As Filed with the Securities and Exchange Commission on May 19, 1999.
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 20-F
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|_| 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, 1998
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 _______________
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Tevecap S.A.
(Exact name of Registrant as specified in its charter)
TEVECAP INC. THE FEDERATIVE REPUBLIC OF BRAZIL
(Translation of Registrant's (Jurisdiction of incorporation or
name into English) organization)
Rua do Rocio, 313
Sao Paulo, SP Brazil
04552-904
(Telephone: 55-11-821-8550)
(Address and telephone number of principal executive offices)
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Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
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(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., Galaxy Brasil Ltda., 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 Satelite Ltda., TVA Banda C 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|
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TABLE OF CONTENTS
PART I
ITEM 1. DESCRIPTION OF BUSINESS..............................................1
ITEM 2. DESCRIPTION OF PROPERTY.............................................21
ITEM 3. LEGAL PROCEEDINGS...................................................21
ITEM 4. CONTROL OF REGISTRANT...............................................22
ITEM 5. NATURE OF TRADING MARKET............................................24
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY
HOLDERS...........................................................25
ITEM 7. TAXATION............................................................26
ITEM 8. SELECTED FINANCIAL DATA.............................................30
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..........................................35
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........51
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT............................52
ITEM 11. COMPENSATION FOR DIRECTORS AND OFFICERS.............................53
ITEM 12. OPTIONS TO PURCHASE SECURITIES......................................54
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS......................54
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED..........................56
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES.....................................57
ITEM 16. CHANGES IN SECURITIES AND CHANGES
IN SECURITY FOR REGISTERED SECURITIES.............................57
ITEM 17. FINANCIAL STATEMENTS................................................57
ITEM 18. FINANCIAL STATEMENTS................................................57
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS...................................57
INDEX TO THE FINANCIAL STATEMENTS.............................................58
GLOSSARY.....................................................................A-1
ii
Presentation of Certain Information
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 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 elsewhere in this Annual Report on Form 20-F for the Year ended
December 31, 1998 (the "Annual Report"), the "Financial Statements") of the
Company. 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, 1998 of R$1.2087 = US$1.00. Such translations should not
be construed as a representation that reais could have been converted at such
rate on such date or at any other date. See "Item 6: Exchange Controls and Other
Limitations Affecting Security Holders." All references in this Annual Report to
(i) "US Dollars,""dollars," "$" or "US$" are to United States dollars and (ii)
"reais," "real" or "R$" are to Brazilian reais. Capitalized terms used in this
Annual Report are defined, unless the context otherwise requires, in the
Glossary attached hereto. Unless otherwise specified, data regarding population
or homes in a licensed area are projections based on 1991 population census
figures compiled by the Instituto Brasileiro de Geografia e Estatistica
("IBGE"). 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 1991 census. Unless
otherwise indicated, references to the number of the Company's subscribers are
based on Company data as of December 31, 1998. The term DIRECTV(R) ("DIRECTV")
(DIRECTV(R) is a registered trademark of Hughes Electronics Corporation ("Hughes
Electronics")) refers to the Ku-Band service provided by Galaxy Brasil in
conjunction with Galaxy Latin America. Data concerning total MMDS, Cable, C-Band
or Ku-Band 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 the pay television systems of the Company and 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.
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. PROSPECTIVE 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. THE
ACCOMPANYING INFORMATION CONTAINED IN THIS ANNUAL REPORT, INCLUDING, WITHOUT
LIMITATION, THE INFORMATION UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND "DESCRIPTION OF BUSINESS,"
IDENTIFIES IMPORTANT FACTORS THAT COULD CAUSE SUCH DIFFERENCES.
iii
PART I
ITEM 1. DESCRIPTION OF BUSINESS
The following description is qualified in its entirety by reference to the
agreements entered into as of May 18, 1999 among the Company, Abril and certain
subsidiaries of the Company to sell the Company's DBS Systems to Galaxy Latin
America, DIRECTV Latin America, Inc. and Darlene Investments Ltd. On the date
hereof, the Company initiated a tender offer for all of the Notes, together with
a consent solicitation for consent by Noteholders to eliminate the restrictive
covenants contained in the Indenture. See "Recent Developments."
General
TVA is a leading pay television operator in Brazil and is one of the
country's largest pay television programming distributors. In 1989, TVA was the
first to provide pay television services in Brazil. With approximately 620,000
subscribers, TVA offers pay television services utilizing four distribution
technologies: MMDS, Cable, digital Ku-Band and digital C-Band. Additionally, TVA
has interests in HBO Brasil Partners and ESPN Brasil Ltda., two programming
joint ventures (the "Programming Ventures"). Through owned, affiliated and
independent pay television operators, TVA programming reaches approximately 1.2
million pay television households. TVA is a majority owned subsidiary of Abril,
S.A. ("Abril"), Latin America's leading magazine publishing, printing and
distribution company. 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").
The Company conducts its pay television operations through four owned
operating systems (the "Owned Systems"): TVA Sistema, TVA Sul, TVA Banda C and
Galaxy Brasil. Through the MMDS and Cable systems of TVA Sistema and TVA Sul,
the Company serves six cities with a combined population of approximately 18
million, including three of the seven largest cities in Brazil: Sao Paulo
(population of 10.2 million), Rio de Janeiro (population of 5.7 million) and
Curitiba (population of 1.5 million). The Company also holds minority interests
in Canbras TVA and TV Filme (the "Operating Ventures"), which together provide
pay television services to an additional seven cities with a total population of
6.5 million. In addition, the Company sells programming to, and receives a per
subscriber fee from, unaffiliated pay television operators ("Independent
Operators").
The Company, through Galaxy Brasil, is the exclusive provider of DIRECTV,
a digital direct broadcast satellite Ku-Band service. Galaxy Brasil receives
programming, scheduling and related services for DIRECTV from Galaxy Latin
America ("GLA"), in which TVA holds a 10.0% equity interest (subject to dilution
as described below). The other owners of GLA are a unit of Hughes Electronics
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. The Company, through TVA Banda C, also provides digital C-Band
television service (together with Galaxy Brasil, the "DBS Systems").
In 1998 the Company completed a corporate reorganization pursuant to which
three new wholly-owned subsidiaries, TVA Distribuidora S.A., TVA Programadora
Ltda. and TVA Satelite Ltda., became holding companies for the Company's
interests in its Cable and MMDS operations, the Programming Ventures and the DBS
Systems, respectively. This corporate reorganization did not result in any
change in the Company's beneficial interests in its subsidiaries and affiliates.
Recent Developments
Sale of DBS Systems and GLA Interest
As of May 18, 1999 the Company entered into two agreements, referred to
below, to sell its DBS Systems to Galaxy Latin America, and to sell its equity
interest in Galaxy Latin America, Inc. and certain related assets to DIRECTV
Latin America and Darlene Investments Ltd. (collectively, the "Proposed Sale").
At the same time, the Company is initiating a tender offer to purchase all of
the Notes (the "Offer"), together with a consent solicitation (the
"Solicitation") for consent by Noteholders to broadly amend the restrictive
covenants contained in the Indenture.
The Proposed Sale represents, in management's opinion, the best
opportunity for addressing the Company's current financial situation. In recent
years the Company has suffered recurring operating losses and has substantial
negative working capital. These developments have been exacerbated by recent
negative events occurring in the Brazilian economy, in particular a currency
devaluation in the first quarter of 1999 and a general recession. As described
below, the Company has failed to comply with certain obligations under its debt
agreements and material contracts, which failures may result in the termination
of certain of the Company's material agreements, acceleration of indebtedness,
and the exercise of other remedies by the Company's creditors. As further
discussed below, Arthur Andersen S/C, the Company's independent public
accountants, has indicated in its audit report for the year ended December 31,
1998 that these factors "raise substantial doubt about [the Company's] ability
to continue as a going concern".
The Proposed Sale is subject to a number of conditions, including the
execution of a Supplemental Indenture. Proceeds from the Proposed Sale will be
used to fund the Offer and Solicitation. See "Company Rationale for the Proposed
Sale" below.
On May 18, 1999, a Master Agreement (the "Master Agreement") relating to
the sale of the Company's equity interests in Galaxy Brasil Ltda. and TVA Banda
C Ltda. was entered into among the Company, Galaxy Brasil Ltda. and TVA Banda C
Ltda., as Sellers, Abril S.A., as a Seller-related entity, and GLA, as
Purchaser. In addition, on May 18, 1999, the GLA Purchase Agreement relating to
the sale of the Company's equity interests in GLA and SurFin Ltd, and certain
assets related thereto, was entered into among the Company, TVA Communications
Ltd. and TVA Finco Ltd., as Sellers, and Abril S.A. as Seller-related entity,
and DIRECTV and Darlene as Purchasers (the "GLA Purchase Agreement" and,
together with the Master Agreement, the "Agreements"). For purposes of this
discussion, (i) GLA, DIRECTV and Darlene are referred to as the "Purchasers" and
(ii) the Company, Galaxy Brasil Ltda., TVA Banda C Ltda, TVA Communications Ltd.
and TVA Finco Ltd. are referred to as the "Sellers".
Pursuant to the Master Agreement, the Company has agreed to sell all of
its interests in the following entities to GLA:
o Galaxy Brasil Ltda. ("Galaxy Brasil" or "GLB"), a wholly-owned
subsidiary of the Company and exclusive local operator of DIRECTV
Ku-Band service in Brazil; and
o TVA Banda C Ltda. ("TVA Banda C"), a subsidiary of the Company and
operator of TVA's C-Band service.
Pursuant to the GLA Purchase Agreement, the Company has agreed to sell all
of its interests in the following entities and assets to DIRECTV and Darlene:
o a 10% equity interest in GLA (subject to dilution as discussed
below), which the Company owns through its British Virgin Islands
subsidiary TVA Communications Ltd.;
o a 20.5% equity interest in SurFin Ltd. ("SurFin"), a Bahamian
limited liability company engaged in financing activities related to
DIRECTV service throughout Latin America;
o certain promissory notes (the "CBC 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) (the "CBC Warrants"),
dated as of April 11, 1997, convertible into equity interests in
CBC.
Galaxy Brasil and TVA Banda C are defined herein as the "Purchased Entities",
and those entities and the assets referred to above are referred to collectively
herein as the "Purchased Interests".
Pursuant to the Agreements, the obligation of the Purchasers to complete
the transactions contemplated by the Agreements is subject to the satisfaction
or waiver of a number of conditions precedent on or prior to the Closing Date,
including, but not limited to, the following:
o Compliance with Indenture. The Proposed Sale must comply in all
respects with the terms of the Indenture (as amended and
supplemented by the Supplemental Indenture) relating to the Notes.
In order to execute the Supplemental Indenture, the Company must
receive the consent of bondholders representing at least a majority
in aggregate principal amount of Notes (the "Requisite Consents")
prior to June 3, 1999, unless extended (the "Consent Expiration
Date"). Holders may not revoke their Consents or withdraw their
tenders of Notes after the Consent Expiration Date.
o Release of Subsidiary Guarantors. Upon the consummation of the
Proposed Sale, all obligations of each of GLB and TVA Banda C, as
Subsidiary Guarantors under the Indenture, must be automatically and
unconditionally released and discharged, and each of GLB and TVA
Banda C must cease to be a Subsidiary Guarantor under the Indenture.
In addition, the Purchasers must receive an Acknowledgment of
Release and Discharge, executed by the Trustee, acknowledging the
release of each of GLB and TVA Banda C from all of their obligations
as Subsidiary Guarantors under the Indenture.
o Approval of ANATEL. The Proposed Sale, which involves a transfer of
telecommunications assets and licenses related thereto, must be
approved by the Agencia Nacional de Telecomunicacoes (National
Telecommunications Agency or "ANATEL"), a regulatory body of the
Brazilian federal government.
o Absence of Material Adverse Change. The absence of any material
adverse change in relation to the business, operations or condition
of any of the Purchased Interests. A devaluation of the Brazilian
real may be deemed to be a material adverse change if either (a) the
closing spot exchange rate as of the day preceding the Closing Date
or (b) the average closing spot exchange rate for the period of five
business days preceding the Closing Date results in an exchange rate
of the Brazilian real to the U.S. dollar greater than R$2.39.
The Agreements are also subject to termination in certain circumstances,
including the following:
o Failure to Consummate the Consent Solicitation by June 15, 1999. The
Agreements may be terminated by the Purchaser if the Requisite
Consents pursuant to the Solicitation shall not have been obtained
on or prior to June 15, 1999.
o Failure of Closing to Occur by September 30, 1999. Either Agreement
may be terminated by any party thereto if the Closing shall not have
occurred on or before September 30, 1999.
o Failure to Consummate the Consent Solicitation by July 15, 1999. The
Agreements may be terminated by the Company if the Requisite
Consents pursuant to the Solicitation shall not have been obtained
on or prior to July 15, 1999.
On the Consent Expiration Date, assuming the Company has received the
Requisite Consents, in anticipation of the Closing GLA shall assume certain
management responsibilities in connection with the operation of GLB, which may
include providing or arranging financing for GLB, on a secured basis (to the
extent that secured financing can be incurred under the terms of the Indenture).
If the Closing of the Proposed Sale does not occur, GLA will relinquish such
management responsibilities back to the Company.
Pursuant to the terms of the Supplemental Indenture, the restrictive
covenants will be substantially eliminated, so that the Proposed Sale will not
result in any violation of, the Indenture. Upon consummation of the Proposed
Sale, all obligations of each of GLB and TVA Banda C under the Indenture shall
be automatically and unconditionally released and discharged in accordance with
Section 10.3(b) of the Indenture, and each of GLB and TVA Banda C shall cease to
be a Subsidiary Guarantor under the Indenture, in each case effective
immediately upon consummation of the Proposed Sale.
Sources of Funding for Payment of Tendered Notes
The net cash proceeds of the Proposed Sale to the Company at the closing
of the Proposed Sale (the "Closing") is expected to be approximately $140
million. The total consideration received by the Company will be comprised of
the following main components:
o in consideration for the Company's interests in GLA, SurFin, the CBC
Notes and the CBC Warrants, the Company will receive a cash payment
of $130 million;
o in consideration for the equity interests of the Company in GLB and
TVA Banda C, the Company will receive the following:
(a) a cash payment currently estimated to be $10 million
(consisting of a cash payment of $66.75 million, offset by
certain royalties and other amounts due to GLA through the
Consent Expiration Date under the Local Operating Agreement,
dated July 29, 1996, between GLA and GLB, and to Hughes
Electronics, in the amount of approximately $51 million as of
April 30, 1999, which amount is expected to increase to
approximately $57 million by the Consent Expiration Date);
(b) a promissory note issued by GLA to the Company in the
principal amount of $22.25 million, to bear interest at LIBID,
which shall be payable only at maturity of the Note in one
single payment two years from the Closing Date;
(c) the release and/or amendment of certain guarantees given by
the Company and TVA Sistema de Televisao S.A., a wholly-owned
subsidiary of the Company, in respect of certain GLB
obligations;
(d) the Purchasers shall acquire GLB and TVA Banda C subject to
the aggregate of dollar-denominated indebtedness of GLB and
TVA Banda C, up to a maximum of $111.2 million; and
(e) the Purchasers shall acquire GLB and TVA Banda C subject to
the aggregate of real-denominated indebtedness of GLB to
Abril, up to a maximum of R$70.9 million, to be repaid by GLB
to Abril in cash immediately following the Closing.
The consideration received by the Company for its equity interests in GLB
and TVA Banda C will be subject to an upward or downward adjustment in
accordance with certain purchase price adjustments based on the indebtedness and
working capital of GLB and TVA Banda C as of the Consent Expiration Date, and
for indemnification claims. Such adjustments may reduce the amount payable at
Closing and under the GLA Promissory Note.
Prior to the Consent Expiration Date the Company will have received from
Bear, Stearns & Co. an opinion indicating that the total consideration received
by the Company for the Purchased Interests is fair to the Company from a
financial point of view.
Concurrently with the consummation of the Proposed Sale, the net proceeds
to the Company from the Proposed Sale will be delivered to The Chase Manhattan
Bank, as Depositary, to fund the Total Consideration payable pursuant to the
Offer. To the extent that the net proceeds to the Company from the Proposed Sale
are less than the Total Consideration, the Company will obtain the remaining
funds required to satisfy the Total Consideration from either the net proceeds
of the sale of other assets of the Company or from a loan from its majority
shareholder, Abril.
Company Rationale for the Proposed Sale
The Proposed Sale represents, in management's opinion, the best
opportunity for addressing the Company's current financial situation.
Development of the Ku-Band business requires significant capital investment to
achieve profitability, and over the last three years the Company has committed
significant financial resources to the development and operation of its Ku-Band
service. The recent changes in the Brazilian economy coupled with the relatively
high cost of developing and operating the Company's Ku-Band service has
adversely affected the Company's cash flow, and has caused the Company to suffer
a significant liquidity shortage, leading to a deficiency in its net working
capital, and resulting in the Company being unable to meet certain of its
obligations, as more particularly described below.
The early stages of the development of a Ku-Band service in a developing
market such as Brazil require a substantial level of capital expenditures.
Acquiring Ku-Band subscribers requires high levels of advertising to educate
consumers about the characteristics and advantages of a satellite television
service, a well-developed sales network to market the product to prospective
subscribers, a customer service infrastructure capable of delivering a high
level of service and the ability to provide financing of consumer equipment
(mainly decoders), to subscribers. In the case of decoder costs, the devaluation
of the dollar against the real in the first quarter of 1999 caused a significant
increase in the cost in reais of equipment. These factors have adversely
affected the Company's cash requirements and liquidity and have caused the
Company's management to conclude that continued ownership of the Purchased
Entities would require levels of future operating and capital expenditures that
would be unduly burdensome for the Company to bear in the current financial
environment.
Arthur Andersen, the Company's independent accountants, has included in
its audit report of the Company's financial statements for the year ended
December 31, 1998 an "emphasis paragraph" which states that the Company's
financial statements have been prepared on the assumption that the Company will
continue as a going concern. In its report, Arthur Andersen has stated that the
Company has suffered recurring losses and has a negative working capital that
"raise substantial doubt about its ability to continue as a going concern". In a
footnote to the Company's financial statements relating to its working capital
deficiency, Arthur Andersen acknowledges that management's plans to continue as
a going concern include efforts to generate the necessary cash flow to meet the
Company's cost structure through sales of non-strategic assets, and an
administrative cost reduction program implemented in the fourth quarter of 1998.
As a result of the Company's allocation of financial resources in support
of the development and operation of its Ku-Band service, the Company lacks the
financial resources required to meet certain of its obligations. Beyond
financial support from its majority shareholder, Abril, the Company has lacked
access to alternative sources of funding. The Company has, since 1998, relied
upon Abril for loans to cover the cash demands, including interest payment on
the Notes. In early 1998 Abril capitalized $100 million previously lent to the
Company. Since that time Abril has lent more than $100 million. Despite these
injections of capital, the Company had negative working capital in excess of $82
million for the year ended December 31, 1998.
As indicated above, Abril has been a crucial source of financial support
and funding for the Company. However, so long as the financing markets limit
both the affordability and accessibility of capital for Abril, management of
Abril has indicated that it will not continue to fund the Company's capital
requirements and cash flow needs in the same manner as it has in the past.
Non-compliance by the Company with Certain Obligations and Restrictions, and
Non-payment of Capital Contributions
The Company has, as a consequence of its negative cash flow, liquidity
shortage and its lack of access to sources of capital, failed to comply with
certain obligations, including certain payment obligations and certain financial
covenants, and has not made several non-mandatory capital contributions to GLA,
which are summarized below. As discussed below, some of these failures may
result in the termination of certain material agreements, and may subject
the Company to the exercise of certain remedies, or the acceleration of certain
indebtedness, of the Company or GLB, or other consequences that could affect the
Company's ability to continue as a going concern.
o Accrued Royalty Payments to GLA. The Company has not made royalty
payments to GLA in accordance with the terms of the Local Operating
Agreement since August 1998. As of April 30, 1999 such unpaid amount
totaled approximately $51 million. Under the terms of the Local
Operating Agreement, GLA is entitled to terminate the Agreement for
failure by GLB to make royalty payments when due. If GLA were to
validly terminate the Local Operating Agreement, GLB would no longer
be entitled to operate the DIRECTV Service in Brasil, and would be
unable to service its current and future subscribers.
o Failure by GLB to Achieve Certain Subscriber Targets. The Local
Operating Agreement provides that if GLB does not reach certain
subscriber targets within prescribed time periods GLA has the right
to terminate GLB's exclusive right to operate the DIRECTV Service in
Brazil, or potentially the right to terminate the Local Operating
Agreement. At the present time GLB does not have the number of
subscribers prescribed by the Local Operating Agreement. The
potential consequence of this circumstance, at this time, would be a
loss of exclusivity to operate the DIRECTV Service in Brazil. There
is no assurance that GLA will not seek to terminate the exclusivity
GLB has enjoyed since initiating DIRECTV Service in Brazil in 1996.
If GLA were to validly terminate GLB's exclusivity, then GLB might
be forced to compete with another operator of DIRECTV Service in
Brazil, which could have a severe impact on GLB's ability to
maintain its current subscribers and to attract new subscribers.
o Indebtedness Payable to SurFin. GLB has incurred indebtedness to
SurFin in the aggregate outstanding principal amount of
approximately $71 million. Of that amount, approximately $60 million
was due and payable in August 1998. Since that time, SurFin has
granted to GLB successive extensions of the maturity date for such
indebtedness. Such extensions are, however, terminable at any time
in SurFin's sole discretion, and there is no assurance that SurFin
will continue to grant such extensions.
o Noncompliance With Certain Financial Covenants. GLB is currently not
in compliance with certain financial covenants (specifically the
debt to tangible net worth ratio covenant and the tangible net worth
covenant) contained in the Equipment Lease Agreement and the
Equipment Lease and Saleback Agreement, each dated as of July 30,
1996 between Citibank, N.A., as Lessor and GLB, as Lessee. Citibank
issued a waiver of those covenant defaults, valid for a period of
six months, from December 31, 1998 until June 30, 1999. However,
there is no assurance that Citibank would be willing to grant
further waivers at the end of such six-month period. In the event
that Citibank were to refuse to grant further waivers, Citibank may
have the right to exercise its remedies under the equipment lease
agreements. Currently the aggregate principal amount due to Citibank
under the two equipment lease agreements referred to above totals
approximately $30 million.
Although GLB may be able to raise certain defenses in the event of
legal actions arising out of any of the foregoing events, the
outcome of any such actions would be uncertain. In addition most of
GLB's financing documents (including the Indenture) contain
cross-default provisions that could be triggered by the enforcement
by any of the creditors mentioned above.
o Non-Contribution of Capital of GLA. The Company has not made
non-mandatory capital contributions to GLA in the amount of $12
million since November, 1998. Since that time, the other members of
GLA have made equity contributions to GLA on five separate
occasions. It is currently expected that additional capital
contributions to GLA will be requested of the Company in the amount
of an additional $11 million by the end of 1999, which amounts the
Company does not presently intend to fund. The consequence of this
is that the Company's equity interest in GLA is now subject to
dilution from its initial 10% interest and is likely to be subject
to further dilution during the remainder of 1999.
The financial crises in Brazil and other emerging markets have contributed
to, and aggravated, the Company's financial difficulties. Financial crises in
Southeast Asia and Russia in the fourth quarters of 1997 and 1998,
respectively, together with domestic economic difficulties, resulted in a
significant devaluation of the real in the first quarter of 1999 by the Central
Bank of Brazil, which allowed the real to float freely against major foreign
currencies. The devaluation, followed by a recession in Brazil, have had a
significant adverse effect upon the operations of the Company, and have
materially raised the cost of debt financing for the Company. First, the
devaluation of the real has caused a substantial increase in local currency
terms of the U.S. dollar-denominated debt burden of the Company. Second, the new
market conditions have significantly impaired the ability of the Company to
obtain financing on acceptable terms. Finally, the recession of the Brazilian
economy has created difficulties in maintaining and attracting new subscribers
and maintaining existing subscribers, in particular for Ku-Band services which
require a more expensive up-front equipment investment than other distribution
technologies and which require subscribers to make monthly decoder lease
payments.
For all the reasons set forth above, Management has concluded that the
Proposed Sale represents the best solution to resolve the financial situation of
the Company. If the Proposed Sale is not consummated, it is expected that the
Company would continue to suffer recurring losses and increasing negative
working capital. This would force the Company to seek to renegotiate its
obligations with its principal creditors, the failure of which could jeopardize
the Company's ability to continue as a going concern.
Programming Distribution and Markets
The following table sets forth information regarding the markets in which
TVA operates systems and distributes programming:
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 4,367,286 1,917,608 76,920 $38.23 30
Rio de Janeiro ....... March 1992 3,015,016 964,804 94,578 38.35 29
TVA Sul
Curitiba ............. March 1992 639,794 236,560 14,718 31.67 15
Cable(b)
TVA Sistema
Sao Paulo ............ October 1994 4,367,286 1,917,608 90,233 39.95 56
TVA Sul
Curitiba ............. January 1995 639,794 263,560 18,076 34.02 44
Camboriu ............. June 1996 37,618 22,686 6,892 36.54 51
Foz do Iguacu ........ June 1996 46,669 29,151 8,285 30.58 55
Florianopolis ........ September 1996 155,382 53,001 6,111 35.64 49
---------
Total MMDS and Cable
Subscribers .......... -- 315,813 -- --
DBS
TVA Banda C/Galaxy
Brasil(c) .............. March 1995 37,000,000 15,238,518 296,847 44.25 93(d)
Subscribers Awaiting
Installation ......... -- -- 13,766 -- --
---------
Total Subscribers-Owned
Systems .............. -- -- 626,426 -- --
=========
Households Receiving
TVA Programming
Owned Systems .......... -- -- 626,426 -- --
---------
Operating Ventures
MMDS
TV Filme, Inc. .........
Brasilia ............. July 1993 464,473 273,135 47,733 $38.60 24
Goiania .............. December 1994 319,434 140,498 8,951 26.64 24
Belem ................ December 1994 197,293 123,820 20,385 33.15 24
Cable
Canbras TVA
Four cities(e) ....... April 1996 222,358 152,773 59,036 -- 50
---------
Total-Operating Ventures
Independent Operators .. -- -- -- 136,105 -- --
=========
(52 Independent
Operators) ........... -- -- -- 449,008 -- --
---------
Total .................. -- -- -- 1,211,539 -- --
=========
(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 701,859, 196,223, 18,055,
19,900 and 29,822 Homes Passed, respectively, as of December 31, 1998.
(c) This data reflects the Company's digital Ku-Band and digital C-Band
operations. TV Homes and Class ABC TV Homes information is national
information for all of Brazil.
(d) Represents Ku-Band operations. C-Band operations provide 26 channels
(including nine SAP channels).
(e) The four cities served by Canbras TVA are Santo Andre, Sao Bernardo,
Guaruja and Sao Vicente.
2
Brazilian Pay Television Market
Brazil is the largest television and video market in Latin America with an
estimated 37.0 million TV Homes which, as of December 31, 1998, watched on
average approximately 2.5 hours of television per day. Approximately 7.8 million
television sets and 2.4 million VCR units were sold in Brazil during 1997. The
pay television industry in Brazil began in 1989 with the commencement by the
Company of UHF service in Sao Paulo. As of December 31, 1998, there were an
estimated 2.6 million pay television subscribers, representing approximately
7.0% of Brazilian TV Homes. By comparison, as of December 31, 1998, 56.1% of TV
Homes in Argentina, 14.0% of TV Homes in Mexico and 76.5% of TV Homes in the
United States 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 DBS Systems. The Ministry of
Communications estimates that Brazil will have 6.0 million pay television
subscribers by 2003.
Ownership
Tevecap is a majority owned subsidiary of Abril S.A. ("Abril") and
benefits from Abril's extensive experience in the business of subscriptions and
distribution, advertising synergies, common research resources and financial
analysis and support. Certain of Tevecap's other shareholders provide the
Company with access to additional international programming and certain
technical and financial expertise. As of December 31, 1998, the Company's
shareholders had invested, in aggregate, approximately $388.0 million in the
Company, and Tevecap's ownership was as follows: Abril, 62.2%; Falcon
International, 12.3%; Hearst, 8.7%; ABC, 8.7%; and CMIF, 8.1%.
Distribution Operating Systems
The following description is qualified in its entirety by reference to the
agreements entered into as of May 18, 1999 among the Company, Abril and certain
subsidiaries of the Company to sell the Company's DBS Systems to Galaxy Latin
America, DIRECTV Latin America, Inc. and Darlene Investments Ltd. See "Recent
Developments."
TVA and the Operating Ventures distribute programming through four
different technologies: MMDS, Cable, digital Ku-Band and digital C-Band. The
availability of multiple distribution technologies enables the Company to
exploit the population and income 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. In 1998 the Company
accelerated efforts to convert MMDS subscribers to the Company's Cable services.
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 the Company's MMDS systems use addressable
converters, which permit the Company 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. See "--Regulatory Framework." MMDS is being used in other emerging pay
television markets such as Venezuela, Hong Kong and Mexico, where Cable has a
strong incumbent position.
3
TVA owns five MMDS licenses and operates MMDS systems in Sao Paulo, Rio de
Janeiro and Curitiba, which have an aggregate population of approximately 17.4
million. TVA serves 186,214 MMDS subscribers in these three cities. The MMDS
systems of TVA offer between 15 and 27 channels of programming. TVA also holds
interests in three MMDS licenses through TV Filme, an Operating Venture, which
operates MMDS systems in Brasilia, Goiania and Belem and has 77,519 MMDS
subscribers. See "--Regulatory Framework--MMDS Regulations."
Cable
TVA has recently emphasized the strategic deployment of Cable service and
currently operates Cable systems in Sao Paulo, Curitiba and three other cities.
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 consisting of 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 the Company'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. The Company's systems in Curitiba, Camboriu and Foz
do Iguacu are being upgraded to 750 MHz bandwidth capacity. The Company's system
in Florianopolis is being constructed to 550 MHz bandwidth capacity. It is
expected that this technology will enable the Company to provide interactive
services, including telecommunications in the future. In addition, the Company'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 11.9 million and
129,597 subscribers. As of December 31, 1998, TVA had deployed approximately
3,865 kilometers of its Cable network, including 1,057 kilometers of fiber optic
cable, including a 940 kilometer fiber optic loop in Sao Paulo and a 117
kilometer fiber optic network in Curitiba. The Company is also upgrading or
constructing the Cable systems in Curitiba, Camboriu and Foz do Iguacu. As a
result of this buildout, as of December 31, 1998, TVA Cable systems passed
712,855 homes in Sao Paulo, approximately 194,517 homes in Curitiba and a total
of 976,854 homes throughout all of the Company's Cable systems. As of December
31, 1998, Canbras TVA, an Operating Venture, had an existing Cable network of
1,407 kilometers, with 356,478 Homes Passed and 59,306 subscribers. Canbras TVA
is constructing Cable networks in ten cities in the greater Sao Paulo area with
a combined population of over 2.8 million. By comparison, TVA's largest
competitor in Sao Paulo for Cable service had, as of the same date, 1.0 million
Homes Passed. TVA and Canbras TVA currently offer between 50 and 56 analog
channels of programming (including off-air channels) on their Cable systems,
depending on the market, and have the capability of offering up to 78 analog
channels. During the year ended December 31, 1998, TVA and Canbras TVA averaged
approximately 3,000 and 2,300 net new Cable subscribers per month, respectively.
DIRECTV
The following description is qualified in its entirety by reference to the
agreements entered into as of May 18, 1999 among the Company, Abril and certain
subsidiaries of the Company to sell the Company's DBS Systems to Galaxy Latin
America, DIRECTV Latin America, Inc. and Darlene Investments Ltd. See "Recent
Developments."
In July 1996, TVA launched Brazil's DIRECTV service, Brazil's first
Ku-Band service, operated by Galaxy Brasil. Galaxy Brasil receives programming
from GLA, including programming which GLA purchases from TVA. Additionally, GLA
provides scheduling and related services to Galaxy Brasil for use with DIRECTV.
GLA distributes programming to Brazil through the transmission of an encoded
signal via the Galaxy VIII-i satellite (launched in December 1997 and replacing
the Galaxy III-R satellite) utilizing 32 transponders to a
4
subscriber's 60 centimeter dish antenna which can be mounted outside a window or
on a rooftop. The signal is then transmitted to an integrated receiver decoder
(an "IRD") in the subscriber's home. A single antenna may serve a single family
dwelling or a multifamily dwelling, such as an apartment building, in which case
each apartment needs to be equipped with a decoder. A unit of Hughes Electronics
leases the Galaxy VIII-i satellite and provides the use of the satellite and
related services to GLA, which, in turn, charges Galaxy Brasil a royalty on a
per subscriber basis for the use of the satellite transponders and related
services. The orbital location of the Galaxy VIII-i satellite enables the
Company to offer more than 150 channels through DIRECTV service to substantially
all of the TV Homes in Brazil, substantially all of which are able to use a
60-centimeter dish antenna due to the Galaxy VIII-i's expanded footprint. In
addition, the Galaxy VIII-i satellite provides a significant improvement in
signal quality, even under adverse weather conditions, although tall buildings
and other tall structures may block reception of the DIRECTV programming signal.
With DIRECTV service, TVA provided 93 channels of video programming (including
35 pay-per-view channels) and 35 channels of audio programming as of December
31, 1998. TVA owns a satellite uplink center for the Brazilian DIRECTV service
in Tambore in greater Sao Paulo (the "Tambore Facility"). The Tambore Facility
is used to uplink programming to the Galaxy VIII-i satellite.
C-Band
TVA has offered C-Band service since 1993, and is the only pay television
operator to deliver a digital C-Band signal in Brazil. TVA's C-Band service
consists of the transmission of a digital encoded signal via the Brasilsat
satellite utilizing four transponders to a satellite antenna 1.1 meters in
diameter located at a subscriber's home, where the signal passes through an
integrated receiver decoder. A single antenna may serve a single family dwelling
or a multifamily dwelling, such as an apartment building, in which case each
apartment needs to be equipped with a decoder. The Brasilsat satellite was
launched in July 1994 and is owned by Empresa Brasileira de Telecomunicacoes
(Brazilian Telecommunications Company, or "Embratel"), the recently-privatized
national long-distance carrier authorized to provide satellite
telecommunications services utilizing the Sistema Brasileiro de Telecomunicacoes
por Satelite (Brazilian Satellite Telecommunications System, or "SBTS"). TVA
utilizes the Brasilsat satellite pursuant to three satellite transponder leases
that expire on May 30, 2002, November 20, 2003, and November 24, 2003,
respectively. The orbital location of the Brasilsat satellite enables TVA to
provide C-Band service throughout Brazil with little or no interference.
However, tall buildings and other tall structures may block reception of C-Band
programming. The Brasilsat satellite has an expected useful life of
approximately 12 to 15 years from the date of launch.
