Annual Report2016
2016 Annual Report
2016 Annual Report
2016 Annual Report
2016 Annual Report
Hemisphere Media Group, Inc.
FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
(cid:2) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
(cid:3)
For the fiscal year ended December 31, 2016
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number: 001-35886
Hemisphere Media Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
4000 Ponce de Leon Blvd., Suite 650
Coral Gables, FL
(Address of principal executive offices)
80-0885255
(I.R.S. Employer
Identification No.)
33146
(Zip Code)
(305) 421-6364
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
Name of Each Exchange on Which Registered
Class A common stock, $0.0001 par value
The NASDAQ Stock Market LLC
Securities Registered Pursuant to Section 12(g) of the Act:
Warrants to purchase Class A common stock, par value $0.0001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes (cid:3) No (cid:2)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes (cid:3) No (cid:2)
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 (cid:2) or No (cid:3).
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes (cid:2) or No (cid:3).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:2)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer’’ and ‘‘smaller reporting company’’ in
Rule 12b-2 of the Exchange Act.
Large Accelerated Filer (cid:3)
Smaller reporting company (cid:3)
Accelerated Filer (cid:2)
Non-accelerated Filer (cid:3)
(Do not check if a
smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes (cid:3) or No (cid:2)
The aggregate market value of the Class A common stock held by non-affiliates of the registrant, computed by reference to
the closing price as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, 2016, was
approximately $115,071,747. No market exists for the shares of Class B common stock, which is neither registered under Section 12
of the Act nor subject to Section 15(d) of the Act. The Class B common stock is convertible into Class A common stock on a
share-for-share basis at the option of the holder. For the sole purpose of making this calculation, the term ‘‘non-affiliate’’ has been
interpreted to exclude directors and executive officers and other affiliates of the registrant and persons affiliated with Hemisphere
Media Group, Inc. Exclusion of shares held by any person should not be construed as a conclusion by the registrant, or an
admission by any such person, that such person is an ‘‘affiliate’’ of the Company, as defined by applicable securities laws.
Class of Stock
Shares Outstanding as of March 14, 2017
Class A common stock, par value $0.0001 per share . . . . . . . . . . . . . . . . . . . . .
Class B common stock, par value $0.0001 per share . . . . . . . . . . . . . . . . . . . . .
21,900,160 shares
20,800,998 shares
Documents Incorporated By Reference: The information required by Part III of this Form 10-K, to the extent not set forth
herein or by amendment, is incorporated by reference from the registrant’s definitive Proxy Statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A for the 2017 Annual Meeting of Shareholders.
HEMISPHERE MEDIA GROUP, INC. AND SUBSIDIARIES
INDEX TO FORM 10-K
December 31, 2016
PART I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial
Item 9.
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related
Item 12.
Item 13.
Item 14.
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions and Director Independence . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
Item 15.
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Index to Consolidated Financial Statements and Schedule(s) . . . . . . . . . . . . . . . . . . . . . . . .
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F-1
PART I
Unless otherwise indicated or the context requires otherwise, in this disclosure, references to the
‘‘Company,’’ ‘‘Hemisphere,’’ ‘‘registrant,’’ ‘‘we,’’ ‘‘us’’ or ‘‘our’’ refers to Hemisphere Media Group, Inc., a
Delaware corporation and, where applicable, its consolidated subsidiaries; ‘‘Amended Term Loan Facility’’
refers to our Term Loan Facility amended on February 14, 2017 as set forth on Exhibit 10.6 to this Annual
Report on Form 10-K; ‘‘Business’’ refers collectively to our consolidated operations; ‘‘Cable Networks’’ refers
to our Networks (as defined below) with the exception of WAPA and WAPA2 Deportes; ‘‘Canal Uno’’ refers
to a joint venture among us and Radio Television Interamericana S.A., Compania de Medios de
Informacion S.A.S and NTC Nacional de Television y Comunicaciones S.A. to operate a broadcast
television network in Colombia; ‘‘Centroamerica TV’’ refers to HMTV Centroamerica TV, LLC, a Delaware
limited liability company; ‘‘Cinelatino’’ refers to Cine Latino, Inc., a Delaware corporation; ‘‘MVS’’ refers to
Grupo MVS, S.A. de C.V., a Mexican Sociedad Anonima de Capital Variable (variable capital corporation)
and its affiliates, as applicable; ‘‘Distributors’’ refers collectively to satellite systems, telephone companies
(‘‘telcos’’), and cable multiple system operators (‘‘MSO’’s), and the MSO’s affiliated regional or individual
cable systems. ‘‘Networks’’ refers collectively to WAPA, WAPA2 Deportes, WAPA America, Cinelatino,
Pasiones, Centroamerica TV and Television Dominicana; ‘‘Nielsen’’ refers to Nielsen Media Research;
‘‘Pasiones’’ refers collectively to HMTV Pasiones US, LLC, a Delaware limited liability company, and
HMTV Pasiones LatAm, LLC, a Delaware limited liability company; ‘‘Television Dominicana’’ refers to
HMTV TV Dominicana, LLC, a Delaware limited liability company; ‘‘Term Loan Facility’’ refers to our
term loan facility amended on July 31, 2014 as set forth on Exhibit 10.5 to the Company’s Annual Report
on Form 10-K for the year ended December 31, 2015; ‘‘WAPA’’ refers to Televicentro of Puerto Rico, LLC,
a Delaware limited liability company; ‘‘WAPA America’’ refers to WAPA America, Inc., a Delaware
corporation; ‘‘WAPA2 Deportes’’ refers to a sports television network in Puerto Rico operated by WAPA;
‘‘WAPA.TV’’ refers to a news and entertainment website in Puerto Rico operated by WAPA.
FORWARD-LOOKING STATEMENTS
CAUTIONARY STATEMENT FOR PURPOSES OF THE ‘‘SAFE HARBOR’’ PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
Statements in this Annual Report on Form 10-K, including the exhibits attached hereto, future
filings by us with the Securities and Exchange Commission, our press releases and oral statements
made by, or with the approval of, our authorized personnel, that relate to our future performance or
future events, may contain certain statements about Hemisphere Media Group, Inc. (the ‘‘Company’’)
and its consolidated subsidiaries that do not directly or exclusively relate to historical facts. These
statements are, or may be deemed to be, ‘‘forward-looking statements’’ within the meaning of the U.S.
Private Securities Litigation Reform Act of 1995.
These forward-looking statements are necessarily estimates reflecting the best judgment and
current expectations, plans, assumptions and beliefs about future events (in each case subject to
change) of our senior management and management of our subsidiaries (including target businesses)
and involve a number of risks, uncertainties and other factors, some of which may be beyond our
control that could cause actual results to differ materially from those expressed or implied in such
forward-looking statements. Without limitation, any statements preceded or followed by or that include
the words ‘‘targets,’’ ‘‘plans,’’ ‘‘believes,’’ ‘‘expects,’’ ‘‘intends,’’ ‘‘will,’’ ‘‘likely,’’ ‘‘may,’’ ‘‘anticipates,’’
‘‘estimates,’’ ‘‘projects,’’ ‘‘should,’’ ‘‘would,’’ ‘‘expect,’’ ‘‘positioned,’’ ‘‘strategy,’’ ‘‘future,’’ ‘‘potential,’’
‘‘forecast,’’ or words, phrases or terms of similar substance or the negative thereof, are forward-looking
statements. These include, but are not limited to, the Company’s future financial and operating results
(including growth and earnings), plans, objectives, expectations and intentions and other statements that
are not historical facts.
2
We claim the protection of the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995 for all forward-looking statements.
Forward-looking statements are not guarantees of performance. If one or more of these factors
materialize, or if any underlying assumptions prove incorrect, our actual results, performance, or
achievements may vary materially from any future results, performance or achievements expressed or
implied by these forward-looking statements. In addition to the risk factors described in ‘‘Item 1A—
Risk Factors’’ in this Annual Report on Form 10-K, those factors include:
• the reaction by advertisers, programming providers, strategic partners, the Federal
Communications Commission (the ‘‘FCC’’) or other government regulators to businesses that we
acquire;
• the potential for viewership of our Networks’ programming to decline or unexpected reductions
in the number of subscribers to our Networks;
• the risk that we may fail to secure sufficient or additional advertising and/or subscription
revenue;
• the inability of advertisers or affiliates to remit payment to us in a timely manner or at all;
• the risk that we may become responsible for certain liabilities of the businesses that we acquire
or joint ventures we enter into;
• future financial performance, including our ability to obtain additional financing in the future on
favorable terms;
• the failure of our Business to produce projected revenues or cash flows;
• reduced access to capital markets or significant increases in borrowing costs;
• our ability to successfully manage relationships with customers and Distributors and other
important relationships;
• continued consolidation of Distributors in the marketplace;
• a failure to secure affiliate agreements or renewal of such agreements on less favorable terms;
• disagreements with our Distributors over contract interpretation;
• our success in acquiring, investing in and integrating complementary businesses;
• the outcome of any pending or threatened litigation;
• the loss of key personnel and/or talent or expenditure of a greater amount of resources
attracting, retaining and motivating key personnel than in the past;
• strikes or other union job actions that affect our operations, including, without limitation, failure
to renew our collective bargaining agreements on mutually favorable terms;
• changes in technology, including changes in the distribution and viewing of television
programming, expanded deployment of personal video recorders, video on demand, internet
protocol television, mobile personal devices and personal tablets and their impact on
subscription and television advertising revenue;
• the failure or destruction of satellites or transmitter facilities that we depend upon to distribute
our Networks;
• uncertainties inherent in the development of new business lines and business strategies;
• changes in pricing and availability of products and services;
3
• changes in the nature of key strategic relationships with partners and Distributors;
• the ability of suppliers and vendors to deliver products and services;
• fluctuations in foreign currency exchange rates and political unrest and regulatory changes in the
international markets in which we operate;
• the deterioration of general economic conditions, either nationally or in the local markets in
which we operate, including, without limitation, in the Commonwealth of Puerto Rico;
• changes in the size of the U.S. Hispanic population, including the impact of federal and state
immigration legislation and policies on both the U.S. Hispanic population and persons
emigrating from Latin America;
• changes in, or failure or inability to comply with, government regulations including, without
limitation, regulations of the FCC, and adverse outcomes from regulatory proceedings; and
• competitor responses to our products and services.
The list of factors above is illustrative, but by no means exhaustive. All forward-looking statements
should be evaluated with the understanding of their inherent uncertainty. All subsequent written and
oral forward-looking statements concerning the matters addressed in this Annual Report on Form 10-K
and attributable to us or any person acting on our behalf are qualified by these cautionary statements.
The forward-looking statements are based on current expectations about future events and are not
guarantees of future performance, and are subject to certain risks, uncertainties and assumptions.
Although we believe that the expectations reflected in the forward-looking statements are reasonable,
these expectations may not be achieved. We may change our intentions, beliefs or expectations at any
time and without notice, based upon any change in our assumptions or otherwise. We undertake no
obligation to publicly update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
Item 1. Business.
OVERVIEW
Our Company
We are a leading U.S. Spanish-language media company serving the fast growing and highly
attractive U.S. Hispanic and Latin American markets with five Spanish-language cable television
networks distributed in the U.S., two Spanish-language cable television networks distributed in Latin
America, and the #1-rated broadcast television network in Puerto Rico.
Headquartered in Miami, Florida, we own and operate the following leading Spanish-language
networks and content production platform, including leading movie and telenovela channels, two of the
most popular Hispanic entertainment genres, and the leading cable television networks targeting the
second, third and fourth largest U.S. Hispanic groups:
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Cinelatino: the leading Spanish-language cable movie network with
20 million subscribers across the U.S., Latin America and Canada,
including 4.6 million subscribers in the U.S. and 15.4 million subscribers
in Latin America. Cinelatino is programmed with a lineup featuring the
best contemporary films and original television series from Mexico,
Latin America, the U.S. and Spain. Driven by the strength of its
programming and distribution, Cinelatino is the #2-Nielsen rated
Spanish-language cable television network in the U.S. overall, based on
coverage ratings.
WAPA: the leading broadcast television network and television content
producer in Puerto Rico. WAPA has been the #1-rated broadcast
television network in Puerto Rico for the last eight years. WAPA is
Puerto Rico’s news leader and the largest local producer of news and
entertainment programming, producing approximately 70 hours in the
aggregate each week of programming that is aired on WAPA and
WAPA America. Through WAPA’s multicast signal, we distribute
WAPA2 Deportes, a leading sports television network in Puerto Rico,
featuring Major League Baseball (MLB), National Basketball Association
(NBA) and professional sporting events from Puerto Rico. Additionally,
we operate WAPA.TV, the leading broadband news and entertainment
website in Puerto Rico featuring news and content produced by WAPA.
20MAR201421502810
WAPA America: a cable television network serving primarily Puerto
Ricans and other Caribbean Hispanics in the U.S., collectively the
second largest segment of the U.S. Hispanic population. WAPA
America’s programming features news and entertainment offerings
produced by WAPA. WAPA America is distributed in the U.S. to
5.3 million subscribers.
Pasiones: a cable television network dedicated to showcasing the most
popular telenovelas and serialized dramas, licensed from major
producers and distributors worldwide. Pasiones is distributed in the U.S.
to 4.6 million subscribers and in Latin America to 13.2 million
subscribers.
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Centroamerica TV: a cable television network targeting Central
Americans living in the U.S., the third largest U.S. Hispanic group and
the fastest growing segment of the U.S. Hispanic population.
Centroamerica TV features the most popular news and entertainment
from Central America, as well as soccer programming from the top
professional soccer leagues in the region. Centroamerica TV is
distributed in the U.S. to 4.1 million subscribers.
Television Dominicana: a cable television network targeting Dominicans
living in the U.S., the fourth largest U.S. Hispanic group. Television
Dominicana features the most popular news and entertainment from
the Dominican Republic and is distributed in the U.S. to 3.2 million
subscribers.
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5
Hemisphere was incorporated in Delaware on January 16, 2013. Shares of our Class A common
stock, par value $0.0001 per share (‘‘Class A common stock’’) are publicly traded under the symbol
‘‘HMTV’’ on the Nasdaq Global Market (‘‘NASDAQ’’). Our warrants, exercisable for shares of Class A
common stock (‘‘Warrants’’), are publicly traded on the Over-the-Counter Bulletin Board under the
ticker symbol ‘‘HMTVW.’’
Our Strategy
Our strategy is to provide unique programming focused on underserved but significant segments of
the U.S. Hispanic population, allowing us to reach a deeper and broader U.S. Hispanic demographic
than our competitors. Our objective is to maintain and improve our position as a leading U.S. Spanish-
language media company by, among other things, (i) investing in content for our Networks to build
viewership, (ii) growing retransmission fees in Puerto Rico and subscriber revenues in both the U.S.
and Latin America, and (iii) driving advertising sales, including advertising on Cinelatino in the U.S.
which was converted to ad-supported in July 2015. Additionally, we continue to look for attractive
opportunities to acquire assets that we consider to be undervalued or fairly valued with attractive
financial or strategic characteristics. We intend to take a long-term view and primarily seek
opportunities which will (i) expand our leadership position in the fast growing and highly desirable U.S.
Hispanic pay-TV market, (ii) expand our portfolio within broadcast networks, and/or cable networks in
Latin America and (iii) identify opportunities to create and/or distribute content to U.S. Hispanics and
Latin Americans through digital platforms. We may also seek a variety of acquisition opportunities,
including businesses where we believe an opportunity for value realization is already present, where we
can realize synergies with our existing businesses, or that are in need of operational turnaround, which
we believe would benefit from our experienced and cohesive management team with the proven ability
to develop and grow acquired assets. At any given time, we may be in discussions relating to one or
more acquisition opportunities. Additionally, we evaluate various digital strategies, from time to time.
Employees
At December 31, 2016, we and our subsidiaries employed 294 full-time persons. In the normal
course of business, we use contract personnel to supplement our employee base to meet business
needs. We or our subsidiaries may hire additional personnel in connection with the closing of future
acquisitions. We believe that employee relations are generally satisfactory. Approximately 139 of our
employees based in Puerto Rico are full-time unionized employees covered by two collective bargaining
agreements (each, a ‘‘CBA’’ and collectively, the ‘‘CBAs’’), one of which was scheduled to expire on
July 23, 2015 and the other which expires on June 27, 2019. Pursuant to its terms, the CBA which was
scheduled to expire on July 23, 2015 automatically renewed for a period of eighteen (18) months upon
such expiration date and remained in effect through January 23, 2017. Following the expiration of the
extension period, the Company and Union de Periodistas Artes Graficas y Ramas Anexas (UPAGRA)
continue to engage in active and good faith negotiations.
Revenue Sources
We operate our business in one operating segment. Our two primary sources of revenue are
advertising revenues and retransmission/subscriber fees. All of our networks generate both advertising
revenues and retransmission/subscriber fees. Historically, Cinelatino had been commercial-free and
generated 100% of its revenue from subscriber fees. However, to further monetize Cinelatino’s strong
ratings and attractive audience, we introduced advertising on Cinelatino’s U.S. feed in July 2015.
Advertising revenue is generated from the sale of advertising time. Our advertising revenue tends to
reflect seasonal patterns of our advertisers’ demand, which is generally greatest during the fourth
quarter of each year, driven by the holiday buying season. In addition, Puerto Rico’s political election
cycle occurs every four years and WAPA benefits from increased advertising sales in an election year.
6
For example, in 2016, WAPA experienced higher advertising sales as a result of political advertising
spending during the 2016 governmental elections. The next election in Puerto Rico will occur in 2020.
Retransmission and subscriber fees are charged to Distributors of our television networks,
including cable, satellite and telecommunication service providers. Our television networks are
distributed pursuant to multi-year agreements that generally provide for monthly subscriber fees with
annual rate increases and have terms of varying length. For the year ended December 31, 2016,
revenue earned under affiliation agreements with two Distributors, DISH Network, LLC and
AT&T Inc. (as successor to DirecTV following the completion of their merger), each accounted for
more than 10% of our total net revenues. We recognize retransmission and subscriber fees when they
are accrued pursuant to the agreements we have entered into with respect to such revenue. We set
forth our net revenue, total assets and operating income in ‘‘Item 8. Financial Statements and
Supplementary Data.’’
We generate over 93% of our net revenues from the United States. For the years ended
December 31, 2016, 2015 and 2014, we generated $129.3 million, $120.6 million and $103.7 million,
respectively, from the United States. For the years ended December 31, 2016, 2015 and 2014, we
generated $9.2 million, $9.2 million and $8.3 million, respectively, from outside the United States.
OUR NETWORKS AND JOINT VENTURES
WAPA
Headquartered in San Juan, Puerto Rico, WAPA is a full-power independent broadcast television
network. WAPA was founded in 1954 as the second broadcast television network in the Caribbean and
the third in Latin America. WAPA occupies a prime channel position (channel 4), and together with its
full-power repeater stations, WTIN in Ponce and WNJX in Mayag¨uez, reaches the entire island with
the strongest television signal in Puerto Rico. WAPA reaches more television households than any of its
competitors in Puerto Rico. WAPA is also distributed by all cable, satellite and telecommunication
service providers in Puerto Rico. WAPA has been the #1-rated broadcast television network in Puerto
Rico for eight consecutive years, with an average household primetime rating of 17.2 and audience
share of 32.9% in the year ended December 31, 2016.
WAPA owns a 66,500 square foot building housing WAPA Holdings’ state-of-the-art production
facilities, television studios, and administrative offices. All of WAPA’s news and most of its local
programs are produced at WAPA’s production facility, which contains four television studios, including
the largest television studio in the Caribbean, fully equipped control rooms, digital video, audio,
editing, post-editing, and graphic production suites, and a scenery shop which produces all scenery and
props for the local productions. WAPA also boasts one of the most technologically advanced news
departments in Puerto Rico.
WAPA is Puerto Rico’s news leader and the largest local producer of entertainment programming,
producing approximately 70 hours in the aggregate each week. In addition to having the top-rated
morning, mid-day, evening and late night newscast, WAPA’s top-rated local shows include P´egate al
Mediod´ıa (the #1-rated midday program), and Lo Se Todo (the #1-rated daily show). WAPA also
licenses and televises blockbuster Hollywood movies and top-rated U.S. television series dubbed into
Spanish. This diverse and unique mix of programming has made WAPA the market leader in Puerto
Rico.
7
In 2009, WAPA launched WAPA2 Deportes in Puerto Rico through its over-the-air signal and
carriage by all cable, satellite and telecommunications distributors in Puerto Rico. WAPA2 Deportes
broadcasts various local and U.S. sports programming, including MLB, with exclusive television rights to
the World Series and the All-Star Game, NBA and Puerto Rico’s professional men’s basketball league,
Baloncesto Superior Nacional. In a short period of time, WAPA2 Deportes has become the leading local
sports network in Puerto Rico.
In 2008, WAPA launched WAPA.TV, which is now one of the most visited local sites in Puerto
Rico. WAPA.TV provides up-to-the-minute news and weather, promotional clips of WAPA’s most
popular shows, additional video content not seen on WAPA, and a platform for viewers to share
comments and interact, driving further audience engagement. In 2016, WAPA.TV’s mobile web version,
WAPA Movil, had 105.9 million total page views, 37.7 million total visits and 1.2 million average
monthly unique visitors.
WAPA America
WAPA America, launched in 2004, is a Spanish-language cable television network targeting viewers
from Puerto Rico, as well as the Dominican Republic, Cuba, Venezuela and Colombia (collectively
referred to as ‘‘Caribbean Hispanics’’), who reside in the U.S. Caribbean Hispanics are the second
largest U.S. Hispanic population segment, representing 18% of the U.S. Hispanic population. Puerto
Ricans in particular are an attractive subset of the U.S. Hispanic market with a purchasing power index
of 110 as compared to other Hispanics. WAPA America is distributed by all major U.S. cable, satellite
and telecommunication operators to 5.3 million subscribers. WAPA America televises approximately
70 hours in the aggregate per week of the top-rated news and entertainment programming produced by
WAPA. WAPA America supplements its programming with acquired telenovelas and cultural
programming, popular sports programming from Puerto Rico and other programming from WAPA’s
library.
WAPA America is primarily distributed on Hispanic programming packages, which generally
consist of 20 or more channels, such as Cinelatino, Pasiones, Centroamerica TV, Television Dominicana,
CNN en Espa˜nol, Discovery en Espa˜nol, History en Espa˜nol, ESPN Deportes and Fox Deportes
(together, ‘‘Hispanic Programming Packages’’). WAPA America is also distributed in more highly
penetrated packages in the major markets of Orlando and Tampa. Hispanic pay-TV subscribers in the
U.S. are expected to grow, driven by the continued long-term growth in Hispanic television households
and by increased penetration of pay-TV among Hispanics. We expect to capitalize on this strong
growth. For more information, see ‘‘—Industry.’’
Cinelatino
Cinelatino is the leading Spanish-language cable movie network with 20 million subscribers across
the U.S., Latin America and Canada. Cinelatino is programmed with a lineup featuring what we believe
to be the best contemporary films and original television series from Mexico, Latin America, the U.S.
and Spain. Cinelatino was launched in Mexico in 1993, and introduced into the U.S. in 1995.
Our programming strategy for Cinelatino is specifically intended to provide the audience with the
broadest selection of the most popular and highest-quality films across all popular genres, from Mexico
and all other Latin American countries that have significant populations in the U.S., including Puerto
Rico, the Dominican Republic, Colombia and Venezuela. Consistent with its programming strategy,
Cinelatino has licensed the rights to many of the highest grossing box office films in Mexico each year
from 2009 to 2016. Additionally, in 2014, we acquired a Spanish-language film library of 100 titles. This
has provided us with substantial additional content, and will be a source of content for our channel as
well as content available for us to license to over-the-top platforms. Cinelatino has an expansive library
of over 600 of the best Spanish-language titles from suppliers across the globe. Driven by the strength
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of its programming and distribution, Cinelatino is the #2-Nielsen rated Spanish-language cable
television network in the U.S. overall based on coverage ratings. In July 2015, Cinelatino introduced
advertising on its network.
Cinelatino has two feeds of its service, one that is distributed in the U.S. and a second that is
distributed throughout Latin America and Canada. Cinelatino is distributed by all major U.S. cable,
satellite and telecommunications operators on Hispanic Programming Packages and has 4.6 million U.S.
subscribers. Hispanic pay-TV subscribers in the U.S. are expected to grow, driven by the continued
long-term growth in Hispanic television households and by increased penetration of pay-TV among
Hispanics. We expect to capitalize on this strong growth. For more information, see ‘‘—Industry.’’
Cinelatino is also distributed by many Latin American pay television distributors, generally on
basic video packages, and has 15.4 million subscribers in more than 15 countries throughout Latin
America. Cinelatino is presently distributed to only 29% of all pay-TV subscribers throughout Latin
America (excluding Brazil), representing a significant growth opportunity. Additionally, we have
licensed movies on a limited basis to over-the-top digital services.
Pasiones
Pasiones, launched in August 2008, focuses on one of the most popular program genres among
Hispanics, telenovelas. The network sets itself apart by showcasing telenovelas produced in Latin
America, Turkey and South Korea (dubbed into Spanish), in contrast to most competitor networks,
which focus exclusively on Mexican telenovelas. In owning both Pasiones and Cinelatino, we provide
content in two of the most popular genres with Hispanics, telenovelas and movies.
Pasiones has two feeds of its service, one that is distributed in the U.S. and a second that is
distributed throughout Latin America. Pasiones is distributed by most major U.S. cable, satellite and
telecommunications operators on Hispanic Programming Packages and has 4.6 million U.S. subscribers.
Hispanic pay-TV subscribers in the U.S. are expected to grow, driven by the continued long-term
growth in Hispanic television households and by increased penetration of pay-TV among Hispanics. We
expect to capitalize on this strong growth. For more information, see ‘‘—Industry.’’
Pasiones is also distributed by many Latin American pay television distributors, generally on basic
video packages, and has 13.2 million subscribers in more than 15 countries throughout Latin America.
Pasiones is presently distributed to only 25% of total pay-TV subscribers throughout Latin America
(excluding Brazil), representing a significant growth opportunity.
Centroamerica TV
Centroamerica TV, launched in September 2004, is the leading network targeting the nearly
6 million Central Americans living in the U.S. Central Americans are the third largest U.S. Hispanic
population group, and represent the fastest growing segment of the U.S. Hispanic population, having
grown 273% from 2000-2016. Centroamerica TV features news and entertainment programming from
leading television broadcast networks in El Salvador, Honduras, Costa Rica, Guatemala, and Panama,
as well as exclusive soccer programming from the top professional leagues in the region.
Centroamerica TV has 4.1 million subscribers in the U.S. and is distributed on Hispanic
Programming Packages. Hispanic pay-TV subscribers in the U.S. are expected to grow, driven by the
long-term growth in Hispanic television households and by increased penetration of pay-TV among
Hispanics. We expect to capitalize on this strong growth. For more information, see ‘‘—Industry.’’
Television Dominicana
Television Dominicana, launched in November 2005, is the leading network targeting the
2.3 million Dominicans living in the U.S. Dominicans are the fourth largest U.S. Hispanic population
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group and have grown by 207% from 2000-2016. Television Dominicana features news and
entertainment programming from leading content producers in the Dominican Republic, as well as
exclusive rights to the Dominican Republic professional baseball league.
Television Dominicana currently has 3.2 million subscribers in the U.S. and is distributed on
Hispanic Programming Packages. Hispanic pay-TV subscribers are expected to grow, driven by
continued long-term growth in Hispanic television households and by increased penetration of pay-TV
among Hispanics. We expect to capitalize on this strong growth. For more information, see
‘‘—Industry.’’
Joint Ventures
On November 3, 2016, we acquired a minority interest in a newly formed joint venture with
Lionsgate to launch a Spanish-language over-the-top (‘‘OTT’’) movie service (the ‘‘OTT JV’’). The
service plans to launch in the fiscal year ending December 31, 2017. The OTT JV had no activity from
operations in the year ending December 31, 2016 and the Company did not make any capital
contributions to the OTT JV in the fiscal year ending December 31, 2016.
On November 30, 2016, we, in partnership with Colombian content producers, Radio Television
Interamericana S.A., Compania de Medios de Informacion S.A.S and NTC Nacional de Television y
Comunicaciones S.A., were awarded a ten (10) year renewable television broadcast concession license
for Canal Uno in Colombia (the ‘‘Canal Uno JV’’). Canal Uno is one of only three national broadcast
television licenses in Colombia. The Canal Uno JV is expected to begin operation of the network
through a newly formed joint venture vehicle on May 1, 2017. For the year ending December 31, 2016,
we accounted for the investment under the equity method. For more information on the OTT JV and
Canal Uno JV, see Note 5, ‘‘Equity Method Investments’’ of Notes to Consolidated Financial
Statements, included in this Annual Report on Form 10-K.
OUR COMPETITION
We compete for the development and acquisition of programming, distribution of our Networks,
selling of commercial time on our Networks, viewership of our Networks, and on-air and creative
talent. Our Networks compete with other Spanish-language broadcast and cable television networks and
digital media companies for the acquisition of programming, viewership, the sale of advertising and
creative talent. Our ability to produce and acquire popular content impacts our viewership and the sale
of advertising.
We also compete with both Spanish-language and English-language broadcast and cable television
networks for distribution of our Networks and the fees paid by cable, satellite and telecommunication
service providers. Our ability to retain and secure distribution agreements is necessary to maintain and
grow subscriber fees, and to attain viewership which drives advertising sales. Our contractual
agreements with Distributors are renewed or renegotiated from time to time in the ordinary course of
business. The launch of new networks and consolidation within the cable and satellite distribution
industry may adversely affect our ability to obtain and maintain distribution of our Networks.
Certain technological advances, including the increased deployment of fiber optic cable, are
expected to allow cable and telecommunication video service providers to continue to expand both their
channel and broadband distribution capacities and to increase transmission speeds. In addition, the
ability to deliver content via new methods and devices is expected to increase substantially. The impact
of such added capacities is hard to predict, but the development of new channels of content
distribution could lead to increased competition for viewers by facilitating the emergence of additional
channels and mobile and internet platforms through which viewers could view programming that is
similar to that offered by our Networks.
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WAPA competes with broadcast television networks and cable television networks in Puerto Rico
for audience viewership, advertising sales, and programming. WAPA’s main competitors are broadcast
television stations owned by Univision and Telemundo, which rely heavily on their U.S. parents for
programming, which consists primarily of telenovelas produced in Mexico, the U.S. and Latin America.
There are a few other local broadcasters, but they tend not to be competitive due to weak
programming and/or poor signal quality. WAPA reaches more television households in Puerto Rico
than any of its competitors. In addition, while all major English-language U.S. broadcast networks have
local affiliates, they are, for the most part, low power stations with nominal ratings. Only approximately
half of the television households in Puerto Rico subscribe to pay-TV and cable channels are generally
not competitive, as they tend to be U.S.-based, English-language channels with little relevance to the
Spanish-speaking Puerto Rican audience. WAPA has effectively customized its programming for the
viewing preferences of the Puerto Rican market with more local entertainment and news programming
than its competitors, as well as blockbuster Hollywood movies and hit U.S. television series (dubbed
into Spanish). As a result, WAPA has been the ratings leader for the past eight years. WAPA2
Deportes competes for viewership, advertising sales and programming with other channels offering
similar sports programming in Puerto Rico. Competitors include U.S.-based cable networks, such as
ESPN, TNT, and TBS, and certain satellite distributors who have acquired sports media rights for their
owned channels. WAPA.TV, including its mobile version, WAPA Movil compete with other news,
weather and entertainment websites for development and acquisition of content, audience and
advertising sales. To an extent, WAPA.TV and WAPA Movil also compete with U.S. search engines and
social networks, such as Google, Facebook and Yahoo, for website traffic and advertising sales.
Many of our competitors may possess greater resources than us, and our financial resources may
be relatively limited when contrasted with many of these competitors.
INTELLECTUAL PROPERTY
Our intellectual property assets principally include copyrights in television programming, websites
and other content, trademarks in brands, names and logos, domain names and licenses of intellectual
property rights of various kinds. The protection of our Networks’ brands and content is of primary
importance to our success. To protect our intellectual property assets, we rely upon a combination of
copyright, trademark, unfair competition, trade secret and internet/domain name statutes, laws and
contractual provisions. However, there can be no assurance of the degree to which these measures will
be successful in any given case. Moreover, effective intellectual property protection may be either
unavailable or limited in certain foreign territories. Policing unauthorized use of our products and
services and related intellectual property is difficult and costly. We seek to limit unauthorized use of
our intellectual property through a combination of approaches. However, the steps taken to prevent the
infringement of our intellectual property by unauthorized third parties may not work.
Third parties may challenge the validity or scope of our intellectual property from time to time,
and the success of any such challenges could result in the limitation or loss of intellectual property
rights. Irrespective of their validity, such claims may result in substantial costs and diversion of
resources which could have an adverse effect on our operations. In addition, piracy, which encompasses
the theft of our signal, and unauthorized use of our content in the digital environment continues to
present a threat to revenues from products and services based on intellectual property.
INDUSTRY
U.S. Hispanic Market
The U.S. Census Bureau estimated that 57 million Hispanics resided in the United States in 2015,
representing an increase of more than 21 million people between 2000 and 2015. Hispanics represent
the largest minority group in the U.S. at 18% of the total U.S. population and accounted for half of
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the total U.S. population growth between 2000 and 2015. This trend is expected to continue as the U.S.
Hispanic population is projected to grow to 70 million by 2025, an increase of 24% from 2015. As a
result of this growth, the U.S. Hispanic market represents the largest Hispanic economy in the world.
In addition, the Hispanic population on average is significantly younger than the overall population.
For example, the median age of U.S. Hispanics is 29, which is 15 years younger than the median age
for non-Hispanic whites.
Geoscape estimates that in 2016 about 67% of the U.S. Hispanic population was of Mexican
origin, followed by Puerto Rican, the second largest Hispanic national group, at over 9%. There are
5.5 million Puerto Ricans and an additional 5.4 million Hispanics from other Caribbean countries
residing in the U.S., and together, Puerto Ricans and other Caribbean Hispanics represent more than
18% of the total U.S. Hispanic population. The Puerto Rican population in the U.S. grew 63% from
2000 to 2016, while the overall Caribbean Hispanic population grew 84% during the same time period,
including the Dominican population which grew 207% from 2000-2016.
Caribbean Hispanics (WAPA America and Television Dominicana target audience)
Place of Origin
Population 2016 % of U.S. Hispanics
Puerto Rico . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dominican Republic . . . . . . . . . . . . . . . . . . . . . . .
Cuba . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Colombia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Venezuela . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,548,525
2,350,679
1,761,635
1,009,973
299,134
Total Caribbean Hispanics . . . . . . . . . . . . . . . . . .
10,969,946
9.3%
3.9%
2.9%
1.7%
0.5%
18.3%
Source: 2016 Geoscape
Central Americans are the third largest U.S. Hispanic regional population group in the U.S.
(behind Mexicans and Caribbean Hispanics), and represent the fastest growing segment of the U.S.
Hispanic population. There are 5.9 million Central Americans residing in the U.S., an increase of 273%
since 2000. Central Americans comprised approximately 10% of the U.S. Hispanic population in 2016,
compared to approximately 4% in 2000.
Central American Hispanics (Centroamerica TV target audience)
Place of Origin
Population 2016 % of U.S. Hispanics
El Salvador . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Guatemala . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Honduras . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nicaragua . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Panama . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costa Rica . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,574,086
1,594,378
714,856
423,020
363,588
239,699
Total Central American Hispanics . . . . . . . . . . . .
5,909,627
4.3%
2.7%
1.2%
0.7%
0.6%
0.4%
9.9%
Source: 2016 Geoscape
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Hispanic Television and Pay-TV Landscape
Within the U.S. cable network industry, the U.S. Hispanic demographic is attractive for a number
of reasons:
• Growth in Hispanic TV households: U.S. Hispanic television households grew by 34% during the
period from 2007 to 2017, from 11.6 million households to 15.6 million households, over five
times the overall U.S. television household growth of only 6%. The continued long-term growth
of Hispanic television households creates a significant opportunity to reach an attractive
audience at a time when overall household growth in the U.S. is more modest.
• Growth in Hispanic pay-TV subscribers: Hispanic pay-TV subscribers are expected to grow
significantly, driven not only by the rapid growth in Hispanic television households, but also by
the increased penetration of pay-TV among Hispanics. Hispanic pay-TV subscribers increased
39% from 2007 to 2017, growing from 8.8 million to 12.2 million subscribers, over 13 times the
3% increase in overall U.S. pay-TV subscribers during the same period. This 39% growth also
significantly over-indexes the 34% Hispanic television household growth during the same period.
Television Viewing and Language Preferences
• Hispanics Enjoy Movies: In 2015, Hispanics made up 18% of the U.S. population, but accounted
for 23% of movie ticket sales. In fact, the President of the National Association of Theater
Owners described Hispanics as ‘‘the most valuable component of moviegoers.’’
