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PROSPECTUS
[LOGO]
TEVECAP S.A.
EXCHANGE OFFER OF
US$48,022,000 12.625% NOTES DUE 2009
FOR
US$48,022,000 12.625% NOTES DUE 2004
----------
We are offering to exchange up to US$48,022,000 of our 12.625% Notes due
2009, which we refer to as the new notes, for up to US$48,022,000 of your
12.625% Notes due 2004, which we refer to as the old notes. We refer to the old
notes and the new notes collectively as the notes.
THIS SOLICITATION WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON NOVEMBER
10, 2004 OR ANY SUBSEQUENT DATE AND TIME RESULTING FROM AN EXTENSION AS
DESCRIBED HEREIN.
To exchange your old notes for new notes:
- you must complete and send the letter of transmittal that
accompanies this prospectus to the exchange agent by 5:00 p.m.,
New York City time, on November 10, 2004; and
- you should read the section called "The Exchange" for further
information on how to exchange your old notes for new notes.
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF RISK FACTORS
THAT YOU SHOULD CONSIDER PRIOR TO TENDERING YOUR OLD NOTES IN THE EXCHANGE
OFFER.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the securities to be issued in the
exchange offer or passed upon the adequacy or accuracy of this prospectus. Any
representation to the contrary is a criminal offense.
DATED OCTOBER 13, 2004
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TABLE OF CONTENTS
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Incorporation of Certain Information by Reference.....................................3
Where You Can Find More Information...................................................3
Presentation of Certain Information...................................................3
Prospectus Summary....................................................................5
Tevecap...............................................................................5
The Exchange Offer....................................................................6
The New Notes.........................................................................7
Differences Between the Old Notes and the New Notes...................................8
Timetable for the Offering............................................................9
Recent Developments..................................................................10
Risk Factors.........................................................................15
Forward-Looking Statements...........................................................20
Use of Proceeds......................................................................21
Selected Consolidated Financial Information..........................................22
Operating and Financial Review and Prospects.........................................24
Description of the New Notes.........................................................30
The Exchange.........................................................................43
Tax Considerations...................................................................48
Experts..............................................................................52
Legal Matters........................................................................52
Enforceability of Civil Liabilities..................................................53
Financial Statemens.................................................................F-1
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You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not making an offer
to sell these securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information contained in this prospectus
is accurate only as of the date on the front cover of this prospectus. Our
business, financial condition, results of operations and prospects may have
changed since that date.
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INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The Securities and Exchange Commission, or the SEC, allows us to
incorporate by reference the information we file with them, which means that we
can disclose important information to you by referring you to documents that we
file with the SEC. The information incorporated by reference is considered to be
part of this prospectus, and some later information that we file with or furnish
to the SEC will automatically be deemed to update and supersede this
information. We incorporate by reference the following documents that have been
filed with the SEC:
- Our Annual Report on Form 20-F/A for the fiscal year ended December
31, 2003.
We also incorporate by reference into this prospectus any filings made with
the SEC under Sections 13(a), 13(c) or 15(d) of the Exchange Act of 1934, as
amended, which we refer to as the Exchange Act, and, to the extent designated
therein, reports on Form 6-K furnished to the SEC, after the date of this
prospectus and prior to the consummation of this offering.
Any statement contained in a document, all or a portion of which is
incorporated or deemed to be incorporated by reference herein, shall be deemed
to be modified or superseded for purposes of this prospectus to the extent that
a statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute part of this
prospectus.
We will provide without charge to each person to whom a copy of this prospectus
is delivered, upon the written or oral request of any such person, a copy of any
or all of the documents referred to above which have been or may be incorporated
herein by reference, other than exhibits to such documents (unless such exhibits
are specifically incorporated by reference in such documents). TO OBTAIN TIMELY
DELIVERY, INVESTORS MUST REQUEST THIS INFORMATION NO LATER THAN FIVE BUSINESS
DAYS BEFORE THE DATE THEY MUST MAKE THEIR INVESTMENT DECISION. Requests should
be directed to the Information Agent, GS Proxylatina S.A., Cerrito 1266, 10 mo
piso of. 42, C1010AAZ Buenos Aires, Argentina, telephone 5411-4811-8391,
facsimile 5411-4811-8985, Attention: Ciro Ortiz, Director.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form F-4 under the
Securities Act of 1933, as amended (the Securities Act), with respect to the new
notes. This prospectus, which is part of the registration statement, does not
contain all of the information set forth in the registration statement and the
exhibits and schedules to the registration statement. For further information
pertaining to us we refer you to the registration statement and the exhibits and
schedules filed as part of the registration statement. If a document has been
filed as an exhibit to the registration statement, we refer you to the copy of
the document that has been filed. Each statement in this prospectus relating to
a document filed as an exhibit is qualified in all respects by the filed
exhibit. The registration statement, including exhibits and schedules thereto,
may be inspected without charge at the SEC's Public Reference Rooms at 450 Fifth
Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for
further information on the operation of the public reference rooms. In addition,
the SEC maintains an Internet web site at www.sec.gov, from which you can
electronically access the registration statement and its exhibits.
PRESENTATION OF CERTAIN INFORMATION
Our accounts, 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 2.1 of our Consolidated Financial Statements. Certain amounts
stated herein in US dollars (other than as set forth in the Consolidated
Financial Statements and financial information derived therefrom) have been
translated, for the convenience of the reader, from REAIS at the rate in effect
on June 30, 2004 of R$3.1075 = US$1.00. Such translations should not be
construed as a representation that REAIS could have been converted at such rate
on such
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date or at any other date. See "Exchange Rate Data" in our Form 20-F/A. All
references in this Prospectus to (i) "US dollars," "$" or "US$" are to United
States dollars and (ii) "REAIS," "REAL" or "R$" are to Brazilian REAIS.
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SOME OF THE INFORMATION IN THIS PROSPECTUS. SINCE
THIS IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT MAY BE
IMPORTANT TO YOU. FOR A MORE COMPLETE UNDERSTANDING OF THE EXCHANGE OFFER, YOU
SHOULD CAREFULLY READ THE ENTIRE PROSPECTUS, INCLUDING THE FINANCIAL STATEMENTS
AND THE NOTES THERETO AND THE DOCUMENTS WE HAVE REFERRED TO YOU. YOU SHOULD PAY
SPECIAL ATTENTION TO THE "RISK FACTORS" SECTION BEGINNING ON PAGE 15 OF THIS
PROSPECTUS.
We hereby offer, upon the terms and subject to the conditions set forth in
this prospectus and the accompanying letter of transmittal, to exchange an
aggregate principal amount of up to US$48,022,000 of our 12.625% Senior Notes
due 2009 which have been registered under the Securities Act of 1933 pursuant to
a registration statement of which this prospectus constitutes a part, for the
same principal amount of our outstanding 12.625% Senior Notes due 2004.
We issued the old notes in an aggregate principal amount of US$250,000,000
on November 26, 1996 through a private placement, and these notes were
subsequently exchanged for notes with identical terms registered under the
Securities Act pursuant to exchange offers in May and December 1997. In June
1999, with the consent of a sufficient principal amount of the holders of the
old notes, we amended the terms of the old notes to eliminate the restrictive
covenants. At the date of this prospectus, TVA Communications Ltd., our
wholly-owned subsidiary, holds old notes in the aggregate principal amount of
US$201,978,000. As of the date hereof, outstanding old notes in the aggregate
principal amount of US$48,022,000 are held by non-affiliates, and it is these
notes we are seeking to exchange in this transaction.
As a condition to the offering, which we may waive at any time, holders of
old notes in the aggregate principal amount of at least 95% of the outstanding
principal amount of US$48,022,000 held by non-affiliates must exchange their old
notes for new notes pursuant to the offer. In the event this minimum threshold
is met, we intend to exchange the old notes that TVA Communications Ltd. holds
in the amount of US$201,978,000 on terms that are materially less favorable than
those offered to the other holders of old notes hereby. In the event this
minimum threshold is not met, we do not currently intend to exchange the old
notes held by TVA Communication Ltd. on materially less favorable terms than
this offer. In that case, we may elect to treat all holders of the old notes in
the same manner, which we anticipate will be materially less favorable than the
terms offered hereby.
We will continue to make interest payments on the old notes, whether or not
they are exchanged in the exchange offer, up to and including November 26, 2004.
TEVECAP
We are a Brazilian company and are a major pay television operator in
Brazil and one of the country's primary pay television programming distributors.
In 1991, we were the first to provide pay television services in Brazil. We
presently offer pay television and broadband internet services utilizing cable
and multipoint microwave distribution system, or wireless cable ("MMDS"),
distribution technologies to nearly 287,595 pay television subscribers and
24,865 broadband internet subscribers (residential and corporate).
We are a majority-owned subsidiary of Abril Comunicacoes S.A. ("Abril"), a
subsidiary of Abril S.A., one of Latin America's largest communications groups.
Our other beneficial shareholders are Falcon International Communications
(Bermuda) L.P. ("Falcon International") and Harpia Holdings Ltd. and Curupira
Holdings Ltda. (subsidiaries of JP Morgan Partners LLC ("JPM")).
We conduct our pay television operations through wholly-owned operating
companies: TVA Sistema de Televisao S.A. ("TVA Sistema"), TVA Sul Parana Ltda.
("TVA Sul"), Comercial Cabo TV Sao Paulo Ltda. ("Comercial Cabo") and
CCS-Camboriu Cable System de TeleComunicacoes Ltda. ("CCS"). Through our MMDS
and cable systems, we serve six cities with a combined population of
approximately 31 million, including three of the seven largest cities in Brazil:
Sao Paulo (population of 10.4 million), Rio de Janeiro (population of 5.9
million) and Curitiba (population of 1.6 million).
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THE EXCHANGE OFFER
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SECURITIES OFFERED.......................... We are offering up to US$48,022,000 aggregate principal amount of
our 12.625% Notes due 2009, which we refer to as the new notes.
THE EXCHANGE OFFER.......................... We are offering to issue the new notes in exchange for the same
principal amount of your 12.625% Senior Notes due 2004, which we
refer to as the old notes. For procedures for tendering, see "The
Exchange Offer."
TENDERS, EXPIRATION DATE, WITHDRAWAL........ The exchange offer will expire at 5:00 p.m. New York City time on
November 10, 2004 unless it is extended. Tenders of old notes may
be not withdrawn at any time; provided, however, that if the
exchange of old notes for new notes as part of the exchange offer
has not occurred on or before January 31, 2005, holders of old
notes who have tendered their old notes in connection with the
offer may withdraw their tender of their old notes at any time
thereafter. If we decide for any reason not to accept any old
notes for exchange, your old notes will be returned to you without
expense to you promptly after the exchange offer expires.
US FEDERAL INCOME TAX CONSEQUENCES.......... Your exchange of old notes for new notes in the exchange offer may
result in income, gain or loss to you for U.S. federal income tax
purposes. The new notes will be treated as issued with original
issue discount ("OID") for U.S. federal income tax purposes. In
general, U.S. Holders of new notes will be required to include OID
thereon in gross income as ordinary interest income under a
constant yield method over the term of the new notes in advance of
cash payments attributable to such income. See "Tax
Considerations--Certain U.S. Federal Income Tax Consequences."
USE OF PROCEEDS............................. We will not receive any proceeds from the issuance of the new notes
in the exchange offer.
EXCHANGE AGENT.............................. HSBC Bank USA, National Association
SOLICITATION AGENTS......................... Eurovest Global Securities Inc. is a solicitation agent for the
portion of the exchange offer being made to non-U.S. persons
outside the United States.
Unibanco - Uniao de Bancos Brasileiros S.A. is the global
solicitation agent for the entirety of the offer and will
coordinate the efforts of both solicitation agents.
FAILURE TO TENDER YOUR OLD NOTES............ If you fail to tender your old notes in the exchange offer, you
will continue to have the limited rights provided by the old
notes. The old notes mature on November 26, 2004, and we cannot
assure you that we will be able to pay the principal due on that
date.
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THE NEW NOTES
THE FOLLOWING SUMMARY CONTAINS BASIC INFORMATION ABOUT THE NEW NOTES. IT IS
NOT INTENDED TO BE COMPLETE. IT DOES NOT CONTAIN ALL THE INFORMATION THAT IS
IMPORTANT TO YOU. FOR A MORE COMPLETE UNDERSTANDING OF THE NEW NOTES, PLEASE
REFER TO THE SECTION OF THIS DOCUMENT ENTITLED "DESCRIPTION OF THE NEW NOTES."
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ISSUER...................................... Tevecap S.A.
NEW NOTES................................... Up to US$48,022,000 aggregate principal amount of 12.625% Senior
Notes due November 26, 2009.
MATURITY DATE............................... November 26, 2009.
INDENTURE................................... The new notes will be issued under the indenture between us, as
issuer, and HSBC Bank USA, National Association, as indenture
trustee, registrar, paying agent and transfer agent, and HSBC Bank
USA, National Association, as principal paying agent to be dated
November 26, 2004.
INTEREST.................................... The new notes will bear interest at the annual rate of 12.625%,
payable semiannually in arrears on each interest payment date.
Interest will accrue on the outstanding principal amount of the
new notes from November 26, 2004.
INTEREST PAYMENT DATES...................... May 26 and November 26 of each year.
PRINCIPAL PAYMENTS.......................... Principal on the new notes will be payable in three equal
installments due on the following dates:
November 26, 2007
November 26, 2008
November 26, 2009
DEFERRAL OF PRINCIPAL....................... In the event of a significant devaluation of the Brazilian REAL
against the US dollar as compared to Brazilian inflation, we will
be permitted to defer the payment of principal, but in no event
beyond the maturity date. For more information, see "Description
of the New Notes--Redemption."
OPTIONAL REDEMPTION......................... On any principal payment date, we may redeem all of the new notes,
at a redemption price of 100% of the outstanding principal amount,
plus accrued and unpaid interest, if any, to the redemption date
(subject to the right of holders of record on the relevant record
date to receive interest due on the relevant interest payment
date).
RANKING..................................... The new notes will constitute direct, unsecured and unconditional
obligations of our company and will rank at least PARI PASSU in
priority of payment with all other present and future unsecured
and unsubordinated obligations of our company.
WITHHOLDING TAXES ADDITIONAL AMOUNTS........ All payments in respect of the new notes will be made free and
clear of, and without withholding or deduction for or on account
of, any present or future taxes, duties, assessments, fees or
other governmental charges of whatever nature (and any fines,
penalties or interest related thereto) imposed or levied by or on
behalf of
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Brazil or the successor jurisdiction (if any) of the
principal paying agent, any political subdivision thereof or
taxing authority therein (each, a "Taxing Jurisdiction"), unless
such withholding or deduction is required by law or as provided in
"Description of the New Notes--Additional Amounts." In that event,
subject to the exceptions set forth in "Description of the New
Notes--Additional Amounts," we will pay to each holder such amounts
duly evidenced as may be necessary in order that every net payment
made by us on each new note after such deduction or withholding
will not be less than the amount then due and payable by us. See
"Description of the New Notes--Additional Amounts."
GOVERNING LAW............................... The indenture, the new notes and related documents, and other
transaction documents are governed by, and construed in accordance
with, the laws of the State of New York.
FORM AND DENOMINATION....................... The new notes will be issued in the form of a global note
registered in the name of DTC or its nominee in integral multiples
of US$1.00.
CLEARANCE AND SETTLEMENT.................... The new notes will be issued in book-entry form through the
facilities of DTC for the accounts of its participants, including
Euroclear Bank S.A./N.V. as the operator of the Euroclear System,
and Clearstream Banking, SOCIETE ANONYME, and will trade in DTC's
Same-Day Funds Settlement System. Beneficial interests in new
notes held in book-entry form will not be entitled to receive
physical delivery of certificated notes except in certain limited
circumstances. For a description of certain factors relating to
clearance and settlement, see "Description of the New Notes."
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DIFFERENCES BETWEEN THE OLD NOTES AND THE NEW NOTES
Pursuant to this prospectus and on the terms and subject to the conditions
set forth herein, we are offering to exchange an aggregate principal amount of
up to US$48,022,000 of our 12.625% Senior Notes due 2009, which we refer to as
the new notes and which have been registered under the Securities Act of 1933
pursuant to a registration statement of which this prospectus constitutes a
part, for the same principal amount of our outstanding 12.625% Senior Notes due
2004, which we refer to as the old notes. The material terms of the new notes
and the old notes are substantially similar, except for the following:
- The final maturity date of the new notes is on November 26, 2009, five
years later than the final maturity date of the old notes;
- The terms of the new notes allow us to defer the payment of principal in
the event of a significant devaluation of the Brazilian real against the US
dollar as compared to Brazilian inflation, but in no event beyond the final
maturity date. For more information, see "Description of the New
Notes-Redemption."
- The new notes will not be guaranteed by our subsidiaries, while the old
notes are guaranteed by certain of our subsidiaries.
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TIMETABLE FOR THE OFFERING
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COMMENCEMENT OF THE EXCHANGE OFFER.............. October 13, 2004.
EXPIRATION OF THE EXCHANGE OFFER................ November 10, 2004, unless extended.
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RECENT DEVELOPMENTS
PAY TELEVISION SERVICES AND PROGRAMMING DISTRIBUTION
We are in the midst of an upgrade of services for our pay television
subscribers. In September 2004, we launched a significant upgrade of the
services for our cable customers in Sao Paulo by offering digital services,
which allow cable customers to view additional channels, including pay-per-view
channels and audio channels, utilize an electronic programming guide, and select
a number of languages and subtitles in which to view programs. Assuming
availability of adequate funds, we expect to launch the upgrade of services for
our MMDS customers in Sao Paulo to digital services in the first quarter of
2005, and to expand digital services for both our cable and MMDS customers to
Rio de Janeiro in 2005.
We are the first Brazilian cable pay television operator to provide digital
services to our customers. In the second half of 2004 and in 2005, we will use
multiple advertising strategies, both through Abril and other media sources, in
order to publicize the features of the digital cable and MMDS services and
attract new subscribers.
In addition to these upgrades, we expect to offer digital video recorder
(DVR) capability, video-on-demand (VOD) services and interactivity in connection
with our cable and MMDS services in the near future. New devices (DVR and
decoder) will offer improved video and audio quality as compared to current
cable and MMDS services and will allow customers to pause, rewind and record
live television. VOD services will provide customers with access to such
services as home shopping, games, and movies on demand. VOD services will have a
competitive price compared to video rental, and customers will not need to leave
their homes to access a significant selection of products, games and movies.
Interactivity will allow customers to send and receive information regarding
programming and other areas of interest.
In the first half of 2004, we began offering flexible tiered subscription
options and developing customized programming packages, to allow subscribers to
choose from a greater number of options in terms of pricing and types of
programming. We intend that these tiered programming packages should attract new
subscribers, as well as retain current subscribers, thereby reducing subscriber
turn-over.
The following table sets forth information regarding the markets in which
we operate pay television systems and distribute programming, as of June 30,
2004:
<Table>
<Caption>
PAY TELEVISION
CLASS ABC AVERAGE REVENUE PROGRAMMING
SERVICE LAUNCH TV TV PER MONTH PER CHANNELS
DATE HOMES(a) HOMES(a) SUBSCRIBERS SUBSCRIBER OFFERED
--------------- ----------- ----------- ----------- --------------- ---------------
Owned Systems:
MMDS
TVA Sistema
Sao Paulo September 1991 2,258,831 785,288 34,824 23.51 28
Rio de Janeiro March 1992 1,907,346 1,007,975 61,301 22.88 27
TVA Sul
Curitiba March 1992 426,836 241,405 6,355 14.95 15
Cable(b)
TVA Sistema
Sao Paulo October 1994 667,426 444,297 142,432 26.0 58
TVA Sul
Curitiba January 1995 317,468 158,896 20,156 23.46 51
Camboriu June 1996 22,925 14,854 9,247 21.24 48
Foz do Iguacu June 1996 105,894 42,944 6,644 17.44 53
Florianopolis September 1996 202,549 124,924 6,181 23.34 50
Total MMDS and Cable Subscribers 287,140
Subscribers Awaiting Installation 455
Total Subscribers 287,595
</Table>
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(a) This data is based on information provided by Pay TV Survey and IBGE.
(b) Our cable systems in Sao Paulo, Curitiba, Camboriu, Foz do Iguacu and
Florianopolis have approximately 668,191, 201,615, 19,890, 18,060 and
29,822 Homes Passed, respectively, as of June 30, 2004.
VOICE OVER INTERNET PROTOCOL
In the fourth quarter of 2004, we and our partners, Net2Phone Comunicacoes
Ltda. and Primeira Escolha Emprudinatos Ltda., expect to launch voice over
internet protocol (VoIP) services, a technology that allows customers to make
telephone calls using a broadband internet connection instead of a regular (or
analog) phone line. With this service, our customers would be able to call
anyone who has a telephone number, including local, long distance, mobile and
international numbers through an adaptor, using a traditional phone. Currently,
no other pay television provider in Brazil presents competition for us in the
VoIP market. Management believes that the VoIP services will attract new
customers and establish us as a cutting edge service provider in the telephony
market.
SALE OF INTEREST IN CANBRAS ENTITIES
In October 2003, we entered into an agreement to sell our entire equity
interest in each of Canbras TVA Cabo Ltda., TV a Cabo Santa Branca Ltda., TV
Mogno Ltda. and TV Eucalipto Ltda. to Horizon Cablevision do Brasil S.A. The
federal Agencia Nacional de TeleComunicacoes (Brazilian Telecommunications
Agency, or ANATEL) approved this sale on June 16, 2004, and all other conditions
precedent to the closing of the sale were waived by the parties during the first
half of 2004. As of the date hereof, the equity interest in each of the listed
Canbras entities has been transferred to Horizon Cablevision do Brasil S.A. and
Abril Comunicacoes S.A., our principal shareholder, received the entire proceeds
of the sale in the amount of US$5.5 million for which we recognized a
shareholders' receivable. In addition, upon the consummation of this sale, the
Association Agreement dated June 14, 1995 among us, TVA Sistema de Televisao
S.A., Canbras TV a Cabo Ltda., TV a Cabo Santa Branca Ltda., and Canbras
Participacoes Ltda. was terminated.
LEGAL PROCEEDINGS
We are involved in litigation against Centrais Eletricas de Santa
Catarina-CELESC, Companhia Paranaense de Energia Eletrica-COPEL and Eletropaulo
Metropolitana Eletricidade de Sao Paulo in order to resolve certain questions
relating to our contracts with these entities, particularly with respect to
increases in pole rental fees requested by these entities. During the first half
of 2004, we entered into settlement negotiations with Eletropaulo Metropolitana
Eletricidade de Sao Paulo, whose claims against us constitute R$128,135.94 of
the total of R$412,101.86 claimed by the three entities. A decision against us
in connection with this litigation may have a material adverse effect on our
consolidated financial position.
We are challenging before Conselho Administrativo de Defesa Economica-CADE,
the Brazilian antitrust authority, certain exclusivity rights with respect to
Brazilian soccer programming enjoyed by one of our main competitors. During the
first half of 2004, we received two favorable decisions from Secretaria de
Direito Economico, the Secretariat of Economic law, and the matter is in its
final stage of review. We do not believe that a decision against us in this
matter would have a material adverse effect on us. However, in the event that
CADE rules in our favor in the final stage, we will have the right to purchase
rights to broadcast Brazilian soccer programming, which we believe would
significantly help us to attract new subscribers and maintain our current
subscribers.
We are judicially disputing the payment of ICMS (sales tax on operations
relating to the provision of goods and services) before the Sao Paulo Court of
Justice. The State of Sao Paulo asserts that ICMS is due at the rate of 25% with
respect to the provision of advertising on pay television. On the other hand,
the Municipality of Sao Paulo asserts that the provision of advertising on pay
television constitutes the rendering of services and therefore that only ISS
(tax over services), and not ICMS, is due at the rate of 5.0%. We have made no
provision with respect to this claim. Management believes, based on the opinion
of our external counsel, that we will prevail in this dispute. Currently, we do
not pay ICMS or ISS over advertising on pay television.
Certain municipalities in the States of Sao Paulo, Parana and Santa
Catarina have announced their intention to charge for the use of public highways
where telecommunication equipment necessary for the rendering of our
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services is installed. We are currently involved in seven claims relating to
this issue. Five of these claims are in the appeals phase in the Courts of
Justice of Sao Paulo, Parana and Santa Catarina, and two of these claims are in
the Appeal Court of the State of Sao Paulo. We have made no provision in this
respect. Based on the opinion of our external counsel, management believes that
the likelihood of an unfavorable outcome relating to these claims is remote.
Certain of our operating subsidiaries are currently defending a lawsuit
brought by the Escritorio Central de Arrecadacao e Distribuicao (Central
Collection and Distribution Office, or "ECAD"). ECAD is an 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 pay television operators
in Brazil. ECAD is seeking a judgment award of 2.55% of all past and present
revenues generated by pay television operators in Brazil. The suits are
currently being submitted to the Superior Court of Justice ("STJ") in order to
determine whether ECAD is entitled to benefit from the copyrights relating to
musical works broadcast on pay television. Suits were filed against TVA Sul in
the Civil Court of Curitiba and against TVA Brasil Radioenlaces Ltda. in the
Civil Court of Sao Paulo. In the suit against TVA Sul, TVA Sul has obtained an
initial ruling in its favor. The suit against TVA Brasil Radioenlaces Ltda. is
currently awaiting judgment. Management believes, based on the opinion of our
external counsel, that the likelihood of an unfavorable outcome relating to
these claims is remote. In addition, the Second Section of the STJ recently
denied ECAD's claim against Uniao de Cinemas Ltda. Management believes this
decision indicates a consolidation of the STJ's jurisprudence contrary to ECAD's
claims.
ABRIL PLEDGE
In order to fulfil certain obligations of Editora Abril S.A. in connection
with the non-convertible debentures issued by Editora Abril S.A. on October 19,
2001, Abril Comunicacoes S.A. granted to the debenture holders of Editora Abril
S.A., a pledge ("caucao") of its shares in us, which represents 62.2% of our
outstanding common shares.
This pledge is still in full force. The debentures of Editora Abril S.A.
will mature on August 1, 2005.