TVA's C-Band service provides the Company with national coverage via
satellite transmission and a large preinstalled market. As of December 31, 1998,
there were approximately 4.5 million parabolic C-Band antennae in use in Brazil,
most of which receive only off-air channels. TVA is able to deliver 38 channels
of programming (including nine SAP channels) in addition to the off-air channels
and currently delivers 26 channels (including nine SAP channels) as compared to
the six channels in addition to the off-air channels offered by its only
significant competitor for this service. As of December 31, 1998, TVA provided
service to 70,403 C-Band subscribers throughout much of Brazil.
The Owned Systems
The following description is qualified in its entirety by reference to the
agreements entered into as of May 18, 1999 among the Company, Abril and certain
subsidiaries of the Company to sell the Company's DBS Systems to Galaxy Latin
America, DIRECTV Latin America, Inc. and Darlene Investments Ltd. See "Recent
Developments."
TVA Sistema, TVA Sul and TVA Banda C
TVA Sistema and TVA Sul operate the Company's MMDS and Cable businesses.
TVA holds a 98.0% equity interest in TVA Sistema, and Robert Civita, a Brazilian
national, holds the remaining 2.0% equity interest. The Company holds an 86.0%
equity interest in TVA Sul, and Abril holds the remaining 14.0%. In November
1998, TVA's C-Band operations were transferred to TVA Banda C, in which TVA
holds a 100% equity interest.
5
GLA and Galaxy Brasil
Pursuant to a Partnership Agreement, dated February 13, 1995, GLA was
formed as a general partnership. As of April 11, 1997, GLA was converted into a
Delaware limited liability company. Such conversion did not materially affect
the governance of GLA or TVA's ownership interest in GLA. Under a Limited
Liability Company Agreement, dated April 11, 1997 (the "GLA Agreement"), GLA is
managed by a seven-member Executive Committee to which DIRECTV Latin America,
Inc. ("DLA") can appoint five members and each of the other partners, including
Tevecap, can appoint one member as long as such partner holds at least an eight
percent equity interest in GLA. The GLA Agreement provides for local operating
agreements between GLA and local operators throughout South America, Central
America, Mexico and the Caribbean which govern the relationship between GLA and
such local operator. The GLA Agreement stipulates that the local operator in
Brazil shall be Galaxy Brasil, 100.0% of the equity interest of which is owned
by Tevecap. The Company has made a total of $42.4 million in capital
contributions under the GLA Agreement as of December 31, 1998. The GLA Agreement
places restrictions, including first negotiation, approval and tag-along rights,
on the transfer of capital stock or voting securities of each of the current
partners in GLA and in certain circumstances their parent entities. GLA's uplink
facility is owned and operated by California Broadcast Center, LLC ("CBC"), a
Delaware limited liability company formed on April 11, 1997 and owned by two
units of Hughes Electronics.
Pursuant to a Local Operating Agreement (the "Local Operating Agreement")
between GLA and Galaxy Brasil, dated July 29, 1996, GLA has agreed to provide to
Galaxy Brasil the exclusive right and ability to supply the DIRECTV service in
Brazil. In accordance with a formula based on the number of subscribers, Galaxy
Brasil is obligated to pay a periodic royalty to GLA. In addition, TVA may not
own or engage in any other Ku-Band service and GLA may not own or engage in any
other pay television service in Brazil. GLA, upon the occurrence of certain
events, has the right to terminate the Local Operating Agreement, or to
terminate Galaxy Brasil's exclusive rights to distribute DIRECTV programming.
Such events include breach of any material obligation of Galaxy Brasil to GLA
and the failure of Galaxy Brasil to meet certain specified performance goals. As
of April 30, 1999 Galaxy Brasil had failed to make royalty payments of
approximately $51 million to GLA. For a more detailed discussion of Galaxy
Brasil's failure to make these royalty payments, and to meet certain subscriber
targets, see "Recent Developments".
The Operating Ventures
The Operating Ventures also operate MMDS (TV Filme) or Cable (Canbras TVA)
systems. TVA holds a 36.0% equity interest in each of Canbras TVA Cabo and TV
Cabo Santa Branca (the "Canbras TVA Companies"). Canbras Participacoes Ltda., a
Brazilian company ("Canbras-Par") holds the remaining interests in Canbras TVA
Cabo and TV Cabo Santa Branca. 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 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 agreed to supply to the Canbras TVA companies 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 will continue to provide MMDS service, where
possible, to customers in the Santo Andre and Sao Bernardo operating area of the
Canbras TVA Companies until cable service is available in these areas. Canbras
TVA Cabo and TV Cabo Santa Branca will compensate TVA for each subscriber that
transfers from TVA's MMDS system to a Canbras TVA Cable system. The Company
agreed to grant to Canbras-Par a "right of first refusal" to participate in
Cable licenses that the Company may obtain, directly or indirectly, and
Canbras-Par granted to the Company 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 will be negotiated in good faith, on a case-by-case basis, in
connection with any future cable license investments.
6
TVA holds a 14.7% equity interest in TV Filme. The remaining interests are
held by Warburg, Pincus Investors, L.P., which currently holds a 38.8% equity
interest; members of the Lins family, Brazilian nationals, who currently hold a
16.2% equity interest; public shareholders, who currently hold 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.
Pursuant to a programming agreement, TVA provides programming to TV Filme, and
TV Filme has agreed to use 50.0% of the channel capacity of each of its MMDS
systems in Brasilia, Goiania and Belem (the "TV Filme Service Area") to
broadcast TVA programming so long as (i) the quality of TVA programming, in the
reasonable judgment of TV Filme, remains compatible with the taste and standards
of TV Filme's subscribers, (ii) TVA continues to own, directly or indirectly,
10.0% of TV Filme's common stock and (iii) TVA remains a subsidiary of Abril.
Within the TV Filme Service Area, TVA may not provide TVA programming to any
Cable or other MMDS pay television service provider and TVA may not compete with
TV Filme as an MMDS service provider. TV Filme also has a nonexclusive license
to TVA programming in 19 cities in which TV Filme has pending license
applications, subject to any exclusive license previously granted by TVA to
other pay television service providers in such cities and which exclusive
license TVA, using its best efforts, is unable to renegotiate to allow TVA to
provide for TV Filme to have a nonexclusive license. TVA may not charge TV Filme
an amount greater than the minimum rates charged by TVA to other subscription
television operators, nor may such charges exceed comparable rates for other
programming of a similar nature. The terms of the programming agreement
terminate on July 20, 2004. From time to time, in connection with the
programming agreement, TV Filme has agreed to enter into additional agreements
with the Company regarding specified channels. The agreements typically have two
year terms and determine the monthly fees which TV Filme pays for such channels.
Programming
TVA
TVA, through its MMDS, Cable and C-Band 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 ESPN Brasil, HBO Brasil, HBO Brasil 2, Cinemax, E!
Entertainment Television, Mundo, Bravo Brasil, Locomotion, NHK, ART and CMT. In
addition, TVA has distribution rights to certain of Brazil's most important
soccer championships, including the Brazilian Cup and the Sao Paulo and Rio de
Janeiro State Championships. TVA has entered into two Programming Ventures, ESPN
do Brasil Ltda. ("ESPN Brasil Ltda.") and HBO Brasil Partners, through which it
distributes a large volume of programming which management believes is
especially important to its subscribers. ESPN Brasil Ltda. is a joint venture
between Tevecap and ESPN Brazil, Inc. (a subsidiary of ESPN, Inc.), each of
which holds a 50.0% equity interest. ESPN, Inc. is a joint venture between ABC
and Hearst. ESPN, Inc. provides the programming of the U.S. channel ESPN2 to
ESPN Brasil Ltda., which packages such programming with Brazilian and other
international content and provides such packaged programming to TVA. Pursuant to
a Quotaholders Agreement, dated June 26, 1995 (the "ESPN Agreement"), ESPN
Brasil has the right to transmit "ESPN2 Service" programming as well as all
library programming of ESPN. The Company has the exclusive right to broadcast
the programming of ESPN Brasil Ltda. in Sao Paulo, Rio de Janeiro, Curitiba,
Brasilia, Belem and Goiania. The Company also acts as the exclusive sales
representative of ESPN Brasil programming with respect to sales to other
Brazilian pay television providers and receives a commission in connection
therewith. The Company is also the sole advertising agent for ESPN Brasil until
June 1999 and receives a commission on advertising sales. ESPN Brasil Ltda., in
turn, receives on an exclusive basis from the Company all rights to soccer and
other sporting events acquired by the Company after February 24, 1995. ESPN
Brazil, Inc. has the right to terminate the ESPN Agreement and dissolve ESPN
Brasil Ltda. in the event that a Brazilian court issues a non-appealable
decision that the Company did not have the right to grant these rights to ESPN
Brasil. TVA's mandatory capital contributions to ESPN Brasil Ltda. are subject
to a maximum aggregate amount of $5.0 million, whether in the form of loans or
subscriptions for additional quotas. The ESPN Agreement is effective until June
17, 2045 and automatically renewable for a 50-year period.
7
HBO Brasil Partners is a joint venture between TVA, which as of December
31, 1998, held a 24.0% equity interest, and HBO Ole Partners, a joint venture
among Time-Warner, Sony, Ole Communications, Inc. and BVI Television
Investments, Inc. (an affiliate of Disney Enterprises, Inc.), which as of the
same date held the remaining 76.0% equity interest. HBO Brasil Partners has
exclusive programming contracts with Sony, Time-Warner and certain independent
programming distributors. HBO Brasil Partners, through an affiliate, provides
the programming for HBO Brasil to TVA. Pursuant to a Partnership Agreement dated
April 15, 1994 (the "HBO Agreement"), HBO Brasil Partners is managed by a
Partners' Committee comprised of an equal number of agents appointed by TVA and
HBO Ole Partners, the other partner. The HBO Agreement provides for the Company
to enter into an affiliation agreement with HBO Brasil Partners, pursuant to
which the Company pays a monthly fee per subscriber to the partnership.
In addition to the Programming Ventures, 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) and Discovery Latin America (People &
Arts, Discovery Brasil, Discovery Kids).
Eurchannel is a channel assembled and distributed exclusively by TVA with
programming acquired from prominent European distributors, such as Canal +, BBC,
Channel 4, TF1, France 2/3, Europe Images and Gaumont. Eurochannel's programs,
which include European movies, series, mini-series, music specials, concerts,
interviews, news, fashion shows, drama and comedies, are broadcast in the
original European language with subtitles in Portuguese.
TVA distributes its programming through its own operations and through
sales of programming to the Operating Ventures, the Independent Operators and,
to a lesser extent, to competing pay television providers.
TVA currently offers subscribers the following channels, among others:
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 channel. TVA also offers HBO Brasil 2,
transmitting HBO Brasil films with a six hour time shift. Recently, in some
locations, TVA began offering Cinemax, an HBO premium movie channel with a film
library complimentary to that of HBO.
ESPN Brasil, offered exclusively by TVA, began transmission on June 17,
1995. TVA negotiated agreements with the major Brazilian soccer confederations,
providing TVA coverage of soccer games of the Sao Paulo State Championship and
the Brazil Cup. ESPN Brasil's programming centers around these 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, for which
TVA recently signed a new non-exclusive 50-year contract automatically renewable
for another 50-year period. 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. ESPN International also currently provides
Portuguese language commentaries exclusively to TVA.
CNN International features news and information programming, offering
international news coverage concerning politics, business, financial and
economic developments, 24 hours a day.
TNT is a movie channel which, pursuant to a non-exclusive agreement with
Turner International, Inc., offers the Turner Network Television movie
collection, including over 5,000 classic movie titles from MGM. In addition, TNT
airs children's programming, documentaries and sporting events. The movies
presented by TNT are
8
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.
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 Brasil is comprised of programming shown on the US Discovery
Channel, based on topics in the areas of nature, science and technology,
history, adventure and world cultures. Recently, TVA began offering Discovery
Kids, a 24-hour channel featuring the best of Discovery programming for
children.
The Fox Channel presents movies, as well as programs from the 2,000 titles
in Fox's library. Fox also presents American television series, such as L.A.
Law, M*A*S*H, and The Simpsons, among many others. Recently, TVA began offering
Fox Kids, a 24-hour channel featuring the best of Fox programming for children.
Eurochannel is specially assembled and packaged by TVA and offers
subscribers European programming. The channel presents programs from the Spanish
Radiotelevision Espanola, the German Deutsche Welle, the BBC, the news from the
French TF1, as well as a variety of quality European films. News, sports, music
and variety shows are also offered.
MTV Brasil is a 24-hour channel produced by MTV Brasil, a joint venture
company owned by Abril and an indirect subsidiary of Viacom International. 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.
Sony Entertainment is primarily a situation-comedy channel, consisting of
Sony's film library, including Friends, Seinfeld, Mad About You and E.R.
The Warner Channel is a family entertainment channel, with new and classic
cartoons, children's programs and movies.
Bravo Brasil 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. TVA inserts
local programming, such as Brazilian music and movies, as well as shows
performed in Brazil by international artists.
CMT-Country Music Television is a 24-hour channel with the best of country
music programming, including videoclips, shows and interviews with the famous
American country artists. CMT programming contains a special block featuring
Brazilian artists.
Mundo presents 24 hours per day of documentaries, biographies and great
moments in sports, music and history, including selected programming from the
History Channel.
Cinemax is a 24-hour movie channel offering a different variety of movie
each day of the week.
E! Entertainment Television presents 24 hours per day of reports regarding
movies, television, fashion and the arts.
CBS Telenoticias is the first international news channel in the Portuguese
language. Its programming includes international news, the most important news
from Brazil and other Latin American countries, as well as selected programs and
documentaries from CBS/Eye on People.
9
MGM Gold is a movie and series channel with selected productions from the
Metro-Goldwin-Mayer studios.
People+Arts is a 24-hour channel presenting documentaries about arts,
personalities and cultures from different countries around the world.
Nickelodeon is a 24 hour channel for children offering programs such as
Rugrats and Bananas in Pijamas.
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.
Locomotion is an animation channel with programming targeted to
adolescents and adults, such as Dr Keds and South Park.
Teleuno is a films and series channel with emphasis on action and
adventure.
Hallmark features mainly original TV movies.
Adulto is an adult entertainment assembled locally.
TVA's channel offerings as of December 31, 1998 included the following:
Channel Description
- ------- -----------
HBO Brasil................................ movie channel
HBO Brasil 2.............................. HBO Brasil with a six-hour time shift
ESPN Brasil............................... sports channel
ESPN International........................ sports channel
CNN....................................... news channel
TNT....................................... movie channel
Cartoon Network........................... cartoon channel
Discovery Brasil.......................... science and documentary channel
Fox Channel............................... movie channel
Eurochannel............................... European variety programming channel
MTV Brasil................................ music channel
RTPi...................................... Portugal's state television channel
CMT....................................... music channel
TV5....................................... French variety programming channel
WorldNet.................................. American news and variety channel
RTVE...................................... Spanish variety channel
Deutsche Welle............................ German variety channel
America 2................................. Argentine variety channel
TeleUno................................... Variety channel
Sony Entertainment........................ situation comedy channel
The Warner Channel........................ family entertainment channel
Bravo Brasil.............................. arts and movies channel
Cinemax................................... movie channel
Mundo..................................... documentary channel
E! Entertainment Television............... American variety channel
10
Channel Description
- ------- -----------
MGM Gold.................................. movies and series channel
NHK....................................... Japanese variety programming channel
RAI....................................... Italian variety programming channel
ART....................................... Arabian variety programming channel
CBS Telenoticias.......................... news channel
Discovery Kids............................ documentary channel
Nickelodeon............................... cartoon channel
People+Arts............................... documentary channel
Fox Kids.................................. cartoon channel
CNN Espanol............................... news channel
America 2................................. Argentine sports channel
CV Noticias............................... Argentine news channel
Dubai..................................... Arabian variety programming channel
Hallmark.................................. movie channel
Adulto.................................... adult movie channel
Locomotion................................ animation channel
SBT....................................... national off-air channel
Globo..................................... national off-air channel
CNT/Gazeta................................ national off-air channel
Bandeirantes.............................. national off-air channel
Record.................................... national off-air channel
Manchete.................................. national off-air channel
Cultura................................... national off-air channel
CBI....................................... local off-air channel
Rede Mulher............................... local off-air channel
Rede Vida................................. local off-air channel
TV Senado................................. local off-air channel
TV Educativa Rio.......................... local off-air channel
TV Camara................................. local off-air channel
TV Legislativa............................ local off-air channel
Canal Comunitario......................... local off-air channel
Canal Universitario....................... local off-air channel
Canal de Sao Paulo........................ local off-air channel
Canal 21.................................. local off-air channel
Rede Gospel............................... local off-air channel
TV Educacao............................... local off-air channel
TV no ar.................................. preview channel
DIRECTV
The following description is qualified in its entirety by reference to the
agreements entered into as of May 18, 1999 among the Company, Abril and certain
subsidiaries of the Company to sell the Company's DBS Systems to Galaxy Latin
America, DIRECTV Latin America, Inc. and Darlene Investments Ltd. See "Recent
Developments."
The DIRECTV programming package offered by Galaxy Brasil as of April 1,
1999 consisted of 93 video channels (including 35 pay-per-view channels),
certain of which, such as Bravo Brasil, CMT Brasil and
11
Eurochannel, are provided by TVA, and 33 audio channels. Programming includes
movies, news, athletic events and other programs available on a pay-per-view
basis. The DIRECTV service channel offerings, other than pay-per-view, as of
December 31, 1998, included the following:
Channel Description
- ------- -----------
HBO Brasil............................... movie channel
HBO Brasil 2............................. HBO Brasil with a six-hour time shift
ESPN Brasil.............................. sports channel
ESPN International....................... sports channel
Eurochannel.............................. European variety programming channel
CMT Brasil............................... music channel
E! Entertainment Television.............. American variety channel
Mundo.................................... documentary channel
MGM Gold................................. movies and series channel
MTV Brasil............................... music channel
MTV Latino............................... music channel
RTPi..................................... Portugal's state television channel
CNN International........................ news channel
CNN Espanol.............................. news channel
CBS Telenoticias......................... news channel
TNT...................................... movie channel
Cartoon Network.......................... cartoon channel
Discovery Brasil......................... science and documentary channel
Sony Entertainment....................... situation comedy channel
Bravo Brasil............................. art and movie channel
Deutsche Welle........................... German variety channel
TVE...................................... Spanish variety channel
Tele Uno................................. Spanish variety channel
Warner Channel........................... family entertainment channel
CBS Telenoticias......................... CBS news channel in Spanish
Bloomberg................................ business news channel
Multipremier............................. Mexican movie channel
ZAZ...................................... Mexican children's programming channel
Travel Channel........................... travel programming channel
NHK...................................... Japanese general entertainment channel
TV Chile International................... Chilean programming channel
Locomotion............................... children's programming channel
Disney Weekend........................... children's programming channel
BBC World................................ world news channel
TV Chile................................. Chilean programming channel
Playboy TV............................... adult programming channel
AdulTVision.............................. adult programming channel
Venus.................................... adult programming channel
Classe................................... education channel
Hallmark................................. television movie channel
People & Arts............................ documentary channel
RAI International........................ Italian variety channel
12
Channel Description
- ------- -----------
TV Senac.................................. educational channel
Animal Planet............................. wildlife programming channel
Rede Vida................................. religious channel
Clima Brasil.............................. weather channel
Clima Mercosul............................ weather channel
Directv Sports............................ sports channel
CNN FN.................................... news channel
CNN SI.................................... news channel
TV5....................................... French language programming
ART....................................... Arabian variety programming channel
MCM....................................... music channel
35 audio channels......................... music channels
Operations
Marketing. The Company 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) prewiring 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. Ku-Band satellite service typically involves
installation of a 60-centimeter dish antenna, which can be mounted outside a
subscriber's window or on the rooftop of a subscriber's building or house,
together with a decoder located at the subscriber's dwelling. As with Ku-Band
service, C-Band service installation includes the installation of a dish
antenna, although of a greater size (1.1 meters in diameter) and a decoder and
related equipment at the subscriber's home. DBS installations at single-family
homes require an entire installation package, while installations at multiple
dwelling units in which drop lines are installed require only a decoder at each
subscriber's location and therefore are less costly to the Company. Once a new
subscriber has requested service, the amount of 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, whether the topography of the
surrounding area makes MMDS service viable and whether the subscriber is located
in an area of Brazil that can be reached by C-Band or Ku-Band service. TVA
provides installation service with its own personnel and through local
subcontractors. TVA or such subcontractor attempts to complete installation and
begin service within 30 days of a subscription order.
Uplink Facilities. A major part of the delivery of TVA's DBS service,
whether Ku-Band or C-Band, is the collection of programming and the
transmission, or uplinking, of such programming to the Galaxy VIII-i satellite
and the Brasilsat satellite, respectively. Upon receipt of programming, the
Company processes, compresses, encrypts, multiplexes (combines with other
channels) and modulates (prepares for transmission to the satellite at a
designated carrier frequency) such programming. The Company uses the uplink
facilities of Embratel in Sao Paulo to service its existing C-Band service. TVA
delivers its programming to the Embratel uplink center via microwave
transmission, where it is prepared for transmission to the Brasilsat satellite
using equipment provided by TVA. With respect to DIRECTV service, TVA
constructed the Tambore Facility, an uplink center in Tambore in the State of
Sao Paulo.
13
The Tambore Facility, which consists of an uplink antenna and ancillary
equipment, has operated since June 1996 and is used to uplink Brazilian
programming to the Galaxy VIII-i satellite. Through the Galaxy VIII-i satellite,
programming from Brazil is mixed with programming from provided by GLA through
the California Broadcast Center in Long Beach and with programming provided by
GLA's local operating companies through uplink facilities in Mexico, Venezuela
and Argentina for delivery to subscribers in Brazil and other countries to which
GLA provides DIRECTV service. The Tambore Facility and the uplink facilities in
Venezuela, Mexico and the United States are equipped with full emergency power
generation equipment and other emergency facilities to enable GLA to avoid
signal disruptions. In connection with the establishment of CBC, TVA
Communications and Tevecap have agreed, pursuant to an Indemnification
Agreement, dated April 11, 1997 (the "Indemnification Agreement"), to provide
certain indemnities in favor of GLA, CBC and its shareholders. To secure its
obligations under the Indemnification Agreement, Tevecap has agreed to pledge
its equity interest in GLA, as well as any future notes or interest it may hold
relating to the uplink facility.
Programming Facilities. Programming equipment is used to prepare the
programming material for transmission via the Company's MMDS, Cable or DBS
Systems, including compression with respect to Cable and Ku-Band service. 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.
Compression System. The Company also uses its programming facilities to
digitize the programming signals used in TVA's Cable and Ku-Band service.
Digital technology permits the compression and transmission of a digital signal
to facilitate multiple channel transmission through a single channel's
bandwidth, thereby giving broadcasters the ability to offer significantly more
channels than is currently the case with analog systems. Digitized signals are
compressed using the MPEG-1 and MPEG-2 standards. (Moving Pictures Expert Group,
the international video compression standard).
Conditional Access System. GLA and News Digital Systems Limited ("NDS"), a
wholly-owned subsidiary of News Corporation, are parties to a System
Implementation and License Agreement. Under the Local Operating Agreement, GLA
provides to Galaxy Brasil the use of the access control system licensed from NDS
and the Smart Cards provided by NDS. The Company expects the access control
system to adequately protect DIRECTV programming from unauthorized access. With
Smart Card technology, it is possible to change the access control system in the
event of a security breach allowing TVA to reestablish security. Management
believes that the ability to take electronic measures and to replace the Smart
Cards will provide an effective means to combat unauthorized programming access.
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 quicker service, TVA is working to decentralize its
subscriber service operations by opening small service offices throughout TVA's
served markets.
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 are an integral part of its strategy to maintain high
levels of subscriber satisfaction and to maximize subscriber retention.
Subscribers select the day of the month on which payment for that month's
service is due, and pay their bills at a bank through direct transfers, which is
the standard payment method in Brazil.
14
Competition
General
TVA and the Operating Ventures compete with pay television service
providers using Cable, MMDS and DBS transmission technologies. The Company
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. The Company and the
Operating Ventures also compete with national broadcast networks and regional
and local broadcast stations. TVA's MMDS and Cable operations and its C-Band
satellite service and Ku-Band satellite service may compete for the same
subscribers.
MMDS and Cable Service
The Company 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. and Net Sul Comunicacoes S.A.
("Net Sul"). On September 4, 1998, the shareholders of Multicanal Participacoes
("Multicanal") approved a transaction with Globo Cabo Holding "(GC Holding"),
its controlling shareholder, pursuant to which the cable television and MMDS
operations of Globo Cabo Participacoes ("GC Par"), a wholly-owned subsidiary of
GC Holding, were merged with an into Multicanal in a share-for-share exchange.
Concurrently, the merged company was renamed Globo Cabo S.A. ("Globo Cabo"). 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.
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 controlled cable
operations 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 the southern of 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. 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 service. Each of these systems
broadcasts programming purchased from TVA as well as from other sources.
DBS Service
The Company's principal competitor in Ku-Band service is Net Sat Servicos
Ltda. ("Net Sat") in which Globo Par also has a controlling interest and whose
other equity holders include News Corporation plc, a subsidiary of The News
Corporation Limited. TVA's Ku-Band service currently offers 128 channels of
audio and video programming, including 35 pay-per-view channels, as compared to
the 110 audio and video channels of programming offered by Net Sat (including
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. With respect to C-Band service, after the implementation of a
conversion program by Net Sat in which its C-Band subscribers were converted to
Ku-Band service, TVA became the sole provider of C-Band service in Brazil.
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
15
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, Bandeirantes, TV Manchete, TV Record and
Gazeta/CNT. The national television networks utilize one or more satellites to
retransmit their signals to their local affiliates throughout Brazil.
Programming Sales
TVA competes with a variety of Brazilian and international programming
providers for sales of its programming to the Operating Ventures and Independent
Operators. In addition, TVA competes with other pay television operators to
purchase programming from some of these Brazilian and international sources.
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
16
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 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:
17
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 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 51.0% 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
18
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.
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 holds 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,
prices 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,
19
although a simplified licensing procedure for high-speed Cable data services may
be installed by ANATEL in the future.
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 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.
Satellite Service Regulation. On October 1, 1991, the Ministry of
Communications enacted Ordinance No. 230 to regulate telecommunications services
via satellite in Brazil ("Ordinance 230"). Under Ordinance 230 any company
authorized to broadcast television by any means is also authorized to broadcast
by satellite transmission. The Company has operated satellite pay-television
services since 1993 through a contract signed with Embratel.
Ordinance No. 281, issued by the Ministry of Communications on November
28, 1995, partially amended Ordinance 230 allowing only companies to which a
concession, permission or authorization had been granted previously by the
Ministry of Communications to provide telecommunications services via satellite.
Companies that were already operating satellite telecommunications services
without such authorization were given a period of 60 days to seek such
authorization. The Company applied for such authorization within the 60-day
period, and on April 23, 1996, the Ministry of Communications issued Ordinance
No. 87/96 ("Ordinance 87"), granting TVA the non-exclusive permission to operate
a pay television service via satellite. Such authorization is valid for a term
of fifteen years, commencing October 26, 1994. Ordinance 87 further provides
that TVA has the obligation to (a) render services continuously and efficiently
in order to fully satisfy users, (b) in an emergency or disaster, render
services to the entities that require services without charge, and (c) meet the
technical adequacy requirements which the Ministry of Communications considers
essential to guarantee fulfillment of the obligations under the permission
granted. In addition, on April 23, 1996, Galaxy Brasil received approval from
the Ministry of Communications, pursuant to Ordinance No. 86/96 ("Ordinance
86"), to operate satellite services via the Galaxy III-R satellite, leased by
Hughes Electronics. Galaxy Brasil also received approval to operate the
corresponding ground transmission station pursuant to Ordinance 86.
Satellite-based pay television services are today regulated by Law 9295/96
("Law 9295"), Law 9472/97 (the "General Law"), Decree 2196/97, which regulates
special telecommunications services, including DBS services, Decree 2195/97,
which regulates the transmission of signals via satellite, and Ordinance 321/97,
which relates specifically to satellite-based pay television services. Law 9295
authorizes the Executive branch of the Brazilian federal Government, within
three years, to limit the ownership by non-Brazilian entities of the voting
capital of
20
entities providing satellite-based pay television services to a maximum of 49%.
In addition, the General Law broadly authorizes the Executive branch to limit
non-Brazilian ownership of telecommunications service providers. Law 9295 also
provided that the granting of concessions for the transmission of signals via
satellite by private companies would occur after December 31, 1997.
On May 21, 1997, the Ministry of Communications issued Ordinance No. 321
("Ordinance 321") governing the granting of licenses to provide satellite pay
television services.
ITEM 2. DESCRIPTION OF PROPERTY
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, and the offices and
uplink facility for Galaxy Brasil, located in Tambore, Sao Paulo State, all of
which are owned by the Company. The Company also owns its data processing
facilities and test equipment.
ITEM 3. 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, 1998, the Company had reserved approximately $7.4
million as contingent liabilities in connection with certain litigation
contingencies, including a number of claims by persons arising in connection
with the termination of their employment (approximately $3.8 million) and claims
relating to the payment by the Company of certain taxes (approximately $0.8
million). In particular, the Company is currently seeking confirmation from
state tax authorities of the non-assessment of certain value-added taxes
(Imposto Sobre Circulacao de Mercadoria e Servicos or "ICMS"). The Company has
also obtained an injunction against the federal imposition of certain social
contribution taxes (Contribuicao Social para a Seguridade Social or "COFINS"),
the final determination of which is pending a judgment from the Brazilian
Supreme Court.
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. In December 1997, a similar lawsuit was filed against Galaxy Brasil
in the 20 Vara Civel 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 examined by court experts with the objective of determining the
amounts in controversy with respect thereto. Although the Company intends 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. As of December 31, 1998, the
Company had reserved approximately $2.7 million for claims related to the ECAD
suits.
21
The Company is also involved in a judicial dispute with Globo Par in
connection with the exclusive right to broadcast the Brazilian Soccer
Championship. Both TVA and Globo Par filed suits in the 1, 2 and 17 Varas Civeis
do Estado de Sao Paulo and the 2 and 16 Varas Civeis do Estado do Rio de Janeiro
requesting an injunction to prevent the other party from broadcasting the
championship. In 1997 the Tribunal de Justica do Rio de Janeiro ruled in favor
of Globo Par, thereby preventing TVA from broadcasting the championship. TVA is
currently challenging this ruling, and bringing forth its own claims, in the
Tribunal de Justica do Estado de Sao Paulo. The Company believes that it has a
valid right to exclusively broadcast the championship pursuant to its agreements
with the Confederacao Brasileira de Futebol (the Brazilian Soccer Federation)
and the Clube dos Treze, a group of soccer teams, and therefore considers the
likelihood of its success in this suit, or a negotiated settlement to the suit,
to be favorable. The loss of such suit, however, may have a material adverse
effect on the consolidated financial position of the Company.
ITEM 4. CONTROL OF REGISTRANT
Tevecap has one class of capital stock, common shares, authorized and
outstanding. As of December 31, 1998, 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, 1998, information regarding the
beneficial ownership of Tevecap's common shares:
Number of Common
Shareholder Shares 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) 34,714,031 15.3
Cable Participacoes Ltda.(b) 4,628,536 2.0
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 50.0% equity interest in each of
Hearst/ABC Video Services II and Cable Participacoes Ltda.
(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 1.0%.
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 90.0% 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
22
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 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. The Indenture, however, contains restrictions on
the ability of Tevecap to purchase shares of its capital stock. Accordingly, the
parties to the Stockholders Agreement have agreed to amend the Stockholders
Agreement prior to the Offering to provide that if the terms of the Indenture
prohibit the Company from purchasing shares that are subject to an Event Put
("Event Put Shares"), in whole or in part, the Company shall not be obligated to
purchase such shares to the extent it is so restricted. However, in such event,
the Company shall, subject to the terms of the Indenture, have the obligation to
issue shares of preferred stock of the Company ("Special Preferred Shares")
should the Tevecap Stockholder elect to convert Event Put Shares to Special
Preferred Shares. The holders of Special Preferred Shares will be entitled to
dividends required by law and a cumulative dividend equal to LIBOR plus a 4.0%
margin, provided that if the terms of the Indenture prohibit the payment of
dividends on the Special Preferred Shares, the Company shall not be obligated to
make such dividend payments to the extent so restricted. However, under the
terms of the Special Preferred Shares such unpaid dividends shall cumulate and
will be paid in full when permissible under the Indenture or when the Indenture
no longer restricts the payment of such dividends. After the payment of all
dividends on the Special Preferred Shares, the Company must use any remaining
profit or reserve to purchase the largest number of Event Put Shares and Special
Preferred Shares, provided that, if the terms of the Indenture prohibit the
purchase of such shares, the Company shall not be obligated to make such
purchases until permitted by the terms of the Indenture.
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. If Tevecap
determines that the terms of the Indenture prohibit it from purchasing such
shares, Tevecap may, subject to the terms of the Indenture, delay the payment of
such purchase price with three annual payments ("Put Annual Payments") or issue
promissory notes denominated in US dollars for the amount of such price ("Put
Promissory Notes"). The Put Promissory Notes would mature three years after
issuance with interest payments due quarterly in arrears. The interest rate on
the Put Promissory Notes would be equal to the rate applicable to US Treasury
obligations of similar maturity plus a margin to be negotiated, with the parties
taking into account the risks associated with the type of obligor, Tevecap's
creditworthiness and investments in Brazil. Under the provisions of the
Stockholders Agreement, as amended, while the Put Promissory Notes are
outstanding, Tevecap may not pay any dividends or make distributions with
respect to its capital stock, including the Special Preferred Shares, should
23
they exist. To the extent dividends, distributions or payment sunder the Put
Promissory Notes may be made under the Indenture, payments must be made first to
satisfy the obligations under the outstanding Put Promissory Notes. If the terms
of the Indenture prohibit the Company from making the Put Annual Payments, the
Company shall not be required to make such payment, but shall be required to
deliver Put Promissory Notes in the principal amount of the affected Put Annual
Payments. If the terms of Indenture prohibit the Company from making an interest
payment required under any Put Promissory Note, the Company shall not be
required to make such payment at such time, provided that any accrued and unpaid
interest shall accumulate and interest on such unpaid amount shall compound
quarterly and the Company shall make payments of interest as soon as such
payment is no longer restricted under the Indenture. Pursuant to the terms of
the proposed amendment to the Stockholders Agreement, payment of the principal
and interest on the Put Promissory Notes would be subordinated to the prior
payment in full of the Notes.