• Hispanics Prefer Television in Spanish: Spanish remains the most used language in the home by
U.S. Hispanic adults, and this powerfully influences television viewing habits. According to
Nielsen, 57% of Hispanics aged 18 and over speak Spanish as much as or more than English in
their homes. Spanish-dominant or bilingual (Spanish/English Equal) homes comprise about 64%
of U.S. Hispanic households, and these homes exhibit a strong preference to watch television in
their native language. Spanish-dominant households view 56% of television in Spanish and
bilingual homes view about 36% of television in Spanish.
Hispanic Advertising Market
Persons living in Hispanic television households represent over 17% of the total U.S. television
household population and 10% of the total U.S. buying power, but the aggregate media spend targeted
at U.S. Hispanics significantly under-indexes both of these metrics. As a result, advertisers have been
allocating a higher proportion of marketing dollars to the Hispanic market, but U.S. Hispanic cable
advertising still under-indexes relative to its consumption.
U.S. Hispanic cable advertising growth has significantly outpaced overall U.S. cable advertising
growth as well as Hispanic broadcast advertising growth. U.S. Hispanic cable advertising revenue grew
at a 14% CAGR from 2009 to 2016, more than doubling from $204 million to $520 million. Going
forward, U.S. Hispanic cable advertising is expected to continue to grow at an 11% CAGR from 2016
to 2019, outpacing forecasted growth for U.S. cable advertising, U.S. Hispanic broadcast advertising and
U.S. general market broadcast advertising.
Similar to the under-indexing of U.S. general market cable advertising relative to viewing share in
the 1980’s and 1990’s, U.S. Hispanic cable advertising today significantly under-indexes relative to its
share of the Spanish-language television audience. In 2016, U.S. Hispanic cable networks garnered only
13% of total U.S. Hispanic television advertising, while accounting for a 23% share of total Spanish-
language television viewing. Viewing of Spanish-language cable networks as a percentage of total
Spanish-language television viewing has grown dramatically from 11% in 2007 to 23% in 2016.
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Latin American Market (excluding Brazil)
Latin America remains an attractive region due to its large population, shared language, strong
economic growth and growing discretionary spending. Pay-TV subscribers in Latin America grew by
44% from 2012 to 2016, and are projected to grow an additional 15 million from 53 million in 2016 to
69 million by 2021 representing projected growth of over 28%. Pay-TV penetration of television
households has expanded from 41% in 2012 to 55% in 2016 and is projected to reach 63% by 2021.
This growth is expected to be driven by a sizeable and growing population, as well as a strong
macroeconomic backdrop and rising disposable income across geographies. In addition, investments in
network infrastructure have improved service and performance, leading to increased penetration for
pay-TV operators.
Puerto Rico Overview
The Commonwealth of Puerto Rico is a U.S. territory and has a U.S. dollar-based economy, U.S.
rule of law and strong governmental ties to the United States. The broadcast television industry in
Puerto Rico is regulated by the FCC, and the banking system is regulated under the U.S. system
(Federal Deposit Insurance Corporation). Puerto Rico has a population of approximately 3.5 million,
with an additional 5.5 million Puerto Ricans living in the mainland U.S. All Puerto Ricans are U.S.
citizens.
Economy
The Puerto Rican economy has been in a recession since 2006, burdened by limited economic
activity, lower-than-estimated revenue collections, high government debt levels relative to the size of
the economy and other fiscal challenges. Based on the most recent information available, the main
economic indicators suggest that the Puerto Rico economy remains weak and there are no strong signs
that a meaningful recovery is taking hold. For fiscal years 2016 and 2017, the Puerto Rico Planning
Board projects a continued economic contraction in the Commonwealth’s real gross national product
(‘‘GNP’’) of 1.2% and 2.0%, respectively, while the Government Development Bank of Puerto Rico’s
(the ‘‘GDB’’) economic activity index (the ‘‘GDB-EAI’’) in December 2016 decreased 3.0% on a
year-over-year basis. The GDB-EAI is a coincident index of economic activity for Puerto Rico made up
of four indicators (payroll employment, electric power generation, cement sales and gasoline
consumption). The seasonally adjusted unemployment rate in Puerto Rico was 12.10% in December
2016.
Based on information published by the Puerto Rico Government, General Fund net revenues for
fiscal year 2015-2016 totaled approximately $9.175 billion, a year-over-year increase of $214.4 million.
Actual fiscal year revenues were $116.7 million below revised estimates. Preliminary General Fund net
revenues for the first seven months of fiscal year 2016-2017 were $4.6 billion, an increase of
$80.1 million when compared to the same period of fiscal year 2015-2016.
On April 6, 2016, the Puerto Rico governor signed the Puerto Rico Emergency Moratorium and
Financial Rehabilitation Act, which gives Puerto Rico’s governor emergency powers to deal with the
challenging fiscal situation, including the ability to declare a moratorium on any debt payment. Puerto
Rico’s governor also issued an executive order intended to protect the GDB’s liquidity by allowing
withdrawals only to fund necessary costs for essential services such as health, public safety and
education services.
On May, 1 2016, pursuant to the debt moratorium law, the Puerto Rico governor issued an
executive order for the moratorium on the debt service payment due by the GDB on May 1, 2016. The
GDB paid the scheduled interest payment of $22 million but defaulted on the principal payment of
$367 million on its notes due on May 1, 2016.
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On June 30, 2016, President Obama signed HR 5278 Bill, the ‘‘Puerto Rico Oversight,
Management, and Economic Stability Act (PROMESA), which aims to establish an oversight board, a
process for restructuring debt, and expedited procedures for approving critical infrastructure projects in
order to address the Puerto Rican government fiscal situation. Among the main components of the bill
are:
• The creation of an Oversight Board consisting of seven voting members, along with the Puerto
Rico governor (or designee) who would serve as an ex-officio non-voting member. The Oversight
Board is responsible, among other things, for approving fiscal plans and budgets as well as
ensuring compliance with both. The Oversight Board also has the ability to facilitate debt
restructuring negotiations.
• Provides a mechanism for debt restructuring. Before court supervised restructuring is permitted,
the Oversight Board must certify that 1) any entity has made good faith efforts to reach a
voluntary restructuring, 2) the entity has adopted procedures to deliver timely audited financial
statements and has delivered drafts to any interested person to make an informed decision,
3) the entity has a fiscal plan in place, and 4) no restructuring for that entity’s debt is already in
place. The Oversight Board then has the exclusive authority as a last resort to initiate a
proceeding in court.
• The Oversight Board will also be able to approve expedited permitting and regulatory processes
for specific infrastructure revitalization projects. The projects must provide economic support,
have access to private capital, and address a need in Puerto Rico’s current infrastructure.
On August 31, 2016, the president of the United States named the seven voting members of the
Oversight Board that will manage Puerto Rico’s finances for at least five years as established by
PROMESA. Also, on September 1, 2016, the Puerto Rico governor named the non-voting member who
will serve as his representative on PROMESA’s fiscal control board. In addition, on September 30,
2016, the Oversight Board listed the public entities to be placed under the Board’s immediate
oversight. The entities placed under immediate control consist of: Puerto Rico’s central government,
three retirement systems (teachers, judicial and employees), the University of Puerto Rico and all
public corporations, including the Aqueduct and Sewer Authority, PREPA, the Puerto Rico Buildings
Authority and the GDB.
As part of PROMESA, a Congressional Task Force on Economic Growth in Puerto Rico was
created. This Task Force, consisting of eight members, provided a status report to Congress, which
included but was not limited to:
• Impediments in current Federal law and programs to economic growth in Puerto Rico, including
equitable access to Federal health care programs;
• Recommended changes to Federal law and programs that, if adopted, would serve to spur
sustainable long-term economic growth and job creation, reduce child poverty, and attract
investment in Puerto Rico; and
• The economic effect of Administrative Order No. 346 of the Department of Health of the
Commonwealth of Puerto Rico (relating to natural products, natural supplements, and dietary
supplements) or any successor or substantially similar order, rule, or guidance of the
Commonwealth of Puerto Rico.
On June 30, 2016, pursuant to the debt moratorium law and, after the enactment of PROMESA,
the Puerto Rico governor issued two executive orders that declare a moratorium on the payment
obligations of the Commonwealth under its general obligation and guaranteed debt, implement various
cash and liquidity preservation measures and protect the Commonwealth and its instrumentalities from
the exercise of creditor remedies as the Commonwealth addresses its fiscal situation.
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PROMESA is an important step towards reducing the level of uncertainty in Puerto Rico and
provides a groundwork for an orderly debt restructuring process, however, ultimate outcomes of actions
to address the challenging Puerto Rico economic environment are uncertain at this time. The economic
outlook is expected to remain negative in 2017. There can be no assurance that any past or new actions
taken by any governmental or regulatory body for the purpose of stabilizing the economy or financial
markets will achieve their intended effect.
Puerto Rico Broadcast Television Market
Puerto Rico has 1.3 million television households, comparable to that of a top 20 U.S. television
market. Puerto Rico is the third largest U.S. Hispanic market behind Los Angeles and New York.
Puerto Rican television broadcasters capture the dominant share of viewership, which is unique
relative to the U.S. The three primary broadcasters in Puerto Rico—WAPA, Univision and
Telemundo—collectively garner approximately 69% of all television household viewership in primetime,
distinguishing Puerto Rico from the U.S. television market, where the four major national broadcast
networks (ABC, CBS, NBC and Fox) garner a collective primetime audience share of less than 30%. In
fact, WAPA’s primetime household rating in 2016 was nearly four times higher than the most highly
rated English-language U.S. broadcast network in the U.S., CBS, and higher than the combined ratings
of CBS, NBC, ABC, FOX and the CW.
GOVERNMENT REGULATION
Our broadcast and cable network operations are subject to regulation by governmental authorities
in the United States, Puerto Rico and other countries where they operate. The rules, regulations,
policies and procedures affecting our Business are constantly subject to change. This section contains a
summary of certain government regulations that may affect our operations. This information is
summary in nature and does not purport to describe all present and proposed laws and regulations
affecting our Business.
Introduction
Our Networks are subject to regulation by the FCC under the Communications Act of 1934, as
amended (‘‘Communications Act’’). Under authority of the Communications Act, the FCC, among
other things, assigns frequency bands for broadcast stations, including the WAPA station, and other
uses; determines the location, frequency and operating power of stations; grants permits and licenses to
construct and operate television stations on particular frequencies; issues, revokes, modifies and renews
television broadcast station licenses; regulates equipment used by stations; determines whether to
approve changes in ownership or control of station licenses; and adopts and implements regulations
and policies which directly or indirectly affect the ownership, operations and profitability of
broadcasting stations.
The FCC has also adopted various rules that regulate the content of programming broadcast by
television stations, including the WAPA station, and carried by cable networks, including our Cable
Networks. These rules regulate, among other things, children’s programming, sponsorship identification
disclosures, closed captioning of certain television programming, and obscene, indecent and profane
content. Additionally, the FCC’s rules require broadcast stations to implement equal employment
opportunity outreach programs and maintain records relating to these programs and make filings with
the FCC evidencing such efforts. The FCC could also adopt other regulations that affect cable
networks, such as the requirement that the cable programming services be on an ‘‘´a la carte’’ basis,
which could affect their business operations.
The following is a brief summary of certain provisions of the Communications Act, and specific
FCC rules and policies and certain other statutes and regulations. The summaries are not intended to
16
describe all present and proposed statutes and FCC rules and regulations that impact broadcast
television and cable network operations. Failure to observe the provisions of the Communications Act
and the FCC’s rules and policies can result in the imposition of various sanctions, including monetary
forfeitures, the grant of ‘‘short-term’’ (less than the maximum term) broadcast license renewals or, for
particularly egregious violations, the denial of a broadcast license renewal application, the revocation of
a broadcast license, or the withholding of approval for acquisition of additional broadcast properties.
FCC Licenses and Renewal
The Communications Act permits the operation of a broadcast station only in accordance with a
license issued by the FCC upon a finding that the grant of a license would serve the public interest,
convenience and necessity. The FCC grants broadcast licenses for specified periods of time and, upon
application, may renew the licenses for additional terms (ordinarily for the full term of eight years).
Generally, the FCC renews a broadcast license upon a finding that (i) the broadcast station has served
the public interest, convenience and necessity; (ii) there have been no serious violations by the licensee
of the Communications Act or the FCC’s rules; and (iii) there have been no other violations by the
licensee of the Communications Act or other FCC rules which, taken together, indicate a pattern of
abuse. After considering these factors, the FCC may renew a broadcast station’s license, either with
conditions or without, or it may designate the renewal application for hearing. In 2013, the FCC
renewed our television licenses for full eight year terms expiring in 2021.
Media Ownership Restrictions and FCC Proceedings
The FCC’s broadcast ownership rules affect the number, type and location of broadcast and
newspaper properties that we are allowed to hold or acquire. The rules now in effect limit the common
ownership, directly or by way of attribution, operation or control of: (i) television stations serving the
same area; (ii) television stations and daily newspapers serving the same area; and (iii) television
stations and radio stations serving the same area. The rules also limit the aggregate national audience
reach of television stations under common ownership, directly or by way of attribution. The FCC’s rules
also define the types of positions and interests that are considered attributable for purposes of the
ownership limits. In general, officers, directors and stockholders holding 5% or more of the voting
interests in Hemisphere are deemed to have attributable interests. The FCC’s ownership limits
therefore apply to our principals and certain investors in our Company. Because we are controlled by a
single stockholder holding a majority of the voting power of our capital stock, the FCC’s current rules
do not treat other five percent or greater voting stockholders as attributable, and those ownership
interests are not required to be reported to the FCC.
The FCC is required by statute to review all of its broadcast ownership rules every four years to
determine if such rules remain necessary in the public interest. In August 2016, the FCC issued an
order keeping most of the current ownership rules in place, finding that they continued to serve the
public interest. The new rules do, however, prohibit joint sales agreements between stations that cannot
be commonly owned. In a separate order, the FCC eliminated the 50% discount that was previously
given to UHF stations in determining compliance with the national audience cap. Several parties have
challenged the ownership rules and the elimination of the UHF discount. Those challenges remain
pending.
Local Television Ownership Rule
Under the local television ownership rule, one party may own, operate, or control up to two
television stations in a market, so long as the market would have at least eight independently owned
full power television stations after the combination and at least one of the stations is not one of the
top-four-rated stations (based on audience share) in the television market. The rule also permits the
ownership, operation or control of two television stations in a market as long as the stations’ Noise
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Limited Service contours do not overlap. Broadcast stations designated by the FCC as ‘‘satellite’’
stations are exempt from the local television ownership rule. WNJX-TV and WTIN-TV have been
designated by the FCC as ‘‘satellite’’ stations of WAPA-TV, a division of WAPA. The FCC may also
waive its local television ownership rule to permit ownership, operation or control of two television
stations in a market that would not otherwise be permissible if one of the stations is in involuntary
bankruptcy, is a ‘‘failed’’ station, or is ‘‘failing’’ (i.e., stations with negative cash flow and less than a
four share all day audience rating). Under the local television ownership rule, the licensee of a
television station that provides more than 15% of another in-market station’s weekly programming or
advertising will be deemed to have an attributable interest in the other station.
Radio-Television Cross-Ownership Rule
The radio-television cross-ownership rule generally allows common ownership of one or two
television stations and up to six radio stations, or, in certain circumstances, one television station and
seven radio stations, in any market where at least 20 independent voices would remain after the
combination; two television stations and up to four radio stations in a market where at least 10
independent voices would remain after the combination; and one television and one radio station
notwithstanding the number of independent voices in the market. A ‘‘voice’’ generally includes
independently owned, same-market commercial and noncommercial broadcast television and radio
stations, newspapers of certain minimum circulation, and one cable system per market.
Newspaper-Broadcast Cross-Ownership Rule
Under the newspaper-broadcast cross-ownership rule, unless grandfathered or subject to waiver, no
party can have an attributable interest in both a daily newspaper (published at least 4 days a week, in
the dominant language of the market, and with a circulation exceeding 5% of the households in the
designated market area) and either a television station or a radio station in the same market if
specified signal contours of the television station or the radio station encompass the entire community
in which the newspaper is published.
Attribution of Ownership
Pursuant to FCC rules, the following relationships and interests are generally considered
attributable for purposes of broadcast ownership restrictions: (i) all officers and directors of a corporate
licensee and its direct or indirect parent(s); (ii) voting stock interests of at least five percent; (iii) voting
stock interests of at least 20 percent, if the holder is a passive institutional investor (such as an
investment company, bank, or insurance company); (iv) any equity interest in a limited partnership or
limited liability company, unless properly ‘‘insulated’’ from management activities; (v) equity and/or
debt interests that in the aggregate exceed 33 percent of a licensee’s total assets, if the interest holder
supplies more than 15 percent of the station’s total weekly programming or is a same-market broadcast
company or daily newspaper publisher; (vi) time brokerage of a broadcast station by a same-market
broadcast company; and (vii) same-market radio and television joint sales agreements. Because we are
controlled by a single stockholder holding a majority of the voting power of our capital stock, the
FCC’s current rules do not treat other five percent or greater voting stockholders as attributable, and
those ownership interests are not required to be reported to the FCC. Pending before the FCC is a
proposal to eliminate the single majority shareholder exception. The FCC is also considering a proposal
to require the disclosure in biennial ownership reports of information about five percent or greater
voting shareholders, even if such interests are not attributable under the FCC’s ownership rules.
Management services agreements and other types of shared services arrangements between
same-market stations that do not include attributable time brokerage or joint sales components
generally are not deemed attributable under the FCC’s current ownership rules. However, the FCC
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now requires that television stations make any shared services agreements available in a station’s public
inspection file.
Commission Approval of Transfer of Control of FCC Licenses
The FCC’s prior approval is required for the transfer of control or assignment of FCC licenses.
We are currently controlled by Gato Investments LP (‘‘Gato’’), which owns a majority of our Class B
common Stock, par value $0.0001 per share (‘‘Class B common stock’’). The FCC’s prior consent would
be required prior to any transaction that would result in a change in control of Hemisphere or Gato.
An application for consent to a transfer of control or assignment of licenses would be subject to a
formal public notice and comment period during which petitions to deny the applications would be
accepted by the FCC.
A person or entity requesting the FCC’s consent to acquire or obtain control of our television
station licenses must demonstrate that the acquisition complies with the FCC’s ownership rules or that
a waiver of the rules is in the public interest. As discussed above, we own two television stations,
WNJX-TV and WTIN-TV, which are operated as ‘‘satellite’’ stations of WAPA-TV. Stations granted
satellite status are exempt from the FCC’s local television ownership rule. Thus, this status permits the
common ownership of the three WAPA broadcast stations that would not otherwise be permitted.
WNJX-TV and WTIN-TV were first accorded satellite status in 2001 due to the unique circumstances
of the Puerto Rico market, including its topography and economic conditions, and the FCC has
renewed this grant in subsequent transactions. We anticipate the FCC would continue to grant satellite
status to WNJX-TV and WTIN-TV in future change-in-control transactions.
Alien Ownership Restrictions
Under the Communications Act, a broadcast license may not be granted to or held by any
corporation that has more than 20% of its capital stock owned or voted by non-U.S. citizens or entities,
whom the FCC refers to as ‘‘aliens,’’ or their representatives, by foreign governments or their
representatives, or by non-U.S. corporations.
Furthermore, the Communications Act provides that no FCC broadcast license may be granted to
or held by any corporation directly or indirectly controlled by any other corporation of which more
than 25% of the capital stock is owned or voted by non-U.S. citizens or entities or their representatives,
by foreign governments or their representatives, or by non-U.S. corporations, if the FCC finds the
public interest will be served by the refusal or revocation of such license. These restrictions apply in
modified form to other forms of business organizations, including partnerships and limited liability
companies. The FCC has interpreted this provision of the Communications Act to require an
affirmative public interest finding before a broadcast license may be granted to or held by any such
entity. In the past, the FCC has made such an affirmative finding with respect to broadcast licenses
only in highly limited circumstances. In 2013, however, the FCC issued a declaratory ruling that
notwithstanding its past practices, it will consider on a case-by-case basis requests for approval of
acquisitions by aliens of in excess of 25% of the capital stock of the parent of a broadcast licensee. In
2016, the FCC adopted rules to simplify the process for submitting a declaratory ruling and modifying
the procedures for the foreign ownership approval process for broadcast station licensees. In acting
upon a request for declaratory ruling, the FCC will coordinate with Executive Branch agencies on
national security, law enforcement, foreign policy and trade policy issues. The new rules also specify
how public companies should monitor foreign ownership compliance and provide for remedial
provisions in the event a public company determines that it has exceeded its foreign ownership limits.
On January 18, 2017, the FCC granted our request to allow foreign investors or aliens to own up
to 49.99% of our capital stock and hold 49.99% of the voting power. However, we are required to
obtain specific approval from the FCC before any alien acquires more than 5% of our capital stock or
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more than 5% voting rights, other than certain foreign investors that the FCC approved in the
declaratory ruling. We are also required to take remedial actions with the FCC if we determine that an
unapproved alien has acquired more than 5% of our capital stock or voting rights.
To the extent necessary to comply with the Communications Act, FCC rules and policies, and the
declaratory ruling, our board of directors may (i) prohibit the ownership, voting or transfer of any
portion of our outstanding capital stock to the extent the ownership, voting or transfer of such portion
would cause us to violate or would otherwise result in violation of any provision of the
Communications Act, FCC rules and policies, or the FCC’s declaratory ruling; (ii) convert shares of
our Class B common stock into shares of our Class A common stock to the extent necessary to bring us
into compliance with the Communications Act, FCC rules and policies, or the FCC’s declaratory ruling;
and (iii) redeem capital stock to the extent necessary to bring us into compliance with the
Communications Act, FCC rules and policies, or the FCC’s declaratory ruling or to prevent the loss or
impairment of any of our FCC licenses.
Digital Television
As of June 12, 2009, all full-power broadcast television stations were required to cease
broadcasting analog programming and convert to all digital broadcasts. Digital broadcasting allows
stations to offer digital channels for a wide variety of services such as high definition video
programming, multiple channels of standard definition video programming, such as WAPA2 Deportes,
data, and other types of communications. Each station is required to provide at least one free
over-the-air video program signal.
To the extent a station has ‘‘excess’’ digital capacity (i.e., digital capacity not used to transmit free,
over-the-air video programming), it may elect to use that capacity in any manner consistent with FCC
technical requirements, including for data transmission, interactive or subscription video services, or
paging and information services. If a station uses its digital capacity to provide any such ‘‘ancillary or
supplementary’’ services on a subscription or otherwise ‘‘feeable’’ basis, it must pay the FCC an annual
fee equal to 5% of the gross revenues realized from such services.
MVPD Retransmission of Local Television Signals
A number of provisions of the Communications Act and FCC rules govern aspects of the
relationship between broadcast television stations and distributors of multiple channels of video
programming such as cable, satellite and telecommunications companies (referred to as ‘‘MVPDs’’).
The rules generally provide certain protections for local broadcast stations, for which MVPDs are an
important means of distribution and a provider of competing program channels.
To ensure that every local television station can be received in its local market without requiring a
cable subscriber to switch between cable and off-air signals, the FCC allows every full-power television
broadcast station to require that all local cable systems and direct broadcast satellite transmit that
station’s primary digital channel to their subscribers within the station’s market (the so-called
‘‘must-carry’’ rule). Alternatively, a station may elect to forego its must-carry rights and seek a
negotiated agreement to establish the terms of its carriage by a local MVPD—referred to as
‘‘retransmission consent.’’ A station electing retransmission consent assumes the risk that it will not be
able to strike a deal with the MVPD and will not be carried. A station has the opportunity to elect
must-carry or retransmission consent every three years. Elections were made in October 2014 for the
2015-2017 three-year period. WAPA elected retransmission consent and has entered into retransmission
consent contracts with all MVPD systems serving Puerto Rico.
MVPDs are not required to carry any programming streams other than a station’s primary video
programming channel. Consequently, WAPA’s multicast channel WAPA2 Deportes is not entitled to
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mandatory carriage under the FCC’s must-carry rules. However, we are free to negotiate with MVPDs
for the carriage of additional programming streams.
In 2014, the FCC adopted rules prohibiting a television broadcast station that is ranked among the
top four stations to negotiate retransmission consent jointly with another station, if the stations are not
commonly owned and serve the same geographic market. In December 2014, the FCC issued a NPRM
requesting comment on whether the definition of MVPD should be expanded to include providers that
make multiple linear streams of video programming available for purchase, regardless of the technology
used to distribute the programming (e.g. entities providing video programming to subscribers through
internet connections). This proceeding remains pending, and we cannot predict what impact, if any, it
will have on our negotiations with video programming distributors.
Repurposing of Broadcast Spectrum for Other Uses
Federal legislation was enacted in February 2012 that, among other things, authorizes the FCC to
conduct voluntary ‘‘incentive auctions’’ in order to reallocate certain spectrum currently occupied by
television broadcast stations to mobile wireless broadband services, to ‘‘repack’’ television stations into
a smaller portion of the existing television spectrum band, and to require television stations that do not
participate in the auction to modify their transmission facilities, subject to reimbursement for
reasonable relocation costs up to an industry-wide total of $1.75 billion.
The FCC has adopted rules concerning the incentive auction and the repacking of the television
band and has commenced the auction process. Under the auction rules implemented by the FCC,
television stations were given an opportunity to offer spectrum for sale to the government in a
‘‘reverse’’ auction whereafter wireless providers were permitted to bid to acquire spectrum from the
government in a related ‘‘forward’’ auction. We filed an application to participate in the reverse
auction. However, because the price to sell our spectrum fell below the value we ascribe to it, we did
not sell any of our spectrum in the auction. Following completion of the incentive auction, which is
expected in the first half of 2017, the FCC will ‘‘repack’’ the remaining television broadcast spectrum,
which may require certain television stations that did not participate in the reverse auction to modify
their transmission facilities, including requiring such stations to operate on other channel designations.
The FCC will reimburse stations for reasonable relocation costs up to a total across all stations of
$1.75 billion. When repacking, the FCC will make reasonable efforts to preserve a station’s coverage
area and population served. In addition, the FCC is prohibited from requiring a station to move
involuntarily from the UHF band, the band in which WAPA’s broadcast licenses operate, to the VHF
band or from the high VHF band to the low VHF band. The FCC has notified us that stations
WNJX-TV and WTIN-TV have been reassigned new channels as a result of the incentive auction. Once
the auction concludes, we will be required to transition WNJX-TV and WTIN-TV to their post-auction
channels.
The outcome of the incentive auction and repacking of broadcast television spectrum, or the
impact of such items on WAPA’s business, cannot be predicted.
EEO Rules
The FCC’s Equal Employment Opportunity (‘‘EEO’’) rules impose job information dissemination,
recruitment, documentation and reporting requirements on broadcast television stations. Broadcasters
are also subject to random audits to ensure compliance with the FCC’s EEO rules and may be
sanctioned for noncompliance.
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Recordkeeping
The FCC rules require broadcast television stations to maintain various records regarding
operations, including equipment performance records and a log of the station’s operating parameters.
Television stations must also maintain a public inspection file, portions of which are hosted on an
FCC-maintained website. This file must contain various records, including the station license, FCC
applications, contour maps, ownership reports, political broadcasting records, EEO public file reports, a
copy of the manual ‘‘The Public and Broadcasting,’’ correspondence from the public, material regarding
FCC investigations or complaints, issues/programs lists, children’s television programming reports,
records concerning compliance with commercial limits in children’s programming, time brokerage
agreements and joint sales agreements, shared services agreements and statements of must-carry/
retransmission elections. The FCC has adopted rules, which are not yet effective, to eliminate the
requirement that stations maintain correspondence from the public in a station’s public inspection file.
Broadcast Localism
In 2007, the FCC issued a Report on Broadcast Localism and Notice of Proposed Rulemaking (the
‘‘Localism Report’’). The Localism Report tentatively concluded that broadcast stations should be
required to have regular meetings with permanent local advisory boards to ascertain the needs and
interests of their communities. The Localism Report also tentatively adopted specific renewal
application processing guidelines that would require broadcasters to air a minimum amount of local
programming. The Localism Report sought public comment on two additional rule changes that would
impact television broadcasters. These rule changes would restrict a broadcaster’s ability to locate a
station’s main studio outside the community of license and the right to operate a station remotely. To
date, the FCC has not issued a decision adopting rules to implement any of the initiatives in the
Localism Report, and it cannot be predicted whether or when the FCC might act to codify any such
initiatives.
Programming and Operations
Rules and policies of the FCC and other federal agencies regulate certain programming practices
and other areas affecting the business or operations of broadcast stations, including WAPA, and cable
networks, including WAPA America and Cinelatino.
Obscenity, Indecency and Profanity. Federal statutes prohibit the broadcast or transmission of
obscene material at any time by broadcast television stations, including the WAPA station, or on cable
networks, including WAPA America and Cinelatino. The FCC’s rules also prohibit television stations,
including the WAPA station, from broadcasting indecent or profane material between the hours of
6:00 a.m. and 10:00 p.m. In recent years, the FCC has intensified its enforcement activities with respect
to programming it considers indecent and has issued numerous fines to licensees found to have violated
the indecency rules.
In 2016, the FCC implemented increased forfeiture amounts for indecency violations that were
enacted by Congress. The maximum permitted fine for an indecency violation is $389,305 per incident
and $3,593,585 for any continuing violation arising from a single act or failure to act.
Because the FCC may investigate indecency complaints on an ex parte basis, a licensee may not
have knowledge of an indecency complaint unless and until the complaint results in the issuance of a
formal FCC letter of inquiry or notice of apparent liability for forfeiture. In July 2010, the U.S. Court
of Appeals for the Second Circuit issued a decision finding that the FCC’s indecency standard was too
vague for broadcasters to interpret and therefore inconsistent with the First Amendment. In June 2011,
the Supreme Court granted certiorari in this case. In June 2012, the Supreme Court issued a decision
which held that the FCC could not fine ABC and FOX (two television networks that were fined for
airing allegedly indecent material) for the specific broadcasts at issue because the FCC had not
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provided them with sufficient notice of its intent to issue fines for the use of fleeting expletives or
momentary nudity. However, the Supreme Court did not make any substantive ruling regarding the
FCC’s current indecency policies. In April 2013, the FCC requested comments on its indecency policy,
including whether to ban the use of fleeting expletives or whether it should only impose fines from
broadcasts that involve repeated and deliberate use of expletives. The FCC has not issued any decisions
regarding indecency enforcement since the Supreme Court’s decision was issued, although it has
advised that it will continue to pursue enforcement actions in egregious cases while it conducts its
review of its indecency policy generally.
Children’s Programming. Federal statutes and FCC rules require broadcast television stations,
including the WAPA station, to broadcast three hours per week of educational and informational
programming (‘‘E/I programming’’) designed for children 16 years of age and younger. FCC rules also
require television stations to air E/I programming on each additional digital multicast program stream
broadcast, with the requirement increasing in proportion to the additional hours of free programming
offered on multicast channels.
Federal statutes and FCC rules also limit the amount and content of commercial matter that may
be included in programming primarily produced and carried for children 12 years and younger by
broadcast television stations and cable networks, including WAPA America and Cinelatino. The FCC’s
rules also limit the display, during children’s programming on broadcast stations and cable networks, of
Internet addresses of websites that contain or link to commercial material or that use program
characters to sell products. In October 2009, the FCC issued a Notice of Inquiry (‘‘Children’s NOI’’)
seeking comment on a broad range of issues related to children’s usage of electronic media and the
current regulatory landscape that governs the availability of electronic media to children. The
Children’s NOI remains pending, and it cannot be predicted what recommendations or further action,
if any, will result from it.
Some U.S. policymakers have sought limitations on food and beverage marketing in media popular
with children and teens. In April 2011, the Interagency Working Group on Food Marketed to Children,
which is comprised of the Federal Trade Commission, the Centers for Disease Control and Prevention,
the Food and Drug Administration and the U.S. Department of Agriculture, jointly requested comment
on proposed nutritional restrictions for food and beverage marketing directed to children and teens
aged 17 years and under. Although the proposed guidelines are nominally voluntary, if these or other
similar guidelines are implemented by food and beverage marketers, they could have a negative impact
on our Networks advertising revenues.
Commercial Loudness. The 2010 Commercial Advertisement Loudness Mitigation Act (‘‘CALM
Act’’) and the FCC rules implementing the CALM Act, require television stations, cable television
operators, satellite television providers, and other pay television providers to limit the average volume
of commercials, including promotional announcements, to the same average volume as the
programming it accompanies. The FCC rules do not specifically require video programming providers,
such as WAPA America or Cinelatino, to comply with the rules regarding the loudness of commercials.
However, video programming distributors may request or require by contract that programming
providers certify compliance with those rules for commercials embedded in programming.
Closed Captioning. FCC rules require the majority of programming broadcast by television
stations and carried on cable networks to contain closed captions. In January 2012, the FCC adopted
rules to require that television programming broadcast by television stations, including the WAPA
station, or transmitted by cable, including on WAPA America or Cinelatino, with captioning include
captioning if subsequently made available online, for example, by streaming on WAPA.TV. Clips of
programming carried on television are required to be captioned if subsequently distributed over the
internet. Additionally, beginning in March 2015, new FCC rules became effective that require
programming captions to adhere to more stringent quality standards. In 2016, rules became effective
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requiring certain clips of programming made available online to be captioned if the underlying
programming aired on television with captions.
Sponsorship Identification. Both the Communications Act and the FCC’s rules generally require
that, when payment or other consideration has been received or promised to a broadcast television
station for the airing of program material, the station must disclose that fact and identify who paid or
promised to provide the consideration at the time of broadcast. Cable systems are subject to the same
requirement when the system is originating programming, also known as cablecasting. In June 2008, the
FCC sought comments on whether it should adopt additional regulations with respect to sponsorship
identification requirements on cable programmers. That proceeding remains pending.
Program Access Restrictions
Under the Communications Act, vertically integrated cable programmers are generally prohibited
from offering different prices, terms, or conditions to competing multichannel video programming
distributors unless the differential is justified by certain permissible factors set forth in the FCC’s
regulations. The FCC’s ‘‘program access’’ rules previously limited the ability of a vertically integrated
cable programmer to enter into exclusive distribution arrangements with cable television operators.
However, in 2012, the FCC declined to extend the exclusive contract prohibition section of the program
access rules beyond its October 5, 2012 sunset date. A cable programmer is considered to be vertically
integrated if it owns or is owned by a cable television operator, in whole or in part, under the FCC’s
program access attribution rules. Cable television operators for this purpose may include telephone
companies that provide video programming directly to subscribers. Because certain of our directors are
also directors of cable companies, we are considered to be a vertically integrated cable programmer and
are subject to the program access rules.
Regulation of the Internet
Internet services, including WAPA.TV, CINELATINO.COM, TVPASIONES.COM,
CENTROAMERICATV.TV, and TELEVISIONDOMINICANA.TV, are subject to regulation in the
U.S. relating to the privacy and security of personally identifiable user information and acquisition of
personal information from children under 13, including the federal Child Online Privacy Protection Act
(COPPA) and the federal Controlling the Assault of Non-Solicited Pornography and Marketing Act
(CAN-SPAM). In addition, a majority of states have enacted laws that impose data security and security
breach obligations. Additional federal, state, territorial laws and regulations may be adopted with
respect to the Internet or other online services, covering such issues as user privacy, child safety, data
security, advertising, pricing, content, copyrights and trademarks, access by persons with disabilities,
distribution, taxation and characteristics and quality of products and services.
Other Regulations
In addition to the regulations applicable to the broadcast, cable television and Internet industries
in general, we are also subject to other federal, state, territorial, and local regulations, including,
without limitation, regulations promulgated by federal, state, and territorial environmental, health and
labor agencies. Cinelatino is also subject to laws and regulations that may be adopted or promulgated
by the governments of other jurisdictions in which it operates.
AVAILABLE INFORMATION
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities
Exchange Act of 1934, as amended (the ‘‘Exchange Act’’) are made available free of charge on or
through our website at www.hemispheretv.com as soon as reasonably practicable after such reports are
24
filed with, or furnished to, the Securities and Exchange Commission (the ‘‘SEC’’ or the ‘‘Commission’’).
The information on our website is not, and shall not be deemed to be, part of this report or
incorporated into any other filings we make with the Commission.
You may read and copy any materials we file with the Commission at the Commission’s Public
Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the
operation of the Public Reference Room by calling the Commission at 1-800-SEC-0330. The SEC also
maintains a website that contains our reports, proxy statements and other information at www.sec.gov.
In addition, copies of our Corporate Governance Guidelines, Audit Committee Charter and Code of
Business Conduct and Ethics, are available at our website at www.hemispheretv.com under ‘‘Investor
Relations—Corporate Governance.’’ Copies will also be provided to any Hemisphere stockholder upon
written request to Investor Relations, Hemisphere Media Group, Inc. at 4000 Ponce de Leon Blvd.,
Suite 650, Coral Gables, FL, 33146, or via electronic mail at ir@hemispheretv.com, or by contacting
Investor Relations by telephone at (212) 486-9500.
