Registration No. 333-37853
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
FORM F-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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TEVECAP S.A.
(Exact Name of Registrant as Specified in its Charter)
TEVECAP INC.
(Translation of Registrant's name into English)
THE FEDERATIVE REPUBLIC OF 4841 NOT APPLICABLE
BRAZIL
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
RUA DO ROCIO, 313 CT CORPORATION SYSTEM
SAO PAULO, SP BRAZIL 1633 BROADWAY
04552-904 NEW YORK, NY 10019
(TELEPHONE: 55-11-821-8550) (TELEPHONE: 212-664-1666)
(Address and telephone number of (Name, address and telephone
Registrant's principal executive number of agent for service)
offices)
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COPY TO:
Peter V. Darrow, Esq.
Mayer, Brown & Platt
1675 Broadway
New York, NY 10019
NAME, ADDRESS AND STANDARD
TELEPHONE NUMBER TRANSLATION OF INDUSTRIAL I.R.S. EMPLOYER
OF ADDITIONAL ADDITIONAL JURISDICTION OF CLASSIFICATION IDENTIFICATION
REGISTRANTS REGISTRANTS' NAMES ORGANIZATION CODE NUMBER NO.
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TVA Sistema de Televisao S.A................. TVA Television The Federative 4841 Not Applicable
Rua do Rocio, 313 Systems Inc. Republic of Brazil
Sao Paulo SP 04552-904
(Telephone: 55-11-821-8550)
TVA Communications, Ltd...................... TVA Communications, The British Virgin 4841 Not Applicable
P.O. Box 71 Ltd. Islands
Craigmuir Chambers
Road Town, British Virgin Islands
(Telephone: 55-11-821-8550)
Galaxy Brasil S.A............................ Galaxy Brazil Inc. The Federative 4841 Not Applicable
Rua do Rocio, 313 Republic of Brazil
Sao Paulo SP 04552-904
(Telephone: 55-11-821-8550)
TVA Sul Participacoes S.A.................... TVA South Holdings The Federative 4841 Not Applicable
Rua Martha Kateiva de Oliveira, 319 Inc. Republic of Brazil
Curitiba PR
(Telephone: 55-11-821-8550)
Comercial Cabo TV Sao Paulo Ltda............. Commercial Cable TV The Federative 4841 Not Applicable
Rua do Rocio, 313 Sao Paulo Ltd. Republic of Brazil
Sao Paulo SP 04552-904
(Telephone: 55-11-821-8550)
TVA Parana Ltda.............................. TVA Parana Ltd. The Federative 4841 Not Applicable
Rua Martha Kateiva de Oliveira, 319 Republic of Brazil
Curitiba PR
(Telephone: 55-11-821-8550)
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NAME, ADDRESS AND STANDARD
TELEPHONE NUMBER TRANSLATION OF INDUSTRIAL I.R.S. EMPLOYER
OF ADDITIONAL ADDITIONAL JURISDICTION OF CLASSIFICATION IDENTIFICATION
REGISTRANTS REGISTRANTS' NAMES ORGANIZATION CODE NUMBER NO.
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TV Alfa Cabo Ltda............................ TV Alpha Cable Ltd. The Federative 4841 Not Applicable
Rua Martha Kateiva de Oliveira, 319 Republic of Brazil
Curitiba PR
(Telephone: 55-11-821-8550)
CCS Camboriu Cable System de Telecomunicacoes The Federative 4841 Not Applicable
Ltda....................................... CCS Camboriu Cable Republic of Brazil
Avenida Brasil, 802 Telecommunications
Balneario de Camboriu SC Systems Ltd.
(Telephone: 55-11-821-8550)
TCC TV a Cabo Ltda........................... TCC Cable TV Ltd. The Federative 4841 Not Applicable
Rua Martha Oliveira, 319 Republic of Brazil
Curitiba PR
(Telephone: 55-11-821-8550)
TVA Sul Foz do Iguacu Ltda................... TVA South Iguacu The Federative 4841 Not Applicable
Rua Carlos Sbaraini, 410 Falls Ltd. Republic of Brazil
Foz do Iguacu PR
(Telephone: 55-11-821-8550)
TVA Sul Santa Catarina Ltda.................. TVA South Santa The Federative 4841 Not Applicable
Rodovia SC 401, no. 867 Catarina Ltd. Republic of Brazil
Florianopolis, SC
(Telephone: 55-11-821-8550)
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
CALCULATION OF REGISTRATION FEE
TITLE OF EACH
CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
BE REGISTERED REGISTERED UNIT(2)(3) PRICE(2)(3) FEE(4)
12 5/8% Senior Guaranteed Notes due 2004(1)....... US$15,368,000 100% US$15,368,000 US$4,656.97
Subsidiary Guarantees of 12 5/8% Senior Notes Due
2004............................................. (5) (5) (5) (5)
(1) The Guarantees by TVA Sistema de Televisao S.A., TVA Communications, Ltd.,
Galaxy Brasil S.A., TVA Sul Participacoes S.A., Comercial Cabo TV Sao Paulo
Ltda, TVA Parana Ltda., TV Alfa Cabo Ltda., CCS Camboriu Cable System de
Telecomunicacoes Ltda., TCC TV a Cabo Ltda., TVA Sul Foz do Iguacu Ltda. and
TVA Sul Santa Catarina Ltda. of the payment of principal, premium, if any,
and interest on the Notes are also being registered hereby. Pursuant to Rule
457(a), no registration fee is required with respect to such Guarantees.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Exclusive of accrued interest, if any.
(4) Calculated pursuant to Rule 457.
(5) No additional consideration will be paid for such securities. Pursuant to
Rule 457 under the Securities Act of 1933, no separate fee is payable
therefor.
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THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS
(LOGO)
US$15,368,000
OFFER FOR ALL OUTSTANDING
12 5/8% SENIOR NOTES DUE 2004
IN EXCHANGE FOR
UP TO US$15,368,000 PRINCIPAL AMOUNT OF
12 5/8% SENIOR NOTES DUE 2004
OF
TEVECAP S.A.
THE EXCHANGE OFFER
WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON DECEMBER 8, 1997, UNLESS EXTENDED.
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Tevecap S.A., a Brazilian corporation ("Tevecap" and, together with its
consolidated subsidiaries and affiliates, "TVA" or the "Company"), hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (which together constitute
the "Registered Exchange Offer"), to exchange an aggregate principal amount of
up to US$15,368,000 of its 12 5/8% Senior Notes due 2004 (the "Exchange Notes")
together with the Subsidiary Guarantees (as defined and together with the
Exchange Notes, the "Exchange Securities"), which have been registered under the
Securities Act of 1933 (the "Securities Act"), pursuant to a Registration
Statement of which this Prospectus constitutes a part, for a like principal
amount of its outstanding 12 5/8% Senior Notes due 2004 (the "Old Notes"), of
which US$15,368,000 aggregate principal amount is outstanding, together with the
Subsidiary Guarantees of the Old Notes (such Subsidiary Guarantees together with
the Old Notes, the "Old Securities").
The Old Securities remained outstanding after the Company consummated an
exchange offer on May 27, 1997, pursuant to the terms and conditions of the
Exchange and Registration Rights Agreement, dated November 26, 1996 (the
"Original Exchange Agreement"). Pursuant to the Original Exchange Agreement, the
Company and the Guarantors (as defined) registered with the Commission
$250,000,000 in aggregate principal amount of new debt securities and guarantees
otherwise identical in all material respects to the Old Securities, except for
certain transfer restrictions and registration rights relating to the Old
Securities. The Exchange Securities are being offered hereunder in order to
satisfy certain obligations of Tevecap with respect to these Old Securities
remaining outstanding under the Exchange and Registration Agreement dated
September 17, 1997 (the "Exchange and Registration Agreement") among Tevecap,
Credit Suisse First Boston (Europe) Limited, Chase Manhattan International
Limited, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Phoenix
Multi-Sector Fund, Inc. and Phoenix Multi-Sector Short Term Bond Fund. The terms
of the Exchange Notes are identical in all material respects to the terms of the
Old Securities, except for certain transfer restrictions relating to the Old
Securities. The Exchange Notes will evidence the same debt as the Old Notes and
will be issued under and be entitled to the same benefits under the Indenture
(as defined) as the Old Notes. In addition, the Exchange Notes and the Old Notes
will be treated as one series of securities under the Indenture. The Exchange
Notes and the Old Notes are collectively referred to herein as the "Notes." See
"Description of the Notes." Pursuant to the Exchange and Registration Agreement,
certain of the holders of the Old Securities that remain outstanding have
agreed, jointly and severally, to pay upon demand all of the expenses of the
Registered Exchange Offer. See "The Registered Exchange Offer."
Interest on the Notes will be payable in cash in US dollars semi-annually on
May 26 and November 26 of each year, commencing on May 26, 1997. The Notes will
mature on November 26, 2004. Except as described below, Tevecap may not redeem
the Notes prior to November 26, 2004. In the event Tevecap receives Net Cash
Proceeds (as defined) at any time on or prior to November 26, 2000 from one or
more specified sales of equity, it may redeem up to $75.0 million of the
aggregate principal amount of the
(CONTINUED ON NEXT PAGE)
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SEE "RISK FACTORS" BEGINNING ON PAGE 21 FOR A DISCUSSION OF CERTAIN FACTORS THAT
HOLDERS OF THE OLD NOTES SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER
AND THAT PROSPECTIVE INVESTORS IN THE EXCHANGE NOTES SHOULD CONSIDER IN
CONNECTION WITH SUCH INVESTMENT.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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The date of this Prospectus is November 6, 1997.
Notes at a price equal to 112.625% of the principal amount to be redeemed,
together with accrued and unpaid interest, if any, to the date of redemption. In
addition, Tevecap may redeem the Notes at any time, in whole but not in part, at
a price equal to 100% of their principal amount, together with accrued and
unpaid interest, if any, to the date of redemption, in the event of certain
changes affecting the withholding tax treatment of the Notes, with the
occurrence of such events to be determined by the Company in accordance with the
terms of the Notes. See "Description of the Notes-Redemption for Changes in
Withholding Taxes." The Notes will not be subject to any sinking fund
requirement. Upon the occurrence of a Change of Control (as defined), each
holder will have the right to require Tevecap to make an offer to repurchase the
Notes held by such holder at a price equal to 101% of the principal amount
thereof, together with accrued and unpaid interest, if any, to the date of
repurchase. See "Description of Notes."
The Notes will be unsecured, senior obligations of Tevecap ranking PARI
PASSU in right of payment with all other existing and future unsecured, senior
Indebtedness (as defined) of Tevecap and senior in right of payment to all other
existing and future subordinated Indebtedness of Tevecap. The Notes will be
jointly and severally guaranteed (the "Subsidiary Guarantees") by each
Restricted Subsidiary (as defined) of Tevecap (the "Guarantors"). The Subsidiary
Guarantees will be unsecured, senior obligations of the Guarantors ranking PARI
PASSU in right of payment with all other existing and future unsecured, senior
Indebtedness of the Guarantors and senior in right of payment to all other
existing and future subordinated Indebtedness of the Guarantors. However,
subject to certain limitations set forth in the Indenture, Tevecap and its
Subsidiaries may incur other senior Indebtedness, including Indebtedness that is
secured by the assets of Tevecap and its Subsidiaries. At December 31, 1996,
Tevecap did not have any aggregate principal amount of outstanding senior
Indebtedness, other than the Notes (exclusive of unused commitments), and the
aggregate principal amount of outstanding senior indebtedness of the Guarantors,
other than the Subsidiary Guarantees, was $4.8 million (exclusive of unused
commitments and short term debt) all of which ranks PARI PASSU with the
Subsidiary Guarantees, but none of which was secured indebtedness. As of June
30, 1997, Tevecap did not have any outstanding senior indebtedness other than
the Notes (exclusive of unused commitments and short term debt) and the
aggregate principal amount of outstanding senior indebtedness of the Guarantors
was $81.0 million (exclusive of unused commitments and short term debt) all of
which ranks PARI PASSU with the Subsidiary Guarantees, and none of which is
secured. Although the Notes are titled "senior" securities, Tevecap has not
issued any Indebtedness to which the Notes would rank senior. See "Description
of Notes--Ranking" and "Certain Other Indebtedness."
The Indenture (as defined) under which the Old Securities were issued and
the Exchange Securities would be issued contains covenants which, among other
limitations, will limit the incurrence of additional indebtedness by Tevecap and
its Restricted Subsidiaries. This limitation is subject to a number of important
qualifications and exceptions. Absent access by the Company to additional
financing (whether debt or equity) this limitation could, in circumstances in
which the Company is unable to incur additional debt under this covenant, and
has fully utilized the available exceptions, limit the ability of the Company to
acquire future network assets, inventory and equipment. However, the Company
retains the option to obtain additional equity financing through capital
contributions from its shareholders, or by means of a public offering in the
international capital markets.
Tevecap's operations are conducted through, and substantially all of
Tevecap's assets are owned by, Tevecap's direct and indirect subsidiaries. The
ability of Tevecap to meet its obligations in respect of the Notes and any
future indebtedness of Tevecap and the ability of Tevecap to refinance the Notes
at their maturity (or upon early redemption or otherwise) will depend on, among
other things, the future performance of such subsidiaries (including the
Guarantors). In addition, the ability of Tevecap's subsidiaries to pay dividends
and make other payments to Tevecap may be restricted by, among other things,
applicable corporate and other laws and regulations and by the terms of
agreements to which such subsidiaries become subject. Also, the property and
assets of certain of such subsidiaries have had, or in the future may have,
liens placed upon them pursuant to existing and future financings of such
subsidiaries. Although the indenture limits the ability of such subsidiaries to
enter into consensual restrictions on their
2
ability to pay dividends and make other payments to Tevecap and to permit liens
to exist on their property and assets, such limitations are subject to a number
of significant qualifications. See "Description of Notes--Certain Covenants." A
portion of the Company's total assets (4.98% at December 31, 1996) represents
interests in entities that are not majority-owned subsidiaries of Tevecap. The
ability of Tevecap to receive funds from these entities may be limited by, among
other things, shareholder agreements with the other investors in those entities,
credit arrangements at those entities and the need of those entities to reinvest
their cash flow in their own operations. In addition, applicable Brazilian law
limits the amount of dividends which may be paid by Tevecap's minority-owned
subsidiaries to the extent they do not have profits available for distribution.
Other statutory and general law obligations may also affect the ability of those
entities to make payments to Tevecap on account of intercompany loans.
Tevecap is making the Registered Exchange Offer in reliance on the position
of the staff of the Securities and Exchange Commission (the "Commission") as set
forth in certain no-action letters addressed to other parties in other
transactions. However, Tevecap has not sought its own no-action letter and there
can be no assurance that the staff of the Commission would make a similar
determination with respect to the Registered Exchange Offer as in such other
circumstances. Based upon these interpretations by the staff of the Commission,
Tevecap believes that Exchange Securities issued pursuant to this Registered
Exchange Offer in exchange for Old Securities may be offered for resale, resold
and otherwise transferred by a holder thereof (other than (i) a broker-dealer
who acquired the Old Securities as a result of market making activities or other
trading activities, (ii) an Initial Purchaser who acquired the Old Securities
directly from the Company solely in order to resell pursuant to Rule 144A of the
Securities Act or any other available exemption under the Securities Act, or
(iii) a person that is an "affiliate" (as defined in Rule 405 of the Securities
Act) of Tevecap) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such Exchange
Securities are acquired in the ordinary course of such holder's business and
that such holder is not participating, and has no arrangement or understanding
with any person to participate, in the distribution of such Exchange Securities.
Holders of Old Securities accepting the Registered Exchange Offer will represent
to Tevecap in the Letter of Transmittal that such conditions have been met. Any
holder who participates in the Registered Exchange Offer for the purpose of
participating in a distribution of the Exchange Securities may not rely on the
position of the staff of the Commission as set forth in these no-action letters
and would have to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction.
Any broker-dealer who receives Exchange Securities for its own account
pursuant to the Registered Exchange Offer must acknowledge that it acquired the
Old Securities as a result of market-making activities or other trading
activities and will deliver a prospectus in connection with any resale of such
Exchange Securities. 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. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Securities received in
exchange for Old Securities where such Old Securities were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. Each of Tevecap and the Subsidiary Guarantors has agreed that, for a
period of 90 days after the date of this Prospectus, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale at the expense of such broker-dealer. See "Exchange Offer," and "Plan of
Distribution."
The Exchange Securities are new securities for which there is currently no
market. Tevecap presently does not intend to apply for listing of the Exchange
Securities on any securities exchange or for quotation through the National
Association of Securities Dealers Automated Quotation System ("NASDAQ"). Tevecap
has been advised by the Initial Purchasers, Chase Securities Inc., Donaldson
Lufkin & Jenrette Securities Corporation, Bear, Stearns & Co. Inc. and Bozano,
Simonsen Securities, Inc., that, following completion of the Exchange Offer,
they presently intend to make a market in the Exchange Securities;
3
however, the Initial Purchasers are not obligated to do so and any market-making
activities with respect to the Exchange Notes may be discontinued at any time
without notice. There can be no assurance that an active public market for the
Exchange Notes will develop.
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the rights and preferences and will be
subject to the limitations applicable thereto under the Indenture. Following
consummation of the Registered Exchange Offer, the holders of Old Notes will
continue to be subject to the existing restrictions upon transfer thereof.
Tevecap will have no further obligation to such holders to provide for the
registration under the Securities Act of the Old Notes held by them. To the
extent that Old Notes are tendered and accepted in the Registered Exchange
Offer, a holder's ability to sell untendered Old Notes could be adversely
affected. It is not expected that an active market for the Old Notes will
develop while they are subject to restrictions on transfer.
Tevecap will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn on or prior to 5:00 p.m., New York City time, on the
date the Registered Exchange Offer expires, which will be December 8, 1997 (the
"Expiration Date"), unless the Registered Exchange Offer is extended by the
Company in its sole discretion, in which case the term "Expiration Date" shall
mean the latest date and time to which the Registered Exchange Offer is
extended. Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date. The Registered Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange. However, the Registered Exchange Offer is subject to certain
conditions which may be waived by Tevecap and to the terms and provisions of the
Exchange and Registration Agreement. The Exchange Notes will bear interest from
the last interest payment date of the Old Notes to occur prior to the issue date
of the Exchange Notes or, if no such interest has been paid, from November 26,
1996. Holders of the Old Notes whose Old Notes are accepted for exchange will
not receive interest on such Old Notes for any period subsequent to the last
interest payment date to occur prior to the issue date of the Exchange Notes,
and will be deemed to have waived the right to receive any interest payment on
the Old Notes accrued from and after such interest payment date.
This Prospectus, together with the Letter of Transmittal, is being sent to
all registered holders of Old Securities as of November 6, 1997.
Tevecap will not receive any proceeds from this Registered Exchange Offer.
No dealer-manager is being used in connection with this Registered Exchange
Offer. See "Use of Proceeds" and "Plan of Distribution."
4
THE EXCHANGE SECURITIES MAY NOT BE OFFERED OR SOLD IN BRAZIL, EXCEPT UNDER
CIRCUMSTANCES WHICH DO NOT CONSTITUTE A PUBLIC OFFERING OR DISTRIBUTION OF
SECURITIES UNDER BRAZILIAN LAWS AND REGULATIONS. THE EXCHANGE SECURITIES HAVE
NOT BEEN, AND WILL NOT BE, REGISTERED WITH THE COMISSAO DE VALORES MOBILIARIOS
("CVM"), THE SECURITIES COMMISSION OF BRAZIL.
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TABLE OF CONTENTS
PAGE
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ENFORCEABILITY OF CIVIL LIABILITIES........................................................................ 5
PRESENTATION OF CERTAIN INFORMATION........................................................................ 6
SUMMARY.................................................................................................... 7
SUMMARY HISTORICAL FINANCIAL AND OTHER DATA................................................................ 19
RISK FACTORS............................................................................................... 21
USE OF PROCEEDS............................................................................................ 35
EXCHANGE RATE DATA......................................................................................... 36
CAPITALIZATION............................................................................................. 38
RECENT DEVELOPMENTS........................................................................................ 53
THE REGISTERED EXCHANGE OFFER.............................................................................. 70
BUSINESS................................................................................................... 77
MANAGEMENT................................................................................................. 104
PRINCIPAL SHAREHOLDERS..................................................................................... 109
CERTAIN TRANSACTIONS WITH RELATED PARTIES.................................................................. 112
DESCRIPTION OF CERTAIN INDEBTEDNESS........................................................................ 116
DESCRIPTION OF NOTES....................................................................................... 118
INCOME TAX CONSIDERATIONS.................................................................................. 150
PLAN OF DISTRIBUTION....................................................................................... 154
EXPERTS.................................................................................................... 154
LEGAL MATTERS.............................................................................................. 155
AVAILABLE INFORMATION...................................................................................... 155
PUBLIC DOCUMENTS........................................................................................... 156
Until February 4, 1998, broker-dealers effecting transactions in the
Exchange Notes, whether or not participating in the Registered Exchange Offer,
may be required to deliver a Prospectus. This is in addition to the obligation
of broker-dealers to deliver a Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
No broker-dealer, salesperson or other individual has been authorized to
give any information or to make any representations in connection with the
Registered Exchange Offer other than those contained in this Prospectus and
Letter of Transmittal and, if given or made, such information or representation
must not be relied upon as having been authorized by the Company. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy the Exchange Notes in any jurisdiction to any person to whom it is unlawful
to make such offer or solicitation in such jurisdiction. The delivery of this
Prospectus shall not, under any circumstances, create any implication that the
information herein is correct at any time subsequent to its date.
ENFORCEABILITY OF CIVIL LIABILITIES
Tevecap and each of the Guarantors are Brazilian corporations with
substantially all of their assets and operations located, and substantially all
of their revenues derived, outside the United States. Each of Tevecap and the
Guarantors has appointed CT Corporation System, New York, New York, as its agent
to receive service of process with respect to any action brought against it in
any federal or state court in the State of New York arising from the Registered
Exchange Offer. However, it may not be possible for investors to enforce outside
the United States judgments against Tevecap and the Guarantors obtained in
5
the United States in any such actions, including actions predicated upon the
civil liability provisions of the US federal and state securities laws. In
addition, certain of the directors and officers of Tevecap and the Guarantors,
and certain of their advisors named herein, are residents of Brazil, and all or
substantially all of the assets of such persons may be located outside the
United States. As a result, it may not be possible for investors to effect
service of process within the United States upon such persons, or to enforce
against them judgments obtained in United States courts, including judgments
predicated upon the civil liability provisions of the US federal and state
securities laws.
Tevecap has been advised by its Brazilian counsel, Basch & Rameh Advogados e
Consultores, that judgments of US courts for civil liabilities predicated upon
the federal securities laws of the United States, subject to certain
requirements described below, may be enforced in Brazil. A judgment against the
directors and officers of Tevecap and the Guarantors or the advisors named
herein who are residents of Brazil or against Tevecap or the Guarantors obtained
outside of Brazil would be enforceable in Brazil against such persons or Tevecap
or the Guarantors without reconsideration of the merits upon confirmation of
that judgment by the Brazilian Supreme Court. That confirmation, generally, will
occur if the foreign judgment (i) fulfills all formalities required for its
enforceability under the laws of the country where the foreign judgment is
granted, (ii) is issued by a competent court after proper service of process,
(iii) is not subject to appeal, (iv) is authenticated by a Brazilian consular
office in the country where the foreign judgment is issued and is accompanied by
a certified Portuguese translation and (v) is not contrary to Brazilian national
sovereignty or public policy or "good morals" (as set forth in Brazilian law).
Notwithstanding the foregoing, no assurance can be given that confirmation would
be obtained, that the process described above can 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 Notes or the Subsidiary
Guarantees. Tevecap has been further advised by its Brazilian counsel that
original actions predicated on the federal securities laws of the United States
may be brought in Brazilian courts and that Brazilian courts may enforce civil
liabilities in such actions against Tevecap or the Guarantors, their respective
directors, certain of their respective officers and the advisors named herein. A
plaintiff (whether Brazilian or non-Brazilian) who resides outside Brazil during
the course of litigation in Brazil must provide a bond to guarantee court costs
and legal fees if the plaintiff owns no real property in Brazil.
PRESENTATION OF CERTAIN INFORMATION
The accounts of the Company, which are maintained in Brazilian reais, were
prepared in accordance with the accounting principles generally accepted in the
United States of America and translated into United States dollars on the basis
set forth in Note 2.3 of the Consolidated Financial Statements (as defined) of
the Company. Certain amounts stated herein in U.S. 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 December 31, 1996 of R$1.0394 = US$1.00. Such
translations should not be construed as a representation that reais could have
been converted at such rate on such date or at any other date. See "Exchange
Rate Data." All references in this Prospectus to (i) "US dollars," "$" or "US$"
are to United States dollars and (ii) "reais," "real" or "R$" are to Brazilian
reais. Capitalized terms used in this Prospectus are defined, unless the context
otherwise requires, in the Glossary attached hereto as Appendix C. Unless
otherwise specified, data regarding population or homes in a licensed area are
projections based on 1991 population census figures compiled by the Instituto
Brasileiro de Geografia e Estastica ("IBGE"). There can be no assurance that the
number of people or the number of households in a specified area has not
increased or decreased by a higher or lower rate than those estimated by the
IBGE since the 1991 census. Unless otherwise indicated, references to the number
of the Company's subscribers are based on Company data as of December 31, 1996.
The term DIRECTV-Registered Trademark- ("DIRECTV")
(DIRECTV-Registered Trademark- is a registered trademark of Hughes Electronics
Corporation ("Hughes Electronics")) refers to the Ku-Band service provided by
Galaxy Brasil in conjunction with Galaxy Latin America. Data concerning total
MMDS, Cable, C-Band or Ku-Band subscribers and penetration rates represent
estimates made by the Company based on the January 1996 data of Kagan World
Media, Inc., the Company's knowledge of the pay television systems of the
Company and the Operating Ventures, and public statements of other Brazilian pay
television providers. Although the Company believes such estimates are
reasonable, no assurance can be made as to their accuracy.
6
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION INCLUDING THE FINANCIAL
STATEMENTS OF TEVECAP AND ITS SUBSIDIARIES (TOGETHER "TVA" OR THE "COMPANY")
INCLUDED ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
TVA is a leading pay television operator in Brazil and is one of the
country's largest pay television programming distributors. In 1989, TVA was the
first to provide pay television services in Brazil and, in July 1996, the
Company launched DIRECTV, Brazil's first digital Ku-Band service. With
approximately 380,000 subscribers, TVA is the only operator in Brazil to offer
pay television services utilizing five distribution technologies: MMDS, Cable,
digital Ku-Band, digital C-Band and UHF. TVA believes that its ability to
strategically deploy alternative technologies provides it with significant
competitive advantages, including the ability to rapidly enter new markets,
maximize penetration of existing markets and deliver service in the most cost
effective manner. Additionally, TVA has interests in HBO Brasil Partners and
ESPN Brasil Ltda., two programming joint ventures (the "Programming Ventures").
Through owned, affiliated and independent pay television operators, TVA
programming reaches approximately one million pay television households. TVA is
a majority owned subsidiary of Abril, S.A. ("Abril"), Latin America's leading
magazine publishing, printing and distribution company. TVA's other shareholders
are Falcon International Communications (Bermuda) L.P. ("Falcon International"),
The Hearst Corporation ("Hearst"), ABC, Inc. ("ABC") and Chase Manhattan
International Finance Ltd. ("CMIF").
The Company conducts its pay television operations through three owned
operating systems (the "Owned Systems"): TVA Sistema, TVA Sul and Galaxy Brasil.
Through the MMDS and Cable systems of TVA Sistema and TVA Sul, the Company
serves six cities with a combined population of approximately 18 million,
including three of the seven largest cities in Brazil: Sao Paulo (population of
10.2 million), Rio de Janeiro (population of 5.7 million) and Curitiba
(population of 1.5 million). The Company also holds minority interests in
Canbras TVA and TV Filme (the "Operating Ventures"), which together provide pay
television services to an additional seven cities with a total population of 6.5
million. In addition, the Company sells programming to, and receives a per
subscriber fee from, unaffiliated pay television operators ("Independent
Operators").
The Company, through Galaxy Brasil, is Brazil's exclusive provider of the
premium programming service, DIRECTV, Brazil's first digital direct broadcast
satellite Ku-Band service. Galaxy Brasil receives programming, scheduling and
related services for DIRECTV from Galaxy Latin America ("GLA"), in which TVA
holds a 10.0% equity interest. The other owners of GLA are a unit of Hughes
Electronics, a member of the Cisneros Group and a subsidiary of Grupo MVS.
Through local operating companies such as Galaxy Brasil, GLA plans to provide
DIRECTV service throughout much of Latin America and the Caribbean. The Company,
through TVA Sistema, also currently provides Brazil's only digital C-Band
television service (together with Galaxy Brasil, the "DBS Systems"). The DBS
Systems enable the Company to deliver a greater number of channels than any
other television operator in Brazil and provide TVA with access to substantially
all of Brazil's 33.9 million TV Homes.
7
ORGANIZATIONAL STRUCTURE
The organizational structure of the Company, including the Owned Systems,
the Operating Ventures, the Programming Ventures and the License Subsidiaries,
is summarized in the following chart. Percentages represent Tevecap's ownership
interest in each entity.
[LOGO]
- ------------------------
(a) License subsidiaries hold pay television licenses for the operation of
certain of the Owned Systems.
(b) TV Filme is publicly traded under the symbol "PYTV." TV Filme's market
capitalization, as of June 30, 1997, was $105.5 million.
(c) Equity interest held through TVA Communications Ltd., a wholly owned
subsidiary of Tevecap ("TVA Communications"), and TVA Communications Aruba
N.V., a wholly-owned subsidiary of TVA Communications.
(d) An executive officer of Abril holds .01% of the capital stock of Galaxy
Brasil and has agreed to transfer such interest to TVA at nominal cost.
Hughes Electronics and the Cisneros Group have a right to purchase, and have
expressed an interest in purchasing, 25.0% of Galaxy Brasil.
(e) Equity interest held through TVA Communications.
(f) The capital stock of each of these companies is currently held by affiliates
of TVA. Each company has agreed to transfer the licenses held by it to TVA
at nominal cost.
8
OWNERSHIP
Tevecap is a majority owned subsidiary of Abril, the leading magazine
publishing, printing and distribution company in Latin America. Abril publishes
over 266 weekly, bi-weekly and monthly titles. During 1996, the combined monthly
paid circulation of Abril and its affiliates averaged 16.6 million copies. TVA
benefits from Abril's extensive experience in the business of subscriptions and
distribution, advertising synergies, common research resources and financial
analysis and support. Certain of Tevecap's other shareholders provide the
Company with access to additional international programming and certain
technical and financial expertise. The Company's shareholders have invested, in
aggregate, approximately $288.0 million in the Company. Tevecap's current
ownership is as follows: Abril, 56.5%; Falcon International, 14.2%; Hearst,
10.0%; ABC, 10.0%; and CMIF, 9.3%. Each of Tevecap's corporate shareholders has
agreed, with certain exceptions, to a reorganization of the ownership of
Tevecap. As a result of the proposed reorganization a new Brazilian corporation
would become an 80% shareholder in Tevecap and Hearst/ABC would remain a 20.0%
shareholder in Tevecap. The new structure would not result in any change in the
current beneficial equity participation of the Stockholders in Tevecap, and the
transactions establishing the new structure and the new structure itself would
have to conform to the restrictions of the Indenture. As of the date hereof, the
timing of the restructuring is under discussion by the Stockholders. See
"Principal Shareholders."
THE BRAZILIAN PAY TELEVISION MARKET
Brazil is the largest television and video market in Latin America with an
estimated 33.9 million TV Homes which, as of December 31, 1995, watched on
average more than 4.0 hours of television per day, as compared to an average of
4.5 hours in the United States. Approximately 6.2 million television sets and
1.9 million VCR units were sold in Brazil during 1995. The pay television
industry in Brazil began in 1989 with the commencement by the Company of UHF
service in Sao Paulo. As of December 31, 1996, there were an estimated 1.8
million pay television subscribers, representing approximately 5.3% of Brazilian
TV Homes. By comparison, as of December 31, 1995, 51.1% of TV Homes in
Argentina, 12.6% of TV Homes in Mexico, 21.7% of TV Homes in the United Kingdom
and 69.2% of TV Homes in the United States subscribed to pay television.
Management believes that the number of pay television subscribers in Brazil will
continue to grow as pay television reaches more households both through the
expansion of existing and new MMDS and Cable systems and through development of
nationwide DBS systems. The Ministry of Communications estimates that Brazil
will have 16.5 million pay television subscribers by 2003.
COMPANY OPERATIONS
MMDS AND CABLE SYSTEMS. TVA's strategy of rapidly deploying an extensive
MMDS network has allowed it to enter new markets quickly and develop broad
geographic coverage which the Company may expand utilizing signal repeaters. TVA
has developed Brazil's largest MMDS network and, with the Operating Ventures,
serves the country's major metropolitan areas. MMDS systems are typically easier
to deploy and require relatively little capital investment for construction and
maintenance as compared to Cable systems. The MMDS systems of the Company and
the Operating Ventures currently provide 15 to 18 channels of programming.
Management expects this number to increase to 31 soon after the Ministry of
Communications grants additional channel rights as allowed under recently passed
regulations. See "Business--Regulatory Framework."
TVA has recently emphasized the strategic deployment of Cable service and
currently operates Cable systems in Sao Paulo, Curitiba and three other cities.
As of December 31, 1996, TVA had deployed approximately 1,139 kilometers of
cable, including 185 kilometers of fiber optic cable. As part of this buildout
plan, the Company constructed a 281 kilometer fiber optic network, including a
57 kilometer fiber optic loop in Sao Paulo and a 28 kilometer fiber optic
network in Curitiba and began upgrading or constructing four recently acquired
Cable systems. As a result, management believes that TVA Cable
9
systems, as of the end of 1996, passed more than 494,000 homes. Additionally,
Canbras TVA is constructing Cable networks in ten cities within the greater Sao
Paulo area with a combined population of over 2.8 million. All of these Cable
systems have been designed for or are being upgraded to either 750 or 550 MHz
bandwidth capacity, the latter of which is readily upgradeable to 750 MHz
bandwidth capacity. The Cable systems of TVA and Canbras TVA currently offer
between 31 and 44 analog channels of programming (including off-air channels).
DBS SYSTEMS. In July 1996, the Company, through Galaxy Brasil, launched
DIRECTV, Brazil's first Ku-Band service. GLA provides Galaxy Brasil with
programming, scheduling and related services for Galaxy Brasil's DIRECTV service
and Galaxy Brasil exclusively markets and sells the DIRECTV service in Brazil.
With DIRECTV service, TVA provided 60 channels of video programming (including
18 pay-per-view channels) and 33 channels of audio programming as of July 1,
1997, with the intention to provide up to 70 channels of video programming in
late 1997. In addition, since December 31, 1996, a competitor has entered the
Ku-Band market, but currently offers only 26 channels of programming (including
four pay-per-view channels). The Company began a nationwide rollout of DIRECTV
in November 1996, at which time TVA initiated a publicity campaign supported by
a nationwide network of trained installers. By comparison, DIRECTV, Inc., a unit
of Hughes Electronics, started its DIRECTV service in the United States in June
1994 and, as of December 31, 1996, had approximately 2.6 million subscribers.
TVA has offered a C-Band service since 1993, and is the only pay television
operator to deliver a digital C-Band signal in Brazil. Currently, TVA's C-Band
service is able to deliver 38 channels (including nine Second Audio Programming
("SAP") channels) in addition to the off-air channels and currently delivers 26
channels (including nine SAP channels). By comparison, TVA's only significant
C-Band competitor offers six analog channels. As of December 31, 1996, there
were over 4.0 million parabolic C-Band antennae in Brazil, most of which were
used to receive only off-air channels. This installed base represents the
Company's target market for its digital C-Band service and the Company expects
to attract these viewers through marketing and promotional initiatives.
PROGRAMMING. Management believes its programming provides a significant
competitive advantage by attracting and retaining subscribers. TVA holds equity
interests in two Programming Ventures, ESPN Brasil Ltda. and HBO Brasil
Partners, both of which provide programming to TVA. ESPN Brasil Ltda. produces
and packages Brazilian sporting events and holds rights to many major Brazilian
soccer championships. ESPN Brasil Ltda. also packages international sporting
events and ESPN2 programming specifically for the Brazilian market. HBO Brasil
Partners packages and distributes HBO Brasil, which airs popular first-run
movies 24 hours a day, either dubbed or subtitled in Portuguese. TVA has
exclusive distribution rights to ESPN Brasil in Sao Paulo, Rio de Janeiro,
Curitiba, Brasilia, Belem and Goiania and has exclusive distribution rights to
HBO Brasil in TVA's served markets.
TVA, in addition to its interests in the Programming Ventures, has entered
into agreements with international programmers such as ABC, Hearst, Time Warner
and Sony to gain the rights to sports, movies, news, arts and entertainment
programming for distribution in Brazil. Management expects TVA to soon offer
Cinemax as part of its DIRECTV service and to introduce CNA, a Brazilian news
channel to be produced by Abril. TVA also generates revenue by selling its
programming to the Operating Ventures and the Independent Operators as well as
to GLA (to be packaged as part of GLA's DIRECTV service) and by selling
advertising spots to be aired on its programming.
10
SUBSCRIBERS AND HOUSEHOLDS RECEIVING TVA PROGRAMMING
Through the Owned Systems, TVA directly serves over 380,000 subscribers.
Together, these subscribers represent approximately 21.1% of all Brazilian pay
television subscribers.
DECEMBER 31, DECEMBER 31,
1995 1996 % CHANGE
------------ ------------ -----------
SUBSCRIBERS-OWNED SYSTEMS
MMDS(a).................................................................. 188,893 230,320 21.9%
Cable(b)................................................................. 15,129 46,011 204.1
DIRECTV and Digital C-Band............................................... 15,126 73,180 383.8
------------ ------------
219,148 349,511 59.5
Paid Subscribers Awaiting Installation(c)................................ 18,343 31,124 69.7
------------ ------------
Total Subscribers-Owned Systems.......................................... 237,491 380,635 60.3
------------ ------------
------------ ------------
- ------------------------
(a) Includes UHF subscribers.
(b) Reflects the purchase by the Company of existing cable systems in Curitiba,
Foz do Iguacu and Camboriu, during 1996.
(c) Subscribers who have paid an installation fee but are awaiting the
installation of service.
Through the Operating Ventures, TVA has minority interests in two pay
television operators which, together, serve over 85,000 subscribers.
DECEMBER 31, DECEMBER 31,
1995 1996 % CHANGE
------------- ------------- -----------
SUBSCRIBERS-OPERATING VENTURES
MMDS..................................................................... 35,572 77,130 116.8%
Cable.................................................................... -- 8,126 --
------ ------
Total Subscribers-Operating Ventures..................................... 35,572 85,256 139.7
------ ------
------ ------
Through the Owned Systems and the Operating Ventures, and through sales of
programming to the Independent Operators, TVA's programming reaches over one
million pay television households, which represent approximately 57.0% of all
Brazilian pay television households.
DECEMBER 31, DECEMBER 31,
1995 1996 % CHANGE
------------ ------------ -----------
HOUSEHOLDS RECEIVING TVA PROGRAMMING
Owned Systems............................................................ 237,491 380,635 60.3%
Operating Ventures....................................................... 35,572 85,256 139.7
Independent Operators.................................................... 341,699 564,499 65.2
------------ ------------
Total.................................................................... 614,762 1,030,390 67.6
------------ ------------
------------ ------------
11
COMPETITIVE ADVANTAGES
Management believes that the Company has the following competitive
advantages:
SUPERIOR QUALITY PROGRAMMING LINEUP. TVA's programming line-up includes
exclusive rights to ESPN Brasil in the Company's major markets, with coverage of
many of Brazil's most important soccer championships, including the Brazilian
Championship and the Sao Paulo and Rio de Janeiro State Championships. The
Company exclusively offers CMT Brasil and Bravo Brasil and is also the only pay
television provider offering HBO programming in TVA's served markets. Management
believes that as the pay television industry grows, programming will become the
critical factor driving consumer selection of a pay television provider, and
that with TVA's relationships with strong international partners and its
exclusive soccer coverage, TVA will continue to offer superior quality
programming.
STRATEGIC DEPLOYMENT OF ALTERNATIVE DISTRIBUTION TECHNOLOGIES. The Company
is the only pay television operator utilizing five distribution technologies:
MMDS, Cable, Ku-Band, C-Band and UHF. The availability of multiple distribution
technologies enables the Company to capitalize on the population and income
characteristics, topography and competitive dynamics of each of its targeted
markets. The Company has the ability to penetrate new markets quickly and
efficiently and to offer tiered programming at low cost with MMDS. The Company
is expanding its Cable systems, where warranted by economic and competitive
conditions, to build its subscriber base and to prepare for future opportunities
in interactive services and telecommunications. Additionally, management
believes the Company can rapidly penetrate virtually any market through the
continued deployment of its DBS Systems.
DBS SYSTEMS: NATIONWIDE COVERAGE AND DIGITAL SERVICE. Through its DBS
Systems, TVA is capable of offering programming to nearly all of Brazil's 33.9
million TV Homes, including those households in markets where Cable or MMDS
systems are either not developed or not economically viable. Through its DIRECTV
service, TVA was the first provider of Ku-Band pay television services in Brazil
and expects to enroll as subscribers a significant share of those who are
interested in broader, digital quality programming and pay-per-view services.
Through its digital C-Band system, the Company provides 26 channels of
programming (including nine SAP channels) and is capable of providing up to 38
channels of programming (including SAP channels). The Company's only significant
competitor in C-Band pay television service provides six analog channels of
programming in addition to off-air channels. The Company currently targets its
C-Band service to the over 4.0 million parabolic C-Band antennae owners in
Brazil, most of whom currently receive only the off-air channels.
MODERN CABLE INFRASTRUCTURE. The Company's Cable systems are constructed
with, or are being upgraded to, either 750 MHz or 550 MHz bandwidth capacity,
the latter of which is readily upgradeable to 750 MHz bandwidth capacity with
only moderate investment. This Cable technology will enable the Company to
provide data transmission and interactive services, including
telecommunications, in the future. Management believes that the Company's major
competitors for Cable service use narrower bandwidths over portions of their
Cable systems and have installed certain types of Cable in households which
currently may prevent them from providing telecommunications or high speed data
delivery through these portions of their systems until substantial additional
investments have been made for system reconstruction or upgrade.
STRONG STRATEGIC PARTNERS. The Company's strategic equity partners continue
to offer valuable expertise. TVA benefits from Abril's extensive experience in
the business of subscriptions and distribution and from the collective
experience of Falcon International, Hearst and ABC with regard to pay television
operations and from access to programming.
12
BUSINESS STRATEGY
TVA seeks to be Brazil's largest and most profitable pay television operator
and programming distributor and intends to capitalize on the convergence and
development of voice, video and telecommunications services. The Company intends
to achieve these goals through the following strategies:
MAXIMIZE PENETRATION IN EXISTING MARKETS. The Company seeks to increase its
penetration of existing markets by: (i) expanding the range of TVA's Cable
systems by extending its fiber optic and coaxial cable network and by seeking
pre-wiring arrangements with residential housing developers, (ii) improving the
signal quality and coverage of TVA's MMDS systems by using signal repeater
technology, (iii) maximizing penetration by offering tiered subscription options
and developing programming packages to appeal to more households and (iv)
expanding its penetration in ABC Class households through its scheduled
nationwide rollout of DIRECTV service and the continued development of C-Band
service.
MAXIMIZE CUSTOMER RETENTION THROUGH SUPERIOR CUSTOMER SERVICE. In order to
maximize customer retention, the Company aims to provide a consistently high
level of customer service. The Company has developed or has acquired the right
to use proprietary management information systems which, among other things,
provide Company representatives immediate access to customer records and
correspondence history. This enables TVA to provide high quality service to its
clients while monitoring subscriber payment patterns. The Company's Churn rate,
which reflects the ability of the Company to retain subscribers, averaged
approximately 1.8% per month during the year ended December 31, 1996.
ENHANCE TVA'S PROGRAMMING PACKAGE. In order to maintain and enhance its
position as a provider of superior programming in Brazil, TVA is developing new
programming through the Programming Ventures, as well as through Abril and other
partners. TVA frequently evaluates the demographics of its subscribers and
potential subscribers and seeks to provide programming most in demand. The
Company also takes advantage of opportunities to enter into exclusive
distribution agreements for popular television programming in Brazil. Management
believes that its DIRECTV service, which includes both basic and premium
channels, as well as pay-per-view movies and events from Brazil, other Latin
American countries, Europe, Asia and the United States, further enhances TVA's
programming offerings and positions the Company to be the provider of the widest
selection of popular programming in Brazil.
ENTER NEW MARKETS. The Company intends to enter new markets by: (i)
acquiring existing MMDS and Cable operations, (ii) initiating the nationwide
rollout of DIRECTV service and (iii) investing in new operating ventures with
other MMDS and Cable operators.
CONTINUE NETWORK ENHANCEMENT. The Company is positioning itself to provide
high speed data transmission, interactive and other telecommunications services
over its systems and to take advantage of possible deregulation and the growing
demand for these services in Brazil. The Company is expanding its Cable systems
with fiber optic and coaxial cable capable of being upgraded to provide such
enhanced services and to provide other enhanced services which may become
available in the future. In addition, the Company continues to explore the
development of digital compression of MMDS signals.
13
THE EXCHANGE OFFER
The Exchange Offer................ Tevecap is offering to exchange pursuant to the Exchange
Offer an aggregate principal amount of up to
US$15,368,000 principal amount of its 12 5/8% Senior
Notes due 2004 (the "Exchange Notes") together with the
Subsidiary Guarantees of the Exchange Notes (such
Subsidiary Guarantees and the Exchange Notes together,
the "Exchange Securities"), for a like principal amount
of its 12 5/8% Senior Notes due 2004 (the "Old Notes")
together with the Subsidiary Guarantees of the Old Notes
(such Subsidiary Guarantees and Old Notes together, the
"Old Securities"). Tevecap will issue the Exchange
Securities on or promptly after the Expiration Date. As
of the date of this Prospectus, US$15,368,000 aggregate
principal amount of Old Notes is outstanding. The terms
of the Exchange Securities are identical in all material
respects to the terms of the Old Securities for which
they may be exchanged pursuant to this offer, except
that the Exchange Securities have been registered under
the Securities Act and are issued free from any covenant
regarding registration. The Exchange Securities will
evidence the same debt as the Old Securities and will be
issued under and be entitled to the same benefits under
the Indenture as the Old Securities. The Old Securities
remained outstanding after the Company consummated an
exchange offer on May 27, 1997, pursuant to the terms
and conditions of the Exchange and Registration Rights
Agreement, dated November 26, 1996 (the "Original
Exchange Agreement"). The Issuance of the Exchange
Securities and the Registered Exchange Offer is intended
to satisfy certain obligations of Tevecap pursuant to
certain registration rights granted under the Exchange
and Registration Agreement. Pursuant to the Exchange and
Registration Agreement, certain of the holders of the
Old Securities have agreed to pay the expenses of the
Registered Exchange Offer. See "The Registered Exchange
Offer" and "Description of the Notes."
Interest Payments................. Interest on the Exchange Notes shall accrue from the
last Interest Payment Date (May 26 or November 26) on
which interest was paid on the Old Notes surrendered.
See "The Exchange Offer--Interest on the Exchange
Notes."
Expiration Date................... The Registered Exchange Offer will expire at 5:00 p.m.,
New York City time, on December 8, 1997, unless extended
by Tevecap in its sole discretion. See "The Registered
Exchange Offer--Expiration Date; Extensions."
Exchange Date..................... The date of acceptance for exchange of the Old Notes and
the consummation of the Registered Exchange Offer will
be the first business day following the Expiration Date
unless extended. See "The Registered Exchange
Offer--Terms of the Exchange."
Withdrawal Rights................. Tenders may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date; otherwise,
all tenders
14
will be irrevocable. See "The Registered Exchange
Offer-- Withdrawal of Tenders."
Procedures for Tendering Notes.... See "The Registered Exchange Offer--Exchange Offer
Procedures."
Federal Income Tax Consequences... The exchange of Old Securities for the Exchange
Securities pursuant to the Registered Exchange Offer
will not result in any income, gain or loss to holders
who participate in the Registered Exchange Offer or to
Tevecap for U.S. income tax purposes. See "Income Tax
Considerations."
Resale............................ Tevecap is making the Registered Exchange Offer in
reliance on the position of the staff of the Commission
as set forth in certain no-action letters addressed to
other parties in other transactions. However, Tevecap
has not sought its own no-action letter and there can be
no assurance that the staff of the Commission would make
a similar determination with respect to the Registered
Exchange Offer as in such other circumstances. Based on
these interpretations by the staff of the Commission,
Tevecap believes that Exchange Securities issued
pursuant to this Registered Exchange Offer in exchange
for Old Securities may be offered for resale, resold and
otherwise transferred by a holder thereof (other than
(i) a broker-dealer who acquired the Old Securities as a
result of market making activities or other trading
activities, (ii) an Initial Purchaser who acquired the
Old Securities directly from the Company solely in order
to resell pursuant to Rule 144A of the Securities Act or
any other available exemption under the Securities Act,
or (iii) a person that is an "affiliate" (as defined in
Rule 405 of the Securities Act) of Tevecap) without
compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such
Exchange Securities are acquired in the ordinary course
of such holder's business and that such holder is not
participating, and has no arrangement or understanding
with any person to participate, in the distribution of
such Exchange Securities. Holders of Old Securities
accepting the Registered Exchange Offer will represent
to Tevecap in the Letter of Transmittal that such
conditions have been met. Any holder who participates in
the Registered Exchange Offer for the purpose of
participating in a distribution of the Exchange
Securities may not rely on the position of the staff of
the Commission as set forth in these no-action letters
and would have to comply with the registration and
prospectus delivery requirements of the Securities Act
in connection with any secondary resale transaction.
Each broker-dealer who receives Exchange Securities for
its own account pursuant to the Registered Exchange
Offer must acknowledge that it acquired the Old
Securities as the result of market-making activities or
other trading activities and will deliver a prospectus
in connection with any resale of such Exchange
Securities. 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
15
an "underwriter" within the meaning of the Securities
Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a
broker-dealer in connection with resales of Exchange
Securities received in exchange for Old Securities where
such Old Securities were acquired by such broker-dealer
as a result of market-making activities or other trading
activities. In addition, pursuant to Section 4(3) under
the Securities Act, until February 4, 1998, all dealers
effecting transactions in the Exchange Securities,
whether or not participating in the Registered Exchange
Offer, may be required to deliver a Prospectus. Each of
Tevecap and the Subsidiary Guarantors has agreed that,
for a period of 90 days after the date of this
Prospectus, it will make this Prospectus available to
any broker-dealer for use in connection with any such
resale at the expense of such broker-dealer. See "The
Registered Exchange Offer" and "Plan of Distribution."
Remaining Old Notes............... Holders of Old Securities who do not tender their Old
Securities in the Registered Exchange Offer or whose Old
Securities are not accepted for exchange will continue
to hold such Old Securities and will be entitled to all
the rights and preferences, and will be subject to the
limitations, applicable thereto under the Indenture. All
untendered and tendered but unaccepted Old Securities
(collectively, the "Remaining Old Securities") will
continue to bear legends restricting their transfer. In
general, the Old Securities may not be offered or sold,
unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable state
securities laws. To the extent that the Registered
Exchange Offer is effected, the trading market, if any,
for Remaining Old Securities could be adversely
affected. See "Risk Factors--Factors Relating to the
Company and the Exchange Securities--Consequences of
Failure to Properly Tender Old Securities Pursuant to
the Registered Exchange Offer." See "The Registered
Exchange Offer--Terms of the Exchange."
Exchange Agent.................... The exchange agent with respect to the Exchange Offer is
The Chase Manhattan Bank (the "Exchange Agent"). The
address and telephone number of the Exchange Agent are
set forth in "The Exchange Offer--Exchange Agent."
Use of Proceeds................... There will be no proceeds to Tevecap from the exchange
pursuant to the Exchange Offer. See "Use of Proceeds."
THE EXCHANGE NOTES
Issuer............................ Tevecap S.A.
Notes Offered..................... $15,368,000 aggregate principal amount of 12 5/8% Senior
Notes due 2004 (the "Exchange Notes" and, together with
the Old Notes, the "Notes").
Maturity.......................... November 26, 2004.
Interest Payment Dates............ May 26 and November 26 of each year, commencing on May
26, 1997.
16
Withholding Taxes; Additional
Amounts......................... Payments in respect of the Notes are not subject to
withholding taxes imposed by Brazil provided that the
Notes are not redeemed prior to November 26, 2004. If
the Notes are redeemed for any reason prior to November
26, 2004, then Brazilian withholding taxes will be
imposed retroactively on interest, fees and commissions
paid by Tevecap in connection with the Notes from the
date of issuance through the date of such redemption.
Tevecap and the Guarantors have agreed to pay such
Additional Amounts (as defined) in respect of such
Brazilian withholding taxes as will result in receipt by
the holders of Notes of such amounts as would have been
received by them had no such withholding or deduction
been required, except to the extent set forth under
"Description of Notes-- Additional Amounts." See also
"Income Tax Considerations-- Brazil."
Sinking Fund...................... None.
Optional Redemption............... Except as described below, Tevecap may not redeem the
Notes prior to November 26, 2004. In the event Tevecap
receives Net Cash Proceeds (as defined) at any time, on
or prior to November 26, 2000, from one or more (i)
Significant Equity Offerings (as defined) or (ii) sales
of Tevecap's Capital Stock to a Strategic Investor (as
defined), Tevecap may redeem up to $75.0 million of the
aggregate principal amount of the Notes at a price equal
to 112.625% of the principal amount to be redeemed,
together with accrued and unpaid interest, if any, to
the date of redemption, provided that at least $175.0
million of the aggregate principal amount of the Notes
remains outstanding after each such redemption. In
addition, Tevecap may redeem the Notes at any time, in
whole but not in part, at a price equal to 100% of their
principal amount, together with accrued and unpaid
interest, if any, to the date of redemption, in the
event of certain changes affecting the withholding tax
treatment of the Notes with the occurrence of such
events to be determined by the Company in accordance
with the terms of the Notes. See "Description of
Notes--Optional Redemption" and "--Redemption for
Changes in Withholding Taxes."
Change of Control................. Upon the occurrence of a Change of Control (as defined),
each holder will have the right to require Tevecap to
make an offer to repurchase the Notes held by such
holder at a price equal to 101% of the principal amount
thereof, together with accrued and unpaid interest, if
any, to the date of repurchase. See "Description of
Notes--Change of Control."
Subsidiary Guarantees............. The Notes are jointly and severally guaranteed (the
"Subsidiary Guarantees"), on a senior basis, by all of
Tevecap's Restricted Subsidiaries (as defined) existing
on the date the Notes were issued and each Restricted
Subsidiary acquired thereafter (the "Guarantors"). See
"Description of Notes--Subsidiary Guarantees."
17
Ranking........................... The Notes are unsecured, senior obligations of Tevecap
ranking PARI PASSU in right of payment with all other
existing and future unsecured, senior Indebtedness (as
defined) of Tevecap and senior in right of payment to
all other existing and future subordinated Indebtedness
of Tevecap. The Subsidiary Guarantees are unsecured,
senior obligations of the Guarantors ranking PARI PASSU
in right of payment with all other existing and future
unsecured, senior Indebtedness of the Guarantors and
senior in right of payment to all other existing and
future subordinated Indebtedness of the Guarantors.
However, subject to certain limitations set forth in the
Indenture, Tevecap and its Subsidiaries may incur other
senior Indebtedness, including Indebtedness that is
secured by the assets of Tevecap and its Subsidiaries.
At December 31, 1996, Tevecap did not have any
outstanding senior Indebtedness, other than the Notes
(exclusive of unused commitments) and the aggregate
principal amount of outstanding senior indebtedness of
the Guarantors, other than the Subsidiary Guarantees,
was 4.8 million (exclusive of unused commitments and
short term indebtedness) all of which ranks PARI PASSU
with the Subsidiary Guarantees, but none of which was
secured indebtedness. As of June 30, 1997, Tevecap did
not have any outstanding senior indebtedness other than
the Notes (exclusive of unused commitments and short
term indebtedness), and the aggregate principal amount
of outstanding senior indebtedness of the Guarantors was
$81.0 million (exclusive of unused commitments and short
term indebtedness) all of which ranks PARI PASSU with
the Subsidiary Guarantees, and none of which is secured.
Although the Notes are titled "senior" securities,
Tevecap has not issued any Indebtedness to which the
Notes would rank senior.
Restrictive Covenants............. The Indenture under which the Notes are issued (the
"Indenture") contains certain covenants which will limit
(i) the incurrence of additional indebtedness and the
issuance of Disqualified Stock by Tevecap and its
Restricted Subsidiaries, (ii) the payment of dividends
on, and the redemption of, capital stock of Tevecap and
the redemption of certain subordinated obligations of
Tevecap, (iii) investments, (iv) sales of assets and
stock of Restricted Subsidiaries, (v) transactions with
affiliates, (vi) the creation and existence of liens,
(vii) investments in Unrestricted Subsidiaries (as
defined), (viii) the types of businesses Tevecap and its
Restricted Subsidiaries may conduct and (ix)
consolidations, mergers and transfers of all or
substantially all of Tevecap's assets. The Indenture
also prohibits certain restrictions on distributions
from Restricted Subsidiaries. However, all of these
limitations and prohibitions are subject to a number of
important qualifications and exceptions. See
"Descriptions of Notes--Certain Covenants."
RISK FACTORS
Prospective investors in the Notes should carefully consider all of the
information set forth in this Prospectus and, in particular, should evaluate the
specific factors set forth under "Risk Factors."
18
SUMMARY HISTORICAL FINANCIAL AND OTHER DATA
The historical data as of December 31, 1996 and 1995, and for the three
years in the period ended December 31, 1996 have been derived from, and should
be read in conjunction with, the audited Consolidated Financial Statements of
the Company included elsewhere in this Prospectus. The historical data as of
December 31, 1994, 1993 and 1992 and for the two years in the period ended
December 31, 1993 are derived from the audited Consolidated Financial Statements
of the Company that are not included elsewhere in this Prospectus.
As required by Brazilian law, and in accordance with local accounting
practices, the financial records of Tevecap and its subsidiaries are maintained
in the applicable Brazilian currency (the real). However, the Consolidated
Financial Statements are presented in US dollars. In order to prepare the
Consolidated Financial Statements, the Company's accounts have been translated
from the applicable Brazilian currency, on the basis described in Note 2.3 to
the Consolidated Financial Statements. 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.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT SELECTED OPERATING
DATA)
STATEMENTS OF OPERATING DATA:
Gross Revenues
Monthly subscriptions...................................... $ 7,070 $ 12,544 $ 27,976 $ 62,496 $ 123,020
Installation............................................... 1,857 4,350 6,997 26,045 61,717
Indirect programming (a)................................... 512 530 1,626 2,866 11,377
Other (b).................................................. 1,322 2,468 7,173 10,603 15,724
Revenue taxes (c).......................................... (305) (371) (872) (7,506) (13,747)
--------- --------- --------- --------- ---------
Total net revenue............................................ 10,456 19,521 42,900 94,504 198,091
--------- --------- --------- --------- ---------
Direct operating expenses (d)................................ 32,905 29,779 28,659 62,026 112,297
Selling, general and administrative expenses................. 17,834 19,957 24,370 46,902 81,455
Depreciation and amortization................................ 2,704 4,813 6,177 13,268 28,216
Allowance for inventory obsolescence......................... -- -- -- -- 2,250
--------- --------- --------- --------- ---------
Total operating expenses..................................... 53,443 54,549 59,206 122,196 224,218
--------- --------- --------- --------- ---------
Operating loss............................................... (42,987) (35,028) (16,306) (27,692) (26,127)
Non operating expenses
Interest expense........................................... (13,538) (8,492) (16,413) (17,745) (17,520)
Equity in income (losses) of affiliates (e)................ -- -- 383 (3,672) (8,532)
Other nonoperating income, net (f)......................... 2,232 5,892 20,339 8,039 4,443
Income tax expense......................................... -- -- -- -- (156)
--------- --------- --------- --------- ---------
Net loss..................................................... $ (54,293) $ (37,628) $ (11,997) $ (41,070) $ (47,892)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
OTHER DATA:
EBITDA-TV Group (g).......................................... $ (40,283) $ (30,215) $ (10,129) $ (13,318) $ 8,991
EBITDA-Galaxy Brasil (g)..................................... -- -- -- (1,106) (4,652)
--------- --------- --------- --------- ---------
EBITDA (g)................................................... (40,283) (30,215) (10,129) (14,424) 4,339
Pro forma interest expense (h)............................... -- -- -- 38,623 45,502
Purchase of fixed assets..................................... 7,627 11,379 22,369 93,029 125,612
Ratio of earnings to fixed charges (i)....................... -- -- -- -- --
CASH FLOW DATA:
Cash provided by (used in) operating activities (j).......... (32,633) (19,180) (9,707) 22,989 (17,696)
Cash provided by (used in) investing activities.............. (11,761) (13,190) (24,334) (119,661) (163,900)
Cash provided by (used in) financing activities.............. 44,088 32,348 38,666 116,229 262,193
SELECTED OPERATING DATA:
Number of subscribers to owned systems (k)................... 42,924 82,985 114,853 219,148 349,511
Average monthly revenue per Subscriber (l)................... $ 18.64 $ 21.30 $ 27.80 $ 33.24 $ 39.15
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents.................................... $ 41 $ 19 $ 4,644 $ 24,201 $ 104,798
Property, plant and equipment................................ 29,561 35,859 51,426 131,266 233,593
Total assets................................................. 40,779 45,529 80,441 216,848 459,122
Loans from affiliated companies.............................. 42,577 89,769 0 586 2,721
Long-term liabilities........................................ 67,736 97,105 4,523 9,604 265,860
Redeemable common shares..................................... -- -- 19,754 149,534 164,910
Total shareholders equity.................................... (54,483) (92,111) 27,590 (18,260) (81,528)
See accompanying Notes to Selected Historical Financial And Other Data
19
NOTES TO SELECTED HISTORICAL FINANCIAL AND OTHER DATA
(a) Represents revenues received by the company for selling programming to
the Independent Operators.
(b) Includes Advertising and Other revenues.
(c) Represents various non-income based taxes paid on certain of the
Company's gross revenue items with rates ranging from 2.65% to 7.65%.
(d) Represents costs directly related to Monthly subscriptions, and a
portion of Installation, Indirect programming and Other revenues.
(e) Represents the Company's pro rata share of the Net loss or income of its
equity investment.
(f) Includes interest income, Gain on issuance of shares by equity
investees, Translation gain or loss, Other nonoperating (expenses) income, net,
and Minority interest. The amount for the year ended December 31, 1994 includes
Interest income totaling $21,806. During that year, the Company received capital
contributions from stockholders which resulted in a surplus of cash invested
during such period.
(g) EBITDA represents the sum of (i) net income (loss), plus, without
duplication (ii) income tax expense, (iii) interest expense (income), net, (iv)
other nonoperating (expenses) income, net (v) depreciation, amortization and all
other non-cash charges, less (vi) non-cash items increasing net income (loss)
with the exception of amortized deferred sign-on and hookup fee revenue, in each
case determined in accordance with GAAP. EBITDA-TV Group and EBITDA-Galaxy
represent operating loss plus depreciation and amortization. The term "TV Group"
refers to the operations of TVA, excluding the operations of Galaxy Brasil. The
TV Group, which constitutes the operations of TVA, excluding the operations of
Galaxy Brasil, represents the more mature operations of the group while Galaxy
Brasil remains in a startup phase and has yet to collect material revenues to
offset the costs of initiating the Ku-Band service. EBITDA has been presented
separately for the TV Group and Galaxy Brasil to take account of the different
stages of development of these operations.
(h) Represents interest expense on a pro forma basis, resulting from the
offering of the 12.625% Senior Notes due 2004 (the "Notes") and the application
of the net proceeds therefrom as follows:
YEAR ENDED
DECEMBER 31
--------------------
1995 1996
--------- ---------
Historical interest expense...................................................................... 17,745 17,520
Elimination of interest expense related to certain affiliated indebtedness....................... (11,788) (4,684)
Interest resulting from the Notes based on an interest rate of 12.625%........................... 31,563 31,563
Amortization of deferred financing costs relating to the Notes................................... 1,103 1,103
--------- ---------
38,623 45,502
--------- ---------
--------- ---------
(i) For the five years ended December 31, 1996, earnings were insufficient
to cover fixed charges by $54,487, $37,920, $13,100, $38,268 and $41,209,
respectively. In calculating the Ratio of earnings to fixed charges, earnings
represents Net loss before minority interest, Equity in (losses) income of
affiliates, less fixed charges. Fixed charges consist of the sum of interest
expense paid or accrued on indebtedness of the Company and its subsidiaries and
affiliates and one-third of operating rental expenses (such amount having been
deemed by the Company to represent the interest portion of such payments).
(j) Cash provided by (used in) operating activities (hereinafter referred to
as cash flows from operating activities) has been determined in accordance with
GAAP while EBITDA has been calculated in accordance with the definition in
footnote (g). In accordance with GAAP, cash flows from operating activities
generally reflect the cash effects of transactions and other events that enter
into the determination of net income. The principal difference between EBITDA
and cash flows from operating activities arise as a result of the treatment of
the changes in the balances of operating assets and liabilities from the
beginning to the end of a reporting period. That is, in accordance with GAAP,
such changes are components of cash flows from operating activities while there
is no similar adjustment in the calculation of EBITDA. EBITDA has been presented
as it is a financial measure commonly used in the Company's industry. EBITDA
should not be considered as an alternative to cash provided by (used in)
operating activities, as an indicator of operating performance or as a measure
of liquidity.
(k) Represents the number of Owned Systems' subscribers as of the last day
of each period.
(l) Average monthly revenue per subscriber refers to the average monthly
subscription fee as of the last day of each period.
20
RISK FACTORS
BEFORE TENDERING OLD SECURITIES FOR EXCHANGE SECURITIES, PROSPECTIVE
INVESTORS SHOULD CONSIDER CAREFULLY ALL THE INFORMATION SET FORTH HEREIN AND, IN
PARTICULAR, THE SPECIAL FACTORS APPLICABLE TO AN INVESTMENT IN BRAZIL AND
APPLICABLE TO AN INVESTMENT IN THE COMPANY, INCLUDING THOSE SET FORTH BELOW. IN
GENERAL, INVESTING IN THE SECURITIES OF ISSUERS IN DEVELOPING COUNTRIES, SUCH AS
BRAZIL, INVOLVES A HIGHER DEGREE OF RISK THAN INVESTING IN THE SECURITIES OF
ISSUERS IN THE UNITED STATES AND OTHER JURISDICTIONS. FOR ADDITIONAL INFORMATION
CONCERNING BRAZIL AND CERTAIN MATTERS DISCUSSED BELOW, SEE "ANNEX A--THE
FEDERATIVE REPUBLIC OF BRAZIL."
RISKS RELATING TO THE COMPANY
LIMITED OPERATING HISTORY; EARLY STAGE COMPANY
The Company, which began operating in 1989, has a limited operating history.
Accordingly, prospective investors have limited historical financial information
about the Company upon which to base an evaluation of the Company's performance
and an investment in the Notes. Since inception, the Company has sustained
substantial losses, due primarily to start-up costs, interest expense and
charges for depreciation and amortization arising from the development of its
pay television systems. Prospective investors should be aware of the
difficulties encountered by enterprises in the early stages of development,
particularly in light of the competitive nature of the Brazilian pay television
industry.
The Company derives most of its revenue from subscription revenue and
installation revenue. Subscriber penetration rates and subscriber sensitivity to
the price of installation and subscription fees will materially affect the
Company's results of operations. As TVA's networks mature, installation fees
will represent a declining portion of the Company's total revenues. The ability
of the Company to generate subscription revenue will depend on the acceptance of
its programming, which in turn will depend on the availability of programming at
a competitive cost and the relative appeal to subscribers of such programming.
There can be no assurance that the Company will be successful in establishing
and maintaining a substantial subscriber base or that it will generate revenues
which, when taken together with its sources of financing, will be sufficient to
meet its operating needs or capital requirements or to service its indebtedness,
including the Notes. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
OPERATING LOSSES AND NEGATIVE CASH FLOW
As of December 31, 1996, the Company had incurred cumulative net losses of
approximately $203,867 million since 1991 and as of December 31, 1996 the
Company had negative working capital of $17,696. The Company may continue to
generate net losses and negative funds from operations during the period in
which the Company develops and expands its pay television distribution systems
and builds its subscriber base. The Company's future operating profitability
will depend upon many factors, including, among others, its ability to market
its products and services successfully, achieve its projected market
penetration, manage subscriber turnover rates effectively and price its pay
television services competitively.
There can be no assurance that the Company will achieve or sustain operating
profitability and positive cash flows in the future. If the Company does not
achieve and maintain operating profitability and positive cash flows on a timely
basis, it may not be able to satisfy its future liquidity needs including
funding its working capital requirements and capital expenditures and meeting
its debt service requirements. Future capital expenditure requirements relate
primarily to: (i) the construction of cable networks and the installation of
equipment at subscribers' locations, (ii) the construction of additional
transmission and headend facilities and related equipment purchases, and (iii)
investments in, and maintenance of vehicles and administrative offices. In
addition, the Company has certain commitments that must be, or have been funded,
in connection with its Operating and Programming Ventures and minority
interests. These requirements and commitments are important to the future
development of the business. To date, the
21
Company has relied on contributions and loans from Abril and investments made by
its other shareholders to fund its operations.
The Company has net operating loss carryforwards ("NOLs") totaling
approximately $135 million which are unexpirable. Although management believes
the Company will be profitable in the future and will be able to realize the
benefits from a portion of the NOLs, in accordance with Statement of Financial
Accounting Standards No. 109 (Accounting for Income Taxes), the Company has
established a valuation allowance for all of these net deferred tax assets due
to its cumulative losses. See Note 12 to the Tevecap Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ADDITIONAL FINANCING
If the Company fails to meet its projected operating results or its capital
needs exceed its projected requirements, the Company may require substantial
investment on a continuing basis to finance its corresponding capital
expenditures. The Company may also require substantial additional capital for
any new pay television license acquisitions or investments or acquisitions of
entities holding such licenses, or for any investments in or acquisitions of
other existing pay television operations in order to further expand the
Company's operations. The amount and timing of the Company's future capital
requirements will depend upon a number of factors, many of which are not within
the Company's control, including subscriber growth and retention, programming
costs, capital costs, marketing expenses, staffing levels, and competitive
conditions. There can be no assurance that the Company's future cash
requirements will not increase as a result of unexpected developments in the
Brazilian pay television industry. Due to its highly leveraged capital
structure, there can be no assurance that the Company will be able to arrange
additional financing to fund capital or other requirements until the Company
maintains positive operating cash flow or that any such financing will be on
terms acceptable to the Company. Following the receipt of any additional
financing, there can be no assurance that the Company will be able to generate
sufficient funds to meet its fixed charges and other obligations. The Indenture
restricts the amount of additional indebtedness the Company may incur, subject
to certain qualifications and exceptions. Failure to obtain any required
additional financing could adversely affect the growth of the Company and,
ultimately, could have a material adverse effect on the Company. See
"Description of Notes--Certain Covenants."
COMPETITIVE INDUSTRY
The pay television industry in Brazil is, and is expected to continue to be,
highly competitive. The Company competes with providers of pay television
services utilizing Cable, MMDS, C-Band technology and, in the near future,
Ku-Band delivery systems and any new delivery systems which may be introduced,
as well as existing off-air broadcast television networks, movie theaters, video
rental stores and other entertainment and leisure activities generally. A number
of the Company's current and potential competitors have greater experience in
the television industry and greater resources, including financial resources,
than the Company.
TVA's principal competitors in Cable service are operations owned or
controlled by Multicanal, Net Brasil, Globo Cabo and RBS. Multicanal and Net
Brasil operate Cable service systems throughout much of Brazil, including Sao
Paulo Rio de Janeiro, Curitiba and several other large metropolitan areas. Globo
Cabo and RBS operate Cable systems in numerous smaller cities, including
Brasilia. RBS also provides MMDS service in Porto Alegre. Net Brasil also
provides MMDS service in Recife and has a license to provide MMDS service in
Curitiba. Globo Par and TV Globo, the owners of Brazil's most popular off-air
channels, control, or have significant interests, in each of Multicanal, Net
Brasil and Globo Cabo. RBS also holds an interest in Multicanal. Management
believes that the Company's only competitor in DBS service is Net Sat, which has
a C-Band service and has announced its intention to begin Ku-Band service in the
near future. TVA's C-Band service offers a greater number of channels of
programming than Net Sat's C-Band service. However, while monthly charges are
comparable and TVA's digital C-Band service offers
22
more channels, often with better picture quality, the analog decoder necessary
for Net Sat's service is significantly less expensive than the digital decoder
necessary for TVA's service. With respect to Ku-Band service, Net Sat uses a
satellite which will provide broader coverage of Brazil when it initiates
service. The orbital location of the Galaxy III-R satellite enables GLA to offer
DIRECTV service to substantially all of the TV Homes in Brazil. However, in the
less populated northern and western regions of Brazil, reception of DIRECTV
programming requires a dish antenna 1.1 meters in diameter and in the western
third of Brazil (a sparsely populated area when compared to the southern and
eastern regions) reception may not be practical due to the size of the antenna
necessary for reception. Globo Par has a controlling interest in Net Sat while
News Corporation plc, a subsidiary of The News Corporation Limited, and Grupo
Televisa, S.A. of Mexico, also hold equity interests in Net Sat.
The Company expects that a number of new MMDS and Cable licenses will be
granted by the Brazilian Ministry of Communications beginning in the first half
of 1997. It is possible that new licenses will be granted to competitors in
areas in which the Company operates. Such awarding of competing licenses could
result in further competition which, in turn, may materially adversely affect
the Company's subscriber base, results of operations and financial condition.
New competitors are likely to emerge in markets in which the Company operates or
intends to operate and may include additional Cable, MMDS, C-Band service and
other competitors. For additional information regarding the competitive
environment in which the Company conducts its business, see
"Business--Competition."
The success of the Company's operating strategies is subject to factors that
are beyond the control of the Company and difficult to predict due, in part, to
the limited history of pay television services in Brazil. Consequently, the size
of the Brazilian market for pay television, the rates of penetration of that
market, the acceptance of pay television by subscribers and commercial
advertisers, the sensitivity of potential subscribers to the price of
installation and subscription fees, the extent and nature of the competitive
environment and the long-term viability of pay television services in Brazil are
uncertain.
HUGHES ELECTRONICS INTEREST IN PANAMSAT
Hughes Electronics, the majority owner of GLA and possible future
shareholder of GLB, agreed in August 1996 to acquire a majority interest in
PanAmSat Corporation ("PanAmSat") from PanAmSat's shareholders, pending
regulatory approval. PanAmSat is the current owner and operator of the PAS-3
satellite. Net Sat has leased transponder space on PAS-3 from PanAmSat to
provide a competing Ku-Band service in Brazil. The ownership by Hughes
Electronics of a majority interest in PanAmSat could have the potential of
creating a conflict of interest since Hughes Electronics will have an interest
in the financial success of Net Sat's Ku-Band service. However, PanAmSat is not
itself engaged in providing pay television service in conflict with the
Company's Ku-Band service, but is only engaged in providing satellite
transponders, on a leased basis, to third parties for a variety of uses.
Furthermore, under the terms of the agreements among GLA and its partners,
Hughes Electronics is only allowed to provide additional services to PanAmSat
with the approval of the other GLA partners. As a consequence there are
limitations on the extent to which Hughes Electronics may engage in activities
which may compete with the Company. No assurances can be given as to the effect,
if any, that the acquisition of a majority interest in PanAmSat by Hughes
Electronics may have on the operations of the Company.
CURRENCY RISK
The Company expects substantially all of its long term debt obligations
(including the Notes) to be denominated in US dollars while the Company
generates revenues only in Brazilian reais. The Company also expects to incur a
significant portion of its equipment costs, and most of its programming costs,
in US dollars. Consequently, the devaluation of the real against the US dollar
could significantly affect the Company's ability to meet its obligations and
fund its capital expenditures, and could adversely affect its results of
operations. While the Company may consider entering into transactions to hedge
the risk of exchange rate fluctuations, the Company, as of July 31, 1997, has
not entered into any such transactions
23
and it may not be possible for the Company to obtain hedging arrangements on
commercially satisfactory terms. In addition, shifts in currency exchange rates
may have a material adverse effect on the Company and may force the Company to
seek additional capital, which may not be available to it. Similarly, the
Company expects that those entities in which it does not have a majority
interest may incur a significant portion of their debt obligations and equipment
and programming costs in US dollars and generate revenues only in Brazilian
reais. Shifts in currency exchange rates may have a material adverse effect on
those entities or make it necessary for those entities to request additional
equity or debt contributions from the Company.
CHANGE IN TECHNOLOGY
The pay television industry as a whole is, and is likely to continue to be,
subject to rapid and significant changes in technology. Although the Company
believes that, for the foreseeable future, these existing and developing
alternative technologies will not materially adversely affect the viability or
competitiveness of its pay television business, there can be no assurance as to
the effect of such technological changes on the Company or that the Company will
not be required to expend substantial financial resources in the development or
implementation of new competitive technologies.
MMDS TRANSMISSION ISSUES
Reception of MMDS programming generally requires a direct, unobstructed
line-of-sight ("LOS") from the Company's headend to the subscriber's antenna.
MMDS service can also be provided by use of signal repeaters. If the LOS is
obstructed, the Company may not be able to supply service to certain potential
subscribers or may be required to install additional signal repeaters. In
addition to limitations resulting from terrain, extremely adverse weather can,
in limited circumstances, damage transmission and receive-site antennas as well
as other transmission equipment.
Interference from other transmission systems can limit the ability of an
MMDS system to serve any particular point, just as interference from one
television station limits the ability of a viewer to receive another television
station signal broadcasting on the same frequency. Under current regulations of
the Ministry of Communications in Brazil, an MMDS license holder is generally
protected from interference within a radius of up to 50 kilometers of the
transmission site, depending on the technical capability of the operator. A
prospective operator must demonstrate that its signal will not cause
interference with the reception of other permitted channels. In the event that
the Company acquires any new MMDS licenses, there can be no assurance that the
Company will be allowed to transmit such MMDS signals up to the full 50
kilometer radius.
DEPENDENCE UPON SATELLITES
The Company's C-Band and Ku-Band service and the delivery of programming to
the MMDS and Cable systems of the Owned Systems and the Operating Ventures
outside Sao Paulo are dependent upon the operation of satellites by third
parties. To deliver programming to the Owned Systems and the Operating Ventures
and provide its C-Band service, the Company utilizes transponders on Brasilsat,
a satellite owned and operated by Embratel, a Brazilian Government owned
company. The Company uses the Galaxy III-R satellite, which is leased and
operated by a unit of Hughes Electronics, to provide its Ku-Band service.
Although the Company has not experienced any significant disruption of its
transmissions to date, satellites are subject to significant risks that may
prevent or impair proper commercial operations, including satellite defects,
destruction and damage and incorrect orbital placement. On occasion, satellite
launches have resulted in a total or constructive total loss due to launch
failure, failure to achieve proper orbit or failure to operate upon reaching
orbit. For example, the original PAS-3 satellite, which Net Sat originally
planned to use for its Ku-Band service, was destroyed upon launch as a result of
a malfunction of the Ariane space launch vehicle. Disruption of the transmission
of the Galaxy III-R satellite or the failure of the launch of any replacement
satellite could have a material adverse effect on the Company. The ability
24
of the Company to transmit its programming following the expected useful life of
the Galaxy III-R satellite, which currently is approximately nine years, and to
broadcast additional channels, will depend upon the ability of the Company to
obtain rights to utilize transponders on other satellites.
RISK OF SIGNAL THEFT
The delivery of pay television programming requires the use of encryption
technology to prevent signal theft. Historically, piracy in the cable television
and DBS industries has been widely reported. With each of its services, the
Company uses an access control system to prevent unauthorized reception of its
programming. The Company's MMDS and Cable systems use various decoder
technologies, and the Company's Ku-Band receiver employs Smart Card technology,
allowing the Company to change the access control system in the event of a
security breach. There can be no assurance, however, that the access control
technology used in connection with each of the Company's delivery services will
be, or remain, effective. If the access control technology is compromised and
not promptly corrected, the Company's revenues and the Company's ability to
market its pay television services would be adversely affected.
REGULATION
Substantially all of the Company's business activities are regulated by the
Brazilian Ministry of Communications. Such regulation relates to, among other
things, licensing, local access to Cable and MMDS systems, commercial
advertising, and foreign investment in Cable and MMDS systems. Changes in the
regulation of the Company's business activities, including decisions by
regulators affecting the Company's operations (such as the granting or renewal
of licenses or decisions as to the subscription rates the Company may charge its
customers) or changes in interpretations of existing regulations by courts or
regulators, could adversely affect the Company. The Company's Cable and MMDS
licenses may not be transferred without regulatory approval. Under current
regulations, the Brazilian Ministry of Communications will grant Cable and MMDS
licenses pursuant to a public bidding process. The Company is unable to predict
what impact, if any, such public bidding will have on its ability to launch and
operate new systems. Any new regulations could have a material adverse effect on
the subscription television industry as a whole and on the Company in
particular. See "Business--Regulatory Framework."
The construction and launch of broadcasting satellites and the operation of
satellite broadcasting systems are subject to substantial regulation by the
Brazilian Ministry of Communications. Ministry of Communications rules are
subject to change in response to industry developments, new technology and
political considerations. Certain aspects of television and telecommunications
operations and ownership are governed by the Brazilian Constitution. It is
expected that a new law enacting constitutional amendments, along with possible
regulations thereunder, will be passed in 1996 or 1997. The Brazilian Government
may enact additional or new regulations applicable to the activities of the
Company's C-Band and Ku-Band satellite services. The Company's business and
business prospects could be adversely affected by the adoption of new
constitutional amendments, laws, policies or regulations or changes in the
interpretation or application of existing laws, policies and regulations. There
can be no assurance that the Company will succeed in obtaining all requisite
regulatory approvals for its operations without the imposition of restrictions
on, or adverse consequences to, the Company. There can also be no assurance that
material adverse changes in regulations affecting the Company's C-Band and
Ku-Band satellite services will not occur in the future. See
"Business--Regulatory Framework."
AVAILABILITY OF PROGRAMMING AND EQUIPMENT
The success of the Company's business will be dependent on its ability to
obtain programming that is appealing to subscribers at commercially reasonable
costs. The Company is dependent on third party suppliers for a significant
amount of its programming. Most of the Company's programming is purchased from
programming providers in the United States and Europe pursuant to contracts some
of which will begin expiring within one year. Although the Company has no reason
to believe that such contracts will be
25
cancelled or will not be renewed upon expiration, in the event such contracts
are cancelled or not renewed, the Company will have to seek programming from
other sources. Such other sources include a large number of international
programming providers as well as the Company's own programming production
capabilities. There can be no assurance that other programming will be available
to the Company on acceptable terms or at all or, if so available, that such
programming will be acceptable to the Company's subscribers. See
"Business--Programming."
The Company currently purchases decoders and antennas from a limited number
of sources. The inability to obtain sufficient components as required, or to
develop alternative sources if and when required in the future, could result in
delays or reductions in customer installations which, in turn, could have a
material adverse effect on the results of operations and financial condition of
the Company.
MANAGEMENT OF GROWTH
The Company is growing rapidly, which could place a significant strain on
its operational and personnel resources. As the Company's business develops and
expands, the Company will need to implement enhanced operational and financial
systems and will require additional employees and management, operational and
financial resources. There can be no assurance that the Company will
successfully implement and maintain such operational and financial systems or
successfully obtain, integrate and utilize the required employees and management
or operational and financial resources in order to manage a developing and
expanding business in a new industry. Failure to implement such systems
successfully and use resources effectively could have a material adverse effect
on the Company's results of operations and financial condition.
TRANSACTIONS WITH RELATED PARTIES; RIGHTS TO PUT THE COMPANY'S STOCK
Tevecap currently engages in, and expects from time to time to engage in,
financial and commercial transactions with its shareholders, subsidiaries and
other affiliates. Although transactions with affiliated persons are subject to
the terms of the Indenture, the Company may continue to enter into certain
transactions with affiliates in the future. While the Company believes that such
transactions in the past have generally had a beneficial effect on the Company,
no assurance can be given that any such transaction, or combination of
transactions, will not have a material adverse effect on the Company in the
future. See "Certain Transactions with Related Parties."
Pursuant to a Stockholders Agreement among Tevecap and its stockholders,
upon the occurrence of certain defined "triggering events," each of the
Stockholders, other than Abril, may demand that Tevecap buy all or a portion of
the shares of capital stock of Tevecap held by such Stockholder, unless the
shares of capital stock held by such Stockholder are publicly registered, listed
or traded (collectively referred to as an "Event Put"). The Indenture, however,
contains restrictions on the ability of Tevecap to purchase shares of its
capital stock. See "Description of Notes--Certain Covenants--Limitation on
Restricted Payments." Accordingly, the parties to the Stockholders Agreement
have unanimously amended the Stockholders Agreement to provide that if the terms
of the Indenture prohibit Tevecap from purchasing shares that are subject to an
Event Put ("Event Put Shares"), in whole or in part, the Company shall not be
obligated to purchase such shares to the extent it is so restricted. However, in
such event, the Company shall, subject to the terms of the Indenture, have the
obligation to issue shares of preferred stock of the Company ("Special Preferred
Shares") should the Tevecap stockholder elect to convert Event Put Shares to
Special Preferred Shares. The holders of Special Preferred Shares will be
entitled to dividends required by law and a cumulative dividend equal to LIBOR
plus a 4.0% margin, provided that if the terms of the Indenture prohibit the
payment of dividends on the Special Preferred Shares, the Company shall not be
obligated to make such dividend payments to the extent so restricted. However,
under the terms of the Special Preferred Shares such unpaid dividends shall
cumulate and will be paid in full when permissible under the Indenture or when
the Indenture no longer restricts the payment of such dividends. After the
payment of all dividends on the Special Preferred Shares, the Company must use
any remaining profit or reserve to
26
purchase the largest number of Event Put Shares and Special Preferred Shares,
provided that, if the terms of the Indenture prohibit the purchasing of such
shares, the Company shall not be obligated to make such purchases until
permitted by the terms of the Indenture.
In addition, pursuant to the Stockholders Agreement, Falcon International
may demand that Tevecap buy all or any portion of the shares of capital stock of
Tevecap held by Falcon International if such shares are not publicly registered,
listed or traded by September 22, 2002 (the "Falcon Time Put"). If the terms of
the Indenture prohibit it from purchasing such shares, Tevecap may, subject to
the terms of the Indenture, delay the payment of such purchase price with three
annual payments ("Put Annual Payments") or issue promissory notes denominated in
US dollars for the amount of such price ("Put Promissory Notes"). The Put
Promissory Notes would mature three years after issuance with interest payments
due quarterly in arrears. The interest rate on the Put Promissory Notes would be
equal to the rate applicable to US Treasury obligations of similar maturity plus
a margin to be negotiated with the parties taking into account the risks
associated with the type of obligor, Tevecap's creditworthiness and investments
in Brazil. Under the provisions of the Stockholders Agreement, as amended, while
the Put Promissory Notes are outstanding, Tevecap may not pay any dividends or
make distributions with respect to its capital stock, including the Special
Preferred Shares should they exist. To the extent dividends and distributions of
payments under the Put Promissory Notes may be made under the Indenture,
payments must be made first to satisfy the obligations under the outstanding Put
Promissory Notes. If the terms of the Indenture prohibit the Company from making
the Put Annual Payments, the Company shall not be required to make such payment,
but shall be required to deliver Put Promissory Notes in the principal amount of
the affected Put Annual Payments. The Indenture does not restrict the principal
amount of Put Promissory Notes which the Company may issue, but does restrict
the ability of the Company to make interest and principal payments on the Put
Promissory Notes. If the terms of the Indenture prohibit the Company from making
an interest payment required under any Put Promissory Note, the Company shall
not be required to make such payment at such time, provided that any accrued and
unpaid interest shall accumulate and interest on such unpaid amount shall
compound quarterly and the Company shall make payments of interest as soon as
such payment is no longer restricted under the Indenture. Pursuant to the terms
of the proposed amendment to the Stockholders Agreement, payment of the
principal and interest on the Put Promissory Notes would be subordinated to the
prior payment in full of the Notes. See "Description of Notes-- Certain
Covenants--Limitation on Restricted Payments," "--Limitation on Indebtedness"
and "Principal Shareholders."
OWNERSHIP OF FUTURE CABLE TELEVISION LICENSES
The Company holds a 36.0% equity interest in Canbras TVA Cabo and TV Cabo
Santa Branca (the "Canbras TVA Companies"), two Cable operators holding Cable
licenses for a number of smaller cities within the greater Sao Paulo
metropolitan area. Canbras, a publicly-traded Canadian company and Canbras-Par,
a Brazilian company, own the remaining interest in Canbras TVA Cabo, and
Canbras-Par owns the remaining interest in TV Cabo Santa Branca. BCI, an
affiliate of BCE, Inc., Canada's largest telecommunications group, holds a $27.0
million convertible debenture that, upon conversion, would permit BCI to become,
INTER ALIA, a majority shareholder of Canbras-Par. Pursuant to the Canbras
Association Agreement, dated June 14, 1995, among TVA, the Canbras TVA
Companies, Canbras and Canbras-Par, the Company agreed to grant to Canbras-Par a
"right of first refusal" to participate in other Cable licenses that the Company
may obtain, directly or indirectly, and Canbras-Par granted to the Company a
similar "right of first refusal" to participate in Cable licenses acquired by
Canbras-Par. The term of the Canbras Association Agreement is for so long as
Canbras-Par or its assignee owns shares "in companies which have the objective
of engaging in the cable TV business." The Canbras Association Agreement does
not specify the terms and conditions on which any co-investments in Cable
licenses are to be made, and the Company expects that such terms and conditions
will be negotiated in good faith, on a case-by-case basis, in connection with
any future Cable license investments. The Company does not believe that the
implementation of the Canbras Association Agreement will have a material adverse
effect on the Company and its on-going operations.
27
Subsequent to the date of the Canbras Association Agreement, the Company,
through TVA Sul, acquired two new Cable systems in Camboriu and Foz do Iguacu.
Under the terms of the Canbras Association Agreement, the Company is required to
offer to Canbras-Par the right to participate in these Cable systems. Although
Canbras-Par has indicated a preliminary interest in participating in these two
Cable systems, the Company has not yet made a formal offer to Canbras and,
therefore, Canbras' precise level of participation is uncertain at this time.
Additionally, Canbras-Par and the Company are contemplating Canbras-Par
investing directly in TVA Sul, on terms to be agreed upon.
The Canbras Association Agreement provides that to the extent programming is
owned exclusively by TVA, programming will be supplied to the Canbras TVA
Companies on an exclusive basis, and that TVA will not supply such programming
to any other party within the geographic territories covered by the licenses
held by the Canbras TVA Companies. The Canbras Association Agreement does not,
by its terms, refer to Ku-Band or C-Band service. Canbras has taken exception to
the Company's view that the programming provisions do not limit the Company's
ability to offer such services in such geographic territories. The Company
believes its on-going discussions with Canbras will lead to a clarification of
these provisions in a manner which will have no material adverse effect on the
Company or its on-going operations. However, there can be no assurance of such
an outcome and as of July 31, 1997, the Company and Canbras had not reached an
agreement on such a clarification.
DIVIDENDS TO SHAREHOLDERS
Brazilian corporation law and the Stockholders Agreement among Tevecap and
its stockholders require Tevecap to distribute to its shareholders a mandatory
dividend equal to 25.0% of its net profits. Net profits are defined under the
Brazilian corporation law as the income remaining after the deduction of
payments due to employees, managers and individual shareholders in the service
of the applicable company. In addition, a Brazilian company is allowed to
distribute dividends only if, after a given fiscal year, its net profits exceed
its accumulated losses. However, in accordance with Brazilian corporation law,
Tevecap may suspend the mandatory dividend upon a unanimous decision of its
shareholders. Pursuant to the terms of an amendment to the Stockholders
Agreement, Tevecap's stockholders have unanimously agreed not to exercise their
right to receive such mandatory dividends (without limiting their right to
receive dividends payable in compliance with the "Limitation on Restricted
Payments" covenant in the Indenture) until the first to occur of (x) the date
that shares of Capital Stock of the Company are issued and listed on a Brazilian
or United States securities exchange in connection with a bona fide public
offering of such shares or the date that any shares of the Capital Stock of the
Company are otherwise effectively listed and traded on any Brazilian or United
States securities exchange, (y) the date that none of the Notes remain
outstanding or (z) the date that such commitment is no longer effective,
enforceable or legal under applicable Brazilian laws and regulations (including
without limitation any construction or interpretation thereof by CVM, any court
or any other governmental authority). Accordingly, although the Stockholders
Agreement and Brazilian corporate law would allow Tevecap to pay certain
dividends, the stockholders have waived their right to the payment of such
dividends as described above, and such dividends shall not be paid to the extent
such payment is restricted by the Indenture as described above. The common stock
dividends provided for by the Stockholders Agreement will cumulate and are
required to be paid to the extent such payment is not restricted by the
Indenture. See "Description of Notes-- Certain Covenants--Limitation on
Restricted Payments."
RIGHTS TO DIRECTV PROGRAMMING
Upon the occurrence of certain stipulated events, GLA, in which TVA has a
10.0% equity interest, has the right to terminate the Local Operating Agreement,
dated March 3, 1995, between GLA and Galaxy Brasil (the "Local Operating
Agreement"). Such termination would result in a cessation of the supply of
programming from GLA to Galaxy Brasil. The events that would entitle GLA to
terminate the Local Operating Agreement include breach of any material
obligation of Galaxy Brasil under the Local
28
Operating Agreement, failure to meet certain annual subscriber goals beginning
August 1, 2000, and revocation of any required governmental licenses. In
addition, GLA has the right to terminate Galaxy Brasil's exclusive rights to
DIRECTV programming if Galaxy Brasil were to fail to reach certain annual
subscriber goals beginning August 1, 1998. The loss of DIRECTV programming could
have a material adverse effect on the revenues and business of the Company.
