Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Form 10-K 71 447K
2: EX-10 Exhibit 10.17 115 364K
3: EX-12 Exhibit 12.1-Stmt. of Ratio to Fixed Charges 1 7K
4: EX-21 Exhibit 21.1-List of Subsidiaries 2± 8K
5: EX-23 Exhibit 23.1-Consent of Accountant 1 6K
6: EX-24 Exhibit 24.1-Power of Attorney 1 7K
7: EX-27 Exhibit 27.1-Financial Data Schedule 1 9K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
The Company has no publicly-trading shares of capital stock. As of March 29,
1999, the Company had 17,810,249 shares of common stock outstanding.
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UIH AUSTRALIA/PACIFIC, INC.
1998 ANNUAL REPORT ON FORM 10-K
Table of Contents
Page
Number
------
PART I
Item 1. Business.................................................................................... 2
Item 2. Properties.................................................................................. 18
Item 3. Legal Proceedings........................................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders......................................... 19
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................... 20
Item 6. Selected Financial Data..................................................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................. 32
Item 8. Financial Statements and Supplementary Data................................................. 35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........ 35
PART III
Item 10. Directors and Executive Officers of the Registrant.......................................... 56
Item 11. Executive Compensation...................................................................... 58
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 62
Item 13. Certain Relationships and Related Transactions.............................................. 62
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................. 63
PART I
ITEM 1. BUSINESS
-----------------
(a) GENERAL DEVELOPMENT OF BUSINESS
------------------------------------
UIH Australia/Pacific, Inc. (the "Company") is a leading provider of
multi-channel television services in Australia, New Zealand and Tahiti. Through
its Australian operating companies CTV Pty Limited and STV Pty Limited
(collectively, "Austar"), the Company is the largest provider of multi-channel
television services in regional Australia, where it operates multi-channel
multi-point distribution systems ("MMDS") and markets a satellite-delivered
direct-to-home ("DTH") service in franchise areas encompassing approximately 2.1
million television homes, or 30.0% of the total Australian market. In addition,
the Company, through its 65.0%-owned New Zealand operating company Saturn
Communications Limited ("Saturn"), is constructing a wireline cable and
telephony system in and around Wellington, New Zealand, a market representing
approximately 141,000 television homes. The Company's other assets include a
25.0% interest in XYZ Entertainment Pty Limited ("XYZ Entertainment"), a
programming company that provides five channels to the Australian multi-channel
television market; up to a 90.0% economic interest in Telefenua S.A.
("Telefenua"), the only provider of multi-channel television services in Tahiti,
with MMDS in a market of 31,000 television homes; and a 100% interest in United
Wireless Pty Limited ("United Wireless"), an Australian company providing
wireless mobile data services primarily in Sydney and Melbourne.
The Company, a Colorado corporation and a wholly-owned subsidiary of UIH
Asia/Pacific Communications, Inc. ("UAP"), which is an indirect 98.0%-owned
subsidiary of United International Holdings, Inc. (together with all of its
subsidiaries other than the Company and the Company's subsidiaries, "UIH"), was
formed on October 14, 1994. Immediately prior to the May 1996 offering of the
Company's 14.0% senior discount notes due 2006 (the "May 1996 Notes"), certain
subsidiaries of UIH that held interests in Australia, New Zealand and Tahiti
were merged with and into the Company. The information in this annual report on
Form 10-K has been prepared as though the Company had performed all foreign
development activities and made all acquisitions of UIH's ownership interests in
multi-channel television, programming and mobile data companies in Australia,
New Zealand and Tahiti since inception. The Company, as presented in this
manner, commenced operations in January 1994 when UIH began its
development-related activities in the Asia/Pacific region. UIH transferred the
net assets of the above mentioned subsidiaries, including capitalized
development costs and investments in affiliated companies, to the Company. The
Company, in turn, reflected these transfers as capital contributions from the
parent company.
HISTORY OF ACQUISITIONS
In 1994, the Company acquired, through directly and indirectly held interests,
an effective 50.0% economic interest in two newly-formed companies that
constitute Austar. In December 1995, the Company acquired from other
shareholders of Austar an additional interest in Austar, thereby increasing its
total economic interest in Austar to 90.0%. In May 1996, as a result of
additional equity contributions, the Company's economic interest in Austar was
increased to 94.0%, which was subsequently increased to 96.0%. In October 1996,
the Company acquired the remaining 4.0% economic interest in Austar. In July
1998, Austar acquired certain Australian pay television assets of East Coast
Television Pty Limited ("ECT"), an affiliate of Century Communications Corp.
("Century"), for $6.2 million 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.
In July 1994, the Company acquired a 50.0% interest in Saturn, which at the time
owned only a small cable television system outside of Wellington. Since the
Company's initial investment, Saturn has begun construction of a hybrid fiber
coaxial ("HFC") cable network planned to pass 141,000 homes in the greater
Wellington area. In July 1996, the Company acquired the remaining 50.0% interest
in Saturn in exchange for a 2.6% interest in the Company, which was exchanged
for a 2.0% interest in UAP in May 1997. In July 1997, SaskTel Holdings (New
Zealand) Inc. ("SaskTel") purchased a 35.0% equity interest in Saturn by
investing approximately New Zealand $("NZ$")29.9 million ($19.6 million) for its
shares (the "Saturn Transaction").
2
In October 1994, the Company and Century formed XYZ Entertainment, each
retaining a 50.0% interest. In June 1995, the Company and Century formed the
50/50 joint venture Century United Programming Ventures Pty Limited ("CUPV") to
hold their investments in XYZ Entertainment. In September 1995, a 50.0% interest
in XYZ Entertainment was sold to a third party, thereby diluting the Company's
indirect interest in XYZ Entertainment to 25.0%. In September 1998, UAP (the
Company's parent) acquired the assets in CUPV held by Century.
In September 1995, the Company purchased a 100% interest in United Wireless. The
Company has since continued the development and funding of United Wireless'
business.
RELATIONSHIP WITH UIH
The Company is an indirect, 98.0%-owned subsidiary of UIH, a global broadband
communications provider of video, voice and data services with operations in
over 20 countries throughout the world. In addition to the Company, UIH's
operations include its interest in United Pan-Europe Communications N.V.
("UPC"), the largest privately-owned multi-channel television operator in
Europe, as well as its other investments in Europe, Asia and Latin America. As
of December 31, 1998, UIH's networks reached 9.4 million homes and served 4.4
million video subscribers, over 138,000 telephony access lines and 20,000
broadband data accounts.
ORGANIZATION OF COMPANY
The following chart summarizes the organizational structure of the Company. The
interests indicated below are summaries of the approximate direct and indirect
economic interests of the Company in its principal businesses. Some of the
Company's interests in such operating companies are held through various
partnerships and holding companies and the Company's voting rights with respect
to certain of such operating companies differ from the economic interest
indicated in the chart. See Item 1(c) "Corporate Organizational Structure."
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UIH Australia/Pacific, Inc.
Operating Ownership
System Principal Business Percentage
-------------- --------------------------------------------------------------------- ----------
Austar Regional Australia, MMDS and DTH multi-channel systems 100.0%
United Wireless Australia, wireless mobile data services 100.0%
Telefenua Tahiti and Moorea, MMDS 90.0%
Saturn Greater Wellington, New Zealand area, wireline cable/telephony system 65.0%
XYZ Entertainment Australian programming 25.0%
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
---------------------------------------------
The Company operates in the multi-channel television and telecommunications
industry through investing in, acquiring and managing multi-channel television,
telephony and programming operations. The Company's reportable segments are the
primary countries in which it operates: Australia, New Zealand and Tahiti. 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. For additional information
applicable to this Item, see Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 13 to the consolidated
financial statements contained in Item 8 "Financial Statements and Supplementary
Data."
(c) NARRATIVE DESCRIPTION OF BUSINESS
---------------------------------
OVERVIEW
The Company is a leading provider of multi-channel television services in
Australia, New Zealand and Tahiti. Through its Australian operating company
Austar, the Company is the largest provider of multi-channel television services
in regional Australia, where it operates MMDS and markets a DTH service in
franchise areas encompassing approximately 2.1 million television homes, or
30.0% of the total Australian market. In addition, the Company, through its
65.0%-owned New Zealand
3
operating company Saturn, is constructing a wireline cable and telephony system
in and around Wellington, New Zealand, a market representing approximately
141,000 television homes. The Company's other assets include a 25.0% interest in
XYZ Entertainment, a programming company that provides five channels to the
Australian multi-channel television market; up to a 90.0% economic interest in
Telefenua, the only provider of multi-channel television services in Tahiti,
with MMDS in a market with 31,000 television homes; and a 100% interest in
United Wireless, an Australian company providing wireless mobile data services
primarily in Sydney and Melbourne.
The Company believes that it is well-positioned to capitalize on the rapidly
increasing demand for multi-channel television and telephony services in
Australia and New Zealand. As of December 31, 1998, excluding project-level
financing, the Company had invested $380.8 million in its networks and operating
infrastructure and had launched service in each of its markets. As of December
31, 1998, the Company's multi-channel television operating systems had an
aggregate of approximately 2.1 million television homes serviceable and
approximately 301,000 subscribers, compared to approximately 1.6 million
television homes serviceable and approximately 206,000 subscribers as of
December 31, 1997 (with a substantial majority of such growth resulting from
Austar's expansion). During this same period, programming subscribers of XYZ
Entertainment increased from approximately 577,000 at December 31, 1997 to
approximately 700,000 at December 31, 1998. While the Company expects that a
substantial portion of its expected growth will come from the continued
development of Austar, the Company is also anticipating significant growth by
its New Zealand multi-channel television and telephony business and its
programming business, each of which the Company believes has attractive growth
prospects.
4
The following table sets forth certain unaudited operating data:
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As of December 31, 1998
-----------------------------------------------------------------------
Basic Economic
Homes in Homes Subscribers/ Basic Ownership
Service Area Serviceable Lines Penetration Interest
------------ ----------- ------------ ----------- ---------
Multi-channel TV Subscribers:
Austar......................... 2,085,000 2,083,108 288,721 13.9% 100.0%
Saturn......................... 141,000 40,950 6,010 14.7% 65.0%
Telefenua...................... 31,000 20,128 6,125 30.4% 90.0%
--------- --------- -------
Total........................ 2,257,000 2,144,186 300,856
========= ========= =======
Telephony Lines:
Saturn (1)..................... 141,000 35,935 7,360 20.5% 65.0%
========= ========= =======
Programming Subscribers:
XYZ Entertainment.............. N/A(2) N/A 699,867(3) N/A 25.0%
========= ========= =======
As of December 31, 1997
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Basic Economic
Homes in Homes Subscribers/ Basic Ownership
Service Area Serviceable Lines Penetration Interest
------------ ----------- ------------ ----------- ---------
Multi-channel TV Subscribers:
Austar......................... 1,635,000 1,589,000 196,205 12.3% 100.0%
Saturn......................... 141,000 23,518 3,059 13.0% 65.0%
Telefenua...................... 31,000 20,128 6,304 31.3% 90.0%
--------- --------- -------
Total........................ 1,807,000 1,632,646 205,568
========= ========= =======
Programming Subscribers:
XYZ Entertainment.............. N/A(2) N/A 577,205(3) N/A 25.0%
========= ========= =======
(1) In April 1998, Saturn launched business and residential telephony
services in the Wellington, New Zealand area.
(2) 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.
(3) This figure represents the total estimated subscribers to the
five-channel XYZ Entertainment package.
5
AUSTAR (AUSTRALIA)
Austar is the largest provider of multi-channel television services in regional
Australia. Austar's market of 2.1 million homes in Australia represents
households outside Australia's six largest cities. Austar experiences
competition for pay television services in only 3.0% of its market.
In 1998, the pay television industry in Australia underwent significant upheaval
brought about by the bankruptcy of Australis Media Limited ("Australis").
Speculation surrounding Australis' financial condition early in the year
culminated in this company being placed in the hands of receivers in May 1998.
Austar had received the majority of its basic programming channels through
Australis ("the Galaxy package") and had also relied on Australis for the
provision of a satellite signal to its subscribers. Following the collapse of
Australis, new program contracts were negotiated directly with program suppliers
and a joint venture was negotiated with Cable and Wireless Optus Limited
("Optus") for the provision and operation of a satellite platform.
Another significant event was Austar's purchase of ECT in July 1998 consisting
of approximately 9,000 subscribers as well as various transmission equipment and
MMDS licenses. Furthermore, Austar was able to access an additional 0.5 million
households located in ECT's operating area on the east coast of Australia and in
the state of Tasmania. Austar began sales and marketing initiatives in these
regions in August 1998.
OPERATING AND GROWTH STRATEGY. Due to the relatively small size and low housing
densities, which characterize Austar's markets, Austar is primarily utilizing
MMDS and DTH wireless technologies to deliver its service. In its metropolitan
markets, Austar offers both an MMDS service and a DTH service (where the MMDS
signal cannot be received). Austar constructs and owns the MMDS transmission
facilities and installs and retains ownership of all the in-home subscriber
equipment. In its non-metropolitan markets, Austar is marketing only the DTH
service and installs and retains ownership of the in-home subscriber equipment.
Approximately 70.0% of the television homes in Austar's service area are in
metropolitan markets with sufficient size and density to justify the
construction of MMDS networks. Austar owns virtually all of the licenses in the
MMDS spectrum currently available in these markets for the provision of MMDS
services. Because MMDS service is less expensive to install than DTH, Austar
services customers in these metropolitan markets with its MMDS service whenever
possible. Approximately 30.0% of homes in these metropolitan markets, however,
are out of the line of sight of Austar's MMDS networks. There are less densely
populated areas outside its metropolitan markets that are more effectively
serviced by DTH technology. In addition, Austar has constructed a wireline cable
network in Darwin, a market containing approximately 27,000 serviceable homes,
where dense vegetation makes an MMDS service impractical.
The deployment of MMDS networks in combination with DTH has allowed Austar to
roll out its service quickly and achieve rapid subscriber growth. Austar
believes that the ability to be the first provider of multi-channel television
services in its markets has allowed it to establish a significant market
presence and strong brand awareness, factors which management believes provide
it with a competitive advantage. Austar is currently the only provider of
multi-channel television services in substantially all of its franchise areas.
See "Austar - Competition."
As of December 31, 1998, Austar had launched service in all of its metropolitan
and non-metropolitan markets. The following table sets forth the summary
operating statistics in Austar's markets:
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As of December 31,
--------------------------------------
1998 1997 1996
--------- --------- ---------
Homes in service area:
Metropolitan homes.................... 1,527,000 1,103,000 997,000
Non-metropolitan homes................ 558,000 532,000 532,000
--------- --------- ---------
Total............................... 2,085,000 1,635,000 1,529,000
========= ========= =========
Net annual gain in basic subscribers.... 92,516 92,758 98,243
Total basic subscribers................. 288,721 196,205 103,447
6
Austar has entered into contracts with a number of service companies to install
MMDS receivers, DTH satellite dishes and set-top decoders.
Currently, variable installation and equipment costs for each MMDS and DTH
subscriber are approximately $378 and $648 per subscriber, respectively. These
subscriber costs are partially offset by the Company's metropolitan and
non-metropolitan installation charges of $10 to $50 and $75, respectively.
Austar retains ownership of all MMDS and DTH customer premises equipment.
PRICING. In September 1998, Austar began tiering the services provided to its
customers. The ability to tier the majority of channels became available
following the collapse of Australis through which Austar had previously
purchased programming. The Company believes Austar's ability to tier services is
a valuable tool in ensuring its product meets customer value expectations, as
they are able to select programming in accordance with their interests. Tiering
also provides customers with a lower basic entry point that both enhances sales
opportunities and helps reduce the level of customer churn. At December 31,
1998, Austar's pricing was:
MMDS DTH
A$ A$
----- -----
Basic Service........................ 31.95 35.95
Movie Tier........................... 10.95 10.95
World Movies......................... 6.95 6.95
Adults Only (Pay per Night).......... 6.95 6.95
Pay-per-View Events.................. 24.95 24.95
MARKETING; CUSTOMER SUPPORT. Austar has focused its marketing and sales efforts
to support its strategy of rapid penetration of its markets. Austar has
developed a comprehensive marketing and sales organization consisting of an
average of over 250 direct sales representatives and over 250 national customer
service and telemarketing personnel. The direct sales force, which operates out
of local offices in each of Austar's metropolitan markets, is currently
generating sales of over 3,000 subscriptions per week. The sales force at
Austar's National Customer Operations Centre ("NCOC") is currently generating
sales of approximately 3,250 subscriptions per week from inbound and outbound
calls. This sales organization is supported by an integrated marketing program
of television, radio and print advertising.
The NCOC is a state-of-the-art fully integrated subscriber management system
featuring a sophisticated digital wide-area network, Cable Data's Intelecable
platform, an automated response unit and predictive dialer technology. The NCOC
currently services all of Austar's MMDS and DTH subscribers and has the capacity
to service all future customers. Incoming calls from all of Austar's markets are
directed to the NCOC where customer service representatives provide sales and
service information. The NCOC currently handles an average of approximately
5,000 calls per day but has scalable capacity to handle at least 7,000 calls per
day. The NCOC facility currently employs over 250 customer service
professionals, which Austar intends to increase as its subscriber base grows in
its franchise areas.
Austar's monthly "churn" (calculated as total disconnects as a percentage of
average subscribers) averaged 3.9% during 1998, 4.2% during 1997 and 5.4% during
1996. Austar believes that this ratio is likely to continue to decline in the
future, although there can be no such assurances. Factors which Austar believes
will contribute to the decline in customer churn include: the continued
enhancement of the price value relationship as more content is added and the
existing content improves, the tiering of services and tailoring packages to
customers, a further reduction in the level of product sampling in a maturing
market, the introduction in 1998 of customer contracts and improved customer
communications combined with loyalty programs.
7
PROGRAMMING. Following the Australis bankruptcy, Austar was able to negotiate
new program contracts with existing and new program suppliers. This gave Austar
the ability to enhance the program line-up and tier services. To promote this
initiative, a re-launch of Austar's service took place in October 1998. Since
the re-launch, Austar's basic DTH package consists of the following channels:
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Channel Programming Genre
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Fox Sports I....................... sports
Fox Sports II...................... sports/exclusive Rugby League games
TV-1............................... general entertainment
Discovery.......................... documentary, adventure, history & lifestyle
Nickelodeon/Nick at Nite........... children's and family entertainment
Arena.............................. general entertainment
Channel [V]........................ music video
Lifestyle.......................... personal and home improvement
Thecomedychannel................... comedy
Weather 21 (1)..................... weather station
BBC World (1)...................... world news
CNBC............................... business news
CNN International.................. international
Sky Racing......................... horse racing
National Geographic................ documentaries
TNT (1)............................ library movies
Cartoon Network.................... cartoons
CMT................................ country music videos
TVSN (1)........................... shopping
Main Attraction (1)................ pay-per-view events
The following programming is available on various tiered bases:
World Movies....................... foreign language
Adults Only (1).................... adult viewing
Showtime........................... premium feature movies
Encore............................. library movies (covering 60's, 70's, 80's & classics)
Movie One (1)...................... premium feature movies
Movie Extra (1).................... premium & library movies
Movie Greats (1)................... library movies
Movie Vision....................... premium and classic movies
Austar also offers an eight-channel "Digital Radio" service to its DTH
customers.
(1) Not available to MMDS subscribers.
8
FOXTEL PROGRAMMING AGREEMENT. In May 1998, Austar and Foxtel Management Pty
Limited ("Foxtel") negotiated a programming agreement with a term ending
December 2007. Under the Foxtel Programming Agreement, Foxtel provides Austar
with TV-1, Showtime and Encore. Showtime and Encore broadcast new release and
classic movies (from the film libraries of Fox Studios, Paramount Pictures,
Sony/Columbia and Universal Studios) and are purchased as a package. The
programming rights are exclusive to Austar throughout its service region (except
for cable subscribers). In a separate agreement with Foxtel, two sports
channels, Fox Sports I and II, are purchased. Fox Sports is a joint venture with
Fox and Liberty Sports, and provides coverage of both international and local
sporting events. Fox's live sports programming includes rights to certain
international cricket and live/delayed telecast rights to Rugby League, Rugby
Union, English Premier League (and other European/Global soccer), as well as the
National Australian Basketball League, US Major League Baseball, NBA and NFL.
OPTUS PROGRAMMING AGREEMENT. Austar currently sources Movie Vision under a
program supply agreement with Optus Vision Pty Limited ("Optus Vision") which
consists of three 24-hour channels comprising premium and classic movies from
MGM, Disney, Warner and Dreamworks. The agreement expires 2007 and is on a
non-exclusive basis.
SATELLITE PLATFORM JOINT VENTURE. Prior to 1998, Austar had contracted with
Australis by way of a franchise agreement for the majority of its basic
programming channels and for the provision of a satellite signal to its
subscribers. Australis had in turn contracted with Optus Network Pty Limited
("Optus Network") for the use of transponders on the Optus B3 satellite. The
Optus B3 satellite has 15 transponders, 7 of which deliver high performance
digital beams with the capacity to deliver up to 14 digital pay television
channels. In anticipation of Australis's collapse, UIH held negotiations with
Optus Network for the establishment and operation of a satellite platform joint
venture. During 1998, when Australis went into receivership, satellite
transmission platforms were effected without any loss of signal to Austar's DTH
or MMDS subscribers. Futhermore, in the later half of 1998, the Satellite
Platform Joint Venture successfully negotiated an agreement which would allow
Foxtel to become a customer of the joint venture. In practice, the management of
the platform is conducted jointly among UIH, Optus Network and Foxtel. A
contract for the establishment and management of the Satellite Platform
encompassing all three parties was signed in December 1998.
OTHER AUSTAR PROGRAMMING. Austar purchases five channels from XYZ Entertainment.
The five channels are Discovery, Nickelodeon, Lifestyle, Channel [V] and Arena.
XYZ Entertainment's program suppliers include Fox, Viacom, Discovery
Communications and Nickelodeon. Additional programming is sourced from a number
of independent sources, and includes CMT, CNN, TNT, Sky Racing and
Thecomedychannel. This programming is sourced at price levels the Company
believes are competitive. In addition, UIH has established separate joint
ventures for the production and supply to Austar of a weather (Weather 21) and
adults only channel.