Item 1A. Risk Factors.
The following risk factors and the forward-looking statements disclaimer elsewhere herein should
be read carefully in connection with evaluating our Business and our subsidiaries. These risks and
uncertainties could cause actual results and events to differ materially from those anticipated. Many of
the risk factors described under one heading below may apply to more than one section in which we
have grouped them for the purpose of this presentation. As a result, you should consider all of the
following factors, together with all of the other information presented herein, in evaluating our
Business and our subsidiaries. These risk factors may be amended, supplemented or superseded from
time to time in future filings and reports that we file with the Commission in the future.
Risk Factors Related to our Business
Service providers could discontinue or refrain from carrying our Networks, decide not to renew their
distribution agreements or renew on less favorable terms, which could substantially reduce the number of
viewers and harm our Business and operating results.
Consolidation among cable and satellite operators has given the largest operators considerable
leverage in their relationships with programmers, including our Networks. Some of our largest
Distributors are combining and have gained, or may gain, market power, which could affect our ability
to maximize the value of our content through those platforms. In addition, many of the countries and
territories in which we distribute our Networks also have a small number of dominant Distributors. The
success of each of our Networks is dependent, in part, on our ability to enter into new carriage
agreements and maintain or renew existing agreements or arrangements with Distributors. Although
our Networks currently have arrangements or agreements with, and are being carried by, many of the
largest Distributors, having such a relationship or agreement with a Distributor does not always ensure
that the Distributors will continue to carry our Networks. Additionally, under our Cable Networks’
current contracts and arrangements, we typically offer Distributors the right to transmit the
programming services comprising our Cable Networks to their subscribers, but not all such contracts or
arrangements require that the programming services comprising our Cable Networks be offered to all
subscribers of, or any specific tiers of, or to a specific minimum number of subscribers of a Distributor.
Also, WAPA is dependent on its retransmission consent agreements that provide for per subscriber fees
with annual rate escalators. No assurances can be provided that WAPA will be able to renegotiate all
such agreements on favorable terms, on a timely basis, or at all. A failure to secure a renewal of our
Networks’ agreements, or a renewal on less favorable terms may result in a reduction in our Business’s
retransmission fees, subscriber fees and advertising revenues, and may have a material adverse effect on
our results of operations and financial position.
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The success of our Business is dependent upon advertising revenue, which is seasonal and cyclical, and will
also fluctuate as a result of a number of other factors, some of which are beyond our control.
The success of our Business is dependent upon our advertising revenues. Our Networks’ ability to
sell advertising time and space depends on, among other things:
• economic conditions in the markets in which our Networks operate;
• the popularity of the programming offered by our Networks;
• changes in the population demographics in the markets in which our Networks operate;
• advertising price fluctuations, which can be affected by the popularity of programming, the
availability of programming, and the relative supply of and demand for commercial advertising;
• our competitors’ activities, including increased competition from other advertising-based
mediums, particularly MVPD operators, and the internet;
• decisions by advertisers to withdraw or delay planned advertising expenditures for any reason;
• labor disputes or other disruptions at major advertisers;
• changes in audience ratings; and
• other factors beyond our control.
Audience ratings may be impacted by a number of factors outside of our control, including a
decline in viewership, changes in ratings technology or methodology or changes in household sampling.
Any decline in audience ratings could cause revenue to decline, adversely impacting our Business and
our operating results. Our advertising revenue and results are also subject to seasonal and cyclical
fluctuations that we expect to continue. Seasonal fluctuations typically result in higher operating income
in the fourth quarter than in the first, second, and third quarters of each year. This seasonality is
primarily attributable to advertisers’ increased expenditures in anticipation of the holiday season
spending. In addition, we typically experience an increase in revenue every four years as a result of
advertising sales in respect of local government elections in Puerto Rico. The next political year will be
2020. As a result of the seasonality and cyclicality of our revenue, and the historically significant
increase in our revenue during election years, investors are cautioned that it has been, and is expected
to remain, difficult to engage in period-over-period comparisons of our revenue and results of
operations.
If our Networks’ viewership declines for any reason, or our audience ratings decline for any reason or our
Networks fail to develop and distribute popular programs, our advertising and subscriber fee revenues could
decrease.
Our Networks’ viewership and audience ratings, as applicable, are critical factors affecting both
(i) the advertising revenue that we receive, and (ii) the extent of retransmission, and subscriber fees we
receive, as applicable, under agreements with our Distributors. Our ratings are dependent, in part, on
our ability to consistently create and acquire programming that meets the changing preferences of
viewers in general and viewers in our Networks’ target demographic category.
Our Networks viewership is also affected by the quality and acceptance of competing programs and
other content offered by other networks, the availability of alternative forms of entertainment and
leisure time activities, including general economic conditions, piracy, digital and on-demand distribution
and growing competition for consumer discretionary spending. Audience ratings may be impacted by a
number of factors outside of our control, including a decline in viewership, changes in ratings
technology or methodology or changes in household sampling. Any decline in our Networks’ viewership
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or audience ratings could cause advertising revenue to decline, subscription revenues to fall, and
adversely impact our Business and operating results.
Our Networks may not be able to grow their subscribers and/or subscriber/retransmission fees, or such
subscribers and/or fees may decline and, as a result, our revenues and profitability may not increase and
could decrease.
The growth of our Networks’ subscriber base depends upon many factors, such as overall growth in
cable, satellite and telco subscribers, the popularity of our Networks’ programming, our ability to
negotiate new carriage agreements, or amendments to, or renewals of, current carriage agreements,
maintenance of existing distribution, and the success of our marketing efforts in driving consumer
demand for their content, as well as other factors that are beyond our control.
A major component of our financial growth strategy is based on our ability to increase our Cable
Networks’ subscriber base. If our Cable Networks’ programming services are required by the FCC to be
offered on an ‘‘`a la carte’’ basis, our Cable Networks could experience higher costs, reduced
distribution of our program service, perhaps significantly, and lose viewers. There can be no assurance
that we will be able to maintain or increase our Cable Networks’ subscriber base on cable, satellite and
telco systems or that our current carriage will not decrease as a result of a number of factors or that
we will be able to maintain or increase our Cable Networks’ current subscriber fee rates.
In particular, negotiations for new carriage agreements, or amendments to, or renewals of, current
carriage agreements, are lengthy and complex, and our Networks are not able to predict with any
accuracy when such increases in our subscriber bases may occur, if at all, or if we can maintain or
increase our current subscriber fee or retransmission fee rates, as applicable. If our Networks are
unable to grow our subscriber bases or if we reduce our subscriber fee or retransmission fee rates, as
applicable, our revenues may not increase and could decrease.
Demand for our programming and our Business, financial condition and results of operations are affected by
changes that impact Hispanic living in the United States.
We believe one of our growth drivers will result from projected increases in the U.S. Hispanic
population and projected increases in their buying power. Factors that impact the U.S. Hispanic
population, including a slow-down in immigration into the U.S. in the future, the impact of federal and
state immigration legislation and policies on both the U.S. Hispanic population and persons emigrating
from Latin America could affect the growth of the U.S. Hispanic population and, as a result, the
demand for our programming. Current events, including the recent U.S. presidential election, have
highlighted the potential for certain major changes in U.S. immigration policies. For example, in 2017,
a series of executive orders temporarily banning travel to the U.S. from several countries in the Middle
East and Africa were signed into order. In 2017, the Department of Homeland Security issued several
guidance memos that expand the federal government’s ability to empower state and local law
enforcement agencies to perform the functions of immigration officers and provide federal immigration
agents wide latitude to arrest, detain and deport undocumented immigrants and legal immigrants with
criminal records, which may disproportionally affect immigrants from Latin America. If additional
executive orders are signed into law, federal immigration legislation is enacted, individual states enact
immigration laws or immigration policy further shifts, such laws and regulations promulgated
thereunder may contain provisions that lead to a slowdown of projected immigration levels in the U.S.
Hispanic population. If the U.S. Hispanic population grows more slowly than anticipated, the projected
buying power of the U.S. Hispanic population may not grow as anticipated. In addition, economic
conditions, such as unemployment, that disproportionately impact the U.S. Hispanic population could
slow the growth of, or reduce, the projected buying power of U.S. Hispanics. If the U.S. Hispanic
population or its buying power grows more slowly than anticipated, it could have a material adverse
effect on our business, financial condition and results of operations.
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In addition, in the U.S. we exclusively target our Hispanic audience through Spanish-language
programming. As U.S. Hispanics become bilingual or English-dominant, demand for our Spanish-
language programming could be adversely impacted by competing English-language programming,
including programming primarily in English-language targeting the bilingual or English-dominant U.S.
Hispanic population. In addition, a shift in policy towards encouraging English-language fluency among
U.S. Hispanic immigrants could also impact demand for Spanish-language programming. If we are
unable to create more programming and networks targeted to this audience, we may lose audience
share to competing English-language or bilingual programming which could lead to lower ratings and
consequently, lower advertising revenues, which could have a material adverse effect on our business,
financial condition and results of operations.
The television markets in which our Networks operate is highly competitive, and we may not be able to
compete effectively, particularly against competitors with greater financial resources, brand recognition,
marketplace presence and relationships with service providers.
Our Networks compete with other television channels for the distribution of their programming,
development and acquisition of content, audience viewership and advertising sales. With respect to
audiences, television stations compete primarily based on program popularity. We cannot provide any
assurances as to the acceptability by audiences of any of the programs our Networks broadcast. Further,
because our Networks compete for the rights to produce or license certain programming, we cannot
provide any assurances that we will be able to produce or obtain any desired programming at costs that
we believe are reasonable. Our inability or failure to broadcast popular programs on our Networks, or
otherwise maintain viewership for any reason, including as a result of significant increases in
programming alternatives and the failure to compete with new technological innovations could result in
a lack of advertisers, or a reduction in the amount advertisers are willing to pay us to advertise, which
could have a material adverse effect on our Business, financial condition, and results of operations.
Our Networks compete with other Spanish-language broadcast and cable television networks, and
digital media companies for the acquisition of programming, viewership, the sale of advertising, and
creative talent. Our Networks also compete for the development and acquisition of programming,
selling of commercial time on our Networks and on-air and creative talent. It is possible that our
competitors, many of which have substantially greater financial and operational resources than our
Networks, could revise their programming to offer more competitive programming which is of interest
to our Networks’ viewers.
Additionally, our Cable Networks compete with other television channels to be included in the
offerings of each video service provider and for placement in the packaged offerings having the most
subscribers. For example, our Cable Networks’ ability to secure distribution is dependent upon the
production, acquisition and packaging of programming, audience viewership, and the prices charged for
carriage. Our Cable Networks’ contractual agreements with Distributors are renewed or renegotiated
from time to time in the ordinary course of business. With respect to WAPA, cable network
programming, combined with increased access to cable and satellite TV, has become a significant
competitor for broadcast television programming viewers.
Our Networks also compete for advertising revenue with general-interest television and other
forms of media, including magazines, newspapers, radio and digital media. Our ability to secure
additional advertising accounts relating to our Networks’ operations depends upon the size of each
Networks’ audience, the popularity of our programming and the demographics of our viewers, as well
as strategies taken by our Networks’ competitors, strategies taken by advertisers and the relative
bargaining power of advertisers. Competition for advertising accounts and related advertising
expenditures is intense. We face competition for such advertising expenditures from a variety of
sources, including other networks and other media. We cannot provide assurance that our Networks’
advertising sponsors will pay advertising rates for commercial air time at levels sufficient for us to make
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a profit, that we will maintain relationships with our current advertising sponsors or that we will be able
to attract new advertising sponsors or increase advertising revenues. Changes in ratings technology, or
methodology or metrics used by advertisers or other changes in advertisers’ media buying strategies also
could have a material adverse effect on our financial condition and results of operations. If we are
unable to attract advertising accounts in sufficient quantities, our revenues and profitability may be
harmed.
Certain technological advances, including the increased deployment of fiber optic cable, are
expected to allow cable and telecommunication video service providers to continue to expand both their
channel and broadband distribution capacities and to increase transmission speeds. In addition, the
ability to deliver content via new methods and devices is expected to increase substantially. The impact
of such added capacities is hard to predict, but the development of new methods of content distribution
could dilute our Networks’ market share and lead to increased competition for viewers by facilitating
the emergence of additional channels and mobile and internet platforms through which viewers could
view programming that is similar to that offered by our Networks.
If any of our existing competitors or new competitors, many of which have substantially greater
financial and operational resources than our Networks, significantly expand their operations or their
market penetration, our Business could be harmed. If any of these competitors were able to invent
improved technology, or our Networks were not able to prevent them from obtaining and using their
own proprietary technology and trade secrets, our Business and operating results, as well as our
Networks’ future growth prospects, could be negatively affected. There can be no assurance that our
Networks will be able to compete successfully in the future against existing or new competitors, or that
increasing competition will not have a material adverse effect on our Business, financial condition or
results of operations.
Interpretation of certain terms of our distribution agreements may have an adverse effect on the distribution
payments we receive under those agreements.
Many of our distribution agreements contain ‘‘most favored nation’’ clauses. These clauses typically
provide that if we enter into an agreement with another Distributor which contains certain more
favorable terms, we must offer some of those terms to our existing Distributors. While we believe that
we have appropriately complied with the most favored nation clauses included in our distribution
agreements, these agreements are complex and other parties could reach a different conclusion that, if
correct, could have a material adverse effect on our results of operations and financial position.
Our results may be adversely affected if long-term programming contracts are not renewed on sufficiently
favorable terms.
Our Networks enter into long-term contracts for acquisition of programming, including movies,
television series, sporting rights and other programs. As these contracts expire, our Networks must
renew or renegotiate these contracts, and if our Networks are unable to renew them on acceptable
terms, we may lose programming rights. Even if these contracts are renewed, the cost of obtaining
programming rights may increase (or increase at faster rates than our historical experience) or the
revenue from distribution of programs may be reduced (or increase at slower rates than our historical
experience). With respect to the acquisition of programming rights, the impact of these long-term
contracts on our results over the term of the contracts depends on a number of factors, including
effectiveness of marketing efforts, the size of audiences and the strength of advertising markets. There
can be no assurance that revenues from programming based on these rights will exceed the cost of the
rights plus the other costs of distributing the programming.
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There has been a shift in consumer behavior as a result of technological innovations and changes in the
distribution of content, which may affect our viewership and the profitability of our Business in unpredictable
ways. Our Networks’ failure to acquire or maintain state-of-the-art technology or adapt our business models
may harm our Business and competitive advantage.
Technology in the video, telecommunications and data services industry is changing rapidly.
Consumer behavior related to changes in content distribution and technological innovation affect our
economic model and viewership in ways that are not entirely predictable. Consumers are increasingly
viewing content on a time-delayed or on-demand basis from traditional distributors and from connected
apps and websites and on a wide variety of screens, such as televisions, tablets, mobile phones and
other devices. Additionally, devices that allow users to view television programs on a time-shifted basis
and technologies that enable users to fast-forward or skip programming, including commercials, such as
DVRs and portable digital devices and systems that enable users to store or make portable copies of
content may affect the attractiveness of our offerings to advertisers and could therefore adversely affect
our revenues. There is increased demand for short-form, user-generated and interactive content, which
have different economic models than our traditional content offerings. Digital downloads, rights
lockers, rentals and subscription services are competing for consumer preferences with each other and
with traditional physical distribution of our content. Each distribution model has different risks and
economic consequences for us, so the rapid evolution of consumer preferences may have an economic
impact that is not completely predictable. Distribution windows are also evolving, potentially affecting
revenues from other windows. We may be required to incur substantial capital expenditures to
implement new technologies, or, if we fail to do so, may face significant new challenges due to
technological advances adopted by competitors, which in turn could result in harm to our Business and
operating results. Additionally, the development of new methods of content distribution could dilute
our Networks’ market share and lead to increased competition for viewers. If we cannot ensure that
our distribution methods and content are responsive to our target audiences, our Business could be
adversely affected.
Certain digital video recording technologies offered by cable and satellite systems allow viewers to
digitally record, store and play back television programming at a later time and may impact our
advertising revenue. Most of these technologies permit viewers to fast forward through advertisements;
or, in certain cases, skip them entirely. The use of these technologies may decrease viewership of
commercials as recorded by media measurement services such as Nielsen and, as a result, lower the
advertising revenues of our television stations. The current ratings provided by Nielsen for use by linear
content providers are limited to live viewing plus viewing of a digitally recorded program on the same
day as the original air date and give broadcasters no credit for delayed viewing that occurs after the
original air date. The effects of new ratings system technologies including people meters and set-top
boxes, and the ability of such technologies to be a reliable standard that can be used by advertisers is
currently unknown.
We face cybersecurity and similar risks, which could result in the disclosure of confidential information,
disruption of our programming services, damage to our brands and reputation, legal exposure and financial
losses.
Our information technology systems, including our online, mobile and app offering, as well as our
internal systems, are susceptible to security breaches, operational data loss, general disruptions in
functionality, and may not be compatible with new technology. We depend on our information
technology systems for the effectiveness of our operations and to interface with our Networks’
customers, as well as to maintain financial records and accuracy. Although we have systems in place to
monitor our security measures, disruption or failures of our and our subsidiaries’ information
technology systems, due to employee error, computer malware, viruses, hacking and phishing attacks, or
otherwise, could impair our ability to effectively and timely provide services and products and maintain
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our financial records. Additionally, outside parties may attempt to fraudulently induce employees or
users to disclose sensitive or confidential information in order to gain access to data. Because the
techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change
frequently and often are not recognized until launched against a target, we may be unable to anticipate
these techniques or to implement adequate preventative measures. Any such breach or unauthorized
access could result in a loss of our proprietary information, which may include user data, a disruption
of our services or a reduction of the revenues we are able to generate from such services, damage to
our brands and reputation, a loss of confidence in the security of our offerings and services, and
significant legal and financial exposure, each of which could potentially have a material adverse effect
on our Business.
We are subject to restrictions on foreign ownership.
Under the Communications Act, a broadcast license may not be granted to or held by any
corporation that has more than 20% of its capital stock owned or voted by non-U.S. citizens or entities
or their representatives, by foreign governments or their representatives, or by non-U.S. corporations.
Furthermore, the Communications Act provides that no FCC broadcast license may be granted to
or held by any corporation that is directly or indirectly controlled by any other corporation of which
more than 25% of the capital stock is owned or voted by non-U.S. citizens or entities or their
representatives, by foreign governments or their representatives, or by non-U.S. corporations, if the
FCC finds the public interest will be served by the refusal or revocation of such license. These
restrictions apply in modified form to other forms of business organizations, including partnerships and
limited liability companies. The FCC has interpreted this provision of the Communications Act to
require an affirmative public interest finding before a broadcast license may be granted to or held by
any such entity.
On January 18, 2017, the FCC granted our request to allow foreign investors or aliens to own up
to 49.99% of our capital stock and hold 49.99% of our voting power. However, we are required to
obtain specific approval from the FCC before any alien acquires more than 5% of our capital stock or
more than 5% voting rights, other than certain foreign investors that the FCC approved in the
declaratory ruling. We are also required to take remedial actions with the FCC if we determine that an
unapproved alien has acquired more than 5% of our capital stock or voting rights.
To the extent necessary to comply with the Communications Act, FCC rules and policies, and the
FCC’s declaratory ruling, our board of directors may (i) prohibit the ownership, voting or transfer of
any portion of our outstanding capital stock to the extent the ownership, voting or transfer of such
portion would cause us to violate or would otherwise result in violation of any provision of the
Communications Act, FCC rules and policies, or the FCC’s declaratory ruling; (ii) convert shares of
our Class B common stock into shares of our Class A common stock to the extent necessary to bring us
into compliance with the Communications Act, FCC rules and policies, or the FCC’s declaratory ruling;
and (iii) redeem capital stock to the extent necessary to bring us into compliance with the
Communications Act, FCC rules and policies, or the FCC’s declaratory ruling or to prevent the loss or
impairment of any of our FCC licenses.
Federal regulation of the broadcasting industry limits WAPA’s operating flexibility.
The ownership, operation and sale of broadcast television stations, such as WAPA, are subject to
the jurisdiction of the FCC under the Communications Act. Matters subject to FCC oversight include
the assignment of frequency bands for broadcast television; the approval of a television station’s
frequency, location and operating power; the issuance, renewal, revocation or modification of a
television station’s FCC license; the approval of changes in the ownership or control of a television
station’s licensee; the regulation of equipment used by television stations; and the adoption and
31
implementation of regulations and policies concerning the ownership, operation, programming and
employment practices of television stations.
WAPA depends upon maintaining its broadcast licenses, which are issued by the FCC for a term of
eight years and are renewable. Applications to renew the broadcast licenses of all television stations
licensed to communities in Puerto Rico, including those associated with WAPA-TV, were renewed in
2013. In the future, interested parties may challenge a renewal application. The FCC has the authority
to revoke licenses, not renew them, or renew them with conditions, including renewals for less than a
full term. It cannot be assured that our license renewal applications for WAPA in the future will be
approved, or that the renewals, if granted, will not include conditions or qualifications that could
adversely affect our operations. If WAPA’s licenses are not renewed in the future, or renewed with
substantial conditions or modifications (including renewing one or more of our licenses for a term of
fewer than eight years), it could prevent us from operating WAPA and generating revenue from it.
Furthermore, WAPA’s ability to successfully negotiate and renegotiate future retransmission
consent agreements may be hindered by potential legislative or regulatory changes to the framework
under which these agreements are negotiated. In March 2011, the FCC issued a Notice of Proposed
Rulemaking to consider changes to its rules governing the negotiation of retransmission consent
agreements. The FCC concluded that it lacked statutory authority to impose mandatory arbitration or
interim carriage obligations in the event of a dispute between broadcasters and pay television operators.
The FCC, however, sought comment on whether it should (1) strengthen existing regulatory provisions
requiring broadcasters and MVPDs to negotiate retransmission consent in ‘‘good faith,’’ (2) enhance
notice obligations to consumers of potential disruptions in service, and/or (3) extend the prohibition on
ceasing carriage of a broadcast station’s signal during an audience measurement period to Direct
broadcast satellite (‘‘DBS’’) systems.
Our Networks are subject to FCC sanctions or penalties if they violate the FCC’s rules or regulations.
If we or any of our officers, directors, or attributable interest holders materially violate the FCC’s
rules and regulations or are convicted of a felony or are found to have engaged in unlawful
anticompetitive conduct or fraud upon another government agency, the FCC may, in response to a
petition by a third party or on its own initiative, in its discretion, commence a proceeding to impose
sanctions upon us that could involve the imposition of monetary penalties, the denial of a license
renewal application, revocation of a broadcast license or other sanctions. In addition, the FCC has
recently emphasized more vigorous enforcement of certain of its regulations, including indecency
standards, sponsorship identification requirements, children’s programming requirements, public file
requirements, which impact broadcasters, and also rules that relate to the emergency alert system and
closed captioning, and equal employment opportunity outreach and recordkeeping requirements, which
impact MVPDs. For example, in 2016, the statutory maximum fine for broadcasting indecent material
increased from $325,000 to $389,305 per incident. In 2014, the FCC issued fines against three cable
network owners, with the fines ranging from $280,000 to $1,120,000, for violating FCC rules relating to
the emergency alert system. These enhanced enforcement efforts could result in increased costs
associated with the adoption and implementation of stricter compliance procedures at our Business
facilities or FCC fines. Additionally, the effect of recent judicial decisions regarding the FCC’s
indecency enforcement practices remain unclear and we are unable to predict the impact of these
decisions on the FCC’s enforcement practices, which could have a material adverse effect on our
Business.
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The cable, satellite and telco-delivered television industry is subject to substantial governmental regulation for
which compliance may increase our Networks’ costs, hinder our growth and possibly expose us to penalties for
failure to comply.
The multichannel video programming distribution industry is subject to extensive legislation and
regulation at the federal level, and many aspects of such regulation are currently the subject of judicial
proceedings and administrative or legislative proposals. Operating in a regulated industry increases our
cost of doing business as video programmers, and such regulation may also hinder our ability to
increase and/or maintain our revenues. The regulation of programming services is subject to the
political process and continues to be under evaluation and subject to change. Material changes in the
law and regulatory requirements are difficult to anticipate and our Business may be harmed by future
legislation, new regulation, deregulation and/or court decisions interpreting such laws and regulations.
The following are examples of the types of currently active legislative, regulatory and judicial
inquiries and proceedings that may impact our Cable Networks. The FCC may adopt rules which would
require cable and satellite providers to make available programming channels on an a la carte basis. A
major component of our financial growth strategy is based on our ability to increase our Cable
Networks’ subscriber base. If our Cable Networks’ programming services are required by the FCC to be
offered on an ‘‘a la carte’’ basis, our Cable Networks could experience higher costs, reduced
distribution of our program service, perhaps significantly, and lose viewers. There can be no assurance
that we will be able to maintain or increase our Cable Networks’ subscriber base on cable, satellite and
telco systems or that our current carriage will not decrease as a result of a number of factors or that
we will be able to maintain or increase our Cable Networks’ current subscriber fee rates.
Further, the FCC and certain courts are examining the types of technologies that will be
considered ‘‘multichannel video programming systems’’ under federal regulation and the rules that will
be applied to distribution of television programming via such technologies. We cannot predict the
outcome of any of these inquiries or proceedings or how their outcome would impact our ability to
have our Cable Networks’ content carried on multichannel programming distribution and the value of
our advertising inventories.
Our Cable Networks are subject to Program Access restrictions.
Because certain of our directors are also directors of cable companies we are considered to be a
vertically integrated cable programmer and are subject to the program access rules. The other holdings
of entities that acquire an interest in our capital stock may be attributable to our Cable Networks and
could further subject us to the program access rule restrictions. While we do not believe our status as a
vertically integrated cable programmer will materially limit or impair the activities of our Cable
Networks, the program access rules could have a material adverse effect on our Business, financial
condition and results of operations.
Cable, satellite and telco television programming signals have been stolen or could be stolen in the future,
which reduces our potential revenue from subscriber fees and advertising.
The delivery of subscription programming requires the use of conditional access technology to limit
access to programming to only those who subscribe to programming and are authorized to view it.
Conditional access systems use, among other things, encryption technology to protect the transmitted
signal from unauthorized access. It is illegal to create, sell or otherwise distribute software or devices to
circumvent conditional access technologies. However, theft of programming has been widely reported,
and the access or ‘‘smart’’ cards used in service providers’ conditional access systems have been
compromised and could be further compromised in the future. When conditional access systems are
compromised, our Networks do not receive the potential subscriber fee revenues from the service
providers. Further, measures that could be taken by service providers to limit such theft are not under
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our control. While we take proactive steps to combat piracy through the encryption of our signal and
other measures, there can be no assurances that these or other steps are effective. Piracy of our
Networks’ copyrighted materials could reduce our revenue and negatively affect our Business and
operating results.
‘‘Must-carry’’ regulations reduce the amount of channel space that is available for carriage of the Cable
Networks cable offerings.
The Cable Act of 1992 imposed ‘‘must carry’’ or ‘‘retransmission consent’’ regulations on cable
systems, requiring them to carry the signals of local broadcast television stations that choose to exercise
their must carry rights rather than negotiate a retransmission consent arrangement. DBS systems are
also subject to their own must carry rules. The FCC’s implementation of these ‘‘must-carry’’ obligations
requires cable and DBS operators to give certain broadcasters preferential access to channel space.
This reduces the amount of channel space that is available for carriage of our Cable Networks offerings
by cable television systems and DBS operators in the U.S. Congress, the FCC or any other foreign
government may, in the future, adopt new laws, regulations and policies regarding a wide variety of
matters which could affect our Cable Networks.
We have operations, properties and viewers that are located in Puerto Rico and Florida and could be adversely
affected in the event of a hurricane or other extreme weather conditions.
WAPA’s corporate office and production facilities are located in Puerto Rico, where major
hurricanes have occurred, as well as other extreme weather conditions, such as tornadoes, floods, fires,
unusually heavy or prolonged rain, droughts and heat waves. Additionally, our corporate office and
certain of our operations provided by our service providers are located in Miami, Florida, where similar
weather conditions have occurred, including major hurricanes. Depending on where any particular
hurricane or other weather event makes landfall, our properties or those of our service providers could
experience significant damage. Such event could have an adverse effect on our ability to broadcast our
programming or produce new shows, which could have an adverse effect on our Business and results of
operations. Additionally, many of WAPA’s regular viewers may be left without power and unable to
view our programming which could have an adverse effect on our Business and results of operations.
Puerto Rico’s continuing economic hardships may have a negative effect on the overall performance of our
Business, financial condition and results of operations.
Financial and economic conditions in Puerto Rico have further deteriorated and continue to be
uncertain. The continuation or worsening of such conditions could have an adverse effect on our
Business, results of operations, and/or financial condition.
The Puerto Rican economy has been and continues to be in a recession since 2006, and has been
burdened by limited economic activity, lower-than-estimated revenue collections, high government debt
levels relative to the size of the economy and other potential fiscal challenges. For more information on
the Puerto Rican economy, see ‘‘—Industry—Puerto Rico Overview—Economy’’.
Additionally, Puerto Rico’s track record of poor budget controls and high poverty levels compared
to the U.S. average presents ongoing challenges. Puerto Rico’s government is facing a poor fiscal
condition, high unemployment rate and extremely low labor force participation. Indeed, increasing
economic problems in Puerto Rico have led to high-levels of migration from the territory, although the
outflows decelerated in the year ending December 31, 2016, as compared to December 31, 2015. The
continued loss of school-age children and those in their prime working years has contributed to Puerto
Rico’s lowered growth prospects going forward.
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In addition to any negative direct consequences to our Business or results of operations arising
from these financial and economic developments, some of these actions may adversely affect advertisers
or other consumers on whom we rely. Our Business and results of operations could be negatively
affected as a result.
Certain of our Cable Networks and our joint venture in Canal Uno have international operations and
exposures that incur certain risks not found in doing business in the United States.
Doing business in foreign countries carries with it certain risks that are not found in doing business
in the United States. The risks of doing business in foreign countries that could result in losses against
which our Cable Networks are not insured include:
• exposure to local economic conditions;
• potential adverse changes in the diplomatic relations of foreign countries with the United States;
• hostility from local populations;
• significant fluctuations in foreign currency value;
• the adverse effect of currency exchange controls or other restrictions;
• restrictions on the withdrawal of foreign investment and earnings;
• government policies against businesses owned by foreigners;
• investment restrictions or requirements;
• expropriations of property;
• the potential instability of foreign governments and economies;
• the risk of insurrections;
• difficulties in collecting revenues and seeking recourse against 3rd parties owing payments to us;
• withholding and other taxes on remittances and other payments by subsidiaries;
• changes in taxation structure; and
• shifting consumer preferences regarding the viewing of video programming.
For example, our joint venture in Canal Uno operates solely in Colombia. Although Colombia has
a long-standing tradition respecting the rule of law, which has been bolstered in recent years by the
present and former government’s policies and programs, no assurances can be given that our joint
venture’s plans and operations will not be adversely affected by future developments in Colombia.
Canal Uno’s operations and activities in Colombia are subject to political, economic and other
uncertainties, including the risk of expropriation, nationalization, renegotiation or nullification of
existing contracts, broadcast licenses or other agreements, changes in laws or taxation policies, currency
exchange restrictions, and changing political conditions and international monetary fluctuations. Future
government actions concerning the economy, taxation, or the operation and regulation of national
over-the-air broadcast concessions, could have a significant effect on the joint venture. Colombia was
home to South America’s largest and longest running insurgency, which recently ended on December 1,
2016 following the government’s ratification of a peace treaty with the Revolutionary Armed Forces of
Colombia (‘‘FARC’’). While the situation has improved dramatically in recent years, there can be no
guarantee that the situation will not again deteriorate. Any increase in kidnapping, gang warfare,
homicide and/or terrorist activity in Colombia generally may disrupt supply chains and discourage
qualified individuals from being involved with the joint venture’s operations. Any changes in regulations
35
or shifts in political attitudes are beyond our control and may adversely affect the joint venture’s
business.
Furthermore, some foreign markets where we operate may be more adversely affected by current
economic conditions than the U.S. For example, in Colombia, decreases in the growth rate, periods of
negative growth, increases in inflation, changes in law, regulation, policy, or future, judicial rulings and
interpretations of policies involving exchange controls and other matters such as (but not limited to)
currency depreciation, interest rates, taxation and other political or economic developments in or
affecting Colombia may affect the overall business environment and may, in turn, adversely impact our
joint venture’s financial condition and results of operations in the future. Colombia’s fiscal deficit and
growing public debt could adversely affect the Colombian economy.
We also may incur additional expenses as a result of changes, including the imposition of new
restrictions, in the existing economic or political environment in the regions where we do business. Acts
of terrorism, hostilities, or financial, political, economic or other uncertainties could lead to a reduction
in revenue or loss of investment, which could adversely affect our results of operations.
Any violation of the Foreign Corrupt Practices Act or other similar laws and regulations could have a negative
impact on us.
We are subject to risks associated with doing business outside of the United States, which exposes
us to complex foreign and U.S. regulations inherent in doing business cross-border and in each of the
countries in which we transact business. We are subject to regulations imposed by the Foreign Corrupt
Practices Act, or the FCPA, and other anti-corruption laws that generally prohibit U.S. companies and
their subsidiaries from offering, promising, authorizing or making improper payments to foreign
government officials for the purpose of obtaining or retaining business. Violations of the FCPA and
other anti-corruption laws may result in severe criminal and civil sanctions as well as other penalties
and the SEC and U.S. Department of Justice have increased their enforcement activities with respect
to the FCPA. Internal control policies and procedures and employee training and compliance programs
that we have implemented to deter prohibited practices may not be effective in prohibiting employees,
contractors or agents from violating or circumventing such policies and the law. If our employees or
agents fail to comply with applicable laws or company policies governing their international operations,
we may face investigations, prosecutions and other legal proceedings and actions which could result in
civil penalties, administrative remedies and criminal sanctions. Any determination that we have violated
the FCPA could have a material adverse effect on our financial condition. Compliance with
international and U.S. laws and regulations that apply to international operations increases the cost of
doing business in foreign jurisdictions.
Adverse conditions in the U.S. and international economies could negatively impact our results of operations.
Unfavorable general economic conditions, such as a recession or economic slowdown in parts of
the United States or in one or more of the major markets in which we operate, could negatively affect
the affordability of and demand for some of our products and services. In addition, adverse economic
conditions may lead to loss of subscriptions for our Networks. If these events were to occur, it could
have a material adverse effect on our results of operations.
The risks associated with our advertising revenue become more acute in periods of a slowing
economy or recession, which may be accompanied by a decrease in advertising. Expenditures by
advertisers tend to be cyclical, reflecting overall economic conditions and budgeting and buying
patterns. Cancellations, reductions or delays in purchases of advertising could, and often do, occur as a
result of a strike, a general economic downturn, an economic downturn in one or more industries or in
one or more geographic areas, or a failure to agree on contractual terms.
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Any potential hostilities, terrorist attacks, or similarly newsworthy events leading to broadcast interruptions,
may affect our revenues and results of operations.
If any existing hostilities escalate, or if the United States experiences a terrorist attack or
experiences any similar event resulting in interruptions to regularly scheduled broadcasting, we may
lose revenue and/or incur increased expenses. Lost revenue and increased expenses may be due to
preemption, delay or cancellation of advertising campaigns, or diminished subscriber fees, as well as
increased costs of covering such events. We cannot predict the (i) extent or duration of any future
disruption to our programming schedule, (ii) amount of advertising revenue that would be lost or
delayed, (iii) the amount of decline in any subscriber fees or (iv) the amount by which broadcasting
expenses would increase as a result. Any such loss of revenue and increased expenses could negatively
affect our results of operations.
The broadcast incentive auction could result in the modification of our broadcast licenses for WAPA by
requiring us to operate on other channels.
The FCC began an incentive auction to recapture certain spectrum currently used by television
broadcasters and repurpose it for other uses. The incentive auction process has three components.
First, the FCC conducted a reverse auction by which each television broadcaster may choose to
retain its rights to a 6 MHz channel of spectrum or volunteer, in return for payment, to relinquish its
station’s spectrum by surrendering the station’s license; relinquishing the right to the station’s spectrum
and thereafter share spectrum with another station; or, for stations that operate in the UHF spectrum,
modifying the station’s UHF channel license to a VHF channel license. Applications for television
stations to participate in the reverse auction were due January 12, 2016. The reverse auction
commenced on March 29, 2016, when television stations participating in the auction were required to
make their initial bid commitments.
Second, the FCC conducted a forward auction of the relinquished broadcast spectrum to new
users.