ABRIL CAPITAL INCREASE
In the first half of 2004, Abril's board of directors has approved a
capital increase in us. This amount corresponds to existing indebtedness between
us and Abril which will be cancelled once the capital increase is effected.
Accordingly, it will not be available for use in future investments by us. The
issue will be submitted to our board of directors for decision in the second
half of 2004.
MINORITY SHAREHOLDERS' OPTION
Pursuant to an Amended and Restated Option Agreement, dated December 5,
1995, as amended, Harpia Holdings Limited and Curupira Holdings Limited, two of
our minority shareholders that are controlled by JPM, have the right to put
their shares in us to Abril at any time.
OUTSTANDING DEBT
As of June 30, 2004, our indebtedness was approximately US$97,315,000 of
which US$55,602,000 consists of obligations to third parties (principally the
old notes) and US$41,140,000 consists of indebtedness under the Abril Credit
Facility, a revolving credit facility effective December 6, 1995 (the "Abril
Credit Facility") with Editora Abril S.A. as the lender, which allows us to draw
down amounts not to exceed a maximum aggregate principal amount of R$60,000,000.
TAX RECOVERY PROGRAM
On April 5, 2000, we and our subsidiaries opted to participate in the
Government's Tax Recovery Program (REFIS), implemented by Decree No. 3,342 dated
January 25, 2000, later converted into Law No. 9,964 dated April
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10, 2000. In addition, our indirect subsidiary TVA Sistema de Televisao S.A.
used its credits for tax loss carryforwards amounting to US$5.3 million for
amortization of interest and fines. As guarantee of the payment of the debts
included in the program, TVA Sistema de Televisao S.A. pledged property with an
aggregate value of US$5.3 million as collateral.
On July 31, 2003, certain of our subsidiaries, including TVA Sistema de
Televisao S.A., through a protocol filed with the Federal Revenue Service, opted
for the Federal Tax Financing Program (PAES), established by Law No. 10,684
dated May 30, 2003. The main reasons for this action were the extension of
maturity dates, refinancing through PAES (special installment program),
inclusion of new taxes, and the use of TJLP (long-term interest rate) for
monetary restatement. Management believes that this payment will be made in
approximately 135 monthly installments, adjusted by TJLP.
RELATED PARTY TRANSACTIONS
We have engaged in a significant number and variety of related party
transactions, including, without limitation, the transactions described below.
Although we believe such transactions are conducted on an arm's-length basis, we
have 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.
EDITORA ABRIL SERVICE AGREEMENT
In January 2002, pursuant to a service agreement with our affiliate Editora
Abril S.A., we outsourced a number of administrative services, including
payroll, human resources, accounting, tax, finance and legal services, to
Editora Abril, for which we pay to Editora Abril S.A. an average annual fee of
approximately US$2.6 million.
PUBLISHING AND ADVERTISING
We publish a monthly programming guide detailing our 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 200,000 copies of our monthly programming guide in return for an
average annual payment of approximately US$110,000. TVA Sistema and Abril also
have a reciprocal advertising agreement in which we publish advertisements for
Abril in our monthly magazine in exchange for advertisements in the magazines
published by Abril.
ABRIL CREDIT FACILITY
We are the borrower under the Abril Credit Facility, a revolving credit
facility effective December 6, 1995 with Editora Abril S.A. as the lender, which
allows us to draw down amounts not to exceed a maximum aggregate principal
amount of R$60,000,000. Since June 1996, we have 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 US
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 us under the Abril Credit Facility. In the
second half of 2004 or in 2005, we intend to capitalize our indebtedness under
the Abril Credit Facility, which will significantly reduce our total outstanding
indebtedness. The aggregate principal amount outstanding under the Abril Credit
Facility was US$41.1 million as of June 30, 2004.
SERVICE AGREEMENT WITH LICENSEHOLDERS
Pursuant to a service agreement dated July 22, 1994, Abril Comunicacoes
S.A., TVA Brasil and TV Show Time (the "Licenseholders") agreed to transfer to
us all the rights and benefits associated with their current and future
pay-television licenses, with the exception of licenses operated by companies in
which we have minority interests. While the Licenseholders retained the title to
the licenses, the Licenseholders promised to take all steps necessary to
transfer the title of the licenses to us. These steps included the appropriate
procedures required by the Ministry of Communications and other governmental
authorities regulating the transfers. The transfer of the title to
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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.
EXCHANGE RATE
As of October 7, 2004, the Commercial Market selling rate published by the
Brazilian Central Bank was R$2.851800 per US$1.00.
The following table sets forth the reported high and low Commercial Market
Selling rates for US dollars for the months indicated:
<Table>
<Caption>
AVERAGE PERIOD END
----------- --------------
January 2004.................................. 2.851800 2.940900
February 2004................................. 2.930300 2.913800
March 2004.................................... 2.905500 2.908600
April 2004.................................... 2.906000 2.944700
May 2004...................................... 3.100400 3.129100
June 2004..................................... 3.130200 3.118300
July 2004..................................... 3.036800 3.026800
August 2004................................... 3.002900 2.933800
September 2004................................ 2.891148 2.858600
October 2004 (through October 7).............. 2.83798 2.851800
</Table>
- ----------
Source: Brazilian Central Bank.
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS AND UNCERTAINTIES, THE
RISK FACTORS DESCRIBED IN OUR 2003 FORM 20-F/A UNDER THE HEADING "RISK FACTORS,"
AND THE OTHER INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS BEFORE MAKING A
DECISION REGARDING THE TRANSACTIONS RELATING TO THE EXCHANGE OFFER. ADDITIONAL
RISKS AND UNCERTAINTIES THAT WE CURRENTLY CONSIDER IMMATERIAL AND RISKS AND
UNCERTAINTIES GENERALLY APPLICABLE TO COMPANIES THAT HAVE UNDERTAKEN SIMILAR
EXCHANGE OFFERINGS MAY ALSO IMPAIR OUR BUSINESS, RESULTS OF OPERATIONS, THE
VALUE OF OUR SECURITIES, INCLUDING THE OLD NOTES AND THE NEW NOTES AND OUR
ABILITY TO MEET OUR FINANCIAL OBLIGATIONS AND OUR ABILITY TO CONSUMMATE THE
EXCHANGE OFFER.
FOR PURPOSES OF THIS SECTION, WHEN WE STATE THAT A RISK, UNCERTAINTY OR
PROBLEM MAY, COULD OR WOULD HAVE AN "ADVERSE EFFECT" ON US, WE MEAN THAT THE
RISK, UNCERTAINTY OR PROBLEM MAY, COULD OR WOULD HAVE AN ADVERSE EFFECT ON OUR
BUSINESS, FINANCIAL CONDITION, LIQUIDITY, RESULTS OF OUR OPERATIONS OR
PROSPECTS, EXCEPT AS OTHERWISE INDICATED OR AS THE CONTEXT MAY OTHERWISE
REQUIRE. YOU SHOULD VIEW SIMILAR EXPRESSIONS IN THIS SECTION AS HAVING A SIMILAR
MEANING.
RISKS RELATING TO US
WE HAVE INCURRED SUBSTANTIAL OPERATING LOSSES AND THERE IS DOUBT ABOUT OUR
ABILITY TO CONTINUE AS A GOING CONCERN.
Since our inception in 1989, we have been developing our businesses and
continue to sustain substantial operating losses due primarily to insufficient
revenue with which to fund build-out, interest expense and charges for
depreciation and amortization. Net losses incurred have been funded principally
by capital contributions from shareholders, borrowings under shareholder loans,
dispositions of non-strategic assets, bank loans and other borrowings made from
time to time. Our management has undertaken efforts to generate the cash flow
necessary to meet our cost structure, including the sale of non-strategic
assets, the reduction of indebtedness and internal cost-cutting measures.
Our consolidated financial statements for the year ended December 31, 2003
and the six months ended June 30, 2004 have been prepared assuming that we will
continue as a going concern. As discussed in Note 1.2 to our financial
statements for the year ended December 31, 2003, our recurring losses from
operations, working capital deficiency and shareholder deficit raise substantial
doubt about our ability to continue as a going concern. In this regard,
managements' plans include: (i) increasing our subscriber base and implementing
technological upgrades to our pay television networks; (ii) streamlining our
principal operating procedures to increase productivity and profitability; (iii)
the continuation of a cost reduction program which was initiated in 2002; (iii)
adjusting our capitalization (including indebtedness) to provide for long term
growth and stability and (iv) sales of non-strategic assets and the
discontinuation of noncompetitive businesses. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
IF THE OFFERING FAILS AND WE ARE UNABLE TO EXCHANGE THE OLD NOTES FOR THE NEW
NOTES, INVOLUNTARY BANKRUPTCY PROCEEDINGS MAY BE IMPOSED UPON US.
We do not have cash on hand to make principal payments on the old notes at
their current maturity. As of June 30, 2004, our total consolidated bank and
financial debt amounted to R$174,563,000 and US$56,175,000. If this exchange
offer fails, we are unlikely to be able to pay the principal on the old notes.
Our assets are currently insufficient to repay our creditors. While any
liquidation proceeding is pending, our ability to operate or manage our
business, to retain employees and to continue to pay for the programming and
equipment required to conduct our operations will be materially adversely
affected. We believe that the ability of our creditors to recover their claims
will diminish significantly if the offering fails and they are forced to
participate in a bankruptcy proceeding.
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IF A SUFFICIENT NUMBER OF HOLDERS OF OLD NOTES DO NOT PARTICIPATE IN THE
EXCHANGE OFFER, OUR WHOLLY-OWNED SUBSIDIARY, TVA COMMUNICATIONS LTD. WILL
RENEGOTIATE THE TERMS OF THE OLD NOTES IT HOLDS AND COMPETE WITH NON-AFFILIATED
HOLDERS FOR AVAILABLE FUNDS.
As a condition to the offering, which we may waive at any time, holders of
old notes in the aggregate principal amount of at least 95% of the principal
amount of US$48,022,000 held by non-affiliates of ours must exchange their old
notes for new notes pursuant to the offer. In the event this minimum threshold
is met, we intend to exchange the old notes that TVA Communications Ltd. holds
in the amount of US$201,978,000 on terms that are materially less favorable to
TVA Communications Ltd. than those offered to the other holders of old notes
hereby. In the event this minimum threshold is not met, we do not currently
intend to exchange the old notes held by TVA Communications Ltd. on terms that
are materially less favorable to TVA Communications Ltd. than this offer. In
that event, we may elect to treat TVA Communications Ltd. and the other holders
of the old notes in the same manner, which we anticipate will be materially less
favorable than the terms offered in this exchange offer.
WE MAY BE SUBJECT TO BRAZILIAN WITHHOLDING TAX IN CONNECTION WITH THE EXCHANGE
OFFER.
Pursuant to an exemption provided under Brazilian tax law for notes issued
on or prior to December 31, 1999, payments in respect of the old notes will not
be subject to withholding taxes imposed by Brazil provided that the old notes
are not redeemed prior to November 26, 2004. Notes of the nature of the new
notes which are issued by Brazilian companies such as ourselves after December
31, 1999 would ordinarily be subject to Brazilian withholding income tax on
payments in respect of interest (including original issue discount), fees,
commissions, expenses, and any other income at a rate of 15% or such other lower
rate as provided for in any applicable tax treaty between Brazil and another
country. In the event the recipient of the payment is domiciled in a tax haven
jurisdiction, as defined by Brazilian tax regulations, the rate would be 25%,
except for payments related to debt securities registered with the Brazilian
Central Bank, such as the new notes, which rate is also subject to a 15% rate in
accordance with Normative Act SRF 252 of 2002. Based on interpretation of recent
provisions of Law 10925, of 2004, we take the position for tax reporting
purposes that the consummation of the exchange offer and the issue of the new
notes constitute a constructive extension of the maturity date of the old notes.
On this basis, we believe that payments in respect of the new notes will not be
subject to withholding taxes imposed by Brazil. In any event, under the terms of
the new notes we have agreed to pay any additional amounts in respect of
Brazilian withholding taxes as will result in receipt by the holders of the new
notes of such amounts as would have been received by them had no such
withholding or deduction been required. However we anticipate that the need to
pay such additional amounts to the holders of the new notes in these
circumstances would materially adversely affect our financial position and our
ability to service payments on the new notes. For more information, see "Income
Tax Considerations--Brazil."
WE MUST HAVE CAPITAL AVAILABLE IN ORDER TO SUCCESSFULLY COMPLETE THE LAUNCH OF
DIGITAL SERVICES FOR OUR CABLE AND MMDS CUSTOMERS, A STEP WHICH IS IMPORTANT TO
ENSURE THE SUCCESS OF OUR FUTURE OPERATIONS.
Our business strategy as a company is dependent on the successful launch of
digital services for our cable and MMDS customers. Management estimates that
US$2.5 million in capital expenditures will be required in order to complete
this technological upgrade to digital services for our MMDS customers in Sao
Paulo, and an additional US$7.0 million will be necessary to expand the digital
services to our MMDS customers in Rio de Janeiro. We have made significant
investments in both cable and MMDS digital technologies, and our financial
condition would be materially adversely affected if we cannot make the required
additional capital expenditures and realize a return on these investments.
A COMPLETED EXCHANGE OFFER MAY INCREASE AND PROLONG YOUR EXPOSURE TO CERTAIN
RISKS AND UNCERTAINTIES.
Our debt obligations would continue to be exposed to many of the risks
described in these "Risk Factors" even after a completed offering. The new notes
have extended maturities in comparison to the old notes, thereby exposing our
creditors to these risks for a longer period of time than would otherwise occur
under the terms of the old notes.
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VOICE OVER INTERNET PROTOCOL IS AN UNCERTAIN REGULATORY AREA, AND CHANGES IN
REGULATION MAY AFFECT OUR ABILITY TO SUCCEED IN THIS MARKET.
Voice over Internet Protocol (VoIP) is a new industry in Brazil, and the
regulatory environment with respect to this technology is still uncertain.
Changes in the regulation of our business activities with respect to VoIP,
including decisions by regulators affecting our operations (such as the granting
or renewal of licenses or decisions as to the telephone rates we may charge our
customers) or changes in interpretations of existing regulations by courts or
regulators, could adversely affect our ability to succeed in the VoIP market and
hurt our financial position. Any new regulations could have a material adverse
effect on the VoIP industry as a whole and on us in particular.
WE MAY NOT BE ABLE TO BROADCAST BRAZILIAN SOCCER DUE TO CERTAIN EXCLUSIVITY
RIGHTS WITH RESPECT TO THIS PROGRAMMING ENJOYED BY ONE OF OUR CHIEF COMPETITORS.
Soccer is the most popular sport in Brazil, and many cable subscribers
consider soccer programming to be an important part of their pay television
services. As of the date of this prospectus, we are unable to broadcast
Brazilian soccer programming because a competitor has obtained exclusive rights
to Brazilian soccer programming. One of our chief competitors operates cable
systems in the metropolitan areas of Sao Paulo, Rio de Janeiro, Curitiba and
Florianopolis and an MMDS system in Curitiba. In each of these areas, their
cable systems have more subscribers than our cable systems due to their larger
networks (but equivalent penetration rates). We are challenging before Conselho
Administrativo de Defesa Economico, the Brazilian antitrust authority, certain
exclusivity rights with respect to Brazilian soccer programming enjoyed by this
competition. If we cannot obtain the right to soccer programming, we believe
that our ability to grow is likely to be adversely affected.
WE MUST EXPERIENCE GROWTH IN OUR SUBSCRIBER BASE IN ORDER TO SUSTAIN OUR
BUSINESS OPERATIONS AND PROSPECTS.
Over the past three years, we have pursued a strategy of reduction of the
number of unprofitable customers, allowing us to improve the programming and
customer service that we are able to provide to profitable customers. In order
for us to sustain our business operations and prospects, we must experience
growth in our subscriber base during the remainder of 2004 and the ensuing
years. We cannot assure you that we will experience growth in our subscriber
base, or that the rate of growth will be sufficient to allow us to continue our
operations.
BECAUSE WE HAVE ENGAGED IN A SIGNIFICANT NUMBER OF RELATED PARTY TRANSACTIONS,
OUR FINANCIAL STATEMENTS MAY NOT BE TRULY REPRESENTATIVE OF OUR FINANCIAL
POSITION.
We have engaged in a significant number and variety of related party
transactions, including, without limitation, transactions with respect to
administrative services, including payroll, human resources, accounting, tax,
finance and legal services; publishing and advertising; financing transactions;
and licenses. Although we believe such transactions are conducted on an
arm's-length basis, we have 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. Our financial statements therefore may not
accurately reflect such costs and if we were to be unable to obtain these
services from our affiliates, our financial position may be adversely affected.
RISKS RELATING TO THE NOTES
THE ABSENCE OF AN ESTABLISHED MARKET FOR THE NEW NOTES MAY AFFECT THE ABILITY OF
HOLDERS TO SELL THEIR NEW NOTES IN THE FUTURE AND MAY AFFECT THE PRICE THEY
WOULD RECEIVE IF SUCH SALE WERE TO OCCUR.
The new notes are new securities for which there is currently no
established market, and we cannot assure you that one will develop. We also
cannot assure you as to the liquidity of any market for the new notes.
As stated above, it is a condition to the offering, which we may waive at
any time, that holders of old notes in the aggregate principal amount of at
least 95% of the outstanding principal amount of US$48,022,000 held by
non-affiliates must exchange their old notes for new notes pursuant to the
offer. However, because we have the
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right to waive this condition and issue a reduced aggregate principal amount of
new notes, there can be no assurance as to the aggregate principal amount of new
notes that will be outstanding after the exchange offer. If only a limited
aggregate amount of new notes is outstanding at any time, the liquidity and
trading value of the new notes may be adversely affected.
HOLDERS OF OLD NOTES WHO DO NOT TENDER THEIR OLD NOTES IN THE EXCHANGE OFFER
WILL HAVE LESS ABILITY TO TRADE THEIR OLD NOTES.
Because the market in the old notes will be significantly reduced after
consummation of the exchange offer, holders of these old notes may experience
difficulty trading their old notes. If only a limited aggregate principal amount
of the old notes is outstanding at any time, the liquidity and trading value of
the old notes may be adversely affected. There can be no assurance regarding
whether a market will remain for the old notes, the ability of the holders of
the old notes to sell them or the prices for which holders may be able to sell
their old notes.
DEVELOPMENTS IN OTHER COUNTRIES MAY AFFECT THE MARKET PRICE OF BRAZILIAN
SECURITIES.
The securities of Brazilian issuers have been influenced by economic and
market conditions in other countries, especially other emerging market
countries. Since the end of 1997, and in particular during 2001 and 2002, the
international financial markets have experienced significant volatility as a
result of economic problems in various emerging market countries, including the
recent economic crisis in Argentina. Investors subsequently have had a
heightened risk perception for investments in such market. As a result, in some
periods Brazil has experienced a significant outflow of US dollars and Brazilian
companies have faced higher costs for raising funds, both domestically and
abroad, and have been impeded from accessing international capital markets. We
cannot assure investors that international capital markets will remain open to
Brazilian companies, including us, or that prevailing interest rates in these
market will be advantageous to us and our ability to obtain additional financing
on acceptable terms or at all. As a consequence, the market value of our
securities may be adversely affected by these or other events outside of Brazil.
CHANGES IN BRAZILIAN TAX LAWS MAY HAVE AN IMPACT ON THE TAXES APPLICABLE TO THE
DISPOSITION OF THE NOTES.
According to Law 10,833, enacted on December 29, 2003, the disposition of
assets located in Brazil by non-residents of Brazil, whether to other
non-residents of Brazil or Brazilian residents and whether made within or
outside Brazil is subject to taxation in Brazil. Although we believe that the
notes do not fall within the definition of assets located in Brazil for the
purposes of Law 10,833, considering the general and unclear scope of Law 10,833
and the absence of judicial guidance in respect thereof, we are unable to
predict how the scope of Law 10,833 would be interpreted in the courts of
Brazil.
WE MAY NOT BE ABLE TO MAKE PAYMENTS IN US DOLLARS.
In the past, the Brazilian economy has experienced balance of payment
deficits and shortages in foreign exchange reserves. The Brazilian government
has responded by restricting the ability of Brazilian or foreign persons or
entities to convert REAIS into foreign currencies generally and US dollars in
particular. The Brazilian government may institute a restrictive exchange
control policy in the future. A restrictive exchange control policy could
prevent or restrict our access to US dollars to meet our US dollar obligations
and also could have a material adverse effect on our business, financial
condition and results of operations. We cannot predict the impact of any such
measures on the Brazilian economy.
JUDGMENTS OF BRAZILIAN COURTS ENFORCING OUR OBLIGATIONS UNDER THE NOTES OR THE
INDENTURE RELATING TO THE OLD NOTES OR THE INDENTURE RELATING TO THE NEW NOTES
WOULD BE PAYABLE ONLY IN REAIS.
If proceedings were brought in Brazil seeking to enforce our obligations
under the notes or the indenture relating to the old notes or the indenture
relating to the new notes, we would not be required to discharge our obligations
in a currency other than REAIS. Under the Brazilian exchange control
limitations, an obligation to pay amounts denominated in a currency other than
REAIS, which is payable in Brazil, may only be satisfied in REAIS at the rate of
exchange, as determined by the Central Bank, in effect on the date of payment.
Accordingly, in case a
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declaration of bankruptcy is made against us, all credits denominated in foreign
currencies shall be converted into REAIS at the prevailing rate on the date of
such declaration. Special authorization by the Central Bank shall be required
for the conversion of such REAIS-denominated amounts into US dollars and for its
remittance abroad.
BOOK-ENTRY REGISTRATION.
Because transfers and pledges of global notes can be effected only through
book entries at DTC, the liquidity of any secondary market for global notes may
be reduced to the extent that some investors are unwilling to hold notes in
book-entry form in the name of a DTC participant. The ability to pledge global
notes may be limited due to the lack of a physical certificate. Beneficial
owners of global notes may, in certain cases, experience delay in the receipt of
payments of principal and interest since such payments will be forwarded by the
paying agent to DTC who will then forward payment to the respective DTC
participants, who will thereafter forward payment directly, or indirectly
through Euroclear or Clearstream, to beneficial owners of the global notes. In
the event of the insolvency of DTC or of a DTC participant in whose name global
notes are recorded, the ability of beneficial owners to obtain timely payment
and (if the limits of applicable insurance coverage by the Securities Investor
Protection Corporation are exceeded, or if such coverage is otherwise
unavailable) ultimate payment of principal and interest on global notes may be
impaired.
THE NOTES WILL BE SUBORDINATED TO CERTAIN STATUTORY LIABILITIES.
Under Brazilian law, our obligations under the notes and the indenture
relating to the old notes and the indenture relating to the new notes are
subordinated to certain statutory preferences. In the event of our bankruptcy,
such statutory preferences, such as claims for salaries, wages, social security
and other taxes, court fees and expenses, will have preference over any other
claims, including claims by any investor under the notes.
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FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this prospectus that are subject to
risks and uncertainties. These statements are based on the beliefs and
assumptions of our management, and on information currently available to us.
Forward-looking statements include statements regarding the intent, belief or
current expectations of our or our directors or executive officers with respect
to, but not limited to:
Forward-looking statements also include information concerning possible or
assumed future results of operations of ours set forth under "Summary" and "Risk
Factors," as well as statements preceded by, followed by, or that include the
words "believes," "may," "continues," "expects," "anticipates," "intends,"
"plans," "estimates" or similar expressions.
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions because they relate to future events and
therefore depend on circumstances that may or may not occur in the future. Our
future results and shareholder values may differ materially from those expressed
in or suggested by these forward-looking statements. Many of the factors that
will determine these results and values are beyond our ability to control or
predict. Investors are cautioned not to put undue reliance on any
forward-looking statements. We do not undertake any obligation to release
publicly any revisions to forward-looking statements contained in this
prospectus to reflect later events or circumstances or to reflect the occurrence
of unanticipated events.
Investors should understand that the following important factors, in
addition to those discussed in this prospectus, could affect our future results
and could cause results to differ materially from those expressed in such
forward-looking statements:
- the performance of the Brazilian economy generally;
- the levels of exchange rates between Brazilian and foreign currencies;
- the telecommunications policy of Brazil's federal government;
- the receipt of additional, and/or the revocation of our existing,
governmental approvals, licenses and concessions;
- the cost and availability of financing;
- the availability of qualified personnel;
- the business abilities and judgment of our personnel;
- the emergence of new technologies and the response of our customer
base to those technologies;
- acquisitions by us of other companies;
- ability to keep investing in new technologies, in particular having
capital to launch new digitial services for our cable and MMDS
customers; and
- other factors discussed under "Risk Factors."
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<Page>
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the new notes.
The new notes will be exchanged for old notes as described in this prospectus
upon our receipt of old notes. We will renegotiate all of the old notes
surrendered in exchange for the new notes.
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<Page>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected financial data as of June 30, 2004 and 2003 have been derived
from, and should be read in conjunction with, our Interim Unaudited Financial
Statements for the six-month periods ended June 30, 2004 and June 30, 2003
included in this prospectus.
As required by Brazilian law, and in accordance with local accounting
practices, our financial records and our subsidiaries financial records are
maintained in the applicable Brazilian currency (the REAL). However, the
financial statements are presented in US dollars in accordance with US GAAP. In
order to prepare the Unaudited Interim Financial Statements, our accounts have
been translated from REAIS, on the basis described in Note 2.1 to the Unaudited
Interim Financial Statements included herein. 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 US dollars may show distortions when
compared on a period-to-period basis.
