10-Q 1 d10q.txt FORM 10-Q -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 2001 Commission File Number 333-64709 Telemundo Holdings, Inc. (Exact name of registrant as specified in its charter) Delaware 13-3993031 (State or other jurisdiction of (I.R.S.Employer incorporation or organization) Identification No.) 2290 West 8th Avenue Hialeah, Florida 33010 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (305) 889-7068 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- As of July 31, 2001 there were 10,000 shares of common stock of the registrant outstanding, all of which were owned by an affiliate. There is no established public trading market for the registrant's common stock. -------------------------------------------------------------------------------- TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES INDEX

1 PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS -------------------------------------------------------------------------------- TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands)

See notes to consolidated financial statements. 2 TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data)

See notes to consolidated financial statements. 3 TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY (Unaudited) (In thousands, except share data)

See notes to consolidated financial statements. 4 TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)

See notes to consolidated financial statements. 5 TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) -------------------------------------------------------------------------------- 1. BUSINESS Telemundo Holdings, Inc. ("Holdings", and collectively with its subsidiaries, the "Company") is one of two national Spanish-language television broadcast companies currently operating in the United States. The Company owns and operates nine full-power UHF television stations serving the following Hispanic Market Areas ("Market Areas" 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) in the United States--Los Angeles, New York, Miami, San Francisco, Chicago, Houston, San Antonio and Denver. Since June 1, 2001, the Company has owned and operated KWHY-TV in Los Angeles, California, the largest independent Spanish-language television station in the largest U.S. Hispanic market, in addition to its owned and operated Network affiliate in the Los Angeles Market Area. Since June 4, 2001, the Company has operated the full-power Spanish-language television station WEYS-TV, in Key West, Florida, serving the Miami Market Area pursuant to a local marketing agreement. The Company also owns and operates the leading full-power VHF television station and related production facilities in Puerto Rico. The Company's stations broadcast a wide variety of network programming, including telenovelas (soap operas), talk shows, movies, entertainment programs, national and international news, sporting events, children's programming, music, comedy and dramatic series. Network programming is provided by Telemundo Network Group LLC (the "Network Company"), an affiliate of the Company. In addition, the Company supplements its network programming with local programming focused on local news and community events. 2. MERGER AND RELATED TRANSACTIONS Holdings was originally formed as a holding company in connection with the August 1998 acquisition of Telemundo Group, Inc. (consequently a wholly-owned subsidiary of Holdings, "TGI") by Liberty Media Corporation (together with its subsidiaries, "Liberty"), Sony Pictures Entertainment Inc. (together with its subsidiaries, "Sony Pictures") and Station Partners, LLC ("Station Partners") (the "Merger"). In connection with the Merger, 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 share advertising revenue pursuant to a revenue sharing arrangement. Pursuant to the Affiliation Agreement, the Company receives a formula-based share of pooled advertising revenue generated by the Company and the Network Company. The following revenue sources (collectively, the "Aggregate Net Advertising Receipts") are included in the pooled revenue: (i) 61% of the net advertising revenue received by the Network Company pursuant to the sale of network advertising and (ii) 100% of the net advertising revenue received by the Company (excluding WKAQ in Puerto Rico, KWHY in Los Angeles and WEYS in Miami) from the sale of local and national spot advertising time. The pooled revenue is shared between the Company and the Network Company, with the Company's share based on the following formula for the first year of the agreement: (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 first year, the threshold levels (i.e., $130 million and $230 million) increase 3% annually. The Company incurs non-network marketing/promotional expenditures, programming expenditures and capital expenditures for its stations. All network programming costs are borne by the Network Company. As part of the Affiliation Agreement, the Network Company and the Company agreed, subject to various conditions, to incur certain programming, marketing/promotional and capital expenditures in each year. 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. 