As Filed with the Securities and Exchange Commission on July 15, 2002.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
Form 20-F
--------------
|_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number _______________
----------------------
Tevecap S.A.
(Exact name of Registrant as specified in its charter)
TEVECAP INC. THE FEDERATIVE REPUBLIC OF BRAZIL
(Translation of Registrant's (Jurisdiction of incorporation
name into English) or organization)
Av. das Nacoes Unidas, 7221 - 7 andar
Sao Paulo, SP Brazil
05425-902
(Telephone: 55-11-3037-4690)
(Address and telephone number of principal executive offices)
--------------------
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
(Title of Class)
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
12-5/8% Senior Notes due 2004 of Tevecap S.A. and guarantees thereof by
each of TVA Sistema de Televisao S.A., TVA Communications Ltd., Comercial Cabo
TV Sao Paulo Ltda., TVA Sul Parana Ltda., CCS Camboriu Cable System de
Telecomunicacoes Ltda., TVA Programadora Ltda. and TVAPAR S.A.
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report:
485,220,440 Common Shares
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
YES _X_ NO ___
Indicate by check mark which financial statements item the registrant has
elected to follow:
ITEM 17 ___ ITEM 18 _X_
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS.................1
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE...............................1
ITEM 3. KEY INFORMATION.......................................................1
ITEM 4. INFORMATION ON THE COMPANY...........................................11
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.........................27
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES...........................40
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS....................45
ITEM 8. FINANCIAL INFORMATION................................................48
ITEM 9. THE OFFER AND LISTING................................................49
ITEM 10.ADDITIONAL INFORMATION................................................49
ITEM 11.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............56
ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN DEBT SECURITIES..................57
ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.......................57
ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
USE OF PROCEEDS.......................................................57
ITEM 15.[RESERVED]............................................................57
ITEM 16.[RESERVED]............................................................57
ITEM 17.FINANCIAL STATEMENTS..................................................57
ITEM 18.FINANCIAL STATEMENTS..................................................58
ITEM 19.EXHIBITS..............................................................58
GLOSSARY
Presentation of Certain Information
This Annual Report on Form 20-F for the year ended December 31, 2001 is
referred to herein as the "Annual Report."
Tevecap S.A. ("Tevecap" and, together with its subsidiaries, "TVA" or the
"Company") is a corporation (sociedade anonima) organized under the laws of the
Federative Republic of Brazil. The accounts of the Company, which are maintained
in Brazilian reais, were prepared in accordance with the accounting principles
generally accepted in the United States of America ("U.S. GAAP") and translated
into United States dollars on the basis set forth in Note 2.3 of the
consolidated financial statements of Tevecap and its subsidiaries (the "Tevecap
Financial Statements" and, together with the financial statements of TVA Sistema
de Televisao S.A., CCS Camboriu Cable System de Telecomunicacoes Ltda. and TVA
Sul Parana Ltda. included in Item 19 of this Annual Report, the "Financial
Statements"). Certain amounts stated herein in U.S. dollars (other than as set
forth in the Financial Statements and financial information derived therefrom)
have been translated, for the convenience of the reader, from reais at the rate
in effect on December 31, 2001 of R$2.3204 = U.S.$1.00. Such translations should
not be construed as a representation that reais could have been converted at
such rate on such date or at any other date. See Item 3, "Key
Information--Selected Financial Data--Exchange Rates."
Capitalized terms used in this Annual Report are defined, unless the
context otherwise requires, in the Glossary attached hereto. All references in
this Annual Report to (i) "U.S. Dollars," "dollars," "$" or "U.S.$" are to
United States dollars and (ii) "reais," "real" or "R$" are to Brazilian reais.
Unless otherwise specified, data regarding population or homes in a
licensed area are projections based on 1996 population census figures compiled
by the Instituto Brasileiro de Geografia e Estatistica ("IBGE") and the
Company's knowledge of its markets. There can be no assurance that the number of
people or the number of households in a specified area has not increased or
decreased by a higher or lower rate than those estimated by the IBGE since the
1996 census. Unless otherwise indicated, references to the number of the
Company's subscribers are based on Company data as of December 31, 2001. Data
concerning total MMDS and Cable subscribers and penetration rates represent
estimates made by the Company based on the data of Pay TV Survey, Associacao
Brasileira de Telecomunicacoes por Assinatura (ABTA), Kagan World Media, Inc.,
IBGE data, the Company's knowledge of its pay television systems and those of
the Operating Ventures, and public statements of other Brazilian pay television
providers. Although the Company believes such estimates are reasonable, no
assurance can be made as to their accuracy. The term DIRECTV(R) ("DIRECTV") is a
registered trademark of Hughes Electronics Corporation and refers to the Ku-Band
service provided by Galaxy Brasil in conjunction with Galaxy Latin America.
Forward-Looking Statements
This Annual Report contains statements which are forward-looking within
the meaning of the Private Securities Litigation Reform Act of 1995. These
statements appear in a number of places in this Annual Report and include
statements regarding the intent, belief or current expectations of the Company
or its officers. Investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties, and that actual results may differ materially from those in the
forward-looking statements as a result of various factors. Neither the Company's
independent auditors, nor any other independent accountants, have compiled,
examined, or performed any procedures, with respect to the prospective financial
information contained herein, nor have they expressed any opinion or any other
form of assurance on such information or its achievability, and assume no
responsibility for, and disclaim any association with, the prospective financial
information.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS.
A. Directors and Senior Management.
Not applicable.
B. Advisers
Not applicable.
C. Auditors
On June 1, 2002, the partners and employees of Arthur Andersen S/C in
Brazil, the former auditors of the Company, joined Deloitte Touche Tohmatsu in
Brazil. The audit reports for the Financial Statements as of December 31, 2001
and 2000 and for each of the three years in the period ended December 31, 2001,
included in this Annual Report, were issued by Deloitte Touche Tohmatsu.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE.
Not applicable.
ITEM 3. KEY INFORMATION
A. Selected Financial Data
The selected financial data as of December 31, 2001 and 2000 and for each
of the three years in the period ended December 31, 2001 have been derived from,
and should be read in conjunction with, the Tevecap Financial Statements
included in this Annual Report. The selected financial data as of December 31,
1999, 1998 and 1997 and for each of the two years in the period ended December
31, 1998 have been derived from audited financial statements of the Company that
are not included elsewhere in this Annual Report.
In July 1999 the Company consummated the sale of the DBS Systems and
certain assets related thereto. These operations have been classified as
"Discontinued Operations" as of and for the periods discussed herein. See Item
4, "Information on the Company--History and Development of the Company."
As required by Brazilian law, and in accordance with local accounting
practices, the financial records of Tevecap and its subsidiaries are maintained
in the applicable Brazilian currency (the real). However, the Financial
Statements are presented in U.S. dollars in accordance with U.S. GAAP. In order
to prepare the Financial Statements, the Company's accounts have been translated
from the applicable Brazilian currency, on the basis described in Note 2.3 to
the Tevecap Financial Statements included in this Annual Report. Because of the
differences between the evolution of the rates of inflation in Brazil and the
changes in the rates of devaluation, amounts presented in U.S. dollars may show
distortions when compared on a period-to-period basis.
1
SELECTED FINANCIAL AND OTHER DATA
Year Ended December 31,
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(Dollars in Thousands)
Consolidated Statement of Operation:
Gross revenues
Monthly subscriptions $ 88,246 $ 97,134 $ 94,055 $ 136,278 $ 142,700
Installation 270 968 1,900 2,886 12,941
Indirect programming (a) 357 3,722 19,580 22,810
Advertising 1,005 2,503 1,597 3,544 4,947
Additional services and others (b) 16,413 20,049 14,924 14,893 13,649
Total gross revenue 105,934 121,011 116,198 177,181 197,047
--------- --------- --------- --------- ---------
Direct operating expenses (d) 51,296 55,402 45,638 93,356 103,216
Taxes on revenues 15,636 13,145 12,782 12,533 13,315
Selling, general and administrative expenses 29,448 33,483 25,590 56,517 64,844
Depreciation and amortization 34,364 43,290 56,879 48,107 35,461
Other operating expense (income), net 1,762 (2,611) 19,012 1,940 3,944
--------- --------- --------- --------- ---------
Total operating expenses 132,506 142,709 159,901 212,453 220,780
--------- --------- --------- --------- ---------
Operating loss from continuing operations (26,572) (21,698) (43,703) (35,272) (23,733)
Interest expense 37,849 45,069 22,254 51,665 44,541
Other nonoperating expenses (income), net
(e) 9,021 (38,433) 7,024 (3,806) (15,146)
Income tax expense -- 2,517 106 24 --
Equity in losses of affiliates, net (f) 2,375 2,004 5,238 12,139 6,851
Income (loss) from discontinued operations -- -- 94,344 (52,773) (21,438)
Extraordinary item - gain on debt repurchase -- -- 53,857 -- --
--------- --------- --------- --------- ---------
Net income (loss) (75,817) (32,855) 69,876 (148,067) (81,417)
========= ========= ========= ========= =========
2
Year Ended December 31,
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
(Dollars in Thousands, Except Selected Operating Data)
Other data:
EBITDA-Continuing operations (g) 9,554 18,981 32,188 14,775 15,672
EBITDA-Discontinued operations (g) -- -- -- 16,968 19,458
------------ ------------ ------------ ------------ ------------
EBITDA (g) 9,554 18,981 32,188 31,743 35,130
Purchase of fixed assets - Continuing operations 30,639 26,716 25,927 81,392 118,909
Purchase of fixed assets - Discontinued operations -- -- -- 61,967 128,958
------------ ------------ ------------ ------------ ------------
Purchase of fixed assets 30,639 26,716 25,927 143,359 247,867
Ratio of earnings to fixed charges(i) -- -- -- -- --
Cash Flow Data:
Net cash provided by (used in) operating
activities (h) 11,612 2,954 (18,435) 2,675 (30,134)
Net cash provided by (used in) investing activities 3,906 6,030 152,006 (162,556) (224,903)
Net cash (used in) provided by financing activities (33,739) (2,746) (133,022) 160,289 151,287
Selected Operating Data:
Continuing operations
Number of Subscribers to Owned Systems (j) 359,282 345,823 309,663 315,813 335,174
Average monthly revenue per Subscriber (k) $24.56 $28.08 $30.37 $43.15 $42.57
Discontinued operations
Number of Subscribers to Owned Systems (j) -- -- -- 296,847 211,209
Average monthly revenue per Subscriber (k) -- -- -- $43.15 $37.18
Consolidated Balance Sheet Data (at period end):
Cash and cash equivalents 634 1,609 1,946 1,397 989
Property, plant and equipment, net 149,594 182,511 211,729 298,004 266,518
Total assets 198,834 279,357 289,948 447,927 442,011
Loans payable to related companies 6,729 141,122 137,168 88,740 54,321
Long-term liabilities 89,255 230,765 225,743 359,543 335,882
Equity (deficit) in discontinued operations -- -- -- (21,858) 13,904
Redeemable common stock 115,252 151,260 178,002 178,002 189,034
Common Stock 371,026 242,342 242,342 242,342 142,495
Total shareholders' deficit (54,764) (162,049) (154,381) (224,257) (187,069)
Notes to Selected Financial and Other Data
(a) Represents revenues received by the Company for selling programming to the
Independent Operators.
(b) Includes Advertising and Other revenues.
(c) Represents various non-income based taxes paid on certain of the Company's
gross revenue items with rates ranging from 3.65% to 15.15%.
(d) Represents costs directly related to Monthly subscriptions, and a portion
of installation, indirect programming and Additional services and others.
(e) Includes interest income, Foreign currency translation loss, Foreign
currency transaction loss, Other nonoperating (expenses) income, net, and
Minority interest.
(f) Represents the Company's pro rata share of the Net loss or income of its
equity investments.
(g) EBITDA represents the sum of (i) net loss, plus, without duplication (ii)
income tax expense, (iii) interest expense (income), net, (iv) other
nonoperating (expenses) income, net (v) depreciation, amortization and all
other non-cash charges, less (vi) non-cash items increasing net income
(loss) with the exception of amortized deferred sign-on and hook-up fee
revenue, in each case determined in accordance with GAAP. The term
"EBITDA-Discontinued operations" refers to the operations of Galaxy Brasil
and TVA Banda C. The term "EBITDA- Continuing operations" refers to the
Company's remaining operations subsequent to the disposition of Galaxy
Brasil and TVA Banda C. See "Item 4--Information on the Company--History
and Development of the Company."
(h) Cash provided by (used in) operating activities (hereinafter referred to
as cash flows from operating activities) has been determined in accordance
with GAAP while EBITDA has been calculated in accordance with the
definition in footnote (g). In accordance with GAAP, cash flows from
3
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, as adjusted, has
been presented as it is a financial measure commonly used in the Company's
industry. As such, management of the Company believes EBITDA, as adjusted,
is a relevant indicator in measuring the financial condition of the
Company in relation to other companies in its industry. EBITDA should not
be considered as an alternative to cash provided by (used in) operating
activities, as an indicator of operating performance or as a measure of
liquidity.
(i) For the five years ended December 31, 2001, earnings were insufficient to
cover fixed charges by $35,877, $13,727, $42,833, $32,828 and $38,269,
respectively. In calculating the Ratio of earnings to fixed charges,
earnings represents Net loss before minority interest, Equity in (losses)
income of affiliates, less fixed charges. Fixed charges consist of the sum
of interest expense paid or accrued on indebtedness of the Company and its
subsidiaries and affiliates and one third of operating rental expenses
(such amount having been deemed by the Company to represent the interest
portion of such payments).
(j) Represents the number of Owned Systems' subscribers as of the last day of
each period.
(k) Average monthly revenue per subscriber refers to the average monthly
subscription fee as of the last day of each period.
Exchange Rates
There are two legal foreign exchange markets in Brazil: the commercial
rate exchange market (the "Commercial Market") and the floating rate exchange
market (the "Floating Market"). The Commercial Market is reserved primarily for
foreign trade transactions and transactions that generally require prior
approval from Brazilian monetary authorities, such as the purchase and sale of
registered investments by foreign persons and related remittances of funds
abroad, such as a repurchase by the Company of the Senior Notes. Purchases of
foreign exchange in the Commercial Market may be carried out only through a
financial institution in Brazil authorized to buy and sell currency in that
market. The "Commercial Market Rate" is the commercial selling rate for
Brazilian currency into U.S. dollars, as reported by the Central Bank. The
"Floating Market Rate" generally applies to transactions to which the Commercial
Market Rate does not apply. Prior to the implementation of the Real Plan, the
Commercial Market Rate and the Floating Market Rate differed significantly at
times. Since the introduction of the real, the two rates have not differed
significantly, although there can be no assurance that there will not be
significant differences between the two rates in the future. Both the Commercial
Market Rate and the Floating Market Rate are reported by the Central Bank on a
daily basis.
Both the Commercial Market Rate and the Floating Market Rate are freely
negotiated but are strongly influenced by the Central Bank. After the
implementation of the Real Plan, the Central Bank initially allowed the real to
float with minimal intervention. On March 6, 1995, the Central Bank announced
that it would intervene in the market and buy or sell U.S. dollars, establishing
a trading band (faixa de flutuacao) in which the exchange rate between the real
and the U.S. dollar would fluctuate. From 1995 through 1998, the Central Bank
periodically adjusted the trading band upward.
On January 13, 1999, the Central Bank attempted a limited devaluation of
the real by modestly elevating the band width in which the real was allowed to
trade. When this limited devaluation proved unsuccessful, the Central Bank
announced that it would no longer use its foreign currency reserves to protect
the value of the real (with the exception of limited interventions to restrain
abrupt fluctuations in the exchange rate), thereby allowing the real to float
freely against other currencies. Consequently, in the weeks following the
initial devaluation, the real has lost more than 40% of its value against the
U.S. dollar. There can be no assurance that the Central Bank will not institute
a new band in the future or that the real will not devalue further.
On January 25, 1999, in the wake of the devaluation and the adoption of a
floating exchange regime, the National Monetary Council adopted Resolution No.
2588, effective as of February 1, 1999. Pursuant to such resolution, banks that
are authorized to operate in the Commercial Market are required to unify their
positions in the two different markets. These markets are now differentiated
solely for regulatory purposes. As a result of Resolution No. 2588, since
February 1, 1999 the Commercial Market rate and the Floating Market rate have
offered identical pricing and liquidity, despite the potential for distinct
treatment for regulatory purposes in the future. Certain specific foreign
exchange transactions are carried out through the Commercial Market and
registered with the Central Bank through its electronic systems. Such
registration allows the remittance of funds abroad through the Commercial
Market.
4
The following table provides the Commercial Market rate for the purchase
of U.S. dollars expressed in reais per U.S. dollar for the periods and dates
indicated.
Exchange Rates of reais per U.S. $1.00
-----------------------------------------------
Low High Average(1) Period End
Year Ended:
December 31, 1997.......... 1.039500 1.116400 1.079058 1.116400
December 31, 1998.......... 1.116500 1.208700 1.162110 1.208700
December 31, 1999.......... 1.207800 2.164700 1.816200 1.789000
December 31, 2000.......... 1.723400 1.984700 1.830200 1.955400
December 31, 2001.......... 1.935700 2.800700 2.350600 2.320400
Month Ended:
January 31, 2002........... 2.293200 2.438400 2.377900 2.418300
February 28, 2002.......... 2.348200 2.619100 2.419600 2.348200
March 31, 2002............. 2.323600 2.406000 2.346600 2.323600
April 30, 2002............. 2.270900 2.368900 2.320400 2.362500
May 31, 2002............... 2.362500 2.529600 2.480300 2.522000
June 30, 2002.............. 2.522000 2.859300 2.714000 2.844400
- ----------
(1) Calculated as the average of the month-end exchange rates during the
relevant period.
Source: Central Bank of Brazil.
On July 9, 2002, the Commercial Market rate (sell) as reported by the
Central Bank was R$2.8540 per U.S.$1.00.
For a description of certain applicable exchange controls, see Item 10,
"Additional Information--Exchange Controls." See also Item 3, "Key
Information--Risk Factors--Factors Relating to Brazil."
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds.
Not applicable.
D. Risk Factors
Before making any investment decision, investors should carefully read
this entire Annual Report and should consider carefully, in light of their own
financial circumstances and investment objectives, all the information set forth
herein and, in particular, certain matters with respect to debt securities
issued by Brazilian companies, including, without limitation, those set forth
below.
Factors Relating to the Company
The Company has incurred substantial operating losses.
5
Since its inception in 1989, the Company has been developing its
businesses and continues to sustain substantial operating losses due primarily
to insufficient revenue with which to fund build-out, interest expense and
charges for depreciation and amortization. Net losses incurred by the Company
have been funded principally by capital contributions from shareholders,
borrowings under shareholder loans, dispositions of non-strategic assets, bank
loans and other borrowings made from time to time.
Management of the Company has undertaken efforts to generate the cash flow
necessary to meet the Company's cost structure, including the sale of
non-strategic assets, the reduction of indebtedness and internal cost-cutting
measures. Although the Company has generated positive cash flow from operating
activities in recent years, Management cannot assure that the Company will
achieve or sustain operating profitability in the near future. The failure of
the Company to achieve and maintain operating profitability on a timely basis
could impair its ability to make payments under the Senior Notes.
The Company operates in a competitive pay television industry.
The pay television industry in Brazil is, and is expected to continue to
be, highly competitive. The Company competes with providers of pay television
services utilizing Cable, MMDS and DBS technology delivery systems and any new
delivery systems which may be introduced, as well as existing off-air broadcast
television networks, movie theaters, video rental stores, internet service
providers and other entertainment and leisure activities generally.
The success of the Company's operating strategies is subject to factors
that are beyond the control of the Company and difficult to predict due, in
part, to the limited history of pay television services in Brazil. Consequently,
the size of the Brazilian market for pay television, the rates of penetration of
that market, the acceptance of pay television by subscribers and commercial
advertisers, the sensitivity of potential subscribers to the price of
installation and subscription fees and the extent and nature of the competitive
environment in the Brazilian pay television industry are uncertain.
The Company's activities are extensively regulated.
Substantially all of the Company's business activities are regulated by
the federal Agencia Nacional de Telecomunicacoes (Brazilian Telecommunications
Agency, or "ANATEL"). Such regulation relates to, among other things, licensing,
local access to Cable and MMDS systems, commercial advertising, and foreign
investment in Cable and MMDS systems. Changes in the regulation of the Company's
business activities, including decisions by regulators affecting the Company's
operations (such as the granting or renewal of licenses or decisions as to the
subscription rates the Company may charge its customers) or changes in
interpretations of existing regulations by courts or regulators, could adversely
affect the Company. ANATEL has the authority to grant Cable and MMDS licenses
pursuant to public bidding processes. The Company is unable to predict what
impact, if any, such public bidding will have on its ability to launch and
operate new systems. Any new regulations could have a material adverse effect on
the subscription television industry as a whole and on the Company in
particular.
The Company may require additional financing.
If the Company fails to meet its projected operating results or its
capital needs exceed its projected requirements, the Company may require
substantial investment on a continuing basis to finance its corresponding
capital expenditures. The Company may also require substantial additional
capital for any new pay television license acquisitions or investments or
acquisitions of entities holding such licenses, or for any investments in or
acquisitions of other existing pay television operations in order to further
expand the Company's operations. The amount and timing of the Company's future
capital requirements will depend upon a number of factors, many of which are not
within the Company's control, including subscriber growth and retention,
programming costs, capital costs, marketing expenses, staffing levels, and
competitive conditions. There can be no assurance that the Company's future cash
requirements will not increase as a result of unexpected developments in the
Brazilian pay television industry. Failure to obtain any required additional
financing to meet these requirements could adversely affect the growth of the
Company and, ultimately, could have a material adverse effect on the Company.
The Company's debt obligations are subject to foreign exchange risk.
6
A significant portion of the debt obligations (including the Senior Notes)
of the Company are denominated in U.S. dollars, while the Company generates
revenues only in Brazilian reais. The Company also incurs a significant portion
of its equipment costs, and most of its programming costs, in U.S. dollars.
Consequently, a significant devaluation of the real against the U.S. dollar can
significantly affect the Company's ability to meet its obligations and fund its
capital expenditures, and could adversely affect its results of operations. In
addition, shifts in currency exchange rates may have a material adverse effect
on the Company and may force the Company to seek additional capital, which may
not be available to it. While the Company may consider entering into
transactions to hedge the risk of exchange rate fluctuations, it may not be
possible for the Company to obtain hedging arrangements on commercially
satisfactory terms.
The Company's industry is subject to rapid changes in technology.
The pay television industry as a whole is, and is likely to continue to
be, subject to rapid and significant changes in technology. The Company is
presently upgrading its Cable and MMDS systems and believes that, for the
foreseeable future, existing and developing alternative technologies will not
materially adversely affect the viability or competitiveness of its pay
television business. However, there can be no assurance as to the effect of such
technological changes on the Company or that the Company will not be required to
expend substantial financial resources in the development or implementation of
new competitive technologies.
The Company has limited assets and depends on its subsidiaries to repay
indebtedness.
Tevecap's operations are conducted through, and substantially all of
Tevecap's assets are owned by, Tevecap's direct and indirect subsidiaries. The
ability of Tevecap to meet its obligations in respect of its indebtedness,
including the Senior Notes, will depend on, among other things, the future
performance of such subsidiaries (including the Guarantors) and the ability of
Tevecap to refinance such indebtedness at maturity (or upon early redemption or
otherwise). In addition, the ability of Tevecap's subsidiaries to pay dividends
and make other payments to Tevecap may be restricted by, among other things,
applicable corporate and other laws and regulations and by the terms of
agreements to which such subsidiaries may become subject. In particular,
Brazilian companies are allowed to distribute dividends only if, after a given
fiscal year, its net profits exceed accumulated losses. In addition, the
property and assets of certain of Tevecap's subsidiaries have had, or in the
future may have, liens placed upon them pursuant to existing and future
financings.
Factors Relating to Brazil
The Brazilian government has often intervened in Brazil's economy.
Over the past 15 years, the Brazilian Government has intervened on many
occasions to change monetary, credit, tariff and other policies in order to
influence the course of Brazil's economy. Examples of such interventions
include:
o controlling wages and prices;
o freezing bank accounts;
o imposing capital controls; and
o inhibiting exports from Brazil.
The Brazilian Government has in the recent past taken actions to slow or
halt economic growth in order to control inflation and to reduce the budget
deficits. It may take further similar actions in the future.
On July 1, 1994 the Brazilian Government implemented an economic
stabilization plan known as the Real Plan to reduce the size of Brazil's federal
budget deficit, lower inflation and introduce a new, stable currency, the real.
Through the Real Plan, the Government intended to reduce certain public
expenditures, collect liabilities owed to the Government and increase tax
revenues. Following implementation of the Real Plan, the rate of inflation in
Brazil, as measured by the Indice Geral de Precos - Disponibilidade Interna (the
general price index - internal availability or "IGP-DI") fell from 1,093.8% for
1994 to 1.71% for 1998. The IGP-DI increased to 19.98% in 1999 following the
devaluation of the real in January 1999, decreased to 9.81% in 2000 and reached
10.40% in 2001. The Real Plan does
7
not contain any wage or price controls. The Real Plan was adopted when President
Fernando Henrique Cardoso was serving as Finance Minister. Since his election as
the President, Mr. Cardoso's government has supported the Real Plan.
In October 1998, President Cardoso was re-elected for an additional four
year term, expiring in January 2003. Following re-election his government
proposed a Fiscal Stability Program. The Program includes cuts in discretionary
governmental spending, increases in government revenues and savings through
social security reforms. Through this Program, the Government intends to
stabilize the ratio of debt to gross domestic product ("GDP") and thus create a
more favorable economic environment. Implementing certain measures under the
Fiscal Stability Program has proved to be difficult due to the considerable
legislative action required to do so. There can be no assurance that the
Brazilian Government will be able to continue passing measures necessary to
successfully implement the Real Plan.
In October 2002, Brazilians will elect a new president. As of the date of
this Annual Report, the front-running presidential candidate is Luiz Inacio Lula
da Silva, a workers' party candidate that has in the past voiced opposition to
market reforms and the repayment of Brazil's external debt. No assurance can be
given that, if elected, Mr. da Silva will not implement policies that will
negatively affect Brazil's markets and economy.
Devaluations of the Brazilian real may negatively affect the financial
results of the Company.
The exchange rate between the real and the U.S. dollar, the relative rates
of real devaluation and the prevailing rates of inflation have affected the
Company's financial results and may continue to do so in the future.
After its introduction on July 1, 1994, the real initially appreciated
against the U.S. dollar, and concerns arose about the overvaluation of the real
relative to the U.S. dollar. To address such concerns and to avoid a rapid
devaluation of the real, in March 1995 the Brazilian Government established a
trading band for the real against the U.S. dollar with a view to a gradual
devaluation of the real. As a result of economic instability in Brazil in late
1998 and early 1999, the trading band was abandoned, resulting in a significant
devaluation of the real against the U.S. dollar. Since January 1, 1999, the
real/U.S. dollar exchange rate has ranged from a low of R$1.21 per U.S.$1.00 on
January 4, 1999 to a high of R$2.80 per U.S.$1.00 on September 21, 2001. On
December 31, 2001, the rate was R$1.96 per U.S.$1.00. There can be no assurance
that the real will maintain its current value. It is uncertain whether the
Brazilian Government will reimplement the trading band policy or any other type
of currency exchange control mechanism. See "Additional Information - Exchange
Controls."
Devaluations of the real relative to the U.S. dollar also create
additional inflationary pressures in Brazil that may negatively affect the
Company. In addition, a significant devaluation generally results in a
curtailment of access to foreign financial markets for the Company and can lead
to government intervention, including recessionary government policies.
The purchase and sale of foreign currency in Brazil is subject to
governmental control.
The purchase and sale of foreign currency in Brazil is subject to
governmental control. Since 1983, the Central Bank has centralized certain
payments of principal on external obligations. The Central Bank also assumed
responsibility for the external obligations in connection with the formal
restructuring of Brazilian sovereign debt.
It is uncertain whether in the future the Brazilian Government will
institute a more restrictive exchange control policy. Such a policy could affect
the ability of Brazilian debtors (including the Company) to make payments
outside of Brazil to meet foreign currency obligations under foreign
currency-denominated liabilities, including the Senior Notes. Many factors
beyond the control of the Company may affect the likelihood of the Government's
imposition of such restrictions at any time. Among such factors are:
o the extent of Brazil's foreign currency reserves;
o the availability of sufficient foreign exchange on the date a
payment is due;
o the size of Brazil's debt service burden relative to the economy as
a whole;
o Brazil's policy towards the International Monetary Fund; and
o political constraints to which Brazil may be subject.
8
The Government has not imposed any restrictions on payments by Brazilian
issuers in respect of securities issued in the international capital markets to
date. However, it may choose to impose such restrictions in the future if
necessary. See Item 10, "Additional Information - Exchange Controls."
Brazil has experienced periods of extreme inflation.
Until mid-1994 Brazil experienced extremely high rates of inflation. The
inflation contributed materially to economic uncertainty in Brazil and to
heightened volatility in the Brazilian securities markets.
After the introduction of the Real Plan, the rate of inflation as measured
by the IGP-DI fell steadily to 1.71% in 1998. Inflation increased to 19.98% in
1999 as a result of the devaluation of the real in January 1999, decreased to
9.81% for 2000 and reached 10.40% in 2001. It is uncertain whether future
actions of the Government (including any further action to adjust the value of
the Brazilian currency) will cause inflation at a higher rate those experienced
since the introduction of the Real Plan or whether any increase in inflation
will have a material adverse effect on the results of operations and financial
condition of the Company.
The availability of credit in the Brazilian market may be limited by
external events.
A number of developments or conditions have significantly affected the
availability of credit in the Brazilian economy. External events have from time
to time resulted in considerable outflows of funds and declines in the amount of
foreign currency invested in Brazil. Such events include the devaluation of the
Mexican peso in December 1994, the Asian economic crisis of 1997, the Russian
currency crisis of 1998, the currency instability that Brazil faced in 1999, and
the ongoing recession in Argentina. To defend the real during such events and to
control inflation, the Government has maintained a tight monetary policy, with
associated high interest rates, and has constrained the growth of credit. It is
uncertain whether these disruptions in the Brazilian economy will adversely
affect the Company's financial condition or results of operations.
Brazil must with comply with performance guidelines under an IMF financial
package.
As a result of economic uncertainty and significant outflows of capital in
late 1998, the Brazilian Government concluded an agreement with the IMF in
November 1998 on a U.S.$41.5 billion aid package. The first tranche of the
package was disbursed in December 1998.
The agreement reached between the IMF and the Government, contained in a
Technical Memorandum of Understanding, sets out the guidelines and the targets
(including fiscal, monetary and external borrowing limits) in respect of the
Brazilian economy. The Memorandum of Understanding is subject to periodic
review. In the event that the goals contained in the Memorandum of Understanding
are not achieved, the IMF automatically suspends the next tranche due under the
loan until a new set of guidelines has been agreed.
As a result of continuing Brazilian economic uncertainty and the
Government's decision to adopt a floating exchange rate regime in January 1999,
the Government and the IMF negotiated a new set of guidelines prior to the
release of the second tranche and formally reached an agreement in March 1999.
The IMF reviewed and approved the Memorandum of Understanding for the first time
on July 2, 1999. The guidelines of the Memorandum of Understanding were amended
on December 2, 1999. Brazil has successfully completed the first series of
reviews under the agreement. There is no assurance, however, that the Brazilian
Government will be able to maintain this performance in the future. Failure to
do so may lead to adverse effects on the Brazilian economy and on the Company's
financial condition or results of operations.
Brazil has experienced an energy crisis.
Brazil has recently experienced a crisis in its electric energy sector. As
a result, Brazilian industrial, commercial and residential customers in certain
regions experienced energy rationing, which negatively affected economic growth
for the country as a whole. The Company relies on electric energy to conduct its
operations, including the transmission of broadcast signals throughout its MMDS
and Cable systems and Internet services. Should it reoccur,
9
future electricity rationing could adversely affect the principal activities of
the Company because of shortages or price increases and, therefore, negatively
impact the business, results of operations and financial condition of the
Company.
10
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
TVA is a major pay television operator in Brazil and one of the country's
primary pay television programming distributors. In 1989, TVA was the first to
provide pay television services in Brazil. With more than 359,000 direct
subscribers, TVA offers pay television services utilizing cable and MMDS
distribution technologies. Through owned and affiliated pay television
operators, TVA programming reaches more than 569,000 pay television households.
TVA is a majority-owned subsidiary of Abril S.A. ("Abril"). TVA's other
beneficial shareholders are Falcon International Communications (Bermuda) L.P.
("Falcon International"), The Hearst Corporation ("Hearst"), ABC, Inc. ("ABC")
and JP Morgan Partners LLC ("JPM").
TVA conducts its pay television operations through two owned operating
systems: TVA Sistema de Televisao S.A. ("TVA Sistema") and TVA Sul Parana Ltda.
("TVA Sul") (together, the "Owned Systems"). Through the MMDS and Cable systems
of the Owned Systems, TVA serves six cities with a combined population of
approximately 31 million, including three of the seven largest cities in Brazil:
Sao Paulo (population of 10.4 million), Rio de Janeiro (population of 5.9
million) and Curitiba (population of 1.6 million). TVA also holds minority
interests in each of Canbras TVA Cabo Ltda. and TV Cabo Santa Branca Comercio
Ltda. (collectively, "Canbras TVA") and TV Filme, Inc. ("TV Filme" and, together
with Canbras TVA, the "Operating Ventures"), which together provide pay
television services to an additional 22 cities with a total population of 12.5
million.
In addition, TVA provides high speed Internet services in the Sao Paulo
and Rio de Janeiro metropolitan areas through TVA Sistema and Rede Ajato Ltda.
("Rede Ajato"), a wholly owned subsidiary. TVA Sistema's "Acesso" service offers
high speed broadband internet access to pay television subscribers utilizing
TVA's Cable and MMDS technologies. In addition, Rede Ajato's "Ajato" service,
the first broadband high speed internet service provider created in Brazil, is a
Portuguese language content and service portal offering multimedia, real video
and music and video conferencing services, among others. TVA is actively
pursuing alliances with content and e-commerce providers in order to provide a
diverse and competitive portfolio of services through Ajato.
Until July 1999, TVA, through Galaxy Brasil Ltda. ("Galaxy Brasil"), was
the exclusive provider in Brazil of DIRECTV, a digital direct broadcast
satellite Ku-Band service. Galaxy Brasil receives programming, scheduling and
related services for DIRECTV from Galaxy Latin America, LLC ("GLA"), in which
TVA held a 10% equity interest. The current owners of GLA are a unit of Hughes
Electronics Corporation and a member of the Cisneros Group. Through local
operating companies such as Galaxy Brasil, GLA provides DIRECTV service
throughout much of Latin America and the Caribbean. TVA, through TVA Banda C
Ltda. ("TVA Banda C"), also provided digital C-Band television service.
In July 1999 TVA consummated the sale of Galaxy Brasil, TVA Banda C and
certain assets related thereto, including its interest in GLA, to GLA and the
members thereof (such sale, the "DBS Sale"). The net cash proceeds to TVA at the
closing of the DBS Sale were approximately U.S.$177.6 million. The total
consideration received by TVA was comprised of the net cash proceeds received at
closing, a promissory note in the principal amount of U.S.$25.5 million (which
was subsequently paid), the assumption of certain dollar and real-denominated
indebtedness and the release of certain guarantees given by TVA and one of its
subsidiaries in respect of certain obligations of Galaxy Brasil.
After the consummation of the DBS Sale, TVA significantly lowered its
total indebtedness, which decreased from U.S.$392.1 million as of December 31,
1998 to U.S.$223.9 million as of December 31, 2000. TVA also significantly
reduced its indebtedness in 2001 through the capitalization of loans in the
aggregate principal amount of $123,159 made to TVA under the Abril Credit
Facility. As a result of these measures, TVA's indebtedness was reduced to
U.S.$77.1 million as of December 31, 2001. See Item 5, "Operating and Financial
Review and Prospects--Liquidity and Capital Resources."
Since 1999 the Company has also concluded the sale of its interests in
programming ventures in order to focus its activities primarily on the
distribution of programming through Cable and MMDS systems. In November 1999,
TVA concluded the sale of its 50% equity interest in ESPN Brasil, the provider
of ESPN Brasil programming, to ESPN Brazil, Inc., which previously held the
remaining 50% equity interest. ESPN Brazil, Inc. is indirectly held by ABC (80%)
and
11
Hearst (20%). In July 2000, TVA concluded the sale of its 24.0% equity interest
in HBO Brasil Partners, the provider of HBO Brasil programming, to the remaining
holders of HBO Brasil Partners. Finally, in November 2000, the Company concluded
the sale of its Eurochannel operations to Multithematiques, a European
programming operator. In consideration for the sale of these programming-related
assets, the Company received net proceeds of approximately $54.9 million.
During the three years ended December 31, 2001, the Company incurred
capital expenditures of approximately $83.3 million, primarily in connection
with the purchase of reception equipment, converters for installation throughout
its Cable and MMDS systems in Brazil, other equipment required to upgrade its
Cable and MMDS networks and, most recently, the development of its internet
operations. Management estimates that $15,404 and $10,971 of capital
expenditures will be required in 2002 and 2003, respectively, principally in
connection with the purchase of materials and equipment, Cable and MMDS network
upgrades and the development of its internet operations.
Tevecap S.A. was founded on June 28, 1991 as a corporation of unlimited
duration under the laws of the Federative Republic of Brazil. Tevecap's
registered office is located at Av. das Nacoes Unidas, 7221 - 7(0)andar, Sao
Paulo, 05425-902 SP, Brazil (telephone: +55-11-3037-4690).
B. Business Overview
Business Strategy
Management of the Company has determined that the concentration by the
Company on its core Cable and MMDS businesses offers the Company the best
opportunity to achieve long term profitability. In addition, the Company is
taking advantage of technological developments to use its Cable and MMDS
infrastructure to provide high speed data transmission, interactive services and
other telecommunications services over its Cable and MMDS systems and to take
advantage of possible deregulation and the growing demand for these services in
Brazil. The Company is expanding its Cable systems with fiber optic and coaxial
cable capable of being upgraded to provide such enhanced services, and, through
Ajato and Acesso, has already begun providing high-speed internet services
through its Cable network in the Sao Paulo and Rio de Janeiro metropolitan
areas. The Company also continues to explore the development of digital
compression of MMDS signals.
In addition, the Company seeks to increase its penetration in existing
markets by: (i) expanding the range of TVA's Cable systems by extending its
fiber optic and coaxial cable network and by seeking pre-wiring arrangements
with residential housing developers, (ii) improving the signal quality and
coverage of TVA's MMDS systems by using signal repeater technology and (iii)
maximizing penetration by offering tiered subscription options and developing
programming packages to appeal to more households. TVA's programming, unlike
that of its primary competitors, is provided through encoded signals and
addressable converters, thereby permitting the creation of a variety of
programming packages. Tiered programming packages allow subscribers a greater
number of choices in terms of pricing and types of programming. The Company
expects that these tiered programming packages will attract new subscribers,
including members of the C class, as well as retain current subscribers, thereby
reducing Churn.
