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 September 30, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to_________
Commission File No. 333-05017
UIH Australia/Pacific, Inc.
(Exact name of Registrant as specified in its charter)
State of Colorado 84-1341958
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4643 South Ulster Street, #1300
Denver, Colorado 80237
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (303) 770-4001
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
----- -----
The Company has no publicly-traded shares of capital stock. As of November 16,
1998, the Company had 13,864,941 shares of common stock outstanding.
UIH AUSTRALIA/PACIFIC, INC.
TABLE OF CONTENTS
Page
Number
------
PART I - FINANCIAL INFORMATION
------------------------------
Item 1 - Financial Statements
- ------
Condensed Consolidated Balance Sheets as of September 30, 1998 and December 31, 1997 (Unaudited)......... 2
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30,
1998 and 1997 (Unaudited)............................................................................ 3
Condensed Consolidated Statement of Stockholder's Deficit for the Nine Months Ended September 30,
1998 (Unaudited)..................................................................................... 4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1998 and
1997 (Unaudited).................................................................................... 5
Notes to Condensed Consolidated Financial Statements (Unaudited)........................................ 6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations............... 15
- ------
PART II - OTHER INFORMATION
---------------------------
Item 6 - Exhibits and Reports on Form 8-K.................................................................... 25
- ------
UIH AUSTRALIA/PACIFIC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Stated in thousands, except share and per share amounts)
(Unaudited)
As of As of
September 30, December 31,
1998 1997
------------- ------------
ASSETS
Current assets
Cash and cash equivalents.................................................................. $ 2,929 $ 12,344
Restricted cash............................................................................ 197 420
Short-term investments..................................................................... -- 12,325
Subscriber receivables..................................................................... 5,147 2,548
Related party receivables.................................................................. 1,131 1,942
Other receivables.......................................................................... 1,136 1,220
Prepaids................................................................................... 4,094 1,468
Other current assets....................................................................... 504 717
-------- --------
Total current assets.................................................................... 15,138 32,984
Property, plant and equipment, net of accumulated depreciation of $129,991 and
$78,179, respectively...................................................................... 158,745 183,101
License fees, net of accumulated amortization of $5,263 and $3,773, respectively............. 9,954 5,691
Goodwill, net of accumulated amortization of $10,105 and $8,044, respectively................ 39,022 43,017
Deferred financing costs, net of accumulated amortization of $2,665 and $1,306,
respectively............................................................................... 11,662 13,393
Other non-current assets, net................................................................ 245 846
-------- --------
Total assets............................................................................ $234,766 $279,032
======== ========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities
Accounts payable, including related party payables of $6,221 and $1,596, respectively...... $ 14,112 $ 5,651
Construction payables...................................................................... 4,343 6,008
Accrued liabilities........................................................................ 18,459 19,372
Related party note payable................................................................. 4,999 4,999
Current portion of long-term debt.......................................................... 3,103 1,825
-------- --------
Total current liabilities............................................................... 45,016 37,855
Due to parent................................................................................ 8,377 5,394
Senior discount notes........................................................................ 343,926 309,123
Other long-term debt......................................................................... 83,387 77,971
Other long-term liabilities.................................................................. 1,562 1,426
-------- --------
Total liabilities....................................................................... 482,268 431,769
-------- --------
Minority interest in subsidiary.............................................................. 11,209 11,416
-------- --------
Stockholder's deficit
Preferred stock, $0.01 par value, 1,000,000 shares authorized, none issued and
outstanding.............................................................................. -- --
Common stock, $0.01 par value, 30,000,000 shares authorized, 13,864,941 shares
issued and outstanding................................................................... 139 139
Additional paid-in capital................................................................. 202,848 139,621
Cumulative translation adjustments......................................................... (35,594) (28,964)
Accumulated deficit........................................................................ (426,104) (274,949)
-------- --------
Total stockholder's deficit............................................................. (258,711) (164,153)
-------- --------
Total liabilities and stockholder's deficit............................................. $234,766 $279,032
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
UIH AUSTRALIA/PACIFIC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Stated in thousands, except share and per share amounts)
(Unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- --------
Service and other revenue............................... $ 22,191 $ 18,341 $ 63,369 $ 49,052
System operating expense, including related party
expense of $1,203, $853, $3,435 and $2,174,
respectively.......................................... (23,343) (13,988) (55,950) (35,857)
System selling, general and administrative expense...... (13,954) (14,220) (38,018) (37,025)
Corporate general and administrative expense, including
related party expense of $219, $203, $635 and $588,
respectively.......................................... 74 (309) (4,454) (885)
Depreciation and amortization........................... (23,286) (22,061) (75,177) (57,797)
-------- -------- --------- ---------
Net operating loss................................. (38,318) (32,237) (110,230) (82,512)
Interest income, including related party income of
$203, $0, $512 and $0, respectively................... 294 247 854 526
Interest expense, including related party expense of
$467, $555, $1,399 and $633, respectively............ (14,568) (11,214) (42,289) (29,676)
Other expense, net...................................... (2,155) (342) (3,560) (1,109)
-------- -------- --------- ---------
Net loss before other items........................ (54,747) (43,546) (155,225) (112,771)
Equity in losses of affiliated companies................ (603) (557) (133) (2,000)
Minority interest in subsidiary......................... 2,138 351 4,203 351
-------- -------- --------- ---------
Net loss........................................... $(53,212) $(43,752) $(151,155) $(114,420)
======== ======== ========= =========
Basic and diluted loss per common share................. $ (3.84) $ (3.16) $ (10.90) $ (8.25)
======== ======== ========= =========
Weighted-average number of common shares
outstanding........................................... 13,864,941 13,864,941 13,864,941 13,864,941
========== ========== ========== ==========
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
UIH AUSTRALIA/PACIFIC, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER'S DEFICIT
(Stated in thousands, except share amounts)
(Unaudited)
Common Stock Additional Cumulative
-------------------- Paid-In Translation Accumlated
Shares Amount Capital Adjustments Deficit Total
---------- ------ ---------- ----------- ---------- ---------
Balances, January 1, 1998...................... 13,864,941 $139 $139,621 $(28,964) $(274,949) $(164,153)
Capital contributions from parent.............. -- -- 63,227 -- -- 63,227
Change in cumulative translation
adjustments.................................. -- -- -- (6,630) -- (6,630)
Net loss....................................... -- -- -- -- (151,155) (151,155)
---------- ---- -------- -------- --------- ---------
Balances, September 30, 1998................... 13,864,941 $139 $202,848 $(35,594) $(426,104) $(258,711)
========== ==== ======== ======== ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
UIH AUSTRALIA/PACIFIC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in thousands)
(Unaudited)
For the Nine Months Ended
September 30,
-------------------------
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................................................ $(151,155) $(114,420)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization................................................................. 75,177 57,797
Equity in losses of affiliated companies...................................................... 133 2,000
Allocation of expense accounted for as capital contributions by parent........................ 3,617 --
Minority interest share of losses............................................................. (4,203) (351)
Accretion of interest on senior discount notes and amortization of deferred financing costs... 36,279 26,969
Increase in receivables and other assets...................................................... (7,531) (914)
Increase in related party payables............................................................ 8,046 2,248
Increase in accounts payable, accrued liabilities and other................................... 4,457 19,992
--------- ---------
Net cash flows from operating activities........................................................ (35,180) (6,679)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments.............................................................. -- (3,663)
Proceeds from sale of short-term investments.................................................... 12,325 22,303
Restricted cash released........................................................................ 176 --
Investments in and advances to affiliated companies and other investments....................... (666) (2,366)
Additions to property, plant and equipment...................................................... (59,070) (67,948)
Decrease in construction payables............................................................... (1,123) (29,385)
--------- ---------
Net cash flows from investing activities........................................................ (48,358) (81,059)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions from parent............................................................... 53,455 --
Cash contributed from minority interest partner................................................. 5,504 19,566
Proceeds from offering of senior discount notes................................................. -- 29,925
Borrowing on related party payables to parent................................................... -- 4,999
Deferred financing costs........................................................................ -- (4,632)
Borrowings on other debt........................................................................ 15,083 65,971
Payment on capital leases and other debt........................................................ (499) (959)
--------- ---------
Net cash flows from financing activities........................................................ 73,543 114,870
--------- ---------
EFFECT OF EXCHANGE RATES ON CASH................................................................ 580 (663)
--------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............................................... (9,415) 26,469
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................................................. 12,344 19,220
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD........................................................ $ 2,929 $ 45,689
========= =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Non-cash capital contribution from parent..................................................... $ 6,155 $ --
========= =========
Gain on issuance of shares by a wholly-owned subsidiary....................................... $ -- $ 5,985
========= =========
Decrease in unrealized loss on investment..................................................... $ -- $ 659
========= =========
Assets acquired with capital leases........................................................... $ 621 $ 535
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash received for interest.................................................................... $ 437 $ 401
========= =========
Cash paid for interest........................................................................ $ 3,988 $ 1,038
========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
UIH AUSTRALIA/PACIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1998
(Monetary amounts stated in thousands)
(Unaudited)
1. ORGANIZATION AND NATURE OF OPERATIONS
UIH Australia/Pacific, Inc. (the "Company"), a wholly-owned subsidiary of UIH
Asia/Pacific Communications, Inc. ("UAP"), which is in turn an indirect
98%-owned subsidiary of United International Holdings, Inc. ("UIH"), was formed
on October 14, 1994, for the purpose of developing, acquiring and managing
foreign multi-channel television, programming and telephony operations.
