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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
Commission File Number 333-64709
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TELEMUNDO HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
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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)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (305) 884-8200
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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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]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of March 31, 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.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of registrant's 1998 annual report to stockholders are
incorporated by reference in items 6, 7, 7A and 8 of Part II of this report.
Certain exhibits to the registration statement on Form S-4, as amended
(Registration number 333-64709 filed with the Securities and Exchange Commission
on September 29, 1998), are incorporated by reference in certain portions of
Item 14 of Part IV of this report.
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TABLE OF CONTENTS
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PART I
Item 1. BUSINESS.............................................................. 1
Item 2. PROPERTIES............................................................13
Item 3. LEGAL PROCEEDINGS.....................................................14
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................14
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS...................................................14
Item 6. SELECTED FINANCIAL DATA...............................................14
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION...............................................14
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............14
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........................15
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE..............................................15
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.....................15
Item 11. EXECUTIVE COMPENSATION.................................................17
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.........20
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.........................21
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K........25
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PART I
ITEM 1. BUSINESS
Telemundo Holdings, Inc. ("Holdings") was formed as a holding company for
the acquisition of Telemundo Group, Inc. ("Telemundo") and its subsidiaries
through the Merger (as defined), that was consummated on August 12, 1998.
References in this report to the "Company" include Holdings, Telemundo and its
subsidiaries. Holdings owns 100% of Telemundo's outstanding capital stock. The
capital stock of Holdings is owned 24.95% by Sony Pictures Entertainment Inc.
("Sony Pictures"), 24.95% by Liberty Media Corporation ("Liberty") and 50.1% by
Station Partners, LLC ("Station Partners"). Station Partners is owned 68% by
Apollo Investment Fund III, L.P. ("Apollo Investment"), which may be deemed to
be an affiliate of TLMD Partners, L.L.C. ("TMLD II"), a significant stockholder
of Telemundo prior to the Merger, and 32% by Bastion Capital Fund, L.P.
("Bastion"), a significant stockholder of Telemundo prior to the Merger.
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 (as defined) 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. 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, 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. For purposes of this
report, unless the context requires otherwise, (i) references to the United
States exclude Puerto Rico and (ii) "Market Area" or "DMA" refers to Designated
Market Area, a term developed by Nielsen Media Research, Inc. ("Nielsen TV") and
used by the television industry to describe a geographically distinct television
market.
Prior to the Merger, Telemundo produced and acquired its network
programming through its network operations (the "Telemundo Network"), which
provided programming 24-hours a day to Telemundo's owned and operated 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 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 also entered into an affiliation
agreement with the Company and related affiliation agreements with the Company's
owned and operated 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 on a predetermined basis. See "Business--Affiliation Agreement."
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.
FORWARD LOOKING DISCLOSURES
Except for the historical information contained in this report, certain
matters discussed herein, including (without limitation) under Part I, Item 1,
"Business", Item 3, "Legal Proceedings" and under Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations", 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.
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RECENT DEVELOPMENTS -- THE MERGER AND RELATED TRANSACTIONS
On August 12, 1998, the Merger was consummated in accordance with the
Agreement and Plan of Merger (the "Merger Agreement"), dated November 24, 1997,
among Holdings, TLMD Acquisition Co. ("TLMD Acquisition"), a wholly owned
subsidiary of Holdings, and Telemundo. Pursuant to the Merger Agreement, TLMD
Acquisition was merged with and into Telemundo (the "Merger"), with Telemundo
being the surviving corporation and becoming a wholly owned subsidiary of
Holdings.
The aggregate consideration paid in connection with the Merger (based on a
purchase price of $44.12537 per share for each outstanding share of Telemundo's
common stock) was approximately $773 million. Of this amount, $300.0 million was
provided by borrowings under the New Credit Facilities (as defined), $125.0
million was provided from the proceeds of the Senior Discount Notes Offering (as
defined), $274.0 million was provided by the Equity Contributions (as defined)
and $74.0 million was provided from the proceeds of the Network Sale.
NEW CREDIT FACILITIES. Telemundo has entered into new credit facilities
(the "New Credit Facilities") providing for aggregate borrowings of up to $350.0
million, which are guaranteed by Holdings and substantially all of Telemundo's
wholly owned domestic subsidiaries. In connection with the New Credit
Facilities, Telemundo terminated its revolving credit facility that was existing
prior to the Merger (the "Old Credit Facility").
EQUITY CONTRIBUTIONS. In connection with the Merger, Holdings received
equity contributions (the "Equity Contributions") aggregating $274.0 million in
cash from Sony Pictures, Liberty and Station Partners. The Equity Contributions
were contributed by Holdings to TLMD Acquisition to fund a portion of the
consideration paid in the Merger. See "Certain Relationships and Related
Transactions--Transactions Related to the Merger--Equity Contributions."
NETWORK SALE. The Company sold its network operations which consisted of
substantially all of the programming and production assets of the Telemundo
Network to the Network Company for $74.0 million. The Network Company and the
Company have entered into 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 on a predetermined
basis. See "Business--Affiliation Agreement" and "Certain Relationships and
Related Transactions--Transactions Related to the Merger--Network Sale and
Affiliation Agreement."
TENDER OFFER. On August 12, 1998, TLMD Acquisition purchased approximately
$191.7 million aggregate principal amount of Telemundo's 10.5% Senior Notes due
2006 (the "10.5% Notes") pursuant to an offer to purchase (as amended on July
20, 1998, the "Tender Offer"). The aggregate principal amount purchased by TLMD
Acquisition pursuant to the Tender Offer represented 99.9% of the aggregate
principal amount outstanding.
THE SENIOR DISCOUNT NOTES OFFERING. Substantially contemporaneously with
the Merger, the Equity Contributions, the Network Sale, the Tender Offer and
initial borrowings under the New Credit Facilities, Holdings issued its 11.5%
Senior Discount Notes due 2008, Series A (the "Series A Notes") in the aggregate
principal amount at maturity of $218.8 million (the "Senior Discount Notes
Offering"). On September 29, 1998, the Company filed with the Securities and
Exchange Commission (the "Commission") a Registration Statement on Form S-4
under the Securities Act of 1933, as amended, pursuant to which Holdings would
exchange each $1,000 principal amount at maturity of its 11.5% Senior Discount
Notes due 2008, Series B (the "Series B Notes") for each $1,000 principal amount
outstanding of its Series A Notes (the "Exchange Offer"). The terms of the
Series A and Series B Notes are identical in all material respects with the
exception of certain registration rights. The Company filed the fourth amendment
with respect to such Registration Statement on February 16, 1999 and the
Registration Statement was declared effective by the Commission on such date.
The Exchange Offer commenced on February 16, 1999 and was terminated on March
18, 1999, with 100% of the aggregate principal amount outstanding of the Series
A Notes being exchanged for an equivalent amount of Series B Notes.
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TELEVISION STATIONS
The Company owns and operates eight full-power and 15 low-power
Spanish-language television stations in the United States and Puerto Rico.
FULL-POWER STATIONS
The Company's U.S. owned and operated full-power stations broadcast network
programming provided by the Network Company and produce and broadcast local news
and limited other programming focused on the audience in each of their
respective local markets. Each full-power station also sells blocks of broadcast
time during certain non-network programming hours to independent programmers
("block time programmers"). The following table sets forth certain information
about the Company's owned and operated full-power Spanish-language television
stations.
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NUMBER OF
RANKING OF RANKING OF OTHER SPANISH-
NUMBER OF MARKET AREA MARKET AREA LANGUAGE
HISPANIC HISPANICS BY NUMBER BY NUMBER TELEVISION
TELEVISION AS A PERCENTAGE OF HISPANIC OF TOTAL STATIONS
MARKET AREA STATION HOUSEHOLDS IN OF TOTAL TELEVISION TELEVISION OPERATING IN
SERVED AND CHANNEL MARKET AREA(1) POPULATION(2) HOUSEHOLDS(1) HOUSEHOLDS(1) MARKET AREA(3)
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Los Angeles, CA KVEA (Ch. 52) 1,444,030 39% 1 2 2
New York, NY WNJU (Ch. 47) 1,004,020 18% 2 1 1
Miami, FL WSCV (Ch. 51) 468,800 37% 3 16 3
San Francisco, CA KSTS (Ch. 48) 329,780 19% 4 5 1
Chicago, IL(4) WSNS (Ch. 44) 314,290 14% 5 3 1
San Antonio, TX KVDA (Ch. 60) 305,400 54% 6 37 2
Houston, TX KTMD (Ch. 48) 304,640 24% 7 11 1
San Juan, PR WKAQ (Ch. 2) 1,200,307 -- -- -- 6
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(1) Estimated by Nielsen TV as of January 1, 1999; except for Puerto Rico,
which was estimated by Mediafax as of January 1999.
(2) Claritas, Inc., 1998, derived from U.S. Census Bureau data and other
government statistics.
(3) The Company and each of its Spanish-language competitors broadcast over
UHF, except in Puerto Rico, where WKAQ and its three major competitors
broadcast over VHF.
(4) The Company owns a 74.5% interest in WSNS through a joint venture.
LOS ANGELES: The Company owns and operates KVEA, Channel 52, licensed to
Corona, California and serving the Los Angeles market. KVEA began operating as a
Spanish-language station in 1985. Los Angeles is the largest U.S. Hispanic
market, representing approximately 17% of the Hispanic television households in
the United States. An estimated 6.1 million Hispanics reside in the Los Angeles
DMA, constituting approximately 39% of the Los Angeles DMA population. The
Hispanic population in Los Angeles more than doubled between 1980 and 1998, and
immigration trends indicate that the Hispanic population will continue to grow
rapidly. The Hispanic population in Los Angeles is predominantly Mexican in
origin.
NEW YORK: The Company owns and operates WNJU, Channel 47, licensed to
Linden, New Jersey and serving the New York market. WNJU began operating as a
Spanish-language station in 1965. New York is the second largest U.S. Hispanic
market, representing approximately 12% of the Hispanic television households in
the United States. An estimated 3.4 million Hispanics reside in the New York
DMA, constituting approximately 18% of the New York DMA population. The Hispanic
population in New York increased by approximately 61% between 1980 and 1998.
Although approximately 36% of this market is of Puerto Rican origin, the New
York Hispanic community is relatively diverse.
MIAMI: The Company owns and operates WSCV, Channel 51, licensed to Ft.
Lauderdale, Florida and serving the Miami-Ft. Lauderdale market. WSCV began
operating as a Spanish-language station in 1985. Miami is the third largest U.S.
Hispanic market, representing approximately 6% of the Hispanic television
households in the United States. An estimated 1.4 million Hispanics reside in
the Miami DMA, constituting approximately 37% of the Miami DMA population. It
has been estimated that more than half of the population of Miami-Dade County is
comprised of Hispanics. The Hispanic population in Miami more
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than doubled between 1980 and 1998. Approximately 54% of Hispanics in Miami
are of Cuban origin.
SAN FRANCISCO: The Company owns and operates KSTS, Channel 48, licensed to
San Jose, California and serving the San Francisco-San Jose market. KSTS began
operating as a Spanish-language station in 1987. The San Francisco-San Jose
Hispanic market is the fourth largest U.S. Hispanic market, representing
approximately 4% of the Hispanic television households in the United States. An
estimated 1.2 million Hispanics reside in the San Francisco DMA (which includes
San Jose), constituting approximately 19% of the San Francisco DMA population.
The Hispanic population in this market almost doubled from 1980 to 1998 and is
over 68% of Mexican origin.
CHICAGO: The Company owns a 74.5% interest in and operates WSNS, Channel
44, licensed to and serving the Chicago market. WSNS began operating as a
Spanish-language station in 1985. The Chicago market is the fifth largest
Hispanic market in the United States, representing approximately 4% of the
Hispanic television households in the United States. An estimated 1.2 million
Hispanics reside in the Chicago DMA, constituting approximately 14% of the
Chicago DMA population. The Hispanic population in Chicago grew by approximately
85% from 1980 to 1998 and is approximately 69% of Mexican origin.
SAN ANTONIO: The Company owns and operates KVDA, Channel 60, licensed to
and serving the San Antonio, Texas market. KVDA began operating as a
Spanish-language station in 1989. The San Antonio market is the sixth largest
U.S. Hispanic market, representing approximately 4% of the Hispanic television
households in the United States. An estimated 1.0 million Hispanics reside in
the San Antonio DMA, constituting approximately 54% of the San Antonio DMA
population. The Hispanic population in San Antonio, which is principally of
Mexican origin, increased by approximately 63% between 1980 and 1998.
HOUSTON: The Company owns and operates KTMD, Channel 48, licensed to
Galveston, Texas and serving the Houston-Galveston market. KTMD began operating
as a Spanish-language station in 1987. The Houston-Galveston market is the
seventh largest U.S. Hispanic market, representing approximately 4% of the
Hispanic television households in the United States. An estimated 1.1 million
Hispanics reside in the Houston DMA (which includes Galveston), constituting
approximately 24% of the Houston DMA population. The Hispanic population in
Houston more than doubled between 1980 and 1998 and is principally of Mexican
origin.
SAN JUAN, PUERTO RICO: The Company owns and operates television station
WKAQ, Channel 2, in San Juan, which together with its affiliate, WOLE (Channel
12 in Aguadilla), and its translator facilities, cover virtually all of Puerto
Rico. WKAQ began operating as a Spanish-language television station in 1954. The
current population of Puerto Rico is approximately 3.9 million.
LOW-POWER STATIONS
Low-power stations ("LPTVs") generally operate at significantly lower
levels of power than full-power stations. In addition, their signals generally
cover smaller areas than those covered by full-power stations and may not cover
the full Market Area in which they are located. LPTVs extend the Company's and
the Network Company's coverage in areas where the Company does not own a
full-power television station or where the Network Company does not have a
network affiliate. The Company's low-power television stations operate with
minimal staff and generally do not originate programming or have their own sales
forces.
In addition to its 15 owned and operated LPTVs, the Company has received
permission from the FCC to build two additional LPTVs.
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The following table sets forth certain information about the Company's
owned and operated LPTVs.
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NUMBER OF HISPANIC
TELEVISION HOUSEHOLDS
MARKET AREA SERVED STATION(S) IN MARKET AREA(1)
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Albuquerque/Santa Fe, NM(2)(3)............. K52BS 184,850
Sacramento, CA(2).......................... K47DQ, K52CK, K61F1 163,310
Boston, MA................................. W32AY 86,790
Austin, TX(2)(4)........................... K11SF 88,880
Salinas/Monterey, CA....................... K15CU 56,500
Colorado Springs, CO....................... K49CJ 42,790
Santa Barbara/Santa Maria, CA.............. K27EI 42,200
Salt Lake City, UT......................... K48EJ 43,260
Odessa/Midland, TX(2)...................... K60EE, K49CD 39,610
Amarillo, TX............................... K36DV 30,690
Reno, NV................................... K52FF 22,870
Abilene, TX................................ K40DX 16,000
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(1) Estimated by Nielsen TV as of January 1, 1999.
(2) These areas are served by more than one LPTV, including affiliated LPTVs.
(3) The Company expects to sell its LPTV in Santa Fe, New Mexico, which is
expected to become an affiliate of the Network Company.
(4) Since December 1996, the Company has been operating K11SF pursuant to
special temporary authority ("STA") granted by the FCC, which lapsed in
November 1998. Although non-reinstatement of the STA would not materially
affect the Company's business, the Company has filed a reinstatement
request with the FCC.
AFFILIATION AGREEMENT
Pursuant to the Affiliation Agreement, the Network Company provides
programming to the Company, and the Company and the Network Company pool and
allocate advertising revenue on a predetermined basis. The initial term of the
Affiliation Agreement is ten years and the Network Company will have the right
to renew the Affiliation Agreement for two consecutive five-year terms if
certain performance goals are met. The Affiliation Agreement is terminable by
either party in the event of a "material default of a material provision" (as
defined therein). The Network Company may terminate its obligations with respect
to any of the Company's low-power television stations and enter into an
affiliation agreement with either another low-power or a full-power television
station in the same licensed community (which need not be owned by the Company)
if that station has greater signal coverage than that of the terminated
low-power station. In addition, the obligations of the Network Company under the
Affiliation Agreement as to a particular station can be terminated under certain
limited circumstances. The Network Sale and the Affiliation Agreement will
result in the Company incurring reduced overall programming and certain other
costs from the levels historically incurred by Telemundo. All network
programming costs are borne by the Network Company. As part of the Affiliation
Agreement, each of the Network Company and the Company agreed, subject to
various conditions, to incur certain programming, marketing/promotional and
capital expenditures in the future. These expenditures may be reduced or
eliminated based on financial tests, which assume such expenditures produce
positive financial results (i.e., incremental revenue). The Company may elect to
incur a portion of such expenditures in a subsequent year. If the Company meets
such financial tests and does not elect to defer a portion of such expenditures,
the Company will incur levels of non-network expenditures which are greater than
non-network expenditures historically incurred by the Company's owned and
operated stations. Any such expenditures on the part of the Company are subject
to the Network Company having incurred its respective expenditures.
PROGRAMMING
The Affiliation Agreement provides that the Network Company will provide
all network programming. Subject to certain
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exceptions, the Company has the exclusive broadcast rights in the areas in which
the Company operates. Moreover, any licensing to third parties of any programs
first shown on the network is subject to agreed upon limitations. Pursuant to
the Affiliation Agreement, all expenses associated with the development of
original Network Company programming will be borne by the Network Company, while
all expenses related to the development of local programming will be borne by
the Company. Each of the stations is responsible for approximately 2 to 3 hours
of local programming daily, consisting primarily of local news and coverage of
community affairs.
ADVERTISING AND REVENUE SHARING
Pursuant to the Affiliation Agreement, the Network Company is responsible
for the sale of all network advertising time, as well as the sale of national
spot advertising time on behalf of network affiliated stations (including the
Company's owned and operated stations), while the Company is responsible for the
sale of local advertising time. Revenue is allocated based on a formula applied
to a combination of the Company's and the Network Company's advertising revenue.
The Affiliation Agreement provides that not less than 50% of all advertising
time during network programming will be available for local and national spot
advertising. All advertising revenue subject to allocation is net of
uncollectible amounts.
Under certain limited circumstances involving a specified number of
"Willful Unauthorized Preemptions" or "Other Unauthorized Preemptions" or a
"Change in Operations" (each as defined in the Affiliation Agreement) affecting
a particular station, the obligations of the Network Company with respect to
such station may be terminated by the Network Company. Upon such a termination,
the percentage of net advertising revenue contributed by the Network Company as
part of the pooled advertising revenue to be allocated under the Affiliation
Agreement would be reduced proportionately.
