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, 2004

Commission File Number: 001-12223

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

Delaware
(State of Incorporation)

No. 95-4398884
(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 255,188,555 shares of Class A Common Stock, including 1,017,180 shares of Company treasury stock, 36,962,390 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 8, 2004.

UNIVISION COMMUNICATIONS INC. AND SUBSIDIARIES

INDEX

				Page
Part I—Financial Information:
•	Financial Introduction			3
	•	Item 1.	Consolidated Financial Statements
		Condensed Consolidated Balance Sheets at June 30, 2004 (Unaudited) and December 31, 2003		4
		Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited) for the three and six months ended June 30, 2004 and 2003		5
		Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2004 and 2003		6
		Notes to the Condensed Consolidated Financial Statements (Unaudited)		7
	•	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19
	•	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
	•	Item 4.	Controls and Procedures	36
Part II—Other Information:
Item 4.		Submission of Matters to a Vote of Security Holders		37
Item 6.		Exhibits and Reports on Form 8-K		37

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 for December 31, 2003.

Part I, Item 1

UNIVISION COMMUNICATIONS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share and per-share data)

			June 30, 2004			December 31, 2003
			(Unaudited)
ASSETS
Current assets:
	Cash		$	79,733		$	76,677
	Accounts receivable, net			383,997			320,106
	Program rights			33,521			39,836
	Prepaid expenses and other			94,081			83,947

		Total current assets		591,332			520,566
Property and equipment, net				576,688			555,469
Intangible assets, net				4,287,895			3,773,099
Goodwill, net				2,196,359			2,192,840
Deferred financing costs, net				12,601			14,104
Program rights				28,673			37,402
Investments in equity method investees				63,171			139,199
Investments in cost method investees				370,133			364,587
Other assets				34,072			45,651

Total assets			$	8,160,924		$	7,642,917

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable and accrued liabilities		$	203,101		$	209,373
	Income taxes			27,987			6,050
	Accrued interest			23,336			23,224
	Accrued license fees			16,084			13,327
	Deferred advertising revenues			—			4,250
	Program rights obligations			19,118			26,762
	Current portion of capital lease obligations			4,463			5,647

		Total current liabilities		294,089			288,633
Long-term debt including accrued interest				1,312,075			1,295,078
Capital lease obligations				39,783			73,268
Deferred advertising revenues				—			5,460
Program rights obligations				22,140			25,579
Deferred tax liabilities				932,046			793,247
Other long-term liabilities				79,361			58,675

		Total liabilities		2,679,494			2,539,940

Noncontrolling interest				255,016			—

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; 323,581,143 and 323,245,149 shares issued, including shares in treasury, at June 30, 2004 and December 31, 2003, respectively)			3,236			3,232
	Paid-in-capital			4,620,315			4,611,048
	Deferred compensation			(2,118	)		(2,410	)
	Retained earnings			628,735			513,438
	Accumulated other comprehensive losses			(1,561	)		(138	)

				5,248,607			5,125,170
	Less common stock held in treasury (1,017,180 shares at June 30, 2004 and December 31, 2003, respectively)			(22,193	)		(22,193	)

		Total stockholders' equity		5,226,414			5,102,977

Total liabilities and stockholders' equity			$	8,160,924		$	7,642,917

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,
		2004			2003			2004			2003
Net revenues:
	Television, radio and Internet services	$	444,916		$	291,057		$	771,402		$	525,229
	Music products and publishing		50,375			29,130			76,773			56,613

Total net revenues			495,291			320,187			848,175			581,842

	Direct operating expenses of television, radio and Internet services		144,000			107,603			276,080			210,239
	Direct operating expenses of music products and publishing		27,275			17,077			42,711			32,502

Total direct operating expenses (excluding depreciation expense)			171,275			124,680			318,791			242,741

Selling, general and administrative expenses (excluding depreciation expense)			146,509			87,316			261,740			163,703
Depreciation and amortization			27,303			19,448			51,989			39,240

Operating income			150,204			88,743			215,655			136,158

Other expenses / (income):
	Interest expense, net		15,396			18,619			31,079			37,211
	Amortization of deferred financing costs		891			951			1,770			1,902
	Stock dividend		(453	)		—			(5,547	)		—
	Equity loss in unconsolidated subsidiaries and other		864			1,522			1,967			8,018
	Gain on change in Entravision ownership interest		—			(1,753	)		—			(1,457	)
	Noncontrolling interest		1,496			—			1,496			—

Income before taxes			132,010			69,404			184,890			90,484
Provision for income taxes			48,266			27,791			69,593			36,112