The following chart presents a summary of the Company's significant investments
in multi-channel television, programming and telephony operations as of
September 30, 1998.
********************************************************
* UIH *
********************************************************
*
100% *
*
********************************************************
* United International Properties, Inc. ("UIPI") *
********************************************************
*
98% *
*
********************************************************
* UAP *
********************************************************
*
100% *
*
********************************************************
* The Company *
********************************************************
*
*
*
********************************************************
* AUSTRALIA: *
* CTV Pty Limited ("CTV") and STV Pty Limited *
* ("STV")(collectively, "Austar")(1) 100% *
* Austar Satellite Pty Limited *
* ("Austar Satellite") 100% *
* United Wireless Pty Limited *
* ("United Wireless") 100% *
* XYZ Entertainment Pty Limited *
* ("XYZ Entertainment") 25% *
* NEW ZEALAND: *
* Saturn Communications Limited ("Saturn") 65% *
* TAHITI: *
* Telefenua S.A. ("Telefenua")(2) 90% *
********************************************************
(1) The Company holds an effective 100% economic interest in Austar
through a combination of ordinary shares and convertible debentures.
(2) The Company owns an effective 90% economic interest in Telefenua. The
Company's economic interest will decrease to 75% and 64% once it has
received a 20% and 40% internal rate of return on its investment in
Tahiti, respectively.
LIQUIDITY AND CAPITAL RESOURCES
A substantial portion of the Company's investments to date relate to its
investment in Austar, which is comprised primarily of multi-channel multi-point
distribution systems ("MMDS") and direct-to-home ("DTH") satellite operations.
The Company has essentially completed the construction and deployment of
Austar's entire MMDS network infrastructure and has incurred certain other
significant expenditures, such as Austar's National Customer Service Center,
which contemplates provision of MMDS and DTH services to a substantially larger
customer base than currently exists. In order to expand Austar's customer base
and build-out the Company's other projects, the Company will need a significant
amount of additional capital. As of September 30, 1998, the Company had a net
working capital deficit of $18,658, excluding related party payables of $11,220.
Due to the nature of the operation, the Company is able to slow the rate of
subscriber connections at Austar and network construction at the Company's other
projects to adjust to the level of funding sources that are available. The
6
UIH AUSTRALIA/PACIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Company believes it can, if necessary, substantially reduce the capital required
at Austar as the majority of future capital expenditures will be for subscriber
installation and premises equipment, which are controllable by the Company based
upon the rate of new subscriber connections. However, the Company needs to
continue the present rate of new subscriber connections to offset current churn
rates at Austar. In September 1998, Austar received a supplemental amendment to
the existing senior syndicated term debt facility in the amount of Australian
$("A$")200,000 ($118,659 as of September 30, 1998) (the "Austar Bank Facility")
which allows Austar to draw up to A$60,000 under the A$90,000 term loan
facility. Austar also received a new bank underwriting commitment for an
A$400,000 senior secured debt facility (the "New Austar Bank Facility"), which
is intended to refinance the Austar Bank Facility by early 1999 (see Note 7).
The Company believes that the financial support from UIH, other potential equity
sources, the Austar Bank Facility, the New Austar Bank Facility commitment, and
the Saturn Bank Facility (as defined in Note 11) combined with, if necessary,
reductions in the Company's planned capital expenditures, are sufficient to
sustain its operations through at least the end of 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying interim condensed consolidated financial statements are
unaudited and include the accounts of the Company and all subsidiaries where it
exercises majority control and owns a majority economic interest. Austar,
Saturn, Telefenua and United Wireless were consolidated for all periods
presented. In November 1997, the Company formed Austar Satellite and began
consolidating its operations. All significant intercompany accounts and
transactions have been eliminated in consolidation.
In management's opinion, all adjustments (of a normal recurring nature) have
been made which are necessary to present fairly the financial position of the
Company as of September 30, 1998 and the results of its operations for the three
and nine months ended September 30, 1998 and 1997. For a more complete
understanding of the Company's financial position and results of its operations,
see the consolidated financial statements of the Company included in the
Company's annual report on Form 10-K for the year ended December 31, 1997.
INVESTMENTS IN AND ADVANCES TO AN AFFILIATED COMPANY, ACCOUNTED FOR UNDER THE
EQUITY METHOD
The Company accounts for its investment in XYZ Entertainment under the equity
method of accounting. Under this method, the investment, originally recorded at
cost, is adjusted to recognize the Company's proportionate share of net earnings
or losses of the affiliate, limited to the extent of the Company's investment in
and advances to the affiliate, including any debt guarantees or other
contractual funding commitments. The Company's proportionate share of net
earnings or losses of XYZ Entertainment includes the amortization of the excess
of its cost over its percentage interest in XYZ Entertainment's net tangible
assets.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Additions, replacements and
major improvements are capitalized, and costs for normal repair and maintenance
of property, plant and equipment are charged to expense as incurred. With
respect to the Company's MMDS and DTH operations, all subscriber equipment and
capitalized installation labor are depreciated using the straight-line method
over estimated useful lives of three years. Upon disconnection of a MMDS or DTH
subscriber, the remaining book value of the subscriber equipment, excluding
converters which are recovered upon disconnection, and the capitalized labor are
written off and accounted for as additional depreciation expense. MMDS
distribution facilities and cable distribution networks are depreciated using
the straight-line method over estimated useful lives of five to ten years.
With respect to the Company's cable distribution networks, initial subscriber
installation costs are capitalized and depreciated over a period no longer than
the depreciation period used for cable television plant or the term of the
license agreement. All installation fees and related costs with respect to
reconnects are recognized in the period in which the reconnection occurs.
7
UIH AUSTRALIA/PACIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Office equipment, furniture and fixtures, buildings and leasehold improvements
are depreciated using the straight-line method over estimated useful lives of
three to ten years.
Assets acquired under capital leases are included in property, plant and
equipment. The initial amount of the leased asset and corresponding lease
liability are recorded at the present value of future minimum lease payments.
Leased assets are amortized over the life of the relevant lease.
COMPREHENSIVE LOSS
The 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. For the three and nine
months ended September 30, 1998 and 1997, the Company's only components of other
comprehensive income (loss) were the changes in cumulative translation
adjustments and the change in unrealized loss on investment (see Note 8).
FOREIGN OPERATIONS
The functional currency for the Company's foreign operations is the applicable
local currency for each affiliate company. Assets and liabilities of foreign
subsidiaries are translated at the exchange rate in effect at period-end, and
the statements of operations are translated at the average exchange rates during
the period. Exchange rate fluctuations on translating foreign currency financial
statements into U.S. dollars that result in unrealized gains or losses are
referred to as translation adjustments. Cumulative translation adjustments are
recorded as a separate component of stockholder's deficit.
Transactions denominated in currencies other than the local currency are
recorded based on exchange rates at the time such transactions arise. Subsequent
changes in exchange rates result in transaction gains and losses which are
reflected in income as unrealized (based on period-end translations) or realized
upon settlement of the transactions.
