UNIVISION COMMUNICATIONS INC - 10-Q Quarterly Report

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UNITED STATES
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, 2003

Commission File Number: 001-12223

UNIVISION COMMUNICATIONS INC.
(Exact Name of Registrant as specified in its charter)

Delaware	No. 95-4398884
(State of Incorporation)	(I.R.S. Employer Identification)

Univision Communications Inc.
1999 Avenue of the Stars, Suite 3050
Los Angeles, California 90067
Tel: (310) 556-7676
(address and telephone number of principal executive offices)

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 ý NO o.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES ý NO o.

There were 160,499,637 shares of Class A Common Stock, 37,462,390 shares of Class P Common Stock, 13,593,034 shares of Class T Common Stock and 17,837,164 of Class V Common Stock outstanding as of July 21, 2003.

UNIVISION COMMUNICATIONS INC. AND SUBSIDIARIES

INDEX

			Page
Part I—Financial Information:
	Financial Introduction		2
		Item 1. Consolidated Financial Statements
		Condensed Consolidated Balance Sheets at June 30, 2003 (Unaudited) and December 31, 2002	3
		Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited) for the three and six months ended June 30, 2003 and 2002	4
		Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2003 and 2002	5
		Notes to the Condensed Consolidated Financial Statements (Unaudited)	6
		Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	16
		Item 3. Quantitative and Qualitative Disclosures About Market Risk	29
		Item 4. Controls and Procedures	29
Part II—Other Information:
Item 4. Submission of Matters to a Vote of Security Holders			29
Item 6. Exhibits and Reports on Form 8-K			30

Part I

UNIVISION COMMUNICATIONS INC. AND SUBSIDIARIES

Financial Introduction

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements. The interim financial statements are unaudited but include all adjustments, which are of a normal recurring nature, that management considers necessary to fairly present the financial position and the results of operations for such periods. Results of operations of interim periods are not necessarily indicative of results for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements in the Company's Annual Report on Form 10-K/A for December 31, 2002.

Part I, Item 1

UNIVISION COMMUNICATIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per-share data)

			June 30, 2003			December 31, 2002
			(Unaudited)
ASSETS
Current assets:
	Cash		$	66,601		$	35,651
	Accounts receivable, net			243,231			238,587
	Program rights			36,546			36,453
	Prepaid expenses and other			81,623			74,267

		Total current assets		428,001			384,958
Property and equipment, net				468,047			477,854
Intangible assets, net				1,494,930			1,425,168
Goodwill, net				514,105			506,411
Deferred financing costs, net				15,420			17,260
Program rights				37,696			36,700
Investments in unconsolidated subsidiaries				513,639			517,176
Other assets				41,116			36,869

Total assets			$	3,512,954		$	3,402,396

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable and accrued liabilities		$	171,628		$	160,433
	Income taxes			10,529			2,140
	Accrued interest			20,042			20,550
	Accrued license fees			13,021			11,794
	Deferred advertising revenues			4,250			4,250
	Program rights obligations			18,136			18,647
	Current portion of long-term debt and capital lease obligations			5,638			5,408

		Total current liabilities		243,244			223,222
Long-term debt including accrued interest				1,366,010			1,353,312
Capital lease obligations				76,042			78,921
Deferred advertising revenues				7,585			9,710
Program rights obligations				28,809			32,909
Deferred tax liabilities				145,462			115,500
Other long-term liabilities				27,937			30,734

		Total liabilities		1,895,089			1,844,308

Stockholders' equity:
	Preferred stock, $.01 par value (10,000,000 shares authorized; 0 issued and outstanding)			—			—
	Common stock, $.01 par value (1,040,000,000 shares authorized; 229,389,225 and 229,129,275 shares issued including shares in treasury at June 30, 2003 and December 31, 2002, respectively)			2,294			2,291
	Paid-in-capital			1,225,167			1,219,884
	Retained earnings			412,383			358,011
	Currency translation adjustment			214			95

				1,640,058			1,580,281
	Less common stock held in treasury (1,017,180 shares at cost at June 30, 2003 and December 31, 2002)			(22,193	)		(22,193	)

		Total stockholders' equity		1,617,865			1,558,088

Total liabilities and stockholders' equity			$	3,512,954		$	3,402,396

See Notes to Condensed Consolidated Financial Statements.