The programming agreements with Foxtel, Optus Vision, XYZ Entertainment and
other distributors provide Austar subscribers access to all available
significant programming content in Australia. The Company believes that both
Foxtel and Optus Vision derive significant benefits from their relationship with
Austar, including their ability to receive programming revenues without build-
out costs and an ability to meet their own minimum subscriber targets under
certain programming agreements.
COMPETITION. The substantial majority of Austar's metropolitan markets are
either small (i.e., approximately 20,000 homes), and/or have relatively low
household densities (generally 25 to 75 homes per square kilometer as compared
to 100 to 130 homes per square kilometre in Australia's largest cities). As a
result, Austar believes that its metropolitan markets generally do not have
sufficient density to justify the construction of competitive wireline cable
systems. While the Company believes household densities could potentially
support wireline cable construction in areas representing approximately 20.0% of
Austar's total franchise homes, the relatively small size of these markets
reduces the attractiveness of constructing a competitive cable network. In
addition, Austar, as a licensed subscription television provider, is authorized
to build wireline cable systems in its markets and, where appropriate, could
construct wireline cable systems.
With the exception of the Foxtel cable television system currently extending
into Austar's 116,000-home Gold Coast metropolitan market, Austar does not
currently have any operational subscription television competitors in its
markets. At December 31, 1998, Austar had 23,000 subscribers in the Gold Coast
and estimates that Foxtel has 13,000 subscribers in this market.
9
Approximately 558,000 of Austar's 2.1 million franchise homes are in
non-metropolitan markets that generally have densities of fewer than 25
households per square kilometer. As a result, the Company believes that these
markets can only be served economically with DTH technology. Austar has the
exclusive right from its programming suppliers to market key movie, sports and
general entertainment programming in these non-metropolitan markets. In
addition, Austar believes it has an additional competitive advantage in offering
DTH service in these markets because over 50.0% of its serviceable homes are
within a 50 kilometer radius of its metropolitan markets, where it has available
sales personnel and installation technicians. Accordingly, Austar believes its
cost to market and install subscribers in these areas should be below that of
any potential competitor without similar infrastructure in place.
Management believes that Austar has established a significant subscriber base,
strong brand awareness and substantial operational and marketing infrastructure,
factors that provide it with a competitive advantage.
MANAGEMENT AND EMPLOYEES. Austar's senior management includes five UIH
employees. Austar and UAP are parties to a 10-year technical assistance
agreement, renewable for up to an additional 15 one-year terms, pursuant to
which Austar pays UAP a monthly fee equal to 5.0% of its gross revenues through
the term of the agreement, for the provision of various management and technical
services. In addition, Austar reimburses UIH for certain direct costs incurred
by UIH, including the salaries and benefits relating to the senior management
team.
As of December 31, 1998, Austar had over 700 employees. Substantially all of
Austar's employees are parties to an "award" governing the minimum conditions of
their employment including probationary periods of employment, rights upon
termination, vacation, overtime and dispute resolution.
SATURN (NEW ZEALAND)
The Company owns 65.0% of Saturn, which launched service on the initial portions
of its HFC network that will allow it to provide multi-channel television
services as well as business and residential telecommunications services in the
greater Wellington area, encompassing 141,000 homes. Wellington is New Zealand's
capital and second largest city. The Company launched service in portions of
this system in September 1996 and expects construction to be completed by late
1999. Saturn launched a full complement of telephone services to both
residential and business markets in April 1998. As of December 31, 1998,
Saturn's activated networks passed approximately 41,000 homes and provided
service to approximately 13,000 subscribers, including cable and telephone. In
addition, Saturn has secured additional rights to use existing poles to attach
its network cable in markets representing 500,000 homes, subject to local
planning approval, and is exploring the possibility of expanding its networks
and services to these markets.
MARKET OVERVIEW. The Company believes that New Zealand, a market of 1.2 million
homes, is attractive for a new local operator that can provide combined video,
voice and data services over a high bandwidth network. New Zealand has a
demographic profile similar to Australia including high per capita income and
strong television, VCR, PC and cellular telephone penetration rates. Wellington
City has over 50.0% PC penetration and over 20.0% of homes subscribing to the
internet. In addition, New Zealand imposes virtually no pricing regulation and
only limited program content regulation and permits operators to offer combined
and bundled multi-channel television, telephony service and internet access over
one network. There is currently only one significant multi-channel television
provider that offers a five-channel UHF-delivered subscription service and one
other local phone service provider.
OPERATING AND GROWTH STRATEGY. Saturn is constructing a 750MHz HFC network
designed to service 500 homes per node with each home drop overlaid with copper
telephony plant. This architecture allows the integrated delivery of pay
television, telephony, internet access, high speed data and future interactive
services. The majority of Saturn's plant, approximately 1,600 kilometers, will
be constructed on aerial utility poles which generally allow for quicker and
more cost-effective network construction than underground wireline. In addition,
because Wellington zoning generally permits only a single additional
communications cable on its aerial utility poles, Saturn's status as first
operator on such poles may limit use of these poles by other communications
providers. Saturn has an interconnect agreement that allows it to provide local
residential and business telephone services. Because the only significant
multi-channel television competitor in the Wellington market offers a
UHF-delivered service that is limited to only five channels, and an expensive 20
channel satellite service, management believes it will be able to build a
significant customer base by offering an attractive basic programming line-up of
10
over 25 channels at competitive prices, as well as pay-per-view movies, local
and long distance telephony services and internet services. Saturn also provides
local and long distance telephone service to business customers as well as
enhanced services such as Centrex and a cable modem service. By bundling
subscription television, telephony and internet services, Saturn is able to
offer pricing discounts across all services, which is proving to be a key
competitive advantage over competitors that offer only one of these services.
PROGRAMMING. Saturn's programming strategy is to offer a wide variety of
high-quality channels at competitive prices. Saturn is currently offering a
single tier of service consisting of 25 channels and is negotiating with a
number of programming services to expand its channel offering. The following is
a list of the programming currently offered by Saturn in its basic package:
[Download Table]
Channel Programming Genre
------- -----------------
TV1, TV2, TV3, TV4................. general entertainment (retransmitted)
ONTV............................... Saturn community channel
BBC World.......................... world news
CNBC............................... world financial news
CNN International.................. world news
MCM................................ music video
Discovery.......................... science and nature
National Geographic................ culture and nature
Animal Planet...................... animal entertainment
TNT................................ classic movies
Cartoon Network.................... children's cartoon programming
Trackside.......................... TAB racing
Kidzone............................ local children's programming
Weather Channel.................... live weather from NZ MetService
Program Guide...................... programming line-up
TVSN............................... shopping
CMTV............................... country music video
Elijah Television.................. non-denominational religious programming
Worldnet........................... U.S. information service news and science
Saturn SportsNet................... local/international sports
The Golf Channel................... 24 hours of golf events/news
Saturn Showcase.................... Saturn programming channels (split screen)
Saturn also offers 19 channels of new release pay-per-view ("PPV") movies,
branded Saturn Home Cinema provided by four leading Hollywood studios. Saturn
has been achieving over 100% PPV buy rates per subscriber.
11
TELEPHONY SERVICES. Saturn offers a full, feature rich telephone service that is
a competitive alternative to Telecom New Zealand ("Telecom"), the incumbent
telephony provider.
Residential Services:
---------------------
Local access
Long distance
Full suite of switched based features (e.g., voicemail, call waiting,
last number dialed, etc.)
Dial-up internet access
Business Telephony Services:
----------------------------
Local access
Long distance service
Full suite of switch based features
Centrex services
High speed cable modem service
PRICING. With its unique bundle of services, Saturn can offer a number of
attractive multiple service bundles, ranging from an entry level package of
cable television service, plus local telephone access and free local calls, for
NZ$27 per month to a package of two telephone lines (free local calls), cable
television service and unlimited internet usage for NZ$53 per month. Saturn is
able to offer a savings of 30.0% based on a customer buying the services from
multiple providers. These bundles are proving a very effective means to drive
penetration and increase revenue per home. Sky TV ("Sky"), Saturn's primary
competitor, charges subscribers a monthly rate of approximately NZ$31 for five
channels of UHF programming with a one-time installation fee of NZ$29 per
subscriber. Sky's digital satellite service is more expensive and has an
installation fee of NZ$350. Saturn's residential and business telephony services
are priced 10.0% to 15.0% below Telecom's standard rates even though Telecom is
offering range discounts. The Company believes that Saturn's internet rates are
some of the most price competitive in the country.
MARKETING; CUSTOMER SUPPORT. Saturn's marketing strategy uses promotion
techniques proven in existing subscription television markets such as the U.S.
and Europe, including direct sales campaigns (door-to-door selling), direct mail
and telemarketing supported by a mass media brand awareness program. Saturn
already enjoys very high and positive brand awareness in the market. There is
considerable interest in purchasing its products and services. Direct sales have
proven to be the most effective technique in other new build markets,
particularly in areas where multi-channel television is in its introductory
stage. Each of these techniques aims to communicate the selling points of the
telephone service, cable television and internet services and in particular the
advantages of purchasing multiple services from one provider. Homes are released
for marketing on a node by node basis as construction is completed, which allows
for a very targeted marketing program tailored to the unique demographic profile
of the territory and enables Saturn to capitalize on the product awareness
resulting from its construction efforts. Saturn's sales strategy is designed to
include an emphasis on the bundled offering and to capitalize on the value,
quality and customer service advantages associated with a one-stop service
provider. Saturn has established a national customer services center at its
corporate headquarters in Wellington. The call management technology employed by
Saturn is scaleable and can be configured to support a national network
expansion. In addition, Saturn is currently developing a sophisticated marketing
database to assist the sales force in a targeted sales approach in future
marketing campaigns.
COMPETITION. Saturn's major telephony competitor is Telecom, New Zealand's
largest telecommunications service provider with nearly a 100% share of local
loop revenues, 75.0% of national and international toll revenues and 90.0% of
cellular revenues. During 1996 and 1997, Telecom constructed an HFC network to
70,000 homes in various parts of New Zealand and began offering a pay TV
service. In 1998, Telecom discountinued its pay television service and Telecom
now appears to be pursuing an asymmetrical digital subscriber line ("ADSL")
strategy for high speed internet access.
There are currently four broadcast networks in New Zealand as well as several
other free-to-air regional channels. The largest provider of subscription
television services in New Zealand is Sky, which operates a five-channel
encrypted UHF subscription television service and has recently launched a
20-channel digital satellite service. Although Sky offers a popular sports
channel on an exclusive basis, the Company believes Sky does not currently offer
value and programming diversity or television/telephony bundling that Saturn
offers.
12
MANAGEMENT AND EMPLOYEES. UIH has appointed three of its employees to senior
management positions at Saturn including Saturn's chief executive officer.
Saturn reimburses UIH for certain direct costs incurred by UIH, including the
salaries and benefits relating to these senior management positions. In
addition, Saturn and UAP are parties to a technical assistance agreement,
pursuant to which Saturn pays UAP a monthly fee equal to 2.5% of its gross
revenues for the provision of various technical, administrative and operational
services.
As of December 3l, 1998, Saturn had approximately 260 employees. Substantially
all of Saturn's employees are parties to a collective employment contract
governing certain conditions of their employment including probationary periods
of employment, termination, redundancy, overtime, holidays, leave and dispute
resolution.
XYZ ENTERTAINMENT (AUSTRALIAN PROGRAMMING)
In October 1994, the Company and Century formed XYZ Entertainment, each
retaining a 50.0% interest. In June 1995, the Company and Century formed the
50/50 joint venture, CUPV, to hold their investments in XYZ Entertainment. In
September 1995, a 50.0% interest in XYZ Entertainment was sold to a third party,
thereby diluting the Company's indirect interest in XYZ Entertainment to 25.0%.
In September 1998, UAP (the Company's parent) acquired the assets in CUPV held
by Century.
Through its interest in XYZ Entertainment, the Company provides five channels
(the "XYZ Channels") which consist of the following:
[Enlarge/Download Table]
Channel Programming Genre
------- -----------------
Discovery................................................ documentary, adventure, history and lifestyle
Nickelodeon/Nick at Nite................................. children's educational, entertainment and cartoons/family-
oriented drama and entertainment
Channel [V].............................................. music video with local presenters
Arena.................................................... drama, comedy, general entertainment, programming and
library movies
Lifestyle................................................ personal and home improvement
XYZ Entertainment provides the XYZ Channels to a subsidiary of Austar, which in
turn supplies them to Austar and Foxtel. The XYZ Channels are available to the
majority of Australia's approximately six million television households,
including all households marketed via MMDS and DTH by Austar and Foxtel. The XYZ
Channels are also distributed to Foxtel for cable distribution pursuant to a
carriage agreement between Foxtel and Austar that has been warranted to XYZ
Entertainment as having a term through 2020. XYZ Entertainment's agreement with
Austar provides for fixed per subscriber prices. The Company understands the
cable carriage agreement between Austar and Foxtel provides for substantial
minimum subscriber guarantees. XYZ Entertainment currently receives monthly
revenues of $3.15 per MMDS or DTH subscriber and $4.15 per Foxtel cable
subscriber. Austar also has an agreement for the distribution of the XYZ
channels to Optus Vision, although distribution has yet to commence. As of
December 31, 1998, the XYZ Channels were distributed to approximately 700,000
multi-channel television subscribers.
OPERATING AND GROWTH STRATEGY. XYZ Entertainment is an independently managed
venture which purchases, edits, packages and transmits programming for the XYZ
Channels in exchange for a monthly fee per subscriber. The Company manages Arena
and the Lifestyle channel; the Company and Foxtel manage Channel [V]; and the
Company, together with Nickelodeon Australia, Inc. ("Nickelodeon"), manage the
Nickelodeon/Nick at Nite channel. Each of these channels reports to a board
comprised of the Company and Foxtel executives. The Discovery Channel is managed
by Discovery Asia and distributed by XYZ Entertainment.
XYZ Entertainment is focusing its marketing efforts on creating, building and
supporting channel identification and brand awareness. XYZ Entertainment's goal
is to acquire quality programming that will engender viewer loyalty. In
addition, XYZ Entertainment offers advertising on each of the XYZ Channels.
13
ACQUISITION OF PROGRAMMING. In July 1995, XYZ Entertainment and Discovery Asia
executed a 12-year exclusive carriage agreement whereby a localized version of
the Discovery Channel replaced the existing documentary channel developed by XYZ
Entertainment. The Company believes that as a result of this arrangement, XYZ
Entertainment is able to offer subscribers higher quality programming at a lower
cost to XYZ Entertainment. XYZ Entertainment and Nickelodeon, a division of
Viacom, are jointly producing and distributing an Australian version of
Nickelodeon/Nick at Nite, which XYZ Entertainment began distributing in October
1995. XYZ Entertainment pays a monthly per subscriber license distribution fee
that is shared equally by Nickelodeon and XYZ Entertainment. XYZ Entertainment
acquires programming and produces interstitials for Arena, Lifestyle and Channel
[V]. XYZ Entertainment has acquired a supply of programming for Arena and
Lifestyle at prices its management considers to be favorable. XYZ Entertainment
is pursuing supply agreements and potential joint venture arrangements with a
number of other international programming suppliers.
In March 1997, XYZ Entertainment and Channel [V] Music Networks ("CVMN"), a
joint venture between Star TV and several record companies including B.M.G.,
EMI, Sony and Warner Music, entered into an agreement to re-brand XYZ
Entertainment's music video channel under a license arrangement with the
international music video channel, Channel [V]. The arrangement, which has a
10-year term, allows XYZ Entertainment to use the Channel [V] trademarks,
interstitial materials and management and gives it access to Channel [V]'s
favorable record programming arrangements. XYZ Entertainment has agreed to pay a
management fee of approximately $0.7 million over the first two years as well as
a licensing fee based on gross subscriber revenues, ranging from 2.5% for the
first two years to 5.0% for the third through the tenth years. After the third
year, CVMN shall have a one-year option to acquire a 20.0% interest in Channel
[V] at a price equal to XYZ Entertainment's cost plus cost of capital at 11.5%
per annum. Upon such acquisition, CVMN will offset its licensing fee against
current and future profit shares.
EMPLOYEES. As of December 31, 1998, XYZ Entertainment had 79 employees and the
Nickelodeon joint venture had 21 employees. The programming joint venture, CUPV,
had 14 employees who provided management services to XYZ Entertainment.
TELEFENUA (TAHITI)
The Company has an up to 90.0% economic interest in Telefenua, which operates a
16 channel MMDS in a franchise area that, as of December 31, 1998, included
approximately 20,000 serviceable homes. Telefenua is currently expanding its
network by selectively adding beam benders and repeaters that will allow its
signal to reach substantially all of the approximately 31,000 homes in its
franchise areas. Telefenua had approximately 6,100 subscribers as of December
31, 1998, representing a 30.4% penetration rate. The Company is in litigation
with its partners. During the fourth quarter of 1998, the Company determined it
had suffered an other-than-temporary loss of control over Telefenua, which
resulted in the deconsolidation of Telefenua at that time. See Item 3 "Legal
Proceedings".
MARKET OVERVIEW. Tahiti and Moorea are the two largest and most populous islands
of French Polynesia, a self-governing territory of the Republic of France. The
French government contributes heavily to French Polynesia's economy and
approximately one-third of Tahiti's population is employed by the national
government. Television viewing alternatives are limited, but demand for
television is strong as demonstrated by the country's high television and VCR
penetration rates, 99.0% and 66.0%, respectively, and average per capita
television viewing of nearly four hours per day. Prior to late 1994, television
choice was limited to two government broadcast channels.
COMPETITION. Telefenua's only subscription television competitor is Canal Plus,
which offers a single channel UHF service offering a combination of sports,
movies and general entertainment programming. There is no existing competition
in Tahiti from DTH services due to limited satellite coverage in the region and
lack of available satellite-delivered French language programming.
MANAGEMENT AND EMPLOYEES. UAP and Telefenua are parties to a technical
assistance agreement, whereby UAP has agreed to provide technical,
administrative and operational assistance to Telefenua for reimbursement of
expenses and a fee equal to 2.0% of Telefenua's gross revenue. Telefenua also
has a similar technical assistance agreement with the Societe Francaise des
Communications et du Cable S.A. ("SFCC"), Telefenua's immediate parent. Although
UAP has assumed all of SFCC's rights and obligations under this agreement, SFCC
is still entitled to receive from Telefenua 0.5% of Telefenua's gross revenues
14
through the term of the agreement. The Company and Telefenua are currently in a
dispute concerning services to be provided under the technical assistance
agreement. See Item 3 "Legal Proceedings".
UNITED WIRELESS (AUSTRALIAN MOBILE DATA)
The Company owns a 100% economic interest in United Wireless which operates a
nationally linked public wireless data network in Australia. United Wireless
holds a unique position in the Australian market place as the only dedicated
owner and operator of a packet-switched wireless data network.
BACKGROUND. The United Wireless network operates on Mobitex packet-switched
technology, developed and licensed by Ericsson. Mobitex is a packet-switched
technology designed specifically for data transmission. Today there are 24 other
Mobitex public networks in operation throughout the world in addition to a
number of private networks.
MARKET OVERVIEW. Australia has a rapidly expanding telecommunications markets,
though most activity is in wireless voice communications, rather than data.
Today there are two carriers operating wireless data networks, United Wireless
and Telstra. There are also three carriers operating GSM voice networks which
indirectly compete with United Wireless in the wireless data industry.
OPERATING AND GROWTH STRATEGY. The United Wireless network covers all
metropolitan areas of Australia's mainland cities and major regional centers.
Currently, United Wireless has deployed 25 base stations and is deploying
additional stations over the next 12 months to increase its geographic coverage
as well as addressing "black-spots" in existing coverage. United Wireless'
network will cover an estimated 85.0% of the Australian population by the end of
1999.
MARKETING AND CUSTOMERS. United Wireless' targeted vertical markets are the
transportation industry for fleet management requirements and the utility, fire
and vending industries for fixed telemetry applications, including remote
monitoring and reading of meters, fire panels, vending machines and other
similar applications.
REVENUE AND PRICING. The majority of United Wireless' revenues to date has been
on modem sales, connection revenues and monthly access and usage fees charged on
a per terminal basis. The average telemetry customer pays approximately $17 per
subscriber per month whereas in the transportation industry the average monthly
revenue is approximately $56 per subscriber per month.
SALES. United Wireless has sales teams in Sydney, Melbourne and Brisbane whose
approach has a two-pronged focus. The first are end-users in the transportation,
utilities, fire and vending industries. United Wireless approaches these
end-users with turn-key solutions for their wireless data communications
requirements with system integrators brought in afterwards as value added
partners to install, integrate and manage the end-solution. The second sales
approach is to target and recruit systems integrators as value added partners
who would act as the primary interface with potential customers. These system
integrators develop specific customer applications which utilize United
Wireless' network for their data transmission requirements.
COMPETITION. United Wireless believes that the Mobitex network technology
provides certain advantages over other operating platforms including the
following: (i) superior transmission quality and over-air data integrity, (ii)
broader redundancy and security capabilities, (iii) larger base station coverage
areas, (iv) lower maintenance and support requirements and (v) reduced
communication costs associated with packet wireless technology.
In Australia, GSM is the major wireless network technology that competes with
United Wireless. At present three carriers operate GSM networks - Telstra, Optus
and Vodafone - and a fourth carrier, One Tel will be entering the market in the
next twelve months. All, however, market their wireless data capabilities as a
secondary focus to their voice capabilities.
Telstra is the only other operator of a packet-switched data network in
Australia, offering the DataTAC network. DataTAC focuses on electronic funds
transfer at point of sale ("EFTPOS") as its core business and does not compete
with United Wireless in its core transportation market or in its telemetry
markets.
15
In the transportation market, United Wireless also competes against traditional
trunk radio networks, although United Wireless has an inherently superior
technology for the transmission of data, especially where global position
systems ("GPS") based requirements are specified.
MANAGEMENT AND EMPLOYEES. UAP and United Wireless are parties to a technical
assistance agreement, pursuant to which UAP has agreed to provide technical,
administrative and operational assistance to United Wireless and UAP receives a
management fee equal to 5.0% of the gross revenue of United Wireless through
December 2007. UIH has appointed the Chief Executive Officer of United Wireless,
pursuant to the terms of this agreement. All costs related to the employment of
this individual are reimbursed to UIH by United Wireless.
As of December 31, 1998, United Wireless had 21 employees.
