As Filed with the Securities and Exchange Commission on June 1, 2001.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
Form 20-F
----------------------
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
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 _______________
----------------------
Tevecap S.A.
(Exact name of Registrant as specified in its charter)
TEVECAP INC. THE FEDERATIVE REPUBLIC OF BRAZIL
(Translation of Registrant's name into English) (Jurisdiction of incorporation or organization)
Rua do Rocio, 313
Sao Paulo, SP Brazil
04552-904
(Telephone: 55-11-3046-8537)
(Address and telephone number of principal executive offices)
======================
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
(Title of Class)
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
12-5/8% Senior Notes due 2004 of Tevecap S.A. and guarantees thereof by
each of TVA Sistema de Televisao S.A., TVA Communications Ltd., Comercial Cabo
TV Sao Paulo Ltda., TVA Sul Parana Ltda., CCS Camboriu Cable System de
Telecomunicacoes Ltda., TVA Distribuidora S.A., TVA Programadora Ltda., TVA
Network Ltda. and TVAPAR S.A.
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report:
226,338,285 Common Shares
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 [X] NO [_]
Indicate by check mark which financial statements item the registrant has
elected to follow:
ITEM 17 [ ] ITEM 18 [X]
================================================================================
TABLE OF CONTENTS
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS..................1
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE................................1
ITEM 3. KEY INFORMATION........................................................1
ITEM 4. INFORMATION ON THE COMPANY............................................11
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS..........................27
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES............................37
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.....................42
ITEM 8. FINANCIAL INFORMATION.................................................45
ITEM 9. THE OFFER AND LISTING.................................................45
ITEM 10. ADDITIONAL INFORMATION...............................................46
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...........53
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN DEBT SECURITIES.................54
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES......................54
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS..................................................54
ITEM 15. [RESERVED]...........................................................54
ITEM 16. [RESERVED]...........................................................54
ITEM 17. FINANCIAL STATEMENTS.................................................54
ITEM 18. FINANCIAL STATEMENTS.................................................54
ITEM 19. EXHIBITS.............................................................54
INDEX TO THE FINANCIAL STATEMENTS.............................................55
GLOSSARY ....................................................................A-1
Presentation of Certain Information
This Annual Report on Form 20-F for the year ended December 31, 2000 is
referred to herein as the "Annual Report."
Tevecap S.A. ("Tevecap" and, together with its subsidiaries, "TVA" or the
"Company") is a corporation (sociedade anonima) organized under the laws of the
Federative Republic of Brazil. The accounts of the Company, which are maintained
in Brazilian reais, were prepared in accordance with the accounting principles
generally accepted in the United States of America and translated into United
States dollars on the basis set forth in Note 2.3 of the consolidated financial
statements of Tevecap and its subsidiaries (the "Tevecap Financial Statements"
and, together with the financial statements of TVA Sistema de Televisao S.A.,
CCS Camboriu Cable System de Telecomunicacoes Ltda. and TVA Sul Parana Ltda.
included in Item 19 of this Annual Report, the "Financial Statements"). Certain
amounts stated herein in U.S. dollars (other than as set forth in the Financial
Statements and financial information derived therefrom) have been translated,
for the convenience of the reader, from reais at the rate in effect on December
31, 2000 of R$1.9554 = U.S.$1.00. Such translations should not be construed as a
representation that reais could have been converted at such rate on such date or
at any other date. See Item 3, "Key Information--Selected Financial
Data--Exchange Rates."
Capitalized terms used in this Annual Report are defined, unless the
context otherwise requires, in the Glossary attached hereto. All references in
this Annual Report to (i) "U.S. Dollars," "dollars," "$" or "U.S.$" are to
United States dollars and (ii) "reais," "real" or "R$" are to Brazilian reais.
Unless otherwise specified, data regarding population or homes in a
licensed area are projections based on 1996 population census figures compiled
by the Instituto Brasileiro de Geografia e Estatistica ("IBGE") and the
Company's knowledge of its markets. There can be no assurance that the number of
people or the number of households in a specified area has not increased or
decreased by a higher or lower rate than those estimated by the IBGE since the
1996 census. Unless otherwise indicated, references to the number of the
Company's subscribers are based on Company data as of December 31, 2000. Data
concerning total MMDS and Cable subscribers and penetration rates represent
estimates made by the Company based on the data of Pay TV Survey, Associacao
Brasileira de Telecomunicacoes por Assinatura (ABTA), Kagan World Media, Inc.,
IBGE data, the Company's knowledge of its pay television systems and those of
the Operating Ventures, and public statements of other Brazilian pay television
providers. Although the Company believes such estimates are reasonable, no
assurance can be made as to their accuracy. The term DIRECTV(R) ("DIRECTV") is a
registered trademark of Hughes Electronics Corporation and refers to the Ku-Band
service provided by Galaxy Brasil in conjunction with Galaxy Latin America.
Forward-Looking Statements
This Annual Report contains statements which are forward-looking within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements appear in a number of places in this Annual Report and include
statements regarding the intent, belief or current expectations of the Company
or its officers. Investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those in the
forward-looking statements as a result of various factors.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS.
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.
Not applicable.
ITEM 3. KEY INFORMATION
A. Selected Financial Data
The selected financial data as of December 31, 2000, 1999 and 1998 and for
each of the three years in the period ended December 31, 2000 have been derived
from, and should be read in conjunction with, the Tevecap Financial Statements
included in this Annual Report. The selected financial data as of December 31,
1997 and 1996 and for each of the two years in the period ended December 31,
1997 have been derived from audited financial statements of the Company that are
not included elsewhere in this Annual Report.
In July 1999 the Company consummated the sale of the DBS Systems and
certain assets related thereto. These operations have been classified as
"Discontinued Operations" as of and for the periods discussed herein. See
Item 4, "Information on the Company--History and Development of the Company."
As required by Brazilian law, and in accordance with local accounting
practices, the financial records of Tevecap and its subsidiaries are maintained
in the applicable Brazilian currency (the real). However, the Financial
Statements are presented in U.S. dollars in accordance with U.S. generally
accepted accounting principles ("U.S. GAAP"). In order to prepare the Financial
Statements, the Company's accounts have been translated from the applicable
Brazilian currency, on the basis described in Note 2.3 to the Tevecap Financial
Statements included in this Annual Report. Because of the differences between
the evolution of the rates of inflation in Brazil and the changes in the rates
of devaluation, amounts presented in U.S. dollars may show distortions when
compared on a period-to-period basis.
1
SELECTED FINANCIAL AND OTHER DATA
Year Ended December 31,
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands, Except Selected Operating Data)
Statements of Operating Data:
Gross revenues
Monthly subscriptions $97,134 $94,055 $136,278 $142,700 $107,692
Installation 968 1,900 2,886 12,941 22,281
Indirect programming (a) 3,164 3,722 19,580 22,810 11,377
Additional services and others (b) 22,796 16,521 18,437 18,596 15,527
Taxes on revenue (c) (13,462) (12,782) (12,533) (13,315) (10,557)
----------- ----------- ----------- ----------- -----------
Total net revenue 110,600 103,416 164,648 183,732 146,320
----------- ----------- ----------- ----------- -----------
Direct operating expenses (d) 57,584 45,638 93,356 103,216 93,846
Selling, general and administrative expenses 33,998 25,590 56,517 64,844 62,468
Depreciation and amortization 43,290 56,879 48,107 35,461 24,350
Provision for equipment and inventory obsolescence (365) 605 1,940 3,944 3,621
----------- ----------- ----------- ----------- -----------
Total operating expenses 134,507 128,712 199,920 207,465 184,285
----------- ----------- ----------- ----------- -----------
Operating loss from continuing operations (23,907) (25,296) (35,272) (23,733) (37,965)
Nonoperating income (expenses)
Interest expense (45,069) (22,254) (51,665) (44,541) (16,287)
Equity in (losses) income of affiliates (e) (2,004) (5,238) (12,139) (6,851) (8,532)
Other nonoperating (expenses) income, net (f) 40,642 68,913 3,806 15,146 5,891
Income tax expense (2,517) (106) (24) 0 (156)
Income (loss) from discontinued operations -- -- (52,773) (21,438) 9,157
Extraordinary item - gain on debt repurchase -- 53,857 -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) (32,855) 69,876 (148,067) (81,417) (47,892)
=========== =========== =========== =========== ===========
Net income (loss) per share for continuing
operations before extraordinary item (0.15) 0.07 (0.42) (0.30) (0.24)
Net loss per share for discontinued operations -- -- (0.23) (0.11) --
Net income per share for extraordinary item -- 0.24 -- -- --
Net income (loss) per share (0.15) 0.31 (0.65) (0.41) (0.24)
Weighted average shares outstanding 226,338,285 226,338,285 223,338,285 196,712,865 196,712,865
2
Year Ended December 31,
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(Dollars in Thousands, Except Selected Operating Data)
Other data:
EBITDA-Continuing operations (g) 19,018 32,188 14,775 15,672 (9,994)
EBITDA-Discontinued operations (g) -- -- 16,968 19,458 14,333
-------- -------- -------- -------- --------
EBITDA (g) 19,018 32,188 31,743 35,130 4,339
Purchase of fixed assets - Continuing operations 26,716 25,927 81,392 118,909 87,867
Purchase of fixed assets - Discontinued operations -- -- 61,967 128,958 37,645
-------- -------- -------- -------- --------
Purchase of fixed assets 26,716 25,927 143,359 247,867 125,612
Ratio of earnings to fixed charges(i) -- -- -- -- --
Cash Flow Data:
Net cash (used in) provided by operating activities (h) (1,862) (18,435) 2,675 (30,134) (23,108)
Net cash used in investing activities 16,284 149,826 (162,556) (224,903) (218,405)
Net cash (used in) provided by financing activities (13,000) (130,842) 160,289 151,287 322,051
Selected Operating Data:
Continuing operations
Number of Subscribers to Owned Systems (j) 345,823 309,663 315,813 335,174 276,331
Average monthly revenue per Subscriber (k) $28.08 $30.37 $43.15 $42.57 $38.97
Discontinued operations
Number of Subscribers to Owned Systems (j) -- -- 296,847 211,209 73,180
Average monthly revenue per Subscriber (k) -- -- $43.15 $37.18 $20.95
Balance Sheet Data (at period end):
Cash and cash equivalents 1,609 1,946 1,397 989 104,739
Property, plant and equipment 182,511 211,729 298,004 266,518 182,683
Total assets 279,357 289,948 447,927 442,011 434,749
Loans from shareholders 141,122 137,168 88,740 54,321 4,360
Long-term liabilities 230,765 225,743 359,543 335,882 264,901
Equity (deficit) in discontinued operations -- -- (21,858) 13,904 17,313
Redeemable common shares 151,260 178,002 178,002 189,034 164,910
Total shareholders' deficit (162,049) (154,381) (224,257) (187,069) (81,528)
3
Notes to Selected Financial and Other Data
(a) Represents revenues received by the Company for selling programming to the
Independent Operators.
(b) Includes Advertising and Other revenues.
(c) Represents various non-income based taxes paid on certain of the Company's
gross revenue items with rates ranging from 3.65% to 11.15%.
(d) Represents costs directly related to Monthly subscriptions, and a portion
of installation, indirect programming and Additional services and others.
(e) Represents the Company's pro rata share of the Net loss or income of its
equity investments.
(f) Includes interest income, Translation gain or loss, Transaction, Other
nonoperating (expenses) income, net, and Minority interest.
(g) EBITDA represents the sum of (i) net loss, plus, without duplication (ii)
income tax expense, (iii) interest expense (income), net, (iv) other
nonoperating (expenses) income, net (v) depreciation, amortization and all
other non-cash charges, less (vi) non-cash items increasing net income
(loss) with the exception of amortized deferred sign-on and hook-up fee
revenue, in each case determined in accordance with GAAP. The term
"EBITDA-Discontinued operations" refers to the operations of Galaxy Brasil
and TVA Banda C. The term "EBITDA- Continuing operations" refers to the
Company's remaining operations subsequent to the disposition of Galaxy
Brasil and TVA Banda C. See "Item 4--Information on the Company--History
and Development of the Company."
(h) Cash provided by (used in) operating activities (hereinafter referred to as
cash flows from operating activities) has been determined in accordance
with GAAP while EBITDA has been calculated in accordance with the
definition in footnote (g). In accordance with GAAP, cash flows from
operating activities generally reflect the cash effects of transactions and
other events that enter into the determination of net income. The principal
difference between EBITDA and cash flows from operating activities arise as
a result of the treatment of the changes in the balances of operating
assets and liabilities from the beginning to the end of a reporting period.
That is, in accordance with GAAP, such changes are components of cash flows
from operating activities while there is no similar adjustment in the
calculation of EBITDA. EBITDA has been presented as it is a financial
measure commonly used in the Company's industry. EBITDA should not be
considered as an alternative to cash provided by (used in) operating
activities, as an indicator of operating performance or as a measure of
liquidity.
(i) For the five years ended December 31, 2000, earnings were insufficient to
cover fixed charges by $13,727, $42,833, $32,828, $38,269 and $50,366,
respectively. In calculating the Ratio of earnings to fixed charges,
earnings represents Net loss before minority interest, Equity in (losses)
income of affiliates, less fixed charges. Fixed charges consist of the sum
of interest expense paid or accrued on indebtedness of the Company and its
subsidiaries and affiliates and one third of operating rental expenses
(such amount having been deemed by the Company to represent the interest
portion of such payments).
(j) Represents the number of Owned Systems' subscribers as of the last day of
each period.
(k) Average monthly revenue per subscriber refers to the average monthly
subscription fee as of the last day of each period.
Exchange Rates
There are two legal foreign exchange markets in Brazil: the commercial rate
exchange market (the "Commercial Market") and the floating rate exchange market
(the "Floating Market"). The Commercial Market is reserved primarily for foreign
trade transactions and transactions that generally require prior approval from
Brazilian monetary authorities, such as the purchase and sale of registered
investments by foreign persons and related remittances of funds abroad, such as
a repurchase by the Company of the Senior Notes. Purchases of foreign exchange
in the Commercial Market may be carried out only through a financial institution
in Brazil authorized to buy and sell currency in that market. The "Commercial
Market Rate" is the commercial selling rate for Brazilian currency into U.S.
dollars, as reported by the Central Bank. The "Floating Market Rate" generally
applies to transactions to which the Commercial Market Rate does not apply.
Prior to the implementation of the Real Plan, the Commercial Market Rate and the
Floating Market Rate differed significantly at times. Since the introduction of
the real, the two rates have not differed significantly, although there can be
no assurance that there will not be significant differences between the two
rates in the future. Both the Commercial Market Rate and the Floating Market
Rate are reported by the Central Bank on a daily basis.
Both the Commercial Market Rate and the Floating Market Rate are freely
negotiated but are strongly influenced by the Central Bank. After the
implementation of the Real Plan, the Central Bank initially allowed the real to
float with minimal intervention. On March 6, 1995, the Central Bank announced
that it would intervene in the market and buy or sell U.S. dollars, establishing
a trading band (faixa de flutuacao) in which the exchange rate between the real
and the U.S. dollar would fluctuate. From 1995 through 1998, the Central Bank
periodically adjusted the trading band upward.
4
On January 13, 1999, the Central Bank attempted a limited devaluation of
the real by modestly elevating the band width in which the real was allowed to
trade. When this limited devaluation proved unsuccessful, the Central Bank
announced that it would no longer use its foreign currency reserves to protect
the value of the real (with the exception of limited interventions to restrain
abrupt fluctuations in the exchange rate), thereby allowing the real to float
freely against other currencies. Consequently, in the weeks following the
initial devaluation, the real has lost more than 40% of its value against the
U.S. dollar. There can be no assurance that the Central Bank will not institute
a new band in the future or that the real will not devalue further.
On January 25, 1999, in the wake of the devaluation and the adoption of a
floating exchange regime, the National Monetary Council adopted Resolution No.
2588, effective as of February 1, 1999. Pursuant to such resolution, banks that
are authorized to operate in the Commercial Market are required to unify their
positions in the two different markets. These markets are now differentiated
solely for regulatory purposes. As a result of Resolution No. 2588, since
February 1, 1999 the Commercial Market rate and the Floating Market rate have
offered identical pricing and liquidity, despite the potential for distinct
treatment for regulatory purposes in the future. Certain specific foreign
exchange transactions are carried out through the Commercial Market and
registered with the Central Bank through its electronic systems. Such
registration allows the remittance of funds abroad through the Commercial
Market.
The following table provides the Commercial Market rate for the purchase of
U.S. dollars expressed in reais per U.S. dollar for the periods and dates
indicated.
Exchange Rates of reais per U.S. $1.00
------------------------------------------------------------
Low High Average(1) Period End
---------- ---------- ---------- ----------
Year Ended:
December 31, 1996............................. 0.972500 1.039400 1.007992 1.039400
December 31, 1997............................. 1.039500 1.116400 1.079058 1.116400
December 31, 1998............................. 1.116500 1.208700 1.162110 1.208700
December 31, 1999............................. 1.207800 2.164700 1.816200 1.789000
December 31, 2000............................. 1.723400 1.984700 1.834800 1.955400
Month Ended:
December 31, 2000............................. 1.952400 1.979500 1.963300 1.955400
January 31, 2001 1.935700 1.975300 1.954500 1.971100
February 28, 2001 1.973900 2.045200 2.001900 2.045200
March 31, 2001 2.020800 2.161600 2.089100 2.161600
April 30, 2001 2.138400 2.301100 2.192500 2.184700
May 31, 2001 2.213000 2.375000 2.298500 2.375000
- ----------
(1) Calculated as the average of the month-end exchange rates during the
relevant period. Source: Central Bank of Brazil.
For a description of certain applicable exchange controls, see Item 10,
"Additional Information--Exchange Controls." See also Item 3 "Key
Information--Risk Factors--Factors Relating to Brazil--Payments of External Debt
and Exchange Controls; Convertibility Risk."
5
B. Capitalization and Indebtedness
The following table sets forth, on a consolidated basis, the short term
debt, long term debt, minority interest, shareholders' equity and total
capitalization of the Company and its consolidated subsidiaries as of December
31, 2000.
As of
December 31, 2000
-----------------
(thousands of dollars)
Short term debt
Financings(1) $ 33,071
---------
Total short term debt $ 33,071
Long term debt
Loans from shareholders 141,122
Financings(2) 49,691
---------
Total long term debt 190,813
Minority interest 2,041
Stockholder's equity (162,049)
---------
Total capitalization 63,876
=========
- ----------
(1) Short term financings consisted of $2,987 in unsecured financings and
$30,184 in secured financings. Short term financings guaranteed by third parties
amounted to $25,500.
(2) Long term financings consisted of $48,022 in unsecured financings and $1,669
in secured financings. Long term financings guaranteed by third parties amounted
to $0.
C. Reasons for the Offer and Use of Proceeds.
Not applicable.
D. Risk Factors
Before making any investment decision, investors should carefully read this
entire Annual Report and should consider carefully, in light of their own
financial circumstances and investment objectives, all the information set forth
herein and, in particular, certain matters with respect to debt securities
issued by Brazilian companies, including, without limitation, those set forth
below.
Factors Relating to the Company
Developmental Stage Company; Substantial Operating Losses
Since its inception in 1989, the Company has been in a developmental or
build-out stage and continues to sustain substantial operating losses due
primarily to insufficient revenue with which to fund build-out, interest expense
and charges for depreciation and amortization. Net losses incurred by the
Company have been funded principally by capital contributions from shareholders,
borrowings under shareholder loans, dispositions of non-strategic assets, bank
loans and other borrowings made from time to time.
6
Management of the Company has undertaken efforts to generate the cash flow
necessary to meet the Company's cost structure, including the sale of
non-strategic assets, the reduction of indebtedness and internal cost-cutting
measures. Although the Company has generated positive cash flow in recent years,
Management cannot assure that the Company will achieve or sustain operating
profitability in the near future. The failure of the Company to achieve and
maintain operating profitability on a timely basis could impair its ability to
make payments under the Senior Notes.
Competitive Pay Television Industry
The pay television industry in Brazil is, and is expected to continue to
be, highly competitive. The Company competes with providers of pay television
services utilizing Cable, MMDS and DBS technology delivery systems and any new
delivery systems which may be introduced, as well as existing off-air broadcast
television networks, movie theaters, video rental stores, internet service
providers and other entertainment and leisure activities generally.
The success of the Company's operating strategies is subject to factors
that are beyond the control of the Company and difficult to predict due, in
part, to the limited history of pay television services in Brazil. Consequently,
the size of the Brazilian market for pay television, the rates of penetration of
that market, the acceptance of pay television by subscribers and commercial
advertisers, the sensitivity of potential subscribers to the price of
installation and subscription fees and the extent and nature of the competitive
environment in the Brazilian pay television industry are uncertain.
Regulation
Substantially all of the Company's business activities are regulated by the
federal Agencia Nacional de Telecomunicacoes (Brazilian Telecommunications
Agency, or "ANATEL"). Such regulation relates to, among other things, licensing,
local access to Cable and MMDS systems, commercial advertising, and foreign
investment in Cable and MMDS systems. Changes in the regulation of the Company's
business activities, including decisions by regulators affecting the Company's
operations (such as the granting or renewal of licenses or decisions as to the
subscription rates the Company may charge its customers) or changes in
interpretations of existing regulations by courts or regulators, could adversely
affect the Company. ANATEL has the authority to grant Cable and MMDS licenses
pursuant to public bidding processes. The Company is unable to predict what
impact, if any, such public bidding will have on its ability to launch and
operate new systems. Any new regulations could have a material adverse effect on
the subscription television industry as a whole and on the Company in
particular.
Additional Financing
If the Company fails to meet its projected operating results or its capital
needs exceed its projected requirements, the Company may require substantial
investment on a continuing basis to finance its corresponding capital
expenditures. The Company may also require substantial additional capital for
any new pay television license acquisitions or investments or acquisitions of
entities holding such licenses, or for any investments in or acquisitions of
other existing pay television operations in order to further expand the
Company's operations. The amount and timing of the Company's future capital
requirements will depend upon a number of factors, many of which are not within
the Company's control, including subscriber growth and retention, programming
costs, capital costs, marketing expenses, staffing levels, and competitive
conditions. There can be no assurance that the Company's future cash
requirements will not increase as a result of unexpected developments in the
Brazilian pay television industry. Failure to obtain any required additional
financing to meet these requirements could adversely affect the growth of the
Company and, ultimately, could have a material adverse effect on the Company.
Currency Risk
A significant portion of the debt obligations (including the Senior Notes)
of the Company are denominated in U.S. dollars, while the Company generates
revenues only in Brazilian reais. The Company also incurs a significant portion
of its equipment costs, and most of its programming costs, in U.S. dollars.
Consequently, a significant devaluation of the real against the U.S. dollar can
significantly affect the Company's ability to meet its obligations and fund its
capital expenditures, and could adversely affect its results of operations. In
addition, shifts in currency exchange rates may have a material adverse effect
on the Company and may force the Company to seek additional capital, which
7
may not be available to it. While the Company may consider entering into
transactions to hedge the risk of exchange rate fluctuations, it may not be
possible for the Company to obtain hedging arrangements on commercially
satisfactory terms. In order to reduce its exposure to exchange rate
fluctuations, the Company has recently considered raising debt financing and
purchasing equipment locally in Brazil. In addition, the Company is discussing
possible hedging arrangements with certain of its programming providers.
Changes in Technology
The pay television industry as a whole is, and is likely to continue to be,
subject to rapid and significant changes in technology. The Company is presently
upgrading its Cable and MMDS systems and believes that, for the foreseeable
future, existing and developing alternative technologies will not materially
adversely affect the viability or competitiveness of its pay television
business. However, there can be no assurance as to the effect of such
technological changes on the Company or that the Company will not be required to
expend substantial financial resources in the development or implementation of
new competitive technologies.
Limited Assets of Tevecap and Dependence on Subsidiaries for Repayment of
Indebtedness
Tevecap's operations are conducted through, and substantially all of
Tevecap's assets are owned by, Tevecap's direct and indirect subsidiaries. The
ability of Tevecap to meet its obligations in respect of its indebtedness,
including the Senior Notes, will depend on, among other things, the future
performance of such subsidiaries (including the Guarantors) and the ability of
Tevecap to refinance such indebtedness at maturity (or upon early redemption or
otherwise). In addition, the ability of Tevecap's subsidiaries to pay dividends
and make other payments to Tevecap may be restricted by, among other things,
applicable corporate and other laws and regulations and by the terms of
agreements to which such subsidiaries may become subject. In particular,
Brazilian companies are allowed to distribute dividends only if, after a given
fiscal year, its net profits exceed accumulated losses. In addition, the
property and assets of certain of Tevecap's subsidiaries have had, or in the
future may have, liens placed upon them pursuant to existing and future
financings.
Factors Relating to Brazil
Risk of Significant Governmental Actions Affecting Brazilian Markets and
Economy
Over the past 15 years, the Brazilian Government has intervened on many
occasions to change monetary, credit, tariff and other policies in order to
influence the course of Brazil's economy. Examples of such interventions
include:
o controlling wages and prices;
o freezing bank accounts;
o imposing capital controls; and
o inhibiting exports from Brazil.
The Brazilian Government has in the recent past taken actions to slow or
halt economic growth in order to control inflation and to reduce the budget
deficits. It may take further similar actions in the future.
On July 1, 1994 the Brazilian Government implemented an economic
stabilization plan known as the Real Plan to reduce the size of Brazil's federal
budget deficit, lower inflation and introduce a new, stable currency, the real.
Through the Real Plan, the Government intended to reduce certain public
expenditures, collect liabilities owed to the Government and increase tax
revenues. Following implementation of the Real Plan, the rate of inflation in
Brazil, as measured by the Indice Geral de Precos - Disponibilidade Interna (the
general price index - internal availability or "IGP-DI") fell from 1,093.8% for
1994 to 1.71% for 1998. The IGP-DI increased to 19.98% in 1999 following the
devaluation of the real in January 1999, and decreased to 9.81% in 2000. The
Real Plan does not contain any wage or price controls. The Real Plan was adopted
when President Fernando Henrique Cardoso was serving as Finance Minister. Since
his election as the President, Mr. Cardoso's government has supported the Real
Plan.
In October 1998, President Cardoso was re-elected for an additional four
year term, expiring in January 2003. Following re-election his government
proposed a Fiscal Stability Program. The Program includes cuts in discretionary
8
governmental spending, increases in government revenues and savings through
social security reforms. Through this Program, the Government intends to
stabilize the ratio of debt to gross domestic product ("GDP") and thus create a
more favorable economic environment. Implementing certain measures under the
Fiscal Stability Program has proved to be difficult due to the considerable
legislative action required to do so. There can be no assurance that the
Brazilian Government will be able to continue passing measures necessary to
successfully implement the Real Plan.
Foreign Exchange Risks
The exchange rate between the real and the U.S. dollar, the relative rates
of real devaluation and the prevailing rates of inflation have affected the
Company's financial results and may continue to do so in the future.
After its introduction on July 1, 1994, the real initially appreciated
against the U.S. dollar, and concerns arose about the overvaluation of the real
relative to the U.S. dollar. To address such concerns and to avoid a rapid
devaluation of the real, in March 1995 the Brazilian Government established a
trading band for the real against the U.S. dollar with a view to a gradual
devaluation of the real. As a result of economic instability in Brazil in late
1998 and early 1999, the trading band was abandoned, resulting in a significant
devaluation of the real against the U.S. dollar. Since January 1, 1999, the
real/U.S. dollar exchange rate has ranged from a low of R$1.21 per U.S.$1.00 on
January 4, 1999 to a high of 2.375 per U.S.$1.00 on May 31, 2001. On December
31, 2000, the rate was R$1.96 per U.S.$1.00. There can be no assurance that the
real will maintain its current value. It is uncertain whether the Brazilian
Government will reimplement the trading band policy or any other type of
currency exchange control mechanism. See Item 10, "Additional Information -
Exchange Controls."
Devaluations of the real relative to the U.S. dollar also create additional
inflationary pressures in Brazil that may negatively affect the Company. In
addition, a significant devaluation generally results in a curtailment of access
to foreign financial markets for the Company and can lead to government
intervention, including recessionary government policies.
Payments of External Debt and Exchange Controls; Convertibility Risk
The purchase and sale of foreign currency in Brazil is subject to
governmental control. Since 1983, the Central Bank has centralized certain
payments of principal on external obligations. The Central Bank also assumed
responsibility for the external obligations in connection with the formal
restructuring of Brazilian sovereign debt.
It is uncertain whether in the future the Brazilian Government will
institute a more restrictive exchange control policy. Such a policy could affect
the ability of Brazilian debtors (including the Company) to make payments
outside of Brazil to meet foreign currency obligations under foreign
currency-denominated liabilities, including the Senior Notes. Many factors
beyond the control of the Company may affect the likelihood of the Government's
imposition of such restrictions at any time. Among such factors are:
o the extent of Brazil's foreign currency reserves;
o the availability of sufficient foreign exchange on the date a payment
is due;
o the size of Brazil's debt service burden relative to the economy as a
whole;
o Brazil's policy towards the International Monetary Fund; and
o political constraints to which Brazil may be subject.
The Government has not imposed any restrictions on payments by Brazilian
issuers in respect of securities issued in the international capital markets to
date. However, it may choose to impose such restrictions in the future if
necessary. See Item 10, "Additional Information - Exchange Controls."
Impact of Extreme Inflation
Until mid-1994 Brazil experienced extremely high rates of inflation. The
inflation contributed materially to economic uncertainty in Brazil and to
heightened volatility in the Brazilian securities markets.
9
After the introduction of the Real Plan, the rate of inflation as measured
by the IGP-DI fell steadily to 1.71% in 1998. Inflation increased to 19.98% in
1999 as a result of the devaluation of the real in January 1999, and decreased
to 9.81% for 2000. It is uncertain whether future actions of the Government
(including any further action to adjust the value of the Brazilian currency)
will cause inflation at a higher rate those experienced since the introduction
of the Real Plan or whether any increase in inflation will have a material
adverse effect on the results of operations and financial condition of the
Company.
Liquidity Risk
A number of developments or conditions have significantly affected the
availability of credit in the Brazilian economy. External events have from time
to time resulted in considerable outflows of funds and declines in the amount of
foreign currency invested in Brazil. Such events include the devaluation of the
Mexican peso in December 1994, the Asian economic crisis of 1997, the Russian
currency crisis of 1998, the currency instability that Brazil faced in 1999, and
the ongoing recession in Argentina. To defend the real during such events and to
control inflation, the Government has maintained a tight monetary policy, with
associated high interest rates, and has constrained the growth of credit. It is
uncertain whether these disruptions in the Brazilian economy will adversely
affect the Company's financial condition or results of operations.
IMF Financial Package
As a result of economic uncertainty and significant outflows of capital in
late 1998, the Brazilian Government concluded an agreement with the IMF in
November 1998 on a U.S.$41.5 billion aid package. The first tranche of the
package was disbursed in December 1998.
The agreement reached between the IMF and the Government, contained in a
Technical Memorandum of Understanding, sets out the guidelines and the targets
(including fiscal, monetary and external borrowing limits) in respect of the
Brazilian economy. The Memorandum of Understanding is subject to periodic
review. In the event that the goals contained in the Memorandum of Understanding
are not achieved, the IMF automatically suspends the next tranche due under the
loan until a new set of guidelines has been agreed.
As a result of continuing Brazilian economic uncertainty and the
Government's decision to adopt a floating exchange rate regime in January 1999,
the Government and the IMF negotiated a new set of guidelines prior to the
release of the second tranche and formally reached an agreement in March 1999.
The IMF reviewed and approved the Memorandum of Understanding for the first time
on July 2, 1999. The guidelines of the Memorandum of Understanding were amended
on December 2, 1999. Brazil has successfully completed the first series of
reviews under the agreement. There is no assurance, however, that the Brazilian
Government will be able to maintain this performance in the future. Failure to
do so may lead to adverse effects on the Brazilian economy and on the Company's
financial condition or results of operations.
Electricity Rationing Program
In May 2001, as a result of a shortfall of electricity generating and
transmission capacity by Brazilian utilities, the Brazilian federal government
announced an electricity rationing plan for the purpose of avoiding electricity
outages throughout most of Brazil. The rationing plan imposes significant
penalties on residences and companies that fail to reduce electricity
consumption by at least 20% in relation to amounts consumed in the previous
year. These penalties range from substantial increases in tariffs (up to 200
percent more per kilowatt hour) to the disruption of electricity service for a
number of days. The rationing program is currently facing certain constitutional
challenges in Brazilian federal courts. However, should the rationing plan be
implemented, the Company is unable to predict what impact, if any, the program
and the penalties imposed by it throughout the Company's licensed areas will
have on the Company's results of operations.
10
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
TVA is a major pay television operator in Brazil and one of the country's
primary pay television programming distributors. In 1989, TVA was the first to
provide pay television services in Brazil. With more than 346,000 direct
subscribers, TVA offers pay television services utilizing cable and MMDS
distribution technologies. Through owned and affiliated pay television
operators, TVA programming reaches more than 533,000 pay television households.
TVA is a majority-owned subsidiary of Abril S.A. ("Abril"). TVA's other
beneficial shareholders are Falcon International Communications (Bermuda) L.P.
("Falcon International"), The Hearst Corporation ("Hearst"), ABC, Inc. ("ABC")
and Chase Manhattan International Finance Ltd. ("CMIF").
TVA conducts its pay television operations through two owned operating
systems: TVA Sistema de Televisao S.A. ("TVA Sistema") and TVA Sul Parana Ltda.
("TVA Sul") (together, the "Owned Systems"). Through the MMDS and Cable systems
of the Owned Systems, TVA serves six cities with a combined population of
approximately 34 million, including three of the seven largest cities in Brazil:
Sao Paulo (population of 10.4 million), Rio de Janeiro (population of 6.4
million) and Curitiba (population of 1.5 million). TVA also holds minority
interests in each of Canbras TVA Cabo Ltda. and TV Cabo Santa Branca Comercio
Ltda. (collectively, "Canbras TVA") and TV Filme, Inc. ("TV Filme" and, together
with Canbras TVA, the "Operating Ventures"), which together provide pay
television services to an additional 22 cities with a total population of 12.5
million.
In addition, TVA provides high speed Internet services in the Sao Paulo and
Rio de Janeiro metropolitan areas through TVA Sistema and Rede Ajato Ltda.
("Rede Ajato"), a wholly owned subsidiary. TVA Sistema's "Acesso" service offers
high speed broadband internet access to pay television subscribers utilizing
TVA's Cable and MMDS technologies. In addition, Rede Ajato's "Ajato" service,
the first broadband high speed internet service provider created in Brazil, is a
Portuguese language content and service portal offering multimedia, real video
and music and video conferencing services, among others. TVA is actively
pursuing alliances with content and e-commerce providers in order to provide a
diverse and competitive portfolio of services through Ajato.
Until July 1999, TVA, through Galaxy Brasil Ltda. ("Galaxy Brasil"), was
the exclusive provider in Brazil of DIRECTV, a digital direct broadcast
satellite Ku-Band service. Galaxy Brasil receives programming, scheduling and
related services for DIRECTV from Galaxy Latin America, LLC ("GLA"), in which
TVA held a 10% equity interest. The current owners of GLA are a unit of Hughes
Electronics Corporation and a member of the Cisneros Group. Through local
operating companies such as Galaxy Brasil, GLA provides DIRECTV service
throughout much of Latin America and the Caribbean. TVA, through TVA Banda C
Ltda. ("TVA Banda C"), also provided digital C-Band television service.
In July 1999 TVA consummated the sale of Galaxy Brasil, TVA Banda C and
certain assets related thereto, including its interest in GLA, to GLA and the
members thereof (such sale, the "DBS Sale"). The net cash proceeds to TVA at the
closing of the DBS Sale were approximately U.S.$177.6 million. The total
consideration received by TVA was comprised of cash, a promissory note in the
principal amount of U.S.$25.5 million, the assumption of certain dollar and
real-denominated indebtedness and the release of certain guarantees given by TVA
and one of its subsidiaries in respect of certain obligations of Galaxy Brasil.
After the consummation of the DBS Sale, TVA significantly lowered its
total indebtedness, which decreased from U.S.$392.1 million as of December 31,
1998 to U.S.$223.9 million as of December 31, 2000. See Item 5, "Operating and
Financial Review and Prospects -- Liquidity and Capital Resources."
Since 1999 the Company has also concluded the sale of its interests in
programming ventures in order to focus its activities primarily on the
distribution of programming through Cable and MMDS systems. In November 1999,
TVA concluded the sale of its 50% equity interest in ESPN Brasil, the provider
of ESPN Brasil programming, to ESPN Brazil, Inc., which previously held the
remaining 50% equity interest. ESPN Brazil, Inc. is indirectly held by ABC (80%)
and Hearst (20%). In July 2000, TVA concluded the sale of its 24.0% equity
interest in HBO Brasil Partners, the provider of HBO Brasil programming, to the
remaining holders of HBO Brasil Partners. Finally, in November 2000, the Company
concluded the sale of its Eurochannel operations to Multithematiques, a European
programming operator. In
11
consideration for the sale of these programming-related assets, the Company
received net cash proceeds of approximately $29.5 million and approximately
$25.4 million in promissory notes payable in installments. As of December 31,
2000, approximately $2.4 million was outstanding under these promissory notes.
During the three years ended December 31, 2000, the Company incurred
capital expenditures of approximately $134.0 million, primarily in connection
with the purchase of reception equipment, converters for installation throughout
its Cable and MMDS systems in Brazil, other equipment required to upgrade its
Cable and MMDS networks and, most recently, the development of its internet
operations. Management estimates that $45,114 and $79,595 of capital
expenditures will be required in 2001 and 2002, respectively, principally in
connection with the purchase of materials and equipment, Cable and MMDS network
upgrades and the development of its internet operations.
Tevecap S.A. was founded on June 28, 1991 as a corporation of unlimited
duration under the laws of the Federative Republic of Brazil. Tevecap's
registered office is located at Rua do Rocio, 313, Sao Paulo, 04552-904 SP,
Brazil (telephone: +55-11-3046-8537).
B. Business Overview
Business Strategy
Management of the Company has determined that the concentration by the
Company on its core Cable and MMDS businesses offers the Company the best
opportunity to achieve long term profitability. In addition, the Company is
taking advantage of technological developments to use its Cable and MMDS
infrastructure to provide high speed data transmission, interactive services and
other telecommunications services over its Cable and MMDS systems and to take
advantage of possible deregulation and the growing demand for these services in
Brazil. The Company is expanding its Cable systems with fiber optic and coaxial
cable capable of being upgraded to provide such enhanced services, and, through
Ajato and Acesso, has already begun providing high-speed internet services
through its Cable network in the Sao Paulo and Rio de Janeiro metropolitan
areas. The Company also continues to explore the development of digital
compression of MMDS signals.
In addition, the Company seeks to increase its penetration in existing
markets by: (i) expanding the range of TVA's Cable systems by extending its
fiber optic and coaxial cable network and by seeking pre-wiring arrangements
with residential housing developers, (ii) improving the signal quality and
coverage of TVA's MMDS systems by using signal repeater technology and (iii)
maximizing penetration by offering tiered subscription options and developing
programming packages to appeal to more households. TVA's programming, unlike
that of its primary competitors, is provided through encoded signals and
addressable converters, thereby permitting the creation of a variety of
programming packages. Tiered programming packages allow subscribers a greater
number of choices in terms of pricing and types of programming. The Company
expects that these tiered programming packages will attract new subscribers,
including members of the C class, as well as retain current subscribers, thereby
reducing Churn.
12
Programming Distribution and Markets
The following table sets forth information regarding the markets in which
TVA operates pay television systems and distributes programming, as of December
31, 2000:
Pay Television
Average Revenue Programming
Service Launch TV Class ABC per Month per Channels
Date Homes(a) TV Homes(a) Subscribers Subscriber Offered
-----------------------------------------------------------------------------------------------
Owned Systems:
MMDS
TVA Sistema
Sao Paulo.............. September 1991 4,501,036 3,128,356 56,652 $25.47 27
Rio de Janeiro......... March 1992 2,829,744 1,470,121 99,912 25.69 28
TVA Sul
Curitiba............... March 1992 547,953 345,208 11,255 21.85 15
Cable(b)
TVA Sistema
Sao Paulo.............. October 1994 2,823,337 2,017,078 135,168 27.34 56
TVA Sul
Curitiba............... January 1995 407,551 227,221 21,476 25.73 50
Camboriu............... June 1996 13,497 9,111 8,202 24.68 48
Foz do Iguacu.......... June 1996 55,244 30,663 7,773 16.96 51
Florianopolis.......... September 1996 81,047 55,750 5,385 25.02 50
Total MMDS and Cable
Subscribers................. -- -- -- 345,823 --
Subscribers Awaiting
Installation................ -- -- -- 648 -- --
Total
Subscribers-Owned
Systems..................... -- -- -- 346,471 -- --
==========
Households Receiving
TVA Programming
Owned Systems................. -- -- -- 346,471 -- --
----------
Operating Ventures:
MMDS
TV Filme, Inc.
Brasilia............... July 1993 447,465 286,987 40,870 31.99
Goiania................ December 1994 272,255 147,786 10,372 25.02
Belem.................. December 1994 261,246 130,243 16,719 34.67
Campina Grande......... August 1999 85,748 24,342 5,389 16.03
Cable
Canbras TVA
Ten cities(c).......... April 1996 767,054 527,254 113,601 23.71
----------
Total-Operating -- -- -- 186,951 -- --
==========
Total......................... -- -- -- 533,422 -- --
==========
- ----------
(a) This data is based on information provided by Pay TV Survey and IBGE.
(b) The Company's Cable Systems in Sao Paulo, Curitiba, Camboriu, Foz do Iguacu
and Florianopolis had approximately 751,318, 196,223, 18,055, 19,900 and
29,822 Homes Passed, respectively, as of December 31, 2000.
(c) The ten cities served by Canbras TVA are Santo Andre, Sao Bernardo, Mogi
das Cruzes, Santa Branca, Sao Vicente, Praia Grande, Santos, Cubatao,
Guaruja and Bertioga.