Cash flows from the Company's operations in foreign countries are translated
based on their reporting currencies. As a result, amounts related to assets and
liabilities reported on the condensed consolidated statements of cash flows will
not agree to changes in the corresponding balances on the condensed consolidated
balance sheets. The effects of exchange rate changes on cash balances held in
foreign currencies are reported as a separate line below cash flows from
financing activities.
NEW ACCOUNTING PRINCIPLE
The Financial Accounting Standards Board 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 value of a derivative depends on
its intended use and designation. SFAS 133 is effective for fiscal years
beginning after June 15, 1999. The Company is currently assessing the effect of
this new standard.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the current
year presentation.
3. ACQUISITION
In July 1998, Austar acquired certain Australian pay television assets of East
Coast Television Pty Limited ("ECT"), an affiliate of Century Communications
Corp. ("Century"), for $6,155 of UIH's newly-created Series B Convertible
Preferred Stock ("Series B Preferred Stock"). ECT's subscription television
business includes subscribers and certain MMDS licenses and transmission
equipment serving the areas in and around Newcastle, Gossford, Wollongong and
Tasmania.
8
UIH AUSTRALIA/PACIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. INVESTMENTS IN AND ADVANCES TO AN AFFILIATED COMPANY, ACCOUNTED FOR UNDER THE
EQUITY METHOD
Investments in Cumulative Equity Cumulative
and Advances to in Losses of Translation
Affiliated Company Affiliated Company Adjustments Total
------------------ ------------------ ----------- -----
As of:
September 30, 1998............... $18,743 $(18,853) $110 $ --
======= ======== ==== ====
December 31, 1997................ $18,610(1) $(18,720) $110 $ --
======= ======== ==== ====
(1) Includes an accrued funding obligation of $406 at December 31, 1997.
The Company does not have a contractual funding obligation to XYZ
Entertainment; however, the Company would face significant and
punitive dilution if it did not make the requested fundings.
5. PROPERTY, PLANT AND EQUIPMENT
As of As of
September 30, December 31,
1998 1997
------------- -----------
Subscriber premises equipment and converters............................... $ 168,504 $160,413
MMDS distribution facilities............................................... 55,281 55,093
Cable distribution networks................................................ 30,892 16,770
Office equipment, furniture and fixtures................................... 12,943 10,813
Buildings and leasehold improvements....................................... 7,610 5,647
Other...................................................................... 13,506 12,544
--------- --------
288,736 261,280
Accumulated depreciation............................................. (129,991) (78,179)
--------- --------
Net property, plant and equipment.................................... $ 158,745 $183,101
========= ========
6. SENIOR DISCOUNT NOTES
As of As of
September 30, December 31,
1998 1997
------------- ------------
May 1996 Notes (as defined below), net of unamortized discount............ $310,711 $278,662
September 1997 Notes (as defined below), net of unamortized discount...... 33,215 30,461
-------- --------
$343,926 $309,123
======== ========
MAY 1996 14% SENIOR DISCOUNT NOTES
The Company's 14% senior notes that were issued in May 1996 at a discount from
their principal amount of $443,000 (the "May 1996 Notes") had an accreted value
of $310,711 as of September 30, 1998. On and after May 15, 2001, cash interest
will accrue and will be payable semi-annually on each May 15 and November 15,
commencing November 15, 2001. The May 1996 Notes are due May 15, 2006. Effective
May 16, 1997, the interest rate on these notes increased by an additional 0.75%
per annum to 14.75%. On October 14, 1998, the Company consummated a cumulative
issuance of its capital stock to its parent resulting in cumulative gross
proceeds of $70,000 (an "Equity Sale"), reducing 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 $447,418 on May 15, 2001, the date cash interest begins to
accrue.
9
UIH AUSTRALIA/PACIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 1997 14% SENIOR DISCOUNT NOTES
The Company's 14% senior notes that were issued in September 1997 at a discount
from their principal amount of $45,000 (the "September 1997 Notes") had an
accreted value of $33,215 as of September 30, 1998. On and after May 15, 2001,
cash interest will accrue and will be payable semi-annually on each May 15 and
November 15, commencing November 15, 2001. The September 1997 Notes are due May
15, 2006. Effective September 23, 1997, the interest rate on these notes
increased by an additional 0.75% per annum to 14.75%. 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 $45,448 on May 15, 2001, the date cash interest
begins to accrue.
7. OTHER LONG-TERM DEBT
As of As of
September 30, December 31,
1998 1997
------------- ------------
Austar Bank Facility....................................................... $74,162 $71,531
Vendor financed equipment at Saturn........................................ 8,515 3,730
Capitalized lease obligations.............................................. 2,760 3,441
Mortgage note, interest at 7.548%, 7-year term............................. 1,053 1,094
------- -------
86,490 79,796
Less current portion.................................................. (3,103) (1,825)
------- -------
$83,387 $77,971
======= =======
AUSTAR BANK FACILITY
In July 1997, Austar secured the Austar Bank Facility to fund Austar's
subscriber acquisition and working capital needs. The Austar Bank Facility
consists of three sub-facilities: (i) A$50,000 revolving working capital
facility, (ii) A$60,000 cash advance facility and (iii) A$90,000 term loan
facility. All of Austar's assets are pledged as collateral for the Austar Bank
Facility. In addition, pursuant to the Austar Bank Facility, Austar cannot pay
any dividends, interest or fees under its technical assistance agreements prior
to December 31, 2000. Subsequent to December 31, 2000, Austar will be permitted
to make these types of payments, subject to certain debt to cash flow ratios. As
of September 30, 1998, Austar had drawn the entire amount of the working capital
facility and the cash advance facility totaling A$110,000 ($65,263 converted
using the September 30, 1998 exchange rate). The working capital facility is
fully repayable on June 30, 2000. The cash advance facility is fully repayable
pursuant to an amortization schedule beginning December 31, 2000 and ending June
30, 2004.
In September 1998, Austar secured the New Austar Bank Facility commitment, of
which the first A$170,000 is intended to refinance the Austar Bank Facility by
early 1999 and the remaining A$230,000 is available upon the contribution of
additional equity on a 2:1 debt-to-equity basis. In the interim, Austar has
received a supplemental amendment to the existing Austar Bank Facility which
allows Austar to draw up to A$60,000 under the A$90,000 term loan facility for a
maximum term of six months from the initial cash draw down at an increased
interest rate of 2.25% above the professional market rate in Australia. All
other terms and conditions of the Austar Bank Facility remain unchanged. As of
September 30, 1998, Austar had drawn A$15,000 ($8,899 converted using the
September 30, 1998 exchange rate) on the term loan facility for a total
outstanding balance of A$125,000 ($74,162 as of September 30, 1998) on the
Austar Bank Facility.
10
UIH AUSTRALIA/PACIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. COMPREHENSIVE LOSS
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1998 1997 1998 1997
--------- -------- --------- ---------
Net loss.......................................... $(53,212) $(43,752) $(151,155) $(114,420)
Other comprehensive loss
Change in cumulative translation adjustments.... (4,747) (8,208) (6,630) (11,601)
Change in unrealized loss on investment......... -- 954 -- 659
-------- -------- --------- ---------
Total comprehensive loss.................... $(57,959) $(51,006) $(157,785) $(125,362)
======== ======== ========= =========
9. RELATED PARTY
Effective May 1, 1996, the Company and UIH Management, Inc. ("UIH Management"),
an indirect wholly-owned subsidiary of UIH, executed a 10-year management
services agreement (the "Management Agreement"), pursuant to which UIH
Management performed certain administrative, accounting, financial reporting and
other services for the Company, which has no separate employees of its own.
Pursuant to the Management Agreement, the management fee was $750 for the first
year of such agreement (beginning May 1, 1996), and it increased on each
anniversary date of the Management Agreement by 8% per year. Effective March 31,
1997, UIH Management assigned its rights and obligations under the Management
Agreement to UAP, the Company's immediate parent, and extended the agreement for
20 years from that date (the "UAP Management Agreement"). In addition, the
Company reimburses UAP or UIH for any out-of-pocket expenses including travel,
lodging and entertainment expenses, incurred by UAP or UIH on behalf of the
Company. In December 1997, UIH began allocating corporate general and
administrative expense to the Company in the form of capital contributions,
based on increased activity at the operating system level. Management believes
that this method of allocating costs is reasonable.
