UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to_________
Commission File No. 333-05017
United Australia/Pacific, Inc.
(Exact name of Registrant as specified in its charter)
State of Colorado 84-1341958
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4643 South Ulster Street, #1300
Denver, Colorado 80237
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (303) 770-4001
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
--- ---
The Company has no publicly-traded shares of capital stock. As of August 8, 2000
the Company had 17,810,299 shares of common stock outstanding.
United Australia/Pacific, Inc.
TABLE OF CONTENTS
Page
Number
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PART I - FINANCIAL INFORMATION
------------------------------
Item 1 - Financial Statements
- ------
Condensed Consolidated Balance Sheets as of June 30, 2000 (Unaudited) and December 31, 1999.............. 2
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2000
and 1999 (Unaudited)................................................................................. 3
Condensed Consolidated Statement of Stockholders' Deficit for the Six Months Ended June 30, 2000
(Unaudited).......................................................................................... 4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2000 and
1999 (Unaudited).................................................................................... 5
Notes to Condensed Consolidated Financial Statements (Unaudited)........................................ 6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations............... 15
- ------
Item 3 - Quantitative and Qualitative Disclosure about Market Risk........................................... 21
- ------
PART II - OTHER INFORMATION
---------------------------
Item 6 - Exhibits and Reports on Form 8-K.................................................................... 23
- ------
UNITED AUSTRALIA/PACIFIC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in thousands, except share and per share amounts)
As of As of
June 30, December 31,
2000 1999
----------- ------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents............................................................................ $ 3,199 $ 6,028
Short-term liquid investments........................................................................ 300,306 269,393
Subscriber receivables, net.......................................................................... 8,906 8,177
Related party receivables............................................................................ 2,601 1,645
Other receivables.................................................................................... 10,304 6,196
Inventory............................................................................................ 5,281 14,193
Prepaids and other current assets.................................................................... 3,426 5,146
-------- --------
Total current assets............................................................................. 334,023 310,778
Investments in and advances to affiliated companies, accounted for under the equity method, net........ 85,448 28,546
Property, plant and equipment, net of accumulated depreciation of $266,678 and $261,891, respectively.. 115,282 219,394
Goodwill and other intangible assets, net of accumulated amortization of $22,727 and $23,536,
respectively......................................................................................... 55,503 91,346
Deferred financing costs, net of accumulated amortization of $5,381 and $4,427, respectively........... 12,807 16,377
Other non-current assets, net.......................................................................... 158 150
-------- --------
Total assets..................................................................................... $603,221 $666,591
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable..................................................................................... $ 5,257 $ 16,463
Accrued liabilities.................................................................................. 28,463 32,151
Construction payables................................................................................ 121 4,370
Current portion of due to parent..................................................................... 15,227 12,754
Current portion of other long-term debt.............................................................. 951 1,500
-------- --------
Total current liabilities........................................................................ 50,019 67,238
Due to parent.......................................................................................... 8,618 9,621
Senior discount notes.................................................................................. 436,336 407,945
Other long-term debt................................................................................... 220,782 261,151
Deferred tax liability................................................................................. 137 1,014
Other long-term liabilities............................................................................ 325 456
-------- --------
Total liabilities................................................................................ 716,217 747,425
-------- --------
Minority interests in subsidiaries..................................................................... 104,010 95,820
-------- --------
Stockholders' deficit:
Preferred stock, $0.01 par value, 1,000,000 shares authorized, none issued and outstanding........... - -
Common stock, $0.01 par value, 30,000,000 shares authorized, 17,810,299 shares issued and
outstanding........................................................................................ 178 178
Additional paid-in capital........................................................................... 306,685 306,616
Deferred compensation................................................................................ (16,614) (19,859)
Accumulated deficit.................................................................................. (464,575) (440,649)
Other cumulative comprehensive loss.................................................................. (42,680) (22,940)
-------- --------
Total stockholders' deficit...................................................................... (217,006) (176,654)
-------- --------
Total liabilities and stockholders' deficit...................................................... $603,221 $666,591
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
UNITED AUSTRALIA/PACIFIC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Stated in thousands, except share and per share amounts)
(Unaudited)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- ------------------------
2000 1999 2000 1999
----------- ----------- ---------- -----------
Revenue....................................................................... $ 42,547 $ 34,388 $ 88,891 $ 64,820
System operating expense, including related party expense of $620, $2,131,
$1,220 and $3,524, respectively............................................. (33,542) (24,212) (69,159) (47,445)
System selling, general and administrative expense............................ (15,487) (11,688) (30,263) (22,341)
Corporate general and administrative expense, including management fees
and allocated expense from related party of $249, $18,640, $485 and
$19,648, respectively....................................................... (2,558) (18,748) (5,277) (19,777)
Depreciation and amortization................................................. (24,770) (25,482) (54,797) (49,943)
---------- ---------- ---------- ----------
Operating loss.......................................................... (33,810) (45,742) (70,605) (74,686)
Gain on issuance of common equity securities by subsidiary.................... - 22,298 61,172 22,298
Interest income............................................................... 5,100 34 8,248 67
Interest expense.............................................................. (19,670) (18,115) (38,969) (33,037)
Other expense, net............................................................ (2,178) (5,436) (2,360) (5,766)
---------- ---------- ---------- ----------
Loss before income taxes and other items................................ (50,558) (46,961) (42,514) (91,124)
Income tax benefit............................................................ 816 - 741 -
Minority interests in subsidiaries............................................ 14,154 - 26,213 -
Share in results of affiliated companies, net................................. (7,785) (5,308) (8,366) (8,680)
---------- ---------- ---------- ----------
Net loss................................................................ $ (43,373) $ (52,269) $ (23,926) $ (99,804)
========== ========== ========== ==========
Foreign currency translation adjustments...................................... $ (4,500) $ 2,122 $ (19,740) $ 3,380
---------- ---------- ---------- ----------
Comprehensive loss...................................................... $ (47,873) $ (50,147) $ (43,666) $ (96,424)
========== ========== ========== ==========
Net loss per common share:
Basic and diluted net loss.............................................. $ (2.44) $ (2.93) $ (1.34) $ (5.60)
========== ========== ========== ==========
Weighted-average number of common shares outstanding:
Basic and diluted....................................................... 17,810,299 17,810,249 17,810,299 17,810,249
========== ========== ========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
UNITED AUSTRALIA/PACIFIC, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(Stated in thousands, except share amounts)
Other
Common Stock Additional Cumulative
-------------------- Paid-In Deferred Accumulated Comprehensive
Shares Amount Capital Compensation Deficit Loss(1) Total
---------- -------- ---------- ------------ ----------- ------------- ---------
Balances, December 31, 1999............. 17,810,299 $178 $306,616 $(19,859) $(440,649) $(22,940) $(176,654)
Cash contributions from parent.......... - - 69 - - - 69
Amortization of deferred compensation... - - - 3,245 - - 3,245
Net income.............................. - - - - (23,926) - (23,926)
Change in cumulative translation
adjustments........................... - - - - - (19,740) (19,740)
========== ==== ======== ======== ========= ======== =========
Balances, June 30, 2000 (Unaudited)..... 17,810,299 $178 $306,685 $(16,614) $(464,575) $(42,680) $(217,006)
========== ==== ======== ======== ========= ======== =========
(1) As of June 30, 2000, Other Cumulative Comprehensive Loss represents foreign currency translation adjustments only.