13
Brazilian Pay Television Market
Brazil is the largest television and video market in Latin America with an
estimated 39 million TV Homes which, as of December 31, 2000, watched on average
approximately 2.5 hours of television per day. Approximately 5.3 million
television sets and 1.2 million VCR units were sold in Brazil during 2000. The
pay television industry in Brazil began in 1989 with the commencement by TVA of
UHF service in Sao Paulo. As of December 31, 2000, there were an estimated 3.5
million pay television subscribers, representing approximately 9.0% of Brazilian
TV Homes. By comparison, as of December 31, 1999, 49% of TV Homes in Argentina,
11% of TV Homes in Mexico and 77% of TV Homes in the United States of America
subscribed to pay television. Management believes that the number of pay
television subscribers in Brazil will continue to grow as pay television reaches
more households both through the expansion of existing and new MMDS and Cable
systems and through development of nationwide Ku-Band transmission system.
Distribution Operating Systems
TVA and the Operating Ventures distribute programming through Cable and
MMDS distribution technologies. The availability of these two distribution
technologies enables TVA to exploit the income and population characteristics,
topography and competitive dynamics of each of its markets.
MMDS
TVA operates Brazil's largest MMDS network, and with the Operating
Ventures, serves the country's major metropolitan areas. MMDS systems are
typically easier to deploy and require relatively little capital investment for
construction and maintenance as compared to Cable systems. Programming is
transmitted by signals through the air from microwave transmitters to a small
receiving antenna located at a subscriber's home or dwelling unit. At the
subscriber's location, the microwave signals are converted to frequencies that
can pass through a conventional coaxial cable into a decoder located near a
television set. All of TVA's MMDS systems use addressable converters, which
permit TVA to offer tiered pricing options that are expected to attract new
customers, retain existing customers and reduce Churn. In accordance with
Brazilian regulations, each MMDS license allows an MMDS operator to provide
service to households in a circular area within a radius of up to 50 kilometers,
depending on the technical capability of the operator. However, tall buildings
and other tall structures may block reception of an MMDS signal. MMDS is being
used in other emerging pay television markets such as Venezuela, Hong Kong and
Mexico, where Cable has a strong incumbent position.
TVA owns four MMDS licenses and operates MMDS systems in Sao Paulo, Rio de
Janeiro and Curitiba, which have an aggregate population of approximately 18.3
million. TVA serves 167,819 MMDS subscribers in these three cities. TVA's MMDS
systems offer between 13 and 28 channels of programming. TVA also holds
interests in other MMDS licenses through TV Filme, an Operating Venture which
operates MMDS systems in Brasilia, Goiania, Belem and Campina Grande and which
had 73,350 MMDS subscribers as of December 31, 2000. TV Filme also has licenses
to operate in eight other cities, including Belo Horizonte and Vitoria.
In 2000 ANATEL authorized TVA to utilize, under TVA's MMDS licenses, the
frequencies corresponding to the return channels of its MMDS systems. TVA will
use these frequencies, which range from 2170 to 2182 MHz, to provide
bi-directional broadband Internet services.
Cable
TVA has recently emphasized the strategic deployment of Cable service and
currently operates Cable systems in Sao Paulo, Curitiba and three other cities
in southern Brazil (Camboriu, Foz do Iguacu and Florianopolis). Cable service
involves a broad band network employing radio frequency transmission through
coaxial and/or fiber optic cable. Cable systems consist of four major parts: a
headend, a distribution network, a subscriber network and a house terminal. The
programming is collected from the headend, then processed and fed into the
distribution path (trunk and distribution cable), which consists of coaxial
and/or fiber optic cables. The signal is then fed into a subscriber network that
is either located in an apartment building or a subscriber's home. Most of TVA's
systems are constructed with either 750 MHz or 550 MHz bandwidth capacity, the
latter of which is readily upgradeable to 750 MHz bandwidth capacity. TVA's
14
systems in Curitiba, Camboriu and Foz do Iguacu are being upgraded to 750 MHz
bandwidth capacity. TVA's system in Florianopolis is being constructed to 550
MHz bandwidth capacity. This technology enables TVA to provide interactive
services, including internet service and, in the future, telecommunications. TVA
recently launched its Ajato high-speed internet service through its Cable system
to subscribers in Sao Paulo. In addition, TVA's Cable systems generally use
addressable converters, which allow the provision of pay-per-view services and
enable TVA to upgrade, downgrade or disconnect a subscriber's service from the
headend on short notice.
TVA, through TVA Sistema and TVA Sul, owns six Cable licenses and operates
Cable systems in Sao Paulo, Curitiba (where TVA originally owned three licenses
that were later merged into one license), Camboriu, Florianopolis and Foz do
Iguacu, which have an aggregate population of approximately 12.7 million and
178,004 subscribers. As of December 31, 2000, TVA had deployed approximately
5,183 kilometers of its Cable network, including 1,103 kilometers of fiber optic
cable, consisting of a 986 kilometer fiber optic loop in Sao Paulo and a 117
kilometer fiber optic network serving Curitiba, Camboriu, and Foz do Iguacu. TVA
is also upgrading or constructing the Cable systems in Curitiba, Camboriu, Foz
do Iguacu and Florianopolis. As a result of this build-out, as of December 31,
2000, TVA Cable systems passed 751,318 homes in Sao Paulo, 196,223 homes in
Curitiba and a total of 1,015,318 homes throughout all of TVA's Cable systems.
As of December 31, 2000, Canbras TVA, an Operating Venture 36% owned by TVA, had
an existing Cable network of 1,881 kilometers, with 434,946 Homes Passed and
113,601 subscribers. Canbras TVA is constructing Cable networks in ten cities in
the greater Sao Paulo area with a combined population of over 2.9 million. TVA
and Canbras TVA currently offer between 50 and 57 analog channels of programming
(including off-air channels) on their Cable systems, depending on the market,
and have the capability of offering up to 77 analog channels using up to 550 MHz
and 110 analog channels using up to 750 MHz. During the twelve months ended
December 31, 2000, TVA and Canbras TVA averaged approximately 2,480 and 1,974
net new Cable subscribers per month, respectively.
Internet
TVA, through TVA Sistema and Rede Ajato, provides high speed Internet
services in the Sao Paulo and Rio de Janeiro metropolitan areas. TVA Sistema's
"Acesso" service offers high speed broadband Internet access to pay television
subscribers utilizing TVA's Cable network. TVA expects that, upon obtaining
certain regulatory approvals, it will also be able to provide Acesso's services
through TVA's MMDS network, thereby creating an expanded service area in the Sao
Paulo and Rio de Janeiro metropolitan areas.
TVA's "Ajato" service, provided through Rede Ajato, was the first broadband
high speed Internet service provider created in Brazil. Ajato is a Portuguese
language content and service portal offering multimedia, real video and music
and video conferencing services, among others. TVA is actively pursuing
alliances with content and e-commerce providers in order to provide a diverse
and competitive portfolio of services through Ajato.
As a result of certain regulatory requirements, TVA has entered into
agreements with other major Internet access providers (including Virtua, a Globo
affiliate, and Speedy, a Telefonica affiliate) and Internet service providers
(including Globo.com, a Globo affiliate, and Terra, a Telefonica affiliate)
pursuant to which Ajato's services are offered through these access providers
and the services of these service providers are offered through Acesso.
As of December 31, 2000, Ajato and Acesso had 7,563 and 5,348 subscribers
(including backlog), respectively. Acesso subscribers currently pay a monthly
subscription fee of R$25 for one-way high speed access and R$49 for two-way high
speed access. Ajato subscribers currently pay a monthly subscription fee of R$35
for unlimited internet service.
The Owned Systems
TVA Sistema and TVA Sul operate TVA's MMDS and Cable businesses. TVA
Sistema operates TVA's MMDS operations in Sao Paulo and Rio de Janeiro and Cable
operations in Sao Paulo. TVA Sistema also operates the business of Acesso, TVA's
Internet access provider. TVA Sul operates TVA's MMDS operations in Curitiba and
Cable operations in Curitiba, Camboriu, Foz do Iguacu and Florianopolis.
15
TVA holds a 98% equity interest in TVA Sistema, and Robert Civita, a
Brazilian national and the beneficial owner of 99.99% of the equity interest of
Abril, holds the remaining 2% equity interest. TVA holds an 86% equity interest
in TVA Sul, and Abril holds the remaining 14%. TVA Sul, in turn, holds a 60%
equity interest in CCS-Camboriu Cable System Telecomunicacoes Ltda. ("CCS
Camboriu"), the operating company for TVA Sul's services in Camboriu, and an
unaffiliated third party holds the remaining 40%.
The Operating Ventures
The Operating Ventures operate Cable (Canbras TVA) and MMDS (TV Filme)
systems. TVA holds a 36% equity interest (and 51% of the total voting capital)
in each of the Canbras TVA companies (Canbras TVA Cabo Ltda. and Santa Branca
Comercio Ltda.). Canbras Participacoes Ltda., a Brazilian company
("Canbras-Par") holds the remaining interests in Canbras TVA. Canbras-Par is an
affiliate of Canbras Holdings Ltd. and Canbras Communications Corp., a
publicly-traded Canadian company, which are affiliates of Bell Canada
International, Inc., an affiliate of BCE Inc., Canada's largest
telecommunications group. The Association Agreement, dated June 14, 1995, among
TVA, TVA Sistema, the Canbras TVA companies, Canbras Communications Corp. and
Canbras Participacoes Ltda. (the "Canbras Association Agreement") provides for
each of the Canbras TVA companies to be governed by a management committee of
three members, one of which TVA has the right to designate. In addition, TVA has
agreed to supply to Canbras TVA all programming regularly supplied to the Owned
Systems at "most favored prices" and other terms at which programming is
provided to the Owned Systems or to third parties in arm's-length transactions.
TVA agreed to grant to Canbras-Par a "right of first refusal" to participate in
Cable licenses that TVA may obtain, directly or indirectly, and Canbras-Par
granted to TVA a similar "right of first refusal" to participate in Cable
licenses acquired by Canbras-Par. The term of the Canbras Association Agreement
is for so long as Canbras-Par or its assignee owns shares "in companies which
have the objective of engaging in the cable TV business." The Canbras
Association Agreement does not specify the terms and conditions on which any
co-investments in Cable licenses are to be made, and such terms and conditions
have been negotiated in good faith, on a case-by-case basis, in connection with
any future cable license investments.
Prior to July 2000, TVA held a 14.7% equity interest in TV Filme. The
remaining interests were held by Warburg, Pincus Investors, L.P., which held a
38.8% equity interest; members of the Lins family, Brazilian nationals, who held
a 16.2% equity interest; public shareholders, who held a 28.15% equity interest;
and certain individuals with a combined 2.15% equity interest (on July 29, 1996,
TV Filme completed a public offering of 2.5 million shares of its common stock
in the United States at an initial price of U.S.$10.00 per share). In August
1999, TV Filme entered into an agreement with a committee representing a
majority of the holders of TV Filme's 12.875% Notes due 2004 pursuant to which
these noteholders would receive (i) a U.S.$25 million cash payment, (ii) U.S.$35
million in new five-year 12% secured notes and (iii) 80% of the new common
shares of the reorganized company. This agreement received court approval under
Charter 11 of the U.S. bankruptcy code in April 2000 and was implemented in July
2000, following approval from ANATEL and the Central Bank of Brazil. Following
implementation of the reorganization plan, TVA's equity interest in TV Filme was
reduced to approximately 0.7%.
Programming
TVA, through its MMDS and Cable systems, currently provides a programming
package consisting of 15 to 56 television channels. TVA programming emphasizes
sports, movies, children's programming and news with a secondary emphasis on
general entertainment.
With respect to MMDS and Cable service in TVA's markets, TVA is currently
the sole provider of HBO Brasil, HBO Brasil 2, Cinemax, Cinemax Prime, Disney
Channel Brasil, E! Entertainment Television, Mundo, BandNews, Eurochannel, Film
and Arts, Locomotion, NHK and ART. In addition, TVA has distribution rights to
certain of Brazil's most important soccer championships, including the Sao Paulo
and Rio de Janeiro State Championships.
In addition, TVA has entered into a number of programming agreements with
international programming providers. For example, TVA has entered into
agreements with Turner Broadcasting Systems Latin America Inc. (Cartoon Network,
TNT, CNN International, CNN Espanol), Fox Latin American Channel Inc. (Fox Latin
America, Fox Kids), Discovery Latin America (People & Arts, Discovery Brasil,
Discovery Kids), Disney Channel and PSN.
TVA currently offers subscribers the following channels, among others:
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Movies and Series
HBO Brasil is the dominant first-run pay television movie channel in
Brazil. HBO Brasil airs 24 hours a day, offering an average of 12 different
films per day with limited commercial slots. All films are either subtitled or
dubbed into Portuguese. In the case of dubbed versions, viewers can listen to
the original soundtrack on an SAP (second audio program) channel. TVA also
offers HBO Brasil 2, transmitting HBO Brasil with a six hour time shift.
AXN is a films and series channel with emphasis on action, adventure and
extreme sports.
Cinemax is a premium 24-hour movie channel with a film library
complementary to that of HBO Brasil. Cinemax features a different variety of
movie each day of the week.
Cinemax Prime is a 24-hour movie channel offering classic movies,
"making-of" features and other award-winning movies.
Disney Channel offers family-oriented movies, locally-produced live shows,
series, cartoons and specials in Portuguese.
Eurochannel offers subscribers programs from major European programming
distributors, such us Canal +, BBC, Channel 4, TF1, France 2/3, Europe Images
and Gaumont. Eurochannel also offers news, series, mini-series, documentaries,
music and variety shows.
Film and Arts is an arts and movie channel, following the same concept as
the U.S. version of the Bravo channel, showing high quality, cultural events,
such as classical music, jazz, opera, ballet and European movies.
Fox presents movies, as well as programs from the 2,000 titles in the
library of Twentieth Century Fox Television International ("Fox"). Fox also
presents American television series, such as L.A. Law, M*A*S*H, and The
Simpsons, among many others. TVA also offers Fox Kids, a 24-hour channel
featuring the best of Fox programming for children.
Hallmark features mainly original TV movies.
MGM Gold is a movie and series channel with selected productions from the
Metro-Goldwin-Mayer studios.
Sony Entertainment is primarily a situation comedy channel, produced by
Sony Pictures Entertainment, Inc., exhibiting series such as Friends, Seinfeld,
Mad About You and E.R.
TNT is a movie channel that offers the Turner Network Television movie
collection, including over 5,000 classic movie titles from Metro Goldwyn Mayer,
Inc. pursuant to a non-exclusive agreement with Turner International, Inc. In
addition, TNT airs children's programming, documentaries and sporting events.
The movies presented by TNT are broadcast in stereo sound and subtitled or
dubbed in Portuguese or Spanish. In the case of dubbed versions, viewers can
listen to the original soundtrack on a SAP channel.
Warner is a family entertainment channel, with new and classic cartoons,
children's programs, situation comedies and movies.
Sports
ESPN Brasil, a popular sports channel, provides coverage of Brazilian
soccer games and other Brazilian and international sports entertainment
programs, mixed with programming from ESPN2.
ESPN International is the second sports channel offered by TVA. ESPN
International offers a number of different sporting events, which include auto
racing, National Football League games, professional tennis matches, Major
League Baseball games, and National Basketball Association games.
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PSN is a 24-hour sports channel created especially for the Brazilian and
Latin American markets. Approximately 60% of PSN's programming is dedicated to
soccer events.
News
BandNews is the first Brazilian headline news program. Produced locally by
TV Band, BandNews presents news 24 hours per day in 30 minute blocks, featuring
the most recent events and relevant news in Brazil and abroad.
CNN International features news and information programming, offering
international news coverage concerning politics, business, financial and
economic developments, 24 hours a day.
CNN Espanol is the Spanish version of CNN International.
Educational Programming
Discovery Brasil is comprised of programming shown on the U.S. Discovery
Channel, based on topics in the areas of nature, science and technology,
history, adventure and world cultures.
Mundo presents 24 hours per day of documentaries, biographies and great
moments in sports, music and history, including selected programming from the
History Channel.
People and Arts is a 24-hour channel presenting documentaries about arts,
personalities and cultures from different countries around the world.
Music and Entertainment
E! Entertainment Television presents 24 hours per day of reports regarding
movies, television, fashion and the arts.
MTV Brasil is a 24-hour channel produced by MTV Brasil Ltda., a joint
venture company owned by Abril and an indirect subsidiary of Viacom
International (Netherlands B.V.). MTV Brasil is entirely produced in Brazil in
Portuguese. MTV Brasil has licensing agreements with the MTV Network, a division
of Viacom International, and transmits a combination of music and other video
clips, cartoons and local programming.
MC Country Music is a 24-hour channel with the best of pop and country
music programming, including videoclips, shows and interviews with famous
American country artists. MC Country Music programming contains a special block
featuring Brazilian artists.
Children's Programming
Cartoon Network is an animated cartoon channel targeted to children that
offers programs such as The Flintstones, The Jetsons, The Smurfs, Yogi Bear and
other classic series.
Discovery Kids is a 24-hour channel featuring the best of Discovery
programming for children.
Fox Kids is a 24-hour channel featuring the best of Fox programming for
children.
Locomotion is an animation channel with programming targeted to adolescents
and adults, such as Dr. Keds and South Park.
Nickelodeon is a 24-hour channel for children offering programs such as
Rugrats and Bananas in Pijamas.
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Ethnic Programming
ART features programming directed at Brazil's Arab community, including
news, sports, films entertainment programs and other programs from Lebanese
television.
Deutsche Welle features programming in German, English and Spanish for the
German community in Brazil.
NHK offers programming in Japanese for Brazil's Japanese community.
RAI offers programming in Italian for Brazil's Italian community.
RTPi, Radiotelevisao Portuguesa Internacional, is a Portuguese state-owned
general entertainment channel produced and assembled in Portugal, airing music
events, talk shows, movies, news and documentaries, exclusive to TVA.
Operations
Marketing. TVA periodically conducts marketing surveys to gauge consumer
preferences and evaluate new and existing markets. TVA also frequently evaluates
the demographics of the subscribers to its programming, seeking to provide
programming most in demand. In each market, TVA's marketing staff typically
applies one or more of the following programs to attract subscribers: (i)
extensive marketing tied to regional events such as soccer matches, (ii)
neighborhood promotional events featuring large screen broadcasts of its channel
offerings, (iii) direct mailings, (iv) telemarketing, (v) television, billboard,
magazine and newspaper advertisements, (vi) pre-wiring arrangements with
residential housing developers and (vii) other promotional marketing activities,
including referral programs and promotional gifts.
Installation. The installation package delivered to a new subscriber
depends upon the type of programming delivery service chosen by the subscriber.
The MMDS installation package features a standard rooftop mount linked to an
antenna and related equipment, including a decoder, located at the subscriber's
location. Cable service requires the installation of a cable line and a decoder
at the subscriber's dwelling. Once a new subscriber has requested service, the
time a subscriber waits for the commencement of service depends on several
factors, including type of service, whether the subscriber has access to Cable,
whether the subscriber is in a single family home or multiple dwelling unit and
whether the topography of the surrounding area makes MMDS service viable. TVA
provides installation service to subscribers, either with its own personnel or
through local subcontractors. In approximately 80% of all cases, TVA installs
its service and begins transmitting programming on the same day in which
subscription orders are received.
Programming Facilities. Programming equipment is used to prepare the
programming material for transmission via TVA's MMDS and Cable systems. The
programming equipment inserts commercial or promotional material, if
appropriate, monitors the quality of the picture and sound, and delivers the
material to the multiplexing system. For programming delivered to TVA as taped
material, the programming equipment also compiles the various programming
segments, inserting commercial and promotional material.
Subscriber Service. Management believes that delivering high levels of
subscriber service in installation and maintenance enables it to maintain high
levels of subscriber satisfaction and to maximize subscriber retention. To this
end, TVA attempts to promptly schedule installations, provides a subscriber
service hotline in each of the metropolitan areas in which TVA operates,
attempts to promptly provide response repair service, and attempts to make
follow-up calls to new subscribers shortly after installation to ensure
subscriber satisfaction. TVA seeks to instill a subscriber service focus in all
its employees through ongoing training and has established an intra-company
electronic mail system to provide a forum for employees to exchange ideas
concerning ways to increase subscriber satisfaction. TVA also has various
employee bonus programs linked to measures of subscriber satisfaction. To enable
its employees to provide service more quickly, TVA is working to centralize its
subscriber service operations.
Management Information Systems and Billing. Management believes that TVA's
proprietary management information systems enable TVA to deliver superior
subscriber service, monitor subscriber payment patterns and facilitate the
efficient management of each of its operating systems. Management believes that
TVA's billing procedures
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are an integral part of its strategy to maintain high levels of subscriber
satisfaction and to maximize subscriber retention. Subscribers have the option
to select the day on which payment for that month's service is due, out of ten
possible dates each month, and pay their bills through payment at a bank,
deduction from checking account or with a credit card.
Competition
General
TVA and the Operating Ventures compete with pay television service
providers using Cable, MMDS and DBS transmission technologies. TVA expects to
continue to face competition from a number of existing and future sources,
including potential competition as a result of new and developing technologies
and the easing of regulation in the pay television industry. TVA believes that
competition is and will continue to be primarily based upon program offerings,
customer satisfaction, quality of the system network and price. Since there is a
very limited history of pay television services in Brazil, there can be no
assurance that, based on the potential size of the Brazilian pay television
industry, the pay television market will be able to sustain a number of
competing pay television providers. TVA and the Operating Ventures also compete
with national broadcast networks and regional and local broadcast stations.
MMDS and Cable Service
TVA competes with other major Cable and MMDS operators in each of its
principal markets. TVA's principal competitors in Cable service are operations
owned or controlled by Globo Cabo S.A. ("Globo Cabo") and Net Sul Comunicacoes
S.A. ("Net Sul"). On September 4, 1998, the shareholders of Multicanal
Participacoes ("Multicanal") approved a transaction with its controlling
shareholder, Globo Cabo Holding ("GC Holding"), pursuant to which the cable
television and MMDS operations of GC Holding's wholly-owned subsidiary, Globo
Cabo Participacoes ("GC Par"), were merged with and into Multicanal in a
share-for-share exchange. Concurrently, the merged company was renamed Globo
Cabo S.A. At the time of the merger, GC Par controlled three cable television
systems and one MMDS operation: Net Sao Paulo, Net Rio, Net Brasilia, and Net
Recife, respectively. Additionally, GC Par held an unconsolidated 50% stake in
Unicabo, which provides cable television services to six medium-sized cities in
the interior of the state of Sao Paulo. At the time of the merger, Multicanal
provided cable television services in eleven cities, including Sao Paulo, Belo
Horizonte, Goiania, Anapolis, Campo Grande and several cities in the interior of
the state of Sao Paulo. Net Sul operates Cable services in 25 cities in southern
Brazil and provides MMDS service in Porto Alegre and Curitiba.
Globo Comunicacoes e Participacoes Ltda. ("Globo Par") and TV Globo, the
owners of Brazil's most popular off-air channels (together, "Globo"), control,
or have significant interests, in Globo Cabo and Net Sul. On June 20, 2000,
Globo Cabo and Net Sul announced an agreement to merge in a share-for-share
exchange, subject to ANATEL's approval. In addition, in September 2000, Globo
Cabo purchased a majority equity interest in RBS, its local cable operator in
southern Brazil, and incorporated RBS's operations into those of Net Sul.
The systems controlled by Globo Cabo and Net Sul offer a similar number of
channels of programming at prices comparable to those charged for TVA's MMDS and
Cable services. Each of these systems broadcasts programming purchased from TVA
as well as from other sources.
DBS Service
TVA also competes with providers of Ku-Band service in Brazil, principally
Net Sat Servicos Ltda. ("Net Sat") and DIRECTV. Globo Par has a controlling
interest in Net Sat, whose other equity holders include News Corporation plc, a
subsidiary of The News Corporation Limited. Net Sat currently offers 110 audio
and video channels of programming (including pay-per-view channels), while
DIRECTV currently offers 128 channels of audio and video programming, including
35 pay-per-view channels. In addition, Tectelcom-Tecnica em Telecomunicacoes
launched its Ku-Band service with 91 audio and video channels in the second
quarter of 1998.
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Off-Air Broadcast Television
Broadcasting services are currently available to substantially all of the
Brazilian population without payment of a subscription fee by six
privately-owned national broadcast television networks and a government-owned
national public television network. The six national broadcast television
networks and their local affiliates currently provide services to nearly all
Brazilian TV Homes without payment of a subscription fee. The national broadcast
television networks and local broadcast stations receive a significant portion
of their revenues from the sale of television advertising, which revenues are
based in part on the audience share and ratings for the networks' programs.
Programming offered by pay television providers, including TVA, directly
competes for audience share and ratings with the programming offered by
broadcast television networks as well as regional and local television
broadcasters. The six national broadcast television networks are Globo, SBT, TV
Band, Rede TV, TV Record and Gazeta/CNT. The national television networks
utilize one or more satellites to retransmit their signals to their local
affiliates throughout Brazil.
Regulatory Framework
The subscription television industry in Brazil is subject to regulation by
the Agencia Nacional de Telecomunicacoes ("ANATEL"), an independent federal
agency, pursuant to Law No. 9472/97 ("Law 9472"), Law No. 9295/96 ("Law 9295")
and Law No. 8977/95 ("Law 8977"). ANATEL is authorized to grant concessions for
MMDS, Cable, DBS, and UHF licenses.
MMDS Regulations
General. Law 9472 authorizes ANATEL, among other things, to issue, revoke,
modify and renew licenses within the spectrum available to MMDS systems, to
approve the assignments and transfer of control of such licenses, to approve the
location of channels that comprise MMDS systems, to regulate the kind,
configuration and operation of equipment used by MMDS systems, and to impose
certain other reporting requirements on channel license holders and MMDS
operators. The licensing and operation of MMDS channels are currently governed
by Decree No. 2196/97 ("Decree 2196"), Ordinance No. 254/97 (as amended by
Ordinance No. 319/97, "Ordinance 254") and Rule No. 002/Rev. 97 ("Rule 002").
Under these regulations, MMDS is defined as the special service of
telecommunication which uses microwaves to transmit codified signals to be
received in pre-established points on a contractual basis.
Licenses. ANATEL grants licenses and regulates the use of channels by MMDS
operators to transmit video programming, entertainment services and other
information. A maximum of 31 MMDS channels (constituting a spectrum bandwidth of
186 MHz) may be authorized for use in an MMDS market. While licenses are usually
granted for the use of up to 16 channels, depending on technical feasibility and
the existence of competition, ANATEL can grant a license for all 31 channels
available in one specific area. If the license is for 16 or more channels, at
least two channels must be reserved for educational and cultural programming. If
the license involves 15 or fewer channels, there is no obligation to reserve any
channel for educational and cultural purposes. In each of the Company's Sao
Paulo and Rio de Janeiro markets, up to 31 MMDS channels are available for MMDS
(in addition to any local off-air VHF/UHF channels which are offered).
An MMDS license is granted for a renewable period of 15 years. The
application for renewal of a license must be filed with ANATEL during the period
from 18 months before the end of the license term. To renew the license, the
license holder must (i) meet applicable legal and regulatory requirements, (ii)
have complied with all legal and contractual obligations during the term of such
license and (iii) meet certain technical and financial requirements.
Under the most recently promulgated provisions of Rule 002, each license
holder and its affiliates may be granted permission to operate MMDS systems in
different areas of Brazil, provided that no holder may be granted licenses for
(i) more than seven municipalities with a population equal to or exceeding
700,000 inhabitants and (ii) more than 12 municipalities with a population
between 300,000 and 700,000 inhabitants. The restrictions only apply to areas in
which the MMDS system operator (or an affiliate thereof) faces no competition
from other pay television services, excluding services that utilize a satellite
to transmit their signal. Rule 002 grants ANATEL full discretion to alter or
eliminate the restrictions. The term affiliate is defined by Rule 002 as any
legal entity that directly or indirectly holds at least 20% of the voting
capital. The Company currently controls five MMDS licenses in cities of more
than 700,000 inhabitants (Sao Paulo (2), Rio de Janeiro, Curitiba and Porto
Alegre), but in each such city TVA has at least one
21
competitor. Prices for pay television services may be freely established by the
system operator, although ANATEL may interfere in the event of abusive pricing.
ANATEL may impose penalties including fines, suspension or revocation of the
license if the license holder fails to comply with applicable regulations or
becomes legally, technically or financially unable to provide MMDS service.
ANATEL also may intervene to the extent operators engage in unfair practices
intended to eliminate competition.
ANATEL awards licenses to use MMDS channels based upon applications
demonstrating that the applicant is qualified to hold the license, that the
proposed market is viable and that the operation of the proposed channels will
not cause impermissible interference to other permitted channels. After ANATEL
determines that an application has met these requirements, it publishes a notice
requesting comments from all parties interested in providing the same services
in the same or a near area. Depending on the comments received, ANATEL may
decide to open a public bid for the service in that area, although it has not
done so in the past. In the case of a public bid, applicants would be evaluated
based on a number of factors including the applicant's proposed schedule for
implementing commercial operations, the applicant's commitment to local
programming and the extent to which the applicant provides free programming to
local cultural and educational institutions. Once an MMDS license application is
granted by ANATEL, the license holder must finalize construction and begin
operations within 12 months, which period may be extended by an additional 12
months.
In addition to qualifying under the application process described above, a
license holder must also demonstrate that its proposed signal does not violate
interference standards in the area of another MMDS channel license holder. To
this end, existing license holders are given a 30-day period in which to
ascertain and comment to ANATEL whether the new license holder's proposed signal
will interfere with existing signals. The area covered by the services is to a
radius of five to 50 kilometers around the transmission site, depending on the
technical capability of the operator.
Other Regulations. MMDS license holders are subject to regulation with
respect to the construction, marketing and lighting of transmission towers
pursuant to the Brazilian Aviation Code and certain local zoning regulations
affecting construction of towers and other facilities. There may also be
restrictions imposed by local authorities. The subscription television industry
also is subject to the Brazilian Consumer Code. The Consumer Code entitles the
purchasers of goods or services to certain rights, including the right to
discontinue a service and obtain a refund if the services are deemed to be of
low quality or not rendered adequately. For instance, in case of a suspension of
the transmission for a given period, the subscriber shall be entitled to a
discount on the monthly fees. Rule No. 002 contains certain provisions relating
to consumer rights, including a provision for mandatory discounts in the event
of interruption of service. The Company, as of December 31, 1998, had not been
required to repay any amounts or provide any discounts due to interruptions of
service. However, the Company does refund prepaid installation service fees when
the Company discovers such service is unavailable for whatever reason.
Due to the regulated nature of the subscription television industry, the
adoption of new, or changes to existing, laws or regulations or the
interpretations thereof may impede the Company's growth and may otherwise have a
material adverse effect on the Company's results of operations and financial
condition.
Cable Regulation
General. Cable services in Brazil are licensed and regulated by ANATEL
pursuant to Law No. 8977/95 ("Law 8977"), Decree No. 2206/97 ("Decree 2206"),
which authorized the regulation of Cable Services, and Ordinance 256/97
("Ordinance 256"), which approved the Norma Complementar do Servico de TV a Cabo
regulating the granting of licenses for, and the operation of, Cable services.
Until Law 8977 was enacted in 1995, the Brazilian Cable industry had been
governed by two principal regulatory measures since its inception in 1989:
Ordinance No. 250, issued by the Ministry of Communications on December 13, 1989
("Ordinance 250"), and its successor, Ordinance No. 36, issued by the Ministry
of Communications on March 21, 1991 ("Ordinance 36").
Ordinance 250 regulated the distribution of television signals ("DISTV") by
physical means (i.e., by Cable) to end-users. DISTV services generally are
limited only to the reception and transmission of signals without any
interference by a DISTV operator with the signal content. Under Ordinance 250,
101 authorizations were granted by the Ministry of Communications to local
operators to commercially exploit DISTV services. Although Ordinance 250 did
22
not specifically address Cable services, a number of DISTV operators (including
the Company's Cable systems) began to offer Cable services based on DISTV
authorizations.
Licenses. Under Law 8977, a Cable operator must obtain a license from
ANATEL in order to provide Cable services in Brazil. All Cable licenses are
nonexclusive licenses to provide Cable services in a service area. Cable
licenses are granted by ANATEL for a period of 15 years and are renewable for
equal and successive periods. Renewal of the Cable license by ANATEL is
mandatory if the Cable system operator has (i) complied with the terms of the
license grant and applicable governmental regulations and (ii) agrees to meet
certain technical and economic requirements relating to the furnishing of
adequate service to subscribers, including system modernization standards.
Ordinance No. 256/97 ("Ordinance 256") imposes restrictions on the number
of areas that can be served by a Cable television system operator (or an
affiliate thereof). Pursuant to Ordinance 256, a Cable system operator (or an
affiliate thereof) may only hold licenses with respect to (i) a maximum of seven
areas with a population of 700,000 and above and (ii) a maximum of 12 areas with
a population of 300,000 or more and less than 700,000. The restrictions only
apply to areas in which the Cable system operator (or an affiliate thereof)
faces no competition from other pay television services, excluding services that
utilize a satellite to transmit their signal. Ordinance 256 grants ANATEL full
discretion to alter or eliminate the restrictions. The term affiliate is defined
by Ordinance 256 as any legal entity that directly or indirectly holds at least
20% of the voting capital of another legal entity or any of two legal entities
under common ownership of at least 20% of their respective voting capital. The
Company currently controls two Cable licenses in cities of more than 700,000
inhabitants (Sao Paulo and Curitiba), but in each such city TVA has at least one
competitor.
Generally, only legal entities that are headquartered in Brazil and that
have 51% of their voting capital by Brazilian-born citizens or persons who have
held Brazilian citizenship for more than 10 years are eligible to receive a
license to operate Cable systems in Brazil. In the event that no private entity
displays an interest in providing Cable services in a particular service area,
ANATEL may grant the local public telecommunications operator a license to
provide Cable services.
Cable operators that previously provided Cable services under a DISTV
authorization granted under Ordinance 250 were required under Law 8977 to file
applications to have their DISTV authorizations converted into Cable licenses.
Ordinance 256 grants a one year period from the date a DISTV authorization is
converted into a cable television license for any Cable system operator to
comply with the restrictions. The Company's Cable systems, all of which were
operating under DISTV authorizations, applied for conversion of their DISTV
authorizations and received approval for such conversion from the Ministry of
Communications.
Cable licenses for service areas not covered by existing authorizations
will be granted pursuant to a public bidding process administered by ANATEL
after prior public consultation. All such licenses shall be nonexclusive
licenses. In order to submit a bid for a license, a bidder must meet certain
financial and legal prerequisites. After such prerequisites are met, a bidder
must then submit a detailed bid describing its plan to provide Cable services in
the service area. In the qualification phase of the bidding process, ANATEL
assigns a number of points to each bid based on certain weighted criteria,
including the timetable for offering subscription programming; the time
allocated to local public interest programming; the number of channels allocated
to educational and cultural programming; and the number of establishments, such
as schools, hospitals and community centers, to which basic service programming
will be offered free of charge. After calculating the number of points awarded
to each bidder, ANATEL will then apply a formula based on the population of the
service area to select the winning bid from among those bidders that meet
certain defined minimum qualifying thresholds. For service areas with a
population of 700,000 or more inhabitants, the qualified bidder that submits the
highest bid for the license will be selected. For service areas with a
population between 300,000 and 700,000 inhabitants, the winning bid is selected
based on the highest product obtained by multiplying the number of points
awarded in the qualification phase and the amount bid for the license. For
service areas with less than 300,000 inhabitants, the winning bid is selected on
the basis of the number of points awarded in the qualification phase and the
payment of a fixed fee.
Once a Cable license is granted, the licensee has an 18 month period from
the date of the license grant to complete the initial stage of the installation
of the Cable system and to commence providing Cable services to subscribers in
the service area. The 18 month period is subject to a single 12 month extension
for cause at the discretion of ANATEL.
23
Any transfer of a Cable license is subject to the prior approval of ANATEL.
A license generally may not be transferred by a licensee until it has commenced
providing Cable services in its service area. Transfers of shares causing a
change in the control of a license or the legal entity which controls a license
also is subject to the prior approval of ANATEL. ANATEL must receive notice of
any change in the capital structure of a licensee, including any transfer of
shares or increase of capital that do not result in a change of control.
A license can be revoked, upon the issue of a judicial decision, in the
event the licensee lacks technical, financial or legal capacity to continue to
operate a Cable system; is under the management of individuals, or under the
control of individuals or corporations who, according to Law 8977, do not
qualify for such positions; has its license transferred, either directly or by
virtue of a change in control, without the prior consent of ANATEL; does not
start to provide Cable services within the time limit specified by Law 8977; or
suspends its activities for more than thirty consecutive days without
justification, unless previously authorized by ANATEL.
Cable Related Service Regulation
General. Brazilian telecommunications services are governed primarily by
(i) Article 21 of the Federal Constitution, as amended by Amendment No. 8 of
August 15, 1995 ("Amendment 8"), (ii) the Telecommunications Code (Law No. 4117
of August 27, 1962, as amended), (iii) Law 9472, (iv) Law 9295 and (v) Law 8977.
The Brazilian Government also has issued detailed regulations covering specific
areas of telecommunications services, including radio broadcasting, paging,
trunking, subscription television, Cable television and cellular telephony.
ANATEL is responsible for the regulation of telecommunications services in
Brazil. Prior to its amendment in 1995, Article 21 of the Federal Constitution
required the Brazilian Government to operate directly, or through concessions
granted to companies whose shares are controlled by the Brazilian Government,
all telephone, telegraph, data transmission and other public telecommunications
services. This constitutional requirement was the basis for the establishment of
the state-owned telephone monopoly, Telebras, which held controlling interests
in 27 regional telephone operating companies. With the adoption of Amendment 8,
Article 21 was modified to permit the Brazilian Government to operate
telecommunications services either directly or through authorizations,
concessions or permissions granted to private entities. In particular, Amendment
8 removed the constitutional requirement that the Brazilian Government must
either directly operate or control the shares of companies which operate
telecommunications services. Even with the adoption of Amendment 8, the
Brazilian Government still retains broad regulatory powers over
telecommunications services. Notwithstanding the existence of the Telebras
monopoly, private companies have been permitted under Brazilian law to provide a
number of telecommunications services other than telephony, including radio
broadcasting, paging, trunking, subscription television and cable television
services. However, fixed public telephony and cellular telephony were
exclusively provided by Telebras through its regional telephone operating
companies. In 1998 the Ministry of Communications and ANATEL concluded the
privatization of all public fixed and cellular telephone companies.
High-Speed Cable Data Services. Law 8977 and Decree 2208, among other
things, authorize cable television operators, such as the Company, in addition
to furnishing video and audio signals on their cable networks, to utilize their
networks for the transmission of meteorological, banking, financial, cultural,
price and other data. This broad grant of authority is understood to permit
Cable television operators to furnish services such as interactive home banking
and high-speed Cable data services to subscribers through their cable television
networks, although a simplified licensing procedure for high-speed Cable data
services may be installed by ANATEL in the future.
On November 29, 1999, ANATEL issued Regulation 190, which authorized the
use of subscriber communication networks (such as Cable systems) by
unidirectional or bidirectional value-added service providers. Regulation 190
also regulates certain terms between value-added service providers and
subscriber network operators. TVA is subject to Resolution 190 both as a cable
operator (through TVA Sistema) and a provider of high speed internet service
(through Ajato).
Cable Telephony. In accordance with Law 8977, the Company is not permitted
to furnish fixed telephone services in Brazil without a specific license to do
so. Therefore, absent a change in Brazilian law, the Company would not be
permitted to furnish cable telephony on its network. There are, however, certain
limited regulatory exceptions pursuant to which private entities other than
Telebras and the regional telephone operating companies have been permitted to
provide limited fixed telephony services in Brazil. Under one particular
exception, certain private telephone networks (Centrais Privadas de Comutacao
Telefonica or "CPCT") serving "condominiums" (as such term is defined
24
under Brazilian law) have been permitted to interconnect their private telephone
networks to the public telephone network operated by the local telephone
operating company. A CPCT is comparable to a private branch exchange (PBX) found
in some larger apartment complexes, hotels and businesses in the United States.
Under Brazilian law, the term "condominium" refers to residential and
nonresidential buildings or building complexes that have entered into a legal
association. In practice, a condominium desiring to establish a CPCT will
generally contract with a private service provider to install, operate and
maintain the CPCT and to secure interconnection with the public telephone
network. Ordinance No. 119/90 of 10 December 1990 ("Ordinance 119"), which was
issued by the predecessor to the Ministry of Communications, sets forth
requirements for the interconnection of CPCTs with the public telephone network.
In general the installation, operation and maintenance of a CPCT does not
require any authorization from the Ministry of Communications or Telebras. In
order to interconnect with the public telephone network, a CPCT must comply with
the requirements set forth in Ordinance 119. Such requirements primarily relate
to meeting technical equipment certification and acceptance standards. Assuming
that such standards are met, the regional telephone operating company is
required under Ordinance 119 to interconnect the CPCT requesting interconnection
to the public telephone network. The Company believes that, under current
Brazilian law, Cable television operators can utilize their Cable television
networks in order to facilitate the installation and operation of a CPCT.
Furthermore, under the authority granted by Ordinance 119, CPCTs may be
interconnected through Cable television networks to the public telephone
network.
Other. On November 24, 1999, ANATEL and ANEEL (Agencia Nacional de Energia
Eletrica, or National Electric Energy Agency) published Joint Resolution No.
001, which sets guidelines for the use of infrastructure among the electric
energy, telecommunications and oil industries in order to maximize the use of
resources and reduce operating costs. TVA has initiated an arbitration
proceeding with Centrais Eletricas de Santa Catarina--CELESC and Companhia
Paranaense de Energia Eletrica--COPEL in order to resolve certain questions
relating to TVA's contracts with these entities, particularly with respect to
pole rental fees.
Legal Proceedings
The Company is party to certain legal actions arising in the ordinary
course of its business which, individually or in the aggregate, are not expected
to have a material adverse effect on the consolidated financial position of the
Company. As of December 31, 2000, the Company had reserved approximately $2.5
million as contingent liabilities in connection with certain litigation
contingencies, involving primarily claims by persons arising in connection with
the termination of their employment.