Austar, Saturn, Telefenua and United Wireless are also parties to technical
assistance agreements with UAP whereby such operating companies pay to UAP fees
based on their respective gross revenues. In addition, UIH has appointed certain
of its employees to serve in senior management positions at the operating
systems. The operating systems reimburse UIH for certain direct costs incurred
by UIH, including salaries and benefits relating to these senior management
positions, pursuant to the terms of the technical assistance agreements.
As of September 30, 1998, UIPI, the immediate parent of UAP, had loaned $4,999
to UIH Australia/Pacific Finance, Inc., a wholly-owned subsidiary of the
Company. This loan accrues interest at 15% per annum and is due on demand. In
October 1998, UIPI contributed the amount of the loan plus interest into equity
in the Company. In addition, for the nine months ended September 30, 1998, UAP
invested $53,455 in cash into the Company in the form of capital contributions
in addition to a non-cash contribution of UIH's Series B Preferred Stock of
$6,155.
Included in the amount due to parent is the following:
As of As of
September 30, December 31,
1998 1997
------------- ------------
Austar technical assistance agreement obligations, including deferred
management fees of $4,644 and $2,248, respectively(1)(2).............. $ 6,750 $ 2,629
Telefenua technical assistance agreement obligations.................... 3,186 2,659
Saturn technical assistance agreement obligations....................... 902 406
United Wireless technical assistance agreement obligations.............. 547 487
Payable to parent for management fees and interest on note payable(2)... 1,887 723
Other................................................................... 1,326 86
------- -------
14,598 6,990
Less current portion................................................ (6,221) (1,596)
------- -------
$ 8,377 $ 5,394
======= =======
11
UIH AUSTRALIA/PACIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) The management fees have been deferred until December 31, 2000 due to
restrictions under the Austar Bank Facility. Subsequent to that date,
Austar will be permitted to make these types of payments, subject to
certain debt to cash flow ratios.
(2) UAP has the option of converting these management fees into equity.
10. SEGMENT INFORMATION
The Company's reportable segments are the various countries in which it operates
multi-channel television, programming and/or telephony operations. These
reportable segments are managed separately because each country presents
different marketing strategies and technology issues as well as distinct
economic climates and regulatory constraints. The Company has selected the
following reportable segments: (i) Australia, including the Company's
investments in Austar, Austar Satellite and United Wireless, (ii) New Zealand,
including the Company's investment in Saturn, (iii) Tahiti, including the
Company's investment in Telefenua and (iv) Corporate, including various holding
companies and consolidating eliminations.
As of and for the Three Months Ended
September 30, 1998
---------------------------------------------------------------
New
Australia Zealand Tahiti Corporate Total
--------- ------- -------- --------- ---------
Service and other revenue............................. $ 20,767 $ 395 $ 1,153 $ (124) $ 22,191
System operating expense, including management fees
of $931, $214, $58, $0 and $1,203, respectively..... $(20,449) $(2,410) $ (608) $ 124 $(23,343)
Selling, general and administrative expense........... $(11,685) $(1,660) $ (609) $ 74 $(13,880)
Adjusted EBITDA (1)................................... $(10,436) $(3,461) $ (6) N/A N/A
Depreciation and amortization......................... $(22,000) $ (907) $ (379) $ -- $(23,286)
Interest income, including related party income....... $ 13 $ 58 $ 19 $ 204 $ 294
Interest expense, including related party expense..... $ (1,716) $ (199) $ (295) $(12,358) $(14,568)
Equity in losses of affiliated companies.............. $ -- $ -- $ -- $ (603) $ (603)
Net loss.............................................. $(41,966) $(4,056) $ (724) $ (6,466) $(53,212)
Cash and cash equivalents............................. $ 457 $ 2,339 $ 125 $ 8 $ 2,929
Property, plant and equipment, net.................... $109,234 $40,596 $ 8,915 $ -- $158,745
Total assets.......................................... $167,668 $49,798 $11,379 $ 5,921 $234,766
For the Three Months Ended
September 30, 1997
---------------------------------------------------------------
New
Australia Zealand Tahiti Corporate Total
--------- ------- -------- --------- ---------
Service and other revenue............................. $ 17,120 $ 133 $1,088 $ -- $ 18,341
System operating expense, including management fees
of $662, $71, $120, $0 and $853, respectively....... $(12,620) $ (802) $ (566) $ -- $(13,988)
Selling, general and administrative expense........... $(12,794) $ (934) $ (492) $ (309) $(14,529)
Adjusted EBITDA (1)................................... $ (7,632) $(1,532) $ 150 N/A N/A
Depreciation and amortization......................... $(21,044) $ (539) $ (478) $ -- $(22,061)
Interest income, including related party income....... $ (6) $ 173 $ 11 $ 69 $ 247
Interest expense, including related party expense..... $ (950) $ (20) $ (23) $(10,221) $(11,214)
Equity in losses of affiliated companies.............. $ -- $ -- $ -- $ (557) $ (557)
Net loss.............................................. $(30,693) $(1,574) $ (465) $(11,020) $(43,752)
12
UIH AUSTRALIA/PACIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Nine Months Ended
September 30, 1998
---------------------------------------------------------------
New
Australia Zealand Tahiti Corporate Total
--------- ------- -------- --------- ---------
Service and other revenue............................. $ 59,301 $ 810 $ 3,412 $ (154) $ 63,369
System operating expense, including management fees
of $2,752, $512, $171, $0 and $3,435, respectively.. $ (49,088) $(5,266) $(1,750) $ 154 $ (55,950)
Selling, general and administrative expense........... $ (32,507) $(3,801) $(1,710) $ (4,454) $ (42,472)
Adjusted EBITDA (1)................................... $ (19,542) $(7,745) $ 123 N/A N/A
Depreciation and amortization......................... $ (71,913) $(2,164) $(1,100) $ -- $ (75,177)
Interest income, including related party income....... $ 34 $ 183 $ 52 $ 585 $ 854
Interest expense, including related party expense..... $ (5,281) $ (316) $ (888) $(35,804) $ (42,289)
Equity in losses of affiliated companies.............. $ -- $ -- $ -- $ (133) $ (133)
Net loss.............................................. $(107,431) $(8,063) $(1,997) $(33,664) $(151,155)
For the Nine Months Ended
September 30, 1997
---------------------------------------------------------------
New
Australia Zealand Tahiti Corporate Total
--------- ------- -------- --------- ---------
Service and other revenue............................. $ 45,775 $ 314 $ 2,963 $ -- $ 49,052
System operating expense, including management fees
of $1,682, $281, $211, $0 and $2,174, respectively.. $(31,945) $(2,461) $(1,451) $ -- $ (35,857)
Selling, general and administrative expense........... $(33,192) $(2,330) $(1,503) $ (885) $ (37,910)
Adjusted EBITDA (1)................................... $(17,680) $(4,196) $ 220 N/A N/A
Depreciation and amortization......................... $(55,092) $(1,436) $(1,269) $ -- $ (57,797)
Interest income, including related party income....... $ 24 $ 196 $ 28 $ 278 $ 526
Interest expense, including related party expense..... $ (1,692) $ (21) $ (684) $(27,279) $ (29,676)
Equity in losses of affiliated companies.............. $ -- $ -- $ -- $ (2,000) $ (2,000)
Net loss.............................................. $(76,204) $(5,753) $(1,927) $(30,536) $(114,420)
(1) Adjusted EBITDA represents net loss, as determined using United States
generally accepted accounting principles, plus net interest expense, income
tax expense, depreciation, amortization, minority interest, management fee
expense, currency exchange gains (losses) and other non-operating income
(expense) items. Industry analysts generally consider adjusted EBITDA to be
an appropriate measure of the performance of multi-channel television
operations. Adjusted EBITDA should not be considered as an alternative to
net income or to cash flows or to any other generally accepted accounting
principle measure of performance or liquidity as an indicator of an
entity's operating performance.
11. SUBSEQUENT EVENTS
NOTES
On October 14, 1998, the Company consummated an Equity Sale, reducing the
interest rate on the May 1996 Notes and the September 1997 Notes (collectively,
the "Notes") from 14.75% to 14.0% per annum.
