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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1999
COMMISSION FILE NUMBER 333-64709
TELEMUNDO HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3993031
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2290 WEST 8TH AVENUE
HIALEAH, FLORIDA 33010
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (305) 884-8200
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No __
As of August 12, 1999 there were 10,000 shares of common stock of the
registrant outstanding, all of which were owned by affiliates. There is no
established public trading market for the registrant's common stock.
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<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
INDEX
PAGE
PART I. FINANCIAL INFORMATION:* NO.
----
Item 1. Financial Statements
Consolidated Statements of Operations for the Three and Six Months
Ended June 30, 1999 and of the Predecessor for the Three and Six
Months Ended June 30, 1998 (Unaudited)............................. 2
Consolidated Balance Sheets at June 30, 1999 (Unaudited)
and December 31, 1998.............................................. 3
Consolidated Statement of Changes in Common Stockholders' Equity
for the Six Months Ended June 30, 1999 (Unaudited)................ 4
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and of the Predecessor for the Six Months
Ended June 30, 1998 (Unaudited)................................... 5
Notes to Consolidated Financial Statements (Unaudited)................. 6
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition..................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk...... 15
PART II. OTHER INFORMATION, AS APPLICABLE
Item 6. Exhibits and Reports on Form 8-K................................ 15
SIGNATURE.................................................................. 16
* For purposes of this report, unless the context requires otherwise,
references to the "Company" include Telemundo Holdings, Inc. and its
subsidiaries and references to the "Predecessor" refer to Telemundo Group,
Inc. and its subsidiaries with respect to periods prior to the Merger (as
defined herein).
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------------- ---------------------------
COMPANY PREDECESSOR COMPANY PREDECESSOR
------- ----------- ------- -----------
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue........................................ $42,261 $56,930 $ 77,463 $101,536
------- ------- -------- --------
Costs and expenses:
Direct operating costs......................... 15,454 26,688 30,701 53,099
Selling, general and administrative expenses
other than network and corporate............ 12,506 10,673 24,926 20,615
Network expenses............................... - 7,945 - 15,156
Corporate expenses............................. 1,349 1,723 2,801 3,343
Depreciation and amortization.................. 6,977 3,880 13,890 7,478
------- ------- -------- --------
36,286 50,909 72,318 99,691
------- ------- -------- --------
Operating income................................... 5,975 6,021 5,145 1,845
Merger related expenses............................ - (1,295) - (2,812)
Interest expense - net............................. (8,961) (5,353) (17,766) (10,681)
------- ------- -------- --------
Loss before income taxes and minority
interest....................................... (2,986) (627) (12,621) (11,648)
Income tax benefit (provision)..................... 3,242 (1,172) 4,572 (2,337)
Minority interest.................................. (361) (771) (722) (1,542)
------- ------- -------- --------
Net loss........................................... $ (105) $(2,570) $ (8,771) $(15,527)
======= ======= ======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
<PAGE>
<TABLE>
<CAPTION>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
JUNE 30, DECEMBER 31,
Assets 1999 1998
- ---------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................. $ 2,305 $ 8,680
Accounts receivable, less allowance for doubtful accounts of $7,507
and $7,585........................................................... 27,732 30,768
Television programming.................................................... 6,020 7,742
Prepaid expenses and other................................................ 3,367 2,819
Due from Network Company, net............................................. 5,218 3,624
-------- ---------
Total current assets............................................. 44,642 53,633
Property and equipment, net................................................... 54,534 50,021
Television programming........................................................ 723 846
Other assets.................................................................. 14,365 15,991
Broadcast licenses and other intangible assets, net........................... 635,549 650,907
-------- ---------
$749,813 $771,398
======== ========
Liabilities and Stockholders' Equity
- ---------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable and accrued expenses..................................... $ 35,874 $ 35,648
Television programming obligations........................................ 1,525 1,303
Current portion of long-term debt......................................... 3,188 1,063
-------- --------
Total current liabilities......................................... 40,587 38,014
Long-term debt................................................................ 397,113 398,889
Deferred taxes, net........................................................... 72,108 81,812
Other liabilities............................................................. 28,827 32,770
-------- --------
538,635 551,485
-------- --------