RISKS RELATING TO THE NOTES
LIMITED ASSETS OF TEVECAP AND DEPENDENCE ON SUBSIDIARIES FOR REPAYMENT OF
NOTES
Tevecap's operations are conducted through, and substantially all of
Tevecap's assets are owned by, Tevecap's direct and indirect subsidiaries. The
ability of Tevecap to meet its obligations in respect of the Notes and any
future indebtedness of Tevecap will depend on, among other things, the future
performance of such subsidiaries (including the Guarantors) and the ability of
Tevecap to refinance the Notes at their maturity (or upon early redemption or
otherwise). In addition, the ability of Tevecap's subsidiaries to pay dividends
and make other payments to Tevecap may be restricted by, among other things,
applicable corporate and other laws and regulations and by the terms of
agreements to which such subsidiaries become subject. Also, the property and
assets of certain of such subsidiaries have had, or in the future may have,
liens placed upon them pursuant to existing and future financings of such
subsidiaries. Although the Indenture limits the ability of such subsidiaries to
enter into consensual restrictions on their ability to pay dividends and make
other payments to Tevecap and to permit liens to exist on their property and
assets, such limitations are subject to a number of significant qualifications.
"See Description of the Notes-- Certain Covenants--Limitations on Restrictions
on Distributions from Restricted Subsidiaries," and "--Limitations on Liens".
A portion of the Company's total assets (4.98% at December 31, 1996)
represents interests in entities that are not majority-owned subsidiaries of
Tevecap. The ability of Tevecap to receive funds from these entities may be
limited by, among other things, shareholder agreements with the other investors
in those entities, credit arrangements at those entities and the need of those
entities to reinvest their cash flow in their own operations. In addition,
applicable Brazilian law limits the amount of dividends which may be paid by
Tevecap's minority-owned subsidiaries to the extent they do not have profits
available for distribution. Other statutory and general law obligations may also
affect the ability of those entities to declare dividends or the ability of
those entities to make payments to Tevecap on account of intercompany loans.
FRAUDULENT CONVEYANCE CONSIDERATIONS
The Company has been advised by its Brazilian counsel, Basch &
Rameh--Advogados e Consultores, that, to the extent that the Subsidiary
Guarantees given by the Guarantors are valid and enforceable in accordance with
the laws of the State of New York and the United States, the laws of Brazil do
not prevent such Subsidiary Guarantees from being valid, binding and enforceable
against the Guarantors in accordance with their terms. In the event US federal
and state fraudulent conveyance or similar laws were applied to the issuance of
a Subsidiary Guarantee, if any Guarantor, at the time it incurs such Subsidiary
Guarantee, (a) (i) was or is insolvent or rendered insolvent by reason of such
incurrence, (ii) was or is engaged in a business or transaction for which the
assets remaining with such Guarantor constituted unreasonably small capital or
(iii) intended or intends to incur, or believed or believes that it would incur,
debts beyond its ability to pay such debts as they mature and (b) received or
receives less than reasonably equivalent value or fair consideration, the
obligations of such Guarantor under its Subsidiary Guarantee could be avoided,
or claims in respect of such Subsidiary Guarantee could be subordinated to all
other debts of such Guarantor. Among other things, a legal challenge of a
Subsidiary Guarantee on fraudulent conveyance grounds may focus on the benefits,
if any, realized by such Guarantor as a result of the issuance by Tevecap of the
Notes. To the extent that any Subsidiary Guarantee were held to be a fraudulent
conveyance or unenforceable for any other reason, the holders of the Notes would
cease to have any claim
29
in respect of the Guarantor issuing such Subsidiary Guarantee and would be
solely creditors of Tevecap and any other Guarantors whose Subsidiary Guarantees
were not avoided or held unenforceable. There can be no assurance that, after
providing for all prior claims, there would be sufficient assets to satisfy
claims of the holders of the Notes relating to any avoided portion of a
Subsidiary Guarantee.
ENFORCEABILITY OF JUDGMENTS
The Company has been advised by its Brazilian counsel, Basch &
Rameh--Advogados e Consultores, that judgments for monetary claims obtained in
US courts arising out of or in relation to the obligations of Tevecap and the
Guarantors under the Indenture, the Notes or the Subsidiary Guarantees 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. 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.
Any judgment obtained against Tevecap or the Guarantors in a court in Brazil
under the Notes, the Subsidiary Guarantees or under the Indenture will be
expressed in the Brazilian currency equivalent of the US dollar judgment amount
at the commercial exchange rate on the date on which such judgment is obtained,
and such Brazilian currency amount will be adjusted in accordance with the
exchange variation until the judgment holder receives effective payment.
ABSENCE OF PUBLIC MARKET FOR THE EXCHANGE SECURITIES; RESTRICTIONS ON RESALE
The Exchange Securities will be new securities for which there currently is
no market. The Initial Purchasers have informed Tevecap that they currently
intend to make a market in the Old Securities and, if issued, the Exchange
Securities, but they are not obligated to do so, and any such market making may
be discontinued at any time without notice. There can be no assurance as to the
development or liquidity of any market for the Exchange Securities. Tevecap does
not intend to apply for listing of the Notes or, if issued, the Exchange Notes
on any securities exchange or for quotation through the National Association of
Securities Dealers Automated Quotation (Nasdaq) system.
CONSEQUENCES OF FAILURE TO PROPERLY TENDER OLD NOTES IN THE EXCHANGE
Issuance of the Exchange Securities in exchange for the Old Securities
pursuant to the Registered Exchange Offer will be made only after timely receipt
by the Exchange Agent of such Old Securities, a properly completed and duly
executed Letter of Transmittal and all other required documents. Therefore,
holders of the Old Securities desiring to tender such Old Securities in exchange
for Exchange Notes should allow sufficient time to ensure timely delivery.
Tevecap is under no duty to give notification of defects or irregularities with
respect to tenders of Old Securities for exchange. Old Securities that are not
tendered or that are tendered but not accepted by Tevecap for exchange, will,
following consummation of the Exchange Offer, continue to be subject to the
existing restrictions upon transfer thereof under the Securities Act and, upon
consummation of the Exchange Offer, certain registration rights under the
Exchange and Registration Agreement will terminate.
In the event the Registered Exchange Offer is consummated, Tevecap will not
be required to register the Remaining Old Securities. Remaining Old Securities
will continue to be subject to the following restrictions on transfer: (i) the
Remaining Old Securities may be resold only if registered pursuant to the
Securities Act, if any exemption from registration is available thereunder, or
if neither such registration
30
nor such exemption is required by law, and (ii) the Remaining Old Securities
will bear a legend restricting transfer in the absence of registration or an
exemption therefrom. Tevecap does not currently anticipate that it will register
the Old Securities under the Securities Act. To the extent that Old Securities
are tendered and accepted in connection with the Registered Exchange Offer, any
trading market for Remaining Old Securities could be adversely affected.
CONTROLS AND RESTRICTIONS ON US DOLLAR REMITTANCES; EXCHANGE REGULATION
Brazilian law provides whenever there is, or is a serious risk of, a
material imbalance in Brazil's balance of payments, the Brazilian Government
may, for a limited period of time, impose restrictions on the remittance to
foreign investors of the proceeds of their investments in Brazil. For
approximately six months in 1989 and early 1990, for example, the Brazilian
Government froze all dividend and capital repatriations that were owed to
foreign equity investors and held by the Central Bank of Brazil (the "Central
Bank") in order to conserve Brazil's foreign currency reserves. These amounts
were subsequently released in accordance with Brazilian Government directives.
There can be no assurance that similar measures will not be taken by the
Brazilian Government in the future.
The Brazilian Government currently restricts the ability of Brazilian or
foreign persons or entities to convert Brazilian currency into US dollars or
other currencies other than in connection with certain authorized transactions.
The issuance of the Notes has been approved by the Central Bank. The Central
Bank has issued a certificate of registration authorizing each of the scheduled
payments of principal at maturity and interest on the Notes. Consent from the
Central Bank will be needed for the payment of principal of and interest on the
Notes upon acceleration of the Notes following an Event of Default (as defined)
and for certain late payments of the Notes (i.e., payments made 181 days or more
after the scheduled payment date). In addition, consent from the Central Bank
will be needed for redemption of the Notes upon certain optional redemption
events. See "Description of Notes." There can be no assurance that the Company
will obtain the necessary consents and certificates from the Central Bank for
the foregoing payments or redemptions.
There can be no assurance that the Brazilian Government will not in the
future impose more restrictive foreign exchange regulations that would have the
effect of eliminating or restricting the Company's access to foreign currency
that it would require to meet its foreign currency obligations, including its
obligations under the Notes. The likelihood of the imposition of such
restrictions by the Brazilian Government may be affected by, among other
factors, the extent of Brazil's foreign currency reserves, the availability of
foreign currency in the foreign exchange markets on the date a payment is due,
the size of Brazil's debt service burden relative to the economy as a whole,
Brazil's policy towards the International Monetary Fund and political
constraints to which Brazil may be subject.
In addition, there are two legal foreign exchange markets in Brazil: the
commercial rate exchange market (the "Commercial Market") and the floating rate
exchange market (the "Floating Market"). The Commercial Market is reserved
primarily for foreign trade transactions and transactions that generally require
prior approval from Brazilian monetary authorities, such as the purchase and
sale of registered investments by foreign persons and related remittances of
funds abroad, such as a repurchase by the Company of the Notes. Purchases of
foreign exchange in the Commercial Market may be carried out only through a
financial institution in Brazil authorized to buy and sell currency in that
market. The "Commercial Market Rate" is the commercial selling rate for
Brazilian currency into US dollars, as reported by the Central Bank. The
"Floating Market Rate" generally applies to transactions to which the Commercial
Market Rate does not apply. Prior to the implementation of the Real Plan, the
Commercial Market Rate and the Floating Market Rate differed significantly at
times. Since the introduction of the REAL, the two rates have not differed
significantly, although there can be no assurance that there will not be
significant differences between the two rates in the future. Both the Commercial
Market Rate and Floating Market Rate are reported by the Central Bank on a daily
basis.
31
Both the Commercial Market Rate and the Floating Market Rate are freely
negotiated but are strongly influenced by the Central Bank, which typically
intervened in the Commercial Market, prior to the implementation of the Real
Plan, in order to control fluctuations and to regulate disparities between the
Commercial Market Rate and the Floating Market Rate. After implementation of the
Real Plan, the Central Bank allowed the real to float with minimal intervention.
However, on March 6, 1995, the Central Bank announced its intention to intervene
in the foreign exchange markets and has subsequently intervened in the markets
and taken other actions affecting such markets.
On March 6, 1995, the Central Bank announced that it would intervene in the
market and buy or sell US dollars, establishing a band (FAIXA DE FLUTUACAO) in
which the exchange rate between the REAL and the US dollar could fluctuate. The
Central Bank initially set the band with a floor of R$0.86 per US$1.00 and a
ceiling of R$0.90 per US$1.00 and provided that, from and after May 2, 1995, the
band would fluctuate between R$0.86 and R$0.98 per US$1.00. Shortly thereafter,
the Central Bank issued a new directive providing that the band would be between
R$0.88 and R$0.93 per US$1.00. On June 22, 1995, the Central Bank issued another
directive providing that the band would be between R$0.91 and R$0.99 per US$1.00
and subsequently reset the band on January 30, 1996 to between R$0.97 and R$1.06
per US$1.00. Upon resetting the band on January 30, 1996, the Central Bank
adjusted the exchange rate within such band on a number of occasions, generally
in increments of R$0.001, by means of buying and selling US dollars in
electronic auctions. On February 18, 1997, the band was reset by the Central
Bank to float between R$1.05 and R$1.14 per US$1.00. On June 30, 1997, the
Commercial Market Rate was R$1.0769 per US$1.00.
RISKS RELATING TO BRAZIL
GENERAL
Social, economic or political instability, among other developments in
Brazil, could adversely affect the financial condition and results of operations
of the Company, the ability of the Company to repay the Notes and the market
value and liquidity of the Notes. In the past, Brazil has suffered from high
levels of inflation, low real growth rates and political uncertainty. Brazil is
generally considered by investors to be an "emerging market" and thus political,
economic, social or other developments in other such markets may adversely
affect the market value and liquidity of the Notes. For example, in December
1994, the Mexican government sharply devalued the peso, resulting in an economic
crisis in Mexico. The Mexican peso crisis adversely affected the market value
and liquidity of securities issued by companies in many of the "emerging
markets," including Brazil. There can be no assurance that events in other such
markets will not adversely affect the market value and liquidity of the Notes.
POLITICAL AND ECONOMIC CONDITIONS
During the past several years, the Brazilian economy has been affected by
significant intervention by the Brazilian Government. The Brazilian Government
has changed monetary, credit, tariff and other policies to influence the course
of Brazil's economy. The Brazilian Government's actions to control inflation and
effect other policies have often involved wage and price controls (including
controls on the price of food and general merchandise) as well as other
interventionist measures, such as freezing bank accounts and imposing capital
controls. The stated policy of the present Government is to reduce gradually
governmental control of the economy. However, Government policies involving
tariffs, exchange controls, regulations and taxation may adversely affect the
Company's business and financial condition, as could the Brazilian Government's
response to inflation, devaluation, social instability and other political,
economic or diplomatic developments. Brazilian politics have been marked by
uncertainty since the country returned to civilian rule in 1985 after 20 years
of military government. The death of a President-elect in 1985 and the
resignation of another President in 1992 in the midst of his impeachment trial,
and frequent turnovers at and below the cabinet level, particularly in the
economic area, historically have resulted in the absence of a coherent and
sustained policy to confront Brazil's economic problems. The election of
Fernando Henrique Cardoso to the presidency of Brazil in 1994 and the reduction
of the level of inflation in Brazil following
32
the introduction of the Real Plan in 1994 have resulted in a more stable
political and economic environment. However, there can be no assurance that
future developments in Brazil will not result in a recurrence of political and
economic instability.
IMPACT OF EXTREME INFLATION
Brazil in the past 20 years has experienced extremely high rates of
inflation. In 1993, the annual rate of inflation in Brazil exceeded 2,700%.
Inflation and certain governmental measures to fight inflation have in the past
significantly and negatively affected the Brazilian economy. See "Annex A--The
Federative Republic of Brazil." Actions taken to combat inflation and public
speculation about possible future actions have contributed significantly to
economic uncertainty in Brazil and the heightened volatility in the Brazilian
securities markets. Future measures to combat inflation could materially and
adversely affect the Brazilian economy and the Company. Prior to 1994, none of
the numerous economic stabilization plans enacted by the Brazilian Government
successfully reduced inflation over the long term. In 1994, the Brazilian
Government introduced the Real Plan. The Real Plan has resulted in a sustained
reduction in the level of Brazilian inflation. The annual rate of inflation for
1995 and 1996 was 14.8% and 9.34%, respectively. There can be no assurance,
however, that inflation will not increase as a result of future Brazilian
governmental actions or for other reasons.
EFFECTS OF EXCHANGE RATE FLUCTUATIONS
Primarily as a result of inflationary pressures, the Brazilian currency has
been devalued repeatedly during the last four decades. Throughout this period,
the Brazilian Government has implemented various economic plans and utilized a
number of exchange rate policies, including sudden devaluations, periodic
mini-devaluations (with the frequency of adjustments ranging from daily to
monthly), floating exchange rate systems, exchange controls and dual exchange
rate markets. Although over long periods of time devaluations of the Brazilian
currency generally have correlated with the rate of inflation in Brazil, such
governmental actions over shorter periods have resulted in significant
fluctuations in the real exchange rate between the Brazilian currency and the US
dollar. See "Exchange Rate Data."
Substantially all of the Company's revenues are denominated in Brazilian
REAIS. A substantial portion of the Company's indebtedness is, and may be
expected to continue to be, denominated in US dollars (including the Notes). In
addition, a portion of the Company's operating expenses, including those
relating to programming commitments and cable television equipment costs, are
denominated in or indexed to US dollars. Any devaluation of the Brazilian
currency relative to any foreign currency in which debt or other obligations of
the Company are denominated, if such devaluation were in excess of inflation,
would result in a foreign exchange loss with respect to such indebtedness and
obligations. As a result, the relationship of Brazil's currency to the value of
the US dollar and other currencies, and the rates of devaluation of Brazil's
currency relative to the prevailing rates of inflation, may adversely affect the
Company's financial condition and results of operations, as well as its ability
to meet its debt service obligations (including payment of principal of,
premium, if any, and interest on the Notes) and operating costs. If the Company
cannot increase its prices to match the rate of inflation, even if the rate of
inflation matches the rate of devaluation, the Company's ability to meet its
debt service obligations and operating costs may be impaired.
In addition, the financial records of Tevecap and its subsidiaries have been
maintained in Brazilian REAIS. However, the Consolidated Financial Statements
are presented in US dollars. In order to prepare the Consolidated Financial
Statements, Tevecap's accounts have been translated from the applicable
Brazilian currency on the basis described in Note 2.3 to the Consolidated
Financial Statements. Because of differences between the evolution of the rates
of inflation in Brazil and changes in the rates of devaluation, amounts
presented in US dollars will show distortions when compared on a
period-to-period basis.
33
CONTROLS AND RESTRICTIONS ON US DOLLAR REMITTANCES
Brazilian law provides that whenever there is, or is a serious risk of, a
material imbalance in Brazil's balance of payments, the Brazilian Government
may, for a limited period of time, impose restrictions on the remittance to
foreign investors of the proceeds of their investments in Brazil. For
approximately six months in 1989 and early 1990, for example, the Brazilian
Government froze all dividend and capital repatriations that were owed to
foreign equity investors and held by the Central Bank of Brazil (the "Central
Bank") in order to conserve Brazil's foreign currency reserves. These amounts
were subsequently released in accordance with Brazilian Government directives.
There can be no assurance that similar measures will not be taken by the
Brazilian Government in the future.
The Brazilian Government currently restricts the ability of Brazilian or
foreign persons or entities to convert Brazilian currency into US dollars or
other currencies other than in connection with certain authorized transactions.
The issuance of the Notes has been approved by the Central Bank. After the Notes
are issued, the Central Bank is expected in due course to issue a certificate of
registration authorizing each of the scheduled payments of principal at maturity
and interest on the Notes. In addition, consent from the Central Bank will be
needed for the payment of principal of and interest on the Notes upon
acceleration of the Notes following an Event of Default (as defined) and for
certain late payments of the Notes (I.E., payments made 181 days or more after a
scheduled payment date). In addition, consent from the Central Bank will be
needed for redemption of the Notes upon certain optional redemption events. See
"Description of Notes." There can be no assurance that the Company will obtain
the necessary consents and certificates from the Central Bank for the foregoing
payments or redemptions.
There can be no assurance that the Brazilian Government will not in the
future impose more restrictive foreign exchange regulations that would have the
effect of eliminating or restricting the Company's access to foreign currency
that it would require to meet its foreign currency obligations, including its
obligations under the Notes. The likelihood of the imposition of such
restrictions by the Brazilian Government may be affected by, among other
factors, the extent of Brazil's foreign currency reserves, the availability of
foreign currency in the foreign exchange markets on the date a payment is due,
the size of Brazil's debt service burden relative to the economy as a whole,
Brazil's policy towards the International Monetary Fund and political
constraints to which Brazil may be subject.
34
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Exchange Securities offered hereby. In consideration for issuing the Exchange
Securities as described in this Prospectus, the Company will receive in exchange
Old Securities in like principal amount, the terms of which are identical in all
material respects to those of the Exchange Securities, except that the Exchange
Securities have been registered under the Securities Act and are issued free of
any covenant regarding transfer restrictions. The Old Securities surrendered in
exchange for the Exchange Securities will be retired and cancelled and cannot be
reissued. Accordingly, the issuance of the Exchange Securities will not result
in any change in the indebtedness of the Company.
The net proceeds to the Company from the offering of the Old Securities was
approximately $241.2 million after deducting discounts, commissions and
estimated expenses of the Offering payable by the Company. The Company used the
net proceeds of the offering of the Old Securities as follows:
(IN MILLIONS)
-------------
Repayment of Short-term bank loans(a)............................................................... $ 5.4
Repayment of Loans from affiliated companies(b)..................................................... 107.9
Capital expenditures, investments and general corporate purposes(c)................................. 127.9
------
$ 241.2
------
------
- ------------------------
(a) The Company repaid all of its Short-term bank loans which it incurred in
connection with the refinancing of certain deferred obligations for the
purchase of property. The annual interest rate on such short-term debt is
LIBOR plus a 1.5% margin.
(b) Includes repayment of all outstanding indebtedness under the Abril Credit
Facility ($105.8 million outstanding as of October 31, 1996). During the
period from September 30, 1996 through October 31, 1996, the Company paid
$16.8 million in connection with its capital spending program. As of July
31, 1997, the Company had not redrawn any amounts under the Abril Credit
Facility. See "Description of Certain Indebtedness." The interest rate
payable by the Company to Abril has ranged from 1.79% to 3.01% per month.
(c) The Company used this portion of the net proceeds to fund its capital
spending needs in connection with its ongoing operations, including
subscriber additions, subscriber equipment purchases, system construction,
installation labor and other expansion activities and, pending such
application, invested such amounts in short-term instruments. Additionally,
based on its business plans and plans supplied by the Operating Ventures and
Programming Ventures, management expects that an aggregate of approximately
$13.2 million of this amount will be invested in HBO Brasil Partners,
Canbras TVA and CNBC for the purpose of funding the Company's PRO RATA share
of these entities' capital spending needs and operating losses, as well as
in the California Broadcast Center (in the form of debt). See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
35
EXCHANGE RATE DATA
There are two legal foreign exchange markets in Brazil: the commercial rate
exchange market (the "Commercial Market") and the floating rate exchange market
(the "Floating Market"). The Commercial Market is reserved primarily for foreign
trade transactions and transactions that generally require prior approval from
Brazilian monetary authorities, such as the purchase and sale of registered
investments by foreign persons and related remittances of funds abroad, such as
a repurchase by the Company of the Notes. Purchases of foreign exchange in the
Commercial Market may be carried out only through a financial institution in
Brazil authorized to buy and sell currency in that market. The "Commercial
Market Rate" is the commercial selling rate for Brazilian currency into US
dollars, as reported by the Central Bank. The "Floating Market Rate" generally
applies to transactions to which the Commercial Market Rate does not apply.
Prior to the implementation of the Real Plan, the Commercial Market Rate and the
Floating Market Rate differed significantly at times. Since the introduction of
the real, the two rates have not differed significantly, although there can be
no assurance that there will not be significant differences between the two
rates in the future. Both the Commercial Market Rate and the Floating Market
Rate are reported by the Central Bank on a daily basis.
Both the Commercial Market Rate and the Floating Market Rate are freely
negotiated but are strongly influenced by the Central Bank, which typically
intervened in the Commercial Market, prior to the implementation of the Real
Plan, in order to control fluctuations and to regulate disparities between the
Commercial Market Rate and the Floating Market Rate. After implementation of the
Real Plan, the Central Bank allowed the REAL to float with minimal intervention.
However, as described below, on March 6, 1995, the Central Bank announced its
intention to intervene in the foreign exchange markets and has subsequently
intervened in the markets and taken other actions affecting such markets.
On August 1, 1993, the CRUZEIRO real replaced the cruzeiro as the unit of
Brazilian currency, with each cruzeiro real being equal to 1,000 cruzeiros.
Beginning in December 1993, the Brazilian Government began implementation of the
Real Plan, which was intended to reduce inflation. On July 1, 1994, the real
replaced the CRUZEIRO REAL as the unit of Brazilian currency, with each REAL
being equal to 2,750 CRUZEIROS REAIS and having an exchange rate of R$1.00 to
US$1.00. According to Brazilian law, the issuance of reais is controlled by
quantitative limits backed by a corresponding amount of US dollars in reserves,
but the Brazilian Government subsequently expanded those quantitative limits and
allowed the REAL to float, with parity between the real and the US dollar
(R$1.00 to US$1.00) as a ceiling.
On March 6, 1995, the Central Bank announced that it would intervene in the
market and buy or sell US dollars, establishing a band (FAIXA DE FLUTUACAO) in
which the exchange rate between the real and the US dollar could fluctuate. The
Central Bank initially set the band with a floor of R$0.86 per US$1.00 and a
ceiling of R$0.90 per US$1.00 and provided that, from and after May 2, 1995, the
band would fluctuate between R$0.86 and R$0.98 per US$1.00. Shortly thereafter,
the Central Bank issued a new directive providing that the band would be between
R$0.88 and R$0.93 per US$1.00. On June 22, 1995, the Central Bank issued another
directive providing that the band would be between R$0.91 and R$0.99 per US$1.00
and subsequently reset the band on January 30, 1996 to between R$0.97 and R$1.06
per US$1.00. Upon resetting the band on January 30, 1996, the Central Bank
adjusted the exchange rate within such band on a number of occasions, generally
in increments of R$.001, by means of buying and selling US dollars in electronic
auctions. On February 18, 1997, the band was reset by the Central Bank to float
between R$1.05 and R$1.14 per US$1.00. On June 30, 1997, the Commercial Market
Rate was R$1.0769 per US$1.00. There can be no assurance that the band will not
be altered in the future. See "Risk Factors--Risks Relating to the
Notes--Controls and Restrictions on US Dollar Remittances; Exchange
Regulation"--and "--Risks Relating to Brazil--Effects of Exchange Fluctuations"
and "--Controls and Restrictions on US Dollar Restrictions."
36
The following table sets forth the Commercial Market Rate for the periods
indicated.
EXCHANGE RATES OF BRAZILIAN CURRENCY PER
US$1.00(A)
-----------------------------------------------
PERIOD(B) LOW HIGH AVERAGE PERIOD END
- ------------------------------ ---------- ---------- ---------- -----------
1991.......................... 0.000062 0.000389 0.000149 0.000389
1992.......................... 0.000393 0.004505 0.001655 0.004505
1993.......................... 0.004557 0.118584 0.032809 0.118584
1994.......................... 0.120444 0.940000 0.645000 0.846000
1995.......................... 0.834000 0.972600 0.917742 0.972500
1996.......................... 0.972600 1.040700 1.005000 1.039400
Six month period ended June
30, 1997...................... 1.039500 1.077700 1.061600 1.076900
- ------------------------
(a) The information set forth in this table is based on information published by
the Central Bank.
(b) The historical information from 1991 through 1994 represents the nominal
Brazilian currency expressed in current reais adjusted for depreciation and
currency substitution. The exchange rates have been translated at the rates
of exchange at the time the successor currencies took effect.
37
CAPITALIZATION
The following table sets forth (i) the actual cash balance and
capitalization of the Company at December 31, 1996 and (ii) the cash balance and
capitalization of the Company at December 31, 1996 as adjusted to give effect to
the offering of the Old Securities and the application of the net proceeds
therefrom. This table should be read in conjunction with the Consolidated
Financial Statements of the Company appearing elsewhere in this Prospectus.
DECEMBER 31, 1996
-----------------
ACTUAL
-----------------
(DOLLARS IN
THOUSANDS)
Cash & cash equivalents........................................................................ 104,798
--------
--------
Short-term bank loans.......................................................................... 18,039
--------
--------
Long-term liabilities
Bank loans................................................................................. 464
Loans from affiliated companies............................................................ 2,721
Loans from shareholders.................................................................... 1,640
Senior Notes due 2004...................................................................... 250,000
--------
Total long-term liabilities.................................................................... 254,825
--------
Redeemable common shares (a)................................................................... 164,910
Shareholders' equity
Paid-in capital............................................................................ 142,495
Accumulated deficit........................................................................ (224,023)
--------
Total shareholders' equity..................................................................... (81,528)
--------
Total capitalization........................................................................... 338,207
--------
--------
- ------------------------
(a) Represents common shares of the Company which certain shareholders may
require the Company to repurchase. See "Principal Shareholders."
38
SELECTED HISTORICAL FINANCIAL AND OTHER DATA
The historical data as of December 31, 1996 and 1995, and for the three
years in the period ended December 31, 1996 have been derived from, and should
be read in conjunction with, the audited Consolidated Financial Statements of
the Company included elsewhere in this Prospectus. The historical data as of
December 31, 1994, 1993 and 1992 and for the two years in the period ended
December 31, 1993 are derived from the audited Consolidated Financial Statements
of the Company that are not included elsewhere in this Prospectus.
As required by Brazilian law, and in accordance with local accounting
practices, the financial records of Tevecap and its subsidiaries are maintained
in the applicable Brazilian currency (the REAL). However, the Consolidated
Financial Statements are presented in US dollars. In order to prepare the
Consolidated Financial Statements, the Company's accounts have been translated
from the applicable Brazilian currency, on the basis described in Note 2.3 to
the Consolidated Financial Statements. 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.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT SELECTED OPERATING
DATA)
STATEMENTS OF OPERATING DATA:
Gross Revenues
Monthly subscriptions........................................ $ 7,070 $ 12,544 $ 27,976 $ 62,496 $ 123,020
Installation................................................. 1,857 4,350 6,997 26,045 61,717
Indirect programming (a)..................................... 512 530 1,626 2,866 11,377
Other (b).................................................... 1,322 2,468 7,173 10,603 15,724
Revenue taxes (c)............................................ (305) (371) (872) (7,506) (13,747)
--------- --------- --------- --------- ---------
Total net revenue.............................................. 10,456 19,521 42,900 94,504 198,091
--------- --------- --------- --------- ---------
Direct operating expenses (d).................................. 32,905 29,779 28,659 62,026 112,297
Selling, general and administrative expenses................... 17,834 19,957 24,370 46,902 81,455
Depreciation and amortization.................................. 2,704 4,813 6,177 13,268 28,216
Allowance for inventory obsolescence........................... -- -- -- -- 2,250
--------- --------- --------- --------- ---------
Total operating expenses....................................... 53,443 54,549 59,206 122,196 224,218
--------- --------- --------- --------- ---------
Operating loss................................................. (42,987) (35,028) (16,306) (27,692) (26,127)
Non operating expenses
Interest expense............................................. (13,538) (8,492) (16,413) (17,745) (17,520)
Equity in income (losses) of affiliates (e).................. -- -- 383 (3,672) (8,532)
Other nonoperating income, net (f)........................... 2,232 5,892 20,339 8,039 4,443
Income tax expense........................................... -- -- -- -- (156)
--------- --------- --------- --------- ---------
Net loss....................................................... $ (54,293) $ (37,628) $ (11,997) $ (41,070) $ (47,892)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
OTHER DATA:
EBITDA-TV Group (g)............................................ $ (40,283) $ (30,215) $ (10,129) $ (13,318) $ 8,991
EBITDA-Galaxy Brasil (g)....................................... -- -- -- (1,106) (4,652)
--------- --------- --------- --------- ---------
EBITDA (g)..................................................... (40,283) (30,215) (10,129) (14,424) 4,339
Pro forma interest expense (h)................................. -- -- -- 38,623 45,502
Purchase of fixed assets....................................... 7,627 11,379 22,369 93,029 125,612
Ratio of earnings to fixed charges (i)......................... -- -- -- -- --
CASH FLOW DATA:
Cash provided by (used in) operating activities (j)............ (32,633) (19,180) (9,707) 22,989 (17,696)
Cash provided by (used in) investing activities................ (11,761) (13,190) (24,334) (119,661) (163,900)
Cash provided by (used in) financing activities................ 44,088 32,348 38,666 116,229 262,193
SELECTED OPERATING DATA:
Number of subscribers to owned systems (k)..................... 42,924 82,985 114,853 219,148 349,511
Average monthly revenue per Subscriber (l)..................... $ 18.64 $ 21.30 $ 27.80 $ 33.24 $ 39.15
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents...................................... $ 41 $ 19 $ 4,644 $ 24,201 $ 104,798
Property, plant and equipment.................................. 29,561 35,859 51,426 131,266 233,593
Total assets................................................... 40,779 45,529 80,441 216,848 459,122
Loans from affiliated companies................................ 42,577 89,769 0 586 2,721
Long-term liabilities.......................................... 67,736 97,105 4,523 9,604 265,860
Redeemable common shares....................................... -- -- 19,754 149,534 164,910
Total shareholders equity...................................... (54,483) (92,111) 27,590 (18,260) (81,528)
See accompanying Notes to Selected Historical Financial And Other Data
39
NOTES TO SELECTED HISTORICAL FINANCIAL AND OTHER DATA
(a) Represents revenues received by the company for selling programming to
the Independent Operators.
(b) Includes Advertising and Other revenues.
(c) Represents various non-income based taxes paid on certain of the
Company's gross revenue items with rates ranging from 2.65% to 7.65%.
(d) Represents costs directly related to Monthly subscriptions, and a
portion of Installation, Indirect programming and Other revenues.
(e) Represents the Company's pro rata share of the Net loss or income of its
equity investment.
(f) Includes interest income, Gain on issuance of shares by equity
investees, Translation gain or loss, Other nonoperating (expenses) income, net,
and Minority interest. The amount for the year ended December 31, 1994 includes
Interest income totaling $21,806. During that year, the Company received capital
contributions from stockholders which resulted in a surplus of cash invested
during such period.
(g) EBITDA represents the sum of (i) net income (loss), plus, without
duplication (ii) income tax expense, (iii) interest expense (income), net, (iv)
other nonoperating (expenses) income, net (v) depreciation, amortization and all
other non-cash charges, less (vi) non-cash items increasing net income (loss)
with the exception of amortized deferred sign-on and hookup fee revenue, in each
case determined in accordance with GAAP. EBITDA-TV Group and EBITDA-Galaxy
represent operating loss plus depreciation and amortization. The term "TV Group"
refers to the operations of TVA, excluding the operations of Galaxy Brasil. The
TV Group, which constitutes the operations of TVA, excluding the operations of
Galaxy Brasil, represents the more mature operations of the group while Galaxy
Brasil remains in a startup phase and has yet to collect material revenues to
offset the costs of initiating the Ku-Band service. EBITDA has been presented
separately for the TV Group and Galaxy Brasil to take account of the different
stages of development of these operations.
(h) Represents interest expense on a pro forma basis, resulting from the
offering of the 12.625% Senior Notes due 2004 (the "Notes") and the application
of the net proceeds therefrom as follows:
YEAR ENDED
DECEMBER 31
--------------------
1995 1996
--------- ---------
Historical interest expense...................................................................... 17,745 17,520
Elimination of interest expense related to certain affiliated indebtedness....................... (11,788) (4,684)
Interest resulting from the Notes based on an interest rate of 12.625%........................... 31,563 31,563
Amortization of deferred financing costs relating to the Notes................................... 1,103 1,103
--------- ---------
38,623 45,502
--------- ---------
--------- ---------
- ------------------------
(i) For the five years ended December 31, 1996, earnings were insufficient to
cover fixed charges by $54,487, $37,920, $13,100, $38,268 and $41,209,
respectively. In calculating the Ratio of earnings to fixed charges,
earnings represents Net loss before minority interest, Equity in (losses)
income of affiliates, less fixed charges. Fixed charges consist of the sum
of interest expense paid or accrued on indebtedness of the Company and its
subsidiaries and affiliates and one-third of operating rental expenses (such
amount having been deemed by the Company to represent the interest portion
of such payments).
(j) Cash provided by (used in) operating activities (hereinafter referred to as
cash flows from operating activities) has been determined in accordance with
GAAP while EBITDA has been calculated in accordance with the definition in
footnote (g). In accordance with GAAP, cash flows from operating activities
generally reflect the cash effects of transactions and other events that
enter into the determination of net income. The principal difference between
EBITDA and cash flows from operating activities arise as a result of the
treatment of the changes in the balances of operating assets and liabilities
from the beginning to the end of a reporting period. That is, in accordance
with GAAP, such changes are components of cash flows from operating
activities while there is no similar adjustment in the calculation of
EBITDA. EBITDA has been presented as it is a financial measure commonly used
in the Company's industry. EBITDA should not be considered as an alternative
to cash provided by (used in) operating activities, as an indicator of
operating performance or as a measure of liquidity.
(k) Represents the number of Owned Systems' subscribers as of the last day of
each period.
(l) Average monthly revenue per subscriber refers to the average monthly
subscription fee as of the last day of each period.
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements (including the notes thereto) included in this Prospectus. For the
purposes of the following discussion, all dollar amounts, with the exception of
average installation and subscriber fees, are set forth in thousands of US
dollars.
This Management's Discussion and Analysis of Financial Condition and Results
of Operations reflects the historical results of the Company. Due to the limited
operating history, startup nature, translations of Brazilian currency into US
dollars, and rapid growth of the Company, period-to-period comparisons of
financial data are not necessarily indicative, and should not be relied upon as
an indicator of the future performance of the Company.
OVERVIEW
Since its inception in 1989, the Company has been in a developmental or
buildout stage. The TV Group, representing the more mature operations of the
Company, has experienced, and continues to experience, rapid growth. In
addition, the Company, through Galaxy Brasil, initiated Ku-Band DIRECTV service
on a limited basis in July 1996. Despite its growth, the Company has sustained
substantial net losses due primarily to insufficient revenue with which to fund
startup costs, interest expense and charges for depreciation and amortization.
However, the TV Group has been generating positive operating cash flow beginning
with the three month period ended June 30, 1996, while Galaxy Brasil,
representing the Company's less mature operations, remains in a start-up phase
and has not yet collected material revenues to offset the costs of initiating
the Ku-Band service. Net losses incurred by the Company since inception have
been funded principally by (i) net contributions of approximately $288,000 from
the Company's shareholders, (ii) borrowings from Abril under the Abril Credit
Facility and (iii) short term borrowings made from time to time. Management
expects the financial results of the Company to improve as the operation of the
Ku-Band service matures and the number of subscribers for the Company's Ku-Band
service and TV Group services continues to grow. There can be no assurance,
however, that the number of the Company's subscribers will grow, or that the
Company's financial performance will improve.
41
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain statements
of operations data expressed in US dollar amounts and as a percentage of net
revenue:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1994 1995 1996
----------------------- ----------------------- -----------------------
% OF NET % OF NET % OF NET
AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE
---------- ----------- ---------- ----------- ---------- -----------
STATEMENT OF OPERATIONS DATA:
Gross revenues Monthly subscriptions......... $ 27,976 65.2% $ 62,496 66.1% $ 123,020 62.1%
Installation................................. 6,997 16.3 26,045 27.6 61,717 31.2
Indirect programming......................... 1,626 3.8 2,866 3.0 11,377 5.7
Other........................................ 7,173 16.7 10,603 11.2 15,724 7.9
Revenue taxes................................ (872) (2.0) (7,506) (7.9) (13,747) (6.9)
---------- ----- ---------- ----- ---------- -----
Net revenue.................................. 42,900 100.0 94,504 100.0 198,091 100.0
---------- ----- ---------- ----- ---------- -----
Direct operating expenses.................... 28,659 66.8 62,026 65.6 112,297 56.7
Selling, general and administrative
expenses................................... 24,370 56.8 46,902 49.6 81,455 41.1
Depreciation and Amortization................ 6,177 14.4 13,268 14.0 28,216 14.2
Allowance for inventory obsolescence......... -- -- -- -- 2,250 1.1
---------- ----- ---------- ----- ---------- -----
Total operating expenses..................... 59,206 138.0 122,196 129.3 224,818 113.2
---------- ----- ---------- ----- ---------- -----
Operating loss............................... (16,306) (38.0) (27,692) (29.3) (26,127) (13.2)
---------- ----- ---------- ----- ---------- -----
Interest income.............................. 21,806 50.8 3,118 3.3 5,813 2.5
Interest expense............................. (16,413) (38.3) (17,745) (18.8) (17,520) (8.8)
Translation (loss) gain...................... (914) (2.1) (339) (0.4) 473 0.2
Equity in (losses) income of affiliates...... 383 0.9 (3,672) (3.9) (8,532) (4.3)
Gain on issuance of shares by equity
investees.................................. 0 0.0 0 0.0 2,317 1.2
Other nonoperating (expenses) income, net.... (1,273) (3.0) 4,389 4.6 (6,009) (3.0)
Minority interest............................ 720 1.7 871 0.9 1,849 0.9
Income tax expense........................... 0 0.0 0 0.0 (156) (0.1)
---------- ----- ---------- ----- ---------- -----
Net loss..................................... $ (11,997) (28.0)% $ (41,070) (43.5)% (47,892) (24.2)%
---------- ----- ---------- ----- ---------- -----
---------- ----- ---------- ----- ---------- -----
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The table below sets forth the number of subscribers at December 31, 1995
and December 31, 1996 for the Owned Systems.
DECEMBER 31, DECEMBER 31,
OWNED SYSTEMS SUBSCRIBERS 1995 1996
- ------------------------------------------------------------------------------------- ------------ ------------
MMDS(a).............................................................................. 188,893 230,320
Cable................................................................................ 15,129 46,011
DIRECTV and Digital C-Band........................................................... 15,126 73,180
------------ ------------
219,148 349,511
Paid Subscribers Awaiting Installation(b)............................................ 18,343 31,124
------------ ------------
Total Owned Systems.................................................................. 237,491 380,635
------------ ------------
------------ ------------
- ------------------------
(a) Includes UHF subscribers.
(b) Subscribers who have paid an installation fee but are awaiting the
installation of service.
The table below sets forth at December 31, 1995 and December 31, 1996 the
approximate number of television households which received TVA's programming
through the Owned Systems and the Operating Ventures and through sales of
programming to the Independent Operators.
42
HOUSEHOLDS RECEIVING TVA PROGRAMMING
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
Total Owned Systems.................................................................. 237,491 380,635
Operating Ventures................................................................... 35,572 85,256
Independent Operators................................................................ 341,699 564,499
------------ ------------
Total................................................................................ 614,762 1,030,390
------------ ------------
------------ ------------
REVENUES. Revenues consist primarily of Monthly subscriptions revenue
(which principally consists of monthly fees paid by subscribers to the Company
for programming services, including equipment use), Installation revenue,
Indirect programming revenue (which consists of payments made to the Company for
the sale of its programming to the Independent Operators) and Other revenue
(which consists of Advertising revenues and Other revenues). Revenue taxes
consist of a 2.65% tax on Advertising revenue and a 7.65% tax on the balance of
revenues, in each case charged by the Brazilian Government.
Monthly subscriptions revenue for the year ended December 31, 1996 was
$123,020, as compared to $62,496 for the comparable period in 1995, an increase
of $60,524. This increase was principally attributable to an increase in
subscriber base and an increase in the amount of average monthly fees for
existing subscribers from $30.43 to $39.15 per subscriber and for new
subscribers from $39.48 to $43.70 per subscriber. The average monthly
subscription price during the year ended December 31, 1996, was $44.94 for MMDS
service, $38.59 for Cable service and $38.02 for C-Band service, as compared to
$44.04, $38.12 and $41.37, respectively, for the year ended December 31, 1995.
The average monthly subscription price for Ku-Band service from its introduction
in July 1996 to December 31, 1996, was $40.20. Galaxy Brasil contributed $2,266
to monthly subscription revenue for the year ended December 31, 1996.
Installation revenue for the year ended December 31, 1996 was $61,717, as
compared to $26,045 for the comparable period in 1995, an increase of $35,672.
This increase was principally attributable to the increase in the number of new
subscribers and also to an increase in the average installation fee for C-Band
service from $586.79 to $649.98. The average installation fee during the year
ended December 31, 1996 was $134.48 for MMDS service, $36.61 for Cable service
and $649.98 for C-Band service, as compared to $169.70, $81.87 and $586.79
respectively, for the year ended December 31, 1995. The average installation fee
for Ku-Band service from its introduction in July 1996 to December 31, 1996, was
$877. The net number of subscribers added to the Company's Owned Systems during
the year ended December 31, 1996 was 130,363, as compared to 104,295 added
during the same period of 1995. Galaxy Brasil contributed $15,609 to
Installation revenue for the year ended December 31, 1996. After an initial
rollout in July 1996, Galaxy Brasil began enrolling subscribers.
Indirect programming revenue for the year ended December 31, 1996 was
$11,377, as compared to $2,866 for the comparable period of 1995, an increase of
$8,511. This increase was principally attributable to the increase in the number
of Independent Operators' subscribers for the period. The number of Independent
Operators' subscribers increased by 222,800 during the year ended December 31,
1996, as compared to an increase of 252,026 during the same period of the prior
year. Independent Operators pay a fee to the Company based on the number of
subscribers to such Independent Operator's system and the number of channels
purchased from the Company. The average monthly fee paid to the Company by an
Independent Operator during the year ended December 31, 1996 was $1.44 per
subscriber.
Other revenue for the year ended December 31, 1996 was $15,724, as compared
to $10,603 for the comparable period of 1995, an increase of $5,121. This change
included a decrease in Advertising revenue to $7,532 from $8,377, a decrease of
$845, and an increase in Other to $8,192 from $2,226, an increase of $5,966. The
decrease in Advertising revenue was attributable to a shift in advertising sales
from advertising on ESPN International programming (the Advertising revenues
from which were reported as Advertising
43
revenues in the Company's consolidated financial statements), to advertising
sales on ESPN Brasil Ltda. programming (the Advertising revenues from which were
not reported in the Advertising revenues line of the Company's consolidated
financial statements but as part of the Company's Equity in (losses) income of
affiliates). The increase in Other revenues was principally due to the increase
in sales of TVA magazine, technical assistance, commissions for sales of HBO
Brasil and ESPN Brasil advertising as well as sales of ESPN Brasil programming
to independent programming providers.
Revenue taxes for the year ended December 31, 1996 were $13,747, as compared
to $7,506 for the same period of the prior year, an increase of $6,241. Galaxy
Brasil contributed $1,488 to revenue taxes for the year ended December 31, 1996.
Galaxy Brasil began enrolling subscribers and collecting revenue in July 1996.
For the reasons noted above, Net revenue for the year ended December 31,
1996 was $198,091, as compared to $94,504 for the comparable period in the
previous year, an increase of $103,587. Galaxy Brasil contributed $16,530 to Net
revenue for the year ended December 31, 1996.
DIRECT OPERATING EXPENSES. Direct operating expenses include Payroll and
benefits, Programming, Transponder lease cost, Technical assistance expense,
Vehicle rentals expense, TVA Magazine and Other expenses. These expenses, with
the exception of Transponder lease costs, are variable expenses which increase
as the number of subscribers increases and the Company's systems grow, and are
also dependent on the type of service subscribers select. Direct operating
expenses for the year ended December 31, 1996 were $112,297, as compared to
$62,026 for the same period in 1995, an increase of $50,271. This increase was
primarily attributable to expenses incurred to service the increase in the
number of subscribers for such period in 1996 compared to the same period in
1995. Payroll and benefits expense increased to $27,203 from $12,520 an increase
of $14,683, as a result of the hiring of more than 217 new employees and an
increase in the amounts of commissions paid to employees. Programming costs
increased to $42,391 from $21,609, an increase of $20,782, as a result of
changes implemented in the programming purchased by the Company. Transponder
lease cost increased to $10,847 from $7,568, an increase of $3,279, as a result
of leasing a third transponder in 1996. Technical assistance costs increased to
$5,507 from $5,152, an increase of $355; Vehicle rentals expense increased to
$1,862 from $1,732, an increase of $130; and the expense of publishing TVA
Magazine increased to $6,842 from $3,318, an increase of $3,524. This increase
was principally due to the increase in the number of subscribers. Other costs
include commissions for third party sales, transportation of equipment and
materials, third party services, maintenance and other miscellaneous expenses.
For the year ended December 31, 1996, Other costs were $17,645, as compared to
$10,127 for the same period the prior year, an increase of $7,518. Galaxy Brasil
contributed $5,854 to Direct operating expenses, as compared to $1,027 for the
comparable period in 1995, an increase of $4,827 as Galaxy Brasil incurred
Payroll and benefits, Vehicle rentals and other costs consistent with starting
this operation.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses include Payroll and benefits expense for selling,
administrative, financial, legal and human resources, Advertising and promotion,
Rent expense, Other administrative expenses, and Other general expenses.
Selling, general and administrative expenses for the year ended December 31,
1996 were $81,455, as compared to $46,902 for the same period of 1995, an
increase of $34,553. The Company has experienced increasing Selling, general and
administrative expenses as a result of its increased pay television activities
and the associated administrative costs, including costs related to opening and
maintaining additional facilities and an overall increase of $5,804 in Payroll
and benefits expense, which, for the year ended December 31, 1996 were $27,431,
as compared to $21,627 for the same period of 1995, resulting from an increase
in the number of employees and sales commissions. Advertising and promotion
expense increased to $21,355 from $11,122, an increase of $10,233, as a result
of an increase in the number of subscribers and promotional activity. Galaxy
Brasil contributed $15,328 to Selling, general and administrative expenses for
the year ended December 31, 1996, as compared to $79 for the comparable period
in 1995, an increase of $15,249. Such
44
increase at Galaxy Brasil was due to increases in Payroll and benefits expense
and Other administrative expenses.
DEPRECIATION, AMORTIZATION AND ALLOWANCE FOR INVENTORY
OBSOLESCENCE. Depreciation and Amortization includes depreciation of systems,
equipment, installation materials, installation personnel and organizational
costs and amortization of concessions. Allowance for inventory obsolescence
represents charges for obsolescence of certain equipment and material.
Depreciation and Amortization for the year ended December 31, 1996 was $28,216,
as compared to $13,268 for the same period of 1995, an increase of $14,948. This
increase was principally due to the depreciation of additional reception
equipment acquired during 1996, including equipment used in the expansion of the
Company's cable systems and decoders used for DIRECTV and C-Band service.
Allowance for inventory obsolescence for the year ended December 31, 1996 was
$2,250 as compared to $0 for the comparable period in 1995, an increase of
$2,250. This increase was principally due to advances in MMDS reception
equipment technology which resulted in the obsolescence of MMDS reception
equipment previously installed by the Company. Galaxy Brasil contributed $2,858
to Depreciation, Amortization and Allowance for inventory obsolescence for the
year ended December 31, 1996, as compared to $127 for the comparable period in
1995, an increase of $2,731. Such increase was due to depreciation expenses
associated with the Tambore Facility.
For the reasons noted above, Operating loss for the year ended December 31,
1996 was $26,127, as compared to $27,692 for the comparable period in 1995, a
decrease of $1,565. Galaxy Brasil contributed $7,510 of this loss for the year
ended December 31, 1996, as compared to $1,233 for the comparable period in
1995, an increase of $6,277.
INTEREST INCOME. Interest income for the year ended December 31, 1996 was
$5,813, as compared to $3,118 for the same period in 1995, an increase of
$2,695. This increase was principally due to interest received by the Company in
connection with temporarily invested portions of the proceeds of the Notes and
capital contributions in December 1995.
INTEREST EXPENSE. Interest expense for the year ended December 31, 1996 was
$17,520, as compared to $17,745 for the same period of 1995, a decrease of $225.
In November 1996 the Company issued the Notes and used some of the proceeds to
repay certain outstanding indebtedness bearing interest rates greater than that
applicable to the Notes.
EQUITY IN LOSSES (INCOME) OF AFFILIATES AND GAIN ON ISSUANCE OF SHARES BY
EQUITY INVESTEE. For the year ended December 31, 1996, Equity in losses
(income) of affiliates amounted to a loss of $8,532, as compared to a loss of
$3,672 in the same period of 1995, an increase in loss of $4,860. The primary
reason for this increase in loss was sustained losses at ESPN Brasil, which was
formed on June 15, 1995. The Gain on issuance of shares by equity investees
amounted to $2,317 for the year ended December 31, 1996 and was due to a capital
gain from TV Filme's equity offering in 1996.
OTHER NON-OPERATING (EXPENSES) INCOME. Other non-operating (expenses)
income for the year ended December 31, 1996 was an expense of $6,009, as
compared to income of $4,389 in the same period in 1995, an increase in expense
of $10,398. This increase was primarily due to costs incurred in 1996 in
connection with the negotiations resulting in the investment in the Company by
certain shareholders in December 1995, a loss of unrecovered decoders installed
in the homes of subscribers whose service was terminated, and the organization
of TVA Sul as a holding company. The Other non-operating expenses for the year
ended December 31, 1996 consisted primarily of fees paid in connection with the
investment of Falcon International and Hearst/ABC Parties in the Company. The
Other non-operating income for the comparable period of 1995 consisted primarily
of income from the sale of movie inventory and other assets.
MINORITY INTEREST. The Minority interest of $1,849 for the year ended
December 31, 1996 represents Mr. Leonardo Petrelli's 13.0% share of the
aggregate losses of TVA Sul.
45
NET LOSS. For the reasons noted above, Net loss for the year ended December
31, 1996 was $47,892, as compared to $41,070 for the comparable period in 1995,
an increase of $6,822.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The table below sets forth the number of subscribers at December 31, 1995
and December 31, 1994 for the Owned Systems.
DECEMBER 31, DECEMBER 31,
OWNED SYSTEM SUBSCRIBERS 1994 1995
- ------------------------------------------------------------------------------------- ------------ ------------
MMDS(a).............................................................................. 111,771 188,893
Cable................................................................................ 1,007 15,129
Digital C-Band....................................................................... 2,075 15,126
------------ ------------
114,853 219,148
Paid Subscribers Awaiting Installation(b)............................................ 13,956 18,343
------------ ------------
Total Owned Systems.................................................................. 128,809 237,491
------------ ------------
------------ ------------
- ------------------------
(a) Includes UHF subscribers.
(b) Subscribers who have paid an installation fee but are awaiting the
installation of service.
The table below sets forth at December 31, 1995 and December 31, 1994 the
approximate number of television households which received TVA's programming
through the Owned Systems and the Operating Ventures and through sales of
programming to the Independent Operators.
HOUSEHOLDS RECEIVING TVA PROGRAMMING
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
Total Owned Systems.................................................................. 128,809 237,491
Operating Ventures................................................................... 7,640 35,572
Independent Operators................................................................ 89,673 341,699
------------ ------------
Total........................................................................ 226,122 614,762
------------ ------------
------------ ------------
REVENUES. Monthly subscriptions revenue for the year ended December 31,
1995 was $62,496, as compared to $27,976 for the comparable period in 1994, an
increase of $34,520. This increase was attributable to the net addition of
104,295 subscribers to the Company's Owned Systems, and the increase in the
average monthly fee for existing subscribers to $33.24 from $27.80, an increase
of $5.44, and for new subscribers to $39.48 from $31.87, an increase of $7.61.
The average monthly subscription price during the year ended December 31, 1995
was $44.04 for MMDS service and $38.12 for Cable service, as compared to $42.48
and $26.26, respectively, for the year ended December 31, 1994. The average
monthly subscription price for C-Band service for the year ended December 31,
1995 was $41.37. In 1994, the Company's C-Band service was in its initial phase
of operations. In addition, Galaxy Brasil's Ku-Band service was under
development in 1995. The Company was able to increase the monthly fee as the
market price for pay television increased. The increase in the number of
subscribers was due to (i) the continued expansion and penetration of the
Company's MMDS service, including the introduction of signal repeaters in Sao
Paulo and Rio de Janeiro, (ii) the full year benefit of Cable system
construction in Sao Paulo and (iii) the net addition of 13,051 C-Band
subscribers through an aggressive national marketing campaign timed to coincide
with the Company's main competitor focusing on its Cable systems. During each
year, all revenues came from the operation of the TV Group as the operations of
Galaxy Brasil were in development.
46
Installation revenue for the year ended December 31, 1995 was $26,045, as
compared to $6,997 for the comparable period in 1994, an increase of $19,048.
This increase was principally attributable to the increase in the number of
installations and to the increase in the average fees for installations. The
average fee for MMDS service installation increased to $169.70 from $119.75, an
increase of $49.95, and the average fee for Cable service installation increased
to $81.87 from $44.69, an increase of $37.18. The C-Band average installation
fee increased to $586.79 from $500.00, an increase of $86.79. The growth in
installations was aided by the continued growing awareness of pay television in
Brazil and the Company's start-up of live broadcasts of the Brazilian National
Soccer Championship, the Sao Paulo State Championship and other soccer events
through ESPN Brasil. As with Monthly subscriptions revenue, all Installation
revenue during each year came from the operations of the TV Group.
Indirect programming revenue for the year ended December 31, 1995 was
$2,866, as compared to $1,626 for the comparable period of 1994, an increase of
$1,240. This increase was principally attributable to the increase in the number
of Independent Operators' subscribers for the period, as compared to the same
period in 1994. Such Independent Operators' subscribers increased to 341,699 at
December 31, 1995, as compared to 89,673 at December 31, 1994, an increase of
252,026. The average fee paid during both 1995 and 1994 was $1.50 per subscriber
per month.
Other revenue for the year ended December 31, 1995 was $10,603, as compared
to $7,173 for the comparable period of 1994, an increase of $3,430. This
increase included an increase in Advertising revenue to $8,377 from $5,727, an
increase of $2,650. The growth in Advertising revenue was due to the increase in
the subscriber base, an increase in the amount of advertising time sold by the
Company per hour of programming and an increase in the rate charged for
advertising time.
Revenue taxes for 1995 were $7,506, as compared to $872 for the prior year,
an increase of $6,634. This increase was primarily attributable to a Government
imposed 5.0% increase in the tax rate, which increased Revenue taxes to 7.65%
from 2.65%, imposed on the Company's Gross revenues (excluding Advertising
revenue, which is taxed at 2.65%).
For the reasons noted above, Net revenue for the year ended December 31,
1995 was $94,504, as compared to $42,900 for the comparable period the previous
year, an increase of $51,604.
DIRECT OPERATING EXPENSES. Direct operating expenses for the year ended
December 31, 1995 were $62,026, as compared to $28,659 for the same period of
1994, an increase of $33,367. This increase was attributable primarily to the
increase in the number of subscribers to the Company's systems which led to
increases in Payroll and benefits expense, Programming expense, Transponder
lease cost, Technical assistance expense, Vehicle rentals expense, TVA Magazine
expense and Other costs. Payroll and benefits expense increased to $12,520 from
$8,022, an increase of $4,498, as the Company added approximately 450 employees.
Programming costs increased to $21,609 from $12,133, an increase of $9,476, as
the Company's subscriber base grew and the Company added four new channels to
each of its distribution systems. Transponder lease cost increased to $7,568
from $1,555, an increase of $6,013, due to an increase in the cost of satellite
transponder leases and the application of a 25.0% tax charged by the Brazilian
Government on transponder lease payments beginning in June 1995. Technical
assistance expense increased to $5,152 from $1,622, an increase of $3,530, due
to an increase in the subscriber base and the upgrade of existing systems for
the receipt of additional channels by subscribers, Vehicle rentals expense
increased to $1,732 from $788, an increase of $944, and TVA Magazine expense
increased to $3,318 from $1,430, an increase of $1,888. These expenses are
variable and increased due to the costs associated with servicing the larger
subscriber base and installing new subscribers. For the year ended December 31,
1995, Other costs were $10,127, as compared to $3,109 for the same period the
prior year, an increase of $7,018. The Company experienced increased expenses as
a result of its increased television activities and associated costs, including
costs related to opening and maintaining additional facilities. Galaxy Brasil
contributed $1,027 to Direct operating expenses for the year ended December 31,
1995, as compared to $0 for the same
47
period of 1994. Galaxy Brasil incurred Payroll and benefits expense, Vehicle
rentals expense and Other costs consistent with starting its DIRECTV service.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended December 31, 1995 were $46,902, as
compared to $24,370 for the same period of 1994, an increase of $22,532. The
Company experienced increased Selling, general and administrative expenses as a
result of its increased pay television activities and associated administrative
costs, including costs related to opening and maintaining additional facilities
and an overall increase in payroll expenses resulting from an increase in the
number of employees. Advertising and promotion expense increased to $11,122 from
$3,540, an increase of $7,582 largely due to the Company's increased promotional
activity, including nationwide C-Band promotion. Galaxy Brasil contributed $79
to Selling, general and administrative expenses for the year ended December 31,
1995, all of which constituted Advertising and rent expenses, as compared to $0
for the same period of 1994.
DEPRECIATION AND AMORTIZATION. Depreciation and Amortization expense for
the year ended December 31, 1995 was $13,268, as compared to $6,177 for the same
period of 1994, an increase of $7,091. The increase was due primarily to
increased capitalization of the costs associated with building the MMDS, Cable
and C-Band systems and with the installation of new subscribers. Galaxy Brasil
contributed $127 to Depreciation and Amortization expense (all of which
constituted Depreciation expense) for the year ended December 31, 1995, as
compared to $0 for the comparable period in 1994.
For the reasons noted above, Operating loss for the year ended December 31,
1995 was $27,692, as compared to $16,306 for the comparable period in 1994, an
increase in loss of $9,303. Galaxy Brasil contributed $11,386 to this loss for
the year ended December 31, 1995, as compared to $0 for the comparable period in
1994.
INTEREST INCOME. For the year ended December 31, 1995, Interest income
totaled $3,118, as compared to $21,806 in the similar period in 1994, a decrease
of $18,688. This reduction in Interest income was a result of the shorter period
in which a capital contribution of $125,000 in 1995 earned interest relative to
the length of time a capital contribution of $151,452 earned interest in 1994,
as well as due to the sharp appreciation of the Brazilian REAL versus the US
dollar upon introduction of the REAL in late 1994.
INTEREST EXPENSE. Interest expense for the year ended December 31, 1995 was
$17,745, as compared to $16,413 for the year ended December 31, 1994, an
increase of $1,332.
EQUITY IN LOSSES (INCOME) OF AFFILIATES. For the year ended December 31,
1995, Equity in losses (income) of affiliates was a loss of $3,672, as compared
to income of $383 for the same period in 1994, a decrease of $4,055. The
principal reasons for this reduction were the loss sustained by ESPN Brasil
Ltda. which came into existence during June 1995, and HBO Brasil Partners, which
came into existence in 1994.
OTHER NON-OPERATING (EXPENSES) INCOME. For the year ended December 31,
1995, Other non-operating (expenses) income was income of $4,389, as compared to
an expense of $1,273 for the same period of 1994, an increase of $5,662. The
primary reasons for this increase were equipment rental income, sales of assets
and a release of certain obligations, among others.
MINORITY INTEREST. The Minority interest of $871 for the twelve months
ended December 31, 1995 represents Mr. Leonardo Petrelli's 20.0% share of the
$4,355 in aggregate losses of TVA Curitiba.
NET LOSS. For the reasons noted above, Net loss for the year ended December
31, 1995 was $41,070, as compared to $11,997 for the comparable period in 1994,
an increase of $29,073.
48
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
The table below sets forth the number of subscribers at December 31, 1994
and December 31, 1993 for the Owned Systems.
DECEMBER 31, DECEMBER 31,
OWNED SYSTEM SUBSCRIBERS 1993 1994
- ------------------------------------------------------------------------------------- ------------- ------------
MMDS(a).............................................................................. 82,474 111,771
Cable................................................................................ 0 1,007
Digital C-Band....................................................................... 511 2,075
------ ------------
82,985 114,853
Paid Subscribers Awaiting Installation(b)............................................ 7,438 13,956
------ ------------
Total Owned Systems.................................................................. 90,423 128,809
------ ------------
------ ------------
- ------------------------
(a) Includes UHF subscribers.
(b) Subscribers who have paid an installation fee but are awaiting the
installation of service.
The table below sets forth at December 31, 1994 and December 31, 1993 the
approximate number of television households which received TVA's programming
through the Owned Systems and the Operating Ventures and through sales of
programming to the Independent Operators.
HOUSEHOLDS RECEIVING TVA PROGRAMMING
DECEMBER 31, DECEMBER 31,
1993 1994
------------ ------------
Total Owned Systems.................................................................. 90,423 128,809
Operating Ventures................................................................... 1,505 7,640
Independent Operators................................................................ 36,659 89,673
------------ ------------
Total................................................................................ 128,587 226,122
------------ ------------
------------ ------------
REVENUES. Monthly subscriptions revenue for the year ended December 31,
1994 was $27,976, as compared to $12,544 for the comparable period of 1993, an
increase of $15,432. This increase was attributable to the net addition of
31,868 subscribers to the Company's Owned Systems and the increase in the
average monthly fee for existing subscribers to $27.80 from $21.30, an increase
of $6.50, and for new subscribers to $31.87 from $23.63 over the same period, an
increase of $8.24. The Company added three premium channels, including HBO
Brasil, and suspended its "a la carte" channel offerings. The increase in the
number of subscribers was due to the continued expansion and penetration of the
Company's MMDS service, principally in Sao Paulo, Rio de Janeiro and Curitiba,
the launch of a Cable system in Sao Paulo, and the net addition (after the
December 1993 launch) of 1,564 C-Band subscribers.
Installation revenue for the year ended December 31, 1994 was $6,997, as
compared to $4,350 for the comparable period of 1993, an increase of $2,647.
This increase was principally attributable to the growing number of subscriber
installations and to the increase in the average revenue for installation of
MMDS service, which increased to $119.75 from $91.33, an increase of $28.42. The
growth in installations was aided by the growing awareness of pay television in
Brazil, the Company's larger sales force and increased promotional activities,
especially with respect to single family homes.
Indirect programming revenue for the year ended December 31, 1994 was
$1,626, as compared to $530 for the previous year, an increase of $1,096. This
increase was principally attributable to the increase in the number of
Independent Operators' subscribers for the period, as compared to the same
period in 1994. Such subscribers increased to 89,673 at December 31, 1994, as
compared to 36,659 at December 31,
49
1993, an increase of 53,014. The average fee paid by the Independent Operators
during both 1993 and 1994 was $1.50 per Independent Operator subscriber per
month.
Other revenue for the year ended December 31, 1994 was $7,173, as compared
to $2,468 for the comparable period of 1993, an increase of $4,705. This
increase included an increase in Advertising and promotion revenue to $5,727
from $2,099, an increase of $3,628. The growth in Advertising and promotion
revenue was due to the increase in the subscriber base, an increase in the
amount of advertising time sold by the Company per hour of programming and an
increase in the rate charged for advertising time.
Revenue taxes were $872 for the period ending December 31, 1994, as compared
to $371 for the comparable period of 1993, an increase of $501. This increase
was based on the growth of the subscriber base and an increase in revenue.
For the reasons noted above, Net revenue for the year ended December 31,
1994 was $42,900, as compared to $19,521 for the previous year, an increase of
$23,379.
DIRECT OPERATING EXPENSES. Direct operating expenses for the year ended
December 31, 1994 were $28,659, as compared to $29,779 for the same period of
1993, a decrease of $1,120. This decrease was attributable primarily a decrease
in Programming Expense, which was partially offset by the increase in the number
of subscribers to the Company's systems, including the increase in Payroll and
benefits expense. Payroll and benefits expense increased to $8,022 from $6,079,
an increase of $1,943, as the Company added approximately 200 employees.
Programming costs decreased to $12,133 from $18,156, a decrease of $6,023. This
decrease was attributable to the termination of the production of the Showtime
channel (a 24 hour per day movie channel), which was expensive relative to other
channels, and the renegotiation of several other programming contracts.
Transponder lease cost increased to $1,555 from $1,262, an increase of $293.
Technical assistance expense decreased to $1,622 from $1,773, a decrease of
$151. Vehicle rentals expense increased to $788 from $597, an increase of $191
and TVA Magazine expense increased to $1,430 from $725, an increase of $705.
Other costs were $3,109, as compared to $1,187 for the same period the prior
year, an increase of $1,922. The Company experienced increased expenses as a
result of its increased television activities and associated costs, including
costs related to opening and maintaining additional facilities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended December 31, 1994 were $24,370, as
compared to $19,957 for 1993, an increase of $4,413. Selling, general and
administrative expenses, excluding Advertising and promotion expenses, remained
essentially unchanged due to the ability of the Company to increase its
subscriber base without increasing Selling, general and administrative expenses,
including human resource expense. Advertising and promotion expense increased to
$3,540 from $2,205, an increase of $1,335. The increase was due to the Company's
increase in promotional activity.
DEPRECIATION AND AMORTIZATION. Depreciation and Amortization expense for
the year ended December 31, 1994 was $6,177, as compared to $4,813 for the same
period of 1993, an increase of $1,364 due primarily to increased capitalization
of the costs associated with building the MMDS and Cable systems and installing
new subscribers.
For the reasons noted above, Operating loss for the year ended December 31,
1994 was $16,306, as compared to $35,028 for the year ended December 31, 1993, a
decrease of $18,772.
INTEREST INCOME. Interest income for the year ended December 31, 1994 was
$21,806, as compared to $5,369 for the previous year, an increase of $16,437.
This increase was due primarily to the contribution to the capital of the
Company by Abril and CMIF of $151,452 in the aggregate and the investment of
surplus funds from such contribution.
50
INTEREST EXPENSE. Interest expense for the year ended December 31, 1994 was
$16,413, as compared to $8,492 for the previous year, an increase of $7,921.
This increase was primarily due to increased borrowing from Abril to fund
ongoing operations.
EQUITY IN LOSSES (INCOME) OF AFFILIATES. For the year ended December 31,
1994, Equity in losses (income) of affiliates was income of $383, as compared to
$0 in the same period in 1993. This increase was the result of the formation of
Tevecap as the holding company of its various operating subsidiaries which
became effective on June 30, 1994 and Equity in Losses in HBO Brasil Partners,
which came into existence in 1994.
OTHER NON-OPERATING (EXPENSES) INCOME. For the year ended December 31,
1994, Other non-operating income and expenses was an expense of $1,273, as
compared to an expense of $557 for the same period in 1993, an increase in
expense of $716. The reasons for this increase in expense were the negative
results of TVA Sistema prior to its acquisition by Tevecap.
MINORITY INTEREST. The Minority interest of $720 for the twelve months
ended December 31, 1994 represents Mr. Leonardo Petrelli's 20.0% share of the
$3,601 in aggregate losses of TVA Parana.
NET LOSS. For the reasons noted above, Net loss for the year ended December
31, 1994 was $11,997, as compared to $37,628 for the comparable period in 1993,
a decrease of $25,631.
SEASONALITY
The Company's revenues are seasonal. Generally, during the Brazilian summer
months of December and January the Company experiences lower demand for
installation for each of its services and lower rates of retention of existing
subscribers for each of its services.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has sustained losses primarily due to
insufficient revenue to fund start-up costs, interest expense and charges for
depreciation and amortization arising from the development of its pay television
systems. As of December 31, 1996, the Company had incurred cumulative net losses
of over $203,867. During the periods under review, the Company required external
funds to finance its capital expenditures, operating activities and make
payments of principal and interest on its indebtedness. The sources of such
funds have been as follows: (i) borrowings from Abril under the Abril Credit
Facility ($105,800 outstanding as of October 31, 1996 which was repaid with the
proceeds from the sale of Tevecap's 12-5/8% Senior Notes due 2004 (the "Notes")
and none of which has been redrawn, (ii) short-term borrowings under short-term
lines of credit ($14,916 outstanding as of December 31, 1996 and $21,322
outstanding as of May 31, 1997), (iii) net capital contributions of
approximately $288,000 from shareholders and (iv) borrowings from shareholders
(approximately $4,608 outstanding as of September 30, 1996 and $0 outstanding as
of December 31, 1996).
The Company's liquidity needs will arise primarily from capital
expenditures, debt service requirements and, in certain periods, the funding of
its working capital requirements. As of December 31, 1996, the Company had
approximately $272,864 of indebtedness outstanding, primarily consisting of
$250,000 principal amount of the Notes.
In addition to debt service, the Company will require substantial amounts of
capital for (i) the construction of cable networks and the installation of
equipment at subscribers' locations, (ii) the construction of additional
transmission and headend facilities and related equipment purchases, (iii) the
continued funding of losses and working capital requirements and (iv)
investments in, and maintenance of, vehicles and administrative offices. In
addition, the Company continually evaluates opportunities to acquire, either
directly or indirectly, pay television licenses and programming rights.
51
The Company made purchases of fixed assets of $11,379, $22,639, $93,029 and
$125,612 in 1993, 1994, 1995 and 1996, respectively. Management estimates that
$292,708 and $239,202 of capital expenditures will be required in 1997 and 1998,
respectively. Of these balances, management anticipates deferring payment of
$108 million and $39 million, respectively, for a period of 360 days in
accordance with the terms of the agreements to be entered into with the parties
from whom the Company will purchase such fixed assets. Such deferrals are
standard practice in Brazil.
The Company also has certain commitments that must be funded, including
capital contributions of approximately $26,992 prior to December 1997 to GLA, TV
Filme, ESPN Brasil Ltda., HBO Brasil Partners, Canbras TVA and CNBC, and
programming payments of approximately $12,895 for the two-year period beginning
January 1, 1997 and ending December 31, 1998. Actual amounts of funds required
may vary materially from these estimates and additional funds could be required
in the event of cost overruns, unanticipated expenses, regulatory changes,
engineering design changes and other technological-driven changes. In connection
therewith, management expects to invest $13,719 and $0 in the Operating
Ventures, the Programming Ventures and in other minority investments in 1997 and
1998, respectively.
The Company's principal sources of liquidity are the Abril Credit Facility
and the Company's short-term line of credit (each as described below), together
with net cash provided by operating activities. However, until sufficient cash
flow is generated from operations, the Company will be required to utilize its
current sources of debt funding to satisfy its liquidity needs. The Company had
approximately $104,798 of cash and cash equivalents as of December 31, 1996.
For the year ended December 31, 1996, net cash used in operating activities
was $17,696, primarily as the result of an increase in accounts receivable of
$23,395, an increase in pre-paid and other assets of $8,973 and an increase in
inventories of $2,227. The increase was partially offset by $26,539 of
depreciation, a non-cash item. For the year ended December 31, 1996, cash used
in investing activities was $163,900, primarily as the result of capital
expenditures of $125,612 for the purchase of fixed assets and investments in
equity and cost investments and concessions of $30,803. The purchases of fixed
assets were principally related to the purchase of decoders, equipment, hardware
and materials and labor used for new subscriber installations and the
investments related to TVA Sul. For the year ended December 31, 1996, net cash
provided by financing activities was $262,193, consisting principally of
$241,875 in net proceeds from the sale of the Notes.
The Abril Credit Facility allows the Company to borrow up to $60,000 on a
revolving basis until December 1998. Since June 1996, the Company has from time
to time requested, and Abril has provided, funds in excess of $60,000. The loans
are generally denominated in REAIS and bear interest at a rate equal to 99.5% of
the CDI rate, the Brazilian interbank lending rate, adjusted at the beginning of
each month. The Company currently has no amounts outstanding under the Abril
Credit Facility. However, the Company will be able to re-borrow the full amount
of such facility, as required.
On December 9, 1996, TVA Sistema, as Borrower, and Tevecap, as Guarantor,
entered into a credit agreement with The Chase Manhattan Bank for the financing
of C-Band decoders and other related equipment (the "EximBank Facility"). The
Export-Import Bank of the United States of America ("EximBank") will guarantee
85.0% of the amount of the loan. The loan is to be made on terms customary for
credits supported by EximBank to Brazilian borrowers. The interest rate will be
LIBOR plus a specified margin. The principal amount of the loan will be $29,350,
which will be dispersed in two tranches, the first in the principal amount of
$11,400 with a term of five years and the second in the principal amount of
$17,950 with a term of 4.5 years. As of December 31, 1996, neither tranche had
been disbursed.
Galaxy Brasil entered into the Galaxy Brasil Leasing Facility, a five-year
$49,900 sale leaseback facility, during the first quarter of 1997. Under the
Galaxy Brasil Leasing Facility, Galaxy Brasil will have access to financing for
the purpose of acquiring dish antennae, decoder boxes and other equipment for
its Ku-Band service. This facility will be available until 2002 and will bear
interest at LIBOR plus a specified
52
margin and customary costs. Galaxy Brasil's payment obligations under the Galaxy
Brasil Leasing Facility were severally guaranteed by the GLA partners.
The Company has also from time to time received contributions and loans from
its shareholders to fund liquidity needs and may continue to receive such
contributions and loans in the future. In addition, as is standard business
practice in Brazil, the Company frequently finances a portion of its working
capital through the deferment of payment terms for the purchase price of
property (typically up to 360 days). These amounts have often subsequently been
refinanced by the Company with short-term bank indebtedness. The Company
currently has lines of credit with terms of 360 days which will continue to be
available after the Offering.
The Company believes, based on management's internal forecasts and
assumptions relating to its operations, that the aggregate net proceeds from the
sale of the Notes, together with the proceeds from the deferral of payments to
suppliers of fixed assets, the EximBank Facility, the Galaxy Brasil Leasing
Facility, the Abril Credit Facility, and funds generated from operations will be
sufficient to meet its working capital and capital expenditure requirements for
at least the period through December 31, 1997. In the long term, the Company
believes, based on management's internal forecasts and assumptions relating to
its operations, that its existing cash and funds generated from operations,
together with its existing financing facilities agreements, will be sufficient
to meet its working capital and capital expenditure requirements. In the event
that the Company's plans change, its assumptions change or prove inaccurate, or
if the proceeds from the sale of the Notes, the EximBank Facility, the Galaxy
Brasil Leasing Facility, the Abril Credit Facility and projected cash flows
otherwise prove insufficient to fund operations (due to unanticipated expenses,
technical problems, difficulties or otherwise), the Company could be required to
seek additional sources of financing. The Company has no current arrangements
with respect to sources of additional financing and there can be no assurance
that the Company would be able to obtain additional financing on terms
acceptable to the Company, or at all.
In addition, the Company's liquidity may also be adversely affected by
statutory minimum dividend requirements under applicable Brazilian law.
ACCOUNTING FOR INCOME TAXES
The Company has approximately $135,036 of net operating losses ("NOLs") to
offset against regular taxes. These NOLs are unexpirable. Statement of Financial
Accounting Standards No. 109 (Accounting for Income Taxes) ("SFAS 109") requires
that the Company determine whether it is "more-likely-than-not" that the Company
will realize the benefits associated with such losses and provides that in
making such a determination, all negative and positive evidence should be
considered (with more weight given to evidence that is "objective and
verifiable"). SFAS No. 109 indicates that "forming a conclusion that a valuation
allowance is not needed is difficult when there is negative evidence such as
cumulative losses in recent years". The Company has a limited operating history
and has generated losses since its inception. In view of this, the Company has
established a full valuation allowance for the amount of NOL carryforwards in
excess of net taxable temporary differences. This determination was based
primarily on historical losses. Management does, however, believe that the
Company will be profitable in the future and, as such, will be able to utilize
these NOLs.
RECENT DEVELOPMENTS
Set forth below is certain unaudited consolidated financial information of
the Company for the three months period ended March 31, 1997 (the "March
Information"), and the three month period ended June 30, 1997 (the "June
Information"). The March Information and the June Information have been prepared
in accordance with U.S. GAAP. The March Information was originally presented in
the report on Form 6-K of the Company and the Guarantors, dated May 1, 1997. The
June Information was originally presented in the report on Form 6-K of the
Company and the Guarantors, dated August 20, 1997. This
53
information should be read in conjunction with the Financial Statements and the
discussion thereof contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Information for any interim
period is not necessarily indicative of results that may be anticipated for a
full year.
MARCH INFORMATION
CONSOLIDATED RESULTS
Consolidated net revenues for the three months ended March 31, 1997 reached
US$67.2 million, compared with US$66.3 million in the fourth quarter and US$33
million in the first quarter of 1996. The Company has more than doubled its
revenues every year for the last three years. Revenues consist primarily of
subscription, installation, advertising, indirect programming and other
revenues, excluding taxes.
Subscription revenue contributed to 66% of net revenues, and amounted to
US$44.3 million in the first quarter of 1997, up 103% from US$21.8 million in
the first quarter of 1996 and US$37.7 in the fourth quarter of 1996.
Subscription revenue can be broken down by distribution technology as follows:
MMDS (64%), cable (11%), C-band (13%) and Ku-band (12%). Revenue increased as a
result of an expanded subscriber base and a higher average monthly fee.
SUBSCRIPTION REVENUE ($000)
FIRST FIRST
TECHNOLOGY QUARTER 1997 % QUARTER 1996 % CHANGE%
- ------------------------------------------------------------ ------------- --- ------------- --- -------------
MMDS........................................................ 28,399 64% 18,831 86% 51%
Cable....................................................... 4,745 11% 1,136 5% 318%
C-Band...................................................... 5,799 13% 1,867 9% 211%
Ku-band..................................................... 5,339 12% 0 0% n/c
------ --- ------ --- ---
Total....................................................... 44,282 100% 21,834 100% 103%
SUBSCRIPTION REVENUE ($000)
FIRST FOURTH
TECHNOLOGY QUARTER 1997 % QUARTER 1996 % CHANGE%
- ------------------------------------------------------------ ------------- --- ------------- --- -------------
MMDS........................................................ 28,399 64% 27,097 72% 5%
Cable....................................................... 4,745 11% 3,467 9% 37%
C-Band...................................................... 5,799 13% 5,391 14% 8%
Ku-band..................................................... 5,339 12% 1,764 5% 203%
------ --- ------ --- ---
Total....................................................... 44,282 100% 37,719 100% 17%
Installation revenue contributed 26% of net revenues, reaching US$17.5
million in the first quarter of 1997, compared with US$22.3 million in the
fourth quarter of 1996. This decrease is attributed to a reduction in the
hook-up fee for Ku-Band and C-Band service.
Advertising revenue amounted to US$1.8 million in the first quarter of 1997,
representing a 92% increase, versus US$0.9 million in the first quarter of 1996.
Indirect programming revenue in the first quarter of 1997 reached US$5.1
million, an increase of 308% compared with US$1.3 million in the first quarter
of the previous year. This revenue consists of payments made to the Company for
the sale of its programming to affiliated companies and independent operators.
54
Direct operating expenses amounted to US$36.4 million for the first three
months of 1997 compared with US$34.6 million in the previous quarter,
representing an increase of 5%. Direct operating expenses as a percentage of
revenue dropped from 61% in the first quarter of 1996 to 54% in the first
quarter of 1997.
Selling, general and administrative expenses amounted to US$25.9 million for
the first three months of 1997, representing 39% of net revenue compared with
US$29.9 million in the fourth quarter of 1996. As a percentage of revenues,
selling, general and administrative expenses decreased from 45% to 39% as a
result of the dilution of fixed expenses.
As a result, EBITDA reached US$4.9 million, an increase of 164% compared
with the US$1.9 million in the fourth quarter of 1996.
Adjusted EBITDA reached US$9.2 million, an increase of 50% compared with
US$6.2 million adjusted EBITDA for the fourth quarter of 1996. The positive
EBITDA of US$9.2 million for the the first quarter of 1997 represented a
turnaround versus the loss of US$3 million during the first quarter of 1996.
Adjusted EBITDA includes the deferment of Ku-Band revenue of US$4.3 million for
the first quarter of 1997.
Depreciation and amortization for the first quarter of 1997 was US$10.4
million as compared with US$9.7 million in the previous quarter, and US$5.1
million in the first quarter of 1996. This includes depreciation of systems,
equipment, installation materials, installation personnel and amortization of
organizational costs and concessions.
Operating loss during the first quarter of 1997 was US$5.5 million, 27% less
than the loss of US$7.6 million reported in the fourth quarter of 1996. The
operating loss for the quarter was also 32% less than the loss of US$8.1 million
in the first quarter of 1996.
Interest income reached US$5.0 million, compared with US$2.3 million in the
previous quarter, or an increase of 118%. Interest expenses were US$11.3
million, compared with US$7.5 million in the fourth quarter of 1996,
representing a 50% increase.
Equity in losses (income) of affiliates amounted to a loss of US$2.5 million
in the first quarter of 1997 compared with a loss of US$1.9 million in the
previous quarter. That loss resulted from ESPN Brasil (US$1.9 million), TV Filme
(US$449,000), and Canbras (US$205,000), and was offset by income from HBO
(US$38,000).
Other non-operating expenses amounted to US$763,000 versus income of US$3.3
million in the fourth quarter of 1996. The unusually high income in the fourth
quarter was due to a gain from TV Filme's equity offering issued in 1996.
Minority interest amounted to US$191,000, representing the minority
shareholder's portion of the US$1 million aggregate losses of TVA Sul.
As a result, net loss for the first three months ended March 31, 1997 was
US$15.5 million versus a net loss of US$11.2 million reported in the fourth
quarter of 1996 and US$12.2 million reported in the first quarter of 1996.
Capital expenditures (cash basis) for the first quarter of 1997 amounted to
US$38.8 million, a 28% decrease from US$54 million in the previous quarter.
Funds were directed mainly to: purchase decoders for all distribution systems;
implement internal networks for MMDS and cable; and cable network build-out,
mainly in Sao Paulo and Curitiba.
SUBSCRIBER PERFORMANCE
Total subscriber base for the first quarter of 1997 totaled 1,093,677, a 9%
growth versus the previous quarter, and an increase of 61% versus the first
quarter of 1996.
55
Owned systems, or proprietary systems, grew to 394,493 subscribers due to
the higher maturity systems of cable and DBS. The Company emphasized the
strategic development of cable service, reaching 1,369 kilometers of cable.
Through independent operators, Tevecap reached 605,606 subscribers as of
March 31, 1997, compared with 564,499 subscribers during the previous quarter,
and 401,744 subscribers in the first quarter of 1996. The number of subscribers
through independent operators increased by 7%, from the first quarter of 1997
and the fourth quarter of 1996, representing an additional 41,107 households
between the fourth quarter of 1996 and the first quarter of 1997.
The table below outlines the number of subscribers as of March 31, 1997 and
March 31, 1996 for owned systems according to different distribution
technologies as well as the number of households which receive TVA programming
through operating ventures and independent operators:
SUBSCRIBER BASE--TOTAL
FIRST FIRST
QUARTER 1997 QUARTER 1996 CHANGE%
------------ ------------ -----------
MMDS...................................................................... 230,002 194,589 18%
Cable..................................................................... 57,263 16,645 244%
Digital C-Band............................................................ 58,821 22,122 166%
Ku-band................................................................... 48,407
------------ ------------ -----
Total Owned Systems....................................................... 394,493 233,356 69%
Operating Ventures*....................................................... 93,578 44,768 109%
Independent Operators..................................................... 605,606 401,744 51%
------------ ------------ -----
Households Receiving TVA Programming...................................... 1,093,667 679,868 61%
- ------------------------
* Represents 100% of subscribers. On an equity subscriber basis there were
6,402 subscribers as of March 31, 1996 and 13,955 subscribers as of December
31, 1996 and 16,187 subscribers as of March 31, 1997.
REVENUES BY OPERATION
The table below outlines consolidated net revenue for the first quarter
ended March 31, 1997 and 1996 and the fourth quarter ended December 31, 1996 for
Owned systems by operation:
CONSOLIDATED NET REVENUE OF OPERATION
FIRST FOURTH FIRST FIRST
QUARTER QUARTER QUARTER QUARTER
1997 1996 % CHANGE 1997 1996
----------- ----------- ------------- ----------- -----------
TVA Sao Paulo................................................ 17,656 19,030 (7%) 17,656 14,290
TVA Rio de Janeiro........................................... 10,436 9,437 11% 10,436 6,396
TVA Sul...................................................... 5,654 4,300 31% 5,654 1,941
Digital C-Band............................................... 8,848 10,017 (12%) 8,848 7,269
Ku-Band...................................................... 15,707 13,336 18% 15,707 0
----------- ----------- ----------- -----------
Total........................................................ 58,301 56,120 4% 58,301 29,896
%CHANGE
-------------
TVA Sao Paulo................................................ 24%
TVA Rio de Janeiro........................................... 63%
TVA Sul...................................................... 191%
Digital C-Band............................................... 22%
Ku-Band...................................................... n/c
Total........................................................ 95%
TVA Sao Paulo: Net revenues amounted to US$17.7 million in the first quarter
of 1997, down 7% compared with US$19 million in the previous quarter. This
decrease was due to a fewer number of installations and a reduction in the
average hook-up fee. As of March 31, 1997, the subscriber base totaled 147,239,
comprising both MMDS and cable systems, a 7% growth over the same period of 1996
and a
56
minor decrease by less than 1% versus the fourth quarter of 1996 which had a
subscriber base 148,149. At the end of the first quarter of 1997, the cable
network extended approximately 245 Km, connecting approximately 67,849 homes.
TVA Rio: Net revenues amounted to US$10.4 million, an increase of 11% versus
the previous quarter and 63% higher than US$6.4 million during the first quarter
of 1996. At the end of the first quarter of 1997, the subscriber base reached
84,573, a 6% growth over the previous quarter's subscriber base of 79,928. This
solid performance was achieved despite the growing cable competition in this
region.
TVA Sul: Net revenues amounted to US$5.7 million, 31% higher than US$4.3
million in the previous quarter and 191% higher than the first quarter of 1996.
As of March 31, 1997, the subscriber base was 55,453, a 15% growth over the
previous quarter. The MMDS system in Curitiba increased 13% to 26,620
subscribers.
C-band: Net revenues amounted to US$8.8 million, a 12% decline compared with
US$10 million in the previous quarter primarily as a result of reduction in the
average hook-up fee. The subscriber base increased by 18% from 49,858 to 58,821
subscribers between the fourth quarter of 1996 and the first quarter of 1997.
TVA is the only pay television operator to deliver a digital C-band signal in
Brazil, offering 26 channels (including nine second audio programming "SAP"
channels) to the whole country. By comparison, TVA's only significant C-band
competitor offers six analog channels.
DirecTV: Net revenues amounted to US$15.7 million in the first quarter of
1997, representing an increase of 18% compared with the US$13.3 million in the
previous quarter. The subscriber base increased by 108% compared with the
previous quarter, amounting to 48,407 subscribers. TVA, through Galaxy Brasil,
launched Brazil's first Ku-band service in July 1996 in a limited regional
roll-out in the Sao Paulo area. The company became fully operational by November
1996 when it began a nationwide publicity campaign supported by a network of
trained installers.
OPERATING VENTURES
Through the operating ventures, TVA has minority interests in two pay
television operators, Canbras and TV Filme, which served 93,578 subscribers as
of March 31, 1997, as outlined in the table below:
SUBSCRIBER BASE-VENTURES (*)
FIRST QUARTER FIRST QUARTER FIRST QUARTER FOURTH QUARTER
1997 1996 % CHANGE 1997 1996 % CHANGE
------------- ------------- ----------- ------------- --------------- ---------------
CANBRAS................................ 12,928 N/C 12,928 8,126 59%
Brasilia............................... 52,256 30,787 70% 52,256 50,602 3%
Goiania................................ 11,258 6,223 81% 11,258 10,426 8%
Belem.................................. 17,136 7,758 121% 17,136 16,102 6%
TV FILME............................... 80,650 44,768 80% 80,650 77,130 5%
------ ------ ------ ------
Total.................................. 93,578 44,768 109% 93,578 85,256 10%
- ------------------------
(*) Represents only paying subscribers
FINANCIAL SITUATION
Total debt reached US$280.7 million as of March 31, 1997, 11% of which was
due in short term representing the refinancing of certain suppliers payable
(US$19.3 million) and the accrued interest on the High Yield (US$11.0 million).
The remaining US$250.4 million was the principal amount of the Notes.
57
TEVECAP S.A.
FIRST QUARTER CONSOLIDATED BALANCE SHEET
FOR THE PERIODS ENDED
MARCH 31, 1997 AND DECEMBER 31, 1996
(IN THOUSANDS OF US DOLLARS)
MARCH 31, DECEMBER 31,
1997 1996 % CHANGE
---------- ------------ ----------
Cash and cash equivalents................................................... 65,066 104,801 (38%)
Accounts receivable, net.................................................... 35,928 32,296 11%
Inventories................................................................. 16,906 13,095 29%
Film exhibition rights...................................................... 856 1,061 (19%)
Prepaid and other assets.................................................... 4,058 1,914 112%
Other accounts receivable................................................... 4,443 5,105 (13%)
---------- ------------ ----------
Total current assets........................................................ 127,257 158,272 (20%)
---------- ------------ ----------
Property, plant and equipment............................................... 260,284 233,612 11%
Investments
Equity affiliates......................................................... 9,454 9,227 2%
Cost basis investees...................................................... 23, 734 14,766 61%
Concession, net........................................................... 16,710 17,574 (5%)
Loans to related companies.................................................. 16,693 15,308 9%
Prepaid expenses............................................................ 8,379 7,990 5%
Other....................................................................... 2,154 2,422 (11%)
---------- ------------ ----------
Total assets................................................................ 464,665 459,171 1%
---------- ------------ ----------
Short-term bank loans....................................................... 30,279 17,361 74%
Film suppliers.............................................................. 10,955 7,012 56%
Other suppliers............................................................. 51,984 52,932 (2%)
Taxes payable other than income taxes....................................... 8,843 8,999 (2%)
Accrued payroll and related liabilities..................................... 7,163 6,141 17%
Advances payments received from subscribers................................. 6,303 6,782 (7%)
Other accounts payable...................................................... 8,107 8,952 (10%)
---------- ------------ ----------
Total current liabilities................................................... 123,634 108,179 14%
---------- ------------ ----------
Long term bank loans........................................................ 250,456 250,464 0%
Loans from related companies................................................ 2,670 4,610 (42%)
Loans from shareholders..................................................... 3,228 23 13935%
Provision for claims........................................................ 4,547 5,039 (10%)
Liability to fund joint venture and equity investee......................... 1,391 1,107 26%
Deferred hook up fee revenue................................................ 9,224 4,883 89%
---------- ------------ ----------
Total long-term liabilities................................................. 271,516 266,126 2%
---------- ------------ ----------
Minority interest........................................................... 1,589 1,779 (11%)
Paid-in-capital............................................................. 287,962 287,962 0%
Accumulated deficit......................................................... (220,036) (204,875) 7%
---------- ------------ ----------
Total shareholder's equity.................................................. 67,926 83,087 (18%)
---------- ------------ ----------
Total liabilities and shareholders' equity.................................. 464,665 459,171 1%
---------- ------------ ----------
58
TEVECAP S.A.
FIRST QUARTER CONSOLIDATED BALANCE SHEET
FOR THE PERIODS ENDED
MARCH 31, 1997 AND 1996
(IN THOUSANDS OF US DOLLARS)
MARCH 31, MARCH 31,
1997 1996 % CHANGE
---------- ---------- -----------
Cash and cash equivalents...................................................... 65,066 560 11519%
Accounts receivable, net....................................................... 35,928 11,689 207%
Inventories.................................................................... 16,906 15,984 6%
Film exhibition rights......................................................... 856 405 111%
Prepaid and other assets....................................................... 4,058 646 528%
Other accounts receivable...................................................... 4,443 4,730 (6%)
---------- ---------- -----------
Total current assets......................................................... 127,257 34,014 274%
---------- ---------- -----------
Property, plant and equipment.................................................. 260,284 141,479 84%
Investments
Equity affiliates............................................................ 9,454 4,584 106%
Cost basis investees......................................................... 23,734 13,266 79%
Concession, net.............................................................. 16,710 7,768 115%
Loans to related companies..................................................... 16,693 12,157 37%
Prepaid expenses............................................................... 8,379 -- n/c
Other.......................................................................... 2,154 3,584 (40%)
---------- ---------- -----------
Total assets................................................................... 464,665 216,852 114%
---------- ---------- -----------
Short-term bank loans.......................................................... 30,279 454 6569%
Film suppliers................................................................. 10,955 6,641 65%
Other suppliers................................................................ 51,984 47,248 10%
Taxes payable other than income taxes.......................................... 8,843 6,872 29%
Accrued payroll and related liabilities........................................ 7,163 5,235 37%
Advances payments received from subscribers.................................... 6,303 4,837 30%
Other accounts payable......................................................... 8,107 1,248 550%
---------- ---------- -----------
Total current liabilities...................................................... 123,634 72,535 70%
---------- ---------- -----------
Long term bank loans........................................................... 250,456 -- n/c
Loans from related companies................................................... 2,670 13,983 (81%)
Loans from shareholders........................................................ 3,228 2,887 12%
Provision for claims........................................................... 4,547 3,660 24%
Liability to fund joint venture and equity investee............................ 1,391 4,665 (70%)
Deferred hook up fee revenue................................................... 9,224 -- n/c
---------- ---------- -----------
Total long-term liabilities.................................................... 271,516 25,195 978%
---------- ---------- -----------
Minority interest.............................................................. 1,589 -- n/c
Paid-in-capital................................................................ 287,962 287,962 --
Accumulated deficit............................................................ (220,036) (168,840) 30%
---------- ---------- -----------
Total shareholder's equity..................................................... 67,926 119,122 (43%)
---------- ---------- -----------
Total liabilities and shareholders' equity..................................... 464,665 216,852 114%
---------- ---------- -----------
59
TEVECAP S.A.