12
Programming Distribution and Markets
The following table sets forth information regarding the markets in which
TVA operates pay television systems and distributes programming, as of December
31, 2001:
Pay Television
Average Revenue Programming
Service Launch TV Class ABC per Month per Channels
Date Homes(a) TV Homes(a) Subscribers Subscriber Offered
-------------- -------- ----------- ----------- --------------- --------------
Owned Systems:
MMDS
TVA Sistema
Sao Paulo........ September 1991 4,501,036 3,128,356 53,909 $22.82 28
Rio de Janeiro... March 1992 2,829,744 1,470,121 98,044 22.90 28
TVA Sul
Curitiba......... March 1992 547,953 345,208 10,474 19.57 15
Cable(b)
TVA Sistema
Sao Paulo........ October 1994 2,823,337 2,017,078 150,309 25.01 57
TVA Sul
Curitiba......... January 1995 407,551 227,221 22,794 23.39 51
Camboriu......... June 1996 13,497 9,111 9,308 21.01 49
Foz do Iguacu.... June 1996 55,244 30,663 8,237 17.03 51
Florianopolis.... September 1996 81,047 55,750 6,207 22.01 49
Total MMDS and Cable
Subscribers......... -- -- -- 359,282 --
Subscribers Awaiting
Installation........ -- -- -- 307 -- --
Total
Subscribers-Owned
Systems............. -- -- -- 359,589 -- --
=======
Households Receiving
TVA Programming
Owned Systems......... -- -- -- 359,589 -- --
-------
Operating Ventures:
MMDS
TV Filme, Inc.
Brasilia......... July 1993 447,465 286,987 35,960 28.29
Goiania.......... December 1994 272,255 147,786 9,010 22.83
Belem............ December 1994 261,246 130,243 14,234 30.96
Campina Grande... August 1999 85,748 24,342 3,946 16.63
Cable
Canbras TVA & Parana
Fourteen cities(c) April 1996 767,054 527,254 147,256 20.40
-------
Total-Operating -- -- -- 210,406 -- --
=======
Total................. -- -- -- 569,995 -- --
=======
- ----------
(a) This data is based on information provided by Pay TV Survey and IBGE.
(b) The Company's Cable Systems in Sao Paulo, Curitiba, Camboriu, Foz do
Iguacu and Florianopolis had approximately 721,069, 201,615, 19,890,
18,060 and 29,822 Homes Passed, respectively, as of December 31, 2001.
(c) Canbras TVA serves ten cities in Sao Paulo State (Santo Andre, Sao
Bernardo, Mogi das Cruzes, Santa Branca, Sao Vicente, Praia Grande,
Santos, Cubatao, Guaruja and Bertioga), and four cities in Parana state
(Cianorte, Guarapuava, Cascavel and Ponta Grossa).
13
Brazilian Pay Television Market
Brazil is the largest television and video market in Latin America with an
estimated 39.5 million TV Homes which, as of December 31, 2001, watched on
average approximately 2.5 hours of television per day. Approximately 4.7 million
television sets and 1.5 million VCR and DVD units were sold in Brazil during
2001. The pay television industry in Brazil began in 1989 with the commencement
by TVA of UHF service in Sao Paulo. As of December 31, 2001, there were an
estimated 3.6 million pay television subscribers, representing approximately
9.0% of Brazilian TV Homes. By comparison, as of December 31, 2001, 65% of TV
Homes in Argentina, 16% of TV Homes in Mexico and 88% of TV Homes in the United
States of America subscribed to pay television. Management believes that the
number of pay television subscribers in Brazil will continue to grow as pay
television reaches more households both through the expansion of existing and
new MMDS and Cable systems and through development of nationwide Ku-Band
transmission system.
Distribution Operating Systems
TVA and the Operating Ventures distribute programming through Cable and
MMDS distribution technologies. The availability of these two distribution
technologies enables TVA to exploit the income and population characteristics,
topography and competitive dynamics of each of its markets.
MMDS
TVA operates Brazil's largest MMDS network, and with the Operating
Ventures, serves the country's major metropolitan areas. MMDS systems are
typically easier to deploy and require relatively little capital investment for
construction and maintenance as compared to Cable systems. Programming is
transmitted by signals through the air from microwave transmitters to a small
receiving antenna located at a subscriber's home or dwelling unit. At the
subscriber's location, the microwave signals are converted to frequencies that
can pass through a conventional coaxial cable into a decoder located near a
television set. All of TVA's MMDS systems use addressable converters, which
permit TVA to offer tiered pricing options that are expected to attract new
customers, retain existing customers and reduce Churn. In accordance with
Brazilian regulations, each MMDS license allows an MMDS operator to provide
service to households in a circular area within a radius of up to 50 kilometers,
depending on the technical capability of the operator. However, tall buildings
and other tall structures may block reception of an MMDS signal. MMDS is being
used in other emerging pay television markets such as Venezuela, Hong Kong and
Mexico, where Cable has a strong incumbent position.
TVA owns four MMDS licenses and operates MMDS systems in Sao Paulo, Rio de
Janeiro and Curitiba, which have an aggregate population of approximately 17.9
million. TVA serves 162,427 MMDS subscribers in these three cities. TVA's MMDS
systems offer between 15 and 28 channels of programming. TVA also holds
interests in other MMDS licenses through TV Filme, an Operating Venture which
operates MMDS systems in Brasilia, Goiania, Belem and Campina Grande and which
had 63,150 MMDS subscribers as of December 31, 2001. TV Filme also has licenses
to operate in eight other cities, including Belo Horizonte and Vitoria.
In 2000 ANATEL authorized TVA to utilize, under TVA's MMDS licenses, the
frequencies corresponding to the return channels of its MMDS systems. TVA
presently uses these frequencies, which range from 2170 to 2182 MHz, to provide
bi-directional broadband Internet services.
Cable
TVA has recently emphasized the strategic deployment of Cable service and
currently operates Cable systems in Sao Paulo, Curitiba and three other cities
in southern Brazil (Camboriu, Foz do Iguacu and Florianopolis). Cable service
involves a broad band network employing radio frequency transmission through
coaxial and/or fiber optic cable. Cable systems consist of four major parts: a
headend, a distribution network, a subscriber network and a house terminal. The
programming is collected from the headend, then processed and fed into the
distribution path (trunk and distribution cable), which consists of coaxial
and/or fiber optic cables. The signal is then fed into a subscriber network that
is either located in an apartment building or a subscriber's home. Most of TVA's
systems are constructed with either 750 MHz or 550 MHz bandwidth capacity, the
latter of which is readily upgradeable to 750 MHz bandwidth capacity. TVA's
14
systems in Curitiba, Camboriu and Foz do Iguacu are being upgraded to 750 MHz
bandwidth capacity. TVA's system in Florianopolis is being constructed to 550
MHz bandwidth capacity. This technology enables TVA to provide interactive
services, including internet service and, in the future, telecommunications. TVA
recently launched its Ajato high-speed internet service through its Cable system
to subscribers in Sao Paulo. In addition, TVA's Cable systems generally use
addressable converters, which allow the provision of pay-per-view services and
enable TVA to upgrade, downgrade or disconnect a subscriber's service from the
headend on short notice.
TVA, through TVA Sistema and TVA Sul, owns six Cable licenses and operates
Cable systems in Sao Paulo, Curitiba (where TVA originally owned three licenses
that were later merged into one license), Camboriu, Florianopolis and Foz do
Iguacu, which have an aggregate population of approximately 12.7 million and
196,855 subscribers. As of December 31, 2001, TVA had deployed approximately
5,233 kilometers of its Cable network, including 1,289 kilometers of fiber optic
cable, consisting of a 1,154 kilometer fiber optic loop in Sao Paulo and a 135
kilometer fiber optic network serving Curitiba, Camboriu, and Foz do Iguacu. TVA
is also upgrading or constructing the Cable systems in Curitiba, Camboriu, Foz
do Iguacu and Florianopolis. As a result of this build-out, as of December 31,
2001, TVA Cable systems passed 721,069 homes in Sao Paulo, 201,615 homes in
Curitiba and a total of 990,456 homes throughout all of TVA's Cable systems. As
of December 31, 2001, Canbras TVA, an Operating Venture 36% owned by TVA, had an
existing Cable network of 2,838 kilometers, with 549,898 Homes Passed and
147,256 subscribers. Canbras TVA is constructing Cable networks in ten cities in
the greater Sao Paulo area and four cities in the state of Parana with a
combined population of over 3.1 million. TVA and Canbras TVA currently offer
between 48 and 57 analog channels of programming (including off-air channels) on
their Cable systems, depending on the market, and have the capability of
offering up to 77 analog channels using up to 550 MHz and 110 analog channels
using up to 750 MHz. During the twelve months ended December 31, 2001, TVA and
Canbras TVA averaged approximately 1,571 and 1,495 net new Cable subscribers per
month, respectively.
Internet
TVA, through TVA Sistema and Rede Ajato, provides high speed Internet
services in the Sao Paulo and Rio de Janeiro metropolitan areas. TVA Sistema's
"Acesso" service offers high speed broadband Internet access to pay television
subscribers utilizing TVA's Cable network. TVA provides bi-directional Internet
services through both its Cable and MMDS systems.
TVA's "Ajato" service, provided through Rede Ajato, was the first
broadband high speed Internet service provider created in Brazil. Ajato is a
Portuguese language content and service portal offering multimedia, real video
and music and video conferencing services, among others. TVA is actively
pursuing alliances with content and e-commerce providers in order to provide a
diverse and competitive portfolio of services through Ajato.
As a result of certain regulatory requirements, TVA has entered into
agreements with other major Internet access providers (including Virtua, a Globo
affiliate, and Speedy, a Telefonica affiliate) and Internet service providers
(including Globo.com, a Globo affiliate, and Terra, a Telefonica affiliate)
pursuant to which Ajato's services are offered through these access providers
and the services of these service providers are offered through Acesso.
As of December 31, 2001, Ajato and Acesso had 10,283 and 9,657 subscribers
(including backlog), respectively. Ajato and Acesso subscribers currently pay a
monthly subscription fee of R$36 and R$33, respectively, for unlimited internet
service.
The Owned Systems
TVA Sistema and TVA Sul operate TVA's MMDS and Cable businesses. TVA
Sistema operates TVA's MMDS operations in Sao Paulo and Rio de Janeiro and Cable
operations in Sao Paulo. TVA Sistema also operates the business of Acesso, TVA's
Internet access provider. TVA Sul operates TVA's MMDS operations in Curitiba and
Cable operations in Curitiba, Camboriu, Foz do Iguacu and Florianopolis.
TVA holds a 100% equity interest in TVA Sistema and in TVA Sul. TVA Sul,
in turn, holds a 60% equity interest in CCS-Camboriu Cable System
Telecomunicacoes Ltda. ("CCS Camboriu"), the operating company for TVA Sul's
services in Camboriu, and an unaffiliated third party holds the remaining 40%.
15
The Operating Ventures
The Operating Ventures operate Cable (Canbras TVA) and MMDS (TV Filme)
systems. TVA holds a 36% equity interest (and 51% of the total voting capital)
in each of the Canbras TVA companies (Canbras TVA Cabo, TV Cabo Santa Branca and
Canbras Parana). Canbras Participacoes Ltda., a Brazilian company
("Canbras-Par") holds the remaining interests in Canbras TVA. Canbras-Par is an
affiliate of Canbras Holdings Ltd. and Canbras Communications Corp., a
publicly-traded Canadian company, which are affiliates of Bell Canada
International, Inc., an affiliate of BCE Inc., Canada's largest
telecommunications group. The Association Agreement, dated June 14, 1995, among
TVA, TVA Sistema, the Canbras TVA companies, Canbras and Canbras Participacoes
Ltda. (the "Canbras Association Agreement") provides for each of the Canbras TVA
companies to be governed by a management committee of three members, one of
which TVA has the right to designate. In addition, TVA has agreed to supply to
Canbras TVA all programming regularly supplied to the Owned Systems at "most
favored prices" and other terms at which programming is provided to the Owned
Systems or to third parties in arm's-length transactions. TVA agreed to grant to
Canbras-Par a "right of first refusal" to participate in Cable licenses that TVA
may obtain, directly or indirectly, and Canbras-Par granted to TVA a similar
"right of first refusal" to participate in Cable licenses acquired by
Canbras-Par. The term of the Canbras Association Agreement is for so long as
Canbras-Par or its assignee owns shares "in companies which have the objective
of engaging in the cable TV business." The Canbras Association Agreement does
not specify the terms and conditions on which any co-investments in Cable
licenses are to be made, and such terms and conditions have been negotiated in
good faith, on a case-by-case basis, in connection with any future cable license
investments.
Prior to July 2000, TVA held a 14.7% equity interest in TV Filme. The
remaining interests were held by Warburg, Pincus Investors, L.P., which held a
38.8% equity interest; members of the Lins family, Brazilian nationals, who held
a 16.2% equity interest; public shareholders, who held a 28.15% equity interest;
and certain individuals with a combined 2.15% equity interest (on July 29, 1996,
TV Filme completed a public offering of 2.5 million shares of its common stock
in the United States at an initial price of U.S.$10.00 per share). In August
1999, TV Filme entered into an agreement with a committee representing a
majority of the holders of TV Filme's 12.875% Notes due 2004 pursuant to which
these noteholders would receive (i) a U.S.$25 million cash payment, (ii) U.S.$35
million in new five-year 12% secured notes and (iii) 80% of the new common
shares of the reorganized company. This agreement received court approval under
Charter 11 of the U.S. bankruptcy code in April 2000 and was implemented in July
2000, following approval from ANATEL and the Central Bank of Brazil. Following
implementation of the reorganization plan, TVA's equity interest in TV Filme was
reduced to approximately 0.7%.
Programming
TVA, through its MMDS and Cable systems, currently provides a programming
package consisting of 15 to 57 television channels. TVA programming emphasizes
sports, movies, children's programming and news with a secondary emphasis on
general entertainment.
With respect to MMDS and Cable service in TVA's markets, TVA is currently
the sole provider of HBO Brasil, HBO Brasil 2, Cinemax, Cinemax Prime, Disney
Channel Brasil, E! Entertainment Television, Mundo, BandNews, Eurochannel, Film
and Arts, Locomotion, NHK and ART.
In addition, TVA has entered into a number of programming agreements with
other international programming providers. For example, TVA has entered into
agreements with Turner Broadcasting Systems Latin America Inc. (Cartoon Network,
TNT, CNN International, CNN Espanol), Fox Latin American Channel Inc. (Fox Latin
America, Fox Kids), Discovery Latin America (People & Arts, Discovery Brasil,
Discovery Kids) and the Disney Channel.
TVA currently offers subscribers the following channels, among others:
Movies and Series
HBO Brasil is the dominant first-run pay television movie channel in
Brazil. HBO Brasil airs 24 hours a day, offering an average of 12 different
films per day with limited commercial slots. All films are either subtitled or
dubbed into Portuguese. In the case of dubbed versions, viewers can listen to
the original soundtrack on an SAP (second audio program) channel. TVA also
offers HBO Brasil 2, transmitting HBO Brasil with a six hour time shift.
16
AXN is a films and series channel with emphasis on action, adventure,
extreme sports and reality shows.
Cinemax is a premium 24-hour movie channel with a film library
complementary to that of HBO Brasil. Cinemax features a different variety of
movie each day of the week.
Cinemax Prime is a 24-hour movie channel offering classic movies,
"making-of" features and other award-winning movies.
Disney Channel offers children's and family-oriented movies,
locally-produced live shows, series, cartoons and specials in Portuguese.
Eurochannel offers subscribers programs from major European programming
distributors, such us Canal +, BBC, Channel 4, TF1, France 2/3, Europe Images
and Gaumont. Eurochannel also offers news, series, mini-series, documentaries,
music and variety shows.
Film and Arts is an arts and movie channel, following the same concept as
the U.S. version of the Bravo channel, showing high quality, cultural events,
such as classical music, jazz, opera, ballet and European movies.
Fox presents movies, as well as programs from the 2,000 titles in the
library of Twentieth Century Fox Television International ("Fox"). Fox also
presents American television series, such as L.A. Law, M*A*S*H, and The
Simpsons, among many others. TVA also offers Fox Kids, a 24-hour channel
featuring the best of Fox programming for children.
Hallmark features mainly original TV movies.
Sony Entertainment is primarily a comedy channel, produced by Sony
Pictures Entertainment, Inc., exhibiting series such as Friends, Seinfeld and
Mad About You.
TNT is a movie channel that offers the Turner Network Television movie
collection, including over 5,000 classic movie titles from Metro Goldwyn Mayer,
Inc. pursuant to a non-exclusive agreement with Turner International, Inc. In
addition, TNT airs children's programming, documentaries and sporting events.
The movies presented by TNT are broadcast in stereo sound and subtitled or
dubbed in Portuguese or Spanish. In the case of dubbed versions, viewers can
listen to the original soundtrack on a SAP channel.
Warner is a family entertainment channel, with new and classic cartoons,
children's programs, situation comedies, movies and series.
Sports
ESPN Brasil, a popular sports channel, provides coverage of Brazilian
soccer games and other Brazilian and international sports entertainment
programs, mixed with programming from ESPN2.
ESPN International is the second sports channel offered by TVA. ESPN
International offers a number of different sporting events, which include auto
racing, National Football League games, professional tennis matches, Major
League Baseball games, and National Basketball Association games. News
BandNews is the first Brazilian headline news program. Produced locally by
TV Band, BandNews presents news 24 hours per day in 30 minute blocks, featuring
the most recent events and relevant news in Brazil and abroad.
CNN International features news and information programming, offering
international news coverage concerning politics, business, financial and
economic developments, 24 hours a day.
CNN Espanol is the Spanish version of CNN International.
17
Educational Programming
Discovery Brasil is comprised of programming shown on the U.S. Discovery
Channel, based on topics in the areas of nature, science and technology,
history, adventure and world cultures.
Mundo presents 24 hours per day of documentaries, biographies, mini-series
and great moments in sports, music and history, including selected programming
from the History Channel.
People and Arts is a 24-hour channel presenting documentaries about arts,
personalities and cultures from different countries around the world.
Music and Entertainment
E! Entertainment Television presents 24 hours per day of reports regarding
movies, television, fashion and the arts.
MTV Brasil is a 24-hour channel produced by MTV Brasil Ltda., a joint
venture company owned by Abril and an indirect subsidiary of Viacom
International (Netherlands B.V.). MTV Brasil is entirely produced in Brazil in
Portuguese. MTV Brasil has licensing agreements with the MTV Network, a division
of Viacom International, and transmits a combination of music and other video
clips, cartoons and local programming.
Children's Programming
Cartoon Network is an animated cartoon channel targeted to children that
offers programs such as The Flintstones, The Jetsons, The Smurfs, Yogi Bear and
other classic series.
Discovery Kids is a 24-hour channel featuring the best of Discovery
programming for children.
Fox Kids is a 24-hour channel featuring the best of Fox programming for
children.
Locomotion is an animation channel with programming targeted to
adolescents and adults, such as Dr. Keds and South Park.
Nickelodeon is a 24-hour channel for children offering programs such as
Rugrats and Bananas in Pijamas.
Ethnic Programming
ART features programming directed at Brazil's Arab community, including
news, sports, films entertainment programs and other programs from Lebanese
television.
Deutsche Welle features programming in German, English and Spanish for the
German community in Brazil.
NHK offers programming in Japanese for Brazil's Japanese community.
RAI offers programming in Italian for Brazil's Italian community.
RTPi, Radiotelevisao Portuguesa Internacional, is a Portuguese state-owned
general entertainment channel produced and assembled in Portugal, airing music
events, talk shows, movies, news and documentaries, exclusive to TVA.
Operations
Marketing. TVA periodically conducts marketing surveys to gauge consumer
preferences and evaluate new and existing markets. TVA also frequently evaluates
the demographics of the subscribers to its programming, seeking to provide
programming most in demand. In each market, TVA's marketing staff typically
applies one or more of the
18
following programs to attract subscribers: (i) extensive marketing tied to
regional events such as soccer matches, (ii) neighborhood promotional events
featuring large screen broadcasts of its channel offerings, (iii) direct
mailings, (iv) telemarketing, (v) television, billboard, magazine and newspaper
advertisements, (vi) pre-wiring arrangements with residential housing developers
and (vii) other promotional marketing activities, including referral programs
and promotional gifts.
Installation. The installation package delivered to a new subscriber
depends upon the type of programming delivery service chosen by the subscriber.
The MMDS installation package features a standard rooftop mount linked to an
antenna and related equipment, including a decoder, located at the subscriber's
location. Cable service requires the installation of a cable line and a decoder
at the subscriber's dwelling. Once a new subscriber has requested service, the
time a subscriber waits for the commencement of service depends on several
factors, including type of service, whether the subscriber has access to Cable,
whether the subscriber is in a single family home or multiple dwelling unit and
whether the topography of the surrounding area makes MMDS service viable. TVA
provides installation service to subscribers, either with its own personnel or
through local subcontractors. In approximately 80% of all cases, TVA installs
its service and begins transmitting programming on the same day in which
subscription orders are received.
Programming Facilities. Programming equipment is used to prepare the
programming material for transmission via TVA's MMDS and Cable systems. The
programming equipment inserts commercial or promotional material, if
appropriate, monitors the quality of the picture and sound, and delivers the
material to the multiplexing system. For programming delivered to TVA as taped
material, the programming equipment also compiles the various programming
segments, inserting commercial and promotional material.
Subscriber Service. Management believes that delivering high levels of
subscriber service in installation and maintenance enables it to maintain high
levels of subscriber satisfaction and to maximize subscriber retention. To this
end, TVA attempts to promptly schedule installations, provides a subscriber
service hotline in each of the metropolitan areas in which TVA operates,
attempts to promptly provide response repair service, and attempts to make
follow-up calls to new subscribers shortly after installation to ensure
subscriber satisfaction. TVA seeks to instill a subscriber service focus in all
its employees through ongoing training and has established an intra-company
electronic mail system to provide a forum for employees to exchange ideas
concerning ways to increase subscriber satisfaction. TVA also has various
employee bonus programs linked to measures of subscriber satisfaction. In
addition, in 2001 TVA completed the establishment of a centralized call center
in order to provide uniform and consistent customer service in connection with
all of its operations.
Management Information Systems and Billing. Management believes that TVA's
proprietary management information systems enable TVA to deliver superior
subscriber service, monitor subscriber payment patterns and facilitate the
efficient management of each of its operating systems. Management believes that
TVA's billing procedures are an integral part of its strategy to maintain high
levels of subscriber satisfaction and to maximize subscriber retention.
Subscribers have the option to select the day on which payment for that month's
service is due, out of ten possible dates each month, and pay their bills
through payment at a bank, deduction from checking account or with a credit
card.
Competition
General
TVA and the Operating Ventures compete with pay television service
providers using Cable, MMDS and DBS transmission technologies. TVA expects to
continue to face competition from a number of existing and future sources,
including potential competition as a result of new and developing technologies
and the easing of regulation in the pay television industry. TVA believes that
competition is and will continue to be primarily based upon program offerings,
customer satisfaction, quality of the system network and price. Since there is a
limited history of pay television services in Brazil, there can be no assurance
that, based on the potential size of the Brazilian pay television industry, the
pay television market will be able to sustain a number of competing pay
television providers. TVA and the Operating Ventures also compete with national
broadcast networks and regional and local broadcast stations.
MMDS and Cable Service
19
TVA competes with other major Cable and MMDS operators in each of its
principal markets. TVA's principal competitors are Cable and MMDS systems
operated by Net, which is controlled by Globo Par. Net operates Cable systems in
the metropolitan areas of Sao Paulo, Rio de Janeiro, Curitiba and Florianopolis.
In each of these areas, Net Cable systems have more subscribers than TVA's Cable
systems, although Management of TVA believes TVA has a higher share of
subscribers in areas of these markets where the competing Cable systems overlap.
Net also operates an MMDS system in Curitiba, although TVA is the MMDS market
leader in that metropolitan area, with a market share of 85%, as compared with
15% for Net's service. TVA also competes with the Cable system of TV Cidade in
the Rio de Janeiro metropolitan area. TV Cidade, owned by affiliates of SBT, TV
Band, Hicks Muse Furst & Tate and GE Capital. TV Cidade currently has a 4% share
of the Cable market in the Rio de Janeiro metropolitan area.
The systems operated by Net and TV Cidade offer a similar number of
channels of programming at prices comparable to those charged for TVA's MMDS and
Cable services. Each of these systems broadcasts programming purchased from TVA
as well as from other sources.
DBS Service
TVA also competes with providers of Ku-Band service in Brazil, principally
Net Sat and DIRECTV. Globo Par has a controlling interest in Net Sat, whose
other equity holders include News Corporation plc, a subsidiary of The News
Corporation Limited. Net Sat currently offers 110 audio and video channels of
programming (including pay-per-view channels), while DIRECTV currently offers
128 channels of audio and video programming, including 35 pay-per-view channels.
Off-Air Broadcast Television
Broadcasting services are currently available to substantially all of the
Brazilian population without payment of a subscription fee by six
privately-owned national broadcast television networks and a government-owned
national public television network. The six national broadcast television
networks and their local affiliates currently provide services to nearly all
Brazilian TV Homes without payment of a subscription fee. The national broadcast
television networks and local broadcast stations receive a significant portion
of their revenues from the sale of television advertising, which revenues are
based in part on the audience share and ratings for the networks' programs.
Programming offered by pay television providers, including TVA, directly
competes for audience share and ratings with the programming offered by
broadcast television networks as well as regional and local television
broadcasters. The six national broadcast television networks are Globo, SBT, TV
Band, Rede TV, TV Record and Gazeta. The national television networks utilize
one or more satellites to retransmit their signals to their local affiliates
throughout Brazil.
Regulatory Framework
The subscription television industry in Brazil is subject to regulation by
the Agencia Nacional de Telecomunicacoes ("ANATEL"), an independent federal
agency, pursuant to Law No. 9472/97 ("Law 9472"), Law No. 9295/96 ("Law 9295")
and Law No. 8977/95 ("Law 8977"). ANATEL is authorized to grant concessions for
MMDS, Cable, DBS, and UHF licenses.
MMDS Regulations
General. Law 9472 authorizes ANATEL, among other things, to issue, revoke,
modify and renew licenses within the spectrum available to MMDS systems, to
approve the assignments and transfer of control of such licenses, to approve the
location of channels that comprise MMDS systems, to regulate the kind,
configuration and operation of equipment used by MMDS systems, and to impose
certain other reporting requirements on channel license holders and MMDS
operators. The licensing and operation of MMDS channels are currently governed
by Decree No. 2196/97 ("Decree 2196"), Ordinance No. 254/97 (as amended by
Ordinance No. 319/97, "Ordinance 254") and Rule No. 002/Rev. 97 ("Rule 002").
Under these regulations, MMDS is defined as the special service of
telecommunication which uses microwaves to transmit codified signals to be
received in pre-established points on a contractual basis.
Licenses. ANATEL grants licenses and regulates the use of channels by MMDS
operators to transmit video programming, entertainment services and other
information. A maximum of 31 MMDS channels (constituting a
20
spectrum bandwidth of 186 MHz) may be authorized for use in an MMDS market.
While licenses are usually granted for the use of up to 16 channels, depending
on technical feasibility and the existence of competition, ANATEL can grant a
license for all 31 channels available in one specific area. If the license is
for 16 or more channels, at least two channels must be reserved for educational
and cultural programming. If the license involves 15 or fewer channels, there is
no obligation to reserve any channel for educational and cultural purposes. In
each of the Company's Sao Paulo and Rio de Janeiro markets, up to 31 MMDS
channels are available for MMDS (in addition to any local off-air VHF/UHF
channels which are offered).
An MMDS license is granted for a renewable period of 15 years. The
application for renewal of a license must be filed with ANATEL during the period
from 18 months before the end of the license term. To renew the license, the
license holder must (i) meet applicable legal and regulatory requirements, (ii)
have complied with all legal and contractual obligations during the term of such
license and (iii) meet certain technical and financial requirements.
Under the most recently promulgated provisions of Rule 002, each license
holder and its affiliates may be granted permission to operate MMDS systems in
different areas of Brazil, provided that no holder may be granted licenses for
(i) more than seven municipalities with a population equal to or exceeding
700,000 inhabitants and (ii) more than 12 municipalities with a population
between 300,000 and 700,000 inhabitants. The restrictions only apply to areas in
which the MMDS system operator (or an affiliate thereof) faces no competition
from other pay television services, excluding services that utilize a satellite
to transmit their signal. Rule 002 grants ANATEL full discretion to alter or
eliminate the restrictions. The term affiliate is defined by Rule 002 as any
legal entity that directly or indirectly holds at least 20% of the voting
capital. The Company currently controls five MMDS licenses in cities of more
than 700,000 inhabitants (Sao Paulo (2), Rio de Janeiro, Curitiba and Porto
Alegre), but in each such city TVA has at least one competitor. Prices for pay
television services may be freely established by the system operator, although
ANATEL may interfere in the event of abusive pricing. ANATEL may impose
penalties including fines, suspension or revocation of the license if the
license holder fails to comply with applicable regulations or becomes legally,
technically or financially unable to provide MMDS service. ANATEL also may
intervene to the extent operators engage in unfair practices intended to
eliminate competition.
ANATEL awards licenses to use MMDS channels based upon applications
demonstrating that the applicant is qualified to hold the license, that the
proposed market is viable and that the operation of the proposed channels will
not cause impermissible interference to other permitted channels. After ANATEL
determines that an application has met these requirements, it publishes a notice
requesting comments from all parties interested in providing the same services
in the same or a near area. Depending on the comments received, ANATEL may
decide to open a public bid for the service in that area, although it has not
done so in the past. In the case of a public bid, applicants would be evaluated
based on a number of factors including the applicant's proposed schedule for
implementing commercial operations, the applicant's commitment to local
programming and the extent to which the applicant provides free programming to
local cultural and educational institutions. Once an MMDS license application is
granted by ANATEL, the license holder must finalize construction and begin
operations within 12 months, which period may be extended by an additional 12
months.
In addition to qualifying under the application process described above, a
license holder must also demonstrate that its proposed signal does not violate
interference standards in the area of another MMDS channel license holder. To
this end, existing license holders are given a 30-day period in which to
ascertain and comment to ANATEL whether the new license holder's proposed signal
will interfere with existing signals. The area covered by the services is to a
radius of five to 50 kilometers around the transmission site, depending on the
technical capability of the operator.
Other Regulations. MMDS license holders are subject to regulation with
respect to the construction, marketing and lighting of transmission towers
pursuant to the Brazilian Aviation Code and certain local zoning regulations
affecting construction of towers and other facilities. There may also be
restrictions imposed by local authorities. The subscription television industry
also is subject to the Brazilian Consumer Code. The Consumer Code entitles the
purchasers of goods or services to certain rights, including the right to
discontinue a service and obtain a refund if the services are deemed to be of
low quality or not rendered adequately. For instance, in case of a suspension of
the transmission for a given period, the subscriber shall be entitled to a
discount on the monthly fees. Rule No. 002 contains certain provisions relating
to consumer rights, including a provision for mandatory discounts in the event
of interruption of service. The Company, as of December 31, 1998, had not been
required to repay any amounts or provide any
21
discounts due to interruptions of service. However, the Company does refund
prepaid installation service fees when the Company discovers such service is
unavailable for whatever reason.
Due to the regulated nature of the subscription television industry, the
adoption of new, or changes to existing, laws or regulations or the
interpretations thereof may impede the Company's growth and may otherwise have a
material adverse effect on the Company's results of operations and financial
condition.
Cable Regulation
General. Cable services in Brazil are licensed and regulated by ANATEL
pursuant to Law No. 8977/95 ("Law 8977"), Decree No. 2206/97 ("Decree 2206"),
which authorized the regulation of Cable Services, and Ordinance 256/97
("Ordinance 256"), which approved the Norma Complementar do Servico de TV a Cabo
regulating the granting of licenses for, and the operation of, Cable services.
Until Law 8977 was enacted in 1995, the Brazilian Cable industry had been
governed by two principal regulatory measures since its inception in 1989:
Ordinance No. 250, issued by the Ministry of Communications on December 13, 1989
("Ordinance 250"), and its successor, Ordinance No. 36, issued by the Ministry
of Communications on March 21, 1991 ("Ordinance 36").
Ordinance 250 regulated the distribution of television signals ("DISTV")
by physical means (i.e., by Cable) to end-users. DISTV services generally are
limited only to the reception and transmission of signals without any
interference by a DISTV operator with the signal content. Under Ordinance 250,
101 authorizations were granted by the Ministry of Communications to local
operators to commercially exploit DISTV services. Although Ordinance 250 did not
specifically address Cable services, a number of DISTV operators (including the
Company's Cable systems) began to offer Cable services based on DISTV
authorizations.
Licenses. Under Law 8977, a Cable operator must obtain a license from
ANATEL in order to provide Cable services in Brazil. All Cable licenses are
nonexclusive licenses to provide Cable services in a service area. Cable
licenses are granted by ANATEL for a period of 15 years and are renewable for
equal and successive periods. Renewal of the Cable license by ANATEL is
mandatory if the Cable system operator has (i) complied with the terms of the
license grant and applicable governmental regulations and (ii) agrees to meet
certain technical and economic requirements relating to the furnishing of
adequate service to subscribers, including system modernization standards.
Ordinance No. 256/97 ("Ordinance 256") imposes restrictions on the number
of areas that can be served by a Cable television system operator (or an
affiliate thereof). Pursuant to Ordinance 256, a Cable system operator (or an
affiliate thereof) may only hold licenses with respect to (i) a maximum of seven
areas with a population of 700,000 and above and (ii) a maximum of 12 areas with
a population of 300,000 or more and less than 700,000. The restrictions only
apply to areas in which the Cable system operator (or an affiliate thereof)
faces no competition from other pay television services, excluding services that
utilize a satellite to transmit their signal. Ordinance 256 grants ANATEL full
discretion to alter or eliminate the restrictions. The term affiliate is defined
by Ordinance 256 as any legal entity that directly or indirectly holds at least
20% of the voting capital of another legal entity or any of two legal entities
under common ownership of at least 20% of their respective voting capital. The
Company currently controls two Cable licenses in cities of more than 700,000
inhabitants (Sao Paulo and Curitiba), but in each such city TVA has at least one
competitor.
Generally, only legal entities that are headquartered in Brazil and that
have 51% of their voting capital by Brazilian-born citizens or persons who have
held Brazilian citizenship for more than 10 years are eligible to receive a
license to operate Cable systems in Brazil. In the event that no private entity
displays an interest in providing Cable services in a particular service area,
ANATEL may grant the local public telecommunications operator a license to
provide Cable services.
Cable operators that previously provided Cable services under a DISTV
authorization granted under Ordinance 250 were required under Law 8977 to file
applications to have their DISTV authorizations converted into Cable licenses.
Ordinance 256 grants a one year period from the date a DISTV authorization is
converted into a cable television license for any Cable system operator to
comply with the restrictions. The Company's Cable systems, all of which were
operating under DISTV authorizations, applied for conversion of their DISTV
authorizations and received approval for such conversion from the Ministry of
Communications.
22
Cable licenses for service areas not covered by existing authorizations
will be granted pursuant to a public bidding process administered by ANATEL
after prior public consultation. All such licenses shall be nonexclusive
licenses. In order to submit a bid for a license, a bidder must meet certain
financial and legal prerequisites. After such prerequisites are met, a bidder
must then submit a detailed bid describing its plan to provide Cable services in
the service area. In the qualification phase of the bidding process, ANATEL
assigns a number of points to each bid based on certain weighted criteria,
including the timetable for offering subscription programming; the time
allocated to local public interest programming; the number of channels allocated
to educational and cultural programming; and the number of establishments, such
as schools, hospitals and community centers, to which basic service programming
will be offered free of charge. After calculating the number of points awarded
to each bidder, ANATEL will then apply a formula based on the population of the
service area to select the winning bid from among those bidders that meet
certain defined minimum qualifying thresholds. For service areas with a
population of 700,000 or more inhabitants, the qualified bidder that submits the
highest bid for the license will be selected. For service areas with a
population between 300,000 and 700,000 inhabitants, the winning bid is selected
based on the highest product obtained by multiplying the number of points
awarded in the qualification phase and the amount bid for the license. For
service areas with less than 300,000 inhabitants, the winning bid is selected on
the basis of the number of points awarded in the qualification phase and the
payment of a fixed fee.
Once a Cable license is granted, the licensee has an 18 month period from
the date of the license grant to complete the initial stage of the installation
of the Cable system and to commence providing Cable services to subscribers in
the service area. The 18 month period is subject to a single 12 month extension
for cause at the discretion of ANATEL.
Any transfer of a Cable license is subject to the prior approval of
ANATEL. A license generally may not be transferred by a licensee until it has
commenced providing Cable services in its service area. Transfers of shares
causing a change in the control of a license or the legal entity which controls
a license also is subject to the prior approval of ANATEL. ANATEL must receive
notice of any change in the capital structure of a licensee, including any
transfer of shares or increase of capital that do not result in a change of
control.
A license can be revoked, upon the issue of a judicial decision, in the
event the licensee lacks technical, financial or legal capacity to continue to
operate a Cable system; is under the management of individuals, or under the
control of individuals or corporations who, according to Law 8977, do not
qualify for such positions; has its license transferred, either directly or by
virtue of a change in control, without the prior consent of ANATEL; does not
start to provide Cable services within the time limit specified by Law 8977; or
suspends its activities for more than thirty consecutive days without
justification, unless previously authorized by ANATEL.
Cable Related Service Regulation
General. Brazilian telecommunications services are governed primarily by
(i) Article 21 of the Federal Constitution, as amended by Amendment No. 8 of
August 15, 1995 ("Amendment 8"), (ii) the Telecommunications Code (Law No. 4117
of August 27, 1962, as amended), (iii) Law 9472, (iv) Law 9295 and (v) Law 8977.
The Brazilian Government also has issued detailed regulations covering specific
areas of telecommunications services, including radio broadcasting, paging,
trunking, subscription television, Cable television and cellular telephony.
ANATEL is responsible for the regulation of telecommunications services in
Brazil. Prior to its amendment in 1995, Article 21 of the Federal Constitution
required the Brazilian Government to operate directly, or through concessions
granted to companies whose shares are controlled by the Brazilian Government,
all telephone, telegraph, data transmission and other public telecommunications
services. This constitutional requirement was the basis for the establishment of
the state-owned telephone monopoly, Telebras, which held controlling interests
in 27 regional telephone operating companies. With the adoption of Amendment 8,
Article 21 was modified to permit the Brazilian Government to operate
telecommunications services either directly or through authorizations,
concessions or permissions granted to private entities. In particular, Amendment
8 removed the constitutional requirement that the Brazilian Government must
either directly operate or control the shares of companies which operate
telecommunications services. Even with the adoption of Amendment 8, the
Brazilian Government still retains broad regulatory powers over
telecommunications services. Notwithstanding the existence of the Telebras
monopoly, private companies have been permitted under Brazilian law to provide a
number of telecommunications services other than telephony, including radio
broadcasting, paging, trunking, subscription television and cable television
services. However, fixed public telephony and cellular telephony were
exclusively provided by
23
Telebras through its regional telephone operating companies. In 1998 the
Ministry of Communications and ANATEL concluded the privatization of all public
fixed and cellular telephone companies.
