 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally accepted
accounting principles ("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.
33
<PAGE>
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements 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
effective July 27, 1999. The Company previously consolidated the operations of
Saturn from July 1, 1996 through December 31, 1998. Prior to that time, the
Company accounted for its investment in Saturn under the equity method. During
the fourth quarter of 1998, the Company discontinued consolidating the results
of operations of Saturn effective as of January 1, 1998 and returned to the
equity method of accounting through July 26, 1999. The change was made 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. Accordingly, the condensed consolidated statement of operations and
statement of cash flows for the period ended December 31, 1998 have been
adjusted to reflect the deconsolidation of Saturn effective as of January 1,
1998. Effective October 1, 1998, the Company discontinued consolidating the
results of operations of Telefenua due to an other-than-temporary loss of
control. 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.
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
34
<PAGE>
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
START-UP COSTS
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the
Costs of Start-up Activities", ("SOP 98-5"), which provides for guidance on the
financial reporting for start-up and organization costs. It requires costs of
start-up activities and organization costs to be expensed as incurred. SOP 98-5
was effective for financial statements for fiscal years beginning after December
15, 1998. There was no material effect of the adoption of SOP 98-5 during 1999.
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.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of subscriber receivables. Concentrations of
credit risk with respect to subscriber receivables are limited due to the large
number of customers comprising the Company's customer base.
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 at each new
measurement date. With respect to this plan, the rights conveyed to employees
are the substantive equivalents to stock appreciation rights. Accordingly,
compensation expense is recognized at each financial statement date based on the
difference between the grant price and the estimated fair value of Austar
United's common stock.
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.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method which
requires recognition of deferred tax assets and liabilities for the expected
future income tax consequences of transactions which have been included in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets, liabilities and loss carryforwards using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Net deferred tax assets are then reduced by a valuation allowance if
management believes it more likely than not that they will not be realized.
35
<PAGE>
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 9) are included in the Company's diluted net income
(loss) per share amounts for 1999.
COMPREHENSIVE INCOME (LOSS)
The Company has adopted 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.
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 generally accepted accounting principles 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.
36
<PAGE>
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 increased to $40.6 million from $35.4
million as previously reported for the year ended December 31, 1999. Basic net
income per share as restated increased to $2.28 from $1.99 as previously
reported for the year ended December 31, 1999. Diluted net income per share as
restated increased to $2.23 from $1.94 as previously reported for the year ended
December 31, 1999.
3. RESTRUCTURING OF ASSETS AND INITIAL PUBLIC OFFERING
RESTRUCTURING OF ASSETS
In June 1999, the Company's interests in Austar, XYZ Entertainment and Saturn
were contributed to Austar United in exchange for new shares issued by Austar
United. On July 27, 1999, Austar United acquired from SaskTel its 35.0% interest
in Saturn in exchange for 13,659,574 of Austar United's shares, thereby
increasing Austar United's ownership interest in Saturn from 65.0% to 100%.
INITIAL PUBLIC OFFERING
In July 1999, Austar United successfully completed an initial public offering
("Austar United IPO") selling 103.5 million shares on the Australian Stock
Exchange, raising gross and net proceeds in Australian dollars ("A$")4.70
($3.03) per share of A$486.5 ($313.6) million and A$453.6 ($292.8) million,
respectively. Based on the carrying value of the Company's investment in Austar
United as of July 27, 1999, the Company recognized a gain of $226.5 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. Austar United's IPO reduced the Company's ownership
interest from 91.7% to approximately 69.2%. Subsequent stock option exercises
reduced the Company's ownership interest to 69.1% as of December 31, 1999.
Including all vested stock options granted to employees, the Company's ownership
interest in Austar United on a fully diluted basis is approximately 67.5% at
December 31, 1999.
4. CASH AND CASH EQUIVALENTS AND SHORT-TERM LIQUID INVESTMENTS
<TABLE>
<CAPTION>
As of December 31, 1999
----------------------------------------------
Cash Short-Term
and Cash Liquid
Equivalents Investments Total
------------- ------------- ------------
(In thousands)
<S> <C> <C> <C>
Cash.................................................... $6,028 $ - $ 6,028
Certificates of deposit................................. - 269,043 269,043
Government securities................................... - 350 350
------ -------- --------
Total................................................ $6,028 $269,393 $275,421
====== ======== ========
As of December 31, 1998
----------------------------------------------
Cash Short-term
and Cash Liquid
Equivalents Investments Total
------------- ------------- ------------
(In thousands)
Cash.................................................... $ 181 $ - $ 181
Commercial paper........................................ - 406 406
Government securities................................... - 357 357
------ -------- --------
Total................................................ $ 181 $ 763 $ 944
====== ======== ========
</TABLE>
37
<PAGE>
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES, ACCOUNTED FOR UNDER
THE EQUITY METHOD
<TABLE><CAPTION>
As of December 31, 1999
-------------------------------------------------------------------------------------------
Investments in Cumulative Share Cumulative
and Advances to in Results of Translation Valuation
Affiliated Companies Affiliated Companies Adjustments Allowance Total
-------------------- -------------------- ----------- ---------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
XYZ Entertainment(1)... $44,306 $(18,564) $ 2,804 $ - $28,546
------- -------- ------- ------- -------
Total............. $44,306 $(18,564) $ 2,804 $ - $28,546
======= ======== ======= ======= =======
As of December 31, 1998
-------------------------------------------------------------------------------------------
Investments in Cumulative Share Cumulative
and Advances to in Results of Translation Valuation
Affiliated Companies Affiliated Companies Adjustments Allowance Total
-------------------- -------------------- ----------- ---------- -------
(In thousands)
Saturn................. $49,808 $(23,138) $(2,881) $ - $23,789
XYZ Entertainment...... 19,363 (18,666) 111 - 808
Telefenua.............. 18,599 (14,215) - (4,384)(2) -
------- -------- ------- ------- -------
Total............. $87,770 $(56,019) $(2,770) $(4,384) $24,597
======= ======== ======= ======= =======
</TABLE>
(1) 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.
at its carrying value of $25.1 million.