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
UNITED AUSTRALIA/PACIFIC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in thousands)
(Unaudited)
For the Six Months Ended
June 30,
--------------------------------
2000 1999
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................................................ $ (23,926) $(99,804)
Adjustments to reconcile net loss to net cash flows from operating activities:
Gain on issuance of common equity securities by subsidiary.................................... (61,172) (22,298)
Share in results of affiliated companies, net................................................. 4,384 2,993
Minority interests in subsidiaries............................................................ (26,213) -
Depreciation and amortization................................................................. 54,797 49,943
Allocation of expense accounted for as capital contributions by parent........................ - 1,568
Stock-based compensation expense.............................................................. 4,718 17,630
Accretion of interest on senior notes and amortization of deferred financing costs............ 30,291 27,734
(Increase) decrease in receivables, net....................................................... (4,228) 65
(Increase) decrease in other assets........................................................... (4,712) 3,347
Increase (decrease) in accounts payable, accrued liabilities and other........................ 1,911 (2,269)
---------- --------
Net cash flows from operating activities........................................................ (24,150) (21,091)
---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term liquid investments....................................................... (1,043,474) (1,066)
Sale of short-term liquid investments........................................................... 987,258 1,060
Investments in and advances to affiliated companies and acquisition of assets................... (4,862) (5,177)
New acquisitions, net of cash acquired.......................................................... (3,684) -
Dividend received from affiliate................................................................ 3,197 -
Capital expenditures............................................................................ (53,942) (46,797)
Deconsolidation of New Zealand subsidiary....................................................... (52) -
Other........................................................................................... (4,618) (829)
---------- --------
Net cash flows from investing activities........................................................ (120,177) (52,809)
---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash contributed from parent.................................................................... 69 29,403
Proceeds from issuance of common equity securities by subsidiary................................ 102,403 -
Borrowings on the Austar Bank Facility.......................................................... - 19,372
Borrowings on the New Austar Bank Facility...................................................... 38,848 162,081
Payment of the Austar Bank Facility............................................................. - (129,149)
Payment on capital leases and other debt........................................................ - (281)
Deferred financing costs and other.............................................................. 695 (7,937)
---------- --------
Net cash flows from financing activities........................................................ 142,015 73,489
---------- --------
EFFECT OF EXCHANGE RATES ON CASH................................................................ (517) 368
---------- --------
DECREASE IN CASH AND CASH EQUIVALENTS........................................................... (2,829) (43)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................................................. 6,028 181
---------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD........................................................ $ 3,199 $ 138
========== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest.......................................................................... $ 7,733 $ 7,265
=========== ========
Cash received for interest...................................................................... $ 10,323 $ 10
========== ========
DECONSOLIDATION OF NEW ZEALAND SUBSIDIARY:
Working capital................................................................................. $ (7,319) $ -
Property, plant and equipment................................................................... 93,202 -
Recording of investment in Saturn............................................................... (62,857) -
Goodwill and other assets....................................................................... 35,451 -
Notes payable and other debt.................................................................... (58,529) -
---------- --------
Total cash relinquished......................................................................... $ (52) $ -
========== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2000
(Unaudited)
1. ORGANIZATION AND NATURE OF OPERATIONS
United Australia/Pacific, Inc. (the "Company" or "United A/P"), a majority-owned
subsidiary of United Asia/Pacific Communications, Inc. ("UAP"), which is in turn
an indirect wholly-owned subsidiary of UnitedGlobalCom, Inc. ("United"), was
formed on October 14, 1994, for the purpose of developing, acquiring and
managing foreign multi-channel television, programming and telephone operations.
The following chart presents a summary of the Company's ownership structure and
its significant investments in telecommunications as of June 30, 2000.
***********************************************************
* *
* United *
* *
***********************************************************
*
100% *
***********************************************************
* *
* United International Properties, Inc. ("UIPI") *
* *
***********************************************************
*
100% *
***********************************************************
* *
* UAP *
* *
***********************************************************
*
100% *
***********************************************************
* *
* The Company *
* *
***********************************************************
*
91.7% *
***********************************************************
* *
* United Austar, Inc. (1) *
* *
***********************************************************
*
72.3% *
***********************************************************
* Austar United Communications Limited *
* ("Austar United") *
* *
***********************************************************
*
*
***********************************************************
* *
*Australia: *
* Austar Entertainment Pty Limited ("Austar") 100.0% *
* Austar United Broadband Pty Limited ("AUB") 100.0% (2)*
* XYZ Entertainment Pty Limited ("XYZ *
* Entertainment") 50.0% *
*New Zealand: *
* Telstra Saturn Limited ("TSL") 50.0% (3)*
* *
***********************************************************
(1) United Austar, Inc. is a holding company for United A/P's
investment in Austar United Communications Limited.
