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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 MARCH 31, 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 [ ] No [X]
As of May 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 Months
Ended March 31, 1999 and of the Predecessor for the Three Months
Ended March 31, 1998 (Unaudited)................................... 2
Consolidated Balance Sheets at March 31, 1999 (Unaudited)
and December 31, 1998............................................. 3
Consolidated Statement of Changes in Common Stockholders' Equity
for the Three Months Ended March 31, 1999 (Unaudited)............. 4
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1999 and of the Predecessor for the Three Months
Ended March 31, 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...... 14
PART II. OTHER INFORMATION, AS APPLICABLE
Item 6. Exhibits and Reports on Form 8-K................................ 14
SIGNATURE.................................................................. 15
* 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)
THREE MONTHS ENDED MARCH 31 COMPANY PREDECESSOR
- ---------------------------------------------------------------------------
1999 1998
-------- --------
Net revenue .................................... $ 35,202 $ 44,606
-------- --------
Costs and expenses:
Direct operating costs ..................... 15,247 26,411
Selling, general and administrative expenses
other than network and corporate ........ 12,420 9,942
Network expenses ........................... -- 7,211
Corporate expenses ......................... 1,452 1,620
Depreciation and amortization .............. 6,913 3,598
-------- --------
36,032 48,782
-------- --------
Operating loss ................................. (830) (4,176)
Merger related expenses ........................ -- (1,517)
Interest expense - net ......................... (8,805) (5,328)
-------- --------
Loss before income taxes and minority interest.. (9,635) (11,021)
Income tax benefit (provision) ................. 1,330 (1,165)
Minority interest .............................. (361) (771)
-------- --------
Net loss ....................................... $ (8,666) $(12,957)
======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
<PAGE>
<TABLE>
<CAPTION>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
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(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................................ $ 11,059 $ 8,680
Accounts receivable, less allowance for doubtful accounts of
$ 7,435 and $7,585 .......................................... 24,518 30,768
Television programming ........................................... 7,001 7,742
Prepaid expenses and other ....................................... 2,386 2,819
Due from Network Company, net .................................... 4,441 3,624
--------- ---------
Total current assets ................................... 49,405 53,633
Property and equipment, net .......................................... 53,302 50,021
Television programming ............................................... 778 846
Other assets ......................................................... 14,785 15,991
Broadcast licenses and other intangible assets, net .................. 645,493 650,907
--------- ---------
$ 763,763 $ 771,398
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable and accrued expenses ............................ $ 35,401 $ 35,648
Television programming obligations ............................... 1,041 1,303
Current portion of long-term debt ................................ 2,125 1,063
--------- ---------
Total current liabilities ................................ 38,567 38,014
Long-term debt ....................................................... 401,384 398,889
Deferred taxes, net .................................................. 79,221 81,812
Other liabilities .................................................... 33,317 32,770
--------- ---------
552,489 551,485
--------- ---------
Minority interest .................................................... 5,455 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 (accumulated deficit) .......................... (8,194) 472
--------- ---------
205,819 214,485
--------- ---------
$ 763,763 $ 771,398
========= =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE>
<TABLE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY (UNAUDITED)
(In thousands, except share data)
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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 ................. -- -- -- (8,666) (8,666)
--------- --------- --------- --------- ---------
Balance, March 31, 1999 .. 10,000 $ -- $ 214,013 $ (8,194) $ 205,819
========= ========= ========= ========= =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
<TABLE>
<CAPTION>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
COMPANY PREDECESSOR
THREE MONTHS ENDED MARCH 31 1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................ $ (8,666) $(12,957)
Charges not affecting cash:
Depreciation and amortization ....................................... 6,913 3,598
Interest accretion .................................................. 3,546 1,460
Provision for losses on accounts receivable ......................... 329 550
Minority interest ................................................... 361 771
Deferred taxes ...................................................... (2,591) --
Changes in assets and liabilities:
Accounts receivable ................................................. 6,400 11,212
Television programming .............................................. 809 (1,047)
Television programming obligations .................................. (262) 1,037
Due from Network Company, net ....................................... (817) --
Accounts payable and accrued expenses and other ..................... 2,548 (519)
-------- --------
Cash flows provided from operating activities ......... 8,570 4,105
-------- --------
CASH FLOWS FROM INVESTING ACTIVITY:
Additions to property and equipment ..................................... (4,784) 2,464)
-------- --------
Cash flows used in investing activity ................. (4,784) 2,464)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Merger costs ............................................................ (584) --
Proceeds from exercise of warrants ...................................... -- 346
Payments of obligations under capital leases ............................ -- (171)
Borrowings under Old Credit Facility .................................... -- 5,227
Payments under Old Credit Facility ...................................... -- (3,000)
Payments to minority interest partner ................................... (823) (748)
-------- --------
Cash flows provided from (used in) financing activities (1,407) 1,654
-------- --------
Increase in cash and cash equivalents ................................... 2,379 3,295
Cash and cash equivalents, beginning of period .......................... 8,680 2,378
-------- --------
Cash and cash equivalents, end of period ................................ $ 11,059 $ 5,673
======== ========
Supplemental cash flow information:
Interest paid ....................................................... $ 5,249 $ 6,910
======== ========
Income taxes paid ................................................... $ 29 $ 78
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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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").