(2) The Company reserved the remaining balance of the Telefenua investment
of $4,384 due to the uncertainty of realization.
As of December 31, 1999 and 1998, the Company had the following differences
related to the excess of its cost over its proportionate interest in each
affiliate's net tangible assets included in the above table. Such differences
are being amortized over 15 years.
<TABLE><CAPTION>
As of December 31, 1999 As of December 31, 1998
--------------------------- ---------------------------
Basis Accumulated Basis Accumulated
Difference Amortization Difference Amortization
------------ -------------- ------------ --------------
(In thousands)
<S> <C> <C> <C> <C>
XYZ Entertainment..................................... $25,791 $(1,609) $ - $ -
Saturn................................................ - - 12,733 (1,005)
------- ------- ------- -------
Total............................................ $25,791 $(1,609) $12,733 $(1,005)
======= ======= ======= =======
</TABLE>
Condensed financial information for Saturn, stated in U.S. dollars, is as
follows:
As of
December 31, 1998
------------------
(In thousands)
Current assets......................................... $ 4,071
Non-current assets..................................... 59,242
--------
Total assets...................................... $ 63,313
========
Current liabilities.................................... $ 33,608
Non-current liabilitities.............................. 19
Shareholders' equity 29,686
--------
Total liabilities and shareholders' equity........ $ 63,313
========
For the Year Ended
December 31, 1998
-------------------
(In thousands)
Revenue................................................ $ 1,693
Expenses............................................... (16,934)
--------
Net loss.......................................... $(15,241)
========
38
<PAGE>
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
As of December 31,
-------------------------
1999 1998
---------- ----------
(In thousands)
<S> <C> <C>
Subscriber premises equipment and converters.............. $276,725 $174,630
MMDS distribution facilities.............................. 64,373 54,725
Cable distribution networks............................... 91,298 2,009
Office equipment, furniture and fixtures.................. 23,111 9,810
Buildings and leasehold improvements...................... 5,645 2,841
Other..................................................... 20,133 13,847
-------- --------
481,285 257,862
Accumulated depreciation............................... (261,891) (147,511)
-------- --------
Net property, plant and equipment...................... $219,394 $110,351
======== ========
</TABLE>
7. GOODWILL AND OTHER INTANGIBLE ASSETS
<TABLE>
<CAPTION>
As of December 31,
-------------------------
1999 1998
---------- ----------
(In thousands)
<S> <C> <C>
Austar United............................................. $114,882 $ -
Austar.................................................... - 55,805
Other..................................................... - 4,266
-------- --------
114,882 60,071
Accumulated amortization............................... (23,536) (17,512)
-------- --------
Net goodwill and other intangible assets............... $ 91,346 $ 42,559
======== ========
</TABLE>
8. CURRENT PORTION OF NOTES PAYABLE
<TABLE>
<CAPTION>
As of December 31,
-------------------------
1999 1998
---------- ----------
(In thousands)
<S> <C> <C>
Austar Bank Facility (See Note 10)......................... $ - $ 36,738
-------- --------
Total current portion of notes payable.................. $ - $ 36,738
======== ========
</TABLE>
9. SENIOR DISCOUNT NOTES
<TABLE>
<CAPTION>
As of December 31,
-------------------------
1999 1998
---------- ----------
(In thousands)
<S> <C> <C>
May 1996 Notes (as defined below), net of
unamortized discount...................................... $369,111 $321,687
September 1997 Notes (as defined below), net
of unamortized discount................................... 38,834 34,953
-------- --------
Total senior discount notes............................. $407,945 $356,640
======== ========
</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 $369.1 million as of December 31, 1999. On and after May 15, 2001, cash
39
<PAGE>
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. The quoted
fair market value of these notes was approximately $375.8 million and $223.7
million as of December 31, 1999 and 1998, respectively.
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 $38.8 million as of December 31, 1999. 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. The quoted fair market value of these notes was
approximately $38.2 million and $22.7 million as of December 31, 1999 and 1998,
respectively.
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.