6 TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) -------------------------------------------------------------------------------- 3. THE RESTRUCTURING AND RELATED TRANSACTIONS The current and former stockholders of Holdings consummated a restructuring of interests on December 15, 2000 (the "Restructuring"). As part of the Restructuring, each of Sony Pictures, Station Partners and Liberty contributed, among other things, all of their capital stock in Holdings to Telemundo Communications Group, Inc., a Delaware corporation ("TCG"), in exchange for shares of common stock of TCG. As a part of the Restructuring, Council Tree Hispanic Broadcasters II, L.L.C. ("Council Tree") purchased membership interests in Station Partners from a former shareholder of Holdings and contributed (through an affiliate) KMAS-TV ("KMAS"), Channel 24, Steamboat Springs, Colorado, KSBS-LP, Channel 67, Denver, Colorado, KMAS-LP, Channel 63, Denver, Colorado and K34FB, Channel 34, Pueblo, Colorado (collectively, the "Denver Stations"), valued at $15 million, to Station Partners, which subsequently contributed the Denver Stations to the Company. In addition, TCG, through its subsidiary, Telemundo Network Interest, Inc. ("TNI"), acquired 67% of the membership interests in the Network Company, all of whose membership interests were previously owned by Liberty and Sony Pictures. Specifically, Liberty contributed, through the contribution of 100% of the capital stock of one of its subsidiaries to TCG, 50% of the outstanding membership interests of the Network Company in exchange for shares of TCG. In addition, Sony Pictures contributed, through a subsidiary, 17% of the outstanding membership interests of the Network Company to TCG in exchange for shares of TCG. As a result, Sony Pictures retained 33% of the Network Company's membership interests and TCG is the managing member of the Network Company. 4. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS In the opinion of management, the accompanying unaudited consolidated financial statements of the Company include all material adjustments (consisting of only normal recurring accruals) necessary to present fairly the Company's unaudited financial position at June 30, 2001, and the results of operations and cash flows for all periods presented. The unaudited results of operations for interim periods are not necessarily indicative of the results to be expected for the year ending 2001. The unaudited pro forma condensed consolidated financials for the year ended December 31, 2000, the six months ended June 30, 2001 and for the twelve months ending June 30, 2001 are not necessarily indicative of the results to be expected for the year ending 2001. For a summary of significant accounting policies, which have not changed from December 31, 2000, and additional financial information, see the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Certain reclassifications have been made in the prior year's financial statements to conform with the current year's presentation. 5. TRANSACTIONS WITH AFFILIATES Sony Pictures and TCG, through subsidiaries, own the Network Company. TCG is the Company's sole shareholder. Pursuant to the Affiliation Agreement, the Company recorded $12.9 million and $12.0 million in incremental net revenue for the six months ended June 30, 2001 and 2000, respectively, the outstanding portion of which is included in Due from Network Company, net. In addition, the Network Company pays certain costs on behalf of the Company and the Company pays certain costs on behalf of the Network Company, which are fully reimbursed. The Company believes these costs to be at fair value and the outstanding balances are included in Due from Network Company, net. As a result of the Affiliation Agreement, the Company relies solely on the Network Company for all of its network programming and is dependent, to a significant extent, on the ability of the Network Company to generate advertising revenue. The Spanish-language television market share for the Company's stations are dependent upon the Network Company's ability to produce or acquire and distribute programming which attracts significant viewer levels. If the programming provided by the Network Company fails to attract viewers, each of the Company's and the Network Company's ability to attract advertisers and generate revenue and profits will be impaired. There can 7 TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) -------------------------------------------------------------------------------- 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 revenue. 