UNIVISION COMMUNICATIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
For the Three and Six Months Ended June 30,
(Dollars in thousands, except share and per-share data)
(Unaudited)

		Three Months Ended June 30,						Six Months Ended June 30,
		2003			2002			2003			2002
Net revenues:
	Television and Internet services	$	291,057		$	303,838		$	525,229		$	515,612
	Music products and publishing		29,130			18,958			56,613			21,633

Total net revenues			320,187			322,796			581,842			537,245

	Direct operating expenses of television and Internet services		107,603			149,158			210,239			239,963
	Direct operating expenses of music products and publishing		17,077			8,759			32,502			10,350

Total direct operating expenses (excluding depreciation expense)			124,680			157,917			242,741			250,313

Selling, general and administrative expenses (excluding depreciation expense)			87,316			78,084			163,703			145,317
Depreciation and amortization			19,448			23,075			39,240			37,247

Operating income			88,743			63,720			136,158			104,368

Interest expense, net			18,619			22,185			37,211			43,634
Amortization of deferred financing costs			951			950			1,902			1,932
Equity loss in unconsolidated subsidiaries and other			1,522			738			8,018			7,401
Gain on change in Entravision ownership interest			(1,753	)		(235	)		(1,457	)		(1,983	)

Income before taxes			69,404			40,082			90,484			53,384
Provision for income taxes			27,791			17,892			36,112			23,595

Net income			41,613			22,190			54,372			29,789
Preferred stock dividend accretion			—			—			—			(25	)

Net income available to common stockholders			41,613			22,190			54,372			29,764
Other comprehensive income:
Currency translation adjustment (expense) income			(20	)		26			119			26

Comprehensive income available to common stockholders		$	41,593		$	22,216		$	54,491		$	29,790

Basic Earnings Per Share
Net income per share available to common stockholders		$	0.18		$	0.10		$	0.24		$	0.14

Weighted average common shares outstanding			228,274,925			227,009,699			228,207,620			220,530,351

Diluted Earnings Per Share
Net income per share available to common stockholders		$	0.16		$	0.09		$	0.21		$	0.12

Weighted average common shares outstanding			257,942,003			257,858,105			257,688,653			255,133,832

See Notes to Condensed Consolidated Financial Statements.

UNIVISION COMMUNICATIONS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30,
(Dollars in thousands)
(Unaudited)

		2003			2002
Net income		$	54,372		$	29,789
Adjustments to reconcile net income to net cash from operating activities:
	Depreciation		33,543			29,104
	Loss on sale of fixed assets		1			238
	Equity loss in unconsolidated subsidiaries		6,620			5,084
	Amortization of intangible assets and deferred financing costs		7,599			10,076
	Deferred income taxes		17,093			11,951
	Non-cash items		(1,951	)		(1,965	)
Changes in assets and liabilities:
	Accounts receivable		(2,962	)		(84,040	)
	License fees payable		73,635			61,072
	Payment of license fees		(72,408	)		(60,566	)
	Program rights		6,471			(21,088	)
	Prepaid expenses and other assets		(25,789	)		(5,750	)
	Accounts payable and accrued liabilities		8,776			19,991
	Income taxes		22,768			(26,151	)
	Income tax benefit from options exercised		1,461			23,480
	Accrued interest		(508	)		7,029
	Program rights obligations		(8,022	)		21,265
	Other, net		(1,773	)		(2,176	)

Net cash provided by operating activities			118,926			17,343

Cash flow from investing activities:
	Station acquisitions		(73,809	)		(668,208	)
	Capital expenditures		(24,079	)		(50,839	)
	Investment in unconsolidated subsidiaries		(3,707	)		2,078
	Proceeds from sale of fixed assets		20			163
	Other		(40	)		(103	)

Net cash used in investing activities			(101,615	)		(716,909	)