TECHNOLOGIES EMPLOYED BY THE COMPANY
The Company currently uses three principal transmission technologies in the
deployment of its multi-channel television services in Australia, New Zealand
and Tahiti. These technologies are as follows: (i) MMDS or wireless cable, (ii)
DTH satellite broadcast services and (iii) wireline cable or CATV, the
technology with which multi-channel television services are most frequently
delivered in the United States. The Company has carefully evaluated the
characteristics of the markets in which it is currently operating or planning to
operate multi-channel television systems and has chosen what it believes to be
the most appropriate transmission technology for each. While these transmission
technologies are, in general, similar with respect to picture quality, all such
technologies offer improved picture quality compared to what has historically
been offered by over-the-air broadcasters.
MMDS is a microwave distribution system for which frequency bands are utilized
for transmission of the programming services. MMDS signals originate from a
head-end facility, which receives satellite-delivered programming services and
delivers such programming via an encoded microwave signal from transmitters
located on a tower or on top of a building to a small receiving antenna located
at a subscriber's premises, where the microwave signals are decoded. MMDS
transmission requires a clear line-of-sight because microwave frequencies will
not pass through obstructions; however, many signal blockages can be overcome
through the use of low power signal repeaters which retransmit an otherwise
blocked signal over a limited area. The initial construction costs of MMDS
generally are significantly lower than a wireline cable or DTH system. The
Company is using MMDS transmission technology in Australia and Tahiti, where
housing density and topography make MMDS the most cost effective technology.
DTH transmits encoded signals directly from a satellite to a subscriber's
premises, where it is decoded. Currently in Australia, all DTH subscription
television services are transmitted via the Optus Network Satellite using High
Performance Beams ("HP Beams") covering certain geographic areas (commonly
referred to as a satellite "footprint"). All of Austar's franchise areas are
within the Optus Network Satellite footprint. Since this signal will be
transmitted at a high power level and frequency utilizing MPEG II digital
technology, its reception can be accomplished with a relatively small (26-35
inch) dish mounted on a rooftop or in the yard for the households located within
the innermost satellite transmission footprint and with a slightly larger (35-47
inch) dish for the households located outside the innermost footprint. Austar is
using DTH transmission technology for homes in its MMDS markets that are not
reachable by its MMDS signals as well as for homes in its franchise areas where
household densities do not support the construction of MMDS systems. Due to
satellite coverage limitations, DTH service is currently not available in
Tahiti. In New Zealand, Sky launched satellite services to New Zealand via the
Optus Network Satellite in the second half of 1998.
A wireline cable television system is a network of coaxial or fiber-optic
transmission cables through which programming is transmitted to a subscriber's
premises from the system's head-end facility, which receives satellite and
tape-delivered programming. Wireline cable television offers a wide bandwidth
that generally allows the transmission of a larger number of channels than MMDS.
When constructed with an HFC network, as the Company plans to do in New Zealand,
the system's infrastructure can be used to deliver telephony and data services.
The primary disadvantages of a wireline cable network are the higher costs of
construction, especially in areas of low housing density, and the length of time
required to construct the network. The Company is constructing wireline cable
systems in New Zealand and, due to topography and housing densities, is
constructing a wireline cable system in one market in Australia.
16
EMPLOYEES
The Company has no employees. Certain management, technical, administrative,
accounting, tax, legal, financial reporting and other services for the Company
are currently provided by UIH and UAP pursuant to the terms of a management
agreement. In addition, UIH supplies certain employees to Austar, Saturn and
United Wireless pursuant to technical assistance agreements with such operating
companies. See Item 13 "Certain Relationships and Related Transactions."
CORPORATE ORGANIZATIONAL STRUCTURE
The Company is a holding company with no operations of its own. The Company
holds majority economic interests in all of its operating companies other than
XYZ Entertainment. Below is a summary of the Company's ownership interests in
its operating companies.
AUSTAR
The Company holds a combined 100% economic interest in Austar, through direct
and indirect holdings of convertible debentures and ordinary shares. The Company
holds approximately 15.0% of the ordinary shares of Austar, which accounts for
an approximately 0.3% economic interest. The Company holds all of Austar's
convertible debentures, which accounts for an approximately 97.8% economic
interest. In addition, through the Company's holdings of certain debentures of
Salstel Media Holdings Pty Limited ("SMH") and Salstel Media Investments Pty
Limited ("SMI"), which in turn hold ordinary shares of Austar, UAP has an
additional effective 1.9% economic interest. Through contractual arrangements
and pursuant to the terms of Austar's charter documents, the Company has the
right to appoint all of the six voting directors of each company.
SATURN
In 1994, the Company acquired a 50.0% interest in Saturn, a New Zealand
corporation. In July 1996, the Company acquired the remaining 50.0% interest in
Saturn in exchange for a 2.6% common equity interest in the Company, which was
exchanged for a 2.0% interest in UAP in May 1997. In July 1997, SaskTel
purchased a 35.0% equity interest in Saturn, reducing the Company's interest in
Saturn to 65.0%.
TELEFENUA
UIH-SFCC Holdings, L.P. ("UIH-SFCC"), a limited partnership wholly-owned by the
Company, is the general partner of a limited partnership (the "Partnership")
that owns 100% of the preferred stock of SFCC, representing approximately 40.0%
of the share capital of SFCC. SFCC is the parent company of Telefenua, which
owns and operates the multi-channel television system in Tahiti. As holder of
100% of the preferred stock of SFCC, the Partnership is entitled to certain
preferential distributions by SFCC. Through its general partner's interest in
the Partnership, UIH-SFCC will receive 90.0% of the distributions made by SFCC
until UIH-SFCC has received the return of its investment plus a 20.0% cumulative
compounded annual return, 75.0% of distributions until it has received the
return of its investment plus a 40.0% cumulative compounded annual return and
64.0% of distributions thereafter. Once UIH-SFCC's total equity investment
exceeds $10.0 million, further equity investments would not be entitled to the
90.0% and 75.0% distributions. Instead, equity investments above $10.0 million,
to the extent not matched pro rata by the Company's partners, would increase the
64.0% that UIH receives after the preferential distributions are made on the
first $10.0 million. As of December 31, 1996, UIH-SFCC had also advanced $7.0
million as a bridge loan to SFCC, approximately $5.0 million of which was
converted into convertible debentures of SFCC, which are convertible into
preferred stock of SFCC. During 1997, UIH-SFCC converted approximately $3.2
million of such debentures into preferred stock with the same terms as the
existing preferred stock of SFCC, to bring UIH-SFCC's total equity investment to
$10.0 million. UIH-SFCC has also invested $2.3 million in equipment, which has
been leased to Telefenua. The Company is involved in litigation with its
partners in the Partnership. During the fourth quarter of 1998, the Company
determined it had suffered an other-than-temporary loss of control over
Telefenua, which resulted in the deconsolidation of Telefenua at that time.
See Item 3 "Legal Proceedings".
17
UNITED WIRELESS
United Wireless is a wholly-owned subsidiary of the Company.
XYZ ENTERTAINMENT
The Company has an indirect 25.0% interest in XYZ Entertainment through its
50.0% interest in CUPV, an Australian corporation owned equally by the Company
and UAP. CUPV holds a 50.0% interest in XYZ Entertainment.
For a discussion of risks associated with foreign operations, see Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
----------------------------------------------------------------------------
For information applicable to this Item, see the notes to the consolidated
financial statements contained in Item 8 "Financial Statements and Supplementary
Data."
ITEM 2. PROPERTIES
-------------------
The Company's executive offices are located in Denver, Colorado, in space leased
by UIH and provided to the Company through the UAP Management Agreement as
described in Item 13 "Certain Relationships and Related Transactions." In
management's opinion, these facilities are sufficient to meet the current and
foreseeable future needs of its operating companies.
Austar leases office space in Sydney for its administrative offices and has
established four regional offices in leased space in certain areas where it has
launched service. Austar also leases locations for smaller local offices in most
of its markets to handle local customer maintenance, marketing and installation.
In addition, Austar leases facilities to house the head-end facility and
transmitter tower in each of its markets. The NCOC is located in leased
facilities in the Gold Coast. Generally, these Austar facilities are leased with
terms of three to six years, with renewal options in many instances. Austar
believes that its leased facilities are sufficient for its foreseeable needs and
that it has access to a sufficient supply of additional facilities in its
various markets, should it require more space.
Saturn owns a head-end/switching and operations facility in Petone, located
north of Wellington. Saturn also leases office and warehouse facilities for its
headquarters in Petone. This lease expires in 2001 with a six-year renewal
option.
XYZ Entertainment currently uses a portion of Foxtel's broadcasting facilities
located in Sydney. XYZ Entertainment pays its proportionate share of Foxtel's
leasing costs (based on space utilized). The Company believes this arrangement
results in operational cost savings. XYZ Entertainment believes its facilities
are sufficient for the foreseeable future.
Telefenua owns office space in Punaania, Tahiti. This facility also contains the
customer service center and the head-end equipment for the system, including
equipment for the receipt of satellite delivered programming and local
broadcasts as well as play-back of taped programming. Telefenua compiles its
16-channel service at this facility and then transmits from its MMDS broadcast
tower located on the island of Moorea.
United Wireless leases corporate office space in Sydney and has a leased
regional sales office in Melbourne.
ITEM 3. LEGAL PROCEEDINGS
--------------------------
Other than as described below, the Company is not a party to any material legal
proceedings, nor is it currently aware of any threatened material legal
proceedings. From time to time, the Company may become involved in litigation
relating to claims arising out of its operations in the normal course of its
business.
The territorial government of Tahiti (in French Polynesia) had legally
challenged the decree and authority of the Conseil Superieur de l'Audiovisuel
18
("CSA") to award Telefenua the authorizations to operate an MMDS service in
French Polynesia. The French Polynesian's challenge to France's authority to
award Telefenua an MMDS license in Tahiti was upheld by the Conseil d'Etat, the
supreme administrative court of France. The territorial government of Tahiti
then brought an action in French court seeking cancellation of the MMDS licenses
awarded by the CSA to Telefenua. On November 25, 1998, the Conseil d' Etat
cancelled the MMDS licenses awarded to Telefenua. Telefenua is in the process of
seeking a new authorization. The Company has no reason to believe that a new
authorization will not be granted. If Telefenua does not obtain a new
authorization, there is no assurance that Telefenua will receive any
restitution. In addition, any available restitution could be limited and could
take years to obtain.
On July 14, 1998, UIH SFCC filed a complaint in the United States District Court
for the District of Colorado, for damages for breach of contract, breach of
fiduciary duty and to enforce UIH SFCC's rights as General Partner in UIH SFCC
LP, a Colorado Limited Partnership which owns an interest in SFCC, the 100%
parent of Telefenua. The three defendants are Loic Brigato, Winfred Anderson and
Yoshiko Payne, limited partners of UIH SFCC LP. On September 27, 1998, UIH filed
a parallel action in the District Court for the State of Colorado. Specifically,
the complaints allege that the defendants have refused to abide by the terms of
the Partnership Agreement and have taken actions highly detrimental to
Telefenua. UIH SFCC seeks monetary damages, a decree of specific performance
requiring defendants to perform their obligations and a constructive trust over
defendants' partnership interest. Defendants have filed in the federal court
action a motion to dismiss the complaint for lack of subject matter
jurisdiction. There has been no decision issued as of this date. The Company
intends to vigorously defend its position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------
None.
19
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
--------------------------------------------------------------------------------
Upon its formation, the Company issued 100 shares of common stock to UAP's
predecessor. In July 1996, the Company issued 387 additional shares of common
stock to UAP as a stock dividend and 13 shares of common stock to Kiwi Cable
Company BVI, Inc. ("Kiwi") in exchange for Kiwi's 50.0% interest in Saturn. In
May 1997, UAP acquired the remaining 13 shares of the Company from Kiwi in
exchange for a 2.0% interest in UAP. At that time, UAP owned all of the 500
shares of issued and outstanding common stock of the Company. In November 1997,
the Company effected a stock split whereby the 500 shares of common stock then
outstanding were exchanged for 13,864,941 shares of common stock. On November
17, 1997, pursuant to the terms of the indentures governing the May 1996 Notes
and the September 1997 private placement of $45.0 million aggregate principal
amount of senior discount notes (the "September 1997 Notes") (collectively, the
"Notes"), the Company issued warrants to purchase a total of 488,000 shares of
its common stock to the holders of the Notes. Neither the common stock nor the
warrants are listed on any exchange. On October 14, 1998, the Company issued
3,945,308 shares of its capital stock to UAP (the "Equity Sale") related to
cumulative gross equity contributions to the Company of $70.0 million through
that date.
The Company has paid no cash dividends since formation. The Company is a holding
company with no independent operations of its own and, as such, its ability to
pay cash dividends is dependent upon distributions from its operating companies.
Such distributions are limited by contractual or other obligations of such
operating companies. In addition, the ability of the operating companies to
distribute funds may be limited by the current or future regulations of the
countries in which they are located.
ITEM 6. SELECTED FINANCIAL DATA
--------------------------------
The following selected consolidated financial data as of and for the years ended
December 31, 1998, 1997, 1996, 1995 and 1994 have been derived from the
Company's audited consolidated financial statements. The data set forth below is
qualified by reference to and should be read in conjunction with the Company's
audited consolidated financial statements including the notes and Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
[Enlarge/Download Table]
For the Years Ended December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(In thousands, except share and per share amounts)
Statement of Operations Data:
Service and other revenue............................ $ 89,819 $ 68,961 $ 24,977 $ 1,883 $ --
System operating expense............................. (71,149) (52,703) (22,865) (3,230) --
System selling, general and administrative expense... (49,738) (50,006) (32,665) (2,482) --
Corporate general and administrative expense......... (5,696) (3,306) (1,376) (920) (659)
Depreciation and amortization........................ (97,140) (80,802) (36,269) (1,003) --
Interest expense and other, net...................... (62,088) (47,792) (14,374) 4,898 --
Share in results of affiliated companies, net........ (10,299) (2,408) (5,414) (16,379) (1,015)
---------- ---------- ---------- ---------- ----------
Net loss............................................. $ (206,291) $ (168,056) $ (87,986) $ (17,233) $ (1,674)
========== ========== ========== ========== ==========
Basic and diluted net loss per common share.......... $ (14.02) $ (12.12) $ (6.44) $ (1.28) $ (0.12)
========== ========== ========== ========== ==========
Weighted-average number of shares outstanding........ 14,718,857 13,864,941 13,670,832 13,504,453 13,504,453
========== ========== ========== ========== ==========
Other Data:
Capital expenditures................................. $ 71,466 $ 101,135 $ 187,100 $ 7,648 $ 1
As of December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(In thousands)
Balance Sheet Data:
Cash, cash equivalents, restricted cash and
short-term liquid investments...................... $ 944 $ 25,089 $ 37,860 $ 8,730 $ --
Property, plant and equipment, net................... $ 122,968 $ 183,101 $ 193,170 $ 27,630 $ 1
Total assets......................................... $ 216,032 $ 279,032 $ 319,323 $ 99,295 $ 24,084
Senior discount notes and other long-term debt....... $ 424,726 $ 387,094 $ 250,057 $ 742 $ --
Total liabilities.................................... $ 510,661 $ 431,769 $ 315,276 $ 21,714 $ 11
Total stockholder's (deficit) equity................. $ (294,629) $ (164,153) $ 4,047 $ 75,066 $ 24,073
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
The following discussion and analysis of the Company's financial condition and
results of operations covers the years ended December 31, 1998, 1997 and 1996
and should be read in conjunction with the Company's condensed consolidated
financial statements and related notes thereto included elsewhere herein. Such
consolidated financial statements provide additional information regarding the
Company's financial activities and condition.
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 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, the Company's
ability to secure adequate capital to fund system growth and development, risks
inherent in the change over to the Year 2000 (including the Company's projected
state of readiness and expected contingency plans for possible worst case
scenarios), risks inherent in investment and operations in foreign countries,
changes in government regulation, changes in the nature of key strategic
relationships with partners and joint venturers, and other factors referenced in
this Report. These forward-looking statements speak only as of the date of this
Report, and the Company expressly disclaims 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. Any statements contained in Management's Discussion and
Analysis of Financial Condition and Results of Operations in this Report related
to Year 2000 are hereby denominated as "Year 2000 Statements" within the meaning
of the Year 2000 Information and Readiness Disclosure Act.
INTRODUCTION
The Company currently holds (i) an effective 100% economic interest in Austar,
(ii) a 65.0% interest in Saturn, (iii) a 25.0% interest in XYZ Entertainment,
(iv) an up to 90.0% economic interest in Telefenua and (v) a 100% interest in
United Wireless. Following its July 1996 acquisition of the remaining 50.0%
interest in Saturn, the Company began consolidating the results of operations of
Saturn, which had previously been accounted for using the equity method of
accounting. The Company's interest in Saturn was reduced to 65.0% in July 1997
with the Saturn Transaction. Due to a change in an accounting principle,
effective January 1, 1998, the Company discontinued consolidating the results of
operations of Saturn and returned to the equity method of accounting. However,
the Company is currently discussing alternatives which would allow for the
consolidation of Saturn. The Company accounts for its interest in XYZ
Entertainment using the equity method of accounting. During the fourth quarter
of 1998, the Company determined it had suffered an other-than-temporary loss of
control over Telefenua, which resulted in the deconsolidation of Telefenua
effective October 1, 1998. See Item 3 "Legal Proceedings".
In connection with the offering of the May 1996 Notes, UIH merged into the
Company UIH's subsidiaries that held interests in certain operating properties
and early stage projects in Australia, New Zealand and Tahiti. The accompanying
financial statements have been prepared on a basis of reorganization accounting
as though the Company had performed all foreign development activities and made
all acquisitions of UIH's ownership interest in multi-channel television,
programming and mobile data companies in Australia, New Zealand and Tahiti since
inception. The Company, as presented in this manner, commenced operations in
January 1994 when UIH began its development-related activities in the
Asia/Pacific region. UIH transferred the net assets of the related subsidiaries,
including capitalized development costs and investments in affiliated companies,
to the Company. The Company reports on the basis of generally accepted
accounting principles in the United States ("U.S. GAAP") and recognizes its
proportionate share of affiliated company income (loss) on the basis of U.S.
GAAP results.
UAP, the Company's parent, provides various management, technical,
administrative, accounting, financial reporting, tax, legal and other services
for the Company pursuant to the terms of a management agreement between UAP and
the Company. In addition, UAP provides similar services to the Company's
operating systems, pursuant to the terms of various technical assistance
agreements with such operating systems. See Item 13 "Certain Relationships and
Related Transactions."
21
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had invested a total of approximately
$416.8 million in its projects. These fundings do not include project-level
financing or amounts contributed by shareholders other than the Company.
[Download Table]
SOURCES OF FUNDINGS: As of
December 31,
1998
--------------
(In thousands)
Senior discount notes proceeds, net of offering costs.. $244,652
Cash contributions and other equity from parent(1)..... 167,853
Interest income........................................ 4,316
--------
Total................................................ $416,821
========
USES OF FUNDINGS: As of
December 31,
1998
--------------
(In thousands)
Austar(1).............................................. $320,144
Saturn................................................. 39,435
Telefenua.............................................. 16,738
XYZ Entertainment...................................... 16,481
United Wireless........................................ 10,161
Other.................................................. 13,862
--------
Total................................................ $416,821
========
(1) Includes issuance/use of $29.8 million and $6.2 million in
convertible preferred stock in 1995 and 1998, respectively, to
acquire interests in Australia.
The Company is responsible for its proportionate share of the capital
requirements of the operating companies. The Company has funded its
proportionate share to date with capital contributed by UIH and UAP and proceeds
from private debt offerings and has reduced its proportionate share to date with
subsidiary bank debt and strategic partner contributions. Through the private
placement of the May 1996 Notes, the Company raised total gross proceeds of
approximately $225.1 million. These notes will accrete to an aggregate principal
amount of $447.4 million at maturity. Through the private placement of the
September 1997 Notes, the Company raised total gross proceeds of approximately
$29.9 million. These notes will accrete to an aggregate principal amount of
$45.4 million at maturity. 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 the Equity Sale, reducing the interest rate from 14.75%
to 14.0% per annum.
AUSTAR
In July 1997, Austar secured the Austar Bank Facility in the amount of A$200.0
million ($122.5 million as of December 31, 1998) to fund Austar's subscriber
acquisition and working capital needs. The Austar Bank Facility consists of
three sub-facilities: (i) A$50.0 million revolving working capital facility,
(ii) A$60.0 million cash advance facility and (iii) A$90.0 million 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 December 31, 1998, Austar had drawn the entire amount of the working capital
facility and the cash advance facility totaling A$110.0 million ($67.4 million
converted using the December 31, 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$200.0 million is intended to refinance the Austar Bank
Facility by April 1999 and the remaining A$200.0 million is available upon the
contribution of additional equity on a 2:1 debt-to-equity basis. The commitment
has been extended to April 30, 1999 and management expects to close this
financial transaction by mid-April 1999. In the interim, Austar has received a
supplemental amendment to the existing Austar Bank Facility which allows Austar
to draw under the A$90.0 million Term Loan Facility at an increased interest
22
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 December 31,
1998, Austar had drawn A$60.0 million ($36.7 million converted using the
December 31, 1998 exchange rate) on the Term Loan Facility for a total
outstanding balance of A$170.0 million. Subsequent to year-end, an additional
A$30.0 million was borrowed against the Term Loan Facility which, along with the
A$60.0 million draw, is payable in full in April 1999.
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 $112.4 million to continue on its
current expansion path from January 1, 1999 through December 31, 1999. 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 April 1999). The remaining sources of funds for such
expansion may include the raising of private or public equity by the Company or
its subsidiaries and/or continued investment by UIH and UAP. Even though the
Company believes that these financings will be successful, if the New Austar
Bank Facility is not closed, the Company believes that committed financial
support from UIH combined with, if necessary, reductions in planned capital
expenditures, are sufficient to sustain its operations through at least
mid-2000.
SATURN
In July 1997, SaskTel purchased a 35.0% equity interest in Saturn by investing
NZ$29.9 million (approximately $19.6 million) directly into Saturn for its
newly-issued shares. In November 1998, Saturn secured a syndicated senior debt
facility in the amount of NZ$125.0 million ($66.0 million as of December 31,
1998) (the "Saturn Bank Facility") to fund the completion of Saturn's network.