High-Speed Cable Data Services. Law 8977 and Decree 2208, among other
things, authorize cable television operators, such as the Company, in addition
to furnishing video and audio signals on their cable networks, to utilize their
networks for the transmission of meteorological, banking, financial, cultural,
price and other data. This broad grant of authority is understood to permit
Cable television operators to furnish services such as interactive home banking
and high-speed Cable data services to subscribers through their cable television
networks, although a simplified licensing procedure for high-speed Cable data
services may be installed by ANATEL in the future.
On November 29, 1999, ANATEL issued Regulation 190, which authorized the
use of subscriber communication networks (such as Cable systems) by
unidirectional or bi-directional value-added service providers. Regulation 190
also regulates certain terms between value-added service providers and
subscriber network operators. TVA is subject to Resolution 190 both as a cable
operator (through TVA Sistema) and a provider of high speed internet service
(through Ajato).
Cable Telephony. In accordance with Law 8977, the Company is not permitted
to furnish fixed telephone services in Brazil without a specific license to do
so. Therefore, absent a change in Brazilian law, the Company would not be
permitted to furnish cable telephony on its network. There are, however, certain
limited regulatory exceptions pursuant to which private entities other than
Telebras and the regional telephone operating companies have been permitted to
provide limited fixed telephony services in Brazil. Under one particular
exception, certain private telephone networks (Centrais Privadas de Comutacao
Telefonica or "CPCT") serving "condominiums" (as such term is defined under
Brazilian law) have been permitted to interconnect their private telephone
networks to the public telephone network operated by the local telephone
operating company. A CPCT is comparable to a private branch exchange (PBX) found
in some larger apartment complexes, hotels and businesses in the United States.
Under Brazilian law, the term "condominium" refers to residential and
nonresidential buildings or building complexes that have entered into a legal
association. In practice, a condominium desiring to establish a CPCT will
generally contract with a private service provider to install, operate and
maintain the CPCT and to secure interconnection with the public telephone
network. Ordinance No. 119/90 of 10 December 1990 ("Ordinance 119"), which was
issued by the predecessor to the Ministry of Communications, sets forth
requirements for the interconnection of CPCTs with the public telephone network.
In general the installation, operation and maintenance of a CPCT does not
require any authorization from the Ministry of Communications or Telebras. In
order to interconnect with the public telephone network, a CPCT must comply with
the requirements set forth in Ordinance 119. Such requirements primarily relate
to meeting technical equipment certification and acceptance standards. Assuming
that such standards are met, the regional telephone operating company is
required under Ordinance 119 to interconnect the CPCT requesting interconnection
to the public telephone network. The Company believes that, under current
Brazilian law, Cable television operators can utilize their Cable television
networks in order to facilitate the installation and operation of a CPCT.
Furthermore, under the authority granted by Ordinance 119, CPCTs may be
interconnected through Cable television networks to the public telephone
network.
In November 2001 Anatel revised regulations concerning the provision of
fixed telephony services to the general public (Servico Telefonico Fixo
Comutado, or "STFC"). These regulations provide that any company meeting certain
criteria can provide STFC services throughout Brazil. In March 2002 TVA
requested authorizations to provide STFC services in the cities of Sao Paulo,
Rio de Janeiro, Curitiba and Porto Alegre.
In August 2001 Anatel revised regulations concerning the provision of
telecommunications services other than STFC, radio and television broadcasting,
pay television and cellular services to the general public (Servico de
Comunicacao Multimidia, or "SCM"). In January 2002 TVA requested that its
existing license for such services be converted into an SCM license.
Other. On November 24, 1999, ANATEL and ANEEL (Agencia Nacional de Energia
Eletrica, or National Electric Energy Agency) published Joint Resolution No.
001, which sets guidelines for the use of infrastructure among the electric
energy, telecommunications and oil industries in order to maximize the use of
resources and reduce operating costs. TVA has initiated an arbitration
proceeding with Centrais Eletricas de Santa Catarina--CELESC and Companhia
Paranaense de Energia Eletrica--COPEL in order to resolve certain questions
relating to TVA's contracts with these
24
entities, particularly with respect to pole rental fees. In November 2001 TVA
also initiated a legal proceeding against Eletropaulo Metropolitana de Sao Paulo
seeking to reduce pole rental fees in the city of Sao Paulo.
Legal Proceedings
The Company is party to certain legal actions arising in the ordinary
course of its business which, individually or in the aggregate, are not expected
to have a material adverse effect on the consolidated financial position of the
Company. As of December 31, 2001, the Company had reserved approximately $1.7
million as contingent liabilities in connection with certain litigation
contingencies, involving primarily claims by persons arising in connection with
the termination of their employment.
The Company's operating companies are currently defending a lawsuit
brought by the Escritorio Central de Arrecadacao e Distribuicao (Central
Collection and Distribution Office, or "ECAD"), a government-created entity
authorized to enforce copyright laws relating to musical works. ECAD filed a
lawsuit in 1993 against all pay-television operators in Brazil seeking to
collect royalty payments in connection with musical works broadcast by the
operators. Suits were filed against TVA in the 14 Vara Civel Forum Central de
Sao Paulo (against TVA Brasil), the 1 Vara Civel Forum Central de Curitiba
(against TVA Sul) and the 2 Vara de Balneario Camboriu (against CCS-Camboriu
Cable System de Telecomunicacoes Ltda.). ECAD is seeking a judgment award of
2.55% of all past and present revenues generated by the operators. The suits are
currently being submitted to the Superior Tribunal de Justica in order to
determine whether ECAD is entitled to benefit from the copyrights relating to
musical works broadcast on pay television. Although the Company intends to
continue to vigorously defend these suits, the loss of such suits may have a
material adverse effect on the consolidated financial position of the Company.
Based on agreements reached by ECAD with other Brazilian television operators,
however, management believes that it can reach a negotiated settlement to these
suits whereby the Company would make monthly payments to ECAD in an amount
significantly lower than that sought by ECAD.
C.
The following chart sets forth the significant subsidiaries comprising the
corporate structure of TVA's Cable, MMDS and Internet businesses. Except as
indicated otherwise, each of the subsidiaries listed below is incorporated in
the Federative Republic of Brazil. See "Business Overview--Owned Systems" and
"--Operating Ventures."
25
--------------
Tevecap S.A.
(TVA)
--------------
|
|
|
---------------------------------------------------------------------
| | | |
100% | 100% | 36% | 100% |
| | | |
- ------------ ------------- ------------ ------------
TVA Sistema TVA Sul Canbras TVA Rede Ajato
- ------------ ------------- ------------ ------------
|
60% |
|
-------------
CCS Camboriu
-------------
D. Property, Plant and Equipment
The Company owns most of the assets essential to its operations. The major
fixed assets of the Company are coaxial and fiber optic cable, converters for
subscribers' homes, electronic transmission, receiving, processing and
distribution equipment, microwave equipment and antennae. The Company leases
certain distribution facilities from third parties, including space on utility
poles, roof rights and land leases for the placement of certain of its hub
sights and head ends and space for other portions of its distribution system.
The Company leases its offices from third parties, with the exception of certain
offices of TVA Sul, located in Curitiba, State of Parana, which are owned by the
Company. The Company also owns its data processing facilities and test
equipment.
26
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion should be read in conjunction with the Financial
Statements (including the notes thereto) included in Appendix F hereto. For the
purposes of the following discussion, all dollar amounts, with the exception of
average installation and subscriber fees, are set forth in thousands of U.S.
dollars.
This discussion of the Company's operating review and prospects reflects
the historical results of TVA. Due to the limited operating history, startup
nature, translations of Brazilian currency into U.S. dollars, and rapid growth
of TVA, period-to-period comparisons of financial data are not necessarily
indicative, and should not be relied upon as an indicator of the future
performance of TVA.
A. Results of Operations
Overview
Since its inception in 1989, TVA has been developing its businesses.
Despite its growth and positive operating cash flow for the year ended December
31, 1999, TVA continues to sustain substantial net losses due primarily to
insufficient revenue with which to fund build-out, interest expense and charges
for depreciation and amortization. Net losses incurred by TVA since inception
have been funded principally by (i) net contributions of $521,130 from TVA's
shareholders, (ii) borrowings from Editora Abril S.A. ("Abril") under a
revolving credit facility, dated December 6, 1995, between TVA, as the borrower,
and Editora Abril S.A., as the lender (the "Abril Credit Facility"), (iii)
dispositions of non-strategic assets and (iv) bank loans and other borrowings
made from time to time. In November 2001, TVA's shareholders agreed to
capitalize outstanding loans in the aggregate principal amount of $123,159 made
to TVA by Editora Abril under the Abril Credit Facility.
In July 1999 TVA consummated the sale of Galaxy Brasil, TVA Banda C and
certain assets related thereto, including its interest in GLA to GLA and the
members thereof (such sale, the "DBS Sale"). These dispositions were conducted
as a result of Management's review of TVA's operations and investment needs and
the resulting intention to concentrate TVA's businesses on the distribution of
pay television and other services through Cable and MMDS operations. See
"Information on the Company--History and Development of the Company."
As a result of these dispositions, TVA's DBS operations have been
classified as "Discontinued Operations."
In addition, in the third quarter of 1999, TVA began offering the services
of Ajato, TVA's high speed internet service provider, which was followed in the
second quarter of 2000 by the services of Acesso, TVA's high speed internet
access provider. The costs and expenses associated with the start-up nature of
these businesses significantly affected the Company's results of operations for
the years ended December 31, 2000 and 1999.
The Company's results of operations for the year ended December 31, 2001
were significantly affected by the following factors: (i) the depreciation of
investments in the construction and modernization of infrastructure used to
improve current services and develop new services, (ii) loans under the Abril
Credit Facility that were capitalized in November 2001, (iii) the contribution
by Abril to TVA of its equity interest in Canbras Parana and (iv) the impact of
the devaluation of the real in 2001, as discussed below.
Critical Accounting Policies
The Financial Statements are presented in accordance with U.S. GAAP. As
such, the Company is required to make certain estimates, judgments and
assumptions that management believes are reasonable based upon the information
available. These estimates, judgments and assumptions affect the reported
amounts of assets and liabilities at the dates of the Financial Statements and
the reported amounts of revenues and expenses during the periods presented. The
significant accounting policies which management believes are the most critical
to aid in fully understanding and evaluating the Company's reported financial
results include the following:
27
Revenue Recognition. Subscription revenues are recognized monthly at the
amount billed to subscribers for service subscribed to and earned during the
month. Installation fees are recognized as revenue on the equipment installation
date to the extent of direct selling costs incurred which are higher than the
revenue. Advertising revenues are recognized, and the production cost of
commercials and programming are charged to expense, when the commercial is
telecast. Other revenues are recognized as services are rendered. Should changes
in conditions cause management to determine these criteria are not met for
certain future transactions, revenue recognized for any reporting period could
be adversely affected.
Deferred Income Taxes. The Company recognizes deferred tax assets and
liabilities based on the differences between the financial statement carrying
amounts and the tax bases of assets and liabilities as well as operating loss
and tax credit carryforwards. The Company regularly reviews the deferred tax
assets for recoverability and establishes a valuation allowance if it is more
likely than not that the deferred tax assets will not be realized, based on
historical taxable income, projected future taxable income, and the expected
timing of the reversals of existing temporary differences. As of December 31,
2001, the Company has approximately $219,630 of net operating losses ("NOLs") to
offset against regular taxes. These NOLs do not expire. 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 the deferred tax assets attributable to the NOL carryforwards and other
deductible differences. Management believes that, should the Company be
profitable in the future, it will be able to utilize these NOLs.
Impairment of Long-Lived Assets. The Company evaluates its long-lived
assets and identifiable intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of the asset to future undiscounted net cash
flows expected to be generated by the asset. In estimating future undiscounted
net cash flows, assets are grouped at the level of each cable television system.
If these estimates or their related assumptions change in the future, the
Company may be required to record impairment charges for these assets not
previously recorded.
Depreciation of Property, Plant and Equipment. Depreciation of property,
plant and equipment is provided using the straight-line method based on the
estimated useful lives of the underlying assets disclosed in Note 10 to the
Tevecap Financial Statements. Given the complex nature of the Company's
property, plant and equipment, the estimates of useful lives require
considerable judgment and are inherently uncertain. If the Company materially
changes the assumptions of useful lives, depreciation expense and net book value
of property, plant and equipment could be materially different.
Provision for Doubtful Accounts. A provision for doubtful accounts is
established on the basis of an analysis of the accounting receivable, in light
of the risks involved, and is considered sufficient to cover any losses incurred
in realization of credits. If the financial condition of the Company's customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.
Recent Accounting Pronouncements
Effective January 1, 2001, the Company adopted Statements of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138
(collectively, "SFAS 133"). SFAS 133 establishes accounting and reporting
standards requiring that all derivative financial instruments (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. Additionally,
SFAS 133 requires that changes in the fair value of derivatives be recognized in
earnings unless specific hedge accounting criteria are met. As the Company does
not utilize derivative financial instruments, the effect of adopting SFAS 133 on
January 1, 2001 did not have a material impact on the Company's consolidated
financial statements.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting, and broadens the criteria for recording
intangible assets separate from goodwill. Recorded goodwill and intangibles will
be evaluated against this new criteria and may result in certain intangibles
being subsumed into goodwill,
28
or alternatively, amounts initially recorded as goodwill may be separately
identified and recognized apart from goodwill. SFAS 142 requires the use of a
nonamortization approach to account for purchased goodwill and certain
intangibles. Under a nonamortization approach, goodwill and certain intangibles
will not be amortized into results of operations, but instead would be reviewed
for impairment and written down and charged to results of operations only in the
periods in which the recorded value of goodwill and certain intangibles is more
than its fair value. The amortization provisions of SFAS 142 apply to goodwill
and intangible assets acquired after June 30, 2001. Effective January 1, 2002,
the Company adopted the provisions of each statement that apply to goodwill and
intangible assets acquired prior to June 30, 2001. Based on the Company's
initial analysis of SFAS 141 and SFAS 142, management believes that the
implementation of these pronouncements will not have a material impact on the
Company's consolidated results of operations or financial condition.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 requires that the market value of
the liabilities related to obligations due to the retirement of assets be
recognized in the period in which they occur, if a reasonable estimate of market
value is possible. Costs of asset retirement are capitalized as part of the
permanent asset cost. In accordance with SFAS 143, the asset retirement
obligation is discounted and an increase is recognized by using the "credit
adjusted risk-free" interest rate in effect when the obligation was initially
recognized. The Company is required to adopt SFAS 143 effective January 1, 2003.
Based on an initial analysis of SFAS 143 requirements, management believes that
the implementation of this statement will not have a material impact on the
Company's consolidated results of operations or financial condition.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS 121") but maintains the fundamental
provisions of SFAS 121 for (a) recognition/valuation of the provision for
impairment of permanent assets to be maintained and used and (b) valuation of
permanent assets to be written off due to their sale. SFAS 144 also supersedes
the provisions of Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business" ("APB 30") with regard to reporting the effects of a disposal of a
segment of a business. The Company adopted SFAS 144 effective January 1, 2002.
Based on the Company's initial analysis of the SFAS 144 requirements, management
believes that the implementation of this pronouncement will not have a material
impact on the Company's consolidated results of operations or financial
condition.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections." SFAS 145 rescinds SFAS 4, "Reporting Gains and Losses from
Extinguishment of Debt," which required that all gains and losses from
extinguishment of debt to be aggregated and classified as an extraordinary item
if material. SFAS 145 requires that gains and losses from extinguishment of debt
be classified as extraordinary only if they meet criteria in APB 30, thus
distinguishing transactions that are part of recurring operations from those
that are unusual or infrequent, or that meet the criteria for classification as
an extraordinary item. SFAS 145 also amends SFAS No. 13, "Accounting for
Leases", to require that lease modifications that have economic effects similar
to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. In addition, SFAS 145 rescinds SFAS 44, "Accounting
for Intangible Assets of Motor Carriers," and SFAS 64, "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements," which are not currently applicable
to us. The provisions of SFAS 145 as they relate to the rescission of SFAS 4
will be applied effective January 1, 2003. Certain provisions related to SFAS 13
are effective for transactions occurring after May 15, 2002. Management does not
expect SFAS 145 to have a material impact on the Company's consolidated results
of operations or financial condition.
Impact of Real Devaluation
All forms of TVA's revenue were affected adversely in dollar terms as a
result of the significant devaluation in the Brazilian real against other major
currencies that occurred primarily in January 1999 and continued in subsequent
years. The devaluation resulted in a loss in the value of the real against the
dollar of approximately 48% during the year ended December 31, 1999. In
addition, the real devalued approximately 9% during the year ended December 31,
2000 and approximately 19% during the year ended December 31, 2001. This
devaluation also resulted in an increase in TVA's dollar-denominated
liabilities. See Item 3, "Key Information--Risk Factors--Factors Relating to the
Company" and "--Factors Relating to Brazil."
29
Change in Functional Currency
As of January 1, 2000, TVA changed its functional currency from the U.S.
dollar to the Brazilian real. This change was made as a result of changes in the
Company's capital and operational structure and a move to using the Brazilian
real for a substantial portion of the Company's business. See Note 2.3 to the
Company's Financial Statements.
Seasonality
The Company's revenues are seasonal. Generally, during the Brazilian
summer months of January and February the Company experiences lower demand for
installation for each of its services. As a result, the Company experiences a
decrease in Installation revenue of approximately 25% in these months, which
decrease is offset by corresponding decreases in Payroll and benefits expense
(i.e., sales commissions), Advertising and promotional expense and Other costs.
30
Consolidated Statements of Operations Data
Year Ended December 31,
-----------------------------------------------------------------------------
2001 2000 1999
----------------------- ----------------------- -----------------------
% of Gross % of Gross % of Gross
Amount Revenue Amount Revenue Amount Revenue
----------------------- ----------------------- -----------------------
Gross revenues
Monthly subscriptions $ 88,246 83.3% $ 97,134 80.3% $ 94,055 80.9%
Installation 270 0.3% 968 0.8% 1,900 1.6%
Indirect Programming -- -- 357 0.3% 3,722 3.2%
Additional services and others 17,418 16.4% 22,552 18.6% 16,521 14.2%
Gross revenue 105,934 100.0% 121,011 100.0% 116,198 100.0%
--------- ----- --------- ----- --------- -----
Direct operating expenses 51,296 48.4% 55,402 45.8% 45,638 39.3%
Taxes on Revenue 15,636 14.8% 13,145 10.9% 12,782 11.0%
Selling, general and administrative
Expense 29,448 27.8% 33,483 27.7% 25,590 22.0%
Depreciation and amortization 34,364 32.4% 43,290 35.8% 56,879 49.0%
Other operating expense, net 1,762 1.7% (2,611) (2.2)% 19,012 16.4%
--------- ----- --------- ----- --------- -----
Total operating expenses 132,506 125.1% 142,709 117.9% 159,901 137.6%
--------- ----- --------- ----- --------- -----
Operating loss (26,572) (25.1)% (21,698) (17.9)% (43,703) (37.6)%
--------- ----- --------- ----- --------- -----
Interest income (4,200) (3.9)% (5,374) (4.4)% (5,896) (5.1)%
Interest expense 37,849 35.7% 45,069 37.2% 22,254 19.2%
Foreign currency transaction loss, net 11,067 10.4% 4,816 3.9% -- --
Foreign currency translation loss, net -- -- -- -- 2,543 2.2%
Other nonoperating expenses (income), net 2,438 2.3% (37,384) (30.9)% 11,055 9.5%
Minority interest (284) (0.3)% (491) (0.4)% (678) (0.6)%
Income taxes -- -- 2,517 2.1% 106 0.1%
--------- ----- --------- ----- --------- -----
Equity in (losses) income of affiliates, net 2,375 2.2% 2,004 1.7% 5,238 4.5%
Income (loss) from continuing operations
before extraordinary item (75,817) (71.6)% (32,855) (27.2)% (78,325) (67.4)%
--------- ----- --------- ----- --------- -----
Income (loss) from discontinued
operations -- -- -- -- 94,344 81.2%
--------- ----- --------- ----- --------- -----
Extraordinary item - gain on debt
repurchase -- -- -- -- 53,857 46.3%
--------- ----- --------- ----- --------- -----
Net income (loss) (75,817) (71.6)% (32,855) (27.2)% 69,876 60.1%
========= ===== ========= ===== ========= =====
31
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
The table below sets forth the number of subscribers at December 31, 2001
and December 31, 2000 for the Owned Systems.
Owned Systems Subscribers December 31, 2001 December 31, 2000
------------------------- ----------------- -----------------
MMDS(a) .................................... 162,427 167,819
Cable ...................................... 196,855 178,004
------- -------
359,282 345,823
Paid Subscribers Awaiting Installation ..... 307 648
------- -------
Total Owned Systems ........................ 359,589 346,471
======= =======
- ----------
(a) Includes UHF subscribers
The table below sets forth the number of Internet subscribers at December
31, 2001 and December 31, 2000.
Internet Subscribers December 31, 2001 December 31, 2000
-------------------- ----------------- -----------------
Ajato and Acceso ........................... 19,649 11,480
Paid Subscribers Awaiting Installation ..... 291 1,431
------ ------
Total Internet Subscribers ................. 19,940 12,911
====== ======
The table below sets forth at December 31, 2001 and December 31, 2000 the
approximate number of television households which received TVA programming
through the Owned Systems and the Operating Ventures.
Households Receiving TVA Programming
December 31, 2001 December 31, 2000
----------------- -----------------
Total Owned Systems ........................ 359,589 346,471
Operating Ventures ......................... 210,406 186,951
Total ...................................... ------- -------
569,995 533,422
======= =======
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 and
Additional services and others (which consists of Advertising revenues and Other
revenues).
Monthly subscriptions revenue for the year ended December 31, 2001 was
$88,246, as compared to $97,134 for the comparable period in 2000. This decrease
is primarily attributable to a 19% devaluation of the real against the U.S.
dollar in 2001, which was slightly offset by an increase in the Company's pay
television subscriber base of approximately 4% and an increase in the Company's
Internet subscriber base by approximately 71%. Average monthly fees for existing
pay television subscribers decreased from $25.87 to $20.56 per subscriber and
for new subscribers decreased from $23.10 to $19.01 per subscriber, largely due
to the increased popularity of lower-priced programming packages and the effect
of the real devaluation in 2001. Without taking into account the real
devaluation, average monthly fees for pay television subscribers would have been
$24.72 for existing subscribers and $19.32 for new subscribers. The average
monthly subscription price during the year ended December 31, 2001 was $19.32
for MMDS service, $21.66 for Cable service and $28.92 for Internet service, as
compared to $25.36, $26.38 and $36,83, respectively, for the year ended December
31, 2000.
32
Installation revenue for the year ended December 31, 2000 was $270, as
compared to $968 for the same period of 2000, a decrease of $698 or 72.1%. This
decrease was primarily due to the lower numbers of installations (81,729 in 2001
as compared with 105,888 in 2000) and a write-off of overdue accounts, also
reflected in a reduction in the provision for doubtful accounts (thereby not
affecting EBITDA). The average installation fee during the year ended December
31, 2000 was $10.15 for MMDS service and $9.22 for Cable service, as compared to
$7.77 and $9.71, respectively, during the year ended December 31, 2000.
Additional services and other revenues for the year ended December 31,
2001 was $17,418, as compared to $22,552 for the comparable period of 2000, a
decrease of 22.7%. Advertising revenue decreased from $2,503 to $1,005, largely
due to an industry-wide reduction in advertising expenditures by large
advertisers. Other revenue decreased from $20,049 to $16,413, principally due to
the provision in 2000 of non-recurring administrative services and equipment
rentals to Galaxy Brasil (following the sale of Galaxy Brasil in 1999) and
engineering services to ESPN Brasil (following the sale of the Company's
interests in ESPN Brasil in 1999). The lack of non-recurring services in 2001
was offset by an increase in the provision of ancillary services to subscribers
(such as technical assistance, decoder rental and magazine sales), which
increased by approximately 83%, from $5,861 in 2000 to $10,727 in 2001.
For the reasons noted above, and in particular the real devaluation in
2001and certain non-recurring revenues in 2000, Gross revenue for the year ended
December 31, 2001 was $105,934, as compared to $121,011 for the comparable
period in the previous year, a decrease of $15,077.
Direct operating expenses. Direct operating expenses include Payroll and
benefits, Programming, Transponder lease cost, Technical assistance, Vehicle
rentals, TVA magazine, Pole rental and Other costs. These expenses are variable
and related to the growth in subscribers and in the Company's systems, and are
also dependent on the type of service subscribers select. Direct operating
expenses for the year ended December 31, 2001 were $51,296, as compared to
$55,402 for the same period in 2000, a decrease of $4,106, or 7.4%. As a
percentage of gross revenues, direct operating expenses represented 48.4% in
2001 as compared with 45.8% in the prior year. This decrease in Direct operating
expenses is attributable principally to a restructuring plan initiated in the
second half of 2001 for the purpose of adjusting to adverse market conditions,
including the effects of the real devaluation (which increased in reais the
costs of dollar-denominated expenses) and an increase in unemployment in TVA's
markets. Direct operating expenses also decreased as a result of the devaluation
of the real, which was 19% in 2001, as compared to 9% in 2000. Payroll and
benefits expense decreased to $8,504 from $9,229, a decrease of $725, primarily
due to a reduction in the number of employees from 1,200 in 2000 to 873 in 2001.
Programming costs decreased to $25,749 from $26,104, a decrease of $355 or 1.4%,
primarily as a result of programming agreements entered into with certain
programming providers that placed ceilings on the dollar/real exchange rate used
to calculate monthly programming costs. Technical assistance decreased to $1,868
from $2,415, a decrease of $547 or 22.7%, largely as a result of improvements in
the installation process which reduced the number of requests for technical
assistance. Transponder lease cost dropped to $22 from $2,408 due to the
cancellation in 2000 of the transponder lease agreement, which was no longer
required after the sale of the DBS Systems. Pole rental decreased to $2,814 from
$3,535, an decrease of $721, due to a reduction in the unit pole cost in the
last quarter of 2001 and the effects of the real devaluation. Other costs
includes acquisition of backbone IP/internet, billing costs , third party
services, transportation of equipment and materials, maintenance and other
miscellaneous expenses. For the year ended December 31, 2001, Other costs were
$9,950, as compared to $9,136 for the prior year, an increase of $814, primarily
due to increased communication and production costs associated with Ajato and
Acesso (backbone IP), an increase in billing costs (due to the 4% increase in
the pay television subscriber base), an increase in maintenance costs, and an
increase in contracted electricity costs, all partially offset by the
devaluation of the real. Taxes on revenue consist of a 3.65% tax on Advertising
revenue and an 15.15% tax on the balance of revenues, in each case charged by
the Brazilian Government. Taxes on revenue for the year ended December 31, 2001
were $15,636, as compared to $13,145 for the same period of the prior year, an
increase of 19.0%. The increase in Taxes on revenue is attributable to the
increase in the tax rates from 11.65% in 2000 to 15.15% in 2001, primarily due
to the introduction of new taxes that cannot be passed on to consumers.
33
Selling, general and administrative expenses. Selling, general and
administrative expenses include Payroll and benefits, Advertising and promotion
expense, Rent, and Other general and administrative expenses. Selling, general
and administrative expenses for the year ended December 31, 2001 were $29,448,
as compared to $33,483 for the same period of 2000, a decrease of $4,035 or
12.1%. Payroll and benefits decreased from $14,942 in 2000 to $9,795 in 2001, a
decrease of $5,147, or 34.4%, largely due to the decrease in the number of
employees, which was partially offset by annual salary increases of
approximately 5% for unionized employees. Advertising and promotion expense
decreased from $7,330 in 2000 to $5,778 in 2001, a decrease of $1,552 or 21.2%,
largely due to the lower number of installations in 2001.
Depreciation and Amortization. Depreciation and amortization includes
depreciation of systems, equipment, installation materials, installation
personnel and amortization of concessions. Depreciation and Amortization for the
year ended December 31, 2001 was $34,364, as compared to $43,290 for the same
period of 2000, a decrease of $8,926, due primarily to the disposal of certain
equipment and devaluation of the real.
Other operating expense (income), net. Other operating expense, net for
the year ended December 31, 2001 was $1,762 as compared to other operating
income, net of $2,611 in the same period in 2000, an increase of $4,373. Other
operating expense, net for 2001 consists primarily of the loss on disposal of
property and equipment and loss on sale of obsolete inventories, partially
offset by other miscellaneous income. The other operating income, net in 2000
consists primarily of the gain from the sale of the Company's Eurochannel
operations in November 2000 ($6,902), partially offset by the write-off of
assets related to cancellation of subscriptions.
For the reasons noted above, Operating loss for the year ended December
31, 2001 was $26,572 compared to $21,698 for the comparable period in 2000, an
increase of $4,874 or 22.5%.
Interest income. Interest income for the year ended December 31, 2001 was
$4,200, as compared to $5,374 for the same period in 2000, a decrease of $1,174,
or 21.8%, primarily as a result of the effect of inflation on inflation-indexed
obligations.
Interest expense. Interest expense for the year ended December 31, 2001
was $37,849, as compared to $45,069 for the same period of 2000, a decrease of
$7,220, principally attributable to $21,508 in interest due to Abril under the
Abril Credit Facility in 2001 (as opposed to $29,690 in 2000).
Other non-operating expense (income) net. Other non-operating expense, net
for the year ended December 31, 2001 was $2,438, as compared to other
non-operating income, net of $37,384 in the same period in 2000, a decrease of
$39,822. Other non-operating income for the year ended December 31, 2000
consisted primarily of the gain from the sale of the Company's minority
interests in HBO Brasil (July 2000).
Minority interest. The Minority interest was $284 for the year ended
December 31, 2001, as compared with $491 for the same period in 2000. In
November 2001 Abril's 14% equity interest in TVA Sul was exchanged for an
increase in Abril's equity interest in TVA. See Item 7, "Major Shareholders and
Related Party Transactions."
Equity in losses of affiliates, net. For the year ended December 31, 2001,
Equity in losses of affiliates amounted to a loss of $2,375, as compared to a
loss of $2,004 in the same period of 2000, an increase of $371. This loss
originated in the operations of Canbras TVA.
Net income (loss). For the reasons noted above, net loss for the year
ended December 31, 2001 was $75,817, as compared to a Net loss of $32,855 for
the comparable period in 2000. Net loss in 2001, which was due primarily to
depreciation of infrastructure and the impact of the real devaluation, did not
impact the cash flow of the Company.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
The table below sets forth the number of subscribers at December 31, 2000
and December 31, 1999 for the Owned Systems.
34
Owned Systems Subscribers December 31, 2000 December 31, 1999
------------------------- ----------------- -----------------
MMDS(a) .................................... 167,819 161,419
Cable ...................................... 178,004 148,244
------- -------
345,823 309,663
Paid Subscribers Awaiting Installation ..... 648 1,513
------- -------
Total Owned Systems ........................ 346,471 311,176
======= =======
- ----------
(a) Includes UHF subscribers
The table below sets forth the number of Internet subscribers at December
31, 2000 and December 31, 1999.
Internet Subscribers December 31, 2000 December 31, 1999
-------------------- ----------------- -----------------
Ajato and Acceso ........................... 11,480 1,524
Paid Subscribers Awaiting Installation ..... 1,431 --
------ -----
Total Internet Subscribers ................. 12,911 1,524
====== =====
The table below sets forth at December 31, 2000 and December 31, 1999 the
approximate number of television households which received TVA programming
through the Owned Systems and the Operating Ventures and through sales of
programming to the Independent Operators (which sales were discontinued in
2000).
Households Receiving TVA Programming
December 31, 2000 December 31, 1999
----------------- -----------------
Total Owned Systems ........................ 346,471 311,176
Operating Ventures ......................... 186,951 158,540
Independent Operators ...................... -- 201,448
------- -------
Total ...................................... 533,422 671,164
======= =======
Revenues. Revenues consist primarily of Monthly subscriptions revenue
(which principally consists of monthly fees paid by subscribers to the Company
for programming services, including equipment use), Installation revenue and
Additional services & others (which consists of Advertising revenues and Other
revenues).
Monthly subscriptions revenue for the year ended December 31, 2000 was
$97,134, as compared to $94,055 for the comparable period in 1999. This increase
is primarily attributable to an increase in the Company's subscriber base of
approximately 12%, which was offset by a 9% devaluation of the real against the
U.S. dollar in 2000. Average monthly fees for existing subscribers increased
from $25.13 to $ 25.87 per subscriber and for new subscribers decreased from
$25.35 to $23.10 per subscriber, largely due to the increased popularity of
lower-priced programming packages. The average monthly subscription price during
the year ended December 31, 2000 was $25.36 for MMDS service and $26.38 for
Cable service, as compared to $25.09 and $25.18, respectively, for the year
ended December 31, 1999.
Installation revenue for the year ended December 31, 2000 was $968, as
compared to $1,900 for the same period of 1999, a decrease of $932 or 49.1%.
This decrease was primarily due to the Company's policy of reducing installation
fees in order to facilitate the entry of new subscribers into the Company's
subscriber base. The average installation fee during the year ended December 31,
2000 was $7.77 for MMDS service and $9.71 for Cable service, as compared to
$28.41 and $17.83, respectively, during the year ended December 31, 1999.
Indirect programming revenue for the year ended December 31, 2000 was
$357, as compared to $3,722 for the comparable period of 1999, a decrease of
$3,365, or 90.4%. This revenue in 1999 was primarily attributable to the
35
Company's Eurochannel operations, which were sold in November 2000. See Item 4,
"Information on the Company--History and Development of the Company." In 2000,
the Company virtually discontinued the collection of programming fees from the
Operating Ventures and Independent Operators, a process which was begun in 1998
(as discussed more fully below in the comparison of the Company's results of
operations for the years ended December 31, 1999 and 1998).
Additional services and other revenues for the year ended December 31,
2000 was $22,552, as compared to $16,521 for the comparable period of 1999, an
increase of 36.5%. Advertising revenue increased from $1,597 to $2,503, largely
due to a more efficient utilization of advertising space available in the
Company's offered channels and monthly programming magazine. Other revenue
increased from $14,924 to $20,049, principally due to the provision of ancillary
services to subscribers (such as technical assistance, decoder rental and
magazine sales), administrative services and rental of equipment to Galaxy
Brasil (after the sale of Galaxy Brasil in July 1999) and engineering services
to ESPN Brasil (after the sale of the Company's equity interests in ESPN Brasil
in November 1999).
For the reasons noted above, gross revenue for the year ended December 31,
2000 was $121,011, as compared to $116,198 for the comparable period in the
previous year, an increase of $4,813.
Direct operating expenses. Direct operating expenses include Payroll and
benefits, Programming, Transponder lease cost, Technical assistance, Vehicle
rentals, TVA magazine, Pole rental and Other costs. These expenses are variable
and related to the growth in subscribers and in the Company's systems, and are
also dependent on the type of service subscribers select. Direct operating
expenses for the year ended December 31, 2000 were $55,402, as compared to
$45,638 for the same period in 1999, an increase of $9,764, or 21.4%. As a
percentage of gross revenues, direct operating expenses represented 45.8% in
2000 as compared with 39.3% in the prior year. This increase in Direct operating
expenses is attributable principally to the costs associated with the
development of the Company's Internet businesses (Ajato and Acesso). Payroll and
benefits expense increased to $9,229 from $7,857, an increase of $1,372,
primarily due to the increase in the number of Ajato and Acesso employees.
Programming costs increased to $26,104 from $24,166, an increase of $1,938 or
8.0%, as a result of the 12% increase in the Company's pay television
subscribers in 2000. Technical assistance increased to $ 2,415 from $1,311, an
increase of $1,104 or 84.2% , largely as a result of a change in the criteria
for the conversion of reais-denominated expenses into U.S. dollars, which in
2000 utilized the average monthly dollar/real exchange rate and in 1999 utilized
historical rates, together with the change in functional currency to reais as of
January 1, 2000. Transponder lease cost increased to $2,408 from $1,975, an
increase of $433, due to an annual increase in contracted rates. Pole rental
increased to $3,535 from $2,935, an increase of $600, due to an increase in unit
costs in 2000. Other costs includes acquisition of backbone IP/internet, billing
costs , third party services, transportation of equipment and materials,
maintenance and other miscellaneous expenses. For the year ended December 31,
2000, Other costs were $9,136 as compared to $4,912 for the prior year, an
increase of $4,224, primarily due to increased communication and production
costs associated with Ajato and Acesso (backbone IP), an increase in billing
costs (due to the 12% increase in the pay television subscriber base), an
increase in maintenance costs (largely impacted by the real devaluation), and in
increase in contracted electricity costs. Taxes on revenue consist of a 3.65%
tax on Advertising revenue and an 11.15% tax on the balance of revenues, in each
case charged by the Brazilian Government. Taxes on revenue for the year ended
December 31, 2000 were $13,145, as compared to $12,782 for the same period of
the prior year, an increase of 2.8%. As a percentage of gross revenue, Taxes on
revenue represents 10.9% of gross revenues. The increase in Taxes on revenue is
attributable to the increase in the tax rates from 8.65% in 1999 to 11.15% in
2000.
Selling, general and administrative expenses. Selling, general and
administrative expenses include Payroll and benefits, Advertising and promotion
expense, Rent, and Other general and administrative expenses. Selling, general
and administrative expenses for the year ended December 31, 2000 were $33,483,
as compared to $25,590 for the same period of 1999, an increase of $7,893 or
30.8%. Payroll and benefits increased from $11,425 in 1999 to $14,942 in 2000,
an increased of $3,517, or 30.8%, largely due to the increase in the number of
Ajato and Acesso employees and annual salary increases of approximately 7% for
unionized employees. Advertising and promotion expense increased from $3,645 in
1999 to $7,330 in 2000, an increase of $3,685, or 101.1%, largely due to
increased marketing efforts to increase the Company's subscriber base,
strengthen the TVA name as a provider of multiple services, and establish the
Ajato brand.
36
Depreciation and Amortization. Depreciation and amortization includes
depreciation of systems, equipment, installation materials, installation
personnel and amortization of concessions. Depreciation and Amortization for the
year ended December 31, 2000 was $43,290, as compared to $56,879 for the same
period of 1999, a decrease of $13,589, due primarily to the write-off in
December 1999 of certain decoders and assets related to the cancellation of
subscriptions.
Other operating expense (income), net. Other operating income net for the
year ended December 31, 2000 was $2,611 as compared to other non-operating
expense, net of $19,012 in the same period in 1999, a decrease of $21,623. Other
operating expense,net for 1999 consisted primarily of the high write-off related
to cancellations of subscriptions. In 2000, other operating income, net consists
primarily of the gain from the sale of the Company's Eurochannel operations in
November 2000 ($6,902), partially offset by the write-off of assets related to
cancellation of subscriptions.
For the reasons noted above, Operating loss for the year ended December
31, 2000 was $21,698 compared to $43,703 for the comparable period in 1999, a
decrease of $22,005 or 50.4%.
Interest income. Interest income for the year ended December 31, 2000 was
$5,374, as compared to $5,896 for the same period in 1999, a decrease of $522,
or 8.9%, primarily as a result of a change in the criteria for the conversion of
reais-denominated income into U.S. dollars, which in 2000 utilized the average
monthly dollar/real exchange rate and in 1999 utilized historical rates.