Third, the FCC will ‘‘repack’’ television stations that do not relinquish spectrum in the auction in
remaining television broadcast spectrum, which may require certain television stations that did not
participate in the reverse auction to modify their transmission facilities, including requiring such
stations to operate on other channel designations. The FCC is authorized to reimburse stations for
reasonable relocation costs up to a total across all stations of $1.75 billion. The FCC, when repacking
the television broadcast spectrum, will use reasonable efforts to preserve a station’s coverage area and
population served. The FCC is prohibited from requiring a station to move involuntarily from the UHF
spectrum band, the band in which WAPA’s broadcast licenses operate, to the VHF spectrum band or
from the high VHF band to the low VHF band. We did not relinquish any of our spectrum in the
auction. The FCC has notified us that stations WNJX-TV and WTIN-TV have been reassigned new
channels as a result of the incentive auction. Once the auction concludes, we will be required to
transition WNJX-TV and WTIN-TV to their post-auction channels.
The auction is expected to conclude in the first half of 2017.
We cannot predict the outcome of the incentive auction; whether following repacking the coverage
area and population served by our stations will be completely preserved; or whether the $1.75 billion
set aside for reimbursing repacking expenses will be sufficient to cover all repacking expenses.
Nevertheless, we do not believe that the auction will have a material negative impact on our Business,
because during repacking the FCC is required to keep our stations in the more desirable UHF band;
our three television stations have overlapping coverage areas, so it is unlikely that we will lose service
to a significant portion of the households that we serve. If the FCC is unable to reimburse all of our
repacking expenses, the amount of the shortfall is unlikely to be material to our Business as a whole.
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Our Networks are subject to interruptions of distribution as a result of our reliance on broadcast towers,
satellites and Distributors for transmission of its programming. A significant interruption in transmission
ability could seriously affect our Business and results of operations, particularly if not fully covered by its
insurance.
Our Networks could experience interruptions of distribution or potentially long-term increased
costs of delivery if the ability of broadcast towers, satellites or satellite transponders, or Distributors to
transmit our Networks’ content is disrupted because of accidents, weather interruptions, governmental
regulation, terrorism, or other third party action.
As protection against these hazards, we maintain insurance coverage against some, but not all,
such potential losses and liabilities. We may not be able to maintain or obtain insurance of the type
and amount we desire at reasonable rates. As a result of market conditions, premiums and deductibles
for certain of our insurance policies may increase substantially. In some instances, certain insurance
could become unavailable or available only for reduced amounts of coverage. For example, coverage
for hurricane damage can be limited, and coverage for terrorism risks can include broad exclusions. If
our Networks were to incur a significant liability for which we were not fully insured, it could have a
material adverse effect on our financial position.
The success of much of our Business is dependent upon the retention and performance of on-air talent and
program hosts and other key employees.
Our Business depends upon the continued efforts, abilities and expertise of our corporate
executive team. There can be no assurance that these individuals will remain with us. Our Business,
financial condition and results of operations could be materially adversely affected if we lose any of
these persons and are unable to attract and retain qualified replacements. Additionally, our Networks
independently contract with several on-air personalities and hosts with significant loyal audiences in
their respective markets. Although our Networks have entered into long-term agreements with some of
their key on-air talent and program hosts to protect their interests in those relationships, we can give
no assurance that all or any of these persons will remain with our Networks or will retain their
audiences. Competition for these individuals is intense and many of these individuals are under no legal
obligation to remain with our Networks. Our competitors may choose to extend offers to any of these
individuals on terms which our Networks may be unable or unwilling to meet. Furthermore, the
popularity and audience loyalty of our Networks’ key on-air talent and program hosts is highly sensitive
to rapidly changing public tastes. A loss of such popularity or audience loyalty is beyond our control
and could limit our Network’ ability to generate revenue and could have a material adverse effect on
our Business, financial condition and results of operations.
We may need to increase the size of our organization, and may experience difficulties in managing growth.
At Hemisphere, the parent holding company, we do not have significant operating assets and only
have a limited number of employees. In connection with the completion of any future acquisitions, we
may be required to hire additional personnel and enhance our information technology systems. Any
future growth may increase our corporate operating costs and impose significant added responsibilities
on members of our management, including the need to identify, recruit, maintain and integrate
additional employees and implement enhanced informational technology systems. Our future financial
performance and our ability to compete effectively will depend, in part, on our ability to manage any
future growth effectively. Future growth will also increase our costs and expenses and limit our
liquidity.
We could be adversely affected by strikes or other union job actions.
A majority of our employees in Puerto Rico are highly specialized union members who are
essential to the production of television programs and news. These employees are covered by our
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CBAs, one of which was scheduled to expire on July 23, 2015 and the other which expires on June 27,
2019. Pursuant to its terms, the CBA which was scheduled to expire on July 23, 2015 automatically
renewed for a period of eighteen (18) months upon such expiration date and remained in effect
through January 23, 2017. Following the expiration of the extension period, the Company and
UPAGRA continue to engage in active and good faith negotiations. While we believe that we will
maintain good working relations with our employees on acceptable terms, there can be no assurance
that we will be able to negotiate the terms of the expired CBA in a manner acceptable to either party.
A strike by, or a lockout of, UPAGRA, which provides personnel essential to the production of
television programs, could delay or halt our ongoing production activities. Such a halt or delay,
depending on the length of time, could cause a delay or interruption in the programming schedule of
certain of our Networks, which could have a material adverse effect on our Business, financial
condition and results of operations.
We could become obligated to pay additional contributions due to the unfunded vested benefits of a
multiemployer pension plan. A future incurrence of withdrawal liability could have a material effect on our
results of operations.
WAPA makes contributions to the Newspaper Guild International Pension Plan (the ‘‘Plan’’ or
‘‘TNGIPP’’), a multiemployer pension plan with a plan year end of December 31 that provides defined
benefits to certain employees covered by our two CBAs. WAPA’s contribution rates to the Plan are
generally determined in accordance with the provisions of the CBAs and a rehabilitation plan that was
adopted by the TNGIPP.
The risks in participating in such a plan are different from the risks of single-employer plans, in
the following respects:
• Assets contributed to a multiemployer plan by one employer may be used to provide benefits to
employees of any other participating employer.
• If a participating employer ceases to contribute to a multiemployer plan, the unfunded
obligation of the plan allocable to such withdrawing employer may be borne by the remaining
participating employers.
WAPA has received Annual Funding Notices, Report of Summary Plan Information, Critical Status
Notices (‘‘Notices’’) and the above-noted Rehabilitation Plan, as defined by the Pension Protection Act
of 2006 (‘‘PPA’’), from the Plan. The Notices indicate that the Plan actuary has certified that the Plan is
in critical status, the ‘‘Red Zone’’, as defined by the PPA, and that a plan of rehabilitation
(‘‘Rehabilitation Plan’’) was adopted by the Trustees of the Plan (‘‘Trustees’’) on May 1, 2010 and then
updated on November 17, 2015. On May 29, 2010, the Trustees sent WAPA a Notice of Reduction and
Adjustment of Benefits Due to Critical Status explaining all changes adopted under the Rehabilitation
Plan, including the reduction or elimination of benefits referred to as ‘‘adjustable benefits.’’ In
connection with the adoption of the Rehabilitation Plan, most of the Plan participating unions and
contributing employers (including the Newspaper Guild International and WAPA), agreed to one of the
‘‘schedules’’ of changes as set forth under the Rehabilitation Plan. WAPA elected the ‘‘Preferred
Schedule’’ and executed a Memorandum of Agreement, effective May 27, 2010 (the ‘‘MOA’’) and
agreed to the following contribution rate increases: 3.0% beginning on January 1, 2013; an additional
3.0% beginning on January 1, 2014; and an additional 3% beginning on January 1, 2015. In 2015, The
Plan’s Trustee’s reviewed the Rehabilitation Plan and the financial projections under the Plan and
determined that is was not prudent to continue benefit accruals under the current Plan and that
implementation of an updated plan with a new benefit design would be in the best interest of the
Plan’s participants. As a result, the Plan’s Board of Trustee’s adopted changes to the Rehabilitation
Plan effective January 1, 2016. WAPA did not elect the new preferred schedule.
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Under the Rehabilitation Plan, as revised in 2015, WAPA will need to agree to one of the updated
‘‘schedules’’ of changes as set forth under the revised Rehabilitation Plan. These schedule options
include a new preferred schedule that does not require contribution increases but requires the
employer to commit to remaining in the Plan for an additional five years, or the existing preferred
schedule or a default schedule, both of which require annual contribution increases of 3% (starting
January 1, 2016).
The future cost of the Plan depends on a number of factors, including the funding status of the
Plan and the ability of other participating companies to meet ongoing funding obligations. Assets
contributed to the Plan are not segregated or otherwise restricted to provide benefits only to the
employees of WAPA. While WAPA’s pension cost for the Plan is established by the CBA, the Plan may
further revise the Rehabilitation Plan to impose additional increased contribution rates and surcharges
based on the funded status of the plan and in accordance with the provisions of the Rehabilitation Plan
and the PPA. Factors that could impact the funded status of the Plan include investment performance,
changes in the participant demographics, financial stability of contributing employers and changes in
actuarial assumptions.
The contribution increases and effect of the Rehabilitation Plan as described above are not
anticipated to have a material effect on our results of operations. However, in the event other
contributing employers are unable to, or fail to, meet their ongoing funding obligations, the financial
impact on WAPA to contribute to any plan underfunding may be material. In addition, if a United
States multiemployer defined benefit plan fails to satisfy certain minimum funding requirements, the
Internal Revenue Service may impose a nondeductible excise tax of 5% on the amount of the
accumulated funding deficiency for those employers contributing to the fund.
If WAPA completely or partially withdrew from the Plan, it would be obligated to pay complete or
partial withdrawal liability (which could be material). Under the statutory requirements applicable to
withdrawal liability with respect to a multiemployer pension plan, in the event of a complete withdrawal
from the Plan, WAPA would be obligated to make withdrawal liability payments to fund its
proportionate share of the Plan’s unfunded vested benefits (‘‘UVBs’’). WAPA’s payment amount for a
given year would be determined based on its highest contribution rate (as limited by the Multiemployer
Pension Reform Act of 2014) and its highest average contribution hours over a period of three
consecutive plan years out of the ten-year period preceding the date of withdrawal. To the extent that
the prescribed payment amount was not sufficient to discharge WAPA’s share of the Plan’s UVBs,
WAPA’s payment obligation would nevertheless end after 20 years of payments (absent a withdrawal
that is part of a mass withdrawal, in which case the annual payments would continue indefinitely or
until WAPA paid its share of the Plan’s UVBs at the time of withdrawal).
Pursuant to the last available notice (for the Plan year ended December 31, 2015), WAPA’s
contributions to the Plan exceeded 5% of total contributions made to the Plan. For more information,
see Note 11, ‘‘Retirement Plans’’ of Notes to Consolidated Financial Statements, included in this
Annual Report on Form 10-K.
A large portion of our revenue is generated from a limited number of customers, and the loss of these
customers could adversely affect our Business.
Our Networks depend upon agreements with a limited number of Distributors. For the year ended
December 31, 2016, two of our Distributors accounted for more than 10% of our total net revenues.
The loss of channel carriage with any significant Distributor, or our inability to renew an affiliation
agreement with any significant Distributor on acceptable terms, would have a materially adverse effect
on our Business, financial condition and results of operations.
40
If our goodwill or intangibles become impaired, we will be required to recognize a non-cash charge which
could have a significant effect on our reported net earnings.
A significant portion of our assets consist of goodwill and intangibles. We test our goodwill and
intangibles for impairment each year. A significant downward revision in the present value of estimated
future cash flows for a reporting unit could result in an impairment of goodwill and intangibles and a
noncash charge would be required. Such a charge could have a significant effect on our reported net
earnings.
Possible strategic initiatives may impact our Business.
We will continue to evaluate the nature and scope of our operations and various short-term and
long-term strategic considerations. There are uncertainties and risks relating to strategic initiatives.
Also, prospective competitors may have greater financial resources. These factors may place us at a
competitive disadvantage in successfully completing future acquisitions and investments. Future
acquisitions or joint ventures may not be available on attractive terms, or at all. If we do make
additional acquisitions, we may not be able to successfully integrate the acquired businesses. For
example, we could face several challenges in the consolidation and integration of information
technology, accounting systems, personnel and operations. In addition, while we believe that there may
be target businesses that we could potentially acquire or invest in, our ability to compete with respect
to the acquisition of certain target businesses that are sizable will be limited by our available financial
resources. We may need to obtain additional financing in order to consummate future acquisitions and
investment opportunities. We cannot assure you that any additional financing will be available to us on
acceptable terms, if at all. This inherent competitive limitation gives others with greater financial
resources an advantage in pursuing acquisition and investment opportunities. Finally, certain
acquisitions or divestitures may be subject to FCC approval and FCC rules and regulations. If we do
not realize the expected benefits or synergies of such transactions, there may be an adverse effect on
our Business, financial condition and results of operations.
Future acquisitions or business opportunities, including investments in complementary businesses could involve
unknown risks that could harm our Business and adversely affect our financial condition.
From time to time, we have acquired or invested in complementary businesses and entered into
joint ventures. In the future we may make other acquisitions, invest in complementary businesses
including joint ventures that involve unknown risks, and may involve significant cash expenditures, debt
incurrence, operating losses and expenses that could have a material adverse effect on our Business,
financial condition, results of operations and cash flows. Such transactions involve numerous other risks
including:
• difficulties integrating acquired businesses, technologies and personnel into our business;
• difficulties in obtaining and verifying the financial statements and other business information of
acquired businesses;
• inability to obtain required regulatory approvals on favorable terms;
• potential loss of key employees, key contractual relationships or key customers of either acquired
businesses or our business;
• assumption of the liabilities and exposure to unforeseen or undisclosed liabilities of acquired
businesses;
• dilution of interests of holders of our common shares through the issuance of equity securities
or equity-linked securities; and
41
• in the case of joint ventures and other investments, interests that diverge from those of our
partners without the ability to direct the management and operations of the joint venture or
investment in the manner we believe most appropriate.
Although we intend to conduct extensive business, financial and legal due diligence in connection
with the evaluation of future business or acquisition opportunities, there can be no assurance our due
diligence investigations will identify every matter that could have a material adverse effect on us. We
may be unable to adequately address the financial, legal and operational risks raised by such businesses,
acquisitions or joint ventures. The realization of any unknown risks could expose us to unanticipated
costs and liabilities and prevent or limit us from realizing the projected benefits of the businesses or
acquisitions, which could adversely affect our financial condition and liquidity. In addition, our
Business, financial condition, results of operations and the ability to service our debt may be adversely
impacted depending on specific risks applicable to any business or company we acquire.
Our use of joint ventures may limit our flexibility with jointly owned investments.
We have and may continue in the future to develop and/or acquire properties in joint ventures
with other persons or entities when circumstances warrant the use of these structures. Our participation
in joint ventures is subject to risks that may not be present with other methods of ownership, including
but not limited to:
• difficulties integrating acquired businesses, technologies and personnel into our business;
• we could experience an impasse on certain decisions because we do not have sole decision-
making authority, which could require us to expend additional resources to resolve such
impasses or potential disputes, including litigation or arbitration;
• our joint venture partners could have investment and financing goals that are not consistent with
our objectives, including the timing, terms and strategies for any investments, and what levels of
debt to incur or carry;
• our ability to transfer our interest in a joint venture to a third party may be restricted and the
market for our interest may be limited;
• our joint venture partners might become bankrupt, fail to fund their share of required capital
contributions or fail to fulfill their obligations as a joint venture partner, which may require us to
infuse our own capital into the venture on behalf of the partner despite other competing uses
for such capital; and
• our joint venture partners may have competing interests in our markets that could create conflict
of interest issues.
Any of the foregoing risks could materially adversely affect our Business, results of operations and
financial condition.
Any potential acquisition or investment in a foreign business or a company with significant foreign operations
may subject us to additional risks.
Acquisitions or investments by us in a foreign business or other companies with significant foreign
operations, subjects us to risks inherent in business operations outside of the United States. These risks
include, for example, currency fluctuations, complex foreign regulatory regimes, unstable local tax
policies, restrictions on the movement of funds across national borders and cultural and language
differences. If realized, some of these risks may have a material adverse effect on our Business, results
of operations and liquidity, and can have an adverse effect on our ability to service our debt.
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We could consume resources in researching acquisitions, business opportunities or financings and capital
market transactions that are not consummated, which could materially adversely affect subsequent attempts to
locate and acquire or invest in another business.
We anticipate that the investigation of each specific acquisition or business opportunity and the
negotiation, drafting, and execution of relevant agreements, disclosure documents, and other
instruments, with respect to such transaction, will require substantial management time and attention
and substantial costs for financial advisors, accountants, attorneys and other advisors. If a decision is
made not to consummate a specific acquisition, business opportunities or financings and capital market
transactions investment or financing, the costs incurred up to that point for the proposed transaction
likely would not be recoverable. Furthermore, even if an agreement is reached relating to a specific
acquisition, investment target or financing, we may fail to consummate the investment or acquisition for
any number of reasons, including those beyond our control. Any such event could consume significant
management time and result in a loss to us of the related costs incurred, which could adversely affect
our financial position and our ability to consummate other acquisitions and investments.
We have incurred substantial costs in connection with our previous acquisitions, joint ventures and growth
strategy, including legal, accounting, advisory and other costs.
We have incurred substantial costs, including a number of non-recurring costs, in connection with
our prior acquisitions, joint ventures and growth strategy and expect to incur substantial costs in
connection with any other transaction we complete in the future. Some of these costs are payable
regardless of whether the acquisition is completed. These costs will reduce the amount of cash
otherwise available to us for acquisitions, business opportunities and other corporate purposes. There is
no assurance that the actual costs will not exceed our estimates. We may continue to incur additional
material charges reflecting additional costs associated with our investments and the integration of our
acquisitions, and joint ventures in fiscal quarters subsequent to the quarter in which the relevant
acquisition was consummated.
Our officers, directors, stockholders and their respective affiliates may have a pecuniary interest in certain
transactions in which we are involved, and may also compete with us.
We have not adopted a policy that expressly prohibits our directors, officers, stockholders or
affiliates from having a direct or indirect pecuniary interest in any investment to be acquired or
disposed of by us or in any transaction to which we are a party or have an interest. Nor do we have a
policy that expressly prohibits any such persons from engaging for their own account in business
activities of the types conducted by us. We may, subject to the terms of our Amended Term Loan
Facility and applicable law, enter into transactions in which such persons have an interest. In addition,
such parties may have an interest in certain transactions such as strategic partnerships or joint ventures
in which we may become involved, and may also compete with us.
In the course of their other business activities, certain of our officers and directors may become aware of
investment and acquisition opportunities that may be appropriate for presentation to us as well as the other
entities with which they are affiliated. Such officers and directors may have conflicts of interest in determining
to which entity a particular business opportunity should be presented.
Certain of our officers and directors may become aware of business opportunities which may be
appropriate for presentation to us as well as the other entities with which they are or may be affiliated.
Due to those officers’ and directors’ existing affiliations with other entities, they may have fiduciary
obligations to present potential business opportunities to those entities in addition to presenting them
to us, which could cause additional conflicts of interest. To the extent that such officers and directors
identify business combination opportunities that may be suitable for entities to which they have
pre-existing fiduciary obligations, or are presented with such opportunities in their capacities as
43
fiduciaries to such entities, they may be required to honor their pre-existing fiduciary obligations to
such entities. Accordingly, they may not present business combination opportunities to us that
otherwise may be attractive to such entities unless the other entities have declined to accept such
opportunities.
Future acquisitions and dispositions may not require a stockholder vote and may be material to us.
Any future acquisitions could be material in size and scope, and our stockholders and potential
investors may have virtually no substantive information about any new business upon which to base a
decision whether to invest in our Class A common stock. In any event, depending upon the size and
structure of any acquisitions, stockholders are generally expected to not have the opportunity to vote
on the transaction, and may not have access to any information about any new business until the
transaction is completed and we file a report with the Commission disclosing the nature of such
transaction and/or business. Similarly, we may effect material dispositions in the future. Even if a
stockholder vote is required for any of our future acquisitions, under our amended and restated
certificate of incorporation and our amended and restated bylaws, our stockholders are allowed to
approve such transactions by written consent, which may effectively result in only our controlling
stockholder having an opportunity to vote on such transactions.
Protection of electronically stored data is costly and if our data is compromised in spite of this protection, we
may incur additional costs, lost opportunities and damage to our reputation.
We maintain information in digital form necessary to conduct our Business, including confidential
and proprietary information regarding our Networks’ advertisers, customers, Distributors, employees
and viewers as well as personal information. Data maintained in digital form is subject to the risk of
intrusion, tampering and theft. We develop and maintain systems to prevent this from occurring, but
the development and maintenance of these systems is costly and requires ongoing monitoring and
updating as technologies change and efforts to overcome security measures become more sophisticated.
Moreover, despite our efforts, the possibility of intrusion, tampering and theft cannot be eliminated
entirely, and risks associated with each of these remain. In addition, we provide confidential,
proprietary and personal information to third parties when it is necessary to pursue business objectives.
While we obtain assurances that these third parties will protect this information and, where
appropriate, monitor the protections employed by these third parties, there is a risk the confidentiality
of data held by third parties may be compromised. If our data systems are compromised, our ability to
conduct our Business may be impaired, we may lose profitable opportunities or the value of those
opportunities may be diminished and, as described above, we may lose revenue as a result of
unlicensed use of our intellectual property. Further, a penetration of our network security or other
misappropriation or misuse of personal consumer or employee information could subject us to
financial, litigation and reputation risk, which could have a negative effect on our Business, financial
condition and results of operations.
Unrelated third parties may bring claims against us based on the nature and content of information posted on
websites maintained by our Networks.
Our Networks host, or may host in the future, internet sites that enable individuals to exchange
information, generate content, comment on content, and engage in various online activities. The law
relating to the liability of providers of these online services for activities of their users is currently
unsettled both within the United States and internationally. Claims may be brought against us for
defamation, negligence, copyright or trademark infringement, unlawful activity, tort, including personal
injury, fraud, or other theories based on the nature and content of information that may be posted
online or generated by our Networks’ internet site users, including WAPA.TV, CINELATINO.COM,
TVPASIONES.COM, CENTROAMERICATV.TV, and TELEVISIONDOMINICANA.TV. Defenses of
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such actions could be costly and involve significant time and attention of our Networks’ management,
our management and other resources.
The success of our Business is highly dependent on the existence and maintenance of intellectual property
rights in the entertainment products and services we create.
The value to us of our intellectual property rights is dependent on the scope and duration of our
rights as defined by applicable laws in the U.S. and abroad and the manner in which those laws are
construed. If those laws are drafted or interpreted in ways that limit the extent or duration of our
rights, or if existing laws are changed, our ability to generate revenue from our intellectual property
may decrease, or the cost of obtaining and maintaining rights may increase. There can be no assurance
that our efforts to enforce our rights and protect our products, services and intellectual property will be
successful in preventing content piracy or signal theft. Content piracy and signal theft present a threat
to our revenues.
The unauthorized use of our intellectual property rights may increase the cost of protecting these
rights or reduce our revenues. New technologies such as the convergence of computing,
communication, and entertainment devices, the falling prices of devices incorporating such technologies,
and increased broadband internet speed and penetration have made the unauthorized digital copying
and distribution of our programming content easier and faster and enforcement of intellectual property
rights more challenging. The unauthorized use of intellectual property in the entertainment industry
generally continues to be a significant challenge for intellectual property rights holders. Inadequate laws
or weak enforcement mechanisms to protect intellectual property in one country can adversely affect
the results of our operations worldwide, despite our efforts to protect our intellectual property rights.
These developments may require us to devote substantial resources to protecting our intellectual
property against unlicensed use and present the risk of increased losses of revenue as a result of
unlicensed distribution of our content.
With respect to intellectual property developed by us and rights acquired by us from others, we are
subject to the risk of challenges to our copyright, trademark and patent rights by third parties.
Successful challenges to our rights in intellectual property may result in increased costs for obtaining
rights or the loss of the opportunity to earn revenue from the intellectual property that is the subject of
challenged rights. We are not aware of any challenges to our intellectual property rights that we
currently foresee having a material effect on our operations.
If we are unable to protect our domain names, our reputation and brands could be adversely affected.
We currently hold various domain name registrations relating to our brands. The registration and
maintenance of domain names generally are regulated by governmental agencies and their designees.
Governing bodies may establish additional top-level domains, appoint additional domain name
registrars or modify the requirements for holding domain names. As a result, we may be unable to
register or maintain relevant domain names. We may be unable, without significant cost or at all, to
prevent third parties from registering domain names that are similar to, infringe upon or otherwise
decrease the value of, our and our subsidiaries trademarks and other proprietary rights. Failure to
protect our domain names could adversely affect our reputation and brands, and make it more difficult
for users to find our Business’s websites and services.
We may face intellectual property infringement claims that could be time-consuming, costly to defend and
result in loss of significant rights.
Other parties may assert intellectual property infringement claims against us, and our Networks’
products may infringe the intellectual property rights of third parties. From time to time, our Business
receives letters alleging infringement of intellectual property rights of others. Intellectual property
45
litigation can be expensive and time-consuming and could divert management’s attention from our
Business. If there is a successful claim of infringement against us, we may be required to pay
substantial damages to the party claiming infringement or enter into royalty or license agreements that
may not be available on acceptable or desirable terms, if at all. Our failure to license proprietary rights
on a timely basis would harm our Business.
Changes in governmental regulation, interpretation or legislative reform could increase our Business’s cost of
doing business and adversely affect our profitability.
Laws and regulations, including in the areas of advertising, consumer affairs, data protection,
finance, marketing, privacy, publishing and taxation requirements, are subject to change and differing
interpretations. Changes in the political climate or in existing laws or regulations, or their
interpretations, or the enactment of new laws or the issuance of new regulations or changes in
enforcement priorities or activity could adversely affect us by, among other things:
• increasing our administrative, compliance, and other costs;
• forcing us to undergo a corporate restructuring;
• limiting our ability to engage in inter-company transactions with our affiliates and subsidiaries;
• increasing our tax obligations, including unfavorable outcomes from audits performed by various
tax authorities;
• affecting our ability to continue to serve our Networks’ customers and to attract new customers;
• affecting cash management practices and repatriation efforts;
• forcing us to alter or restructure our Networks’ relationships with vendors and contractors;
• increasing compliance efforts or costs;
• limiting our use of or access to personal information;
• restricting our ability to market our products; and
• requiring us to implement additional or different programs and systems.
For example, the new presidential administration has called for substantial change to fiscal and tax
policies, which may include comprehensive tax reform. In addition, the new administration has
expressed apprehension toward existing trade agreements, such as the North American Free Trade
Agreement and the need to renegotiate its terms. We cannot predict the impact, if any, of these
changes to our business. However, it is possible that these changes could adversely affect our business.
It is likely that some policies adopted by the new administration will benefit us and others will
negatively affect us. Until we know what changes are enacted, we will not know whether in total we
benefit from, or are negatively affected by, the changes.
Compliance with regulations is costly and time-consuming, and we may encounter difficulties,
delays or significant expenses in connection with such compliance, and we may be exposed to significant
penalties, liabilities, reputational harm and loss of business in the event that we fail to comply. While it
is not possible to predict when or whether fundamental policy or interpretive changes would occur,
these or other changes could fundamentally change the dynamics of the industries in which we operate
or the costs associated with our operations. Changes in public policy or enforcement priorities could
materially affect our profitability, our ability to retain or grow business, or in the event of extreme
circumstances, our financial condition. There can be no assurance that legislative or regulatory change
or interpretive differences will not have a material adverse effect on our Business.
46
Changes in accounting standards can significantly impact reported operating results.
Generally accepted accounting principles, accompanying pronouncements and implementation
guidelines for many aspects of our Business, including those related to intangible assets and income
taxes, are complex and involve significant judgments. Changes in these rules or their interpretation
could significantly change our reported operating results.
Section 404 of the Sarbanes-Oxley Act of 2002 requires us to document and test our internal controls over
financial reporting and to report on our assessment as to the effectiveness of these controls. Any delays or
difficulty in satisfying these requirements or negative reports concerning our internal controls could have a
material adverse effect on our future results of operations and financial condition.
The Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain effective internal
control over financial reporting and disclosure controls and procedures. We must perform system and
process evaluation and testing of our internal control over financial reporting to allow our management
to report on the effectiveness of our internal control over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act of 2002. Our testing, or the subsequent testing by our
independent registered public accounting firm, may reveal deficiencies in internal control over financial
reporting that are deemed to be material weaknesses. Compliance with Section 404 will require that we
incur substantial accounting expense and expend significant management time on compliance-related
issues. The need to focus on compliance with Section 404 of Sarbanes-Oxley may strain management
and finance resources and otherwise present additional administrative and operational challenges as our
management seeks to comply with these requirements.
We may in the future discover areas of our internal controls that need improvement, particularly
with respect to our existing acquired businesses, businesses that we may acquire in the future and newly
formed businesses or entities. We cannot be certain that any remedial measures we take will ensure
that we implement and maintain adequate internal controls over our financial reporting processes and
reporting in the future.
In addition, we may acquire an entity that was not previously subject to U.S. public company
requirements or did not previously prepare financial statements in accordance with GAAP or is not in
compliance with the requirements of the Sarbanes-Oxley Act of 2002 or other public company
reporting obligations applicable to such entity. We may incur additional costs in order to ensure that
after such acquisition, we continue to comply with the requirements of the Sarbanes-Oxley Act of 2002
and our other public company requirements, which in turn could reduce our earnings or cause us to
fail to meet our reporting obligations. In addition, development of an adequate financial reporting
system and the internal controls of any such entity to achieve compliance with the Sarbanes-Oxley Act
of 2002 may increase the time and costs necessary to complete any such acquisition or cause us to fail
to meet our reporting obligations. To the extent any of these newly acquired entities or any existing
entities have deficiencies in its internal controls, it may impact our internal controls.
Any failure to implement required new or improved controls, or difficulties encountered in their
implementation, could harm our operating results or cause us to fail to meet our reporting obligations.
If we are not able to comply with the requirements of Section 404 in a timely manner, if we fail to
remedy any material weakness and maintain effective internal control over our financial reporting in
the future, or if our independent registered public accounting firm is unable to provide us with an
unqualified report regarding the effectiveness of our internal controls over financial reporting to the
extent required by Section 404 of the Sarbanes-Oxley Act of 2002, our financial statements may be
inaccurate, our ability to report our financial results on a timely and accurate basis may be adversely
affected, investors could lose confidence in the reliability of our financial statements, our access to the
capital markets may be restricted, the trading price of our Class A common stock and Warrants may
decline, and we may be subject to sanctions or investigations by regulatory authorities, including the
SEC or NASDAQ. In addition, failure to comply with our reporting obligations with the Commission
47
may cause an event of default to occur under our Amended Term Loan Facility, or similar instruments
governing any debt we incur in the future.
From time to time we may be subject to litigation for which we may be unable to accurately assess our level of
exposure and which, if adversely determined, may have a material adverse effect on our consolidated financial
condition or results of operations.
We and our subsidiaries are or may become parties to legal proceedings that are considered to be
either ordinary or routine litigation incidental to our or their current or prior businesses or not
material to our consolidated financial position or liquidity. There can be no assurance that we will
prevail in any litigation in which we or our subsidiaries may become involved, or that our or their
insurance coverage will be adequate to cover any potential losses. To the extent that we or our
subsidiaries sustain losses from any pending litigation which are not reserved or otherwise provided for
or insured against, our Business, results of operations, cash flows and/or financial condition could be
materially adversely affected.
Our Amended Term Loan Facility may limit our financial and operating flexibility.
Our Amended Term Loan Facility includes financial covenants restricting our subsidiaries ability to
incur additional indebtedness, pay dividends or make other payments, make loans and investments, sell
assets, incur certain liens, enter into transactions with affiliates, and consolidate, merge or sell assets.
These covenants limit our ability to fund future working capital and capital expenditures, engage in
future acquisitions or development activities, or otherwise realize the value of our assets and
opportunities fully because of the need to dedicate a portion of cash flow from operations to payments
on debt. In addition, such covenants limit our flexibility in planning for, or reacting to, changes in the
industries in which we operate.
Risks Related to Our Securities and Corporate Structure
If securities or industry analysts do not publish or cease publishing research or reports about us, our
Business, or our market, or if they change their recommendations regarding our Class A common stock
adversely, the price and trading volume of our Class A common stock and Warrants could decline.
If securities or industry analysts do not publish or cease publishing research or reports about us,
our Business, or our market, or if they change their recommendations regarding our Class A common
stock adversely, the price and trading volume of our Class A common stock and Warrants could
decline. The trading market for our Class A common stock and Warrants will be influenced by the
research and reports that industry or securities analysts may publish about our Business, our market, or
our competitors. As of December 31, 2016, only three industry analysts published research on our
Business. If any of the analysts who may cover our Business change their recommendation regarding
our stock adversely, or provide more favorable relative recommendations about our competitors, the
price of our Class A common stock and Warrants would likely decline. If any analyst who may cover
our Business were to cease coverage of Hemisphere or fail to regularly publish reports about us, we
could lose visibility in the financial markets, which in turn could cause our stock price or trading
volume to decline.
The stock price of our Class A common stock and Warrants may be volatile.
The stock price of our Class A common stock and Warrants may be volatile and subject to wide
fluctuations. In addition, the trading volume of our Class A common stock and Warrants may fluctuate
and cause significant price variations to occur. Some of the factors that could cause fluctuations in the
stock price or trading volume of our Class A common stock and Warrants include:
• market and economic conditions, including market conditions in the cable television
programming and broadcasting industries;
48
• actual or expected variations in quarterly operating results;
• future exercise of Warrants held by warrant holders;
• liquidity of our Class A common stock and our Warrants;
• differences between actual operating results and those expected by investors and analysts;
• changes in recommendations by securities analysts;
• operations and stock performance of our competitors;
• accounting charges, including charges relating to the impairment of goodwill;
• significant acquisitions or strategic alliances by us or by our competitors;
• sales of our Class A common stock, including sales by our directors and officers or significant
investors;
• recruitment or departure of key personnel;
• loss of key advertisers; and
• changes in reserves for professional liability claims.
We cannot assure you that the price of our Class A common stock will not fluctuate or decline
significantly in the future. In addition, the stock market in general can experience considerable price
and volume fluctuations that may be unrelated to our performance.
The market liquidity for our Class A common stock and Warrants is relatively low and may make it difficult
to purchase or sell our Class A common stock and Warrants.
The average daily trading volume in our Class A common stock and our Warrants during the year
ended December 31, 2016 was approximately 55,809 shares and 31,754, respectively. Although a more
active trading market may develop in the future, there can be no assurance as to the liquidity of any
markets that may develop for our Class A common stock and Warrants or the prices at which holders
may be able to sell our Class A common stock and Warrants and the limited market liquidity for our
securities could affect a holder’s ability to sell at a price satisfactory to that holder.
We are a ‘‘controlled company’’ within the meaning of NASDAQ rules and, as a result, we qualify for, and
choose to rely on, exemptions from certain corporate governance requirements.
Our controlling stockholder, Gato Investments LP, controls the majority of the voting power of all
of our outstanding capital stock. As a result of the concentration of the voting rights in our Company,
we are a ‘‘controlled company’’ within the meaning of the rules and corporate governance standards of
NASDAQ. Under the NASDAQ rules, a company of which more than 50% of the voting power is held
by an individual, group or another company is a ‘‘controlled company’’ and may elect not to comply
with certain NASDAQ corporate governance requirements, including:
• the requirement that a majority of our board of directors consists of independent directors;
• the requirement that we have a nominating/corporate governance committee that is composed
entirely of independent directors;
• the requirement that we have a compensation committee that is composed entirely of
independent directors; and
• the requirement for an annual performance evaluation of the nominating/corporate governance
and compensation committees.
We have elected not to comply with the above corporate governance requirements. Accordingly,
our stockholders are not afforded the same protections generally as stockholders of other
49
NASDAQ-listed companies for so long as we remain a ‘‘controlled company’’ and rely upon such
exemptions. The interests of our controlling stockholder may conflict with the interests of our other
stockholders, and the concentration of voting power in such stockholder will limit our other
stockholders’ ability to influence corporate matters.
Our controlling stockholder exercises significant influence over us and their interests in our Business may be
different from the interests of our stockholders; future sales of substantial amounts of our Class A common
stock may adversely affect our market price.
Our controlling stockholder, Gato Investments LP, controls the majority of the voting power of all
of our outstanding capital stock. The controlling stockholders’ Class B common stock vote on a 10 to 1
basis with our Class A common stock, which means that each share of our Class B common stock has
10 votes and each share of our Class A common stock has 1 vote. All shares of our capital stock vote
together as a single class. Accordingly, our controlling stockholder generally has the ability for the
foreseeable future to influence the outcome of any of our corporate actions which require stockholder
approval, including, but not limited to, the election of directors, significant corporate transactions, such
as a merger or other sale of the Company or the sale of all or substantially all of our assets. This
concentrated voting control will limit your ability to influence corporate matters and could adversely
affect the market price of our Class A common stock and Warrants.