Of this amount, NZ$83.3 million has been subscribed for by financial
institutions. Until Saturn obtains irrevocable commitments in the form of equity
funding or additional underwriting commitments for the balance of NZ$41.7
million, the maximum that may be drawn down is NZ$73.0 million ($38.5 million as
of December 31, 1998). If Saturn is successful in obtaining the necessary
commitments from other financing sources, Saturn may borrow an additional
NZ$10.3 million 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 December 31, 1998, Saturn had drawn NZ$40.0 million ($21.1
million as of December 31, 1998) on the loan facility at a rate of approximately
8.12% per annum. The eight-year debt facility has an interest rate of 3.0% over
the current base rate upon drawdown. Subsequent to year-end, NZ$8.0 million was
borrowed for a total outstanding balance of NZ$48.0 million.
The Company expects the need for additional funding for Saturn in the future.
Saturn's capital needs include approximately $37.2 million for the completion of
the network required by Saturn to offer cable television and telephony services
and approximately $4.8 million until Saturn has sufficient cash flows to cover
its operations and the capital required to install customers, although there can
be no assurance that further additional capital will not be required. The
sources of funds for such expansion may include the Saturn Bank Facility, the
raising of private or public equity by the Company or its subsidiaries and/or
continued investment by UIH and SaskTel. Even though the Company believes that
this financing will be successful, the Company believes that committed financial
support from UIH combined with, if necessary, reductions in planned capital
expenditures, are sufficient to sustain its operations through at least
mid-2000.
OTHER
The Company expects that the aggregate future funding requirements for XYZ
Entertainment and United Wireless are less than $2.0 million for 1999.
The indentures governing UIH's senior secured discount notes due February 2008
and the Company's Notes (collectively, the "Indentures") 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
23
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
YEAR ENDED DECEMBER 31, 1998
The Company incurred a net loss during the year ended December 31, 1998 of
$206.3 million, which included non-cash items such as depreciation and
amortization expense totaling $97.1 million and accretion of interest on the
Notes and amortization of deferred financing costs totaling $49.5 million.
Cash and cash equivalents decreased $12.1 million from $12.3 million as of
December 31, 1997 to $0.2 million as of December 31, 1998. Principal sources of
cash during the year ended December 31, 1998 included cash contributions from
parent of $58.9 million, borrowings on the Austar Bank facility of $39.5
million, proceeds from the sale of short-term investments of $12.3 million and
other sources totaling $0.3 million.
During the year ended December 31, 1998, cash was used principally for the
purchase of property, plant and equipment totaling $71.5 million to continue new
subscriber connections and the build-out of existing projects, the funding of
operating activities of $23.8 million, investments in affiliated companies and
acquisition of assets of $11.4 million, the deconsolidation of Saturn of $9.9
million, the payment of capital leases and other debt of $3.3 million and other
investing and financing uses of $3.2 million.
YEAR ENDED DECEMBER 31, 1997
The Company incurred a net loss during the year ended December 31, 1997 of
$168.1 million, which includes non-cash items such as depreciation and
amortization expense totaling $80.8 million and accretion of interest on the
Notes and amortization of deferred financing costs totaling $38.7 million.
Cash and cash equivalents decreased $6.9 million from $19.2 million as of
December 31, 1996 to $12.3 million as of December 31, 1997. Principal sources of
cash during the year ended December 31, 1997 included borrowings on the Austar
Bank Facility of $85.2 million, gross proceeds from the issuance of the
September 1997 Notes of $29.9 million, the purchase of a 35.0% interest in
Saturn by SaskTel for $19.6 million, borrowings from parent of $10.0 million,
cash contributions from parent of $7.9 million and net proceeds from the net
decrease in short-term investments of $6.3 million.
During the year ended December 31, 1997, cash was used principally for the
purchase of property, plant and equipment of $101.1 million to continue the
build-out of existing projects, primarily at Austar, a decrease in construction
payables of $29.6 million, investments in the Company's affiliated companies of
$3.3 million, deferred financing costs and other uses totaling $6.9 million and
the funding of operating activities of $24.9 million during the year.
YEAR ENDED DECEMBER 31, 1996
The Company incurred a net loss during the year ended December 31, 1996 of $88.0
million, which includes non-cash items such as depreciation and amortization
expense totaling $36.3 million and accretion of interest on the Notes and
amortization of deferred financing costs totaling $20.3 million.
Cash and cash equivalents increased $10.5 million from $8.7 million as of
December 31, 1995 to $19.2 million as of December 31, 1996. Principal sources of
cash during this period included gross proceeds from the issuance of the May
1996 Notes of $225.1 million, an increase in construction payables of $38.4
million, borrowings of $17.5 million and cash contributions from parent of $10.7
million.
During the year ended December 31, 1996, cash was used principally for the
purchase of property, plant and equipment of $187.1 million to construct
24
Austar's and Telefenua's systems, repayments on related party debt of $25.0
million, the purchase of net short-term investments of $18.6 million,
investments in the Company's affiliated companies of $16.2 million, deferred
financing costs and other uses totaling $9.0 million, the purchase of the
approximately 4.0% remaining economic interest in Austar for $7.9 million and
the funding of operating activities of $17.4 million during the year.
RESULTS OF OPERATIONS
SELECTED SYSTEM OPERATING DATA. The following table displays selected system
operating data in Austar's local currency:
[Enlarge/Download Table]
For the Years Ended December 31,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
(In thousands)
Austar (A$):
Service and other revenue............................ 136,072 86,470 26,852
System operating expense (1)......................... (105,183) (58,053) (33,702)
System selling, general and administrative expense... (75,169) (57,900) (23,330)
Adjusted EBITDA (2).................................. (37,981) (26,027) (29,770)
Capital expenditures................................. 96,162 100,149 157,315
(1) Includes management fees of A$6.3 million, A$3.5 million and A$0.4 million,
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, cash flows or any other generally accepted accounting principle
measure of performance or liquidity as an indicator of an entity's
operating performance.
SERVICE AND OTHER REVENUE. The Company's service and other revenue (including
installation revenues) increased $20.8 million and $44.0 million for the years
ended December 31, 1998 and 1997, respectively, compared to the corresponding
amounts in the prior years as follows:
[Enlarge/Download Table]
For the Years Ended December 31,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
(In thousands)
Austar................................................. $85,199 $63,848 $21,244
Saturn................................................. -- 473 110
Telefenua.............................................. 3,411 4,118 3,513
United Wireless........................................ 257 522 110
Other.................................................. 952 -- --
------- ------- -------
Total service and other revenue................... $89,819 $68,961 $24,977
======= ======= =======
AUSTAR
Service and other revenue at Austar increased $21.4 million, or 33.5%,
from $63.8 million for the year ended December 31, 1997 to $85.2
million for the year ended December 31, 1998. On a functional currency
basis, Austar's service and other revenue increased A$49.6 million,
from A$86.5 million for the year ended December 31, 1997 to A$136.1
million for the year ended December 31, 1998, a 57.3% increase. These
increases were primarily due to subscriber growth (288,721 at December
31, 1998 compared to 196,205 at December 31, 1997) as Austar continued
to roll-out its services. The U.S. dollar increases occurred despite
the negative impact of approximately $15.0 million due to fluctuation
in exchange rates between the years ended December 31, 1998 and 1997.
Service and other revenue at Austar increased $42.6 million, or
200.9%, from $21.2 million for the year ended December 31, 1996 to
$63.8 million for the year ended December 31, 1997. This increase was
primarily due to subscriber growth from an average of approximately
54,000 subscribers during 1996 to an average of approximately 150,000
subscribers during 1997, as Austar continued to roll-out its services.
25
SATURN
The Company discontinued consolidating the results of Saturn's
operations effective January 1, 1998. Accordingly, the Company
reported no service and other revenue from Saturn for the year ended
December 31, 1998.
The Company began consolidating the results of Saturn's operations
effective July 1, 1996. Accordingly, the Company reported no service
and other revenue from Saturn during the first half of 1996. Service
and other revenue at Saturn increased $0.4 million, or 400.0% from
$0.1 million for the year ended December 31, 1996 to $0.5 million for
the year ended December 31, 1997. This increase was primarily due to
growth in subscribers from an average of approximately 1,300
subscribers during 1996 to an average of approximately 2,400
subscribers during 1997.
SYSTEM OPERATING EXPENSE. The Company's operating expenses increased $18.4
million and $29.8 million for the years ended December 31, 1998 and 1997,
respectively, compared to the corresponding amounts in the prior years as
follows:
[Enlarge/Download Table]
For the Years Ended December 31,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
(In thousands)
Austar................................................. $65,289 $42,792 $17,990
Saturn................................................. -- 4,015 1,344
Telefenua.............................................. 1,751 2,040 2,118
United Wireless........................................ 1,301 1,789 1,413
Other.................................................. 2,808 2,067 --
------- ------- -------
Total system operating expense.................... $71,149 $52,703 $22,865
======= ======= =======
AUSTAR
Operating expense for Austar increased $22.5 million, or 52.6%, from
$42.8 million for the year ended December 31, 1997 to $65.3 million
for the year ended December 31, 1998. On a functional currency basis,
Austar's operating expense increased A$47.1 million, from A$58.1
million for the year ended December 31, 1997 to A$105.2 million for
the year ended December 31, 1998, an 81.1% increase. These increases
were primarily due to a $2.0 million increase in satellite programming
costs resulting from the May 1998 agreements with Foxtel and Optus
Vision to obtain additional programming rights in connection with the
receivership of Australis as well as additional satellite platform
costs associated with the May 1998 joint venture with Optus Vision
($0.7 million). The Company expects that the restructuring of
programming costs for certain channels will result in somewhat higher
costs in the near term for these channels which will be offset by
lower costs in the long-term when compared to Austar's previous
agreements with Australis. The remainder of the increase between
periods was due to an increase in salaries and benefits related to the
additional personnel necessary to support Austar's 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 approximately $12.1 million due to
fluctuation in exchange rates between the years ended December 31,
1998 and 1997.
The Company reported an increase in system operating expense from
Austar of $24.8 million, or 137.8%, from $18.0 million for the year
ended December 31, 1996 to $42.8 million for the year ended December
31, 1997. This increase was primarily due to an increase in satellite
programming fees and copyright costs, which corresponds to the
increase in subscribers and additional basic programming services; an
increase in salaries and benefits related to the additional personnel
necessary to support Austar's launch of local and state offices in its
markets; and an increase in customer subscriber management expenses
related to the volume increases in telephone, billing and collection
costs. The remainder of the increase related to increases in system
travel, maintenance, vehicle costs and management fees.
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
26
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.
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. In May 1998, a
subsidiary of Austar began billing the joint venture between Austar
and Optus Networks for the transponder rental. The Company eliminates
all related party accounts in consolidation.
SATURN
The Company discontinued consolidating the results of Saturn's
operations effective January 1, 1998. Accordingly, the Company
reported no system operating expense from Saturn for the year ended
December 31, 1998.
The Company began consolidating the results of Saturn's operations
effective July 1, 1996. Accordingly, the Company reported no system
operating expense from Saturn during the first half of 1996. System
operating expense at Saturn increased $2.7 million or 207.7% from $1.3
million for the year ended December 31, 1996 to $4.0 million for the
year ended December 31, 1997. This increase was primarily due to an
increase in personnel expenses in order to support Saturn's build-out
of its HFC network in the Wellington area.
SYSTEM SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. The Company's system
selling, general and administrative expense decreased $0.3 million and increased
$17.3 million for the years ended December 31, 1998 and 1997, respectively,
compared to the corresponding amounts in the prior years as follows:
[Enlarge/Download Table]
For the Years Ended December 31,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
(In thousands)
Austar................................................. $46,986 $42,810 $26,948
Saturn................................................. -- 3,581 2,008
Telefenua.............................................. 1,710 2,063 2,586
United Wireless........................................ 1,042 1,552 1,123
------- ------- -------
Total system selling, general and administrative
expense......................................... $49,738 $50,006 $32,665
======= ======= =======
AUSTAR
System selling, general and administrative expense for Austar
increased $4.2 million, or 9.8%, from $42.8 million for the year ended
December 31, 1997 to $47.0 million for the year ended December 31,
1998. On a functional currency basis, Austar's selling, general and
administrative expense increased A$17.3 million, from A$57.9 million
for the year ended December 31, 1997 to A$75.2 million for the year
ended December 31, 1998, a 29.9% increase. This increase was primarily
due to an increase in salaries as a result of additional personnel
necessary to support the increase in subscribers and an increase in
marketing costs. The U.S. dollar increases were positively impacted by
approximately $8.4 million due to fluctuation in exchange rates
between the years ended December 31, 1998 and 1997.
System selling, general and administrative expense for Austar
increased $15.9 million, or 59.1%, from $26.9 million for the year
ended December 31, 1996 to $42.8 million for the year ended December
31, 1997. This increase was primarily due to an increase in salaries
associated with the NCOC and Austar's corporate headquarters as a
result of additional personnel necessary to support the increase in
subscribers, an increase in marketing costs related to print, radio
and television advertisements associated with subscriber acquisition
and retention and an increase in direct sales commissions due to
subscriber growth. In addition, Austar experienced certain one-time
charges for the restructuring and consolidation of various regional
offices.
27
Austar expects system selling, general and administrative expense as a
percentage of service revenue to decline in future periods because a
significant portion of Austar's infrastructure costs, such as the
NCOC, its corporate management staff and media-related marketing
costs, have already been incurred and are fixed in relation to changes
in subscriber volumes. Other system selling, general and
administrative expense relating to commissions and acquisition costs
is expected to vary in relation to the number of customer sales and
installations.
SATURN
The Company discontinued consolidating the results of Saturn's
operations effective January 1, 1998. Accordingly, the Company
reported no system selling, general and administrative expense from
Saturn for the year ended December 31, 1998.
The Company began consolidating the results of Saturn's operations
effective July 1, 1996. Accordingly, the Company reported no system
selling, general and administrative expense from Saturn during the
first half of 1996. Saturn's system selling, general and
administrative expense increased $1.6 million, or 80.0%, from $2.0
million for the year ended December 31, 1996 to $3.6 million for the
year ended December 31, 1997. This increase was primarily due to
increases in direct sales commissions due to subscriber growth as well
as marketing and promotion costs for subscriber acquisition.
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSE. The Company's corporate general
and administrative expense increased $2.4 million, or 72.7%, from $3.3 million
for the year ended December 31, 1997 to $5.7 million for the year ended December
31, 1998. This increase related 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.
The Company's corporate general and administrative expense increased $1.9
million, or 135.7%, from $1.4 million for the year ended December 31, 1996 to
$3.3 million for the year ended December 31, 1997. This increase was primarily
due to an increase in the allocation of UIH corporate general and administrative
expenses to the Company, based on increased activity at the operating system
level.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
$16.3 million and $44.5 million for the years ended December 31, 1998 and 1997,
respectively, compared to the corresponding amounts in the prior years.
[Enlarge/Download Table]
For the Years Ended December 31,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
(In thousands)
Austar................................................. $95,403 $76,913 $33,446
Saturn................................................. -- 2,033 800
Telefenua.............................................. 1,100 1,212 1,382
United Wireless........................................ 637 644 641
------- ------- -------
Total depreciation and amortization............... $97,140 $80,802 $36,269
======= ======= =======
AUSTAR
Depreciation and amortization expense for Austar increased $18.5
million, or 24.1%, from $76.9 million for the year ended December 31,
1997 to $95.4 million for the year ended December 31, 1998. On a
functional currency basis, Austar's depreciation and amortization
expense increased A$43.4 million, from A$99.6 million for the year
ended December 31, 1997 to A$143.0 million for the year ended December
31, 1998, a 43.6% increase. 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 approximately $14.9
million due to fluctuation in exchange rates between the years ended
December 31, 1998 and 1997.
Depreciation and amortization expense from Austar increased $43.5
million, or 130.2% from $33.4 million for the year ended December 31,
1996 to $76.9 million for the year ended December 31, 1997. This
28
increase was primarily due to the larger fixed asset base due to the
significant deployment of operating assets to meet subscriber growth
as well as an increase in expense related to subscriber disconnects.
SATURN
The Company discontinued consolidating the results of Saturn's
operations effective January 1, 1998. Accordingly, the Company
reported no depreciation and amortization expense from Saturn for the
year ended December 31, 1998. The Company began consolidating the
results of Saturn's operations effective July 1, 1996. Accordingly,
the Company reported no depreciation and amortization expense from
Saturn during the first half of 1996. Depreciation and amortization
expense for Saturn increased $1.2 million, or 150.0%, from $0.8
million for the year ended December 31, 1996 to $2.0 million for the
year ended December 31, 1997. This increase was primarily due to the
larger fixed asset base as Saturn continues to build-out its HFC
network in the Wellington area.
SHARE IN RESULTS OF AFFILIATED COMPANIES. The Company recognized an increase in
share in results of affiliated companies of $7.9 million for the year ended
December 31, 1998 and a decrease in share in results of affiliated companies of
$3.0 million for the year ended December 31, 1997, compared to the corresponding
amounts in the prior years as follows:
[Enlarge/Download Table]
For the Years Ended December 31,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
(In thousands)
XYZ Entertainment...................................... $ 55 $(2,408) $(4,484)
Saturn................................................. (10,354) -- (930)
------- ------- -------
Total share in earnings (losses) of affiliated
companies....................................... $(10,299) $(2,408) $(5,414)
======== ======= =======
XYZ ENTERTAINMENT
Share in losses from XYZ Entertainment decreased $2.5 million, or
104.2%, from $2.4 million for the year ended December 31, 1997 to
earnings of $0.1 million for the year ended December 31, 1998. This
decrease was primarily attributable to higher revenue resulting from
XYZ Entertainment's subscriber increase.
Share in losses from XYZ Entertainment decreased $2.1 million, or
46.7%, from $4.5 million for the year ended December 31, 1996 to $2.4
million for the year ended December 31, 1997. This decrease was
primarily attributable to higher revenue, resulting from XYZ
Entertainment's subscriber increase, and overall reductions in
staffing levels during 1997.
SATURN
Due to a change in an accounting principle, effective January 1, 1998,
the Company discontinued consolidating the results of operations of
Saturn and returned to the equity method of accounting. The results of
operations of Saturn were consolidated from July 1, 1996 through
December 31, 1997.
PROVISION FOR LOSSES ON MARKETABLE EQUITY SECURITIES AND INVESTMENT RELATED
COSTS. In October 1998, as a result of an other-than-temporary loss of control
of Telefenua, the Company recorded a reserve for the remaining balance in its
investment of $4,384. In December 1997, based on the financial difficulties and
potential insolvency of Australis, the Company determined that the loss relating
to its investment in Australis was other than temporary. As a result, the
Company recorded a provision for this loss of $4,784 for the year ended December
31, 1997.
INTEREST INCOME. Interest income decreased $1.4 million from $1.6 million for
the year ended December 31, 1997 to $0.2 million for the year ended December 31,
1998. The decrease was attributable to reduced cash and short-term liquid
investment balances.
Interest income decreased $3.9 million, or 70.9%, from $5.5 million for the year
ended December 31, 1996 to $1.6 million for the year ended December 31, 1997.
This decrease was primarily due to reduced cash and short-term liquid investment
balances related to the funding of the Company's investments in affiliated
companies.
29
INTEREST EXPENSE. Interest expense, including related party expense, increased
$12.7 million, or 28.9%, from $44.0 million for the year ended December 31, 1997
to $56.7 million for the year ended December 31, 1998. This increase was
primarily due to continued accretion on the Notes at 14.75% during most of 1998
compared to 14.0% for 1997. In addition, interest expense related to the Austar
Bank Facility, which was secured in July 1997, was $7.5 million in 1998 compared
to $4.0 million in 1997.
Interest expense, including related party expense, increased $21.8 million, or
98.2%, from $22.2 million for the year ended December 31, 1996 to $44.0 million
for the year ended December 31, 1997. This increase was primarily due to the
accretion of interest on the September 1997 Notes and the accretion of interest
for an entire year on the May 1996 Notes. The Notes currently accrete interest
at a rate of 14.0% compounded semi-annually. The interest rate increased from
14.0% to 14.75% on May 16, 1997, but was reduced back to 14.0% per annum on
October 14, 1998, when the Company consummated the Equity Sale.
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 March 9, 1999, 83.0% 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
79.0% of the items identified by the Company during the Identification Phase as
to Year 2000 compliance. Of the items researched, 74.0% 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 by mid-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 evaluate 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.
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.
30
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 a 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 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.
31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
--------------------------------------------------------------------
INVESTMENT PORTFOLIO
The Company does not use derivative financial instruments in its non-trading
investment portfolio. The Company places its 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. The
Company also places its short-term investments in liquid instruments that meet
high credit quality standards with original maturities at the date of purchase
of between three and twelve months. The Company also limits the amount of credit
exposure to any one issue, issuer or type of instrument. These investments are
subject to interest rate risk and will fall in value if market interest rates
increase, however, the Company does not expect any material loss with respect to
its investment portfolio.
The table below provides information about the Company's non-trading investment
portfolio, including cash flows and related weighted-average fixed interest
rates by expected maturity dates.
[Enlarge/Download Table]
As of December 31, 1998
------------------------------------
$ Amount Rate Fair Value
-------- ----- ----------
Maturity Fiscal Year 1999 (In thousands, except interest rates)
Cash and cash equivalents................................... $181 2.75% $181
Short-term liquid investments............................... 763 4.93% 763
---- ----
Total portfolio........................................ $944 4.51% $944
==== ====
IMPACT OF FOREIGN CURRENCY RATE CHANGES
The Company is 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. The Company's 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 the Company's share in results of its minority-owned affiliates such
as XYZ Entertainment and Saturn.
The spot rates for the countries in the Australia/Pacific region are shown below
for the Australian and New Zealand dollars per one U.S. dollar.
Australia New Zealand
--------- -----------
December 31, 1998..................... 1.6332 1.8939
December 31, 1997..................... 1.5378 1.7161
December 31, 1996..................... 1.2583 1.4156
In general, the Company and the operating companies do not execute hedge
transactions to reduce the Company's exposure to foreign currency exchange rate
risk. 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.
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. The Company may also acquire
interests in companies that operate in countries where the removal or conversion
of currency is restricted.
32
INTEREST RATE SENSITIVITY
The table below provides information about the Company's financial instruments
that are sensitive to changes in interest rates, primarily debt obligations. The
information is presented in U.S. dollar equivalents, which is the Company's
reporting currency. The instrument's actual cash flows are denominated in both
U.S. dollars (May 1996 and September 1997 Notes) and Australian dollars (Austar
Bank Facility).