Interest expense. Interest expense for the year ended December 31, 2000
was $45,069, as compared to $22,254 for the same period of 1999, an increase of
$22,815, principally attributable to the change in functional currency to the
real in 2000, which resulted in the full recognition of $29,690 in interest due
to Abril under the Abril Credit Facility, and the issuance by a wholly-owned
subsidiary of dollar-denominated notes, resulting in additional interest expense
of $2,409. These effects were offset by a reduction in interest expense under
the Senior Notes from $15,445 in 1999 to $8,000 in 2000, due to the purchase of
81% of the Senior Notes by a wholly-owned subsidiary of the Company in July
1999.
Other non-operating expense (income) net. Other non-operating income, net
for the year ended December 31, 2000 was $37,384, as compared to other
non-operating expense, net of $(11,055) in the same period in 1999, an increase
of $48,439. Other non-operating income for the year ended December 31, 2000
consisted primarily of the gain from the sale of the Company's minority
interests in HBO Brasil (July 2000). In 1999 other non-operating expense
consisted primarily of the write-off of the Company's investment in TV Filme Inc
and the loss on sale of the Company's equity interests in ESPN Brasil (November
1999).
Minority interest. The Minority interest of $491 for the year ended
December 31, 2000, as compared with $678 for the same period in 1999, represents
Abril's 14% share in the aggregate losses of TVA Sul.
Equity in losses of affiliates, net. For the year ended December 31, 2000,
Equity in losses of affiliates amounted to $2,004, as compared to $5,238 in the
same period of 1999, a decrease of $3,234. This loss originated in the
operations of Canbras TVA. The reduction in losses reflects the sale of the
Company's minority equity interests in HBO Brasil (July 2000) and ESPN Brasil
(November 1999).
Income from discontinued operations. The income from discontinued
operations for the year ended December 31, 1999 consisted of the gain from the
DBS sale (July 1999), partially offset by the loss from operations of the DBS
business during 1999 through the date of disposal. In 2000 the Company did not
have any discontinued operations.
Extraordinary item - gain on debt repurchase. The extraordinary gain of
$53,857 in 1999 reflects the gain (net of transaction fees and write-off of
unamortized debt issuance costs) resulting from the repurchase by a wholly-owned
subsidiary in July 1999 of the Company's Senior Notes in the aggregate principal
amount of $201,978. In 2000 the Company did not engage in any transactions
resulting in extraordinary items.
Net income (loss). For the reasons noted above, Net loss for the year
ended December 31, 2000 was $32,855, as compared to Net income of $69,876 for
the comparable period in 1999.
37
B. Liquidity and Capital Resources
Since inception, the Company has sustained losses primarily due to
insufficient revenue to fund start-up costs, interest expense and charges for
depreciation and amortization arising from the development of its pay television
systems. As of December 31, 2001, the Company had cumulative net losses of
$219,630. During the periods under review, the Company required external funds
to finance its capital expenditures, operating activities and make payments of
principal and interest on its indebtedness. The sources of such funds have been
as follows: (i) borrowings from Abril under the Abril Credit Facility, of which
$6,729 was outstanding as of December 31, 2001, (ii) borrowings under lines of
credit, of which $20,640 was outstanding as of December 31, 2001, (iii) net
capital contributions of approximately $521,130 from shareholders, (iv) the
EximBank Facility, of which $1,674 was outstanding as of December 31, 2001
(which amount was fully repaid in April 2002), (v) the Senior Notes, of which
$48,022 was outstanding to unaffiliated parties as of December 31, 2001, (vi)
the issuance of short term notes from time to time by an offshore subsidiary
under a short term note program, of which $11,363 was outstanding as of December
31, 2001 (which amount was fully repaid in January 2002) and (vii) the
disposition of non-strategic assets, including the DBS Systems and certain
assets related thereto and the Company's programming-related assets, for which
the Company received net cash proceeds in 1999 and 2000 of approximately
$177,600 and $51,070, respectively.
The Company's liquidity needs will arise primarily from capital
expenditures, debt service requirements and, in certain periods, the funding of
its working capital requirements. As of December 31, 2001, the Company had
approximately $77,065 of indebtedness outstanding, primarily consisting of the
Senior Notes in the aggregate principal amount of $48,022, $6,729 outstanding
under the Abril Credit Facility, and short term notes in an aggregate principal
amount of $11,363 (fully repaid in January 2002).
In addition to debt service, the Company will require capital for (i) the
continued funding of losses and working capital requirements, (ii) the
construction and upgrade of cable networks and the installation of equipment at
subscribers' locations, (iii) the construction of additional transmission and
headend facilities and related equipment purchases, (iv) the development of its
Internet businesses and (iv) investments in, and maintenance of, vehicles and
administrative offices.
The Company made purchases of fixed assets of $25,927, $26,716 and $30,639
in 1999, 2000 and 2001, respectively. Management estimates that $15,405 and
$10,971 of capital expenditures will be required in 2002 and 2003, respectively,
principally in connection with the purchase of materials and equipment, Cable
and MMDS network upgrades and the development of its Internet operations. The
actual amount of funds required in 2002 and 2003 may vary materially from these
estimates, as a result of which additional funds could be required in the event
of cost overruns, unanticipated expenses, regulatory changes, engineering design
changes and other technology-driven changes.
The Company's principal sources of liquidity are borrowings from Editora
Abril and the Company's short-term borrowings (each as described below),
together with net cash provided by operating activities. However, until
sufficient cash flow is generated from operations, the Company will be required
to utilize its current sources of debt funding to satisfy its liquidity needs.
In November 2001, the Company's shareholders approved the capitalization of
outstanding loans in the aggregate principal amount of $123,159 under the Abril
Credit Facility. This capitalization lowered the Company's leverage ratio and
improved its borrowing capacity under existing and new lines of credit. The
Company had approximately $634 of cash and cash equivalents as of December 31,
2001.
For the year ended December 31, 2001, net cash provided by operating
activities was $11,612, primarily as the result of the net loss for the year of
$75,817, which was partially offset by $33,053 of Depreciation and a foreign
currency transaction loss of $11,067. For the year ended December 31, 2001, net
cash provided by investing activities was $3,906, as the result of the
collection of a $28,236 promissory note attributable to the DBS sale and $14,554
net repayments of loans to related companies, partially offset by capital
expenditures for the purchase of fixed assets of $30,639. The purchases of fixed
assets were principally related to the expansion of Cable and MMDS networks, the
purchase of reception equipment, which includes hardware, materials and labor
used for new subscriber installations and decoders, and the development of the
Company's Internet operations. For the year ended December 31, 2001, net cash
used in financing activities was $33,739, consisting principally of repayments
of loans from banks, shareholders and related companies.
38
The Abril Credit Facility allows the Company to borrow up to $60,000 on a
revolving basis. Since June 1996, the Company has from time to time requested,
and Abril has provided, funds in excess of $60,000. The loans are generally
denominated in reais and bear interest at a rate equal to a percentage of the
CDI rate, the Brazilian interbank lending rate, adjusted at the beginning of
each month. In November 2001, the Company's shareholders approved the
capitalization of outstanding loans in the aggregate principal amount of
$123,159 under the Abril Credit Facility. As of December 31, 2001, the Company
had $6,729 outstanding under the Abril Credit Facility.
On December 9, 1996, TVA Sistema, as Borrower, and Tevecap, as Guarantor,
entered into a credit agreement with The Chase Manhattan Bank for the financing
of C-Band decoders and other related equipment (the "EximBank Facility"). The
Export-Import Bank of the United States of America ("EximBank") also guaranteed
85% of the amount of the loan. The loan was made on terms customary for credits
supported by EximBank to Brazilian borrowers with an interest rate of LIBOR plus
a specified margin. The principal amount of the loan was $29,350, which was
dispersed in two tranches, the first in April 1997 in the principal amount of
$11,400 with a term of five years and the second in August 1997 in the principal
amount of $17,950 with a term of 4.5 years. As of December 31, 2001, the
principal amount outstanding under the EximBank Facility was $1,674. This amount
was fully repaid in April 2002.
On November 26, 1996, Tevecap raised funds in foreign markets through a
private placement of $250,000 12 5/8% Senior Notes (the "Senior Notes") maturing
on November 26, 2004 and guaranteed by certain of Tevecap's subsidiaries. The
Senior Notes were subsequently registered under the Securities Act pursuant to
Exchange Offers in May and December 1997. Concurrently with the consummation of
the DBS Sale in July 1999, as described above, the net proceeds to the Company
from the DBS Sale were used by the Company to repurchase, through a wholly-owned
subsidiary, Senior Notes in the aggregate principal amount of $201,978. In
addition, the Company obtained a consent from holders of the Senior Notes to
amend the restrictive covenants contained in the terms of the Senior Notes. See
Item 10, "Additional Information--Material Contracts--DBS Sale, Tender Offer and
Consent Solicitation."
In December 2000, the Company, through TVA Inc., a wholly-owned subsidiary
established a $50,000 Guaranteed Short Term Note Program under which TVA Inc.
may issue notes (guaranteed by the Company) in the international capital markets
from time to time. Notes issued under the program can have maturities of up to
two years. Since inception of the Program, TVA has issued a total of $10,443
under the program. As of December 31, 2001, $11,363 was outstanding under the
Program (including accrued but unpaid interest), which amount was fully repaid
in January 2002.
During the periods under review the Company has also raised funds through
the disposition of non-strategic assets, including the DBS Systems and certain
assets related thereto and the Company's programming-related assets (ESPN
Brasil, HBO Brasil and Eurochannel), for which the Company received net cash
proceeds in 1999 and 2000 of approximately $177,542 and $51,070, respectively.
See Item 4, "Information on the Company--History and Development of the
Company."
The Company's liquidity may also be adversely affected by statutory
minimum dividend requirements under applicable Brazilian law.
C. Research and Development
The Company is not engaged in significant research and development
operations. However, the Company continues to consider the utilization of its
Cable and MMDS networks for the provision of other services, such as telephony
services. Current ANATEL regulations permit any company meeting certain criteria
to provide telephony services beginning in 2002. In addition, the Company
continues to monitor the development of compression technology that would permit
the Company to significantly increase the number of channels provided by its
Cable and MMDS networks.
D. Trend Information
The Company's results of operations for the three years ended December 31,
2001 have been affected by Brazilian economic conditions, including a
significant devaluation of the real in 1999 and a continued devaluation through
2001. This devaluation, together with a recession in Brazil, had a significant
adverse effect on the operations of
39
the Company, and materially raised the cost of financing for the Company. In
addition, the recessionary environment created difficulties in maintaining
existing subscribers. These factors led the Company to implement a strategy
focused on the sale of non-strategic assets, including the Company's DBS and
programming-related assets. See Item 4, "Information on the Company--History and
Development of the Company."
During the year ended December 31, 2001, due to an electricity rationing
program that limited economic growth in Brazil and the effects on the Brazilian
economy of the Argentine economic crisis, the Brazilian economy experienced a
recession, high rates of inflation and increased levels of unemployment. Despite
this adverse economic environment, the Company was able to increase its pay
television subscriber base by approximately 4%.
The Company's results of operations for the year ending December 31, 2002
will be influenced generally by Brazilian economic conditions, including the
possibility of adverse effects arising from Brazilian presidential elections in
October 2002 and the potential implementation of additional electricity
rationing programs by the Brazilian government. See Item 3, "Key
Information--Risk Factors--Factors Relating to Brazil."
The Company's sales are also subject to seasonality. See
"--Overview--Seasonality."
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The Company is managed by its Conselho de Administracao ("Board of
Directors") and Diretoria ("Committee of Officers"). Day-to-day operations of
the Company are managed by the Company's Executivos ("Executive Officers"). See
Item 10, "Additional Information--Estatuto Social."
Board of Directors
Member Position Current Position Held Since
- ------ -------- ---------------------------
Robert Civita............................. President 1994
Jose Augusto P. Moreira................... Member 1994
Robert Hefley Blocker..................... Member 1995
Roger Philip Hipskind..................... Member 1998
Giancarlo Francesco Civita................ Member 1999
Francisco Savio Couto Pinheiro............ Member 1995
Robert R. Ruggiero Jr..................... Member 2000
Marc Nathanson............................ Member 2000
Mitchell R. Cohen......................... Member 2001
Raymond E. Joslin......................... Member 2000
Edgardo del Valle Rosso................... Member 2000
Committee of Officers
Member Position Current Position Held Since
- ------ -------- ---------------------------
Jose Augusto P. Moreira................... Member 1992
Antonio Valdemir Pereira Ramos............ Member 1999
Marcelo Vaz Bonini........................ Member 2001
Executive Officers
Member Position Current Position Held Since
- ------ -------- ---------------------------
Jose Augusto P. Moreira................... President 1998
Leila Abraham Loria....................... Chief Executive Officer 1999
Marcelo Vaz Bonini........................ Chief Financial Officer 1999
Vito Chiarella Neto....................... Customer Relationship Officer 2001
Amilton Lucca............................. Internet Operations Officer 2001
Kunio Ohara............................... Information Technology Officer 1999
40
Roberto Civita has been President of the Board of Directors since 1994.
Mr. Civita has been Chairman and Chief Executive Officer of Abril since 1990 and
previously served as its President for eight years. Mr. Civita attended Columbia
University's graduate program in sociology, and holds a degree in economics,
with a minor in publishing, from the University of Pennsylvania. In 1991 Mr.
Civita was elected "Person of the Year" by the Brazilian American Chamber of
Commerce in New York. Mr. Civita is the father of Giancarlo Francesco Civita.
Jose Augusto P. Moreira has been a member of the Board of Directors since
1994 and a member of the Committee of Officers since July 1992. Mr. Moreira has
been associated with Abril since 1965, and currently serves as Vice-Chairman of
the Abril Group. Mr. Moreira has a degree in Economics from the Faculdade de
Economia Sao Luis in Sao Paulo and is a graduate of the Program for Management
Development at Harvard Business School.
Robert Hefley Blocker has been a member of the Board of Directors since
1995. Mr. Blocker was associated with the Chase Manhattan Bank for 22 years, the
last nine of which he served as President Director. Mr. Blocker is currently
President and Managing Partner of Blocker Assessoria de Investimentos e
Participacoes S.A., a consulting firm for national and multinational companies.
Mr. Blocker is also a member of several other Boards of Directors, including
those of Arno S.A. and the American Chamber of Commerce in Sao Paulo.
Roger P. Hipskind has been a member of the Board of Directors since 1998.
Mr. Hipskind is a member of the Board of Directors of Banco Sul America S.A.
(Brazil) and a partner in Blocker Investment Advisory Ltda. Prior to his joining
TVA, Mr. Hipskind served as President and member of the Board of the U.S.
Brazilian Chambers of Commerce in Rio de Janeiro and Sao Paulo, respectively,
and Executive Vice President of the Chase Manhattan Bank in Brazil. Mr. Hiskind
holds B.A. from St. Mary's College, a Masters in Political Science from Notre
Dame University and a post-graduation Economics Certificate from the U.S.
Foreign Institute at the University of Wisconsin. He also has a degree in
Advanced Marketing Management from the Instituto Pour L'Etude des Methodes de
Direction de L'Enterprise in Switzerland.
Giancarlo Francesco Civita has been a member of the Board of Directors
since 1994. Mr. Civita has been associated with Abril since 1986, and currently
oversees magazine publication operations. Mr. Civita has also served a General
Director of the Programming Unit at TVA. Mr. Civita holds an M.B.A. from the
Harvard Graduate School of Business Administration, as well as an undergraduate
degree in Social Communication from the Escola Superior de Propaganda e
Marketing in Sao Paulo. Mr. Civita is the son of Robert Civita.
Francisco Savio Couto Pinheiro has been a member of the Board of Directors
since 1995. Mr. Pinheiro is a former Secretary of Communications who has also
held posts at Embratel and Radiobras, the Brazilian government-owned
broadcasting company. Mr. Pinheiro is currently a consultant and General Manager
of SP Communications. Mr. Pinheiro holds undergraduate and graduate degrees in
telecommunications.
Robert R. Ruggiero Jr. has been a member of the Board of Directors since
2000. Mr. Ruggiero Jr. is a member of the Investment Committee of the Compass
Capital Fund and previously served as Vice President in the Chase Manhattan
Bank's Merchant Banking Group. His previous experience includes assignments in
the Mergers & Acquisitions Group., Mexico Corporate Finance Group and the Global
Chemicals Group. Mr. Ruggiero Jr. holds a B.A. from Connecticut College and an
M.A. from the Columbia University School of International Affairs.
Marc Nathanson has been a member of the Board of Directors since 2000 and
was previously a member of the Advisory Board. Mr. Nathanson is the Chairman and
Chief Executive Officer of Falcon International and Falcon Holding Group, L.P.,
one of the largest cable TV operators in the United States. Mr. Nathanson is a
32 year veteran of the cable TV industry and a Director and member of the
Executive Committee of the National Cable Television Association. He was
appointed by President Clinton and confirmed by the U.S. Senate for a three year
term as a member of the International Broadcasting Board of Governors of the
United States Information Agency. He holds an M.A. from the University of
California and a B.A. from the University of Denver.
Mitchell R. Cohen is a managing director at Hellman & Friedman. Mr.
Cohen's primary areas of focus are the media an telecommunications industries.
Prior to joining the firm in 1989, Mr. Cohen was an associate in the Merchant
Banking Department and the Office of the Chairman at Shearson Lehman Hutton Inc.
Mr. Cohen is a director of Eastern Wireless Corporation and Falcon International
Communications L.P., and a former director of VoiceStream Wireless
41
Corporation and Avanstar, Inc. Mr. Cohen graduated from the McIntire School of
Commerce at the University of Virginia.
Raymond E. Joslin has been a member of the Board of Directors since 2000
and was previously a member of the Advisory Board. Mr. Joslin is group head of
Hearst Entertainment & Syndication and is a vice president and member of the
board of directors of The Hearst Corporation. Mr. Joslin has 35 years of
experience in the cable communications industry, and holds executive positions
at The A&E Television Networks, The History Channel, Lifetime Television and
ESPN. Mr. Joslin attended the Carnegie Institute of Technology and Harvard
Business School, and holds a B.A. in Economics from Trinity College.
Edgardo del Valle Rosso has been a member of the Board of Directors since
2000. Mr. Rosso is the Finance Vice President of Walt Disney Brasil, where he is
responsible for managing and directing the finance, operations and business
planning functions of the company. Mr. Rosso has worked for multinational
companies, including PricewaterhouseCoopers, Pepsi-Cola and Ericsson in
countries such as England, Brazil and Argentina. Mr. holds an undergraduate
degree in accounting.
Antonio Valdemir Pereira Ramos has been a member of the Committee of
Officers since 1999. Mr. Pereira joined Abril in 1968 and is currently the Audit
Officer of Editora Abril S.A. Mr. Pereira is also a member of the Tax Committee
responsible for the corporate reorganizations and fiscal orientation for the
operations of Editora Abril. Mr. Pereira graduated in Accounting and Actuarial
Sciences from the Fundacao Armando Alvares Penteado, with a specialization in
the areas of Auditing and Accounting.
Leila Abraham Loria has been the Chief Executive Office of TVA since June
1999. Previously, Mrs. Loria was Business Director at the retail operation of
Mesbla Lojas de Departamentos S.A. Ms. Loria also held managing positions at
Wal-Mart Brasil and Galaxy Brasil and was responsible for the development and
implementation of these operations in Brazil. Mrs. Loria graduated with a degree
in Administration from the Fundacao Getulio Vargas Foundation in 1976. Mrs.
Loria also graduated with a Masters in Administration from COPPEAD-UFRJ and an
Executive MBA from APG-Amana.
Marcelo Vaz Bonini has been the Chief Financial Officer of TVA since 1999.
Mr. Bonini joined TVA in 1993 and has since then participated in joint ventures
with strategic partners, the launching of bond offerings in the American market,
and various corporate reorganizations (mergers, acquisitions and takeovers).
Prior to his involvement in TVA, he was an auditor at Cooper & Lybrand. Mr.
Bonini graduated with a degree in Accounting Sciences from the Pontificia
Universidade Catolica de Sao Paulo.
Vito Chiarella Neto has been the Customer Relationship Officer of TVA
since March 2002. Mr. Neto joined the Abril Group in 1992 and worked in the
comptroller's department until 1999 when he became General Manager of operations
at TVA Sul. In 2000 and 2001, he was the Director of TVA's operations in Sao
Paulo. Mr. Neto graduated with a degree in Accounting from the Faculdades
Tibirica.
Amilton Lucca has been the Internet Operations Officer of TVA since August
2001. Prior to his association with TVA, beginning in 1997, Mr. Lucca was
responsible for telecom operations at EDS. Mr. Lucca graduated with a degree in
Electric Engineering and a masters degree in Telecommunications from FAAP.
Kunio Ohara has been the Information Technology Officer since September
1999. Mr. Ohara joined the Abril Group 1996 and worked in the areas of
Technology and Production. Mr. Ohara began work as Information Technology
Officer for Galaxy Brasil in 1999. Mr. Ohara has 10 years of experience working
with USWEST and Abril. Mr. Ohara graduated with a masters in Administration from
FGV and with an Electronic Engineering degree from ITA.
B. Compensation
For the year ended December 31, 2001, the aggregate compensation,
including bonuses, of all Directors, Officers and Executive Officers of the
Company was $0.8 million. Members of the Board of Directors and the Committee of
Officers do not receive a salary from the Company.
42
For the year ended December 31, 2001, the aggregate amount set aside by
the Company to provide pension, retirement or similar benefits to Directors,
Officers and Executive Officers was $75,802.
C. Board Practices
Members of the Board of Directors and Committee of Officers are elected
for a two-year period, currently expiring on March 2004. Executive Officers are
appointed and removed by the Board of Directors and do not have a stated term of
office. Directors, Officers and Executive Officers do not enter into service
contracts with the Company. See Item 7, "Major Shareholders and Related Party
Transactions--Major Shareholders--Board of Directors" and Item 10, "Additional
Information--Estatuto Social."
43
D. Employees
The following table sets forth the number of officers, managers and
other permanent employees of the Company as of the dates indicated.
As of December 31,
---------------------------------------------------------------------------------------------------
2001(*) 2000 1999
------------------------------ ------------------------------ ------------------------------
City Officers Management Others Officers Management Others Officers Management Others
- ---- -------- ---------- ------ -------- ---------- ------ -------- ---------- ------
Sao Paulo 8 27 643 9 35 719 9 26 678
Rio de Janeiro -- 2 88 1 4 253 2 4 209
Curitiba -- 2 64 -- 3 121 -- 3 110
Camboriu -- 1 11 -- 1 19 -- 2 24
Florianopolis -- 1 12 -- -- 20 -- -- 27
Foz do Iguacu -- 1 13 -- -- 15 -- -- 19
----- ------ ------- ------ ------ ----- ------ ------ -----
Total 8 34 831 10 43 1,147 11 35 1,067
===== ====== ======= ====== ====== ===== ====== ====== =====
- ----------
* As of December 31, 2001, the Company also employed 12 interns and 52
temporary employees compared to 47 interns and 82 temporary employees as
of December 31, 2000, most of whom were located in Sao Paulo and Rio de
Janeiro. These figures are not available as of the same date in 1999.
E. Share Ownership
No Director, Officer or Executive Officer listed above owns more than 1%
of the common shares of Tevecap S.A. However, Robert Civita is the owner of
99.99% of the share capital of Abril S.A., which in turn holds of 82.3% of the
common shares of Tevecap S.A. See Item 7, "Major Shareholders and Related Party
Transactions."
44
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
Tevecap has one class of capital stock, common shares, authorized and
outstanding. As of December 31, 2001, 485,220,440 common shares were
outstanding, representing authorized social capital of R$837,601,700. The
following table sets forth, as of December 31, 2001, information regarding the
beneficial ownership of Tevecap's common shares:
Number of
Common Shares
Shareholder Owned Percentage
----------- ------------- ----------
Abril S.A................................................... 399,582,903,748 82.3%
Falcon International Communications (Bermuda) L.P.(a)....... 27,930,827 5.7
Hearst/ABC Video Services II(b)............................. 39,342,567 8.1
JP Morgan Partners LLC (c).................................. 18,364,122 3.7
All directors and executive officers as a group............. 21 -(d)
(a) A subsidiary of Falcon International Communications L.L.C.
(b) Each of Hearst and ABC indirectly holds a 50% equity interest in
Hearst/ABC Video Services II.
(c) 11,496,329 and 6,867,793 of the shares beneficially owned by JP
Morgan Partners LLC ("JPM") are held of record by two wholly-owned
subsidiaries of CMIF (the "Chase Parties"). In December 1995, CMIF
sold a portion of the shares beneficially owned by it to Hearst and
ABC.
(d) Less than 1%.
On February 17, 1998, the shareholders approved a capital increase whereby
the number of shares held by Abril increased from 111,075,318 to 140,700,748
(thereby increasing its ownership interest from 56.5% to 62.2% and reducing the
ownership interests of the remaining shareholders commensurately). In addition,
on November 19, 2001, the shareholders approved a capital increase whereby the
number of shares held by Abril increased from 140,700,748 to 399,582,903
(thereby increasing its ownership interest from 62.2% to 82.3% and reducing the
ownership interests of the remaining shareholders commensurately). Both capital
increases were paid through the capitalization of loans owed by the Company to
Abril under the Abril Credit Facility. In addition, the 2001 capital increase
was paid through contributions of the minority interests of Abril in TVA Sul and
Canbras Parana and Roberto Civita in TVA Sistema. See Item 5, "Operating and
Financial Review and Prospects--Liquidity and Capital Resources."
The relations among the Company's equity holders are governed by a
Stockholders Agreement (the "Stockholders Agreement"), dated December 6, 1995,
among Tevecap, Robert Civita, Abril, the Chase Parties, Falcon International and
HABC II and CPL (together with HABC II, "Hearst/ABC Parties" and together with
Robert Civita, Abril, the Chase Parties and Falcon International, the
"Stockholders"). The following describes certain terms of the Stockholders
Agreement, as amended.
Transfer of Shares. Any Stockholder desiring to transfer shares of capital
stock to any third party, including another Stockholder, must first offer such
shares to Tevecap and all of the other Stockholders. Tevecap has the right to
determine first whether to purchase such shares; if Tevecap elects not to
exercise its right to purchase the shares, the other Stockholders may elect to
purchase such shares. If Tevecap or the other Stockholders decide to purchase
the offered shares, all of such shares must be purchased. If neither Tevecap nor
the other Stockholders offer to purchase all of the offered shares, the
Stockholder desiring to sell such shares may sell the shares to any person,
provided that (i) all of the shares are sold simultaneously within six months
after the decision by Tevecap and the Stockholders not to purchase the shares,
(ii) Tevecap has not determined that the person making such purchase is a
stockholder of undesirable character, lacks necessary financial capacity or
competes with the Company, and (iii) the price for sale to such third party is
at least 90% of the price offered to the Company and the other Stockholders. The
provisions regarding transfers of shares do not apply to transfers to certain
affiliates of the Stockholders. In addition, the Stockholders have preference
over all other persons or entities to subscribe for new issuances of capital
stock by the Company in proportion to their existing ownership of capital stock.
45
Event Put Options. Upon the occurrence of certain defined "triggering
events" each of the Stockholders, other than Abril, may demand that Tevecap buy
all or a portion of the shares of capital stock of Tevecap held by such
Stockholder, unless the shares of capital stock held by such Stockholder are
publicly registered, listed or traded (collectively referred to as an "Event
Put"). The triggering events are: (i) the amount of capital stock held by such
Stockholder exceeds the amount allowed under any legal restriction to which such
Stockholder may be subject ("Regulatory Put"); (ii) a breach without cure within
a designated period by Robert Civita, Abril, any of the respective affiliates of
Robert Civita or Abril or Tevecap of any representation, warranty, covenant or
duty made or owed pursuant to the Stockholders Agreement, the Stock Purchase
Agreement, dated August 25, 1995, among Robert Civita, Abril, the Chase Parties,
and certain other parties, or the Stock Purchase Agreement, dated December 6,
1995, among Tevecap, Robert Civita, Abril, HABC Parties, the Chase Parties,
Falcon International and certain other parties; (iii) a breach without cure
within a designated period by Abril of the Abril Credit Facility; (iv) Robert
Civita ceases to directly or indirectly hold without the approval of the
Stockholders 31.258% of the capital stock and voting capital stock of Tevecap or
he ceases to control the voting capital stock held by his affiliates
representing 50% or more of the voting capital stock of Tevecap; (v) the Service
Agreement, dated July 22, 1994, as amended, among Tevecap, Televisao Show Time
Ltda. ("TV Show Time"), TVA Brasil Radioenlaces Ltda. ("TVA Brasil") and Abril,
each of which holds certain licenses covering certain operations of TVA, ceases
to be valid or effective or TV Show Time, TVA Brasil or Abril is liquidated or
dissolved or files voluntarily, or has filed against it involuntarily, any
petition in bankruptcy or (vi) another Stockholder exercises an Event Put, other
than a Regulatory Put. The price to be paid in connection with an Event Put is
set at fair market value determined by appraisal or by a multiple of Tevecap's
most recent quarterly earnings. However, in the event Tevecap does not have the
funds to satisfy its payment obligations under an Event Put, then, subject to a
number of conditions, exercising Stockholders may elect to receive special
voting or non-voting preferred shares of Tevecap. These preferred shares will
have priority with respect to the distribution of dividends and repurchases of
shares by Tevecap. The carrying value of the redeemable shares subject to an
Event Put reflect the capital contributions made by the Stockholders (other than
Falcon shares also subject to a Time Put, as described below, the carrying value
of which is adjusted to fair value in accordance with the probability of
redemption). See Note 17 to the Company's Financial Statements.
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. However, in the
event Tevecap does not have the funds to satisfy its payment obligations under
the Time Put, then, subject to a number of conditions, Tevecap may deliver to
Falcon promissory notes payable three years from the issue date thereof. In the
event Tevecap is unable to satisfy its payment obligations under these
promissory notes, Falcon may be entitled, subject to a number of conditions, to
sell its shares of Tevecap to a third party.
Registration Rights. The Chase Parties, considered together, the
Hearst/ABC Parties or Falcon International may request that the Company effect
the registration of any or all of the capital stock held by such Stockholder.
However, the Company is not obligated to effect more than one registration
requested by a Stockholder in any 12 month period or more than three
registrations requested by a Stockholder in total. The capital stock that is the
subject of the registration demand must be of a certain minimum amount. In
addition, Tevecap must offer each Stockholder other than Abril the opportunity
to register capital stock held by such Stockholder, subject to standard
reductions in amount such Stockholder may register as recommended by the
managing underwriter. Tevecap is obligated to pay all registration expenses
other than underwriting discounts and commissions or transfer taxes, and Tevecap
is only obligated to pay for the fees and expenses of Tevecap's counsel and
accountants.
Board of Directors. Tevecap is governed by a board of directors with 11
members. Under the Stockholders Agreement, Abril designates six members, Falcon
International designates two members, the Chase Parties together designate one
member, and Hearst/ABC Parties designates one member. The final member is an
independent member nominated by Abril and designated by an affirmative vote of
all shareholders entitled to designate a director. The affirmative vote of
members of the board representing the Chase Parties, Falcon International and
Hearst/ABC Parties is required for: acquisition of ownership interests in other
companies; acquisition or liens on equity in other companies or liens on assets
other than in ordinary course and in aggregate less than $500,000; incurrence of
indebtedness of less than one year maturity and in an amount greater than
$1,000,000; incurrence of indebtedness of greater than one year maturity except
trade debt and in an aggregate amount of less than $500,000; loans on advance
payments; non-financial
46
guarantees in aggregate totaling more than $100,000; transactions with
affiliates; and modifications to the Service Agreement. Tevecap must obtain the
approval of Hearst/ABC Parties before entering into contracts in excess of
$1,000,000 in value and making any material programming decisions. Tevecap must
obtain the approval of Falcon International before entering into contracts in
excess of $1,000,000. Tevecap must obtain the approval of each of Hearst/ABC
Parties, the Chase Parties and Falcon International before any corporate
restructuring or any public offering of securities of Tevecap.
Required Dividend. Tevecap is required by the terms of the Stockholders
Agreement to pay annual dividends equal to the net cash flow of Tevecap or 25%
of the net consolidated profit (as defined by Brazilian law) of Tevecap. Since
inception, Tevecap has never declared a dividend.
B. Related Party Transactions
Overview
Tevecap has engaged in a significant number and variety of related party
transactions, including, without limitation, the transactions described below.
Tevecap has not performed any studies or analyses to determine whether the terms
of past transactions with related parties have been equivalent to arm's-length
transactions and cannot state with any certainty the extent to which such
transactions are comparable to those which might have been obtained from a
non-affiliated third party.
Transactions Among Shareholders
On December 6, 1995, Tevecap's shareholders executed a Stock Purchase
Agreement and a Stockholders Agreement relating to the investment of ABC and
Hearst in the Company through Hearst/ABC Parties. See Item 7, "Major
Shareholders and Related Party Transactions--Major 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 Company and the shareholders. These agreements supplemented other existing
agreements among Shareholders. The following contracts are the principal
agreements among the Company and the Tevecap shareholders (each of which, unless
specified otherwise, is dated as of December 6, 1995).
General and Advisory Services
Under an Advisory Services Agreement, each of Hearst, ABC and HABC II has
agreed, upon a request from the Company, to use its reasonable efforts to
arrange for the investors to furnish personnel to provide advisory services to
the Company. To date, the Company and Hearst, ABC and HABC II have not entered
into a supplemental agreement to provide specific personnel or services at a
particular cost.
Programming
In connection with the investment by Hearst and ABC in Tevecap, Tevecap
and these two parties entered into a Programming Agreement (the "Hearst/ABC
Programming Agreement"). Pursuant to the Hearst/ABC Programming Agreement, each
of Hearst and ABC has agreed to offer first to Tevecap pay programming that
Hearst or ABC (or any subsidiary of which either Hearst or ABC owns at least 80%
of the outstanding equity interests) intends to license for use in Brazil in the
pay television markets served by TVA. The parties also agreed to consider future
co-production activities which could enhance TVA's business and competitive
position. Tevecap agreed to pay to each of Hearst and ABC such fees and expenses
as are agreed upon at the time such programming or co-production services are
provided. The Hearst/ABC Programming Agreement does not apply to The Walt Disney
Company or its subsidiaries other than ABC and ABC's subsidiaries. In addition,
the Hearst/ABC Programming Agreement does not apply to the activities of The A&E
Television Networks, Lifetime Television and ESPN, including agreements relating
to ESPN Brasil.
Transactions Among Related Parties
Publishing and Advertising
47
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 290,000 copies of the Company's monthly
magazine in return for a monthly payment of approximately $151,000. The monthly
magazine was distributed in accordance with a distribution agreement, dated
September 1992, between the Company and Abril, pursuant to which the Company
paid Abril approximately $40,000 per month. In October 2001, the Company
discontinued its distribution agreement with Abril and contracted with an
independent third party to provide these services.
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.
Abril Credit Facility
Tevecap has entered, as the borrower, into a revolving credit facility
(the "Abril Credit Facility") with Editora Abril S.A., as the lender. The Abril
Credit Facility, effective December 6, 1995, allows the Company to draw down
amounts not to exceed a maximum aggregate principal amount of $60,000,000. Since
June 1996, Tevecap has from time to time requested, and Abril has provided,
funding in excess of the aggregate maximum principal amount. The loans provided
under the Abril Credit Facility are denominated in reais, unless the loan is a
pass-through loan that Abril has funded in U.S. dollars, in which case the loan
is funded in a real-equivalent amount. Abril has agreed to use its reasonable
commercial efforts to obtain the lowest possible interest rates for its loans to
Tevecap under the Abril Credit Facility. As of December 31, 2001, the aggregate
principal amount outstanding under the Abril Credit Facility was $6.7 million.
In November 2001, Tevecap's shareholders approved the capitalization of
outstanding loans in the aggregate principal amount of $123,159,000 under the
Abril Credit Facility.
Other Intercompany/Shareholder Loans
Tevecap has used the proceeds from the Abril Credit Facility to make
capital contributions to TVA Sistema, as well as to extend loans to various
interrelated companies. The aggregate outstanding amounts under these loans as
of December 31, 2001 were: $11.2 million to TVA Brasil; $8.0 million to Canbras
TVA and its affiliates in Parana state; and $30.5 million to TVA Communications.
In addition, TV Show Time has loans outstanding to Abril, which loans, as of
December 31, 2001, had an aggregate outstanding amount of approximately $1.3
million.
Service Agreement with Licenseholders
Pursuant to a Service Agreement, dated July 22, 1994, as amended, TVA
Brasil and TV Show Time (the "Licenseholders") agreed to transfer to TVA all the
rights and benefits associated with their current and future pay-television
licenses, with the exception of licenses operated by companies in which TVA has
minority interests. While the Licenseholders retained the title to such
licenses, the Licenseholders promised to take all steps necessary to transfer
the title of such licenses to Tevecap. Such steps included the appropriate
procedures required by the Ministry of Communications and any other governmental
authority regulating the transfers. The transfer of the title to such licenses
is currently either pending, subject to approval by the Ministry of
Communications, or waiting for the passage of certain statutory or regulatory
waiting periods.
ITEM 8. FINANCIAL INFORMATION
Item 19 contains all financial statements required to be filed as part of
this Annual Report.
48
ITEM 9. THE OFFER AND LISTING
A. Offer Listing and Details.
Tevecap has one class of capital stock, common shares, authorized and
outstanding. The Company's common stock are not listed on any exchange and are
not publicly traded. See Item 7, "Major Shareholders and Related Party
Transactions--Major Shareholders."
B. Plan of Distribution
Not applicable.
C. Markets
The Company's outstanding registered securities consist solely of the
Company's 12"% Senior Notes due 2004 (referred to herein as the "Senior Notes")
that were registered under the Securities Act pursuant to an Exchange Offer
which expired on May 23, 1997 and a subsequent Exchange Offer which expired on
December 10, 1997. There is no formal trading market for such securities.
The Company does not have any publicly traded class of equity securities.
See Item 9(A) above.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Estatuto Social
1. The Company's object, as set forth in Subsection 3 of Chapter I of its
Estatuto Social, is as follows: (i) the production, acquisition,
licensing, distribution, import and export of television programs; (ii)
the rendering of telecommunication services, in particular pay television
services, as well as other services relating to signal transmission,
reception and distribution systems and television programs; (iii)
advertisement and publicity exploitation; and (iv) investment in other
companies, especially those in the telecommunication field.
2. The Company is managed by the Board of Directors and the Committee of
Officers. Day to day management, however, is carried out by the Executive
Officers. See Item 6, "Directors, Senior Management and Employees."
The Board of Directors is composed of 11 regular members and 11
alternates, each elected by the general shareholders meeting. The Board of
Directors shall meet whenever necessary and at least every three months,
49
upon request in writing by any of its regular or alternate Directors (such
request to be delivered at least ten business days before the date of the
meeting and upon presentation of the agenda to be discussed). The meeting
of the Board of Directors shall be convened only with the attendance of at
least six of its regular members, in person or as represented by their
respective alternates. The resolutions shall be taken by the favorable
vote of the majority of the Directors present at the meeting.
The Committee of Officers comprises a minimum of two and a maximum of five
members. The Committee of Officers manages the business of the Company in
general and practices any and all acts necessary or advisable, except
those which, pursuant to applicable law, the Estatuto Social or the
Stockholders Agreement, are the responsibility of the shareholders or the
Board of Directors.
(a) There are no provisions in the Estatuto Social relating to the power
of Directors or Officers to vote on a proposal in which a conflict of
interest exists or may exist.