Minority interest............................................................. 5,464 5,428
-------- --------
Contingencies and commitments
Common stockholders' equity:
Common stock, $.01 par value, 10,000 shares issued and outstanding........ - -
Additional paid-in capital................................................ 214,013 214,013
Retained earnings (deficit)............................................... (8,299) 472
-------- --------
205,714 214,485
-------- --------
$749,813 $771,398
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY (UNAUDITED)
(In thousands, except share data)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
NUMBER OF ADDITIONAL RETAINED COMMON
SHARES COMMON PAID-IN EARNINGS STOCKHOLDERS'
OUTSTANDING STOCK CAPITAL (DEFICIT) EQUITY
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998.............. 10,000 $ - $214,013 $ 472 $214,485
Net loss................................ - - - (8,771) (8,771)
------ --------- -------- ------- --------
Balance, June 30, 1999.................. 10,000 $ - $214,013 $(8,299) $205,714
====== ========= ======== ======= ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
Six Months Ended June 30 1999 1998
- --------------------------------------------------------------------------------- ---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................................. $ (8,771) $(15,527)
Charges not affecting cash:
Depreciation and amortization......................................... 13,890 7,478
Interest accretion.................................................... 7,349 2,998
Provision for losses on accounts receivable........................... 687 1,285
Minority interest..................................................... 722 1,542
Deferred taxes........................................................ (5,237) -
Changes in assets and liabilities:
Accounts receivable................................................... 3,114 2,658
Television programming................................................ 1,845 (2,108)
Television programming obligations.................................... 222 409
Due from Network Company, net......................................... (1,594) -
Accounts payable and accrued expenses and other....................... (1,633) 10,065
-------- --------
Cash flows provided from operating activities.................. 10,594 8,800
-------- --------
CASH FLOWS FROM INVESTING ACTIVITY:
Additions to property and equipment....................................... (7,529) (5,589)
-------- --------
Cash flows used in investing activity.......................... (7,529) (5,589)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments to minority interest partner..................................... (1,646) (1,496)
Payments under new credit facility........................................ (7,000) -
Merger costs.............................................................. (794) (446)
Proceeds from exercise of warrants........................................ - 3,347
Payments of obligations under capital leases.............................. - (345)
Borrowings under old credit facility...................................... - 5,397
Payments under old credit facility........................................ - (9,221)
-------- --------
Cash flows used in financing activities........................ (9,440) (2,764)
-------- --------
Increase (decrease) in cash and cash equivalents.......................... (6,375) 447
Cash and cash equivalents, beginning of period............................ 8,680 2,378
-------- --------
Cash and cash equivalents, end of period.................................. $ 2,305 $ 2,825
======== ========
Supplemental cash flow information:
Interest paid......................................................... $ 9,909 $ 7,090
======== ========
Income taxes paid, including Puerto Rico withholding taxes............ $ 2,041 $ 163
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ------------------------------------------------------------------------------
1. BUSINESS
Telemundo Holdings, Inc. ("Holdings", and collectively with its subsidiaries,
the "Company") is one of two national Spanish-language television broadcast
companies currently operating in the United States. The Company owns and
operates seven full-power UHF stations serving the seven largest Hispanic Market
Areas (a term developed by Nielsen Media Research, Inc. and used by the
television industry to describe a geographically distinct television market) in
the United States--Los Angeles, New York, Miami, San Francisco, Chicago, San
Antonio and Houston. The Company also owns and operates the leading full-power
television station and related production facilities in Puerto Rico. The
Company's stations broadcast a wide variety of network programming, including
movies, dramatic series, sitcoms, telenovelas (soap operas), talk shows,
entertainment programs, national and international news, music and sporting
events. In addition, the Company supplements its network programming with local
programming focused on local news and community events.
2. MERGER AND RELATED TRANSACTIONS
On August 12, 1998 TLMD Acquisition Co., a wholly-owned subsidiary of Holdings,
acquired all the equity interests of Telemundo Group, Inc. ("Telemundo") and was
merged with and into Telemundo, with Telemundo being the surviving corporation
and becoming a wholly-owned subsidiary of Holdings (the "Merger"). Holdings is
owned 50.1% by Station Partners, LLC, 24.95% by Sony Pictures Entertainment Inc.
("Sony Pictures") and 24.95% by Liberty Media Corporation ("Liberty")
(collectively, the "Purchaser"). Station Partners, LLC is owned 68% by Apollo
Investment Fund III, L.P. ("Apollo Investment") and 32% by Bastion Capital Fund,
L.P. ("Bastion").
