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 136 666K
2: EX-12 Exhibit 12.1-Ratio of Earnings to Fixed Assets 1 6K
3: EX-21 Exhibit 21.1-List of Subsidiaries 1 7K
4: EX-24 Exhibit 24.1-Power of Attorney 1 8K
5: EX-27 Exhibit 27.1-Financial Data Schedule 2± 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 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________to _________
Commission file Number 333-05017
__________________
UIH Australia/Pacific, Inc.
(Exact name of registrant as specified in its charter)
Colorado 84-1341958
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4643 South Ulster Street
Suite 1300
Denver, Colorado 80237
(303) 770-4001
(Address, including zip code and telephone number,
including area code, of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
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 28,
1997, the Company had outstanding 500 shares of Common Stock.
UIH AUSTRALIA/PACIFIC, INC.
1996 ANNUAL REPORT ON FORM 10-K
Table of Contents
PART I
Item 1. Business........................................................ 2
Item 2. Properties...................................................... 20
Item 3. Legal Proceedings............................................... 21
Item 4. Submission of Matters to a Vote of Security Holders............. 21
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................. 22
Item 6. Selected Financial Data......................................... 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 23
Item 8. Financial Statements and Supplementary Data..................... 33
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................. 33
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 59
Item 11. Executive Compensation.......................................... 62
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................................. 66
Item 13. Certain Relationships and Related Transactions.................. 66
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports............ 68
on Form 8-K
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 company Austar, which is comprised of two companies,
CTV Pty Limited, ("CTV") and STV Pty Limited ("STV"), the Company is the largest
provider of multi-channel television services in regional Australia, where it
operates wireless cable systems ("MMDS") and markets a direct-to-home ("DTH")
service in franchise areas encompassing approximately 1.6 million television
homes, or 25% of the total Australian market. In addition, the Company, through
its New Zealand operating company Saturn Communications Limited ("Saturn") is
constructing a wireline cable and telephony system in Wellington, New Zealand, a
market representing approximately 135,000 television homes. The Company's other
assets include a 25% interest in XYZ Entertainment Pty Limited ("XYZ
Entertainment" or "XYZ"), a programming company that provides four channels to
the Australian multi-channel television market as part of the "Galaxy Package,"
the most widely distributed programming package in Australia and the core
component of Austar's programming offering, up to a 90% economic interest in
Telefenua S.A. ("Telefenua"), the only provider of multi-channel television
services in Tahiti, with an MMDS system in a market with 31,000 television
homes, and a 100% interest in United Wireless Pty Limited ("United Wireless"), a
provider of wireless mobile data services in Australia.
The Company, a majority-owned subsidiary of UIH Asia/Pacific
Communications, Inc. ("UAP"), which is in turn a wholly-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 (the "May 1996 Offering")
of the Company's 14% Senior Discount Notes due 2006 (the "Notes"), certain
subsidiaries of UIH that held its 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% 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%. In May 1996, as a result of additional
equity contributions, the Company's economic interest in Austar was increased to
94%, which was subsequently increased to 96%. In October 1996, the Company
acquired the remaining 4% economic interest in Austar.
In July 1994, the Company acquired a 50% 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 on a hybrid fiber
coaxial ("HFC") cable network planned to pass 135,000 homes in the Wellington
area. In July 1996, the Company acquired the remaining 50% interest in Saturn in
exchange for a 2.6% interest in the Company.
2
In October 1994, the Company and Century Communications Corp. ("Century")
formed XYZ Entertainment, each retaining a 50% interest. In September 1995, the
joint venture between Century and UIH, Century United Programming Ventures Pty
Limited ("CUPV") sold a 50% interest in XYZ Entertainment to a third party,
thereby diluting the Company's indirect interest in XYZ Entertainment to 25%.
In January 1995, the Company acquired an indirect effective 90% economic
interest in Telefenua. The Company's economic interest decreases to 75% and 64%
once the Company has received a 20% and 40%, respectively, internal rate of
return on its investment in Telefenua. The Company has funded the construction
and development of Telefenua's multi-channel television system.
In August 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, majority-owned subsidiary of UIH, a leading
provider of multi-channel television services outside the United States. UIH,
together with its strategic and financial partners, has ownership interests in
multi-channel television systems in operation or under construction in 25
countries in Europe, Latin America and, through the Company, the
Australia/Pacific region. As of December 31, 1996, UIH's multi-channel
television systems had approximately 10.4 million television homes in their
respective service areas, passed approximately 7.2 million homes and had
approximately 3.1 million subscribers. In addition to the Company, UIH's
operations include its 50% interest in United and Philips Communications B.V., a
joint venture with Philips Electronics N.V. that is the largest privately-owned
multi-channel television operator in Europe.
UIH and the Company are parties to a management agreement pursuant to which
UIH will continue to perform and be compensated for certain management,
technical, administrative, accounting, tax, legal, financial reporting and other
services for the Company.
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 "Corporate Organizational Structure."
3
UIH Australia/Pacific, Inc.
Operating Ownership
System Principal Business Percentage
--------- ------------------------------------------ ----------
Austar Regional Australia, MMDS and DTH
multi-channel systems 100%
Saturn Greater Wellington, New Zealand area,
wireline cable system 100%
United
Wireless Australia, wireless mobile data services 100%
Telefenua Tahiti and Moorea, MMDS
multi-channel system 90%
XYZ
Entertainment Australian Programming 25%
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
--------------------------------------------------
The Company operates in the cable television industry through investing in,
acquiring and managing multi-channel television, telephony and programming
operations.
(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 systems and markets a DTH service
in franchise areas encompassing approximately 1.6 million television homes, or
25% of the total Australian market. In addition, the Company, through its New
Zealand operating company Saturn, is constructing a wireline cable and telephony
system in Wellington, New Zealand, a market representing approximately 135,000
television homes. The Company's other assets include a 25% interest in XYZ, a
programming company that provides four channels to the Australian multi-channel
television market as part of the Galaxy Package, the most widely distributed
programming package in Australia and the core component of Austar's programming
offering, a 90% economic interest in Telefenua, the only provider of
multi-channel television services in Tahiti, with an MMDS system in a market
with 31,000 television homes, and a 100% interest in United Wireless, an
Australian company providing 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, New Zealand and Tahiti. As of February 28, 1997, the Company had
invested over $275 million in its networks and operating infrastructure and had
launched service in each of its markets. As of February 28, 1997 the Company's
multi-channel television operating systems had an aggregate of approximately 1.8
million television homes serviceable and approximately 131,000 subscribers,
compared to approximately 296,200 television homes serviceable and approximately
29,300 subscribers as of December 31, 1995 (with a substantial majority of such
growth resulting from Austar's expansion). During this same period, programming
subscribers of XYZ increased from approximately 65,000 to approximately 380,000.
While the Company expects that a substantial portion of its growth will come
from the continued development of Austar, the Company is also anticipating
significant growth by its other operating companies, each of which the Company
believes has attractive growth prospects.
4
The following table sets forth certain unaudited operating statistics of
the operating companies as of February 28, 1997:
Television
Homes in Homes
Operating System Technology Service Area Serviceable Subscribers
---------------- ---------- ------------ ----------- -----------
Austar MMDS/DTH 1,622,000 1,528,730 123,689
Saturn Cable/Telephony 141,000 15,975 1,903
Telefenua MMDS 31,000 19,584 5,472
XYZ Programming N/A N/A 380,000
--------- --------- -------
Total 1,794,000 1,564,289 511,064
========= ========= =======
AUSTAR (AUSTRALIA)
Austar is the largest provider of multi-channel television services in
regional Australia (areas outside Australia's six largest cities). In early
1996, Austar initiated widespread deployment of its services and, as of February
28, 1997, had launched MMDS service in 38 metropolitan markets containing
approximately 782,000 homes and had initiated the marketing of DTH services in
non-metropolitan markets containing approximately 747,000 homes. These markets
represent over 97% of Austar's 1.6 million franchise television homes, the
remaining 40,000 of which will be serviceable by mid-1997.
Austar has entered into franchise agreements with Australis Media Limited
("Australis") that grant it the right to provide the Galaxy programming package
within its franchise areas through 2009 (extendible at Austar's option through
2019).
OPERATING AND GROWTH STRATEGY. Due to the relatively small size and low
housing densities which characterize the markets in its franchise areas, Austar
is primarily utilizing MMDS and DTH wireless technologies to deliver its
service. In its metropolitan markets, Austar constructs and owns the
transmission facilities and installs and retains ownership of the in-home
subscriber equipment. In its non-metropolitan markets, Austar is marketing a DTH
service (consisting primarily of the Galaxy programming package) and installs
and retains ownership of the in-home subscriber equipment. As a result, Austar
did not incur the costs necessary to own the facilities required to offer a DTH
service and only incurs capital costs when a DTH subscriber is installed.
Approximately 800,000 of the television homes in Austar's service area are in
metropolitan markets with sufficient size and densities 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. A small number (approximately 20%) of homes in these metropolitan
markets, however, are out of the line of sight of Austar's MMDS networks. Austar
services these homes with its DTH service. Austar markets its programming
services via DTH in its non-metropolitan franchise areas representing 747,000
television homes. These are less densely populated areas outside its
metropolitan markets that are more effectively serviced by DTH technology. In
addition, Austar recently began construction of a wireline cable network in
Darwin, a market containing approximately 26,200 serviceable homes where dense
vegetation makes an MMDS system impractical.
The deployment of MMDS networks in combination with DTH has allowed Austar
to roll out its service quickly and achieve rapid subscriber growth in its
franchise areas. Austar believes that the ability to be the first provider of
multi-channel television services in each of its markets has allowed Austar 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.
5
As of February 28, 1997, Austar had launched service in 38 of its
metropolitan markets representing 782,000 out of 800,000 potential serviceable
homes. Austar currently anticipates launching service in its remaining
metropolitan markets by mid 1997. In mid-January and February 1997, sales orders
declined in relation to the previous months due to a planned reduction in sales
and marketing efforts designed to conserve cash in light of existing funding
needs. The following table sets forth the summary operating statistics in
Austar's launched metropolitan markets, which are served primarily by MMDS, as
well as its non-metropolitan markets served by DTH:
[Enlarge/Download Table]
1996 1997
--------------------------------------------------------------------------- -------------------
June 30 July 31 Aug. 31 Sept. 30 Oct. 31 Nov. 30 Dec. 31 Jan. 31 Feb. 28
-------- -------- -------- --------- -------- ------- ------- ------- -------
Cumulative metropolitan
markets launched....... 13 19 20 23 27 35 38 38 38
Metropolitan homes
serviceable............ 476,000 604,000 626,000 655,000 700,000 754,000 782,000 782,000 782,000
Non-metropolitan homes
servicable............. 747,000 747,000 747,000 747,000 747,000 747,000 747,000 747,000 747,000
--------- --------- --------- ---------- --------- --------- --------- --------- ---------
Total homes
serviceable............ 1,223,000 1,351,000 1,373,000 1,402,000 1,447,000 1,501,000 1,529,000 1,529,000 1,529,000
========= ========= ========= ========= ========= ========= ========= ========= =========
Sales orders.............. 9,461 15,665 12,535 13,063 23,799 19,485 18,769 18,771 11,410
Net gain in subscribers... 5,656 9,521 10,452 11,021 15,024 13,212 14,898 12,620 7,659
Total subscribers......... 29,282 38,803 49,255 60,276 75,300 88,512 103,410 116,030 123,689
World Movies
subscribers............ 5,237 6,959 8,655 10,111 11,698 12,729 13,907 15,420 17,025
Installation backlog(1)... 6,500 10,000 9,200 8,200 13,860 10,945 10,879 11,709 8,611
(1)Estimated for periods prior to October.
To facilitate the rapid roll-out of its service, Austar has established
local offices in the majority of its metropolitan markets. These local offices
coordinate marketing, installation and customer service in Austar's metropolitan
markets and surrounding non-metropolitan areas. The local offices are supported
by five regional offices. Each regional office typically serves three to twelve
metropolitan markets. Austar estimates that approximately 70% of its potential
non-metropolitan customers are within fifty kilometers of its metropolitan
service areas. This proximity enables Austar to reduce installation and service
costs associated with DTH service to non-metropolitan subscribers and to focus
subscription sales through the use of marketing, promotional and sales tactics.
Austar has entered into contracts with a number of service companies to
install MMDS receivers, DTH satellite dishes and set-top decoders. Installers
collect the installation fee, install subscriber equipment and test reception
quality. Austar has trained and established certain guidelines for third party
service company employees who install Austar reception equipment. Austar has an
extensive quality assurance program and expends a significant amount of effort
to follow-up on installations to ensure customer satisfaction and, in the case
of DTH equipment installed within its metropolitan markets, verify that more
economical MMDS technology could not be used. Austar believes its efforts to
resolve service problems quickly has helped establish customer loyalty.
As of January 31, 1997, Austar had spent $39.5 million for construction of
MMDS head-end and transmission facilities for all of its operating systems.
Variable installation and equipment costs for each MMDS and DTH subscriber are
currently approximately $460 and $780 per subscriber, respectively. These
subscriber costs are partially offset by the Company's metropolitan and
non-metropolitan installation charges of $31 to $75 and $150, respectively.
Austar retains ownership of all MMDS and DTH customer premises equipment.
PRICING. Austar is currently providing the eight channel Galaxy Package,
the most widely distributed programming package in Australia, plus three to five
additional channels of programming as its basic package at a monthly rate of
approximately $31, with a one-time installation charge ranging from
approximately $31 to $75 for metropolitan subscribers and $150 for
non-metropolitan DTH subscribers. Austar also integrates all available off-air
channels into its basic channel line up at no additional charge. In March 1996,
Austar began offering its first premium channel, World Movies, which consists
6
primarily of foreign movies, art films and features. Austar is charging
approximately $5.30 per month for World Movies. As of February 28, 1997, Austar
had 17,025 subscribers for its World Movies premium channel.
MARKETING; CUSTOMER SUPPORT. Austar has focused its marketing and sales
efforts to support its strategy of rapid system roll-out which management
believes will provide it with a competitive advantage in each of its markets.
Austar has developed a comprehensive marketing and sales organization consisting
of a 180 person direct sales force and over 200 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 approximately 2,500 subscriptions per week. The sales force at Austar's
National Customer Operations Center ("NCOC") is currently generating sales of
approximately 2,750 additional 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 in its existing markets.
NCOC employees process installation orders, handle customer inquiries, including
programming and technical questions, and implement the customer retention
program, which includes telephone contact with customers following a
cancellation request, as well as making unprompted contact with customers
immediately following installation in an effort to ensure customer satisfaction.
Incoming calls from all of Austar's markets are directed to the NCOC where
customer service representatives are available to provide sales and service
information. The NCOC currently handles approximately 3,000 calls per day but
has scaleable capacity to handle at least 5,000 calls per day. The NCOC facility
currently employs 200 customer service professionals, which Austar intends to
increase as its subscriber base grows in its franchise areas. In addition,
Austar is exploring the possibility of using the NCOC to outsource customer
service to third parties in similar lines of business where appropriate.
Austar's monthly "churn" (calculated as total disconnects as a percentage
of average subscribers) has averaged 5.4% during 1996 and declined to 4.1%
during the fourth quarter of 1996. Austar believes that this ratio is likely to
continue to decline in the future due to several factors, although there can be
no such assurances. First, over 31% of the total disconnects in 1996 have
resulted from subscribers in the Gold Coast (which represents only 12% of
Austar's total subscribers as of February 28, 1997), the only market in which
Austar currently faces competition. As a result of this competitive environment,
Austar's installation fee in the Gold Coast is only $15 as compared to $31 to
$75 in other metropolitan markets and $150 in non-metropolitan markets. A higher
installation charge results in a larger financial commitment to the service by
the subscriber and therefore reduces the probability of churn. In connection
with the Company's acquisition of Australis' interest in Austar and related
agreements and transactions (the "Australis Arrangement"), Austar will be
compensated by Australis for any Foxtel Management Pty Limited ("Foxtel")
subscribers in the Gold Coast. Second, due to the significantly higher
installation charges in its non-metropolitan markets summarized above, Austar
believes that this ratio will decline as its percentage of non-metropolitan
subscribers to total subscribers increases (because Austar only launched its
rural DTH service in May 1996, its percentage of non-metropolitan subscribers to
total subscribers has increased from 0% on May 1, 1996 to approximately 28% at
February 28, 1997). Approximately 49% of Austar's total serviceable homes are in
its non-metropolitan franchise area. Austar's average monthly churn in its
non-metropolitan markets has been approximately 2% during 1996. Finally, Austar
expects its churn to decline as it continues to implement its customer assurance
and retention program and the breadth and quality of its programming package
improves and is actively negotiating to add additional sports and other
programming to its offering. In addition, the Company is in the process of
implementing specific plans to decrease churn, such as introducing direct debit
banking for customers, and reducing telephone abandonment rates which would aid
in customer retention and satisfaction. In the first two months of 1997, Austar
experienced slightly higher churn than in the later part of 1996. The Company
7
believes that churn during these two months was higher than normal due to
seasonality from the December holiday season and less compelling programming,
particularly movies, during these months.
PROGRAMMING. The Company believes that programming is an important
component in building successful multi-channel television systems. Accordingly,
Austar has secured the right to distribute the Galaxy Package of programming in
its service areas pursuant to franchise agreements with Australis with initial
terms through 2009 (extendible at the option of Austar through 2019). Austar
believes that the terms of its franchise agreements with Australis are favorable
to Austar and that these terms provide Austar with a programming cost advantage
over potential competitors. See "Austar-- Franchise Agreements."
The Galaxy Package is the most widely distributed programming package in
Australia and is the core programming offering of Austar, ECT, Australis and
Foxtel. Management believes that approximately 75% of Australia's multi-channel
television subscribers subscribe to the Galaxy Package. The channels in the
Galaxy Package were developed exclusively for the Australian market by several
of the world's leading programming companies, including Paramount, Sony,
Universal, Fox and Viacom. The Galaxy Package consists of the following eight
channels:
Galaxy Channel Programming Genre
-------------- -----------------
Showtime..................... premium feature movies
Encore....................... library movies
Fox Sports................... sports
TV-1......................... general entertainment
Discovery.................... documentary, adventure, history and lifestyle
Nickelodeon/Nick at Nite..... children's and family entertainment
Arena........................ general entertainment
Channel [V].................. music video
In addition to the right to distribute the Galaxy Package, Austar has the
right to distribute any additional channels offered by Galaxy and will pay
Australis for such channels a fee no greater than that charged to any other
person and in no case greater than Australis' cost (as charged by third parties
with respect to programming delivered by such party to Australis or the lowest
price at which Australis agrees to distribute Australis produced or compiled
programming), plus 10%. See "Austar--Franchise Agreements."
Austar has also secured additional programming on a non-exclusive basis,
which it is distributing to its customers as part of its basic programming
package, and Austar integrates all available free-to-air channels into its basic
channel line up at no additional charge. Austar's other "cable" channels include
the following:
Other Channels Programming Genre
-------------- -----------------
CMT........................... country music videos
BBC World..................... world news
CNBC(1)....................... business news
Asia Business News (2)........ regional business news
TNT(2)(3)..................... library movies
Cartoon Network(2)(3)......... cartoons
CNN International(2).......... world news
The Value Channel(4).......... shopping
Preview(4).................... programming guide
(1) All markets except the Gold Coast.
(2) The Gold Coast (MMDS) only.
(3) TNT and Cartoon Network share one channel.
(4) DTH only.
In March 1996, Austar began offering its first optional premium channel,
World Movies, which consists primarily of foreign movies, art films and
8
features. Austar is charging approximately $5.30 per month for World Movies.
Initial demand for this service has been strong with approximately 17,025
customers as of February 28, 1997, approximately 14% of Austar's basic
subscribers.
In March 1997, Austar acquired the programming rights to and initiated
transmission of the Super League Channel to all of its customers for the
season's initial four games. The parties are currently negotiating a long-term
agreement, although there can be no assurances that Austar will be successful in
obtaining an agreement on satisfactory terms, if at all. The Super League is a
rugby league competition supported by News Corp. and produced in partnership
with News Corp.'s Fox Sports joint venture. Rugby league is one of the most
popular television sports in the Queensland and New South Wales portions of
Austar's franchise areas. The Super League Channel currently provides live
telecasts (and replay rights) of certain Super League weekly games on Friday
nights, Saturday, Sunday and Monday evenings, but the suppliers of the channel
have indicated their intention to add, at some point in the future, additional
"football" programming, including U.S. NFL games and international soccer.
Austar intends to expand further the number of programming services
available on its MMDS systems and expects that, upon deregulation of the DTH
business in July 1997, it will be marketing additional channels of programming
via DTH. Austar's MMDS systems have the capacity to transmit up to 19 analog
channels (of which Austar currently uses 11 to 12 in its markets) in addition to
free-to-air channels, which are integrated into the programming line-up at the
rooftop. Austar is currently testing digital technology in one market and
intends to offer digital service in certain metropolitan markets if and when
competitive factors dictate. The DTH service marketed by Austar utilizes MPEG II
digital technology which has over 100 channels of capacity. In addition to any
additions to the Galaxy Package, Austar has also secured, beginning in July 1997
for a five-year period, a 54 MHz transponder capable of broadcasting between 10
and 15 digital channels on the Optus Networks satellite that currently transmits
the Galaxy Package, and pursuant to the Australis Arrangement has the right to
deliver such programming to its customers through the Galaxy system. The Company
is currently evaluating the revenue generation potential for program carriage on
this transponder and may sublease all or a portion of its transponder capacity
during the initial term of the agreement. Such transponder payments will be
approximately $480,000 per month, beginning in July 1997, under the agreement
with Optus Networks.
FRANCHISE AGREEMENTS. Austar has entered into franchise agreements with
Australis. Each franchise agreement is for a term of 15 years commencing in
October 1994, and Austar has the option to renew the franchise agreements on
identical terms for another ten years. Under the franchise agreements, Australis
granted Austar the license and right to distribute the Galaxy programming
package in its franchise areas. These franchise agreements provide exclusivity
over wireless technologies and provide that Australis will not grant rights to
any other person to use Australis' satellite infrastructure or system to
transmit Galaxy in Austar's franchise areas.
Pursuant to the terms of its franchise agreements, Austar pays a percentage
of net revenues to Australis for the right to distribute the Galaxy Package. For
purposes of the franchise agreements, net revenues equal gross revenues received
from the eight Galaxy channels currently provided less certain agreed costs,
including depreciation of subscriber equipment, which the Company believes
results in a favorable programming pricing structure.
In March 1995, Australis granted Foxtel a license to distribute the Galaxy
Package over cable television systems throughout Australia, including Austar's
franchise areas. The Company believes that because of such action, Australis was
in breach of its franchise agreements. Foxtel is currently distributing Galaxy
programming, in only one of Austar's markets, the Gold Coast, which contains
approximately 116,000 serviceable homes. On June 19, 1996, pursuant to the
Australis Arrangement, Austar and the Company agreed to settle their dispute
with Australis with respect to this matter. As part of the Australis
Arrangement, the parties agreed that Australis is entitled to grant Foxtel the
non-exclusive right to distribute Galaxy programming by cable, but that Foxtel
may not sublicense or assign this right without Austar's consent. Australis
agreed to pay to Austar an amount equal to the amount Australis received from
Foxtel for programming service for the period from March 1995 through June 30,
9
1996, less the amount Australis paid to third party programming suppliers for
such programming with respect to Foxtel subscribers located in Austar's
franchise areas during such period. In addition, from June 30, 1996 through the
term of the franchise agreements, Austar has the right in its sole discretion,
either to (i) sublicense to Foxtel the right to transmit the services provided
to it by Australis (and any other services) by cable transmission in its
franchise areas or (ii) require Australis to pay Austar an amount each month
equal to the sum of (a) the greater of A$4.50 per subscriber and all revenues
(less programming costs) per subscriber during such month received under the
agreement between Foxtel and Australis, with respect to Foxtel subscribers
located in Austar's franchise areas and (b) an additional amount (if any) to put
Austar in the position that it would have been in had it sublicensed the
services provided to it by Australis directly to Foxtel (which currently would
be approximately $8 per Foxtel subscriber per month). The Company believes that,
because its programming costs are less than the revenue to be generated by
sublicensing such programming to Foxtel, the benefits to be gained from this
aspect of the Australis Arrangement will be substantial over the years. As part
of the Australis Arrangement, Australis agreed to extend the term of the
franchise agreements by five years to an initial 15-year term and amended
certain financial and strategic terms of the franchise agreements. Australis
also granted to Austar the right to use Australis' satellite infrastructure to
provide additional DTH services within Austar's franchise areas. In addition,
Australis agreed to provide all future Galaxy channels to Austar at a price no
less favorable than that charged other persons and in any event at no more than
Australis' cost (as charged by third parties with respect to programming
delivered by such party to Australis or the lowest price of which Australis
agrees to distribute Australis produced or compiled programming), plus 10%. In
return, the Company agreed (i) to waive and release any claim arising out of or
in connection with Australis' execution and performance of its license agreement
with Foxtel and (ii) not to make any objection or claim against Australis or
Foxtel in connection with such license agreement. Management believes the
Australis Arrangement is favorable to Austar.
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 kilometer in Australia's largest capital 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% 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 franchise areas. In the Gold Coast, Austar is
currently providing 13 channels of programming as its basic package which
includes the eight channel Galaxy programming package as well as five additional
channels, at a monthly rate of approximately $23 with a one-time installation
charge of approximately $15. Foxtel offers the Galaxy Package of eight channels
as well as its ten other satellite or locally originated channels for a monthly
fee of $31 and an installation charge of $16. At February 28, 1997, Austar had
14,956 subscribers in the Gold Coast and estimates that Foxtel has 7,500
subscribers in this market. In addition, Austar is currently testing digital
MMDS technology in the Gold Coast and expects to implement digital service in
those metropolitan markets where competitive conditions dictate.
Approximately 747,000 of Austar's 1.6 million franchise homes are in
non-metropolitan markets which 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. Existing
regulations prohibit any DTH service other than the Galaxy programming package
from being offered in Australia prior to July 1997. Austar has the exclusive
right to market the Galaxy DTH service in its franchise area. Although
regulations will no longer prohibit additional DTH services after June 1997,
Austar will retain its exclusive right to market the Galaxy Package in its
franchise areas through 2009 (extendible to 2019 at Austar's option). In
addition, Austar believes it has an additional competitive advantage in offering
DTH service in these markets because over 70% of its serviceable homes are
within a fifty kilometer radius of its metropolitan markets, in most of which
10
it has 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. Optus
Vision has publicly announced that it plans to offer subscription television
services by DTH throughout Australia. In addition, the Company understands that
Australis and Optus Vision plan to form a joint venture whereby Australis will
contribute to the venture its satellite infrastructure allowing for DTH
transmission of Optus Vision's programming services. The Company believes that
using the infrastructure by any entity other than Austar for the provision of
DTH services within Austar's franchise area would be in violation of its
franchise agreements with Australis and has recently commenced proceedings
seeking injunctive relief preventing the use of Australis' infrastructure by
Optus Vision in Austar's franchise area. There can be no assurance that Austar
will prevail in its lawsuit or that, even if it is successful in obtaining an
injunction to prevent the consummation of the joint venture, Optus Vision or
others will not compete in Austar's franchise area.
MANAGEMENT AND EMPLOYEES. Austar's senior management includes 10 UAP
employees appointed to Austar that collectively have 130 years experience in the
construction, marketing and operation of multi-channel television systems.
Austar and UIH are parties to a 10-year Technical Assistance Agreement,
renewable for up to an additional 15 one-year terms, pursuant to which Austar
pays UIH a monthly fee equal to 4% of its gross revenues through October 2002,
3% through October 2004 and 2% through the remaining term of the agreement, for
the provision of various management and technical services, and reimburses UIH
for certain direct costs incurred by UIH, including the salaries and benefits
relating to the senior management team.
As of January 31, 1997, Austar had a total of 699 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 100% of Saturn, which recently 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 Wellington area, encompassing 135,000 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 mid-1998. Saturn also operates an existing cable system, which
passes approximately 6,000 homes, on the Kapiti Coast north of Wellington. As of
February 28, 1997, Saturn's activated networks passed approximately 16,000 homes
and serviced approximately 1,900 subscribers. In addition, Saturn has secured
additional rights to use existing poles to attach its network cable in markets
representing 200,000 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 television homes, is attractive for multi-channel television providers.
New Zealand has a demographic profile similar to Australia, including high per
capita income and strong television, VCR and cellular telephone penetration
rates. In addition, New Zealand imposes virtually no pricing regulation and only
limited program content regulation and permits operators to offer combined
multi-channel television and telephony services over one network. There is
currently only one significant multi-channel television provider that currently
offers a five-channel UHF-delivered subscription service.
OPERATING AND GROWTH STRATEGY. Saturn is constructing a 750 MHz HFC network
designed to service 500 homes per node with each home drop overlaid with copper
telephony plant. This architecture will allow the integrated delivery of pay TV,
telephony, Internet access, high speed data and future interactive services. The
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majority of Saturn's approximately 1,600 kilometers of plant will be constructed
on aerial utility poles which will 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. Because the only
significant multi-channel television competitor in the Wellington market offers
a UHF-delivered service that is limited to only five channels, management
believes it will be able to build a significant customer base by offering an
attractive basic programming line-up of over 30 channels at competitive prices,
as well as pay-per-view, data and telephony services. Saturn is currently
negotiating for an interconnect agreement that will allow it to provide local
residential and business telephone services. By bundling both subscription
television and telephony services, Saturn will be able to offer pricing
discounts across both services, which management believes will provide an
advantage over competitors that offer only one service. Saturn is currently in
the preliminary stages of discussions with several telecommunications providers
in the New Zealand market concerning potential strategic partnership
arrangements. There can be no assurances, however, that Saturn will be able to
conclude successfully any such arrangements.
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 21 channels and is currently 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:
Channel Programming Genre
------- -----------------
TV 1.................... general entertainment
TV 2.................... general entertainment
TV 3.................... general entertainment
Capital TV.............. general entertainment
Community Channel....... local news, events
CNN International ...... world news
Asia Business News...... Asian business news
Discovery............... science and nature
NBC Superchannel........ general entertainment
TNT..................... classic movies
Cartoon Network......... children's cartoon programming
Trackside............... TAB racing
Kidzone................. children's programming
Weather Channel......... live weather from NZ MetService
Program Guide........... programming line-up
TVSN.................... shopping
CMTV.................... country music video
RFO..................... French general entertainment
NHK..................... Japanese general entertainment
Elijah Television....... non-denominational religious programming
Worldnet................ U.S. information service news and science
In addition, in 1996 Saturn has negotiated two pay-per-view licensing
agreements with Columbia TriStar and Universal Pictures and expects to have
agreements with several other studios and to launch its pay-per-view services in
the second quarter of 1997.
PRICING. Saturn currently offers a single basic service package with 21
channels in Wellington at a monthly subscription rate of $23 with a one time
installation fee of $30 per subscriber. Sky TV ("Sky"), Saturn's primary
competitor, charges subscribers a monthly rate of approximately $36 for five
channels of programming with a one time installation fee of $35 per subscriber.
Saturn is currently offering new subscribers a promotional monthly basic rate of
$17 for the months from November 1996 to March 1997.
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MARKETING; CUSTOMER SUPPORT. Saturn's marketing strategy uses promotion
techniques proven in existing subscription television markets such as the United
States and Europe, including direct sales campaigns (door-to-door selling),
direct mail and telemarketing supported by a mass media brand awareness program.
Direct sales has proven to be the most effective technique in other cable
television markets, particularly in areas where multi-channel television is in
its introductory stage. Each of these techniques aims to communicate the selling
points of cable television: expanded choice, high entertainment value and
breadth of programming genre to potential subscribers. Homes are released for
marketing on a node by node basis as construction is completed, which allows 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 telephony services (once these can be offered) and to
capitalize on the value, quality and customer service advantages associated with
bundled services. Saturn has established a national customer services center at
its corporate headquarters in Wellington. All 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. There are currently three broadcast networks in New Zealand,
with plans for a fourth network announced. The largest provider of subscription
television services in New Zealand is Sky, which operates a five channel
scrambled UHF subscription television service. Although Sky offers a popular
sports channel on an exclusive basis, Sky does not currently offer the
programming diversity or television/telephony bundling that Saturn plans to
offer, services Saturn believes will drive its penetration. Sky has recently
announced, however, that for an installation fee of $420 it intends to offer a
satellite service primarily targeted to rural areas of New Zealand that
currently are unable to receive Sky's UHF signal and which may enable it to
provide up to an additional five channels. Independent News Limited, which is
49% owned by News Corp., has recently announced that it is negotiating to
acquire a significant shareholding in Sky. In addition, Telecom New Zealand
("Telecom"), New Zealand's largest telecommunications service provider with
nearly a 100% share of local loop revenues, 75% of national and international
toll revenues and 90% of cellular revenues, has announced its intention to
rebuild certain of its existing networks using HFC technology, which will allow
it to offer video and data services to a total of approximately 70,000 homes in
various parts of New Zealand, and that further expansion of its network will
depend on results of the initial roll-out. Telecom recently activated the
initial portion of its network in the Wellington area, which passes
approximately 2,000 homes. Telecom is also expected to be the primary
competition to Saturn's planned local loop telephony service.
MANAGEMENT AND EMPLOYEES. The Company has appointed three of its employees
to senior management positions at Saturn, including Saturn's chief executive
officer, Jack Matthews, and Saturn's technical director and customer operations
director. UAP also provides technical, administrative and operational assistance
to Saturn. Saturn reimburses UAP for all direct and indirect costs associated
with these services, including employee costs, and pays UAP 5% of Saturn's gross
revenue through 1999.