(2) On August 11, 1999, AUB, a wholly-owned subsidiary of Austar
United, was formed to provide broadband Internet access services
to the Australian market.
(3) On April 6, 2000, Saturn Communications Limited ("Saturn") merged
with Telstra New Zealand Limited ("Telstra NZ"), a wholly-owned
subsidiary of Telstra Corporation Limited ("Telstra").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States ("U.S. GAAP") requires management to
6
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying interim condensed consolidated financial statements are
unaudited and include the accounts of the Company and all subsidiaries where the
Company exercises a controlling financial interest through the ownership of a
majority voting interest. During the first six months of 1999, the Company
accounted for its investment in Saturn under the equity method in order to
comply with the consensus guidance of the Emerging Issues Task Force regarding
Issue 96-16 ("EITF 96-16"), and related rules of the Securities and Exchange
Commission ("SEC"), because the minority shareholder of Saturn ("SaskTel") had
participating approval or veto rights with respect to certain significant
decisions of Saturn in the ordinary course of business. Immediately prior to
Austar United's initial public offering ("Austar United IPO"), Austar United
issued 13,659,574 shares of Austar United to SaskTel for their 35.0% interest in
Saturn and began consolidating Saturn's results effective August 1, 1999.
Effective April 1, 2000, the Company again discontinued consolidating the
results of Saturn due to the formation of TSL, a 50/50 joint venture, which is
accounted for under the equity method.
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 microwave 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
7
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONDENSED 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.
REVENUE RECOGNITION
Revenue is primarily derived from the sale of multi-channel television,
telephone and Internet services to subscribers and is recognized in the period
the related services are provided. Initial installation fees are recognized as
revenue in the period in which the installation occurs, to the extent
installation fees are equal to or less than direct selling costs, which are
expensed. To the extent installation fees exceed direct selling costs, the
excess fees are deferred and amortized over the average contract period. All
installation fees and related costs with respect to reconnections and
disconnections are recognized in the period in which the reconnection or
disconnection occurs because reconnection fees are charged at a level equal to
or less than related reconnection costs.
STOCK-BASED COMPENSATION
Stock-based compensation is recognized using the intrinsic value method for the
Austar United stock option plan, which results in compensation expense for the
difference between the grant price and the fair market value of Austar United's
common stock at each new measurement date for options granted prior to July 27,
1999. With respect to this plan, the rights conveyed to employees are the
substantive equivalents to stock appreciation rights.
STAFF ACCOUNTING BULLETIN NO. 51 ("SAB 51") ACCOUNTING POLICY
Gains realized as a result of stock issuances by the Company's subsidiaries are
recorded in the statement of operations, except for any transactions which must
be credited directly to equity in accordance with the provisions of SAB 51.
BASIC AND DILUTED NET LOSS PER SHARE
"Basic net loss per share" is determined by dividing net loss available to
common stockholders by the weighted-average number of common shares outstanding
during each period. "Diluted net loss per share" includes the effects of
potentially issuable common stock, but only if dilutive.
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 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.
8
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. In June 1999, the FASB
approved Statement of Financial Accounting Standards No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 ("SFAS 137"). SFAS 137 amends the effective date of
SFAS 133, which will now be effective for the Company's first quarter 2001. The
Company is currently assessing the effect of this new standard.
In December 1999, the SEC staff issued Staff Accounting Bulletin No. 101,
"Revenue Recognition" ("SAB 101") which provides interpretive guidance on the
recognition, presentation and disclosure of revenue in financial statements. The
Company is required to determine the impact of SAB 101 no later than the end of
the fourth quarter of fiscal 2000. Depending on the results of the evaluation,
the implementation of SAB 101 may require the Company to restate its current
year results to reflect any cumulative effect of change in accounting principal
as if SAB 101 had been implemented on January 1, 2000. The Company is currently
reviewing SAB 101 to determine what impact, if any, the adoption of SAB 101 will
have on its financial position or results of operations. However, based upon a
preliminary review, the Company does not believe that the adoption of SAB 101
will have a material impact.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the current
year presentation.
3. ACQUISITIONS AND OTHER
SECONDARY OFFERING. On March 29, 2000, Austar United sold 20.0 million ordinary
shares on the Australian Stock Exchange (the "Secondary Offering") at Australian
dollars ("A$") 8.50 ($5.20) per share for gross and net proceeds of A$170.0
($104.0) million and A$167.5 ($102.4) million, respectively, which was received
in April 2000. Based on the carrying value of the Company's investment in Austar
United as of March 29, 2000, the Company recognized a gain of $61.2 million
resulting from the step-up in the carrying amount of the Company's investment in
Austar United, in accordance with SAB 51. No deferred taxes were recorded
related to this gain due to the Company's intent on holding its investment in
Austar United indefinitely.
The Austar United IPO and concurrent issuances of shares in exchange for
additional assets reduced the Company's ownership interest in Austar United from
91.7% to approximately 69.2%. Subsequent stock option exercises and the
Secondary Offering reduced the Company's ownership interest to 66.3% as of June
30, 2000. Including all vested stock options granted to employees, the Company's
ownership interest in Austar United on a fully diluted basis was approximately
64.3% at June 30, 2000.
ACQUISITIONS. Effective January 20, 2000, AUB acquired a 50.0% interest in
Massive Media Pty Limited ("Massive Media") for A$4.4 ($2.7) million including
A$0.6 ($0.3) million in Austar United shares and A$3.8 ($2.3) million in cash.
Massive Media owns 100% of Massive Interactive Pty Limited, an Internet
development company, and 75.0% of Massive Technologies Pty Limited, a software
company focused on Internet development.
On April 1, 2000, Saturn purchased Paradise Net Limited, an Internet Service
Provider ("ISP") that has 33,000 subscribers, primarily residential, throughout
New Zealand for approximately A$14.6 ($8.7) million. Paradise Net Limited was
merged into TSL.