FIRST QUARTER CONSOLIDATED STATEMENT OF INCOME
FOR THE PERIODS ENDED
MARCH 31, 1997 AND 1996
(IN THOUSANDS OF US DOLLARS)
FIRST FIRST
QUARTER % NET QUARTER % NET
1997 REVENUE 1996 REVENUE % CHANGE
--------- ----------- ----------- ----------- -----------
Monthly subscriptions..................................... 44,282 66% 21,834 66% 103%
Installation.............................................. 17,456 26% 10,078 31% 73%
Advertising............................................... 1,810 3% 941 3% 92%
Indirect programming...................................... 5,115 8% 1,255 4% 308%
Other..................................................... 3,854 6% 1,067 3% 261%
--------- ----- ----------- ----- -----
Gross revenues............................................ 72,517 108% 35,175 107% 106%
Revenue taxes............................................. (5,286) (8%) (2,170) (7%) 144%
--------- ----- ----------- ----- -----
Net revenue............................................... 67,231 100% 33,005 100% 104%
Direct operating expenses................................. 36,438 54% 20,080 61% 81%
Selling, general and administrative expenses.............. 25,891 39% 15,952 48% 62%
--------- ----- ----------- ----- -----
EBITDA.................................................... 4,902 7% (3,027) (9%) n/c
Allowance for inventory and obsolescence.................. 38 0% -- -- n/c
Depreciation and amortization............................. 10,397 15% 5,097 15% 104%
--------- ----- ----------- ----- -----
Operating loss............................................ (5,533) (8%) (8,124) (25%) (32%)
Interest income........................................... 5,035 7% 1,396 4% 261%
Interest expense.......................................... (11,316) (17%) (1,088) (3%) 940%
Translation loss.......................................... (610) (1%) (77) (0%) 692%
Equity losses of affiliates............................... (2,466) (4%) (3,222) (10%) (23%)
Other nonoperating expenses, net.......................... (763) (1%) (1,156) (4%) (34%)
--------- ----- ----------- ----- -----
Loss before income taxes and minority interest............ (15,653) (23%) (12,271) (37%) 28%
Income tax minority interest.............................. 191 0% 119 0% 61%
--------- ----- ----------- ----- -----
Net loss.................................................. (15,462) (23%) (12,152) (37%) 27%
--------- ----- ----------- ----- -----
60
TEVECAP S.A.
FIRST QUARTER CONSOLIDATED STATEMENT OF INCOME
FOR THE PERIODS ENDED
MARCH 31, 1997 AND DECEMBER 31, 1996
(IN THOUSANDS OF US DOLLARS)
FIRST FOURTH
QUARTER % NET QUARTER % NET
1997 REVENUE 1996 REVENUE % CHANGE
--------- ----------- --------- ----------- -----------
Monthly subscriptions............................................... 44,282 66% 37,719 57% 17%
Installation........................................................ 17,456 26% 22,321 34% (22%)
Advertising......................................................... 1,810 3% 2,170 3% (17%)
Indirect programming................................................ 5,115 8% 6,099 9% (16%)
Other............................................................... 3,854 6% 2,900 4% 33%
--------- ----- --------- ----- -----------
Gross revenues...................................................... 72,517 108% 71,209 107% 2%
Revenue taxes....................................................... (5,286) (8%) (4,866) (7%) 9%
--------- ----- --------- ----- -----------
Net revenue......................................................... 67,231 100% 66,343 100% 1%
Direct operating expenses........................................... 36,438 54% 34,567 52% 5%
Selling, general and administrative expenses........................ 25,891 39% 29,919 45% (13%)
--------- ----- --------- ----- -----------
EBITDA.............................................................. 4,902 7% 1,857 3% 164%
Allowance for inventory and obsolescence............................ 38 0% (243) 0% (116%)
Depreciation and amortization....................................... 10,397 15% 9,669 15% 8%
--------- ----- --------- ----- -----------
Operating loss...................................................... (5,533) (8%) (7,569) (11%) (27%)
Interest income..................................................... 5,035 7% 2,312 3% 118%
Interest expenses................................................... (11,316) (17%) (7,544) (11%) 50%
Translation loss.................................................... (610) (1%) (64) 0% 853%
Equity losses of affiliates......................................... (2,466) (4%) (1,890) (3%) 30%
Other nonoperating (expenses) income, net........................... (763) (1%) 3,326 5% (123%)
--------- ----- --------- ----- -----------
Loss before income taxes and minority interest...................... (15,653) (23%) (11,429) (17%) 37%
Income taxes........................................................ (51) 0% (100%)
Minority interest................................................... 191 0% 316 0% (40%)
--------- ----- --------- ----- -----------
Net loss............................................................ (15,462) (23%) (11,164) (17%) 38%
--------- ----- --------- ----- -----------
61
JUNE INFORMATION
CONSOLIDATED RESULTS
Consolidated net revenues for the second quarter ended June 30, 1997 reached
US$82.7 million, compared with US$67.2 million in the first quarter of 1997 and
US$41.8 million in the second quarter of 1996. The Company has more than doubled
its revenues every year for the last three years. Revenues consist primarily of
subscription fees but also include installation, advertising, indirect
programming and other revenues, excluding taxes.
Subscription revenue contributed 64% of net revenues, and amounted to
US$53.1 million in the second quarter of 1997, up 91% from US$27.8 million in
the second quarter of 1996 and an increase of 19% compared with US$44.8 million
in the first quarter of 1997. It can be broken down by distribution technology
as follows: MMDS (56%), cable (12%), C-band (12%) and Ku-band (20%). Revenue
increased as a result of an expanded subscriber base and a higher average
monthly fee. The increase in the average monthly fee was a result of an
improvement in signal transmission enabling the Company to offer premium
packages to all subscribers.
SUBSCRIPTION REVENUE ($000)
- ------------------------------------------------------------------------------------------------------------------------------
TECHNOLOGY SECOND QUARTER 1997 % SECOND QUARTER 1996 % CHANGE%
- ----------------------------------------------- ------------------- --- ------------------- --- -------------
MMDS........................................... 29,728 56% 23,506 84% 26%
Cable.......................................... 6,186 12% 1,599 6% 287%
C-Band......................................... 6,329 12% 2,655 10% 138%
Ku-band........................................ 10,888 20% 0 0% n/c
------ --- ------ --- ---
Total.......................................... 53,131 100% 27,760 100% 91%
SUBSCRIPTION REVENUE ($000)
- ------------------------------------------------------------------------------------------------------------------------------
FIRST QUARTER
TECHNOLOGY SECOND QUARTER 1997 % 1997 % CHANGE%
- ------------------------------------------------- ------------------- --- ----------------- --- -------------
MMDS............................................. 29,728 56% 28,399 63% 5%
Cable............................................ 6,186 12% 4,745 11% 31%
C-Band........................................... 6,329 12% 5,799 13% 9%
Ku-band.......................................... 10,888 20% 5,876 13% 85%
--
------ --- ------ ---
Total............................................ 53,131 100% 44,819 100% 19%
Installation revenue comprised 29% of net revenues, reaching US$24.3 million
in second quarter of 1997, compared with US$18.1 million in the first quarter.
This increase was the result of a strong sales performance during the second
quarter of 1997.
Indirect programming revenues in the second quarter of 1997 reached US$6.5
million, an increase of 298% versus US$1.6 million in the second quarter of the
previous year. The revenue consists of payments made to the Company for the sale
of its programming to Affiliated Companies and Independent Operators.
Direct operating expenses amounted to US$43.3 million for the second quarter
of 1997 compared with US$36.4 million in the previous quarter, representing an
increase of 19%. Direct operating expenses as a percentage of revenue dropped
from 54% in the first quarter of 1997 to 52% in the second quarter of 1997 as
result of productivity improvements.
Selling, general and administrative expenses reached US$31.5 million,
representing 38% of net revenue compared with US$25.9 million in the first
quarter of 1997. As a percentage of revenues, selling, general and
administrative expenses decreased from 39% to 38% as a result of dilution of
fixed expenses.
As a result, EBITDA reached US$7.9 million, an increase of 61% versus the
US$4.9 million in the first quarter of 1997.
62
Adjusted EBITDA reached US$12.4 million in the second quarter of 1997, an
increase of 35% compared with the US$9.2 million adjusted EBITDA for the first
quarter of 1997. Adjusted EBIDTA includes the deferment of Ku-band revenue of
US$4.5 million for the second quarter of 1997.
Depreciation and amortization and allowance for inventory obsolescence for
the second quarter of 1997 was US$13.5 million as compared with US$10.4 million
in the previous quarter, and US$7.3 million in the second quarter of 1996. This
includes depreciation of systems, equipment, installation materials,
installation labor and amortization of organizational costs and concessions.
Operating loss during the second quarter of 1997 was US$5.6 million, versus
US$5.5 million in the first quarter of 1997, representing an increase of 2%. The
operating loss for the quarter was also 17% less than the loss of US$6.8 million
in the second quarter of 1996.
Interest income reached US$1.4 million in the second quarter of 1997,
compared with US$5.0 million in the previous quarter, as a result of the
company's expansion investments. Interest expenses were US$13.6 million,
compared with US$11.3 million in the first quarter of 1997, representing a 21%
increase.
Equity in losses (income) of affiliates amounted to a loss of US$3.2 million
in the second quarter of 1997 versus a loss of US$2.5 million in the previous
quarter. That loss resulted from ESPN Brasil (US$2.0 million), TV Filme
(US$619,000), Canbras (US$617,000), and HBO (US$36,000).
Other non-operating revenues/expenses amounted to an income of US$528,000
compared with losses of US$763,000 in the first quarter of 1997.
Minority interest amounted to US$200,000, representing the minority
shareholder's portion of the US$1 million aggregate losses of TVA Sul. As a
result, net loss for the second quarter ended June, 30, 1997 was US$20.9 million
compared with a net loss of US$15.5 million reported in the first quarter of
1997 and US$12.1 million reported in the second quarter of 1996.
Capital expenditures (cash basis) for the second quarter of 1997 amounted to
US$69.0 million, an 78% increase from US$38.8 million in the previous quarter.
Funds were directed mainly to the purchase of decoders for all distribution
systems, the construction of internal networks for MMDS and cable, and cable
network build-out primarily in Sao Paulo and Curitiba.
SUBSCRIBER PERFORMANCE
Total subscriber base for the second quarter of 1997 totaled 1.2 million, an
12% growth versus the previous quarter, and an increase of 48% versus the second
quarter of 1996.
Owned or proprietary systems grew to 460,704 subscribers, or 17% when
compared to the first quarter of 1997. This performance was achieved by
extending the Cable system to 1,697 kilometers and completing the Distribution
and Sales Operations of the Ku business to include the entire Brazilian Ku
market. In the case of MMDS, it is important to note that even with the transfer
of 7,719 subscribers to the Cable Operation, the MMDS operation grew by 3% in
the second quarter of 1997 when compared to the previous period.
TVA's installation backlog as of June 30, 1997 was 30,000 subscribers,
representing less than 30 days of installations.
Through independent operators, TVA reached 649,159 subscribers as of June
30, 1997, compared with 605,606 subscribers during the previous quarter.
63
The table below outlines the number of subscribers as of June 30, 1997 and
March 30, 1997, for owned systems according to different distribution
technologies as well as the number of households which receive TVA programming
through Operating Ventures and Independent Operators:
TOTAL SUBSCRIBER BASE
- -----------------------------------------------------------------------------------------------------------------------
FIRST QUARTER
SECOND QUARTER 1997 1997 CHANGE %
------------------- ----------------- ---------------
MMDS.......................................................... 236,823 230,002 3%
Cable......................................................... 73,514 57,263 28%
Digital C-band................................................ 68,761 58,821 17%
Ku-band....................................................... 81,606 48,407 69%
Total Owned Systems........................................... 460,704 394,493 17%
Operating Ventures............................................ 110,091 93,578 18%
Independent Operators......................................... 649,159 605,606 7%
---------- -----------------
Households Receiving TVA Programming.......................... 1,219,954 1,093,677 12%
* Represents 100% of subscribers; on an equity subscriber basis there were
16,187 subscribers as of March 31, 1997 and 19,884 subscribers as of June 30,
1997.
REVENUES BY OPERATION
The table below outlines consolidated net revenue by operation for owned
system for the second quarter ended June 30, 1997 and the first quarter ended
March 31, 1997.
CONSOLIDATED NET REVENUE BY OPERATION
- -----------------------------------------------------------------------------------------------------------------------
FIRST QUARTER
SECOND QUARTER 1997 1997 % CHANGE
------------------- ----------------- ---------------
TVA Sao Paulo................................................. 18,449 17,656 4%
TVA Rio de Janeiro............................................ 12,011 10,436 15%
TVA Sul....................................................... 6,801 5,654 20%
Digital C-Band................................................ 8,964 8,848 1%
Ku-Band....................................................... 24,863 15,707 58%
------ ------
Total....................................................... 71,088 58,301 22%
TVA Sao Paulo: Net revenues amounted to US$18.4 million in the second
quarter of 1997, up 4% compared with US$17.7 million in the previous quarter due
to the higher number of installations and an increase in the average hook-up
fee. As of June 30, 1997, the subscriber base for both MMDS and cable systems
totaled 154,461, an increase of 5% versus the first quarter of 1997 which had a
subscriber base of 147,239.
TVA Rio: Net revenues reached US$12 million, an increase of 15% compared
with the previous quarter. At the end of the second quarter of 1997, the
subscriber base reached 93,920, representing an 11% growth over the previous
quarter's subscriber base of 84, 573. This solid performance was achieved
despite the growing cable competition in this region.
TVA Sul: Net revenues amounted to US$6.8 million, 20% higher than the US$5.7
million in the previous quarter. As of June 30, 1997, subscriber base reached
61,956, a growth of 12% over the previous quarter. The MMDS system in Curitiba
grew by 11% to 29,535 subscribers.
C Band: Net revenues amounted to US$9 million, a 1% increase versus US$8.8
million in the previous quarter. The subscriber base increased by 17% from
58,821 to 68,761 subscribers between the first and the second quarter of 1997.
DirecTV: Net revenues amount to US$24.9 million in the second quarter of
1997, representing an increase of 58% compared with the US$15.7 million in the
previous quarter. The subscriber base increased by 69% as compared with the
previous quarter, reaching a total of 81,606 subscribers as of June 30, 1997.
64
TVA, through Galaxy Brasil, launched Brazil's first Ku-band service in July,
1996 in a limited regional roll-out in the Sao Paulo area. The company became
fully operational in November, 1996 when it began a nationwide publicity
campaign support by a network of trained installers.
OPERATING VENTURES
Through the operating ventures, TVA has minority interests in two pay
television operators, Canbras and TV Filme, which served 110,091 subscribers as
of June 30, 1997, as outlined in the table below:
SUBSCRIBER BASE-VENTURES (*)
- -----------------------------------------------------------------------------------------------------------------------
FIRST QUARTER
SECOND QUARTER 1997 1997 CHANGE %
------------------- ----------------- ---------------
CANBRAS....................................................... 19,082 12,928 48%
Brasilia...................................................... 55,083 52,256 5%
Goiania....................................................... 14,297 11,258 27%
Belem......................................................... 21,629 17,136 26%
TV FILME...................................................... 91,009 80,650 13%
--
------- ------
Total......................................................... 110,091 93,578 18%
- ------------------------
(*) Represents paying subscribers
FINANCIAL SITUATION
Total debt reached US$363.8 million as of June 30, 1997, 10% of which was
short term, representing the refinancing of certain supplier payables (US$22.2
million), the accrued interest on the High Yield bonds (US$3.2 million), leasing
agreements with Citibank (US$10 million) and Eximbank financing (US$1.2
million).
The remaining US$327.2 million is long term and includes the principal
amount of the High Yield bonds (US$250.0 million), the Citibank leasing (US$39.3
million), Eximbank financing (US$8.8 million), certain supplier payables (US$2.6
million) and US$26.5 million with the Abril Group relative to the acquisition of
Ku decoders in order to avoid an increase in import taxes.
65
TEVECAP, S.A.
SECOND QUARTER CONSOLIDATED BALANCE SHEET
FOR THE PERIODS ENDED
JUNE 30, 1997 AND 1996
(IN THOUSANDS OF US DOLLARS)
JUNE 30, JUNE 30,
1997 1996 % CHANGE
---------- ---------- -----------
Cash and cash equivalents...................................................... 32,381 1,228 2537%
Accounts receivable, net....................................................... 47,759 15,634 205%
Inventories.................................................................... 15,582 14,506 7%
Film exhibition rights......................................................... 606 574 6%
Prepaid and other assets....................................................... 10,457 1,877 457%
Other accounts receivable...................................................... 7,288 2,164 237%
---------- ---------- -----------
Total current assets........................................................... 114,073 35,983 217%
---------- ---------- -----------
Property, plant and equipment.................................................. 337,845 166,157 103%
Investments
- --Equity affiliates............................................................ 7,682 5,498 40%
- --Cost basis investees......................................................... 27,734 16,339 70%
- --Concessions, net............................................................. 16,276 7,558 115%
Loans to related companies..................................................... 20,277 2,128 853%
Advances payments for investments.............................................. -- 10,965 n/c
Prepaid expenses............................................................... 8,576 -- n/c
Other.......................................................................... 2,193 3,766 (42%)
---------- ---------- -----------
Total assets................................................................... 534,656 248,394 115%
---------- ---------- -----------
Short-term bank loans.......................................................... 36,594 -- n/c
Film suppliers................................................................. 15,536 6,004 159%
Other suppliers................................................................ 47,271 47,924 (1%)
Taxes payable other than income taxes.......................................... 9,369 7,991 17%
Accrued payroll and related liabilities........................................ 7,891 7,136 11%
Advances payments received from subscribers.................................... 5,850 6,955 (16%)
Other accounts payable......................................................... 13,340 4,067 228%
---------- ---------- -----------
Total current liabilities...................................................... 135,851 80,077 70%
---------- ---------- -----------
Long-term bank loans........................................................... 300,718 -- n/c
Loans from related companies................................................... 26,453 51,021 (48%)
Loans from shareholders........................................................ 3,802 2,842 34%
Provision for claims........................................................... 5,089 4,081 25%
Liability to fund joint venture and equity investee............................ 561 3,310 (83%)
Deferred hook up fee revenue................................................... 13,754 -- n/c
---------- ---------- -----------
Total long-term liabilities.................................................... 350,377 61,254 472%
---------- ---------- -----------
Minority interest.............................................................. 1,401 -- n/c
Paid-in-capital................................................................ 287,962 287,962 --
Accumulated deficit............................................................ (240,935) (180,899) 33%
---------- ---------- -----------
Total shareholder's equity..................................................... 47,027 107,063 (56%)
---------- ---------- -----------
Total liabilities and shareholders' equity..................................... 534,656 248,394 115%
---------- ---------- -----------
66
TEVECAP, S.A.
SECOND QUARTER CONSOLIDATED BALANCE SHEET
FOR THE PERIODS ENDED
JUNE 30, 1997 AND MARCH 31, 1997
(IN THOUSANDS OF US DOLLARS)
JUNE 30, MARCH 31,
1997 1997 % CHANGE
---------- ---------- -----------
Cash and cash equivalents...................................................... 32,381 65,066 (50%)
Accounts receivable, net....................................................... 47,759 35,928 33%
Inventories.................................................................... 15,582 16,906 (8%)
Film exhibition rights......................................................... 606 856 (29%)
Prepaid and other assets....................................................... 10,457 4,058 158%
Other accounts receivable...................................................... 7,288 4,443 64%
---------- ---------- -----
Total current assets........................................................... 114,073 127,257 (10%)
---------- ---------- -----
Property, plant and equipment.................................................. 337,845 260,284 30%
Investments
- --Equity affiliates............................................................ 7,682 9,454 (19%)
- --Cost basis investees......................................................... 27,734 23,734 17%
- --Concessions, net............................................................. 16,276 16,710 (3%)
Loans to related companies..................................................... 20,277 16,693 21%
Prepaid expenses............................................................... 8,576 8,379 2%
Other.......................................................................... 2,193 2,154 2%
---------- ---------- -----
Total assets................................................................... 534,656 464,665 15%
---------- ---------- -----
Short-term bank loans.......................................................... 36,594 30,279 21%
Film suppliers................................................................. 15,536 10,955 42%
Other suppliers................................................................ 47,271 51,984 (9%)
Taxes payable other than income taxes.......................................... 9,369 8,843 6%
Accrued payroll and related liabilities........................................ 7,891 7,163 10%
Advances payments received from subscribers.................................... 5,850 6,303 (7%)
Other accounts payable......................................................... 13,340 8,107 65%
---------- ---------- -----
Total current liabilities...................................................... 135,851 123,634 10%
---------- ---------- -----
Long-term bank loans........................................................... 300,718 250,456 20%
Loans from related companies................................................... 26,453 2,670 891%
Loans from shareholders........................................................ 3,802 3,228 18%
Provision for claims........................................................... 5,089 4,547 12%
Liability to fund joint venture and equity investee............................ 561 1,391 (60%)
Deferred hook up fee revenue................................................... 13,754 9,224 49%
---------- ---------- -----
Total long-term liabilities.................................................... 350,377 271,516 29%
---------- ---------- -----
Minority interest.............................................................. 1,401 1,589 (12%)
Paid-in-capital................................................................ 287,962 287,962 --
Accumulated deficit............................................................ (240,935) (220,036) 9%
---------- ---------- -----
Total shareholder's equity..................................................... 47,027 67,926 (31%)
---------- ---------- -----
Total liabilities and shareholders' equity..................................... 534,656 464,665 15%
---------- ---------- -----
67
TEVECAP S.A.
SECOND QUARTER CONSOLIDATED STATEMENT OF INCOME
FOR THE PERIODS ENDED
JUNE 30, 1997 AND 1996
(IN THOUSANDS OF US DOLLARS)
SECOND SECOND
QUARTER % NET QUARTER % NET
1997 REVENUE 1996 REVENUE % CHANGE
--------- ----------- --------- ----------- -----------
Monthly Subscriptions............................................... 53,131 64% 27,760 66% 91%
Installation........................................................ 24,279 29% 12,329 29% 97%
Advertising......................................................... 1,136 1% 1,548 4% (27%)
Indirect programming................................................ 6,459 8% 1,624 4% 298%
Other............................................................... 3,936 5% 1,571 4% 151%
--------- ----- --------- ----- -----------
Gross revenues...................................................... 88,941 108% 44,832 107% 98%
Revenue taxes..................................................... (6,222) (8%) (3,029) (7%) 105%
--------- ----- --------- ----- -----------
Net revenue......................................................... 82,719 100% 41,803 100% 98%
Direct operating expenses........................................... 43,286 52% 24,109 58% 80%
Selling, general and administrative expenses........................ 31,518 38% 17,230 41% 83%
--------- ----- --------- ----- -----------
EBITDA.............................................................. 7,915 10% 464 1% 1606%
Allowance for inventory and obsolescence............................ 999 1% 1,638 4% (39%)
Depreciation and amortization....................................... 12,547 15% 5,629 13% 123%
--------- ----- --------- ----- -----------
Operating loss...................................................... (5,631) (7%) (6,803) (16%) (17%)
Interest income..................................................... 1,357 2% 994 2% 37%
Interest expenses................................................... (13,644) (16%) (2,959) (7%) 361%
Translation loss.................................................... (469) (1%) (54) 0% 769%
Equity losses of affiliates......................................... (3,239) (4%) (3,025) (7%) 7%
Other nonoperating (expenses) income, net........................... 528 1% (364) (1%) (245%)
--------- ----- --------- ----- -----------
Loss before income taxes and minority interest...................... (21,098) (26%) (12,211) (29%) 73%
Income taxes minority interest...................................... 200 0% 152 0% 32%
--------- ----- --------- ----- -----------
Net loss............................................................ (20,898) (25%) (12,059) (29%) 73%
--------- ----- --------- ----- -----------
68
TEVECAP S.A.
SECOND QUARTER CONSOLIDATED STATEMENT OF INCOME
FOR THE PERIODS ENDED
JUNE 30, 1997 AND MARCH 31, 1997
(IN THOUSANDS OF US DOLLARS)
SECOND FIRST
QUARTER % NET QUARTER % NET
1997 REVENUE 1997 REVENUE % CHANGE
--------- ----------- --------- ----------- -----------
Monthly subscriptions............................................... 53,131 64% 44,819 67% 19%
Installation........................................................ 24,279 29% 18,149 27% 34%
Advertising......................................................... 1,136 1% 1,810 3% (37%)
Indirect programming................................................ 6,459 8% 5,114 8% 25%
Other............................................................... 3,936 5% 2,624 4% 50%
--------- ----- --------- ----- -----------
Gross revenues...................................................... 88,941 108% 72,516 108% 23%
Revenue taxes..................................................... (6,222) (8%) (5,286) (8%) 18%
--------- ----- --------- ----- -----------
Net revenue......................................................... 82,719 100% 67,230 100% 23%
Direct operating expenses......................................... 43,286 52% 36,438 54% 19%
Selling, general and administrative............................... 31,518 38% 25,891 39% 22%
--------- ----- --------- ----- -----------
EBITDA.............................................................. 7,915 10% 4,901 7% 61%
Allowance for inventory and....................................... 999 1% 38 0%
Depreciation and amortization..................................... 12,547 15% 10,397 15% 21%
--------- ----- --------- ----- -----------
Operating loss...................................................... (5,631) (7%) (5,534) (8%) 2%
Interest income................................................... 1,357 2% 5,035 7% (73%)
Interest expenses................................................. (13,644) (16%) (11,316) (17%) 21%
Translation loss.................................................. (469) (1%) (610) (1%) (23%)
Equity income (losses) of affiliates.............................. (3,239) (4%) (2,466) (4%) 31%
Other nonoperating income (expenses), net......................... 528 1% (763) (1%) (169%)
--------- ----- --------- ----- -----------
Loss before income taxes and minority interest...................... (21,098) (26%) (15,654) (23%) 35%
Income taxes minority interest...................................... 200 0% 191 0% 5%
--------- ----- --------- ----- -----------
Net income (loss)................................................... (20,898) (25%) (15,463) (23%) 35%
--------- ----- --------- ----- -----------
69
THE REGISTERED EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
In connection with the sale of the Old Securities, Tevecap and the
Subsidiary Guarantors entered into the Original Exchange Agreement with the
Initial Purchasers, pursuant to which Tevecap and each of the Subsidiary
Guarantors agreed to use its best efforts to file with the Commission a
registration statement with respect to the exchange of the Old Securities for a
series of registered debt securities with terms identical in all material
respects to the terms of the Old Securities, except that the registered exchange
securities were issued free from any covenant regarding transfer restrictions.
On May 27, 1997, the Company and the Subsidiary Guarantors concluded,
pursuant to the terms of the Original Exchange Agreement, the original exchange
offer. Holders of Old Securities did not exchange Old Notes in the principal
amount of $15,368,000 under the original exchange offer. The Company and certain
of such holders of Old Securities have entered into the Exchange and
Registration Agreement, pursuant to which the Company and the Subsidiary
Guarantors have agreed to take appropriate actions to file with the Commission a
registration statement with respect to the exchange of the Old Securities
remaining outstanding for a series of registered debt securities with terms
identical in all material respects to the terms of the Old Securities, except
that the Exchange Securities are issued free from any covenant regarding
transfer restrictions. The Company and the Subsidiary Guarantors have reserved
the right to terminate the Exchange and Registration Agreement and their
obligations therewith at any time and in their sole discretion. Pursuant to the
Exchange and Registration Agreement, certain of the holders of the Old
Securities that remain outstanding have agreed to be jointly and severally
liable for and to pay on demand the costs and expenses incurred by the Company
and the Subsidiary Guarantors in connection with the Registered Exchange Offer
whether or not it is consummated, including upon termination of the Exchange and
Registration Agreement by the Company and the Subsidiary Guarantors.
Tevecap together with the Subsidiary Guarantors is making the Registered
Exchange Offer in reliance on the position of the staff of the Commission as set
forth in certain no-action letters addressed to other parties in other
transactions. However, Tevecap has not sought its own no-action letter and there
can be no assurance that the staff of the Commission would make a similar
determination with respect to the Registered Exchange Offer as in such other
circumstances. Based upon these interpretations by the staff of the Commission,
Tevecap believes that the Exchange Securities issued pursuant to this Registered
Exchange Offer in exchange for Old Securities may be offered for resale, resold
and otherwise transferred by a holder thereof (other than (i) a broker-dealer
who acquired the Old Securities as a result of market making activities or other
trading activities, (ii) an Initial Purchaser who acquired the Old Securities
directly from the Company solely in order to resell pursuant to Rule 144A of the
Securities Act or any other available exemption under the Securities Act, or
(iii) a person that is an "affiliate" (as defined in Rule 405 of the Securities
Act) of Tevecap) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such Exchange
Securities are acquired in the ordinary course of such holder's business and
that such holder is not participating, and has no arrangement or understanding
with any person to participate, in the distribution of such Exchange Securities.
Holders of Old Securities accepting the Registered Exchange Offer will represent
to Tevecap in the Letter of Transmittal that such conditions have been met. Any
holder who participates in the Registered Exchange Offer for the purpose of
participating in a distribution of the Exchange Securities may not rely on the
position of the staff of the Commission as set forth in these no-action letters
and would have to comply with the registration and prospectus delivery
requirements of the Securities Act in connection any secondary resale
transaction.
Each broker-dealer that receives Exchange Securities for its own account in
exchange for Old Securities, where such Old Securities were acquired by such
broker-dealer 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 Exchange Securities. See "Plan of Distribution." This
Prospectus, as it may be amended
70
or supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Securities received in exchange for Old Securities
where such Old Securities were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Letter of Transmittal
states that by acknowledging and delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. Tevecap has agreed that for a period of 90 days after the
Expiration Date, it will make this Prospectus available to broker-dealers for
use in connection with any such resale at the expense of such broker-dealer. See
"Plan of Distribution."
Except as aforesaid, this Prospectus may not be used for an offer to resell,
resale or other retransfer of Exchange Securities.
The Registered Exchange Offer is not being made to, nor will Tevecap accept
tenders for exchange from, holders of Old Securities in any jurisdiction in
which the Registered Exchange Offer or the acceptance thereof would not be in
compliance with the securities or blue sky laws of such jurisdiction.
TERMS OF THE EXCHANGE
Upon the terms and subject to the conditions of the Registered Exchange
Offer, Tevecap will, unless such Old Securities are withdrawn in accordance with
the withdrawal rights specified in "--Withdrawal of Tenders" below, accept any
and all Old Securities validly tendered prior to 5:00 p.m., New York City time,
on the Expiration Date. Tevecap will issue, on or promptly after the Expiration
Date, an aggregate principal amount of up to US$15,368,000 of Exchange Notes in
exchange for a like principal amount of outstanding Old Notes tendered and
accepted in connection with the Registered Exchange Offer. The Exchange Notes
issued in connection with the Registered Exchange Offer will be delivered on the
earliest practicable date on or following the Expiration Date. Holders may
tender some or all of their Old Notes in connection with the Registered Exchange
Offer.
The terms of the Exchange Securities are identical in all material respects
to the terms of the Old Securities, except that the Exchange Securities have
been registered under the Securities Act and are issued free from any covenant
regarding transfer restrictions. The Exchange Notes will evidence the same debt
as the Old Notes and will be issued under and be entitled to the same benefits
under the Indenture as the Old Notes. As of the date of this Prospectus,
US$15,368,000 aggregate principal amount of the Old Notes is outstanding.
In connection with the issuance of the Old Notes, Tevecap 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 Notes--Book-Entry; Delivery and Form," the Exchange 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. See "Description of the Notes--Book-Entry; Delivery and Form."
Holders of Old Securities do not have any appraisal or dissenters' rights in
connection with the Registered Exchange Offer. Old Securities which are not
tendered for exchange or are tendered but not accepted in connection with the
Registered Exchange Offer will remain outstanding and be entitled to the
benefits of the Indenture, but will not be entitled to any registration rights
under the Exchange and Registration Rights Agreement.
Tevecap shall be deemed to have accepted validly tendered Old Securities
when, as and if Tevecap has 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 Exchange Securities from Tevecap.
If any tendered Old Securities 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
71
Securities will be returned, without expense, to the tendering holder thereof as
promptly as practicable after the Expiration Date.
Holders who tender Old Securities in connection with the Registered 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 Securities in connection with the Registered Exchange Offer.
Tevecap and the Guarantors will pay all charges and expenses, other than certain
applicable taxes described below, in connection with the Registered Exchange
Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
December 8, 1997, unless extended by the Company in its sole discretion, in
which case the term "Expiration Date" shall mean the latest date and time to
which the Registered Exchange Offer is extended.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at the rate of 12 5/8% per annum.
Interest on the Exchange Notes shall accrue from the last Interest Payment Date
on which interest was paid on the Old Notes surrendered.
Interest on the Exchange Notes will be payable semiannually on May 26 or
November 26 of each year, commencing on the first Interest Payment Date
following the issuance thereof.
Holders of Old Notes whose Old Notes are accepted for exchange will not
receive interest on such Old Notes for any period subsequent to the last
interest payment date to occur prior to the issue date of the Exchange Notes,
and will be deemed to have waived the right to receive any interest payment on
the Old Notes accrued from and after such interest payment date.
EXCHANGE OFFER PROCEDURES
Only a holder of record of Old Securities on November 6, 1997, may tender
such Old Securities in connection with the Registered Exchange Offer. The tender
to the Company of Old Securities by a holder thereof as set forth below and the
acceptance thereof by the Company will constitute a binding agreement between
the tendering holder and the Company 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
Securities for exchange pursuant to the Registered 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
one of the addresses 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 Securities 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 Securities, 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 SECURITIES, 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 SECURITIES
SHOULD BE SENT TO THE COMPANY.
72
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Old Securities surrendered for exchange
pursuant thereto are tendered (i) by a registered holder of the Old Securities
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 Securities are registered in the name of a person other
than the signer of a Letter of Transmittal, the Old Securities 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 the
Company in its 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 Securities tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and all
tenders of any particular Old Securities not properly tendered or to not accept
any particular Old Securities which acceptance might, in the judgment of the
Company or its counsel, be unlawful. The Company also reserves the absolute
right to waive any defects or irregularities or conditions of the Registered
Exchange Offer as to any particular Old Securities either before or after the
Expiration Date (including the right to waive the ineligibility of any holder
who seeks to tender Old Securities in the Registered Exchange Offer). The
interpretation of the terms and conditions of the Registered Exchange Offer as
to any particular Old Securities either before or after the Expiration Date
(including the Letter of Transmittal and the instructions thereto) by the
Company shall be final and binding on all parties. Unless waived, all defects or
irregularities in connection with tenders of Old Securities for exchange must be
cured within such reasonable period of time as the Company shall determine.
Neither the Company, 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 Securities 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 Securities, such Old Securities 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 Securities.
If the Letter of Transmittal or any Old Securities 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 should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
By tendering, each holder will represent to the Company that, among other
things, the Exchange Securities acquired pursuant to the Registered Exchange
Offer are being obtained in the ordinary course of business of the person
receiving such Exchange Securities, whether or not such person is the holder and
such person has no arrangement with any person to participate in the
distribution of the Exchange Securities. If any holder or any such other person
is an "affiliate," as defined under Rule 405 of the Securities Act, of the
Company, is engaged in or intends to engage in or has an arrangement or
understanding with any person to participate in a distribution of such Exchange
Securities to be acquired pursuant to the Registered Exchange Offer, or acquired
the Old Securities 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
73
that receives Exchange Securities for its own account in exchange for Old
Securities, where such Old Securities 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 Exchange Securities. 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 SECURITIES FOR EXCHANGE; DELIVERY OF EXCHANGE SECURITIES
The Company will accept, promptly after the Expiration Date, all Old
Securities properly tendered and will issue the Exchange Securities promptly
after acceptance of the Old Securities. For purposes of the Registered Exchange
Offer, the Company shall be deemed to have accepted properly tendered Old
Securities for exchange when, as and if the Company has 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 Exchange Securities for Old Securities that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of (i) certificates for such Old Securities
or a timely confirmation of such Old Securities 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
Securities are not accepted for any reason set forth in the terms and conditions
of the Exchange Offer, or if Old Securities are submitted for a greater amount
than the holder desires to exchange, such unaccepted or unexchanged Old
Securities will be returned without expense to the tendering holder thereof (or,
in the case of Old Securities tendered by book-entry transfer into the Exchange
Agent's account at DTC pursuant to the book-entry procedures described below,
such nonexchanged Old Securities will be credited to an account maintained with
DTC) designated by the tendering holder as promptly as practicable after the
expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Securities at DTC for purposes of the Registered 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 Securities by causing DTC to transfer such Old Securities into
the Exchange Agent's account at DTC in accordance with such DTC's procedures for
transfer. However, although delivery of Old Securities 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 one of the
addresses 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 Securities desires to tender such Old
Securities and the Old Securities are not immediately available, or time will
not permit such holder's Old Securities 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 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 Securities and the
amount of Old Securities 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 Securities, in proper form for
transfer,
74
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 Securities, 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 Securities may be withdrawn at any time prior to the
Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Old Securities to be withdrawn, identify the Old
Securities to be withdrawn (including the amount of such Old Securities), and
(where certificates for Old Securities have been transmitted) specify the name
in which such Old Securities are registered, if different from that of the
withdrawing holder. If certificates for Old Securities 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 Securities 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 Securities and otherwise comply with the procedures of such
facility. All questions as to the validity, form and eligibility (including time
of receipt) of such notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Old Securities so
withdrawn will be deemed not to have been validly tendered for exchange for
purposes of the Exchange Offer. Any Old Securities 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 Securities
tendered by book-entry transfer into the Exchange Agent's account at DTC
pursuant to the book-entry transfer procedures described above, such Old
Securities will be credited to an account with DTC specified by the Holder) as
soon as practicable after withdrawal, rejection of tender or termination of the
Registered Exchange Offer. Properly withdrawn Old Securities 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
The Chase Manhattan Bank has been appointed as Exchange Agent in connection
with the 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, at its offices at 450 West 33rd Street, 15th
Floor, New York, New York 10001. The Exchange Agent's telephone number is (212)
946-3014 and facsimile number is (212) 946-8177.
FEES AND EXPENSES
Tevecap will not make any payment to brokers, dealers or others soliciting
acceptances of the Registered Exchange Offer.
Tevecap will pay certain other expenses to be incurred in connection with
the Registered Exchange Offer, including the fees and expenses of the Trustee,
accounting and certain legal fees.
Holders who tender their Old Securities for exchange will not be obligated
to pay any transfer taxes in connection therewith. If, however, Exchange
Securities are to be delivered to, or are to be issued in the name of, any
person other than the registered holder of the Old Securities tendered, or if
tendered Old Securities are registered in the name of any person other than the
person signing the Letter of Transmittal,
75
or if a transfer tax is imposed for any reason other than the exchange of Old
Securities in connection with the Registered 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.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the Old
Notes as reflected in Tevecap's accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by
Tevecap upon the consummation of the Exchange Offer. Any expenses of the
Registered Exchange Offer that are paid by Tevecap will be amortized by Tevecap
over the term of the Exchange Notes under generally accepted accounting
principles.
CONSEQUENCES OF FAILURE TO PROPERLY TENDER OLD NOTES IN THE EXCHANGE
Issuance of the Exchange Securities in exchange for the Old Securities
pursuant to the Registered Exchange Offer will be made only after timely receipt
by the Exchange Agent of such Old Securities, a properly completed and duly
executed Letter of Transmittal and all other required documents. Therefore,
holders of the Old Securities desiring to tender such Old Securities in exchange
for Exchange Securities should allow sufficient time to ensure timely delivery.
Tevecap is under no duty to give notification of defects or irregularities with
respect to tenders of Old Securities for exchange. Old Securities that are not
tendered or that are tendered but not accepted by Tevecap for exchange, will,
following consummation of the Registered Exchange Offer, continue to be subject
to the existing restrictions upon transfer thereof under the Securities Act and,
upon consummation of the Registered Exchange Offer, certain registration rights
under the Exchange and Registration Rights Agreement will terminate.
In the event the Registered Exchange Offer is consummated, Tevecap will not
be required to register the Remaining Old Securities. Remaining Old Securities
will continue to be subject to the following restrictions on transfer: (i) the
Remaining Old Securities may be resold only if registered pursuant to the
Securities Act, if any exemption from registration is available thereunder, or
if neither such registration nor such exemption is required by law, and (ii) the
Remaining Old Securities will bear a legend restricting transfer in the absence
of registration or an exemption therefrom. Tevecap does not currently anticipate
that it will register the Old Securities under the Securities Act. To the extent
that Old Securities are tendered and accepted in connection with the Registered
Exchange Offer, any trading market for Remaining Old Securities could be
adversely affected.
76
BUSINESS
TVA is a leading pay television operator in Brazil and is one of the
country's largest pay television programming distributors. In 1989, TVA was the
first to provide pay television services in Brazil and, in July 1996, the
Company launched DIRECTV, Brazil's first digital Ku-Band service. With
approximately 380,000 subscribers, TVA is the only operator in Brazil to offer
pay television services utilizing five distribution technologies: MMDS, Cable,
digital Ku-Band, digital C-Band and UHF. TVA believes that its ability to
strategically deploy alternative technologies provides it with significant
competitive advantages, including the ability to rapidly enter new markets,
maximize penetration of existing markets and deliver service in the most cost
effective manner. Additionally, TVA has interests in HBO Brasil Partners and
ESPN Brasil Ltda., two programming joint ventures (the "Programming Ventures").
Through owned, affiliated and independent pay television operators, TVA
programming reaches approximately one million pay television households. TVA is
a majority owned subsidiary of Abril, S.A. ("Abril"), Latin America's leading
magazine publishing, printing and distribution company. TVA's other shareholders
are Falcon International Communications (Bermuda) L.P. ("Falcon International"),
The Hearst Corporation ("Hearst"), ABC, Inc. ("ABC") and Chase Manhattan
International Finance Ltd. ("CMIF").
The Company conducts its pay television operations through three owned
operating systems (the "Owned Systems"): TVA Sistema, TVA Sul and Galaxy Brasil.
Through the MMDS and Cable systems of TVA Sistema and TVA Sul, the Company
serves six cities with a combined population of approximately 18 million,
including three of the seven largest cities in Brazil: Sao Paulo (population of
10.2 million), Rio de Janeiro (population of 5.7 million) and Curitiba
(population of 1.5 million). The Company also holds minority interests in
Canbras TVA and TV Filme (the "Operating Ventures"), which together provide pay
television services to an additional seven cities with a total population of 6.5
million. In addition, the Company sells programming to, and receives a per
subscriber fee from, unaffiliated pay television operators ("Independent
Operators").
The Company, through Galaxy Brasil, is Brazil's exclusive provider of the
premium programming service, DIRECTV, Brazil's first digital direct broadcast
satellite Ku-Band service. Galaxy Brasil receives programming, scheduling and
related services for DIRECTV from Galaxy Latin America ("GLA"), in which TVA
holds a 10.0% equity interest. The other owners of GLA are a unit of Hughes
Electronics, a member of the Cisneros Group and a subsidiary of Grupo MVS.
Through local operating companies such as Galaxy Brasil, GLA plans to provide
DIRECTV service throughout much of Latin America and the Caribbean. The Company,
through TVA Sistema, also currently provides Brazil's only digital C-Band
television service (together with Galaxy Brasil, the "DBS Systems"). The DBS
Systems enable the Company to deliver a greater number of channels than any
other television operator in Brazil and provide TVA with access to substantially
all of Brazil's 33.9 million TV Homes.
77
PROGRAMMING DISTRIBUTION AND MARKETS
The following table sets forth information regarding the markets in which
TVA operates systems and distributes programming:
AVERAGE
REVENUE PER PAY TELEVISION
SERVICE LAUNCH CLASS ABC MONTH PER PROGRAMMING
DATE TV HOMES HOUSEHOLDS(A) SUBSCRIBERS SUBSCRIBER CHANNELS OFFERED
---------------- ----------- ------------- ----------- ----------- -----------------
OWNED SYSTEMS
MMDS
TVA Sistema
Sao Paulo(b)......................... September 1991 3,978,096 2,732,686 126,797 $ 39.98 18
Rio de Janeiro....................... March 1992 2,659,472 1,694,193 79,928 38.61 15
TVA Sul
Curitiba............................. March 1992 502,512 364,707 23,595 32.90 15
CABLE(C)...............................
TVA Sistema
Sao Paulo............................ October 1994 3,978,096 2,732,686 21,352 35.66 44
TVA Sul
Curitiba............................. January 1995 502,512 364,707 10,377 27.93 44
Camboriu............................. June 1996 37,618 22,686 5,209 38.27 31
Foz do Iguacu........................ June 1996 46,669 28,145 7,157 29.17 34
Florianopolis........................ September 1996 155,382 93,706 1,916 -- --
-----------
TOTAL MMDS AND CABLE SUBSCRIBERS....... -- -- -- 276,331 -- --
-----------
DBS
TVA Sistema/Galaxy
Brasil(d).............................. March 1995 33,900,000 19,568,310 73,180 $ 32.62 26(e)
SUBSCRIBERS AWAITING INSTALLATION...... -- -- -- 31,124 -- --
-----------
TOTAL SUBSCRIBERS-OWNED SYSTEMS........ -- -- -- 380,635 -- --
-----------
-----------
HOUSEHOLDS RECEIVING TVA PROGRAMMING
OWNED SYSTEMS.......................... -- -- -- 380,635 -- --
-----------
OPERATING VENTURES
MMDS
TV Filme, Inc.
Brasilia............................. July 1993 412,996 308,677 50,602 $ 44.49 16
Goiania.............................. December 1994 319,434 179,542 10,426 43.41 16
Belem................................ December 1994 221,370 135,020 16,102 46.49 15
CABLE
Canbras TVA
Four cities(f)....................... April 1996 222,358 152,773 8,126 -- 38
-----------
TOTAL-OPERATING VENTURES............... -- -- -- 85,256 -- --
-----------
-----------
INDEPENDENT OPERATORS
(53 Independent Operators)............. -- -- -- 564,499 -- --
-----------
TOTAL.................................. -- -- -- 1,030,390 -- --
-----------
-----------
- --------------------------
(a) The number of Class ABC Households is based on information provided by Grupo
Midia, IBGE and IBOPE.
(b) The number of MMDS subscribers includes 9,341 UHF subscribers in the Sao
Paulo metropolitan area. UHF subscribers are provided two channels of
programming, HBO Brasil and ESPN Brasil. The average revenue per month per
UHF subscriber, as of December 31, 1996, was approximately $22.96.
78
(c) The Company's Cable Systems in Sao Paulo, Curitiba, Camboriu, Foz do Iguacu
and Florianopolis had approximately 238,450, 53,277, 25,032, 20,404 and
23,031 Homes Passed, respectively, as of December 31, 1996.
(d) This data principally reflects the Company's digital C-Band operations. TVA
launched DIRECTV service, on a limited basis, in July 1996. As of December
31, 1996, the DIRECTV service offered 53 channels of video programming at an
average per month subscriber fee of $48.20. Since that date the number of
channels offered through the DIRECTV service has increased to 60. TV Homes
and Class ABC Households information is national information for all of
Brazil.
(e) The number includes nine SAP channels.
(f) The four cities served by Canbras TVA are Santo Andre, Sao Bernardo, Guaruja
and Sao Vicente.
BRAZILIAN PAY TELEVISION MARKET
Brazil is the largest television and video market in Latin America with an
estimated 33.9 million TV Homes which, as of December 31, 1995, watched on
average more than 4.0 hours of television per day, as compared to an average of
4.5 hours in the United States. Approximately 6.2 million television sets and
1.9 million VCR units were sold in Brazil during 1995. The pay television
industry in Brazil began in 1989 with the commencement by the Company of UHF
service in Sao Paulo. As of December 31, 1996, there were an estimated 1.8
million pay television subscribers, representing approximately 5.3% of Brazilian
TV Homes. By comparison, as of December 31, 1995, 51.1% of TV Homes in
Argentina, 12.6% of TV Homes in Mexico, 21.7% of TV Homes in the United Kingdom
and 69.2% of TV Homes in the United States subscribed to pay television.
Management believes that the number of pay television subscribers in Brazil will
continue to grow as pay television reaches more households both through the
expansion of existing and new MMDS and Cable systems and through development of
nationwide DBS systems. The Ministry of Communications estimates that Brazil
will have 16.5 million pay television subscribers by 2003.
UNITED
BRAZIL(A) ARGENTINA(B) MEXICO(B) KINGDOM(B)
----------- --------------- ----------- -------------
(NUMBERS IN THOUSANDS, EXCEPT PERCENTAGES)
TV Homes......................................................... 33,900 9,000 13,200 22,347
----------- ----- ----------- ------
Cable Subscribers.............................................. 560 4,410 1,257 1,400
MMDS Subscribers............................................... 295(d) 189 406 --
C-Band Subscribers............................................. 125 -- -- 3,447
Ku-Band Subscribers............................................ -- -- -- --
----------- ----- ----------- ------
Total Subscribers................................................ 980 4,599 1,663 4,847
----------- ----- ----------- ------
----------- ----- ----------- ------
Total Subscribers/TV Homes (%)................................... 2.9% 51.1% 12.6% 21.7%
UNITED
STATES(C)
-----------
TV Homes......................................................... 95,000
-----------
Cable Subscribers.............................................. 62,500
MMDS Subscribers............................................... 800
C-Band Subscribers............................................. 2,460(e)
Ku-Band Subscribers............................................ 2,460(e)
-----------
Total Subscribers................................................ 65,760
-----------
-----------
Total Subscribers/TV Homes (%)................................... 69.2%
- ------------------------
(a) The information set forth for Brazil represents estimates made by the
Company based upon figures compiled and published by the IBGE, management's
knowledge of the Company's pay television systems and those of the Operating
Ventures, and public statements of other pay television providers.
Management believes such estimates are reasonable, but neither management
nor any other party can provide assurances as to their accuracy. Kagan World
Media, Inc. reports that there were, as of December 31, 1995, 464 MMDS
subscribers, and 654 Cable subscribers and 100 C-Band subscribers in Brazil.
(b) The information set forth for Argentina, Mexico and the United Kingdom is
based on December 1995 data of Kagan World Media, Inc. and 1996 data of Paul
Kagan Associates, Inc.
(c) Source: National Cable Television Association.
(d) The number of MMDS subscribers includes UHF subscribers. (e)The number
represents C-Band and Ku-Band subscribers collectively.
COMPETITIVE ADVANTAGES
Management believes that the Company has the following competitive
advantages:
SUPERIOR QUALITY PROGRAMMING LINEUP. TVA's programming line-up includes
exclusive rights to ESPN Brasil in the Company's major markets, with coverage of
many of Brazil's most important soccer championships, including the Brazilian
Championship and the Sao Paulo and Rio de Janeiro State Championships. The
Company exclusively offers CMT Brasil and Bravo Brasil and is also the only pay
television provider offering HBO programming in TVA's served markets. Management
believes that as the
79
pay television industry grows, programming will become the critical factor
driving consumer selection of a pay television provider, and that with TVA's
relationships with strong international partners and its exclusive soccer
coverage, TVA will continue to offer superior quality programming.
STRATEGIC DEPLOYMENT OF ALTERNATIVE DISTRIBUTION TECHNOLOGIES. The Company
is the only pay television operator utilizing five distribution technologies:
MMDS, Cable, Ku-Band, C-Band and UHF. The availability of multiple distribution
technologies enables the Company to capitalize on the population and income
characteristics, topography and competitive dynamics of each of its targeted
markets. The Company has the ability to penetrate new markets quickly and
efficiently and to offer tiered programming at low cost with MMDS. The Company
is expanding its Cable systems, where warranted by economic and competitive
conditions, to build its subscriber base and to prepare for future opportunities
in interactive services and telecommunications. Additionally, management
believes the Company can rapidly penetrate virtually any market through the
continued deployment of its DBS Systems.
DBS SYSTEMS: NATIONWIDE COVERAGE AND DIGITAL SERVICE. Through its DBS
Systems, TVA is capable of offering programming to nearly all of Brazil's 33.9
million TV Homes, including those households in markets where Cable or MMDS
systems are either not developed or not economically viable. Through its DIRECTV
service, TVA is the first provider of Ku-Band pay television services in Brazil
and expects to enroll as subscribers a significant share of those who are
interested in broader, digital quality programming and pay-per-view services.
Through its digital C-Band system, the Company provides 26 channels of
programming (including nine SAP channels) and is capable of providing up to 38
channels of programming (including SAP channels). The Company's only significant
competitor in C-Band pay television service provides six analog channels of
programming in addition to off-air channels. The Company currently targets its
C-Band service to the estimated 4.0 million parabolic C-Band antennae owners in
Brazil, most of whom currently receive only the off-air channels.
MODERN CABLE INFRASTRUCTURE. The Company's Cable systems are constructed
with, or are being upgraded to, either 750 mhz or 550 mhz bandwidth capacity,
the latter of which is readily upgradeable to 750 mhz bandwidth capacity with
only moderate investment. This Cable technology will enable the Company to
provide data transmission and interactive services, including
telecommunications, in the future. Management believes that the Company's major
competitors for Cable service use narrower bandwidths over portions of their
Cable systems and have installed certain types of Cable in households which
currently may prevent them from providing telecommunications or high speed data
delivery through these portions of their systems until substantial additional
investments have been made for system reconstruction or upgrade.
STRONG STRATEGIC PARTNERS. The Company's strategic equity partners continue
to offer valuable expertise. TVA benefits from Abril's extensive experience in
the business of subscriptions and distribution and from the collective
experience of Falcon International, Hearst and ABC with regard to pay television
operations and from access to programming.
BUSINESS STRATEGY
TVA seeks to be Brazil's largest and most profitable pay television operator
and programming distributor and intends to capitalize on the convergence and
development of voice, video and telecommunications services. The Company intends
to achieve these goals through the following strategies:
MAXIMIZE PENETRATION IN EXISTING MARKETS. The Company seeks to increase its
penetration of existing markets by: (i) expanding the range of TVA's Cable
systems by extending its fiber optic and coaxial cable network and by seeking
pre-wiring arrangements with residential housing developers, (ii) improving the
signal quality and coverage of TVA's MMDS systems by using signal repeater
technology, (iii) maximizing penetration by offering tiered subscription options
and developing programming packages to appeal to more households and (iv)
expanding its penetration in ABC Class households through its scheduled
nationwide rollout of DIRECTV service and the continued development of C-Band
service.
80
MAXIMIZE CUSTOMER RETENTION THROUGH SUPERIOR CUSTOMER SERVICE. In order to
maximize customer retention, the Company aims to provide a consistently high
level of customer service. The Company has developed or has acquired the right
to use proprietary management information systems which, among other things,
provide Company representatives immediate access to customer records and
correspondence history. This enables TVA to provide high quality service to its
clients while monitoring subscriber payment patterns. The Company's Churn rate,
which reflects the ability of the Company to retain subscribers, averaged
approximately 1.8% per month during the year ended December 31, 1996. The
average monthly Churn rate for MMDS service in 1994 was 1.6%, in 1995 was 1.3%,
and in 1996 was 2.4%. The average monthly Churn rate for Cable service in 1994
was less than 1.0%, in 1995 was 1.1%, and in 1996 (the year Cable service was
initiated) was 0.8%. The average monthly Churn rate for C-Band service in 1994
was 5.3%, in 1995 was 0.1% and for the year ended December 31, 1996, was 2.0%.
DIRECTV service was only initiated in July 1996.
ENHANCE TVA'S PROGRAMMING PACKAGE. In order to maintain and enhance its
position as a provider of superior programming in Brazil, TVA is developing new
programming through the Programming Ventures, as well as through Abril and other
partners. TVA frequently evaluates the demographics of its subscribers and
potential subscribers and seeks to provide programming most in demand. The
Company also takes advantage of opportunities to enter into exclusive
distribution agreements for popular television programming in Brazil. Management
believes that its DIRECTV service, which includes both basic and premium
channels, as well as pay-per-view movies and events from Brazil, other Latin
American countries, Europe, Asia and the United States, further enhances TVA's
programming offerings and positions the Company to be the provider of the widest
selection of popular programming in Brazil.
ENTER NEW MARKETS. The Company intends to enter new markets by: (i)
acquiring existing MMDS and Cable operations, (ii) initiating the nationwide
rollout of DIRECTV service and (iii) investing in new operating ventures with
other MMDS and Cable operators.
CONTINUE NETWORK ENHANCEMENT. The Company is positioning itself to provide
high speed data transmission, interactive and other telecommunications services
over its systems and to take advantage of possible deregulation and the growing
demand for these services in Brazil. The Company is expanding its Cable systems
with fiber optic and coaxial cable capable of being upgraded to provide such
enhanced services. In addition, the Company continues to explore the development
of digital compression of MMDS signals.
Through the implementation of the Company's strategy, the Company has been
able to achieve rapid subscriber growth. The following chart sets forth
information regarding (i) the number of subscribers to the Company's Owned
Systems at December 31, 1993, 1994, 1995 and 1996, (ii) the number of new
81
installations during the years ended December 31, 1993, 1994, 1995, and 1996,
and (iii) the average installation fee for the year ended December 31, 1996.
AVERAGE
INSTALLATION
SUBSCRIBERS AT NEW INSTALLATIONS FEE FOR THE
END OF PERIOD(A) DURING PERIOD YEAR ENDED
------------------------------------------ ------------------------------------------ DEC. 31,
1993 1994 1995 1996 1993 1994 1995 1996 1996
--------- --------- --------- --------- --------- --------- --------- --------- -----------
MMDS
Sao Paulo................... 54,183 72,425 121,969 126,797 33,966 34,372 75,332 61,235 $ 117.99
Rio de Janeiro.............. 20,490 28,234 51,664 79,928 12,961 13,855 31,733 48,928 182.38
Curitiba.................... 7,801 11,112 15,260 23,595 5,965 5,972 10,513 17,117 79.83
--------- --------- --------- --------- --------- --------- --------- --------- -----------
Total MMDS.................... 82,474 111,771 188,893 230,320 52,892 54,199 117,578 127,280 --
--------- --------- --------- --------- --------- --------- --------- --------- -----------
CABLE
Sao Paulo................... -- 1,007 13,885 21,352 -- 482 6,546 6,907 $ 40.39
Curitiba.................... -- -- 1,244 10,377 -- -- 434 3,794 21.57
Foz do Iguacu............... -- -- -- 7,157 -- -- -- 2,275 150.00
Camboriu.................... -- -- -- 5,209 -- -- -- 1,596 150.00
Florianopolis............... -- -- -- 1,916 -- -- -- 1,966 150.00
--------- --------- --------- --------- --------- --------- --------- --------- -----------
Total Cable................... -- 1,007 15,129 46,011 -- 482 6,980 16,538 --
--------- --------- --------- --------- --------- --------- --------- --------- -----------
DBS
C--Band/DIRECTV(b)............ 511 2,075 15,126 73,180 511 1,914 16,873 66,085 $ 649.98
--------- --------- --------- --------- --------- --------- --------- --------- -----------
Total Subscribers-Owned
Systems..................... 82,985 114,853 219,148 349,511 53,403 56,595 141,431 209,903 --
--------- --------- --------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- --------- --------- -----------
- ------------------------
(a) Excludes backlog, reconnected and disconnected subscribers.
(b) DIRECTV service was launched, on a limited basis, in July 1996. The full
list price for initiation of the service is $877.00.
OWNERSHIP
Tevecap is a majority owned subsidiary of Abril, the leading magazine
publishing, printing and distribution company in Latin America. Abril publishes
over 266 weekly, bi-weekly and monthly titles. During 1996, the combined monthly
paid circulation of Abril and its affiliates averaged 16.6 million copies. TVA
benefits from Abril's extensive experience in the business of subscriptions and
distribution, advertising synergies, common research resources and financial
analysis and support. Certain of Tevecap's other shareholders provide the
Company with access to additional international programming and certain
technical and financial expertise. The Company's shareholders have invested, in
aggregate, approximately $288.0 million in the Company. Tevecap's current
ownership is as follows: Abril, 56.5%; Falcon International, 14.2%; Hearst,
10.0%; ABC, 10.0%; and CMIF, 9.3%. Each of Tevecap's corporate shareholders has
agreed, with certain exceptions, to a reorganization of the ownership of
Tevecap. As a result of the proposed reorganization a new Brazilian corporation
would become an 80% shareholder in Tevecap and Hearst/ABC would remain a 20.0%
shareholder in Tevecap. The new structure would not result in any change in the
current beneficial equity participation of the Stockholders in Tevecap, and the
transactions establishing the new structure and the new structure itself would
have to conform to the restrictions of the Indenture. As of the date hereof, the
timing of the restructuring is under discussion by the Stockholders. See
"Principal Shareholders."
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DISTRIBUTION OPERATING SYSTEMS
TVA and the Operating Ventures distribute programming through five different
technologies: MMDS, Cable, Ku-Band, C-Band, and UHF. The availability of
multiple distribution technologies enables the Company to exploit the population
and income characteristics, topography and competitive dynamics of each of its
markets.
MMDS
TVA's strategy of rapidly deploying an extensive MMDS network has allowed it
to enter new markets quickly and develop broad geographic coverage which the
Company may expand utilizing signal repeaters. TVA has developed Brazil's
largest MMDS network, and with the Operating Ventures, serves the country's
major metropolitan areas. MMDS systems are typically easier to deploy and
require relatively little capital investment for construction and maintenance as
compared to Cable systems. Programming is transmitted by signals through the air
from microwave transmitters to a small receiving antenna located at a
subscriber's home or dwelling unit. At the subscriber's location, the microwave
signals are converted to frequencies that can pass through a conventional
coaxial cable into a decoder located near a television set. In accordance with
Brazilian regulations, each MMDS license allows an MMDS operator to provide
service to households in a circular area within a radius of up to 50 kilometers,
depending on the technical capability of the operator. It is expected that
expansion into such newly available territory would require minimal additional
capital spending by the Company. However, tall buildings and other tall
structures may block reception of an MMDS signal. See "Regulatory Framework."
MMDS is being used in other emerging pay television markets such as Venezuela
and Hong Kong, and in Mexico, where Cable has a strong incumbent position.
TVA owns five MMDS licenses and operates MMDS systems in Sao Paulo, Rio de
Janeiro and Curitiba, which have an aggregate population of approximately 17.4
million. TVA serves 230,320 MMDS subscribers in these three cities. During the
year ended December 31, 1996, TVA averaged approximately 3,500 net new MMDS
subscribers per month. The MMDS systems of TVA offer between 15 to 18 channels
of programming. Management intends to increase its channel offerings to 31 soon
after the Ministry of Communications grants additional channel rights as allowed
under recently passed regulations. See "Regulatory Framework." TVA also holds
interests in three MMDS licenses through TV Filme, an Operating Venture, which
operates MMDS systems in Brasilia, Goiania and Belem and has 77,130 MMDS
subscribers. See "Regulatory Framework--MMDS Regulation." During the year ended
December 31, 1996, the Operating Ventures averaged approximately 3,500 net new
MMDS subscribers per month. In addition, TVA provides UHF service to 9,341
subscribers in the Sao Paulo metropolitan area.
CABLE
TVA has recently emphasized the strategic deployment of Cable service and
currently operates Cable systems in Sao Paulo, Curitiba and three other cities.
Cable service involves a broad band network employing radio frequency
transmission through coaxial and/or fiber optic cable. Cable systems consist of
four major parts: a headend, a distribution network, a subscriber network and a
house terminal. The programming is collected from the headend, then processed
and fed into the distribution path consisting of trunk and distribution cable,
which consists of coaxial and/or fiber optic cables. The signal is then fed into
a subscriber network that is either located in an apartment building or a
subscriber's home. Most of the Company's systems are constructed with either 750
mhz or 550 mhz bandwidth capacity, the latter of which is readily upgradeable to
750 mhz bandwidth capacity. The Company's four newly acquired systems in
Curitiba (2), Camboriu (1) and Foz do Iguacu (1) are being upgraded to 550 mhz
bandwidth capacity. The Company's new system in Florianopolis is being
constructed to 550 mhz bandwidth capacity. It is expected that this technology
will enable the Company to provide interactive services, including
telecommunications in the future. In addition, the Company's Cable systems
generally use addressable converters, which allow
83
the provision of pay-per-view services and enable TVA to upgrade, downgrade or
disconnect a subscriber's service from the headend on short notice.
TVA, through TVA Sistema and TVA Sul, owns eight Cable licenses and operates
Cable systems in Sao Paulo, Curitiba, Camboriu, Florianopolis and Foz do Iguacu,
which have an aggregate population of approximately 11.9 million and 46,011
subscribers. As of December 31, 1996, TVA had deployed approximately 1,139
kilometers of its Cable network, including 185 kilometers of fiber optic cable.
As part of this build-out plan, the Company constructed a 281 kilometer fiber
optic network, including a 57 kilometer fiber optic loop in Sao Paulo and a 28
kilometer fiber optic network in Curitiba, and is upgrading or constructing the
three recently acquired Cable systems. As a result of this buildout, as of
December 31, 1996, TVA Cable systems passed approximately 300,000 homes in Sao
Paulo, approximately 118,000 homes in Curitiba and a total of 494,000 throughout
all of the Company's Cable systems. As of December 31, 1996, Canbras TVA, an
Operating Venture, had an existing Cable network of approximately 173
kilometers, with approximately 62,000 Homes Passed and approximately 8,126
subscribers. Canbras TVA is constructing Cable networks in ten cities in the
greater Sao Paulo area with a combined population of over 2.8 million. By
comparison, TVA's largest competitor in Sao Paulo for Cable service had, as of
June 30, 1996, a Cable network in Sao Paulo of approximately 1,225 miles
(including approximately 151 miles of fiber optic cable) with 463,900 Homes
Passed. TVA and Canbras TVA currently offer between 31 and 44 analog channels of
programming (including off-air channels) on their Cable systems, depending on
the market, and have the capability of offering up to 78 analog channels. During
the year ended December 31, 1996, TVA averaged approximately 2,600 net new Cable
subscribers per month, and Canbras TVA, after its first eight months of
operation ended December 31, 1996, had 8,126 subscribers.
DIRECTV
In July 1996, TVA launched, on a limited basis, Brazil's DIRECTV service,
Brazil's first Ku-Band service. A nationwide rollout of DIRECTV was launched in
November 1996, at which time TVA initiated a publicity campaign supported by a
nationwide network of trained installers. By comparison, DIRECTV, Inc., a unit
of Hughes Electronics, started its DIRECTV service in the United States in June
1994 and had, as of December 31, 1996, approximately 2.6 million subscribers for
this service.
Galaxy Brasil receives programming from GLA, including programming which GLA
purchases from TVA. Additionally, GLA provides scheduling and related services
to Galaxy Brasil for use with DIRECTV. GLA distributes programming to Brazil
through the transmission of an encoded signal via the Galaxy III-R satellite
utilizing 12 transponders to a subscriber's 60 centimeter dish antenna which can
be mounted outside a window or on a rooftop. The signal is then transmitted to
an integrated receiver decoder in the subscriber's home. A single antenna may
serve a single family dwelling or a multifamily dwelling, such as an apartment
building, in which case each apartment needs to be equipped with a decoder. A
unit of Hughes Electronics leases the Galaxy III-R satellite and provides the
use of the satellite and related services to GLA pursuant to a technical service
agreement, the term of which extends until October 31, 2010. GLA, in turn,
charges Galaxy Brasil a royalty on a per subscriber basis for the use of the
satellite transponders and related services. The orbital location of the Galaxy
III-R satellite enables the Company to offer DIRECTV service to substantially
all of the TV Homes in Brazil. However, in the less populated northern and
western regions of Brazil, reception of DIRECTV programming requires a dish
antenna 1.1 meters in diameter and in the western third of Brazil (a sparsely
populated area when compared to the southern and eastern regions) reception may
require an even larger antenna. In addition, tall buildings and other tall
structures may block reception of the DIRECTV programming signal. The Galaxy
III-R satellite was launched in December 1995 and has an expected useful life of
nine years from the date of launch. Hughes Electronics expects to launch within
the next 12 months a second satellite to provide additional transponders for
transmission of DIRECTV programming. With DIRECTV service, TVA provided 60
channels of video programming (including 18 pay-per-view channels) and 33
channels of audio programming as of July 1, 1997. The Company expects that the
number of video channels will increase to 70 in the
84
last quarter of 1997. In addition, since December 31, 1996 a competitor has
entered the Ku-Band market, but offers only 26 channels of programming
(including four pay-per-view channels). TVA owns and has made a substantial
investment in a satellite uplink center for the Brazilian DIRECTV service in
Tambore in greater Sao Paulo (the "Tambore Facility"). The Tambore Facility is
used to uplink programming to the Galaxy III-R satellite.
At the original full installation price of $990, the purchase of DIRECTV
services was affordable only for the affluent Class A households in Brazil.
However, TVA expects to be able to reduce the installation fee having
consummated the Galaxy Brasil Leasing Facility and certain financings under the
SurFin Credit Facility and upon consummation of additional financings in the
future. Management expects these financing arrangements to enable the Company to
finance the acquisition and lease of antennae decoder boxes and other equipment,
thereby permitting TVA to reduce the initial installation fee and to spread the
expenses to subscribers of installing such equipment over time. Management also
expects the cost of decoders and associated equipment to decline as new
manufacturers enter the market and proposed manufacturing facilities in Brazil
open. Accordingly, as the cost of DIRECTV service is reduced, management expects
the purchase of DIRECTV service to become more affordable to a broader segment
of Class ABC Households including Class ABC Households outside the more affluent
urban areas of Brazil. In addition, management expects to offer different tiers
of service, charging different installation and subscription prices for each
tier of service. Such tiered service will also allow the Company to offer
DIRECTV service to a broader segment of Class ABC Households. In any case,
management believes DIRECTV service may be profitable for the Company, even if
purchase of DIRECTV service remains feasible only for affluent Brazilians.
However, no assurances can be given that Galaxy Brasil Leasing Facility and the
SurFin Credit Facility will provide the Company with the ability to reduce the
installation fees for DIRECTV service to the extent necessary to attract less
affluent purchasers, or that DIRECTV service will be attractive to a large
segment of Brazilians whether or not affluent.
C-BAND
TVA has offered C-Band service since 1993, and is the only pay television
operator to deliver a digital C-Band signal in Brazil. TVA's C-Band service
consists of the transmission of a digital encoded signal via the Brasilsat
satellite utilizing four transponders to a satellite antenna 1.1 meters in
diameter located at a subscriber's home, where the signal passes through an
integrated receiver decoder. A single antenna may serve a single family dwelling
or a multifamily dwelling, such as an apartment building, in which case each
apartment needs to be equipped with a decoder. The Brasilsat satellite was
launched in July 1994 and is owned by EMPRESA BRASILEIRA DE TELECOMUNICACOES
(Brazilian Telecommunications Company, or "Embratel"), the Brazilian
Government-owned company authorized to provide satellite telecommunications
services utilizing the SISTEMA BRASILEIRO DE TELECOMUNICACOES POR SATELITE
(Brazilian Satellite Telecommunications System, or "SBTS"). TVA utilizes the
Brasilsat satellite pursuant to three satellite transponder leases that expire
on May 30, 2002, November 20, 2003, and November 24, 2003, respectively. The
orbital location of the Brasilsat satellite enables TVA to provide C-Band
service throughout Brazil with little or no interference. However, tall
buildings and other tall structures may block reception of C-Band programming.
The Brasilsat satellite has an expected useful life of approximately 12 to 15
years from the date of launch.
TVA's C-Band service provides the Company with national coverage via
satellite transmission and a large preinstalled market. As of December 31, 1996,
there were approximately 4.0 million parabolic C-Band antennae in use in Brazil,
most of which receive only off-air channels. This installed base represents the
Company's target market for its digital C-Band service and the Company expects
to attract these viewers through marketing and promotional initiatives. TVA is
able to deliver 38 channels of programming (including nine SAP channels) in
addition to the off-air channels and currently delivers 26 channels (including
nine SAP channels) as compared to the six channels in addition to the off-air
channels offered by its only significant competitor for this service. TVA
provides service to 49,858 C-Band subscribers
85
throughout much of Brazil. During the year ended December 31, 1996, TVA averaged
approximately 2,900 net new C-Band subscribers per month.
UHF SERVICE
TVA's UHF service is the broadcast of an encoded UHF signal over a
geographic area. TVA provides UHF service only in Sao Paulo and has 9,341
subscribers for such service. TVA's UHF service provides two channels of
programming, HBO Brasil and ESPN Brasil. This service is provided to subscribers
who are unable to receive or have chosen not to have access to other pay
television services. UHF subscribers pay on average approximately $22.96 per
month for this limited service.
RECENT ACQUISITIONS AND LICENSE APPLICATIONS
TVA's expansion into new metropolitan areas is limited by the number of MMDS
and Cable licenses held by TVA. In order to expand, TVA seeks to purchase
existing operations and licenses, form new ventures such as the Operating
Ventures to offer pay television in markets for which TVA does not hold a
license, find new Independent Operators to purchase TVA programming, and, either
individually or along with various partners and affiliated parties, apply for
new MMDS and Cable licenses.
Since January 1996, TVA has purchased four existing Cable systems, two in
Curitiba and one in each of two other cities in southern Brazil, and has
purchased a license to operate a Cable system in a fourth city. As of the
respective dates of their acquisitions, the two systems in Curitiba had a total
of 4,515 subscribers, and the systems in the two other cities had a total of
8,298 subscribers. The four acquired systems had in the aggregate, as of
December 31, 1996, Cable networks comprising approximately 482 kilometers. The
Company is upgrading the operations of the four existing Cable systems and is
constructing a cable system in the fourth city.
In addition, TVA has submitted proposals to the Ministry of Communications
for concessions to provide service in numerous locations, including the 15 state
capitals, currently being evaluated by the Ministry of Communications for pay
television service (none of which currently receive either MMDS or Cable
service). No date has been set for the auction of these concessions, in which
TVA intends to participate either individually or in conjunction with local
partners. See "Regulatory Framework." Management expects the bidding process for
new Cable licenses to begin in the last quarter 1997.
TVA SISTEMA AND TVA SUL
TVA Sistema and TVA Sul operate the Company's MMDS, Cable and C-Band
businesses. TVA holds a 98.0% equity interest in TVA Sistema, and the estate of
Matias Machline, a Brazilian national, holds the remaining 2.0% equity interest.
The Company holds an 86.0% equity interest in TVA Sul, and Leonardo Petrelli, a
Brazilian national, holds the remaining 14.0%. Pursuant to an Association
Agreement, dated February 15, 1996 (the "TVA Sul Agreement"), for so long as Mr.
Petrelli controls at least 8.0% of the voting capital of TVA Sul, he is allowed
to exercise veto power over a number of decisions relating to TVA Sul,
including: any merger, split, liquidation or dissolution of TVA Sul; any sale,
purchase of or lien on property of over R$50,000 in value; any acquisition or
transfer of any debt of over R$50,000 in value; any guaranty or surety given by
TVA Sul; approval of budget and business plans; approval of dividends of over
25.0% of net profit; and any modifications to TVA Sul's ESTATUTO SOCIAL
(BYLAWS). Mr. Petrelli has irrevocably waived his veto rights and consented to
the execution and delivery by TVA Sul of the Indenture and the Subsidiary
Guarantee by TVA Sul and such other documents and agreements as may be required
under the Indenture and the Subsidiary Guarantee and the performance by TVA Sul
of its rights and obligations under the Indenture, the Subsidiary Guarantee and
such other documents and agreements to which TVA Sul may be a party pursuant to
the Indenture. The TVA Sul Agreement has a term equal to the longer of 10 years
or the duration of the licenses required to operate TVA Sul, and for equal
successive periods thereafter.
86
GLA AND GALAXY BRASIL
Pursuant to a Partnership Agreement, dated February 13, 1995, GLA was formed
as a general partnership. As of April 11, 1997, GLA was converted into a
Delaware limited liability company. Such conversion did not materially affect
the governance of GLA or TVA's ownership interest in GLA. Under a Limited
Liability Company Agreement, dated April 11, 1997 (the "GLA Agreement"), GLA is
managed by a seven-member Executive Committee to which Directv International,
Inc. ("DTI") can appoint four members and each of the other partners, including
Tevecap, can appoint one member as long as such partner holds at least an eight
percent equity interest in GLA. The GLA Agreement provides for local operating
agreements between GLA and local operators throughout South America, Central
America, Mexico and the Caribbean which will govern the relationship between GLA
and such local operator. The GLA Agreement stipulates that the local operator in
Brazil shall be Galaxy Brasil, 100.0% of the equity interest of which is
currently owned by Tevecap, but up to 12.5% of which may be purchased by DTI and
up to 12.5% of which may be purchased by Darlene Investments, a member of the
Cisneros Group. Tevecap, in turn, has an option to purchase up to 15.0% of the
equity interest of the local operator in Venezuela, all of which is currently
owned by Darlene Investments. The current partners in GLA have also agreed to
"seek and maintain" equity positions in other local operators. The Company has
agreed to make capital contributions under the GLA Agreement of $33.5 million,
of which $27.8 million had been contributed as of July 1, 1997. The GLA
Agreement places restrictions, including first negotiation, approval and
tag-along rights, on the transfer of capital stock or voting securities of each
of the current partners in GLA and in certain circumstances their parent
entities. In connection with the conversion of GLA into a limited liability
company, GLA's uplink facility was transferred to California Broadcast Center,
LLC, a Delaware limited liability company formed on April 11, 1997 and owned by
two units of Hughes Electronics.
Pursuant to a Local Operating Agreement (the "Local Operating Agreement")
between GLA and Galaxy Brasil, dated July 29, 1996, GLA has agreed to provide to
Galaxy Brasil the exclusive right and ability to supply the DIRECTV service in
Brazil. In accordance with a formula based on the number of subscribers, Galaxy
Brasil is obligated to pay a periodic royalty to GLA. In addition, TVA may not
own or engage in any other Ku-Band service and GLA may not own or engage in any
other pay television service in Brazil. GLA, upon the occurrence of certain
events, has the right to terminate the Local Operating Agreement, or to
terminate Galaxy Brasil's exclusive rights to distribute DIRECTV programming.
Such events include breach of any material obligation of Galaxy Brasil to GLA
and the failure of Galaxy Brasil to meet certain specified performance goals.
THE OPERATING VENTURES
The Operating Ventures also operate MMDS (TV Filme) or Cable (Canbras TVA)
systems. TVA holds a 36.0% equity interest in each of Canbras TVA Cabo and TV
Cabo Santa Branca (the "Canbras TVA Companies"). Canbras Communications Corp., a
publicly-traded Canadian company ("Canbras"), and Canbras Participacoes Ltda., a
Brazilian company ("Canbras-Par") hold the remaining interests in Canbras TVA
Cabo and Canbras-Par owns the remaining interest in TV Cabo Santa Branca. Bell
Canada International, Inc. ("BCI"), an affiliate of BCE Inc., Canada's largest
telecommunications group, holds a $27.0 million convertible debenture that upon
conversion, would permit BCI to become, inter alia, a majority shareholder of
Canbras-Par. The Canbras Association Agreement provides for each of the Canbras
TVA companies to be governed by a management committee of three members, one of
which TVA has the right to designate. In addition, TVA agreed to supply to the
Canbras TVA companies all programming regularly supplied to the Owned Systems at
"most favored prices" and other terms at which programming is provided to the
Owned Systems or to third parties in arm's-length transactions. TVA will
continue to provide MMDS service, where possible, to customers in the Santo
Andre and Sao Bernardo operating area of the Canbras TVA Companies until cable
service is available in these areas. Canbras TVA Cabo and TV Cabo Santa Branca
will compensate TVA for each subscriber that transfers from TVA's
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MMDS system to a Canbras TVA Cable system. The Company agreed to grant to
Canbras-Par a "right of first refusal" to participate in Cable licenses that the
Company may obtain, directly or indirectly, and Canbras-Par granted to the
Company a similar "right of first refusal" to participate in Cable licenses
acquired by Canbras-Par. The term of the Canbras Association Agreement is for so
long as Canbras-Par or its assignee owns shares "in companies which have the
objective of engaging in the cable TV business." The Canbras Association
Agreement does not specify the terms and conditions on which any co-investments
in Cable licenses are to be made, and such terms and conditions will be
negotiated in good faith, on a case-by-case basis, in connection with any future
cable license investments.
TVA holds a 14.7% equity interest in TV Filme. The remaining interests are
held by Warburg, Pincus Investors, L.P., which currently holds a 38.8% equity
interest; members of the Lins family, Brazilian nationals, who currently hold a
16.2% equity interest, public shareholders, who currently hold a 28.15% equity
interest and certain individuals with a combined 2.15% equity interest. On July
29, 1996, TV Filme completed a public offering of 2.5 million shares of its
common stock in the United States at an initial price of $10.00 per share.
Pursuant to a programming agreement, TVA provides programming to TV Filme, and
TV Filme has agreed to use 50.0% of the channel capacity of each of its MMDS
systems in Brasilia, Goiania and Belem (the "TV Filme Service Area") to
broadcast TVA programming so long as (i) the quality of TVA programming, in the
reasonable judgment of TV Filme, remains compatible with the taste and standards
of TV Filme's subscribers, (ii) TVA continues to own, directly or indirectly,
10.0% of TV Filme's common stock and (iii) TVA remains a subsidiary of Abril.
Within the TV Filme Service Area, TVA may not provide TVA programming to any
Cable or other MMDS pay television service provider and TVA may not compete with
TV Filme as an MMDS service provider. TV Filme also has a nonexclusive license
to TVA programming in 19 cities in which TV Filme has pending license
applications, subject to any exclusive license previously granted by TVA to
other pay television service providers in such cities and which exclusive
license TVA, using its best efforts, is unable to renegotiate to allow TVA to
provide for TV Filme to have a nonexclusive license. TVA may not charge TV Filme
an amount greater than the minimum rates charged by TVA to other subscription
television operators, nor may such charges exceed comparable rates for other
programming of a similar nature. The terms of the programming agreement
terminate on July 20, 2004. From time to time, in connection with the
programming agreement, TV Filme has agreed to enter into additional agreements
with the Company regarding specified channels. The agreements typically have two
year terms and determine the monthly fees which TV Filme pays for such channels.
PROGRAMMING
TVA
TVA, through its MMDS, Cable and C-Band systems, currently provides a
programming package consisting of 15 to 44 television channels. TVA programming
emphasizes sports, movies, and news with a secondary emphasis on general
entertainment.
With respect to MMDS and Cable service in TVA's market, TVA is currently the
sole provider of ESPN Brasil, HBO Brasil, CMT Brasil, Bravo Brasil, the
Superstation, RTPi and Eurochannel. In addition, TVA has distribution rights to
certain of Brazil's most important soccer championships, including the Brazilian
Championship and the Sao Paulo and Rio de Janeiro State Championships. TVA has
entered into two Programming Ventures, ESPN do Brasil Ltda. ("ESPN Brasil
Ltda.") and HBO Brasil Partners, through which it distributes a large volume of
programming which management believes is especially important to its
subscribers. ESPN Brasil Ltda. is a joint venture between Tevecap and ESPN
Brazil, Inc. (a subsidiary of ESPN, Inc.), each of which holds a 50.0% equity
interest. ESPN, Inc. is a joint venture between ABC and Hearst. ESPN, Inc.
provides the programming of the US channel ESPN2 to ESPN Brasil Ltda., which
packages such programming with Brazilian and other international content and
provides such packaged programming to TVA. Pursuant to a Quotaholders Agreement,
dated June 26, 1995 (the "ESPN Agreement"), ESPN Brasil has the right to
transmit "ESPN2 Service" programming as
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well as all library programming of ESPN. The Company has the exclusive right to
broadcast the programming of ESPN Brasil Ltda. in Sao Paulo, Rio de Janeiro,
Curitiba, Brasilia, Belem and Goiania. The Company also acts as the exclusive
sales representative of ESPN Brasil programming with respect to sales to other
Brazilian pay television providers and receives a commission in connection
therewith. The Company is also the sole advertising agent for ESPN Brasil until
June 1999 and receives a commission on advertising sales. ESPN Brasil Ltda., in
turn, receives on an exclusive basis from the Company all rights to soccer and
other sporting events acquired by the Company after February 24, 1995. ESPN
Brazil, Inc. has the right to terminate the ESPN Agreement and dissolve ESPN
Brasil Ltda. in the event that a Brazilian court issues a non-appealable
decision that the Company did not have the right to grant these rights to ESPN
Brasil. TVA's mandatory capital contributions to ESPN Brasil Ltda. are subject
to a maximum aggregate amount of $5.0 million, whether in the form of loans or
subscriptions for additional quotas. The ESPN Agreement is effective until June
17, 2045 and automatically renewable for a 50-year period.
HBO Brasil Partners is a joint venture between TVA, which as of December 31,
1996, held a 33.3% equity interest, and HBO Ole Partners, a joint venture among
Time-Warner, Sony and Ole Communications, Inc., which as of the same date held
the remaining 66.7% equity interest. HBO Brasil Partners has exclusive
programming contracts with Sony, Time-Warner and certain independent programming
distributors. HBO Brasil Partners, through an affiliate, provides the
programming for HBO Brasil to TVA. Pursuant to a Partnership Agreement dated
April 15, 1994 (the "HBO Agreement"), HBO Brasil Partners is managed by a
Partners' Committee comprised of an equal number of agents appointed by TVA and
HBO Ole Partners, the other partner. The HBO Agreement provides for the Company
to enter into an affiliation agreement with HBO Brasil Partners, pursuant to
which the Company pays a monthly fee per subscriber to the partnership. During
the first quarter of 1997, TVA's equity interest in HBO Brasil was reduced to
24.0% as a result of the entry of BVI Television Investments, Inc., an affiliate
of Disney Enterprises, Inc., as a partner in HBO Brasil Partners.
In addition to the Programming Ventures, TVA has entered into a number of
other programming agreements. Since June 1991, TVA has had a programming
agreement with De Santi & Vallone to broadcast SuperStation programming in
Brazil, with exclusivity in Sao Paulo, Rio de Janeiro, Curitiba, Brasilia, Belem
and Goiania, as well as throughout all of Brazil via C-Band. Through the
SuperStation, TVA provides exclusive attractions from the news departments of
two major US television networks (CBS and NBC) as well as general interest
programming. In December 1996, TVA began transmitting programming from the
History Channel on the SuperStation. TVA acquired the rights to transmit the
History Channel programming through an agreement with A&E Networks Television.
The Bravo Company, a joint venture among NBC and certain other parties, provides
international movies and arts programming for the Bravo Brasil channel on an
exclusive basis to TVA for distribution in Brazil. TVA customizes Bravo Brasil
with the insertion of Brazilian arts and movie programming. Country Music
Television, which is owned by Group W Broadcasting, Inc. and Gaylord
Entertainment Company, provides programming for CMT Brasil, which TVA customizes
with Brazilian content. Pursuant to a Letter of Understanding, dated January 18,
1996, TVA and Country Music Television ("CMT") agreed to form CMT Brasil as a
joint venture entity, in which TVA will hold a 75.0% equity interest and CMT
will hold the remaining 25.0% equity interest. The formation of this joint
venture is still under discussion by the parties. Eurochannel is a channel
assembled exclusively by TVA with programming from the German channel Deutsche
Welle, the Spanish channel Radiotelevision Espanola, European movies, and series
acquired from the BBC. Additionally, pursuant to existing agreements, TVA is
planning, through DIRECTV service, to become the first provider of Cinemax
programming in Brazil (expected by September 1997). TVA also plans to transmit
CNA, a Brazilian news channel to be produced by Abril with programming from SBT,
a Brazilian off-air channel. TVA distributes its programming through its own
operations and through sales of programming to the Operating Ventures, Galaxy
Latin America, the Independent Operators and, to a lesser extent, to competing
pay television providers.
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In addition, TVA offers non-exclusive programming from major international
subscription television programming providers, including such channels as ESPN
International, CNN, TNT, Fox, and the Discovery Channel.
TVA currently offers subscribers the following channels, among others:
HBO BRASIL is the dominant first-run pay television movie channel in Brazil.
HBO Brasil airs 24 hours a day offering an average of 12 different films per day
with limited commercial slots. All films are either subtitled or dubbed into
Portuguese. In the case of dubbed versions, viewers can listen to the original
soundtrack on an SAP channel. Recently, in some locations, TVA began offering
HBO Brasil2, transmitting HBO Brasil films with a six hour time shift.
ESPN BRASIL, offered exclusively by TVA, began transmission on June 17,
1995. TVA negotiated agreements with the major Brazilian soccer confederations,
providing TVA, as of the 1997 season, exclusive first choice coverage of soccer
games of the Brazilian Soccer Championship, the Sao Paulo State Championship and
the Brazil Cup. ESPN Brasil's programming centers around these exclusive soccer
games and other exclusive Brazilian and international sports entertainment
programs, mixed with programming from ESPN2.
ESPN INTERNATIONAL is the second sports channel offered by TVA, for which
TVA recently signed a new non-exclusive 50-year contract automatically renewable
for another 50-year period. ESPN International offers a number of different
sporting events, which include auto racing, National Football League games,
professional tennis matches, Major League Baseball games, and National
Basketball Association games. ESPN International also currently provides
Portuguese language commentaries exclusively to TVA.
CNN INTERNATIONAL features news and information programming, offering
international news coverage concerning politics, business, financial and
economic developments, 24 hours a day.
TNT is a movie channel which, pursuant to a non-exclusive agreement with
Turner International, Inc., offers the Turner Network Television movie
collection, including over 5,000 classic movie titles from MGM. In addition, TNT
airs children's programming, documentaries and sporting events. The movies
presented by TNT are broadcast in stereo sound and subtitled or dubbed in
Portuguese or Spanish. In the case of dubbed versions, viewers can listen to the
original soundtrack on a SAP channel.
CARTOON NETWORK is an animated cartoon channel targeted to children that
offers programs such as THE FLINTSTONES, THE JETSONS, THE SMURFS, YOGI BEAR and
other classic series.
DISCOVERY BRASIL is comprised of programming shown on the US Discovery
Channel, based on topics in the areas of nature, science and technology,
history, adventure and world cultures.
THE FOX CHANNEL presents movies, as well as programs from the 2,000 titles
in Fox's library. Fox also presents American television series, such as L.A.
LAW, M*A*S*H, and THE SIMPSONS, among many others.
THE SUPERSTATION is a general entertainment channel programmed by De Santi &
Vallone for TVA's distribution in Brazil. De Santi & Vallone has entered into
exclusive contracts with leading American networks for the transmission of
documentary, variety, music and news programming. The SuperStation offers
popular programs, such as THE LATE SHOW WITH DAVID LETTERMAN, E! ENTERTAINMENT
programs, NBC and CBS news, as well as a variety of other programs, including
programming from the History Channel, interviews, and programs on such topics as
food and cooking, travel and fashion.
EUROCHANNEL is specially assembled and packaged by TVA and offers
subscribers European programming. The channel presents programs from the Spanish
Radiotelevision Espanola, the German Deutsche Welle, the BBC, the news from the
French TF1, as well as a variety of quality European films. News, sports, music
and variety shows are also offered.
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MTV BRASIL is a 24-hour channel produced by MTV Brasil, a joint venture
company owned by Abril and an indirect subsidiary of Viacom International. MTV
Brasil is entirely produced in Brazil in Portuguese. MTV Brasil has licensing
agreements with the MTV Network, a division of Viacom International, and
transmits a combination of music and other video clips, cartoons and local
programming.
MTV LATINO presents original programming from MTV Latin America, which
includes music and other video clips and cartoons in Spanish.
CMT BRASIL is a country music channel with programming supplied from the US
version of Country Music Television channel exclusively to TVA and customized
for Brazil with Brazilian country music and local events.
SONY ENTERTAINMENT is primarily a situation-comedy channel, consisting of
Sony's film library, including FRIENDS, SEINFELD, MAD ABOUT YOU and E.R.
THE WARNER CHANNEL is a family entertainment channel, with new and classic
cartoons, children's programs and movies.
BRAVO BRASIL is an arts and movie channel, following the same concept as the
US version of the Bravo channel, showing high quality, cultural events, such as
classical music, jazz, opera, ballet and European movies. TVA inserts local
programming, such as Brazilian music and movies, as well as shows performed in
Brazil by international artists.
RTPI, Radiotelevisao Portuguesa Internacional, is a Portuguese state-owned
general entertainment channel produced and assembled in Portugal, airing music
events, talk shows, movies, news, documentaries, exclusive to TVA.
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TVA's complete channel offerings as of July 1, 1997 are as follows:
CHANNEL DESCRIPTION
- -------------------------------------------------------- --------------------------------------------------------
HBO Brasil.............................................. movie channel
HBO Brasil 2............................................ HBO Brasil with a six-hour time shift
ESPN Brasil............................................. sports channel
ESPN International...................................... sports channel
CNN International....................................... news channel
TNT..................................................... movie channel
Cartoon Network......................................... cartoon channel
Discovery Brasil........................................ science and documentary channel
Fox Channel............................................. movie channel
SuperStation............................................ variety programming channel
Eurochannel............................................. European variety programming channel
MTV Brasil.............................................. music channel
MTV Latino.............................................. music channel
RTPi.................................................... Portugal's state television channel
CMT Brasil.............................................. music channel
TV5..................................................... French variety programming channel
WorldNet................................................ American news and variety channel
RTVE.................................................... Spanish variety channel
Deutsche Welle.......................................... German variety channel
America 2............................................... Argentine variety channel
CV Noticias............................................. Argentine news channel
CV Sports............................................... Argentine sports channel
Canal de Noticias NBC................................... NBC news channel in Spanish
TeleUno................................................. Spanish variety channel
Sony Entertainment...................................... situation comedy channel
The Warner Channel...................................... family entertainment channel
Bravo Brasil............................................ arts and movie channel
Globo................................................... national off-air channel
SBT..................................................... national off-air channel
Gazeta/CNT.............................................. national off-air channel
Bandeirantes............................................ national off-air channel
Record.................................................. national off-air channel
Manchete................................................ national off-air channel
Cultura................................................. national off-air channel
CBI..................................................... local off-air channel
Rede Mulher............................................. local off-air channel
Rede Vida............................................... local off-air channel
TV Senado............................................... local off-air channel
TV Educativa Rio........................................ local off-air channel
The following additional channels are under development and are expected to
be offered by TVA to the Brazilian subscription television marketplace.