Registration Rights. At any time after December 6, 1997, 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. Also, 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 and Advisory Board. Tevecap is governed by a board of
directors with 11 members. Under the Stockholders Agreement, Abril designates
six members, Falcon International designates two members, the Chase Parties
together designate one member, and Hearst/ABC Parties designates 2 members. 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
Service Agreement. Tevecap must get 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 get the approval of Falcon International
before entering into contracts in excess of $1,000,000. Tevecap must get 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 25.0%
of the net consolidated profit (as defined by Brazilian law) of Tevecap.
However, Tevecap may delay the payment of such dividends to the extent the
payment of such dividends is prohibited by the Indenture, and such dividends
will accumulate and be payable to the extent allowed under the Indenture.
ITEM 5. NATURE OF TRADING MARKET
The Company's outstanding registered securities consist solely of the
Company's 125/8% Senior Notes due 2004 that were registered under the Securities
Act pursuant to an Exchange Offer 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.
24
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
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 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 US 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.
On August 1, 1993, the cruzeiro real replaced the cruzeiro as the unit of
Brazilian currency, with each cruzeiro real being equal to 1,000 cruzeiros.
Beginning in December 1993, the Brazilian Government began implementation of the
Real Plan, which was intended to reduce inflation. On July 1, 1994, the real
replaced the cruzeiro real as the unit of Brazilian currency, with each real
being equal to 2,750 cruzeiros reais and having an exchange rate of R$1.00 to
US$1.00. According to Brazilian law, the issuance of reais is controlled by
quantitative limits backed by a corresponding amount of US dollars in reserves,
but the Brazilian Government subsequently expanded those quantitative limits and
allowed the real to float, with parity between the real and the US dollar
(R$1.00 to US$1.00) as a ceiling.
On March 6, 1995, the Central Bank announced that it would intervene in
the market and buy or sell US dollars, establishing a band (faixa de flutuacao)
in which the exchange rate between the real and the US dollar could fluctuate.
The Central Bank initially set the band with a floor of R$0.86 per US$1.00 and a
ceiling of R$0.90 per US$1.00 and provided that, from and after May 2, 1995, the
band would fluctuate between R$0.86 and R$0.98 per US$1.00. Shortly thereafter,
the Central Bank issued a new directive providing that the band would be between
R$0.88 and R$0.93 per US$1.00. On June 22, 1995, the Central Bank issued another
directive providing that the band would be between R$0.91 and R$0.99 per US$1.00
and subsequently reset the band on January 30, 1996 to between R$0.97 and R$1.06
per US$1.00. Upon resetting the band on January 30, 1996, the Central Bank
adjusted the exchange rate within such band on a number of occasions, generally
in increments of R$.001, by means of buying and selling US dollars in electronic
auctions. The band was adjusted from time to time and, throughout 1998, the real
traded generally between R$1.12 and R$1.22 per U.S.$1.00.
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 and liquidity,
despite the potential for distinct treatment for regulatory purposes in the
future.
25
Certain specific foreign exchange transactions are carried out through the
Commercial Market and registered with the Central Bank, which issues a
Certificate of Registration. Such Certificate of Registration allows the
remittance of funds abroad as authorized by such Certificate of Registration.
On December 31, 1998 and May 18, 1998, the Commercial Market rate as
reported by the Central Bank was R$1.2087 per U.S.$1.00 and R$1.665100 per
U.S.$1.00, respectively.
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(1)
----------------------------------------------------
Year Ended: Low High Average(2) Period End
----------------------------------------------------
December 31, 1992 0.000392 0.004505 0.001810 0.004505
December 31, 1993 0.004557 0.118584 0.032342 0.118584
December 31, 1994 0.120444 1.000000 0.458968 0.848000
December 31, 1995 0.834000 0.972600 0.921583 0.972500
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
- ----------
(1) Amounts have been translated from the predecessor currencies in effect
during the relevant period, at the buying rates of exchange at the time
the successor currency became the lawful currency of Brazil. The exchange
rates at which the predecessor currencies were converted are described
herein.
(2) Calculated as the average of the month-end exchange rates during the
relevant period. Source: Central Bank of Brazil.
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 Brazilian currency into US dollars or
other currencies other than in connection with certain authorized transactions.
The 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.
ITEM 7. 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 "Notes") including any interest thereon) and
to beneficial owners of the Notes that are non-residents of Brazil in connection
with the purchase, ownership and disposition of such Notes. This summary is
limited to Tevecap and to non-residents of Brazil which
26
acquire the Notes at the original issue price, and does not address investors
who purchase 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
Notes and the price at which the 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
15.0% 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 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 Notes have an original maturity of
96 months, such reduction will apply to payments of interest and other income
with respect to the 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 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 Notes, interest and other income with respect to the 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 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 Notes
at par in the event that it is required to gross up for Brazilian withholding
tax imposed at a rate in excess of 15.0%.
Any earnings or capital gains resulting from the sale (whether inside or
outside Brazil) of any 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 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
Notes). The rate of IOF tax paid by the Company with respect to the issuance of
the 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, 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 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
27
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 Notes).
United States
The following is a summary of the material United States Federal income
tax consequences to a beneficial owner of the 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 ("US Holders"). Such tax treatment may vary depending upon
the particular situation of a US 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 US dollar
or persons that hold Notes as part of a "straddle" or "conversion transaction"
or otherwise as part of a "synthetic asset") and is limited to investors which
hold Notes as capital assets. In addition, this summary is limited to US Holders
that acquire the Notes at their issue price and does not address investors that
purchase 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-US 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 Notes
Interest on the Notes will be taxable to a US Holder as ordinary income at
the time it accrues or is received in accordance with the US Holder's method of
accounting for tax purposes. The amount includible in the income of a US Holder
will be the gross amount of interest, including any Additional Amounts, if any,
payable to holders of Notes (i.e., the amount before deduction of any Brazilian
withholding taxes).
Disposition of a Note
Generally, any sale, redemption or other taxable disposition of a Note by
a US 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
28
received) and (2) the US 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 US 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
US 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 US 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 5.0% 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 US Holder's United States Federal income tax rate multiplied
by its foreign source income for the taxable year, a US Holder may have
insufficient foreign source income to utilize fully any foreign tax credit
attributable to such Brazilian withholding taxes (but such US 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 US Holder). A US 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 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 Notes are outstanding, each DTC
participant or indirect participant holding an interest in a Note on behalf of a
US 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 US Holder's name, address and taxpayer identification number (either such
US 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 US
Holder during the calendar year. These reporting requirements, however, do not
apply with respect to certain US 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 US 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 US
Holder or paying agent making payments in respect of a Note may be required to
"backup" withhold a tax equal to 31.0% of each payment of interest and principal
with respect to the Notes. This backup withholding tax is not an additional tax
and may be credited against the US Holder's United States Federal income tax
liability if the required information is furnished to the IRS.
29
ITEM 8. SELECTED FINANCIAL DATA
The selected financial data as of December 31, 1998, 1997 and 1996 and for
each of the three years in the period ended December 31, 1998 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,
1995 and 1994 and for each of the two years in the period ended December 31,
1995 have been derived from the audited financial statements of the Company that
are not included elsewhere in this Annual Report.
In October 1998 the Board of Directors of the Company approved a plan of
disposition of the Company's DBS operations, including the Ku-Band operations of
Galaxy Brasil. This decision was based on Management's review of operations and
investment needs and the resulting intention to concentrate the Company's
businesses on the distribution of pay television services through Cable and MMDS
operations. As of December 31, 1998, Management of the Company was negotiating
the terms of the disposition of the DBS operations, which disposition is not
expected to result in a loss to the Company. Management expects to conclude and
approve the terms of the disposition by the end of the second quarter of 1999.
As a result of the anticipated disposition described above, the Company's
DBS operations have been classified as "Discontinued Operations," the selected
financial data of which is discussed separately in "Selected Financial and Other
Data--Discontinued Operations" below.
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.
30
SELECTED FINANCIAL AND OTHER DATA
Year Ended December 31,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(Dollars in Thousands, Except Selected Operating Data)
Statements of Operating Data:
Gross revenues
Monthly subscriptions $136,278 $142,700 $107,692 $ 62,496 $27,976
Installation 2,886 12,941 22,281 26,045 6,997
Indirect programming (a) 19,580 22,810 11,377 2,866 1,626
Other (b) 18,437 18,596 15,527 10,603 7,173
Taxes on revenue(c) (12,533) (13,315) (10,557) (7,506) (872)
-------- -------- -------- -------- --------
Total net revenue 164,648 183,732 146,320 94,504 42,900
-------- -------- -------- -------- --------
Direct operating expenses (d) 93,356 103,216 93,846 62,026 28,659
Selling, general and administrative expenses 56,517 64,844 62,468 46,902 24,370
Depreciation and amortization 48,107 35,461 24,350 13,268 6,177
Provision for equipment and inventory obsolescence 1,940 3,944 3,621 0 0
-------- -------- -------- -------- --------
Total operating expenses 199,920 207,465 184,285 122,196 59,206
-------- -------- -------- -------- --------
Operating loss from continuing operations (35,272) (23,733) (37,965) (27,692) (16,306)
Nonoperating expenses
Interest expense (51,665) (44,541) (16,287) (17,745) (16,413)
Equity in (losses) income of affiliates (e) (12,139) (6,851) (8,532) (3,672) 383
Other nonoperating (expenses) income, net (f) 3,806 15,146 5,891 8,039 20,339
Income tax expense (24) 0 (156) 0 0
Income (loss) from discontinued operations (52,773) (21,438) 9,157 0 0
-------- -------- -------- -------- --------
Net loss (148,067) (81,417) (47,892) (41,070) (11,997)
======== ======== ======== ======== ========
Other data:
EBITDA-Continuing operations (g) 14,775 15,672 (9,994) (13,318) (10,129)
EBITDA-Discontinued operations (g) 16,968 19,458 14,333 (1,106) 0
-------- -------- -------- -------- --------
EBITDA (g) 31,743 35,130 4,339 (14,424) (10,129)
Purchase of fixed assets - Continuing operations 81,392 118,909 87,867 93,029 22,369
Purchase of fixed assets - Discontinued operations 61,967 128,958 37,645 0 0
-------- -------- -------- -------- --------
Purchase of fixed assets 143,359 247,867 125,612 93,029 22,369
Ratio of earnings to fixed charges(i) -- -- -- -- --
Cash Flow Data:
Net cash (used in) provided by operating activities (h) 2,675 (30,134) (23,108) 22,989 (9,707)
Net cash used in investing activities (162,556) (224,903) (218,405) (119,661) (24,334)
Net cash provided by financing activities 160,289 151,287 322,051 116,229 38,666
31
Year Ended December 31,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(Dollars in Thousands, Except Selected Operating Data)
Selected Operating Data:
Continuing operations
Number of Subscribers to Owned Systems (j) 315,813 335,174 276,331 219,148 114,853
Average monthly revenue per Subscriber (k) $ 43.15 $ 42.57 $ 38.97 $ 33.24 27.80
Discontinued operations
Number of Subscribers to Owned Systems (j) 296,847 211,209 73,180 0 0
Average monthly revenue per Subscriber (k) $ 43.78 $ 37.18 $ 20.95 0 0
Balance Sheet Data (at period end):
Cash and cash equivalents 1,397 989 104,739 24,201 4,644
Property, plant and equipment 298,004 266,518 182,683 131,266 51,426
Total assets 447,927 442,011 434,749 216,848 80,441
Loans from shareholders 88,740 54,321 4,360 586 0
Long-term liabilities 359,543 335,882 264,901 9,604 4,523
Equity (deficit) in discontinued operations (21,858) 13,904 17,313 0 0
Redeemable common shares 178,002 189,034 164,910 149,534 19,754
Total shareholders' equity (deficit) (224,257) (187,069) (81,528) (18,260) 27,590
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 2.65% to 7.65%.
(d) Represents costs directly related to Monthly subscriptions, and a portion of
installation, indirect programming and Other revenues.
(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, Other nonoperating
(expenses) income, net, and Minority interest. The amount included for the year
ended December 31, 1994 includes interest income totaling $21,806. During that
year, the Company received capital contributions from stockholders which
resulted in a surplus of cash invested during such period.
(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 "EBITDA Continued
operations", represent the Company`s remaining operations subsequent to an
eventual disposition of Galaxy Brasil and TVA Banda C.
(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
32
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, 1998, earnings were insufficient to
cover fixed charges by $13,100, $38,269, $50,366, $54,044 and $84,493,
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.
33
SELECTED FINANCIAL AND OTHER DATA - DISCONTINUED OPERATIONS
Because operations of Galaxy Brasil were begun in 1996, and the Company's
C-Band operations were not significant in 1995, the following discussion does
not present information for the years ended December 31, 1995 or 1994.
Year Ended December 31,
1998 1997 1996
------- ------- -------
(Dollars in Thousands, Except
Selected Operating Data)
Statements of Operating Data:
Gross revenues
Monthly subscriptions $129,961 $ 78,534 $ 15,328
Installation 59,382 77,865 39,436
Other 580 0 197
Taxes on revenue (a) (13,664) (11,789) (3,190)
-------- -------- --------
Total net revenue 176,259 144,610 51,771
-------- -------- --------
Direct operating expenses (b) 112,622 73,742 18,451
Selling, general and administrative expenses 46,669 51,410 18,987
Depreciation and amortization 39,185 20,920 3,866
Provision for equipment and inventory obsolescence 3,321 5,275 0
-------- -------- --------
Total operating expenses 201,797 151,347 41,304
-------- -------- --------
Operating income (loss) (25,538) (6,737) 10,467
-------- -------- --------
Nonoperating expenses
Interest expense (25,048) (16,316) (1,476)
Other nonoperating (expenses) income, net (c) (2,187) 1,615 166
Income tax expense 0 0 0
-------- -------- --------
Net income (loss) (52,773) (21,438) 9,157
======== ======== ========
Other data:
EBITDA (d) 16,968 19,458 14,333
Purchase of fixed assets 61,967 128,958 37,645
Selected Operating Data:
Number of Subscribers to Owned Systems (e) 296,847 211,209 73,180
Average monthly revenue per Subscriber (f) 43.78 37.18 20.95
Balance Sheet Data (at period end):
Cash and cash equivalents 1,308 35 59
Property, plant and equipment 181,740 155,454 50,910
Total assets 217,654 170,777 69,743
Loans from shareholders 58,905 46,090 23,226
Long-term liabilities 63,425 91,655 28,573
Total shareholders' equity (deficit) (21,858) 13,904 17,313
34
Notes to Selected Financial and Other Data
(a) Represents various non-income based taxes paid on certain of the Company's
gross revenue items with rates ranging from 2.65% to 7.65%.
(b) Represents costs directly related to Monthly subscriptions, and a portion of
installation revenues.
(c) Includes interest income, Translation gain or loss, Other nonoperating
(expenses) income, net.
(d) EBITDA represents the sum of (i) net income (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.
(e) Represents the number of Owned Systems' subscribers as of the last day of
each period.
(f) Average monthly revenue per subscriber refers to the average monthly
subscription fee as of the last day of each period.
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Since its inception in 1989, the Company has been in a developmental or
buildout stage. Despite its growth and positive operating cash flow for the year
ended December 31, 1998, the Company 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
the Company since inception have been funded principally by (i) net
contributions of approximately $388,000 from the Company's shareholders
(consisting of $288,000 as of December 31, 1997 and a $100,000 capital increase
in February 1998) (ii) borrowings from Abril under the Abril Credit Facility and
a shareholder loan to Galaxy Brasil and (iii) bank loans and other borrowings
made from time to time.
In October 1998 the Board of Directors of the Company approved a plan of
disposition of the Company's DBS operations, including the Ku-Band operations of
Galaxy Brasil. This decision was based on Management's review of operations and
investment needs and the resulting intention to concentrate the Company's
businesses on the distribution of pay television services through Cable and MMDS
operations. As of December 31, 1998, Management of the Company was negotiating
the terms of the disposition of the DBS operations, which disposition is not
expected to result in a loss to the Company. Management expects to conclude and
approve the terms of the disposition by the end of the second quarter of 1999.
See "Recent Developments."
35
As a result of the anticipated disposition described above, the Company's
DBS operations have been classified as "Discontinued Operations," the financial
condition and results of operations of which are discussed separately in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Discontinued Operations" below.
Year Ended December 31,
--------------------------------------------------------------------------
1996 1997 1998
---------------------- ---------------------- --------------------
% of Net % of Net % of Net
Amount Revenue Amount Revenue Amount Revenue
-------- -------- -------- -------- -------- --------
(U.S. $ thousands, except percentages)
Statement of Operations Data:
Gross revenues
Monthly subscriptions $107,692 73.6% $142,700 77.7% $136,278 82.8%
Installation 22,281 15.2% 12,941 7.0% 2,886 1.8%
Indirect programming 11,377 7.8% 22,810 12.4% 19,580 11.9%
Other 15,527 10.6% 18,596 10.1% 18,437 11.2%
Taxes on revenue (10,557) (7.2)% (13,315) (7.2)% (12,533) (7.6)%
-------- -------- -------- -------- -------- --------
Net revenue 146,320 100.0% 183,732 100.0% 164,648 100.0%
-------- -------- -------- -------- -------- --------
Direct operating expenses 93,846 64.1% 103,216 56.2% 93,356 56.7%
Selling, general and administrative
expense 62,468 42.7% 64,844 35.3% 56,517 34.3%
Depreciation and amortization 24,350 16.6% 35,461 19.3% 48,107 29.2%
Provision for equipment and
inventory obsolescence 3,621 2.5% 3,944 2.1% 1,940 1.2%
-------- -------- -------- -------- -------- --------
Total operating expenses 184,285 125.9% 207,465 112.9% 199,920 121.4%
-------- -------- -------- -------- -------- --------
Operating loss (37,965) (25.9)% (23,733) (12.9)% (35,272) (21.4)%
-------- -------- -------- -------- -------- --------
Interest income 5,896 4.0% 14,205 7.7% 6,718 4.1%
Interest expense (16,287) (11.1)% (44,541) (24.2)% (51,665) (31.4)%
Translation (loss) gain 473 0.3% (902) (0.5)% (17) 0.0%
Equity in (losses) income of affiliates (8,532) (5.8)% (6,851) (3.7)% (12,139) (7.4)%
Other nonoperating (expenses)
income, net (2,327) (1.6)% 927 0.5% (4,233) (2.6)%
Minority interest 1,849 1.3% 916 0.5% 1,338 0.8%
Income taxes (156) (0.1)% 0 0.0% (24) 0.0%
-------- -------- -------- -------- -------- --------
Loss from continuing operations (57,049) (39.0)% (59,979) (32.6)% (95,294) (57.9)%
-------- -------- -------- -------- -------- --------
Income (loss) from discontinued
operations 9,157 6.3% (21,438) (11.7)% (52,773) (32.1)%
-------- -------- -------- -------- -------- --------
Net loss (47,892) (32.7)% (81,417) (44.3)% (148,067) (89.9)%
======== ======== ======== ======== ======== ========
36
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
The table below sets forth the number of subscribers at December 31, 1997
and December 31, 1998 for the Owned Systems.
December 31, December 31,
------------ ------------
Owned Systems Subscribers 1997 1998
------------------------- ------- -------
MMDS(a) ..................................... 240,913 186,216
Cable ....................................... 94,261 129,597
------- -------
335,174 315,813
Paid Subscribers Awaiting Installation(b).... 17,963 13,766
------- -------
Total Owned Systems ......................... 353,137 329,579
======= =======
- ----------
(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, 1997 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,
------------ ------------
1997 1998
--------- ---------
Total Owned Systems(a) ......... 353,137 329,579
Operating Ventures ............. 142,148 136,105
Independent Operators .......... 669,543 449,008
--------- ---------
Total .......................... 1,164,828 914,692
========= =========
- ----------
(a) Excludes Ku-Band and C-Band operations
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 Other revenue
(which consists of Advertising revenues and Other revenues). Taxes on revenue
consist of a 2.65% tax on Advertising revenue and a 7.65% tax on the balance of
revenues, in each case charged by the Brazilian Government.
Monthly subscriptions revenue for the year ended December 31, 1998 was
$136,278, as compared to $142,700 for the comparable period in 1997, a decrease
of $6,422 or 4.5%. This decrease was principally attributable to a decrease in
the subscriber base and average monthly fees for existing subscribers from
$38.26 to $37.92 and for new subscribers from $43.41 to $39.21 per subscriber.
The average monthly subscription price during the year ended December 31, 1998,
was $37.77 for MMDS service and $38.14 for Cable service, as compared to $39.39,
$35.36, respectively, for the year ended December 31, 1997. The decrease in
subscriber base and resulting reduction in Revenues and average monthly
subscription prices were due primarily to the economic crisis that affected the
Brazilian economy, and in particular the pay television sector, in the second
semester of 1998.
Installation revenue for the year ended December 31, 1998 was $2,886, as
compared to $12,941 for the same period of 1997, a decrease of $10,055 or 77.7%.
This decrease was the result of a 42% sales reduction performance during the
year of 1998 when compared with the same period of 1997, again due to the
economy's
37
crisis as mentioned above. The average installation fee during the year ended
December 31, 1998 was $72.85 for MMDS service, $38.62 for Cable service, as
compared to $103.58 and $35.89, respectively, during the year ended December 31,
1997.
Indirect programming revenue for the year ended December 31, 1998 was
$19,580, as compared to $22,810 for the comparable period of 1997, a decrease of
$3,230, or approximately 14.2%. This decrease was principally attributable to a
change in the billing process between programming suppliers and the Operating
Ventures and the Independent Operators initiated in the second quarter of the
year. 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, currently collects 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 220,535 (all of whom were
non-revenue generating subscribers) during the year ended December 31, 1998.
Independent Operators pay 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, 1998 was $2.92 per
subscriber, as compared with $2.60 per subscriber for the comparable period in
1997.
Other revenue for the year ended December 31, 1998 was $18,437, as
compared to $18,596 for the comparable period of 1997, a decrease of 0.9%. This
change included a decrease in Advertising revenue to $3,544 from $4,947, a
decrease of $1,403, and an increase in Other to $14,893 from $13,649, an
increase of $1,244. The decrease in Advertising revenue due to the infancy of
the industry and the lack of reliable ratings measures, the sales of Pay TV
advertising in Brazil are still very low, representing less than 1% of all the
advertising market. The increase in Other revenues was principally due to
increased commissions for sales of HBO Brasil and ESPN Brasil advertising as
well as sales of TVA magazine to independent programming providers.
Taxes on revenue for the year ended December 31, 1998 were $12,533, as
compared to $13,315 for the same period of the prior year, a decrease of 5.9%.
As a percentage of net revenue taxes on revenue represents 7.6% of net revenues
and are consistent with the prior year.
For the reasons noted above, Net revenue for the year ended December 31,
1998 was $164,648, as compared to $183,732 for the comparable period in the
previous year, a decrease of $19,084.
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 relate to subscribers variation and the growth 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, 1998 were $93,356, as compared to
$103,216 for the same period in 1997, a decrease of $9,860. As a percentage of
net revenues, direct operating expenses represents 56.7% as compared with 56.2%
in the prior year. Payroll and benefits expense decreased to $15,968 from
$22,593, a decrease of $6,625, as a result of the lay-off of more than 194
employees. Programming costs decreased to $54,282 from $56,394, a decrease of
$2,112 or 3.8%, primarily due to a revised billing procedure for Operating
Ventures and Independent Operators as described above. Transponder lease cost
decreased to $2,336 from $6,312, a decrease of $3,976, as a result of the
renegotiation of transponder costs. Pole rental increased from $2,157 to $3,247,
an increase of $1,090 due to the expansion of TVA's cable network during the
year. 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, 1998, Other costs were
$8.975, as compared to $7,026 for the same period the prior year, an increase of
$1,949.
Selling, general and administrative expenses. Selling, general and
administrative expenses include payroll and benefits, expense for selling,
administrative, financial and human resources, advertising and promotion, rent
38
expense, other administrative expenses, and other general expenses. Selling,
general and administrative expenses for the year ended December 31, 1998 were
$56,517, as compared to $64,844 for the same period of 1997, a decrease of
$8,327 or 12.8%. While the Company's general and administrative expenses
remained relatively unchanged in the year ended December 31, 1998 as compared to
the year ended December 31, 1997, Advertising and promotion expense decreased
from $18,367 in 1997 to $9,335 in 1998, a decrease of 49.2%, 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 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, 1998 was $48,107,
as compared to $35,461 for the same period of 1997, an increase of $12,646, due
primarily to higher fixed asset balances as a result of purchases of cable
networks, decoders, installation equipment and other fixed assets in 1997, the
depreciation of which was recognized in 1998. Provision for equipment and
inventory obsolescence for the year ended December 31, 1998 was $1,940 as
compared to $3,944 for the comparable period in 1997, a decrease of $2,004.
For the reasons noted above, Operating loss for the year ended December
31, 1998 was $35,272 compared to $23,733 for the comparable period in 1997, an
increase of $11,539.
Interest income. Interest income for the year ended December 31, 1998 was
$6,718, as compared to $14,205 for the same period in 1997, a decrease of $7,487
principally attributable to the application by the Company of the proceeds of
the Notes in 1997.
Interest expense. Interest expense for the year ended December 31, 1998
was $51,665, as compared to $44,541 for the same period of 1997, an increase of
$7,124, principally attributable to the interest paid on the Notes and loans
from shareholders.
Equity in (losses) income of affiliates. For the year ended December 31,
1998, Equity in (losses) income of affiliates amounted to a loss of $12,139, as
compared to a loss of $6,851 in the same period of 1997, an increase of $5,288.
This loss was comprised of ESPN Brasil ($8,938), HBO Brasil ($2,081) and Canbras
TVA ($1,120).
Other non-operating (expenses) income net. Other non-operating (expenses)
income net for the year ended December 31, 1998 was an expense of $4,233, as
compared to income of $927 in the same period in 1997, an increase in expense of
$5,160. Other non-operating expenses for the year ended December 31, 1998
consisted primarily of charges for provision of certain equipment and material
installed in the homes of subscribers whose service was terminated.
Minority interest. The Minority interest of $1,338 for the year ended
December 31, 1998 represents Abril's 14.0% share in aggregate losses of TVA Sul.
Income (loss) from discontinued operations. Loss from discontinued
operations for the year ended December 31, 1998 was $52,773 as compared to
$21,438 for the comparable period in 1997, an increase of $31,335. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Discontinued Operations."
Net loss. For the reasons noted above, Net loss for the year ended
December 31, 1998 was $148,067 as compared to $81,417 for the comparable period
in 1997, an increase of $66,650.
39
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
The table below sets forth the number of subscribers at December 31, 1996
and December 31, 1997 for the Owned Systems.
December 31, December 31,
------------ ------------
Owned Systems Subscribers 1996 1997
------------------------- ------- -------
MMDS(a) ..................................... 230,320 240,913
Cable ....................................... 46,011 94,261
------- -------
276,331 335,174
Paid Subscribers Awaiting Installation(b).... 31,124 17,963
------- -------
Total Owned Systems ......................... 307,455 353,137
======= =======
- ----------
(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, 1996 and December 31, 1997 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,
------------ ------------
1996 1997
--------- ---------
Total Owned Systems(a) ......... 307,455 353,137
Operating Ventures ............. 85,256 142,148
Independent Operators .......... 564,499 669,543
--------- ---------
Total .......................... 957,210 1,164,828
========= =========
- ----------
(a) Excludes Ku-Band and C-Band operations
Monthly subscriptions revenue for the year ended December 31, 1997 was
$142,700, as compared to $107,692 for the comparable period in 1996, an increase
of $35,008 or 32.5%. This increase was principally attributable to a 21.3%
increase in the subscriber base. The average monthly fees for existing
subscribers decreased from $39.07 in 1996 to $38.26 in 1997 and for new
subscribers decreased from $43.82 in 1996 to $43.41 in 1997 per subscriber. The
average monthly subscription price during the year ended December 31, 1997, was
$39.39 for MMDS service and $35.36 for Cable service, as compared to $40.33 and
$32.80, respectively, for the year ended December 31, 1996.
Installation revenue for the year ended December 31, 1997 was $12,941, as
compared to $22,281 for the same period of 1996, a decrease of $9,340. This
decrease was basically the result of a decrease in average installation fees and
in net sales. The average installation fee during the year ended December 31,
1997 was $103.58 for MMDS service and $35.89 for Cable service, as compared to
$134.48 and $36.61 respectively, during the year ended December 31, 1996.
Indirect programming revenue for the year ended December 31, 1997 was
$22,810, as compared to $11,377 for the comparable period of 1996, an increase
of $11,443, or approximately 100%. This increase was principally attributable to
the increase in the number of Independent Operators' subscribers for the period.
The number of Independent Operators' subscribers increased by 105,044 during the
year ended December 31, 1997, as compared to an increase of 222,800 during the
same period of the prior year. The average monthly fee paid to the Company by an
Independent Operator during the year ended December 31, 1998 was $2.60 per
subscriber.
40
Other revenue for the year ended December 31, 1997 was $18,596, as
compared to $15,527 for the comparable period of 1996, an increase of $3,069.
This change included a decrease in Advertising revenue to $4,947 from $7,532,
and an increase in Other to $13,649 from $7,995, an increase of $5,654. The
decrease in Advertising revenue was attributable to a shift in advertising on
ESPN International programming (the Advertising revenues from which were
reported as Advertising revenues in the Company's consolidated financial
statements), to advertising sales on ESPN Brasil Ltda programming (the
Advertising revenues from which were not reported in the Advertising revenues
line of the Company's consolidated financial statements but as part of the
Company's Equity in (losses) income of affiliates). The increase in Other
revenues was principally due to increased commissions for sales of HBO Brasil
and ESPN Brasil advertising as well as sales of TVA magazine to independent
programming providers.
Taxes on revenue for the year ended December 31, 1997 were $13,315, as
compared to $10,557 for the same period of the prior year, an increase of
$2,758. As a percentage of net revenue taxes on revenue, represents 7.2% of net
revenues and are consistent with the prior year.
For the reasons noted above, Net revenue for the year ended December 31,
1997 was $183,732, as compared to $146,320 for the comparable period in the
previous year, an increase of $37,412.
Direct operating expenses. Direct operating expenses for the year ended
December 31, 1997 were $103,216, as compared to $93,846 for the same period in
1996, an increase of $9,370. As a percentage of net revenues, direct operating
expenses represents 56.2% as compared with 64.1% in the prior year. Payroll and
benefits expense decreased to $22,593 from $23,324, a decrease of $731.
Programming costs increased to $56,394 from $42,315, an increase of $14,079 or
33.3%, approximately the same variation as occurred in monthly subscription
revenue. Transponder lease cost increased to $6,312 from $5,737, an increase of
$575, as a result of the leasing of a fourth transponder in the fourth quarter
of 1997. Technical assistance costs decreased from $5,507 to $1,832, a decrease
of $3,675. Vehicle rentals expense decreased from $1,772 to $1,075, a decrease
of $697; and the expense of publishing TVA Magazine decreased from $6,311 to
$5,827. Pole rental increased to $2,157 from $448, an increase of $1,709, due to
the expansion of TVA's cable plant during the year. For the year ended December
31, 1997, Other costs were $7,026, as compared to $8,432 for the same period the
prior year, a decrease of $1.406.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the year ended December 31, 1997 were $64,844, as
compared to $62,468 for the same period of 1996, an increase of $2,376 or 3.8%.
Advertising and promotion expense increased to $18,367 from $11,445 an increase
of $6,922, as a result of an increase in the number of subscribers and
promotional activity.
Depreciation, Amortization and Provision for equipment and inventory
obsolescence. Depreciation and Amortization for the year ended December 31, 1997
was $35,461, as compared to $24,350 for the same period of 1996, an increase of
$11,111. Provision for equipment and inventory obsolescence for the year ended
December 31, 1997 was $3,944 as compared to $3,621 for the comparable period in
1996, an increase of $323.
For the reasons noted above, Operating loss for the year ended December
31, 1997 was $23,733 compared to $37,965 for the comparable period in 1996, a
decrease of $14,232.
Interest income. Interest income for the year ended December 31, 1997 was
$14,205, as compared to $5,896, an increase of $8,309, principally due to
interest received on invested portions of the proceeds of the Notes.
Interest expense. Interest expense for the year ended December 31, 1997
was $44,541, as compared to $16,287 for the same period of 1996, an increase of
$28,254 principally attributable to the interest paid on the Notes.
Equity in (losses) income of affiliates. For the year ended December 31,
1997, Equity in (losses) income of affiliates amounted to a loss of $6,851, as
compared to a loss of $8,532 in the same period of 1996, a decrease in loss of
$1,681. The loss was principally related to the sustained losses at ESPN Brasil.
41
Other non-operating (expenses) income net. Other non-operating (expenses)
income net for the year ended December 31, 1997 was income of $927, as compared
to a loss of $2,327 in the same period in 1996, an increase of $3,254 primarily
attributable to a capital gain arising from an increase in the value of the
Company's interest in HBO Brasil Partners following the entry of BVI Television
Investments, Inc. as an equityholder in HBO Brasil Partners.
Minority interest. The Minority interest of $916 for the year ended
December 31, 1997 represents Mr. Leonardo Petrelli's 14.0% share in aggregate
losses of TVA Sul.
Income (loss) from discontinued operations. Loss from discontinued
operations for the year ended December 31, 1997 was a loss of $21,438 as
compared to income of $9,157 for the comparable period in 1996, an increase of
$30,595. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Discontinued Operations."
Net loss. For the reasons noted above, Net loss for the year ended
December 31, 1997 was $81,417 as compared to $47,892 for the comparable period
in 1996, an increase of $33,525.
Management's Discussion and Analysis of Financial Condition and Results of
Operations of Discontinued Operations
Year Ended December 31,
--------------------------------------------------------------------------------
1996 1997 1998
---------------------- ----------------------- -----------------------
% of Net % of Net % of Net
Amount Revenue Amount Revenue Amount Revenue
-------- -------- -------- -------- -------- --------
(U.S. $ thousands, except percentages)
Statement of Operations Data:
Gross revenues
Monthly subscriptions $ 15,328 29.6% $ 78,534 54.3% $129,961 73.7%
Installation 39,436 76.2% 77,865 53.8% 59,382 33.7%
Other 197 0.4% 0 580 0.3%
Taxes on revenue (3,190) (6.2)% (11,789) (8.2)% (13,664) (7.8)%
-------- -------- -------- -------- -------- --------
Net revenue 51,771 100.0% 144,610 100.0% 176,259 100.0%
-------- -------- -------- -------- -------- --------
Direct operating expenses 18,451 35.6% 73,742 51.0% 112,622 63.9%
Selling, general and
administrative expense 18,987 36.7% 51,410 35.6% 46,669 26.5%
Depreciation and
amortization 3,866 7.5% 20,920 14.5% 39,185 22.2%
Provision for equipment and
inventory obsolescence 0 5,275 3.6% 3,321 1.9%
-------- -------- -------- -------- -------- --------
Total operating expenses 41,304 79.8% 151,347 104.7% 201,797 114.5%
-------- -------- -------- -------- -------- --------
Operating income (loss) 10,467 20.2% (6,737) (4.7)% (25,538) (14.5)%
-------- -------- -------- -------- -------- --------
Interest income 160 0.3% 863 0.6% 109 0.1%
Interest expense (1,476) (2.9)% (16,316) (11.3)% (25,048) (14.2)%
Translation (loss) gain 0 0.0% 767 0.5% (2,713) (1.5)%
Other nonoperating
(expenses) income, net 6 0.0% (15) 0.0% 417 0.2%
Income taxes 0 0.0% 0 0.0% 0
-------- -------- -------- -------- -------- --------
Net income (loss) 9,157 17.7% (21,438) (14.8)% (52,773) (29.9)%
======== ======== ======== ======== ======== ========
42
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
The table below sets forth the number of subscribers at December 31, 1997
and December 31, 1998 for the Discontinued Operations.