SATURN BANK FACILITY
In November 1998, Saturn secured a syndicated senior debt facility in the amount
of New Zealand $("NZ$")125,000 ($62,500 as of September 30, 1998) (the "Saturn
Bank Facility") to fund the completion of Saturn's network. Of this amount,
NZ$83,335 has been subscribed for by financial institutions. Until Saturn
13
UIH AUSTRALIA/PACIFIC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
obtains irrevocable commitments in the form of equity funding or additional
underwriting commitments for the balance of NZ$41,665, the maximum that may be
drawn down is NZ$73,000 ($36,500 as of September 30, 1998). If Saturn is
successful in obtaining the necessary commitments from other financing sources,
Saturn may borrow an additional NZ$10,335 from the initial syndicate of banks.
If Saturn is not successful in obtaining the necessary commitments, the
outstanding balance will be due May 31, 1999. As of November 16, 1998, Saturn
had drawn NZ$40,000 on the loan facility at a rate of approximately 8.12% per
annum. The ten-year debt facility has an interest rate of 3% over the current
base rate upon drawdown.
14
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the Company's financial condition and
results of operations should be read in conjunction with the Company's condensed
consolidated financial statements and related notes thereto included elsewhere
herein. Such condensed consolidated financial statements provide additional
information regarding the Company's financial activities and condition.
The Company conducts no operations other than through its operating companies in
which it holds varying interests. Because the operating companies have not yet
achieved the expected subscriber penetration levels anticipated with mature
operating systems, the Company believes that its historical results of
operations discussed herein are not indicative of future results of its
operations.
The Company has no employees of its own. UAP, the Company's parent, provides
various management, financial reporting, accounting and other services for the
Company pursuant to the terms of the UAP Management Agreement. Austar, Saturn,
Telefenua and United Wireless are also parties to technical service agreements
with UAP for which such operating companies pay to UAP fees based on their
respective gross revenues.
Certain statements in this Report may constitute "forward-looking statements"
within the meaning of the federal securities laws. Such forward-looking
statements may include, among other things, statements concerning the Company's
plans, objectives and future economic prospects, expectations, beliefs, future
plans and strategies, anticipated events or trends and similar expressions
concerning matters that are not historical facts. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance or achievements of the Company,
or industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among other things, changes in television
viewing preferences and habits by subscribers and potential subscribers, their
acceptance of new technology, programming alternatives and new services offered
by the Company, the Company's ability to secure adequate capital to fund system
growth and development, risks inherent in investment and operations in foreign
countries, changes in government regulation, and other factors referenced in
this Report.
SUMMARY OPERATING DATA
The following tables set forth certain unaudited operating data:
As of
September 30, 1998
------------------------------------------------------------------------
Television Economic
Homes in Homes Basic Basic Ownership
Service Area Serviceable Subscribers Penetration Interest
------------ ----------- ----------- ----------- ---------
MULTI-CHANNEL TELEVISION:
Austar................................................... 2,085,000 2,072,706 251,255 12.1% 100% (1)
Saturn................................................... 141,000 42,712 4,651 10.9% 65%
Telefenua................................................ 31,000 20,128 6,125 30.4% 90% (2)
--------- --------- -------
Total................................................. 2,257,000 2,135,546 262,031
========= ========= =======
TELEPHONY:
Saturn (3)............................................... 141,000 26,974 4,190 15.5% 65%
========= ========= =======
PROGRAMMING:
XYZ Entertainment........................................ N/A (4) N/A 647,255 (5) N/A 25%
========= ========= =======
15
As of
September 30, 1997
------------------------------------------------------------------------
Television Economic
Homes in Homes Basic Basic Ownership
Service Area Serviceable Subscribers Penetration Interest
------------ ----------- ----------- ----------- ---------
MULTI-CHANNEL TELEVISION:
Austar................................................... 1,622,000 1,589,000 178,832 11.3% 100% (1)
Saturn................................................... 141,000 20,124 2,829 14.1% 65%
Telefenua................................................ 31,000 20,128 6,257 31.1% 90% (2)
--------- --------- -------
Total................................................. 1,794,000 1,629,252 187,918
========= ========= =======
PROGRAMMING:
XYZ Entertainment........................................ N/A (4) N/A 524,000 (5) N/A 25%
========= ========= =======
(1) The Company holds an effective 100% interest in Austar through a
combination of ordinary shares and convertible debentures.
(2) The Company holds an effective 90% economic interest in Telefenua. The
Company's economic interest will decrease to 75% and 64% once it has
received a 20% and 40% internal rate of return on its investment in Tahiti,
respectively.
(3) In April 1998, Saturn launched business and residential telephony services
in the Wellington, New Zealand area.
(4) The Company expects that XYZ Entertainment's programming package will be
marketed to virtually all of Australia's 6.5 million television households
by Australian multi-channel television providers.
(5) This figure represents the total estimated subscribers to the five-channel
XYZ Entertainment package.
SELECTED SYSTEM OPERATING DATA. The following table displays selected system
operating data in each company's local currency (A$, NZ$ or French Pacific franc
("CFP").
For the Three Months Ended For the Three Months Ended
September 30, 1998 September 30, 1997
--------------------------------------- -----------------------------------------
Austar Saturn Telefenua Austar Saturn Telefenua
A$ NZ$ CFP A$ NZ$ CFP
-------- --------- --------- --------- -------- ----------
(In thousands) (In thousands)
Service and other revenue...... 34,620 780 123,662 23,093 206 120,034
System operating expense (1)... (33,395) (4,750) (65,279) (15,465) (1,239) (62,278)
System selling, general and
administrative expense....... (19,149) (3,276) (65,351) (16,674) (1,446) (54,771)
Adjusted EBITDA (2)............ (16,355) (6,826) (735) (8,009) (2,368) 15,951
Capital expenditures........... 20,219 13,936 5,105 28,620 1,924 16,091
For the Nine Months Ended For the Nine Months Ended
September 30, 1998 September 30, 1997
--------------------------------------- -----------------------------------------
Austar Saturn Telefenua Austar Saturn Telefenua
A$ NZ$ CFP A$ NZ$ CFP
-------- --------- --------- --------- -------- ----------
(In thousands) (In thousands)
Service and other revenue...... 93,890 1,507 373,129 59,972 466 314,552
System operating expense (3)... (73,423) (9,742) (191,425) (39,363) (3,631) (154,034)
System selling, general and
administrative expense....... (50,633) (7,022) (186,905) (42,014) (3,460) (159,606)
Adjusted EBITDA (2)............ (25,795) (14,309) 13,530 (19,179) (6,211) 23,353
Capital expenditures........... 47,669 39,051 23,270 70,386 12,488 42,047
(1) Includes management fees of A$1,569, NZ$420, CFP6,233, A$1,037, NZ$111 and
CFP12,966, respectively.
(2) Adjusted EBITDA represents net loss, as determined using United States
generally accepted accounting principles, plus net interest expense, income
tax expense, depreciation, amortization, minority interest, management fee
expense, currency exchange gains (losses) and other non-operating income
(expense) items. Industry analysts generally consider adjusted EBITDA to be
an appropriate measure of the performance of multi-channel television
operations. Adjusted EBITDA should not be considered as an alternative to
net income or to cash flows or to any other generally accepted accounting
principle measure of performance or liquidity as an indicator of an
entity's operating performance.
(3) Includes management fees of A$4,371, NZ$948, CFP18,731, A$2,226, NZ$414 and
CFP22,441, respectively.
16
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1998, the Company had invested a total of approximately
$458.7 million in its projects. These fundings do not include amounts
contributed by shareholders other than the Company or amounts contributed in
either cash or stock to increase the Company's economic interests.
SOURCES OF FUNDINGS:
As of
September 30,
1998
--------------
(In thousands)
Senior discount notes proceeds, net of offering costs........ $250,430
Equity from parent........................................... 115,442
System financing (1)......................................... 92,794
--------
$458,666
========
(1) These amounts were converted using the exchange rate on each funding
date.
USES OF FUNDINGS:
As of
September 30,
1998
--------------
(In thousands)
Austar...................................................... $378,986
Saturn...................................................... 38,605
Telefenua................................................... 16,738
XYZ Entertainment........................................... 14,756
United Wireless............................................. 9,581
--------
Total................................................... $458,666
========
AUSTAR
The Company expects the need for additional funding for Austar in the
future. The amount of capital needed is dependent primarily upon three
factors: (i) the number of new subscribers added; (ii) the level of churn,
that is, the level of existing subscribers who disconnect from Austar's
service; and (iii) the mix of DTH satellite compared to MMDS installations.