CARRIAGE AGREEMENT
The Network Company has entered into a carriage agreement (the "Carriage
Agreement") with a subsidiary of Tele-Communications, Inc. ("TCI"). Pursuant to
the Carriage Agreement, the Network Company pays TCI fees for delivering new
Hispanic surname households as subscribers to a TCI cable system carrying the
Network Company's programming ("TCI Hispanic Subscribers"). The Affiliation
Agreement provides that the Company will reimburse the Network Company for
one-half of the fees actually paid by the Network Company (up to $2.50 per TCI
Hispanic Subscriber) for the first 400,000 TCI Hispanic Subscribers, and a
specified percentage of such fees (up to a maximum payment obligation of
$1,000,000) for TCI Hispanic Subscribers in excess of 400,000 and for new
Hispanic cable subscribers on other than TCI cable systems carrying the Network
Company's programming ("Non-TCI Subscribers"). The Company's maximum total
payment obligation for additional TCI Hispanic Subscribers and Non-TCI
Subscribers is $2,000,000. Liberty is the programming unit of TCI.
PROGRAMMING
As a result of the Affiliation Agreement, the Company relies on the Network
Company for network programming. The Network Company provides the Company with a
wide variety of network programming, including movies, telenovelas (soap
operas), talk shows, entertainment programs, national and international news,
music and sporting events.
On June 16, 1998, the Telemundo network announced its programming schedule
for the 1998-1999 broadcast season. The Telemundo network provided the Company
with action and adventure programs such as ANGELES, AXN, REYES Y REY and
OPERACION RESCATE (OPERATION RESCUE), game shows such as BUSCANDO PAREJA (THE
DATING GAME) and LOS RECIEN CASADOS (THE NEWLYWEDS) and situation comedies such
as SOLO EN AMERICA (ONLY IN AMERICA) and UNA FAMILIA CON ANGEL (A FAMILY WITH
ANGEL ). The Telemundo network's programming schedule is further supplemented by
a new line-up of feature films from Sony Pictures' library.
The Telemundo network also provides the Emmy Award-winning show, OCURRIO
ASI, a one-hour reality-based investigative news magazine show, SEVCEC, a talk
show which is designed to entertain the public with a mix of celebrities,
musical performances and comedians and educate the public on a wide range of
issues, including immigration and violence, and EL Y ELLA (HE AND SHE), a talk
show that discusses everyday topics and common problems from the male and female
perspective. The remainder of the programming provided by the Telemundo network
is purchased from various program suppliers primarily
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in Mexico and Latin America.
The Telemundo network's programming currently includes network newscasts
produced by CBS-Telenoticias.
In addition, the Company's owned and operated full-power stations produce
and broadcast local news and limited other programming focused on the audience
in each of their respective local markets.
The programming lineup of WKAQ in Puerto Rico differs from that of the
Telemundo network, but includes approximately 10 hours per week of network
programming. Through its production studios, WKAQ produces approximately 29
hours of programming weekly, including variety and comedy shows, mini-series,
news and public affairs shows, all primarily directed toward the Puerto Rico
market. In addition, WKAQ has the right of first refusal for the Puerto Rico
market to purchase telenovelas and other programming produced by Televisa, S.A.
de C.V. ("Televisa"), the largest supplier of Spanish-language programming in
the world, pursuant to a programming agreement that expires in May 2005. WKAQ
also broadcasts programming from other Latin American countries and broadcasts
United States syndicated programming dubbed in Spanish.
AFFILIATES
In addition to the Company's owned and operated stations, the Network
Company provides programming to 150 affiliates serving 48 Hispanic markets in
the United States. These affiliates, which consist of 31 affiliated broadcast
stations and 119 satellite direct cable affiliates that take the Network
Company's signal directly from the satellite, represent approximately 29% of the
Network Company's total coverage of the U.S. Hispanic market.
SALES AND MARKETING
Pursuant to the Affiliation Agreement, the Network Company is responsible
for the sale of all network advertising time, as well as the sale of national
spot advertising time on behalf of network affiliated stations (including the
Company's owned and operated stations), while the Company is responsible for the
sale of local advertising time. Revenue is allocated between the Company and the
Network Company based on a formula applied to a combination of the Company's and
the Network Company's advertising revenue. See "--Affiliation Agreement." Each
of the Company's owned and operated full-power stations maintains a sales and
marketing force to sell local advertising time on its own behalf.
The Network Company currently has a network and national spot sales and
marketing force, including account executives and sales managers with
backgrounds in both Spanish-language and English-language media, to sell
advertising time broadcast over the Network Company's entire network (network
sales) and to sell advertising time in markets covered by the Company's owned
and operated stations and the Network Company's other network affiliates
(national spot sales). The Network Company currently has national sales offices
in New York, Los Angeles, Miami, Chicago, San Francisco, San Antonio, Dallas,
Houston and Orange County, California.
The Company and the Network Company sell advertising time to a broad and
diverse group of advertisers. No single advertiser accounted for 10% or more of
Telemundo's 1998 total revenue. According to HISPANIC BUSINESS MAGAZINE, the top
ten advertisers in Spanish-language media in 1998, all of which broadcast
advertisements over the Telemundo network and the Company's owned and operated
stations, were:
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The Procter & Gamble Co. Anheuser-Busch Companies Inc.
Sears, Roebuck & Co. Philip Morris Companies, Inc.
AT&T Corp. Toyota Motor Corp.
General Motors Corporation McDonald's Corporation
MCI Communications Corporation Colgate-Palmolive Company
</TABLE>
Additionally, the Network Company and each of the Company's stations sell
blocks of air time during non-network programming hours to block time
programmers. The Company's stations are replacing certain time periods
historically sold to block time programmers with network programming.
7
<PAGE>
AUDIENCE MEASUREMENT SYSTEMS
The Company's advertising revenue depends to a large extent on its audience
share. The Nielsen Hispanic Television Index ("NHTI"), which began in November
1992, and the Nielsen Hispanic Station Index ("NHSI") provide national network
(NHTI) and local (NHSI) television ratings and share data for the Hispanic
audience.
COMPETITION
The broadcasting industry has become increasingly competitive in recent
years. The competitive success of a television network or station depends
primarily on public response to the programs broadcast, which affects the
revenue earned by the network or station from the sale of advertising time. In
addition to programming, factors determining competitive position include
management's ability and experience, marketing, research and promotional
efforts.
In the Spanish-language television broadcast market, the Company faces
significant competition from Univision Communications, Inc. ("Univision"), which
operates the other Spanish-language broadcast company in the United States and
has a substantially greater audience share than the Company. In each of the
markets in which the Company owns and operates full-power stations, except
Puerto Rico, the Company's station competes directly with a full-power Univision
station. Together the Univision stations and the Univision network affiliates
reach a larger percentage of Hispanic viewers in the United States than the
Company's owned and operated stations and the Network Company's network
affiliates and within the last year have attracted as much as 86% of the U.S.
Spanish-language television network audience (as reported by Nielsen TV).
Generally, the competing Univision stations have been operating in their markets
longer than have the Company's stations. Univision also owns Galavision, a
Spanish-language cable network that is reported to serve approximately 2.7
million Hispanic subscribers, representing approximately 59% of all Hispanic
households that subscribe to cable television. Both Televisa and Corporacion
Venezolana de Television, C.A. ("Venevision"), which are significant
stockholders of Univision, have entered into long-term contracts to supply
Spanish-language programming to the Univision and Galavision networks. Televisa
is the largest supplier of Spanish-language programming in the world. Through
these program license agreements, Univision has the right of first refusal to
air in the United States all Spanish-language programming produced by Televisa
and Venevision. These supply contracts have traditionally provided Univision
with a competitive programming advantage.
Certain of the Company's stations, particularly in Puerto Rico, Los Angeles
and Miami, also face competition on a local level from various independent
Spanish-language television stations. In March 1998, TV Azteca, S.A. de C.V.
("TV Azteca"), one of two Mexican television broadcast companies, announced its
intention to create a third Spanish-language network in the United States. To
date, the Company is not aware of any substantive activity with respect to the
establishment of such network.
There are also several independent Spanish-language television stations
that broadcast, on a full-time or part-time basis, in markets in which the
Company owns and operates stations. Independent Spanish-language television
stations compete with Company-owned stations in the Los Angeles, Miami and New
York Market Areas.
The Company's owned and operated television stations and the Network
Company's affiliates also face competition for advertising revenue from other
sources serving the same markets and competing for the same target audience,
such as other Spanish-language and English-language media, including television
stations, cable channels, direct broadcast satellites, radio stations,
magazines, newspapers, movies and other forms of entertainment. The
English-language media are generally better developed and better capitalized
than the Spanish-language media in the United States. The Company also competes
with English-language broadcasters for Hispanic viewers, including the four
principal English-language television networks, ABC, CBS, NBC and Fox, and, in
certain cities, the UPN and WB networks. Certain of these and other
English-language networks have begun producing Spanish-language programming and
simulcasting certain programming in English and Spanish. Several cable
programming networks, including HBO, ESPN and CNN, provide Spanish-language
services as well. There can be no assurance that current Spanish-language
television viewers will continue to watch the Company's or any other
Spanish-language broadcaster's programming rather than English-language
programming or Spanish-language simulcast programming.
In Puerto Rico, WKAQ has three significant Spanish-language television
station competitors. In addition, three other Spanish-language television
stations operate in that market. Although the general market programming of the
major English-language U.S. networks is available in Puerto Rico through cable
carriage, none of such networks has attracted a significant
8
<PAGE>
share of the Puerto Rico audience to date. On October 2, 1998, Chancellor Media
Corp. and one of its subsidiaries (collectively, "Chancellor") filed a transfer
application seeking FCC consent of Chancellor's acquisition of Pegasus
Broadcasting of San Juan, L.L.C., the licensee of WAPA. WAPA is one of WKAQ's
significant competitors. On December 4, 1998, the Company filed a "Petition to
Deny" Chancellor's transfer application on both procedural and substantive
grounds. Chancellor filed its opposition to the Petition to Deny on December 17,
1998 and WAPA filed a reply on December 28, 1998. Subsequently, Chancellor
announced that it had assigned its agreement to acquire WAPA to LIN Television,
Inc. ("LIN"). The Company believes that LIN's acquisition of WAPA will likely
raise the same regulatory concerns presented by the Chancellor application given
certain common ownership interests in Chancellor and LIN. The FCC has yet to
rule on the Company's Petition to Deny. It is not possible to predict how the
ultimate outcome of this proceeding or the possible acquisition of WAPA by LIN
may affect the Company's business.
Further advances in technology such as video compression and programming
delivered through fiber optic telephone lines could lower entry barriers for new
channels and encourage the development of increasingly specialized niche
programming.
FCC REGULATION
LICENSING
The ownership of the Company's television stations and certain of its
television broadcasting operations are subject to the jurisdiction of the FCC
under the Communications Act of 1934, as amended (the "Communications Act"). The
Communications Act was substantially amended by the Telecommunications Act of
1996 (the "Telecommunications Act"). The Communications Act prohibits the
operation of television broadcasting stations except under a license issued by
the FCC and empowers the FCC, among other matters, to issue, renew, revoke and
modify broadcast licenses, to determine the location of stations, to establish
areas to be served and to regulate certain aspects of broadcast programming. The
Communications Act prohibits the assignment of a broadcast license or the
transfer of control of a licensee without the prior approval of the FCC. If the
FCC determines that violations of the Communications Act or the FCC's own
regulations have occurred, it may impose sanctions ranging from admonition of a
licensee to license revocation.
The Communications Act provides that a license may be granted to any
applicant if the public interest, convenience and necessity will be served
thereby, subject to certain limitations. Pursuant to the terms of the
Telecommunications Act, the FCC increased the terms of such licenses and their
renewals from five to eight years. FCC licenses of full-power stations held by
the Company have the following expiration dates: WNJU--June 1, 1999; WKAQ and
WSCV--February 1, 2005; WSNS--December 1, 2005; KTMD and KVDA--August 1, 2006;
and KSTS and KVEA--December 1, 2006. The Company must apply to renew these
licenses, and third parties may challenge those applications. The Company filed
a renewal application with respect to WNJU on February 1, 1999. Although the
Company has no reason to believe that its licenses will not be renewed in the
ordinary course, there can be no assurance that its licenses will be renewed.
INITIAL FCC CONSENT
The Senior Discount Notes Offering, the Merger, the Equity Contributions,
the Network Sale, the Tender Offer, the closing of the New Credit Facilities and
the related transactions are collectively referred to herein as the
"Transactions". On July 30, 1998, the FCC issued an initial consent to the
transfer of control of certain broadcast licenses to Holdings (the "Initial FCC
Consent"). The parties consummated the Transactions on the basis of the Initial
FCC Consent. Any person whose interests are adversely affected by the Initial
FCC Consent has 30 days after public notice thereof to seek reconsideration or
review of the Initial FCC Consent. If no timely petition for reconsideration or
review of the Initial FCC Consent is filed within 30 days thereof and the FCC
does not timely reconsider the action on its own motion within 40 days thereof,
such Initial FCC Consent shall become a final order and shall no longer be
subject to further administrative or judicial review at the close of business on
the 40th day after public notice of the Initial FCC Consent. On August 6, 1998
Univision, the Company's primary competitor, filed an application (the
"Univision Application") seeking review of the Initial FCC Consent. On August
26, 1998, the Company filed its opposition to the Univision Application and on
September 19, 1998, Univision filed its reply. The FCC has not yet acted upon
the Univision Application. Although the Company cannot predict the timing for
FCC action on, or the outcome of, the Univision Application, the Univision
Application or any timely judicial appeal of the FCC decision on the Univision
Application may substantially delay the Initial FCC Consent becoming a final
order.
ATTRIBUTABLE INTERESTS
Under current FCC regulations, the officers, directors and certain of the
equity owners of a broadcasting company are deemed to have an "attributable
interest" in the broadcasting company. In the case of a corporation owning or
controlling television stations, subject to certain exceptions, there is
generally attribution only to officers and directors and to stockholders who own
5% or more of the outstanding voting stock (except for certain institutional
investors, which are subject to a 10%
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<PAGE>
voting stock benchmark provided certain conditions are satisfied). In addition,
under one of these exceptions, there is no attribution of minority stock
interests if there is a single holder of more than 50% of the outstanding voting
stock of a corporate broadcast licensee in which the minority interest is held.
Under current FCC rules governing multiple and cross-ownership of broadcast
companies, a license to operate a television station will not be granted (unless
established waiver standards are met) to any party (or parties under common
control) that has an attributable interest in another television station with an
overlapping service contour, as defined in the rules. The regulations also
prohibit a party from having an attributable interest in television stations
located in markets which, in the aggregate, include more than 35% of total U.S.
television households. (For purposes of this rule, UHF stations are attributed
with 50% of the television households in their respective markets). The rules
also prohibit (with certain qualifications) a party from holding attributable
interests in (i) a television and a radio station, (ii) a television station and
a cable television system, or (iii) a television or radio station and a daily
newspaper, in the same local market. In addition, the FCC's "cross-interest"
policy generally prohibits a party (or parties under common control) that has an
attributable interest in one media company from having a non-attributable but
"meaningful" interest, including a significant non-voting equity interest, in
another media company serving "substantially the same area." The FCC is
conducting rulemaking proceedings to consider, among other things, changes in
its attribution rules and the modification of the local cross-ownership
restrictions and the cross-interest policy. In addition, on March 12, 1998, the
FCC commenced a formal inquiry to review all of its broadcast ownership rules
which are not otherwise under review, including the national audience
limitation, the associated 50% discount for UHF stations and the
cable/television cross-ownership rule. The Company cannot predict the timing or
effect of any changes resulting from these rulemaking proceedings.
The Company does not have any attributable interests in other broadcast
stations, cable systems or newspapers, but the parent company of one of the
Company's stockholders, directly or indirectly, holds (i) attributable interests
in cable television systems within each of the markets served by the Company's
television stations, and (ii) non-attributable interests in television stations
operating within certain of the markets served by the Company's television
stations. In addition, a limited partner of one of the Company's stockholders
holds attributable interests in cable television systems within two of the
markets served by the Company's television stations. Pursuant to the Initial FCC
Consent, these interests in the Company were deemed not to be attributable under
FCC rules and not to be "meaningful" for purposes of the cross-interest policy.
FOREIGN OWNERSHIP RESTRICTIONS
The Communications Act authorizes the FCC, if the FCC determines that it
would be in the public interest, to prohibit the issuance of a broadcast license
to, or the holding of a broadcast license by, any corporation directly or
indirectly controlled by any other corporation of which more than 25% of the
capital stock is owned of record or voted by non-U.S. citizens or their
representatives or a foreign government or a representative thereof or any
corporation organized under the laws of a foreign country (collectively,
"Aliens"). The FCC has issued interpretations of existing law under which these
restrictions in modified form apply to other forms of business organizations,
including partnerships. In the Initial FCC Consent, the FCC held that 22.67% of
the capital stock of the Company is indirectly owned of record by Aliens and
that 23.26% of the voting stock of the Company is indirectly voted by Aliens. If
the FCC ultimately determines that more than 25% of the capital stock of the
Company is indirectly owned of record or voted by Aliens, the Stockholders are
prepared to restructure their respective investment in the Company or take any
other action necessary to reduce the indirect Alien ownership in the Company to
no more than 25%.
COVERAGE AND MUST-CARRY RIGHTS
Pursuant to the Cable Television Consumer Protection and Competition Act of
1992, television broadcasters are required to make triennial elections to
exercise either certain "must-carry" or "retransmission consent" rights in
connection with their carriage by cable systems in each broadcaster's local
market. By electing must-carry rights, a broadcaster demands carriage on a
specified channel on cable systems within its Area of Dominant Influence
("ADI"), as defined by the Arbitron 1991-92 Television Market Guide. However,
these must-carry rights are not absolute, but are dependent on variables such as
the number of activated channels on, and the location and size of, the cable
system, the amount of duplicative programming on a broadcast station, the
channel positioning demands of other broadcast stations and the signal quality
of the stations at the cable system's principal headend. Alternatively, if a
broadcaster chooses to exercise retransmission consent rights, it can prohibit
cable systems from carrying its signal or grant the appropriate cable system the
authority to retransmit the broadcast signal for a
10
<PAGE>
fee or other consideration. LPTVs have very limited must-carry rights, although
cable systems cannot retransmit LPTV stations' signals without their consent.
The Company's owned and operated full-power stations have elected must-carry
rights. The Telecommunications Act modified the way in which markets for
carriage will be determined for purposes of the must-carry rules: it provides
that the FCC will determine a broadcast station's market by using commercial
publications that delineate television markets based on viewing patterns. This
modification has resulted in the FCC ruling that for the election period
commencing January 1, 2000, a station's market will be defined by the DMA to
which it has been designated. The FCC is authorized to entertain requests for
expansion or other modification of television station markets, and is now
required to resolve any market modification request within 120 days after the
request is filed.
A number of the Company's stations serving several markets and many of the
Network Company's affiliates are classified by the FCC as "low-power" stations.
Certain of the Company's owned and operated stations and the Network Company's
affiliates increase their coverage through use of "translators" that rebroadcast
the station's signal. Both low power and translator stations are referred to as
"LPTV" stations and generally operate at significantly lower levels of power
than full-power stations. Under FCC rules, in addition to its policies regarding
digital television technology ("DTV"), such LPTV stations operate on a secondary
basis, and therefore, are subject to displacement by a full-power station or
other facility if one is licensed and they must tolerate defined levels of
electromagnetic interference from full-power stations.