As of January 31, 1997, Saturn had 125 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.
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XYZ (AUSTRALIAN PROGRAMMING)
Through its 25% interest in XYZ, the Company provides four channels (the
"XYZ Channels") of the eight channels which are distributed as the Galaxy
Package, the most widely distributed programming package in Australia. The XYZ
Channels consist of the following:
[Enlarge/Download Table]
Channel Programming Genre
------- -----------------
Discovery Channel............ documentary, adventure, history and lifestyle programming
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, library movies
XYZ provides the XYZ Channels to Continental Century Pay Television Pty
Limited (the "A Licenseholder"), which in turn, pursuant to long-term carriage
agreements, supplies them as part of the Galaxy Package to Australis and its
franchisees and to Foxtel. The Galaxy Package is available to the majority of
Australia's approximately six million television households, including all
households marketed via MMDS and DTH by Australis and its franchisees, pursuant
to a carriage agreement between Australis and the A Licenseholder that has been
warranted to XYZ as having a term through at least 2010. The XYZ Channels are
also distributed to Foxtel pursuant to a carriage agreement between Foxtel and
the A Licenseholder that has been warranted to XYZ as having a term through
2020. XYZ's agreement with the A Licenseholder provides for fixed per subscriber
prices. The Company understands the carriage agreement between the A
Licenseholder and Foxtel provides for substantial minimum subscriber guarantees.
XYZ currently receives monthly revenues of approximately $3.15 per MMDS or DTH
subscriber and $4.15 per Foxtel subscriber. ECT, an affiliate of the A
Licenseholder, has guaranteed the performance of all of the A Licenseholder's
obligations to XYZ under this agreement. As of February 28, 1997, the XYZ
channels were distributed to approximately 380,000 multi-channel television
subscribers.
OPERATING AND GROWTH STRATEGY. XYZ 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 and Century jointly
manage Arena; the Company, Century and Foxtel manage Channel [V]; and the
Company and Century, together with Nickelodeon Australia, Inc. ("Nickelodeon")
manage the Nickelodeon/Nick at Nite channel. Each of these three channels
reports to a board comprised of the Company, Century and Foxtel executives. The
Discovery Channel is managed by Discovery Asia and distributed by XYZ.
XYZ is focusing its marketing efforts on creating, building and supporting
channel identification and brand awareness. XYZ's goal is to acquire quality
programming that will engender viewer loyalty. In addition, when restrictions on
multi-channel television advertising expire in mid-1997, XYZ plans to offer
advertising on each of the XYZ Channels. XYZ also plans to create and distribute
two additional channels in 1997.
ACQUISITION OF PROGRAMMING. In July 1995, XYZ and Discovery Asia executed a
twelve-year exclusive carriage agreement whereby a localized version of the
Discovery Channel replaced the existing documentary channel developed by XYZ.
The Company believes that, as a result of this arrangement, XYZ will be able to
offer subscribers higher quality programming at a lower cost to XYZ.
XYZ and Nickelodeon, a division of Viacom, are jointly producing and
distributing an Australian version of Nickelodeon/Nick at Nite, which XYZ began
distributing in October 1995. XYZ pays a monthly per subscriber license
distribution fee that is shared equally by Nickelodeon and XYZ.
XYZ acquires programming and locally produces interstitials for, packages
and distributes Arena and Channel [V]. XYZ has acquired a two to three year
supply of programming for Arena at prices its management considers to be
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favorable. XYZ is pursuing supply agreements and potential joint venture
arrangements with a number of other international programming suppliers.
In March 1997, XYZ 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's music video channel
under a license arrangement with the international music video channel, Channel
[V]. The arrangement, which has a ten year term, will allow XYZ to use the
Channel [V] trademarks, interstitial materials and management and gives it
access to Channel [V]'s favorable record programming arrangements. XYZ has
agreed to pay a management fee of A$1 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% for the third through the tenth years. After the third
year, CVMN shall have a one-year option to acquire a 20% interest in Channel [V]
at a price equal to XYZ'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 January 31, 1997, XYZ had 51 employees and the Nickelodeon
joint venture had 20 employees. The programming joint venture between the
Company and Century had 11 employees that provide management services to XYZ.
TELEFENUA (TAHITI)
The Company has an up to 90% economic interest in Telefenua which operates
a 15 channel MMDS service in a service area that, as of February 28, 1997,
included approximately 19,600 television 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 serviceable homes
in its franchise areas. Telefenua had 5,472 subscribers as of February 28, 1997,
representing a 28% penetration rate. The Company is in the early stages of
negotiating the sale of all or a portion of Telefenua to a local strategic
investor, although there can be no assurance that the Company will conclude such
a transaction.
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% and 66%, 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.
OPERATING AND GROWTH STRATEGY. Telefenua is focusing on increasing its
penetration rates through continued direct marketing campaigns, including
door-to-door sales, and expanding its serviceable homes through select
deployment of beam benders and repeaters. Management is actively seeking to
expand its programming offering including the planned introduction of premium
movie services. Telefenua is also expanding its network by adding additional
beam benders and repeaters. The Company anticipates this expansion will be
completed over the next 12 to 24 months.
PRICING. The subscription fee for Telefenua's basic tier is approximately
$49 per month and the expanded tier monthly rate is approximately $60. To date,
nearly 99% of Telefenua's customers are subscribing to the expanded tier of
service. Telefenua also charges a one-time installation rate of approximately
$100.
PROGRAMMING. Telefenua offers a combination of French and English language
services. Telefenua's current channel line-up consists of 15 channels segregated
into two tiers of service--a basic service with 12 channels and an expanded tier
with an additional three channels. Telefenua's basic tier offers the two local
broadcast channels as well as French language childrens', sports, general
entertainment and music channels and the English language CNN International
channel. Telefenua also offers a French/Tahitian language program guide and
15
plans to offer a local public access channel. The expanded tier includes French
language movies, a documentary channel and ESPN International.
With the exception of CNN International, ESPN International and the two
local broadcast channels, all programming consists of taped French satellite
services. Current French regulations require approval of the national regulatory
authority for all programming. The following is a list of programming currently
offered by Telefenua:
Channel Programming Genre
------- -----------------
RFO 1................... government broadcast, general entertainment
RFO 2................... government broadcast, general entertainment
CNN International....... world news
RTL..................... general entertainment
Eurosport............... sports
Canal J/Canal Jimmy..... adult and childrens'
Serie Club.............. general entertainment
Paris Premiere.......... arts, life
MCM..................... music video
M6...................... general entertainment
CMT..................... country music video
Program Guide........... program guide service
Planete................. documentary (expanded basic tier)
Cine Cinemas............ movies (expanded basic tier)
ESPN International...... sports (expanded basic tier)
MARKETING; CUSTOMER SUPPORT. Telefenua utilizes several marketing
techniques, proven in the U.S. multi-channel television industry, including
door-to-door, direct mail and local media. The Company's customer service center
also conducts telemarketing campaigns and has opened sales boutiques in high
traffic areas throughout Tahiti and Moorea. Marketing campaigns consist of
selected promotions targeting specific demographic groups throughout the year
and new markets as they are activated. Telefenua's customer service center is
located at its corporate headquarters. The center handles all customer
inquiries, coordinates installations and manages all maintenance activities.
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. The Company estimates that
Canal Plus had approximately 3,800 subscribers, of which an estimated 1,000 are
also customers of Telefenua. The monthly subscription fee for Canal Plus'
service is approximately equal to the subscription fee for Telefenua's
15-channel expanded tier service. 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. UIH and the Societe Francaise des Communications
et du Cable S.A. ("SFCC"), Telefenua's immediate parent, are parties to a
Technical Assistance Agreement, whereby UIH has agreed to provide technical,
administrative and operational assistance to SFCC. SFCC has a similar technical
assistance agreement with Telefenua under which it makes available to Telefenua
UIH's services 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 reimbursement of expenses and a fee equal to 5.5%
of Telefenua's gross revenue through the end of 1996, 3.5% of gross revenue for
the following 12 months, and 2.5% thereafter. The fees payable to UIH under its
Technical Assistance Agreement with SFCC are 5%, 3% and 2% of Telefenua's gross
revenues over the same periods. UIH is also reimbursed for all direct and
indirect costs associated with the services it provides. UIH has appointed two
of its employees to serve as managing director and technical director of
Telefenua. UIH pays these employees' salaries and benefits and charges Telefenua
for these amounts.
16
As of January 31, 1997, Telefenua had 40 employees.
UNITED WIRELESS (AUSTRALIAN MOBILE DATA)
The Company owns a 100% economic interest in United Wireless, a provider of
two-way wireless mobile data services in Australia. Wireless data networks
provide for the two-way transmission of packet switched data between a
customer's terminal and a host computer. The transmission of wireless data
occurs over a network, similar in configuration to a cellular telephone network,
which is constructed and maintained by a local network carrier, such as United
Wireless.
BACKGROUND. In September 1995, the Company acquired a 100% interest in
BellSouth Mobile Data Australia Pty Limited which was renamed United Wireless.
United Wireless is in the second phase of its network deployment in the major
metropolitan markets of Australia. United Wireless' network is based on the
"Mobitex" technology, developed by Ericsson and Swedish Telekom and launched in
1984. Today, there are 14 operational Mobitex wireless data networks deployed
throughout Europe, North America and the Asia/Pacific region.
MARKET OVERVIEW. The Australian wireless mobile and fixed data industry is
in an early stage of development. Wireless data services were first introduced
in Australia in 1992 by United Wireless' predecessor. Today, there are two
public wireless data carriers in Australia with a total estimated installed base
of 5,500 customer terminals.
OPERATING AND GROWTH STRATEGY. United Wireless is aggressively expanding
its network coverage areas to encompass the metropolitan markets of Adelaide,
Brisbane, Canberra, the Gold Coast, Melbourne, Perth and Sydney. The Company
plans on spending approximately $3.7 million for network construction and
working capital needs through 1998.
MARKETING AND CUSTOMERS. United Wireless' target market includes large
companies with significant potential installed bases, such as utilities,
security alarm firms, commercial banks, transport companies, and courier and
delivery companies. Management believes that the most expeditious and economical
approach to building an installed customer terminal base is to target its
efforts on securing these large corporate accounts. Specific applications that
United Wireless plans to target include remote order entry (i.e., sales persons
and couriers), credit and debit card validation, remote meter reading for
utilities, security monitoring and vending machine inventory monitoring.
REVENUE AND PRICING. The majority of United Wireless' revenues are derived
from monthly access fees charged on a per terminal basis. The average customer
pays a monthly rate of $25 per terminal.
SALES. United Wireless utilizes a network of systems integrators that act
as the primary interface with potential customers. These systems integrators
develop specific customer applications which utilize the Mobitex wireless
network for transmission of data. United Wireless works closely with these
systems integrators providing technical, marketing and other general sales
support.
COMPETITION. United Wireless competes primarily with Telstra Wireless Data,
a subsidiary of Telstra, whose wireless data network was developed by Motorola.
The Company estimates Telstra Wireless Data has an installed base of
approximately 5,250 customer terminals.
In addition to an existing competitor, United Wireless could face
competition in the future from certain companies that are attempting to
implement satellite-generated data transmission and paging services on a global
scale. The launch of low earth orbit satellite systems offering wide area public
data communications in Australia is expected between 1999 and 2002. The Company
believes, however, that the costs of both terminal equipment and data
transmission are expected to be significantly greater than those incurred by
United Wireless.
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The Company believes that the Mobitex network provides certain competitive
advantages over other operating platforms including: (i) superior transmission
quality; (ii) broader redundancy capabilities; (iii) larger base station
coverage areas; (iv) lower maintenance and support requirements; and (v) a
greater array of proven application solutions.
EMPLOYEES. As of January 31, 1997, United Wireless had 23 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: (i) microwave multipoint distribution
systems (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 a MMDS system 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 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 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 New Zealand or
Tahiti although Sky has recently announced plans to start delivering services to
New Zealand by satellite.
A wireline cable television system is a network of coaxial or fiber-optic
transmission cables through which programming is transmitted to a subscriber's
premises from the system's head-end facility, which receives satellite and
tape-delivered programming. Wireline cable television offers a wide bandwidth
that generally allows the transmission of a larger number of channels than MMDS.
When constructed with a HFC network, as 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.
18
EMPLOYEES
The Company has no employees. Administrative and other services for the
Company are currently provided by UIH. UIH and the Company are parties to the
UIH Management Agreement pursuant to which UIH provides all management and
administrative services necessary for the Company. UIH supplies certain
employees to Austar, Saturn and Telefenua pursuant to Technical Assistance
Agreements with such operating companies. See Item 13 of Part III "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. Below is a summary of the Company's ownership interests in its operating
companies.
AUSTAR
The Company holds a combined 100% economic interest in CTV and STV, which
operate together under the name Austar, through direct and indirect holdings of
convertible debentures and ordinary shares. The Company holds approximately 15%
of the ordinary shares of CTV and STV, which accounts for an approximately 0.3%
economic interest in Austar. The Company holds all of CTV's and STV's
convertible debentures, which accounts for an approximately 97.8% economic
interest in Austar. 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 CTV and
STV, UAP has an additional effective 1.9% economic interest in Austar. Although
the Company holds debentures and one share in each of SMH and SMI, it does not
control such entities or have controlling rights as a shareholder of such
entities. Through contractual arrangements and pursuant to the terms of CTV's
and STV's respective charter documents, the Company has the right to appoint all
of the six voting directors of each company.
XYZ
The Company has an indirect 25% interest in XYZ through its 50% interest in
CUPV, an Australian corporation owned equally by the Company and Century. CUPV
holds a 50% interest in XYZ. The remaining 50% interest in XYZ is held by
Foxtel.
SATURN
In 1994, the Company acquired a 50% interest in Saturn, a New Zealand
corporation. In July 1996, the Company acquired the remaining 50% interest in
Saturn in exchange for a 2.6% common equity interest in the Company.
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% 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% of the distributions made by SFCC until
UIH-SFCC has received the return of its investment plus a 20% cumulative
compounded annual return, 75% of distributions until it has received the return
of its investment plus a 40% cumulative compound annual return and 64% of
distributions thereafter. Once UIH-SFCC's total equity investment exceeds $10
million, further equity investments would not be entitled to the 90% and 75%
distributions. Instead, equity investments above $10 million, to the extent not
19
matched pro rata by the Company's partners, would increase the 64% that UIH
receives after the preferential distributions are made on the first $10 million.
As of September 30, 1996, UIH-SFCC has also advanced $7 million as a bridge loan
to SFCC, approximately $5 million of which was converted into convertible
debentures of SFCC, which are convertible into preferred stock of SFCC. UIH-SFCC
intends to convert approximately $3.1 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 million. UIH-SFCC has also invested
$2.3 million in equipment, which has been leased to Telefenua.
UNITED WIRELESS
United Wireless is a wholly-owned subsidiary of the Company.
For a discussion of risks associated with foreign operations, refer to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 of Part II of this Form 10-K.
(d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
--------------------------------------------------------------------------------
For information applicable to this item, refer to the notes to the
financial statements contained in Item 8 of Part II of this Form 10-K.
ITEM 2. PROPERTIES
-------------------
The Company's executive offices are located in Denver, Colorado, in space
leased by UIH. In management's opinion, 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 five 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 has constructed a head-end facility on leased property in
Paraparaumu. Saturn leases office and warehouse facilities for its headquarters
in Petone, located north of Wellington, and additional office and warehouse
space on the Kapiti Coast. These leases have six- and three-year terms,
respectively, with six- and three-year renewal options, respectively. Saturn
also has a two-year lease for additional warehouse space in Petone. Saturn has
an option to acquire the Kapiti office premises.
XYZ currently uses a portion of Foxtel's broadcasting facilities located in
Sydney. XYZ is currently negotiating with Foxtel terms of a four-year lease for
this facility. The Company believes this arrangement results in operational cost
savings. XYZ 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
15-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.
20
ITEM 3. LEGAL PROCEEDINGS
--------------------------
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 has legally challenged the Decree and
authority of the CSA to award Telefenua the authorizations to operate an MMDS
system 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 has brought an action in French court seeking cancellation of the MMDS
licenses awarded by the CSA to Telefenua, although no such cancellation has yet
taken place. A law recently enacted by the French Parliament may give Telefenua
a statutory basis for seeking a new authorization from the communications
agency, should the existing authorization be nullified. The Company believes
that if the existing authorization is nullified and Telefenua is unable to
obtain a new authorization, Telefenua may petition for restitution for the
taking of such authorization. There can be no assurance, however, that if the
existing authorization is nullified a new authorization will be obtained. If
Telefenua does not obtain a new authorization, however, there is no assurance
that Telefenua will receive any restitution. In addition, any available
restitution could be limited and could take years to obtain.
Carl M. Johnson, an individual who claimed to have worked with UIH in
connection with the acquisition by Austar of certain of its licenses, has
claimed that UIH owes him a 12.5% equity interest in unspecified subsidiaries of
UIH. This complaint, which was filed on April 24, 1996 and served on UIH in
October 1996, is pending in a civil court in Melbourne, Australia, and seeks an
unspecified amount of damages. UIH intends to vigorously defend these claims.
On November 6, 1996, Austar filed a complaint in the Supreme Court of New
South Wales, Commercial Division, seeking injunctive relief to prevent (i)
Australis from transferring its satellite delivery systems and associated
infrastructure to its joint venture with Optus Vision and (ii) Optus Vision from
using such infrastructure to deliver DTH services in Austar's franchise area.
Austar believes that the use of the infrastructure by any entity other than
Austar for the provision of DTH services within Austar's franchise areas
violates the terms of Austar's franchise agreement with Australis which granted
Austar an exclusive license and franchise to use the infrastructure within its
franchise areas. Austar is seeking injunctive relief or, in the alternative,
damages associated with this violation of its franchise agreements. On December
6, 1996, Australis filed counterclaims against Austar and the Company alleging
generally that Austar and the Company breached implied terms of the Australis
Arrangement by seeking such injunctive relief. In addition, Optus Vision claims
that the exclusive nature of Austar's franchise agreements violates Australia's
Trade Practices Act. The Company intends vigorously to defend its position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------
No matters have been submitted to a vote of security holders during the
quarter ended December 31, 1996.
21
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
--------------------------------------------------------------------------------
UAP owns 487 (97.4%) of the 500 shares of issued and outstanding common
stock of the Company. The remaining 13 shares are owned by Kiwi Cable Company
BVI, Inc.("Kiwi"), the entity from which the Company acquired the remaining 50%
interest in Saturn for approximately $7.8 million. The holder of this 2.6%
interest was granted a one-time conversion right to exchange such interest for
an equivalent interest in the common stock of UAP, upon certain circumstances.
The Company has paid no dividends to either UAP or Kiwi. The Company is a
holding company with no independent operations of its own and, as such, its
ability to pay dividends is dependent upon distributions from its operating
companies. Such distributions may be 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 summary consolidated financial data for the years ended
December 31, 1994, 1995 and 1996 and balance sheet data as of December 31, 1995
and 1996 have been derived from the Company's consolidated financial statements
which have been audited by Arthur Andersen LLP, independent public accountants,
whose report indicated a reliance on other auditors relative to certain amounts
relating to the Company's interest in Telefenua and XYZ as of and for the year
ended December 31, 1995. The data set forth below is qualified by reference to
and should be read in conjunction with the audited Consolidated Financial
Statements of the Company and Notes thereto, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in Item 7 of
Part II of this Form 10-K.
[Enlarge/Download Table]
For the Years Ended
December 31,
----------------------------------------------------
1994 1995 1996
----- ---- ----
(In thousands, except share and per share data)
STATEMENT OF OPERATIONS DATA:
Service and other revenue .................................. $ -- $ 1,883 $ 24,977
System operating expense ................................... -- (3,230) (30,730)
System selling, general and
administrative expense .................................. -- (2,482) (24,800)
Corporate general and
administrative expense .................................. (659) (920) (1,376)
Depreciation and amortization
expense ................................................. -- (1,003) (36,269)
Equity in losses of affiliated
companies ............................................... (1,015) (16,379) (5,414)
Net loss ................................................... (1,674) (17,233) (87,986)
Net loss per common share .................................. $ (3,437) $ (35,386) $(178,471)
Weighted average number of
shares outstanding ...................................... 487 487 493
OTHER DATA:
Capital expenditures ....................................... $ 1 $ 7,648 $ 187,100
22
As of December 31,
------------------
1995 1996
----- ----
(In thousands)
BALANCE SHEET DATA:
Cash, cash equivalents, and short-term investments....... $ 8,730 $ 37,860
Property, plant and equipment, net....................... 27,630 193,170
Total assets............................................. 99,295 319,323
Senior discount notes and other liabilities.............. 867 251,397
Total liabilities........................................ 21,714 314,946
Total stockholders' equity............................... 75,066 4,377
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
INTRODUCTION
The Company currently holds (i) an effective 100% economic interest in
Austar, (ii) a 100% interest in Saturn, (iii) a 25% interest in XYZ, (iv) an up
to 90% economic interest in Telefenua and (v) a 100% interest in United
Wireless. Because the Company accounts for its less than majority owned
operating companies on the equity method, prior to September 1995, only the
Company's Tahitian subsidiary, Telefenua, was consolidated. In September 1995,
the Company acquired a 100% interest in United Wireless at which time it began
consolidating its results of operations. In late December 1995, the Company
increased its economic interest in Austar from 50% to 90% (the "Austar
Transaction"). During 1996, the Company further increased its economic interest
in Austar to 100%. Prior to the Austar Transaction, the Company accounted for
its investment in Austar using the equity method of accounting. The Company
began consolidating the results of operations of Austar on January 1, 1996.
Following its July 1996 acquisition of the remaining 50% 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
accounts for its interest in XYZ using the equity method of accounting.
In connection with the offering of the Notes, UIH merged into the Company
UIH's subsidiaries that hold 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 foreign multi-channel television, programming and mobile
data interests in Australia, New Zealand and Tahiti since inception. The Company
commenced operations in January 1994 when UIH began its development related
activities in the Australia/Pacific region. The Company reflected all of the
transfers from UIH as a capital contribution from parent in the accompanying
consolidated financial statements. The Company reports on the basis of U.S. GAAP
and recognizes its proportionate share of affiliated company income (loss) on
the basis of U.S. GAAP results.
The operating companies have, since inception, been engaged primarily in
the construction of their networks and organizational and start-up activities.
As a result, the Company has generated negative cash flow from operating
activities for all periods presented. Accordingly, the Company believes that its
historical results of operations discussed herein are not indicative of the
results of operations which will follow the completion of construction and
initial marketing of service by the operating companies. As demonstrated by the
table below, the Company has invested significant capital in the operating
companies each of which are experiencing a rapid growth in subscribers.
23
[Enlarge/Download Table]
December 31, 1996
--------------------------------------------------------------------------
Invested Subscriber
Company Service Capital Net Gain
Consolidated Subsidiaries: Ownership(1) Launch Date (In millions) Subscribers During 1996
-------------------------- ------------ ------------- ------------- ----------- -----------
Austar.................. 100% Aug. 1995 $185.4 103,410 98,206
Saturn.................. 100% Sept. 1996 23.9 1,697 738
Telefenua............... 90% Mar. 1995 16.7 5,187 1,061
United Wireless......... 100% Sept. 1995 5.0 N/A N/A
Unconsolidated Affiliate:
-------------------------
XYZ..................... 25% Apr. 1995 $ 10.8 340,000 275,000
(1) For an explanation of the Company's interests in each of the operating
companies, see Item 1 "Narrative Description of Business-Corporate
Organizational Structure."
UIH, 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 UIH Management Agreement between UIH
and the Company. See Item 13 "Certain Relationships and Related Transactions."
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1996
SERVICE AND OTHER REVENUE. The Company's service revenues (including
installation revenues) increased to $25 million for the year ended December 31,
1996 from $1.9 million in the comparable prior year period. This increase was
primarily attributable to increases in service and installation revenues at
Austar. Service and other revenues for the years ended December 31, 1995 and
1996 were as follows:
For the Years Ended
December 31,
--------------------------------
1994 1995 1996
------- ------- ------
(In thousands)
Austar............................. $ -- $ -- $21,244
Telefenua.......................... -- 1,882 3,513
Saturn............................. -- -- 110
United Wireless.................... -- 1 110
-------- ------ -------
Total service and
other revenue.............. $ -- $1,883 $24,977
======== ====== =======
AUSTAR
Service revenues at Austar were $21.2 million in 1996. Revenues
consisted primarily of service and installation fees from basic
subscribers of $14 million and $7 million, respectively, with other
revenue totaling $.2 million. The Company began consolidating the
results of Austar on January 1, 1996. As a result, the Company
reported no service revenues from Austar in 1995. Austar's actual
service revenues in 1995 were $0.4 million. The increase in service
revenues in 1996 was primarily attributable to an increase in
subscribers (5,204 at December 31, 1995 compared to 103,410 at
December 31, 1996). Such increase was the result of the rapid roll-out
of Austar's services initially launched in August 1995.
24
TELEFENUA
Telefenua's service revenues increased to $3.5 million from $1.9
million in 1995, primarily attributable to an increase in subscribers
(4,126 at December 31, 1995 compared to 5,187 at December 31, 1996).
SATURN
The Company began consolidating the results of Saturn effective
July 1, 1996. Saturn's actual service revenues for the years ended
December 31, 1996 and 1995 were $0.2 million and $0.1 million,
respectively. The increase is attributable to an increase in
subscribers from 959 in 1995 to 1,697 in 1996.
SYSTEM OPERATING EXPENSES. The Company's operating expenses increased to
$30.7 million for 1996 from $3.2 million in 1995, primarily as a result of
increases in operating expenses at Austar. System operating expenses for the
years ended December 31, 1995 and 1996 were as follows:
For the Years Ended
December 31,
----------------------------
1994 1995 1996
---- ---- ----
(In thousands)
Austar................................... $ -- $ -- $26,310
Telefenua................................ -- 2,836 2,118
Saturn................................... -- -- 889
United Wireless.......................... -- 394 1,413
------ ------- -------
Total system operating expenses..... $ -- $ 3,230 $30,730
====== ======= =======
AUSTAR
The Company reported operating expenses from Austar of $26.3
million in 1996, consisting primarily of salary and benefits ($11
million), satellite programming fees ($5.5 million) and annual MMDS
spectrum license fees ($2 million), with the remainder consisting
primarily of office-related expenses, system travel/recruitment and
the NCOC and field office start-up costs. The Company began
consolidating the results of Austar on January 1, 1996. As a result,
the Company reported no operating expenses from Austar in the
Company's consolidated statements of operations for 1994 or 1995.
Austar's operating expenses for 1995 were approximately $4.3 million.
The increase in operating expenses in 1996 was primarily attributable
to the rapid roll-out of Austar's services initially launched in
August 1995 and the corresponding increase in subscribers. Austar is
experiencing high operating expenses relative to service revenues due
to certain fixed operating expenses (such as management overhead,
license fees and certain marketing costs) as well as non-recurring
start up costs (such as initial market research, NCOC establishment
costs and additional one-time expenses due to the name change to
"Austar") associated with the launch of its service. Austar expects
operating expenses as a percent of service revenues to decline as
start-up costs are reduced and as certain fixed operating expenses are
spread over expected increases in service revenues.
TELEFENUA
Operating expenses consolidated by the Company from Telefenua
decreased to $2.1 million in 1996 from $2.8 million in 1995, primarily
due to a decrease in technical-related repairs and maintenance and
tape production costs, partially offset by an increase in the
subscribers in 1996. Telefenua's operating expenses in 1996 consisted
primarily of programming related expenses ($1.2 million) with the
remainder consisting of payroll-related costs and technical-related
costs.
25
SATURN
The Company began consolidating Saturn on July 1, 1996.
Accordingly, while the Company reported operating expenses of $0.9
million for Saturn in its consolidated statement of operations for
1996, Saturn's actual operating expenses were approximately $2.3
million for 1996 consisting primarily of payroll and office expenses
related to the start-up activities, including system design and
engineering work, for expansion of Saturn's Wellington system in 1996.
Saturn's system operating expenses in 1995 were $1.1 million.
SYSTEM SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company's system
selling, general and administrative expenses increased to $24.8 million for 1996
from $2.5 million in 1995, primarily attributable to increases in system
selling, general and administrative expenses at Austar. System selling, general
and administrative expenses for 1995 and 1996 were as follows:
For the Years Ended
December 31,
---------------------------
1994 1995 1996
---- ---- ----
(In thousands)
Austar......................................... $ -- $ -- $18,628
Telefenua...................................... -- 2,286 2,586
Saturn......................................... -- -- 2,463
United Wireless................................ -- 196 1,123
----- ------ -------
Total system selling, general and
administrative expenses............... $ -- $2,482 $24,800
===== ====== =======
AUSTAR
System selling, general and administrative expenses consolidated
by the Company from Austar were $18.6 million for the year ended
December 31, 1996 and consisted primarily of $5.5 million in marketing
costs related to print, radio and television advertisements utilized
in the launch of Austar's services throughout its service areas during
1996, direct sales commissions ($4.1 million) and for general and
administrative expenses at Austar's Sydney corporate headquarters ($9
million). The Company began consolidating the results of Austar on
January 1, 1996. Accordingly, the Company reported no system selling,
general and administrative expenses for Austar in 1995 or 1994.
Austar's actual system selling, general and administrative expenses
were approximately $3.1 million in 1995 compared to $0.4 million in
1994. The increase relates to marketing efforts associated with
Austar's 1995 service launch. The increase in system selling, general
and administrative expenses was primarily attributable to an increase
in marketing related to the increased roll-out of MMDS operating
systems and the initiation of DTH service in 1996.
TELEFENUA
System selling, general and administrative expenses consolidated
by the Company from Telefenua increased to $2.6 million in 1996
compared to $2.3 million in 1995 and $0 in 1994. This increase was
primarily attributable to increased marketing efforts associated with
Telefenua's March 1995 service launch.
SATURN
The Company reported system selling, general and administrative
expenses from Saturn of $2.5 million for 1996. The Company began
consolidating the results of Saturn effective July 1, 1996.
Accordingly, no system selling, general and administrative expenses for
1995 and 1994 were reported. Saturn's actual selling, general and
administrative costs increased to $2.8 million in 1996 from $1.2
million in 1995 and $0.4 million in 1994. The increase is attributable
26
to increased marketing efforts to expand the subscriber base as
Saturn's system expanded.
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSE. The Company's corporate
general and administrative expenses for the year ended December 31, 1996 were
$1.4 million as compared to $0.9 million in 1995 and $0.7 million in 1994. These
expenses relate to corporate staff dedicated to the region.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased to $36.3 million in 1996 compared to $1 million in 1995 due primarily
to the depreciation and amortization of $30.3 million from Austar in 1996. This
increase in depreciation and amortization was attributable primarily to the
significant deployment of operating assets at Austar beginning in early 1996 and
continuing throughout the year as Austar launched service and began serving
subscribers in a number of new markets. Depreciation expense is expected to
increase substantially in future periods as capital expenditures for the
build-out of Austar's MMDS sites and the launch of Saturn's wireline cable plant
and related increases in capital necessary for subscriber equipment continue for
the next several months. The Company began consolidating the results of Austar
on January 1, 1996. As a result, the Company reported no depreciation and
amortization from Austar in its consolidated statements of operations for the
years ended December 31, 1994 and 1995. The Company had no depreciation and
amortization expense in 1994.
EQUITY IN LOSSES OF AFFILIATED COMPANIES. The Company recognized equity in
losses of affiliated companies of $16.4 million and $5.4 million for the years
ended December 31, 1995 and 1996, respectively, primarily due to the decrease in
its ownership of XYZ and the consolidation of Austar beginning in January 1996.
Equity losses in affiliated companies for 1995 and 1996 are as follows:
For the Years Ended
December 31,
----------------------------
1994 1995 1996
----- ---- ----
(In thousands)
Austar(1)............................ $ 551 $ 3,212 $ -
Saturn(2)............................ 365 1,438 930
XYZ(3)............................... 99 11,729 4,484
------- ------- -------
Total equity in losses of
affiliated companies........ $ 1,015 $16,379 $ 5,414
======= ======= =======
(1) The companies that comprise Austar were incorporated in mid-1994.
The Company acquired an initial interest in these companies in the
fall of 1994 and increased its economic interest in these
companies to 90% in late December 1995. Austar launched its first
MMDS system in August 1995. The Company began consolidating Austar
effective January 1, 1996. Accordingly, the Company reported no
equity in losses related to Austar in 1996.
(2) The Company acquired an initial 50% interest in Saturn in July
1994. Accordingly, the Company recognized equity in losses for
Saturn for only the six months ended December 31, 1994, as
compared to the full twelve months for the year ended December 31,
1995. The Company increased its ownership interest in Saturn from
50% to 100% in July 1996. Accordingly, subsequent to that time,
the Company consolidated the operating results of Saturn. Prior to
such time, the Company recognized equity in losses from Saturn.
(3) XYZ was formed in October of 1994 and began distributing its four
Channels in April 1995.
SATURN
In addition, in 1995, Saturn initiated engineering and design
work and started system construction and accordingly incurred more
losses in 1995 as compared to 1994.
27
XYZ
Equity in losses of XYZ decreased to $4.5 million in 1996 from
$11.7 million in 1995. This decrease was primarily attributable to the
decrease in the Company's interest in XYZ from 50% to 25% in September
1995. In addition, XYZ reported a lower net loss in 1996 due to higher
revenues in 1996 resulting from an increase in programming subscribers
combined with a favorable comparison to 1995 which included high
start-up costs associated with the launch of the channels. XYZ's actual
operating revenues for 1996 were $7.6 million compared to $1.3 million
for 1995. XYZ's operating, selling, general and administrative expenses
for 1996 were $17.3 million (consisting primarily of satellite
transponder costs of $5.9 million, staffing costs of $3.3 million,
production/programming costs of $4.9 million and advertising/marketing
costs of $1.6 million) compared to $27.5 million for 1995.