6. DERIVATIVES Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards 133 ("SFAS 133"), Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, and SFAS 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. SFAS 133 requires that all derivatives be recorded as either assets or liabilities measured at fair value on the balance sheet and establishes criteria for designation and effectiveness of derivative transactions for which hedge accounting is applied. The Company assesses the initial and ongoing effectiveness of its hedging relationships in accordance with its documented policies. As a result of the adoption of this standard as of January 1, 2001, the Company recorded a transition adjustment reflecting a one-time after-tax unrealized gain of $2.3 million to other comprehensive income. The impact of the adoption of SFAS 133 relates to the Company's two interest rate swaps, which are used to manage financing costs associated with changes in variable interest rates on its $530 million senior secured credit facilities (as described below). The interest rate swap transactions qualify as cash flow hedges and are recorded on the consolidated balance sheet as of June 30, 2001 as follows: $1.7 million financial liabilities and $1.0 million accumulated other comprehensive loss, net of income taxes of $638,000. Using the hypothetical derivative method, the Company recognized a loss on the fair value on the interest rate swaps of $105,000, which is included in other income, net in the consolidated statements of operations. The Company will apply the assertions relating to SFAS 133 on a quarterly basis. 7. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standard Board ("FASB") released SFAS 141, Business Combinations, ("SFAS 141"), and SFAS 142, Goodwill and Other Intangible Assets ("SFAS 142"). SFAS 141 prohibits the use of the pooling-of-interests ("pooling") method of accounting for business combinations initiated after the issuance date of the financial statements. SFAS 142 reduces the maximum amortization period of goodwill and intangible assets to 20 years. However, it also requires that an identifiable intangible asset, that is determined to have an indefinite useful economic life and observable market not be amortized, but separately tested for impairment using a fair-value based approach. SFAS 142 is effective January 1, 2002, when it will be adopted by the Company. The impact on the consolidated financial statements, as a result of the adoption of SFAS 141 and SFAS 142 has not been determined. 8. COMPREHENSIVE LOSS Comprehensive loss consists of net loss and changes in the value of derivatives in accordance with the adoption of SFAS 133. The components of the Company's comprehensive loss is as follows (in thousands): Six Months Ended June 30, 2001 ------------- Net loss $(7,639) Cumulative adoption of new accounting principle - SFAS 133, net of income taxes of $1,138 2,344 Unrealized loss on derivatives, net of income taxes of $2,137 (3,343) ------- Comprehensive loss $(8,638) ======= 8 TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) -------------------------------------------------------------------------------- 9. ACQUISITION AND RELATED FINANCING The Company acquired certain of the assets and assumed certain of the liabilities of independent full-power Spanish-language television station KWHY-TV, Channel 22, in Los Angeles, CA and its related low-power television station, KWHY-LP, Channel 22, in Santa Barbara, CA (collectively, "KWHY"), for approximately $239 million (the "KWHY Acquisition"). The KWHY Acquisition closed on June 1, 2001. The KWHY Acquisition has been accounted for under the purchase method of accounting. Accordingly, the results of operations have been included in the consolidated statements of operations beginning on June 1, 2001. On June 1, 2001, TGI, as borrower, the Company, as parent guarantor, and a syndicate of lenders entered into an amended and restated credit agreement. The senior secured credit facilities are comprised of a reducing revolving credit facility in an aggregate principal amount of up to $100.0 million, a tranche A term credit facility in an aggregate principal amount of $75.0 million, and a tranche B term credit facility in an aggregate principal amount of $355.0 million (the "Credit Facilities"). On May 31, 2001, in connection with the acquisition of KWHY, TCG issued shares of its Series A Convertible Preferred Stock and its Series B Convertible Preferred Stock in exchange for $70.0 million from certain of its stockholders. Shares of the Series A Convertible Preferred Stock, which have one vote per share and are convertible into TCG's Class A Common Stock, were issued to Liberty, Sony Pictures, SPE Mundo and TLMD LLC. Shares of the Series B Convertible Preferred Stock, which have three votes per share and are convertible into TCG's Class B Common Stock, were issued to Station Partners. Accordingly, on a voting basis, the issued and outstanding capital stock of TCG (including the Class A and Class B Common Stock and the Series A and Series B Convertible Preferred Stock on a combined basis) may be voted 15.67% by Sony Pictures (which includes the shares held by SPE Mundo), 24.92% by Liberty, 55.48% by Station Partners, 3.33% by Bron-Villanueva Capital, LLC ("BV Capital") and 0.59% by TLMD LLC. BV Capital and TLMD LLC are both affiliates of the managing partners of Bastion. Liberty's voting rights are subject to an irrevocable proxy, subject to certain conditions, in favor of Station Partners to vote all the shares of TCG held by Liberty. The unaudited pro forma information of the Company as if the KWHY Acquisition had occurred on January 1, is as follows (in thousands): Six months ended June 30, 2001 2000 -------------------------------------------------------------------- Revenue $123,157 $112,117 Loss from continuing operations (8,901) (6,026) 9 TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued) -------------------------------------------------------------------------------- The