CHILDREN'S PROGRAMMING
Pursuant to the Children's Television Act of 1990, the amount of commercial
matter that may be broadcast during programming designed for children 12 years
of age and younger has been limited to 12 minutes per hour on weekdays and 10.5
minutes per hour on weekends. In addition, television stations are required to
broadcast a minimum of three hours per week of "core" children's educational
programming, which the FCC defines as programming that (i) has serving the
educational and informational needs of children 16 years of age and under as a
significant purpose; (ii) is regularly scheduled, weekly and at least 30 minutes
in duration; and (iii) is aired between the hours of 7:00 a.m. and 10:00 p.m. A
television station found not to have complied with the "core" programming
requirements or the children's commercial limitations could face sanctions,
including monetary fines and the possible non-renewal of its broadcasting
license.
RECENT AND PROPOSED LEGISLATION; PROPOSED RULEMAKING
On February 17, 1998, the FCC adopted a final table of digital channel
allotments and rules for the implementation of DTV service (including
high-definition television) in the United States. The digital table of
allotments provides each existing full power television station licensee or
permittee with a second broadcast channel to be used during the transition to
DTV, conditioned upon the surrender of one of the channels at the end of the DTV
transition period. The implementing rules permit broadcasters to use their
assigned digital spectrum flexibly to provide either standard or high-definition
video signals and additional services, including, for example, data transfer,
subscription video, interactive materials and audio signals, subject to the
requirement that they continue to provide at least one free, over-the-air
television service. The FCC has set a target date of 2006 for expiration of the
transition period, subject to biennial reviews to evaluate the progress of DTV,
including the rate of consumer acceptance. Under present FCC rules, applications
for construction permits for the Company's DTV stations are due November 1,
1999, and construction must be completed by May 1, 2002. Conversion to DTV may
reduce the geographic reach of the Company's stations or result in increased
interference, with, in either case, a corresponding loss of population coverage.
DTV implementation will impose additional costs on the Company, primarily due to
the capital costs associated with construction of DTV facilities and increased
operating costs both during and after the transition period. In addition, on
July 10, 1998, the FCC initiated a rulemaking proceeding to determine how the
must-carry rule will be applied to the digital broadcast channel assigned to
each current full power television station licensee. The Company cannot predict
the effect this proceeding will have on the cable carriage of the Company's full
power television stations. Also, pursuant to the Telecommunications Act, on
November 19, 1998, the FCC adopted rules that require broadcasters to pay the
United States Treasury a fee of five percent of gross revenue received from
ancillary or supplementary uses of their DTV spectrum for which the broadcasters
charge subscription fees or other compensation. The FCC has maintained the
secondary status of LPTV stations in connection with its implementation of a
channel allotment plan for DTV, but has announced steps to assist LPTV stations
that are displaced or otherwise affected by DTV operations, including affording
procedural protections to LPTV stations that seek to relocate to a new channel
to eliminate interference to or from an allotted full service DTV facility.
In August 1998, the FCC adopted new rules and procedures that establish
the use of competitive bidding (auctions) to resolve mutually exclusive
applications for major changes to existing broadcast stations and competing
applications for all new
11
<PAGE>
broadcast stations. The rules apply to full power commercial analog television
stations as well as all secondary commercial television broadcast services,
including LPTV and television translator services.
Under certain copyright laws, the signals of broadcast television stations
that can be received by viewers over-the-air cannot be retransmitted to those
viewers by satellite video providers without the prior consent of parties
holding copyrights to the underlying programming. However, the Satellite Home
Viewer Act creates a statutory copyright license that permits satellite video
providers to retransmit to subscribers the signals of certain broadcast
television stations or networks that cannot be received by those subscribers
over-the-air. In February of 1999, the FCC concluded a rulemaking proceeding to
more clearly define the standard that should be used by satellite video
providers, under the Satellite Home Viewer Act, to determine if a subscriber
receives a given broadcast television signal over-the-air. Several legislative
proposals were subsequently introduced to address this issue. It is not possible
to predict how the ultimate outcome of the legislative proposals will affect the
Company's business.
Congress and the FCC currently have under consideration and may in the
future adopt new laws or modify existing laws and regulations and policies
regarding a wide variety of matters, including the adoption of new equal
employment opportunity rules and policies and the adoption of attribution rules
which would further restrict broadcast station ownership, that could directly or
indirectly adversely affect the ownership and operation of the Company's
broadcast properties, as well as the Company's business strategies.
The adoption of various measures could accelerate the existing trend toward
vertical integration in the media and home entertainment industries and cause
the Company to face more formidable competition in the future. The
Telecommunications Act modified or eliminated restrictions on the offering of
multiple network services by the existing major television networks,
restrictions on the participation by the regional telephone operating companies
in cable television and other direct-to-home video technologies, and certain
restrictions on broadcast station ownership. The Company is unable to predict
whether these or other potential changes in the regulatory environment could
restrict or curtail the ability of the Company to acquire, operate and dispose
of stations or, in general, to compete profitably with other operators of
television stations and other media properties.
The laws, rules, regulations and interpretations governing the Company's
business are revised from time to time and it is not possible to predict the
effect that future regulatory changes will have on the Company's business.
ENVIRONMENTAL MATTERS
Under certain environmental laws, a current or previous owner of real
property, and parties that generate or transport hazardous substances that are
disposed of at real property, may be liable for the costs of investigating and
remediating such substances on or under the property. The federal Comprehensive
Environmental Response, Compensation & Liability Act, as amended ("CERCLA"), and
similar state laws, impose liability on a joint and several basis, regardless of
whether the owner, operator, or other responsible party was at fault for the
presence of such hazardous or toxic substances. Environmental laws also may
impose restrictions on the manner in which property may be used or businesses
may be operated, and these restrictions may require expenditures for compliance.
In connection with the ownership or operation of its facilities, the Company
could be liable for such costs in the future.
The Company currently is not aware of any material environmental claims
pending or threatened against it, and does not believe it is subject to any
material environmental remediation obligations. However, no assurance can be
given that a material environmental claim or compliance obligation will not
arise in the future. The cost of defending against any claims of liability, of
remediating a contaminated property, or of complying with future environmental
requirements could impose material costs on the Company.
SEASONALITY OF BUSINESS
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 revenue for the fourth quarter. The seasonality is more
pronounced in Puerto Rico and as a result, the Company experiences seasonal
fluctuations to a greater degree than the U.S. broadcasting industry in general.
Because costs are more ratably spread
12
<PAGE>
throughout the year, the impact of this seasonality on operating income is more
pronounced. Seasonal revenue fluctuations in the Company's revenue may also be
impacted by the Affiliation Agreement.
EMPLOYEES
As of December 31, 1998, the Company and its subsidiaries had approximately
790 full-time employees, approximately 216 of whom were employees of WKAQ in
Puerto Rico. Approximately 60 employees of KVEA, 65 employees of WNJU, 36
employees of KSTS, 128 employees of WKAQ and 27 employees of WSNS are covered by
union contracts. The Company believes its relations with its employees and
unions are satisfactory.
ITEM 2. PROPERTIES
The table below sets forth the Company's principal properties as of
December 31, 1998.
<TABLE>
<CAPTION>
LEASE/OPTION
STATION LOCATION USE OWNED/LEASED SIZE (SQ. FT.) EXPIRATION
------- -------- --- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
WSCV Hialeah, FL Office & studio(1) Leased 25,000 2000/2004
Transmission tower site Leased 2004/2011
WNJU Hasbrouck Hts, NJ Office & studio(2) Leased 15,000 2003/2007
Transmission tower site Leased 2004
KVEA Glendale, CA Office & studio Leased 32,000 2002
Transmission tower site Leased (3)
KTMD Houston, TX Office & studio Leased 17,000 2003
Transmission tower site Owned N/A
KSTS San Jose, CA Office & studio Leased 16,000 2003
Transmission tower site(4) Leased 2015
WSNS Chicago, IL Office & studio Owned 21,000 N/A
Transmission tower site(5) Leased 2009/2019
KVDA San Antonio, TX Office & studio Owned 20,000 N/A
Transmission tower site Owned N/A
WKAQ San Juan, Puerto Rico Office & studio Owned 200,000 N/A
Transmission tower site(6) Leased 2009
</TABLE>
(1) WSCV and the Company also share additional space in the Network Company's
operations center in Hialeah, Florida.
(2) WNJU also shares space in the Network Company's national sales offices in
New York, New York.
(3) The Company currently uses this site pursuant to an oral lease whose term
will expire in 2003, with options to extend until 2013.
(4) Relocating to an alternative transmitter and antenna site in San Jose,
California in 1999; lease expiration dates reflect the terms of the lease
for the alternate site.
(5) Relocating to an alternative transmitter and antenna site in Chicago,
Illinois in 1999; lease expiration dates reflect the terms of the lease for
the alternate site.
(6) Located on property owned by the Department of Natural Resources of the
Commonwealth of Puerto Rico.
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<PAGE>
The Company also leases various properties throughout the country for LPTVs
and use as corporate offices. None of these lease commitments are material to
the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is aware of six lawsuits that have been filed relating to the
Merger. Telemundo and its directors at the time of the Merger are defendants in
all of the lawsuits. Certain of Telemundo's significant pre-Merger stockholders
are defendants in two of the lawsuits. All of the lawsuits were filed by
pre-Merger stockholders of Telemundo not affiliated with the Company or its
affiliates, seeking to represent a putative class of all such stockholders. All
of the lawsuits were filed in the Delaware Court of Chancery. On March 5, 1998,
the six actions were consolidated for all purposes, and the complaint entitled
Mimona Capital, CA No. 16052-NC was designated as the sole operative complaint
for the consolidated action. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders in the fourth quarter
of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
There is no established public trading market for the Company's common
stock. As of March 31, 1999, there were three holders of record of the Company's
common stock. The Company has not paid dividends on its common stock and does
not expect to pay dividends on its common stock in the foreseeable future. The
Series B Notes and the New Credit Facilities contain restrictions on the
Company's ability to pay dividends on its common stock.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the Company, set forth in the Company's 1998
Annual Report to Stockholders under "Selected Historical Consolidated Financial
Data," at page 1, are incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Management's Discussion and Analysis of Results of Operations and Financial
Condition, set forth in the Company's 1998 Annual Report to Stockholders at
pages 2 through 8, is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information related to quantitative and qualitative disclosures about
market risk, set forth in the Company's 1998 Annual Report to Stockholders under
"Liquidity and Sources of Capital," at pages 7 through 8, is incorporated herein
by reference.
14
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements and related notes thereto,
set forth in the Company's 1998 Annual Report to Stockholders at pages 9 through
25, are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and position of each executive
officer and director of Holdings:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Roland A. Hernandez...... 41 President, Chief Executive Officer and Chairman
Peter J. Housman II....... 47 Chief Financial Officer and Treasurer
Osvaldo F. Torres......... 37 Vice President, General Counsel and Secretary
Vincent L. Sadusky........ 33 Vice President, Finance
Leon D. Black............. 47 Director
Guillermo Bron............ 47 Director
Brian D. Finn............. 38 Director
Yair Landau............... 35 Director
Enrique F. Senior......... 55 Director
Bruce H. Spector.......... 56 Director
Barry Thurston............ 57 Director
Edward M. Yorke........... 40 Director
</TABLE>
ROLAND A. HERNANDEZ. Mr. Hernandez has been President, Chief Executive
Officer and Chairman of Holdings since August 1998, a director of Telemundo
since 1989 and President and Chief Executive Officer of Telemundo since March
1995. Since November 1997, Mr. Hernandez has been an executive officer of HIC
Broadcast, Inc. ("HIC"), which owns Spanish-language television station KFWD,
Channel 52, a broadcast affiliate of the Telemundo network serving the
Dallas/Fort Worth market. From 1987 to 1997, Mr. Hernandez was an executive
officer of the corporate general partner of Interspan Communications
("Interspan"), the predecessor to HIC. Mr. Hernandez is also a director of
Wal-Mart Stores, Inc.
PETER J. HOUSMAN II. Mr. Housman has been the Chief Financial Officer and
Treasurer of Holdings since August 1998 and the Chief Financial Officer and
Treasurer of Telemundo since February 1987.
OSVALDO F. TORRES. Mr. Torres has been Vice President, General Counsel and
Secretary of Holdings since August 1998 and Vice President, General Counsel and
Secretary of Telemundo since May 1997. From May 1996 to May 1997, Mr. Torres
served as Associate General Counsel and Secretary of Telemundo. From February
1995 to May 1996, Mr. Torres served as an associate in the law firm of Gunster,
Yoakley, Valdes-Fauli & Stewart, P.A., in West Palm Beach, Florida. From
February 1989 to February 1995, Mr. Torres served as an associate in the law
firm of Schulte Roth & Zabel in New York City.
VINCENT L. SADUSKY. Mr. Sadusky has been Vice President, Finance of
Holdings since November 1998. From March 1994 to November 1998, Mr. Sadusky held
various financial positions with Telemundo, most recently as Vice President
Finance of the Telemundo Network and of Telemundo's owned and operated stations.
From 1986 to March 1994, Mr. Sadusky served in the accounting firm of Ernst &
Young LLP, most recently as a Manager.
15
<PAGE>
LEON D. BLACK. Mr. Black has been a director of Holdings since August 1998
and was Chairman of the Board of Directors of Telemundo from December 30, 1994
to August 1998. Mr. Black is one of the founding principals and, since its
formation, has been a limited partner of Apollo Advisors, L.P. ("Apollo
Advisors"), which was established in 1990 and which, together with its
affiliates, acts as managing general partner of Apollo Investment Fund, L.P.,
AIF II, L.P., Apollo Investment Fund III, L.P. and Apollo Investment Fund IV,
L.P., private securities investment funds. Mr. Black is also a founding
principal of Lion Advisors, L.P. ("Lion Advisors"), which acts as financial
advisor to and representative for certain institutional investors with respect
to securities investments. Mr. Black is also a director of Converse, Inc.,
Samsonite Corporation and Vail Resorts, Inc.
GUILLERMO BRON. Mr. Bron has been a director of Holdings since August 1998
and was a director of Telemundo from December 30, 1994 to August 1998. From July
1993 to the present, Mr. Bron has been an officer, director and principal
stockholder of the corporate general partner of Bastion Partners, which is the
general partner of Bastion. Mr. Bron is also a director of United PanAm
Financial Corp.
BRIAN D. FINN. Mr. Finn has been a director of Holdings since August 1998.
Mr. Finn has been a principal of Clayton, Dubilier & Rice, Inc., a private
investment firm, since 1997. From 1993 to 1997, Mr. Finn was a Managing
Director and Co-Head of Mergers & Acquisitions at Credit Suisse First Boston.
Mr. Finn is also a director of Dynatech Corporation.
YAIR LANDAU. Mr. Landau has been a director of Holdings since August 1998.
Mr. Landau joined Sony Pictures in May 1991 and has served as its Executive
Vice President, Corporate Development and Strategic Planning, since October
1997.
ENRIQUE F. SENIOR. Mr. Senior has been a director of Holdings since August
1998. Mr. Senior is a Managing Director and Executive Vice President of Allen &
Company, Incorporated, having joined Allen & Company in 1973. Mr. Senior is also
a director of Princeton Video Image, Inc. and dick clark productions, inc.
BRUCE H. SPECTOR. Mr. Spector has been a director of Holdings since August
1998 and was a director of Telemundo from December 1994 to August 1998. From
1992 to 1995, Mr. Spector was a consultant to Apollo Advisors. In March 1995,
Mr. Spector became a principal of Apollo Advisors. Mr. Spector is also a
director of Metropolis Realty Trust, Inc., Nexthealth, Inc., United
International Holdings, Inc. and Vail Resorts, Inc.
BARRY THURSTON. Mr. Thurston has been a director of Holdings since August
1998. Mr. Thurston has served as President of Columbia TriStar Television
Distribution, an affiliate of Sony Pictures, and its predecessors since 1986. In
this capacity, Mr. Thurston is responsible for the domestic distribution to
television outlets of all Sony Pictures' television and feature film product.
EDWARD M. YORKE. Mr. Yorke has been a director of Holdings since August
1998 and was a director of Telemundo from June 1995 to August 1998. Since August
1998, Mr. Yorke has been a Managing Director and principal of Donaldson, Lufkin
& Jenrette Securities Corporation. From 1992 to August 1998, Mr. Yorke was a
principal of Apollo Advisors and Lion Advisors.
Pursuant to the Stockholders Agreement (as defined), Station Partners, Sony
Pictures and Liberty agreed to elect nine directors to the Board of Directors of
Holdings, of which four directors are designated by Station Partners, two
directors are designated by Sony Pictures, one director is nominated by Liberty,
subject to the approval of a majority of the outstanding shares of common stock
of the Company held by stockholders other than Liberty, and two directors are
designated as independent. One of the independent directors is nominated by
Station Partners, subject to the approval of Liberty and Sony Pictures, and the
other independent director is nominated by Liberty and Sony Pictures, subject to
the approval of Station Partners. Station Partners has designated Messrs. Black,
Bron, Hernandez and Spector as directors, Sony Pictures has designated Messrs.
Landau and Thurston as directors and Mr. Finn has been nominated by Liberty.
Messrs. Senior and Yorke have been selected as the independent directors. The
Stockholders Agreement also requires that certain Major Decisions receive the
unanimous approval of each of Station Partners, Sony Pictures and Liberty. See
"Certain Relationships and Related Transactions--Transactions Related to the
Merger--Stockholders Agreement."
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ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the compensation for
services in all capacities to the Company for the years ended December 31, 1998,
1997, and 1996 paid to (a) the Chief Executive Officer, (b) the other three most
highly compensated executive officers of the Company during 1998 and (c) the two
most highly compensated executive officers of Telemundo who were not employees
of the Company at December 31, 1998 (collectively, the "Named Executive
Officers"). Mr. Tringali became an executive officer of Telemundo in 1996.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS (#)
-------------------------
ANNUAL SECURITIES ALL OTHER
BONUS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION DURING YEAR SALARY ($) ($)(1) OPTIONS (#) ($)(2)
- ----------------------------------- ---- ---------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Roland A. Hernandez................. 1998 782,700 733,333 0 9,116
President and Chief Executive 1997 700,000 0 30,000 8,438
Officer 1996 700,000 913,889 0 8,615
Peter J. Housman II................. 1998 387,000 366,666 0 7,140
Chief Financial Officer and 1997 325,000 0 30,000 6,233
Treasurer 1996 325,000 186,506 0 7,733
Osvaldo F. Torres................... 1998 177,400 52,500 0 5,587
Vice President, General Counsel 1997 142,900 30,000 15,000 5,729
and Secretary 1996 84,200 16,000 0 657
Vincent L. Sadusky.................. 1998 120,700 37,500 0 5,696
Vice President, Finance 1997 102,700 30,000 15,000 5,495
1996 85,100 17,500 0 4,039
Steven J. Levin..................... 1998 242,100(3) 266,666 0 6,382(3)
Executive Vice President 1997 344,900 0 30,000 6,233
1996 315,500 331,566 0 7,733
Donald J. Tringali.................. 1998 242,100(3) 266,666 0 6,382(3)
Executive Vice President 1997 344,900 0 30,000 3,502
1996 177,000(4) 261,486 75,000 742(4)
</TABLE>
(1) Bonus amounts represent compensation for services for the respective years
shown.
