- -------------------------------------------------------------------------------
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 SEPTEMBER 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 /check mark/ No _____
As of November 10, 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.
- -------------------------------------------------------------------------------
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION*: NO.
----
<S> <C>
Item 1. Financial Statements
Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 1999, the period August 13, 1998 to September 30, 1998
and of the Predecessor for the period July 1, 1998 to August 12, 1998 and the
period January 1, 1998 to August 12, 1998 (Unaudited)............................................ 2
Consolidated Balance Sheets at September 30, 1999 (Unaudited)
and December 31, 1998............................................................................ 3
Consolidated Statement of Changes in Common Stockholders' Equity
for the Nine Months Ended September 30, 1999 (Unaudited)......................................... 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999, the period August 13, 1998 to September 30, 1998
and of the Predecessor for the period January 1, 1998 to August 12, 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
</TABLE>
* 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
- --------------------------------------------------------------------------------
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
----------------------------------------------- ----------------------------------
THREE MONTHS NINE MONTHS
ENDED ENDED AUGUST 13 TO JULY 1 TO JANUARY 1 TO
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, AUGUST 12, AUGUST 12,
1999 1999 1998 1998 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenue........................................ $38,619 $116,082 $21,819 $23,135 $124,671
Costs and expenses:
Direct operating costs......................... 15,653 46,354 7,518 10,762 63,861
Selling, general and administrative
expenses other than network and
corporate................................... 11,298 36,224 5,599 4,900 25,515
Network expenses............................... - - - 3,390 18,546
Corporate expenses............................. 1,290 4,091 717 787 4,130
Depreciation and amortization.................. 7,063 20,953 2,636 1,546 9,024
------- -------- ------- ------ --------
35,304 107,622 16,470 21,385 121,076
------- ------- ------- ------- --------
Operating income................................... 3,315 8,460 5,349 1,750 3,595
Merger related expenses............................ - - - (2,694) (5,506)
Interest expense - net............................. (9,200) (26,966) (5,254) (2,386) (13,067)
Other expense...................................... (465) (465) - - -
------- ------- ------- ------- --------
Income (loss) before income taxes and
minority interest............................... (6,350) (18,971) 95 (3,330) (14,978)
Income tax benefit (provision)..................... 853 5,425 (692) (776) (3,113)
Minority interest.................................. (361) (1,083) (196) (356) (1,898)
------- ------- ------- ------- --------
Net loss........................................... $(5,858) $(14,629) $ (793) $(4,462) $(19,989)
======= ======== ======= ======= ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1999 1998
- -----------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................. $ 4,965 $ 8,680
Accounts receivable, less allowance for doubtful accounts of $7,836
and $7,585........................................................... 25,564 30,768
Television programming.................................................... 5,203 7,742
Prepaid expenses and other................................................ 2,693 2,819
Due from Network Company, net............................................. 3,646 3,624
-------- --------
Total current assets............................................. 42,071 53,633
Property and equipment, net................................................... 55,469 50,021
Television programming........................................................ 674 846
Other assets.................................................................. 14,034 15,991
Broadcast licenses and other intangible assets, net........................... 630,042 650,907
-------- --------
$742,290 $771,398
======== ========
Liabilities and Stockholders' Equity
- -----------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable and accrued expenses..................................... $ 36,404 $ 35,648
Television programming obligations........................................ 1,286 1,303
Current portion of long-term debt......................................... 4,250 1,063
-------- -------
Total current liabilities......................................... 41,940 38,014
Long-term debt................................................................ 396,985 398,889
Deferred taxes, net........................................................... 70,404 81,812
Other liabilities............................................................. 27,615 32,770
-------- -------
536,944 551,485
-------- -------
Minority interest............................................................. 5,490 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)............................................... (14,157) 472
-------- --------
199,856 214,485
-------- --------
$742,290 $771,398
======== ========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<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................................. - - - (14,629) (14,629)
------ ------ -------- -------- --------
Balance, September 30, 1999.............. 10,000 $ - $214,013 $(14,157) $199,856
====== ====== ======== ======== ========
</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
------------------------------- ------------
NINE MONTHS
ENDED AUGUST 13 TO JANUARY 1 TO
SEPTEMBER 30, SEPTEMBER 30, AUGUST 12,
1999 1998 1998
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................. $(14,629) $ (793) $(19,989)
Charges not affecting cash:
Depreciation and amortization.................................... 20,953 2,636 9,024
Interest accretion............................................... 11,283 1,965 3,732
Provision for losses on accounts receivable...................... 1,001 48 1,720
Minority interest................................................ 1,083 196 1,898
Changes in assets and liabilities:
Accounts receivable.............................................. 4,953 8,433 5,956
Television programming........................................... 2,711 (421) (462)
Television programming obligations............................... (17) (372) (1,684)
