continued...
The Company's primary source of cash flow is its broadcasting operations. Funds for debt service, capital expenditures and operations historically have been provided by income from operations and by borrowings.
Capital expenditures, which include those of UTG, the Network and Galavision, totaled $29,280,000 through September 30, 1998 and $21,711,000 through September 30, 1997. These amounts exclude the capitalized transponder lease obligations of the Network. In addition to performing normal capital maintenance and replacing several towers and antennas, the Company is also in the process of upgrading and relocating several of its television station facilities. In conjunction with the Company's non-NOVELA production agreement with Televisa (see below), the Network is expanding its production facilities. Furthermore, during the next few years, the Company also will make an investment in digital technology. The amount of this investment has not been quantified, as the Company is in the process of determining its available options. Capital spending in 1998, including a carryover from 1997 of approximately $9,000,000 due to timing of certain projects, will approximate $45,000,000. Capital spending in 1999, 2000 and 2001 is expected to approximate $25,000,000 per annum.
At September 30, 1998, the Bank Facility consisted of a $313,250,000 amortizing term loan (the "Term Facility") with a final maturity of December 31, 2003, and a $200,000,000 reducing revolving credit facility (the "Revolving Credit Facility") maturing on the same date. Furthermore, the Bank Facility permits the lenders thereunder to advance up to an additional $250,000,000 of term loans (the "Incremental Facility"), although the Company has not requested and there are no commitments at this time to lend any such additional amounts. At September 30, 1998, the Company had approximately $400,000,000 available to borrow through a combination of its Revolving Credit and Incremental Facilities.
The Term Facility amortizes quarterly, with $49,000,000 required to be repaid during 1998. Through the nine months ended September 30, 1998, the Company has paid $36,750,000. In addition, in the first quarter of 1998, the Company made a $10,000,000 prepayment against its Term Facility as a result of its annual "excess cash flow" calculation based on its 1997 operating results. The payment was funded by an increase in the Revolving Credit Facility and subsequently repaid within the quarter with cash from operations. The Revolving Credit Facility has quarterly scheduled reductions in availability beginning in 1999. If any loans are made available under the Incremental Facility, such loans will be amortized beginning on March 31, 1999, and are required to be repaid in full on or before August 31, 2004.
Loans made under the Bank Facility bear interest rates, which include interest rate margin costs, determined by reference to the ratio of the Company's total indebtedness to EBITDA for the four fiscal quarters most recently concluded (the "Leverage Ratio"). The interest rate margins applicable to the Eurodollar (Libor) loans range from 0.35% to 1.00% per annum. Furthermore, there are no interest rate margins applicable to prime rate loans. At September 30, 1998, the interest rate applicable to the Company's Eurodollar loans was approximately 6.00%, which includes an interest rate margin cost of 0.35%. The interest rate applicable to all prime rate loans was between 8.25% and 8.50%.
In November 1996 the Company entered into interest rate cap agreements to reduce the impact of changes in interest rates on its Term Facility. The Company has two interest rate cap agreements with commercial banks that terminate in November 1998, covering a total notional principal amount of $220,000,000 of its Term Facility. The agreements effectively limit the Company's Eurodollar interest rate exposure to 7% on $220,000,000 of the Term Facility. The fee for the interest rate protection agreements of $462,000 was capitalized as a deferred financing cost and is being amortized over two years, the period of the instruments, on a straight-line basis. At the present time, the Company has no plans of entering into any new interest rate cap agreements.
The Company expects to explore both Spanish-language television and other media-acquisition opportunities to complement and capitalize on the Company's existing business and management. The purchase price for such acquisitions may be paid (i) with cash derived from operating cash flow, proceeds available under the Bank Facility or proceeds from future debt or equity offerings, (ii) with equity or debt securities of the Company or (iii) with any combination thereof.
As a result of net operating loss carryforwards attributable to the Acquisition, net operating losses since the Acquisition, tax consequences of the Reorganization, other timing differences and subsequent
book taxable income, the Company has available a deferred tax asset of approximately $46,700,000 to offset future taxes payable arising from operations. In addition, at September 30, 1998, the Company had approximately $481,900,000 of net remaining intangible assets that will be expensed over the next 20 years for financial reporting purposes and will not be deductible for tax purposes.
The Company acquired the Spanish-language broadcast rights in the U.S. to all 64 of the 1998 World Cup Soccer Championship Games from a Televisa subsidiary for a fixed payment of $25,000,000 in total, paid in four equal installments in May, June, August and September 1998. In addition to these payments and consistent with past coverage of the World Cup Games, the Company was responsible for all costs associated with advertising, promotion and broadcast of the World Cup Games, as well as the production of certain television programming related to the games.