(2) The following amounts are included in the above table. Retirement
contributions and matching 401(k) contributions: Mr. Hernandez--$6,600 for
1998, $4,750 for 1997 and $6,250 for 1996; Mr. Housman--$6,600 for 1998,
$4,750 for 1997 and $6,250 for 1996; Mr. Torres--$5,047 for 1998, $4,750
for 1997 and $0 for 1996; Mr. Sadusky--$5,221 for 1998, $4,750 for 1997 and
$3,419 for 1996; Mr. Levin--$6,067 for 1998, $4,750 for 1997 and $6,250 for
1996; and Mr. Tringali--$6,067 for 1998, $2,019 for 1997 and $0 for 1996.
Life insurance premium payments: Mr Hernandez--$2,516 for 1998, $3,688 for
1997 and $3,848 in 1996; Mr. Housman--$540 for 1998 and $1,483 in each of
1997 and 1996; Mr. Torres--$540 for 1998, $979 in 1997 and $657 in 1996;
and Mr. Sadusky--$475 for 1998, $745 in 1997 and $620 in 1996; Mr.
Levin--$315 for 1998 and $1,483 in each of 1997 and 1996; and Mr.
Tringali--$315 for 1998, $1,483 in 1997 and $742 in 1996.
(3) In connection with the Merger, as of August 13, 1998, Messrs. Levin and
Tringali became employees of the Network Company. The 1998 compensation
amounts for Mr. Levin and Mr. Tringali represent compensation for services
rendered
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to Telemundo through August 12, 1998.
(4) From May 1995 through May 1996, Mr Tringali served as a consultant to
Telemundo. Consulting fees paid to Mr. Tringali in 1996 amounted to
$130,800.
OPTION GRANTS IN 1998
No options were granted by Holdings or Telemundo in 1998. Currently, the
Company has no stock option plans.
AGGREGATED OPTION EXERCISES IN 1998 AND YEAR-END OPTION VALUE
No options were exercised in 1998. However, in connection with the Merger,
on August 12, 1998, all of the unexercised options outstanding held by the Named
Executive Officers immediately prior to the Effective Time (as defined in the
Merger Agreement) (whether or not such option was then exercisable) were
converted into the right to receive, subject to any required withholding taxes,
the following cash payments: Mr. Hernandez--$17,800,513 for 542,500 shares
underlying such options; Mr. Housman--$1,786,279 for 80,000 shares underlying
such options; Mr. Torres--$202,505 for 15,000 shares underlying such options;
Mr. Sadusky--$202,505 for 15,000 shares underlying such options; Mr.
Levin--$1,957,529 for 80,000 shares underlying such options; and Mr.
Tringali--$1,867,538 for 105,000 shares underlying such options.
DIRECTORS COMPENSATION
Each of the directors of Holdings, other than Mr. Hernandez, serving on the
Board of Directors of Holdings receives for services as a director (i) $18,000
as an annual retainer, (ii) $2,500 for each regularly scheduled Board meeting
attended, (iii) a $2,500 annual fee for each committee such director serves on
and (iv) $1,500 for each extraordinary meeting of the Board attended.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee of Holdings are Bruce H. Spector,
Brian D. Finn and Barry Thurston. None of the members of the Compensation
Committee has ever served as an officer or employee of Holdings, nor has any
such member served as a member of a compensation committee or other board of
directors' committee performing similar functions of any other entity in 1998
except that Mr. Spector served on the compensation committee for United
International Holdings, Inc. and Mr. Senior served on the compensation committee
of Princeton Video Image, Inc.
EMPLOYMENT AGREEMENTS
Mr. Hernandez's employment agreement with Telemundo, dated as of March 9,
1995, as amended, remains in effect until February 28, 2001 and automatically
extends for additional one-year terms thereafter unless either party elects to
terminate the agreement. The amended employment agreement provides for an annual
base salary of $800,000 from February 29, 1998 through the remainder of his term
of employment. Mr. Hernandez will be eligible for annual bonuses for each of the
1999, 2000 and 2001 fiscal years up to 100% of his base salary, in each case, if
Telemundo achieves certain EBITDA (as defined in the employment agreement)
targets.
Mr. Housman's employment agreement with Telemundo, dated as of March 7,
1997, as amended, remains in effect until February 28, 2001 and automatically
extends for additional one-year terms thereafter unless either party elects to
terminate the agreement. The agreement provides for an annual base salary of
$400,000 from February 29, 1998 through the remainder of his term of employment.
Mr. Housman will be eligible for annual bonuses of up to 100% of his base salary
for the 1999, 2000 and 2001 fiscal years, in each case, if Telemundo achieves
certain EBITDA targets.
In addition to the specific provisions described above, the employment
agreements, as amended, for Messrs. Hernandez
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<PAGE>
and Housman each contain the provisions set forth below. If such executive's
employment is terminated because of death, disability or other event rendering
the applicable executive unable to perform his duties and obligations under the
agreement, in addition to his base salary and certain benefits through the date
of termination, Telemundo is obligated to pay such executive a bonus, if earned,
for the year in which such termination occurred. If such an executive is
terminated for "cause" (as defined in the applicable employment agreement) or
such an executive resigns without "good reason" (as defined in the applicable
employment agreement) pursuant to a resignation that is not a "specified
resignation" (as defined in the applicable employment agreement), Telemundo is
obligated to pay such executive only his base salary and certain other benefits
through the date of termination or resignation. The agreements provide that if
the executive is terminated by Telemundo "without cause" or by the executive for
"good reason" (each as defined in the applicable employment agreement), the
executive will be entitled to receive through an entitlement date that is the
later of February 28, 2001 or the first anniversary of the date of termination
of the executive's employment, (i) his base salary, (ii) his bonus for the
fiscal year in which such termination occurs and (iii) his benefits (or
reimbursement of the cost thereof) under his employment agreement. These
employment agreements also provide that if (a) there is a "change of control
transaction" (as defined in the applicable employment agreement), (b) the
applicable executive is offered a position allowing him to keep his title with
the successor to all or any part of Telemundo's business and (c) a "diminution
in duty" (as defined in the applicable employment agreement) would have occurred
but for the offer of a position as described in clause (b) above, then the
applicable executive will have the option of declining the position offered as
described in clause (b) above and instead modifying his position to a position
(but not senior to that offered) that has such work location, time commitment,
duties, responsibilities and terms as the applicable executive officer may
specify in his sole and absolute discretion after consultation with Telemundo.
In addition, the employment agreements provide for "specified resignation
rights" (as defined in the applicable employment agreement) which allow the
executive, during the one-month period beginning 14 months after a change of
control transaction, to terminate his employment for any reason whatsoever; any
such termination will be treated as if it were a termination for "good reason"
(the consequences of which are described above). The consummation of the Merger
constituted a "change of control transaction."
Mr. Torres' employment agreement with Telemundo, dated as of September 10,
1997 remains in effect until December 31, 1999 and automatically extends for
additional one-year terms thereafter unless either party elects to terminate the
agreement. Pursuant to Mr. Torres' employment agreement, his current annual base
salary is $200,000. For the period beginning on May 14, 1999 and ending on
December 31, 1999, the base salary will be mutually agreed upon by Mr. Torres
and Telemundo, but in no event will the base salary increase be less than ten
percent of the then current base salary. For the 1999 fiscal year, Mr. Torres is
entitled to a performance bonus equal to fifteen percent of his base salary. The
performance bonus is awarded based solely upon an assessment of Mr. Torres'
performance of his duties, without regard to the financial condition or
performance of Telemundo. For the 1999 fiscal year, Mr. Torres is also entitled
to a bonus based upon Telemundo's achievement with respect to EBITDA targets.
Mr. Torres has the right to resign without "good reason" (as defined in the
employment agreement) and terminate the employment agreement at any time within
six months after a "change of control transaction" (as defined in the employment
agreement) occurs and is entitled to receive (i) his base salary earned up to
the date of resignation and (ii) all benefits due up to the date of resignation.
Mr. Torres also has the right to terminate the employment agreement if a
"diminution in duty," a "designated relocation," or any other "good reason
event" (each as defined in the employment agreement) occurs and is entitled to
receive (i) his base salary earned through the later of December 31, 1999 or six
months after the date of termination of his employment, (ii) his bonus, if any,
earned for the fiscal year in which such termination occurs and (iii) all
benefits to which he is entitled through the later of December 31, 1999 or six
months after the date of termination of his employment. The consummation of the
Merger constituted a "change of control transaction."
Mr. Sadusky's employment agreement with Telemundo, dated as of September
10, 1997 remains in effect until December 31, 1999 and automatically extends for
additional one-year terms thereafter unless either party elects to terminate the
agreement. Pursuant to Mr. Sadusky's employment agreement, his current annual
base salary is $150,000. For the period beginning on July 24, 1999 and ending on
December 31, 1999, the base salary will be mutually agreed upon by Mr. Sadusky
and Telemundo, but in no event will the base salary increase be less than ten
percent of the then current base salary. For the 1999 fiscal year, Mr. Sadusky
is entitled to a performance bonus equal to fifteen percent of his base salary.
The performance bonus is awarded based solely upon an assessment of Mr.
Sadusky's performance of his duties, without regard to the financial condition
or performance of Telemundo. For the 1999 fiscal year, Mr. Sadusky is also
entitled to a bonus based upon Telemundo's achievement with respect to EBITDA
targets. Mr. Sadusky has the right to resign without "good reason" (as defined
in the employment agreement) and terminate the employment agreement at any time
within six months after a "change of control transaction" (as defined in the
employment agreement) occurs and is entitled to receive (i) his base salary
earned up to the date of resignation and (ii) all benefits due up to the date of
resignation. Mr. Sadusky also has the right to terminate the employment
agreement if a "diminution in duty," a "designated relocation," or any other
"good reason event" (each as defined
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<PAGE>
in the employment agreement) occurs and is entitled to receive (i) his base
salary earned through the later of December 31, 1999 or six months after the
date of termination of his employment, (ii) his bonus, if any, earned for the
fiscal year in which such termination occurs and (iii) all benefits to which he
is entitled through the later of December 31, 1999 or six months after the date
of termination of his employment. The consummation of the Merger constituted a
"change of control transaction."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 31, 1998, the number and
percentage of outstanding shares of voting stock of Holdings beneficially owned
by: (i) each executive officer and director of Holdings; (ii) all executive
officers and directors of Holdings as a group; and (iii) each person known by
Holdings to own beneficially more than five percent of Holdings' voting stock,
respectively. Holdings believes that each individual or entity named has sole
investment and voting power with respect to shares of voting stock of Holdings
indicated as beneficially owned by them, except as otherwise noted.
<TABLE>
<CAPTION>
NUMBER OF PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES OF CLASS
------------------------------------ --------- --------
<S> <C> <C>
5% OWNERS:
Station Partners, LLC(1)(2)................ 7,505 75.05%
c/o Apollo Management, L.P.
1301 Avenue of the Americas
New York, New York 10019
Liberty Media Corporation(2)............... 2,495 24.95%
8101 East Prentice Avenue
Englewood, Colorado 80111
Sony Pictures Entertainment Inc............ 2,495 24.95%
10202 West Washington Boulevard
Culver City, California 90232-3195
EXECUTIVE OFFICERS AND DIRECTORS:
Roland A. Hernandez........................ -- --
Peter J. Housman II........................ -- --
Osvaldo F. Torres.......................... -- --
Vincent L. Sadusky......................... -- --
Leon D. Black (3).......................... -- --
Guillermo Bron (4)......................... -- --
Brian D. Finn.............................. -- --
Yair Landau (5)............................ -- --
Enrique F. Senior.......................... -- --
Bruce H. Spector (3)....................... -- --
Barry Thurston (5)......................... -- --
Edward M. Yorke............................ -- --
All directors and officers as a group(6)... -- --
</TABLE>
(1) Station Partners is owned approximately 68% by Apollo Investment and
approximately 32% by Bastion. Apollo Investment is a Delaware limited
partnership of which Apollo Advisors II, L.P., a Delaware limited
partnership ("Advisors II"), is the managing general partner. Apollo
Capital Management II, Inc., a Delaware corporation ("Apollo Capital II"),
is the general partner of Advisors II. Apollo Management L.P., a Delaware
limited partnership ("Apollo Management"), serves as manager of Apollo
Investment. AIF III Management, Inc., a Delaware corporation ("AIM"), is
the general partner of Apollo Management. Mr. Leon Black, a director of
Holdings, is a director and stockholder of Apollo Capital II, a director of
AIM and one of the founding principals and a limited partner of Apollo
Investment. Mr. Bruce Spector, currently a director of Holdings, is a
principal of Apollo Management and Advisors II and a Vice President of
Apollo Capital II. Bastion Capital Fund, L.P. is a Delaware limited
partnership. The sole general partner of Bastion Capital Fund, L.P. is
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<PAGE>
Bastion Partners, L.P., a Delaware limited partnership ("Bastion
Partners"). The general partners of Bastion Partners are Bron Corp., a
Delaware corporation ("BC"), and Villanueva Investments, Inc., a Delaware
corporation ("VII"). The sole holder of voting stock and the sole director
and officer of BC is Mr. Guillermo Bron, currently a director of Holdings.
The sole holder of voting stock of VII is the Daniel Villanueva Living
Trust, a trust created under the laws of California, the co-trustees of
which are Daniel D. Villanueva and Myrna E. Villanueva. Mr. Villanueva, a
director of Telemundo prior to the Merger, is the sole director and
principal officer of VII. Messrs. Bron and Villanueva are the managing
directors of Bastion Capital Corp., which manages the affairs of Bastion
pursuant to a management agreement.
(2) Liberty has granted to Station Partners a proxy to vote all of the shares
of common stock of Holdings owned by Liberty. As a result of such proxy,
Liberty is not entitled to vote any of the shares of common stock of
Holdings owned by it. Such shares are included in the amount shown as
beneficially owned by Station Partners in the table above.
(3) Messrs. Black and Spector are associated with Apollo Management, the
manager of Apollo Investment, and disclaim beneficial ownership of all
shares of Holdings held by Station Partners.
(4) Mr. Bron is associated with Bastion and disclaims beneficial ownership of
all shares of Holdings held by Station Partners.
(5) Messrs. Landau and Thurston are associated with Sony Pictures and disclaim
beneficial ownership of all shares of Holdings held by Sony Pictures.
(6) Excludes shares shown in the table above as held by Station Partners,
Liberty and Sony Pictures.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS RELATED TO THE MERGER
MERGER AGREEMENT
On August 12, 1998 the Merger was consummated in accordance with the Merger
Agreement pursuant to which TLMD Acquisition was merged with and into Telemundo,
with Telemundo being the surviving corporation and becoming a wholly owned
subsidiary of Holdings. In the Merger, each outstanding share of Telemundo's
common stock was converted into the right to receive $44.12537 in cash.
EQUITY CONTRIBUTIONS
Pursuant to a funding agreement, dated as of November 24, 1997, Station
Partners, Liberty and Sony Pictures made equity contributions to Holdings in the
amounts of $137.2 million (of which $93.3 million was funded by Apollo
Investment and $43.9 million was funded by Bastion), $68.4 million and $68.4
million, respectively.
NETWORK SALE AND AFFILIATION AGREEMENT
In connection with the Merger, the Company sold its network operations,
which consisted of substantially all of the programming and production assets of
the Telemundo Network, to the Network Company. The Network Company is equally
owned by an affiliate of Sony Pictures and an affiliate of Liberty. Sony
Pictures and Liberty each own 24.95% of Holdings. The proceeds of the Network
Sale were contributed to TLMD Acquisition and Telemundo, and were used to fund
the consummation of the Merger and refinance existing indebtedness of Telemundo.
In connection with the Network Sale, the Company also entered into the
Affiliation Agreement with the Network Company, pursuant to which the Network
Company provides network programming to the Company, and the Company and the
Network Company have agreed to pool and allocate advertising revenue on a
predetermined basis. See "Business--Affiliation Agreement."
PROXY
Station Partners has the right to vote 75.05% of the common stock of
Holdings as a result of the grant by Liberty of an irrevocable proxy to vote all
of its shares of the common stock of Holdings. The proxy may be terminated by
Liberty under
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<PAGE>
certain specified circumstances.
STOCKHOLDERS AGREEMENT
In connection with the Merger, Sony Pictures, Liberty and Station Partners
(collectively, the "Initial Stockholders") entered into a stockholders agreement
(the "Stockholders Agreement") pursuant to which the Initial Stockholders agreed
to elect nine directors to the Board of Directors of Holdings, of which four
directors would be designated by Station Partners, two directors would be
designated by Sony Pictures, one director would be nominated by Liberty, subject
to the approval of a majority of the outstanding shares of common stock of the
Company held by stockholders other than Liberty, and two directors would be
designated as independent. One of the independent directors would be nominated
by Station Partners, subject to the approval of Liberty and Sony Pictures, and
the other independent director would be nominated by Liberty and Sony Pictures,
subject to the approval of Station Partners.
The Stockholders Agreement requires that Major Decisions (as defined in the
Stockholders Agreement) receive the unanimous approval of the Initial
Stockholders. Major Decisions include (i) changing the nature or scope of the
Company's predominantly Spanish-language broadcast business or acquiring an
additional material broadcast station or other substantial business, (ii)
issuing any equity or debt securities of Holdings, (iii) merging, consolidating
or reorganizing the Company, (iv) selling all or substantially all of the assets
of the Company, (vi) selling assets of the Company with a fair value in excess
of $10 million, (v) taking any action relating to the termination, dissolution,
liquidation or winding-up of the Company, (vii) taking any action that would
constitute certain events of insolvency and (viii) entering into any related
transaction between any station or the Company and any of its affiliates
(excluding transactions between the Company and the Network Company). In
addition, the approval of Station Partners and Sony Pictures is required to
permit any station owned, directly or indirectly, by Holdings to enter into,
amend, take any action to terminate or fail to renew any affiliation agreement.
The Stockholders Agreement also requires that the appointment of the Chief
Executive Officer and Chief Financial Officer, on the recommendation of Station
Partners, be approved by Sony Pictures.