GAIN ON SALE OF INVESTMENT. In September 1995 the Company sold one half of
its interest in XYZ at cost. As the recognition of equity losses through that
date had reduced the Company's investment to zero, the Company recognized a gain
on the entire amount received of $4.1 million.
INTEREST EXPENSE. The Company issued approximately $225.1 million (gross
proceeds) of the Notes in May 1996 (the "May 1996 Offering"). As a result of the
May 1996 Offering, the Company incurred interest expense of $20.3 million for
the year ended December 31, 1996. Prior to the May 1996 Offering, the Company
had no significant amount of interest-bearing debt.
INTEREST INCOME. Interest income increased to $4.1 million from $0.2
million in 1995 and $0 in 1994. The increase is attributable to higher
short-term investment balances resulting from the issuance of the Notes.
YEARS ENDED DECEMBER 31, 1994 AND 1995
Although the Company was formed in 1994, most of the operating companies
did not launch service until mid- to late-1995.
SERVICE AND OTHER REVENUE. The Company's service revenues (including
installation revenues) increased to $1.9 million for the year ended December 31,
1995 from $0 in the prior year.
AUSTAR
The Company began consolidating the results of Austar on January
1, 1996. As a result, the Company reported no service revenues from
Austar in 1995. Austar's actual service revenues for 1995 were $0.4
million compared to $0 in 1994. The increase in service revenues in
1995 was primarily attributable to an increase in subscribers (none
at December 31, 1994 compared to 5,204 at December 31, 1995). Such
increase was the result of the rapid roll-out of Austar's services
initially launched August 1995.
TELEFENUA
Telefenua's service revenues increased from $0 in 1994 to $1.9
million for 1995. The increase is primarily attributable to an
increase in subscribers (none at December 31, 1994 compared to 4,126
at December 31, 1995). Telefenua launched service in March 1995.
SATURN
The Company began consolidating the results of Saturn effective
July 1, 1996. Accordingly, the Company reported no service revenue
from Saturn in 1995. Saturn's actual service revenues for the year
ended December 31, 1994 were $0.05 million compared to $0.1 million
for the year ended December 31, 1995. The increase was primarily
attributable to an increase in subscribers from 443 at December 31,
1994 to 959 at December 31, 1995.
28
SYSTEM OPERATING EXPENSES. The Company's operating expenses increased to
$3.2 million for the year ended December 31, 1995 from $0 in the prior year,
primarily as a result of increases in operating expenses at Telefenua.
AUSTAR
The Company began consolidating the results of Austar on January
1, 1996. As a result, the Company reported no operating expenses from
Austar in the Company's consolidated statements of operations for 1994
and 1995. Austar's actual operating expenses increased to
approximately $4.3 million in 1995 relative to 1994. Operating
expenses consisted primarily of payroll ($1.7 million), satellite
programming fees ($0.4 million) with the remainder consisting
primarily of office related expenses, system travel/recruitment and
NCOC and field office start-up costs. The increase in operating
expenses in 1995 was primarily attributable to the rapid roll-out of
Austar's services, initially launched in August 1995, and the
corresponding increase in subscribers (none at December 31, 1994
compared to 5,204 at December 31, 1995).
TELEFENUA
Operating expenses consolidated by the Company from Telefenua
increased to $2.8 million in 1995 from $0 in 1994. Telefenua's
operating expenses for 1995 consisted primarily of programming fees,
production costs and payroll related costs. Telefenua launched
service in March 1995 resulting in the increase in operating
expenses.
SATURN
The Company began consolidating Saturn on July 1, 1996.
Accordingly, the Company reported no operating expenses for Saturn in
its consolidated statements of operations for the years ended
December 31, 1994 and 1995. Saturn's actual operating expenses were
$0.4 million for 1994 compared to $1.1 million for 1995. The increase
is attributable to system expansion and increased subscribers (443 at
December 31, 1994 compared to 959 at December 31, 1995).
SYSTEM SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company's system
selling, general and administrative expenses increased to $2.5 million for the
year ended December 31, 1995 from $0 in 1994.
AUSTAR
The Company began consolidating the results of Austar on January
1, 1996. Accordingly, the Company reported no system selling, general
and administrative expenses for Austar in 1994 or 1995. Austar's
actual system selling, general and administrative expenses were $0.4
million in 1994 compared to approximately $3.1 million in 1995. The
increase relates to marketing efforts associated with Austar's 1995
service launch.
TELEFENUA
System selling, general and administrative expenses consolidated
by the Company from Telefenua increased to $0 in 1994 compared to
$2.3 in 1995. This increase was primarily attributable to increased
marketing efforts associated with Telefenua's March 1995 service
launch.
29
SATURN
The Company began consolidating Saturn effective July 1, 1996.
Accordingly, no system selling, general and administrative expenses
for 1994 and 1995 were reported. Saturn's actual selling, general and
administrative costs increased from $0.4 million in 1994 to $1.2
million in 1995. The increase is attributable to increased marketing
efforts to expand the subscriber base as Saturn's system expanded.
CORPORATE GENERAL AND ADMINISTRATIVE EXPENSE. The Company's corporate
general and administrative expense for the year ended December 31, 1995
increased to $0.9 million from $0.7 million in the year ended December 31, 1994,
primarily due to the hiring of additional corporate staff dedicated to the
region.
DEPRECIATION AND AMORTIZATION. The Company had depreciation and
amortization expense of $1 million for the year ended December 31, 1995 due
primarily to the acquisition of Telefenua and the launch of its system in March
1995. The Company had no such expenses in 1994.
EQUITY IN LOSSES OF AFFILIATED COMPANIES. The Company recognized equity in
losses of affiliated companies of $1 million and $16.4 million for the years
ended December 31, 1994 and 1995, respectively. The companies that comprise
Austar were incorporated in mid-1994. The Company acquired an initial interest
in these companies in the fall of 1994 and increased its economic interest in
these companies to 90% in late December 1995. Austar launched its first MMDS
system in August 1995. The Company acquired an initial 50% interest in Saturn in
July 1994. Accordingly, the Company recognized equity in losses for Saturn for
only the six months ended December 31, 1994, as compared to the full twelve
months for the year ended December 31, 1995. In addition, in 1995, Saturn
initiated engineering and design work and started system construction and
accordingly incurred more losses in 1995 as compared to 1994. XYZ was formed in
October of 1994 and began distributing its four channels in April 1995.
GAIN ON SALE OF INVESTMENT. In September 1995 the Company sold one half of
its interest in XYZ at cost. As the recognition of equity losses through that
date had reduced the Company's investment to zero, the Company recognized a gain
on the entire amount received of $4.1 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company is responsible for its proportionate share of the capital
requirements of the operating companies and has funded its share to date with
capital contributed by UIH and from the proceeds of the May 1996 Offering. As of
December 31, 1996, the Company had approximately $29.5 million of cash and short
term investments on hand, excluding the cash on hand at the operating companies.
The Company plans to pursue additional sources of funding to meet these needs.
Sources of additional capital may include debt and equity financing at the
operating company level, financing provided by the Company's financial and
strategic partners and additional debt and equity financing by the Company.
There can be no assurance, however, that the Company will be successful in
obtaining all or a portion of its anticipated funding needs.
If the Company or UAP do not consummate an issuance of capital stock
resulting in gross proceeds to the Company of at least $70,000 (an "Equity
Sale") prior to May 16, 1997, then the interest rate on the Notes will be
increased by an additional 0.75% per annum, until such time as the Equity Sale
is effected. In addition, if the Company or UAP do not consummate an Equity Sale
prior to November 16, 1997, the then holders of the Notes will be entitled to
receive warrants to purchase common stock of the Company, assuming the aggregate
fair market value of the Company's equity is $150,000, or, in certain
circumstances, of UAP. The Company plans to pursue additional sources of funding
that may constitute an Equity Sale, although there can be no assurance that the
Company will be successful in concluding an Equity Sale prior to May 16 or
November 16, 1997.
30
The following table sets forth, as of December 31, 1996, (i) the total
estimated funding required for the construction and initial marketing of the
operating companies' systems in their existing license areas, including any
capital invested to date and the application of any operating cash flow sources
for such operating companies, (ii) the total amount of capital invested in each
of the operating companies and the portion funded by the Company and (iii) the
total estimated additional funding required based on the assumptions stated in
clause (i) above, and the Company's estimated portion of such funding. Such
amounts are expected to be funded over the next 24 to 36 months. The estimated
required additional funding numbers below have not been reduced to give effect
to any surplus cash flow of any one operating company which might be available
to fund the requirements of another operating company. To the extent the
operating companies fund their construction and other costs through project
financing, the Company's portion of estimated additional funding would be
reduced proportionately. The Company's portion of estimated additional funding
would be increased proportionately to the extent cash flow from the operating
companies and other sources of financing are not sufficient to meet project
funding requirements. To the extent that the other shareholders of XYZ fail to
fund their pro rata share of the additional shareholder capital, the Company may
fund all or a portion of such shortfall.
[Enlarge/Download Table]
Estimated Total Project Capital Invested Estimated Required
Funding Requirements As of December 31, 1996 (1) Additional Funding
----------------------------- ---------------------------- ------------------
Operating
Company The Company Total The Company(2) Total(2) The Company Total
------- ----------- ---------------- -------------- ---------- ------------ -------
(In millions)
Austar............ $ 377.9 $ 377.9 $ 185.4(3) $ 185.4(3) $ 192.5 $ 192.5
Saturn............ 109.7 109.7 23.9(4) 23.9(4) 85.8 85.8
XYZ............... 14.0 56.0 10.8 43.4 3.2 12.6
Telefenua......... 17.4 17.4 16.7 16.7 0.7 0.7
United Wireless... 8.2 8.2 5.0 5.0 3.2 3.2
------- -------- ------- ------- ------- -------
Total........ $ 527.2 $ 569.2 $ 241.8 $ 274.4 $ 285.4 $ 294.8
======= ======== ======= ======= ======= =======
(1) Certain amounts contributed by the Company's partners were contributed in
currencies other than U.S. dollars. Such amounts have been translated to
U.S. dollars using a convenience translation.
(2) Includes amounts contributed to Austar (approximately $11.1 million) and
Saturn (approximately $2.9 million) by shareholders other than the Company,
which amounts were contributed by such shareholders prior to the acquisition
of their respective interests by the Company.
(3) Does not include the $58.6 million used by the Company to increase its
economic interest in Austar to approximately 100%.
(4) Does not include the value of shares of Class A Common Stock exchanged for
shares of the Company to increase the Company's interest in Saturn to 100%.
The indentures associated with UIH's Senior Secured Discount Notes 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 Indenture. The Company, Austar and Telefenua are restricted under
the Company's Indenture. The restrictions imposed by the Indentures will be
eliminated upon the retirement of UIH's Notes at their maturity in November
1999, and upon the retirement of the Company's Notes at their maturity in May
2006, respectively.
Prior to the close of the May 1996 Offering, the Company was financed
solely by capital contributed by UIH. During the year ended December 31, 1994,
UIH contributed $25.3 million in cash to the Company, $22.8 million of which was
used to finance the Company's investments in Austar, XYZ and Saturn.
Approximately $1.9 million was used for costs incurred in the acquisition and
development of its projects, the majority of which was for Telefenua. The
remainder was used for non-operating costs.
31
During the year ended December 31, 1995, the Company recognized losses of
$17.2 million of which $16.4 million was from non-cash equity in losses of
affiliated companies. UIH contributed total capital of $68.4 million, consisting
of $29.8 million of UIH's preferred stock and the remainder in cash, to the
Company and made bridge loans of $9.9 million to Austar and indirectly to
Telefenua through its parent, Societe Francaise des Communications et du Cable
S.A. ("SFCC"). The Company used approximately $45.1 million of the contributed
capital, including the UIH preferred stock, to acquire an additional 40%
economic interest in Austar in December 1995. The Company used $6.1 million in
cash to fund the operations of Telefenua and made an additional $22.5 million in
capital contributions to the operating companies. The Company received $4.1
million for the sale of 50% of its interest in XYZ and recognized a gain of the
same amount. The Company purchased $7.1 million of property and equipment, the
majority of which was purchased by Telefenua for construction of its system. The
remainder was used for other non-operating costs.
During the period from January 1, 1996 to May 13, 1996, the closing date of
the May 1996 Offering, UIH contributed capital of $17.3 million to the Company
and made additional bridge loans of $15.1 million to Austar. On May 13, 1996,
the Company sold the Notes with net proceeds to the Company from such sale
totaling $215.5 million. At that time, the Company acquired $25 million of the
Austar bridge loans from UIH with proceeds from the May 1996 Offering and
converted those loans (plus accrued interest of $0.6 million) to equity of
Austar and then an additional $25 million in Austar capital calls was funded,
thereby increasing the Company's interest in Austar to 96%. Prior to the closing
of the May 1996 Offering, approximately $5 million of the SFCC bridge loans was
converted into convertible debentures of SFCC, which are convertible into
preferred stock of SFCC. The remaining SFCC bridge loans totaling $2.6 million
(including accrued interest) will be either (i) repaid by SFCC, after which time
the Company would invest the proceeds of such repayment as permitted under the
Company's Indenture, or (ii) converted by the Company into equity of SFCC.
During the year ended December 31, 1996, the Company recognized losses of
$88 million of which $36.3 million was from non-cash depreciation and
amortization and $5.4 million of non-cash equity in losses of affiliated
companies. The Company also recorded non-cash accretion of interest on the Notes
of $20.1 million. The Company had an increase in receivables and other assets of
$3 million and an increase in accounts payable, accrued liabilities and other of
$13.2 million due to the growth in Austar, Telefenua and Saturn as their systems
continued to be built-out. The Company also had an increase in accounts payable
for capital expenditures of $38.3 million due to payables for construction of
the systems. During the year ended December 31, 1996, the Company purchased
$187.1 million of property, plant and equipment, the majority of which was
purchased by Austar and Saturn for construction of their systems. The Company
made $12.2 million in capital contributions to Saturn and XYZ during the year.
The Company purchased $199.2 million of short-term investments and sold $180.6
million of short-term investments as part of its cash management activities. The
remainder of the capital contributions from UIH was used in operations.
In October 1996, the Company acquired from Australis for $7.9 million the
approximately 4% remaining economic interest in Austar and purchased ordinary
shares and convertible notes of Australis for $4 million, issued upon exercise
of warrants and other rights granted to the Company.
FOREIGN CURRENCY EXCHANGE RATE RISKS; HEDGING
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 or
intercompany loans payable linked to the U.S. dollar.
32
In general, the Company and the operating companies do not execute hedge
transactions to reduce the Company's exposure to foreign currency exchange rate
risks. Accordingly, the Company may experience economic loss and a negative
impact on earnings with respect to its holdings solely as a result of foreign
currency exchange rate fluctuations, which include foreign currency devaluations
against the dollar. The Company may also experience economic loss and a negative
impact on earnings related to these monetary assets and liabilities. In general,
exchange rate risk to the Company related to the operating companies'
commitments for equipment purchases and operating expenses is generally limited
due to the insignificance of the related monetary asset and liability balances;
however, exchange rate risk to the Company of these notes payable, notes
receivable and debt linked to the U.S. dollar have and will continue to impact
the Company's reported earnings. Because of the manner in which the Company
accounts for its interest in XYZ, any adverse effects on reported earnings of
these companies would impact the Company through its equity in losses of
affiliated companies.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------
The consolidated financial statements of the Company are filed under this
Item beginning on Page 34. The financial statement schedules required by
Regulation S-X are filed under Item 14 of this Annual Report on form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
--------------------------------------------------------------------------------
None.
33
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 majority-owned subsidiary of
UIH Asia/Pacific Communications, Inc.) and subsidiaries as of December 31, 1995
and 1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for the years ended December 31, 1994, 1995 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 did not audit the financial statements of Telefenua S.A. as of
and for the year ended December 31, 1995, a subsidiary which is consolidated in
the accompanying consolidated financial statements. UIH Australia/Pacific,
Inc.'s consolidated financial statements for the year ended December 31, 1995
reflect assets, liabilities, revenues, expenses and a net loss related to
Telefenua S.A. of $10,989,000, $9,710,000, $1,882,000, $5,438,000 and
$3,556,000, respectively. We did not audit the financial statements of XYZ
Entertainment Pty Limited ("XYZ") as of and for the year ended December 31,
1995, an investment which is reflected in the accompanying consolidated
financial statements on the equity method of accounting. UIH Australia/Pacific,
Inc.'s consolidated statement of operations reflects equity in losses related to
XYZ of $11,729,000 for the year ended December 31, 1995, and Note 4 to the
consolidated financial statements includes summarized financial data for XYZ.
The financial statements of Telefenua S.A. and XYZ as of and for the year ended
December 31, 1995 were audited by other auditors whose reports have been
furnished to us and our opinion, insofar as it relates to the summarized
financial data for Telefenua S.A. and XYZ included in Notes 3 and 4 to the
consolidated financial statements and to the amounts included in the
accompanying consolidated financial statements with respect to Telefenua S.A.
and XYZ, is based solely on the reports of the other auditors.
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 and the reports of other auditors, 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, 1995 and 1996, and the results of their
operations and their cash flows for the years ended December 31, 1994, 1995 and
1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado
March 28, 1997
34
REPORT OF INDEPENDENT AUDITORS
To the shareholders of TELEFENUA SA:
We have audited the balance sheet of TELEFENUA SA as of December 31, 1995
and the related statement of income and changes in financial position for the
year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards in France, which do not differ substantially from generally accepted
auditing standards in the United States. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TELEFENUA SA as of December
31, 1995 and the results of its operations and changes in its financial position
for the year then ended, in conformity with generally accepted accounting
principles in the United States of America.
The accounting practices of the Company used in preparing the accompanying
financial statements conform with generally accepted accounting principles in
the United States of America, but do not fully conform with accounting
principles generally accepted in France. As a consequence, those financial
statements differ from statutory financial statements that will be submitted for
the approval of the Company's shareholders in conformity with local corporate
laws.
A description of the significant differences between such principles and
those accounting principles generally accepted in the United States, and the
effect of those differences on net income, total assets and shareholders' equity
are set forth in Note 2(a) of the notes to the financial statements.
COOPERS & LYBRAND
Papeete, Tahiti
February 16, 1996
35
INDEPENDENT AUDITORS' REPORT
The Board of Directors
We have audited the accompanying consolidated balance sheet of XYZ
Entertainment Pty Ltd as of December 31, 1995 and 1994 and the related
consolidated statements of operations, stockholders' deficiency and cash flows
for the year ended December 31, 1995 and the period from October 17, 1994 (date
of inception) to December 31, 1994, which are expressed in Australian dollars.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Australia which do not differ in any material respect from auditing
standards generally accepted in the United States. Those standards require that
we plan and perform the audit to obtain reasonable assurance as to 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 the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
XYZ Entertainment Pty Ltd as of December 31, 1995 and the results of its
operations and its cash flows for the year ended December 31, 1995 and the
period from October 17, 1994 (date of inception) to December 31, 1994, in
conformity with accounting principles generally accepted in Australia.
Generally accepted accounting principles in Australia vary in certain
significant respects from generally accepted accounting principles in the United
States. Application of generally accepted accounting principles in the United
States would have affected amounts reported as stockholders' deficiency and net
loss as at and for the year ended December 31, 1995 and from the period from
October 17, 1994 (date of inception) to December 31, 1994 to the extent
summarized in Note 12 to the financial statements.
Deloitte Touche Tohmatsu
Chartered Accountants
Sydney, Australia
March 15, 1996
36
[Enlarge/Download Table]
UIH AUSTRALIA/PACIFIC, INC.
CONSOLIDATED BALANCE SHEETS
(AFTER CORPORATE REORGANIZATION--SEE NOTE 1)
(Stated in Thousands)
December 31,
---------------------
1995 1996
-------- --------
ASSETS
Current assets
Cash and cash equivalents..................................................... $ 8,730 $ 19,220
Short-term investments........................................................ -- 18,640
Subscriber receivables........................................................ 138 1,625
Related party receivables..................................................... 1,907 1,958
Other current assets.......................................................... 932 2,393
-------- --------
Total current assets............................................... 11,707 43,836
Investments in and advances to affiliated companies, accounted for under the
equity method................................................................. 2,829 --
Other investments in affiliated companies, including marketable equity
securities.................................................................... -- 1,372
Property, plant and equipment, net of accumulated depreciation of $1,217
and $31,611, respectively..................................................... 27,630 193,170
License fees, net of accumulated amortization of $442 and $2,520,
respectively ................................................................. 10,693 10,387
Goodwill, net of accumulated amortization of $38 and $3,835, respectively........ 45,324 58,134
Other non-current assets, net, including $0 and $1,600, respectively, of
related party receivables..................................................... 1,112 12,424
-------- --------
Total assets........................................................ $ 99,295 $319,323
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities, including $1,488 and $1,575,
respectively, of related party payables................................ $ 7,749 $ 20,468
Construction payables......................................................... -- 38,331
Accrued funding obligation.................................................... 1,834 1,270
Other current liabilities..................................................... 169 722
-------- --------
Total current liabilities.......................................... 9,752 60,791
Due to parent.................................................................... 11,095 2,758
Senior discount notes and other liabilities...................................... 867 251,397
-------- --------
Total liabilities................................................. 21,714 314,946
Minority interest in subsidiaries................................................ 2,515 --
Commitments (Note 12)
Stockholders' Equity:
Common stock, $.01 par value, 1,000 shares authorized, 487 and 500 shares
issued and outstanding, respectively........................................ -- --
Additional paid-in capital.................................................... 93,782 112,485
Unrealized loss on investment................................................. -- (3,412)
Cumulative translation adjustments............................................ 191 2,197
Accumulated deficit........................................................... (18,907) (106,893)
-------- --------
Total stockholders' equity.......................................... 75,066 4,377
-------- --------
Total liabilities and stockholders' equity.......................... $ 99,295 $319,323
======== ========
The accompanying notes are an integral part of these consolidated balance sheets.
37
UIH AUSTRALIA/PACIFIC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AFTER CORPORATE REORGANIZATION--SEE NOTE 1)
(Stated in Thousands, except Share and Per Share Data)
[Enlarge/Download Table]
For the Years Ended
December 31,
--------------------------------------
1994 1995 1996
---------- ----------- ----------
Service and other revenue.......................................... $ -- $ 1,883 $ 24,977
System operating expense, including $85, $610 and $787,
respectively, of related party expenses......................... -- (3,230) (30,730)
System selling, general and administrative expense................. -- (2,482) (24,800)
Corporate general and administrative expense, including $659, $918
and $750, respectively, of management fees to related party..... (659) (920) (1,376)
Depreciation and amortization...................................... -- (1,003) (36,269)
-------- -------- ---------
Net operating loss............................................ (659) (5,752) (68,198)
Equity in losses of affiliated companies........................... (1,015) (16,379) (5,414)
Gain on sale of investment in affiliated company................... -- 4,132 --
Interest income.................................................... -- 157 4,106
Interest expense................................................... -- (30) (20,298)
Interest expense, related party, net............................... -- -- (458)
Other income, net.................................................. -- 219 90
-------- -------- ---------
Net loss before minority interest............................. (1,674) (17,653) (90,172)
Minority interest in subsidiary.................................... -- 420 2,186
-------- -------- ---------
Net loss...................................................... $ (1,674) $(17,233) $ (87,986)
======== ======== =========
Net loss per common share.......................................... $ (3,437) $(35,386) $(178,471)
======== ======== =========
Weighted average number of common shares outstanding............... 487 487 493
======== ======== =========
The accompanying notes are an integral part of these consolidated statements.
38
[Enlarge/Download Table]
UIH AUSTRALIA/PACIFIC, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AFTER CORPORATE REORGANIZATION--SEE NOTE 1)
(Stated in Thousands, except Share Data)
Common Stock Additional Unrealized Cumulative
---------------- Paid-in Loss on Translation Accumulated
Shares Amount Capital Investment Adjustments Deficit Total
------ ------ ------- ---------- ----------- ------- -----
Balances, January 1, 1994.. -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock... 487 -- -- -- -- -- --
Capital contributions from
parent.................. -- -- 25,342 -- -- -- 25,342
Cumulative translation
adjustment.............. -- -- -- -- 405 --
405
Net loss................... -- -- -- -- -- (1,674) (1,674)
--- ----- -------- ------- ------ ---------- --------
Balances, December 31,
1994.................... 487 -- 25,342 -- 405 (1,674) 24,073
Capital contributions from
parent.................. -- -- 68,440 -- -- -- 68,440
Change in cumulative
translation adjustment.. -- -- -- -- (214) -- (214)
Net loss................... -- -- -- -- -- (17,233) (17,233)
--- ----- -------- ------- ------ --------- --------
Balances, December 31,
1995................... 487 93,782 -- 191 (18,907) 75,066
Capital contributions
from parent............ -- -- 10,903 -- -- -- 10,903
Acquisition of remaining
50% interest
in Saturn.............. 13 -- 7,800 -- -- -- 7,800
Unrealized loss on
investment............. -- -- -- (3,412) -- -- (3,412)
Change in cumulative
translation
adjustment.............. -- -- -- -- 2,006 -- 2,006
Net loss................... -- -- -- -- -- (87,986) (87,986)
--- ------ -------- ------- ------ --------- --------
Balances, December 31,
1996................... 500 $ -- $112,485 $(3,412) $2,197 $(106,893) $ 4,377
=== ====== ======== ======= ====== ========= ========
The accompanying notes are an integral part of these consolidated statements.
39
[Enlarge/Download Table]
UIH AUSTRALIA/PACIFIC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AFTER CORPORATE REORGANIZATION--SEE NOTE 1)
(Stated in Thousands)
For the Years Ended
December 31,
----------------------------------
1994 1995 1996
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .................................................................... $ (1,674) $ (17,233) $ (87,986)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation and amortization .......................................... -- 1,003 36,269
Equity in losses of affiliate companies, net ........................... 1,015 16,379 5,414
Gain on sale of investment in affiliated company ....................... -- (4,132) --
Minority interest share of losses ...................................... -- (420) (2,186)
Technical assistance agreement payables................................. -- -- 1,677
Loan guarantee fee...................................................... -- -- (784)
Accretion of interest on senior discount notes ......................... -- -- 20,067
Increase in subscriber receivables ..................................... -- -- (1,487)
Increase in other assets ............................................... (1,852) (1,487) (1,512)
Increase in accounts payable, accrued liabilities and other ............ 11 238 13,185
--------- --------- ---------
Net cash flows from operating activities .................................... (2,500) (5,652) (17,343)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short-term investments .......................................... -- -- (199,242)
Sale of short-term investments .............................................. -- -- 180,602
Investments in and advances to affiliated companies and other
investments .............................................................. (22,841) (22,472) (16,204)
Purchase of additional interests in Austar, net of cash
acquired in 1995 ......................................................... -- (8,017) (7,920)
Proceeds from sale of investment in affiliated company ...................... -- 4,132 --
Purchase of property, plant and equipment ................................... (1) (7,648) (187,100)
Increase in construction payables............................................ -- -- 38,331
--------- -------- ---------
Net cash flows from investing activities .................................... (22,842) (34,005) (191,533)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Capital contributions from parent ........................................... 25,342 38,600 10,664
Proceeds from offering of senior discount notes ............................. -- -- 225,115
Borrowings on bridge loan payable to parent ................................. -- 9,927 15,073
Payment of bridge loan payable to parent .................................... -- -- (25,000)
Deferred debt offering costs ................................................ -- -- (10,007)
Borrowing on other debt ..................................................... -- -- 2,465
--------- --------- ---------
Net cash flows from financing activities .................................... 25,342 48,527 218,310
--------- --------- ---------
EFFECT OF EXCHANGE RATES ON CASH ............................................ -- (140) 1,056
--------- --------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS ....................................... -- 8,730 10,490
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .............................. -- -- 8,730
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD .................................... $ -- $ 8,730 $ 19,220
========= ========= =========
NON-CASH INVESTING AND FINANCING ACTIVITIES
Non-cash capital contribution of preferred stock from parent
utilized in purchase of additional 40% interest in Austar ........... $ -- $ 29,840 $ --
========= ========= =========
Non-cash stock issuance utilized in purchase of 50% interest
in Saturn ........................................................... $ -- $ -- $ 7,800
========= ========= =========
Assets acquired with capital leases .................................... $ -- -- $ 3,632
========= ========= =========
The accompanying notes are an integral part of these consolidated statements.
40
UIH AUSTRALIA/PACIFIC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AFTER CORPORATE REORGANIZATION--SEE NOTE 1)
AS OF DECEMBER 31, 1995 AND 1996
(Monetary Amounts in Thousands)
1. ORGANIZATION AND BACKGROUND
UIH Australia/Pacific, Inc. (the "Company"), a majority-owned subsidiary of
UIH Asia/Pacific Communications, Inc. ("UAP"), which is in turn an indirect
wholly-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.
Immediately prior to the May 1996 offering (the "May 1996 Offering") of the
Company's 14% Senior Discount Notes due 2006 (the "Notes"), UIH Australia, Inc.,
UIH Australia II, Inc. and UIH Australia III, Inc. (the "UIH Australia
Subsidiaries"); UIH New Zealand, Inc. (the "UIH New Zealand Subsidiary");
UIH-SFCC, Inc. (the "UIH Tahiti Subsidiary"); and UIH Australia Holdings, Inc.
were merged with and into the Company. The UIH Australia Subsidiaries held UIH's
interest in the two companies that form Austar, the UIH New Zealand Subsidiary
held UIH's interest in Saturn Communications Limited ("Saturn"), the UIH Tahiti
Subsidiary held UIH's interest in Telefenua S.A. ("Telefenua"), UIH Australia
Holdings, Inc. held UIH's interest in United Wireless Pty Limited ("United
Wireless") and the Company held UIH's interest in XYZ Entertainment Pty Limited
("XYZ Entertainment" or "XYZ"). 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 interests in multi-channel television, programming and mobile data
companies in Australia, Tahiti and New Zealand since inception. The reorganized
Company commenced operations in January 1994 when UIH began its development
related activities in the Pacific region. UIH transferred the net assets of the
above mentioned subsidiaries, including capitalized development costs and
investments in affiliated companies, to the Company at its historical cost,
which the Company reflected as capital contributions from the parent company.
Capital contributions totaled $25,342, $68,440 and $10,903 for the years ended
December 31, 1994, 1995 and 1996, respectively. The accompanying consolidated
financial statements have been prepared as though the Company made investments
in the following entities on the original date UIH or certain of its
wholly-owned subsidiaries made the investment:
* The Company acquired, through directly and indirectly held interests,
an effective 50% economic interest in the two companies that form Austar
in 1994. In December 1995, the Company increased its effective economic
interest in Austar (formerly CEtv) to 90%. In May 1996, the Company
increased its economic interest in Austar to 94% which was subsequently
increased to 96% and in October 1996, acquired the remaining 4% economic
interest in Austar for $7,920. The companies that comprise Austar (CTV
Pty Limited ("CTV") and STV Pty Limited ("STV")) have acquired
multi-point microwave distribution systems ("MMDS") licenses to supply
subscription television services to television households in the
northern, northeastern and southern regions of Australia outside of the
country's largest cities and are currently constructing multi-channel
television systems to service many of the television homes in their
license areas. Those homes that cannot be served by MMDS will be
serviceable by a direct to home satellite service marketed by Austar.
The Company's ownership interests are comprised of direct and indirect
holdings of convertible debentures and ordinary shares of CTV and STV.
Ownership of the debentures entitles the Company to vote for directors
on the same basis as ordinary shares. The Company is party to various
securityholder agreements which enable it to designate all of the six
voting directors of both CTV and STV. The Company has consolidated
Austar for balance sheet purposes effective December 31, 1995 and for
income statement purposes effective January 1, 1996. Prior to these
dates, the Company accounted for its investments in CTV and STV under
the equity method.
41
* The Company acquired an effective 90% economic interest in Telefenua in
January 1995. The Company's economic interest will decrease to 75% and
64% once the Company has received a 20% and 40% internal rate of return
on its investment in Telefenua, respectively. Telefenua operates, since
March 1995, the only multi-channel subscription television system on the
islands of Tahiti and Moorea in French Polynesia. Through its majority
ownership of UIH SFCC LP, a Colorado limited partnership that holds 100%
of the preferred stock of SFCC, which in turn is the parent company of
Telefenua, the Company has the right to appoint three of the six board
members. Furthermore, by agreement with the common shareholders, the
Company has the right to appoint a fourth director. The Company
consolidates its investment in Telefenua.
* In July 1994, the Company acquired a 50% interest in Kiwi
Communications Limited, which recently changed its name to Saturn.
Saturn is constructing a wireline multi-channel television system in New
Zealand, primarily in the greater Wellington area. In July 1996, the
Company acquired the remaining 50% interest in Saturn in exchange for a
2.6% interest in the Company which was valued at approximately $7,800.
The holder of this interest was granted a one-time conversion right to
exchange such interest for an equivalent interest in the common stock of
UAP upon certain circumstances. 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.
* XYZ Entertainment is an Australian proprietary company incorporated in
New South Wales. Century United Programming Ventures Pty Limited
("CUPV"), an Australian corporation, owned equally by the Company and
Century Communications Corp. ("Century"), holds a 50% interest in XYZ
Entertainment. In October 1994, the Company acquired an initial 50%
interest in XYZ Entertainment. In September 1995, a third party
purchased a 50% interest in XYZ Entertainment, thereby diluting the
Company's indirect interest in XYZ Entertainment to 25%. The Company
accounts for its investment through CUPV in XYZ on the equity basis.