Pursuant to the Merger, each outstanding share of Telemundo common stock was
converted into the right to receive $44.12537 in cash.
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)
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The following summarized, unaudited pro forma results of operations for the
three months ended March 31, 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.
THREE MONTHS
ENDED MARCH 31,
(IN THOUSANDS) 1998
------------------------------------------------------------
Net revenue................................ $32,475
Operating income........................... 553
Net loss................................... (9,391)
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. 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. The six actions were
consolidated for all purposes. Plaintiffs in this action have executed a
voluntary stipulation of dismissal which has been submitted to the Court for
approval.
The Company and its subsidiaries are involved in a number of other 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 March 31, 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.
7
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
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 $6.7 million in incremental net revenue for the
three months ended March 31, 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.
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.
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 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.
9
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONTINUED)
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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 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 months ended March 31, 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 months ended March 31,
1998 are not comparable to the 1999 period, which reflects the Merger and
related transactions, including the impact of the Network Sale and the
Affiliation Agreement. Accordingly, MD&A for 1999 as compared to 1998 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 months ended
March 31, 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 months ended March 31, 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 months ended March 31, 1999 as compared to the
corresponding period of 1998 was as follows (in thousands):
THREE MONTHS ENDED
MARCH 31,
------------------
1999 1998 CHANGE
------- ------- ------
Network and National Spot $ 4,983 $19,992 (75)%
Local ................... 19,432 17,634 10 %
Incremental revenue from
Affiliation Agreement 6,666 --
Other revenue ........... 4,121 6,980 (41)%
------- -------
Net revenue ............. $35,202 $44,606 (21)%
======= =======
The decrease in network and national spot revenue is primarily the result of the
Network Sale. Excluding network revenue, national spot revenue would have
increased by 12%. This was a result of the continued strong growth in the
overall Spanish-language television market, offset in part by a decline in
overall average audience shares for the Company's U.S. stations.
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. The increase in local revenue is also due to an increase at WNJU-New
York, where growth in the local Spanish-language television market led to
increased local revenue.
The Company experienced an overall decline in U.S. audience share in the two
years prior to the Merger which it believes had been in part the consequence of
difficulties the Predecessor encountered in acquiring and developing programming
to compete effectively with its principal competitor's prime-time programming.
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
10
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONTINUED)
- --------------------------------------------------------------------------------
programming has been introduced. However, programming provided by the Network
Company thus far has not had the effect of improving overall audience shares.
The Telemundo network's average share of the weekday Spanish-language television
network audience was 14% during the fourth quarter of 1998 and 12% during the
first quarter of 1999 compared to 18% during the fourth quarter of 1997 and 17%
during the first quarter of 1998. A change in audience share typically has a
delayed impact on revenue.
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 the elimination of international
program sales and affiliate representation revenue as a result of the Network
Sale, and a decrease in the sale of blocks of broadcast time to independent
programmers. Other revenue may decline in the remaining 1999 quarters relative
to the prior year, as the Company's stations have replaced certain time periods
historically sold to independent programmers with network programming.