CHANNEL DESCRIPTION
- -------------------------------------------------------- --------------------------------------------------------
Cinemax................................................. movie channel
CNA..................................................... news channel
Mundo................................................... variety channel
E! Entertainment........................................ entertainment news channel
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DIRECTV
The DIRECTV programming package offered by Galaxy Brasil as of July 1, 1997
consisted of 60 video channels (including 18 pay-per-view channels), certain of
which, such as Bravo Brasil, CMT Brasil and Eurochannel, are provided by TVA,
and 33 audio channels. The Company expects that the number of video channels
will increase to approximately 70 in the last quarter of 1997. Programming
includes movies, news, athletic events and other programs available on a
pay-per-view basis. The complete DIRECTV service channel offerings, other than
pay-per-view, as of July 1, 1997, were as follows:
CHANNEL DESCRIPTION
- -------------------------------------------------------- --------------------------------------------------------
HBO Brasil.............................................. movie channel
HBO Brasil 2............................................ HBO Brasil with a six-hour time shift
ESPN Brasil............................................. sports channel
ESPN International...................................... sports channel
Eurochannel............................................. European variety programming channel
CMT Brasil.............................................. music channel
MTV Brasil.............................................. music channel
MTV Latino.............................................. music channel
RTPi.................................................... Portugal's state television channel
CNN International....................................... news channel
TNT..................................................... movie channel
Cartoon Network......................................... cartoon channel
Discovery Brasil........................................ science and documentary channel
Sony Entertainment...................................... sit-com channel
Bravo Brasil............................................ art and movie channel
Deutsche Welle.......................................... German variety channel
TVE..................................................... Spanish variety channel
Tele Uno................................................ Spanish variety channel
Warner Channel.......................................... family entertainment channel
CBS Telenoticias........................................ CBS news channel in Spanish
Bloomberg............................................... business news channel
Multipremier............................................ Mexican movie channel
ZAZ..................................................... Mexican children's programming channel
Travel Channel.......................................... travel programming channel
NHK..................................................... Japanese general entertainment channel
BBC..................................................... U.K. news channel
TVN..................................................... Chilean programming channel
Gazeta/CNT.............................................. national off-air channel
TV Senado............................................... local off-air channel
TV Educativa Rio........................................ local off-air channel
TV Cultura.............................................. local off-air channel
Nickelodeon............................................. children's programming channel
Discovery Kids.......................................... children's programming channel
Locomotion.............................................. children's programming channel
BBC World............................................... world news channel
TV Chile................................................ Chilean programming channel
Playboy TV.............................................. adult programming channel
AdulTVision............................................. adult programming channel
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OPERATIONS
MARKETING. The Company periodically conducts marketing surveys to gauge
consumer preferences and evaluate new and existing markets. TVA also frequently
evaluates the demographics of the subscribers to its programming, seeking to
provide programming most in demand. In each market, TVA's marketing staff
typically applies one or more of the following programs to attract subscribers:
(i) extensive marketing tied to regional events such as soccer matches, (ii)
neighborhood promotional events featuring large screen broadcasts of its channel
offerings, (iii) direct mailings, (iv) telemarketing, (v) television, billboard,
magazine and newspaper advertisements, (vi) prewiring arrangements with
residential housing developers and (vii) other promotional marketing activities,
including referral programs and promotional gifts.
INSTALLATION. The installation package delivered to a new subscriber
depends upon the type of programming delivery service chosen by the subscriber.
The MMDS installation package features a standard rooftop mount linked to an
antenna and related equipment, including a decoder, located at the subscriber's
location. Cable service requires the installation of a cable line and a decoder
at the subscriber's dwelling. Ku-Band satellite service typically involves
installation of a 60-centimeter dish antenna, which can be mounted outside a
subscriber's window or on the rooftop of a subscriber's building or house,
together with a decoder located at the subscriber's dwelling. As with Ku-Band
service, C-Band service installation includes the installation of a dish
antenna, although of a greater size (1.1 meters in diameter) and a decoder and
related equipment at the subscriber's home. DBS installations at single-family
homes require an entire installation package, while installations at multiple
dwelling units in which drop lines are installed require only a decoder at each
subscriber's location and therefore are less costly to the Company. Once a new
subscriber has requested service, the amount of time a subscriber waits for the
commencement of service depends on several factors, including type of service,
whether the subscriber has access to Cable, whether the subscriber is in a
single family home or multiple dwelling unit, whether the topography of the
surrounding area makes MMDS service viable and whether the subscriber is located
in an area of Brazil that can be reached by C-Band or Ku-Band service. TVA
provides installation service with its own personnel and through local
subcontractors. TVA or such subcontractor attempts to complete installation and
begin service within 30 days of a subscription order.
UPLINK FACILITIES. A major part of the delivery of TVA's DBS service,
whether Ku-Band or C-Band, is the collection of programming and the
transmission, or uplinking, of such programming to the Galaxy III-R satellite
and the Brasilsat satellite, respectively. Upon receipt of programming, the
Company processes, compresses, encrypts, multiplexes (combines with other
channels) and modulates (prepares for transmission to the satellite at a
designated carrier frequency) such programming. The Company uses uplink
facilities of Embratel in Sao Paulo to service its existing C-Band service. TVA
delivers its programming to the Embratel uplink center via microwave
transmission, where it is prepared for transmission to the Brasilsat satellite
using equipment provided by TVA. For its DIRECTV service, the Company has built
the Tambore Facility, an uplink center, for a total cost of approximately $20
million in Tambore in the State of Sao Paulo consisting of an uplink antenna and
ancillary equipment. The Tambore Facility has operated since June 1996 and is
used to uplink Brazilian programming to the Galaxy III-R satellite. Through the
Galaxy III-R satellite, programming from Galaxy Brasil is mixed with programming
from the California Broadcast Center (the "CBC") in Long Beach and with
programming provided by members of the Cisneros Group through an uplink facility
in Venezuela and by Grupo Frequencia Modulada Television through its uplink
facility in Mexico, for delivery to subscribers in Brazil and other countries to
which GLA provides DIRECTV service. The Tambore Facility and the uplink
facilities in Venezuela, Mexico and the United States are equipped with full
emergency power generation equipment and other emergency facilities to enable
GLA to avoid signal disruptions. As of April 11, 1997, California Broadcast
Center, LLC, a new Delaware limited liability company, was established, the
principal asset of which is GLA's satellite uplink facility. The new company is
owned by two subsidiaries of Hughes Electronics. In connection with the
establishment of the new company, TVA Communications and Tevecap have agreed,
pursuant to the Indemnification Agreement, to provide certain indemnities in
favor of GLA, DTI, the
94
newly-established company and its shareholders. To secure its obligations under
the Indemnification Agreement, Tevecap has agreed to pledge its equity interest
in GLA, as well as any future notes or interest it may hold relating to the
uplink facility.
PROGRAMMING FACILITIES. Programming equipment is used to prepare the
programming material for transmission via the Company's MMDS, Cable or DBS
systems, including compression with respect to Cable and Ku-Band service. The
programming equipment inserts commercial or promotional material, if
appropriate, monitors the quality of the picture and sound, and delivers the
material to the multiplexing system. For programming delivered to TVA as taped
material, the programming equipment also compiles the various programming
segments, inserting commercial and promotional material.
COMPRESSION SYSTEM. The Company also uses its programming facilities to
digitize the programming signals used in TVA's Cable and Ku-Band service.
Digital technology permits the compression and transmission of a digital signal
to facilitate multiple channel transmission through a single channel's
bandwidth, thereby giving broadcasters the ability to offer significantly more
channels than is currently the case with analog systems. Digitized signals are
compressed using the MPEG-2 standard. (Moving Pictures Expert Group-2, the
international video compression standard).
CONDITIONAL ACCESS SYSTEM. GLA and News Digital Systems Limited ("NDS"), a
wholly-owned subsidiary of News Corporation, are parties to a System
Implementation and License Agreement. Under the Local Operating Agreement, GLA
provides to Galaxy Brasil the use of the access control system licensed from NDS
and the Smart Cards provided by NDS. The Company expects the access control
system to adequately protect DIRECTV programming from unauthorized access. With
Smart Card technology, it is possible to change the access control system in the
event of a security breach allowing TVA to reestablish security. Management
believes that the ability to take electronic measures and to replace the Smart
Cards will provide an effective means to combat unauthorized programming access.
SUBSCRIBER SERVICE. Management believes that delivering high levels of
subscriber service in installation and maintenance enables it to maintain high
levels of subscriber satisfaction and to maximize subscriber retention. To this
end, TVA attempts to promptly schedule installations, provides a subscriber
service hotline in each of the metropolitan areas in which TVA operates,
attempts to promptly provide response repair service, and attempts to make
follow-up calls to new subscribers shortly after installation to ensure
subscriber satisfaction. TVA seeks to instill a subscriber service focus in all
its employees through ongoing training and has established an intra-company
electronic mail system to provide a forum for employees to exchange ideas
concerning ways to increase subscriber satisfaction. TVA also has various
employee bonus programs linked to measures of subscriber satisfaction. To enable
its employees to provide quicker service, TVA is working to decentralize its
subscriber service operations by opening small service offices throughout TVA's
served markets.
MANAGEMENT INFORMATION SYSTEMS AND BILLING. Management believes that TVA's
proprietary management information systems enable TVA to deliver superior
subscriber service, monitor subscriber payment patterns and facilitate the
efficient management of each of its operating systems. Management believes that
TVA's billing procedures are an integral part of its strategy to maintain high
levels of subscriber satisfaction and to maximize subscriber retention.
Subscribers select the day of the month on which payment for that month's
service is due, and pay their bills at a bank through direct transfers, which is
the standard payment method in Brazil. After disconnection and the removal of
the delinquent subscribers decoder box, the Company generally offers to
reconnect the delinquent subscribers for a fee of approximately $50.00.
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COMPETITION
GENERAL
TVA and the Operating Ventures compete with pay television service providers
using Cable, MMDS and DBS transmission technologies. The Company expects to
continue to face competition from a number of existing and future sources,
including potential competition as a result of new and developing technologies
and the easing of regulation in the pay television industry. TVA believes that
competition is and will continue to be primarily based upon program offerings,
customer satisfaction, quality of the system network and price. Since there is a
very limited history of pay television services in Brazil, there can be no
assurance that, based on the potential size of the Brazilian pay television
industry, the pay television market will be able to sustain a number of
competing pay television providers. The Company and the Operating Ventures also
compete with national broadcast networks and regional and local broadcast
stations. TVA's MMDS and Cable operations and its C-Band satellite service and
Ku-Band satellite service may compete for the same subscribers.
MMDS AND CABLE SERVICE
TVA's principal competitors in Cable service are operations owned or
controlled by Multicanal Participacoes S.A. ("Multicanal"), Net Brasil S.A.
("Net Brasil"), Globo Cabo S.A. ("Globo Cabo") and RBS Participacoes S.A.
("RBS"). Multicanal and Net Brasil operate Cable systems throughout much of
Brazil, including Sao Paulo, Rio de Janeiro, Curitiba and several other large
metropolitan areas. Globo Cabo has Cable systems in approximately 18 cities
including Brasilia. RBS operates Cable services in 19 cities in Brazil and
provides MMDS service in Porto Alegre. Net Brasil also provides MMDS service in
Recife, and has a license to provide MMDS service in Curitiba. Globo
Comunicacoes e Participacoes Ltda. ("Globo Par") and TV Globo, the owners of
Brazil's most popular off-air channels (together, "Globo"), control, or have
significant interests, in each of Multicanal, Net Brasil and Globo Cabo. RBS
also holds an interest in Multicanal. The systems controlled by Multicanal, Net
Brasil, Globo Cabo and RBS offer a similar number of channels of programming at
prices comparable to those charged for TVA's MMDS and Cable Service. Each of
these systems broadcasts programming purchased from TVA as well as from other
services.
DBS SERVICE
Management believes its only competitor in DBS service is Net Sat Servicos
Ltda. ("Net Sat") in which Globo Par also has a controlling interest and whose
other equity holders include News Corporation plc, a subsidiary of The News
Corporation Limited and Grupo Televisa, S.A., of Mexico. TVA offers 26 channels
of programming with its C-Band service, compared to the six channels offered by
Net Sat's C-Band service. However, while monthly charges are comparable and
TVA's digital C-Band service offers more channels, often with better picture
quality, the analog decoder necessary for Net Sat's C-Band service is
significantly less expensive than the digital decoder TVA's subscribers must
purchase. With respect to Ku-Band service, Net Sat uses a satellite which
provides broader coverage of Brazil. The orbital location of the Galaxy III-R
satellite enables GLA to offer DIRECTV service to substantially all of the TV
Homes in Brazil. However, in the less populated northern and western regions of
Brazil, reception of DIRECTV programming requires a dish antenna up to 1.1
meters in diameter and in the western third of Brazil (a sparsely populated area
when compared to the southern and eastern regions) reception may not be
practical due to the size of the antenna necessary for reception. TVA's Ku-Band
service currently offers 60 channels of programming, including 18 pay-per-view
channels, as compared to the 26 channels of programming offered by Net Sat
(including four pay-per-view channels).
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OFF-AIR BROADCAST TELEVISION
Broadcasting services are currently available to substantially all of the
Brazilian population without payment of a subscription fee by six
privately-owned national broadcast television networks and a government-owned
national public television network. The six national broadcast television
networks and their local affiliates currently provide services to nearly all
Brazilian TV Homes without payment of a subscription fee. The national broadcast
television networks and local broadcast stations receive a significant portion
of their revenues from the sale of television advertising, which revenues are
based in part on the audience share and ratings for the networks' programs.
Programming offered by pay television providers, including TVA, directly
competes for audience share and ratings with the programming offered by
broadcast television networks as well as regional and local television
broadcasters. The six national broadcast television networks are Globo, SBT,
Bandeirantes, TV Manchete, TV Record and Gazeta/CNT. The national television
networks utilize one or more satellites to retransmit their signals to their
local affiliates throughout Brazil.
PROGRAMMING SALES
TVA competes with a variety of Brazilian and international programming
providers for sales of its programming to the Operating Ventures and Independent
Operators. In addition, TVA competes with other pay television operators to
purchase programming from some of these Brazilian and international sources.
REGULATORY FRAMEWORK
The subscription television industry in Brazil is subject to regulation by
the Brazilian Ministry of Communications pursuant to Law No. 9472/97 ("Law
9472") and Law No. 9295/96 ("Law 9295"). The Ministry of Communications has to
date granted concessions for MMDS, Cable, DBS, and UHF licenses. This authority
is expected to be delegated in late 1997 to the AGENCIA NACIONAL DE
TELECOMUNICACOES ("ANATEL"), a division of the Ministry of Communications.
MMDS REGULATIONS
GENERAL. Law 9472 authorizes the Ministry of Communications, among other
things, to issue, revoke, modify and renew licenses within the spectrum
available to MMDS systems, to approve the assignments and transfer of control of
such licenses, to approve the location of channels that comprise MMDS systems,
to regulate the kind, configuration and operation of equipment used by MMDS
systems, and to impose certain other reporting requirements on channel license
holders and MMDS operators. The licensing and operation of MMDS channels are
currently governed by Decree No. 2196/97 ("Decree 2196"), Ordinance No. 254/97
("Ordinance 254") and Rule No. 002/Rev. 97 ("Rule 002"). Under these
regulations, MMDS is defined as the special service of telecommunication which
uses microwaves to transmit codified signals to be received in pre-established
points on a contractual basis.
LICENSES. The Ministry of Communications grants licenses and regulates the
use of channels by MMDS operators to transmit video programming, entertainment
services and other information. A maximum of 31 MMDS channels (constituting a
spectrum bandwidth of 186 mhz) may be authorized for use in an MMDS market.
While licenses are usually granted for the use of up to 16 channels, depending
on technical feasibility and the existence of competition, the Ministry of
Communications can grant a license for all 31 channels available in one specific
area. If the license is for 16 or more channels, at least two channels must be
reserved for educational and cultural programming. If the license involves less
than 15 channels, only one channel must be reserved for educational and cultural
purposes. If a license is for fewer than 15 channels, there is no obligation to
reserve any channel for educational and cultural purposes. In each of the
Company's operating or targeted markets, up to 31 MMDS channels are available
for MMDS (in addition to any local off-air VHF/UHF channels which are offered).
97
An MMDS license is granted for a renewable period of 15 years. The
application for renewal of a license must be filed with the Ministry of
Communications during the period from 180 to 120 days before the end of the
license term. To renew the license, the license holder must (i) meet applicable
legal and regulatory requirements, (ii) have complied with all legal and
contractual obligations during the term of such license, (iii) meet certain
technical and financial requirements and (iv) provide educational and cultural
programming.
Under the most recently promulgated provisions of Rule 002, each license
holder and its affiliates may be granted permission to operate MMDS systems in
different areas of Brazil, provided that no holder may be granted licenses for
(i) more than seven municipalities with a population equal to or exceeding
700,000 inhabitants and (ii) more than 12 municipalities with a population
between 300,000 and 700,000 inhabitants. The restrictions only apply to areas in
which the MMDS system operator (or an affiliate thereof) faces no competition
from other pay television services, excluding services that utilize a satellite
to transmit their signal. Rule 002 grants the Ministry of Communications full
discretion to alter or eliminate the restrictions. The term affiliate is defined
by Rule 002 as "(i) any legal entity that directly or indirectly holds at least
20% of the voting capital of another legal entity or any of two legal entities
under common ownership of at least 20% of their respective voting capital, (ii)
any of two legal entities that have at least one officer or director in common,
(iii) any of two legal entities when, due to a financial relationship between
them, one entity is dependent on the other." The Company currently controls four
MMDS licenses in cities of more than 700,000 inhabitants (Sao Paulo, Rio de
Janeiro, Curitiba and Porto Alegre), but in each such city TVA has at least one
competitor. No assurance can be given as to the number of licenses that will be
granted, if any. Prices for pay television services may be freely established by
the system operator, although the Ministry of Communications may interfere in
the event of abusive pricing. The Ministry of Communications may impose
penalties including fines, suspension or revocation of the license if the
license holder fails to comply with applicable regulations or becomes legally,
technically or financially unable to provide MMDS service. The Ministry of
Communications also may intervene to the extent operators engage in unfair
practices intended to eliminate competition.
The Ministry of Communications awards licenses to use MMDS channels based
upon applications demonstrating that the applicant is qualified to hold the
license, that the proposed market is viable and that the operation of the
proposed channels will not cause impermissible interference to other permitted
channels. After the Ministry of Communications determines that an application
has met these requirements, it publishes a notice requesting comments from all
parties interested in providing the same services in the same or a near area.
Depending on the comments received, the Ministry of Communications may decide to
open a public bid for the service in that area, although it has not done so in
the past. In the case of a public bid, applicants would be evaluated based on a
number of factors including the applicant's proposed schedule for implementing
service aspects of the applicant's community relations, such as involvement of
local residents as stockholders of the applicant, the applicant's commitment to
local programming and the extent to which the applicant provides free
programming to local cultural and educational institutions. Once an MMDS license
application is granted by the Ministry of Communications, the license holder
must finalize construction and begin operations within 12 months, which period
may be extended by an additional 12 months.
In addition to qualifying under the application process described above, a
license holder must also demonstrate that its proposed signal does not violate
interference standards in the area of another MMDS channel license holder. To
this end, existing license holders are given a 30-day period in which to
ascertain and comment to the Ministry of Communications whether the new license
holder's proposed signal will interfere with existing signals. The area covered
by the services is exclusive to a radius of five to 50 kilometers around the
transmission site, depending on the technical capability of the operator.
OTHER REGULATIONS. MMDS license holders are subject to regulation with
respect to the construction, marketing and lighting of transmission towers
pursuant to the Brazilian Aviation Code and certain local zoning regulations
affecting construction of towers and other facilities. There may also be
restrictions
98
imposed by local authorities. The subscription television industry also is
subject to the Brazilian Consumer Code. The Consumer Code entitles the
purchasers of goods or services to certain rights, including the right to
discontinue a service and obtain a refund if the services are deemed to be of
low quality or not rendered adequately. For instance, in case of a suspension of
the transmission for a given period, the subscriber shall be entitled to a
discount on the monthly fees. Rule No. 002 contains certain provisions relating
to consumer rights, including a provision for mandatory discounts in the event
of interruption of service. The Company as of July 15, 1997, had not been
required to repay any amounts or provide any discounts due to interruptions of
service. However, the Company does refund prepaid installation service fees when
the Company discovers such service is unavailable for whatever reason. Due to
the regulated nature of the subscription television industry, the adoption of
new, or changes to existing, laws or regulations or the interpretations thereof
may impede the Company's growth and may otherwise have a material adverse effect
on the Company's results of operations and financial condition.
CABLE REGULATION
GENERAL. Cable services in Brazil are licensed and regulated by the
Ministry of Communications pursuant to Law No. 8977/95 and Decree No. 2208/97
("Decree 2208"). Until Law 8977 was enacted in 1995, the Brazilian Cable
industry had been governed by two principal regulatory measures since its
inception in 1989: Ordinance No. 250, issued by the Ministry of Communications
on December 13, 1989 ("Ordinance 250"), and its successor, Ordinance No. 36,
issued by the Ministry of Communications on March 21, 1991 ("Ordinance 36"). On
November 28, 1995, the President of Brazil enacted Decree No. 1718 ("Decree
1718") and on September 9, 1996, the Ministry of Communications issued Ordinance
1086 ("Ordinance 1086") regulating the granting and use of Cable Licenses.
Ordinance 250 regulated the distribution of television signals ("DISTV") by
physical means (i.e., by Cable) to end-users. DISTV services generally are
limited only to the reception and transmission of signals without any
interference by a DISTV operator with the signal content. Under Ordinance 250,
101 authorizations were granted by the Ministry of Communications to local
operators to commercially exploit DISTV services. Although Ordinance 250 did not
specifically address Cable services, a number of DISTV operators (including the
Company's Cable systems) began to offer Cable services based on DISTV
authorizations.
By issuing Ordinance 36 in March 1991, the Ministry of Communications
suspended Ordinance 250, although it allowed the DISTV authorizations issued
during the preceding 15 months to remain valid. The Ministry of Communications
submitted proposed regulations relating to Cable services for public comment at
the same time Ordinance 36 was issued. These proposed regulations were never
adopted and no further regulatory action was taken until the enactment of Law
8977 in 1995. Currently Law 8977, together with Decree 1718 (which provides the
implementing procedures for Law 8977) and Ordinance 1086, constitute the
regulatory framework for Cable services in Brazil.
LICENSES. Under Law 8977, a Cable operator must obtain a license from the
Ministry of Communications in order to provide Cable services in Brazil. All
Cable licenses are nonexclusive licenses to provide Cable services in a service
area. Cable licenses are granted by the Ministry of Communications for a period
of 15 years and are renewable for equal and successive periods. Renewal of the
Cable license by the Ministry of Communications is mandatory if the Cable system
operator has (i) complied with the terms of the license grant and applicable
governmental regulations and (ii) agrees to meet certain technical and economic
requirements relating to the furnishing of adequate service to subscribers,
including system modernization standards.
Ordinance No. 256/97 ("Ordinance 256") imposes restrictions on the number of
areas that can be served by a Cable television system operator (or an affiliate
thereof). Pursuant to Ordinance 256, a Cable system operator (or an affiliate
thereof) may only hold licenses with respect to (i) a maximum of seven areas
with a population of 700,000 and above and (ii) a maximum of 12 areas with a
population of 300,000
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or more and less than 700,000. The restrictions only apply to areas in which the
Cable system operator (or an affiliate thereof) faces no competition from other
pay television services, excluding services that utilize a satellite to transmit
their signal. Ordinance 256 grants the Ministry of Communications full
discretion to alter or eliminate the restrictions. The term affiliate is defined
by Ordinance 256 as "(i) any legal entity that directly or indirectly holds at
least 20% of the voting capital of another legal entity or any of two legal
entities under common ownership of at least 20% of their respective voting
capital, (ii) any of two legal entities that have at least one officer or
director in common, (iii) any of two legal entities when, due to a financial
relationship between them, one entity is dependent on the other." The Company
currently controls four Cable licenses in cities of more than 700,000
inhabitants (Sao Paulo and Curitiba), but in each such city TVA has at least one
competitor.
Generally, only legal entities that are headquartered in Brazil and that
have 51.0% of their voting capital by Brazilian-born citizens or persons who
have held Brazilian citizenship for more than 10 years are eligible to receive a
license to operate Cable systems in Brazil. In the event that no private entity
displays an interest in providing Cable services in a particular service area,
the Ministry of Communications may grant the local public telecommunications
operator a license to provide Cable services.
Cable operators that presently provide Cable services under a DISTV
authorization granted under Ordinance 250 are required under Law 8977 to file
applications to have their DISTV authorizations converted into Cable licenses.
Ordinance 256 grants a one year period from the date a DISTV authorization is
converted into a cable television license for any Cable system operator to
comply with the restrictions. The Company's Cable systems, all of which are
operating under DISTV authorizations, have applied for conversion of their DISTV
authorizations.
Cable licenses for service areas not covered by existing authorizations will
be granted pursuant to a public bidding process administered by the Ministry of
Communications after prior public consultation. All such licenses shall be
nonexclusive licenses. In order to submit a bid for a license, a bidder must
meet certain financial and legal prerequisites. After such prerequisites are
met, a bidder must then submit a detailed bid describing its plan to provide
Cable services in the service area. In the qualification phase of the bidding
process, the Ministry of Communications assigns a number of points to each bid
based on certain weighted criteria, including the degree of ownership of the
bidder by residents of the local service area; the channel capacity of the
proposed system; the timetable for installing the Cable system; the timetable
for offering subscription programming and amount of such programming; the time
allocated to local public interest programming; the number of channels allocated
to educational and cultural programming; the number of establishments, such as
schools, hospitals and community centers, to which basic service programming
will be offered free of charge; and the proposed basic subscription rate. After
calculating the number of points awarded to each bidder, the Ministry of
Communications will then apply a formula based on the population of the service
area to select the winning bid from among those bidders that meet certain
defined minimum qualifying thresholds. For service areas with a population of
700,000 or more inhabitants, the qualified bidder that submits the highest bid
for the license will be selected. For service areas with a population between
300,000 and 700,000 inhabitants, the winning bid is selected based on the
highest product obtained by multiplying the number of points awarded in the
qualification phase and the amount bid for the license. For service areas with
less than 300,000 inhabitants, the winning bid is selected on the basis of the
number of points awarded in the qualification phase and the payment of a fixed
fee.
Once a Cable license is granted, the licensee has an 18 month period from
the date of the license grant to complete the initial stage of the installation
of the Cable system and to commence providing Cable services to subscribers in
the service area. The 18 month period is subject to a single 12 month extension
for cause at the discretion of the Ministry of Communications.
Any transfer of a Cable license is subject to the prior approval of the
Ministry of Communications. A license generally may not be transferred by a
licensee until it has commenced providing Cable services in
100
its service area. Transfers of shares causing a change in the control of a
license or the legal entity which controls a license also is subject to the
prior approval of the Ministry of Communications. The Ministry of Communications
must receive notice of any change in the capital structure of a licensee,
including any transfer of shares or increase of capital that do not result in a
change of control.
A license can be revoked, upon the issue of a judicial decision, in the
event the licensee lacks technical, financial or legal capacity to continue to
operate a Cable system; is under the management of individuals, or under the
control of individuals or corporations who, according to Law 8977, do not
qualify for such positions; has its license transferred, either directly or by
virtue of a change in control, without the prior consent of the Ministry of
Communications; does not start to provide Cable services within the time limit
specified by Law 8977; or suspends its activities for more than thirty
consecutive days without justification, unless previously authorized by the
Ministry of Communications.
CABLE RELATED SERVICE REGULATION
GENERAL. Brazilian telecommunications services are governed primarily by
(i) Article 21 of the Federal Constitution, as amended by Amendment No. 8 of
August 15, 1995 ("Amendment 8"), (ii) the Telecommunications Code (Law No. 4117
of August 27, 1962, as amended), (iii) Law 9472 and (iv) Law 9295. The Brazilian
Government also has issued detailed regulations covering specific areas of
telecommunications services, including radio broadcasting, paging, trunking,
subscription television, Cable television and cellular telephony. The Ministry
of Communications presently is responsible for the regulation of
telecommunications services in Brazil. Prior to its amendment in 1995, Article
21 of the Federal Constitution required the Brazilian Government to operate
directly, or through concessions granted to companies whose shares are
controlled by the Brazilian Government, all telephone, telegraph, data
transmission and other public telecommunications services. This constitutional
requirement was the basis for the establishment of the state-owned telephone
monopoly, Telebras, which holds controlling interests in 27 regional telephone
operating companies. With the adoption of Amendment 8, Article 21 was modified
to permit the Brazilian Government to operate telecommunications services either
directly or through authorizations, concessions or permissions granted to
private entities. In particular, Amendment 8 removed the constitutional
requirement that the Brazilian Government must either directly operate or
control the shares of companies which operate telecommunications services. Even
with the adoption of Amendment 8, the Brazilian Government still retains broad
regulatory powers over telecommunications services. Notwithstanding the
existence of the Telebras monopoly, private companies have been permitted under
Brazilian law to provide a number of telecommunications services other than
telephony, including radio broadcasting, paging, trunking, subscription
television and cable television services. However, fixed public telephony and
cellular telephony were exclusively provided by Telebras through its regional
telephone operating companies. While Amendment 8 permits the Brazilian
Government to authorize private companies to provide such services, further
action on the part of the Brazilian legislature will be required before private
entities may actually provide fixed telephony services.
HIGH-SPEED CABLE DATA SERVICES. Law 8977 and Decree 2208, among other
things, authorize cable television operators, such as the Company, in addition
to furnishing video and audio signals on their cable networks, to utilize their
networks for the transmission of meteorological, banking, financial, cultural,
prices and other data. This broad grant of authority by the Ministry of
Communications is understood to permit Cable television operators to furnish
services such as interactive home banking and high-speed Cable data services to
subscribers through their cable television networks.
CABLE TELEPHONY. Under present Brazilian law, only Telebras' regional
telephone operating companies are permitted to furnish fixed telephone services
in Brazil. Therefore, absent a change in Brazilian law, the Company would not be
permitted to furnish cable telephony on its network. There are, however, certain
limited regulatory exceptions pursuant to which private entities other than
Telebras and the regional telephone operating companies have been permitted to
provide limited fixed telephony services in
101
Brazil. Under one particular exception, certain private telephone networks
(CENTRAIS PRIVADAS DE COMUTACAO TELEFONICA or "CPCT") serving "condominiums" (as
such term is defined under Brazilian law) have been permitted to interconnect
their private telephone networks to the public telephone network operated by the
local telephone operating company. A CPCT is comparable to a private branch
exchange (PBX) found in some larger apartment complexes, hotels and businesses
in the United States. Under Brazilian law, the term "condominium" refers to
residential and nonresidential buildings or building complexes that have entered
into a legal association. In practice, a condominium desiring to establish a
CPCT will generally contract with a private service provider to install, operate
and maintain the CPCT and to secure interconnection with the public telephone
network. Ordinance No. 119/90 of the 10 December 1990 ("Ordinance 119"), which
was issued by the predecessor to the Ministry of Communications, sets forth
requirements for the interconnection of CPCTs with the public telephone network.
In general the installation, operation and maintenance of a CPCT does not
require any authorization from the Ministry of Communications or Telebras. In
order to interconnect with the public telephone network, a CPCT must comply with
the requirements set forth in Ordinance 119. Such requirements primarily relate
to meeting technical equipment certification and acceptance standards. Assuming
that such standards are met, the regional telephone operating company is
required under Ordinance 119 to interconnect the CPCT requesting interconnection
to the public telephone network. The Company believes that, under current
Brazilian law, Cable television operators can utilize their Cable television
networks in order to facilitate the installation and operation of a CPCT.
Furthermore, under the authority granted by Ordinance 119, CPCTs may be
interconnected through Cable television networks to the public telephone
network.
SATELLITE SERVICE REGULATION. On October 1, 1991, the Ministry of
Communications enacted Ordinance No. 230 to regulate telecommunications services
via satellite in Brazil ("Ordinance 230"). Under Ordinance 230 any company
authorized to broadcast television by any means is also authorized to broadcast
by satellite transmission. The Company has operated satellite pay-television
services since 1993 through a contract signed with Embratel.
Ordinance No. 281, issued by the Ministry of Communications on November 28,
1995, partially amended Ordinance 230 allowing only companies to which a
concession, permission or authorization had been granted previously by the
Ministry of Communications to provide telecommunications services via satellite.
Companies that were already operating satellite telecommunications services
without such authorization were given a period of 60 days to seek such
authorization. The Company applied for such authorization within the 60-day
period, and on April 23, 1996, the Ministry of Communications issued Ordinance
No. 87/96 ("Ordinance 87"), granting TVA the non-exclusive permission to operate
a pay television service via satellite. Such authorization is valid for a term
of fifteen years, commencing October 26, 1994. Ordinance 87 further provides
that TVA has the obligation to (a) render services continuously and efficiently
in order to fully satisfy users, (b) in an emergency or disaster, render
services to the entities that require services without charge, and (c) meet the
technical adequacy requirements which the Ministry of Communications considers
essential to guarantee fulfillment of the obligations under the permission
granted. In addition, on April 23, 1996, Galaxy Brasil received approval from
the Ministry of Communications, pursuant to Ordinance No. 86/96 ("Ordinance
86"), to operate satellite services via the Galaxy III-R satellite, leased by
Hughes Electronics. Galaxy Brasil also received approval to operate the
corresponding ground transmission station pursuant to Ordinance 86.
On May 21, 1997, the Ministry of Communications issued Ordinance No. 321
("Ordinance 321") governing the granting of licenses to provide satellite pay
television services.
PROPERTIES
The Company owns most of the assets essential to its operations. The major
fixed assets of the Company are coaxial and fiber optic cable, converters for
subscribers' homes, electronic transmission, receiving, processing and
distribution equipment, microwave equipment and antennae. The Company leases
certain distribution facilities from third parties, including space on utility
poles, roof rights and land
102
leases for the placement of certain of its hub sights and head ends and space
for other portions of its distribution system. The Company leases its offices
from third parties, with the exception of certain offices of TVA Sul, located in
Curitiba, State of Parana, and the offices and uplink facility for Galaxy
Brasil, located in Tambore, Sao Paulo State, all of which are owned by the
Company. The Company also owns its data processing facilities and test
equipment.
EMPLOYEES
TVA had 1,677 employees as of December 31, 1996. TVA utilizes third-party
contract employees in connection with the construction of its broadcast system
network and certain other activities. Substantially all of the employees of TVA
are represented by unions. TVA believes that it has good employee and labor
relations.
LEGAL PROCEEDINGS
The Company is party to certain legal actions arising in the ordinary course
of its business which, individually or in the aggregate, are not expected to
have a material adverse effect on the combined financial position of the
Company. As of December 31, 1996, the Company had reserved approximately $5.0
million as contingent liabilities in connection with certain litigation
contingencies, including a number of claims by persons arising in connection
with the termination of their employment (approximately $1.8 million) and claims
relating to the payment by the Company of certain taxes on imported materials
(approximately $2.4 million). See Note 19 to the Tevecap Financial Statements
included herein. As a result of an agreement between the Company and
governmental authorities regarding an installment payment schedule for one such
tax (the IMPOSTO SOBRE CIRCULACAO DE MERCADORIAS E SERVICOS, or "ICMS"), the
Company reduced its reserve for litigation contingencies to approximately $5.0
million as of December 31, 1996, which amount includes a provision for claims
described in the following paragraph.
The Company's operating companies are currently defending a lawsuit brought
by the Escritorio Central de Arrecadacao e Distribuicao (Central Collection and
Distribution Office, or "ECAD"), a government-created entity authorized to
enforce copyright laws relating to musical works. ECAD filed a lawsuit in 1993
against all pay-television operators in Brazil seeking to collect royalty
payments in connection with musical works broadcast by the operators. The suit
was filed against TVA in the Tribunal de Justica do Estado de Sao Paulo, the 16
Vara Civil do Estado de Sao Paulo, the Tribunal de Justica do Estado do Parana
and the Tribunal de Justica do Estado de Santa Catarina. The suit was filed
against TV Filme in the Tribunal de Justica do Estado de Goias, the Tribunal de
Justica do Distrito Federal and the Tribunal de Justica do Estado do Para and
against Canbras TVA in the Tribunal de Justica do Estado de Sao Paulo. ECAD is
seeking a judgment award of 2.55% of all past and present revenues generated by
the operators. The Company and all such cable operators are currently in the
process of responding to this suit. Although the Company intends to vigorously
defend this suit, the loss of such suit may have a material adverse effect on
the consolidated financial position of the Company. Based on agreements reached
by ECAD with other Brazilian television operators, however, management believes
that it can reach a negotiated settlement to this suit whereby the Company would
make monthly payments to ECAD in an amount significantly lower than that sought
by ECAD. As of December 31, 1996, the Company had reserved approximately
$770,000 for claims related to the ECAD suit.
103
MANAGEMENT
The Company is managed by its CONSELHO DE ADMINISTRACAO ("Board of
Directors"), CONSELHO CONSULTIVO ("Advisory Board") and DIRETORIA ("Committee of
Officers"). Members of the Board of Directors and Committee of Officers are
elected for a two-year period, currently expiring on April 30, 1998. Day-to-day
operations of the Company are managed by the Company's EXECUTIVOS ("Executive
Officers").
BOARD OF DIRECTORS
MEMBER AGE POSITION
- ----------------------------------------------------------------------------------------------- --- -----------
Robert Civita.................................................................................. 60 President
Jose Augusto P. Moreira........................................................................ 53 Member
Robert Hefley Blocker.......................................................................... 61 Member
Giancarlo Francesco Civita..................................................................... 33 Member
Thomaz Souza Correa Neto....................................................................... 58 Member
Francisco Savio Couto Pinheiro................................................................. 43 Member
Arnaldo Bonoldi Dutra.......................................................................... 44 Member
Sergio Vladimirschi Junior..................................................................... 31 Member
Jose Luis de Salles Freire..................................................................... 48 Member
Jorge Fernando Koury Lopes..................................................................... 46 Member
Oswaldo Leite de Moraes Filho.................................................................. 47 Member
ADVISORY BOARD
MEMBER AGE POSITION
- ----------------------------------------------------------------------------------------------- --- -----------
Robert Civita.................................................................................. 60 President
Jose Augusto P. Moreira........................................................................ 53 Member
Robert Hefley Blocker.......................................................................... 61 Member
Claudio Dascal................................................................................. 53 Member
Giancarlo Francesco Civita..................................................................... 33 Member
Francisco Savio Couto Pinheiro................................................................. 43 Member
Stephen Vaccaro................................................................................ 42 Member
Marc Nathanson................................................................................. 51 Member
Tully M. Friedman.............................................................................. 54 Member
Raymond E. Joslin.............................................................................. 60 Member
Herbert A. Granath............................................................................. 68 Member
COMMITTEE OF OFFICERS
MEMBER AGE POSITION
- ----------------------------------------------------------------------------------------------- --- -----------
Jose Augusto Pinto Moreira..................................................................... 53 Member
Angelo Silvio Rossi............................................................................ 50 Member
Claudio Cesar D`Emilio......................................................................... 46 Member
Sergio Vladimirschi Junior..................................................................... 31 Member
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EXECUTIVE OFFICERS
MEMBER AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
Raul Rosenthal....................................... 49 President and Chief Executive Officer
Douglas Duran........................................ 43 Chief Financial Officer
Alexandre Annemberg.................................. 58 TVA/Network Officer
Luiz Gleiser......................................... 47 Programming Officer
Jose Carlos Romeiro Alves............................ 44 Management Information System Officer
Virgilio Jose Carreira Amaral........................ 43 Engineering Officer
Roseli Parrella...................................... 38 Human Resources Officer
Leila Abraham Loria.................................. 43 Galaxy Brasil Officer
Leonardo Petrelli Neto............................... 36 Curitiba Operations Officer
Luiz Eduardo B.P. Rocha.............................. 36 Rio de Janeiro Officer
Celso Antonio Penteado............................... 47 Sao Paulo Operations Officer
Walter Barbosa de Sousa Jr........................... 40 Digisat Officer
ROBERT CIVITA has been President of the Board of Directors since July 1994
and President of the Advisory Board since September 1995. Mr. Civita has been
Chairman and Chief Executive Officer of Abril since 1990 and previously served
as its President for eight years. Mr. Civita attended Columbia University's
graduate program in sociology, and holds a degree in economics, with a minor in
publishing, from the University of Pennsylvania. In 1991 Mr. Civita was elected
"Person of the Year" by the Brazilian American Chamber of Commerce in New York.
Mr. Civita is the father of Giancarlo Francesco Civita.
JOSE AUGUSTO P. MOREIRA has been a member of the Board of Directors since
July 1994, a member of the Advisory Board since September 1995 and a member of
the Committee of Officers since July 1992. Mr. Moreira has been associated with
Abril since 1965, and currently serves as Abril's Vice President of Finance and
Administration. Mr. Moreira has a degree in Economics from the Faculdade de
Economia Sao Luis in Sao Paulo, and participates in the Program for Management
Development at Harvard Business School.
ROBERT HEFLEY BLOCKER has been a member of the Board of Directors since
April 1995 and a member of the Advisory Board since September 1995. Mr. Blocker
was associated with the Chase Manhattan Bank for 22 years, the last nine of
which he served as President Director. Mr. Blocker is currently President and
Managing Partner of Blocker Assessoria de Investimentos e Participacoes S.A., a
consulting firm for national and multinational companies. Mr. Blocker is also a
member of several other Boards of Directors, including those of Arno S.A. and
the American Chamber of Commerce in Sao Paulo.
GIANCARLO FRANCESCO CIVITA has been a member of the Board of Directors since
August 1994 and a member of the Advisory Board since September 1997. Mr. Civita
has been associated with Abril since 1986, and currently serves as the General
Director of MTV Brasil. From 1992 to 1994 Mr. Civita was the General Director of
the Programming Unit at TVA Brasil. Mr. Civita holds an M.B.A. from Harvard
Graduate School of Business Administration, as well as an undergraduate degree
in Social Communication from the Escola Superior de Propaganda e Marketing in
Sao Paulo. Mr. Civita is the son of Robert Civita.
THOMAZ SOUTO CORREA NETO has been a member of the Board of Directors since
November 1995. Mr. Correa is Executive Vice President and Editorial Director of
Abril, and has served as Editor-in-Chief of several of Abril's major magazines.
Mr. Correa is also the President of the Brazilian Publishers Association. Mr.
Correa studied Economics at Universidade MacKenzie.
FRANCISCO SAVIO COUTO PINHEIRO has been a member of the Board of Directors
since September 1995 and a member of the Advisory Board since September 1995.
Mr. Pinheiro is a former Secretary of Communications who has also held posts at
Embratel and Radiobras, the Brazilian government-owned
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broadcasting company. Mr. Pinheiro is currently a consultant and General Manager
of SP Communications. Mr. Pinheiro holds undergraduate and graduate degrees in
Telecommunications.
ARNALDO BONOTRI DUTRA has been a member of the Board of Directors since
April 1996. Mr. Dutra is the Country General Counsel of Banco Chase Manhattan
S.A., an affiliate of The Chase Manhattan Bank. Mr. Dutra is also the legal
advisor to all the Chase companies in Brazil. Mr. Dutra holds a law degree from
the Pontificia Universidade Catolica de Sao Paulo and a master of laws degree
from the Universidade de Sao Paulo.
SERGIO VLADIMIRSCHI JUNIOR has been a member of the Board of Directors since
September 1995 and a member of the Committee of Officers since April 1996. Mr.
Vladimirschi was associated with Drexel Burnham Lambert, where he worked as an
analyst for two years, and is an executive with Fechaduras Brasil S.A., one of
Brazil's leading hardware manufacturers, where he served as Marketing Officer
for seven years. Mr. Vladimirschi holds a B.S. in Finance from the Wharton
School at the University of Pennsylvania. Mr. Vladimirschi is the nephew of Marc
Nathanson.
JOSE LUIS DE SALLES FREIRE has been a member of the Board of Directors since
September 1995. Mr. Freire has been active in the areas of banking, corporate
finance and corporate law, and is a member of the Board of Directors of the
BOLSA DE VALORES DE SAO PAULO (Sao Paulo Stock Exchange). Mr. Freire holds a law
degree from the Universidade de Sao Paulo and a master of laws degree in
Comparative Law from New York University Law School.
JORGE FERNANDO KOURY LOPES has been a member of the Board of Directors since
November 1995. Mr. Lopes holds a law degree from the Faculdade de Direito
Sorocaba and a master of laws degree in Corporate Jurisprudence from New York
University.
OSWALDO LEITE DE MORAES FILHO has been a member of the Board of Directors
since November 1995. Mr. Moraes holds a law degree from the Universidade de Sao
Paulo and a master of laws degree in Corporate Jurisprudence from New York
University. Mr. Moraes is a member of the Instituto Brasileiro de Direitos
Tributarios (Brazilian Tax Law Institute).
ANGELO SILVIO ROSSI has been a member of the Committee of Officers since
July 1994. Mr. Rossi has been associated with Abril since 1968, and holds a
graduate degree in Economics from the Fundacao Getulio Vargas, as well as an
undergraduate degree in Economics from Universidade MacKenzie.
STEPHEN VACCARO has been a member of the Advisory Board since April 1996.
Mr. Vaccaro has been a Managing Director of The Chase Manhattan Bank since
February 1990 and is currently responsible for the bank's Media and
Telecommunications business in Latin America. Mr. Vaccaro has been employed by
The Chase Manhattan Bank in various positions since 1977. He is a graduate of
Cornell University with a B.A. in Economics.
MARC NATHANSON has been a member of the Advisory Board since September 1995.
Mr. Nathanson is the Chairman and Chief Executive Officer of Falcon
International and Falcon Holding Group, L.P., one of the largest cable TV
operators in the United States. Mr. Nathanson is a 27 year veteran of the cable
TV industry and a Director and member of the Executive Committee of the National
Cable Television Association. He was appointed by President Clinton and
confirmed by the U.S. Senate for a three year term as a member of the
International Broadcasting Board of Governors of the United States Information
Agency. He holds an M.A. from the University of California and a B.A. from the
University of Denver. Mr. Nathanson is the uncle of Sergio Vladimirschi Junior.
TULLY M. FRIEDMAN has been a member of the Advisory Board since September
1995. Mr. Friedman is a General Partner of Hellman & Friedman. He is currently a
member of the board of directors of: Falcon International Communications LLC,
APL Limited, Levi Strauss & Co., Mattel, Inc., McKesson Corporation and
MobileMedia Corporation. Mr. Friedman is a member of the Executive Committee and
a Trustee
106
of the American Enterprise Institute, and a Director of the Stanford Management
Company. Mr. Friedman holds a J.D. from Harvard Law School and a B.A. from
Stanford University.
RAYMOND E. JOSLIN has been a member of the Advisory Board since April 1996.
Mr. Joslin is group head of Hearst Entertainment & Syndication and is a vice
president and member of the board of directors of The Hearst Corporation. Mr.
Joslin has 30 years of experience in the cable communications industry, and
holds executive positions at The A&E Television Networks, The History Channel,
Lifetime Television and ESPN. Mr. Joslin attended the Carnegie Institute of
Technology and Harvard Business School, and holds a B.A. in Economics from
Trinity College.
HERBERT A. GRANATH has been a member of the Advisory Board since April 1996.
Mr. Granath was recently promoted to Chairman, Disney/ABC International
Television; before that he was President of ABC Cable and International
Broadcast Group. Mr. Granath is also the Chairman of the Board of ESPN and A&E
Television Networks. From 1982 to 1993, Mr. Granath served as President of
Capital Cities/ABC Video Enterprises. Mr. Granath holds a B.S. degree from
Fordham University's College of Arts and Sciences. He later did graduate work in
communication arts.
CLAUDIO CESAR D`EMILIO has been a member of the Committee of Officers since
July 1992. Mr. D`Emilio has been associated with Abril since 1975, and currently
holds the position of Finance Officer of Abril. Mr. D`Emilio holds undergraduate
degrees in Corporate Management and Accounting and a master's degree in Finance
from the Universidade de Sao Paulo.
RAUL ROSENTHAL has been President and Chief Executive Officer of TVA since
May 1997, responsible for all business units. From September 1996 to May 1997,
he served with the Abril Group as Vice-President responsible for Strategic
Planning, Corporate Development and five business units. From 1986 to 1996, Dr.
Rosenthal served as president of American Express' Operations in several Latin
American countries, including Brazil, Argentina and Uruguay. Dr. Rosenthal is
Assistant Professor of Macroeconomics, Financial Simulations and Decision
Analysis at the Universidade de Sao Paulo. He holds a degree in Production
Engineering, as well as a Master's degree in Operations Research from the
Universidade Federal do Rio de Janeiro, and a Ph.D in Production Engineering
from the University of Birmingham-England.
DOUGLAS DURAN has been the Chief Financial Officer of the Company since
April 1992. Mr. Duran has 25 years of experience in corporate finance, and has
held positions at Abril such as Manager of Financial Operations and Corporate
Treasury Officer. Mr. Duran holds a degree in Business Administration from
Amador Aguiar College and has completed several extension courses in Finance at
the Universidade de Sao Paulo.
VIRGILIO JOSE CARREIRA AMARAL has been the Engineering Officer of the
Company since February 1995. Mr. Amaral has extensive experience in the field of
broadcasting technology, including 18 years developing and installing television
transmission systems for TV Globo. Mr. Amaral holds a degree in Electronic
Engineering from the Universidade de Sao Paulo.
ALEXANDRE ANNEMBERG has been the TVA/Network Officer since Februry 1997. He
has also held executive positions at Olivetti do Brasil, Sharp do Brail and NET
Sao Paulo. Mr. Annenberg holds a degree in Electronic Engineering from Instituto
Technologico da Acronautica (ITA) and a degree in Business Administration from
Fundacao Getulio Vargas.
LUIZ GLEISER has been the TVA Programming Officer since June 1997. He has
held positions with the major Brazilian television networks, such as Manchete,
Globo, and Bandeirantes. He holds a degree in Journalism and Communications from
Universidade Federal do Rio de Janiro.
JOSE CARLOS ROMEIRO ALVES has been the Management Information System Officer
since July 1997. He has 23 years of experience in business and information
project development,, working for banks and
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consulting firms. Mr. Alves holds an M.B.A. degree from the Universidade de Sao
Paulo and a degree in Production Engineering from Mackenzie University.
ROSELI PARELLA has been the Human Resources Officer of the Company since
February 1997. Ms. Parrella has been associated with Abril since 1991 and has 16
years of experience in the human resources area, having held management
positions at several multinational companies. Ms. Parrella holds an
undergraduate degree in Psychology from the Pontificia Universidade Catolica de
Sao Paulo and has also studied at the Stanford Business School.
LEILA ABRAHAM LORIA has been the Galaxy Brasil Officer since July 1997. She
has earned broad experience working for department stores such as Mesbla and Wal
Mart, in their commercial, marketing and purchasing areas. Ms. Loria holds an
MBA degree from Universidade Federal do Rio de Janeiro and a degree in Business
Administration from Fundacao Getulio Vargas.
LEONARDO PETRELLI NETO has been the Curitiba Officer of the Company since
March 1992. Mr. Petrelli has extensive experience in the telecommunication
industry, and is currently a shareholder and officer of TVA Sul and SSC--Sistema
Sul de Comunicacao, a radio and television holding company. Mr. Petrelli holds
degrees in Telecommunications from Grossmont College in San Diego, California
and Cinema from the University of Sound and Arts in Hollywood, California.
LUIZ EDUARDO B. P. ROCHA has been the Rio de Janeiro Officer of the Company
since March 1996. Mr. Rocha has held several high-level positions, such as
Superintendent of Purchasing, at two of the largest department store chains in
Brazil: Lojas Americanas S.A. and Mesbla Lojas de Departamento, with which he
was associated for 11 years. Mr. Rocha holds an undergraduate degree in Civil
Engineering from the Universidade Federal do Rio de Janeiro and a masters degree
in Finance and Marketing from COPPEAD.
WALTER BARBOSA DE SOUSA JR, has been the Digisat Officer since July 1997. He
has 16 years of experience in banking, consulting and industry. In 1994, he was
assigned General Manager of the Sporting Wheels Div., Positrade Corp. (Mangels
Group). He holds a degree in Business Administration from Fundacao Getulio
Vargas.
COMPENSATION FOR DIRECTORS, OFFICERS AND EXECUTIVE OFFICERS
For the year ended December 31, 1996 the aggregate compensation, including
bonuses, of all Directors, Officers and Executive Officers of the Company was
$2,015,780. Members of the Board of Directors, the Advisory Board and the
Committee of Officers do not receive a salary from the Company.
For the year ended December 31, 1996, the aggregate amount set aside by the
Company to provide pension, retirement or similar benefits to Directors,
Officers and Executive Officers was approximately $60,000.
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PRINCIPAL SHAREHOLDERS
Tevecap has one class of capital stock, common shares, authorized and
outstanding. As of December 31, 1996, 196,712,855 common shares were outstanding
representing authorized social capital of R$366,000,715. The following table
sets forth as of September 30, 1996, information regarding the beneficial
ownership of Tevecap's common shares:
NUMBER OF COMMON
SHAREHOLDER SHARES OWNED PERCENTAGE
- --------------------------------------------------------------------------------- ------------------ -----------
Abril S.A........................................................................ 111,075,318 56.47%
Falcon International Communications (Bermuda) L.P.(a)............................ 27,930,827 14.20
Hearst/ABC Video Services II(b).................................................. 34,714,031 17.65
Cable Participacoes Ltda.(b)..................................................... 4,628,536 2.35
Chase Manhattan International Finance Ltd.(c).................................... 18,364,122 9.33
All directors and executive officers as a group.................................. 21 --(d)
- ------------------------
(a) A subsidiary of Falcon International Communications L.L.C.
(b) Each of Hearst and ABC indirectly holds a 50.0% equity interest in each of
Hearst/ABC Video Services II and Cable Participacoes Ltda.
(c) 11,496,329 and 6,867,793 of the shares beneficially owned by Chase Manhattan
International Finance Ltd. ("CMIF") are held of record by two wholly-owned
subsidiaries of CMIF (the "Chase Parties"). In December 1995, CMIF sold a
portion of the shares beneficially owned by it to Hearst and ABC.
(d) Less than 1.0%.
The relations among the Company's equity holders are governed by a
Stockholders Agreement (the "Stockholders Agreement"), dated December 6, 1995,
among Tevecap, Robert Civita, Abril, the Chase Parties, Falcon International and
HABC II and CPL (together with HABC II, "Hearst/ABC Parties" and together with
Robert Civita, Abril, the Chase Parties and Falcon International, the
"Stockholders"). The following describes certain terms of the Stockholders
Agreement, as amended.
TRANSFER OF SHARES. Any Stockholder desiring to transfer shares of capital
stock to any third party, including another Stockholder, must first offer such
shares to Tevecap and all of the other Stockholders. Tevecap has the right to
determine first whether to purchase such shares; if Tevecap elects not to
exercise its right to purchase the shares, the other Stockholders may elect to
purchase such shares. If Tevecap or the other Stockholders decide to purchase
the offered shares, all of such shares must be purchased. If neither Tevecap nor
the other Stockholders offer to purchase all of the offered shares, the
Stockholder desiring to sell such shares may sell the shares to any person,
provided that (i) all of the shares are sold simultaneously within six months
after the decision by Tevecap and the Stockholders not to purchase the shares,
(ii) Tevecap has not determined that the person making such purchase is a
stockholder of undesirable character, lacks necessary financial capacity or
competes with the Company, and (iii) the price for sale to such third party is
at least 90.0% of the price offered to the Company and the other Stockholders.
The provisions regarding transfers of shares do not apply to transfers to
certain affiliates of the Stockholders. In addition, the Stockholders have
preference over all other persons or entities to subscribe for new issuances of
capital stock by the Company in proportion to their existing ownership of
capital stock.
EVENT PUT OPTIONS. Upon the occurrence of certain defined "triggering
events" each of the Stockholders, other than Abril, may demand that Tevecap buy
all or a portion of the shares of capital stock of Tevecap held by such
Stockholder, unless the shares of capital stock held by such Stockholder are
publicly registered, listed or traded (collectively referred to as an "Event
Put"). The triggering events are: (i) the amount of capital stock held by such
Stockholder exceeds the amount allowed under any legal restriction to which such
Stockholder may be subject ("Regulatory Put"); (ii) a breach without cure within
a designated period by Robert Civita, Abril, any of the respective affiliates of
Robert Civita or Abril or
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Tevecap of any representation, warranty, covenant or duty made or owed pursuant
to the Stockholders Agreement, the Stock Purchase Agreement, dated August 25,
1995, among Robert Civita, Abril, the Chase Parties, and certain other parties,
or the Stock Purchase Agreement, dated December 6, 1995, among Tevecap, Robert
Civita, Abril, HABC Parties, the Chase Parties, Falcon International and certain
other parties; (iii) a breach without cure within a designated period by Abril
of the Abril Credit Facility; (iv) Robert Civita ceases to directly or
indirectly hold without the approval of the Stockholders 31.258% of the capital
stock and voting capital stock of Tevecap or he ceases to control the voting
capital stock held by his affiliates representing 50% or more of the voting
capital stock of Tevecap; (v) the Service Agreement, dated July 22, 1994, as
amended, among Tevecap, Televisao Show Time Ltda. ("TV Show Time"), TVA Brasil
Radioenlaces Ltda. ("TVA Brasil") and Abril, each of which holds certain
licenses covering certain operations of TVA, ceases to be valid or effective or
TV Show Time, TVA Brasil or Abril is liquidated or dissolved or files
voluntarily, or has filed against it involuntarily, any petition in bankruptcy
or (vi) another Stockholder exercises an Event Put, other than a Regulatory Put.
The price to be paid in connection with an Event Put is set at fair market value
determined by appraisal or by a multiple of Tevecap's most recent quarterly
earnings. The Indenture, however, contains restrictions on the ability of
Tevecap to purchase shares of its capital stock. See "Description of
Notes--Certain Covenants--Limitation on Restricted Payments." Accordingly, the
parties to the Stockholders Agreement have agreed to amend the Stockholders
Agreement prior to the Offering to provide that if the terms of the Indenture
prohibit the Company from purchasing shares that are subject to an Event Put
("Event Put Shares"), in whole or in part, the Company shall not be obligated to
purchase such shares to the extent it is so restricted. However, in such event,
the Company shall, subject to the terms of the Indenture, have the obligation to
issue shares of preferred stock of the Company ("Special Preferred Shares")
should the Tevecap Stockholder elect to convert Event Put Shares to Special
Preferred Shares. The holders of Special Preferred Shares will be entitled to
dividends required by law and a cumulative dividend equal to LIBOR plus a 4.0%
margin, provided that if the terms of the Indenture prohibit the payment of
dividends on the Special Preferred Shares, the Company shall not be obligated to
make such dividend payments to the extent so restricted. However, under the
terms of the Special Preferred Shares such unpaid dividends shall cumulate and
will be paid in full when permissible under the Indenture or when the Indenture
no longer restricts the payment of such dividends. After the payment of all
dividends on the Special Preferred Shares, the Company must use any remaining
profit or reserve to purchase the largest number of Event Put Shares and Special
Preferred Shares, provided that, if the terms of the Indenture prohibit the
purchase of such shares, the Company shall not be obligated to make such
purchases until permitted by the terms of the Indenture.
TIME PUT OPTIONS. In addition, pursuant to the Stockholders Agreement,
Falcon International may demand that Tevecap buy all or any portion of the
shares of capital stock of Tevecap held by Falcon International if such shares
are not publicly registered, listed or traded by September 22, 2002 (the "Falcon
Time Put"). The price to be paid in connection with the Falcon Time Put is fair
market value determined in the same manner as an Event Put. If Tevecap
determines that the terms of the Indenture prohibit it from purchasing such
shares, Tevecap may, subject to the terms of the Indenture, delay the payment of
such purchase price with three annual payments ("Put Annual Payments") or issue
promissory notes denominated in US dollars for the amount of such price ("Put
Promissory Notes"). The Put Promissory Notes would mature three years after
issuance with interest payments due quarterly in arrears. The interest rate on
the Put Promissory Notes would be equal to the rate applicable to US Treasury
obligations of similar maturity plus a margin to be negotiated, with the parties
taking into account the risks associated with the type of obligor, Tevecap's
creditworthiness and investments in Brazil. Under the provisions of the
Stockholders Agreement, as amended, while the Put Promissory Notes are
outstanding, Tevecap may not pay any dividends or make distributions with
respect to its capital stock, including the Special Preferred Shares, should
they exist. To the extent dividends, distributions or payments under the Put
Promissory Notes may be made under the Indenture, payments must be made first to
satisfy the obligations under the outstanding Put Promissory Notes. If the terms
of the Indenture prohibit the Company from making the
110
Put Annual Payments, the Company shall not be required to make such payment, but
shall be required to deliver Put Promissory Notes in the principal amount of the
affected Put Annual Payments. If the terms of Indenture prohibit the Company
from making an interest payment required under any Put Promissory Note, the
Company shall not be required to make such payment at such time, provided that
any accrued and unpaid interest shall accumulate and interest on such unpaid
amount shall compound quarterly and the Company shall make payments of interest
as soon as such payment is no longer restricted under the Indenture. Pursuant to
the terms of the proposed amendment to the Stockholders Agreement, payment of
the principal and interest on the Put Promissory Notes would be subordinated to
the prior payment in full of the Notes. See "Description of Notes--Certain
Covenants--Limitation on Restricted Payments" and "--Limitation on
Indebtedness."
REGISTRATION RIGHTS. At any time after December 6, 1997, the Chase Parties,
considered together, the Hearst/ABC Parties or Falcon International may request
that the Company effect the registration of any or all of the capital stock held
by such Stockholder. However, the Company is not obligated to effect more than
one registration requested by a Stockholder in any 12 month period or more than
three registrations requested by a Stockholder in total. Also, the capital stock
that is the subject of the registration demand must be of a certain minimum
amount. In addition, Tevecap must offer each Stockholder other than Abril the
opportunity to register capital stock held by such Stockholder, subject to
standard reductions in amount such Stockholder may register as recommended by
the managing underwriter. Tevecap is obligated to pay all registration expenses
other than underwriting discounts and commissions or transfer taxes, and Tevecap
is only obligated to pay for the fees and expenses of Tevecap's counsel and
accountants.
BOARD OF DIRECTORS AND ADVISORY BOARD. Tevecap is governed by a board of
directors with 11 members. Under the Stockholders Agreement, Abril designates
six members, Falcon International designates two members, the Chase Parties
together designate one member, and Hearst/ABC Parties designates 2 members. The
affirmative vote of members of the board representing the Chase Parties, Falcon
International and Hearst/ABC Parties is required for: acquisition of ownership
interests in other companies; acquisition or liens on equity in other companies
or liens on assets other than in ordinary course and in aggregate less than
$500,000; incurrence of indebtedness of less than one year maturity and in an
amount greater than $1,000,000; incurrence of indebtedness of greater than one
year maturity except trade debt and in an aggregate amount of less than
$500,000; loans on advance payments; non-financial guarantees in aggregate
totalling more than $100,000; transactions with affiliates; and modifications to
Service Agreement. Tevecap must get the approval of Hearst/ABC Parties before
entering into contracts in excess of $1,000,000 in value and making any material
programming decisions. Tevecap must get the approval of Falcon International
before entering into contracts in excess of $1,000,000. Tevecap must get the
approval of each of Hearst/ABC Parties, the Chase Parties and Falcon
International before any corporate restructuring or any public offering of
securities of Tevecap.
REQUIRED DIVIDEND. Tevecap is required by the terms of the Stockholders
Agreement to pay annual dividends equal to the net cash flow of Tevecap or 25.0%
of the net consolidated profit (as defined by Brazilian law) of Tevecap.
However, Tevecap may delay the payment of such dividends to the extent the
payment of such dividends is prohibited by the Indenture, and such dividends
will accumulate and be payable to the extent allowed under the Indenture. See
"Risk Factors--Risks Relating to the Company-- Dividends to Shareholders."
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CERTAIN TRANSACTIONS WITH RELATED PARTIES
OVERVIEW
Tevecap has engaged in a significant number and variety of related party
transactions, including, without limitation, the transactions described below.
Tevecap has not performed any studies or analyses to determine whether the terms
of past transactions with related parties have been equivalent to arm's-length
transactions and cannot state with any certainty the extent to which such
transactions are comparable to those which might have been obtained from a
non-affiliated third party.
TRANSACTIONS AMONG SHAREHOLDERS
On December 6, 1995, Tevecap's shareholders executed a Stock Purchase
Agreement and a Stockholders Agreement relating to the investment of ABC and
Hearst in the Company through Hearst/ABC Parties. See "Principal Shareholders."
On that date, the Tevecap shareholders also executed a series of
inter-shareholder agreements relating to, among other things, the provision of
services and programming among the shareholders. These agreements supplemented
other existing agreements among Shareholders. The following contracts are the
principal agreements among the Company and the Tevecap shareholders (each of
which, unless specified otherwise, is dated as of December 6, 1995).
GENERAL AND ADVISORY SERVICES
Under an Advisory Services Agreement, each of Hearst, ABC and HABC II has
agreed, upon a request from the Company, to use its reasonable efforts to
arrange for the investors to furnish personnel to provide advisory services to
the Company. To date, the Company and Hearst, ABC and HABC II have not entered
into a supplemental agreement to provide specific personnel or services at a
particular cost.
In addition, on April 1, 1996, Tevecap entered into a separate Advisory
Services Agreement with Falcon International Communications, L.L.C. Pursuant to
this agreement, which has a renewable two-year term, Falcon International
Communications, L.L.C. has agreed to provide a range of advisory services to the
Company, encompassing such areas as accounting, budget and billing procedures,
financial and operation statements, customer, employee and government relations,
the design, purchase and maintenance of equipment and supplies, negotiations
with programmers and other such matters as the Company may reasonably request.
In exchange for such services, the Company has agreed to pay Falcon
International Communications, L.L.C. an annual fee of $200,000, which amount may
be revised on each anniversary of the agreement.
PROGRAMMING
In connection with the investment by Hearst and ABC in Tevecap, Tevecap and
these two parties entered into a Programming Agreement (the "Hearst/ABC
Programming Agreement"). Pursuant to the Hearst/ABC Programming Agreement, each
of Hearst and ABC has agreed to offer first to Tevecap pay programming that
Hearst or ABC (or any subsidiary of which either Hearst or ABC owns at least
80.0% of the outstanding equity interests) intends to license for use in Brazil
in the pay television markets served by TVA. The parties also agreed to consider
future co-production activities which could enhance TVA's business and
competitive position. Tevecap agreed to pay to each of Hearst and ABC such fees
and expenses as are agreed upon at the time such programming or co-production
services are provided. The Hearst/ABC Programming Agreement does not apply to
The Walt Disney Company or its subsidiaries other than ABC and ABC's
subsidiaries. In addition, the Hearst/ABC Programming Agreement does not apply
to the activities of The A&E Television Networks, Lifetime Television and ESPN,
including agreements relating to ESPN Brasil.
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OTHER TRANSACTIONS AMONG SHAREHOLDERS
Each of Tevecap's corporate shareholders has entered into a side letter to
the Stock Purchase Agreement and the Stockholders Agreement pursuant to which
each of Abril, Falcon and the Chase Parties agreed, with certain exceptions, to
exchange all of its respective shares in Tevecap for a corresponding number of
shares of a newly-formed Brazilian corporation. The new corporation would become
an 80.0% shareholder in Tevecap and Hearst/ABC would remain a 20.0% shareholder
in Tevecap, which would be reorganized as a Brazilian limitada. This new
structure would not result in any change in the current beneficial equity
participation of the Stockholders in Tevecap. In addition, the transactions in
establishing the new structure and the new structure itself would have to
conform to the restrictions of the Indenture. As of the date hereof, the timing
of the restructuring is under discussion by the Stockholders.
TRANSACTIONS AMONG RELATED PARTIES
GENERAL AND ADVISORY SERVICES
TVA Sistema and MTV Brasil have entered into various agreements, dated
August 27, 1996, governing reciprocal services between the Company and MTV
Brasil. The services covered by the agreement include billing, subleasing,
equipment use, administrative, financial, accounting, human resources,
engineering, infrastructure and satellite services. TVA Sistema and Abril have
also entered into an agreement, dated January 1995, with Uniser, a division of
Abril, pursuant to which Uniser provides telecommunications, maintenance, human
resources, travel, legal other services in exchange for a monthly payment of
approximately $20,000.
In addition, pursuant to an agreement dated January 10, 1995, Tevecap has
agreed to provide various financial services to Canbras, in return for which
Tevecap receives a monthly payment of approximately $5,000. Tevecap provides
similar financial services to Galaxy Brasil, in return for which the Company
receives a monthly payment of $5,000 pursuant to an agreement dated March 9,
1995. Tevecap also provides to ESPN Brasil Ltda. financial services, for which
it receives a payment of approximately $7,500 per month, and satellite and other
engineering services, for which it receives a payment of approximately $78,000
per month, pursuant to an agreement dated June 26, 1995.
The Company has also entered into an agreement with SMC Marketing Ltda.
("SMC"), dated September 1, 1995, to provide space, equipment and personnel to
SMC, in return for which the Company receives a monthly payment of approximately
US$29,000.
PUBLISHING AND ADVERTISING
The Company publishes a monthly magazine detailing the Company's programming
options in a given month. In connection with this magazine, TVA Sistema has
entered into an agreement with Abril, dated September 1992, pursuant to which
Abril publishes approximately 300,000 copies of the Company's monthly magazine
in return for a monthly payment of approximately $240,000. The monthly magazine
is distributed in accordance with a distribution agreement, dated September
1992, between the Company and Irmaos Reis, pursuant to which the Company pays
Irmaos Reis approximately $60,000 per month.
TVA Sistema and Abril also have a reciprocal advertising agreement in which
the Company publishes advertisements for Abril in the Company's monthly magazine
in exchange for advertisements for the Company (and third parties through the
Company) in the magazines published by Abril.
In addition, the Company has an agreement with SMC, dated September 1, 1995,
pursuant to which the Company assists SMC in selling advertising, in return for
which the Company receives 25.0% of SMC's advertising revenues.
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INSURANCE
TVA currently reimburses TVA Sistema for payments made by TVA Sistema
pursuant to an insurance policy covering the operations of TVA Sistema, TVA
Brasil Abril Video da Amazonia and the former MTV Division of Abril
(collectively, the "Insureds"). TVA Sistema makes such payments pursuant to an
agreement among the Insureds dated September 30, 1996. The annual premiums paid
by TVA Sistema and reimbursed by the Company amount to approximately $84,000.
ABRIL CREDIT FACILITIES
Tevecap has entered, as the borrower, into a revolving credit facility (the
"Abril Credit Facility") with Abril, as the lender. The Abril Credit Facility,
effective December 6, 1995 and valid for a period of 36 months, allows the
Company to draw down amounts not to exceed a maximum aggregate principal amount
of $60,000,000. Since June 1996, Tevecap has from time to time requested, and
Abril has provided, funding in excess of the aggregate maximum principal amount.
The loans provided under the Abril Credit Facility are denominated in reais,
unless the loan is a pass-through loan that Abril has funded in 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 Tevecap under the Abril Credit Facility. As of October
31, 1996, the aggregate principal amount of loans outstanding under the Abril
Credit Facility was approximately $105.8 million, which was fully repaid to
Abril with the proceeds of the offering of the Old Securities. As of July 31,
1997, the Company had not redrawn any amounts under the Abril Credit Facility.
See Note 10 to the Consolidated Financial Statements of the Company.
In addition, Galaxy Brasil has entered, as borrower, into a revolving credit
facility (the Abril-Galaxy Credit Facility) with Abril, as the lender. The
Abril-Galaxy Credit Facility, effective May 12, 1997 and valid until December
30, 1997 allows Galaxy Brasil to draw down amounts not to exceed a maximum
aggregate principal amount of R$60,000,000. As of June 30, 1997, the aggregate
principal amount of loans outstanding under the Abril-Galaxy Credit Facility was
R$23.8 million.
OTHER INTERCOMPANY/SHAREHOLDER LOANS
Tevecap has used the proceeds from the Abril Credit Facility to make capital
contributions to TVA Sistema and Galaxy Brasil, as well as to extend loans to
various interrelated companies. The aggregate outstanding amounts under these
loans as of December 31, 1996 were: $25.6 million to TVA Brasil; $16.4 million
to Galaxy Brasil; $12.3 million to SMC; $8.3 million to TVA Sul; $3.7 million to
Canbras TVA; $188,000 to Comercial Cabo Sao Paulo; and $96,000 to other
affiliates.
Abril has received loans from ESPN Brasil Ltda., which loans, as of December
31, 1996, had an aggregate principal outstanding amount of $1.5 million.
In addition, TVA Sistema has made loans to various interrelated companies.
The aggregate principal outstanding amounts under these loans as of December 31,
1996 were $2.9 million to TVA Sul and $130,000 to TV Show Time. TV Show Time has
loans outstanding to Abril, which loans, as of December 31, 1996, had an
aggregate outstanding amount of approximately $2.7 million.
All other intercompany and shareholder loans outstanding as of December 31,
1996 equaled an aggregate principal amount of approximately $1.6 million.
ADVANCES OF CAPITAL CONTRIBUTIONS
As of December 31, 1996, the Company had made advances of capital
contributions of $254.2 million, $10.6 million and $53,256 to TVA Sistema, TVA
Sul and other affiliates, respectively.
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SERVICE AGREEMENT WITH LICENSEHOLDERS
Pursuant to a Service Agreement, dated July 22, 1994, as amended, TVA Brasil
and TV Show Time (the "Licenseholders") agreed to transfer to TVA all the rights
and benefits associated with their current and future pay-television licenses,
with the exception of licenses operated by companies in which TVA has minority
interests. While the Licenseholders retained the title to such licenses, the
Licenseholders promised to take all steps necessary to transfer the title of
such licenses to Tevecap. Such steps included the appropriate procedures
required by the Ministry of Communications and any other governmental authority
regulating the transfers. The transfer of the title to such licenses is
currently either pending, subject to approval by the Ministry of Communications,
or waiting for the passage of certain statutory or regulatory waiting periods.
AFFILIATE INTERESTS IN THE OFFERING OF THE OLD SECURITIES
The Company used a portion of the net proceeds of the Offering of the Old
Securities to repay amounts outstanding under the Abril Credit Facility. See
"Use of Proceeds" and "Description of Certain Indebtedness."
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The Company has entered into, or will soon enter into, certain arrangements
for the purpose of obtaining financing for its operations, including the
purchase of decoders for use in its DBS operations and for working capital. Set
forth below is a summary of these arrangements.
The Abril Credit Facility allows the Company to borrow up to $60.0 million
on a revolving basis until December 1998. Since June 1996, the Company has from
time to time requested, and Abril has provided, funds in excess of $60.0
million. The loans are generally denominated in reais and bear interest at a
rate equal to 99.5% of the CDI rate, the Brazilian interbank lending rate,
adjusted at the beginning of each month. During June 1996, the applicable
interest rate was 2.013% per month. As of December 31, 1996, after the
application of approximately $105.78 million of the proceeds from the Notes to
reduce the amounts outstanding thereunder, the Company had no amounts
outstanding under the Abril Credit Facility. As of July 31, 1997, the Company
had not redrawn any amounts under the Abril Credit Facility. However, the
Company will be able to re-borrow the full amount of such facility, as required.
On December 9, 1996, Tevecap, as Guarantor, and TVA Sistema, as Borrower,
entered into a credit agreement with The Chase Manhattan Bank to finance the
acquisition of C-Band decoders and other related equipment. The Export-Import
Bank of the United States (the "EximBank") guarantees 85.0% of amounts borrowed
under the credit facility (the "EximBank Facility"). As of June 30, 1997, TVA
Sistema had borrowed $27,878,000 under the EximBank Facility. The credit
facility has been made available to TVA on terms customary for credits to
Brazilian companies that are supported by the EximBank, and bears interest at
LIBOR plus 0.25%. TVA Sistema's obligations under the EximBank Facility will be
unconditionally guaranteed by Tevecap.
In March 1997, Galaxy Brasil entered into a five-year, $49.9 million lease
and sale-leaseback facility (the "Galaxy Brasil Leasing Facility") with
Citibank, N.A. As of June 30, 1997, Galaxy Brasil had $49,287,230 in principal
amount outstanding under the Galaxy Brasil Leasing Facility. Under the Galaxy
Brasil Leasing Facility, Galaxy Brasil obtained financing for the purpose of
acquiring dish antennas, decoder boxes and other equipment for Ku-Band service.
The amount financed under the Galaxy Brasil Leasing Facility bears interest at a
rate of LIBOR plus a specified margin and customary costs. The lease payment
obligation of Galaxy Brasil is secured by a pledge of subscriber revenues,
together with a secured guarantee by the partners of GLA. The terms of the
Galaxy Brasil Leasing Facility (i) prohibit the payment of dividends by Galaxy
Brasil if, after giving effect to such payment, Galaxy Brasil's ratio of debt
(including capital lease obligations and guarantees) to tangible net worth would
be greater than three to one (3:1) and (ii) prohibit the incurrence of debt to
third parties and affiliates if such ratio would be greater than four to one
(4:1) and three to one (3:1), respectively. Citibank N.A. has provided
exceptions to these provisions to allow the guarantee of the Notes by Galaxy
Brasil.
The partners of GLA have severally guaranteed the obligations of Galaxy
Brasil under the Galaxy Brasil Leasing Facility, in each case up to a negotiated
limit. The obligations of Tevecap under the guarantee are limited to
approximately $25.5 million of principal and a proportionate share of interest,
fees, and other amounts. The guarantors, including Tevecap, have entered into a
contribution agreement, pursuant to which each partner agrees to contribute to
payments required to be made by any partner under the guaranty. Under the
contribution agreement, the obligations of Tevecap are limited to $25.5 million
of principal and a proportionate share of interest, fees, and other amounts.
Tevecap's obligations under the contribution agreement are secured by a pledge
of its equity interests in GLA and SurFin, as well as by an agreement to pledge
any future debt or equity interests it may hold relating to CBC.
In connection with the operations of GLA and Galaxy Brasil, TVA and the
other members of GLA have formed SurFin Ltd. ("SurFin"), a corporation organized
under the laws of the Bahamas, to provide financing to local operating companies
for the purchase of equipment provided to subscribers. TVA owns 20.5% of the
capital stock of SurFin. The other (direct and indirect) shareholders of SurFin
Ltd. are
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affiliates of (i) Hughes Electronics, with 39.3% of the capital stock, (ii)
Darlene Investments, with 20.4% of the capital stock, and (iii) Grupo MVS, with
19.8% of the capital stock.
On September 24, 1996, SurFin entered into a syndicated credit agreement
with Citicorp USA, Inc., as administrative agent, which establishes a
three-year, $150.0 million revolving credit facility (the "SurFin Credit
Facility"). Proceeds from the SurFin Credit Facility will be used by SurFin to
provide financing to DIRECTV local operating companies in Latin America, which
are (in most cases) affiliates of GLA and/or one or more of GLA's shareholders,
including Galaxy Brasil. Such local operating companies will use the funds
borrowed from SurFin for the purpose of financing the acquisition of dish
antennas, decoder boxes and other equipment for Ku-Band service. Loans under the
SurFin Credit Facility will bear interest, at SurFin's option, at a rate equal
to LIBOR plus a specified margin, or at a rate equal to Citibank's prime rate.
Loans made by SurFin to such local operating companies will bear interest at
rates to be negotiated.
Each of the partners of GLA (other than TVA) has jointly and severally
guaranteed the full amount of the obligations of SurFin under the SurFin Credit
Facility. TVA has also guaranteed the obligations of SurFin to the syndicate of
lenders, but TVA's obligations under such guaranty are limited to $10.5 million
of principal and a proportionate share of interest, fees, and other amounts. The
guarantors, including TVA, have entered into a contribution agreement, setting
forth their obligations to contribute to each other in connection with their
respective obligations under their respective guarantees. Under the contribution
agreement, the obligations of TVA are limited to $10.5 million of principal and
a proportionate share of interest, fees, and other amounts. TVA's obligations
under the contribution agreement are secured by a pledge of its equity interests
in GLA and SurFin, as well as by an agreement to pledge any future debt or
equity interests it may hold relating to CBC. Management expects the SurFin
Credit Facility to facilitate the expansion of GLA by enabling local operating
companies (including, possibly, Galaxy Brasil) to finance the acquisition of
dish antennae decoder boxes and other equipment, thereby permitting subscribers
to spread the expense of installing such equipment over time.
On April 11, 1997, a new Delaware limited liability company was established,
the principal asset of which is GLA's uplink facility, CBC. The new company is
owned by two subsidiaries of Hughes Electronics. In connection with the
establishment of the new company, TVA Communications and Tevecap have agreed,
pursuant to the Indemnification Agreement, to provide certain indemnities in
favor of GLA, Hughes Communications GLA, the newly-established company and its
shareholders. To secure its obligations under the Indemnification Agreement,
Tevecap has agreed to pledge its equity interest in GLA, as well as any future
notes or interests it may hold relating to CBC.
In May, 1997, Galaxy Brasil, as borrower, entered into the Abril-Galaxy
Credit Facility with Abril, as the lender. The Abril-Galaxy Credit Facility,
effective May 12, 1997 and valid until December 30, 1997, allows Galaxy Brasil
to draw down amounts not to exceed a maximum aggregate principal amount of
R$60,000,000. As of June 30, 1997, the aggregate principal amount of loans
outstanding under the Abril-Galaxy Credit Facility was R$23.8 million. The
applicable interest rate as of such date was 2.66% per month.
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DESCRIPTION OF NOTES
GENERAL
The Old Notes were issued and the Exchange Notes are to be issued under an
Indenture, to be dated as of November 26, 1996 and amended as of March 19, 1997
and supplemented as of April 10, 1997 (the "Indenture"), between the Company,
the Guarantors, The Chase Manhattan Bank, as Trustee (the "Trustee") and Chase
Trust Bank, as Paying Agent, a copy of which is available upon request to the
Company. The terms of the Exchange Notes are identical in all material respects
to the terms of the Old Notes, except for certain transfer restrictions and
registration rights relating to the Old Notes. The Exchange Notes and the Old
Notes are deemed the same class of notes under the Indenture and are entitled to
the benefit thereof. Unless specifically stated otherwise, this description
applies to both the Exchange Notes and the Old Notes. The statements under this
caption relating to the 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 Notes is set forth under "Certain Definitions." The Indenture was amended
by Amendment No. 1 to Indenture, dated as of March 19, 1997, to clarify language
in the definition of Permitted Liens and was supplemented by Supplement to
Indenture, dated as of April 10, 1997, to provide for TVA Sul Santa Catarina
Ltd. to be a Guarantor.
Principal of, premium, if any, and interest on, the Notes will be payable,
and the 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 Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
The Notes have been designated for trading in the PORTAL market.
TERMS OF THE NOTES
The Notes will be unsecured, senior obligations of the Company, limited to
$15,368,000 million aggregate principal amount, and will mature on November 26,
2004. Each Note will bear interest at the rate per annum shown on the front
cover of this Prospectus from the date of issuance, or from the most recent date
to which interest has been paid or provided for, payable semiannually in cash on
May 26 and November 26 of each year commencing May 26, 1997 to holders of record
at the close of business on the May 1 or November 1 immediately preceding the
interest payment date.
OPTIONAL REDEMPTION
At any time and from time to time prior to November 26, 2000, if the Company
receives Net Cash Proceeds from one or more (i) Significant Equity Offerings or
(ii) sales of the Company's Capital Stock to a Strategic Investor, the Company
may redeem in the aggregate up to $75.0 million principal amount of Notes, at a
redemption price (expressed as a percentage of principal amount) of 112.625%,
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); PROVIDED, HOWEVER, that at least $175.0
million aggregate principal amount of the Notes must remain outstanding after
each such redemption.
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ADDITIONAL AMOUNTS
All payments made by the Company or any Guarantor under or with respect to
the Notes or any Guarantee will be made free and clear of and without
withholding or deduction for or on account of any present or future taxes,
duties, assessments or governmental charges of whatever nature imposed or levied
by or on behalf of the Federative Republic of Brazil or Japan or any political
subdivision or taxing authority thereof or therein ("Taxes"), unless the Company
or such Guarantor, as the case may be, is required to withhold or deduct any
amount for or on account of Taxes by law or by the interpretation or
administration thereof. If the Company or any Guarantor is so required to
withhold or deduct any amount for or on account of Taxes from any payment made
under or with respect to the Notes or the Subsidiary Guarantee of such
Guarantor, the Company or such Guarantor, as the case may be, will pay such
additional amounts ("Additional Amounts") as may be necessary so that the net
amount received by each holder of Notes (including Additional Amounts) after
such withholding or deduction will not be less than the amount the holder would
have received if such Taxes had not been withheld or deducted. Provided,
however, that no such Additional Amounts will be payable with respect to a
payment made to a holder of Notes with respect to any Tax which would not have
been imposed, payable or due (i) but for the fact that the holder or a
beneficial owner of a Note is or was a domiciliary, national or resident of, or
engages or engaged in business, maintains or maintained a permanent
establishment or is or was physically present in Brazil or Japan, or otherwise
has some present or former connection with Brazil or Japan other than the mere
holding of such Notes or the receipt of principal or interest in respect
thereof; (ii) but for the failure of the holder or beneficial owner of Notes to
comply with a request by the Company or any Guarantor to satisfy any
certification, identification or other reporting requirements which the holder
or such beneficial owner is legally entitled to satisfy, whether imposed by
statute, treaty, regulation or administrative practices, concerning the
nationality, residence or connection with Brazil or Japan of such holder or
beneficial owner; or (iii) if, where presentation is required, the presentation
for payment had occurred within 30 days after the date such payment was due and
payable or was provided for, whichever is later. Notwithstanding the preceding
sentence, the limitations on the Company's obligation to pay Additional Amounts
set forth in clause (ii) of the preceding sentence shall not apply if a
certification, identification, or other reporting requirement described in
clause (ii) would be materially more onerous, in form, in procedure or in the
substance of information disclosed, to such Holders or beneficial owners (taking
into account any relevant differences between U.S. and Brazilian law, regulation
or administrative practice) than comparable information or other reporting
requirements imposed under U.S. tax law, regulation (including proposed
regulations) and administrative practice or other reporting requirements imposed
as of the date of this Prospectus under U.S. tax law, regulation (including
proposed regulations) and administrative practice (such as IRS Forms 1001, W-8
and W-9). The obligation of the Company or any Guarantor to pay Additional
Amounts in respect of Taxes shall not apply with respect to (x) any estate,
inheritance, gift, sales, transfer, personal property or any similar Tax or (y)
any Tax which is payable otherwise than by deduction or withholding from
payments made under or with respect to the Notes. The Company and the Guarantor,
as applicable, will (i) make any required withholding or deduction, (ii) remit
the full amount deducted or withheld to the relevant authority (the "Taxing
Authority") in accordance with applicable law, (iii) use their best efforts to
obtain certified copies of tax receipts evidencing the payment of any Taxes so
deducted or withheld from each Taxing Authority imposing such Taxes and (iv) in
the event that such certified copies of tax receipts are obtained, promptly send
such certified copies of tax receipts to the Principal Paying Agent for prompt
forwarding to any holder that has made a written demand therefor of the
Principal Paying Agent. The Company or the Guarantor will attach to each
certified copy a certificate stating (x) that the amount of withholding tax
evidenced by the certified copy was paid in connection with payments in respect
of the principal amount of Notes then outstanding and (y) the amount of such
withholding tax paid per US$1,000 of principal amount of the Notes. See "Income
Tax Considerations--United States--Effect of Brazilian Withholding Taxes." If,
notwithstanding the Company's or such Guarantor's efforts to obtain such
receipts, the same are not obtainable, the Company or such Guarantor
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will provide to the Principal Paying Agent such other evidence of such payments
as the Company or such Guarantor may reasonably obtain.
At least 30 days prior to each date on which any payment under or with
respect to the Notes is due and payable (unless such obligation to pay
Additional Amounts arises after the 30th day prior to such date, in which case
it shall be promptly thereafter), if the Company or any Guarantor will be
obligated to pay Additional Amounts with respect to such payment, the Company or
such Guarantor will deliver to the Trustee and each Paying Agent an Officers'
Certificate stating the fact that such Additional Amount will be payable and the
amounts so payable and will set forth such other information necessary to enable
the Trustee and each Paying Agent to pay such Additional Amounts to holders of
Notes on the payment date. Each Officers' Certificate shall be relied upon until
receipt of a further Officers' Certificate addressing such matters.
Whenever in the Indenture or in this "Description of 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 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 Notes may be redeemed at the option of the Company, in whole but not in
part, at any time prior to maturity if (i) there is any change in or amendment
to the Treaty to Avoid Double Taxation entered into between Brazil and Japan,
approved by Legislative Decree No. 43 dated November 23, 1967, and enacted in
Brazil by Decree No. 61,899 dated December 14, 1967, as amended by Decree No.
81,194 dated January 9, 1978, which has the effect of increasing the rate of tax
applicable under such treaty to a rate exceeding 15.0% of interest payable; or
(ii) as the result of any change in or amendment to the laws, regulations or
rulings of Brazil or Japan 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 or any Guarantor has or will become
obligated to pay Additional Amounts (excluding interest and penalties) in excess
of the Additional Amounts that the Company or any Guarantor 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 or the Guarantors, as the case may be, taking reasonable
measures available to them, then the Company may, at its option, redeem or cause
the redemption of the Notes, as a whole but not in part, upon not more than 60
nor less than 30 days' notice to the holders of such 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 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 or any Guarantor 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 or any Guarantor would be obligated to pay such
Additional Amounts were a payment in respect of the 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 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 Note of $1,000 in original principal
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amount or less will be redeemed or repurchased in part. If any Note is to be
redeemed or repurchased in part only, the notice of redemption or repurchase
relating to such 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 Note.
RANKING
The Notes will be unsecured, senior obligations of the Company ranking PARI
PASSU 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. The Subsidiary Guarantees
will be unsecured, senior obligations of the Guarantors ranking pari passu in
right of payment with all other existing and future unsecured, senior
Indebtedness of the Guarantors and senior in right of payment to all other
existing and future subordinated Indebtedness of the Guarantors. 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 December 31, 1996,
Tevecap did not have any outstanding senior Indebtedness other than the Notes
(exclusive of unused commitments) and short term debt) and the aggregate
principal amount of outstanding senior Indebtedness of the Guarantors, other
than the Subsidiary Guarantees, was $4.8 million (exclusive of unused
commitments and short term debt) all of which ranks pari passu with the
Subsidiary Guarantees, but none of which was secured Indebtedness. As of June
30, 1997, Tevecap did not have any outstanding senior indebtedness other than
the Notes (exclusive of unused commitments and short term debt), and the
aggregate principal amount of outstanding senior Indebtedness of the Guarantors
was $81.0 million (exclusive of unused commitments and short term debt) all of
which ranks pari passu with the Subsidiary Guarantees, and none of which is
secured. See "Certain Other Indebtedness."
SUBSIDIARY GUARANTEES
Each of the Company's existing and future Restricted Subsidiaries (the
"Guarantors"), as primary obligor and not merely as surety, will jointly and
severally, irrevocably and fully and unconditionally Guarantee, on a senior
basis, the performance and punctual payment when due, whether at Stated
Maturity, by acceleration or otherwise, of all obligations of the Company under
the Indenture and the Notes, whether for principal of or interest on the Notes,
expenses, indemnification or otherwise (all such obligations guaranteed by such
Guarantors being herein called the "Guaranteed Obligations"). Such Guarantors
will agree to pay, in addition to the amount stated above, any and all expenses
(including reasonable counsel fees and expenses) incurred by the Trustee or the
Holders in enforcing any rights under the Subsidiary Guarantees.
Each Subsidiary Guarantee will be limited to an amount not to exceed the
maximum amount that can be Guaranteed, as it relates to such Guarantor, voidable
under applicable law relating to fraudulent conveyance or fraudulent transfer or
similar laws affecting the rights of creditors generally. See "Risk
Factors--Fraudulent Conveyance Considerations."
Each Subsidiary Guarantee is a continuing Guarantee and shall (i) remain in
full force and effect until payment in full of all the Guaranteed Obligations,
(ii) be binding upon such Guarantor and (iii) inure to the benefit of and be
enforceable by the Trustee, the Holders and their successors, transferees and
assigns.
The Indenture provides that, subject to the provisions described in the next
succeeding paragraph, no Guarantor may consolidate or merge with or into
(whether or not such Guarantor is the surviving entity or Person) another
corporation, entity or Person unless (i) the entity or Person formed by or
surviving any such consolidation or merger (if other than such Guarantor)
assumes all the obligations of such Guarantor under the Subsidiary Guarantee and
the Indenture pursuant to a supplemental indenture, in form satisfactory to the
Trustee, (ii) immediately after such transaction, no Default or Event of Default
exists,
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(iii) immediately after such transaction, the Company will have Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of the Company
immediately preceding such transaction and (iv) the Company will, at the time of
such transaction after giving pro forma effect thereto, be permitted to Incur at
least $1.00 of additional Indebtedness pursuant to paragraph (a) under "Certain
Covenants-- Limitation on Indebtedness."