* The Company acquired a 100% interest in August 1995 in United Wireless,
a provider of wireless mobile data services in Australia, primarily
Sydney and Melbourne, and is in the initial stages of deploying its
distribution network and marketing its services. The Company accounted
for its acquisition using the purchase method of accounting. The Company
has consolidated United Wireless since August 1995.
LIQUIDITY AND CAPITAL RESOURCES
A substantial portion of the Company's investments to date relate to its
investment in Austar which is comprised primarily of 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 at
Austar, the Company's 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
complete the anticipated build-out of Austar and the Company's other projects,
the Company will need a significant amount of additional capital which is not
currently available.
As of December 31, 1996, the Company had a net working capital deficit of
$15,380, excluding $1,575 due UIH. Owing to the nature of the operation, the
Company is able to slow the rate of network construction at Austar and 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
42
capital required at Austar as the majority of future capital expenditures will
be for subscriber installation and premise equipment, which are controllable by
the Company based upon the rate of new subscriber connection. The Company is
currently in the process of seeking additional sources of funds, which sources
could include private equity, bank and/or public debt and the sale of certain
non-strategic assets. The Company may or may not be successful in completing all
or any of such offerings. The Company believes, however, that continued
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 early 1998.
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.
In July 1996, the Company effected a 4.87 for 1 stock split. All share
amounts have been restated for all periods presented to reflect this event.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and all subsidiaries where it exercises majority control and owns a
majority economic interest. During the year ended December 31, 1995, the Company
consolidated Telefenua, and subsequent to August 31, 1995, United Wireless. Due
to the Company's acquisition of the majority economic interest in CTV and STV in
late December 1995, the accompanying December 31, 1995 consolidated balance
sheet consolidates the accounts of CTV and STV as of December 31, 1995. The
Company recognized equity losses from its investments in CTV and STV through
December 31, 1995. The Company consolidated the operations of CTV and STV
beginning January 1, 1996. 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. All significant intercompany accounts and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents include cash and investments with original
maturities of less than three months. The portion of short-term investments and
the Company's investment in Australis Media Limited (see Note 5) which are
classified as available-for-sale in accordance with the provisions of Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("SFAS 115"), are accounted for at fair market
value. As of December 31, 1996, the Company held approximately $18,640 of
short-term investments (which are comprised primarily of certificates of deposit
and government securities) classified as available-for-sale securities which are
stated at amortized cost, which approximates fair value, under the provisions of
SFAS 115.
43
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% to 50%, its investments are held through a combination of voting common
stock, preferred stock, debentures or convertible debt, and 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
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 cost over net tangible assets acquired. Investments in and advances to
affiliated companies are as follows:
[Enlarge/Download Table]
As of December 31, 1995
---------------------------------------------------------------------------
Investments in
and Advances to Cumulative Equity Cumulative
Affiliated in Losses of Translation
Companies Affiliated Companies(1) Adjustments Total
--------- ----------------------- ----------- -----
Saturn......................... $ 4,520 $ (1,803) $ 112 $ 2,829
XYZ Entertainment.............. 11,718(2) (11,828) 110 --
------- ------- ------ -------
$16,238 $ (13,631) $ 222 $ 2,829
======= ========= ====== =======
[Enlarge/Download Table]
As of December 31, 1996
--------------------------------------------------------------------------
Investments in
and Advances to Cumulative Equity Cumulative
Affiliated in Loss of Translation
Company Affiliated Company(3) Adjustment Total
------- --------------------- ---------- -----
XYZ Entertainment.............. $16,202(4) $ (16,312) $ 110 $ --
======= ========= ====== =======
(1) Does not include cumulative equity in losses for Austar of $3,763, as
Austar's balance sheet was consolidated effective December 31, 1995.
(2) Includes $4,132 of investment prior to the receipt of $4,132 of proceeds
received from the sale of 50% of the Company's interest. As the Company had
recorded equity in losses from XYZ Entertainment in an amount equal to its
invested capital, the Company recognized a gain of $4,132 on this
transaction. In addition, the Company accrued an additional funding
obligation of $1,834 as of December 31, 1995.
(3) Does not include cumulative equity in losses for Saturn of $2,733, as
Saturn's balance sheet was consolidated effective July 1, 1996.
(4) Includes an accrued funding obligation of $1,270 at December 31, 1996.
The Company recognized $11,729 and $4,484 of equity losses from XYZ
Entertainment for the years ended December 31, 1995 and 1996, respectively,
including $1,834 and $1,270 of additional equity losses associated with the
Company's accrued funding obligation to XYZ Entertainment. The Company does not
have a contractual funding obligation to XYZ Entertainment; however, the Company
would face significant and punitive dilution if it did not make the scheduled
fundings.
44
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Additions, replacements
and major improvements are capitalized, and costs for normal repair and
maintenance of property, plant and equipment are charged to expense as incurred.
All subscriber equipment and capitalized installation labor is depreciated over
3 years. Upon disconnection of a subscriber the remaining book value of the
subscriber equipment, excluding converters which are recovered upon
disconnection, and capitalized labor is written off. Depreciation expense is
computed using the straight-line method over the asset's estimated useful life
as shown below:
Average Years
-------------
MMDS distribution facilities..... 5-10
Cable distribution networks...... 5-10
Subscriber premises equipment
and converters................ 3
Furniture and fixtures........... 10
Leasehold improvements........... 6-10
Other............................ 3-5
LEASED ASSETS
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.
LICENSE FEES
The acquisition of MMDS licenses has been recorded at cost. The cost to
acquire these licenses ($10,520), acquired for a 5-year period for Australia,
will be amortized over the remaining license period upon commencement of
operations. The licenses are renewable every 5 years. In Tahiti, the license
rights, totaling $2,387, are amortized over a 10-year period.
GOODWILL
The Company's acquisition of an additional 40% economic interest in CTV and
STV was recorded as a step acquisition. The majority of the purchase price of
$45,081 was recorded as goodwill as the underlying net book value of all
tangible and intangible assets approximated their respective fair values at that
date. Accordingly, goodwill of $44,790 will be amortized over 15 years beginning
January 1, 1996. The Company's acquisition in July 1996 of the additional 50%
interest in Saturn resulted in an additional $8,773 of goodwill which is being
amortized over 15 years.
RECOVERABLE AMOUNTS OF TANGIBLE AND INTANGIBLE ASSETS
The carrying amount of all tangible and intangible assets are reviewed
periodically whenever events and circumstances indicate the carrying value of
the assets may exceed their recoverable amount. The recoverable amounts of all
tangible and intangible assets have been determined using net cash flows which
have not been discounted to their present values.
REVENUE RECOGNITION
Monthly service revenues are recognized as revenue in the period the
related services are provided to the subscribers. 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. To the
extent installation fees exceed direct selling costs, the excess would be
deferred and amortized over the average contract period.
45
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 provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"), 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 and liabilities 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 for amounts
which do not satisfy the realization criteria of SFAS 109.
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 year end
and the statements of operations are translated at the average exchange rates
during the period. Exchange rate fluctuations on translating foreign currency
financial statements into U.S. dollars result in unrealized gains or losses
referred to as translation adjustments. Cumulative translation adjustments are
recorded as a separate component of stockholders' equity.
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.
In accordance with Statement of Financial Accounting Standards No. 95,
"Statement of Cash Flows," 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 below cash flows from financing
activities.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
3. ACQUISITIONS
In January 1995, the Company acquired an initial 90% economic interest in
Telefenua in exchange for a cash contribution into Telefenua of $6,060, the
contribution of a note and accrued interest due UIH of $817 and equipment leased
to Telefenua totaling $2,039. Details of the net assets acquired, which were
denominated in French Pacific francs and translated to U.S. dollars using the
exchange rate on the day of the acquisition, are as follows:
46
Tangible assets.......................................... $ 4,213
Intangible assets........................................ 1,835
Other ................................................... 107
Cash ................................................... 6,181
Accounts payable and accrued liabilities................. (783)
Due to affiliate......................................... (2,110)
Minority shareholders' interest.......................... (527)
-------
Total consideration.................................. $ 8,916
=======
The purchase price was allocated to the net assets acquired based on
relative fair market values.
The Company's cumulative investment in Telefenua as of December 31, 1996
includes the cash and notes contributed of $6,877, an equipment lease of $2,285
and bridge loans in the amount of $4,527, plus additional cash investment during
1996 totaling $3,048. The Company's consolidated assets, liabilities, revenues,
expenses and net loss after intercompany eliminations related to Telefenua for
the year ended December 31, 1995 totaled $10,989, $9,710, $1,882, $5,438 and
$3,556, respectively.
In response to a legal challenge by the President of Tahiti, the Conseil
d'Etat of France recently canceled a decree authorizing MMDS systems in French
Polynesia and similar French territories. The cancellation could provide a legal
basis to cancel a required authorization already granted to Telefenua by the
communications agency because the authorization was based in part on the decree.
A law recently enacted by the French Parliament gives Telefenua a legal basis to
ask for a new authorization from the communications agency, should the existing
authorization be nullified. There can be no assurance, however, that if the
existing authorization is nullified a new authorization will be obtained, or if
a new authorization is obtained, that it would not differ from the existing
authorization.
In December 1995, the Company acquired an additional 40% effective
economic interest in Austar from other shareholders increasing its effective
economic interest to 90%. The Company paid $15,240 in cash and contributed
170,513 shares of UIH's convertible preferred stock having an initial
liquidation value and fair value of $29,840 for the additional 40% effective
economic interest. Details of the net assets acquired, which were denominated in
Australian dollars and translated to U.S. dollars using the exchange rate on the
day of the acquisition, are as follows:
Tangible assets........................................... $ 18,267
Intangible assets......................................... 8,643
Receivables, prepaids and other........................... 2,704
Cash .................................................... 7,222
Accounts payable and accrued liabilities.................. (6,140)
Other debt................................................ (890)
Minority shareholders' interest........................... (2,363)
Net investment prior to acquisition of 40%................ (27,153)
-------
290
Goodwill 44,790
--------
Total consideration................................... $ 45,080
========
47
The Company's cumulative investment in Austar as of December 31, 1995
includes cash invested of $19,903, bridge loans of $5,400, the purchase of a 10%
interest from another shareholder for $5,613 and the purchase of the 40%
interest from another shareholder for $45,080. The Company's equity in losses
from Austar for the years ended December 31, 1994 and 1995 are $551 and $3,212,
respectively. The Company invested an additional $149,076 in Austar during 1996,
including certain bridge loans from UIH totaling $19,600 (See Note 8) and
acquired the remaining minority interest in October 1996 for $7,920.
In 1994, the Company acquired a 50% interest in Saturn. In July, 1996, the
Company acquired the remaining 50% of Saturn by issuing 13 shares of its common
stock valued at $7,800. Details of the net assets acquired, which were
determined in New Zealand dollars and translated to U.S. dollars using the
exchange rate on the day of the acquisition, are as follows:
Tangible assets.............................................. $ 8,509
Receivables, prepaids and other.............................. 373
Cash......................................................... 708
Accounts payable and accrued liabilities..................... (1,430)
Net investment prior to acquisition of 50%................... (9,133)
-------
(973)
Goodwill..................................................... 8,773
-------
Total consideration.......................................... $ 7,800
=======
The Company's cumulative investment in Saturn as of December 31, 1996 was
$18,561.
4. INVESTMENTS IN AND ADVANCES TO AFFILIATED COMPANIES, ACCOUNTED FOR UNDER
THE EQUITY METHOD
Investments in and advances to affiliated companies accounted for under the
equity method amount to $2,829 and $0 as of December 31, 1995 and 1996,
respectively.
Condensed financial information for the Company's significant equity
investees is presented below.
CTV
In September 1994, the Company began to fund its 40% economic interest in
CTV, an Australian company that currently holds MMDS licenses in Australia. The
Company then acquired an additional 10% economic interest in CTV from another
shareholder for $5,613. As noted above, in December 1995, the Company purchased
an additional 40% economic interest in CTV which increased its economic interest
to 90% and, accordingly, the Company has consolidated the balance sheet of CTV
effective December 31, 1995 (see Note 1).
Condensed financial information for CTV, stated in U.S. dollars, is as
follows:
For the Years Ended
December 31,
-------------------
1994(1) 1995
---- -----
CONDENSED CONSOLIDATED INCOME STATEMENT DATA
Revenue........................................... $ -- $ 433
Operating, selling, general and
administrative expenses......................... (243) (4,804)
Depreciation and amortization..................... (3) (1,113)
------- ---------
Net operating loss........................... (246) (5,484)
Interest, net..................................... 246 914
Other............................................. -- 245
------- -------
Net loss..................................... $ -- $(4,325)
======= =======
(1) CTV began operations during 1994.
STV
In October 1994, the Company began to fund its 50% economic interest in
STV, an Australian company that holds MMDS licenses in Australia. In December
1995, the Company purchased an additional 40% economic interest in STV which
increased its economic interest to 90%, and, accordingly, the Company has
consolidated the balance sheet of STV effective December 31, 1995 (see Note 1).
48
Condensed financial information for STV, stated in U.S. dollars, is as follows:
For the Years Ended
December 31,
-----------------------
1994(1) 1995
---------- --------
CONDENSED CONSOLIDATED INCOME STATEMENT DATA
Revenue.......................................... $ -- $ 10
Operating, selling, general and
administrative expenses....................... (197) (2,670)
Depreciation and amortization.................... (3) (158)
--------- --------
Net operating loss.......................... (200) (2,818)
Interest, net.................................... 107 315
---------- ---------
Net loss.................................... $ (93) $ (2,503)
========== ========
(1) STV began operations during 1994.
XYZ
Condensed financial information for XYZ Entertainment stated in U.S.
dollars, which is derived from financial statements audited by Deloitte Touche
Tohmatsu, is as follows:
As of
December 31, 1995
-----------------
CONDENSED CONSOLIDATED BALANCE SHEET DATA
Cash......................................................... $ 2,309
Property, plant and equipment, net........................... 2,499
Intangible assets, net....................................... 1,871
Other assets................................................. 1,933
--------
Total assets............................................ $ 8,612
========
Accounts payable and accrued liabilities..................... $16,068
Shareholder loans............................................ 21,597
Shareholders' equity......................................... (29,053)
--------
Total liabilities and shareholders' equity.............. $ 8,612
========
For the Years Ended
December 31,
--------------------
1994(1) 1995
---- ----
CONDENSED CONSOLIDATED INCOME STATEMENT DATA
Revenue............................................. $ -- $ 1,266
Operating, selling, general and
administrative expenses.......................... (183) (27,511)
Depreciation and amortization....................... -- (2,662)
------- --------
Net operating loss............................. (183) (28,907)
Interest, net....................................... 2 145
------- --------
Net loss....................................... $ (181) $(28,762)
======= ========
(1) XYZ Entertainment began operations during 1994.
49
SATURN
Condensed financial information for Saturn, stated in U.S. dollars, is as
follows:
As of
December 31, 1995
-----------------
Condensed Consolidated Balance Sheet Data
Cash $ 248
Property, plant and equipment, net............................. 1,478
Other assets................................................... 303
------
Total assets.............................................. $2,029
======
Accounts payable and accrued liabilities....................... $2,802
Related party debt............................................. --
Shareholders' equity........................................... (773)
------
Total liabilities and shareholders' equity................ $2,029
======
For the Years Ended
December 31,
-------------------
1994 1995
----- -------
CONDENSED CONSOLIDATED INCOME STATEMENT DATA
Revenue............................................... $ 43 $ 148
Operating, selling, general and
administrative expenses............................ (976) (2,365)
Depreciation and amortization......................... (351) (385)
------- -------
Net operating loss............................... (1,284) (2,602)
Other................................................. 69 (55)
------- -------
Net loss......................................... $(1,215) $(2,657)
======= =======
5. OTHER INVESTMENTS IN AFFILIATED COMPANIES, INCLUDING MARKETABLE EQUITY
SECURITIES
In May 1996, the Company used $10,000 of the proceeds from its offering of
the Notes (see Note 7) to acquire a UIH subsidiary which guaranteed $10,000 of
debt for Australis Media Limited ("Australis"), Austar's primary supplier of
programming. As consideration for giving the guarantee, the Company received
warrants valued at $784 to acquire 4,171,460 ordinary shares or convertible
debentures. On October 31, 1996, the Company's $10,000 guarantee of Australis'
debt expired. The Company used $3,339 of the related cash to acquire 7,736,171
debentures of Australis. Further, the Company exercised warrants to acquire
Australis common stock and debentures at A$0.20 per share for 3,016,832 shares
of Australis common stock and 1,154,628 debentures. Each debenture is
convertible into one common share of Australis. As of December 31, 1996, the
Company had recognized an unrealized loss of $3,412 on the Australis investment
in accordance with the provisions of SFAS 115, thereby reducing the carrying
value of the investment to $1,372.
50
6. PROPERTY, PLANT AND EQUIPMENT
As of
December 31,
--------------------
1995 1996
--------- ---------
MMDS distribution facilities.......................... $15,417 $ 57,073
Cable distribution networks........................... 266 12,912
Subscriber premises equipment and converters.......... 7,728 129,337
Furniture and fixtures................................ 255 1,462
Leasehold improvements................................ 1,582 3,525
Other................................................. 3,599 20,472
------- --------
28,847 224,781
Accumulated depreciation.............................. (1,217) (31,611)
------- --------
Net property, plant and equipment..................... $27,630 $193,170
======= ========
7. SENIOR DISCOUNT NOTES AND OTHER LIABILITIES
Senior discount notes and other liabilities consists of the following:
As of
December 31,
-----------------
1995 1996
------- -------
The Notes, net of unamortized discount................... $ -- $245,182
Capitalized lease obligations............................ 890 4,522
Mortgage note, interest at 7.885%, 7 year term........... -- 1,252
Other.................................................... 124 1,337
------ --------
1,014 252,293
Less current portion................................. (147) (896)
------ --------
$ 867 $251,397
====== ========
On May 14, 1996, the Company raised total gross proceeds of approximately
$225,115 from the private placement of $443,000 aggregate principal amount of
the Notes. No cash interest payments are required until May 15, 2001, at which
time cash interest payments will be payable semi-annually on each May 15 and
November 15. The Notes are due May 15, 2006. In September 1996, the Notes were
exchanged for 14% Senior Discount Notes due 2006, Series B. As of December 31,
1996, the Notes had an accreted value of $245,182. The trading value of the
Notes as of December 31, 1996 was $230,360.
If the Company or UAP does not consummate an issuance of capital stock
resulting in gross proceeds to the Company of at least $70,000 (an "Equity
Sale") prior to May 16, 1997, then the interest rate on the Senior Discount
Notes will be increased by an additional 0.75% per annum, until such time as the
Equity Sale is effected. In addition, if the Company or UAP does not consummate
an Equity Sale prior to November 16, 1997, the then holders of the Senior
Discount Notes will be entitled to receive warrants to purchase common stock of
the Company or, in certain circumstances, of UAP. The Company plans to pursue
additional sources of funding that may constitute an Equity Sale although there
can be no assurance that the Company will be successful in concluding an Equity
Sale prior to May 16 or November 16, 1997.
8. RELATED PARTY
In connection with the corporate reorganization discussed in Note 1, the
Company and UIH have executed a 10-year management services agreement (the "UIH
Management Agreement"), pursuant to which UIH will continue to perform certain
51
administrative, accounting, financial reporting and other services for the
Company, which has no separate employees of its own. For the years ended
December 31, 1994 and 1995 and for the first four months of 1996, UIH allocated
approximately $659, $918 and $250 to the Company for such services. Effective
May 1, 1996, pursuant to the UIH Management Agreement, UIH will be paid a
management fee of $750 for the first year of such agreement, which fees shall
increase on the first anniversary date of the UIH Management Agreement and each
anniversary date thereafter by 8% per year. In addition, the Company shall
reimburse UIH for any out-of-pocket expenses incurred by UIH in performance of
its duties under the UIH Management Agreement, including travel, lodging and
entertainment expenses.
UIH has executed technical assistance agreements with CTV and STV pursuant
to which it will provide various management and technical services. Under the
agreements, UIH receives a management fee equal to 5% of CTV and STV's total
revenue, less certain deductions, for the first two years, 4% for the next six
years, 3% for the following two years and 2% thereafter. In addition, UIH is
reimbursed for all direct costs associated with services it provides for Austar.
Austar's managing director, chief operating officer and marketing director are
employees of UIH that have been seconded to Austar. In addition, UIH has
appointed seven other management personnel and all six directors. During the
years ended December 31, 1995 and 1996, CTV and STV paid UIH a total of $555 and
$2,338 under such agreements, respectively.
UIH and the parent company of Telefenua have executed a technical services
agreement whereby UIH has agreed to provide technical, administrative and
operational assistance to Telefenua. The parent company has a similar technical
assistance agreement with Telefenua under which it makes available to Telefenua
UIH's services 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 for the following 12 months, and 2.5%
thereafter. The fees payable to UIH under its technical services agreement with
an indirect majority owned subsidiary are 5%, 3% and 2% of Telefenua's gross
revenues over the same periods. UIH is also reimbursed for all direct and
indirect costs associated with the services it provides. UIH has appointed two
of its employees to serve as the managing director and the technical director of
Telefenua. UIH pays these employee's salaries and benefits and charges Telefenua
for these amounts. During the years ended December 31, 1995 and 1996, Telefenua
paid UIH $615 and $0 under this agreement, respectively.
Saturn and UIH have executed a technical services agreement pursuant to
which UIH provides 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% of Saturn's gross revenue through July 1999. UIH is also
reimbursed for all direct and indirect costs associated with these services. The
managing director, technical director and customer operations director are
employees of UIH that have been seconded to Saturn pursuant to the terms of the
technical services agreement. During the years ended December 31, 1995 and 1996,
Saturn paid UIH $0 and $525 under this agreement, respectively.
Included in the due to parent payable is the following:
As of
December 31,
-------------------
1995 1996
------- ------
CTV bridge loans(1)................................ $ 5,400 $ --
Telefenua bridge loan, including
accrued interest of $231
and $0, respectively (2)........................ 4,527 --
CTV/STV technical assistance
agreement obligations........................... 1,488 1,135
Telefenua technical assistance
agreement obligations........................... 1,168 1,879
Saturn technical assistance
agreement obligations........................... -- 1,002
Other.............................................. -- 317
------- --------
12,583 4,333
Less current portion...................... (1,488) (1,575)
------- --------
$11,095 $ 2,758
======= ========
52
(1) The loan extended to CTV had an interest rate of 9.25%. The loan and accrued
interest were converted into equity of CTV in May 1996.
(2) The loan extended to Telefenua is at an interest rate of 14% and is
compounded annually and has no terms of repayment. The Company has the
option to convert the bridge loan into equity of Telefenua.
Upon completion of the offering of the Notes discussed in Note 7,
approximately $25,000 of the proceeds were used to acquire certain bridge loans
made by UIH to CTV, STV and Telefenua noted above, including $15,073 advanced to
Austar and Telefenua subsequent to December 31, 1995. The Austar bridge loans
and related accrued interest were converted into equity of Austar in May 1996.
9. STOCKHOLDERS' EQUITY
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,
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 Company has recorded a
liability for the estimated amount of the bonus earned during 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.
10. INCOME TAXES
In general, a United States 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%
to 50% 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 United States between
its U.S. 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 Notes in May 1996, 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 in accordance with SFAS 109 as if it filed separate income tax returns in
53
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)
which is recognized under SFAS 109 will be accounted for as a deemed capital
distribution or contribution. The primary differences between taxable income
(loss) and net income (loss) for financial reporting purposes relate to
accounting for equity in income (losses) of affiliated companies, the
non-consolidation of its consolidated foreign subsidiaries for U.S. tax purposes
and the current non-deductibility of interest expense on the Company's Senior
Discount Notes for federal income tax purposes. 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 United States federal
and state tax purposes even though the Company records its allocable share of
affiliate income (losses) for financial reporting purposes. Accordingly, due to
the indefinite reversal of such amounts in future periods, no deferred tax
assets have been established for tax basis in excess of the Company's book basis
(approximately $7,000 and $9,000 at December 31, 1995 and 1996, respectively) in
investments in affiliated companies who, in turn have equity investments in
foreign corporations.
The significant components of the net deferred tax asset are as follows:
As of
December 31,
------------------
1995 1996
------- ------
Basis differences in property,
plant and equipment............................ $ -- $ 625
Accrued interest expense on the Notes............... -- 7,826
Company's United States tax net operating
loss carryforward.............................. $1,189 --
Tax net operating loss carryforward of
consolidated foreign subsidiaries(1)........... 4,165 25,539
------ --------
Deferred tax asset.................................. 5,354 33,990
Valuation reserve................................... (5,354) (33,990)
------ --------
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,
--------------------------------
1994 1995 1996
-------- -------- --------
Expected income tax expense (benefit) at statutory rates................... $ (653) $(6,721) $(34,315)
Tax effect of permanent and other differences:
Book/tax basis differences associated with foreign equity investments... 396 6,388 2,111
Amortization of licenses................................................ -- 157 625
Amortization of outside basis differences............................... -- -- 1,324
Non-deductible entertainment............................................ -- 222 139
Effect of net book operating losses not recognized (recognized)......... 257 (85) 29,981
Other................................................................... -- 39 135
------- -------- --------
Total income tax expense (benefit)......................................... $ -- $ -- $ --
======= ======== ========
54
11. REVENUES BY GEOGRAPHIC AREA
The following table sets forth the Company's revenue by geographic area:
For the Years Ended
December 31,
---------------------------------
1994 1995 1996
------- ------- ------
AUSTRALIA
Austar................................ $ -- $ -- $21,244
United Wireless....................... -- 1 110
NEW ZEALAND
Saturn................................ -- -- 110
TAHITI
Telefenua............................. -- 1,882 3,513
------- ------ -------
$ -- $1,883 $24,977
======= ====== =======
12. COMMITMENTS
Austar has license fees payable annually as follows:
1997........................................... $ 2,629
1998........................................... 2,629
1999........................................... 2,629
2000........................................... 2,338
2001 and thereafter............................ 1,021
-------
$11,246
=======
Austar has capital lease obligations as follows:
1997........................................... $ 1,327
1998........................................... 1,753
1999........................................... 2,151
2000........................................... 113
2001 and thereafter............................ 47
-------
5,391
Future finance charges......................... (869)
--------
$ 4,522
========
Austar has operating lease obligations as follows:
1997............................................ $2,714
1998............................................ 2,491
1999............................................ 1,983
2000............................................ 1,707
2001 and thereafter............................. 3,466
-------
$12,361
=======
During 1994, CTV and STV entered into franchise agreements with Australis.
The agreements carry 15-year terms and may be extended for an additional 10
years. The agreements provide for an exclusive license and franchise for MMDS
and satellite services and a non-exclusive license and franchise for cable
services for all franchisor services including uplink and programming including
55
programming including Channel [V] (a 24 hour music video channel), Arena,
Showtime, Nickelodeon, TV1, Encore, Discovery and Fox Sports (the "Galaxy
Package").
Under the agreements, minimum payments are due, which include service fees
based on varying percentages of net revenues as defined in the agreement, and
subscription levies which are dependent on the number of subscribers.
Austar has secured, beginning in July 1997, for a five-year period a 54 MHz
transponder capable of broadcasting between 10 and 15 digital channels on the
Optus Vision Pty Limited ("Optus") satellite that currently transmits the Galaxy
Package, and pursuant to an agreement with Australis has the right to deliver
such programming to its customers through the Galaxy system. The Company will
pay approximately $480 per month in satellite service fees under its agreement
with Optus. Satellite fees payable annually are as follows:
1997..................................................... $ 2,880
1998..................................................... 5,760
1999..................................................... 5,760
2000..................................................... 5,760
2001..................................................... 5,760
2002..................................................... 2,880
-------
$28,800
=======
Although Austar's franchise agreements were formerly exclusive for all
multi-channel television including MMDS and cable television operations, the
Company and Austar have recently agreed to allow Foxtel Management Pty Limited
("Foxtel") to carry the Galaxy programming package on Foxtel's wireline cable
television systems throughout Australia. This agreement provides that Austar
will be compensated for any Foxtel subscriber in its franchise area in an amount
equal to the profit margin Austar would have received if it had sublicensed such
programming to Foxtel (the "Australis Arrangement").
13. CONTINGENCIES
In October 1996, a complaint was served on UIH by an individual who claimed
to have worked with UIH in connection with the acquisition by Austar of certain
of its licenses claiming that UIH owes him a 12.5% equity interest in
unspecified subsidiaries of UIH in consideration of services purportedly
provided. This complaint, seeking an unspecified amount of damages, is pending
in a civil court in Melbourne, Australia. UIH intends to vigorously defend these
claims, which UIH believes are without merit.
On November 6, 1996, Austar filed a complaint in the Supreme Court of New
South Wales, Commercial Division, seeking an injunction to prevent (i) Australis
from transferring its satellite delivery systems and associated infrastructure
to its joint venture with Optus and (ii) Optus from using such infrastructure to
deliver DTH services in Austar's franchise area. Austar believes that using the
infrastructure by any entity other than Austar for the provision of DTH services
within Austar's franchise areas violates the terms of Austar's franchise
agreement with Australis which granted Austar an exclusive license and franchise
to use the infrastructure within its franchise areas. Austar is seeking
injunctive relief or, in the alternative, damages associated with this violation
of its franchise agreements.
On December 6, 1996, Australis filed counterclaims against Austar and the
Company alleging generally that Austar and the Company breached implied terms of
the Australis Arrangement by seeking such injunctive relief. In addition, Optus
claims that the exclusive nature of Austar's franchise agreements violates
Australia's Trade Practices Act. The Company intends to vigorously defend its
position.
56
Australis, Austar's primary supplier of programming, is engaged in a rapid
roll-out of service that has required a significant amount of capital and has
strained its liquidity. Australis has recently closed private offerings of debt
and equity securities that Australis announced would enable it to carry its
business through to cash flow positive. If such financing is not sufficient to
satisfy Australis' long-term capital needs, Australis may have difficulty
meeting contractual obligations with respect to the four Galaxy channels
distributed directly by Australis. The Company believes that if Austar is no
longer able to obtain the four Galaxy channels provided by Australis on an
exclusive basis and it were required to seek replacement programming, it would
have access to the same programming directly from the suppliers of the four
Galaxy channels or sufficient alternative programming on competitive terms.
There can be no assurance, however, that this would be the case and the
inability of Austar to procure the same or suitable alternative programming at
competitive rates and on an exclusive basis in its service areas could have a
material adverse effect on the Company.
14. PRO FORMA INFORMATION
The following unaudited pro forma information for the year ended December
31, 1995 gives effect to the acquisitions of the additional 50% economic
interests in Austar, the disposition of the 25% interest in XYZ Entertainment,
the acquisition of the additional 50% economic interest in Saturn and the
acquisition of United Wireless as if each had occurred on January 1, 1995. The
pro forma financial information does not purport to represent what the Company's
results of operations would actually have been if such transactions had in fact
occurred on such date. The pro forma adjustments are based upon currently
available information and upon certain assumptions that management believes are
reasonable under current circumstances.
[Enlarge/Download Table]
For the Year Ended
December 31, 1995
---------------------------------------------------------------------
United
Austar XYZ Saturn Wireless Pro
Actual Transaction(1) Sale (2) Purchase(3) Purchase(4) Forma
------ ------------- -------- ----------- ---------- ----------
Service and other revenue.................... $ 1,883 $ 443 $ -- $ 148 $ 33 $ 2,507
System operating expense..................... (3,230) (793) -- (863) (687) (5,573)
System selling, general and administrative
expense.................................. (2,482) (6,681) -- (1,502) (341) (11,006)
Corporate general and administrative
expense.................................. (920) -- -- -- -- (920)
Depreciation and amortization expense........ (1,003) (4,259) -- (997) (86) (6,345)
------- -------- ------- -------- ------- --------
Net operating loss...................... (5,752) (11,290) -- (3,214) (1,081) (21,337)
Equity in losses of affiliated companies..... 3,212 4,132 1,438 -- (7,597)
(16,379)
Interest, net................................ 127 1,230 -- -- -- 1,357
Other, net................................... 4,771 244 (4,132) (55) 1 829
-------- -------- ------- -------- ------- --------
Net loss................................ $(17,233) $ (6,604) $ -- $ (1,831) $(1,080) $(26,748)
======== ======== ======= ======== ======= ========
(1) Amounts represent Austar's actual operating results for the year ended
December 31, 1995 as if Austar had been consolidated for the entire year
except for "Equity in losses of affiliated companies" which represents the
elimination of the Company's share of Austar's losses recognized during the
year, and except for a portion of "Depreciation and amortization expense"
totaling $2,988 which represents amortization related to the goodwill
recorded in connection with the acquisition of the additional 40% effective
economic interest, amortized over 15 years on a straight-line basis.
57
(2)Represents elimination of the gain on sale of XYZ and 25% of the equity in
losses previously recognized.
(3)Amounts represent Saturn's actual operating results for the year ended
December 31, 1995 as if Saturn had been consolidated for the entire year
except for "Equity in losses of affiliated companies" which represents the
elimination of the Company's share of Saturn's losses recognized during the
year ended and except for a portion of "Depreciation and amortization
expense," totaling $612 which represents amortization of goodwill recorded
in connection with the purchase of the additional 50% interest in Saturn,
which is amortized over 15 years on a straight-line basis.
(4)Represents actual operating results of United Wireless during the eight
months ended August 1995, the period prior to the Company's acquisition of
its 100% interest.