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30,
2004 2003
------------ ------------
(Dollars in thousands)
CONSOLIDATED STATEMENT OF OPERATION:
GROSS REVENUES
Monthly subscriptions 44,507 38,857
Installation 581 675
Advertising 1,622 923
Additional services and others (a) 2,425 1,897
Taxes on revenues (b) (6,868) (6,233)
Total net revenue 42,267 36,119
--------- ---------
Direct operating expenses (c) 19,777 19,574
Selling, general and administrative expenses 10,234 10,937
Depreciation and amortization 12,072 11,531
Other operating expense (income), net (6,291) 1,342
--------- ---------
TOTAL OPERATING EXPENSES 35,792 43,384
--------- ---------
OPERATING LOSS FROM CONTINUING OPERATIONS 6,475 (7,265)
NONOPERATING (INCOME) EXPENSES
Interest expense 10,652 8,653
Foreign Currency transaction loss, net 4,327 (12,833)
Other nonoperating expenses (income), net (d) (241) (8)
Income tax expense (income) (6,625) 19,911
Equity in (income) losses of affiliates, net (e) 468 (439)
--------- ---------
NET INCOME (LOSS) (2,106) (22,549)
========= =========
</Table>
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<Table>
<Caption>
SIX MONTHS ENDED JUNE 30,
----------------------------
2004 2003
------------ ------------
OTHER DATA:
Purchase of property, plant and equipment 4,281 3,772
RATIO OF EARNINGS TO FIXED CHARGES (h) -- --
CASH FLOW DATA:
Net cash provided by (used in) operating activities 10,037 (1,740)
Net cash provided by (used in) investing activities (4,281) (3,877)
Net cash (used in) provided by financing activities (3,242) 3,925
SELECTED OPERATING DATA:
PAY TV
Number of Subscribers (f) 287,140 287,108
Average monthly revenue per Subscriber (g) 25.14 22.16
INTERNET BROADBAND - RESIDENTIAL
Number of Subscribers (g) 22,972 15,796
Average monthly revenue per Subscriber (f) 26.07 25.01
INTERNET BROADBAND - SOHO
Number of Subscribers (g) 1,688 1,136
Average monthly revenue per Subscriber (g) 155.81 145.38
<Caption>
JUNE 30 DECEMBER 31
------------ -------------
2004 2003
CONSOLIDATED BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents 797 292
Property, plant and equipment, net 62,602 76,317
Total assets 93,637 107,931
Loans payable to related companies 41,140 39,712
Redeemable Common Stock 24,019 24,201
Long-term liabilities 66,398 69,380
Total shareholders' deficit (87,327) (89,431)
</Table>
- ----------
NOTES TO SELECTED FINANCIAL AND OTHER DATA
(a) Includes Advertising and Other revenues (such as cable modem fee,
frequencies lease, wholesale, technical assistance).
(b) Represents various non-income based taxes paid on certain of our gross
revenue items with rates ranging from 3.65% to 15.15%.
(c) Represents costs directly related to the subscriber base and new
installations evolution.
(d) Includes interest income and minority interest.
(e) Represents our pro rata share of the net loss or income of its equity
investments.
(f) Represents the number of subscribers as of the last day of each period.
(g) Average monthly revenue per subscriber refers to the average monthly
subscription fee as of the last day of each period.
(h) For the six-month periods ended June 30, 2004 and 2003, earnings were
insufficient to cover fixed charges by $8,136 and $2,966, respectively. In
calculating the ratio of earnings to fixed charges, earnings represent pre-tax
net loss before minority interest, equity in (losses) income of affiliates, plus
fixed charges. Fixed charges consist of interest expense.
PRO FORMA FINANCIAL EFFECT ON US OF THE EXCHANGE OFFER
In the event that the Exchange Offer is consummated and all old notes are
exchanged for new notes, we anticipate the following effects on our financial
information:
- A decrease in the amount of our current liabilities of US$48,022,000;
- An increase in our long-term liabilities of US$48,022,000; and
- The removal of the guarantees by our subsidiaries referred to in note
8.a. of our unaudited consolidated financial statements for the
six-month periods ended June 30, 2004 and 2003.
- 23 -
<Page>
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO (i) TEVECAP'S AUDITED FINANCIAL
STATEMENTS (INCLUDING THE NOTES THERETO) INCLUDED IN THE ANNUAL STATEMENT AS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FORM 20-F/A ON SEPTEMBER
27, 2004, AND (ii) TEVECAP'S UNAUDITED FINANCIAL STATEMENTS FOR THE SIX-MONTH
PERIODS ENDED JUNE 30, 2004 AND JUNE 30, 2003 INCLUDED HEREIN. TEVECAP'S
FINANCIAL STATEMENTS HAVE BEEN PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES IN THE UNITED STATES. FOR THE PURPOSES OF THE FOLLOWING
DISCUSSION, ALL DOLLAR AMOUNTS, WITH THE EXCEPTION OF AVERAGE INSTALLATION AND
SUBSCRIBER FEES, ARE SET FORTH IN US DOLLARS.
OVERVIEW
We are one of Brazil's primary pay television programming distributors, as
well as a provider of internet broadband services. Because our pay television
business is more mature than our internet business, our internet business may
grow faster and generate a greater percentage of our revenues in coming years.
In addition, we plan to launch voice over internet protocol (VoIP) services in
the fourth quarter of 2004. As we introduce and develop this new VoIP business,
it may grow faster than our existing businesses and the relationship of revenue
to expenses described herein may not be indicative of future results.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA FOR THE SIX MONTHS ENDED JUNE 30,
2004 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2003
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------
2004 2003
--------------------------- ----------------------------
% OF NET % OF NET
AMOUNT REVENUE AMOUNT REVENUE
------------- ----------- -------------- -----------
(Dollars in (Dollars in
thousands) thousands)
Gross revenues
Monthly subscriptions 44,507 105.3% 38,857 107.6%
Installation 581 1.3% 675 1.9%
Additional services and others 4,047 9.6% 2,820 7.8%
Taxes on Revenue (6,868) (16.2)% (6,233) (17.3)%
---------- -------- --------- -------
Net revenue 42,267 100.0% 36,119 100.0%
---------- -------- --------- -------
Direct operating expenses 19,777 46.8% 19,574 54.2%
Selling, general and administrative expense 10,234 24.2% 10,937 30.3%
Depreciation and amortization 12,072 28.6% 11,531 31.9%
Other operating (income) expense, net (6,291) (14.9)% 1,342 3.7%
---------- -------- --------- -------
Total operating expenses 35,792 84.7% 43,384 120.1%
---------- -------- --------- -------
Operating income (loss) 6,475 15.3% (7,265) (20.1)%
---------- -------- --------- -------
Interest income (368) (0.9)% (119) (0.3)%
Interest expense 10,652 25,2% 8,653 24.0%
Foreign currency transaction (gain) loss, net 4,327 10.2% (12,833) (35.5)%
Minority interest 127 0.3% 111 0.3%
Income taxes (a) (6,625) (15.6)% 19,911 55.1%
Equity in losses (income) of affiliates, net 468 1.1% (439) (1.3)%
---------- -------- --------- -------
Net income (loss) (2,106) (4.9)% (22,549) (62.4)%
========== ======== ========= =======
</Table>
- ----------
(a) Includes provision for income taxes in 2004 due to foreign currency gain in
respect of the old notes.
- 24 -
<Page>
The table below sets forth the number of our cable and MMDS subscribers at
June 30, 2004 and June 30, 2003.
<Table>
<Caption>
CABLE/MMDS SUBSCRIBERS JUNE 30, 2004 JUNE 30, 2003
------------- -------------
MMDS(a).......................................... 102,480 109,207
Cable............................................ 184,660 177,901
Paid subscribers awaiting installation........... 455 838
------- -------
Total............................................ 287,595 287,946
======= =======
</Table>
- ----------
(a) Includes UHF subscribers
The table below sets forth the number of our internet subscribers at June
30, 2004 and June 30, 2003.
<Table>
<Caption>
INTERNET SUBSCRIBERS JUNE 30, 2004 JUNE 30, 2003
------------- -------------
Ajato (a)........................................ 24,660 16,932
Paid subscribers awaiting installation........... 205 211
------- ------
Total............................................ 24,865 17,143
======= ======
</Table>
- ----------
(a) Excludes subscribers that formerly subscribed separately to Acesso for
internet access and who now receive both internet access and internet
service through Ajato.
GROSS REVENUES. Gross revenues consist primarily of monthly subscription
revenue (which principally consists of monthly fees paid by subscribers to us
for programming services, including equipment use), installation revenue and
additional services and others (which consists of advertising revenues and other
revenues).
PAY TELEVISION. Gross revenues from pay television services increased from
32.1 million in the six months ended June 30, 2003 to 37.7 million in the six
months ended June 30, 2004, an increase of 17.6%.
INTERNET. Our residential and corporate internet subscriber base increased
by approximately 54.0% in the six month period ended June 30, 2003 and 45.0% in
the six month period ended June 30, 2004 due to our strategy of providing
various upgrade offers (bundling) that favorably impacts our churn rates. Gross
revenues from internet services increased from 4.0 million in the six months
ended June 30, 2003 to 4.6 million in the six months ended June 30, 2004, an
increase of 12.7%.
MONTHLY SUBSCRIPTIONS. Monthly subscription revenue for the six months
ended June 30, 2004 was US$44.5 million, an increase of 14.7%, as compared to
US$38.8 million for the same period in 2003. The increase in revenue, in spite
of the stability in the number of our pay television subscribers, was due to the
large growth in our internet subscriber base and increases for our television
programming in REAL terms various market segments through tiered programming
options. The average monthly subscription price during the six months ended June
30, 2004 was US$23.48 for MMDS service, US$26.06 for cable service, US$26.07 for
residential internet service and US$155.81 for corporate internet service, as
compared to US$21.12, US$22.80, US$25.01 and US$145.38, respectively, for the
six months ended June 30, 2003. The average increase in monthly subscription
price between June 30, 2003 and June 30, 2004 was 13.4% in US dollar terms and
4.8% in reias terms for pay television service (including both MMDS and cable),
4.2% in US dollar terms and (3.75%) in reais terms for residential internet
service, and 7.2% in US dollar terms and (1.0%) in reais terms for corporate
internet service.
INSTALLATION. Installation revenue for the six months ended June 30, 2004
was US$581,000, as compared to US$675,000 for the same period in 2003, a
decrease of US$94,000 or 13.9%. This decrease was primarily due to our strategy
of slightly reducing installation fees in order to attract more subscribers. The
average installation fee during the six months ended June 30, 2004 was US$20.61
for MMDS service and US$14.51 for cable service, as compared to US$26.32 and
US$15.50, respectively, during the six months ended June 30, 2003. The average
installation fee for internet sales was US$7.75 in the six months ended June 30,
2004, as compared to US$15.57 in the six months ended June 30, 2003.
- 25 -
<Page>
ADDITIONAL SERVICES AND OTHER REVENUES. Additional services and other
revenues for the six months ended June 30, 2004 was US$4.0 million, as compared
to US$2.8 million for the same period in 2003, an increase of 43.5%. The
increase was primarily as a result of an increase in advertising revenue from
US$923,000 in the first half of 2003 to US$1.6 million in the first half of 2004
representing an increase of 75.7%, primarily due to the outsourcing of our
advertising requirements to Editora Abril and increased activity in the
advertising market. Other revenue increased from US$1.9 million in the first
half of 2003 to US$2.4 million in the first half of 2004, principally due to the
increase in the Internet subscriber base and subscription revenues.
TAXES ON REVENUES. Taxes on revenue consist of a 3.65% tax on advertising
revenue and a 15.15% tax on revenues other than advertising revenue. Taxes on
revenue for the six months ended June 30, 2004 were US$6.9 million, as compared
to US$6.2 million for the same period in the prior year, an increase of 10.2%.
The increase in taxes on revenue is attributable to our increase in revenues.
Taxes on revenue as a percentage of gross revenues were 14.0% in the six month
period ended June 30, 2004, as compared to 14.7% in the six month period ended
June 30, 2003.
NET REVENUE
Net revenue for the six months ended June 30, 2004 was US$42.3 million, as
compared to US$36.1 million for the same period in 2003, an increase of US$6.2
million or 17.0%.
DIRECT OPERATING EXPENSES
Direct operating expenses include expenses in connection with payroll and
benefits for non-administrative employees, programming, technical assistance,
TVA magazine, pole rental and other operations. These expenses are variable and
related to the subscriber base evolution and are also dependent on the type of
service subscribers select. Direct operating expenses for the six months ended
June 30, 2004 were US$19.8 million, as compared to US$19.6 million for the same
period in 2003, an increase of US$203,000, or 1.0%. As a percentage of net
revenues, direct operating expenses represented 46.8% in the first half of 2004,
as compared to 54.2% in the first half of 2003. This relative decrease in direct
operating expenses demonstrates the positive results of our restructuring
efforts with gains in productivity being incorporated into our cost structure.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses include payroll and benefits
for administrative and selling employees, advertising and promotion expense,
rent, and other general and administrative expenses. Selling, general and
administrative expenses for the six months ended June 30, 2004 were US$10.2
million, as compared to US$11.0 million for the same period in 2003, a decrease
of US$703,000 or 6.4%, due to a reduction in our allowance for doubtful accounts
provision (as credit conditions in the market improved) and the impact of the
continuous cost cutting program that we implemented since 2002.
Payroll and benefits expense for selling and administrative employees
increased from US$2.1 million in the first half of 2003 to US$2.7 million in the
first half of 2004, an increase of US$638,000, or 30.5%, largely due to the new
structure in our commercial area established to support new sales level and
segmented channels. Advertising and promotion expense increased from US$1.3
million in the first half of 2003 to US$1.9 million in the first half of 2004,
an increase of US$564,000 or 43.5%, due to sales increases and a new
communication and institutional strategy. Rent and other general and
administrative expenses were significantly reduced in the first half of 2004 due
to the favorable impact of our cost cutting program.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization includes depreciation of systems, equipment
and installation materials and amortization of concessions. Depreciation and
amortization for the six months ended June 30, 2004 was US$12.1 million, as
compared to US$11.5 million for the same period in 2003, an increase of
US$541,000 due primarily to the increase in our capital expenditure.
- 26 -
<Page>
OTHER OPERATING (INCOME) EXPENSE, NET
We recorded other operating income for the six months ended June 30, 2004
of US$6.3 million as compared to other operating expenses of US$1.3 million for
the same period in 2003 due to the sale of Canbras authorized by Anatel in June,
for which we recorded a gain of US$8.7 million.
OPERATING (INCOME) LOSS
Operating loss for the six months ended June 30, 2004 was US$6.5 million
(positive) compared to US$7.3 million (negative) for the same period in 2003, an
increase of US$13.7 million.
INTEREST INCOME
Interest income for the six months ended June 30, 2004 was US$368,000, as
compared to US$119,000 for the same period in 2003, an increase of US$249,000,
or 209.2%.
INTEREST EXPENSE
Interest expense for the six months ended June 30, 2004 was US$10.7
million, as compared to US$8.7 million for the same period in 2003, an increase
of US$2.0 million, principally attributable to an increase in the prime interest
rates in Brazilian.
FOREIGN CURRENCY TRANSACTION (INCOME) LOSS, NET
Foreign currency transaction income increased from a loss of US$12.8
million in the six months ended June 30, 2003 to income of US$4.3 million in the
six months ended June 30, 2004 as a result of the depreciation of the real
against the dollar of 7.6% during the six months ended June 30, 2004 compared to
an appreciation of 18.7% during the six months ended June 30, 2003.
MINORITY INTEREST
Minority interest was US$127,000 for the six months ended June 30, 2004, as
compared to US$111,000 for the same period in 2003, due to improvement in the
operational figures in our Camboriu operation.
INCOME TAXES
Income taxes expense in the first half of 2003 were US$19.9 million
compared to a benefit of US$6.6 million in the first half of 2004, primarily as
a result of the depreciation of the real against the dollar in the first half of
2004. In 2003 the real appreciated against the dollar, and we recorded foreign
currency gains which generated income tax expense. As the real depreciated in
the first six months of 2004 against the dollar, we recorded income tax benefit.
EQUITY IN (LOSSES) INCOME OF AFFILIATES, NET
For the six months ended June 30, 2004, equity in losses of affiliates was
US$468,000, as compared to a gain of US$439,000 in the same period in 2003, a
decrease of US$907,000 due to the impact of exchange rate variations on the
results of impact over Canbras.
NET INCOME (LOSS)
Net loss for the six months ended June 30, 2004 was US$2.1 million, as
compared to a net loss of US$22.6 million for the same period in 2003, an
improvement of US$20.4 million or 90.6%.
- 27 -
<Page>
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have 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 our pay television systems. As
of June 30, 2004, we had cumulative net losses of US$540.1 million. During the
periods under review, we required external funds to finance our capital
expenditures and operating activities and make payments of principal and
interest on our indebtedness. The sources of such funds have been as follows:
(i) borrowings from Abril under the Abril Credit Facility, of which US$41.1
million was outstanding as of June 30, 2004, (ii) borrowings under short-term
revolving credit facilities, of which US$7.6 million was outstanding as of June
30, 2004, (iii) net capital contributions of approximately US$516.5 million from
shareholders, and (iv) the old notes, of which an aggregate principal amount of
US$48,022,000 was outstanding to unaffiliated parties as of June 30, 2004.
As of June 30, 2004, we had US$97.3 million of indebtedness outstanding,
primarily consisting of the old notes in the aggregate principal amount of
US$48.0 million, US$41.1 million outstanding under the Abril Credit Facility,
and short-term revolving credit facilities in an aggregate principal amount of
US$7.6 million. We will likely require capital for (i) the continued funding of
losses and working capital requirements, (ii) the installation of equipment at
subscribers' locations, (iii) the construction/maintenance of
additional/existing transmission and headend facilities and related equipment
purchases, (iv) the launching of digital services for MMDS customers and related
expenses, (v) the development of our internet businesses and (vi) the payment of
the principal amount of our indebtedness.
We made purchases of fixed assets in the aggregate amount of US$4.3 million
and US$3.8 million in the first half of 2004 and the first half of 2003,
respectively. Management estimates that US$6.9 million of capital expenditures
will be required in the second half of 2004, principally related to the
launching of digital cable services, the maintenance of cable and MMDS networks
and our subscriber base, the purchase of reception equipment (spare parts),
which includes hardware, materials and labor used for new subscriber
installations and decoders, and the development of our internet operations.
Our principal sources of liquidity are borrowings under the Abril Credit
Facility and our short-term revolving credit facility, together with net cash
provided by operating activities. Our liquidity needs arise primarily from
capital expenditures, debt service requirements and, during certain periods, the
funding of our working capital requirements. Until sufficient cash flow is
generated from operations to satisfy our liquidity needs, we will be required to
utilize our current sources of debt funding to supplement our cash flow. We had
approximately US$797,000 of cash and cash equivalents as of June 30, 2004.
For the six months ended June 30, 2004, net cash provided by operating
activities was US$10.0 million. For the six months ended June 30, 2004, net cash
used in investing activities was US$4.3 million, largely as the result of
capital expenditures for the purchase of fixed assets of US$3.8 million. The
purchases of fixed assets were principally related to the maintenance of cable
and MMDS networks and the subscriber base, the purchase of reception equipment
(spare parts), which includes hardware, materials and labor used for new
subscriber installations , and the development of our internet operations. For
the six months ended June 30, 2004, net cash used in financing activities was
US$3.2 million, reducing our indebtedness levels.
Our liquidity may also be adversely affected by statutory minimum dividend
requirements, which are 25% of profits under applicable Brazilian law.
TREND INFORMATION
Our results of operations for the six-months ended June 30, 2004 have been
affected by Brazilian economic conditions. In the first half of 2004, the REAL
depreciated by 7.6% to R$3.1075 per US$1.00 compared to December 31, 2003.
During the first six months of 2004, the Brazilian economy performed favorably,
with industrial production and GDP increasing in the first half of 2004 in
comparison with the second half of 2003, impacting favorably the employment
level and income levels in the economy. Our results of operations for the year
ending December 31, 2004 will be influenced by Brazilian economic conditions and
the roll-out of our new digital services.
- 28 -
<Page>
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
- 29 -
<Page>
DESCRIPTION OF THE NEW NOTES
THE FOLLOWING SUMMARY DESCRIBES CERTAIN PROVISIONS OF THE NEW NOTES AND THE
INDENTURE RELATING THERETO. THIS SUMMARY DOES NOT PURPORT TO BE COMPLETE AND IS
SUBJECT TO, AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, THE PROVISIONS OF THE
INDENTURE RELATING TO THE NEW NOTES AND THE NEW NOTES. CAPITALIZED TERMS USED IN
THE FOLLOWING SUMMARY AND NOT OTHERWISE DEFINED HEREIN SHALL HAVE THE MEANINGS
ASCRIBED TO THEM IN THE INDENTURE RELATING TO THE NEW NOTES. YOU MAY OBTAIN
COPIES OF THE INDENTURE RELATING TO THE NEW NOTES AND SPECIMEN NOTES UPON
REQUEST TO THE INDENTURE TRUSTEE OR THE PAYING AGENT IN LUXEMBOURG AT THE
ADDRESSES SET FORTH UNDER "WHERE YOU CAN FIND MORE INFORMATION." REFERENCES TO
"THE COMPANY" IN THIS SECTION REFER TO TEVECAP S.A.
GENERAL
The new notes are to be issued under an Indenture, to be dated as of
November 26, 2004 (the "Indenture"), between the Company, HSBC Bank USA,
National Association, as Trustee (the "Trustee") and HSBC Bank USA, National
Association, as Paying Agent, a copy of which is available upon request to the
Company. The statements under this caption relating to the new notes and the
Indenture are summaries and do not purport to be complete, and where reference
is made to particular provisions of the Indenture, such provisions, including
the definitions of certain terms, are incorporated by reference as a part of
such summaries or terms, which are qualified in their entirety by such
reference. A summary of certain defined terms used in the Indenture and referred
to in the following summary description of the new notes is set forth under
"Certain Definitions."
Principal of, premium, if any, and interest on, the new notes will be
payable, and the new notes may be exchanged or transferred, at the office or
agency of the Company in the Borough of Manhattan, The City of New York (which
initially shall be the corporate trust office of the Trustee in New York, New
York), except that, at the option of the Company, payment of interest may be
made by check mailed to the address of the holders as such address appears in
the Note Register.
The new notes will be issued only in fully registered form, without
coupons, in denominations of US$1.00 and any integral multiple of US$1.00. No
service charge will be made for any registration of transfer or exchange of new
notes, but the Company or the Trustee may require payment of a sum sufficient to
cover any transfer tax or other similar governmental charge payable in
connection therewith.
TERMS OF THE NEW NOTES
The new notes will be unsecured, senior obligations of the Company, limited
to US$48,022,000 aggregate principal amount, and will mature on November 26,
2009. Each new note will bear interest at the rate per annum shown on the front
cover of this Prospectus from November 26, 2004 (the "Issue Date"), or from the
most recent date to which interest has been paid or provided for, payable
semiannually in arrears in cash on May 26 and November 26 of each year
commencing May 26, 2005 to holders of record at the close of business on the May
1 or November 1 immediately preceding the interest payment date.
REDEMPTION
(a) SCHEDULED REDEMPTION: Unless previously redeemed, or purchased or
cancelled, each Note will be redeemed (subject as provided in clause (b)
below) in three equal installments on the dates set out below (each an
"Installment Amount"):
<Table>
<Caption>
SCHEDULED REDEMPTION DATE INSTALLMENT AMOUNT
------------------------------------------------ ------------------------------------
November 26, 2007 (the "First Redemption Date") 33.33% of aggregate principal amount
November 26, 2008 (the "Second Redemption Date") 33.33% of aggregate principal amount
November 26, 2009 (the "Third Redemption Date") 33.34% of aggregate principal amount
</Table>
- 30 -
<Page>
(b) ADJUSTMENT OF INSTALLMENT AMOUNTS:
(i) If the Exchange Rate Increase with respect to the First Redemption
Date is greater than the Inflation Rate Increase with respect to the
First Redemption Date, then:
(I) the Installment Amount due on the First Redemption Date
shall be reduced by the amount of the Exchange Adjustment
applicable to the First Redemption Date;
(II) the Installment Amount due on the Second Redemption Date
shall be increased by the amount which is equal to 50% of
the amount of the Exchange Adjustment applicable to the
First Redemption Date; and
(III) the Installment Amount due on the Third Redemption Date
shall be increased by the amount which is equal to 50% of
the amount of the Exchange Adjustment applicable to the
First Redemption Date.
(ii) If the Exchange Rate Increase with respect to the Second Redemption
Date is greater than the Inflation Rate Increase with respect to the
Second Redemption Date, then:
(I) the Installment Amount due on the Second Redemption Date (as
adjusted, if applicable, in accordance with clause
(b)(i)(II) above) shall be reduced by the amount of the
Exchange Adjustment applicable to the Second Redemption
Date; and
(II) the Installment Amount due on the Third Redemption Date (as
adjusted, if applicable, in accordance with clause
(b)(i)(III) above) shall be increased by the amount of the
Exchange Adjustment applicable to the Second Redemption
Date.
(iii) If the Installment Amount due on any Redemption Date is reduced as
set forth in clauses (b)(i) or (b)(ii) above, then interest shall
continue to accrue on the amount of such reduction in accordance
with the indenture until paid in full.
(c) OPTIONAL REDEMPTION. On any of the First Redemption Date, the Second
Redemption Date, or the Third Redemption Date, the Company may redeem all
of the new notes, at a redemption price of 100% of the outstanding
principal amount of the new notes so redeemed, plus accrued and unpaid
interest, if any, to the Redemption Date (subject to the right of holders
of record on the relevant record date to receive interest due on the
relevant interest payment date).