PUT/CALL AGREEMENT
In general, common stock of Holdings held by an Initial Stockholder may not
be transferred without the consent of the other Initial Stockholders. The
Initial Stockholders have entered into a Put/Call Agreement, pursuant to which,
at any time after the fifth anniversary of the Merger, and subject to regulatory
approval, including FCC approval, Station Partners has the right to sell its
ownership interest in Holdings to Sony Pictures and Liberty. Each of Sony
Pictures and Liberty are severally obligated to purchase 50% of such ownership
interest for a price (the "Station Partners Purchase Price") equal to a
proportional amount, based upon Station Partners' then ownership interest in
Holdings, of the price that an unrelated third party would pay to acquire the
entire ownership of Holdings, in an arm's-length transaction. Notwithstanding
the foregoing, if the Station Partners Purchase Price is lower than the amount
that would be required to be paid to Station Partners such that Station
Partners' internal rate of return with respect to its investment, equals a
compounded return of 10% (the "Minimum Value"), then the price to be paid for
Station Partners' ownership interest in Holdings shall be the Minimum Value. If
the Station Partners Purchase Price is higher than the amount that would be
required to be paid to Station Partners such that Station Partners' internal
rate of return with respect to its investment equals a compounded annual return
of 40% (the "Maximum Value"), then the price to be paid for Station Partners'
ownership interest in the Company shall be the Maximum Value. If Station
Partners exercises its right to sell to Sony Pictures and Liberty its ownership
interest in Holdings, Sony Pictures and Liberty also will be required to
purchase certain rights to interests in the Network Company held by Station
Partners (the "Network Rights") at a price derived from a predetermined and
agreed upon formula. After the fifth anniversary of the Merger, and subject to
regulatory approval, including FCC approval, Sony Pictures and Liberty jointly
have the right to purchase all of Station Partners' ownership interest in
Holdings for a purchase price equal to the Station Partners Purchase Price or,
if applicable, the Minimum Value or Maximum Value. If Sony Pictures and Liberty
exercise their joint right to purchase Station Partners' ownership interest in
Holdings, then Sony Pictures and Liberty also will be required to purchase the
Network Rights at a price derived from a predetermined and agreed upon formula.
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SHARING AGREEMENT
Pursuant to a sharing agreement, dated as of August 12, 1998, between
Telemundo and the Network Company, Telemundo and the Network Company share
certain facilities, equipment, and administrative services, the cost of which is
allocated and borne ratably between the parties.
TRANSACTIONS PRIOR TO THE MERGER
Prior to the Merger and in connection with the consummation on December 30,
1994 (the "Consummation Date") of its plan of reorganization (the "Plan") under
the Bankruptcy Code, Telemundo entered into a number of agreements with certain
persons, including TLMD II and certain of its affiliates, relating to the
securities of Telemundo and defining certain aspects of the ongoing relationship
between Telemundo and such persons. All of these agreements, which are briefly
summarized below, were terminated upon consummation of the Transactions.
WARRANTS
Pursuant to the Plan, as of the Consummation Date, holders of certain
claims against and interests in Telemundo received cash, 10.25% Notes, Telemundo
common stock, and/or five-year warrants to purchase Series A common stock at
$7.00 per share (the "Creditors' Warrants").
Pursuant to Telemundo's Restated Certificate of Incorporation, the holders
of the Series B common stock had the right until December 30, 1998 (or for a
shorter period upon the occurrence of certain events) to elect a majority of the
Board. Of the 10,000,000 shares of common stock distributed under the Plan,
4,388,394 were shares of Series A common stock and 5,611,606 were shares of
Series B common stock, of which 3,011,885 were distributed in the aggregate to
Apollo Investment and Bastion. Pursuant to the Plan, Reliance Insurance Company
("Reliance"), which had directly owned or controlled 58.4% of the then
outstanding common stock of Telemundo, received approximately 10.2% of the total
outstanding common stock of Telemundo, all of which was Series A common stock
and warrants to purchase 416,667 shares of Series A common stock at $7.19 per
share. In addition, certain affiliates of Reliance received warrants to purchase
38 shares of Series A common stock at $7.00 per share.
At the Effective Time, all outstanding warrants were converted into the
right to receive, subject to any required withholding taxes, a cash payment
equal to the product of (i) the total number of shares then subject to each such
Warrant multiplied by (ii) the excess of the Merger Consideration over the
exercise price per share subject to such Warrant, which payment was made in
connection with the Merger.
OLD SHAREHOLDERS AGREEMENT
TLMD II, Mr. Leon Black, a director of Holdings, Bastion and Hernandez
Partners, a California general partnership of which Roland A. Hernandez, the
Chief Executive Officer and a Director of Holdings, is a partner, entered into a
shareholders agreement (the "Old Shareholders Agreement") pursuant to which each
of them agreed to vote their shares through a voting committee comprised of
three members. The Old Shareholders Agreement was terminated in connection with
the Transactions.
OLD REGISTRATION AGREEMENT
In connection with the Plan, Telemundo, Apollo Advisors, L.P. ("Advisors")
and Reliance entered into a registration rights agreement (the "Old Registration
Agreement") pursuant to which Telemundo, subject to certain conditions, agreed
to register under the Securities Act the 10.25% Notes and the common stock held
by Advisors and its affiliates or Reliance and its affiliates, or their
respective transferees. The registration provisions of the Old Registration
Agreement have been terminated.
23
<PAGE>
OTHER TRANSACTIONS
TELEMUNDO TRANSACTIONS WITH SONY PICTURES
In May 1997, Telemundo, Columbia TriStar Television, Inc. ("Columbia
TriStar Television"), an affiliate of Sony Pictures, and TV Azteca agreed to
jointly produce certain Spanish-language television programming. The first of
these programs is scheduled for broadcast on the Telemundo network beginning in
the fall of 1998. Telemundo Network, Inc. has entered into various agreements
with Columbia TriStar Television and Columbia TriStar Television Distribution
pursuant to which Columbia TriStar Television Distribution has agreed to license
to Telemundo Network, Inc. for broadcast on the Telemundo network certain motion
pictures and Columbia TriStar Television has agreed to develop and produce for
broadcast on the Telemundo network television serial programming and provide to
Telemundo certain advertising sales, consulting and marketing assistance. These
agreements were assumed by the Network Company in connection with the Network
Sale.
The Company purchases broadcast equipment in the normal course of its
business from various equipment suppliers, including Sony Corporation of America
and other affiliates of Sony Pictures. The Company believes such equipment was
purchased at fair market value.
INDEMNIFICATION OF DIRECTORS AND OFFICERS; DIRECTORS AND OFFICERS INSURANCE
Pursuant to the Merger Agreement, the Company and Telemundo maintain the
right to indemnification and exculpation of officers and directors provided for
in the Restated Certificate of Incorporation and Amended and Restated By-laws of
Telemundo as in effect on the date of the Merger Agreement, with respect to
indemnification and exculpation for acts and omissions occurring prior to the
Effective Time. To the fullest extent permitted by applicable law, Telemundo has
agreed to indemnify and hold harmless each present and former director and
officer of Telemundo for acts and omissions occurring prior to the Effective
Time. Telemundo has also agreed to advance expenses to each such indemnified
person and to cooperate fully in the defense of any such matter. Pursuant to the
Merger Agreement, for a period of six years after the Effective Time, the
Company or Telemundo will maintain officers' and directors' liability insurance
covering the persons who, on the date of the Merger Agreement, were covered by
Telemundo's officers' and directors' liability insurance policies with respect
to acts and omissions occurring prior to the Effective Time.
KFWD AFFILIATION AGREEMENT
HIC owns and operates television station KFWD, Channel 52, the Telemundo
network affiliate for Dallas/Fort Worth. Mr. Hernandez and his family own HIC
and Mr. Hernandez serves as an executive officer and director of HIC. The
affiliate relationship between the Network Company and HIC is governed by an
Affiliation and Representation Agreement dated as of August 31, 1993, as amended
(the "KFWD Affiliation Agreement"). The KFWD Affiliation Agreement was assumed
by the Network Company in connection with the Network Sale. Telemundo and
Interspan, HIC's predecessor, entered into a Modification Agreement, dated as of
September 10, 1997 (the "Modification Agreement"), which modified the KFWD
Affiliation Agreement. The compensation committee of Telemundo, pursuant to
authority delegated to it by its Board of Directors, negotiated the terms of the
Modification Agreement on behalf of Telemundo. Among other things, the
Modification Agreement extended the term of the KFWD Affiliation Agreement
through February 28, 2001 and provided HIC with the right to terminate the KFWD
Affiliation Agreement by giving Telemundo six months' written notice of such
termination during the 12-month period following the termination, for any
reason, of Mr. Hernandez's employment relationship with Telemundo. Under the
KFWD Affiliation Agreement, as modified by the Modification Agreement, Telemundo
paid to HIC $1,500,000 during the twelve month period ended August 31, 1998 and
will pay to HIC $1,612,500 and $1,733,438 during the 12-month periods ending on
August 31, 1999 and 2000, respectively, and at the rate of $1,863,445 on an
annualized basis during the period beginning on September 1, 2000 and ending on
February 28, 2001. In addition, HIC may be entitled to an amount up to $120,500
of bonus compensation based upon ratings performance of the station during any
12-month period.
24
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1. Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts (page F-1).
All other matters have been omitted because they are inapplicable, not
required, or the information is included elsewhere in the Company's
Consolidated Financial Statements or notes thereto.
(a) 2. Exhibits.
A list of the exhibits required to be filed as part of this report is
set forth in the Index to Exhibits on page F-2 of this report.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the three months ended
December 31, 1998.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Hialeah, Florida, on the 31st day of March, 1999.
TELEMUNDO GROUP, INC.
(Registrant)
By: /s/ ROLAND A. HERNANDEZ
--------------------------------------
Roland A. Hernandez
President, Chief Executive Officer
and Chairman
The undersigned directors and officers of Telemundo Holdings, Inc.
hereby constitute and appoint Peter J. Housman II and Osvaldo F. Torres, and
each of them, with full power to act without the other and with full power of
substitution and resubstitution, our true and lawful attorneys-in-fact with full
power to execute in our name and behalf in the capacities indicated below this
report and any and all amendments thereto and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission and hereby ratify and confirm all that such
attorneys-in-fact, or any of them, or their substitutes shall lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons in the capacities indicated
on March 31, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ ROLAND A. HERNANDEZ President, Chief Executive Officer
- --------------------------------------------- and Chairman
Roland A. Hernandez
/s/ PETER J. HOUSMAN II Chief Financial Officer and Treasurer
- ---------------------------------------------
Peter J. Housman II
/s/ OSVALDO F. TORRES Vice President, General Counsel and
- --------------------------------------------- Secretary
Osvaldo F. Torres
/s/ VINCENT L. SADUSKY Vice President, Finance
- ---------------------------------------------
Vincent L. Sadusky
/s/ LEON D. BLACK Director
- ---------------------------------------------
Leon D. Black
/s/ GUILLERMO BRON Director
- ---------------------------------------------
Guillermo Bron
/s/ BRIAN D. FINN Director
- ---------------------------------------------
Brian D. Finn
/s/ YAIR LANDAU Director
- ---------------------------------------------
Yair Landau
/s/ ENRIQUE F. SENIOR Director
- ---------------------------------------------
Enrique F. Senior
26
<PAGE>
/s/ BRUCE H. SPECTOR Director
- ---------------------------------------------
Bruce H. Spector
/s/ BARRY THURSTON Director
- --------------------------------------------
Barry Thurston
/s/ EDWARD M. YORKE Director
- --------------------------------------------
Edward M. Yorke
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
TELEMUNDO GROUP, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------------- ------------- ------------------------------------ ------------- --------------
ADDITIONS
------------------------------------
BALANCE AT CHARGED TO DEDUCTED
BEGINNING OF CHARGED TO PROFIT OTHER ACCOUNTS FROM RESERVES BALANCE AT
DESCRIPTION PERIOD AND LOSS OR INCOME - DESCRIBE -DESCRIBE(A) END OF PERIOD
- ------------------------------------- ------ ------------------ -------- ----------- -------------
<S> <C> <C> <C> <C> <C>
COMPANY:
Period August 13 to December 31, 1998:
Allowance for doubtful accounts........ $8,634 $542 $ - $1,591 $7,585
====== ==== === ====== ======
PREDECESSOR:
Period January 1 to August 12, 1998:
Allowance for doubtful accounts........ $7,583 $1,720 $ - $669 $8,634
====== ====== === ==== ======
Year Ended December 31, 1997:
Allowance for doubtful accounts........ $5,943 $3,479 $ - $1,839 $7,583
====== ====== === ====== ======
Year Ended December 31, 1996:
Allowance for doubtful accounts........ $2,650 $5,522 $ - $2,229 $5,943
====== ====== === ====== ======
</TABLE>
(a) Amounts written off, net of recoveries.
F-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<S> <C>
2.1 Merger Agreement dated as of November 24, 1997 by and among
TLMD Station Group, Inc., TLMD Acquisition Co. and Telemundo
Group, Inc.*
3.1 The Company's Amended and Restated Certificate of
Incorporation.*
3.2 The Company's Restated Bylaws.*
4.1 Indenture dated as of August 12, 1998 between the Company, as
issuer, and Bank of Montreal Trust Company, as trustee.*
4.2 Form of 11.5% Senior Discount Notes due 2008.*
4.3 Registration Rights Agreement dated as of August 12, 1998
between the Company, Credit Suisse First Boston Corporation
and CIBC Oppenheimer Corp.*
10.1 Memorandum of Agreement Re: Umbrella Affiliation Agreement
dated as of August 12, 1998 between Telemundo Network Group
LLC and Telemundo Group, Inc.**
10.2 Memorandum of Agreement Re: Cable Payments dated as of August
12, 1998 between Telemundo Network Group LLC and Telemundo
Group, Inc.*
10.3 Form of High Power Station Affiliation Agreement.*
10.4 Stockholders Agreement dated as of August 12, 1998 between
the Company, Apollo Investment Fund III, L.P., Bastion
Capital Fund L.P., Liberty Media Corporation, Sony Pictures
Entertainment Inc. and Station Partners, LLC.*
10.5 Asset Purchase Agreement dated as of August 12, 1998 between
Telemundo Group, Inc., Telemundo Network Inc. and Telemundo
Network Group LLC.*
10.6 Credit Agreement dated as of August 4, 1998 between TLMD
Acquisition Co., as borrower, the Company, as parent
guarantor, the Lenders (as named therein), Credit Suisse
First Boston Corporation and Canadian Imperial Bank of
Commerce.*
10.7 Pledge Agreement dated as of August 12, 1998 between
Telemundo Group, Inc., the Company, the Subsidiary Pledgors
(as named therein) and Credit Suisse First Boston
Corporation.*
10.8 Security Agreement dated as of August 12, 1998 between
Telemundo Group, Inc., the Company and the Subsidiary
Guarantors (as named therein).*
10.9 Subsidiary Guarantee Agreement dated as of August 12, 1998
between the Subsidiary Guarantors (as defined therein) and
Credit Suisse First Boston Corporation.*
10.10 Amended and Restated Employment Agreement dated as of
September 10, 1997 between the Company and Roland A.
Hernandez.^
10.11 Amended and Restated Employment Agreement dated as of
September 10, 1997 between the Company and Peter J. Housman
II.^
F-2
<PAGE>
10.12 Employment Agreement dated as of September 10, 1997 between
the Company and Osvaldo F. Torres.^
10.13 Employment Agreement dated as of September 10, 1997 between
the Company and Vincent L. Sadusky.*
13.1 Company's 1998 Annual Report to Stockholders.
21.1 Subsidiaries of the Registrant.*
23.1 Independent Auditors' Report.
27.1 Financial Data Schedule.
</TABLE>
* Incorporated by reference to the Telemundo Holdings, Inc. Registration
Statement on Form S-4, as amended (Registration number 333-64709 filed
with the Commission on September 29, 1998).
** Incorporated by reference to the Telemundo Holdings, Inc. Registration
Statement on Form S-4, as amended (Registration number 333-64709 filed
with the Commission on September 29, 1998). Confidential treatment
requested for certain portions.
^ Incorporated by reference to the Annual Report on form 10-K dated
December 31, 1997 of Telemundo Group, Inc.
F-3
EXHIBIT 13.1
COMPANY'S 1998 ANNUAL REPORT TO STOCKHOLDERS
<TABLE>
<CAPTION>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS)
REORGANIZATION
COMPANY(S) PREDECESSOR(B) PREDECESSOR(C)
---------- ------------------------------------------------------ -------------
AUGUST 13 JANUARY 1
TO TO YEAR ENDED DECEMBER 31,
DECEMBER 31, AUGUST 12, ------------------------------------------------------
1998 1998 1997 1996 1995 1994
------------ ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue .............................. $ 68,667 $ 124,671 $ 197,588 $ 202,713 $ 169,148 $ 183,894
Operating income ......................... 17,075 3,595 16,121 29,306 14,275 13,142
Reorganization items ..................... -- -- -- -- -- 76,255
Merger related expenses .................. -- (5,506) (1,707) -- -- --
Interest expense--net .................... (14,618) (13,067) (20,849) (18,920) (14,489) (645)
Loss from investment in and
disposal of TeleNoticias ............. -- -- -- (5,561) (6,355) (1,314)
Minority interest ........................ (606) (1,898) (2,808) (2,125) -- --
Income (loss) before
extraordinary item ..................... 472 (19,989) (13,444) (1,179) (10,088) 84,049
Extraordinary item--
extinguishment of debt ................. -- -- -- (17,243) -- 130,482
Net income (loss) ........................ 472 (19,989) (13,444) (18,422) (10,088) 214,531
Dividends declared on common
shares ............................... -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
COMPANY(A) PREDECESSOR(B)
---------- --------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
(AT END OF PERIOD):
Working capital .......................... $ 15,619 $ 44,177 $ 44,769 $ 35,541 $ 32,325
Broadcast licenses and
other intangible assets, net ........... 650,907 128,366 132,831 90,200 92,792
Total assets ............................. 771,398 290,086 295,560 224,459 232,024
Long-term debt ........................... 399,952 189,081 179,695 108,032 100,724
Common stockholders'
equity ................................. 214,485 29,909 42,893 60,251 70,000
</TABLE>
(a) Historical financial data for Telemundo Holdings, Inc. ("Holdings") has not
been provided for periods prior to August 13, 1998 as Holdings did not have
any operations or account balances prior to the Merger (as defined).
(b) 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, whereby Telemundo
became a wholly-owned subsidiary of Holdings (the "Merger"). 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 the
financial statements and related notes, the term "Predecessor" refers to
Telemundo from January 1, 1995 to August 12, 1998) 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.
(c) In 1994, net income was significantly impacted by nonrecurring income and
expense items related to Telemundo's financial restructuring. Telemundo was
recapitalized and adopted fresh start reporting as of December 31, 1994.
Consequently, Telemundo is referred to as the Reorganization Predecessor in
1994.
1
<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.
Pursuant to the Affiliation Agreement, the Company receives a formula-based
allocation of advertising revenue (the "Compensation Pool") generated by the
Company and the Network Company. The Compensation Pool consists of the following
revenue sources (collectively, the "Aggregate Net Advertising Receipts"): (i)
61% of the net advertising revenue received by the Network Company pursuant to
the sale of network advertising and block time (time made available for paid
programming) and (ii) 100% of the net advertising revenue received by the
Company (excluding WKAQ in Puerto Rico) from the sale of "spot" and local
advertising time and local and national block time. The Compensation Pool is
shared between the Company and the Network Company, with the Company's
allocation based on the following formula: (i) 80% of the first $130 million of
Aggregate Net Advertising Receipts; plus (ii) 55% of the incremental Aggregate
Net Advertising Receipts above $130 million up to $230 million; plus (iii) 45%
of the incremental Aggregate Net Advertising Receipts above $230 million. After
the initial year, the threshold levels (i.e., $130 million and $230 million)
will be increased 3% annually.