58
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
MANAGEMENT
The directors and executive officers of the Company and the key employees
of the operating companies and their ages and positions with the respective
company are set forth below.
Name Age Position
---- --- --------
The Company:
Gene W. Schneider......... 70 Chairman of the Board
Michael T. Fries.......... 34 President, Chief Executive
Officer and Director
J. Timothy Bryan.......... 36 Chief Financial Officer and
Director
John C. Porter............ 39 Chief Operating Officer
Donald F. Hagans.......... 50 Chief Development Officer
Kevin Ong................. 41 Vice President--Finance
Mark L. Schneider......... 41 Director
Operating Companies:
Robert G. McRann.......... 62 Managing Director, Austar
David C. P. Banks......... 45 Chief Operating Officer, Austar
Bruce Mann................ 41 Director of Sales and Marketing,
Austar
Robert J. Birrell......... 34 Finance Director, Austar
Jack B. Matthews.......... 45 Chief Executive Officer, Saturn
Michel Laurent............ 44 Managing Director, Telefenua
Joseph P. Gatto, Jr. ..... 50 Chief Executive Officer, United
Wireless
Senior management of the Company, initially Messrs. Porter and Hagans, will
participate in a non-voting, advisory role to the Board of Directors.
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. He has served as Chairman of
the Board of Directors of UIH since May 1989 and UIH's Chief Executive Officer
since October 1995. Mr. Schneider was, until November 1991, Chairman of United
Artists Entertainment Company, the third-largest U.S. cable television company
and the largest theater owner in the world. He was 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 Entertainment Company
("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. He also has
served on the boards of directors of several other companies, including Turner
Broadcasting Corporation.
MICHAEL T. FRIES has served as Chief Executive Officer of the Company since
November 1996, as President of the Company and UAP since their respective
formations, and as a Director of the Company and UAP since November 1996. Mr.
Fries was President of UIH Asia/Pacific, Inc., the predecessor to the Company
previously responsible for all operating and development activities of the
Company in the Asia/Pacific region. Prior to assuming that position in 1995, Mr.
Fries served as Senior Vice President, Development, of UIH, in which capacity he
was responsible for managing UIH's worldwide acquisitions and new business
development activities since March 1990, including UIH's expansion into the
Asia/Pacific market. From 1985 to 1990, Mr. Fries was employed by PaineWebber
Incorporated (New York) where he spent approximately one year in the firm's
59
venture capital group and four years in the investment banking division,
specializing in domestic and international transactions for companies in the
media and telecommunications industry.
J. TIMOTHY BRYAN is the Chief Financial Officer and a Director of both the
Company and UAP, positions he has held since December 1996. Effective January 1,
1997, he became the Chief Financial Officer of UIH. Prior to joining UIH in
December 1996, Mr. Bryan served as Vice President of Finance and Treasurer of
Jones Financial Group, Inc., an affiliate of Jones International, Limited and
Jones Intercable, Inc. from 1993 to January 1996, and as Treasurer of Jones
Intercable, Inc. from 1990 to 1993. From 1988 through 1990, he served in the
Communications Division of the Corporate Banking Department of NationsBank of
North Carolina and from 1983 to 1988, worked at Mellon Bank Corporation in the
Corporate and International Banking Departments.
JOHN C. PORTER has served as Chief Operating Officer of the Company since
November 1996 and Chief Operating Officer of Austar since April 1995, where he
directly managed the technical, operating and administrative aspects of Austar's
multi-channel systems and was the principal executive in the field responsible
for the launch of MMDS and cable systems, as well as Austar's DTH business. As
Chief Operating Officer of the Company, Mr. Porter will continue to participate
in the management and operations of Austar, along with the Company's other
operating companies. Prior to joining Austar, Mr. Porter spent the last 10 years
serving in various capacities for Time Warner Cable, a subsidiary of Time
Warner, Inc. Most recently, Mr. Porter acted as the Division President, Central
Ohio, a 170,000 subscriber, 400 employee division. Mr. Porter has over 16 years
of management experience in the U.S.
multi-channel television industry.
DONALD F. HAGANS has served as Chief Development Officer of the Company and
UAP since their respective formations and was a Regional Vice President of UIH
Asia/Pacific Inc., from January 1994 to November 1996. Mr. Hagans serves as
chairman of Austar and oversees UIH's interests in XYZ and United Wireless. From
January 1989 until joining UIH in January 1994, Mr. Hagans was a principal in
the firm, Hagans Ziegler, a private investment group specializing in domestic
and international ventures. Mr. Hagans also acted as the Legislative Director
for Texas Senator Phil Gramm, participated extensively in the activities of the
International Bank Subcommittee of the U.S. Senate and practiced law as an
attorney in a private practice.
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 Director with Jones Intercable, Inc. and
Treasurer of Jones International, Limited, where he was responsible for
financial operations and various accounting functions. From 1977 to 1988, Mr.
Ong was employed at KPMG Peat Marwick, attaining an audit senior manager
position.
MARK L. SCHNEIDER has been a Director of the Company since November 1996.
Mr. Schneider is also a Director of UIH and UAP. In December 1996, Mr. Schneider
became Executive Vice President of UIH. In May 1996, Mr. Schneider became Chief
of Strategic Planning and Operational Oversight of UIH. He served as President
of UIH from July 1992 until March 1995 and was Senior Vice President of UIH from
May 1989 until July 1992. During these periods Mr. Schneider was responsible for
all of its international multi-channel television system and programming
activities. Prior to joining UIH, he served as Vice President of Corporate
Development at United Cable from March 1987 until May 1989. In that position, he
was responsible for United Cable's acquisition and development of international
cable television systems and other businesses.
Gene W. Schneider and Mark L. Schneider are father and son. No other family
relationships exist between any other executive officers or directors of the
Company.
60
OTHER MANAGEMENT
Senior management of the operating companies include the following
individuals:
ROBERT G. MCRANN has served as Managing Director of Austar since joining
that company in March 1995. Mr. McRann is responsible for the management of all
aspects of Austar's MMDS, DTH and cable television operations including
engineering, customer service, marketing and administrative functions. For the
twelve years prior to joining Austar, Mr. McRann served as Senior Vice President
responsible for Cox Cable's San Diego system, which had annual revenues in 1995
of $140 million and a subscriber base of over 325,000. Mr. McRann has over 18
years of management experience in the U.S. multi-channel television industry.
DAVID C. P. BANKS has served as Chief Operating Officer of Austar since
joining Austar in January 1997. Mr. Banks directly manages the technical,
operating and administrative aspects of Austar's multi-channel systems. Prior to
joining Austar and since 1994, Mr. Banks served as a regional general manager
for Australis Media Limited, and a key member of the management team which
launched pay TV into the Australian market for Australis Media Limited. From
1985 until December 1993, Mr. Banks served at various management positions for
eight years at Tyco/Wormald Group, the world's largest fire protection and flow
control company with annual sales in excess of $3 billion. Mr. Banks' most
recent position with Tyco/Wormald Group was Director-Contracting at Tyco
Laboratories Asia Pacific, where he was responsible for 1500 employees and
annual sales of A$170 million.
BRUCE MANN has served as Sales and Marketing Director of Austar since
joining that company in April 1995. Mr. Mann is responsible for the development
of Austar's marketing and sales 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, and prior to that as Manager Arbitrage of Macquarie Bank
Limited. 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 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, a entrepreneurial business marketing sophisticated video
and voice processing systems. Mr. Matthews has over 14 years of U.S.
multi-channel television industry experience.
MICHEL LAURENT has served as Managing Director of Telefenua since May 1995.
Since joining Telefenua, Mr. Laurent has been responsible for the launch of
Telefenua's service and rapid increase in its customer base. From 1991 until
joining Telefenua, Mr. Laurent held various positions with Videotron Limited,
61
the largest cable television and telecommunications company in the province of
Quebec and the second largest multiple system operator in Canada. Mr. Laurent
most recently served as Vice President of Operations for Videotron's Montreal
division and was responsible for technical, operating and marketing aspects of
the business. Mr. Laurent is fluent in French and English.
JOSEPH P. GATTO, JR. has been the Chief Executive Officer of United
Wireless since May 1996. Mr. Gatto was the Vice President--Development of UAP
focusing on telecommunications business development within the Asia/Pacific
region. Prior to joining UIH, 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 also served in various sales and
marketing capacities for U.S. and Asian telecommunications and technology
companies.
ITEM 11. EXECUTIVE COMPENSATION
All of the officers of the Company are employed by UIH, the majority
indirect stockholder of the Company. The Company pays no separate compensation
to these officers; however, the Company and UIH are parties to the 10-year
management agreement (the "UIH Management Agreement"), pursuant to which the
Company pays UIH a management fee for certain services provided to the Company.
Most of the members of senior management of Austar, Saturn and Telefenua
are U.S. or Canadian 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 pursuant to Technical
Assistance Agreements between UIH and each of Austar, Saturn and Telefenua. Gene
W. Schneider, the Company's Chairman, 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. The Chief Executive Officer of the Company,
Michael T. Fries, is also an officer and employee of UIH and spends
approximately 75% of his time on matters pertaining to the Company and its
operations. J. Timothy Bryan, the Company's Chief Financial Officer, 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,
Fries and Bryan, will be 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, Fries and Bryan, the Company pays a management fee to UIH under the
UIH Management Agreement for certain services, including those of Messrs.
Schneider, Fries and Bryan, performed on behalf of the Company. The following
chart summarizes the compensation paid during the years ended December 31, 1995
and 1996 to the Company's Chief Executive Officer and the four most highly
compensated executive officers of the Company and the operating companies.
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SUMMARY COMPENSATION TABLE
Long Term
Compensation
Awards(1)
Securities
Underlying All Other
Annual Compensation Options(#) Compensation(2)
------------------------------------ ----------- ---------------
Name and Principal Position Year Salary Bonus
--------------------------- ---- ------- ---------
Gene W. Schneider(3)......... 1996 $346,827 $ - 100,000 $4,750
CHAIRMAN 1995 324,577 - 40,000 4,620
Michael T. Fries(3).......... 1996 230,577 - 10,000 4,750
CHIEF EXECUTIVE OFFICER 1995 212,769 - 35,000 4,620
Robert G. McRann............. 1996 221,423 79,377(4) - 4,750
MANAGING DIRECTOR, AUSTAR 1995 161,538 24,279(4) - 3,836
John C. Porter(5)............ 1996 195,986 77,911(6) - 4,750
CHIEF OPERATING OFFICER 1995 138,750 25,748(6) - 3,468
Donald F. Hagans............. 1996 199,038 35,000 - -
VICE PRESIDENT--AUSTRALIA 1995 175,000 - 12,000 -
(1) Options with respect to shares of Class A Common Stock of UIH granted to
such executives as officers and employees of UIH.
(2) Consists of matching employer contributions made by UIH under UIH's Employee
401(k) Plan.
(3) Total compensation paid by UIH for duties performed with respect to the
Company and other operations of UIH.
(4) Includes $29,985 and $24,279 of additional cash compensation relating to
the overseas assignment of Mr. McRann during 1996 and 1995, respectively.
(5) Mr. Porter became an employee of UIH on March 27, 1995.
(6) Includes $35,509 and $25,748 of additional cash compensation relating to the
overseas assignment of Mr. Porter during 1996 and 1995, respectively.
Messrs. Schneider, Fries and Hagans, as employees and officers of UIH, have
been granted options to acquire stock of UIH. Messrs. McRann and Porter have not
been granted any options by UIH. The following tables set forth information
concerning options to purchase shares of UIH Class A Common Stock granted to
these executives in the last fiscal year as well as the value of unexercised
options held by such executives as of December 31, 1996. No such executive has
exercised any options during the fiscal year ended December 31, 1996.
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OPTION GRANTS IN LAST FISCAL YEAR(1)
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term(2)
---------------------------------------------------- -------------------------
Percentage
of Total
Number of Options
Securities Granted to
Underlying Employees Exercise
Options in Fiscal Price Expiration
Name Granted (#) Year ($/Sh) Date 5% ($) 10% ($)
---- ----------- ---- ------ ---- ------ -------
Gene W. Schneider..... 100,000 15.27 $12.75 12/20/06 $801,841 $2,032,022
Michael T. Fries...... 10,000 1.53 12.75 12/20/06 80,184 203,202
Robert G. McRann...... - - - - - -
John C. Porter........ - - - - - -
Donald F. Hagans...... - - - - - -
(1) Stock options granted are for UIH Class A Common Stock. The stock options
granted during the last fiscal year become exercisable with respect to 25%
of the shares covered thereby after the first anniversary of the effective
date of the grant and with respect to the remaining 75% in equal monthly
increments over the three-year period thereafter. The initial 25% of all of
the options listed in this table becomes exercisable on December 20, 1997.
Vesting of the options granted is accelerated upon a change of control of
UIH as defined in UIH's stock option plan.
(2) The potential gains shown are net of the option exercise price and do not
include the effect of any taxes associated with exercise. The amounts shown
are for the assumed rates of appreciation only, do not constitute
projections of future stock price performance, and may not necessarily be
realized. Actual gains, if any, on stock option exercises depend on the
future performance of the Common Stock, continued employment of the optionee
through the term of the options, and other factors.
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION VALUES
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options Options
Shares at FY-End (#) at FY-End ($)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized ($) Unexercisable Unexercisable
---- ------------ ------------ ------------- -------------
Gene W. Schneider...... - - 143,125/146,875 -
Michael T. Fries....... - - 115,624/49,375 -
Robert G. McRann....... - - - -
John C. Porter......... - - - -
Donald F. Hagans....... - - 64,500/27,499 -
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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, Mr. McRann has
such an employment agreement with UIH. This five-year employment agreement
provides for an annual base salary of $225,000 per year, to be reviewed
annually, with eligibility for an annual bonus of up to 30% of the base salary,
based on the performance of Austar as well as Mr. McRann's individual
performance. Mr. McRann was also granted an incentive interest, that vests over
a four year period, equal to .75% of the "residual equity value" of Austar,
calculated as (i) ten times EBITDA from the prior 12 months, less (ii) the sum
of Austar's net liabilities and an amount equal to the total shareholder
investment in Austar, plus a 12% compounded annual return on such investment. In
the event of a change of control of Austar, the residual equity value will be
the greater of (x) the amount calculated above or (y) the net gross proceeds to
the shareholders from the event that causes the change of control, less an
amount equal to the total shareholder investment in Austar, plus a 12%
compounded annual return on such investment. Austar reimburses UIH under the
Technical Assistance Agreement for employment costs associated with Mr. McRann.
COMPENSATION OF DIRECTORS
All of the directors of the Company are also directors or officers of UIH,
the majority stockholder of the Company, 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 and XYZ and as part of
their duties may determine the compensation of those operating companies'
employees. None of the employees of such operating companies, however, are
directors of the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Articles of Incorporation eliminates 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 by or in the right of the Company, arising out of
65
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 487 (97.4%) of the 500 shares of issued and outstanding common
stock of the Company. The remaining 13 shares are owned by Kiwi, the entity from
which the Company acquired the remaining 50% interest in Saturn. Kiwi was
granted a one-time conversion right to exchange its 2.6% interest in the Company
for an equivalent interest in the common stock of UAP.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP WITH UAP AND UIH
The Company is currently a direct, majority owned subsidiary of UAP, and
prior to the May 1996 Offering, its operations were funded by UIH, UAP's parent
corporation. Immediately prior to the May 1996 Offering, UIH Australia, Inc.,
UIH Australia II, and UIH Australia III, Inc. (the "UIH Australia
Subsidiaries"); UIH New Zealand, Inc. (the "UIH New Zealand Subsidiary");
UIH-SFCC, Inc. (the "UIH Tahiti Subsidiary"); and UIH Australia Holdings, Inc.
were merged with and into the Company (the "Merger"). The UIH Australia
Subsidiaries held UIH's interest in Austar, the UIH New Zealand Subsidiary held
UIH's interest in Saturn, the UIH Tahiti Subsidiary held UIH's interest in
Telefenua, UIH Australia Holdings, Inc. held UIH's interest in United Wireless
(the "UIH Wireless Subsidiary") and the Company held UIH's interest in XYZ
Entertainment. Each of the UIH Australia Subsidiaries, the UIH New Zealand
Subsidiary, the UIH Tahiti Subsidiary, the UIH Wireless Subsidiary and the
Company were initially capitalized with $100 and 100 shares of common stock were
issued to UIH, the sole shareholder of such corporations. During the years ended
December 31, 1994, 1995 and 1996, UIH contributed (i) a total of $19.7 million,
$50.8 million and none, respectively, to the UIH Australia Subsidiaries, which
amounts were used to fund the UIH Australia Subsidiaries' investment in Austar;
(ii) a total of $2.5 million, none and none, respectively, to the UIH New
Zealand Subsidiary, which amounts were used to fund the UIH New Zealand
Subsidiary's investment in Saturn, (iii) a total of none, $6.9 million and none,
respectively, to the UIH Tahiti Subsidiary, which amounts were used to fund the
UIH Tahiti Subsidiary's investment in Telefenua; (iv) a total of none, $911,000
and $875,000, respectively, to the UIH Wireless Subsidiary, which amounts were
used to fund the UIH Wireless Subsidiary's investment in United Wireless and (v)
a total of $629,000, $5.1 million and $1.8 million, respectively, to the
Company, which amounts were used to fund the Company's investment in XYZ
Entertainment. No additional shares of capital stock were issued to UIH in
connection with these capital contributions. During the years ended December 31,
1994, 1995 and 1996, UIH made bridge loans (i) totaling none, $5.4 million and
$19.6 million, respectively, to certain of the UIH Australia Subsidiaries, which
amounts in turn were used to make loans to Austar; (ii) totaling none, $2
million and $2.8 million, respectively, to the UIH New Zealand Subsidiary, which
amounts in turn were used to make loans to Saturn; and (iii) totaling none, $6.8
million and $600,000, respectively, to the UIH Tahiti Subsidiary, which amounts
in turn were used to make loans to Telefenua. These bridge loans are payable
upon demand and bear interest at rates ranging from 9.25% to 14% per annum. At
the time of the May 1996 Offering, the Company acquired $25 million of these
bridge loans and the remaining portion of the bridge loans were contributed to
the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
As a result of the Merger, all of the issued and outstanding capital stock
of the UIH Australian Subsidiaries, the UIH New Zealand Subsidiary, the UIH
Tahiti Subsidiary and the UIH Wireless Subsidiary were canceled.
66
In connection with the Saturn Purchase, the Company declared and paid a
dividend of 387 shares of common stock to UAP and issued to the other
shareholder of Saturn, Kiwi, 13 shares of common stock, which represented 2.6%
of the Company's issued and outstanding common stock.
The Company and UIH are parties to UIH Management Agreement, pursuant to
which UIH 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 UIH Management Agreement, UIH is paid a
management fee of $750,000 for the first year of such agreement, which fees
shall increase on the first anniversary date of the UIH Management Agreement and
each anniversary date thereafter by 8% per year. In addition, the Company shall
reimburse UIH for any out-of-pocket expenses incurred by UIH in performance of
its duties under the UIH Management Agreement, including travel, lodging and
entertainment expenses. UIH calculated the management fee for the first year of
the UIH Management Agreement, based upon an estimate of staff hours to
accomplish the various administrative, accounting, financial reporting and other
services to be provided to the Company under the UIH Management Agreement. UIH
then calculated the percentage those hours constituted of the respective
employees' annual work hours and multiplied that percentage by the employment
cost for such employees to UIH. The Company believes the fee payable under the
UIH Management Agreement to be comparable to the costs for such services if
obtained from a non-affiliate of UIH. The Company understands that UIH has
agreed to assign its interests under the UIH Management Agreement to UAP.
UIH and each of Austar, Saturn and Telefenua are parties to Technical
Assistance Agreements, pursuant to which UIH provides certain technical
assistance in connection with such operating companies' design, development,
construction, marketing and operation of their respective multi-channel
television systems. In addition, pursuant to such agreements, certain members of
senior management of Austar, Saturn and Telefenua are employees of UIH that have
been seconded to the respective operating companies. Fees paid under these
Technical Assistance Agreements are typically a percentage (currently 4% to 5%,
declining to 2% in future years) of gross revenues generated by the operating
companies plus reimbursements for costs associated with such seconded employees.
For the year ended December 31, 1994, Austar, Saturn and Telefenua had accrued
fees to UIH under their respective Technical Assistance Agreements of
approximately $89,000, $3,000 and $0, respectively. For the year ended December
31, 1995, Austar, Saturn and Telefenua had accrued fees to UIH under their
respective Technical Assistance Agreements of approximately $1.5 million,
$574,000 and $1.2 million, respectively. For the year ended December 31, 1996,
Austar, Saturn and Telefenua had accrued fees under these agreements of
approximately $648,000, $1 million and $2 million, respectively. The fees
payable to UIH under each of the Technical Assistance Agreements were negotiated
between UIH and their respective companies and their other shareholders at such
time as UIH did not hold the majority interest in such Operating Companies. The
Company understands that UIH has agreed to assign its interests under the UIH
Management Agreement to UAP.
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%). 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.
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PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements
Included in PART II of the Report:
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UIH AUSTRALIA/PACIFIC, INC.
Report of Independent Public Accountants................................ 34
Report of Independent Auditors.......................................... 35
Independent Auditors' Report............................................ 36
Consolidated Balance Sheets as of December 31, 1995 and 1996............ 37
Consolidated Statements of Operations For the Years Ended
December 31, 1994, 1995 and 1996...................................... 38
Consolidated Statements of Stockholders' Equity For the Years Ended
December 31, 1994, 1995 and 1996...................................... 39
Consolidated Statements of Cash Flows For the Years Ended
December 31, 1994, 1995 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:
None Required
(ii) Separate Financial Statements and Related Schedules
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CTV PTY LIMITED
Independent Audit Report................................................ 72
Balance Sheets as of December 31, 1994 and 1995......................... 73
Profit and Loss Accounts for the Period Ended
December 31, 1994 and the Year Ended December 31, 1995................ 74
Statements of Cash Flows for the Period Ended
December 31, 1994 and the Year Ended December 31, 1995................ 75
Notes to the Financial Statements....................................... 76
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STV PTY LIMITED
Independent Audit Report................................................ 87
Balance Sheets as of December 31, 1994 and 1995......................... 88
Profit and Loss Accounts for the Period Ended
December 31, 1994 and the Year Ended December 31, 1995................ 90
Statements of Cash Flows for the Period Ended
December 31, 1994 and the Year Ended December 31, 1995................ 91
Notes to the Financial Statements....................................... 92
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XYZ ENTERTAINMENT PTY LIMITED
Independent Auditors' Report............................................ 103
Consolidated Statements of Operations for the Period from
October 17, 1994 (date of inception) to December 31, 1994 and the
Years Ended December 31, 1995......................................... 104
Consolidated Balance Sheets as of December 31, 1995 and 1994............ 105
Consolidated Statements of Shareholders' Deficiency for the
Period from October 17, 1994 (date of inception) to December
31, 1994 and the Years Ended December 31, 1995........................ 106
Consolidated Statements of Cash Flows for the Period from
October 17, 1994 (date of inception) to December 31, 1994
and the Years Ended December 31, 1995................................. 107
Notes to the Consolidated Financial Statements.......................... 108
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SATURN COMMUNICATIONS LIMITED (FORMERLY KNOWN AS KIWI CABLE COMPANY
LIMITED)
Auditors' Report........................................................ 122
Statement of Financial Performance for the Years Ended
December 31, 1994 and 1995............................................ 123
Statement of Movements in Equity for the Years Ended
December 31, 1994 and 1995............................................ 124
Statement of Financial Position as of December 31, 1994 and 1995........ 125
Statement of Cash Flows for the Years Ended December 31, 1994
and 1995.............................................................. 127
Notes to and Forming Part of the Financial Statements................... 128
(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 Articles of Incorporation, as amended, and By-Laws of the
Registrant are included as Exhibits 3.1 and 3.2. (1)
10.1 Purchase Agreement dated May 8, 1996, among the Issuer,
Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ") and Merrill Lynch & Co., Merrill Lynch, Pierce
Fenner & Smith Incorporated ("Merrill Lynch"). (1)
10.2 Memorandum of Variation dated December 21, 1995 to the
Subscription and Securityholders Agreement, among United
International Holdings, Inc.,("UIHI"), UIH Australia, Inc.
("UIHA"), Salstel Media Holdings Pty Limited ("SMH"),
Australis and CTV Pty Limited ("CTV"). (1)
10.3 Memorandum of Variation dated December 21, 1995 to the
Subscription and Securityholders Agreement dated
October 12, 1994, among UIHI, UIH Australia II, Inc.
("UIHI II"), Salstel Media Investment Pty Limited ("SMI"),
Australis and STV Pty Limited ("STV"). (1)
10.4 Memorandum of Variation dated April 4, 1996 to the CTV
Securityholders Agreement, among UIHI, UIHA, Australis,
SMH and CTV. (1)
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10.5 Memorandum of Variation dated April 4, 1996 to the STV
Securityholders Agreement, among UIHI, UIHA II, Australis,
SMI and STV. (1)
10.6 Security Purchase Agreement dated December 21, 1995, between
Media International Holdings Limited ("MHL") and UIHA. (1)
10.7 Security Purchase Agreement dated December 21, 1995, between
MIHL and UIHA II. (1)
10.8 Agreement dated December 21, 1995, among UIHI, UIHA and
SMH. (1)
10.9 Amending Agreement dated April 4, 1996 to CTV Securityholders
Agreement, among UIHI, UIHA and SMH. (1)
10.10 Agreement dated December 21, 1995, among UIHI, UIHA II and
SMI. (1)
10.11 Amending Agreement dated April 4, 1996 to the STV
Securityholders Agreement, among UIHI, UIHA II and
SMI. (1)
10.12 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)
10.13 Shareholders Deed dated June 30, 1995, among Century
Communications Corp., CPVC, UIHI, the Issuer and
CUPV. (1)
10.14 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)
10.15 Master Agreement dated January 11, 1995, between UIH-SFCC L.P.
and Societe Francaise des Communications et du Cable S.A.
("Societe"). (1)
10.16 Shareholder's Agreement dated January 11, 1995, among
UIH-SFCC L.P. and the shareholders named therein. (1)
10.17 Franchise Agreement dated October 12, 1994, between Australis
and CTV. (1)
10.18 Agreement dated June 19, 1996, between Australis, the Issuer
and Galaxy Communications Pty Limited ("Galaxy") re: CTV
Franchise Agreement. (1)
10.19 Franchise Agreement dated October 12, 1994, between Australis
and STV. (1)
10.20 Agreement dated June 19, 1996, between Australis, the Issuer
and Galaxy re: STV Franchise Agreement. (1)
10.21 Channel Supply Agreement dated June 30, 1995, among XYZ, CUPV
and East Coast Pay Television Pty Limited ("ECT"). (1)
70
10.22 Technical Assistance Agreement dated October 12, 1994,
between STV and UIMI. (1)
10.23 Technical Assistance Agreement dated July 8, 1994, between
Kiwi Cable Company BVI, Inc. ("Kiwi") and UIHI. (1)
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 UIHI, UPI,
Inc. and the Issuer. (1)
12.1 Statement re: Ratio of Earnings to Fixed Charges.
21.1 List of Subsidiaries.
24.1 Powers 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.
71
INDEPENDENT AUDIT REPORT
To the Board of Directors of
CTV Pty Limited
We have audited the accompanying consolidated financial statements of CTV
Pty Limited and its subsidiaries for the period ended 31 December 1994 and the
year ended 31 December 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on those consolidated financial statements based on our audits.
We conducted our audits in accordance with Australian Auditing Standards,
which do not differ substantially from generally accepted auditing standards in
the United States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free from material misstatements. An audit includes examining, on a test
basis, evidence supporting 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, the consolidated financial statements referred to above
present fairly, in all material respects the consolidated financial position of
CTV Pty Limited as of 31 December 1994 and 1995, and the consolidated results of
the group's operations and consolidated cash flows for the periods then ended in
accordance with Australian Accounting Standards.
There are certain differences between Australian Accounting Standards and
those generally accepted in the United States of America. Application of the
generally accepted accounting principles in the United States of America would
not result in material differences to these consolidated financial statements.
Arthur Andersen
Chartered Accountants
Sydney, Australia
29 March 1996
72
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CTV PTY LIMITED AND ITS SUBSIDIARIES
BALANCE SHEETS
AS AT 31 DECEMBER 1995
Economic Entity
---------------
December 31,
--------------------------------
Note 1994 1995
-------- --------
$A $A
Current assets
Cash...................................................... 19,371,145 9,712,936
Receivables .............................................. 3 718,939 4,538,627
Inventory................................................. -- 679,628
Other..................................................... 4 25,582 830,133
----------- -----------
20,115,666 15,761,324
----------- -----------
Non-current assets
Investments .............................................. 5 2 2
Property, plant and equipment ............................ 6 2,746,809 17,955,579
Intangibles............................................... 7 5,021,630 7,906,674
----------- -----------
Total non-current assets ............................ 7,768,441 25,862,255
----------- -----------
Total assets ................................... 27,884,107 41,623,579
----------- -----------
Current liabilities
Creditors and borrowings ................................. 8 2,747,734 15,477,769
Provisions ............................................ -- --
----------- -----------
Total current liabilities ........................... 2,747,734 15,477,769
----------- -----------
Non-current liabilities
Creditors and borrowings ................................. 9 36,165 684,945
Provisions................................................ 10 -- 156,267
----------- -----------
Total non-current liabilities ....................... 36,165 841,212
----------- -----------
Total liabilities .............................. 2,783,899 16,318,981
----------- -----------
Net assets..................................................... 25,100,208 25,304,598
=========== ===========
Shareholders' equity
Share capital ............................................ 11 42,729 42,729
Reserves ................................................. 13 5,116,536 5,116,536
Retained profits/(accumulated losses) .................... 206 (5,795,404)
----------- -----------
5,159,471 (636,139)
Convertible debentures ................................... 12 19,940,737 25,940,737
----------- -----------
Total shareholders' equity ..................... 25,100,208 25,304,598
=========== ===========
The accompanying notes form an integral part of this balance sheet.
73
CTV PTY LIMITED AND ITS SUBSIDIARIES
PROFIT AND LOSS ACCOUNT
[Enlarge/Download Table]
Economic Entity
---------------------------------------
Period Ended Year Ended
------------ -----------
December 31, December 31,
------------ ------------
1994 1995
---- ----
$A $A
Revenue:
Service.............................................. -- 579,690
--------- ----------
-- 579,690
--------- ----------
Expenses:
General and administration........................... 321,494 6,406,782
Depreciation and amortization........................ 4,055 1,491,456
Management fees...................................... -- 29,651
--------- ----------
325,549 7,927,889
--------- ----------
Operating loss............................................ (325,549) (7,348,199)
--------- ----------
Non-operating income (expense)
Interest income...................................... 327,355 1,227,029
Interest expense and costs of finance................ (1,600) (2,180)
Other, net foreign exchange gains--non-speculative
trading........................................... -- 327,740
--------- ----------
325,755 1,552,589
--------- ----------
Net profit (loss) before tax.............................. 206 (5,795,610)
Income tax attributable to net profit/(loss).............. -- --
--------- ----------
Net profit/(loss)......................................... 206 (5,795,610)
--------- ----------
Retained profits/(accumulated losses) at beginning of
period................................................. -- 206
--------- ----------
Retained profits/(accumulated losses) at end of period.... 206 (5,795,404)
========= ==========
The accompanying notes form an integral part of this profit and loss account.
74
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CTV PTY LIMITED AND ITS SUBSIDIARIES
STATEMENTS OF CASH FLOWS
Economic Entity
---------------------------------------------
Period Ended Year Ended
------------ ------------
December 31, December 31,
------------ ------------
Note 1994 1995
----- ----
$A $A
-- --
Cash flows from operating activities
Receipts from customers.................... -- 522,211
Payments to suppliers and employees........ (297,332) (3,973,333)
Interest received.......................... 327,355 1,227,029
Interest and other costs of finance paid... (1,600) (2,180)
---------- ----------
Net operating cash flows................... 28,423 (2,226,273)
---------- ----------
Cash flows from investing activities
Purchase of subsidiaries, net of cash
acquired................................ (12) (10)
Payments for plant and equipment........... (55,871) (15,326,279)
Payments for MDS and broadcast
licenses................................ (5,021,630) (3,437,458)
Decrease in inventory net of payables...... -- --
Loans granted.............................. (718,939) (3,768,962)
Payments for investments................... -- (2)
---------- -----------
Net investing cash flows................... (5,796,452) (22,532,711)
---------- -----------
Cash flows from financing activities
Proceeds from share issues................. 5,159,265 --
Proceeds from issue of convertible
debentures.............................. 19,940,737 6,000,000
Proceeds from intercompany loans........... -- --
Payment on intercompany loans.............. -- --
Proceeds from short term loans............. 39,781 8,818,202
Proceeds from lease financing.............. -- --
Repayment of finance lease principal....... (609) (45,167)
---------- -----------
Net financing cash flows................... 25,139,174 14,773,035
---------- -----------
Net increase/(decrease) in cash held............ 19,371,145 (9,985,949)
Cash at beginning of period..................... -- 19,371,145
Effect of different exchange rate............... -- 327,740
---------- -----------
Cash at the end of the period................... 8, 16 19,371,145 9,712,936
========== ===========
The accompanying notes form an integral part of this statement of cash flows.
75
CTV PTY LIMITED AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF ACCOUNTING
The financial statements have been prepared in accordance with the
historical cost convention using the Australian dollar ("$A") as the reporting
currency and using the accounting policies described below. They do not take
account of changes in either the general purchasing power of the dollar or in
the prices of specific assets.