ADDITIONAL AMOUNTS
All payments by the Company in respect of the new notes will be made free
and clear of, and without withholding or deduction for or on account of, any
present or future taxes, duties, assessments, fees or other governmental charges
of whatever nature (and any fines, penalties or interest related thereto)
(collectively, "Taxes") imposed or levied by or on behalf of the Federative
Republic of Brazil or the successor jurisdiction (if any) of any paying agent
or, in each case, any political subdivision thereof or taxing authority therein
(each, a "Taxing Jurisdiction"), unless such withholding or deduction is
required by law. In that event, the Company shall pay to each holder or new
notes such additional amounts ("Additional Amounts") duly evidenced as may be
necessary in order that every net payment made by the Company on each new note
after deduction or withholding for or on account of any Tax imposed upon or as a
result of such payment by the Taxing Jurisdiction will not be less than the
amount then due and payable on such new note. The foregoing obligation to pay
Additional Amounts, however, will not apply to: (i) any Tax which would not have
been imposed, withheld or otherwise deducted but for the existence of any
present or former connection between such holder of new notes (or between a
fiduciary, settlor, beneficiary, member or shareholder of such holder, if such
holder is an estate, a trust, a partnership or a corporation), on the one hand,
and the Taxing Jurisdiction, on the other hand, including, without limitation,
such holder (or such fiduciary, settlor, beneficiary, member or shareholder)
being or having been a citizen or resident thereof or being or having been
engaged in a trade or business or present therein or having, or having had, a
permanent establishment
- 31 -
<Page>
therein, or any other connection of any kind, other than the mere receipt of
such payment or the ownership or holding of such new note; (ii) any Tax which
would not have been imposed, withheld or otherwise deducted but for the
presentation by such holder of new notes for payment (where presentation is
required) on a date more than 30 days after the date on which such payment
became due and payable or the date on which payment thereof is duly provided
for, whichever occurs later; (iii) the extent that the Taxes would not have been
imposed, withheld or otherwise deducted but for the failure of such holder of
new notes to comply with any certification, identification or other reporting
requirements concerning the nationality, residence, identity or connection with
the Taxing Jurisdiction of the holder of new notes if (a) such compliance is
required or imposed by statute, regulation, administrative practice or treaty or
other applicable law of such Taxing Jurisdiction as a precondition to exemption
from all or a part of such Tax and (b) at least 30 days prior to the date on
which the Companies apply this clause (iii), the Company shall have notified
such holder of new notes that some or all holders of new notes shall be required
to comply with such requirement; (iv) a Tax imposed, withheld or otherwise
deducted on a payment to an individual and required to be made pursuant to
European Council Directive 2003/48/EC or any other Directive implementing the
conclusions of the ECOFIN Council Meeting of 26-27 November 2000 on the taxation
of savings income or any law complying with, or introduced in order to conform
to, such Directive; (v) any Tax imposed, withheld or otherwise deducted on a new
note presented for payment by or on behalf of a holder of new notes who would
have been able to avoid such withholding or deduction by presenting the relevant
new note to another Paying Agent; (vi) any estate, inheritance, gift, sales,
transfer or personal property tax or similar Tax or any Tax payable other than
by withholding on a payment on the new notes; or (vii) any combination of items
(i) through (vi) above.
The Company shall also pay any duly evidenced present or future stamp,
court or documentary taxes or any other excise taxes, charges or similar levies
which arise in any jurisdiction from the execution, delivery, registration or
the making of payments in respect of the new notes, excluding any such taxes,
charges or similar levies imposed by any jurisdiction outside of any Taxing
Jurisdiction other than those resulting from, or required to be paid in
connection with, the enforcement of the new notes following the occurrence of
any Default.
No Additional Amounts shall be paid with respect to a payment on a new note
to a holder of new notes that is a fiduciary or partnership or any person other
than the sole beneficial owner of such payment to the extent a beneficiary or
settlor with respect to such fiduciary or a member of such partnership or
beneficial owner would not have been entitled to receive payment of the
Additional Amounts had the beneficiary, settlor, member or beneficial owner been
the holder of new notes of the new note.
The Company shall provide the Trustee with the official acknowledgment of
the relevant taxing authority (or, if such acknowledgment is not available, a
certified copy thereof, if available) evidencing the payment of taxes in any
Taxing Jurisdiction in respect of which the Company has paid any Additional
Amounts. Copies of such documentation shall be made available to the Paying
Agents upon request therefor.
The Company will: (i) at least 10 Business Days prior to the first interest
payment date (and at least 10 Business Days prior to each succeeding interest
payment date or any redemption date or the maturity date if there has been any
change with respect to the matters set forth in the below-mentioned officer's
certificate), deliver to the Trustee and each paying agent an officer's
certificate (a) specifying the amount, if any, of taxes described in this
section "-Additional Amounts" imposed or levied by or on behalf of any Taxing
Jurisdiction (the "Relevant Withholding Taxes") required to be deducted or
withheld on the payment of principal of or interest on the new notes to holders
of new notes and the Additional Amounts, if any, due to holders of new notes in
connection with such payment, and (b) certifying that the Company will pay such
deduction or withholding; (ii) prior to the due date for the payment thereof,
pay any such Relevant Withholding Taxes, together with any penalties or interest
applicable thereto; (iii) within 15 days after paying such Relevant Withholding
Taxes, deliver to the Trustee and each paying agent evidence of such payment and
of the remittance thereof to the relevant taxing or other authority as described
herein; and (iv) pay any Additional Amounts due to holders of new notes on any
interest payment date, redemption date or the maturity date to the Trustee in
accordance with the provisions of this section. Any such officer's certificate
will be deemed to be duly provided if sent by facsimile to the Trustee and each
paying agent.
The Company hereby covenants to indemnify the Trustee and each paying agent
for, and to hold each harmless against, any loss, liability or expense
reasonably incurred without negligence, bad faith or willful misconduct on such
person's part, arising out of or in connection with actions taken or omitted by
any of them in reliance on any officer's certificate furnished pursuant to this
section or the failure of the Trustee or any paying
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agent for any reason (other than its own negligence, bad faith or willful
misconduct) to receive on a timely basis any such officer's certificate or any
information or documentation requested by it or otherwise required by applicable
law or regulations to be obtained, furnished or filed in respect of such
Relevant Withholding Taxes. The Company will make available to any holder of new
notes requesting the same, evidence that the applicable Relevant Withholding
Taxes have been paid.
Whenever in the Indenture or in this "Description of the New Notes" there
is mentioned, in any context, the payment of amounts based upon the payment of
principal, premium, if any, interest or of any other amount payable under or
with respect to any new note, such mention shall be deemed to include mention of
the payment of Additional Amounts as are, were or would be payable in respect
thereof.
REDEMPTION FOR CHANGES IN WITHHOLDING TAXES
The new notes may be redeemed at the option of the Company, in whole but
not in part, at any time prior to maturity if as the result of any change in or
amendment to the laws, regulations or rulings of Brazil or any political
subdivision or taxing authority thereof or therein, or any change in the
application or official interpretation of such laws, regulations or rulings
(including the holding of a court of competent jurisdiction), the Company has or
will become obligated to pay Additional Amounts (excluding interest and
penalties) in excess of the Additional Amounts that the Company would be
obligated to pay if Taxes (excluding interest and penalties) were imposed with
respect to such payments of interest at a rate of 15.0%, and such obligation
cannot be avoided by the Company taking reasonable measures available to them,
then the Company may, at its option, redeem or cause the redemption of the new
notes, as a whole but not in part, upon not more than 60 nor less than 30 days'
notice to the holders of such new notes (with copies to the Trustee and each
Paying Agent) at 100.0% of their principal amount, together with accrued
interest to (but excluding) the date fixed for redemption, plus any such
Additional Amounts payable with respect to such principal amount and interest as
provided under "--Additional Amounts." Prior to the giving of notice of
redemption of the new notes as described herein and as a condition to any such
redemption, the Company will deliver to the Trustee an Officers' Certificate
(together with a copy of the written opinion of counsel to the effect that the
applicable rate has so increased, or the Company has or will become so obligated
to pay Additional Amounts as a result of such change or amendment), stating that
the Company is entitled to effect such redemption and setting forth in
reasonable detail a statement of facts relating thereto. No notice of redemption
shall be given earlier than 90 days prior to the earliest date on which the
Company would be obligated to pay such Additional Amounts were a payment in
respect of the new notes then due and, at the time such notice of redemption is
given, such obligation to pay such Additional Amounts remains in effect.
SELECTION
In the case of any partial redemption or repurchase, selection of the new
notes for redemption or repurchase will be made by the Trustee on a pro rata
basis, by lot or by such other method as the Trustee in its sole discretion
shall deem to be fair and appropriate, although no new note of US$1.00 in
original principal amount or less will be redeemed or repurchased in part. If
any new note is to be redeemed or repurchased in part only, the notice of
redemption or repurchase relating to such new note shall state the portion of
the principal amount thereof to be redeemed or repurchased. A new note in
principal amount equal to the unredeemed or unrepurchased portion thereof will
be issued in the name of the holder thereof upon cancellation of the original
new note.
RANKING
The new notes will be unsecured, senior obligations of the Company ranking
equally in right of payment with all other existing and future unsecured, senior
indebtedness of the Company and senior in right of payment to all other existing
and future subordinated indebtedness of the Company. Subject to certain
limitations set forth in the Indenture, the Company and its Subsidiaries may
incur other senior indebtedness, including indebtedness that is secured by
certain assets of the Company and its Subsidiaries. At June 30, 2004, the
Company did not have any outstanding senior indebtedness other than the old
notes (exclusive of unused commitments) and short term debt).
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DEFAULTS
An "Event of Default" is defined in the Indenture as (i) a default in any
payment of interest on any new note when due, continued for 30 days, (ii) a
default in the payment of principal or premium, if any, of any new note when due
at its Stated Maturity, upon optional redemption, upon required repurchase, upon
declaration or otherwise, (iii) the failure by us to comply with any other
agreements contained in the Indenture for 45 days after notice (in each case,
other than a failure to purchase new notes which shall constitute an Event of
Default under clause (ii) above), (iv) indebtedness of ours (other than Excluded
Debt) is not paid within any applicable grace period after failure to pay when
due or is accelerated by the holders thereof because of a default (the "cross
acceleration provision"); (v) Excluded Debt that is held by Persons who are not
Affiliates of the Company is not paid within any applicable grace period after
failure to pay when due or is accelerated by the holders thereof because of a
default and the total principal amount of such unpaid or accelerated Excluded
Debt exceeds US$35 million, (vi) certain events of bankruptcy, insolvency or
reorganization of ours (the "bankruptcy provisions"), (vii) any judgment or
decree for the payment of money in excess of US$5 million (to the extent not
covered by insurance as acknowledged in writing by the insurer) is rendered
against us and such judgment or decree shall remain undischarged or unstayed for
a period of 60 days after such judgment becomes final and non-appealable (the
"judgment default provision"), or (viii) there shall have occurred any seizure,
compulsory acquisition, expropriation or nationalization of material assets of
ours and our Subsidiaries. However, a default under clause (iv) will not
constitute an Event of Default until the Trustee or the holders of 25.0% in
principal amount of the outstanding new notes notify us of the default and the
Company does not cure such default within the time specified in clause (iv)
hereof after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the holders
of at least 25.0% in principal amount of the outstanding new notes by notice to
us may declare the principal of and accrued and unpaid interest on all the new
notes to be due and payable. Upon such a declaration, such principal and accrued
and unpaid interest shall be due and payable immediately. If an Event of Default
relating to certain events of bankruptcy, insolvency or reorganization of ours
occurs and is continuing, the principal of and accrued and unpaid interest on
all the new notes will become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any holders. Under
certain circumstances, the holders of a majority in principal amount of the
outstanding new notes may rescind any such acceleration with respect to the new
notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default occurs and is continuing, the Trustee will be
under no obligation to exercise any of the rights or powers under the Indenture
at the request or direction of any of the holders unless such holders have
offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no holder may pursue any
remedy with respect to the Indenture or the new notes unless (i) such holder has
previously given the Trustee notice that an Event of Default is continuing, (ii)
holders of at least 25.0% in principal amount of the outstanding new notes have
requested the Trustee to pursue the remedy, (iii) such holders have offered the
Trustee reasonable security or indemnity against any loss, liability or expense,
(iv) the Trustee has not complied with such request within 60 days after the
receipt of the request and the offer of security or indemnity and (v) the
holders of a majority in principal amount of the outstanding new notes have not
given the Trustee a direction that, in the opinion of the Trustee, is
inconsistent with such request within such 60-day period. Subject to certain
restrictions, the holders of a majority in principal amount of the outstanding
new notes are given the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee or of exercising any
trust or power conferred on the Trustee. The Trustee, however, may refuse to
follow any direction that conflicts with law or the Indenture or that the
Trustee determines is unduly prejudicial to the rights of any other holder or
that would involve the Trustee in personal liability. Prior to taking any action
under the Indenture, the Trustee shall be entitled to indemnification
satisfactory to it in its sole discretion against all losses and expenses caused
by taking or not taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder notice of the Default
within 90 days after it occurs. Except in the case of a Default in the payment
of principal of, premium (if any) or interest on any new note, the Trustee may
withhold notice if and so long as a committee of its Trust officers in good
faith determines that withholding notice is in the interests of the Noteholders.
In addition, the Company is required to deliver to the Trustee, within 120 days
after the end of each fiscal year, a certificate indicating whether the signers
thereof know of any Default that occurred during the previous year. We also are
required to deliver to the Trustee, within 30 days after the occurrence thereof,
written notice of
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any events which would constitute certain Defaults, their status and what action
the Company is taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the
consent of the holders of a majority in principal amount of the new notes then
outstanding and any past default or compliance with any provisions may be waived
with the consent of the holders of a majority in principal amount of the new
notes then outstanding. However, without the consent of each holder of an
outstanding new note affected, no amendment may, among other things, (i) reduce
the amount of new notes whose holders must consent to an amendment, (ii) reduce
the rate of or extend the time for payment of interest on any new note, (iii)
reduce the principal of or extend any Stated Maturity of any new note, (iv)
reduce the premium payable upon the redemption or repurchase of any new note or
change the time at which any new note may be redeemed as described under
"--Optional Redemption" above, (v) make any new note payable in money other than
that stated in the new note, (vi) amend or modify any of the provisions of the
Indenture relating to the ranking of the new notes in any manner that adversely
affects the rights of any holder of the new notes, (vii) impair the right of any
holder to receive payment of principal of and interest on such holder's new
notes on or after the due dates therefor or to institute suit for the
enforcement of any payment on or with respect to such holder's new notes, or
(viii) make any change in the amendment provisions which require each holder's
consent or in the waiver provisions.
Without the consent of any holder, the Company and the Trustee may amend
the Indenture to cure any ambiguity, omission, defect or inconsistency, to
provide for the assumption by a successor corporation of our obligations under
the Indenture, to provide for uncertificated new notes in addition to or in
place of certificated new notes (provided that the uncertificated new notes are
issued in registered form for purposes of Section 163(f) of the Code) to secure
the new notes, to add to the covenants of ours for the benefit of the new
noteholders or to surrender any right or power conferred upon us, to make any
change that does not adversely affect the rights of any holder or to comply with
any requirement of the Commission in connection with the qualification of the
Indenture under the Trust Indenture Act.
The consent of the holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to the holders a notice briefly describing such amendment.
However, the failure to give such notice to all the holders, or any defect
therein, will not impair or affect the validity of the amendment.
TRANSFER AND EXCHANGE
A Noteholder may transfer or exchange new notes in accordance with the
Indenture. Upon any transfer or exchange, the registrar and the Trustee may
require a Noteholder, among other things, to furnish appropriate endorsements
and transfer documents and the Company may require a Noteholder to pay any taxes
or other charges required by law. The Company is not required to transfer or
exchange any new note selected for redemption or to transfer or exchange any new
note for a period of 15 days prior to a selection of new notes to be redeemed.
The new notes will be issued in registered form, and the registered holder of a
new note will be treated as the owner of such new note for all purposes.
DEFEASANCE
The Company at any time may terminate all its obligations under the new
notes and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the new notes, to replace mutilated, destroyed, lost or
stolen new notes and to maintain a registrar and paying agent in respect of the
new notes. The Company at any time may terminate its obligations under the
operation of the cross acceleration provision and the judgment default provision
described under "Defaults" above ("covenant defeasance").
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The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the new notes may not be accelerated because
of an Event of Default with respect thereto. If the Company exercises its
covenant defeasance option, payment of the new notes may not be accelerated
because of an Event of Default specified in clause (iii), (iv) and (vi) under
"Defaults" above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or US
Government Obligations for the payment of principal, premium (if any) and
interest on the new notes to redemption or maturity, as the case may be, and
must comply with certain other conditions, including delivery to the Trustee of
an Opinion of Counsel to the effect that holders of the new notes will not
recognize income, gain or loss for US Federal income tax purposes as a result of
such deposit and defeasance and will be subject to US Federal income tax on the
same amount and in the same manner and at the same times as would have been the
case if such deposit and defeasance had not occurred (and, in the case of legal
defeasance only, such Opinion of Counsel must be based on a ruling of the
Internal Revenue Service or other change in applicable Federal income tax law).
FOREIGN EXCHANGE RESTRICTIONS; CURRENCY INDEMNITY
Payments in respect of the new notes shall be made in US dollars as shall
be legal tender at the time of payment for the payment of public and private
debts in that currency. In the event that on any payment date in respect of the
new notes, any restrictions or prohibition of access to the Brazilian foreign
exchange market exists, the Company agrees to pay all amounts payable under the
new notes in the currency of such new notes by means of any legal procedure
existing in Brazil (except commencing legal proceedings against the Brazilian
Central Bank), on any due date for payment under the new notes. All costs and
taxes payable in connection with the procedures referred to in this covenant
shall be borne by the Company.
US dollars are the sole currency of account and payment for all sums
payable by the Company under or in connection with the new notes, including
damages. Any amount received or recovered in a currency other than US dollars
(whether as a result of, or of the enforcement of, a judgment or order of a
court of any jurisdiction, in the winding-up or dissolution of the Company or
otherwise) by any holder of a new note in respect of any sum expressed to be due
to it from the Company shall only constitute a discharge to the Company to the
extent of the dollar amount which the recipient is able to purchase with the
amount so received or recovered in that other currency on the date of that
receipt or recovery (or, if it is not practicable to make that purchase on that
date, on the first date on which it is practicable to do so). If that dollar
amount is less than the dollar amount expressed to be due to the recipient under
any new note, the Company shall indemnify it against any loss sustained by it as
a result. In any event the Company shall indemnify the recipient against the
cost of making any such purchase. For the purposes of this paragraph, it will be
sufficient for the holder of a new note to certify in a satisfactory manner
(indicating sources of information used) that it would have suffered a loss had
an actual purchase of dollars been made with the amount so received in that
other currency on the date of receipt or recovery (or, if a purchase of dollars
on such date had not been practicable, on the first date on which it would have
been practicable, it being required that the need for a change of date be
certified in the manner mentioned above). These indemnities constitute a
separate and independent obligation from other obligations of the Company, shall
give rise to a separate and independent cause of action, shall apply
irrespective of any indulgence granted by any holder of a new note and shall
continue in full force and effect despite any other judgment, order, claim or
proof for a liquidated amount in respect of any sum due under any new note.
ENFORCEABILITY OF JUDGMENTS WITH RESPECT TO THE NEW NOTES
Service of process upon the Company (other than an insolvency, liquidation
or bankruptcy proceeding or any other proceeding in the nature of an in rem or
quasi in rem proceeding) to enforce their obligations under the Indenture or the
new notes may be obtained within the United States by service upon CT
Corporation System. Since substantially all of the assets of the Company and its
subsidiaries are outside the United States, any judgment obtained in the United
States against the Company, including judgments with respect to the payment of
amounts owing with respect to the new notes, may not be collectible within the
United States.
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Judgments for monetary claims obtained in US courts arising out of or in
relation to the obligations of the Company under the Indenture and the new notes
will be enforceable in Brazil, provided that such judgment has been previously
confirmed by the Brazilian Federal Supreme Court. In order to be confirmed by
the Brazilian Federal Supreme Court, such foreign judgment must meet the
following conditions: (a) it must comply with all formalities required for its
enforceability under the laws of the country where it was issued; (b) it must
have been given by a competent court after the proper service of process on the
parties; (c) it must not be subject to appeal; (d) it must not offend Brazilian
national sovereignty, public policy or good morals; and (e) it must be duly
authenticated by a competent Brazilian consulate and be accompanied by a sworn
translation thereof into Portuguese. Notwithstanding the foregoing, no assurance
can be given that such confirmation will be obtained, that the process described
above can be conducted in a timely manner or that a Brazilian court will enforce
such monetary judgment. See "Enforceability of Civil Liabilities."
Any judgment obtained against the Company in a court in Brazil under any
new note or under the Indenture will be expressed in the Brazilian currency
equivalent to the US dollar amount of such sum at the commercial exchange rate
of the date at which such judgment is obtained, and such Brazilian currency
amount will be corrected in accordance with the exchange variation until the
judgment holder receives effective payment.
CERTAIN BANKRUPTCY LAW CONSIDERATIONS
Brazilian Bankruptcy Law (Decree-law No. 7,661, of June 21, 1945, the
"Brazilian Bankruptcy Law") establishes two different proceedings for the
resolution of debts of commercial companies which are insolvent or do not pay
their obligations when due: the bankruptcy proceeding ("FALENCIA") and the
reorganization proceeding ("CONCORDATA"). Both proceedings apply to all
unsecured creditors of a company which is declared bankrupt or which is under a
reorganization proceeding. In the event that the Company is declared bankrupt or
enters into a CONCORDATA, the new notes will be considered general unsecured
indebtedness of the Company and therefore will be subject to such proceedings.
Under a bankruptcy proceeding (essentially a liquidation proceeding),
payments in respect of the new notes will be subject to an order of priority.
Generally, Brazilian Bankruptcy Law and other applicable rules establish that
claims of employees for wages or indemnity and tax claims have priority over
other claims against the bankrupt estate. Other claims are subject to the
following order of priority: (i) secured credits, (ii) credits with special
privileges over certain assets, (iii) credits with general privilege and (iv)
unsecured credits (including the new notes). Credits in foreign currency are
converted into Brazilian currency on the date the company is declared bankrupt
and are not subject to adjustment in accordance with the exchange variation.
Such amount in Brazilian currency must be monetarily adjusted to account for
inflation (in accordance with the rules applicable from time to time) and bear
no interest.
Under a CONCORDATA proceeding, which is a protection available under the
Brazilian Bankruptcy Law for commercial companies experiencing financial
distress to avoid the declaration of bankruptcy, the company's unsecured credits
existing at the time the CONCORDATA is declared are rescheduled for one of the
periods defined in the law which in virtually all cases is 24 months (in which
event 40.0% of the debt must be paid in the first year). The benefit may be
given by the court without any prior consultation with or manifestation by the
creditors, so long as the beneficiary demonstrates, INTER ALIA, that its assets
are worth at least 50.0% of its unsecured indebtedness. The CONCORDATA
proceeding has the following basic characteristics: (i) it only affects
unsecured creditors; (ii) it does not affect the day-to-day management of the
company, the other commercial obligations of the company and the obligations
assumed after the date on which the CONCORDATA is declared; (iii) amounts due in
foreign currency subject to the CONCORDATA are converted into local currency on
the date on which the CONCORDATA is accepted by the court and are not subject to
adjustment in accordance with the exchange variation; (iv) amounts due under the
CONCORDATA, either in local currency or converted into local currency, must be
monetarily adjusted to account for inflation (in accordance with the rules
applicable from time to time) and bear interest at the rate of 12.0% per annum;
and (v) a company under CONCORDATA which fails to meet its rescheduled
obligations will be declared bankrupt.
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CONSENT TO JURISDICTION AND SERVICE
The Indenture will provide that the Company will appoint CT Corporation
System as its agent for service of process in any suit, action or proceeding
with respect to the Indenture or the new notes and for actions brought under
Federal or state securities laws brought in any Federal or state court located
in the City of New York and will submit to such jurisdiction.
CONCERNING THE TRUSTEE
HSBC Bank USA, National Association is to be the Trustee under the
Indenture and has been appointed by the Company as Registrar, and HSBC Bank USA,
National Association has been appointed as Paying Agent with regard to the new
notes.
GOVERNING LAW
The Indenture provides that it and the new notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
For purposes of the following definitions and the Indenture generally, all
calculations and determinations shall be made in accordance with GAAP and shall
be based upon the consolidated financial statements of the Company and its
Subsidiaries prepared in accordance with GAAP.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person but excluding any debt
securities convertible into such equity.
"Code" means the United States Internal Revenue Code of 1986, as amended.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Determination Period" shall mean, as the context requires, the First
Determination Period or the Second Determination Period.
"Exchange Act" means the United States Securities Exchange Act of 1934, as
amended.
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"Exchange Adjustment" means:
(i) with respect to the First Redemption Date, an amount equal to:
(A) the Installment Amount due on the First Redemption Date MINUS
(B) the Installment Amount due on the First Redemption Date FIRST
converted into REAIS using the Exchange Rate as of November 1, 2004,
SECOND MULTIPLIED BY the sum of (1) one PLUS (2) the Inflation Rate
Increase for the First Redemption Date and THIRD converted into US
dollars using the Exchange Rate as of five Business Days prior to
the First Redemption Date; and
(ii) with respect to the Second Redemption Date, an amount equal to:
(A) the Installment Amount due on the Second Redemption Date (as
adjusted, if applicable, in accordance with clause b(i)(II) under
"Redemption" above) MINUS
(B) the Installment Amount due on the Second Redemption Date (as
adjusted, if applicable, in accordance with clause b(i)(II) under
"Redemption" above) FIRST converted into REAIS using the Exchange
Rate as of November 1, 2004, SECOND MULTIPLIED BY the sum of (1) one
PLUS (2) the Inflation Rate Increase for the Second Redemption Date
and THIRD converted into US dollars using the Exchange Rate as of
five Business Days prior to the Second Redemption Date.
"Exchange Rate" means, as of any date, the REAL/US dollar commercial rate,
expressed as the amount of REAIS per one US dollar, reported as of 7:30pm (Sao
Paulo time) on such date by the Banco Central do Brasil on SISBACEN Data System
under transaction code PTAX-800 ("CONSULTAS DE CAMBIO" or Exchange Rate Inquiry)
Option 5 ("COTACOES PARA CONTABILIDADE" or Rates for Accounting Purposes) market
type L (corresponding to US dollars traded in the foreign exchange market
segment officially denominated "LIVRE" and commonly known as "COMMERCIAL"), or
such other transaction code as shall have replaced the PTAX-800 transaction code
from time to time.
"Exchange Rate Increase" means, with respect to the First Redemption Date
or the Second Redemption Date, the percentage increase, if any, in the Exchange
Rate for the period from the first day of the First Determination Period or the
Second Determination Period (as applicable) until the final day of the First
Determination Period or the Second Determination Period (as applicable).
"Excluded Debt" means indebtedness due in respect of the Company's old
notes.
"First Determination Period," for exchange rate purposes, means the period
from November 1, 2004 through and including the fifth Business Day prior to the
First Redemption Date.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect from time to time, including those set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting profession.
All ratios and computations based on GAAP contained in the Indenture shall be
computed in conformity with GAAP as in effect on the Issue Date.