[Enlarge/Download Table]
As of December 31, 1998
-----------------------------
Book Value Fair Value
---------- ----------
(U.S. dollars, in thousands, except interest rates)
Long-term and short-term debt:
Fixed rate USD Denominated..................... $356,640 $246,433
Average interest rate........................ 14.00% 20.71%
Variable rate A$ Denominated................... $104,090 $104,090
Average interest rate........................ 6.75% 6.75%
The table below presents principal cash flows and related weighted-average
interest rates by expected maturity dates for the Company's debt obligations.
The information is presented in U.S. dollar equivalents, which is the Company's
reporting currency. The instrument's actual cash flows are denominated in both
U.S. dollars (May 1996 and September 1997 Notes) and Australian dollars (Austar
Bank Facility).
[Enlarge/Download Table]
As of December 31, 1998
--------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total
------ ------ ------ ------ ------ ---------- -------
(U.S. dollars, in thousands, except interest rates)
Long-term and short-term debt:
Fixed rate USD Denominated........... -- -- -- -- -- $356,640 $356,640
Average interest rate.............. -- -- -- -- -- 14.00% 14.00%
Variable rate A$ Denominated......... $36,738 -- -- -- -- $ 67,352 $104,090
Average interest rate.............. 6.75% -- -- -- -- 6.75% 6.75%
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 two interest rate swaps to manage interest rate exposure on the
Austar Bank Facility. These swap agreements expire in 2002 and effectively
convert an aggregate principal amount of A$50.0 million ($30.6 million as of
December 31, 1998) of variable rate, long-term debt into fixed rate borrowings.
As of December 31, 1998, the weighted-average fixed rate under these agreements
was 7.94% compared to a weighted-average variable rate on the Austar Bank
Facility of 6.75%. As a result of these swap agreements, interest expense was
increased by approximately A$0.6 million ($0.4 million) during 1998.
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. As of December 31, 1998, the Company
estimates it would have paid approximately A$1.3 million ($0.8 million) to
terminate the agreements.
33
The table below provides information about the Company's interest rate swaps.
The table presents notional amounts and weighted-average interest rates by
expected (contractual) maturity dates. Notional amounts are used to calculate
the contractual payments to be exchanged under the contract. The information is
presented in U.S. dollar equivalents (in thousands), which is the Company's
reporting currency. The instrument's actual cash flows are denominated in
Australian dollars.
[Enlarge/Download Table]
As of December 31, 1998
--------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total
------ ------ ------ ------ ------ ---------- -------
(U.S. dollars, in thousands, except interest rates)
Interest Rate Swaps:
Variable to fixed..... -- -- -- $30,615 -- -- $30,615
Average pay rate %.... 8.00% 8.00% 8.00% 8.00% -- -- 8.00%
Average receive rate % 6.75% 6.75% 6.75% 6.75% -- -- 6.75%
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------
The consolidated financial statements of the Company are filed under this Item
as follows:
[Enlarge/Download Table]
Page
Number
------
UIH AUSTRALIA/PACIFIC, INC.
Report of Independent Public Accountants................................................................. 36
Consolidated Balance Sheets as of December 31, 1998 and 1997............................................. 37
Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996............... 38
Consolidated Statements of Stockholder's (Deficit) Equity for the Years Ended December 31, 1998,
1997 and 1996.......................................................................................... 39
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996............... 40
Notes to Consolidated Financial Statements............................................................... 41
The financial statement schedules required by Regulation S-X are filed under
Item 14 "Exhibits, Financial Statement Schedules and Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
--------------------------------------------------------------------------------
None.
35
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To UIH Australia/Pacific, Inc.:
We have audited the accompanying consolidated balance sheets of UIH
Australia/Pacific, Inc. (a Colorado corporation and wholly-owned subsidiary of
UIH Asia/Pacific Communications, Inc.) and subsidiaries as of December 31, 1998
and 1997 and the related consolidated statements of operations, stockholder's
(deficit) equity and cash flows for the years ended December 31, 1998, 1997 and
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of UIH Australia/Pacific, Inc. and subsidiaries as of
December 31, 1998 and 1997, and the results of their operations and their cash
flows for the years ended December 31, 1998, 1997 and 1996 in conformity with
generally accepted accounting principles.
As explained in Note 2 to the consolidated financial statements, effective
January 1, 1998, the Company changed its method of accounting for its investment
in its 65%-owned subsidiary, Saturn Communications Limited.
ARTHUR ANDERSEN LLP
Denver, Colorado
March 29, 1999
36
[Enlarge/Download Table]
UIH AUSTRALIA/PACIFIC, INC.
CONSOLIDATED BALANCE SHEETS
(Stated in thousands, except share and per share amounts)
As of December 31,
-------------------
1998 1997
ASSETS -------- --------
Current assets
Cash and cash equivalents................................................................................. $ 181 $ 12,344
Restricted cash........................................................................................... -- 420
Short-term liquid investments............................................................................. 763 12,325
Subscriber receivables.................................................................................... 6,322 2,548
Related party ............................................................................................ 746 1,942
Other receivables......................................................................................... 736 1,220
Prepaids and other current assets......................................................................... 4,615 2,185
-------- --------
Total current assets................................................................................. 13,363 32,984
Investments in and advances to affiliated companies, accounted for under the equity method, net............. 24,597 --
Property, plant and equipment, net of accumulated depreciation of $147,511 and $78,179, respectively........ 122,968 183,101
Goodwill and other intangible assets, net of accumulated amortization of $17,512 and $11,817, respectively.. 42,559 48,708
Deferred financing costs, net of accumulated amortization of $3,237 and $1,306, respectively................ 11,675 13,393
Other non-current assets.................................................................................... 870 846
-------- --------
Total assets......................................................................................... $216,032 $279,032
======== ========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities
Accounts payable.......................................................................................... $ 5,426 $ 4,055
Accrued liabilities....................................................................................... 28,522 19,372
Construction payables..................................................................................... 1,076 6,008
Related party payables.................................................................................... 3,665 1,596
Related party note payable................................................................................ -- 4,999
Current portion of notes payable.......................................................................... 36,738 --
Current portion of other long-term debt................................................................... 2,189 1,825
-------- --------
Total current liabilities............................................................................ 77,616 37,855
Due to parent............................................................................................... 6,578 5,394
Senior discount notes....................................................................................... 356,640 309,123
Other long-term debt........................................................................................ 68,086 77,971
Other long-term liabilities................................................................................. 1,741 1,426
-------- --------
Total liabilities.................................................................................... 510,661 431,769
-------- --------
Commitments and contingencies (Notes 14 and 15)
Minority interest in subsidiary............................................................................. -- 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, 17,810,249 and 13,864,941 shares
issued and outstanding, respectively................................................................... 178 139
Additional paid-in capital............................................................................... 215,624 139,621
Accumulated deficit...................................................................................... (481,240) (274,949)
Other cumulative comprehensive loss...................................................................... (29,191) (28,964)
-------- --------
Total stockholder's deficit................................................................................. (294,629) (164,153)
-------- --------
Total liabilities and stockholder's deficit................................................................. $216,032 $279,032
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
37
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UIH AUSTRALIA/PACIFIC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Stated in thousands, except share and per share amounts)
For the Years Ended
December 31,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
Service and other revenue................................................................ $ 89,819 $ 68,961 $ 24,977
System operating expense, including related party expense of
$4,124, $3,291 and $788, respectively.................................................. (71,149) (52,703) (22,865)
System selling, general and administrative expense....................................... (49,738) (50,006) (32,665)
Corporate general and administrative expense, including management fee to
related party of $853, $790 and $750, respectively..................................... (5,696) (3,306) (1,376)
Depreciation and amortization............................................................ (97,140) (80,802) (36,269)
---------- ---------- ----------
Net operating loss.................................................................. (133,904) (117,856) (68,198)
Interest income, including related party income of $0, $425, and $1,438,
respectively........................................................................... 207 1,569 5,544
Interest expense, including related party expense of $1,079, $1,730, and $1,896,
respectively........................................................................... (56,705) (43,994) (22,194)
Provision for losses on marketable equity securities and investment related costs........ (4,462) (4,784) --
Other (expense) income, net.............................................................. (1,128) (1,601) 90
---------- ---------- ----------
Net loss before other items......................................................... (195,992) (166,666) (84,758)
Share in results of affiliated companies, net............................................ (10,299) (2,408) (5,414)
Minority interest in subsidiary.......................................................... -- 1,018 2,186
---------- ---------- ----------
Net loss............................................................................ $ (206,291) $ (168,056) $ (87,986)
========== ========== ==========
Basic and diluted net loss per common share.............................................. $ (14.02) $ (12.12) $ (6.44)
========== ========== ==========
Weighted-average number of common shares outstanding..................................... 14,718,857 13,864,941 13,670,832
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
38
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UIH AUSTRALIA/PACIFIC, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S (DEFICIT) EQUITY
(Stated in thousands, except share amounts)
Other
Cumulative Total
Common Stock Additional Components of Sum of
-------------------- Paid-In Accumulated Comprehensive Comprehensive
Shares Amount Capital Deficit Income(Loss)(1) Income(Loss) Total
---------- -------- ---------- ----------- --------------- ------------- ---------
Balances, January 1, 1996............... 13,504,453 $135 $ 93,647 $ (18,907) $ 191 $ (18,716) $ 75,066
=========
Cash contributions from parent.......... -- -- 10,903 -- -- -- 10,903
Acquisition of remaining 50.0%
interest in New Zealand subsidiary.... 360,488 4 7,796 -- -- -- 7,800
Unrealized loss on investment........... -- -- -- -- (3,412) (3,412) (3,412)
Change in cumulative translation
adjustments........................... -- -- -- -- 1,676 1,676 1,676
Net loss................................ -- -- -- (87,986) -- (87,986) (87,986)
---------
Total comprehensive loss................ -- -- -- -- -- $ (89,722) --
---------- ---- -------- --------- -------- ========= ---------
Balances, December 31, 1996............. 13,864,941 139 112,346 (106,893) (1,545) 4,047
Cash contributions from parent.......... -- -- 7,863 -- -- -- 7,863
Non-cash contributions from parent...... -- -- 9,749 -- -- -- 9,749
Gain on sale of stock by New
Zealand subsidiary................... -- -- 5,985 -- -- -- 5,985
Issuance of warrants to purchase
common stock.......................... -- -- 3,678 -- -- -- 3,678
Provision for loss on marketable
equity securities, net................ -- -- -- -- 3,412 3,412 3,412
Change in cumulative translation
adjustments........................... -- -- -- -- (30,831) (30,831) (30,831)
Net loss................................ -- -- -- (168,056) -- (168,056) (168,056)
---------
Total comprehensive loss................ -- -- -- -- -- $(195,475) --
---------- ---- -------- --------- -------- ========= ---------
Balances, December 31, 1997............. 13,864,941 139 139,621 (274,949) (28,964) (164,153)
Cash contributions from parent.......... -- -- 58,947 -- -- -- 58,947
Non-cash contributions from parent...... -- -- 17,095 -- -- -- 17,095
Issuance of capital stock to
parent related to cumulative
cash capital contributions............ 3,945,308 39 (39) -- -- -- --
Change in cumulative translation
adjustments........................... -- -- -- -- (227) (227) (227)
Net loss................................ -- -- -- (206,291) -- (206,291) (206,291)
---------
Total comprehensive loss................ -- -- -- -- -- $(206,518) --
---------- ---- -------- --------- -------- ========= ---------
Balances, December 31, 1998............. 17,810,249 $178 $215,624 $(481,240) $(29,191) $(294,629)
========== ==== ======== ========= ======== =========
(1) As of December 31, 1996, the components of Other Cumulative Comprehensive
Income (Loss) include $1,867 and $(3,412) for foreign currency translation
adjustments and unrealized loss on investment, respectively. As of December
31, 1997 and 1998, Other Cumulative Comprehensive Income (Loss) represents
foreign currency translation adjustments.
The accompanying notes are an integral part of these consolidated financial statements.
39
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UIH AUSTRALIA/PACIFIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in thousands)
For the Years Ended
December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................................. $(206,291) $(168,056) $(87,986)
Adjustments to reconcile net loss to net cash flows from operating activities:
Depreciation and amortization.......................................................... 97,140 80,802 36,269
Share in results of affiliated companies, net.......................................... 10,299 2,408 5,414
Allocation of expense accounted for as capital contributions by parent................. 4,622 1,949 --
Provision for losses on marketable equity securities and investment related costs...... 4,462 4,784 --
Minority interest share of losses...................................................... -- (1,018) (2,186)
Accretion of interest on senior notes and amortization of deferred financing costs..... 49,508 38,747 20,270
Increase in subscriber receivables..................................................... (4,062) (1,375) (1,487)
Decrease (increase) in related party receivables....................................... 1,305 (316) (51)
(Increase) decrease in other assets.................................................... (5,719) 68 (1,461)
Increase in technical assistance agreement payables.................................... 8,193 7,375 1,677
Increase in accounts payable, accrued liabilities and other............................ 16,701 9,725 12,122
--------- --------- --------
Net cash flows from operating activities................................................. (23,842) (24,907) (17,419)
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term liquid investments................................................ (763) (15,988) (199,242)
Sale of short-term liquid investments.................................................... 12,325 22,303 180,602
Restricted cash released (deposited)..................................................... -- (420) --
Investments in and advances to affiliated companies and acquisition of assets............ (11,389) (3,272) (16,204)
Purchase of additional interest in Australian investment................................. -- -- (7,920)
Deconsolidation of New Zealand subsidiary................................................ (9,881) -- --
Purchase of property, plant and equipment................................................ (71,466) (101,135) (187,100)
Increase (decrease) in construction payables............................................. (2,007) (29,621) 38,407
--------- --------- --------
Net cash flows from investing activities................................................. (83,181) (128,133) (191,457)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash contributed from parent............................................................. 58,947 7,863 10,664
Cash contributed from minority interest partner.......................................... -- 19,566 --
Proceeds from offering of senior discount notes.......................................... -- 29,925 225,115
Borrowings on related party payable to parent............................................ -- 9,998 15,073
Payment on bridge loan payable to parent................................................. -- -- (25,000)
Deferred financing costs................................................................. (473) (5,643) (10,007)
Borrowings of other debt................................................................. 39,519 85,210 2,465
Payment of capital leases and other debt................................................. (3,326) (490) --
--------- --------- --------
Net cash flows from financing activities................................................. 94,667 146,429 218,310
--------- --------- --------
EFFECT OF EXCHANGE RATES ON CASH......................................................... 193 (265) 1,056
--------- --------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS......................................... (12,163) (6,876) 10,490
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........................................... 12,344 19,220 8,730
--------- --------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD................................................. $ 181 $ 12,344 $ 19,220
========= ========= ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Non-cash capital contributions from parent............................................... $ 12,473 $ 7,800 $ --
========= ========= ========
Gain on issuance of shares by New Zealand subsidiary..................................... $ -- $ 5,985 $ --
========== ========= ========
Non-cash issuance of warrants to purchase common stock................................... $ -- $ 3,678 $ --
========= ========= ========
Non-cash stock issuance for purchase of 50.0% interest in New Zealand subsidiary......... $ -- $ -- $ 7,800
========= ========= ========
Increase in unrealized loss on investment................................................ $ -- $ (985) $ (3,412)
========= ========= ========
Assets acquired with capital leases...................................................... $ 1,299 $ 548 $ 3,632
========= ========= ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest................................................................... $ 5,323 $ 1,239 $ --
========= ========= ========
Cash received for interest............................................................... $ 144 $ 796 $ 3,578
========= ========= ========
The accompanying notes are an integral part of these consolidated financial statements.
40
UIH AUSTRALIA/PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997
(Monetary amounts stated in thousands)
1. ORGANIZATION AND BACKGROUND
UIH Australia/Pacific, Inc. (the "Company"), a wholly-owned subsidiary of UIH
Asia/Pacific Communications, Inc. ("UAP"), which is in turn an indirect
98.0%-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 December
31, 1998.
********************************************************
* UIH *
********************************************************
*
100% *
*
********************************************************
* United International Properties, Inc. ("UIPI") *
********************************************************
*
98% *
*
********************************************************
* UAP *
********************************************************
*
100% *
*
********************************************************
* The Company *
********************************************************
*
*
*
********************************************************
* CTV Pty Limited and STV Pty Limited *
* (collectively, "Austar")(Australia) 100% *
* United Wireless Pty Limited *
* ("United Wireless") ("Australia") 100% *
* Telefenua S.A. ("Telefenua")(Tahiti) 90% *
* Saturn Communications Limited ("Saturn") *
* (New Zealand) 65% *
* XYZ Entertainment Pty Limited *
* ("XYZ Entertainment")(Australia) 25% *
********************************************************
LIQUIDITY AND CAPITAL RESOURCES
The Company and its subsidiaries have experienced net losses since formation. As
of December 31, 1998, the Company's working capital and projected operating
cashflow are not sufficient to fund its expenditures and to service its
indebtedness over the next 12 months.
A substantial portion of the Company's investments to date relate to its
investment in Austar, which is comprised primarily of multi-channel multi-point
distribution systems ("MMDS") and direct-to-home ("DTH") satellite operations.
The Company has essentially completed the construction and deployment of
Austar's entire MMDS network infrastructure and has incurred certain other
significant expenditures, such as Austar's National Customer Service Center,
which contemplates provision of MMDS and DTH services to a substantially larger
customer base than currently exists. If additional capital financings are not
available to continue to connect new customers, revenues will decline and the
current net operating loss will increase over time due to customer
disconnections, which are normally experienced in connection with multi-channel
television operations. In order to expand Austar's customer base and build-out
the Company's other projects, the Company will need a significant amount of
additional capital. As of December 31, 1998, the Company had a net working
capital deficit of $60,588, excluding related party payables of $3,665. The
working capital deficit includes $36,738 of bank debt for Austar which the
Company expects will be refinanced by the end of April 1999 upon execution of
the new credit facility at Austar.
41
UIH AUSTRALIA/PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Due to the nature of the Company's operations, the Company is generally able to
slow the rate of subscriber connections at Austar and network construction at
the Company's other projects to adjust to the level of funding sources that are
available. The Company believes it can, if necessary, substantially reduce the
capital required at Austar as the majority of future capital expenditures will
be for subscriber installation and premises equipment, which are controllable by
the Company based upon the rate of new subscriber connections.
In late 1998, Austar received a supplemental amendment to the existing senior
syndicated term debt facility in the amount of Australian $("A$")200,000
($122,459 as of December 31, 1998) (the "Austar Bank Facility") which allows
Austar to draw on the A$90,000 Term Loan Facility. As of December 31, 1998,
Austar had drawn A$60,000 under the Term Loan Facility and the remaining
A$30,000 was drawn subsequent to year end. 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 April 30, 1999 (see Note 8). If the New Austar Bank Facility does not close,
the Term Loan portion of the Austar Bank Facility (A$90,000) will be due April
30, 1999. The Company remains reliant upon the continued financial and
management support of its immediate controlling entity, UAP, and its ultimate
controlling entity, UIH. The Company believes it will close the New Austar and
Saturn Bank Facilities by April 30, 1999 and also continues to investigate other
potential financial alternatives. However, even if such new facilities are not
finalized, the Company believes that committed financial support from UIH
combined with, if necessary, reductions in the Company's planned capital
expenditures, are sufficient to sustain its operations through at least mid-
2000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and all subsidiaries where it exercises a controlling financial interest
through the ownership of a majority voting interest. The Company has
consolidated the operations of Saturn since July 1, 1996. Prior to that time,
the Company accounted for its investment in Saturn under the equity method. The
Company discontinued consolidating the results of operations from Saturn due to
a change in an accounting principle effective January 1, 1998. However, the
Company is currently discussing alternatives which would allow for the
consolidation of Saturn. Effective October 1, 1998, the Company discontinued
consolidating the results of operations of Telefenua due to an
other-than-temporary loss of control and began using the equity method of
accounting (See Note 15). 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 maturities
greater than three months. Short-term liquid investments are classified as
available-for-sale and reported at fair market value.
RESTRICTED CASH
Cash held as collateral for letters of credit is classified based on the
expected expiration of such facilities.
INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES, ACCOUNTED FOR UNDER THE
EQUITY METHOD
For those investments in companies in which the Company's voting interest is
20.0% to 50.0%, its 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 affiliates, limited to the
extent of the Company's investment in and advances to the affiliates, including
42
UIH AUSTRALIA/PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. All MMDS/DTH subscriber equipment and capitalized installation
labor is depreciated over 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 unamortized portion
of 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
reconnect are recognized in the statement of operations in the period in which
the reconnection occurs.
Office equipment, furniture and fixtures, building 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.
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 cost, and
amortization expense is computed using the straight-line method over the term of
the license. In Australia, the cost to acquire these licenses for a five-year
period is being amortized over the remaining license period. The licenses are
renewable every five years.
RECOVERABLE 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 cable television services to
subscribers and is recognized in the period the related services are provided.
Initial installation fees are recognized as revenue in the period in which the
installation occurs, to the extent installation fees are equal to or less than
direct selling costs, which are expensed. To the extent installation fees exceed
direct selling costs, the excess fees are deferred and amortized over the
average contract period. All installation fees and related costs with respect to
reconnections and disconnections are recognized in the statement of operations
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.
43
UIH AUSTRALIA/PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of subscriber receivables. Concentrations of
credit risk with respect to subscriber receivables are limited due to the large
number of customers comprising the Company's customer base.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method which
requires recognition of deferred tax assets and liabilities for the expected
future income tax consequences of transactions which have been included in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets, liabilities and loss carryforwards using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Net deferred tax assets are then reduced by a valuation allowance if
management believes it more likely than not that they will not be realized.
STOCKHOLDER'S DEFICIT
Gains realized as a result of stock sales 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 Staff
Accounting Bulletin No. 51 ("SAB 51").
On October 14, 1998, the Company issued 3,945,308 shares of its capital stock to
UAP (the "Equity Sale") related to cumulative gross equity contributions to the
Company of $70,000 through that date.
BASIC AND DILUTED LOSS PER SHARE
"Basic loss per share" is determined by dividing net loss available to common
shareholders by the weighted-average number of common shares outstanding during
each period. "Diluted earnings per share" includes the effects of potentially
issuable common stock, but only if dilutive. The treasury stock method, using
the average price of the Company's common stock for the period, is applied to
determine dilution from options and warrants. The if-converted method is used
for convertible securities. Because of reported losses, there are no differences
between basic and diluted loss per share amounts for the Company for any of the
years presented. The only potentially dilutive securities excluded as
antidilutive were the warrants issued in November 1997 (see Note 9).
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.