Cash flow from financing activities:
	Proceeds from long-term debt		191,000			447,000
	Repayment of long-term debt		(181,124	)		(117,429	)
	Exercise of options		3,825			29,706
	Increase in deferred financing costs		(62	)		(139	)

Net cash provided by financing activities			13,639			359,138

Net increase (decrease) in cash			30,950			(340,428	)
Cash beginning of period			35,651			380,829

Cash end of period		$	66,601		$	40,401

Supplemental disclosure of cash flow information:
	Interest paid	$	35,546		$	32,896

	Income taxes (refunded) paid	$	(4,793	)	$	15,022

See Notes to Condensed Consolidated Financial Statements.

UNIVISION COMMUNICATIONS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2003
(Unaudited)

1. Organization of the Company

Univision Communications Inc. and its wholly owned subsidiaries (the "Company," "we," "us" and "our"), the leading Spanish-language media company in the United States, operates in three business segments: television, music and Internet. The Company's television operations include Univision Network, its owned and operated television stations, TeleFutura Network, its owned and operated television stations and Galavisión. The Company's music operations include the Univision Music label, Fonovisa record label and a 50% interest in Disa Records ("Disa"). Univision Online, Inc. ("Univision Online"), operates the Company's Internet portal, Univision.com.

2. Recent Developments

On April 17, 2003, the Company entered into an asset purchase agreement to acquire a full-power television station in Sacramento, California for $65,000,000 from Family Stations, Inc. The Company is awaiting FCC approval. The funds for the station purchase will come primarily from the Company's revolving credit facility.

On April 28, 2003, the Company entered into a limited liability company agreement with Televisa Pay-TV Venture, Inc., to form a ⁵⁰/50 joint venture called Spanish Subscription Television LLC. The joint venture was formed to broadcast Televisa's pay television channels, other than general entertainment channels and novelas, in the United States. The joint venture, which was launched during the quarter, currently offers two movie channels and one teen lifestyle channel. In the future two additional music video channels will be launched. The joint venture is jointly controlled by Televisa and the Company with each agreeing to fund $20,000,000 over the first three years of the venture. As of June 30, 2003, the Company and Televisa had each funded $2,500,000.

The Company has entered into an asset purchase agreement to acquire a full-power television station in Tucson, Arizona for approximately $12,000,000 from Sungilt Corporation. The Company is awaiting FCC approval. The funds for the station purchase will come primarily from the Company's revolving credit facility.

On May 30, 2003, the Company acquired the assets of a full-power television station in Albuquerque, New Mexico for $20,000,000 from Paxson Communications Inc. The funds for the station purchase came primarily from the Company's revolving credit facility.

The Company has agreed to acquire Hispanic Broadcasting Corporation ("HBC") pursuant to a definitive merger agreement dated June 11, 2002 in which each share of HBC common stock would be exchanged for the right to receive 0.85 of a share of the Company Class A common stock. HBC is the largest Spanish-language radio broadcaster in the United States. As a result of the merger, we expect to issue approximately 93 million Class A common shares and we expect to reserve approximately 5 million shares for issuance pursuant to HBC stock options that we would assume in the acquisition.

On February 28, 2003, the stockholders of the Company and of HBC approved the transaction. On March 26, 2003, the Company reached an agreement with the United States Department of Justice ("DOJ") allowing the acquisition, provided that prior to the closing the Company exchanges all of its shares of capital stock of Entravision Communications Corporation ("Entravision") for shares of a new class of non-voting preferred stock of Entravision that will not have any consent or other voting rights other than the right to approve (a) a merger, consolidation, business combination, reorganization,