(b) The aggregate compensation of the Board of Directors and the Committee
of Officers is fixed pursuant to a General Shareholders Meeting and is
distributed among the Directors and Officers as determined by the Board of
Directors at a duly convened meeting.
(c) Pursuant to Subsection 20 of Chapter V of the Estatuto Social and the
Stockholders Agreement, the incurrence of the following indebtedness must
be approved by all Directors appointed by minority shareholders: (i)
indebtedness with a maturity of less than one year and in an amount
greater than U.S.$1,000,000; and (ii) indebtedness with a maturity of more
than one year (except trade debt in an aggregate amount lower than
U.S.$500,000). Any other incurrence of indebtedness can be approved by a
majority of the Directors present at a meeting of the Board of Directors
or by any two Officers in the ordinary course of business.
(d) There are no provisions in the Estatuto Social setting forth age
limits or retirement requirements for Directors and Officers. Directors
are elected for a period of two years (with the opportunity of reelection)
by a shareholders meeting and remain as Directors until the appointment of
their respective successors. In case of a vacancy, a general shareholders
meeting shall be called to elect a substitute.
Officers are elected by the Board of Directors for a period of two years
and can be reelected. In case of a vacancy, a meeting of the Board of
Directors shall be immediately called to elect the substitute, who shall
complete the term of the Officer so replaced.
(e) All Directors, whether regular or alternates, must be shareholders of
the Company, although the Estatuto Social does not require ownership of a
minimum number of shares to qualify as a Director. Officers do not need to
be shareholders of the Company.
3. The Company's capital is divided into and represented by 485,220,440
shares, all of which are common shares entitled to one vote in
shareholders meetings.
(a) There are no provisions in the Estatuto Social setting forth a time
limit for dividend entitlements to lapse. All shares are entitled to the
same dividend payments. Under Brazilian law, the Company is required to
pay dividends in an amount equal to 25% of its net consolidated profit (as
defined by Brazilian law). In addition, upon resolution of the Board of
Directors, interim dividends may be distributed out of net profits
declared in annual or semiannual financial statements.
(b) There are no provisions in the Estatuto Social concerning staggered
intervals for the reelection of Directors or permitting or requiring
cumulative voting.
(c) All shares have the right to share in the Company's net profits. At
the end of any fiscal year, from the net profits earned, 5% shall be
deducted to from the legal reserve (which shall not exceed 20% of
outstanding social capital).
50
(d) All shares have the same right to share any surplus in case of a
liquidation of the Company after settlement of all outstanding debts. In
the event of liquidation, a general shareholders meeting shall determine
the form of liquidation, appoint the liquidator and an audit committee to
operate during the liquidation period.
(e) The resolutions of a general shareholders meeting authorizing the
purchase or redemption of the Company shares shall comply with the
provisions in the Stockholders Agreement governing resolutions at general
shareholders meetings.
(f) There are no sinking fund provisions in the Estatuto Social.
(g) All of the Company's shares are issued and fully paid. Consequently,
the shareholders are not subject to further capital calls.
(h) There are no provisions in the Estatuto Social discriminating against
any existing or prospective holder of such securities as a result of such
shareholder owning a substantial number of shares.
4. In order to modify the rights of shareholders, the Estatuto Social must be
amended to reflect such modification. The Estatuto Social can be amended
only through a resolution passed at a general shareholders meeting.
5. General shareholders meetings can be ordinary or extraordinary. Ordinary
general shareholders meetings shall be held within four months following
the closing of the fiscal year, whereas the extraordinary general
shareholders meetings are held whenever necessary. All general
shareholders meetings shall be called by the Board of Directors. Only the
shareholders whose shares are subscribed to in their respective names, in
the applicable register, up to three days before the date fixed for the
general shareholders meeting, may participate and vote in such meeting.
6. Under Brazilian law, non-Brazilians are not entitled to own on a combined
basis more than 49% of the voting stock of the Company.
7. There are no provisions in the Estatuto Social that would have the effect
of delaying, deferring or preventing a change in control of the Company.
However, pursuant to the Stockholders Agreement, any existing shareholder
desiring to sell its shares must first offer its shares to the remaining
shareholders. The Stockholders Agreement also contains other transfer
restrictions relating to the Company's shares. See Item 7, "Major
Shareholders and Related Party Transactions--Major Shareholders."
8. There are no provisions in the Estatuto Social governing the ownership
threshold above which shareholders ownership must be disclosed.
9. Brazilian corporate law is significantly different from U.S. corporate law
in a number of areas. The Brazilian form of Articles of Incorporation
(Estatuto Social) includes both the Anglo-Saxon concept of Articles of
Incorporation and the concept of "by-laws." Tevecap S.A., like other large
Brazilian companies, has a two-tier governance system, which typically
involves a management or executive board (Committee of Officers) and a
supervisory board (Board of Directors). The Committee of Officers is the
executive body. Its members are appointed by the Board of Directors and
are employed by the Company. The Board of Directors has supervising and
advising functions only. Its members are representatives of shareholders
and cannot be employed by the Company. The Board of Directors' duties
include supervision of the Committee of Officers and the general course of
business of the Company. The Board of Directors also performs advisory
functions vis-a-vis the Committee of Officers.
10. There are no provisions in the Estatuto Social imposing more stringent
conditions than those required by law to change the capital of the
Company. However, pursuant to the Stockholders Agreement, any existing
shareholder desiring to sell its shares must first offer its shares to the
remaining shareholders. The Stockholders Agreement also contains other
transfer restrictions relating to the Company's shares. See Item 7, "Major
Shareholders and Related Party Transactions--Major Shareholders."
51
C. Material Contracts
DBS Sale
As of May 18, 1999, the Company entered into the following agreements: (i)
a Master Agreement (the "Master Agreement") relating to the sale of the
Company's equity interests in Galaxy Brasil and TVA Banda C, among the Company,
Galaxy Brasil and TVA Banda C, as Sellers, Abril, as a Seller-related entity,
and GLA, as Purchaser, and (ii) a GLA Purchase Agreement relating to the sale of
the Company's indirect equity interests in GLA and certain assets related
thereto, among the Company, TVA Communications Ltd. and TVA Finco Ltd., as
Sellers, and Abril as a Seller-related entity, and Directv Latin America, Inc.
("DLA") and Darlene Investments (an affiliate of the Cisneros Group) as
Purchasers (the "GLA Purchase Agreement" and, together with the Master
Agreement, the "Purchase Agreements"). The sale of these assets is referred to
in this Annual Report as the "DBS Sale."
Pursuant to the Master Agreement, the Company agreed to sell all of its
interests in the following entities to GLA:
o Galaxy Brasil, a wholly-owned subsidiary of the Company and
exclusive local operator of DIRECTV Ku-Band service in Brazil; and
o TVA Banda C, a wholly-owned subsidiary of the Company and operator
of TVA's C-Band service.
Pursuant to the GLA Purchase Agreement, the Company agreed to sell all of
its interests in the following entities and assets to DLA and Darlene
Investments:
o a 10% equity interest in LA, which the Company owned through its
British Virgin Islands subsidiary, TVA Communications Ltd.;
o a 20.5% equity interest in SurFin Ltd. , a Bahamian limited
liability company engaged in financing activities related to DIRECTV
service throughout Latin America;
o certain promissory notes in the aggregate principal amount of
$7,124,800, representing indebtedness of California Broadcast Center
LLC ("CBC"), a Delaware limited liability company the principal
asset of which is a GLA satellite uplink facility; and
o the CBC Class B Unit Purchase Warrants (# W-3), dated as of April
11, 1997, convertible into equity interests in CBC.
The net cash proceeds to the Company at the closing of the DBS Sale, which
occurred in July 1999, were approximately $177.6 million. The total
consideration received by the Company was comprised of the net cash received at
closing, a promissory note in the principal amount of $25.5 million (which was
fully paid in August 2001), the assumption of certain dollar and
real-denominated indebtedness and the release of certain guarantees given by the
Company and one of its subsidiaries in respect of certain obligations of Galaxy
Brasil.
Tender Offer and Consent Solicitation
Concurrently with the consummation of the DBS Sale, the net proceeds to
the Company from the DBS Sale were delivered to The Chase Manhattan Bank, as
Depositary, to fund a tender offer and consent solicitation (the "Offer")
relating to TVA's $250,000,000 12 5/8% Senior Notes due 2004 (the "Senior
Notes"). Pursuant to the Offer, a wholly-owned subsidiary of the Company
purchased Senior Notes in the aggregate principal amount of $201,978,000 and the
Company obtained a consent from holders of the Senior Notes to broadly amend the
restrictive covenants contained in the terms of the Senior Notes.
D. Exchange Controls
Brazilian law provides that, whenever there is, or is a serious risk of, a
material imbalance in Brazil's balance of payments, the Brazilian Government
may, for a limited period of time, impose restrictions on the remittance to
foreign
52
investors of the proceeds of their investments in Brazil, as it did for
approximately six months in 1989 and early 1990, as well as on the conversion of
the Brazilian currency into foreign currencies.
The Brazilian Government currently restricts the ability of Brazilian or
foreign persons or entities to convert reais into foreign currencies other than
in connection with certain authorized transactions. There can be no assurance
that the Brazilian Government will not in the future impose more restrictive
foreign exchange regulations that would have the effect of eliminating or
restricting the Company's access to foreign currency that would be required to
meet its foreign currency obligations, including payments under the 12 5/8%
Senior Notes due 2004 issued by Tevecap in November 1996. The likelihood of the
imposition of such restrictions by the Brazilian Government may be affected by,
among other factors, the extent of Brazil's foreign currency reserves, the
availability of sufficient foreign currency on the date a payment is due, the
size of Brazil's debt service burden relative to the economy as a whole,
Brazil's policy towards the International Monetary Fund and political
constraints to which Brazil may be subject.
For a description of the foreign exchange markets in Brazil, see Item 3,
"Key Information--Selected Financial Data--Exchange Rates." See also "Risk
Factors--Factors Relating to Brazil."
E. Taxation
Brazil
The following is a summary of the material Brazilian income tax
consequences to Tevecap in connection with the sale and repayment of Tevecap's
12 5/8% Senior Notes due 2004 (the "Senior Notes") including any interest
thereon) and to beneficial owners of the Senior Notes that are non-residents of
Brazil in connection with the purchase, ownership and disposition of such Senior
Notes. This summary is limited to Tevecap and to non-residents of Brazil which
acquire the Senior Notes at the original issue price, and does not address
investors who purchase Senior Notes at a premium or market discount. In
addition, this summary is based on the Brazilian tax regulations as presently in
effect and does not take into account possible future changes in such tax laws.
Individuals domiciled in Brazil and Brazilian companies are taxed in
Brazil on the basis of their worldwide income (which includes earnings of
Brazilian companies' foreign subsidiaries, branches and affiliates). The
earnings of branches of foreign companies and non-Brazilian residents in general
are taxed in Brazil only when derived from Brazilian sources. Interest, fees,
commissions and any other income (which for the purposes of this paragraph
includes any deemed income on the difference between the issue price of the
Senior Notes and the price at which the Senior Notes are redeemed) payable by a
Brazilian obligor to an individual, company, entity, trust or organization
domiciled outside Brazil is considered derived from Brazilian sources and is
therefore subject to income tax withheld at the source. Brazilian tax laws
expressly authorize the paying source to pay the income or earnings net of taxes
and, therefore, to assume the cost of the applicable tax. The rate of
withholding is 15% or such other lower rate as is provided for in an applicable
tax treaty between Brazil and such other country where the recipient of the
payment has its domicile. If the beneficiary of the payment is located in a
country in which the effective tax rate on net income is lower than 20%, the
withholding rate is 25%. Notwithstanding the foregoing, the applicable
withholding tax rate for negotiable instruments such as the Senior Notes was
reduced to zero, pursuant to Resolutions 1853 of July 31, 1991 and 644 of
October 22, 1980 of the Central Bank, subject to Central Bank Circular 2661 of
February 8, 1996, which restricts such withholding tax reductions to negotiable
instruments having a minimum maturity of 96 months. As a result, since the
Senior Notes have an original maturity of 96 months, such reduction will apply
to payments of interest and other income with respect to the Senior Notes.
If, however, any Note is redeemed prior to November 26, 2004, such
reduction will not apply and, therefore, upon such redemption the Brazilian
withholding tax will be imposed on the amount of interest, fees and commissions
paid on such Senior Notes from the date of issue through the date of redemption.
Based on the advice of its Brazilian tax counsel, Tevecap believes and intends
to take the position for tax reporting purposes that, in the event of any such
early redemption to which such withholding tax applies, so long as the paying
agent through which such payment is made is located in Japan and payment to such
paying agent discharges the obligations of Tevecap to make payments in respect
of the Senior Notes, interest and other income with respect to the Senior Notes
will be subject to Brazilian withholding tax at a rate of 12.5% under the tax
treaty in effect between Brazil and Japan. In any event, under the terms of the
Senior Notes, Tevecap would be required to gross up Noteholders for any
Brazilian withholding tax, subject to customary
53
exceptions. Tevecap has the right to redeem the Senior Notes at par in the event
that it is required to gross up for Brazilian withholding tax imposed at a rate
in excess of 15%.
Any earnings or capital gains resulting from the sale (whether inside or
outside Brazil) of any Senior Notes by a non-resident of Brazil to another
non-resident of Brazil are not subject to tax in Brazil. Earnings or capital
gains resulting from the sale (whether inside or outside Brazil) of any Senior
Notes by a non-resident of Brazil to a resident of Brazil should not be subject
to tax in Brazil, although the matter is not free from doubt.
On February 8, 1996, the Brazilian Federal Government issued Decree No.
1,815, which imposed a tax on Brazilian issuers with respect to foreign exchange
transactions ("IOF tax") related to the entering into Brazil of proceeds
resulting from foreign loans (including the issue of securities such as the
Senior Notes). The rate of IOF tax paid by the Company with respect to the
issuance of the Senior Notes was zero %. Decree No. 1,815 was revoked by Decree
No. 2,219 of May 2, 1997 which currently regulates the IOF tax. The IOF tax rate
was reduced to zero upon the adoption of Ordinance No. 85 on April 24, 1997.
However, under Law No. 8.894 dated June 21, 1994, such tax rate may be increased
up to 25%.
On August 15, 1996, the Brazilian Congress approved Constitutional
Amendment No. 12 creating a new temporary tax, the Contribuicao Provisoria sobre
Movimentacao Financeira ("CPMF"). Based on such Amendment, Law No. 9,311 of
October 24, 1996 ("Law 9,311") was enacted, creating the CPMF tax. Under Law No.
9,311, as amended, all financial debit and money transfers through Brazilian
bank accounts effected as from January 23, 1997 until December 31, 1998,
including payments made by the Company with respect to the Senior Notes, will be
subject to the assessment of the CPMF tax at the rate of 0.2%. Funds arising
from the collection of CPMF tax will be applied only in the public health
system. Since January 23, 1999, CPMF was extinguished and Congress approved
Constitutional Amendment No. 21, on March 19, 1999, in order to reestablish CPMF
at the rate of 0.38%, starting on June 19, 1999, for a period of one year, and
subsequently at the rate of 0.38%, for a period of two years. The Constitutional
Amendment No. 37 of June 2001 extended the CPMF leviance until December 31, 2004
at 0.38%.
There is no stamp, transfer or other similar tax in Brazil with respect to
the transfer, assignment or sale of any debt instrument outside Brazil
(including the Senior Notes).
United States
The following is a summary of the material United States Federal income
tax consequences to a beneficial owner of the Senior Notes that is a citizen or
resident of the United States, a corporation, partnership or other entity
created or organized in or under the laws of the United States or any State
thereof, an estate the income of which is subject to United States Federal
income taxation regardless of its source or a trust for which a court within the
United States is able to exercise primary supervision over its administration
and for which one or more U.S. fiduciaries have the authority to control all
substantive decisions, as well as other persons subject to United States Federal
income taxation on a net income basis in respect of the purchase, ownership and
disposition of a Note ("U.S. Holders"). Such tax treatment may vary depending
upon the particular situation of a U.S. Holder. This summary does not discuss
all of the tax consequences that may be relevant to certain types of investors
subject to special treatment under the United States Federal income tax laws
(such as individual retirement accounts and other tax deferred accounts, banks,
securities broker-dealers, life insurance companies, tax-exempt organizations,
foreign persons, persons whose "functional currency" is other than the U.S.
dollar or persons that hold Senior Notes as part of a "straddle" or "conversion
transaction" or otherwise as part of a "synthetic asset") and is limited to
investors which hold Senior Notes as capital assets. In addition, this summary
is limited to U.S. Holders that acquire the Senior Notes at their issue price
and does not address investors that purchase Senior Notes at a premium or market
discount. This summary is based on the Internal Revenue Code of 1986, as amended
(the "Code"), final, temporary and proposed Treasury regulations thereunder (the
"Regulations"), revenue rulings, court cases, and other legal authorities as now
in effect (or proposed) and as currently interpreted, and does not take into
account possible changes in such tax laws or other legal authorities or such
interpretations. No rulings on any of the issues discussed below will be sought
from the United States Internal Revenue Service (the "IRS").
PROSPECTIVE PURCHASERS OF THE NOTES ARE ADVISED TO CONSULT THEIR TAX
ADVISERS AS TO THE CONSEQUENCES OF A PURCHASE AND SALE OF NOTES, INCLUDING,
WITHOUT
54
LIMITATION, (I) THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR NON-U.S. TAX
LAWS TO WHICH THEY MAY BE SUBJECT, AND OF ANY POSSIBLE LEGISLATIVE OR
ADMINISTRATIVE CHANGES IN LAW, (II) THE UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES OF THE POSSIBLE DEDUCTION BY THE ISSUER OF BRAZILIAN TAXES (AND OF
THE PAYMENT BY THE ISSUER OF ADDITIONAL AMOUNTS WITH RESPECT THERETO) FROM
PAYMENTS ON THE NOTES, (III) THE AVAILABILITY FOR UNITED STATES FEDERAL INCOME
TAX PURPOSES OF A CREDIT OR DEDUCTION FOR ANY BRAZILIAN TAXES SO DEDUCTED AND
(IV) THE CONSEQUENCES OF PURCHASING THE NOTES AT A PRICE OTHER THAN THEIR ISSUE
PRICE.
Interest on the Senior Notes
Interest on the Senior Notes will be taxable to a U.S. Holder as ordinary
income at the time it accrues or is received in accordance with the U.S.
Holder's method of accounting for tax purposes. The amount includible in the
income of a U.S. Holder will be the gross amount of interest, including any
Additional Amounts, if any, payable to holders of Senior Notes (i.e., the amount
before deduction of any Brazilian withholding taxes).
Disposition of a Note
Generally, any sale, redemption or other taxable disposition of a Note by
a U.S. Holder will result in taxable gain or loss equal to the difference
between (1) the sum of the amount of cash and the fair market value of other
property received with respect to such taxable sale, redemption or other
distribution (other than consideration attributable to accrued interest not
previously taken into account, which consideration would be treated as interest
received) and (2) the U.S. Holder's tax basis in the Note. Any gain or loss upon
a sale or other disposition of a Note will be capital gain or loss (which will
be long-term if the Note is held for more than one year).
Effect of Brazilian Withholding Taxes
It is believed that payments with respect to a Note will not be subject to
Brazilian withholding tax unless the Note is redeemed prior to November 26,
2004. See "--Brazil." In the case of any Note which is so redeemed, withholding
taxes in respect of interest previously paid may be imposed by Brazil at the
time of redemption. Any Brazilian tax withheld generally will be treated as a
foreign income tax that U.S. Holders may elect to deduct in computing their
taxable income or, subject to the limitations on foreign tax credits generally,
to credit against their United States Federal income tax liability. No such
deduction or credit will be available to the extent Brazil pays a subsidy to a
U.S. Holder, a related person or Tevecap, the amount of which is determined
(directly or indirectly) by reference to the amount of the withholding tax.
While Brazil does not have a program or policy of paying such subsidies at
present, it has had programs of that nature in the past and could implement such
programs again in the future. For purposes of determining a U.S. Holder's United
States foreign tax credit, the gain or loss on the sale, redemption or other
taxable disposition of a Note will generally constitute United States source
income. Interest (including any Additional Amounts payable by Tevecap) will
generally constitute foreign source passive income or financial services income
for United States foreign tax credit purposes. However, if a Note is redeemed
prior to November 26, 2004, and payments with respect to the Note are subject to
Brazilian withholding tax imposed at a rate of 5% or more, the IRS might
retroactively treat interest paid with respect to the Note as high withholding
tax interest. In any event, because the amount of foreign taxes for which the
foreign tax credit may be taken for the taxable year is generally limited to an
amount equal to the U.S. Holder's United States Federal income tax rate
multiplied by its foreign source income for the taxable year, a U.S. Holder may
have insufficient foreign source income to utilize fully any foreign tax credit
attributable to such Brazilian withholding taxes (but such U.S. Holder may be
entitled to utilize the foreign tax credit attributable to such withholding
taxes for the holders' previous two or succeeding five taxable years, or such
withholding taxes may instead be deductible by the U.S. Holder). A U.S. Holder
may be required to provide the IRS with a certified copy of the receipt
evidencing payment of withholding tax imposed in respect of payments on the
Senior Notes in order to claim a foreign tax credit in respect of such
withholding tax.
Information Reporting and Backup Withholding
For each calendar year in which the Senior Notes are outstanding, each DTC
participant or indirect participant holding an interest in a Note on behalf of a
U.S. Holder and each paying agent making payments in respect of a Note will
55
generally be required to provide the IRS with certain information, including
such U.S. Holder's name, address and taxpayer identification number (either such
U.S. Holder's Social Security number or its employer identification number, as
the case may be), and the aggregate amount of interest and principal paid to
such U.S. Holder during the calendar year. These reporting requirements,
however, do not apply with respect to certain U.S. Holders, including
corporations, securities dealers, other financial institutions, tax-exempt
organizations, qualified pension and profit sharing trusts, individual
retirement accounts.
In the event that a U.S. Holder fails to establish its exemption from such
information reporting requirements or is subject to the reporting requirements
described above and fails to supply its correct taxpayer identification number
in the manner required by applicable law, or underreports its tax liability, the
direct or indirect DTC participant holding such interest on behalf of such U.S.
Holder or paying agent making payments in respect of a Note may be required to
"backup" withhold a tax equal to 31% of each payment of interest and principal
with respect to the Senior Notes. This backup withholding tax is not an
additional tax and may be credited against the U.S. Holder's United States
Federal income tax liability if the required information is furnished to the
IRS.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
The Company is a foreign issuer subject to the reporting requirements of
the Exchange Act and the rules and regulations thereunder. The Company files
reports with the Securities and Exchange Commission (the "Commission") in
electronic format via EDGAR. These reports can be accessed through the
Commission's website (www.sec.gov) and can also be inspected at the public
reference facilities maintained by the Commission at 450 Fifth Street N.W., Room
1024, Washington, DC 20549, and at the SEC's regional offices located at the
Woolworth Building, 233 Broadway, New York, New York 10279 and 175 W. Jackson
Boulevard, Suite 900, Chicago, Illinois 60604. Copies of such materials may be
obtained at prescribed rates. Other information regarding the Company can be
accessed through the Company's website (www.tva.com.br). All information
obtained through the Company's website is expressly not incorporated by
reference herein.
I. Subsidiary Information
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to foreign currency exchange rate risk and interest
rate risk. As of December 31, 2001, Tevecap had dollar-denominated debt of
U.S.$64.7 million which is due as follows:
Principal
----------------------
(thousands of dollars)
2002 15,652
2003 1,073
2004 48,022
2005 --
2006 and thereafter --
-------
$64,747
=======
56
During January 1999, the Brazilian real experienced a significant
devaluation after the Central Bank abandoned the exchange band within which the
real was permitted to trade. Since that time, the exchange rate has been
volatile, ranging up to R$2.80 per U.S. dollar. See Item 3, "Key
Information--Selected Financial Data--Exchange Rates."
Although the Company's reporting currency is the U.S. dollar, the cash
flow required to service its indebtedness is generated in local currency,
Brazilian reais (R$). Using the year end 2001 exchange rate (R$2.3204 per
U.S.$1.00), the cash flow in reais to pay the interest (U.S.$1.4 million) and
principal due in 2002 would be R$3.3 million and R$33.0 million, respectively. A
devaluation of the real to R$2.70 per U.S. dollar would require cash flow of
R$3.9 million and R$38.4 million, respectively. If the real devalued to R$3.00
per U.S. dollar, the cash flow in reais to pay the interest and principal due in
2002 would be R$4.3 million and R$42.6 million, respectively.
The Company is also subject to interest rate risk on its loans in local
currency. As of December 31, 2001, the Company had $6.7 million of loans from an
affiliate denominated in Brazilian reais, which bears interest at the average
cost of funds of the affiliate. The majority of the affiliate's debt is in reais
and bears interest at the CDI rate (the interbank certificate of deposit rate in
Brazil), plus 0.5%.
During 2001, the CDI rate ranged from 15.1% to 17.3%. The average rate for
the year was 16.2%, and the rate at December 31, 2001 was 17.29%. If the CDI
rate rose to 25%, interest payments on the $6.7 million would be approximately
$1.7 million annually. If the CDI rate rose to 30%, the annual interest payments
would be $2.0 million. Most of the interest due on these loans in the past has
been added to principal rather than paid in cash.
The Company does not hedge any of its market risks (other than entering
into certain programming agreements that place ceilings on the dollar/real
exchange rate used to calculate monthly programming costs) and does not utilize
derivative financial instruments.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN DEBT SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not applicable.
ITEM 15. [RESERVED]
ITEM 16. [RESERVED]
PART III
57
ITEM 17. FINANCIAL STATEMENTS
The Company is furnishing financial statements pursuant to the
instructions in Item 18 of Form 20-F.
ITEM 18. FINANCIAL STATEMENTS
See Item 19(a) for a list of financial statements filed as part of this
Form 20-F.
ITEM 19. EXHIBITS
(a) Financial Statements. The following financial statements and schedules
are filed as part of this annual report, together with the report of the
independent public accountants.
58
INDEX TO THE FINANCIAL STATEMENTS
Page
----
TEVECAP S.A. AND SUBSIDIARIES - Consolidated Financial Statements Together
with Independent Auditors' Report - December 31, 2001 and 2000...........................F-1
TVA SISTEMA DE TELEVISAO S.A. - Financial Statements Together
with Independent Auditors' Report - December 31, 2001 and 2000...........................F-50
59
TVA SUL PARANA LTDA. AND SUBSIDIARY - Consolidated Financial Statements Together
with Independent Auditors' Report - December 31, 2001 and 2000...........................F-75
CCS--CAMBORIU CABLE SYSTEM DE TELECOMUNICACOES LTDA. -
Financial Statements Together with Independent Auditors' Report - December 31, 2001
and 2000............................................................................F-97
60
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TEVECAP S.A.
By: /s/ Marcelo Vaz Bonini
-------------------------------
Name: Marcelo Vaz Bonini
Title: Officer
By: /s/ Vito Chiarella Neto
-------------------------------
Name: Vito Chiarella Neto
Title: Officer
Date: July 15, 2002
61
GLOSSARY
ABC: ABC, Inc., formerly known as "Capital Cities/ABC, Inc."
Abril: Abril S.A.
Abril Credit Facility: A revolving credit facility, dated December 6,
1995, between Tevecap, as the borrower, and Abril, as the lender.
ANATEL: Agencia Nacional de Telecomunicacoes (National Telecommunications
Agency), an independent Brazilian federal agency authorized to regulate the
Brazilian subscription television industry.
BBC: British Broadcasting Corporation.
C-Band: A satellite transmission system which provides a signal on the "c"
bandwidth.
Cable: A Cable network employs electromagnetic transmission over coaxial
and/or fiber-optic cable to transmit multiple channels carrying images, sound
and data between a central facility and individual customers' television sets.
Networks may allow one-way (from a headend to a residence and/or business) or
two-way transmission from a headend to a residence and/or business with a data
return path for the headend.
Cable license: A license that is granted by the applicable governing body
pursuant to its authority under the communications laws of a particular country
for the purpose of providing Cable services for a specific franchise/license
area.
Canbras: Canbras Communications Corp., a Canadian corporation.
Canbras Association Agreement: Association Agreement dated June 14, 1995,
among Tevecap, TVA Sistema, the Canbras TVA companies, Canbras and Canbras-Par.
Canbras Parana: Canbras Parana Ltda., a Brazilian limitada, in which
Tevecap holds a 36% equity interest and Canbras Par holds a 64% equity interest.
Canbras TVA: The operations of Canbras TVA Cabo, TV Cabo Santa Branca and
Canbras Parana, in each of which Tevecap holds a 36% equity interest and Canbras
Par holds a 64% equity interest.
Canbras TVA Cabo: Canbras TVA Cabo Ltda., a Brazilian limitada, in which
Tevecap holds a 36% equity interest and Canbras Par holds a 64% equity interest.
Canbras-Par: Canbras Participacoes, Ltda., a Brazilian limitada
wholly-owned by Canbras.
Central Bank: Central Bank of Brazil (Banco Central do Brasil)
Chase Parties: Two wholly owned subsidiaries of CMIF through which CMIF
holds its equity interest in Tevecap.
Churn: With respect to a pay television system for a given period, the
quotient expressed as a percentage of (i) the number of subscribers disconnected
from such system less the number of formerly disconnected subscribers
reconnected to the system divided by (ii) the number of subscribers to the
system as of the beginning of the period plus the number of subscribers added to
the system.
A-1
CMIF: Chase Manhattan International Finance Ltd., an affiliate of The
Chase Manhattan Bank which holds a 8.1% interest in Tevecap through two wholly
owned subsidiaries.
Coaxial cable: Cable consisting of a central conductor surrounded by and
insulated from another conductor. It is the standard material used in
traditional Cable systems. Signals are transmitted through it at different
frequencies, giving greater channel capacity than is possible with twisted pair
cable, but less than is allowed by optical fiber.
Company: Tevecap, together with its consolidated subsidiaries.
CPL: Cable Participacoes Ltda., a Brazilian limitada, jointly owned by
Hearst and ABC, which limitada holds a 2% equity interest in Tevecap.
CPCT: Centrais Privadas de Comutacao Telefonica, certain private telephone
networks comparable to private branch exchanges (PBX) found in larger apartment
complexes, hotels and businesses in the United States.
Darlene Investments: Darlene Investments Ltd., a Cayman Islands limited
liability company which is part of the Cisneros Group of Companies.
DBS: Direct broadcast satellite service, operating in C-Band or Ku-Band
width, by which television programming is transmitted to individual dwellings,
each served by a single satellite dish.
DBS Sale: The sale by the Company of the DBS Systems and certain assets
related thereto in July 1999.
DBS Systems: Ku-Band and C-Band operations of Galaxy Brasil and TVA Banda
C, respectively.
DIRECTV: Brazil's first digital Ku-Band service, which is operated by
Galaxy Brasil and Galaxy Latin America.
DISTV: The distribution of television signals by physical means (i.e., by
Cable) to end users, generally limited to signals without interference by a
DISTV operator with the signal content.
DLA: DIRECTV Latin America, Inc. a California corporation wholly-owned by
Hughes Communications Inc. that holds a 77.8% equity interest in GLA.
ESPN Brasil: Programming provided by ESPN Brasil Ltda., an indirect
subsidiary of ESPN, Inc. , in which ABC has an 80% equity interest and Hearst
has a 20% equity interest.
Event Put: A triggering event under the Stockholders Agreement pursuant to
which each of the Stockholders (other than Abril) may, in certain circumstances,
demand that Tevecap purchase all or a portion of its shares.
Falcon International: Falcon International Communications (Bermuda L.P.),
a subsidiary of Falcon International Communications, L.L.C., a Delaware limited
liability company.
Falcon Time Put: A provision of the Stockholders Agreement pursuant to
which Falcon International may, in certain circumstances, demand that Tevecap
purchase all or a portion of the shares held by Falcon International.
Fiber-optic cable: Cable made of glass fibers through which signals are
transmitted as pulses of light. Fiber-optic cable has the capacity for a large
number of channels.
A-2
Financial Statements: The audited financial statements of Tevecap and its
subsidiaries and the notes thereto included herein.
Fox: Twentieth Century Fox Television International.
Galaxy Brasil: Galaxy Brasil S.A., a wholly-owned subsidiary of Tevecap
that was sold to Galaxy Latin America in July 1999.
Galaxy Latin America: Galaxy Latin America, LLC, a Delaware limited
liability company the members of which are DLA, which holds a 77.8% equity
interest and Darlene Investments, which holds a 22.2% equity interest.
Globo: Globo Par and TV Globo, the owners of a number of Brazil's over the
air channels.
Globo Par: Globo Comunicacoes e Participacoes Ltda.
Guarantors: TVA Sistema de Televisao S.A., TVA Communications Ltd.,
Comercial Cabo TV Sao Paulo Ltda., TVA Sul Parana Ltda., CCS Camboriu Cable
System de Telecomunicacoes Ltda., TVA Programadora Ltda., TVA Network Ltda. and
TVAPAR S.A.
HABC II: Hearst/ABC Video Services II, a Delaware general partnership
jointly owned by Hearst and ABC, which partnership holds a 15.3% equity interest
in Tevecap.
HBO Brasil: Programming provided by HBO Brasil Partners.
HBO Brasil Ltda: A Brazilian limitada, wholly owned by HBO Brasil
Partners, that distributes HBO programming in Brazil.
Headend: A collection of hardware, typically including satellite
receivers, modulators, amplifiers and videocassette playback machines. Signals,
when processed, are then combined for distribution within the Cable network.
Hearst: The Hearst Corporation.
Hearst/ABC Parties: HABC II and CPL.
Hearst/ABC Programming Agreement: Programming Agreement, dated December 6,
1995, among Tevecap, Hearst and ABC.
Homes Passed: Homes that can be connected to a Cable distribution system
without further extension of the distribution network.
IBGE: Instituto Brasileiro de Geografia e Estatistica.
Indenture: The Indenture, dated as of November 26, 1996 and as amended and
supplemented from time to time, among Tevecap, the Guarantors, Chase Manhattan
Bank, as trustee, and Chase Trust Bank, as principal paying agent in connection
with the Senior Notes.
Independent Operators: Independent pay television system operators to
which TVA sells programming.
A-3
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.
Ku-Band: A satellite transmission system which provides a signal over the
"ku" bandwidth.
MMDS (Multi-channel multi-point distribution system): A one-way radio
transmission of television channels over microwave frequencies from a fixed
station transmitting to multiple receiving facilities located at fixed points.
MMDS license: A license that is granted by the applicable governing body
pursuant to its authority under the communications laws of a particular country
for the purpose of providing MMDS services for a specific franchise/license
area.
MTV Brasil: MTV Brasil Ltda., a Brazilian limitada in which Abril holds a
50% equity interest and Viasem Brasil Holdings Ltda. (an indirect subsidiary of
Viacom International) holds the remaining 50% equity interest.
Net Sat: Net Sat Servicos Ltda., in which Globo Par has a controlling
interest and whose other equity holders include News Corporation, a subsidiary
of The News Corporation Limited.
News Corporation: News Corporation plc.
Operating Ventures: Canbras TVA and TV Filme, two of TVA's minority-owned
ventures.
Owned Systems: TVA Sistema and TVA Sul.
Pay-per-view: Payment made for individual programs rather than a monthly
subscription for a whole channel or group of channels. Pay-per-view channels
currently provide certain popular sporting events or major motion pictures for
which customers may be prepared to make a special payment.
Penetration rate: The measurement of the take-up of Cable services. The
penetration rate as of a given date is calculated by dividing the number of
subscribers connected to a system on such date by the total number of homes
passed in such system.
Real Plan: A Brazilian Government stabilization program, announced in
December 1993, aimed at curtailing inflation and building a foundation for
sustained economic growth.
Regulatory Put: A provision in the Stockholders Agreement pursuant to
which an Event Put is triggered if the amount of capital stock held by a
Stockholder (other than Abril) exceeds the amount allowed under an appropriate
legal restriction.
Revenue per subscriber: Total revenue derived from a subscriber television
system divided by the average number of subscribers for that period.
SAP: Second Audio Programming, which provides the option of audio in a
second language for the programming on channels for which it is offered.
Securities Act: United States Securities Act of 1933, as amended.
Senior Notes: Tevecap's 250,000,000 12 5/8% Senior Notes due 2004 issued
on November 26, 1996.
A-4
Stockholders: HABC II, CPL, Robert Civita, Abril, the Chase Parties and
Falcon International.
Stockholders Agreement: Stockholders Agreement, dated December 6, 1995,
among the Stockholders.
Telecommunications Code: The Brazilian Telecommunications Code of 1962, as
amended.
Tevecap: Tevecap S.A.
TV Cabo Santa Branca: TV Cabo Santa Branca Comercio Ltda., a Brazilian
limitada, in which Tevecap holds a 36% equity interest and Canbras Par holds a
64% equity interest.
TV Filme: TV Filme, Inc., a Delaware corporation in which, as of December
31, 1999, Tevecap held a 14.7% equity interest, Warburg, Pincus Investors, L.P.
held a 38.8% equity interest, members of the Lins family held a 16.2% equity
interest, public stockholders held a 28.15% equity interest and certain
individuals held the remaining 2.15% equity interest. Upon the implementation of
a restructuring agreement with creditors, Tevecap's equity interest in TV Filme
was reduced to approximately 0.7%.
TV Homes: The number of households in a given area possessing at least one
television set.
TV Show Time: Televisao Show Time Ltda., a Brazilian limitada in which the
estate of Matias Machline and an associate currently hold a 53% equity interest
and in which the remaining 47% is currently held by various Abril shareholders.
TVA: Tevecap S.A. and its consolidated subsidiaries and affiliates.
TVA Banda C: TVA Banda C Ltda., a Brazilian limitada in which TVA held a
100% equity interest prior to the sale of TVA Banda C to Galaxy Latin America in
July 1999.
TVA Brasil: TVA Brasil Radioenlaces S.A., a Brazilian limitada in which
the estate of Matias Machline currently holds a 50% equity interest and in which
the remaining 50% is currently held by various Abril shareholders.
TVA Sistema: TVA Sistema de Televisao S.A., a Brazilian corporation in
which Tevecap holds a 100% equity interest.
TVA Sul: The operations of TVA Sul Parana Ltda., a Brazilian limitada in
which TVA holds a 100% equity interest, and CCS-Camboriu Cable System de
Telecomunicacoes Ltda., a Brazilian limitada in which TVA Sul Parana Ltda. holds
a 60% equity interest and an unaffiliated third party holds the remaining 40%
equity interest.
UHF: Broadcast of a television signal at an ultra-high frequency over a
given geographical area.
VCR: Video cassette recorders.
A-5
Tevecap S.A. and Subsidiaries
Consolidated Financial Statements Together with
Independent Auditors' Report
As of December 31, 2001 and 2000 and for each of the three years in the period
ended December 31, 2001
TEVECAP S.A.