Net income			83,744			41,613			115,297			54,372
Other comprehensive (expense) income:
	Currency translation adjustment (expense) income		(222	)		(20	)		(1,423	)		119

Comprehensive income		$	83,522		$	41,593		$	113,874		$	54,491

Basic Earnings Per Share
Net income per share		$	0.26		$	0.18		$	0.36		$	0.24

Weighted average common shares outstanding			322,491,566			228,274,925			322,403,893			228,207,620

Diluted Earnings Per Share
Net income per share		$	0.24		$	0.16		$	0.33		$	0.21

Weighted average common shares outstanding			352,844,308			257,942,003			352,982,595			257,688,653

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)

		2004			2003
Net income		$	115,297		$	54,372
Adjustments to reconcile net income to net cash from operating activities:
	Depreciation		40,356			33,543
	Loss on sale of fixed assets		180			1
	Equity loss in unconsolidated subsidiaries		1,450			6,620
	Amortization of intangible assets and deferred financing costs		13,403			7,599
	Deferred income taxes		28,971			17,093
	Stock dividend		(5,547	)		—
	Noncontrolling interest		838			—
	Non-cash items		(390	)		(1,951	)
Changes in assets and liabilities, net of assets acquired and liabilities assumed:
	Accounts receivable		(43,116	)		(2,962	)
	Program rights		16,464			6,471
	Prepaid expenses and other assets		11,082			(25,789	)
	Accounts payable and accrued liabilities		(16,492	)		8,776
	Income taxes		21,165			22,768
	Income tax benefit from options exercised		1,612			1,461
	Accrued interest		112			(508	)
	Accrued license fees		2,757			1,227
	Program rights obligations		(11,344	)		(8,022	)
	Other, net		(4,543	)		(1,773	)

Net cash provided by operating activities			172,255			118,926

Cash flow from investing activities:
	Acquisitions, net of acquired cash		(135,573	)		(73,809	)
	Purchase of Los Angeles building		(52,530	)		—
	Capital expenditures		(30,013	)		(24,079	)
	Investment in unconsolidated subsidiaries		1,688			(3,707	)
	Cash of variable interest entities		12,196			—
	Other, net		333			(20	)

Net cash used in investing activities			(203,899	)		(101,615	)

Cash flow from financing activities:
	Proceeds from issuance of long-term debt		170,000			191,000
	Repayment of long-term debt		(142,696	)		(181,124	)
	Proceeds from issuance of common stock		599,426			—
	Repurchase of common stock		(599,426	)		—
	Exercise of stock options		7,719			3,825
	Payment of offering costs		(57	)		—
	Deferred financing costs		(266	)		(62	)

Net cash provided by financing activities			34,700			13,639

Net increase in cash			3,056			30,950
Cash beginning of year			76,677			35,651

Cash end of period		$	79,733		$	66,601

Supplemental disclosure of cash flow information:
	Interest paid	$	36,366		$	35,546

	Income taxes paid (refunds)	$	11,837		$	(4,793	)

See Notes to Condensed Consolidated Financial Statements.

UNIVISION COMMUNICATIONS INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

June 30, 2004

(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 four business segments: television, radio, music and Internet. The Company's television operations include the Univision and TeleFutura networks, the Company's owned and operated television stations and Galavisión, our cable network. Univision Radio, Inc. ("Univision Radio") operates the Company's radio business, which includes its radio network and owned and operated radio stations. See Note 2 to the Condensed Consolidated Financial Statements. The Company's music operations include the Univision Records label, Fonovisa Records label and a 50% interest in Disa Records, S.A. de C.V. ("Disa"), which is consolidated in accordance with the guidelines of Financial Accounting Standards Board ("FASB") Interpretation No. 46 ("FIN 46"), which was adopted by the Company on March 31, 2004. See Note 7 to the Condensed Consolidated Financial Statements. Univision Online, Inc. ("Univision Online") operates the Company's Internet portal, Univision.com.

2. Acquisition of Hispanic Broadcasting Corporation

On September 22, 2003, in an effort to expand its media business, the Company completed its acquisition of Hispanic Broadcasting Corporation ("HBC") in which each share of HBC common stock was exchanged for 0.85 of a share of the Company's Class A common stock. As a result of the acquisition, we issued approximately 92.7 million Class A common shares and we reserved approximately 5 million shares for issuance pursuant to HBC stock options that we assumed in the acquisition. The 92.7 million shares were valued at $35.312, determined by taking the average market price per share of Univision common stock for the two days prior, the day of and two days subsequent to the announcement date (June 12, 2002) of the acquisition. The HBC options were valued at approximately $80,000,000 using the Black-Scholes option pricing model and the acquisition costs to date totals approximately $31,600,000.