Substantially all fixed costs required to operate Austar's service have
already been incurred. The average cost to install a subscriber includes
variables such as equipment, marketing and sales costs, and installation
fees. The average cost of a subscriber who disconnects is reduced by the
recovery of certain equipment (principally converters), and is further
reduced if a new subscriber is installed in a previously disconnected home.
Austar plans to continue to expand and add subscribers; however, the timing
of such expansion and the funds required for such expansion are largely
variable. Based upon current plans and budgeted churn, Austar will require
approximately $45.0 million to continue on its current expansion path for
the period from October 1, 1998 to December 31, 1998 which will be funded
substantially by the Austar Bank Facility, as amended. Austar will also
require approximately $110.0 million for similar expansion plans for 1999,
an increase over previously-disclosed estimates, primarily due to the
acquisition of approximately 500,000 homes related to the Company's
acquisition of certain assets of ECT and due to an increase in satellite
programming costs resulting from the recent agreements with Foxtel
Management Pty Limited ("Foxtel") and Optus Vision Pty Limited ("Optus").
The required capital for 1999 will be funded substantially by the New
Austar Bank Facility (assuming that the Austar Bank Facility will be
refinanced by the New Austar Bank Facility by early 1999). The remaining
sources of funds for such expansion may include the raising of private or
public equity, continued investment by UIH or the sale of non-strategic
assets. The Company may or may not be successful in completing all or any
of such financings. The Company believes, however, that financial support
from UIH, other potential equity sources, the Austar Bank Facility and the
New Austar Bank Facility commitment combined with, if necessary, reductions
in planned capital expenditures, are sufficient to sustain its operations
through at least the end of 1999.
17
SATURN
The Company expects the need for additional funding for Saturn in the
future. Saturn's capital needs include approximately $37.0 million in
capital for the completion of the network required by Saturn to offer cable
television and telephony services and the capital required to install
customers. The sources of funds for such expansion may include the Saturn
Bank Facility, the raising of private or public equity, continued
investment by UIH, the raising of equipment financing or the sale of
non-strategic assets. The Saturn Bank Facility, secured in November 1998,
is a syndicated senior debt facility of NZ$125.0 million ($62.5 million) of
which NZ$73.0 million ($36.5 million) is available through May 1999. The
maximum facility is subject to Saturn obtaining irrevocable commitments
from other financing sources (see Note 11). Management currently estimates
that the Company's portion of the total funding required for Saturn is
approximately $14.0 million (taking into consideration the Saturn Bank
Facility) for the period from October 1, 1998 until Saturn has sufficient
cash flows from operations to cover such needs, although there can be no
assurances that further additional capital will not be required. The
Company believes, however, that financial support from UIH combined with,
if necessary, reductions in planned capital expenditures, are sufficient to
sustain its operations through at least the end of 1999.
OTHER
The Company expects that the aggregate future funding requirements for
Telefenua, XYZ Entertainment and United Wireless are less than $5.0
million.
The indentures governing UIH's senior secured discount notes due February 2008
and the Company's Notes place restrictions on the Company and its restricted
subsidiaries with respect to incurring additional debt. The Company and all of
the operating companies are currently restricted under the UIH indentures. The
Company, Austar and Telefenua are restricted under the Company's indentures. The
restrictions imposed by the UIH indentures will be eliminated upon the
retirement of UIH's notes at their maturity in February 2008, and the
restrictions imposed by the Company's indentures will be eliminated upon the
retirement of the Company's Notes at their maturity in May 2006. In addition,
pursuant to the Austar Bank Facility, Austar cannot pay any dividends, interest
on debentures and subordinated debt, or fees under its technical assistance
agreements prior to December 31, 2000. Subsequent to December 31, 2000, Austar
will be permitted to make these types of payments, subject to certain debt to
cash flow ratios.
On November 17, 1997, pursuant to the terms of the indentures governing the
Notes, the Company issued warrants to purchase a total of 488,000 shares of its
common stock, which represented 3.4% of its common stock. The warrants are
exercisable at a price of $10.45 per share which would result in gross proceeds
of approximately $5.1 million, if exercised. The warrants are exercisable
through May 15, 2006.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
The Company incurred a net loss during the nine months ended September 30, 1998
of $151.2 million, which included non-cash items such as depreciation and
amortization expense totaling $75.2 million and accretion of interest on the
Notes and amortization of deferred financing costs totaling $36.3 million.
Cash and cash equivalents decreased $9.4 million from $12.3 million as of
December 31, 1997 to $2.9 million as of September 30, 1998. Principal sources of
cash during the nine months ended September 30, 1998 included cash contributions
from parent of $53.5 million, borrowings on other debt of $15.1 million,
proceeds from the sale of short-term investments of $12.3 million, cash
contributions from the minority interest partner in Saturn of $5.5 million and
other sources totaling $0.7 million.
During the nine months ended September 30, 1998, cash was used principally for
purchases of property, plant and equipment totaling $59.1 million to continue
new subscriber connections at Austar and the build-out of existing projects,
primarily Saturn, the funding of operating activities of $35.2 million and other
investing and financing uses of $2.2 million.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
The Company incurred a net loss during the nine months ended September 30, 1997
of $114.4 million, which included non-cash items such as depreciation and
amortization expense totaling $57.8 million and accretion of interest on the
Notes and amortization of deferred financing costs totaling $27.0 million.
18
Cash and cash equivalents increased $26.5 million from $19.2 million as of
December 31, 1996 to $45.7 million as of September 30, 1997. Principal sources
of cash during the nine months ended September 30, 1997 included borrowings from
Austar's interim financing facility of $66.0 million, proceeds from the offering
of the September 1997 Notes of $29.9 million, cash contributions from the
minority interest partner of $19.6 million, net proceeds from the net decrease
in short-term investments of $18.6 million and borrowings from parent of $5.0
million.
During the nine months ended September 30, 1997, cash was used principally for
the purchase of property, plant and equipment of $67.9 million to construct
Austar's and Telefenua's systems, a decrease in construction payables of $29.4
million, the funding of operating activities of $6.7 million, the payment of
deferred financing costs of $4.6 million and other investing and financing uses
totaling $4.0 million.
RESULTS OF OPERATIONS
EXCHANGE RATES. The Company translates revenue and expense from its foreign
subsidiaries using the weighted-average exchange rates during the period.
However, for ease of presentation, the spot rates for the countries in the
Australia/Pacific region are shown below for the Australian dollar, the New
Zealand dollar and the French Pacific franc, respectively, per one U.S. dollar.
Australia New Zealand Tahiti
--------- ----------- ------
September 30, 1998....................................... 1.6855 2.0000 99.6872
December 31, 1997........................................ 1.5378 1.7161 109.6900
September 30, 1997....................................... 1.3778 1.5584 108.0000
December 31, 1996........................................ 1.2574 1.4156 95.8500
SERVICE AND OTHER REVENUE. The Company's service and other revenue increased
$3.9 million and $14.3 million for the three and nine months ended September 30,
1998, respectively, compared to the amounts for the corresponding periods in the
prior year as follows:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- -------
(In thousands)
Austar................................................ $20,588 $16,986 $58,934 $45,510
Saturn................................................ 395 133 810 314
Telefenua............................................. 1,153 1,088 3,412 2,963
United Wireless....................................... 55 134 213 265
------- ------- ------- -------
Total service and other revenue.................. $22,191 $18,341 $63,369 $49,052
======= ======= ======= =======
AUSTAR
Service and other revenue for Austar increased $3.6 million, or 21.2%, from
$17.0 million for the three months ended September 30, 1997 to $20.6
million for the three months ended September 30, 1998. Service and other
revenue for Austar increased $13.4 million, or 29.5%, from $45.5 million
for the nine months ended September 30, 1997 to $58.9 million for the nine
months ended September 30, 1998. On a functional currency basis, Austar's
service and other revenue increased A$11.5 million, from A$23.1 million for
the three months ended September 30, 1997 to A$34.6 million for the three
months ended September 30, 1998, a 49.8% increase. Austar's service and
other revenue increased A$33.9 million, from A$60.0 million for the nine
months ended September 30, 1997 to A$93.9 million for the nine months ended
September 30, 1998, a 56.5% increase. These increases were primarily due to
subscriber growth (251,255 at September 30, 1998 compared to 178,832 at
September 30, 1997) as Austar continues to roll-out its services. The U.S.
dollar increases occurred despite the negative impact of $4.9 million due
to fluctuation in exchange rates between the three months ended September
30, 1998 and 1997 and the negative impact of $12.3 million due to
fluctuation in exchange rates between the nine months ended September 30,
1998 and 1997.