9
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On April 6, 2000, Austar United merged Saturn with Telstra NZ, a wholly-owned
subsidiary of Telstra, to form a 50/50 joint venture, TSL. Telstra is the
largest telecommunications company in Australia. TSL will offer voice, data and
video to New Zealand's business and residential market. Telstra and Austar
United expect to invest approximately $500.0 million over five years to create a
state-of-the-art national broadband network.
On April 27, 2000, AUB purchased Artson Pty Limited, an ISP that does business
under the name "OntheNet" for A$6.1 ($3.6) million. "OntheNet" operates on the
Gold Coast in Queensland and has approximately 6,000 subscribers.
On June 27, 2000, AUB acquired the business assets of a Townsville-based ISP,
which does business under the name of Ultranet Pty Limited, with approximately
5,000 subscribers for A$1.8 ($1.1) million payable over four months.
4. INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES, ACCOUNTED FOR UNDER
THE EQUITY METHOD
As of June 30, 2000
-------------------------------------------------------------------------------------
Investments in Cumulative Share Cumulative
and Advances to Dividends in Results of Translation
Affiliated Companies Received Affiliated Companies Adjustments Total
-------------------- --------- -------------------- ----------- ------------
(In thousands)
XYZ Entertainment.................. $ 44,306 $(3,197) $(15,320) $ (72) $25,717
TSL................................ 66,318 - (7,787) (1,283) 57,248
Other.............................. 2,797 - (166) (148) 2,483
-------- ------- -------- ------- -------
Total.......................... $113,421 $(3,197) $(23,273) $(1,503) $85,448
======== ======= ======== ======= =======
As of December 31, 1999
---------------------------------------------------------------------------
Investments in Cumulative Share Cumulative
and Advances to in Results of Translation
Affiliated Companies Affiliated Companies Adjustments Total
--------------------- -------------------- ----------- ------------
(In thousands)
XYZ Entertainment.................. $44,306 $(18,564) $2,804 $28,546
------- -------- ------ -------
Total.......................... $44,306 $(18,564) $2,804 $28,546
======= ======== ====== =======
5. PROPERTY, PLANT AND EQUIPMENT
As of As of
June 30, December 31,
2000 1999
----------- ------------
(In thousands)
Subscriber premises equipment and converters.............................. $274,149 $276,725
MMDS/DTH distribution facilities.......................................... 62,043 64,373
Cable distribution networks............................................... 1,977 91,298
Office equipment, furniture and fixtures.................................. 20,786 23,111
Buildings and leasehold improvements...................................... 3,859 5,645
Other..................................................................... 19,146 20,133
-------- --------
381,960 481,285
Accumulated depreciation............................................... (266,678) (261,891)
-------- --------
Net property, plant and equipment...................................... $115,282 $219,394
======== ========
6. GOODWILL AND OTHER INTANGIBLE ASSETS
As of As of
June 30, December 31,
2000 1999
----------- ------------
(In thousands)
Austar United............................................................. $ 78,230 $114,882
Accumulated amortization............................................... (22,727) (23,536)
-------- --------
Net goodwill and other intangible assets............................... $ 55,503 $ 91,346
========= ========
10
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. SENIOR DISCOUNT NOTES
As of As of
June 30, December 31,
2000 1999
----------- ------------
(In thousands)
May 1996 Notes ........................................................... $395,321 $369,111
September 1997 Notes ..................................................... 41,015 38,834
-------- --------
Total senior discount notes............................................ $436,336 $407,945
======== ========
8. OTHER LONG-TERM DEBT
As of As of
June 30, December 31,
2000 1999
----------- ------------
(In thousands)
New Austar Bank Facility.................................................. $219,039 $202,703
Saturn Bank Facility...................................................... - 57,685
Capitalized leases and other.............................................. 2,694 2,263
-------- --------
221,733 262,651
Less current portion................................................... (951) (1,500)
-------- --------
Total other long-term debt............................................. $220,782 $261,151
========= ========
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 Austar's syndicated senior secured debt facility (the "New Austar
Bank Facility"). Two of these swap agreements expire in 2002 and effectively
convert an aggregate principal amount of A$50.0 ($29.8) 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 ($59.7)
million of variable rate, long-term debt into fixed rate borrowings. As of June
30, 2000, the weighted-average fixed rate under these agreements was 5.7%
compared to a weighted-average variable rate of approximately 8.6%.
Fair values of the interest rate swap agreements are based on the estimated
amounts that the Company would receive or pay to terminate the agreements at the
reporting date, taking into account current interest rates and the current
creditworthiness of the counterparties.
9. RELATED PARTY
Effective May 1, 1996, the Company and United Management, Inc. ("United
Management"), an indirect wholly-owned subsidiary of United, executed a 10-year
management services agreement (the "Management Agreement"), pursuant to which
United Management performs certain administrative, accounting, financial
reporting and other services for the Company, which has no separate employees of
its own. Pursuant to the Management Agreement, the management fee was $0.75
million for the first year of such agreement (beginning May 1, 1996), and it
increases on each anniversary date of the Management Agreement by 8.0% per year.
11
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. This allocation was discontinued as of January 1, 2000.
For the six months ended June 30, 2000 and 1999, the Company recorded $0.5
million and $0.4 million, respectively, in management fees due from the Company
to UAP. In 1999, the Company also recorded $17.6 million of non-cash stock-based
compensation expense related to UAP stock appreciation rights and $1.6 million
of other corporate general and administrative expense.
Effective June 24, 1999, United and Austar United executed a management services
agreement pursuant to which United performs certain technical and consulting
services in return for a monthly management fee. The monthly fee payable by
Austar United to United in 2000 is $0.2 million per month. This amount may be
adjusted before January 1 of each year by the board of directors of United but
may not increase by more than 15.0% in any one year. This agreement also
requires that Austar United reimburse United for all direct and other expenses
reasonably incurred by United on behalf of Austar United. The agreement will
continue through December 31, 2010.