Notwithstanding the preceding paragraph, if no Default exists or would exist
under the Indenture, concurrently with any sale or disposition (by merger or
otherwise) of any Guarantor in accordance with the terms of the Indenture
(including the covenant described under "Certain Covenants--Limitation on Sales
of Assets and Subsidiary Stock") (other than a transaction subject to the
provisions described under "Merger and Consolidation") by the Company or a
Restricted Subsidiary to any Person that is not an Affiliate of the Company or
any of the Restricted Subsidiaries, such Guarantor will automatically and
unconditionally be released from all obligations under its Subsidiary Guarantee;
PROVIDED, HOWEVER, that any such release shall occur only to the extent that all
obligations of such Guarantor under, and all of its guarantees of, and all of
its pledges of assets or other security interests which secure, any other
Indebtedness of the Company shall also terminate upon such release, sale or
transfer.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each holder will have the right to require the Company to repurchase
all or any part of such holder's Notes at a purchase price in cash equal to 101%
of the principal amount thereof plus accrued and unpaid interest, if any, to the
date of purchase (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date):
(i) an event or series of events by which any "person" or "group" (as
such terms are used in Sections 13(d) and 14(d) of the Exchange Act), other
than one or more Permitted Holders, is or becomes after the date of issuance
of the Notes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5
under the Exchange Act as in effect on the date of the Indenture), of more
than 35.0% of the total voting power of all Voting Stock of the Company
outstanding;
(ii) (A) another corporation merges into the Company or the Company
consolidates with or merges into any other corporation or (B) the Company
conveys, transfers or leases all or substantially all its assets to any
person or group (other than any conveyance, transfer or lease between the
Company and a Wholly-Owned Subsidiary of the Company), in each case, in one
transaction or a series of related transactions with the effect that a
person or group other than one or more Permitted Holders becomes the
"beneficial owner" of more than 35.0% of all Voting Stock of the Company
then outstanding;
(iii) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors (or equivalent
governing body) of the Company (together with any new Directors (or
equivalent persons) whose election by the Company's Board of Directors (or
equivalent governing body), or whose nomination for election by such
entity's shareholders, was approved by a vote of a majority of the Directors
(or equivalent persons) then still in office who were either Directors (or
equivalent persons) at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Directors (or equivalent persons) then in
office; or
(iv) the Permitted Holders collectively shall fail to beneficially own
at least 35.0% of all Voting Stock of the Company then outstanding.
The Company's other senior Indebtedness may contain prohibitions of certain
events that would constitute a Change of Control. In addition, the exercise by
the Holders of Notes of their right to require the Company to repurchase the
Notes could cause a default under such other senior Indebtedness, even if
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the Change of Control itself does not, due to the financial effect of such
repurchases on the Company. Finally, the Company's ability to pay cash to the
Holders of Notes upon a repurchase may be limited by the Company's then existing
financial resources. The consent of the Brazilian Central Bank will be required
prior to the funding of the repurchase of the Notes.
Within 30 days following any Change of Control, unless the Company has
mailed a redemption notice with respect to all the outstanding Notes after such
Change of Control, the Company shall mail a notice to each holder with a copy to
the Trustee stating: (i) that a Change of Control has occurred and that such
holder has the right to require the Company to purchase such holder's Notes at a
purchase price in cash equal to 101% of the principal amount thereof plus
accrued and unpaid interest, if any, to the date of purchase (subject to the
right of Holders of record on a record date to receive interest on the relevant
interest payment date); (ii) the circumstances and relevant facts and financial
information concerning such Change of Control; (iii) the repurchase date (which
shall be no earlier than 30 days nor later than 60 days from the date such
notice is mailed); and (iv) the procedures determined by the Company, consistent
with the Indenture, that a Holder must follow in order to have its Notes
purchased.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of the Indenture, the Company will comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations described in the Indenture by virtue thereof.
The definition of "Change of Control" includes a disposition of all or
substantially all of the property and assets of the Company and its
Subsidiaries. With respect to the disposition of property or assets, the phrase
"all or substantially all" as used in the Indenture varies according to the
facts and circumstances of the subject transaction, has no clearly established
meaning under New York law (which is the choice of law under the Indenture) and
is subject to judicial interpretation. Accordingly, in certain circumstances
there may be a degree of uncertainty in ascertaining whether a particular
transaction would involve a disposition of "all or substantially all" of the
property or assets of a Person, and therefore it may be unclear as to whether a
Change of Control has occurred and whether the Company is required to make an
offer to repurchase the Notes as described above.
CERTAIN COVENANTS
The Indenture contains certain covenants including, among others, the
following:
LIMITATION ON INDEBTEDNESS. (a) The Company shall not, and shall not permit
any of its Restricted Subsidiaries to, directly or indirectly, Incur any
Indebtedness, and the Company shall not issue any Disqualified Stock; PROVIDED,
HOWEVER, that the Company and any Restricted Subsidiary may Incur Indebtedness,
and the Company may issue shares of Disqualified Stock, if on the date thereof
the Indebtedness to Annualized Operating Cash Flow Ratio of the Company would
have been less than or equal to (i) 6.5 to 1.0 in the case of Indebtedness
Incurred prior to November 26, 1999 and (ii) 6.0 to 1.0 in the case of
Indebtedness Incurred on and after November 26, 1999, in each case determined on
a pro forma basis.
(b) The foregoing limitation shall not apply to the Incurrence of: (i)
Indebtedness of the Company or any Restricted Subsidiary under any Senior Credit
Facility or the Abril Credit Facility in an aggregate principal amount at any
one time outstanding not to exceed $50.0 million; (ii) Indebtedness of the
Company to any Restricted Subsidiary and Indebtedness of a Restricted Subsidiary
to the Company or another Restricted Subsidiary; PROVIDED, HOWEVER, that any
subsequent issuance or transfer of any Capital Stock which results in any such
Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent
transfer of such Indebtedness (other than to another Restricted Subsidiary) will
be deemed, in each case, to constitute the Incurrence of such Indebtedness by
the issuer thereof; (iii) Indebtedness
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represented by the Notes (including the Subsidiary Guarantees); (iv)
Indebtedness outstanding on the Issue Date (other than Indebtedness described in
clause (i), (ii) or (iii) of this paragraph); (v) Refinancing Indebtedness in
respect of Indebtedness of the Company or any Restricted Subsidiary Incurred
pursuant to clauses (i) through (iv) above, this clause (v), or clause (xiv)
below in a principal amount (or, for original issue discount Indebtedness, the
accredited principal thereof) so refinanced; (vi) Hedging Obligations consisting
of Interest Rate Agreements and Currency Agreements related to Indebtedness
otherwise permitted to be Incurred pursuant to the Indenture or otherwise
entered into in the ordinary course of business, PROVIDED that in each case the
notional amount shall not exceed the underlying obligations or assets; (vii)
Guarantees by the Company of Indebtedness or other obligations of any of its
Restricted Subsidiaries so long as the Incurrence of such Indebtedness or
obligations by such Restricted Subsidiary is permitted under the terms of the
Indenture; (viii) Indebtedness of Galaxy Brasil in an aggregate principal amount
at any one time outstanding not to exceed the lesser of (A) an amount equal to
the sum of (I) the product of (1) $480.0 multiplied by (2) the number of Galaxy
Brasil Subscribers at the date of Incurrence plus (II) $20 million and (B)
$130.0 million; (ix) Indebtedness of any Special Restricted Subsidiary if, after
giving effect to such Incurrence, the ratio of (A) the aggregate principal
amount of all Indebtedness of such Special Restricted Subsidiary outstanding as
of the date of determination to (B) the total shareholders' equity (excluding
any retained earnings or accumulated deficit) of such Special Restricted
Subsidiary as of the date of determination is less than or equal to 2:1; (x)
Indebtedness of the Company represented by Subordinated Shareholder Loans in an
aggregate principal amount at any one time outstanding not to exceed $100.0
million; (xi) Indebtedness consisting of performance and other similar bonds and
reimbursement obligations Incurred in the ordinary course of business securing
the performance of contractual, franchise or license obligations of the Company
or a Restricted Subsidiary, or in respect of a letter of credit obtained to
secure such performance; (xii) Indebtedness arising from agreements providing
for indemnification, adjustment of purchase price or similar obligations, or
from Guarantees or letters of credit, surety bonds or performance bonds securing
any obligations of the Company or any Restricted Subsidiary pursuant to such
agreements, Incurred in connection with any Asset Disposition; (xiii)
Indebtedness of the Company represented by the SurFin Guarantee in an aggregate
principal amount at any one time outstanding not to exceed $25.0 million; (xiv)
Indebtedness of TVA Sistema under the EximBank Credit Agreement in an aggregate
principal amount at any one time outstanding not to exceed $30.0 million; (xv)
Indebtedness of the Company represented by the Put Promissory Notes; (xvi)
Indebtedness of Galaxy Brasil in an aggregate principal amount at any one time
outstanding not to exceed $25.0 million; and (xvii) other Indebtedness in an
aggregate principal amount which, together with all other Indebtedness of the
Company then outstanding (other than Indebtedness permitted by clauses (i)
through (xvi) above or the preceding paragraph) does not exceed $50.0 million.
LIMITATION ON RESTRICTED PAYMENTS. (a) The Company shall not, and shall not
permit any Restricted Subsidiary, directly or indirectly, to (i) declare or pay
any dividend or make any distribution on or in respect of its Capital Stock
(including any payment in connection with any merger or consolidation involving
the Company) except (1) dividends or distributions payable in its Capital Stock
(other than Disqualified Stock) and (2) dividends or distributions payable
solely to the Company or another Restricted Subsidiary (and, if such Restricted
Subsidiary is not a Wholly-Owned Subsidiary, to its other stockholders on a PRO
RATA basis), (ii) purchase, redeem, retire or otherwise acquire for value any
Capital Stock (including options or warrants to acquire such Capital Stock) of
the Company or any Restricted Subsidiary, (iii) purchase, repurchase, redeem,
prepay interest, defease or otherwise acquire or retire for value, prior to
scheduled maturity, scheduled repayment, scheduled interest payment date or
scheduled sinking fund payment, any Subordinated Obligations, or make any cash
interest payment on Subordinated Shareholder Loans or (iv) make any Investment
(other than a Permitted Investment) in any Person (any such dividend,
distribution, purchase, redemption, repurchase, defeasance, other acquisition,
retirement, interest payment or Investment being herein referred to as a
"Restricted Payment"), if at the time the Company or such Restricted Subsidiary
makes such Restricted Payment: (x) after giving effect to such Restricted
Payment, a Default shall have occurred and be continuing (or would result
therefrom); or (y) the Company could not
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incur at least an additional $1.00 of Indebtedness under the covenant described
under "Certain Covenants--Limitation on Indebtedness"; or (z) the aggregate
amount of such Restricted Payment and all other Restricted Payments declared
(the amount so expended, if other than in cash, to be determined in good faith
by the Board of Directors, whose determination shall be conclusive and evidenced
by a resolution of the Board of Directors) or made subsequent to the Issue Date
would exceed the sum of: (A) an amount equal to the Company's Cumulative
Operating Cash Flow less 1.6 times the Company's Cumulative Consolidated
Interest Expense; plus (B) the aggregate Net Cash Proceeds received by the
Company from the issue or sale of its Capital Stock (other than Disqualified
Stock) or other cash contributions to its capital subsequent to the Issue Date
(other than an issuance or sale to a Subsidiary of the Company or an employee
stock ownership plan or other trust established by the Company or any of its
Subsidiaries); plus (C) the amount by which Indebtedness of the Company is
reduced on the Company's balance sheet upon conversion or exchange (other than
by a Restricted Subsidiary of the Company) subsequent to the Issue Date of any
Indebtedness of the Company convertible or exchangeable for Capital Stock (other
than Disqualified Stock) of the Company (less the amount of any cash or other
property distributed by the Company upon such conversion or exchange); and plus
(D) in the case of the disposition or repayment of any Investment constituting a
Restricted Payment other than an Investment made pursuant to clause (v) of
paragraph (b) below made after the Issue Date, an amount equal to the lesser of
the return of capital with respect to such Investment and the cost of such
Investment, in either case, less the cost of the disposition of such Investment.
For purposes of determining the amount expended for Restricted Payments, cash
distributed shall be valued at the face amount thereof and property or services
distributed or transferred other than cash shall be valued at its Fair Market
Value.
(b) So long as there is no Default or Event of Default continuing, the
provisions of paragraph (a) shall not prohibit: (i) any purchase or redemption
of Capital Stock or Subordinated Obligations of the Company or Capital Stock of
any Restricted Subsidiary made by exchange for, or out of the Net Cash Proceeds
from a substantially concurrent sale (other than to a Restricted Subsidiary of
the Company) of, Capital Stock of the Company (other than Disqualified Stock) or
any purchase of Capital Stock made with Put Promissory Notes; PROVIDED, HOWEVER,
that (A) such purchase or redemption shall be excluded in the calculation of the
amount of Restricted Payments and (B) the Net Cash Proceeds from such sale shall
be excluded from the calculation of amounts under clause (B) of paragraph (a);
(ii) any purchase or redemption of Subordinated Obligations of the Company made
by exchange for, or out of the proceeds from a substantially concurrent sale of,
Subordinated Obligations of the Company; PROVIDED, HOWEVER, that (A) the final
maturity date of such Subordinated Obligations, determined as of the date of
Incurrence, occurs not earlier than the Stated Maturity of the Notes and (B) the
Average Life of such Subordinated Obligations is equal to or greater than the
Average Life of the Subordinated Obligations being purchased or redeemed; and
PROVIDED, FURTHER, that such purchase or redemption shall be excluded in the
calculation of the amount of Restricted Payments; (iii) dividends paid within 60
days after the date of declaration if at such date of declaration such dividend
would have complied with this provision; PROVIDED, HOWEVER, that such dividends
shall be included in the calculation of the amount of Restricted Payments; (iv)
Investments in Galaxy Latin America or its Affiliates made subsequent to the
Issue Date in an aggregate amount at any time outstanding not to exceed $15.0
million; (v) Investments in a Permitted Business financed with the net proceeds
of this Offering as described under "Use of Proceeds"; and (vi) Minority
Investments made subsequent to the Issue Date constituting a Restricted Payment
by the Company or any Restricted Subsidiary in any Person that operates
principally, or has been formed to operate principally, a Permitted Business in
an aggregate amount at any time outstanding not to exceed $45.0 million.
The Indenture will provide that the Company will be required, as a condition
to the issuance of the Notes, and to thereafter maintain enforceable written
commitments (the Shareholder Commitments") from each shareholder of the Company
agreeing that such shareholder will not exercise its voting rights to receive
mandatory statutory dividends (without limiting such shareholder's right
otherwise to receive dividends pursuant to and in compliance with this covenant
"Limitation on Restricted Payments"), provided that the Shareholder Commitments
will cease to be effective on the first to occur of (x) the date
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that shares of Capital Stock of the Company are issued and listed on a Brazilian
or United States securities exchange in connection with a bona fide public
offering of such shares or the date that any shares of the Capital Stock of the
Company are otherwise effectively listed and traded on any Brazilian or United
States securities exchange, (y) the date that none of the Notes remain
outstanding or (z) the date that such commitment is no longer effective,
enforceable or legal under applicable Brazilian laws and regulations (including
without limitation any construction or interpretation thereof by CVM, any court
or any other governmental authority). The Indenture will provide that the
Company will obtain Shareholder Commitments in connection with any future
issuances of Capital Stock to the extent the Shareholder Commitments would then
be effective, enforceable and legal under the terms of the foregoing proviso.
Notwithstanding the foregoing, but provided it would not render any of the other
Shareholder Commitments unenforceable, the Company need not obtain and/or
maintain Shareholder Commitments from persons that are not shareholders of the
Company on the Issue Date or any Affiliate of any such shareholder to the extent
it does not relate to more than 10.0% of the outstanding shares of Capital Stock
of the Company.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED
SUBSIDIARIES. The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, create or permit to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any such Restricted
Subsidiary to (i) pay dividends or make any other distributions on its Capital
Stock or pay any Indebtedness or other obligation owed to the Company or another
Restricted Subsidiary of the Company, (ii) make any Investment in the Company or
another Restricted Subsidiary of the Company or (iii) transfer any of its
property or assets to the Company or another Restricted Subsidiary of the
Company; except: (A) any encumbrance or restriction pursuant to an agreement in
effect on the date of Issuance of the Notes and described in this Prospectus;
(B) any encumbrance or restriction with respect to a Restricted Subsidiary
pursuant to an agreement relating to any Indebtedness Incurred by a Restricted
Subsidiary prior to the date on which such Restricted Subsidiary was acquired by
the Company (other than Indebtedness Incurred as consideration in, or to provide
all or any portion of the funds or credit support utilized to consummate, the
transaction or series of related transactions pursuant to which such Restricted
Subsidiary was acquired by the Company) and outstanding on such date; (C) any
encumbrance or restriction with respect to a Restricted Subsidiary pursuant to
an agreement effecting a refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clauses (A) or (B) or this clause (C) or contained in
any amendment to an agreement referred to in clauses (A) or (B) or this clause
(C); PROVIDED, HOWEVER, that the encumbrances and restrictions contained in any
such refinancing agreement or amendment are no less favorable to the holders of
the Notes than encumbrances and restrictions contained in such agreements; (D)
any such customary encumbrance or restriction contained in a security document
creating a Lien permitted under the Indenture to the extent relating to the
property or asset subject to such Lien following a default in respect of the
applicable obligation; (E) in the case of clause (iii), any encumbrance or
restriction (1) that restricts in a customary manner the subletting, assignment
or transfer of any property or asset that is subject to a lease, license, or
similar contract, or (2) contained in security agreements securing Indebtedness
of a Restricted Subsidiary to the extent such encumbrance or restrictions
restrict the transfer of the property subject to such security agreements; (F)
any restriction with respect to a Restricted Subsidiary imposed pursuant to an
agreement in effect for the sale or disposition thereof and the duration of
which does not exceed 60 days; or (G) any encumbrance or restriction contained
in an agreement pursuant to which Galaxy Brasil Incurs Indebtedness in
compliance with the terms of the Indenture, PROVIDED, HOWEVER, that the terms of
such encumbrance or restriction are no more restrictive than those contained in
the Equipment Agreements as they exist on the Issue Date.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK. (a) The Company shall
not, and shall not permit any Restricted Subsidiary to, make any Asset
Disposition, unless (i) the Company or such Restricted Subsidiary receives
consideration (including by way of relief from, or by any other Person assuming
sole responsibility for, any liabilities, contingent or otherwise) at the time
of such Asset Disposition at least equal to the Fair Market Value of the shares
and assets subject to such Asset Disposition, (ii)(A) at least 75.0% of the
consideration thereof received by the Company or such Restricted Subsidiary is
in the form of
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cash or Cash Equivalents or (B) at least 75.0% of the consideration thereof
received by the Company or such Restricted Subsidiary consists of assets used in
connection with a Permitted Business; and (iii) an amount equal to 100.0% of the
Net Available Cash from such Asset Disposition is applied by the Company (or
such Restricted Subsidiary, as the case may be) (A) FIRST, to the extent the
Company elects (or is required by the terms of any senior Indebtedness of the
Company or Indebtedness of a Restricted Subsidiary), to prepay, repay or
purchase such senior Indebtedness, or such Indebtedness of a Restricted
Subsidiary (in each case other than Indebtedness owed to the Company or an
Affiliate of the Company) within 365 days from the later of the date of such
Asset Disposition or the receipt of such Net Available Cash; (B) SECOND, to the
extent of the balance of Net Available Cash after application in accordance with
clause (A), to the extent the Company or such Restricted Subsidiary elects, to
reinvest in Additional Assets (including by means of an Investment in Additional
Assets by a Restricted Subsidiary with Net Available Cash received by the
Company or another Restricted Subsidiary) within 365 days from the later of the
date of such Asset Disposition or the receipt of such Net Available Cash; (C)
THIRD, to the extent of the balance of such Net Available Cash after application
in accordance with clauses (A) and (B) ("Excess Proceeds"), to make an offer
("Asset Sale Offer") to purchase Notes pursuant and subject to the conditions of
the Indenture to the Noteholders at a purchase price of 100.0% of the principal
amount thereof plus accrued and unpaid interest to the purchase date, and (D)
FOURTH, to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A), (B) and (C), for general corporate
purposes. Notwithstanding the foregoing provisions, the Company and its
Restricted Subsidiaries shall not be required to apply any Net Available Cash in
accordance herewith except to the extent that the aggregate Net Available Cash
from all Asset Dispositions which are not applied in accordance with this
covenant at any time exceed $10 million. Upon completion of any Asset Sale
Offer, the amount of Excess Proceeds shall be reset at zero.
For the purposes of this covenant, the following will be deemed to be cash
or Cash Equivalents: (i) the assumption of Indebtedness (other than Disqualified
Stock) of the Company or any Restricted Subsidiary and the release of the
Company or such Restricted Subsidiary from all liability on such Indebtedness in
connection with such Asset Disposition and (ii) securities received by the
Company or any Restricted Subsidiary of the Company from the transferee that are
promptly converted by the Company or such Restricted Subsidiary into cash at its
face value.
(b) In the event of an Asset Disposition that requires the purchase of Notes
pursuant to clause (a)(iii)(C), the Company will be required to purchase Notes
tendered pursuant to an offer by the Company for the Notes at a purchase price
of 100.0% of their principal amount plus accrued interest to the purchase date
in accordance with the procedures (including prorating in the event of
oversubscription) set forth in the Indenture. If the aggregate purchase price of
the Notes tendered pursuant to the offer is less than the Net Available Cash
allotted to the purchase of the Notes, the Company will apply the remaining Net
Available Cash in accordance with clause (a)(iii)(D) above.
(c) The Company will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Notes pursuant to the
Indenture. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under the Indenture by virtue thereof.
LIMITATION ON AFFILIATE TRANSACTIONS. (a) The Company will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, enter into or
conduct any transaction (including the purchase, sale, lease or exchange of any
property, or the rendering of any service) with any Affiliate of the Company (an
"Affiliate Transaction") unless: (i) the terms of such Affiliate Transaction are
no less favorable to the Company or such Restricted Subsidiary, as the case may
be, than those that could be obtained at the time of such transaction in
arm's-length dealings with a Person who is not such an Affiliate; (ii) in the
event such Affiliate Transaction involves an aggregate amount in excess of $2.0
million, the terms of such transaction have been approved by a majority of the
members of the Board of Directors of the Company and by a
127
majority of the members of such Board having no personal stake in such Affiliate
Transaction, if any; and (iii) in the event such Affiliate Transaction involves
an aggregate amount in excess of $10.0 million, the Company has received a
written opinion from an independent investment banking firm of nationally
recognized standing in the United States that such Affiliate Transaction is fair
to the Company or such Restricted Subsidiary, as the case may be, from a
financial point of view; PROVIDED that, in the case of an Affiliate Transaction
described in clause (ii) or (iii), the Company shall promptly after consummation
thereof deliver an Officers' certificate to the Trustee certifying as to the
compliance by the Company with clauses (i) and (ii) or (i) and (iii) as the case
may be, of this covenant; and PROVIDED FURTHER that in the case of an Affiliate
Transaction with Galaxy Latin America, the Company or such Restricted Subsidiary
shall only be required to obtain the opinion described in clause (iii) if such
Affiliate Transaction involves an aggregate amount in excess of $20.0 million.
(b) The provisions of the foregoing paragraph (a) will not apply to (i)
transactions with or among the Company and/or any of the Restricted
Subsidiaries; PROVIDED in any such case, no officer, director or beneficial
holder of 5% or more of any class of Capital Stock of the Company shall
beneficially own any Capital Stock of any such Restricted Subsidiary, (ii)
transactions between the Company and any Restricted Subsidiary that are solely
for the benefit of the Company or a Subsidiary Guarantor, (iii) transactions
between or among Unrestricted Subsidiaries, (iv) any dividend permitted by the
covenant described under "Certain Covenants--Limitation on Restricted Payments,"
(v) directors' fees, indemnification and similar arrangements, officers'
indemnification, employee stock option or employee benefit plans, employee
salaries and bonuses or legal fees paid or created in the ordinary course of
business and (vi) transactions and arrangements pursuant to agreements in
existence on the Issue Date and described in the Prospectus. In addition,
paragraph (a) shall not apply (x) to Indebtedness Incurred by the Company from
Abril under the Abril Credit Facility or from shareholders pursuant to
Subordinated Shareholder Loans and (y) to any transaction entered into in
connection with the reorganization of the Company's ownership structure or the
restructuring of its legal form described under "Certain Transactions with
Related Parties--Transactions Among Shareholders" in the Prospectus.
LIMITATION ON LIENS. The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, create or permit to exist any
Lien, other than Permitted Liens, on any of its property or assets (including
Capital Stock of any Restricted Subsidiary), whether owned on the Issue Date or
thereafter acquired, securing any obligation, unless the obligations due under
the Indenture and the Notes and the Subsidiary Guarantees are secured, on an
equal and ratable basis (or on a senior basis, in the case of Indebtedness
subordinated in right of payment to the Notes or the Subsidiary Guarantees),
with the obligations so secured.
LIMITATION ON SALES OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES. The
Company will not (i) sell, and will not permit any Restricted Subsidiary of the
Company to issue, sell or transfer, any Capital Stock of a Restricted Subsidiary
or (ii) permit any Person (other than the Company or a Wholly-Owned Restricted
Subsidiary) to acquire Capital Stock of any Restricted Subsidiary, if in either
case as the result thereof such Restricted Subsidiary would no longer be a
Restricted Subsidiary of the Company, except for (A) Capital Stock issued, sold
or transferred to the Company or a Wholly-Owned Restricted Subsidiary and (B)
Capital Stock issued by a Person prior to the time (1) such Person becomes a
Restricted Subsidiary, (2) such Person merges with or into a Restricted
Subsidiary or (3) a Restricted Subsidiary merges with or into such Person,
PROVIDED, that such Capital Stock was not issued by such Person in anticipation
of the type of transaction contemplated by subclause (1), (2) or (3). This
provision shall not prohibit the Company or any of its Restricted Subsidiaries
from selling or otherwise disposing of all of the Capital Stock of any
Restricted Subsidiary; PROVIDED that any such sale constitutes an Asset
Disposition for purposes of, and the Net Cash Proceeds from any such sale are
applied in accordance with, the covenant described under "Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock."
ADDITIONAL SUBSIDIARY GUARANTEES. The Indenture will provide that if the
Company or any of its Restricted Subsidiaries shall acquire or create another
Restricted Subsidiary after the Issue Date, then such newly acquired or created
Restricted Subsidiary shall execute a Subsidiary Guarantee and deliver an
opinion of counsel, in accordance with the terms of the Indenture.
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MERGER AND CONSOLIDATION. The Company shall not consolidate with or merge
with or into, or convey, transfer or lease all or substantially all its assets
to, any Person and the Company will not permit any of its Restricted
Subsidiaries to enter into such a transaction if such transaction, in the
aggregate, would result in the conveyance or transfer of all or substantially
all of the assets of the Company and its Restricted Subsidiaries taken as a
whole, to any Person, unless: (i) the resulting, surviving or transferee Person
(the "Successor Company") is a corporation organized and existing under the laws
of the Federative Republic of Brazil or any State or political subdivision
thereof and the Successor Company (if not the Company) expressly assumes, by
supplemental indenture, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company under the Notes
and the Indenture; (ii) immediately after giving effect to such transaction (and
treating any Indebtedness that becomes an obligation of the Successor Company or
any Restricted Subsidiary of the Successor Company as a result of such
transaction as having been Incurred by the Successor Company or such Restricted
Subsidiary at the time of such transaction), no Default shall have occurred and
be continuing; (iii) immediately after giving effect to such transaction, the
Successor Company would be able to Incur at least an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described under "Certain
Covenants--Limitation on Indebtedness"; (iv) immediately after giving effect to
such transaction, the Successor Company will have Consolidated Net Worth in an
amount which is not less than the Consolidated Net Worth of the Company
immediately prior to such transaction; (v) each Guarantor shall have delivered a
written instrument in form satisfactory to the Trustee confirming its Guarantee;
and (vi) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger or transfer and such supplemental indenture (if any) comply with the
Indenture; PROVIDED, HOWEVER, that clause (iii) shall not apply to the merger of
Cable Participacoes Ltda., or Hearst/ABC Video Services II, each an entity owned
by The Hearst Corporation and ABC, Inc., or Falcon International Communications
(Bermuda) L.P. with and into the Company in connection with the reorganization
of the Company's ownership structure described under "Certain Transactions with
Related Parties--Transactions Among Shareholders" in the Prospectus.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture, but the
Company, in the case of a lease of all or substantially all its assets, will not
be released from the obligation to pay the principal of and interest on the
Notes.
SEC REPORTS. The Indenture will provide that, whether or not the Company
has a class of securities registered under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), following any Exchange Offer or the
effectiveness of any Shelf Registration Statement, the Company shall furnish
without cost to each holder of Notes, the Trustee and the Initial Purchasers and
file with the Commission (whether or not the Company is a public reporting
company at the time): (i) within 140 days after the end of each fiscal year of
the Company, annual reports on Form 20-F (or any successor form) containing the
information required to be contained therein (or required in such successor
form); (ii) within 60 days after the end of each of the first three fiscal
quarters of each fiscal year, reports on Form 6-K (or any successor form)
containing substantially the same information required to be contained therein;
and (iii) promptly from time to time after the occurrence of an event required
to be therein reported, such other reports on Form 6-K (or any successor form)
containing substantially the same information required to be contained in Form
8-K (or required in any successor form). Prior to the effectiveness of the
Exchange Offer Registration Statement with the Commission, the Company will file
with the Trustee and provide the Initial Purchasers, all of the information that
would have been required to have been filed with the Commission pursuant to
clauses (i), (ii) and (iii) above. Each of the reports will be prepared in
accordance with US GAAP consistently applied, will include the amounts of EBITDA
(as defined herein), based on US GAAP financial data and will be prepared in
accordance with the applicable rules and regulations of the Commission. The
Company will agree to use its reasonable best efforts to schedule, disseminate
in a customary manner for public companies information concerning, and conduct a
conference call for holders of Notes to discuss with appropriate senior officers
of the Company the results of operating and financial
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conditions of the Company within 30 days of filing any reports described in
clause (i) and (ii) above with the Commission.
LIMITATION ON DESIGNATIONS OF SPECIAL RESTRICTED SUBSIDIARIES. The
Indenture will provide that the Company may designate any Restricted Subsidiary
as a "Special Restricted Subsidiary" under the Indenture (a "Special
Designation") if such Special Restricted Subsidiary engages in, or will engage
principally in, a Permitted Business in a Newly-Licensed Service Area. Such
Special Designation may be revoked at any time if all Indebtedness of such
Special Restricted Subsidiary that is outstanding immediately following such
revocation would, if Incurred at such time, have been permitted to be Incurred
for all purposes under the Indenture. All Special Designations and revocations
thereof must be evidenced by Board Resolutions of the Company delivered to the
Trustee certifying compliance with the foregoing provisions. In any event, a
Special Restricted Subsidiary will remain a Restricted Subsidiary for all
purposes of the Indenture, except that a Special Restricted Subsidiary shall be
treated as an Unrestricted Subsidiary for purposes of calculating Operating Cash
Flow, Consolidated Income Tax Expense, Consolidated Interest Expense and
Consolidated Net Income.
LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES. The Indenture will
provide that the Board of Directors may designate any Subsidiary of the Company
(other than a Guarantor, but including any newly acquired or newly formed
Subsidiary) (a "Designation") to be an Unrestricted Subsidiary if: (a) no
Default shall have occurred and be continuing at the time of or after giving
effect to such Designation; (b) the Company would be permitted under the
Indenture to make an Investment under all applicable provisions of the covenant
described under "Certain Covenants--Limitation on Restricted Payments" at the
time of Designation (assuming the effectiveness of such Designation) in an
amount (the "Designation Amount") equal to the Fair Market Value of such
Subsidiary on such date; and (c) such Subsidiary and its Subsidiaries own no
Capital Stock or Indebtedness of, and hold no Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated. The Board of Directors may designate any
Unrestricted Subsidiary to be a Restricted Subsidiary (a "Revocation");
PROVIDED, HOWEVER, that immediately after giving effect to such designation (x)
no Default shall have occurred and be continuing and (y) all Liens and
Indebtedness of such Unrestricted Subsidiary outstanding immediately following
such Revocation would, if Incurred at such time, have been permitted to be
Incurred for all purposes of the Indenture. Any such Designation and Revocation
by the Board of Directors shall be evidenced to the Trustee by promptly filing
with the Trustee a copy of the board resolution giving effect thereto and an
Officers' Certificate certifying that such action complied with the foregoing
provisions.
LIMITATION ON INVESTMENTS IN UNRESTRICTED SUBSIDIARIES. The Company will
not make, and will not permit its Restricted Subsidiaries to make, any
Investment in Unrestricted Subsidiaries if, at the time thereof, such
Investment, together with the aggregate amount of all Investments previously
made (other than Permitted Investments), would exceed the amount of Restricted
Payments then permitted to be made pursuant to the covenant described under
"Certain Covenants--Limitation on Restricted Payments". Any Investments in
Unrestricted Subsidiaries permitted to be made pursuant to this covenant (i)
will be treated as a Restricted Payment in calculating the amount of Restricted
Payments made by the Company and (ii) may be made in cash or property.
BUSINESS OF THE COMPANY; RESTRICTIONS ON TRANSFERS OF EXISTING
BUSINESS. The Indenture will provide that the Company will not, and will not
permit any of the Restricted Subsidiaries to, be principally engaged in any
business or activity other than a Permitted Business. In addition, the Company
and the Restricted Subsidiaries will not be permitted to, directly or
indirectly, transfer to any Unrestricted Subsidiary (i) any of the licenses,
permits or authorizations used in the Permitted Business of the Company and the
Restricted Subsidiaries on the Issue Date or (ii) any material portion of the
"property and equipment" (as such term is used in the Company's consolidated
financial statements) of the Company or any Restricted Subsidiary used in the
licensed service areas of the Company and the Restricted Subsidiaries as they
exist
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on the Issue Date; PROVIDED that the Company and the Restricted Subsidiaries may
make Asset Dispositions in compliance with the covenant described under "Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock" and pledge
property and assets to the extent permitted in the covenant described under
"Certain Covenants--Limitations on Liens."
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in any
payment of interest on any Note when due, continued for 30 days, (ii) a default
in the payment of principal or premium, if any, of any Note when due at its
Stated Maturity, upon optional redemption, upon required repurchase, upon
declaration or otherwise, (iii) the failure by the Company or any Restricted
Subsidiary to comply with its obligations under "Certain Covenants--Merger and
Consolidation" above, (iv) the failure by the Company or any Restricted
Subsidiary to comply with any covenants (other than the covenant described under
"Certain Covenants--Merger and Consolidation") or any other agreements contained
in the Indenture for 45 days after notice (in each case, other than a failure to
purchase Notes which shall constitute an Event of Default under clause (ii)
above), (v) Indebtedness of the Company or any Restricted Subsidiary 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 amount of
such Indebtedness unpaid or accelerated exceeds $10.0 million (or the US Dollar
Equivalent) (the "cross acceleration provision"), (vi) certain events of
bankruptcy, insolvency or reorganization of the Company or a Restricted
Subsidiary (the "bankruptcy provisions"), (vii) any judgment or decree for the
payment of money in excess of $10.0 million (or the US Dollar Equivalent) (to
the extent not covered by insurance as acknowledged in writing by the insurer)
is rendered against the Company or a Restricted Subsidiary 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"),
(viii) there shall have occurred any seizure, compulsory acquisition,
expropriation or nationalization of material assets of the Company and its
Subsidiaries or (ix) the failure of any Subsidiary Guarantee to be in full force
and effect (except as contemplated by the terms thereof) or the denial or
disaffirmation by any Guarantor of its obligations under the Indenture or any
Subsidiary Guarantee if such default continues for 10 days, unless otherwise
released from such Guarantee obligation pursuant to the Indenture. 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 Notes
notify the Company 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 Notes by notice to the
Company may declare the principal of and accrued and unpaid interest on all the
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 the
Company occurs and is continuing, the principal of and accrued and unpaid
interest on all the 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 Notes may rescind any such acceleration with respect to the 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 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 Notes have
requested the Trustee to pursue the remedy, (iii) such holders have offered the
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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 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
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 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. The Company
also is required to deliver to the Trustee, within 30 days after the occurrence
thereof, written notice of 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 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 Notes then
outstanding. However, without the consent of each holder of an outstanding Note
affected, no amendment may, among other things, (i) reduce the amount of Notes
whose holders must consent to an amendment, (ii) reduce the rate of or extend
the time for payment of interest on any Note, (iii) reduce the principal of or
extend the Stated Maturity of any Note, (iv) reduce the premium payable upon the
redemption or repurchase of any Note or change the time at which any Note may be
redeemed as described under "Optional Redemption" above, (v) make any Note
payable in money other than that stated in the Note, (vi) amend or modify any of
the provisions of the Indenture relating to the ranking of the Notes or the
Subsidiary Guarantees in any manner that adversely affects the rights of any
holder of the Notes, (vii) impair the right of any holder to receive payment of
principal of and interest on such holder's 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 Notes, (viii) release any Guarantor from any of its
obligations under its Subsidiary Guarantee or the Indenture, except in
compliance with the terms thereof or (ix) 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 the obligations of the Company
under the Indenture, to provide for uncertificated Notes in addition to or in
place of certificated Notes (provided that the uncertificated Notes are issued
in registered form for purposes of Section 163(f) of the Code, to secure the
Notes, to add to the covenants of the Company for the benefit of the Noteholders
or to surrender any right or power conferred upon Company, 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.
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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 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 Note selected for redemption or to transfer or exchange any Note
for a period of 15 days prior to a selection of Notes to be redeemed. The Notes
will be issued in registered form and the registered holder of a Note will be
treated as the owner of such Note for all purposes.
DEFEASANCE
The Company at any time may terminate all its obligations under the 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 Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Company at any time may terminate its obligations under the covenants
described under "--Certain Covenants" (other than the covenant described under
"Certain Covenants--Merger and Consolidation"), the operation of the cross
acceleration provision, the bankruptcy provisions with respect to Restricted
Subsidiaries and the judgment default provision described under "Defaults" above
and the limitations contained in clauses (iii) and (iv) under "Certain
Covenants--Merger and Consolidation" above ("covenant defeasance").
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 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 Notes may not be accelerated because of an
Event of Default specified in clause (iv), (v) and (vi) (with respect only to
Restricted Subsidiaries), or (vii) or (ix) under "Defaults" above or because of
the failure of the Company to comply with clause (iii) or (iv) under "Certain
Covenants--Merger and Consolidation" 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 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 Notes will not recognize
income, gain or loss for U.S. Federal income tax purposes as a result of such
deposit and defeasance and will be subject to U.S. 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 Notes or any Subsidiary Guarantee 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 Notes or any Subsidiary Guarantee, any restrictions or
prohibition of access to the Brazilian foreign exchange market exists, the
Company and each Guarantor agree to pay all amounts payable under the Notes in
the currency of such Notes by means of any legal procedure existing in Brazil
(except commencing legal proceedings against the Brazilian Central Bank), on
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any due date for payment under the Notes. All costs and taxes payable in
connection with the procedures referred to in this covenant shall be borne by
the Company and the Guarantors.
US dollars are the sole currency of account and payment for all sums payable
by the Company and the Guarantors under or in connection with the Notes and the
Subsidiary Guarantees, 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 and the Guarantors or otherwise) by any holder of a
Note in respect of any sum expressed to be due to it from the Company and the
Guarantors shall only constitute a discharge to the Company and the Guarantors
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 Note, the Company and the Guarantors shall, jointly and severally, indemnify
it against any loss sustained by it as a result. In any event the Company and
the Guarantors shall, jointly and severally, 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 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 and
the Guarantors, shall give rise to a separate and independent cause of action,
shall apply irrespective of any indulgence granted by any holder of a 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 Note.
ENFORCEABILITY OF JUDGMENTS WITH RESPECT TO THE NOTES AND SUBSIDIARY GUARANTEES
Service of process upon the Company or any Guarantor in an action (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, the Notes or the Subsidiary Guarantees may be
obtained within the United States by service upon CT Corporation System. See
"Risk Factors--Risks Relating to the Notes--Enforceability of Judgments." 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 or any Guarantor, including judgments with respect to the payment of
amounts owing with respect to the Notes or the Subsidiary Guarantees, may not be
collectible within the United States.
Judgments for monetary claims obtained in US courts arising out of or in
relation to the obligations of the Company and the Guarantors under the
Indenture and the 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 of Brazil, 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 or the Guarantors in a court in
Brazil under any 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
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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 or any of the
Guarantors is declared bankrupt or enters into a concordata, the Notes will be
considered general unsecured indebtedness of the Company and the Guarantors and
therefore will be subject to such proceedings.
Under a bankruptcy proceeding (essentially a liquidation proceeding),
payments in respect of the 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 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.
CONSENT TO JURISDICTION AND SERVICE
The Indenture will provide that the Company and the Guarantors will appoint
CT Corporation System as their agent for service of process in any suit, action
or proceeding with respect to the Indenture, the Notes or the Subsidiary
Guarantees 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. See "Risk Factors--Risks Relating to the
Notes--Enforceability of Judgments."
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CONCERNING THE TRUSTEE
The Chase Manhattan Bank is to be the Trustee under the Indenture and has
been appointed by the Company as Registrar, and Chase Trust Bank has been
appointed as Paying Agent with regard to the Notes. Affiliates of the Trustee
own approximately 9.3% of the common shares of the Company.
GOVERNING LAW
The Indenture provides that it and the 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 US GAAP and
shall be based upon the consolidated financial statements of the Company and its
Subsidiaries prepared in accordance with US GAAP. For purposes of this
"Description of Notes," the term "Company" means Tevecap S.A. excluding its
Subsidiaries.
"Abril Credit Facility" means the Revolving Credit Agreement, dated December
6, 1995 between the Company and Abril S.A., as lender, as amended, refinanced or
replaced from time to time.
"Acquired Indebtedness" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such Person merges with or
into or consolidates with or becomes a Restricted Subsidiary of such specified
Person and (ii) Indebtedness secured by a Lien encumbering any asset acquired by
such specified Person, which Indebtedness was not incurred in anticipation of,
and was outstanding prior to, such merger, consolidation or acquisition.
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) to be used by the Company or a Restricted
Subsidiary in a Permitted Business; (ii) the Capital Stock of a Person that
becomes a Restricted Subsidiary as a result of the acquisition of such Capital
Stock by the Company or another Restricted Subsidiary; or (iii) Capital Stock
constituting a minority interest in any Person that at such time is a Restricted
Subsidiary; PROVIDED, HOWEVER, that, in the case of clauses (ii) and (iii), such
Restricted Subsidiary is primarily engaged in a Permitted Business.
"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. For
purposes of the covenants described under "Certain Covenants--Limitation on
Sales of Assets and Subsidiary Stock" and "Certain Covenants--Limitation on
Affiliate Transactions", "Affiliate" shall also include any beneficial owner of
shares representing 10.0% or more of the total voting power of the Voting Stock
(on a fully diluted basis) of the Company or of rights or warrants to purchase
such Voting Stock (whether or not currently exercisable) and any Person who
would be an Affiliate of any such beneficial owner pursuant to the first
sentence hereof, and for the purposes of the covenant described under "Certain
Covenants--Limitation on Affiliate Transactions" only, shall include (i) Bell
Canada, (ii) Canbras Communications Corp., (iii) Canbras Participacoes Ltda.,
(iv) Canbras TVA Cabo Ltda., (v) TV Cabo Santa Branca Comercio Ltda. and (vi)
Galaxy Latin America.
"Asset Disposition" means any sale, lease, transfer, issuance or other
disposition (or series of related sales, leases, transfers, issuances or
dispositions that are part of a common plan) of shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares), property,
services or other assets (each referred to for the purposes of this definition
as a "disposition") by the Company or any of its Restricted Subsidiaries
(including any disposition by means of a merger, consolidation or similar
transaction) other
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than (i) a disposition by a Restricted Subsidiary to the Company or by the
Company or a Restricted Subsidiary to a Wholly-Owned Restricted Subsidiary, (ii)
a disposition of inventory, services or accounts receivable in the ordinary
course of business consistent with market practice, (iii) a disposition of
obsolete or worn out equipment or equipment that is no longer useful in the
conduct of the business of the Company and its Subsidiaries and that is disposed
of in each case in the ordinary course of business, and (iv) a disposition by
Galaxy Brasil of up to 25.0% of its Capital Stock to Hughes Communications GLA
and Darlene Investments, a member of the Cisneros Group, or their respective
affiliates, pursuant to the Galaxy Latin America Partnership Agreement as it
exists on the Issue Date.
"Attributable Indebtedness" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
interest rate borne by the Notes, compounded annually) of the total obligations
of the lessee for rental payments during the remaining term of the lease
included in such Sale/Leaseback Transaction (including any period for which such
lease has been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"California Broadcast Center" or "CBC" means the California Broadcast Center
LLC, the owner of an uplink center located in Long Beach, California, which
provides certain uplink services to Galaxy Latin America.
"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, including any Preferred Stock and
Disqualified Stock, but excluding any debt securities convertible into such
equity.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP, and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date such lease may be terminated without penalty.
"Cash Equivalents" means, at any time, (i) any direct obligations (or
certificates representing an ownership interest in such obligations) of the
United States of America or the Federative Republic of Brazil (including any
agency or instrumentality thereof) for the payment of which the full faith and
credit of the United States of America or the Federative Republic of Brazil is
pledged and which are not callable or redeemable at the issuer's option, each
with a maturity of 180 days or less from the date of acquisition; (ii)
certificates of deposit, money market deposit accounts and acceptances with a
maturity of 180 days or less from the date of acquisition of any financial
institution that is a Brazilian regulated Bank or a member of the Federal
Reserve System having combined capital and surplus and undivided profits of not
less than $500.0 million (or the US dollar equivalent); and (iii) commercial
paper with a maturity of 180 days or less from the date of acquisition issued by
a corporation that is not an Affiliate of the Company or any of its Subsidiaries
and is organized under the laws of any state of the United States or the
District of Columbia whose debt rating, at the time as of which such investment
is made, is at least "A-1" by Standard & Poor's Corporation or at least "P-1" by
Moody's Investors Service, Inc. or rated at least an equivalent rating category
of another nationally recognized securities rating agency.
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"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Income Tax Expense" means, with respect to any Person, for any
period the aggregate of the federal, state, local and foreign income tax expense
of such Person and its Subsidiaries for such period, on a consolidated basis as
determined in accordance with GAAP.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such total interest expense, and to the extent
incurred by the Company or its Restricted Subsidiaries, (i) interest expense
attributable to Capitalized Lease Obligations, (ii) amortization of debt
discount, (iii) capitalized interest, (iv) non-cash interest expenses, (v)
commissions, discounts and other fees and charges owed with respect to letters
of credit and bankers' acceptance financing, (vi) the net costs associated with
Hedging Obligations (including amortization of fees), (vii) Preferred Stock
dividends in respect of all Preferred Stock of the Company or a Wholly-Owned
Restricted Subsidiary, (viii) interest accruing on any Indebtedness of any other
Person to the extent such Indebtedness is Guaranteed by the Company or any
Restricted Subsidiary and (ix) the cash contributions to any employee stock
ownership plan or similar trust to the extent such contributions are used by
such plan or trust to pay interest or fees to any Person (other than the
Company) in connection with Indebtedness Incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net income (loss) of
the Company and its consolidated Subsidiaries; PROVIDED, HOWEVER, that there
shall not be included in such Consolidated Net Income: (i) any net income (loss)
of any Person if such Person is not a Restricted Subsidiary, except that (A)
subject to the limitations contained in clause (iv) below, the Company's equity
in the net income of any such Person for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash actually distributed
by such Person during such period to the Company or a Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or other
distribution paid to a Restricted Subsidiary, to the limitations contained in
clause (iii) below) and (B) the Company's equity in a net loss of any such
Person (other than an Unrestricted Subsidiary) for such period shall be included
in determining such Consolidated Net Income; (ii) any net income (loss) of any
person acquired by the Company or a Subsidiary in a pooling of interests
transaction for any period prior to the date of such acquisition; (iii) any net
income (loss) of any Restricted Subsidiary if such Restricted Subsidiary is
subject to restrictions, directly or indirectly, on the payment of dividends or
the making of distributions by such Restricted Subsidiary, directly or
indirectly, to the Company, except that (A) subject to the limitations contained
in (iv) below, the Company's equity in the net income of any such Restricted
Subsidiary for such period shall be included in such Consolidated Net Income up
to the aggregate amount of cash that could have been distributed by such
Restricted Subsidiary during such period to the Company or another Restricted
Subsidiary as a dividend (subject, in the case of a dividend that could have
been made to another Restricted Subsidiary, to the limitation contained in this
clause) and (B) the Company's equity in a net loss of any such Restricted
Subsidiary for such period shall be included in determining such Consolidated
Net Income; (iv) any gain (but not loss) realized upon the sale or other
disposition of any assets of the Company or its consolidated Subsidiaries which
are not sold or otherwise disposed of in the ordinary course of business and any
gain (but not loss) realized upon the sale or other disposition of any Capital
Stock of any Person; (v) any extraordinary gain or loss; and (vi) the cumulative
effect of a change in accounting principles.
"Consolidated Net Worth" means the total of the amounts shown on the balance
sheet of the Company and the Restricted Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending at least 45 days prior to the taking of any
action for the purpose of which the determination is being made as (i) the par
or stated value of all outstanding Capital Stock of the Company plus (ii) paid
in capital or capital surplus relating to such Capital Stock plus (iii) any
retained earnings or earned surplus less (A) any accumulated deficit and (B) any
amounts attributable to Disqualified Stock.
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"Cumulative Consolidated Interest Expense" means, as of any date of
determination, Consolidated Interest Expense from October 1, 1996 to the end of
the Company's most recently ended full fiscal quarter for which financial
statements are available prior to such date, taken as a single accounting
period.
"Cumulative Operating Cash Flow" means, as of any date of determination,
Operating Cash Flow from October 1, 1996 to the end of the Company's most
recently ended full fiscal quarter for which financial statements are available
prior to such date, taken as a single accounting period.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock of
such Person which by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable) or upon the happening of any event
(i) matures or is mandatorily redeemable pursuant to a sinking fund obligation
or otherwise, (ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock or (iii) is redeemable at the option of the holder thereof,
in whole or in part, in each case on or prior to the first anniversary of the
Stated Maturity of the Notes.
"Equipment Agreements" means the Equipment Lease Agreement, dated as of July
30, 1996, between Citibank N.A., as lessor, and Galaxy Brasil, as lessee, and
related agreements, and the Equipment Sale and Leaseback Agreement, dated as of
July 30, 1996, between Citibank N.A., as lessor, and Galaxy Brasil, as lessee,
and related agreements, as each such agreement may be amended, supplemented or
otherwise modified from time to time.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"EximBank Credit Agreement" mean the Credit Agreement to be entered into
among the Company, The Chase Manhattan Bank, as lender, and the Export-Import
Bank of the United States, as amended, supplemented or otherwise modified from
time to time.
"Fair Market Value" means, with respect to any asset, the price which could
be negotiated in an arm's-length free market transaction, for cash, between a
willing seller and a willing buyer, neither of which is under compulsion to
complete the transaction. The Fair Market Value of any asset or assets shall be
determined by the Board of Directors of the Company, acting in good faith, and
shall be evidenced by a resolution of such Board of Directors provided to the
Trustee; PROVIDED that, solely for purposes of clause (i) of the covenant
described under "Certain Covenants--Limitation on Sales of Assets and Subsidiary
Stock" the Company shall be deemed not to have received Fair Market Value for an
Asset Disposition unless (a) in the event such Asset Disposition involves an
aggregate amount in excess of $2.0 million, the terms of such transaction have
been approved by a majority of the members of the Board of Directors of the
Company and by a majority of the members of such Board having no personal stake
in such Asset Disposition, if any, and (b) in the event such Asset Disposition
involves an aggregate amount in excess of $20.0 million, the Company has
received a written opinion from an independent investment banking firm of
nationally recognized standing in the United States that such Asset Disposition
is fair to the Company or such Restricted Subsidiary, as the case may be, from a
financial point of view (except that no such opinion shall be required in
connection with a public offering of common stock of a Restricted Subsidiary
either (A) registered under the Securities Act and/or (B) registered with the
CVM and listed on the Sao Paulo Stock Exchange or Rio de Janeiro Stock
Exchange).
"Galaxy Brasil" means Galaxy Brasil S.A., a Restricted Subsidiary of the
Company on the Issue Date.
"Galaxy Brasil Subscribers" means, as of any date, the number of subscribers
to the pay television services offered by Galaxy Brasil, excluding subscribers
who have paid an installation fee to Galaxy Brasil at such date but who are
awaiting installation of such services.
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"Galaxy Latin America" means Galaxy Latin America, a Delaware general
partnership in which the Company holds a 10% equity interest on the Issue Date.
"Galaxy Latin America Partnership Agreement" means the Partnership
Agreement, dated February 13, 1995, as in effect on the Issue Date, among Galaxy
Brasil and a unit of Hughes Electronics, a member of the Cisneros Group and a
subsidiary of Grupo MVS.
"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.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation of any other Person (whether arising by virtue
of partnership arrangements, or by agreement to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Indebtedness of the payment thereof or
to protect such obligee against loss in respect thereof (in whole or in part);
PROVIDED, HOWEVER, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Guarantor" means any Subsidiary that has issued a Guarantee.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder," "holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
"Incur" or "incur" means issue, assume, Guarantee, incur or otherwise become
liable for; PROVIDED, HOWEVER, that any Indebtedness or Capital Stock of a
Person existing at the time such person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be incurred by such
Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used
as a noun shall have a correlative meaning.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of indebtedness of such Person for borrowed money, (ii) the principal
of and premium (if any) in respect of obligations of such Person evidenced by
bonds, debentures, notes or other similar instruments, (iii) all obligations of
such Person in respect of letters of credit or other similar instruments
(including reimbursement obligations with respect thereto), (iv) all obligations
of such Person to pay the deferred and unpaid purchase price of property or
services, which purchase price is due more than six months after the date of
placing such property in service or taking delivery and title thereto or the
completion of such services, (v) all Capitalized Lease Obligations of such
Person and all Attributable Indebtedness of such Person, (vi) all Indebtedness
of other Persons secured by a Lien on any asset of such Person, whether or not
such Indebtedness is assumed by such Person, PROVIDED, HOWEVER, that the amount
of Indebtedness of such Person shall be the lesser of (A) the fair market value
of such asset at such date of determination and (B) the amount of such
Indebtedness of such other Persons, (vii) all Indebtedness of other Persons to
the extent Guaranteed by such Person, (viii) the amount of all obligations of
such Person with respect to the redemption, repayment or other repurchase of any
Disqualified Stock or, with respect to any Subsidiary of the Company, any
Preferred Stock (but excluding,
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in each case, any accrued dividends) and (ix) to the extent not otherwise
included in this definition, Hedging Obligations of such Person; PROVIDED,
HOWEVER, that in no event shall Indebtedness include Trade Payables not overdue
or being contested in good faith. The amount of Indebtedness of any Person at
any date shall be the outstanding balance at such date of all unconditional
obligations as described above and the maximum liability, upon the occurrence of
the contingency giving rise to the obligation, of any contingent obligations at
such date.
"Indebtedness to Annualized Operating Cash Flow Ratio" means, as of any date
of determination, the ratio of (i) the aggregate principal amount of all
outstanding Indebtedness of the Company and its Restricted Subsidiaries as of
such date plus, without duplication, the aggregate liquidation preference or
redemption amount of all Disqualified Stock of the Company (excluding any such
Disqualified Stock (x) held by the Company or a Wholly-Owned Restricted
Subsidiary of the Company or (y) outstanding on the Issue Date), to (ii)
Operating Cash Flow of the Company and its Restricted Subsidiaries for the most
recently ended fiscal quarter for which financial statements are available prior
to such date multiplied by four, determined on a pro forma basis (and after
giving pro forma effect to (A) the incurrence of such Indebtedness and (if
applicable) the application of the net proceeds therefrom, including to
refinance other Indebtedness, as if such Indebtedness was incurred, and the
application of such proceeds occurred, at the beginning of such period; (B) the
incurrence, repayment or retirement of any other Indebtedness by the Company and
its Restricted Subsidiaries since the first day of such period as if such
Indebtedness was incurred, repaid or retired at the beginning of such period
(except that, in making such computation, the amount of Indebtedness under any
revolving credit facility shall be computed based upon the average balance of
such Indebtedness at the end of each month during such period); (C) in the case
of Acquired Indebtedness, the related acquisition as if such acquisition had
occurred at the beginning of such period; and (D) any acquisition or disposition
by the Company and its Restricted Subsidiaries (or by any Person that
subsequently became a Restricted Subsidiary or was merged with or into the
Company or any Restricted Subsidiary since the beginning of such period) of any
company or any business or any assets out of the ordinary course of business, or
any related repayment of Indebtedness, in each case since the first day of such
period, assuming such acquisition or disposition had been consummated on the
first day of such period). For purposes of this definition, whenever pro forma
effect is to be given to a transaction, the pro forma calculation shall be made
in good faith by a responsible financial or accounting officer of the Company.
"Indemnification Agreement" means the Indemnification Agreement to be
entered into among the Company, Galaxy Latin America, Hughes Communications GLA
and affiliates thereof, California Broadcast Center, TVA Communications Ltd.,
Darlene Investments, Inversiones Divtel, D.T., C.A., Grupo Frecuencia Modulada
Television and Grupo MVS.
"Interest Rate Agreement" means with respect to any Person any interest rate
protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are recorded
as accounts receivable on the balance sheet of such Person) or other extension
of credit (including by way of Guarantee or similar arrangement, but excluding
any debt or extension of credit represented by a bank deposit other than a time
deposit) or capital contribution to (by means of any transfer of cash or other
property to others or any payment for property or services for the account or
use of others), or any purchase or acquisition of Capital Stock, Indebtedness or
other similar instruments issued by such Person.
"Issue Date" means the date on which the Notes are originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
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"Minority Investment" means any Investment by the Company or any Restricted
Subsidiary in an entity or Person in which the Company or such Restricted
Subsidiary owns or controls 50.0% or less of the total voting power of the
Capital Stock or other equity interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees of any such entity or Person.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and when
received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to the properties or assets that are the subject of such Asset Disposition or
received in any other noncash form) therefrom, in each case net of (i) all
legal, title and recording tax expenses, commissions and other fees and expenses
incurred, and all Federal, state, foreign and local taxes required to be paid or
accrued as a liability under GAAP, as a consequence of such Asset Disposition,
(ii) all payments made on any Indebtedness which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any Lien upon
such assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Disposition, or by applicable law, be repaid out of the
proceeds from such Asset Disposition, (iii) all distributions and other payments
required to be made to any Person owning a beneficial interest in assets subject
to sale or minority interest holders in Subsidiaries or joint ventures as a
result of such Asset Disposition and (iv) the deduction of appropriate amounts
to be provided by the seller as a reserve, in accordance with GAAP, against any
liabilities associated with the assets disposed of in such Asset Disposition and
retained by the Company or any Restricted Subsidiary of the Company after such
Asset Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result of such issuance or sale.
"Newly-Licensed Service Area" means a service area in which (i) such Special
Restricted Subsidiary is licensed to provide any of Cable or MMDS service and
(ii) neither the Company nor any Restricted Subsidiary is then licensed to
provide such Cable or MMDS service in such service area on the Issue Date.
"Officers' Certificate" means a certificate signed by two Officers.
"Operating Cash Flow" means, for any period, the Consolidated Net Income
(Loss) of the Company and its Restricted Subsidiaries for such period, plus,
without duplication, (i) extraordinary net losses and net losses on sales of
assets outside the ordinary course of business during such period, to the extent
such losses were deducted in computing Consolidated Net Income (Loss), plus (ii)
Consolidated Income Tax Expense, and any provision for taxes utilized in
computing the net losses under clause (i) hereof, plus (iii) Consolidated
Interest Expense (income), net, plus (iv) Other nonoperating (expenses) income,
net (v) depreciation, amortization and all other non-cash charges, to the extent
such depreciation, amortization and other non-cash charges were deducted in
computing such Consolidated Net Income (Loss) (including amortization of
goodwill and other intangibles) (other than non-cash charges which require an
accrual or reserve for cash charges in future periods), less (vi) non-cash items
increasing Consolidated Net Income (Loss) of such Person for such period
(excluding any items which represent the reversal of any accrual of, or cash
reserve for, anticipated cash charges in any prior period and excluding the
amortization of deferred sign-on and hook-up fee revenue).
"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.
"Permitted Business" means (i) the delivery or distribution of television,
radio, paging or other telecommunications services in Latin America and Portugal
and (ii) any business or activity reasonably related thereto, including, without
limitation, any business conducted by the Company or any Restricted
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Subsidiary on the Issue Date, the acquisition, holding or exploitation of any
license relating to the delivery of the services described in clause (i) of this
definition, the development or acquisition of rights to programming for delivery
or distribution in accordance with clause (i) of this definition and any other
business involving voice, data or video telecommunications services.
"Permitted Holders" means each of Abril S.A., Falcon International
Communications LLC, Falcon International Communications L.P., Falcon
International Communications (Bermuda) L.P., The Hearst Corporation, ABC, Inc.
and Chase Manhattan International Finance Ltd. and any entity of which any of
the foregoing, individually or collectively, beneficially owns more than 50.0%
of the Voting Stock.
"Permitted Investment" means (i) an Investment by the Company or any of its
Restricted Subsidiaries in the Company or a Restricted Subsidiary of the Company
or a Person which will, upon making such Investment, become a Restricted
Subsidiary; PROVIDED, HOWEVER, that the primary business of such Restricted
Subsidiary is a Permitted Business; (ii) any Investment in the California
Broadcast Center by the Company or a Restricted Subsidiary in an amount not to
exceed $10.0 million and, upon the repayment in full of such Investment by the
California Broadcast Center to the Company, the Investment of such amount in
Galaxy Latin America; and (iii) Temporary Cash Investments.
"Permitted Liens" means, (i) Liens for taxes, assessments or other
governmental charges not yet delinquent or which are being contested in good
faith and by appropriate proceedings if adequate reserves with respect thereto
are maintained on the books of the Company or such Subsidiary, as the case may
be, in accordance with GAAP; (ii) carriers', warehousemen's, mechanics',
landlords', materialmen's, repairmen's or other like Liens arising in the
ordinary course of business in respect of obligations which are not yet due or
which are bonded or which are being contested in good faith and by appropriate
proceedings if adequate reserves with respect thereto are maintained on the
books of the Company or such Restricted Subsidiary, as the case may be, in
accordance with GAAP; (iii) pledges or deposits in connection with workmen's
compensation, unemployment insurance and other social security legislation; (iv)
deposits to secure the performance of bids, tenders, trade or government
contracts (other than for borrowed money), leases, licenses, statutory
obligations, surety and appeal bonds, performance bonds and other obligations of
a like nature incurred in the ordinary course of business; (v) judgment or
attachment Liens against the Company or any of its Restricted Subsidiaries not
giving rise to an Event of Default; (vi) Liens arising by operation of law;
(vii) Liens in favor of the Company or any Wholly-Owned Restricted Subsidiary of
the Company; (viii) Liens securing Indebtedness Incurred by the Company in
compliance with to clause (i) of paragraph (b) of the covenant described under
"Certain Covenants--Limitation on Indebtedness"; (ix) Liens on property and
assets (together with accounts receivable arising from such property and assets)
of Galaxy Brasil acquired with the proceeds of Indebtedness Incurred by Galaxy
Brasil in compliance with clause (viii) of paragraph (b) of the covenant
described under "Certain Covenants--Limitation on Indebtedness" or with the
proceeds of other Indebtedness Incurred in compliance with the Indenture,
PROVIDED that such Liens may not secure Indebtedness exceeding an amount equal
to the greater of (A) the amount permitted to be Incurred pursuant to such
clause (viii) and (B) an amount equal to the Operating Cash Flow of Galaxy
Brasil for the four most recent fiscal quarters for which financial statements
are available prior to the date of Incurrence; (x) Liens on real or personal
property of the Company or a Restricted Subsidiary of the Company acquired,
constructed or constituting improvements made after the Issue Date to secure
Purchase Money Indebtedness Incurred after the Issue Date in compliance with the
Indenture; PROVIDED, that (A) such Liens do not extend to any assets other than
the assets so acquired, (B) such Liens shall be created no later than 10 days
after the acquisition of such assets and (C) the principal amount of such
Indebtedness secured by such a Lien does not exceed 80% of such purchase price
or cost of construction or improvement of the property subject to such Lien;
(xi) Liens existing on the Issue Date; (xii) the pledge by the Company (A) to
the other members of Galaxy Latin America of warrants and promissory notes it
holds in the California Broadcast Center to secure its obligations under the
Equipment Agreements and the contribution agreement to be entered into in
connection with the SurFin Guarantee and the pledge of such warrants and
promissory notes, together with the equity interest it holds of Galaxy
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Latin America, to secure its tax indemnity obligations under the Indemnification
Agreement and (B) to Falcon International of the shares of Capital Stock of the
Company purchased with Put Promissory Notes; and (xiii) Liens to secure
Indebtedness Incurred to extend, renew, refinance or refund (or successive
extensions, renewals, refinancings or refundings), in whole or in part,
Indebtedness secured by any Lien referred to in the foregoing clauses (vii),
(viii), (ix), (x) and (xi) so long as such Lien does not extend to any other
property and the principal amount of Indebtedness so secured is not increased
except as otherwise permitted under the definition of Refinancing Indebtedness.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision hereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the note which is due or overdue or is to become due at the
relevant time.
"Purchase Money Indebtedness" means Indebtedness (i) consisting of the
deferred purchase price of property, conditional sale obligations, obligations
under any title retention agreement and other purchase money obligations, in
each case where the maturity of such Indebtedness does not exceed the
anticipated useful life of the asset being financed, and (ii) incurred to
finance the acquisition by the Company or a Restricted Subsidiary of such asset,
including additions or improvements.
"Put Promissory Notes" means any promissory notes which may be issued by the
Company to Falcon International pursuant to the Stockholders Agreement, as
amended, in the event the Indenture prohibits the Company from purchasing shares
of Capital Stock held by such stockholder; PROVIDED that (a) such notes have
been expressly subordinated in right of payment in full to the Notes (including
principal, interest and premium, if any, and as a consequence of any repurchase,
redemption, or other repayment of the Notes, by way of optional redemption,
Asset Sale Offer or Change of Control Offer to the extent any applicable rights
to repayment are exercised by the Noteholders), (b) such notes are not
Guaranteed by any of the Company's Subsidiaries and are not secured by any Lien
on any property or asset of the Company or any Restricted Subsidiary (other than
by the pledge of the shares of Capital Stock of the Company purchased with Put
Promissory Notes), (c) such notes do not have a Stated Maturity of principal or
any redemption or repurchase or other similar provision (upon a default or
otherwise) earlier than a date at least one year after the final Stated Maturity
of the Notes; and (d) such notes bear interest at a rate consistent with the
terms of the Stockholders Agreement, as amended; PROVIDED, FURTHER, that
payments of interest on such notes may be made solely to the extent Restricted
Payments in like amount may then be made in accordance with the covenant
described under "Certain Covenants -- Limitation on Restricted Payments," with
any such interest payment being included in the calculation of whether the
conditions of clause (z) of paragraph (a) of such covenant have been met with
respect to any subsequent Restricted Payments.
"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, renew, repay or extend (including pursuant to any defeasance
or discharge mechanism) (collectively, "refinances," and "refinanced" shall have
a correlative meaning) any Indebtedness existing on the date of the Indenture or
Incurred in compliance with the Indenture (including Indebtedness of the Company
that refinances Indebtedness of any Restricted Subsidiary and Indebtedness of
any Restricted Subsidiary that refinances Indebtedness of another Restricted
Subsidiary) including Indebtedness that refinances Refinancing Indebtedness,
PROVIDED, HOWEVER, that (i) in respect of Indebtedness having a Stated Maturity
after the Stated Maturity of the Notes, the Refinancing Indebtedness has a
Stated Maturity no earlier than the Stated Maturity of the Indebtedness being
refinanced, (ii) in respect of Indebtedness having a Stated Maturity
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prior to the Stated Maturity of the Notes, the Refinancing Indebtedness bears an
interest rate materially lower than that of the Indebtedness being refinanced,
(iii) the Refinancing Indebtedness has an Average Life at the time such
Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being refinanced, (iv) such Refinancing
Indebtedness is Incurred in an aggregate principal amount (or if issued with
original issue discount, an aggregate issue price) that is equal to or less than
the sum of the aggregate principal amount (or if issued with original issue
discount, the aggregate accredited value) then outstanding of the Indebtedness
being refinanced and (v) the Refinancing Indebtedness shall be subordinated or
PARI PASSU (whichever is applicable) in right of payment to the Notes to the
same extent as the Indebtedness being refinanced is subordinated or PARI PASSU
in right of payment to the Notes; PROVIDED, FURTHER, that Refinancing
Indebtedness shall not include Indebtedness of a Restricted Subsidiary which
refinances Indebtedness of the Company or Indebtedness of the Company or a
Restricted Subsidiary that refinances Indebtedness of an Unrestricted
Subsidiary. Notwithstanding the foregoing, in the case of Indebtedness
represented by obligations described in clause (iv) of the definition of
"Indebtedness," the re-incurrence of such Indebtedness within 60 days after the
repayment thereof shall be deemed to be Refinancing Indebtedness for purposes of
this definition; PROVIDED, HOWEVER, that it otherwise complies with the terms of
this definition and that the amount of such Indebtedness deemed to be
Refinancing Indebtedness hereunder shall not exceed $50.0 million at any one
time.
"Representative" means any trustee, agent or representative (if any) of an
issue of Senior Indebtedness.
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Person owning such property transfers
such property to another Person and leases it back from such Person.
"SEC" or "Commission" means the Securities and Exchange Commission.
"Senior Credit Facility" means any senior credit facility (whether a term or
a revolving facility) as such credit facility may be amended, modified,
supplemented, restated or replaced from time to time.
"Significant Equity Offering" means either (i) a public offering of Common
Stock of the Company either (A) registered under the Securities Act and/or (B)
registered with the CVM and listed on the Sao Paulo Stock Exchange or Rio de
Janeiro Stock Exchange or (ii) an offering on behalf of the Company pursuant to
Rule 144A under the Securities Act of Common Stock of the Company to 100 or more
beneficial holders if such Common Stock is thereafter included for trading
privileges in the PORTAL trading system of Nasdaq.
"Special Restricted Subsidiary" means any Restricted Subsidiary of the
Company that has been designated by the Board of Directors, by a Board
Resolution delivered to the Trustee, as a Special Restricted Subsidiary and as
to which there has not been an effective revocation, in each case in accordance
with the covenant under "Certain Covenants--Limitation on Designations of
Special Restricted Subsidiaries."
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable.
"Strategic Investor" means any Person engaged in a Permitted Business that
as of the date of determination has a Total Equity Market Capitalization of at
least $1.0 billion.
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Notes pursuant to a written agreement.
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"Subordinated Shareholder Loans" means Indebtedness of the Company for money
borrowed from a shareholder beneficially owning at least 5.0% of the issued and
outstanding shares of common stock of the Company (or any Affiliate of such
shareholder), PROVIDED that (A) such Indebtedness (and any refinancing thereof)
has been expressly subordinated in right of payment to the prior payment in full
of all Indebtedness (including principal, interest and premium, if any, under
the Notes and the Indenture) of the Company (including as a consequence of any
repurchase, redemption or other repayment of the Notes, by way of optional
redemption, Asset Sale Offer, or Change of Control Offer to the extent any
applicable rights to repayment are exercised by the Noteholders), (B) such
Indebtedness (and any refinancing thereof) is not Guaranteed by any of the
Company's Subsidiaries and is not secured by any Lien on any property or asset
of the Company or any Restricted Subsidiary, (C) such Indebtedness (and any
refinancing thereof) does not have a Stated Maturity of principal or any
redemption or repurchase or other similar provision (upon a default or
otherwise) earlier than a date at least one year after the final Stated Maturity
of the Notes and (D) such Indebtedness bears interest at a rate consistent with
prevailing market practice for subordinated loans; PROVIDED FURTHER that
payments of interest on such Indebtedness (and any refinancing thereof) may be
made solely to the extent Restricted Payments in like amount may then be made in
accordance with the covenant described under "Certain Covenants--Limitation on
Restricted Payments," with any such interest payment being included in the
calculation of whether the conditions of clause (z) of paragraph (a) of such
covenant have been met with respect to any subsequent Restricted Payments.
"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.
"Subsidiary Guarantee" means, individually, any Guarantee of payment of the
Notes which may from time to time be executed and delivered by a Subsidiary or
affiliate of the Company pursuant to the terms of the Indenture, and,
collectively, all such Guarantees. Each such Subsidiary Guarantee will be in the
form prescribed in the Indenture.
"SurFin Guarantee" means the Guarantee, dated as of September 18, 1996, by
the Company in favor of Citicorp USA, Inc. as such guarantee may be amended,
modified, supplemented or restated from time to time.
"Temporary Cash Investments" means any of the following: (i) any Investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof,
(ii) Investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States of America having capital, surplus and undivided profits
aggregating in excess of $250 million (or the foreign currency equivalent
thereof) and whose long-term debt, or whose parent holding company's long-term
debt, is rated "A" (or such similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined in Rule 436
under the Securities Act), (iii) repurchase obligations with a term of not more
than seven days for underlying securities of the types described in clause (i)
above entered into with a bank meeting the qualifications described in clause
(ii) above, (iv) Investments in commercial paper, maturing not more than 180
days after the date of acquisition, issued by a corporation (other than an
Affiliate of the Company) organized and in existence under the laws of the
United States of America or any foreign country recognized by the United States
of America with a rating at the time as of which any investment therein is made
of "P-1" (or higher) according to Moody's Investors Service, Inc. or "A-1" (or
higher) according to Standard and Poor's Ratings Group.
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"Total Equity Market Capitalization" of any Person means, as of any date of
determination, the product of (i) the aggregate number of outstanding shares of
Common Stock of such Person on such date (which shall not include any options or
warrants on, or securities convertible or exchangeable into, shares of Common
Stock of such Person) and (ii) the average closing price of such Common Stock
over the 20 consecutive trading days immediately preceding such date. If no such
closing price exists with respect to shares of any such class, the value of such
shares shall be determined by the Board of Directors in good faith and evidenced
by a resolution of the Board of Directors filed with the Trustee.
"Trade Payables" means, with respect to any Person, any accounts payable or
any indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by such Person (including letters of credit issued in respect
thereof) arising in the ordinary course of business in connection with the
acquisition of either (x) current assets as characterized in accordance with
GAAP or (y) services which are currently expensed in accordance with GAAP.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company (other
than a Guarantor) designated as such pursuant to and in compliance with the
covenant described under "Certain Covenants--Limitation on Designations of
Unrestricted Subsidiaries" and (ii) any Subsidiary of an Unrestricted
Subsidiary.
"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. For purposes of determining whether any
Indebtedness can be incurred (including Permitted Indebtedness), any Investment
can be made and any Affiliate Transaction can be undertaken (a "Tested
Transaction"), the "US Dollar Equivalent" of such Indebtedness, Investment or
Affiliate Transaction shall be determined on the date incurred, made or
undertaken and no subsequent change in the US Dollar Equivalent shall cause such
Tested Transaction to have been incurred, made or undertaken in violation of the
Indenture.
"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.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Wholly-Owned Subsidiary" means a Subsidiary of the Company, at least 95.0%
of the Capital Stock of which (other than directors' qualifying shares) is owned
by the Company or another Wholly-Owned Subsidiary of the Company.
BOOK-ENTRY; DELIVERY AND FORM
Except as set forth below, the Exchange Notes will be issued in the form of
one or more registered notes in global form without coupons (each a "Global
Note"). Upon issuance, each Global Note will be deposited with, or on behalf of,
The Depository Trust Company ("DTC") and registered in the name of Cede & Co.,
as nominee of DTC.
Old Notes originally purchased by or transferred to (i) institutional
"accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act) who are not "qualified institutional buyers" (as defined in Rule
144A under the Securities Act and referred to as "QIBs"), (ii) QIBs who elected
to take physical delivery of their certificates instead of holding their
interest in Global Notes, or (iii) any other holders who are not QIBs, which Old
Notes were issued in registered form without coupons (the "Old
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Certificated Notes") are exchangeable for Exchange Notes in registered form
without coupons (the "Exchange Certificated Notes").
Interests in the Global Notes will be exchangeable or transferable, as the
case may be, for Exchange Certificated Notes if (i) DTC notifies Tevecap that it
is unwilling or unable to continue as depositary for such Global Notes, or DTC
ceases to be a "Clearing Agency" registered under the Exchange Act, and a
successor depositary is not appointed by Tevecap within 90 days, or (ii) an
Event of Default has occurred and is continuing with respect to such Notes. Upon
the occurrence of any of the events described in the preceding sentence, Tevecap
will cause the appropriate Exchange Certificated Notes to be delivered.
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. QIBs 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 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 Notes or to pledge the 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 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 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
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
148
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 payments made on account of Notes by the
Depository, or for maintaining, supervising or reviewing any records of the
Depository relating to such Notes.
Payments with respect to the principal of, premium, if any, and interest on
any 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 Notes under the
Indenture. Under the terms of the Indenture, the Company and the Trustee may
treat the persons in whose names the 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 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 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 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 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 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 Notes to be issued).
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Notes will be made in immediately available funds. So
long as the 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 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 Notes are expected to trade in the Depositary's
Same-Day Funds Settlement System, and secondary market trading activity in the
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 Notes.
149
INCOME TAX CONSIDERATIONS
BRAZIL
The following is a summary of the material Brazilian income tax consequences
to Tevecap in connection with the sale and repayment of the Notes including any
interest thereon) and to beneficial owners of the Notes that are non-residents
of Brazil in connection with the purchase, ownership and disposition of such
Notes. This summary is limited to Tevecap and to non-residents of Brazil which
acquire the Notes at the original issue price, and does not address investors
who purchase Notes at a premium or market discount. In addition, this summary is
based on the Brazilian tax regulations as presently in effect and does not take
into account possible future changes in such tax laws.
Individuals domiciled in Brazil and Brazilian companies are taxed in Brazil
on the basis of their worldwide income (which includes earnings of Brazilian
companies' foreign subsidiaries, branches and affiliates). The earnings of
branches of foreign companies and non- Brazilian residents in general are taxed
in Brazil only when derived from Brazilian sources. Interest, fees, commissions
and any other income (which for the purposes of this paragraph includes any
deemed income on the difference between the issue price of the Notes and the
price at which the Notes are redeemed) payable by a Brazilian obligor to an
individual, company, entity, trust or organization domiciled outside Brazil is
considered derived from Brazilian sources and is therefore subject to income tax
withheld at the source. Brazilian tax laws expressly authorize the paying source
to pay the income or earnings net of taxes and, therefore, to assume the cost of
the applicable tax. The rate of withholding is 15.0% or such other lower rate as
is provided for in an applicable tax treaty between Brazil and such other
country where the recipient of the payment has its domicile. Notwithstanding the
foregoing, the applicable withholding tax rate for negotiable instruments such
as the Notes was reduced to zero, pursuant to Resolutions 1853 of July 31, 1991
and 644 of October 22, 1980 of the Central Bank, subject to Central Bank
Circular 2661 of February 8, 1996, which restricts such withholding tax
reductions to negotiable instruments having a minimum maturity of 96 months. As
a result, since the Notes have an original maturity of 96 months, such reduction
will apply to payments of interest and other income with respect to the Notes.
If, however, any Note is redeemed prior to November 26, 2004, such reduction
will not apply and, therefore, upon such redemption the Brazilian withholding
tax will be imposed on the amount of interest, fees and commissions paid on such
Notes from the date of issue through the date of redemption. Based on the advice
of its Brazilian tax counsel, Tevecap believes and intends to take the position
for tax reporting purposes that, in the event of any such early redemption to
which such withholding tax applies, so long as the paying agent through which
such payment is made is located in Japan and payment to such paying agent
discharges the obligations of Tevecap to make payments in respect of the Notes,
interest and other income with respect to the Notes will be subject to Brazilian
withholding tax at a rate of 12.5% under the tax treaty in effect between Brazil
and Japan. In any event, under the terms of the Notes, Tevecap would be required
to gross up Noteholders for any Brazilian withholding tax, subject to customary
exceptions. Tevecap has the right to redeem the Notes at par in the event that
it is required to gross up for Brazilian withholding tax imposed at a rate in
excess of 15.0%.
Any earnings or capital gains resulting from the sale (whether inside or
outside Brazil) of any Notes by a non-resident of Brazil to another non-resident
of Brazil are not subject to tax in Brazil. Earnings or capital gains resulting
from the sale (whether inside or outside Brazil) of any Notes by a non-resident
of Brazil to a resident of Brazil should not be subject to tax in Brazil,
although the matter is not free from doubt.
On February 8, 1996, the Brazilian Federal Government issued Decree No.
1,815, which imposed a tax on Brazilian issuers with respect to foreign exchange
transactions ("IOF tax") related to the entering into Brazil of proceeds
resulting from foreign loans (including the issue of securities such as the
Notes). The rate of IOF tax paid by the Company with respect to the issuance of
the Notes was zero percent. Decree No. 1,815 was revoked by Decree No. 2,219 of
May 2, 1997 which currently regulates the IOF tax. The IOF
150
tax rate was reduced to zero upon the adoption of Ordinance No. 85 on April 24,
1997. However, under Law No. 8.894 dated June 21, 1994, such tax rate may be
increased up to 25%.
On August 15, 1996, the Brazilian Congress approved Constitutional Amendment
No. 12 creating a new temporary tax, the Contribuicao Provisoria sobre
Movimentacao Financeira ("CPMF"). Based on such Amendment, Law No. 9.311 of
October 24, 1996 was enacted, creating the CPMF tax. Under Law No. 9.311/96, all
financial debit and money transfers through Brazilian bank accounts effected as
from January 23, 1997 until February 22, 1998, including payments made by the
Company with respect to the Notes, will be subject to the assessment of the CPMF
tax at the rate of 0.2%.
There is no stamp, transfer or other similar tax in Brazil with respect to
the transfer, assignment or sale of any debt instrument outside Brazil
(including the Notes).
UNITED STATES
The following is a summary of the material United States Federal income tax
consequences to a beneficial owner of the Notes that is a citizen or resident of
the United States, a corporation, partnership or other entity created or
organized in or under the laws of the United States or any State thereof, an
estate the income of which is subject to United States Federal income taxation
regardless of its source or a trust for which a court within the United States
is able to exercise primary supervision over its administration and for which
one or more U.S. fiduciaries have the authority to control all substantive
decisions, as well as other persons subject to United States Federal income
taxation on a net income basis in respect of the purchase, ownership and
disposition of a Note ("US Holders"). Such tax treatment may vary depending upon
the particular situation of a US Holder. This summary does not discuss all of
the tax consequences that may be relevant to certain types of investors subject
to special treatment under the United States Federal income tax laws (such as
individual retirement accounts and other tax deferred accounts, banks,
securities broker-dealers, life insurance companies, tax-exempt organizations,
foreign persons, persons whose "functional currency" is other than the US dollar
or persons that hold Notes as part of a "straddle" or "conversion transaction"
or otherwise as part of a "synthetic asset") and is limited to investors which
hold Notes as capital assets. In addition, this summary is limited to US Holders
that acquire the Notes at their issue price and does not address investors that
purchase Notes at a premium or market discount. This summary is based on the
Internal Revenue Code of 1986, as amended (the "Code"), final, temporary and
proposed Treasury regulations thereunder (the "Regulations"), revenue rulings,
court cases, and other legal authorities as now in effect (or proposed) and as
currently interpreted, and does not take into account possible changes in such
tax laws or other legal authorities or such interpretations. No rulings on any
of the issues discussed below will be sought from the United States Internal
Revenue Service (the "IRS").
PROSPECTIVE PURCHASERS OF THE NOTES ARE ADVISED TO CONSULT THEIR TAX
ADVISERS AS TO THE CONSEQUENCES OF A PURCHASE AND SALE OF NOTES, INCLUDING,
WITHOUT LIMITATION, (I) THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR
NON-US TAX LAWS TO WHICH THEY MAY BE SUBJECT, AND OF ANY POSSIBLE LEGISLATIVE OR
ADMINISTRATIVE CHANGES IN LAW, (II) THE UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES OF THE POSSIBLE DEDUCTION BY THE ISSUER OF BRAZILIAN TAXES (AND OF
THE PAYMENT BY THE ISSUER OF ADDITIONAL AMOUNTS WITH RESPECT THERETO) FROM
PAYMENTS ON THE NOTES, (III) THE AVAILABILITY FOR UNITED STATES FEDERAL INCOME
TAX PURPOSES OF A CREDIT OR DEDUCTION FOR ANY BRAZILIAN TAXES SO DEDUCTED AND
(IV) THE CONSEQUENCES OF PURCHASING THE NOTES AT A PRICE OTHER THAN THEIR ISSUE
PRICE.
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INTEREST ON THE NOTES
Interest on the Notes will be taxable to a US Holder as ordinary income at
the time it accrues or is received in accordance with the US Holder's method of
accounting for tax purposes. The amount includible in the income of a US Holder
will be the gross amount of interest, including any Additional Amounts, if any,
payable to holders of Notes (I.E., the amount before deduction of any Brazilian
withholding taxes).
DISPOSITION OF A NOTE
Generally, any sale, redemption or other taxable disposition of a Note by a
US Holder will result in taxable gain or loss equal to the difference between
(1) the sum of the amount of cash and the fair market value of other property
received with respect to such taxable sale, redemption or other distribution
(other than consideration attributable to accrued interest not previously taken
into account, which consideration would be treated as interest received) and (2)
the US Holder's tax basis in the Note. Any gain or loss upon a sale or other
disposition of a Note will be capital gain or loss (which will be long-term if
the Note is held for more than one year).
EXCHANGE OFFER
The exchange of Old Notes for Exchange Notes pursuant to the Exchange Offer
will not be considered a recognition event for United States Federal income tax
purposes and accordingly a US Holder will not recognize taxable gain or loss as
a result thereof. For the purposes of determining the amount and character of
gain or loss upon the subsequent sale or exchange of Exchange Notes, a US Holder
would have the same tax basis and holding period in an Exchange Note as such US
Holder's tax basis and holding period in the Note exchanged therefor.
EFFECT OF BRAZILIAN WITHHOLDING TAXES
It is believed that payments with respect to a Note will not be subject to
Brazilian withholding tax unless the Note is redeemed prior to November 26,
2004. See "--Brazil." In the case of any Note which is so redeemed, withholding
taxes in respect of interest previously paid may be imposed by Brazil at the
time of redemption. Any Brazilian tax withheld generally will be treated as a
foreign income tax that US Holders may elect to deduct in computing their
taxable income or, subject to the limitations on foreign tax credits generally,
to credit against their United States Federal income tax liability. No such
deduction or credit will be available to the extent Brazil pays a subsidy to a
US Holder, a related person or Tevecap, the amount of which is determined
(directly or indirectly) by reference to the amount of the withholding tax.
While Brazil does not have a program or policy of paying such subsidies at
present, it has had programs of that nature in the past and could implement such
programs again in the future. For purposes of determining a US Holder's United
States foreign tax credit, the gain or loss on the sale, redemption or other
taxable disposition of a Note will generally constitute United States source
income. Interest (including any Additional Amounts payable by Tevecap) will
generally constitute foreign source passive income or financial services income
for United States foreign tax credit purposes. However, if a Note is redeemed
prior to November 26, 2004, and payments with respect to the Note are subject to
Brazilian withholding tax imposed at a rate of 5.0% or more, the IRS might
retroactively treat interest paid with respect to the Note as high withholding
tax interest. In any event, because the amount of foreign taxes for which the
foreign tax credit may be taken for the taxable year is generally limited to an
amount equal to the US Holder's United States Federal income tax rate multiplied
by its foreign source income for the taxable year, a US Holder may have
insufficient foreign source income to utilize fully any foreign tax credit
attributable to such Brazilian withholding taxes (but such US Holder may be
entitled to utilize the foreign tax credit attributable to such withholding
taxes for the holders' previous two or succeeding five taxable years, or such
withholding taxes may instead be deductible by the US Holder). A US Holder may
be required to provide the IRS with a certified copy of the receipt evidencing
payment of withholding tax
152
imposed in respect of payments on the Notes in order to claim a foreign tax
credit in respect of such withholding tax.
INFORMATION REPORTING AND BACKUP WITHHOLDING
For each calendar year in which the Notes are outstanding, each DTC
participant or indirect participant holding an interest in a Note on behalf of a
US Holder and each paying agent making payments in respect of a Note will
generally be required to provide the IRS with certain information, including
such US Holder's name, address and taxpayer identification number (either such
US Holder's Social Security number or its employer identification number, as the
case may be), and the aggregate amount of interest and principal paid to such US
Holder during the calendar year. These reporting requirements, however, do not
apply with respect to certain US Holders, including corporations, securities
dealers, other financial institutions, tax-exempt organizations, qualified
pension and profit sharing trusts, individual retirement accounts.
In the event that a US Holder fails to establish its exemption from such
information reporting requirements or is subject to the reporting requirements
described above and fails to supply its correct taxpayer identification number
in the manner required by applicable law, or underreports its tax liability, the
direct or indirect DTC participant holding such interest on behalf of such US
Holder or paying agent making payments in respect of a Note may be required to
"backup" withhold a tax equal to 31.0% of each payment of interest and principal
with respect to the Notes. This backup withholding tax is not an additional tax
and may be credited against the US Holder's United States Federal income tax
liability if the required information is furnished to the IRS.
153
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Securities for its own account
pursuant to the Registered Exchange Offer must acknowledge that it will deliver
a prospectus in connection with any resales of such Exchange Securities. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Securities received in
exchange for Securities where such Securities were acquired as a result of
market-making activities or other trading activities. Each of the Company and
the Subsidiary Guarantors has agreed that, for a period of 90 days after the
Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale at the
expense of such broker-dealer. In addition, until February 4, 1998, all dealers
effecting transactions in the Exchange Securities may be required to deliver a
prospectus.
The Company will not receive any proceeds from any sale of Exchange
Securities by broker-dealers. Exchange Securities received by broker-dealers for
their own account pursuant to the Registered Exchange Offer may be sold from
time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Exchange
Securities or a combination of such methods of resale, at market prices
prevailing at the time of resale, at prices related to such prevailing market
prices or at negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer or the
purchasers of any such Exchange Securities. Any broker-dealer that resells
Exchange Securities that were received by it for its own account pursuant to the
Registered Exchange Offer and any broker or dealer that participates in a
distribution of such Exchange Securities may be deemed to be an "underwriter"
within the meaning of the Securities Act and any profit on any such resale of
Exchange Securities and any commission or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The Letter of Transmittal states that, by acknowledging that it will deliver 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.
For a period of 90 days after the Expiration Date the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the Letter
of Transmittal at the expense of such broker-dealer. The Company and the
Subsidiary Guarantors have jointly and severally agreed to pay all expenses
incident to the Registered Exchange Offer (including the expenses of one counsel
for the Holders of the Securities) other than commissions or concessions of any
broker-dealers and will indemnify the Holders of the Securities (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
EXPERTS
The consolidated balance sheets of Tevecap S.A. and Subsidiaries as of
December 31, 1996 and 1995 and the related statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1996 have been included herein in reliance on the report of
Coopers & Lybrand, independent public accountants, given on the authority of
that firm as experts in auditing and accounting.
The balance sheets of TVA Sistema de Televisao S.A. as of December 31, 1996
and 1995 and the related statements of income, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31, 1996
have been included herein in reliance on the report of Coopers & Lybrand,
independent public accountants, given on the authority of that firm as experts
in auditing and accounting.
The balance sheets of TVA Sul Participacoes and Subsidiaries as of December
31, 1996 and 1995 and the related statements of income, changes in shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1996 have been included herein in reliance on the report of Coopers &
154
Lybrand, independent public accountants, given on the authority of that firm as
experts in auditing and accounting.
The Financial Information of TV Alfa Cabo Ltda., TCC TV a Cabo Ltda., CCS
Camboriu Cable System de Telecommunicoes Ltda., TVA Sul Foz do Iguacu Ltda., and
TVA Sul Santa Catarina Ltda. for the periods ended December 31, 1996 have been
included herein in reliance on the reports of Coopers & Lybrand, independent
public accountants, given on the authority of that firm as expects in auditing
and account.
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the
Exchange Notes being offered hereby will be passed upon for the Company by Basch
& Rameh--Advogados e Consultores, Sao Paulo, with respect to matters of
Brazilian law, and by Mayer, Brown & Platt, New York, with respect to matters of
United States federal law and New York law. The matters referred to under
"Income Tax Considerations--United States" will be passed upon for the Company
by Mayer, Brown & Platt, New York.
AVAILABLE INFORMATION
Tevecap and the Guarantors have filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement on Form F-4 under the
Securities Act of 1933 (the "Securities Act"), with respect to the Exchange
Securities offered hereby (the "Exchange Offer Registration Statement"). This
Prospectus, which constitutes a part of the Exchange Offer Registration
Statement, does not contain all the information set forth in the Exchange Offer
Registration Statement, certain parts of which have been omitted from the
Prospectus in accordance with the rules and regulations of the Commission. For
further information with respect to Tevecap, the Guarantors and the Exchange
Securities offered hereby, reference is made to the Exchange Offer Registration
Statement, including the exhibits and schedules filed therewith, and the
financial statements and notes filed as a part thereof. Statements made in the
Prospectus concerning the contents of any document referred to herein are not
necessarily complete. With respect to each such document filed with the
Commission as an exhibit to the Exchange Offer Registration Statement, reference
is made to the exhibit for a more complete description of the matter involved,
and each such statement shall be deemed qualified in its entirely by such
reference.
Tevecap is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith is required to file reports with the Commission. All reports and other
information filed by Tevecap, and the Exchange Offer Registration Statement,
including the exhibits and schedules thereto, may be inspected and copied at the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission located at Seven World Trade Center, New York, New York 10048, and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials may be obtained from the Public
Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and its public reference facilities in New
York, New York, and Chicago, Illinois, at the prescribed rates.
As a result of the filing of the Exchange Offer Registration Statement with
the Commission, the Guarantors will become subject to the informational
requirements of the Exchange Act, and in accordance therewith will be required
to file reports and other information with the Commission. The Indenture
provides that, whether or not Tevecap has a class of securities registered under
the Exchange Act, Tevecap shall furnish without cost to each holder of Notes and
file with the Commission (whether or not Tevecap is a public reporting company
at the time), the Trustee and the Initial Purchasers: (i) within 140 days after
the end of each fiscal year of Tevecap, annual reports on Form 20-F (or any
successor form) containing the information required to be contained therein (or
required in such successor form); (ii) within 60 days after the end of each of
the first three fiscal quarters of each fiscal year, reports on Form 6-K (or any
successor
155
form); and (iii) promptly from time to time after the occurrence of any event
required to be therein reported, such other reports on Form 6-K (or any
successor form) containing substantially the same information required to be
contained in Form 8-K (or required in any successor form). Each of the reports
will be prepared in accordance with US GAAP consistently applied and will be
prepared in accordance with the applicable rules and regulations of the
Commission.
As foreign private issuers, Tevecap and the Guarantors are exempt from
certain provisions of the Exchange Act prescribing the furnishing and content of
proxy statements.