The Company's operating companies are currently defending a lawsuit brought
by the Escritorio Central de Arrecadacao e Distribuicao (Central Collection and
Distribution Office, or "ECAD"), a government-created entity authorized to
enforce copyright laws relating to musical works. ECAD filed a lawsuit in 1993
against all pay-television operators in Brazil seeking to collect royalty
payments in connection with musical works broadcast by the operators. The suit
was filed against TVA in the Tribunal de Justica do Estado de Sao Paulo, the 16
Vara Civel do Estado de Sao Paulo, the Tribunal de Justica do Estado do Parana
and the Tribunal de Justica do Estado de Santa Catarina. The suit was filed
against TV Filme in the Tribunal de Justica do Estado de Goias, the Tribunal de
Justica do Distrito Federal and the Tribunal de Justica do Estado do Para and
against Canbras TVA in the Tribunal de Justica do Estado de Sao Paulo. ECAD is
seeking a judgment award of 2.55% of all past and present revenues generated by
the operators. The suits are currently being submitted to the Superior Tribunal
de Justica in order to determine whether ECAD is entitled to benefit from the
copyrights relating to musical works broadcast on pay television. Although the
Company intends to continue to vigorously defend these suits, the loss of such
suits may have a material adverse effect on the consolidated financial position
of the Company. Based on agreements reached by ECAD with other Brazilian
television operators, however, management believes that it can reach a
negotiated settlement to these suits whereby the Company would make monthly
payments to ECAD in an amount significantly lower than that sought by ECAD.
C. Organizational Structure
The following chart sets forth the significant subsidiaries comprising the
corporate structure of TVA's Cable, MMDS and Internet businesses. Except as
indicated otherwise, each of the subsidiaries listed below is incorporated in
the Federative Republic of Brazil. See "Business Overview--Owned Systems" and
"--Operating Ventures."
25
----------------------
Tevecap S.A.
(TVA)
----------------------
|
|
--------------------------
100% 100%
| |
| |
---------------------- ----------------------
TVA Distribuidora S.A. Rede Ajato
---------------------- ----------------------
|
|
- ---------------------- | ----------------------
|
TVA Sistema 98% | 36% Canbras TVA
|
- ---------------------- | ----------------------
|
|
- ---------------------- |
|
TVA Sul 86% |
|
- ---------------------- |
| |
60% |
|
- ---------------------- | ----------------------
|
CCS Camboriu | 0.7% TV Filme
(Delaware)
- ---------------------- ----------------------
D. Property, Plant and Equipment
The Company owns most of the assets essential to its operations. The major
fixed assets of the Company are coaxial and fiber optic cable, converters for
subscribers' homes, electronic transmission, receiving, processing and
distribution equipment, microwave equipment and antennae. The Company leases
certain distribution facilities from third parties, including space on utility
poles, roof rights and land leases for the placement of certain of its hub
sights and head ends and space for other portions of its distribution system.
The Company leases its offices from third parties, with the exception of certain
offices of TVA Sul, located in Curitiba, State of Parana, which are owned by the
Company. The Company also owns its data processing facilities and test
equipment.
26
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion should be read in conjunction with the Financial
Statements (including the notes thereto) included in Appendix F hereto. For the
purposes of the following discussion, all dollar amounts, with the exception of
average installation and subscriber fees, are set forth in thousands of U.S.
dollars.
This discussion of the Company's operating review and prospects reflects
the historical results of TVA. Due to the limited operating history, startup
nature, translations of Brazilian currency into U.S. dollars, and rapid growth
of TVA, period-to-period comparisons of financial data are not necessarily
indicative, and should not be relied upon as an indicator of the future
performance of TVA.
A. Results of Operations
Overview
Since its inception in 1989, TVA has been in a developmental or build-out
stage. Despite its growth and positive operating cash flow for the year ended
December 31, 1999, TVA continues to sustain substantial net losses due primarily
to insufficient revenue with which to fund build-out, interest expense and
charges for depreciation and amortization. Net losses incurred by TVA since
inception have been funded principally by (i) net contributions of $387,803 from
TVA's shareholders, (ii) borrowings from Abril S.A. ("Abril") under a revolving
credit facility, dated December 6, 1995, between TVA, as the borrower, and
Abril, as the lender (the "Abril Credit Facility"), (iii) dispositions of
non-strategic assets and (iv) bank loans and other borrowings made from time to
time.
In July 1999 TVA consummated the sale of Galaxy Brasil, TVA Banda C and
certain assets related thereto, including its interest in GLA to GLA and the
members thereof (such sale, the "DBS Sale"). These dispositions were conducted
as a result of Management's review of TVA's operations and investment needs and
the resulting intention to concentrate TVA's businesses on the distribution of
pay television and other services through Cable and MMDS operations. See
"Information on the Company--History and Development of the Company."
As a result of these dispositions, TVA's DBS operations have been
classified as "Discontinued Operations." In addition, the proceeds from these
sales have been classified as other non-operating income for the year ended
December 31, 1999.
In addition, in the third quarter of 1999, TVA began offering the services
of Ajato, TVA's high speed internet service provider, which was followed in the
second quarter of 2000 by the services of Acesso, TVA's high speed internet
access provider. The costs and expenses associated with the start-up nature of
these businesses have significantly affected the Company's results of operations
for the years ended December 31, 2000 and 1999.
Impact of Real Devaluation
All forms of TVA's revenue were affected adversely in dollar terms as a
result of the devaluation in the Brazilian real against other major currencies
that occurred primarily in January 1999. The devaluation resulted in a loss in
the value of the real against the dollar of approximately 48% during the year
ended December 31, 1999. In addition, the real devalued approximately 9% during
the year ended December 31, 2000 and approximately [ ]% from January 1, 2000
through May 31, 2001. This devaluation also resulted in an increase in TVA's
dollar-denominated liabilities. See Item 3, "Key Information--Risk
Factors--Factors Relating to the Company--Currency Risk" and "--Factors Relating
to Brazil--Foreign Exchange Risk."
Change in Functional Currency
As of January 1, 2000, TVA changed its functional currency from the U.S.
dollar to the Brazilian real. This change was made as a result of an analysis of
the functional currency of TVA and the fact that the Brazilian economy no longer
meets the SFAS 52 definition of a highly-inflationary economy. This accounting
method, which differs
27
significantly from the method adopted prior to January 1, 2000, divides the
impact of monetary valuation between exchange rate losses on TVA's statements of
operations and cumulative translation adjustments on TVA's balance sheets.
Seasonality
The Company's revenues are seasonal. Generally, during the Brazilian summer
months of January and February the Company experiences lower demand for
installation for each of its services. As a result, the Company experiences a
decrease in Installation revenue of approximately 25% in these months, which
decrease is offset by corresponding decreases in Payroll and benefits expense
(i.e., sales commissions), Advertising and promotional expense and Other costs.
Statement of Operations Data
Year Ended December 31,
-------------------------------------------------------------------------
2000 1999 1998
--------------------- ------------------------- -----------------------
% of Net % of Net % of Net
Amount Revenue Amount Revenue Amount Revenue
-------- -------- -------- -------- -------- --------
Gross revenues
Monthly subscriptions $97,134 87.8% $94,055 91.0% $136,278 82.8%
Installation 968 0.9% 1,900 1.8% 2,886 1.8%
Indirect programming 3,164 2.9% 3,722 3.6% 19,580 11.9%
Additional services and others 22,796 20.6% 16,521 16.0% 18,437 11.2%
Taxes on revenue (13,462) (12.2)% (12,782) (12.4)% (12,533) (7.6)%
-------- -------- -------- -------- -------- --------
Net revenue 110,600 100.0% 103,416 100.0% 164,648 100.0%
-------- -------- -------- -------- -------- --------
Direct operating expenses 57,584 52.1% 45,638 44.1% 93,356 56.7%
Selling, general and administrative
Expense 33,998 30.7% 25,590 24.7% 56,517 34.3%
Depreciation and amortization 43,290 39.1% 56,879 55.0% 48,107 29.2%
Provision for equipment and inventory (365) (0.3)% 605 (0.6)% 1,940 1.2%
obsolescence
-------- -------- -------- -------- -------- --------
Total operating expenses 134,507 121.6% 128,712 124.5% 199,920 121.4%
-------- -------- -------- -------- -------- --------
Operating loss (23,907) (21.6)% (25,296) (24.5)% (35,272) (21.4%)
-------- -------- -------- -------- -------- --------
Interest income 5,374 4.9% 5,896 5.7% 6,718 4.1%
Interest expense (45,069) (40.7)% (22,254) (21.5)% (51,665) (31.4)%
Transaction (4,816) (4.4)% -- -- -- --
Translation (loss) gain -- -- (2,543) (2.5)% (17) 0.0%
Equity in (losses) income of affiliates (2,004) (1.8)% (5,238) (5.1)% (12,139) (7.4)%
Other nonoperating (expenses) income, net 39,593 35.8% 64,882 62.7% (4,233) (2.6)%
Minority interest 491 0.4% 678 0.7% 1,338 0.8%
Income taxes (2,517) (2.3)% (106) (0.1)% (24) 0.0%
-------- -------- -------- -------- -------- --------
Income (loss) from continuing operations
before extraordinary item (32,855) (29.7)% 16,019 15.5% (95,294) (57.9)%
-------- -------- -------- -------- -------- --------
Income (loss) from discontinued
operations -- -- -- -- (52,773) (32.1)%
-------- -------- -------- -------- -------- --------
Extraordinary item - gain on debt
repurchase -- -- 53,857 52.1% -- --
-------- -------- -------- -------- -------- --------
Net income (loss) (32,855) (29.7)% 69,876 67.6% (148,067) (89.9)%
======== ======== ======== ======== ======== ========
28
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
The table below sets forth the number of subscribers at December 31, 2000
and December 31, 1999 for the Owned Systems.
December 31, December 31,
Owned Systems Subscribers 2000 1999
------------------------- ------------ ------------
MMDS(a) ...................................... 167,819 161,419
Cable ........................................ 178,004 148,244
---------- ----------
345,823 309,663
Paid Subscribers Awaiting Installation(b) .... 648 1,513
---------- ----------
Total Owned Systems .......................... 346,471 311,176
========== ==========
----------
(a) Includes UHF subscribers
(b) Subscribers who have paid an installation fee but are awaiting the
installation of service.
The table below sets forth at December 31, 2000 and December 31, 1999 the
approximate number of television households which received TVA programming
through the Owned Systems and the Operating Ventures and through sales of
programming to the Independent Operators (which sales were discontinued in
2000).
Households Receiving TVA Programming
December 31, December 31,
2000 1999
------------ ------------
Total Owned Systems ...................... 346,471 311,176
Operating Ventures ....................... 186,951 158,540
Independent Operators .................... -- 201,448
---------- -----------
Total .................................... 533,422 671,164
========== ===========
Revenues. Revenues consist primarily of Monthly subscriptions revenue
(which principally consists of monthly fees paid by subscribers to the Company
for programming services, including equipment use), Installation revenue,
Indirect programming revenue (which consists of payments made to the Company for
the sale of its programming to the Independent Operators) and Additional
services and others (which consists of Advertising revenues and Other revenues).
Taxes on revenue consist of a 3.65% tax on Advertising revenue and an 11.15% tax
on the balance of revenues, in each case charged by the Brazilian Government.
Monthly subscriptions revenue for the year ended December 31, 2000 was
$97,134, as compared to $94,055 for the comparable period in 1999. This increase
is primarily attributable to an increase in the Company's subscriber base of
approximately 12%, which was offset by a 9% devaluation of the real against the
U.S. dollar in 2000. Average monthly fees for existing subscribers increased
from $25.13 to $ 25.87 per subscriber and for new subscribers decreased from
$25.35 to $23.10 per subscriber, largely due to the increased popularity of
lower-priced programming packages. The average monthly subscription price during
the year ended December 31, 2000 was $25.36 for MMDS service and $26.38 for
Cable service, as compared to $25.09 and $25.18, respectively, for the year
ended December 31, 1999.
Installation revenue for the year ended December 31, 2000 was $968, as
compared to $1,900 for the same period of 1999, a decrease of $932 or 49.1%.
This decrease was primarily due to the Company's policy of reducing installation
fees in order to facilitate the entry of new subscribers into the Company's
subscriber base. The average installation fee during the year ended December 31,
2000 was $7.77 for MMDS service and $9.71 for Cable service, as compared to
$28.41 and $17.83, respectively, during the year ended December 31, 1999.
Indirect programming revenue for the year ended December 31, 2000 was
$3,164, as compared to $3,722 for the comparable period of 1999, a decrease of
$558, or approximately 15%. This revenue is primarily attributable to the
Company's Eurochannel operations, which were sold in November 2000. See Item 4,
"Information on the Company--History and Development of the Company." In 2000,
the Company virtually discontinued the collection of programming fees from the
Operating Ventures and Independent Operators, a process which was begun in 1998
(as
29
discussed more fully below in the comparison of the Company's results of
operations for the years ended December 31, 1999 and 1998).
Additional services and other revenues for the year ended December 31, 2000
was $22,796, as compared to $16,521 for the comparable period of 1999, an
increase of 38%. Advertising revenue increased from $1,597 to $2,747, largely
due to a more efficient utilization of advertising space available in the
Company's offered channels and monthly programming magazine. Other revenue
increased from $14,924 to $20,049, principally due to the provision of ancillary
services to subscribers (such as technical assistance, decoder rental and
magazine sales), administrative services and rental of equipment to Galaxy
Brasil (after the sale of Galaxy Brasil in July 1999) and engineering services
to ESPN Brasil (after the sale of the Company's equity interests in ESPN Brasil
in November 1999).
Taxes on revenue for the year ended December 31, 2000 were $13,462, as
compared to $12,782 for the same period of the prior year, an increase of 5.3%.
As a percentage of net revenue, Taxes on revenue represents 12% of net revenues.
The increase in Taxes on revenue is attributable to the increase in the tax
rates from 8.65% in 1999 to 11.15% in 2000.
For the reasons noted above, Net revenue for the year ended December 31,
2000 was $110,600, as compared to $103,416 for the comparable period in the
previous year, an increase of $7,184.
Direct operating expenses. Direct operating expenses include Payroll and
benefits, Programming, Transponder lease cost, Technical assistance, Vehicle
rentals, TVA magazine, Pole rental and Other costs. These expenses are variable
and related to the growth in subscribers and in the Company's systems, and are
also dependent on the type of service subscribers select. Direct operating
expenses for the year ended December 31, 2000 were $57,584, as compared to
$45,638 for the same period in 1999, an increase of $11,946, or 26.2%. As a
percentage of net revenues, direct operating expenses represented 52.1% in 2000
as compared with 44.1% in the prior year. This increase in Direct operating
expenses is attributable principally to the costs associated with the
development of the Company's Internet businesses (Ajato and Acesso). Payroll and
benefits expense increased to $9,895 from $7,857, an increase of $2,038,
primarily due to the increase in the number of Ajato and Acesso employees.
Programming costs increased to $27,340 from $24,166, an increase of $3,174 or
13,1%, as a result of the 12% increase in the Company's pay television
subscribers in 2000. Technical assistance increased to $ 2,415 from $1,311, an
increase of $1,104 or 84.2% , largely as a result of a change in the criteria
for the conversion of reais-denominated expenses into U.S. dollars, which in
2000 utilized the average monthly dollar/real exchange rate and in 1999 utilized
historical rates, together with the change in functional currency to reais as of
January 1, 2000. Transponder lease cost increased to $2,501 from $1,975, an
increase of $526, due to an annual increase in contracted rates. Pole rental
increased to $3,535 from $2,935, an increase of $600, due to an increase in unit
costs in 2000. Other costs includes acquisition of backbone IP/internet, billing
costs , third party services, transportation of equipment and materials,
maintenance and other miscellaneous expenses. For the year ended December 31,
2000, Other costs were $9,239, as compared to $4,812 for the prior year, an
increase of $4,427, primarily due to increased communication and production
costs associated with Ajato and Acesso (backbone IP), an increase in billing
costs (due to the 12% increase in the pay television subscriber base), an
increase in maintenance costs (largely impacted by the real devaluation), and in
increase in contracted electricity costs.
Selling, general and administrative expenses. Selling, general and
administrative expenses include Payroll and benefits, Advertising and promotion
expense, Rent, and Other general and administrative expenses. Selling, general
and administrative expenses for the year ended December 31, 2000 were $33,998,
as compared to $25,590 for the same period of 1999, an increase of $8,408 or
32.9%. Payroll and benefits increased from $11,425 in 1999 to $14,942 in 2000,
an increased of $3,517, or 30.8%, largely due to the increase in the number of
Ajato and Acesso employees and annual salary increases of approximately 7% for
unionized employees. Advertising and promotion expense increased from $3,645 in
1999 to $7,666 in 2000, an increase of $4,021, or 110.3%, largely due to
increased marketing efforts to increase the Company's subscriber base,
strengthen the TVA name as a provider of multiple services, and establish the
Ajato brand.
Depreciation, Amortization and Provision for equipment and inventory
obsolescence. Depreciation and amortization includes depreciation of systems,
equipment, installation materials, installation personnel and organizational
costs and amortization of concessions. Provision for equipment and inventory
obsolescence represents charges for lost and obsolete equipment and material.
Depreciation and Amortization for the year ended December 31,
30
2000 was $43,290, as compared to $56,879 for the same period of 1999, a decrease
of $13,589, due primarily to the write-off in December 1999 of certain decoders,
materials and capitalized labor costs. Provision for equipment and inventory
obsolescence for the year ended December 31, 2000 was $365 as compared to $(605)
for the comparable period in 1999, an increase of $970, largely due to the sale
of certain equipment previously considered obsolete and the corresponding
reversal in the provision for equipment and inventory obsolescence.
For the reasons noted above, Operating loss for the year ended December 31,
2000 was $23,907 compared to $25,296 for the comparable period in 1999, a
decrease of $1,389 or 5.5%.
Interest income. Interest income for the year ended December 31, 2000 was
$5,374, as compared to $5,896 for the same period in 1999, a decrease of $522,
or 8.9%, primarily as a result of a change in the criteria for the conversion of
reais-denominated income into U.S. dollars, which in 2000 utilized the average
monthly dollar/real exchange rate and in 1999 utilized historical rates.
Interest expense. Interest expense for the year ended December 31, 2000 was
$45,069, as compared to $22,254 for the same period of 1999, an increase of
$22,815, principally attributable to the change in functional currency to the
real in 2000, which resulted in the full recognition of $29,690 in interest due
to Abril under the Abril Credit Facility, and the issuance by a wholly-owned
subsidiary of dollar-denominated notes, resulting in additional interest expense
of $2,409. These effects were offset by a reduction in interest payable under
the Senior Notes from $15,445 in 1999 to $8,000 in 2000, due to the purchase of
81% of the Senior Notes by a wholly-owned subsidiary of the Company in July
1999.
Equity in (losses) income of affiliates. For the year ended December 31,
2000, Equity in (losses) income of affiliates amounted to a loss of $2,004, as
compared to a loss of $5,238 in the same period of 1999, an decrease of $3,234.
This loss originated in the operations of Canbras TVA. The reduction in losses
reflects the sale of the Company's minority equity interests in HBO Brasil (July
2000) and ESPN Brasil (November 1999).
Other non-operating (expenses) income net. Other non-operating (expenses)
income net for the year ended December 31, 2000 was $39,593, as compared to
$64,882 in the same period in 1999, a decrease of $25,289. Other non-operating
income for the year ended December 31, 2000 consisted primarily of the proceeds
from the sale of the Company's Eurochannel operations (November 2000) and the
Company's minority interest in HBO Brasil (July 2000). Other non-operating
income for the year ended December 31, 1999 consisted primarily of the proceeds
from the DBS sale (July 1999) and the sale of the Company's equity interests in
ESPN Brasil (November 1999).
Minority interest. The Minority interest of $491 for the year ended
December 31, 2000, as compared with $678 for the same period in 1999, represents
Abril's 14% share in the aggregate losses of TVA Sul.
Extraordinary item - gain on debt repurchase. The extraordinary gain of
$53,857 in 1999 reflects the gain (net of transaction fees) resulting from the
repurchase by a wholly-owned subsidiary in July 1999 of the Company's Senior
Notes in the aggregate principal amount of $201,978. In 2000 the Company did not
engage in any transactions resulting in extraordinary items.
Net income (loss). For the reasons noted above, Net loss for the year ended
December 31, 2000 was $32,855, as compared to Net income of $69,876 for the
comparable period in 1999.
31
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
The table below sets forth the number of subscribers at December 31, 1999
and December 31, 1998 for the Owned Systems.
December 31, December 31,
Owned Systems Subscribers 1999 1998
------------------------- ------------ ------------
MMDS(a) ...................................... 161,419 186,216
Cable ........................................ 148,244 129,597
---------- ---------
309,663 315,813
Paid Subscribers Awaiting Installation(b) .... 1,513 13,766
---------- ---------
Total Owned Systems .......................... 311,176 329,579
========== =========
----------
(a) Includes UHF subscribers
(b) Subscribers who have paid an installation fee but are awaiting the
installation of service.
The table below sets forth at December 31, 1999 and December 31, 1998 the
approximate number of television households which received TVA programming
through the Owned Systems and the Operating Ventures and through sales of
programming to the Independent Operators.
Households Receiving TVA Programming
December 31, December 31,
1999 1998
------------ ------------
Total Owned Systems(a) 311,176 329,579
Operating Ventures 158,540 136,105
Independent Operators 201,448 449,008
---------- ----------
Total 671,164 914,692
========== ==========
----------
(a) Excludes Ku-Band and C-Band operations
Revenues. Monthly subscriptions revenue for the year ended December 31,
1999 was $94,055, as compared to $136,278 for the comparable period in 1998.
Although this decrease was partially attributable to the effects of the real
devaluation, the decrease was mitigated by an increase in subscriber fees, as
measured in reais. Average monthly fees for existing subscribers declined from
$37.92 to $25.13 and for new subscribers from $39.21 to $25.35 per subscriber.
The average monthly subscription price during the year ended December 31, 1999
was $25.09 for MMDS service and $25.18 for Cable service, as compared to $37.77
and $38.14, respectively, for the year ended December 31, 1998. Average monthly
fees declined due to the same factors that affected Monthly subscriptions
revenue.
Installation revenue for the year ended December 31, 1999 was $1,900, as
compared to $2,886 for the same period of 1998, a decrease of $986 or 34.2%.
This decrease was the result of a 31% sales reduction performance during the
year of 1999 when compared with the same period of 1998, again due to the
recessionary environment described above. The average installation fee during
the year ended December 31, 1999 was $28.41 for MMDS service and $17.83 for
Cable service, as compared to $72.85 and $38.62, respectively, during the year
ended December 31, 1998. This decrease was due to the Company's policy of
reducing installation fees in order to facilitate the entry of new subscribers
into the Company's subscriber base.
Indirect programming revenue for the year ended December 31, 1999 was
$3,722, as compared to $19,580 for the comparable period of 1998, a decrease of
$15,858, or approximately 61%. This decrease was principally attributable to a
change in the billing process between programming suppliers and the Operating
Ventures and the Independent
32
Operators initiated in the second quarter of 1998. Certain programming providers
began billing the Operating Ventures and the Independent Operators directly for
their programming fees. Consequently, the Company, instead of collecting
programming fees from the Operating Ventures and remitting such fees to
programming providers, began collecting a fee solely for arranging for such
programming to be provided to the Operating Ventures and Independent Operators.
The reduction in Indirect programming revenue attributable to this change in
billing procedure is also reflected as a reduction in the Company's Programming
cost, as described below. The number of Independent Operators' subscribers
decreased by 247,560 (the majority of whom were non-revenue generating
subscribers) during the year ended December 31, 1999. Independent Operators paid
a fee to the Company based on the number of subscribers to such Independent
Operators' systems and the number of channels purchased from the Company. The
average monthly fee paid to the Company by an Independent Operator during the
year ended December 31, 1999 was $1.64 per subscriber, as compared with $2.92
per subscriber for the comparable period in 1998.
Additional services and others for the year ended December 31, 1999 was
$16,521, as compared to $18,347 for the comparable period of 1998, a decrease of
10%. Excluding the impact of the real devaluation, Additional services and
others increased approximately 18% (measured in reais). Advertising revenue
decreased from $3,544 to $1,597, reflecting the infancy of the Brazilian pay
television industry and the lack of reliable ratings measures, as a result of
which the sale of pay television advertising in Brazil is relatively low,
representing less than 2% of the Brazilian advertising market in 1999. Other
revenue increased slightly from $14,893 to $14,924, principally due to the
provision of administrative services and rental of equipment to Galaxy Brasil
(after the sale of Galaxy Brasil in July 1999), engineering services to ESPN
Brasil (after the sale of the Company's equity interests in ESPN Brasil in
November 1999) and certain other ancillary services to subscribers (such as
technical assistance, decoder rental and magazine sales).
Taxes on revenue for the year ended December 31, 1999 were $12,782, as
compared to $12,533 for the same period of the prior year, an increase of 2%. As
a percentage of net revenue, Taxes on revenue represents 12.4% of net revenues.
The increase in Taxes on revenue is primarily attributable to the increase in
the tax rates on non-advertising revenue (from 7.65% in 1998 to 8.65% in 1999)
and advertising revenue (from 2.65% in 1998 to 3.65% in 1999).
For the reasons noted above, Net revenue for the year ended December 31,
1999 was $103,416, as compared to $164,648 for the comparable period in the
previous year, a decrease of $61,232.
Direct operating expenses. Direct operating expenses for the year ended
December 31, 1999 were $45,638, as compared to $93,356 for the same period in
1998, a decrease of $47,718. As a percentage of net revenues, direct operating
expenses represented 44.1% in 1999 as compared with 56.7% in the prior year.
This decrease in Direct operating expenses is attributable to a company-wide
reorganization initiated in the fourth quarter of 1998 that reduced the number
of employees and increased productivity and efficiency in all areas of the
Company's operations. Payroll and benefits expense decreased to $7,857 from
$15,968, a decrease of $8,111, as a result of the lay-off of more than 172
employees. Programming costs decreased to $24,166 from $54,282, a decrease of
$30,116 or 55.5%, primarily due to the renegotiation of Programming costs, which
effectively reduced the Company's dollar-denominated programming costs, a
revised billing procedure for Operating Ventures and Independent Operators, as
described above, and the application of bulk rates in connection with MDUs
(multiple dwelling units). Transponder lease cost decreased to $1,975 from
$2,336, a decrease of $361. Pole rental increased to $2,935 from $3,247, a
decrease of $321. Other costs include commissions for third party sales,
transportation of equipment and materials, third party services, maintenance and
other miscellaneous expenses. For the year ended December 31, 1999, Other costs
were $4,812, as compared to $8,975 for the same period the prior year, a
decrease of $4,613.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the year ended December 31, 1999 were $25,590, as
compared to $56,517 for the same period of 1998, a decrease of $30,927 or 54.7%.
This decrease was due in large part to an internal restructuring that resulted
in, among other effects, the centralization of certain operations, the
simplification of integrated software installation and a reduction in workforce.
Advertising and promotion expense decreased from $9,335 in 1998 to $3,645 in
1999, a decrease of 60.1%, as a result of the Company's reduced advertising
efforts in light of the Brazilian economic crisis.
Depreciation, Amortization and Provision for equipment and inventory
obsolescence. Depreciation and Amortization for the year ended December 31, 1999
was $56,879, as compared to $48,107 for the same period of 1998, an increase of
$8,772, due primarily to higher fixed asset balances as a result of purchases of
cable networks, decoders,
33
installation equipment and other fixed assets in 1998, the depreciation of which
was recognized in 1999. Provision for equipment and inventory obsolescence for
the year ended December 31, 1999 was $605 as compared to $1,940 for the
comparable period in 1998, a decrease of $1,335,due primarily to the
classification of fewer inventory as obsolete in 1999 as compared to 1998.
For the reasons noted above, Operating loss for the year ended December 31,
1999 was $25,296 compared to $35,272 for the comparable period in 1998, an
decrease of $9,976.
Interest income. Interest income for the year ended December 31, 1999 was
$5,896, as compared to $6,718 for the same period in 1998, a decrease of $822,
primarily due to short term loans extended to discontinued operations in 1998
that were not extended in 1999.
Interest expense. Interest expense for the year ended December 31, 1999 was
$22,254, as compared to $51,665 for the same period of 1998, an decrease of
$29,411, principally attributable to the purchase of Senior Notes in the
aggregate principal amount of $201,978 by a wholly-owned subsidiary of the
Company and the impact of the real devaluation on intercompany loans denominated
in reais.
Equity in (losses) income of affiliates. For the year ended December 31,
1999, Equity in (losses) income of affiliates amounted to a loss of $5,238, as
compared to a loss of $12,139 in the same period of 1998, a decrease of $6,901.
These losses originated in the operations of Canbras TVA ($4,909) and HBO Brasil
($329).
Other non-operating (expenses) income net. Other non-operating (expenses)
income net for the year ended December 31, 1999 was $64,882, as compared to
($4,233) in the same period in 1998, an increase of $69,115. Other non-operating
income for the year ended December 31, 1999 consisted primarily of the proceeds
from the July 1999 sale of the DBS Systems, together with certain assets related
thereto, and the November 1999 sale of the Company's equity interests in ESPN
Brasil.
Minority interest. The Minority interest of $678 for the year ended
December 31, 1999, as compared with $1,338 for the same period in 1998,
represents Abril's 14% share in the aggregate losses of TVA Sul.
Income (loss) from discontinued operations. Loss from discontinued
operations for the year ended December 31, 1999 was $0 as compared to $52,773
for the comparable period in 1998. This decrease was due to the sale of the DBS
Systems, the proceeds of which are recognized as non-operating income. See Item
4, "Information on the Company--History and Development of the Company."
Extraordinary item - gain on debt repurchase. The extraordinary gain of
$53,857 in 1999 reflects the gain (net of transaction fees) resulting from the
repurchase by a wholly-owned subsidiary in July 1999 of the Company's Senior
Notes in the aggregate principal amount of $201,978.
Net income (loss). For the reasons noted above, Net income for the year
ended December 31, 1999 was $69,876, as compared to a Net loss of $148,067 for
the comparable period in 1998.
B. Liquidity and Capital Resources
Since inception, the Company has sustained losses primarily due to
insufficient revenue to fund start-up costs, interest expense and charges for
depreciation and amortization arising from the development of its pay television
systems. As of December 31, 2000, the Company had cumulative net losses of
$398,592. During the periods under review, the Company required external funds
to finance its capital expenditures, operating activities and make payments of
principal and interest on its indebtedness. The sources of such funds have been
as follows: (i) borrowings from Abril under the Abril Credit Facility, of which
$141,122 was outstanding as of December 31, 2000, (ii) borrowings under lines of
credit, of which $28,387 was outstanding as of December 31, 2000, (iii) net
capital contributions of approximately $387,803 from shareholders, (iv) the
EximBank Facility, of which $6,353 was outstanding as of December 31, 2000, (v)
the Senior Notes, of which $48,022 was outstanding to unaffiliated parties as of
December 31, 2000, and (vi) the disposition of non-strategic assets, including
the DBS Systems and certain assets related thereto and the Company's
34
programming-related assets, for which the Company received net cash proceeds in
1999 and 2000 of approximately $177,600 and $51,070 respectively.
The Company's liquidity needs will arise primarily from capital
expenditures, debt service requirements and, in certain periods, the funding of
its working capital requirements. As of December 31, 2000, the Company had
approximately $223,884 of indebtedness outstanding, primarily consisting of
loans under the Abril Credit Facility ($141,122) and Senior Notes in the
aggregate principal amount of $48,022.
In addition to debt service, the Company will require capital for (i) the
continued funding of losses and working capital requirements, (ii) the
construction and upgrade of cable networks and the installation of equipment at
subscribers' locations, (iii) the construction of additional transmission and
headend facilities and related equipment purchases, (iv) the development of its
Internet businesses and (iv) investments in, and maintenance of, vehicles and
administrative offices.
The Company made purchases of fixed assets of $87,867, $118,909, $81,392,
$25,927 and $26,716 in 1996, 1997, 1998, 1999 and 2000, respectively (not
including $37,645, $128,958 and $61,967 in connection with discontinued
operations in 1996, 1997 and 1998, respectively). Management estimates that
$45,114 and $79,595 of capital expenditures will be required in 2001 and 2002,
respectively, principally in connection with the purchase of materials and
equipment, Cable and MMDS network upgrades and the development of its Internet
operations. The actual amount of funds required in 2001 and 2002 may vary
materially from these estimates, as a result of which additional funds could be
required in the event of cost overruns, unanticipated expenses, regulatory
changes, engineering design changes and other technology-driven changes.
The Company's principal sources of liquidity are borrowings from Abril and
the Company's short-term borrowings (each as described below), together with net
cash provided by operating activities. However, until sufficient cash flow is
generated from operations, the Company will be required to utilize its current
sources of debt funding to satisfy its liquidity needs. The Company's
shareholders are currently considering certain measures, including the possible
capitalization of a portion of the Company's shareholder loans, that will lower
the Company's leverage ratio and improve its borrowing capacity under existing
and new lines of credit. The Company had approximately $1,609 of cash and cash
equivalents as of December 31, 2000.
For the year ended December 31, 2000, net cash used in operating activities
was $1,862, primarily as the result of the net loss for the year of $32,855,
which was partially offset by $41,622 of Depreciation and Disposal and write-off
of property, plant and equipment of $2,046. For the year ended December 31,
2000, net cash used in investing activities was $16,284, as the result of
capital expenditures for the purchase of fixed assets of $26,716, cash received
on sale of assets of $43,000. The purchases of fixed assets were principally
related to the expansion of Cable and MMDS networks, the purchase of reception
equipment, which includes hardware, materials and labor used for new subscriber
installations and decoders, and the development of the Company's Internet
operations. For the year ended December 31, 2000, net cash used in financing
activities was $13,000, consisting principally of repayments of loans from
banks, shareholders and related companies.
The Abril Credit Facility allows the Company to borrow up to $60,000 on a
revolving basis. Since June 1996, the Company has from time to time requested,
and Abril has provided, funds in excess of $60,000. The loans are generally
denominated in reais and bear interest at a rate equal to a percentage of the
CDI rate, the Brazilian interbank lending rate, adjusted at the beginning of
each month. As of December 31, 2000, the Company had $141,122 outstanding under
the Abril Credit Facility.
On December 9, 1996, TVA Sistema, as Borrower, and Tevecap, as Guarantor,
entered into a credit agreement with The Chase Manhattan Bank for the financing
of C-Band decoders and other related equipment (the "EximBank Facility"). The
Export-Import Bank of the United States of America ("EximBank") also guaranteed
85% of the amount of the loan. The loan was made on terms customary for credits
supported by EximBank to Brazilian borrowers with an interest rate of LIBOR plus
a specified margin. The principal amount of the loan was $29,350, which was
dispersed in two tranches, the first in April 1997 in the principal amount of
$11,400 with a term of five years and the second in August 1997 in the principal
amount of $17,950 with a term of 4.5 years. As of December 31, 2000, the
principal amount outstanding under the EximBank Facility was $6,353.
35
On November 26, 1996, Tevecap raised funds in foreign markets through a
private placement of $250,000 12 5/8% Senior Notes (the "Senior Notes") maturing
on November 26, 2004 and guaranteed by certain of Tevecap's subsidiaries. The
Senior Notes were subsequently registered under the Securities Act pursuant to
Exchange Offers in May and December 1997. Concurrently with the consummation of
the DBS Sale in July 1999, as described above, the net proceeds to the Company
from the DBS Sale were used by the Company to repurchase, through a wholly-owned
subsidiary, Senior Notes in the aggregate principal amount of $201,978. In
addition, the Company obtained a consent from holders of the Senior Notes to
amend the restrictive covenants contained in the terms of the Senior Notes. See
Item 10, "Additional Information--Material Contracts--DBS Sale, Tender Offer and
Consent Solicitation."
On February 7, 2000, the Company, through TVA Overseas Ltd., a wholly-owned
subsidiary, raised funds in the international capital markets through a private
placement of $25,500 11.5% Guaranteed Participation Certificates (the
"Participation Certificates") maturing on August 6, 2001. Each Participation
Certificate represents a fractional undivided interest in a $25,500 promissory
note (the "GLA Promissory Note") issued by GLA in favor of the Company as
partial consideration for the sale by the Company to GLA of the Company's entire
equity interests in Galaxy Brasil and TVA Banda C. Holders of the Participation
Certificates, however, have no recourse to GLA for any amounts payable under the
Participation Certificates or the GLA Promissory Note.
During the periods under review the Company has also raised funds through
the disposition of non-strategic assets, including the DBS Systems and certain
assets related thereto and the Company's programming-related assets (ESPN
Brasil, HBO Brasil and Eurochannel), for which the Company received net cash
proceeds in 1999 and 2000 of approximately $177,542 and $51,070, respectively.
The Company also received a series of promissory notes upon the consummation of
such sales, the outstanding amount of which, as of December 31, 2000, was
$27,900. See Item 4, "Information on the Company--History and Development of the
Company."
The Company's liquidity may also be adversely affected by statutory minimum
dividend requirements under applicable Brazilian law.
Accounting for Income Taxes
The Company has approximately $300,359 of net operating losses ("NOLs") to
offset against regular taxes. These NOLs do not expire. Statement of Financial
Accounting Standards No. 109 (Accounting for Income Taxes) ("SFAS 109") requires
that the Company determine whether it is "more-likely-than-not" that the Company
will realize the benefits associated with such losses and provides that in
making such a determination, all negative and positive evidence should be
considered (with more weight given to evidence that is "objective and
verifiable"). SFAS No. 109 indicates that "forming a conclusion that a valuation
allowance is not needed is difficult when there is negative evidence such as
cumulative losses in recent years." The Company has a limited operating history
and has generated losses since its inception. In view of this, the Company has
established a full valuation allowance for the amount of NOL carryforwards in
excess of net taxable temporary differences. This determination was based
primarily on historical losses. Management believes that, should the Company be
profitable in the future, it will be able to utilize these NOLs.
C. Research and Development
The Company is not engaged in significant research and development
operations. However, the Company continues to consider the utilization of its
Cable and MMDS networks for the provision of other services, such as telephony
services. Current ANATEL regulations permit any company meeting certain criteria
to provide telephony services beginning in 2002. In addition, the Company
continues to monitor the development of compression technology that would permit
the Company to significantly increase the number of channels provided by its
Cable and MMDS networks.
D. Trend Information
The Company's results of operations for the three years ended December 31,
2000 have been affected by Brazilian economic conditions, including a
significant devaluation of the real in 1999. This devaluation, together with a
recession in Brazil, had a significant adverse effect on the operations of the
Company, and materially raised the cost of financing for the Company. In
addition, the recessionary environment created difficulties in maintaining
existing
36
subscribers and attracting new subscribers, in particular for Ku-Band services,
which require a more expensive up-front investment in equipment that other
distribution technologies and which require subscribers to make monthly decoder
lease payments. These factors led the Company to implement a strategy focused on
the sale of non-strategic assets, including the Company's DBS and
programming-related assets. See Item 4, "Information on the Company--History and
Development of the Company."
During the year ended December 31, 2000, Brazilian economic conditions
began to improve, as a result of which the Company was able to increase its pay
television subscriber base by approximately 12%.
The Company's results of operations for the year ending December 31, 2001
will be influenced generally by Brazilian economic conditions, including a
possible electricity rationing program to be implemented by the Brazilian
Government. See Item 3, "Key Information--Risk Factors--Factors Relating to
Brazil--Electricity Rationing Program."
The Company's sales are also subject to seasonality. See
"--Overview--Seasonality."
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The Company is managed by its Conselho de Administracao ("Board of
Directors") and Diretoria ("Committee of Officers"). Day-to-day operations of
the Company are managed by the Company's Executivos ("Executive Officers"). See
Item 10, "Additional Information--Estatuto Social."
Board of Directors
Member Position Current Position Held Since
- ------ -------- ---------------------------
Robert Civita................................ President 1994
Jose Augusto P. Moreira...................... Member 1994
Robert Hefley Blocker........................ Member 1995
Roger Philip Hipskind........................ Member 1998
Giancarlo Francesco Civita................... Member 1999
Francisco Savio Couto Pinheiro............... Member 1995
Robert R. Ruggiero Jr........................ Member 2000
Marc Nathanson............................... Member 2000
Joseph Yang.................................. Member 2000
Raymond E. Joslin............................ Member 2000
Edgardo del Valle Rosso...................... Member 2000
Committee of Officers
Member Position Current Position Held Since
- ------ -------- ---------------------------
Jose Augusto P. Moreira...................... Member 1992
Antonio Valdemir Pereira Ramos............... Member 1999
Marcelo Vaz Bonini Member 2001
Executive Officers
Member Position Current Position Held Since
- ------ -------- ---------------------------
Jose Augusto P. Moreira...................... President 1998
Leila Abraham Loria.......................... Chief Executive Officer 1999
Marcelo Vaz Bonini........................... Chief Financial Officer 1999
Roberto Rio Branco Gouveia................... Chief Operations Officer 2001
Jose Carlos Henrique Romeiro Alves........... Ajato Chief Operations Officer 1999
Virgilio Amaral.............................. Technology Officer 1999
Kunio Ohara.................................. Information Technology Officer 1999
Herval Franchi Rossi Cossi................... Infrastructure Officer 2001
Roseli Parrella.............................. Human Resources Officer 1997
Alexandre Oliveira de Athayde................ Marketing Officer 2000
37
Roberto Civita has been President of the Board of Directors since 1994.
Mr. Civita has been Chairman and Chief Executive Officer of Abril since 1990 and
previously served as its President for eight years. Mr. Civita attended Columbia
University's graduate program in sociology, and holds a degree in economics,
with a minor in publishing, from the University of Pennsylvania. In 1991 Mr.
Civita was elected "Person of the Year" by the Brazilian American Chamber of
Commerce in New York. Mr. Civita is the father of Giancarlo Francesco Civita.
Jose Augusto P. Moreira has been a member of the Board of Directors since
1994 and a member of the Committee of Officers since July 1992. Mr. Moreira has
been associated with Abril since 1965, and currently serves as Vice-Chairman of
the Abril Group. Mr. Moreira has a degree in Economics from the Faculdade de
Economia Sao Luis in Sao Paulo and is a graduate of the Program for Management
Development at Harvard Business School.
Robert Hefley Blocker has been a member of the Board of Directors since
1995. Mr. Blocker was associated with the Chase Manhattan Bank for 22 years, the
last nine of which he served as President Director. Mr. Blocker is currently
President and Managing Partner of Blocker Assessoria de Investimentos e
Participacoes S.A., a consulting firm for national and multinational companies.
Mr. Blocker is also a member of several other Boards of Directors, including
those of Arno S.A. and the American Chamber of Commerce in Sao Paulo.
Roger P. Hipskind has been a member of the Board of Directors since 1998.
Mr. Hipskind is a member of the Board of Directors of Banco Sul America S.A.
(Brazil) and a partner in Blocker Investment Advisory Ltda. Prior to his joining
TVA, Mr. Hipskind served as President and member of the Board of the U.S.