Austar and Saturn were parties to technical assistance agreements with UAP
whereby such operating companies paid to UAP fees based on their respective
gross revenues. The operating systems reimbursed United for certain direct costs
incurred by United, including salaries and benefits relating to senior
management positions, pursuant to the terms of the technical assistance
agreements. For the six months ended June 30, 1999, the Company recorded $3.5
million in related party management fees under these agreements. Effective June
24, 1999, the rights under these management fee agreements were assigned to
Austar United as part of the restructuring associated with the Austar United
IPO. Accordingly, the related party management fees recorded for the six months
ended June 30, 2000 were eliminated during the Austar United consolidation.
Included in the amount due to parent is the following:
As of As of
June 30, December 31,
2000 1999
---------- ------------
(In thousands)
United A/P................................................................ $ 2,462 $ 1,977
Austar United technical assistance agreement obligations, including
management fees of $2,400 and $1,200, respectively....................... 7,948 2,874
Austar technical assistance agreement obligations, including deferred
management fees of $8,618 and $9,472, respectively (1)................... 12,637 13,889
Saturn technical assistance agreement obligations, including deferred
management fees of $0 and $149, respectively............................. - 1,820
Other..................................................................... 798 1,815
------- -------
23,845 22,375
Less current portion................................................. (15,227) (12,754)
------- -------
Total due to parent.................................................. $ 8,618 $ 9,621
======= =======
(1) Austar United and UAP have the option of converting these management
fees into equity.
12
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. SEGMENT INFORMATION
The Company's segment information is as follows:
As of As of
June 30, December 31,
For the Three Months Ended June 30, 2000 For the Six Months Ended June 30, 2000 2000 1999
-------------------------------------------- ------------------------------------------- -------- ------------
Internet Internet Total Total
Video Telephone Data Other Total Video Telephone Data Other Total Assets Assets
------- ---------- -------- ------- ------- ------- --------- --------- ------- ------- -------- ------------
(In thousands) (In thousands)
Revenue:
Australia......... $41,688 $ - $ 421 $ 438 $42,547 $82,537 $ - $ 429 $ 1,037 $ 84,003 $577,360 $563,627
New Zealand....... - - - - - 844 3,166 878 - 4,888 - 76,139
Other............. - - - - - - - - - 25,861 26,825
------- ---- ------- ------- ------- ------- ------ ------- ------- -------- -------- --------
Total........... $41,688 $ - $ 421 $ 438 $42,547 $83,381 $3,166 $ 1,307 $ 1,037 $ 88,891 $603,221 $666,591
======= ==== ======= ======= ======= ======= ====== ======= ======= ======== ======== ========
Adjusted EBITDA:(1)
Australia......... $ 2,030 $(89) $(5,143) $(3,280) $(6,482) $ 3,222 $ (126) $(6,864) $(5,057) $ (8,825)
New Zealand....... - - - - - (253) (357) 248 (1,344) (1,706)
Other............. - - - (299) (299) - - - (559) (559)
------- ---- ------- ------- ------- ------- ------ ------ ------- --------
Total........... $ 2,030 $(89) $(5,143) $(3,579) $(6,781) $ 2,969 $ (483) $(6,616) $(6,960) $(11,090)
======= ==== ======= ======= ======= ======= ====== ======= ======= ========
For the Three Months Ended For the Six Months Ended
June 30, 1999 June 30, 1999
-------------------------------- -------------------------------
Video Other Total Video Other Total
--------- --------- --------- --------- -------- ---------
(In thousands) (In thousands)
Revenue:
Australia......... $34,388 $ - $34,388 $64,820 $ - $64,820
------- ------- ------- ------- ------ -------
Total........... $34,388 $ - $34,388 $64,820 $ - $64,820
======= ======= ======= ======= ====== =======
Adjusted EBITDA: (1)
Australia......... $ 619 $(2,131) $(1,512) $(1,441) $(3,525) $(4,966)
Other............. - (1,118) (1,118) - (2,147) (2,147)
------- ------- ------- ------- ------- -------
Total........... $ 619 $(3,249) $(2,630) $(1,441) $(5,672) $(7,113)
======== ======= ======= ======= ======= =======
(1) "Adjusted EBITDA" represents net operating earnings before depreciation,
amortization and stock-based compensation charges. Industry analysts
generally consider Adjusted EBITDA to be a helpful way to measure the
performance of cable television operations and communications companies.
Management believes Adjusted EBITDA helps investors to assess the cash flow
from operations from period to period and thus, to value the Company's
business. Adjusted EBITDA should not, however, be considered a replacement
for net income, cash flows or for any other measure of performance or
liquidity under U.S. GAAP, or as an indicator of a company's operating
performance. The Company's presentation of Adjusted EBITDA may not be
comparable to statistics with a similar name reported by other companies.
Not all companies and analysts calculate EBITDA in the same manner.
13
UNITED AUSTRALIA/PACIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Adjusted EBITDA reconciles to the consolidated statement of operations as
follows:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------ ------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(In thousands)
Operating loss................................................. $(33,810) $(45,742) $(70,605) $(74,686)
Depreciation and amortization.................................. 24,770 25,482 54,797 49,943
Non-cash stock-based compensation expense...................... 2,259 17,630 4,718 17,630
-------- -------- -------- --------
Consolidated Adjusted EBITDA.............................. $ (6,781) $ (2,630) $(11,090) $ (7,113)
======== ======== ========= ========
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed consolidated
financial statements and related notes thereto included elsewhere herein. Such
condensed consolidated financial statements provide additional information
regarding our financial activities and condition. Certain statements in this
report may constitute "forward-looking statements" within the meaning of the
federal securities laws. Such forward-looking statements may include, among
other things, statements concerning our plans, objectives and future economic
prospects, expectations, beliefs, future plans and strategies, anticipated
events or trends and similar expressions concerning matters that are not
historical facts. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements of the Company (or entities in which the Company has
interests), or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, changes in
television viewing preferences and habits by subscribers and potential
subscribers, their acceptance of new technology, programming alternatives and
new services offered by the Company, our ability to secure adequate capital to
fund system growth and development, risks inherent in investment and operations
in foreign countries, changes in government regulation, acquisitions and
integration of acquisitions, 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.