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 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 within other cumulative comprehensive income (loss) in the consolidated
statements 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.
44
UIH AUSTRALIA/PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash flows from the Company's operations in foreign countries are calculated
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 item below cash flows from financing activities.
NEW ACCOUNTING PRINCIPLES
The American Institute of Certified Public Accountants recently issued Statement
of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"),
which is required to be adopted by affected companies for fiscal years beginning
after December 15, 1998. SOP 98-5 defines start-up and organization costs, which
must be expensed as incurred. The Company does not expect the adoption of SOP
98-5 to have a material effect on its financial position or results of
operations.
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 market 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. ACQUISITIONS AND DISPOSITIONS
In July 1997, SaskTel Holdings (New Zealand), Inc. ("SaskTel") purchased a 35.0%
equity interest in Saturn by investing approximately New Zealand $("NZ$")29,900
($19,566) directly into Saturn for its newly-issued shares (the "Saturn
Transaction"). The Saturn Transaction resulted in a SAB51 gain of $5,985, which
was credited directly to paid-in capital.
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.
45
UIH AUSTRALIA/PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. CASH AND CASH EQUIVALENTS, RESTRICTED CASH AND SHORT-TERM LIQUID
INVESTMENTS
[Enlarge/Download Table]
As of December 31, 1998
--------------------------------------------------
Short-term
Cash and Cash Restricted Liquid
Equivalents Cash Investments Total
------------- ----------- ------------ -------
Cash................................. $181 $ -- $ -- $181
Certificates of deposit.............. -- -- -- --
Commercial paper..................... -- -- 406 406
Government securities................ -- -- 357 357
---- ---- ---- ----
Total............................. $181 $ -- $763 $944
==== ==== ==== ====
As of December 31, 1997
--------------------------------------------------
Short-term
Cash and Cash Restricted Liquid
Equivalents Cash Investments Total
------------- ----------- ------------ -------
Cash................................ $12,344 $420 $ -- $12,764
Certificates of deposit............. -- -- 8,399 8,399
Commercial paper.................... -- -- 3,926 3,926
------- ---- ------- -------
Total............................ $12,344 $420 $12,325 $25,089
======= ==== ======= =======
5. INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES, ACCOUNTED FOR UNDER
THE EQUITY METHOD
[Enlarge/Download Table]
As of December 31, 1998
---------------------------------------------------------------------------------------
Investments in Cumulative Equity Cumulative
and Advances to in Losses of Translation Valuation
Affiliated Companies Affiliated Companies Adjustments Allowance Total
-------------------- -------------------- ----------- ----------- -------
Saturn............................ $49,808 $(23,138) $(2,881) $ -- $23,789
XYZ Entertainment................. 19,363 (18,666) 111 -- 808
Telefenua......................... 18,599 (14,215) -- (4,384)(1) --
------- -------- ------- ------- -------
Total.......................... $87,770 $(56,019) $(2,770) $(4,384) $24,597
======= ======== ======= ======= =======
[Enlarge/Download Table]
As of December 31, 1997
--------------------------------------------------------------------------------------
Investments in Cumulative Equity Cumulative
and Advances to in Losses of Translation Valuation
Affiliated Companies Affiliated Companies Adjustments Allowance Total
-------------------- -------------------- ----------- ----------- -----
XYZ Entertainment................. $18,610 $(18,720) $110 $-- $--
======= ======== ==== === ===
(1) The Company has reserved the remaining balance of the Telefenua
investment of $4,384 due to the uncertainty of realization (See Note
15).
46
UIH AUSTRALIA/PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Condensed financial information for Saturn, stated in U.S. dollars, is as
follows:
[Enlarge/Download Table]
As of
December 31, 1998
-----------------
Current assets............................................. $ 4,071
Non-current assets......................................... 59,242
-------
Total assets............................................ $63,313
=======
Current liabilities........................................ $33,608
Non-current liabilities.................................... 19
Shareholders' equity....................................... 29,686
-------
Total liabilities and shareholders' equity.............. $63,313
=======
For the Year Ended December 31, 1998
------------------------------------
Revenue.................................................... $ 1,693
Expenses................................................... (16,934)
--------
Net loss................................................ $(15,241)
========
6. PROPERTY, PLANT AND EQUIPMENT
[Enlarge/Download Table]
As of December 31,
--------------------------
1998 1997
-------- --------
Subscriber premises equipment and converters............... $187,247 $160,413
MMDS distribution facilities............................... 54,725 55,093
Cable distribution networks................................ 2,009 16,770
Office equipment, furniture and fixtures................... 9,810 10,813
Buildings and leasehold improvements....................... 2,841 5,647
Other...................................................... 13,847 12,544
-------- --------
270,479 261,280
Accumulated depreciation................................ (147,511) (78,179)
-------- --------
Net property, plant and equipment....................... $122,968 $183,101
======== ========
7. GOODWILL AND OTHER INTANGIBLE ASSETS
[Enlarge/Download Table]
As of December 31,
--------------------------
1998 1997
-------- --------
Austar..................................................... $55,805 $51,552
Saturn..................................................... -- 6,100
Other...................................................... 4,266 2,873
------- -------
60,071 60,525
Accumulated amortization................................ (17,512) (11,817)
------- -------
Net goodwill and other intangible assets................ $42,559 $48,708
======= =======
8. CURRENT PORTION OF NOTES PAYABLE
[Enlarge/Download Table]
As of December 31,
--------------------------
1998 1997
-------- --------
Austar Bank Facility (See Note 10)......................... $36,738 $ --
------- ----
Total notes payable..................................... $36,738 $ --
======= ====
47
UIH AUSTRALIA/PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. SENIOR DISCOUNT NOTES
[Enlarge/Download Table]
As of December 31,
--------------------------
1998 1997
-------- --------
May 1996 Notes (as defined below), net of
unamortized discount...................................... $321,687 $278,662
September 1997 Notes (as defined below), net of
unamortized discount...................................... 34,953 30,461
-------- --------
Total senior discount notes............................. $356,640 $309,123
======== ========
MAY 1996 NOTES
The 14.0% senior notes, which the Company issued in May 1996 at a discount from
their principal amount of $443,000 (the "May 1996 Notes"), had an accreted value
of $321,687 as of December 31, 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 the Equity
Sale resulting in gross proceeds to the Company of $70,000 which reduced the
interest rate from 14.75% to 14.0% per annum. Due to the increase in the
interest rate effective May 16, 1997 until consummation of the Equity Sale, the
May 1996 Notes will accrete to a principal amount of $447,418 on May 15, 2001,
the date cash interest begins to accrue. The quoted fair market value of these
notes was approximately $223,700 and $292,380 as of December 31, 1998 and 1997,
respectively.
SEPTEMBER 1997 NOTES
The 14.0% senior notes, which the Company issued in September 1997 at a discount
from their principal amount of $45,000 (the "September 1997 Notes"), had an
accreted value of $34,953 as of December 31, 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 the 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. The quoted fair market value of these notes was approximately
$22,700 and $29,700 as of December 31, 1998 and 1997, respectively.
On November 17, 1997, pursuant to the terms of the indentures governing the May
1996 Notes and the September 1997 Notes (collectively, the "Notes"), the Company
issued warrants to purchase 488,000 shares of its common stock, which
represented 3.4% of its common stock. The warrants are exercisable at a price of
$10.45 per share which would result in gross proceeds of approximately $5,100
upon exercise. The warrants are exercisable through May 15, 2006. The warrants
were valued at $3,678 and have been reflected as an additional discount to the
Notes on a pro-rata basis and as an increase in additional paid-in capital.
10. OTHER LONG-TERM DEBT
[Enlarge/Download Table]
As of December 31,
--------------------------
1998 1997
-------- --------
Austar Bank Facility (as defined below).................... $67,352 $71,531
Vendor financed equipment at Saturn........................ -- 3,730
Capital leases and other................................... 2,923 4,535
------- -------
70,275 79,796
Less current portion.................................... (2,189) (1,825)
------- -------
Total other long-term debt.............................. $68,086 $77,971
======= =======
48
UIH AUSTRALIA/PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
AUSTAR BANK FACILITY
In July 1997, Austar secured a senior syndicated term debt facility in the
amount of A$200,000 ($122,459 as of December 31, 1998) 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 can not (a)
pay any dividends, (b) make any payments of interest on the Company's Notes or
(c) pay any fees under its technical assistance agreements prior to December 31,
2000. Subsequent to December 31, 2000, the payments in (a), (b) and (c) above
may be made, subject to certain debt to cash flow ratios. As of December 31,
1998, Austar had drawn the entire amount of the working capital facility and the
cash advance facility totaling A$110,000 ($67,352 converted using the December
31, 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$200,000 is intended to refinance the Austar Bank Facility in
April 1999 and the remaining A$200,000 is available upon the contribution of
additional equity on a 2:1 debt-to-equity basis. The commitment has been
extended to April 30, 1999 and management expects to close this financial
transaction by mid-April 1999. In the interim, Austar has received a
supplemental amendment to the existing Austar Bank Facility which allows Austar
to draw under the A$90,000 Term Loan Facility 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 December 31,
1998, Austar had drawn A$60,000 ($36,738 converted using the December 31, 1998
exchange rate) on the Term Loan Facility for a total outstanding balance of
A$170,000. Subsequent to year-end an additional A$30,000 was borrowed against
the Term Loan Facility which, along with the A$60,000 draw, is payable in full
in April 1999.
DEBT MATURITIES
The Company's maturities of its other long-term debt are as follows:
1999....................................................... $ 2,189
2000....................................................... 734
2001....................................................... --
2002....................................................... --
2003 and thereafter........................................ 67,352
-------
$70,275
=======
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 two interest rate swaps to manage interest rate exposure on the
Austar Bank Facility. These swap agreements expire in 2002 and effectively
convert an aggregate principal amount of A$50.0 million ($30.6 million as of
December 31, 1998) of variable rate, long-term debt into fixed rate borrowings.
As of December 31, 1998, the weighted-average fixed rate under these agreements
was 7.94% compared to a weighted-average variable rate on the Austar Bank
Facility of 6.75%. As a result of these swap agreements, interest expense was
increased by approximately A$0.6 million ($0.4 million) during 1998.
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. As of December 31, 1998, the Company
estimates it would have paid approximately A$1.3 million ($0.8 million) to
terminate the agreements.
11. 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 performs certain administrative, accounting, financial reporting and
other services for the Company, which has no separate employees of its own. For
the first four months of 1996, UIH Management allocated approximately $250 for
49
UIH AUSTRALIA/PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
such services. Pursuant to the Management Agreement, the management fee was $750
for the first year (beginning May 1, 1996), and it increases on each anniversary
date of the Management Agreement by 8.0% 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"). For the years ended December
31, 1998, 1997 and 1996, the Company recorded $853, $790 and $750, respectively,
in related party management fees. The Company is also allocated a portion of
UIH's indirect overhead costs such as administrative, accounting, financial
reporting and other services. These costs are recorded as a deemed capital
contribution in the Company's financial statements. For the years ended December
31, 1998, 1997 and 1996, the Company recorded $4,622, $1,949 and $0,
respectively, in corporate general and administrative expense allocated from
UIH.
UIH Management executed a 10-year technical assistance agreement with Austar
pursuant to which it provided various management and technical services. This
agreement is renewable for up to an additional 15 one-year terms. Under the
agreement dated October 12, 1994, UIH Management was to receive a management fee
equal to 5.0% of Austar's total revenue, less certain deductions, for the first
two years, 4.0% for the next six years, 3.0% for the following two years and
2.0% thereafter. Effective March 31, 1997, UIH Management assigned its rights
and obligations under this agreement to UAP. In addition, the management fee was
revised to remain at 5.0% of Austar's gross revenue throughout the remaining
term of the agreement. Austar's chief operating officer and director of sales,
marketing and programming are employees of UIH that have been seconded to
Austar. In addition, UIH has appointed three other management personnel and all
six directors. Austar reimburses UIH for certain direct costs incurred by UIH,
including salaries and benefits relating to these senior management positions.
Telefenua and SFCC, the parent company of Telefenua, executed a 10-year
technical services agreement on January 11, 1995, whereby SFCC would provide
technical, administrative and operational assistance to Telefenua encompassing
the following areas: (i) engineering, design, construction and equipment
purchasing; (ii) marketing, selling and advertising; (iii) accounting, billing
and subscriber management systems and (iv) personnel management and training for
a fee equal to 5.5% of Telefenua's gross revenue through 1996, 3.5% of gross
revenue during 1997 and 2.5% thereafter. SFCC would also be reimbursed for all
direct and indirect costs associated with the services it provided. Effective
January 11, 1995, SFCC assigned all of its rights and obligations to UIH
Management, except that SFCC retained the right to receive 0.5% of Telefenua's
gross revenues through the term of the agreement. Accordingly, Telefenua would
pay UIH Management fees of 5.0%, 3.0% and 2.0% of Telefenua's gross revenues
over the same periods. Effective March 31, 1997, UIH Management assigned its
rights and obligations under this agreement to UAP. Telefenua reimburses UIH for
certain direct costs incurred by UIH. The Company and Telefenua are currently in
a dispute concerning services to be provided under the technical assistance
agreement.
Saturn and UIH executed a technical services agreement pursuant to which UIH
provided technical, administrative and operational assistance to Saturn
encompassing the following areas: (i) engineering, design, construction and
equipment purchasing; (ii) marketing, pricing and packaging of services; (iii)
selection of programming and negotiations with suppliers and (iv) accounting,
billing and subscriber management systems. UIH receives a management fee equal
to 5.0% of Saturn's gross revenue through July 1999. Effective March 31, 1997,
UIH assigned all its rights and obligations under this agreement to UAP. In
connection with SaskTel's investment in Saturn on July 23, 1997, the management
fee payable to UAP was reduced to 2.5% of Saturn's gross revenue and the
management fee payable to SaskTel became 2.5% of Saturn's gross revenue under a
similar agreement. The chief executive officer is an employee of UIH that has
been seconded to Saturn. Saturn reimburses UIH for certain direct costs incurred
by UIH, including salaries and benefits relating to this senior management
position.
United Wireless and UAP executed a technical services agreement, commencing
January 1, 1997, pursuant to which UAP has agreed to provide technical,
administrative and operational assistance to United Wireless encompassing the
following areas: (i) design, engineering and construction of the network; (ii)
marketing and sales of the service; (iii) network management, customer
management and information systems and (iv) personnel and training. UAP receives
a management fee equal to 5.0% of the gross revenue of United Wireless through
December 2007. The chief executive officer is an employee of UIH that has been
seconded to United Wireless. United Wireless reimburses UIH for certain direct
costs incurred by UIH, including salaries and benefits relating to this senior
management position.
50
UIH AUSTRALIA/PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Included in the due to parent payable is the following:
[Enlarge/Download Table]
As of December 31,
--------------------------
1998 1997
-------- --------
Austar technical assistance agreement obligations, including deferred......
management fees of $5,973 and $2,248, respectively (1) (2)................ $8,347 $2,629
Telefenua technical assistance agreement obligations....................... -- 2,659
Saturn technical assistance agreement obligations.......................... -- 406
United Wireless technical assistance agreement obligations................. 605 487
Payable to parent for management fees and interest on note payable(2)...... 1,056 723
Other...................................................................... 235 86
------ ------
10,243 6,990
Less current porton..................................................... (3,665) (1,596)
------ ------
$6,578 $5,394
====== ======
(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.
As of December 31, 1997, UIPI had loaned $4,999 to UIH Australia/Pacific
Finance, Inc., a wholly-owned subsidiary of the Company. This loan accrued
interest at 15.0% and was due on demand. In December 1998, UIPI contributed the
amount of the loan, plus interest, totaling $6,242 into equity in the Company.
12. INCOME TAXES
In general, a U.S. corporation may claim a foreign tax credit against its
federal income tax expense for foreign income taxes paid or accrued. Because the
Company must calculate its foreign tax credit separately for dividends received
from each foreign corporation in which the Company owns 10.0% to 50.0% of the
voting stock, and because of certain other limitations, the Company's ability to
claim a foreign tax credit may be limited, particularly with respect to
dividends paid out of earnings subject to a high rate of foreign income tax.
Generally, the Company's ability to claim a foreign tax credit is limited to the
amount of U.S. taxes the Company pays with respect to its foreign source income.
In calculating its foreign source income, the Company is required to allocate
interest expense and overhead incurred in the U.S. between its domestic and
foreign activities. Accordingly, to the extent U.S. borrowings are used to
finance equity contributions to its foreign subsidiaries, the Company's ability
to claim a foreign tax credit may be significantly reduced. These limitations
and the inability of the Company to offset losses in one foreign jurisdiction
against income earned in another foreign jurisdiction could result in a high
effective tax rate on the Company's earnings. The Company has an ownership
interest in Telefenua, which is located in Tahiti, a self-governing territory of
France, with which the United States does not have an income tax treaty. As a
result, the Company may be subject to increased withholding taxes on dividend
distributions and other payments from Telefenua and also may be subject to
double taxation with respect to income generated by Telefenua.
The Company is included as a member of UIH's consolidated tax return and, after
the offering of the May 1996 Notes, remained a member of the UIH consolidated
group. UIH and the Company are parties to a tax sharing agreement that defines
the parties' rights and obligations with respect to tax liabilities and benefits
relating to the Company and its operations as part of the consolidated group of
UIH. In general, UIH is responsible for filing consolidated tax returns and
paying the associated taxes, and the Company will reimburse UIH for the portion
of the tax cost relating to the Company and its operations. For financial
reporting purposes, the Company accounts for income taxes as if it filed
separate income tax returns in accordance with the fundamental provisions of the
tax sharing agreement. Any differences in income tax expense (benefit) allocated
to the Company by UIH in accordance with the tax sharing agreement and the
income tax expense (benefit) will be accounted for as a deemed capital
distribution or contribution. Because the Company holds certain of its foreign
investments through affiliates which hold investments accounted for under the
equity method in foreign corporations, taxable income (loss) generated does not
flow through to the Company for U.S. federal and state tax purposes even though
the Company records its allocable share of affiliate income (losses) for
51
UIH AUSTRALIA/PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
financial reporting purposes. Accordingly, due to the indefinite reversal of
such amounts in future periods, no deferred tax assets have been established for
tax basis in excess of the Company's book basis (approximately $13,000 and
$10,000 as of December 31, 1998 and 1997, respectively) in investments in
affiliated companies who, in turn, have equity investments in foreign
corporations.
The Company's United States tax net operating losses, totaling approximately
$12,100 at December 31, 1998, expire beginning in 2004 through 2014. The
significant components of the net deferred tax asset are as follows:
[Enlarge/Download Table]
As of December 31,
--------------------------
1998 1997
--------- --------
Basis differences in property, plant and equipment............................ $ 1,367 $ 1,074
Accrued interest expense on the Notes......................................... 32,885 17,435
U.S. tax net operating loss carryforward...................................... 4,615 1,338
Basis difference in marketable equity securities.............................. 1,696 1,818
Tax net operating loss carryforward of consolidated foreign subsidiaries(1)... 107,856 67,412
--------- --------
Deferred tax asset............................................................ 148,419 89,077
Valuation reserve............................................................. (148,419) (89,077)
--------- --------
Deferred tax asset, net....................................................... $ -- $ --
========= ========
(1) For Australian income tax purposes, the net operating loss
carryforward may be limited in the event of a change in control of
Austar or a change in the business.
The difference between income tax expense provided in the financial statements
and the expected income tax expense (benefit) at statutory rates is reconciled
as follows:
[Enlarge/Download Table]
For the Years Ended December 31,
--------------------------------------
1998 1997 1996
--------- ---------- ----------
Expected income tax benefit at the U.S. statutory rate of 35.0%.............. $(72,202) $(58,820) $(30,795)
Tax effect of permanent and other differences:
Change in valuation reserve............................................... 64,624 56,060 27,663
State tax, net of federal benefit......................................... (6,189) (5,042) (3,520)
International rate differences............................................ (1,251) (615) (181)
Non-deductible interest accretion on the Notes............................ 2,605 2,145 973
Amortization of outside basis differences................................. 1,412 1,570 1,324
Amortization of licenses.................................................. 1,819 1,312 625
Book/tax basis differences associated with foreign equity investments..... 3,914 915 2,111
Non-deductible expenses and other......................................... 5,268 2,475 1,800
-------- -------- --------
Total income tax expense (benefit)........................................... $ -- $ -- $ --
======== ======== ========
13. SEGMENT INFORMATION
Operating segments are components of an enterprise for which separate financial
information is available and is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. 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 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 and Other, including various holding companies
and eliminations.