Substantially contemporaneously with the completion of the Merger, TLMD
Acquisition Co. accepted for payment an aggregate of $191.7 million principal
amount of the outstanding 10.5% Senior Notes Due 2006 (the "10.5% Notes") of
Telemundo (representing 99.9% of such issue) tendered in connection with a
tender offer by TLMD Acquisition Co. pursuant to an Offer to Purchase and
Consent Solicitation Statement, as amended on July 20, 1998 (the "Tender
Offer").
Prior to the Merger, Telemundo produced or acquired and distributed its network
programming through its network operations (the "Telemundo Network"), which
provided programming 24-hours a day to Telemundo's stations and network
affiliates. In connection with the Merger, the Company sold its network
operations (the "Network Sale"), which consisted of substantially all of the
programming and production assets and the related liabilities of the Telemundo
Network, to Telemundo Network Group LLC (the "Network Company"), a company
formed in connection with the Merger which is equally owned by a subsidiary of
Sony Pictures and a subsidiary of Liberty. The Network Company entered into an
affiliation agreement with the Company and related affiliation agreements with
the Company's stations (collectively, the "Affiliation Agreement"), pursuant to
which the Network Company provides network programming to the Company, and the
Company and the Network Company pool and allocate advertising revenues pursuant
to a revenue sharing arrangement. As a result, the Company is no longer required
to bear the costs or expenses related to, or fund or make capital expenditures
in connection with, the development of network programming or the operations of
the Telemundo Network.
Holdings had no operations prior to the Merger. Approximately $773.0 million was
required to fund the Merger and the related transactions. Of this amount, $300.0
million was provided from borrowings under new credit facilities providing for
aggregate borrowings of up to $350.0 million (the "New Credit Facilities"),
$125.0 million was provided from the proceeds of a $218.8 million aggregate
principal amount at maturity Senior Discount Notes due 2008 (the "Senior
Discount Notes") offering, $274.0 was provided from Purchaser equity
contributions (the "Equity Contributions") and $74.0 million was provided from
the Network Sale.
6
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------
The following summarized, unaudited pro forma results of operations for the
three and six months ended June 30, 1998, assume the Merger, the Tender Offer,
initial borrowings under the New Credit Facilities, the Equity Contributions,
issuance of the Senior Discount Notes and the Network Sale occurred on January
1, 1998. The pro forma information is presented for informational purposes and
is not necessarily indicative of the operating results that would have occurred
had the Merger and related transactions been consummated on January 1, 1998, nor
is it necessarily indicative of future operations.
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
(In thousands) 1998 1998
---------------------------------------------------------------------------
<S> <C> <C>
Net revenue........................ $42,249 $74,724
Operating income................... 8,958 9,511
Net loss........................... (1,686) (11,077)
</TABLE>
In November 1997, after the announcement of the proposed Merger, Telemundo and
its directors at the time of the Merger were named as defendants in six
purported class actions filed on behalf of Telemundo's pre-Merger public
stockholders, which were later consolidated into one action. The suits are
virtually identical and allege that Telemundo and its directors violated
fiduciary duties owed to Telemundo's public stockholders by entering into the
merger agreement with the Purchaser. This action was terminated on April 12,
1999 upon the approval by the Court of the voluntary stipulation of dismissal
without prejudice executed by the parties. No compensation of any kind was paid.
The Company and its subsidiaries are involved in a number of actions arising out
of the ordinary course of business and are contesting the allegations of the
complaints in each pending action and believe, based on current knowledge, that
the outcome of all such actions will not have a material adverse effect on the
Company's consolidated results of operations or financial condition.
3 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
As a result of the Merger and related transactions, the accompanying financial
statements of the Predecessor (for purposes of the financial statements and
related notes, the term "Predecessor" refers to Telemundo prior to the Merger
and related transactions) and the Company are not comparable in all material
respects and are separated by a line, since the financial statements report
financial position, results of operations, and cash flows of these two separate
entities.
In the opinion of management, the accompanying unaudited consolidated financial
statements of the Company and the Predecessor include all adjustments
(consisting of normal recurring accruals only) necessary to present fairly the
Company's financial position at June 30, 1999, and the results of operations and
cash flows for all periods presented. The results of operations for interim
periods are not necessarily indicative of the results to be obtained for the
entire year.