purchase price allocation was based on the fair values of the assets acquired and liabilities assumed, which were based on an independent valuation and allocation as follows (in thousands): Television programming $ 1,087 Prepaid expenses and other current assets 143 Property and equipment 5,790 Broadcast license and other intangibles 236,124 Accounts payable and accrued expenses (2,457) Television program obligations (284) ---------- Total purchase price $240,403 ========== The allocation and related life of the intangibles are as follows (in thousands): Broadcast licenses 40 years $206,724 Advertiser base 7 years 29,000 Workforce 5 years 400 10. PENDING ACQUISITION AND RELATED FINANCING On June 25, 2001, the Company entered into a definitive agreement to acquire the full-power independent television station KXTX-TV, Channel 39, in Dallas, Texas ("KXTX"), from Southwest Sports Television, L.P. for approximately $65.0 million plus costs and other liabilities (the "KXTX Acquisition"). The KXTX Acquisition is subject to the approval of the Federal Communications Commission ("FCC") and certain other conditions, including expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("Hart-Scott-Rodino"). The application for approval of the KXTX Acquisition was filed with the FCC on July 10, 2001. The FCC accepted the application for filing on July 24, 2001. The time period during which third parties may petition the FCC to deny the application expires on August 23, 2001. The applicable waiting period under Hart-Scott-Rodino will expire on August 13, 2001. The Company has requested "early termination" of such waiting period. Subject to the receipt of all regulatory approvals, the Company anticipates that it will close this transaction in the fourth quarter of 2001 and that it will fund the KXTX Acquisition through a combination of borrowings under the Company's Credit Facilities and funds to be received from the offering of the senior discount notes. 10 TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -------------------------------------------------------------------------------- Introduction 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 nine full-power UHF television stations serving the following Hispanic Market Areas ("Market Areas" 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) in the United States--Los Angeles, New York, Miami, San Francisco, Chicago, Houston, San Antonio and Denver. Eight of these stations serve the seven largest Hispanic Market Areas in the United States. Four of these markets are among the five largest general Market Areas in the United States. Since June 1, 2001, the Company has owned and operated KWHY-TV in Los Angeles, California, the largest independent Spanish-language television station in the largest U.S. Hispanic market, in addition to its owned and operated network affiliate in the Los Angeles Market Area. Since June 4, 2001, the Company has operated the full-power Spanish-language television station WEYS-TV, in Key West, Florida ("WEYS"), serving the Miami market pursuant to a local marketing agreement. The Company also owns and operates the leading full-power VHF television station and related production facilities in Puerto Rico and 16 domestic low-power television stations. The Company's stations broadcast a wide variety of network programming, including telenovelas (soap operas), talk shows, movies, entertainment programs, national and international news, sporting events, children's programming, music, comedy and dramatic series. In addition, the Company supplements its network programming with local programming focused on local news and community events. Network programming is provided 24-hours a day to the Company's U.S. stations by Telemundo Network Group LLC (the "Network Company"), an affiliate of the Company. WKAQ in Puerto Rico, KWHY in Los Angeles and WEYS in Miami broadcast a similar variety of programs. However, while these stations air certain of the Network Company's programming, a substantial amount of their programming is either internally developed and produced, or acquired directly by each station from third party producers unrelated to the Network Company. Including the Company's owned and operated stations, the Network Company currently serves 81 markets in the United States, including 49 of the 50 largest Hispanic markets, and reaches approximately 88% of all U.S. Hispanic households. Holdings was originally formed as a holding company in connection with the August 1998 acquisition of Telemundo Group, Inc. (consequently a wholly-owned subsidiary of Holdings "TGI") by Liberty Media Corporation (together with its subsidiaries, "Liberty"), Sony Pictures Entertainment Inc. (together with its subsidiaries, "Sony Pictures") and Station Partners, LLC ("Station Partners") (the "Merger"). The former stockholders of Holdings consummated a restructuring of interests on December 15, 2000 (the "Restructuring"). As part of the Restructuring, each of Sony Pictures, Station Partners and Liberty contributed, among other things, all of their capital stock in Holdings to Telemundo Communications Group, Inc. ("TCG"), in exchange for shares of common stock of TCG. In addition, Council Tree purchased membership interests in Station