PUBLIC DOCUMENTS
The information presented in the section entitled "Annex A--The Federative
Republic of Brazil" is based upon material obtained from the Central Bank of
Brazil, the Sao Paulo and Rio de Janeiro Stock Exchanges, the IBGE and from
other publicly available information referred to therein. The information is
believed to be accurate but has not been independently verified by Tevecap or
any of its advisors in connection with the Offering.
156
TEVECAP S.A. AND SUBSIDIARIES
REPORT ON CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995 AND FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED
DECEMBER 31, 1996
TEVECAP S.A. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
PAGE
-----
Report of Independent Accountants.......................................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995............................................... F-3
Consolidated Statements of Operations for each of the three years in the period ended December 31, 1996.... F-4
Consolidated Statements of Change in Shareholders' Equity and Statement of Redeemable Common Stock for each
of the three years in the period ended December 31, 1996................................................. F-5
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1996.... F-6
Notes to these Consolidated Financial Statements........................................................... F-8
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
TEVECAP S.A.
We have audited the accompanying consolidated balance sheets of TEVECAP S.A.
and subsidiaries (the "Company") as of December 31, 1996 and 1995, and the
related consolidated statements of operations, changes in shareholders' equity
and redeemable common stock and cash flows for each of the three years in the
period ended December 31, 1996, all expressed in United States dollars. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of TEVECAP S.A.
and subsidiaries as of December 31, 1996 and 1995, and the consolidated results
of operations and cash flows for each of the three years in the period ended
December 31, 1996, in conformity with accounting principles generally accepted
in the United States of America.
Coopers & Lybrand
Sao Paulo, Brazil
April 11, 1997
F-2
TEVECAP S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS OF U.S. DOLLARS)
DECEMBER 31,
--------------------
1996 1995
--------- ---------
ASSETS
Current assets
Cash and cash equivalents (Note 3)......................................................... $ 104,798 $ 24,201
Accounts receivable, net (Note 4).......................................................... 32,296 11,253
Inventories (Note 5)....................................................................... 13,095 13,076
Film exhibition rights (Note 6)............................................................ 1,061 30
Prepaid and other assets (Note 7).......................................................... 2,829 2,968
Other accounts receivable (Note 8)......................................................... 3,008 985
--------- ---------
Total current assets................................................................... 157,087 52,513
--------- ---------
Property, plant and equipment, net (Note 12)................................................. 233,593 131,266
Investments (Note 11)
Equity affiliates.......................................................................... 7,667 3,462
Cost basis investees....................................................................... 16,326 11,240
Concessions, net........................................................................... 17,574 7,978
Loans to related companies (Note 9).......................................................... 15,308 6,732
Debt issuance costs.......................................................................... 9,145 --
Others....................................................................................... 2,422 3,657
--------- ---------
Total assets........................................................................... $ 459,122 $ 216,848
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term bank loans (Note 13)............................................................ $ 18,039 $ --
Film suppliers............................................................................. 7,012 5,892
Other suppliers............................................................................ 52,932 52,078
Taxes payable other than income taxes...................................................... 8,953 6,171
Accrued payroll and related liabilities.................................................... 6,141 4,571
Advance payments received from subscribers................................................. 10,482 3,986
Other accounts payable (Note 14)........................................................... 4,543 3,272
--------- ---------
Total current liabilities.............................................................. 108,102 75,970
--------- ---------
Long-term liabilities
Loans (Note 13)............................................................................ 250,464 --
Loans from related companies (Note 9)...................................................... 2,721 586
Loans from shareholders (Note 15).......................................................... 1,640 3,086
Provision for claims (Note 19)............................................................. 5,045 3,763
Liability to fund equity investee (Note 11)................................................ 1,107 2,169
Deferred hook-up fee revenue............................................................... 4,883 --
--------- ---------
Total long-term liabilities............................................................ 265,860 9,604
--------- ---------
Commitments and contingencies (Note 17)
Minority interest............................................................................ 1,778 --
Redeemable common stock, no par value, 85,637,516 shares issued and outstanding.............. 164,910 149,534
Shareholders' equity
Common stock, no par value, 111,075,339 shares issued and outstanding (Note 18)............ 142,495 142,495
Accumulated deficit........................................................................ (224,023) (160,755)
--------- ---------
Total shareholders' equity............................................................. (81,528) (18,260)
--------- ---------
Total liabilities and shareholders' equity............................................. $ 459,122 $ 216,848
--------- ---------
--------- ---------
The accompanying notes are an integral part of these consolidated financial
statements
F-3
TEVECAP S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF U.S. DOLLARS)
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
Gross revenues
Monthly subscriptions....................................................... $ 123,020 $ 62,496 $ 27,976
Installation................................................................ 61,717 26,045 6,997
Advertising................................................................. 7,532 8,377 5,727
Indirect programming........................................................ 11,377 2,866 1,626
Other....................................................................... 8,192 2,226 1,446
Revenue taxes............................................................... (13,747) (7,506) (872)
---------- ---------- ----------
Net revenue............................................................. 198,091 94,504 42,900
---------- ---------- ----------
Direct operating expenses
Payroll and benefits........................................................ 27,203 12,520 8,022
Programming................................................................. 42,391 21,609 12,133
Transponder lease cost...................................................... 10,847 7,568 1,555
Technical assistance........................................................ 5,507 5,152 1,622
Vehicle rentals............................................................. 1,862 1,732 788
TVA magazine................................................................ 6,842 3,318 1,430
Other costs................................................................. 17,645 10,127 3,109
---------- ---------- ----------
112,297 62,026 28,659
---------- ---------- ----------
Selling, general and administrative expenses
Payroll and benefits........................................................ 27,431 21,627 14,241
Advertising and promotion................................................... 21,355 11,122 3,540
Rent........................................................................ 3,422 1,073 656
Other administrative expenses............................................... 18,910 6,673 2,206
Other general expenses...................................................... 10,337 6,407 3,727
---------- ---------- ----------
81,455 46,902 24,370
---------- ---------- ----------
Allowance for obsolescence.................................................... 2,250 -- --
Depreciation.................................................................. 26,539 12,848 6,177
Amortization.................................................................. 1,677 420 --
---------- ---------- ----------
Operating loss.......................................................... (26,127) (27,692) (16,306)
---------- ---------- ----------
Interest income............................................................... 5,813 3,118 21,806
Interest expense.............................................................. (17,520) (17,745) (16,413)
Translation gain (loss)....................................................... 473 (339) (914)
Equity in losses of affiliates................................................ (8,532) (3,672) 383
Gain on issuance of shares by equity investees................................ 2,317 -- --
Other nonoperating (expenses) income, net..................................... (6,009) 4,389 (1,273)
---------- ---------- ----------
Loss before income taxes and minority interest.......................... (49,585) (41,941) (12,717)
Income taxes (Note 10)........................................................ (156) -- --
---------- ---------- ----------
Loss before minority interest........................................... (49,741) (41,941) (12,717)
Minority interest............................................................. 1,849 871 720
---------- ---------- ----------
Net loss................................................................ $ (47,892) $ (41,070) $ (11,997)
---------- ---------- ----------
---------- ---------- ----------
The accompany notes are an integral part of these consolidated financial
statements
F-4
TEVECAP S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND STATEMENT OF REDEEMABLE COMMON STOCK
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF U.S. DOLLARS)
REDEEMABLE
PAID-IN TOTAL COMMON
CAPITAL ACCUMULATED SHAREHOLDERS' STOCK
(NOTE 18) DEFICIT EQUITY (NOTE 18)
---------- ------------ ------------- -----------
Balance as of December 31, 1993 (Combined)................. $ 10,797 $ (102,908) $ (92,111) --
Capital contributed on:
June 30, 1994............................................ 131,698 131,698 --
July 25, 1994............................................ $ 19,754
Net loss for the period.................................... (11,997) (11,997) --
---------- ------------ ------------- -----------
Balance as of December 31, 1994 (Consolidated)............. 142,495 (114,905) 27,590 19,754
Capital contributed on:
September 22, 1995....................................... 2,000
September 25, 1995....................................... 8,000
September 26, 1995....................................... 40,000
December 8, 1995......................................... 75,000
Net loss for the period.................................... (41,070) (41,070) --
Accretion related to Redeemable Common Stock............... (4,780) (4,780) 4,780
---------- ------------ ------------- -----------
Balance as of December 31, 1995 (Consolidated)............. 142,495 (160,755) (18,260) 149,534
Net loss for the period.................................... (47,892) (47,892) --
Accretion related to Redeemable Common Stock............... (15,376) (15,376) 15,376
---------- ------------ ------------- -----------
Balance as of December 31, 1996 (Consolidated)............. $ 142,495 $ (224,023) $ (81,528) $ 164,910
---------- ------------ ------------- -----------
---------- ------------ ------------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
TEVECAP S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF U.S. DOLLARS)
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................. $ (47,892) $ (41,070) $ (11,997)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation........................................................... 26,539 12,848 6,141
Amortization........................................................... 1,677 420 --
Allowance for exhibition costs......................................... -- 827 --
Allowance for doubtful accounts........................................ 2,352 2,196 848
Allowance for obsolescence............................................. 2,250 -- --
Provision for claims................................................... 1,276 2,688 864
Minority interest...................................................... (1,849) (871) (721)
Disposal and write-off of property, plant and equipment................ 1,005 341 662
Gain on issuance of shares by equity investees......................... (2,317) -- --
Equity in losses (income) of affiliates................................ 8,532 3,672 (383)
Changes in operating assets and liabilities:
Film exhibition rights................................................. (1,031) 560 (114)
Accounts receivable.................................................... (23,395) (5,908) (7,007)
Prepaid and other assets............................................... (8,973) (1,269) (1,364)
Other accounts receivable.............................................. (775) (709) (199)
Accrued interest....................................................... 5,908 9,241 723
Inventories............................................................ (2,227) (7,373) (2,383)
Suppliers.............................................................. 1,549 36,275 5,309
Taxes payable other than income taxes.................................. 2,665 4,881 685
Accrued payroll and related liabilities................................ 1,371 1,636 1,454
Advances received from subscribers..................................... 6,451 2,956 (496)
Deferred hook-up fee revenue........................................... 4,883 -- --
Other accounts payable................................................. 4,305 1,648 (1,729)
----------- ----------- -----------
Net cash (used in) provided by operating activities.................. (17,696) 22,989 (9,707)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment.............................. (125,612) (93,029) (22,369)
Loans to related companies............................................. (39,181) (7,967) (3,482)
Cash received on loans to related companies............................ 31,696 2,591 4,481
Purchase of concessions................................................ (14,235) (6,393) (2,035)
Investments in equity and cost investments............................. (16,568) (14,863) (929)
----------- ----------- -----------
Net cash used in investing activities................................ (163,900) (119,661) (24,334)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank loans............................................................. 268,503 -- --
Capital contributions.................................................. -- 125,000 151,452
Repayments of loans from shareholders.................................. (2,929) -- (3,082)
Loans from related companies........................................... 168,414 131,860 96,986
Repayments of loans from related companies............................. (171,795) (140,631) (186,755)
Repayment of loans from banks.......................................... -- -- (19,935)
----------- ----------- -----------
Net cash provided by financing activities............................ 262,193 116,229 38,666
----------- ----------- -----------
Net increase in cash and cash equivalents.................................. 80,597 19,557 4,625
Cash and cash equivalents at beginning of the period....................... 24,201 4,644 19
----------- ----------- -----------
Cash and cash equivalents at end of the period....................... $ 104,798 $ 24,201 $ 4,644
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL CASH DISCLOSURE:
Cash paid for interest................................................... $ 7,312 $ 8,390 $ 16,413
----------- ----------- -----------
----------- ----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements
F-6
TEVECAP S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS OF U.S. DOLLARS)
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1994 1995
--------- --------- ---------
SUPPLEMENTAL NONCASH FINANCING ACTIVITIES:
Accrued interest on related company loans refinanced as principal balance......... $ 354 $ 9,355 $ --
--------- --------- ---------
--------- --------- ---------
DETAILS OF ACQUISITIONS:
Fair value of assets acquired..................................................... $ 15,701 -- --
Liabilities assumed............................................................... (1,385) -- --
--------- --------- ---------
Cash paid......................................................................... 14,316 -- --
Less: cash acquired............................................................... (81) -- --
--------- --------- ---------
Net cash paid for acquisitions...................................................... $ 14,235 -- --
--------- --------- ---------
--------- --------- ---------
The accompanying notes are an integral part of these consolidated financial
statements
F-7
TEVECAP S.A. AND SUBSIDIARIES
Notes to these Consolidated Financial Statements
(in thousands of U.S. dollars)
1. THE COMPANY AND ITS PRINCIPAL OPERATIONS
The accompanying consolidated financial statements have been prepared to
reflect the consolidated results of TEVECAP S.A. and its subsidiaries (the
"Company").
TEVECAP S.A. is a holding company, the subsidiaries of which render services
related to wireless cable and cable and parabolic antenna television systems,
including marketing and advertising, production, distribution and licensing of
domestic and foreign television programs. The Company has wireless cable channel
rights primarily in major urban markets in Brazil.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant policies followed in the preparation of the accompanying
consolidated financial statements are described below:
2.1 BASIS OF PRESENTATION AND CONSOLIDATION
A) BASIS OF PRESENTATION
The consolidated financial statements are presented in U.S. dollars and have
been prepared in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP"), which differ in certain respects from
accounting principles applied by the Company in its local currency financial
statements, which are prepared in accordance with accounting principles
generally accepted in Brazil ("Brazilian GAAP").
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
financial statement dates and the reported amount of revenues and expenses
during the reporting periods. Since management's judgment involves making
estimates concerning the likelihood of future events, the actual results could
differ from those estimates which will have a positive or negative effect on
future period results.
B) CONSOLIDATION AS OF AND FOR THE THREE YEARS ENDED DECEMBER 31, 1996
On June 30, 1994, TEVECAP S.A. was established as a holding company for
certain entities which were under common control. Subsequent to this date,
additional entities were formed under, or acquired by TEVECAP S.A., as described
elsewhere in these consolidated financial statements. Accordingly, the
consolidated financial statements as of and for the year ended December 31, 1994
and thereafter are prepared on a consolidated basis.
The consolidated financial statements include the accounts of all
majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated on consolidation.
2.2 ACCOUNTING RECORDS
As required by Brazilian Law and in accordance with local accounting
practices, the accounting records of the Company are maintained in Brazilian
currency (REAL). In order to present the consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America, the Company maintains additional accounting records which are used
solely for this purpose.
F-8
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.3 CURRENCY REMEASUREMENT
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
52, "Foreign Currency Transactions", the United States dollar has been assumed
to be the functional currency as Brazil is a "hyperinflationary" country. As
such, the local accounts of the Company are translated into United States
dollars as follows:
- Nonmonetary assets and liabilities are translated at historical rates. All
other assets and liabilities are translated at the official rate of
exchange of R$1.0394 to US$1 in effect on December 31, 1996; and R$0.973
to US$1 in effect on December 31, 1995.
- Income and expenses are translated at the average exchange rates in effect
each month, except for those related to assets and liabilities which are
translated at historical exchange rates, and deferred income taxes, which
are translated at the current rate. Translation gains/losses are
recognized in the income statement.
2.4 CONSOLIDATED FINANCIAL STATEMENTS
The Company's operating subsidiaries included in the consolidated financial
statements are:
OWNERSHIP INTEREST AS
OF DECEMBER 31,
----------------------
1996 1995
---------- ----------
Owned Systems
TVA Sistema de Televisao S.A............................................................ 98.00% 98.00%
TVA Sul Participacoes S.A............................................................... 87.00% --
TVA Sul Parana Ltda. (a), (b)......................................................... 87.00% 80.00%
TVA Sul Santa Catarina Ltda. (b)...................................................... 87.00% --
TVA Sul Foz do Iguacu Ltda. (b)....................................................... 87.00% --
TCC TV a Cabo Ltda. (b)............................................................... 87.00% --
TV Alfa Cabo Ltda. (b)................................................................ 87.00% --
CCS Camboriu Cable Systems de Telecomunicacoes Ltda................................... 52.20% --
Galaxy Brasil S.A....................................................................... 100.00% 100.00%
License Subsidiary
Comercial Cabo TV Sao Paulo Ltda. (c)................................................... 100.00% 100.00%
Programming Ventures
TVA Communications Ltd.................................................................. 100.00% 100.00%
TVA Communications Aruba N.V.......................................................... 100.00% --
- ------------------------
(a) In August 1996, TVA Curitiba Servicos Telecomunicacoes Ltda. changed its
name to TVA Parana Ltda. ("Parana"). The Company's initial investment in
Parana together with its contributions of $18,454 relating to the
acquisition of 27,712,345 shares during the year ended December 31, 1996,
was in excess of the Company's share of the book value of Parana after the
contribution. This resulted in a loss of $2,727.
(b) One common share in each of these entities is owned by a Brazilian National
pursuant to local legislative requirements.
(c) 0.00149% of the common shares in this entity are owned by the controlling
shareholder of the parent company pursuant to local legislative
requirements.
F-9
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.5 ACQUISITIONS
During the year ended December 31, 1996, the Company acquired control of the
following entities which are accounted for under the purchase method of
accounting: i) in February 1996, the Company acquired TVA Sul Santa Catarina
("TVA SSC"); ii) in March 1996, the Company acquired TCC TV a Cabo Ltda. ("TCC")
and TV Alfa Cabo Ltda. ("TV Alfa"); and iii) in May 1996, the Company acquired
TVA Sul Foz do Iguacu Ltda. ("TVA SF") and CCS Camboriu Cable Systems de
Telecomunicacoes Ltda. ("CCS"). In each case, the excess of the purchase price
over the fair value of assets acquired represents the value of concessions of
certain television stations. These concessions are being amortized on a straight
line basis over ten years.
The purchase prices have been allocated to the assets purchased and the
liabilities assumed based upon the fair values on the dates of acquisition, as
follows:
TVA SSC TVA SF CCS TCC TV ALFA
----------- --------- --------- --------- ---------
Current assets, other than cash........................................ -- $ 23 $ 7 $ 51 $ 5
Property, plan and equipment........................................... $ 25 319 3,501 238 176
Other assets........................................................... -- 3 -- -- --
Concessions............................................................ 45 5,346 841 2,622 2,418
Other liabilities...................................................... (55) (377) (139) (127) (687)
--- --------- --------- --------- ---------
Purchase price, net of cash received................................... $ 15 $ 5,314 $ 4,210 $ 2,784 $ 1,912
--- --------- --------- --------- ---------
--- --------- --------- --------- ---------
Total purchase price............................................. $ 15 $ 5,324 $ 4,210 $ 2,834 $ 1,933
--- --------- --------- --------- ---------
--- --------- --------- --------- ---------
The operating results of these acquired businesses have been included in the
consolidated statement of operations from the dates of acquisition. On the basis
of a pro forma consolidation of the results of operations as if the acquisition
had taken place on January 1, 1995, consolidated net revenues would have been
$98,147 for the year ended December 31, 1995. Such pro forma amount does not
purport to be indicative of the results that would have occurred had the
acquisition been in effect for the periods presented, nor does it purport to be
indicative of the results that will be obtained in the future.
The Company is unable to present pro forma amounts for income before
extraordinary items and net income as, although management attempted to obtain
such information from the owners, it was not available. These entities were
acquired for the purpose of expanding the cable TV system penetration for the
Company. The assets purchased will be operated under the Company's management,
using the Company's programming and employees.
2.6 CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as cash and cash in banks and
investments in interest-bearing securities and are carried at cost plus accrued
interest. Short-term investments with original maturities of three months or
less at the time of purchase are considered cash equivalents.
2.7 FINANCIAL INSTRUMENTS
In accordance with SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments", information is provided about the fair value of certain financial
instruments for which it is practicable to estimate that value.
F-10
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.7 FINANCIAL INSTRUMENTS (CONTINUED)
For the purposes of SFAS No. 107, the estimated fair value of a financial
instrument is the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
The carrying values of the Company's financial instruments as of December 31,
1996 and 1995 approximate management's best estimate of their estimated fair
values. The following methods and assumptions were used to estimate the fair
value of each class of financial instrument for which it is practicable to
estimate that value:
- The fair value of certain financial assets carried at cost, including
cash, accounts receivable, other accounts receivable, and certain other
short-term assets, is considered to approximate their respective carrying
value due to their short-term nature.
- The fair value of payables to film suppliers and other suppliers, other
accounts payable, loans to related companies and certain other short-term
liabilities is considered to approximate their respective carrying value
due to their short-term nature.
- The fair value of loans from related companies approximates their
respective carrying values as interest on these loans is at market rates.
2.8 ACCOUNTS RECEIVABLE
An allowance for doubtful accounts is established on the basis of an
analysis of the accounts receivable, in light of the risks involved, and is
considered sufficient to cover any losses incurred in realization of credits.
2.9 INVENTORIES
Inventories consist of materials and supplies and imports in transit.
Materials and supplies are used to provide service to new customers, and to
ensure continuity of service to existing customers. Imports in transit represent
materials purchased from foreign countries that have not yet been received.
Inventories are stated at the lower of cost or market. Cost is determined
principally under the average cost method.
An allowance for obsolescence has been established on the basis of an
analysis of slow-moving materials and supplies.
2.10 FILM EXHIBITION RIGHTS AND PROGRAM LICENSING
Film exhibition rights and program licensing costs are deferred and
recognized as the films and/or programs are exhibited. The allowance for
exhibition expiration is determined based on management's estimate of the
Company's capacity to telecast the films and projected revenue streams.
2.11 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated using the
straight-line method, over the remaining useful lives, as described in Note 12.
F-11
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.12 ADVERTISING
Advertising revenues are recognized, and the production cost of commercials
and programming are charged to expense, when the commercial is telecast.
2.13 RECOVERABILITY OF LONG-LIVED ASSETS TO BE HELD AND USED IN THE BUSINESS
Management reviews long-lived assets, primarily the Company's licenses and
its property and equipment to be held and used in the business, for the purposes
of determining and measuring impairment on a recurring basis or when events or
changes in circumstances indicate that the carrying value of an asset or group
of assets may not be recoverable. Assets are grouped and evaluated for possible
impairment at the level of each cable television system; impairment is assessed
on the basis of the forecasted undiscounted cash flows of the businesses over
the estimated remaining lives of the assets related to those systems. A
write-down of the carrying value of the assets or group of assets to estimated
fair value will be made when appropriate.
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of", from January 1,
1996, and the effect on the consolidated financial statements as a result of the
adoption was not significant.
2.14 REVENUE RECOGNITION
Hook-up fees are recognized as revenue on the equipment installation date to
the extent of direct selling costs incurred. The remainder is deferred and
amortized to income over the estimated average period that subscribers are
expected to remain connected to the system. Subscription revenues are recognized
as earned on an accrual basis.
2.15 LICENSES
Televisao Show Time Ltda. ("TV Show Time") and TVA Brasil Radioenlaces Ltda.
("TVA Brasil") hold certain licenses covering certain operations of the Company.
The use of such licenses is provided to the Company, for a nominal fee, under a
Service Agreement dated July 22, 1994, as amended, among TEVECAP S.A., TV Show
Time, TVA Brasil and Abril S.A.
Pursuant to the Service Agreement, TV Show Time and TVA Brasil have agreed
to transfer the licenses, which are carried at nil value, to TEVECAP S.A. at
nominal cost.
2.16 ACCOUNTING FOR ISSUANCES OF STOCK BY SUBSIDIARIES AND EQUITY INVESTEES
Gains or losses arising from the issuances of shares by subsidiaries and
equity investees are recognized in income to the extent that the net book value
of the shares owned after the sale exceeds or is lower than the net book value
per share immediately prior to the sale of the shares by the subsidiary or
equity investees.
F-12
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. CASH AND CASH EQUIVALENTS
As of December 31, 1996 and 1995, cash and cash equivalents were comprised
of:
1996 1995
---------- ---------
Cash on hand and in banks................................................. $ 1,296 $ 640
Short-term investments.................................................... 103,502 23,561
---------- ---------
$ 104,798 $ 24,201
---------- ---------
---------- ---------
4. ACCOUNTS RECEIVABLE
As of December 31, 1996 and 1995, accounts receivable were comprised of:
1996 1995
--------- ---------
Subscriptions........................................................... $ 8,798 $ 5,154
Installation fees....................................................... 19,020 4,637
Advertising and programming............................................. 4,511 1,810
Barter.................................................................. 5,248 2,989
Others.................................................................. 478 70
Allowance for doubtful accounts......................................... (5,759) (3,407)
--------- ---------
$ 32,296 $ 11,253
--------- ---------
--------- ---------
5. INVENTORIES
As of December 31, 1996 and 1995, inventories were comprised of:
1996 1995
--------- ---------
Materials and supplies.................................................. $ 14,323 $ 10,913
Imports in transit...................................................... 1,022 2,163
Allowance for obsolescence.............................................. (2,250) --
--------- ---------
$ 13,095 $ 13,076
--------- ---------
--------- ---------
6. FILM EXHIBITION RIGHTS
As of December 31, 1996 and 1995, film exhibition rights were comprised of:
1996 1995
--------- ---------
Exhibition rights........................................................ $ 2,223 $ 1,192
Allowance for exhibition expiration...................................... (1,162) (1,162)
--------- ---------
$ 1,061 $ 30
--------- ---------
--------- ---------
F-13
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. PREPAID AND OTHER ASSETS
As of December 31, 1996 and 1995, prepaid expenses were comprised of:
1996 1995
--------- ---------
Advances to suppliers...................................................... $ 1,973 $ 2,078
Prepaid TVA magazine publishing expenses................................... 510 562
Prepaid meals and transportation........................................... 227 171
Others..................................................................... 119 157
--------- ---------
$ 2,829 $ 2,968
--------- ---------
--------- ---------
8. OTHER ACCOUNTS RECEIVABLE
As of December 31, 1996 and 1995, other accounts receivable were comprised
of:
1996 1995
--------- ---------
Advances to employees........................................................... $ 476 $ 491
Accounts receivable from related companies (Note 9)............................. 1,460 389
Others.......................................................................... 1,072 105
--------- ---------
$ 3,008 $ 985
--------- ---------
--------- ---------
9. RELATED PARTY TRANSACTIONS
The following tables summarize the transactions between the Company and
related parties as of December 31, 1996 and 1995 and for the three years ended
December 31, 1996:
DECEMBER 31,
--------------------
1996 1995
--------- ---------
Abril S.A.
Accounts payable......................................................... $ 104 --
Loans payable............................................................ 2,721 $ 39
Televisao Abril Ltda.
Accounts receivable...................................................... 136 --
ESPN do Brasil Ltda.
Accounts receivable...................................................... 28 389
Loans receivable......................................................... -- 3,913
Accounts payable......................................................... 367 963
Canbras TV a Cabo Ltda.
Accounts receivable...................................................... 70 --
Loans receivable......................................................... 3,710 815
Loans payable............................................................ -- 547
F-14
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
DECEMBER 31,
--------------------
1996 1995
--------- ---------
HBO Partners
Accounts receivable...................................................... $ 271 --
Loans receivable......................................................... 1,792 $ 1,879
TV Sagatti
Loans receivable......................................................... -- 118
Galaxy Latin America
Loans receivable......................................................... 7,100 --
Accounts payable......................................................... 769 --
TVAICO
Loans receivable......................................................... 1,640 --
AICO
Loans receivable......................................................... 1,059 --
Leonardo Petrelli
Accounts receivable...................................................... 906 --
Editora Azul
Accounts payable......................................................... -- 104
Others
Accounts receivable...................................................... 49 --
Loans receivable......................................................... 7 7
Accounts receivable...................................................... 4 55
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
Abril S.A.
Net interest expense......................................... $ 7,196 $ 16,566 --
Printing costs............................................... 4,516 2,723 $ 1,309
ESPN do Brasil Ltda.
Programming costs............................................ 3,850 646 --
Net interest income.......................................... (773) -- --
Net interest expense......................................... -- 330 --
AICO
Net interest income.......................................... (354) -- --
TV Filme
Programming revenue.......................................... (6,435) (742) (163)
Canbras TV a Cabo
Net interest expense......................................... 150 -- --
Programming revenue.......................................... (207) -- --
F-15
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY TRANSACTIONS (CONTINUED)
Loans granted to or obtained from related companies, under loan agreements,
are denominated in reais and subject to variable interest of 1.80% to 2.50% per
month in December 31, 1996 (3.44% per month in December 31, 1995).
Effective December 31, 1996 the Company has a credit facility with Abril
S.A. under which the Company is allowed to borrow up to $60,000 on a revolving
basis until December 1998. In November 1996, TEVECAP S.A. raised funds through a
private placement of $250,000 million 12.625% Senior Notes. Part of the proceeds
of this placement were used to repay the amount drawn under this facility. The
Company has not drawn any amounts under the facility subsequent to the
application of such proceeds.
Additionally, Abril S.A. provided a guarantee in the course of the year for
equipment imported by Galaxy Brasil S.A., TVAST, TV Filme and TVA Parana. The
amount outstanding pursuant to this guarantee as of December 31, 1996 was
$58,345.
The Company and Falcon International Communications Services Inc., one of
the Company's shareholders, signed a consulting service agreement on April 1,
1996 related to the Company's operations and technologies. Initially, the
duration of this agreement is two years, renewable every subsequent two-year
period thereafter. The payment for the consulting services amounts to $200 per
annum.
Related-party transactions relating to programming sales and costs and
printing services costs were carried out at usual market rates and terms.
10. DEFERRED INCOME TAX
The tax effects of temporary differences that give rise to a significant
portion of the deferred tax asset and deferred tax liability as of December 31,
1996 and 1995 are as follows:
1996 1995
---------- ----------
Deferred tax assets:
Net operating loss carryforwards........................................................ $ 44,562 $ 32,700
Deferred charges........................................................................ 7,536 7,720
Deferred hook-up fee revenue............................................................ 1,611 --
Allowance for obsolescence.............................................................. 437 --
Provision for claims.................................................................... 1,528 --
Allowance for decoders.................................................................. 438 --
Others.................................................................................. 148 680
---------- ----------
Total gross deferred tax asset...................................................... 56,260 41,100
---------- ----------
Less valuation allowance.............................................................. (50,274) (33,111)
---------- ----------
Net deferred tax asset.................................................................... 5,986 7,989
Deferred tax liability:
Installation costs...................................................................... (5,986) (7,989)
---------- ----------
Total gross deferred tax liability.................................................. (5,986) (7,989)
---------- ----------
Net deferred tax asset.................................................................... $ -- $ --
---------- ----------
---------- ----------
The Company has a limited operating history and has generated losses since
its inception. The valuation allowance has been established in accordance with
the requirements of SFAS No. 109.
F-16
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. DEFERRED INCOME TAX (CONTINUED)
As of December 31, 1996, the Company and subsidiaries have unexpirable
accumulated tax losses of $135,036.
The consolidated income tax credit was different from the amount computed
using the Brazilian statutory income tax for the reasons set forth in the
following table:
DECEMBER 31,
---------------------------------
1996 1995 1994
---------- --------- ----------
Loss before income taxes and minority interest................................. $ 49,585 $ 41,941 $ 12,717
Statutory income tax rate...................................................... 33% 30.56% 43%
---------- --------- ----------
16,363 12,817 5,468
Increase (decrease) in the income tax rate..................................... 2,644 (8,466) 3,037
Monetary correction net of unallowable amortization............................ 2,088 (308) (11,240)
Monetary correction of deferred charges amortization........................... 4,996 (5,576) (14,264)
Translation rate difference on exhibition rights............................... -- 381 (476)
Translation (loss) gain of tax losses.......................................... (2,103) 1,896 5,606
Monetary correction of shareholders' equity.................................... -- 5,889 33,181
Monetary correction of installation materials depreciation..................... 3,648 (314) (5,708)
Equity in losses of affiliate.................................................. (2,816) (1,122) 165
Income before income tax of TVA communications................................. (1,436) (6) --
Others......................................................................... (6,377) (1,345) (207)
---------- --------- ----------
Net income tax benefit for the period.......................................... 17,007 3,846 15,562
Increase in valuation allowance................................................ (17,163) (3,846) (15,562)
---------- --------- ----------
$ (156) $ -- $ --
---------- --------- ----------
---------- --------- ----------
Income tax payable represents amounts owing by subsidiaries calculated on a
unitary basis.
11. INVESTMENTS
Investments as of December 31, 1996 and 1995 were comprised of:
PERCENTAGE
OF CONTROL 1996 1995
------------- --------- ---------
Equity basis investments:
TV Filme, Inc.......................................................... 14.3(a (b) $ 6,840 $ 2,352
ESPN Brasil Ltda....................................................... 50 827 --
HBO Brasil Partners.................................................... 33 -- 1,110
--------- ---------
$ 7,667 $ 3,462
--------- ---------
--------- ---------
Liability to fund joint venture or equity investee:
ESPN Brasil Ltda....................................................... 50 -- $ (2,009)
Canbras TV a Cabo...................................................... 36 $ (997) (160)
HBO Brasil Partners.................................................... 33 (110) --
--------- ---------
$ (1,107) $ (2,169)
--------- ---------
--------- ---------
F-17
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INVESTMENTS (CONTINUED)
PERCENTAGE
OF CONTROL 1996 1995
------------- --------- ---------
Cost basis investments:
Galaxy Latin America................................................... 10 $ 16,320 $ 11,220
Others................................................................. 6 20
--------- ---------
$ 16,326 $ 11,240
--------- ---------
--------- ---------
Concessions, net:
Stations in South of Brazil............................................ $ 10,436 --
Ype Radio e Televisao Ltda. concessions................................ 6,363 $ 6,363
Comercial Cabo Ltda.................................................... 1,970 1,970
Other.................................................................. 65 65
Amortization........................................................... (1,260) (420)
--------- ---------
$ 17,574 $ 7,978
--------- ---------
--------- ---------
- ------------------------
(a) Accounted for under the equity method because the Company has two seats out
of six on the Board of Directors, is dependent on the Company for a
substantial portion of its revenue and has an option to acquire an
additional 2% interest.
(b) During the year ended December 31, 1996 there was a reduction in the
interest of Tevecap S.A. in TV Filme, Inc. from 16.7% to 14.3% due to
subscription of shares issued by other shareholders, for which an amount in
excess of the book value was paid. This resulted in a capital gain of
$2,317.
On February 3, 1995, an agreement was signed between TEVECAP S.A., Hughes
(GLA Inc./USA), Inversiones Divtel (ODC Cisneiros/Venezuela) and Multivision
(MVS/Mexico) for the incorporation of Galaxy Latin America in August 1995. On
March 3, 1995, the operational agreement between Galaxy Latin America and
TEVECAP S.A. was formalized with the purchase of 10% of the shares of Galaxy
Latin America for $7,194. On March 9, 1995, Galaxy Brasil S.A. was created, with
99.5% of the shares held by TEVECAP S.A. Galaxy Brasil S.A. provides
distribution services of multichannel TV programs to all national regions. The
transmission commenced February 1996. Galaxy Latin America will charge Galaxy
Brasil for the use of a satellite.
F-18
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INVESTMENTS (CONTINUED)
The ESPN Brasil joint venture was formed in June 1995, with TEVECAP S.A. and
ESPN International each holding 50% of ESPN Brasil's shares. Operations
commenced on June 15, 1995, and the objective of ESPN Brasil is the transmission
of ESPN's international sport programs. Condensed financial information of the
joint venture as of and for the years ended December 31, 1996 and 1995 are as
follows:
1996 1995
---------- ---------
Current assets.......................................................... $ 3,640 $ 3,483
Non-current assets...................................................... $ 2,107 $ 262
Current liabilities..................................................... $ 3,663 $ 3,850
Long-term liabilities................................................... $ -- $ 3,913
Revenues................................................................ $ 12,733 $ 4,748
Gross losses............................................................ $ (9,785) $ (2,884)
Loss before income taxes................................................ $ (10,715) $ (4,020)
Net loss................................................................ $ (10,715) $ (4,020)
The Company holds a 33.33% interest in HBO Brasil Partners joint venture.
The operations commenced in 1994 and condensed financial information as of and
for the years ended December 31, 1996 and 1995 are as follows:
1996 1995
--------- ---------
Current assets.......................................................... $ 10,080 $ 6,385
Non-current assets...................................................... $ 1,659 $ 762
Current liabilities..................................................... $ 11,615 $ 3,855
Long-term liabilities................................................... $ -- $ --
Revenues................................................................ $ 20,867 $ 11,354
Gross losses............................................................ $ (3,072) $ (4,384)
Loss before income taxes................................................ $ (3,168) $ (4,323)
Net loss................................................................ $ (3,168) $ (4,323)
On April 3, 1995, TEVECAP S.A. acquired 49% of the common shares and 49% of
the preferred shares of Ype Radio e Televisao Ltda., for $6,363, obtaining the
concession of certain television channels. The concessions are being amortized
over ten years.
In previous years the Company acquired Comercial Cabo Ltda., obtaining the
concessions for certain television channels and other minor investments. The
concessions are being amortized over ten years.
F-19
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. PROPERTY, PLAN AND EQUIPMENT
As of December 31, 1996 and 1995, property, plant and equipment were
comprised of:
ANNUAL
DEPRECIATION
RATE
% 1996 1995
----------------- ---------- ----------
Machinery and equipment..................................................... 10 $ 47,784 $ 37,877
Converters.................................................................. 10 101,837 36,485
Leasehold improvements...................................................... 25 2,111 1,830
Furniture and fixtures...................................................... 10 2,089 1,226
Premises.................................................................... 10 2,730 1,116
Vehicles.................................................................... 20 1,257 457
Software.................................................................... 20 2,949 1,529
Tools....................................................................... 10 696 621
Reception equipment......................................................... 20 73,330 45,711
Cable plant................................................................. 10 25,385 6,513
Building.................................................................... 4 11,734 342
---------- ----------
271,902 133,707
Accumulated depreciation.................................................... (50,661) (23,373)
Telephone line use rights................................................... 2,320 1,453
Trademarks, patents and others.............................................. 165 577
Fixed assets in transit..................................................... 8,917 18,902
Others...................................................................... 950 --
---------- ----------
$ 233,593 $ 131,266
---------- ----------
---------- ----------
13. LOANS
As of December 31, 1996, loans were comprised of:
SHORT-TERM LONG-TERM
----------- ----------
Working capital, foreign currency denominated............................................. $ 3,123 $ 250,464
Local currency financings................................................................. 14,916 --
----------- ----------
$ 18,039 $ 250,464
----------- ----------
----------- ----------
On November 26, 1996, TEVECAP S.A. raised funds in foreign markets through a
private placement amounting to $250,000 of Senior Notes. These Senior Notes
mature on November 26, 2004 and are guaranteed by certain of TEVECAP S.A.'s
subsidiaries. Interest thereon is at 12.625% per annum and is payable on May 25
and November 25 of each year commencing on May 25, 1997.
Debt issuance costs associated with the 12,625% Senior Notes amounted to
$9,241 and are being amortized over the term of the Senior Notes. Amortization
costs for the year ended December 31, 1996 amounted to $96.
Short-term financings in local currency are secured by promissory notes and
chattel mortgages, and bear interest at rates varying from 8% to 9% per year.
F-20
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. LOANS (CONTINUED)
Short-term bank loans as of December 31, 1996 represent the refinancing of
certain supplier payables. The average short-term interest rate on such loans is
LIBOR Plus 1.5%.
14. OTHER ACCOUNTS PAYABLE
As of December 31, 1996 and 1995, other accounts payable were comprised of:
1996 1995
--------- ---------
Accounts payable to related companies (Note 9)............................. $ 1,244 $ 1,122
Advertising................................................................ 265 427
Importation expenses payable............................................... 1,627 599
Others..................................................................... 1,407 1,124
--------- ---------
$ 4,543 $ 3,272
--------- ---------
--------- ---------
15. LOANS FROM SHAREHOLDERS
Loans from shareholders as of December 31, 1996 and 1995 were comprised of:
1996 1995
--------- ---------
Roberto Civita............................................................. $ -- $ 2,616
Maricia I. R. Rossi........................................................ -- 61
Edgard Silvio Faria........................................................ -- 184
Angelo Silvio Rossi........................................................ -- 45
Leonardo Petrelli.......................................................... 1,640 180
--------- ---------
$ 1,640 $ 3,086
--------- ---------
--------- ---------
Loans from shareholders in 1995 were subject to interest based on UFIR
(Fiscal Reference Unit) variation which was 22.46% during that year. The
December 31, 1996 loan balance represents an advance from a shareholder and is
not subject to interest.
16. INSURANCE
The Company maintains insurance coverage for its fixed assets and
inventories in an amount considered sufficient to cover the risks involved.
17. LEASED ASSETS AND COMMITMENTS
The Company has entered into film distribution contracts and licensing
agreements with film producers for programming for future periods. Such
contracts and agreements, which range in life from one to nine years with the
exception of a specific contract with ESPN which has a life of 50 years, require
a per-subscriber fee to be paid by the Company on a monthly basis.
The Company has funding commitments related to Galaxy Latin America, TV
Filme, ESPN Brasil Ltda., HBO Brasil Partners, Canbras TVA and CNBC of
approximately $27,009 which must be met prior to December, 1997.
F-21
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. LEASED ASSETS AND COMMITMENTS (CONTINUED)
The Company has rented office space until the year 2001. As of December 31,
1996, future minimum rental payments applicable to operating leases in respect
of this space aggregate approximately $5,038 as follows:
1997................................................................ $ 1,805
1998................................................................ 1,438
1999................................................................ 623
2000................................................................ 589
2001................................................................ 583
---------
Total............................................................... $ 5,038
---------
---------
As of December 31, 1996, the Company had contractual commitments with
Embratel for transponder use until the year 2003. Based on the contract
provisions, these commitments are currently estimated to aggregate approximately
$71,854, as follows:
1997............................................................... $ 11,665
1998............................................................... 11,665
1999............................................................... 11,665
2000............................................................... 11,665
2001............................................................... 11,665
2002............................................................... 8,054
2003............................................................... 5,475
---------
Total.............................................................. $ 71,854
---------
---------
Through its subsidiary, Galaxy Brasil S.A., the Company has a licensing
agreement with Galaxy Latin America for the use of the trademark, DirecTV,
satellite and programming, which requires a per-subscriber fee to be paid by the
Company on a monthly basis for an indefinite period, calculated based on the
number of subscribers.
18. COMMON STOCK
Common stock as of December 31, 1996 and 1995 was comprised of:
1996 1995
------------------------- -------------------------
US$ SHARES US$ SHARES
---------- ------------- ---------- -------------
Common stock subject to redemption............................. $ 144,754 85,637,516 $ 144,754 85,637,516
---------- ------------- ---------- -------------
---------- ------------- ---------- -------------
Paid-in capital................................................ $ 142,495 111,075,339 $ 142,495 111,075,339
---------- ------------- ---------- -------------
---------- ------------- ---------- -------------
A) COMMON STOCK SUBJECT TO REDEMPTION
As of December 31, 1996 and 1995, 43.5% of the common stock of TEVECAP S.A.
was subject to an Event Put, i.e. a "triggering event" under the Stockholders
Agreement pursuant to which each of the shareholders (other than Abril) may, in
certain circumstances, demand that TEVECAP S.A. purchase all or a portion of its
shares, unless the shares of capital stock held by such Stockholder are publicly
F-22
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. COMMON STOCK (CONTINUED)
registered, listed or traded. In addition, as of December 31, 1996 and 1995,
14.2% of these shares are also subject to Time Put whereby, pursuant to the
Stockholders Agreement, Falcon International may demand that TEVECAP S.A. buy
all or a portion of Falcon's shares of capital stock held in TEVECAP S.A. if
such shares are not publicly registered, listed or traded by September 22, 2002.
For purposes of the Event Put, triggering events are: (i) the amount of
capital stock held by a stockholder with an Event Put exceeds the amount allowed
under any legal restriction to which such Stockholder may be subject
("Regulatory Put"); (ii) a breach without cure within a designated period by
certain specified entities/individuals of any representation, warranty, covenant
or duty made or owed pursuant to certain agreements; (iii) a breach without cure
within a designated period by Abril of the Abril Credit Facility; (iv) the
controlling shareholder of Abril ceases to directly or indirectly hold a
specified percentage of TEVECAP S.A. without the approval of the Stockholders or
ceases to control the voting capital stock held by his affiliates representing
50% or more of the voting capital stock of TEVECAP S.A.; (v) the Service
Agreement as amended, among TEVECAP S.A., TV Show Time, TVA Brasil and Abril
ceases to be valid or effective or TV Show Time, TVA Brasil and Abril is
liquidated or dissolved or files voluntarily, or has filed against it
involuntarily, any petition in bankruptcy; or (vi) another Stockholder exercises
an Event Put other than a Regulatory Put.
The Company's management believes that the probability of occurrence of the
triggering events which would permit any of its shareholders to exercise their
Event Put is remote. However, a company that is public in the United States, and
which therefore is required to register its securities with the United States
Securities and Exchange Commission (the "SEC"), is required for accounting
purposes to present redeemable equity securities separately from shareholders'
equity, if redemption of such securities is beyond the control of the
registrant. That presentation is required even if the likelihood of redemption
is remote.
The Common Shares subject to the Time Put are redeemable at fair value as
determined by appraisal or by a multiple of the Company's most recent quarterly
earnings. The Company has recorded an accretion on these shares to fair market
value of $15,376 and $4,780 with respect to the years ended December 31, 1996
and 1995, determined by Company management.
B) PAID-IN CAPITAL
Paid-in capital represents registered common shares without par value.
The Company's shareholders are entitled to minimum dividends of 25% of net
income for the year, adjusted according to Corporation Law. As the Company has
not recorded net income since its inception, no such dividends are payable.
19. LITIGATION CONTINGENCIES
Certain claims and lawsuits arising in the ordinary course of business have
been filed or are pending against the Company which were not recognized in the
consolidated financial statements. The Company has also recorded provisions
related to certain claims in amounts that management considers to be adequate
after considering a number of factors including (but not limited to) the views
of legal counsel, the nature of the claims and the prior experience of the
Company.
F-23
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
19. LITIGATION CONTINGENCIES (CONTINUED)
In management's opinion, all contingencies have been adequately provided for
or are without merit, or are of such kind that if disposed of unfavorably, would
not have a material adverse effect on the financial position or future results
of operations of the Company.
20. PENSION PLAN
In April 1996, the Company became a co-sponsor of the private pension entity
named Abrilprev Sociedade de Previdencia Privada, the primary objective of which
is to grant employees benefits other than those provided by Social Security. The
plan is optional to all employees of the sponsoring entities. Abrilprev operates
as a Defined Contribution Plan. Company contributions are made based on a fixed
percentage applied to the payroll of the sponsoring entities based on actuarial
calculations. Plan expenses amounted to $368 for the year ended December 31,
1996.
21. APRIL HEALTH CARE PLAN
In February 1996, the Abril Health Care Plan was created to provide health
care to Abril S.A. companies' employees and their dependants. Both the companies
and the employees contribute monthly to Associacao Abril de Beneficios, the
company is responsible for the plan management.
In 1996, contributions made by TEVECAP S.A. and certain affiliated companies
amounted to $2,088.
22. SUPPLEMENTARY INFORMATION--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
ALLOWANCE ALLOWANCE DEFERRED
FOR FOR ALLOWANCE TAXATION
DOUBTFUL ALLOWANCE FOR EXHIBITION FOR VALUATION PROVISION
ACCOUNTS OBSOLESCENCE EXPIRATION DECODERS ALLOWANCE FOR CLAIMS
----------- ------------- ----------- ----------- ----------- -----------
Balance as of December 31, 1993................... 363 91 3,367 -- 13,703 210
Additions charged to expense...................... 848 -- -- -- 15,562 920
Reduction......................................... -- (91) (3,032) -- -- (55)
----- ----- ----------- ----- ----------- -----
Balance as of December 31, 1994................... 1,211 -- 335 -- 29,265 1,075
Additions charged to expense...................... 2,196 -- 827 -- 3,846 2,688
----- ----- ----------- ----- ----------- -----
Balance as of December 31, 1995................... 3,407 -- 1,162 -- 33,111 3,763
Additions charged to expense...................... 2,352 2,250 -- 1,371 17,163 1,282
----- ----- ----------- ----- ----------- -----
Balance as of December 31, 1996................... 5,759 2,250 1,162 1,371 50,274 5,045
----- ----- ----------- ----- ----------- -----
----- ----- ----------- ----- ----------- -----
23. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued certain Statements of
Financial Accounting Standards which are not effective with respect to the
fiscal years presented in the consolidated financial statements.
SFAS No. 125, "Accounting for Transfer and Servicing of Financial Assets and
Extinguishments of Liabilities", provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
after December 31, 1996. This standard is not expected to have a material
F-24
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
23. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
effect on the financial position and the results of operations of the Company
due to the absence of material transactions of this nature.
SFAS No. 128, "Earnings per Share", is effective for fiscal years beginning
after December 15, 1997. This standard establishes guidelines for computing and
presenting earnings per share ("EPS") and applies to entities with publicly held
common stock or potential common stock.
This replaces the presentation of primary EPS with a presentation of basic
EPS. It also requires dual presentation of basic and diluted EPS for all
entities with complex capital structures. This standard is not expected to have
an impact on the company given that the Company does not have publicly held
common stock or potential common stock.
24. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES
TEVECAP S.A. conducts a significant portion of its business through
subsidiaries. The $250,000 12-5/8% Senior Notes issued to institutional buyers
in November, 1996 are jointly and severally, irrevocably and fully and
unconditionally guaranteed, on a senior basis, by all of Tevecap's direct and
indirect subsidiaries except for TVA Communications Aruba N.A. and TVA TCG
Sistema TV.
Presented below is condensed consolidating and combined financial
information for: i) TEVECAP S.A. on a parent company only basis; ii) the
Wholly-Owned Guarantor Subsidiaries; iii) the Majority-Owned Guarantor
Subsidiaries; iv) Non-guarantor Subsidiaries; v) Eliminations; and vi)
Consolidated Tevecap S.A. and Subsidiaries.
The equity method has been used by TEVECAP S.A., the Wholly-Owned Guarantor
Subsidiaries and the Majority-Owned 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 Communications Ltd.
- Galaxy Brasil S.A.
- Comercial Cabo TV Sao Paulo Ltda.
B) MAJORITY-OWNED GUARANTOR SUBSIDIARIES
- TVA Sistema de Televisao S.A.
- TVA Sul Participacoes S.A.
- TVA Parana Ltda.
- TVA Alfa Cabo Ltda.
- CCS Camboriu Cable System de Telecommunicacoes Ltda.
- TCC TV a Cabo Ltda.
- TVA Sul Foz do Iguacu Ltda.
F-25
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
- TVA Sul Santa Catarina Ltda.
C) NON-GUARANTOR SUBSIDIARIES
- TVA Communications Aruba N.A.
- TVA TCG Sistema de Televisao de Porto Alegre S.A.
Separate financial statements for TVA Sistema de Televisao S.A. have been
presented as of December 31, 1996 and 1995, and the related statements of
operations, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1996.
Separate consolidated and combined financial statements for TVA Sul
Participacoes S.A. have also been presented as of December 31, 1996 and 1995,
and the related statements of operations, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1996.
Audited financial information has also been included for TVA Alfa Cabo
Ltda., CCS Camboriu Cable System de Telecommunicacoes Ltda., TVA Sul Santa
Catarina Ltda., TCC TV a Cabo Ltda., TVA Parana Ltda. and TVA Sul Foz do Iguacu
Ltda. as of December 31, 1996 and for the periods from the dates of acquisition
to December 31, 1996. See Note 2.5.
Separate financial statements for the Wholly-Owned Guarantor Subsidiaries
have not been presented based on management's determination that they do not
provide additional information that is material to investors.
F-26
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1996
(IN THOUSANDS OF U.S. DOLLARS)
MAJORITY-
PARENT WHOLLY- OWNED OWNED NON- GUARANTOR
ASSETS COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------- ----------- ------------- ------------ ------------
Cash and cash equivalents.................. 103,282 59 1,444 13 -- 104,798
Accounts receivable, net................... -- 10,367 22,568 (639) 32,296
Inventories................................ -- -- 13,095 -- 13,095
Film exhibition rights..................... -- -- 1,061 -- 1,061
Prepaid expenses and other assets.......... -- 71 2,758 -- 2,829
Other accounts receivable.................. 1,032 242 4,372 (2,638) 3,008
----------- ------------- ----------- ------ ------------ ------------
Total current assets................. 104,314 10,739 45,298 13 (3,277) 157,087
----------- ------------- ----------- ------ ------------ ------------
Property, plant and equipment.............. -- 49,745 184,376 42 (570) 233,593
Investments-equity affiliates.............. 64,844 -- -- (57,177) 7,667
Cost basis investees..................... -- 16,326 -- -- 16,326
Concessions, net......................... 7,138 -- 10,436 -- 17,574
Advances payments for investments.......... -- -- -- -- --
Loans to affiliated companies.............. 338,442 16,278 3,027 (342,439) 15,308
Debt issuance costs........................ 9,145 -- -- -- 9,145
Other...................................... -- 877 1,545 -- 2,422
----------- ------------- ----------- ------ ------------ ------------
Total assets......................... 523,883 93,965 244,682 55 (403,463) 459,122
----------- ------------- ----------- ------ ------------ ------------
----------- ------------- ----------- ------ ------------ ------------
LIABILITIES
Short-term bank loans...................... $ 3,166 $ 6,789 $ 8,084 -- -- $ 18,039
Film suppliers............................. -- -- 19,828 -- $ (12,816) 7,012
Other suppliers............................ 163 4,925 48,127 -- (283) 52,932
Taxes payable other than income taxes...... -- 964 7,989 -- -- 8,953
Accrued payroll and related liabilities.... -- 637 5,504 -- -- 6,141
Advances payments received from
subscribers.............................. -- 3,685 6,797 -- -- 10,482
Other accounts payable..................... 180 900 5,951 -- (2,488) 4,543
----------- ------------- ----------- ------ ------------ ------------
Total current liabilities............ 3,509 17,900 102,280 -- (15,587) 108,102
----------- ------------- ----------- ------ ------------ ------------
Financing.................................. 250,000 464 -- -- -- 250,464
Loans from affiliated companies............ -- 16,600 316,154 $ 96 (330,129) 2,721
Loans from shareholders.................... -- -- 1,640 -- -- 1,640
Provisions from claims..................... -- -- 5,039 -- 6 5,045
Liability to fund equity investee.......... 160,067 110 -- 110 (159,180) 1,107
Deferred hook-up fee revenue............... -- 4,883 -- -- -- 4,883
----------- ------------- ----------- ------ ------------ ------------
Total long-term liabilities.......... 410,067 22,057 322,833 206 (489,303) 265,860
----------- ------------- ----------- ------ ------------ ------------
Minority interest.......................... -- -- 1,310 -- 468 1,778
Redeemable common stock, no par value...... 164,910 -- -- -- -- 164,910
Shareholders' equity
Paid-in capital.......................... 142,495 71,489 33,837 3,216 (108,542) 142,495
Retained earnings........................ (197,098) (17,481) (215,578) (3,367) 209,501 (224,023)
----------- ------------- ----------- ------ ------------ ------------
Total shareholders' equity........... (54,603) 54,008 (181,741) (151) 100,959 (81,528)
----------- ------------- ----------- ------ ------------ ------------
Total liabilities and shareholders'
equity............................. $ 523,883 $ 93,965 $ 244,682 $ 55 $ (403,463) $ 459,122
----------- ------------- ----------- ------ ------------ ------------
----------- ------------- ----------- ------ ------------ ------------
F-27
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS OF U.S. DOLLARS)
DESCRIPTION
Gross revenues
Monthly subscription........................ -- $ 2,266 $ 120,754 -- -- $ 123,020
Installation................................ -- 15,609 46,108 -- -- 61,717
Advertising Revenue......................... -- -- 7,532 -- -- 7,532
Indirect Programming........................ -- -- 11,377 -- -- 11,377
Other....................................... -- 143 8,049 -- -- 8,192
Revenue taxes............................... -- (1,488) (12,259) -- -- (13,747)
----------- ----------- ----------- ------------- ------------ ---------
Net revenue................................... -- 16,530 181,561 -- -- 198,091
----------- ----------- ----------- ------------- ------------ ---------
Direct operating expenses
Payroll and benefits........................ -- 2,781 24,422 -- -- 27,203
Programming................................. -- -- 42,391 -- -- 42,391
Transponder lease cost...................... -- 905 9,942 -- -- 10,847
Technical assistance........................ -- -- 5,507 -- -- 5,507
Vehicle rentals............................. -- 90 1,772 -- -- 1,862
TVA Magazine................................ -- -- 6,842 -- -- 6,842
Other costs................................. -- 2,078 15,567 -- -- 17,645
----------- ----------- ----------- ------------- ------------ ---------
5,854 106,443 112,297
----------- ----------- ----------- ------------- ------------ ---------
Selling, general and administrative expenses
Payroll and benefits........................ 1,491 25,940 27,431
Advertising and promotion................... 7,369 13,986 21,355
Rent........................................ 177 3,245 3,422
Other administrative expenses............... $ 836 6,316 11,758 18,910
Other general expenses...................... -- -- 10,337 10,337
----------- ----------- ----------- ------------- ------------ ---------
836 15,353 65,266 81,455
----------- ----------- ----------- ------------- ------------ ---------
Allowance for obsolescence.................... -- -- 2,250 2,250
Depreciation.................................. -- 2,858 23,681 26,539
Amortization.................................. 840 -- 837 1,677
----------- ----------- ----------- ------------- ------------ ---------
Operating loss................................ (1,676) (7,535) (16,916) (26,127)
----------- ----------- ----------- ------------- ------------ ---------
Interest income............................... 1,995 596 7,590 -- $ (4,368) 5,813
Interest expenses............................. (12,751) (1,770) (7,270) $ (97) 4,368 (17,520)
Translation................................... (218) 292 399 -- -- 473
Equity (in losses) income of affiliates....... (44,751) (1,220) (883) (1,220) 39,542 (8,532)
Other nonoperating, net....................... 9,243 (1,884) 278 -- (11,329) (3,692)
----------- ----------- ----------- ------------- ------------ ---------
Loss before income tax and minority
interest.................................... (48,158) (11,521) (16,802) (1,317) 28,213 (49,585)
Income taxes.................................. -- -- (156) -- -- (156)
----------- ----------- ----------- ------------- ------------ ---------
Net loss before minority interest............. (48,158) (11,521) (16,958) (1,317) 28,213 (49,741)
----------- ----------- ----------- ------------- ------------ ---------
Minority interest............................. -- -- 38 -- 1,811 1,849
----------- ----------- ----------- ------------- ------------ ---------
Net loss...................................... $ (48,158) $ (11,521) $ (16,920) $ (1,317) $ 30,024 $ (47,892)
----------- ----------- ----------- ------------- ------------ ---------
----------- ----------- ----------- ------------- ------------ ---------
F-28
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS OF U.S. DOLLARS)
WHOLLY- MAJORITY-
PARENT OWNED OWNED NON- GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------- ----------- ----------- ------------- ------------ ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................... $ (48,158) $ (11,521) $ (16,920) $ (1,317) $ 30,024 $ (47,892)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation................................ -- 2,858 23,681 -- -- 26,539
Amortization................................ 840 -- 837 -- -- 1,677
Allowance for exhibition costs.............. -- -- -- -- -- 0
Allowance for doubtful accounts............. -- -- 2,352 -- -- 2,352
Allowance for obsolescence.................. -- -- 2,250 -- -- 2,250
Provision for claims........................ -- -- 1,276 -- -- 1,276
Minority interest........................... -- -- (38) -- (1,811) (1,849)
Disposal and write-off of fixed assets...... -- -- 1,005 -- -- 1,005
Capital gain................................ (2,317) -- -- -- -- (2,317)
Equity in losses (earnings) of affiliates... 44,751 1,220 -- 1,220 (38,659) 8,532
Changes in operating assets and
liabilities:................................ -- -- -- -- -- 0
Film exhibition rights...................... -- -- (1,031) -- -- (1,031)
Accounts receivable......................... -- (10,368) (13,666) -- 639 (23,395)
Prepaid and other assets.................... (9,145) (877) 188 -- 861 (8,973)
Other accounts receivable................... (1,030) (278) (2,816) -- 3,349 (775)
Other....................................... -- -- -- -- -- 0
Accrued interest............................ 8,062 (888) (2,107) -- 841 5,908
Inventories................................. -- -- (2,227) -- -- (2,227)
Legal deposits.............................. -- -- (30) -- 30 0
Suppliers................................... 163 (934) 11,798 -- (9,478) 1,549
Taxes payable other than income taxes....... -- (130) 2,795 -- -- 2,665
Accrued payroll and related liabilities..... -- 569 802 -- -- 1,371
Advances received from subscribers.......... -- 3,685 2,766 -- -- 6,451
Deferred accounts payable................... -- 4,883 -- -- -- 4,883
Other accounts payable...................... 5 645 4,550 -- (895) 4,305
--------- ----------- ----------- ------------- ------------ ---------
Net cash (used in) provided by operating
activities.................................. (6,829) (11,136) 15,465 (97) (15,099) (17,696)
--------- ----------- ----------- ------------- ------------ ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisition
Purchase of fixed assets.................... -- (41,152) (84,454) -- (6) (125,612)
Loans to affiliated companies............... (112,557) (17,675) (508) -- 91,559 (39,181)
Cash received on loans to affiliated
companies................................. 54,445 8,205 9,315 -- (40,269) 31,696
Purchase of concessions..................... -- -- (14,235) -- -- (14,235)
Investments in equity and cost
investments............................... (100,452) (5,100) -- -- 88,984 (16,568)
--------- ----------- ----------- ------------- ------------ ---------
Net cash used in investing activities......... (158,564) (55,722) (89,882) -- 140,268 (163,900)
--------- ----------- ----------- ------------- ------------ ---------
F-29
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
WHOLLY- MAJORITY-
PARENT OWNED OWNED NON- GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS TOTAL
--------- ----------- ----------- ------------- ------------ ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short term bank loans....................... 253,166 7,253 7,406 -- 678 268,503
Capital contributions....................... -- 65,359 17,533 15 (82,907) --
Repayments of loans from shareholders....... -- -- (2,929) -- -- (2,929)
Loans from shareholders..................... -- -- -- -- -- --
Loans to shareholders....................... -- -- -- -- -- --
Loans from affiliated companies............. 163,858 28,835 62,423 95 (86,797) 168,414
Repayments of loans from affiliated
companies................................. (171,795) (34,542) (9,315) -- 43,857 (171,795)
Repayments of loans from banks.............. -- -- -- -- -- --
--------- ----------- ----------- ------------- ------------ ---------
Net cash provided by financing activities..... 245,229 66,905 75,118 110 (125,169) 262,193
--------- ----------- ----------- ------------- ------------ ---------
--------- ----------- ----------- ------------- ------------ ---------
Net (decrease) increase in cash and cash
equivalents................................. 79,836 47 701 13 -- 80,597
Cash and cash equivalents at beginning of the
period...................................... 23,446 12 743 -- -- 24,201
--------- ----------- ----------- ------------- ------------ ---------
Cash and cash equivalents at end of the
period...................................... $ 103,282 $ 59 $ 1,444 $ 13 $ -- $ 104,798
--------- ----------- ----------- ------------- ------------ ---------
--------- ----------- ----------- ------------- ------------ ---------
Supplemental cash disclosure:
Cash paid for interest...................... $ 7,312 -- -- -- -- $ 7,312
--------- ----------- ----------- ------------- ------------ ---------
--------- ----------- ----------- ------------- ------------ ---------
Supplemental noncash financing activities:
Accrued interest on related company loans
refinanced as principal balance........... -- $ 648 $ 1,497 $ -- $ (1,791) $ 354
--------- ----------- ----------- ------------- ------------ ---------
--------- ----------- ----------- ------------- ------------ ---------
Details of acquisitions:
Fair value of assets acquired............... -- -- 15,701 -- -- 15,701
Liabilities assumed......................... -- -- (1,385) -- -- (1,385)
--------- ----------- ----------- ------------- ------------ ---------
Cash paid................................... -- -- 14,316 -- -- 14,316
Less: cash acquired......................... -- -- (81) -- -- (81)
--------- ----------- ----------- ------------- ------------ ---------
Net cash paid for acquisitions................ -- -- $ 14,235 -- -- $ 14,235
--------- ----------- ----------- ------------- ------------ ---------
--------- ----------- ----------- ------------- ------------ ---------
F-30
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1995
(IN THOUSANDS OF U.S. DOLLARS)
WHOLLY- MAJORITY- NON-
PARENT OWNED OWNED GUARANTOR
ASSETS COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------- ----------- ------------- ------------ ------------
Current assets
Cash and cash equivalents.................. $ 23,446 $ 12 $ 743 -- -- $ 24,201
Accounts receivable (net).................. -- -- 11,253 -- -- 11,253
Inventories................................ -- -- 13,076 -- -- 13,076
Film exhibition rights..................... -- -- 30 -- -- 30
Prepaid and other assets................... -- 55 2,913 -- -- 2,968
Other accounts receivable.................. 2 -- 1,490 -- (507) 985
--------- ------------- ----------- ------------- ------------ ------------
Total current assets................. 23,448 67 29,505 -- (507) 52,513
--------- ------------- ----------- ------------- ------------ ------------
Property, plant and equipment.............. -- 11,492 120,350 -- (576) 131,266
Investments
Equity affiliates........................ 7,252 1,110 -- $ 1,110 (6,010) 3,462
Cost basis investees..................... 15 11,225 -- -- -- 11,240
Concessions, net......................... 7,978 -- -- -- -- 7,978
Loans to related companies................. 281,034 6,786 10,480 -- (291,568) 6,732
Other...................................... -- -- 1,568 -- 2,089 3,657
--------- ------------- ----------- ------------- ------------ ------------
Total assets......................... $ 319,727 $ 30,680 $ 161,903 $ 1,110 $ (296,572) $ 216,848
--------- ------------- ----------- ------------- ------------ ------------
--------- ------------- ----------- ------------- ------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Film suppliers............................. -- -- $ 9,512 -- $ (3,620) $ 5,892
Other suppliers............................ -- $ 5,859 46,219 -- -- 52,078
Taxes payable other than income taxes...... -- 1,095 5,076 -- -- 6,171
Accrued payroll and related liabilities.... -- 68 4,503 -- -- 4,571
Advance payments received from
subscribers.............................. -- -- 3,986 -- -- 3,986
Other accounts payable..................... $ 169 273 2,830 -- -- 3,272
--------- ------------- ----------- ------------- ------------ ------------
Total current liabilities............ 169 7,295 72,126 -- (3,620) 75,970
--------- ------------- ----------- ------------- ------------ ------------
Long-term liabilities
Loans from related companies............... 585 23,174 265,282 -- (288,455) 586
Loans from shareholders.................... -- -- 3,086 -- -- 3,086
Provision for claims....................... -- -- 3,763 -- -- 3,763
Liability to fund equity investee.......... 160,508 -- -- -- (158,339) 2,169
--------- ------------- ----------- ------------- ------------ ------------
Total long-term liabilities.......... 161,093 23,174 272,131 -- (446,794) 9,604
--------- ------------- ----------- ------------- ------------ ------------
Redeemable common stock, no par value...... 149,534 -- -- -- -- 149,534
Shareholders' equity
Paid-in capital.......................... 142,495 6,214 17,017 $ 3,117 (26,348) 142,495
Accumulated deficit...................... (133,564) (6,003) (199,371) (2,007) 180,190 (160,755)
--------- ------------- ----------- ------------- ------------ ------------
Total shareholders' equity........... 8,931 211 (182,354) 1,110 153,842 18,260)
--------- ------------- ----------- ------------- ------------ ------------
Total liabilities and shareholders'
equity................................. $ 319,727 $ 30,680 $ 161,903 $ 1,110 $ (296,572) $ 216,848
--------- ------------- ----------- ------------- ------------ ------------
--------- ------------- ----------- ------------- ------------ ------------
F-31
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1995
(IN THOUSANDS OF U.S. DOLLARS)
WHOLLY- MAJORITY- NON-
PARENT OWNED OWNED GUARANTOR
DESCRIPTION COMPANY SUBSIDIARY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- ------------- ------------ -------------
Gross revenues
Monthly subscriptions..................... -- -- $ 62,496 -- -- $ 62,496
Installation.............................. -- -- 26,045 -- -- 26,045
Advertising............................... -- -- 8,377 -- -- 8,377
Indirect programming...................... -- -- 2,866 -- -- 2,866
Other..................................... -- -- 2,226 -- -- 2,226
Revenue taxes............................. -- -- (7,506) -- -- (7,506)
----------- ----------- ----------- ------------- ------------ -------------
Net revenue................................. -- -- 94,504 -- -- 94,504
----------- ----------- ----------- ------------- ------------ -------------
Direct operating expenses
Payroll and benefits...................... -- $ 315 12,205 -- -- 12,520
Programming............................... -- -- 21,609 -- -- 21,609
Transponder lease cost.................... -- -- 7,568 -- -- 7,568
Technical assistance...................... -- -- 5,152 -- -- 5,152
Vehicle rentals........................... -- 7 1,725 -- -- 1,732
TVA Magazine.............................. -- -- 3,318 -- -- 3,318
Other costs............................... -- 705 9,422 -- -- 10,127
----------- ----------- ----------- ------------- ------------ -------------
-- 1,027 60,999 -- -- 62,026
Selling, general and administrative expenses
Payroll and benefits...................... -- -- 21,627 -- -- 21,627
Advertising and promotion................. -- 62 11,060 -- -- 11,122
Rent...................................... -- 18 1,055 -- -- 1,073
Other administrative expenses............. $ 198 202 6,273 -- -- 6,673
Other general expenses.................... -- 4 6,403 -- -- 6,407
----------- ----------- ----------- ------------- ------------ -------------
198 286 46,418 -- -- 46,902
----------- ----------- ----------- ------------- ------------ -------------
Depreciation................................ -- 127 12,721 -- -- 12,848
Amortization................................ 420 -- -- -- -- 420
----------- ----------- ----------- ------------- ------------ -------------
Operating loss.............................. (618) (1,440) (25,634) -- -- (27,692)
----------- ----------- ----------- ------------- ------------ -------------
Interest income............................. 6,772 350 7,965 -- $ (11,969) 3,118
Interest expense............................ (15,273) (1,226) (13,215) -- 11,969 (17,745)
Translation loss............................ (28) (151) (160) -- -- (339)
Equity in (losses) of affiliates............ (27,316) (1,427) -- $ (1,427) 26,498 (3,672)
Other nonoperating (expenses) income, net... (477) 811 4,055 -- -- 4,389
----------- ----------- ----------- ------------- ------------ -------------
Loss before income taxes and minority
interest.................................. (36,940) (3,083) (26,989) (1,427) 26,498 (41,941)
Income taxes................................ -- -- -- -- -- --
----------- ----------- ----------- ------------- ------------ -------------
Net loss before minority interest........... (36,940) (3,083) (26,989) (1,427) 26,498 (41,941)
Minority interest........................... -- -- -- -- 871 871
----------- ----------- ----------- ------------- ------------ -------------
Net loss.................................... $ (36,940) $ (3,083) $ (26,989) $ (1,427) $ 27,369 $ (41,070)
----------- ----------- ----------- ------------- ------------ -------------
----------- ----------- ----------- ------------- ------------ -------------
F-32
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS OF U.S. DOLLARS)
WHOLLY- MAJORITY- NON-
PARENT OWNED OWNED GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ----------- ----------- ------------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................... $ (36,940) $ (3,083) $ (26,989) $ (1,427) $ 27,369 $ (41,070)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES:
Depreciation............................. -- 127 12,721 -- -- 12,848
Amortization............................. 420 -- -- -- -- 420
Allowance for exhibition costs........... -- -- 827 -- -- 827
Allowance for doubtful accounts.......... -- -- 2,196 -- -- 2,196
Provision for claims..................... -- -- 2,688 -- -- 2,688
Minority interest........................ -- -- -- -- (871) (871)
Disposal and write-off of fixed assets... -- 4,352 474 -- (4,485) 341
Equity in losses (earnings) of
affiliates............................. 27,316 (1,427) -- 1,427 (23,644) 3,672
CHANGES IN OPERATING ASSETS AND
LIABILITIES:
Film exhibition rights................... -- -- 560 -- -- 560
Accounts receivable...................... -- -- (5,908) -- -- (5,908)
Prepaid and other assets................. -- (55) (1,214) -- -- (1,269)
Other accounts receivable................ (2) -- (599) -- -- (601)
Accrued interest......................... 8,473 244 5,395 -- (4,871) 9,241
Inventories.............................. -- 333 (7,706) -- -- (7,373)
Legal deposits........................... -- -- (108) -- -- (108)
Suppliers................................ -- 5,385 34,004 -- (3,114) 36,275
Taxes payable other than income taxes.... -- 1,095 3,786 -- -- 4,881
Accrued payroll and related
liabilities............................ -- 68 1,568 -- -- 1,636
Deferred accounts payable................ -- -- 2,956 -- -- 2,956
Other accounts payable................... 3 273 1,372 -- -- 1,648
--------- ----------- ----------- ------------- ------------ ------------
Net cash (used in) provided by operating
activities............................... (730) 7,312 26,023 -- (9,616) 22,989
--------- ----------- ----------- ------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets................. -- (11,619) (86,470) -- 5,060 (93,029)
Loans to related companies............... (115,498) (6,709) (8,220) -- 122,460 (7,967)
Cash received on loans to related
companies.............................. 34,220 -- 26 -- (31,655) 2,591
Purchase of concessions.................. (6,393) -- -- -- -- (6,393)
Investments in equity and cost
investments............................ (4,382) (13,763) -- (3,117) 6,399 (14,863)
--------- ----------- ----------- ------------- ------------ ------------
Net cash used in investing activities...... (92,053) (32,091) (94,664) (3,117) 102,264 (119,661)
--------- ----------- ----------- ------------- ------------ ------------
F-33
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
WHOLLY- MAJORITY- NON-
PARENT OWNED OWNED GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ----------- ----------- ------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital Contributions.................... 125,000 2,154 -- 3,117 (5,271) 125,000
Repayments of loans from shareholders.... -- 2,154 -- -- (2,154) --
Loans from related companies............. 131,858 22,848 97,218 -- (120,064) 131,860
Repayments of loans from related
companies.............................. (140,629) (2,365) (32,477) -- 34,840 (140,631)
--------- ----------- ----------- ------------- ------------ ------------
Net cash provided by financing
activitities............................. 116,229 24,791 64,741 3,117 (92,649) 116,229
--------- ----------- ----------- ------------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents.............................. 23,446 12 (3,901) -- -- 19,557
Cash and cash equivalents at beginning of
the period............................... -- -- 4,644 -- -- 4,644
--------- ----------- ----------- ------------- ------------ ------------
Cash and cash equivalents at end of the
period................................... $ 23,446 $ 12 $ 743 $ -- $ -- $ 24,201
--------- ----------- ----------- ------------- ------------ ------------
--------- ----------- ----------- ------------- ------------ ------------
SUPPLEMENTAL CASH DISCLOSURE:
Cash paid for interest................... $ 8,390 -- $ 2,708 -- $ (2,708) $ 8,390
--------- ----------- ----------- ------------- ------------ ------------
--------- ----------- ----------- ------------- ------------ ------------
SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES:
Accrued interest on related company loans
refinanced as principal balance.......... $ 9,355 $ 34 $ 4,754 -- $ (4,788) $ 9,355
--------- ----------- ----------- ------------- ------------ ------------
--------- ----------- ----------- ------------- ------------ ------------
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS OF U.S. DOLLARS)
MAJORITY-
PARENT OWNED
DESCRIPTION COMPANY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------- ----------- ----------- ------------ -------------
Gross revenues
Monthly subscriptions...................................... -- $ 27,976 -- $ 27,976
Installation............................................... -- 6,997 -- 6,997
Advertising................................................ -- 5,727 -- 5,727
Indirect programming....................................... -- 1,626 -- 1,626
Other...................................................... -- 1,446 -- 1,446
----------- ----------- ------------ -------------
Revenue taxes.............................................. -- (872) -- (872)
----------- ----------- ------------ -------------
Net revenue.................................................. -- 42,900 -- 42,900
Direct operating expenses
Payroll and benefits....................................... -- 8,022 -- 8,022
Programming................................................ -- 12,133 -- 12,133
Transponder lease cost..................................... -- 1,555 -- 1,555
Technical assistance....................................... -- 1,622 -- 1,622
Vehicle rentals............................................ -- 788 -- 788
TVA Magazine............................................... -- 1,430 -- 1,430
Other costs................................................ -- 3,109 -- 3,109
----------- ----------- ------------ -------------
-- 28,659 -- 28,659
----------- ----------- ------------ -------------
F-34
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
MAJORITY-
PARENT OWNED
DESCRIPTION COMPANY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------- ----------- ----------- ------------ -------------
Selling, general and administrative expenses
Payroll and benefits....................................... -- 14,241 -- 14,241
Advertising and promotion.................................. -- 3,540 -- 3,540
Rent....................................................... -- 656 -- 656
Other administrative expenses.............................. -- 2,206 -- 2,206
Other general expenses..................................... $ 143 3,584 -- 3,727
----------- ----------- ------------ -------------
143 24,227 -- 24,370
----------- ----------- ------------ -------------
Depreciation................................................. -- 6,177 -- 6,177
----------- ----------- ------------ -------------
Operating loss............................................... (143) (16,163) -- (16,306)
----------- ----------- ------------ -------------
Interest income.............................................. 64,360 8,479 $ (51,033) 21,806
Interest expense............................................. (5,279) (62,166) 51,032 (16,413)
Translation loss............................................. (231) (683) -- (914)
Equity in (losses) income of affiliates...................... (61,063) -- 61,446 383
Other nonoperating expenses, net............................. (1,228) (45) -- (1,273)
----------- ----------- ------------ -------------
Loss before income taxes and minority interest income taxes
(Note 11).................................................. (3,584) (70,578) 61,445 (12,717)
----------- ----------- ------------ -------------
Net loss before minority interest............................ (3,584) (70,578) 61,445 (12,717)
Minority interest............................................ -- -- 720 720
----------- ----------- ------------ -------------
Net loss..................................................... $ (3,584)` $ (70,578) $ 62,165 $ (11,997)
----------- ----------- ------------ -------------
----------- ----------- ------------ -------------
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS OF U.S. DOLLARS)
WHOLLY- MAJORITY-
PARENT OWNED OWNED
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------- ----------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................... $ (3,584) -- $ (70,578) $ 62,165 $ (11,997)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
(USED IN) PROVIDED BY OPERATING ACTIVITIES:
Depreciation................................. -- -- 6,141 -- 6,141
Allowance for doubtful accounts.............. -- -- 848 -- 848
Provision for claims......................... -- -- 864 -- 864
Minority interest............................ -- -- -- (721) (721)
Disposal and write-off of fixed assets....... -- -- 662 -- 662
Equity in losses (earnings) of affiliates.... 61,063 -- -- (61,446) (383)
F-35
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
24. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
WHOLLY- MAJORITY-
PARENT OWNED OWNED
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------- ----------- ------------ ------------
CHANGES IN OPERATING ASSETS AND LIABILITIES:... -- -- -- -- --
Film exhibition rights....................... -- -- (114) -- (114)
Accounts receivable.......................... -- -- (7,007) -- (7,007)
Prepaid and other assets..................... -- -- (1,364) -- (1,364)
Other accounts receivable.................... -- -- (706) 507 (199)
Accrued interest............................. (74,306) -- 57,221 17,808 723
Inventories.................................. -- $ (333) (2,050) -- (2,383)
Suppliers.................................... -- 474 5,342 (507) 5,309
Taxes payable other than income taxes........ -- -- 685 -- 685
Accrued payroll and related liabilities...... -- -- 1,454 -- 1,454
Advances received from subscribers........... -- -- (496) -- (496)
Other accounts payable....................... 166 -- (1,663) (232) (1,729)
--------- ------------- ----------- ------------ ------------
Net cash (used in) provided by operating
activities................................... (16,661) 141 (10,761) 17,574 (9,707)
--------- ------------- ----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets..................... -- (4,362) (18,007) -- (22,369)
Loans to related companies................... (148,622) (33) (2,098) 147,271 (3,482)
Cash received on loans to related
companies.................................. 5,997 -- 4,019 (5,535) 4,481
Purchase of concessions...................... (2,035) -- -- -- (2,035)
Investments in equity and cost investments... (929) -- -- -- (929)
--------- ------------- ----------- ------------ ------------
Net cash used in investing activities.......... (145,589) (4,395) (16,086) 141,736 (24,334)
--------- ------------- ----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITITIES:
Capital Contributions........................ 162,250 1,808 7,588 (20,194) 151,452
Repayments of loans from shareholders........ -- -- (3,082) -- (3,082)
Loans from related companies................. -- 2,446 225,581 (131,041) 96,986
Repayments of loans from related companies... -- -- (178,680) (8,075) (186,755)
Repayments of loans from banks............... -- -- (19,935) -- (19,935)
--------- ------------- ----------- ------------ ------------
Net cash provided by financing activitities.... 162,250 4,254 31,472 (159,310) 38,666
--------- ------------- ----------- ------------ ------------
Net increase in cash and cash equivalents...... -- -- 4,625 -- 4,625
Cash and cash equivalents at beginning of the
period....................................... -- -- 19 -- 19
--------- ------------- ----------- ------------ ------------
Cash and cash equivalents at end of the
period....................................... -- -- $ 4,644 -- $ 4,644
--------- ------------- ----------- ------------ ------------
--------- ------------- ----------- ------------ ------------
SUPPLEMENTAL CASH DISCLOSURE:
Cash paid for interest....................... $ 16,413 -- $ 8,583 $ (8,583) $ 16,413
--------- ------------- ----------- ------------ ------------
--------- ------------- ----------- ------------ ------------
SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES:
Accrued interest on related company loans
refinanced as principal balance.............. -- -- $ 56,427 $ (56,427) --
--------- ------------- ----------- ------------ ------------
--------- ------------- ----------- ------------ ------------
25. SUBSEQUENT EVENTS
In 1997, the negotiation of a lease contract between the subsidiary, Galaxy
Brasil S.A., and Citibank N.A. in the amount of $49,900 was concluded. Such
contract has a five-year term with interest at 12.5% per year. The contract is
guaranteed by TEVECAP S.A. and TVA Sistema de Televisao S.A. In addition,
management entered into a credit agreement for a total of $29,350 with Chase
Manhattan Bank.
F-36
TVA SISTEMA DE TELEVISAO S.A.
REPORT ON FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995 AND FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED
DECEMBER 31, 1996
TVA SISTEMA DE TELEVISAO S.A.
INDEX TO FINANCIAL STATEMENTS
CONTENTS
PAGE
---------
Report of Independent Accountants.......................................................................... F-38
Balance Sheets as of December 31, 1996 and 1995............................................................ F-39
Statements of Operations for each of the three years in the period ended December 31, 1996................. F-40
Statements of Changes in Shareholders' Equity for each of the three years in the period ended December 31,
1996..................................................................................................... F-41
Statements of Cash Flows for each of the three years in the period ended December 31, 1996................. F-42
Notes to these Financial Statements........................................................................ F-43
F-37
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
TVA SISTEMA DE TELEVISAO S.A.
We have audited the accompanying balance sheets of TVA SISTEMA DE TELEVISAO
S.A. (the "Company") as of December 31, 1996 and 1995, and the related
statements of operations, changes in shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1996, all expressed in
United States dollars. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TVA SISTEMA DE TELEVISAO
S.A. as of December 31, 1996 and 1995, and the related results of their
operations and cash flows for each of the three years in the period ended
December 31, 1996, in conformity with accounting principles generally accepted
in the United States of America.
Coopers & Lybrand
Sao Paulo, Brazil
April 11, 1997
F-38
TVA SISTEMA DE TELEVISAO S.A.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS OF U.S. DOLLARS)
ASSETS
DECEMBER 31,
--------------------
1996 1995
--------- ---------
Current assets
Cash and cash equivalents (Note 3)........................................................ $ 750 $ 698
Accounts receivable, net (Note 4) 21, 625 11,221
Accounts receivable from related companies (Note 8)....................................... 2,582 945
Inventories (Note 5)...................................................................... 9,126 13,076
Film exhibition rights (Note 6)........................................................... 1,061 30
Prepaid and other assets (Note 7)......................................................... 2,155 2,845
Other accounts receivable................................................................. 888 543
--------- ---------
Total current assets.................................................................... 38,187 29,358
Property, plant and equipment, net (Note 11)................................................ 165,543 118,884
Loans to related companies (Note 8)......................................................... 3,024 10,480
Other....................................................................................... 1,502 1,559
--------- ---------
Total assets............................................................................ $ 208,256 $ 160,281
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term bank loans (Note 12)........................................................... $ 8,084 --
Film suppliers............................................................................ 19,828 $ 9,512
Other suppliers........................................................................... 44,940 46,123
Taxes payable other than income taxes..................................................... 7,522 5,020
Accrued payroll and related liabilities................................................... 5,057 4,250
Advance payments received from subscribers................................................ 6,782 3,986
Other accounts payable (Note 13).......................................................... 2,687 1,828
--------- ---------
Total current liabilities............................................................... 94,900 70,719
--------- ---------
Long-term liabilities
Loans from shareholders (Note 9).......................................................... -- 2,906
Loans from related companies (Note 8)..................................................... 293,658 254,802
Provisions for claims (Note 17)........................................................... 5,039 3,763
--------- ---------
Total long-term liabilities............................................................. 298,697 261,471
--------- ---------
Commitments and contingencies (Notes 15 and 17)
Shareholders' equity
Common shares, no par value, 6,980,764 shares authorized, issued and outstanding (Note
16)..................................................................................... 16,303 16,303
Accumulated deficit....................................................................... (201,644) (188,212)
--------- ---------
Total shareholders' equity.............................................................. (185,341) (171,909)
--------- ---------
Total liabilities and shareholders' equity.............................................. $ 208,256 $ 160,281
--------- ---------
--------- ---------
The accompanying notes are an integral part of these financial statements
F-39
TVA SISTEMA DE TELEVISAO S.A.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF U.S. DOLLARS)
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
Gross revenues
Monthly subscriptions....................................................... $ 108,774 $ 59,263 $ 26,584
Installation................................................................ 43,954 26,045 6,997
Advertising................................................................. 7,532 8,377 5,721
Indirect programming........................................................ 11,377 2,866 1,626
Other....................................................................... 7,983 2,226 1,446
Revenue taxes............................................................... (11,841) (7,280) (801)
---------- ---------- ----------
Net revenue............................................................. 167,779 91,497 41,573
---------- ---------- ----------
Direct operating expenses
Payroll and benefits........................................................ 20,581 10,749 7,017
Programming................................................................. 39,067 21,609 12,133
Transponder lease cost...................................................... 9,942 7,568 1,555
Technical assistance........................................................ 5,261 4,937 1,607
Vehicle rentals............................................................. 1,452 1,478 767
TVA magazine................................................................ 6,401 3,318 1,430
Other costs................................................................. 13,762 9,190 2,677
---------- ---------- ----------
96,466 58,849 27,186
---------- ---------- ----------
Selling, general and administrative expenses
Payroll and benefits........................................................ 24,662 21,089 14,034
Advertising and promotion................................................... 13,382 10,793 3,540
Rent........................................................................ 2,998 941 656
Other administrative expenses............................................... 9,772 5,981 2,205
Other general expenses...................................................... 9,500 5,917 2,782
---------- ---------- ----------
60,314 44,721 23,217
---------- ---------- ----------
Allowance for obsolescence.................................................... 2,250 -- --
Depreciation.................................................................. 22,128 12,535 6,141
---------- ---------- ----------
Operating loss.......................................................... (13,379) (24,608) (14,971)
Interest income............................................................... 7,365 7,800 8,298
Interest expense.............................................................. (5,227) (9,687) (59,598)
Translation gain (loss)....................................................... 26 (167) (662)
Other nonoperating (expenses) income, net..................................... (2,217) 4,028 (45)
---------- ---------- ----------
Loss before income taxes................................................ (13,432) (22,634) (66,978)
Income taxes (Note 10)........................................................ -- -- --
---------- ---------- ----------
Net loss................................................................ $ (13,432) $ (22,634) $ (66,978)
---------- ---------- ----------
---------- ---------- ----------
The accompanying notes are an integral part of these financial statements
F-40
TVA SISTEMA DE TELEVISAO S.A.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF U.S. DOLLARS)
PAID-IN
CAPITAL ACCUMULATED
(NOTE 16) DEFICIT TOTAL
----------- ------------ -----------
Balance as of December 31, 1993............................................. $ 10,797 $ (98,600) $ (87,803)
Capital contributed on:
February 28, 1994......................................................... 5,432 -- 5,432
April 4, 1994............................................................. 74 -- 74
Net loss for the year....................................................... -- (66,978) (66,978)
----------- ------------ -----------
Balance as of December 31, 1994............................................. $ 16,303 $ (165,578) $ (149,275)
Net loss for the year....................................................... -- (22,634) (22,634)
----------- ------------ -----------
Balance as of December 31, 1995............................................. 16,303 (188,212) (171,909)
----------- ------------ -----------
Net loss for the year....................................................... (13,432) (13,432) --
----------- ------------ -----------
Balance as of December 31, 1996............................................. $ 16,303 $ (201,644) $ (185,341)
----------- ------------ -----------
----------- ------------ -----------
The accompanying notes are an integral part of these financial statements
F-41
TVA SEISTEMA DE TELEVISAO S.A.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF U.S. DOLLARS)
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
Cash flows from operating activities:
Net loss......................................................................... $ (13,432) $ (22,634) $ (66,978)
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities:
Depreciation................................................................... 22,128 12,535 6,141
Allowance for doubtful accounts................................................ 1,966 2,196 848
Allowance for obsolescence..................................................... 2,250 -- --
Allowance for exhibition costs................................................. -- 827 --
Provision for claims........................................................... 1,276 2,688 865
Loss on disposal of property, plant and equipment.............................. 1,005 474 629
Changes in operating assets and liabilities:
Film exhibition rights......................................................... (1,031) 560 (114)
Accounts receivable............................................................ (12,370) (5,876) (7,007)
Prepaid and other assets....................................................... 690 (1,191) (1,330)
Other accounts receivable...................................................... (1,925) (711) (1,461)
Accrued interest............................................................... (3,604) 356 54,019
Inventories.................................................................... 1,700 (7,706) (2,050)
Suppliers...................................................................... 9,133 34,010 5,270
Taxes payable other than income taxes.......................................... 2,502 3,759 662
Accrued payroll and related liabilities........................................ 807 1,453 1,394
Advances received from subscribers............................................. 2,796 2,955 (495)
Other accounts payable......................................................... 1,537 426 1,128
--------- --------- ---------
Net cash provided by (used in) operating activities.......................... 15,428 24,121 (8,479)
--------- --------- ---------
Cash flows from investing activities:
Purchase of property, plant and equipment........................................ (69,792) (85,016) (17,938)
Loans to affiliated companies.................................................... (508) (8,220) (2,098)
Cash received on loans to related companies...................................... 9,315 26 3,942
--------- --------- ---------
Net cash used in investing activities........................................ (60,985) (93,210) (16,094)
--------- --------- ---------
Cash flows from financing activities:
Capital contribution............................................................. -- -- 5,506
Bank loans....................................................................... 7,406 -- --
Repayments of loans from shareholders............................................ (2,767) -- (3,082)
Loans from related companies..................................................... 40,970 89,000 227,188
Repayments of loans from related companies....................................... -- (23,857) (180,477)
Repayments of loans from bank.................................................... -- -- (19,935)
--------- --------- ---------
Net cash provided by financing activities........................................ 45,609 65,143 29,200
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents............................... 52 (3,946) 4,627
Cash and cash equivalents at beginning of the period............................... 698 4,644 17
--------- --------- ---------
Cash and cash equivalents at end of the period............................... $ 750 $ 698 $ 4,644
--------- --------- ---------
--------- --------- ---------
Supplemental cash disclosure:
Cash paid for interest........................................................... $ 317 -- $ 8,583
--------- --------- ---------
--------- --------- ---------
Supplemental non-cash financing activities:
Accrued interest on related company loans refinanced as principal balance........ -- $ 2,468 $ 54,158
--------- --------- ---------
--------- --------- ---------
The accompanying notes are an integral part of these financial statements
F-42
TVA SISTEMA DE TELEVISAO S.A.
NOTES TO THESE FINANCIAL STATEMENTS
(IN THOUSANDS OF U.S. DOLLARS)
1. TVA SISTEMA DE TELEVISAO S.A. (THE "COMPANY") AND ITS PRINCIPAL OPERATIONS
The Company renders services related to wireless cable and cable and
parabolic antenna television systems, including marketing and advertising,
production, distribution and licensing of domestic and foreign television
programs. The Company has wireless cable channel rights primarily in major urban
markets in Brazil.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant policies followed in the preparation of the accompanying
financial statements are described below:
2.1 BASIS OF PRESENTATION
The financial statements are presented in U.S. dollars and have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP"), which differ in certain respects from
accounting principles applied by the Company in its local currency financial
statements, which are prepared in accordance with accounting principles
generally accepted in Brazil ("Brazilian GAAP").
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
financial statement dates and the reported amount of revenues and expenses
during the reporting periods. Since management's judgment involves making
estimates concerning the likelihood of future events, the actual results could
differ from those estimates which will have a positive or negative effect on
future period results.
2.2 ACCOUNTING RECORDS
As required by Brazilian Law, and in accordance with local accounting
practices, the accounting records of the Company are maintained in Brazilian
currency ("REAL" or "R$"). In order to present the financial statements in
conformity with U.S. GAAP, the Company maintains additional accounting records
which are used solely for this purpose.
2.3 CURRENCY REMEASUREMENT
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
52, "Foreign Currency Translations", the United States dollar has been assumed
to be the functional currency as Brazil is a "hyperinflationary" country. As
such, the local accounts of the Company are translated into United States
dollars as follows:
- Nonmonetary assets and liabilities are translated at historical rates. All
other assets and liabilities are translated at the official rate of
exchange of R$1.0394 to US$l in effect on December 31, 1996, and R$0.973
to US$l in effect on December 31, 1995.
- Income and expenses are translated at the average exchange rates in effect
each month, except for those related to assets and liabilities which are
translated at historical exchange rates, and deferred income taxes, which
are translated at the current rate. Translation gains/losses are
recognized in the income statement.
F-43
TVA SISTEMA DE TELEVISAO S.A.
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
2.4 CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as cash and cash in banks and
investments in interest-bearing securities and are carried at cost plus accrued
interest. Short-term investments with original maturities of three months or
less at the time of purchase are considered cash equivalents.
2.5 FINANCIAL INSTRUMENTS
In accordance with SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments" information is provided about the fair value of certain financial
instruments for which it is practicable to estimate that value.