"Holder," "holder" or "Noteholder" means the Person in whose name a note is
registered on the Registrar's books.
"IGP-M" shall mean the INDICE GERAL DE PRECOS DO MERCADO, as published by
the FUNDACAO GETULIO VARGAS, or such other index as shall replace the IGP-M from
time to time.
"IGP-M Variation" for any Determination Period shall mean the product of
the IGP-M for each month during such Determination Period; it being understood
that (i) for period from November 1, 2007 through and
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including the fifth Business Day prior to the First Redemption Date, the IGP-M
for such period shall be calculated on a pro rata temporis basis using the IGP-M
for the month of October 2007 and (ii) for the period from November 1, 2008
through and including the fifth Business Day prior to the Second Redemption
Date, the IGP-M for such period shall be calculated on a pro rata temporis basis
using the IGP-M for the month of October 2008.
"Inflation Rate Increase" means:
(i) with respect to the First Redemption Date, the product of the
IGP-M Variation for the First Determination Period MULTIPLIED by 1.12; and
(ii) with respect to the Second Redemption Date, the product of
the IGP-M Variation for the Second Determination Period multiplied by 1.15.
"Issue Date" means the date on which the new notes are originally issued.
"Officers' Certificate" means a certificate signed by two Officers;
provided that one of the officers giving an Officers' Certificate pursuant to
Section 4.3 of the Indenture shall be the principal executive, financial or
accounting officer of the Company.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
hereof or any other entity.
"Redemption Date" shall mean, as the context requires, the First Redemption
Date, the Second Redemption Date or the Third Redemption Date.
"SEC" or "Commission" means the United States Securities and Exchange
Commission.
"Second Determination Period," for exchange rate purposes, means the period
from November 1, 2004 through and including the fifth Business Day prior to the
Second Redemption Date.
"Stated Maturity" means, with respect to any security, any date specified
in such security as a fixed date on which the payment of principal of such
security is due and payable.
"Subsidiary" of any Person means any corporation, association, partnership,
joint venture or other business entity (i) of which more than 50.0% of the total
voting power of shares of Capital Stock or other interests (including
partnership interests) entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by (A) such Person,
(B) such Person and one or more Subsidiaries of such Person or (C) one or more
Subsidiaries of such Person and (ii) which is controlled by such Person. Unless
otherwise specified herein, each reference to a Subsidiary shall refer to a
Subsidiary of the Company.
"US Dollar Equivalent" means, with respect to any monetary amount in a
currency other than the US dollar at any one time for the determination thereof,
the amount of US dollars obtained by converting such foreign currency involved
in such computation into US dollars at the spot rate for the purchase of US
dollars with the applicable foreign currency as quoted by Reuters at
approximately 11:00 a.m. (New York time) on the date not more than two business
days prior to such determination.
"US Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
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BOOK-ENTRY; DELIVERY AND FORM
The new notes are issued in the form of global securities held in
book-entry form. DTC or its nominee is the sole registered holder of the new
notes for all purposes under the Indenture. Owners of beneficial interests in
the new notes represented by the global securities hold their interests pursuant
to the procedures and practices of DTC. As a result, beneficial interests in any
such securities are shown on, and transfers are effected only through, records
maintained by DTC and its direct and indirect participants. Any such interests
may not be exchanged for certificated securities, except in limited
circumstances. Owners of beneficial interests must exercise any rights in
respect of their interests, including any right to convert or require repurchase
of their interests in the new notes, in accordance with the procedures and
practices of DTC. Beneficial owners are not holders and are not entitled to any
rights under the global securities or the Indenture. The Company and the
trustee, and any of our respective agents, may treat DTC as the sole holder and
registered owner of the global securities.
The Depository has advised the Company that it is (i) a limited purpose
trust company organized under the laws of the State of New York, (ii) a member
of the Federal Reserve System, (iii) a "clearing corporation" within the meaning
of the Uniform Commercial Code, as amended, and (iv) a "Clearing Agency"
registered pursuant to Section 17A of the Exchange Act. The Depository was
created to hold securities for its participants (collectively, the
"Participants") and facilitates the clearance and settlement of securities
transactions between Participants through electronic book entry changes to the
accounts of its Participants, thereby eliminating the need for physical transfer
and delivery of certificates. The Depository's Participants include securities
brokers and dealers (including the Initial Purchasers), banks and trust
companies, clearing corporations and certain other organizations. Access to the
Depository's system is also available to other entities such as banks, brokers,
dealers and trust companies (collectively, the "Indirect Participants") that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly. Investors who are not Participants may beneficially own
securities held by or on behalf of the Depository only through Participants or
Indirect Participants.
The Company expects that pursuant to procedures established by the
Depository (i) upon deposit of the Global Notes, the Depository or its custodian
will credit the accounts of Participants designated by the Initial Purchasers
with an interest in a Global Note and (ii) ownership of the new notes will be
shown on, and the transfer of ownership thereof will be effected only through,
records maintained by the Depository (with respect to the interest of
Participants), the Participants and the Indirect Participants. The laws of some
states require that certain persons take physical delivery in definitive form of
securities that they own and that security interests in negotiable instruments
can only be perfected by delivery of certificates representing the instruments.
Consequently, the ability to transfer new notes or to pledge the new notes as
collateral will be limited to such extent.
So long as the Depository or its nominee is the registered owner of a
Global Note, the Depository or such nominee, as the case may be, will be
considered the sole owner or Holder of the new notes represented by such Global
Note for all purposes under the Indenture. Except as provided below, owners of
beneficial interests in a Global Note will not be entitled to have new notes
represented by such Global Note registered in their names, will not receive or
be entitled to receive physical delivery of Certificated Securities, and will
not be considered the owners or holders thereof under the Indenture for any
purpose, including with respect to giving of any directions, instruction or
approval to the Trustee thereunder. As a result, the ability of a person having
a beneficial interest in new notes represented by a Global Note to pledge such
interest to persons or entities that do not participate in the Depository's
system or to otherwise take action with respect to such interest, may be
affected by the lack of a physical certificate evidencing such interest.
Accordingly, each person owning a beneficial interest in a Global Note must
rely on the procedures of the Depository and, if such beneficial owner is not a
Participant or an Indirect Participant, on the procedures of the Participant
through which such person owns its interest, to exercise any rights of a Holder
under the Indenture or such Global Note. The Company understands that under
existing industry practice, in the event the Company requests any action of
holders or a person that is an owner of a beneficial interest in a Global Note
desires to take any action that the Depository, as the Holder of such Global
Note, is entitled to take, the Depository would authorize the Participants to
take such action and the Participant would authorize beneficial owners owning
through such Participants to take such action or would otherwise act upon the
instruction of such beneficial owners. Neither the Company nor the Trustee will
have any responsibility or liability for any aspect of the records relating to
or
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payments made on account of new notes by the Depository, or for maintaining,
supervising or reviewing any records of the Depository relating to such new
notes.
Payments with respect to the principal of, premium, if any, and interest on
any new notes represented by a Global Note registered in the name of the
Depository or its nominee on the applicable record date will be payable by the
Trustee to or at the direction of the Depository or its nominee in its capacity
as the registered Holder of such Global Note representing such new notes under
the Indenture. Under the terms of the Indenture, the Company and the Trustee may
treat the persons in whose names the new notes, including the Global Notes, are
registered as the owners thereof for the purpose of receiving such payment and
for any and all other purposes whatsoever. Consequently, neither the Company nor
the Trustee has or will have any responsibility or liability for the payment of
such amounts to beneficial owners of new notes (including principal, premium, if
any, and interest), or to immediately credit the accounts of the relevant
Participants with such payment, in amounts proportionate to their respective
holdings in principal amount of beneficial interest in a Global Note as shown on
the records of the Depository. Payments by the Participants and the Indirect
Participants to the beneficial owners of new notes will be governed by standing
instructions and customary practice and will be the responsibility of the
Participants or the Indirect Participants.
CERTIFICATED SECURITIES
If (i) the Company notifies the Trustee in writing that the Depository is
no longer willing or able to act as a depository and the Company is unable to
locate a qualified successor within 90 days, (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of new
notes in definitive form under the Indenture, or (iii) upon the occurrence of
certain other events, then, upon surrender by the Depository of its Global
Notes, Certificated Securities will be issued to each person that the Depository
identifies as the beneficial owner of the new notes represented by the Global
Note. In addition, subject to certain conditions, any person having a beneficial
interest in a Global Note may, upon request to the Trustee, exchange such
beneficial interest for Certificated Securities. Upon any such issuance, the
Trustee is required to register such Certificated Securities in the name of such
person or persons (or the nominee of any thereof), and cause the same to be
delivered thereto.
Neither the Company nor the Trustee shall be liable for any delay by the
Depository or any Participant or Indirect Participant in identifying the
beneficial owners of the related new notes and each such person may conclusively
rely on, and shall be protected in relying on, instructions from the Depository
for all purposes (including with respect to the registration and delivery, and
the respective principal amounts, of the new notes to be issued).
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the new notes will be made in immediately available funds.
So long as the new notes are represented by a permanent Global Note or Notes,
all payments of principal, premium, if any, and interest will be made by the
Company in immediately available funds.
Secondary trading in long-term notes and debentures of corporate issuers is
generally settled in clearing-house or next-day funds. So long as the new notes
are represented by a permanent Global Note or Notes registered in the name of
the Depositary or its nominee, except for trades between Euroclear and Cedel
participants, interests in the new notes are expected to trade in the
Depositary's Same-Day Funds Settlement System, and secondary market trading
activity in the new notes will therefore be required by the Depositary to settle
in immediately available funds. No assurance can be given as to the effect, if
any, of settlement in immediately available funds on the trading activity in the
new notes.
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THE EXCHANGE
Upon the terms and subject to the conditions of this exchange offer, we
will, unless such old notes are withdrawn in accordance with the withdrawal
rights specified in "--Withdrawal of Tenders" below, accept any and all old
notes validly tendered prior to 5:00 p.m., New York City time, on the Expiration
Date. We will issue, on or promptly after the Expiration Date, an aggregate
principal amount of up to US$48,022,000 of new notes in exchange for the same
principal amount of outstanding old notes tendered and accepted in connection
with this exchange offer. The new notes issued in connection with this exchange
offer will be delivered on November 26, 2004 or otherwise on the earliest
practicable date on or following the Expiration Date. We will continue to make
interest payments on the old notes, whether or not they are exchanged in the
exchange offer, up to and including November 26, 2004. Holders must tender all
of their old notes in connection with this exchange offer in order to have their
tender accepted. The new notes will have the terms and be subject to the
conditions of an Indenture dated November 26, 2004 between us, the Trustee and
HSBC Bank USA, National Association, as Paying Agent. As of the date of this
Prospectus, US$48,022,000 aggregate principal amount of the old notes is
outstanding to persons not affiliated with us. In connection with the issuance
of the old notes, we arranged for the old notes originally purchased by
qualified institutional buyers to be issued and transferable in book-entry form
through the facilities of The Depository Trust Company ("DTC"), acting as
depositary. Except as described in "Description of the New Notes--Book-Entry;
Delivery and Form," the new notes will be issued in the form of a global note
registered in the name of DTC or its nominee and each holder's interest therein
will be transferable in book-entry form through DTC. Holders of old notes do not
have any appraisal or dissenters' rights in connection with this exchange offer.
Old notes which are not tendered for exchange or are tendered but not accepted
in connection with this exchange offer will remain outstanding and will not be
entitled to the covenant restrictions originally provided for under the
indenture relating to the old notes and stripped out in later amendments and
supplements to such indenture. We shall be deemed to have accepted validly
tendered old notes when, as and if we have given oral or written notice thereof
to the Exchange Agent. The Exchange Agent will act as agent for the tendering
holders for the purposes of receiving the new notes from us. If any tendered old
notes are not accepted for exchange because of an invalid tender, the occurrence
of certain other events set forth herein or otherwise, certificates for any such
unaccepted old notes will be returned, without expense, to the tendering holder
thereof as promptly as practicable after the Expiration Date. Holders who tender
old notes in connection with this exchange offer will not be required to pay
brokerage commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of old notes in
connection with this exchange offer. We will pay all charges and expenses, other
than certain applicable taxes described below, in connection with this exchange
offer. See "--Fees and Expenses."
IMPORTANT NOTICE WITH RESPECT TO BRAZILIAN LAW
In making this exchange offer, we do not express any intent to novate the
old notes.
EXPIRATION DATE; EXTENSIONS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
November 10 , 2004, unless extended by us in our sole discretion, in which case
the term "Expiration Date" shall mean the latest date and time to which this
exchange offer is extended.
We reserve the right to extend the Expiration Date at any time and from
time to time, in accordance with applicable laws and regulations, regardless of
the amount of tenders of old notes we have received, by issuing a press release
or making any other public announcement (or by written notice to the holders of
record of the old notes as of the immediately preceding day) as promptly as
practicable, and in no event later than 9:00 a.m., New York City time, on the
next day other than Saturday, Sunday or any other day on which banks located in
New York, New York, USA or Sao Paulo, Brazil are authorized or obligated to
close (each, a "Business Day") after the previously announced Expiration Date.
Such announcement or notice may state that we are extending the solicitation for
a specified period of time or on a daily basis.
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EXCHANGE OFFER PROCEDURES
The tender to us of old notes by a holder thereof as set forth below and
the acceptance thereof by us will constitute a binding agreement between the
tendering holder and us upon the terms and subject to the conditions set forth
in this Prospectus and in the accompanying Letter of Transmittal.
Except as set forth below, a holder who wishes to tender old notes for
exchange pursuant to this exchange offer must transmit a properly completed and
duly executed Letter of Transmittal, including all other documents required by
such Letter of Transmittal, to the Exchange Agent at the address set forth below
under "Exchange Agent" prior to 5:00 p.m. New York City time on the Expiration
Date. In addition, either (i) certificates for such old notes must be received
by the Exchange Agent along, with the Letter of Transmittal, or (ii) a timely
confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such old
notes, if such procedure is available, into the Exchange Agent's account at DTC
pursuant to the procedure for book-entry transfer described below, must be
received by the Exchange Agent prior to 5:00 p.m. New York City time on the
Expiration Date, or (iii) the holder must comply with the guaranteed delivery
procedures described below. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF
TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE
HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL,
PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES,
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF
TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO US.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the old notes surrendered for exchange
pursuant thereto are tendered (i) by a registered holder of the old notes who
has not completed the box entitled "Special Issuance Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution (as defined below). In the event that signatures on a
Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantees must be by a firm which is a member
of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust company
having an office or correspondent in the United States (collectively, "Eligible
Institutions").
If old notes are registered in the name of a person other than the signer
of a Letter of Transmittal, the old notes surrendered for exchange must be
endorsed by, or be accompanied by a written instrument or instruments of
transfer or exchange, in satisfactory form as determined by us in our sole
discretion, duly executed by the registered holder with the signature thereon
guaranteed by an Eligible Institution. All questions as to the validity, form,
eligibility (including time of receipt) and acceptance of old notes tendered for
exchange will be determined by us in our sole discretion, which determination
shall be final and binding. We reserve the absolute right to reject any and all
tenders of any particular old notes not properly tendered or to not accept any
particular old notes which acceptance might, in our judgment or our counsel's
judgment, be unlawful. We also reserve the absolute right to waive any defects
or irregularities or conditions of this exchange offer as to any particular old
notes either before or after the Expiration Date (including the right to waive
the ineligibility of any holder who seeks to tender old notes in this exchange
offer). The interpretation of the terms and conditions of this exchange offer as
to any particular old notes either before or after the Expiration Date
(including the Letter of Transmittal and the instructions thereto) by us shall
be final and binding on all parties. Unless waived, all defects or
irregularities in connection with tenders of old notes for exchange must be
cured within such reasonable period of time as we shall determine.
Neither we, the Exchange Agent nor any other person shall be under any duty
to give notification of any defect or irregularity with respect to any tender of
old notes for exchange, nor shall any of them incur any liability for failure to
give such notification. The Exchange Agent intends to use reasonable efforts to
give notification of such defects or irregularities.
If the Letter of Transmittal is signed by a person or persons other than
the registered holder or holders of old notes, such old notes must be endorsed
or accompanied by appropriate powers of attorney, in either case signed exactly
as the name of names of the registered holder or holders that appear on the old
notes. If the Letter of Transmittal or any old notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of a corporation or others acting in a fiduciary or representative
capacity, such persons
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should so indicate when signing, and, unless waived by us, proper evidence
satisfactory to us of their authority to so act must be submitted.
By tendering, each holder will represent to us that, among other things,
the new notes acquired pursuant to this exchange offer are being obtained in the
ordinary course of business of the person receiving such new notes, whether or
not such person is the holder and such person has no arrangement with any person
to participate in the distribution of the new notes. If any holder or any such
other person is an "affiliate," as defined under Rule 405 of the Securities Act,
of ours, is engaged in or intends to engage in or has an arrangement or
understanding with any person to participate in a distribution of such new notes
to be acquired pursuant to this exchange offer, or acquired the old notes as a
result of market making or other trading activities, such holder or any such
other person (i) could not rely on the applicable interpretations of the staff
of the Commission and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction.
Each broker-dealer that receives new notes for its own account in exchange
for old notes, where such old notes were acquired as a result of market making
activities or other trading activities must acknowledge that it will deliver a
prospectus in connection with any resale of such new notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon the terms and subject to the conditions of this exchange offer, we
will accept all old notes properly tendered and will issue the new notes on
November 29, 2004 or otherwise on the earliest practicable date on or following
the Expiration Date. For purposes of this exchange offer, we shall be deemed to
have accepted properly tendered old notes for exchange when, as and if we have
given oral or written notice thereof to the Exchange Agent, with written
confirmation of any oral notice to be given promptly thereafter. In all cases,
issuance of new notes for old notes that are accepted for exchange pursuant to
this exchange offer will be made only after timely receipt by the Exchange Agent
of (i) certificates for such old notes or a timely confirmation of such old
notes into the Exchange Agent's account at DTC, (ii) a properly completed and
duly executed Letter of Transmittal and (iii) all other required documents. If
any tendered old notes are not accepted for any reason set forth in the terms
and conditions of this exchange offer, or if old notes are submitted for a
greater amount than the holder desires to exchange, such unaccepted or
unexchanged old notes will be returned without expense to the tendering holder
thereof (or, in the case of old notes tendered by book-entry transfer into the
Exchange Agent's account at DTC pursuant to the book-entry procedures described
below, such nonexchanged old notes will be credited to an account maintained
with DTC) designated by the tendering holder as promptly as practicable after
the expiration or termination of this exchange offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the old notes at DTC for purposes of this exchange offer within two business
days after the date of this Prospectus, and any financial institution that is a
participant in the DTC systems may make book-entry delivery of old notes by
causing DTC to transfer such old notes into the Exchange Agent's account at DTC
in accordance with such DTC's procedures for transfer. However, although
delivery of old notes may be effected through book-entry transfer at DTC, the
Letter of Transmittal or facsimile thereof, with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received by the Exchange Agent at the address set forth below under
"--Exchange Agent" on or prior to the Expiration Date or the guaranteed delivery
procedures described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the old notes desires to tender such old notes
and the old notes are not immediately available, or time will not permit such
holder's old notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange
Agent has received from such Eligible Institution a properly completed and duly
executed Letter of
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Transmittal (or a facsimile thereof) and Notice of Guaranteed Delivery,
substantially in the form of the corresponding exhibit to the Registration
Statement of which this Prospectus constitutes a part (by telegram, telex,
facsimile transmission, mail or hand delivery), setting forth the name and
address of the holder of old notes and the amount of old notes tendered, stating
that the tender is being made thereby and guaranteeing that within three New
York Stock Exchange ("NYSE") trading days after the date of execution of the
Notice of Guaranteed Delivery, the certificates for all physically tendered old
notes, in proper form for transfer, or a Book-Entry Confirmation, as the case
may be, and any other documents required by the Letter of Transmittal will be
deposited by the Eligible Institution with the Exchange Agent, and (iii) the
certificates for all physically tendered old notes, in proper form for transfer,
or a Book-Entry Confirmation, as the case may be, and all other documents
required by the Letter of Transmittal, are received by the Exchange Agent within
three NYSE trading days after the date of execution of the Notice of Guaranteed
Delivery.
WITHDRAWAL RIGHTS
Tenders of old notes may be not withdrawn at any time; provided, however,
that if the exchange of old notes for new notes as part of the exchange offer
has not occurred on or before January 31, 2005, holders of old notes who have
tendered their old notes in connection with the offer may withdraw their tender
of their old notes at any time thereafter. Subject to the preceding sentence,
for a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at the address set forth below under "Exchange
Agent." Any such notice of withdrawal must specify the name of the person having
tendered the old notes to be withdrawn, identify the old notes to be withdrawn
(including the amount of such old notes), and (where certificates for old notes
have been transmitted) specify the name in which such old notes are registered,
if different from that of the withdrawing holder. If certificates for old notes
have been delivered or otherwise identified to the Exchange Agent, then, prior
to the release of such certificates the withdrawing holder must also submit the
serial numbers of the particular certificates to be withdrawn and a signed
notice of withdrawal with signatures guaranteed by an Eligible Institution
unless such holder is an Eligible Institution. If old notes have been tendered
pursuant to the procedure for book-entry transfer described above, any notice of
withdrawal must specify the name and number of the account at DTC to be credited
with the withdrawn old notes and otherwise comply with the procedures of such
facility.
We reserve the right to contest the validity of any such withdrawal. All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by us, whose determination shall be final and
binding on all parties. Any old notes so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of this exchange offer. Any old
notes which have been tendered for exchange but which are not exchanged for any
reason will be returned to the holder thereof without cost to such holder (or,
in the case of old notes tendered by book-entry transfer into the Exchange
Agent's account at DTC pursuant to the book-entry transfer procedures described
above, such old notes will be credited to an account with DTC specified by the
Holder) as soon as practicable after withdrawal, rejection of tender or
termination of this exchange offer, and all of the rights of the holders with
respect to such old notes existing prior to the date that such old notes were
tendered will again be in effect. Properly withdrawn old notes may be retendered
by following one of the procedures described under "--Exchange Offer Procedures"
above at any time on or prior to the Expiration Date.
EXCHANGE AGENT
HSBC Bank USA, National Association has been appointed as Exchange Agent in
connection with this exchange offer. Questions and requests for assistance,
requests for additional copies of this Prospectus or of the Letter of
Transmittal should be directed to the Exchange Agent. HSBC Bank USA, National
Association's office is located at 425 Fifth Avenue, New York, NY 10018-2706.
HSBC Bank USA, National Branch may also be reached by telephone at 212-525-1316
or by facsimile at 212-525-1300.
FEES AND EXPENSES
We will pay certain fees to the Solicitation Agents (to Eurovest Global
Securities Inc. only in connection with old notes held by non-U.S. Persons
outside the United States) for soliciting acceptances of this exchange offer. We
will pay certain other expenses to be incurred in connection with this exchange
offer, including the fees and expenses of the Trustee, accounting and certain
legal fees. Holders who tender their old notes for exchange will not be
obligated to pay any transfer taxes in connection therewith. If, however, new
notes are to be delivered to, or are
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to be issued in the name of, any person other than the registered holder of the
old notes tendered, or if tendered old notes are registered in the name of any
person other than the person signing the Letter of Transmittal, or if a transfer
tax is imposed for any reason other than the exchange of old notes in connection
with this exchange offer, then the amount of any such transfer taxes (whether
imposed on the registered holder or any other persons) will be payable by the
tendering holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendered holder.
CONSEQUENCES OF FAILURE TO PROPERLY TENDER OLD NOTES IN THE EXCHANGE
Issuance of the new notes in exchange for the old notes pursuant to this
exchange offer will be made only after timely receipt by the Exchange Agent of
such old notes, a properly completed and duly executed Letter of Transmittal and
all other required documents. Therefore, holders of the old notes desiring to
tender such old notes in exchange for new notes should allow sufficient time to
ensure timely delivery. We are under no duty to give notification of defects or
irregularities with respect to tenders of old notes for exchange.
We anticipate that we will not be able to make principal payments on the
old notes at their current maturity. Upon consummation of the exchange offer and
issuance of the new notes, we anticipate that we will continue to be unable to
make principal payments on any old notes that have not been exchanged pursuant
to the exchange offer. Holders of old notes who do not exchange them in the
exchange offer will not receive payments of principal on the current maturity of
the old notes, and we cannot predict when we may be able to make such principal
payments.
As a condition to the offering, which we may waive at any time, holders of
old notes in the aggregate principal amount of at least 95% of the principal
amount of US$48,022,000 held by non-affiliates of ours must exchange their old
notes for new notes pursuant to the offer. In the event this minimum threshold
is met, we intend to exchange the old notes that TVA Communications Ltd. holds
in the amount of US$201,978,000 on terms that are materially less favorable to
TVA Communications Ltd. than those offered to the other holders of old notes
hereby. In the event this minimum threshold is not met, we do not currently
intend to exchange the old notes held by TVA Communications Ltd. on terms that
are materially less favorable to TVA Communications Ltd. than this offer. In
that event, we may elect to treat TVA Communications Ltd. and the other holders
of the old notes in the same manner, which we anticipate will be materially less
favorable than the terms offered in this exchange offer.
- 47 -
<Page>
TAX CONSIDERATIONS
BRAZIL
PROSPECTIVE HOLDERS OF THE NEW NOTES ARE ADVISED TO CONSULT THEIR OWN TAX
ADVISERS AS TO THE CONSEQUENCES OF HOLDING THE NEW NOTES, INCLUDING, WITHOUT
LIMITATION, THE CONSEQUENCES OF THE RECEIPT OF INTEREST AND THE SALE, REDEMPTION
OR REPAYMENT OF THE NEW NOTES.
BRAZILIAN TAX CONSIDERATIONS
The following discussion is a summary of the Brazilian tax considerations
relating to an investment in the new notes by a non-resident of Brazil. The
discussion is based on the tax laws of Brazil as in effect on the date hereof
and is subject to any change in Brazilian law that may come into effect after
such date. The information set forth below is intended to be a general
discussion only and does not address all possible tax consequences relating to
an investment in the new notes.