AND SUBSIDIARIES
Index to Consolidated Financial Statements
Contents
Page
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000 F-3
Consolidated Statements of Operations for each of the three years in the
period ended December 31, 2001 F-5
Consolidated Statements of Changes in Shareholders' Deficit and Redeemable
Common Stock for each of the three years in the period ended
December 31, 2001 F-7
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 2001 F-8
Notes to The Consolidated Financial Statements F-10
F-1
Independent Auditors' Report
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, 2001 and 2000, and the related
consolidated statements of operations, changes in shareholders' deficit and
redeemable common stock and cash flows for each of the three years in the period
ended December 31, 2001, all expressed in United States dollars. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated 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, 2001 and 2000, and the consolidated
results of its operations and cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
Deloitte Touche Tohmatsu
Sao Paulo, Brazil,
June 17, 2002
F-2
TEVECAP S.A.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2001 and 2000
in thousands of U.S. dollars
December 31,
----------------------
2001 2000
-------- --------
ASSETS
Current assets
Cash and cash equivalents $ 634 $ 1,609
Accounts receivable, net (Footnote 3) 6,474 7,737
Inventories, net (Footnote 4) 11,117 12,501
Prepaid and other assets (Footnote 5) 2,198 4,063
Accounts receivable from related parties (Footnote 6) 232 96
Promissory note -- 27,744
Other accounts receivable (Footnote 7) 1,431 8,813
-------- --------
Total current assets 22,086 62,563
-------- --------
Property, plant and equipment, net (Footnote 10) 149,594 182,511
Investments (Footnote 9)
Equity basis 549 --
Concessions, net 5,365 7,919
Loans receivable from related companies (Footnote 6) 6,911 17,532
Debt issuance costs, net (accumulated amortization;
2001- $ 3,905; 2000- $ 3,416) 937 640
Judicial deposits 13,028 8,192
Other 364 --
-------- --------
Total assets $198,834 $279,357
======== ========
See accompanying notes to consolidated financial statements
F-3
TEVECAP S.A.
AND SUBSIDIARIES
Consolidated Balance Sheets, continued
December 31, 2001 and 2000
in thousands of U.S. dollars
December 31,
-------------------------
2001 2000
--------- ---------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Loans (Footnote 11) $ 21,241 $ 33,071
Film suppliers 11,458 5,122
Other suppliers 6,206 9,004
Taxes payable other than income taxes (Footnote 13) 5,209 5,457
Accrued payroll and related liabilities 1,560 2,470
Advance payments received from subscribers 204 253
Other accounts payable (Footnote 12) 2,019 1,963
--------- ---------
Total current liabilities 47,897 57,340
--------- ---------
Long-term liabilities
Loans (Footnote 11) 49,095 49,691
Loans payable to related companies (Footnote 6) 6,729 141,122
Taxes payable other than income taxes (Footnote 13) 28,515 29,468
Provision for claims (Footnote 18) 1,697 2,546
Liability to fund equity investees (Footnote 9) 3,219 7,938
--------- ---------
Total long-term liabilities 89,255 230,765
--------- ---------
Commitments and contingencies (Footnotes 16 and 18)
Minority interest 1,194 2,041
Redeemable common stock, no par value, 85,637,526 shares authorized,
issued and outstanding as of December 31, 2001 and 2000 115,252 151,260
Shareholders' deficit
Common stock, no par value, 399,582,914 and 140,700,759
shares authorized, issued and outstanding as of December 31, 2001 and
2000, respectively
371,026 242,342
Accumulated other comprehensive income (loss) 16,855 (1,555)
Accumulated deficit (442,645) (402,836)
--------- ---------
Total shareholders' deficit (54,764) (162,049)
--------- ---------
Total liabilities and shareholders' deficit $ 198,834 $ 279,357
========= =========
See accompanying notes to consolidated financial statements
F-4
TEVECAP S.A.
AND SUBSIDIARIES
Consolidated Statements of Operations
for the years ended December 31, 2001, 2000 and 1999
in thousands of U.S. dollars
Year ended December 31,
-----------------------------------------
2001 2000 1999
--------- --------- ---------
Gross revenues
Monthly subscriptions $ 88,246 $ 97,134 $ 94,055
Installation 270 968 1,900
Advertising 1,005 2,503 1,597
Indirect programming -- 357 3,722
Additional services 16,413 20,049 14,924
--------- --------- ---------
105,934 121,011 116,198
--------- --------- ---------
Direct operating expenses (excluding depreciation and amortization stated
separately below)
Taxes on revenues 15,636 13,145 12,782
Payroll and benefits 8,504 9,229 7,857
Programming 25,749 26,104 24,166
Transponder lease cost 22 2,408 1,975
Technical assistance 1,868 2,415 1,311
TVA magazine 2,389 2,575 2,482
Pole rental 2,814 3,535 2,935
Other costs 9,950 9,136 4,912
--------- --------- ---------
66,932 68,547 58,420
--------- --------- ---------
Selling, general and administrative expenses
Payroll and benefits 9,795 14,942 11,425
Advertising and promotion 5,778 7,330 3,645
Rent 1,777 2,022 2,005
Other selling, general and administrative expenses 12,098 9,189 8,515
--------- --------- ---------
29,448 33,483 25,590
--------- --------- ---------
Depreciation 33,053 41,622 55,174
Amortization 1,311 1,668 1,705
Other operating expense (income), net (Footnote 14) 1,762 (2,611) 19,012
--------- --------- ---------
Loss from operations (26,572) (21,698) (43,703)
--------- --------- ---------
Interest income (4,200) (5,374) (5,896)
Interest expense 37,849 45,069 22,254
Foreign currency translation loss, net -- -- 2,543
Foreign currency transaction loss, net 11,067 4,816 --
Other nonoperating expense (income), net (Footnote 15) 2,438 (37,384) 11,055
--------- --------- ---------
Loss before income taxes, equity in affiliates, minority
interest, discontinued operations and extraordinary (73,726) (28,825) (73,659)
item
Income tax expense - current (Footnote 8) -- 2,517 106
--------- --------- ---------
Loss before equity in affiliates, minority interest, (73,726) (31,342) (73,765)
discontinued operations and extraordinary item
Equity in losses of affiliates, net 2,375 2,004 5,238
--------- --------- ---------
Loss before minority interest, discontinued operations and
extraordinary item (76,101) (33,346) (79,003)
Minority interest (284) (491) (678)
--------- --------- ---------
Loss before discontinued operations and extraordinary item (75,817) (32,855) (78,325)
--------- --------- ---------
See accompanying notes to consolidated financial statements
F-5
TEVECAP S.A.
AND SUBSIDIARIES
Consolidated Statements of Operations, continued
for the years ended December 31, 2001, 2000 and 1999
in thousands of U.S. dollars
Year ended December 31,
--------------------------------------
2001 2000 1999
-------- -------- --------
Discontinued operations (Footnote 23)
Gain on sale of discontinued operations of DBS business, including
loss from operations during phase-out period, net of tax of $0 -- -- (94,344)
-------- -------- --------
Income (loss) before extraordinary item (75,817) (32,855) 16,019
Extraordinary item - gain on debt repurchase, net of tax of $0 -- -- (53,857)
-------- -------- --------
Net income (loss) $(75,817) $(32,855) $ 69,876
======== ======== ========
Other comprehensive income (loss) -
Foreign currency translation adjustment $ 18,410 $ (1,555) $ --
-------- -------- --------
Comprehensive income (loss) $(57,407) $(34,410) $ 69,876
======== ======== ========
See accompanying notes to consolidated financial statements
F-6
TEVECAP S.A.
AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Deficit and Redeemable
Common Stock
for the years ended December 31, 2001, 2000 and 1999
in thousands of U.S. dollars
Accumulated
Other Total Redeemable
Common Accumulated Comprehensive Shareholders' Common
Stock Deficit Income (Loss) Deficit Stock
--------- ----------- ------------- ------------- ----------
Balance as of January 1, 1999 $ 242,342 $(466,599) $ $(224,257) $ 178,002
Net income for the year 69,876 69,876
--------- --------- --------- --------- ---------
Balance as of December 31, 1999 242,342 (396,723) (154,381) 178,002
Foreign currency translation adjustment, net of
tax of $0 (1,555) (1,555)
Net loss for the year (32,855) (32,855)
Adjustment of redeemable common
stock to redemption price 26,742 26,742 (26,742)
--------- --------- --------- --------- ---------
Balance as of December 31, 2000 242,342 (402, 836) (1,555) (162,049) 151,260
Capital contribution (Footnote 6) 128,684 128,684
Foreign currency translation adjustment, net of
tax of $0 18,410 18,410
Net loss for the year (75,817) (75,817)
Adjustment of redeemable common
stock to redemption price 36,008 36,008 (36,008)
--------- --------- --------- --------- ---------
Balance as of December 31, 2001 $ 371,026 $(442,645) $ 16,855 $ (54,764) $ 115,252
========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements
F-7
TEVECAP S.A.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the years ended December 31, 2001, 2000 and 1999
in thousands of U.S. dollars
Year Ended December 31,
---------------------------------------
2001 2000 1999
-------- -------- ---------
Cash flows from operating activities:
Net income (loss) $(75,817) $(32,855) $ 69,876
Adjustments to reconcile net income (loss) to net cash
from operating activities
Depreciation 33,053 41,622 55,174
Amortization 1,311 1,668 1,705
Amortization of debt issuance costs 192 219 219
Write off unamortized debt issuance costs -- -- 5,185
Provision for doubtful accounts 43 (3,775) 196
Provision for equipment and inventory obsolescence (3,021) (365) 605
Provision for claims (849) 129 (4,004)
Minority interest (284) (491) (678)
Disposal and write-off of property, plant and equipment 1,074 2,046 57,028
Gain on sale of assets -- (40,454) (159,638)
Write-off of investments -- 8 6,668
Buy back gain of Senior Notes -- -- (70,692)
Equity in losses of affiliates 2,375 2,004 5,238
Foreign currency transaction loss, net 11,067 4,816 --
Changes in operating assets and liabilities:
Film exhibition rights -- 1,278 290
Accounts receivable 1,220 3,600 12,921
Prepaid and other assets 1,865 (451) 1,564
Accrued interest 29,337 32,615 14,334
Inventories 4,405 (1,823) 3,982
Suppliers 3,538 (3,248) (25,910)
Taxes payable other than income taxes (1,201) 6,178 14,513
Accrued payroll and related liabilities (910) 81 (1,568)
Advances received from subscribers (49) (685) (1,064)
Other 4,263 (9,163) (4,379)
-------- -------- ---------
Net cash provided by (used in) operating activities 11,612 2,954 (18,435)
-------- -------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment (30,639) (26,716) (25,927)
Proceeds from sales of property, plant and equipment and other assets -- 43,000 177,542
Collection of promissory note 28,236 -- --
Loans to related companies (10,696) (19,205) --
Repayment of loans to related companies 25,250 8,951 2,180
Purchases of investments (8,245) -- (1,789)
-------- -------- ---------
Net cash provided by investing activities 3,906 6,030 152,006
-------- -------- ---------
Cash flows from financing activities:
Proceeds from bank loans 21.291 26,752 6,661
Repayment of loans from banks (44,842) (17,375) (191,948)
Proceeds from loans from shareholders 13,306 25,219 63,695
Repayments of loans from shareholders (23,494) (37,342) (11,430)
-------- -------- ---------
Net cash used in financing activities (33,739) (2,746) (133,022)
-------- -------- ---------
Effect of exchange rate changes on cash and cash equivalents 17,246 (6,575) --
-------- -------- ---------
Net increase (decrease) in cash and cash equivalents (975) (337) 549
Cash and cash equivalents at beginning of the period 1,609 1,946 1,397
-------- -------- ---------
Cash and cash equivalents at end of the period $ 634 $ 1,609 $ 1,946
======== ======== =========
Supplemental cash disclosure:
Cash paid for interest $ 7,671 $ 6,073 $ 15,784
Cash paid for income taxes -- 2,517 106
See accompanying notes to consolidated financial statements
F-8
TEVECAP S.A.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, continued
for the years ended December 31, 2001, 2000 and 1999
in thousands of U.S. dollars
Year Ended December 31,
------------------------------------
2001 2000 1999
-------- -------- --------
Supplemental noncash financing and investing activities:
Accrued interest on related company loans refinanced
as principal balance $ 21,666 $ 27,808 $ 3,835
Transfer of monetary assets and capitalization of loans
in exchange for shares 128,684 -- --
Promissory note received in sale of DBS business -- -- 25,500
See accompanying notes to consolidated financial statements
F-9
TEVECAP S.A.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts expressed in thousands of U.S. dollars,
unless otherwise indicated)
1. The Company and its principal operations
1.1. General
The consolidated financial statements have been prepared to reflect the
consolidated results of Tevecap S.A. ("Tevecap") and its subsidiaries (the
"Company").
Tevecap is a holding company, the subsidiaries of which render services
related to wireless cable, cable and high-speed internet, including
marketing and advertising, production, distribution and licensing of
domestic and foreign television programs. The Company has wireless cable
channel rights primarily in major urban markets in Brazil.
As of December 31, 2001, Abril S.A. ("Abril"), a printing and distribution
company, was the majority shareholder of the Company.
1.2 Significant risks and uncertainties
The Company's consolidated financial statements for the year ended
December 31, 2001 were prepared on a going concern basis which
contemplates the realization of assets and settlement of liabilities and
commitments in the normal course of business. The Company incurred a net
loss of $75,817 during the year ended December 31, 2001 and had negative
working capital of $25,811 and a shareholders' deficit of $54,764 at
December 31, 2001. The continuation of the Company as a going concern is
dependent upon its ability to generate sufficient cash from operating and
financing activities. In this regard, managements' plans include: (i)
improvement in the generation of cash from operations, including a cost
reduction program which was implemented in 2001; (ii) securitization of
accounts receivable as a source of financing; and (iii) sales of
nonstrategic assets and the discontinuation of noncompetitive businesses.
The consolidated financial statements do not include any adjustments
related to the recoverability and classification of recorded amounts or
the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
2. Summary of significant accounting policies
Significant policies followed in the preparation of the consolidated
financial statements are described below:
F-10
TEVECAP S.A.
AND SUBSIDIARIES
2.1. Basis of presentation and consolidation
a) Basis of presentation
The consolidated financial statements are presented in United States
dollars and have been prepared in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP"), which
differ in certain respects from accounting principles applied by the
Company in its local currency financial statements, which are prepared in
accordance with accounting principles generally accepted in Brazil
("Brazilian GAAP").
The preparation of financial statements in accordance with U.S. GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities as of the financial statement dates and the
reported amount of revenues and expenses during the reporting periods.
Since management's judgment involves making estimates concerning the
likelihood of future events, the actual results could differ from these
estimates.
b) Principles of consolidation
The consolidated financial statements include the accounts of Tevecap and
all majority-owned subsidiaries.
Investments in affiliated companies, owned 20% to 50% inclusive, are
carried at cost and adjusted for the Company's equity in undistributed
earnings or losses and dividends received since acquisition. Investments
in less than 20% owned affiliates are accounted for under the cost method.
Intercompany transactions and accounts are eliminated in consolidation.
2.2. Accounting records
As required by Brazilian Law and in accordance with local accounting
practices, the accounting records of the Company are maintained in
Brazilian currency (real). In order to present the consolidated financial
statements in conformity with U.S. GAAP, the Company maintains additional
accounting records that are used solely for this purpose.
2.3. Currency remeasurement
As of January 1, 2000, based on changes in the Company's capital and
operational structure and a move to using the Brazilian real for a
substantial portion of the Company's business, the Company changed its
functional currency from the United States dollar to the Brazilian real
(R$). This change was made in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation."
F-11
TEVECAP S.A.
AND SUBSIDIARIES
Assets and liabilities are translated into U.S. dollars at the exchange
rate in effect at the end of the reporting period, and revenues, expenses,
gains and losses are translated into U.S. dollars at the average rates
prevailing in the period. The resulting net translation gains and losses
are reported, net of tax, in accumulated other comprehensive income (loss)
in shareholders' deficit.
2.4 Consolidated financial statements
The Company's operating subsidiaries included in the consolidated
financial statements are:
Ownership Interest as of
December 31,
------------------------
2001 2000
-------- --------
Owned Systems
TVA Distribuidora S.A. (c) -- 100.00%
TVA Sistema de Televisao S.A 100.00% 98.00%
TVA Sul Parana Ltda 100.00% 86.00%
CCS Camboriu Cable Systems de Telecomunicacoes Ltda 60.00% 51.60%
TVAPar S.A. (c) -- 100.00%
Rede Ajato Ltda. (b) 100.00% 100.00%
License Subsidiary
Comercial Cabo TV Sao Paulo Ltda. (a) 100.00% 100.00%
Ype Radio e Televisao Ltda. (c) -- 100.00%
TVA Sistema de Televisao de Porto Alegre S.A. (c) -- 100.00%
Programming Ventures
TVA Programadora Ltda. (c) -- 100.00%
TVA Channels Ltda. (c) -- 100.00%
TVA Inc. 100.00% 100.00%
TVA Overseas Ltd. 100.00% 100.00%
TVA Communications Ltd. 100.00% 100.00%
TVA Communications Aruba N.V. (c) -- 100.00%
TVA Continental S.A. (d) 100.00% --
TVA Pelicano S.A. (d) 100.00% --
TVA Network Participacoes S.A. (d) 100.00% --
a. 0.00149% of the common shares in this entity are owned by the controlling
shareholder of the parent company pursuant to local legislative
requirements.
b. On August 1, 1999, the company Rede Ajato Ltda. was created to operate in
the high-speed internet market.
F-12
TEVECAP S.A.
AND SUBSIDIARIES
c. In July 2001, the Company began the corporate restructuring process by
merging direct subsidiaries TVA Distribuidora S.A. and TVA Programadora
Ltda., and, subsequently, indirect subsidiaries Ype Radio e Televisao
Ltda., TVA Sistema de Televisao de Porto Alegre S.A., TVA Communications
Aruba N.V., and TVAPar S.A. The investment acquired in TVA Channels Ltda.,
through the merger of TVA Programadora Ltda., was transferred to TVA
Sistema de Televisao S.A., which subsequently merged that entity.
d. In September 2001, as part of the corporate restructuring process, the
parent company Abril and related company Editora Abril S.A. (a company
under common control with Abril) transferred their respective ownership
interest in TVA Sul Parana Ltda. and TVA Sistema de Televisao S.A. to the
Company. Additionally, Abril S.A. also transferred to the Company its
ownership interest in TVA Continental S.A., which is the sole owner of TVA
Pelicano S.A. and TVA Network Participacoes S.A.
2.5 Cash and cash equivalents
Cash and cash equivalents are defined as cash and cash in banks and
investments in interest-bearing securities. Short-term investments with
original maturities of three months or less at the time of purchase are
considered cash equivalents.
2.6 Financial instruments
In accordance with SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments" ("SFAS 107"), 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 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 following methods and assumptions were used to
estimate the fair value of each class of financial instrument for which it
is practicable to estimate that value:
o The fair value of certain financial assets carried at cost,
including cash and cash equivalents, accounts receivable, other
accounts receivable and certain other short-term assets, is
considered to approximate their respective carrying value due to
their short-term nature.
o The fair value of payables to film suppliers and other suppliers,
other accounts payable and certain other short-term liabilities are
considered to approximate their respective carrying value due to
their short-term nature.
o The fair value of loans receivable from and loans payable to related
companies approximates the carrying value, as interest on these
loans is variable and based on market rates.
o The fair value of third party loans, except for Senior Notes,
approximates the carrying value as the interest rates on these loans
are either fixed at a rate comparable with the current market rate
or variable and based on market rates.
F-13
TEVECAP S.A.
AND SUBSIDIARIES
o The fair value of Senior Notes represents 85% of its carrying value
as of December 31, 2001 (90% of its carrying value as of December
31, 2000). Fair value is estimated based on quoted market prices.
2.7 Accounts receivable
A provision for doubtful accounts is established on the basis of an
analysis of the accounts receivable, in light of the risks involved, and
is considered sufficient to cover any losses incurred in realization of
credits.
2.8 Inventories
Inventories consist of materials and supplies and imports in transit.
Materials and supplies are used to provide service to new customers, and
to ensure continuity of service to existing customers. Imports in transit
represent materials purchased from foreign countries that have not yet
been received.
Inventories are stated at the lower of cost or market. Cost is determined
principally under the average cost method.
A provision for obsolescence has been established on the basis of an
analysis of slow-moving materials and supplies.
2.9 Property, plant and equipment
Property, plant and equipment are stated at cost and depreciated using the
straight-line method, over the remaining useful lives, as described in
Note 10.
2.10 Advertising and promotion costs
Costs of advertising and promotion are expensed as incurred.
2.11 Recoverability of long-lived assets to be held and used
The Company evaluates its long-lived assets and identifiable intangible
assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of the asset to future undiscounted net cash flows
expected to be generated by the asset. In estimating future undiscounted
net cash flows, assets are grouped at the level of each cable television
system. If an asset is
F-14
TEVECAP S.A.
AND SUBSIDIARIES
considered to be impaired, the impairment to be recognized is measured as
the amount by which the carrying amount of the asset exceeds the fair
value of the asset.
2.12 Revenue recognition
Subscription revenues are recognized monthly at the amount billed to
subscribers for service subscribed to and earned during the month.
Installation fees are recognized as revenue on the equipment installation
date to the extent of direct selling costs incurred which are higher than
the revenue.
Advertising revenues are recognized, and the production cost of
commercials and programming are charged to expense, when the commercial is
telecast.
Others revenues are recognized as services are rendered.
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 in the future, which are carried at nil value, to
Tevecap at nominal cost.
2.14 Concessions
Concessions represent the right to engage in various telecommunications
services in defined areas or cities in Brazil. The cost of these
concessions is being amortized on the straight-line basis over 10 years.
F-15
TEVECAP S.A.
AND SUBSIDIARIES
2.15 Deferred income taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases as well as operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. Valuation
allowances are established when it is more likely than not that some or
all of the deferred tax assets will not be realized.
2.16 Debt issuance costs
Debt issuance costs are amortized over the term of the underlying debt on
a straight-line basis. The results of amortization on a straight-line
basis do not differ materially from those obtained by using the interest
method.
2.17 Concentrations of credit risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts
receivable. Such concentrations of credit risk are limited due to the
large numbers comprising the Company's subscriber and customer base and
their dispersion across different geographic regions. As of December 31,
2001 and 2000, the Company had no other significant concentrations of
credit risk.
2.18 Reclassifications
Certain prior years amounts have been reclassified for comparative
purposes.
F-16
TEVECAP S.A.
AND SUBSIDIARIES
3. Accounts receivable, net
As of December 31, 2001 and 2000, accounts receivable were comprised of:
2001 2000
-------- --------
Subscriptions and installation fees $ 11,934 $ 11,368
Advertising 501 1,022
Programming 182 694
Other 1,495 2,248
Provision for doubtful accounts (7,638) (7,595)
-------- --------
$ 6,474 $ 7,737
======== ========
No single customer accounted for more than 10% of total accounts
receivable as of December 31, 2001 and 2000.
4. Inventories, net
As of December 31, 2001 and 2000, inventories were comprised of:
2001 2000
-------- --------
Materials and supplies $ 9,012 $ 15,645
Imports in transit 2,454 226
Provision for obsolescence (349) (3,370)
-------- --------
$ 11,117 $ 12,501
======== ========
5. Prepaid and other assets
As of December 31, 2001 and 2000, prepaid expenses were comprised of:
2001 2000
-------- --------
Advances to suppliers $ 170 $ 1,107
Prepaid meals and transportation 69 227
Advances for imports 1,354 1,437
Other 605 1,292
-------- --------
$ 2,198 $ 4,063
======== ========
F-17
TEVECAP S.A.
AND SUBSIDIARIES
6. Related party transactions
The following tables summarize the transactions between the Company and
its related parties as of December 31, 2001 and 2000 and for the three
years ended December 31, 2001:
December 31,
---------------------------
2001 2000
-------- --------
Abril (parent company)
Accounts receivable $ 73 $ 1
Loans receivable -- 11,481
Loans payable 1,292 --
Accounts payable 2 --
Editora Abril S.A. (under common control with Abril)
Accounts receivable 69 49
Loans payable 5,437 141,122
Accounts payable 264 250
Canbras TVA Cabo Ltda. (equity affiliate)
Accounts receivable 6 --
Loans receivable 27 5,892
Accounts payable -- 7
Parana Participacoes Ltda. (under common control with
Abril)
Loans receivable 4,721 --
Zerelda Participacoes S/C Ltda. (equity affiliate)
Loans receivable 1,022 --
TV Jacaranda Ltda. (equity affiliate)
Loans receivable 1,007 --
Others
Accounts receivable 84 46
Loans receivable 134 159
Accounts payable 20 15
F-18
TEVECAP S.A.
AND SUBSIDIARIES
6. Related party transactions (Continued)
2001 2000 1999
------- ------- -------
Abril S.A. (parent company)
Net interest income (expense) $21,508 $29,690 $(3,835)
Printing costs 3,087 2,763 1,447
Falcon International Communications Services Inc.
(shareholder)
Consulting fees -- 200 196
TV Filme Inc. (cost method investment)
Programming revenue -- -- 184
Canbras TVA Cabo Ltda. (equity affiliate)
Programming revenue -- -- 216
California Broadcast Center L.L.C. (cost method
investment)
Net interest income -- -- 197
The Company and its related parties maintain a cash management system
centralized at Editora Abril S.A. The centralized cash management system results
in accounts receivable from and payable to related parties depending on the cash
needs of the companies.
Loans granted to or obtained from related companies, under loan agreements, are
denominated in reais and subject to variable interest of 1.01% to 1.53% per
month as of December 31, 2001 (1.19 % to 1.44% per month as of December 31,
2000). There is not a defined maturity date for the loans.
Tevecap has a credit facility with Abril and Editora Abril S.A. ("Abril Credit
Facility") under which Tevecap is allowed to borrow up to $60,000 on a revolving
basis. Since June 1996, Tevecap has from time to time requested, and Abril has
provided, funding in excess of the aggregate maximum principal amount. On
November 19, 2001, Abril increased the Company's capital through the
capitalization of $123,159 of such borrowings and the transfer of certain
monetary assets and liabilities amounting to $5,525, increasing Abril's
ownership interest in the Company from 62.17% to 82.35%. As of December 31,
2001, $6,729 was outstanding under the Abril Credit Facility.
Abril has provided a guarantee for equipment imported by TVA Sistema de
Televisao S.A., Rede Ajato Ltda. and TVA Sul Parana Ltda. The amount outstanding
pursuant to this guarantee as of December 31, 2001 was $2,173.
F-19
TEVECAP S.A.
AND SUBSIDIARIES
7. Other accounts receivable
As of December 31, 2001 and 2000, other accounts receivable were comprised
of:
2001 2000
-------- --------
Galaxy Brasil Ltda $ -- $ 1,265
TVA Banda C Ltda -- 945
Multithematiques - Sale of Eurochannel -- 4,036
Tax recoverable 559 802
Other 872 1,765
-------- --------
$ 1,431 $ 8,813
======== ========
8. Income taxes
The tax effects of temporary differences that give rise to deferred tax
assets as of December 31, 2001 and 2000 are as follows:
2001 2000
-------- --------
Deferred tax assets:
Net operating loss carryforwards $ 74,674 $102,122
Provision for obsolescence 704 894
Provision for claims 4,281 4,877
Other 398 2,214
-------- --------
Total gross deferred tax asset 80,057 110,107
-------- --------
Less valuation allowance (80,057) (110,107)
-------- --------
Net deferred tax asset $ -- $ --
======== ========
There were no deferred tax liabilities as of December 31, 2001 and 2000.
F-20
TEVECAP S.A.
AND SUBSIDIARIES
8. Income taxes (Continued)
Management has established a full valuation allowance against the deferred
tax assets as it is more likely than not that the deferred tax assets will
not be realized.
As of December 31, 2001, the Company and subsidiaries have unexpirable
accumulated tax losses of $219,630.
The consolidated income taxes are different from the amount computed using
the Brazilian statutory income tax rate for the reasons set forth in the
following table:
2001 2000 1999
-------- -------- --------
Income (loss) before income taxes $(73,726) $(28,825) $(73,659)
Statutory income tax rate 34% 34% 37%
-------- -------- --------
Computed income tax benefit (25,067) (9,801) (27,254)
Amortization of deferred charges (1,898) (2,415) (2,750)
Translation loss on tax losses 15,676 6,552 34,209
Equity in (income) losses of affiliates (18,067) (27,370) 341
Capital loss on acquisition of investments 2,480 -- --
(Deductible) taxable devaluation gain (loss) for Brazilian statutory purposes 230 1,707 (27,839)
Depreciation 2,017 4,371 9,300
Net loss of merged companies 3,069 -- --
Proposed dividend 38,022 -- --
Adjustment to accumulated tax losses 15,013 -- --
Discontinued operations -- -- 54,791
Other (1,425) 506 (1,500)
Tax loss carryforward used -- 4,903 --
Increase (decrease) in valuation allowance (30,050) 24,064 (39,192)
-------- -------- --------
Total income tax expense per consolidated statements of operations $ -- $ 2,517 $ 106
======== ======== ========
Income tax expense represents amounts owed by subsidiaries calculated on a
stand-alone basis, as Brazilian income tax law does not allow consolidated tax
returns.
F-21
TEVECAP S.A.
AND SUBSIDIARIES
9. Investments
Investments as of December 31, 2001 and 2000 were comprised of:
Percentage
of Control 2001 2000
---------- -------- --------
Equity method investments $ 549 $ --
Liability to fund equity method investments
Canbras TVA Cabo Ltda 36 $ 2,610 $ 7,938
Tv Jacaranda Ltda 21 11 --
Zerelda Participacoes S/C Ltda 36 598 --
-------- --------
$ 3,219 $ 7,938
======== ========
Concessions, net:
Stations in South of Brazil $ 6,664 $ 7,908
Ype Radio e Televisao Ltda 4,906 5,822
Comercial Cabo Ltda 1,519 1,803
Other 57 60
Accumulated amortization (7,781) (7,674)
-------- --------
$ 5,365 $ 7,919
======== ========
F-22
TEVECAP S.A.
AND SUBSIDIARIES
10. Property, plant and equipment, net
As of December 31, 2001 and 2000, property, plant and equipment were
comprised of:
Annual Depreciation Rate December 31,
-------------------------
% 2001 2000
------------------------ --------- ---------
Reception equipment 20 $ 108,399 $ 116,519
Cable plant 10 66,360 79,854
Machinery and equipment 10 55,144 58,386
Decoders 10 64,100 72,710
Leasehold improvements 25 1,199 2,891
Furniture and fixtures 10 1,588 1,871
Premises 10 3,490 3,901
Vehicles 20 1,978 2,592
Software 20 10,465 5,751
Tools 10 743 838
Building 4 2,920 3,462
Other 3,734 4,176
Accumulated depreciation (170,526) (170,440)
--------- ---------
$ 149,594 $ 182,511
========= =========
11. Loans
As of December 31, 2001 and 2000, loans were comprised of:
------------------------ ------------------------
December 31, 2001 December 31, 2000
------------------------ ------------------------
Short-term Long-term Short-term Long-term
---------- ---------- ---------- ----------
Senior Notes due 2004 (a) $ -- $ 48,022 $ -- $ 48,022
Participation Certificates (b) -- -- 25,500 --
Euro notes (c) 10,443 -- -- --
Bank loans (d) 9,113 1,073 5,974 1,669
Accrued interest 1,685 -- 1,597 --
---------- ---------- ---------- ----------
$ 21,241 $ 49,095 $ 33,071 $ 49,691
========== ========== ========== ==========
a. On November 26, 1996, Tevecap raised funds in a foreign market
through a private placement of Senior Notes amounting to $250,000.
These Senior Notes mature on November 26, 2004 and are guaranteed by
certain of Tevecap's subsidiaries (see Note 25). 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.
F-23
TEVECAP S.A.
AND SUBSIDIARIES
11. Loans (Continued)
On July 28, 1999, the subsidiary TVA Communications Ltd. repurchased in
the foreign market $201,978 aggregate principal amount of Tevecap's Senior
Notes at a price of $131,201. The purchase was made at 35% less than the
carrying value of the notes, which resulted in an extraordinary gain of
$70,692 ($53,857 net of bank fees and write-off of unamortized debt
issuance costs). As a consequence of this event, the repurchased notes are
kept in the portfolio for future placement in the secondary market.
At the time the Senior Notes were repurchased, Tevecap obtained consent
from the remaining note holders to eliminate the significant restrictive
covenants in the Senior Notes agreements.
b. On February 7, 2000, the Company, through its wholly-owned subsidiary, TVA
Overseas Ltd. raised funds in foreign markets through a private placement
of $25,500, 11.5% guaranteed participation certificates ("the
participation certificates"). Each participation certificate represented a
fractional undivided interest in a $25,500 promissory note ("the GLA
Promissory Note") issued by GLA in favor of the Company as partial
consideration for the sale by the Company to GLA of the Company's entire
equity interest in Galaxy Brasil and TVA Banda C. Holders of the
participation certificates, however, had no recourse to GLA for any
amounts payable under the participation certificates or the GLA Promissory
Note. The participation certificates were repaid at maturity in August
2001.
c. In December 2000, the Company, through TVA Inc., a wholly-owned
subsidiary, established a $50,000 Guaranteed Short Term Note Program under
which TVA Inc. may issue notes (guaranteed by the Company) in the
international capital markets from time to time. Since inception of the
program, TVA Inc. has issued a total of $10,443 Euro notes under the
program. These notes have a single maturity on January 28, 2002. Interest
thereon is at 11.25% per year, plus exchange rate variation, payable
semiannually. The principal and accrued but unpaid interest were fully
repaid in January 2002.
F-24
TEVECAP S.A.
AND SUBSIDIARIES
d. Bank loans are comprised of the following:
2001 2000
------------------------- -------------------------
Short-Term Long Term Short-Term Long-Term
---------- ---------- ---------- ----------
Banco Bradesco - revolving credit facility, interest of 2.20%
per month $ 2,598 -- $ 1,337 --
Banco Daycoval - revolving credit facility, interest of 0.0985% plus
Selic (Special system for settlement and custody) rate 1,416 -- -- --
(0.0691% as of December 31, 2001) per month
Banco Rural -revolving credit facility, interest of 0.91% plus CDI
(Interbank Deposit Certificate) rate (0.0615% as of December 2,339 -- -- --
31, 2001) per month
Banco do Brasil - revolving credit facility, interest of 0.6% plus
CDI rate per month 529 -- -- --
Citibank - financial leasing, fixed in U.S. dollars, due August 28,
2004, interest of 13% per annum 749 1,073 -- --
Eximbank - annual interest of LIBOR (4.88% as of December 31,
2001) plus 0.0025%, repaid in full in April 2002 1,674 -- 4,684 1,669
Less: Accrued interest (192) -- (47)
---------- ---------- ---------- ----------
Total $ 9,113 1,073 $ 5,974 1,669
========== ========== ========== ==========
e. Annual maturities of long-term debt are as follows:
2003 $ 762
2004 48,333
-------
Total $49,095
=======
12. Other accounts payable
As of December 31, 2001 and 2000, other accounts payable were comprised
of:
2001 2000
-------- --------
Accounts payable to related companies $ 286 $ 272
Other 1,733 1,691
-------- --------
$ 2,019 $ 1,963
======== ========
F-25
TEVECAP S.A.
AND SUBSIDIARIES
13. Taxes payable other than income taxes
As of December 31, 2001 and 2000, taxes payable other than income taxes
were comprised of:
2001 2000
-------- --------
COFINS $ 413 $ 564
ICMS 21,968 19,225
PIS 73 2,458
Tax Recovery Program - REFIS 10,926 12,229
Other 344 449
-------- --------
33,724 34,925
( - ) current liabilities (5,209) (5,457)
-------- --------
$ 28,515 $ 29,468
======== ========
As a result of the agreement for sale of 100% in Galaxy Brasil Ltda. and
TVA Banda C Ltda., the Company assumed liabilities on the negotiation date
referring to taxes that were accrued as a charge to the gain determined on
the sale of interest in these companies. The balance related to these
taxes as of December 31, 2001 is $5,124 classified as ICMS ($8,103 as of
December 31, 2000, being $6,848 classified as ICMS and $1,255 as PIS).
On April 5, 2000, the Company opted for the REFIS (Federal Government Tax
Recovery Program), established by Decree N(Degree) 3.342/00 of January 25,
2000, later changed into Law N(Degree) 9.964/00 of April 10, 2000.
With the option for the REFIS, Tevecap is able to finance its taxes
payable ($2,177) to the Federal Government for five years and its
subsidiaries are able to pay such taxes ($11,138) based on 1.2% of their
monthly revenues. Based on their revenue projections, the approximate
timing for paying the total account is about five years. The restatement
of the tax payable included in the REFIS is made based on the TJLP
(Brazilian long-term interest rate).
During the year ended December 31, 2000, the Company also renegotiated the
ICMS (a state value-added tax) due with the Sao Paulo State Government.
Based on the agreement, the Company will finance its taxes payable for
five years.
F-26
TEVECAP S.A.
AND SUBSIDIARIES
14. Other operating expense (income), net
2001 2000 1999
-------- -------- --------
Write-off of assets related to cancellation of
subscriptions $ -- $ 4,656 $ 18,407
Loss on disposal of property and equipment 3,763 -- --
Loss on sale of obsolete inventories 1,106 -- --
Provision (reversal of provision) for inventory
obsolescence (528) (365) 605
Gain on sale of Eurochannel -- (6,902) --
Other (2,579) -- --
-------- -------- --------
$ 1,762 $ (2,611) $ 19,012
======== ======== ========
F-27
TEVECAP S.A.
AND SUBSIDIARIES
15. Other nonoperating expense (income), net
2001 2000 1999
-------- -------- --------
Write-off of investment in TV Filme Inc -- -- 6,668
Gain on sale of 24% equity interest in HBO Brazil
Partners -- (40,454) --
Loss on sale of 50% equity interest in ESPN do --
Brasil Ltda -- 2,139
Other 2,438 3,070 2,248
-------- -------- --------
$ 2,438 $(37,384) $ 11,055
======== ======== ========
16. Commitments
The Company has rented its office space through the year 2006. As of
December 31, 2001, future minimum rental payments applicable to operating
leases in respect of this space aggregate approximately $3,160, as
follows:
2002 $ 632
2003 632
2004 632
2005 632
2006 632
------
Total $3,160
======
During the year ended December 31, 1999, the Company's 36%-owned equity
investment Canbras TVA Cabo Ltda. issued $30,000 of debt. Such debt is
guaranteed by the Company. As of December 31, 2001, $18,500 of the debt is
outstanding.
F-28
TEVECAP S.A.
AND SUBSIDIARIES
17. Shareholders' equity
The changes in the number of shares of common stock and redeemable common
stock during the years ended December 31, 2001, 2000 and 1999 were as
follows:
Redeemable
common
Common stock stock Total
------------ ----------- -----------
Shares as of January 1, 1999 140,700,759 85,637,526 226,338,285
Increase of capital -- -- --
------------ ----------- -----------
Shares as of December 31, 1999 140,700,759 85,637,526 226,338,285
Increase of capital -- -- --
------------ ----------- -----------
Shares as of December 31, 2000 140,700,759 85,637,526 226,338,285
Increase of capital 258,882,155 -- 258,882,155
------------ ----------- -----------
Shares as of December 31, 2001 399,582,914 85,637,526 485,220,440
============ =========== ===========
a) Common stock subject to redemption
As of December 31, 2001, 17.6% of the common stock of Tevecap was subject
to an Event Put (37.7% in 2000), i.e., a "triggering event" under the
Stockholders' Agreement pursuant to which each of the shareholders (other
that Abril) may, in certain circumstances, demand that Tevecap purchase
all or a portion of its shares, unless the shares of capital stock held by
such stockholders are publicly registered, listed or traded. In addition,
as of December 31, 2001, 5.8% of these shares are also subject to a Time
Put (12.3% in 2000) whereby, pursuant to the Stockholders' Agreement,
shareholder Falcon International Communications ("Falcon") may demand that
Tevecap buy all or a portion of Falcon's shares of capital stock held in
Tevecap if such shares are not publicly registered, listed or traded by
September 22, 2002.