Partners from a former shareholder of Holdings and contributed (through an affiliate) KMAS-TV ("KMAS"), Channel 24, Steamboat Springs, Colorado, KSBS-LP, Channel 67, Denver, Colorado, KMAS-LP, Channel 63, Estes Park, Colorado and K34FB, Channel 34, Pueblo, Colorado (collectively, the "Denver Stations"), valued at $15 million, to Station Partners, which subsequently contributed the Denver Stations to the Company. As a result of the Restructuring, TCG, through its subsidiary, Telemundo Network Interest, Inc. ("TNI"), acquired 67% of the membership interests in the Network Company, all of whose membership interests were previously owned by Liberty and Sony Pictures. Specifically, Liberty contributed, through the contribution of 100% of the capital stock of one of its subsidiaries to TCG, 50% of the outstanding membership interests of the Network Company in exchange for shares of TCG. In addition, Sony Pictures contributed, through a subsidiary, 17% of the outstanding membership interests of the Network Company to TCG in exchange for shares for TCG. As a result, 11 TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) -------------------------------------------------------------------------------- Sony Pictures retained 33% of the Network Company's membership interests and TCG is the managing member of the Network Company. In connection with the Merger, 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 share advertising revenue pursuant to a revenue sharing arrangement. Pursuant to the Affiliation Agreement, the Company receives a formula-based share of pooled advertising revenue generated by the Company and the Network Company. The following revenue sources (collectively, the "Aggregate Net Advertising Receipts") are included in the pooled revenue: (i) 61% of the net advertising revenue received by the Network Company pursuant to the sale of network advertising and (ii) 100% of the net advertising revenue received by the Company (excluding WKAQ in Puerto Rico, KWHY in Los Angeles and WEYS in Miami) from the sale of local and national spot advertising time. The pooled revenue is shared between the Company and the Network Company, with the Company's share based on the following formula for the first year of the agreement: (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 first year, the threshold levels (i.e., $130 million and $230 million) increase 3% annually. The Company incurs non-network marketing/promotional expenditures, programming expenditures and capital expenditures for its stations. All network programming costs are borne by the Network Company. As part of the Affiliation Agreement, the Network Company and the Company agreed, subject to various conditions, to incur certain programming, marketing/promotional and capital expenditures in each year. 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. The following discussion and analysis of results of operations and financial condition 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 statements" within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. Forward-looking statements are not guarantees of future performance and are subject to certain risks and uncertainties, including (without limitation) those risks associated with operating in a competitive market; effect of national and local economic conditions; the Company's outstanding indebtedness and debt 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 impact of the 2000 Census on the Company's markets and other factors outside the Company's control; future capital requirements; the impact of competition; the ability of third party program suppliers to produce quality programming, including its impact on market share and advertising revenue in each of the Company's markets; the strength or weakness of the advertising market; the cost of programming; changes in technology and standards in the Company's industry; the loss of key employees; the ability to attract and retain qualified personnel; the modification or termination of the Affiliation Agreement; the impact of litigation; the ability to retain the licenses issued by the Federal Communications Commission ("FCC Licenses") and the impact of current or pending legislation and regulations, including Federal Communications Commission ("FCC") rulemaking proceedings; business disruptions including catastrophic events; increases in the costs and the impact of potential utility interruptions and other factors which may be described from time to time in filings of the Company with the Securities and Exchange Commission. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. 