2
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
- --------------------------------------------------------------------------------
The Affiliation Agreement provides that the Company will continue to incur
non-network marketing/promotional expenditures, programming expenditures and
capital expenditures for its stations. The Network Sale and the Affiliation
Agreement will result in the Company incurring reduced overall programming and
certain other costs from the levels historically incurred by the Predecessor.
All network programming costs are now borne by the Network Company. As part of
the Affiliation Agreement, each of the Network Company and the Company agreed,
subject to various conditions, to incur certain programming,
marketing/promotional and capital expenditures in the future. These expenditures
may be reduced or eliminated based on financial tests, which assume such
expenditures produce positive financial results (i.e., incremental revenue). The
Company can also elect to incur a portion of such expenditures in a subsequent
year. If the Company meets such financial tests and does not elect to defer a
portion of such expenditures, the Company will incur levels of these non-network
expenditures which are greater than non-network expenditures historically
incurred by the Company's stations. Any such expenditures on the part of the
Company are subject to the Network Company having incurred its respective
expenditures.
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.
All statements, other than statements of historical facts, included in
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" ("MD&A") and located elsewhere herein regarding the Company's
operations, financial position and business strategy, may constitute
forward-looking statements. 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.
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.
On February 26, 1996, the Predecessor completed the acquisition of a 74.5%
interest in Video 44, which owns WSNS-TV, Channel 44 in Chicago. The acquisition
was accounted for under the purchase method of accounting (see Note 9 of "Notes
to Consolidated Financial Statements").
RESULTS OF OPERATIONS
For the years ended December 31, 1997 and 1996 the Predecessor's results include
the operations of the Telemundo Network and do not reflect Merger related
transactions. Consequently, the results for the years ended December 31, 1997
and 1996 are not comparable to the 1998 periods, which reflect the Merger and
related transactions, including
3
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
- --------------------------------------------------------------------------------
the impact of the Network Sale and the Affiliation Agreement from August 13,
1998 to December 31, 1998. Accordingly, MD&A for 1998 as compared to 1997 has
been presented on a historical basis and has been supplemented with certain pro
forma disclosures. The pro forma results of operations for years ended December
31, 1998 and 1997 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, 1997.
The pro forma results of operations for years ended December 31, 1998 and 1997
are not necessarily indicative of what would have occurred if the Merger and
related transactions had taken place on January 1, 1997.
Net revenue for each of the three years in the period ended December 31, 1998
was as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 (A) CHANGE 1997 CHANGE 1996
----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Network and national spot.......... $ 65,219 (23)% $ 84,297 - $ 84,015
Local.............................. 92,145 10 % 84,115 (6)% 89,812
Incremental revenue from
Affiliation Agreement........... 8,011 - -
Other revenue...................... 27,963 (4)% 29,176 1 % 28,886
-------- -------- --------
Net revenue........................ $193,338 (2)% $197,588 (3)% $202,713
======== ======== ========
</TABLE>
(a) The aggregate of the period from August 13, 1998 to December 31, 1998 and
the period from January 1, 1998 to August 12, 1998 (Predecessor) (the "1998
Combined Periods ").
The decrease in network and national spot revenue in 1998 is primarily the
result of the Network Sale. Excluding network revenue, national spot revenue
would have decreased by 6% in 1998. This was a result of a decline in overall
average audience shares in the U.S., 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. The increase in network and national spot revenue in 1997 is the result
of the continued growth in the overall Spanish-language television market in the
U.S. and the acquisition of WSNS-Chicago, offset by a decline in audience share.
Excluding the impact of WSNS, which is reflected in the financial statements
effective February 27, 1996, network and national spot revenue would have
decreased by 1% in 1997.
The increase in local revenue in 1998 is primarily the result of an increase at
KVEA-Los Angeles and other major stations, where growth in the local
Spanish-language television market led to increased local revenue. The increase
in 1998 is also due to WKAQ-Puerto Rico maintaining its dominant audience
share, coupled with growth in its overall market. The decrease in local revenue
in 1997 is primarily the result of the decline in audience share which impacted
all U.S. stations, most significantly KVEA and WSCV-Miami, offset in part by
revenue growth at WKAQ. Local revenue was also impacted by the operations of
WSNS being included for the entire year in 1997. Excluding the impact of WSNS,
local revenue would have decreased by 7% in 1997.
The Company believes that the overall decline in U.S. audience share previously
noted has 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
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
4
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
- --------------------------------------------------------------------------------
television network audience was 17%, 17%, 18% and 14% for the first through
fourth quarters of 1998, respectively, and was 18% for each quarter of 1997. A
change in audience share typically has a delayed impact on revenue.
Incremental revenue from the Affiliation Agreement represents the allocation of
the Compensation Pool pursuant to the Affiliation Agreement in excess of revenue
generated by the Company's U.S. stations.
Other revenue decreased in 1998 primarily due to a decrease in trade revenue and
decreases in international program sales and affiliate representation revenue as
a result of the Network Sale, offset in part by an increase in the sale of
blocks of broadcast time to independent programmers. Other revenue increased in
1997 primarily as a result of an increase in international program sales and the
impact of WSNS, which was offset by the decline in sales of blocks of broadcast
time to independent programmers. Excluding the impact of WSNS, other revenue
would have decreased by 1% in 1997. Other revenue may decline further in 1999,
as the Company's stations replace certain time periods historically sold to
independent programmers with network programming.
On a pro forma basis, net revenue would have increased by $10.4 million or 7% in
1998 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, decrease in national spot revenue and decrease in
other revenue as discussed above.
Direct operating costs decreased by 8% for the 1998 Combined Periods from the
prior year as a result of the Network Sale. Excluding those costs relating to
the network, direct operating costs would have increased by 8% in 1998. This
was primarily the result of an increase of $3.8 million in station programming
and production expenses related to costs incurred to produce and acquire station
programming including WKAQ. As discussed above, pursuant to the Affiliation
Agreement, the Network Company bears all network programming costs. The Company
will continue to incur non-network programming expenditures in connection with
its stations, including all programming expenditures for WKAQ. Also as discussed
above, pursuant to the Affiliation Agreement, the Company, through its stations,
may be required to incur, 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. The $6.3
million or 7% increase in direct operating costs in 1997 primarily reflected an
increase in programming and production expenses at the network and WKAQ, and the
impact of including the costs of WSNS for the entire year. Excluding the impact
of WSNS, direct operating costs would have increased by 6%.
Selling, general and administrative expenses other than network and corporate
increased by 10% for the 1998 Combined Periods from the prior year. This was
primarily the result of greater sales commissions related to the increase in
revenue and an increase in general and administrative expenditures and
advertising and promotional expenditures. As discussed above, pursuant to the
Affiliation Agreement, the Company may be required to incur, under certain
circumstances, levels of marketing and promotional expenditures which are
greater than marketing and promotional expenditures historically incurred by the
Company's stations. The $1.2 million or 3% decrease in selling, general and
administrative expenses other than network and corporate in 1997 was primarily
the result of the Company's cost reduction efforts, particularly at the station
group, and was offset in part by the impact of the acquisition of WSNS.
Excluding WSNS, selling, general and administrative expenses would have
decreased by 4%.
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, decreased by 39% for the 1998 Combined Periods
from the prior year as a result of the Network Sale. Pursuant to the Network
Sale, the Company will not incur these costs. The $1.8 million or 6% increase in
1997 primarily reflected increases in network advertising and promotion costs.
Corporate expenses increased by $1.2 million for the 1998 Combined Periods from
the prior year which was primarily the result of an increase in executive
performance-based compensation and additional legal costs. Corporate expenses
increased by $518,000 in 1997 which is primarily a result of a full year of
compensation and
5
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
- --------------------------------------------------------------------------------
operating expenses associated with an additional corporate office and increased
legal costs, offset in part by a decrease in executive performance-based
compensation.
Depreciation and amortization increased by $5.7 million for the 1998 Combined
Periods from 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. Depreciation and
amortization expense increased by $627,000 or 5% in 1997 which reflected an
increase in fixed asset additions and the impact of a full year of WSNS.
Merger related expenses include investment banking, legal, accounting and other
costs incurred through August 12, 1998 for services provided to the Predecessor
in connection with the Merger.
Interest expense for the period January 1 through August 12, 1998 and for the
years 1997 and 1996 includes: (i) interest accrued and accreted on the 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), (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 the period August 13, 1998 through
December 31, 1998 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
7.22% 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 10.5% Senior Notes. Interest expense was
offset by interest income of $197,000 for the period August 13, 1998 to December
31, 1998, $180,000 for the period January 1, 1998 to August 12, 1998 and
$303,000 and $304,000 for the years ended 1997 and 1996, respectively.
Net loss from investment in TeleNoticias of $3.1 million in 1996 represented the
Predecessor's 42% share of Telenoticias del Mundo L.P.'s ("TeleNoticias") net
loss and related costs. In addition, the loss on disposal of TeleNoticias of
$2.4 million in 1996 resulted from the disposal of the Predecessor's interests
in TeleNoticias on June 26, 1996 (see Note 10 of "Notes to Consolidated
Financial Statements").
The income tax provision recorded in each of the periods 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 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.
During 1998, the Internal Revenue Service ("IRS") completed an examination of
the Predecessor's 1994 and 1995 federal income tax returns. Adjustments and
assessments as a result of the audit are immaterial to the Company's
consolidated financial position and results of operations. The adjustments did
not result in any further limitation to the Company's available NOLs and certain
disallowed deductions will be taken in tax returns subsequent to the 1994 and
1995 returns.
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.
6
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
- --------------------------------------------------------------------------------
The extraordinary loss on extinguishment of debt in 1996 is related to the
repurchase of the 10.25% Senior Notes.
LIQUIDITY AND SOURCES OF CAPITAL
Cash flows provided from operating activities were $34.3 million for the 1998
Combined Periods as compared to the Predecessor's $486,000 and $24.7 million for
1997 and 1996, respectively. The increase is primarily the result of the
increase in operating income before depreciation and amortization in the 1998
Combined Periods, which included the net effect of the Network Sale. In
addition, changes in certain asset and liability accounts, including the
collection of network operations receivables and the servicing of network
operations liabilities which were retained as part of the Network Sale, also
contributed to the increase. The decrease in 1997 was the result of a decrease
in operating income before depreciation and amortization and the net effect of
changes in certain asset and liability accounts.
The Company had working capital of $15.6 million at December 31, 1998.
Capital expenditures of approximately $10.1 million were made by the Company and
the Predecessor during 1998 for the replacement and upgrading of equipment and
upgrading of facilities. Of this amount, $3.5 million related to network
operations. As a result of the Network Sale, the Company no longer has capital
expenditure requirements with respect to network operations. 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.
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 outstanding at
December 31, 1998. The Company does not presently anticipate the need to obtain
any additional financing to fund operations.
The New Credit Facilities consist of a $25 million amortizing term loan with a
final maturity of September 30, 2005 (the "Tranche A Term Loan"), a $175 million
amortizing term loan with a final maturity of March 31, 2007 (the "Tranche B
Term Loan") and the Revolving Credit Facility.
The Tranche A Term Loan amortizes quarterly beginning December 31, 1999 and the
scheduled principal repayments increase each year. The Tranche B Term Loan
requires equal quarterly principal repayments beginning December 31, 1999, with
a $162.3 million balloon payment due March 31, 2007. The Revolving Credit
Facility has scheduled annual reductions in availability beginning December 31,
2001.
The New Credit Facilities require mandatory prepayments under certain
circumstances related to an asset sale, an equity issuance or the incurrence of
additional indebtedness. In addition, the Company is required to prepay
outstanding principal within 90 days of year end beginning December 31, 1999, an
amount equal to 75% of excess cash flow (as defined in the New Credit
Facilities) if the Company's ratio of total debt to EBITDA (as defined in the
New Credit Facilities) is greater than or equal to five to one and 50% of excess
cash flow if the Company's ratio of total debt to EBITDA is less than five to
one, in each case less $5 million. The Company can prepay the New Credit
Facilities at any time. Prepayments are allocated pro-rata to the Tranche A Term
Loan and the Tranche B Term Loan in the inverse order of maturity.
Telemundo entered into two floating for fixed interest rate swap transactions,
fixing a 5.145% London Interbank Offered Rates ("LIBOR") equivalent interest
rate on $100 million principal amount, effective from September 29, 1998 to
August 13, 2003 and a 5.135% LIBOR equivalent interest rate on $100 million
principal amount, effective from December 10, 1998 to August 13, 2003. Pursuant
to the New Credit Facilities, Telemundo is required to hedge the interest rate
on 50% of the outstanding Tranche A and Tranche B Term Loans through August 13,
2000.
7
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
- --------------------------------------------------------------------------------
The Senior Discount Notes were issued at a substantial discount from their
stated principal amount at maturity and were structured to produce a yield to
maturity of 11.5% per annum. The Senior Discount Notes begin accruing cash
interest on August 15, 2003. Interest becomes payable commencing February 15,
2004. The Senior Discount Notes will mature on August 15, 2008.
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, including those relating to: (i) the incurrence of
indebtedness or the guarantee or assumption of indebtedness; (ii) the creation
or incurrence of mortgages, pledges or security interests on the property or
assets of the Company or any of its subsidiaries; (iii) the sale of assets of
the Company or any of its subsidiaries; (iv) the merger or consolidation of the
Company; (v) the payment of dividends or the redemption or repurchase of any
capital stock or subordinated indebtedness of the Company; (vi) change of
control and (vii) investments and acquisitions.
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 fixed
rate for LIBOR swap transactions, as discussed above.
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 information systems directly in order to ensure compliance, which
is expected to be completed by June 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.