Due from Network Company, net.................................... (22) (2,514) -
Accounts payable and accrued expenses and other.................. 145 (1,406) 13,467
Deferred taxes................................................... (6,941) - -
-------- -------- --------
Cash flows provided from operating activities............. 20,520 7,772 13,662
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITY:
Additions to property and equipment................................. (10,501) (484) (6,569)
-------- -------- --------
Cash flows used in investing activity.................... (10,501) (484) (6,569)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under New Credit Facilities................ - 300,000 -
Proceeds from Equity Contributions.................................. - 273,993 -
Proceeds from issuance of Senior Discount Notes..................... - 125,000 -
Proceeds from Network Sale.......................................... - 73,993 -
Repurchase of Telemundo equity interests............................ - (518,282) -
Repurchase of 10.5% Notes, consent fees and related costs........... - (217,451) -
Repay other indebtedness and related costs.......................... - (192) -
Deferred financing costs............................................ - (14,500) -
Payments to minority interest partner............................... (2,470) (403) (1,992)
Borrowings under New Credit Facilities.............................. 2,000 - -
Payments under New Credit Facilities................................ (12,000) (19,000) -
Merger costs........................................................ (1,264) (6,852) -
Proceeds from exercise of warrants.................................. - - 3,747
Payments of obligations under capital leases........................ - - (424)
Borrowings under Old Credit Facility................................ - - 7,925
Payments under Old Credit Facility and related costs................ - (272) (11,721)
-------- -------- --------
Cash flows used in financing activities.................. (13,734) (3,966) (2,465)
-------- -------- --------
Increase (decrease) in cash and cash equivalents.................... (3,715) 3,322 4,628
Cash and cash equivalents, beginning of period...................... 8,680 7,006 2,378
-------- -------- --------
Cash and cash equivalents, end of period............................ $ 4,965 $ 10,328 $ 7,006
======== ======== ========
Supplemental cash flow information:
Interest paid................................................... $ 14,905 $ 7,390 $ 7,090
======== ======== ========
Income taxes paid, including Puerto Rico withholding taxes...... % 4,065 $ 21 $ 185
======== ======== ========
</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 nine months ended September 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 NINE MONTHS
ENDED ENDED
(IN THOUSANDS) SEPTEMBER 30, SEPTEMBER 30,
1998 1998
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Net revenue................................................. $39,356 $114,091
Operating income............................................ 8,440 22,022
Net loss.................................................... (3,581) (12,984)
</TABLE>
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 September 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 $17.1 million in incremental net revenue for the
nine months ended September 30, 1999, the unpaid portion of 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 unpaid amounts 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
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
- -------------------------------------------------------------------------------
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 reflects seasonal patterns with respect to advertiser
expenditures. Increased advertising during the holiday season results in
increases in advertising revenue for the fourth quarter, particularly in Puerto
Rico. As a result, the Company experiences seasonal fluctuations to a greater
degree than its direct competitors and the broadcasting industry in general.
Because costs are more ratably spread throughout the year, the impact of this
seasonality on operating income is pronounced. However, the allocation of
advertising revenue pursuant to the Affiliation Agreement reduces the effects of
historical seasonality on aggregate revenue.
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 he 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)
- -------------------------------------------------------------------------------
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
The three and nine months ended September 30, 1998 reflect the Merger and
related transactions, including the impact of the Network Sale and Affiliation
Agreement from August 13, 1998 to September 30, 1998. The Predecessor's results
for periods prior to August 13, 1998 include the operations of the Telemundo
Network and do not reflect Merger related transactions. Consequently, the
results for the three and nine months ended September 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 for the entire period. 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 nine months ended
September 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 nine months ended
September 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 nine months ended September 30, 1999 as compared
to the corresponding periods of 1998 was as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1999 1998(a) CHANGE 1999 1998(b) CHANGE
-------- ------- ------ -------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Network and National Spot....... $ 5,411 $12,970 (58)% $ 16,906 $ 58,005 (71)%
Local........................... 24,436 22,073 11 % 69,236 63,575 9 %
Incremental revenue from
Affiliation Agreement........ 4,178 2,674 17,060 2,674
Other revenue................... 4,594 7,237 (37)% 12,880 22,236 (42)%
-------- ------- -------- --------
Net revenue.......................$38,619 $44,954 (14)% $116,082 $146,490 (21)%
======= ======= ======== ========
</TABLE>
(a) The aggregate of the period from August 13, 1998 to September 30, 1998
and the period from July 1, 1998 to August 12, 1998 (Predecessor)
(b) The aggregate of the period from August 13, 1998 to September 30, 1998
and the period from January 1, 1998 to August 12, 1998 (Predecessor)
The decrease in network and national spot revenue for both the three and nine
month periods ended September 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 13% and 6% for the three and nine
month periods ended September 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. In addition, several national spot advertisers had
reallocated their advertising expenditures to network.