12 TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) -------------------------------------------------------------------------------- The Company acquired certain of the assets and assumed certain of the liabilities of independent full-power Spanish-language television station KWHY-TV, Channel 22, in Los Angeles, CA and its related low-power television station, KWHY-LP, Channel 22, in Santa Barbara, CA (collectively, "KWHY"), for approximately $239 million (the "KWHY Acquisition"). The KWHY Acquisition closed on June 1, 2001. On June 1, 2001, TGI, as borrower, the Company, as parent guarantor, and a syndicate of lenders entered into an amended and restated credit agreement. The senior secured credit facilities are comprised of a reducing revolving credit facility in an aggregate principal amount of up to $100.0 million, a tranche A term credit facility in an aggregate principal amount of $75.0 million, and a tranche B term credit facility in an aggregate principal amount of $355.0 million (the "Credit Facilities"). On May 31, 2001, in connection with the acquisition of KWHY, TCG issued shares of its Series A Convertible Preferred Stock and its Series B Convertible Preferred Stock in exchange for $70.0 million from certain of its stockholders. Shares of the Series A Convertible Preferred Stock, which have one vote per share and are convertible into TCG's Class A Common Stock, were issued to Liberty, Sony Pictures and TLMD LLC. Shares of the Series B Convertible Preferred Stock, which have three votes per share and are convertible into TCG's Class B Common Stock, were issued to Station Partners. Accordingly, on a voting basis, the issued and outstanding capital stock of TCG (including the Class A and Class B Common Stock and the Series A and Series B Convertible Preferred Stock on a combined basis) may be voted 15.67% by Sony Pictures, 24.92% by Liberty, 55.48% by Station Partners, 3.33% by Bron-Villanueva Capital, LLC ("BV Capital") and 0.59% by TLMD LLC. BV Capital and TLMD LLC are both affiliates of the managing partners of Bastion. Liberty's voting rights are subject to an irrevocable proxy, subject to certain conditions, in favor of Station Partners to vote all the shares of TCG held by Liberty. On June 1, 2001, the Company entered into a local marketing agreement with WEYS Television Corp. to operate the full-power Spanish-language television station WEYS in Key West, Florida, serving the Miami market. The Company also entered into an option agreement to acquire the assets of WEYS and its associated LPTVs for approximately $9.0 million. With this agreement and the acquisition of KWHY, the Company has created duopolies in two of the three largest Hispanic markets in the U.S. On June 25, 2001, the Company entered into a definitive agreement to acquire the full-power independent television station KXTX-TV, Channel 39, in Dallas, Texas ("KXTX"), from Southwest Sports Television, L.P. for approximately $65.0 million plus costs and other liabilities (the "KXTX Acquisition"). The KXTX Acquisition is subject to the approval of the Federal Communications Commission ("FCC") and certain other conditions, including expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("Hart-Scott-Rodino"). The application for approval of the KXTX Acquisition was filed with the FCC on July 10, 2001. The FCC accepted the application for filing on July 24, 2001. The time period during which third parties may petition the FCC to deny the application expires on August 23, 2001. The applicable waiting period under Hart-Scott-Rodino will expire on August 13, 2001. The Company has requested "early termination" of such waiting period. Subject to the receipt of all regulatory approvals, the Company anticipates that it will close this transaction in the fourth quarter of 2001 (see Note 10). The Company will fund the KXTX Acquisition through a combination of borrowings under the Company's Credit Facilities and funds to be received through the issuance of the Notes due 2008 (as described below). 13 TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) -------------------------------------------------------------------------------- On July 30, 2001, the Company signed a purchase agreement to issue $75,153,000 aggregate principal amount at maturity of 11.5% Senior Discount Notes due 2008 (the "Notes"). The issuance of the Notes is subject to customary conditions and the Company expects the issuance to occur on August 10, 2001. The Notes will not be registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States absent a registration statement or an applicable exemption from registration requirements. The Company will use the net proceeds from the sale of the Notes to finance the KXTX Acquisition. If the acquisition of KXTX is not consummated, the Company will use the net proceeds from the sale of the Notes to repay debt under the Company's Credit Facilities. Results of Operations Net revenue for the three and six months ended June 30, 2001 as compared to the corresponding periods of 2000 was as follows (in thousands):

Local revenue at the Company's domestic television stations increased by 49% and 45% for the three and six months ending June 30, 2001 from the corresponding periods of the prior year, respectively, which was primarily the result of increases in audience share at the Company's major stations, continued growth in the local Spanish-language television markets and the addition of KWHY from June 1, 2001. Local revenue at WKAQ-Puerto Rico increased by 3% and 4% for the three and six months ending June 30, 2001 from the corresponding periods of the prior year, respectively, as a result of increases in audience share. Excluding the impact of KWHY, local revenue at the Company's domestic television stations would have increased by 33% and 36% for the three and six months ending June 30, 2001 from the corresponding periods of the prior