dissolution, liquidation, or termination of Entravision; (b) the direct or indirect disposition by Entravision of any interest in any FCC license with respect to any Company-affiliated television station; (c) any amendment of Entravision's charter documents adversely affecting such preferred stock; and (d) any issuance of additional shares of such preferred stock. Any shares of such preferred stock that are transferred by the Company (other than to its affiliates) will automatically convert into Class A common stock of Entravision; in addition, such shares can be converted by the Company immediately prior to any transfer to a non-affiliate. The Company has agreed to work with Entravision to convert the preferred stock into a new but substantially similar class of non-voting common stock if such new class of common stock is authorized. In addition, the Company will be required to sell enough of its Entravision stock so that the Company's ownership of Entravision does not exceed 15% by March 26, 2006 and 10% by March 26, 2009. The agreement with the DOJ will have no impact on the Company's existing television station affiliation agreements with Entravision. We expect the transaction to close once we receive approval from the Federal Communications Commission. At June 30, 2003, the Company has approximately $18,000,000 of capitalized merger costs that it will have to expense if it does not complete the acquisition of HBC.

3. Changes in Common Stock and Redeemable Convertible Preferred Stock

During the three months ended June 30, 2003, options were exercised for 203,450 shares of Class A Common Stock, resulting in an increase to Common Stock of $2,035 and an increase to Paid-in-capital of $4,204,000, which included a tax benefit associated with the transactions of $1,178,000. During the six months ended June 30, 2003, options were exercised for 259,950 shares of Class A Common Stock, resulting in an increase to Common Stock of $2,600 and an increase to Paid-in-capital of $5,283,000, which included a tax benefit associated with the transactions of $1,461,000.

4. Earnings Per Share

The following is the reconciliation of the basic and diluted earnings-per-share computations required by Statement of Financial Accounting Standards ("SFAS") No. 128 ("Earnings Per Share"):

	Three Months Ended June 30, 2003					Three Months Ended June 30, 2002
	Income (Numerator)		Shares (Denominator)	Per-Share Amount		Income (Numerator)		Shares (Denominator)	Per-Share Amount
	(Dollars in thousands, except for share and per-share data)
Net income	$	41,613				$	22,190
Basic Earnings Per Share:
Net income per share available to common stockholders		41,613	228,274,925	$	0.18		22,190	227,009,699	$	0.10

Effect of Dilutive Securities
Warrants		—	27,409,316				—	27,716,623
Options		—	2,257,762				—	3,131,783

Diluted Earnings Per Share:
Net income per share available to common stockholders	$	41,613	257,942,003	$	0.16	$	22,190	257,858,105	$	0.09

	Six Months Ended June 30, 2003					Six Months Ended June 30, 2002
	Income (Numerator)		Shares (Denominator)	Per-Share Amount		Income (Numerator)			Shares (Denominator)	Per-Share Amount
	(Dollars in thousands, except for share and per-share data)
Net income	$	54,372				$	29,789
Less preferred stock dividend accretion		—					(25	)

Basic Earnings Per Share:
Net income per share available to common stockholders		54,372	228,207,620	$	0.24		29,764		220,530,351	$	0.14

Effect of Dilutive Securities
Warrants		—	27,406,977				—		27,861,532
Options		—	2,074,056				—		3,464,093
Convertible Preferred Stock		—	—				25		3,277,856

Diluted Earnings Per Share:
Net income per share available to common stockholders	$	54,372	257,688,653	$	0.21	$	29,789		255,133,832	$	0.12

In December 2002, the Financial Accounting Standards Board issued SFAS No. 148 "Accounting for Stock-Based Compensation—Transition and Disclosure." SFAS No. 148 amends SFAS No. 123 "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair-value for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for financial statements issued for 2003. As allowed by SFAS No. 123, the Company follows the disclosure requirements of SFAS No. 123, but continues to account for its employee stock option plans in

accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," which results in no charge to earnings when options are issued at fair market value.

Had compensation cost for the Company's 1996 Performance Award Plan been determined based on the fair value at the grant date for awards in the three and six months ended June 30, 2003 and 2002 consistent with the provisions of SFAS No. 123, as amended by SFAS No. 148, the Company's net income and earnings per share available to common stockholders would have been reduced to the pro forma amounts indicated below:

	Three Months Ended June 30,
	Basic Earnings Per Share		Diluted Earnings Per Share
	2003	2002	2003	2002
	(In thousands, except per-share data)
Net income available to common stockholders—as reported	$<