52
UIH AUSTRALIA/PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company's segment information is as follows:
[Enlarge/Download Table]
As of and for the Year Ended December 31, 1998
----------------------------------------------------------
Corporate
Australia New Zealand Tahiti and Other Total
--------- ----------- -------- --------- ---------
Service and other revenue................................... $ 86,864 $ -- $ 3,411 $ (456) $ 89,819
Systems operating expense, including management fees of
$3,953, $0, $171, $0 and $4,693, respectively............. $ (69,854) $ -- $(1,751) $ 456 $ (71,149)
Selling, general and administrative expense................. $ (48,028) $ -- $(1,710) $ (5,696) $ (55,434)
Adjusted EBITDA (1)......................................... $ (27,065) $ -- $ 121 N/A N/A
Depreciation and amortization............................... $ (96,040) $ -- $(1,100) $ -- $ (97,140)
Interest income, including related party income............. $ 74 $ -- $ 52 $ 81 $ 207
Interest expense, including related party expense........... $ (7,461) $ -- $ (888) $(48,356) $ (56,705)
Provision for loss on marketable equity securities
and investment related costs.............................. $ -- $ -- $ -- $ (4,462) $ (4,462)
Equity in earnings of affiliated companies, net............. $ 55 $(10,354) $ -- $ -- $ (10,299)
Net loss.................................................... $(142,408) $(10,354) $(1,997) $(51,532) $(206,291)
Cash and cash equivalents................................... $ 181 $ -- $ -- $ -- $ 181
Property, plant and equipment, net.......................... $ 122,968 $ -- $ -- $ -- $ 122,968
Total assets................................................ $ 181,169 $ 23,789 $ -- $ 11,074 $ 216,032
[Enlarge/Download Table]
As of and for the Year Ended December 31, 1997
----------------------------------------------------------
Corporate
Australia New Zealand Tahiti and Other Total
--------- ----------- -------- --------- ---------
Service and other revenue................................... $ 64,370 $ 473 $ 4,118 $ -- $ 68,961
Systems operating expense, including management fees of
$2,558, $435, $298, $0 and $3,291, respectively........... $ (46,648) $(4,015) $(2,040) $ -- $ (52,703)
Selling, general and administrative expense................. $ (44,362) $(3,581) $(2,063) $ (3,306) $ (53,312)
Adjusted EBITDA (1)......................................... $ (24,082) $(6,688) $ 313 N/A N/A
Depreciation and amortization............................... $ (77,557) $(2,033) $(1,212) $ -- $ (80,802)
Interest income, including related party income............. $ 80 $ 380 $ 41 $ 1,068 $ 1,569
Interest expense, including related party expense........... $ (4,031) $ (23) $(1,343) $(38,597) $ (43,994)
Provision for loss on marketable equity securities
and investment related costs.............................. $ -- $ -- $ -- $ (4,784) $ (4,784)
Equity in losses of affiliated companies, net............... $ -- $ -- $ -- $ (2,408) $ (2,408)
Net loss.................................................... $(108,133) $(6,930) $(4,304) $(48,689) $(168,056)
Cash and cash equivalents................................... $ 1,262 $ 9,881 $ 246 $ 955 $ 12,344
Property, plant and equipment, net.......................... $ 147,871 $26,484 $ 8,746 $ -- $ 183,101
Total assets................................................ $ 202,325 $43,349 $11,359 $ 21,999 $ 279,032
53
UIH AUSTRALIA PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
[Enlarge/Download Table]
As of and for the Year Ended December 31, 1996
----------------------------------------------------------
Corporate
Australia New Zealand Tahiti and Other Total
--------- ----------- -------- --------- ---------
Service and other revenue................................... $ 21,354 $ 110 $ 3,513 $ -- $ 24,977
Systems operating expense, including management fees of
$649, $89, $375, $0 and $1,113, respectively.............. $(19,403) $(1,344) $(2,118) $ -- $(22,865)
Selling, general and administrative expense................. $(28,071) $(2,008) $(2,586) $ (1,376) $(34,041)
Adjusted EBITDA (1)......................................... $(25,471) $(3,153) $ (816) N/A N/A
Depreciation and amortization............................... $(34,087) $ (800) $(1,382) $ -- $(36,269)
Interest income, including related party income............. $ 287 $ 32 $ -- $ 5,225 $ 5,544
Interest expense, including related party expense........... $ (915) $ -- $(1,011) $(20,268) $(22,194)
Equity in losses of affiliated companies, net............... $ -- $ -- $ -- $ (5,414) $ (5,414)
Net loss.................................................... $(58,274) $(4,126) $(4,230) $(21,356) $(87,986)
Cash and cash equivalents................................... $ 7,787 $ 410 $ 213 $ 10,810 $ 19,220
Property, plant and equipment, net.......................... $166,012 $16,309 $10,849 $ -- $193,170
Total assets................................................ $236,259 $25,655 $14,386 $ 43,023 $319,323
(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.
14. COMMITMENTS
The Company has MMDS and programming license fees and programming commitments
due annually as follows:
1999......................................... $ 38,310
2000......................................... 45,658
2001......................................... 51,541
2002......................................... 54,583
2003 and thereafter.......................... 57,152
--------
$247,244
========
The Company has operating lease obligations as follows:
1999......................................... $2,464
2000......................................... 606
2001......................................... 495
2002......................................... 149
2003 and thereafter.......................... 22
------
$3,736
======
54
UIH AUSTRALIA PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A subsidiary of Austar has a five-year agreement with Optus Networks to lease a
54MHz transponder. Pursuant to the agreement, which commenced September 1, 1997,
Austar will pay approximately $370 per month in satellite service fees to Optus
Networks. Satellite fees payable annually are approximately as follows:
1999......................................... $ 4,440
2000......................................... 4,440
2001......................................... 4,440
2002......................................... 2,960
-------
$16,280
=======
UIH and many of its employees serving as senior management in the Company's
operating companies are parties to employment agreements, typically with terms
of three to five years. The agreements generally provide for a specified base
salary as well as a bonus set at a specified percentage of the base salary. The
bonus is based on the performance of the respective company and the employee.
The agreements often provide for the grant of an incentive interest equal to a
percentage of the residual equity value of the respective company, which is
typically defined as the fair market value of the business less net liabilities
and a reasonable return on shareholders' investment. The Company has recorded a
liability for the estimated amount of the bonus earned during 1998, 1997 and
1996. The employment agreements generally also provide for cost of living
differentials, relocation and moving expenses, automobile allowances and income
tax equalization payments, if necessary, to keep the employee's tax liability
the same as it would be in the United States.
15. CONTINGENCIES
Other than as described below, the Company is not a party to any other material
legal proceedings, nor is it currently aware of any other threatened material
legal proceedings. From time to time, the Company may become involved in
litigation relating to claims arising out of its operations in the normal course
of its business.
The territorial government of Tahiti (in French Polynesia) had legally
challenged the decree and authority of the Conseil Superieur de l'Audiovisuel
("CSA") to award Telefenua the authorizations to operate an MMDS service in
French Polynesia. The French Polynesian's challenge to France's authority to
award Telefenua an MMDS license in Tahiti was upheld by the Conseil d'Etat, the
supreme administrative court of France. The territorial government of Tahiti
then brought an action in French court seeking cancellation of the MMDS licenses
awarded by the CSA to Telefenua. On November 25, 1998, the Conseil d' Etat
cancelled the MMDS licenses awarded to Telefenua. Telefenua is in the process of
seeking a new authorization. The Company has no reason to believe that a new
authorization will not be granted. If Telefenua does not obtain a new
authorization, there is no assurance that Telefenua will receive any
restitution. In addition, any available restitution could be limited and could
take years to obtain.
On July 14, 1998, UIH SFCC filed a complaint in the United States District Court
for the District of Colorado, for damages for breach of contract, breach of
fiduciary duty and to enforce UIH SFCC's rights as General Partner in UIH-SFCC
LP, a Colorado Limited Partnership which owns an interest in SFCC, the 100%
parent of Telefenua. The three defendants are Loic Brigato, Winfred Anderson and
Yoshiko Payne, limited partners of UIH-SFCC LP. On September 27, 1998, UIH filed
a parallel action in the District Court for the State of Colorado. Specifically,
the complaints allege that the defendants have refused to abide by the terms of
the Partnership Agreement and have taken actions highly detrimental to
Telefenua. UIH-SFCC seeks monetary damages, a decree of specific performance
requiring defendants to perform their obligations and a constructive trust over
defendants' partnership interest. Defendants have filed in the federal court a
motion to dismiss the complaint for lack of subject matter jurisdiction. There
has been no decision issued as of this date. The Company intends to vigorously
defend its position.
55
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------------
MANAGEMENT
The directors and officers of the Company and the key employees of the operating
companies and other management of the Company and their ages and positions are
set forth below.
[Download Table]
Name Age Position
---- --- --------
The Company:
Gene W. Schneider 72 Chairman of the Board and Chief Executive Officer
Michael T. Fries 36 President and Director
John C. Porter 41 Chief Operating Officer
Operating Companies:
Bruce Mann 43 Sales, Marketing and Programming Director, Austar
Robert J. Birrell 36 Finance Director, Austar
Jack B. Matthews 47 Chief Executive Officer, Saturn
Joseph P. Gatto, Jr. 52 Chief Executive Officer, United Wireless
Other Management:
Kevin Ong 43 Vice President--Finance
Ellen P. Spangler 50 Vice President and Secretary
Valerie L. Cover 42 Controller
DIRECTORS AND EXECUTIVE OFFICERS
GENE W. SCHNEIDER has served as Chairman of the Board of Directors of the
Company and UAP since their respective formations and Chief Executive Officer
since October 1998. He has served as Chairman of the Board of Directors of UIH
since May 1989 and as its Chief Executive Officer since October 1995. From May
1989 until November 1991, Mr. Schneider served as Chairman of United Artists
Entertainment Company ("United Artists"), then the third-largest U.S. cable
television company. He was a founder of United Cable Television Corporation
("United Cable") in the early 1950's and, as its Chairman and Chief Executive
Officer, built United Cable into the eighth-largest multiple system operator
prior to merging with United Artists in 1989. He has been active in cable
television affairs and has served on numerous National Cable Television
Association ("NCTA") committees and special projects since NCTA's inception in
the early 1950's. Mr. Schneider is also Chairman of the Board of Advance Display
Technologies, Inc..
MICHAEL T. FRIES has served as President of the Company and UAP since their
respective formations, and as a Director of the Company and UAP since November
1996. He served as Chief Executive Officer of the Company from November 1996
until September 1998. Prior to becoming President of the Company, Mr. Fries
served as Senior Vice President, Development, of UIH, in which capacity he was
responsible for managing UIH's acquisitions and new business development
activities since March 1990, including UIH's expansion into the Asia/Pacific,
Latin America and European markets. Mr. Fries is also a member of the
Supervisory Board of UPC.
JOHN C. PORTER has served as Chief Operating Officer of UAP since January 1997,
and has served as the Managing Director of Austar Entertainment Pty Limited,
which became an indirect subsidiary of the Company in 1997, since July 1997.
From March 1995 until January 1997, Mr. Porter served as Chief Operating Officer
for Austar Entrtainment Pty Limited, where he was responsible for the design and
deployment of such company's multi-channel multi-point distribution
system/satellite/cable television network. Prior to joining Austar Entertainment
Pty Limited, Mr. Porter served as the President of the Ohio Division of Time
Warner, Inc., which had over 250,000 cable customers.
56
OPERATING COMPANIES
BRUCE MANN has served as Sales, Marketing and Programming Director of Austar
since joining that company in April 1995. Mr. Mann is responsible for the
development of Austar's marketing, sales and programming techniques and has
played a critical role in the successful implementation of these plans
throughout Austar's franchise area. Mr. Mann has been involved in various
marketing capacities of communications and entertainment companies for the past
15 years, including eight years at Time Warner Cable as Director of
Marketing-Brooklyn, Queens. From 1994 until joining Austar, Mr. Mann served as
President, National Division, of Cross Country Wireless, Inc., a U.S. provider
of wireless multi-channel television services. From 1991 to 1994, Mr. Mann
served as Vice President-Marketing of Washington Redskins/Jack Kent Cooke
Stadium, Inc., specializing in sports and entertainment related promotion,
advertising and marketing.
ROBERT J. BIRRELL has served as Finance Director of Austar since January 1996
and has been involved with the development aspects of the Austar business since
April 1994. Mr. Birrell is responsible for the accounting, finance, inventory
control, investor relations and legal aspects of Austar's business. Prior to
joining Austar, Mr. Birrell has been involved with various activities in large
scale retailing in the Australian marketplace. From 1985 to 1993, Mr. Birrell
served as Treasurer of Industrial Equity Limited, an Australian based investment
company. Mr. Birrell has over 14 years experience in the banking and business
environment in Australia.
JACK B. MATTHEWS has served as Chief Executive Officer of Saturn since joining
that company in January 1995. Mr. Matthews is responsible for the technical,
operating and marketing aspects of the business. Mr. Matthews has served in
various general management capacities with several U.S. multiple system
operators, including Cox Cable Communications and Continental Cablevision. From
August 1993 until joining Saturn, Mr. Matthews was the Vice President-Sales &
Marketing of Arrowsmith Technologies, a cable technology company, which develops
and installs advanced field operations management and operations support systems
for the cable television industry. From 1990 to 1993, Mr. Matthews was the
President of COMM/ONE, an entrepreneurial business marketing sophisticated video
and voice processing systems. Mr. Matthews has over 14 years of U.S.
multi-channel television industry experience.
JOSEPH P. GATTO, JR. has been the Chief Executive Officer of United Wireless
since May 1996. From May 1995 to May 1996, Mr. Gatto served as the Vice
President-Development of UAP, focusing on telecommunications business
development within the Asia/Pacific region. Prior to joining UAP, Mr. Gatto was
the Director of Sales of Plexsys International Corp., a cellular system network
manufacturer, where he was responsible for worldwide sales. Mr. Gatto has served
in various sales and marketing capacities for U.S. and Asian telecommunications
and technology companies for the past 26 years.
OTHER MANAGEMENT
KEVIN ONG has served as Vice President--Finance of the Company since May 1996.
Prior to joining UIH, Mr. Ong served in various financial and senior management
positions with U.S. and international cable television operators. From 1988 to
1994, Mr. Ong served as a Director with Jones Intercable, Inc. and the Treasurer
of Jones International, Limited, where he was responsible for financial
operations and various accounting functions.
ELLEN P. SPANGLER has served as Vice President and Secretary of the Company
since July 1997. Ms. Spangler is responsible for the legal operations of the
Company. Ms. Spangler also serves as Senior Vice President of Business and Legal
Affairs and Secretary of UIH, a position she has held since December 1996. From
February 1991 to December 1996, Ms. Spangler was Vice President and Assistant
Secretary of UIH. Prior to joining UIH in January 1991, she served as Director
of Business Affairs, Programming, at Tele-Communications, Inc. ("TCI") from 1987
to 1991, and as Acquisitions Counsel at TCI from 1984 to 1987.
VALERIE L. COVEr has served as Controller for the Company since its formation in
October 1994. Ms. Cover is responsible for the accounting and financial
reporting functions of the Company. She has served as Controller of UIH since
joining UIH in October 1990 and became a Vice President of UIH in December 1996.
Prior to joining UIH, she was Director of Corporate Accounting at United Artists
from May 1989 until October 1990 and Manager of Financial Reporting at United
Cable from June 1986 until May 1989.
57
ITEM 11. EXECUTIVE COMPENSATION
---------------------------------
All of the officers of the Company are employed by UIH, the indirect 98.0%
stockholder of the Company. The Company pays no separate compensation to these
officers; however, the Company and UIH Management are parties to the Management
Agreement, pursuant to which the Company pays UIH Management a management fee
for certain services provided to the Company. Effective March 31, 1997, UIH
Management assigned its rights and obligations under the Management Agreement to
UAP in the UAP Management Agreement. UIH Management and UAP also became parties
to a similar management agreement (the "UIH Management Agreement") effective
March 31, 1997.
Certain members of senior management of Austar, Saturn and United Wireless are
U.S. expatriates who are employed by UIH and have been seconded to the
respective operating companies. The respective operating companies reimburse UIH
for compensation paid to these employees. Gene W. Schneider, the Company's
Chairman and Chief Executive Officer, is also the Chairman and Chief Executive
Officer of UIH and spends only a portion of his time on matters pertaining to
the Company and its operations. Michael T. Fries, the Company's President, is
also an officer and employee of UIH and spends only a portion of his time on
matters pertaining to the Company and its operations. The services of Messrs.
Schneider and Fries are provided to the Company pursuant to the UIH Management
Agreement. While the Company and its operating companies do not reimburse UIH
directly for a specified portion of the compensation UIH pays to Messrs.
Schneider and Fries, UAP pays a management fee to UIH under the UIH Management
Agreement for certain services, including those of Messrs. Schneider and Fries,
performed on behalf of the Company.
SUMMARY COMPENSATION TABLE
--------------------------
The following table sets forth the compensation paid during the years ended
December 31, 1998, 1997 and 1996 to the Company's Chief Executive Officer and
the four most highly compensated executive officers of the Company and the
operating companies, whose annual salary and bonus exceeded $100,000 for the
year ended December 31, 1998. In addition, the information in this section
reflects compensation received by the named executive officers for all services
performed for the Company, UAP, UIH and their respective affiliates:
[Enlarge/Download Table]
Summary Compensation Table
Long-Term
Compensation
Annual Compensation Awards
--------------------------------------- --------------
Other Securities
Annual Underlying All Other
Name and Principal Position Year Salary Bonus Compensation(1) Options (#)(2) Compensation
--------------------------- ------ -------- ------------ ------------ -------------- ------------
Gene W. Schneider 1998 $450,000(3) $ -- $ -- 287,500(4) $5,512(5)
Chief Executive Officer 1997 $369,904(3) $ -- $ -- 250,000(6) $5,398(5)
1996 $346,827(3) $ -- $ -- 100,000(7) $5,398(5)
Michael T. Fries 1998 $300,000(3) $250,000 $25,000 625,000(8) $5,632(5)
President 1997 $245,346(3) $ -- $ -- 350,000(9) $5,398(5)
1996 $230,577(3) $ -- $ -- 10,000(10) $5,398(5)
John C. Porter 1998 $245,913(3) $ 30,000 $60,081 250,000(11) $5,632(5)
Chief Operating Officer 1997 $218,972(3) $ 60,000 $47,142 200,000(12) $5,398(5)
1996 $195,986(3) $ 42,402 $35,509 -- $5,398(5)
Bruce Mann 1998 $181,457 $ 41,470 $21,839 245,000(13) $5,296(14)
Sales, Marketing and 1997 $160,770 $ 45,900 $24,476 50,000(15) $4,884(14)
Programming Director (Austar) 1996 $148,481 $ 29,106 $22,539 -- $4,885(14)
Jack B. Matthews 1998 $155,000 $ -- $19,725 -- $5,170(16)
Chief Executive Officer (Saturn) 1997 $154,731 $ 29,000 $19,753 4,000(17) $4,854(16)
1996 $144,808 $ 15,000 $16,206 -- $4,841(16)
58
(1) Amounts represent additional cash compensation relating to overseas
assignment.
(2) Amounts represent the number of options with respect to shares of Class A
Common Stock of UIH, UAP, United Pan-Europe Communications ("UPC") and UIH
Latin America ("ULA") granted to such executives as officers and employees
of UIH.
(3) Amounts represent total compensation paid by UIH for duties performed with
respect to the Company and other operations of UIH.
(4) Includes phantom stock options for 125,000 shares granted by UPC on
September 24, 1998, and valued at $18.00 per share. Such phantom stock
options vest evenly over 48 months with vesting having commenced April 1,
1997 and expire October 8, 2008. Includes phantom stock options for 62,500
shares granted by UAP on October 8, 1998, and valued at $10.00 per share.
Such phantom stock options vest evenly over 48 months commencing on the
date of grant and expire October 8, 2008. Also includes UIH options granted
on October 8, 1998 to acquire 100,000 shares of Class A Common Stock at a
purchase price of $8.3125 per share. Such options vest evenly over 48
months commencing on the date of grant and expire October 8, 2008. For
information concerning the award of stock options by UIH included herein,
see "Option Grants Table" below.
(5) Amounts consist of matching employer contributions made by UIH under UIH's
employee 401(k) plan of $4,800, $4,750 and $4,750 for the years ended
December 31, 1998, 1997 and 1996, respectively, with the remainder
consisting of term life insurance premiums paid by UIH for such officer's
benefit.
(6) Includes phantom stock options for 125,000 shares granted by UAP on June 6,
1997, and valued at $10.00 per share. Such phantom options vest evenly over
48 months commencing on the date of grant and expire June 6, 2007. Includes
phantom stock options for 125,000 shares granted by ULA on June 6, 1997,
and valued at $4.26 per share. Such phantom options vest evenly over 48
months commencing on the date of grant and expire June 6, 2007.
(7) Includes UIH options granted on December 20, 1996 to acquire 100,000 shares
of Class A Common Stock at a purchase price of $12.75 per share. Such
options vest evenly over 48 months commencing on the date of grant and
expire December 20, 2006.
(8) Includes phantom stock options for 175,000 shares granted by UAP on October
8, 1998, and valued at $10.00 per share. Such phantom stock options vest
evenly over 48 months commencing on the date of grant and expire October 8,
2008. Includes phantom stock options for 300,000 shares granted by ULA on
September 18, 1998, and valued at $8.98 per share. Such phantom stock
options vest evenly over 48 months commencing on the date of grant and
expire September 18, 2008. Includes phantom stock options for 50,000 shares
granted by UPC on September 18, 1998, and valued at $20.35 per share. Such
phantom stock options vest evenly over 48 months commencing on the date of
grant and expire September 18, 2008. Also includes UIH options granted on
September 18, 1998 to acquire 100,000 shares of Class A Common Stock at a
purchase price of $10.375 per share. Such options vest evenly over 48
months commencing on the date of grant and expire September 18, 2008. For
information concerning the award of stock options by UIH included herein,
see "Option Grants Table" below.
(9) Includes phantom stock options for 350,000 shares granted by UAP on June 6,
1997, and valued at $10.00 per share. Such phantom stock options vest
evenly over 48 months commencing on the date of grant and expire June 6,
2007.
(10) Includes UIH options granted on December 20, 1996 to acquire 10,000 shares
of Class A Common Stock at a purchase price of $12.75 per share. Such
options vest evenly over 48 months commencing on the date of grant and
expire December 20, 2006.
(11) Includes phantom stock options for 225,000 shares granted by UAP on October
8, 1998, and valued at $10.00 per share. Such phantom stock options vest
evenly over 48 months with vesting having commenced on June 8, 1996 for
125,000 shares and the balance commencing on date of grant, and expire
October 8, 2008. Also includes UIH options granted December 18, 1998 to
acquire 25,000 shares of Class A Common Stock at a purchase price of
$10.375 per share. Such options vest evenly over 48 months commencing on
the date of grant and expire December 18, 2008. For information concerning
the award of stock options by UIH included herein, see "Option Grants
Table" below.
(12) Includes phantom stock options for 200,000 shares granted by UAP on June 6,
1997, and valued at $10.00 per share. Such phantom stock options vest
evenly over 48 months commencing on the date of grant and expire June 6,
2007.
(13) Includes phantom stock options for 225,000 shares granted by UAP on October
8, 1998, and valued at $10.00 per share. Such phantom stock options vest
evenly over 48 months with vesting having commenced on June 8, 1996 for
125,000 shares and the balance commencing on date of grant and expire
October 8, 2008. Also includes UIH options granted on December 18, 1998 to
acquire 20,000 shares of Class A Common Stock at a purchase price of
$10.375 per share. Such options vest evenly over 48 months commencing on
the date of grant and expire December 18, 2008. For information concerning
the award of stock options by UIH included herein, see "Option Grants
Table" below.
59
(14) Amounts consist of matching employer contributions made by UIH under UIH's
employee 401(k) plan of $4,464, $4,236 and $4,237 for the years ended
December 31, 1998, 1997 and 1996, respectively, with the remainder
consisting of term life insurance premiums paid by UIH for Mr. Mann's
benefit.
(15) Includes phantom stock options for 50,000 shares granted by UAP on June 6,
1997, and valued at $10.00 per share. Such phantom stock options vest
evenly over 48 months commencing on the date of grant and expire June 6,
2007.