Discontinued Operations December 31, 1997 December 31, 1998
----------------------- ----------------- -----------------
DIRECTV and Digital C-Band 211,209 296,847
Revenues. Monthly subscriptions revenue for the year ended December 31,
1998 was $129,961, as compared to $78,534 for the comparable period in 1997, an
increase of $51,427. This increase was principally attributable to an increase
in the subscriber base, offset by decreases in average monthly fees for new
subscribers from $47.10 in 1997 to $45.54 in 1998 per subscriber. Monthly fees
from new subscribers increased slightly from $44.05 to $44.25. The average
monthly subscription price during the year ended December 31, 1998 was $48.46
for Ku-Band service and $30.72 for C-band service, as compared to $49.69 and
$32.24, respectively, for the year ended December 31, 1997.
Installation revenue for the year ended December 31, 1998 was $59,382, as
compared to $77,865 for the same period of 1997, a decrease of $18,483. This
decrease was the result of a 19.1% sales reduction performance during the year
of 1998 when compared with the same period of 1997 and the significant reduction
in the average installation fee, which, during the year ended December 31, 1998
was $309.20 for Ku-Band service and $54.46 for C-band service, as compared to
$513.12 and $347.03 respectively, during the year ended December 31, 1997.
Taxes on revenue for the year ended December 31, 1998 were $13,664, as
compared to $11,789 for the same period of the prior year, an increase of
$1,875. As a percentage of net revenue taxes on revenue, represents 7.8% of net
revenue and are consistent with the prior year.
For the reasons noted above, Net revenue for the year ended December 31,
1998 was $176,259, as compared to $144,610 for the comparable period in the
previous year, an increase of $31,649.
Direct operating expenses. Direct operating expenses for the year ended
December 31, 1998 were $112,622, as compared to $73,742 for the same period in
1997, an increase of $38,880. Payroll and benefits expense increased to $8,818
from $7,311, an increase of $1,507, as a result of the hiring of employees.
Programming costs increased to $73,535 from $38,837, an increase of $34,698 due
to the increase in the subscriber base and in the number of channels for the
Ku-Band operations. Transponder lease cost increased to $10,998 from $7,583, an
increase of $3,415. For the year ended December 31, 1998, Other costs were
$17,472, as compared to $18,070 for the same period the prior year, a decrease
of $598.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the year ended December 31, 1998 were $46,669, as
compared to $51,410 for the same period of 1997, a decrease of $4,741 or 9.2%.
Payroll and benefits expense which, for the year ended December 31, 1998 were
$8,809 as compared to $5,452 for the same period of 1997, resulting from an
increase in the number of sales department employees. Advertising and promotion
for the year ended December 31, 1998 was $14,830, as compared to $19,158 for the
same period in 1997, a decrease of $4,328 as a result of reduced advertising
efforts in light of the Brazilian economic crisis.
Depreciation and Provision for equipment and inventory obsolescence.
Depreciation includes depreciation of systems and equipment and organizational
costs. Provision for equipment and inventory obsolescence represents charges for
lost and obsolete equipment and material. Depreciation for the year ended
December 31, 1998 was $39,185, as compared to $20,920 for the same period of
1997, an increase of $18,265. Provision for equipment and inventory obsolescence
for the year ended December 31, 1998 was $3,321 as compared to $5,275 for the
comparable period in 1997.
43
For the reasons noted above, Operating loss for the year ended December
31, 1998 was $25,538 compared to $6,737 for the comparable period in 1997, an
increase of $18,801.
Interest income. Interest income for the year ended December 31, 1998 was
$109, as compared to $863 for the same period in 1997, a decrease of $754.
Interest expense. Interest expense for the year ended December 31, 1998
was $25,048, as compared to $16,316 for the same period of 1997, an increase of
$8,732 principally attributable to the interest related to the Galaxy Brasil
Leasing Facility and loans from shareholders.
Other non-operating (expenses) income. Other non-operating (expenses)
income for the year ended December 31, 1998 was income of $417, as compared to
expense of $15 in the same period in 1997, an increase of $432.
Net loss. For the reasons noted above, Net loss for the year ended
December 31, 1998 was $52,773 as compared to $21,438 for the comparable period
in 1997, an increase of $31,335.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
The table below sets forth the number of subscribers at December 31, 1996
and December 31, 1997 for the Discontinued Operations.
Discontinued Operations December 31, 1996 December 31, 1997
----------------------- ----------------- -----------------
DIRECTV and Digital C-Band 73,180 211,209
Monthly subscriptions revenue for the year ended December 31, 1997 was
$78,534, as compared to $15,328 for the comparable period in 1996, an increase
of $63, 206. This increase was principally attributable to an increase in the
subscriber base and average monthly fees for existing subscribers to $44.05 in
1998 from $39.72 in 1997 and for new subscribers from $38.85 in 1997 to $47.10
in 1998 per subscriber. The average monthly subscription price during the year
ended December 31, 1998, was $49.69 for Ku-Band service and $32.24 for C-band
service, as compared to $49.05 and $35.36, respectively, for the year ended
December 31, 1997.
Installation revenue for the year ended December 31, 1997 was $77,865, as
compared to $39,436 for the same period of 1996, an increase of $38,429. This
increase was the result of a strong sales performance during the year ended
December 31, 1997, principally for the Company's Ku-Band operations and occurred
in spite of a decrease in average installation fees. The average installation
fee during the year ended December 31, 1997 was $513.12 for Ku-Band service and
$347.03 for C-band service, as compared to $877.00 and $649.98 respectively,
during the year ended December 31, 1996.
Taxes on revenue for the year ended December 31, 1997 were $11,789, as
compared to $3,190 for the same period of the prior year, an increase of $8,599.
As a percentage of net revenue, Taxes on revenue represents 8.2% of net
revenues.
For the reasons noted above, Net revenue for the year ended December 31,
1997 was $144,610, as compared to $51,771 for the comparable period in the
previous year, an increase of $92,839.
Direct operating expenses. Direct operating expenses for the year ended
December 31, 1997 were $73,742, as compared to $18,451 for the same period in
1996, an increase of $55,291. Payroll and benefits expense increased to $7,311
from $3,879, an increase of $3,432, as a result of the hiring of new employees.
Programming costs increased to $38,837 from $981, due to the initiation of
Ku-Band commercial operations, the nationwide roll-out of which occurred in the
fourth quarter of 1996 and became substantial in 1997. Transponder lease cost,
which is a
44
variable cost, increased to $7,583 from $4,205, an increase of $3,378, as a
result of an increase in subscribers of the Ku-Band operation. For the year
ended December 31, 1997, Other costs were $18,070, as compared to $8,765 for the
same period the prior year, an increase of $9,305.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the year ended December 31, 1997 were $51,410, as
compared to $18,987 for the same period of 1996, an increase of $32,423. The DBS
business experienced increasing Selling, general and administrative expenses as
a result of its increased pay television activities and the associated
administrative costs, including costs related to opening and maintaining
additional facilities and an overall increase in Payroll and benefits expense
resulting from an increase in the number of employees. Advertising and promotion
expense increased to $19,158 from $9,910, an increase of $9,248, as result of an
increase in the number of subscriber and promotional activity.
Depreciation and Provision for equipment and inventory obsolescence.
Depreciation and provision for equipment and inventory obsolescence for the year
ended December 31, 1997 was $20,920 as compared to $3,866 for the comparable
period in 1996, an increase of $17,054. This was basically due to the start up
of operations in 1996 and the acquistion and utilization of such equipment and
inventory in 1997.
For the reasons noted above, Operating income (loss) for the year ended
December 31, 1997 was a loss of $6,737 compared to income of $10,467, for the
comparable period in 1996.
Interest expense. Interest expense for the year ended December 31, 1997
was $16,316, as compared to $1,476 for the same period of 1996, an increase of
$14,840 attributable to principally the interest related to the Galaxy Brasil
Leasing Facility and loans from shareholders.
Net income (loss). For the reasons noted above, Net loss for the year
ended December 31, 1997 was $21,438 as compared to a Net income of $9,157 for
the comparable period in 1996, a decrease of $30,595.
Liquidity and Capital Resources
The following discussion is qualified in its entirety by the information
contained in "Recent Developments".
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, 1998, the Company had cumulative net losses of over
$433,351. 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) cash and cash equivalents of $104,798 at December 31, 1996, (ii)
borrowings from Abril under the Abril Credit Facility, of which $88,740 was
outstanding as of December 31, 1998 and a shareholder loan of $58,671
outstanding as of December 31, 1998 to Galaxy Brasil, (iii) borrowings under
lines of credit, of which $34,917 was outstanding as of December 31, 1998, (iv)
net capital contributions of approximately $388,000 from shareholders, (v) the
EximBank Facility, of which $18,123 was outstanding as of December 31, 1998,
(vi) the Galaxy Brasil Leasing Facility, of which $33,483 was outstanding as of
December 31, 1998, and (vii) the Notes, of which $250,000 was outstanding as of
December 31, 1998.
The Company had negative working capital of $82,171 at December 31, 1998.
Arthur Andersen, the Company's independent accountants, has included in its
audit report of the Company's financial statements for the year ended December
31, 1998 an "emphasis paragraph" which states that the Company's financial
statements have been prepared on the assumption that the Company will continue
as a going concern. In its report, Arthur Andersen has stated that the Company
has suffered recurring losses and has a negative working capital that "raise
substantial doubt about its ability to continue as a going concern". In a
footnote to the Company's financial statements relating to its working capital
deficiency, Arthur Andersen acknowledges that management's plans to continue as
a going
45
concern include efforts to generate the necessary cash flow to meet the
Company's cost structure through sales of non-strategic assets, and an
administrative cost reduction program implemented in the fourth quarter of 1998.
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, 1998, the Company had
approximately $486,913 of indebtedness outstanding, primarily consisting of
$250,000 principal amount of the Notes and loans from shareholders.
In addition to debt service, the Company will require capital for (i) the
continued funding of losses and working capital requirements, (ii) the
construction of cable networks and the installation of equipment at subscribers'
locations, (iii) the construction of additional transmission and headend
facilities and related equipment purchases and (iv) investments in, and
maintenance of, vehicles and administrative offices.
The Company has, as a consequence of its negative cash flow, liquidity
shortage and its lack of access to sources of capital, failed to comply with
certain obligations, including certain payment obligations and certain financial
covenants, summarized below. As discussed below, some of these failures may
result in the termination of certain material agreements, and may subject the
Company to the exercise of certain remedies, or the acceleration of certain
indebtedness, of the Company or GLB, or other consequences that could affect the
Company's ability to continue as a going concern.
o Accrued Royalty Payments to GLA. The Company has not made royalty
payments to GLA in accordance with the terms of the Local Operating
Agreement since August 1998. As of April 30, 1999 such unpaid amount
totaled approximately $51 million. Under the terms of the Local
Operating Agreement, GLA is entitled to terminate the Agreement for
failure by GLB to make royalty payments when due. If GLA were to
validly terminate the Local Operating Agreement, GLB would no longer
be entitled to operate the DIRECTV Service in Brasil, and would be
unable to service its current and future subscribers.
o Indebtedness Payable to SurFin. GLB has incurred indebtedness to
SurFin in the aggregate outstanding principal amount of
approximately $71 million. Of that amount, approximately $60 million
was due and payable in August 1998. Since that time, SurFin has
granted to GLB successive extensions of the maturity date for such
indebtedness. Such extensions are, however, terminable at any time
in SurFin's sole discretion, and there is no assurance that SurFin
will continue to grant such extensions.
o Noncompliance With Certain Financial Covenants. In connection with
the Galaxy Brasil Leasing Facility, GLB is currently not in
compliance with certain financial covenants (specifically the debt
to tangible net worth ratio covenant and the tangible net worth
covenant) contained in the Equipment Lease Agreement and the
Equipment Lease and Saleback Agreement, each dated as of July 30,
1996 between Citibank, N.A., as Lessor and GLB, as Lessee. Citibank
issued a waiver of those covenant defaults, valid for a period of
six months, from December 31, 1998 until June 30, 1999. However,
there is no assurance that Citibank would be willing to grant
further waivers at the end of such six-month period. In the event
that Citibank were to refuse to grant further waivers, Citibank may
have the right to exercise its remedies under the equipment lease
agreements. Currently the aggregate principal amount due to Citibank
under the two equipment lease agreements referred to above totals
approximately $30 million.
Although GLB may be able to raise certain defenses in the event of legal actions
arising out of any of the foregoing events, the outcome of any such actions
would be uncertain. In addition most of GLB's financing documents (including the
Indenture) contain cross-default provisions that could be triggered by the
enforcement by any of the creditors mentioned above.
The Company made purchases of fixed assets of $22,369, $93,029, $87,867,
$118,909 and $81,392 in 1994, 1995, 1996, 1997 and 1998, respectively (not
including $37,645, $128,958 and $61,967 in connection discontinued operations in
1996, 1997 and 1998 respectively). Management estimates that $29,292 and $22,502
of capital expenditures will be required in 1999 and 2000, respectively,
principally in connection with the purchase of
46
materials and equipment.
The Company also has certain commitments that must be funded, including
investments of $23,954 prior to December 31, 1999 in GLA ($18,000), Surfin
($2,000) and ESPN Brasil Ltda ($3,954). Actual amounts of funds required may
vary materially from these estimates and additional funds could be required in
the event of cost overruns, unanticipated expenses, regulatory changes,
engineering design changes and other technological-driven changes. In addition,
these commitments may be eliminated as a result of the consummation of the sales
of assets described above.
The Company's principal sources of liquidity are borrowings from Abril and
the Company's short-term line of credit (each as described below), together with
net cash provided by operating activities. However, until sufficient cash flow
is generated from the operations, the Company will be required to utilize its
current sources of debt funding to satisfy its liquidity needs. In addition, in
1999 the Company expects to consummate sales of certain non-strategic assets
described above, thereby eliminating the Company's need to finance the
operations related to such assets. The Company had approximately $1,397 of cash
and cash equivalents as of December 31, 1998.
For the year ended December 31, 1998, net cash provided by operating
activities was $2,675, primarily as the result of the net loss for the year of
$148,067, which was partially offset by $46,402 of depreciation, discontinued
operations result $52,773 and equity in losses of affiliates $12,139. For the
year ended December 31, 1998, the net cash used in investing activities was
$162,556, as the result of capital expenditures for the purchase of fixed assets
of $81,392, loans to related companies of $44,071, investments in equity and
cost investments of $20,082 and to discontinued operations of $17,011. The
purchases of fixed assets were principally related to the purchase of expansion
of cable networks and reception equipment, which includes hardware, materials
and labor used for new subscriber installations, and decoders. For the year
ended December 31, 1998, net cash provided by financing activities was $160,289,
consisting principally of borrowings from the Abril Credit Facility and capital
contributions.
The Abril Credit Facility allows the Company to borrow up to $60,000 on a
revolving basis until December 1998. 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, 1998, the Company had $88,740
outstanding under the Abril Credit Facility. In addition, in 1997 Abril made a
subordinated shareholder loan of $61,725 to Galaxy Brasil, of which $58,671 was
outstanding as of December 31, 1998.
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
85.0% 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, 1998,
the principal amount outstanding under the EximBank Facility was $18,123.
Galaxy Brasil entered into the Galaxy Brasil Leasing Facility, a five-year
$49,900 sale leaseback facility, during the first quarter of 1997. Under the
Galaxy Brasil Leasing Facility, Galaxy Brasil has access to financing for the
purpose of acquiring dish antennae, decoder boxes and other equipment for its
Ku-Band service. This facility will be available until 2002 and bear interest at
a fixed rate of 12.5% per year. During 1997 Galaxy Brasil drew down the entire
amount available under the Galaxy Brasil Leasing Facility, and had $33,483
outstanding as of December 31, 1998. Galaxy Brasil's payment obligations under
the Galaxy Brasil Leasing Facility are guaranteed by Tevecap and Abril.
In connection with the Galaxy Brasil Leasing Facility, GLB is currently
not in compliance with certain financial covenants (specifically the debt to
tangible net worth ratio covenant and the tangible net worth covenant) contained
47
in the Equipment Lease Agreement and the Equipment Lease and Saleback Agreement,
each dated as of July 30, 1996 between Citibank, N.A., as Lessor and GLB, as
Lessee. Citibank issued a waiver of those covenant defaults, valid for a period
of six months, from December 31, 1998 until June 30, 1999. However, there is no
assurance that Citibank would be willing to grant further waivers at the end of
such six-month period. In the event that Citibank were to refuse to grant
further waivers, Citibank may have the right to exercise its remedies under the
equipment lease agreements. Currently the aggregate principal amount due to
Citibank under the two equipment lease agreements referred to above totals
approximately $30 million. Although GLB may be able to raise certain defenses in
the event of legal actions arising out of any of the foregoing events, the
outcome of any such actions would be uncertain. In addition most of GLB's
financing documents (including the Indenture) contain cross-default provisions
that could be triggered by the enforcement by any of the creditors mentioned
above.
On November 26, 1996, Tevecap raised funds in foreign markets through a
private placement amounting to $250,000 12 5/8% Senior Notes (the "Notes").
These Notes mature on November 26, 2004 and are guaranteed by certain of
Tevecap's subsidiaries. The Indenture relating to the Notes contains certain
restrictive covenants which relate to, among others, the ability of Tevecap and
the Guarantors to incur additional indebtedness, declare dividends, effect asset
dispositions, enter into new liens, sell capital stock, enter into mergers
and/or consolidations, invest in non-guarantor subsidiaries that are not
Guarantors and transfer existing businesses. As of December 31, 1998, the
Company was in compliance with all restrictive covenants contained in the
Indenture.
In addition, 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 $274,070 of net operating losses ("NOLs") to
offset against regular taxes. These NOLs are unexpirable. 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.
Year 2000 Compliance
Many computer systems, including some of those used by the Company in the
past, identify dates using only the last two digits of the year. These systems
are unable to distinguish between dates in the year 2000 and dates in the year
1900. That inability (referred to as the "Year 2000 issue"), if not addressed,
could cause these systems to fail or provide incorrect information after
December 31, 1999 or when using dates after December 31, 1999.
In 1998 the Company established a program for identifying, prioritizing
and replacing or modifying systems and processes that may be affected by the
Year 2000 issue (the "Year 2000 Program") and that could, consequently, affect
the Company's business, operations and exposure to liability from third parties.
These areas primarily covered by the Year 2000 Program are:
o information technology ("IT") systems (software systems relating to
billing, customer service, corporate finance, supplies and other
areas)
o non-IT systems (hardware, telecommunications and other systems)
o external interfaces with third parties (including financial
institutions, programming providers, vendors
48
and service providers)
In addition, in 1998 the Company established a Year 2000 Committee,
comprised of the Company's Chief Information Technology Officer, Information
Technology Manager and a team of independent consultants. The principal
functions of the Year 2000 Committee are to coordinate the testing and
implementation of Year 2000 compliant systems and to report to Management the
Company's progress in these areas. In addition, the Company is participating in
the Year 2000 compliance program adopted by Abril S.A., the Company's majority
shareholder. All Company employees were made aware of potential Year 2000 issues
in a letter from the President of the Company circulated to all employees
concerning potential Year 2000 issues and the need for the Company to promptly
and diligently address these issues.
The Company's Year 2000 Program is being executed in the following stages,
all of which the Company expects to complete on or prior to July 31, 1999:
Stage: Target Completion Month
------ -----------------------
o awareness August 1998
o systems inventory July 1998
o software inventory September 1998
o equipment inventory October 1998
o personal applications inventory March 1999
o external contacts March 1999
o replacement or modification of systems June 1999
o testing June 1999
o evaluation of results June 1999
o Year 2000 certification July 1999
o contingency plans July 1999
As of May 17, 1999, the Company had completed several phases of the Year
2000 Program and was in the process of completing the phases relating to
replacement or modification of systems, testing and evaluation of results. The
Company expects these phases to be completed on or prior to June 30, 1999. In
addition, as of May 17, 1999, the Company was commencing the development of
contingency plans in the event of a "worst case" scenario, as described more
fully below, which phase is scheduled to be completed on or prior to July 31,
1999.
With respect to IT systems, the Company has replaced or modified the
following three primary software systems with Year 2000 compliant systems:
o An in-house intellicable system handling billing and customer
service was replaced by a Year 2000 compliant Cable Data system with
the assistance of the consulting firm Integris. As of May 17, 1999,
this new system had been installed in each of the Company's
principal offices, with the exception of the Rio de Janeiro and
Curitiba offices, where the Company has experienced some delays in
installing the new system. Nevertheless, the Company expects that
the installation of the new system in the remaining offices will be
completed on or prior to June 30, 1999.
o The Company's in-house finance system, which consisted of 15
separate systems, was replaced by a comprehensive Year 2000
compliant Oracle financial system.
o A Placomp system handling materials and supplies was refurbished to
comply with Year 2000 issues.
With respect to non-IT systems, the Company has replaced all systems
requiring modification, installing IBM Risk 6000, AIX and Oracle database
hardware systems.
As of May 17, 1999, approximately 70% of the Company's IT systems and 60%
of the Company's non-IT
49
systems had been fully tested or otherwise validated as Year 2000 compliant. The
Company expects that the remaining systems will be fully tested or otherwise
validated as compliant on or prior to June 30, 1999. Of the systems tested thus
far, certain minor compliance difficulties were encountered with respect to the
refurbishing of the Placomp system described above. These problems were promptly
resolved by the Company with the assistance of independent consultants.
With respect to external contacts, the Company established a formal
communications process with its financial institutions, programming providers,
vendors, service providers and other third party contacts to determine the
extent to which such parties are addressing Year 2000 issues. In connection with
the process, the Company sent approximately 20 questionnaires requesting
information regarding the Year 2000 compliance status of these parties. The
Company has received responses from all such parties indicating that all are
Year 2000 compliant or expect to be Year 2000 compliant on a timely basis.
The Company expects to incur total costs of approximately $8.3 million to
address Year 2000 issues, including the replacement and modification of IT and
non-IT systems, the conducting of testing to evaluate the compliance of systems
and the hiring of consultants to install and oversee the testing of such
systems. Approximately $1.2 million of these costs relate to the replacement and
modification of systems that were planned prior to the implementation of the
Year 2000 Program. Approximately $1.2 million of total Year 2000 Program costs
relate to the engagement by the Company of the services of external consultants
to assist in the implementation, replacement, modification and testing of
systems.
The Company has funded, and will fund, the costs for the Year 2000 Program
through cash flow from operations and shareholder loans. Overall, approximately
$7.5 million of total costs will be capitalized and $0.8 million will be
expensed. The $8.3 million total costs have been or are expected to be spent in
accordance with the Year 2000 Program stages described above and in the
following amounts:
Quarter Amount
------- ------
First quarter 1998 $0.8 million
Second quarter 1998 $1.2 million
Third quarter 1998 $1.9 million
Fourth quarter 1998 $1.7 million
First quarter 1999 $1.1 million
Second quarter 1999 $0.8 million (estimated)
Third quarter 1999 $0.6 million (estimated)
Fourth quarter 1999 $0.2 million (estimated)
The Company's estimates of the costs associated with the Year 2000 Program
are based on the best estimates of the Company derived by utilizing numerous
assumptions of future events, including the continued availability of resources,
third-party Year 2000 compliance modification plans and other factors. The
Company expects the necessary modifications will be made on a timely basis and
does not believe that the cost of these modifications or the Year 2000 Program
as a whole will have a material adverse effect on the business, financial
condition and results of operations of the Company.
Although all critical systems over which the Company has control are
expected to be Year 2000 compliant and tested before the Year 2000, the Company
has identified certain areas of concern in a worst possible scenario. These
areas include a systems failure beyond the control of the Company impeding the
ability of the Company to transmit programming to subscribers and to submit
monthly statements to subscribers. Such a failure could lead to lost revenues,
increased operating costs, a loss of subscribers and other business
interruptions of a material nature. In addition, such a failure could lead to
potential claims of mismanagement, misrepresentation and breach of contract.
As of May 17, 1999, the Company was in the process of preparing
contingency plans to be implemented in
50
the event of any material systems failure on or after December 31, 1999. These
contingency plans are expected to be completed on or prior to July 31, 1999. The
Company's Year 2000 Committee is working with each of the Company's business
units to review existing business continuity plans and to modify these plans to
include Year 2000 contingency plans for the business processes, systems and
third-party interfaces that may experience delays due to Year 2000 issues. The
Company's contingency plans will be developed in accordance with the following
stages:
o assessment of each business process for business risk and potential
need for contingency plans
o creation of contingency plans as necessary in accordance with risk
analysis
o testing of contingency plans
o evaluation of test results
o revision of contingency plans as necessary as a result of evaluation
of test results
o review and modification of contingency plans as part of ongoing
management process
The Company expects to have completed all stages of its Year 2000 Program,
including the testing of all systems and the establishment of appropriate
contingency plans, on or prior to July 31, 1999. Upon the completion of the Year
2000 Program, Management expects that the Company's business and operations will
not be materially adversely affected as a result of identified Year 2000 issues.
Due to the general uncertainty inherent in evaluating Year 2000 issues and the
inability to anticipate all potential risks associated with such issues,
however, the Company cannot ensure its ability to resolve on a timely and
cost-effective manner all difficulties that may arise in connection with Year
2000 issues and that may affect the Company's operations, business and exposure
to third party liability.
The discussion regarding Year 2000 issues above contains forward-looking
statements, including, without limitation, statements relating to the Company's
business plans, strategies, objectives, expectations, intentions and resources,
made pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995. The Company cautions all readers that
forward-looking statements contained in this Year 2000 discussion are based on
certain assumptions that may vary from actual results. In particular, the dates
on which the Company anticipates the completion and implementation of Year 2000
compliant systems and contingency plans are based on the best estimates of
Company Management. These estimates were derived by utilizing numerous
assumptions of future events, including the continued availability of resources,
third-party Year 2000 compliance modification plans and other factors. As a
result, the Company cannot ensure that the estimates and objectives described
herein will be achieved, or that all stages of the Year 2000 Program will be
implemented on schedule. In addition, for the same reasons, the Company cannot
ensure that the costs associated with the Year 2000 Program will remain at the
levels described herein.
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to foreign currency exchange rate risk and interest
rate risk. At December 31, 1998, Tevecap has dollar denominated debt of
US$303,380, which is due as follows:
(In Thousands of US dollars)
Principal
----------------------------
1999 $ 41,028
2000 6,478
2001 4,876
2002 998
2003 and thereafter 250,000
----------------------------
$303,380
============================
The amounts above do not include the debt balances of Galaxy Brasil, as it
is the Company's intention to dispose of Galaxy Brasil and C-Band operations,
which are accounted for as discontinued operations.
51
During January 1999, the Brazilian Real experienced a devaluation after
the Central Bank abandoned the exchange bond within which the real was permitted
to trade. Since that time, the exchange rate has been volatile, ranging up to
R$2.10 per U.S. dollar.
Although the Company's functional currency and its reporting currency is
the U.S. dollar, the cash flow required to service the debt is generated in
local currency, Brazilian reais (R$). Using the year end 1998 exchange rate
(R$1.208 per U.S. dollar), the cash flow in reais to pay the interest and
principal due in 1999 would have been R$88,838 and R$49,561, respectively. A
devaluation of the real to R$2.00 per U.S. dollar would require cash flow of
R$147,082 to pay the interest due in 1999 of US$73,541. Cash flow in reais to
pay the principal due in U.S. dollars would be R$82,056. 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 1999 would be R$183,853 and R$102,570, respectively.
The Company is also subject to interest rate risk on its loans in local
currency. At December 31, 1998, the Company had $88,740 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 CDI (the interbank certificate of deposit rate in Brazil)
plus 1/2%.
During 1998, the CDI Rate ranged from 19.0% to 42.3%. The average rate for
the year was 28.5%. If the CDI rate rose to 40%, interest payments on the
$88,740 would be approximately $35,496 annually. If the CDI rate rose to 50%,
the annual interest payments would be $44,370. It is the intention of the
Company and its affiliates to convert these loans to equity during 1999 if
necessary. In addition, 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
derivatives.
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The Company is managed by its Conselho de Administracao ("Board of
Directors"), Conselho Consultivo ("Advisory Board") and Diretoria ("Committee of
Officers"). Members of the Board of Directors and Committee of Officers are
elected for a two-year period, currently expiring on April 30, 2000. Day-to-day
operations of the Company are managed by the Company's Executivos ("Executive
Officers").
Board of Directors
Current Position
Member Position Held Since
- ------ -------- ----------
Robert Civita.......................... President 1994
Jose Augusto P. Moreira................ Member 1994
Robert Hefley Blocker.................. Member 1995
Roger Philip Hipskind.................. Member 1998
Thomaz Souto Correa Neto............... Member 1995
Francisco Savio Couto Pinheiro......... Member 1995
Arnaldo Bonoldi Dutra.................. Member 1996
Sergio Vladimirschi Junior............. Member 1995
Jose Luis de Salles Freire............. Member 1995
Jorge Fernando Koury Lopes............. Member 1995
Oswaldo Leite de Moraes Filho.......... Member 1995
52
Advisory Board
Current Position
Member Position Held Since
- ------ -------- ----------
Robert Civita.......................... President 1995
Jose Augusto P. Moreira................ Member 1995
Robert Hefley Blocker.................. Member 1995
Roger Philip Hipskind.................. Member 1998
Thomaz Souto Correa Neto............... Member 1998
Francisco Savio Couto Pinheiro......... Member 1995
Stephen Vaccaro........................ Member 1996
Marc Nathanson......................... Member 1995
Tully M. Friedman...................... Member 1995
Raymond E. Joslin...................... Member 1996
Herbert A. Granath..................... Member 1996
Committee of Officers
Current Position
Member Position Held Since
- ------ -------- ----------
Jose Augusto Pinto Moreira............. Member 1992
Angelo Silvio Rossi.................... Member 1996
Claudio Cesar D`Emilio................. Member 1992
Sergio Vladimirschi Junior............. Member 1996
Executive Officers
Current Position
Member Position Held Since
- ------ -------- ----------
Jose Augusto P. Moreira................ President 1998
Douglas Duran.......................... Chief Financial Officer 1992
Luiz Eduardo B.P. Rocha................ Brazil Chief Operations Officer 1997
Alexandre Annemberg.................... Chief Technology Officer 1997
Guilherme Marconi...................... South Operations Officer 1997
Roberto Rio Branco Nabuco de Gouvea.... Sao Paulo Operations Officer 1997
Paulo de Toledo Barros................. Rio de Janeiro Operations 1997
Officer
Jose Carlos R.H. Alves................. Chief Information Technology 1997
Officer
Leila Abraham Loria.................... Galaxy Brasil Officer 1997
Roseli Parrella........................ Human Resources Officer 1997
Andre Muller Borges.................... General Counsel 1998
Marcelo Vaz Bonini..................... Controller 1994
Marc Nathanson is the uncle of Sergio Vladimirschi Junior.
ITEM 11. COMPENSATION FOR DIRECTORS AND OFFICERS
For the year ended December 31, 1998, the aggregate compensation,
including bonuses, of all Directors, Officers and Executive Officers of the
Company was $4,345,725. Members of the Board of Directors, the Advisory Board
and the Committee of Officers do not receive a salary from the Company.
For the year ended December 31, 1998, the aggregate amount set aside by
the Company to provide pension, retirement or similar benefits to Directors,
Officers and Executive Officers was $128,818.
53
ITEM 12. OPTIONS TO PURCHASE SECURITIES
Not applicable.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN 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.
In addition, on April 1, 1996, Tevecap entered into a separate Advisory
Services Agreement with Falcon International Communications, L.L.C. Pursuant to
this agreement, which has a renewable two-year term, Falcon International
Communications, L.L.C. has agreed to provide a range of advisory services to the
Company, encompassing such areas as accounting, budget and billing procedures,
financial and operation statements, customer, employee and government relations,
the design, purchase and maintenance of equipment and supplies, negotiations
with programmers and other such matters as the Company may reasonably request.
In exchange for such services, the Company has agreed to pay Falcon
International Communications, L.L.C. an annual fee of $200,000, which amount may
be revised on each anniversary of the agreement.
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
80.0% 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
54
Agreement does not apply to the activities of The A&E Television Networks,
Lifetime Television and ESPN, including agreements relating to ESPN Brasil.
Other Transactions Among Shareholders
In 1995 each of Tevecap's corporate shareholders entered into a side
letter to the Stock Purchase Agreement and the Stockholders Agreement pursuant
to which each of Abril, Falcon and the Chase Parties agreed, with certain
exceptions, to exchange all of its respective shares in Tevecap for a
corresponding number of shares of a newly-formed Brazilian corporation. The new
corporation would become an 80.0% shareholder in Tevecap and Hearst/ABC would
remain a 20.0% shareholder in Tevecap, which would be reorganized as a Brazilian
limitada. This new structure would not result in any change in the current
beneficial equity participation of the Stockholders in Tevecap. In addition, the
transactions in establishing the new structure and the new structure itself
would have to conform to the terms of the Indenture.
Transactions Among Related Parties
General and Advisory Services
TVA Sistema and MTV Brasil have entered into various agreements, dated
August 27, 1996, governing reciprocal services between the Company and MTV
Brasil. The services covered by the agreement include billing, subleasing,
equipment use, administrative, financial, accounting, human resources,
engineering, infrastructure and satellite services. TVA Sistema and Abril have
also entered into an agreement, dated January 1995, with Uniser, a division of
Abril, pursuant to which Uniser provides telecommunications, maintenance, human
resources, travel, legal other services in exchange for a monthly payment of
approximately $57,000.
Tevecap provides financial and administrative services to Galaxy Brasil,
in return for which the Company receives a monthly payment of $47,000 pursuant
to an agreement dated March 9, 1995. Tevecap also provides to ESPN Brasil Ltda.
satellite and other engineering services, for which it receives a payment of
approximately $263,000 per month, pursuant to an agreement dated June 26, 1995.
The Company has also entered into an agreement with HBO Brasil Ltda.,
dated September 1, 1995, to provide space, equipment and engineering services to
HBO Brasil Ltda., in return for which the Company receives a monthly payment of
approximately US$111,000.
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 435,000 copies of the Company's monthly
magazine in return for a monthly payment of approximately $257,000. 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 $72,000 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.