8
<PAGE>
<TABLE>
<CAPTION>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
COMPANY PREDECESSOR
------------ -----------------------------------------
AUGUST 13 TO JANUARY 1 TO YEAR ENDED DECEMBER 31,
DECEMBER 31, AUGUST 12, -------------------------
1998 1998 1997 1996
------------- ------------ --------- ---------
<S> <C> <C> <C> <C>
Net revenue ........................................................ $ 68,667 $ 124,671 $ 197,588 $ 202,713
--------- --------- --------- ---------
Costs and expenses:
Direct operating costs ......................................... 22,109 63,861 93,297 86,994
Selling, general and administrative expenses other than
network and corporate ....................................... 16,921 25,515 38,707 39,910
Network expenses ............................................... - 18,546 30,650 28,835
Corporate expenses ............................................. 1,922 4,130 4,875 4,357
Depreciation and amortization .................................. 10,640 9,024 13,938 13,311
--------- --------- --------- ---------
51,592 121,076 181,467 173,407
--------- --------- --------- ---------
Operating income ................................................... 17,075 3,595 16,121 29,306
Merger related expenses ............................................ - (5,506) (1,707) -
Interest expense, net .............................................. (14,618) (13,067) (20,849) (18,920)
Loss from investment in TeleNoticias ............................... - - - (3,120)
Loss on disposal of TeleNoticias ................................... - - - (2,441)
--------- --------- --------- ---------
Income (loss) before income taxes, minority interest and
extraordinary item ............................................. 2,457 (14,978) (6,435) 4,825
Income tax provision ............................................... (1,379) (3,113) (4,201) (3,879)
Minority interest .................................................. (606) (1,898) (2,808) (2,125)
--------- --------- --------- ---------
Income (loss) before extraordinary item ............................ 472 (19,989) (13,444) (1,179)
Extraordinary item - extinguishment of debt ........................ - - - (17,243)
--------- --------- --------- ---------
Net income (loss) .................................................. $ 472 $ (19,989) $ (13,444) $ (18,422)
========= ========= ========= =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9
<PAGE>
<TABLE>
<CAPTION>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
COMPANY PREDECESSOR
------------ -----------
December 31, December 31,
Assets 1998 1997
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................................. $ 8,680 $ 2,378
Accounts receivable, less allowance for doubtful accounts of $7,585
and $7,583 ........................................................................ 30,768 54,155
Television programming ................................................................ 7,742 15,154
Prepaid expenses and other ............................................................ 2,819 9,287
Due from Network Company, net ......................................................... 3,624 -
--------- ---------
Total current assets ......................................................... 53,633 80,974
Property and equipment, net ............................................................... 50,021 66,602
Television programming .................................................................... 846 6,779
Other assets .............................................................................. 15,991 7,365
Broadcast licenses and other intangible assets, net ....................................... 650,907 128,366
--------- ---------
$ 771,398 $ 290,086
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ...................................................................... $ 5,042 $ 7,726
Accrued expenses and other ............................................................ 30,606 22,761
Television programming obligations .................................................... 1,303 6,310
Current portion of long-term debt ..................................................... 1,063 -
--------- ---------
Total current liabilities ..................................................... 38,014 36,797
Long-term debt ............................................................................ 398,889 189,081
Deferred taxes, net ....................................................................... 81,812 -
Capital lease obligations ................................................................. - 5,120
Other liabilities ......................................................................... 32,770 23,845
--------- ---------
551,485 254,843
--------- ---------
Minority interest ......................................................................... 5,428 5,334
--------- ---------
Contingencies and commitments
Common stockholders' equity:
Common Stock, $.01 par value, 10,000 shares authorized and
outstanding at December 31, 1998 .................................................... - -
Predecessor Series A Common Stock, $.01 par value, 14,388,394 shares
authorized, 7,129,614 shares outstanding at December 31, 1997 ...................... - 71
Predecessor Series B Common Stock, $.01 par value, 5,611,606 shares
authorized, 3,088,341 shares outstanding at December 31, 1997 ...................... - 31
Additional paid-in capital ................................................................ 214,013 71,761
Retained earnings (accumulated deficit) ................................................... 472 (41,954)
--------- ---------
214,485 29,909
--------- ---------
$ 771,398 $ 290,086
========= =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10
<PAGE>
<TABLE>
<CAPTION>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
(In thousands, except share data)
NUMBER OF SHARES OUTSTANDING COMMON STOCK
------------------------------------- -------------------------------------
SERIES A SERIES B SERIES A SERIES B
COMMON COMMON COMMON COMMON COMMON COMMON
STOCK STOCK STOCK STOCK STOCK STOCK
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
PREDECESSOR:
Balance, December 31, 1995...................... - 5,933,865 4,066,335 $ - $ 59 $ 41
Net loss........................................ - - - - - -
Issuance of stock pursuant to exercise of
stock options................................. - 150,000 - - 2 -
Warrant conversions............................. - 2,015 - - - -
Stock conversions............................... - 536,103 (536,103) - 5 (5)
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1996...................... - 6,621,983 3,530,232 - 66 36
Net loss........................................ - - - - - -
Warrant conversions............................. - 65,740 - - - -
Stock conversions............................... - 441,891 (441,891) - 5 (5)
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1997...................... - 7,129,614 3,088,341 - 71 31
Net loss........................................ - - - - - -
Warrant conversions............................. - 523,988 - - 5 -
Stock conversions............................... - 1,843 (1,843) - - -
--------- --------- --------- --------- --------- ---------
Balance, August 12, 1998........................ - 7,655,445 3,086,498 - 76 31
COMPANY:
Elimination of former equity interests.......... - (7,655,445) (3,086,498) - (76) (31)
Common Stock issued in connection
with the Merger............................... 10,000 - - - - -
Distribution in excess of continuing
shareholder's basis........................... - - - - - -
Net income...................................... - - - - - -
--------- --------- --------- --------- --------- ---------
Balance, December 31, 1998...................... 10,000 - - $ - $ - $ -
========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS COMMON
PAID-IN (ACCUMULATED) STOCKHOLDERS'
CAPITAL DEFICIT EQUITY
--------- --------- ---------
<S> <C> <C> <C>
PREDECESSOR:
Balance, December 31, 1995...................... $ 70,239 $ (10,088) $ 60,251
Net loss........................................ - (18,422) (18,422)
Issuance of stock pursuant to exercise of
stock options................................. 1,048 - 1,050
Warrant conversions............................. 14 - 14
Stock conversions............................... - - -
--------- --------- ---------
Balance, December 31, 1996...................... 71,301 (28,510) 42,893
Net loss........................................ - (13,444) (13,444)
Warrant conversions............................. 460 - 460
Stock conversions............................... - - -
--------- --------- ---------
Balance, December 31, 1997...................... 71,761 (41,954) 29,909
Net loss........................................ - (19,989) (19,989)
Warrant conversions............................. 3,742 - 3,747
Stock conversions............................... - - -
--------- --------- ---------
Balance, August 12, 1998........................ 75,503 (61,943) 13,667
COMPANY:
Elimination of former equity interests.......... (75,503) 61,943 (13,667)
Common Stock issued in connection
with the Merger............................... 273,993 - 273,993
Distribution in excess of continuing
shareholder's basis........................... (59,980) - (59,980)
Net income...................................... - 472 472
--------- --------- ---------
Balance, December 31, 1998...................... $ 214,013 $ 472 $ 214,485
========= ========= =========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11
<PAGE>
<TABLE>
<CAPTION>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
COMPANY PREDECESSOR
--------------- ------------------------------------------------------------
AUGUST 13 TO JANUARY 1 TO YEAR ENDED DECEMBER 31,
DECEMBER 31, AUGUST 12, --------------------------------------
1998 1998 1997 1996
--------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................... $ 472 $ (19,989) $ (13,444) $ (18,422)
Charges not affecting cash:
Depreciation and amortization............ 10,640 9,024 13,938 13,311
Interest accretion....................... 5,657 3,732 5,557 4,559
Provision for losses on
accounts receivable.................... 542 1,720 3,479 5,522
Loss from investment in TeleNoticias..... - - - 3,120
Loss on disposal of TeleNoticias......... - - - 2,441
Minority interest........................ 606 1,898 2,808 2,125
Extraordinary item - extinguishment
of debt................................ - - - 17,243
Changes in assets and liabilities:
Accounts receivable...................... 13,570 5,956 (3,971) (9,316)
Television programming................... 167 (462) (3,283) (2,392)
Television programming obligations....... (909) (1,684) 794 594
Due from Network Company, net............ (3,624) - - -
Accounts payable and accrued expenses
and other.............................. (6,442) 13,467 (5,392) 5,888
--------------- --------------- --------------- ----------------
Cash flows provided from
operating activities............... 20,679 13,662 486 24,673
--------------- --------------- --------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment........ (3,506) (6,569) (11,156) (9,125)
Acquisition of Video 44,
net of cash acquired..................... - - - (43,973)
Investments in TeleNoticias................ - - - (1,704)
Disposal of TeleNoticias, net.............. - - - (2,769)
--------------- --------------- --------------- ----------------
Cash flows used in
investing activities............... (3,506) (6,569) (11,156) (57,571)
--------------- --------------- --------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings under
New Credit Facilities.................... 300,000 - - -
Payments under New Credit Facilities....... (31,000) - - -
Proceeds from Equity Contributions......... 273,993 - - -
Proceeds from issuance of
Senior Discount Notes.................... 125,000 - - -
Proceeds from Network Sale................. 73,993 - - -
Repurchase of Predecessor
equity interests......................... (518,282) - - -
Repurchase of 10.5% Senior Notes,
consent fees and related costs........... (217,452) - - -
Repayment of other indebtedness and
related costs............................ (192) - - -
Deferred financing costs................... (14,500) - - -
Merger costs............................... (5,791) - - -
Proceeds from exercise of options
and warrants............................. - 3,747 460 1,065
Net proceeds from issuance of
10.5% Senior Notes....................... - - - 169,981
Repurchase of 10.25% Notes,
consent fee and related costs............ - - - (118,993)
Payments of obligations under
capital leases........................... - (424) (727) (642)
Borrowings under Old Credit Facility....... - 5,425 9,854 8,012
Payments under Old Credit Facility
and related costs........................ (272) (9,221) (6,025) (13,993)
Payments to minority interest partner...... (996) (1,992) (2,720) (2,061)
Payments of reorganization items
and other................................ - - (881) (1,083)
--------------- --------------- --------------- ----------------
Cash flows provided from (used in)
financing activities............... (15,499) (2,465) 461 42,286
--------------- --------------- --------------- ----------------
Increase (decrease) in cash and
cash equivalents......................... 1,674 4.628 (10,209) 9,388
Cash and cash equivalents,
beginning of period...................... 7,006 2,378 12,587 3,199
--------------- --------------- --------------- ----------------
Cash and cash equivalents, end of period... $ 8,680 $ 7,006 $ 2,378 $ 12,587
=============== =============== =============== ================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF 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.
BASIS OF PRESENTATION
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"). 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 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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Holdings and its
subsidiaries from August 13, 1998 and the Predecessor and its subsidiaries for
periods prior to August 12, 1998. All significant intercompany balances and
transactions have been eliminated in consolidation. The operations of the
Company's and the Predecessor's 74.5% interest in a joint venture ("Video 44")
which owns WSNS-TV, Channel 44 in Chicago, are consolidated with those of the
Company. The accounting impact of the interest attributable to the partner which
owns the remaining 25.5% of the venture is reflected as minority interest. The
Predecessor's 42% investment in Telenoticias del Mundo, L.P. ("TeleNoticias")
had been accounted for by the equity method until June 26, 1996, when
substantially all of the assets and certain liabilities of TeleNoticias were
sold (see Note 10).
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates.
CASH AND CASH EQUIVALENTS
The Company considers short-term investments with an original maturity of three
months or less to be cash equivalents. Such short-term investments are carried
at cost which approximates fair value.
13
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
TELEVISION PROGRAMMING
Television programming rights and the related obligations are carried at the
lower of unamortized cost or estimated net realizable value. The costs of the
rights are amortized on varying bases related to the license period, usage of
the programs and management's estimate of revenue to be realized from each
airing of the programs.
DEPRECIATION AND AMORTIZATION
Property and equipment and broadcast licenses and other intangible assets are
depreciated by the straight-line method over estimated useful lives.
BROADCAST LICENSES AND OTHER INTANGIBLE ASSETS
Broadcast licenses and other intangible assets at December 31, 1998 represent
the portions of the Merger consideration not attributable to specific tangible
assets at the time of the Merger. Broadcast licenses and other intangible assets
at December 31, 1997 represent the portions of reorganization value (in
connection with Telemundo's 1994 reorganization) and Video 44 purchase price not
attributable to specific tangible assets at the time of the reorganization and
the purchase of Video 44.
The Company evaluates the recoverability of its investment in long-term tangible
and intangible assets in relation to anticipated cash flows on an undiscounted
basis. If the estimated future cash flows were projected to be less than the
carrying value, an impairment write-down would be recorded.
REVENUE RECOGNITION
Revenue for the Company is derived primarily from the sale of advertising time
on a national spot and local basis. In addition, the Company earns revenue from
the sale of blocks of broadcast time during non-network programming hours. The
Company's revenue is also impacted by the revenue sharing aspect of the
Affiliation Agreement (see Note 2). Revenue was derived by the Predecessor from
the sale of national spot and local advertising time, the sale of blocks of
broadcast time and also from the sale of advertising time on a network basis.
Revenue is recognized when earned, i.e., when the advertisement is aired or the
block of broadcast time is utilized. The Company reviews the collectibility of
its accounts receivable and adjusts its allowance for doubtful accounts
accordingly. During 1998, 1997 and 1996, no customer accounted for more than 10%
of the Company's or the Predecessor's revenue.
INCOME TAXES
Income taxes provided reflect the current and deferred tax consequences of
events that have been recognized in the financial statements or tax returns. A
valuation allowance is recorded if it is more likely than not that a deferred
tax asset will not be realized.
INTEREST RATE ARRANGEMENTS
The Company uses interest rate swaps to hedge interest rate exposures. In this
type of hedge, the differential to be paid or received (which is a function of
market interest rates) is accrued and recognized in interest expense. In June
1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
which is required to be adopted in years beginning after June 15, 1999. SFAS 133
will require the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of the derivative are either (i) offset against
the change in fair value of assets, liabilities or firm commitments through
earnings, or (ii) recognized in other comprehensive income until the hedged item
is recognized in earnings. The ineffective portion of a derivative's change in
fair value will be immediately recognized in earnings. The Company will adopt
SFAS 133 in the first
14
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
quarter of 2000 and cannot determine what the effect of SFAS 133 will be on the
earnings and financial position of the Company at that time.
COMPREHENSIVE INCOME
During 1997, the Financial Accounting Standards Board issued Statement No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 provides guidance for
the presentation of comprehensive income. The Company's adoption of SFAS 130
resulted in no reclassification to the financial statements presented, as
comprehensive income is the same as net income for all periods.
SEGMENT REPORTING
During 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). SFAS 131 establishes standards for disclosure of operating segments,
products, services, geographic areas and major customers. The Company operates
in one principal industry segment, television broadcasting. Separate segment
disclosures are not applicable.
RECLASSIFICATIONS
Certain reclassifications have been made in the prior years' financial
statements to conform with the current year's presentation.
2. MERGER AND RELATED TRANSACTIONS
On August 12, 1998 TLMD Acquisition Co. merged with and into Telemundo, with
Telemundo being the surviving corporation and becoming a wholly-owned subsidiary
of Holdings. 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.
Pursuant to the Affiliation Agreement, the Company receives a formula-based
allocation of advertising revenue (the "Compensation Pool") generated by the
Company and the Network Company. The Compensation Pool consists of the following
revenue sources (collectively, the "Aggregate Net Advertising Receipts"): (i)
61% of the net
15
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
advertising revenue received by the Network Company pursuant to the sale of
network advertising and block time (time made available for paid programming)
and (ii) 100% of the net advertising revenue received by the Company (excluding
WKAQ in Puerto Rico) from the sale of "spot" and local advertising time and
local and national block time. The Compensation Pool is shared between the
Company and the Network Company, with the Company's allocation based on the
following formula: (i) 80% of the first $130 million of Aggregate Net
Advertising Receipts; plus (ii) 55% of the incremental Aggregate Net Advertising
Receipts above $130 million up to $230 million; plus (iii) 45% of the
incremental Aggregate Net Advertising Receipts above $230 million. After the
initial year, the threshold levels (i.e., $130 million and $230 million) will be
increased 3% annually.
The Affiliation Agreement provides that the Company will continue to incur
non-network marketing/promotional expenditures, programming expenditures and
capital expenditures for its stations. The Network Sale and the Affiliation
Agreement will result in the Company incurring reduced overall programming and
certain other costs from the levels historically incurred by the Predecessor.
All network programming costs are now borne by the Network Company. As part of
the Affiliation Agreement, each of the Network Company and the Company agreed,
subject to various conditions, to incur certain programming,
marketing/promotional and capital expenditures in the future. These expenditures
may be reduced or eliminated based on financial tests, which assume such
expenditures produce positive financial results (i.e., incremental revenue). The
Company can also elect to incur a portion of such expenditures in a subsequent
year. If the Company meets such financial tests and does not elect to defer a
portion of such expenditures, the Company will incur levels of these non-network
expenditures which are greater than non-network expenditures historically
incurred by the Company's stations. Any such expenditures on the part of the
Company are subject to the Network Company having incurred its respective
expenditures.
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.
The Merger was accounted for using the purchase method of accounting. The
purchase consideration of approximately $622 million has been allocated to the
net assets acquired based upon fair value. The net assets of Holdings were
adjusted to reflect the continuing ownership of Bastion (15.1% prior to the
merger). This adjustment of $60 million, a "deemed dividend", represents the
difference between the proceeds this shareholder received for its ownership
interest in Telemundo and its basis in the Predecessor, adjusted for the Network
Sale. The following is a summary of the allocation of purchase consideration and
deferred financing fees (in thousands):
<TABLE>
<S> <C>
Accounts receivable.......................................... $ 43,796
Other current assets (excluding television programming)...... 26,512
Television programming....................................... 8,755
Property and equipment....................................... 48,910
Other assets................................................. 16,099
Broadcast licenses and other intangible assets............... 659,391
Accounts payable............................................. 11,289
Accrued liabilities.......................................... 30,766
Television programming obligations........................... 2,212
Long-term debt............................................... 425,318
Other non-current liabilities................................ 32,057
Deferred tax liabilities, net................................ 82,417
Minority interest............................................ 5,391
Stockholders' equity......................................... 214,013
</TABLE>
16
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The carrying value of accounts receivable, other current assets, television
programming, other assets, accounts payable, accrued liabilities, television
programming obligations, other non-current liabilities and minority interest
were considered to closely approximate fair value. The allocation of the
purchase consideration to property and equipment, broadcast licenses and other
intangible assets is based upon independent appraisals. Deferred taxes reflect
the tax effect of differences in financial reporting and tax basis of assets and
liabilities.
The following summarized, unaudited pro forma results of operations for 1998 and
1997, 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, 1997. 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, 1997, nor is it necessarily
indicative of future operations.
<TABLE>
<CAPTION>
(In thousands) 1998 1997
----------------------------------------------------------------------------------
<S> <C> <C>
Net revenue......................................... $159,247 $148,836
Operating income.................................... 27,212 25,917
Net loss............................................ (20,051) (19,479)
</TABLE>
3. PROPERTY AND EQUIPMENT
The components, useful lives and accumulated depreciation and amortization of
the Company's and the Predecessor's property and equipment are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES COMPANY PREDECESSOR
DECEMBER 31 (IN YEARS) 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land............................................... N/A $ 7,690 $ 4,727
Buildings and improvements......................... 20 to 40 14,752 19,333
Broadcast and other equipment...................... 2 to 13 22,590 53,152
Construction in progress........................... N/A 3,892 -
Satellite transponder.............................. * - 6,999
Leasehold improvements............................. * 3,253 10,846
------- --------
52,177 95,057
Less: accumulated depreciation and
amortization................................... (2,156) (28,455)
------- --------
$50,021 $ 66,602
======= ========
</TABLE>
*Shorter of life of lease or useful life of asset
17
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
4. BROADCAST LICENSES AND OTHER INTANGIBLE ASSETS
The components, useful lives and accumulated amortization of the Company's and
the Predecessor's intangible assets are as follows (dollars in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES COMPANY PREDECESSOR
DECEMBER 31 (IN YEARS) 1998 1997
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FCC broadcast licenses............................... 40 $427,593 $121,828
Goodwill............................................. 40 202,417 -
Affiliation Agreement................................ 10 1,000 -
Advertiser base...................................... 5 25,110 8,259
Other................................................ 3 3,271 2,744
-------- --------
659,391 132,831
Less: accumulated amortization....................... (8,484) (4,465)
-------- --------
$650,907 $128,366
======== ========
</TABLE>
5. ACCRUED EXPENSES AND OTHER
The components of the Company's and the Predecessor's accrued expenses are as
follows (in thousands):
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
DECEMBER 31 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accrued compensation and commissions................................... $ 4,545 $ 4,400
Accrued agency commissions............................................. 5,909 5,969
Accrued merger costs................................................... 11,109 -
Accrued interest expense............................................... 2,205 5,040
Other accrued expenses................................................. 6,838 7,352
------- -------
$30,606 $22,761
======= =======
</TABLE>
6. LONG-TERM DEBT
The components of the Company's and the Predecessor's long-term debt are as
follows (in thousands):
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
DECEMBER 31 1998 1997
- ------------------------------------------------------------------------- --------------- -----------------
<S> <C> <C>
New Credit Facilities.................................................... $269,000 $ -
Senior Discount Notes.................................................... 130,657 -
10.5% Senior Notes....................................................... 295 185,073
10.25% Notes............................................................. - 165
Old Credit Facility...................................................... - 3,843
-------- --------
399,952 189,081
Less: current portion.................................................... (1,063) -
-------- --------
$398,889 $189,081
======== ========
</TABLE>
Significant terms of the Company's debt agreements are as follows:
NEW CREDIT FACILITIES: In connection with the Merger, Telemundo entered
into the New Credit Facilities, providing for aggregate borrowings of
up to $350 million. The New Credit Facilities consist of a $25 million
amortizing term loan with a final maturity of September 30, 2005 (the
"Tranche A Term Loan"), a $175 million amortizing term loan with a
final maturity of March 31, 2007 (the "Tranche B Term Loan")
18
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
and a $150 million revolving credit facility with a final maturity of
September 30, 2005 (the "Revolving Credit Facility").
The Tranche A Term Loan amortizes quarterly beginning December 31, 1999
and the scheduled principal repayments increase each year. The Tranche
B Term Loan requires equal quarterly principal repayments beginning
December 31, 1999, with a $162.3 million balloon payment due March 31,
2007. The Revolving Credit Facility has scheduled annual reductions in
availability beginning December 31, 2001. There was $69 million
outstanding under the Revolving Credit Facility at December 31, 1998.
The Tranche A Term Loan and the Revolving Credit Facility bear interest
based upon either the London Interbank Offered Rates ("LIBOR") or the
Alternative Base Rate (greater of the prime rate or federal funds rate
plus 0.5%), plus an interest rate margin determined by reference to the
ratio of Telemundo's debt to EBITDA (as defined) for the four fiscal
quarters most recently concluded (the "Leverage Ratio"). The interest
rate margins applicable to LIBOR borrowing range from 0.75% to 1.875%
per annum. The interest rate margins applicable to Alternative Base
Rate borrowing range from zero to 0.875%. At December 31, 1998, the
interest rate applicable to the Tranche A Term Loan and the Revolving
Credit Facility was 6.90% and 6.74%, respectively, which includes an
interest rate margin of 1.5%. The Revolving Credit Facility also
provides for payment of a commitment fee of 0.5% per annum of the
unused portion, which may be reduced based upon the Leverage Ratio. At
December 31, 1998 the commitment fee was 0.375%.