The Company was incorporated on 21 April 1994. The comparative financial
statements have been prepared for the period 21 April 1994 to 31 December 1994
and for the year ended 31 December 1995.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
the parent entity, CTV Pty Limited, and its subsidiaries. The term "Economic
Entity" used throughout these financial statements means the parent entity and
its subsidiaries.
FOREIGN CURRENCY TRANSACTIONS
Transactions in foreign currencies are converted at the exchange rates in
effect at the date of each transaction.
Amounts payable to or by the economic entity in foreign currencies have
been translated into Australian currency at the exchange rates current at year
end.
Exchange differences relating to monetary items are brought to account in
the profit and loss account in the period when the exchange rates change, as
exchange gains or losses.
INCOME TAX
The economic entity follows the policy of tax-effect accounting. The income
tax expense in the profit and loss account represents the tax on the pre-tax
accounting profit adjusted for income and expenses never to be assessed or
allowed for taxation purposes. The provision for deferred income tax liability
and the future income tax benefit represent the tax effect of differences
between income and expense items recognized in different accounting periods for
book and tax purposes, calculated at the tax rates expected to apply when the
differences reverse.
The benefit arising from estimated carry forward tax losses has not been
recorded in the future income tax benefit account as realization of such benefit
is considered not to be virtually certain.
LEASED ASSETS
Assets of the economic entity acquired under finance leases are
capitalized. The initial amount of the leased asset and corresponding lease
liability are recorded at the present value of minimum lease payments. Leased
assets are amortized over the life of the relevant lease. Lease liabilities are
reduced by the principal component of lease payments. The interest component is
charged against operating profit.
76
CTV PTY LIMITED AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Operating leases are not capitalized and rental payments are charged
against operating profit in the period in which they are incurred.
INVENTORY
Inventory consists of home subscriber equipment including cable, antennae
and decoders and is valued at cost.
PROPERTY, PLANT AND EQUIPMENT
Land and buildings are valued at cost. The carrying amount of property,
plant and equipment is reviewed annually by directors to ensure that it is not
in excess of the recoverable amount from the assets.
Property, plant and equipment, excluding freehold land, are depreciated or
amortized at rates based upon their expected useful lives using the straight
line method.
Leasehold improvements................................. 6 years
Computer equipment..................................... 3 years
Motor vehicles......................................... 5 years
Furniture and fittings................................. 10 years
INTANGIBLES
The acquisition of MDS licenses has been brought to account at cost. The
cost to acquire these licenses, acquired for a 5 year period, will be amortized
over the remaining license period upon commencement of broadcasting operations.
They are renewable every 5 years.
The licenses have been issued for a term of five years, with the license
fee payable annually in advance. The license fee is payable to Spectrum
Management Agency, an agent of the Australian Federal Government.
RECOVERABLE AMOUNTS OF NON-CURRENT ASSETS
The carrying amount of all non-current assets are reviewed at least
periodically whenever events and circumstances indicate the carrying value of
the assets may exceed their recoverable amount. The recoverable amounts of all
non-current assets have been determined using net cash flows which have not been
discounted to their present values.
PROVISION FOR ANNUAL LEAVE
Provision has been made in the financial statements for benefits accruing
to employees in relation to such matters as annual leave.
REVENUE RECOGNITION
Monthly service revenues are recognized as revenue in the period the
related services are provided to the subscribers. The Company recognizes
installation revenues to the extent of direct selling costs in the period the
installation occurs. To the extent installation fees exceed direct selling
costs, the excess would be deferred and amortized over the average contract
period. Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables.
77
CTV PTY LIMITED AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base.
NOTE 2. INCOME TAX
(a) Non-current deferred tax liabilities and assets are as follows:
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Economic Entity
---------------------------------------
Period ended Year ended
------------ ----------
December 31, December 31,
------------- ------------
1994 1995
---- ----
$A $A
-- --
Interest receivable and prepaids.................................... (14,367) (339,527)
------- ----------
Total non-current deferred tax liability............................ (14,367) (339,527)
Net operating loss carryforward.......................... ....... 2,061,456
----------
Total non-current deferred tax asset................................ -- 2,061,456
------- ----------
Net non-current deferred tax asset before valuation allowance.... (14,367) 1,721,929
Valuation allowance.............................................. -- (1,721,929)
------- ----------
Net non-current deferred tax asset (liability)...................... (14,367) --
======= ==========
Net operating loss carryforwards have an unlimited carryforward period for
Australian tax purposes.
(b) The difference between income tax expense provided in the financial
statements and the prima facie income tax expense is reconciled as follows:
[Enlarge/Download Table]
Economic Entity
---------------------------------------
Period ended Year ended
------------ ----------
December 31, December 31,
------------- ------------
1994 1995
---- ----
$A $A
-- --
Net profit/(loss).................................................. 206 (5,795,610)
Prima facie tax thereon @ 36%...................................... 74 (2,086,420)
Tax effect of permanent and other differences:
--Timing differences........................................... (14,367) (339,527)
--Amortization of licenses..................................... -- 198,873
--Entertainment non-deductible................................. 14,293 165,618
--Effect of tax losses not brought to account.................. -- 2,061,456
------- ----------
Total income tax attributable to net profit/(loss)................. -- --
======= ==========
(c) Benefit of income tax losses not brought to account
As at 31 December 1995, the parent entity has unconfirmed unrecouped income
tax losses of $5,795,404 available to offset against future years' taxable
income. The benefit of these losses of $2,061,456 has not been brought to
account as realization is not virtually certain. The benefit will only be
obtained if:
(i) the company derives future assessable income of a nature and of an
amount sufficient to enable the benefits from the deductions for
the losses to be realized;
(ii) the company continues to comply with the conditions for
deductibility imposed by the law;
(iii) no changes in tax legislation adversely affect the company in
realizing the benefit from the deductions for the losses; and
78
CTV PTY LIMITED AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(iv) any change in the business or control of the company does not
affect the ability to utilize the available losses.
NOTE 3. RECEIVABLES (CURRENT):
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Economic Entity
-----------------------
1994 1995
----- ----
$A $A
Trade debtors.......................................................... -- 57,479
Less: provision for doubtful debts..................................... -- (5,792)
------ ----------
-- 51,687
Related parties:
--United International Holdings Inc................................ 95,865 140,217
--Other............................................................ -- 712,554
--Related body corporate--STV Pty Ltd................................. 623,074 3,627,044
Other persons.......................................................... -- 7,125
------- ---------
718,939 4,538,627
======= =========
NOTE 4. OTHER ASSETS (CURRENT):
Prepaid expenses....................................................... 10,465 787,916
Security deposits...................................................... 15,117 42,217
------- ---------
Total other assets (current)........................................... 25,582 830,133
======= =========
NOTE 5. INVESTMENTS (NON-CURRENT):
Investments in associated companies (Note 18)..........................
2 2
======= =========
NOTE 6. PROPERTY, PLANT AND EQUIPMENT:
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Leasehold improvements:
--At cost.......................................................... -- 151,200
--Accumulated depreciation......................................... -- (8,705)
--------- ----------
Total leasehold improvements, net...................................... -- 142,495
--------- ----------
Plant and equipment:
--At cost.......................................................... 55,881 15,737,143
--Accumulated depreciation......................................... (4,055) (872,818)
--------- ----------
Total plant and equipment, net......................................... 51,826 14,864,325
--------- ----------
Plant and equipment under lease:
--At capitalized cost.............................................. 44,506 912,820
--Accumulated depreciation......................................... -- (61,563)
--------- ----------
Total leased plant and equipment, net.................................. 44,506 851,257
--------- ----------
Capitalized network construction expenditures:
--At cost.......................................................... 2,650,477 2,097,502
--Accumulated amortization.........................................
-- --
--------- ----------
Total capitalized development expenditures, net:....................... 2,650,477 2,097,502
--------- ----------
Total property, plant and equipment, net:.............................. 2,746,809 17,955,579
========= ==========
79
CTV PTY LIMITED AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
NOTE 7. INTANGIBLE ASSETS (NON-CURRENT):
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Economic Entity
-----------------------------
1994 1995
---- ----
$A $A
MDS licenses:
--At cost........................................................... 5,018,215 8,196,618
--Accumulated amortization.......................................... -- (544,093)
----------- ------------
Total MDS licenses net:................................................. 5,018,215 7,652,525
------------ -----------
Program Rights fees at cost: -- 250,000
--Accumulated amortization.......................................... -- (8,333)
Other at cost........................................................... -- --
Organization costs at cost:............................................. 3,415 12,482
------------ -----------
Total intangible assets, net............................................ 5,021,630 7,906,674
============ ===========
NOTE 8. CREDITORS AND BORROWINGS (CURRENT):
Unsecured:
Overdraft.......................................................... -- --
Trade creditors.................................................... 1,684 5,727,304
Unearned Income.................................................... -- 29,062
Accrued Expenses................................................... 2,698,537 728,113
Due to related body corporate--United International
Holdings Inc.................................................... 39,781 8,857,983
Secured:
Finance lease liability (Note 15).................................. 7,732 135,307
----------- -----------
Total current creditors and borrowings.................................. 2,747,734 15,477,769
=========== ===========
NOTE 9. CREDITORS AND BORROWINGS (NON-CURRENT):
Secured
Finance lease liability (Note 15).................................. 36,165 684,945
----------- -----------
Total non-current creditors and borrowings.............................. 36,165 684,945
=========== ===========
NOTE 10. PROVISIONS (NON-CURRENT):
Annual leave............................................................
-- 156,267
========== ===========
NOTE 11. SHARE CAPITAL:
Authorized capital:
--100,000,000 ordinary shares of $1 each............................ 100,000,000 100,000,000
----------- -----------
Total authorized capital as at 31 December 1995......................... 100,000,000 100,000,000
Issued and paid up capital:
--42,729 ordinary shares of $1 each................................. 42,729 42,729
----------- -----------
Total issued and paid up capital........................................ 42,729 42,729
=========== ===========
80
CTV PTY LIMITED AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Movement in issued shares for the year:
[Enlarge/Download Table]
Number of Number of
Number of Redeemable Number of Redeemable
Ordinary Preference Ordinary Preference
Shares Shares Shares Shares
1994 1994 1995 1995
-------- ---------- ---------- ----------
Opening number of shares........................... 3 -- 42,729 --
Issued during the year............................. 42,726 13 -- --
Redeemed........................................... -- 13 -- --
------ --- ------- ----
Closing number of shares........................... 42,729 -- 42,729 --
====== === ====== ====
NOTE 12. CONVERTIBLE DEBENTURES:
During the year ended 31 December 1995, the company issued 162,643
convertible debentures for $A6,000,000. These debentures confer rights upon the
holders as creditors of the company. They do not confer any right to attend or
vote at general meetings. Interest is payable to the holders equal to the amount
of the distribution that the holder would have received if, as at the date the
entitlement to the distribution was determined, all of the debentures of that
holder and all other holders had been converted into shares.
The convertible debentures have been included in shareholders' equity in
the balance sheet as debenture holders are entitled to an equivalent return to
the ordinary shareholders.
Conversion of debentures is permitted at anytime provided conversion would
not result in the breach of any Statute by the debenture holder or any other
person.
Debentures may be converted into fully paid ordinary shares on a one for
one basis unless the normal value of the issued shares is reconstructed which
would result in a different conversion factor. Debentures may not be redeemed
for cash.
In the event of a winding up of the company, the rights of the debenture
holders against the company in respect of the debentures are postponed until the
claims of all holders of senior indebtedness have been satisfied in full. Senior
indebtedness means secured obligations, unsecured and unsubordinated obligations
of the company, other than debentures and shares.
NOTE 13. RESERVES:
Economic Entity
---------------------------
December 31,
---------------------------
1994 1995
---- ----
$A $A
Share premium opening balance.................... -- 5,116,536
Premium on issues of shares...................... 5,116,536 --
Redemption of preference shares.................. -- --
--------- ---------
Total reserves................................... 5,116,536 5,116,536
========= =========
81
CTV PTY LIMITED AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
NOTE 14. EMPLOYEE ENTITLEMENTS:
SUPERANNUATION COMMITMENTS
The economic entity contributes to a defined contribution superannuation
plan for substantially all of its employees. Each participating entity in the
economic entity has a legal obligation to contribute to the schemes, which are
as follows:
(a) Hourly employees and commission employees--Employee Retirement
Fund, a fund administered by MLC. This is a defined contribution
fund; and
(b) Salaried employees--CETV Superannuation Fund, a fund administered
by MLC (contributions 6%). This is a defined contribution fund.
NOTE 15. COMMITMENTS:
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Economic Entity
----------------------
December 31,
1994 1995
---- ----
$A $A
(a) Annual license fees are payable as follows:
Not later than one year......................................................... 1,212,627 3,068,099
Later than one year but not later than two years................................ 1,212,627 3,068,099
Later than two years but not later than five years.............................. 3,637,881 5,121,828
Later than five years........................................................... -- --
--------- ----------
6,063,135 11,258,026
========= ==========
(b) Finance lease expenditure contracted for is payable as follows:
Not later than one year......................................................... 12,429 215,798
Later than one year but not later than two years................................ 12,429 233,412
Later than two years but not later than five years.............................. 30,044 553,335
Later than five years........................................................... -- --
--------- ----------
54,902 1,002,545
Future finance charges.......................................................... 11,005 182,293
--------- ----------
Net finance lease liability..................................................... 43,897 820,252
========= ==========
Reconciled to:
Current liability (Note 8)...................................................... 7,732 135,307
Non-current liability (Note 9).................................................. 36,165 684,945
--------- ----------
43,897 820,252
========= ==========
(c) Operating lease expenditure contracted for is payable as follows:
Not later than one year......................................................... 137,500 467,767
Later than one year but not later than two years................................ 137,500 467,767
Later than two years but not later than five years.............................. 412,500 1,405,357
Later than five years........................................................... -- 529,372
--------- ----------
687,500 2,870,263
========= ==========
82
CTV PTY LIMITED AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(d) On 24 July 1994, the Company entered into a franchise agreement with
Australis Media Limited. The agreement carries a 15 year term beginning on
24 July 1994 and may be extended for an additional 10 years. The agreement
provides for an exclusive license and franchise for MDS and Satellite and a
non-exclusive license and franchise for cable for all franchisor services
including uplink and programming including Channel [V] (a 24 hour music
video channel), Arena, Showtime, Nickelodeon, TV1, Encore, Discovery and
Fox Sports.
Under the agreement, minimum payments are due, which include service fees
based on varying percentages of net revenues as defined in the agreement,
and subscription levies which are dependent on the number of subscribers.
NOTE 16. NOTES TO THE STATEMENT OF CASH FLOWS:
(a) RECONCILIATION OF CASH
For the purposes of the statement of cash flows, cash includes cash on hand
and in banks and deposits at call, net of outstanding bank overdrafts. Cash
at the end of the financial year as shown in the Statement of Cash Flows is
reconciled to the related items in the balance sheet as follows:
[Enlarge/Download Table]
Economic Entity
-----------------------------
December 31,
-----------------------------
1994 1995
----- ----
$A $A
Cash.......................................................... 73,377 (261,963)
Short term money market deposits.............................. 19,297,768 9,974,899
---------- ----------
19,371,145 9,712,936
========== ==========
(b) Reconciliation of net cash provided by operating
activities to operating loss after income tax.
Operating profit (loss) after income tax:..................... 206 (5,795,610)
Adjustments for non-cash income and expense items:
Depreciation and amortization expense.................... 4,055 1,491,456
Bad debts expense and provision for doubtful debts....... -- 5,792
Transfers to provisions:
Annual leave............................................. -- 156,267
Unrealized foreign exchange gain.............................. -- (327,740)
Increase in other receivables............................ -- (57,479)
Increase in trade creditors.............................. 49,744 3,785,221
Increase in inventory.................................... -- (679,628)
Increase in other assets................................. (25,582) (804,552)
--------- ----------
Net cash from operating activities............................ 28,423 (2,226,273)
========= ==========
83
CTV PTY LIMITED AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(c) SUBSIDIARIES ACQUIRED
The following subsidiaries were acquired by the economic entity for cash
consideration. The fair value of net tangible assets acquired was as
follows:
Fair value of
net tangible assets
--------------------
1994 1995
---- ----
Entity $A $A
------
Jacolyn Pty Limited............................... 2 --
Yanover Pty Limited............................... 2 --
Keansburg Pty Limited............................. 2 --
Orloff Pty Limited................................ 2 --
Maxi-Vu Pty Limited............................... 2 --
Vinatech Pty Limited.............................. 2 --
Palara Vale Pty Limited........................... -- 2
Auldana Pty Limited............................... -- 2
Grovern Pty Limited............................... -- 2
Lystervale Pty Limited............................ -- 2
Minorite Pty Limited.............................. -- 2
--- ---
Fair value of net identifiable assets............. 12 10
Goodwill on acquisition........................... -- --
--- ---
Total consideration............................... 12 10
=== ===
(d) Non-cash financing and investing activities
During the year the economic entity acquired plant and equipment with an
aggregate fair value of $A821,522 (1994: $A44,506) by means of finance
leases. These transactions are not reflected in the Statement of Cash
Flows.
NOTE 17. SUBSIDIARIES:
The following were subsidiaries at 31 December 1995, and have been included
in the consolidated financial statements. The financial years of all
subsidiaries are the same as that of the parent entity.
[Enlarge/Download Table]
Book value of Contribution to
Parent Consolidated
Entity's % of Result for the
Investment Shares Held Period
------------- ----------- --------------
Place of
Incorporation Date of Type of 1994 1995 1994 1995 1994 1995
Name of Controlled Entity Formation (a) Acquisition Shares $A $A % % $A $A
Jacolyn Pty Limited........ Australia 14/6/94 Ordinary 2 100 --
Yanover Pty Limited........ Australia 21/7/94 Ordinary 2 100 --
Keansburg Pty Limited...... Australia 14/6/94 Ordinary 2 100 --
Orloff Pty Limited......... Australia 14/6/94 Ordinary 2 100 --
Maxi-Vu Pty Limited........ Australia 4/8/94 Ordinary 2 100 --
Palara Vale Pty Limited.... Australia 24/4/95 Ordinary 2 100 --
Auldana Beach Pty Limited.. Australia 24/4/95 Ordinary 2 100 --
Grovern Pty Limited........ Australia 24/4/95 Ordinary 2 100 --
Lystervale Pty Limited..... Australia 24/4/95 Ordinary 2 100 --
Vinatech Pty Limited....... Australia 29/7/94 Ordinary 2 100 --
Minorite Pty Limited....... Australia 24/4/95 Ordinary 2 100 --
-- ---
22 --
== ===
(a) All entities operate solely in their place of incorporation/formation.
84
CTV PTY LIMITED AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
NOTE 18. ASSOCIATED COMPANIES:
Details of material interests in associated companies are as follows:
[Enlarge/Download Table]
Ownership Dividends
Interest Received
------------- ---------------------------------
Name of
Associated Principal Activity of Balance
Company Associated Company 1994 1995 Date 1994 1995
---------- --------------------- ---- ---- ------- ---- ----
Communication & Delivery of subscription
Entertainment television services to 31
Australia Pty regional Australia. 50% 50% December -- --
Limited
Ilona Investments Delivery of subscription
Pty Limited television services to 30
regional Australia 50% 50% June -- --
Economic Entity
---------------
1994 1995
$A $A
Aggregate carrying amount of investments in associated 2 2
companies.............................................. --- ---
Aggregate amount of investments in associated
companies, as determined under the equity
method of accounting.................................. 2 2
=== ===
NOTE 19. RELATED PARTY DISCLOSURES:
(a) OTHER DIRECTOR TRANSACTIONS
Crase Partners, a director-related firm of J. K. Crase, provided general
accounting services to the company during the year. These services were provided
at an arms length basis.
J. K. Crase, a director, purchased equipment from the company during the
year. The purchase was made on an arms length basis.
(b) TRANSACTIONS WITH RELATED PARTIES IN THE WHOLLY OWNED GROUP
The parent entity entered into the following transactions during the year
with related parties in the wholly owned group:
loans were advanced to subsidiaries to fund the acquisition of MDS
licenses. Loans totaled $A5,021,618 and $A8,309,384 at December 31, 1994
and 1995, respectively.
These transactions were undertaken on commercial terms and conditions.
85
CTV PTY LIMITED AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
(c) TRANSACTIONS WITH ASSOCIATED COMPANIES
The parent entity entered into certain transactions with associated
companies, being loans advanced and received on an arms length basis. CTV has
amounts receivable from STV of $A623,074 and $A3,627,044 at December 31, 1994
and 1995, respectively.
NOTE 20. US GAAP INFORMATION:
The accounting policies followed in preparation for the consolidated
financial statements differ in one respect to those generally accepted in the
United States of America (US GAAP). For US GAAP purposes, the convertible
debentures would be classified as a non-current liability and not equity.
The calculation of shareholder's equity in accordance with US GAAP is as
follows:
December 31,
------------------------
1994 1995
--------- --------
$A $A
Shareholder's equity as per balance sheet.... 25,100,208 25,304,598
Adjustments to reported equity:
Convertible debentures.................. (19,940,737) (25,940,737)
----------- -----------
Shareholder's equity in accordance with
US GAAP................................... 5,159,471 (636,139)
=========== ===========
86
INDEPENDENT AUDIT REPORT
To the Board of Directors of
STV Pty Limited
We have audited the accompanying consolidated financial statements of STV
Pty Limited and its subsidiaries for the period ended 31 December 1994 and the
year ended 31 December 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on those consolidated financial statements based on our audits.
We conducted our audits in accordance with Australian Auditing Standards,
which do not differ substantially from generally accepted auditing standards in
the United States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free from material misstatements. An audit includes examining, on a test
basis, evidence supporting 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 provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects the consolidated financial position of
STV Pty Limited as of 31 December 1994 and 1995, and the consolidated results of
the group's operations and consolidated cash flows for the periods then ended in
accordance with Australian Accounting Standards.
There are certain differences between Australian Accounting Standards and
those generally accepted in the United States of America. Application of the
generally accepted accounting principles in the United States of America would
not result in material differences to these consolidated financial statements.
Arthur Andersen
Chartered Accountants
Sydney, Australia
29 March 1996
87
STV PTY LIMITED AND ITS SUBSIDIARIES
BALANCE SHEET
AS AT 31 DECEMBER 1995
[Download Table]
Economic Entity
-------------------------
December 31,
-------------------------
Note 1994 1995
---- ----
$A $A
Current assets
Cash.............................. 10,078,250 2,236
Receivables....................... 3 63,934 1,325,563
Prepayments and other............. -- 382,866
---------- ----------
Total current assets................... 10,142,184 1,710,665
---------- ----------
Non-current assets
Investments....................... 4 2 2
Property, plant and equipment..... 5 527,373 6,085,042
Intangibles....................... 6 3,562 3,727,654
---------- ----------
Total non-current assets............... 530,937 9,812,698
---------- ----------
Total assets........................... 10,673,121 11,523,363
---------- ----------
Current liabilities
Creditors and borrowings.......... 7 759,411 4,673,587
---------- ----------
Total current liabilities.............. 759,411 4,673,587
---------- ----------
Non-current liabilities
Creditors and borrowings.......... 8 36,165 313,981
Provisions........................ 9 -- 11,495
---------- ----------
Total non-current liabilities.......... 36,165 325,476
---------- ----------
Total liabilities...................... 795,576 4,999,063
---------- ----------
Net assets............................. 9,877,545 6,524,300
========== ==========
The accompanying notes form an integral part of this balance sheet.
88
STV PTY LIMITED AND ITS SUBSIDIARIES
BALANCE SHEET
AS AT 31 DECEMBER 1995
Economic Entity
--------------------------
December 31,
--------------------------
Note 1994 1995
----- ----
$A $A
Shareholders' equity
Share capital............ 10 133,296 133,296
Reserves................. 12 1,426,959 1,426,959
Accumulated losses....... ( 122,457) (3,475,702)
---------- ----------
1,437,798 (1,915,447)
Convertible debentures........ 11 8,439,747 8,439,747
---------- ----------
Total shareholders' equity.... 9,877,545 6,524,300
========== ==========
The accompanying notes form an integral part of this balance sheet.
89
STV PTY LIMITED AND ITS SUBSIDIARIES
PROFIT AND LOSS ACCOUNT
Economic Entity
--------------------------------
Period Ended Year Ended
Note December 31, December 31,
-------------------------------
1994 1995
----------- ------------
$A $A
Revenue:
Service........................... -- 13,819
-------- ----------
-- 13,819
-------- ----------
Expenses:
General and administration........ 258,991 3,576,688
Depreciation and amortization..... 4,055 212,635
-------- ----------
263,046 3,789,323
-------- ----------
Operating loss......................... (263,046) (3,775,504)
-------- -----------
Non-operating income (expense)
Interest income................... 142,189 422,563
Interest expense and costs of
finance........................ (1,600) (304)
-------- ----------
140,589 422,259
-------- ----------
Net loss before tax.................... (122,457) (3,353,245)
Income tax attributable to net loss.... -- --
-------- ----------
Net loss............................... (122,457) (3,353,245)
-------- ----------
Accumulated losses at beginning of
period.............................. -- (122,457)
-------- ----------
Accumulated losses at end of
period.............................. (122,457) (3,475,702)
======== ==========
The accompanying notes form an integral part of this profit and loss account.
90
STV PTY LIMITED AND ITS SUBSIDIARIES
STATEMENT OF CASH FLOWS
[Enlarge/Download Table]
Economic Entity
-------------------------------------
Period Ended Year Ended
December 31, December 31,
------------------------------------
Notes 1994 1995
------ ----
$A $A
Inflows/(Outflows) Inflows/(Outflows)
Cash flows from operating activities:
Receipts from customers............... -- 74,749
Payments to suppliers and
employees.......................... (210,202) (3,876,242)
Interest received..................... 78,255 422,563
Interest and other costs of finance
paid............................... (1,600) (304)
---------- ------------
Net operating cash flows................... (133,547) (3,379,234)
---------- ------------
Cash flows from investing activities:
Purchase of subsidiaries, net of
cash acquired...................... (2) (12)
Payments for plant, equipment and
construction in process............ (486,922) (5,381,613)
Payments for MDS licenses............. (3,562) (3,757,962)
Payments for investments.............. -- (2)
Loans granted......................... -- (1,322,587)
---------- -----------
Net investing cash flows................... (490,486) (10,462,176)
---------- -----------
Cash flows from financing activities:
Proceeds from issues of shares........ 1,560,255 --
Proceeds from short-term loans........ 702,890 3,787,493
Proceeds from debenture issues........ 8,439,747 --
Repayment of finance lease
principal.......................... (609) (22,097)
---------- -----------
Net financing cash flows................... 10,702,283 3,765,396
---------- -----------
Net increase (decrease) in cash held....... 10,078,250 (10,076,014)
Cash at the beginning of the period........ -- 10,078,250
---------- -----------
Cash at the end of the period.............. 15 10,078,250 2,236
========== ===========
The accompanying notes form an integral part of this statement of cash flows.
91
STV PTY LIMITED AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1. STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF ACCOUNTING
The financial statements have been prepared in accordance with the
historical cost convention using the Australian dollar ("$A") as the reporting
currency and using the accounting policies described below. Further, they do not
take account of changes in either the general purchasing power of the dollar or
in the prices of specific assets.
The Company was incorporated on 28 June 1994. The comparative financial
statements have been prepared for the period 28 June 1994 to 31 December 1994
and for the year ended 31 December 1995.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
the parent entity, STV Pty Limited, and its subsidiaries. The term "Economic
Entity" used throughout these financial statements means the parent entity and
its subsidiaries.
FOREIGN CURRENCY TRANSACTIONS
Transactions in foreign currencies are converted at the exchange rates in
effect at the date of each transaction.
Amounts payable to or by the economic entity in foreign currencies have
been translated into Australian currency at the exchange rates current at year
end.
Exchange differences relating to monetary items are brought to account in
the profit and loss account in the period when the exchange rates change, as
exchange gains or losses.
INCOME TAX
The economic entity follows the policy of tax-effect accounting. The income
tax expense in the profit and loss account represents the tax on the pre-tax
accounting profit adjusted for income and expenses never to be assessed or
allowed for taxation purposes. The provision for deferred income tax liability
and the future income tax benefit represent the tax effect of differences
between income and expense items recognized in different accounting periods for
book and tax purposes, calculated at the tax rates expected to apply when the
differences reverse.
The benefit arising from estimated carry forward tax losses has not been
recorded in the future income tax benefit account as realization of such benefit
is considered not to be virtually certain.
LEASED ASSETS
Assets of the economic entity acquired under finance leases are
capitalized. The initial amount of the leased asset and corresponding lease
liability are recorded at the present value of minimum lease payments. Leased
assets are amortized over the life of the relevant lease. Lease liabilities are
reduced by the principal component of lease payments. The interest component is
charged against operating profit.
Operating leases are not capitalized and rental payments are charged
against operating profit in the period in which they are incurred.
92
STV PTY LIMITED AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS-(Continued)
PROPERTY, PLANT AND EQUIPMENT
Land and buildings are valued at cost. The carrying amount of property,
plant and equipment is reviewed annually by directors to ensure that it is not
in excess of the recoverable amount from the assets.
Leasehold improvements.................................. 6 years
Computer equipment...................................... 3 years
Motor vehicles.......................................... 5 years
Furniture and fixtures.................................. 10 years
Property, plant and equipment, excluding freehold land, are depreciated or
amortized at rates based upon their expected useful lives using the straight
line method.
INTANGIBLES
The acquisition of MDS licenses has been brought to account at cost. The
cost to acquire these licenses, acquired for a 5 year period, will be amortized
over the remaining license period upon commencement of broadcasting operations.
They are renewable every 5 years.
The licenses have been issued for a term of five years, with the license
fee payable annually in advance. The license fee is payable to Spectrum
Management Agency, an agent of the Australian Federal Government.
RECOVERABLE AMOUNTS OF NON-CURRENT ASSETS
The carrying amounts of all non-current assets are reviewed at least
periodically whenever events and circumstances indicate the carrying value of
the assets may exceed their recoverable amount. The recoverable amounts of all
non-current assets have been determined using net cash flows which have not been
discounted to their present values.
ANNUAL LEAVE
Provision has been made in the financial statements for benefits accruing
to employees in relation to such matters as annual leave.
REVENUE RECOGNITION
Monthly service revenues are recognized as revenue in the period the
related services are provided to the subscribers. The Company recognizes
installation revenues to the extent of direct selling costs in the period the
installation occurs. To the extent installation fees exceed direct selling
costs, the excess would be deferred and amortized over the average contract
period. Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base.
93
STV PTY LIMITED AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
NOTE 2. INCOME TAX
(a) Non-current deferred tax liabilities and assets are as follows:
[Enlarge/Download Table]
Economic Entity
------------------------------
Period Ended Year Ended
December 31, December 31,
------------------------------
1994 1995
---- ----
$A $A
Interest receivable and prepaids................................. -- (133,683)
---------- ---------
Total non-current deferred tax liability......................... -- (133,683)
Net operating loss carryforward................................ 42,500 1,195,261
---------- ---------
Total non-current deferred tax asset............................. 42,500 1,195,261
---------- ----------
Net non-current deferred tax asset before valuation allowance.. 42,500 1,061,578
Valuation allowance...................................... (42,500) (1,061,578)
---------- ----------
Net non-current deferred tax asset (liability)................... -- --
========== ==========
Net operating loss carryforwards have an unlimited carryforward period for
Australian tax purposes.
(b) The difference between income tax expense provided in the financial
statements and the prima facie income tax expense is reconciled as follows:
[Enlarge/Download Table]
Economic Entity
------------------------------
Period Ended Year Ended
December 31, December 31,
------------------------------
1994 1995
---- ----
$A $A
Net loss...................................................... (122,457) (3,353,245)
Prima facie tax thereon @ 36%................................. (44,085) (1,207,168)
Tax effect of permanent and other differences
--Timing differences........................................ -- (133,683)
--Entertainment non deductible.............................. 1,585 133,397
--Amortization of licenses.................................. -- 12,193
--Effect of losses not brought to account................... 42,500 1,195,261
-------- ----------
Total income tax attributable to net loss..................... -- --
======== ==========
(c) Benefit of income tax losses not brought to account
As at 31 December 1995, the parent entity has unconfirmed unrecouped income
tax losses of $A3,475,702 available to offset against future years' taxable
income. The benefit of these losses of $A1,237,761 has not been brought to
account as realization is not virtually certain. The benefit will only be
obtained if:
(a) the company derives future assessable income of a nature and of an
amount sufficient to enable the benefits from the deductions for the losses
to be realized;
(b) the company continues to comply with the conditions for
deductibility imposed by the law;
(c) no changes in tax legislation adversely affect the company in
realizing the benefit from the deductions for the losses; and
(d) any change in the business or control of the company does not
affect the ability to utilize the available losses.