The Company and Televisa have an agreement to each produce three thirteen-week new non-NOVELA programs. Both Univision and Televisa are required to use commercially reasonable efforts to complete the production of their respective three programs so that such programs are available to commence airing no later than October 31, 1998. The Company is currently broadcasting its three required programs. Televisa has produced two of its required programs and the third is scheduled for production in the first quarter of 1999. The Televisa programs are scheduled to air in the first half of 1999. No assurance can be given that the Univision and Televisa programs will be successful.
A joint venture between the Home Shopping Network Capital LLC and the Company formed the Home Shopping Network En Espanol LLC. The joint venture has created a live Spanish-language television shopping service intended for distribution in the United States, Latin America, Portugal and Spain. On March 30, 1998, the Home Shopping Network En Espanol LLC began broadcasting three hours of programming, seven days a week on Galavision, the Company's Spanish-language cable network. Under the terms of the agreement, the Home Shopping Network Capital LLC and the Company have an approximate equal interest in the joint venture. The annual capital contributions estimated to be required to be made by each party under the agreement are $1,600,000 in 1998, $2,300,000 in 1999 and $1,900,000 in 2000, with a maximum capital contribution limit of $6,000,000 over a five-year period. The Company accounts for its investment in the Home Shopping Network En Espanol LLC under the equity method. No assurance can be given that the joint venture will be successful.
In August 1998, the Company acquired a film library from the Million Dollar Video Corporation for approximately $11,500,000, including legal fees. The funds for the purchase were derived from the Company's income from operations and borrowings from its existing bank facilities. The acquisition was accounted for under the purchase method of accounting.
YEAR 2000 ISSUES
Like most businesses today, the Company is reliant on computer systems and other electronic and mechanical technologies in carrying out its operations and management of its resources. Some of the Company's operations are either carried out through or supported by third parties, such as signal distribution and television audience ratings, while approximately 50% of the Company's programming is sourced from third parties. Approximately 80% of Univision's Network broadcast distribution (including commercial spots) is provided through its O&Os with the remainder provided via its broadcast affiliates. Additional distribution is provided through the Company's cable affiliates. Except for the Network and its Fresno, Miami, Phoenix, Sacramento/Modesto and San Antonio O&Os, which are located in Company owned properties, all other operations are situated in facilities leased from and maintained by third parties.
The Company's business is primarily contracted through advertising agencies and to a lesser degree from direct local market advertisers (collectively, "Advertisers"). No single Advertiser represents more than 10 percent of the Company's advertising revenues.
The sales order entry and Nielsen rating systems used by the Company are mainframe-based. These systems are owned and maintained by third-party vendors and located in such vendors' facilities. The remaining computer systems of the Company are not mainframe-based and use standard industry specific software applications. The Year 2000 issue results from computer software programs written to use two digits rather than four to define the applicable year. Certain of the Company's computer programs that have date sensitive software may recognize a date using "00" as the year 1900 instead of the Year 2000. Computer programs used by the Company's Suppliers (as defined below) may experience the same date recognition issues. If this occurs, the potential exists for computer system failures or miscalculations by computer programs used by the Company and its Suppliers, which could cause disruption of the Company's operations.
Through its Year 2000 Project Office ("Project Office"), the Company continues its effort to assess its Year 2000 readiness as well as that of its Advertisers, satellite service providers, programming suppliers, broadcast affiliates, Nielsen rating service, landlords, and vendors and other suppliers that may be critical to the Company's business (collectively, "Suppliers" unless the context indicates otherwise). The Project Office is staffed with the Company's two principal engineers, and representatives from management information systems, legal, risk management, finance, and operations. An independent consulting firm with broadcasting systems integration experience has been assisting the Company with the assessment phase of the Company's Year 2000 program. The Company expects that such firm may continue to assist the Company with the corrective and verification efforts.
In addressing its Year 2000 readiness, the Company has been engaged in a five-prong program that consists of the following:
- ASSESSMENT. This phase is three-fold. Part one is the location and identification of all computer systems, software products, building systems and equipment (with embedded systems) used within each operational unit of the Company (the "Systems Inventory"). Part two is the identification of mission critical Systems within each of the operational units. Part three is the evaluation (including communicating with manufacturers with respect to their equipment) of Systems to determine whether such Systems will be able to process data before, on and after January 1, 2000 ("compliant Systems"). Mission critical Systems have been or will be given priority in the evaluation process.
- CORRECTIVE ACTION. Systems and equipment that are non-compliant are being or are to be retired, repaired or replaced. Mission critical items have been or will be given priority.