Interest (including original issue discount), fees, commissions, expenses,
and any other income payable by a Brazilian borrower to an individual, entity,
trust or organization domiciled outside Brazil are generally subject to
withholding income tax. As of January 1, 1996, the rate of withholding tax is
15% or such other lower rate as provided for in any applicable tax treaty
between Brazil and another country. In the event the recipient of the payment is
domiciled in a tax haven jurisdiction, as defined by Brazilian tax regulations,
the rate will be 25%, except for payments related to debt securities registered
with the Brazilian Central Bank, such as the notes, which rate is also subject
to 15% in accordance with Normative Act SRF 252, of 2002.
Notwithstanding the foregoing, the applicable withholding tax rate on
interest, fees, commissions and original issue discount under instruments with a
minimum average maturity greater than 96 months such as the old Notes was
reduced to 0%, pursuant to Law 9481 of August 13, 1997, as amended by Law 9532
of December 10, 1997. However, pursuant to Law 9959 of January 27, 2000, this
reduced rate is no longer in effect for new debt securities issued as of January
1, 2000. In this respect, according to Law 9959 of January 27, 2000, the
withholding income tax applicable to these transactions as of January 1, 2000 is
15%.
However, according to Law 10925 of July 23, 2004 such reduction was
maintained in case of renegotiation of debt securities with a minimum average
maturity greater than 96 months, such as the old Notes. Accordingly, we believe
and understand that the applicable rate of withholding income tax on interest,
fees, commissions and original issue discount under the new notes is also 0%.
Any earnings or capital gains made outside Brazil as a result of a
transaction between two non-residents of Brazil in respect of debt instruments
issued by a non-Brazilian company are not subject to a tax in Brazil. In such
circumstances, gains resulting from discounts obtained by a non-resident in the
purchase of the new notes or capital gains realized on the sale of such
securities are not subject to tax in Brazil. However, according to Law 10833,
dated December 29, 2003, which came into force on January 1, 2004, the
disposition of assets located in Brazil by non-residents, whether to other
non-residents or Brazilian residents, may become subject to taxation in Brazil.
Although the new notes should not fall within the definition of assets located
in Brazil for purposes of Law 10833, considering the general and unclear scope
of Law 10833 and the absence of judicial court rulings with respect thereto, it
is unpredictable whether such understanding ultimately will prevail in the
courts of Brazil. In principle, any profits realized on a sale of the new notes
by the non-residents of Brazil would not be subject to taxation in Brazil.
Generally, there are no stamp, transfer or other similar taxes in Brazil
with respect to the transfer, assignment or sale of the new notes outside
Brazil, nor any inheritance, gift or succession tax applicable to the ownership,
transfer or disposition of the new notes, except for gift and inheritance taxes
imposed in some states of Brazil on gifts and bequests by individuals or
entities not domiciled or residing in Brazil to individuals or entities
domiciled or residing within such Brazilian states.
- 48 -
<Page>
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of certain U.S. federal income tax
consequences to holders of old notes or new notes ("Holders") of (i) exchanging
old notes for new notes and (ii) holding new notes received in the exchange
offer.
This summary is based upon the Internal Revenue Code of 1986, as amended
(the "CODE"), proposed, temporary and final Treasury regulations ("TREASURY
REGULATIONS"), published administrative interpretations of the IRS and judicial
decisions, all of which are subject to change, possibly on a retroactive basis.
This summary does not purport to consider all aspects of U.S. federal income
taxation that may be relevant to a particular Holder. Further, the U.S. federal
income tax treatment of a Holder may vary depending on such Holder's particular
situation. Certain classes of Holders (including foreign persons, insurance
companies, tax-exempt organizations, employee stock ownership plans, financial
institutions, brokers, dealers, subchapter S corporations, persons whose
functional currency is not the U.S. dollar, persons in whose hands the old notes
or the new notes are not "capital assets" (as defined in Section 1221 of the
Code), persons that hold old notes (or will hold new notes) as a hedge or
otherwise have hedged (or will hedge) the risk of holding old notes (or new
notes), persons that hold old notes (or will hold new notes) as part of (or in
connection with) a "straddle," "conversion" or other integrated transaction and
persons that use the mark-to-market method of accounting) may be subject to
special rules not discussed below. The discussion below does not consider the
effect of any non-U.S., state, local or other tax laws or any U.S. tax
considerations (e.g., estate or gift tax) other than the U.S. federal income tax
considerations specifically discussed herein that may be applicable to a
particular Holder. We have not sought any rulings from the Internal Revenue
Service (the "IRS") with respect to the statements made in this discussion, and
there can be no assurance that the IRS will agree with such statements. This
summary does not deal with persons that acquire new notes subsequent to the
exchange offer.
EACH HOLDER IS URGED TO CONSULT SUCH HOLDER'S OWN TAX ADVISOR TO DETERMINE
THE PARTICULAR U.S. FEDERAL, STATE, LOCAL, NON-U.S. AND OTHER TAX CONSEQUENCES
TO SUCH HOLDER OF THE EXCHANGE OFFER AND HOLDING EXCHANGE NOTES.
For purposes of the discussion herein, a "U.S. HOLDER" means a Holder that
is (i) a citizen of the United States or a resident of the United States for
U.S. federal income tax purposes, (ii) a corporation or another entity treated
as a corporation for U.S. federal income tax purposes created or organized in or
under the laws of the United States, any state thereof or the District of
Columbia, (iii) an estate the income of which is subject to U.S. federal income
tax without regard to its source or (iv) a trust if (x) a court within the
United States is able to exercise primary supervision over the administration of
the trust and one or more United States persons have the authority to control
all substantial decisions of the trust or (y) the trust has a valid election in
effect under applicable Treasury Regulations to be treated as a United States
person. THIS DISCUSSION DOES NOT ADDRESS THE TAX CONSEQUENCES APPLICABLE TO
HOLDERS THAT ARE NOT U.S. HOLDERS, INCLUDING FOREIGN PERSONS AND PARTNERSHIPS
(INCLUDING FOR THIS PURPOSE ANY ENTITY TREATED AS A PARTNERSHIP FOR U.S. FEDERAL
INCOME TAX PURPOSES). A HOLDER THAT IS NOT A U.S. HOLDER SHOULD CONSULT ITS OWN
TAX ADVISOR.
OVERVIEW
Whether and to what extent a U.S. Holder that exchanges old notes for new
notes pursuant to the exchange offer will recognize taxable gain or loss will
depend on whether the exchange qualifies as a tax-free recapitalization for U.S.
federal income tax purposes. An exchange of old notes for new notes will qualify
as a recapitalization only if the old notes and the new notes that are part of
such exchange constitute "stock or securities" for purpose of the reorganization
provisions of the Code.
The rules for determining whether a debt instrument constitutes a security
for this purpose are unclear. The term "security" is not defined in the Code or
Treasury Regulations and has not been clearly defined by judicial decisions. The
test as to whether a debt instrument is a security involves an overall
evaluation of the nature of the debt instrument, the extent of the investor's
proprietary interest in the issuer compared with the similarity of the debt
- 49 -
<Page>
instrument to a right to receive a cash payment and certain other
considerations. One of the most significant factors considered in determining
whether a particular debt instrument is a security is its original term. In
general, debt instruments with a term of less than five years are not likely to
(but may in certain circumstances) be considered securities, debt instruments
with a term of ten years or more are highly likely to be considered securities,
and debt instruments with an initial term at issuance of five to ten years are
often considered securities, but their status may be unclear. Although it is
unclear, we intend to take the position that the notes will not constitute
"stock or securities" for purposes of the reorganization provisions of the Code.
Therefor, we intend to treat the exchange of old notes for new notes as a
taxable exchange for U.S. federal income tax purposes. Unless otherwise
specified, the following discussion assumes the correctness of such treatment.
Notwithstanding the foregoing, it is possible that the IRS could assert
that the notes are either our "securities" or, due to our financial condition
and the effective subordination of the notes to the creditors of our subsidiary,
a form of preferred equity in us. A successful recharacterization of the notes
as "stock or securities" and the treatment of the exchange as a tax-free
reorganization could have adverse federal income tax consequences to the
Holders. HOLDERS ARE ADVISED TO CONSULT THEIR TAX ADVISORS REGARDING THE EFFECT
OF ANY SUCH RECHARACTERIZATION.
EXCHANGE OF OLD NOTES FOR NEW NOTES
A U.S. Holder that exchanges old notes for new notes generally will
recognize taxable gain or loss equal to the difference between (i) the amount
realized (as defined below) in the exchange and (ii) the U.S. Holder's adjusted
tax basis (as defined below) in the old notes. This amount realized is allocated
between principal and accrued interest (including OID). We intend, and each
Holder agrees by participating in the exchange offer to allocate all the new
notes received under the exchange to the principal amount (rather than to
accrued interest) of its old notes. The gain or loss on the principal portion is
the difference between the amount realized allocable to principal and the tax
basis of the principal. Such gain or loss generally will be capital gain or loss
if the old notes are held as a capital asset, and will be long-term capital gain
or loss if the U.S. Holder's holding period in the old notes is more than one
year. The deductibility of capital losses is subject to limitations under the
Code. A U.S. Holder that acquired old notes with market discount generally will
be required to treat a portion of any gain as ordinary income to the extent of
any accrued market discount not previously included in income. The portion of
the amount realized allocable to interest will be included in gross income by a
U.S. Holder to the extent it has not previously been taken into account under
the OID rules. A U.S. Holder will be entitled to a deduction for interest,
including OID, previously accrued in excess of the amount realized allocable to
interest.
The amount realized generally will equal the issue price of the new notes,
I.E., the fair market value of the old notes on the date of the exchange. A U.S.
Holder's adjusted tax basis in the U.S. Holder's old notes generally will equal
the price such U.S. Holder paid therefor, increased by the amount of any market
discount and OID previously included in income by such U.S. Holder with respect
to such debt, and reduced (but not below zero) by any amortizable bond premium
previously amortized with respect to the debt.
The U.S. Holder's tax basis in the new notes received in such a taxable
exchange will equal the "issue price" of the new notes it receives, and the U.S.
Holder's holding period for the U.S. Holder's new notes will begin on the date
following the date the exchange.
CONSEQUENCES OF HOLDING NEW NOTES
IN GENERAL
We intend to treat the new notes as indebtedness for U.S. federal income
tax purposes.
ORIGINAL ISSUE DISCOUNT
The new notes may be treated as issued with OID for U.S. federal income tax
purposes. OID is defined as the excess of a debt instrument's stated redemption
price at maturity over its issue price. As noted above, the issue price of a new
note will equal the fair market value of the old note exchanged therefor. The
stated redemption price
- 50 -
<Page>
at maturity of a new note is the sum of all payments due under the new note
other than payments of qualified stated interest. The payments of interest on
the new notes will constitute qualified stated interest and thus will not factor
into the calculation of the stated redemption price at maturity.
In general, a U.S. Holder of a new note will be required to include OID
thereon in gross income as ordinary interest income under a constant yield
method over the term of the new note in advance of cash payments attributable to
such income, regardless of whether such U.S. Holder is a cash or accrual method
taxpayer and without regard to the timing or amount of actual payments.
SALE, RETIREMENT OR OTHER TAXABLE DISPOSITION
Upon the sale, retirement or other taxable disposition of a new note, a
U.S. Holder generally would recognize gain or loss equal to the difference
between the amount realized upon the sale, retirement or other taxable
disposition (other than amounts relating to interest that has accrued but not
yet taken into account, which will be taxable as such) and the U.S. Holder's
adjusted tax basis in the new note. Such gain or loss generally would be capital
gain or loss (except that gain would be taxable as ordinary income to the extent
attributable to accrued market discount that has not previously been included in
gross income by the U.S. Holder), and would be long-term capital gain or loss if
the holding period for the new note exceeded one year at the time of the sale,
retirement or other taxable disposition. In general, a U.S. Holder's adjusted
tax basis in a new note would equal the initial tax basis of the new note at the
time of its receipt in the exchange determined in the manner described above,
increased by the amount of OID. The ability of a U.S. Holder to deduct a capital
loss could be subject to limitations under the Code.
BACKUP WITHHOLDING AND INFORMATION REPORTING
The new notes may be subject to information reporting requirements and U.S.
federal backup withholding tax at the then applicable rate if the Holder fails
to supply an accurate taxpayer identification number or otherwise fails to
comply with applicable U.S. information reporting or certification requirements.
A U.S. Holder that provides a properly executed IRS Form W-9 will be treated as
complying with applicable backup withholding and information reporting rules.
Any amounts withheld will be allowed as a refund with respect to, or credit
against, the Holder's U.S. federal income tax liability.
THE PRECEDING DISCUSSION OF CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS IS
FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. EACH HOLDER SHOULD CONSULT
SUCH HOLDER'S TAX ADVISOR REGARDING THE PARTICULAR U.S. FEDERAL, STATE, LOCAL,
NON-U.S. AND OTHER TAX CONSEQUENCES OF PURCHASING, HOLDING, EXCHANGING AND
DISPOSING OF OUR OLD NOTES AND NEW NOTES AND PARTICIPATING IN THE EXCHANGE,
INCLUDING THE CONSEQUENCES OF ANY PROPOSED CHANGE IN APPLICABLE LAWS.
- 51 -
<Page>
EXPERTS
The audited consolidated financial statements of Tevecap S.A. and
subsidiaries incorporated in this prospectus by reference from our Annual Report
on Form 20-F/A for the year ended December 31, 2003, have been audited by
Deloitte Touche Tohmatsu Auditores Independentes, an independent registered
public accounting firm, as stated in their report, which is incorporated herein
by reference, and have been so incorporated in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
The audited financial statements of CCS-Camboriu Cable System de
TeleComunicacoes Ltda. Incorporated in his prospectus by reference from our
Annual Report on Form 20-F/A for the year ended December 31, 2003, have been
audited by Deloitte Touche Tohmatsu Auditores Independentes, an independent
registered public accounting firm, as stated in their report, which is
incorporated herein by reference, and have been so incorporated in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
LEGAL MATTERS
The validity of the new notes under New York law will be passed upon by
Clifford Chance US LLP, New York, New York, United States.
The validity of the new notes and certain matters of Brazilian law relating
to the new notes and the indenture relating thereto will also be passed upon for
us by Machado, Meyer, Sendacze e Opice, Sao Paulo, Brazil.
- 52 -
<Page>
ENFORCEABILITY OF CIVIL LIABILITIES
We are a SOCIEDADE ANONIMA, organized under the laws of the Federative
Republic of Brazil. All of our executive officers and directors presently reside
in Brazil. Under the terms and conditions of the new notes, we will agree (and
under the terms of the old notes, we agreed) that the courts of the State of New
York and the federal courts of the United States, in each case sitting in The
City of New York, New York, shall have jurisdiction to hear and determine any
suit, action or proceeding, and to settle any disputes, which may arise out of
or in connection with the new notes (or the old notes, as the case may be) and,
for such purposes, irrevocably submit to the jurisdiction of such courts.
However, most of our assets are located in Brazil. As a result, it will be
necessary for you to comply with Brazilian law in order to obtain an enforceable
judgment against these foreign resident persons or our assets. It may not be
possible for investors to effect service of process within the United States
upon our executive officers and directors, or to realize in the United States
upon judgments against these persons obtained in US courts based upon civil
liabilities of these persons, including any judgments based upon US federal
securities laws, to the extent these judgments exceed these persons' US assets.
Specifically, our Brazilian legal counsel, Machado, Meyer, Sendacze e
Opice, has advised us that Brazilian courts will enforce judgments of US courts
for civil liabilities predicated on the US securities laws, without
reconsideration of the merits, only if the judgment satisfies certain
requirements and receives confirmation from the Federal Supreme Court of Brazil.
The foreign judgment will be confirmed if:
- it fulfills all formalities required for its enforceability under the
laws of the country that granted the foreign judgment;
- it was issued by a competent court in the jurisdiction where the
judgment was awarded after service of process was properly made in
accordance with applicable law;
- it is not subject to appeal;
- it is for the payment of a sum certain of money;
- it is authenticated by a Brazilian consular office in the country
where it was issued, and is accompanied by a sworn translation into
Portuguese; and
- it is not contrary to Brazilian national sovereignty, public policy or
good morals, and does not contain any provision which for any reason
would not be upheld by the courts of Brazil.
Notwithstanding the foregoing, we cannot assure you that such confirmation
would be obtained, that the process described above would be conducted in a
timely manner or that a Brazilian court would enforce a monetary judgment for
violation of the US securities laws with respect to the new notes or the old
notes, as the case may be.
Our Brazilian legal counsel, Machado, Meyer, Sendacze e Opice, has also
advised us that:
- as a plaintiff, you may bring an original action predicated on the US
securities laws in Brazilian courts and that, subject to applicable
laws, Brazilian courts may enforce liabilities in these types of
actions against us, our respective directors, and certain of our
respective officers and advisors under certain circumstances;
- if you reside outside Brazil and own no real property in Brazil, you
must provide a bond sufficient to guarantee court costs and legal
fees, including the defendant's attorneys' fees, as determined by the
Brazilian court in connection with litigation in Brazil, except in the
case of the enforcement of a foreign judgment which has been confirmed
by the Brazilian Federal Supreme Court; and
- Brazilian law limits investors' abilities as judgment creditors to
satisfy a judgment against their debtors by attaching certain of their
respective assets.
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<Page>
TEVECAP S.A. AND SUBSIDIARIES
Consolidated Financial Statements
for the Six-month Periods Ended June 30, 2004 and 2003
F-1
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<Table>
PAGE
Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003 F-3
Consolidated Statements of Operations for the six-month periods ended
June 30, 2004 and 2003 F-5
Consolidated Statements of Changes in Shareholders' Deficit and Redeemable Common Stock
for the six-month periods ended June 30, 2004 and 2003 F-7
Consolidated Statements of Cash Flows for the six-month periods ended
June 30, 2004 and 2003 F-8
Notes to The Consolidated Financial Statements F-9
</Table>
F-2
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND DECEMBER 31, 2003
IN THOUSANDS OF U.S. DOLLARS
<Table>
<Caption>
JUNE 30, DECEMBER 31,
---------------- ----------------
2004 2003
---------------- ----------------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents $ 797 $ 292
Accounts receivable, net (Note 3) 2,713 4,426
Inventories, net 8,600 8,470
Prepaid and other assets 175 677
Recoverable taxes 505 632
Other accounts receivable 843 946
---------------- ----------------
Total current assets 13,633 15,443
---------------- ----------------
Property, plant and equipment, net (Note 7) 62,602 76,317
Investments - equity basis (Note 6) - 549
Intangible assets, net 4,587 5,725
Loans receivable from related companies (Note 4) 6,020 3,271
Deferred income taxes 110 -
Judicial deposits 6,685 6,626
---------------- ----------------
Total assets $ 93,637 $ 107,931
================ ================
</Table>
The accompanying notes are an integral part of the
consolidated financial statements
F-3
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
AS OF JUNE 30, 2004 AND DECEMBER 31, 2003
IN THOUSANDS OF U.S. DOLLARS
<Table>
<Caption>
JUNE 30, DECEMBER 31,
--------------- ---------------
2004 2003
--------------- ---------------
(UNAUDITED) (UNAUDITED)
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities
Loans (Note 8) $ 56,175 $ 56,081
Film suppliers 5,355 6,619
Other suppliers 2,647 4,333
Tax recovery program - PAES/REFIS (Note 9) 1,235 1,497
Taxes payable other than income taxes 6,028 7,867
Income tax payable 125 278
Accrued payroll and related liabilities 1,393 1,437
Advances from customers 3,097 2,839
Deferred income tax (Note 5.2) 11,241 19,292
Other accounts payable 2,069 2,398
--------------- ---------------
Total current liabilities 89,365 102,641
--------------- ---------------
Long-term liabilities
Loans payable to related companies (Note 4) 41,140 39,712
Tax recovery program - PAES/REFIS (Note 9) 12,132 12,836
Accrual for contingencies (Note 14) 12,771 11,272
Liability to fund equity investees (Note 6) - 5,349
Other accounts payable 355 211
--------------- ---------------
Total long-term liabilities 66,398 69,380
--------------- ---------------
Commitments (Footnote 11)
Minority interest 1,182 1,140
Redeemable common stock, no par value, 46,294,952 shares
authorized, issued and outstanding as of June 30, 2004 and
December 31, 2003 (Note 12) 24,019 24,201
Shareholders' deficiency
Common stock, no par value, 438,925,488 shares authorized,
issued and outstanding as June 30, 2004 and December 31, 2003 446,026 446,026
Accumulated other comprehensive income 6,744 2,716
Accumulated deficit (540,097) (538,173)
--------------- ---------------
Total shareholders' deficiency (87,327) (89,431)
--------------- ---------------
Total liabilities and shareholders' deficiency $ 93,637 $ 107,931
=============== ===============
</Table>
The accompanying notes are an integral part of the
consolidated financial statements
F-4
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2004 AND 2003
IN THOUSANDS OF U.S. DOLLARS
<Table>
<Caption>
SIX-MONTH PERIODS ENDED JUNE 30,
----------------------------------
2004 2003
--------------- ---------------
(UNAUDITED) (UNAUDITED)
Gross revenues
Monthly subscriptions $ 44,507 $ 38,857
Installation 581 675
Advertising 1,622 923
Additional services 2,425 1,897
Taxes on revenues (6,868) (6,233)
--------------- ---------------
42,267 36,119
--------------- ---------------
Direct operating expenses (excluding depreciation and
amortization stated separately below)
Payroll and benefits 1,276 1,556
Programming 12,710 11,924
Technical assistance 609 764
TVA magazine 783 741
Pole rental 684 379
Other costs 3,715 4,210
--------------- ---------------
19,777 19,574
--------------- ---------------
Selling, general and administrative expenses 10,234 10,937
Depreciation e amortization 12,072 11,531
Tax recovery program 657 -
Other operating (income) expense, net (Note 10) (6,948) 1,342
--------------- ---------------
Income (loss) from operations 6,475 (7,265)
--------------- ---------------
Interest income (368) (119)
Interest expense 10,652 8,653
Foreign currency transaction (income) loss, net 4,327 (12,833)
--------------- ---------------
Loss before income taxes, equity in (income) losses
of affiliates, and minority interest (8,136) (2,966)
Income tax expense - current (Note 5.1) 135 98
Income tax (benefit) expense - deferred (Note 5.1) (6,760) 19,813
--------------- ---------------
Loss before equity in (income) losses of affiliates
and minority interest (1,511) (22,877)
Equity in (income) losses of affiliates, (Note 6) 468 (439)
--------------- ---------------
Loss before minority interest (1,979) (22,438)
Minority interest 127 111
--------------- ---------------
Net loss (2,106) (22,549)
=============== ===============
</Table>
The accompanying notes are an integral part of the
consolidated financial statements
F-5
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2004 AND 2003
IN THOUSANDS OF U.S. DOLLARS
<Table>
<Caption>
SIX-MONTH PERIODS ENDED JUNE 30,
----------------------------------
2004 2003
--------------- ---------------
(UNAUDITED) (UNAUDITED)
Other comprehensive income (loss) -
Foreign currency translation adjustment $ (4,028) $ 5,913
--------------- ---------------
Comprehensive income (loss) $ 1,922 $ (28,462)
=============== ===============
</Table>
The accompanying notes are an integral part of the
consolidated financial statements
F-6
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT AND REDEEMABLE
COMMON STOCK
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2004
IN THOUSANDS OF U.S. DOLLARS
(UNAUDITED)
<Table>
<Caption>
ACCUMULATED OTHER TOTAL REDEEMABLE
ACCUMULATED COMPREHENSIVE SHAREHOLDERS' COMMON
COMMON STOCK DEFICIT INCOME (LOSS) DEFICIT STOCK
------------ ------------ ----------------- ------------- ------------
Balance as of December 31, 2003 446,026 (538,173) 2,716 (89,431) 24,201
Foreign currency translation adjustments,
net of tax of $0 (unaudited) 4,028 4,028
Net loss (unaudited) (2,106) (2,106)
Adjustment of redeemable common
Stock to redemption price 182 182 (182)
------------ ------------ ----------------- ------------- ------------
Balance as of June 30, 2004 (unaudited) $ 446,026 $ (540,097) $ 6,744 $ (87,327) 24,019
</Table>
The accompanying notes are an integral part of the
consolidated financial statements
F-7
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2004, AND 2003
IN THOUSANDS OF U.S. DOLLARS
<Table>
<Caption>
SIX-MONTH PERIODS ENDED JUNE 30,
----------------------------------------
2004 2003
------------------- -----------------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES: $ 10,037 (1,740)
------------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (3,806) (3,488)
Purchases of intangible assets (475) (284)
Loans to related companies - (230)
Repayments of loans to related companies - 125
------------------- -----------------
Net cash used in investing activities (4,281) (3,877)
------------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank loans 17,259 10,638
Repayment of loans from banks (20,646) (19,816)
Proceeds from loans from shareholders 23,158 38,455
Repayments of loans from shareholders (23,013) (25,352)
------------------- -----------------
Net cash provided by (used in) financing activities (3,242) 3,925
------------------- -----------------
Effect of exchange rate changes on cash and cash equivalents (2,009) 1,687
------------------- -----------------
Net increase (decrease) in cash and cash equivalents 505 (5)
Cash and cash equivalents at beginning of the period 292 245
------------------- -----------------
Cash and cash equivalents at end of the period $ 797 $ 240
=================== =================
SUPPLEMENTAL CASH DISCLOSURE:
Cash paid for interest $ 3,903 4,221
Cash paid for income tax $ 268 122
SUPPLEMENTAL NON-CASH FINANCING AND INVESTING ACTIVITIES:
Accrued interest on related company loans refinanced
as principal balance $ 7,469 6,497
Recognition of loans receivable to shareholder in
connection with the sale of investments (Note 6) $ 5,518 -
</Table>
The accompanying notes are an integral part of the
consolidated financial statements
F-8
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS EXPRESSED IN THOUSANDS OF U.S. DOLLARS,
UNLESS OTHERWISE INDICATED)
1. THE COMPANY AND ITS PRINCIPAL OPERATIONS
1.1. GENERAL
The consolidated financial statements have been prepared to reflect the
consolidated results of Tevecap S.A. ("Tevecap") and its subsidiaries
(the "Company").