The Company has made a preliminary allocation of the purchase price to FCC licenses, goodwill, advertising-related intangibles and favorable leases based upon a preliminary appraisal of the assets acquired and liabilities assumed of Univision Radio. The Company expects the final appraisal to be completed by the third quarter 2004. The Company may have a material reclassification on the balance sheet in the third quarter between goodwill and FCC licenses, both of which are expected to have an indefinite life. In addition, there may be additional identified intangibles that could have an impact on future expense. These reclassifications could also have a material impact on the deferred tax liability. For the three and six months ended June 30, 2004, the Company incurred amortization expense of $2,028,000 and $4,165,000, respectively, related to Univision Radio's amortizable identified intangibles, primarily advertising contracts, acquired as a result of our acquisition of HBC in September 2003.

Advertiser contracts were being amortized over a nine-month period that expired in June 2004. The favorable leases are being amortized over various periods through the year 2042.

Purchase Price Allocation	(Dollars in thousands)
Purchase price	$	3,353,286
Estimated net liabilities assumed		91,523
Acquisition costs		31,607
Deferred tax liability on identified intangibles		544,192

Intangible assets and goodwill		4,020,608
FCC licenses		(2,483,264	)
Favorable leases		(6,696	)
Advertiser related intangibles, primarily advertiser contracts		(5,772	)
Other intangible assets		(2,739	)

Goodwill	$	1,522,137

The following unaudited pro forma information gives effect to the merger between the Company and HBC and assumes that the transaction had occurred as of January 1, 2003. The pro forma information is presented for informational purposes only. You should not rely on the pro forma information as an indication of the results of operations of future periods or the results that actually would have been realized had the companies been a single company during the periods presented. The pro forma information is based upon available information and upon certain assumptions that management of the Company believes are reasonable. The pro forma information includes adjustments that give effect to the merger under the purchase method of accounting. The pro forma information does not reflect any pro forma adjustments for other business acquisitions in 2003 by the Company or HBC, since they do not individually or in the aggregate exceed the threshold for reporting of a significant subsidiary. The pro forma information does not reflect any adjustments for synergies that the Company has realized or expects to realize from the acquisition.

	Three Months Ended June 30,				Six Months Ended June 30,
	2004 Actual		2003 Pro forma		2004 Actual		2003 Pro forma
	(Dollars in thousands except per share data)
Net revenues	$	495,291	$	395,567	$	848,175	$	712,028
Net income	$	83,744	$	51,384	$	115,297	$	68,550
Basic Earnings Per Share	$	0.26	$	0.16	$	0.36	$	0.21
Diluted Earnings Per Share	$	0.24	$	0.15	$	0.33	$	0.20

Pro forma net income includes merger costs incurred by HBC and charged to operating expenses of $1,200,000, net of tax, for the six months ended June 30, 2003.

3. Changes in Common Stock and Paid-in-Capital

During the three months ended June 30, 2004, options were exercised for 164,468 shares of Class A Common Stock resulting in an increase to Common Stock of $1,645, and an increase to paid-in-capital of $4,491,000, which included a tax benefit associated with the transactions of $751,000. During the six months ended June 30, 2004, options were exercised for 335,994 shares of Class A Common Stock, resulting in an increase to Common Stock of $3,360 and an increase to Paid-in-capital of $9,324,000, which included a tax benefit associated with the transactions of $1,612,000. Additionally, paid-in- capital decreased by $57,000 related to issuance costs for a stock transaction.

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, 2004					Three Months Ended June 30, 2003
(Dollars in thousands, except for share and per share data)	Income (Numerator)		Shares (Denominator)	Per-Share Amount		Income (Numerator)		Shares (Denominator)	Per-Share Amount
Basic Earnings Per Share:
Net income	$	83,744	322,491,566	$	0.26	$	41,613	228,274,925	$	0.18

Effect of Dilutive Securities
Warrants		—	27,412,926				—	27,409,316
Options		—	2,939,816				—	2,257,762

Diluted Earnings Per Share:
Net income	$	83,744	352,844,308	$	0.24	$	41,613	257,942,003	$	0.16

	Six Months Ended June 30, 2004					Six Months Ended June 30, 2003
(Dollars in thousands, except for share and per share data)	Income (Numerator)		Shares (Denominator)	Per-Share Amount		Income (Numerator)		Shares (Denominator)	Per-Share Amount
Basic Earnings Per Share:
Net income	$	115,297	322,403,893	$	0.36	$	54,372	228,207,620