94
STV PTY LIMITED AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
NOTE 3. RECEIVABLES (CURRENT):
[Enlarge/Download Table]
Economic Entity
----------------------------------
1994 1995
---- ----
$A $A
Accounts Receivable Trade.......................... -- 3,004
--Allowance for Bad Debts........................ -- (28)
Non-trade amounts owing by:
Related parties
--Wholly owned group........................... -- --
--Associated companies......................... -- 1,322,587
Other persons................................... 63,934 --
--------- ---------
Total current receivables.......................... 63,934 1,325,563
========= =========
NOTE 4. INVESTMENTS (NON-CURRENT):
Investments in associated companies (Note 17)...... 2 2
========= =========
NOTE 5. PROPERTY, PLANT AND EQUIPMENT:
Leasehold improvements:
--At cost........................................ -- 128,274
--Accumulated amortization....................... -- (7,801)
---------- ---------
Total leasehold improvements, net.................. -- 120,473
---------- ----------
Plant and equipment:
--At cost........................................ 55,881 4,093,944
--Accumulated depreciation....................... ( 4,055) (149,677)
---------- ----------
Total plant and equipment, net..................... 51,826 3,944,267
---------- ----------
Plant and equipment under lease:
--At capitalized cost............................ 44,506 408,832
--Accumulated depreciation....................... -- (25,343)
----------- ----------
Total lease plant and equipment, net............... 44,506 383,489
----------- ----------
Capitalized network construction expenditures:
--At cost........................................ 431,041 1,636,813
--Accumulated amortization....................... -- --
----------- -----------
Total capitalized development expenditures, net.... 431,041 1,636,813
----------- -----------
Total property, plant and equipment, net........... 527,373 6,085,042
=========== ===========
95
STV PTY LIMITED AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
NOTE 6. INTANGIBLE ASSETS (NON-CURRENT):
[Enlarge/Download Table]
Economic Entity
----------------------------------
1994 1995
---- ----
$A $A
MDS licenses....................................... 1,570 3,501,285
--Accumulated Amortization....................... -- (25,536)
Other licenses..................................... -- 251,570
--Accumulated Amortization....................... -- (8,333)
Other.............................................. 1,992 8,668
---------- -----------
Total intangible assets, net....................... 3,562 3,727,654
========== ===========
NOTE 7. CREDITORS AND BORROWINGS (CURRENT):
Unsecured:
Trade creditors................................. 1,689 120,561
Accrued expenses................................ 47,100 --
Due to associated company--CTV Pty Limited...... 623,021 3,627,044
Due to related body corporate--United
International Holdings Inc.................... 79,816 863,341
Secured:
Secured: Finance lease liability (Note 14)...... 7,732 62,641
---------- -----------
759,358 4,673,587
========== ===========
NOTE 8. CREDITORS AND BORROWINGS (NON-CURRENT):
Secured:
Finance lease liability (Note 14).............. 36,165 313,981
---------- -----------
Total non-current creditors and borrowings........ 36,165 313,981
========== ===========
NOTE 9. PROVISIONS (NON-CURRENT):
Annual leave...................................... -- 11,495
=========== ===========
NOTE 10. SHARE CAPITAL:
Authorized capital:
--100,000,000 ordinary shares of $1
each......................................... 100,000,000 100,000,000
----------- -----------
Total authorized capital.......................... 100,000,000 100,000,000
=========== ===========
Issued and paid up capital:
--133,296 ordinary shares of $1.00 each......... 133,296 133,296
----------- -----------
Total issued and paid up capital.................. 133,296 133,296
=========== ===========
96
STV PTY LIMITED AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Movement in issued shares for the year:
[Enlarge/Download Table]
Number of Number of
Number of Redeemable Number of Redeemable
Ordinary Preference Ordinary Preference
Shares Shares Shares Shares
--------- ---------- --------- -----------
1994 1994 1995 1995
------ ---- ---- ----
Opening number of shares....................... -- -- 133,296 --
Issued during the year (a)..................... 133,296 2 -- --
Redeemed....................................... -- 2 -- --
------- ---- ------- ----
Closing number of shares....................... 133,296 -- 133,296 --
======= ==== ======= ====
NOTE 11. CONVERTIBLE DEBENTURES:
During the year ended 31 December 1995, the company had outstanding 986,707
convertible debentures for $A8,439,747. These debentures confer rights upon the
holders as creditors of the company. They do not confer any right to attend or
vote at general meetings. Interest is payable to the holders equal to the amount
of the distribution that the holder would have received if, as at the date the
entitlement to the distribution was determined, all of the debentures of that
holder and all other holders had been converted into shares.
The convertible debentures have been included in shareholders' equity in
the balance sheet as debenture holders are entitled to an equivalent return to
the ordinary shareholders.
Conversion of debentures is permitted at any time provided conversion would
not result in the breach of any Statute by the debenture holder or any other
person.
Debentures may be converted into fully paid ordinary shares on a one for
one basis unless the normal value of the issued shares is reconstructed which
would result in a different conversion factor. Debentures may not be redeemed
for cash.
In the event of a winding up of the company, the rights of the debenture
holders against the company in respect of the debentures are postponed until the
claims of all holders of senior indebtedness have been satisfied in full. Senior
indebtedness means secured obligations, unsecured and unsubordinated obligations
of the company, other than debentures and shares.
NOTE 12. RESERVES:
Economic Entity
December 31,
---------------------------
1994 1995
---- ----
$A $A
Share premium opening balance............. -- 1,426,959
Premium on issue of shares................ 1,426,959 --
--------- ---------
Total reserves............................ 1,426,959 1,426,959
========= =========
97
STV PTY LIMITED AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
NOTE 13. EMPLOYEE ENTITLEMENTS:
Superannuation commitments
The economic entity contributes to a defined contribution superannuation
plan for substantially all of its employees. Each participating entity in the
economic entity has a legal obligation to contribute to the schemes, which are
as follows:
(a) Hourly employees and commission employees--Employee Retirement
Fund, a fund administered by MLC. This is a defined contribution fund.
(b) Salaried employees--CETV Superannuation Fund, a fund administered by
MLC (contributions 6%). This is a defined contribution fund.
NOTE 14. COMMITMENTS:
[Enlarge/Download Table]
Economic Entity
--------------------
1994 1995
---- ----
$A $A
(a) Annual license fees are payable as follows:
Not later than one year........................................................ -- 1,227,291
Later than one year but not later than two years............................... -- 1,227,291
Later than two years but not later than five years............................. -- 1,686,787
Later than five years.......................................................... -- --
------ ---------
-- 4,141,369
====== =========
(b) Finance lease expenditure contracted for is payable as follows:
Not later than one year........................................................ 12,429 99,657
Later than one year but not later than two years............................... 12,429 117,272
Later than two years but not later than five years............................. 30,043 243,506
Later than five years.......................................................... -- --
------ ---------
54,901 460,435
Future finance charges.............................................................. 11,004 83,813
------ ---------
Net finance lease liability......................................................... 43,897 376,622
====== =========
Reconciled to:
Current liability (Note 7)..................................................... 7,732 62,641
Non-current liability (Note 8)................................................. 36,165 313,981
------ ---------
43,897 376,622
====== =========
(c) Operating lease expenditure contracted for is payable as follows:
Not later than one year........................................................ -- 169,642
Later than one year but not later than two years............................... -- 169,642
Later than two years but not later than five years............................. -- 510,984
Later than five years.......................................................... -- 148,112
------ ---------
-- 998,380
====== =========
(d) On 12 October 1994, the Company entered into a franchise agreement with
Australis Media Limited. The agreement carries a 15 year term beginning on
12 October 1994 and may be extended for an additional 10 years. The
agreement provides for an exclusive license and franchise for MDS and
Satellite and a non-exclusive license and franchise for cable for all
franchisor services including uplink and programming including Channel [V]
(a 24 hour music video channel), Arena, Showtime, Nickelodeon, TV1, Encore,
Discovery and Fox Sports.
98
STV PTY LIMITED AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Under the agreement, minimum payments are due, which include service fees
based on varying percentages of net revenues as defined in the agreement,
and subscription levies which are dependent on the number of subscribers.
NOTE 15. NOTES TO THE STATEMENT OF CASH FLOWS:
(a) Reconciliation of Cash
For the purposes of the statement of cash flows, cash includes cash on hand
and in banks and deposits at call, net of outstanding bank overdrafts. Cash at
the end of the financial year as shown in the Statement of Cash Flows is
reconciled to the related items in the Balance Sheet as follows:
Economic Entity
----------------------
1994 1995
---- ----
$A $A
Cash............................................. 5,994 2,236
Short-term money market deposits................. 10,072,256 --
---------- -----
10,078,250 2,236
========== =====
(b) Reconciliation of net cash provided by operating activities to
operating loss after income tax.
[Enlarge/Download Table]
Economic Entity
-------------------------------
Period Ended Year Ended
December 31, December 31,
------------ -----------
1994 1995
---- ----
$A $A
Operating loss after income tax.......................... (122,457) (3,353,245)
Adjustments for non-cash income and expense items:
Depreciation and amortization expense............... 4,055 212,635
Bad debts expense and provision for doubtful
debts............................................ -- 28
Unrealized foreign exchange gain.................... -- --
Transfers to provisions:
Annual leave........................................ -- 11,495
Increase in other receivables....................... (63,934) 60,930
Increase (decrease) in trade creditors.............. 48,789 71,789
Increase in other assets............................ -- (382,866)
-------- ----------
Net cash from operating activities.................. (133,547) (3,379,234)
======== ==========
(c) Subsidiaries acquired
99
STV PTY LIMITED AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
The following subsidiaries were acquired by the economic entity for cash
consideration. The fair value of net tangible assets acquired was as follows:
Fair Value
of Net Tangible
Assets Acquired
------------------------
1994 1995
---- ----
Entity $A $A
------
Selectra Pty Limited....................... 2 --
Vermint Grove Pty Limited--cash............ -- 2
Kidilla Pty Limited--cash.................. -- 2
Dovevale Pty Limited--cash................. -- 2
Carryton Pty Limited--cash................. -- 2
Xtek Bay Pty Limited--cash................. -- 2
Windytide Pty Limited--cash................ -- 2
--- ---
Fair value of net identifiable assets...... 2 12
Goodwill on acquisition.................... --- ---
Total consideration........................ 2 12
=== ===
(d) Non-cash financing and investing activities.
During the year the economic entity acquired plant and equipment with an
aggregate fair value of $A354,822 (1994: $A44,506) by means of finance leases.
These transactions are not reflected in the Statement of Cash Flows.
NOTE 16. SUBSIDIARIES:
The following were subsidiaries at 31 December 1995, and have been included
in the consolidated financial statements. The financial years of all
subsidiaries are the same as that of the parent entity.
[Enlarge/Download Table]
Contribution to
Place of Book Value of Consolidated
Name of Incorporation/ Date of Type of Parent Entity's % of Result for the
Controlled Entity Formation(a) Acquisition Shares Investment Shares Held Year
----------------- ------------- ----------- ------- --------------- ------------ --------------
1994 1995 1994 1995 1994 1995
---- ---- ---- ---- ---- ----
$A $A % %
Vermint Grove Pty Australia 26/4/95 Ordinary -- 2 100 -- -- --
Limited
Kidilla Pty Limited Australia 26/4/95 Ordinary -- 2 100 -- -- --
Dovevale Pty Limited Australia 26/4/95 Ordinary -- 2 100 -- -- --
Carryton Pty Limited Australia 26/4/95 Ordinary -- 2 100 -- -- --
Xtek Bay Pty Limited Australia 26/4/95 Ordinary -- 2 100 -- -- --
Selectra Pty Limited Australia 29/7/94 Ordinary 2 2 100 100 -- --
Windytide Pty Limited Australia 26/4/95 Ordinary -- 2 100 -- -- --
---- ---- --- ---
2 14 -- --
==== ==== === ===
(a) All entities operate solely in their place of incorporation/formation.
100
STV PTY LIMITED AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
NOTE 17. ASSOCIATED COMPANIES:
Details of material interests in associated companies are as follows:
[Enlarge/Download Table]
Name of Associated Principal Activity of Ownership Balance Dividends
Company Associated Company Interest Date Received
------------------ --------------------- ------------- ----------- --------------
1994 1995 1994 1995
---- ---- ---- ----
Communication & Delivery of subscription
Entertainment television services to
Australia Pty Limited regional Australia 50% 50% 31 December -- --
Chippawa Pty Limited Delivery of subscription
television services to
regional Australia 50% 50% 30 June -- --
--- ---
-- --
=== ===
[Enlarge/Download Table]
Economic Entity
-------------------
1994 1995
---- ----
$A $A
Aggregate carrying amount of investments in associated companies........ 2 2
----- ----
Aggregate amount of investment in associated companies, as determined
under the equity method of accounting........................................ 2 2
===== ====
NOTE 18. RELATED PARTY DISCLOSURES:
A. OTHER DIRECTOR TRANSACTIONS
Crase Partners, a director-related firm of J. K. Crase, a director,
provided general accounting services to the company during the period. These
services were provided at an arms length basis.
B. TRANSACTIONS WITH RELATED PARTIES IN THE WHOLLY OWNED GROUP
The parent entity entered into the following transactions during the year
with related parties in the wholly owned group:
* loans were advanced to subsidiaries to fund the acquisition of MDS
licenses and total $A0 and $A3,863,022. STV also has amounts payable to United
International Holdings, Inc. of $A79,816 and $A863,341 at December 31, 1994 and
1995, respectively.
These transactions were undertaken on commercial terms and conditions.
C. TRANSACTIONS WITH ASSOCIATED COMPANIES
The parent entity entered into certain transactions with associated
companies, being loans advanced and received on an arms length basis. STV has
receivables from associated companies totaling $A0 and $A1,322,587 at December
31, 1994 and 1995, respectively. STV has amounts payable to CTV of $A623,074 and
$A3,627,044 as of the same dates.
101
STV PTY LIMITED AND ITS SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
NOTE 19. US GAAP INFORMATION
The accounting policies followed in preparation for the consolidated
financial statements differ in one respect to those generally accepted in the
United States of America (US GAAP). For US GAAP purposes, the convertible
debentures would be classified as a non-current liability and not equity.
The calculation of shareholders' equity in accordance with US GAAP is as
follows:
[Enlarge/Download Table]
December 31,
------------------------------
1994 1995
---- ----
$A $A
Shareholders' equity as per balance sheet.............. 9,877,545 6,524,300
Adjustments to reported equity:
Convertible debentures............................ (8,439,747) (8,439,747)
---------- ----------
Shareholders' equity in accordance with US GAAP........ 1,437,798 (1,915,447)
========== ==========
102
XYZ ENTERTAINMENT PTY LTD
INDEPENDENT AUDITORS' REPORT
The Board of Directors
We have audited the accompanying consolidated balance sheets of XYZ
Entertainment Pty Limited as of December 31, 1994 and 1995 and the related
consolidated statements of operations, shareholders' deficiency and cash flows
for the period from October 17, 1994 (date of inception) to December 31, 1994
and the financial year ended December 31, 1995, which are expressed in
Australian dollars. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Australia which do not differ in any material respect from auditing
standards generally accepted in the United States. Those standards require that
we plan and perform the audit to obtain reasonable assurance as to 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 the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
XYZ Entertainment Pty Limited as of December 31, 1994 and 1995 and the results
of its operations and its cash flows for the years then ended, in conformity
with accounting principles generally accepted in Australia.
Generally accepted accounting principles in Australia vary in certain
significant respects from generally accepted accounting principles in the United
States. Application of generally accepted accounting principles in the United
States would have affected amounts reported as shareholders' deficiency and net
loss as at and for the period from October 17, 1994 (date of inception) to
December 31, 1994 and the year ended December 31, 1995 to the extent summarized
in Note 12 to the financial statements.
Deloitte Touche Tohmatsu
Chartered Accountants
Sydney, Australia
March 15, 1996
103
XYZ ENTERTAINMENT PTY LTD
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM OCTOBER 17, 1994 (DATE OF INCEPTION) TO DECEMBER 31, 1994
AND THE YEAR ENDED DECEMBER 31, 1995
[Download Table]
1994 1995
Note $A $A
Revenue
Channel supply................................. Nil 1,117,091
Other.......................................... Nil 592,149
Interest....................................... 2,829 196,291
------- ----------
2,829 1,905,531
------- ----------
Operating expenses
Cost of services............................... Nil 24,677,575
Selling, general and administrative............ 236,703 12,475,597
Depreciation and amortization.................. 2 Nil 3,594,737
------- ----------
Cost of operations.................................. 236,703 40,747,909
------- ----------
Net loss before income taxes........................ 233,874 38,842,378
------- ----------
Income taxes........................................ 3 Nil Nil
------- ----------
Net loss............................................ 2 233,874 38,842,378
------- ----------
Net loss per share.................................. 116,937 19,421,189
======= ==========
Weighted average number of ordinary shares out-
standing during the period....................... 2 2
======= ==========
The accompanying notes form part of these financial statements.
104
XYZ ENTERTAINMENT PTY LTD
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1994 AND 1995
[Enlarge/Download Table]
1994 1995
Note $A $A
ASSETS
Current assets
Cash and cash equivalents.......................... 670,754 3,105,803
Receivables........................................ 33,000 1,006,241
Amounts due from stockholder....................... Nil 21,219
Program material rights (net of accumulated
amortization of $Anil and $A1,430,000).......... Nil 2,298,935
------- ----------
Total current assets......................... 703,754 6,432,198
------- ----------
Non-current assets
Property, plant and equipment...................... 4 57,448 3,361,070
Investment in associated company................... 6 Nil 245,518
Amounts due from related party..................... 8 Nil 1,326,578
Program material rights (net of accumulated
amortization of $Anil and $A180,000)............ Nil 217,916
------- ----------
Total non-current assets..................... 57,448 5,151,082
------- ----------
Total assets............................. 761,202 11,583,280
======= ==========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities
Creditors, trade................................... Nil 20,792,868
Other creditors and accruals....................... Nil 75,656
Amounts due to related party....................... Nil Nil
------- ----------
Total current liabilities..................... Nil 20,868,524
------- ----------
Non-current liabilities
Creditors, trade................................... Nil 743,086
Amounts due to stockholders........................ 8 995,074 29,047,920
------- ----------
Total non-current liabilities................. 995,074 29,791,006
------- ----------
Total liabilities........................ 995,074 50,659,530
------- ----------
Commitments and Contingencies (See Notes)
Stockholders' deficiency
Redeemable preferences shares, par value $A1.00 per
share: Authorized 100,000 shares, none issued
and outstanding ............................ Nil Nil
Ordinary shares, par value $A1.00 per share:
Authorized 900,000 shares, 2 issued and 9 2 2
outstanding ................................ Nil Nil
Accumulated deficit................................ (233,874) (39,076,252)
--------- -----------
Total stockholders' deficiency........... (233,872) (39,076,250)
-------- -----------
Total liabilities and stockholders'
deficiency............................ 761,202 11,583,280
======== ===========
The accompanying notes form part of these financial statements.
105
XYZ ENTERTAINMENT PTY LTD
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIENCY
FOR THE PERIOD FROM OCTOBER 17, 1994 (DATE OF INCEPTION) TO DECEMBER 31, 1994
AND THE YEAR ENDED DECEMBER 31, 1995
[Enlarge/Download Table]
Ordinary Accumulated Total
$A $A $A
Balance at October 17, 1994.................... Nil
Issue of ordinary shares....................... 2 2
Net loss....................................... (233,874) (233,874)
----------- -----------
Balance at December 31, 1994................... 2 (233,874) (233,872)
--- ----------- -----------
Net loss....................................... (38,842,378) (38,842,378)
----------- -----------
Balance at December 31, 1995................... 2 (39,076,252) (39,076,250)
=== =========== ===========
The accompanying notes form part of these financial statements.
106
XYZ ENTERTAINMENT PTY LTD
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM OCTOBER 17, 1994 (DATE OF INCEPTION) TO DECEMBER 31, 1994
AND THE YEAR ENDED DECEMBER 31, 1995
[Download Table]
1994 1995
$A $A
Cash flows from operating activities
Cash receipts in the course of operations............. Nil 370,348
Cash payments in the course of operations............. (269,703) (17,351,047)
Interest received..................................... 2,829 196,291
-------- -----------
Net cash used in operating activities................. (266,874) (16,784,408)
-------- -----------
Cash flows from investing activities
Payments for property, plant and equipment............ (57,448) (4,999,012)
Proceeds from sale of program material rights......... Nil 2,304,795
Payment for investment................................ Nil (1)
Payments for program material rights.................. Nil (7,164,583)
------- -----------
Net cash used in investing activities................. (57,448) (9,858,801)
------- -----------
Cash flows from financing activities
Proceeds from issues of shares........................ 2 Nil
Proceeds from stockholder loans....................... 995,074 29,078,258
------- -----------
Net cash provided by financing activities............. 995,076 29,078,258
------- -----------
Net increase in cash and cash equivalents held............. 670,754 2,435,049
Cash and cash equivalents at the beginning of the
period ................................................. Nil 670,754
------- -----------
Cash and cash equivalents at the end of the period......... 670,754 3,105,803
======= ===========
Reconciliation of Net Loss to Net Cash Used in
Operating Activities
Net loss ............................................. (233,874) (38,842,378)
Add non-cash items:
Amounts set aside to provisions.................. Nil 1,771,817
Depreciation and amortization.................... Nil 3,594,737
Gain on disposal of program material rights...... Nil (189,213)
Loss on disposal of program material rights...... Nil 1,511,315
Gain on disposal of fixed assets................. Nil (168,358)
Loss on disposal of fixed assets................. Nil 9,690
-------- -----------
Net cash used in operating activities before change
in assets and liabilities.......................... (233,874) (32,312,390)
Change in assets and liabilities:
Increase in trade receivables.................... (33,000) (994,460)
(Increase) decrease in other receivables......... Nil (1,518,255)
Increase in creditors............................ Nil 18,040,697
-------- -----------
Net cash used in operating activities....... (266,874) (16,784,408)
======== ===========
The accompanying notes form part of these financial statements.
107
XYZ ENTERTAINMENT PTY LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM OCTOBER 17, 1994 (DATE OF INCEPTION) TO DECEMBER 31, 1994
AND THE YEAR ENDED DECEMBER 31, 1995
NOTE 1--STATEMENT OF ACCOUNTING POLICIES
The significant policies which have been adopted in the preparation of
these consolidated financial statements are:
(a) BASIS OF PREPARATION
This statement of significant accounting policies is given to assist in the
understanding of the consolidated financial statements. For the purposes of
these consolidated financial statements, XYZ Entertainment Pty Ltd (the
"Company") and its controlled entities (subsidiaries) (collectively, "XYZ") are
defined under Australian law as the Economic Entity. This term is used
throughout these Notes to the consolidated financial statements. The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Australia (Australian GAAP), include
disclosures required by the United States Securities and Exchange Commission and
are presented in Australian dollars ($A). The accounting principles differ in
certain respects from accounting principles generally accepted in the United
States (US GAAP). The significant differences and the approximate related effect
on the consolidated financial statements are set out in Note 12. Although the
company is financially dependent on related bodies corporate for its ongoing
viability, the financial statements have been prepared on a going concern basis,
after considering undertakings by related bodies corporate to provide ongoing
financial support. The financial statements have been prepared on the basis of
historical costs and do not take into account changing money values. Consistent
accounting policies have been employed in the preparation and presentation of
the consolidated financial statements.
The company was incorporated on October 17, 1994 and commenced trading from
that date. Through its controlled entities, the company provides programming for
four of eight channels of the multi-channel base programming package (the
"Galaxy Package") offered and distributed by the Satellite A and B license
holders in Australia. The Galaxy Package is distributed via satellite, microwave
Multipoint distribution system and other transmission technologies by the
Satellite B license holder through distribution facilities in the six largest
capital cities in Australia and regional Western Australia, and by franchisees
to substantially all of the population in Australia.
The Company's programming for the four channels was first aired on April
23, 1995 by the Satellite A and B license holders. Regional distribution
commenced in New South Wales in August 1995 and in other states in October 1995.
Programming provided by the Company as at the date of this report includes
Red, a music video channel; ARENA, a general entertainment channel; NICKELODEON,
a children's/family/classic channel; and DISCOVERY, a documentary channel.
(b) PRINCIPLES OF CONSOLIDATION
The accounts have been prepared by consolidating the financial statements
of all the entities that comprise the Economic Entity, being the Company (the
chief entity) and its controlled entities. A list of controlled entities appears
in Note 7.
The purchase method of accounting has been used to account for subsidiaries
acquired during the period. The Company undertakes a valuation of the net assets
acquired in purchase transactions in accordance with generally accepted
accounting principles. Accordingly, the Company has stated the net assets
108
XYZ ENTERTAINMENT PTY LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE PERIOD FROM OCTOBER 17, 1994 (DATE OF INCEPTION) TO DECEMBER 31, 1994
AND THE YEAR ENDED DECEMBER 31, 1995
acquired from purchased companies at their estimated fair values at the
date of acquisition. The consolidated accounts include the information and
results of each controlled entity from the date on which the Company obtains
control and until such time as the Company ceases to control such entity.
In preparing the consolidated accounts, the intercompany balances and
transactions, and any unrealized profits arising within the Economic Entity have
been eliminated in full.
(c) REVENUE AND REVENUE RECOGNITION
Sales revenue comprises license fees earned from a related entity for
development and production of channels of programming for subscription
television broadcasting services. Revenue is recognized at the time subscription
services are provided to customers.
(d) RECOVERABLE AMOUNT OF NON-CURRENT ASSETS
The carrying amounts of all non-current assets are reviewed to determine
whether they are in excess of their recoverable amount as of the balance sheet
date. If the carrying amount of a non-current asset exceeds the recoverable
amount, the asset is written down to the lower amount. In assessing recoverable
amounts, the relevant net cash inflows arising from the continued use and
subsequent disposal of non-current assets have not been discounted to their
present value unless otherwise indicated.
(e) FOREIGN CURRENCY TRANSACTIONS
Foreign currency transactions are translated to Australian currency at the
rates of exchange existing at the dates of the transactions. Amounts receivable
and payable in foreign currencies at the balance sheet date are translated at
the rates of exchange existing on that date.
Exchange differences relating to amounts payable and receivable in foreign
currencies are recorded in the profit and loss account as exchange gains or
losses in the financial year in which the exchange rates change.
(f) TAXATION
XYZ adopts the liability method of tax effect accounting. The tax effect of
temporary differences which arise from items recorded in different periods for
income tax and accounting purposes, are carried forward on the balance sheet as
deferred tax assets and deferred tax liabilities, as applicable. Deferred tax
assets arising from temporary differences are not recorded unless realization of
the asset is assured beyond a reasonable doubt. Deferred tax assets which
include tax losses are only recorded when their realization is virtually
certain.
The recovery of deferred tax assets (both recognized and unrecognized) is
contingent upon sufficient taxable income being earned in future periods,
continuation of the relevant tax laws and each relevant company continuing to
comply with the appropriate legislation.
109
XYZ ENTERTAINMENT PTY LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE PERIOD FROM OCTOBER 17, 1994 (DATE OF INCEPTION) TO DECEMBER 31, 1994
AND THE YEAR ENDED DECEMBER 31, 1995
(g) PLANT AND EQUIPMENT
ACQUISITION
Items of plant and equipment are recorded at historical cost and
depreciated as outlined below.
DEPRECIATION
Items of plant and equipment are depreciated over their estimated useful
lives on a straight-line basis. The estimated useful lives of such items range
from four to ten years. Items of plant and equipment are depreciated from the
date the asset commences earning revenue.
Leases
Payments made under operating leases are charged against profits in equal
installments over the accounting periods covered by the lease term, except where
an alternative basis is more representative of the pattern of benefits to be
derived from the leased property.
(h) SUPERANNUATION
XYZ contributes to one defined contribution fund for all employee groups.
Contributions of $A135,675 were made to the fund during the year as a percentage
of salaries based on statutory requirements.
(I) Program Material Rights
Program material rights are recognized as an asset and stated at the lower
of unamortized cost and net realizable value. The rights represent the ability
to use television programs over a specified period of time, as set out in the
license agreements. Program material rights acquired under license agreements
are recognized when the license period begins and all of the following
conditions are met:
(i) The cost of each license fee for each program is known or is
reasonably determinable;
(ii) The program material has been accepted by the licensee in
accordance with the terms of the license agreement; and,
(iii) The licensor can deliver the program material rights, and the
licensee can exercise the rights.
Amortization of the cost of program material rights is charged to the
statement of operations based on the regular assessment of the benefit of
individual license agreements, over the term of the agreement. If the benefits
are reasonably determinable through the number of times a particular program is
aired, then costs are charged to the statement of operations accordingly. An
accelerated method of amortization is used when the first broadcast of a program
is estimated to be more valuable than its reruns. Costs are allocated on a
straight-line basis over the period of the agreement if each broadcast is
expected to produce approximately the same amount of revenue.
110
XYZ ENTERTAINMENT PTY LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE PERIOD FROM OCTOBER 17, 1994 (DATE OF INCEPTION) TO DECEMBER 31, 1994
AND THE YEAR ENDED DECEMBER 31, 1995
Program material rights are classified as current assets if they are
expected to be used within one year.
(j) STATEMENT OF CASH FLOWs
For the purposes of the statement of cash flows, cash and cash equivalents
includes bank overdrafts and all highly liquid investments which are readily
convertible to cash at the Company's option.
(k) LOSS PER SHARE
Loss per share is calculated by dividing net loss by the weighted average
number of issued ordinary shares outstanding during the period.
(l) PROVISIONS
Employee Entitlements
Provision is made for benefits accruing to employees in respect of wages
and salaries, annual leave, long service leave, and sick leave when it is
probable that settlement will be required and are capable of being measured
reliably.
Provisions made in respect of wages and salaries, annual leave, sick leave,
and other employee entitlements expected to be settled within twelve months, are
measured at their nominal values.
Provisions made in respect of other employee entitlements which are not
expected to be settled within twelve months are measured as the present value of
the estimated future cash outflows to be made by the economic entity in respect
of services provided by employees up to the reporting date.
(m) DATE OF INCORPORATION
The company was incorporated on October 17, 1994 and accordingly
comparative figures cover the period from inception.
(n) INVESTMENTS
ASSOCIATED COMPANIES
The Company equity accounts for its investments in associated companies in
equity supplementary financial statements. Investments in which the Company has
a material interest and over which it exercises significant influence, but does
not control, are considered to be associated companies. The ability to exercise
significant influence over the strategic operating, investing and financing
policies of a company may be indicated by, for example, representation on the
board of directors, participation in policy-making processes, material
intercompany transactions, interchange of management personnel or provision of
technical information.
Investments in associated companies are carried at the lower of cost and
recoverable amount. Dividends are recorded in the profit and loss account after
they have been declared by the associated company in a general meeting.
111
XYZ ENTERTAINMENT PTY LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE PERIOD FROM OCTOBER 17, 1994 (DATE OF INCEPTION) TO DECEMBER 31, 1994
AND THE YEAR ENDED DECEMBER 31, 1995
During the year, the Company entered into an agreement with Nickelodeon
Australia, Inc to produce NICKELODEON AUSTRALIA, a children's channel. The
Company jointly controls Nickelodeon Australia Management Pty Limited with
Nickelodeon Australia, Inc, and as such has the capacity to significantly
influence decision-making in these companies. The term of the joint venture is
15 years.
Selected disclosures under the equity method of accounting relating to the
entity in which the Company is able to exercise significant influence are
provided in Note 6.
None of the shares in associated companies are listed on the Australian
Stock Exchange.
NOTE 2--EXPENDITURES
[Download Table]
1994 1995
$A $A
Expenses included in the net loss were:
Depreciation and amortization:
--plant and equipment......................... Nil 828,647
--program material rights..................... Nil 2,766,090
--- ---------
Total depreciation and amortization..... Nil 3,594,737
=== =========
Amounts set Aside to Provision:
--employee entitlements--annual leave......... Nil 75,656
--provision for doubtful debts................ Nil 1,696,160
--- ---------
Nil 1,771,816
=== =========
Exchange (gain) loss, net, on foreign currency
transactions:
Exchange gain on foreign currency
transactions.............................. Nil (368,670)
--- --------
Exchange (gain) loss, net.................... Nil (368,670)
=== ========
NOTE 3--INCOME TAXES
At December 31, 1995 XYZ had accumulated tax losses carried forward of
approximately $A7,997,055 (1994: $A71,840). The losses may be carried forward
indefinitely under Australian income tax legislation.
112
XYZ ENTERTAINMENT PTY LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE PERIOD FROM OCTOBER 17, 1994 (DATE OF INCEPTION) TO DECEMBER 31, 1994
AND THE YEAR ENDED DECEMBER 31, 1995
The tax effects of temporary differences, at the Australian statutory rate
of 36%, which give rise to significant portions of deferred tax assets or
liabilities and the corresponding valuation allowance at December 31, 1995 are
as follows:
1994 1995
$A $A
Deferred tax assets
Tax loss carryforward............. 77,978 9,816,188
Accrued expenses and other........ Nil 266,479
------ ----------
77,978 10,082,667
Deferred tax liabilities
Depreciation and amortization..... Nil 1,897,111
------ ----------
Net deferred tax assets........... 77,978 8,185,556
Less valuation allowance.......... 77,978 8,185,556
------ ----------
Nil Nil
====== ==========
Tax losses of $A1,897,111 (1994: $Anil) have been brought to account and
fully applied against deferred tax liabilities.
XYZ has provided a valuation allowance for the total amount of net deferred
tax assets since realization of these assets is not assured, principally due to
the Economic Entity being in the start-up phase of operations. For US GAAP
purposes as described in Note 12, a valuation allowance for the total amount of
the net deferred tax assets has also been provided.
NOTE 4--PROPERTY, PLANT AND EQUIPMENT
1994 1995
$A $A
Plant and equipment--at cost.................. 57,448 4,026,837
Less: accumulated depreciation............... Nil (665,767)
------ ---------
Total property, plant and equipment..... 57,448 3,361,070
====== =========
There have been no current valuations included in the above amounts.