10. OTHER LONG-TERM DEBT
<TABLE>
<CAPTION>
As of December 31,
-------------------------
1999 1998
---------- ----------
(In thousands)
<S> <C> <C>
Austar Bank Facility (as defined below)................ $202,703 $ 67,352
Saturn Bank Facility (as defined below)................ 57,685 -
Capitalized leases and other........................... 2,263 2,923
-------- --------
262,651 70,275
Less current portion................................ (1,500) (2,189)
-------- --------
Total other long-term debt......................... $261,151 $ 68,086
======== ========
</TABLE>
AUSTAR BANK FACILITY
In July 1997, Austar secured a senior syndicated term debt facility (the "Austar
Bank Facility") in the amount of A$200.0 million to fund its subscriber
acquisition and working capital needs. Austar had drawn the full amount of the
facility by April 1999 when it secured a new syndicated senior secured debt
facility (the "New Austar Bank Facility") for A$400.0 million to refinance the
A$200.0 million Austar 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 Austar Bank Facility, and Tranche 2 is available upon the
contribution of additional equity on a 2:1 debt-to-equity basis. As of December
31, 1999, Austar had drawn A$309.0 ($202.7) 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
40
<PAGE>
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 NZ$125.0 ($65.4) million to fund the completion
of Saturn's network. As of December 31, 1999, Saturn had drawn NZ$109.0 ($57.7)
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 3.0%
over the current base rate upon draw down and has averaged approximately 8.6%.
The Saturn Bank Facility is repayable over a five year period beginning fourth
quarter 2001.
DEBT MATURITIES
The Company's maturities of its other long-term debt are as follows:
Year ended December 31, 2000....................... $ 1,500
Year ended December 31, 2001....................... 5,356
Year ended December 31, 2002....................... 18,069
Year ended December 31, 2003....................... 62,069
Year ended December 31, 2004....................... 96,839
Thereafter......................................... 78,818
--------
$262,651
========
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 ($32.8) 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
($65.6) million of variable rate, long-term debt into fixed rate borrowings. As
of December 31, 1999, the weighted-average fixed rate under these agreements was
8.0% compared to a weighted-average variable rate on the New Austar Bank
Facility of approximately 7.6%. As a result of these swap agreements, interest
expense was increased by approximately A$0.9 ($0.6) million during 1999.
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$60.6 ($31.7) 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 December 31, 1999, the average fixed rate under the agreement
was 9.3% compared to a weighted-average variable rate of 8.6%. As a result of
this swap agreement, interest expense was increased by approximately NZ$0.4
($0.2) million during 1999.
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.
11. RELATED PARTY
Effective May 1, 1996, the Company and United Management, Inc. ("United
Management") (formerly known as UIH Management, Inc.), an indirect wholly-owned
subsidiary of United, executed a 10-year management services agreement (the
41
<PAGE>
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
"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 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.
Management believes that this method of allocating costs is reasonable. For the
years ended December 31, 1999, 1998 and 1997, the Company recorded $20.8
million, $4.6 million and $1.9 million, respectively, in corporate general and
administrative expense allocated from United and management fees due from the
Company to UAP. The December 31, 1999 amount includes $17.6 million of non-cash
stock-based compensation expense related to UAP stock appreciation rights.
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 1999 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. For the years ended December 31, 1999, 1998 and 1997, the Company
recorded $0.9 million, $0.9 million and $0.8 million, respectively, 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.
Included in the amount due to parent is the following:
<TABLE>
<CAPTION>
As of December 31,
-------------------------
1999 1998
---------- ----------
(In thousands)
<S> <C> <C>
United A/P.......................................................... $ 1,977 $ 1,056
Austar United technical assistance agreement obligations,
including management fees of $1,200 and $0, respectively........... 2,874 -
Austar technical assistance agreement obligations, including
deferred management fees of $9,472 and $5,973, respectively (1).... 13,889 8,347
Saturn technical assistance agreement obligations................... 1,820 -
Other............................................................... 1,815 840
------- -------
22,375 10,243
Less current portion........................................... (12,754) (3,665)
------- -------
Total due to parent............................................ $ 9,621 $ 6,578
======= =======
</TABLE>
(1) Austar United and UAP have the option of converting these management
fees into equity.
42
<PAGE>
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. STOCKHOLDERS' DEFICIT
EQUITY TRANSACTIONS OF SUBSIDIARY
Variable plan accounting for stock options and the recognition of deferred
compensation expense by the Company's subsidiary affect the equity accounts of
the Company. The following represents the effect on additional paid-in capital
and deferred compensation as a result of these equity transactions:
For the Year Ended
December 31, 1999
------------------
Austar
United
------------------
(In thousands)
Variable plan accounting for stock options............... $40,883
Deferred compensation expense............................ (40,883)
Amortization of deferred compensation.................... 21,024
-------
Total............................................... $21,024
=======
AUSTAR UNITED PLAN
On June 17, 1999, Austar United established a stock option plan (the "Austar
United Plan"). Effective on Austar United's IPO date of July 27, 1999, certain
employees of United and Austar United were granted options under the Austar
United Plan in direct proportion to their previous holding of UAP options under
the UAP Plan along with retroactive vesting through the initial public offering
date to reflect vesting under the UAP Plan. The maximum term of options granted
under the Austar United Plan is ten years. In general, the options vest in equal
monthly increments over the four-year period following the date of grant. Under
the Austar United Plan, options to purchase a total of 28,760,709 shares have
been authorized, of which 3,231,428 were available for grant. The Austar United
Plan was accounted for as a variable plan prior to the Australian IPO and as a
fixed plan effective July 27, 1999. For the year ended December 31, 1999, $4.9
million of compensation expense was recognized under this plan in the statement
of operations.