Brazilian Chambers of Commerce in Rio de Janeiro and Sao Paulo, respectively,
and Executive Vice President of the Chase Manhattan Bank in Brazil. Mr. Hiskind
holds B.A. from St. Mary's College, a Masters in Political Science from Notre
Dame University and a post-graduation Economics Certificate from the U.S.
Foreign Institute at the University of Wisconsin. He also has a degree in
Advanced Marketing Management from the Instituto Pour L'Etude des Methodes de
Direction de L'Enterprise in Switzerland.
Giancarlo Francesco Civita has been a member of the Board of Directors
since 1994. Mr. Civita has been associated with Abril since 1986, and currently
oversees magazine publication operations. Mr. Civita has also served a General
Director of the Programming Unit at TVA. Mr. Civita holds an M.B.A. from the
Harvard Graduate School of Business Administration, as well as an undergraduate
degree in Social Communication from the Escola Superior de Propaganda e
Marketing in Sao Paulo. Mr. Civita is the son of Robert Civita.
Francisco Savio Couto Pinheiro has been a member of the Board of Directors
since 1995. Mr. Pinheiro is a former Secretary of Communications who has also
held posts at Embratel and Radiobras, the Brazilian government-owned
broadcasting company. Mr. Pinheiro is currently a consultant and General Manager
of SP Communications. Mr. Pinheiro holds undergraduate and graduate degrees in
telecommunications.
Robert R. Ruggiero Jr. has been a member of the Board of Directors since
2000. Mr. Ruggiero Jr. is a member of the Investment Committee of the Compass
Capital Fund and previously served as Vice President in the Chase Manhattan
Bank's Merchant Banking Group. His previous experience includes assignments in
the Mergers & Acquisitions Group., Mexico Corporate Finance Group and the Global
Chemicals Group. Mr. Ruggiero Jr. holds a B.A. from Connecticut College and an
M.A. from the Columbia University School of International Affairs.
Marc Nathanson has been a member of the Board of Directors since 2000 and
was previously a member of the Advisory Board. Mr. Nathanson is the Chairman and
Chief Executive Officer of Falcon International and Falcon Holding Group, L.P.,
one of the largest cable TV operators in the United States. Mr. Nathanson is a
32 year veteran of the cable TV industry and a Director and member of the
Executive Committee of the National Cable Television Association. He was
appointed by President Clinton and confirmed by the U.S. Senate for a three year
term as a member of the International Broadcasting Board of Governors of the
United States Information Agency. He holds an M.A. from the University of
California and a B.A. from the University of Denver.
Joseph Yang has been a member of the Board of Directors since 2000.
Mr. Yang is a pricipal at Hellman & Friedman and was previously a director of
Corporate Finance at Baring Brothers & Co. in Hong Kong. He has also
38
worked extensively in the telecommunications sector. Mr. Yang is a director
of Eastern Sea Leam Chabang Terminal Co., Ltd. and Tevecap, and was formerly a
director of the Covenant Group, Easycall Asia Limited and Powerbar, Inc.
Mr. Yang holds a B.A. in Economics from the University of California at Berkeley
and an M.B.A. from the Wharton School at the University of Pennsylvania.
Raymond E. Joslin has been a member of the Board of Directors since 2000
and was previously a member of the Advisory Board. Mr. Joslin is group head of
Hearst Entertainment & Syndication and is a vice president and member of the
board of directors of The Hearst Corporation. Mr. Joslin has 35 years of
experience in the cable communications industry, and holds executive positions
at The A&E Television Networks, The History Channel, Lifetime Television and
ESPN. Mr. Joslin attended the Carnegie Institute of Technology and Harvard
Business School, and holds a B.A. in Economics from Trinity College.
Edgardo del Valle Rosso has been a member of the Board of Directors since
2000. Mr. Rosso is the Finance Vice President of Walt Disney Brasil, where he is
responsible for managing and directing the finance, operations and business
planning functions of the company. Mr. Rosso has worked for multinational
companies, including PricewaterhouseCoopers, Pepsi-Cola and Ericsson in
countries such as England, Brazil and Argentina. Mr. holds an undergraduate
degree in accounting.
Antonio Valdemir Pereira Ramos has been a member of the Committee of
Officers since 1999. Mr. Pereira joined Abril in 1968 and is currently the Audit
Officer of Editora Abril S.A. Mr. Pereira is also a member of the Tax Committee
responsible for the corporate reorganizations and fiscal orientation for the
operations of Editora Abril. Mr. Pereira graduated in Accounting and Actuarial
Sciences from the Fundacao Armando Alvares Penteado, with a specialization in
the areas of Auditing and Accounting.
Leila Abraham Loria has been the Chief Executive Office of TVA since June
1999. Previously, Mrs. Loria was Business Director at the retail operation of
Mesbla Lojas de Departamentos S.A. Ms. Loria also held managing positions at
Wal-Mart Brasil and Galaxy Brasil and was responsible for the development and
implementation of these operations in Brazil. Mrs. Loria graduated with a degree
in Administration from the Fundacao Getulio Vargas Foundation in 1976. Mrs.
Loria also graduated with a Masters in Administration from COPPEAD-UFRJ and an
Executive MBA from APG-Amana.
Marcelo Vaz Bonini has been the Chief Financial Officer of TVA since 1999.
Mr. Bonini joined TVA in 1993 and has since then participated in joint ventures
with strategic partners, the launching of bond offerings in the American market,
and various corporate reorganizations (mergers, acquisitions and takeovers).
Prior to his involvement in TVA, he was an auditor at Cooper & Lybrand. Mr.
Bonini graduated with a degree in Accounting Sciences from the Pontificia
Universidade Catolica de Sao Paulo.
Roberto Rio Branco Nabuco de Gouvea has been the Chief Operating Officer
since January 2001. He joined TVA in 1997 as the Officer of Operations for
Rio de Janeiro. He was previously associated with Citibank and Bank Boston. Mr.
Nabuco has extensive experience in the retail market, working for Mesbla Lojas
de Departamentos S.A. for 18 years and as Supervisory Officer for the franchise
operations of Lojas Especializadas. Mr. Nabuco graduated in Aministration from
the FGV/RJ in 1970. Mr. Nabuco also attended courses at Harvard Business School
and Babson College in Boston.
Jose Carlos Alves has been the Ajato Chief Operations Officer since 1999.
Mr. Alves has 28 years of experience in information technology and professional
services. Previously, he held positions in finance companies and industrial
technology service operations. As Information Technology Manager and later as
Officer of AJATO Operations, he was directly involved in the design and
development strategy of these new businesses at TVA. Mr. Alves graduated with
the degree in Product Engineering from Universidade Mackenzie and received an
MBA from the University of Sao Paulo.
Virgilio Jose Carreira Amaral has been the Technology Officer since 1999.
Mr. Amaral joined TVA as Engineering Officer of the Company in 1995. Mr. Amaral
has extensive experience in the field of broadcasting technology, including 18
years developing and installing television transmission systems for TV Globo.
Mr. Amaral holds a degree in Electronic Engineering from the Universidade de
Sao Paulo.
39
Kunio Ohara has been the Information Technology Officer since September
1999. Mr. Ohara joined the Abril Group 1996 and worked in the areas of
Technology and Production. Mr. Ohara began work as Information Technology
Officer for Galaxy Brasil in 1999. Mr. Ohara has 10 years of experience working
with USWEST and Abril. Mr. Ohara graduated with a masters in Administration from
FGV and with an Electronic Engineering degree from ITA.
Herval Franchi Rossi Cossi has been the Infrastructure Officer since March
of 2001. Prior to working with TVA, Mr Rossi was active in various companies
including Bell Canada-Vesper S.A., Aspect Telecommunications, HP/Verifone,
Unibanco and Banco Itau. Mr. Rossi graduated with a masters in Information
Technology and Computer Science and Data Processing from the University of
Pennsylvania and holds a degree in Computer Science from Universidade de
Campinas, Sao Paulo.
Roseli Terezinha Parrella has been the Human Resources Officer since
February 1997. Ms. Parrella joined Abril in November 1991 as Organizational
Development Manager and later as Corporate Organizational Development Manager.
Ms. Parrella implemented human resources policies and development programs for
the Executive Group of Abril. Previously, Ms. Parrella worked for Alcatel,
Monsanto and Elebra. Ms. Parrella graduated in Psychology from OSEC-SP.
Alexandre Oliveira de Athayde has been the Marketing Officer since 2000.
Previously, Mr. Oliveira worked with C&A, Credicard and Citibank in their sales
and production departments. Mr. Oliveira was responsible for the implementation
in Brazil of AON Direct Group Inc. and the management of their operations,
strategy and marketing and sales plans. Mr. Oliveira graduated with a degree in
Corporate Management and International Commerce from FASP.
B. Compensation
For the year ended December 31, 2000, the aggregate compensation, including
bonuses, of all Directors, Officers and Executive Officers of the Company was
$2.1 million. Members of the Board of Directors and the Committee of Officers do
not receive a salary from the Company.
For the year ended December 31, 2000, the aggregate amount set aside by the
Company to provide pension, retirement or similar benefits to Directors,
Officers and Executive Officers was $58,500.
C. Board Practices
Members of the Board of Directors and Committee of Officers are elected for
a two-year period, currently expiring on Februrary 24, 2002. Executive Officers
are appointed and removed by the Board of Directors and do not have a stated
term of office. Directors, Officers and Executive Officers do not enter into
service contracts with the Company. See Item 7, "Major Shareholders and Related
Party Transactions--Major Shareholders--Board of Directors" and Item 10,
"Additional Information--Estatuto Social."
40
D. Employees
The total number of persons employed by the Company has decreased
substantially from the year ended December 31, 1998 to the year ended December
31, 2000, primarily as a result of efficiency measures and the sale of
non-strategic operations, including the DBS Systems (Galaxy Brasil and TVA Banda
C) and programming-related assets (HBO Brasil, ESPN Brasil and Eurochannel). See
Item 4, "Information on the Company--History and Development of the Company."
The following table sets forth the number of officers, managers and other
permanent employees of the Company as of the dates indicated.
As of December 31,
------------------------------------------------------------------------------------------------------------
2000(*) 1999 1998
---------------------------------- ---------------------------------- ----------------------------------
City Officers Management Others Officers Management Others Officers Management Others
- ----------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Sao Paulo 9 35 719 9 26 678 21 57 1,440
Rio de Janeiro 1 4 253 2 4 209 1 4 244
Curitiba -- 3 121 -- 3 110 1 4 141
Camboriu -- 1 19 -- 2 24 -- 2 21
Florianopolis -- -- 20 -- -- 27 -- 1 18
Foz do Iguacu -- -- 15 -- -- 19 -- 2 --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total 10 43 1,147 11 35 1,067 23 70 1,864
========== ========== ========== ========== ========== ========== ========== ========== ==========
- ----------
* As of December 31, 2000, the Company also employed 47 interns and 82
temporary employees, most of whom were located in Sao Paulo and Rio de
Janeiro. These figures are not available as of the same date in previous
years.
E. Share Ownership
No Director, Officer or Executive Officer listed above owns more than 1% of
the common shares of Tevecap S.A. However, Robert Civita is the owner of 99.99%
of the share capital of Abril S.A., which in turn holds of 62.2% of the common
shares of Tevecap S.A. See Item 7, "Major Shareholders and Related Party
Transactions."
41
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
Tevecap has one class of capital stock, common shares, authorized and
outstanding. As of December 31, 2000, 226,338,285 common shares were
outstanding, representing authorized social capital of R$478,740,715. The
following table sets forth, as of December 31, 2000, information regarding the
beneficial ownership of Tevecap's common shares:
Number of
Common Shares
Shareholder Owned Percentage
----------- ------------- ----------
Abril S.A ........................................... 140,700,748 62.2%
Falcon International Communications (Bermuda) L.P.(a) 27,930,827 12.3
Hearst/ABC Video Services II(b) ..................... 39,342,567 17.3
Chase Manhattan International Finance Ltd.(c) ....... 18,364,122 8.1
All directors and executive officers as a group ..... 21 -(d)
(a) A subsidiary of Falcon International Communications L.L.C.
(b) Each of Hearst and ABC indirectly holds a 50% equity interest in each
of Hearst/ABC Video Services II.
(c) 11,496,329 and 6,867,793 of the shares beneficially owned by Chase
Manhattan International Finance Ltd. ("CMIF") are held of record by
two wholly-owned subsidiaries of CMIF (the "Chase Parties"). In
December 1995, CMIF sold a portion of the shares beneficially owned by
it to Hearst and ABC.
(d) Less than 1%.
On February 17, 1998, the shareholders approved a capital increase whereby
the number of shares held by Abril increased from 111,075,318 to 140,700,748
(thereby increasing its ownership interest from 56.5% to 62.2% and reducing the
ownership interests of the remaining shareholders commensurately). The capital
increase was paid through the capitalization of loans owed by the Company to
Abril under the Abril Credit Facility.
The relations among the Company's equity holders are governed by a
Stockholders Agreement (the "Stockholders Agreement"), dated December 6, 1995,
among Tevecap, Robert Civita, Abril, the Chase Parties, Falcon International and
HABC II and CPL (together with HABC II, "Hearst/ABC Parties" and together with
Robert Civita, Abril, the Chase Parties and Falcon International, the
"Stockholders"). The following describes certain terms of the Stockholders
Agreement, as amended.
Transfer of Shares. Any Stockholder desiring to transfer shares of capital
stock to any third party, including another Stockholder, must first offer such
shares to Tevecap and all of the other Stockholders. Tevecap has the right to
determine first whether to purchase such shares; if Tevecap elects not to
exercise its right to purchase the shares, the other Stockholders may elect to
purchase such shares. If Tevecap or the other Stockholders decide to purchase
the offered shares, all of such shares must be purchased. If neither Tevecap nor
the other Stockholders offer to purchase all of the offered shares, the
Stockholder desiring to sell such shares may sell the shares to any person,
provided that (i) all of the shares are sold simultaneously within six months
after the decision by Tevecap and the Stockholders not to purchase the shares,
(ii) Tevecap has not determined that the person making such purchase is a
stockholder of undesirable character, lacks necessary financial capacity or
competes with the Company, and (iii) the price for sale to such third party is
at least 90% of the price offered to the Company and the other Stockholders. The
provisions regarding transfers of shares do not apply to transfers to certain
affiliates of the Stockholders. In addition, the Stockholders have preference
over all other persons or entities to subscribe for new issuances of capital
stock by the Company in proportion to their existing ownership of capital stock.
Event Put Options. Upon the occurrence of certain defined "triggering
events" each of the Stockholders, other than Abril, may demand that Tevecap buy
all or a portion of the shares of capital stock of Tevecap held by such
Stockholder, unless the shares of capital stock held by such Stockholder are
publicly registered, listed or traded (collectively referred to as an "Event
Put"). The triggering events are: (i) the amount of capital stock held by such
Stockholder exceeds the amount allowed under any legal restriction to which such
Stockholder may be subject ("Regulatory Put"); (ii) a breach without cure within
a designated period by Robert Civita, Abril, any of the respective
42
affiliates of Robert Civita or Abril or Tevecap of any representation, warranty,
covenant or duty made or owed pursuant to the Stockholders Agreement, the Stock
Purchase Agreement, dated August 25, 1995, among Robert Civita, Abril, the Chase
Parties, and certain other parties, or the Stock Purchase Agreement, dated
December 6, 1995, among Tevecap, Robert Civita, Abril, HABC Parties, the Chase
Parties, Falcon International and certain other parties; (iii) a breach without
cure within a designated period by Abril of the Abril Credit Facility; (iv)
Robert Civita ceases to directly or indirectly hold without the approval of the
Stockholders 31.258% of the capital stock and voting capital stock of Tevecap or
he ceases to control the voting capital stock held by his affiliates
representing 50% or more of the voting capital stock of Tevecap; (v) the Service
Agreement, dated July 22, 1994, as amended, among Tevecap, Televisao Show Time
Ltda. ("TV Show Time"), TVA Brasil Radioenlaces Ltda. ("TVA Brasil") and Abril,
each of which holds certain licenses covering certain operations of TVA, ceases
to be valid or effective or TV Show Time, TVA Brasil or Abril is liquidated or
dissolved or files voluntarily, or has filed against it involuntarily, any
petition in bankruptcy or (vi) another Stockholder exercises an Event Put, other
than a Regulatory Put. The price to be paid in connection with an Event Put is
set at fair market value determined by appraisal or by a multiple of Tevecap's
most recent quarterly earnings.
Time Put Options. In addition, pursuant to the Stockholders Agreement,
Falcon International may demand that Tevecap buy all or any portion of the
shares of capital stock of Tevecap held by Falcon International if such shares
are not publicly registered, listed or traded by September 22, 2002 (the "Falcon
Time Put"). The price to be paid in connection with the Falcon Time Put is fair
market value determined in the same manner as an Event Put.
Registration Rights. The Chase Parties, considered together, the Hearst/ABC
Parties or Falcon International may request that the Company effect the
registration of any or all of the capital stock held by such Stockholder.
However, the Company is not obligated to effect more than one registration
requested by a Stockholder in any 12 month period or more than three
registrations requested by a Stockholder in total. The capital stock that is the
subject of the registration demand must be of a certain minimum amount. In
addition, Tevecap must offer each Stockholder other than Abril the opportunity
to register capital stock held by such Stockholder, subject to standard
reductions in amount such Stockholder may register as recommended by the
managing underwriter. Tevecap is obligated to pay all registration expenses
other than underwriting discounts and commissions or transfer taxes, and Tevecap
is only obligated to pay for the fees and expenses of Tevecap's counsel and
accountants.
Board of Directors. Tevecap is governed by a board of directors with 11
members. Under the Stockholders Agreement, Abril designates five members, Falcon
International designates two members, the Chase Parties together designate one
member, and Hearst/ABC Parties designates 2 members. The final member is an
independent member nominated by Abril and designated by an affirmative vote of
all shareholders entitled to designate a director. The affirmative vote of
members of the board representing the Chase Parties, Falcon International and
Hearst/ABC Parties is required for: acquisition of ownership interests in other
companies; acquisition or liens on equity in other companies or liens on assets
other than in ordinary course and in aggregate less than $500,000; incurrence of
indebtedness of less than one year maturity and in an amount greater than
$1,000,000; incurrence of indebtedness of greater than one year maturity except
trade debt and in an aggregate amount of less than $500,000; loans on advance
payments; non-financial guarantees in aggregate totaling more than $100,000;
transactions with affiliates; and modifications to the Service Agreement.
Tevecap must obtain the approval of Hearst/ABC Parties before entering into
contracts in excess of $1,000,000 in value and making any material programming
decisions. Tevecap must obtain the approval of Falcon International before
entering into contracts in excess of $1,000,000. Tevecap must obtain the
approval of each of Hearst/ABC Parties, the Chase Parties and Falcon
International before any corporate restructuring or any public offering of
securities of Tevecap.
Required Dividend. Tevecap is required by the terms of the Stockholders
Agreement to pay annual dividends equal to the net cash flow of Tevecap or 25%
of the net consolidated profit (as defined by Brazilian law) of Tevecap. Since
inception, Tevecap has never declared a dividend.
43
B. Related Party Transactions
Overview
Tevecap has engaged in a significant number and variety of related party
transactions, including, without limitation, the transactions described below.
Tevecap has not performed any studies or analyses to determine whether the terms
of past transactions with related parties have been equivalent to arm's-length
transactions and cannot state with any certainty the extent to which such
transactions are comparable to those which might have been obtained from a
non-affiliated third party.
Transactions Among Shareholders
On December 6, 1995, Tevecap's shareholders executed a Stock Purchase
Agreement and a Stockholders Agreement relating to the investment of ABC and
Hearst in the Company through Hearst/ABC Parties. See Item 4, "Control of
Registrant." On that date, the Tevecap shareholders also executed a series of
inter-shareholder agreements relating to, among other things, the provision of
services and programming among the Company and the shareholders. These
agreements supplemented other existing agreements among Shareholders. The
following contracts are the principal agreements among the Company and the
Tevecap shareholders (each of which, unless specified otherwise, is dated as of
December 6, 1995).
General and Advisory Services
Under an Advisory Services Agreement, each of Hearst, ABC and HABC II has
agreed, upon a request from the Company, to use its reasonable efforts to
arrange for the investors to furnish personnel to provide advisory services to
the Company. To date, the Company and Hearst, ABC and HABC II have not entered
into a supplemental agreement to provide specific personnel or services at a
particular cost.
Programming
In connection with the investment by Hearst and ABC in Tevecap, Tevecap and
these two parties entered into a Programming Agreement (the "Hearst/ABC
Programming Agreement"). Pursuant to the Hearst/ABC Programming Agreement, each
of Hearst and ABC has agreed to offer first to Tevecap pay programming that
Hearst or ABC (or any subsidiary of which either Hearst or ABC owns at least 80%
of the outstanding equity interests) intends to license for use in Brazil in the
pay television markets served by TVA. The parties also agreed to consider future
co-production activities which could enhance TVA's business and competitive
position. Tevecap agreed to pay to each of Hearst and ABC such fees and expenses
as are agreed upon at the time such programming or co-production services are
provided. The Hearst/ABC Programming Agreement does not apply to The Walt Disney
Company or its subsidiaries other than ABC and ABC's subsidiaries. In addition,
the Hearst/ABC Programming Agreement does not apply to the activities of The A&E
Television Networks, Lifetime Television and ESPN, including agreements relating
to ESPN Brasil.
Transactions Among Related Parties
Publishing and Advertising
The Company publishes a monthly magazine detailing the Company's
programming options in a given month. In connection with this magazine, TVA
Sistema has entered into an agreement with Abril, dated September 1992, pursuant
to which Abril publishes approximately 465,000 copies of the Company's monthly
magazine in return for a monthly payment of approximately $123,000. The monthly
magazine is distributed in accordance with a distribution agreement, dated
September 1992, between the Company and Irmaos Reis, pursuant to which the
Company pays Irmaos Reis approximately $40,000 per month.
TVA Sistema and Abril also have a reciprocal advertising agreement in which
the Company publishes advertisements for Abril in the Company's monthly magazine
in exchange for advertisements for the Company (and third parties through the
Company) in the magazines published by Abril.
44
Abril Credit Facility
Tevecap has entered, as the borrower, into a revolving credit facility (the
"Abril Credit Facility") with Abril, as the lender. The Abril Credit Facility,
effective December 6, 1995, allows the Company to draw down amounts not to
exceed a maximum aggregate principal amount of $60,000,000. Since June 1996,
Tevecap has from time to time requested, and Abril has provided, funding in
excess of the aggregate maximum principal amount. The loans provided under the
Abril Credit Facility are denominated in reais, unless the loan is a
pass-through loan that Abril has funded in U.S. dollars, in which case the loan
is funded in a real-equivalent amount. Abril has agreed to use its reasonable
commercial efforts to obtain the lowest possible interest rates for its loans to
Tevecap under the Abril Credit Facility. As of December 31, 2000, the aggregate
principal amount outstanding under the Abril Credit Facility was $141.1 million.
Other Intercompany/Shareholder Loans
Tevecap has used the proceeds from the Abril Credit Facility to make
capital contributions to TVA Sistema, as well as to extend loans to various
interrelated companies. The aggregate outstanding amounts under these loans as
of December 31, 2000 were: $13.3 million to TVA Brasil; $6.0 million to Canbras
TVA; $1.7 million to TVA Communications; and $26.3 million to other affiliates.
In addition, TV Show Time has loans outstanding to Abril, which loans, as of
December 31, 2000, had an aggregate outstanding amount of approximately $1.7
million.
Service Agreement with Licenseholders
Pursuant to a Service Agreement, dated July 22, 1994, as amended, TVA
Brasil and TV Show Time (the "Licenseholders") agreed to transfer to TVA all the
rights and benefits associated with their current and future pay-television
licenses, with the exception of licenses operated by companies in which TVA has
minority interests. While the Licenseholders retained the title to such
licenses, the Licenseholders promised to take all steps necessary to transfer
the title of such licenses to Tevecap. Such steps included the appropriate
procedures required by the Ministry of Communications and any other governmental
authority regulating the transfers. The transfer of the title to such licenses
is currently either pending, subject to approval by the Ministry of
Communications, or waiting for the passage of certain statutory or regulatory
waiting periods.
ITEM 8. FINANCIAL INFORMATION
Item 19 contains all financial statements required to be filed as part of
this Annual Report.
ITEM 9. THE OFFER AND LISTING
A. Offer Listing and Details.
Tevecap has one class of capital stock, common shares, authorized and
outstanding. The Company's common stock are not listed on any exchange and are
not publicly traded. See Item 7, "Major Shareholders and Related Party
Transactions--Major Shareholders."
B. Plan of Distribution
Not applicable.
C. Markets
The Company's outstanding registered securities consist solely of the
Company's 12"% Senior Notes due 2004 (referred to herein as the "Senior Notes")
that were registered under the Securities Act pursuant to an Exchange Offer
45
which expired on May 23, 1997 and a subsequent Exchange Offer which expired on
December 10, 1997. There is no formal trading market for such securities.
The Company does not have any publicly traded class of equity securities.
See Item 9(A) above.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Estatuto Social
1. The Company's object, as set forth in Subsection 3 of Chapter I of its
Estatuto Social, is as follows: (i) the production, acquisition, licensing,
distribution, import and export of television programs; (ii) the rendering
of telecommunication services, in particular pay television services, as
well as other services relating to signal transmission, reception and
distribution systems and television programs; (iii) advertisement and
publicity exploitation; and (iv) investment in other companies, especially
those in the telecommunication field.
2. The Company is managed by the Board of Directors and the Committee of
Officers. Day to day management, however, is carried out by the Executive
Officers. See Item 6, "Directors, Senior Mangement and Employees."
The Board of Directors is composed of 11 regular members and 11 alternates,
each elected by the general shareholders meeting. The Board of Directors
shall meet whenever necessary and at least every three months, upon request
in writing by any of its regular or alternate Directors (such request to be
delivered at least ten business days before the date of the meeting and
upon presentation of the agenda to be discussed). The meeting of the Board
of Directors shall be convened only with the attendance of at least six of
its regular members, in person or as represented by their respective
alternates. The resolutions shall be taken by the favorable vote of the
majority of the Directors present at the meeting.
The Committee of Officers comprises a minimum of two and a maximum of five
members. The Committee of Officers manages the business of the Company in
general and practices any and all acts necessary or advisable, except those
which, pursuant to applicable law, the Estatuto Social or the Stockholders
Agreement, are the responsibility of the shareholders or the Board of
Directors.
(a) There are no provisions in the Estatuto Social relating to the power of
Directors or Officers to vote on a proposal in which a conflict of interest
exists or may exist.
(b) The aggregate compensation of the Board of Directors and the Committee
of Officers is fixed pursuant to a General Shareholders Meeting and is
distributed among the Directors and Officers as determined by the Board of
Directors at a duly convened meeting.
46
(c) Pursuant to Subsection 20 of Chapter V of the Estatuto Social and the
Stockholders Agreement, the incurrence of the following indebtedness must
be approved by all Directors appointed by minority shareholders: (i)
indebtedness with a maturity of less than one year and in an amount greater
than U.S.$1,000,000; and (ii) indebtedness with a maturity of more than one
year (except trade debt in an aggregate amount lower than U.S.$500,000).
Any other incurrence of indebtedness can be approved by a majority of the
Directors present at a meeting of the Board of Directors or by any two
Officers in the ordinary course of business.
(d) There are no provisions in the Estatuto Social setting forth age limits
or retirement requirements for Directors and Officers. Directors are
elected for a period of two years (with the opportunity of reelection) by a
shareholders meeting and remain as Directors until the appointment of their
respective successors. In case of a vacancy, a general shareholders meeting
shall be called to elect a substitute.
Officers are elected by the Board of Directors for a period of two years
and can be reelected. In case of a vacancy, a meeting of the Board of
Directors shall be immediately called to elect the substitute, who shall
complete the term of the Officer so replaced.
(e) All Directors, whether regular or alternates, must be shareholders of
the Company, although the Estatuto Social does not require ownership of a
minimum number of shares to qualify as a Director. Officers do not need to
be shareholders of the Company.
3. The Company's capital is divided into and represented by 226,338,285
shares, all of which are common shares entitled to one vote in shareholders
meetings.
(a) There are no provisions in the Estatuto Social setting forth a time
limit for dividend entitlements to lapse. All shares are entitled to the
same dividend payments. Under Brazilian law, the Company is required to pay
dividends in an amount equal to 25% of its net consolidated profit (as
defined by Brazilian law). In addition, upon resolution of the Board of
Directors, interim dividends may be distributed out of net profits declared
in annual or semiannual financial statements.
(b) There are no provisions in the Estatuto Social concerning staggered
intervals for the reelection of Directors or permitting or requiring
cumulative voting.
(c) All shares have the right to share in the Company's net profits. At the
end of any fiscal year, from the net profits earned, 5% shall be deducted
to from the legal reserve (which shall not exceed 20% of outstanding social
capital).
(d) All shares have the same right to share any surplus in case of a
liquidation of the Company after settlement of all outstanding debts. In
the event of liquidation, a general shareholders meeting shall determine
the form of liquidation, appoint the liquidator and an audit committee to
operate during the liquidation period.
(e) The resolutions of a general shareholders meeting authorizing the
purchase or redemption of the Company shares shall comply with the
provisions in the Stockholders Agreement governing resolutions at general
shareholders meetings.
(f) There are no sinking fund provisions in the Estatuto Social.
(g) All of the Company's shares are issued and fully paid. Consequently,
the shareholders are not subject to further capital calls.
(h) There are no provisions in the Estatuto Social discriminating against
any existing or prospective holder of such securities as a result of such
shareholder owning a substantial number of shares.
4. In order to modify the rights of shareholders, the Estatuto Social must be
amended to reflect such modification. The Estatuto Social can be amended
only through a resolution passed at a general shareholders meeting.
47
5. General shareholders meetings can be ordinary or extraordinary. Ordinary
general shareholders meetings shall be held within four months following
the closing of the fiscal year, whereas the extraordinary general
shareholders meetings are held whenever necessary. All general shareholders
meetings shall be called by the Board of Directors. Only the shareholders
whose shares are subscribed to in their respective names, in the applicable
register, up to three days before the date fixed for the general
shareholders meeting, may participate and vote in such meeting.
6. Under Brazilian law, non-Brazilians are not entitled to own on a combined
basis more than 49% of the voting stock of the Company.
7. There are no provisions in the Estatuto Social that would have the effect
of delaying, deferring or preventing a change in control of the Company.
However, pursuant to the Stockholders Agreement, any existing shareholder
desiring to sell its shares must first offer its shares to the remaining
shareholders. The Stockholders Agreement also contains other transfer
restrictions relating to the Company's shares. See Item 7, "Major
Shareholders and Related Party Transactions--Major Shareholders."
8. There are no provisions in the Estatuto Social governing the ownership
threshold above which shareholders ownership must be disclosed.
9. Brazilian corporate law is significantly different from U.S. corporate law
in a number of areas. The Brazilian form of Articles of Incorporation
(Estatuto Social) includes both the Anglo-Saxon concept of Articles of
Incorporation and the concept of "by-laws." Tevecap S.A., like other large
Brazilian companies, has a two-tier governance system, which typically
involves a management or executive board (Committee of Officers) and a
supervisory board (Board of Directors). The Committee of Officers is the
executive body. Its members are appointed by the Board of Directors and are
employed by the Company. The Board of Directors has supervising and
advising functions only. Its members are representatives of shareholders
and cannot be employed by the Company. The Board of Directors' duties
include supervision of the Committee of Officers and the general course of
business of the Company. The Board of Directors also performs advisory
functions vis-a-vis the Committee of Officers.
10. There are no provisions in the Estatuto Social imposing more stringent
conditions than those required by law to change the capital of the Company.
However, pursuant to the Stockholders Agreement, any existing shareholder
desiring to sell its shares must first offer its shares to the remaining
shareholders. The Stockholders Agreement also contains other transfer
restrictions relating to the Company's shares. See Item 7, "Major
Shareholders and Related Party Transactions--Major Shareholders."
C. Material Contracts
DBS Sale
As of May 18, 1999, the Company entered into the following agreements: (i)
a Master Agreement (the "Master Agreement") relating to the sale of the
Company's equity interests in Galaxy Brasil and TVA Banda C, among the Company,
Galaxy Brasil and TVA Banda C, as Sellers, Abril, as a Seller-related entity,
and GLA, as Purchaser, and (ii) a GLA Purchase Agreement relating to the sale of
the Company's indirect equity interests in GLA and certain assets related
thereto, among the Company, TVA Communications Ltd. and TVA Finco Ltd., as
Sellers, and Abril as a Seller-related entity, and Directv Latin America, Inc.
("DLA") and Darlene Investments (an affiliate of the Cisneros Group) as
Purchasers (the "GLA Purchase Agreement" and, together with the Master
Agreement, the "Purchase Agreements"). The sale of these assets is referred to
in this Annual Report as the "DBS Sale."
Pursuant to the Master Agreement, the Company agreed to sell all of its
interests in the following entities to GLA:
o Galaxy Brasil, a wholly-owned subsidiary of the Company and exclusive
local operator of DIRECTV Ku-Band service in Brazil; and
o TVA Banda C, a wholly-owned subsidiary of the Company and operator of
TVA's C-Band service.
48
Pursuant to the GLA Purchase Agreement, the Company agreed to sell all of
its interests in the following entities and assets to DLA and Darlene
Investments:
o a 10% equity interest in LA, which the Company owned through its
British Virgin Islands subsidiary, TVA Communications Ltd.;
o a 20.5% equity interest in SurFin Ltd. , a Bahamian limited liability
company engaged in financing activities related to DIRECTV service
throughout Latin America;
o certain promissory notes in the aggregate principal amount of
$7,124,800, representing indebtedness of California Broadcast Center
LLC ("CBC"), a Delaware limited liability company the principal asset
of which is a GLA satellite uplink facility; and
o the CBC Class B Unit Purchase Warrants (# W-3), dated as of April 11,
1997, convertible into equity interests in CBC.
The net cash proceeds to the Company at the closing of the DBS Sale, which
occurred in July 1999, were approximately $177.6 million. The total
consideration received by the Company was comprised of cash, a promissory note
in the principal amount of $25.5 million, the assumption of certain dollar and
real-denominated indebtedness and the release of certain guarantees given by the
Company and one of its subsidiaries in respect of certain obligations of Galaxy
Brasil.
Tender Offer and Consent Solicitation
Concurrently with the consummation of the DBS Sale, the net proceeds to the
Company from the DBS Sale were delivered to The Chase Manhattan Bank, as
Depositary, to fund a tender offer and consent solicitation (the "Offer")
relating to TVA's $250,000,000 12 5/8% Senior Notes due 2004 (the "Senior
Notes"). Pursuant to the Offer, a wholly-owned subsidiary of the Company
purchased Senior Notes in the aggregate principal amount of $201,978,000 and the
Company obtained a consent from holders of the Senior Notes to broadly amend the
restrictive covenants contained in the terms of the Senior Notes.
D. Exchange Controls
Brazilian law provides that, whenever there is, or is a serious risk of, a
material imbalance in Brazil's balance of payments, the Brazilian Government
may, for a limited period of time, impose restrictions on the remittance to
foreign investors of the proceeds of their investments in Brazil, as it did for
approximately six months in 1989 and early 1990, as well as on the conversion of
the Brazilian currency into foreign currencies.
The Brazilian Government currently restricts the ability of Brazilian or
foreign persons or entities to convert reais into foreign currencies other than
in connection with certain authorized transactions. There can be no assurance
that the Brazilian Government will not in the future impose more restrictive
foreign exchange regulations that would have the effect of eliminating or
restricting the Company's access to foreign currency that would be required to
meet its foreign currency obligations, including payments under the 12-5/8%
Senior Notes due 2004 issued by Tevecap in November 1996. The likelihood of the
imposition of such restrictions by the Brazilian Government may be affected by,
among other factors, the extent of Brazil's foreign currency reserves, the
availability of sufficient foreign currency on the date a payment is due, the
size of Brazil's debt service burden relative to the economy as a whole,
Brazil's policy towards the International Monetary Fund and political
constraints to which Brazil may be subject.
For a description of the foreign exchange markets in Brazil, see Item 3,
"Key Information--Selected Financial Data--Exchange Rates." See also "Risk
Factors--Factors Relating to Brazil--Payments of External Debt and Exchange
Controls; Convertibility Risk."
49
E. Taxation
Brazil
The following is a summary of the material Brazilian income tax
consequences to Tevecap in connection with the sale and repayment of Tevecap's
12 5/8% Senior Notes due 2004 (the "Senior Notes") including any interest
thereon) and to beneficial owners of the Senior Notes that are non-residents of
Brazil in connection with the purchase, ownership and disposition of such Senior
Notes. This summary is limited to Tevecap and to non-residents of Brazil which
acquire the Senior Notes at the original issue price, and does not address
investors who purchase Senior Notes at a premium or market discount. In
addition, this summary is based on the Brazilian tax regulations as presently in
effect and does not take into account possible future changes in such tax laws.
Individuals domiciled in Brazil and Brazilian companies are taxed in Brazil
on the basis of their worldwide income (which includes earnings of Brazilian
companies' foreign subsidiaries, branches and affiliates). The earnings of
branches of foreign companies and non- Brazilian residents in general are taxed
in Brazil only when derived from Brazilian sources. Interest, fees, commissions
and any other income (which for the purposes of this paragraph includes any
deemed income on the difference between the issue price of the Senior Notes and
the price at which the Senior Notes are redeemed) payable by a Brazilian obligor
to an individual, company, entity, trust or organization domiciled outside
Brazil is considered derived from Brazilian sources and is therefore subject to
income tax withheld at the source. Brazilian tax laws expressly authorize the
paying source to pay the income or earnings net of taxes and, therefore, to
assume the cost of the applicable tax. The rate of withholding is 15% or such
other lower rate as is provided for in an applicable tax treaty between Brazil
and such other country where the recipient of the payment has its domicile.
Notwithstanding the foregoing, the applicable withholding tax rate for
negotiable instruments such as the Senior Notes was reduced to zero, pursuant to
Resolutions 1853 of July 31, 1991 and 644 of October 22, 1980 of the Central
Bank, subject to Central Bank Circular 2661 of February 8, 1996, which restricts
such withholding tax reductions to negotiable instruments having a minimum
maturity of 96 months. As a result, since the Senior Notes have an original
maturity of 96 months, such reduction will apply to payments of interest and
other income with respect to the Senior Notes.
If, however, any Note is redeemed prior to November 26, 2004, such
reduction will not apply and, therefore, upon such redemption the Brazilian
withholding tax will be imposed on the amount of interest, fees and commissions
paid on such Senior Notes from the date of issue through the date of redemption.
Based on the advice of its Brazilian tax counsel, Tevecap believes and intends
to take the position for tax reporting purposes that, in the event of any such
early redemption to which such withholding tax applies, so long as the paying
agent through which such payment is made is located in Japan and payment to such
paying agent discharges the obligations of Tevecap to make payments in respect
of the Senior Notes, interest and other income with respect to the Senior Notes
will be subject to Brazilian withholding tax at a rate of 12.5% under the tax
treaty in effect between Brazil and Japan. In any event, under the terms of the
Senior Notes, Tevecap would be required to gross up Noteholders for any
Brazilian withholding tax, subject to customary exceptions. Tevecap has the
right to redeem the Senior Notes at par in the event that it is required to
gross up for Brazilian withholding tax imposed at a rate in excess of 15%.
Any earnings or capital gains resulting from the sale (whether inside or
outside Brazil) of any Senior Notes by a non-resident of Brazil to another
non-resident of Brazil are not subject to tax in Brazil. Earnings or capital
gains resulting from the sale (whether inside or outside Brazil) of any Senior
Notes by a non-resident of Brazil to a resident of Brazil should not be subject
to tax in Brazil, although the matter is not free from doubt.
On February 8, 1996, the Brazilian Federal Government issued Decree No.
1,815, which imposed a tax on Brazilian issuers with respect to foreign exchange
transactions ("IOF tax") related to the entering into Brazil of proceeds
resulting from foreign loans (including the issue of securities such as the
Senior Notes). The rate of IOF tax paid by the Company with respect to the
issuance of the Senior Notes was zero %. Decree No. 1,815 was revoked by Decree
No. 2,219 of May 2, 1997 which currently regulates the IOF tax. The IOF tax rate
was reduced to zero upon the adoption of Ordinance No. 85 on April 24, 1997.
However, under Law No. 8.894 dated June 21, 1994, such tax rate may be increased
up to 25%.
On August 15, 1996, the Brazilian Congress approved Constitutional
Amendment No. 12 creating a new temporary tax, the Contribuicao Provisoria sobre
Movimentacao Financeira ("CPMF"). Based on such Amendment,
50
Law No. 9,311 of October 24, 1996 ("Law 9,311") was enacted, creating the CPMF
tax. Under Law No. 9,311, as amended, all financial debit and money transfers
through Brazilian bank accounts effected as from January 23, 1997 until December
31, 1998, including payments made by the Company with respect to the Senior
Notes, will be subject to the assessment of the CPMF tax at the rate of 0.2%.
Funds arising from the collection of CPMF tax will be applied only in the public
health system. Since January 23, 1999, CPMF was extinguished and Congress
approved Constitutional Amendment No. 21, on March 19, 1999, in order to
reestablish CPMF at the rate of 0.38%, starting on June 19, 1999, for a period
of one year, and subsequently at the rate of 0.30%, for a period of two years.
There is no stamp, transfer or other similar tax in Brazil with respect to
the transfer, assignment or sale of any debt instrument outside Brazil
(including the Senior Notes).
United States
The following is a summary of the material United States Federal income tax
consequences to a beneficial owner of the Senior Notes that is a citizen or
resident of the United States, a corporation, partnership or other entity
created or organized in or under the laws of the United States or any State
thereof, an estate the income of which is subject to United States Federal
income taxation regardless of its source or a trust for which a court within the
United States is able to exercise primary supervision over its administration
and for which one or more U.S. fiduciaries have the authority to control all
substantive decisions, as well as other persons subject to United States Federal
income taxation on a net income basis in respect of the purchase, ownership and
disposition of a Note ("U.S. Holders"). Such tax treatment may vary depending
upon the particular situation of a U.S. Holder. This summary does not discuss
all of the tax consequences that may be relevant to certain types of investors
subject to special treatment under the United States Federal income tax laws
(such as individual retirement accounts and other tax deferred accounts, banks,
securities broker-dealers, life insurance companies, tax-exempt organizations,
foreign persons, persons whose "functional currency" is other than the U.S.
dollar or persons that hold Senior Notes as part of a "straddle" or "conversion
transaction" or otherwise as part of a "synthetic asset") and is limited to
investors which hold Senior Notes as capital assets. In addition, this summary
is limited to U.S. Holders that acquire the Senior Notes at their issue price
and does not address investors that purchase Senior Notes at a premium or market
discount. This summary is based on the Internal Revenue Code of 1986, as amended
(the "Code"), final, temporary and proposed Treasury regulations thereunder (the
"Regulations"), revenue rulings, court cases, and other legal authorities as now
in effect (or proposed) and as currently interpreted, and does not take into
account possible changes in such tax laws or other legal authorities or such
interpretations. No rulings on any of the issues discussed below will be sought
from the United States Internal Revenue Service (the "IRS").