For a summary of significant accounting policies, which have not changed from
December 31, 1998, and additional financial information, see the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
Certain reclassifications have been made in the prior year's financial
statements to conform with the current year's presentation.
4. TRANSACTIONS WITH AFFILIATES
Apollo Investment and Bastion, through Station Partners, LLC, are significant
shareholders of the Company. Apollo Investment may be deemed to be an affiliate
of TLMD Partners II, L.L.C., a significant shareholder of Telemundo prior to the
Merger. Bastion was a significant shareholder of Telemundo prior to the Merger.
Sony Pictures and Liberty, through their subsidiaries, own the Network Company
and are significant shareholders of the Company. Pursuant to the Affiliation
Agreement, the Company recorded $12.9 million in incremental net revenue for the
six months ended June 30, 1999, which is included in due from Network Company,
net. In addition, the Network Company pays certain costs on behalf of the
Company and the Company pays certain costs on behalf of the Network Company,
which are fully reimbursed. The Company believes these costs to be at fair value
and are included in due from Network Company, net.
7
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------
As a result of the Affiliation Agreement, the Company relies solely on the
Network Company for all of its network programming and is dependent, to a
significant extent, on the ability of the Network Company to generate
advertising revenues. The Spanish-language television market shares for the
Company's stations are dependent upon the Network Company's ability to produce
or acquire and distribute programming which attracts significant viewer levels.
If the programming provided by the Network Company fails to attract viewers,
each of the Company's and the Network Company's ability to attract advertisers
and generate revenues and profits will be impaired. There can be no assurance
that the programming provided by the Network Company will achieve or maintain
satisfactory viewership levels or that the Company or the Network Company will
be able to generate significant advertising revenues.
8
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
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INTRODUCTION
On August 12, 1998, TLMD Acquisition Co., a wholly-owned subsidiary of Telemundo
Holdings, Inc. ("Holdings", collectively with its subsidiaries, the "Company"),
acquired all the equity interests of Telemundo Group, Inc. ("Telemundo") and was
merged with and into Telemundo, with Telemundo being the surviving corporation
and becoming a wholly-owned subsidiary of Holdings (the "Merger"). Holdings is
owned 50.1% by Station Partners, LLC, 24.95% by Sony Pictures Entertainment Inc.
("Sony Pictures") and 24.95% by Liberty Media Corporation ("Liberty")
(collectively, the "Purchaser"). Station Partners, LLC is owned 68% by Apollo
Investment Fund III, L.P. ("Apollo Investment") and 32% by Bastion Capital Fund,
L.P. ("Bastion").
The Company is one of two national Spanish-language television broadcast
companies currently operating in the United States. The Company owns and
operates seven full-power UHF stations serving the seven largest Hispanic Market
Areas in the United States--Los Angeles, New York, Miami, San Francisco,
Chicago, San Antonio and Houston. Four of these markets are among the five
largest general Market Areas in the United States. ("Market Area" refers to
Designated Market Area, a term developed by Nielsen Media Research, Inc. and
used by the television industry to describe a geographically distinct television
market). The Company also owns and operates the leading full-power television
station and related production facilities in Puerto Rico.
Prior to the Merger, Telemundo produced or acquired and distributed its network
programming through its network operations (the "Telemundo Network"), which
provided programming 24-hours a day to Telemundo's stations and network
affiliates. In connection with the Merger, the Company sold its network
operations (the "Network Sale"), which consisted of substantially all of the
programming and production assets and the related liabilities of the Telemundo
Network, to Telemundo Network Group LLC (the "Network Company"), a company
formed in connection with the Merger which is equally owned by a subsidiary of
Sony Pictures and a subsidiary of Liberty. The Network Company entered into an
affiliation agreement with the Company and related affiliation agreements with
the Company's stations (collectively, the "Affiliation Agreement"), pursuant to
which the Network Company provides network programming to the Company, and the
Company and the Network Company pool and allocate advertising revenue pursuant
to a revenue sharing arrangement. As a result, the Company is no longer required
to bear the costs or expenses related to, or fund or make capital expenditures
in connection with, the development of network programming or the operations of
the Telemundo Network. Including the Company's stations, the Network Company
currently serves 63 markets in the United States, including the 37 largest
Hispanic markets, and reaches approximately 85% of all U.S. Hispanic households.