For the purposes of SFAS No. 107, the estimated fair value of a financial
instrument is the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
The carrying values of the Company's financial instruments as of December 31,
1996 and 1995 approximate management's best estimate of their estimated fair
values. The following methods and assumptions were used to estimate the fair
value of each class of financial instrument for which it is practicable to
estimate that value:
- The fair value of certain financial assets carried at cost, including
cash, accounts receivable, other accounts receivable, and certain other
short-term assets is considered to approximate their respective carrying
value due to their short-term nature.
- The fair value of payables to film suppliers and other suppliers, other
accounts payable, loans to related companies and certain other short-term
liabilities is considered to approximate their respective carrying value
due to their short-term nature.
- The fair value of loans from related companies approximates their
respective carrying values, as interest on these loans is at market rates.
2.6 ACCOUNTS RECEIVABLE
An allowance for doubtful accounts is established on the basis of an
analysis of the accounts receivable, in light of the risks involved, and is
considered sufficient to cover any losses incurred in realization of credits.
2.7 INVENTORIES
Inventories consist of materials and supplies and imports in transit.
Materials and supplies are used to provide service to new customers, and to
ensure continuity of service to existing customers. Imports in transit represent
materials purchased from foreign countries that have not yet been received.
Inventories are stated at the lower of cost or market. Cost is determined
principally under the average cost method.
An allowance for obsolescence has been established on the basis of an
analysis of slow-moving materials and supplies.
F-44
TVA SISTEMA DE TELEVISAO S.A.
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
2.8 FILM EXHIBITION RIGHTS AND PROGRAM LICENSING
Film exhibition rights and program licensing costs are deferred and
recognized as the films and/or programs are exhibited. The allowance for
exhibition expiration is determined based on management's estimate of the
Company's capacity to telecast the films and projected revenue streams.
2.9 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated using the
straight-line method, over the remaining useful lives, as described in Note 11.
2.10 ADVERTISING
Advertising revenues are recognized, and the production cost of commercials
and programming are charged to expense, when the commercial is telecast.
2.11 RECOVERABILITY OF LONG-LIVED ASSETS TO BE HELD AND USED IN THE BUSINESS
Management reviews long-lived assets, primarily the Company's licenses and
its property and equipment to be held and used in the business, for the purposes
of determining and measuring impairment on a recurring basis or when evens or
changes in circumstances indicate that the carrying value of an asset or group
of assets may not be recoverable. Assets are grouped and evaluated for possible
impairment at the level of each cable television system; impairment is assessed
on the basis of the forecasted undiscounted cash flows of the businesses over
the estimated remaining lives of the assets related to those systems. A
write-down of the carrying value of the assets or group of assets to estimated
fair value will be made when appropriate.
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", from January 1,
1996, and the effect on the financial statements as a result of the adoption was
not significant.
2.12 REVENUE RECOGNITION
Hook up fees are recognized as revenue on the equipment installation date to
the extent of direct selling costs incurred. Subscription revenues are
recognized as earned on an accrual basis.
2.13 LICENSES
Televisao Show Time Ltda. ("TV Show Time") and TVA Brasil Radioenlaces Ltda.
("TVA Brasil") hold licenses covering certain operations of the Company. The use
of such licenses is provided to the Company, for a nominal fee, under a Service
Agreement dated July 22, 1994, as amended, among TEVECAP, TV Show Time, TVA
Brasil and Abril S.A.
Pursuant to the Service Agreement, TV Show Time and TVA Brasil have agreed
to transfer the licenses, which are carried at nil value, to TEVECAP at nominal
cost.
F-45
TVA SISTEMA DE TELEVISAO S.A.
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
3. CASH AND CASH EQUIVALENTS
As of December 31, 1996 and 1995, cash and cash equivalents were comprised
of:
DECEMBER 31,
--------------------
1996 1995
--------- ---------
Cash on hand and in banks......................................................................... $ 721 $ 582
Short-term investments............................................................................ 29 116
--------- ---------
$ 750 $ 698
--------- ---------
--------- ---------
4. ACCOUNTS RECEIVABLE
As of December 31, 1996 and 1995, accounts receivable were comprised of:
DECEMBER 31,
--------------------
1996 1995
--------- ---------
Subscriptions............................................................................... $ 7,294 $ 5,154
Installation fees........................................................................... 9,789 4,605
Advertising and programming................................................................. 4,511 1,810
Barter...................................................................................... 5,248 2,989
Others...................................................................................... 156 70
Allowance for doubtful accounts............................................................. (5,373) (3,407)
--------- ---------
$ 21,625 $ 11,221
--------- ---------
--------- ---------
5. INVENTORIES
As of December 31, 1996 and 1995, inventories were comprised of:
DECEMBER 31,
--------------------
1996 1995
--------- ---------
Materials and supplies...................................................................... $ 10,544 $ 10,913
Imports in transit.......................................................................... 832 2,163
Allowance for obsolescence.................................................................. (2,250) --
--------- ---------
$ 9,126 $ 13,076
--------- ---------
--------- ---------
6. FILM EXHIBITION RIGHTS
As of December 31, 1996 and 1995, film exhibition rights were comprised of:
DECEMBER 31,
--------------------
1996 1995
--------- ---------
Exhibition rights.............................................................................. $ 2,223 $ 1,192
Allowance for exhibition expiration............................................................ (1,162) (1,162)
--------- ---------
$ 1,061 $ 30
--------- ---------
--------- ---------
F-46
TVA SISTEMA DE TELEVISAO S.A.
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
7. PREPAID AND OTHER ASSETS
As of December 31, 1996 and 1995, prepaid expenses were comprised of:
DECEMBER 31,
--------------------
1996 1995
--------- ---------
Advances to suppliers.......................................................................... $ 1,411 $ 2,022
Prepaid TVA magazine publishing expenses....................................................... 510 562
Prepaid meals and transportation............................................................... 194 147
Others......................................................................................... 40 114
--------- ---------
$ 2,155 $ 2,845
--------- ---------
--------- ---------
8. RELATED-PARTY TRANSACTIONS
The following tables summarize the transactions between the Company and
related parties as of December 31, 1996 and 1995 and for the three years in the
period ended December 31, 1996:
DECEMBER 31,
--------------------
1996 1995
--------- ---------
TVA Parana
Loans receivable.......................................................................... $ 2,936 $ 10,480
Accounts receivable....................................................................... 1,343 --
Accounts payable.......................................................................... 580 --
TV Cabo Santa Catarina
Loans receivable.......................................................................... 88 --
Tevecap S.A.
Loans payable............................................................................. 286,284 249,885
Coml. Cabo
Loans payable............................................................................. 4,642 4,917
HBO Brasil
Accounts receivable....................................................................... 778 507
Televisa Abril Ltda.
Accounts receivable....................................................................... 136 --
ESPN Brasil Ltda.
Accounts receivable....................................................................... 55 438
Accounts payable.......................................................................... 337 510
Abril S.A.
Accounts receivable....................................................................... 19 --
Accounts payable.......................................................................... 104 108
Loans payable............................................................................. 2,721 --
Galaxy Brasil
Accounts receivable....................................................................... 136 --
Others
Accounts receivable....................................................................... 115 --
Accounts payable.......................................................................... 32 9
Loans payable............................................................................. 11 --
F-47
TVA SISTEMA DE TELEVISAO S.A.
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
8. RELATED-PARTY TRANSACTIONS (CONTINUED)
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
Tevecap
Net interest (income) expense.................................................... $ (1,749) $ 2,465 $ 54,143
Abril S.A.
Printing cost.................................................................... 4,516 2,723 1,309
Net interest expense............................................................. 46 -- --
Coml. Cabo
Net interest income.............................................................. (319) -- --
TV Cabo Santa Catarina
Net interest income.............................................................. (21) -- --
ESPN do Brasil Ltda.
Programming costs, net........................................................... 3,850 646 --
TVA Parana
Net interest income.............................................................. (1,330) (2,286) --
TV Filme
Programming revenue.............................................................. (6,435) (742) (163)
Canbras TV a Cabo
Programming revenue.............................................................. (207) -- --
The related company loans are denominated in reais and are subject to
monetary restatement until December 31, 1995 plus interest charges at the market
rate which ranged from 1.80% to 2.50% per month in December 1996 (3.44% per
month in December 1995). Such loans are renewable every year on December 31.
The Company's parent, TEVECAP S.A. ("Tevecap"), and Falcon International
Communications Services Inc., one of Tevecap's shareholders, signed a consulting
service agreement on April 1, 1996 related to the Company's operations and
technologies. Initially, the duration of this agreement is two years, renewable
every subsequent two-year period thereafter. The payment for the consulting
services amounts to $200 per annum.
Related-party transactions relating to programming sales and costs and
printing service costs were carried out at usual market rates and terms.
The Company received guarantees in the course of the year from its parent
company Tevecap and from Abril S.A. in the form of collateral and letters of
credit. The amount outstanding pursuant to these guarantees as of December 31,
1996 was $3,198 and $47,890, respectively.
The Company, as well as other subsidiaries of Tevecap, is a joint and
several guarantor in a private placement transaction conducted by Tevecap in the
amount of $250,000. This transaction was carried out on November 26, 1996, with
an eight-year term and interest rate of 12.625% p.a.
F-48
TVA SISTEMA DE TELEVISAO S.A.
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
9. LOANS FROM SHAREHOLDERS
Loans from shareholders as of December 31, 1996 and 1995 were comprised of:
DECEMBER 31,
--------------------
1996 1995
--------- ---------
Roberto Civita................................................................................. $ -- $ 2,616
Maricla I. Rossi............................................................................... $ -- $ 61
Edgard Silvio Faria............................................................................ $ -- $ 184
Angelo Silvio Rossi............................................................................ $ -- $ 45
--------- ---------
$ -- $ 2,906
--------- ---------
--------- ---------
Loans from shareholders in 1995 were subject to interest based on the UFIR
(Fiscal Reference Unit) variation which was 22.46% during that year.
10. DEFERRED INCOME TAX
The tax effects of temporary differences that give rise to a significant
portion of the deferred tax asset and deferred tax liability as of December 31,
1996 and 1995 are as follows:
DECEMBER 31,
----------------------
1996 1995
---------- ----------
Deferred tax assets:
Net operating loss carryforwards........................................................ $ 29,845 $ 24,267
Deferred charges........................................................................ $ 5,581 $ 7,238
Allowance for obsolescence.............................................................. $ 437 $ --
Provision for claims.................................................................... $ 1,461 $ --
Allowance for decoders.................................................................. $ 438 $ --
Others.................................................................................. $ 379 $ 688
---------- ----------
Total gross deferred tax asset.................................................... $ 38,141 $ 32,536
Less valuation allowance................................................................ $ (32,685) $ (24,861)
---------- ----------
Net deferred tax asset.................................................................. $ 5,456 $ 7,675
Deferred tax liability:
Installation costs.................................................................... $ (5,456) $ (7,675)
---------- ----------
Total gross deferred tax liability................................................ $ (5,456) $ (7,675)
---------- ----------
Net deferred tax asset.................................................................. $ -- $ --
---------- ----------
---------- ----------
The Company has a limited operating history and has generated losses since
its inception. The valuation allowance has been established in accordance with
the requirements of SFAS No. 109 "Accounting for Income Taxes". As of December
31, 1996, the Company has unexpirable accumulated tax losses of $90,439.
F-49
TVA SISTEMA DE TELEVISAO S.A.
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
10. DEFERRED INCOME TAX (CONTINUED)
Income tax was different from the amount computed using the Brazilian
statutory income tax for the reasons set forth in the following table:
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
Loss before income taxes and minority interest................................... $ 13,432 $ 22,635 $ 66,979
Statutory income tax rate........................................................ 33% 30.56% 43%
--------- --------- ---------
4,433 6,917 28,801
Increase (decrease) in the income tax rate....................................... 1,957 (7,670) 2,846
Monetary correction of deferred charges amortization............................. 5,102 (5,634) (14,264)
Translation rate difference on exhibition rights................................. -- 381 --
Translation (loss) gain of tax losses............................................ (2,054) 1,718 3,369
Monetary correction of shareholders' equity...................................... -- (449) (822)
Monetary correction of installation materials depreciation....................... 3,761 (452) (5,142)
Others........................................................................... (5,375) 3,198 (1,116)
--------- --------- ---------
Net income tax benefit for the period............................................ 7,824 (1,991) 13,672
(Increase) decrease in valuation allowance....................................... (7,824) 1,991 (13,672)
--------- --------- ---------
$ -- $ -- $ --
--------- --------- ---------
--------- --------- ---------
F-50
TVA SISTEMA DE TELEVISAO S.A.
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
11. PROPERTY, PLANT AND EQUIPMENT
As of December 31, 1996 and 1995, property, plant and equipment were
comprised of:
ANNUAL DECEMBER 31,
DEPRECIATION ----------------------
RATE % 1996 1995
------------ ---------- ----------
Machinery and equipment..................................................... 10 $ 32,417 $ 29,598
Converters.................................................................. 10 68,078 36,485
Leasehold improvements...................................................... 25 2,007 1,795
Furniture and fixtures...................................................... 10 1,199 1,032
Premises.................................................................... 10 1,376 1,066
Vehicles.................................................................... 20 1,044 442
Software.................................................................... 20 2,626 1,360
Tools....................................................................... 10 632 621
Reception equipment......................................................... 20 68,637 44,508
Cable plant................................................................. 10 21,931 7,089
Building.................................................................... 4 -- 342
---------- ----------
199,947 124,338
Accumulated depreciation.................................................... (45,727) (23,114)
Telephone line use rights................................................... 1,888 1,370
Trademarks, patents and others.............................................. 165 164
Fixed assets in transit..................................................... 8,579 16,126
Others...................................................................... 691 --
---------- ----------
$ 165,543 $ 118,884
---------- ----------
---------- ----------
12. SHORT-TERM BANK LOANS
Short-term bank loans as of December 31, 1996 represent the refinancing of
certain supplier payables. The average short-term interest rate on such loans is
LIBOR plus 1.5%.
13. OTHER ACCOUNTS PAYABLE
As of December 31, 1996 and 1995, other accounts payable were comprised of:
DECEMBER 31,
--------------------
1996 1995
--------- ---------
Accounts payable to related companies (Note 8)................................................. $ 1,053 $ 627
Advertising.................................................................................... 265 427
Importation expenses payable................................................................... 1,330 328
Others......................................................................................... 39 446
--------- ---------
$ 2,687 $ 1,828
--------- ---------
--------- ---------
F-51
TVA SISTEMA DE TELEVISAO S.A.
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
14. INSURANCE
The Company maintains insurance coverage for its fixed assets and
inventories in an amount considered sufficient to cover the risks involved.
15. LEASED ASSETS AND COMMITMENTS
The Company has entered into film distribution contracts and licensing
agreements with film producers for programming for future periods. Such
contracts and agreements, which range in life from one to nine years with the
exception of a specific contract with ESPN, which has a life of 50 years,
require a per-subscriber fee to be paid by the Company on a monthly basis.
The Company has rented its office space until the year 2001. As of December
31, 1996, minimum rental payments applicable to operating leases in respect of
this space aggregate approximately $5,038 as follows:
1997................................................................ $ 1,805
1998................................................................ 1,438
1999................................................................ 623
2000................................................................ 589
2001 583
---------
Total............................................................... $ 5,038
---------
---------
As of December 31, 1996, the Company had contractual commitments with
Embratel for transponder use until the year 2003. Based on the contract
provisions, these operating lease commitments are currently estimated to
aggregate approximately $71,854, as follows:
1997............................................................... $ 11,665
1998............................................................... 11,665
1999............................................................... 11,665
2000............................................................... 11,665
2001............................................................... 11,665
2002............................................................... 8,054
2003............................................................... 5,475
---------
Total.............................................................. $ 71,854
---------
---------
16. COMMON SHARES
Common shares represent registered shares without par value.
The Company's shareholders are entitled to minimum dividends of 25% of net
income for the year, adjusted according to Corporation Law. As the Company has
not recorded net income since its inception, no such dividends are payable.
F-52
TVA SISTEMA DE TELEVISAO S.A.
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
17. LITIGATION CONTINGENCIES
Certain claims and lawsuits arising in the ordinary course of business have
been filed or are pending against the Company which were not recognized in the
financial statements. The Company has also recorded provisions related to
certain claims in amounts that management considers to be adequate after
considering a number of factors including (but not limited to) the views of
legal counsel, the nature of the claims and the prior experience of the Company.
In management's opinion, all contingencies have been adequately provided for
or are without merit or are of such kind that, if disposed of unfavorably, would
not have a material adverse effect on the financial position or future results
of operations of the Company.
18. PENSION PLAN
In April 1996, the Company became a co-sponsor of the private pension entity
named Abrilprev Sociedade de Previdencia Privada, the primary objective of which
is to grant employees benefits other than those provided by Social Security. The
plan is optional to all employees of the sponsoring entities. Abrilprev operates
as a Defined Contribution Plan. Company contributions are made based on a fixed
percentage applied to the payroll of the sponsoring entities based on actuarial
calculations. Plan expenses amounted to $308 for the year ended December 31,
1996.
19. ABRIL HEALTH CARE PLAN
In February 1996, the Abril Health Care Plan, Associacao Abril de Beneficios
(the "Health Care Plan"), was created to provide health care to Abril S.A.
companies' employees and their dependents. Both the companies and the employees
contribute monthly to the Health Care Plan which is responsible for the plan
management. In 1996, contributions made by the Company to the Health Care Plan
amounted to $1,288.
20. WORKING CAPITAL DEFICIENCY
The Company's financial statements for the year ended December 31, 1996 were
prepared on a going concern basis which contemplates the realization of assets
and settlement of liabilities and commitments in the normal course of business.
The Company incurred net losses of $13,432 and $22,634 for the two years in the
period ended December 31, 1996, respectively. In addition, the Company had
negative working capital of $56,713 at December 31, 1996.
The Company is endeavoring to reverse its pattern of losses and effectively
meet its liquidity needs through increasing the revenue base and other means.
In the event that these steps prove to be inadequate to maintain Sistema's
operating cash flow, the Company's principal shareholder, TEVECAP, intends to
maintain the Company as a going concern. TEVECAP's support may be in the form of
cash advances, loans, equity infusions or external guarantees.
F-53
TVA SISTEMA DE TELEVISAO S.A.
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
21. SUPPLEMENTARY INFORMATION--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
ALLOWANCE DEFERRED
ALLOWANCE ALLOWANCE FOR TAXATION
FOR DOUBTFUL FOR EXHIBITION VALUATION PROVISION
ACCOUNTS OBSOLESCENCE EXPIRATION ALLOWANCE FOR CLAIMS
------------- ------------- ----------- ----------- -----------
Balance as of December 31, 1993................... $ 363 $ 91 $ 3,367 $ 13,180 $ 210
Additions charged to expense...................... 848 -- -- 13,672 920
Reduction......................................... -- (91) (3,032) -- (55)
------ ------ ----------- ----------- -----------
Balance as of December 31, 1994................... $ 1,211 $ -- $ 335 $ 26,852 $ 1,075
Additions (reductions) charged to expense......... 2,196 -- 827 (1,991) 2,688
------ ------ ----------- ----------- -----------
Balance as of December 31, 1995................... $ 3,407 $ -- $ 1,162 $ 24,861 $ 3,763
Additions charged to expense...................... 1,966 2,250 -- 7,824 1,276
------ ------ ----------- ----------- -----------
Balance as of December 31, 1996................... $ 5,373 $ 2,250 $ 1,162 $ 32,685 $ 5,039
------ ------ ----------- ----------- -----------
------ ------ ----------- ----------- -----------
22. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued certain Statements of
Financial Accounting Standards which are not effective with respect to the
fiscal years presented in the consolidated financial statements.
SFAS No. 125, "Accounting for Transfer and Servicing of Financial Assets and
Extinguishments of Liabilities", provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
after December 31, 1996. This standard is not expected to have a material effect
on the financial position and the results of operations of the Company due to
the absence of material transactions of this nature.
SFAS No. 128, "Earnings per Share", is effective for fiscal years beginning
after December 15, 1997. This standard establishes guidelines for computing and
presenting earnings per share ("EPS") and applies to entities with publicly held
common stock or potential common stock. This replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS for all entities with complex capital structures. This
standard is not expected to have an impact on the Company given that the Company
does not have publicly held common stock or potential common stock.
F-54
TVA SUL PARTICIPACOES S.A. AND SUBSIDIARIES
REPORT ON FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995 AND FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED
DECEMBER 31, 1996
TVA SUL PARTICIPACOES S.A. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
CONTENTS
PAGE
---------
Report of Independent Accountants.......................................................................... F-56
Balance Sheets as of December 31, 1996 and 1995............................................................ F-57
Statements of Operations for each of the three years in the period ended December 31, 1996................. F-58
Statements of Changes in Shareholders' Equity for each of the three years in the period ended December 31,
1996..................................................................................................... F-59
Statements of Cash Flows for each of the three years in the period ended December 31, 1996................. F-60
Notes to these Financial Statements........................................................................ F-62
F-55
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
TVA SUL PARTICIPACOES S.A.
We have audited the accompanying consolidated balance sheet of TVA SUL
PARTICIPACOES S.A. and subsidiaries (the "Company") as of December 31, 1996, and
the related consolidated statements of operations, changes in shareholders'
equity and cash flows for the year then ended; and, combined balance sheet as of
December 31, 1995, and the related combined statements of operations changes in
shareholders' equity and cash flows for each of the two years in the period then
ended, all expressed in United States dollars. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit incudes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of TVA SUL
PARTICIPACOES S.A. and subsidiaries as of December 31, 1996 and the related
consolidated results of operations and cash flows for the year then ended; and
the combined balance sheet as of December 31, 1995, and the related combined
statements of operations, changes in shareholders' equity and cash flows for
each of the two years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America.
Coopers & Lybrand
Sao Paulo, Brazil
April 9, 1997
F-56
TVA SUL PARTICIPACOES S.A. AND SUBSIDIARIES
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
(IN THOUSANDS OF U.S. DOLLARS)
DECEMBER 31,
--------------------------
1996 1995
(CONSOLIDATED) (COMBINED)
------------- -----------
ASSETS
Current assets
Cash and cash equivalents (Note 3)................................................. $ 694 $ 45
Accounts receivable, net (Note 4).................................................. 943 32
Inventories (Note 5)............................................................... 3,969 --
Prepaid and other assets (Note 6).................................................. 603 68
Other accounts receivable (Note 7)................................................. 901 2
------------- -----------
Total current assets........................................................... 7,110 147
Property, plant and equipment, net (Note 11)......................................... 18,833 1,466
Concessions, less accumulated amortization ($837).................................... 10,436 --
Other................................................................................ 46 9
Total assets................................................................... $ 36,425 $ 1,622
------------- -----------
------------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Suppliers.......................................................................... $ 3,187 $ 97
Taxes payable other than income taxes.............................................. 467 56
Accrued payroll and related liabilities............................................ 447 253
Other accounts payable (Note 8).................................................... 1,500 18
Accounts payable to related companies (Note 9)..................................... 1,779 983
------------- -----------
Total current liabilities...................................................... 7,380 1,407
------------- -----------
Long-term liabilities................................................................ 11,354 10,480
Loans from related companies (Note 9).............................................. -- 180
Loans from shareholders............................................................ 12,781 --
------------- -----------
Advances from shareholders (Note 9)
Total long-term liabilities.................................................... 24,135 10,660
------------- -----------
Minority interest.................................................................... 1,310 --
Shareholders' equity
Paid-in capital (Note 13).......................................................... 17,534 1
Accumulated deficit................................................................ (13,934) (10,446)
------------- -----------
Total shareholders' equity..................................................... 3,600 (10,445)
------------- -----------
Total liabilities and shareholders' equity..................................... $ 36,425 $ 1,622
------------- -----------
------------- -----------
The Accompanying notes are an integral part of these financial statements.
F-57
TVA SUL PARTICIPACOES S.A. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF U.S. DOLLARS)
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
(CONSOLIDATED) (COMBINED) (COMBINED)
------------- ----------- -----------
Gross revenues
Monthly subscriptions................................................. $ 11,980 $ 3,233 $ 1,392
Installation.......................................................... 2,154 -- --
Other................................................................. 66 -- 6
Revenue taxes......................................................... (418) (227) (71)
------------- ----------- -----------
Net revenue....................................................... 13,782 3,006 1,327
------------- ----------- -----------
Direct operating expenses
Payroll and benefits.................................................. 3,841 1,456 1,005
Programming........................................................... 3,324 -- --
Technical assistance.................................................. 246 215 15
Vehicle rentals....................................................... 320 247 21
TVA magazine.......................................................... 441 -- --
Other costs........................................................... 1,805 232 432
------------- ----------- -----------
9,977 2,150 1,473
------------- ----------- -----------
Selling, general and administrative expenses
Payroll and benefits.................................................. 1,278 538 207
Advertising and promotion............................................. 604 267 --
Rent.................................................................. 247 114 --
Other administrative expenses......................................... 1,986 292 1
Other general expenses................................................ 837 486 802
------------- ----------- -----------
4,952 1,697 1,010
------------- ----------- -----------
Depreciation............................................................ 1,553 186 36
Amortization............................................................ 837 -- --
------------- ----------- -----------
Operating loss.................................................... (3,537) (1,027) (1,192)
------------- ----------- -----------
Interest income......................................................... 225 165 181
Interest expense........................................................ (2,043) (3,527) (2,568)
Translation gain (loss)................................................. 373 8 (22)
Other nonoperating income, net.......................................... 1,612 27 --
------------- ----------- -----------
Loss before income taxes and minority interest.................... (3,370) (4,354) (3,601)
Income taxes (Note 10).................................................. (156) -- --
------------- ----------- -----------
Loss before minority interest..................................... (3,526) (4,354) (3,601)
Minority interest....................................................... 38 -- --
------------- ----------- -----------
Net loss.......................................................... $ (3,488) $ (4,354) $ (3,601)
------------- ----------- -----------
------------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
F-58
TVA SUL PARTICIPACOES S.A. AND SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF U.S. DOLLARS)
PAID-IN
CAPITAL ACCUMULATED
(NOTE 13) DEFICIT TOTAL
----------- ------------ ---------
Balance as of December 31, 1993 (combined).................................... $ 1 $ (2,491) $ (2,490)
Net loss for the year......................................................... (3,601) (3,601)
----------- ------------ ---------
Balance as of December 31, 1994 (combined).................................... 1 (6,092) (6,091)
Net loss for the year......................................................... (4,354) (4,354)
----------- ------------ ---------
Balance as of December 31, 1995 (combined).................................... 1 (10,446) (10,445)
Capital contributed on:
August 30, 1996............................................................. 17,533 17,533
Net loss for the year......................................................... (3,488) (3,488)
----------- ------------ ---------
Balance as of December 31, 1996 (consolidated)................................ $ 17,534 $ (13,934) $ (3,600)
----------- ------------ ---------
----------- ------------ ---------
The accompanying notes are an integral part of these financial statements.
F-59
TVA SUL PARTICIPACOES S.A. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF U.S. DOLLARS)
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
(CONSOLIDATED) (COMBINED) (COMBINED)
------------- ----------- -----------
Cash flows from operating activities:
Net Loss.............................................................. $ (3,488) $ (4,354) $ (3,601)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation........................................................ 1,553 186 36
Amortization........................................................ 837 -- --
Allowance for doubtful accounts..................................... 386 -- --
Disposal of property, plant and equipment........................... -- -- (15)
Minority interest................................................... (38) -- --
Changes in operating assets and liabilities:
Accounts receivable................................................... (1,296) (32) --
Prepaid and other assets.............................................. (502) (23) (34)
Other accounts receivable............................................. (891) 5 6
Accrued interest...................................................... 1,497 2,331 2,328
Inventories........................................................... (3,927) -- --
Other assets.......................................................... (30) (1) (5)
Suppliers............................................................. 2,665 (6) 72
Taxes payable other than income taxes................................. 293 27 22
Accrued payroll and related liabilities............................... (4) 113 59
Advances received from subscribers.................................... (30) -- --
Other accounts payable excluding accounts payable from related
companies........................................................... 1,664 945 47
------------- ----------- -----------
Net cash used in operating activities................................. (1,311) (809) (1,085)
------------- ----------- -----------
Cash flows used in investing activities:
Purchase of property, plant and equipment............................. (14,662) (1,454) (69)
Acquisition of businesses, net of cash acquired....................... (14,235) -- --
------------- ----------- -----------
Net cash used in investing activities............................. (28,897) (1,454) (69)
------------- ----------- -----------
Cash flows provided by (used in) financing activities:
Capital contributions................................................. 17,533 -- --
Repayments of loans from shareholders................................. (162) -- --
Loans from related companies.......................................... 8,672 8,220 1,152
Advances from shareholders............................................ 12,781 -- --
Repayments of loans from related companies............................ (9,315) (5,912) --
Minority interest..................................................... 1,348 -- --
------------- ----------- -----------
Net cash provided by financing activities......................... 30,857 2,308 1,152
------------- ----------- -----------
Net increase (decrease) in cash and cash equivalents.................... 649 45 (2)
Cash and cash equivalents at beginning of the period.................... 45 -- 2
------------- ----------- -----------
Cash and cash equivalents at end of the period.................... $ 694 $ 45 $ --
------------- ----------- -----------
------------- ----------- -----------
The accompanying notes are an integral part of these financial statements.
F-60
TVA SUL PARTICIPACOES S.A. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS OF U.S.)
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
(CONSOLIDATED) (COMBINED) (COMBINED)
------------- ----------- -----------
SUPPLEMENTAL CASH DISCLOSURE:
Cash paid for interest................................................ $ -- $ 2,708 $ --
------------- ----------- -----------
------------- ----------- -----------
SUPPLEMENTAL NONCASH FINANCING ACTIVITIES:
Accrued interest on related company loans refinanced as principal
balance............................................................. $ 1,497 $ 2,286 $ 2,269
------------- ----------- -----------
------------- ----------- -----------
DETAILS OF ACQUISITIONS:
Fair value of assets acquired......................................... 15,701 -- --
Liabilities assumed................................................... (1,385) -- --
------------- ----------- -----------
Cash paid............................................................. 14,316 -- --
Less: cash acquired................................................... (81) -- --
Net cash paid for acquisitions........................................ $ 14,235 $ -- $ --
------------- ----------- -----------
------------- ----------- -----------
The Accompanying notes are an integral part of these financial statements.
F-61
TVA SUL PARTICIPACOES S.A. AND SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS
(IN THOUSANDS OF U.S. DOLLARS)
1. THE COMPANY AND ITS PRINCIPAL OPERATIONS
The accompanying financial statements reflect the results of operations of
TVA Sul PARTICIPACOES S.A. and its subsidiaries (the "Company").
TVA Sul Participacoes S.A. is a holding company, the subsidiaries of which
render services related to wireless cable and cable television systems,
including marketing and advertising, production, distribution and licensing of
domestic and foreign television programs. The Company has wireless cable channel
rights primarily in major urban markets in the South of Brazil.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant policies followed in the preparation of the accompanying
consolidated and combined financial statements are described below:
2. 1 BASIS OF PRESENTATION; COMBINED AND CONSOLIDATED
A. BASIS OF PRESENTATION
The combined and consolidated financial statements are presented in U.S.
dollars and have been prepared in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP"), which differ
in certain respects from accounting principles applied by the Company in its
local currency financial statements, which are prepared in accordance with
accounting principles generally accepted in Brazil ("Brazilian GAAP").
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
financial statement dates and the reported amount of revenues and expenses
during the reporting periods. Since management's judgment involves making
estimates concerning the likelihood of future events, the actual results could
differ from those estimates which will have a positive or negative effect on
future period results.
B. CONSOLIDATED PRESENTATION AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1996
TVA Sul Participacoes S.A. was incorporated on March 3, 1996 as a holding
company for certain entities which were under common control. Accordingly, the
financial statements as of and for the year ended December 31, 1996 are prepared
on a consolidated basis.
The consolidated financial statements include the accounts of all
majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated on consolidation.
C. COMBINED PRESENTATION AS OF DECEMBER 31, 1995 AND FOR EACH OF THE TWO YEARS
IN THE PERIOD ENDED DECEMBER 31, 1995
The combined financial statements as of December 31, 1995 and for each of
the two years in the period ended December 31, 1995 reflect the results of TVA
Parana (formerly TVA Curitiba Servicos Telecomunicacoes Ltda.).
F-62
TVA SUL PARTICIPACOES S.A. AND SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
2.2 ACCOUNTING RECORDS
As required by Brazilian Law, and in accordance with local accounting
practices, the accounting records of the Company are maintained in Brazilian
currency ("REAIS" or "R$"). In order to present the financial statements in
conformity with accounting principles generally accepted in the United States of
America, the Company maintains additional accounting records which are used
solely for this purpose.
2.3 CURRENCY REMEASUREMENT
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
52, "Foreign Currency Transactions", the United States dollar has been assumed
to be the functional currency as Brazil is a "hyperinflationary" country. As
such, the local accounts of the Company are translated into United States
dollars as follows:
- Nonmonetary assets and liabilities are translated at historical rates. All
other assets and liabilities are translated at the official rate of
exchange of R$1.0394 to US$1 in effect on December 31, 1996, and R$0.973
to US$1 in effect on December 31, 1995.
- Income and expenses are translated at the average exchange rates in effect
each month, except for those related to assets and liabilities which are
translated at historical exchange rates and deferred income taxes, which
are translated at the current rate. Translation gains and losses are
recognized in the income statement.
2.4 CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as cash and cash in banks and
investments in interest-bearing securities and are carried at cost plus accrued
interest. Short-term investments with original maturities of three months or
less at the time of purchase are considered cash equivalents.
2.5 COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
The Company's combined and consolidated operating subsidiaries included in
the financial statements are:
OWNERSHIP INTEREST AS OF
DECEMBER 31,
------------------------------
1996 1995
(CONSOLIDATED) (COMBINED)
--------------- -------------
TVA Sul Parana Ltda. (a)............................................................. 100.00% 80.00%
TVA Sul Santa Catarina Ltda. (a)..................................................... 99.50% --
TVA Sul Foz do Iguacu Ltda. (a)...................................................... 100.00% --
CCS Camboriu Cable System de Telecomuicacoes Ltda.................................... 60.00% --
TCC TV a Cabo Ltda. (a).............................................................. 100.00% --
TV Alfa Cabo Ltda. (a)............................................................... 100.00% --
- ------------------------
a) One common share in each of these entities is owned by a Brazilian National
pursuant to local legislation.
F-63
TVA SUL PARTICIPACOES S.A. AND SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
2.6 ACQUISITIONS
During the year ended December 31, 1996 the Company acquired control of the
following entities which were accounted for under the purchase method of
accounting: i) in February 1996, the Company acquired TVA Sul Santa Catarina
("TVA SSC"); ii) in March 1996, the Company acquired TCC TV a Cabo Ltda. ("TCC")
and TV Alfa Cabo Ltda. ("TV Alfa"); and iii) in May 1996, the Company acquired
TVA Sul Foz do Iguacu Ltda. ("TVA SF") and CCS Camboriu Cable Systems de
Telecomunicacoes Ltda. ("CCS"). In each case, the excess of the purchase price
over the fair value of assets acquired represents the value of concessions of
certain television stations. These concessions are being amortized on a straight
line basis over ten years.
The purchase prices have been allocated to the assets purchased and the
liabilities assumed based upon the fair values on the dates of acquisition, as
follows:
TVA SSC TVA SF CCS TCC TV ALFA
----------- --------- --------- --------- ---------
Current assets, other than cash................................. $ -- $ 23 $ 7 $ 51 $ 5
Property, plant and equipment................................... 25 319 3,501 238 176
Other assets.................................................... -- 3 -- -- --
Concessions..................................................... 45 5,346 841 2,622 2,418
Other liabilities............................................... (55) (377) (139) (127) (687)
----- --------- --------- --------- ---------
Purchase price, net of cash received............................ $ 15 $ 5,314 $ 4,210 $ 2,784 $ 1,912
----- --------- --------- --------- ---------
----- --------- --------- --------- ---------
Total purchase price........................................ $ 15 $ 5,324 $ 4,210 $ 2,834 $ 1,933
----- --------- --------- --------- ---------
----- --------- --------- --------- ---------
The operating results of these acquired businesses have been included in the
consolidated statement of operations from the dates of acquisition. On the basis
of a pro forma consolidation of the results of operations as if the acquisitions
had taken place on January 1, 1995, consolidated net revenues would have been
$15,512 (unaudited) and $4,876 (unaudited) for the years ended December 31, 1996
and 1995 respectively. Such pro forma amounts do not purport to be indicative of
results that would have occurred had the acquisition been in effect for the
periods presented, nor do they purport to be indicative of the results that will
be obtained in the future.
The Company is unable to present pro forma amounts for income before
extraordinary items and net income as, although management attempted to obtain
such information from the owners, it was not available. These entities were
acquired for the purpose of expanding the cable TV system penetration for the
Company. The assets purchased will be operated under the Company's management,
using the Company's programming and employees.
2.7 FINANCIAL INSTRUMENTS
In accordance with SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments", information is provided about the fair value of certain financial
instruments for which it is practicable to estimate that value.
For the purposes of SFAS No. 107, the estimated fair value of a financial
instrument is the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
The carrying values of the Company's financial instruments as of December 31,
1996 and 1995 approximate management's best estimate of their estimated fair
values. The following
F-64
TVA SUL PARTICIPACOES S.A. AND SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
2.7 FINANCIAL INSTRUMENTS (CONTINUED)
methods and assumptions were used to estimate the fair value of each class of
financial instrument for which it is practicable to estimate that value:
- The fair value of certain financial assets carried at cost, including
cash, accounts receivable, other accounts receivable, and certain other
short-term assets is considered to approximate their respective carrying
value due to their short-term nature.
- The fair value of payables to suppliers, other accounts payable, loans to
related companies and certain other short-term liabilities is considered
to approximate their respective carrying value due to their short-term
nature.
- The fair value of loans from related companies approximates their
respective carrying values as interest on these loans is at market rates.
2.8 ACCOUNTS RECEIVABLE
An allowance for doubtful accounts was established on the basis of an
analysis of the accounts receivable, in light of the risks involved, in an
amount sufficient to cover any losses incurred in realization of credits.
2.9 INVENTORIES
Inventories consist of materials and supplies used to provide service to new
customers, and to ensure continuity of service to existing customers.
Inventories are stated at the lower of cost or market. Cost is determined
principally under the average cost method
2.10 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated using the
straight-line method, over the remaining useful lives, as described in Note 11.
2.11 RECOVERABILITY OF LONG-LIVED ASSETS TO BE HELD AND USED IN THE BUSINESS
Management reviews long-lived assets, primarily the Company's concessions
and its property and equipment to be held and used in the business, for the
purposes of determining and measuring impairment on a recurring basis or when
events or changes in circumstances indicate that the carrying value of an asset
or group of assets may not be recoverable. Assets are grouped and evaluated for
possible impairment at the level of each cable television system; impairment is
assessed on the basis of the forecasted undiscounted cash flows of the
businesses over the estimated remaining lives of the assets related to those
systems. A write-down of the carrying value of the assets or group of assets to
estimated fair value will be made when appropriate.
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", from January 1,
1996 and the effect on the financial statements as a result of the adoption was
not significant.
F-65
TVA SUL PARTICIPACOES S.A. AND SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
2.12 REVENUE RECOGNITION
Hook up fees are recognized as revenue on the equipment installation date to
the extent of direct selling costs incurred. Subscription revenues are
recognized as earned on an accrual basis.
2.13 ACCOUNTING FOR ISSUANCES OF STOCK BY SUBSIDIARIES
Gains and losses arising from the issuances of previously unissued shares to
unrelated parties by subsidiaries are recognized in income as nonoperating
income to the extent that the net book value of the shares owned by the parent
after the sale exceed or is lower than the net book value per share immediately
prior to the sale of the shares by the subsidiary.
3. CASH AND CASH EQUIVALENTS
As of December 31, 1996 and 1995, cash and cash equivalents were comprised
of:
DECEMBER 31,
----------------------
1996 1995
--------- -----
Cash on hand and in banks...................................................... $ 502 $ 45
Short-term investments......................................................... 192 --
--------- ---
$ 694 $ 45
--------- ---
--------- ---
4. ACCOUNTS RECEIVABLE, NET
As of December 31, 1996 and 1995, accounts receivable were comprised of:
DECEMBER 31,
----------------------
1996 1995
--------- -----
Subscriptions.................................................................. $ 612 --
Installation fees.............................................................. 539 $ 32
Others......................................................................... 178 --
Allowance for doubtful accounts................................................ (386) --
--------- ---
$ 943 $ 32
--------- ---
--------- ---
5. INVENTORIES
As of December 31, 1996 and 1995, inventories were comprised of:
DECEMBER 31,
--------------------
1996 1995
--------- ---------
Materials and suppliers...................................................... $ 3,779 $ --
Import in transit............................................................ 190 --
--------- ---------
$ 3,969 $ --
--------- ---------
--------- ---------
F-66
TVA SUL PARTICIPACOES S.A. AND SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
6. PREPAID AND OTHER ASSETS
As of December 31, 1996 and 1995, prepaid expenses were comprised of:
DECEMBER 31,
----------------------
1996 1995
--------- -----
Advances to suppliers.......................................................... $ 563 $ 22
Prepaid meals and transportation............................................... -- 20
Others......................................................................... 40 26
--------- ---
$ 603 $ 68
--------- ---
--------- ---
7. OTHER ACCOUNTS RECEIVABLE
As of December 31, 1996 and 1995, other accounts receivable were comprised
of:
DECEMBER 31,
----------------------
1996 1995
--------- -----
Advances to employees....................................................... $ 79 --
Accounts receivable from related companies (Note 9)......................... 610 --
Others...................................................................... (212) $ 2
--
---------
$ 901 $ 2
--
--
---------
---------
8. OTHER ACCOUNTS PAYABLE
As of December 31, 1996 and 1995, other accounts payable were comprised of:
DECEMBER 31,
----------------------
1996 1995
--------- -----
Pledges and guarantees........................................................ $ 332 --
Bank loans.................................................................... 427 --
Accounts payable--imports..................................................... 297 --
Others........................................................................ 444 $ 18
--------- ---
$ 1,500 $ 18
--------- ---
--------- ---
F-67
TVA SUL PARTICIPACOES S.A. AND SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
9. RELATED PARTY TRANSACTIONS
The following tables summarize the transactions between the Company and
related parties as of December 31, 1996 and 1995 and for each of the three years
in the period ended December 31, 1996:
DECEMBER 31,
--------------------
1996 1995
--------- ---------
Leonardo Petrelli
Advance from shareholder............................................... $ 1,643 --
TVA Sistema de Televisao S.A.
Loans payable.......................................................... 3,025 $ 10,480
Accounts payable....................................................... 1,343 983
Accounts receivable.................................................... 603 --
Tevecap S.A.
Advance from shareholder............................................... 11,138 --
Accounts receivable.................................................... 6 --
Loans payable.......................................................... 8,329 --
TVA Paga Parana
Accounts receivable.................................................... 1 --
ESPN do Brasil Ltda.
Accounts payable....................................................... 30 --
Others
Accounts payable....................................................... 406 --
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
TVA Sistema de Televisao S.A.
Net interest expense............................................... 1,330 2,286 --
Tevecap
Net interest expense............................................... 166 -- 2,269
The related company loans are denominated in reais and are subject to
monetary restatement until December 31, 1995 plus interest charges at the market
rate which ranged from 1.8% to 2.2% per month in December 1996 (3.44% per month
in December 1995). Such loans are renewable every year on December 31.
F-68
TVA SUL PARTICIPACOES S.A. AND SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
10. DEFERRED INCOME TAX
The tax effects of temporary differences that give rise to a significant
portion of the deferred tax asset and deferred tax liability as of December 31,
1996 and 1995 are as follows:
DECEMBER 31,
--------------------
1996 1995
--------- ---------
Deferred tax assets:
Net operating loss carryforwards......................................... $ 5,044 $ 3,425
Deferred charges......................................................... 97 --
Others................................................................... 171 11
--------- ---------
Total gross deferred tax asset....................................... 5,312 3,436
--------- ---------
Less valuation allowance................................................. (5,071) (3,122)
--------- ---------
Net deferred tax asset..................................................... 241 314
Deferred tax liability:
Installation costs....................................................... 241 314
--------- ---------
Total gross deferred tax liability................................... (241) (314)
--------- ---------
Net deferred tax asset................................................... $ -- $ --
--------- ---------
--------- ---------
The Company has a limited operating history and has generated losses since
its inception. The valuation allowance has been established in accordance with
the requirements of SFAS No. 109, "Accounting for Income Taxes".
As of December 31, 1996, the Company and subsidiaries have unexpirable
accumulated tax losses of $15,285.
The combined income tax expense was different from the amount computed using
the Brazilian statutory income tax for the reasons set forth in the following
table:
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
Loss before income taxes and minority interest................... $ 3,370 $ 4,354 $ 3,601
Statutory income tax rate........................................ 33.00% 30.56% 43%
--------- --------- ---------
1,112 1,331 1,548
Increase (decrease) in the income tax rate....................... 76 (753) 212
Monetary correction of deferred charges.......................... (198) -- --
Monetary correction net of unallowable amortization.............. 486 -- --
Others........................................................... 317 (26) (116)
--------- --------- ---------
Consolidated income tax benefit for the period................... 1,793 552 1,644
Increase in valuation allowance.................................. (1,949) (552) (1,644)
--------- --------- ---------
$ (156) $ -- $ --
--------- --------- ---------
--------- --------- ---------
Income tax payable represents amounts owing by subsidiaries calculated on a
unitary basis.
F-69
TVA SUL PARTICIPACOES S.A. AND SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
11. PROPERTY, PLANT AND EQUIPMENT
As of December 31, 1996 and 1995, property, plant and equipment were
comprised of:
ANNUAL
DEPRECIATION DECEMBER 31,
RATE --------------------
% 1996 1995
------------ --------- ---------
Machinery and equipment.................................... 10 $ 1,847 $ 172
Converters................................................. 10 5,412 --
Leasehold improvements..................................... 25 104 35
Furniture and fixtures..................................... 10 548 164
Premises................................................... 10 320 3
Vehicles................................................... 20 126 15
Software................................................... 20 116 45
Tools...................................................... 10 65 --
Reception equipment........................................ 20 4,693 1,203
Cable plant................................................ 10 3,454 --
Building................................................... 4 3,765 --
--------- ---------
20,450 1,637
Accumulated depreciation................................... (2,071) (254)
Telephone line use rights.................................. 60 83
Fixed assets in transit.................................... 338 --
Others..................................................... 56 --
--------- ---------
$ 18,833 $ 1,466
--------- ---------
--------- ---------
12. INSURANCE
The Company maintains insurance coverage for its fixed assets and
inventories in an amount considered sufficient to cover the risks involved.
13. PAID-IN CAPITAL
Paid-in capital as of December 31, 1996 and 1995 was comprised of:
1996 1995
----------------------- ------------------------
US$ SHARES US$ SHARES
--------- ------------ --- -----------
TVA Parana............................................ -- -- $ 1 1,000
--
--
--------- ------------ -----
--------- ------------ -----
TVA Sul Participacoes S.A............................. $ 17,534 18,470,825 -- --
--
--
--------- ------------ -----
--------- ------------ -----
Paid-in capital represents registered common shares without par value.
The Company's shareholders are entitled to a minimum dividend of 25% of net
income for the year, adjusted according to the Corporation Law. As the Company
has recorded no net income since its inception, no such dividends are payable.
F-70
TVA SUL PARTICIPACOES S.A. AND SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
14. SUPPLEMENTARY INFORMATION--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
DEFERRED TAXATION
VALUATION ALLOWANCE FOR
ALLOWANCE DOUBTFUL ACCOUNTS
----------------- -------------------
Balance as of December 31, 1993.......................... $ 926 --
Additions charged to expense............................. 1,644 --
------ -----
Balance as of December 31, 1994.......................... 2,570 --
Additions charged to expense............................. 552 --
------ -----
Balance as of December 31, 1995.......................... 3,122 --
Additions charged to expense............................. 1,949 $ 386
------ -----
Balance as of December 31, 1996.......................... $ 5,071 $ 386
------ -----
------ -----
15. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued certain Statements of
Financial Accounting Standards which are not effective with respect to the
fiscal years presented in the consolidated financial statements.
SFAS No. 125, "Accounting for Transfer and Servicing of Financial Assets and
Extinguishment of Liabilities", provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
after December 31, 1996. This standard is not expected to have a material effect
on the financial position and the results of operations of the Company due to
the absence of material transactions of this nature.
SFAS No. 128, "Earnings per Share", is effective for fiscal years beginning
after December 15, 1997. This standard establishes guidelines for computing and
presenting earnings per share ("EPS") and applies to entities with publicly held
common stock or potential common stock. This replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS for all entities with complex capital structures. This
standard is not expected to have an impact on the Company given that the Company
does not have publicly held common stock or potential common stock.
16. ABRIL HEALTH CARE PLAN
In February 1996, the Abril Health Care Plan, Associacao Abril de Beneficios
(the "Health Care Plan"), was created to provide health care to Abril S.A.
companies' employees and their dependents. Both the companies and the employees
contribute monthly to the Health Care Plan which is responsible for the plan
management. In 1996, contributions made by the Company to the Health Care Plan
and certain affiliated companies amounted to $115.
F-71
TV ALFA CABO LTDA., TCC TV A CABO LTDA.,
CCS CAMBORIU CABLE SYSTEM DE
TELECOMUNICACOES LTDA., TVA SUL PARANA LTDA.,
TVA SUL FOZ DO IGUACU LTDA. AND
TVA SUL SANTA CATARINA LTDA.
REPORT ON FINANCIAL INFORMATION
AS OF AND FOR THE PERIODS ENDED
DECEMBER 31, 1996
TV ALFA CABO LTDA. ("TV ALFA"), TCC TV A CABO LTDA. ("TCC"),
CCS CAMBORIU CABLE SYSTEM DE TELECOMUNICACOES LTDA. ("CCS"),
TVA SUL PARANA LTDA., ("TVA PARANA"), TVA SUL FOZ DO IGUACU
LTDA. ("FOZ DO IGUACU") AND TVA SUL SANTA CATARINA LTDA. ("SSC")
INDEX TO FINANCIAL INFORMATION
CONTENTS
PAGE
---------
Reports of Independent Accountants......................................................................... F-73
Balance Sheets as of December 31, 1996..................................................................... F-79
Statements of Income for the periods ended December 31, 1996............................................... F-80
Statements of Changes in Shareholders' Equity for the periods ended December 31, 1996...................... F-81
Statement of Cash Flows for the periods ended December 31, 1996............................................ F-82
Notes to Financial Information............................................................................. F-83
F-72
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
TV ALFA CABO LTDA.
We have audited the accompanying financial information reflecting the
balance sheet of TV ALFA CABO LTDA., as of December 31, 1996, and the related
statements of operations, changes in shareholders' equity and cash flows for the
period from March 310, 1996 to December 31, 1996, all expressed in United States
dollars. This financial information is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
information based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial information are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial information. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial information presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial information referred to above presents fairly,
in all material respects, the financial position of TV ALFA CABO LTDA., as of
December 31, 1996 and the results of operations and cash flows for the period
from March 30, 1996 to December 31, 1996, in conformity with accounting
principles generally accepted in the United States of America.
Coopers & Lybrand
Sao Paulo, Brazil
April 9, 1997
F-73
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
TCC TV A CABO LTDA.
We have audited the accompanying financial information reflecting the
balance sheet of TCC TV A CABO LTDA., as of December 31, 1996, and the related
statements of operations, changes in shareholders' equity and cash flows for the
period from March 310, 1996 to December 31, 1996, all expressed in United States
dollars. This financial information is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
information based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial information are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial information. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial information presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial information referred to above presents fairly,
in all material respects, the financial position of TCC TV A CABO LTDA., as of
December 31, 1996 and the results of operations and cash flows for the period
from March 30, 1996 to December 31, 1996, in conformity with accounting
principles generally accepted in the United States of America.
Coopers & Lybrand
Sao Paulo, Brazil
April 9, 1997
F-74
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
CCS CAMBORIU CABLE SYSTEM
DE TELECOMUNICACOES LTDA
We have audited the accompanying financial information reflecting the
balance sheet of CCS CAMBORIU CABLE SYSTEM DE TELECOMUNICACOES LTDA, as of
December 31, 1996, and the related statements of operations, changes in
shareholders' equity and cash flows for the period from March 310, 1996 to
December 31, 1996, all expressed in United States dollars. This financial
information is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial information based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial information are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial information. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial information presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial information referred to above presents fairly,
in all material respects, the financial position of CCS CAMBORIU CABLE SYSTEM DE
TELECOMUNICACOES LTDA., as of December 31, 1996 and the results of operations
and cash flows for the period from March 30, 1996 to December 31, 1996, in
conformity with accounting principles generally accepted in the United States of
America.
Coopers & Lybrand
Sao Paulo, Brazil
April 9, 1997
F-75
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
TVA SUL SANTA CATARINA LTDA.
We have audited the accompanying financial information reflecting the
balance sheet of TVA SUL SANTA CATARINA LTDA., as of December 31, 1996, and the
related statements of operations, changes in shareholders' equity and cash flows
for the period from February 28, 1996 to December 31, 1996, all expressed in
United States dollars. This financial information is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial information based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial information are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial information. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial information presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial information referred to above presents fairly,
in all material respects, the financial position of TVA SUL SANTA CATARINA
LTDA., as of December 31, 1996 and the results of operations and cash flows for
the period from February 28, 1996 to December 31, 1996, in conformity with
accounting principles generally accepted in the United States of America.
Coopers & Lybrand
Sao Paulo, Brazil
April 9, 1997
F-76
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
TVA SUL FOX DO IGUACU LTDA.
We have audited the accompanying financial information reflecting the
balance sheet of TVA SUL FOZ DO IGUACU LTDA., as of December 31, 1996, and the
related statements of operations, changes in shareholders' equity and cash flows
for the period from March 31, 1996 to December 31, 1996, all expressed in United
States dollars. This financial information is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial information based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial information are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial information. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial information presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial information referred to above presents fairly,
in all material respects, the financial position of TVA SUL FOZ DO IGUACU LTDA.,
as of December 31, 1996 and the results of operations and cash flows for the
period from March 30, 1996 to December 31, 1996, in conformity with accounting
principles generally accepted in the United States of America.
Coopers & Lybrand
Sao Paulo, Brazil
April 9, 1997
F-77
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
TVA SUL PARANA LTDA.
We have audited the accompanying financial information reflecting the
balance sheet of TVA SUL PARANA LTDA., as of December 31, 1996, and the related
statements of operations, changes in shareholders' equity and cash flows for the
year then ended, all expressed in United States dollars. This financial
information is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial information based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial information are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial information. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial information presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial information referred to above presents fairly,
in all material respects, the financial position of TVA SUL PARANA LTDA., as of
December 31, 1996 and the results of operations and cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America.
Coopers & Lybrand
Sao Paulo, Brazil
April 9, 1997
F-78
TV ALFA, TCC, CCS, TVA PARANA, FOZ DO IGUACU AND SSC
BALANCE SHEETS
AS OF DECEMBER 31, 1996
(IN THOUSANDS OF U.S. DOLLARS)
FOZ DO
TV ALFA TCC CCS SSC IGUACU
----------- --------- --------- --------- ---------
ASSETS
Current assets
Cash and cash equivalents (Note 3)............................. $ 14 $ 70 $ 86 $ -- $ 34
Accounts receivable, net (Note 4).............................. 77 13 3 49 15
Inventories.................................................... -- -- 901 420 584
Prepaid and other assets (Note 5).............................. -- -- 31 19 144
Other accounts receivable (Note 6)............................. 352 140 25 54 224
----- --------- --------- --------- ---------
Total current assets......................................... 443 223 1,052 542 1,001
Property, plant and equipment, net (Note 8)...................... 160 264 3,455 2,470 502
Loans to related companies (Note 7).............................. -- -- -- -- --
Other............................................................ -- 5 -- -- 25
----- --------- --------- --------- ---------
Total assets................................................. $ 603 $ 492 $ 4,507 $ 3,012 $ 1,528
----- --------- --------- --------- ---------
----- --------- --------- --------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current assets
Suppliers...................................................... $ 137 165 477 335 580
Taxes payable other than income taxes.......................... 109 31 34 5 50
Accrued payroll and related liabilities........................ 14 -- 11 45 56
Other accounts payable (Note 9).................................. 77 5 711 1,363 357
----- --------- --------- --------- ---------
Total current assets........................................... 37 204 1,233 1,748 1,043
----- --------- --------- --------- ---------
Long-term liabilities
Loans from related companies (Note 7).......................... 492 -- -- 2,153 579
----- --------- --------- --------- ---------
Total long-term liabilities.................................... 492 -- -- 2,153 579
----- --------- --------- --------- ---------
Shareholders' equity
Paid in capital 344 47 4,012 1 5
Accumulated (deficit) income................................... (570) 241 (738) (890) (94)
----- --------- --------- --------- ---------
Total shareholders' equity................................... (226) 288 3,274 (889) (94)
----- --------- --------- --------- ---------
Total liabilities and shareholders' equity................... $ 603 $ 492 $ 4,507 $ 3,012 $ 1,528
----- --------- --------- --------- ---------
----- --------- --------- --------- ---------
TVA
PARANA
---------
ASSETS
Current assets
Cash and cash equivalents (Note 3)............................. $ 406
Accounts receivable, net (Note 4).............................. 786
Inventories.................................................... 2,058
Prepaid and other assets (Note 5).............................. 408
Other accounts receivable (Note 6)............................. 857
---------
Total current assets......................................... 4,515
Property, plant and equipment, net (Note 8)...................... 11,982
Loans to related companies (Note 7).............................. 2,066
Other............................................................ 14
---------
Total assets................................................. $ 18,577
---------
---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current assets
Suppliers...................................................... $ 1,490
Taxes payable other than income taxes.......................... 238
Accrued payroll and related liabilities........................ 321
Other accounts payable (Note 9).................................. 2,776
---------
Total current assets........................................... 4,825
---------
Long-term liabilities
Loans from related companies (Note 7).......................... 9,213
---------
Total long-term liabilities.................................... 9,213
---------
Shareholders' equity
Paid in capital 18,454
Accumulated (deficit) income................................... 4,539
---------
Total shareholders' equity................................... 4,539
---------
Total liabilities and shareholders' equity................... $ 18,577
---------
---------
The accompanying notes are an integral part of this Financial Information
F-79
TV ALFA, TCC, CCS, TVA PARANA, FOZ DO IGUACU AND SSC
STATEMENTS OF INCOME
FOR THE PERIODS ENDED DECEMBER 31, 1996
(IN THOUSANDS OF U.S. DOLLARS)
FOZ DO
TV ALFA TCC CCS SSC IGUACU
--------- --------- --------- --------- ---------
Gross Revenues
Monthly subscriptions............................................. $ 1,000 $ 828 $ 943 $ 103 $ 1,080
Installations..................................................... 11 -- -- 11 70
Other............................................................. -- 2 30 -- --
Revenue taxes..................................................... (21) (20) (26) (3) (23)
--------- --------- --------- --------- ---------
Net revenue................................................... 990 810 947 111 1,127
--------- --------- --------- --------- ---------
Direct operating expenses
Payroll and benefits.............................................. -- 3 120 198 125
Programming....................................................... 408 420 286 20 507
Technical assistance.............................................. -- -- -- -- --
Vehicle rentals................................................... -- -- -- -- --
TVA magazine...................................................... 42 37 -- 9 53
Other costs....................................................... -- 48 215 535 150
--------- --------- --------- --------- ---------
450 508 621 762 835
--------- --------- --------- --------- ---------
Selling, general and administrative expenses
Payroll and benefits.............................................. 143 4 123 -- 159
Advertising and promotion......................................... -- 3 23 94 50
Rent.............................................................. 35 14 6 60 --
Other administrative expenses..................................... 34 49 111 106 65
Other general expenses............................................ 118 -- -- -- 5
--------- --------- --------- --------- ---------
330 70 263 260 279
--------- --------- --------- --------- ---------
Depreciation........................................................ 21 20 99 44 40
--------- --------- --------- --------- ---------
Operating income/(loss)....................................... 189 212 (36) (955) (27)
--------- --------- --------- --------- ---------
Interest income..................................................... 27 11 12 -- 11
Interest expense.................................................... (26) (28) (34) -- (27)
Translation gain (loss)............................................. 72 (54) (2) 95 32
Other nonoperating income, net...................................... 2 -- -- -- --
--------- --------- --------- --------- ---------
Income (loss) before income taxes............................. 264 141 (60) (860) (11)
Income taxes (Note 10).............................................. -- (64) (34) -- (58)
--------- --------- --------- --------- ---------
Net income (loss)............................................. $ 264 77 (94) (860) (69)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
TVA
PARANA
---------
Gross Revenues
Monthly subscriptions............................................. $ 8,026
Installations..................................................... 2,062
Other............................................................. 34
Revenue taxes..................................................... (325)
---------
Net revenue................................................... 9,797
---------
Direct operating expenses
Payroll and benefits.............................................. 3,395
Programming....................................................... 1,683
Technical assistance.............................................. 246
Vehicle rentals................................................... 320
TVA magazine...................................................... 300
Other costs....................................................... 857
---------
6,801
---------
Selling, general and administrative expenses
Payroll and benefits.............................................. 849
Advertising and promotion......................................... 434
Rent.............................................................. 132
Other administrative expenses..................................... 1,621
Other general expenses............................................ 714
---------
3,750
---------
Depreciation........................................................ 1,329
---------
Operating income/(loss)....................................... (2,083)
---------
Interest income..................................................... 283
Interest expense.................................................... (1,893)
Translation gain (loss)............................................. 99
Other nonoperating income, net...................................... 125
---------
Income (loss) before income taxes............................. (3,469)
Income taxes (Note 10).............................................. --
---------
Net income (loss)............................................. (3,469)
---------
---------
The accompanying notes are an integral part of this Financial Information
F-80
TV ALFA, TCC, CCS, TVA PARANA, FOZ DO IGUACU AND SSC
STATEMENTS OF CHANGE IN SHAREHOLDERS' EQUITY
FOR THE PERIODS ENDED DECEMBER 31, 1996
(IN THOUSANDS OF U.S. DOLLARS)
TVA PARANA
-----------------------------------
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
--------- ------------ ----------
Balance as of January 1, 1996................................................ $ 1 $ (10,446) $ (10,445)
Capital contributed on:
April 30, 1996............................................................. 14,895 14,895
August 30, 1996............................................................ 3,558 3,558
Net loss for the period...................................................... (3,469) (3,469)
--------- ------------ ----------
Balance as of December 31, 1996............................................ $ 18,454 $ (13,915) $ 4,539
--------- ------------ ----------
--------- ------------ ----------
SSC
-------------------------------------
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
----------- ------------- ---------
Balance as of February 28, 1996................................................... $ 1 $ (30) $ (29)
Net loss for the period........................................................... (860) (860)
--- ----- ---------
Balance as of December 31, 1996................................................. $ 1 $ (890) $ (889)
--- ----- ---------
--- ----- ---------
TV ALFA TCC
------------------------------------- ----------------------------
PAID-IN ACCUMULATED PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL CAPITAL DEFICIT
----------- ------------- --------- ----------- ---------------
Balance as of March 30, 1996................................ $ 344 $ (834) $ (490) $ 47 $ 164
Net loss for the period..................................... 264 264 77
----- ----- --------- --- -----
Balance as of December 31, 1996........................... $ 344 $ (570) $ (226) $ 47 $ 241
----- ----- --------- --- -----
----- ----- --------- --- -----
TOTAL
---------
Balance as of March 30, 1996................................ $ 211
Net loss for the period..................................... 77
---------
Balance as of December 31, 1996........................... $ 288
---------
---------
CCS FOZ DO IGUACU
----------------------------------- ----------------------------
PAID-IN ACCUMULATED PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL CAPITAL DEFICIT
--------- ------------- --------- ----------- ---------------
Balance as of March 30, 1996.............................. $ 4,012 $ (644) $ 3,368 $ 5 $ (30)
Net loss for the period................................... (94) (94) (69)
--
--------- ----- --------- ---
Balance as of December 31, 1996......................... $ 4,012 $ (738) $ 3,274 $ 5 $ (99)
--
--
--------- ----- --------- ---
--------- ----- --------- ---
TOTAL
---------
Balance as of March 30, 1996.............................. $ (25)
Net loss for the period................................... (69)
---
Balance as of December 31, 1996......................... $ (94)
---
---
The accompanying notes are an integral part of this Financial Information
F-81
TV ALFA, TCC, CCS, TVA PARANA, FOZ DO IGUACU AND SSC
STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED DECEMBER 31, 1996
(IN THOUSANDS OF U.S. DOLLARS)
FOZ DO
TV ALFA TCC CCS SSC IGUACU
----------- --------- --------- --------- -----------
Cash flows from operating activities:
Net loss........................................................... $ 264 $ 77 $ (94) $ (860) $ (89)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation..................................................... 21 20 99 44 40
Changes in operating assets and liabilities:
Accounts receivable.............................................. (76) (13) (3) (49) (15)
Prepaid and other assets......................................... -- 4 (34) (19) (120)
Other accounts receivable........................................ (342) (10) (15) (53) (256)
Accrued interest................................................. -- -- -- (31) (23)
Inventories...................................................... -- 42 (907) (420) (584)
Legal deposits................................................... -- (5) -- -- --
Suppliers........................................................ (91) 62 388 335 579
Taxes payable other than income taxes............................ 18 26 11 5 50
Accrued payroll and related liabilities.......................... (124) (13) (12) 46 33
Advances received from subscribers............................... (39) -- -- 2 --
Other accounts payable........................................... (119) 2 706 1,361 2
----- --- --- --------- ---
Net cash (used in) provided by operating activities............ (488) 192 139 361 (363)
Cash flows provided by (used in) investing activities:
Purchase of property, plant and equipment.......................... (6) (44) (53) (2,490) (215)
Loans to related companies......................................... -- (127) -- -- --
----- --- --- --------- ---
Net cash used in investing activities.......................... (6) (171) (53) (2,490) (215)
Cash flows provided by (used in) financing activities:
Capital contributions.............................................. -- -- -- -- --
Loans from related companies....................................... 492 -- -- 2,177 826
Repayment of loans from related companies.......................... -- -- -- (48) (224)
Repayment of loans from shareholders............................... -- -- -- -- --
Repayments of loans to related Companies........................... -- -- -- -- --
----- --- --- --------- ---
Net cash provided by financing activities...................... 492 -- -- 2,129 602
----- --- --- --------- ---
Net (decrease) increase in cash and cash equivalents................. (2) 21 86 -- 24
Cash and cash equivalents at beginning of the period................. 16 49 -- -- 10
----- --- --- --------- ---
Cash and cash equivalents at end of the period................. $ 14 $ 70 $ 86 $ -- $ 34
----- --- --- --------- ---
----- --- --- --------- ---
Supplemental non-cash financing activities:
Accrued interest on related company loans refinanced as principal
balance.......................................................... $ -- $ -- $ -- $ (34) $ (23)
----- --- --- --------- ---
----- --- --- --------- ---
TVA
PARANA
---------
Cash flows from operating activities:
Net loss........................................................... $ (3,469)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation..................................................... 1,329
Changes in operating assets and liabilities:
Accounts receivable.............................................. (754)
Prepaid and other assets......................................... (340)
Other accounts receivable........................................ (855)
Accrued interest................................................. 1,549
Inventories...................................................... (2,058)
Legal deposits................................................... (5)
Suppliers........................................................ 1,392
Taxes payable other than income taxes............................ 182
Accrued payroll and related liabilities.......................... 68
Advances received from subscribers............................... 8
Other accounts payable........................................... 1,767
---------
Net cash (used in) provided by operating activities............ (1,186)
Cash flows provided by (used in) investing activities:
Purchase of property, plant and equipment.......................... (11,846)
Loans to related companies......................................... (2,066)
---------
Net cash used in investing activities.......................... (13,912)
Cash flows provided by (used in) financing activities:
Capital contributions.............................................. 18,453
Loans from related companies....................................... 7,010
Repayment of loans from related companies.......................... (9,794)
Repayment of loans from shareholders............................... (180)
Repayments of loans to related Companies........................... (30)
---------
Net cash provided by financing activities...................... 15,459
---------
Net (decrease) increase in cash and cash equivalents................. 361
Cash and cash equivalents at beginning of the period................. 45
---------
Cash and cash equivalents at end of the period................. $ 406
---------
---------
Supplemental non-cash financing activities:
Accrued interest on related company loans refinanced as principal
balance.......................................................... $ 1,549
---------
---------
The accompanying notes are an integral part of this Financial Information
F-82
TV ALFA, TCC, CCS, TVA PARANA, FOZ DO
IGUACU AND SSC
NOTES TO THIS FINANCIAL INFORMATION
1. PRINCIPAL OPERATIONS
The accompanying financial information reflects the results of operations of
TV Alfa Cabo Ltda. ("TV Alfa"), TCC TV a Cabo Ltda. ("TCC"), CCS Camboriu Cable
System de Telecommunicacoes Ltda. ("CCS"), TVA Sul Foz do Iguacu Ltda. ("Foz do
Iguacu") and, TVA Sul Santa Catarina Ltda. ("SSC"), all subsidiaries of TVA Sul
Participacoes S.A. from the dates of acquisition by TVA Sul Participacoes S.A.
to December 31, 1966. The acquisition dates of these entities are as follows:
- - TV Alfa --March 30, 1996
- - CCS --May 30, 1996
- - Foz do Iguacu --May 30, 1996
--February 28,
- - SCC 1996
- - TCC --March 30, 1996
TVA Sul Parana Ltda. ("TVA Parana") became a subsidiary of TVA Sul
Participacoes S.A. in September, 1996. Prior to this date, TVA Parana was under
common control. Accordingly, the results of operations for TVA Parana are for
the year ended December 31, 1996.
Hereinafter, TV Alfa, TCC, CCS, Foz do Iguacu, SSC and TVA Parana are
referred as to "the Companies".
These Companies render services related to wireless cable and cable
television systems, including marketing and advertising, production,
distribution and licensing of domestic and foreign television programs. The
Companies have wireless cable channel rights primarily in major urban markets in
the South of Brazil.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant policies followed in the preparation of the accompanying
Financial Information are described below:
2.1 BASIS OF PRESENTATION
The accompanying Financial Information are presented in U.S. Dollars and
have been prepared in accordance with accounting principles generally accepted
in the United States of America ("U.S. GAAP"), which differ in certain respects
from accounting principles applied by the Companies in their local currency
financial statements, which are prepared in accordance with accounting
principles generally accepted in Brazil ("Brazilian GAAP").
The Financial Information has been derived from the Companies records and
reflects all adjustments which are, in the opinion of management, necessary for
a fair presentation of the Financial Information.
The preparation of Financial Information 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 Information 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 those estimates which will have a positive or negative effect on
future period results.
F-83
TV ALFA, TCC, CCS, TVA PARANA, FOZ DO
IGUACU AND SSC
NOTES TO THIS FINANCIAL INFORMATION (CONTINUED)
2.2 ACCOUNTING RECORDS
As required by Brazilian Law, and in accordance with local accounting
practices, the accounting records of the Companies are maintained in Brazilian
currency ("reais" or "R$"). In order to present the Financial Information in
conformity with accounting principles generally accepted in the United States of
America, the Companies maintain additional accounting records which are used
solely for this purpose.
2.3 CURRENT REMEASUREMENT
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
52, "Foreign Currency Transactions", the United States dollar has been assumed
to be the functional currency as Brazil is a "hyperinflationary" country. As
such, the local Financial Information of the Companies is translated into United
States dollars as follows:
- Nonmonetary assets and liabilities are translated at historical rates. All
other assets and liabilities are translated at the official rate of
exchange of R$1.0394 to US$1 in effect on December 31, 1996.
- Income and expenses are translated at the average exchange rates in effect
each month, except for those related to assets and liabilities which are
translated at historical exchange rates, and deferred income taxes, which
are translated at the current rate. Translation gains and losses are
recognized in the income statement.
2.4 CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as cash and cash in banks and
investments in interest-bearing securities and are carried at cost plus accrued
interest. Short-term investments with original maturities of three months or
less at the time of purchase are considered cash equivalents.
2.5 FINANCIAL INSTRUMENTS
In accordance with SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments", information is provided about the fair value of certain financial
instruments for which it is practicable to estimate that value.
For the purposes of SFAS No. 107, the estimated fair value of a financial
instrument is the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
The carrying values of the financial instruments of the Companies as of December
31, 1996 approximate management's best estimate of their estimated fair values.
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate that
value:
- The fair value of certain financial assets carried at cost, including
cash, accounts receivable, other accounts receivable, and certain other
short-term assets is considered to approximate their respective carrying
value due to their short-term nature.
- The fair value of payables to suppliers, other accounts payable, loans to
affiliated companies and certain other short-term liabilities is
considered to approximate their respective carrying value due to their
short-term nature.
F-84
TV ALFA, TCC, CCS, TVA PARANA, FOZ DO
IGUACU AND SSC
NOTES TO THIS FINANCIAL INFORMATION (CONTINUED)
2.5 FINANCIAL INSTRUMENTS (CONTINUED)
- The fair value of loans from related companies approximates their
respective carrying values as interest on these loans is a market rates.
2.6 ACCOUNTS RECEIVABLE
An allowance for doubtful accounts is established on the basis of an
analysis of the accounts receivable, in light of the risks involved, in an
amount sufficient to cover any losses incurred in realization of credits.
2.7 INVENTORIES
Inventories consist of materials and supplies used to provide services to
new customers, and to ensure continuity of services to existing customers.
Inventories are stated at the lower of cost or market. Cost is determined
principally under the average cost method.
2.8 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated using the
straight-line method, over the remaining useful lives, as described in Note 8.
2.9 RECOVERABILITY OF LONG-LIVED ASSETS TO BE HELD AND USED IN THE BUSINESS
Management reviews long-lived assets, primarily the Companies property and
equipment to be held and used in the business, for the purposes of determining
and measuring impairment on a recurring basis or when events or changes in
circumstances indicate that the carrying value of an asset or group of assets
may not be recoverable. Assets are grouped and evaluated for possible impairment
at the level of each cable television system; impairment is assessed on the
basis of the forecasted undiscounted cash flows of the businesses over the
estimated remaining lives of the assets related to those systems. A write-down
of the carrying value of the assets or group of assets to estimated fair value
will be made when appropriate.
The Companies adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", from January 1,
1996 and the effect on the Financial Information as a result of the adoption was
not significant.
2.10 REVENUE RECOGNITION
Hook up fees are recognized as revenue on the equipment installation date to
the extent of direct selling costs incurred. Subscription revenues are
recognized as earned on an accrual basis.
F-85
TV ALFA, TCC, CCS, TVA PARANA, FOZ DO
IGUACU AND SSC
NOTES TO THIS FINANCIAL INFORMATION (CONTINUED)
3. CASH AND CASH EQUIVALENTS
As of December 31, 1996, cash and cash equivalents were comprised of:
TV ALFA TCC CCS SSC
----------- ----- --- ---
Cash on hand and in banks.................................................. $ 1 $ 62 $ 86 $ --
Short-term investments..................................................... 13 8 -- --
--- --- --- ---
$ 14 $ 70 $ 86 $ --
--- --- --- ---
--- --- --- ---
FOZ DO TVA
IGUACU PARANA
----------- -----------
Cash on hand and in banks.................................................. $ 34 $ 309
Short-term investments..................................................... -- 97
--- -----
$ 34 $ 406
--- -----
--- -----
4. ACCOUNTS RECEIVABLE, NET
As of December 31, 1996, accounts receivable were comprised of:
TV ALFA TCC CCS SSC
----------- ----- --- ---
Subscriptions.............................................................. $ -- $ -- $ -- $ 47
Installation fees.......................................................... 6 -- -- 4
Others..................................................................... 137 13 3 --
Allowance for doubtful accounts............................................ (66) -- -- (2)
--- --- --- ---
$ 77 $ 13 $ 3 $ 49
--- --- --- ---
--- --- --- ---
FOZ DO TVA
IGUACU PARANA
----------- -----------
Subscriptions.............................................................. $ -- $ 564
Installation fees.......................................................... -- 529
Others..................................................................... 15 10
Allowance for doubtful accounts............................................ -- (317)
--- -----
$ 15 $ 786
--- -----
--- -----
5. PREPAID AND OTHER ASSETS
As of December 31, 1996, prepaid expenses were comprised of:
TV ALFA TCC CCS SSC
----------- ----- --- ---
Advances to suppliers...................................................... $ -- $ -- $ 31 $ 19
Prepaid meals and transportation........................................... -- -- -- --
--- --- --- ---
$ -- $ -- $ 31 $ 19
--- --- --- ---
--- --- --- ---
FOZ DO TVA
IGUACU PARANA
----------- -----------
Advances to suppliers...................................................... $ 144 $ 369
Prepaid meals and transportation........................................... -- 39
----- -----
$ 144 $ 408
----- -----
----- -----
6. OTHER ACCOUNTS RECEIVABLE
As of December 31, 1996, other accounts receivable were comprised of:
TV ALFA TCC CCS SSC
----------- --------- --- ---
Advances to employees........................................................ $ -- $ -- $ -- $ --
Accounts receivable from related Companies (Note 7).......................... 352 127 19 23
----- --------- --- ---
Others....................................................................... -- 13 6 31
----- --------- --- ---
$ 352 $ 140 $ 25 $ 54
----- --------- --- ---
----- --------- --- ---
FOZ DO TVA
IGUACU PARANA
----------- -----------
Advances to employees........................................................ $ -- $ 45
Accounts receivable from related Companies (Note 7).......................... 29 812
----- -----
Others....................................................................... 195 --
----- -----
$ 224 $ 857
----- -----
----- -----
F-86
TV ALFA, TCC, CCS, TVA PARANA, FOZ DO
IGUACU AND SSC
NOTES TO THIS FINANCIAL INFORMATION (CONTINUED)
7. RELATED PARTY TRANSACTIONS
The following tables summarize the transactions between the Companies and
related companies as of and for the periods ended December 31, 1996:
TV ALFA TCC CCS SSC
----------- ----- --- ---------
TEVECAP
Loans payable.......................................................... -- -- -- 87
TVA SISTEMA
Accounts receivable.................................................... -- -- -- 23
Accounts payable....................................................... -- -- 2 2
Loans payable.......................................................... -- -- -- --
TVA PARANA
Accounts receivable.................................................... -- -- -- --
Accounts payable....................................................... -- -- -- 126
Loans payable.......................................................... -- -- -- 2,066
TVA SUL
Accounts receivable.................................................... 352 127 -- --
Accounts payable....................................................... -- -- 706 1,128
Loans payable.......................................................... 492 -- -- --
SSC
Accounts receivable.................................................... -- -- -- --
Loans receivable....................................................... -- -- -- --
FOZ DO IGUACU
Account receivable..................................................... -- -- 19 --
Accounts payable....................................................... -- -- -- --
CCS
Accounts payable....................................................... -- -- -- --
ESPN DO BRASIL
Accounts payable....................................................... -- -- -- --
FOZ DO TVA
IGUACU PARANA
----------- -----------
TEVECAP
Loans payable.......................................................... -- --
TVA SISTEMA
Accounts receivable.................................................... -- 580
Accounts payable....................................................... 1 1,346
Loans payable.......................................................... -- 2,937
TVA PARANA
Accounts receivable.................................................... 29 --
Accounts payable....................................................... -- --
Loans payable.......................................................... -- --
TVA SUL
Accounts receivable.................................................... -- 105
Accounts payable....................................................... -- 401
Loans payable.......................................................... 579 6,276
SSC
Accounts receivable.................................................... -- 127
Loans receivable....................................................... -- 2,066
FOZ DO IGUACU
Account receivable..................................................... -- --
Accounts payable....................................................... -- 29
CCS
Accounts payable....................................................... 20 --
ESPN DO BRASIL
Accounts payable....................................................... -- 30
The related Company loans are denominated in reais and are subject to
monetary restatement until December 31, 1995 plus interest charges at the market
rate which ranged from 1.8% to 2.2% per month in December 1996. Such loans are
renewable every year on December 31.
F-87
TV ALFA, TCC, CCS, TVA PARANA, FOZ DO
IGUACU AND SSC
NOTES TO THIS FINANCIAL INFORMATION (CONTINUED)
8. PROPERTY, PLANT AND EQUIPMENT
As of December 31, 1996, property, plant and equipment were comprised of:
ANNUAL
DEPRECIA- TION FOZ DO TVA
RATE % TV ALFA TCC CCS SSC IGUACU PARANA
------------- ----------- ----- --------- --------- ----------- ---------
Machinery and equipment................... 10 -- 81 7 192 232 1,269
Converters................................ 10 -- 30 -- 98 -- 5,286
Leasehold improvements.................... 25 -- -- 3,447 2 -- 378
Furniture and fixtures.................... 10 275 2 74 47 22 204
Premises.................................. 10 -- 3 -- 6 5 20
Vehicles.................................. 20 -- -- 3 51 33 39
Software.................................. 20 -- -- 5 14 16 81
Tools..................................... 10 -- -- 2 -- -- 62
Reception equipment....................... 20 -- -- -- -- -- 4,689
Cable plant............................... 10 -- 229 -- 2,052 280 959
Building.................................. 4 -- -- -- -- -- 330
--- --- --------- --------- --- ---------
275 345 3,538 (2,462) 588 13,317
Accumulated depreciation (115) (81) (101) (45) (121) (1,584)
Telephone line use rights................. -- -- 4 -- 12 189
Fixed assets in transit................... -- -- 14 -- -- 60
Others.................................... -- -- -- 53 23 --
--- --- --------- --------- --- ---------
160 264 3,455 2,470 502 11,982
--- --- --------- --------- --- ---------
--- --- --------- --------- --- ---------
9. OTHER ACCOUNTS PAYABLE
As of December 31, 1996, other accounts payable were comprised of:
FOZ DO
TV ALFA TCC CCS SSC IGUACU
----------- ----- --------- --------- -----------
Accounts payable to related companies (Note 7)............... $ -- $ -- $ 708 $ 1,256 $ 21
Accounts payable on importation.............................. -- -- -- 93 --
Other........................................................ 77 5 3 14 336
--- --- --------- --------- -----
$ 77 $ 5 $ 711 $ 1,363 $ 357
--- --- --------- --------- -----
--- --- --------- --------- -----
TVA
PARANA
---------
Accounts payable to related companies (Note 7)............... $ 1,806
Accounts payable on importation.............................. 205
Other........................................................ 765
---------
$ 2,776
---------
---------
F-88
TV ALFA, TCC, CCS, TVA PARANA, FOZ DO
IGUACU AND SSC
NOTES TO THIS FINANCIAL INFORMATION (CONTINUED)
10. INCOME TAXES
The Companies income tax was different from the amount computed using the
Brazilian statutory income tax for the reasons set forth in the following table:
FOZ DO TVA
TV ALFA TCC CCS SSC IGUACU PARANA
----------- --------- --------- --------- ----------- ---------
Income (Loss) before income tax............................. 264 141 (60) (860) (11) (3,469)
Statutory income tax rate................................... 33.00% 33.00% 33.00% 33.00% 33.00% 33.00%
----- --------- --------- --------- ----- ---------
----- --------- --------- --------- ----- ---------
87 47 (20) (284) (4) (1,145)
----- --------- --------- --------- ----- ---------
----- --------- --------- --------- ----- ---------
Others...................................................... (87) 17 54 (1) 62 (34)
----- --------- --------- --------- ----- ---------
Consolidated income tax for the period...................... -- 64 34 (285) 58 (1,179)
----- --------- --------- --------- ----- ---------
Increase in valuationallowance.............................. -- -- -- 285 -- 1,179
----- --------- --------- --------- ----- ---------
-- 64 34 -- 58 --
----- --------- --------- --------- ----- ---------
----- --------- --------- --------- ----- ---------
11. INSURANCE
The Companies maintain insurance coverage for their fixed assets and
inventories in an amount considered sufficient to cover the risks involved.
12. PAID-IN CAPITAL
Paid-in capital as of December 31, 1996 was comprised of:
FOZ DO TVA
TV ALFA TCC CCS SSC IGUACU PARANA
--------- --------- ---------- --- --------- ------------
US....................................................... $ 344 47 4,012 1 5 18,454
--------- --------- ---------- --- --------- ------------
--------- --------- ---------- --- --------- ------------
Shares................................................... 278,000 250,000 4,850,000 200 5,000 27,712,345
--------- --------- ---------- --- --------- ------------
--------- --------- ---------- --- --------- ------------
13. RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued certain Statements of
Financial Accounting Standards which are not effective with respect to the
periods presented in the Financial Information.
SFAS No. 125, "Accounting for Transfer and Servicing of Financial Assets and
Extinguishment of Liabilities", provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
after December 31, 1996. This standard is not expected to have a material effect
on the financial position and the results of operations of the Companies due to
the absence of material transactions of this nature.
SFAS No. 128, "Earnings per Share", is effective for fiscal years beginning
after December 15, 1997. This standard establishes guidelines for computing and
presenting earnings per share ("EPS") and applies to entities with publicly held
common stock or potential common stock. This replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS for all entities with complex capital structures. This
standard is not expected to have an impact on the Companies given that the
Companies do not have publicly held common stock or potential common stock.
F-89
ANNEX A
THE FEDERATIVE REPUBLIC OF BRAZIL
THE INFORMATION SET FORTH BELOW IS BASED ON MATERIAL OBTAINED FROM VARIOUS
SOURCES BELIEVED TO BE ACCURATE BUT HAS NOT BEEN INDEPENDENTLY VERIFIED.
GENERAL
GEOGRAPHY AND DEMOGRAPHY. Brazil is the fifth largest country in the world
and the largest country in Latin America, occupying approximately 3.3 million
square miles and 60% of South America's land mass.
Brazil's population in 1995 was approximately 157 million, the sixth largest
in the world. The population is currently growing at a rate of approximately
1.9% per year and is expected to reach 172 million by the end of this century.
Brazil is comprised of 26 states and the federal district in which Brasilia,
the capital, is located. The largest cities in Brazil are Sao Paulo and Rio de
Janeiro with metropolitan area populations of 10.2 million and 5.7 million,
respectively. Brasilia, Belem, Belo Horizonte, Curitiba, Fortaleza, Porto
Alegre, Recife and Salvador also have populations of more than one million each.
GOVERNMENT. Brazil is a federative republic with a representative form of
federal government. In October 1988, a new constitution was enacted, and the
presidential form of government consisting of three independent branches
executive, legislative and judicial was maintained. The constitutional review
prescribed by the Constitution of 1988 was initiated by the Brazilian National
Congress ("Congress") in October 1993 and resulted in the creation of the Social
Emergency Fund outlined below and the reduction of the presidential term from
five years to four years. See Appendix B, "The Brazilian Economy." In addition,
on April 21, 1993, a national referendum was held to decide whether Brazil
should continue as a presidential republic or should become a parliamentary
republic or parliamentary monarchy. Brazilians voted to continue the current
presidential republic form of government.
Executive power is vested in the President, who is elected by popular vote
for a term of four years and currently cannot be reelected for successive terms.
The President has the power to appoint Ministers and to appoint other executives
in selected administrative and political posts. The presidential powers are
limited by the Constitution. Under certain circumstances, the President may
issue provisional measures which, to be effective beyond 30 days, need the
approval of the Brazilian Congress. The legislative branch is composed of a
Senate consisting of 81 Senators elected for eight-year terms, and a Chamber of
Deputies consisting of 513 Deputies elected for four-year terms. Senators and
Deputies are elected directly by popular vote. The judicial branch is headed by
the Federal Supreme Court, which is, in constitutional matters, the court of
final appeal from both federal and state courts. The judicial branch also
includes the Superior Court of Justice and various lower federal courts. On the
state level, executive power is vested in Governors who are elected for
four-year terms; legislative power is vested in State Deputies who are also
elected for four years. Judicial power is vested in state courts; however,
judicial proceedings in which the Federal Government is involved must be
submitted to federal courts sitting in each state.
RECENT POLITICAL HISTORY. The Brazilian military ruled the country from
1964 to 1985, when a series of political reforms were enacted culminating in the
reintroduction of direct elections for President and the convening of a
Constitutional Assembly to adopt a new Brazilian Constitution. During this
period, Brazil solidified its position as one of the 10 largest economies in the
world in terms of gross domestic product ("GDP") with an industrial base focused
on exports.
On December 17, 1989, Fernando Collor de Mello became the first President of
Brazil elected by direct popular vote since 1960. Elections were held in late
1990 for state governorships, one-third of the
A-1
federal Senate and all of the federal Chamber of Deputies. As a result of these
elections, the Brazilian Democratic Movement Party, which had won a majority in
the federal legislature and most of the state governorships in the 1986
elections, lost its majority in the legislature as many of its seats were lost
to several other parties.
On September 29, 1992, Brazil's lower house of Congress voted to authorize
the Senate to begin an impeachment trial against President Collor based on
corruption charges. At that time, the members of the President's cabinet
submitted their resignations. According to Brazilian law, Mr. Collor was
required to step down from office for a period of 180 days while the trial
proceeded. During this 180-day period, Vice President Itamar Franco became
acting President while the Senate decided whether to convict or to acquit the
President. On December 29, 1992, Mr. Collor submitted his official resignation
as President of Brazil. Consequently, Mr. Franco, as elected Vice President,
assumed the position of President for the remainder of Mr. Collor's term in
office, which concluded on January 1, 1995.
General elections were held on October 3, 1994 to elect a new President, all
state governors, and to renew the federal Chamber of Deputies and the federal
Senate. Fernando Henrique Cardoso (who served as Finance Minister under Mr.
Franco's administration and is generally viewed as the architect of the Real
Plan), representing the Partido Social Democrata Brasileiro (the Brazilian
Social Democratic Party or the "PSDB"), was elected in the first round with 54%
of the valid vote. Luis Inacio da Silva, of the Worker's Party, was his closest
contender. Mr. Cardoso's presidential campaign received a strong boost from the
rapid fall in the rate of inflation which followed the introduction of the new
currency in July 1994. See Appendix B, "The Brazilian Economy."
Since his election Mr. Cardoso has appointed Mr. Pedro Malan, the former
President of the Central Bank of Brazil, as the new Finance Minister. In May
1995, the President of the Central Bank, Mr. Persio Arida resigned and in June
1995 Mr. Gustavo Loyola was appointed as the new President of the Central Bank.
President Cardoso has indicated that the overriding goals of his economic
policies will be to continue the effort to combat inflation while negotiating
with Congress for permanent fiscal reforms.
THE CARDOSO ADMINISTRATION
Mr. Cardoso took office on January 1, 1995, and has concentrated his efforts
on two main issues: making structural reforms and completing the anti-inflation
program. Those efforts have demanded extensive political negotiations with the
various parties in and outside the Government.
The objectives of the structural reforms are to provide the Government with
a sound fiscal budget by revamping the tax and social security systems, and to
enhance and create incentives to stimulate private sector participation in
former Government monopolies such as telecommunications, oil and infrastructure
in general.
AMENDMENTS TO BRAZILIAN CONSTITUTION
On August 15, 1995, four amendments to the Brazilian Constitution were
approved by Congress which allow greater competition in the Brazilian economy:
(i) Constitutional Amendment no. 5/95 altered Article 25, paragraph 2 of the
Constitution by extinguishing the monopoly over pipeline distribution of gas;
(ii) Constitutional Amendment no. 6/95 altered Article 175, paragraph 1 and
Article 170, item IX of the Constitution by removing the distinction between
Brazilian companies capitalized from domestic sources (capital nacional) and
those capitalized from foreign sources (capital estrangeiro) and granting both
types of company mineral exploration rights; (iii) Constitutional Amendment no.
7/95 altered Article 78 of the Constitution by permitting foreign vessels to
engage in inland and coastal shipping; and (iv) Constitutional Amendment no.
8/95 altered Article 21 items XI and XII(a) of the Constitution by opening the
telecommunications sector to private sector companies.
A-2
On November 9, 1995, Congress enacted Constitutional Amendment no. 9 which
altered Article 177 of the Brazilian Constitution allowing the Republic to
contract state owned or private companies in order to carry out, in accordance
with a law which has not yet been enacted, certain oil-related activities, such
as (i) prospecting for and exploitation of deposits of oil and natural gas; (ii)
refining of national or foreign oil; imports and exports of oil, natural gas and
its basic by-products; (iii) oceanic transportation of crude oil of national
origin or of basic oil by-products produced in Brazil; and (iv) pipeline
transportation of crude oil, its by-products and natural gas of any origin.
Presently, Congress is discussing a constitutional amendment proposing
changes in the social security system, which is considered to be one of Brazil's
greatest fiscal problems. The proposed changes are aimed at stabilizing the
system's financial condition through modifications in the pension benefit
structure, increases in mandatory contributions, changes in retirement criteria,
and the elimination of certain privileges such as the federal civil servant
retirement plan. The Cardoso administration has also sent to Congress a
proposal, presently being discussed by a special commission in the Chamber of
Deputies, for administrative reforms aimed at increasing management efficiency
and extinguishing the job stability presently granted to public sector
employees, thereby allowing a reduction of payroll expenses.
In addition, the Government has stated that it intends to propose a new tax
system which would attempt to simplify and enhance the efficiency of the current
tax structure. The proposed system would shift allocations from the Government
to the states and municipalities, in order to reduce the allocation of
expenditures on the federal level. In addition, the proposed system would lower
taxes on investments and exports from their current levels.
A-3
ANNEX B
THE BRAZILIAN ECONOMY
THE INFORMATION SET FORTH BELOW IS BASED ON MATERIAL OBTAINED FROM VARIOUS
SOURCES BELIEVED TO BE ACCURATE BUT HAS NOT BEEN INDEPENDENTLY VERIFIED.
RECENT PERFORMANCE
Throughout the 1980s and into the early 1990s, the Brazilian economy
experienced periods of high inflation and recession. Recently, however, the
Brazilian economy has shown improvement in a number of areas. Gross domestic
product ("GDP") grew in constant real terms by 4.2% in 1995, 5.9% in 1994 and
4.2% in 1993, compared with a decrease of 0.8% in 1992. Industrial production
increased by 2.0% in 1995, 7.0% in 1994 and 6.9% in 1993, compared with declines
of 3.8%, 1.8% in 1992 and 1991, respectively. In 1995, the service sector
experienced an overall growth rate of 5.7% in real terms as a result of
increases in retail services of 7.4%, transportation of 3.9% and communications
of 24.3%.