Tevecap is a holding company, the subsidiaries of which render services
related to wireless cable, cable and high-speed internet, including
marketing and advertising, production, distribution and licensing of
domestic and foreign television programs. The Company has wireless cable
channel rights primarily in major urban markets in Brazil.
As of June 30, 2004, Abril Comunicacoes S.A. ("Abrilcom"), a printing
and distribution company, was the majority shareholder of the Company.
In the Company's opinion, all adjustments necessary for a fair
presentation of the unaudited results of operations for the six-month
periods ended June, 30 2004 and 2003, are included. All such adjustments
are accruals of a normal and recurring nature. The results of operations
for the period ended June 30, 2004 are not necessarily indicative of the
results of operations to be expected for the full year. The accompanying
consolidated financial statements are unaudited and should be read in
conjunction with the consolidated financial statements for the year
ended December 31, 2003 included in the Company's 2003 annual report on
Form 20-F/A.
1.2 SIGNIFICANT RISKS AND UNCERTAINTIES
The Company's consolidated financial statements for the period ended
June 30, 2004 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 a net loss of
$2,106 during the period ended June 30, 2004 and had negative working
capital of $75,732 and a shareholders' deficiency of $87,327 at June 30,
2004. The continuation of the Company as a going concern is dependent
upon its ability to generate sufficient cash from operating and
financing activities. In this regard, managements' plans include: (i)
increasing the Company's subscriber base and implementing technological
upgrades to its pay television networks; (ii) streamlining the Company's
principal operating procedures to increase productivity and
profitability; (iii) the continuation of a cost reduction program which
was initiated in 2002; (iii) adjusting the Company's capitalization
(including indebtedness) to provide for long term growth and stability
and (iv) sales of non-
F-9
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
strategic assets and the discontinuation of noncompetitive businesses.
The consolidated financial statements do not include any adjustments
related to the recoverability and classification of recorded amounts or
the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant policies followed in the preparation of the consolidated
financial statements are described in the annual consolidated financial
statements.
2.1. BASIS OF PRESENTATION
The consolidated financial statements are presented in United States
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 in accordance with U.S. GAAP
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.
F-10
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
3. ACCOUNTS RECEIVABLE, NET
As of June 30, 2004 and December 31, 2003, accounts receivable were
comprised of:
<Table>
<Caption>
JUNE 30, 2004 DECEMBER 31, 2003
--------------------- ---------------------
(UNAUDITED) (UNAUDITED)
Subscriptions and installation fees $ 4,861 $ 4,785
Advertising 372 380
Programming 42 30
Barter transactions of advertising 749 2,224
Other 173 255
Provision for doubtful accounts (3,484) (3,248)
------------------- -------------------
$ 2,713 $ 4,426
=================== ===================
</Table>
No single customer accounted for more than 10% of total accounts
receivable as of June 30, 2004 and December 31, 2003.
F-11
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
4. RELATED PARTY BALANCES AND TRANSACTIONS
The following tables summarize the balances as of June 30, 2004 and
December 31, 2003 and transactions for the six-month periods ended June
30, 2004 and 2003 between the Company and its related parties:
<Table>
<Caption>
JUNE 30, DECEMBER 31,
--------------- ---------------
2004 2003
--------------- ---------------
(UNAUDITED) (UNAUDITED)
Editora Abril S.A
Loans payable $ 33,307 $ 32,128
Abril Comunicacoes S.A
Loans receivable 5,518 -
Loans payable 966 1,039
Canbras TVA Cabo Ltda. (equity affiliate)
Loans receivable 20 21
Parana Participacoes Ltda
Loans receivable - 1,132
Zerelda Participacoes S/C Ltda. (equity affiliate)
Loans receivable - 820
TV Jacaranda Ltda. (equity affiliate)
Loans receivable - 809
Abril Investments Corporation
Loans receivable 365 365
Loans payable 6,867 6,545
Others
Loans receivable 117 124
--------------- ---------------
Loans receivable - noncurrent assets $ 6,020 $ 3,271
Loans payable - long-term liabilities $ 41,140 $ 39,712
</Table>
F-12
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
4. RELATED PARTY TRANSACTIONS AND BALANCES (CONTINUED)
<Table>
<Caption>
JUNE 30, 2004 JUNE 30, 2003
-------------------------------------
(UNAUDITED) (UNAUDITED)
TRANSACTIONS
Editora Abril S.A
Net interest expense $ 3,301 $ 1,549
Printing costs 830 561
Parana Participacoes S/C Ltda
Interest income (47) (628)
Abril Investments Corporation
Interest expense (income) 808 (921)
</Table>
THE TERMS OF THE ABOVE RELATED PARTY TRANSACTIONS AND BALANCES ARE
CONSISTENT WITH THOSE DESCRIBED IN THE ANNUAL CONSOLIDATED FINANCIAL
STATEMENTS.
PLEDGE OF THE COMPANY'S SHARES
In order to fulfill certain obligations of Editora Abril S.A. in
connection with the non-convertible debentures issued by Editora Abril
S.A. on October 19, 2001, Abril Comunicacoes S.A. granted to the
debenture holders of Editora Abril S.A., a pledge in 62.2% the Company's
outstanding common shares.
CAPITALIZATION OF THE LOANS PAYABLE TO EDITORA ABRIL S.A.
In the first half of 2004, Editora Abril S.A.'s Board of Directors
approved the capitalization of the Company's loans payable to Editora
Abril S.A.
F-13
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
5. INCOME TAXES
5.1. The amounts charged to the provision for income tax in results for
the period ended June 30, 2004 and 2003, are comprised as follows:
<Table>
<Caption>
JUNE 30, 2004 JUNE 30, 2003
---------------- -----------------
(UNAUDITED) (UNAUDITED)
Current income tax provision (135) (98)
Deferred income taxes 6,760 (19,813)
-------------- -----------------
6,625 (19,911)
============== ================
</Table>
5.2. The tax effects of temporary differences that give rise to deferred
tax assets as of June 30, 2004 and December 31, 2003 are as follows:
<Table>
<Caption>
JUNE 30, 2004 DECEMBER 31, 2003
------------------ ---------------------
(UNAUDITED) (UNAUDITED)
Deferred tax assets:
Net operating loss carryforwards $ 84,970 $ 77,105
Provision for obsolescence 1,903 1,496
Provision for claims 4,943 5,850
Other 6,795 6,888
----------------- --------------------
Total gross deferred tax asset 98,611 91,339
----------------- --------------------
Less valuation allowance (98,501) (91,339)
----------------- --------------------
Deferred tax asset $ 110 $ -
----------------- --------------------
Deferred tax liability:
Foreign currency exchange gain deferred for tax purposes (11,241) (19,292)
----------------- --------------------
Deferred tax liability $ (11,241) $ (19,292)
----------------- --------------------
</Table>
5.3. Management has established a full valuation allowance against the
deferred tax assets as it is more likely than not that the
deferred tax assets will not be realized.
As of June 30, 2004, the Company and subsidiaries have accumulated
tax losses of $249,912 that do not expire.
F-14
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
The consolidated income taxes are different from the amount computed using the
Brazilian statutory income tax rate for the reasons set forth in the following
table:
<Table>
<Caption>
JUNE 30,
----------------------------------
2004 2003
---------------- ---------------
(UNAUDITED) (UNAUDITED)
Income (loss) before income taxes $ (8,136) $ (2,966)
Statutory income tax rate 34% 34%
-------------- --------------
Computed income tax benefit (2,766) (1,008)
Amortization of deferred charges (749) (769)
Translation (gain) loss on tax losses 5,520 (13,119)
(Earnings) losses in affiliates abroad (12,342) 17,808
Capital gain sale of investments (2,907) -
(Deductible) taxable devaluation gain (loss) for Brazilian statutory purposes 637 2,162
Other (1,180) (451)
Increase in valuation allowance 7,162 15,288
-------------- --------------
Total income tax expense per consolidated statements of operations $ (6,625) $ 19,911
============== ==============
</Table>
Income tax expense represents amounts owed by subsidiaries calculated on a
stand-alone basis, as Brazilian income tax law does not allow consolidated tax
returns.
F-15
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
6. INVESTMENTS
Investments are summarized as follows:
<Table>
<Caption>
EQUITY IN EARNINGS
(LOSSES) FOR THE SIX
INVESTMENTS MONTHS ENDED
PERCENTAGE OF --------------------------- --------------------
CONTROL JUNE 30, DECEMBER 31, JUNE 30, JUNE 30,
------------- ----------- ------------ -------- --------
2004 2003 2004 2003
----------- ------------ -------- --------
(UNAUDITED)
EQUITY METHOD INVESTMENTS:
- TV Manaca Ltda. 64.00% - 549 - -
----------- ------------ -------- --------
TOTAL - 549 - -
=========== ============ ======== ========
</Table>
<Table>
<Caption>
EQUITY IN EARNINGS
(LOSSES) FOR THE SIX
MONTHS ENDED
----------------------------
JUNE 30, DECEMBER 31, JUNE 30, JUNE 30,
PERCENTAGE OF ----------- -------------- ------------- ------------
CONTROL 2004 2003 2004 2003
------------- ----------- -------------- ------------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
LIABILITY TO FUND EQUITY INVESTEES:
- Parana Participacoes Ltda. 65.44% - 712 (149) -
- Zerelda Participacoes S/C Ltda. 36.00% - 1,015 (266) (2,168)
- Canbras TVA Cabo Ltda. 36.00% - 3,325 (43) 2,557
- TV Jacaranda Ltda. 34.00% - 297 (10) 50
---------- ------------- ----------- -----------
TOTAL - 5,349 (468) 439
========== ============= =========== ===========
TOTAL EQUITY IN EARNINGS (LOSSES) (468) 439
=========== ===========
</Table>
As of December 31, 2003, TVA held a minority interest in each of Canbras
TVA Cabo Ltda., TV Cabo Santa Branca Comercio Ltda. and Canbras Parana
Ltda. (collectively, "Canbras TVA"), which together provide cable
television services to an additional 19 cities with a total population
of 2.9 million. In October 2003, the Company entered into an agreement
to sell its interests in Canbras TVA to Horizon Cablevision do Brasil
S.A. for U.S.$5,518. At that time, the consummation of the sale was
pending ANATEL approval and consequently, the sale was not recorded by
the Company. ANATEL approval was received on June 16, 2004, at which
time the sale was recognized. The proceeds from the sale were paid
directly to Abril Comunicacoes S.A. in 2003, the Company's principal
shareholder for which the Company recognized a receivable from its
shareholder. In connection with the sale, the Company recognized a gain
of approximately U.S.$8,673 during the six-month period ended June 30,
2004 (Note 10).
F-16
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
7. PROPERTY, PLANT AND EQUIPMENT, NET
As of June 30, 2004 and December 31, 2003, property, plant and equipment
were comprised of:
<Table>
<Caption>
ANNUAL DEPRECIATION RATE JUNE 30, DECEMBER 31,
---------------------------- ------------------ ------------------
% 2004 2003
---------------------------- ------------------ ------------------
(UNAUDITED) (UNAUDITED)
Reception equipment 20 $ 91,641 $ 95,264
Cable plant 10 47,876 51,418
Machinery and equipment 10 37,964 40,614
Decoders 10 51,469 55,165
Leasehold improvements 25 1,260 1,355
Furniture and fixtures 10 1,098 1,178
Premises 10 986 1,061
Vehicles 20 1,068 1,139
Tools 10 539 577
Building 4 2,244 2,413
Other 1,235 1,477
Accumulated depreciation (174,778) (175,344)
---------------- ---------------
$ 62,602 $ 76,317
================ ===============
</Table>
8. LOANS
As of June 30, 2004 and December 31, 2003, loans were comprised of:
<Table>
<Caption>
JUNE 30, 2004 DECEMBER 31, 2003
------------------- ----------------------
SHORT-TERM SHORT-TERM
------------------- ----------------------
(UNAUDITED) (UNAUDITED)
Senior Notes due 2004 (a) $ 48,022 $ 48,022
Bank loans 7,580 7,486
Accrued interest 573 573
------------------ ---------------------
$ 56,175 $ 56,081
================== =====================
</Table>
a. On November 26, 1996, Tevecap raised funds in a foreign market
through a private placement of Senior Notes amounting to US$250,000.
These Senior Notes mature on November 26, 2004 and are guaranteed by
certain of Tevecap's subsidiaries (see Note 16). Interest thereon is
at 12.625% per annum and is payable on May 25 and November 25 of each
year commencing on May 25, 1997.
On July 28, 1999, the subsidiary TVA Communications Ltd. repurchased
in the foreign market $201,978 aggregate principal amount of
Tevecap's Senior Notes. At the time the
F-17
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
Senior Notes were repurchased, Tevecap obtained consent from the
remaining note holders to eliminate the significant restrictive
covenants in the Senior Notes agreements.
b. Bank loans are comprised of the following:
<Table>
<Caption>
JUNE 30, 2004 DECEMBER 31, 2003
--------------------------- ---------------------------
SHORT -TERM LONG TERM SHORT-TERM LONG-TERM
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Banco Bradesco - revolving credit facility,
interest of 1,68% per month $ - $ - 2,303 -
Banco Daycoval -revolving credit facility,
interest of 1,20% plus CDI rate per month
(2.63% plus CDI rate per month as of
December 31, 2003) 553 - 622 -
Citibank - fixed in U.S. dollars, due
August 28, 2004, interest of 13% per
annum per month as of June 30, 2004 and
December 31, 2003 42 - 369 -
Banco Safra - annual interest 2,05% per
month (2,65% as of December 31, 2003) 2,533 - 3,104 -
HSBC - revolving credit facility, interest
of 0,64% plus CDI rate per month 138 - - -
Banco Industrial e Comercial - revolving credit
facility, interest of 1% plus CDI rate per month 3,309 - - -
Banco General Motors fixed in Reais, interest
of 1,77% per month 23 - - -
Credibel -revolving credit facility, interest
of 1% plus CDI rate per month (2.32% plus
CDI per month as of December 31, 2003) 982 - 1,088 -
------------ ------------ ------------ ------------
Total $ 7,580 - $ 7,486 -
============ ============ ============ ============
</Table>
9. TAX RECOVERY PROGRAM (REFIS) AND SPECIAL INSTALLMENT PROGRAM (PAES)
On April 5, 2000, Tevecap S.A. and its subsidiaries opted for the
Government's Tax Recovery Program (REFIS), implemented by Decree No.
3,342 of January 25, 2000, later converted into Law No. 9,964 of April
10, 2000. In addition, the indirect subsidiary TVA Sistema de Televisao
S.A. used its credits for tax loss carryforwards amounting to $5,263 for
amortization of interest and fines.
In guarantee of the payment of the debts included in the program, the
subsidiary pledged property items as collateral in the amount of $5,267.
F-18
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
On July 31, 2003, certain subsidiaries of the Company, including TVA
Sistema de Televisao S.A., through a protocol filed with the Federal
Revenue Service, opted for the Federal Tax Financing Program (PAES),
established by Law No. 10,684 of May 30, 2003.
The main reasons for this option were the extension of maturity dates,
refinancing through PAES (Special Installment Program), inclusion of new
taxes, and the use of TJLP (long-term interest rate) for monetary
restatement.
Management believes that this payment will be made in approximately 135
monthly installments, adjusted by TJLP.
As of June 30, 2004 and December 31, 2003, this accounts payable is
segregated between short and long-term as follows:
<Table>
<Caption>
JUNE 30, 2004 DECEMBER 31, 2003
------------------ ---------------------
(UNAUDITED) (UNAUDITED)
Short-term 1,235 1,497
Long-term 12,132 12,836
------------------ ---------------------
TOTAL 13,367 14,333
================== =====================
</Table>
10. OTHER OPERATING (INCOME) EXPENSE, NET
<Table>
<Caption>
JUNE 30,
-----------------------------
2004 2003
------------ -------------
(UNAUDITED) (UNAUDITED)
Write-off of assets related to cancellation of
subscriptions $ 1,310 $ 1,314
Gain (loss) on disposal of property and equipment 232 (169)
Gain on sale of investments (i) (8,673) -
Other 183 197
------------ -------------
$ (6,948) $ 1,342
============ =============
</Table>
(i) See Note 6 for a description of this transaction.
F-19
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
11. COMMITMENTS
The Company has rented its office space through the year 2008. As of
June 30, 2004, future minimum rental payments applicable to operating
leases in respect of this space aggregate approximately $81,600, as
follows:
<Table>
2004 14,707
2005 28,959
2006 21,298
2007 16,225
2008 411
---------------
Total $ 81,600
===============
</Table>
12. REDEEMABLE COMMON STOCK
The Company has outstanding redeemable common stock during as follows:
As of June 30, 2004, 9.5% of the common stock of Tevecap was subject to
an Event Put, i.e., 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, unless the shares of capital stock held by such
stockholders are publicly registered, listed or traded. In addition, as
of June 30, 2004, 5.8% of the common stock of Tevecap (27,930 thousand
stocks) are also subject to a Time Put whereby, pursuant to the
Stockholders' Agreement, shareholder Falcon International Communications
("Falcon") may demand that Tevecap buy all or a portion of Falcon's
shares of capital stock held in Tevecap 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 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;
F-20
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
(v) the Service Agreement as amended, among Tevecap, 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.
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, Tevecap has public debt in
the United States of America, and which therefore is required to
register its securities with the United States Securities and Exchange
Commission, 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 stocks subject to the Time Put are redeemable at fair value
as determined by appraisal. In the event Tevecap does not have the funds
to satisfy its payment obligations under the Time Put, then, subject to
a number of conditions, Tevecap may deliver to Falcon promissory notes
payable three years from the issue date thereof. In the event Tevecap is
unable to satisfy its payment obligations under these promissory notes,
Falcon may be entitled, subject to a number of conditions, to sell its
shares of Tevecap to a third party. As of the date of these financial
statements, Falcon has not exercised the Falcon Time Put.
Harpia Holdings Limited and Curupira Holdings Limited, which together
own 3.7% of the Company's common stocks subject to the Event Put, also
have the right to put their shares in Tevecap directly to Abril S.A. at
any time
On December 19, 2003, Abril Comunicacoes S.A. acquired the participation
held by Hearst ABC Video Services of 8,1% increasing their total
ownership interest in the Company to 90.45%. As a result of the
acquisition, the redemption features related to these common shares were
removed. Therefore, the amount related to the redeemable common stock
that was held by Hearst was reclassified from liabilities to
shareholders equity in the Company's financial statements.
F-21
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
13. CAPITAL STOCK
The capital stock of the Company as of June 30, 2004, held entirely by
Brazilian stockholders, is represented by 485.220.440 common stocks.
The Company's bylaws provide that stockholders are entitled to a minimum
dividend of 25% of annual net income in accordance with Brazilian
Corporate Law, after deduction of the allocation to the legal reserve.
Additionally, Law No. 9,249/95 introduced the option of paying interest
on capital, calculated based on the TJLP in effect for the period, which
may also be considered as part of the minimum mandatory dividend.
14. ACCRUAL FOR CONTINGENCIES
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"), 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. ECAD is seeking a judgment award of 2.55% of all past and
present revenues generated by the operators. The suits are currently
being submitted to the Superior Tribunal de Justica in order to
determine whether ECAD is entitled to benefit from the copyrights
relating to musical works broadcast on pay television. Suits were filed
against TVA in the 1 Vara Civel Forum Central de Curitiba (against TVA
Sul) and the 14 Vara Civel Forum Central de Sao Paulo (against TVA
Brasil). The suit against TVA Sul has been initially ruled in TVA's
favor, while the suit against TVA Brasil is currently awaiting judgment.
Based on the opinion of its attorneys, management of TVA believes that
TVA is likely to prevail in these suits. In the event the Company does
not prevail in connection with these proceedings, however, the
consolidated financial position of the Company may be materially
adversely affected.
The Company is also involved in litigation against Centrais Electricas
de Santa Catarina-CELESC, Companhia Paranaense de Energia
Electrica-COPEL and Eletropaulo Metropolitana de Sao Paulo relating to
its contracts with these entities. During the first half of 2004, the
Company entered into settlement negotiations with Eletropaulo
Metropolitana de Sao Paulo, whose claims against the Company amount to
R$128,135.94 of the total of
F-22
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
R$412,106.86 claimed by the three entities. Based on the opinion of
external legal counsel, the Company's management believes that the
likelihood of an unfavorable outcome relating to these lawsuits is
possible.
In the opinion of the Company's management and external legal counsel, a
provision was recorded for all lawsuits for which the likelihood of an
adverse outcome is probable. The Company has not recorded provisions for
lawsuits for which the likelihood of an adverse outcome is possible or
remote. The accrued amounts being contested in court are as follows:
<Table>
<Caption>
JUNE 30, 2004 DECEMBER 31, 2003
---------------------- ---------------------
LONG-TERM LONG-TERM
---------------------- ---------------------
(UNAUDITED) (UNAUDITED)
Civil and labor
lawsuits 2,487 2,541
COFINS (Tax on revenue) 11 11
ICMS (VAT state tax) 8,680 6,853
FGTS (Social security compulsory deposit) - 185
IOF 1,485 -
Other 108 1,682
---------------------- ---------------------
12,771 11,272
====================== =====================
</Table>
For certain accrued lawsuits, the Company and its subsidiaries have
judicial deposits in the amount of $6,685 and $6,626 as of June 30, 2004
and December 31, 2003. The Company pledged property items as collateral
in the amount of $ 18,071 as of June 30, 2004.
15. SEGMENTS
Segment information has been prepared in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
The Company's reportable segments are determined based on products and
services provided by each segment:
a. Pay Tv - programming packages consisting of 15 to 57 television
channels;
b. Internet - high speed broadband internet access; and
F-23
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies.
15. SEGMENTS
JUNE 30, 2004
<Table>
<Caption>
PAY TV INTERNET TOTAL
----------- ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Net revenues 37,695 4,572 42,267
Direct operating expenses and SG&A expenses 28,184 1,827 30,011
Depreciation and amortization 10,944 1,128 12,072
Other operating expense, net (6,291) - (6,291)
Interest income (368) - (368)
Interest expense 10,652 - 10,652
Foreign currency transaction loss, net 4,327 - 4,327
Income tax expense (6,625) - (6,625)
Equity in losses of affiliates 468 - 468
Minority interest 127 - 127
Net (loss) income (3,723) 1,617 (2,106)
Capital expenditures 4,281 - 4,281
Total assets 93,637 - 93,637
</Table>
F-24
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
15. SEGMENTS (CONTINUED)
JUNE 30, 2003
<Table>
<Caption>
PAY TV INTERNET TOTAL
----------- ----------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Gross revenues 32,061 4,058 36,119
Direct operating expenses and SG&A expenses 28,171 2,340 30,511
Depreciation and amortization 9,953 1,578 11,531
Other operating expense, net 1,335 7 1,342
Interest income (94) (25) (119)
Interest expense 8,615 38 8,653
Foreign currency transaction loss, net (12,833) - (12,833)
Income tax expense 19,911 - 19,911
Equity in losses of affiliates (439) - (439)
Minority interest 111 - 111
Net (loss) income (22,669) 120 (22,549)
Capital expenditures 3,772 - 3,772
Total assets 107,931 - 107,931
</Table>
F-25
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
16. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES
Tevecap conducts a significant portion of its business through
subsidiaries. The $250,000 12 5/8% Senior Notes issued to institutional
buyers in November 1996 are jointly and severally, irrevocably and fully
and unconditionally guaranteed on a senior basis by all of Tevecap's
direct and indirect subsidiaries except for TVA Communications Aruba
N.V., TVA Channels Ltda., Rede Ajato Ltda., Ype Radio and Televisao
Ltda., TVA Inc, TVA Overseas Ltd. and TVA TCG Sistema de Televisao Porto
Alegre.
Presented below is condensed consolidating financial information for: i)
Tevecap 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, 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. (merged in 2001 and wholly-owned in 2000)
- TVA Programadora Ltda. (merged in 2001 and wholly-owned in 2000)
- TVA Par S.A. (merged in 2001 and wholly-owned in 2000)
- TVA Communications Ltd.
- Comercial Cabo TV Sao Paulo Ltda.
- TVA Sistema de Televisao S.A. (majority-owned in 2000)
- TVA Sul Parana Ltda. (majority-owned in 2000)
b) MAJORITY-OWNED GUARANTOR SUBSIDIARIES
- CCS Camboriu Cable System de Telecomunicacoes Ltda.
F-26
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
16. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
c) NON-GUARANTOR SUBSIDIARIES
- TVA Communications Aruba N.V.
- TVA TCG Sistema de Televisao de Porto Alegre S.A. (merged in 2001
and non guarantor in 2000)
- Rede Ajato Ltda.
- TVA Channel Ltda. (merged in 2001 and non-guarantor in 2000)
- Ype Radio e Televisao Ltda. (merged in 2001 and non-guarantor in
2000)
- TVA Overseas Ltd.
- TVA Inc
- TVA Continental S.A.
- TVA Pelicano S.A.
- TVA Network Participacoes S.A.
Separate financial statements have been presented for CCS Camboriu Cable
System Telecomunicacoes Ltda. as of June 30, 2004 and 2003.