PROSPECTIVE PURCHASERS OF THE NOTES ARE ADVISED TO CONSULT THEIR TAX
ADVISERS AS TO THE CONSEQUENCES OF A PURCHASE AND SALE OF NOTES, INCLUDING,
WITHOUT LIMITATION, (I) THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR
NON-U.S. TAX LAWS TO WHICH THEY MAY BE SUBJECT, AND OF ANY POSSIBLE LEGISLATIVE
OR ADMINISTRATIVE CHANGES IN LAW, (II) THE UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES OF THE POSSIBLE DEDUCTION BY THE ISSUER OF BRAZILIAN TAXES (AND OF
THE PAYMENT BY THE ISSUER OF ADDITIONAL AMOUNTS WITH RESPECT THERETO) FROM
PAYMENTS ON THE NOTES, (III) THE AVAILABILITY FOR UNITED STATES FEDERAL INCOME
TAX PURPOSES OF A CREDIT OR DEDUCTION FOR ANY BRAZILIAN TAXES SO DEDUCTED AND
(IV) THE CONSEQUENCES OF PURCHASING THE NOTES AT A PRICE OTHER THAN THEIR ISSUE
PRICE.
Interest on the Senior Notes
Interest on the Senior Notes will be taxable to a U.S. Holder as ordinary
income at the time it accrues or is received in accordance with the U.S.
Holder's method of accounting for tax purposes. The amount includible in the
income of a U.S. Holder will be the gross amount of interest, including any
Additional Amounts, if any, payable to holders of Senior Notes (i.e., the amount
before deduction of any Brazilian withholding taxes).
51
Disposition of a Note
Generally, any sale, redemption or other taxable disposition of a Note by a
U.S. Holder will result in taxable gain or loss equal to the difference between
(1) the sum of the amount of cash and the fair market value of other property
received with respect to such taxable sale, redemption or other distribution
(other than consideration attributable to accrued interest not previously taken
into account, which consideration would be treated as interest received) and (2)
the U.S. Holder's tax basis in the Note. Any gain or loss upon a sale or other
disposition of a Note will be capital gain or loss (which will be long-term if
the Note is held for more than one year).
Effect of Brazilian Withholding Taxes
It is believed that payments with respect to a Note will not be subject to
Brazilian withholding tax unless the Note is redeemed prior to November 26,
2004. See "--Brazil." In the case of any Note which is so redeemed, withholding
taxes in respect of interest previously paid may be imposed by Brazil at the
time of redemption. Any Brazilian tax withheld generally will be treated as a
foreign income tax that U.S. Holders may elect to deduct in computing their
taxable income or, subject to the limitations on foreign tax credits generally,
to credit against their United States Federal income tax liability. No such
deduction or credit will be available to the extent Brazil pays a subsidy to a
U.S. Holder, a related person or Tevecap, the amount of which is determined
(directly or indirectly) by reference to the amount of the withholding tax.
While Brazil does not have a program or policy of paying such subsidies at
present, it has had programs of that nature in the past and could implement such
programs again in the future. For purposes of determining a U.S. Holder's United
States foreign tax credit, the gain or loss on the sale, redemption or other
taxable disposition of a Note will generally constitute United States source
income. Interest (including any Additional Amounts payable by Tevecap) will
generally constitute foreign source passive income or financial services income
for United States foreign tax credit purposes. However, if a Note is redeemed
prior to November 26, 2004, and payments with respect to the Note are subject to
Brazilian withholding tax imposed at a rate of 5% or more, the IRS might
retroactively treat interest paid with respect to the Note as high withholding
tax interest. In any event, because the amount of foreign taxes for which the
foreign tax credit may be taken for the taxable year is generally limited to an
amount equal to the U.S. Holder's United States Federal income tax rate
multiplied by its foreign source income for the taxable year, a U.S. Holder may
have insufficient foreign source income to utilize fully any foreign tax credit
attributable to such Brazilian withholding taxes (but such U.S. Holder may be
entitled to utilize the foreign tax credit attributable to such withholding
taxes for the holders' previous two or succeeding five taxable years, or such
withholding taxes may instead be deductible by the U.S. Holder). A U.S. Holder
may be required to provide the IRS with a certified copy of the receipt
evidencing payment of withholding tax imposed in respect of payments on the
Senior Notes in order to claim a foreign tax credit in respect of such
withholding tax.
Information Reporting and Backup Withholding
For each calendar year in which the Senior Notes are outstanding, each DTC
participant or indirect participant holding an interest in a Note on behalf of a
U.S. Holder and each paying agent making payments in respect of a Note will
generally be required to provide the IRS with certain information, including
such U.S. Holder's name, address and taxpayer identification number (either such
U.S. Holder's Social Security number or its employer identification number, as
the case may be), and the aggregate amount of interest and principal paid to
such U.S. Holder during the calendar year. These reporting requirements,
however, do not apply with respect to certain U.S. Holders, including
corporations, securities dealers, other financial institutions, tax-exempt
organizations, qualified pension and profit sharing trusts, individual
retirement accounts.
In the event that a U.S. Holder fails to establish its exemption from such
information reporting requirements or is subject to the reporting requirements
described above and fails to supply its correct taxpayer identification number
in the manner required by applicable law, or underreports its tax liability, the
direct or indirect DTC participant holding such interest on behalf of such U.S.
Holder or paying agent making payments in respect of a Note may be required to
"backup" withhold a tax equal to 31% of each payment of interest and principal
with respect to the Senior Notes. This backup withholding tax is not an
additional tax and may be credited against the U.S. Holder's United States
Federal income tax liability if the required information is furnished to the
IRS.
52
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
The Company is a foreign issuer subject to the reporting requirements of
the Exchange Act and the rules and regulations thereunder. The Company files
reports with the Securities and Exchange Commission (the "Commission") in
electronic format via EDGAR. These reports can be accessed through the
Commission's website (www.sec.gov) and can also be inspected at the public
reference facilities maintained by the Commission at 450 Fifth Street N.W., Room
1024, Washington, DC 20549, as well as the regional offices of the Commission
located at Seven World Trade Center, 13th floor, New York, New York 10017 and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials may be obtained at prescribed rates. Other information regarding the
Company can be accessed through the Company's website (www.tva.com.br).
I. Subsidiary Information
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to foreign currency exchange rate risk and interest
rate risk. As of December 31, 2000, Tevecap had dollar-denominated debt of
U.S.$82.8 million which is due as follows:
Principal
----------------------
(thousands of dollars)
2001 $ 33,071
2002 1,669
2003 0
2004 48,022
2005 and thereafter 0
--------
$ 82,762
========
During January 1999, the Brazilian real experienced a devaluation after the
Central Bank abandoned the exchange band within which the real was permitted to
trade. Since that time, the exchange rate has been volatile, ranging up to
R$2.30 per U.S. dollar. See Item 3, "Key Information--Selected Financial
Data--Exchange Rates."
Although the Company's reporting currency is the U.S. dollar, the cash flow
required to service its indebtedness is generated in local currency, Brazilian
reais (R$). Using the year end 2000 exchange rate (R$1.9554 per U.S.$1.00), the
cash flow in reais to pay the interest (U.S.$8.1 million) and principal due in
2001 would be R$15.9 million and R$64.7 million, respectively. A devaluation of
the real to R$2.30 per U.S. dollar would require cash flow of R$18.7 million and
R$76.1 million, respectively, to pay the interest (U.S.$8.1 million) and
principal due in 2001. If the real devalued to R$2.50 per U.S. dollar, the cash
flow in reais to pay the interest and principal due in 2001 would be R$20.3
million and R$82.7 million, respectively.
The Company is also subject to interest rate risk on its loans in local
currency. As of December 31, 2000, the Company had $141.1 million of loans from
an affiliate denominated in Brazilian reais, which bears interest at the average
cost of funds of the affiliate. The majority of the affiliate's debt is in reais
and bears interest at the CDI rate (the interbank certificate of deposit rate in
Brazil), plus 0.5%.
53
During 2000, the CDI rate ranged from 18.7% to 16.1%. The average rate for
the year was 17.5%. If the CDI rate rose to 25%, interest payments on the $141.1
million would be approximately $35.3 million annually. If the CDI rate rose to
30%, the annual interest payments would be $42.3 million. Most of the interest
due on these loans in the past has been added to principal rather than paid in
cash.
The Company does not hedge any of its market risks and does not have
derivative investments.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN DEBT SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not applicable.
ITEM 15. [RESERVED]
ITEM 16. [RESERVED]
PART III
ITEM 17. FINANCIAL STATEMENTS
The Company is furnishing financial statements pursuant to the instructions
in Item 18 of Form 20-F.
ITEM 18. FINANCIAL STATEMENTS
See Item 19(a) for a list of financial statements filed as part of this
Form 20-F.
ITEM 19. EXHIBITS
(a) Financial Statements. The following financial statements and schedules
are filed as part of this annual report, together with the report of the
independent public accountants.
54
INDEX TO THE FINANCIAL STATEMENTS
Page
----
TEVECAP S.A. AND SUBSIDIARIES - Consolidated Financial Statements Together
with Report of Independent Public Accountants - December 31, 2000
and 1999.................................................................F-1
Report of Independent Public Accountants.................................F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999.............F-3
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 2000........................F-5
Consolidated Statements of Changes in Shareholders' Deficit
and Statement of Redeemable Common Stock for each of
the three years in the period ended December 31, 2000..............F-6
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2000........................F-7
Notes to the Consolidated Financial Statements...........................F-9
TVA SISTEMA DE TELEVISAO S.A. - Financial Statements Together
with Report of Independent Public Accountants - December 31, 2000
and 1999................................................................F-46
Report of Independent Public Accountants................................F-47
Balance Sheets as of December 31, 2000 and 1999.........................F-48
Statements of Operations for each of the three
years in the period ended December 31, 2000.......................F-50
Statements of Changes in Shareholders' Deficit for
each of the three years in the period ended December 31, 2000.....F-51
Statements of Cash Flows for each of the three
years in the period ended December 31, 2000.......................F-52
Notes to the Financial Statements.......................................F-53
55
TVA SUL PARANA LTDA. AND SUBSIDIARY - Consolidated Financial Statements
Together with Report of Independent Public Accountants -
December 31, 2000 and 1999..............................................F-67
Report of Independent Public Accountants................................F-68
Consolidated Balance Sheets as of December 31, 2000 and 1999............F-69
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 2000................................F-71
Consolidated Statements of Changes in Shareholders' Equity for each
of the three years in the period ended December 31, 2000.............F-72
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 2000................................F-73
Notes to Financial Statements...........................................F-75
CCS--CAMBORIU CABLE SYSTEM DE TELECOMUNICACOES LTDA. -
Financial Statements Together with Report of Independent Public
Accountants - December 31, 2000 and 1999................................F-88
Report of Independent Public Accountants................................F-89
Balance Sheets as of December 31, 2000 and 1999.........................F-90
Statements of Operations for each of the three years in the period
ended December 31, 2000..............................................F-92
Statements of Changes in Shareholders' Equity for each of the three
years in the period ended December 31, 2000..........................F-93
Statements of Cash Flows for each of the three years in the period
ended December 31, 2000..............................................F-94
Notes to Financial Statements...........................................F-95
56
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TEVECAP S.A.
By: /s/ Jose Augusto P. Moreira
-------------------------------
Name: Jose Augusto P. Moreira
Title: Officer
By: /s/ Marcelo Vaz Bonini
-------------------------------
Name: Marcelo Vaz Bonini
Title: Officer
Date: June 1, 2001
57
TEVECAP S.A.
AND SUBSIDIARIES
Index to Consolidated Financial Statements
Contents
Page
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-3
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 2000 F-5
Consolidated Statements of Changes in Shareholders' Deficit and
Statements of Redeemable Common Stock for each of the three
years in the period ended December 31, 2000 F-6
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 2000 F-7
Notes to The Consolidated Financial Statements F-9
F-1
Report of Independent Public Accountants
To the Shareholders and Directors of
TEVECAP S.A.
We have audited the accompanying consolidated balance sheets of TEVECAP S.A. and
subsidiaries (the "Company") as of December 31, 2000 and 1999, and the related
consolidated statements of operations, changes in shareholders' deficit and
redeemable common stock and cash flows for each of the three years in the period
ended December 31, 2000, all expressed in United States dollars. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of TEVECAP S.A. and
subsidiaries as of December 31, 2000 and 1999, and the consolidated results of
their operations and cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States of America.
Arthur Andersen S/C
Sao Paulo, Brazil,
February 16, 2001
F-2
TEVECAP S.A.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2000 and 1999
(in thousands of U.S. dollars)
December 31,
--------------------
2000 1999
-------- --------
ASSETS
Current assets
Cash and cash equivalents $ 1,609 $ 1,946
Accounts receivable, net 7,737 7,562
Inventories, net 12,501 10,313
Film exhibition rights -- 1,278
Prepaid and other assets 4,063 3,612
Accounts receivable from related parties 96 155
Judicial deposits -- 832
Promissory note 27,744 --
Other accounts receivable 8,813 5,496
-------- --------
Total current assets 62,563 31,194
-------- --------
Property, plant and equipment, net 182,511 211,729
Investments
Equity basis -- 2,190
Cost basis investments -- 8
Concessions, net 7,919 10,366
Loans to related companies 17,532 5,973
Debt issuance costs, net (accumulated amortization;
2000- $ 8,601 ;1999- $ 8,382) 640 859
Promissory note -- 25,500
Judicial deposits 8,192 2,129
-------- --------
Total assets $279,357 $289,948
======== ========
F-3
TEVECAP S.A.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2000 and 1999
(in thousands of U.S. dollars)
December 31,
----------------------------
2000 1999
----------- -----------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Loans $ 33,071 $ 8,492
Film suppliers 5,122 8,711
Other suppliers 9,004 8,662
Taxes payable other than income taxes 5,457 5,969
Accrued payroll and related liabilities 2,470 2,389
Advance payments received from subscribers 253 938
Other accounts payable 1,963 2,637
----------- -----------
Total current liabilities 57,340 37,798
----------- -----------
Long-term liabilities
Loans 49,691 57,446
Loans from shareholders 141,122 137,168
Taxes payable other than income taxes 29,468 22,778
Provision for claims 2,546 2,417
Liability to fund equity investee 7,938 5,934
----------- -----------
Total long-term liabilities 230,765 225,743
----------- -----------
Commitments and contingencies (Notes 15 and 17)
Minority interest 2,041 2,786
Redeemable common stock, no par value, 85,637,526 shares
Issued and outstanding 151,260 178,002
Shareholders' deficit
Common stock, no par value, 140,700,759
Shares issued and outstanding 242,342 242,342
Accumulated other comprehensive loss
Cumulative translation adjustment (1,555) --
Accumulated deficit (402,836) (396,723)
----------- -----------
Total shareholders' deficit (162,049) (154,381)
----------- -----------
Total liabilities and shareholders' deficit $ 279,357 $ 289,948
=========== ===========
F-4
TEVECAP S.A.
AND SUBSIDIARIES
Consolidated Statements of Operations
for the years ended December 31, 2000, 1999 and 1998
(in thousands of U.S. dollars)
Year ended December 31,
--------------------------------------------------
2000 1999 1998
------------- ------------- -------------
Gross revenues
Monthly subscriptions $ 97,134 $ 94,055 $ 136,278
Installation 968 1,900 2,886
Advertising 2,747 1,597 3,544
Indirect programming 3,164 3,722 19,580
Additional services 20,049 14,924 14,893
Taxes on revenues (13,462) (12,782) (12,533)
------------- ------------- -------------
Net revenue 110,600 103,416 164,648
------------- ------------- -------------
Direct operating expenses
Payroll and benefits 9,895 7,857 15,968
Programming 27,340 24,166 54,282
Transponder lease cost 2,501 1,975 2,336
Technical assistance 2,415 1,311 1,212
Vehicle rentals 84 100 178
TVA magazine 2,575 2,482 7,158
Pole rental 3,535 2,935 3,247
Other costs 9,239 4,812 8,975
------------- ------------- -------------
57,584 45,638 93,356
------------- ------------- -------------
Selling, general and administrative expenses
Payroll and benefits 14,942 11,425 24,849
Advertising and promotion 7,666 3,645 9,335
Rent 2,022 2,005 3,976
Other general and administrative expenses 9,368 8,515 18,357
------------- ------------- -------------
33,998 25,590 56,517
------------- ------------- -------------
Provision for equipment and inventory obsolescence (365) 605 1,940
Depreciation 41,622 55,174 46,402
Amortization 1,668 1,705 1,705
------------- ------------- -------------
Operating loss from continuing operations (23,907) (25,296) (35,272)
------------- ------------- -------------
Interest income 5,374 5,896 6,718
Interest expense (45,069) (22,254) (51,665)
Translation loss -- (2,543) (17)
Transaction (4,816) -- --
Equity in losses of affiliates (2,004) (5,238) (12,139)
Other nonoperating income (expenses), net 39,593 64,882 (4,233)
------------- ------------- -------------
Income (loss) from continuing operations before income taxes and
minority interest (30,829) 15,447 (96,608)
Income taxes (2,517) (106) (24)
------------- ------------- -------------
Income (loss) from continuing operations before minority interest (33,346) 15,341 (96,632)
Minority interest 491 678 1,338
------------- ------------- -------------
Income (loss) from continuing operations before extraordinary item (32,855) 16,019 (95,294)
Loss from discontinued operations -- -- (52,773)
Extraordinary item - gain on debt repurchase -- 53,857 --
------------- ------------- -------------
Net income (loss) $ (32,855) $ 69,876 $ (148,067)
============= ============= =============
Other comprehensive loss -
Cumulative translation adjustment $ (1,555) $ -- $ --
------------- ------------- -------------
Comprehensive income (loss) $ (34,410) $ 69,876 $ (148,067)
============= ============= =============
Net income (loss) per share for continuing operations before
extraordinary item (0.15) 0.07 (0.43)
Net loss per share for discontinued operations -- -- (0.23)
Net income per share for extraordinary item -- 0.24 --
Net income (loss) per share (0.15) 0.31 (0.66)
Weighted average shares outstanding 226,338,285 226,338,285 223,338,285
F-5
TEVECAP S.A.
AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Deficit and Statement
of Redeemable Common Stock
for the years ended December 31, 2000, 1999 and 1998
(in thousands of U.S. dollars)
Cumulative Total Redeemable
Paid-in Accumulated Translation Shareholders' Common
Capital Deficit Adjustments Deficit Stock
----------- ----------- ----------- ----------- -----------
Balance as of December 31, 1997 $ 142,495 $ (329,564) $ $ (187,069) $ 189,034
Capital contributed on February 2, 1998 99,847 99,847
Net loss for the year (148,067) (148,067)
Reversal related to redeemable common stock 11,032 11,032 (11,032)
----------- ----------- ----------- ----------- -----------
Balance as of December 31, 1998 $ 242,342 $ (466,599) $ $ (224,257) $ 178,002
Net income for the year 69,876 69,876
----------- ----------- ----------- ----------- -----------
Balance as of December 31, 1999 $ 242,342 $ (396,723) $ $ (154,381) $ 178,002
Currency translation adjustments (1,555) (1,555)
Net loss for the year (32,855) (32,855)
Reversal related to redeemable common stock 26,742 26,742 (26,742)
----------- ----------- ----------- ----------- -----------
Balance as of December 31, 2000 $ 242,342 $ (402,836) $ (1,555) $ (162,049) $ 151,260
=========== =========== =========== =========== ===========
F-6
TEVECAP S.A.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the years ended December 31, 2000, 1999 and 1998
(in thousands of U.S. dollars)
Year Ended December 31,
--------------------------------------------
2000 1999 1998
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) $ (32,855) $ 69,876 $(148,067)
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Depreciation 41,622 55,174 46,402
Amortization 1,668 1,705 1,705
Amortization of debt issuance cost 219 5,404 1,550
Provision for doubtful accounts (3,775) 196 3,407
Provision for equipment and inventory obsolescence (365) 605 1,940
Provision for claims 129 (4,004) 1,617
Minority interest (491) (678) (1,338)
Disposal and write-off of property, plant and equipment 2,046 57,028 1,574
Gain on sale of assets (40,454) (134,138) --
Write-off of investments 8 6,668 --
Buy back gain of Senior Notes -- (70,692) --
Discontinued operations -- -- 52,773
Equity in losses of affiliates 2,004 5,238 12,139
Changes in operating assets and liabilities:
Film exhibition rights 1,278 290 (277)
Accounts receivable 3,600 12,921 53
Prepaid and other assets (451) 1,564 8,657
Promissory note -- (25,500) --
Other accounts receivable (8,489) (1,198) 1,928
Accrued interest 32,615 14,334 258
Inventories (1,823) 3,982 8,680
Suppliers (3,248) (25,910) 1,931
Taxes payable other than income taxes 6,178 14,513 4,342
Accrued payroll and related liabilities 81 (1,568) (1,382)
Advances received from subscribers (685) (1,064) 1,968
Other accounts payable (674) (3,181) 2,815
--------- --------- ---------
Net cash (used in) provided by operating activities (1,862) (18,435) 2,675
--------- --------- ---------
Cash flows (used in) provided by investing activities:
Purchases of property, plant and equipment (26,716) (25,927) (81,392)
Discontinued operations -- -- (17,011)
Cash received on sale of assets 43,000 177,542 --
Loans to related companies -- -- (44,071)
Purchase of concessions -- (1) --
Investments in equity and cost investments -- (1,788) (20,082)
--------- --------- ---------
Net cash (used in) provided by investing activities 16,284 149,826 (162,556)
--------- --------- ---------
Cash flows (used in) provided by financing activities:
Bank loans 26,752 6,661 14,549
Capital contributions -- -- 99,847
Loans from shareholders 25,219 63,695 126,084
Loans to related companies (19,205) -- --
Repayments of loans from shareholders (37,342) (11,430) --
Repayments of loans to related companies 8,951 2,180 31,429
Repayments of loans from related companies -- -- (83,696)
Repayment of loans from banks (17,375) (191,948) (27,924)
--------- --------- ---------
Net cash (used in) provided by financing activities (13,000) (130,842) 160,289
--------- --------- ---------
Effect of exchange rate changes (1,759) -- --
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (337) 549 408
Cash and cash equivalents at beginning of the period 1,946 1,397 989
--------- --------- ---------
Cash and cash equivalents at end of the period $ 1,609 $ 1,946 $ 1,397
========= ========= =========
Supplemental cash disclosure:
Cash paid for interest $ 6,073 $ 15,784 $ 31,712
========= ========= =========
F-7
TEVECAP S.A.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the years ended December 31, 2000, 1999 and 1998
(in thousands of U.S. dollars)
Year Ended December 31,
----------------------------------------
2000 1999 1998
--------- --------- ---------
Supplemental noncash financing and investing activities:
Accrued interest on related company loans refinanced
As principal balance $ 27,808 $ (3,835) $ 10,930
F-8
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
1. The Company and its principal operations
The consolidated financial statements have been prepared to reflect the
consolidated results of TEVECAP S.A. and its subsidiaries (the "Company").
TEVECAP S.A. is a holding company, the subsidiaries of which render
services related to wireless cable, cable and high-speed internet,
including marketing and advertising, production, distribution and licensing
of domestic and foreign television programs. The Company has wireless cable
channel rights primarily in major urban markets in Brazil.
As of December 31, 2000, Abril S.A. ("Abril"), a printing and distribution
company, was the majority shareholder of the Company.
2. Summary of significant accounting policies
Significant policies followed in the preparation of the consolidated
financial statements are described below:
2.1. Basis of presentation and consolidation
a) Basis of presentation
The consolidated financial statements are presented in U.S. dollars and
have been prepared in accordance with accounting principles generally
accepted in the United States of America ("U.S. GAAP"), which differ in
certain respects from accounting principles applied by the Company in its
local currency financial statements, which are prepared in accordance with
accounting principles generally accepted in Brazil ("Brazilian GAAP").
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
financial statement dates and the reported amount of revenues and expenses
during the reporting periods. Since management's judgment involves making
estimates concerning the likelihood of future events, the actual results
could differ from these estimates.
2.1. Basis of presentation and consolidation (Continued)
b) Principles of consolidation
The consolidated financial statements include the accounts of TEVECAP S.A.
and all majority-owned subsidiaries.
Investments in affiliated companies, owned 20% to 50% inclusive, are
carried at cost plus the Company's equity in undistributed earnings since
acquisition. Investments in less than 20% owned affiliates are accounted
for under the cost method. Intercompany transactions and accounts are
eliminated in consolidation.
F-9
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
2.2. Accounting records
As required by Brazilian Law and in accordance with local accounting
practices, the accounting records of the Company are maintained in
Brazilian currency (real). In order to present the consolidated financial
statements in conformity with accounting principles generally accepted in
the United States of America, the Company maintains additional accounting
records which are used solely for this purpose.
2.3. Currency remeasurement
As of January 1, 2000, based on the changes in the Company's capital and
operational structure, the Company changed its functional currency from the
United States dollar to the Brazilian real (R$). This change was made based
on the premises of the Statement of Financial Accounting Standards ("SFAS")
52, "Foreign Currency Transactions", since currently a substantial portion
of Company's business is now conducted in Brazilian reais.
Assets and liabilities are translated into U.S. dollars at the exchange
rate in effect at the end of the reporting period, and revenues and
expenses are translated into U.S. dollars at the average rates prevailing
in the period. The resulting net translation gains and losses are reported
as currency translation adjustments in shareholders' deficit.
F-10
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
2.4 Consolidated financial statements
The Company's operating subsidiaries included in the consolidated financial
statements are:
Ownership Interest as of
December 31,
--------------------
2000 1999
------- -------
Owned Systems
TVA Distribuidora S.A. 100.00% 100.00%
TVA Sistema de Televisao S.A. 98.00% 98.00%
TVA Sul Parana Ltda. 86.00% 86.00%
CCS Camboriu Cable Systems de Telecomunicacoes Ltda. 51.60% 51.60%
TVAPar S.A. 100.00% 100.00%
Rede Ajato Ltda. (b) 100.00% 100.00%
License Subsidiary
Comercial Cabo TV Sao Paulo Ltda. (a) 100.00% 100.00%
Ype Radio e Televisao Ltda. 100.00% 100.00%
TVA Sistema de Televisao de Porto Alegre S.A. 100.00% 100.00%
Programming Ventures
TVA Programadora Ltda. 100.00% 100.00%
TVA Channels Ltda. 100.00% 100.00%
TVA Inc 100.00% --
TVA Overseas Ltd. 100.00% --
TVA Communications Ltd. 100.00% 100.00%
TVA Communications Aruba N.V. 100.00% 100.00%
a. 0.00149% of the common shares in this entity are owned by the controlling
shareholder of the parent company pursuant to local legislative
requirements.
b. On August 1, 1999, the company Rede Ajato Ltda. was created to operate in
the high-speed internet market.
F-11
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
2.5 Cash and cash equivalents
Cash and cash equivalents are defined as cash and cash in banks and
investments in interest-bearing securities and are carried at cost plus
accrued interest. Short-term investments with original maturities of three
months or less at the time of purchase are considered cash equivalents.
2.6 Financial instruments
In accordance with SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments", information is provided about the fair value of certain
financial instruments for which it is practicable to estimate that value.
For the purposes of SFAS No. 107, the estimated fair value of a financial
instrument is the amount at which the instrument could be exchanged in a
current transaction between willing parties, other than in a forced or
liquidation sale. The carrying values of the Company's financial
instruments as of December 31, 2000 and 1999 approximate management's best
estimate of their fair values. The following methods and assumptions were
used to estimate the fair value of each class of financial instrument for
which it is practicable to estimate that value:
o The fair value of certain financial assets carried at cost, including
cash, accounts receivable, other accounts receivable, and certain
other short-term assets, is considered to approximate their respective
carrying value due to their short-term nature.
o The fair value of payables to film suppliers and other suppliers,
other accounts payable, loans to related companies and certain other
short-term liabilities are considered to approximate their respective
carrying value due to their short-term nature.
o The fair value of loans from related companies approximates their
respective carrying values, as interest on these loans is variable and
based on market rates.
o The fair value of third party loans, except for Senior Notes,
approximates their carrying value as the interest rates on these loans
are either fixed at a rate comparable with the current market rate or
variable and based on market rates.
o The fair value of Senior Notes represents 90% of its carrying value as
of December 31, 2000.
F-12
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
2.7 Accounts receivable
A provision for doubtful accounts is established on the basis of an
analysis of the accounts receivable, in light of the risks involved, and
is considered sufficient to cover any losses incurred in realization of
credits.
2.8 Inventories
Inventories consist of materials and supplies and imports in transit.
Materials and supplies are used to provide service to new customers, and
to ensure continuity of service to existing customers. Imports in transit
represent materials purchased from foreign countries that have not yet
been received.
Inventories are stated at the lower of cost or market. Cost is determined
principally under the average cost method.
A provision for obsolescence has been established on the basis of an
analysis of slow-moving materials and supplies.
2.9 Film exhibition rights and program licensing
Film exhibition rights and program licensing costs are deferred and
charged to expense as the films and/or programs are exhibited.
2.10 Property, plant and equipment
Property, plant and equipment are stated at cost and depreciated using the
straight-line method, over the remaining useful lives, as described in
Note 10.
2.11 Advertising
Advertising revenues are recognized, and the production cost of
commercials and programming are charged to expense, when the commercial is
telecast.
2.12 Recoverability of long-lived assets to be held and used in the business
Management reviews long-lived assets, primarily the Company's licenses and
its property and equipment to be held and used in the business, for the
purposes of determining and measuring impairment on a recurring basis or
when events or changes in circumstances indicate that the carrying value
of an asset or group of assets may not be recoverable. Assets are grouped
and evaluated for possible impairment at the level of each cable
television system; impairment is assessed on the basis of the forecasted
undiscounted cash flows of the businesses over the estimated remaining
lives of the assets related to those systems. A write-down of the carrying
value of the assets or group of assets to estimated fair value will be
made if and when appropriate.
F-13
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
2.13 Revenue recognition
Hook-up fees are recognized as revenue on the equipment installation date
to the extent of direct selling costs incurred which are generally higher
than the revenue, and the related selling costs are expensed. Subscription
revenues are recognized as earned on an accrual basis.
2.14 Licenses
Televisao Show Time Ltda. ("TV Show Time") and TVA Brasil Radioenlaces
Ltda. ("TVA Brasil") hold licenses covering certain operations of the
Company. The use of such licenses is provided to the Company, for a
nominal fee, under a Service Agreement dated July 22, 1994, as amended,
among TEVECAP S.A., TV Show Time, TVA Brasil and Abril S.A.
Pursuant to the Service Agreement, TV Show Time and TVA Brasil have agreed
to transfer the licenses, which are carried at nil value, to TEVECAP S.A.
at nominal cost.
2.15 Concessions
Concessions represent the right to engage in various telecommunications
services in defined areas or cities in Brazil. The cost of these
concessions is being amortized on the straight-line basis over 10 years.
F-14
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
3. Accounts receivable, net
As of December 31, 2000 and 1999, accounts receivable were comprised of:
2000 1999
--------- ---------
Subscriptions and installation fees $ 11,368 $ 14,375
Advertising 1,022 1,437
Programming 694 1,000
Other 2,248 2,120
Provision for doubtful accounts (7,595) (11,370)
--------- ---------
$ 7,737 $ 7,562
========= =========
4. Inventories, net
As of December 31, 2000 and 1999, inventories were comprised of:
2000 1999
--------- ---------
Materials and supplies $ 15,645 $ 13,431
Imports in transit 226 617
Provision for obsolescence (3,370) (3,735)
--------- ---------
$ 12,501 $ 10,313
========= =========
5. Prepaid and other assets
As of December 31, 2000 and 1999, prepaid expenses were comprised of:
2000 1999
--------- ---------
Advances to suppliers $ 1,107 $ 1,088
Prepaid meals and transportation 227 106
Advances for imports 1,437 --
Debt issuance costs 220 220
Other 1,072 2,198
--------- ---------
$ 4,063 $ 3,612
========= =========
F-15
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
6. Related party transactions
The following tables summarize the transactions between the Company and
its related parties as of December 31, 2000 and 1999 and for the three
years ended December 31, 2000:
December 31,
--------------------------
2000 1999
---------- ----------
Abril S.A
Accounts receivable $ 1 $ 47
Loans receivable 11,481 --
Accounts payable -- 291
Editora Abril S.A
Accounts receivable $ 49 $ --
Loans payable 141,122 137,168
Accounts payable 250 --
Canbras TVA Cabo Ltda
Accounts receivable $ -- $ 11
Loans receivable 5,892 5,799
Accounts payable 7 --
Others
Accounts receivable $ 46 $ 97
Loans receivable 159 174
Accounts payable 15 27
F-16
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
6. Related-party transactions (Continued)
2000 1999 1998
--------- --------- ---------
Abril S.A
Net interest expense $ 29,690 $ (3,835) $ 17,154
Printing costs 2,763 1,447 3,301
TV Filme Inc.
Programming revenue $ -- $ (184) $ (3,010)
Canbras TVA Cabo Ltda
Programming revenue $ -- $ (216) $ (2,185)
California Broadcast Center L.L.C
Net interest income $ -- $ (197) $ (769)
Loans granted to or obtained from related companies, under loan
agreements, are denominated in reais and subject to variable interest of
1.44% to 1.19% per month as of December 31, 2000 (2.17 % to 1.58% per
month as of December 31, 1999).
TEVECAP S.A. has a credit facility with Abril S.A. under which TEVECAP
S.A. is allowed to borrow up to $60,000 on a revolving basis until
December 1999. Since June 1996, TEVECAP S.A., has from time to time
requested, and Abril S.A. has provided, funding in excess of the aggregate
maximum principal amount. As of December 31, 2000 $141,122 was drawn down
under the facility. The credit facility is subject to a variable interest
rate of 1.90% to 1.63% per month as of December 31, 2000 (2.51% to 1.97%
per month as of December 31, 1999).
F-17
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
6. Related-party transactions (Continued)
Additionally, Abril S.A. provided a guarantee for equipment imported by
TVA Sistema de Televisao S.A., TV Filme Inc. ("TV Filme") and TVA Sul
Parana Ltda. The amount outstanding pursuant to this guarantee as of
December 31, 2000 was $25,500. The Company and Falcon Internacional
Communications Services Inc., one of the Company's shareholders, signed a
consulting service agreement in April 1996 related to the Company's
operations and technologies. Initially, the duration of this agreement was
two years, renewable every subsequent two-year period thereafter. The
payment for the consulting services amounts to $ 200 per annum.
Related-party transactions relating to programming sales and costs and
printing services costs were carried out at usual market rates and terms.
7. Other accounts receivable
As of December 31, 2000 and 1999, other accounts receivable were comprised
of:
2000 1999
-------- --------
Galaxy Brasil Ltda $ 1,265 $ 2,015
TVA Banda C Ltda 945 471
ESPN do Brasil Ltda 25 145
Multithematiques - Sale of Eurochannell 4,036 --
Tax recoverable 802 1,246
Other 1,740 1,619
-------- --------
$ 8,813 $ 5,496
======== ========
F-18
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
8. Income taxes
The tax effects of temporary differences that give rise to a significant
portion of the deferred tax asset and deferred tax liability as of
December 31, 2000 and 1999 are as follows:
2000 1999
----------- -----------
Deferred tax assets:
Net operating loss carryforwards $ 102,122 $ 74,731
Provision for obsolescence 894 784
Provision for claims 4,877 8,270
Provision for decoders 756 673
Other 1,458 1,639
----------- -----------
Total gross deferred tax asset 110,107 86,097
----------- -----------
Deferred tax liability:
Installation costs -- (54)
----------- -----------
Total gross deferred tax liability -- (54)
----------- -----------
Net deferred tax asset 110,107 86,043
----------- -----------
Less valuation allowance for continuing operations (110,107) (86,043)
----------- -----------
Net deferred tax asset/liability $ -- $ --
=========== ===========
F-19
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
8. Income taxes (Continued)
The valuation allowance has been established in accordance with the
requirements of SFAS No. 109, "Accounting for Income Taxes".
As of December 31, 2000, the Company and subsidiaries have unexpirable
accumulated tax losses of $ 300,359.
The consolidated income tax benefit was different from the amount computed
using the Brazilian statutory income tax for the reasons set forth in the
following table:
2000 1999 1998
--------- --------- ---------
Income (loss) before income taxes and minority interest $ (30,829) $ 69,304 $(149,381)
Statutory income tax rate 34% 37% 33%
--------- --------- ---------
(10,482) 25,642 (49,296)
Increase (decrease) in the income tax rate (2,607) (5,661) --
Unallowable amortization (254) (349) (724)
Deferred charges amortization (2,415) (2,750) (3,972)
Translation loss on tax losses 6,552 34,209 4,902
Installation materials depreciation -- 867 (125)
Equity in (gain) losses of affiliate (28,463) 219 4,006
Net loss of TVA Overseas Ltd. 1,093 -- --
Net loss of TVA Communication Aruba -- 122 139
(Deductible) taxable devaluation gain (loss) for Brazilian Statutory Purposes -- (27,839) (11,351)
Depreciation 4,371 9,300 4,988
Write-off of assets related to cancellations of subscriptions and decoders 165 8,864 --
Net loss of merged companies -- -- 1,273
Other 5,590 (3,326) 3,458
--------- --------- ---------
Net income tax expense (benefit) for the period (26,450) 39,298 (46,702)
Tax loss carryforward used 4,903 -- --
Increase (decrease) in valuation allowance for continuing operations 24,064 (39,192) 27,891
Increase in valuation allowance for discontinued operations -- -- 18,835
--------- --------- ---------
$ 2,517 $ 106 $ 24
========= ========= =========
Income tax payable represents amounts owed by subsidiaries calculated on a
stand-alone basis, as Brazilian income tax law does not allow consolidated
tax returns.
F-20
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
9. Investments
Investments as of December 31, 2000 and 1999 were comprised of:
Percentage
of Control 2000 1999
----------- ---------- ----------
Joint ventures and equity basis investments:
HBO Brazil Partners Ltda 24 -- 2,190
---------- ----------
$ -- $ 2,190
========== ==========
Liability to fund joint ventures and Equity basis investments:
Canbras TVA Cabo Ltda 36 $ 7,938 $ 5,934
---------- ----------
$ 7,938 $ 5,934
========== ==========
Concessions, net:
Stations in South of Brazil $ 7,908 $ 8,646
Ype Radio e Televisao Ltda. concessions 5,822 6,363
Comercial Cabo Ltda 1,803 1,970
Other 60 66
Amortization (7,674) (6,679)
---------- ----------
$ 7,919 $ 10,366
========== ==========
a) In July 28, 2000, the Company concluded the sale of this interest at HBO
Brazil Partners, generating a gain of $40,454, accounted for as
nonoperating income.
b) As of December 31, 1999, TVA held a 14.7% equity interest in TV Filme. The
remaining interests were held by Warburg, Pincus Investors, L.P., which
held a 38.8% equity interest; members of the Lins family, Brazilian
nationals, who held a 16.2% equity interest; public shareholders, who held
a 28.15% equity interest; and certain individuals with a combined 2.15%
equity interest (on July 29, 1996, TV Filme completed a public offering of
2.5 million shares of its common stock in the United States at an initial
price of $10.00 per share). In August 1999, TV Filme entered into an
agreement with a committee representing a majority of the holders of TV
Filme's 12.875% Notes due 2004 pursuant to which these Noteholders
received (i) a $25 million cash payment, (ii) $35 million in new five-year
12% notes and (iii) 80% of the new common shares of the reorganized
company. As a result of this agreement the company's interest in TV Filme
was reduced to less than 1%. Accordingly, as of December 31, 1999 the
Company write off the amount of this investment.
F-21
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
10. Property, plant and equipment, net
As of December 31, 2000 and 1999, property, plant and equipment were
comprised of:
Annual
Depreciation December 31,
Rate -------------------------------
% 2000 1999
----------- ----------- -----------
Reception equipment 20 $ 116,519 $ 121,250
Cable plant 10 79,854 85,207
Machinery and equipment 10 58,386 58,823
Decoders 10 72,710 72,294
Leasehold improvements 25 2,891 3,020
Furniture and fixtures 10 1,871 1,989
Premises 10 3,901 4,040
Vehicles 20 2,592 2,900
Software 20 5,751 2,225
Tools 10 838 878
Building 4 3,462 3,784
----------- -----------
348,775 356,410
Trademarks, patents and others 164 186
Telephone line use rights 2,545 2,995
Other 1,070 1,120
Accumulated depreciation (170,440) (149,020)
Fixed assets in transit 397 38
----------- -----------
$ 182,511 $ 211,729
=========== ===========
F-22
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
11. Loans
As of December 31, 2000 and 1999, loans were comprised of:
December 31, 2000 Short-term Long-term
--------- ---------
Senior Notes due 2004 (a) $ 572 $ 48,022
Bank loans 6,021 1,669
Participation Certificates (b) 26,478 --
--------- ---------
$ 33,071 $ 49,691
========= =========
December 31, 1999 $ 8,492 $ 57,446
========= =========
a. On November 26, 1996, Tevecap S.A. raised funds in foreign markets through
a private placement of Senior Notes amounting to $250,000. These Senior
Notes mature on November 26, 2004 and are guaranteed by certain of Tevecap
S.A.'s subsidiaries. Interest thereon is at 12.625% per annum and is
payable on May 25 and November 25 of each year commencing on May 25, 1997.
On July 28, 1999, the subsidiary TVA Communications Ltd. (TVAICO)
repurchased in the foreign market the Company's Senior Notes at a price of
US$131,201. The purchase was made at 35% less than the carrying value of
the notes, which resulted in an extraordinary gain of US$70,692 (US$53,857
net of bank fees and amortization of debt issuance cost). As a consequence
of this event, from the total amount of US$250,000 of Senior Notes issued,
US$201,978 is kept in the portfolio for future placement in the secondary
market.