For purposes of the proforma disclosures presented below, Austar United has
computed the fair values of all options granted during the year ended December
31, 1999 using the Black-Scholes single-option pricing model and the following
weighted-average assumptions:
Risk-free interest rate.................. 5.81%
Expected life............................ 7 years
Expected volatility...................... 40.44%
Expected dividend yield.................. 0%
The total fair value of options granted was approximately A$88.0 ($57.7) million
for the year ended December 31, 1999. This amount is amortized using the
straight-line method over the vesting period of the options. Cumulative
compensation expense recognized in proforma net income, with respect to options
that are forfeited prior to vesting, is adjusted as a reduction of proforma
compensation expense in the period of forfeiture. Pro forma stock-based
compensation, net of the effect of the forfeitures and net of actual
compensation expense recorded in the statement of operations was nil for the
year ended December 31, 1999.
43
<PAGE>
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of stock option activity for the Austar United Plan is as follows:
<TABLE>
<CAPTION>
For the Year Ended
December 31, 1999
----------------------------------
Number Weighted-
of Average
Shares Exercise Price
------------ -------------------
(Australian dollars)
<S> <C> <C>
Outstanding at beginning of period...................... - -
Granted during the period............................... 25,631,736 2.26
Cancelled during the period............................. (102,455) 3.75
Exercised during the period............................. (684,250) 1.83
----------
Outstanding at end of period............................ 24,845,031 2.27
==========
Exercisable at end of period............................ 11,564,416 1.90
==========
</TABLE>
The combined weighted-average fair values and weighted-average exercise prices
of options granted during the year ended December 31, 1999 are as follows:
<TABLE>
<CAPTION>
For the Year Ended
December 31, 1999
---------------------------------------
Number Fair Exercise
Exercise Price of Options Value Price
-------------- ------------- ---------- ---------------
(Australian dollars)
<S> <C> <C> <C>
Less than market price.................................. 22,334,236 3.58 1.91
Equal to market price................................... 3,222,500 2.47 4.70
Greater than market price............................... 75,000 2.43 4.70
----------
Total................................................ 25,631,736 3.44 2.26
==========
</TABLE>
The following table summarizes information about the Austar United Plan options
outstanding and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
Weighted-Average
Number of Remaining Number of
Options Contractual Life Options
Exercise Price (Australian dollars) Outstanding (Years) Exercisable
-------------- ----------- ---------------- -----------
<S> <C> <C> <C>
$1.80................................................... 20,813,572 9.55 11,171,494
$4.70................................................... 4,031,459 9.60 392,922
---------- ----------
Total................................................ 24,845,031 9.56 11,564,416
========== ==========
</TABLE>
13. INCOME TAXES
In general, a U.S. corporation may claim a foreign tax credit against its
federal income tax expense for foreign income taxes paid or accrued. Because the
Company must calculate its foreign tax credit separately for dividends received
from each foreign corporation in which the Company owns 10.0% to 50.0% of the
voting stock, and because of certain other limitations, the Company's ability to
claim a foreign tax credit may be limited, particularly with respect to
dividends paid out of earnings subject to a high rate of foreign income tax.
Generally, the Company's ability to claim a foreign tax credit is limited to the
amount of U.S. taxes the Company pays with respect to its foreign source income.
In calculating its foreign source income, the Company is required to allocate
interest expense and overhead incurred in the U.S. between its domestic and
foreign activities. Accordingly, to the extent U.S. borrowings are used to
finance equity contributions to its foreign subsidiaries, the Company's ability
to claim a foreign tax credit may be significantly reduced. These limitations
and the inability of the Company to offset losses in one foreign jurisdiction
against income earned in another foreign jurisdiction could result in a high
effective tax rate on the Company's earnings.
44
<PAGE>
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company is included as a member of United's consolidated tax return and,
after the offering of the May 1996 Notes, remained a member of the United
consolidated group. United and the Company are parties to a tax sharing
agreement that defines the parties' rights and obligations with respect to tax
liabilities and benefits relating to the Company and its operations as part of
the consolidated group of United. In general, United is responsible for filing
consolidated tax returns and paying the associated taxes, and the Company will
reimburse United for the portion of the tax cost relating to the Company and its
operations. For financial reporting purposes, the Company accounts for income
taxes as if it filed separate income tax returns in accordance with the
fundamental provisions of the tax sharing agreement. Any differences in income
tax expense (benefit) allocated to the Company by United in accordance with the
tax sharing agreement and the income tax expense (benefit) will be accounted for
as a deemed capital distribution or contribution. Because the Company holds
certain of its foreign investments through affiliates which hold investments
accounted for under the equity method in foreign corporations, taxable income
(loss) generated does not flow through to the Company for U.S. federal and state
tax purposes even though the Company records its allocable share of affiliate
income (losses) for financial reporting purposes. Accordingly, due to the
indefinite reversal of such amounts in future periods, no deferred tax assets
have been established for tax basis in excess of the Company's book basis
(approximately $18.0 million and $13.0 million as of December 31, 1999 and 1998,
respectively) in investments in affiliated companies who, in turn, have equity
investments in foreign corporations.