Exports in 1995 increased by 6.8% over 1994 while imports grew by 50.4% in
the same period. The trade balance presented a deficit of the equivalent of
US$3.2 billion in 1995 compared to a surplus of the equivalent of US$10.6
billion in 1994. Through July 1996, the trade balance has shown a modest US$600
million (0.1% of GDP) deficit, compared to a US$4.3 billion deficit during the
same period in 1995. For the first seven months of the year, export growth has
exceeded that of 1995, while the growth of imports has lagged behind that of the
previous year, thereby narrowing the trade deficit.
Brazil registered significant growth in international currency reserves in
1995, despite the instability which followed the Mexican peso crisis. After a
sharp decline in the first four months of the year, an increase in foreign
capital inflows was registered which replenished reserves to the equivalent of
US$51.8 billion at year-end 1995, up from US$38.8 billion at year-end 1994 and
US$32.2 billion at year-end 1993. By July 31, 1996, reserves totaled more than
the equivalent of US$58 billion. After a fine-tuning of the management of the
foreign exchange rate regime during 1994, the Central Bank has pursued a policy
of gradually depreciating the currency against the dollar. In 1995, the real
fell in value against the US dollar from R$0.844 to R$0.972 per US dollar and
has since depreciated to 1.015 on August 23, 1996, reflecting this policy of
gradual depreciation.
In 1995, Brazil experienced an average monthly rate of inflation of 1.75%,
as measured by the FIPE (Foundation for Economic Research) consumer price index.
In the period from January 1994 through June 1994, average monthly inflation, as
measured by the FIPE, was 43.75%, but declined to 2.86% in the period from July
1994 through December 1994. This reduction resulted from the implementation of
the third phase of the Real Plan and occurred without the price, wage or asset
freezing mechanisms previously utilized in prior stabilization programs. See
"Real Plan and Current Economic Policy."
The sharp decline of inflation during the second half of 1994 contributed to
a considerable recovery of domestic demand and coincided with a significant
acceleration of the growth rate of the Brazilian economy. The twelve-month GDP
growth rate increased to 7.7% in the second quarter of 1995 from 4.1% in the
second quarter of 1994. As a result, the trade balance deteriorated and
government was forced to implement deflationary measures which reduced GDP
growth to 4.2% in the fourth quarter of 1995.
B-1
The following table sets forth selected Brazilian economic indicators for
the years indicated:
SELECTED BRAZILIAN ECONOMIC INDICATORS
1991 1992 1993 1994 1995
--------- --------- --------- --------- ---------
THE ECONOMY
Gross domestic product ("GDP"):.............................. $ 330.7 328.2 341.7 355.6 370.5
(in billions of constant 1994
REAIS(A)
(in billions of dollars)(b)................................ 436.8 449.9 484.9 528.0 650.0
Real GDP growth (decline)(a)................................. 0.3% (0.8)% 4.2% 5.9% 4.2%
Population (millions)........................................ 147.1 149.4 151.6 153.7 156.6
GDP per capita (in US$)(c)................................... $ 2,970.0 3,012.0 3,199.0 3,435.0 4,151.0
Unemployment rate(d)......................................... 4.83% 5.76% 5.31% 5.06% 4.7%
Consumer price increase (FIPE) (rate of change)(e)........... 458.6% 1,129.4% 2,491.0% 941.3% 23.1%
Nominal devaluation rate(f).................................. 528.5% 1,059.0% 2,532.5% 613.4% 15.0%
Domestic real interest rate(g)............................... 6.7% 30.2% 7.1% 24.8% 33.4%
Balance of payments
(in billions of dollars):
Exports...................................................... $ 31.6 35.8 38.6 43.5 46.5
Imports...................................................... 21.0 20.6 25.3 33.1 49.6
Current account.............................................. (1.4) 6.1 (0.6) (1.5) N.A.
Capital account.............................................. 0.8 10.3 10.7 9.2 N.A.
Change in total reserves(h).................................. (0.6) 14.4 8.4 6.6 13
Total official reserves...................................... 9.4 23.8 32.2 38.8 51.8
PUBLIC FINANCE
Primary surplus (deficit) as % of GDP(i)..................... 2.9 1.6 2.3 5.1 0.4
Real interest expense as % of GDP............................ (1.6) (4.6) (2.4) (3.7) 5.4
Operational surplus (deficit) as % of GDP(j)................. (.2) (2.8) (1.2) 1.3 (5.0)
PUBLIC DEBT
(in billions of US dollars)
Gross internal debt (nominal)(k)............................. 71.6 97.6 101.0 191.3 256.4
Gross external debt (nominal)(l)............................. 100.8 99.6 104.5 118.2 130.9
Net Public debt.............................................. 144.3 150.6 149.4 181.5 217.1
Internal..................................................... 52.9 74.8 84.0 128.9 176.3
External..................................................... 91.4 75.8 65.4 52.6 40.9
- ------------------------
Notes:
(a) Calculated based upon constant average 1994 REAIS.
(b) Converted to dollars based on the weighted average exchange rate for each
year.
(c) Not adjusted for purchasing parity.
(d) Average annual unemployment rate of the metropolitan regions of Belo
Horizonte, Porto Alegre, Recife, Rio de Janeiro, Salvador and Sao Paulo.
(e) The FIPE index is one indicator of inflation. While many inflation
indicators are used in Brazil, the FIPE is calculated by the Foundation for
Economic Research at the University of Sao Paulo, an independent research
organization, and is one of the most widely utilized indices.
(f) Year on year percentage devaluation of the REAL against the US dollar (sell
side).
(g) Brazilian federal treasury securities deflated by the GPI-DS., General Price
Index-Domestic Supply calculated by the Getulio Vargas Foundation.
B-2
(h) Because of the impact of "Errors and omissions" and adjustments for
valuation/devaluation of other currencies against the US dollar,
monetization/demonetization of gold and reclassified assets, figures
regarding changes in total reserves do not reflect the sum of the "Current
account" and the "Capital account." See "Balance of Payments and Foreign
Trade--Balance of Payments."
(i) The primary surplus results represent Government revenues less expenditures,
excluding interest expenditures on public debt.
(j) The operational balance reflects the consolidated fiscal balance less
interest expenditures, adjusted for the effects of inflation.
(k) Consolidated debt, calculated as the gross internal debt less credits
between governmental entities.
(l) Gross external debt less total reserves.
SOURCES: IBGE; GETULIO VARGAS FOUNDATION; CENTRAL BANK.
REAL PLAN AND CURRENT ECONOMIC POLICY
In December 1993, the Federal Government announced a stabilization program,
known as the Real Plan, aimed at curtailing inflation and building a foundation
for sustained economic growth. The Real Plan was designed to address persistent
deficits in the Federal Government's accounts, expansive credit policies and
widespread, backward-looking indexation.
The Real Plan was formulated as a three-stage process: the first stage
included a fiscal adjustment proposal for 1994, consisting of a combination of
spending cuts and an increase in tax rates and collections intended to eliminate
a budget deficit originally projected at US$22.0 billion (4.2% of GDP). Elements
of the proposal included (i) cuts in current expenditures and investment through
the transfer of some activities from the Federal Government to the states and
municipalities, (ii) establishment of the Emergency Social Fund ("ESF"),
financed by reductions in constitutionally mandated transfers of Federal
Government revenues to the states and municipalities, to ensure financing of
social welfare spending by the Federal Government, (iii) a prohibition on sales
of public bonds by the Federal Government except to refinance existing debt and
for certain expenditures and investment, (iv) new taxes, including a new levy on
financial transactions and (v) recovery of mandatory Social Security
Contributions ("COFINS"), due to judicial acknowledgment that such contributions
were permissible under the Constitution.
The centerpiece of the first stage of the Real Plan was the creation in 1994
of the ESF, the mandate for which has been renewed for the current year through
1997. The ESF enables the Federal Government to temporarily break certain
constitutionally mandated links between revenue and expenditure. Pursuant to
this amendment, 20.0% of Federal Government revenues otherwise earmarked for
specific purposes were released and deposited into the ESF to ensure financing
of social welfare spending by the Federal Government for 1994 and 1995. In
adopting this constitutional amendment, however, Congress did not modify the
existing provisions requiring the Federal Government to share a significant
portion of its revenues with the States and municipalities.
The second stage of the Real Plan, initiated on March 1, 1994, began the
process of reform of the Brazilian monetary system. Brazil's long history of
high inflation had led to the continuous and systematic deterioration of the
domestic currency, which no longer served as a store of value and had lost its
utility as a unit of account. Because inflation had reduced dramatically the
information content of prices quoted in local currency, economic agents had
included in their contracts a number of mechanisms for indexation and
denomination of obligations in Indexed units of account. The process of
rehabilitation of the national currency began with the creation and
dissemination of the UNIDADE REAL DE VALOR (the Unit of Real Value, or "URV") as
a unit of account. The second stage of the Real Plan was designed to eliminate
the indexation of prices to prior inflation and link indexation to the URV, a
unit of account.
The introduction of the URV was premised on the theory that a reference unit
with a nominal value corrected frequently and based on the best estimate of
current inflation would express values more realistically than traditional
indexing methods. The URV, therefore, was calculated daily based on estimates
drawn from three price indices: the National Consumer Price Index (Extended)
developed by the IBGE; the General Price Index (Market) calculated by the FGV
and the Consumer Price Index developed
B-3
by the Institute of Economic Research Foundation ("FlPE"). The URV index was
designed to track the loss in the purchasing power of the CRUZEIRO REAL, the
legal currency at the time.
The third stage of the Real Plan began on July 1, 1994, with the
introduction of the REAL as Brazil's currency. All contracts denominated in URVs
were automatically converted into REAIS at a conversion rate of one to one, and
the URV, together with the CRUZEIRO REAL, ceased to exist (although the CRUZEIRO
REAL was generally accepted until August 31, 1994). Just after its introduction,
the REAL appreciated significantly; the REAIS/US dollar exchange rate (sell
side) in the commercial market, set at 1.00 REAL/1.00 US dollar when the REAL
was introduced, stood at 0.846 REAIS/US dollar on December 31, 1994. In March
1995, the government adopted an exchange rate band and since then a policy to
avoid further exchange rate overvaluation has been followed. The REAL/US dollar
exchange rate was set at 0.973 on December 31, 1995 (sell side), which meant a
devaluation of 15% of the REAL against the US dollar. On August 23, 1996 the
REAL/US rate was set at 1.015 (sell side).
In the beginning of 1995, in an effort to control the burgeoning rate of
economic activity which followed the sharp decline in inflation, the Federal
Government took several measures to control monetary growth, including strict
credit control and a significant increase in real interest rates. In the third
quarter of 1995 the economy returned to a level of sustainable economic growth
and credit control was partially released while interest rates began to fall.
Finally, in order to consolidate the Real Plan the Federal Government has
introduced a series of proposals to reform the Constitution that will provide
the structural changes necessary for long-term economic stability.
The five "economic order" amendments proposed by the government have been
approved by Congress and are now awaiting implementing regulatory legislation.
These amendments eliminate the Federal Government's monopoly in the areas of
telecommunications, distribution of natural gas, oil and coastal and fluvial
shipping and change the definition of what constitutes a Brazilian company to
any company registered in Brazil. The extension of the ESF until June 1997 was
also approved early in 1996. The social security reform and the administrative
reform are presently being considered for approval by Congress.
The Federal Government has stated that it intends to propose several other
amendments to Brazilian legislation to further consolidate the Real Plan.
GROSS DOMESTIC PRODUCT
Brazil's economic growth has fluctuated greatly in recent years. The average
real growth rate of GDP during the six-year period from 1990 to 1995 was 1.5%,
but real GDP growth was negative in both 1990, when it declined by 4.4%, and
1992, when it declined by 0.8%. During this period, the services and agriculture
sectors grew at average rates of 2.3% and 2.8%, respectively, while the
industrial sector increased by 0.2%. During 1993, the Brazilian economy
recovered: real GDP grew by 4.2%, the industrial sector grew by 6.9% and the
services sector grew by 3.5%. Agriculture was the only principal sector to
decline during 1993, by 1%. In 1994, the agricultural sector recovered,
registering a growth rate of 8.1%, due primarily to the record grain harvest,
which reached 75.2 million tons. In 1994, the industrial and services sectors
grew at rates of 7.0% and 4.1%, respectively, and GDP grew 5.9%. In 1995,
overall GDP growth was 4.2%, with agriculture and services growing 5.9% and
5.7%, respectively, and industry growing 2%.
B-4
The following table sets forth Brazil's real GDP for each of the years
indicated:
REAL GROWTH (DECLINE) OF GDP PER SECTORS (% OF CHANGE)
1991 1992 1993 1994
--------- --------- --------- ---------
Total GDP...................................................................... 0.3 (0.8) 4.2 5.9
Agriculture.................................................................... 2.8 5.4 (1.0) 8.1
Industry....................................................................... (1.8) (3.8) 6.9 7.0
Mining....................................................................... 0.9 0.8 0.6 4.7
Manufacture
Building..................................................................... (3.5) (6.6) 4.8 6.1
Public Utilities............................................................. 4.3 1.6 3.7 2.4
Services....................................................................... 1.6 0.0 3.5 4.1
Retail Sales................................................................. 0.0 (2.5) 6.7 5.9
Transportation............................................................... 2.5 2.4 4.2 4.3
Communication.................................................................. 19.6 5.7 10.7 13.6
Financial Institutions......................................................... (8.0) (4.6) (2.2) (2.8)
Public Administration.......................................................... 1.6 1.5 1.5 1.4
1995
---------
Total GDP...................................................................... 4.2
Agriculture.................................................................... 5.9
Industry....................................................................... 2.0
Mining....................................................................... 3.1
Manufacture
Building..................................................................... 0.1
Public Utilities............................................................. 7.5
Services....................................................................... 5.7
Retail Sales................................................................. 7.4
Transportation............................................................... 3.9
Communication.................................................................. 24.3
Financial Institutions......................................................... (7.4)
Public Administration.......................................................... 1.4
- ------------------------
SOURCE: IBGE and Central Bank.
PRIVATIZATION PROGRAM
The Federal Government, directly or through various state-owned enterprises,
owns many companies and controls a major portion of activities in the mining and
oil and gas sectors. Energy production, rail transport, postal services and
telecommunications are all directly or indirectly controlled by the Federal
Government. The public sector grew very rapidly during the 1970s and continues
to play a significant role in Brazil's economy.
To reduce its participation in the economy, the Federal Government has
engaged in the privatization of certain State enterprises. The objectives of the
privatization program are (i) to reduce the role of the State in the economy and
allocate more resources to social investment, (ii) to reduce the public sector
debt, (iii) to encourage increased competition and thereby raise the standards
and efficiency of Brazilian industry and (iv) to strengthen the capital markets
and promote wider share ownership. As originally presented, the PLANO REAL
contemplated constitutional amendments which would permit private participation
in the State-controlled petroleum and telecommunication sectors and in other
areas that had constitutionally mandated monopolies, such as pipeline
distribution of gas and the shipping industry. These amendments were not adopted
during the constitutional review that concluded on May 31, 1994, but the
amendments were presented to Congress again in 1995 and all have been approved.
A council directly subordinate to the President (the CONSELHO NACIONAL DE
DESESTATIZACAO or "Privatization Council") along with BNDES are responsible for
administering the privatization program. To date, privatizations have, for the
most part, been effected through share auctions conducted on Brazil's stock
exchanges.
As of February 29, 1996, a total of 42 State enterprises had been
privatized, and several minority interests held by Government companies had been
sold for nominal consideration (consisting of Brazilian currency or devalued
debt issued by the Federal Government, its agencies or State- controlled
enterprises and redeemable at face value) totaling US$9.6 billion.
For 1996, plans are to privatize electric utilities and rail transport
services companies. In February 1995, the LEI DE CONCESSOES DE SERVICOS PUBLICOS
("Public Services Concessions Law") was enacted permitting investment in the
electricity sector by private companies or individuals. In addition, on July 7,
B-5
1995, Congress approved Law No. 9074, which permits independent, third-party
producers of electricity to compete with the State monopolies. The President has
also sent to Congress a constitutional amendment that would allow the private
sector to build and operate hydroelectric plants. Within the electricity sector,
priority is being given to the privatization of Light S.A., the auction of which
took place in May 1996. Escelsa, the other distribution company owned by the
Federal Government, was privatized on July 11, 1995. During the first quarter of
1997, the government plans to privatize the Companhia Vale do Rio Doce ("CVRD")
conglomerate, one of the largest corporations in Brazil and the largest explorer
of iron ore in the world.
Several Brazilian labor unions have opposed certain of the privatization
measures proposed by the Federal Government, but the Federal Government has to
date been able to move forward with its program despite such opposition.
In addition to the privatization program, the Federal Government has sought
to reduce the regulation of economic activity generally. Important developments
in this regard include the trade liberalization and the termination of most
price controls. The Federal Government has also acted to deregulate certain
segments of the economy, including fuel and oil derivatives, airlines, shipping
and steel, and is introducing measures designed to increase competition in areas
such as highway maintenance and transportation, areas which were previously
controlled, in most cases, by Government enterprises.
PRICES
Brazil has experienced high and chronic inflation for many years, which
hindered investment and economic growth and contributed to income inequality.
Inflation and certain Federal Government measures taken to combat inflation have
had significant negative effects on the Brazilian economy generally, on the
fiscal accounts of the Federal Government and on its ability to service its
external debt. See "Public Finance" and "Public Debt."
B-6
The following table sets forth consumer price increases in the city of Sao
Paulo, as measured by the FIPE price index.
FIPE CONSUMER PRICES
-------------------------
TRAILING
PERIOD MONTHLY 12 MONTHS(A)
- ----------- ----------- ------------
1989 December..................................................... 1,635.90%
1990 December..................................................... 1,639.10
1991 December..................................................... 458.60
1992 December..................................................... 1,129.50
1993 December..................................................... 2,490.10
1994 December..................................................... 941.30
1995 January...................................................... 0.80 648.10
February..................................................... 1.32 448.50
March........................................................ 1.93 293.89
April........................................................ 2.64 176.49
May.......................................................... 1.97 94.31
June......................................................... 2.66 32.32
July......................................................... 3.72 28.33
August....................................................... 1.43 27.67
September.................................................... 0.74 27.57
October...................................................... 1.48 25.48
November..................................................... 1.14 23.19
December..................................................... 1.21 23.14
1996 January...................................................... 1.82 24.39
February..................................................... 0.40 23.26
March........................................................ 0.23 21.20
April........................................................ 1.62 20.00
May.......................................................... 1.34 19.26
June......................................................... 1.41 17.81
July......................................................... 1.31 15.07
- ------------------------
Notes:
(a) Annual figures for each month from January 1995 represent trailing 12-month
inflation rates.
SOURCE: Institute for Economic Research (FIPE).
Throughout the 1980s Brazil experienced periods of severe inflation. In
1986, President Jose Sarney's government endeavored to confront the problem with
the Cruzado Plan, which sought to end inflation via a general price and wage
freeze and the introduction of a new currency. The plan succeeded in bringing
down inflation for the year to 68.1% as measured by the FIPE index of consumer
prices in Sao Paulo and was very popular for a time. The Cruzado Plan, however,
eventually created serious distortions in the economy as well as shortages and
finally failed, resulting in renewed high inflation.
From 1987 through 1990, annual inflation rates rose from a year-end low of
367.2% in 1987 to close 1990 at 1,639.1% for the year. The new government of
President Fernando Collor de Mello tried a number of plans to ameliorate the
situation but, after some success at first with inflation falling to 458.6% in
1991, failed to stabilize prices.
During the planning stages of the current Real Plan in 1993, inflation rose
to levels around 30% per month and 2,490.1% for the year. In the implementation
of the Real Plan in mid-1993, the Unit of Real Value ("URV") was implemented as
a general price and wage index that would peg real prices to the value of the
dollar and adjusted based on depreciation of the currency as well as inflation.
This served to downplay the effects of inflation to the public since both prices
and wages would be adjusted automatically to compensate. This allowed the
nominal currency, the CRUZEIRO REAL to become de-linked from price expectations
allowing inflation measured in the nominal currency to reach 50% per month while
the real value of wages and prices were kept constant by the URV.
B-7
Since the implementation of the third phase of the Real Plan, including the
introduction of the real, in July 1994, the rate of inflation has decreased
significantly. See "Real Plan and Current Economic Policy." The high monthly
rates of inflation experienced in the first half of 1994 have fallen to single
digits. Residual inflation from the end of the first six months of 1994 resulted
in a monthly inflation rate of approximately 5.5% for July. The gradual decline
of the impact of these factors resulted in decreasing inflation rates, reaching
1.55% for the month of September. In October and November, the inflation rate
moved upward approximately one percentage point due to seasonal factors,
accentuated by a long period of drought in the producer regions. In December,
the inflation rate dropped to 0.57% as the supply of farm products normalized.
In January 1995, the inflation rate reached 1.36% impacted by rises in natural
resource products prices and costs of building. Less intense upwards movement in
these factors caused the rate of inflation to decrease to 1.15% in February
1995. The inflation rate reached 1.8% and 2.3% in March and April 1995,
respectively. The acceleration in the rate of inflation was caused primarily by
the increase in industrial prices, housing and clothing costs. After another
decline in May to 0.4%, inflation rose to 2.62% and 2.24% in June and July 1995,
respectively. This acceleration resulted from a rise in public transport fares.
In September and October a sharp decline in farm product prices reduced
inflation significantly. In January 1996, the increase in inflation was caused
by a rise in electricity and telephone prices.
BALANCE OF PAYMENTS AND FOREIGN TRADE
GENERAL
Like other countries in Latin America, Brazil's balance of payments
deteriorated in the early 1980s as the result of a series of adverse economic
developments. These developments were further exacerbated by rising US dollar
interest rates, which increased the cost of servicing Brazil's external debt and
led to current account deficits, the debt crisis and curtailment of Brazil's
access to international financial markets.
Since 1992, however, Brazil has experienced an increase in capital inflows,
as foreign investments, have surged. Net direct investments increased to over
US$2.9 billion from in 1995, from US$1.7 billion in 1994 and US$901 million in
1990. For the period of January 1996 through June 1996, foreign direct
investment totaled US $4.5 billion. Foreign reserves edged up during the 1990s.
From December 31, 1990 to December 31, 1995, the foreign reserves maintained by
the Central Bank increased by 451%, totaling US$51.8 billion at December 31,
1995, which covered approximately 13 months of imports of goods, or 8 months of
imports of goods and services.
Since 1990, the Federal Government's economic policies have increased the
importance of the external sector of the economy. Recent reforms directly
affecting the external sector include a reduction in import tariffs, the
negotiation of the Mercosul free trade agreement among Brazil, Argentina,
Uruguay and Paraguay, the liberalization of certain foreign exchange
transactions and the liberalization of foreign investment regulations.
B-8
BALANCE OF PAYMENTS
The following table sets forth information regarding Brazil's balance of
payments for each of the years indicated:
BALANCE OF PAYMENTS
IN US$ MILLION
1991 1992 1993 1994 1995
--------- --------- --------- --------- ----------
CURRENT ACCOUNT............................................ $ (1,407) $ 6,143 $ (592) $ (1,689) $ (17,784)
Trade balance............................................ 10,579 15,239 13,307 10,466 (3,157)
Exports................................................ 31,620 35,793 38,563 43,545 46,506
Imports................................................ 21,041 20,554 25,256 33,079 49,663
Services (net)........................................... (13,542) (11,339) (15,585) (14,743) (18,600)
Interest................................................. (8,621) (7,253) (8,280) (5,668) (8,158)
Other.................................................... (4,921) (4,086) (7,305) (8,405) (10,442)
Unilateral transfers..................................... 1,558 2,243 1,686 2,568 3,973
Revenues............................................... 1,599 2,315 1,792 2,751 4,224
Expenditures........................................... 43 72 106 183 251
CAPITAL ACCOUNT............................................ (4,148) 25,271 10,115 14,294 29,820
Investment (net)......................................... 170 2,972 6,170 8,131 4,670
Reinvestment............................................. 365 175 100 83 200
Financing................................................ 2,026 13,258 2,380 1,939 2,641
Foreign................................................ 2,125 13,191 2,625 2,389 3,487
Brazilian.............................................. (99) 67 (245) (450) (845)
Amortizations............................................ (7,830) (8,572) (9,978) (50,411) (11,026)
Paid................................................... (7,830) (7,147) (9,288) (11,001) (11,026)
Refinanced (incl. Paris Club).......................... 0 1,425 (710) (39,410) 0
Currency loans........................................... 964 17,577 11,659 53,802 34,403
Short-term............................................. (3,033) 2,602 869 909 19,667
Long-term.............................................. 3,997 14,975 10,790 52,893 14,736
Other capital............................................ 157 (139) (215) 750 (1,068)
ERRORS AND OMISSIONS....................................... 876 (1,386) (1,119) 334 1,444
SURPLUS (DEFICIT).......................................... (4,679) 30,028 8,404 12,939 13,480
FINANCING.................................................. 4,679 (30,028) (8,404) (12,939) (13,480)
Assets (increase)........................................ 369 (14,670) (8,709) (7,215) (12,919)
Use of IMF credit........................................ (590) (406) (495) (129) (47)
Short-term liabilities................................... 4,900 (14,952) 800 (5,593) (514)
Arrears................................................ 5,621 (14,259) 1,133 (5,535) (510)
Others................................................. (721) (699) (333) 58 (4)
In 1995, Brazil's balance of payments registered a surplus of US$13.5
billion. In 1994 and 1993 the surplus in Brazil's balance of payments reached
US$12.9 billion and US$8.4 billion, respectively.
After recording a US$6.1 billion current account surplus in 1992, Brazil
registered a US$592 million Current account deficit in 1993. Among the factors
that led to that decline were reductions of 12.7% and 24.8% in the trade surplus
and the net inflow of Unilateral transfers, respectively, and an increase of
37.4% in the service deficit, reflecting an increase both in external debt
service costs and expenses related to other services. In 1994, the Current
account registered a deficit of US$1.7 billion due to a decrease of 21.3% in the
trade surplus. The reduction in the trade surplus resulted from a 31.0% increase
in imports, which totaled US$33.1 billion, caused by a significant increase in
imports of consumer goods and capital goods as a result of the Real Plan.
Exports increased by 12.9% in 1994, totaling US$43.6 billion. In 1995 the
Current
B-9
account turned sharply negative as imports grew 50.1% while exports grew by a
mere 6.8%. This growth in imports was primarily the result of an appreciation of
the real and the release of pent-up demand from the stability in the new
currency. Overall trade balance figures for 1995 showed a deficit of US$3.2
billion, with exports of US$46.5 billion and imports of US$49.7 billion. Despite
the development of a the first trade deficit in many years, Brazil's Capital
account surplus grew to a record US$29.8 billion.
Brazil's Capital account includes direct investments, portfolio investments
and short, medium and long-term indebtedness. The Capital account has registered
a surplus since 1992 and in 1995 the surplus climbed 108.6% to reach US$29.8
billion. In 1994, the Capital account rose to US$14.3 billion mainly as a result
of the Brady program which resulted in a 361.4% increase in Currency loans to
US$52.9 billion. During 1995, although Currency loans declined when compared to
the previous year, the rise in short-term inflows by US$18.8 billion was still
impressive when compared to 1993. Overall Currency loans totaled US$34.4 billion
in 1995.
FOREIGN TRADE
The following table sets forth certain details regarding Brazil's foreign
trade for the years indicated:
PRINCIPAL FOREIGN TRADE INDICATORS
1991 1992 1993 1994 1995
---------- ---------- ---------- ---------- ---------
Exports as % of GDP................................... 7.2% 8.0% 8.0% 8.2% 7.0%
Imports as % of GDP................................... 4.8 4.6 5.3 6.2 8.0
Trade balance as % of GDP............................. 2.4 3.4 2.7 2.0 (0.5)
Growth (decline) in foreign trade(a).................. 1.1 7.0 13.7 19.7 25.5
Exports: % increase (decrease)(b)................... 0.7 13.2 7.8 12.9 7.0
Imports: % increase (decrease)(b)................... 1.8 (2.3) 24.0 30.2 50.0
Trade balance: % change from prior period........... (1.6) 44.0 (13.9) (20.8) (131)
Exports/Imports(c).................................... 1.5x 1.7x 1.5x 1.3x 0.94x
EXPORTS:
US$ in millions..................................... $ 31,620 $ 35,793 $ 38,563 $ 43,545 $ 46,506
1,000 tons 165,974 167,295 182,323 194,880 N.A.
% change from period(d)............................. (1.3)% 0.8% 9.0% 6.9% N.A.
IMPORTS:
US$ in millions..................................... $ 21,041 $ 20,554 $ 25,256 $ 33,079 $ 49,663
1,000 tons 63,278 68,057 77,813 84,819 N.A.
% change from prior period(d)....................... 10.7% 7.6% 14.7% 8.6% N.A.
Trade balance......................................... $ 10,579 $ 15,239 $ 13,307 $ 10,466 $ (3,157)
- ------------------------
Notes:
(a) Percentage change in exports and imports from previous year.
(b) Percentage change from previous year.
(c) Exports divided by imports.
(d) Percentage change in volume, by weight.
SOURCE: Central Bank
B-10
Overall trade flows in 1995 totaled a record US$96.2 billion, representing
an increase of 25.5% over those of the previous year.
In addition to maintaining an export financing program, PROEX, which in 1991
replaced the previous FINEX program, the Federal Government has adopted a series
of measures aimed at promoting foreign trade. The Federal Government has
attempted to encourage domestic competition by liberalizing imports through the
elimination of certain non-tariff restrictions, such as the list of goods with
respect to which the issuance of import licenses had been suspended, the
requirement that traders submit their import requirements to the Federal
Government in advance and the linking of certain imports to exports.
In 1991, the Federal Government announced a schedule for tariff reductions
for a three-year period ending in January 1994, aimed at attaining rates varying
from zero to 40%, with an average tariff of 14.2%. As of February 1992, further
tariff reductions were made, with adjustments every nine months instead of at
one-year intervals. Accordingly, the reduction in tariffs to an average rate of
16.8% from 20.8% originally scheduled for January 1, 1993 was implemented on
October 1, 1992. The Federal Government implemented the last set of scheduled
tariff reductions on July 1, 1993, when the average duty and the maximum tariff
were reduced to 14.2% and 40%, respectively.
The Federal Government also reduced tariffs to moderate domestic price
increases to support the Real Plan. In September and October 1994 it implemented
significant new tariff reductions, covering over 5,000 products and reducing the
average tariff to 11.32%. In September 1996, the government removed the ICMS
export tax. This tax was applied to a broad range of mostly primary goods and
its removal is expected to boost export competitiveness.
Average tariffs are also being reduced as a result of Brazil's
implementation of a schedule of preferences from its current tariffs applicable
to imports from Mercosul countries. The preference, which was a 75% reduction
from otherwise applicable rates during the second half of 1993 and 82% during
the first half of 1994, was raised to 89% beginning on July 1, 1994 and to 100%
beginning on January 1, 1995, although certain products were excepted from this
discount. In December 1994, the four member countries of Mercosul established
January 1, 1995 as the date for the implementation of the Common External Tariff
("CET"), intended to transform the region into a customs union. The CET ranges
from 0.0% to a maximum of 20.0%, but each member country was allowed a list of
300 exceptions (399 in the case of Paraguay) to the CET. The products on each
country's list of exceptions have tariffs varying from the CET, but such tariffs
are scheduled to be reduced automatically each year until 2001, at which time
such tariffs will equal the CET rates. The introduction of the CET has raised
Brazil's average tariffs slightly, to 11.99%.
In February 1995, the Minister of Finance increased the import tariff on
passenger cars to 32.0% from 20.0%, with a scheduled reduction of 2.0 percentage
points each year until reaching 20.0% again in 2001. In addition, in order to
reduce the current account deficit, in March 1995, the Minister of Finance
increased to 70.0% the import tariff on roughly 100 durable consumer goods,
including passenger cars (but not utility vehicles), home appliances and
electric and electronic equipment, to be in effect for a period of one year. In
May 1995, the tariff on utility vehicles was raised to 70.0%. In April 1995,
approximately 20 of such durable goods had their tariffs reduced to a range
between 40.0% and 63.0% to meet the tariff level established in GATT
negotiations. Passenger cars and utility vehicles will also have their maximum
tariffs reduced to 63.0% as of January 1, 1997, 49% as of January 1, 1998, 35%
as of January 1, 1999 and 20% as of January 1, 2000, which is the CET level. A
recent agreement with the European Union, Japan and the Republic of Korea will
result in a reduction to 30% in the import tariff on up to 50,000 vehicles per
year.
Brazil's list of exceptions to the CET was published in April 1995 revised
in May 1995, encompassing 460 products (including those that had their tariffs
increased in March and May 1995), some of which are expected to remain on the
list until 2001, while others of which may be withdrawn or have their tariffs
altered in order to assure domestic supply or to prevent domestic speculative
price movements.
B-11
Brazil is a signatory to the Final Act of the GATT Uruguay Round, pursuant
to which it is committed to staged reductions in tariffs beginning in 1995, over
five years with respect to industrial products and over ten years with respect
to agricultural products.
FOREIGN INVESTMENT
Foreign investment in Brazil has traditionally focused on direct investment
in the manufacturing sector. Beginning in 1991, foreign investment increased
substantially, surpassing the levels reached during the period from 1973 to
1982, before the debt crisis. In 1994, net foreign direct investment increased
by more than US$1 billion, to reach US$1.7 billion, while the net portfolio
investment decreased US$1.9 billion, reaching US$11.6 billion. Figures indicate
that in 1995 net foreign direct investment reached US$3.0 billion while net
portfolio investment was US$4.8 billion.
The following table sets forth information regarding foreign investment in
Brazil for each of the years indicated.
FOREIGN INVESTMENT IN BRAZIL (IN US$)
INFLOWS OUTFLOWS NET INFLOWS
----------------------------------- ------------------------------------- ------------------------
PORTFOLIO(A) DIRECT(B) TOTAL PORTFOLIO(A) DIRECT(B) TOTAL PORTFOLIO(A) DIRECT(B)
----------- ----------- --------- ----------- ------------- --------- ----------- -----------
1990...................... 824 1,131 1,955 245 230 475 579 901
1991...................... 4,187 1,095 5,282 378 123 601 3,809 972
1992...................... 9,930 1,749 11,709 2,594 189 2,763 7,366 1,580
1993...................... 23,554 1,302 24,854 10,019 580 10,599 13,451 722
1994...................... 32,621 2,356 30,265 21,046 618 21,664 11,575 1,738
1995...................... 25,559 3,285 25,844 17,806 315 18,121 4,753 2,970
TOTAL
---------
1990...................... 1,480
1991...................... 4,781
1992...................... 8,946
1993...................... 14,173
1994...................... 9,837
1995...................... 7,723
- ------------------------
Notes:
(a) Includes bonds, commercial paper and notes, except those related to external
debt restructuring bonds.
(b) Includes reinvestment of earnings. SOURCE: Central Bank.
In March 1995, the Federal Government eased certain restrictions on foreign
lending and investment in response to the deterioration in the current account.
Such measures included the reduction of the IOF on foreign capital inflows, if
over a certain maturity, to 0.0% from 7.0% on loans, to 5.0% from 9.0% on
investments in foreign capital fixed income funds and to 0.0% from 1.0% on
portfolio investments. In August 1995, responding to the strong capital inflows
of the end of the second quarter of 1995, the government increased restrictions
on foreign lending and investments. The IOF charged on bonds and loans issued
abroad was increased to 5% and the IOF charged on fixed income funds was
increased to 7%. In February 1996, the Government increased to 3 years the
minimum term for the issuance of bonds, and in October 1996 established the
following IOF charges:
(i) 3% for loans with a minimum maturity of less than 3 years;
(ii) 2% for loans with a minimum maturity of or in excess of 3 years but
less than 4 years;
(iii) 1% for loans with a minimum maturity of or in excess of 4 years but
less than 5 years; and
(iv) 0% for loans with a minimum maturity of or in excess of 5 years.
PUBLIC FINANCE
CONSOLIDATED PUBLIC SECTOR FISCAL PERFORMANCE
The consolidated public sector is comprised of the Federal Government, the
several State enterprises, and State and local governments. In turn, the Federal
Government consolidates the accounts of the National Treasury, the social
security system, and the income and loss statement of the Central Bank, but not
the proceeds from privatization. With the adoption of several important
structural reforms in recent
B-12
years, the Federal Government has established as its objective a substantial
improvement in the fiscal performance of the consolidated public sector as
measured by the operational results.
Brazil reports its fiscal balance using two principal measures, all of which
are calculated according to the official statistical guidelines of the IMF:
- PRIMARY BALANCE, which is the financial balance less net borrowing costs
of the Federal Government.
- OPERATIONAL BALANCE, which is similar to primary balance but excludes the
inflationary component of interest payments on domestic debt of the
non-financial public sector. This balance is the primary balance plus
accrued real interest on the external and domestic debt. This balance is
used to correct the distortions which affect the measurement of public
finances in an inflationary environment.
Brazil generated a consolidated primary surplus in each year from 1990 to
1995. However, real interest expense (both domestic and external) on the public
debt accounted for the operational deficits registered during most of the
period. In 1994, a significant increase in tax revenues, due to the reduction in
inflation and to the economic boom, increased the primary surplus to 5.1% of GDP
while the real interest expense on the public debt reached 3.7% of GDP.
Consequently, Brazil posted an operational surplus of 1.1% of GDP in 1994
compared with a deficit of 2.2% in 1992 and a surplus of 0.2% in 1993. In 1995,
the operational deficit reached 4.95% of GDP due to real interest expenses which
totaled 5.4% of GDP while in the primary concept a surplus of 0.45% of GDP was
registered.
Set forth below are the public sector borrowing requirements since 1990:
PUBLIC SECTOR BORROWING REQUIREMENTS HISTORICAL SUMMARY(A)
1991 1992 1993 1994 1995
--------- --------- --------- --------- ---------
SELECTED ECONOMIC INDICATORS(b)
Real GDP growth (decline).............................. 0.2% (0.8)% 4.2% 5.9% 4.2%
Monetary base (end of period) change................... 291.2 991.3 1,953.2 308 22.60
Real interest rate(c).................................. 6.7 30.1 7.1 24.8 33.5
PUBLIC FINANCE(d)
Financial result....................................... (24.4)% (44.3)% (58.4)% (44.4)% 7.4%
Primary result......................................... 3.0 2.4 2.6 5.1 0.4
Real interest.......................................... (1.6) (4.6) (2.4) (3.7) (5.4)
Domestic............................................... 0.4 (3.2) (0.9) (3.0) (4.7)
External............................................... (2.0) (1.4) (1.5) (0.7) (0.7)
Operational result..................................... 1.4 (2.2) 0.2 1.1 (5.0)
Domestic financing..................................... 3.7 (3.3) 0.2 2.4 7.8
External financing..................................... 0.0 2.8 2.4 2.7 (3.3)
Issue of money......................................... (2.3) (2.7) (2.4) (4.1) 0.5
- ------------------------
Notes:
(a) Surplus (deficit).
(b) Deflated by official government deflator.
(c) Implicit real interest rate on public sector internal debt.
(d) All figures expressed as a percentage of GDP.
SOURCE: Central Bank.
B-13
PUBLIC DEBT
GENERAL
Public sector debt ("public debt") in Brazil consists of the internal and
external debt of the Federal Government, State and local governments and public
sector enterprises. Pursuant to the Constitution, the Brazilian Senate is vested
with powers to establish, upon a request by the President, (i) global limits for
the consolidated debt of the Government, States, and municipalities, (ii) the
terms and conditions of the internal and external financial transactions of the
Federal Government, including public sector enterprises, at all levels of
government, and (iii) the terms and conditions for guarantees of the Government
of any internal and external financial transaction. Furthermore, any external
financial transaction entered into at any level of government must be authorized
by the Senate.
The following table sets forth the consolidated gross and net debt of the
public sector as at December 31 for each of the years 1991 through 1995:
PUBLIC SECTOR DEBT
IN US$ MILLION
1991 1992 1993 1994 1995
---------- ---------- ---------- ---------- ----------
CONSOLIDATED GROSS PUBLIC SECTOR DEBT(A)............. $ 172,371 $ 196,733 $ 205,460 $ 309,530 $ 387,340
Internal........................................... 71,557 97,159 100,990 91,340 256,420
External(b)........................................ 100,834 99,574 104,470 118,190 130,920
BY SECTOR, FEDERAL GOVERNMENT AND CENTRAL BANK
Gross debt......................................... 99,904 120,105 124,820 203,840 247,920
Internal........................................... 33,965 52,039 57,160 126,600 170,650
Securities debt.................................. 11,561 36,403 42,060 71,400 116,340
Other debt(c).................................. 22,404 15,636 15,100 55,200 54,310
External........................................... 65,939 69,663 67,660 74,240 77,270
Credits
Internal......................................... (41,480) (49,128) (48,810) (87,060) (104,270)
Public sector(d)............................... (26,179) (27,697) (34,440) (30,780) (32,830)
Other(e)....................................... (15,301) (21,431) (14,470) (56,280) (71,440)
External(f)...................................... (9,406) (23,754) (32,210) (38,810) (51,260)
STATE AND LOCAL GOVERNMENT
Gross debt......................................... 29,098 39,263 43,540 63,520 81,750
Internal......................................... 24,887 34,861 38,940 61,380 79,350
External......................................... 4,211 4,402 4,600 2,140 2,400
Credits
Internal......................................... (1,103) (1,843) (1,370) (2,990) (4,580)
Public sector(d)................................. 0 0 0 0 0
Other(e)....................................... (1,103) (1,843) 1,370 (2,990) (4,580)
External(f)........................................ 0 0 0 0 0
STATE ENTERPRISES
Gross debt......................................... 69,568 65,062 64,650 46,140 51,730
Internal......................................... 38,884 39,549 39,330 34,140 39,250
External......................................... 30,684 25,510 25,320 11,980 12,480
Credits
Internal......................................... (935) (1,131) (1,240) (3,183) (4,150)
Public sector(d)................................. (692) (870) (1,090) (2,735) (3,800)
Other(e)......................................... (243) (261) (15) (45) (35)
External(f)........................................ 0 0 0 0 0
NET PUBLIC SECTOR DEBT(G)............................ 144,286 150,594 149,390 181,500 217,140
Internal........................................... 52,858 74,776 84,000 128,900 176,250
External........................................... 91,428 75,818 65,390 52,600 40,890
B-14
- ------------------------
Notes:
(a) Consolidated gross public sector debt consolidates debts between public
sector entities.
(b) Includes short-term debt obligations.
(c) Includes monetary base, CRUZADOS NOVOS in accounts frozen under the Collor
Plan, compulsory deposits required upon release of frozen accounts, other
deposits of the financial system with the Central Bank and federal
securities that can be used in the national privatization program.
(d) Internal public sector credits owed by other public sector entities. These
amounts are consolidated into the consolidated gross public sector debt
amounts above.
(e) Other internal credits consist primarily of deposits at private sector
financial institutions.
(f) External credits are equivalent to the Federal Government's international
reserves. The external credits of the Federal Government and Central Bank
include collateral acquired in connection with the April 1994 debt
restructuring.
(g) Net public sector debt is consolidated gross public sector debt less
aggregate credits of the Federal Government and Central Bank, State and
local governments and state enterprises (excluding internal public sector
credits that have been excluded from the consolidated gross public sector
debt).
SOURCE: Central Bank.
In 1994, net public sector debt was approximately US$182 billion, of which
US$129 billion represented domestic indebtedness. Net public debt in 1995
reached US$217 billion, an increase of 20% from the December 1994 figure. This
result was mainly due to a 36.7% rise in the net internal debt which is related
to a significant increase registered by the federal security debt. The rise of
net public debt is also attributable in large part to the substantial increase
in the net debt of State and local governments, which stood at US$60.5 billion
in 1994 and US$77.2 billion in 1995. On the other hand, in the same period, net
external debt decreased by 22% to US$41 billion due a significant accumulation
of international reserves.
EXTERNAL DEBT
As of December 31, 1995, Brazilian foreign debt was US$159 billion.
Approximately US$125 billion of the total represented medium and long-term debt,
of which US$25 billion was owned to foreign commercial banks, US$32 billion to
international entities and government agencies, US$54 billion to bond holders
and US$14 billion to suppliers and other creditors. Most of the commercial bank
debt was denominated in US dollars and bore interest at floating rates. The
"Brady Plan"-type debt restructuring of April 1994 substantially altered
Brazil's external debt profile. While the interest arrears were capitalized, the
restructuring reduced previously outstanding principal obligations by about US$4
billion. See "Public Debt-- Debt Crisis and Restructuring."
B-15
The following table sets forth details of Brazil's public sector external
debt by type of borrower for each of the years indicated:
PUBLIC SECTOR EXTERNAL DEBT BY TYPE OF BORROWER(A)
(US DOLLARS IN MILLIONS)
1991 1992 1993 1994 1995
--------- --------- --------- --------- ---------
Public sector.............................................. 94,627 93,437 90,613 87,330 87,455
Registered(a)............................................ 75,423 86,669 83,515 86,864 87,168
Non registered........................................... 19,204 6,768 7,098 466 287
Private sector............................................. 29,283 42,512 55,113 60,965 71,550
Registered(a)............................................ 17,573 24,166 30,755 32,804 42,145
Non registered........................................... 11,710 18,346 24,358 28,161 29,405
Total...................................................... 123,910 135,949 145,726 148,295 159,005
External debt/% of GDP..................................... 28.35% 31.11% 33.35% 33.93% 42.97%
- ------------------------
Notes:
(a) Debt with an original maturity of one year or more.
SOURCE: Central Bank.
DEBT CRISIS AND RESTRUCTURING
With the inception of the debt crisis in 1982, voluntary lending to Brazil
by commercial banks ceased. With its foreign reserves in decline, Brazil
struggled to make debt service payments by achieving substantial trade
surpluses. Emergency lending by commercial banks and multilateral organizations
in 1983 and 1984, together with rescheduling of outstanding commercial bank
debt, helped to stem the loss of reserves. In 1983, the IMF undertook to provide
Brazil with R$2 billion of Special Drawing Rights ("SDRs") (approximately US$4.6
billion, as at December 31, 1982) over a three-year period, and commercial bank
creditors agreed to reschedule US$4.5 billion in principal payments and provide
US$4.4 billion in new money. Agreement was also reached with the country's
foreign governmental (Paris Club) creditors that year, resulting in the
restructuring of 95% of Brazil's principal and interest obligations falling due
during the period from August 31, 1983 through December 31, 1984, as well as
arrearages relating to the period from January 1, 1983 through July 1, 1983 in
the aggregate amount of approximately US$3 billion. In 1984, commercial bank
creditors agreed to an additional rollover of US$5.2 billion in principal and a
new money facility for US$6.5 billion in additional funds. Brazil's subsequent
inability to meet all of the lending conditions established by the IMF led to a
succession of new letters of intent and periodic suspensions of IMF
disbursements.
Brazil did not seek new money from commercial banks in a 1986 debt
rescheduling covering approximately US$16 billion of 1985 and 1986 medium and
long-term maturities and approximately US$15 billion of short-term trade and
interbank lines. A sharp drop in reserves in 1986 as a result of a large capital
account deficit and a sizable current account shortfall led the Federal
Government to declare a moratorium on principal and interest payments to
commercial banks in February 1987.
1988 FINANCING PLAN
In September 1988, Brazil's bank creditors agreed, among other things, to
reschedule approximately US$61 billion over a 20-year period pursuant to a
Multi-Year Deposit Facility Agreement ("MYDFA") and to provide an additional
US$5.2 billion in new money pursuant to a Parallel Financing Agreement (a
syndicated term loan), a Commercial Bank Co-financing Agreement (a parallel
co-financing with certain World Bank project and sector loans), a New Money
Trade Deposit Facility Agreement (to be used for medium-term trade finance
starting one year after original disbursement) and 1988 New Money Bonds.
Approximately US$1 billion of Brazil Investment Bonds were also issued as part
of this package, and
B-16
approximately US$15 billion of short-term lines were extended. The deal was
accompanied by an IMF standby arrangement of US$1.44 billion agreed in August
1988. The IMF suspended disbursements in 1989, however, because of the Federal
Government's inability to meet public-sector deficit targets. As a result, the
third tranche (US$600 million) of the US$5.2 billion new money package was not
disbursed. With reserves once again under pressure, the Federal Government
imposed new limitations on interest payments to holders of external commercial
bank debt in July 1989.
Brazil initiated formal negotiations with commercial bank creditors in
August 1990. As of January 1991, the Federal Government permitted the full
payment of external debts owed by private sector and financial institution
borrowers and the servicing of 30.0% of interest payments due and payable by
public sector obligors. Following the promulgation of CMN Resolution 1,812, as
of April 1, 1991, the treatment previously accorded to private sector debt was
extended to the external debt obligations of Petrobras and CVRD and their
subsidiaries. In April 1991, Brazil and the Bank Advisory Committee ("BAC"),
consisting of approximately 20 of Brazil's largest commercial bank creditors,
reached agreement on the treatment of approximately US$9.1 billion in interest
arrears accrued on Brazil's external commercial bank debt up to December 31,
1990. Under the agreement, the commercial banks received US$2 billion of such
amount in 1991, and the remainder of such past due interest was exchanged for
approximately US$7.1 billion aggregate principal amount of IDU Bonds on November
20, 1992 and March 18, 1993.
1992 ARRANGEMENTS WITH IMF AND PARIS CLUB
In January 1992, Brazil reached agreement with the IMF on a standby facility
of 1.5 billion SDR (approximately US$2 billion). Of this amount, 75.0% was to
have entered the country in the form of new money, while the remaining 25.0% was
to have been used to finance the acquisition of collateral for the proposed
restructuring of Brazil's medium and long-term public sector indebtedness
described below. The standby arrangement was subsequently suspended, however,
because of Brazil's inability to meet agreed performance criteria targets,
leaving 1.37 billion SDR undrawn as of the August 31, 1993 facility expiration
date.
On February 26, 1992, Brazil reached agreement with Paris Club creditors for
the rescheduling of debt owed to other governments and governmental agencies
totaling US$12.1 billion. The agreement required Brazil to make approximately
US$4.1 billion in debt service payments in 1992 and 1993 and provided for the
rescheduling of approximately US$11 billion over a 14-year period, with a grace
period of three years. Although Brazil has completed bilateral agreements
implementing the February 1992 accord with all countries except Italy, debt
relief for some maturities was conditional on continued performance under the
IMF standby facility, and Brazil continues to discuss the impact, if any, of
this condition with some countries.
1992 FINANCING PLAN
On July 9, 1992, Brazil and the BAC reached an agreement-in-principle on the
restructuring of Brazil's medium and long- term public sector indebtedness owed
to commercial banks, as well as on a parallel arrangement for interest arrears
accrued in respect of such indebtedness since January 1, 1991. Pursuant to that
agreement, on April 15, 1994, Brazil issued approximately US$43.1 billion
principal amount of bonds to holders of certain medium and long-term public
sector debt ("Eligible Debt") of Brazil or guaranteed by Brazil owed to
commercial banks and certain other private sector creditors in consideration for
the tender by such holders of their Eligible Debt and interest arrears accrued
in respect thereof since January 1, 1991 ("Eligible Interest"). The bonds were
issued pursuant to exchange agreements, implementing the Republica Federativa do
Brazil 1992 Financing Plan (the "Financing Plan"), which provided for the
restructuring of approximately US$41.6 billion of Eligible Debt and arrangements
for approximately US$5.5 billion of Eligible Interest. The Financing Plan was a
"Brady Plan"-type restructuring, the term coined for debt restructuring based on
the policy articulated by US Treasury Secretary Nicholas Brady in a speech
before the Third World Debt Conference in March 1989. The Brady Plan
B-17
advocated restructuring which would, among other things, (i) exchange debt for
freely transferable bonds, (ii) result in significant reductions in the level of
debt and the rate of interest payable thereon, and (iii) collateralize some
types of new bonds with the pledge of US Treasury zero-coupon obligations.
Holders of Eligible Debt exchanged their Eligible Debt for the following
types of bonds: (i) Par Bonds ("Par Bonds"), (ii) Discount Bonds ("Discount
Bonds"), (iii) Front-Loaded Interest Reduction Bonds ("FLIRBs"), (iv)
Front-Loaded Interest Reduction with Capitalization Bonds ("C-Bonds"), and (v) a
combination of New Money Bonds ("New Money Bonds"), and Debt Conversion Bonds
("Debt Conversion Bonds"). Eligible Interest was exchanged (after giving effect
to certain interest rate adjustments and cash interest payments made by Brazil
pursuant to the Financing Plan) for EI Bonds (the "EI Bonds"). The Par Bonds,
Discount Bonds, FLIRBs, C-Bonds, New Money Bonds, Debt Conversion Bonds and EI
Bonds are referred to herein collectively as the "Brady Bonds." Subject to their
respective terms, each of the Brady Bonds is eligible for use as currency in the
Brazilian privatization program.
The Financing Plan produced a reduction of US$4 billion in the stock of
Eligible Debt: the US$11.20 billion allocated to Discount Bonds will result in
the issuance of US$7.28 billion of such bonds (assuming the exchange of Phase-In
Bonds for Discount Bonds). In addition, the Federal Government estimates that
the Financing Plan will generate another US$4 billion in interest savings over
the 30-year repayment period. Upon completion of the phased delivery of
collateral (scheduled for April 15, 1996), Brazil will have defeased
approximately US$17.8 billion of its external debt in the form of Par and
Discount Bonds. The total cost of collateral to the Republic will be
approximately US$3.9 billion, of which US$2.8 billion was delivered on April 15,
1994 from the Republic's own resources; the Republic subsequently delivered
US$251.9 million of collateral as scheduled on 17th October, 1994 and US$237.1
million as scheduled on April 18, 1995.
At the Republic's option, the Brady Bonds may be redeemed at par in whole or
in part prior to their maturity. The EI Bonds and New Money Bonds also include a
mandatory redemption provision under which the Republic is required to redeem
the EI Bonds and New Money Bonds at par if the Republic prepays certain
obligations.
B-18
ANNEX C
GLOSSARY
ABC: ABC, Inc., formerly known as "Capital Cities/ABC, Inc."
ABC CLASS HOUSEHOLDS: The highest three classes of Brazilian households
based upon the achievement of a total of 10 points or higher on the
classification scale used by the Associacao Brasileira de Anunciantes (Brazilian
Advertisers Association) to determine a household's socio-economic class, which
ranges from A to E depending on the education level of the head of the
household, the possession by the household of certain items of material comfort,
including automobiles, television sets and other household items, and the hiring
of domestic servants by the household.
ABRIL: Abril S.A., the leading magazine publishing, printing and
distribution company in Latin America.
ABRIL CREDIT FACILITY: A revolving credit facility, dated December 6, 1995,
between Tevecap, as the borrower, and Abril, as the lender.
BBC: British Broadcasting Corporation.
BCE: BCE, Inc., an affiliate of Bell Canada Inc., Canada's largest
telecommunications group.
BCI: Bell Canada International, Inc., an affiliate of BCE.
BNDES: Banco National de Desenolvimento Economico e Social, the national
development bank owned by the Brazilian Government.
BRASILSAT: A satellite operated by Embratel through which the Company
provides C-Band service.
C-BAND: A satellite transmission system which provides a signal on the "c"
bandwidth.
CABLE: A Cable network employs electromagnetic transmission over coaxial
and/or fiber-optic cable to transmit multiple channels carrying images, sound
and data between a central facility and individual customers' television sets.
Networks may allow one-way (from a headend to a residence and/or business) or
two-way transmission from a headend to a residence and/or business with a data
return path for the headend.
CABLE LICENSE: A license that is granted by the applicable governing body
pursuant to its authority under the communications laws of a particular country
for the purpose of providing Cable services for a specific franchise/license
area.
CANBRAS: Canbras Communications Corp., a Canadian corporation.
CANBRAS ASSOCIATION AGREEMENT: Association Agreement dated June 14, 1995,
among Tevecap, TVA Sistema, the Canbras TVA Companies, Canbras and Canbras-Par.
CANBRAS TVA COMPANIES: Canbras TVA Cabo and TV Cabo Santa Branca.
CANBRAS TVA CABO: Canbras TVA Cabo Ltda., a Brazilian limitada.
CANBRAS TVA: The operations of Canbras TVA Cabo and TV Cabo Santa Branca, in
each of which Tevecap holds a 36.0% equity interest and Canbras Par holds a
64.0% equity interest.
CANBRAS-PAR: Canbras Participacoes, Ltda., a Brazilian limitada wholly-owned
by Canbras.
CBC: California Broadcasting Center, an uplink center for GLA located in
Long Beach, California.
CBS: CBS, Inc.
CENTRAL BANK: Central Bank of Brazil (Banco Central do Brasil)
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CHASE PARTIES: Two wholly owned subsidiaries of CMIF through which CMIF
holds its equity interest in Tevecap.
CHURN: With respect to a pay television system for a given period, the
quotient expressed as a percentage of (i) the number of subscribers disconnected
from such system less the number of formerly disconnected subscribers
reconnected to the system divided by (ii) the number of subscribers to the
system as of the beginning of the period plus the number of subscribers added to
the system.
CISNEROS GROUP: Cisneros Group of Companies, which holds a 10% interest in
GLA through Darlene Investments.
CMIF: Chase Manhattan International Finance Ltd., an affiliate of The Chase
Manhattan Bank which holds a 9.3% interest in Tevecap through two wholly owned
subsidiaries.
COAXIAL CABLE: Cable consisting of a central conductor surrounded by and
insulated from another conductor. It is the standard material used in
traditional Cable systems. Signals are transmitted through it at different
frequencies, giving greater channel capacity than is possible with twisted pair
cable, but less than is allowed by optical fiber.
COMERCIAL CABO SAO PAULO: Comercial Cabo TV Sao Paulo Ltda., a Brazilian
limitada in which Tevecap holds a 99% equity interest.
COMPANY: Tevecap, together with its consolidated subsidiaries.
CONSOLIDATED FINANCIAL STATEMENTS: The audited and unaudited consolidated
financial statements of Tevecap and its subsidiaries and the notes thereto
included herein.
CPL: Cable Participacoes Ltda., a Brazilian limitada, jointly owned by
Hearst and ABC, which limitada holds a 2.35% equity interest in Tevecap.
CPCT: Centrais Privadas de Comutacao Telefonica, certain private telephone
networks comparable to private branch exchanges (PBX) found in larger apartment
complexes, hotels and businesses in the United States.
CVM: Comissao de Valores Mobiliarios, the securities commission of Brazil.
DARLENE INVESTMENTS: Darlene Investments, LLC, a Cayman Islands limited
liability company which is part of the Cisneros Group of Companies.
DBS: Direct broadcast satellite service, operating in C-Band or Ku-Band
width, by which television programming is transmitted to individual dwellings,
each served by a single satellite dish.
DBS SYSTEMS: Ku-Band and C-Band operations of Galaxy Brasil and TVA Sistema,
respectively.
DE SANTI & VALLONE: De Santi & Vallone Antennas & Telecommunications
Consultants.
DIRECTV: Brazil's first digital Ku-Band service, which is operated by Galaxy
Brasil and Galaxy Latin America.
DISTV: The distribution of television signals by physical means (i.e., by
Cable) to end users, generally limited to signals without interference by a
DISTV operator with the signal content.
DTI: Directv International, Inc., a corporation wholly-owned by Hughes
Communications that holds a 60.0% equity interest in GLA.
EMBRATEL: Empresa Brasileira de Telecommunicacoes, the Brazilian
government-owned company authorized to provide satellite telecommunications
services utilizing the Sistema Brasiliero de Telecomunicacoes por Satelite
(Brazilian Satellite Telecommunications System).
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EQUITY SUBSCRIBERS: Subscribers to the Operating Ventures adjusted for the
Company's equity ownership in the Operating Ventures.
ESPN: ESPN, Inc., in which ABC has an 80.0% equity interest and Hearst has a
20.0% equity interest.
ESPN AGREEMENT: Quotaholders Agreement, dated June 26, 1995, among Tevecap,
TVA Sistema, ESPN Brazil, Inc. and ESPN Brasil Ltda.
ESPN BRASIL: Programming provided by ESPN Brasil Ltda.
ESPN BRAZIL, INC.: A Delaware corporation wholly owned by ESPN.
ESPN BRASIL LTDA.: ESPN do Brasil Ltda., a Brazilian limitada in which
Tevecap holds a 50.0% equity interest and ESPN Brazil, Inc., holds a 50.0%
equity interest.
EVENT PUT: A triggering event under the Stockholders Agreement pursuant to
which each of the Stockholders (other than Abril) may, in certain circumstances,
demand that Tevecap purchase all or a portion of its shares.
EXCHANGE AND REGISTRATION AGREEMENT: Exchange and Registration Agreement,
dated September 17, 1997, among Tevecap, Credit Suisse First Boston (Europe)
Limited, Chase Manhattan International Limited, Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Phoenix Multi-Sector Fund, Inc. and Phoenix Multi-Sector
Short Term Bond Fund.
EXIMBANK: The Export-Import Bank of the United States.
EXIMBANK FACILITY: A credit facility, dated December 9, 1996, among Tevecap,
as Guarantor, TVA Sistema, as borrower, and The Chase Manhattan Bank, N.A., as
lender. The EximBank will guarantee 85% of amounts borrowed under the EximBank
Facility.
FALCON INTERNATIONAL: Falcon International Communications (Bermuda L.P.), a
subsidiary of Falcon International Communications, L.L.C., a Delaware limited
liability company.
FALCON TIME PUT: A provision of the Stockholders Agreement pursuant to which
Falcon International may, in certain circumstances, demand that Tevecap purchase
all or a portion of the shares held by Falcon International.
FIBER-OPTIC CABLE: Cable made of glass fibers through which signals are
transmitted as pulses of light. Fiber-optic cable has the capacity for a large
number of channels.
FOX: Twentieth Century Fox Television International.
GALAXY BRASIL: Galaxy Brasil S.A., a wholly-owned subsidiary of Tevecap
which operates Brazil's first Ku-Band system.
GALAXY BRASIL LEASING FACILITY: A $49.9 million lease and sale-leaseback
facility entered into by Galaxy Brasil, as lessee, and Citibank, N.A., as lessor
in March 1997.
GALAXY LATIN AMERICA: A Delaware limited liability company the members of
which are DTI, which holds a 60.0% equity interest, Darlene Investments, which
holds a 20.0% equity interest, TVA Communications, which holds a 10% equity
interest, and Grupo Frecuencia Modulada Television, which holds a 10.0% equity
Interest.
GALAXY III-R: A satellite owned and operate by Hughes Communications through
which Galaxy Brasil provides DIRECTV service.
GLA: Galaxy Latin America.
GLA AGREEMENT: Partnership Agreement, dated February 13, 1995 among the GLA
partners.
GLOBO: Globo Par and TV Globo, the owners of a number of Brazil's over the
air channels.
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GLOBO CABO: Globo Cabo S.A., a Cable service provider in Brazil.
GLOBO PAR: Globo Comunicacoes e Participacoes Ltda.
GRUPO MIDIA: Grupo de Midia Sao Paulo.
GRUPO FRECUENCIA MODULADA TELEVISION: Grupo Frecuencia Modulada Television,
S.A. de C.V., a Mexican corporation wholly owned by Grupo MVS.
GRUPO MVS: Grupo MVS, S.A. de C.V., a Mexican corporation.
GUARANTORS: Tevecap's Restricted Subsidiaries (as defined in the Indenture).
HABC II: Hearst/ABC Video Services II, a Delaware general partnership
jointly owned by Hearst and ABC, which partnership holds a 17.65% equity
interest in Tevecap.
HBO BRASIL: Programming provided by HBO Brasil Partners.
HBO BRASIL PARTNERS: HBO Brasil Partners Ltd., a joint venture between TVA,
which holds a 33% equity interest, and HBO Ole Partners, which holds a 66.7%
equity interest.
HBO OLE PARTNERS: A partnership among Time Warner Entertainment Company,
L.P., SPE Latin American Acquisition Corporation and Ole Communications, Inc.
HEADEND: A collection of hardware, typically including satellite receivers,
modulators, amplifiers and videocassette playback machines. Signals, when
processed, are then combined for distribution within the Cable network.
HEARST: The Hearst Corporation.
HEARST/ABC PARTIES: HABC II and CPL.
HEARST/ABC PROGRAMMING AGREEMENT: Programming Agreement, dated December 6,
1995, among Tevecap, Hearst and ABC.
HOMES PASSED: Homes that can be connected to a Cable distribution system
without further extension of the distribution network.
HUGHES COMMUNICATIONS: Hughes Communications, Inc.
HUGHES ELECTRONICS: Hughes Electronics Corporation.
IBGE: Instituto Brasileiro de Geografia e Estatistica.
IBOPE: Instituto Brasileiro de Opiniao Publica e Estatistica.
INDEMNIFICATION AGREEMENT: Indemnification Agreement to be entered into
among the Company, GLA, Hughes Communications and affiliates thereof, CBC, TVA
Communications, Darlene Investments, Inversiones Divtel, D.T., C.A., Grupo
Frecuencia Modulada Television and Grupo MVS.
INDENTURE: The indenture, dated November 26, 1996, among Tevecap, the
Guarantors, The Chase Manhattan Bank, as trustee, and Chase Trust Bank, as
principal paying agent in connection with the Notes.
INDEPENDENT OPERATORS: Independent pay television system operators to which
TVA sells programming.
INITIAL PURCHASERS: Chase Securities Inc., Donaldson, Lufkin & Jenrette
Securities Corporation, Bear Stearns & Co. Inc. and Bozano, Simonsen Securities
Inc.
INTERACTIVE SERVICES: Services commonly referred to as pay-on-demand,
shop-at-home, video games, ATM services, or such other interactive services as
video phone and telephony which can be more easily provided with the development
of high-capacity hybrid fiber optic/coaxial distribution networks.
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IRMAOS REIS: Distribuidora Irmaos Reis S.A., a Brazilian corporation in
which Abril holds a 30.5% equity interest.
KU-BAND: A satellite transmission system which provides a signal over the
"ku" bandwidth.
LICENSE SUBSIDIARIES: Companies that hold pay television licenses covering
the operation of certain of the Owned Systems.
LOCAL OPERATING AGREEMENT: Local Operating Agreement, dated July 29, 1996,
between GLA and Tevecap.
LOS: An unobstructed "Line of Sight" from any of the Company's MMDS headends
to a subscriber's antenna.
MGM: Metro Goldwyn Mayer, Inc.
MINISTRY OF COMMUNICATIONS: The Brazilian Ministry of Communications,
authorized to regulate the Brazilian subscription television industry pursuant
to the Brazilian Telecommunications Code of 1962.
MMDS (MULTI-CHANNEL MULTI-POINT DISTRIBUTION SYSTEM): A one-way radio
transmission of television channels over microwave frequencies from a fixed
station transmitting to multiple receiving facilities located at fixed points.
MMDS LICENSE: A license that is granted by the applicable governing body
pursuant to its authority under the communications laws of a particular country
for the purpose of providing MMDS services for a specific franchise/license
area.
MTV BRASIL: MTV Brasil Ltda., a Brazilian LIMITADA in which Abril holds a
50.0% equity interest and Viasem Brasil Holdings Ltda. (an indirect subsidiary
of Viacom International) holds the remaining 50% equity interest.
MULTICANAL: Multicanal Participacoes S.A., a Cable service provider in
Brazil.
NBC: National Broadcasting Company, Inc.
NDS: News Digital Systems Limited, a wholly-owned subsidiary of News
Corporation.
NET BRASIL: Net Brasil S.A., a Cable and MMDS service provider in Brazil.
NET SAT: Net Sat Servicos Ltda., TVA's prospective competitor in DBS
Service, in which Globo Par has a controlling interest and whose other equity
holders include News Corporation, a subsidiary of The News Corporation Limited,
and Grupo Televisa, S.A. of Mexico.
NEWS CORPORATION: News Corporation plc.
OPERATING VENTURES: Canbras TVA and TV Filme, two of TVA's minority-owned
ventures.
OWNED SYSTEMS: TVA Sistema, TVA Sul and Galaxy Brasil.
PANAMSAT: PanAmSat Corporation, the current owner and operator of the
PAS-III satellite.
PAY-PER-VIEW: Payment made for individual programs rather than a monthly
subscription for a whole channel or group of channels. Currently only offered in
Brazil by TVA through DIRECTV, and envisioned as a means of providing certain
popular sporting events or major motion pictures for which customers may be
prepared to make a special payment.
PENETRATION RATE: The measurement of the take-up of Cable services. The
penetration rate as of a given date is calculated by dividing the number of
subscribers connected to a system on such date by the total number of homes
passed in such system.
PROGRAMMING VENTURES: HBO Brasil Partners and ESPN Brasil Ltda.
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RBS: RBS Participacoes S.A., a Cable and MMDS service provider in Brazil.
REAL PLAN: A Brazilian Government stabilization program, announced in
December 1993, aimed at curtailing inflation and building a foundation for
sustained economic growth.
REGISTRATION RIGHTS AGREEMENT: The Registration Rights Agreement, dated
November 26, 1996, pursuant to which Tevecap and the Guarantors agree to file
with the United States Securities and Exchange Commission the Exchange Offer
Registration Statement on an appropriate form under the Securities Act with
respect to an offer to exchange the Notes for Exchange Notes.
REGULATORY PUT: A provision in the Stockholders Agreement pursuant to which
an Event Put is triggered if the amount of capital stock held by a Stockholder
(other than Abril) exceeds the amount allowed under an appropriate legal
restriction.
REVENUE PER SUBSCRIBER: Total revenue derived from a subscriber television
system divided by the average number of subscribers for that period.
SAP: Second Audio Programming, which provides the option of audio in a
second language for the programming on channels for which it is offered.
SBT: TVSBT--Canal 4 de Sao Paulo S.A., a Brazilian national off-air channel.
SECURITIES ACT: United States Securities Act of 1933, as amended.
SMART CARD: Encoded card placed in a decoder used for Ku-Band service. The
Smart Card is used to regulate access to Ku-Band services.
SMC: SMC Marketing Ltda., a Brazilian limitada, wholly owned by HBO
Partners, that distributes HBO programming in Brazil.
SONY: Sony Pictures Entertainment, Inc.
STOCKHOLDERS: HABC II, CPL, Robert Civita, Abril, the Chase Parties and
Falcon International.
STOCKHOLDERS AGREEMENT: Stockholders Agreement, dated December 6, 1995,
among the Stockholders.
SUBSIDIARY GUARANTEES: Guarantees executed by each of Tevecap's Restricted
Subsidiaries (as defined in the Indenture).
SURFIN: SurFin Ltd., a corporation organized under the laws of the Bahamas,
the (direct and indirect) shareholders of which are Tevecap, holding 20.5%,
DIRECTV International Inc., a subsidiary of Hughes Communications, holding
39.3%, Darlene Investments, holding 20.4%, and Grupo Frecuencia Modulada
Television, holding 19.8%.
SURFIN CREDIT FACILITY: A three year $150.0 million credit facility between
SurFin and Citicorp USA, Inc., as administrative agent, under a syndicated
credit agreement, dated September 24, 1996.
TAMBORE FACILITY: TVA's Ku-Band uplink center located in the city of Tambore
in greater Sao Paulo.
TELECOMMUNICATIONS CODE: The Brazilian Telecommunications Code of 1962, as
amended.
TELEPHONY: The provision of telephone service.
TEVECAP: Tevecap S.A.
TIME WARNER: Time Warner Entertainment Company, L.P.
TRUNK: The "transportation" component within a Cable and/or broadband
network architecture that carries the system product to the distribution portion
of the architecture, which in turn goes to customers' homes.
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TV CABO SANTA BRANCA: TV Cabo Santa Branca Comercio Ltda., a Brazilian
limitada, in which Tevecap holds a 36% equity interest and Canbras Par holds a
64.0% equity interest.
TV FILME: TV Filme, Inc., a Delaware corporation in which Tevecap currently
holds a 14.7% equity interest, Warburg, Pincus Investors, L.P. currently holds a
38.8% equity interest, members of the Lins family currently hold a 16.2% equity
interest, public stockholders currently hold a 28.15% equity interest and
certain individuals own the remaining 2.15% equity interest. Upon exercise of a
warrant with a nominal exercise price, Tevecap's ownership interest will
increase to 16.7%.
TV FILME SERVICE AREA: Brasilia, Belem and Goiania.
TV GROUP: The operations of TVA excluding the operations and results of
Galaxy Brasil.
TV HOMES: The number of households in a given area possessing at least one
television set.
TV SHOW TIME: Televisao Show Time Ltda., a Brazilian limitada in which the
estate of Matias Machline and an associate currently hold a 53.0% equity
interest and in which the remaining 47.0% is currently held by various Abril
shareholders.
TVA: Tevecap S.A. and its consolidated subsidiaries and affiliates.
TVA BRASIL: TVA Brasil Radioenlaces S.A., a Brazilian limitada in which the
estate of Matias Machline currently holds a 50.0% equity interest and in which
the remaining 50.0% is currently held by various Abril shareholders.
TVA COMMUNICATIONS: TVA Communications Ltd., a British Virgin Islands
company wholly-owned by Tevecap, through which Tevecap holds a 10.0% equity
interest in Galaxy Latin America.
TVA CURITIBA: TVA Curitiba Servicos em Telecommunicacoes Ltda., a Brazilian
limitada in which Tevecap held an 80.0% equity interest and Leonardo Petrelli
held a 20.0% equity interest prior to TVA Curitiba's merger into TVA Parana
Ltda. and the reorganization of TVA Parana Ltda. as a subsidiary of TVA Sul
Participacoes S.A. in October 1996.
TV GLOBO: A provider of off-air programming in Brazil and an affiliate of
Globo.
TVA SISTEMA: TVA Sistema de Televisao S.A., a Brazilian corporation in which
Tevecap holds a 98.0% equity interest and the estate of Matias Machline holds a
2.0% equity interest.
TVA SUL: The operations of TVA Parana Ltda., TVA Alfa Cabo Ltda., TVA Cabo
Camboriu Ltda., TCC TV a Cabo Ltda. and TVA Cabo Foz do Iguacu Ltda., which are
wholly-owned subsidiaries of TVA Sul Participacoes S.A., a Brazilian corporation
in which Tevecap holds an 86.0% equity interest and Leonardo Petrelli Neto holds
the remaining 14.0% equity interest.
UHF: Broadcast of a television signal at an ultra-high frequency over a
given geographical area.
VCR: Video cassette recorders.
VIACOM INTERNATIONAL: Viacom International (Netherlands B.V.).
C-7
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Purchase Agreement, Registration Rights Agreement and Stockholders
Agreement (included as Exhibits 10.1, 10.2 and 10.3 to this Registration
Statement, respectively) provide for the indemnification under certain
circumstances of directors, officers and controlling persons of the Company.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES:
(a) Exhibits:
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ----------- -------------------------------------------------------------------------------------------------------
*3.1 -- Articles of Incorporation of Tevecap S.A. (English translation including amendments)
*3.2 -- Memorandum of the Organizational Shareholders' Meeting and By-laws of TVA Sistema de Televisao S.A.
(English translation including amendments)
*3.3 -- Memorandum and Articles of Association TVA Communications Ltd.
*3.4 -- Memorandum of General Meeting of Association and By-laws of Galaxy Brasil S.A. (English translation
including amendments)
*3.5 -- Memorandum of General Meeting of Association and By-laws of TVA Sul Participacoes S.A. (English
translation including amendments)
*3.6 -- Articles of Incorporation of Comercial Cabo TV Sao Paulo Ltda. (English translation including
amendments)
*3.7 -- Articles of Incorporation of TVA Parana S.A. (English translation including amendments)
*3.8 -- Articles of Incorporation of TV Alfa Cabo Ltda. (English translation including amendments)
*3.9 -- Articles of Incorporation of CCS Camboriu Cable System de Telecommunicacoes Ltda. (English translation
including amendments)
*3.10 -- Articles of Incorporation of TCC TV a Cabo Ltda. (including English translation)
*3.11 -- Articles of Incorporation of TVA Sul Foz do Iguacu Ltda. (English translation including amendments)
*3.12 -- Articles of Incorporation of TVA Sul Santa Catarina Ltda. (English translation)
*4.1 -- Indenture dated as of November 26, 1996, as amended, among Tevecap S.A., the Subsidiary Guarantors and
The Chase Manhattan Bank, as Trustee (including exhibits)
*4.2 -- Forms of Notes (included in Exhibit 4.1)
*4.3 -- Forms of Guarantees (included in Exhibit 4.1)
5.1 -- Opinion of Basch & Rameh, Brazilian counsel to certain of the Registrants, as to the legality of the
Notes and Guarantees of Guarantors incorporated under the Federative Republic of Brazil
5.2 -- Opinion of Mayer, Brown & Platt, U.S. counsel to the Registrants, as to the legality of the Notes and
the Guarantees
II-1
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ----------- -------------------------------------------------------------------------------------------------------
5.3 -- Opinion of Harney, Westwood & Riegels, British Virgin Islands counsel to TVA Communications Ltd. as to
the legality of the Guarantee of TVA Communications Ltd.
8.1 -- Opinion of Mayer, Brown & Platt, U.S. counsel to the Registrants, as to certain U.S. tax matters
*10.1 -- Purchase Agreement dated as of November 21, 1996 among Tevecap S.A., the Guarantors and the Initial
Purchasers
*10.2 -- Registration Rights Agreement dated as of November 26, 1996, among Tevecap S.A., the Guarantors and the
Initial Purchasers
*10.3 -- Stockholders Agreement, dated December 6, 1995, among Tevecap S.A., Robert Civita, Abril S.A., Falcon
International Communications (Bermuda L.P.), Hearst/ABC Video Services II, Cable Participacoes Ltda.,
Harpia Holdings Limited and Curupira Holdings Limited (including amendments)
*10.4 -- Side Letter, dated December 6, 1995, among Abril S.A., Falcon International Communications (Bermuda
L.P.), Hearst/ABC Video Services II, Cable Participacoes Ltda., Harpia Holdings Limited and Curupira
Holdings Limited
*10.5 -- Revolving Credit Facility, dated December 6, 1995, between Tevecap S.A. and Abril S.A.
*10.6 -- Credit Facility, dated December 9, 1996, among Tevecap S.A., TVA Sistema de Televisao S.A., The Chase
Manhattan Bank and the Export-Import Bank of the United States
*10.7 -- Association Agreement, dated February 15, 1996, among Tevecap S.A., TVA Sistema de Televisao S.A., TVA
Brasil Radioenlaces Ltda., Leonardo Petrelli Neto, TV Delta de Curitiba Ltda., TV Cabo Servicos Santa
Catarina Ltda., TV Cabo Servicos Parana Ltda. and TVA Curitiba Servicos em Telecomunicacoes Ltda.
(including English Translation)
*10.8 -- Services Agreement, dated July 22, 1994, among TVA Brasil Radioenlaces Ltda., Televisao Show Time
Ltda., Abril S.A. and Tevecap S.A. (English translation including amendments)
*10.9 -- Credit Facility, dated May 12, 1997 between Galaxy Brasil S.A. and Abril S.A. (English translation)
*10.10 -- Exchange and Registration Agreement dated as of September 17, 1997, among Tevecap S.A., Credit Suisse
First Boston (Europe) Limited, Chase Manhattan International Limited, Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Phoenix Multi-Sector Fixed Income Fund Inc. and Phoenix Multi-Sector Short Term
Bond Fund.
*21.1 -- Subsidiaries of Tevecap S.A.
23.1 -- Consent of Coopers & Lybrand Auditores Independentes
23.2 -- Consent of Basch & Rameh (included in Exhibit 5.1)
23.3 -- Consent of Mayer, Brown & Platt re: its opinion as to the legality of the Notes and the Guarantees
(included in Exhibits 5.2 and 8.1)
23.5 -- Consent of Harney, Westwood & Riegels (included in Exhibit 5.3)
24.1 -- Powers of Attorney for Tevecap S.A. and each of the Guarantors (included in signature pages to the
Registration Statement)
*99.1 -- Authorization of the Central Bank of Brazil authorizing the issuance of the Notes (English translation)
II-2
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
- ----------- -------------------------------------------------------------------------------------------------------
*99.2 -- Form of Letter of Transmittal
*99.3 -- Form of Notice of Guaranteed Delivery
*99.4 -- Form of Letter to Clients
*99.5 -- Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees
- ------------------------
* Previously filed.
ITEM 22. UNDERTAKINGS
Each of the undersigned Registrants hereby undertakes that insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Each of the undersigned Registrants hereby undertakes (i) to respond to
requests for information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11, or 13 of this Form, within one business day of
receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means; and (ii) to arrange or provide for a
facility in the U.S. for the purpose of responding to such requests.
Each of the undersigned Registrants hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction that was not
the subject of and included in the registration statement when it became
effective.
No Registrant has entered into any arrangement or understanding with any
person to distribute the securities to be received in the Registered Exchange
Offer and to the best of each Registrant's information and belief, each person
participating in the Exchange Offer is acquiring the securities in its ordinary
course of business and has no arrangement or understanding with any person to
participate in the distribution of the securities to be received in the
Registered Exchange Offer. In this regard, the registrant will make each person
participating in the Registered Exchange Offer aware (through the Exchange Offer
Prospectus or otherwise) that if the Registered Exchange Offer is being
registered for the purpose of secondary resales, any securityholder using the
exchange offer to participate in a distribution of the securities to be acquired
in the Registered Exchange Offer (1) could not rely on the staff position
enunciated in Exxon Capital Holdings Corporation (available May 13, 1988) or
similar letters and (2) must comply with registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. The registrant acknowledges that such a secondary resale
transaction should be covered by an effective registration statement containing
the selling securityholder information required by Item 507 of Regulation S-K.
Each of the Registrants hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
II-3
undersigned undertake that such reoffering prospectus will contain the
information called for by the applicable registration form who respect to
reofferings by persons who may be deemed to be underwriters, in addition to the
information called for by the other Items of the applicable form.
Each of the undersigned Registrants hereby undertakes that every prospectus:
(i) that is filed pursuant to the immediately preceding paragraph or (ii) that
purports to meet the requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
part of an amendment to the Registration Statement and will not be used until
such amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
Tevecap S.A., has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Sao Paulo,
the Federative Republic of Brazil, on this 4th day of November, 1997.
Tevecap S.A.
By *
-----------------------------------------
Jose Augusto P. Moreira
Officer
By *
-----------------------------------------
Claudio Cesar D'Emilio
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on November 4, 1997.
NAME TITLE
- ---------------------------------------- ---------------------------
* Chief Executive Officer
- ---------------------------------------- (Principal Executive
Raul Rosenthal Officer)
* Chief Financial Officer
- ---------------------------------------- (Principal Financial and
Douglas Duran Accounting Officer)
* Director
- ----------------------------------------
Robert Civita
* Director
- ----------------------------------------
Jose Augusto P. Moreira
* Director
- ----------------------------------------
Robert Hefley Blocker
* Director
- ----------------------------------------
Giancarlo Francesco Civita
* Director
- ----------------------------------------
Thomaz Souto Correa Netto
* Director
- ----------------------------------------
Francisco Savio Couto Pinheiro
II-5
NAME TITLE
- ---------------------------------------- ---------------------------
* Director
- ----------------------------------------
Arnaldo Bonotri Dutra
* Director
- ----------------------------------------
Sergio Vladimirschi Junior
* Director
- ----------------------------------------
Jose Luis De Salles Freire
* Director
- ----------------------------------------
Jorge Fernando Koury Lopes
* Director
- ----------------------------------------
Oswaldo Leite De Moraes Filho
By: /s/
DOUGLAS
DURAN
---
Nam
Douglas
Duran,
asATTORNEY-IN-FACT
By: /s/
JOSE
AUGUSTO
P.
MOREIRA
---
Nam
Jose
Augusto
P.
Moreira,
as
ATTORNEY-IN-FACT
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
TVA Sistema de Televisao S.A., has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Sao Paulo, the Federative Republic of Brazil, on this 4th day of November,
1997.
TVA Sistema de Televisao S.A.
By *
-----------------------------------------
Robert Civita
President
By *
-----------------------------------------
Jose Augusto P. Moreira
Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on November 4, 1997.
NAME TITLE
- ------------------------------ ---------------------------
* President
- ------------------------------ (Principal Executive
Robert Civita Officer)
* Financial Director
- ------------------------------ (Principal Financial and
Jose Augusto P. Moreira Accounting Officer)
* Director
- ------------------------------
Giancarlo Francesco Civita
* Director
- ------------------------------
Victor Civita
By: /s/
DOUGLAS
DURAN
---
Nam
Douglas
Duran,
asATTORNEY-IN-FACT
By: /s/
JOSE
AUGUSTO
P.
MOREIRA
---
Nam
Jose
Augusto
P.
Moreira,
as
ATTORNEY-IN-FACT
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
TVA Communications, Ltd., has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Sao Paulo, the Federative Republic of Brazil, on this 4th day of November,
1997.
TVA Communications, Ltd.
By *
-----------------------------------------
Robert Civita
Officer
By *
-----------------------------------------
Jose Augusto P. Moreira
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on November 4, 1997.
NAME TITLE
- ------------------------------ ---------------------------
* President
- ------------------------------ (Principal Executive
Robert Civita Officer)
* Financial Officer
- ------------------------------ (Principal Financial and
Jose Augusto P. Moreira Accounting Officer)
* Officer
- ------------------------------
Angelo Silvio Rossi
* Officer
- ------------------------------
Placido Loriggio
By: /s/
DOUGLAS
DURAN
---
Nam
Douglas
Duran,
asATTORNEY-IN-FACT
By: /s/
JOSE
AUGUSTO
P.
MOREIRA
---
Nam
Jose
Augusto
P.
Moreira
ATTORNEY-IN-FACT
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
Galaxy Brasil S.A., has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Sao
Paulo, the Federative Republic of Brazil, on this 4th day of November, 1997.
Galaxy Brasil S.A.
By *
-----------------------------------------
Jose Augusto P. Moreira
President
By *
-----------------------------------------
Claudio Cesar D'Emilio
Financial Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on November 4, 1997.
NAME TITLE
- ------------------------------ ---------------------------
* President
- ------------------------------ (Principal Executive
Jose Augusto P. Moreira Officer)
* Financial Director
- ------------------------------ (Principal Financial and
Claudio Cesar D'Emilio Accounting Officer)
* Administrative Director
- ------------------------------
Angelo Silvio Rossi
By: /s/
DOUGLAS
DURAN
---
Nam
Douglas
Duran,
asATTORNEY-IN-FACT
By: /s/
JOSE
AUGUSTO
P.
MOREIRA
---
Nam
Jose
Augusto
P.
Moreira
ATTORNEY-IN-FACT
II-9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
TVA Sul Participacoes S.A., has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Sao Paulo, the Federative Republic of Brazil, on this 4th day of November,
1997.
TVA Sul Participacoes S.A.
By *
-----------------------------------------
Douglas Duran
Director
By *
-----------------------------------------
Leonardo Petrelli
Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on November 4, 1997.
NAME TITLE
- ------------------------------ ---------------------------
* Director
- ------------------------------ (Principal Executive
Jose Augusto P. Moreira Officer)
* Director
- ------------------------------ (Principal Financial and
Douglas Duran Accounting Officer)
* Director
- ------------------------------
Leonardo Petrelli
By: /s/
DOUGLAS
DURAN
---
Nam
Douglas
Duran,
asATTORNEY-IN-FACT
By: /s/
JOSE
AUGUSTO
P.
MOREIRA
---
Nam
Jose
Augusto
P.
Moreira
ATTORNEY-IN-FACT
II-10
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
Comercial Cabo TV Sao Paulo Ltda., has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Sao Paulo, the Federative Republic of Brazil, on this 4th day of
November, 1997.
Comercial Cabo TV Sao Paulo Ltda.
By *
-----------------------------------------
Jose Augusto P. Moreira
Financial Director
By *
-----------------------------------------
Claudio Cesar D'Emilio
Financial Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on November 4, 1997.
NAME TITLE
- ------------------------------ ---------------------------
* Financial Director
- ------------------------------ (Principal Executive
Jose Augusto P. Moreira Officer)
* Financial Director
- ------------------------------ (Principal Financial and
Claudio Cesar D'emilio Accounting Officer)
By: /s/
DOUGLAS
DURAN
---
Nam
Douglas
Duran,
asATTORNEY-IN-FACT
By: /s/
JOSE
AUGUSTO
P.
MOREIRA
---
Nam
Jose
Augusto
P.
Moreira,
as
ATTORNEY-IN-FACT
II-11
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
TVA Parana Ltda., has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Sao
Paulo, the Federative Republic of Brazil, on this 4th day of November, 1997.
TVA Parana Ltda.
By *
-----------------------------------------
Douglas Duran
Director
By *
-----------------------------------------
Leonardo Petrelli
Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on November 4, 1997.
NAME TITLE
- ------------------------------ ---------------------------
* Director
- ------------------------------ (Principal Executive
Jose Augusto P. Moreira Officer)
* Director
- ------------------------------ (Principal Financial and
Douglas Duran Accounting Officer)
* Director
- ------------------------------
Leonardo Petrelli
By: /s/
DOUGLAS
DURAN
---
Nam
Douglas
Duran,
asATTORNEY-IN-FACT
By: /s/
JOSE
AUGUSTO
P.
MOREIRA
---
Nam
Jose
Augusto
P.
Moreira,
as
ATTORNEY-IN-FACT
II-12
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
TV Alfa Cabo Ltda., has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Sao
Paulo, the Federative Republic of Brazil, on this 4th day of November, 1997.
TV Alfa Cabo Ltda.
By *
-----------------------------------------
Douglas Duran
Director
By *
-----------------------------------------
Leonardo Petrelli
Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on November 4, 1997.
NAME TITLE
- ------------------------------ ---------------------------
* Director
- ------------------------------ (Principal Executive
Jose Augusto P. Moreira Officer)
* Director
- ------------------------------ (Principal Financial and
Douglas Duran Accounting Officer)
* Director
- ------------------------------
Leonardo Petrelli
By: /s/
DOUGLAS
DURAN
---
Nam
Douglas
Duran,
asATTORNEY-IN-FACT
By: /s/
JOSE
AUGUSTO
P.
MOREIRA
---
Nam
Jose
Augusto
P.
Moreira,
as
ATTORNEY-IN-FACT
II-13
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
CCS Camboriu Cable System de Telecomunicacoes Ltda., has duly caused this
Registration Statement thereto to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Sao Paulo, the Federative Republic of
Brazil, on this 4th day of November, 1997.
CCS Camboriu Cable System de
Telecomunicacoes Ltda.
By *
-----------------------------------------
Douglas Duran
Director
By *
-----------------------------------------
Leonardo Petrelli
Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on November 4, 1997.
NAME TITLE
- ------------------------------ ---------------------------
* Director
- ------------------------------ (Principal Executive
Douglas Duran Officer)
* Director
- ------------------------------ (Principal Financial and
Leonardo Petrelli Accounting Officer)
* Director
- ------------------------------
Narbal Andrade De Souza
By: /s/
DOUGLAS
DURAN
---
Nam
Douglas
Duran,
asATTORNEY-IN-FACT
By: /s/
JOSE
AUGUSTO
P.
MOREIRA
---
Nam
Jose
Augusto
P.
Moreira,
as
ATTORNEY-IN-FACT
II-14
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
TCC TV a Cabo Ltda., has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Sao
Paulo, the Federative Republic of Brazil, on this 4th day of November, 1997.
TCC TV a Cabo Ltda.
By *
-----------------------------------------
Douglas Duran
Director
By *
-----------------------------------------
Leonardo Petrelli
Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on November 4, 1997.
NAME TITLE
- ------------------------------ ---------------------------
* Director
- ------------------------------ (Principal Executive
Jose Augusto P. Moreira Officer)
* Director
- ------------------------------ (Principal Financial and
Douglas Duran Accounting Officer)
* Director
- ------------------------------
Leonardo Petrelli
By: /s/
DOUGLAS
DURAN
---
Nam
Douglas
Duran,
asATTORNEY-IN-FACT
By: /s/
JOSE
AUGUSTO
P.
MOREIRA
---
Nam
Jose
Augusto
P.
Moreira,
as
ATTORNEY-IN-FACT
II-15
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
TVA Sul Foz do Iguacu Ltda., has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Sao Paulo, the Federative Republic of Brazil, on this 4th day of November,
1997.
TVA Sul Foz do Iguacu Ltda.
By *
-----------------------------------------
Douglas Duran
Director
By *
-----------------------------------------
Leonardo Petrelli
Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on November 4, 1997.
NAME TITLE
- ------------------------------ ---------------------------
* Director
- ------------------------------ (Principal Executive
Jose Augusto P. Moreira Officer)
* Director
- ------------------------------ (Principal Financial and
Douglas Duran Accounting Officer)
* Director
- ------------------------------
Leonardo Petrelli
By: /s/
DOUGLAS
DURAN
---
Nam
Douglas
Duran,
asATTORNEY-IN-FACT
By: /s/
JOSE
AUGUSTO
P.
MOREIRA
---
Nam
Jose
Augusto
P.
Moreira,
as
ATTORNEY-IN-FACT
II-16
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
TVA Sul Santa Catarina Ltda., has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Sao Paulo, the Federative Republic of Brazil, on this 4th day of November,
1997.
TVA Sul Santa Catarina Ltda.
By *
-----------------------------------------
Jose Augusto Moreira
Officer
By *
-----------------------------------------
Claudio Cesar D'Emilio
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on November 4, 1997.
NAME TITLE
- ------------------------------ ---------------------------
* Chief Executive Officer
- ------------------------------ (Principal Executive
Jose Augusto P. Moreira Officer)
* Chief Financial Officer
- ------------------------------ (Principal Financial and
Douglas Duran Accounting Officer)
* Director
- ------------------------------
Leonardo Petrelli
By: /s/
DOUGLAS
DURAN
---
Nam
Douglas
Duran,
asATTORNEY-IN-FACT
By: /s/
JOSE
AUGUSTO
P.
MOREIRA
---
Nam
Jose
Augusto
P.
Moreira,
as
ATTORNEY-IN-FACT
II-17
SIGNATURE OF AUTHORIZED UNITED STATES REPRESENTATIVE
Pursuant to the Securities Act of 1933, the undersigned certifies that it is
the duly authorized United States representative of each of Tevecap S.A., TVA
Sistema de Televisao S.A., TVA Communications Ltd., Galaxy Brasil S.A., TVA Sul
Participacoes S.A., Comercial Cabo TV Sao Paulo Ltda., TVA Parana Ltda., TV Alfa
Cabo Ltda., CCS Camboriu Cable System de Telecomunicacoes Ltda., TCC TV a Cabo
Ltda., TVA Sul Foz do Iguacu Ltda., and TVA Sul Santa Catarina Ltda. has signed
this Registration Statement on this 4th day of November, 1997.
T-Cap, Inc.
(Authorized U.S. Representative)
By /s/ Douglas Duran
-----------------------------------------
Douglas Duran
II-18