Our controlling stockholder may delay or prevent a change in control in our Business. In addition,
the significant concentration of stock ownership may adversely affect the value of our Class A common
stock and Warrants due to a resulting lack of liquidity of our Class A common stock or a perception
among investors that conflicts of interest may exist or arise. If our controlling stockholder sells a
substantial amount of our Class A common stock (upon conversion of their Class B common stock,
which may be converted at any time in their sole discretion) or Warrants in the public market, or
investors perceive that these sales could occur, the market price of our Class A common stock and
Warrants could be adversely affected.
The interests of our controlling stockholder, which has investments in other companies, may from
time to time diverge from the interests of our other stockholders, particularly with regard to new
investment opportunities. Our controlling stockholder is not restricted from investing in other
businesses involving or related to programming, content, production and broadcasting. Our controlling
stockholder may also engage in other businesses that compete or may in the future compete with our
Business.
We have entered into a Registration Rights Agreement and joinders thereto with certain parties,
including our controlling stockholder. If requested properly under the terms of the Registration Rights
Agreement, certain of these stockholders have the right to require us to register the offer and sale of
all or some of their Class A common stock (including upon conversion of their Class B common stock
and Warrants) under the Securities Act in certain circumstances and also have the right to include
those shares in a registration initiated by us. If we are required to include the shares of capital stock
held by these stockholders pursuant to these registration rights in a registration initiated by us, sales
made by such stockholders may adversely affect the price of our Class A common stock and Warrants
and our ability to raise needed capital. In addition, if these stockholders exercise their demand
registration rights and cause a large number of shares to be sold in the public market or demand that
we include their shares for registration on a shelf registration statement, such sales or shelf registration
may have an adverse effect on the market price of our Class A common stock or Warrants.
Any other future sales of substantial amounts of our Class A common stock into the public
market, or perceptions in the market that such sales could occur, may adversely affect the prevailing
market price of our Class A common stock and Warrants and impair our ability to raise capital through
the sale of additional equity securities.
50
We have a staggered board of directors and other anti-takeover provisions, which may entrench management
and discourage unsolicited stockholder proposals that may be in the best interests of our stockholders.
Our amended and restated certificate of incorporation provides that our board of directors will be
divided into three classes, each of which will generally serve for a term of three years with only one
class of directors being elected in each year. As a result, at any annual meeting only a minority of the
board of directors will be considered for election. Since this ‘‘staggered board’’ would prevent our
stockholders from replacing a majority of our board of directors at any annual meeting, it may entrench
management and discourage unsolicited stockholder proposals that may be in the best interests of our
stockholders. Some of the provisions of our amended and restated certificate of incorporation,
amended and restated bylaws and Delaware law could, together or separately, discourage potential
acquisition proposals or delay or prevent a change in control. In particular, our board of directors is
authorized to issue up to 50,000,000 shares of preferred stock with rights and privileges that might be
senior to either class of our common stock and, without the consent of the holders of either class of
our common stock.
Warrants may be exercised in the future, which would increase the number of shares eligible for future resale
in the public market and result in dilution to our stockholders.
We issued Warrants to certain holders upon the consummation of the Transaction. To the extent
such Warrants are exercised, additional shares of our Class A common stock will be issued, which will
result in dilution to the holders of our common stock and increase the number of shares eligible for
resale in the public market. Sales of substantial numbers of such shares in the public market could
adversely affect the market price of our Class A common stock. For the year ended December 31,
2016, 70,000 Warrants had been exercised into 35,000 additional shares of our Class A common stock.
Pursuant to the terms of the agreements governing our Warrants, a warrantholder may exercise its Warrants
for only a whole number of shares of our Class A common stock and such Warrants, are subject to
redemption rights.
Pursuant to the terms of the agreements governing our Warrants, a warrantholder may exercise its
Warrants only for a whole number of shares of our Class A common stock. This means that only an
even number of warrants may be exercised at any given time by the warrantholder. For example, if a
warrantholder holds one Warrant to purchase one-half of a share of our Class A common stock, such
Warrant shall not be exercisable. If a warrantholder holds two Warrants, such Warrants will be
exercisable for one share of our Class A common stock. We will not pay cash in lieu of fractional
Warrants and will not cash-settle any Warrants. Additionally, our Warrants, other than certain Warrants
held by the holders of our Class B common stock and former affiliates of Azteca Acquisition
Corporation, are subject to redemption, in our sole discretion, when the price of our Class A common
stock trades at or above $18.00 per share for a specified trading period as set forth in the agreement
governing our Warrants.
Our dependence on subsidiaries for cash flow may negatively affect our Business.
We are a holding company with no business operations of our own. Our only significant asset is,
the outstanding capital stock and membership interests of our subsidiaries. We conduct, and expect to
continue conducting, all of our business operations through our subsidiaries. Accordingly, our ability to
pay our obligations is dependent upon dividends and other distributions from our subsidiaries to us.
Although our Amended Term Loan Facility permits certain restricted payments from our subsidiaries to
us to pay for our administrative expenses corporate overhead, franchise taxes, public company costs,
directors’ fees and certain insurance premiums and deductibles, it restricts our subsidiaries ability to
remit dividends to us in other instances. Additionally, dividends to us from WAPA are also subject to
certain local taxation. Consequently, our ability to pay dividends is limited by funds that our
51
subsidiaries are permitted to dividend to us, and in certain instances, will subject us to certain tax
liabilities.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
We lease our headquarters at 4000 Ponce de Leon Blvd., Coral Gables, FL 33146. In 2016, we
relocated our headquarters to a larger facility in Coral Gables. If necessary, we may, from time to time,
lease additional facilities for our activities. The current lease is for a term of 89 months and runs
through October 2023.
WAPA is headquartered in San Juan, Puerto Rico in an owned 66,500 square foot building located
in one of the most affluent areas in San Juan. The building houses our state-of-the-art technology,
television studios, and administrative offices. All of WAPA’s news and local programs are produced at
our production facility, which consists of four television studios, including the largest television studio in
the Caribbean, fully equipped control rooms, digital video, audio, editing, post editing, and graphic
production suites, and a scenery shop which produces all scenery and props for the local productions.
We also lease the land for our transmission towers in Cayey, Puerto Rico, Jayuya, Puerto Rico and
Maricao, Puerto Rico pursuant to long-term lease facilities. We believe WAPA’s current facilities are
adequate to meet our needs for the foreseeable future. If necessary, we may, from time to time,
downsize current facilities or lease additional facilities for our activities. We own our property in San
Juan, Puerto Rico.
The following table sets forth our principal places of business at December 31, 2016:
Location
Description
Area (Square Feet)
Coral Gables, FL . . . . . . .
San, Juan, Puerto Rico . . Administrative Offices, TV Production
Headquarters
8,543
66,500
Item 3. Legal Proceedings.
From time to time, we or our subsidiaries may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. However, litigation is subject to inherent
uncertainties and determination as to the amount of the accrual required for such contingencies is
highly subjective and requires judgments about future events. An adverse result in these or other
matters may arise from time to time that may harm our Business. Neither we nor any of our
subsidiaries are presently a party to any material litigation, nor to the knowledge of management is any
litigation threatened against us or our subsidiaries, which may materially affect us.
Item 4. Mine Safety Disclosures.
Not applicable.
52
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.
Our Class A common stock is listed and traded on NASDAQ under the symbol ‘‘HMTV.’’ There is
no publicly traded market for our Class B common stock. At March 14, 2017, there were 21,900,160
shares of Class A common stock outstanding, and the closing sale price of our ordinary shares was
$10.95. Also as of that date, we had approximately 25 and 4 ordinary shareholders of record of our
Class A common stock and Class B common stock, respectively. This number does not include the
stockholders for whom shares are held in a ‘‘nominee’’ or ‘‘street’’ name. We have not declared any
dividends and we have no present intention to pay dividends on our Class A common stock or Class B
common stock. Our Amended Term Loan Facility restricts our ability to declare dividends in certain
situations.
Price Range of our Class A Common Stock
The table below sets forth the intra-day high and low sales prices per share of our Class A
common stock for the periods indicated as reported on NASDAQ:
Fiscal Year ended December 31, 2016
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$14.81
$13.28
$13.40
$12.66
$12.00
$10.35
$11.12
$10.75
High
Low
Fiscal Year ended December 31, 2015
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$14.49
$13.25
$15.10
$15.19
$11.92
$11.69
$11.74
$12.86
High
Low
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information with respect to compensation plans under which our
equity securities are authorized for issuance as of December 31, 2016:
Number of securities to
be issued upon exercise
of outstanding options,
Warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
Warrants and rights
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column(a))
(b)
2,920,000
$11.64
2,836,461
—
—
$11.64
—
2,836,461
Plan category
Equity compensation
plans approved by
security holders . . . .
Equity compensation
plans not approved
by security holders . .
Total . . . . . . . . . . . . . .
2,920,000
53
On May 16, 2013, our board of directors approved the adoption of the Hemisphere Media
Group, Inc. Amended and Restated 2013 Equity Incentive Plan (the ‘‘Equity Incentive Plan’’) pursuant
to which incentive compensation and performance compensation awards may be provided to our
employees, directors, officers, consultants or advisors or our subsidiaries or their respective affiliates.
The Equity Incentive Plan authorizes the issuance of up to 7.2 million shares of our Class A common
stock. The number of securities remaining available for issuance in column (b) of the table above
reflects our issuance of certain shares of restricted Class A common stock in connection with grants
authorized by our board of directors. The description of the Equity Incentive Plan above is qualified in
its entirety by reference to the full text of the Equity Incentive Plan.
Performance Graph
The following graph compares the performance of our Class A common stock with the
performance of the S&P 500 and a peer group index of companies that we believe are closest to ours
(the ‘‘Peer Group Index’’) by measuring the changes in our Class A common stock prices from April 5,
2013, through December 31, 2016. Because no published index of comparable media companies
currently reports values on a dividends-reinvested basis, we have created a Peer Group Index for
purposes of this graph in accordance with the requirements of the Commission. The Peer Group Index
is made up of companies that engage in the broadcast and cable television programming as a significant
element of their business, although not all of the companies included in the Peer Group Index
participate in all of the lines of business in which we are engaged, and some of the companies included
in the Peer Group Index also engage in lines of business in which we do not participate. Additionally,
the market capitalizations of many of the companies included in the Peer Group Index are quite
different from ours. The common stock of the following companies has been included in the Peer
Group Index: AMC Networks Inc., Discovery Communications Inc., Entravision Communications
Corporation and Scripps Networks Interactive, Inc. The chart assumes $100 was invested on April 5,
2013 in each of our Class A common stock, S&P 500 and in a peer group weighted by market
capitalization at the beginning of the period.
54
Hemisphere Stock Performance vs. Peer Index
Hemisphere Media Group, Inc.
S&P 500
Peer Index
44.1%
9.5%
(13.2%)
170
160
150
140
130
120
110
100
90
80
70
Apr-13
Aug-13 Dec-13
Apr-14
Aug-14 Dec-14
Apr-15
Aug-15 Dec-15
Apr-16
Aug-16 Dec-16
8MAR201711334450
Source: Capital IQ
Note: Peer Index includes; AMC Networks, Discovery Communications, Entravision Communications
and Scripps Networks Interactive.
This performance graph shall not be deemed ‘‘filed’’ for purposes of Section 18 of the Exchange
Act, or otherwise subject to the liabilities of that section. It may only be incorporated by reference in
another filing under the Exchange Act or Securities Act of 1933, as amended, if such subsequent filing
specifically references this filing.
Recent Sales of Unregistered Securities
None.
Item 6. Selected Financial Data.
The following table sets forth our selected historical consolidated financial information for the
periods presented. The selected financial information for the fiscal years ended December 31, 2016,
2015, 2014 and 2013 have been derived from our audited consolidated financial statements and the
selected financial data for the year ended December 31, 2012 has been derived from WAPA Holdings’
audited consolidated financial statements.
The financial information indicated may not be indicative of future performance. This financial
information and other data should be read in conjunction with our audited and unaudited consolidated
55
financial statements, including the notes thereto, and ‘‘Management’s Discussion and Analysis of
Financial Condition and Results of Operations’’ included in this Annual Report on Form 10-K.
2016
2015
2014
2013
2012
Selected Statement of Operations Information:
(amounts in thousands expect per share
data)
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . .
$138,525
40,023
28,372
(10,372)
$129,790
34,867
22,781
(9,042)
$111,989
26,027
12,986
(2,429)
$ 86,005
7,722
(1,167)
(3,130)
$ 71,367
20,866
17,315
(6,285)
Net income (loss) . . . . . . . . . . . . . . . . . . . . . .
$ 18,000
$ 13,739
$ 10,557
$ (4,297) $ 11,030
Basic net income (loss) per share . . . . . . . . . .
Diluted net income (loss) per share . . . . . . . . .
Weighted average shares outstanding
$
$
0.43
0.43
$
$
0.32
0.31
$
$
0.25
0.25
$
$
(0.14) $ 11,030
(0.14) $ 11,030
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . .
41,666
42,274
42,840
43,802
42,321
42,622
31,143
31,143
1
1
Selected Balance Sheet Information:(a)
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangibles . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . .
Total member’s capital . . . . . . . . . . . . . . . . . .
$163,090
164,887
64,849
137,615
530,441
261,101
269,340
—
$179,532
164,887
78,185
126,292
548,896
270,255
278,641
—
$142,010
164,887
91,611
119,889
518,397
261,984
256,413
—
$176,622
130,794
34,610
108,094
450,120
209,332
240,788
—
$ 10,084
10,983
1,678
93,113
115,858
76,199
—
39,659
(a) Note that the 2015 balance sheet presentation was adjusted to conform with current year adoption
of ASU 2015-03 Simplifying the Presentation of Debt Issuance Costs, which requires that deferred
financing fees be presented in the balance sheet as a direct reduction of Long-term debt. For more
information, see Note 7, ‘‘Long-term debt’’ of Notes to our Consolidated Financial Statements
included elsewhere in this Annual Report.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis summarizes our financial condition and operating
performance and should be read in conjunction with our historical consolidated financial statements
and notes thereto included above. Unless the context indicates otherwise, the terms the ‘‘Company,’’
‘‘Hemisphere,’’ ‘‘we,’’ ‘‘our’’ or ‘‘us’’ are used to refer to Hemisphere Media Group, Inc. and its
consolidated subsidiaries.
Significant components of management’s discussion and analysis of results of operations and
financial condition include:
• Overview. The overview section provides a summary of our business, operational divisions and
business trends, outlook and strategy.
• Consolidated Results of Operations. The consolidated results of operations section provides an
analysis of our results on a consolidated basis for the year ended December 31, 2016 compared
to the year ended December 31, 2015, and for the year ended December 31, 2015 compared to
the year ended December 31, 2014.
56
• Liquidity and Capital Resources. The liquidity and capital resources section provides a discussion
of our cash flows for the year ended December 31, 2016 compared to the year ended
December 31, 2015, and for the year ended December 31, 2015 compared to the year ended
December 31, 2014.
OVERVIEW
We operate our business in one operating segment. We own and operate the following leading
Spanish-language Networks and content platform:
• Cinelatino: the leading Spanish-language cable movie network with 20 million subscribers across
the U.S., Latin America and Canada. Cinelatino is programmed with a lineup featuring the best
contemporary films and original television series from Mexico, Latin America, the U.S. and
Spain. Driven by the strength of its programming and distribution, Cinelatino is the #2-Nielsen
rated Spanish-language cable television network in the U.S. overall, based on coverage ratings;
• WAPA: the leading broadcast television network and television content producer in Puerto Rico.
WAPA has been the #1-rated broadcast television network in Puerto Rico for the last eight
years. WAPA is Puerto Rico’s news leader and the largest local producer of news and
entertainment programming, producing approximately 70 hours in the aggregate each week.
Through its multicast signal, WAPA distributes WAPA2 Deportes, a leading sports television
network in Puerto Rico, featuring MLB, NBA and professional sporting events from Puerto
Rico. Additionally, we operate WAPA.TV, the leading broadband news and entertainment
website in Puerto Rico featuring news and content produced by WAPA;
• WAPA America: a cable television network serving primarily Puerto Ricans and other Caribbean
Hispanics in the U.S. WAPA America’s programming includes approximately 70 hours in the
aggregate of news and entertainment programming produced by WAPA. WAPA America is
distributed in the U.S. to 5.3 million subscribers;
• Pasiones: a cable television network dedicated to showcasing the most popular telenovelas and
serialized dramas, distributed in the U.S. and Latin America. Pasiones features many of the best
telenovelas licensed from the most popular television networks. Pasiones has 17.8 million
subscribers across the U.S. and Latin America;
• Centroamerica TV: a cable television network targeting Central Americans, the third largest U.S.
Hispanic group and the fastest growing segment of the U.S. Hispanic population. Centroamerica
TV features the most popular news and entertainment from Central America, as well as soccer
programming from the top professional soccer leagues in the region. Centroamerica TV is
distributed in the U.S. to 4.1 million subscribers; and
• Television Dominicana: a cable television network targeting Dominicans living in the U.S.
Television Dominicana features the most popular news and entertainment from the Dominican
Republic and is distributed in the U.S. to 3.2 million subscribers.
Our two primary sources of revenues are advertising revenues and retransmission/subscriber fees.
All of our Networks derive revenues from advertising, including Cinelatino, which introduced
advertising in July 2015. Advertising revenues are generated from the sale of advertising time which are
typically pursuant to advertising orders with advertisers providing for an agreed upon advertising
commitment and price per spot. Our advertising revenues are tied to the success of our programming,
including the popularity of our programming as measured by Nielsen. Our advertising is variable in
nature and tends to reflect seasonal patterns of our advertisers’ demand, which is generally greatest
during the fourth quarter of each year, driven by the holiday buying season. In addition, Puerto Rico’s
political election cycle occurs every four years and we benefit from increased advertising sales in an
election year. For example, in 2016, we experienced higher advertising sales as a result of political
57
advertising spending during the 2016 governmental elections. The next election in Puerto Rico will be
in 2020.
All of our Networks receive fees paid by distributors, including cable, satellite and
telecommunications service providers. These revenues are generally based on a per subscriber fee
pursuant to multi-year contracts, commonly referred to as ‘‘affiliation agreements,’’ which generally
provide for annual rate increases. The specific retransmission/subscriber fees we earn vary from period
to period, distributor to distributor and also vary among our Networks, but are generally based upon
the number of each distributor’s subscribers who receive our Networks. The terms of certain non-U.S.
affiliation agreements provide that the fee revenues are paid as a fixed contractual monthly fee.
Changes in retransmission/subscriber fees are primarily derived from changes in contractual affiliation
rates charged for our Networks and changes in the number of subscribers. Accordingly, we continually
review the quality of our programming to ensure that it is maximizing our Networks’ viewership and
giving our Networks’ subscribers a premium, high-value experience. The continued growth in our
retransmission/subscriber fees will, to a certain extent, be dependent on the growth in subscribers of the
cable, satellite and telecommunication service providers distributing our Networks, and new system
launches. Our revenues may also increase over time through contractual rate increases stipulated in
most of our affiliation agreements.
We generate over 93% of our net revenues from the United States. For the years ended
December 31, 2016, 2015 and 2014, we generated $129.3 million, $120.6 million and $103.7 million,
respectively, from the United States. For the years ended December 31, 2016, 2015 and 2014, we
generated $9.2 million, $9.2 million and $8.3 million, respectively, from outside the United States.
WAPA has been the #1-rated broadcast television network in Puerto Rico for the last eight years
and management believes it is highly valued by its viewers and Distributors. WAPA is distributed by all
pay-TV distributors in Puerto Rico and has been successfully growing retransmission fees. WAPA’s
primetime household rating in 2016 was nearly four times higher than the most highly rated English-
language U.S. broadcast network in the U.S., CBS, and higher than the combined ratings of CBS, NBC,
ABC, FOX and the CW. As a result of its ratings success in the last eight years, management believes
WAPA is well positioned for future growth in retransmission fees, similar to the growth in
retransmission fees that the four major U.S. networks (ABC, CBS, NBC and Fox) have experienced in
the U.S.
WAPA America, Cinelatino, Pasiones, Centroamerica TV and Television Dominicana occupy a
valuable and unique position as they are among the small group of Hispanic cable networks to have
achieved broad distribution in the U.S. As a result, management believes our U.S. networks are
well-positioned to benefit from growth in both the growing national advertising spend targeted at the
highly sought-after U.S. Hispanic cable television audience, and significant growth in subscribers, as the
U.S. Hispanic population continues its long-term growth. Cinelatino and WAPA America are presently
rated by Nielsen.
Hispanics represent 18% of the total U.S. population and approximately 10% of the total U.S.
buying power, but the aggregate media spend targeted at U.S. Hispanics significantly under-indexes
both of these metrics. As a result, advertisers have been allocating a higher proportion of marketing
dollars to the Hispanic market, but U.S. Hispanic cable advertising still under-indexes relative to its
consumption. U.S. Hispanic cable network advertising revenue grew at a 14% CAGR from 2009 to
2016, more than doubling from $204 million to $520 million. Going forward, U.S. Hispanic cable
advertising is expected to continue to grow at a 11% CAGR from 2016 to 2019, outpacing forecasted
growth for U.S. cable advertising, U.S. Hispanic broadcast advertising and U.S. general market
broadcast advertising.
Management expects our U.S. networks to benefit from significant growth in subscribers, as the
U.S. Hispanic population continues its long-term growth. The U.S. Census Bureau estimated that
58
57 million Hispanics resided in the United States in 2015, representing an increase of approximately
21 million people between 2000 and 2015, and that number is projected to grow to 70 million by 2025.
Hispanic television households grew by 34% during the period from 2007 to 2017, from 11.6 million
households to 15.6 million households. Similarly, Hispanic pay-TV subscribers increased 39% since 2007
to 12.2 million subscribers in 2017. The continued long-term growth of Hispanic television households
and pay-TV subscribers creates a significant opportunity for all of our Networks.
Similarly, management expects Cinelatino and Pasiones to benefit from significant growth in Latin
America. Fueled by a sizeable and growing population, a strong macroeconomic backdrop, rising
disposable incomes and investments in network infrastructure resulting in improved service and
performance, pay-TV subscribers in Latin America (excluding Brazil) grew by 44% from 2012 to 2016,
and are projected to grow an additional 15 million from 53 million in 2016 to 69 million by 2021
representing projected growth of over 28%. Furthermore, Cinelatino and Pasiones are each presently
distributed to only 29% and 25%, respectively, of total pay-TV subscribers throughout Latin America.
Accordingly, growth through new system launches represents a significant growth opportunity.
Management believes Cinelatino and Pasiones have widespread appeal throughout Latin America, and
therefore will be able to expand distribution throughout the region.
MVS, one of our stockholders, provides operational, technical as well as distribution services to
Cinelatino pursuant to several agreements. An agreement, which had granted MVS the non-exclusive
right to distribute the service throughout Latin America was terminated by MVS effective February 29,
2016. We continued to operate under the terms of the terminated agreement through December 31,
2016.
An agreement between Cinelatino and Dish Mexico (an affiliate of MVS), pursuant to which Dish
Mexico distributes the network and Cinelatino receives revenue, was extended through August 1, 2017.
CONSOLIDATED RESULTS OF OPERATIONS
Comparison of Consolidated Operating Results for the Years Ended December 31, 2016 and
December 31, 2015 (amounts in thousands)
Years Ended
December 31,
2016
2015
$ Change
Favorable/
(Unfavorable)
% Change
Favorable/
(Unfavorable)
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$138,525
$129,790
$ 8,735
6.7%
Operating Expenses:
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposition of assets . . . . . . . . . . . . . . . . .
Total Operating Expenses . . . . . . . . . . . . . . . . .
Operating Income . . . . . . . . . . . . . . . . . . . . . . . .
41,293
38,333
16,608
2,262
6
98,502
40,023
41,189
36,037
17,218
446
33
94,923
34,867
(104)
(2,296)
610
(1,816)
27
(3,579)
5,156
Other Expenses:
Interest expense, net
. . . . . . . . . . . . . . . . . . . . . .
(11,651)
(12,086)
435
Income before Income Taxes . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . .
28,372
(10,372)
22,781
(9,042)
5,591
(1,330)
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 18,000
$ 13,739
$ 4,261
(0.3)%
(6.4)%
3.5%
NM
NM
(3.8)%
14.8%
3.6%
24.5%
(14.7)%
31.0%
NM = not meaningful
59
Net Revenues
Net revenues for the year ended December 31, 2016 were $138.5 million, an increase of 7%,
compared to net revenues of $129.8 million for the same period in 2015. Subscriber and retransmission
fees increased $7.1 million, or 11%, driven by annual rate increases across all of our channels, as well
as subscriber growth. Growth in advertising revenues of $1.6 million, or 3%, was driven by political
advertising revenue, as well as growth at Cinelatino, which benefitted from a full year of advertising
revenue, offset in part by a reduction in local advertising in Puerto Rico due to a decline in the
television advertising market. Excluding political advertising revenue, net revenues increased
$6.1 million, or 5%, for the year ended December 31, 2016.
Subscribers(a)
(amounts in thousands)
December 31,
2016
December 31,
2015
U.S. Cable Networks:
WAPA America(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cinelatino . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pasiones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Centroamerica TV . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Television Dominicana . . . . . . . . . . . . . . . . . . . . . . . . . .
5,300
4,588
4,620
4,063
3,249
5,158
4,443
4,374
3,967
2,991
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21,820
20,933
Latin America Cable Networks:
Cinelatino . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pasiones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15,430
13,235
28,665
11,891
10,198
22,089
(a) Amounts presented are based on most recent remittances received from our Distributors
as of the respective dates shown above.
(b) Excluding digital basic subscribers, subscribers to WAPA America on Hispanic
programming tiers increased by 5.0% from December 31, 2015 to December 31, 2016.
Operating Expenses
Cost of Revenues: Cost of revenues consists primarily of programming and production costs,
programming amortization and distribution costs. For the year ended December 31, 2016, cost of
revenues were $41.3 million, as compared with $41.2 million for the year ended December 31, 2015.
Cost of revenues were flat year-over-year, as higher programming costs driven by the introduction of
several new Turkish drama series, higher costs related to the launch of advertising on Cinelatino in July
2015, and higher news costs related to the coverage of the 2016 elections were offset by the timing of
certain programming, including Miss Universe and Miss Puerto Rico, which were staged in 2015, but
not in 2016.
Selling, General and Administrative: Selling, general and administrative expenses consist principally
of promotion, marketing and research, stock-based compensation, employee costs, occupancy costs and
other general administrative costs. For the year ended December 31, 2016, selling, general and
administrative expenses increased $2.3 million, or 6%, due primarily to higher personnel costs,
increased research and marketing costs, and one-time separation payments to former employees.
Partially offsetting the increases was lower stock-based compensation as compared to the prior year.
60
Depreciation and Amortization: Depreciation and amortization expense consists of depreciation of
fixed assets and amortization of intangibles. For the year ended December 31, 2016, depreciation and
amortization expense decreased $0.6 million, or 4.0%, primarily due to the expiration of the useful lives
of certain fixed assets, which were fully reflected in the prior year period. These fixed assets continue
to be used in the operations of the business.
Other Expenses: Other expenses include legal and financial advisory fees, and other fees incurred
in connection with acquisition and corporate finance activities, including debt and equity financings. For
the year ended December 31, 2016, other expenses increased $1.8 million, due to higher legal and
advisory fees incurred in connection with strategic activities.
Loss on Disposition of Assets: Loss on disposition of assets reflects losses on disposal of
equipment no longer used in our operations.
Other Expenses
Other expenses consist primarily of interest expense. For the year ended December 31, 2016, other
expenses decreased by $0.4 million, or 4%. The decrease was primarily due to the lower interest
expense as a result of the decrease in the average outstanding balance of our Term Loan Facility.
Income Tax Expense
Income tax expense increased $1.3 million due to an increase in income before taxes of
$5.6 million for the year ended December 31, 2016. For more information, see Note 6, ‘‘Income Taxes’’
of Notes to our Consolidated Financial Statements included elsewhere in this Annual Report.
Net Income
Net income increased $4.3 million for the year ended December 31, 2016.
61
CONSOLIDATED RESULTS OF OPERATIONS
Comparison of Consolidated Operating Results for the Years Ended December 31, 2015 and
December 31, 2014
Years Ended
December 31,
2015
2014
$ Change
Favorable/
(Unfavorable)
% Change
Favorable/
(Unfavorable)
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$129,790
$111,989
$17,801
15.9%
Operating Expenses:
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposition of assets . . . . . . . . . . . . . . . . .
Total Operating Expenses . . . . . . . . . . . . . . . . .
Operating Income . . . . . . . . . . . . . . . . . . . . . . . .
41,189
36,037
17,218
446
33
94,923
34,867
36,450
31,608
16,552
1,282
70
85,962
26,027
Other Expenses:
Interest expense, net
. . . . . . . . . . . . . . . . . . . . . .
Loss on extinguishment of debt . . . . . . . . . . . . . . .
(12,086)
—
(11,925)
(1,116)
Income before income taxes . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . .
22,781
(9,042)
12,986
(2,429)
(12,086)
(13,041)
(4,739)
(4,429)
(666)
836
37
(8,961)
8,840
(161)
1,116
955
9,795
(6,613)
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 13,739
$ 10,557
$ 3,182
(13.0)%
(14.0)%
(4.0)%
65.2%
52.9%
(10.4)%
34.0%
(1.4)%
100.0%
7.3%
75.4%
NM
30.1%
Net Revenues
Net revenues for the year ended December 31, 2015 were $129.8 million, an increase of 16%,
compared to net revenues of $112.0 million for the same period in 2014. This increase was primarily
driven by growth in advertising revenues and higher subscriber and retransmission fees. The growth in
revenue was also a result of the inclusion of the operating results of the Acquired Cable Networks for
a full year, which were acquired on April 1, 2014.
Operating Expenses
Cost of Revenues: Cost of revenues consists primarily of programming and production costs,
programming amortization and distribution costs. For the year ended December 31, 2015, cost of
revenues increased $4.7 million, or 13%. This increase was due to the inclusion of the Acquired Cable
Networks, which were not included in the prior year’s first quarter, and increased investment in
programming, consistent with our previously stated strategy.
Selling, General and Administrative: Selling, general and administrative expenses consist principally
of promotion, marketing and research, stock-based compensation, employee costs, occupancy costs and
other general administrative costs. For the year ended December 31, 2015, selling, general and
administrative expenses increased $4.4 million, or 14%, due primarily to the inclusion of the operating
results of the Acquired Cable Networks, which were not included in the prior year’s first quarter. This
increase was also driven by higher sales and marketing expenses as we launched advertising on
Cinelatino, as well as higher salaries, as we expand our infrastructure to support the growth of our
business.
62
Depreciation and Amortization: Depreciation and amortization expense consists of depreciation of
fixed assets and amortization of intangibles. For the year ended December 31, 2015, depreciation and
amortization expense increased $0.7 million, or 4.0%, primarily due to an additional quarter of
amortization of intangible assets related to the Acquired Cable Networks, which was not included in
the prior year’s first quarter, offset in part by the decline in amortization of intangible assets in the
current year due to the expiration of the useful lives of certain intangibles.
Other Expenses: Other expenses include legal and financial advisory fees, and other fees incurred
in connection with corporate finance activities, including debt and equity financings, and acquisition
activities. For the year ended December 31, 2015, other expenses decreased $0.8 million, or 65%, due
to higher costs incurred in connection with the Cable Networks Acquisition and refinancing of our
Term Loan Facility in the prior year as compared to the fees incurred in connection with the secondary
equity offering in the current year.
Loss on Disposition of Assets: Loss on disposition of assets reflects losses on disposal of
equipment no longer used in our operations.
Other Expenses
Other expenses consist primarily of interest expense. For the year ended December 31, 2015, other
expenses decreased by $1.0 million, or 7%. The decrease was primarily due to the loss on
extinguishment of debt incurred in the prior year in connection with the refinancing of our Term Loan
Facility, offset in part by higher interest expense due to an increase in the average balance of our Term
Loan Facility.
Income Tax Expense
Income tax expense increased $6.6 million due to an increase in income before taxes of
$9.8 million for the year ended December 31, 2015. The increase in income tax expense was also due
to the reversal in the prior year’s second quarter of a $2.5 million valuation allowance related to
foreign tax credits. For more information, see Note 6, ‘‘Income Taxes’’ of Notes to our Consolidated
Financial Statements included elsewhere in this Annual Report.
Net Income
Net income increased $3.2 million for the year ended December 31, 2015.
LIQUIDITY AND CAPITAL RESOURCES
Sources and Uses of Cash
Our principal sources of cash are cash on hand, and cash flows from operating activities. As of
December 31, 2016, the Company had $163.1 million of cash on hand. Our primary uses of cash
include the production and acquisition of programming, operational costs, personnel costs, equipment
purchases, interest payments on our outstanding debt and income tax payments and may be used to
fund acquisitions.
Management believes cash on hand and cash flow from operations will be sufficient to meet its
current contractual financial obligations and to fund anticipated working capital and capital expenditure
requirements for existing operations. Our current financial obligations include maturities of debt,
operating lease obligations and other commitments from the ordinary course of business that require
cash payments to vendors and suppliers.
63
Cash Flows
Years Ended December 31,
2016
2015
2014
Amounts in thousands
Cash provided by (used in):
Operating activities . . . . . . . . . . . . . . . . . . . . . .
Investing activities . . . . . . . . . . . . . . . . . . . . . . .
Financing activities . . . . . . . . . . . . . . . . . . . . . . .
$ 27,445
(3,493)
(40,394)
$42,192
(5,355)
685
$ 23,274
(104,852)
46,966
Net (decrease) increase in cash . . . . . . . . . . . . . .
$(16,442) $37,522
$ (34,612)
Comparison for the Year Ended December 31, 2016 and December 31, 2015
Operating Activities
Cash provided by operating activities is primarily driven by our net income, adjusted for non-cash
items and changes in working capital. Non-cash items consist primarily of depreciation of property and
equipment, amortization of intangibles, programming amortization, amortization of deferred financing
costs, stock-based compensation expense, deferred taxes and provision for bad debts.
Net cash provided by operating activities for the year ended December 31, 2016 was $27.4 million,
a decrease of $14.8 million, as compared to $42.2 million in the same period in 2015, due primarily to
a $14.8 million decrease in net working capital and a $4.2 million decrease in non-cash items, which
offset a $4.3 million increase in net income. Working capital decreased primarily as a result of
increased prepaid taxes and other current assets of $6.5 million, an increase in programming rights of
$2.5 million, a decrease in accrued expenses of $4.8 million, a decrease in programming rights payable
of $1.8 million, a decrease in taxes payable of $0.8 million, and a decrease in accounts receivable of
$1.2 million. Non-cash items decreased primarily as a result of a $2.6 million decrease in deferred
taxes, a $0.9 million decrease in stock-based compensation, a $0.6 million decrease in depreciation and
amortization and a $0.5 million decrease in the provision for bad debts, which was partially offset by a
$0.5 million increase in program amortization.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2016 was $3.5 million, as
compared to net use of cash of $5.4 million in the same period in 2015. The decrease is primarily due
to lower capital expenditures in 2016.
Financing Activities
For the year ended December 31, 2016, net cash used in financing activities was $40.4 million, as
compared to net cash provided of $0.7 million in the prior year. This decrease is primarily due to the
repurchase of Class A common stock of $30.7 million and higher principal debt payments of
$6.0 million in 2016, and proceeds raised in 2015 related to the issuance of stock of $5.4 million. For
more information, see Note 7, ‘‘Long-Term Debt’’ of Notes to the Consolidated Financial Statements,
included in this Annual Report on Form 10-K.
Comparison for the Year Ended December 31, 2015 and December 31, 2014
Operating Activities
Cash provided by operating activities is primarily driven by our net income, adjusted for non-cash
items and changes in working capital. Non-cash items consist primarily of depreciation of property and
64
equipment, amortization of intangibles, programming amortization, amortization of deferred financing
costs, stock-based compensation expense, deferred taxes and provision for bad debts.
Net cash provided by operating activities for the year ended December 31, 2015 was $42.2 million
as compared to $23.3 million in the same period in 2014, due primarily to a $3.2 million increase in net
income, a $0.5 million increase in non-cash items and a $15.3 million increase in net working capital.
Non-cash items increased primarily as a result of a $1.3 million increase in programming amortization,
a $0.7 million increase in depreciation and amortization expense, and a $0.5 million increase in the
provision for bad debt, offset in part by a $1.1 million decrease in loss on extinguishment of debt and a
$0.3 million decline in stock-based compensation.
Investing Activities
Net cash used in investing activities for the year ended December 31, 2015 was $5.4 million, as
compared to net use of cash of $104.9 million in the same period in 2014. The decline in cash used by
investing activities is primarily due to the Cable Networks Acquisition in 2014, which was funded with
$101.9 million from cash on our balance sheet, offset in part by an increase in capital expenditures of
$2.4 million.