The Company's United States tax net operating losses, totaling approximately
$21.9 million at December 31, 1999, expire beginning in 2014 through 2029. The
significant components of the net deferred tax asset are as follows:
<TABLE>
<CAPTION>
As of December 31,
-------------------------
1999 1998
---------- ----------
(In thousands)
<S> <C> <C>
Deferred tax assets:
--------------------
Basis differences in property, plant and equipment...................................... $ 482 $ 1,367
Accrued interest expense on the Notes................................................... 52,040 32,885
U.S. tax net operating loss carryforward................................................ 8,323 4,615
Basis difference in marketable equity securities........................................ 1,696 1,696
Tax net operating loss carryforward of consolidated foreign subsidiaries (1)............ 156,470 107,856
--------- ---------
Gross deferred tax assets................................................................. 219,011 148,419
Deferred tax liabilities:
-------------------------
Other................................................................................... (1,014) -
--------- ---------
Gross deferred tax liabilities............................................................ (1,014) -
--------- ---------
Valuation allowance for deferred tax assets............................................... (219,011) (148,419)
--------- ---------
Deferred tax liabilities, net............................................................. $ (1,014) $ -
========= =========
</TABLE>
(1) For Australian income tax purposes, the net operating loss
carryforward may be limited in the event of a change in control of
Austar or a change in the business.
45
<PAGE>
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The difference between income tax expense provided in the financial statements
and the expected income tax expense (benefit) at statutory rates is reconciled
as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------
1999 1998 1997
------------- -------------- -------------
(In thousands)
<S> <C> <C> <C>
Expected income tax benefit at the U.S. statutory rate of 35.0%............ $ 12,177 $(68,597) $(58,333)
Tax effect of permanent and other differences:
Change in valuation reserve.............................................. 66,968 64,624 56,060
State tax, net of federal benefit........................................ 1,044 (6,189) (5,042)
International rate differences........................................... 3,325 (1,251) (615)
Non-deductible interest accretion on the Notes........................... 1,693 2,605 2,145
Amortization of outside basis differences................................ 788 1,412 1,570
Amortization of licenses................................................. 923 1,819 1,312
Gain on issuance of common equity securities by subsidiary............... (94,528) - -
Non-deductible expenses and other........................................ 8,603 5,577 2,903
-------- -------- --------
Total income tax expense................................................... $ 993 $ - $ -
======== ======== ========
</TABLE>
14. SEGMENT INFORMATION
The Company's business has historically been derived from its video
entertainment segment. This service has been provided in various countries where
the Company owns and operates its systems. Accordingly, the Company's current
reportable segments are the various countries in which it operates multi-channel
television, programming and/or telephony operations. These reportable segments
are evaluated separately because each country presents different marketing
strategies and technology issues as well as distinct economic climates and
regulatory constraints. The key operating performance criteria used in this
evaluation include revenue growth, operating income before depreciation,
amortization, non-cash general and administrative expense allocated from parent,
stock-based compensation charges ("Adjusted EBITDA") and capital expenditures.
Senior management of the Company does not view segment results below Adjusted
EBITDA, therefore, interest income, interest expense, provision for losses on
investment related costs, gain on sale of investments, share in results of
affiliated companies, minority interests in subsidiaries and other expenses are
not broken out by segment below.
46
<PAGE>
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company's segment information is as follows:
<TABLE>
<CAPTION>
For the year ended December 31, 1999 As of December 31, 1999
--------------------------------------------- ---------------------------------------------
Property, Plant
Multichannel Capital and Equipment, Total
Television Telephony Other Total Expenditures Net Assets
----------- --------- ------- --------- ------------ ---------------- -----------
(In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Australia......................... $144,632 $ - $ - $144,632 $ 94,513 $123,617 $563,627
New Zealand....................... 1,279 4,107 734 6,120 23,306 95,777 76,139
Other............................. - - - - - - 26,825
-------- ------- ----- -------- -------- -------- --------
Total........................... $145,911 $ 4,107 $ 734 $150,752 $117,819 $219,394 $666,591
======== ======= ===== ======== ======== ======== ========
Adjusted EBITDA: (1)
Australia......................... $ (4,742) $ - $ - $ (4,742)
New Zealand....................... (918) (1,160) (47) (2,125)
Other............................. - - (169) (169)
-------- ------- ----- --------
Total........................... $ (5,660) $(1,160) $(216) $ (7,036)
======== ======= ===== ========
For the year ended December 31, 1998 As of December 31, 1998
--------------------------------------------- ---------------------------------------------
Property, Plant
Multichannel Capital and Equipment, Total
Television Telephony Other Total Expenditures Net Assets
----------- --------- ------- --------- ------------ ---------------- -----------
(In thousands) (In thousands)
Revenue:
Australia......................... $ 86,408 $ - $ - $ 86,408 $ 71,197 $110,351 $181,169
New Zealand....................... - - - - - - 23,789
Other............................. 3,411 - - 3,411 269 - 11,074
-------- ------- ----- -------- -------- -------- --------
Total........................... $ 89,819 $ - $ - $ 89,819 $ 71,466 $110,351 $216,032
======== ======= ===== ======== ======== ======== ========
Adjusted EBITDA: (1)
Australia......................... $(27,065) $ - $ - $(27,065)
New Zealand....................... - - - -
Other............................. (101) - - (101)
-------- ------- ----- --------
Total........................... $(27,166) $ - $ - $(27,166)
======== ======= ===== ========
For the year ended December 31, 1997 As of December 31, 1997
--------------------------------------------- ---------------------------------------------
Property, Plant
Multichannel Capital and Equipment, Total
Television Telephony Other Total Expenditures Net Assets
----------- --------- ------- --------- ------------ ---------------- -----------
(In thousands) (In thousands)
Revenue:
Australia.......................... $ 64,370 $ - $ - $ 64,370 $ 84,375 $147,871 $202,325
New Zealand........................ 473 - - 473 16,258 26,484 43,349
Other.............................. 4,118 - - 4,118 502 8,746 33,358
-------- ------- ----- -------- -------- -------- --------
Total............................ $ 68,961 $ - $ - $ 68,961 $101,135 $183,101 $279,032
======== ======= ===== ======== ======== ======== ========
Adjusted EBITDA: (1)
Australia.......................... $(24,082) $ - $ - $(24,082)
New Zealand........................ (6,688) - - (6,688)
Other.............................. (254) - - (254)
-------- ------- ----- --------
Total............................ $(31,024) $ - $ - $(31,024)
======== ======= ===== ========
</TABLE>
47
<PAGE>
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) "Adjusted EBITDA" represents net operating earnings before depreciation,
amortization, non-cash general and administrative expense allocated from
parent 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.