19
SYSTEM OPERATING EXPENSE. System operating expense increased $9.3 million and
$20.1 million for the three and nine months ended September 30, 1998,
respectively, compared to the amounts for the corresponding periods in the prior
year as follows:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- -------
(In thousands)
Austar................................................ $19,860 $11,375 $ 45,501 $29,841
Saturn................................................ 2,410 802 5,266 2,461
Austar Satellite...................................... 148 831 2,431 831
Telefenua............................................. 608 566 1,750 1,451
United Wireless....................................... 317 414 1,002 1,273
------- ------- ------- -------
Total system operating expense.................... $23,343 $13,988 $55,950 $35,857
======= ======= ======= =======
AUSTAR
Operating expense for Austar increased $8.5 million, or 74.6%, from $11.4
million for the three months ended September 30, 1997 to $19.9 million for
the three months ended September 30, 1998. Operating expense for Austar
increased $15.7 million, or 52.7%, from $29.8 million for the nine months
ended September 30, 1997 to $45.5 million for the nine months ended
September 30, 1998. On a functional currency basis, Austar's operating
expense increased A$17.9 million, from A$15.5 million for the three months
ended September 30, 1997 to A$33.4 million for the three months ended
September 30, 1998, a 115.5% increase. Austar's operating expense increased
A$34.0 million, from A$39.4 million for the nine months ended September 30,
1997 to A$73.4 million for the nine months ended September 30, 1998, an
86.3% increase. These increases were primarily due to an increase in
satellite programming costs resulting from the May 1998 agreements with
Foxtel and Optus to obtain additional programming rights in connection with
the receivership of Australis Media Limited ("Australis") as well as
additional satellite platform costs associated with the May 1998 joint
venture with Optus. The Company expects that the restructuring of
programming costs for certain channels will result in somewhat higher costs
for these channels which will be offset by lower costs in the long-term
when compared to Austar's previous agreements with Australis. The remainder
of the increase between periods was due to an increase in salaries and
benefits related to the additional personnel necessary to support Austar's
establishment of local and state offices in its markets and an increase in
customer subscriber management expense related to volume increases in
telephone, billing and collection costs. The U.S. dollar increases were
positively impacted by $4.7 million due to fluctuation in exchange rates
between the three months ended September 30, 1998 and 1997 and positively
impacted by $10.2 million due to fluctuation in exchange rates between the
nine months ended September 30, 1998 and 1997.
During the nine months ended September 30, 1998, Austar incurred one-time
charges of $1.4 million as a result of the receivership of Australis and
the subsequent termination of various agreements and incurred additional
programming expense of $2.0 million related to its new programming
agreements and $0.7 million related to the operation of the joint venture
with Optus.
Austar expects operating expense as a percentage of service revenue to
decline in future periods because a significant portion of Austar's
distribution facilities and network costs, such as local and state office
staffing levels, operating costs and wireless license costs, have already
been incurred and are fixed in relation to changes in subscriber volumes.
Other system operating expense, such as certain costs related to
programming and subscriber management expense, will vary in direct
proportion to the number of subscribers.
SATURN
For the three months ended September 30, 1998, the Company reported system
operating expense from Saturn of $2.4 million, an increase of $1.6 million,
or 200.0%, compared with system operating expense of $0.8 million for the
corresponding period in 1997. For the nine months ended September 30, 1998,
the Company reported system operating expense from Saturn of $5.3 million,
an increase of $2.8 million, or 112.0%, compared with system operating
expense of $2.5 million for the corresponding period in 1997. On a
20
functional currency basis, Saturn's operating expense increased NZ$3.6
million, from NZ$1.2 million for the three months ended September 30, 1997
to NZ$4.8 million for the three months ended September 30, 1998, a 300.0%
increase. Saturn's operating expense increased NZ$6.1 million, from NZ$3.6
million for the nine months ended September 30, 1997 to NZ$9.7 million for
the nine months ended September 30, 1998, a 169.4% increase. These
increases were primarily due to an increase in programming costs related to
the launch of additional sports programs during 1998 and an increase in
personnel expenses in order to support Saturn's build-out of its hybrid
fiber coaxial network in the Wellington area. The U.S. dollar increases
were positively impacted by $0.7 million due to fluctuation in exchange
rates between the three months ended September 30, 1998 and 1997 and
positively impacted by $1.4 million due to fluctuation in exchange rates
between the nine months ended September 30, 1998 and 1997.
AUSTAR SATELLITE
In September 1997, the Company commenced transponder fee payments for a
satellite service fee of approximately $0.4 million per month as part of
its five-year agreement with Optus Networks Pty Limited. In May 1998,
Austar Satellite began billing the joint venture between Austar and Optus
for the transponder rental. The Company eliminates all related party
accounts in consolidation.
SYSTEM SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. System selling, general and
administrative expense decreased $0.3 million and increased $1.0 million for the
three and nine months ended September 30, 1998, respectively, compared to the
amounts for the corresponding periods in the prior year as follows:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- -------
(In thousands)
Austar................................................ $11,379 $12,301 $31,692 $31,910
Saturn................................................ 1,660 934 3,801 2,330
Telefenua............................................. 609 492 1,710 1,503
United Wireless....................................... 306 493 815 1,282
------- ------- ------- -------
Total system selling, general and
administrative expense......................... $13,954 $14,220 $38,018 $37,025
======= ======= ======= =======
SATURN
System selling, general and administrative expense increased $.8 million,
or 88.9%, from $0.9 million for the three months ended September 30, 1997
to $1.7 million for the three months ended September 30, 1998. System
selling, general and administrative expense increased $1.5 million, or
65.2%, from $2.3 million for the nine months ended September 30, 1997 to
$3.8 million for the nine months ended September 30, 1998. On a functional
currency basis, Saturn's selling, general and administrative expense
increased NZ$1.9 million, from NZ$1.4 million for the three months ended
September 30, 1997 to NZ$3.3 million for the three months ended September
30, 1998, a 135.7% increase. Saturn's selling, general and administrative
expense increased NZ$3.5 million, from NZ$3.5 million for the nine months
ended September 30, 1997 to NZ$7.0 million for the nine months ended
September 30, 1998, a 100.0% increase. These increases were primarily due
to increases in marketing and promotion costs as well as additional
personnel costs related to the April 1998 launch of Saturn's telephony
services. The U.S dollar increases were positively impacted by $0.5 million
due to fluctuation in exchange rates between the three months ended
September 30, 1998 and 1997 and positively impacted by $1.0 million due to
fluctuation in exchange rates between the nine months ended September 30,
1998 and 1997.
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSE. Corporate general and
administrative expense decreased $0.4 million and increased $3.6 million for the
three and nine months ended September 30, 1998, respectively, compared to the
amounts for the corresponding periods in the prior year. The decrease for the
three-month period was primarily a result of adjusting for previously-allocated
costs. The increase for the nine-month period was primarily due to the
allocation of UIH corporate general and administrative expense to the Company in
the form of capital contributions, based on increased activity at the operating
system level. Management believes that this method of allocating costs is
reasonable.