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. In addition, WKAQ's revenue
was negatively impacted for the three and nine months ended September 30, 1998
as a result of advertisers reducing their spending while business and services,
including electricity, were disrupted due to damage caused by Hurricane Georges
in September 1998.
The Telemundo network's average share of the weekday Spanish-language television
network audience was 13% during the first and second quarters of 1999 and
improved to 15% during the third quarter of 1999, compared to 16% during the
first through third quarters of 1998. A change in audience share typically has a
delayed impact on revenue.
To address the decline in audience share, the Network Company launched a new
programming schedule in August 1999. The new schedule includes replacing several
Monday through Friday prime time variety shows with telenovelas, creating
original talk shows and improving sports programming. These initiatives are
reflected in the improvement in the Telemundo network's audience share during
the third quarter of 1999, as discussed above.
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 hours of blocks of
broadcast time sold to independent programmers and the elimination of
international program sales and affiliate representation revenue as a result of
the Network Sale.
Net revenue would have decreased by $737,000 for the three months ended
September 30, 1999 from the comparable period of the prior year on a pro forma
basis which would have been due to a decrease in national spot revenue and
other, offset in part by the increase in local revenue, as discussed above. Net
revenue would have increased by $2.0 million for the nine months ended September
30, 1999 from the comparable period of the prior year on a pro forma basis which
would 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.
Direct operating costs decreased by 14% and 35% for the three and nine month
periods ended September 30, 1999, respectively, 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 12% for
the three and nine month periods ended September 30, 1999. This was primarily
the result of increases of $1.6 million and $4.8 million for the three and nine
month periods ended September 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 8% and 16% for the three and nine month periods ended September 30,
1999, respectively, from the corresponding periods of the prior year. This was
primarily the result of an increase in advertising and promotional expenditures
and contractual increases in research service fees. 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 $214,000 and $756,000 for the three and nine
month periods ended September 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 and lower accrued
performance based compensation, 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.
Depreciation and amortization increased by $2.9 million and $9.3 million for the
three and nine month periods ended September 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 the nine months
ended September 30, 1999, (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 $53,000 and $100,000 of interest income for the three
months ended September 30, 1999 and 1998, respectively, and by $198,000 and
$259,000 for the nine months ended September 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
primarily from the tax effect of the reversal of deferred temporary differences
offset in part by a provision for Puerto Rico income taxes and 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 August 12, 1998 are subject to
certain limitations imposed by Section 382 of the Internal Revenue Code and
their use will be limited.
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.
LIQUIDITY AND SOURCES OF CAPITAL
Cash flows provided from operating activities were $20.5 million and $21.4
million for the nine months ended September 30, 1999 and 1998, respectively. The
decrease is primarily the result of changes in certain asset and liability
accounts, including the collection of network operations receivables and the
change in deferred taxes, offset in part by the increase in operating income
before depreciation and amortization.
12
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (CONTINUED)
- -------------------------------------------------------------------------------
Capital expenditures of approximately $10.5 million were made during the nine
months ended September 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 an
additional $4.5 million of capital expenditures in 1999. As a result of the
Network Sale, the Company no longer has capital expenditure requirements with
respect to network operations.
The Company had working capital of $131,000 at September 30, 1999.
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 $59 million outstanding at September 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
$950,000. 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. The Company has tested
some of its critical information systems directly in order to ensure compliance.
The Company does not expect to incur any further significant amounts 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 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.
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 September 30, 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: November 12, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,965
<SECURITIES> 0
<RECEIVABLES> 33,400
<ALLOWANCES> 7,836
<INVENTORY> 0
<CURRENT-ASSETS> 42,071
<PP&E> 62,177
<DEPRECIATION> 6,710
<TOTAL-ASSETS> 742,290
<CURRENT-LIABILITIES> 41,940
<BONDS> 401,235
0
0
<COMMON> 0
<OTHER-SE> 199,856
<TOTAL-LIABILITY-AND-EQUITY> 742,290
<SALES> 116,082
<TOTAL-REVENUES> 116,082
<CGS> 0
<TOTAL-COSTS> 107,622
<OTHER-EXPENSES> 1,548
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,966
<INCOME-PRETAX> (20,054)
<INCOME-TAX> (5,425)
<INCOME-CONTINUING> (14,629)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,629)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