15
SUMMARY OPERATING DATA
The following tables set forth certain unaudited operating data:
As of June 30, 2000
---------------------------------------------------------
Television Basic
Homes in Homes Subscribers/ Basic
Service Area Passed Lines Penetration
------------ --------- ------------- ------------
Video subscribers:
Austar......................................... 2,085,000 2,083,108 406,326 19.5%
TSL............................................ 141,000 93,015 19,006 20.4%
--------- --------- ---------
Total..................................... 2,226,000 2,176,549 425,247
--------- --------- ---------
Telephone lines:
TSL - Residential.............................. 141,000 93,015 27,986 30.1%
TSL - Business................................. N/A N/A 3,535 N/A
--------- --------- --------- -----
Total..................................... 31,521
---------
Programming subscribers:
XYZ Entertainment.............................. N/A N/A 1,017,000(1) N/A
--------- --------- --------- -----
Data subscribers:
TSL............................................ N/A N/A 36,335 N/A
Austar United Broadband........................ N/A N/A 8,490 N/A
--------- --------- --------- -----
Total..................................... 44,825
---------
As of June 30, 1999
---------------------------------------------------------
Television Basic
Homes in Homes Subscribers/ Basic
Service Area Passed Lines Penetration
------------ --------- ------------- ------------
Video subscribers:
Austar......................................... 2,085,000 2,083,108 329,002 15.8%
Saturn......................................... 141,000 72,212 11,163 15.5%
--------- --------- ---------
Total..................................... 2,226,000 2,155,320 340,165
--------- --------- ---------
Telephone lines:
Saturn - Residential........................... 141,000 71,710 14,219 19.8%
Saturn - Business.............................. N/A N/A 1,464 N/A
--------- --------- --------- -----
Total..................................... 15,683
---------
Programming subscribers:
XYZ Entertainment.............................. N/A N/A 807,680(1) N/A
--------- --------- --------- -----
Data subscribers:
Saturn......................................... N/A N/A 2,927 N/A
--------- --------- --------- -----
(1) This figure represents the total estimated subscribers to the five-channel
XYZ Entertainment package.
16
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, we had invested approximately $466.3 million in our
projects. These fundings do not include amounts contributed by shareholders
other than UAP and the Company, proceeds from the Australian IPO or Secondary
Offering, the operating subsidiary bank borrowings or amounts contributed in
either cash or stock to acquire additional economic interests.
As of
June 30,
Sources of Fundings: 2000
-----------
(In thousands)
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...................................................... 7,096
--------
Total...................................................................... $466,324
========
As of
December 31,
Uses of Fundings: 1999
------------
(In thousands)
Austar (1)...................................................................... $349,429
Saturn.......................................................................... 44,612
XYZ Entertainment............................................................... 16,481
Other (2)....................................................................... 55,802
--------
Total...................................................................... $466,324
========
(1) Includes issuance/use of $29.8 million and $6.2 million in United
convertible preferred stock in 1995 and 1998, respectively, to acquire
additional economic interests in Australia.
(2) Includes $17.2 million paid by United to purchase 2.0% of UAP from
Kiwi Cable in December 1999.
We had $303.5 million of cash, cash equivalents and short-term liquid
investments on hand as of June 30, 2000. This cash, in addition to borrowing
capacity on the New Austar Bank Facility and the proceeds from the Austar United
IPO, has been and will continue to be used to expand Austar United's customer
base, complete the build-out of its network and introduce new services such as
telephone and Internet/data.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
Cash and cash equivalents decreased $2.8 million from $6.0 million as of
December 31, 1999 to $3.2 million as of June 30, 2000. Principal sources of cash
during the six months ended June 30, 2000 included proceeds from the issuance of
common equity securities by a subsidiary of $102.4 million, borrowings on the
New Austar Bank Facility of $38.8 million and other sources totaling $4.0
million.
During the six months ended June 30, 2000, cash was used principally for the
purchases of property, plant and equipment totaling $53.9 million as Austar
continues to expand its businesses into the data market, the net cash invested
in short-term liquid investments of $56.2 million, the funding of operating
activities of $24.2 million, investments in and advances to affiliated companies
of $4.9 million, new acquisitions of $3.7 million and other uses totaling $1.2
million.
FOR THE SIX MONTHS ENDED JUNE 30, 1999
Cash and cash equivalents decreased $0.1 million from $0.2 million as of
December 31, 1998 to $0.1 million as of June 30, 1999. Principal sources of cash
during the six months ended June 30, 1999 included borrowings on the New Austar
Bank Facility of $162.1 million, borrowings on the Austar Bank Facility of $19.4
million, cash contributions from parent of $29.4 million and other sources of
$1.4 million.
During the six months ended June 30, 1999, cash was used principally for payment
of the Austar Bank Facility of $129.1 million, purchases of property, plant and
17
equipment totaling $46.8 million to continue new subscriber connections at
Austar and the build-out of existing projects, the funding of operating
activities of $21.1 million, deferred financing costs of $7.9 million,
investments in and advances to affiliated companies of $5.2 million and other
uses totaling $2.3 million.
RESULTS OF OPERATIONS
EXCHANGE RATES. We translate revenue and expense from our foreign subsidiaries
using the weighted-average exchange rates during the period. These rates and the
spot rates for the end of each period are listed below.