F-27
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
16. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2004
<Table>
<Caption>
WHOLLY- MAJORITY-
OWNED OWNED NON-
PARENT GUARANTOR GUARANTOR GUARANTOR
ASSETS COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------ ------------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Current assets
Cash and cash equivalents $ 6 $ 458 $ 327 $ 6 $ - $ 797
Accounts receivable, net - 2,716 - 1,388 (1,391) 2,713
Inventories, net - 8,523 77 - - 8,600
Prepaid and other assets 117 57 1 - - 175
Other accounts receivable 150 332,955 114 70 (331,941) 1,348
----------- ------------ ------------ ------------ ------------- ------------
Total current assets 273 344,709 519 1,464 (333,332) 13,633
----------- ------------ ------------ ------------ ------------- ------------
Property, plant and equipment,
net - 61,635 1,856 - (889) 62,602
Investments
Equity basis 36,749 1,774 - - (38,523) -
Intangible assets, net 678 3,909 - - - 4,587
Loans to related companies 49,235 20,116 1,461 54,258 (119,050) 6,020
Dividends receivable 299,688 - - - (299,688) -
Deferred income taxes - - 110 - - 110
Judicial deposits - 6,467 218 - - 6,685
----------- ------------ ------------ ------------ ------------- ------------
Total assets $ 386,623 $ 438,610 $ 4,164 $ 55,722 $ (791,482) $ 93,637
=========== ============ ============ ============ ============= ============
</Table>
F-28
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
16. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2004
<Table>
<Caption>
WHOLLY- MAJORITY-
OWNED OWNED NON-
PARENT GUARANTOR GUARANTOR GUARANTOR
LIABILITIES AND SHAREHOLDERS' EQUITY COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------- ------------ ------------ ------------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Current Liabilities
Loans 380,480 7,580 - - (331,885) 56,175
Film suppliers - 5,135 220 - - 5,355
Other suppliers 13 4,011 14 - (1,391) 2,647
Tax recovery program 356 879 - - - 1,235
Taxes payable other than income
taxes 1,492 4,442 94 - - 6,028
Income tax payable - - 125 - - 125
Accrued payroll and related
liabilities - 1,378 15 - - 1,393
Advance payments received from
subscribers - 3,097 - - - 3,097
Deferred income tax 11,241 - - - - 11,241
Other accounts payable 92 1,780 239 14 (56) 2,069
------------ ------------- ------------ ----------- ------------- ------------
Total current liabilities 393,674 28,302 707 14 (333,332) 89,365
------------ ------------- ------------ ----------- ------------- ------------
Long-term liabilities
Loans from related companies 25,400 112,188 - 22,602 (119,050) 41,140
Tax recovery program 4,700 7,432 - - - 12,132
Accrual for contingencies 2,934 9,336 501 - - 12,771
Dividends payable - 254,744 - 44,944 (299,688) -
Liability to fund equity investee 13,213 - - - (13,213) -
Other accounts payable - 355 - - - 355
------------ ------------- ------------ ----------- ------------- ------------
Total long-term liabilities 46,247 384,055 501 67,546 (431,951) 66,398
------------ ------------- ------------ ----------- ------------- ------------
Minority interest - - - - 1,182 1,182
Redeemable common stock 24,019 - - - - 24,019
Shareholders' deficit
Common stock 445,313 284,076 4,012 15,068 (302,443) 446,026
Accumulated other comprehensive
income (loss) (429) 213,032 (1,660) 6,217 (210,416) 6,744
Accumulated deficit (522,201) (470,855) 604 (33,123) 485,478 (540,097)
------------ ------------- ------------ ----------- ------------- ------------
Total shareholders' deficit (77,317) 26,253 2,956 (11,838) (27,381) (87,327)
------------ ------------- ------------ ----------- ------------- ------------
Total liabilities and
shareholders' deficit 386,623 438,610 4,164 55,722 (791,482) 93,637
============ ============= ============ =========== ============= ============
</Table>
F-29
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
16. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED JUNE 30, 2004
<Table>
<Caption>
WHOLLY-
OWNED MAJORITY- NON-
PARENT GUARANTOR OWNED GUARANTOR
DESCRIPTION COMPANY SUBSIDIARIES GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Gross revenues
Monthly subscriptions - 43,338 1,169 - - 44,507
Installation - 565 16 - - 581
Advertising - 1,622 - - - 1,622
Other - 2,404 21 - - 2,425
Taxes on revenue - (6,699) (170) 1 - (6,868)
------------ ------------ ------------- ------------ ------------ ------------
Net revenue - 41,230 1,036 1 - 42,267
------------ ------------ ------------- ------------ ------------ ------------
Direct operating expenses - 19,265 512 - - 19,777
Selling, general and
administrative expenses 149 9,962 122 1 - 10,234
Depreciation and amortization 211 11,874 135 - (148) 12,072
Other operating expense, net (8,193) 1,937 - (35) - (6,291)
------------ ------------ ------------- ------------ ------------ ------------
Operating loss 7,833 (1,808) 267 35 148 6,475
------------ ------------ ------------- ------------ ------------ ------------
Interest income (554) (14,049) (113) - 14,348 (368)
Interest expense 19,149 5,507 25 319 (14,348) 10,652
Foreign currency transaction (income)
loss, net 27,092 (20,186) 14 (2,593) - 4,327
------------ ------------ ------------- ------------ ------------ ------------
Income (loss) before income taxes,
income (loss) of equity affiliates
and minority interest (37,854) 26,920 341 2,309 148 (8,136)
Income taxes (6,650) - 25 - - (6,625)
------------ ------------ ------------- ------------ ------------ ------------
Income (loss) before income (loss) of
equity in affiliates and minority
interest (31,204) 26,920 316 2,309 148 (1,511)
Equity in (losses) of affiliates, net (29,088) (191) - 6 29,741 468
------------ ------------ ------------- ------------ ------------ ------------
Income (loss) before minority interest (2,116) 27,111 316 2,303 (29,593) (1,979)
Minority interest - - - - 127 127
------------ ------------ ------------- ------------ ------------ ------------
Net income (loss) (2,116) 27,111 316 2,303 (29,720) (2,106)
============ ============ ============= ============ ============ ============
</Table>
F-30
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
16. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONSOLIDATED STATEMENT'S OF CASH FLOWS
FOR THE PERIOD ENDED JUNE 30, 2004
<Table>
<Caption>
WHOLLY- MAJORITY- NON-
PARENT OWNED OWNED GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES: 578 8,860 612 (17) 4 10,037
----------- ------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and
equipment - (3,771) (35) - - (3,806)
Purchase of intangible assets - (475) - - - (475)
Loans to related companies (221) - (7) - 228 -
Repayment of loans to related
companies 81 - - - (81) -
----------- ------------ ------------ ------------ ------------ ------------
Net cash used in investing activities (140) (4,246) (42) - 147 (4,281)
----------- ------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank loans - 17,259 - - - 17,259
Repayments of loans from banks (3,031) (17,615) - - - (20,646)
Proceeds from loans from shareholders 3,958 19,422 - 6 (228) 23,158
Repayments of loans from shareholders (262) (22,832) - - 81 (23,013)
----------- ------------ ------------ ------------ ------------ ------------
Net cash provided by financing
activities 665 (3,766) - 6 (147) (3,242)
----------- ------------ ------------ ------------ ------------ ------------
Effect of exchange rate changes (1,192) (518) (304) 9 (4) (2,009)
----------- ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents (89) 330 266 (2) - 505
Cash and cash equivalents at beginning
of the period 95 128 61 8 - 292
----------- ------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of the
period 6 458 327 6 - 797
=========== ============ ============ ============ ============ ============
</Table>
F-31
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
16. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2003
<Table>
<Caption>
WHOLLY- MAJORITY-
OWNED OWNED NON-
PARENT GUARANTOR GUARANTOR GUARANTOR
ASSETS COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ ------------ ------------
UNAUDITED UNAUDITED UNAUDITED UNAUDITED UNAUDITED UNAUDITED
Current assets
Cash and cash equivalents $ 95 $ 128 $ 61 $ 8 $ - $ 292
Accounts receivable, net - 4,432 (4) 1,493 (1,495) 4,426
Inventories, net - 8,400 70 - - 8,470
Prepaid and other assets 278 397 2 - - 677
Other accounts receivable 142 320,289 271 64 (319,188) 1,578
----------- ------------ ------------ ------------ ------------ ------------
Total current assets 515 333,646 400 1,565 (320,683) 15,443
----------- ------------ ------------ ------------ ------------ ------------
Property, plant and equipment, - 75,327 2,099 - (1,109) 76,317
net
Investments
Equity basis 25,626 1,710 - 549 (27,336) 549
Intangible assets, net 986 4,739 - - - 5,725
Loans to related companies 49,305 18,677 1,452 54,258 (120,421) 3,271
Dividends receivable 322,332 - - - (322,332) -
Judicial deposits - 6,407 219 - - 6,626
----------- ------------ ------------ ------------ ------------ ------------
Total assets $ 398,764 $ 440,506 $ 4,170 $ 56,372 $ (791,881) $ 107,931
=========== ============ ============ ============ ============ ============
</Table>
F-32
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
16. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2003
<Table>
<Caption>
WHOLLY- MAJORITY-
OWNED OWNED NON-
PARENT GUARANTOR GUARANTOR GUARANTOR
LIABILITIES AND SHAREHOLDERS' EQUITY COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------ ------------
UNAUDITED UNAUDITED UNAUDITED UNAUDITED UNAUDITED UNAUDITED
Current Liabilities
Loans 367,730 7,486 - - (319,135) 56,081
Film suppliers - 6,474 145 - - 6,619
Other suppliers 14 5,798 19 - 4,333
(1,498)
Tax recovery program 563 934 - - - 1,497
Taxes payable other than income
taxes 3,802 3,974 91 - - 7,867
Income tax payable - 1 277 - - 278
Accrued payroll and related
liabilities - 1,424 13 - - 1,437
Advance payments received from
subscribers - 2,844 (5) - - 2,839
Deferred income tax 19,292 - - - - 19,292
Other accounts payable 97 2,106 230 15 (50) 2,398
--------- ------------ ------------ ------------ ------------ ------------
Total current liabilities 391,498 31,041 770 15 (320,683) 102,641
========= ============ ============ ============ ============ ============
Long-term liabilities
Loans from related companies 21,415 116,129 - 22,588 (120,420) 39,712
Tax recovery program 4,783 8,053 - - - 12,836
Accrual for contingencies - 10,723 549 - - 11,272
Dividends payable - 273,992 - 48,340 (322,332) -
Liability to fund equity investee 35,524 - - 154 (30,329) 5,349
Other accounts payable - 211 - - - 211
--------- ------------ ------------ ------------ ------------ ------------
Total long-term liabilities 61,722 409,108 549 71,082 (473,081) 69,380
--------- ------------ ------------ ------------ ------------ ------------
Minority interest - - - - 1,140 1,140
Redeemable stock 24,201 - - - - 24,201
Shareholders' deficit
Common stock 445,313 284,076 4,012 15,068 (302,443) 446,026
Accumulated other comprehensive
income (loss) (3,703) 214,247 (1,449) 5,633 (212,012) 2,716
Accumulated deficit (520,267) (497,966) 288 (35,426) 515,198 (538,173)
--------- ------------ ------------ ------------ ------------ ------------
Total shareholders' deficit (78,657) 357 2,851 (14,725) 743 (89,431)
--------- ------------ ------------ ------------ ------------ ------------
Total liabilities and
shareholders' deficit 398,764 440,506 4,170 56,372 (791,881) 107,931
========= ============ ============ ============ ============ ============
</Table>
F-33
<Page>
TEVECAP S.A.
AND SUBSIDIARIES
16. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED JUNE 30, 2003
<Table>
<Caption>
WHOLLY-
OWNED MAJORITY- NON-
PARENT GUARANTOR OWNED GUARANTOR
DESCRIPTION COMPANY SUBSIDIARIES GUARANTOR SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Gross revenues
Monthly subscriptions - 36,810 944 1,103 - 38,857
Installation - 645 21 9 - 675
Advertising - 891 - 32 - 923
Other - 1,711 14 174 (2) 1,897
Taxes on revenue (5,956) (143) (134) (6,233)
----------- ------------ ------------ ------------ ------------ ------------
Net revenue - 34,101 836 1,184 (2) 36,119
----------- ------------ ------------ ------------ ------------ ------------
Direct operating expenses - 18,205 470 901 (2) 19,574
Selling, general and administrative
expenses 1,360 9,373 80 124 - 10,937
Depreciation and amortization 195 11,083 132 257 (136) 11,531
Other operating expense, net - 1,342 - - - 1,342
----------- ------------ ------------ ------------ ------------ ------------
Operating loss (1,555) (5,902) 154 (98) 136 (7,265)
----------- ------------ ------------ ------------ ------------ ------------
Interest income (974) (11,174) (164) 562 11,631 (119)
Interest expense 14,813 5,507 7 (43) (11,631) 8,653
Foreign currency transaction (income) (74,102) 54,000 (62) 7,331 - (12,833)
loss, net
Income (loss) before income taxes,
income (losses) of equity affiliates
and minority interest 58,708 (54,235) 373 (7,948) 136 (2,966)
Income taxes 19,813 - 98 - - 19,911
----------- ------------ ------------ ------------ ------------ ------------
Income (loss) before income (losses)
of equity in affiliates and minority
interest 38,895 (54,235) 275 (7,948) 136 (22,877)
Equity in (losses) of affiliates, net 61,323 (167) - (50) (61,545) (439)
----------- ------------ ------------ ------------ ------------ ------------
Income (loss) before minority
interest (22,428) (54,068) 275 (7,898) 61,681 (22,438)
Minority interest - - - - 111 111
----------- ------------ ------------ ------------ ------------ ------------
Net income (loss) (22,428) (54,068) 275 (7,898) 61,570 (22,549)
=========== ============ ============ ============ ============ ============
</Table>
F-34
<Page>
16. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONSOLIDATED STATEMENT'S OF CASH FLOWS
FOR THE SEMESTER ENDED JUNE 30, 2003
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
<Table>
<Caption>
WHOLLY- MAJORITY- NON-
PARENT OWNED OWNED GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES: 773 (2,641) (1) 129 - (1,740)
----------- ------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and
equipment - (3,450) (24) (14) - (3,488)
Purchase of intangible assets - (284) - - - (284)
Loans to related companies (3,021) - (632) (438) 3,861 (230)
Repayment of loans to related
companies 4,378 - 631 217 (5,101) 125
----------- ------------ ------------ ------------ ------------ ------------
Net cash used in investing activities 1,357 (3,734) (25) (235) (1,240) (3,877)
----------- ------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank loans - 10,638 - - - 10,638
Repayments of loans from banks (2,749) (17,034) - (33) - (19,816)
Proceeds from loans from shareholders 13,122 29,184 - 10 (3,861) 38,455
Repayments of loans from shareholders (16,415) (14,038) - - 5,101 (25,352)
----------- ------------ ------------ ------------ ------------ ------------
Net cash provided by financing
activities (6,042) 8,750 - (23) 1,240 3,925
----------- ------------ ------------ ------------ ------------ ------------
Effect of exchange rate changes 3,890 (2,301) 32 66 - 1,687
----------- ------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents (22) 74 6 (63) - (5)
Cash and cash equivalents at beginning
of the period 26 110 24 85 - 245
----------- ------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of the
period 4 184 30 22 - 240
=========== ============ ============ ============ ============ ============
</Table>
* * * * * * *
F-35
<Page>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
INDEX TO FINANCIAL STATEMENTS
CONTENTS
<Table>
<Caption>
PAGE
Balance Sheets as of June 30, 2004 and December 31, 2003 F-37
Statements of Operations for the six-month periods ended June 30, 2004 and 2003 F-39
Statements of Changes in Shareholders' Equity for the six-month period ended June 30, 2004 F-40
Statements of Cash Flows for the six-month periods ended June 30, 2004 and 2003 F-41
Notes to Financial Statements F-42
</Table>
F-36
<Page>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
BALANCE SHEETS
AS OF JUNE 30,2004 AND DECEMBER 31, 2003
(IN THOUSANDS OF U.S. DOLLARS)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
----------- ------------
2004 2003
----------- ------------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents $ 327 $ 61
Inventories 77 70
Prepaid and other assets 1 2
Recoverable taxes 105 255
Other accounts receivable 9 12
----------- ------------
Total current assets 519 400
----------- ------------
Property, plant and equipment, net (Note 5) 1,856 2,099
Loans to related companies (Note 3) 1,461 1,452
Deferred income taxes 110 -
Judicial deposits 218 219
----------- ------------
Total assets $ 4,164 $ 4,170
=========== ============
</Table>
F-37
<Page>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
BALANCE SHEETS, CONTINUED
AS OF JUNE 30,2004 AND DECEMBER 31, 2003
(IN THOUSANDS OF U.S. DOLLARS)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
----------- ------------
2004 2003
----------- ------------
(UNAUDITED) (UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Film suppliers $ 220 $ 145
Other suppliers 14 19
Taxes payable other than income taxes 219 368
Accrued payroll and related liabilities 15 13
Rent payable 137 134
Other accounts payable 102 91
----------- ------------
Total current liabilities 707 770
----------- ------------
Long-term liabilities
Taxes payable other than income taxes 346 384
Provision for claims (Note 8) 155 165
----------- ------------
Total long-term liabilities 501 549
----------- ------------
Shareholders' equity
Common stock, no par value, 4,850,000 shares
authorized, issued and outstanding (Note 6) 4,012 4,012
Accumulated other comprehensive loss (1,660) (1,449)
Accumulated income 604 288
----------- ------------
Total shareholders' equity 2,956 2,851
----------- ------------
Total liabilities and shareholders' equity $ 4,164 $ 4,170
=========== ============
</Table>
F-38
<Page>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
STATEMENTS OF OPERATIONS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2004 AND 2003
(IN THOUSANDS OF U.S. DOLLARS)
<Table>
<Caption>
SIX-MONTH PERIODS ENDED JUNE 30,
---------------------------------
2004 2003
-------------- ---------------
(UNAUDITED) (UNAUDITED)
Gross revenues
Monthly subscriptions $ 1,169 $ 944
Installation 16 21
Additional services 21 14
Taxes on revenues (170) (143)
-------------- ---------------
1,036 836
-------------- ---------------
Direct operating expenses (excluding depreciation
stated separately below)
Payroll and benefits 22 17
Programming 404 299
Other costs 86 154
-------------- ---------------
512 470
-------------- ---------------
Selling, general and administrative expenses 122 80
-------------- ---------------
Depreciation 135 132
-------------- ---------------
Operating income 267 154
-------------- ---------------
Interest income (113) (164)
Interest expense 25 7
Foreign currency transaction (gain) loss, net 14 (62)
-------------- ---------------
Income (loss) before income taxes 341 373
-------------- ---------------
Income tax expense - current (Note 4) 135 98
Income tax (benefit) expense - deferred (Note 4) (110) -
-------------- ---------------
Net income (loss) $ 316 $ 275
============== ===============
Other comprehensive loss -
Foreign currency translation adjustment 211 (528)
-------------- ---------------
Comprehensive income (loss) $ 105 $ 803
============== ===============
</Table>
F-39
<Page>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2004
(IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
<Table>
<Caption>
ACCUMULATED
OTHER
COMMON ACCUMULATED COMPREHENSIVE
STOCK DEFICIT LOSS TOTAL
-------- ----------- ------------- --------
Balance as of December 31, 2003 4,012 288 (1,449) 2,851
Foreign currency translation adjustment, net
of tax of $0 (unaudited) - - (211) (211)
Net income (unaudited) - 316 - 316
-------- ----------- ------------- --------
Balance as of June 30, 2004 (unaudited) $ 4,012 $ 604 $ (1,660) $ 2,956
======== =========== ============= ========
</Table>
F-40
<Page>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
STATEMENTS OF CASH FLOWS
FOR THE SIX-MONTH PERIODS ENDED JUNE 30, 2004 AND 2003
(IN THOUSANDS OF U.S. DOLLARS)
<Table>
<Caption>
SIX-MONTH PERIODS ENDED JUNE 30,
--------------------------------
2004 2003
-------------- --------------
(UNAUDITED) (UNAUDITED)
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES: 613 (1)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (35) (24)
Loans to related companies (7) (632)
Repayments of loans to related companies - 631
-------------- --------------
Net cash used in investing activities (42) (25)
-------------- --------------
Effect of exchange rate changes on cash and cash equivalents (305) 32
-------------- --------------
Net increase (decrease) in cash and cash equivalents 266 6
Cash and cash equivalents at beginning of the period 61 24
-------------- --------------
Cash and cash equivalents at end of the year $ 327 $ 30
============== ==============
</Table>
F-41
<Page>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
1. THE COMPANY AND ITS PRINCIPAL OPERATIONS
CCS - Camboriu Cable System Telecomunicacoes Ltda. (the "Company")
renders services related to wireless cable and cable television systems,
including marketing and advertising, production, distribution and
licensing of domestic and foreign television programs. The Company has
wireless cable channel rights primarily in the city of Camboriu. The
Company's operations are substantially dependent on the Tevecap Group
regarding programming, marketing, financial and administrative systems.
In the Company's opinion, all adjustments necessary for a fair
presentation of the unaudited results of operations for the six-month
periods ended June, 30 2004 and 2003, are included. All such adjustments
are accruals of a normal and recurring nature. The results of operations
for the period ended June 30, 2004 are not necessarily indicative of the
results of operations to be expected for the full year. The accompanying
consolidated financial statements are unaudited and should be read in
conjunction with the consolidated financial statements for the year
ended December 31, 2003 included in the Company's 2003 annual report on
Form 20-F.
1.2 SIGNIFICANT RISKS AND UNCERTAINTIES
The Company's financial statements for the period ended June 30, 2004
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 during the period ended June
30, 2004 had negative working capital of $188. The continuation of the
Company as a going concern is dependent upon its ability to generate
sufficient cash from operating and financing activities. In this regard,
managements' plans include: (i) increasing the Company's subscriber base
and implementing technological upgrades to its pay television networks;
(ii) streamlining the Company's principal operating procedures to
increase productivity and profitability; (iii) the continuation of a
cost reduction program which was initiated in 2002 and (iii) adjusting
the Company's capitalization (including indebtedness) to provide for
long term growth and stability. The financial statements do not include
any adjustments related to the recoverability and classification of
recorded amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going
concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant policies followed in the preparation of the consolidated
financial statements are described in the annual consolidated financial
statements.
F-42
<Page>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
2.1. BASIS OF PRESENTATION
The financial statements are presented in United States 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 in accordance with U.S. GAAP
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.
3. RELATED PARTY TRANSACTIONS
The following tables summarize the transactions between the Company and
related parties as of June 30, 2004 and December 31, 2003:
<Table>
<Caption>
JUNE 30, DECEMBER 31,
----------- ------------
2004 2003
----------- ------------
(UNAUDITED) (UNAUDITED)
TVA Sul Parana Ltda. (parent company)
Loans receivable 1,461 1,452
----------- ------------
Loans receivable $ 1,461 $ 1,452
</Table>
The Company and its related parties maintain a cash management system
centralized at TVA Sul Parana Ltda. The centralized cash management
system results in accounts receivable from and payable to related
parties depending on the cash needs of the companies.
Loans granted to or obtained from related companies, under loan
agreements, are denominated in reais and subject to variable interest of
1.88% per month as of June 30, 2004 (1.96% per month as of December 31,
2003).
F-43
<Page>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
4. INCOME TAXES
Deferred income taxes reflect the future tax consequences of net
operating loss carryforwards and differences between the tax basis and
the financial reporting basis of assets and liabilities. A valuation
allowance has been established against the net deferred tax asset
(primarily consisting of net operating loss carryforwards and
provisions) as management believes it is more likely than not that the
deferred tax assets will not be realized. Accordingly, no benefit has
been recognized for the Company's net operating losses and other
deferred tax assets. As of June 30, 2004, the Company had no net
operating loss carryforwards.
The tax effects of temporary differences that give rise to deferred tax
assets as of of June 30, 2004 and December 31, 2003 are as follows:
<Table>
<Caption>
JUNE 30, DECEMBER 31,
----------------------------
2004 2003
----------------------------
(UNAUDITED) (UNAUDITED)
Deferred tax assets:
Provision for claims 58 58
Other 52 19
----------------------------
Total gross deferred tax asset 110 77
----------------------------
Less valuation allowance - (77)
----------------------------
Deferred tax asset 110 -
----------------------------
</Table>
4. INCOME TAXES (CONTINUED)
F-44
<Page>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
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:
<Table>
<Caption>
JUNE 30, JUNE 30,
----------- -----------
2004 2003
----------- -----------
(UNAUDITED) (UNAUDITED)
Income (loss) before income taxes $ 341 $ 373
Statutory income tax rate 34% 34%
----------- -----------
Computed income tax expense (benefit) 116 127
Deductible devaluation loss for Brazilian statutory purposes - 17
Other (14) (65)
Change in valuation allowance (77) 19
----------- -----------
Income tax expense per statements of operations $ 25 $ 98
=========== ===========
</Table>
5. PROPERTY, PLANT AND EQUIPMENT, NET
As of June 30, 2004 and December 31, 2003, property, plant and equipment
were comprised of:
<Table>
<Caption>
ANNUAL
DEPRECIATION
RATE JUNE 30, DECEMBER 31,
----------- ------------
% 2004 2003
----------- ------------
(UNAUDITED) (UNAUDITED)
Reception equipment 20 $ 590 $ 605
Cable plant 10 655 704
Machinery and equipment 10 207 220
Decoders 10 98 101
Leasehold improvements 25 5 5
Building 4 1,896 2,039
Furniture and fixtures 10 41 43
Vehicles 20 37 40
Software 20 9 9
Tools 10 2 2
Other 4 8
Accumulated depreciation (1,688) (1,677)
----------- ------------
$ 1,856 $ 2,099
=========== ============
</Table>
F-45
<Page>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
6. SHAREHOLDER'S EQUITY
Common stock as of June30, 2004 and December 31, 2003 was comprised of:
<Table>
<Caption>
JUNE 30, 2004 DECEMBER 31, 2003
----------------------------- -----------------------------
$ SHARES $ SHARES
------------ -------------- ------------ --------------
Construtora ENE ESSE Ltda. $ 1,605 1,940,000 $ 1,605 1,940,000
TVA Sul Parana Ltda. 2,407 2,910,000 2,407 2,910,000
------------ -------------- ------------ --------------
$ 4,012 4,850,000 $ 4,012 4,850,000
============ ============== ============ ==============
</Table>
7. LOAN GUARANTEES
In November 1996, Tevecap issued $250,000 12-5/8% Senior Notes to
institutional buyers in a private placement. The Notes, which mature in
November 2004, were subsequently registered with the Securities and
Exchange Commission in May 1997. These Notes are jointly and severally,
irrevocably and fully unconditionally guaranteed, on a senior basis, by
Tevecap's direct and indirect subsidiaries, including the Company. On
July 28, 1999 the related company, TVA Communications Ltd., repurchased
80.79% of these Notes.
8. 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 the opinion of the Company's management and external legal counsel, a
provision was recorded for all lawsuits for which the likelihood of an
adverse outcome is probable. The Company has not recorded provisions for
lawsuits for which the likelihood of an adverse outcome is possible or
remote.
*******
F-46