At the time the Senior Notes were repurchased the Company obtained consent
from the remaining noteholders to eliminate the majority of the
restrictive covenants in the Senior Notes agreements.
Debt issuance costs associated with the 12.625% senior notes amounted to
$9,241 and are being amortized over the term of the senior notes.
Amortization costs for the year ended December 31, 2000 amounted to $ 219.
F-23
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
11. Loans (Continued)
b. On February 7, 2000, the Company, through a its wholly-owned subsidiary,
TVA Overseas Ltd. raised funds in foreign markets through a private
placement of $25,500, 11.5% guaranteed participation certificates ("the
participation certificates") maturing on August 6, 2001. Each
participation certificate represents a fractional undivided interest in a
$25,500 promissory note ("the GLA Promissory Note") issued by GLA in favor
of the Company as partial consideration for the sale by the Company to GLA
of the Company's entire equity interest in Galaxy Brasil and TVA Banda C.
Holders of the participation certificates, however, have no recourse to
GLA for any amounts payable under the participation certificates or the
GLA Promissory Note.
Annual maturities of long-term debt are as follows:
2002 $ 1,669
2003 --
2004 48,022
----------
Total $ 49,691
==========
12. Other accounts payable
As of December 31, 2000 and 1999, other accounts payable were comprised
of:
2000 1999
-------- --------
Accounts payable to related companies $ 272 $ 318
Advertising -- 85
Importation expenses payable 71 116
Other 1,620 2,118
-------- --------
$ 1,963 $ 2,637
======== ========
F-24
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
13. Taxes payable other than income taxes
As of December 31, 2000 and 1999, taxes payable other than income taxes
were comprised of:
2000 1999
---------- ----------
COFINS $ 564 $ 11,082
ICMS 19,225 13,091
PIS 2,458 4,290
Tax Recovery Program - REFIS 12,229 --
Other 449 284
---------- ----------
34,925 28,747
========== ==========
( - ) current liabilities (5,457) (5,969)
---------- ----------
$ 29,468 $ 22,778
========== ==========
As a result of the agreement for sale of 100% in Galaxy Brasil Ltda. and
TVA Banda C Ltda., the Company assumed liabilities on the negotiation date
referring to taxes that were accrued as a charge to the gain determined on
the sale of interest in these companies. The balance related to these
taxes as of December 31, 2000 is US$8,103 (US$7,534 as of December 31,
1999).
On April 5, 2000, the Company opted for the REFIS (Tax Recovery Program),
established by Decree N(Degree) 3.342/00 of January 25, 2000, later
changed into Law N(Degree) 9.964/00 of April 10, 2000.
With the option for the REFIS, TEVECAP is able to finance its taxes
payable (US$2,177) to the Federal Government for five years and its
subsidiaries are able to pay such taxes (US$11,138) based on 1.2% of their
monthly revenues. Based on their revenue projections, the approximate
timing for paying the total account is about 5 years. The restatement of
the tax payable included in the REFIS is made based on the TJLP (Brazilian
long-term interest rate).
During year 2000, the Company also renegotiated with the Sao Paulo State
Government the ICMS due. Based on the agreement, the Company will finance
its taxes payable for five years.
F-25
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
14. Other nonoperating, income (expenses), net
2000 1999 1998
--------- --------- ---------
Extraordinary losses on transmission rights $ -- $ -- $ (2,690)
Capital gain (loss) on :
Sale of HBO Brazil Partners 40,454 -- --
Sale of channel Eurochannel 6,865 -- --
Sale of DTH operation (432) 125,873 --
Sale of ESPN do Brasil Ltda (2,139) --
Write-off of investment in TV Filme Inc -- (6,668) --
Write-off of assets related to cancellations of subscriptions
(4,656) (18,407) --
Write-off of decoders - Digisat sale -- (31,529) --
Other (2,638) (2,248) (1,543)
--------- --------- ---------
$ 39,593 $ 64,882 $ (4,233)
========= ========= =========
15. Leased assets and commitments
The Company has rented its office space through the year 2005. As of
December 31, 2000, future minimum rental payments applicable to operating
leases in respect of this space aggregate approximately $7,360, as
follows:
2001 $ 1,472
2002 1,472
2003 1,472
2004 1,472
2005 1,472
---------
Total $ 7,360
=========
F-26
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
16. Common stock
Common stock as of December 31, 2000 and 1999 was comprised of:
2000 1999
------------------------------------------------------------------
US$ Shares US$ Shares
------------ ------------ ------------ ------------
Redeemable common stock
(including accretion) $ 151,260 85,637,526 $ 178,002 85,637,526
------------ ------------ ------------ ------------
Paid-in capital $ 242,342 140,700,759 $ 242,342 140,700,759
============ ============ ============ ============
a) Common stock subject to redemption
As of December 31, 2000 and 1999, 37.7% of the common stock of Tevecap
S.A. was subject to an Event Put, i.e., a "triggering event" under the
Stockholders' Agreement pursuant to which each of the shareholders (other
that Abril) may, in certain circumstances, demand that TEVECAP S.A.
purchase all or a portion of its shares, unless the shares of capital
stock held by such Stockholder are publicly registered, listed or traded.
In addition, as of December 31, 2000 and 1999, 12.3% of these shares are
also subject to a Time Put whereby, pursuant to the Stockholders'
Agreement, Falcon International Communications may demand that TEVECAP
S.A. buy all or a portion of Falcon's shares of capital stock held in
TEVECAP S.A. if such shares are not publicly registered, listed or traded
by September 22, 2002.
For purposes of the Event Put, triggering events are: (i) the amount of
the capital stock held by a stockholder with an Event Put exceeds the
amount allowed under any legal restriction to which such Stockholder may
be subject ("Regulatory Put"); (ii) a breach without cure within a
designated period by certain specified entities/individuals of any
representation, warranty, covenant or duty made or owed pursuant to
certain agreements; (iii) a breach without cure within a designated period
by Abril of the Abril Credit Facility; (iv) the controlling shareholder of
Abril ceases to directly or indirectly hold a specified percentage of
TEVECAP S.A. without the approval of the Stockholders or ceases to control
the voting capital stock held by its affiliates representing 50% or more
of the voting capital stock of TEVECAP S.A.; (v) the Service Agreement as
amended, among TEVECAP S.A., TV Show Time, TVA Brasil and Abril ceases to
be valid or effective or TV Show Time, TVA Brasil and Abril is liquidated
or dissolved or files voluntarily, or has filed against it involuntarily,
any petition in bankruptcy; or (vi) another Stockholder exercises an Event
Put other than a Regulatory Put.
F-27
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
16. Common stock (Continued)
The Company's management believes that the probability of occurrence of
the triggering events, which would permit any of its shareholders to
exercise their Event Put, is remote.
However, a company that is public in the United States, and which
therefore is required to register its securities with the United States
Securities and Exchange Commission (the "SEC"), is required for accounting
purposes to present redeemable equity securities separately from
shareholders' equity, if redemption of such securities is beyond the
control of the registrant. That presentation is required even if the
likelihood of redemption is remote.
The Common Shares subject to the Time Put are redeemable at fair value as
determined by appraisal or by a multiple of the Company's most recent
quarterly earnings. The Company has recorded a reversal on these shares to
fair market value of $26,742 with respect to the year ended December 31,
2000.
b) Paid-in capital
Paid-in capital represents registered common shares without par value.
The Company's shareholders are entitled to minimum dividends of 25% of net
income for the year, adjusted according to Brazilian Corporation Law. As
the Company has not recorded net income since its inception, no such
dividends are payable.
17. Litigation contingencies
Certain claims and lawsuits arising in the ordinary course of business
have been filed or are pending against the Company, which were not
recognized in the consolidated financial statements. The Company has also
recorded provisions related to certain claims in amounts that management
considers to be adequate after considering a number of factors including
(but not limited to) the views of legal counsel, the nature of the claims
and the prior experience of the Company.
In Management's opinion, all contingencies have been adequately provided
for or are without merit, or are of such kind that if disposed of
unfavorably, would not have a material adverse effect on the financial
position or future results of operations of the Company.
F-28
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
18. Pension plan
In April 1996, the Company became a co-sponsor of the private pension
entity named Abrilprev Sociedade de Previdencia Privada ("Abrilprev"), the
primary objective of which is to grant employees benefits other than those
provided by Social Security. The plan is optional to all employees of the
sponsoring entities. Abrilprev operates as a Defined Contribution Plan.
Company contributions are made based on a fixed percentage applied to the
payroll of the sponsoring entities based on actuarial calculations.
Contribution expenses amounted to $262 for the year ended December 31,
2000 ($201 in 1999 and $511 in 1998).
19. Abril Health Care Plan
In February 1996, the Abril Health Care Plan, Associacao Abril de
Beneficios (the "Health Care Plan"), was created to provide health care to
Abril S.A. companies' employees and their dependents. Both the companies
forming part of the Abril Group and the employees thereof contribute
monthly to Associacao Abril de Beneficios, the company responsible for
management of the plan.
In 2000, contributions made by TEVECAP S.A. and certain affiliates of
Associacao Abril de Beneficios amounted to $939 ($933 in 1999 and $2,046
in 1998).
20. Supplementary information - valuation and qualifying accounts and reserves
Provision
Provision For Deferred
For Decoders Taxation Provision
Doubtful Provision for And Valuation For
Accounts Obsolescence Equipment Allowance Claims
----------- ----------- ----------- ----------- -----------
Balance as of December 31, 1997 $ 7,767 $ 3,120 $ 4,445 $ 78,509 $ 4,804
Additions charged to expense 3,407 10 1,930 46,726 1,617
--------- --------- --------- --------- ---------
Balance as of December 31, 1998 $ 11,174 $ 3,130 $ 6,375 $ 125,235 $ 6,421
Additions charged to expense 196 605 -- -- --
Reduction -- -- (6,375) (39,192) (4,004)
--------- --------- --------- --------- ---------
Balance as of December 31, 1999 $ 11,370 $ 3,735 $ -- $ 86,043 $ 2,417
Additions charged to expense -- 24,064 129
Reduction (3,775) (365) -- -- --
--------- --------- --------- --------- ---------
Balance as of December 31, 2000 $ 7,595 $ 3,370 $ -- $ 110,107 $ 2,546
========= ========= ========= ========= =========
F-29
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
21. Recent accounting pronouncements
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The standard requires that all
derivative instruments (1) be recognized as assets or liabilities and (2)
be adjusted to fair value each period. SFAS 133 is effective for fiscal
year beginning after June 15, 2000. As of December 31, 2000 the Company has
no operations with hedging activities.
22. Segments of Business
Tevecap's corporate structure was completed by dividing the Company into
three distinct operating divisions (two for 1999 and 1998):
a. Pay Tv;
b. Programming which concentrates Tevecap's programming interest at TVA
Channels Ltda.;
c. Internet which concentrates Tevecap's internet interests at Rede Ajato
Ltda. (internet access) and its broadband infrastructure operations.
F-30
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
December 31, 2000
Pay Programming Internet TOTAL
Tv
Net Revenue 106,475 2,325 1,800 110,600
Operating Expenses 73,333 4,177 13,707 91,217
Depreciation and Amortization 41,998 805 487 43,290
-------- -------- -------- --------
Operating Loss (8,856) (2,657) (12,394) (23,907)
Interest expense, net (44,254) (273) 16 (44,511)
Equity income (losses) affiliates (2,004) -- -- (2,004)
Other Nonoperating (2,166) 41,740 19 39,593
-------- -------- -------- --------
Income (loss) before Income taxes (57,280) 38,810 (12,359) (30,829)
And minority interest
Income Tax (2,517) -- -- (2,517)
Minority interest 491 -- -- 491
-------- -------- -------- --------
Net Income (loss) before extraordinary item (59,306) 38,810 (12,359) (32,855)
Extraordinary item - gain on debt repurchase -- -- -- --
-------- -------- -------- --------
Net income (loss) (59,306) 38,810 (12,359) (32,855)
======== ======== ======== ========
Capital Expenditures 24,232 19 2,465 26,716
Total assets 230,016 45,747 3,594 279,357
F-31
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
22. Segments of Business (Continued)
December 31, 1999
Pay Tv Programming TOTAL
----------- ----------- -----------
Net Revenue 99,007 4,409 103,416
Operating Expenses 65,351 6,482 71,833
Depreciation and Amortization 55,566 1,313 56,879
----------- ----------- -----------
Operating Loss (21,910) (3,386) (25,296)
Interest expense, net (19,138) 237 (18,901)
Equity income (losses) affiliates (4,909) (329) (5,238)
Other Nonoperating 64,892 (10) 64,882
----------- ----------- -----------
Income (loss) before Income taxes 18,935 (3,488) 15,447
And minority interest
Income Tax (106) -- (106)
Minority interest 678 -- 678
----------- ----------- -----------
Net Income (loss) before extraordinary item 19,507 (3,488) 16,019
Extraordinary item - gain on debt repurchase 53,857 -- 53,857
----------- ----------- -----------
Net income (loss) 73,364 (3,488) 69,876
=========== =========== ===========
Capital Expenditures 25,878 49 25,927
Total assets 280,550 9,398 289,948
F-32
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
December 31, 1998
Total
Continuing Discontinued
Pay Tv Programming Operations Operations (DTH) TOTAL
------ ----------- ---------- ---------------- -----
Net Revenue 134,577 30,071 164,648 176,259 340,907
Operating Expenses 118,313 33,500 151,813 162,612 314,425
Depreciation and Amortization 45,523 2,584 48,107 39,185 87,292
-------- -------- -------- -------- --------
Operating Income (Loss) (29,259) (6,013) (35,272) (25,538) (60,810)
Interest expense, net (44,868) (96) (44,964) (27,652) (72,616)
Equity income (losses) affiliates (1,119) (11,020) (12,139) -- (12,139)
Other Nonoperating (2,683) (1,550) (4,233) 417 (3,816)
-------- -------- -------- -------- --------
Loss before Income Taxes
(77,929) (18,679) (96,608) (52,773) (149,381)
And minority interest
Income Tax (24) -- (24) -- (24)
Minority interest 1,338 -- 1,338 -- 1,338
-------- -------- -------- -------- --------
Net Loss (76,615) (18,679) (95,294) (52,773) (148,067)
======== ======== ======== ======== ========
Capital Expenditures 79,978 1,414 81,392 61,967 143,359
Total assets 435,576 12,351 447,927 217,654 665,581
F-33
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
23. Financial information for subsidiary guarantors and non-guarantor
subsidiaries
TEVECAP S.A. conducts a significant portion of its business through
subsidiaries. The $250,000 12 5/8% Senior Notes issued to institutional
buyers in November 1996 are jointly and severally, irrevocably and fully
and unconditionally guaranteed on a senior basis by all of Tevecap's direct
and indirect subsidiaries except for TVA Communications Aruba N.V., TVA
Channels Ltda., Rede Ajato Ltda., Ype Radio and Televisao Ltda., TVA Inc,
TVA Overseas Ltd. and TVA TCG Sistema de Televisao Porto Alegre.
Presented below is condensed consolidating financial information for: i)
TEVECAP S.A. on a parent company only basis; ii) the Wholly Owned Guarantor
Subsidiaries; iii) the Majority-Owned Guarantor Subsidiaries; iv)
Non-guarantor Subsidiaries; v) Eliminations; and vi) Consolidated Tevecap
S.A. and subsidiaries.
The equity method has been used by Tevecap S.A., the Wholly Owned Guarantor
Subsidiaries and the Majority-Owned Guarantor Subsidiaries with respect to
investments in their subsidiaries.
The following sets forth the Wholly Owned Guarantor Subsidiaries, the
Majority-Owned Guarantor Subsidiaries and the Non-Guarantor Subsidiaries:
a) Wholly-Owned Guarantor Subsidiaries
- TVA Distribuidora S.A.
- TVA Programadora Ltda.
- TVA PAR S.A.
- TVA Communications Ltd.
- Comercial Cabo TV Sao Paulo Ltda.
b) Majority-Owned Guarantor Subsidiaries
- TVA Sistema de Televisao S.A.
- TVA Sul Parana Ltda.
- CCS Camboriu Cable System de Telecomunicacoes Ltda.
F-34
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
23. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (Continued)
c) Non-Guarantor Subsidiaries
- TVA Communications Aruba N.A.
- TVA TCG Sistema de Televisao de Porto Alegre S.A.
- Rede Ajato Ltda.
- TVA Channels Ltda.
- Ype Radio e Televisao Ltda.
- TVA Overseas Ltd.
- TVA Inc
Separate financial statements for TVA Sistema de Televisao S.A. have been
presented as of December 31, 2000 and 1999 and the related statements of
operations, changes in shareholders' equity and cash flows for each of the
three years in the period ended December 31, 2000.
During 1999, TVA Sul Participacoes S.A, TVA Sul Foz do Iguacu Ltda. and TVA
Sul Santa Catarina Ltda. were merged into TVA Sul Parana Ltda.
Separate financial statements for TVA Sul Parana Ltda have been presented
as of December 31, 2000 and 1999, and the related statements of operations,
changes in shareholder's equity and cash flows for each of three years in
the period ended December 31, 2000.
Separate financial statements for CCS Camboriu Cable System
Telecomunicacoes Ltda. as of December 31, 2000 and 1999, and the related
statements of operations, changes in shareholder's equity and cash flows
for each of three years in the period ended December 31, 2000.
F-35
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
23. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (Continued)
Consolidated Balance Sheets
as of December 31, 2000
Wholly- Majority-
Owned Owned Non-
Parent Guarantor Guarantor guarantor
Assets company Subsidiaries Subsidiaries subsidiaries Eliminations Consolidated
----------- ------------ ------------ ------------ ------------ ------------
Current assets
Cash and cash equivalents $ 26 $ 22 $ 256 $ 1,305 $ -- $ 1,609
Accounts receivable, net -- -- 8,919 990 (2,172) 7,737
Inventories, net -- -- 12,501 -- -- 12,501
Prepaid and other assets 780 -- 2,938 345 -- 4,063
Accounts receivable from related
parties 674 3 2,535 3,181 (6,297) 96
Promissory note -- -- -- 27,744 27,744
Other accounts receivable 1,636 40,658 6,987 190 (40,658) 8,813
----------- ----------- ----------- ----------- ----------- -----------
Total current assets 3,116 40,683 34,136 33,755 (49,127) 62,563
----------- ----------- ----------- ----------- ----------- -----------
Property, plant and equipment, net 10 325 179,307 5,856 (2,987) 182,511
Investments
Equity basis 180,576 42,368 -- -- (222,944) --
Concessions, net -- 3,460 4,459 -- -- 7,919
Loans to related companies 527,513 455,364 -- 58,928 (1,024,273) 17,532
Debt Issuance costs, net 640 -- -- -- -- 640
Dividends receivable 46,325 -- -- -- (46,325) --
Judicial deposits 201,978 7,934 258 (201,978) 8,192
----------- ----------- ----------- ----------- ----------- -----------
Total assets $ 758,180 $ 744,178 $ 225,836 $ 98,797 $(1,547,634) $ 279,357
=========== =========== =========== =========== =========== ===========
F-36
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
23. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (Continued)
Consolidated Balance Sheets
as of December 31, 2000
Wholly- Majority-
Owned Owned Non-
Parent Guarantor Guarantor Guarantor
Liabilities and Shareholders' Equity Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------ ------------
Current Liabilities
Loans 572 -- 6,021 26,478 -- 33,071
Film suppliers -- -- 5,103 19 -- 5,122
Other suppliers 526 -- 9,093 1,557 (2,172) 9,004
Taxes payable other than income taxes 1,858 -- 3,439 160 -- 5,457
Accrued payroll and related liabilities -- -- 1,940 530 -- 2,470
Advance payments received from subscribers -- -- 247 6 -- 253
Other accounts payable 40,811 49 5,308 2,750 (46,955) 1,963
---------- ---------- ---------- ---------- ---------- ----------
Total current liabilities 43,767 49 31,151 31,500 (49,127) 57,340
---------- ---------- ---------- ---------- ---------- ----------
Long-term liabilities
Loans 250,000 -- 1,669 -- (201,978) 49,691
Loans from related companies 151,732 506,460 465,699 41,504 (1,024,273) 141,122
Taxes payable other than income taxes 8,468 -- 20,664 336 -- 29,468
Provision for claims -- -- 2,022 524 -- 2,546
Dividends payable -- 46,325 -- -- (46,325) --
Liability to fund equity investee 299,738 298,249 -- -- (590,049) 7,938
---------- ---------- ---------- ---------- ---------- ----------
Total long-term liabilities 709,938 851,034 490,054 42,364 (1,862,625) 230,765
---------- ---------- ---------- ---------- ---------- ----------
Minority interest -- -- 2,041 -- -- 2,041
Redeemable common stock, no par value 151,260 -- -- -- -- 151,260
Shareholders' deficit
Paid-in capital 241,629 87,247 55,040 11,260 (152,834) 242,342
Accumulated other comprehensive loss
Cumulative translation adjustment (2,999) 11,695 27,913 (3,894) (34,270) (1,555)
Accumulated deficit (385,415) (205,847) (380,363) 17,567 551,222 (402,836)
---------- ---------- ---------- ---------- ---------- ----------
Total shareholders' deficit (146,785) (106,905) (297,410) 24,933 364,118 (162,049)
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and shareholders'
Deficit 758,180 744,178 225,836 98,797 (1,547,634) 279,357
========== ========== ========== ========== ========== ==========
F-37
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
23. Financial information for subsidiary guarantors and non-guarantor
Subsidiaries (Continued)
Consolidated Statements of Operations
for the year ended December 31, 2000
Wholly- Majority-
Owned Owned Non-
Parent guarantor Guarantor Guarantor
Description Company Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ --------- ------------ ------------ ------------
Gross revenues
Monthly subscriptions 96,140 994 97,134
Installation 901 67 968
Advertising 2,505 242 2,747
Indirect programming 689 2,475 3,164
Other 21,258 46 (1,255) 20,049
Taxes on revenue (13,130) (332) (13,462)
-------- -------- -------- -------- -------- --------
Net revenue 108,363 3,492 (1,255) 110,600
-------- -------- -------- -------- -------- --------
Direct operating expenses
Payroll and benefits 6,522 3,373 9,895
Programming 25,994 1,346 27,340
Transponder lease cost 2,283 218 2,501
Technical assistance 2,415 -- 2,415
Vehicle rentals 84 -- 84
TVA Magazine 2,679 (104) 2,575
Pole rental 3,535 -- 3,535
Other costs 6,285 2,954 9,239
-------- -------- -------- -------- -------- -------
49,797 7,787 57,584
-------- -------- -------- -------- -------- -------
Selling, general and administrative expenses
Payroll and benefits 13,817 1,125 14,942
Advertising and promotion 5,193 2,473 7,666
Rent 1,935 87 2,022
Other general and administrative expenses 1,181 7,627 1,815 1,255 9,368
-------- -------- -------- -------- -------- -------
1,181 28,572 5,500 1,255 33,998
-------- -------- -------- -------- -------- -------
Provision for equipment and inventory
Obsolescence -- (365) -- -- (365)
Depreciation -- 40,783 1,290 451 41,622
Amortization 822 846 -- -- 1,668
-------- -------- -------- -------- -------- -------
Operating loss (1,181) (822) (11,270) (11,085) 451 (23,907)
-------- -------- -------- -------- -------- -------
Interest income 2,124 25,632 1,321 1,865 (25,568) 5,374
Interest expense (63,643) (195) (3,725) (3,074) 25,568 (45,069)
Transaction (21,690) 20,208 (1,414) (1,920) -- (4,816)
Equity in (losses) of affiliates 55,412 22,288 -- -- (79,704) (2,004)
Other nonoperating (expenses) income, net (1,685) (78) (47) 41,403 -- 39,593
-------- -------- -------- -------- -------- -------
Income (loss) before income
Taxes and minority interest (30,663) 67,033 (15,135) 27,189 (79,253) (30,829)
Income taxes (2,244) (273) (2,517)
-------- -------- -------- -------- -------- -------
Income (loss) before minority
Interest (32,907) 67,033 (15,408) 27,189 (79,253) (33,346)
Minority interest 491 491
-------- -------- -------- -------- -------- -------
Net income (loss) (32,907) 67,033 (14,917) 27,189 (79,253) (32,855)
======== ======== ======== ======== ======== =======
F-38
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
23. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (Continued)
Consolidated Statement's of Cash Flows
for the year ended December 31, 2000
Wholly- Majority- Non-
Parent Owned Owned Guarantor
Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------ ------------
Cash flows from operating activities:
Net loss (32,907) 67,033 (14,917) 27,189 (79,253) (32,855)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation 40,783 1,290 (451) 41,622
Amortization 822 846 1,668
Amortization of debt issuance cost 219 219
Provision for doubtful accounts (3,771) (4) (3,775)
Provision for equipment and inventory
obsolescence (365) (365)
Provision for claims 209 (80) 129
Minority interest (745) 254 (491)
Disposal and write-off of property, plant and
equipment 2,046 1,493 (1,493) 2,046
Gain on sales of assets (40,454) (40,454)
Write-off of investments (5,124) 5,132 8
Equity in losses of affiliates (55,412) (22,288) 79,704 2,004
Changes in operating assets and liabilities:
Film exhibition rights 1,278 1,278
Accounts receivable 2,472 (494) 1,622 3,600
Prepaid and other assets 354 (473) (332) (451)
Promissory notes 25,500 (25,500) --
Other accounts receivable 904 64 (8,818) (3,327) 2,688 (8,489)
Accrued interest 56,734 (25,500) 1,885 (502) (2) 32,615
Inventories (1,823) (1,823)
Suppliers (281) (1) (671) (531) (1,764) (3,248)
Taxes payable other than income taxes 2,445 3,548 185 6,178
Accrued payroll and related liabilities 72 9 81
Advances received from subscribers (686) 1 (685)
Other accounts payable 11 12 2,012 (163) (2,546) (674)
-------- -------- -------- -------- -------- --------
Net cash (used in) provided by operating
activities (2,433) 15,018 21,604 (34,810) (1,241) (1,862)
-------- -------- -------- -------- -------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment (313) (25,410) (2,484) 1,491 (26,716)
Cash received on sale of assets 43,000 43,000
Loans to related companies (99,335) (40,958) (58,928) 180,016 (19,205)
Purchase of concessions
Investments in equity and cost investments (9) 9
-------- -------- -------- -------- -------- --------
Net cash used in investing activities (99,335) (41,280) (25,410) (18,412) 181,516 (2,921)
-------- -------- -------- -------- -------- --------
Cash flows from financing activities:
Bank loans 1,252 25,500 26,752
Capital contributions (2,546) 2,546
Dividends payable 23,597 (23,597)
Loans from shareholders 37,364 92,981 37,106 38,217 (180,449) 25,219
Repayments of loans from shareholders (37,342) (50,574) (21,844) (7,833) 80,251 (37,342)
Repayments of loans to related companies 59,355 29,507 (79,911) 8,951
Repayments of loans from banks (6,060) (11,315) (17,375)
-------- -------- -------- -------- -------- --------
Net cash provided by financing activities 76,914 45,771 5,199 58,430 (180,109) 6,205
-------- -------- -------- -------- -------- --------
Effect of exchange rate changes 24,869 (19,497) (2,918) (4,047) (166) (1,759)
-------- -------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents 15 12 (1,525) 1,161 (337)
Cash and cash equivalents at beginning of
the period 11 10 1,781 144 1,946
-------- -------- -------- -------- -------- --------
Cash and cash equivalents at end of the period 26 22 256 1,305 1,609
======== ======== ======== ======== ======== ========
F-39
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
23. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (Continued)
Consolidated Balance Sheets
as of December 31, 1999
Wholly- Majority-
Owned owned Non-
Parent Guarantor Guarantor guarantor
Assets company Subsidiaries subsidiaries subsidiaries Eliminations Consolidated
----------- ----------- ----------- ----------- ----------- -----------
Current assets
Cash and cash equivalents $ 11 $ 10 $ 1,781 $ 144 $ $ 1,946
Accounts receivable, net 7,620 492 (550) 7,562
Inventories, net 10,313 10,313
Film exhibition rights 1,278 1,278
Prepaid and other assets 1,134 2,465 13 3,612
Accounts receivable from related parties 676 6 2,866 215 (3,608) 155
Judicial deposits 832 832
Other accounts receivable 2,537 15,219 2,812 87 (15,159) 5,496
----------- ----------- ----------- ----------- ----------- -----------
Total current assets 4,358 15,235 28,689 2,229 (19,317) 31,194
----------- ----------- ----------- ----------- ----------- -----------
Property, plant and equipment, net 10 12 208,825 6,640 (3,758) 211,729
Investments
Equity basis 115,556 7,813 2,190 (123,369) 2,190
Cost basis investments 8 8
Concessions, net 4,618 5,748 10,366
Loans to related companies 529,964 484,522 (1,008,513) 5,973
Debt Issuance costs, net 859 859
Dividends receivable 76,426 (76,426)
Promissory note 25,500 25,500
Judicial deposits 1 201,978 2,128 (201,978) 2,129
----------- ----------- ----------- ----------- ----------- -----------
Total assets $ 752,674 $ 714,178 $ 245,390 $ 11,067 $(1,433,361) $ 289,948
=========== =========== =========== =========== =========== ===========
F-40
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
23. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (Continued)
Consolidated Balance Sheets
as of December 31, 1999
Wholly- Majority-
Owned Owned Non-
Parent Guarantor Guarantor Guarantor
Liabilities and Shareholders' Equity Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
---------- ---------- ---------- ---------- ---------- ----------
Loans 15,730 7,920 (15,158) 8,492
Film suppliers -- 7,143 1,568 8,711
Other suppliers 807 1 7,724 539 (409) 8,662
Taxes payable other than income taxes 1,582 4,334 53 5,969
Accrued payroll and related liabilities -- 1,868 521 2,389
Advance payments received from subscribers -- 933 5 938
Other accounts payable 142 37 3,296 2,913 (3,751) 2,637
---------- ---------- ---------- ---------- ---------- ----------
Total current liabilities 18,261 38 33,218 5,599 (19,318) 37,798
---------- ---------- ---------- ---------- ---------- ----------
Loans 250,000 9,424 (201,978) 57,446
Loans from related companies 135,491 507,217 492,334 10,639 (1,008,513) 137,168
Taxes payable other than income taxes 6,299 16,221 258 22,778
Provision for claims 1,813 604 2,417
Dividends payable 76,426 (76,426)
Liability to fund equity investee 302,242 316,130 (612,438) 5,934
---------- ---------- ---------- ---------- ---------- ----------
Total long-term liabilities 694,032 899,773 519,792 11,501 (1,899,355) 225,743
---------- ---------- ---------- ---------- ---------- ----------
Minority interest 2,786 2,786
Redeemable common stock, no par value 178,002 178,002
Shareholders' deficit
Paid-in capital 241,629 87,247 55,040 8,714 (150,288) 242,342
Accumulated deficit (379,250) (272,880) (365,446) (14,747) 635,600 (396,723)
---------- ---------- ---------- ---------- ---------- ----------
Total shareholders' deficit (137,621) (185,633) (310,406) (6,033) 485,312 (154,381)
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and shareholders'
Deficit 752,674 714,178 245,390 11,067 (1,433,361) 289,948
========== ========== ========== ========== ========== ==========
F-41
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
23. Financial information for subsidiary guarantors and non-guarantor
Subsidiaries (Continued)
Consolidated Statements of Operations
for the year ended December 31, 1999
Wholly- Majority-
owned Owned Non-
Parent guarantor Guarantor Guarantor
Description Company Subsidiaries Subsidiaries Eliminations Consolidated
-------- -------- -------- -------- -------- --------
Gross revenues
Monthly subscriptions 93,989 66 94,055
Installation 1,872 28 1,900
Advertising 1,361 236 1,597
Indirect programming 857 2,865 3,722
Other 13,191 1,733 14,924
Taxes on revenue (12,381) (401) (12,782)
-------- -------- -------- -------- -------- --------
Net revenue 98,889 4,527 103,416
-------- -------- -------- -------- -------- --------
Direct operating expenses
Payroll and benefits 5,036 2,821 7,857
Programming 22,907 1,259 24,166
Transponder lease cost 1,449 526 1,975
Technical assistance 1,311 1,311
Vehicle rentals 100 100
TVA Magazine 2,162 320 2,482
Pole rental 2,935 2,935
Other costs 1,754 1,940 1,118 4,812
-------- -------- -------- -------- -------- --------
1,754 37,840 6,044 45,638
-------- -------- -------- -------- -------- --------
Selling, general and administrative expenses
Payroll and benefits 10,611 814 11,425
Advertising and promotion 2,487 1,158 3,645
Rent 1,958 47 2,005
Other administrative expenses 3,430 4,106 20 7,556
Other general expenses 714 245 959
-------- -------- -------- -------- -------- --------
3,430 19,876 2,284 25,590
-------- -------- -------- -------- -------- --------
Provision for equipment, inventory and
Obsolescence 605 605
Depreciation 54,215 1,451 (492) 55,174
Amortization 840 865 1,705
-------- -------- -------- -------- -------- --------
Operating loss (5,184) (840) (14,512) (5,252) 492 (25,296)
-------- -------- -------- -------- -------- --------
Interest income 3,188 26,724 10,692 165 (34,873) 5,896
Interest expense (50,687) (1,201) (5,215) (24) 34,873 (22,254)
Translation gain (loss) (80) (190) (2,399) 126 (2,543)
Equity in (losses) of affiliates (9,123) (78,998) (329) 83,212 (5,238)
Other nonoperating (expenses) income, net 47,574 69,856 (52,538) (10) 64,882
Dividends 76,426 (76,426)
-------- -------- -------- -------- -------- --------
Income (loss) before income
Taxes and minority interest 62,114 (61,075) (63,972) (5,324) 83,704 15,447
Income taxes (106) (106)
-------- -------- -------- -------- -------- --------
Income (loss) before minority
Interest 62,114 (61,075) (64,078) (5,324) 83,704 15,341
Minority interest 678 678
-------- -------- -------- -------- -------- --------
Income (loss) from continuing operations before
Extraordinary item 62,114 (61,075) (63,400) (5,324) 83,704 16,019
-------- -------- -------- -------- -------- --------
Extraordinary item - gain on debt repurchase 53,857 53,857
-------- -------- -------- -------- -------- --------
Net income (loss) 62,114 (7,218) (63,400) (5,324) 83,704 69,876
======== ======== ======== ======== ======== ========
F-42
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
23. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (Continued)
Consolidated Statement's of Cash Flows
for the year ended December 31, 1999
Wholly- Majority- Non-
Parent owned Owned Guarantor
Company subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------ ------------
Cash flows from operating activities:
Net loss 62,114 (7,218) (63,400) (5,324) 83,704 69,876
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation 54,215 1,451 (492) 55,174
Amortization 840 865 1,705
Amortization of debt issuance cost 5,404 5,404
Provision for doubtful accounts 162 34 196
Provision for equipment and inventory obsolescence 605 605
Provision for claims (3,751) (253) (4,004)
Minority interest (678) (678)
Disposal and write-off of property, plant and
equipment 57,028 57,028
Gain on sale of assets (68,189) (65,949) (134,138)
Write-off of investments in TV Filme Inc. 6,668 6,668
Buy back gain of Senior Notes (70,692) (70,692)
Equity in losses of affiliates 9,123 78,998 329 (83,212) 5,238
Changes in operating assets and liabilities:
Film exhibition rights 290 290
Accounts receivable 10,207 2,690 24 12,921
Prepaid and other assets 1,171 133 260 1,564
Promissory notes (25,500) (25,500)
Other accounts receivable (247) (61) (2,533) (142) 1,785 (1,198)
Accrued interest 46,552 (25,506) (6,820) 109 (1) 14,334
Inventories 3,982 3,982
Suppliers 22 1 (36,551) (1,280) 11,898 (25,910)
Taxes payable other than income taxes 7,877 6,584 52 14,513
Accrued payroll and related liabilities (1,251) (317) (1,568)
Advances received from subscribers (1,066) 2 (1,064)
Other accounts payable (33) 9 (2,443) 722 (1,436) (3,181)
-------- -------- -------- -------- -------- --------
Net cash (used in) provided by operating activities 38,294 (82,910) 15,288 (1,377) 12,270 (18,435)
-------- -------- -------- -------- -------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment (10) (24,260) (1,657) (25,927)
Loans to related companies (81,214) (67,107) (117) 148,438
Cash received on sale of assets 47,542 130,000 177,542
Purchase of concessions (1) (1)
Investments in equity and cost investments (840) (1,788) 840 (1,788)
-------- -------- -------- -------- -------- --------
Net cash used in investing activities (34,522) 62,893 (24,378) (3,445) 149,278 149,826
-------- -------- -------- -------- -------- --------
Cash flows from financing activities:
Bank loans 6,661 6,661
Capital contributions 840 (840)
Dividends payable (76,426) 76,426
Repayments of loans from shareholders (11,430) (23,387) (18,571) (3,971) 45,929 (11,430)
Loans from shareholders 63,695 76,711 63,634 6,306 (146,651) 63,695
Loans from related companies 1,788 (1,788)
Repayments of loans to related companies 39,172 20,988 218 (58,198) 2,180
Repayments of loans from banks (18,811) (131,286) (41,851) (191,948)
-------- -------- -------- -------- -------- --------
Net cash provided by financing activities (3,800) 19,452 10,091 4,963 (161,548) (130,842)
-------- -------- -------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents (28) (565) 1,001 141 549
Cash and cash equivalents at beginning of the period 39 575 780 3 1,397
-------- -------- -------- -------- -------- --------
Cash and cash equivalents at end of the period 11 10 1,781 144 1,946
======== ======== ======== ======== ======== ========
F-43
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
23. Financial information for subsidiary guarantors and non-guarantor
Subsidiaries (Continued)
Consolidated Statements of Operations
for the year ended December 31, 1998
Wholly- Majority-
owned owned Non-
Parent guarantor guarantor Guarantor
Description Company Subsidiaries subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------ ------------
Gross revenues
Monthly subscriptions 136,278 136,278
Installation 2,886 2,886
Advertising 2,649 895 3,544
Indirect programming 11,460 8,120 19,580
Other 8,669 6,224 14,893
Revenue taxes (11,540) (993) (12,533)
-------- -------- -------- -------- -------- --------
Net revenue 150,402 14,246 164,648
-------- -------- -------- -------- -------- --------
Direct operating expenses
Payroll and benefits 11,669 4,299 15,968
Programming 49,531 4,751 54,282
Transponder lease cost 1,157 1,179 2,336
Technical assistance 1,212 1,212
Vehicle rentals 178 178
TVA Magazine 5,241 1,917 7,158
Pole rental 3,247 3,247
Other costs 7,186 1,789 8,975
-------- -------- -------- -------- -------- --------
79,421 13,935 93,356
-------- -------- -------- -------- -------- --------
Selling, general and administrative expenses
Payroll and benefits 23,334 1,515 24,849
Advertising and promotion 7,829 1,506 9,335
Rent 3,589 387 3,976
Other administrative expenses 2,050 18 13,762 270 16,100
Other general expenses 2,085 172 2,257
-------- -------- -------- -------- -------- --------
2,050 18 50,599 3,850 56,517
-------- -------- -------- -------- -------- --------
Provision for equipment, inventory and
Obsolescence 1,940 1,940
Depreciation 45,541 889 (28) 46,402
Amortization 840 865 1,705
-------- -------- -------- -------- -------- --------
Operating loss from continuing operations (2,050) (858) (27,964) (4,428) 28 (35,272)
-------- -------- -------- -------- -------- --------
Interest income 14,635 3,029 6,291 46 (17,283) 6,718
Interest expense (45,031) (371) (23,140) (408) 17,285 (51,665)
Translation gain (loss) 101 (46) (437) 365 (17)
Equity in (losses) of affiliates (323,730) (55,138) (2,082) 368,811 (12,139)
Other nonoperating (expenses) income, net 206,070 (208,438) (354) (1,511) (4,233)
-------- -------- -------- -------- -------- --------
Income (loss) from continuing operations before
Income taxes and minority interest (150,005) (261,822) (45,604) (8,018) 368,841 (96,608)
Income taxes (24) (24)
-------- -------- -------- -------- -------- --------
Income (loss) from continuing operations before
Minority interest (150,005) (261,822) (45,628) (8,018) 368,841 (96,632)
Minority interest 1,338 1,338
-------- -------- -------- -------- -------- --------
Income (loss) from continuing operations (150,005) (261,822) (44,290) (8,018) 368,841 (95,294)
Loss from discontinued operations (52,970) 197 (52,773)
-------- -------- -------- -------- -------- --------
Net income (loss) (150,005) (314,792) (44,093) (8,018) 368,841 (148,067)
======== ======== ======== ======== ======== ========
F-44
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
23. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (Continued)
Consolidated Statement's of Cash Flows
for the year ended December 31, 1998
Wholly- Majority- Non-
Parent Owned Owned Guarantor
Company Subsidiaries subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------ ------------
Cash flows from operating activities:
Net loss (150,005) (314,792) (44,093) (8,018) 368,841 (148,067)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation 45,541 889 (28) 46,402
Amortization 840 865 1,705
Amortization of debt issuance cost 1,550 1,550
Provision for doubtful accounts 3,407 3,407
Provision for equipment and inventory obsolescence 1,940 1,940
Provision for claims 760 857 1,617
Minority interest (1,338) (1,338)
Disposal and write-off of property, plant and
equipment 1,574 1,574
Discontinued operations 52,970 (197) 52,773
Equity in losses (earnings) of affiliates 323,730 55,138 2,082 (368,811) 12,139
Changes in operating assets and liabilities:
Film exhibition rights 1,291 (1,568) (277)
Accounts receivable 3,955 (3,216) (686) 53
Prepaid and other assets (985) 9,915 (273) 8,657
Other accounts receivable (209) (1) 1,951 (138) 325 1,928
Accrued interest 257 6 (5) 258
Inventories 8,680 8,680
Suppliers 784 (4,080) 3,387 1,840 1,931
Taxes payable other than income taxes 4,083 259 4,342
Accrued payroll and related liabilities (2,220) 838 (1,382)
Advances received from subscribers 1,965 3 1,968
Other accounts payable (82) 28 2,124 (1,293) 2,038 2,815
-------- -------- -------- -------- -------- --------
Net cash (used in) provided by operating activities 175,040 (205,817) 36,123 (6,185) 3,514 2,675
-------- -------- -------- -------- -------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment (12) (74,101) (7,283) 4 (81,392)
Discontinued Operations 14,529 (31,112) (428) (17,011)
Loans to related companies (136,956) (12,257) (158) 105,300 (44,071)
Investments in equity and cost investments (254,959) 227,584 4 7,281 8 (20,082)
-------- -------- -------- -------- -------- --------
Net cash used in investing activities (377,386) 184,203 (74,683) (2) 105,312 (162,556)
-------- -------- -------- -------- -------- --------
Cash flows from financing activities:
Bank loans 14,549 14,549
Principal payments on capital leases
Capital contributions 99,847 99,847
Loans from related companies 128,573 21,204 79,671 6,641 (110,005) 126,084
Repayments of loans to related companies 68,056 820 7,097 (44,544) 31,429
Repayments of loans from related companies (94,111) (256) (34,599) (453) 45,723 (83,696)
Repayments of loans from banks (27,924) (27,924)
Minority interest
-------- -------- -------- -------- -------- --------
Net cash provided by financing activities 202,365 21,768 38,794 6,188 (108,826) 160,289
-------- -------- -------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents 19 154 234 1 -- 408
Cash and cash equivalents at beginning of the period 20 421 546 2 -- 989
-------- -------- -------- -------- -------- --------
Cash and cash equivalents at end of the period 39 575 780 3 -- 1,397
======== ======== ======== ======== ======== ========
F-45
TVA SISTEMA DE TELEVISAO S.A.