Financing Activities
For the year ended December 31, 2015, cash provided by financing activities was $0.7 million, as
compared to $47.0 million in the same period in 2014. This decrease is primarily due to the
$47.9 million of net proceeds from the refinancing of our Term Loan Facility on July 31, 2014, principal
debt payments made during 2015 of $2.3 million and repurchases of warrants in 2015 of $1.8 million,
offset in part by net proceeds from the secondary equity offering in May 2015 of $5.4 million and net
proceeds from the exercise of warrants and stock options of $0.2 million. For more information, see
Note 7, ‘‘Long-Term Debt’’ of Notes to the Consolidated Financial Statements, included in this Annual
Report on Form 10-K.
Discussion of Indebtedness
On July 31, 2014, certain of our subsidiaries (the ‘‘Borrowers’’) amended the Term Loan Facility
(the ‘‘Existing Term Loan Facility’’), which provides for an aggregate principal amount of borrowings of
$225.0 million and matures on July 30, 2020. Pricing on the Existing Term Loan Facility was set at
LIBOR plus 400 basis points subject to a LIBOR floor of 1.00% resulting in an effective interest rate
of 5.00%, and 0.5% of original issue discount (‘‘OID’’). The Existing Term Loan Facility also provides
an uncommitted accordion option (the ‘‘Incremental Facility’’) allowing for additional borrowings under
the Existing Term Loan Facility up to an aggregate principal amount equal to (i) $40.0 million plus
(ii) an additional amount of up to 4.0x first lien net leverage. The obligations under the Existing Term
Loan Facility are guaranteed by HMTV, LLC, our direct wholly-owned subsidiary, and all of our
existing and future subsidiaries (subject to certain exceptions in the case of immaterial subsidiaries).
Additionally, the Existing Term Loan Facility provides for an uncommitted incremental revolving loan
option in an aggregate principal amount of up to $20.0 million, which is secured on a pari passu basis
by the collateral securing the Existing Term Loan Facility. The Existing Term Loan Facility is secured
by a first-priority perfected security interest in substantially all of our assets.
The proceeds of our borrowings under the Existing Term Loan Facility, were used to pay fees and
expenses associated with the Cable Networks Acquisition, and for general corporate purposes including
potential future acquisitions. The OID of $1.7 million, net of accumulated amortization of $0.8 million
at December 31, 2016, was recorded as a reduction to the principal amount of the Existing Term Loan
Facility outstanding and will be amortized as a component of interest expense over the term of the
Existing Term Loan Facility. We recorded $2.3 million of deferred financing costs associated with the
65
Existing Term Loan Facility, as amended, net of accumulated amortization of $1.1 million at
December 31, 2016, which was recorded as a reduction to the principal amount of the Existing Term
Loan Facility outstanding and will be amortized utilizing the effective interest rate method over the
remaining term of the Existing Term Loan Facility. In July 2014, we recorded a $1.1 million loss on
early extinguishment of debt; $0.7 million related to deferred costs and $0.4 million related to OID.
The Existing Term Loan Facility principal payments are payable on quarterly due dates
commencing September 30, 2014, with a final installment on July 30, 2020.
In addition, pursuant to the terms of the Existing Term Loan Facility, within 90 days after the end
of each fiscal year (commencing with the fiscal year ending December 31, 2015), the Borrowers are
required to make a prepayment of the loan principal in an amount equal to 50% of the excess cash
flow of the most recently completed fiscal year. Excess cash flow is generally defined as net income
plus depreciation and amortization expense, less mandatory prepayments of the term loan, interest
charges, income taxes and capital expenditures, and adjusted for the change in working capital. The
percentage of the excess cash flow used to determine the amount of the prepayment of the loan
declines from 50% to 25% and again to 0% at lower leverage ratios.
In March of 2016, the Company made an excess cash flow payment of $8.3 million. As permitted
under the Existing Term Loan Facility, the excess cash flow payment was allocated in direct order of
maturity. Accordingly, we did not make the scheduled quarterly loan amortization payments in 2016.
On February 14, 2017 (the ‘‘Closing Date), the Borrowers amended the Existing Term Loan
Facility (as amended, the ‘‘Amended Term Loan Facility’’) (see Note 12 Subsequent Events).
The Amended Term Loan Facility provides for term loans in the aggregate principal amount of
$213.3 million, which will mature on February 14, 2024 (the Existing Term Loan Facility was due to
mature on July 30, 2020). The Amended Term Loan Facility, issued with 0.5% of original issue
discount, will bear interest at the Borrowers’ option of either (i) LIBOR plus a margin of 3.50%
(decreased from a margin of 4.00% under the Existing Term Loan Facility) or (ii) or an Alternate Base
Rate (‘‘ABR’’) plus a margin of 2.50% (decreased from a margin of 3.00% under the Existing Term
Loan Facility). There is no LIBOR floor (a decrease from a LIBOR floor of 1.00% under the Existing
Term Loan Facility).
The Amended Term Loan Facility will require the Borrowers to make amortization payments (in
quarterly installments) equal to 1.00% per annum with respect to the Existing Term Loan Facility with
any remaining amount due at final maturity. The Amended Term Loan Facility principal payments will
commence on March 31, 2017 with a final installment on February 14, 2024. Voluntary prepayments
will be permitted, in whole or in part, subject to certain minimum prepayment requirements; provided
that any prepayments made prior to the date that is six months from the Closing Date of the Amended
Term Loan Facility, for the purpose of repricing or effectively repricing the Amended Term Loan
Facility, will be required to include a 1.00% prepayment premium.
The Amended Term Loan Facility, among other terms, provides for an uncommitted incremental
loan option (the ‘‘Incremental Facility’’) allowing for increases for borrowings under the Amended
Term Loan Facility and borrowing of new tranches of term loans, up to an aggregate principal amount
equal to (i) $65.0 million (increased from $40.0 million from the Existing Credit Agreement) plus
(ii) an additional amount (the ‘‘Incremental Facility Increase’’) provided, if after giving effect to such
Incremental Facility Increase (as well as any other additional term loans), on a pro forma basis, the
First Lien Net Leverage Ratio (as defined in the Amended Credit Agreement) for the most recent four
consecutive fiscal quarters does not exceed 4.00:1.00 and the Total Net Leverage Ratio (as defined in
the Amended Credit Agreement) for the most recent four consecutive fiscal quarters does not exceed
6.00:1.00. The First Lien Net Leverage Ratio and the Total Net Leverage Ratio each caps the cash
netted against debt up to a maximum amount of $60.0 million (increased from $45.0 million under the
66
Existing Credit Agreement). Additionally, the Amended Term Loan Facility also provides for an
uncommitted incremental revolving loan option (the ‘‘Incremental Revolving Facility’’) allowing for an
aggregate principal amount of up to $30.0 million, which shall be secured on a pari passu basis by the
collateral securing the Amended Term Loan Facility.
The foregoing description is not complete and is qualified in its entirety by reference to the full
text of the Credit Agreement and Guaranty Agreement, each filed as exhibits to this Annual Report on
Form 10-K.
Contractual Obligations
Our contractual obligations as of December 31, 2016 are as follows (amounts in thousands):
Total
Less than
1 Year
1 - 3 Years
3 - 5 Years
Long-term debt obligations, including current
portion(1)(a) . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease obligations . . . . . . . . . . . . . . . . .
Interest(2)(a) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other commitments(3) . . . . . . . . . . . . . . . . . . . .
$213,347
2,739
38,192
9,924
$ — $
481
10,667
5,427
722
902
21,335
3,866
$212,625
701
6,190
631
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$264,202
$16,575
$26,825
$220,147
After
5 Years
$ —
655
—
—
$655
(1) Excludes interest, original issue discount related to debt and any future excess cash payments.
(2) While variable interest debt, forecasted interest obligation calculated using the current rate of
interest at December 31, 2016.
(3) Includes programming commitments which are not yet available and are not included on the
balance sheet.
(a) As a result of the 2017 Amended Term Loan Facility, long-term debt obligations and interest
amounts will change due to a lower interest rate and later maturity date, with quarterly
amortization payments commencing March 31, 2017.
Additionally, TNGIPP is in critical status under the PPA. Pursuant the most recent information
provided to us by the TNGIPP’s actuary, our proportionate share of the projected benefit obligation
unfunded vested benefits of the Plan, exceeded plan assets by $3.7 million as the Plan is unfunded.
Estimates of our future contribution obligation are primarily dependent on future changes in the Plan’s
Rehabilitation Plan (which, in turn, are dependent on interest rates future investment returns, and
future regulatory law changes) and future collective bargaining agreements covering the Plan
participants.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet financing arrangements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our consolidated financial statements are prepared in accordance with GAAP, which requires
management to make estimates, judgments and assumptions that affect the amounts reported in the
consolidated financial statements included in the Annual Report on Form 10-K and accompanying
notes. Management considers an accounting policy to be critical if it is important to our financial
condition and results of operations, and if it requires significant judgment and estimates on the part of
management in its application. The development and selection of these critical accounting policies have
67
been determined by management and the related disclosures have been reviewed with the Audit
Committee of our Board of Directors. We consider policies relating to the following matters to be
critical accounting policies:
• Revenue recognition
• Valuation of goodwill and intangible assets
• Amortization and impairment of programming rights
• Income taxes
• Equity-based compensation
For an in-depth discussion of each of our significant accounting policies, including our critical
accounting policies and further information regarding the estimates and assumptions involved in their
application, see Note 1 to the accompanying consolidated financial statements included in Item 15,
‘‘Exhibits, Financial Statements and Schedules’’ in this Annual Report on Form 10-K.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk
We finance our capital needs through our Amended Term Loan Facility at our indirect wholly-
owned subsidiary, Hemisphere Media Holdings, LLC.
The variable-rate of interest on the Amended Term Loan Facility exposes us to market risk for
changes in interest rates. Loans thereunder bear interest at rates that vary with changes in prevailing
market rates. With respect to the Amended Term Loan Facility, we do not speculate on the future
direction of interest rates. As of December 31, 2016, our exposure to changing market rates with
respect to the Amended Term Loan Facility was as follows:
Dollars in millions
December 31,
2016
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable rate debt
Interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$213.3
5.00%
As of December 31, 2016, total outstanding balance on the Amended Term Loan Facility was
approximately $213.3 million. In the event of an increase in the interest rate of 100 basis points,
assuming a principal of $213.3 million, we would incur an increase in interest expense of approximately
$2.1 million per year. Such potential increases or decreases are based on certain simplifying
assumptions, including a constant level of debt, no interest rate swap or hedge in place, and an
immediate, across-the-board increase or decrease in the level of interest rates with no other subsequent
changes for one year.
Foreign Currency Exchange Risk
Although we currently conduct business in various countries outside the United States, we are not
subject to any material currency risk because our cash flows are collected primarily in U.S. Dollars.
Reported earnings and assets may be reduced in periods in which the U.S. dollar increases in value
relative to those currencies.
Our objective in managing exposure to foreign currency fluctuations is to reduce volatility of
earnings and cash flow. Accordingly, we may enter into foreign currency derivative instruments that
change in value as foreign exchange rates change, such as foreign currency forward contracts or foreign
currency options. Any gains and losses on the fair value of derivative contracts would be largely offset
by gains and losses on the underlying assets being hedged. We held no foreign currency derivative
financial instruments at December 31, 2016.
68
Item 8. Financial Statements and Supplementary Data.
The response to this item is provided in this Annual Report on Form 10-K under Item 15 Exhibits,
Financial Statements and Schedules and is incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer
and Chief Financial Officer, evaluated our disclosure controls and procedures, as of December 31,
2016. Our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31,
2016, our disclosure controls and procedures were effective to ensure that all information required to
be disclosed is recorded, processed, summarized and reported within the time periods specified, and
that information required to be filed in the reports that we file or submit under the Exchange Act is
accumulated and communicated to our management, including our principal executive and principal
financial officers, to allow timely decisions regarding required disclosure.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not
expect that our disclosure controls and procedures will prevent all errors and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design of a control system
must reflect the fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if
any, have been detected. These inherent limitations include the realities that judgments in decision-
making can be faulty and that breakdowns can occur because of simple error and mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by collusion of two or more
people or by management override of controls.
The design of any system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, a control may become inadequate because
of changes in conditions or because the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and may not be detected.
Changes in Internal Controls
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the fiscal year ended December 31, 2016 that has
materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
Management’s Annual Report on Internal Control Over Financial Reporting
Management’s report on internal control over financial reporting is set forth in our Consolidated
Financial Statements included on page F-2 under the caption ‘‘Management’s Report on Internal
Control over Financial Reporting,’’ which is incorporated herein by reference.
69
Attestation Report of the Independent Registered Public Accounting Firm
The effectiveness of our internal control over financial reporting, has been audited by RSM
US LLP, an independent registered public accounting firm, as stated in their report, which is included
in our Consolidated Financial Statements on page F-3 under the caption ‘‘Report of Independent
Registered Public Accounting Firm,’’ which is incorporated herein by reference.
Item 9B. Other Information.
None.
70
Item 10. Directors, Executive Officers and Corporate Governance.
Item 11. Executive Compensation.
PART III
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Item 14. Principal Accounting Fees and Services.
The information required by Items 10, 11, 12, 13 and 14 will be furnished (and are hereby
incorporated by reference) by an amendment hereto or pursuant to a definitive proxy statement
pursuant to Regulation 14A that will contain such information. Notwithstanding the foregoing,
information appearing in the section ‘‘Audit Committee Report’’ shall not be deemed to be
incorporated by reference in this report.
71
Item 15. Exhibits, Financial Statements and Schedules.
(a) List of Documents Filed as part of this Form 10-K
PART IV
1) Financial Statements
See Index to Consolidated Financial Statements on Page F-1 following this Part IV.
2) Financial Statement Schedules
No schedules are required because either the required information is not present or is not present
in amounts sufficient to require submission of the schedule, or because the information required is
included in the consolidated financial statements or the notes thereto.
(b) List of Exhibits. The following is a list of exhibits filed, furnished or incorporated by reference as
a part of this Annual Report on Form 10-K.
Exhibit No.
2.1
2.2
3.1
3.2
4.1
4.2
4.3
Description of Exhibits
Merger Agreement, dated as of January 22, 2013, by and among Azteca Acquisition
Corporation, the Company, InterMedia Espa˜nol Holdings, LLC, Cine Latino, Inc.,
Hemisphere Merger Sub I, LLC, Hemisphere Merger Sub II, Inc. and Hemisphere
Merger Sub III, Inc. (incorporated herein by reference to Exhibit 2.1 to the Company’s
Registration Statement on Form S-4 filed with the Commission on January 25, 2013 (File
No. 333-186210)).
Asset Purchase Agreement, dated as of January 22, 2014, by and among Hemisphere
Media Holdings, LLC, Media World, LLC and the other parties named therein.
(incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on
Form 8-K filed with the Commission on January 23, 2014 (File No. 001-35886)).
Amended and Restated Certificate of Incorporation of Hemisphere Media Group, Inc.
(incorporated herein by reference to Exhibit 3.3 to Amendment No. 2 to the Company’s
Registration Statement on Form S-4 filed with the Commission on March 11, 2013 (File
No. 333-186210)).
Amended and Restated Bylaws of Hemisphere Media Group, Inc. (incorporated by
reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the
Commission on September 7, 2016 (File No. 001-35886)).
Specimen Hemisphere Class A common stock Certificate (incorporated herein by
reference to Exhibit 4.1 to Amendment No. 2 to the Company’s Registration Statement
on Form S-4 filed with the Commission on March 11, 2013 (File No. 333-186210)).
Specimen Hemisphere Class B common stock Certificate (incorporated herein by
reference to Exhibit 4.2 to Amendment No. 2 to the Company’s Registration Statement
on Form S-4 filed with the Commission on March 11, 2013 (File No. 333-186210)).
Specimen Warrant Certificate (incorporated herein by reference to Exhibit 3.3 to
Amendment No. 2 to the Company’s Registration Statement on Form S-4 filed with the
Commission on March 11, 2013 (File No. 333-186210)).
72
Exhibit No.
4.4
4.5
4.6
4.7
4.8
4.9
4.10
10.1
10.2
Description of Exhibits
Equity Restructuring and Warrant Purchase Agreement, dated as of January 22, 2013, by
and among Azteca Acquisition Corporation, the Company, Azteca Acquisition
Holdings, LLC, Brener International Group, LLC, InterMedia Partners VII, L.P.,
InterMedia Cine Latino, LLC, Cinema Aeropuerto, S.A. de C.V. and the other parties
identified therein (incorporated herein by reference to Exhibit 4.4 to the Company’s
Registration Statement on Form S-4 filed with the Commission on January 25, 2013 (File
No. 333-186210)).
Lock-Up Agreement, dated as of January 22, 2013, by and among InterMedia Espa˜nol
Holdings, LLC, Cine Latino, Inc. and the parties identified as ‘‘IM Investor’’, ‘‘Cine
Investors’’ and ‘‘Azteca Investors’’ therein (incorporated herein by reference to
Exhibit 4.5 to Amendment No. 2 to the Company’s Registration Statement on Form S-4
filed with the Commission on March 11, 2013 (File No. 333-186210)).
Joinder to Lock-Up Agreement, dated as of October 21, 2016, by and among Gato
Investments LP and the Company (incorporated by reference to Exhibit 99.3 to the
Company’s Current Report on Form 8-K filed with the Commission on October 24, 2016
(File No. 001-35886)).
Joinder to Lock-Up Agreement, dated as of October 21, 2016, by and among Peter M.
Kern, an individual, and the Company (incorporated by reference to Exhibit 99.4 to the
Company’s Current Report on Form 8-K filed with the Commission on October 24, 2016
(File No. 001-35886)).
Warrant Agreement, dated June 29, 2011, by and between Azteca Acquisition
Corporation and Continental Stock Transfer & Trust Company (incorporated herein by
reference to Exhibit 4.1 to Azteca Acquisition Corporations’ Current Report on
Form 8-K filed with the Commission on July 6, 2011 (File No. 000-54443).
Assignment, Assumption and Amendment of Warrant Agreement, dated as of April 4,
2013, by and among Azteca Acquisition Corporation, the Company and Continental
Stock Transfer & Trust Company (incorporated herein by reference to Exhibit 4.6 to the
Company’s Registration Statement on Form 8-A filed with the Commission on April 4,
2013 (File No. 000-54925)).
Hemisphere Media Group, Inc. Amended and Restated 2013 Equity Incentive Plan
(incorporated herein by reference to Appendix A to the Company’s Definitive Proxy
Statement for its 2016 Annual Meeting of Stockholders filed with the Commission on
April 6, 2016 (File No. 001-35886)).
Form of Indemnification Agreement (incorporated herein by reference to Exhibit 10.1 to
Amendment No. 3 to the Company’s Registration Statement on Form S-4 filed with the
Commission on March 15, 2013 (File No. 333-186210)).
Registration Rights Agreement by and among the Company and the parties identified
therein, dated January 22, 2013 (incorporated herein by reference to Exhibit 10.2 to
Amendment No. 2 to the Company’s Registration Statement on Form S-4 filed with the
Commission on March 11, 2013 (File No. 333-186210)).
73
Exhibit No.
10.4
10.5
10.6
10.7
10.8
10.9
Description of Exhibits
Credit Agreement, dated as of July 30, 2013, by and among Hemisphere Media
Holdings, LLC, a Delaware limited liability company, InterMedia Espa˜nol, Inc., a
Delaware corporation, the lenders party thereto from time to time, Deutsche Bank
Securities Inc. as joint lead arranger and lead bookrunner, GE Capital Markets, Inc., as
joint lead arranger, Deutsche Bank AG New York Branch, as administrative agent and
collateral agent, General Electric Capital Corporation, as syndication agent, and the
other parties named therein (incorporated herein by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed with the Commission on July 31, 2013
(File No. 001-35886)).
Amendment No. 1 to the Credit Agreement, dated as of July 31, 2014, by and among
Hemisphere Media Holdings, LLC, a Delaware limited liability company, InterMedia
Espa˜nol, Inc., a Delaware corporation, the lenders party thereto from time to time,
JPMorgan Chase Bank, N.A., as successor administrative agent and collateral agent,
J.P. Morgan Securities LLC as joint lead arranger and joint bookrunner, Deutsche Bank
Securities Inc., as joint lead arranger, joint bookrunner and syndication agent and CIT
Capital Securities LLC as documentation agent, and the other parties named therein
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K filed with the Commission on July 31, 2014 (File No. 001-35886)).
Amendment No. 2 to the Credit Agreement, dated as of February 14, 2017, by and
among Hemisphere Media Holdings, LLC, a Delaware limited liability company,
InterMedia Espa˜nol, Inc., a Delaware corporation, the lenders party thereto from time to
time, JPMorgan Chase Bank, N.A., as administrative agent and collateral agent,
JPMorgan Chase Bank, N.A., Deutsche Bank Securities Inc. and Royal Bank of Canada
as joint lead arrangers and joint bookrunners, CIT Capital Securities LLC as
documentation agent, and the other parties named therein (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the Commission
on February 14, 2017 (File No. 001-35886)).
Guaranty Agreement, dated as of July 30, 2013, by and among HMTV, LLC, a Delaware
limited liability company, Hemisphere Media Holdings, LLC, a Delaware limited liability
company, InterMedia Espa˜nol, Inc., a Delaware corporation, the subsidiary guarantors
from time to time party thereto and Deutsche Bank AG New York Branch as
administrative agent (incorporated herein by reference to Exhibit 10.2 to the Company’s
Current Report on Form 8-K filed with the Commission on July 31, 2013 (File
No. 001-35886)).
Stockholders Agreement, dated as of September 6, 2016, by and among the Company,
Gato Investments LP, InterMedia Hemisphere Roll-Over, L.P., InterMedia
Partners VII, L.P., Gemini Latin Holdings, LLC, Peter M. Kern and Searchlight II
HMT, L.P. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report
on Form 8-K filed with the Commission on September 7, 2016 (File No. 001-35886)).
Amendment No. 1 to Stockholders Agreement and Waiver of Minimum Condition, dated
as of October 21, 2016, by and among Hemisphere Media Group, Inc., Gato
Investments LP, InterMedia Hemisphere Roll-Over L.P., InterMedia Partners VII, L.P.,
Gemini Latin Holdings, LLC, Peter M. Kern, an individual, and Searchlight II HMT, L.P.
(incorporated by reference to Exhibit 99.2 to the Company’s Current Report on
Form 8-K filed with the Commission on October 24, 2016 (File No. 001-35886)).
10.10*†
Form of Nonqualified Stock Option Award Agreement.
74
Exhibit No.
Description of Exhibits
10.11*†
Form of Restricted Stock Award Agreement.
10.12*†
Form of Executive Nonqualified Stock Option Award Agreement.
10.13*†
Form of Executive Restricted Stock Award Agreement.
10.14†
10.15†
Amended and Restated Employment Agreement, dated as of October 26, 2016, by and
between Hemisphere Media Group, Inc. and Alan J. Sokol (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Commission
on October 28, 2016).
Amended and Restated Employment Agreement, dated as of October 26, 2016, by and
between Hemisphere Media Group, Inc. and Craig D. Fischer (incorporated by reference
to Exhibit 10.2 to the Company’s Current Report on Form 8-K, filed with the
Commission on October 28, 2016).
10.16*† Amended and Restated Consulting Agreement, dated as of November 16, 2016, by and
between the Company and James M. McNamara.
10.17†
10.18†
Amended and Restated Employment Agreement, dated as of October 26, 2016, by and
between Hemisphere Media Group, Inc. and Alex J. Tolston (incorporated by reference
to Exhibit 10.3 to the Company’s Current Report on Form 8-K, filed with the
Commission on October 28, 2016).
Employment Agreement, dated September 30, 2013, by and among the Company,
Televicentro of Puerto Rico, LLC and Jose E. Ramos (incorporated herein by reference
to Exhibit 10.10 to the Company’s Annual Report on Form 10-K filed with the
Commission on March 28, 2014 (File No. 001-35886)).
10.19*† Amended and Restated Employment Agreement, dated as of March 9, 2017, by and
between the Company and Karen A. Maloney.
10.20†
10.21†
Employment Agreement, dated August 7, 2015, by and between the Company and Vicky
Bathija (incorporated herein by reference to Exhibit 10.16 to the Company’s Annual
Report on Form 10-K filed with the Commission on March 14, 2016 (File
No. 001-35886)).
Offer Letter, dated December 1, 2015, by and between the Company and Lucia Ballas-
Traynor (incorporated herein by reference to Exhibit 10.17 to the Company’s Annual
Report on Form 10-K filed with the Commission on March 14, 2016 (File
No. 001-35886)).
21.1*
Subsidiaries of the Company.
23.1*
Consent of RSM US LLP, independent accountants for the Company.
31.1*
31.2*
Certification of CEO Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange
Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
Certification of CFO Pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange
Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1**‡ Certification of CEO Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
75
Exhibit No.
Description of Exhibits
32.2**‡ Certification of CFO Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*
XBRL Instance Document.
101.SCH*
XBRL Taxonomy Extension Schema.
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase.
101.LAB*
XBRL Taxonomy Extension Label Linkbase.
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase.
101.DEF*
XBRL Taxonomy Definition Linkbase.
*
Filed herewith
** Furnished herewith
‡ A signed original of the written statement required by Section 906 has been provided to the
Company and will be retained by the Company and forwarded to the SEC or its staff upon
request.
†
Indicates management contract or compensatory plan, contract or arrangement.
76
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SIGNATURES
HEMISPHERE MEDIA GROUP, INC.
(Registrant)
Dated: March 15, 2017
By:
/s/ ALAN J. SOKOL
Alan J. Sokol
Chief Executive Officer and President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
Signature
Title
Date
/s/ PETER M. KERN
Peter M. Kern
/s/ ALAN J. SOKOL
Alan J. Sokol
/s/ CRAIG D. FISCHER
Craig D. Fischer
/s/ LEO HINDERY, JR.
Leo Hindery, Jr.
/s/ JAMES M. MCNAMARA
James M. McNamara
/s/ ERNESTO VARGAS GUAJARDO
Ernesto Vargas Guajardo
/s/ GABRIEL BRENER
Gabriel Brener
Chairman of the Board and Director
March 15, 2017
Chief Executive Officer and President
(Principal Executive Officer) and
Director
March 15, 2017
Chief Financial Officer (Principal
Financial and Accounting Officer)
March 15, 2017
Director
March 15, 2017
Director
March 15, 2017
Director
March 15, 2017
Director
March 15, 2017
77
Signature
Title
Date
/s/ ERIC C. NEUMAN
Eric C. Neuman
/s/ VINCENT L. SADUSKY
Vincent L. Sadusky
/s/ JOHN ENGELMAN
John Engelman
/s/ ANDREW S. FREY
Andrew S. Frey
/s/ ERIC ZINTERHOFER
Eric Zinterhofer
Director
March 15, 2017
Director
March 15, 2017
Director
March 15, 2017
Director
March 15, 2017
Director
March 15, 2017
78
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Management’s Report on Internal Control Over Financial Reporting . . . . . . . . . . . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Financial Statements of Hemisphere Media Group, Inc.:
Consolidated Balance Sheets as of December 31, 2016 and 2015 . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for the Years Ended December 31, 2016, 2015 and
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31,
2016, 2015 and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended
Page
F-2
F-3
F-4
F-5
F-6
December 31, 2016, 2015 and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 2015 and
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
F-8
F-9
F-1
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Hemisphere’s management, under the supervision and with the participation of our Chief
Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate
internal controls over financial reporting, as such term is defined in Rule 13a-15(f) and Rule 15d-15(f)
of the Securities Exchange Act of 1934, as amended, designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the United States of America
(‘‘GAAP’’). The Company’s internal control over financial reporting includes those policies and
procedures that:
1.
2.
3.
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP and that receipts and
expenditures of the Company are being made only in accordance with authorizations of
management and the directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
As required by Section 404 of the Sarbanes Oxley Act of 2002, management assessed the
effectiveness of Hemisphere Media Group, Inc. and subsidiaries’ (the ‘‘Company’’) internal control over
financial reporting as of December 31, 2016. Management’s assessment is based on the criteria for
effective control over financial reporting described in Internal Control—Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (‘‘COSO’’) in 2013. Based
upon our assessment and those criteria, management determined that Company’s internal control over
financial reporting was effective as of December 31, 2016.
The effectiveness of our internal control over financial reporting has been audited by RSM
US LLP, an independent registered public accounting firm, as stated in their report, which is included
in our Consolidated Financial Statements on page F-3 under the caption ‘‘Report of Independent
Registered Public Accounting Firm.’’
Date: March 15, 2017
BY:
/s/ ALAN J. SOKOL
Alan J. Sokol
President and Chief Executive Officer
/s/ CRAIG D. FISCHER
Craig D. Fischer
Chief Financial Officer
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Hemisphere Media Group, Inc.
We have audited the accompanying consolidated balance sheets of Hemisphere Media Group, Inc.
and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of
operations, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2016. We also have audited Hemisphere Media Group Inc.’s
and subsidiaries internal control over financial reporting as of December 31, 2016, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 2013. Hemisphere Media Group Inc.’s and subsidiaries
management is responsible for these financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on
the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of material misstatement
and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary in the circumstances.
We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (a) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (b) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (c) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Hemisphere Media Group Inc. and subsidiaries as of
December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2016, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, Hemisphere Media
Group, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
/s/ RSM US LLP
Miami, Florida
March 15, 2017
F-3
Hemisphere Media Group, Inc.
Consolidated Balance Sheets
As of December 31, 2016 and 2015
(amounts in thousands, except share and par value amounts)
2016
2015
Assets
Current Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net of allowance for doubtful accounts of $1,711 and $1,512, respectively . .
Due from related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Programming rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid taxes and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$163,090
25,566
1,505
5,450
7,904
$179,532
25,519
1,722
5,552
4,541
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
203,515
216,866
Programming rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Broadcast license . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangibles, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,450
25,501
41,356
164,887
64,849
18,638
1,245
7,457
25,397
41,356
164,887
78,185
13,280
1,468
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$530,441
$548,896
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due to related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued agency commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Programming rights payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt
3,525
413
6,725
4,488
6,378
1,619
3,610
3,293
—
2,463
1,182
8,168
3,995
6,569
1,722
3,047
4,426
8,278
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30,051
39,850
Programming rights payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt, net of current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Defined benefit pension obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
107
210,270
17,829
2,844
365
209,391
17,928
2,721
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
261,101
270,255
Stockholders’ Equity
Preferred stock, $0.0001 par value; 50,000,000 shares authorized; 0 shares issued and outstanding
at December 31, 2016 and December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class A common stock, $.0001 par value; 100,000,000 shares authorized; 24,944,913 and 15,342,440
shares issued at December 31, 2016 and 2015, respectively . . . . . . . . . . . . . . . . . . . . . . . . .
Class B common stock, $.0001 par value; 33,000,000 shares authorized; 20,800,998 and 30,027,418
issued at December 31, 2016 and 2015, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost 3,606,696 and 236,171 at December 31, 2016 and 2015, respectively . . . . . .
Retained earnings
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
2
—
1
2
261,051
(35,069)
43,837
(483)
3
256,551
(3,144)
25,837
(607)
Total Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
269,340
278,641
Total Liabilities and Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$530,441
$548,896
See accompanying notes to consolidated financial statements.
F-4
Hemisphere Media Group, Inc.
Consolidated Statements of Operations
Years Ended December 31, 2016, 2015 and 2014
(amounts in thousands, except per share amounts)
2016
2015
2014
Net revenues
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$138,525
$129,790
$111,989
Operating Expenses:
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposition of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41,293
38,333
16,608
2,262
6
98,502
40,023
41,189
36,037
17,218
446
33
94,923
34,867
36,450
31,608
16,552
1,282
70
85,962
26,027
Other Expenses:
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on extinguishment of debt
(11,651)
—
(12,086)
—
(11,925)
(1,116)
(11,651)
(12,086)
(13,041)
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28,372
(10,372)
22,781
(9,042)
12,986
(2,429)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 18,000
$ 13,739
$ 10,557
Earnings per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
0.43
0.43
$
$
0.32
0.31
$
$
0.25
0.25
Weighted average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
41,666
42,274
42,840
43,802
42,321
42,622
See accompanying notes to consolidated financial statements.
F-5
Hemisphere Media Group, Inc.
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2016, 2015 and 2014
(amounts in thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss):
2016
2015
2014
$18,000
$13,739
$10,557
Adjustment to defined benefit plan, net of tax . . . . . . . . . . . . . . . . . .
124
(21)
50
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$18,124
$13,718
$10,607
See accompanying notes to consolidated financial statements.
F-6
Hemisphere Media Group, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2016, 2015 and 2014
(amounts in thousands)
Class A
Common Stock
Class B
Common Stock
Shares Par Value Shares Par Value
11,241
—
305
—
—
—
—
2,973
—
14,519
—
324
—
—
—
479
—
5
15
—
1
—
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
—
—
—
33,000
—
—
—
—
—
—
(2,973)
—
30,027
—
—
—
—
—
—
—
—
—
—
3
—
—
—
—
—
—
—
—
3
—
—
—
—
—
—
—
—
—
—
Additional Class A
Accumulated
Paid In
Capital
240,817
2,908
120
3,012
—
1
—
—
Treasury Retained Comprehensive
Income (Loss)
Earnings
Stock
(938)
1,541
— 10,557
—
—
(636)
—
—
—
—
(1,023)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
50
Total
240,788
10,557
2,908
120
3,012
(1,023)
1
—
50
246,858
—
2,522
(1,961)
12,098
— 13,739
—
—
(586)
—
—
256,413
13,739
2,522
272
3,053
—
—
—
(1,183)
5,407
(1,778)
60
157
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
272
3,053
(1,183)
5,407
(1,778)
60
157
(21)
(21)
15,342
—
328
$ 1
—
—
30,027
—
—
$ 3
—
—
$256,551
—
934
$ (3,144)
$25,837
— 18,000
—
—
$(607)
—
—
$278,641
18,000
934
—
—
—
9,226
—
35
13
—
—
—
—
1
—
—
—
—
—
—
—
(9,226)
—
—
—
—
—
—
—
(1)
—
—
—
—
210
3,757
—
—
—
(31,925)
—
(976)
420
155
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
124
210
3,757
(31,925)
—
(976)
420
155
124
Balance at December 31, 2013 .
Net income . . . . . . . . . . .
Issuance of restricted stock . .
Excess tax benefits related to
the issuance of restricted
stock . . . . . . . . . . . . . .
Stock-based compensation . .
Repurchases of Class A
common stock . . . . . . . .
Exercise of warrants . . . . . .
Conversion of Class B
common stock to Class A
common stock . . . . . . .
Other comprehensive income,
net of tax . . . . . . . . . . .
Balance at December 31,
2014 . . . . . . . . . . . . . .
Net income . . . . . . . . . . .
Issuance of restricted stock . .
Excess tax benefits related to
the issuance of restricted
stock . . . . . . . . . . . . . .
Stock-based compensation . .
Repurchase of Class A
common stock . . . . . . . .
Issuance of Class A common
stock . . . . . . . . . . . . . .
Repurchase of warrants . . . .
Exercise of warrants . . . . . .
Exercise of stock options . . .
Other comprehensive loss, net
of tax . . . . . . . . . . . . . .
Balance at December 31,
2015 . . . . . . . . . . . . . .
Net income . . . . . . . . . . .
Issuance of restricted stock . .
Excess tax benefits related to
the issuance of restricted
stock . . . . . . . . . . . . . .
Stock-based compensation . .
Repurchase of Class A
common stock . . . . . . . .
Conversion of Class B
common stock to Class A
common stock . . . . . . . .
Repurchase of warrants . . . .
Exercise of warrants . . . . . .
Exercise of stock options . . .
Other comprehensive income,
net of tax . . . . . . . . . . .
Balance at December 31,
2016 . . . . . . . . . . . . . .
24,944
$ 2
20,801
$ 2
$261,051
$(35,069)
$43,837
$(483)
$269,340
See accompanying notes to consolidated financial statements.
F-7
Hemisphere Media Group, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2016, 2015 and 2014
(amounts in thousands)
2016
2015
2014
Cash Flows From Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 18,000
$ 13,739
$ 10,557
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Program amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of original issue discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on disposition of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on early extinguishment of debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in assets and liabilities:
(Increase) decrease in:
16,608
12,182
501
378
4,691
398
6
—
(5,429)
17,218
11,703
504
382
5,575
920
33
—
(2,838)
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Programming rights
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due from related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other assets
(453)
(15,073)
217
(3,029)
(1,676)
(12,619)
(388)
3,487
Increase (decrease) in:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due to related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Programming rights payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,062
(769)
(578)
(1,391)
(103)
227
287
395
4,206
452
705
107
16,552
10,370
507
310
5,920
462
70
1,116
(2,264)
(7,430)
(9,715)
(1,398)
(4,397)
610
49
3,400
(1,418)
(120)
93
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27,445
42,192
23,274
Cash Flows From Investing Activities:
Investment in joint venture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of cable networks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Flows From Financing Activities:
Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments of long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchase of warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercise of warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess tax benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(111)
(3,392)
10
—
(3,493)
—
(8,278)
—
—
(976)
420
(31,925)
155
210
—
(5,358)
3
—
—
(2,971)
10
(101,891)
(5,355)
(104,852)
—
(2,250)
—
5,407
(1,778)
60
(1,183)
157
272
70,565
(21,941)
(756)
—
—
1
(1,023)
—
120
Net cash (used in) provided by financing activities . . . . . . . . . . . . . . . . . . . . . .