(16) Amounts consist of matching employer contributions made by UIH under UIH's
employee 401(k) plan of $4,428, $4,206 and $4,193 for the years ended
December 31, 1998, 1997 and 1996, respectively, with the remainder
consisting of term life insurance premiums paid by UIH for Mr. Matthew's
benefit.
(17) Includes UIH options granted on December 20, 1997 to acquire 4,000 shares
of Class A Common Stock at a purchase price of $10.875 per share. Such
options vest evenly over 24 months commencing on the date of grant and
expire December 20, 2007.
OPTION GRANTS TABLE
-------------------
Messrs. Schneider, Fries, Porter, Mann and Matthews, as employees of UIH, have
been granted options to acquire stock of UIH and its subsidiaries. The following
tables set forth information concerning options to purchase shares of UIH Class
A Common Stock granted to these executives during 1998 as well as the value of
unexercised options held by such executives as of December 31, 1998. No such
executive has exercised any options during the year ended December 31, 1998. The
Company has not granted any options to acquire its stock.
[Enlarge/Download Table]
Option Grants in Last Year(1)
Individual Grants
------------------------------------------------------------------ Potential Realizable Value
Number of Percentage of at Assumed Annual Rates
Securities Total Options of Stock Price Appreciation
Underlying Granted to Exercise Market Price for Option Term (2)
Options Employees in Price on grant Expiration ----------------------------
Name Granted (#) Last Year(3) ($/Sh) Date ($/Sh) Date 5% ($) 10% ($)
---- ----------- ------------- --------- ----------- ----------- --------- ----------
Gene W. Schneider 100,000 27.8% $ 8.3125 $ 8.3125(4) 10/08/08 $522,769 $1,324,798
Michael T. Fries 100,000 27.8% $10.3750 $10.3750(5) 09/18/08 $652,478 $1,653,508
John C. Porter 25,000 7.0% $10.3750 $18.2500(6) 12/18/08 $163,120 $ 413,377
Bruce Mann 20,000 5.6% $10.3750 $18.2500(6) 12/18/08 $130,496 $ 330,702
Jack B. Matthews -- -- -- -- -- -- --
(1) The stock options granted during 1998 vest in equal monthly increments over
the four-year period following the date of grant. Vesting of the options
granted would be accelerated upon a change of control of UIH as defined in
UIH's 1993 Stock Option Plan.
(2) The potential gains shown are net of the option exercise price and do not
include the effect of any taxes associated with exercise. The amounts shown
are for the assumed rates of appreciation only, do not constitute
projections of future stock price performance, and may not necessarily be
realized. Actual gains, if any, on stock option exercises depend on the
future performance of the Class A Common Stock, continued employment of the
optionee through the term of the options, and other factors.
(3) Based on all options to purchase Class A Common Stock granted to employees
of the Company and UIH during the year ended December 31, 1998.
(4) Represents the closing market price per share of the Class A Common Stock
on Nasdaq on October 8, 1998.
(5) Represents the closing market price per share of the Class A Common Stock
on Nasdaq on September 18, 1998.
(6) Represents the closing market price per share of the Class A Common Stock
on Nasdaq on December 18, 1998.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION TABLE
------------------------------------------------------------
The following table sets forth information concerning unexercised options for
UIH Class A Common Stock held by officers named in the Summary Compensation
Table above as of December 31, 1998.
60
[Enlarge/Download Table]
Aggregate Option Exercises in Last Year and Year-End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Year-End (#) Options at Year-End ($)
Name Exercisable/Unexercisable Exercisable/Unexercisable
---- ------------------------- -------------------------
Gene W. Schneider.................................. 239,167 / 150,833 $1,955,577 / $1,390,673
Michael T. Fries................................... 161,875 / 103,125 $1,465,157 / $ 879,844
John C. Porter..................................... 0 / 25,000 $ 0 / $ 221,875
Bruce Mann......................................... 0 / 20,000 $ 0 / $ 177,500
Jack B. Matthews................................... 2,000 / 2,000 $ 16,750 / $ 16,750
AGREEMENTS WITH EMPLOYEES
Many of the employees serving as senior management in the Company's operating
companies are parties to employment agreements typically with terms of three to
five years. The agreements generally provide for a specified base salary as well
as a bonus set at a specified percentage of the base salary, which bonus is
based on the performance of the respective company and employee. The agreements
often provide for the grant of an incentive interest equal to a percentage of
the residual equity value of the respective company, which is typically defined
as the fair market value of the business less net liabilities and a reasonable
return on shareholders' investment. The employment agreements generally also
provide for cost of living differentials, relocation and moving expenses,
automobile allowances and income tax equalization payments, if necessary, to
keep the employee's tax liability the same as it would be in the United States.
Of the persons identified in the Summary Compensation Table, Messrs. Porter,
Mann and Matthews continue to have such an employment agreement with UIH. The
agreements with Porter and Mann terminate on October 8, 2002. Matthews'
agreement terminated January 1, 1999, however, a current contract is under
negotiation. These employment agreements provide for an annual base salary of
$252,500 for Porter, $200,000 for Mann and $165,000 for Matthews, and
eligibility for an annual bonus of up to a fixed percentage of the base salary,
based on the performance of their respective entities as well as the
individual's performance. All are entitled to participate in UIH employee
benefits. In addition, Mr. Matthews is eligible to receive a project award based
on company defined targets over the term of his compensation agreement. His base
salary is reviewed annually.
COMPENSATION OF DIRECTORS
All of the directors of the Company are also directors or officers of UIH, UAP
and/or officers of the Company. They receive no separate cash compensation for
serving as directors of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Board of Directors has no separate Compensation Committee as the
Company currently does not have any employees. UIH's Compensation Committee,
none of the members of which are employees or executive officers of the Company,
determine the compensation of the Company's executive officers in their capacity
as employees of UIH. Directors or executive officers of the Company may serve on
the Boards of Directors of Austar, Saturn, Telefenua, United Wireless and XYZ
Entertainment and, as part of their duties, may determine the compensation of
those operating companies' employees. However, none of the employees of such
operating companies are directors of the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Articles of Incorporation eliminate the personal liability of its
directors to the Company and its stockholders for monetary damages for breach of
the directors' fiduciary duties in certain circumstances. The Company's Articles
of Incorporation and Bylaws provide that the Company shall indemnify its
officers and directors to the fullest extent permitted by law. The Company
believes that such indemnification covers at least negligence and gross
negligence on the part of indemnified parties.
The Company has entered into agreements to indemnify its directors and officers,
in addition to the indemnification provided for in the Company's Articles of
Incorporation and Bylaws. These agreements require the Company, among other
things, to indemnify the Company's directors and officers for certain expenses
(including attorney's fees), judgments, fines, penalties and settlement amounts
incurred by any such person in certain actions or proceedings, including actions
61
by or in the right of the Company, arising out of such person's services as a
director or officer of the Company, any subsidiary of the Company or any other
company or enterprise to which the person provides services at the request of
the Company. The Company believes that these agreements are necessary to attract
and retain qualified persons as directors and officers.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-------------------------------------------------------------------------
UAP owns 100% of the 17,810,249 shares of issued and outstanding common stock of
the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
---------------------------------------------------------
RELATIONSHIP WITH UAP AND UIH
The Company is currently a direct, wholly-owned subsidiary of UAP, which is an
indirect, 98.0%-owned subsidiary of UIH. The Company's operations to date have
been funded by capital contributions from UIH and UAP as well as proceeds from
the Notes, minority shareholder contributions and subsidiary bank debt.
The Company and UAP are parties to the UAP Management Agreement pursuant to
which UAP agreed to continue to perform certain administrative, accounting,
financial reporting and other services for the Company, which has no separate
employees of its own. Pursuant to the UAP Management Agreement, the management
fee was $750,000 for the first year of such agreement (beginning May 1, 1996),
and it increases on each anniversary date of the UAP Management Agreement by 8%
per year. The management fee for the first year of the UAP Management Agreement
was calculated based on an estimate of staff hours to accomplish the various
administrative, accounting, financial reporting and other services to be
provided to the Company under the UAP Management Agreement. The percentage those
hours constituted of the respective employees' annual work hours was then
multiplied by the employment cost to UIH for such employees.
Each of Austar, Saturn, Telefenua and United Wireless are parties to technical
assistance agreements with UAP, pursuant to which the operating companies
receive certain technical assistance in connection with such operating
companies' design, development, construction, marketing and operation of their
respective multi-channel television systems. Fees paid under these technical
assistance agreements are a percentage (currently between 2.5% and 5.0%) of
gross revenues generated by the operating companies plus reimbursements for
costs associated with the seconded employees. As of December 31, 1998, Austar,
Saturn, Telefenua and United Wireless had accrued fees due to parent under their
technical assistance agreements of $8.3 million, $1.1 million, $3.1 million and
$0.6 million, respectively.
TAX SHARING AGREEMENT
The Company is included as a member of UIH's consolidated tax return and, is a
member of the UIH consolidated group (as long as non-UIH ownership of the
Company does not exceed 20.0%). UIH and the Company are parties to a tax sharing
agreement that defines the parties' rights and obligations with respect to tax
liabilities and benefits relating to the Company and its operations as part of
the consolidated group of UIH. In general, UIH is responsible for filing
consolidated tax returns and paying the associated taxes and the Company will
reimburse UIH for the portion of the tax cost relating to the Company and its
operations.
62
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
-------------------------------------------------------------------------
(a)(1) Financial Statements
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INCLUDED IN PART II OF THE REPORT: Page
Number
------
UIH AUSTRALIA/PACIFIC, INC.
Report of Independent Public Accountants................................................................. 36
Consolidated Balance Sheets as of December 31, 1998 and 1997............................................. 37
Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996............... 38
Consolidated Statements of Stockholder's Deficit for the Years Ended December 31, 1998,
1997 and 1996.......................................................................................... 39
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996............... 40
Notes to Consolidated Financial Statements............................................................... 41
(a)(2) Financial Statement Schedules
INCLUDED IN PART IV OF THE REPORT:
(i) Financial Statement Schedules required to be filed
UIH AUSTRALIA/PACIFIC, INC.
Report of Independent Public Accountants................................................................. S-1
Schedule I - Condensed Financial Information of the Registrant (Parent only)............................. S-2
(ii) Separate Financial Statements and Related Schedules
None.
(a) (3) Exhibits
3.1 Articles of Incorporation of the Registrant, as amended. (1)
3.2 By-Laws of the Registrant. (1)
4.1 The Indenture dated as of May 14, 1996, between the Issuer and
American Bank National Association. (1)
4.2 The Indenture dated as of September 23, 1997, between the Issuer
and Firstar Bank of Minnesota, N.A. (2)
4.3 Warrant Agreement dated as of November 15, 1997, between the
Issuer and Firstar Bank of Minnesota, N.A. (1)
4.4 The Articles of Incorporation, as amended, and By-Laws of the
Registrant are included as Exhibits 3.1 and 3.2. (1)
10.1 Memorandum of Variation dated December 21, 1995 to the
Subscription and Securityholders Agreement, among United
International Holdings, Inc., ("UIH"), UIH Australia, Inc.
("UIHA"), Salstel Media Holdings Pty Limited ("SMH"), Australis
Media Limited ("Australis") and CTV Pty Limited ("CTV"). (1)
10.2 Memorandum of Variation dated December 21, 1995 to the
Subscription and Securityholders Agreement dated October 12,
1994, among UIH, UIH Australia II, Inc. ("UIHA II"), Salstel
Media Investment Pty Limited ("SMI"), Australis and STV Pty
Limited ("STV"). (1)
63
10.3 Memorandum of Variation dated April 4, 1996 to the CTV
Securityholders Agreement, among UIH ,UIHA, Australis, SMH and
CTV. (1)
10.4 Memorandum of Variation dated April 4, 1996 to the STV
Securityholders Agreement, among UIH, UIHA II, Australis, SMI and
STV. (1)
10.5 Agreement dated December 21, 1995, among UIH, UIHA and SMH. (1)
10.6 Amending Agreement dated April 4, 1996 to CTV Securityholders
Agreement, among UIH, UIHA and SMH. (1)
10.7 Agreement dated December 21, 1995, among UIH, UIHA II and SMI.
(1)
10.8 Amending Agreement dated April 4, 1996 to the STV Securityholders
Agreement, among UIH, UIHA II and SMI. (1)
10.9 Subscription and Investment Agreement dated July 21, 1997, among
SaskTel Holdings (New Zealand), Inc. ("SaskTel"), Saskatchewan
Telecommunications Holding Corporation, UIH New Zealand Holdings,
Inc. ("UIHNZ"), UIH Asia/Pacific Communications, Inc. ("UAP") and
Saturn Communications Limited ("Saturn"), as amended. (2)
10.10 Shareholders Agreement dated July 23, 1997, among SaskTel, UIHNZ
and Saturn. (2)
10.11 XYZ Shareholders Agreement dated September 6, 1995, among Century
United Programming Ventures Pty Limited ("CUPV"), Foxtel
Management Pty Limited ("Foxtel"), XYZ Entertainment Pty Limited
("XYZ"), Century United Programming Ventures ("CPVC") and the
Issuer. (1)
10.12 Shareholders Deed dated June 30, 1995, among Century
Communications Corporation, CPVC, UIH, the Issuer and CUPV. (1)
10.13 UIH-SFCC L.P. Amended and Restated Agreement of Limited
Partnership dated January 6, 1995, among UIH-SFCC Inc. and the
limited partners named therein. (1)
10.14 Master Agreement dated January 11, 1995, between UIH-SFCC L.P.
and the Societe Francaise des Communications et du Cable S.A.
("Societe"). (1)
10.15 Shareholder's Agreement dated January 11, 1995, among UIH-SFCC
L.P. and the shareholders named therein. (1)
10.16 A$200,000,000 Syndicated Senior Secured Debt Facility Agreement
dated July 31, 1997, among Austar Entertainment Pty Limited
("Austar"), Chase Securities Australia Limited, the Guarantors
named herein and the financial institutions named herein. (3)
10.17 Syndicated Senior Secured Debt Facility Agreement, dated November
5, 1998 by and among Saturn Communications Limited, as the
Borrower, Kiwi Cable Company Limited, as Guarantor, each
financial institution specified as a bank in Schedule 1 attached
thereto, and Toronto Dominion Australia Limited, as the Agent.
10.18 Channel Supply Agreement dated June 30, 1995, among XYZ, CUPV and
East Coast Pay Television Pty Limited ("ECT"). (1)
10.19 Technical Assistance Agreement dated October 12, 1994, between
CTV and United International Management, Inc. ("UIMI"). (1)
64
10.20 Technical Assistance Agreement dated October 12, 1994, between
STV and UIMI. (1)
10.21 Technical Assistance Agreement dated July 8, 1994, between Saturn
and UIH. (1)
10.22 Amendment No. 1 to Technical Assistance Agreement dated July 23,
1997, between Saturn and UAP. (2)
10.23 Technical Assistance Agreement dated July 23, 1997, between
SaskTel and Saturn. (2)
10.24 Technical Assistance Agreement dated January 11, 1995, between
Telefenua S.A. and Societe. (1)
10.25 Assignment of Rights and Delegation of Duties under Technical
Assistance Agreement dated January 11, 1995, between Societe and
UIMI. (1)
10.26 Management Agreement dated May 1, 1996, between UIH Management,
Inc. and the Registrant. (1)
10.27 Tax Allocation Agreement dated May 8, 1996, among UIH, UAP and
the Issuer. (1)
12.1 Statement re: Ratio of Earnings to Fixed Charges.
21.1 List of Subsidiaries.
23.1 Consent of Independent Public Accountants--Arthur Andersen LLP
(UIH Australia/Pacific, Inc.).
24.1 Power of Attorney.
27.1 Financial Data Schedule.
----------------------
(1) Incorporated by reference from the Company's Registration Statement on Form
S-4 (SEC File No. 333-05017) filed on May 31, 1996.
(2) Incorporated by reference from the Company's Registration Statement on Form
S-4 (SEC File No. 333-39707) filed on November 6, 1997.
(3) Incorporated by reference from Amendment No. 1 to the Company's
Registration Statement on Form S-4 (SEC File No. 333-39707) filed on
December 5, 1997.
(b) Reports on Form 8-K filed during the quarter:
None.
65
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To UIH Australia/Pacific, Inc.:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of UIH Australia/Pacific, Inc. included in
this Form 10-K and have issued our report thereon dated March 29, 1999. Our
audit was made for the purpose of forming an opinion on the basic consolidated
financial statements taken as a whole. The following schedule is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic consolidated financial
statements as indicated in our report with respect thereto and, in our opinion,
based on our audits, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
Denver, Colorado
March 29, 1999
S-1
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UIH AUSTRALIA/PACIFIC, INC.
PARENT ONLY
SCHEDULE 1
Condensed Financial Information of the Registrant
(Stated in thousands, except share and per share amounts)
As of December 31,
-------------------------
1998 1997
-------- --------
ASSETS
Current Assets
Cash and cash equivalents...................................................................... $ -- $ 955
Short-term liquid investments.................................................................. 763 12,325
Related party receivables and costs to be reimbursed........................................... 327 738
Other current assets........................................................................... 3 195
-------- --------
Total current assets........................................................................ 1,093 14,213
Investments in and advances to affiliated companies, accounted for under the equity method....... 52,801 122,247
Deferred financing costs, net of accumulated amortization of $1,215 and $624, respectively....... 9,173 9,757
Other non-current assets......................................................................... -- 77
-------- --------
Total assets................................................................................ $ 63,067 $146,294
======== ========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities
Related party payables......................................................................... $ 1,056 $ 723
Accounts payable............................................................................... -- 195
Accrued liabilities............................................................................ -- 406
-------- --------
Total current liabilities................................................................... 1,056 1,324
Senior discount notes............................................................................ 356,640 309,123
-------- --------
Total liabilities........................................................................... 357,696 310,447
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, 17,810,249 and 13,864,941
shares issued and outstanding, respectively................................................. 178 139
Additional paid-in capital..................................................................... 215,624 139,621
Accumulated deficit............................................................................ (481,240) (274,949)
Other cumulative comprehensive loss............................................................ (29,191) (28,964)
-------- --------
Total stockholder's deficit................................................................. (294,629) (164,153)
-------- --------
Total liabilities and stockholder's deficit...................................................... $ 63,067 $146,294
======== ========
S-2
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UIH AUSTRALIA/PACIFIC, INC.
PARENT ONLY
SCHEDULE 1
Condensed Information as to the Operations of the Registrant
(Stated in thousands)
For the Years Ended December 31,
------------------------------------------
1998 1997 1996
---------- ---------- ----------
Corporate general and administrative expense, including management
fees to related party of $853, $790 and $750, respectively.............. $ (5,689) $ (3,189) $ (1,173)
--------- --------- --------
Net operating loss................................................... (5,689) (3,189) (1,173)
Interest income........................................................... 81 643 3,505
Interest expense.......................................................... (48,108) (38,115) (20,270)
Other expense, net........................................................ (836) (559) (59)
--------- --------- --------
Net loss before other item........................................... (54,552) (41,220) (17,997)
Share in losses of affiliated companies, net.............................. (151,739) (126,836) (69,989)
--------- --------- --------
Net loss............................................................. $(206,291) $(168,056) $(87,986)
========= ========= ========
S-3
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UIH AUSTRALIA/PACIFIC, INC.
PARENT ONLY
SCHEDULE 1
Condensed Information as to the Cash Flows of the Registrant
(Stated in thousands)
For the Years Ended
December 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................................ $(206,291) $(168,056) $(87,986)
Adjustments to reconcile net loss to net cash flows from operating activities:
Share in results of affiliated companies, net................................. 151,739 126,836 69,989
Allocation of expense accounted for as capital contributions by parent........ 4,622 1,949 --
Accretion of interest on senior notes and amortization of deferred
financing costs............................................................. 48,108 38,115 20,270
(Increase) decrease in related party receivables and other assets............. 603 1,768 (2,112)
Increase in accounts payable, accrued liabilities and other................... 2,332 2,210 70
--------- --------- --------
Net cash flows from operating activities........................................ 1,113 2,822 231
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term liquid investments....................................... (763) (15,988) (199,242)
Sale of short-term liquid investments........................................... 12,325 22,303 180,602
Investments in and advances to affiliated companies and other investments....... (72,570) (61,024) (171,553)
--------- --------- --------
Net cash flows from investing activities........................................ (61,008) (54,709) (190,193)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash contributed from parent.................................................... 58,947 7,863 10,664
Proceeds from offering of senior discount notes................................. -- 29,925 225,115
Borrowings on related party payable to parent................................... -- 4,999 --
Payment on bridge loan payable to parent........................................ -- -- (25,000)
Deferred financing costs........................................................ (7) (755) (10,007)
--------- --------- --------
Net cash flows from financing activities........................................ 58,940 42,032 200,772
--------- --------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................................ (955) (9,855) 10,810
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.................................. 955 10,810 --
--------- --------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD........................................ $ -- $ 955 $ 10,810
========= ========= ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Non-cash capital contributions from parent...................................... $ 12,473 $ 7,800 $ 25,000
========= ========= ========
Gain on issuance of shares by New Zealand subsidiary............................ $ -- $ 5,985 $ --
========= ========= ========
Non-cash issuance of warrants to purchase common stock.......................... $ -- $ 3,678 $ --
========= ========= ========
Non-cash stock issuance for purchase of 50.0% interest in New Zealand subsidiary $ -- $ -- $ 7,800
========= ========= ========
Increase in unrealized loss on investment....................................... $ -- $ (985) $ (3,412)
========= ========= ========
S-4
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Denver,
State of Colorado, on this 31 day of March 1999.
UIH Australia/Pacific, Inc.
a Colorado corporation
By: /S/ Valerie L. Cover
---------------------------------
Valerie L. Cover
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this Report to be signed by the following persons in the
capacities and on the dates indicated.
[Download Table]
Title of Position
Signature Held With the Registrant
--------- ------------------------
*
---------------------------------
Gene W. Schneider Chairman of the Board and March 31, 1999
Chief Executive Officer
*
---------------------------------
Michael T. Fries Director and President March 31, 1999
/S/ Valerie L. Cover
---------------------------------
Valerie L. Cover Controller (Principal
Accounting Officer) March 31, 1999
* By: /S/ Valerie L. Cover
---------------------------
Valerie L. Cover
Attorney-in-fact
66
Dates Referenced Herein and Documents Incorporated by Reference
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