In addition, the Company has an agreement with HBO Brasil Ltda., dated
September 1, 1995, pursuant to which the Company assists HBO Brasil Ltda. in
selling advertising, in return for which the Company receives 25.0% of HBO
Brasil Ltda.'s advertising revenues.
55
Insurance
TVA currently reimburses TVA Sistema for payments made by TVA Sistema
pursuant to an insurance policy covering the operations of TVA Sistema, TVA
Brasil Abril Video da Amazonia and the former MTV Division of Abril
(collectively, the "Insureds"). TVA Sistema makes such payments pursuant to an
agreement among the Insureds dated September 30, 1997. The annual premiums paid
by TVA Sistema and reimbursed by the Company amount to approximately $86,000.
Abril Loans
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 and valid for a period of 36 months, 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, 1998, the aggregate principal amount outstanding under the Abril
Credit Facility was $88.7 million. In addition, in 1997 and 1998 Abril made a
shareholder loan to Galaxy Brasil, of which $58.6 million was outstanding as of
December 31, 1998.
Other Intercompany/Shareholder Loans
Tevecap has used the proceeds from the Abril Credit Facility to make
capital contributions to TVA Sistema and Galaxy Brasil, as well as to extend
loans to various interrelated companies. The aggregate outstanding amounts under
these loans as of December 31, 1998 were: $21.6 million to TVA Brasil; $12.3 to
SMC; $26.4 million to TVA Sul; $6.0 million to Canbras TVA; $36.7 to TVA
Communciations; and $0.9 million to other affiliates. In addition, TV Show Time
has loans outstanding to Abril, which loans, as of December 31, 1998, had an
aggregate outstanding amount of approximately $2.5 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.
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
Not applicable.
56
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
The Company is not in default on any of its debt instruments. However, the
Company is not in compliance with certain terms thereof. See "Recent
Developments."
ITEM 16. CHANGES IN SECURITIES AND CHANGES
IN SECURITY FOR REGISTERED SECURITIES
Not applicable.
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. FINANCIAL STATEMENTS AND 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 accountants.
57
INDEX TO THE FINANCIAL STATEMENTS
Page
----
Report on Consolidated Financial Statements of Tevecap S.A. and
Subsidiaries as of December 31, 1998 and 1997 and for each of the
three years in the period ended December 31, 1998.......................F-1
Report of Independent Accountants................................F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997.....F-3
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1998...................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, 1998......................................................F-6
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1998...................F-7
Notes to the Consolidated Financial Statements...................F-9
Report on Financial Statements of TVA Sistema de Televisao S.A.
as of December 31, 1998 and 1997 and for each of the three
years in the period ended December 31, 1998............................F-53
Report of Independent Accountants...............................F-55
Balance Sheets as of December 31, 1998 and 1997.................F-56
Statements of Operations for each of the three
years in the period ended December 31, 1998..................F-58
Statements of Changes in Shareholders' Deficit for
each of the three years in the period ended
December 31, 1998............................................F-59
Statements of Cash Flows for each of the three
years in the period ended December 31, 1998..................F-60
Notes to the Financial Statements...............................F-61
Report on Financial Statements of TVA Sul Parana Ltda. and subsidiary as
of December 31, 1998 and 1997 and for each of the three years in the
period ended December 31, 1998.........................................F-77
Report of Independent Accountants...............................F-79
Consolidated Balance Sheets as of December 31, 1998 and 1997....F-80
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1998..................F-82
58
Page
----
Consolidated Statements of Changes in Shareholders' Equity
for each of the three years in the period ended
December 31, 1998............................................F-83
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1998..................F-84
Notes to Consolidated Financial Statements......................F-86
Report on Financial Statements of CCS--Camboriu Cable System de
Telecomunicacoes Ltda. as of December 31, 1998 and 1997 and for
each of the two years in the period ended December 31, 1998 and
the period from inception, May 30, 1996 to December 31, 1996..........F-100
Report of Independent Accountants..............................F-102
Balance Sheets as of December 31, 1998 and 1997................F-103
Statements of Operations for each of the two years in the
period ended December 31, 1998 and the period from
inception, May 30, 1996 to December 31, 1996................F-105
Statements of Changes in Shareholders' Equity for
each of the two years in the period ended December
31, 1998 and the period from inception, May 30, 1996
to December 31, 1996........................................F-106
Statements of Cash Flows for each of the two years in
the period ended December 31, 1998 and the period
from inception, May 30, 1996 to December 31, 1996...........F-107
Notes to Financial Statements..................................F-108
59
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/ Claudio Cesar D'Emilio
-----------------------------
Name: Claudio Cesar D'Emilio
Title: Officer
Date: May 19, 1999
60
GLOSSARY
ABC: ABC, Inc., formerly known as "Capital Cities/ABC, Inc."
Abril: Abril S.A., the leading magazine publishing, printing and
distribution company in Latin America.
Abril Credit Facility: A revolving credit facility, dated December 6,
1995, between Tevecap, as the borrower, and Abril, as the lender.
BBC: British Broadcasting Corporation.
Brasilsat: A satellite operated by Embratel through which the Company
provides C-Band service.
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 Companies: Canbras TVA Cabo and TV Cabo Santa Branca.
Canbras TVA Cabo: Canbras TVA Cabo Ltda., a Brazilian limitada.
Canbras TVA: The operations of Canbras TVA Cabo and TV Cabo Santa Branca,
in each of which Tevecap holds a 36.0% equity interest and Canbras Par holds a
64.0% equity interest.
Canbras-Par: Canbras Participacoes, Ltda., a Brazilian limitada
wholly-owned by Canbras.
CBC: California Broadcasting Center, an uplink center for GLA located in
Long Beach, California.
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.
A-1
Cisneros Group: Cisneros Group of Companies, which holds a 10% interest in
GLA through Darlene Investments.
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.
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.
Comercial Cabo Sao Paulo: Comercial Cabo TV Sao Paulo Ltda., a Brazilian
limitada in which Tevecap holds a 99% equity interest.
Company: Tevecap, together with its consolidated subsidiaries.
CPL: Cable Participacoes Ltda., a Brazilian limitada, jointly owned by
Hearst and ABC, which limitada holds a 2.0% 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 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 that holds a 70% equity interest in GLA.
Embratel: Empresa Brasileira de Telecomunicacoes, the recently-privatized
Brazilian national telephone carrier authorized to provide satellite
telecommunications services utilizing the Sistema Brasiliero de Telecomunicacoes
por Satelite (Brazilian Satellite Telecommunications System).
ESPN: ESPN, Inc., in which ABC has an 80.0% equity interest and Hearst has
a 20.0% equity interest.
ESPN Agreement: Quotaholders Agreement, dated June 26, 1995, among
Tevecap, TVA Sistema, ESPN Brazil, Inc. and ESPN Brasil Ltda.
ESPN Brasil: Programming provided by ESPN Brasil Ltda.
ESPN Brazil, Inc.: A Delaware corporation wholly owned by ESPN.
ESPN Brasil Ltda.: ESPN do Brasil Ltda., a Brazilian limitada in which
Tevecap holds a 50.0% equity interest
A-2
and ESPN Brazil, Inc., holds a 50.0% 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.
EximBank: The Export-Import Bank of the United States.
EximBank Facility: A credit facility, dated December 9, 1996, among
Tevecap, as Guarantor, TVA Sistema, as borrower, and The Chase Manhattan Bank,
N.A., as lender. The EximBank guarantees 85% of amounts borrowed under the
EximBank Facility.
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.
Fox: Twentieth Century Fox Television International.
Galaxy Brasil: Galaxy Brasil S.A., a wholly-owned subsidiary of Tevecap
which operates Brazil's first Ku-Band system.
Galaxy Brasil Leasing Facility: A five-year, $49.9 million lease and
sale-leaseback facility entered into in March 1997 by Galaxy Brasil, as lessee,
and Citibank, N.A., as lessor.
Galaxy Latin America: Galaxy Latin America, LLC, a Delaware limited
liability company the members of which are DLA, which holds a 70% equity
interest, Darlene Investments, which holds a 20% equity interest and TVA
Communications, which holds a 10% equity interest.
Galaxy VIII-i: A satellite owned and operated by Hughes Communications
through which Galaxy Brasil provides DIRECTV service. Galaxy VIII-i was launched
in December 1997 and replaced the Galaxy III-R satellite with respect to the
transmission of GLA programming.
GLA: Galaxy Latin America.
GLA Agreement: Limited Liability Company Agreement of Galaxy Latin
America, LLC, dated April 11, 1997.
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.
Grupo Frecuencia Modulada Television: Grupo Frecuencia Modulada
Television, S.A. de C.V., a Mexican corporation wholly owned by Grupo MVS.
A-3
Guarantors: TVA Sistema de Televisao S.A., Galaxy Brasil 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 Satelite Ltda, TVA Banda C 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 Partners, that
distributes HBO programming in Brazil.
HBO Brasil Partners: HBO Brasil Partners Ltd., a joint venture between
TVA, which holds a 24.0% equity interest, and HBO Ole Partners, which holds a
76.0% equity interest.
HBO Ole Partners: A partnership among Time Warner Entertainment Company,
L.P., SPE Latin American Acquisition Corporation, Ole Communications, Inc. and
BVI Television Investments, Inc.
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.
Hughes Communications: Hughes Communications, Inc.
Hughes Electronics: Hughes Electronics Corporation.
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, Chase Manhattan Bank, as trustee,
and Chase Trust Bank, as principal paying agent in connection with the 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.
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.
A-4
Local Operating Agreement: Local Operating Agreement, dated July 26, 1996,
between GLA and Galaxy Brasil.
MGM: Metro Goldwyn Mayer, Inc.
Ministry of Communications: The Brazilian Ministry of Communications,
authorized to regulate the Brazilian subscription television industry pursuant
to the Brazilian Telecommunications Code of 1962.
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
50.0% equity interest and Viasem Brasil Holdings Ltda. (an indirect subsidiary
of Viacom International) holds the remaining 50% equity interest.
Multicanal: Multicanal Participacoes S.A., a Cable service provider in
Brazil.
NBC: National Broadcasting Company, Inc.
NDS: News Digital Systems Limited, a wholly-owned subsidiary of News
Corporation.
Net Brasil: Net Brasil S.A., a Cable and MMDS service provider in Brazil.
Net Sat: Net Sat Servicos Ltda., TVA's competitor in DBS service, 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.
the Notes: Tevecap's 250,000,000 12 5/8% Senior Notes due 2004 issued on
November 26, 1996.
Operating Ventures: Canbras TVA and TV Filme, two of TVA's minority-owned
ventures.
Owned Systems: TVA Sistema, TVA Sul and Galaxy Brasil.
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.
Programming Ventures: HBO Brasil Partners and ESPN Brasil Ltda.
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
A-5
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.
SBT: TVSBT--Canal 4 de Sao Paulo S.A., a Brazilian national off-air
channel.
Securities Act: United States Securities Act of 1933, as amended.
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.
SurFin: SurFin Ltd., a corporation organized under the laws of the
Bahamas, the (direct and indirect) shareholders of which are Tevecap, holding
20.5%, DIRECTV International Inc., a subsidiary of Hughes Communications,
holding 39.3%, Darlene Investments, holding 20.4%, and Grupo Frecuencia Modulada
Television, holding 19.8%.
SurFin Credit Facility: A three year $150.0 million credit facility
between SurFin and Citicorp USA, Inc., as administrative agent, under a
syndicated credit agreement, dated September 24, 1996.
Tambore Facility: TVA's Ku-Band uplink center located in the city of
Tambore in greater Sao Paulo.
Telecommunications Code: The Brazilian Telecommunications Code of 1962, as
amended.
Telephony: The provision of telephone service.
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
64.0% equity interest.
TV Filme: TV Filme, Inc., a Delaware corporation in which Tevecap
currently holds a 14.7% equity interest, Warburg, Pincus Investors, L.P.
currently holds a 38.8% equity interest, members of the Lins family currently
hold a 16.2% equity interest, public stockholders currently hold a 28.15% equity
interest and certain individuals own the remaining 2.15% equity interest.
TV Filme Service Area: Brasilia, Belem and Goiania.
TV Group: The operations of TVA excluding the operations and results of
Galaxy Brasil.
A-6
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 53.0% equity
interest and in which the remaining 47.0% 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 holds a
100% equity interest.
TVA Brasil: TVA Brasil Radioenlaces S.A., a Brazilian limitada in which
the estate of Matias Machline currently holds a 50.0% equity interest and in
which the remaining 50.0% is currently held by various Abril shareholders.
TVA Communications: TVA Communications Ltd., a British Virgin Islands
company wholly-owned by Tevecap, through which Tevecap holds a 10.0% equity
interest in Galaxy Latin America.
TVA Curitiba: TVA Curitiba Servicos em Telecommunicacoes Ltda., a
Brazilian limitada in which Tevecap held an 80.0% equity interest and Leonardo
Petrelli held a 20.0% equity interest prior to TVA Curitiba's merger into TVA
Parana Ltda. and the reorganization of TVA Parana Ltda. as a subsidiary of TVA
Sul Participacoes S.A. in October 1996.
TV Globo: A provider of off-air programming in Brazil and an affiliate of
Globo.
TVA Sistema: TVA Sistema de Televisao S.A., a Brazilian corporation in
which Tevecap holds a 98.0% equity interest Robert Civita, a Brazilian national,
holds a 2.0% equity interest.
TVA Sul: The operations of TVA Sul Parana Ltda., a Brazilian limitada in
which TVA holds an 86.0% equity interest and Abril holds the remaining 14.0%
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.
UHF: Broadcast of a television signal at an ultra-high frequency over a
given geographical area.
VCR: Video cassette recorders.
Viacom International: Viacom International (Netherlands B.V.).
A-7
TEVECAP S.A.
AND SUBSIDIARIES
REPORT ON CONSOLIDATED
FINANCIAL STATEMENTS
as of December 31, 1998 and 1997
and for each of the three years in the
period ended December 31, 1998
TEVECAP S.A.
AND SUBSIDIARIES
Index to Consolidated Financial Statements
Contents
Page
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for each of the three years in
the period ended December 31, 1998 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, 1998 F-6
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1998 F-7
Notes to The Consolidated Financial Statements F-9
F-1
ARTHUR ANDERSEN S/C
Report of Independent 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, 1998 and 1997, and the related
consolidated statements of operations, changes in shareholders' equity and
redeemable common stock and cash flows for each of the three years in the period
ended December 31, 1998, 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, 1998 and 1997, and the consolidated results of
their operations and cash flows for each of the three years in the period ended
December 31, 1998, in conformity with accounting principles generally accepted
in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered recurring
losses and has negative net working capital and a net capital deficiency that
raise substantial doubt about its ability to continue as a going concern.
Management's actions in regard to these matters include the sale of certain
assets, as discussed in Note 24 and Note 25b. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
Arthur Andersen
Sao Paulo, Brazil
March 5, 1999 (Except for Note 25b as to which the date is May 18, 1999)
F-2
TEVECAP S.A.
AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1998 and 1997
(In thousands of U.S. dollars)
December 31,
----------------------
1998 1997
-------- --------
ASSETS
Current assets
Cash and cash equivalents $ 1,397 $ 989
Accounts receivable, net 20,679 24,139
Inventories, net 14,900 23,590
Film exhibition rights 1,568 1,291
Prepaid and other assets 5,176 13,833
Accounts receivable from related parties 1,052 2,622
Other accounts receivable 4,232 4,807
-------- --------
Total current assets 49,004 71,271
-------- --------
Property, plant and equipment, net 298,004 266,518
Investments in and advances to discontinued
operations -- 13,904
Investments
Equity basis 1,944 5,168
Cost basis investments 49,096 36,904
Concessions, net 12,070 13,775
Loans to related companies 29,416 24,745
Debt issuance costs, net (accumulated
amortization;
1998- $2,978; 1997 - $ 1,428) 6,263 7,813
Other 2,130 1,913
-------- --------
Total assets $447,927 $442,011
======== ========
F-3
TEVECAP S.A.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
(in thousands of U.S. dollars)
December 31,
-----------------------
1998 1997
--------- ---------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Loans $ 41,028 $ 40,600
Film suppliers 17,568 12,087
Other suppliers 25,715 29,265
Deficit in discontinued operations 21,858 --
Taxes payable other than income taxes 13,229 9,034
Accrued payroll and related liabilities 3,957 5,339
Advance payments received from subscribers 2,002 34
Other accounts payable 5,818 3,003
--------- ---------
Total current liabilities 131,175 99,362
--------- ---------
Long-term liabilities
Loans 262,352 275,899
Loans from shareholders 88,740 54,321
Provision for claims 7,426 5,662
Liability to fund equity investee 1,025 --
--------- ---------
Total long-term liabilities 359,543 335,882
--------- ---------
Commitments and contingencies (Note 16)
Minority interest 3,464 4,802
Redeemable common stock, no par value, 85,637,526
shares
Issued and outstanding 178,002 189,034
Shareholders' deficit
Common stock, no par value, 140,700,759
Shares issued and outstanding 242,342 142,495
Accumulated deficit (466,599) (329,564)
--------- ---------
Total shareholders' deficit (224,257) (187,069)
--------- ---------
Total liabilities and shareholders' deficit $ 447,927 $ 442,011
========= =========
F-4
TEVECAP S.A.
AND SUBSIDIARIES
Consolidated Statements of Operations
for the years ended December 31, 1998, 1997 and 1996
(in thousands of U.S. dollars)
Year ended December 31,
-------------------------------------------
1998 1997 1996
----------- ----------- -----------
Gross revenues
Monthly subscriptions $ 136,278 $ 142,700 $ 107,692
Installation 2,886 12,941 22,281
Advertising 3,544 4,947 7,532
Indirect programming 19,580 22,810 11,377
Other 14,893 13,649 7,995
Taxes on revenues (12,533) (13,315) (10,557)
----------- ----------- -----------
Net revenue 164,648 183,732 146,320
----------- ----------- -----------
Direct operating expenses
Payroll and benefits 15,968 22,593 23,324
Programming 54,282 56,394 42,315
Transponder lease cost 2,336 6,312 6,737
Technical assistance 1,212 1,832 5,507
Vehicle rentals 178 1,075 1,772
TVA magazine 7,158 5,827 6,311
Pole rental 3,247 2,157 448
Other costs 8,975 7,026 8,432
----------- ----------- -----------
93,356 103,216 93,846
----------- ----------- -----------
Selling, general and administrative
expenses
Payroll and benefits 24,849 24,432 24,885
Advertising and promotion 9,335 18,367 11,445
Rent 3,976 3,721 3,245
Other administrative expenses 16,100 16,407 12,619
Other general expenses 2,257 1,917 10,274
----------- ----------- -----------
56,517 64,844 62,468
----------- ----------- -----------
Provision for equipment and inventory
obsolescence 1,940 3,944 3,621
Depreciation 46,402 33,704 22,673
Amortization 1,705 1,757 1,677
----------- ----------- -----------
Operating loss from continuing
operations (35,272) (23,733) (37,965)
----------- ----------- -----------
Interest income 6,718 14,205 5,896
Interest expense (51,665) (44,541) (16,287)
Translation gain (loss) (17) (902) 473
Equity in losses of affiliates (12,139) (6,851) (8,532)
Other nonoperating (expenses) income, net (4,233) 927 (2,327)
----------- ----------- -----------
Loss from continuing operations
before income taxes and
minority interest (96,608) (60,895) (58,742)
Income taxes (24) -- (156)
----------- ----------- -----------
Loss from continuing operations
before minority interest (96,632) (60,895) (58,898)
Minority interest 1,338 916 1,849
----------- ----------- -----------
Loss from continuing operations (95,294) (59,979) (57,049)
Income (loss) from discontinued operations (52,773) (21,438) 9,157
----------- ----------- -----------
Net loss $ (148,067) $ (81,417) $ (47,892)
=========== =========== ===========
Net loss per share for
continuing operations (0,43) (0,30) (0,29)
Net income (loss) per
share for discontinued
operations (0,23) (0,11) 0,05
Net loss per share (0,66) (0,41) (0,24)
Weighted average shares
outstanding 223,659,822 196,712,865 596,712,865
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, 1998, 1997 and 1996
(in thousands of U.S. dollars)
Total Redeemable
Paid-in Accumulated Shareholders' Common
Capital Deficit Deficit Stock
--------- --------- --------- ---------
Balance as of December 31, 1995 $ 142,495 $(160,755) $ (18,260) $ 149,534
Net loss for the year (47,892) (47,892)
Accretion related to redeemable common stock (15,376) (15,376) 15,376
--------- --------- --------- ---------
Balance as of December 31, 1996 $ 142,495 $(224,023) $ (81,528) $ 164,910
--------- --------- --------- ---------
Net loss for the year (81,417) (81,417)
Accretion related to redeemable common stock (24,124) (24,124) 24,124
--------- --------- --------- ---------
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
========= ========= ========= =========
F-6
TEVECAP S.A.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the years ended December 31, 1998, 1997 and 1996
(in thousands of U.S. dollars)
Year Ended December 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
Cash flows from operating activities:
Net loss $(148,067) $ (81,417) (47,892)
Adjustments to reconcile net loss to net
cash (used in) provided by operating activities:
Depreciation 46,402 33,704 22,673
Amortization 1,705 1,757 1,677
Amortization of debt issuance cost 1,550 1,332 96
Provision for doubtful accounts 3,407 3,334 1,381
Provision for equipment and inventory
obsolescence 1,940 3,944 3,521
Provision for claims 1,764 611 1,282
Minority interest (1,338) 3,024 1,778
Disposal and write-off of property,
plant and equipment 1,574 338 1,005
Discontinued operations 52,773 21,438 (9,157)
Equity in losses of affiliates 12,139 6,851 11,285
Changes in operating assets and liabilities:
Film exhibition rights (277) (230) (1,031)
Accounts receivable 53 (13,914) (7,742)
Prepaid and other assets 8,657 (11,075) (7,226)
Other accounts receivable 1,928 (4,587) (1,972)
Accrued interest 258 26,659 2,720
Inventories 8,680 (11,365) (2,269)
Suppliers 1,931 (13,666) 2,898
Taxes payable other than income taxes 4,195 1,669 2,329
Accrued payroll and related liabilities (1,382) 6 947
Advances received from subscribers 1,968 (2,411) 81
Other accounts payable 2,815 3,864 508
--------- --------- ---------
Net cash (used in) provided by
operating activities 2,675 (30,134) (23,108)
--------- --------- ---------
Cash flows used in investing activities:
Purchases of property, plant and equipment (81,392) (118,909) (87,867)
Discontinued operations (17,011) 295 (11,106)
Loans to related companies (44,071) (61,939) (89,270)
Purchases of concessions -- -- (11,273)
Investments in equity and cost
investments (20,082) (44,350) (18,889)
--------- --------- ---------
Net cash used in investing
activities (162,556) (224,903) (218,405)
--------- --------- ---------
Cash flows from financing activities:
Bank loans 14,549 59,509 258,026
Capital contributions 99,847 -- --
Loans from shareholders 126,084 54,908 202,417
Repayments of loans to related companies (83,696) (4,442) (201,042)
Repayments of loans from related companies 31,429 45,724 62,650
Repayment of loans from banks (27,924) (4,412) --
--------- --------- ---------
Net cash provided by financing
activities 160,289 151,287 322,051
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents 408 (103,750) 80,538
Cash and cash equivalents at beginning of
the period 989 104,739 24,201
Cash and cash equivalents at end
of the period $ 1,397 989 104,739
========= ========= =========
Supplemental cash disclosure:
Cash paid for interest $ 31,712 32,038 7,312
========= ========= =========
F-7
TEVECAP S.A.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the years ended December 31, 1998, 1997 and 1996
(in thousands of U.S. dollars)
Year Ended December 31,
------------------------------
1998 1997 1996
-------- -------- --------
Supplemental noncash financing and investing
activities:
Accrued interest on related company loans
refinanced as principal balance $ 10,930 $ 4,599 $ 354
Details of acquisitions:
Fair value of assets acquired -- -- 12,739
Liabilities assumed -- -- (1,385)
-------- -------- --------
Cash paid -- -- 11,354
Less: cash acquired -- -- (81)
-------- -------- --------
Net cash paid for acquisitions $ -- $ -- $ 11,273
======== ======== ========
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 and cable and parabolic antenna
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.
As of December 31, 1998, 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.
During 1998, the Company's Board of Directors approved a plan of
disposition of the DTH Division (Direct to Home). As a result, the
financial statements have been retroactively restated to present the DTH
Division as discontinued operations. See Note 3 for further discussion.
F-9
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
2.1. Basis of presentation and consolidation
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.
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
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 52, "Foreign Currency Transactions", the United States dollar has been
assumed to be the functional currency, as a substantial portion of
Company's business is conducted in United States dollars. As such, the
local accounts of the Company are translated into United States dollars as
follows:
o Nonmonetary assets and liabilities are translated at historical
rates. All other assets and liabilities are translated at the
official rate of exchange of R$1.2087 to US$1 in effect on December
31, 1998 and R$1.1164 to US$1 in effect on December 31, 1997.
Translation gains/losses are recognized in the income statement.
o Income and expenses are translated at the average exchange rates in
effect each month, except for those related to assets and
liabilities which are translated at historical exchange rates, and
deferred income taxes, which are translated at the current rate.
Translation gains/losses are recognized in the income statement.
F-10
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(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,
-------------------------------
1998 1997
------------- -------------
Owned Systems
TVA Distribuidora S.A. (c) 100.00% --
TVA Sistema de Televisao S.A 98.00% 98.00%
TVA Sul Participacoes S.A. (b) -- 86.00%
TVA Sul Parana Ltda. (b) 86.00% 86.00%
TVA Sul Santa Catarina Ltda. (b) -- 86.00%
TVA Sul Foz do Iguacu Ltda. (b) -- 86.00%
CCS Camboriu Cable Systems de Telecomunicacoes Ltda 52.20% 52.20%
TVA PAR S.A 100.00% 100.00%
TVA Finco Ltda 100.00% 100.00%
License Subsidiary
Comercial Cabo TV Sao Paulo Ltda. (a) 100.00% 100.00%
TVA Satelite S.A. (c) 100.00% --
Galaxy Brasil S.A. (e) 100.00% 100.00%
TVA Banda C Ltda. (d) 99.99% --
Ipe Radio e Televisao Ltda 100.00% 100.00%
TVA TCG Sistema de Televisao de Porto Alegre S.A 100.00% 100.00%
Programming Ventures
TVA Programadora S.A. (c) 100.00% --
TVA Channels Ltda. (d) 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) During 1998, TVA Sul Participacoes S.A., TVA Sul Santa Catarina,
Ltda and TVA Sul Foz do Iguacu Ltda. were merged into TVA Sul Parana
Ltda.
(c) In March 1998, these holding companies were created due to a
business reorganization.
(d) In March 1998, these companies were created from the spin-off of TVA
Sistema de Televisao's satelite and programming divisions.
(e) Subsequent to December 31, 1998, Galaxy Brasil was converted to a
"Limitada", a limited liability corporation.
F-11
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(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, 1998 and 1997 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 is 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 59% of its carrying value
as of December 31, 1998.
F-12
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(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 11.
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
(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. The remainder is deferred
and amortized to income over the estimated average period that subscribers
are expected to remain connected to the system. 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 Accounting for issuance of stock by subsidiaries and equity investees
Gains or losses arising from the issuance of shares by subsidiaries and
equity investees are recognized in income to the extent that the net book
value of the shares owned after the sale exceeds or is lower than the net
book value per share immediately prior to the sale of the shares by the
subsidiary or equity investees.
2.16 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
(in thousands of U.S. dollars)
3. Discontinued Operations
In October 1998 the Company announced that its Board of Directors had
approved a plan of disposition of the DBS Systems, which comprises the
Galaxy Brasil S.A. operations (KU-Band) and C-Band operations. This
decision was based upon management's review of operations, investments
needs and focus of the Company's business on the distribution of pay
television services through cable and MMDS operations. As of December 31,
1998, the Company was negotiating to dispose of the DBS Systems and no
losses are expected on this transaction. Company's management expects to
conclude and approve the negotiation by the end of the first semester of
1999.
The summarized balance sheet of the DBS Systems as of December 31 was as
follows:
1998 1997
Assets
Accounts receivable, net $ 23,793 $ 23,032
Inventories 156 --
Other current assets 11,988 6,119
Property, plant and equipment, net 149,300 113,316
Equipment under capital lease, net 32,440 42,138
Other non-current assets 526 701
--------- ---------
218,203 185,306
========= =========
Liabilities and Equity
Loans 2,402 9,458
Capital leases 33,483 9,980
Suppliers 116,477 51,580
Other current liabilities 19,067 8,104
Capital leases - long-term -- 33,483
Loans from related companies 58,905 46,090
Deferred hook up fees 8,464 12,098
Other long-term liabilities 1,263 609
Equity (deficit) (21,858) 13,904
--------- ---------
$ 218,203 $ 185,306
========= =========
F-15
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
3. Discontinued Operations (Continued)
The following is a summary of the operating results of the DBS Systems
for the three years ended December 31:
1998 1997 1996
Revenues $ 176,259 $ 144,610 $ 51,771
Operating costs and expenses (201,797) (151,347) (41,304)
--------- --------- ---------
Income (loss) from operations (25,538) (6,737) 10,467
Interest income (expense) (27,652) (14,686) (1,316)
Other nonoperating (expense) income, net 417 (15) 6
--------- --------- ---------
Net income (loss) from operations $ (52,773) $ (21,438) $ 9.157
========= ========= =========
4. Cash and cash equivalents
As of December 31, 1998 and 1997, cash and cash equivalents were comprised
of:
1998 1997
------ ------
Cash on hand and in banks $1,388 $ 69
Short-term investments 9 920
------ ------
$1,397 $ 989
====== ======
Short-term investments as of December 31, 1998 were comprised principally
of short-term deposits.
F-16
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
5. Accounts receivable, net
As of December 31, 1998 and 1997, accounts receivable were comprised of:
1998 1997
-------- --------
Subscriptions $ 16,182 $ 11,695
Installation fees 5,362 8,565
Advertising and programming 5,807 4,958
Barter 4,406 5,857
Other 96 831
Provision for doubtful accounts (11,174) (7,767)
-------- --------
$ 20,679 $ 24,139
======== ========
6. Inventories, net
As of December 31, 1998 and 1997, inventories were comprised of:
1998 1997
-------- --------
Materials and supplies $ 16,420 $ 25,192
Imports in transit 1,610 1,518
Provision for obsolescence (3,130) (3,120)
-------- --------
$ 14,900 $ 23,590
======== ========
7. Prepaid and other assets
As of December 31, 1998 and 1997, prepaid expenses were comprised of:
1998 1997
------- -------
Advances to suppliers $ 1,965 $12,249
Prepaid meals and transportation 38 89
Debt issuance costs 1,274 1,332
Other 1,899 163
------- -------
$ 5,176 $13,833
======= =======
F-17
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
8. Related party transactions
The following tables summarize the transactions between the Company and
its related parties as of December 31, 1998 and 1997 and for the three
years ended December 31, 1997:
December 31,
-------------------
1998 1997
------- -------
TVA Finco Ltda
Loans receivable $14,117 $ 4,100
Abril S.A
Accounts payable $ 399 $ 430
Loans payable 88,740 54,321
Accounts receivable -- 34
Televisao Abril Ltda
Accounts receivable $ 98 $ --
ESPN do Brasil Ltda
Accounts receivable $ 131 $ 31
Accounts payable 26 489
Canbras TV a Cabo Ltda
Accounts receivable $ 39 $ 10
Loans receivable 5,955 6,160
HBO Brasil Partners Ltda
Loans receivable $ 1,792 $ 1,792
California Broadcast Center L.L.C
Loans receivable $ 7,315 $ 7,314
TVA Network Ltda
Accounts receivable $ -- $ 2,138
Galaxy do Brasil S.A
Accounts receivable $ 153 $ --
TVA Banda C Ltda
Accounts receivable $ 545 $ --
Loans receivable 234 5,179
Others
Accounts receivable $ 86 $ 409
Loans receivable 3 200
Accounts payable -- 14
F-18
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
8. Related-party transactions (Continued)
1998 1997 1996
------- ------- -------
Abril S.A
Net interest expense $17.154 $ 4,653 $ 7,196
Printing costs 3,301 4,389 4,516
ESPN do Brasil Ltda
Programming costs $ 5.188 $ 5,213 $ 3,850
Programming revenue (1,120) -- --
Net interest (income) expense -- (1,720) (773)
TV Filme Inc.
Programming revenue $(3,010)) $(8,629) $(6,435)
Canbras TV a Cabo Ltda
Programming revenue $(2,185) $(1,837) $ (207)
Net interest expense -- -- 150
California Broadcast Center L.L.C
Net interest income $ (769) $ (551) $ --
Abril Investments Corporation
Net interest income $ -- $ -- $ (354)
Loans granted to or obtained from related companies, under loan
agreements, are denominated in reais and subject to variable interest of
1.76% to 3.23% per month as of December 31, 1998 (3.85% to 4.45% per month
as of December 31, 1997).
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 1998. As of December 31, 1998 $88,740 was drawn down under the
facility. The credit facility is subject to a variable interest rate of
1.76% to 3.23% per month as of December 31, 1998 (3.85% to 4.45% per month
as of December 31, 1997) and will be paid after December 31, 1999.
F-19
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
8. Related-party transactions (Continued)
Additionally, Abril S.A. provided a guarantee in the course of the year
for equipment imported by Galaxy Brasil S.A., TVA Sistema de Televisao
S.A. ("TVAST"), TV Filme Inc. ("TV Filme") and TVA Sul Parana Ltda. The
amount outstanding pursuant to this guarantee as of December 31, 1998 was
$34,853. The Company and Falcon International Communications Services
Inc., one of the Company's shareholders, signed a consulting service
agreement on April 1, 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.
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, 1998 and 1997 are as follows:
1998 1997
--------- ---------
Deferred tax assets:
Net operating loss carryforwards $ 106,141 $ 64,191
Deferred charges 2,219 4,818
Provision for obsolescence 1,901 871
Provision for claims 8,253 5,097
Provision for decoders 866 904
Hook up fee 1,425 2,624
Other 4,939 3,159
--------- ---------
Total gross deferred tax asset 125,744 81,664
--------- ---------
Less valuation allowance for continuing operations (95,100) (67,209)
Less valuation allowance for discontinued operations (30,135) (11,300)
--------- ---------
Net deferred tax asset 509 3,155
Deferred tax liability:
Installation costs (509) (3,155)
--------- ---------
Total gross deferred tax liability $ (509) $ (3,155)
========= =========
Net deferred tax asset/liability $ -- $ --
========= =========
F-20
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
9. Income taxes (Continued)
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, 1998, the Company and subsidiaries have unexpirable
accumulated tax losses of $274,070.