For purposes of the Event Put, triggering events are: (i) the amount of
the capital stock held by a stockholder with an Event Put exceeds the
amount allowed under any legal restriction to which such stockholder may
be subject ("Regulatory Put"); (ii) a breach without cure within a
designated period by certain specified entities/individuals of any
representation, warranty, covenant or duty made or owed pursuant to
certain agreements; (iii) a breach without cure within a designated period
by Abril of the Abril Credit Facility; (iv) the controlling shareholder of
Abril ceases to directly or indirectly hold a specified percentage of
Tevecap without the approval of the stockholders or ceases to control the
voting capital stock held by its affiliates representing 50% or more of
the voting capital stock of Tevecap; (v) the Service Agreement as amended,
among Tevecap, TV Show Time, TVA Brasil and
F-29
TEVECAP S.A.
AND SUBSIDIARIES
17. Shareholders' equity (Continued)
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 has public
debt or equity in the United States of America, and which therefore is
required to register its securities with the United States Securities and
Exchange Commission, is required for accounting purposes to present
redeemable equity securities separately from shareholders' equity, if
redemption of such securities is beyond the control of the registrant.
That presentation is required even if the likelihood of redemption is
remote.
The common shares subject to the Time Put are redeemable at fair value as
determined by appraisal. Accordingly, the carrying value of such
redeemable common stock is adjusted to the fair value when redemption
appears probable. In the event Tevecap does not have the funds to satisfy
its payment obligations under the Time Put, then, subject to a number of
conditions, Tevecap may deliver to Falcon promissory notes payable three
years from the issue date thereof. In the event Tevecap is unable to
satisfy its payment obligations under these promissory notes, Falcon may
be entitled, subject to a number of conditions, to sell its shares of
Tevecap to a third party.
b) Dividends
The Company's shareholders are entitled to minimum dividends of 25% of net
income for the year, adjusted according to Brazilian Corporation Law. As
the Company has not recorded net income under Brazilian Corporation Law
since its inception, no such dividends are payable.
18. Litigation contingencies
The Company is party to certain legal actions arising in the ordinary
course of its business which, individually or in the aggregate, are not
expected to have a material adverse effect on the consolidated financial
position of the Company. As of December 31, 2001, the Company had reserved
$1,697 as contingent liabilities in connection with certain litigation
contingencies where management and legal counsel believe that the risk of
loss is probable, primarily involving claims by persons arising in
connection with the termination of their employment.
F-30
TEVECAP S.A.
AND SUBSIDIARIES
18. Litigation contingencies (Continued)
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. ECAD is seeking a judgment award of
2.55% of all past and present revenues generated by the operators. The
suits are currently being submitted to the Superior Tribunal de Justica in
order to determine whether ECAD is entitled to benefit from the copyrights
relating to musical works broadcast on pay television. Although the
Company intends to continue to vigorously defend these suits, the loss of
such suits may have a material adverse effect on the consolidated
financial position of the Company. Based on agreements reached by ECAD
with other Brazilian television operators, however, management believes
that it can reach a negotiated settlement to these suits whereby the
Company would make monthly payments to ECAD in an amount significantly
lower than that sought by ECAD.
19. Pension plan
In April 1996, the Company became a co-sponsor of the private pension
entity named Abrilprev Sociedade de Previdencia Privada ("Abrilprev"), the
primary objective of which is to grant employees benefits other than those
provided by Social Security. The plan is optional to all employees of the
sponsoring entities. Abrilprev operates as a Defined Contribution Plan.
Company contributions are made based on a fixed percentage applied to the
payroll of the sponsoring entities based on actuarial calculations.
Contribution expenses amounted to $221 for the year ended December 31,
2001 ($262 in 2000 and $201 in 1999).
20. 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 companies' employees and their dependents. Both the companies
forming part of the Abril Group and the employees thereof contribute
monthly to Associacao Abril de Beneficios, the company responsible for
management of the plan.
In 2001, contributions made by Tevecap and certain affiliates of
Associacao Abril de Beneficios amounted to $883 ($939 in 2000 and $933 in
1999).
F-31
TEVECAP S.A.
AND SUBSIDIARIES
21. Valuation and qualifying accounts and reserves
Provision Deferred
For Provision for Provision Taxation Provision
Doubtful Inventory For Valuation For
Accounts Obsolescence Decoders Allowance Claims
------------ ------------- ------------ ------------ ------------
Balance as of January 1, 1999 $ 11,174 $ 3,130 $ 6,375 $ 125,235 $ 6,421
Additions 196 605 -- -- --
Deductions -- -- (6,375) (39,192) (4,004)
------------ ------------- ------------ ------------ ------------
Balance as of December 31, 1999 $ 11,370 $ 3,735 $ -- $ 86,043 $ 2,417
Additions -- -- -- 24,064 129
Deductions (3,775) (365) -- -- --
------------ ------------- ------------ ------------ ------------
Balance as of December 31, 2000 $ 7,595 $ 3,370 $ -- $ 110,107 $ 2,546
Additions 43 -- -- -- --
Deductions -- (3,021) -- (30,050) (849)
------------ ------------- ------------ ------------ ------------
Balance as of December 31, 2001 $ 7,638 $ 349 $ -- $ 80,057 $ 1,697
============ ============= ============ ============ ============
22. Recent accounting pronouncements
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No.
137 and SFAS No. 138 (collectively, "SFAS 133"). SFAS 133 establishes
accounting and reporting standards requiring that all derivative financial
instruments (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. Additionally, SFAS 133 requires that
changes in the fair value of derivatives be recognized in earnings unless
specific hedge accounting criteria are met. As the Company does not
utilize derivative financial instruments, the effect of adopting SFAS 133
on January 1, 2001 did not have a material impact on the Company's
consolidated financial statements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations" ("SFAS 141") and SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires
business combinations initiated after June 30, 2001 to be accounted for
using the purchase method of accounting, and broadens the criteria for
recording intangible assets separate from goodwill. Recorded goodwill and
intangibles will be evaluated against this new criteria and may result in
certain intangibles being subsumed into goodwill, or alternatively,
amounts initially recorded as goodwill may be separately identified and
recognized apart from goodwill. SFAS 142 requires the use of a
nonamortization approach to account for purchased goodwill and certain
intangibles. Under a nonamortization approach, goodwill and certain
intangibles will not be amortized into results of operations, but instead
would be reviewed for impairment and written down and charged to results
of operations only in the periods in which the recorded value of goodwill
and certain intangibles is more than its fair value. The amortization
provisions of SFAS 142 apply to goodwill and intangible assets acquired
after June 30, 2001. Effective January 1, 2002, the Company adopted the
provisions of each statement that apply to goodwill and intangible assets
acquired prior to June 30, 2001. Based on the Company's initial analysis
of SFAS 141 and SFAS 142, management believes that the implementation of
these
F-32
TEVECAP S.A.
AND SUBSIDIARIES
pronouncements will not have a material impact on the Company's
consolidated results of operations or financial condition.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 requires that the market
value of the liabilities related to obligations due to the retirement of
assets be recognized in the period in which they occur, if a reasonable
estimate of market value is possible. Costs of asset retirement are
capitalized as part of the permanent asset cost. In accordance with SFAS
143, the asset retirement obligation is discounted and an increase is
recognized by using the "credit adjusted risk-free" interest rate in
effect when the obligation was initially recognized. The Company is
required to adopt SFAS 143 effective January 1, 2003. Based on an initial
analysis of SFAS 143 requirements, management believes that the
implementation of this statement will not have a material impact on the
Company's consolidated results of operations or financial condition.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121") but
maintains the fundamental provisions of SFAS 121 for (a)
recognition/valuation of the provision for impairment of permanent assets
to be maintained and used and (b) valuation of permanent assets to be
written off due to their sale. SFAS 144 also supersedes the provisions of
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business"
("APB 30") with regard to reporting the effects of a disposal of a segment
of a business. The Company adopted SFAS 144 effective January 1, 2002.
Based on the Company's initial analysis of the SFAS 144 requirements,
management believes that the implementation of this pronouncement will not
have a material impact on the Company's consolidated results of operations
or financial condition.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and
Technical Corrections." SFAS 145 rescinds SFAS 4, "Reporting Gains and
Losses from Extinguishment of Debt," which required that all gains and
losses from extinguishment of debt to be aggregated and classified as an
extraordinary item if material. SFAS 145 requires that gains and losses
from extinguishment of debt be classified as extraordinary only if they
meet criteria in APB 30, thus distinguishing transactions that are part of
recurring operations from those that are unusual or infrequent, or that
meet the criteria for classification as an extraordinary item. SFAS 145
also amends SFAS No. 13, "Accounting for Leases", to require that lease
modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback
transactions. In addition, SFAS 145 rescinds SFAS 44, "Accounting for
Intangible Assets of Motor Carriers," and SFAS 64, "Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements," which are not currently
applicable to us. The provisions of SFAS 145 as they relate to the
rescission of
F-33
TEVECAP S.A.
AND SUBSIDIARIES
SFAS 4 will be applied effective January 1, 2003. Certain provisions
related to SFAS 13 are effective for transactions occurring after May 15,
2002. Management does not expect SFAS 145 to have a material impact on the
Company's consolidated results of operations or financial condition
23. Discontinued Operations
In July 1999, Tevecap consummated the sale of the DBS business, consisting
of Galaxy Brasil, TVA Banda C and certain assets related thereto,
including its interest in GLA, to GLA and the members thereof Tevecap
received net proceeds of $177,600, comprised of cash, a promissory note in
the principal amount of $25,500 (which was subsequently paid in 2001), the
assumption of certain dollar and real-denominated indebtedness and the
release of certain guarantees given by Tevecap and one of its subsidiaries
in respect to certain obligations of Galaxy Brasil.
24. Segments
Segment information has been prepared in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
Company's reportable segments are determined based on products and
services provided by each segment:
a. Pay Tv - programming packages consisting of 15 to 57 television
channels;
b. Internet - high speed broadband internet access; and
c. Programming - programming which concentrates Tevecap's programming
interest at TVA Channels Ltda.
During 1999 and 2000, the Company sold certain operations of the
Programming segment. As a result, management changed the structure of its
internal organization and transferred the remaining operations of the
Programming segment to the Pay TV segment, thereby eliminating the
Programming segment for 2000. It was impracticable to restate prior
periods to conform to the current year presentation.
F-34
TEVECAP S.A.
AND SUBSIDIARIES
2001
Pay Tv Internet TOTAL
-------- -------- --------
Gross revenues 101,572 4,362 105,934
Direct operating expenses and SG&A expenses 87,502 8,878 96,380
Depreciation and amortization 32,969 1,395 34,364
Other operating expense, net 1,762 -- 1,762
Interest income (4,182) (18) (4,200)
Interest expense 37,830 19 37,849
Foreign currency transaction loss, net 11,038 29 11,067
Other nonoperating expense, net 2,379 59 2,438
Income tax expense -- -- --
Equity in losses of affiliates 2,375 -- 2,375
Minority interest (284) -- (284)
Net loss (69,817) (6,000) (75,817)
Capital expenditures 30,029 610 30,639
Total assets 195,852 2,982 198,834
F-35
TEVECAP S.A.
AND SUBSIDIARIES
24. Segments (Continued)
2000
Pay Tv Internet TOTAL
-------- -------- --------
Gross revenues 119,030 1,981 121,011
Direct operating expenses and SG&A expenses 90,571 11,459 102,030
Depreciation and amortization 42,802 488 43,290
Other operating income, net 2,611 -- 2,611
Interest income 5,355 19 5,374
Interest expense 45,067 2 45,069
Foreign currency transaction loss, net 4,816 -- 4,816
Other nonoperating income (expense), net 37,427 (43) 37,384
Income tax expense 2,517 -- 2,517
Equity in losses of affiliates 2,004 -- 2,004
Minority interest 491 -- 491
Net loss (22,863) (9,992) (32,855)
Capital expenditures 24,232 2,465 26,716
Total assets 230,016 3,594 279,357
F-36
TEVECAP S.A.
AND SUBSIDIARIES
1999
Discontinued
Pay Tv Internet Programming Operations TOTAL
-------- -------- ----------- ------------ --------
Gross revenues 111,357 112 4,729 -- 116,198
Direct operating expenses and SG&A
expenses 75,559 1,649 6,802 -- 84,010
Depreciation and amortization 55,427 139 1,313 -- 56,879
Other operating expense, net 19,012 -- -- 19,012
Interest income 5,793 1 102 -- 5,896
Interest expense 22,230 -- 24 -- 22,254
Foreign currency translation loss, net 2,702 -- (159) -- 2,543
Other nonoperating expense, net 11,045 -- 10 -- 11,055
Income tax expense 106 -- -- 106
Equity in losses of affiliates 4,909 -- 329 -- 5,238
Minority interest 678 -- -- 678
Discontinued operations - gain on sale -- -- 94,344 94,344
Extraordinary item - gain on debt
repurchase 53,857 -- -- 53,857
Net income (loss) (19,305) (1,675) (3,488) 94,344 69,876
Capital expenditures 25,878 -- 49 25,927
Total assets 278,928 1,622 9,398 289,948
F-37
TEVECAP S.A.
AND SUBSIDIARIES
25. Financial information for subsidiary guarantors and non-guarantor
subsidiaries
Tevecap conducts a significant portion of its business through
subsidiaries. The $250,000 12 5/8% Senior Notes issued to institutional
buyers in November 1996 are jointly and severally, irrevocably and fully
and unconditionally guaranteed on a senior basis by all of Tevecap's
direct and indirect subsidiaries except for TVA Communications Aruba N.V.,
TVA Channels Ltda., Rede Ajato Ltda., Ype Radio and Televisao Ltda., TVA
Inc, TVA Overseas Ltd. and TVA TCG Sistema de Televisao Porto Alegre.
Presented below is condensed consolidating financial information for: i)
Tevecap on a parent company only basis; ii) the Wholly Owned Guarantor
Subsidiaries; iii) the Majority-Owned Guarantor Subsidiaries; iv)
Non-guarantor Subsidiaries; v) Eliminations; and vi) Consolidated Tevecap
S.A. and subsidiaries.
The equity method has been used by Tevecap, the Wholly Owned Guarantor
Subsidiaries and the Majority-Owned Guarantor Subsidiaries with respect to
investments in their subsidiaries.
The following sets forth the Wholly Owned Guarantor Subsidiaries, the
Majority-Owned Guarantor Subsidiaries and the Non-Guarantor Subsidiaries:
a) Wholly-Owned Guarantor Subsidiaries
- TVA Distribuidora S.A.
- TVA Programadora Ltda.
- TVA PAR S.A.
- TVA Communications Ltd.
- Comercial Cabo TV Sao Paulo Ltda.
- TVA Sistema de Televisao S.A. (majority-owned in 2000 and
1999)
- TVA Sul Parana Ltda. (majority-owned in 2000 and 1999)
b) Majority-Owned Guarantor Subsidiaries
- CCS Camboriu Cable System de Telecomunicacoes Ltda.
F-38
TEVECAP S.A.
AND SUBSIDIARIES
25. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (Continued)
c) Non-Guarantor Subsidiaries
- TVA Communications Aruba N.A.
- TVA TCG Sistema de Televisao de Porto Alegre S.A.
- Rede Ajato Ltda.
- TVA Channels Ltda.
- Ype Radio e Televisao Ltda.
- TVA Overseas Ltd.
- TVA Inc
Separate financial statements have been presented for TVA Sistema de
Televisao S.A., TVA Sul Parana Ltda and CCS Camboriu Cable System
Telecomunicacoes Ltda. as of December 31, 2001 and 2000 and for each of
the three years in the period ended December 31, 2001.
During 1999, TVA Sul Participacoes S.A, TVA Sul Foz do Iguacu Ltda. and
TVA Sul Santa Catarina Ltda. were merged into TVA Sul Parana Ltda.
F-39
TEVECAP S.A.
AND SUBSIDIARIES
25. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (Continued)
Consolidated Balance Sheets
as of December 31, 2001
Wholly- Majority-
Owned Owned Non-
Parent Guarantor Guarantor guarantor
Assets Company Subsidiaries Subsidiaries subsidiaries Eliminations Consolidated
----------- ----------- ----------- ----------- ----------- -----------
Current assets
Cash and cash equivalents $ 9 $ 603 $ 20 $ 2 $ $ 634
Accounts receivable, net -- 6,283 50 147 (6) 6,474
Inventories, net -- 11,043 74 -- 11,117
Prepaid and other assets 489 1,705 2 2 2,198
Accounts receivable from related
parties 378 71 5 161 (383) 232
Other accounts receivable 123 67,296 116 54 (66,158) 1,431
----------- ----------- ----------- ----------- ----------- -----------
Total current assets 999 87,001 267 366 (66,547) 22,086
----------- ----------- ----------- ----------- ----------- -----------
Property, plant and equipment, net -- 145,859 3,079 2,796 (2,140) 149,594
Investments
Equity basis 63,684 1,792 -- 549 (65,476) 549
Concessions, net 2,267 3,098 -- -- -- 5,365
Loans to related companies 456,843 20,246 566 65,518 (536,262) 6,911
Debt Issuance costs, net 937 -- -- -- 937
Dividends receivable 184,107 -- -- -- (184,107) --
Judicial deposits -- 12,829 199 -- 13,028
Other -- 202,342 -- -- (201,978) 364
----------- ----------- ----------- ----------- ----------- -----------
Total assets $ 708,837 $ 473,167 $ 4,111 $ 69,229 $(1,056,510) $ 198,834
=========== =========== =========== =========== =========== ===========
F-40
TEVECAP S.A.
AND SUBSIDIARIES
25. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (Continued)
Consolidated Balance Sheets
as of December 31, 2001
Wholly- Majority-
Owned Owned Non-
Parent Guarantor Guarantor Guarantor
Liabilities and Shareholders' Equity Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ------------ ------------ ------------ ------------
Current Liabilities
Loans 66,730 9,248 -- 11,421 (66,158) 21,241
Film suppliers -- 11,182 276 -- -- 11,458
Other suppliers 251 5,714 30 218 (7) 6,206
Taxes payable other than income taxes 1,703 3,280 155 71 -- 5,209
Accrued payroll and related liabilities -- 1,443 17 100 -- 1,560
Advance payments received from
subscribers -- 199 8 (3) -- 204
Other accounts payable 359 1,830 147 65 (382) 2,019
----------- ----------- ----------- ----------- ----------- -----------
Total current liabilities 69,043 32,896 633 11,872 (66,547) 47,897
----------- ----------- ----------- ----------- ----------- -----------
Long-term liabilities
Loans 250,000 996 -- 77 (201,978) 49,095
Loans from related companies 18,878 487,189 -- 36,923 (536,261) 6,729
Taxes payable other than income taxes 5,341 22,685 489 -- -- 28,515
Provision for claims -- 1,689 3 5 -- 1,697
Dividends payable -- 145,361 -- 38,746 (184,107) --
Liability to fund equity investee 289,850 -- -- 11 (286,642) 3,219
----------- ----------- ----------- ----------- ----------- -----------
Total long-term liabilities 564,069 657,920 492 75,762 (1,208,988) 89,255
----------- ----------- ----------- ----------- ----------- -----------
Minority interest -- -- 1,194 -- -- 1,194
Redeemable common stock 115,252 -- -- -- -- 115,252
Shareholders' deficit
Common stock 370,313 100,899 2,817 3,388 (106,391) 371,026
Accumulated other comprehensive income
(loss) 15,381 59,748 (949) 2,081 (59,406) 16,855
Accumulated deficit (425,221) (378,296) (76) (23,874) 384,822 (442,645)
----------- ----------- ----------- ----------- ----------- -----------
Total shareholders' deficit (39,527) (217,649) 1,792 (18,405) 219,025 (54,764)
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and
shareholders' deficit 708,837 473,167 4,111 69,229 (1,056,510) 198,834
=========== =========== =========== =========== =========== ===========
F-41
TEVECAP S.A.
AND SUBSIDIARIES
25. Financial information for subsidiary guarantors and non-guarantor
Subsidiaries (Continued)
Consolidated Statements of Operations
for the year ended December 31, 2001
Wholly-
Owned Majority- Non-
Parent Guarantor Owned Guarantor
Description Company Subsidiaries Guarantor Subsidiaries Eliminations Consolidated
----------- ------------ ----------- ------------ ------------ ------------
Gross revenues
Monthly subscriptions -- 84,192 2,025 2,029 -- 88,246
Installation -- 200 20 50 -- 270
Advertising -- 1,005 -- -- -- 1,005
Other -- 17,033 130 302 (1,052) 16,413
----------- ----------- ----------- ----------- ----------- -----------
Net revenue -- 102,430 2,175 2,381 (1,052) 105,934
----------- ----------- ----------- ----------- ----------- -----------
Direct operating expenses
Taxes on revenue -- 14,926 553 157 -- 15,636
Payroll and benefits (132) 6,669 58 1,909 -- 8,504
Programming 24 24,577 655 493 -- 25,749
Transponder lease cost -- 22 -- -- -- 22
Technical assistance -- 1,839 24 5 -- 1,868
TVA Magazine -- 2,369 20 -- -- 2,389
Pole rental -- 2,779 35 -- -- 2,814
Other costs 22 6,983 118 3,879 (1,052) 9,950
----------- ----------- ----------- ----------- ----------- -----------
(86) 60,164 1,463 6,443 (1,052) 66,932
----------- ----------- ----------- ----------- ----------- -----------
Selling, general and administrative expenses
Payroll and benefits 22 9,586 80 107 -- 9,795
Advertising and promotion 9 5,378 32 359 -- 5,778
Rent -- 1,739 4 34 -- 1,777
Other general and administrative expenses 1,239 10,569 233 57 -- 12,098
----------- ----------- ----------- ----------- ----------- -----------
1,270 27,272 349 557 -- 29,448
----------- ----------- ----------- ----------- ----------- -----------
Depreciation and amortization 646 33,159 356 580 (377) 34,364
Other operating expense, net -- 1,757 5 -- -- 1,762
----------- ----------- ----------- ----------- ----------- -----------
Operating loss (1,830) (19,922) 2 (5,199) (377) (26,572)
----------- ----------- ----------- ----------- ----------- -----------
Interest income (3,046) (26,607) (65) (19) 25,537 (4,200)
Interest expense 55,247 3,530 213 4,396 (25,537) 37,849
Transaction 44,407 (24,226) -- (9,114) -- 11,067
Other nonoperating (expenses) income, net 5,445 329 5 (3,341) -- 2,438
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes, equity
and minority interest (103,883) 27,052 (151) 2,879 (377) (73,726)
Income taxes -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Income ( loss) before equity and minority
interest (103,883) 27,052 (151) 2,879 (377) (73,726)
Equity in (losses) of affiliates (22,247) -- -- 315 24,307 2,375
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before minority
interest (81,636) 27,052 (151) 2,564 23,930 (76,101)
Minority interest -- -- (27) -- (257) (284)
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) (81,636) 27,052 (124) 2,564 23,673 (75,817)
=========== =========== =========== =========== =========== ===========
F-42
TEVECAP S.A.
AND SUBSIDIARIES
25. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (Continued)
Consolidated Statement's of Cash Flows
for the year ended December 31, 2001
Wholly- Majority- Non-
Parent Owned Owned Guarantor
Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------ ------------
Cash flows from operating activities:
Net loss (75,814) 25,372 (68) (1,702) (23,605) (75,817)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation -- 32,493 357 580 (377) 33,053
Amortization 646 665 -- -- 1,311
Amortization of debt issuance cost 192 -- -- -- 192
Provision for doubtful accounts -- 7,460 (7,281) (136) -- 43
Provision for equipment and inventory
obsolescence -- 344 (3,365) -- -- (3,021)
Provision for claims -- 1,689 (2,019) (519) -- (849)
Minority interest -- -- -- (284) (284)
Disposal and write-off of property, plant and 10 877 2 185 -- 1,074
equipment
Write-off of investments (6,620) (544) 5,516 1,648 -- --
Equity in losses of affiliates (22,248) 41 315 24,267 2,375
Foreign currency transaction loss, net 44,407 (24,231) 5 (9,114) 11,067
Changes in operating assets and liabilities:
Accounts receivable -- (13,743) 16,152 979 (2,168) 1,220
Prepaid and other assets 291 (1,705) 2,936 343 -- 1,865
Accrued interest 45,347 (23,787) (36) 7,813 -- 29,337
Inventories -- (11,387) 15,792 -- -- 4,405
Suppliers (275) 16,896 (13,890) (1,358) 2,165 3,538
Taxes payable other than income taxes (3,282) 25,965 (23,459) (425) -- (1,201)
Accrued payroll and related liabilities -- 1,443 (1,923) (430) -- (910)
Advances received from subscribers -- 199 (239) (9) -- (49)
Other 4,176 (12,618) 11,974 729 (2) 4,263
--------- --------- --------- --------- --------- ---------
Net cash (used in) provided by operating
activities (13,170) 25,429 454 (1,101) -- 11,612
--------- --------- --------- --------- --------- ---------
Cash flows from investing activities:
Purchase of property, plant and equipment -- (31,857) (151) 1,369 -- (30,639)
Collection of promissory note -- -- 28,236 -- 28,236
Loans to related companies (79,489) (19,853) (1,032) (11,145) 100,823 (10,696)
Repayment of loans to related companies 83,187 4,516 467 11,531 (74,451) 25,250
Purchases of investments (7,393) -- (852) -- (8,245)
--------- --------- --------- --------- --------- ---------
Net cash used in investing activities (3,695) (47,194) (716) 29,139 26,372 3,906
--------- --------- --------- --------- --------- ---------
Cash flows from financing activities:
Bank loans -- 10,078 11,213 -- 21,291
Dividends receivable and payable (137,782) 99,036 38,746 -- --
Transfer of investments to dividends 188,991 (141,806) (47,185) -- --
Loans from shareholders 13,306 71,153 29,669 (100,822) 13,306
Repayments of loans from shareholders (23,494) (39,752) (34,698) (74,450) (23,494)
Repayments of loans from banks (6,391) (9,155) (29,296) -- (44,842)
--------- --------- --------- --------- --------- ---------
Net cash provided by financing activities 34,630 (10,446) (31,551) (26,372) (33,739)
--------- --------- --------- --------- --------- ---------
Effect of exchange rate changes (17,782) 32,792 26 2,210 -- 17,246
--------- --------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents (17) 581 (236) (1,303) -- (975)
Cash and cash equivalents at beginning of the
period 26 22 256 1,305 -- 1,609
--------- --------- --------- --------- --------- ---------
Cash and cash equivalents at end of the
period 9 603 20 2 -- 634
========= ========= ========= ========= ========= =========
F-43
TEVECAP S.A.
AND SUBSIDIARIES
25. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (Continued)
Consolidated Balance Sheets
as of December 31, 2000
Wholly- Majority-
Owned Owned Non-
Parent Guarantor Guarantor guarantor
Assets company Subsidiaries Subsidiaries subsidiaries Eliminations Consolidated
------------ ------------ ------------ ------------ ------------ ------------
Current assets
Cash and cash equivalents $ 26 $ 22 $ 256 $ 1,305 $ -- $ 1,609
Accounts receivable, net -- -- 8,919 990 (2,172) 7,737
Inventories, net -- -- 12,501 -- -- 12,501
Prepaid and other assets 780 -- 2,938 345 -- 4,063
Accounts receivable from related
parties 674 3 2,535 3,181 (6,297) 96
Promissory note -- -- -- 27,744 27,744
Other accounts receivable 1,636 40,658 6,987 190 (40,658) 8,813
------------ ------------ ------------ ------------ ------------ ------------
Total current assets 3,116 40,683 34,136 33,755 (49,127) 62,563
------------ ------------ ------------ ------------ ------------ ------------
Property, plant and equipment, net 10 325 179,307 5,856 (2,987) 182,511
Investments
Equity basis 180,576 42,368 -- -- (222,944) --
Concessions, net -- 3,460 4,459 -- -- 7,919
Loans to related companies 527,513 455,364 -- 58,928 (1,024,273) 17,532
Debt Issuance costs, net 640 -- -- -- -- 640
Dividends receivable 46,325 -- -- -- (46,325) --
Judicial deposits 201,978 7,934 258 (201,978) 8,192
------------ ------------ ------------ ------------ ------------ ------------
Total assets $ 758,180 $ 744,178 $ 225,836 $ 98,797 $ (1,547,634) $ 279,357
============ ============ ============ ============ ============ ============
F-44
TEVECAP S.A.
AND SUBSIDIARIES
25. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (Continued)
Consolidated Balance Sheets
as of December 31, 2000
Wholly- Majority-
Owned Owned Non-
Parent Guarantor Guarantor Guarantor
Liabilities and Shareholders' Equity Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------ ------------
Current Liabilities
Loans 572 -- 6,021 26,478 -- 33,071
Film suppliers -- -- 5,103 19 -- 5,122
Other suppliers 526 -- 9,093 1,557 (2,172) 9,004
Taxes payable other than income taxes 1,858 -- 3,439 160 -- 5,457
Accrued payroll and related liabilities -- -- 1,940 530 -- 2,470
Advance payments received from
subscribers -- -- 247 6 -- 253
Other accounts payable 40,811 49 5,308 2,750 (46,955) 1,963
-------- ------------ ------------ ------------ ------------ ------------
Total current liabilities 43,767 49 31,151 31,500 (49,127) 57,340
-------- ------------ ------------ ------------ ------------ ------------
Long-term liabilities
Loans 250,000 -- 1,669 -- (201,978) 49,691
Loans from related companies 151,732 506,460 465,699 41,504 (1,024,273) 141,122
Taxes payable other than income taxes 8,468 -- 20,664 336 -- 29,468
Provision for claims -- -- 2,022 524 -- 2,546
Dividends payable -- 46,325 -- -- (46,325) --
Liability to fund equity investee 299,738 298,249 -- -- (590,049) 7,938
-------- ------------ ------------ ------------ ------------ ------------
Total long-term liabilities 709,938 851,034 490,054 42,364 (1,862,625) 230,765
-------- ------------ ------------ ------------ ------------ ------------
Minority interest -- -- 2,041 -- -- 2,041
Redeemable common stock, no par value 151,260 -- -- -- -- 151,260
Shareholders' deficit
Paid-in capital 241,629 87,247 55,040 11,260 (152,834) 242,342
Accumulated other comprehensive loss
Cumulative translation adjustment (2,999) 11,695 27,913 (3,894) (34,270) (1,555)
Accumulated deficit (385,415) (205,847) (380,363) 17,567 551,222 (402,836)
-------- ------------ ------------ ------------ ------------ ------------
Total shareholders' deficit (146,785) (106,905) (297,410) 24,933 364,118 (162,049)
-------- ------------ ------------ ------------ ------------ ------------
Total liabilities and
shareholders' Deficit 758,180 744,178 225,836 98,797 (1,547,634) 279,357
======== ============ ============ ============ ============ ============
F-45
TEVECAP S.A.
AND SUBSIDIARIES
25. Financial information for subsidiary guarantors and non-guarantor
Subsidiaries (Continued)
Consolidated Statements of Operations
for the year ended December 31, 2000
Wholly-
Owned Majority- Non-
Parent Guarantor Owned Guarantor
Description Company Subsidiaries Guarantor Subsidiaries Eliminations Consolidated
-------- ------------ --------- ------------ ------------ ------------
Gross revenues
Monthly subscriptions 96,140 994 97,134
Installation 901 67 968
Advertising 2,503 2,503
Indirect programming 357 357
Other 21,304 (1,255) 20,049
-------- ------------ -------- ------------ ------------ --------
Net revenue 121,205 1,061 (1,255) 121,011
-------- ------------ -------- ------------ ------------ --------
Direct operating expenses
Taxes on revenue 13,130 15 13,145
Payroll and benefits 6,522 2,707 9,229
Programming 25,994 110 26,104
Transponder lease cost 2,283 125 2,408
Technical assistance 2,415 -- 2,415
TVA Magazine 2,679 (104) 2,575
Pole rental 3,535 -- 3,535
Other costs 6,369 2,767 9,136
-------- ------------ -------- ------------ ------------ --------
62,927 5,620 68,547
-------- ------------ -------- ------------ ------------ --------
Selling, general and administrative expenses
Payroll and benefits 13,817 1,125 14,942
Advertising and promotion 5,193 2,137 7,330
Rent 1,935 87 2,022
Other general and administrative expenses 1,181 7,627 1,636 1,255 9,189
-------- ------------ -------- ------------ ------------ --------
1,181 28,572 4,985 1,255 33,483
-------- ------------ -------- ------------ ------------ --------
Depreciation -- -- 40,783 1,290 451 41,622
Amortization -- 822 846 -- -- 1,668
Other -- -- 4,291 (6,902) -- (2,611)
-------- ------------ -------- ------------ ------------ --------
Operating loss (1,181) (822) (16,214) (3,932) 451 (21,698)
-------- ------------ -------- ------------ ------------ --------
Interest income (2,124) (25,632) (1,321) (1,865) 25,568 (5,374)
Interest expense 63,643 195 3,725 3,074 (25,568) 45,069
Transaction 21,690 (20,208) 1,414 1,920 -- 4,816
Other nonoperating (expenses) income, net 1,685 78 2,256 (41,403) -- (37,384)
-------- ------------ -------- ------------ ------------ --------
Income (loss) before income taxes, equity,
discontinued operations and minority
interest (86,075) 44,745 (22,288) 34,342 451 (28,825)
Income taxes 2,244 -- 273 -- -- 2,517
-------- ------------ -------- ------------ ------------ --------
Income (loss) before equity, discontinued
operations and minority interest (88,319) 44,745 (22,561) 34,342 451 (31,342)
Equity in (losses) of affiliates (55,412) (22,288) -- -- 79,704 2,004
-------- ------------ -------- ------------ ------------ --------
Income (loss) before discontinued operations
and minority interest (32,907) 67,033 (22,561) 34,342 (79,253) (33,346)
Minority interest -- -- (491) -- -- (491)
-------- ------------ -------- ------------ ------------ --------
Net income (loss) (32,907) 67,033 (22,070) 34,342 (79,253) (32,855)
======== ============ ======== ============ ============ ========
F-46
TEVECAP S.A.
AND SUBSIDIARIES
25. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (Continued)
Consolidated Statement's of Cash Flows
for the year ended December 31, 2000
Wholly-
Owned Majority- Non-
Parent Guarantor Owned Guarantor Parent
Company Subsidiaries Guarantor Subsidiaries Eliminations Consolidated
--------- ------------ --------- ------------ ------------ ------------
Cash flows from operating activities:
Net loss (32,907) 67,033 (14,917) 27,189 (79,253) (32,855)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation 40,783 1,290 (451) 41,622
Amortization 822 846 1,668
Amortization of debt issuance cost 219 219
Provision for doubtful accounts (3,771) (4) (3,775)
Provision for equipment and inventory
obsolescence (365) (365)
Provision for claims 209 (80) 129
Minority interest (745) 254 (491)
Disposal and write-off of property, plant and 2,046 1,493 (1,493) 2,046
equipment
Gain on sales of assets (40,454) (40,454)
Write-off of investments (5,124) 5,132 8
Equity in losses of affiliates (55,412) (22,288) 79,704 2,004
Foreign currency transactions loss, net 21,690 (20,208) 1,414 1,920 4,816
Changes in operating assets and liabilities:
Film exhibition rights 1,278 1,278
Accounts receivable 2,472 (494) 1,622 3,600
Prepaid and other assets 354 (473) (332) (451)
Promissory notes 25,500 (25,500) --
Accrued interest 56,734 (25,500) 1,885 (502) (2) 32,615
Inventories (1,823) (1,823)
Suppliers (281) (1) (671) (531) (1,764) (3,248)
Taxes payable other than income taxes 2,445 3,548 185 6,178
Accrued payroll and related liabilities 72 9 81
Advances received from subscribers (686) 1 (685)
Other 915 76 (6,806) (3,490) 142 (9,163)
-------- -------- -------- -------- -------- --------
Net cash (used in) provided by operating
activities 19,257 (5,190) 23,018 (32,890) (1,241) 2,954
-------- -------- -------- -------- -------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment (313) (25,410) (2,484) 1,491 (26,716)
Cash received on sale of assets 43,000 43,000
Loans to related companies (99,335) (40,958) (58,928) 180,016 (19,205)
Repayments of loans to related companies 59,355 29,507 (79,911) 8,951
Investments in equity and cost investments (9) 9
-------- -------- -------- -------- -------- --------
Net cash used in investing activities (39,980) (11,773) (25,410) (18,412) 101,605 6,030
-------- -------- -------- -------- -------- --------
Cash flows from financing activities:
Bank loans 1,252 25,500 26,752
Capital contributions (2,546) 2,546
Dividends receivable and payable 23,597 (23,597)
Loans from shareholders 37,364 92,981 37,106 38,217 (180,449) 25,219
Repayments of loans from shareholders (37,342) (50,574) (21,844) (7,833) 80,251 (37,342)
Repayments of loans from banks (6,060) (11,315) (17,375)
-------- -------- -------- -------- -------- --------
Net cash provided by financing activities 17,559 16,264 5,199 58,430 (100,198) (2,746)
-------- -------- -------- -------- -------- --------
Effect of exchange rate changes 3,179 711 (4,332) (5,967) (166) (6,575)
-------- -------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents 15 12 (1,525) 1,161 (337)
Cash and cash equivalents at beginning of
the period 11 10 1,781 144 1,946
-------- -------- -------- -------- -------- --------
Cash and cash equivalents at end of the
period 26 22 256 1,305 1,609
======== ======== ======== ======== ======== ========
F-47
TEVECAP S.A.