Index to Financial Statements
Contents
Page
----
Report of Independent Public Accountants F-47
Balance Sheets as of December 31, 2000 and 1999 F-48
Statements of Operations for each of the three years in the
period ended December 31, 2000 F-50
Statements of Changes in Shareholders' Deficit for each of the
three years in the period ended December 31, 2000 F-51
Statements of Cash Flows for each of the three years in the
period ended December 31, 2000 F-52
Notes to the Financial Statements F-53
F-46
Report of Independent Public Accountants
To the Shareholders and Directors of
TVA SISTEMA DE TELEVISAO S.A.
We have audited the accompanying balance sheets of TVA SISTEMA DE TELEVISAO S.A.
(the "Company") as of December 31, 2000 and 1999, and the related statements of
operations, changes in shareholders' deficit and cash flows for each of the
three years in the period ended December 31, 2000, all expressed in United
States dollars. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TVA SISTEMA DE TELEVISAO S.A.
as of December 31, 2000 and 1999, and the related results of its operations and
cash flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America.
Arthur Andersen S/C
Sao Paulo, Brazil,
February 16, 2001
F-47
TVA SISTEMA DE TELEVISAO S.A.
Balance Sheets
December 31, 2000 and 1999
(in thousands of U.S. dollars)
December 31,
----------------------
2000 1999
-------- --------
ASSETS
Current assets
Cash and cash equivalents $ 118 $ 822
Accounts receivable, net 8,351 6,905
Inventories, net 10,586 7,928
Prepaid and other assets 2,748 2,264
Judicial deposits -- 744
Accounts receivable from related companies 2,518 3,436
Other accounts receivable 6,348 2,539
-------- --------
Total current assets 30,669 24,638
-------- --------
Property, plant and equipment, net 147,781 170,246
Judicial deposits 5,764 1,106
-------- --------
Total assets $184,214 $195,990
======== ========
F-48
TVA SISTEMA DE TELEVISAO S.A.
Balance Sheets
December 31, 2000 and 1999
(in thousands of U.S. dollars)
December 31,
-----------------------
2000 1999
--------- ---------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Loans $ 6,021 $ 6,681
Film suppliers 4,562 6,286
Other suppliers 8,503 7,119
Taxes payable other than income taxes 2,909 3,662
Accrued payroll and related liabilities 1,725 1,563
Accounts payable to related companies 3,927 1,183
Advance payments received from subscribers 194 870
Other accounts payable 1,326 1,991
--------- ---------
Total current liabilities 29,167 29,355
--------- ---------
Long-term liabilities
Loans 1,669 9,424
Loans from related companies 437,991 462,546
Taxes payable other than income taxes 17,679 14,082
Provision for claims 1,325 1,705
--------- ---------
Total long-term liabilities 458,664 487,757
--------- ---------
Commitments and contingencies (Notes 15 and 17)
Shareholders' deficit
Common shares, no par value, 6,980,764
shares issued and outstanding 16,303 16,303
Accumulated other comprehensive gain
Cumulative translation adjustment 28,802 --
Accumulated deficit (348,722) (337,425)
--------- ---------
Total shareholders' deficit (303,617) (321,122)
--------- ---------
Total liabilities and shareholders' deficit $ 184,214 $ 195,990
========= =========
F-49
TVA SISTEMA DE TELEVISAO S.A.
Statements of Operations
for the years ended December 31, 2000, 1999 and 1998
(in thousands of U.S. dollars)
Year Ended December 31,
-------------------------------------------
2000 1999 1998
----------- ----------- -----------
Gross revenues
Monthly subscriptions $ 82,467 $ 79,721 $ 115,175
Installation 808 1,687 2,334
Advertising 2,505 1,342 2,649
Indirect programming 689 857 11,460
Additional services 19,878 12,614 8,016
Taxes on revenues (11,411) (10,678) (9,920)
----------- ----------- -----------
Net revenue 94,936 85,543 129,714
----------- ----------- -----------
Direct operating expenses
Payroll and benefits 5,484 4,260 10,924
Programming 22,351 18,803 42,950
Transponder lease cost 2,283 1,449 1,157
Technical assistance 2,120 1,058 1,981
Vehicle rentals 78 95 178
TVA magazine 2,427 1,872 4,558
Pole rentals 3,052 2,501 2,439
Other costs 5,151 1,365 3,995
----------- ----------- -----------
42,946 31,403 68,182
----------- ----------- -----------
Selling, general and administrative expenses
Payroll and benefits 12,055 9,219 19,270
Advertising and promotion 4,739 2,307 7,481
Rent 1,866 1,805 3,217
Other general and administrative expenses 7,329 4,659 13,041
----------- ----------- -----------
25,989 17,990 43,009
----------- ----------- -----------
Provision for equipment and inventory obsolescence (46) 202 1,940
Depreciation 35,972 47,988 39,484
----------- ----------- -----------
Operating loss from continuing operations (9,925) (12,040) (22,901)
----------- ----------- -----------
Interest income 959 10,474 5,840
Interest expense (3,318) (4,396) (16,496)
Translation loss -- (2,168) (642)
Transaction (1,066) -- --
Other nonoperating income (expenses), net 2,053 (49,356) (1,060)
----------- ----------- -----------
Loss from continuing operations $ (11,297) $ (57,486) $ (35,259)
Income from discontinued operations -- -- 10
----------- ----------- -----------
Net loss $ (11,297) $ (57,486) $ (35,249)
=========== =========== ===========
Other comprehensive income-
Cumulative translation adjustments $ 28,802 $ -- $ --
----------- ----------- -----------
Comprehensive income (loss) $ 17,505 $ (57,486) $ (35,249)
=========== =========== ===========
Net loss per share for continuing operations (1.62) (8.23) (5.05)
Net income per share for discontinued operations 0 0 0
Net loss per share (1.62) (8.23) (5.05)
Weighted average shares outstanding 6,980,764 6,980,764 6,980,764
F-50
TVA SISTEMA DE TELEVISAO S.A.
Statements of Changes in Shareholders' Deficit
for the years ended December 31, 2000, 1999 and 1998
(in thousands of U.S. dollars)
Cumulative
Paid-in Translation Accumulated
Capital Adjustments Deficit Total
--------- --------- --------- ---------
Balance as of December 31, 1997 $ 16,303 $ $(244,690) $(228,387)
Net loss for the year (35,249) (35,249)
--------- --------- --------- ---------
Balance as of December 31, 1998 16,303 (279,939) (263,636)
Net loss for the year (57,486) (57,486)
--------- --------- --------- ---------
Balance as of December 31, 1999 $ 16,303 $ $(337,425) $(321,122)
Translation adjustments 28,802 28,802
Net loss for the year (11,297) (11,297)
--------- --------- --------- ---------
Balance as of December 31, 2000 $ 16,303 $ 28,802 $(348,722) $(303,617)
========= ========= ========= =========
F-51
TVA SISTEMA DE TELEVISAO S.A.
Statements of Cash Flows
for the years ended December 31, 2000, 1999 and 1998
(in thousands of U.S. dollars)
Year Ended December 31,
-------------------------------------
2000 1999 1998
--------- --------- ---------
Cash flows from operating activities:
Net loss $ (11,297) $ (57,486) $ (35,249)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 30,800 47,988 39,484
Provision for doubtful accounts -- (173) 3,334
Provision for equipment and inventory obsolescence -- 202 1,940
Provision for claims (380) (3,608) (21)
Disposal of property, plant and equipment 496 54,403 1,574
Discontinued operations -- -- (10)
Transaction 1,066 -- --
Changes in operating assets and liabilities:
Film exhibition rights -- -- 1,291
Accounts receivable (1,446) 10,227 2,277
Prepaid and other assets (484) 303 9,677
Other accounts receivable including related companies (6,805) (232) (93)
Accrued interest 1,872 (6,890) 9,170
Inventories (2,658) 2,645 1,354
Suppliers (340) (36,883) (644)
Taxes payable other than income taxes 2,842 5,266 4,496
Accrued payroll and related liabilities 163 (1,078) (2,175)
Advances received from subscribers (676) (1,014) 268
Other accounts payable 2,080 (2,405) 3,401
--------- --------- ---------
Net cash provided by operating activities 15,233 11,265 40,074
--------- --------- ---------
Cash flows used in investing activities:
Purchases of property, plant and equipment (23,319) (22,149) (64,340)
Loans to related companies -- -- (158)
Discontinued operations -- -- (615)
Repayments of loans to related companies -- -- (36,949)
Others -- -- 9
--------- --------- ---------
Net cash used in investing activities (23,319) (22,149) (102,053)
--------- --------- ---------
Cash flows from financing activities:
Bank loans 1,252 6,659 11,652
Repayments of loans from shareholders (20,688) (16,714) --
Loans from related companies 35,495 58,410 70,314
Repayments of loans from related companies -- -- 7,441
Repayments of loans from bank (10,168) (37,124) (27,019)
--------- --------- ---------
Net cash provided by financing activities 5,891 11,231 62,388
--------- --------- ---------
Effect of exchange rate changes 1,491 -- --
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (704) 347 409
Cash and cash equivalents at beginning of the period 822 475 66
--------- --------- ---------
Cash and cash equivalents at end of the period $ 118 $ 822 $ 475
========= ========= =========
Supplemental cash disclosure:
Cash paid for interest $ -- $ -- --
========= ========= =========
Supplemental non-cash financing activities:
Accrued interest on related company loans refinanced as
principal balance $ 1,871 $ 9,042 $ 7,664
========= ========= =========
F-52
TVA SISTEMA DE TELEVISAO S.A.
Notes to the Financial Statements
(in thousands of U.S. dollars)
1. The Company and its principal operations
TVA Sistema de Televisao S.A. ("the Company") renders services related to
wireless cable and cable television systems, including marketing and
advertising, production, distribution and licensing of domestic and foreign
television programs. The Company has wireless cable channel rights
primarily in major urban markets in Brazil.
2. Summary of significant accounting policies
Significant policies followed in the preparation of the financial
statements are described below:
2.1. Basis of presentation
The financial statements are presented in U.S. dollars and have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP"), which differ in certain respects
from accounting principles applied by the Company in its local currency
financial statements, which are prepared in accordance with accounting
principles generally accepted in Brazil ("Brazilian GAAP").
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
financial statement dates and the reported amount of revenues and expenses
during the reporting periods. Since management's judgment involves making
estimates concerning the likelihood of future events, the actual results
could differ from these estimates.
2.2. Accounting records
As required by Brazilian Law, and in accordance with local accounting
practices, the accounting records of the Company are maintained in
Brazilian currency (real). In order to present the financial statements in
conformity with accounting principles generally accepted in the United
States of America, the Company maintains additional accounting records
which are used solely for this purpose.
2.3. Currency remeasurement
As of January 1, 2000, based on the changes in the Company's capital and
operational structure, the Company changed its functional currency from the
United States dollar to the Brazilian real (R$). This change was performed
based on the premises of the Statement of Financial Accounting Standards
("SFAS") 52, "Foreign Currency Transactions", since currently a substantial
portion of Company's business is conducted in Brazilian reais.
Assets and liabilities are translated into U.S. dollars at the exchange
rate in effect at the end of the reporting period, and revenues and
expenses are translated into U.S. dollars at the average rates prevailing
in the period. The resulting net translation gains and losses are reported
as currency translation adjustments in shareholders' deficit.
F-53
TVA SISTEMA DE TELEVISAO S.A.
Notes to the Financial Statements, (Continued)
(in thousands of U.S. dollars)
2.4. Cash and cash equivalents
Cash and cash equivalents are defined as cash and cash in banks and
investments in interest-bearing securities and are carried at cost plus
accrued interest. Short-term investments with original maturities of three
months or less at the time of purchase are considered cash equivalents.
2.5. Financial instruments
In accordance with SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments" information is provided about the fair value of certain
financial instruments for which it is practicable to estimate that value.
For the purposes of SFAS No. 107, the estimated fair value of a financial
instrument is the amount at which the instrument could be exchanged in a
current transaction between willing parties, other than in a forced or
liquidation sale. The carrying values of the Company's financial
instruments as of December 31, 2000 and 1999 approximate management's best
estimate of their fair values. The following methods and assumptions were
used to estimate the fair value of each class of financial instrument for
which it is practicable to estimate that value:
o The fair value of certain financial assets carried at cost, including
cash, accounts receivable, other accounts receivable, and certain
other short-term assets is considered to approximate their respective
carrying value due to their short-term nature.
o The fair value of payables to film suppliers and other suppliers,
other accounts payable, loans to related companies and certain other
short-term liabilities are considered to approximate their respective
carrying value due to their short-term nature.
o The fair value of loans from related companies approximates their
respective carrying values, as interest on these loans is variable and
based on market rates.
2.6. Accounts receivable
A provision for doubtful accounts is established on the basis of an
analysis of the accounts receivable, in light of the risks involved, and is
considered sufficient to cover any losses incurred in realization of
credits.
2.7. Inventories
Inventories consist of materials and supplies and imports in transit.
Materials and supplies are used to provide service to new customers, and to
ensure continuity of service to existing customers. Imports in transit
represent materials purchased from foreign countries that have not yet been
received.
Inventories are stated at the lower of cost or market. Cost is determined
principally under the average cost method.
F-54
TVA SISTEMA DE TELEVISAO S.A.
Notes to the Financial Statements, (Continued)
(in thousands of U.S. dollars)
A provision for obsolescence has been established on the basis of an
analysis of slow-moving materials and supplies.
2.8. Film exhibition rights and program licensing
Film exhibition rights and program licensing costs are deferred and
charged to expense as the films and/or programs are exhibited.
2.9. Property, plant and equipment
Property, plant and equipment are stated at cost and depreciated using the
straight-line method, over the remaining useful lives, as described in
Note 10.
2.10. Advertising
Advertising revenues are recognized, and the production cost of
commercials and programming are charged to expense, when the commercial is
telecast.
2.11. Recoverability of long-lived assets to be held and used in the business
Management reviews long-lived assets, primarily the Company's licenses and
its property and equipment to be held and used in the business, for the
purposes of determining and measuring impairment on a recurring basis or
when events or changes in circumstances indicate that the carrying value
of an asset or group of assets may not be recoverable. Assets are grouped
and evaluated for possible impairment at the level of each cable
television system; impairment is assessed on the basis of the forecasted
undiscounted cash flows of the businesses over the estimated remaining
lives of the assets related to those systems. A write-down of the carrying
value of the assets or group of assets to estimated fair value will be
made if and when appropriate.
2.12. Revenue recognition
Hook up fees are recognized as revenue on the equipment installation date
to the extent of direct selling costs incurred which are generally higher
than the revenue, and the related selling costs are expensed. Subscription
revenues are recognized as earned on an accrual basis.
2.13. Licenses
Televisao Show Time Ltda. ("TV Show Time") and TVA Brasil Radioenlaces
Ltda. ("TVA Brasil") hold licenses covering certain operations of the
Company. The use of such licenses is provided to the Company, for a
nominal fee, under a Service Agreement dated July 22, 1994, as amended,
among TEVECAP, TV Show Time, TVA Brasil and Abril S.A.
Pursuant to the Service Agreement, TV Show Time and TVA Brasil have agreed
to transfer the licenses, which are carried at nil value, to TEVECAP at
nominal cost.
F-55
TVA SISTEMA DE TELEVISAO S.A.
Notes to the Financial Statements, (Continued)
(in thousands of U.S. dollars)
3. Accounts receivable, net
As of December 31, 2000 and 1999, accounts receivable were comprised of:
December 31,
---------------------
2000 1999
-------- --------
Subscriptions and installation fee $ 9,476 $ 11,821
Advertising 624 1,604
Affiliates (programming and services) 2,172 549
Other 2,247 2,372
Provision for doubtful accounts (6,168) (9,441)
-------- --------
$ 8,351 $ 6,905
======== ========
4. Inventories, net
As of December 31, 2000 and 1999, inventories were comprised of:
December 31,
---------------------
2000 1999
-------- --------
Materials and supplies $ 13,457 $ 10,653
Imports in transit 130 607
Provision for obsolescence (3,001) (3,332)
-------- --------
$ 10,586 $ 7,928
======== ========
5. Prepaid and other assets
As of December 31, 2000 and 1999, prepaid expenses were comprised of:
December 31,
---------------------
2000 1999
-------- --------
Advances to suppliers $ 1,039 $ 1,411
Prepaid meals and transportation 180 92
Other 1,529 761
-------- --------
$ 2,748 $ 2,264
======== ========
F-56
TVA SISTEMA DE TELEVISAO S.A.
Notes to the Financial Statements, (Continued)
(in thousands of U.S. dollars)
6. Related-party transactions
The following tables summarize the transactions between the Company and
its related parties as of December 31, 2000 and 1999 and for each of the
three years in the period ended December 31, 2000:
December 31,
----------------------
2000 1999
--------- --------
TVA Sul Parana Ltda
Accounts receivable 1 531
Accounts payable 128 --
TVA Distribuidora S.A
Loans payable 420,820 443,778
Tevecap S.A
Loans payable 13,348 14,590
Accounts payable 360 393
Comercial Cabo Ltda
Loans payable 2,288 2,501
Editora Abril
Accounts payable 250 --
Abril S.A
Accounts receivable 1 --
Accounts payable -- 315
Loans payable 1,535 1,677
TV Filme Inc.
Accounts receivable -- 80
TVA Network Participacoes S.A
Accounts receivable 6 215
Accounts payable -- 56
SMC Marketing Promocional Ltda
Accounts receivable -- 44
TVA Channels Ltda
Accounts receivable 2,460 2,542
Accounts payable 3,109 414
Others
Accounts receivable 50 24
Accounts payable 80 5
F-57
TVA SISTEMA DE TELEVISAO S.A.
Notes to the Financial Statements, (Continued)
(in thousands of U.S. dollars)
6. Related-party transactions (Continued)
December 31,
-----------------------------
2000 1999 1998
------ ------- -------
Tevecap S.A
Net interest (income) expense $ $ -- $ 7,664
Abril S.A
Printing cost 2,763 1,447 1,521
Comercial Cabo Ltda
Net interest income -- (1,201) (318)
TVA Sul Parana Ltda
Net interest income -- -- (295)
TV Filme Inc.
Programming revenue -- -- (2,424)
The related company loans are denominated in reais and are subject to
monetary restatement until December 31, 1995 plus interest charges at the
market rate which ranged from 1.44% to 1.19% per month in December 2000
(2.17% to 1.58% per month in December 1999). Such loans are renewable
every year on December 31.
Related-party transactions relating to programming sales and costs and
printing services costs were carried out at usual market rates and terms.
The Company received guarantees in the course of the year from its parent
company Tevecap S.A. and from Abril S.A. in the form of collateral and
letters of credit. The amount outstanding pursuant to these guarantees as
of December 31, 2000 and 1999 was $3,249 and $12,256, respectively.
F-58
TVA SISTEMA DE TELEVISAO S.A.
Notes to the Financial Statements, (Continued)
(in thousands of U.S. dollars)
7. Other accounts receivable
As of December 31, 2000 and 1999, other accounts payable were comprised
of :
2000 1999
------ ------
Multimatiques - Sale of Eurochannell $4,036 $ --
Galaxy Brasil Ltda. 29 15
TVA Banda C Ltda. 898 418
ESPN do Brasil Ltda. 34 145
Taxes recoverable 252 734
Other 1,099 1,227
------ ------
$6,348 $2,539
====== ======
8. Loan guarantees
In November 1996, Tevecap S.A., issued $250,000 12-5/8% Senior Notes to
institutional buyers in a private placement. The Notes, which mature in
November 2004, were subsequently registered with the Securities and
Exchange Commission in May 1997. These Notes are jointly and severally,
irrevocably and fully unconditionally guaranteed, on a senior basis, by
Tevecap's direct and indirect subsidiaries, including the Company. On
July 28, 1999 the related company TVA Communications Ltd. ("TVAICO")
repurchased in the foreign market 80.79% of these Notes.
F-59
TVA SISTEMA DE TELEVISAO S.A.
Notes to the Financial Statements, (Continued)
(in thousands of U.S. dollars)
9. Income taxes
The tax effects of temporary differences that give rise to a significant
portion of the deferred tax asset and deferred tax liability as of
December 31, 2000 and 1999 are as follows:
December 31,
---------------------
2000 1999
-------- --------
Deferred tax assets:
Net operating loss carryforwards $ 53,377 $ 56,504
Provision for obsolescence 557 525
Provision for claims 2,625 5,935
Provision for decoders 756 673
Other 683 642
-------- --------
Total deferred tax asset 57,998 64,279
-------- --------
Less valuation allowance (57,998) (64,279)
-------- --------
Net deferred tax asset $ -- $ --
======== ========
The Company has a limited operating history and has generated losses since
its inception. The valuation allowance has been established in accordance
with the requirements of SFAS No. 109 "Accounting for Income Taxes".
As of December 31, 2000, the Company has unexpirable accumulated tax
losses of $156,991.
F-60
TVA SISTEMA DE TELEVISAO S.A.
Notes to the Financial Statements, (Continued)
(in thousands of U.S. dollars)
9. Income taxes (Continued)
Income tax was different from the amount computed using the Brazilian
statutory income tax for the reasons set forth in the following table:
Year Ended December 31,
------------------------------------
2000 1999 1998
-------- -------- --------
Loss before income taxes and minority interest $(11,297) $(57,486) $(35,249)
Statutory income tax rate 34% 37% 33%
-------- -------- --------
(3,841) (21,270) (11,632)
Increase (decrease) in the income tax rate (1,948) (2,352) --
Deferred charges amortization (2,415) (2,686) (3,546)
Translation loss of tax losses 4,954 22,225 3,893
Installation materials -- 867 --
(Deductible) taxable devaluation gain (loss) for Brazilian
Statutory Purposes 243 (6,057) (10,339)
Depreciation 3,613 8,647 4,539
Write-off of assets related to cancellations of
subscriptions and decoders -- 8,347 --
Other 835 4,790 (2,319)
-------- -------- --------
Net income tax (benefit) expense for the period 1,441 12,511 (19,404)
Tax loss carryfoward used 4,840 -- --
-------- -------- --------
Increase (decrease) in valuation allowance (6,281) (12,511) 19,404
-------- -------- --------
$ -- $ -- $ --
======== ======== ========
F-61
TVA SISTEMA DE TELEVISAO S.A.
Notes to the Financial Statements, (Continued)
(in thousands of U.S. dollars)
10. Property, plant and equipment, net
As of December 31, 2000 and 1999, property, plant and equipment were
comprised of:
Annual
Depreciation December 31,
Rate -------------------------------
% 2000 1999
-------------- ------------ ------------
Reception equipment 20 $ 105,976 $ 107,324
Cable plant 10 68,408 72,944
Machinery and equipment 10 41,783 39,649
Decoders 10 62,338 61,606
Leasehold improvements 25 2,359 2,342
Furniture and fixtures 10 1,170 1,235
Premises 10 2,021 2,174
Vehicles 20 1,714 2,006
Software 20 8,635 6,632
Tools 10 764 798
------------ ------------
295,168 296,710
Telephone line use rights 1,626 2,041
Trademarks, patents and others 164 179
Other 898 1,121
Accumulated depreciation (150,472) (129,843)
Fixed assets in transit 397 38
------------ ------------
$ 147,781 $ 170,246
============ ============
11. Loans
The loans as of December 31, 2000 represent the refinancing of certain
supplier payables. The average interest rate on such loans is Libor plus
2.0%, and the long term portion will be paid in 2002.
F-62
TVA SISTEMA DE TELEVISAO S.A.
Notes to the Financial Statements, (Continued)
(in thousands of U.S. dollars)
12. Other accounts payable
As of December 31, 2000 and 1999, other accounts payable were comprised
of:
December 31,
-----------------------
2000 1999
------- ------
Advertising $ 44 $ 93
Importation expenses payable 40 107
Other 1,242 1,791
------ ------
$1,326 $1,991
====== ======
13. Taxes payable other than income taxes
As of December 31, 2000 and 1999, taxes payable other than income taxes
were comprised of :
December 31,
--------------------------
2000 1999
-------- --------
COFINS $ 403 $ 9,597
ICMS 10,011 5,395
PIS 72 2,602
Tax Recovery Program - Refis 9,877 --
Other 225 150
-------- --------
$ 20,588 $ 17,744
(-) Current liabilities (2,909) (3,662)
-------- --------
$ 17,679 $ 14,082
======== ========
On April 5, 2000, the Company opted for the REFIS (Tax Recovery Program),
established by Decree N(Degree) 3.342/00 of January 25, 2000, later
changed into Law N(Degree) 9.964/00 of April 10, 2000.
With the option for the REFIS, the Company will be able to pay such taxes
based on 1.2% of its monthly revenues. Based on its revenue projections,
the approximate timing for paying the total account is about 5 years. The
restatement of the tax debt included in the REFIS is made based on the
TJLP (Brazilian long term interest rate).
During year 2000, the Company also renegotiated with Sao Paulo State
Government the ICMS due. Based on the agreement, the Company is able to
finance its taxes payable for five years.
F-63
TVA SISTEMA DE TELEVISAO S.A.
Notes to the Financial Statements, (Continued)
(in thousands of U.S. dollars)
14. Other nonoperating, income (expenses), net
Year Ended December 31,
----------------------------------
2000 1999 1998
-------- -------- --------
Write-off of assets related to cancellations of subscriptions $ (2,589) $(16,477) $ --
Write-off of decoders - Digisat operation -- (31,529) --
Gain on sale of channel Eurochannell 5,105 -- --
Other (463) (1,350) (1,060)
-------- -------- --------
$ 2,053 $(49,356) $ (1,060)
======== ======== ========
15. Leased assets and commitments
The Company has rented its office space until the year 2005. As of
December 31, 2000, future minimum rental payments applicable to
operating leases in respect of this space aggregate approximately
$7,205 , as follows:
2001 1,441
2002 1,441
2003 1,441
2004 1,441
2005 1,441
------
Total $7,205
======
F-64
TVA SISTEMA DE TELEVISAO S.A.
Notes to the Financial Statements, (Continued)
(in thousands of U.S. dollars)
16. Common shares
Common shares represent registered shares without par value.
The Company's shareholders are entitled to minimum dividends of 25% of net
income for the year, adjusted according to Brazilian Corporation Law. As
the Company has not recorded net income since its inception, no such
dividends are payable.
17. Litigation contingencies
Certain claims and lawsuits arising in the ordinary course of business
have been filed or are pending against the Company which were not
recognized in the financial statements. The Company has also recorded
provisions related to certain claims in amounts that management considers
to be adequate after considering a number of factors including (but not
limited to) the views of legal counsel, the nature of the claims and the
prior experience of the Company.
In management's opinion, all contingencies have been adequately provided
for or are without merit, or are of such kind that, if disposed of
unfavorably, would not have a material adverse effect on the financial
position or future results of operations of the Company.
18. Pension plan
In April 1996, the Company became a co-sponsor of the private pension
entity named Abrilprev Sociedade de Previdencia Privada ("Abrilprev"), the
primary objective of which is to grant employees benefits other than those
provided by Social Security. The plan is optional to all employees of the
sponsoring entities. Abrilprev operates as a Defined Contribution Plan.
Company contributions are made based on a fixed percentage applied to the
payroll of the sponsoring entities based on actuarial calculations.
Contribution expenses amounted to $198 for the year ended
December 31, 2000 ($162 in 1999 and $313 in 1998).
19. Abril Health Care Plan
In February 1996, the Abril Health Care Plan, Associacao Abril de
Beneficios (the "Health Care Plan"), was created to provide health care to
Abril S.A. companies' employees and their dependents. Both the companies
forming part of the Abril Group and the employees thereof contribute
monthly to the Health Care Plan which is responsible for the management of
the plan. In 2000, contributions made by the Company to Associacao Abril
de Beneficios amounted to $681 ($642 in 1999 and $1,365 in 1998).
20. Supplementary information - valuation and qualifying accounts and reserves
Deferred
Provision Provision Tax Provision
for Doubtful For Valuation for
Accounts Obsolescence Allowance Claims
-------- -------- -------- --------
Balance as of December 31, 1997 $ 6,280 $ 3,120 $ 57,386 $ 5,334
Additions charged to expense 3,334 10 19,404 --
Reduction -- -- -- (21)
-------- -------- -------- --------
Balance as of December 31, 1998 $ 9,614 $ 3,130 $ 76,790 $ 5,313
Additions charged to expense -- 202 -- --
F-65
TVA SISTEMA DE TELEVISAO S.A.
Notes to the Financial Statements, (Continued)
(in thousands of U.S. dollars)
Reduction (173) -- (12,511) (3,608)
-------- -------- -------- --------
Balance as of December 31, 1999 $ 9,441 $ 3,332 $ 64,279 $ 1,705
Additions charged to expense -- -- -- --
Reduction (3,273) (331) (6,281) (380)
======== ======== ======== ========
Balance as of December 31, 2000 $ 6,168 $ 3,001 $ 57,998 $ 1,325
======== ======== ======== ========
21. Recent accounting pronouncements
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The standard requires that all
derivative instruments (1) be recognized as assets or liabilities and
(2) be adjusted to fair value each period. SFAS 133 is effective for
fiscal year beginning after June 15, 2000. As of December 31, 2000 the
Company has no operations with hedging activities.
* * * * * * *
F-66
TVA SUL PARANA LTDA.
AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
Contents
Page
----
Report of Independent Public Accountants F-68
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-69
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 2000
F-71
Consolidated Statements of Changes in Shareholders' Equity
for each of the three years in the period ended December 31, 2000
F-72
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 2000
F-73
Notes to Consolidated Financial Statements F-75
F-67
Report of Independent Public Accountants
To the Shareholders and Directors of
TVA SUL PARANA LTDA.
We have audited the accompanying consolidated balance sheet of TVA SUL PARANA
LTDA. and subsidiary (the "Company") as of December 31, 2000 and 1999, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
2000, all expressed in United States dollars. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of TVA Sul ParANA
LTDA. and subsidiary as of December 31, 2000 and 1999, and the consolidated
results of their operations and cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
Arthur Andersen S/C
Sao Paulo, Brazil,
February 16, 2001
F-68
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2000 and 1999
(in thousands of U.S. dollars)
December 31,
--------------------
2000 1999
------- -------
ASSETS
Current assets
Cash and cash equivalents $ 138 $ 959
Accounts receivable, net 599 863
Inventories, net 1,915 2,384
Prepaid and other assets 190 204
Accounts receivable from related parties 235 7
Other accounts receivable 639 359
------- -------
Total current assets 3,716 4,776
------- -------
Property, plant and equipment, net 28,839 35,340
Concessions, net 4,459 5,747
Judicial deposits 2,153 1,004
Others 17 18
------- -------
Total assets $39,184 $46,885
======= =======
The accompanying notes are an integral part of the financial statements.
F-69
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2000 and 1999
(in thousands of U.S. dollars)
December 31,
2000 1999
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Loans $ -- $ 1,239
Film suppliers 541 857
Others suppliers 708 745
Taxes payable other than income taxes 532 673
Accrued payroll and related liabilities 214 304
Advance payments received from subscribers 53 64
Accounts payable to related companies -- 551
Other accounts payable 185 153
-------- --------
Total current liabilities 2,233 4,586
-------- --------
Long-term liabilities
Loans from related companies 27,708 29,788
Taxes payable other than income taxes 2,985 2,141
Provision for claims 697 108
-------- --------
Total long-term liabilities 31,390 32,037
-------- --------
Contingencies (Note 13)
Minority interest 1,467 1,569
Shareholders' equity
Paid-in capital 44,213 44,213
Accumulated other comprehensive loss
Cumulative translation adjustment (860) --
Accumulated deficit (39,259) (35,520)
-------- --------
Total shareholders' equity 4,094 8,693
-------- --------
Total liabilities and shareholders' equity $ 39,184 $ 46,885
======== ========
The accompanying notes are an integral part of the financial statements.
F-70
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Consolidated Statements of Operations
for the years ended December 31, 2000, 1999 and 1998
(in thousands of U.S. dollars)
Year Ended December 31,
----------------------------------------------
2000 1999 1998
------------ ------------ ------------
Gross revenues
Monthly subscriptions $ 13,673 $ 14,268 $ 21,009
Installation 93 185 518
Additional services 1,380 596 650
Taxes on revenue (1,719) (1,702) (1,620)
------------ ------------ ------------
Net revenue 13,427 13,347 20,557
------------ ------------ ------------
Direct operating expenses
Payroll and benefits 1,038 776 1,019
Programming 3,643 4,104 6,515
Technical assistance 295 253 (769)
TVA magazine 252 290 683
Pole rentals 483 434
808
Other costs 1,140 580 707
------------ ------------ ------------
6,851 6,437 8,963
------------ ------------ ------------
Selling, general and administrative expenses
Payroll and benefits 1,762 1,392 3,793
Advertising and promotion 454 180 348
Rent 69 153 372
Other general and administrative expenses 298 161 4,450
------------ ------------ ------------
2,583 1,886 8,963
------------ ------------ ------------
Provision for equipment and inventory obsolescence -- 403 --
Depreciation 4,407 5,761 6,021
Amortization 846 865 865
------------ ------------ ------------
Operating loss (1,260) (2,005) (4,255)
------------ ------------ ------------
Interest income 362 218 407
Interest expense (407) (819) (6,799)
Translation (loss) gain -- (233) 205
Transaction (348) -- --
Other nonoperating (expense) income, net (1,781) (3,182) 284
------------ ------------ ------------
Loss before income taxes and minority interest (3,434) (6,021) (10,158)
Income taxes (273) (106) (24)
------------ ------------ ------------
Loss before minority interest (3,707) (6,127) (10,182)
Minority interest (32) (208) (103)
------------ ------------ ------------
Net loss $ (3,739) $ (6,335) $ (10,285)
------------ ------------ ------------
Other comprehensive loss -
Cumulative translation adjustment (860) -- --
------------ ------------ ------------
Comprehensive income (loss) $ (4,599) $ (6,335) $ (10,285)
============ ============ ============
Net loss per share (0.08) (0.14) (0.23)
Weighted average shares outstanding 44,099,122 44,099,122 44,099,122
The accompanying notes are an integral part of the financial statements.
F-71
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2000, 1999 and 1998
(in thousands of U.S. dollars)
Cumulative
Paid-in Translation Accumulated
Capital Adjustments Deficit Total
-------- -------- -------- --------
Balance as of December 31, 1997 $ 44,213 $ $(18,900) $ 25,313
Net loss for the year (10,285) (10,285)
-------- -------- -------- --------
Balance as of December 31, 1998 $ 44,213 $ $(29,185) $ 15,028
Net loss for the year (6,335) (6,335)
-------- -------- -------- --------
Balance as of December 31, 1999 $ 44,213 $ $(35,520) $ 8,693
-------- -------- -------- --------
Currency Translation Adjustments (860) -- (860)
Net loss for the year (3,739) (3,739)
-------- -------- -------- --------
Balance as of December 31, 2000 $ 44,213 $ (860) $(39,259) $ 4,094
======== ======== ======== ========
The accompanying notes are an integral part of the financial statements.
F-72
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
for the years ended December 31, 2000, 1999 and 1998
(in thousands of U.S. dollars)
Year Ended December 31,
----------------------------------
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net loss $ (3,739) $ (6,335) $(10,285)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 3,907 5,761 6,021
Amortization 1,288 865 865
Provision for doubtful accounts -- 30 202
Provision for inventory obsolescence -- 403 --
Provision for claims 589 (143) (72)
Minority interest 32 208 103
Disposal and write-off of property, plant and equipment 1,676 2,635
Transaction 348 -- --
Changes in operating assets and liabilities
Accounts receivable 264 275 1,411
Prepaid and other assets 14 (172) 237
Other accounts receivable (1,656) (78) (60)
Accrued interest 13 174 5,095
Inventories 469 1,338 7,326
Other assets -- (584) (108)
Film suppliers and others suppliers (353) (1,309) (3,483)
Taxes payable other than income taxes 703 1,320 448
Accrued payroll and related liabilities (90) (175) (44)
Advances received from subscribers (11) (51) 115
Other accounts payable (519) (25) (944)
-------- -------- --------
Net cash provided by operating activities 2,935 4,137 6,827
-------- -------- --------
Cash flows used in investing activities
Purchases of property, plant and equipment (2,090) (2,121) (9,725)
Acquisition of businesses, net of cash acquired
-------- -------- --------
Net cash used in investing activities (2,090) (2,121) (9,725)
-------- -------- --------
Cash flows (used in) provided by financing activities
Bank Loans -- -- 2,897
Repayments of loans from shareholders -- (1,858) --
Loans from related companies 4,311 5,222 9,353
Advances from shareholders -- -- --
Repayments of loans from related companies (3,855) -- (8,064)
Repayments of loans from banks (1,147) (4,726) (1,464)
Minority interest -- -- --
-------- -------- --------
Net cash (used in) provided by financing activities (691) (1,362) 2,722
-------- -------- --------
Effect of exchange rate changes (975) -- --
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (821) 654 (176)
Cash and cash equivalents at beginning of the period 959 305 481
-------- -------- --------
Cash and cash equivalents at end of the period $ 138 $ 959 $ 305
======== ======== ========
The accompanying notes are an integral part of the financial statements.
F-73
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
for the years ended December 31, 2000, 1999 and 1998
(in thousands of U.S. dollars)
Year Ended December 31,
---------------------------------------
2000 1999 1998
----------- --------- ------------
Supplemental cash disclosure
Cash paid for interest $ 13 $ - $ 295
=========== ========= ============
Supplemental noncash financing activities
Accrued interest on related company loans refinanced
as principal balance $ - $ - $ 4,764
=========== ========= ============
The accompanying notes are an integral part of the financial statements.
F-74
TVA SUL PARANA LTDA.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
1. The Company and its principal operations
The accompanying financial statements have been prepared to reflect the
results of TVA Sul Parana Ltda. and its subsidiary (the "Company").
TVA Sul Parana Ltda.. is a holding company, the subsidiary of which renders
services related to wireless cable and cable television systems, including
marketing and advertising, production, distribution and licensing of
domestic and foreign television programs. The Company has wireless cable
channel rights primarily in major urban markets in the South of Brazil. The
Company's operations are substantially dependent on TVA Group regarding
programming, marketing, financial and administrative systems.
2. Summary of significant accounting policies
Significant policies followed in the preparation of the consolidated
financial statements are described below:
2.1. Basis of presentation and consolidation
a) Basis of presentation
The consolidated financial statements are presented in U.S. dollars and
have been prepared in accordance with accounting principles generally
accepted in the United States of America ("U.S. GAAP"), which differ in
certain respects from accounting principles applied by the Company in its
local currency financial statements, which are prepared in accordance with
accounting principles generally accepted in Brazil ("Brazilian GAAP").
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
financial statement dates and the reported amount of revenues and expenses
during the reporting periods. Since management's judgment involves making
estimates concerning the likelihood of future events, the actual results
could differ from these estimates.
b) Principles of consolidation
The consolidated financial statements include the accounts of the
majority-owned subsidiary. All significant intercompany balances and
transactions have been eliminated on consolidation.
F-75
TVA SUL PARANA LTDA.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
2.2. Accounting records
As required by Brazilian Law, and in accordance with local accounting
practices, the accounting records of the Company are maintained in
Brazilian currency ("reais" or "R$"). In order to present the financial
statements in conformity with accounting principles generally accepted in
the United States of America, the Company maintains additional accounting
records which are used solely for this purpose.
2.3. Currency remeasurement
As of January 1, 2000, based on the changes in the Company's capital and
operational structure, the Company changed its functional currency from the
United States dollar to the Brazilian real (R$). This change was performed
based on the premises of the Statement of Financial Accounting Standards
("SFAS") 52, "Foreign Currency Transactions", since currently a substantial
portion of Company's business is conducted in Brazilian reais.
Assets and liabilities are translated into U.S. dollars at the exchange
rate in effect at the end of the reporting period, and revenues and
expenses are translated into U.S. dollars at the averages rates prevailing
in the period. The resulting net translation gains and losses are reported
as currency translation adjustments in shareholders' deficit.
2.4. Consolidated financial statements
The Company's consolidated financial statements as of December 31, 2000 and
1999 includes TVA Sul Parana Ltda. as a parent company and its 60%
ownership interest in CCS Camboriu Cable System de Telecomunicacoes Ltda.
2.5. Cash and cash equivalents
Cash and cash equivalents are defined as cash and cash in banks and
investments in interest-bearing securities and are carried at cost plus
accrued interest. Short-term investments with original maturities of three
months or less at the time of purchase are considered cash equivalents.
F-76
TVA SUL PARANA LTDA.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
2.6. Financial instruments
In accordance with SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments", information is provided about the fair value of certain
financial instruments for which it is practicable to estimate that value.
For the purposes of SFAS No. 107, the estimated fair value of a financial
instrument is the amount at which the instrument could be exchanged in a
current transaction between willing parties, other than in a forced or
liquidation sale. The carrying values of the Company's financial
instruments as of December 31, 2000 and 1999 approximate management's best
estimate of their fair values. The following methods and assumptions were
used to estimate the fair value of each class of financial instrument for
which it is practicable to estimate that value:
o The fair value of certain financial assets carried at cost, including
cash, accounts receivable, other accounts receivable, and certain
other short-term assets is considered to approximate their respective
carrying value due to their short-term nature.
o The fair value of payables to suppliers, other accounts payable, loans
to related companies and certain other short-term liabilities are
considered to approximate their respective carrying value due to their
short-term nature.
o The fair value of loans from related companies approximates their
respective carrying values, as interest on these loans is variable and
based on market rates.