113
XYZ ENTERTAINMENT PTY LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE PERIOD FROM OCTOBER 17, 1994 (DATE OF INCEPTION) TO DECEMBER 31, 1994
AND THE YEAR ENDED DECEMBER 31, 1995
NOTE 5--COMMITMENTS AND CONTINGENCIES
1994 1995
$A $A
Contracts for Expenditure for Program Material Rights
--Not later than one year.............................. Nil 174,082
--Later than one year but not later than two years..... Nil Nil
--Later than two years but not later than three years.. Nil Nil
--Later than three years but not later than four years. Nil Nil
--Later than four years but not later than five years.. Nil Nil
--Later than five years................................ Nil Nil
--- -------
Nil 174,082
=== =======
Commitments Under Non-cancelable Operating Leases
--Not later than one year.............................. Nil 11,794
--Later than one year but not later than two years..... Nil 12,362
--Later than two years but not later than three years.. Nil 10,976
--Later than three years but not later than four years. Nil 568
--Later than four years but not later than five years.. Nil Nil
--Later than five years................................ Nil Nil
--- ------
Nil 35,700
=== ======
CONTINGENCIES
The Company and its controlled entities are party to matters involving
certain claims which arise in the normal course of business, none of which, in
the opinion of management, is expected to have a materially adverse effect on
the Company's consolidated financial position or results of operation.
REGULATION
Management asserts that no communication of any kind has been received from
the Australian Broadcasting Authority ("ABA"), the Australian Competition and
Consumer Commission of Australia ("ACCC"), or the Foreign Investment Review
Board of Australia ("FIRB"), or any other agency indicating that the Company
and/or its controlled entities is or may be in violation of any law or
regulation of the Commonwealth of Australia or any subdivision or agency
thereof.
NOTE 6--INFORMATION ABOUT INVESTMENTS IN ASSOCIATED COMPANIES
[Enlarge/Download Table]
Equity-
Ownership Carrying Accounted
Name of Company Principal Activity Interest Amount Amount
-------- -------- ----------
1994 1995 1994 1995 1994 1995
Percent $A $A $A $A
Nickelodeon Australia Production and Development
Management Pty Limited of the Nickelodeon Channel N/A 50 Nil 245,518 Nil 245,518
The balance date of the associate is June 30.
114
XYZ ENTERTAINMENT PTY LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE PERIOD FROM OCTOBER 17, 1994 (DATE OF INCEPTION) TO DECEMBER 31, 1994
AND THE YEAR ENDED DECEMBER 31, 1995
The carrying amount of the investment in the associated company is as
follows:
$A
Carrying amount of investment in shares in associate company....... 1
Amounts due from associated company at the balance date ........... 1,941,677
Provision for non-recoverability................................... (1,696,160)
----------
245,518
==========
The carrying amount of the investment equates to the equity-accounted
amount at December 31, 1995 as follows:
$A
Carrying amount of investment in shares in
associated company........................................... 1
XYZ's maximum obligation to contribute to the
operating losses of the associated company. ................. (1,696,160)
----------
(1,696,159)
Amounts due from associated company at the balance date......... 1,941,677
----------
245,518
==========
NOTE 7--PARTICULARS IN RELATION TO CONTROLLED ENTITIES
[Enlarge/Download Table]
Book Value of Contribution to
Investment Consolidated Loss
----------------- --------------------
Class Interest
of Held 1994 1995 1994 1995
Share Percent $A $A $A $A
Chief Entity
XYZ Entertainment Pty
Limited..................... 233,874 38,842,378
Corporate Bodies Corporate
XYZ Programming Pty
Limited..................... Ord 100 Nil 2 Nil Nil
Arena Television Pty Limited...
Ord 100 Nil 2 Nil Nil
Quest Television Pty Limited...
Ord 100 Nil 2 Nil Nil
Max Television Pty Limited.....
Ord 100 Nil 2 Nil Nil
Red Television Pty
Limited..................... Ord 100 Nil 2 Nil Nil
------- ----------
Consolidated net loss.......... 233,874 38,842,378
======= ==========
Each of the controlled entities are incorporated in, and carry on business
in, Australia.
NOTE 8--RELATED PARTY DISCLOSURES
Ownership Interests in Related Parties
Information in relation to ownership interests in controlled entities is
provided in Note 7.
115
XYZ ENTERTAINMENT PTY LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE PERIOD FROM OCTOBER 17, 1994 (DATE OF INCEPTION) TO DECEMBER 31, 1994
AND THE YEAR ENDED DECEMBER 31, 1995
REMUNERATION OF DIRECTORS
The directors of the Company during the period were:
D F Hagans (appointed 12/12/94)
A Tow (appointed 11/5/95)
R J Freudenstein(appointed 6/9/95)
R J Birrel(appointed 17/10/94, resigned 11/5/95)
M W Booth (appointed 17/10/94, resigned 12/12/94, reappointed 6/9/95)
D Garry (appointed 17/10/94, resigned 17/10/94)
L M Head (appointed 17/10/94, resigned 17/10/94)
[Enlarge/Download Table]
1994 1995
$A $A
Total income received, or due and receivable, by directors of the Company from
the Company and any related body corporate, and by all directors of each
entity in the Economic Entity from corporations of which they are directors,
or related bodies corporate or an entity controlled by the chief entity................. 52,500 363,786
====== =======
The number of directors of the Company whose total income falls within the following
bands: No No
$ANil -- $A9,999........................................................................ 4 7
====== =======
LOANS TO DIRECTORS
There were no loans in existence at balance date (or at December 31, 1994)
made, guaranteed or secured by the Company to directors of a corporation in the
Economic Entity or a related body corporate, their spouses, relatives or
relatives of spouses.
LOANS FROM DIRECTOR RELATED ENTITIES
[Enlarge/Download Table]
TERMS AND CONDITIONS
TYPE OF OF NAME OF RELATED DIRECTOR 1995
TRANSACTION TYPE OF TRANSACTION ENTITY RELATED $A
Non-interest bearing, Century United
Loans advanced no set terms over Programming Ventures D Hagans and 14,523,960
from stockholder.... payment Pty Limited A Tow
Loans advanced Non-interest bearing, Foxtel Management Pty R Freudenstein
from stockholder...... set terms of Limited and M Booth 14,523,960
repayment ----------
29,047,920
==========
Loans from director related entities at December 31, 1994 amounted to
$995,074. Of this amount, $820,074 had been advanced by UIH Australia
Programming Inc. and $175,000 by Century Programming Ventures Corp., both being
joint and equal stockholders in the Company at that date.
116
XYZ ENTERTAINMENT PTY LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE PERIOD FROM OCTOBER 17, 1994 (DATE OF INCEPTION) TO DECEMBER 31, 1994
AND THE YEAR ENDED DECEMBER 31, 1995
LOANS TO DIRECTOR RELATED ENTITIES
[Enlarge/Download Table]
TERMS AND CONDITIONS
TYPE OF OF NAME OF RELATED DIRECTOR 1995
TRANSACTION TYPE OF TRANSACTION ENTITY RELATED $A
Non-interest bearing, Century United
Loans advanced to no set terms of Programming Ventures D Hagans and
stockholder......... repayment Pty Limited A Tow 881,633
=======
There were no loans to Director Related Entities at December 31, 1994.
OTHER TRANSACTIONS WITH DIRECTOR RELATED ENTITIES
[Enlarge/Download Table]
TERMS AND CONDITIONS
TYPE OF OF NAME OF RELATED DIRECTOR 1995
TRANSACTION TYPE OF TRANSACTION ENTITY RELATED $A
Establishment and
restructuring Normal commerical UIH Australia
fees paid......... terms and conditions Programming Inc. D Hagans 250,000
Establishment and
restructuring Normal commerical Century Programming
fees paid......... terms and conditions Ventures Corp. A Tow 250,000
Establishment,
operating and Century United
management Normal commercial Programming Ventures D Hagans and
fees.............. terms and conditions Pty Limited A Tow 860,444
Channel supply Continental Century
license fee Normal commercial Pay Television Pty
revenue........... terms and conditions Limited A Tow 943,358
Channel supply
license fee Normal commercial Foxtel Management R Freuderstein
revenue........... terms and conditions Pty Limited and M Booth 330,753
Continental Century
There were no other transactions with Director Related Parties at December
31, 1994.
117
XYZ ENTERTAINMENT PTY LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE PERIOD FROM OCTOBER 17, 1994 (DATE OF INCEPTION) TO DECEMBER 31, 1994
AND THE YEAR ENDED DECEMBER 31, 1995
LOANS TO OTHER RELATED ENTITIES
[Download Table]
TERMS AND CONDITIONS
TYPE OF OF NAME OF RELATED 1995
TRANSACTION TYPE OF TRANSACTION ENTITY $A
Loans advanced to Non-interest bearing,
associated no set terms of Nickelodeon Australia
company.............. repayment Management Pty Limited 1,941,677
Non-interest bearing,
Loans advanced to no set terms of
related party........ repayment Nickelodeon Australia Inc. 1,326,578
There were no loans to Other Related Entities at December 31, 1994.
OTHER TRANSACTIONS WITH OTHER RELATED ENTITIES
[Download Table]
TERMS AND CONDITIONS
TYPE OF OF NAME OF RELATED 1995
TRANSACTION TYPE OF TRANSACTION ENTITY $A
Nickelodeon Australia
Normal commercial Management Pty
Subscriptions payable.. terms and conditions Limited 113,219
There were no other transactions with other related entities at December
31, 1994.
TRANSACTIONS WITHIN THE WHOLLY-OWNED GROUP
During the financial period, the company provided management services to
other entities in the wholly-owned group at no charge. In addition, the company
paid license fees and reimbursed certain costs to other entities in the
wholly-owned group in the ordinary course of business and on normal terms and
conditions.
CONTROLLING ENTITIES
The chief (parent) entity in the economic entity is XYZ Entertainment Pty
Limited.
The ultimate holding company in the wholly-owned group is XYZ Entertainment
Pty Limited.
118
XYZ ENTERTAINMENT PTY LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE PERIOD FROM OCTOBER 17, 1994 (DATE OF INCEPTION) TO DECEMBER 31, 1994
AND THE YEAR ENDED DECEMBER 31, 1995
The chief entity, at the year end, was jointly controlled by Century United
Programming Ventures Pty Limited ("CUPV") and Foxtel Management Pty Limited.
Both companies are incorporated in Australia.
CUPV is jointly owned by UIH Australia Programming Inc. ("UIH") and Century
Programming Ventures Corp. ("CPVC"). The ultimate parent entity of UIH is United
International Holdings, Inc. The ultimate parent entity of CPVC is Century
Communications Corporation.
Foxtel Management Pty Limited is jointly owned by The News Corporation
Limited and Telstra Corporation Limited.
NOTE 9--SHARE CAPITAL
[Download Table]
1994 1995
$A $A
Authorized Capital
900,000 ordinary shares of $A1.00 each.................... 900,000 900,000
100,000 redeemable preference shares of $A1.00 each....... 100,000 100,000
--------- ---------
1,000,000 1,000,000
--------- ---------
Issued and Paid-Up Capital
2 ordinary shares of $A1.00 each.......................... 2 2
========= =========
Upon incorporation the Company issued two fully paid ordinary shares of $1
each.
NOTE 10--FINANCIAL REPORTING BY SEGMENTS
The Company predominantly operates in Australia and in one industry, being
programming for subscription television services.
NOTE 11--NON-HEDGED FOREIGN CURRENCY BALANCES
The Australian dollar equivalent of foreign currency balances included in
the accounts which are not effectively hedged are as follows:
1994 1995
$A $A
US Dollars
Liabilities
Current............................ Nil 1,719,055
Non-current........................ 995,074 743,085
------- ---------
Total......................... 995,074 2,462,140
======= =========
Assets
Current............................ Nil 25,729
======= =========
Sterling
Liabilities
Current............................ Nil 10,949
======= =========
119
XYZ ENTERTAINMENT PTY LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE PERIOD FROM OCTOBER 17, 1994 (DATE OF INCEPTION) TO DECEMBER 31, 1994
AND THE YEAR ENDED DECEMBER 31, 1995
NOTE 12--SUMMARY OF DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY ACCEPTED
IN AUSTRALIA AND THE UNITED STATES
As stated in note 1, the consolidated financial statements of XYZ have been
prepared in accordance with accounting principles generally accepted in
Australia, which differ in certain significant respects from those generally
accepted in the United States. A description of the major differences between
Australian GAAP and US GAAP affecting the Company follows:
(a) STATEMENT OF CASH FLOWS
Under US GAAP, a Statement of Cash Flows would not provide a subtotal for
"net cash used in operating activities before changes in assets and liabilities"
as shown in Reconciliation of Net Loss to Net Cash Used in Operating Activities.
(b) DEFERRED TAXATION
Australian GAAP adopts the full liability method of tax effect accounting
whereby deferred tax assets and liabilities arising from timing differences are
recorded in the balance sheet at the rate of tax expected to be applicable at
the time those timing differences reverse. A deferred tax asset in relation to
available tax losses may be recognized to the extent that there is virtual
certainty of its recovery against future taxable income.
Under US GAAP, deferred taxes are provided on all temporary differences.
Temporary differences encompass timing differences and other events that create
differences between the tax basis of an asset or liability and its reported
amount in the financial statements. A deferred tax asset is recorded in a loss
period and is reduced by a valuation allowance to the extent it is more likely
than not that the deferred tax asset will not be realized.
No deferred tax asset has been recognized in these accounts.
(c) INVESTMENTS IN AND ADVANCES TO ASSOCIATED COMPANIES
The Economic Entity equity accounts for its investments in associated
companies in equity supplementary financial statements. Corporations in which
the Economic Entity has a material interest and over which the Economic Entity
exercises significant influence, but does not control, are considered to be
associated companies. The ability to exercise significant influence over the
strategic operating, investing and financing policies of a company may be
indicated by, for example, representation on the board of directors,
participation in policy-making processes, material intercompany transactions,
interchange of management personnel or provision of technical information.
Investments in associated companies are carried at the lower of cost and
recoverable amount. Dividends are recorded in the profit and loss account after
they have been declared by the associated company in a general meeting.
Under US GAAP, the equity method of accounting is used for investments in
which the Company exerts significant influence. Under this method, the
investment, originally recorded at cost, is adjusted to recognize the Company's
share of net earnings or losses of the associates, limited to the extent of the
Company's investment in and advances to the associates, including any debt
guarantees or other contractual funding commitments.
120
XYZ ENTERTAINMENT PTY LTD
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE PERIOD FROM OCTOBER 17, 1994 (DATE OF INCEPTION) TO DECEMBER 31, 1994
AND THE YEAR ENDED DECEMBER 31, 1995
Investments in and advances to associated companies are as follows:
$A
Investment......................................................... 1
Amounts due from associated company (net of provision
for non-recoverability of $A1,696,160).......................... 245,517
-------
245,518
=======
(d) RECONCILIATION OF NET LOSS AND STOCKHOLDERS' DEFICIENCY AS REPORTED
UNDER AUSTRALIAN GAAP TO US GAAP
A reconciliation of net loss and stockholders' deficiency as reported under
Australian GAAP to US GAAP is not required as there is no difference between the
results reported under Australian GAAP and US GAAP at the balance date.
FAIR VALUE OF OTHER FINANCIAL INSTRUMENTS AND OTHER DISCLOSURES
The carrying amount of the following instruments approximate fair value
because of the short maturity of these instruments--cash at bank, promissory
notes, trade and other receivables, and trade creditors and accruals (including
amounts owing to related entities).
NEW ACCOUNTING PRINCIPLES
The US Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121")
which is required to be adopted by affected companies for fiscal years beginning
after December 15, 1995. The Company does not believe that the provisions of
SFAS 121 will have a material effect on the Company's reported results.
NOTE 13--REPORTING OF SIX MONTH PERIODS
Six Months
Six Months Ended
Ended December 31,
June 30, 1995 1995
------------- ------------
$A $A
Revenue
Channel Supply............................. 100,747 1,016,344
Other...................................... Nil 592,149
Interest................................... 62,587 133,704
---------- ----------
163,334 1,742,197
Operating Expenses
Cost of services........................... 15,732,400 8,945,175
Selling, general and administrative ....... 7,162,916 5,312,681
Depreciation and amortization.............. 1,366,875 2,227,862
---------- ----------
24,262,191 16,485,718
---------- ----------
NET LOSS........................................ 24,098,857 14,743,521
========== ==========
121
AUDITORS' REPORT
To the shareholders of
Saturn Communications Limited (formerly Kiwi Cable Company Limited):
We have audited the accompanying financial statements of Saturn
Communications Limited (formerly Kiwi Cable Company Limited) for the years ended
31 December 1994 and 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on those
financial statements based on our audits.
We conducted our audits in accordance with New Zealand Auditing Standards,
which do not differ substantially from generally accepted auditing standards in
the United States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free from material misstatements. An audit includes examining, on a test
basis, evidence supporting 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, the financial statements referred to above present fairly,
in all material respects the financial position of Saturn Communications Limited
as of 31 December 1994 and 1995, and the results of the Company's operations for
the years then ended in accordance with New Zealand Accounting Standards.
There are certain differences between New Zealand Accounting Standards and
those generally accepted in the United States of America. Application of the
generally accepted accounting principles in the United States of America would
not result in material differences to these financial statements.
Arthur Andersen
Wellington, New Zealand
20 February 1996
122
SATURN COMMUNICATIONS LIMITED
STATEMENT OF FINANCIAL PERFORMANCE
For the years
Ended 31 December
-----------------
Note 1994 1995
NZ$ NZ$
Programming Revenue.............. 70,389 169,223
Other Revenue.................... -- 57,835
---------- -----------
Total Revenue.................... 70,389 227,058
Expenses
Programming Expenses............. 203,901 448,243
Selling, general & administration 684,811 1,306,969
Management fee expense to 309,426 17,209
related party.................
Other operating expenses......... 845,791 2,506,326
---------- -----------
Deficit before taxation for the 2 (1,973,540) (4,051,689)
year..........................
Income tax expense............... 11 -- --
----------- ----------
Net deficit for the year......... (1,973,540) (4,051,689)
=========== ==========
The accompanying notes form an integral part of these financial statements.
123
SATURN COMMUNICATIONS LIMITED
STATEMENT OF MOVEMENTS IN EQUITY
FOR THE YEARS ENDED 31 DECEMBER 1994 and 1995
NZ$
----------
Balance, at December 31, 1993...................................... (2,314,485)
Contributions from owners.......................................... 7,155,259
Net deficit........................................................ (1,973,540)
-----------
Balance, at December 31, 1994...................................... 2,867,234
Net deficit........................................................ (4,051,689)
-----------
Balance, at December 31, 1995...................................... (1,184,455)
===========
The accompanying notes form an integral part of these financial statements.
124
SATURN COMMUNICATIONS LIMITED
STATEMENT OF FINANCIAL POSITION
As at 31 December
---------------------
Note 1994 1995
NZ$ NZ$
Owner's Equity
Share capital [Shares issued: 347,368
(1994: 347,368)]...................... 3 347,368 347,368
Reserves................................. 3 6,981,575 6,981,575
Retained earnings........................ (4,461,709) (8,513,398)
----------- -----------
2,867,234 (1,184,455)
Non-Current Liabilities
Related party loan....................... 8 -- 3,076,199
Current Liabilities
Accounts Payable & Accruals
Trade creditors..................... 103,584 135,894
Other............................... 110,868 122,207
----------- ----------
214,452 258,101
Employee Entitlements.................... 24,554 62,747
Converter Deposits....................... 24,356 --
Current-portion finance lease liability.. 9 23,701 14,270
Related party payables................... 8 -- 879,336
----------- ----------
287,063 1,214,454
----------- ----------
Total Liabilities And Equity............. 3,154,297 3,106,198
=========== ==========
The accompanying notes form an integral part of these financial statements.
125
SATURN COMMUNICATIONS LIMITED
STATEMENT OF FINANCIAL POSITION--(Continued)
As at 31 December
--------------------
Note 1994 1995
NZ$ NZ$
Non-Current Assets
Property, plant and equipment
Cost ............................. 3,297,551 4,150,307
Accumulated depreciation.......... (1,300,597) (1,887,172)
----------- -----------
4 1,996,954 2,263,135
Investments--Unlisted Shares.......... -- 5,000
---------- -----------
1,996,954 2,268,135
Current Assets
Cash . 733,407 379,547
Accounts receivables
Customers....................... -- 21,746
Employees....................... 34,472 32,545
Others.......................... 17,143 33,463
Provision for doubtful debts.... -- (10,000)
---------- ----------
51,615 77,754
Inventories.......................... 170,709 160,074
Prepayments.......................... -- 29,351
Related party receivables............ 8 201,612 191,337
---------- -----------
1,157,343 838,063
---------- -----------
Total Assets......................... 3,154,297 3,106,198
========== ===========
The accompanying notes form an integral part of these financial statements
126
SATURN COMMUNICATIONS LIMITED
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 DECEMBER 1995
[Enlarge/Download Table]
For the years ended
31 December
-------------------
Note 1994 1995
NZ$ NZ$
CASH FLOWS FROM OPERATING ACTIVITIES
Cash was provided from:
Customers......................................... 22,031 171,749
Cash was disbursed to:
Payments to suppliers and employees............... (1,496,891) (3,624,231)
----------- -----------
Net cash flows from operating activities............... 10 (1,474,860) (3,452,482)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash was provided from:
Proceeds from sale of fixed assets................ 142,306 69,829
Cash was applied to:
Purchase of fixed assets.......................... (726,123) (932,018)
Purchase of investments........................... -- (5,000)
---------- -----------
Net cash flows from investing activities............... (583,817) (867,189)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash was provided from:
Share issue....................................... 3 7,155,259 --
Related party loans............................... -- 3,965,811
Cash was applied to:
Related party loan repayment...................... (4,402,250) --
----------- ----------
Net cash flow from financing activities................ 2,753,009 3,965,811
Net increase/(decrease) in cash held................... 694,332 (353,860)
Add opening cash brought forward....................... 39,075 733,407
---------- ----------
Ending cash carried forward............................ 733,407 379,547
========== ==========
The accompanying notes form an integral part of these financial statements.
127
SATURN COMMUNICATIONS LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 1995
1. STATEMENT OF ACCOUNTING POLICIES
a) The reporting entity changed its name subsequent to year end from Kiwi
Cable Company Limited to Saturn Communications Limited. These financial
statements have been prepared under the requirements of the Companies Act 1955
and the Financial Reporting Act 1993.
The measurement base adopted is that of historical cost and the New Zealand
dollar ("NZ$") as the reporting currency.
b) CURRENCY
These financial statements have been prepared in New Zealand dollars.
c) FIXED ASSETS
All fixed assets are recorded at cost. Additions, retirements and major
improvements are capitalized and costs for normal repair and maintenance are
charged to expense as incurred.
d) DEPRECIATION
Depreciation is provided on a straight line basis on all tangible fixed
assets at rates calculated to allocate the assets' cost, less estimated residual
value, over their estimated useful lives.
Major depreciation rates are:
Plant and equipment......... 10-20%
Leasehold improvements...... 20%
Office equipment............ 20%
Motor vehicles.............. 20%
e) INCOME TAX
The income tax expense charged to the statement of financial performance
includes both the current year liability and the income tax effects of timing
differences after allowing for non-assessable income and non-deductible
expenses.
Deferred taxation is calculated using the liability method on a
comprehensive basis. Debit balances in the deferred tax account arising from net
accumulated timing differences and future income tax benefits arising from
income tax losses carried forward are only recognised if realisation is more
likely than not.
f) INVENTORIES
Inventories are valued at lower of actual cost or net realisable value.
128
SATURN COMMUNICATIONS LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 1995
g) LEASES
Finance leases, which effectively transfer to the entity substantially all
of the risks and benefits incident to ownership of the leased item, are
capitalised at the lower of the fair value of the leased property, and the
present value of the minimum lease payments. The leased assets and corresponding
liabilities are disclosed and the leased assets are amortised over the period
the entity is expected to benefit from their use.
Operating lease payments, where the lessors effectively retain
substantially all the risks and benefits of ownership of the leased items, are
included in the determination of the operating surplus in equal instalments over
the lease term.
h) EXPENDITURE CARRIED FORWARD
Significant items of expenditure having a benefit or relationship to more
than one period are written off over the period to which they relate.
i) REVENUE RECOGNITION
Monthly service are recognised as revenue in the period the related
services are provided to the subscribers. Installation fees are recognised as
revenue to the extent of direct selling costs.
j) FOREIGN CURRENCIES
Transactions in foreign currencies are translated at the New Zealand rate
of exchange ruling at the date of transaction.
At balance date foreign monetary assets and liabilities are translated at
the closing rate, and exchange variations arising from these translations are
included in the statement of financial performance as operating items.
ADDITIONAL UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES DISCLOSURES
k) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from these estimates.
l) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and investments with original
maturities of less than three months.
129
SATURN COMMUNICATIONS LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 1995
m) NEW ACCOUNTING PRINCIPLES
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be disposed of" ("SFAS 121")
which is required to be adopted by affected companies for fiscal years beginning
after December 15, 1995. SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used by the Company be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company adopted the
principles of this statement on January 1, 1996. The provisions of SFAS 121 did
not have an effect on the Company's reported results.
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 123 "Accounting for the Stock-Based
Compensation" ("SFAS 123") which is required to be adopted by affected companies
for fiscal years beginning after December 15, 1995. The Company does not believe
that the provisions of SFAS 123 will have a material effect on the Company's
reported results.
n) CHANGES IN ACCOUNTING POLICIEs
There have been no material changes in accounting policies during the year.
All policies have been applied on consistent bases with previous years.
2. DEFICIT BEFORE TAXATION
HAS BEEN DETERMINED
1994 1995
NZ$ NZ$
After charging:
Audit fees and expenses............ 15,080 6,000
Depreciation....................... 570,904 586,575
Interest........................... 8,151 82
Rental and leasing costs........... 71,804 77,489
3. SHARE CAPITAL
1994 1995
NZ$ NZ$
Issued 347,368 ordinary shares of $1.00 each
(1994 347,368 shares) fully paid......... 347,368 347,368
------- -------
347,368 347,368
======= =======
On 8 July 1994 United International Holdings, Inc, (UIH), a publicly listed
company incorporated in the USA, acquired a 50% interest in the company via the
issue of 173,684 shares by the company.
130
SATURN COMMUNICATIONS LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS--(Continued)
FOR THE YEAR ENDED 31 DECEMBER 1995
The shares were purchased by UIH at a price of $US14.39 ($NZ24.12), giving
rise to a share premium reserve at balance date of $US2,389,509 ($NZ4,005,883).
Also on the 8 July 1994 the balance of the Todd International loan account,
being $US 1,775,000 ($NZ2,975,692) after forgiveness of $US50,176 ($NZ84,117)
and repayment of $US900,000 ($NZ1,508,801), converted to equity.
4. FIXED ASSETS
[Enlarge/Download Table]
1994
-----------------------------------
Accumulated Net Book
Cost Depreciation Value
-------- ------------ ----------
Leasehold improvements................................. 121,516 (49,341) 72,175
Office equipment (including Finance Lease Assets)...... 227,909 (74,638) 153,271
Plant and equipment.................................... 2,895,750 (1,159,362) 1,736,388
Motor vehicles......................................... 52,376 (17,256) 35,120
--------- ---------- ---------
3,297,551 (1,300,597) 1,996,954
========= ========== =========
[Enlarge/Download Table]
1995
-----------------------------------
Accumulated Net Book
Cost Depreciation Value
-------- ------------ ----------
Leasehold improvements................................. 127,912 (74,197) 53,715
Office equipment (including Finance Lease Assets)...... 445,160 (143,085) 302,075
Plant and equipment.................................... 3,477,675 (1,640,460) 1,837,215
Motor vehicles......................................... 99,560 (29,430) 70,130
--------- ---------- ---------
4,150,307 (1,887,172) 2,263,135
========= ========== =========
5. CONTINGENT LIABILITIES
There are no contingent liabilities outstanding at year end (1994: nil).
6. CAPITAL EXPENDITURE COMMITMENTS
Estimated capital expenditure contracted for at balance date but not
provided for NZ$659,235 (1994: nil).
131
SATURN COMMUNICATIONS LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS--(Continued)
FOR THE YEAR ENDED 31 DECEMBER 1995
7. OPERATING LEASE COMMITMENTS
At balance date the Company had the following operating lease commitments
for office space and certain vehicles:
[Enlarge/Download Table]
1995 1994
NZ$ NZ$
Payable:
within 1 year................................................ 449,982 84,985
between 1 and 2 years........................................ 457,468 82,535
between 2 and 3 years........................................ 357,915 80,031
between 3 and 4 years........................................ 233,425 52,487
between 4 and 5 years........................................ 233,425 52,487
greater than 5 years......................................... 571,989 393,653
--------- -------
2,304,204 746,178
========= =======
8. RELATED PARTIES
During the year ended December 31, 1995, Saturn Communications Limited were
involved in the following related party transactions:
United International Holdings, Inc
(significant shareholder)
Received funding.........................NZ$3,910,256 (1994: nil)
Funding was provided by United International Holdings for Saturn to
meet its day to day obligations. The funding has been provided interest free and
repayable on demand. Although the amount is repayable on demand, a call will not
be made until Saturn can afford to meet its day to day obligations and pay back
this funding.
An affiliate of Todd International
Limited (significant shareholder)
Received funding............................NZ$45,279 (1994: nil)
Todd provided funding allowing Saturn to meet its day to day obligations.
An affiliate of United International Holdings
Received payment of prior year balance
Cash Received............................... NZ$22,195 (1994: nil)
Balance Receivable.......................... NZ$12,227 (1994: $34,422)
Saturn also have a receivable balance owing from:
Todd International Limited (significant
shareholder)
Receivable.............................NZ$191,337(1994: NZ$201,613)
The receivable from Todd International is denominated in US dollars and is
on interest free terms.
132
SATURN COMMUNICATIONS LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS--(Continued)
FOR THE YEAR ENDED 31 DECEMBER 1995
Funding was provided by United International Holdings for Saturn to meet
its day to day obligations. The funding has been provided interest free and
repayable on demand. Although the amount is repayable on demand a call will not
be made until Saturn can afford to meet its day to day obligations and pay back
this funding.
United International Holdings--Tahiti
(subsidiary of United International
Holdings, Inc.) Received payment of
prior year balance
Cash Received............................ NZ$ Nil (1994: $22,195)
Balance Receivable....................... NZ$ 12,227 (1994: $12,227)
Saturn also has the following balances with:
Todd International Limited (significant shareholder)
Receivable............................... NZ$191,337(1994: $201,612)
Payable.................................. NZ$ 45,279(1994: Nil)
The receivable from Todd International is denominated in US dollars and is
on interest free terms. The payable is denominated in New Zealand dollars and is
interest free repayable on demand.
9. FINANCE LEASES
At 31 December the following finance lease existed:
Asset Lease
Value Liability
NZ$ NZ$
Canon photocopier and fax
1995........................................ 19,263 14,270
1994........................................ 24,400 23,701
The finance lease payment commitments as at balance date were payable:
1995 1994
NZ$ NZ$
within 1 year................................ 7,752 9,431
between 1 and 2 years........................ 6,518 7,752
between 2 and 3 years........................ -- 6,718
------ ------
14,270 23,901
====== ======
133
SATURN COMMUNICATIONS LIMITED
NOTES TO AND FORMING PART OF THE FINANCIAL STATEMENTS--(Continued)
FOR THE YEAR ENDED 31 DECEMBER 1995
10. RECONCILIATION OF NET DEFICIT AFTER TAXATION TO NET CASH OUTFLOW FROM
OPERATING ACTIVITIES
[Enlarge/Download Table]
For the Years Ended
December 31,
--------------------
1994 1995
NZ$ NZ$
Net deficit after taxation................................... (1,973,540) (4,051,509)
Add non-cash items:
Depreciation............................................ 570,905 586,575
Provision for doubtful debts............................ -- 10,000
Add/(less) movements in working capital items
(Increase) in receivables and prepayments............... (48,358) (65,489)
(Increase)/decrease in inventories...................... (170,709) 10,635
Increase/(decrease) in accounts payable and accruals.... 134,897 19,293
Increase in employee entitlements....................... 11,945 38,193
---------- ----------
Net cash outflow from operations................... (1,474,860) (3,452,302)
========== ==========
11. INCOME TAXATION
The Company has accumulated tax losses of approximately NZ$7,500,000 (1994:
NZ$3,785,650), tax effect NZ$2,475,000 (1994:NZ$1,249,330), carried forward and
available to offset against future assessable income. The benefit of these
losses has not been brought to account. The ability to utilise these losses will
not expire, subject to the company maintaining continuity of ownership and
meeting other requirements of income tax legislation.
The Company's net deferred tax asset is as follows:
As at December 31,
--------------------------
1994 1995
-------- --------
Net operating loss carryforward................ 1,249,330 2,475,000
Valuation allowance............................ (1,249,330) (2,475,000)
----------- -----------
Net deferred tax asset......................... -- --
=========== ===========
134
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 28th day of March, 1997.
UIH Australia/Pacific, Inc.
a Colorado corporation
By: /S/ J. Timothy Bryan
---------------------------------
J. Timothy Bryan
Chief Financial Officer
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 Director and Chairman of
the Board March 27, 1997
*
--------------------------------------
Michael T. Fries Director, President and
Chief Executive Officer March 27, 1997
/s/ J. Timothy Bryan
-------------------------------------
J. Timothy Bryan Director and Chief
Financial Officer March 27, 1997
*
-------------------------------------
Valerie L. Cover Controller (Principal
Accounting Officer) March 27, 1997
*
------------------------------------
Mark L. Schneider Director March 27, 1997
* By: /S/ J. Timothy Bryan
---------------------------
J. Timothy Bryan
Attorney-in-fact
135
Dates Referenced Herein and Documents Incorporated by Reference
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