Seasonal revenue fluctuations are common in the television broadcasting industry
and the Company's revenue, particularly in Puerto Rico, reflects seasonal
patterns with respect to advertiser expenditures. The first quarter generally
produces the lowest level of revenue due to the reduced demand for advertising
time. Because costs are more ratably spread throughout the year, the impact of
this seasonality on operating income is more pronounced during the first
quarter. However, the allocation of advertising revenue pursuant to the
Affiliation Agreement will impact the effects of historical seasonality.
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Company's consolidated
financial statements and related notes. Except for historical information
contained herein, certain matters discussed are forward-looking disclosures that
involve risks and uncertainties, including (without limitation) those risks
associated with the effect of economic conditions; the Company's outstanding
indebtedness and leverage; restrictions imposed by the terms of the Company's
indebtedness; changes in advertising revenue which are caused by changes in
national and local economic conditions, the relative popularity of the Network
Company's and the Company's programming, the demographic characteristics of the
Company's markets and other factors outside the Company's control; future
capital requirements; the impact of competition, including its impact on market
share and advertising revenue in each of the Company's markets; the loss of key
employees; the modification or termination of the Affiliation Agreement; the
impact of litigation; the impact of current or pending legislation and
regulations, including Federal Communications Commission ("FCC") rulemaking
proceedings; and other factors which may be described from time to time in
filings of the Company with the Securities and Exchange Commission.
Forward-looking statements generally can be identified by the use of
forward-looking terminology
9
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONTINUED)
- ------------------------------------------------------------------------------
such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe"
or "continue" or the negative thereof or variations thereon or similar
terminology. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable at this time, it can give no
assurance that such expectations will prove to have been correct.
TRANSACTIONS AFFECTING COMPARABILITY OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
Pursuant to the Merger, Telemundo became a wholly-owned subsidiary of Holdings
on August 12, 1998. The purchase method of accounting was used to record assets
acquired and liabilities assumed. As a result of the Merger and related
transactions, the accompanying financial statements of the Predecessor (for
purposes of "Management's Discussion and Analysis of Results of Operations and
Financial Condition" ("MD&A"), the term "Predecessor" refers to Telemundo prior
to the Merger and related transactions) and the Company are not comparable in
all material respects and are separated by a line, since the financial
statements to which MD&A relates, report financial position, results of
operations and cash flows of these two separate entities.
RESULTS OF OPERATIONS
For the three and six months ended June 30, 1998 the Predecessor's results
include the operations of the Telemundo Network and do not reflect Merger
related transactions. Consequently, the results for the three and six months
ended June 30, 1998 are not comparable to the 1999 periods, which reflect the
Merger and related transactions, including the impact of the Network Sale and
the Affiliation Agreement. Accordingly, MD&A has been presented on a historical
basis and has been supplemented with certain pro forma disclosures. The pro
forma results of operations for the three and six months ended June 30, 1998
include the pro forma impact of the Network Sale, the Affiliation Agreement,
interest expense on the Company's new indebtedness, amortization of broadcast
licenses and other intangible assets resulting from the Merger, Merger related
financing costs and the impact of other Merger related transactions, as if these
transactions had occurred on January 1, 1998. The pro forma results of
operations for the three and six months ended June 30, 1998 are not necessarily
indicative of what would have occurred if the Merger and related transactions
had taken place on January 1, 1998.
Net revenue for the three and six months ended June 30, 1999 as compared to the
corresponding periods of 1998 was as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
COMPANY PREDECESSOR COMPANY PREDECESSOR
------- ----------- ------- -----------
1999 1998 CHANGE 1999 1998 CHANGE
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Network and National Spot........ $ 6,512 $25,043 (74)% $11,495 $ 45,035 (74)%
Local............................ 25,368 23,868 6 % 44,800 41,502 8 %
Incremental revenue from
Affiliation Agreement......... 6,216 - 12,882 -
Other revenue.................... 4,165 8,019 (48)% 8,286 14,999 (45)%
------- ------- ------- --------
Net revenue...................... $42,261 $56,930 (26)% $77,463 $101,536 (24)%
======= ======= ======= ========
</TABLE>
The decrease in network and national spot revenue for both the three and six
month periods ended June 30, 1999, as compared to the corresponding periods of
1998, is primarily the result of the Network Sale. Excluding network revenue,
national spot revenue would have decreased by 11% and 2% for the three and six
month periods ended June 30, 1999, respectively. This was a result of the
decline in overall average audience shares for the Company's U.S. stations,
offset in part by the continued strong growth in the overall Spanish-language
television market.