year, respectively. The increases in national spot revenue of 25% and 10% for the three and six months ended June 30, 2001 from the corresponding periods of the prior year, respectively, were primarily the result of increases in audience share. Excluding the impact of KWHY, national revenue at the Company's domestic television stations would have increased by 22% and 9% for the three and six months ending June 30, 2001 from the corresponding periods of the prior year, respectively. The Telemundo network's average share of the Spanish-language television audience (Adults 18-49) was 26% during the first and second quarters of 2001 and 23% during the fourth quarter of 2000, compared to 22% during the second quarter of 2000, 18% during the first quarter of 2000 and 19% during the fourth quarter of 1999. Throughout 2000 and the first half of 2001, the Company's audience share levels have increased significantly as a result of various successful programming initiatives. A change in audience share typically has a delayed impact on revenue. 14 TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) -------------------------------------------------------------------------------- Incremental revenue from the Affiliation Agreement represents the share of the pooled revenue pursuant to the Affiliation Agreement in excess of revenue generated by the Company's U.S. stations. The amount of incremental revenue recognized in any period is impacted by the timing of the attainment of the Aggregate Net Advertising Receipts thresholds discussed above. Other revenue decreased by 24% and 47% for the three and six months ending June 30, 2001 from the corresponding periods of the prior year, respectively, which was primarily the result of the elimination of substantially all U.S. paid programming (i.e., infomercials) at the end of the second quarter of 2000, with the exception of KWHY. These decreases were offset in part by including KWHY's June results in the 2001 periods. Direct operating costs increased by 16% and 18% for the three and six months ended June 30, 2001 from the corresponding periods of the prior year, respectively. This was primarily the result of an increase in costs incurred to enhance and expand local news in the U.S. and the addition of KWHY. Excluding KWHY, direct operating costs would have increased by 11% and 15% for the three and six months ending June 30, 2001 from the corresponding periods of the prior year, respectively. Selling, general and administrative expenses increased by 17% for both the three and six months ended June 30, 2001 from the corresponding periods of the prior year. This was primarily the result of the payment of increased sales commissions relating to the increase in local revenue, an increase in advertising expenditures and the addition of KWHY. Excluding KWHY, selling, general and administrative expenses would have increased by 14% and 15% for the three and six months ending June 30, 2001 from the corresponding periods of the prior year, respectively. Corporate expenses increased by $195,000 and $391,000 for the three and six months ending June 30, 2001 from the corresponding periods of the prior year, respectively. Depreciation and amortization increased by $1.5 million and $2.4 million for the three and six months ended June 30, 2001 from the corresponding periods of the prior year, respectively. This was primarily a result of the additions to property and equipment during 2000 and 2001, including those relating to upgrading stations to a digital technology platform and the addition of KWHY. Excluding KWHY, depreciation and amortization would have increased by $581,000 and $1.5 million for the three and six months ending June 30, 2001 from the corresponding periods of the prior year, respectively. Interest expense, net increased by $1.4 million and $1.8 million for the three and six months ended June 30, 2001 from the corresponding periods of the prior year, respectively. This was primarily the result of higher interest rates on greater balances outstanding under the Credit Facilities and an increase in interest accreted on the $218.8 million aggregate principal amount at maturity 11.5% Senior Discount Notes due 2008. The income tax (provision)/benefit for the three and six months ended June 30, 2001, respectively, result primarily from the tax effect of changes in federal, state and Puerto Rico deferred temporary differences, offset in part by a current provision for federal, state and Puerto Rico income taxes. The income tax provision for the three and six months ended June 30, 2000 results primarily from a current provision for federal, state and Puerto Rico income taxes and Puerto Rico withholding taxes related to intercompany interest, offset in part by the tax effect of changes in federal, state and Puerto Rico deferred temporary differences. The Company is in a net operating loss position for federal income tax purposes. The Company's use of its net operating loss carryforwards are subject to certain limitations imposed by Section 382 of the Internal Revenue Code and their use will be limited. Minority interest represents the accounting impact of distributions to the 25.5% partner in Video 44, which is based on a minimum preferred distribution to such partner. Video 44 is a partnership that owns and operates WSNS-Chicago. The extraordinary item-extinguishment of debt, net of taxes of $3.1 million for the three and six months ended June 30, 2001 was the result of a write-off of the debt issuance costs from the credit facilities upon refinancing. 