(40,394)
685
46,966
Net (decrease) increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(16,442)
37,522
(34,612)
Cash:
Beginning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$179,532
142,010
176,622
Ending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$163,090
$179,532
$ 142,010
Supplemental Disclosures of Cash Flow Information:
Cash payments for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 10,911
$ 11,305
$ 11,171
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 15,023
$
5,812
$
4,438
See accompanying notes to consolidated financial statements.
F-8
Hemisphere Media Group, Inc.
Notes to Consolidated Financial Statements
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: The accompanying Consolidated Financial Statements include the accounts of
Hemisphere Media Group, Inc. (‘‘Hemisphere’’ or the ‘‘Company’’), the parent holding company of
Cine Latino, Inc. (‘‘Cinelatino’’), WAPA Holdings, LLC (formerly known as InterMedia Espa˜nol
Holdings, LLC) (‘‘WAPA Holdings’’), and HMTV Cable, Inc., the parent company of the entities for
the acquired networks consisting of Pasiones, TV Dominicana, and Centroamerica TV (see below).
Hemisphere was formed on January 16, 2013 for purposes of effecting the transaction, (see Note 2),
which was consummated on April 4, 2013. In these notes, the terms ‘‘Company,’’ ‘‘we,’’ ‘‘us’’ or ‘‘our’’
mean Hemisphere and all subsidiaries included in our Consolidated Financial Statements.
On April 1, 2014, we acquired the assets of three Spanish-language cable television networks from
Media World, LLC, a Florida limited liability company (‘‘Seller’’), for $101.9 million in cash. The three
acquired cable networks include Pasiones, Centroamerica TV and TV Dominicana.
On November 3, 2016, we acquired a minority interest in a newly formed joint venture with
Lionsgate to launch a Spanish-language over-the-top (OTT) movie service (The ‘‘OTT JV’’). The
service plans to launch in the fiscal year ending December 31, 2017. The OTT JV had no activity from
operations in the year ending December 31, 2016 and the Company did not make any capital
contributions to the OTT JV in the fiscal year ending December 31, 2016.
On November 30, 2016, we, in partnership with Colombian content producers, Radio Television
Interamericana S.A., Compania de Medios de Informacion S.A.S and NTC Nacional de Television y
Comunicaciones S.A., were awarded a ten (10) year renewable television broadcast concession license
for Canal Uno in Colombia (the ‘‘Canal Uno JV’’). Canal Uno is one of only three national broadcast
television licenses in Colombia. The Canal Uno JV is expected to begin operations of the network
through a newly formed joint venture vehicle on May 1, 2017. For the year ending December 31, 2016,
we accounted for the investment under the equity method. For more information on the OTT JV and
Canal Uno JV, see Note 5, ‘‘Equity Method Investments’’ of Notes to Consolidated Financial
Statements, included in this Annual Report on Form 10-K.
Reclassification: Certain prior year amounts on the presented consolidated balance sheet have
been reclassified to conform with current year presentation. The prior year balance sheet presentation
was adjusted to conform with current year adoption of ASU 2015-03 Simplifying the Presentation of Debt
Issuance Costs, which requires that deferred financing fees be presented in the balance sheet as a direct
reduction of Long-term debt. As a result, prior year assets and liabilities both decreased by
$2.3 million.
Principles of consolidation: The consolidated financial statements include our accounts and the
accounts of our subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Basis of presentation: The accompanying consolidated financial statements for us and our
subsidiaries have been prepared in accordance with accounting principles generally accepted in the
United States of America (‘‘U.S. GAAP’’).
Operating segments: The Company determines its operating segments based upon (i) financial
information reviewed by the chief operating decision maker, the Chief Executive Officer, (ii) internal
management and related reporting structure and (iii) the basis upon which the chief operating decision
maker makes resource allocation decisions. We have one operating segment, Hemisphere.
F-9
Hemisphere Media Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Net earnings per common share: Basic earnings per share (‘‘EPS’’) are computed by dividing
income attributable to common stockholders by the number of weighted-average outstanding shares of
common stock. Diluted EPS reflects the effect of the assumed exercise of stock options and vesting of
restricted shares only in the periods in which such effect would have been dilutive.
The following table sets forth the computation of the common shares outstanding used in
determining basic and diluted EPS (amounts in thousands, except per share amounts):
Years Ended December 31
2016
2015
2014
Numerator for earnings per common share
calculation:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$18,000
$13,739
$10,557
Denominator for earnings per common share
calculation:
Weighted-average common shares, basic . . . . . . . . . . .
Effect of dilutive securities
41,666
42,840
42,321
Stock options, restricted stock and warrants . . . . . . .
608
962
301
Weighted-average common shares, diluted . . . . . . . . . .
42,274
43,802
42,622
EPS
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.43
0.43
$
$
$
0.32
0.31
$
$
0.25
0.25
We apply the treasury stock method to measure the dilutive effect of its outstanding warrants,
stock options and restricted stock awards and include the respective common share equivalents in the
denominator of our diluted income per common share calculation. Per the Accounting Standards
Codification (‘‘ASC’’) 260 accounting guidance, under the treasury stock method, the incremental
shares (difference between the number of shares assumed issued and the number of shares assumed
purchased) shall be included in the denominator of the diluted EPS computation (ASC 260-10-45-23).
The assumed exercise only occurs when the warrants are ‘‘In the Money’’ (exercise price is lower than
the average market price for the period). If the warrants are ‘‘Out of the Money’’ (exercise price is
higher than the average market price for the period), the exercise is not assumed since the result would
be anti-dilutive. Potentially dilutive securities representing 1.9 million, 1.0 million and 1.1 million shares
of common stock for the years ended December 31, 2016, 2015 and 2014, respectively, were excluded
from the computation of diluted income per common share for this period because their effect would
have been anti-dilutive. The net income per share amounts are the same for our Class A and Class B
common stock because the holders of each class are legally entitled to equal per share distributions
whether through dividends or in liquidation.
In computing earnings per share, the Company’s Nonvoting Stock is considered a participating
security. Each share of Nonvoting Stock has identical rights, powers, limitations and restrictions in all
respects as each share of common of the Company, including the right to receive the same
consideration per share payable in respect of each share of common stock, except that holders of
Nonvoting Stock shall have no voting rights or powers whatsoever.
F-10
Hemisphere Media Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Revenue recognition: Revenue related to the sale of advertising and contracted time is recognized
at the time of broadcast. Retransmission consent fees and subscriber fees received from multi-channel
video providers are recognized in the period in which the services are performed, generally pursuant to
multi-year carriage agreements based on the number of subscribers.
In May 2014, the FASB issued an accounting pronouncement related to revenue recognition, which
applies a single, comprehensive recognition model for all contracts with customers. This standard, as
amended, contains principles with respect to the measurement and timing of recognition of revenue.
The Company will recognize revenue to reflect the transfer of goods or services to customers at an
amount that it expects to be entitled to receive in exchange for those goods or services. The new
standard is effective for the annual reporting periods beginning after December 15, 2017. The Company
will apply the new revenue standard beginning January 1, 2018.
The Company has identified retransmission consent fees/ subscriber fees and advertising sales as
significant and is currently in the process of analyzing each of these revenue streams in accordance with
the new guidance to determine the impact on the consolidated financial statements. The guidance
permits two methods of adoption: retrospectively to each prior reporting period presented (full
retrospective method), or retrospectively with the cumulative effect of initially applying the guidance
recognized at the date of initial application (the cumulative catch-up transition method). When the
Company has completed its evaluation, it will determine the method of transition that will be used in
adopting the new standard.
Barter transactions: The Company engages in barter transactions in which advertising time is
exchanged for products or services. Barter transactions are accounted for at the estimated fair value of
the products or services received, or advertising time given up, whichever is more clearly determinable.
Barter revenue is recognized at the time the advertising is broadcast. Barter expense is recorded at the
time the merchandise or services are used and/or received.
Barter revenue and expense included in the consolidated statements of operations are as follows
(amounts in thousands):
Barter revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Barter expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 934
(756)
$ 811
(791)
$ 1,311
(1,075)
2016
2015
2014
$ 178
$ 20
$
236
Programming costs: Programming costs are recorded in cost of revenues based on the Company’s
contractual agreements with various third party programming Distributors which are generally
multi-year agreements.
Stock-based compensation: We have given equity incentives to certain employees. We account for
such equity incentives in accordance with ASC 718 ‘‘Stock Compensation,’’ which requires us to
measure compensation cost for equity settled awards at fair value on the date of grant and recognize
compensation cost in the consolidated statements of operations over the requisite service or
performance period the award is expected to vest. Compensation cost is determined by using either the
Monte Carlo simulation model or the Black-Scholes option pricing model.
F-11
Hemisphere Media Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Advertising and marketing costs: The Company expenses advertising and marketing costs as
incurred. The Company incurred advertising and marketing costs of $3.8 million, $3.5 million and
$2.4 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Cash: The Company maintains its cash in bank deposit accounts which, at times, may exceed
federally-insured limits. The Company has not experienced any losses in such accounts.
Accounts receivable: Accounts receivable are carried at the original charge amount less an
estimate made for doubtful receivables based on a review of all outstanding amounts. Management
determines the allowance for doubtful accounts by regularly evaluating individual customer receivables
and considering a customer’s financial condition and current economic conditions. Accounts receivable
are written off when deemed uncollectible. Recoveries of accounts receivable previously written off are
recorded as income when received. The Company considers an account receivable to be past due if any
portion of the receivable balance is outstanding for more than 90 days. Changes in the allowance for
doubtful accounts for the years ended December 31, 2016, 2015 and 2014 consisted of the following
(amounts in thousands):
Year
Description
2016 . . . . . . . . . Allowance for doubtful accounts
2015 . . . . . . . . . Allowance for doubtful accounts
2014 . . . . . . . . . Allowance for doubtful accounts
Beginning
of Year
$1,512
$1,073
$ 651
Additions Write-offs
Recoveries
$399
$920
$462
$201
$482
$ 45
$1
$1
$5
End
of Year
$1,711
$1,512
$1,073
Programming rights: We enter into multi-year license agreements with various programming
Distributors for distribution of their respective programming (‘‘programming rights’’) and capitalize
amounts paid to secure or extend these programming rights at the lower of unamortized cost or
estimated net realizable value. If management estimates that the unamortized cost of programming
rights exceeds the estimated net realizable value, an adjustment is recorded to reduce the carrying
value of the programming rights. No such write-down was deemed necessary during the years ended
December 31, 2016, 2015 and 2014. Programming rights are amortized over the term of the related
license agreements or the number of exhibitions, whichever occurs first. The amortization of these
rights, which was $12.2 million, $11.7 million and $10.4 million for the years ended December 31, 2016,
2015 and 2014, respectively, is recorded as part of cost of revenues in the accompanying consolidated
statements of operations. Accumulated amortization of the programming rights was $18.3 million and
$19.7 million at December 31, 2016 and 2015, respectively. Costs incurred in connection with the
purchase of programs to be broadcast within one year are classified as current assets, while costs of
those programs to be broadcast subsequently are considered noncurrent. Program obligations are
classified as current or noncurrent in accordance with the payment terms of the license agreement.
Property and equipment: Property and equipment are recorded at cost. Depreciation is
determined using the straight-line method over the expected remaining useful lives of the respective
assets. Useful lives range from 1 - 40 years for improvements, equipment, buildings and towers. Upon
retirement or other disposition, the cost and related accumulated depreciation of the assets are
removed from the accounts and the resulting gain or loss is reflected in the determination of net
income or loss. Expenditures for maintenance and repairs are expensed as incurred. Property and
equipment is reviewed for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable.
F-12
Hemisphere Media Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Investments: The Company holds an investment in an equity method investees. Investments in
equity method investees are those for which the Company has the ability to exercise significant
influence, but does not control and is not the primary beneficiary. Significant influence typically exists if
the Company has a 20% to 50% ownership interest in the venture unless persuasive evidence to the
contrary exists. Under this method of accounting, the Company typically records its proportionate share
of the net earnings or losses of equity method investees and a corresponding increase or decrease to
the investment balances. Cash payments to equity method investees such as additional investments,
loans and advances and expenses incurred on behalf of investees, as well as payments from equity
method investees such as dividends, distributions and repayments of loans and advances are recorded
as adjustments to investment balances. The Company evaluates its equity method investments for
impairment whenever events or changes in circumstances indicate that the carrying amounts of such
investments may not be recoverable.
Goodwill and other intangibles: The Company’s goodwill is recorded as a result of the
Company’s business combinations using the acquisition method of accounting. Indefinite lived
intangible assets include a broadcast license, trademark and tradenames. Other intangible assets include
customer relationships, non-compete agreement and affiliate agreements with an estimated useful life
of one to ten years. Other intangible assets are amortized over their estimated lives using the
straight-line method. Costs incurred to renew or extend the term of recognized intangible assets are
capitalized and amortized over the useful life of the asset.
The Company tests its broadcast license annually for impairment or whenever events or changes in
circumstances indicate that such assets might be impaired. The impairment test consists of a
comparison of the fair value of these assets with their carrying amounts using a discounted cash flow
valuation method, assuming a hypothetical start-up scenario.
The Company tests its trademarks and tradenames annually for impairment or whenever events or
changes in circumstances indicate that such assets might be impaired. The test consists of a comparison
of the fair value of these assets with the carrying amounts utilizing an income approach in the form of
the royalty relief method, which measure the cost savings that a business enjoys since it does not have
to pay a royalty rate for the use of a particular domain name and brand.
The Company tests its goodwill annually for impairment or whenever events or changes in
circumstances indicate that goodwill might be impaired. The first step of the goodwill impairment test
compares the fair value of each reporting unit with its carrying amount, including goodwill. The fair
value of the reporting units are determined through the use of a discounted cash flow analysis
incorporating variables such as revenue projections, projected operating cash flow margins, and
discount rates.
The valuation assumptions used in the discounted cash flow model reflect historical performance
of the Company and prevailing values in the broadcast and cable markets. If the fair value exceeds the
carrying amount, goodwill is not considered impaired. If the carrying amount exceeds the fair value, the
second step of the goodwill impairment test is performed to measure the amount of impairment loss, if
any. The second step of the goodwill impairment test compares the implied fair value of goodwill with
the carrying amount of that goodwill. If the carrying amount of goodwill exceeds the implied fair value,
an impairment loss shall be recognized in an amount equal to that excess.
F-13
Hemisphere Media Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Note 1. Nature of Business and Significant Accounting Policies (Continued)
The Company tests its other finite lived intangible asset for impairment whenever events or
changes in circumstances indicate that such asset or asset group might be impaired. This analysis is
performed by comparing the respective carrying value of the asset group to the current and expected
future cash flows, on an undiscounted basis, to be generated from such asset group. If such analysis
indicates that the carrying value of this asset group is not recoverable, the carrying value of such asset
group is reduced to fair value.
Deferred financing costs: Deferred financing costs are recorded net of accumulated amortization
and are presented as a reduction to the principal amount of the long-term debt. Amortization is
calculated on the effective-interest method over the term of the applicable loan. Amortization of
deferred financing costs was $0.5 million, $0.5 million and $0.5 million, which is included in interest
expense, net in the accompanying consolidated statements of operations for the years ended
December 31, 2016, 2015 and 2014, respectively. Accumulated amortization of deferred financing costs
was $1.5 million and $1.0 million at December 31, 2016 and 2015. The net deferred financing costs of
$1.8 million and $2.3 million at December 31, 2016 and 2015, respectively, and have been presented on
the consolidated balance sheets as a reduction to the principal amount of the Long-term debt
outstanding.
Income taxes:
Income taxes are accounted for under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax basis
and operating loss and tax credit carryforwards. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment date.
We record foreign withholding tax, which is withheld by foreign customers from their remittances
to us, on a gross basis as a component of income taxes and separate from revenue in the consolidated
statement of operations.
We follow the accounting standard on accounting for uncertainty in income taxes, which addresses
the determination of whether tax benefits claimed or expected to be claimed on a tax return should be
recorded in the financial statements. Under this guidance, we may recognize the tax benefit from an
uncertain tax position only if it is more-likely-than-not that the tax position will be sustained upon
examination by taxing authorities, based on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position are measured based on the largest benefit
that has a greater than 50% likelihood of being realized upon ultimate settlement. The guidance on
accounting for uncertainty in income taxes also addresses de-recognition, classification, interest and
penalties on income taxes, and accounting in interim periods. To the extent that interest and penalties
are assessed by taxing authorities on any underpayment of income taxes, such amounts are accrued and
classified as a component of income tax expense.
Fair value of financial instruments: The carrying amounts of cash, accounts receivable and
accounts payable approximate fair value because of the short maturity of these items. The carrying
F-14
Hemisphere Media Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Note 1. Nature of Business and Significant Accounting Policies (Continued)
value of the long-term debt approximates fair value because this instrument bears interest at a variable
rate, is pre-payable, and is at terms currently available to the Company.
Generally accepted accounting principles establish a framework for measuring fair value and
expanded disclosures about fair value measurements. This guidance enables the reader of the financial
statements to assess the inputs used to develop those measurements by establishing a hierarchy for
ranking the quality and reliability of the information used to determine fair values. Under this
guidance, assets and liabilities carried at fair value must be classified and disclosed in one of the
following three categories:
Level 1—inputs to the valuation methodology are unadjusted quoted prices for identical assets
or liabilities in active markets that are accessible at the measurement date.
Level 2—inputs to the valuation methodology include quoted prices in markets that are not
active or quoted prices for similar assets and liabilities in active markets, and inputs that are
observable for the asset or liability, either directly or indirectly, for substantially the full term
of the financial instrument.
Level 3—inputs to the valuation methodology are unobservable, reflecting the entity’s own
assumptions about assumptions market participants would use in pricing the asset or liability.
The categorization of an asset or liability within the valuation hierarchy is based upon the lowest
level of input that is significant to the fair value measurement. Valuation techniques used need to
maximize the use of observable inputs and minimize the use of unobservable inputs.
The Company’s programming rights and goodwill are classified as Level 3 in the fair value
hierarchy, as they are measured at fair value on a non-recurring basis and are adjusted to fair value
only when the carrying values exceed their fair values. For the years ended December 31, 2016, 2015
and 2014 there were no adjustments to fair value.
The Company’s variable-rate debt is classified as Level 2 in the fair value hierarchy, as its
estimated fair value is derived from quoted market prices by independent dealers. The carrying value of
the long-term debt approximates fair value at December 31, 2016 and 2015.
Major customers and suppliers: Two of our Distributors accounted for more than 10% of our
total net revenues for the year ended December 31, 2016. There were no other Distributors or other
customers that accounted for more than 10% of revenue in any year. Our Networks are provided to
these Distributors pursuant to affiliation agreements with varying terms.
Recent accounting pronouncements:
In January 2017, the Financial Accounting Standards Board
(‘‘FASB’’) issued Accounting Standards Updated (‘‘ASU’’, ‘‘Update’’) 2017-04—Intangibles—Goodwill and
Other (Topic 350) Simplifying the Test for Goodwill Impairment. The amendments in this Update simplify
how an entity is required to test goodwill for impairment by eliminating step 2 from the goodwill
impairment test. In computing the implied fair value of goodwill under step 2, an entity had to perform
procedures to determine the fair value at the impairment testing date of its assets and liabilities
following the procedure that would be required in determining the fair value of assets acquired and
liabilities assumed in a business combination. Under amendments in this Update, an entity would
perform its annual, or interim, testing by comparing the fair value of a reporting unit with its carrying
amount. An entity would recognize an impairment charge for the amount by which the carrying amount
F-15
Hemisphere Media Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Note 1. Nature of Business and Significant Accounting Policies (Continued)
exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to the
reporting unit. The amendments in this update are effective for annual periods beginning after
December 15, 2020, and interim periods within those annual periods. Early adoption is permitted for
interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.
In May 2014, the FASB and the International Accounting Standards Board updated the accounting
guidance related to revenue recognition. The updated accounting guidance provides a single, contract-
based revenue recognition model to help improve financial reporting by providing clearer guidance on
when an entity should recognize revenue, and by reducing the number of standards to which an entity
has to refer. In July 2015, the FASB voted to defer the effective date by one year for annual reporting
periods beginning after December 31, 2017. The updated accounting guidance provides companies with
alternative methods of adoption. In March 2016, the FASB issued ASU 2016-08- Revenue from Contracts
with Customers (Topic 606): Principle versus Agent Considerations (Reporting Revenue Gross versus Net).
In April 2016, the FASB issued further guidance related to revenue recognition with ASU 2016-10—
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
(‘‘Update 2016-10’’). In May 2016, the Financial Accounting Standards Board (‘‘FASB’’) issued
Accounting Standards Updated (‘‘ASU’’) 2016-12—Revenue from contracts with Customers (Topic 605)
Narrow-Scope Improvements and Practical Expedients. ASU 2016-08, ASU 2016-10, and ASU 2016-12 do
not change the core principle of the guidance in Topic 606, rather they clarify issues around assessing
collectability, agent vs principle, performance obligations and issues concerning implementation at
transition to the ASU. The effective date for implementation remains unchanged and will impact the
first interim period of our 2018 fiscal year. The Company has identified retransmission consent fees/
subscriber fees and advertising sales as significant and is currently in the process of analyzing each of
these revenue streams in accordance with the new guidance to determine the impact on the
consolidated financial statements. The guidance permits two methods of adoption: retrospectively to
each prior reporting period presented (full retrospective method), or retrospectively with the
cumulative effect of initially applying the guidance recognized at the date of initial application (the
cumulative catch-up transition method). When the Company has completed its evaluation, it will
determine the method of transition that will be used in adopting the new standard.
The FASB issued ASU 2016-02—Leases (Topic 842) in February 2016. ASU 2016-02 amends the
FASB Accounting Standards Codification, creating Topic 842, Leases. Topic 842 affects any entity that
enters into a lease, with specified scope exemptions, and supersedes Topic 840, Leases. The core
principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases,
including operating leases. The recognition, measurement and presentation of expenses and cash flows
from a lease by a lessee have not changed significantly from previous GAAP. The principle difference
from previous guidance is that the assets and liabilities arising from an operating lease should be
recognized in the statement of financial position. The guidance will be effective for the first interim
period of our 2019 fiscal year. Early application of the amendments in this update is permitted. We are
currently evaluating the impact of the new standard
Use of estimates:
In preparing these consolidated financial statements, management had to make
estimates and assumptions that affected the reported amounts of assets and liabilities and the
disclosures of contingent assets and liabilities as of the balance sheets date, and the reported revenues
and expenses for the years then ended. Such estimates are based on historical experience and other
assumptions that are considered appropriate in the circumstances. However, actual results could differ
from those estimates.
F-16
Hemisphere Media Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Note 2. Related Party Transactions
The Company has various agreements with MVS, a Mexican media and television conglomerate,
which has directors and stockholders in common with the Company as follows:
• An agreement through August 1, 2017, pursuant to which MVS provides Cinelatino with satellite
and support services including origination, uplinking and satellite delivery of two feeds of
Cinelatino’s channel (for U.S. and Latin America), master control and monitoring, dubbing,
subtitling and close captioning, and other support services (the ‘‘Satellite and Support Services
Agreement’’). This agreement was amended on May 20, 2015, to expand the services MVS
provides to Cinelatino to include commercial insertion and editing services to support advertising
sales on Cinelatino’s U.S. feed. Expenses incurred under this agreement are included in cost of
revenues in the accompanying condensed consolidated statements of operations. Total expenses
incurred were $2.6 million, $2.3 million and $2.1 million for the years ended December 31, 2016,
2015 and 2014, respectively, and are included in cost of revenues.
• A ten-year master license agreement through July 2017, which grants MVS the non-exclusive
right (except with respect to pre-existing distribution arrangements between MVS and third party
distributors that were effective at the time of the consummation of our initial public offering) to
duplicate, distribute and exhibit Cinelatino’s service via cable, satellite or by any other means in
Latin America and in Mexico to the extent that Mexico distribution is not owned by MVS.
Pursuant to the agreement, Cinelatino receives revenue net of MVS’s distribution fee, which is
presently equal to 13.5% of all license fees collected from Distributors in Latin America and
Mexico. Total revenues recognized were $4.0 million, $5.1 million and $4.2 million for the years
ended December 31, 2016, 2015 and 2014, respectively. MVS has terminated the agreement
effective February 29, 2016. We continued to operate under the terms of the terminated
agreement through December 31, 2016.
• An affiliation agreement through August 1, 2017 for the distribution and exhibition of
Cinelatino’s programming service through Dish Mexico (dba Commercializadora de Frecuencias
Satelitales, S de R.L. de C.V.), an MVS affiliate that transmits television programming services
throughout Mexico. Total revenues recognized were $2.2 million, $2.0 million and $1.9 million
for the years ended December 31, 2016, 2015 and 2014, respectively.
• An affiliation agreement, effective July 2015 through January 2018 for the distribution and
exhibition of Pasiones’ Latin American programming service through Dish Mexico (dba
Comercializadora de Frecuencias Satelitales, S de R.L. de C.V.), an MVS affiliate that transmits
television programming services throughout Mexico. Total revenues recognized were $0.0 for the
years ended December 31, 2016 and 2015.
• In October 2016, we licensed programming from MVS. Expenses incurred under this agreement
are included in cost of revenues and amounted to $0.0 million for the years ended December 31,
2016. At December 31, 2016, $0 million is included in programming rights related to this
agreement.
• In November 2013, we licensed six movies from MVS. Expenses incurred under this agreement
are included in cost of revenues and amounted to $0.0 million for the years ended December 31,
2016, 2015, and 2014. At December 31, 2016 and 2015, $0.0 million is included in programming
rights related to this agreement.
F-17
Hemisphere Media Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Note 2. Related Party Transactions (Continued)
Amounts due from MVS pursuant to the agreements noted above, amounted to $1.5 million and
$1.7 million at December 31, 2016 and 2015, respectively, and are remitted monthly. Amounts due to
MVS pursuant to the agreements noted above amounted to $0.5 million and $1.1 million at
December 31, 2016 and 2015, respectively, and are remitted monthly.
We renewed the three-year consulting agreement effective April 9, 2016 with James M.
McNamara, a member of the Company’s board of directors, to provide the development, production
and maintenance of programming, affiliate relations, identification and negotiation of carriage
opportunities, and the development, identification and negotiation of new business initiatives including
sponsorship, new channels, direct-to-consumer programs and other interactive initiatives. Total expenses
incurred under these agreements are included in selling, general and administrative expenses and
amounted to $0.6 million for the year ended December 31, 2016 and $0.7 million for the years ended
December 31, 2015 and 2014, respectively. Amounts due this related party totaled $0 at December 31,
2016 and 2015, respectively.
We have entered into programming agreements with Panamax Films, LLC (‘‘Panamax’’), an entity
owned by James M. McNamara for the licensing of three specific movie titles. Expenses incurred under
this agreement are included in cost of revenues in the accompanying consolidated statements of
operations, and amounted to $0.0 million for each of the years ended December 31, 2016, 2015 and
2014. At December 31, 2016 and 2015, $0.1 million and $0.1 million, respectively, is included in other
assets in the accompanying consolidated balance sheets as prepaid programming related to these
agreements.
During 2013, we engaged Pantelion to assist in the licensing of a feature film in the United States.
Pantelion is a joint venture made up of several organizations, including Panamax Films, LLC
(‘‘Panamax’’), Lions Gate Films Inc. (‘‘Lions Gate’’) and Grupo Televisa. Panamax is owned by James
McNamara, who is also the Chairman of Pantelion. We agreed to pay to Pantelion, in connection with
their services, up to 12.5% of all ‘‘licensing revenues’’. Total licensing revenues are included in net
revenues in the accompanying consolidated statements of operations and amounted to $0.1 million for
the year ended December 31, 2016 and $0.0 million for the years ended December 31, 2015 and 2014,
respectively. Total expenses incurred are included in cost of revenues in the accompanying consolidated
statements of operations and amounted to $0.0 for each of the years ended December 31, 2016, 2015,
and 2014. Amounts due Pantelion at December 31, 2016 and 2015 totaled $0. In October 2015,
Pantelion purchased advertising time on one of our channels, which amounted to $0.0 million, net of
commission.
We entered into agreements to license the rights to motion pictures from Lions Gate for a total
license fee of $1.0 million. Some of the titles are owned or controlled by Pantelion, for which Lions
Gate acts as Pantelion’s exclusive licensing agent. Fees paid by Cinelatino to Lions Gate may be
remunerated to Pantelion in accordance with their financial arrangements. Expenses incurred under this
agreement are included in cost of revenues in the accompanying consolidated statements of operations,
and amounted to $0.3 million and $0.2 million for the years ended December 31, 2016 and 2015,
respectively. At December 31, 2016 and 2015, $0.3 million and $0.2 million, respectively, is included in
programming rights, related to these agreements, in the accompanying consolidated balance sheets.
We entered into a services agreement with InterMedia Advisors, LLC (‘‘IMA’’) which has officers,
directors and stockholders in common with the Company for services including, without limitation,
office space and operational support pursuant to a reimbursement agreement with IMA’s affiliate,
F-18
Hemisphere Media Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Note 2. Related Party Transactions (Continued)
InterMedia Partners VII, L.P. Expenses incurred under this agreement are included in selling, general
and administrative expenses in the accompanying consolidated statements of operations and amounted
to $0.1 million for the year ended December 31, 2016 and $0.0 million for the years ended
December 31, 2015 and 2014, respectively. The amounts due from this related party amounted to
$0.1 million and $0.0 million as of December 31, 2016 and 2015, respectively.
Note 3. Property and Equipment
Property and equipment at December 31, 2016 and 2015 consists of the following (amounts in
thousands):
Land and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Towers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 8,724
11,579
27,953
5,484
$ 8,724
9,399
24,312
5,484
2016
2015
Less: accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . .
Equipment installations in progress . . . . . . . . . . . . . . . . . . . . .
53,740
(29,115)
47,919
(26,103)
24,625
876
21,816
3,581
$ 25,501
$ 25,397
Depreciation expense was $3.2 million, $3.7 million and $3.8 million for the years ended
December 31, 2016, 2015 and 2014, respectively.
Note 4. Goodwill and Intangible Assets
Goodwill and intangible assets consist of the following at December 31, 2016 and 2015 (amounts in
thousands):
Broadcast license . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 41,356
164,887
64,849
$ 41,356
164,887
78,185
Total intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$271,092
$284,428
December 31,
2016
2015
F-19
Hemisphere Media Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Note 4. Goodwill and Intangible Assets (Continued)
A summary of changes in the Company’s goodwill and other indefinite lived intangible assets, on a
net basis, for the years ended December 31, 2016 and 2015 is as follows (amounts in thousands):
Net Balance at
December 31, 2015
Additions
Impairment
Net Balance at
December 31, 2016
Broadcast license . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brands . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangibles . . . . . . . . . . . . . . . . . . . . .
Total indefinite-lived intangibles . . . . . . . .
$ 41,356
164,887
15,986
700
$222,929
$—
—
—
—
$—
$—
—
—
—
$—
$ 41,356
164,887
15,986
700
$222,929
Net Balance at
December 31, 2014
Additions
Impairment
Net Balance at
December 31, 2015
Broadcast licenses . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brands . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangibles . . . . . . . . . . . . . . . . . . . . .
Total indefinite-lived intangibles . . . . . . . .
$ 41,356
164,887
15,986
700
$222,929
$—
—
—
—
$—
$—
—
—
—
$—
$ 41,356
164,887
15,986
700
$222,929
A summary of the changes in the Company’s other amortizable intangible assets for the years
ended December 31, 2016 and 2015 is as follows (amounts in thousands):
Net Balance at
December 31, 2015
Additions
Amortization
Net Balance at
December 31, 2016
Affiliate relationships . . . . . . . . . . . . . . . . .
Advertiser relationships . . . . . . . . . . . . . . .
Non-compete agreement . . . . . . . . . . . . . . .
Other intangibles . . . . . . . . . . . . . . . . . . . .
Total finite-lived intangibles . . . . . . . . . . .
$56,766
2,344
2,333
56
$61,499
$—
—
—
94
$94
$(12,298)
(552)
(549)
(31)
$(13,430)
$44,468
1,792
1,784
119
$48,163
Net Balance at
December 31, 2014
Additions
Amortization
Net Balance at
December 31, 2015
Affiliate relationships . . . . . . . . . . . . . . . . .
Advertiser relationships . . . . . . . . . . . . . . .
Non-compete agreement . . . . . . . . . . . . . . .
Other intangibles . . . . . . . . . . . . . . . . . . . .
Total finite-lived intangibles . . . . . . . . . . .
$69,064
2,896
2,882
83
$74,925
$—
—
—
65
$65
$(12,298)
(552)
(549)
(92)
$(13,491)
$56,766
2,344
2,333
56
$61,499
The aggregate amortization expense of the Company’s amortizable intangible assets was
$13.4 million, $13.5 million and $12.7 million for the years ended December 31, 2016, 2015 and 2014.
F-20
Hemisphere Media Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Note 4. Goodwill and Intangible Assets (Continued)
The weighted average remaining amortization period is 4.2 years at December 31, 2016. Future
estimated amortization expense is as follows (amounts in thousands):
Year Ending December 31,
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount
$13,281
13,205
8,455
6,032
7,190
$48,163
Note 5. Equity Method Investments
On November 3, 2016, we acquired a minority interest in a newly formed joint venture with
Lionsgate to launch a Spanish-language OTT movie service. The service plans to launch in the fiscal
year ending December 31, 2017. The OTT JV had no activity from operations in the year ending
December 31, 2016 and the Company did not make any capital contributions to the OTT JV in the
fiscal year ending December 31, 2016.
On November 30, 2016, we, in partnership with Colombian content producers, Radio Television
Interamericana S.A., Compania de Medios de Informacion S.A.S and NTC Nacional de Television y
Comunicaciones S.A., were awarded a ten (10) year renewable television broadcast concession license
for Canal Uno in Colombia. Canal Uno is one of only three national broadcast television licenses in
Colombia. The Canal Uno JV is expected to begin operations of the network through a newly formed
joint venture vehicle on May 1, 2017. For the year ending December 31, 2016, we accounted for the
investment under the equity method.
Note 6. Income Taxes
For the years ended December 31, 2016, 2015 and 2014, Income before provision for income taxes,
includes the following components (amounts in thousands):
Domestic income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10,997
17,375
$ 9,663
13,118
$ 6,764
6,222
2016
2015
2014
$28,372
$22,781
$12,986
For the years ended December 31, 2016, 2015 and 2014, income tax expense is composed of the
following (amounts in thousands):
Current income tax expense . . . . . . . . . . . . . . . . . . . .
Deferred income tax (benefit) . . . . . . . . . . . . . . . . . . .
$15,800
(5,428)
$11,880
(2,838)
$ 4,693
(2,264)
2016
2015
2014
$10,372
$ 9,042
$ 2,429
F-21
Hemisphere Media Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Note 6. Income Taxes (Continued)
Current tax expense for the years ended December 31, 2016, 2015 and 2014 includes $1.7 million,
$1.5 million and $1.1 million of foreign withholding tax, respectively.
For the years ended December 31, 2016, 2015 and 2014 the Company’s income tax expense and
effective tax rates were as follows:
2016
2015
2014
35.0% 35.0% 35.0%
Pre-tax book income—US Only . . . . . . . . . . . . . . . . . .
21.4% 20.2% 16.9%
Pre-tax book income—PR Only . . . . . . . . . . . . . . . . . .
Permanent items . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.2%
4.0%
3.2%
Return to provision true-ups—Current/Deferred . . . . . . (cid:4)1.1% (cid:4)1.4% (cid:4)3.8%
3.4%
Foreign rate differential
Foreign tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . (cid:4)32.0% (cid:4)24.5% (cid:4)31.1%
0.0% (cid:4)19.6%
Change in valuation allowance . . . . . . . . . . . . . . . . . . .
0.0%
8.9%
6.0%
Foreign withholding taxes . . . . . . . . . . . . . . . . . . . . . .
6.7%
0.0% (cid:4)2.2%
4.0%
Deferred foreign tax credit offset . . . . . . . . . . . . . . . . .
1.4% (cid:4)0.3%
1.9%
State taxes and state rate change . . . . . . . . . . . . . . . . .
0.0%
0.0%
0.3%
UTP adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . .
2.2%
2.4%
36.6% 39.7% 18.8%
For the year ended December 31, 2016, the items that significantly affect the differences between
the tax provision calculated at the statutory federal income tax rate and the actual tax benefit recorded
primarily relate to increases in taxes in Puerto Rico and foreign withholding taxes that will generate
offsetting U.S. foreign tax credits. The foreign rate differential is created by significant operations taxed
in Puerto Rico which has a higher tax rate than the US federal rate. The operations that are taxed in
Puerto Rico are also taxed in the U.S., generating a foreign tax credit. As a result, Puerto Rico timing
differences creating deferred tax liabilities represent future Puerto Rico taxes and future potential
foreign tax credits. The deferred foreign tax credit offset represents the future foreign tax credits
related to the Puerto Rico timing differences. The Company receives revenue from various foreign
jurisdictions that are subject to withholding taxes. These withholding taxes have been recorded in the
provision for income taxes and generate foreign tax credits.
For the year ended December 31, 2015, the items that significantly affect the differences between
the tax provision calculated at the statutory federal income tax rate and the actual tax benefit recorded
relate to increases in taxes in Puerto Rico and foreign withholding taxes that will generate offsetting
U.S. foreign tax credits.
For the year ended December 31, 2014, the items that significantly affect the differences between
the tax provision calculated at the statutory federal income tax rate and the actual tax benefit recorded
relate to increases in taxes in Puerto Rico that will generate offsetting U.S. foreign tax credits and the
reduction of the valuation allowance. The realization of deferred tax assets depends on the generation
of sufficient taxable income of the appropriate character and in the appropriate taxing jurisdiction
during the future periods in which the related temporary differences become deductible. A valuation
allowance is provided to reduce such deferred tax assets to amounts more likely than not to be
ultimately realized. The Company reversed a valuation allowance of $2.5 million on the deferred tax
F-22
Hemisphere Media Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Note 6. Income Taxes (Continued)
assets to increase the total amount that management believed would be ultimately realized, due to the
expected increase in income following the Cable Networks Acquisition on April 1, 2014.
The Company may be audited by federal, state and local tax authorities, and from time to time
these audits could result in proposed assessments. The Company has open tax years from 2012 forward
for federal and state tax purposes. During 2015, the Company received a notice that the Hemisphere
Media Group, Inc. 2013 tax return was selected for examination by the IRS. The audit was closed with
no findings in 2016.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities calculated for financial reporting purposes and the amounts calculated
for preparing its income tax returns in accordance with tax regulations and the net tax effects of
operating loss and tax credits carried forward. Net deferred tax liabilities consist of the following
components as of December 31, 2016 and 2015 (amounts in thousands):
2016
2015
Deferred tax assets:
Allowances for doubtful accounts . . . . . . . . . . . . . . . . . . . .
Deferred branch tax benefit
. . . . . . . . . . . . . . . . . . . . . . . .
State tax Federal deduction true-up . . . . . . . . . . . . . . . . . . .
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign tax credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,046
15,859
70
—
43
1,204
11,449
3,865
690
2,286
$ 1,976
15,813
—
29
39
1,440
5,572
3,465
651
2,376
Other DTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
533
—
38,045
31,361
Deferred tax liabilities:
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(505)
(20,910)
(3,117)
(12,704)
(196)
(23,000)
(3,098)
(9,715)
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . .
(37,236)
(36,009)
$
809
$ (4,648)
The deferred tax amounts mentioned above have been classified on the accompanying consolidated
balance sheets at December 31, 2016 and 2015 as follows (amounts in thousands):
Non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$18,638
$13,280
Non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$17,829
$17,928
2016
2015
F-23
Hemisphere Media Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Note 6. Income Taxes (Continued)
At December 31, 2016 and 2015, the Company has foreign tax credit carryforwards for U.S. federal
purposes and foreign minimum credits totaling $11.4 million and $5.6 million, respectively, which expire
during the years 2021 through 2025. These tax credits were generated on revenues earned by our
channels for airing content in Puerto Rico, Mexico and Latin America.
Upon audit, taxing authorities may prohibit the realization of all or part of an uncertain tax
position. The Company regularly assesses the outcome of potential examinations in each of the tax
jurisdictions when determining the adequacy of the amount of unrecognized tax benefit recorded. The
Company recognizes interest and penalties related to uncertain tax positions, if any, in income tax
expense. As of December 31, 2016, the Company has uncertain tax position reserves of $0.4 million and
$0.3 million recorded related interest expense of $0.0 million as of December 31, 2016 and 2015.
During 2014, the Company identified an uncertain tax position and recorded a liability of $0.7 million
with an offsetting deferred tax asset. The company accrued no interest related to this item.
Note 7. Long-Term Debt
Long-term debt as of December 31, 2016 and 2015 consists of the following (amounts in
thousands):
Senior Notes due July 2020 . . . . . . . . . . . . . . . .
Less: Current portion . . . . . . . . . . . . . . . . . . . . .
December 31, 2016
December 31, 2015
$210,270
—
$210,270
$217,669
(8,278)
$209,391
Note that the prior year balance sheet presentation was adjusted to conform with current year
adoption of ASU 2015-03 Simplifying the Presentation of Debt Issuance Costs, which requires that
deferred financing fees be presented in the balance sheet as a direct reduction of Long-term debt. As a
result, prior year assets and liabilities both decreased by $2.3 million.
On July 31, 2014, certain of our subsidiaries (the ‘‘Borrowers’’) amended the Term Loan Facility
(the ‘‘Existing Term Loan Facility’’) which provides for an aggregate principal amount of $225.0 million
and matures on July 30, 2020. Pricing on the Existing Term Loan Facility was set at LIBOR plus
400 basis points subject to a LIBOR floor of 1.00% resulting in an effective interest rate 5.00%, and
0.5% of original issue discount (‘‘OID’’). The Existing Term Loan Facility also provides an
uncommitted accordion option (the ‘‘Incremental Facility’’) allowing for additional borrowings under
the Existing Term Loan Facility up to an aggregate principal amount equal to (i) $40.0 million plus
(ii) an additional amount of up to 4.0x first lien net leverage. The obligations under the Existing Term
Loan Facility are guaranteed by HMTV, LLC, our direct wholly-owned subsidiary, and all of our
existing and future subsidiaries (subject to certain exceptions in the case of immaterial subsidiaries).
Additionally, the Existing Term Loan Facility provides for an uncommitted incremental revolving loan
option in an aggregate principal amount of up to $20.0 million, which shall be secured on a pari passu
basis by the collateral securing the Existing Term Loan Facility. The Existing Term Loan Facility is
secured by a first-priority perfected security interest in substantially all of our assets.
The proceeds of the Existing Term Loan Facility, were used to pay fees and expenses associated
with the Cable Networks Acquisition, and for general corporate purposes including potential future
acquisitions. The OID of $1.3 million, net of accumulated amortization of $1.1 million at December 31,
F-24
Hemisphere Media Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Note 7. Long-Term Debt (Continued)
2016, was recorded as a reduction to the principal amount of the Existing Term Loan Facility
outstanding and will be amortized as a component of interest expense over the term of the Existing
Term Loan Facility. We recorded $1.8 million of deferred financing costs associated with the Existing
Term Loan Facility, as amended, net of accumulated amortization of $1.5 million at December 31,
2016, which was recorded as a reduction to the principal amount of the Long-term debt outstanding
and will be amortized utilizing the effective interest rate method over the remaining term of the
Existing Term Loan Facility. In July 2014, we recorded a $1.1 million loss on early extinguishment of
debt; $0.7 million related to deferred costs and $0.4 million related to OID.
The Existing Term Loan Facility principal payments are payable on quarterly due dates
commencing September 30, 2014, with a final installment on July 30, 2020.
In addition, pursuant to the terms of the Existing Term Loan Facility, within 90 days after the end
of each fiscal year (commencing with the fiscal year ending December 31, 2015), the Borrowers are
required to make a prepayment of the loan principal in an amount equal to 50% of the excess cash
flow of the most recently completed fiscal year. Excess cash flow is generally defined as net income
plus depreciation and amortization expense, less mandatory prepayments of the term loan, interest
charges, income taxes and capital expenditures, and adjusted for the change in working capital. The
percentage of the excess cash flow used to determine the amount of the prepayment of the loan
declines from 50% to 25% and again to 0% at lower leverage ratios.
In March of 2016, the Company made an excess cash flow payment of $8.3 million. As permitted
under the Existing Term Loan Facility, the excess cash flow payment was allocated at our election and
in direct order of maturity, accordingly, we did not make the scheduled quarterly loan amortization
payments in 2016.
Following are maturities of long-term debt, at December 31, 2016 (amounts in thousands):(a)
Year Ending December 31,
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
—
—
722
212,625
$213,347
(a) Table does not consider any future excess cash payments.
On February 14, 2017 (the ‘‘Closing Date), the Borrowers amended the Existing Term Loan
Facility. (the ‘‘Amended Term Loan Facility’’) (see Note 12 Subsequent Event).
The Amended Term Loan Facility provides for term loans in the aggregate principal amount of
$213.3 million, which will mature on February 14, 2024. (the Existing Term Loan Facility was due to
mature on July 30, 2020). The Amended Term Loan Facility, issued with 0.5% of original issue
discount, will bear interest at the Borrowers’ option of either (i) LIBOR plus a margin of 3.50%
(decreased from a margin of 4.00% under the Existing Term Loan Facility) or (ii) or an Alternate Base
Rate (‘‘ABR’’) plus a margin of 2.50% (decreased from a margin of 3.00% under the Existing Term
F-25
Hemisphere Media Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Note 7. Long-Term Debt (Continued)
Loan Facility). There is no LIBOR floor (a decrease from a LIBOR floor of 1.00% under the Existing
Term Loan Facility).
The Amended Term Loan Facility will require the Borrowers to make amortization payments (in
quarterly installments) equal to 1.00% per annum with respect to the Existing Term Loan Facility with
any remaining amount due at final maturity. The Amended Term Loan Facility principal payments will
commence on March 31, 2017 with a final installment on February 14, 2024. Voluntary prepayments
will be permitted, in whole or in part, subject to certain minimum prepayment requirements; provided
that any prepayments made prior to the date that is six months from the Closing Date of the Amended
Term Loan Facility, for the purpose of repricing or effectively repricing the Amended Term Loan
Facility, will be required to include a 1.00% prepayment premium.
Following are maturities of long-term debt under the Amended Term Loan Facility, (amounts in
thousands):(a)
Year Ending December 31,
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2,133
2,133
2,133
2,133
204,815
$213,347
The Amended Term Loan Facility, among other terms, provides for an uncommitted incremental
loan option (the ‘‘Incremental Facility’’) allowing for increases for borrowings under the Amended
Term Loan Facility and borrowing of new tranches of term loans, up to an aggregate principal amount
equal to (i) $65.0 million (increased from $40.0 million from the Existing Credit Agreement) plus
(ii) an additional amount (the ‘‘Incremental Facility Increase’’) provided, if after giving effect to such
Incremental Facility Increase (as well as any other additional term loans), on a pro forma basis, the
First Lien Net Leverage Ratio (as defined in the Amended Credit Agreement) for the most recent four
consecutive fiscal quarters does not exceed 4.00:1.00 and the Total Net Leverage Ratio (as defined in
the Amended Credit Agreement) for the most recent four consecutive fiscal quarters does not exceed
6.00:1.00. The First Lien Net Leverage Ratio and the Total Net Leverage Ratio each caps the cash
netted against debt up to a maximum amount of $60.0 million (increased from $45.0 million under the
Existing Credit Agreement). Additionally, the Amended Term Loan Facility also provides for an
uncommitted incremental revolving loan option (the ‘‘Incremental Revolving Facility’’) allowing for an
aggregate principal amount of up to $30.0 million, which shall be secured on a pari passu basis by the
collateral securing the Amended Term Loan Facility.
Note 8. Stockholders’ Equity
Capitalization
Capital Stock
In connection with the Transaction (i) the holders of Cinelatino common stock and the holder of
membership interests in WAPA Holdings (the ‘‘Cinelatino/WAPA Investors’’) surrendered their
F-26
Hemisphere Media Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Note 8. Stockholders’ Equity (Continued)
respective interests and received an aggregate of 33,000,000 shares of Hemisphere Class B common
stock, par value $0.0001 (‘‘Class B common stock’’)(of which 1.5 million Class B Common Stock is
subject to forfeiture if the market price of shares of Hemisphere Class A common stock does not reach
certain levels), a cash payment equal to an aggregate of $5.0 million, and purchased 2,333,334 warrants
from Azteca founders to purchase Hemisphere Class A common stock, par value $0.0001 (such
warrants, ‘‘Warrants’’ and such stock, ‘‘Class A common stock’’); (ii) each share of Azteca common
stock was automatically converted into one share of Class A common stock; (iii) each Amended Azteca
Warrant, as defined below, was automatically converted into an equal number of Warrants; and
(iv) immediately prior to the consummation of the Transaction, Azteca Acquisition Holdings, LLC and
certain existing shareholders of Azteca contributed 250,000 shares of Azteca common stock to Azteca
for cancellation and agreed to subject an additional 250,000 shares of Class A common stock to certain
forfeiture provisions (a total of 503,788 shares of Class A common stock is subject to forfeiture) if the
market price of shares of Hemisphere Class A common stock does not reach certain levels. Following
the consummation of the Transaction, there were 10,991,100 shares of Class A stock outstanding and
33,000,000 shares of Hemisphere Class B stock outstanding. Subsequent to the Transaction, an
additional 250,000 shares of Class A restricted stock were issued. From time to time the Company has
issued Class A common stock to certain members of management and board of directors as equity
compensation, subject to time and performance vesting conditions, as discussed below.
As of December 31, 2016, the Company had 21,900,160 shares of Class A common stock
(including shares subject to forfeiture), and 20,800,998 shares of Class B common stock (including
shares subject to forfeiture), issued and outstanding.
Pursuant to the Equity Restructuring and Warrant Purchase Agreement, dated as of January 22,
2013, by and among Azteca Acquisition Holdings, LLC and the Company and the other parties
identified therein, certain initial stockholders of Azteca Acquisition Corporation (which merged with
the Company in connection with its initial public offering), agreed to subject 378,788 shares of Class A
common stock to certain forfeiture provisions if the market price of shares of Hemisphere Class A
common stock did not equal or exceed $15.00 per share for any 20 trading days within at least one
30-trading day period within 36 months of April 4, 2013. Effective the close of trading on April 4, 2016,
such holders forfeited 378,788 shares of Class A common stock back to the Company as a result.
In the event the last sale price of the Class A common stock does not equal or exceed $15.00 per
share (as adjusted for stock splits, share dividends, reorganizations, recapitalizations and the like) for
any 20 trading days within at least one 30-trading day period before April 4, 2018, 125,000 shares of
Class A common stock and 1.5 million shares of Class B Common Shares will be forfeited.
On June 8, 2016, the Company completed a privately negotiated stock repurchase of 2.8 million
shares of Class A common stock at a price of $10.50 per share for $29.4 million. On March 16, 2016,
the Company completed a repurchase of 100,000 shares of Class A common stock at a price of $13.35
per share for $1.3 million. The repurchased shares were placed into treasury to be used for general
corporate purposes.
On October 21, 2016, an aggregate of 9.2 million shares of Class B common stock held by
InterMedia Partners VII, L.P. and its affiliates (‘‘IM’’) were distributed to limited partners of IM. A
beneficial owner of shares of Class B common stock may transfer, directly or indirectly, shares of
Class B common stock, whether by sale, assignment, gift or otherwise, only to a Class B Permitted
Transferee (as defined in the Company’s amended an and restated certificate of incorporation) and no
F-27
Hemisphere Media Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Note 8. Stockholders’ Equity (Continued)
Class B stockholder may otherwise transfer beneficial ownership (as hereinafter defined) of any shares
of Class B common stock. As such, shares of Class B common stock held by IM were converted to
shares of Class A common stock, including an aggregate of 419,383 shares of Class B common stock
that are subject to forfeiture and distribution as elected by IM’s limited partners were converted into
shares of Class A common stock.
Warrants
The Company has issued 14.7 million warrants, which qualify as equity instruments. Each warrant
entitles the holder to purchase one-half of the number of shares of our Class A common stock at a
price of $6.00 per half share. At December 31, 2016, 12.3 million warrants were issued and outstanding,
which are exercisable into 6.1 million shares of our Class A common stock. Warrants are only
exercisable for a whole number of shares of common stock (i.e. only an even number of warrants may
be exercised at any given time by a registered holder). Thus, a holder must exercise at least two
warrants, at an effective exercise price of $12.00 per warrant. At the option of the Company, 8.7 million
warrants may be called for redemption, provided that the last sale price of our Class A common stock
reported has been at least $18.00 per share on each of twenty trading days within the thirty-day period
ending on the third business day prior to the date on which notice of redemption is given. The warrants
expire on April 4, 2018.
During the year ended December 31, 2016, we repurchased 1.0 million warrants for $1.0 million,
and we issued 35,000 shares of Class A common stock upon the exercise of 70,000 warrants for total
exercise proceeds of $0.4 million.
Voting
Class B common stock votes on a 10 to 1 basis with the Class A common stock, which means that
each share of Class B common stock will have 10 votes and each share of Class A common stock will
have 1 vote. The Class B common stock shall be convertible in whole or in part at any time at the
option of the holder or holders thereof, into an equal number of Class A common stock. Warrants are
not entitled to vote, unless converted into shares of the Company’s Class A common stock.
Equity Incentive Plans
Effective May 16, 2016, the stockholders of all classes of capital stock of the Company approved at
the annual stockholder meeting the Hemisphere Media Group, Inc. Amended and Restated 2013
Equity Incentive Plan (the ‘‘2013 Equity Incentive Plan’’) to increase the number of shares of Class A
common stock that may be delivered under the 2013 Equity Incentive Plan by 3.2 million shares,
provide limits on non-employee director awards and additional provisions as set forth therein (a copy
of the 2013 Equity Incentive Plan is provided in the Company’s 2016 annual proxy statement). An
aggregate of 7.2 million shares of our Class A common stock were authorized for issuance under the
terms of the Equity Incentive Plan. At December 31, 2016, 2.8 million shares remained available for
issuance of stock options or other stock-based awards under our 2013 Equity Incentive Plan (including
shares of restricted Class A common stock surrendered to the Company in payment of taxes required
to be withheld in respect of vested shares of restricted Class A common stock, which are available for
re-issuance). The expiration date of the 2013 Equity Incentive Plan, on and after which date no awards
may be granted, is April 4, 2023. The Company’s board of directors, or a committee thereof,
F-28
Hemisphere Media Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Note 8. Stockholders’ Equity (Continued)
administers the 2013 Equity Incentive Plan and has the sole and plenary authority to, among other
things: (i) designate participants; (ii) determine the type, size, and terms and conditions of awards to be
granted; and (iii) determine the method by which an award may be settled, exercised, canceled,
forfeited or suspended.
The Company’s time-based restricted stock awards and option awards generally vest in three equal
annual installments beginning on the first anniversary of the grant date, subject to the grantee’s
continued employment or service with the Company. The Company’s event-based restricted stock
awards and option awards generally vest either upon the Company’s Class A common stock attaining a
$15.00 closing price per share, as quoted on the NASDAQ Global Market, on at least 10 trading days,
subject to the grantee’s continued employment or service with the Company. Other event-based
restricted stock awards granted to certain members of our Board vest on the day preceding the
Company’s annual shareholder meeting.
Stock-Based Compensation
Stock-based compensation expense related to stock options and restricted stock was $4.7 million,
$5.6 million and $5.9 million for the years ended December 31, 2016, 2015, and 2014, respectively. At
December 31, 2016, there was $3.5 million of total unrecognized compensation cost related to
non-vested stock options, which is expected to be recognized over a weighted-average period of
2.2 years. At December 31, 2016, there was $3.3 million of total unrecognized compensation cost
related to non-vested restricted stock, which is expected to be recognized over a weighted-average
period of 2.0 years.
Stock Options
The fair value of stock options granted is estimated at the date of grant using the Black-Scholes
pricing model for time-based options and the Monte Carlo simulation model for event-based options.
The expected term of options granted is derived using the simplified method under
ASC 718-10-S99-1/SEC Topic 14.D for ‘‘plain vanilla’’ options and the Monte Carlo simulation for
event-based options. Expected volatility is based on the historical volatility of the Company’s
competitors given its lack of trading history. The risk-free interest rate is based on the U.S. Treasury
yield for a period consistent with the expected term of the option in effect at the time of the grant.
The Company has estimated forfeitures of 1.5%, as the awards are to management for which the
Company expects lower turnover, and has assumed no dividend yield, as dividends have never been
paid to stock or option holders and will not be paid for the foreseeable future.
Black-Scholes Option Valuation Assumptions
2016
2015
2014
1.60% - 2.44% 1.76% - 2.12% 1.76% - 1.92%
—
26.4% - 32.4% 25.8% - 29.5% 28.4% - 30.9%
6.0 - 6.3
6.2
6.3
—
—
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . .
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . .
Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted-average expected term (years) . . . . . . . . .
F-29
Hemisphere Media Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Note 8. Stockholders’ Equity (Continued)
The following table summarizes stock option activity for the years ended December 31, 2016, 2015
and 2014 (shares and intrinsic values in thousands):
Number of
shares
Weighted-
average exercise
price
Weighted-
average
remaining
contractual
term
Aggregate
intrinsic
value
Outstanding at December 31, 2013 .
Granted . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . .
Outstanding at December 31, 2014 .
Granted . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . .
1,730
140
—
—
1,870
215
(15)
(27)
Outstanding at December 31, 2015 .
2,043
Granted . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . .
Outstanding at December 31, 2016 .
Vested at December 31, 2016 . . . . .
Exercisable at December 31, 2016 . .
890
(13)
—
2,920
1,533
1,533
$11.20
$11.56
—
—
$11.23
$13.61
10.60
10.60
$11.49
$11.97
10.60
—
$11.64
$11.55
$11.55
9.3
9.7
—
—
8.4
6.2
—
—
7.6
6.2
—
—
7.6
6.5
6.5
$2,208
—
—
—
$4,721
—
—
—
$6,740
—
—
—
$1,274
$ 974
$ 974
The weighted average grant date fair value of options granted for the years ended December 31,
2016, 2015 and 2014 was $3.71, $4.13 and $3.75. At December 31, 2016, 0.3 million options granted are
unvested, event-based options.
Restricted Stock
Certain employees and directors have been awarded restricted stock under the 2013 Equity
Incentive Plan. The time-based restricted stock grants vest primarily over a period of three years. The
fair value and expected term of event-based restricted stock grants is estimated at the grant date using
the Monte Carlo simulation model.
F-30
Hemisphere Media Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Note 8. Stockholders’ Equity (Continued)
The following table summarizes restricted share activity for the years ended December 31, 2016,
2015 and 2014 (shares in thousands):
Number of
shares
Weighted-average
grant date fair value
Outstanding at December 31, 2013 . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2014 . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2015 . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2016 . . . . . . . . . . . . . . .
945
79
(305)
—
719
99
(324)
—
494
395
(328)
—
561
$10.18
11.34
11.33
—
$ 9.82
$12.42
10.65
—
$ 9.79
11.82
10.88
—
$10.58
At December 31, 2016, 0.2 million shares of restricted stock issued are unvested, event-based
shares.
Note 9. Contingencies
The Company is involved in various legal actions, generally related to its operations. Management
believes, based on advice from legal counsel, that the outcome of such legal actions will not adversely
affect the financial condition of the Company.
Note 10. Commitments
The Company has entered into certain rental property contracts with third parties, which are
accounted for as operating leases. Rental expense was $0.7 million, $0.6 million and $0.3 million for the
years ended December 31, 2016, 2015 and 2014, respectively
The Company has certain commitments including various operating leases.
Future minimum payments for these commitments and other commitments, primarily
programming, are as follows (amounts in thousands):
Year Ending December 31,
Operating
Leases
Other
Commitments
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 and thereafter . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
$ 488
455
449
358
997
$2,747
$5,427
2,574
1,292
621
10
$9,924
Total
$ 5,915
3,029
1,741
979
1,007
$12,671
F-31
Hemisphere Media Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Note 11. Retirement Plans
WAPA, a wholly owned subsidiary of the Company, makes contributions to the Televicentro de
Puerto Rico Special Retirement Benefits (the ‘‘Retirement Plan’’). The Retirement Plan is available to
all reporters and union employees after completing three (3) months of service. Eligible employees,
those meeting active service minimums and minimum age requirements, are eligible to receive a
one-time lump sum payment at retirement, of two (2) weeks per year of service capped at a maximum
payment of forty-five (45) weeks. The number of retirees is capped at five (5) per year. There are 164
participants in the Retirement Plan.
Following is the plan’s projected benefit obligation at December 31, 2016 and 2015. (amounts in
thousands):
2016
2015
Projected benefit obligation:
Balance, beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid to participants . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,865
109
104
(45)
(6)
$2,682
112
102
53
(84)
Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,027
$2,865
At December 31, 2016, 2015 and 2014, the funded status of the plan was as follows (amounts in
thousands):
2016
2015
2014
Excess of benefit obligation over the value of plan
assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized net actuarial loss . . . . . . . . . . . . . . . . . .
Unrecognized prior service cost . . . . . . . . . . . . . . . . . .
$(3,027) $(2,865) $(2,682)
904
86
818
52
905
69
Accrued benefit cost . . . . . . . . . . . . . . . . . . . . . . . .
$(2,157) $(1,891) $(1,692)
The plan is unfunded. As such, the Company is not required to make annual contributions to the
plan.
At December 31, 2016 and 2015, the amounts recognized in the consolidated balance sheets were
classified as follows (amounts in thousands):
Accrued benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . .
$(3,027) $(2,865)
974
870
Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(2,157) $(1,891)
2016
2015
Amounts recorded in accumulated other comprehensive loss are reported net of tax.
F-32
Hemisphere Media Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Note 11. Retirement Plans (Continued)
The benefits expected to be paid in each of the next five years and thereafter are as follows
(amounts in thousands):
Years Ending December 31,
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 through 2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount
$ 186
246
121
123
205
870
$1,751
At December 31, 2016 and 2015, the following weighted-average rates were used:
Discount rate on the benefit obligation . . . . . . . . . . . . . . . . . . . . . . . .
Rate of employee compensation increase . . . . . . . . . . . . . . . . . . . . . . .
3.78% 3.90%
4.00% 4.00%
Pension expense for the years ended December 31, 2016, 2015 and 2014, consists of the following
(amounts in thousands):
2016
2015
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . .
Recognized actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . .
Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . .
Net loss amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016
2015
2014
$109
104
—
—
17
42
$112
102
—
—
17
51
$ 82
105
—
—
17
27
$272
$282
$231
WAPA makes contributions to the Plan, a multiemployer pension plan with a plan year end of
December 31 that provides defined benefits to certain employees covered by two CBAs, one of which
was scheduled to expire on July 23, 2015 and the other of which expires on June 27, 2016. Pursuant to
its terms, the CBA which was scheduled to expire on July 23, 2015 automatically renewed for a period
of eighteen (18) months upon such expiration date and remained in effect through January 23.
Following the expiration of the extension period, the Company and UPAGRA continue to engage in
active and good faith negotiations. WAPA’s contribution rates to the Plan are generally determined in
accordance with the provisions of the CBAs and a rehabilitation plan that was adopted by the TNGIPP.
The risks in participating in such a plan are different from the risks of single-employer plans, in
the following respects:
• Assets contributed to a multiemployer plan by one employer may be used to provide benefits to
employees of any other participating employer.
F-33
Hemisphere Media Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Note 11. Retirement Plans (Continued)
• If a participating employer ceases to contribute to a multiemployer plan, the unfunded
obligation of the plan allocable to such withdrawing employer may be borne by the remaining
participating employer.
Under current law regarding multiemployer defined benefit plans, WAPA’s withdrawal (or amass
withdrawal of all contributing employers from any underfunded multiemployer defined benefit plan)
would require us to make payments to the plan for our proportionate share of the multiemployer plan’s
UVBs benefits. Under the statutory requirements applicable to withdrawal liability with respect to a
multiemployer pension plan, in the event of a complete withdrawal from the Plan, WAPA’s payment
amount for a given year would be determined based on its highest contribution rate (as limited by the
Multiemployer Pension Reform Act of 2014) and highest and its highest average contribution hours
over a period of three consecutive plan years out of the ten-year period preceding the date of
withdrawal. To the extent that the prescribed payment amount was not sufficient to discharge WAPA’s
share of the Plan’s UVBs, WAPA’s payment obligation would nevertheless end after 20 years of
payments (absent a withdrawal that is part of a mass withdrawal, in which case the annual payments
would continue indefinitely or until WAPA paid its proportionate share of the Plan’s UVBs).
WAPA has received Annual Funding Notices, Report of Summary Plan Information, Critical Status
Notices (‘‘Notices’’) and the above-noted Rehabilitation Plan, as defined by the Pension Protection Act
of 2006 (‘‘PPA’’), from the Plan. The Notices indicate that the Plan actuary has certified that the Plan is
in critical status, the ‘‘Red Zone’’, as defined by the PPA, and that a plan of rehabilitation
(‘‘Rehabilitation Plan’’) was adopted by the Trustees of the Plan (‘‘Trustees’’) on May 1, 2010 and then
updated on November 17, 2015. On May 29, 2010, the Trustees sent WAPA a Notice of Reduction and
Adjustment of Benefits Due to Critical Status explaining all changes adopted under the Rehabilitation
Plan, including the reduction or elimination of benefits referred to as ‘‘adjustable benefits.’’ In
connection with the adoption of the Rehabilitation Plan, most of the Plan participating unions and
contributing employers (including the Newspaper Guild International and WAPA), agreed to one of the
‘‘schedules’’ of changes as set forth under the Rehabilitation Plan. WAPA elected the ‘‘Preferred
Schedule’’ and executed a Memorandum of Agreement, effective May 27, 2010 (the ‘‘MOA’’) and
agreed to the following contribution rate increases: 3.0% beginning on January 1, 2013; an additional
3.0% beginning on January 1, 2014; and an additional 3% beginning on January 1, 2015. In 2015, The
Plan’s Trustee’s reviewed the Rehabilitation Plan and the financial projections under the Plan and
determined that is was not prudent to continue benefit accruals under the current Plan and that
implementation of an updated plan with a new benefit design would be in the best interest of the
Plan’s participants. As a result, the Plan’s Board of Trustee’s adopted changes to the Rehabilitation
Plan effective January 1, 2016.
Under the Rehabilitation Plan, as revised in 2015, WAPA will need to agree to one of the updated
‘‘schedules’’ of changes as set forth under the revised Rehabilitation Plan. These schedule options
include a new preferred schedule that does not require contribution increases but requires the
employer to commit to remaining in the Plan for an additional five years, or the existing preferred
schedule or a default schedule, both of which require annual contribution increases of 3% (starting
January 1, 2016).
The contribution increases and effect of the Rehabilitation Plan as described above are not
anticipated to have a material effect on the Company’s results of operations. However, in the event
other contributing employers are unable to, or fail to, meet their ongoing funding obligations, the
F-34
Hemisphere Media Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Note 11. Retirement Plans (Continued)
financial impact on WAPA to contribute to any plan underfunding may be material. In addition, if a
United States multiemployer defined benefit plan fails to satisfy certain minimum funding
requirements, the Internal Revenue Service may impose a nondeductible excise tax of 5.0% on the
amount of the accumulated funding deficiency for those employers contributing to the fund.
If WAPA completely or partially withdrew from the Plan, it would be obligated to pay complete or
partial withdrawal liability (which could be material). Pursuant to the last available notice (for the Plan
year ended December 31, 2014), WAPA’s contributions to the Plan exceeded 5% of total contributions
made to the Plan.
Further information about the Plan is presented in the table below (amounts in thousands):
Pension Fund
EIN
TNGIPP (Plan
Pension Protection
Act Zone Status
2013
Funding Improvement
Plan/Rehabilitation Plan
Status
WAPA’s
Contribution
2015
2014
2016
Surcharge
Imposed
No. 001) . . . . 52-1082662
Red
Implemented
$156 $151 $144
Yes
Expiration
Date of
Collective
Bargaining
Agreements
July 21, 2015
June 27, 2016
Note 12. Subsequent Event
On February 14, 2017, certain of our subsidiaries entered into an amendment to our credit
agreement providing for a $213.3 million senior secured term loan B facility (the ‘‘Amended Term Loan
Facility’’), which extended the maturity date by over three years from July 2020 to February 2024.
Interest on the Amended Term Loan Facility was set at LIBOR plus 350 (decreased from a margin of
4.00% under the Existing Term Loan Facility) basis points and no LIBOR floor (decreased from a
LIBOR floor of 1.00% under the Existing Term Loan Facility). The Amended Term Loan Facility
principal payments are payable on quarterly due dates commencing March 14, 2017, and a final
installment on February 14, 2024. Estimated transaction costs total approximately $2.3 million. We are
currently evaluating the accounting for the debt refinancing and related transaction costs.
Note 13. Quarterly Financial Data (Unaudited)
(Amounts in thousands, except per share amounts)
2016 Quarters Ended(a)
March 31
June 30
September 30
December 31
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share:
$30,971
7,164
2,700
$35,031
10,677
5,029
$33,116
9,579
4,349
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dilutive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.06
$ 0.06
$
$
0.12
0.12
$
$
0.11
0.11
39,407
12,603
5,922
$ 0.15
$ 0.15
F-35
Hemisphere Media Group, Inc.
Notes to Consolidated Financial Statements (Continued)
Note 13. Quarterly Financial Data (Unaudited) (Continued)
2015 Quarters Ended(a)
March 31
June 30
September 30
December 31
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share:
$29,471
7,056
2,462
$32,618
8,780
3,431
$31,465
7,951
2,910
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dilutive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.06
$ 0.06
$
$
0.08
0.08
$
$
0.07
0.07
$36,236
11,079
4,934
$
$
0.11
0.11
2014 Quarters Ended(b)
March 31
June 30
September 30
December 31
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share:
$20,951
3,647
248
$29,055
6,612
5,318
$28,781
5,559
663
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dilutive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 0.01
$ 0.01
$
$
0.13
0.13
$
$
0.02
0.02
$33,202
10,211
4,330
$
$
0.10
0.10
(a) The sum of the quarters will not equal the full year due to rounding.
(b) On April 1, 2014, the Cable Networks Acquisition was consummated, and the operating results are
included in our consolidated financial statements as of the date of the acquisition.
F-36
SECTION 302 CERTIFICATION
EXHIBIT 31.1
I, Alan J. Sokol, certify that:
1.
I have reviewed this annual report on Form 10-K of Hemisphere Media Group, Inc. (the
‘‘registrant’’);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
(b) Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the
audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial reporting.
Date: March 15, 2017
By: /s/ ALAN J. SOKOL
Alan J. Sokol
Chief Executive Officer and President
I, Craig D. Fischer, certify that:
SECTION 302 CERTIFICATION
EXHIBIT 31.2
1.
I have reviewed this annual report on Form 10-K of Hemisphere Media Group, Inc. (the
‘‘registrant’’);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being
prepared;
(b) Designed such internal control over financial reporting, or caused such internal control
over financial reporting to be designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the
audit committee of the registrant’s board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial reporting.
Date: March 15, 2017
By: /s/ CRAIG D. FISCHER
Craig D. Fischer
Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Hemisphere Media Group, Inc. (the ‘‘Company’’) on
Form 10-K for the period ending December 31, 2016 as filed with the Securities and Exchange
Commission on the date hereof (the ‘‘Report’’), I, Alan J. Sokol, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in my capacity as
an officer of the Company that, to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of
the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
/s/ ALAN J. SOKOL
Alan J. Sokol
Chief Executive Officer and President
Date: March 15, 2017
The foregoing certification is being furnished solely to accompany the Report pursuant to 18
U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934,
as amended, and is not to be incorporated by reference into any filing of the Company, whether made
before or after the date hereof, regardless of any general incorporation language in such filing.
A signed original of this written statement required by Section 906 has been provided to
Hemisphere Media Group, Inc. and will be retained by Hemisphere Media Group, Inc. and furnished
to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Hemisphere Media Group, Inc. (the ‘‘Company’’) on
Form 10-K for the period ending December 31, 2016 as filed with the Securities and Exchange
Commission on the date hereof (the ‘‘Report’’), I, Craig D. Fischer, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in my capacity as
an officer of the Company that, to my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Company.
/s/ CRAIG D. FISCHER
Craig D. Fischer
Chief Financial Officer
Date: March 15, 2017
The foregoing certification is being furnished solely to accompany the Report pursuant to 18
U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934,
as amended, and is not to be incorporated by reference into any filing of the Company, whether made
before or after the date hereof, regardless of any general incorporation language in such filing.
A signed original of this written statement required by Section 906 has been provided to
Hemisphere Media Group, Inc. and will be retained by Hemisphere Media Group, Inc. and furnished
to the Securities and Exchange Commission or its staff upon request.
HEMISPHERE MEDIA GROUP, INC.
HEMISPHERE MEDIA GROUP, INC.
4000 PONCE DE LEON BOULEVARD
SUITE 650
CORAL GABLES, FL 33146
212-486-9500
ir.hemispheretv.com