10
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONTINUED)
- ------------------------------------------------------------------------------
The increase in local revenue is primarily the result of WKAQ-Puerto Rico
maintaining its dominant audience share, coupled with growth in its overall
market. Local revenue for the U.S. stations increased marginally from the prior
year, where strong growth in the local Spanish-language television markets more
than offset the overall decline in audience shares.
The Telemundo network's average share of the weekday Spanish-language television
network audience was 12% during the first and second quarters of 1999, compared
to 17% and 16% during the first and second quarters of 1998, respectively. A
change in audience share typically has a delayed impact on revenue. Although
there can be no assurance, the Company believes that as a result of the Merger
and related transactions, it will likely be able to compete more effectively in
the future with expanded programming options. Since the Network Sale, certain
new programming has been introduced. However, programming provided by the
Network Company thus far has not had the effect of improving overall audience
shares.
Incremental revenue from the Affiliation Agreement represents the allocation of
Company and Network Company revenue pursuant to the Affiliation Agreement in
excess of revenue generated by the Company's U.S. stations.
Other revenue decreased primarily due to a decrease in the sale of blocks of
broadcast time to independent programmers and the elimination of international
program sales and affiliate representation revenue as a result of the Network
Sale. Other revenue may decline in the remaining 1999 quarters relative to the
prior year, as a result of the Network Sale and the Company's stations having
replaced certain time periods historically sold to independent programmers with
network programming.
On a pro forma basis, net revenue would have increased by $12,000 and $2.7
million for the three and six months ended June 30, 1999, respectively. This
would primarily have been due to an increase in network revenue included in the
allocation of pooled revenue received pursuant to the Affiliation Agreement, as
well as the increase in local revenue, offset in part by decreases in national
spot and other revenue as discussed above.
Direct operating costs decreased by 42% for the three and six month periods
ended June 30, 1999 from the corresponding periods of the prior year as a result
of the Network Sale. Excluding those costs relating to the network, direct
operating costs would have increased by 11% and 12%, respectively, for the three
and six month periods ended June 30, 1999. This was primarily the result of
increases of $1.5 million and $3.1 million for the three and six month periods
ended June 30, 1999, respectively, in station programming and production
expenses related to costs incurred to produce and acquire station programming at
WKAQ-Puerto Rico and produce local news in the U.S. The Company will continue to
incur non-network programming expenditures in connection with its stations,
including all programming expenditures for WKAQ. Pursuant to the Affiliation
Agreement, the Company incurs under certain circumstances, levels of non-network
programming expenditures which are greater than non-network programming
expenditures historically incurred by the Company's stations. However, overall
programming expenditures will be reduced from historical Predecessor levels as a
result of the Network Company incurring all network programming costs.
Selling, general and administrative expenses other than network and corporate
increased by 17% and 21% for the three and six month periods ended June 30,
1999, respectively, from the corresponding periods of the prior year. This was
primarily the result of an increase in advertising and promotional expenditures,
contractual increases in research service fees and the employment of additional
sales personnel. Pursuant to the Affiliation Agreement, the Company incurs,
under certain circumstances, levels of marketing and promotional expenditures
which are greater than marketing and promotional expenditures historically
incurred by the Company's stations.
Pursuant to the Network Sale, network expenses, which represent costs associated
with the network sales force, network engineering and other technical network
departments, network research, network sales support and business development,
affiliate relations and network general and administrative costs, are no longer
incurred by the Company.
11
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONTINUED)
- ------------------------------------------------------------------------------
Corporate expenses decreased by $374,000 and $542,000 for the three and six
month periods ended June 30, 1999, respectively, from the corresponding periods
of the prior year. This was primarily the result of a reduction in corporate
compensation in connection with the Merger, offset in part by the classification
of certain functions as corporate expenses that were classified as network
expenses in the prior year, such as corporate engineering, human resources and
management information systems.
As a result of the above, the operating income before depreciation and
amortization improved by $3.1 million and $9.7 million for the three and six
month periods ended June 30, 1999, respectively, from the corresponding periods
of the prior year. On a pro forma basis, operating income before depreciation
and amortization would have decreased by $3.0 million and $4.4 million for the
three and six months ended June 30, 1999, respectively.