- VERIFICATION. Corrective measures are to be verified by both current-date and future-date testing. Any necessary remedial action identified during this phase will be taken and verified. Mission critical items have been or will be given priority.
- COMMUNICATIONS PROGRAM--AFFILIATES, SUPPLIERS, LANDLORDS AND
ADVERTISERS. The Company implemented a communications program with its Suppliers (1) to understand their Year 2000 issues, (2) to determine how such issues could impact the Company's operations, and (3) to determine the Suppliers' Year 2000 mitigation plans to address or manage the issues that relate to the Company's business and, with respect to landlords, the leased facilities.
- CONTINGENCY PLANS. Contingency plans are to be formulated to ensure, at a minimum, that our Network and O&O broadcasting operations continue without interruption prior to, during and after January 1, 2000.
Although work on the different parts of the Year 2000 program has been taking place concurrently, the primary focus has been on the assessment phase, in particular, with respect to equipment (computer and other electronic and mechanical technology) that is critical to its broadcasting operations (signal, programming and commercial spot distribution on its Network and O&Os). The assessment of equipment critical to the Company's broadcasting operations is expected to be completed around December 31, 1998. The targeted date for the completion of all phases of the Year 2000 program is August 31, 1999, subject to
Suppliers' responsiveness to the Company's inquiries of their Year 2000 issues. Verification activities will begin in the first quarter of 1999 and continue throughout the year. The Company is also in the process of developing its contingency plans to ensure that its Network and O&Os operations continue without interruption, and expects to have such plans completed by the end of April 1999.
Based on the Year 2000 program work completed to date:
- Approximately 80% of the equipment critical to the distribution of our broadcast signal (without content) and for the insertion and delivery of content has been Year 2000 assessed, and corrective work identified has been taken or will be taken before December 31, 1998, subject to Suppliers' Year 2000 solutions and such solutions timely availability. The Company's major satellite provider informed the Company in August 1998 that the satellite carrying the Network feed has been tested and the Company is in the process of confirming that such satellite is Year 2000 ready. In addition, the satellite provider has notified the Company that it expects to complete the testing of the corresponding satellite ground equipment during the fourth quarter of 1998.
- Approximately 80% of the Systems critical to our sales, marketing and research operations have been assessed, and corrective work has been initiated.
- Approximately 90% of the Systems used in our administrative operations or by our outside service providers (finance, payroll, benefits administration) have been assessed, and corrective work has been initiated.
- Approximately 30% of our facilities' infrastructures (owned and leased combined) as well as the Company's own network communications and desktop systems have been assessed, and corrective work has been initiated.
Approximately 10% of the total corrective work identified for all phases of our program has been completed. Based on the work completed to date, capital as well as personnel and non-personnel costs related to the Year 2000 program have not been material. Although additional assessment activities remain to be completed, the Company does not expect that the future costs related to the Company's internal Year 2000 issues will have a material impact on the Company's operations, subject to completion of the assessment and contingency planning phases and the availability of solutions from Suppliers. The Company will fund the costs to resolve its Year 2000 issues primarily from its operating cash flow and, if necessary, proceeds available under its Bank Facility.
The Company expects that its Systems will be fully operational and will not cause any material disruptions because of Year 2000 issues. Because of the uncertainties associated with assessing the preparedness of Suppliers and Advertisers, there is a risk of a material adverse effect on the Company's future results of operations if the Company's Suppliers and Advertisers are not capable of correcting their Year 2000 issues. The Company's major risk centers around its ability to transmit the Network and O&Os broadcast signals and satisfy the contractual commitments to air the commercial spots of its Advertisers.
STATEMENTS FOR FORWARD-LOOKING INFORMATION
Information contained in this report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 which can be identified by the use of forward-looking terminology such as "will," "expects," or "plans," or the negative thereof or other variations thereon or comparable terminology. The matters set forth under the caption "Risk Factors" in the Company's Prospectus filed with the Securities and Exchange Commission on October 13, 1998 constitute cautionary statements identifying important factors with respect to such forward-looking statements, including certain risks and uncertainties, that could cause actual results to differ materially from those in such forward-looking statements.
SEASONALITY
The advertising revenues of the Company vary over the calendar year. Historically, approximately 30% of total advertising revenues have been generated in the fourth quarter and 20% in the first quarter, with the remainder split approximately equally between the second and third quarters, exclusive of special programming such as the 1998 World Cup games. Because of the relatively fixed nature of the costs of the Company's business, seasonal variations in operating income are more pronounced than those of revenues.
UNIVISION COMMUNICATIONS INC. AND SUBSIDIARIES |