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:
1998 1997 1996
Loss before income taxes and minority interest $ 149,381 $ 82,333 $ 49,585
Statutory income tax rate 33% 33% 33%
--------- --------- ---------
49,296 27,170 16,363
Increase (decrease) in the income tax rate -- -- 2,644
Unallowable amortization 724 738 2,088
Deferred charges amortization 3,972 4,230 4,996
Translation (loss) gain of tax losses (4,902) (3,089) (2,103)
Installation materials depreciation 125 107 3,648
Equity in losses of affiliate (4,006) (2,261) (2,816)
Net loss of TVA Communication Aruba (139) (1,957) (1,436)
Other 1,632 3,297 (6,377)
--------- --------- ---------
Net income tax benefit for the period 46,702 28,235 17,007
Increase in valuation allowance for continuing
operations (27,891) (20,205) (14,342)
Increase in valuation allowance for
discontinued operations (18,835) (8,030) (2,821)
--------- --------- ---------
$ (24) $ -- $ (156)
========= ========= =========
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-21
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
10. Investments
Investments as of December 31, 1998 and 1997 were comprised of:
Percentage
of Control 1998 1997
---------- ------- -------
Joint ventures and equity basis investments:
ESPN do Brasil Ltda. 50 $ 1,213 $ 2,748
HBO Brasil Partners Ltda. 24 (b) 731 2,325
Canbras TV a Cabo Ltda. 36 -- 95
------- -------
$ 1,944 $ 5,168
======= =======
Liability to fund joint ventures and
Equity basis investments:
Canbras TV a Cabo Ltda. 36 $ 1,025 $ --
------- -------
$ 1,025 $ --
======= =======
Cost basis investments:
TV Filme, Inc. 14.7 (a) $ 6,667 $ 6,667
Galaxy Latin America L.L.C. 10 42,421 30,220
Other 8 17
------- -------
$49,096 $36,904
======= =======
Concessions, net:
Stations in South of Brazil $ 8,646 $ 8,646
Ype Radio e Televisao Ltda. concessions 6,363 6,363
Comercial Cabo Ltda 1,970 1,970
Other 65 65
Amortization (4,974) (3,269)
------- -------
$12,070 $13,775
======= =======
F-22
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
10. Investments (Continued)
a) TV Filme, Inc. ("TV Filme") was accounted for under the equity
method until December 31, 1996. Until that time, the Company had the
right to elect two of six members of the Board of Directors and,
additionally, a significant proportion of TV Filme's business was
transacted with the Company. In 1997, the number of members on the
Board of Directors of TV Filme increased to seven while the
Company's representation was unchanged. In addition, the level of
transactions effected between TV Filme and Tevecap decreased
substantially. The Company therefore reassessed this treatment
resulting in a change to the cost method of accounting.
b) During 1997, HBO Brazil Partners Ltda. issued shares at a price
above book value. The Company did not contribute capital for this
issuance on a basis proportionate with its ownership interest in HBO
Brazil Partners Ltda. and, consequently, the Company's equity
interest fell from 33% to 24%. The Company recorded a gain of $1,140
resulting from this issuance representing the increase in the book
value of its shareholding.
F-23
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
10. Investments (Continued)
The ESPN do Brasil Ltda. ("ESPN Brasil") joint venture was formed in June
1995, with TEVECAP S.A. and ESPN Brazil, Inc. ("ESPN") each holding 50% of
ESPN Brasil's shares. Operations representing the transmission of ESPN's
international sports programs commenced on June 15, 1995. Condensed
financial information of the joint venture as of and for the years ended
December 31, 1998, 1997 and 1996 is as follows:
1998 1997 1996
-------- -------- --------
Current assets $ 6,326 $ 9,702 $ 3,640
Non-current assets 1,875 1,278 2,107
Current liabilities 5,774 5,003 3,663
Long term liabilities -- -- --
Revenues 21,061 18,031 12,733
Gross losses (17,906) (11,992) (9,785)
Loss before income taxes (17,876) (11,715) (10,715)
Net loss (17,876) (11,715) (10,715)
HBO Brazil Partners Ltda. ("HBO Brazil") is a joint venture between
TVAICO, which as of December 31, 1998 and 1997 held a 24% equity interest,
and HBO Brazil and HBO SOUTH B.V., which as of the same dates held the
remaining 76%.
HBO Brazil, Disney Enterprises, Inc., provides the programming to TVA
Sistema de Televisao S.A.
The operations of HBO Brazil commenced in 1994 and condensed financial
information as of and for the years ended December 31, 1998, 1997 and 1996
are as follows:
1998 1997 1996
-------- -------- --------
Current assets $ 22,951 $ 27,826 $ 12,271
Non-current assets 2,500 2,570 1,944
Current liabilities 23,343 26,681 14,470
Long-term liabilities -- -- --
Revenues 63,698 48,790 22,563
Gross losses (3,974) (2,779) (3,203)
Loss before income taxes (4,026) (2,844) (3,247)
Net Loss (5,038) (3,830) (3,547)
F-24
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
11. Property, plant and equipment, net
As of December 31, 1998 and 1997, property, plant and equipment were
comprised of:
Annual
Depreciation December 31,
Rate -----------------------
% 1998 1997
------------ --------- ---------
Machinery and equipment 10 $ 55,708 $ 42,032
Decoders 10 120,434 105,156
Leasehold improvements 25 3,020 3,821
Furniture and fixtures 10 1,907 1,693
Premises 10 3,957 2,662
Vehicles 20 3,095 3,344
Software 20 2,511 4,647
Tools 10 878 831
Reception equipment 20 153,614 123,765
Cable plant 10 83,671 30,593
Building 4 3,784 3,783
--------- ---------
432,579 322,327
Trademarks, patents and others 186 179
Telephone line use rights 2,978 2,372
Other 691 4,434
Provision for decoders and machinery
and equipment (6,375) (4,445)
Accumulated depreciation (134,398) (83,287)
Fixed assets in transit 2,343 24,938
--------- ---------
$ 298,004 $ 266,518
========= =========
F-25
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
12. Loans
As of December 31, 1998 and 1997, loans were comprised of:
December 31, 1998 Short-term Long-term
---------- ---------
Senior Notes due 2004 $ 2,981 $250,000
Bank loans 38,047 12,352
-------- --------
$ 41,028 $262,352
======== ========
December 31, 1997 $ 40,600 $275,899
======== ========
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.
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, 1998 amounted to
$1,550.
The Senior Notes Indenture contains certain restrictive covenants which
relate to, inter alia, the ability of TEVECAP S.A. and the guarantor
subsidiaries to incur additional indebtedness, declare dividends, effect
asset dispositions, enter into new liens, sell capital stock, enter into
mergers and/or consolidations, invest in non-guarantor subsidiaries,
transfer existing businesses, etc. As of December 31, 1998, the Company
was in compliance with all restrictive covenants contained in the Senior
Notes Indenture.
Bank loans in local currency are secured by promissory notes and chattel
mortgages; interest rates on these loans vary from 8.5% to 10% per year.
F-26
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
12. Loans (Continued)
Annual maturities of long-term debt, including the current component, for
the five years subsequent to December 31, 1998 are as follows:
1999 $ 41,028
2000 6,478
2001 4,876
2002 998
2003 and thereafter 250,000
--------
Total $303,380
========
13. Other accounts payable
As of December 31, 1998 and 1997, other accounts payable were comprised
of:
1998 1997
------ ------
Accounts payable to related companies $ 425 $ 933
Advertising 1,619 165
Importation expenses payable 45 564
Other 3,729 1,341
------ ------
$5,818 $3,003
====== ======
F-27
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
14. Leased assets and commitments
The Company has funding commitments related to Galaxy Latin America, TV
Filme, ESPN Brasil, HBO Brasil Partners Ltda., Canbras TV a Cabo Ltda.,
TVA Sistema de Televisao S.A. and Surfin Ltd. of approximately $24,000,
which must be met prior to December 1999.
The Company has rented its office space until the year 2003. As of
December 31, 1998, future minimum rental payments applicable to operating
leases in respect of this space aggregate approximately $9,213, as
follows:
1999 $1,956
2000 1,848
2001 1,803
2002 1,803
2003 1,803
------
Total $9,213
======
As of December 31, 1998, the Company had contractual commitments with
Empresa Brasileira de Telecomunicacoes ("Embratel") for the use of a
transponder until the year 2004. Based on the contract provisions, these
commitments are currently estimated to aggregate approximately $79,776, as
follows:
1999 $13,296
2000 13,296
2001 13,296
2002 13,296
2003 13,296
2004 13,296
-------
Total $79,776
=======
F-28
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
15. Common stock
Common stock as of December 31, 1998 and 1997 was comprised of:
1998 1997
------------------------- -------------------------
US$ Shares US$ Shares
----------- ----------- ----------- -----------
Redeemable common stock
(including accretion) $ 178,002 85,637,526 $ 189,034 85,637,526
----------- ----------- ----------- -----------
Paid-in capital $ 242,342 140,700,759 $ 142,495 111,075,339
=========== =========== =========== ===========
a) Common stock subject to redemption
As of December 31, 1998 and 1997, 43.5% 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, 1998 and 1997, 14.2% 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-29
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
15. 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 $11,032 with respect to the year ended December 31,
1998 and an accretion of $24,124 with respect to the year ended December
31, 1997, determined by Company management.
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.
16. 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-30
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
17. 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 $511 for the year ended December 31,
1998 ($1,070 in 1997 and $303 in 1996).
18. Abril Health Care Plan
In February 1996, the Abril 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 1998, contributions made by TEVECAP S.A. and certain affiliates of
Associacao Abril de Beneficios amounted to $2,046 ($1,988 in 1997 and
$1,864 in 1996).
19. Supplementary information - valuation and qualifying accounts and reserves
Provision
Provision For Provision Deferred
For Provision Decoders For Taxation Provision
Doubtful for And Exhibition Valuation for
Accounts Obsolescence Equipment Expiration Allowance Claims
------------ ------------ ------------ ------------ ------------ ------------
Balance as of December 31, 1995 $ 3,052 $ -- $ -- $ 1,162 $ 32,662 $ 3,763
Additions charged to expense 1,381 2,250 1,371 14,342 1,282
------------ ------------ ------------ ------------ ------------ ------------
Balance as of December 31, 1996 $ 4,433 $ 2,250 $ 1,371 $ 1,162 $ 47,004 $ 5,045
Additions charged to expense 3,334 870 3,074 -- 20,205 617
Reduction -- -- -- (1,162) -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance as of December 31, 1997 $ 7,767 $ 3.120 $ 4,445 $ -- $ 67,209 $ 5,662
Additions charged to expense 3,407 10 1,930 -- 27,891 1,584
------------ ------------ ------------ ------------ ------------ ------------
Balance as of December 31, 1998 $ 11,174 $ 3.130 $ 6,375 $ -- $ 95,100 $ 7,246
============ ============ ============ ============ ============ ============
F-31
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
20. 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, 1999. As of December 31, 1998 the Company
has no operations with hedging activities.
In March 1998, the AICPA issued Statement of position 98-1 (SOP 98-1),
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". SOP 98-1 requires capitalization of certain direct costs
and interest costs after preliminary development efforts have been made.
SOP 98-1 is effective for fiscal year beginning after December 15, 1998.
At this time, management is considering the impact of this pronouncement,
but does not believe it will have a material effect on the Company's
consolidated financial statements.
F-32
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
21. Capital leases
In 1997, the Company through its subsidiary Galaxy Brasil S.A. acquired
equipment (decoders) through a capital lease contract with Citibank, N.A.
Such contract has a five-year term with interest at LIBOR plus 2,5 % per
year. Following is an analysis of this equipment:
1998
--------
Equipment (decoders) $ 49,900
Less: accumulated amortization (17,460)
--------
$ 32,440
========
Following is a schedule by year of future minimum lease payments under
these capital leases with the present value of the net minimum lease
payments as of December 31, 1998:
1999 12,988
2000 11,945
2001 10,905
2002 3,625
--------
Total minimum lease payments $ 39,463
Less: amount representing interest (5,980)
--------
Present value of net minimum lease payment $ 33,483
========
Galaxy Brasil S.A. is currently not in compliance with certain financial
covenants (specifically the debt to tangible net worth ratio covenant and
the tangible net worth covenant) contained in the Equipment Lease
Agreement and the Equipment Lease and Saleback Agreement, each dated as of
July 30, 1996 between Citibank, N.A., as Lessor and the Company, as
Lessee. Citibank issued a waiver of those covenant defaults, valid for a
period of six months, from December 31, 1998 until June 30, 1999. However,
there is no assurance that Citibank would be willing to grant further
waivers at the end of such six-month period. In the event that Citibank
were to refuse to grant further waivers, Citibank may have the right to
exercise its remedies under the equipment lease agreements. Consequently,
the present value of net minimum lease payment was reclassified to current
liabilities as presented in the summarized balance sheet of the
discontinued operations in Note 3.
F-33
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
22. Segments of Business
Tevecap's corporate structure was completed by dividing the Company into
three distinct operating divisions:
a. Distribution which includes Cable and MMDS operations;
b. Programming which concentrates Tevecap's programming interest at
ESPN Brasil and HBO Brasil, as well as other own channel;
c. Satellite or DTH Division which holds the C Band and DirecTV
operations.
December 31, 1998
Total Discontinued
MMDS Continuing Operations
& Cable Programming Others Operations (DTH) TOTAL
Net Revenue 134,004 30,071 573 164,648 176,259 340,907
Operating Expenses 93,348 33,500 24,965 151,813 162,612 314,425
Depreciation and Amortization 43,063 2,584 2,460 48,107 39,185 87,292
-------- -------- -------- -------- -------- --------
Operating Loss (2,407) (6,013) (26,852) (35,272) (25,538) (60,810)
Interest expense, net (13,926) (96) (30,942) (44,964) (27,652) (72,616)
Equity income (losses) affiliates (1,119) (11,020) -- (12,139) -- (12,139)
Other Nonoperating 1,889 (1,550) (4,572) (4,233) 417 (3,816)
-------- -------- -------- -------- -------- --------
Loss before Income Taxes
And minority interest (15,563) (18,679) (62,366) (96,608) (52,773) (149,381)
Income Tax (24) -- -- (24) -- (24)
Minority interest 1,338 -- -- 1,338 -- 1,338
-------- -------- -------- -------- -------- --------
Net Loss (14,249) (18,679) (62,366) (95,294) (52,773) (148,067)
======== ======== ======== ======== ======== ========
Capital Expenditures 68,906 1,414 11,072 81,392 61,967 143,359
Total assets 353,326 12,351 82,250 447,927 217,654 665,581
F-34
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
22. Segments of Business (Continued)
December 31, 1997
Total Discontinued
MMDS Continuing Operations
& Cable Programming Others Operations (DTH) TOTAL
Net Revenue 147,919 35,260 553 183,732 144,610 328,342
Operating Expenses 111,491 41,788 18,725 172,004 130,427 302,431
Depreciation and Amortization 32,737 1,886 838 35,461 20,920 56,381
-------- -------- -------- -------- -------- --------
Operating Income (Loss) 3,691 (8,414) (19,010) (23,733) (6,737) (30,470)
Interest expense, net (7,655) (23,583) (31,238) (14,686) (45,924)
Equity income (losses) affiliates (1,543) (5,308) -- (6,851) -- (6,851)
Other Nonoperating (4,475) 5,402 927 (15) 912
-------- -------- -------- -------- -------- --------
Loss before Income Taxes
And minority interest (9,982) (13,722) (37,191) (60,895) (21,438) (82,333)
Income Tax -- -- -- -- -- --
Minority interest 916 -- -- 916 -- 916
-------- -------- -------- -------- -------- --------
Net Loss (9,066) (13,722) (37,191) (59,979) (21,438) (81,417)
======== ======== ======== ======== ======== ========
Capital Expenditures 106,137 3,166 9,606 118,909 128,958 247,867
Total assets 350,545 20,268 71,198 442,011 170,777 612,788
December 31, 1996
Total Discontinued
MMDS Continuing Operations
& Cable Programming Others Operations (DTH) TOTAL
Net Revenue 119,096 19,811 7,413 146,320 51,771 198,091
Operating Expenses 68,014 56,501 35,420 159,935 37,438 197,373
Depreciation and Amortization 16,672 5,012 2,666 24,350 3,866 28,216
-------- -------- -------- -------- -------- --------
Operating Income (Loss) 34,410 (41,702) (30,673) (37,965) 10,467 (27,498)
Interest expense, net (3,474) (239) (6,205) (9,918) (1,316) (11,234)
Equity income (losses) affiliates -- -- (8,532) (8,532) -- (8,532)
Other Nonoperating (8,603) (1,483) 7,759 (2,327) 6 (2,321)
-------- -------- -------- -------- -------- --------
Income (Loss) before
Income Taxes and minority interest 22,333 (43,424) (37,651) (58,742) 9,157 (49,585)
Income Tax -- -- (156) (156) -- (156)
Minority interest 357 -- 1,492 1,849 -- 1,849
-------- -------- -------- -------- -------- --------
Net Loss 22,690 (43,424) (36,315) (57,049) 9,157 (47,892)
======== ======== ======== ======== ======== ========
Capital Expenditures 75,286 157 12,524 87,967 37,645 125,612
Total assets 242,409 0 192,340 434,749 69,743 504,492
F-35
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(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.A,
TVA Channels Ltda., TVA Finco Ltda., Ype Radio e Televisao Ltda. 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 Satelite Ltda.
- TVA PAR S.A.
- TVA Banda C Ltda.
- TVA Communications Ltd.
- Galaxy Brasil S.A.
- Comercial Cabo TV Sao Paulo Ltda.
b) Majority-Owned Guarantor Subsidiaries
- TVA Sistema de Televisao S.A.
- TVA Sul Parana Ltda. (during 1998, TVA Sul Participacoes S.A.,
TVA Sul Santa Catarina Ltda. and TVA Sul Foz do Iguacu Ltda.
were merged into TVA Sul Parana Ltda.)
- CCS Camboriu Cable System de Telecomunicacoes Ltda.
F-36
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(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.
- TVA Finco Ltda.
- TVA Channels Ltda.
- Ype Radio e Televisao Ltda.
Separate financial statements for TVA Sistema de Televisao S.A. have been
presented as of December 31, 1998 and 1997 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, 1998.
During 1998, 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, 1998 and 1997, 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, 1998.
Separate financial statements for CCS Camboriu Cable System
Telecomunicacoes Ltda. as of December 31, 1998 and 1997, and the related
statements of operations, changes in shareholder's equity and cash flows
for each of two years in the period ended December 31, 1998 and the period
from inception, May 30, 1996 to December 31, 1996.
F-37
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
23. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (Continued)
Condensed Consolidated Balance Sheets
as of December 31, 1998
Wholly- Majority-
Owned owned Non-
Parent Guarantor Guarantor guarantor
Assets company Subsidiaries subsidiaries subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------ ------------
Current assets
Cash and cash equivalents $ 39 $ 575 $ 780 $ 3 $ $ 1,397
Accounts receivable, net 17,989 3,216 (526) 20,679
Inventories, net 14,900 14,900
Film exhibition rights 1,568 1,568
Prepaid and other assets 2,305 2,598 273 5,176
Accounts receivable from related parties 884 7 1,922 64 (1,825) 1,052
Other accounts receivable 2,005 2,131 96 4,232
---------- ---------- ---------- ---------- ----------- -----------
Total current assets 5,233 582 40,320 5,220 (2,351) 49,004
---------- ---------- ---------- ---------- ----------- -----------
Property, plant and equipment 12 295,808 6,435 (4,251) 298,004
Investments
Equity basis 14,392 16,956 731 (30,135) 1,944
Cost basis investments 49,088 8 49,096
Concessions, net 5,458 6,612 12,070
Loans to related companies 505,944 32,512 158 (509,198) 29,416
Debt Issuance costs, net 6,263 6,263
Other 78 2,052 - 2,130
---------- ---------- ---------- ---------- ----------- -----------
Total assets $ 531,910 $ 104,608 $ 344,950 $ 12,394 $(545,935) $ 447,927
========== ========== ========== ========== =========== ===========
F-38
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
23. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (Continued)
Condensed Consolidated Balance Sheets
as of December 31, 1998
Wholly- Majority-
Owned owned Non-
Parent Guarantor Guarantor Guarantor
Liabilities and Shareholders' deficit Company Subsidiaries subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------ ------------
Loans 2,981 38,047 41,028
Film suppliers 27,071 2,803 (12,306) 17,568
Other suppliers 784 24,347 584 25,715
Deficit in discontinued operations 21,858 21,858
Taxes payable other than income taxes 4 12,966 259 13,229
Accrued payroll and related liabilities 3,119 838 3,957
Advance payments received from subscribers 1,999 3 2,002
Other accounts payable 174 28 5,739 2,203 (2,326) 5,818
-------- -------- -------- -------- -------- --------
Total current liabilities 3,943 21,886 113,288 6,690 (14,632) 131,175
-------- -------- -------- -------- -------- --------
Loans 250,000 12,352 262,352
Obligations under capital leases
Loans from related companies 86,256 36,722 456,283 6,407 (496,928) 88,740
Provision for claims 6,569 857 7,426
Liability to fund equity investee 213,444 246,265 (458,684) 1,025
-------- -------- -------- -------- -------- --------
Total long-term liabilities 549,700 282,987 475,204 7,264 (955,612) 359,543
-------- -------- -------- -------- -------- --------
Minority interest 3,464 3,464
Redeemable common stock, no par value 178,002 178,002
Shareholders' deficit
Paid-in capital 241,629 114,527 54,327 7,874 (176,015) 242,342
Accumulated deficit (441,364) (314,792) (301,333) (9,434) 600,324 (466,599)
-------- -------- -------- -------- -------- --------
Total shareholders' deficit (199,735) (200,265) (247,006) (1,560) 424,309 (224,257)
-------- -------- -------- -------- -------- --------
Total liabilities and shareholders'
Deficit 531,910 104,608 344,950 12,394 (545,935) 447,927
======== ======== ======== ======== ======== ========
F-39
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
23. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (continued)
Condensed Consolidated Statements of Operations
for the year ended December 31, 1998
Wholly- Majority-
owned Owned Non-
Parent guarantor Guarantor Guarantor
Description Company 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
Taxes on revenue (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)
--------- --------- --------- --------- --------- ---------
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)
--------- --------- --------- --------- --------- ---------
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
---------- ---------- ---------- ---------- --------- ----------
Loss from continuing operations (150,005) (261,822) (44,290) (8,018) 368,841 (95,294)
Income (loss) from discontinued operations (52,970) 197 (52,773)
--------- --------- --------- --------- --------- ---------
Net loss (150,005) (314,792) (44,093) (8,018) 368,841 (148,067)
========= ========= ========= ========= ========= =========
F-40
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
23. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (continued)
Condensed 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 907 857 1,764
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 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 3,936 259 4,195
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
Repayments of loans from shareholders
Loans from shareholders
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-41
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
23. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (Continued)
Condensed Consolidated Balance Sheets
as of December 31, 1997
Wholly- Majority-
Owned owned Non-
Parent Guarantor Guarantor guarantor
Assets company Subsidiaries subsidiaries subsidiaries Eliminations Consolidated
- ------ ------- ------------ ------------ ------------ ------------ ------------
Current assets
Cash and cash equivalents $ 20 $ 421 $ 546 $ 2 $ $ 989
Accounts receivable, net 25,351 (1,212) 24,139
Inventories, net 23,590 23,590
Film exhibition rights 1,291 1,291
Prepaid and other assets 1,320 12,513 13,833
Accounts receivable from related parties 359 6 3,231 22 (996) 2,622
Other accounts receivable 2,400 2,407 4,807
---------- ---------- ---------- ---------- ---------- ----------
Total current assets 4,099 427 68,929 24 (2,208) 71,271
---------- ---------- ---------- ---------- ---------- ----------
Property, plant and equipment 267,047 42 (571) 266,518
Investments in and advances to
discontinued operations 14,529 (625) 13,904
Investments
Equity basis 60,584 2,325 (57,741) 5,168
Cost basis investments 6,667 30,220 9 8 36,904
Concessions, net 6,298 7,477 13,775
Loans to related companies 437,044 21,075 3,591 (436,965) 24,745
Debt Issuance costs, net 7,813 7,813
Other 2,420 (507) 1,913
---------- ---------- ---------- ---------- ---------- ----------
Total assets $ 537,034 $ 51,722 $ 348,848 $ 2,399 $ (497,992) $ 442,011
========== ========== ========== ========== ========== ==========
F-42
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
23. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (Continued)
Condensed Consolidated Balance Sheets
as of December 31, 1997
Wholly- Majority-
Owned Owned Non-
Parent Guarantor Guarantor Guarantor
Liabilities and Shareholders' deficit Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
------------------------------------- ------- ------------ ------------ ------------ ------------ ------------
Loans 2,720 37,880 40,600
Obligations under capital leases
Film suppliers 25,229 (13,142) 12,087
Other suppliers 30,269 (1,004) 29,265
Taxes payable other than income taxes 5 9,029 9,034
Accrued payroll and related liabilities 5,339 5,339
Advance payments received from subscribers 34 34
Other accounts payable 256 3,617 3,496 (4,366) 3,003
-------- -------- -------- -------- -------- --------
Total current liabilities 2,981 111,397 3,496 (18,512) 99,362
-------- -------- -------- -------- -------- --------
Loans 250,000 25,899 275,899
Obligations under capital leases
Loans from affiliated companies 51,794 15,774 407,704 214 (421,165) 54,321
Provision for claims 5,662 5,662
Liability to fund equity investee 203,828 (203,828)
-------- -------- -------- -------- -------- --------
Total long-term liabilities 505,622 15,774 439,265 214 (624,993) 335,882
-------- -------- -------- -------- -------- --------
Minority interest 4,802 4,802
Redeemable common stock, no par value 189,034 189,034
Shareholders' deficit
Paid-in capital 141,789 39,669 55,356 105 (94,424) 142,495
Accumulated deficit (302,392) (3,721) (261,972) (1,416) 239,937 (329,564)
-------- -------- -------- -------- -------- --------
Total shareholders' deficit (160,603) 35,948 (206,616) (1,311) 145,513 (187,069)
-------- -------- -------- -------- -------- --------
Total liabilities and shareholders'
Deficit 537,034 51,722 348,848 2,399 (497,992) 442,011
======== ======== ======== ======== ======== ========
F-43
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
23. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (continued)
Condensed Consolidated Statements of Operations
for the year ended December 31, 1997
Wholly- Majority-
owned owned Non-
Parent guarantor guarantor Guarantor
Description Company Subsidiaries subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------ ------------
Gross revenues
Monthly subscriptions 142,700 142,700
Installation 12,941 12,941
Advertising 4,947 4,947
Indirect programming 22,810 22,810
Other 13,649 13,649
Revenue taxes (13,315) (13,315)
--------- --------- --------- --------- --------- ---------
Net revenue 183,732 183,732
--------- --------- --------- --------- --------- ---------
Direct operating expenses
Payroll and benefits (22,593) (22,593)
Programming (56,394) (56,394)
Transponder lease cost (6,312) (6,312)
Technical assistance (1,832) (1,832)
Vehicle rentals (1,075) (1,075)
TVA Magazine (5,827) (5,827)
Pole rental (7,026) (7,026)
Other costs (2,157) (2,157)
--------- --------- --------- --------- --------- ---------
(103,216) (103,216)
--------- --------- --------- --------- --------- ---------
Selling, general and administrative expenses
Payroll and benefits (24,432) (24,432)
Advertising and promotion (18,367) (18,367)
Rent (3,721) (3,721)
Other administrative expenses (2,857) (6) (13,544) (16,407)
Other general expenses (1,917) (1,917)
--------- --------- --------- --------- --------- ---------
(2,857) (6) (61,981) (64,844)
--------- --------- --------- --------- --------- ---------
Provision for equipment, inventory and
Obsolescence (3,944) (3,944)
Depreciation (33,704) (33,704)
Amortization (840) (917) (1,757)
--------- --------- --------- --------- --------- ---------
Operating loss from continuing operations (3,697) (6) (20,030) (23,733)
--------- --------- --------- --------- --------- ---------
Interest income 44,226 773 8,350 (39,144) 14,205
Interest expense (42,888) (365) (40,325) (107) 39,144 (44,541)
Translation gain (loss) (204) 290 (950) (38) (902)
Equity in (losses) of affiliates (54,668) 127 3,764 550 43,376 (6,851)
Other nonoperating (expenses) income, net (3,207) 2,822 (87) 1,399 927
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations before
Income taxes and minority interest (60,438) 3,641 (49,278) 1,804 43,376 (60,895)
Income taxes
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations before
Minority interest (60,438) 3,641 (49,278) 1,804 43,376 (60,895)
Minority interest 916 916
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations (60,438) 3,641 (48,362) 1,804 43,376 (59,979)
Loss from discontinued operations (21,438) (21,438)
--------- --------- --------- --------- --------- ---------
Net income (loss) (81,876) 3,641 (48,362) 1,804 43,376 (81,417)
========= ========= ========= ========= ========= =========
F-44
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
23. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (continued)
Condensed Consolidated Statement's of Cash Flows
for the year ended December 31, 1997
Wholly- Majority- Non-
Parent owned owned Guarantor
Company subsidiaries subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------ ------------
Cash flows from operating activities:
Net loss (81,876) 3,641 (48,362) 1,804 43,376 (81,417)
Adjustments to reconcile net loss to net cash
(used in) provided by operating
activities:
Depreciation 33,704 33,704
Amortization 840 917 1,757
Amortization of debt issuance cost 1,332 1,332
Provision for doubtful accounts 3,334 3,334
Provision for equipment and inventory obsolescence 3,944 3,944
Provision for claims (6) 617 611
Minority interest 3,024 3,024
Disposal and write-off of property, plant and
equipment 338 338
Gain on issuance of shares by equity investees
Discontinued operations 21,438 21,438
Equity in losses (earnings) of affiliates 54,668 (127) (3,764) (550) (43,376) 6,851
Changes in operating assets and liabilities:
Film exhibition rights (230) (230)
Accounts receivable (13,334) (580) (13,914)
Prepaid and other assets (1,320) (9,755) (11,075)
Other accounts receivable (1,727) (6) (2,140) (22) (692) (4,587)
Accrued interest 26,642 17 26,659
Inventories (11,365) (11,365)
Suppliers (163) (12,456) (1,047) (13,666)
Taxes payable other than income taxes 5 1,664 1,669
Accrued payroll and related liabilities 6 6
Advances received from subscribers (2,411) (2,411)
Other accounts payable 76 (2,029) 3,498 2,319 3,864
--------- --------- --------- --------- --------- ---------
Net cash (used in) provided by operating activities (6,733) 3,508 (31,656) 4,747 (30,134)
--------- --------- --------- --------- --------- ---------
Cash flows from investing activities:
Purchase of property, plant and equipment (118,909) (118,909)
Discontinued Operations 295 295
Loans to related companies (169,224) (4,797) (200) 112,282 (61,939)
Investments in equity and cost investments (49,570) (13,876) (8) (1,894) 20,998 (44,350)
--------- --------- --------- --------- --------- ---------
Net cash used in investing activities (218,499) (18,673) (119,117) (1,894) 133,280 (224,903)
--------- --------- --------- --------- --------- ---------
Cash flows from financing activities:
Bank loans 59,509 59,509
Principal payments on capital leases
Capital contributions 23,962 (2,965) (20,997)
Repayments of loans from shareholders
Loans from shareholders
Loans from related companies 53,111 15,586 98,391 101 (112,281) 54,908
Repayments of loans to related companies 70,622 3,421 (28,319) 45,724
Repayments of loans from related companies (1,317) (31,442) 28,317 (4,442)
Repayments of loans from banks (446) (3,966) (4,412)
Minority interest
--------- --------- --------- --------- --------- ---------
Net cash provided by financing activities 121,970 15,586 149,875 (2,864) (133,280) 151,287
--------- --------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents (103,262) 421 (898) (11) - (103,750)
Cash and cash equivalents at beginning of the period 103,282 - 1,444 13 - 104,739
--------- --------- --------- --------- --------- ---------
Cash and cash equivalents at end of the period 20 421 546 2 - 989
========= ========= ========= ========= ========= =========
F-45
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
23. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (continued)
Condensed Consolidated Statements of Operations
for the year ended December 31, 1996
Wholly- Majority-
owned Owned Non-
Parent guarantor Guarantor Guarantor
Description Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------ ------------
Gross revenues
Monthly subscriptions 107,692 107,692
Installation 22,281 22,281
Advertising 7,532 7,532
Indirect programming 11,377 11,377
Other 7,995 7,995
Revenue taxes (10,557) (10,557)
-------- -------- -------- -------- -------- --------
Net revenue 146,320 146,320
-------- -------- -------- -------- -------- --------
Direct operating expenses
Payroll and benefits (23,324) (23,324)
Programming (42,315) (42,315)
Transponder lease cost (5,737) (5,737)
Technical assistance (5,507) (5,507)
Vehicle rentals (1,772) (1,772)
TVA Magazine (6,311) (6,311)
Pole rental (448) (448)
Other costs (8,432) (8,432)
-------- -------- -------- -------- -------- --------
(93,846) (93,846)
-------- -------- -------- -------- -------- --------
Selling, general and administrative expenses
Payroll and benefits (24,885) (24,885)
Advertising and promotion (11,445) (11,445)
Rent (3,245) (3,245)
Other administrative expenses (836) (25) (11,758) (12,619)
Other general expenses (10,274) (10,274)
-------- -------- -------- -------- -------- --------
(836) (25) (61,607) (62,468)
-------- -------- -------- -------- -------- --------
Provision for equipment, inventory and
Obsolescence (3,621) (3,621)
Depreciation (22,673) (22,673)
Amortization (840) (837) (1,677)
-------- -------- -------- -------- -------- --------
Operating loss from continuing operations (1,676) (25) (36,264) (37,965)
-------- -------- -------- -------- -------- --------
Interest income 1,995 436 7,590 (4,125) 5,896
Interest expense (12,751) (338) (7,226) (97) 4,125 (16,287)
Translation gain (loss) (218) (3) 398 296 473
Equity in (losses) of affiliates (53,908) (1,220) (1,220) 47,816 (8,532)
Other nonoperating (expenses) income, net 9,243 (1,890) (9,680) (2,327)
-------- -------- -------- -------- -------- --------
Loss from continuing operations before income
taxes and minority interest (57,315) (3,040) (45,182) (1,317) 48,112 (58,742)
Income taxes (156) (156)
-------- -------- -------- -------- -------- --------
Loss from continuing operations before minority
Interest (57,315) (3,040) (45,338) (1,317) 48,112 (58,898)
Minority interest (306) 2,155 1,849
-------- -------- -------- -------- -------- --------
Loss from continuing operations (57,315) (3,040) (45,644) (1,317) 50,267 (57,049)
Income (loss) from discontinued operations 9,157 17,933 (17,933) 9,157
-------- -------- -------- -------- -------- --------
Net loss (48,158) (3,040) (27,711) (1,317) 32,334 (47,892)
======== ======== ======== ======== ======== ========
F-46
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
23. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (continued)
Condensed Consolidated Statement's of Cash Flows
for the year ended December 31, 1996
Wholly- Majority- Non-
Parent owned owned Guarantor
Company subsidiaries subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------ ------------
Cash flows from operating activities:
Net loss (48,158) (3,040) (27,711) (1,317) 32,334 47,892
Adjustments to reconcile net loss to net cash
(used in) provided by operating
activities:
Depreciation 22,673 22,673
Amortization 840 637 1,677
Amortization of debt issuance cost 96 96
Provision for doubtful accounts 1,381 1,381
Provision for equipment and inventory obsolescence 3,521 3,521
Provision for claims 1,282 1,282
Minority interest 1,309 469 1,778
Disposal and write-off of property, plant and
equipment 1,005 1,005
Discontinued operations (9,157) (17,933) 17,933 (9,157)
Capital gain (2,317) 2,317 --
Equity in losses of affiliates 52,278 1,220 4,385 1,220 (47,818) 11,285
Changes in operating assets and liabilities:
Film exhibition rights (1,031) (1,031)
Accounts receivable (8,381) 639 (7,742)
Prepaid and other assets (9,241) 237 1,778 (7,226)
Other accounts receivable (1,030) (2,937) 1,995 (1,972)
Accrued interest 2,720 2,720
Inventories (2,269) (2,269)
Suppliers 163 (10) 12,223 (9,478) 2,898
Taxes payable other than income taxes 2,329 2,329
Accrued payroll and related liabilities 947 947
Advances received from subscribers 81 81
Other accounts payable 11 (8) 2,545 (2,040) 508
-------- ------- -------- ------ -------- --------
Net cash (used in) provided by operating activities (13,795) (1,838) (5,507) (97) (1,871) (23,108)
-------- ------- -------- ------ -------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment (87,861) (42) 36 (87,867)
Discontinued operations (12,545) 19,372 (17,933) (11,106)
Loans to related companies (112,557) (17,675) (6,812) 47,774 (89,270)
Purchase of concessions (11,273) (11,273)
Investments in equity and cost investments (86,283) (5,100) 72,494 (18,889)
-------- ------- -------- ------ -------- --------
Net cash used in investing activities (211,385) (22,775) (86,574) (42) 102,371 (218,405)
-------- ------- -------- ------ -------- --------
Cash flows from financing activities:
Bank loans 250,446 7,580 258,026
Principal payments on capital leases
Capital contributions 33,539 28,317 57 (61,913) --
Loans from shareholders
Loans from related companies 163,858 17,399 59,652 95 (38,587) 202,417
Repayments of loans to related companies 54,445 8,205 62,650
Repayments of loans from related companies (163,733) (34,542) (2,767) (201,042)
Repayments of loans from banks
Minority interest
-------- ------- -------- ------ -------- --------
Net cash provided by financing activities 305,016 24,601 92,782 152 (100,500) 322,051
-------- ------- -------- ------ -------- --------
Net increase (decrease) in cash and cash equivalents 79,836 (12) 701 13 -- 80,538
Cash and cash equivalents at beginning of the period 23,446 12 743 -- -- 24,201
-------- ------- -------- ------ -------- --------
Cash and cash equivalents at end of the period 103,282 -- 1,444 13 -- 104,739
======== ======= ======== ====== ======== ========
F-47
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
24. Working capital deficiency
The Company's financial statements for the year ended December 31, 1998
were prepared on a going concern basis, which contemplates the realization
of assets and settlement of liabilities and commitments in the normal
course of business. The Company incurred net losses of $148,067 and
$81,417 for the two years in the period ended December 31, 1998. In
addition, the Company had negative working capital of $82,171 at December
31, 1998. In addition, the Company has failed to comply with certain
obligations under its debts agreements and material contracts, which
failures may result in the termination of certain of the Company's
material agreements acceleration of indebtedness, and the exercise of
other remedies by the Company's creditors.
The Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a
timely basis. These obligations include interest payments on the Company's
Senior Notes and other indebtedness, commitments to finance equity
investees and capital expenditure requirements.
Management's plans to continue as a going concern include efforts to
generate the necessary cash flow to meet the Company's cost structure
through sales of non-strategic assets and an administrative cost reduction
program implemented in the fourth quarter of 1998. Management of the
Company is contemplating sales of certain non-strategic assets in order to
concentrate the business of the Company in the distribution of pay
television services through cable and MMDS operations. Consummation of
these asset sales will, in some circumstances, be subject to the approval
of ANATEL (Agencia Nacional de Telecomunicacoes), which management
believes will occur within 90 days of the signing of the relevant
agreements relating to such sales.
Management anticipates that, upon the consummation of the asset sales
described above, the Company's cash flow will be sufficient to allow it to
operate and expand its continuing businesses. Nevertheless, should the
Company experience difficulties in generating cash flow sufficient to meet
its cash needs subsequent to the consummation of such sales, the Company
has received a written commitment from Abril S.A. to provide guarantees in
relation to the raising of necessary funds and, if necessary, to
capitalize certain loans made by Abril S.A. to the Company, all
conditioned upon the consummation of the sales of assets described above.
F-48
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
25. Subsequent events
a. In mid-January 1999, the Central Bank of Brazil changed its exchange
policy and extinguished the so-called exchange band, through which it
managed the margin of the fluctuation of the real in relation to the U.S.
dollar, allowing the market to freely negotiate the exchange rate. The
real devalued from R$1,208 per US$ on December 31, 1998 to R$ 1,9934 per
US$ on March 5, 1999.
A large portion of the Company's operating expenses, principally
programming, is denominated in U.S. dollars. The Company is currently
negotiating with its suppliers of programming. In addition, the Company
has net U.S. dollar denominated liabilities of US$303,380 at December 31,
1998.
b. On May 18, 1999 the Company entered into two agreements, referred to
below, to sell its DBS Systems to Galaxy Latin America, and to sell its
equity interest in Galaxy Latin America and certain related assets to
DIRECTV Latin America and Darlene Investments (collectively, the "Proposed
Sale"). At the same time, the Company is initiating a tender offer to
purchase all of the Senior Notes (the "Offer"), together with a consent
solicitation (the "Solicitation") for consent by Noteholders to eliminate
the restrictive covenants contained in the Indenture.
The Proposed Sale represents, in management's opinion, the best
opportunity for addressing the Company's current financial situation. The
Proposed Sale is subject to a number of conditions, including the
execution of a Supplemental Indenture. Proceeds from the Proposed Sale
will be used to fund the Offer.
Pursuant to these agreements, the Company has agreed to sell all of its
interests in the following entities to GLA:
- Galaxy Brasil Ltda. ("GLB", formerly Galaxy Brasil S.A.), a
wholly-owned subsidiary of the Company and exclusive local
operator of DIRECTV Ku-Band service in Brazil;
- TVA Banda C Ltda. ("TVA Banda C"), a subsidiary of the Company
and operator of TVA's C-Band service;
- a 10% equity interest in GLA (subject to dilution as discussed
below), which the Company owns through its British Virgin
Islands subsidiary TVA Communications Ltd.;
F-49
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
25. Subsequent events (Continued)
- a 20.5% equity interest in SurFin Ltd. ("SurFin"), a Bahamian
limited liability company engaged in financing activities
related to DIRECTV service throughout Latin America;
- certain promissory notes (the "CBC Notes") in the aggregate
principal amount of $7,125, 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
- the CBC Class B Unit Purchase Warrants (the "CBC Warrants"),
dated as of April 11, 1997, convertible into equity interests
in CBC, which is accounted for the cost basis with zero value.
Pursuant to the Agreements, the obligation of the Purchasers to complete
the transactions contemplated by the Agreements is subject to the
satisfaction or waiver of a number of conditions precedent on or prior to
the Closing Date, including, but not limited to, the following:
- The Proposed Sale must comply in all respects with the terms
of the Indenture (as amended and supplemented by the
Supplemental Indenture) relating to the Notes. In order to
execute the Supplemental Indenture, the Company must receive
the consent of bondholders representing at least a majority in
aggregate principal amount of Notes (the "Requisite Consents")
prior to June 3, 1999, unless extended (the "Consent
Expiration Date"). Holders may not revoke their Consents or
withdraw their tenders of Notes after the Consent Expiration
Date.
- Upon the consummation of the Proposed Sale, all obligations of
each of GLB and TVA Banda C, as Subsidiary Guarantors under
the Indenture, must be automatically and unconditionally
released and discharged, and each of GLB and TVA Banda C must
cease to be a Subsidiary Guarantor under the Indenture. In
addition, the Purchasers must receive an Acknowledgment of
Release and Discharge, executed by the Trustee, acknowledging
the release of each of GLB and TVA Banda C from all of their
obligations as subsidiary guarantors under the Indenture.
- The Proposed Sale, which involves a transfer of
telecommunications assets and licenses related thereto, must
be approved by the Agencia Nacional de Telecomunicacoes
(National Telecommunications Agency or "ANATEL"), a regulatory
body of the Brazilian federal government.
F-50
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
25. Subsequent events (Continued)
- The absence of any material adverse change in relation to the
business, operations or condition of any of the Purchased
Interests. A devaluation of the Brazilian real may be deemed
to be a material adverse change if either (a) the closing spot
exchange rate as of the day preceding the Closing Date or (b)
the average closing spot exchange rate for the period of five
business days preceding the Closing Date results in an
exchange rate of the Brazilian real to the U.S. dollar greater
than R$2.39.
The Agreements are also subject to termination in certain circumstances,
including the following:
- The Agreements may be terminated by the Purchaser if the
Requisite Consents pursuant to the Solicitation shall not have
been obtained on or prior to June 15, 1999.
- Either Agreement may be terminated by any party thereto if the
Closing shall not have occurred on or before September 30,
1999.
Sources of Funding for Payment of Tendered Notes
The net cash proceeds of the Proposed Sale to the Company at Closing is
expected to be approximately $140,000. The total consideration received by
the Company will be comprised of the following main components:
- in consideration for the Company's interests in GLA, SurFin,
the CBC Notes and the CBC Warrants, the Company will receive a
cash payment of $130,000;
- in consideration for the equity interests of the Company in
Galaxy do Brasil Ltda. and TVA Banda C, the Company will
receive the following:
(a) a cash payment currently estimated to be $10,000
(consisting of a cash payment of $66,750, offset by
certain royalties and other amounts due to GLA through
the Consent Expiration Date under the Local Operating
Agreement, dated July 29, 1996, between GLA and Galaxy
do Brasil Ltda, and to Hughes Electronics, in the amount
of approximately $51,000 as of April 30, 1999, which
amount is expected to increase to approximately $57,000
by the Consent Expiration Date);
(b) a promissory note issued by GLA to the Company in the
principal amount of $22,250, to bear interest at LIBID,
which shall be payable only at maturity of the Note in
one single payment two years from the Closing Date;
F-51
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(in thousands of U.S. dollars)
25. Subsequent events (Continued)
(c) the release and/or amendment of certain guarantees given
by the Company and TVA Sistema de Televisao S.A., a
wholly-owned subsidiary of the Company, in respect of
certain Galaxy Brasil obligations;
(d) the Purchasers shall acquire Galaxy Brasil and TVA Banda
C subject to the aggregate of dollar-denominated
indebtedness of Galaxy Brasil and TVA Banda C, up to a
maximum of $111,200; and
(e) the Purchasers shall acquire Galaxy Brasil and TVA Banda
C subject to the aggregate of real-denominated
indebtedness of Galaxy Brasil to Abril, up to a maximum
of R$70,900, to be repaid by Galaxy Brasil to Abril in
cash immediately following the Closing.
The consideration received by the Company for its equity interests in
Galaxy do Brasil Ltda and TVA Banda C will be subject to an upward or
downward adjustment in accordance with certain purchase price adjustments
based on the indebtedness and working capital of Galaxy Brasil and TVA
Banda C as of the Consent Expiration Date, and for indemnification claims.
Such adjustment may reduce the amount payable under the GLA Promissory
Note.
* * * * * * *
F-52
TVA SISTEMA DE TELEVISAO S.A.
REPORT ON FINANCIAL
STATEMENTS
as of December 31, 1998 and 1997
and for each of the three years in the
period ended December 31, 1998
F-53
TVA SISTEMA DE TELEVISAO S.A.
Index to Financial Statements
Contents
Page
Report of Independent Accountants F-55
Balance Sheets as of December 31, 1998 and 1997 F-56
Statements of Operations for each of the three years in the
period ended December 31, 1998 F-58
Statements of Changes in Shareholders' Deficit for each of the
three years in the period ended December 31, 1998 F-59
Statements of Cash Flows for each of the three years in the
period ended December 31, 1998 F-60
Notes to the Financial Statements F-61
F-54
ARTHUR ANDERSEN S/C
Report of Independent 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, 1998 and 1997, 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, 1998, 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, 1998 and 1997, and the related results of its operations and
cash flows for each of the three years in the period ended December 31, 1998, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered recurring
losses and has negative net working capital and a net capital deficiency that
raise substantial doubt about its ability to continue as a going concern.
Management's actions in regard to these matters are discusssed in Note 18. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Arthur Andersen
Sao Paulo, Brazil
March 5, 1999
F-55
TVA SISTEMA DE TELEVISaO S.A.
Balance Sheets
December 31, 1998 and 1997
(in thousands of U.S. dollars)
December 31,
---------------------
1998 1997
-------- --------
ASSETS
Current assets
Cash and cash equivalents $ 475 $ 66
Accounts receivable, net 16,959 22,570
Accounts receivable from related companies 3,617 3,207
Inventories, net 10,775 12,139
Film exhibition rights -- 1,291
Prepaid and other assets 2,567 12,244
Other accounts receivable 1,854 2,203
-------- --------
Total current assets 36,247 53,720
-------- --------
Property, plant and equipment, net 250,488 229,136
Investments - cost basis investments -- 9
Loans to related companies 158 7,097
Other 2,122 2,090
-------- --------
Total assets $289,015 $292,052
======== ========
The accompanying notes are an integral part of the financial statements.
F-56
TVA SISTEMA DE TELEVISaO S.A.
Balance Sheets
December 31, 1998 and 1997
(in thousands of U.S. dollars)
December 31,
-----------------------
1998 1997
--------- ---------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Loans $ 32,256 $ 29,880
Film suppliers 26,906 25,229
Other suppliers 23,382 25,703
Deficit in discontinued operations -- (625)
Taxes payable other than income taxes 11,472 7,982
Accrued payroll and related liabilities 2,641 4,816
Advance payments received from subscribers 1,884 1,616
Other accounts payable 5,579 2,178
--------- ---------
Total current liabilities 104,120 96,779
--------- ---------
Long-term liabilities
Loans 12,351 25,899
Loans from related companies 429,861 391,177
Provision for claims 6,319 5,334
--------- ---------
Total long-term liabilities 448,531 422,410
--------- ---------
Commitments and contingencies
Shareholders' deficit
Common shares, no par value, 6,980,764
shares issued and outstanding 16,303 16,303
Accumulated deficit (279,939) (244,690)
--------- ---------
Total shareholders' deficit (263,636) (228,387)
--------- ---------
Total liabilities and shareholders' deficit $ 289,015 $ 292,052
========= =========
The accompanying notes are an integral part of the financial statements.
F-57
TVA SISTEMA DE TELEVISaO S.A.
Statements of Operations
for the years ended
December 31, 1998, 1997 and 1996
(in thousands of U.S. dollars)
Year Ended December 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
Gross revenues
Monthly subscriptions $ 115,175 $ 117,507 $ 95,712
Installation 2,334 10,142 20,127
Advertising 2,649 4,947 7,532
Indirect programming 11,460 22,810 11,377
Other 8,016 13,142 7,929
Taxes on revenues (9,920) (11,357) (10,139)
--------- --------- ---------
Net revenue 129,714 157,191 132,538
--------- --------- ---------
Direct operating expenses
Payroll and benefits 10,924 17,967 19,483
Programming 42,950 47,472 38,991
Transponder lease cost 1,157 6,312 5,737
Technical assistance 1,981 1,630 5,261
Vehicle rentals 178 889 1,452
TVA magazine 4,558 5,120 5,870
Other costs 6,434 6,782 7,075
--------- --------- ---------
68,182 86,172 83,869
--------- --------- ---------
Selling, general and administrative
expenses
Payroll and benefits 19,270 23,035 23,607
Advertising and promotion 7,481 17,538 10,841
Rent 3,217 3,639 2,998
Other administrative expenses 8,267 7,961 9,772
Other general expenses 4,774 3,883 9,437
--------- --------- ---------
43,009 56,056 56,655
--------- --------- ---------
Provision for equipment, inventory and 1,940 2,666 3,621
obsolescence
Depreciation 39,484 30,251 21,120
--------- --------- ---------
Operating loss from continuing (22,901) (17,954) (32,727)
operations
Interest income 5,840 6,920 7,365
Interest expense (16,496) (34,888) (5,183)
Translation (loss) gain (642) (92) 26
Other nonoperating (expenses) income, net (1,060) (796) (846)
--------- --------- ---------
Loss from continuing operations
before income taxes (35,259) (46,810) (31,365)
Income taxes -- -- --
--------- --------- ---------
Loss from continuing operations $ (35,259) $ (46,810) $ (31,365)
Income from discontinued operations 10 3,764 17,933
--------- --------- ---------
Net loss $ (35,249) $ (43,046) $ (13,432)
========= ========= =========
Net loss per share for (5,05) (6,71) (4,49)
continuing operations
Net income per share for 0 0,54 2,57
discontinued operations
Net loss per share (5,05) (6,17) (1,92)
The accompanying notes are an integral part of the financial statements.
F-58
TVA SISTEMA DE TELEVISaO S.A.
Statements of Changes in Shareholders' Deficit
for the years ended
December 31, 1998, 1997 and 1996
(in thousands of U.S. dollars)
Paid-in Accumulated
Capital Deficit Total
--------- --------- ---------
Balance as of December 31, 1995 $ 16,303 $(188,212) $(171,909)
Net loss for the period (13,432) (13,432)
--------- --------- ---------
Balance as of December 31, 1996 16,303 (201,644) (185,341)
Net loss for the period (43,046) (43,046)
--------- --------- ---------
Balance as of December 31, 1997 16,303 (244,690) (228,387)
Net loss for the period (35,249) (35,249)
--------- --------- ---------
Balance as of December 31, 1998 $ 16,303 $(279,939) $(263,636)
========= ========= =========
The accompanying notes are an integral part of the financial statements.
F-59
TVA SISTEMA DE TELEVISaO S.A.
Statements of Cash Flows
for the years ended
December 31, 1998, 1997 and 1996
(in thousands of U.S. dollars)
Year Ended December 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
Cash flows from operating activities:
Net loss $ (35,249) $ (43,046) $ (13,432)
Adjustments to reconcile net loss to net
cash (used in)
provided by operating activities:
Depreciation 39,484 30,251 21,120
Provision for doubtful accounts 3,334 1,847 1,381
Provision for equipment and inventory 1,940 2,666 3,621
obsolescence
Provision for claims 985 295 1,276
Disposal of property, plant and equipment 1,574 338 1,005
Discontinued operations (10) (3,764) (17,933)
Changes in operating assets and liabilities:
Film exhibition rights 1,291 (230) (1,031)
Accounts receivable 2,277 (10,009) (7,470)
Prepaid and other assets 9,677 (8,587) 690
Other accounts receivable including related (93) (4,030) (2,363)
companies
Accrued interest 9,170 26,076 (3,604)
Inventories 1,354 (3,882) 1,700
Suppliers (644) (13,836) 9,133
Taxes payable other than income taxes 3,490 1,084 1,918
Accrued payroll and related liabilities (2,175) (69) 753
Advances received from subscribers 268 (814) (200)
Other accounts payable 3,401 (202) 990
--------- --------- ---------
Net cash (used in) provided by 40,074 (25,912) (2,446)
operating activities
--------- --------- ---------
Cash flows used in investing activities:
Purchases of property, plant and equipment (64,340) (97,143) (69,041)
Loans to related companies (158) (199) (7,320)
Discontinued operations (615) -- 23,761
Repayments of loans to related companies (36,949) (3,149) --
Others 9 (9) --
--------- --------- ---------
Net cash used in investing activities (102,053) (100,500) (52,600)
--------- --------- ---------
Cash flows from financing activities:
Bank loans 11,652 51,841 7,580
Repayments of loans from shareholders -- (2,767)
Loans from related companies 70,314 76,972 40,970
Repayments of loans from related companies 7,441 3,420 9,315
Repayments of loans from bank (27,019) (6,505) --
--------- --------- ---------
Net cash provided by financing 62,388 125,728 55,098
activities
--------- --------- ---------
Net (decrease) increase in cash and cash 409 (684) 52
equivalents
Cash and cash equivalents at beginning of the 66 750 698
period
--------- --------- ---------
Cash and cash equivalents at end of the $ 475 $ 66 $ 750
period
========= ========= =========
Supplemental cash disclosure:
Cash paid for interest $ -- $ -- 317
========= ========= =========
Supplemental non-cash financing activities:
Accrued interest on related company loans
refinanced as principal balance $ 7,664 23,515 $ --
========= ========= =========
The accompanying notes are an integral part of the financial statements.
F-60
TVA SISTEMA DE TELEVISaO S.A.
Notes to the Financial Statements, Continued
(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 and parabolic antenna 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.
During 1998, the Company's Board of Directors approved a plan of
disposition of the C-Band Division. As a result, the financial statements
have been retroactively restated to present the C-Band Division as
discontinued operations. See Note 3 for further discussion.
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.
F-61
TVA SISTEMA DE TELEVISaO S.A.
Notes to the Financial Statements, Continued
(in thousands of U.S. dollars)
2.3. Currency remeasurement
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 52, "Foreign Currency Translations", the United States dollar has been
assumed to be the functional currency as a substantial portion of
Company's operations is conducted in United States dollars. As such, the
local accounts of the Company are translated into United States dollars as
follows:
o Nonmonetary assets and liabilities are translated at historical
rates. All other assets and liabilities are translated at the
official rate of exchange of R$1.2087 to US$1 in effect on December
31, 1998, and R$1.1164 to US$1 in effect on December 31, 1997.
Translation gains and losses are recognized in the income statement.
o Income and expenses are translated at the average exchange rates in
effect each month, except for those related to assets and
liabilities which are translated at historical exchange rates, and
deferred income taxes, which are translated at the current rate.
Translation gains/losses are recognized in the income statement.
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, 1998 and 1997 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-62
TVA SISTEMA DE TELEVISaO S.A.
Notes to the Financial Statements, Continued
(in thousands of U.S. dollars)
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 is 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.
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.
F-63
TVA SISTEMA DE TELEVISaO S.A.
Notes to the Financial Statements, Continued
(in thousands of U.S. dollars)
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. 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.
3. Discontinued Operations
In October 1998 the Company announced that its Board of Directors had
approved a plan of disposition of the C-Band Division. This decision was
based upon management's review of operations, investments needs and focus
of the Company's business on the distribution of pay television services
through cable and MMDS operations. In October 1998, the Company spun-off
its C-Band operation, creating TVA Banda C entity, wholly owned by
Tevecap.
F-64
TVA SISTEMA DE TELEVISaO S.A.
Notes to the Financial Statements, Continued
(in thousands of U.S. dollars)
3. Discontinued Operations (Continued)
The summarized balance sheet of C-Band operations as of December 31 was as
follows:
1998 1997
Assets
Accounts receivable, net $ -- $3,598
Property, plant and equipment, net -- 2,042
Company's investment and advances -- 625
--------- ------
-- 6,265
========= ======
Liabilities and Equity
Loans -- 372
Other current liabilities -- 2,501
Loans from related companies -- 3,392
--------- ------
$ -- $6,265
========= ======
The following is a summary of the results of the C-Band operations for the
three years ended December 31:
1998 1997 1996
Revenues $ 21,759 $ 33,784 $ 35,241
Operating costs and expenses (20,729) (30,020) (17,264)
-------- -------- --------
Income (loss) from operations 1,030 3,764 17,977
Interest income (expense) (1,020) -- (44)
-------- -------- --------
Net income (loss) from operations $ 10 $ 3,764 $ 17,933
======== ======== ========
Continued
F-65
TVA SISTEMA DE TELEVISaO S.A.
Notes to the Financial Statements, Continued
(in thousands of U.S. dollars)
4. Accounts receivable, net
As of December 31, 1998 and 1997, accounts receivable were comprised of:
December 31,
----------------------
1998 1997
-------- --------
Subscriptions $ 14,269 $ 9,024
Installation fees 4,653 7,040
Advertising and programming 3,212 4,887
Barter 4,406 5,857
Other 33 2,042
Provision for doubtful accounts (9,614) (6,280)
-------- --------
$ 16,959 $ 22,570
======== ========
5. Inventories, net
As of December 31, 1998 and 1997, inventories were comprised of:
December 31,
------------------------
1998 1997
-------- --------
Materials and supplies $ 12,308 $ 13,835
Imports in transit 1,597 1,424
Provision for obsolescence (3,130) (3,120)
-------- --------
$ 10,775 $ 12,139
======== ========
6. Prepaid and other assets
As of December 31, 1998 and 1997, prepaid expenses were comprised of:
December 31,
--------------------
1998 1997
------- -------
Advances to suppliers $ 749 $11,980
Prepaid meals and transportation 24 89
Other 1,794 175
------- -------
$ 2,567 $12,244
======= =======
Continued
F-66
TVA SISTEMA DE TELEVISaO S.A.
Notes to the Financial Statements, Continued
(in thousands of U.S. dollars)
7. Related-party transactions
The following tables summarize the transactions between the Company and
its related parties as of December 31, 1998 and 1997 and for each of the
three years in the period ended December 31, 1998:
December 31,
-----------------------
1998 1997
------ --------
TVA Sul Parana Ltda
Loans receivable $ -- $ 3,705
Accounts receivable 1,448 541
Accounts payable -- 21
Tevecap S.A
Loans payable 423,676 384,324
Accounts payable 428 --
Comercial Cabo Ltda
Loans payable 3,702 4,320
ESPN do Brasil Ltda
Accounts receivable 131 31
Accounts payable -- 489
Abril S.A
Accounts receivable 97 34
Accounts payable $ 399 $ 430
Loans payable 2,483 2,533
TV Filme Inc.
Accounts receivable 64 19
TVA Network S.A
Accounts receivable 20 2,138
Galaxy Brasil S.A
Accounts receivable 235 26
SMC Maketing
Accounts receivable 275 --
TVA Channel
Accounts receivable 762 --
TVA Banda C
Accounts receivable 545 --
Loans receivable 158 3,392
Others
Accounts receivable 40 88
Loans receivable -- 22
Accounts payable 16 8
Continued
F-67
TVA SISTEMA DE TELEVISaO S.A.
Notes to the Financial Statements, Continued
(in thousands of U.S. dollars)
7. Related-party transactions, continued
December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Tevecap S.A
Net interest (income) expense $ 7,664 $ 27,768 $ (1,749)
Abril S.A
Printing cost 1,521 4,389 4,516
Net interest (income) expense -- (188) 46
Comercial Cabo Ltda
Net interest income (318) (322) (319)
TV Cabo Santa Branca Ltda
Net interest income -- (14) (21)
ESPN do Brasil Ltda
Programming costs, net 5,188 3,493 3,850
TVA Sul Parana Ltda
Net interest income (295) (469) (1,330)
TV Filme Inc.
Programming revenue (2,424) (8,629) (6,435)
Canbras TVA Cabo Ltda
Programming revenue -- (1,837) (207)
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 1.76% to 3.23% per month in December 1998
(3.85% to 4.45% per month in December 1997). Such loans are renewable
every year on December 31.
TEVECAP S.A. ("Tevecap"), and Falcon International Communications Services
Inc., one of Tevecap's shareholders, signed a consulting service agreement
on April 1, 1997 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 service 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, 1998 was $29,807 and $29,350, respectively.
Continued
F-68
TVA SISTEMA DE TELEVISaO S.A.
Notes to the Financial Statements, Continued
(in thousands of U.S. dollars)
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.
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, 1998 and 1997 are as follows:
December 31,
--------------------
1998 1997
-------- --------
Deferred tax assets:
Net operating loss carryforwards $ 68,517 $ 50,981
Deferred charges 1,467 3,458
Provision for obsolescence 1,251 732
Provision for claims 4,812 3,011
Provision for decoders 866 904
Others 151 1,076
-------- --------
Total gross deferred tax asset 77,064 60,162
Less valuation allowance (76,790) (57,386)
-------- --------
Net deferred tax asset 274 2,776
Deferred tax liability:
Installation costs (274) (2,776)
-------- --------
Total gross deferred tax liability $ (274) $ (2,776)
======== ========
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, 1998, the Company has unexpirable accumulated tax
losses of $194,916.
Continued
F-69
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,
----------------------------------
1998 1997 1996
-------- -------- --------
Loss before income taxes and minority interest $ 35,249 $ 43,047 $ 13,432
Statutory income tax rate 33% 33% 33%
-------- -------- --------
11,632 14,206 4,433
Increase (decrease) in the income tax rate -- -- 1,957
Deferred charges amortization 3,546 3,839 5,102
Translation (loss) gain of tax losses (3,893) (2,069) (2,054)
Installation materials depreciation -- 69 3,761
Translation gain on loans from related companies 10,339 8,910 --
Others (2,220) (254) (5,375)
-------- -------- --------
Net income tax benefit (provision) for the period 19,404 24,701 7,824
(Increase) decrease in valuation allowance (19,404) (24,701) (7,824)
-------- -------- --------
$ -- $ -- $ --
======== ======== ========
Continued
F-70
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, 1998 and 1997, property, plant and equipment were
comprised of:
Annual
Depreciation December 31,
Rate ----------------------
% 1998 1997
------------ --------- ---------
Machinery and equipment 10 $ 35,990 $ 39,704
Decoders 10 107,730 94,586
Leasehold improvements 25 2,342 3,715
Furniture and fixtures 10 1,207 1,328
Premises 10 2,135 2,005
Vehicles 20 2,243 2,706
Software 20 6,932 4,449
Tools 10 798 761
Reception equipment 20 132,900 107,251
Cable plant 10 24,735 24,650
--------- ---------
317,012 281,155
Telephone line use rights 2,024 2,031
Trademarks, patents and others 179 179
Other 691 2,672
Accumulated depreciation (118,802) (77,915)
Fixed assets in transit 49,384 21,014
--------- ---------
$ 250,488 $ 229,136
========= =========
11. Loans
The loans as of December 31, 1998 represent the refinancing of certain
supplier payables. The average interest rate on such loans is LIBOR plus
2.0%, and the principal will be paid as follows:
1999 $ 32,256
2000 6,478
2001 4,875
2002 998
---------
Total $ 44,607
=========
Continued
F-71
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, 1998 and 1997, other accounts payable were comprised
of:
December 31,
-----------------
1998 1997
------ ------
Accounts payable to related companies $ 843 $ 970
Advertising 3,437 165
Importation expenses payable 31 398
Other 1,268 645
------ ------
$5,579 $2,178
====== ======
13. Leased assets and commitments
The Company has rented its office space until the year 2003. As of
December 31, 1998, future minimum rental payments applicable to operating
leases in respect of this space aggregate approximately $9,213 as follows:
1999 $ 1,956
2000 1,848
2001 1,803
2002 1,803
2003 1,803
---------
Total $ 9,213
=========
Continued
F-72
TVA SISTEMA DE TELEVISaO S.A.
Notes to the Financial Statements, Continued
(in thousands of U.S. dollars)
13. Leased assets and commitments (Continued)
As of December 31, 1998, the Company had contractual commitments with
Empresa Brasileira de Telecomunicacoes ("Embratel") for the use of a
transponder until the year 2004. Based on the contract provisions, these
operating lease commitments are currently estimated to aggregate
approximately $79,776, as follows:
1999 $13,296
2000 13,296
2001 13,296
2002 13,296
2003 13,296
2004 13,296
--------
Total $79,776
========
14. 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.
15. 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.
Continued
F-73
TVA SISTEMA DE TELEVISaO S.A.
Notes to the Financial Statements, Continued
(in thousands of U.S. dollars)
16. 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 $313 for the year ended December 31,
1998 ($425 in 1997 and $308 in 1996).
17. 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 1998, contributions made by the Company to Associacao Abril
de Beneficios amounted to $1,365 ($1,485 in 1997 and $1,288 in 1996).
18. Working capital deficiency
The Company's financial statements for the year ended December 31, 1998
were prepared on a going concern basis which contemplates the realization
of assets and settlement of liabilities and commitments in the normal
course of business. The Company incurred net losses of $35,249 and $43,046
for the two years in the period ended December 31, 1998 and 1997,
respectively. In addition, the Company had negative working capital of
$67,873 and a net capital deficiency of $263,636 at December 31, 1998.
The Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a
timely basis. These obligations include mainly capital expenditure
requirements and interest payments on the Company's loans.
Management's plans to continue as a going concern include efforts to
generate the necessary cash flow to meet the Company's cost structure
through an administrative cost reduction program implemented in the fourth
quarter of 1998. The Company is concentrating the business of the Company
in the distribution of pay television services through cable and MMDS
operations.
Continued
F-74
TVA SISTEMA DE TELEVISaO S.A.
Notes to the Financial Statements, Continued
(in thousands of U.S. dollars)
Management anticipates that, upon the full implementation of the plans
described above, the Company's cash flow will be sufficient to allow it to
operate and expand its continuing businesses.
In addition, the Company's principal shareholders, Tevecap is
contemplating the sale of certain non-strategic assets in order to
concentrate its businness on distribution of pay television services.
19. Supplementary information - valuation and qualifying accounts and reserves
Provision Deferred
Provision Provision for Tax Provision
for Doubtful For Exhibition Valuation for
Accounts Obsolescence Expiration Allowance Claims
------------ ------------ ---------- --------- ---------
Balance as of December 31, 1995 $ 3,052 $ -- $ 1,162 $ 24,861 $ 3,763
Additions charged to expense 1,381 2,250 -- 7,824 1,276
-------- -------- -------- -------- --------
Balance as of December 31, 1996 $ 4,433 $ 2,250 $ 1,162 $ 32,685 $ 5,039
Additions charged to expense 1,847 870 -- 24,701 295
Reduction -- -- (1,162) -- --
-------- -------- -------- -------- --------
Balance as of December 31, 1997 $ 6,280 $ 3,120 $ -- $ 57,386 $ 5,334
Additions charged to expense 3,334 10 -- 19,404 985
-------- -------- -------- -------- --------
Balance as of December 31, 1998 $ 9,614 $ 3,130 $ -- $ 76,790 $ 6,319
======== ======== ======== ======== ========
20. 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, 1999. As of December 31, 1998 the Company
has no operations with hedging activities.
In March 1998, the AICPA issued Statement of position 98-1 (SOP 98-1),
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". SOP 98-1 requires capitalization of certain direct costs
and interest costs after preliminary development efforts have been made.