On a pro forma basis, net revenue would have increased by $2.7 million or 8% in
1999 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 and national spot revenue and decrease in other revenue as discussed
above.
Direct operating costs decreased by 42% for the three months ended March 31,
1999 from the corresponding period 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 15% for the quarter. This was primarily the result of an
increase of $1.7 million in station programming and production expenses related
to costs incurred to produce and acquire station programming at WKAQ 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 25% for the three months ended March 31, 1999 from the
corresponding period of the prior year. This was primarily the result of greater
sales commissions related to the increase in local revenue and an increase in
advertising and promotional expenditures and legal costs. 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.
Corporate expenses decreased by $168,000 from the comparable period 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 loss before depreciation and
amortization improved by $6.7 million from the comparable period of the prior
year.
Depreciation and amortization increased by $3.3 million for the three months
ended March 31, 1999 from the corresponding period 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.
11
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONTINUED)
- --------------------------------------------------------------------------------
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 accrued and paid 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
$80,000 and $87,000 of interest income for the three months ended March 31, 1999
and 1998, respectively.
The income tax provision recorded in 1998 related to WKAQ, which is taxed
separately under Puerto Rico income tax regulations, 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 the above items.
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.
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.
Minority interest represents the accounting impact of distributions to the 25.5%
partner in Video 44, which is based on a minimum preferred distribution to such
partner.
LIQUIDITY AND SOURCES OF CAPITAL
Cash flows provided from operating activities were $8.6 million and $4.1 million
for the three months ended March 31, 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 $10.8 million at March 31, 1999.
Capital expenditures of approximately $4.8 million were made during the three
months ended March 31, 1999 for the replacement and upgrading of equipment,
including the ongoing conversion to digital television technology. As part of
the Affiliation Agreement, each of the Network Company and the Company agreed,
subject to various conditions, to incur certain capital expenditure levels which
may be reduced based on financial tests. As a result of the continued conversion
to digital television technology, the Company expects to incur capital
expenditures of approximately $17.0 million in 1999. As a result of the Network
Sale, the Company no longer has capital expenditure requirements with respect to
network operations.
The Predecessor's principal sources of liquidity were cash from operations and
the Old Credit Facility. As a result of the Merger, the Company has a new
capital structure which includes a $150 million revolving credit facility with a
final maturity of September 30, 2005 (the "Revolving Credit Facility"). The
Company plans on financing cash needs through cash generated from operations and
the Revolving Credit Facility, under which there was $69 million
12
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONTINUED)
- --------------------------------------------------------------------------------
outstanding at March 31, 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 it's New Credit Facilities. To mitigate
the impact of fluctuations in interest rates, the Company entered into two fixed
rate for London Interbank Offered Rates ("LIBOR") swap transactions.
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 July 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 Company does not believe that the most reasonably likely
worst case Year 2000 scenario would significantly impact the Company's financial
position. The Company will continuously monitor the need for a contingency plan
as it acquires additional information regarding the Year 2000 compliance
programs of its customers, suppliers and other service providers.
13
<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 March 31, 1999.
14
<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: May 13, 1999 Peter J. Housman II
Chief Financial Officer and Treasurer
15
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 11,059
<SECURITIES> 0
<RECEIVABLES> 31,953
<ALLOWANCES> 7,435
<INVENTORY> 0
<CURRENT-ASSETS> 49,405
<PP&E> 56,955
<DEPRECIATION> 3,653
<TOTAL-ASSETS> 763,763
<CURRENT-LIABILITIES> 38,567
<BONDS> 401,384
0
0
<COMMON> 0
<OTHER-SE> 205,819
<TOTAL-LIABILITY-AND-EQUITY> 763,763
<SALES> 35,202
<TOTAL-REVENUES> 35,202
<CGS> 0
<TOTAL-COSTS> 36,032
<OTHER-EXPENSES> 361
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,805
<INCOME-PRETAX> (9,996)
<INCOME-TAX> (1,330)
<INCOME-CONTINUING> (8,666)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,666)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