Depreciation and amortization increased by $3.1 million and $6.4 million for the
three and six month periods ended June 30, 1999, respectively, from the
corresponding periods of the prior year. This was primarily a result of the
additional value of broadcast licenses and other intangible assets recorded as a
result of applying the purchase method of accounting to the Merger.
Interest expense for 1998 includes: (i) interest accrued and accreted on the
10.25% Senior Notes due 2001 ("10.25% Senior Notes") which were outstanding
during such period (approximately 99.8% of which were tendered in a repurchase
offer on February 26, 1996 and the remaining outstanding amounts were redeemed
in connection with the Merger), (ii) interest accrued and accreted on the 10.5%
Senior Notes due 2006 (the "10.5% Senior Notes") (approximately 99.9% of which
were tendered in a repurchase offer on August 12, 1998), (iii) amortization of
deferred issuance costs for the 10.5% Senior Notes, and (iv) interest and
amortization of fees on the Predecessor's revolving credit facility (the "Old
Credit Facility") which was terminated on August 12, 1998. Interest expense for
1999 includes: (i) interest and amortization of fees on the new credit
facilities providing for aggregate borrowings of up to $350.0 million (the "New
Credit Facilities") at an average interest rate of 7.2% during such period, (ii)
interest accreted on the $218.8 million aggregate principal amount at maturity
11.5% Senior Discount Notes Due 2008, which were issued at a discount and
structured to produce a yield to maturity of 11.5% per annum (the "Senior
Discount Notes"), (iii) amortization of deferred issuance costs for the New
Credit Facilities and the Senior Discount Notes and (iv) interest accrued and
accreted on the remaining 10.5% Senior Notes. Interest expense was offset by
$65,000 and $72,000 of interest income for the three months ended June 30, 1999
and 1998, respectively, and by $145,000 and $159,000 for the six months ended
June 30, 1999 and 1998, respectively.
As a result of the Merger and related transactions, the Company recorded a net
deferred tax liability of $82.4 million. This primarily represents the tax
effect of approximately $457.0 million of FCC broadcast licenses and other
identifiable intangible assets that will be expensed over periods extending up
to 40 years for financial reporting purposes that have lower tax basis, and
certain intangible assets that will not be deductible for tax purposes.
The income tax provision recorded in 1998 related to WKAQ, which is taxed
separately under Puerto Rico income tax regulations, a provision for Puerto Rico
withholding taxes related to intercompany interest, and certain federal and
state income and franchise taxes. The income tax benefit in 1999 results from
the tax effect of the reversal of deferred temporary differences offset in part
by a provision for Puerto Rico withholding taxes related to intercompany
interest. The Company is in a net operating loss position for federal income tax
purposes. The Company's use of its net operating loss carryforwards ("NOLs")
incurred prior to December 31, 1994 are subject to certain limitations imposed
by Section 382 of the Internal Revenue Code and their use will be limited. As a
result of the Merger, NOLs incurred from January 1, 1995 to August 12, 1998 will
also be subject to Section 382 limitations.
Minority interest represents the accounting impact of distributions to the 25.5%
minority partner in Video 44, which is based on a minimum preferred distribution
to such partner. Video 44 is a partnership that owns and operates WSNS-Chicago.
12
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONTINUED)
- ------------------------------------------------------------------------------
LIQUIDITY AND SOURCES OF CAPITAL
Cash flows provided from operating activities were $10.6 million and $8.8
million for the six months ended June 30, 1999 and 1998, respectively. The
increase is primarily the result of the increase in operating income before
depreciation and amortization and changes in certain asset and liability
accounts.
The Company had working capital of $4.1 million at June 30, 1999.
Capital expenditures of approximately $7.5 million were made during the six
months ended June 30, 1999 for the replacement and upgrading of equipment,
including the ongoing conversion to digital television technology. As part of
the Affiliation Agreement the Company agreed, subject to various conditions, to
incur certain levels of capital expenditures. As a result of the continued
conversion to digital television technology, the Company expects to incur
capital expenditures of approximately $17 million in 1999. As a result of the
Network Sale, the Company no longer has capital expenditure requirements with
respect to network operations.