Australian
Dollars
----------
For the six months ended June 30, 2000................ 1.6442
For the six months ended June 30, 1999................ 1.5489
Spot rate as of June 30, 2000......................... 1.6755
Spot rate as of December 31, 1999..................... 1.5244
REVENUE. Our revenue increased $8.1 million and $24.1 million for the three and
six months ended June 30, 2000, respectively, compared to the amounts for the
corresponding periods in the prior year as follows:
For the Three Months Ended For the Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(In thousands) (In thousands)
Austar United.............................. $42,547 $34,388 $88,891 $64,820
------- ------- ------- -------
Total revenue......................... $42,547 $34,388 $88,891 $64,820
======= ======= ======= =======
AUSTAR UNITED
Revenue for Austar United increased $8.1 million, or 23.5% from $34.4 million
for the three months ended June 30, 1999 to $42.5 million for the three months
ended June 30, 2000. On a functional currency basis, Austar United's revenue
increased A$18.7 million, from A$53.3 million for the three months ended June
30, 1999 to A$72.0 million for the three months ended June 30, 2000, a 35.1%
increase. Austar United's revenue increased $24.1 million, or 37.2%, from $64.8
million for the six months ended June 30, 1999 to $88.9 million for the six
months ended June 30, 2000. On a functional currency basis, Austar United's
revenue increased A$44.9 million, from A$100.4 million for the six months ended
June 30, 1999 to A$145.3 million for the six months ended June 30, 2000, a 44.7%
increase.
The increase in video revenue from period to period was primarily due to Austar
United's subscriber growth (406,326 at June 30, 2000 compared to 329,002 at June
30, 1999) as well as growth in premium tiers, resulting in an average revenue
per subscriber of A$56.71 ($33.49) and A$55.35 ($33.67) for the three and six
months ended June 30, 2000, respectively, compared to A$51.89 ($33.91) and
A$50.31 ($32.48) for the same period in the prior year.
ADJUSTED EBITDA. Adjusted EBITDA loss increased $4.2 million and $4.0 million
for the three and six months ended June 30, 2000, respectively, compared to the
corresponding amounts in the prior year as follows:
For the Three Months Ended For the Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(In thousands) (In thousands)
Austar United.............................. $(6,482) $(1,512) $(10,531) $(4,966)
Other...................................... (299) (1,118) (559) (2,147)
------- ------- -------- -------
Total Adjusted EBITDA................. $(6,781) $(2,630) $(11,090) $(7,113)
======= ======= ======== =======
18
AUSTAR UNITED
Austar United's Adjusted EBITDA loss increased by $5.0 million, or 333.3%, from
negative $1.5 million for the three months ended June 30, 1999 to negative $6.5
million for the three months ended June 30, 2000. On a functional currency
basis, Austar United's Adjusted EBITDA loss increased A$8.7 million, or 378.3%,
from negative A$2.3 million for the three months ended June 30, 1999 to negative
A$11.0 million for the three months ended June 30, 2000. Austar United's
adjusted EBITDA loss increased by $5.5 million, or 110.0%, from negative $5.0
million for the six months ended June 30, 1999 to negative $10.5 million for the
six months ended June 30, 2000. On a functional currency basis, Austar United's
adjusted EBITDA loss increased A$9.8 million from negative A$7.7 million for the
six months ended June 30, 1999 to negative A$17.5 million for the six months
ended June 30, 2000, a 127.3% increase. This increase in Adjusted EBITDA loss is
primarily due to the increased expenses associated with the launch of AUB's
Internet business.
The Adjusted EBITDA for video improved by $1.4 million and $4.4 million for the
three and six months ended June 30, 2000, respectively, compared to the same
periods in the prior year. Austar's incremental sales growth was partially
offset by increased programming costs as subscribers increased and the
Australian dollar weakened against the U.S. dollar, as well as by increased
marketing costs due to a push for improved brand name awareness in the
marketplace during the second quarter.
The Adjusted EBITDA loss for the Internet business increased to $5.1 million and
$6.6 million for the three and six months ended June 30, 2000, respectively,
compared to nil in the prior year as AUB rolls out its broadband Internet
services.
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSE. Our corporate general and
administrative expense decreased $16.2 million and $14.5 million for the three
and six months ended June 30, 2000, respectively, compared to the amounts for
the corresponding periods in the prior year. This decrease was primarily
attributable to a stock-based compensation charge of $17.6 million from the
Austar United stock option plan in June 1999 ("Austar United Plan"), compared to
$2.3 million and $4.7 million for the three and six months ended June 30, 2000,
respectively.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense decreased
$0.7 million and increased $4.9 million for the three and six months ended June
30, 2000, respectively, compared to the amount for the corresponding periods in
the prior year as follows:
For the Three Months Ended For the Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(In thousands) (In thousands)
Austar United.............................. $24,483 $25,482 $54,223 $49,943
Other...................................... 287 - 574 -
------- ------- ------- -------
Total depreciation and amortization
expense............................. $24,770 $25,482 $54,797 $49,943
======= ======= ======= =======
AUSTAR UNITED
Depreciation and amortization expense for Austar United decreased $1.0 million,
or 3.9%, from $25.5 million for the three months ended June 30, 1999 to $24.5
million for the three months ended June 30, 2000. On a functional currency
basis, Austar United's depreciation and amortization expense increased A$1.8
million, from A$39.0 million for the three months ended June 30, 1999 to A$40.8
million for the three months ended June 30, 2000, a 4.6% increase.
Depreciation and amortization expense for Austar United increased $4.3 million,
or 8.6%, from $49.9 million for the six months ended June 30, 1999 to $54.2
million for the six months ended June 30, 2000. On a functional currency basis,
Austar United's depreciation and amortization expense increased A$11.5 million,
from A$77.5 million for the six months ended June 30, 1999 to A$89.0 million for
the six months ended June 30, 2000, a 14.8% increase. This increase is primarily
due to Saturn being consolidated for the first quarter 2000 and reported under
the equity method during the first six months in 1999.
GAIN ON ISSUANCE OF COMMON EQUITY SECURITIES BY SUBSIDIARY. On March 29, 2000,
Austar United successfully completed a Secondary Offering selling 20.0 million
shares on the Australian Stock Exchange raising gross and net proceeds at A$8.50
($5.20) per share of A$170.0 ($104.0) million and A$167.5 ($102.4) million,
19
respectively. Based on the carrying value of our investment in Austar United as
of March 29, 2000, we recognized a gain of $61.2 million from the resulting
step-up in the carrying amount of our investment in Austar United, in accordance
with SAB 51. No deferred taxes were recorded related to this gain due to our
intent on holding our investment in Austar United indefinitely.