Adjusted EBITDA reconciles to the consolidated statement of operations as
follows:
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Net operating loss..................................... $(142,814) $(133,904) $(117,856)
Depreciation and amortization.......................... 104,720 97,140 80,802
Non-cash stock-based compensation expense.............. 22,540 - -
Non-cash general and administrative expense
allocation from parent............................... 3,216 4,621 1,949
Management fees........................................ 5,302 4,977 4,081
--------- --------- ---------
Consolidated Adjusted EBITDA...................... $ (7,036) $ (27,166) $ (31,024)
========= ========= =========
</TABLE>
15. COMMITMENTS
The Company has MMDS and programming license fees and programming commitments
due annually as follows (in thousands):
Year ended December 31, 2000............................ $ 4,159
Year ended December 31, 2001............................ 4,178
Year ended December 31, 2002............................ 4,178
Year ended December 31, 2003............................ 4,178
Year ended December 31, 2004............................ 4,178
Thereafter.............................................. 7,164
-------
$28,035
=======
The Company has various lease agreements for office space, equipment and
vehicles. Rent expense under these lease agreements totaled $4.1 million, $2.6
million and $2.9 million for the years ended December 31, 1999, 1998 and 1997,
respectively.
The Company has operating lease obligations as follows (in thousands):
Year ended December 31, 2000............................ $ 533
Year ended December 31, 2001............................ 413
Year ended December 31, 2002............................ 215
Year ended December 31, 2003............................ 160
Year ended December 31, 2004............................ 122
Thereafter.............................................. 321
=======
$ 1,764
=======
48
<PAGE>
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A subsidiary of Austar has a five-year agreement with Optus Networks to lease a
54MHz transponder. Pursuant to the agreement, which commenced September 1, 1997,
Austar will pay approximately $370 per month in satellite service fees to Optus
Networks. Satellite fees payable annually are approximately as follows:
Year ended December 31, 2000............................ $ 4,440
Year ended December 31, 2001............................ 4,440
Year ended December 31, 2002............................ 2,960
=======
$11,840
=======
16. CONTINGENCIES
The Company is not a party to any material legal proceedings, nor is it
currently aware of any threatened material legal proceedings. From time to time,
the Company may become involved in litigation relating to claims arising out of
its operations in the normal course of its business.
17. SUBSEQUENT EVENTS
In January 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 $4.4 million including $0.6
million in Austar United shares and $3.8 million in cash.
On February 23, 2000, Austar United announced 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"). This is
expected to close by the end of March 2000.
On March 29, 2000, Austar United announced the sale of 20.0 million shares to
the public at A$8.50 ($5.15) per share for gross proceeds to the Company of
A$170.0 ($103.0) million.
49
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
-------------------------------------------------------------------------
<TABLE>
<CAPTION>
(a)(1) Financial Statements
Included in PART II of the Report: Page
Number
------
<S> <C>
UNITED AUSTRALIA/PACIFIC, INC.
Report of Independent Public Accountants................................................................. 27
Consolidated Balance Sheets as of December 31, 1999 and 1998............................................. 28
Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997............... 29
Consolidated Statements of Stockholders' Deficit for the Years Ended December 31, 1999,
1998 and 1997.......................................................................................... 30
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997............... 31
Notes to Consolidated Financial Statements............................................................... 33
(a)(2) Financial Statement Schedules
Included in PART IV of the Report:
(i) Financial Statement Schedules required to be filed
UNITED AUSTRALIA/PACIFIC, INC.
Report of Independent Public Accountants................................................................. S-1
Schedule I - Condensed Financial Information of the Registrant (Parent only)............................. S-2
</TABLE>
(ii) Separate Financial Statements and Related Schedules
None.
