EVC

Business Context and Reporting Period

Company: Entravision Communications Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Business Overview: Entravision is a diversified Spanish-language media company operating in four segments: television broadcasting (42 stations, primarily Univision affiliates), radio broadcasting (58 stations), outdoor advertising (~11,400 faces), and publishing (El Diario/la Prensa). The company targets the U.S. Hispanic market, reaching approximately 80% of all Hispanics in the United States.

Key Financial Metrics (Year Ended Dec 31, 2002)

Note: The significant improvement in operating income and net loss compared to 2001 is primarily due to the adoption of SFAS No. 142, which eliminated the amortization of goodwill and certain indefinite-life intangible assets, reducing expenses by approximately $80.9 million.

Material Changes vs. Prior Period

• Revenue Growth: Net revenue increased 14% to $238.5 million, driven by a 22% increase in television revenue and a 16% increase in radio revenue. Outdoor revenue declined 4% due to reduced inventory sold and rates in the first half of the year.
• Profitability: The company moved from an operating loss of $72.8 million in 2001 to an operating income of $14.6 million in 2002. This turnaround was largely non-cash, resulting from the cessation of goodwill amortization under new accounting standards (SFAS No. 142).
• Acquisitions: In 2002, the company acquired four television stations and four radio stations for approximately $108 million. A pending acquisition of three Los Angeles radio stations from Big City Radio for $100 million cash plus stock was announced in December 2002.
• Debt Structure: In March 2002, the company issued $225 million in senior subordinated notes due 2009 at 8.125% interest. Proceeds were used to repay the bank credit facility, though the facility was subsequently redrawn to $66 million for working capital and acquisitions.

Guidance, Outlook, Risks, and Unusual Items

Management Commentary and Outlook

Management anticipates continued revenue growth in 2003 driven by full-year operations of 2002 acquisitions and potential new acquisitions. They expect broadcast cash flow and EBITDA as adjusted to increase as a percentage of net revenue. However, they note that results could be offset by economic downturns or geopolitical events affecting advertising spending.

Risks and Contingencies

• History of Losses: Despite the 2002 operating income, the company has a history of net losses ($10.6M in 2002, $65.8M in 2001, $92.2M in 2000) and substantial indebtedness, which limits its ability to raise capital and grow.
• Debt Covenants: The company is subject to restrictive covenants in its credit facility and indenture, including limits on additional debt, dividends, and asset sales. Failure to meet financial ratios could trigger acceleration of debt.
• Univision Relationship: Univision Communications Inc. owns approximately 31% of the company and holds all Class C stock, granting it significant influence over material decisions, including mergers and FCC license assignments. Two Univision-elected directors resigned in August 2002 due to a conflict of interest regarding Univision's merger with Hispanic Broadcasting Corporation.
• Advertising Volatility: The company does not obtain long-term commitments from advertisers, making revenue susceptible to cancellations or reductions during economic downturns.
• Regulatory Risks: The company faces risks related to FCC license renewals, digital television conversion costs (estimated at $18 million between 2003-2006), and potential changes in ownership rules.

Unusual Items

The 2002 financial results include a $1.6 million settlement expense related to a contract dispute with a former radio national representation firm (Interep). Additionally, the adoption of SFAS No. 142 resulted in a one-time reduction of amortization expense of $80.9 million, which is not indicative of ongoing cash flow generation.

Investor Verification Checklist

• Debt Service Coverage: Verify the company's ability to service $305.9 million in debt, including the $225 million senior subordinated notes, given its history of net losses.
• Intangible Asset Valuation: Review the assumptions used for goodwill and indefinite-life intangible asset impairment testing, as these assets comprise a significant portion of the balance sheet.
• Preferred Stock Redemption: Confirm the company's liquidity plan for the potential redemption of Series A mandatorily redeemable convertible preferred stock (approx. $143.5 million) starting April 2006.
• Univision Merger Impact: Monitor the outcome of the Univision/Hispanic Broadcasting Corporation merger and any potential divestiture requirements that could affect Entravision's stock price or governance.
• Acquisition Financing: Assess the impact of the pending $100 million Big City Radio acquisition on leverage ratios and cash flow.