INTEREST INCOME. Interest income increased $5.1 million and $8.2 million for the
three and six months ended June 30, 2000, respectively, compared to the amounts
for the corresponding periods in the prior year. The increase was attributable
to the increase in short-term liquid investment balances due to the Austar
United IPO and the Secondary Offering.
INTEREST EXPENSE. Interest expense increased $1.6 million and $5.9 million for
the three and six months ended June 30, 2000, respectively, compared to the
amounts for the corresponding periods in the prior year. This increase was
primarily due to increased interest expense related to the Austar Bank Facility
and the Notes for the three and six months ended June 30, 2000 compared to the
amounts for the corresponding periods in the prior year.
MINORITY INTEREST IN SUBSIDIARY. The minority interests' share of losses was
$14.2 million and $26.2 million for the three and six months ended June 30,
2000, respectively. Austar United's IPO (July 1999) and its Secondary Offering
(March 2000) reduced our indirect ownership to 66.3% as of June 30, 2000. For
accounting purposes, we continue to consolidate 100% of the results of
operations of Austar United, then deduct the minority interests' share of income
(losses) before arriving at net income (loss).
SHARE IN RESULTS OF AFFILIATED COMPANIES, NET. Our share in losses of affiliated
companies increased $2.5 million for the three months ended June 30, 2000 and
decreased $0.3 million for the six months ended June 30, 2000 compared to the
amounts for the corresponding periods in the prior year as follows:
For the Three Months Ended For the Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(In thousands) (In thousands)
XYZ Entertainment........................... $ 201 $(3,633) $ (414) $(5,035)
Saturn/TSL (1).............................. (7,787) (1,675) (7,787) (3,645)
Other....................................... (199) - (165) -
------- ------- ------- -------
Total share in results of affiliated
companies........................... $(7,785) $(5,308) $(8,366) $(8,680)
======= ======= ======= =======
(1) During the six months ended June 30, 1999, the equity method of
accounting was used to account for Saturn's results due to certain
minority shareholder rights. Effective August 1, 1999, Austar United
increased its ownership in Saturn to 100% and began consolidating its
results of operations. Effective April 1, 2000, Austar United
decreased its ownership in Saturn to 50.0% with the TSL transaction
and returned to the equity method of accounting.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- -------------------------------------------------------------------
INVESTMENT PORTFOLIO
We do not use derivative financial instruments in our non-trading investment
portfolio. We place our cash and cash equivalent investments in highly liquid
instruments that meet high credit quality standards with original maturities at
the date of purchase of less than three months. Also, our short-term investments
are placed in liquid instruments that meet high credit quality standards with
original maturities at the date of purchase of between three and twelve months.
Credit exposure is limited to any one issue, issuer or type of instrument. These
investments are subject to interest rate risk and will fall in value if market
interest rates increase, however, we do not expect any material loss with
respect to our investment portfolio.
IMPACT OF FOREIGN CURRENCY RATE CHANGES
We are exposed to foreign exchange rate fluctuations related to the operating
subsidiaries' monetary assets and liabilities and the financial results of
foreign subsidiaries when their respective financial statements are translated
into U.S. dollars during consolidation. Our exposure to foreign exchange rate
fluctuations also arises from intercompany charges such as the cost of
equipment, management fees and certain other charges. These intercompany
accounts are predominantly denominated in the functional currency of the foreign
subsidiary.
The operating companies' monetary assets and liabilities are subject to foreign
currency exchange risk as certain equipment purchases and payments for certain
operating expenses, such as programming expenses, are denominated in currencies
other than their own functional currency. In addition, certain of the operating
companies have notes payable and notes receivable which are denominated in a
currency other than their own functional currency. Foreign currency rate changes
also affect our share in results of our unconsolidated affiliates.
In general, the Company and the operating companies do not execute hedge
transactions to reduce our exposure to foreign currency exchange rate risk.
Accordingly, we may experience economic loss and a negative impact on earnings
and equity with respect to our holdings solely as a result of foreign currency
exchange rate fluctuations.
The countries in which the operating companies now conduct business generally do
not restrict the removal or conversion of local or foreign currency, however,
there is no assurance this situation will continue. We may also acquire
interests in companies that operate in countries where the removal or conversion
of currency is restricted.
INTEREST RATE SENSITIVITY
The table below provides information about our primary debt obligations. The
information is presented in U.S. dollar equivalents, which is our reporting
currency. The instrument's actual cash flows are denominated in both U.S.
dollars (the Senior Discount Notes) and Australian dollars (New Austar Bank
Facility).
As of June 30, 2000
-------------------------------
Book Value Fair Value
------------- -----------
(U.S. dollars, in thousands, except interest rates)
Long-term and short-term debt:
Fixed rate USD denominated Senior Discount Notes........... $436,336 $448,509
Average interest rate................................... 14.0% 13.3%
Variable rate A$ denominated New Austar Bank Facility...... $219,039 $219,039
Average interest rate................................... 7.4% 7.4%
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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 Senior Discount Notes) and Australian dollars (New Austar Bank
Facility).
As of June 30, 2000
------------------------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter Total
------- -------- -------- -------- -------- ----------- ----------
(U.S. dollars, in thousands, except interest rates)
Long-term and short-term debt:
Fixed rate USD denominated Senior
Discount Notes............................ $ - $ - $ - $ - $ - $436,336 $436,336
Variable rate A$ denominated New
Austar Bank Facility...................... $ - $ - $7,666 $42,165 $67,355 $101,853 $219,039
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 ($29.8) 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
($59.7) million of variable rate, long-term debt into fixed rate borrowings. As
of June 30, 2000, the weighted-average fixed rate under these agreements was
5.7% compared to a weighted-average variable rate of 8.6%.
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.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter.
None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
United Australia/Pacific, Inc.
Date: August 14, 2000
----------------------------
By: /s/ Valerie L. Cover
----------------------------
Valerie L. Cover
Controller
(A Duly Authorized Officer and Principal Financial Officer)
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