(a)(3) Exhibits
3.1 Articles of Incorporation of the Registrant, as amended. (1)
3.2 Articles of Amendment to Articles of Incorporation of Registrant.
3.3 By-Laws of the Registrant. (1)
4.1 The Indenture dated as of May 14, 1996, between the Issuer and
American Bank National Association (now known as Firstar Bank of
Minnesota N.A. (the "Trustee")) (the "1996 Indenture"). (1)
4.2 Supplemental Indenture dated as of July 20, 1999, between Issuer
and Trustee with respect to the 1996 Indenture. (2)
4.3 The Indenture dated as of September 23, 1997, between the Issuer
and Trustee (the "1997 Indenture"). (3)
4.4 Supplemental Indenture dated as of July 20, 1999, between Issuer
and Trustee with respect to the 1997 Indenture. (2)
4.5 Warrant Agreement dated as of November 15, 1997, between the
Issuer and Trustee. (3)
4.6 The Articles of Incorporation, as amended, and By-Laws of the
Registrant are included as Exhibits 3.1 and 3.2. (1) 10.1
A$400,000,000 Syndicated Senior Secured Debt Facility Agreement
dated April 23, 1999, among Austar Entertainment Pty Limited
("Austar"), Chase Securities Australia Limited, the Guarantors
named therein and the financial institutions named therein. (4)
50
<PAGE>
10.2 Supplemental Deed dated July 15, 1999 between Saturn
Communications Limited, as the Borrower ("Saturn"), the
guarantors and mortgagors named therein, each financial
institution specified as a bank in Schedule 1 attached thereto,
and Toronto Dominion Australia Limited, as the Agent ("Agent").
(5)
10.3 Second Supplemental Deed dated July 29, 1999 between Saturn
Communications, the guarantor and mortgagor named therein and
Agent. (5)
10.4 XYZ Shareholders Agreement dated September 6, 1995, among Century
United Programming Ventures Pty Limited ("CUPV"), Foxtel
Management Pty Limited ("Foxtel"), XYZ Entertainment Pty Limited
("XYZ"), Century United Programming Ventures ("CPVC") and the
Issuer. (1)
10.5 Shareholders Deed dated June 30, 1995, among Century
Communications Corporation, CPVC, United, the Issuer and CUPV.
(1)
10.6 Channel Supply Agreement dated June 30, 1995, among XYZ, CUPV and
East Coast Pay Television Pty Limited ("ECT"). (1)
10.7 Management Agreement dated May 1, 1996, between United
Management, Inc. and the Issuer. (1)
10.8 Tax Allocation Agreement dated May 8, 1996, among United, UAP and
the Issuer. (1)
10.9 Management Services Agreement dated June 24, 1999, between United
International Holdings, Inc. doing business as UnitedGlobalCom
("United") and Austar United Communications Ltd. ("Austar
United"). (6)
10.10 Registration Rights Agreement dated June 16, 1999 between Austar
United and UIH Austar, Inc. (6)
10.11 Master Seconded Employee Services Agreement dated June 16, 1999,
between United and Austar United. (6)
10.12 General Agreement dated June 16, 1999 between United and Austar
United. (6)
12.1 Statement re: Ratio of Earnings to Fixed Charges.
21.1 List of Subsidiaries.
23.1 Consent of Independent Public Accountants--Arthur Andersen LLP
(United Australia/Pacific, Inc.).
24.1 Power of Attorney.
27.1 Financial Data Schedule.
---------------------
(1) Incorporated by reference from the Company's Registration Statement on Form
S-4 (SEC File No. 333-05017) filed on May 31, 1996.
(2) Incorporated by reference from the Certain Report on Form 8-K (SEC File No.
333-05017) filed on July 28, 1999.
(3) Incorporated by reference from Amendment No. 1 to the Company's
Registration Statement on Form S-4 (SEC File No. 333-39707) filed on
December 5, 1997.
(4) Incorporated by reference from the Annual Report on Form 10-K of United
International Holdings, Inc. for the period ended December 31, 1998 (File
No. 0-21974).
(5) Incorporated by reference from Quarterly Report on Form 10-Q (SEC File No.
333-05017) for the quarter ended September 30, 1999, filed on November 15,
1999.
(6) Incorporated by reference from the Company's Annual Report on Form 10-K for
the period ended December 31, 1999, filed on March 30, 2000.
(b) Reports on Form 8-K filed during the quarter:
None.
51
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To United Australia/Pacific, Inc.:
We have audited, in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements of United
Australia/Pacific, Inc. included in this Form 10-K/A No. 1 and have issued our
report thereon dated March 29, 2000 (except with respect to the matter discussed
in Note 2 to the consolidated financial statements, as to which the date is
August 14, 2000). Our audit was made for the purpose of forming an opinion on
the basic consolidated financial statements taken as a whole. The following
schedule is the responsibility of the Company's management and is presented for
purposes of complying with the Securities and Exchange Commission's rules and is
not part of the basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements as indicated in our report with respect
thereto and, in our opinion, based on our audits, fairly states in all material
respects the financial data required to be set forth therein in relation to the
basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Denver, Colorado
March 29, 2000 (except with respect
to the matter discussed in Note 2
to the consolidated financial
statements, as to which the date
is August 14, 2000).
S-1
<PAGE>
<TABLE>
<CAPTION>
UNITED AUSTRALIA/PACIFIC, INC.