2.7. Accounts receivable
A provision for doubtful accounts is established on the basis of an
analysis of the accounts receivable, in light of the risks involved and is
considered sufficient to cover any losses incurred in realization of
credits.
2.8. Inventories
Inventories consist of materials and supplies used to provide service to
new customers, and to ensure continuity of service to existing customers.
Inventories are stated at the lower of cost or market. Cost is determined
principally under the average cost method. A provision for obsolescence has
been established on the basis of an analysis of slow-moving materials and
suppliers.
F-77
TVA SUL PARANA LTDA.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
2.9. Property, plant and equipment
Property, plant and equipment are stated at cost and depreciated using the
straight-line method, over the remaining useful lives, as described in
Note 7.
2.10. Recoverability of long-lived assets to be held and used in the business
Management reviews long-lived assets, primarily the Company's concessions
and its property and equipment to be held and used in the business, for
the purposes of determining and measuring impairment on a recurring basis
or when events or changes in circumstances indicate that the carrying
value of an asset or group of assets may not be recoverable. Assets are
grouped and evaluated for possible impairment at the level of each cable
television system; impairment is assessed on the basis of the forecasted
undiscounted cash flows of the businesses over the estimated remaining
lives of the assets related to those systems. A write-down of the carrying
value of the assets or group of assets to estimated fair value will be
made if and when appropriate.
2.11. Revenue recognition
Hook up fees are recognized as revenue on the equipment installation date
to the extent of direct selling costs incurred which are generally higher
than the revenue, and the related selling costs are expensed. Subscription
revenues are recognized as earned on an accrual basis.
2.12 Concessions
Concessions represent the right to engage in various telecommunications
services in defined areas or cities in Brazil. The cost of these
concessions is being amortized on the straight-line basis over 10 years.
F-78
TVA SUL PARANA LTDA.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
3. Accounts receivable, net
As of December 31, 2000 and 1999, accounts receivable were comprised of:
December 31,
--------------------
2000 1999
------- -------
Subscriptions and installation fee $ 1,805 $ 2,519
Advertising 6 63
Programming 8 --
Provision for doubtful accounts (1,220) (1,719)
------- -------
$ 599 $ 863
======= =======
4. Inventories
As of December 31, 2000 and 1999, inventories were comprised of:
December 31,
----------------------
2000 1999
------- -------
Materials and suppliers $ 2,188 $ 2,778
Imports in transit 96 9
Provision for obsolescence (369) (403)
------- -------
$ 1,915 $ 2,384
======= =======
F-79
TVA SUL PARANA LTDA.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
5. Related party transactions
The following tables summarize the transactions between the Company and
related parties as of December 31, 2000 and 1999 and for each of the three
years in the period ended December 31, 2000:
December 31,
---------------------
2000 1999
------- -------
TVA Sistema de Televisao S.A
Accounts payable $ -- $ 531
Accounts receivable 218 --
TVA Distribuidora S.A
Loans payable 27,708 29,788
Abril S.A
Accounts payable -- 20
Editora Abril S.A
Accounts receivable 8 --
TVA Network Participacoes S.A
Accounts receivable $ 9 $ 7
December 31,
--------------------------
2000 1999 1998
----- ----- ------
TVA Sistema de Televisao S.A
Net interest expense $-- $-- $ 295
Tevecap S.A
Net interest expense $-- $-- $4,764
The related company loans are denominated in reais and are subject to
monetary restatement until December 31, 1995 plus interest charges at the
market rate which ranged from 1.90% to 1.63% per month as of December 31,
2000 (2.51% to 1.97% per month as of December 31, 1999). Such loans are
renewable every year on December 31.
F-80
TVA SUL PARANA LTDA.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
6. Income taxes
The tax effects of temporary differences that give rise to a significant
portion of the deferred tax asset and deferred tax liability as of
December 31, 2000 and 1999 are as follows:
December 31,
------------------
2000 1999
------- -------
Deferred tax assets
Net operating loss carryforwards $ 6,315 $ 6,076
Provision for claims 498 377
Provision for obsolescence 338 259
Other 670 766
------- -------
Total gross deferred tax asset 7,821 7,478
------- -------
Deferred tax liability
Installation costs -- (54)
------- -------
Total gross deferred tax liability -- (54)
------- -------
Net deferred tax asset 7,821 7,424
------- -------
Less valuation allowance (7,821) (7,424)
------- -------
Net deferred tax asset/liability $ -- $ --
======= =======
The Company has a limited operating history and has generated losses since
its inception. The valuation allowance has been established in accordance
with the requirements of SFAS No. 109, "Accounting for Income Taxes".
As of December 31, 2000, the Company and subsidiaries have unexpirable
accumulated tax losses of $18,568.
F-81
TVA SUL PARANA LTDA.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
6. Income taxes (Continued)
The consolidated and combined income tax expense was different from the
amount computed using the Brazilian statutory income tax for the reasons
set forth in the following table:
Year Ended December 31,
--------------------------------
2000 1999 1998
------- ------- --------
Loss before income taxes and minority interest $(3,434) $(6,021) $(10,158)
Statutory income tax rate 34% 37% 33%
------- ------- --------
(1,168) (2,227) (3,352)
Increase (decrease) in the income tax rate (225) (150) --
Deferred charges amortization (45) (51) (71)
Translation loss on tax losses 533 2,512 443
Net loss of merged companies -- -- 1,273
Unallowable amortization 136 151 (62)
Installation materials -- 236 --
Deductible devaluation loss for Brazilian Statutory Purposes -- (620) (245)
Write-off assets related to cancellations of subscriptions 165 -- --
Depreciation 515 499 454
Other (98) 763 320
------- ------- --------
Net income tax expense (benefit) for the period (187) 1,113 (1,240)
Tax loss carryforward used 63 -- --
Increase (decrease) in valuation allowance 397 (1,007) 1,264
------- ------- --------
$ 273 $ 106 $ 24
======= ======= ========
Income tax payable represents amounts owed by subsidiaries calculated on a
stand-alone basis, as Brazilian income tax law does not allow consolidated
tax returns.
F-82
TVA SUL PARANA LTDA.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
7. Property, plant and equipment, net
As of December 31, 2000 and 1999, property, plant and equipment were
comprised of:
Annual
Depreciation
Rate
December 31,
------------------------
% 2000 1999
-------- --------
Reception equipment 20 $ 8,366 $11,747
Cable plant 10 14,587 15,714
Machinery and equipment 10 3,980 4,156
Converters 10 10,532 10,823
Leasehold improvements 25 130 138
Furniture and fixtures 10 461 502
Premises 10 712 715
Vehicles 20 557 608
Software 20 216 231
Tools 10 68 73
Building 4 3,462 3,784
-------- -------
43,071 48,491
Telephone line use rights 346 378
Accumulated depreciation (14,578) (13,529)
-------- -------
$ 28,839 $35,340
======== ========
8. Concessions, net
As of December 31, 2000 and 1999, concessions were comprised of:
December 31,
-----------------------
2000 1999
------- -------
CCS - Camboriu Cable System Telecomunicacoes Ltda $ 769 $ 841
TVA Sul Parana Ltda. (Stations in south of Brazil) 7,139 7,805
Accumulated amortization (3,449) (2,899)
------- -------
$ 4,459 $ 5,747
======= =======
F-83
TVA SUL PARANA LTDA.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
9. Loan guarantees
In November 1996, Tevecap S.A., issued $250,000 12-5/8% Senior Notes to
institutional buyers in a private placement. The Notes, which mature in
November 2004, were subsequently registered with the Securities and
Exchange Commission in May 1997. These Notes are jointly and severally,
irrevocably and fully unconditionally guaranteed, on a senior basis, by
Tevecap's direct and indirect subsidiaries, including the Company. On July
28, 1999 the related company TVA Communications Ltd. ("TVAICO")
repurchased in the foreign market 80.79% of these Notes.
10. Taxes payable other than income taxes
As of December 31, 2000 and 1999, taxes payable other than income taxes
were comprised of:
2000 1999
------- -------
COFINS $ 135 $ 1,419
ICMS 1,899 979
PIS 40 308
Tax Recovery Program - Refis 1,260 --
Other 183 108
------- -------
3,517 2,814
( - ) current liabilities (532) (673)
------- -------
$ 2,985 $ 2,141
======= =======
On April 5, 2000, the Company opted for the REFIS (Tax Recovery Program),
established by Decree N(Degree) 3.342/00 of January 25, 2000, later
changed into Law N(Degree) 9.964/00 of April 10, 2000.
With the option for the REFIS, the Company will be able to pay such taxes
based on 1.2% of its monthly revenues. Based on its revenue projections,
the approximate timing for paying the total account is about 5 years. The
restatement of the tax debt included in the REFIS is made based on the
TJLP (Brazilian long term interest rate).
During year 2000, the Company also renegotiated with Sao Paulo State
Government the ICMS due. Based on the agreement, the Company is able to
finance its taxes payable for five years.
F-84
TVA SUL PARANA LTDA.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
11. Other nonoperating, income (expenses), net
2000 1999 1998
------- ------- ----
Write-off of assets related to
cancellations of subscriptions $(1,748) $(1,930) $--
Write-off of decoders -- (705) --
Others (33) (547) 284
------- ------- ----
$(1,781) $(3,182) $284
======= ======= ====
12. Paid-in capital
Paid-in capital as of December 31, 2000 and 1999 was comprised of:
2000 1999
--------------------------------- --------------------------------
US$ Shares US$ Shares
----------- ----------- ----------- ----------
Abril S.A $ 6,190 2,456,150 $ 6,190 2,456,150
TVA Distribuidora S.A 38,023 15,087,776 38,023 15,087,776
----------- ----------- ----------- ----------
$ 44,213 17,543,926 $ 44,213 17,543,926
=========== =========== =========== ==========
Paid-in capital represents registered common shares without par value.
The Company's shareholders are entitled to a minimum dividend of 25% of
net income for the year, adjusted according to the Brazilian Corporation
Law. As the Company has recorded no net income since its inception, no
such dividends are payable.
F-85
TVA SUL PARANA LTDA.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
13. Litigation contingencies
Certain claims and lawsuits arising in the ordinary course of business
have been filed or are pending against the Company, which were not
recognized in the consolidated financial statements. The Company has also
recorded provisions related to certain claims in amounts that management
considers to be adequate after considering a number of factors including
(but not limited to) the views of legal counsel, the nature of the claims
and the prior experience of the Company.
In management's opinion, all contingencies have been adequately provided
for or are without merit, or are of such kind that, if disposed of
unfavorably, would not have a material adverse effect on the financial
position or future results of operations of the Company.
14. Pension Plan
In April 1996, the Company became a co-sponsor of the private pension
entity named Abrilprev Sociedade de Previdencia Privada ("Abrilprev"), the
primary objective of which is to grant employees benefits other than those
provided by Social Security. The plan is optional to all employees of the
sponsoring entities. Abrilprev operates as a Defined Contribution Plan.
Company contributions are made based on a fixed percentage applied to the
payroll of the sponsoring entities based on actuarial calculations.
Contribution expenses amounted to $ 11 for the year ended December 31,
2000 ($10 in 1999).
15. Abril Health Care Plan
In February 1996, the Abril Health Care Plan, Associacao Abril de
Beneficios (the "Health Care Plan"), was created to provide health care to
Abril S.A. companies' employees and their dependents. Both the companies
forming part of the Abril Group and the employees thereof contribute
monthly to the Health Care Plan, which is responsible for the management
of the plan. In 2000, contributions made by the Company to the Health Care
Plan and certain affiliates companies to Associacao Abril de Beneficios
amounted to $128 ($97 for 1999).
F-86
TVA SUL PARANA LTDA.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
16. Supplementary information - valuation and qualifying accounts and reserves
Provision Provision Deferred Provision
for Doubtful for Taxation for
Accounts Obsolescence Valuation claims
Allowance
------- ------------ --------- ------
Balance as of December 31, 1997 $ 1,487 $ -- $ 7,167 $ 323
Additions charged to expense 202 -- 1,264 (72)
------- ------- ------- -----
Balance as of December 31, 1998 $ 1,689 $ -- $ 8,431 $ 251
Additions charged to expense -- 403 -- --
Reduction 30 (1,007) (143)
------- ------- ------- -----
Balance as of December 31, 1999 $ 1,719 $ 403 $ 7,424 $ 108
Additions charged to expense -- 397 589
Reduction (499) (34) -- --
------- ------- ------- -----
Balance as of December 31, 2000 $ 1,220 $ 369 $ 7,821 $ 697
======= ======= ======= =====
17. Recent accounting pronouncements
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The standard requires that all
derivative instruments (1) be recognized as assets or liabilities and (2)
be adjusted to fair value each period. SFAS 133 is effective for fiscal
year beginning after June 15, 2000. As of December 31, 2000 the Company
has no operations with hedging activities.
* * * * * * *
F-87
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
INDEX TO FINANCIAL STATEMENTS
Contents
Page
Report of Independent Public Accountants F-89
Balance Sheets as of December 31, 2000 and 1999 F-90
Statements of Operations for each of the three years in
the period ended December 31, 2000 F-92
Statements of Changes in Shareholders' Equity for each
of the three years in the period ended December 31, 2000. F-93
Statements of Cash Flows for each of the three years in
the period ended December 31, 2000. F-94
Notes to Financial Statements F-95
F-88
Report of Independent Public Accountants
To the Shareholders and Directors of
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
We have audited the accompanying balance sheet of CCS - CAMBORIU CABLE SYSTEM
TELECOMUNICACOES LTDA. (the "Company") as of December 31, 2000 and 1999, and the
related statements of operations, changes in shareholders' equity and cash flows
for each of the three years in the period ended December 31, 2000, all expressed
in United States dollars. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CCS - CAMBORIU CABLE SYSTEM
TELECOMUNICACOES LTDA. as of December 31, 2000 and 1999, and the related
statements of its operations and cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America.
Arthur Andersen S/C
Sao Paulo, Brazil,
February 16, 2001
F-89
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Balance Sheets
December 31, 2000 and 1999
(in thousands of U.S. dollars)
December 31,
--------------------
2000 1999
------ ------
ASSETS
Current assets
Cash and cash equivalents $ 2 $ 129
Accounts receivable, net 72 181
Inventories 104 127
Prepaid and other assets 14 --
Recoverable taxes 136 41
Accounts receivable from related parties 18 17
Other accounts receivable 37 17
------ ------
Total current assets 383 512
------ ------
Property, plant and equipment, net 3,899 4,453
Judicial deposits 305 --
------ ------
Total assets $4,587 $4,965
====== ======
F-90
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Balance Sheets
December 31, 2000 and 1999
(in thousands of U.S. dollars)
December 31,
-----------------------
2000 1999
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Film Suppliers $ 90 $ 109
Others suppliers 92 85
Taxes payable other than income taxes 91 80
Accrued payroll and related liabilities 22 47
Income taxes 134 81
Advance payments received from subscribers 14 18
Accounts payable to related companies -- 1
Other accounts payable 93 42
------- -------
Total current liabilities 536 463
------- -------
Long-term liabilities
Loans from related companies 126 426
Taxes payable other than income taxes 244 152
Provision from claims 13 --
------- -------
Total long-term liabilities 383 578
------- -------
Contingencies (Note 9)
Shareholders' equity
Paid-in capital 4,012 4,012
Accumulated other comprehensive loss
Cumulative translation adjustments (335) --
Accumulated deficit (9) (88)
------- -------
Total shareholders' equity 3,668 3,924
------- -------
Total liabilities and shareholders' equity $ 4,587 $ 4,965
======= =======
F-91
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Statements of Operations
for the years ended December 31, 2000 , 1999 and 1998
(in thousands of U.S. dollars)
Year ended December 31,
---------------------------------------------------
2000 1999 1998
----------- ----------- -----------
Gross revenues
Monthly subscriptions $ 2,106 $ 1,833 $ 2,454
Installation 11 32 90
Additional services 96 20 51
Taxes on revenue (249) (184) (71)
----------- ----------- -----------
Net revenue 1,964 1,701 2,524
----------- ----------- -----------
Direct operating expenses
Payroll and benefits 93 84 105
Programming 491 528 740
Other costs 223 93 178
----------- ----------- -----------
807 705 1,023
----------- ----------- -----------
Selling, general and administrative expenses
Payroll and benefits 176 147 286
Advertising and promotion 19 6 2
Other general and administrative expenses 98 59 485
----------- ----------- -----------
293 212 773
----------- ----------- -----------
Depreciation 403 229 338
----------- ----------- -----------
Operating income 461 555 390
----------- ----------- -----------
Interest income 37 226 50
Interest expense (94) -- (242)
Translation gain (loss) -- (135) 23
Other nonoperating (expense) income, net (119) (17) 58
----------- ----------- -----------
Income before income taxes 285 629 279
----------- ----------- -----------
Income taxes (206) (106) (24)
----------- ----------- -----------
Net income $ 79 $ 523 $ 255
=========== =========== ===========
Other comprehensive loss -
Cumulative translation adjustment (335) -- --
----------- ----------- -----------
Comprehensive income (loss) (256) 523 255
=========== =========== ===========
Net income per share 0.02 0.11 0.05
Weighted average shares outstanding 4,850,000 4,850,000 4,850,000
F-92
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Statements of Changes in Shareholders' Equity
for the years ended December 31, 2000, 1999 and 1998
(in thousands of U.S. dollars)
Cumulative
Paid-in Translation Accumulated
Capital Adjustments Deficit Total
------- ----------- ------- ------
Balance as of December 31, 1997 $ 4,012 $ $(866) $3,146
Net income for the year 255 255
------- ----- ----- ------
Balance as of December 31, 1998 $ 4,012 $ $(611) $3,401
Net income for the year 523 523
----- ----- ------
Balance as of December 31, 1999 $ 4,012 $ $ (88) $3,924
Currency translation adjustments (335) (335)
Net income for the year 79 79
------- ----- ----- ------
Balance as of December 31, 2000 $ 4,012 $(335) $ (9) $3,668
======= ===== ===== ======
F-93
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Statements of Cash Flows
for the years ended December 31, 2000 ,1999 and 1998
(in thousands of U.S. dollars)
Year Ended December 31,
-----------------------------------
2000 1999 1998
----- ----- -----
Cash flows from operating activities:
Net income $ 79 $ 523 $ 255
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 378 229 338
Provision for doubtful accounts -- (14) (278)
Provision for claims 13 -- (4)
Changes in operating assets and liabilities
Accounts receivable 109 (59) 310
Prepaid and the other assets (14) -- --
Other accounts receivable including recoverable taxes and accounts
receivable from related parties (421) 4 (33)
Accrued interest 64 (227) --
Inventories 23 2 237
Suppliers (12) 8 139
Taxes payable other than income taxes 103 140 2
Income Taxes 53 57 24
Accrued payroll and related liabilities (25) 1 7
Advances received from subscribers (4) -- --
Other accounts payable 50 (16) (70)
----- ----- -----
Net cash provided by operating activities 396 648 927
----- ----- -----
Cash flows used in investing activities:
Purchase of property, plan and equipment (203) (132) (207)
----- ----- -----
Net cash used in investing activities (203) (132) (207)
----- ----- -----
Cash flows (used in) provided by financing activities:
Loans from banks (116)
Loans from related companies 348 (446) (602)
Repayments of loans from related companies (677) -- --
----- ----- -----
Net cash (used in) provided by financing activities (329) (446) (718)
----- ----- -----
Effect of exchange rate changes 9 -- --
----- ----- -----
Net increase (decrease) in cash and cash equivalents (127) 70 2
Cash and cash equivalents at beginning of the period 129 59 57
----- ----- -----
Cash and cash equivalents at end of the period $ 2 $ 129 $ 59
===== ===== =====
F-94
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
1. The Company and its principal operations
CCS - Camboriu renders services related to wireless cable and cable
television systems, including marketing and advertising, production,
distribution and licensing of domestic and foreign television programs. The
Company has wireless cable channel rights primarily in the city of
Camboriu. The Company's operations are substantially dependent on TVA Group
regarding programming, marketing, financial and administrative systems.
2. Summary of significant accounting policies
Significant policies followed in the preparation of the financial
statements are described below:
2.1. Basis of presentation
The financial statements are presented in U.S. dollars and have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP"), which differ in certain respects
from accounting principles applied by the Company in its local currency
financial statements, which are prepared in accordance with accounting
principles generally accepted in Brazil ("Brazilian GAAP").
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
financial statement dates and the reported amount of revenues and expenses
during the reporting periods. Since management's judgment involves making
estimates concerning the likelihood of future events, the actual results
could differ from these estimates.
2.2. Accounting records
As required by Brazilian Law, and in accordance with local accounting
practices, the accounting records of the Company are maintained in
Brazilian currency ("real"). In order to present the financial statements
in conformity with accounting principles generally accepted in the United
States of America, the Company maintains additional accounting records
which are used solely for this purpose.
2.3. Currency remeasurement
As of January 1, 2000, based on the changes in the Company's capital and
operational structure, the Company changed its functional currency from the
United States dollar to the Brazilian real (R$). This change was performed
based on the premises of the Statement of Financial Accounting Standards
("SFAS") 52, "Foreign Currency Transactions", since currently a substantial
portion of Company's business is conducted in Brazilian reais.
Assets and liabilities are translated into U.S. dollars at the exchange
rate in effect at the end of the reporting period, and revenues and
expenses are translated into U.S. dollars at the average rates prevailing
in the period. The resulting net translation gains and losses are reported
as currency translation adjustments in shareholders' deficit.
F-95
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
2.4. Cash and cash equivalents
Cash and cash equivalents are defined as cash and cash in banks and
investments in interest-bearing securities and are carried at cost plus
accrued interest. Short-term investments with original maturities of three
months or less at the time of purchase are considered cash equivalents.
2.5. Financial instruments
In accordance with SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments", information is provided about the fair value of certain
financial instruments for which it is practicable to estimate that value.
For the purposes of SFAS No. 107, the estimated fair value of a financial
instrument is the amount at which the instrument could be exchanged in a
current transaction between willing parties, other than in a forced or
liquidation sale. The carrying values of the Company's financial
instruments as of December 31, 2000 and 1999 approximate management's best
estimate of their fair values. The following methods and assumptions were
used to estimate the fair value of each class of financial instrument for
which it is practicable to estimate that value:
o The fair value of certain financial assets carried at cost, including
cash, accounts receivable, other accounts receivable, and certain
other short-term assets is considered to approximate their respective
carrying value due to their short-term nature.
F-96
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
2.5. Financial instruments (Continued)
o The fair value of payables to suppliers, other accounts payable, loans
to related companies and certain other short-term liabilities are
considered to approximate their respective carrying value due to their
short-term nature.
o The fair value of loans from related companies approximates their
respective carrying values as interest on these loans is at market
rates.
2.6. Accounts receivable
A provision for doubtful accounts was established on the basis of an
analysis of the accounts receivable, in light of the risks involved, and is
considered sufficient to cover any losses incurred in realization of
credits.
2.7. Inventories
Inventories consist of materials and supplies used to provide service to
new customers, and to ensure continuity of service to existing customers.
Inventories are stated at the lower of cost or market. Cost is determined
principally under the average cost method.
2.8. Property, plant and equipment
Property, plant and equipment are stated at cost and depreciated using the
straight-line method, over the remaining useful lives, as described in
Note 6.
2.9. Recoverability of long-lived assets to be held and used in the business
Management reviews long-lived assets, primarily the Company's concessions
and its property and equipment to be held and used in the business, for the
purposes of determining and measuring impairment on a recurring basis or
when events or changes in circumstances indicate that the carrying value of
an asset or group of assets may not be recoverable. Assets are grouped and
evaluated for possible impairment at the level of each cable television
system; impairment is assessed on the basis of the forecasted undiscounted
cash flows of the businesses over the estimated remaining lives of the
assets related to those systems. A write-down of the carrying value of the
assets or group of assets to estimated fair value will be made if and when
appropriate.
F-97
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
2.10. Revenue recognition
Hook up fees are recognized as revenue on the equipment installation date
to the extent of direct selling costs incurred which are generally higher
than the revenue, and the related selling costs are expensed. Subscription
revenues are recognized as earned on an accrual basis.
3. Accounts receivable, net
As of December 31, 2000 and 1999, accounts receivable were comprised of:
December 31,
--------------------
2000 1999
----- -----
Subscriptions and installation $ 112 $ 224
Advertising 6 7
Programming 1 --
Provision for doubtful accounts (47) (50)
----- -----
$ 72 $ 181
===== =====
4. Related party transactions
The following tables summarize the transactions between the Company and
related parties as of December 31, 2000 and 1999:
December 31,
------------------
2000 1999
---- ----
TVA Sistema de Televisao S.A
Accounts receivable $ 11 $ 16
TVA Sul Parana Ltda
Accounts receivable 7 1
Accounts payable -- --
Loans payable 126 426
Abril S.A
Accounts payable $-- $ 1
F-98
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
5. Income taxes
The tax effects of temporary differences that give rise to a significant
portion of the deferred tax asset and deferred tax liability as of December
31, 2000 and 1999 are as follows:
December 31,
---------------
2000 1999
---- ----
Deferred tax assets:
Net operating loss carryforwards $ 1 $ 39
Other (1) 6
---- ----
Total gross deferred tax asset -- 45
---- ----
Less valuation allowance -- (45)
---- ----
Net deferred tax asset $-- $--
==== ====
The Company has a limited operating history and has generated losses since
its inception. The valuation allowance has been established in accordance
with the requirements of SFAS No. 109, "Accounting for Income Taxes".
As of December 31, 2000, the Company has unexpirable accumulated tax losses
of $2.
The income tax expense was different from the amount computed using the
Brazilian statutory income tax for the reasons set forth in the following
table:
2000 1999 1998
----- ----- -----
Income before income taxes and minority interest $ 285 $ 629 $ 279
Statutory income tax rate 34% 37% 33%
----- ----- -----
97 233 92
Increase (decrease) in the income tax rate 1 22 --
Translation loss of tax losses 3 30 11
Deductible devaluation loss for Brazilian Statutory Purposes
150 (169) 76
----- ----- -----
Income tax for the period 251 116 179
Decrease in valuation allowance (45) (10) (155)
----- ----- -----
$ 206 $ 106 $ 24
===== ===== =====
F-99
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
6. Property, plant and equipment, net
As of December 31, 2000 and 1999, property, plant and equipment were
comprised of:
Annual
Depreciation December 31,
Rate ---------------------
% 2000 1999
------- -------
Reception equipment 20 $ 585 $ 513
Cable plant 10 893 977
Machinery and equipment 10 343 312
Converters 10 26 --
Leasehold improvements 25 4 --
Building 25 3,154 3,447
Furniture and fixtures 10 79 86
Vehicles 20 15 16
Software 20 7 8
Tools 10 2 2
------- -------
5,108 5,361
Telephone line use rights 4 4
Accumulated depreciation (1,218) (918)
Fixed assets in transit 5 6
------- -------
$ 3,899 $ 4,453
======= =======
7. Paid-in capital
Paid-in capital as of December 31, 2000 and 1999 was comprised of:
2000 1999
-------------------------- --------------------------
US$ Shares US$ Shares
---------- ---------- ---------- ----------
Construtora ENE ESSE Ltda $ 1,605 1,940,000 $ 1,605 1,940,000
TVA Sul Parana Ltda 2,407 2,910,000 2,407 2,910,000
---------- ---------- ---------- ----------
$ 4,012 4,850,000 $ 4,012 4,850,000
========== ========== ========== ==========
Paid-in capital represents registered common shares without par value.
The Company's shareholders are entitled to minimum dividends of 25% of net
income for the year, adjusted according to Brazilian Corporation Law. As
the Company has not recorded net income since its inception, no such
dividends are payable.
8. Loan guarantees
In November 1996, Tevecap S.A., issued $250,000 12-5/8% Senior Notes to
institutional buyers in a private placement. The Notes, which mature in
November 2004, were subsequently
F-100
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
registered with the Securities and Exchange Commission in May 1997. These
Notes are jointly and severally, irrevocably and fully unconditionally
guaranteed, on a senior basis, by Tevecap's direct and indirect
subsidiaries, including the Company. On July 28, 1999 the related company
TVA Communications Ltd. ("TVAICO") repurchased in the foreign market 80.79%
of these Notes.
9. Litigation contingencies
Certain claims and lawsuits arising in the ordinary course of business have
been filed or are pending against the Company which were not recognized in
the financial statements. The Company has also recorded provisions related
to certain claims in amounts that management considers to be adequate after
considering a number of factors including (but not limited to) the views of
legal counsel, the nature of the claims and the prior experience of the
Company.
In management's opinion, all contingencies have been adequately provided
for or are without merit, or are of such kind that, if disposed of
unfavorably, would not have a material adverse effect on the financial
position or future results of operations of the Company.
10. Abril Health Care Plan
In February 1996, the Abril Health Care Plan, Associacao Abril de
Beneficios (the "Health Care Plan"), was created to provide health care to
Abril S.A. companies' employees and their dependents. Both the companies
forming part of the Abril Group and the employees thereof contribute
monthly to the Health Care Plan, which is responsible for the management of
the plan. In 2000, contributions made by the Company to the Health Care
Plan amounted to $17 ($15 in 1999).
11. Supplementary information - valuation and qualifying accounts and reserves
Deferred Provision
Taxation for Provision
Valuation Doubtful for
Allowance Accounts Claims
--------- -------- ------
Balance as of December 31, 1997 $ 210 $ 342 $ 4
Additions charged to expense (155) (278) (4)
----- ----- -----
Balance as of December 31, 1998 $ 55 $ 64 $ --
Reduction (10) (14)
----- ----- -----
Balance as of December 31, 1999 $ 45 $ 50 $ --
Additions charged to expense -- 13
Reduction (45) (3) --
----- ----- -----
Balance as of December 31, 2000 $ -- 47 13
===== ===== =====
F-101
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
12. Recent accounting pronouncements
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The standard requires that all
derivative instruments (1) be recognized as assets or liabilities and (2)
be adjusted to fair value each period. SFAS 133 is effective for fiscal
year beginning after June 15, 2000. As of December 31, 2000 the Company has
no operations with hedging activities.
* * * * * * *
F-102
GLOSSARY
ABC: ABC, Inc., formerly known as "Capital Cities/ABC, Inc."
Abril: Abril S.A.
Abril Credit Facility: A revolving credit facility, dated December 6, 1995,
between Tevecap, as the borrower, and Abril, as the lender.
ANATEL: Agencia Nacional de Telecomunicacoes (National Telecommunications
Agency), an independent Brazilian federal agency authorized to regulate the
Brazilian subscription television industry.
BBC: British Broadcasting Corporation.
C-Band: A satellite transmission system which provides a signal on the "c"
bandwidth.
Cable: A Cable network employs electromagnetic transmission over coaxial
and/or fiber-optic cable to transmit multiple channels carrying images, sound
and data between a central facility and individual customers' television sets.
Networks may allow one-way (from a headend to a residence and/or business) or
two-way transmission from a headend to a residence and/or business with a data
return path for the headend.
Cable license: A license that is granted by the applicable governing body
pursuant to its authority under the communications laws of a particular country
for the purpose of providing Cable services for a specific franchise/license
area.
Canbras: Canbras Communications Corp., a Canadian corporation.
Canbras Association Agreement: Association Agreement dated June 14, 1995,
among Tevecap, TVA Sistema, the Canbras TVA companies, Canbras and Canbras-Par.
Canbras TVA: The operations of Canbras TVA Cabo and TV Cabo Santa Branca,
in each of which Tevecap holds a 36% equity interest and Canbras Par holds a 64%
equity interest.
Canbras-Par: Canbras Participacoes, Ltda., a Brazilian limitada
wholly-owned by Canbras.
CBS: CBS, Inc.
Central Bank: Central Bank of Brazil (Banco Central do Brasil)
Chase Parties: Two wholly owned subsidiaries of CMIF through which CMIF
holds its equity interest in Tevecap.
Churn: With respect to a pay television system for a given period, the
quotient expressed as a percentage of (i) the number of subscribers disconnected
from such system less the number of formerly disconnected subscribers
reconnected to the system divided by (ii) the number of subscribers to the
system as of the beginning of the period plus the number of subscribers added to
the system.
CMIF: Chase Manhattan International Finance Ltd., an affiliate of The Chase
Manhattan Bank which holds a 8.1% interest in Tevecap through two wholly owned
subsidiaries.
A-1
Coaxial cable: Cable consisting of a central conductor surrounded by and
insulated from another conductor. It is the standard material used in
traditional Cable systems. Signals are transmitted through it at different
frequencies, giving greater channel capacity than is possible with twisted pair
cable, but less than is allowed by optical fiber.
Company: Tevecap, together with its consolidated subsidiaries.
CPL: Cable Participacoes Ltda., a Brazilian limitada, jointly owned by
Hearst and ABC, which limitada holds a 2% equity interest in Tevecap.
CPCT: Centrais Privadas de Comutacao Telefonica, certain private telephone
networks comparable to private branch exchanges (PBX) found in larger apartment
complexes, hotels and businesses in the United States.
Darlene Investments: Darlene Investments Ltd., a Cayman Islands limited
liability company which is part of the Cisneros Group of Companies.
DBS or DTH: Direct broadcast satellite service, operating in C-Band or
Ku-Band width, by which television programming is transmitted to individual
dwellings, each served by a single satellite dish.
DBS Sale: The sale by the Company of the DBS Systems and certain assets
related thereto in July 1999.
DBS Systems: Ku-Band and C-Band operations of Galaxy Brasil and TVA Banda
C, respectively.
DIRECTV: Brazil's first digital Ku-Band service, which is operated by
Galaxy Brasil and Galaxy Latin America.
DISTV: The distribution of television signals by physical means (i.e., by
Cable) to end users, generally limited to signals without interference by a
DISTV operator with the signal content.
DLA: DIRECTV Latin America, Inc. a California corporation wholly-owned by
Hughes Communications Inc. that holds a 77.8% equity interest in GLA.
ESPN Brasil: Programming provided by ESPN Brasil Ltda., an indirect
subsidiary of ESPN, Inc. , in which ABC has an 80% equity interest and Hearst
has a 20% equity interest.
Event Put: A triggering event under the Stockholders Agreement pursuant to
which each of the Stockholders (other than Abril) may, in certain circumstances,
demand that Tevecap purchase all or a portion of its shares.
Falcon International: Falcon International Communications (Bermuda L.P.), a
subsidiary of Falcon International Communications, L.L.C., a Delaware limited
liability company.
Falcon Time Put: A provision of the Stockholders Agreement pursuant to
which Falcon International may, in certain circumstances, demand that Tevecap
purchase all or a portion of the shares held by Falcon International.
Fiber-optic cable: Cable made of glass fibers through which signals are
transmitted as pulses of light. Fiber-optic cable has the capacity for a large
number of channels.
Financial Statements: The audited financial statements of Tevecap and its
subsidiaries and the notes thereto included herein.
A-2
Fox: Twentieth Century Fox Television International.
Galaxy Brasil: Galaxy Brasil S.A., a wholly-owned subsidiary of Tevecap
that was sold to Galaxy Latin America in July 1999.
Galaxy Latin America: Galaxy Latin America, LLC, a Delaware limited
liability company the members of which are DLA, which holds a 77.8% equity
interest and Darlene Investments, which holds a 22.2% equity interest.
Globo: Globo Par and TV Globo, the owners of a number of Brazil's over the
air channels.
Globo Cabo: Globo Cabo S.A., a Cable service provider in Brazil.
Globo Par: Globo Comunicacoes e Participacoes Ltda.
Guarantors: TVA Sistema de Televisao S.A., TVA Communications Ltd.,
Comercial Cabo TV Sao Paulo Ltda., TVA Sul Parana Ltda., CCS Camboriu Cable
System de Telecomunicacoes Ltda., TVA Distribuidora S.A., TVA Programadora
Ltda., TVA Network Ltda. and TVAPAR S.A.
HABC II: Hearst/ABC Video Services II, a Delaware general partnership
jointly owned by Hearst and ABC, which partnership holds a 15.3% equity interest
in Tevecap.
HBO Brasil: Programming provided by HBO Brasil Partners.
HBO Brasil Ltda: A Brazilian limitada, wholly owned by HBO Brasil Partners,
that distributes HBO programming in Brazil.
Headend: A collection of hardware, typically including satellite receivers,
modulators, amplifiers and videocassette playback machines. Signals, when
processed, are then combined for distribution within the Cable network.
Hearst: The Hearst Corporation.
Hearst/ABC Parties: HABC II and CPL.
Hearst/ABC Programming Agreement: Programming Agreement, dated December 6,
1995, among Tevecap, Hearst and ABC.
Homes Passed: Homes that can be connected to a Cable distribution system
without further extension of the distribution network.
IBGE: Instituto Brasileiro de Geografia e Estatistica.
Indenture: The Indenture, dated as of November 26, 1996 and as amended and
supplemented from time to time, among Tevecap, the Guarantors, Chase Manhattan
Bank, as trustee, and Chase Trust Bank, as principal paying agent in connection
with the Senior Notes.
Independent Operators: Independent pay television system operators to which
TVA sells programming.
Interactive services: Services commonly referred to as pay-on-demand,
shop-at-home, video games, ATM services, or such other interactive services as
video phone and telephony which can be more easily provided with the development
of high-capacity hybrid fiber optic/coaxial distribution networks.
A-3
Irmaos Reis: Distribuidora Irmaos Reis S.A., a Brazilian corporation in
which Abril holds a 30.5% equity interest.
Ku-Band: A satellite transmission system which provides a signal over the
"ku" bandwidth.
MGM: Metro Goldwyn Mayer, Inc.
MMDS (Multi-channel multi-point distribution system): A one-way radio
transmission of television channels over microwave frequencies from a fixed
station transmitting to multiple receiving facilities located at fixed points.
MMDS license: A license that is granted by the applicable governing body
pursuant to its authority under the communications laws of a particular country
for the purpose of providing MMDS services for a specific franchise/license
area.
MTV Brasil: MTV Brasil Ltda., a Brazilian limitada in which Abril holds a
50% equity interest and Viasem Brasil Holdings Ltda. (an indirect subsidiary of
Viacom International) holds the remaining 50% equity interest.
Net Sat: Net Sat Servicos Ltda., in which Globo Par has a controlling
interest and whose other equity holders include News Corporation, a subsidiary
of The News Corporation Limited.
News Corporation: News Corporation plc.
Operating Ventures: Canbras TVA and TV Filme, two of TVA's minority-owned
ventures.
Owned Systems: TVA Sistema and TVA Sul.
Pay-per-view: Payment made for individual programs rather than a monthly
subscription for a whole channel or group of channels. Pay-per-view channels
currently provide certain popular sporting events or major motion pictures for
which customers may be prepared to make a special payment.
Penetration rate: The measurement of the take-up of Cable services. The
penetration rate as of a given date is calculated by dividing the number of
subscribers connected to a system on such date by the total number of homes
passed in such system.
Real Plan: A Brazilian Government stabilization program, announced in
December 1993, aimed at curtailing inflation and building a foundation for
sustained economic growth.
Regulatory Put: A provision in the Stockholders Agreement pursuant to which
an Event Put is triggered if the amount of capital stock held by a Stockholder
(other than Abril) exceeds the amount allowed under an appropriate legal
restriction.
Revenue per subscriber: Total revenue derived from a subscriber television
system divided by the average number of subscribers for that period.
SAP: Second Audio Programming, which provides the option of audio in a
second language for the programming on channels for which it is offered.
Securities Act: United States Securities Act of 1933, as amended.
A-4
Senior Notes: Tevecap's 250,000,000 12 5/8% Senior Notes due 2004 issued on
November 26, 1996.
Smart Card: Encoded card placed in a decoder used for Ku-Band service. The
Smart Card is used to regulate access to Ku-Band services.
Sony: Sony Pictures Entertainment, Inc.
Stockholders: HABC II, CPL, Robert Civita, Abril, the Chase Parties and
Falcon International.
Stockholders Agreement: Stockholders Agreement, dated December 6, 1995,
among the Stockholders.
Subsidiary Guarantees: Guarantees executed or assumed by each of the
Guarantors.
Telecommunications Code: The Brazilian Telecommunications Code of 1962, as
amended.
Tevecap: Tevecap S.A.
Time Warner: Time Warner Entertainment Company, L.P.
TV Cabo Santa Branca: TV Cabo Santa Branca Comercio Ltda., a Brazilian
limitada, in which Tevecap holds a 36% equity interest and Canbras Par holds a
64% equity interest.
TV Filme: TV Filme, Inc., a Delaware corporation in which, as of December
31, 1999, Tevecap held a 14.7% equity interest, Warburg, Pincus Investors, L.P.
held a 38.8% equity interest, members of the Lins family held a 16.2% equity
interest, public stockholders held a 28.15% equity interest and certain
individuals held the remaining 2.15% equity interest. Upon the implementation of
a restructuring agreement with creditors, Tevecap's equity interest in TV Filme
was reduced to approximately 0.7%.
TV Homes: The number of households in a given area possessing at least one
television set.
TV Show Time: Televisao Show Time Ltda., a Brazilian limitada in which the
estate of Matias Machline and an associate currently hold a 53% equity interest
and in which the remaining 47% is currently held by various Abril shareholders.
TVA: Tevecap S.A. and its consolidated subsidiaries and affiliates. TVA
Banda C: TVA Banda C Ltda., a Brazilian limitada in which TVA held a 100% equity
interest prior to the sale of TVA Banda C to Galaxy Latin America in July 1999.
TVA Brasil: TVA Brasil Radioenlaces S.A., a Brazilian limitada in which the
estate of Matias Machline currently holds a 50% equity interest and in which the
remaining 50% is currently held by various Abril shareholders.
TVA Sistema: TVA Sistema de Televisao S.A., a Brazilian corporation in
which Tevecap holds a 98% equity interest Robert Civita, a Brazilian national,
holds a 2% equity interest.
TVA Sul: The operations of TVA Sul Parana Ltda., a Brazilian limitada in
which TVA holds an 86% equity interest and Abril holds the remaining 14% equity
interest, and CCS-Camboriu Cable System de Telecomunicacoes Ltda., a Brazilian
limitada in which TVA Sul Parana holds a 60% equity interest and Construtora ENE
ESSE Ltda. holds the remaining 40% equity interest.
A-5
UHF: Broadcast of a television signal at an ultra-high frequency over a
given geographical area.
VCR: Video cassette recorders.
A-6