The interest rate margins applicable to the Tranche B Term Loan LIBOR
borrowing and Alternate Base Rate borrowing is fixed at 2.125% and
1.125%, respectively. At December 31, 1998, the interest rate
applicable to the Tranche B Term Loan was 7.53%, which includes an
interest rate margin of 2.125%.
The New Credit Facilities require mandatory prepayments under certain
circumstances related to an asset sale, an equity issuance or the
incurrence of additional indebtedness. In addition, the Company is
required to prepay outstanding principal within 90 days of year end
beginning December 31, 1999, an amount equal to 75% of excess cash flow
(as defined in the New Credit Facilities) if the Company's ratio of
total debt to EBITDA (as defined in the New Credit Facilities) is
greater than or equal to five to one and 50% of excess cash flow if the
Company's ratio of total debt to EBITDA is less than five to one, in
each case less $5 million. The Company can prepay the New Credit
Facilities at any time. Prepayments are allocated pro-rata to the
Tranche A Term Loan and the Tranche B Term Loan in the inverse order of
maturity. The New Credit Facilities are collateralized by substantially
all of the assets of Holdings and each wholly-owned domestic U.S.
subsidiary of Telemundo.
SENIOR DISCOUNT NOTES: In connection with the Merger, the Company
completed the sale of $218.8 million in aggregate principal amount of
the Senior Discount Notes which are unsecured obligations of the
Company. The Senior Discount Notes were issued at a substantial
discount from their stated principal amount at maturity and were
structured to produce a yield to maturity of 11.5% per annum. The
Senior Discount Notes begin accruing cash interest on August 15, 2003
and require semi-annual interest payments beginning on February 15,
2004 on their principal amount at maturity at a rate of 11.5% per
annum. The principal balance is due in its entirety on August 15, 2008.
10.5% SENIOR NOTES: The 10.5% Senior Notes were issued at a discount in
1996 and were structured to produce a yield to maturity of 10.5% per
annum. The 10.5% Senior Notes are unsecured obligations and require
semi-annual interest payments at the rate of 7% per annum on their
principal amount at maturity through and including February 15, 1999,
and after such date bear interest at a rate of 10.5% per annum on their
principal amount at maturity. The principal balance is due in its
entirety on February 26, 2006. In connection with the Merger, 99.9% of
the outstanding principal amount was repurchased.
10.25% NOTES: On February 26, 1996 the Predecessor completed the sale
of $192 million in aggregate principal amount of 10.5% Senior Notes,
the proceeds of which were used primarily for the acquisition of Video
44 and to repurchase $116.7 million principal amount of the 10.25%
Notes tendered in a repurchase offering, representing approximately
99.8% of the aggregate outstanding principal amount (see Note 9). The
remaining $183,500 were redeemed in connection with the Merger.
19
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
OLD CREDIT FACILITY: The Old Credit Facility provided for borrowings of
up to $20 million, which was subject to an accounts receivable
borrowing base. Interest accrued at a rate of prime plus 1.75% (10.25%
and 10% at December 31, 1997 and 1996, respectively, and averaged
10.19% for 1997 and 10% for 1996). In connection with the Merger, the
Old Credit Facility was terminated.
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, including those relating to: (i) the incurrence of
indebtedness or the guarantee or assumption of indebtedness; (ii) the creation
or incurrence of mortgages, pledges or security interests on the property or
assets of the Company or any of its subsidiaries; (iii) the sale of assets of
the Company or any of its subsidiaries; (iv) the merger or consolidation of the
Company; (v) the payment of dividends or the redemption or repurchase of any
capital stock of the Company; (vi) change of control and (vii) investments and
acquisitions.
The New Credit Facilities financial ratios require Telemundo, for certain
periods of time, to maintain consolidated debt to EBITDA (as defined in the
New Credit Facilities) ratios, consolidated interest expense coverage ratios and
consolidated fixed charge coverage ratios.
Interest paid was $6,319,000, $13,752,000, $14,312,000 and $8,667,000 for the
period August 13 to December 31, 1998, the period January 1 to August 12, 1998
and the years ended 1997 and 1996, respectively.
Pursuant to the New Credit Facilities, Telemundo is required to hedge the
interest rate on 50% of the outstanding Tranche A and Tranche B Term Loans
through August 13, 2000. The Company manages interest rate exposure by swapping
floating rate for fixed rate interest. As part of such management of interest
rate exposure, the Company entered into derivative instruments to swap a
floating interest rate for a fixed rate for a portion of its debt. At December
31, 1998, the Company had two interest rate swap contracts exchanging a floating
interest rate for a fixed rate for notional values of $100,000,000 each. Under
this type of interest rate swap, notional amounts do not quantify risk or
represent assets or liabilities of the Company, but are only used in the
calculation of cash interest settlements under the contracts. These contracts
are effective from September 29, 1998 (with a fixed LIBOR equivalent interest
rate of 5.145%) and December 10, 1998 (with a fixed LIBOR equivalent interest
rate of 5.135%), respectively, to August 13, 2003. The fair value of these
arrangements as of December 31, 1998 was $571,000. The Company does not reflect
the carrying value or changes in the carrying value of these arrangements in the
financial statements.
7. INCOME TAXES
The Company and its domestic subsidiaries file a consolidated federal income tax
return. The Company files a separate Puerto Rico income tax return for its
operations in Puerto Rico. The income tax provision consisted of the following
(in thousands):
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
------------ ------------------------------------------------
AUGUST 13 TO JANUARY 1 TO
DECEMBER 31, AUGUST 12, 1998 YEAR ENDED DECEMBER 31,
1998 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current:
Puerto Rico (a)............................... $1,666 $2,646 $3,794 $3,473
Federal, state and other...................... 318 467 407 406
------ ------ ------ ------
1,984 3,113 4,201 3,879
Deferred:
Federal, state and other...................... (605) - - -
------ ------ ------ ------
$1,379 $3,113 $4,201 $3,879
====== ====== ====== ======
</TABLE>
(a) Represents a provision for withholding taxes related to intercompany
interest.
20
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The following reconciles the amount which would be provided by applying the 35%
federal statutory rate to income (loss) before income tax expense to the federal
income taxes actually provided (in thousands):
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
------------ ------------------------------------------------
AUGUST 13 TO JANUARY 1 TO
DECEMBER 31, AUGUST 12, 1998 YEAR ENDED DECEMBER 31,
1998 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Provision assuming federal
statutory rate............................. $ 860 $(5,242) $(2,252) $1,689
Puerto Rico withholding tax................... 1,083 1,720 2,466 2,257
State and other taxes......................... 206 304 265 264
Other......................................... (73) 2,096 (767) (611)
Goodwill...................................... 684 - - -
Change in valuation allowance................. (1,381) 4,235 4,489 280
------ ------ ------ ------
Total income tax provision.................... $1,379 $3,113 $4,201 $3,879
====== ====== ====== ======
</TABLE>
The Predecessor paid $708,000 and $1,790,000 for withholding taxes related to
its operations in Puerto Rico in 1997 and 1996, respectively. In addition, the
Predecessor paid state income and franchise and foreign withholding taxes of
$185,000, $289,000 and $514,000 for the period January 1 to August 12, 1998 and
the years 1997 and 1996, respectively. The Company paid federal and state income
and franchise taxes of $210,000 during the period August 13 to December 31,
1998.
The tax effects comprising the Company's and the Predecessor's net deferred
taxes are as follows (in thousands):
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
------- -----------
December 31 1998 1997
----------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards ("NOLs")............... $ 96,257 $88,449
Capital loss carryforward............................... - 8,827
Allowance for doubtful accounts......................... 2,597 2,771
Senior Discount Notes original issue discount........... 2,139 -
Other................................................... 4,855 5,186
-------- -------
105,848 105,233
Valuation allowance..................................... (34,683) (83,182)
-------- -------
71,165 22,051
-------- -------
Deferred Tax Liabilities:
Amortization of FCC broadcast licenses and other
identifiable intangibles............................ (150,603) (21,748)
Accelerated depreciation................................ (2,374) (303)
-------- -------
(152,977) (22,051)
-------- -------
Net deferred tax asset (liability)............................ $(81,812) $ -
========= =======
</TABLE>
Limitations imposed by Section 382 of the Internal Revenue Code limit (except in
certain circumstances) the amount of NOLs which will be available to offset the
Company's future U.S. taxable income. The Company's NOLs incurred before
December 31, 1994 of $136.8 million will be limited to $6.6 million annually, or
a total of $59.4 million through 2007. The Company's NOLs incurred from January
1, 1995 through August 12, 1998 of $68.3 million will be limited to
approximately $14.1 million annually. Accordingly, a valuation allowance has
been established to offset the NOLs that the Company will be unable to utilize.
The Company has approximately $29.9 million of U.S. NOLs that are not subject to
limitations.
21
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The Company has NOLs expiring as follows (in thousands):
<TABLE>
<CAPTION>
COMMONWEALTH OF
U.S. PUERTO RICO
------------------------------- ---------------------------
<S> <C> <C> <C>
2001................. $ 14,410 1999................... $ 5,658
2002................. 43,317 2000................... 3,402
2003................. 31,227 2001................... 1,931
2004................. 6,294 2002................... 313
2005................. 31,855 2004................... 21
2006................. 27,012 2005................... 511
2007................. 8,779 -------
2008................. 289 $11,836
2009................. 10,843
2010................. 24,337
2011................. 8,363
2017................. 3,977
2018................. 24,274
--------
$234,977
</TABLE>
The Company also has state tax NOLs in various jurisdictions.
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.
The Internal Revenue Service ("IRS") has examined the Predecessor's 1994 and
1995 federal income tax returns. Adjustments and assessments as a result of the
audit are immaterial to the Company's consolidated financial position and
results of operations. The adjustments did not result in any further limitation
to the Company's available NOLs and certain disallowed deductions will be taken
in tax returns subsequent to the 1994 and 1995 returns.
8. COMMON STOCK
Holdings has one class of common stock. Each share of common stock entitles the
holder to one vote on all matters brought before the Annual Meeting of
Stockholders. In connection with the Merger, all existing common stock, warrants
and options of the Predecessor were cancelled.
In connection with the Merger, Station Partners, LLC, Sony Pictures and Liberty
(the "Initial Stockholders") entered into a Stockholders Agreement (the
"Stockholders Agreement") pursuant to which the Initial Stockholders agreed to
elect nine directors to the Board of Directors of Holdings, of which four
directors are designated by Station Partners, LLC, two directors are
designated by Sony Pictures, one director is nominated by Liberty, subject
to the approval of a majority of the outstanding shares of common stock of the
Company held by stockholders other than Liberty, and two directors are
designated as independent. One of the independent directors is nominated
by Station Partners, LLC subject to the approval of Liberty and Sony Pictures,
and the other independent director is nominated by Liberty and Sony
Pictures, subject to the approval of Station Partners.
9. VIDEO 44 ACQUISITION AND PREDECESSOR REFINANCING
On February 26, 1996, Telemundo completed the acquisition of a 74.5% interest in
a joint venture ("Video 44"), which owns WSNS-TV, Channel 44 in Chicago, which
had been Telemundo's largest affiliated station (the "Acquisition"). The
purchase price for the Acquisition included $44.6 million of cash and $1.3
million of costs and liabilities associated with the Acquisition.
22
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
On February 26, 1996 Telemundo also completed the sale of $192 million in
aggregate principal amount of 10.5% Senior Notes, the proceeds of which were
used primarily for the Acquisition and to repurchase $116.7 million principal
amount of the 10.25% Notes. The repurchase resulted in an extraordinary loss of
$17.2 million in 1996. The remaining 10.25% Notes and 99.9% of the 10.5% Senior
Notes were redeemed in connection with the Merger (see Note 2).
10. INVESTMENT IN TELENOTICIAS
From July 1994 through June 1996 Telemundo held a 42% interest in Telenoticias
del Mundo, L.P. ("TeleNoticias"), an international Spanish-language news
service. On June 26, 1996, Telemundo acquired the remaining 58% interest in
TeleNoticias from its former partners for approximately $5.1 million (the
"Purchase"). Contemporaneous with the Purchase, Telemundo sold substantially all
of the assets and certain liabilities of TeleNoticias for approximately $5.75
million, which resulted in a loss on disposal of TeleNoticias of $2.4 million.
11. EMPLOYEE RETIREMENT AND INCENTIVE PLANS
The Company maintains qualified defined contribution retirement and savings
plans for its U.S. employees. The contributions to these plans totaled $253,000,
$632,000, $549,000 and $732,000 for the periods August 13 to December 31, 1998,
January 1 to August 12, 1998 and for the years ended 1997 and 1996,
respectively. As a result of the Network Sale, the Company is no longer
responsible for retirement benefit costs associated with Network Company
employees.
Pursuant to the Predecessor's 1994 reorganization, the Predecessor adopted a
Stock Plan (the "Stock Plan") whereby key employees were granted restricted
stock or options to acquire up to 1,000,000 shares of Series A common stock,
exercisable for a maximum term of 10 years. The Stock Plan was terminated in
connection with the Merger. The Company does not have a stock plan.
12. CONTINGENCIES AND COMMITMENTS
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.
23
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The Company is obligated under various leases, some of which contain renewal
options and provide for cost escalation payments. At December 31, 1998, future
minimum rental payments under such leases are as follows (in thousands):
OPERATING
LEASES
-------------
1999........................................... $ 2,865
2000........................................... 2,853
2001........................................... 2,926
2002........................................... 2,627
2003........................................... 1,841
2004 and later................................. 5,613
-------
Total minimum lease payments................... $18,725
=======
Rent expense was $951,000, $2,259,000, $3,881,000 and $5,264,000 for the
periods August 13 to December 31, 1998, January 1 to August 12, 1998 and for the
years 1997 and 1996, respectively. In connection with the Network Sale, the
Company is not responsible for rent costs associated with Network Company
facilities.
The Company has employment agreements with certain officers pursuant to which
the Company has commitments for compensation through 2001 which also provide for
compensation in the event such officers' employment is terminated under certain
circumstances.
The Company has contracted for certain audience measurement services in the U.S.
and Puerto Rico. The Company is committed to pay $4,519,000, $4,040,000,
$878,000, $673,000 and $700,000 in 1999, 2000, 2001, 2002 and 2003,
respectively.
The Company has certain programming contracts for which the Company is committed
to pay $1,750,000 in each of 1999 through
2003 and $872,000 in 2004.
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 is 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.
13. 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 $8.0 million in incremental net revenue for the
period August 13, 1998 to December 31, 1998, a portion of which is included in
Due from Network Company. In addition, pursuant to other contractual
arrangements, 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.
24
<PAGE>
TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
The Predecessor paid compensation pursuant to an affiliation agreement of
approximately $923,000, $1,433,000 and $1,350,000 for the period January 1 to
August 12, 1998 and for the years 1997 and 1996, respectively, to a broadcast
television station affiliate in which the President and Chief Executive Officer
of the Company and of the Predecessor has a financial interest.
The Company purchases broadcast equipment in the normal course of its business
from various equipment suppliers, including Sony Corporation of America and its
related companies ("Sony"), which are affiliates of Sony Pictures. The Company
purchased approximately $1.4 million of equipment from Sony during the period
August 13 to December 31, 1998 and believes these purchases to be at fair market
value.
In February 1996, the Predecessor completed the offering of its 10.5% Senior
Notes in which BT Alex. Brown Incorporated was a co-manager and received an
underwriting fee. A director of the Predecessor was a Managing Director of BT
Alex. Brown Incorporated.
14. FINANCIAL INSTRUMENTS
Pursuant to the Financial Accounting Standards Board Statement No. 107,
"Disclosures about Fair Values of Financial Instruments," the estimated fair
values of the Company's and the Predecessor's financial instruments are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
COMPANY PREDECESSOR
-------------------------------------- ------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------------------------- ------------------------------------
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
---------------------- --------------- --------------------- --------------
<S> <C> <C> <C> <C>
Cash and cash equivalents.................. $ 8,680 $ 8,680 $ 2,378 $ 2,378
Accounts receivable, net................... 30,768 30,768 54,155 54,155
Interest rate swap contracts............... 571 - -
Long-term debt:
New Credit Facilities................. 269,000 269,000 - -
Senior Discount Notes................. 130,657 124,716 - -
10.5% Senior Notes..................... 295 295 185,073 201,600
10.25% Notes........................... - - 165 183
Old Credit Facility.................... - - 3,843 3,843
</TABLE>
The carrying amount reported in the consolidated balance sheet for cash and cash
equivalents and accounts receivable approximates fair value because of the
short-term maturity of these financial instruments. The New Credit Facilities
and the Old Credit Facility approximate fair value because they are variable
rate instruments. Estimated fair value for the Senior Discount Notes, the
interest rate swap contracts and the 10.5% Senior Notes is based upon market
prices. Estimated fair value for the 10.25% Notes is based upon the face amount
of such notes.
25
EXHIBIT 23.1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Telemundo Holdings, Inc.
Hialeah, Florida
We have audited the accompanying consolidated balance sheets of Telemundo
Holdings, Inc. and subsidiaries ("Company") and Telemundo Group, Inc. and
subsidiaries ("Predecessor ") as of December 31, 1998 and 1997, respectively
and, as to the Company, the related consolidated statements of operations,
changes in common stockholders' equity and cash flows for the period August
13,1998 to December 31, 1998 and, as to the Predecessor, the related
consolidated statements of operations, changes in common stockholders' equity
and cash flows for the period January 1, 1998 to August 12, 1998 and for the two
years ended December 31, 1997. Our audits also included the financial statement
schedule listed in the index at item 14. These consolidated financial statements
and financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company as of
December 31, 1998 and the results of their operations and their cash flows for
the period August 13,1998 to December 31, 1998 and, as to the Predecessor, the
financial position as of December 31, 1997 and the results of operations and
their cash flows for the period January 1, 1998 to August 12, 1998 and for the
two years ended December 31, 1997 in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
As more fully discussed in Note 1 to the consolidated financial statements, the
Predecessor Company was acquired in a business combination accounted for as a
purchase. As a result of the acquisition, the consolidated financial statements
for the period subsequent to the acquisition are presented on a different basis
of accounting than those for the periods prior to the acquisition and,
therefore, are not directly comparable.
/s/ Deloitte & Touche LLP
New York, New York
March 24, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,680
<SECURITIES> 0
<RECEIVABLES> 38,353
<ALLOWANCES> 7,585
<INVENTORY> 0
<CURRENT-ASSETS> 53,633
<PP&E> 52,177
<DEPRECIATION> 2,156
<TOTAL-ASSETS> 771,398
<CURRENT-LIABILITIES> 38,014
<BONDS> 398,889
0
0
<COMMON> 0
<OTHER-SE> 214,485
<TOTAL-LIABILITY-AND-EQUITY> 771,398
<SALES> 193,338
<TOTAL-REVENUES> 193,338
<CGS> 0
<TOTAL-COSTS> 172,668
<OTHER-EXPENSES> 5,506
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,685
<INCOME-PRETAX> (15,325)
<INCOME-TAX> 4,492
<INCOME-CONTINUING> (19,517)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,517)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