SOP 98-1 is effective for fiscal year beginning after December 15, 1998.
At this time, management is considering the impact of this pronouncement,
but does not believe it will have a material effect on the Company's
consolidated financial statements.
Continued
F-75
TVA SISTEMA DE TELEVISaO S.A.
Notes to the Financial Statements, Continued
(in thousands of U.S. dollars)
21. Subsequent events
In mid-January 1999, the Central Bank of Brazil changed its exchange
policy and extinguished the so-called exchange band, through which it
managed the margin of the fluctuation of the real in relation to the U.S.
dollar, allowing the market to freely negotiate the exchange rate. The
real devalued from R$1,208 per US$ on December 31, 1998 to R$ 1,9934 per
US$ on March 5, 1999.
A large portion of the Company's operating expenses, principally
programming, is denominated in U.S. dollars. The Company is currently
negotiating with its suppliers of programming. In addition, the Company
has net U.S. dollar denominated liabilities of US$44,607 at December 31,
1998.
* * * * * * *
F-76
TVA SUL PARANA LTDA.
AND SUBSIDIARY
REPORT ON CONSOLIDATED
FINANCIAL STATEMENTS
as of December 31, 1998 and 1997
and for each of the three years in the period ended
December 31, 1998
F-77
TVA SUL PARANA LTDA.
AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
Contents
Page
Report of Independent Accountants F-79
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-80
Consolidated Statements of Operations for each of the three years in
the period ended December 31, 1998 F-82
Consolidated Statements of Changes in Shareholders' Equity for each of
the three years in the period ended December 31, 1998 F-83
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 1998 F-84
Notes to Consolidated Financial Statements F-86
F-78
[logo of ARTHUR ANDERSEN S/C]
Report of Independent Accountants
To the Shareholders and Directors of
TVA SUL PARANA S.A.
We have audited the accompanying consolidated balance sheet of TVA SUL PARANA
S.A. and subsidiary (the "Company") as of December 31, 1998 and 1997, 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,
1998, 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, 1998 and 1997, and the consolidated
results of their operations and cash flows for each of the three years in the
period ended December 31, 1998, in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered recurring
losses and has negative net working capital that raise substantial doubt about
its ability to continue as a going concern. Management's actions in regard to
these matters are discussed in note 17. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Arthur Andersen
Sao Paulo, Brazil
March 5, 1999
F-79
TVA SUL PARANA S.A.
AND SUBSIDIARY
Consolidated Balance Sheets
as of December 31, 1998 and 1997
(in thousands of U.S. dollars)
December 31,
----------------------
1998 1997
------- -------
ASSETS
Current assets
Cash and cash equivalents $ 305 $ 481
Accounts receivable, net 1,168 2,781
Inventories 4,125 11,451
Prepaid and other assets 32 269
Other accounts receivable 288 228
------- -------
Total current assets 5,918 15,210
------- -------
Property, plant and equipment, net 41,615 37,911
Concessions, net 6,612 7,477
Other 438 330
------- -------
Total assets $54,583 $60,928
======= =======
The accompanying notes are an integral part of the financial statements.
F-80
TVA SUL PARANA S.A.
AND SUBSIDIARY
Consolidated Balance Sheets
as of December 31, 1998 and 1997
(in thousands of U.S. dollars)
December 31,
1998 1997
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Loans $ 5,791 $ 2,719
Film suppliers 947 --
Others suppliers 1,964 6,394
Taxes payable other than income taxes 1,494 1,046
Accrued payroll and related liabilities 479 523
Advances payments received from subscribers 115 --
Accounts payable to related companies 586 753
Other accounts payable 143 920
-------- --------
Total current liabilities 11,519 12,355
-------- --------
Long-term liabilities
Loans -- 1,640
Loans from related companies 26,424 20,039
Provision for claims 251 323
-------- --------
Total long-term liabilities 26,675 22,002
-------- --------
Commitments and contingencies (Note 13)
Minority interest 1,361 1,258
Shareholders' equity
Paid-in capital 44,213 44,213
Accumulated deficit (29,185) (18,900)
-------- --------
Total shareholders' equity 15,028 25,313
-------- --------
Total liabilities and shareholders' equity $ 54,583 $ 60,928
======== ========
The accompanying notes are an integral part of the financial statements.
F-81
TVA SUL PARANA S.A.
AND SUBSIDIARY
Consolidated Statements of Operations
for the years ended
December 31, 1998, 1997 and 1996
(in thousands of U.S. dollars)
Year Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Gross revenues
Monthly subscriptions $ 21,009 $ 25,193 $ 11,980
Installation 518 2,799 2,154
Other 650 506 66
Taxes on revenue (1,620) (1,958) (418)
-------- -------- --------
Net revenue 20,557 26,540 13,782
-------- -------- --------
Direct operating expenses
Payroll and benefits 1,019 4,626 3,841
Programming 6,515 8,922 3,324
Technical assistance (769) 202 246
Vehicle rentals -- 186 320
TVA magazine 683 707 441
Other costs 1,515 2,402 1,805
-------- -------- --------
8,963 17,045 9,977
-------- -------- --------
Selling, general and administrative expenses
Payroll and benefits 3,793 1,397 1,278
Advertising and promotion 348 824 604
Rent 372 82 247
Other administrative expenses 4,034 2,723 1,987
Other general expenses 416 896 837
-------- -------- --------
8,963 5,922 4,953
-------- -------- --------
Depreciation 6,021 3,455 1,553
Amortization 865 917 837
-------- -------- --------
Operating loss (4,255) (799) (3,538)
-------- -------- --------
Interest income 407 631 225
Interest expense (6,799) (5,440) (2,043)
Translation (loss) gain 205 (58) 374
Other nonoperating (expense) income, net 284 (567) 1,612
-------- -------- --------
Loss before income taxes and minority interest (10,158) (6,233) (3,370)
Income taxes (24) -- (156)
-------- -------- --------
Loss before minority interest (10,182) (6,233) (3,526)
Minority interest (103) 52 38
-------- -------- --------
Net loss $(10,285) $ (6,181) $ (3,488)
Net loss per share (0,23) (0,14) (0,19)
The accompanying notes are an integral part of the financial statements.
F-82
TVA SUL PARANA S.A.
AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
for the years ended
December 31, 1998, 1997 and 1996
(in thousands of U.S. dollars)
Paid-in Accumulated
Capital Deficit Total
------- ----------- ---------
Balance as of December 31, 1995 $ 1 $(13,939) $(13,938)
Capital contributed on:
August 30, 1996 17,533 $ 17,533
Dissolution of capital (1,220) 1,220 --
------- -------- --------
Balance as of December 31, 1996 $16,314 $(12,719) $ 3,595
Capital contributed on:
December 2, 1997 27,899 27,899
Net loss for the year (6,181) (6,181)
------- -------- --------
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
======= ======== ========
The accompanying notes are an integral part of the financial statements.
F-83
TVA SUL PARANA S.A.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
for the years ended
December 31, 1998, 1997 and 1996
(in thousands of U.S. dollars)
Year Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
Net loss $(10,285) $ (6,181) $ (3,488)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 6,021 3,455 1,553
Amortization 865 917 837
Provision for doubtful accounts 202 1,101 386
Provision for claims (72) 323 --
Minority interest 103 (52) (38)
Changes in operating assets and liabilities
Accounts receivable 1,411 (2,939) (1,296)
Prepaid and other assets 237 334 (502)
Other accounts receivable (60) 673 (891)
Accrued interest 5,095 3,816 1,497
Inventories 7,326 (7,482) (3,927)
Other assets (108) (284) (30)
Film suppliers and others suppliers (3,483) 3,207 2,665
Taxes payable other than income taxes 448 579 293
Accrued payroll and related liabilities (44) 76 (4)
Advances received from subscribers 115 (1,026) 796
Other accounts payable (944) (580) 838
-------- -------- --------
Net cash used in operating activities 6,827 (4,063) (1,311)
-------- -------- --------
Cash flows used in investing activities
Purchases of property, plant and equipment (9,725) (20,491) (17,624)
Acquisition of businesses, net of cash acquired -- (11,273)
-------- -------- --------
Net cash used in investing activities (9,725) (20,491) (28,897)
-------- -------- --------
Cash flows from financing activities
Bank Loans 2,897 4,359 --
Capital contributions -- 27,899 17,533
Repayments of loans from shareholders -- -- (162)
Loans from related companies 9,353 6,302 8,672
Advances from shareholders -- (12,781) 12,781
Repayments of loans from related companies (8,064) (1,438) (9,315)
Repayments of loans from banks (1,464) -- --
Minority interest -- -- 1,348
-------- -------- --------
Net cash provided by financing activities 2,722 24,341 30,857
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (176) (213) 649
Cash and cash equivalents at beginning of the period 481 694 45
-------- -------- --------
Cash and cash equivalents at end of the period $ 305 $ 481 $ 694
======== ======== ========
The accompanying notes are an integral part of the financial statements.
F-84
TVA SUL PARANA S.A.
AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
for the years ended
December 31, 1998, 1997 and 1996
(in thousands of U.S. dollars)
Year Ended December 31,
------------------------------
1998 1997 1996
-------- -------- --------
Supplemental cash disclosure
Cash paid for interest $ 295 $ -- $ --
======== ======== ========
Supplemental noncash financing activities
Accrued interest on related company loans refinanced
as principal balance $ 4,764 $ 3,816 $ 1,497
======== ======== ========
Details of acquisitions
Fair value of assets acquired -- -- 12,739
Liabilities assumed -- -- (1,385)
-------- -------- --------
Cash paid -- -- 11,354
Less: cash acquired -- -- (81)
-------- -------- --------
Net cash paid for acquisitions $ -- $ -- $ 11,273
======== ======== ========
The accompanying notes are an integral part of the financial statements.
F-85
TVA SUL PARANA S.A.
AND SUBSIDIARY
Notes to 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 S.A. and its subsidiary (the "Company").
TVA Sul Parana S.A. is a holding company, the subsidiary of which render
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 accompanying
consolidated and combined 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) Consolidated presentation as of and for the years ended December 31,
1998 and 1997
TVA Sul Parana S.A. was incorporated on October 30, 1998 as a holding
company for certain entities, which were under common control.
Accordingly, the financial statements as of
F-86
TVA SUL PARANA S.A.
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
2.2. Basis of presentation and consolidation (Continued)
and for the years ended December 31, 1998 and 1997 are prepared on a
consolidated basis.
The consolidated financial statements include the accounts of all
majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated on consolidation.
2.3. 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.
2.4. Currency remeasurement
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 52, "Foreign Currency Transactions", the United States dollar has been
assumed to be the functional currency as a substantial portion of the
Company's operations are conducted in United States dollar. As such, the
local accounts of the Company are translated into United States dollars as
follows:
o Nonmonetary assets and liabilities are translated at historical
rates. All other assets and liabilities are translated at the
official rate of exchange of R$1.2087 to US$1 in effect on December
31, 1998, and R$1.1164 to US$1 in effect on December 31, 1997.
Translation gains and losses are recognized in the income statement.
o Income and expenses are translated at the average exchange rates in
effect each month, except for those related to assets and
liabilities which are translated at historical exchange rates and
deferred income taxes, which are translated at the current rate.
Translation gains and losses are recognized in the income statement.
F-87
TVA SUL PARANA S.A.
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
2.5. Consolidated financial statements
The Company's consolidated financial statements as of December 31,1998 and
1997 includes TVA Sul Parana S.A. as a parent company and its 60%
ownership interest in CCS Camboriu Cable System de Telecomunicacoes Ltda.
2.6. 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.
2.7. 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, 1998 and 1997 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
is 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.
2.9. 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, in an
amount sufficient to cover any losses incurred in realization of credits.
F-88
TVA SUL PARANA S.A.
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
2.10. 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.
2.11. 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 8.
2.12. 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.
2.13. Revenue recognition
Hook up fees are recognized as revenue on the equipment installation date
to the extent of direct selling costs incurred. Subscription revenues are
recognized as earned on an accrual basis.
2.14. Accounting for issuance of stock by subsidiaries
Gains and losses arising from the issuance of previously unissued shares
to unrelated parties by subsidiaries are recognized in income as
nonoperating income to the extent that the net book value of the shares
owned by the parent after the sale exceeds or is lower than the net book
value per share immediately prior to the sale of the shares by the
subsidiary.
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-89
TVA SUL PARANA S.A.
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
3. Cash and cash equivalents
As of December 31, 1998 and 1997, cash and cash equivalents were comprised
of:
December 31,
-------------------
1998 1997
-------- --------
Cash on hand and in banks $ 298 $ 463
Short-term investments 7 18
-------- --------
$ 305 $ 481
======== ========
4. Accounts receivable, net
As of December 31, 1998 and 1997, accounts receivable were comprised of:
December 31,
-------------------
1998 1997
-------- --------
Subscriptions $ 1,915 $ 2,671
Installation fees 709 1,526
Advertasing 233 71
Provision for doubtful accounts (1,689) (1,487)
-------- --------
$ 1,168 $ 2,781
======== ========
5. Inventories
As of December 31, 1998 and 1997, inventories were comprised of:
December 31,
-------------------
1998 1997
-------- --------
Materials and suppliers $ 4,111 $ 11,357
Imports in transit 14 94
-------- --------
$ 4,125 $ 11,451
======== ========
F-90
TVA SUL PARANA S.A.
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
6. Related party transactions
The following tables summarize the transactions between the Company and
related parties as of December 31, 1998 and 1997 and for each of the three
years in the period ended December 31, 1998:
December 31,
1998 1997
-------- --------
TVA Sistema de Televisao S.A
Loans payable -- 3,705
Accounts payable $ 586 $ 753
Accounts receivable 12 21
Tevecap S.A
Accounts receivable -- --
Loans payable $ 26,424 $ 16,334
1998 1997 1996
-------- -------- --------
TVA Sistema de Televisao S.A
Net interest expense $ 295 $ 483 $ 1,330
Tevecap S.A
Net interest expense $ 4,764 $ 3,333 $ 166
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 3.85% to 4,45% per month as of December 1998
(3,85% to 4,45% per month as of December 1997). Such loans are renewable
every year on December 31.
F-91
TVA SUL PARANA S.A.
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
7. 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, 1998 and 1997 are as follows:
December 31,
-------------------
1998 1997
-------- --------
Deferred tax assets
Net operating loss carryforwards $ 7,743 $ 6,552
Deferred charges -- 71
Provision for claims 104 104
Provision for obsolescence 139 139
Others 505 449
-------- --------
Total gross deferred tax asset 8,491 7,315
-------- --------
Less valuation allowance (8,431) (7,167)
-------- --------
Net deferred tax asset 60 148
Deferred tax liability
Installation costs 60 148
-------- --------
Total gross deferred tax liability (60) (148)
-------- --------
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, 1998, the Company and subsidiaries have unexpirable
accumulated tax losses of $23,464.
F-92
TVA SUL PARANA S.A.
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
7. 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,
----------------------------------
1998 1997 1996
-------- -------- --------
Loss before income taxes and minority interest $ 10,158 $ 6,233 $ 3,370
Statutory income tax rate 33.00% 33.00% 33.00%
-------- -------- --------
3,352 2,057 1,112
(Decrease) Increase in the income tax rate -- -- 76
Deferred charges (372) (341) (198)
Losses of tax carryforward on incorporated companies (1,273) -- --
Unallowable amortization 62 110 486
Others (529) 269 317
-------- -------- --------
Consolidated income tax benefit for the period 1,240 2,095 1,793
Increase in valuation allowance (1,264) (2,095) (1,949)
-------- -------- --------
$ (24) $ -- $ (156)
======== ======== ========
Income tax payable represents amounts owed by subsidiaries calculated on a
unitary basis.
F-93
TVA SUL PARANA S.A.
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
8. Property, plant and equipment, net
As of December 31, 1998 and 1997, property, plant and equipment were
comprised of:
Annual
Depreciation December 31,
Rate ---------------------
% 1998 1997
--------- --------
Machinery and equipment 10 $ 4,089 $ 2,858
Converters 10 11,919 9,393
Leasehold improvements 25 138 106
Furniture and fixtures 10 491 365
Premises 10 696 657
Vehicles 20 589 638
Software 20 227 197
Tools 10 73 70
Reception equipment 20 15,278 13,246
Cable plant 10 10,501 5,943
Building 4 3,784 3,783
--------- --------
47,785 37,256
Telephone line use rights 377 341
Fixed assets in transit 4,846 5,686
Accumulated depreciation (11,393) (5,372)
--------- --------
$ 41,615 $ 37,911
========= ========
9. Concessions, net
As of December 31, 1998 and 1997, concessions were comprised of:
December 31,
---------------------
1998 1997
-------- --------
CCS - Camboriu Cable System Telecomunicacoes Ltda. $ 841 $ 841
TVA Sul Parana Ltda. (Stations in south of Brazil) 7,805 7,805
Accumulated amortization (2,034) (1,169)
-------- --------
$ 6,612 $ 7,477
======== ========
F-94
TVA SUL PARANA S.A.
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
10. Loans
As of December 31, 1998, loans were comprised of:
Short-term Long-term
---------- ----------
Loans $ 5,791 --
---------- ----------
$ 2,719 1,640
========== ==========
Loans as of December 31, 1998 represent the refinancing of certain
suppliers' payables. They bear interest at rates varying from 8.26% to
9.29% per year.
11. Loan guarantees
In November 1996, Tevecap S.A., issued $250,000 12-5/8% Senior Notes to
institutional buyers in a private placement. The Notes, which mature in
November 2004, were subsequently registered with the Securities and
Exchange Commission in May 1997. These Notes are jointly and severally,
irrevocably and fully unconditionally guaranteed, on a senior basis, by
Tevecap's direct and indirect subsidiaries, including the Company.
F-95
TVA SUL PARANA S.A.
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
12. Paid-in capital
Paid-in capital as of December 31, 1998 and 1997 was comprised of:
1998 1997
------------------------ ------------------------
US$ Shares US$ Shares
------------------------ ------------------------
Abril S.A $ 6,190 2,456,150 $ 6,190 6,919,869
TVA Distribuidora S.A 38,023 15,087,776 38,023 42,507,763
----------- ----------- ----------- -----------
$ 44,213 17,543,926 $ 44,213 49,427,632
=========== =========== =========== ===========
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.
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.
F-96
TVA SUL PARANA S.A.
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
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 $18 for the year ended December 31, 1998
($2 in 1997).
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 1998, contributions made by the Company to the Health Care
Plan and certain affiliates companies to Associacao Abril de Beneficios
amounted to $212 ($115 for 1997).
16. Supplementary information - valuation and qualifying accounts and reserves
Deferred
Taxation Provision for Provision
Valuation Doubtful for
Allowance Accounts Claims
------------- ------------- ---------------
Balance as of December 31, 1995 $ 3,123 $ -- $ --
Additions charged to expense 1,949 386 --
------------- ------------- ---------------
Balance as of December 31, 1996 $ 5.072 $ 386 $ --
Additions charged to expense 2,095 1,101 323
------------- ------------- ---------------
Balance as of December 31, 1997 $ 7,167 $ 1,487 $ 323
Additions charged to expense 1,264 202 (72)
------------- ------------- ---------------
Balance as of December 31, 1998 $ 8,431 $ 1,689 $ 251
============= ============= ===============
F-97
TVA SUL PARANA S.A.
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
17. Working capital deficiency
The Company's financial statements for the year ended December 31, 1998
were prepared on a going concern basis, which contemplates the realization
of assets and settlement of liabilities and commitments in the normal
course of business. The Company incurred net losses of $10,285 for the
period ended December 31, 1998. In addition, as described in Note 1, the
Company has significant dependency on TVA Group operations.
The Company is endeavoring to reverse its pattern of losses and
effectively meet its liquidity needs through increasing the revenue base
and other means.
In the event that these steps prove to be inadequate to maintain the
Company's operating cash flow, the Company's principal shareholder,
TEVECAP, intends to maintain the Company as a going concern. TEVECAP's
continuation as a going concern is dependent upon its ability to generate
sufficient cash flow to meet its obligations on a timely basis. The
management plans of TEVECAP are fully disclosed in its financial
statements.
18. 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, 1999. As of December 31,1998 the Company has
no operations with hedging activities.
In March 1998, the AICPA issued Statement of position 98-1 (SOP 98-1),
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". SOP 98-1 requires capitalization of certain direct costs
and interest costs after preliminary development efforts have been made.
SOP 98-1 is effective for fiscal year beginning after December 31, 1998.
At this time, management is considering the impact of this pronouncement,
but does not believe it will have a material effect on the Company's
consolidated financial statements.
F-98
TVA SUL PARANA S.A.
AND SUBSIDIARY
Notes to Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
19. Subsequent events - Change in the Central Bank of Brazil's Exchange Policy
In mid-January 1999, the Central Bank of Brazil changed its exchange
policy and extinguished the so-called exchange band, through which it
managed the margin of the fluctuation of the real in relation to the U.S.
dollar, allowing the market to freely negotiate the exchange rate. The
real devalued from R$1,208 per US$ on December 31, 1998 to R$ 1,9934 per
US$ on March 5, 1999.
A large portion of the Company's operating expenses, principally
programming, is denominated in U.S. dollars. The Company is currently
negotiating with its suppliers of programming. In addition, the Company
has net U.S. dollar denominated liabilities of US$5,719 at December 31,
1998.
F-99
CCS - CAMBORIU SYSTEM
TELECOMUNICACOES LTDA.
REPORT ON FINANCIAL
STATEMENTS
as of December 31, 1998 and 1997
and for each of the two years in the period ended
December 31, 1998 and the period from inception, May
30, 1996 to December 31, 1996
F-100
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
INDEX TO FINANCIAL STATEMENTS
Contents
Page
Report of Independent Accountants F-102
Balance Sheets as of December 31, 1998 and 1997 F-103
Statements of Operations for each of the two years in the period
ended December 31, 1998 and the period from inception, May 30,
1996 to December 31, 1996 F-105
Statements of Changes in Shareholders' Equity for each of the two
years in the period ended December 31, 1998 and the period from
inception, May 30, 1996 to December 31, 1996. F-106
Statements of Cash Flows for each of the two years in the period
ended December 31, 1998 and the period from inception, May 30,
1996 to December 31, 1996 F-107
Notes to Financial Statements F-108
F-101
ARTHUR ANDERSEN S/C
Report of Independent 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, 1998 and 1997, and the
related statements of operations, changes in shareholders' equity and cash flows
for each of the two years in the period ended December 31, 1998 and the period
from inception, May 30, 1996 to December 31, 1996, 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, 1998 and 1997, and the related
statements of its operations, changes in shareholders' equity and cash flows for
each of the two years in the period ended December 31, 1998 and the period from
inception, May 30, 1996 to December 31, 1996, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered recurring
losses and has negative net working capital that raise substantial doubt about
its ability to continue as a going concern. Management's actions in regard to
these matters are discussed in note 12. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Arthur Andersen S/C
Sao Paulo, Brazil
March 5, 1999
F-102
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements
(in thousands of U.S. dollars)
Balance Sheets
as of December 31, 1998 and 1997
(in thousands of U.S. dollars)
December 31,
-------------------
1998 1997
------ ------
ASSETS
Current assets
Cash on hand and in banks $ 59 $ 57
Accounts receivable, net 108 140
Inventories 129 366
Recoverable Taxes 47 40
Accounts receivable from related parties 16 4
Other accounts receivable 16 2
------ ------
Total current assets 375 609
------ ------
Property, plant and equipment, net 4,550 4,681
------ ------
Total assets $4,925 $5,290
====== ======
Continued
F-103
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements
(in thousands of U.S. dollars)
Balance Sheets
as of December 31, 1998 and 1997
(in thousands of U.S. dollars)
December 31,
------------------
1998 1997
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Loans $ -- $ 116
Film Suppliers 109 --
Others suppliers 77 47
Taxes payable other than income taxes 92 90
Accrued payroll and related liabilities 46 39
Income taxes 24 --
Accounts payable to related companies 42 91
Others accounts payable 35 56
------- -------
Total current liabilities 425 439
------- -------
Long-term liabilities
Loans from related companies 1,099 1,701
Provision from claims -- 4
------- -------
Total long-term liabilities 1,099 1,705
------- -------
Shareholders' equity
Paid-in capital 4,012 4,012
Accumulated deficit (611) (866)
------- -------
Total shareholders' equity 3,401 3,146
------- -------
Total liabilities and shareholders' equity $ 4,925 $ 5,290
======= =======
Continued
F-104
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements
(in thousands of U.S. dollars)
Statements of Operations
for the years ended December 31, 1998 and 1997 and the period from
inception, May 30, 1996 to December 31, 1996
(in thousands of U.S. dollars)
Year ended December 31,
---------------------------------
1998 1997 1996
------- ------- -------
Gross revenues
Monthly subscriptions $ 2,454 $ 2,522 $ 943
Installation 90 145 --
Other 51 106 30
Taxes on revenue (71) (88) (26)
------- ------- -------
Net revenue 2,524 2,685 947
------- ------- -------
Direct operating expenses
Payroll and benefits 105 243 120
Programming 740 920 286
Other costs 178 459 215
------- ------- -------
1,023 1,622 621
------- ------- -------
Selling, general and administrative expenses
Payroll and benefits 286 249 123
Advertising and promotion 2 82 23
Rent 91 -- 6
Other administrative expenses 394 268 111
------- ------- -------
773 599 263
------- ------- -------
Depreciation 338 264 99
------- ------- -------
Operating income (loss) 390 200 (36)
------- ------- -------
Interest income 50 85 12
Interest expenses (242) (355) (34)
Translation gain (loss) 23 10 (2)
Other nonoperating (expense) income, net 58 (68) --
------- ------- -------
Income (loss) before income taxes 279 (128) (60)
------- ------- -------
Income taxes (24) -- (34)
------- ------- -------
Net income (Ioss) $ 255 $ (128) $ (94)
======= ======= =======
Net income (loss) per share 0.05 (0.03) (0.02)
Continued
F-105
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements
(in thousands of U.S. dollars)
Statements of Changes in Shareholders' Equity
for the years ended December 31, 1998 and 1997 and the period from
inception, May 30, 1996 to December 31, 1996
(in thousands of U.S. dollars)
Paid-in Accumulated
Capital Deficit Total
------- ------- -------
Balance as of May 30, 1996 $ 4,012 $ (644) $ 3,368
Net loss for the period -- (94) (94)
------- ------- -------
Balance as of December 31, 1996 4,012 (738) 3,274
------- ------- -------
Net loss for the period -- (128) (128)
------- ------- -------
Balance as of December 31, 1997 4,012 (866) 3,146
------- ------- -------
Net income for the period -- 255 255
------- ------- -------
Balance as of December 31, 1998 $ 4,012 $ (611) $ 3,401
======= ======= =======
Continued
F-106
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements
(in thousands of U.S. dollars)
Statements of Cash Flows
for the years ended December 31, 1998 and 1997 and the period from
inception, May 30, 1996 to December 31, 1996
(in thousands of U.S. dollars)
Year Ended December 31,
-------------------------------------------
1998 1997 1996
------- ------- -------
Cash flows from operating activities:
Net income (loss) $ 255 $ (128) $ (94)
Adjustments to reconcile net loss to net cash
Provided by operating activities:
Depreciation 338 264 99
Provision for doubtful accounts (278) 342 --
Provision for claims (4) 4 --
Accounts receivable 310 (479) (3)
Other accounts receivable including recoverable taxes
and accounts receivable from related parties (33) 8 (49)
Inventories 237 541 (907)
Suppliers 139 (373) 388
Taxes payable other than income taxes 2 56 11
Income Taxes 24 -- --
Accrued payroll and related liabilities 7 28 (12)
Other accounts payable (70) 85 --
------- ------- -------
Net cash provided by operating activities 927 348 (567)
------- ------- -------
Cash flows from investing activities:
Purchase of fixed assets (207) (1,488) (53)
------- ------- -------
Net cash used in investing activities (207) (1,488) (53)
------- ------- -------
Cash flows from financing activities:
Loans from banks (116) 116 --
Loans from related companies (602) 995 706
------- ------- -------
Net cash provided by financing activities (718) 1,111 706
------- ------- -------
Net increase (decrease) in cash and cash equivalents 2 (29) 86
Cash and cash equivalents at beginning of the period 57 86 --
------- ------- -------
Cash on hand and in banks at end of the period $ 59 $ 57 $ 86
======= ======= =======
Suplemental cash disclosure:
Cash paid for interest -- -- --
======= ======= =======
Suplemental non-cash financing activities:
Accrued interest on related company loans refinanced
As principal -- -- --
======= ======= =======
Continued
F-107
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements
(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.
Continued
F-108
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
2.3. Currency remeasurement
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 52, "Foreign Currency Transactions", the United States dollar has been
assumed to be the functional currency as a substantial portion of the
Company's operations are conducted in United States dollars. As such, the
local accounts of the Company are translated into United States dollars as
follows:
o Nonmonetary assets and liabilities are translated at historical
rates. All other assets and liabilities are translated at the
official rate of exchange of R$1.2087 to US$1 in effect on December
31, 1998, and R$1.1164 to US$1 in effect on December 31, 1997.
Translation gains and losses are recognized in the income statement.
o Income and expenses are translated at the average exchange rates in
effect each month, except for those related to assets and
liabilities which are translated at historical exchange rates and
deferred income taxes, which are translated at the current rate.
Translation gains and losses are recognized in the income statement.
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, 1998 and 1997 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.
Continued
F-109
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to 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
is 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, in an
amount 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.
Continued
F-110
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to 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. Subscription revenues are
recognized as earned on an accrual basis.
3. Accounts receivable, net
As of December 31, 1998 and 1997, accounts receivable were comprised of:
December 31,
-------------------
1998 1997
----- -----
Subscriptions $ 116 $ 474
Installation fees 23 8
Advertising 33 --
Provision for doubtful accounts (64) (342)
----- -----
$ 108 $ 140
===== =====
4. Related party transactions
The following tables summarize the transactions between the Company and
related parties as of December 31, 1998 and 1997:
December 31,
--------------------
1998 1997
------ ------
TVA Sistema de Televisao S.A
Accounts payable $ $ 56
Accounts receivable 12
TVA Sul Parana Ltda
Accounts payable $ 42 $ 35
Accounts receivable 4 4
Loans payable 1,099 1,701
Continued
F-111
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to 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, 1998 and 1997 are as follows:
December 31,
----------------
1998 1997
----- -----
Deferred tax assets:
Net operating loss carryforwards $ 92 $ 150
Others (37) 60
----- -----
Total gross deferred tax asset 55 210
----- -----
Less valuation allowance (55) (210)
----- -----
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".
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:
Year Ended December 31,
-------------------------------
1998 1997 1996
------- ------- -------
Income (loss) before income taxes and minority interest $ 279 $ (128) $ (60)
Statutory income tax rate 33.00% 33.00% 33.00%
------- ------- -------
92 (42) (20)
Deferred charges 11 15 --
Others 76 26 54
------- ------- -------
Consolidated income tax provision (benefit) for the period 179 (1) 34
Increase (decrease) in valuation allowance (155) 1 --
------- ------- -------
$ 24 $ -- $ 34
======= ======= =======
Continued
F-112
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
6. Property, plant and equipment, net
As of December 31, 1998 and 1997, property, plant and equipment were
comprised of:
Annual
Depreciation December 31,
Rate --------------------
% 1998 1997
------- -------
Machinery and equipment 10 $ 294 $ 248
Building 25 3,447 3,447
Furniture and fixtures 10 83 79
Vehicles 20 15 15
Software 20 8 8
Tools 10 2 2
Reception equipment 20 443 278
Cable plant 10 937 936
------- -------
5,229 5,013
Telephone line use rights 4 4
Accumulated depreciation (689) (351)
Fixed assets in transit 6 15
------- -------
$ 4,550 $ 4,681
======= =======
7. Paid-in capital
Paid-in capital as of December 31, 1998 and 1997 was comprised of:
1998 1997
------------------------- -------------------------
US$ Shares US$ Shares
---------- ---------- ---------- ----------
Construtora ENE ESSE Ltda $ 1,605 1,940,000 $ 1,605 1,940,000
TVA Sul Participacoes S.A -- -- 2,407 2,910,000
TVA Sul Parana S.A 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.
Continued
F-113
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
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.
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 1998, contributions made by the Company to the Health Care
Plan amounted to $21 ($18 in 1997).
Continued
F-114
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
11. Supplementary information - valuation and qualifying accounts and reserves
Deferred Provision
Taxation for Provision
Valuation Doubtful For
Allowance Accounts Claims
---------- ---------- ----------
Balance as of May 30, 1996 $ -- $ -- $ --
Additions charged to expense 209
---------- ---------- ----------
Balance as of December 31, 1996 $ 209 $ -- $ --
Additions charged to expense 1 342 4
---------- ---------- ----------
Balance as of December 31, 1997 $ 210 $ 342 $ 4
Reduction (155) (278) (4)
---------- ---------- ----------
Balance as of December 31, 1998 $ 55 $ 64 $ --
========== ========== ==========
12. Working capital deficiency
The Company's financial statements for the year ended December 31, 1998
were prepared on a going concern basis, which contemplates the realization
of assets and settlement of liabilities and commitments in the normal
course of business. The Company has negative working capital as of
December 31, 1998. In addition as described in Note 1, the Company has
significant dependency on TVA Group operations.
The Company is endeavoring to reverse its pattern of losses and
effectively meet its liquidity needs through increasing the revenue base
and other means.
In the event that these steps prove to be inadequate to maintain the
Company's operating cash flow, the Company's principal shareholder,
TEVECAP, intends to maintain the Company as a going concern. TEVECAP's
continuation as a going concern is dependent upon its ability to generate
sufficient cash flow to meet its obligations on a timely basis. The
management plans of TEVECAP are fully disclosed in its financial
statements.
Continued
F-115
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements, Concluded
(in thousands of U.S. dollars)
13. 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, 1999. As of December 31,1998 the Company has
no operations with hedging activities.
In March 1998, the AICPA issued Statement of position 98-1 (SOP 98-1),
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". SOP 98-1 requires capitalization of certain direct costs
and interest costs after preliminary development efforts have been made.
SOP 98-1 is effective for fiscal year beginning after December 15, 1998.
At this time, management is considering the impact of this pronouncement,
but does not believe it will have a material effect on the Company's
consolidated financial statements.
14. Subsequent events
In mid-January 1999, the Central Bank of Brazil changed its exchange
policy and extinguished the so-called exchange band, through which it
managed the margin of the fluctuation of the real in relation to the U.S.
dollar, allowing the market to freely negotiate the exchange rate. The
real devalued from R$1,208 per US$ on December 31, 1998 to R$ 1,9934 per
US$ on March 5, 1999.
A large portion of the Company's operating expenses, principally
programming, is denominated in U.S. dollars. The Company is currently
negotiating with its suppliers of programming.
Concluded
F-116