PARENT ONLY
SCHEDULE 1
Condensed Financial Information of the Registrant
(Stated in thousands, except share and per share amounts)
As of December 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................................ $ 298 $ -
Short-term liquid investments........................................................................ 497 763
Related party receivables and costs to be reimbursed................................................. 327 327
Other current assets................................................................................. 10 3
-------- --------
Total current assets.............................................................................. 1,132 1,093
Investments in and advances to affiliated companies, accounted for under the equity method, net...... 223,675 52,801
Deferred financing costs, net of accumulated amortization of $1,927 and $1,215, respectively......... 8,461 9,173
-------- --------
Total assets...................................................................................... $233,268 $ 63,067
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Related party payables............................................................................... $ 1,977 $ 1,056
Accounts payable..................................................................................... - -
Accrued liabilities.................................................................................. - -
-------- --------
Total current liabilities......................................................................... 1,977 1,056
Senior discount notes.................................................................................. 407,945 356,640
-------- --------
Total liabilities................................................................................. 409,922 357,696
Minority interest...................................................................................... - -
-------- --------
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 and 17,810,249
shares issued and outstanding, respectively......................................................... 178 178
Additional paid-in capital........................................................................... 306,616 215,624
Deferred compensation................................................................................ (19,859) -
Accumulated deficit.................................................................................. (440,649) (481,240)
Other cumulative comprehensive loss.................................................................. (22,940) (29,191)
-------- --------
Total stockholders' deficit....................................................................... (176,654) (294,629)
-------- --------
Total liabilities and stockholders' deficit......................................................... $233,268 $ 63,067
======== ========
</TABLE>
S-2
<PAGE>
<TABLE>
<CAPTION>
UNITED AUSTRALIA/PACIFIC, INC.
PARENT ONLY
SCHEDULE 1
Condensed Information as to the Operations of the Registrant
(Stated in thousands)
For the Years Ended December 31,
----------------------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Corporate general and administrative expense, including management
fees to related party of $921, $853 and $790, respectively............................. $ (4,301) $ (5,689) $ (3,189)
-------- --------- ---------
Operating loss...................................................................... (4,301) (5,689) (3,189)
Interest income.......................................................................... 40 81 643
Interest expense......................................................................... (52,017) (48,108) (38,115)
Other expense, net....................................................................... (1) (836) (559)
-------- --------- ---------
Loss before other item.............................................................. (56,279) (54,552) (41,220)
Share in results of affiliated companies, net............................................ 96,870 (151,739) (126,836)
-------- --------- ---------
Net income (loss)................................................................... $ 40,591 $(206,291) $(168,056)
======== ========= =========
Foreign currency translation adjustments................................................. $ 6,251 $ (227) $ (30,831)
Unrealized gains on securities:
Reclassification adjustment for losses included in net income (loss)................ - - 3,412
-------- --------- ---------
Comprehensive income (loss).............................................................. $ 46,842 $(206,518) $(195,475)
======== ========= =========
</TABLE>
S-3
<PAGE>
<TABLE>
<CAPTION>
UNITED AUSTRALIA/PACIFIC, INC.
PARENT ONLY
SCHEDULE 1
Condensed Information as to the Cash Flows of the Registrant
(Stated in thousands)
For the Years Ended
December 31,
-------------------------------------
1999 1998 1997
---------- ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................................................... $ 40,591 $(206,291) $(168,056)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Share in results of affiliated companies, net............................................. (96,870) 151,739 126,836
Allocation of expense accounted for as capital contributions by parent.................... 3,216 4,622 1,949
Accretion of interest on senior notes and amortization of deferred
financing costs.......................................................................... 52,017 48,108 38,115
Decrease in related party receivables and other assets.................................... 157 603 1,768
Increase in accounts payable, accrued liabilities and other............................... 921 2,332 2,210
-------- --------- ---------
Net cash flows from operating activities.................................................... 32 1,113 2,822
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term liquid investments................................................... - (763) (15,988)
Sale of short-term liquid investments....................................................... 266 12,325 22,303
Investments in and advances to affiliated companies and other investments................... (29,659) (72,570) (61,024)
-------- --------- ---------
Net cash flows from investing activities.................................................... (29,393) (61,008) (54,709)
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash contributed from parent................................................................ 29,659 58,947 7,863
Proceeds from offering of senior discount notes............................................. - - 29,925
Borrowings on related party payable to parent............................................... - - 4,999
Deferred financing costs.................................................................... - (7) (755)
-------- --------- ---------
Net cash flows from financing activities.................................................... 29,659 58,940 42,032
-------- --------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............................................ 298 (955) (9,855)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............................................. - 955 10,810
-------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................................................... $ 298 $ - $ 955
======== ========= =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Non-cash capital contributions from parent.................................................. $ 17,233 $ 12,473 $ 7,800
======== ========= =========
Gain on issuance of shares by New Zealand subsidiary........................................ $ - $ - $ 5,985
======== ========= =========
Non-cash issuance of warrants to purchase common stock...................................... $ - $ - $ 3,678
======== ========= =========
Increase in unrealized loss on investment................................................... $ - $ - $ (985)
======== ========= =========
</TABLE>
S-4
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Denver,
State of Colorado, on this 14th day of August 2000.
United Australia/Pacific, Inc.
a Colorado corporation
By: /S/ Valerie L. Cover
-------------------------------------
Valerie L. Cover
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this Report to be signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Title of Position
Signature Held With the Registrant
--------- ------------------------
<S> <C> <C>
*
---------------------------------
Gene W. Schneider Chairman of the Board August 14, 2000
*
---------------------------------
Michael T. Fries Director, President and August 14, 2000
Chief Executive Officer
/S/ Valerie L. Cover
---------------------------------
Valerie L. Cover Controller (Principal
Accounting Officer) August 14, 2000
* By: /S/ Valerie L. Cover
------------------------
Valerie L. Cover
Attorney-in-fact
</TABLE>
52