21
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense
increased $1.2 million and $17.4 million for the three and nine months ended
September 30, 1998, respectively, compared to the amounts for the corresponding
periods in the prior year as follows:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1998 1997 1998 1997
-------- -------- -------- -------
(In thousands)
Austar................................................ $21,774 $20,870 $70,009 $54,579
Saturn................................................ 907 540 2,165 1,436
Austar Satellite...................................... 74 -- 1,439 --
Telefenua............................................. 380 478 1,100 1,269
United Wireless....................................... 151 173 464 513
------- ------- ------- -------
Total depreciation and amortization
expense........................................ $23,286 $22,061 $75,177 $57,797
======= ======= ======= =======
AUSTAR
Depreciation and amortization expense for Austar increased $0.9 million, or
4.3%, from $20.9 million for the three months ended September 30, 1997 to
$21.8 million for the three months ended September 30, 1998. Depreciation
and amortization expense from Austar increased $15.4 million, or 28.2%,
from $54.6 million for the nine months ended September 30, 1997 to $70.0
million for the nine months ended September 30, 1998. On a functional
currency basis, Austar's depreciation and amortization expense increased
A$8.0 million, from A$27.1 million for the three months ended September 30,
1997 to A$35.1 million for the three months ended September 30, 1998, a
29.5% increase. Austar's depreciation and amortization expense increased
A$38.0 million, from A$68.4 million for the nine months ended September 30,
1997 to A$106.4 million for the nine months ended September 30, 1998, a
55.6% increase. These increases were primarily due to the larger fixed
asset base due to the significant deployment of operating assets to meet
subscriber growth as well as an increase in depreciation expense related to
subscriber disconnects. The U.S. dollar increases were positively impacted
by $5.0 million due to fluctuation in exchange rates between the three
months ended September 30, 1998 and 1997 and positively impacted by $13.3
million due to fluctuation in exchange rates between the nine months ended
September 30, 1998 and 1997.
INTEREST EXPENSE. Interest expense increased $3.4 million and $12.6 million for
the three and nine months ended September 30, 1998, respectively, compared to
the amounts for the corresponding periods in the prior year. These increases
were primarily due to continued accretion on the Notes at 14.75% during 1998
compared to 14% for the majority of the prior year interim period. In addition,
interest expense related to the Austar Bank Facility, which was secured in July
1997, was $1.7 million and $5.3 million for the three and nine months ended
September 30, 1998, respectively, compared to $1.0 million and $1.7 million for
the three and nine months ended September 30, 1997, respectively.
FOREIGN CURRENCY EXCHANGE RATE RISKS
The Company's foreign 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 Company's foreign operating companies have notes payable and
notes receivable that are denominated in and loans payable that are linked to 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, which include foreign currency devaluations against
the dollar.
22
Assets and liabilities of foreign subsidiaries are translated at the 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 result in
unrealized gains or losses referred to as translation adjustments. Cumulative
translation adjustments are recorded as a separate component of stockholder's
deficit. During the nine months ended September 30, 1998, the Company recorded a
change in cumulative translation adjustments of $6.6 million, primarily due to
the fluctuation in the Australian dollar compared to the U.S. dollar exchange
rates from 1.5378 as of December 31, 1997 to 1.6855 as of September 30, 1998, a
change of 9.6%.
Transactions denominated in currencies other than the local currency are
recorded based on exchange rates at the time such transactions arise. Subsequent
changes in exchange rates result in transaction gains and losses which are
reflected in income as unrealized (based on period-end translations) or realized
upon settlement of the transactions.
Cash flows from the Company's operations in foreign countries are translated
based on their reporting currencies. As a result, amounts related to assets and
liabilities reported on the consolidated statements of cash flows will not agree
to changes in the corresponding balances on the consolidated balance sheets. The
effects of exchange rate changes on cash balances held in foreign currencies are
reported as a separate line below cash flows from financing activities.
YEAR 2000 CONVERSION
The Company's multi-channel 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 may not be
capable of accurately recognizing dates beginning on January 1, 2000. This
problem could cause miscalculations, resulting in the Company's multi-channel
television and telephony systems or programming services malfunctioning or
failing to operate.
YEAR 2000 PROGRAM. In response to possible Year 2000 problems, the Board of
Directors of UIH established a Task Force to assess the impact that potential
Year 2000 problems may have on company-wide operations, including the Company
and its operating companies, and to implement necessary changes to address such
problems. The Task Force reports directly to the UIH Board. In creating a
program to minimize Year 2000 problems, the Task Force identified certain
critical operations of the business of the Company. These critical operations
are 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 has 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.
As of November 5, 1998, 66.0% of the operating systems of the Company have
completed the Identification Phase and the Task Force is working on the
Implementation Phase for these systems. The Task Force has researched almost
63.5% of the items identified by the Company during the Identification Phase as
to Year 2000 compliance. Of the items researched, 60.8% are either compliant or
can be easily remediated without significant cost to the Company. Currently, the
Task Force expects to complete its research on substantially all of the items
identified during first quarter 1999. Based on current data to date, the
computer systems for all corporate operations are expected to be in compliance
with Year 2000 by mid-1999 and should not require material remediation or
replacement.
The Task Force has targeted mid-1999 for commencement of the Testing Phase. At
this time, the Company anticipates that all material aspects of the program will
be completed before January 1, 2000. Currently, UIH is managing the program with
its internal Task Force. During the Implementation Phase, the Task Force will
also be evaluating the need for external resources to complete the
Implementation Phase and implement the Testing Phase. In the event the Task
Force elects to use external resources, such resources may not, however, be
available.
23
In addition to its program, UIH is a member of a Year 2000 working group, which
has 12 cable television companies and meets under the auspices of Cable Labs.
The dialogue with the other cable operators has assisted UIH in developing its
Year 2000 program. Part of the agenda of the working group is to develop test
procedures and contingency plans for critical components of operating systems
for the benefit of all of its members.
THIRD PARTY DEPENDENCIES. The Company believes its largest Year 2000 risk is its
dependency upon third-party products. Two significant areas on which the
Company's systems depend upon third-party products are programming and telephony
interconnects. The Company does not have the ability to control such parties in
their assessment and remediation procedures for potential Year 2000 problems.
Should these parties not be prepared for Year 2000, their systems may fail and
the Company would not be able to provide its services to its customers. The
Company is in the process of communicating with these parties on the status of
their Year 2000 compliance programs in an effort to prevent any possible
interruptions or failures. To date, responses to such communications have been
limited and the responses received state only that the party is working on Year
2000 issues and does not have a definitive position at this time. As a result,
the Company is unable to assess the risk posed by its dependence upon such third
parties' systems. The Task Force is considering certain limited contingency
plans, including preparing back-up programming and stand-by power generators.
Such contingency plans may not, however, resolve the problem in a satisfactory
manner. With respect to other third-party systems, each operating system is
responsible for inquiring of their vendors and other entities with which they do
business (e.g., utility companies, financial institutions and facility owners)
as to such entities' Year 2000 compliance programs.
The Task Force is working closely with the manufacturers of the Company's
headend devices to remedy any Year 2000 problems assessed in the headend
equipment. Recent information from the two primary manufacturers of such
equipment indicate that most of the equipment used in the Company's operating
systems are not date sensitive. Where such equipment needs to be upgraded for
Year 2000 issues, such vendors are upgrading without charge. These upgrades are
expected to be completed before year-end 1999, but such process is not wholly
within the control of the Company or its systems. With respect to billing and
customer care systems, the Company uses standard billing and customer care
programs from several vendors. The Task Force is working with such vendors to
achieve Year 2000 compliance for all systems. On an overall basis, the Task
Force continues to analyze the Year 2000 program and will revise the program as
necessary throughout 1998 and 1999, including procedures it undertakes with
respect to third parties to ensure their Year 2000 compliance.
COSTS OF COMPLIANCE. The Task Force has not yet determined the full cost of its
Year 2000 program and its related impact on the financial condition of the
Company. In the course of its business, the Company has made substantial capital
adjustments over the past few years in improving its systems, primarily for
reasons other than Year 2000. Because these upgrades also resulted in Year 2000
compliance, replacement and remediation costs have been low. The Task Force has
identified certain replacement and remediation costs for the Company which are
currently estimated at $0.2 million. Although no assurance can be made, the
Company believes that the known Year 2000 compliance issues can be remedied
without a material financial impact. No assurance can be made, however, as to
the total cost for the Year 2000 program until all of the data has been
gathered. In addition, the Company can not predict the financial impact it will
incur if Year 2000 problems are caused by third parties upon which its systems
are dependent or experienced by entities in which it holds investments. The
failure of any one of these parties to implement Year 2000 procedures could have
a material adverse impact on the operations and financial condition of the
Company.
24
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.
25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
UIH AUSTRALIA/PACIFIC, INC.
Date: November 16, 1998
---------------------------------------
By: /S/ Valerie L. Cover
---------------------------------------
Valerie L. Cover
Controller
(A Duly Authorized Officer and Principal Financial Officer)
26