15 TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Continued) -------------------------------------------------------------------------------- Liquidity and Sources of Capital Cash flows used in and provided by operating activities were $7.7 million and $11.5 million for the six months ended June 30, 2001 and 2000, respectively. The decrease is primarily the result of changes in certain asset and liability accounts, the timing of the payments of accounts payable, taxes and interest, and an increase in net loss due to the increases in depreciation and amortization and interest expense. The Company had working capital of $33.7 million at June 30, 2001. Capital expenditures of approximately $7.3 million were made during the six months ended June 30, 2001 to replace and upgrade equipment and facilities, including upgrading stations to a digital technology platform. The Company expects to incur capital expenditures of approximately $20 million in 2001 in connection with the continued conversion to digital technology as well as regular maintenance capital spending. The Company's principal sources of liquidity are cash from operations and a $100 million revolving credit facility with a final maturity of February 15, 2008 (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 none outstanding at June 30, 2001. The Company's interest income and expense are sensitive to changes in the general level of U.S. and certain European interest rates. In this regard, changes in these rates affect the interest earned on the Company's cash equivalents as well as interest paid on its Credit Facilities. To mitigate the impact of fluctuations in interest rates, the Company entered into two fixed rate for London Interbank Offered Rates ("LIBOR") swap transactions in late 1998. The Company uses derivative financial instruments to manage financing cost associated with changes in interest rates. Interest rate swaps involve periodic exchange of payments without the exchange of underlying principal or notional amounts. Net payments are recognized as an adjustment to interest expense, net. The Company does not use any of these instruments for trading purposes. If the Company were to have borrowings outstanding for the maximum amount possible under the Revolving Credit Facility, it would have $100 million principal amount subject to change in interest rates, whereby a change of 100 basis points would have approximately a $1.0 million impact on pre-tax earnings and pre-tax cash flows over a one-year period. The Company's credit risk associated with these derivative contracts is generally limited to an unrealized gain on those contracts with a positive fair market value, should any counterparty fail to perform as contracted. The counterparty to the Company's derivative contracts is a major international financial institution. The Company continually monitors the credit quality of this financial institution and does not expect non-performance by the counterparty. 16 TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES -------------------------------------------------------------------------------- Item 3. Quantitative and Qualitative Disclosures About Market Risk The information required by this item is included in the "Liquidity and Capital Resources" section of the Company's Management's Discussion and Analysis of Results of Operations and Financial Condition contained in this document. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K

17 TELEMUNDO HOLDINGS, INC. AND SUBSIDIARIES -------------------------------------------------------------------------------- 10.5 Amended and Restated Subsidiary Guarantee Agreement dated as of June 1, 2001 among Telemundo Group, Inc., the Company, the Subsidiary Guarantors (as named therein) and Credit Suisse First Boston Corporation (incorporated by reference to Exhibit 10.5 filed as part of the Company's 8-K dated June 1, 2001). 10.6 Amended and Restated Stockholders' Agreement dated as of May 31, 2001 by and among Telemundo Communications Group, Inc., Station Partners, LLC, Sony Pictures Entertainment Inc., Liberty Media Corporation, Council Tree Hispanic Broadcasters II, L.L.C., BCF Media, LLC, Bastion Capital Fund, L.P., TLMD LLC, Villanueva Investments, Inc., The Bron 2000 Trust and Bron-Villanueva Capital, LLC (incorporated by reference to Exhibit 10.6 filed as part of the Company's 8-K dated June 1, 2001). 99.1 Telemundo Holdings, Inc. and Subsidiaries- Unaudited Pro Forma Condensed Consolidated Financial Statements For the Year Ended December 31, 2000 and Six Months Ended June 30, 2001. (b) Reports on Form 8-K On June 15, 2001, a Report on Form 8-K was filed which describes the consummation of the KWHY Acquisition.

18 SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TELEMUNDO HOLDINGS, INC. (Registrant) By: /s/ Vincent L. Sadusky ----------------------------------------- Dated: August 3, 2001 Vincent L. Sadusky Chief Financial Officer and Treasurer 19

TELEMUNDO HOLDING INC 10-Q