The New Credit Facilities include a $150 million revolving credit facility with
a final maturity of September 30, 2005 (the "Revolving Credit Facility"). The
New Credit Facilities require the Company to maintain certain financial ratios
and, along with the Senior Discount Notes, impose on the Company certain
limitations or prohibitions. The Company plans on financing cash needs through
cash generated from operations and the Revolving Credit Facility, under which
there was $62 million outstanding at June 30, 1999. The Company does not
presently anticipate the need to obtain any additional financing to fund
operations.
The Company's interest income and expense are sensitive to changes in the
general level of U.S. and certain European interest rates. In this regard,
changes in these rates affect the interest earned on the Company's cash
equivalents as well as interest paid on its New Credit Facilities. To mitigate
the impact of fluctuations in interest rates, the Company entered into two fixed
rates for London Interbank Offered Rates ("LIBOR") swap transactions. If the
Company were to have borrowings outstanding for the maximum amount possible
under the New Credit Facilities, it would have $150 million principal amount
subject to changes in interest rates, whereby a change of 100 basis points would
have a $1.5 million impact on pre-tax earnings and pre-tax cash flows over a
one-year period.
YEAR 2000 ISSUE
The Company has developed plans, utilizing internal resources, to ensure its
information systems are capable of properly utilizing dates beyond December 31,
1999. Since January 1, 1997, the Company has upgraded or replaced many of its
accounting and traffic computer systems, including the conversion to new
software which is Year 2000 compliant, at a total cost of approximately
$450,000. Additionally, the Company has evaluated its other principal computer
systems and other systems utilizing computer technology and based on its current
assessments, which are largely based upon representations of third parties, has
determined they are substantially Year 2000 compliant. Although the Company
believes it is substantially Year 2000 compliant, it is currently in the process
of testing its critical information systems directly in order to ensure
compliance, which is expected to be completed by September 1, 1999. The Company
does not expect to incur more than an additional $250,000 for preparation
relating to the Year 2000 issue.
The Company is also seeking to work with its relevant customers, suppliers and
other service providers, including the Network Company, to ensure their systems
are Year 2000 compliant. If any of the Company's customers are not Year 2000
compliant, the Company could, among other things, experience delays in
collections of accounts receivable or reduced demand for advertising time.
Further, Year 2000 non-compliance by the Company's suppliers and other service
providers could adversely affect the overall operations of the Company. The
Company depends on the Network Company for the substantial majority of its
programming. Any disruptions to the Network Company's programming transmission
would directly impact the Company. Although the impact on the Company caused by
the failure of its significant customers, suppliers and other service providers
to achieve Year 2000 compliance in a timely and effective manner is uncertain,
the Company's business and results of operations could be materially adversely
affected by such failure. The amount of such potential impact has not been
estimated. However, the
13
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONTINUED)
- ------------------------------------------------------------------------------
Company does not believe that the most reasonably likely worst case Year 2000
scenario would significantly impact the Company's financial position. The
Company does not have a formal contingency plan, however in the event of a
failure in network broadcast operations the Company's disaster recovery plan
provides for broadcasting at an alternate location. Additionally, the Company's
major broadcast stations have alternate power sources.
14
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is included in the "Liquidity and Capital
Resources" section of the Company's Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in this document.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27- Financial data schedule.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the three months
ended June 30, 1999.
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELEMUNDO HOLDINGS, INC.
(Registrant)
By: /s/ Peter J. Housman II
------------------------------------------
Dated: August 13, 1999 Peter J. Housman II
Chief Financial Officer and Treasurer
16
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,305
<SECURITIES> 0
<RECEIVABLES> 35,239
<ALLOWANCES> 7,507
<INVENTORY> 0
<CURRENT-ASSETS> 44,642
<PP&E> 60,364
<DEPRECIATION> 5,830
<TOTAL-ASSETS> 749,813
<CURRENT-LIABILITIES> 40,577
<BONDS> 400,301
0
0
<COMMON> 0
<OTHER-SE> 205,714
<TOTAL-LIABILITY-AND-EQUITY> 749,813
<SALES> 77,463
<TOTAL-REVENUES> 77,463
<CGS> 0
<TOTAL-COSTS> 72,318
<OTHER-EXPENSES> 722
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,766
<INCOME-PRETAX> (13,343)
<INCOME-TAX> (4,572)
<INCOME-CONTINUING> (8,771)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,771)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