AND SUBSIDIARIES
25. Financial information for subsidiary guarantors and non-guarantor
Subsidiaries (Continued)
Consolidated Statements of Operations
for the year ended December 31, 1999
Wholly-
Owned Majority- Non-
Parent Guarantor Owned Guarantor
Description Company Subsidiaries Guarantor Subsidiaries Eliminations Consolidated
--------- ------------ --------- ------------ ------------ ------------
Gross revenues
Monthly subscriptions 93,989 66 94,055
Installation 1,872 28 1,900
Advertising 1,361 236 1,597
857 2,865 3,722
Other 13,191 1,733 14,924
-------- ------------ -------- -------- ------------ --------
Net revenue 111,270 4,928 116,198
-------- ------------ -------- -------- ------------ --------
Direct operating expenses
Taxes on revenue 12,381 401 12,782
Payroll and benefits 5,036 2,821 7,857
Programming 22,907 1,259 24,166
Transponder lease cost 1,449 526 1,975
Technical assistance 1,311 1,311
TVA Magazine 2,162 320 2,482
Pole rental 2,935 2,935
Other costs 1,754 2,040 1,118 4,912
-------- ------------ -------- -------- ------------ --------
1,754 50,221 6,445 58,420
-------- ------------ -------- -------- ------------ --------
Selling, general and administrative expenses
Payroll and benefits 10,611 814 11,425
Advertising and promotion 2,487 1,158 3,645
Rent 1,958 47 2,005
Other selling, general and administrative
expenses 3,430 4,820 265 8,515
-------- ------------ -------- -------- ------------ --------
3,430 19,876 2,284 25,590
-------- ------------ -------- -------- ------------ --------
Depreciation 54,215 1,451 (492) 55,174
Amortization 840 865 1,705
Other 18,407 605 19,012
-------- ------------ -------- -------- ------------ --------
Operating loss (23,591) (840) (14,512) (5,252) 492 (43,703)
-------- ------------ -------- -------- ------------ --------
Interest income (3,188) (26,724) (10,692) (165) 34,873 (5,896)
Interest expense 50,687 1,201 5,215 24 (34,873) 22,254
Translation gain (loss) 80 190 2,399 (126) 2,543
Other nonoperating (expenses) income, net 28,363 (69,856) 52,538 10 11,055
Dividends (76,426) 76,426
-------- ------------ -------- -------- ------------ --------
Income (loss) before income taxes, equity,
discontinued operations and minority
interest (23,107) 17,923 (63,972) (4,995) 492 (73,659)
Income taxes 106 106
-------- ------------ -------- -------- ------------ --------
Income (loss) before equity, discontinued
operations and minority interest (23,107) 17,923 (64,078) (4,995) 492 (73,765)
Equity in (losses) of affiliates 9,123 78,998 329 (83,212) 5,238
-------- ------------ -------- -------- ------------ --------
Income (loss) before discontinued operations
and minority interest (32,230) (61,075) (64,078) (5,324) 83,704 (79,003)
Minority interest (678) (678)
-------- ------------ -------- -------- ------------ --------
Income (loss/) before discontinued
operations and extraordinary item (32,230) (61,075) (63,400) (5, 324) 83,704 (78,325)
Discontinue operations (94,344) (94,344)
-------- ------------ -------- -------- ------------ --------
Income (loss) from continuing operations
before extraordinary item 62,114 (61,075) (63,400) (5, 324) 83,704 16,019
Extraordinary item - gain on debt repurchase (53,857) (53,857)
-------- ------------ -------- -------- ------------ --------
Net income (loss) 62,114 (7,218) (63,400) (5, 324) 83,704 69,876
======== ============ ======== ======== ============ ========
F-48
TEVECAP S.A.
AND SUBSIDIARIES
25. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (Continued)
Consolidated Statement's of Cash Flows
for the year ended December 31, 1999
Wholly-
Owned Majority- Non-
Parent Guarantor Owned Guarantor Parent
Company Subsidiaries Guarantor Subsidiaries Eliminations Consolidated
------- ------------ --------- ------------ ------------- ------------
Cash flows from operating activities:
Net loss 62,114 (7,218) (63,400) (5,324) 83,704 69,876
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation 54,215 1,451 (492) 55,174
Amortization 840 865 1,705
Amortization of debt issuance cost 219 219
Write off debt issuance cost 5,185 5,185
Provision for doubtful accounts 162 34 196
Provision for equipment and inventory
obsolescence 605 605
Provision for claims (3,751) (253) (4,004)
Minority interest (678) (678)
Disposal and write-off of property, plant and 57,028 57,028
equipment
Gain on sale of assets (93,689) (65,949) (159,638)
Write-off of investments in TV Filme Inc. 6,668 6,668
Buy back gain of Senior Notes (70,692) (70,692)
Equity in losses of affiliates 9,123 78,998 329 (83,212) 5,238
Changes in operating assets and liabilities:
Film exhibition rights 290 290
Accounts receivable 10,207 2,690 24 12,921
Prepaid and other assets 1,171 133 260 1,564
Accrued interest 46,552 (25,506) (6,820) 109 (1) 14,334
Inventories 3,982 3,982
Suppliers 22 1 (36,551) (1,280) 11,898 (25,910)
Taxes payable other than income taxes 7,877 6,584 52 14,513
Accrued payroll and related liabilities (1,251) (317) (1,568)
Advances received from subscribers (1,066) 2 (1,064)
Other (280) (52) (4,976) 580 349 (4,379)
-------- -------- -------- -------- ------------ --------
Net cash (used in) provided by operating
activities 38,294 (82,910) 15,288 (1,377) 12,270 (18,435)
-------- -------- -------- -------- ------------ --------
Cash flows from investing activities:
Purchase of property, plant and equipment (10) (24,260) (1,657) (25,927)
Loans to related companies (81,214) (67,107) (117) 148,438
Cash received on sale of assets 47,542 130,000 177,542
Repayments of loans to related companies 39,172 20,988 218 (58,198) 2,180
Purchase of investments (840) (1) (1,788) 840 (1,789)
-------- -------- -------- -------- ------------ --------
Net cash used in investing activities 4,650 83,881 (24,160) (3,445) 91,080 152,006
-------- -------- -------- -------- ------------ --------
Cash flows from financing activities:
Bank loans 6,661 6,661
Capital contributions 840 (840)
Dividends payable (76,426) 76,426
Repayments of loans from shareholders (11,430) (23,387) (18,571) (3,971) 45,929 (11,430)
Loans from shareholders 63,695 76,711 63,634 6,306 (146,651) 63,695
Loans from related companies 1,788 (1,788)
Repayments of loans from banks (18,811) (131,286) (41,851) (191,948)
-------- -------- -------- -------- ------------ --------
Net cash provided by financing activities (42,972) (1,536) 9,873 4,963 (103,350) (133,022)
-------- -------- -------- -------- ------------ --------
Net increase (decrease) in cash and cash
equivalents (28) (565) 1,001 141 549
Cash and cash equivalents at beginning
of the period 39 575 780 3 1,397
-------- -------- -------- -------- ------------ --------
Cash and cash equivalents at end of the
period 11 10 1,781 144 1,946
======== ======== ======== ======== ============ ========
* * * * * * * *
F-49
TVA SISTEMA DE TELEVISAO S.A.
Financial Statements Together with
Independent Auditors' Report
As of December 31, 2001 and 2000 and for each of the three years in the period
ended December 31, 2001
TVA SISTEMA DE TELEVISAO S.A.
Index to Financial Statements
Page
Independent Auditors' Report F-51
Balance Sheets as of December 31, 2001 and 2000 F-52
Statements of Operations for each of the three years in the period
ended December 31, 2001 F-54
Statements of Changes in Shareholders' Deficit for each of the three
years in the period ended December 31, 2001 F-55
Statements of Cash Flows for each of the three years in the period
ended December 31, 2001 F-56
Notes to the Financial Statements F-57
The accompanying notes are an integral part of the financial statements.
F-50
TVA SISTEMA DE TELEVISAO S.A.
Independent Auditors' Report
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, 2001 and 2000, and the related statements of
operations, changes in shareholders' deficit and cash flows for each of the
three years in the period ended December 31, 2001, 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, 2001 and 2000, and the results of its operations and cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America.
Deloitte Touche Tohmatsu
Sao Paulo, Brazil,
June 17, 2002
The accompanying notes are an integral part of the financial statements.
F-51
TVA SISTEMA DE TELEVISAO S.A.
Balance Sheets
December 31, 2001 and 2000
(in thousands of U.S. dollars)
December 31,
-------------------
2001 2000
-------- --------
ASSETS
Current assets
Cash and cash equivalents $ 535 $ 118
Accounts receivable, net (Footnote 3) 5,856 8,351
Inventories, net (Footnote 4) 10,029 10,586
Prepaid and other assets (Footnote 5) 1,617 2,748
Accounts receivable from related companies (Footnote 6) 193 2,518
Other accounts receivable (Footnote 7) 869 6,348
-------- --------
Total current assets 19,099 30,669
-------- --------
Property, plant and equipment, net (Footnote 10) 124,631 147,781
Judicial deposits 10,201 5,764
-------- --------
Total assets $153,931 $184,214
======== ========
F-52
TVA SISTEMA DE TELEVISAO S.A.
Balance Sheets, Continued
December 31, 2001 and 2000
(in thousands of U.S. dollars)
December 31,
----------------------
2001 2000
--------- ---------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Loans (Footnote 11) $ 8,888 $ 6,021
Film suppliers 9,730 4,562
Other suppliers 5,632 8,503
Taxes payable other than income taxes (Footnote 13) 2,874 2,909
Accrued payroll and related liabilities 1,317 1,725
Accounts payable to related companies (Footnote 6) 611 3,927
Advance payments received from subscribers 168 194
Other accounts payable (Footnote 12) 1,129 1,326
--------- ---------
Total current liabilities 30,349 29,167
--------- ---------
Long-term liabilities
Loans (Footnote 11) 996 1,669
Loans payable to related companies (Footnote 6) 382,808 437,991
Taxes payable other than income taxes (Footnote 13) 19,356 17,679
Provision for claims (Footnotes 17 and 20) 1,240 1,325
--------- ---------
Total long-term liabilities 404,400 458,664
--------- ---------
Commitments and contingencies (Footnotes 8, 15 and 17)
Shareholders' deficit
Common stock, no par value, 6,980,764 shares authorized,
issued and outstanding 16,303 16,303
Accumulated other comprehensive income 75,573 28,802
Accumulated deficit (372,694) (348,722)
--------- ---------
Total shareholders' deficit (280,818) (303,617)
--------- ---------
Total liabilities and shareholders' deficit $ 153,931 $ 184,214
========= =========
The accompanying notes are an integral part of the financial statements.
F-53
TVA SISTEMA DE TELEVISAO S.A.
Statements of Operations
for the years ended December 31, 2001, 2000 and 1999
(in thousands of U.S. dollars)
Year Ended December 31,
------------------------------------
2001 2000 1999
--------- --------- --------
Gross revenues
Monthly subscriptions $ 71,875 $ 82,467 $ 79,721
Installation 164 808 1,687
Advertising 951 2,505 1,342
Indirect programming 108 689 857
Additional services 16,992 19,878 12,614
--------- --------- --------
90,090 106,347 96,221
--------- --------- --------
Direct operating expenses (excluding depreciation stated
separately below)
Taxes on revenues 13,157 11,411 10,678
Payroll and benefits 5,916 5,484 4,260
Programming 21,318 22,351 18,803
Transponder lease cost 22 2,283 1,449
Technical assistance 1,646 2,120 1,058
TVA magazine 2,165 2,427 1,872
Pole rentals 2,451 3,052 2,501
Other costs 5,788 5,229 1,460
--------- --------- --------
52,463 54,357 42,081
--------- --------- --------
Selling, general and administrative expenses
Payroll and benefits 8,978 12,055 9,219
Advertising and promotion 5,045 4,739 2,307
Rent 1,702 1,866 1,805
Other selling, general and administrative expenses 9,035 7,329 4,659
--------- --------- --------
24,760 25,989 17,990
--------- --------- --------
Depreciation 29,111 35,972 47,988
Others operating expense (income), net (Footnote 14) 3,105 (2,099) 49,558
--------- --------- --------
Loss from operations (19,349) (7,872) (61,396)
--------- --------- --------
Interest income (785) (959) (10,474)
Interest expense 3,146 3,318 4,396
Foreign currency translation loss, net -- -- 2,168
Foreign currency transaction loss, net 2,262 1,066 --
--------- --------- --------
Loss before income taxes (23,972) (11,297) (57,486)
Income taxes -- -- --
--------- --------- --------
Net loss $ (23,972) $ (11,297) $(57,486)
========= ========= ========
Other comprehensive income-
Foreign currency translation adjustment $ 46,771 $ 28,802 $ --
--------- --------- --------
Comprehensive income (loss) $ 22,799 $ 17,505 $(57,486)
========= ========= ========
The accompanying notes are an integral part of the financial statements.
F-54
TVA SISTEMA DE TELEVISAO S.A.
Statements of Changes in Shareholders' Deficit
for the years ended December 31, 2001, 2000 and 1999
(in thousands of U.S. dollars)
Accumulated
Other Total
Common Accumulated Comprehensive Shareholders'
Stock Deficit Income (loss) Deficit
------ ----------- ------------- -------------
Balance as of January 1, 1999 $16,303 $(279,939) $ $(263,636)
Net loss for the year (57,486) (57,486)
------- --------- --------- ---------
Balance as of December 31, 1999 16,303 (337,425) (321,122)
Foreign currency translation
adjustment, net of tax 28,802 28,802
Net loss for the year (11,297) (11,297)
------- --------- --------- ---------
Balance as of December 31, 2000 16,303 (348,722) 28,802 (303,617)
Foreign currency translation
adjustment, net of tax 46,771 46,771
Net loss for the year (23,972) (23,972)
------- --------- --------- ---------
Balance as of December 31, 2001 $16,303 $(372,694) $ 75,573 $(280,818)
======= ========= ========= =========
The accompanying notes are an integral part of the financial statements.
F-55
TVA SISTEMA DE TELEVISAO S.A.
Statements of Cash Flows
for the years ended December 31, 2001, 2000 and 1999
(in thousands of U.S. dollars)
Year Ended December 31,
--------------------------------
2001 2000 1999
-------- -------- --------
Cash flows from operating activities:
Net loss $(23,972) $(11,297) $(57,486)
Adjustments to reconcile net loss to net cash from operating
activities
Depreciation 29,111 35,972 47,988
Reversal of provision for doubtful accounts (284) (3,273) (173)
Provision (reversal of provision) for inventory obsolescence (2,788) (331) 202
Reversal of provision for claims (85) (380) (3,608)
Disposal and write-off of property, plant and equipment 685 496 54,403
Foreign currency transaction loss, net 2,262 1,066 --
Changes in operating assets and liabilities:
Accounts receivable 2,779 (1,446) 10,227
Prepaid and other assets 1,131 (484) 303
Inventories 3,345 (2,658) 2,645
Suppliers 2,297 (340) (36,883)
Taxes payable other than income taxes 1,642 2,842 5,266
Accrued payroll and related liabilities (408) 163 (1,078)
Advances received from subscribers (26) (676) (1,014)
Other (146) (6,293) (2,637)
-------- -------- --------
Net cash used in operating activities 15,543 13,361 18,155
-------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (30,029) (23,319) (22,149)
-------- -------- --------
Net cash provided by investing activities (30,029) (23,319) (22,149)
-------- -------- --------
Cash flows from financing activities:
Proceeds from bank loans 11,307 3,124 4,697
Repayments of loans from bank (9,066) (10,168) (37,124)
Proceeds from loans from related companies 26,226 35,495 53,482
Repayments of loans from related companies (12,512) (20,688) (16,714)
-------- -------- --------
Net cash provided by financing activities 15,955 7,763 4,341
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents (1,052) 1,491 --
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 417 (704) 347
Cash and cash equivalents at beginning of the period 118 822 475
-------- -------- --------
Cash and cash equivalents at end of the period $ 535 $ 118 $ 822
======== ======== ========
Supplemental non-cash financing activities:
======== ======== ========
Accrued interest on related company loans refinanced as
principal balance $ 1,656 $ 1,871 $ 9,042
======== ======== ========
Cash paid for interest $ -- $ -- $ --
Cash paid for income taxes -- -- --
The accompanying notes are an integral part of the financial statements.
F-56
TVA SISTEMA DE TELEVISAO S.A.
Notes to the Financial Statements
(in thousands of U.S. dollars)
1. The Company and its principal operations
TVA Sistema de Televisao S.A. ("the Company") renders services related to
wireless cable and cable television systems, including marketing and
advertising, production, distribution and licensing of domestic and
foreign television programs. The Company has wireless cable channel rights
primarily in major urban markets in Brazil.
2. Summary of significant accounting policies
Significant policies followed in the preparation of the financial
statements are described below:
2.1. Basis of presentation
The financial statements are presented in U.S. dollars and have been
prepared in accordance with accounting principles generally accepted in
the United States of America ("U.S. GAAP"), which differ in certain
respects from accounting principles applied by the Company in its local
currency financial statements, which are prepared in accordance with
accounting principles generally accepted in Brazil ("Brazilian GAAP").
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
financial statement dates and the reported amount of revenues and expenses
during the reporting periods. Since management's judgment involves making
estimates concerning the likelihood of future events, the actual results
could differ from these estimates.
2.2. Accounting records
As required by Brazilian Law, and in accordance with local accounting
practices, the accounting records of the Company are maintained in
Brazilian currency (real). In order to present the financial statements in
conformity with U.S. GAAP, the Company maintains additional accounting
records, which are used solely for this purpose.
F-57
TVA SISTEMA DE TELEVISAO S.A.
Notes to the Financial Statements, (Concluded)
(in thousands of U.S. dollars)
2.3. Currency remeasurement
As of January 1, 2000, Tevecap S.A. ("Tevecap"), the Company's parent,
changed its functional currency from the United States dollar to the
Brazilian real. As the Company uses the functional currency of its parent,
the Company also changed its functional currency from the United States
dollar to the Brazilian real on January 1, 2000. This change was made in
accordance with Statement of Financial Accounting Standards ("SFAS") No.
52, "Foreign Currency Translation".
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" ("SFAS 107") 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 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 following methods and assumptions were used to
estimate the fair value of each class of financial instrument for which it
is practicable to estimate that value:
o The fair value of certain short-term financial assets and
liabilities, including cash and cash equivalents, accounts
receivable, accounts receivable from related parties, other accounts
receivable, film suppliers, other suppliers and other accounts
payable approximate their respective carrying value due to their
short-term nature.
o The fair value of loans payable to related companies approximates
their respective carrying values, as interest on these loans is
variable and based on market rates.
o The fair value of third party loans approximates the carrying value
as the substantial majority of the loans are due in less than one
year.
F-58
TVA SISTEMA DE TELEVISAO S.A.
Notes to the Financial Statements, (Concluded)
(in thousands of U.S. dollars)
2.6. Accounts receivable
A provision for doubtful accounts is established on the basis of an
analysis of the accounts receivable, in light of the risks involved, and
is considered sufficient to cover any losses incurred in realization of
credits.
2.7. Inventories
Inventories consist of materials and supplies and imports in transit.
Materials and supplies are used to provide service to new customers, and
to ensure continuity of service to existing customers. Imports in transit
represent materials purchased from foreign countries that have not yet
been received.
Inventories are stated at the lower of cost or market. Cost is determined
principally under the average cost method.
A provision for obsolescence has been established on the basis of an
analysis of slow-moving materials and supplies.
2.8. Property, plant and equipment
Property, plant and equipment are stated at cost and depreciated using the
straight-line method, over the remaining useful lives, as described in
Note 10.
F-59
TVA SISTEMA DE TELEVISAO S.A.
Notes to the Financial Statements, (Concluded)
(in thousands of U.S. dollars)
2.9 Recoverability of long-lived assets
The Company evaluates its long-lived assets and identifiable intangible
assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of the asset to future undiscounted net cash flows
expected to be generated by the asset. In estimating future undiscounted
net cash flows, assets are grouped at the level of each cable television
system. If an asset is considered to be impaired, the impairment to be
recognized is measured as the amount by which the carrying amount of the
asset exceeds the fair value of the asset.
2.10. Revenue recognition
Subscription revenues are recognized monthly at the amount billed to
subscribers for service subscribed to and earned during the month.
Installation fees are recognized as revenue on the equipment installation
date to the extent of direct selling costs incurred which are higher than
the revenue.
Advertising revenues are recognized, and the production cost of
commercials and programming are charged to expense, when the commercial is
telecast.
Revenues from indirect programming and additional services recognized as
services are rendered.
2.11. 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 in the future, which are carried at nil value, to
Tevecap at nominal cost.
F-60
TVA SISTEMA DE TELEVISAO S.A.
Notes to the Financial Statements, (Concluded)
(in thousands of U.S. dollars)
2.12. Deferred income taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases as well as operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. Valuation
allowances are established when it is more likely than not that some or
all of the deferred tax assets will not be realized.
2.13. Concentrations of credit risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts
receivable. Such concentrations of credit risk are limited due to the
large numbers comprising the Company's subscriber and customer base and
their dispersion across different geographic regions. As of December 31,
2001 and 2000, the Company had no other significant concentrations of
credit risk.
2.14. Reclassifications
Certain prior years amounts have been reclassified for comparative
purposes.
F-61
3. Accounts receivable, net
As of December 31, 2001 and 2000, accounts receivable were comprised of:
December 31,
------------------
2001 2000
------- -------
Subscriptions and installation fee $ 9,514 $ 9,476
Advertising 376 624
Programming and services 354 2,172
Other 1,496 2,247
Provision for doubtful accounts (5,884) (6,168)
-------- --------
$ 5,856 $ 8,351
======== ========
No single customer accounted for more than 10% of total accounts
receivable as of December 31, 2001 and 2000.
4 Inventories, net
As of December 31, 2001 and 2000, inventories were comprised of:
December 31,
-------------------
2001 2000
-------- --------
Materials and supplies $ 7,807 $ 13,457
Imports in transit 2,435 130
Provision for obsolescence (213) (3,001)
-------- --------
$ 10,029 $ 10,586
======== ========
5. Prepaid and other assets
As of December 31, 2001 and 2000, prepaid expenses were comprised of:
December 31,
-------------------
2001 2000
-------- --------
Advances to suppliers $ 1,450 $ 2,385
Prepaid meals and transportation 50 180
Other 117 183
-------- --------
$ 1,617 $ 2,748
======== ========
F-62
TVA SISTEMA DE TELEVISAO S.A.
Notes to the Financial Statements, (Concluded)
(in thousands of U.S. dollars)
6. Related-party transactions
The following tables summarize the transactions between the Company and
its related parties as of December 31, 2001 and 2000 and for each of the
three years in the period ended December 31, 2001.
December 31,
---------------------
2001 2000
---------- ---------
TVA Sul Parana Ltda. (subsidiary of parent company)
Accounts receivable 122 1
Accounts payable 200 128
TVA Distribuidora S.A (subsidiary of parent company)
Loans payable -- 420,820
Tevecap S.A. (parent company)
Accounts receivable 9 --
Loans payable 379,587 13,348
Accounts payable 333 360
Comercial Cabo Ltda. (subsidiary of parent company)
Loans payable 1,928 2,288
Editora Abril (under common control with Abril S.A.)
Accounts receivable 37 --
Accounts payable 49 250
Abril S.A. (major shareholder of parent company)
Accounts receivable 1 1
Loans payable 1,293 1,535
TVA Network Participacoes S.A. (subsidiary of parent company)
Accounts receivable 1 6
Accounts payable 2 --
TVA Channels Ltda. (subsidiary of parent company)
Accounts receivable -- 2,460
Accounts payable -- 3,109
Others
Accounts receivable 23 50
Accounts payable 27 80
F-63
TVA SISTEMA DE TELEVISAO S.A.
Notes to the Financial Statements, (Concluded)
(in thousands of U.S. dollars)
6. Related-party transactions (Continued)
Year ended December 31,
------------------------------
2001 2000 1999
-------- -------- --------
Abril S.A
Printing costs 2,132 2,763 1,447
Comercial Cabo Ltda
Net interest income -- -- 1,201
The Company and its related parties maintain a cash management system
centralized at Tevecap . The centralized cash management system results in
accounts receivable from and payable to related parties depending on the
cash needs of the companies.
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 1.01% to 1.53% per month in December 2001
(1.19% to 1.44% per month in December 2000). Such loans are renewable
every year on December 31.
The Company received guarantees in the course of the year from Tevecap and
Abril S.A. in the form of collateral and letters of credit. The amount
outstanding pursuant to these guarantees as of December 31, 2001 and 2000
was $3,211 and $3,249, respectively.
7. Other accounts receivable
As of December 31, 2001 and 2000, other accounts receivable were comprised
of:
2001 2000
------ ------
Multimatiques - Sale of Eurochannell $ -- $4,036
Galaxy Brasil Ltda -- 29
TVA Banda C Ltda -- 898
ESPN do Brasil Ltda -- 34
Taxes recoverable 293 252
Other 576 1,099
------ ------
$ 869 $6,348
====== ======
F-64
TVA SISTEMA DE TELEVISAO S.A.
Notes to the Financial Statements, (Concluded)
(in thousands of U.S. dollars)
8. Loan guarantees
In November 1996, Tevecap issued $250,000 12-5/8% Senior Notes to
institutional buyers in a private placement. The Notes, which mature in
November 2004, were subsequently registered with the Securities and
Exchange Commission in May 1997. These Notes are jointly and severally,
irrevocably and fully unconditionally guaranteed, on a senior basis, by
Tevecap's direct and indirect subsidiaries, including the Company. On July
28, 1999 the related company TVA Communications Ltd. repurchased 80.79% of
these Notes.
9. Income taxes
The tax effects of temporary differences that give rise to deferred tax
assets as of December 31, 2001 and 2000 are as follows:
December 31,
--------------------
2001 2000
-------- --------
Deferred tax assets:
Net operating loss carryforwards $ 54,441 $ 53,377
Provision for obsolescence 331 557
Provision for claims 2,253 2,625
Other 34 1,439
-------- --------
Total deferred tax asset 57,059 57,998
-------- --------
Less valuation allowance (57,059) (57,998)
-------- --------
Net deferred tax asset $ -- $ --
======== ========
There were no deferred tax liabilities as of December 31, 2001 and 2000.
The Company has a limited operating history and has generated losses since
its inception. Management has established a full valuation allowance
against the deferred tax assets as it is more likely than not that the
deferred tax will not be realizable.
As of December 31, 2001, the Company has unexpirable accumulated tax
losses of $160,120.
F-65
TVA SISTEMA DE TELEVISAO S.A.
Notes to the Financial Statements, (Concluded)
(in thousands of U.S. dollars)
9. Income taxes (Continued)
Income tax was different from the amount computed using the Brazilian
statutory income tax for the reasons set forth in the following table:
Year Ended December 31,
----------------------------------
2001 2000 1999
-------- -------- --------
Loss before income taxes $(23,972) $(11,297) $(57,486)
Statutory income tax rate 34% 34% 37%
-------- -------- --------
Computed income tax benefit (8,150) (3,841) (21,270)
Change in the income tax rate -- (1,948) (2,352)
Deferred charges amortization (1,898) (2,415) (2,686)
Translation loss of tax losses 8,394 4,954 22,225
Depreciation 1,976 3,613 8,647
Write-off of assets related to cancellations
of subscriptions and decoders -- 8,347
Other 617 1,078 (400)
Tax loss carryfoward used -- 4,840 --
Decrease in valuation allowance (939) (6,281) (12,511)
-------- -------- --------
Income taxes per statements of operations $ -- $ -- $ --
======== ======== ========
F-66
TVA SISTEMA DE TELEVISAO S.A.
Notes to the Financial Statements, (Concluded)
(in thousands of U.S. dollars)
10. Property, plant and equipment, net
As of December 31, 2001 and 2000, property, plant and equipment were
comprised of:
Annual
Depreciation December 31,
Rate -----------------------
% 2001 2000
------------ --------- ---------
Reception equipment 20 $ 98,447 $ 105,976
Cable plant 10 57,001 68,408
Machinery and equipment 10 43,084 41,783
Decoders 10 54,933 62,338
Leasehold improvements 25 2,162 2,359
Furniture and fixtures 10 1,153 1,170
Premises 10 1,731 2,021
Vehicles 20 1,343 1,714
Software 20 13,730 8,635
Tools 10 675 764
Other 2,293 2,688
Accumulated depreciation (152,663) (150,472)
Fixed assets in transit 742 397
--------- ---------
$ 124,631 $ 147,781
========= =========
F-67
TVA SISTEMA DE TELEVISAO S.A.
Notes to the Financial Statements, (Concluded)
(in thousands of U.S. dollars)
11. Loans
Bank loans are comprised of the following:
2001 2000
------------------------- -------------------------
Short-Term Long-Term Short-Term Long-Term
------------ ----------- ------------ -----------
Banco Bradesco - revolving credit facility,
interest of 2.20% per month $2,598 $ -- $1,337 $ --
Banco Daycoval -revolving credit facility,
interest of 0.0985% plus Selic (Special system
for settlement and custody) rate (0.0691% as
of December 31, 2001) per month 1,056 -- -- --
Banco Rural -revolving credit facility, interest
of 0.91% plus CDI (Interbank Deposit Certificate)
rate (0.0615% as of December 31, 2001) per month 2,339 -- -- --
Banco do Brasil - revolving credit facility,
interest of 0.6% plus CDI rate per month 529 -- -- --
Citibank - financial leasing, fixed in U.S. dollars,
due August 28, 2004, interest of 13% per annum 692 996 -- --
Eximbank - annual interest of LIBOR (4.88% as of
December 31, 2001) plus 0.0025%, repaid in full in
April 2002 1,674 -- 4,684 1,669
------ ------ ------ ------
Total 8,888 996 6,021 1,669
====== ====== ====== ======
F-68
TVA SISTEMA DE TELEVISAO S.A.
Notes to the Financial Statements, (Concluded)
(in thousands of U.S. dollars)
12. Other accounts payable
As of December 31, 2001 and 2000, other accounts payable were comprised
of:
December 31,
-------------------
2001 2000
------ ------
Advertising $ 113 $ 44
Importation expenses payable 54 40
Other 962 1,242
------ ------
$1,129 $1,326
====== ======
13. Taxes payable other than income taxes
As of December 31, 2001 and 2000, taxes payable other than income taxes
were comprised of:
December 31,
-----------------------
2001 2000
-------- --------
COFINS $ 295 $ 403
ICMS 13,589 10,011
PIS 51 72
Tax Recovery Program - REFIS 7,987 9,877
Other 308 225
-------- --------
22,230 20,588
(-) Current liabilities (2,874) (2,909)
-------- --------
$ 19,356 $ 17,679
======== ========
On April 5, 2000, the Company opted for the REFIS (Federal Government Tax
Recovery Program), established by Decree N(Degree) 3.342/00 of January 25,
2000, later changed into Law N(Degree) 9.964/00 of April 10, 2000.
With the option for the REFIS, the Company will be able to pay such taxes
based on 1.2% of its monthly revenues. Based on its revenue projections,
the approximate timing for paying the total account is about five years.
The restatement of the tax debt included in the REFIS is made based on the
TJLP (Brazilian long term interest rate).
During year 2000, the Company also renegotiated with Sao Paulo State
Government the ICMS (stated value-added tax) due. Based on the agreement,
the Company is able to finance its taxes payable for five years.
F-69
TVA SISTEMA DE TELEVISAO S.A.
Notes to the Financial Statements, (Concluded)
(in thousands of U.S. dollars)
14. Other operating expense (income), net
Year Ended December 31,
-------------------------------
2001 2000 1999
------- -------- --------
Write-off of assets related to cancellations of subscriptions $ -- $ 2,589 $ 16,477
Loss on disposal of property and equipment 3,439 -- --
Loss on sale of obsolete inventory 1,064 -- --
Write-off of digisat decoders -- 31,529
Gain on sale Eurochannel -- (5,105) --
Other (1,398) 417 (1,552)
------- -------- --------
$ 3,105 $ (2,099) $ 49,558
======= ======== ========
15. Commitments
The Company has rented its office space until the year 2006. As of
December 31, 2000, future minimum rental payments applicable to operating
leases in respect of this space aggregate approximately $3,160, as
follows:
2002 632
2003 632
2004 632
2005 632
2006 632
------
Total $3,160
======
16. Dividends
The Company's shareholders are entitled to minimum dividends of 25% of net
income for the year, adjusted according to Brazilian Corporation Law. As
the Company has not recorded net income under Brazilian Corporation Law
since its inception, no such dividends are payable.
17. Litigation contingencies
Certain claims and lawsuits arising in the ordinary course of business
have been filed or are pending against the Company, which were not
recognized in the financial statements. The Company has also recorded
provisions related to certain claims in amounts that management considers
to be adequate after considering a number of factors including (but not
limited to) the views of legal counsel, the nature of the claims and the
prior experience of the Company.
F-70
TVA SISTEMA DE TELEVISAO S.A.
Notes to the Financial Statements, (Concluded)
(in thousands of U.S. dollars)
The Company has provided for losses on all cases where the assessment of
management and legal counsel indicates that a loss is probable. Management
believes that such legal matters will not have a material adverse effect
on the Company's results of operations, financial condition or cash flows.
18. Pension plan
In April 1996, the Company became a co-sponsor of the private pension
entity named Abrilprev Sociedade de Previdencia Privada ("Abrilprev"), the
primary objective of which is to grant employees benefits other than those
provided by Social Security. The plan is optional to all employees of the
sponsoring entities. Abrilprev operates as a Defined Contribution Plan.
Company contributions are made based on a fixed percentage applied to the
payroll of the sponsoring entities based on actuarial calculations.
Contribution expenses amounted to $183 for the year ended December 31,
2001 ($198 in 2000 and $162 in 1999).
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. Group employees and their dependents. Both the companies
forming part of the Abril Group and the employees thereof contribute
monthly to the Health Care Plan, which is responsible for the management
of the plan. In 2001, contributions made by the Company to Associacao
Abril de Beneficios amounted to $708 ($681 in 2000 and $642 in 1999).
F-71
TVA SISTEMA DE TELEVISAO S.A.
Notes to the Financial Statements, (Concluded)
(in thousands of U.S. dollars)
20. Supplementary information - valuation and qualifying accounts and reserves
Deferred
Provision Provision Tax Provision
for Doubtful For Valuation for
Accounts Obsolescence Allowance Claims
------------ ------------ --------- ---------
Balance as of January 1, 1999 $ 9,614 $ 3,130 $ 76,790 $ 5,313
Additions -- 202 -- --
Deductions (173) -- (12,511) (3,608)
------- ------- -------- -------
Balance as of December 31, 1999 9,441 3,332 64,279 1,705
Additions -- -- -- --
Deductions (3,273) (331) (6,281) (380)
------- ------- -------- -------
Balance as of December 31, 2000 6,168 3,001 57,998 1,325
Additions -- -- -- --
Deductions (284) (2,788) (939) (85)
------- ------- -------- -------
Balance as of December 31, 2001 $ 5,884 $ 213 $ 57,059 $ 1,240
======= ======= ======== =======
21. Recent accounting pronouncements
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No.
137 and SFAS No. 138 (collectively, "SFAS 133"). SFAS 133 establishes
accounting and reporting standards requiring that all derivative financial
instruments (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. Additionally, SFAS 133 requires that
changes in the fair value of derivatives be recognized in earnings unless
specific hedge accounting criteria are met. As the Company does not
utilize derivative financial instruments, the effect of adopting SFAS 133
on January 1, 2001 did not have a material impact on the Company's
financial statements.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations" ("SFAS 141") and SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires
business combinations initiated after June 30, 2001 to be accounted for
using the purchase method of accounting, and broadens the criteria for
recording intangible assets separate from goodwill. Recorded goodwill and
intangibles will be evaluated against these new criteria and may result in
certain intangibles being subsumed into goodwill, or alternatively,
amounts initially recorded as goodwill may be separately identified and
recognized apart from goodwill. SFAS 142 requires the use of a
nonamortization approach to account for purchased goodwill and certain
intangibles. Under a nonamortization approach, goodwill and certain
intangibles will not be amortized into results of operations, but instead
would be reviewed for impairment and written down and charged to results
of operations only in the periods in which the recorded value of goodwill
and certain intangibles is more than its fair value. The amortization
provisions of SFAS 142 apply to goodwill and intangible assets acquired
after June 30, 2001. Effective January 1, 2002, the Company adopted the
provisions of each
F-72
TVA SISTEMA DE TELEVISAO S.A.
Notes to the Financial Statements, (Concluded)
(in thousands of U.S. dollars)
statement that apply to goodwill and intangible assets acquired prior to
June 30, 2001. As the Company has not entered into business combinations,
management believes that the implementation of these pronouncements will
not have a material impact on the Company's results of operations or
financial condition.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 requires that the market
value of the liabilities related to obligations due to the retirement of
assets be recognized in the period in which they occur, if a reasonable
estimate of market value is possible. Costs of asset retirement are
capitalized as part of the permanent asset cost. In accordance with SFAS
143, the asset retirement obligation is discounted and an increase is
recognized by using the "credit adjusted risk-free" interest rate in
effect when the obligation was initially recognized. The Company is
required to adopt SFAS 143 effective January 1, 2003. Based on an initial
analysis of SFAS 143 requirements, management believes that the
implementation of this statement will not have a material impact on the
Company's results of operations or financial condition.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121") but
maintains the fundamental provisions of SFAS 121 for (a)
recognition/valuation of the provision for impairment of permanent assets
to be maintained and used and (b) valuation of permanent assets to be
written off due to their sale. SFAS 144 also supersedes the provisions of
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business"
("APB 30") with regard to reporting the effects of a disposal of a segment
of a business. The Company adopted SFAS 144 effective January 1, 2002.
Based on the Company's initial analysis of the SFAS 144 requirements,
management believes that the implementation of this pronouncement will not
have a material impact on the Company's results of operations or financial
condition.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and
Technical Corrections." SFAS 145 rescinds SFAS 4, "Reporting Gains and
Losses from Extinguishment of Debt," which required that all gains and
losses from extinguishment of debt to be aggregated and classified as an
extraordinary item if material. SFAS 145 requires that gains and losses
from extinguishment of debt be classified as extraordinary only if they
meet criteria in APB 30, thus distinguishing transactions that are part of
recurring operations from those that are unusual or infrequent, or that
meet the criteria for classification as an extraordinary item. SFAS 145
also amends SFAS No. 13, "Accounting for Leases", to require that lease
modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback
transactions.
F-73
TVA SISTEMA DE TELEVISAO S.A.
Notes to the Financial Statements, (Concluded)
(in thousands of U.S. dollars)
In addition, SFAS 145 rescinds SFAS 44, "Accounting for Intangible Assets
of Motor Carriers," and SFAS 64, "Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements," which are not currently applicable to us. The
provisions of SFAS 145 as they relate to the rescission of SFAS 4 will be
applied effective January 1, 2003. Certain provisions related to SFAS 13
are effective for transactions occurring after May 15, 2002. Management
does not expect SFAS 145 to have a material impact on the Company's
results of operations or financial condition
* * * * * * *
F-74
TVA SUL PARANA LTDA. and Subsidiary
Consolidated Financial Statements Together with
Independent Auditors' Report
As of December 31, 2001 and 2000 and for each of the three years in the period
ended December 31, 2001
TVA SUL PARANA LTDA.
AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Contents
Page
Independent Auditors' Report F-76
Consolidated Balance Sheets as of December 31, 2001 and 2000 F-77
Consolidated Statements of Operations for each of the three years in
the period ended December 31, 2001 F-79
Consolidated Statements of Changes in Shareholders' Equity for each
of the three years in the period ended December 31, 2001 F-80
Consolidated Statements of Cash Flows for each of the three years in
the period ended December 31, 2001 F-81
Notes to Consolidated Financial Statements F-83
F-75
Independent Auditors' Report
To the Shareholders and Directors of
TVA SUL PARANA LTDA.
We have audited the accompanying consolidated balance sheets of TVA SUL PARANA
LTDA. and subsidiary (the "Company") as of December 31, 2001 and 2000, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
2001, all expressed in United States dollars. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of TVA SUL
PARANA LTDA. and subsidiary as of December 31, 2001 and 2000, and the
consolidated results of its operations and cash flows for each of the three
years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
Deloitte Touche Tohmatsu
Sao Paulo, Brazil,
June 17, 2002
F-76
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2001 and 2000
(in thousands of U.S. dollars)
December 31,
-----------------
2001 2000
------- -------
ASSETS
Current assets
Cash and cash equivalents $ 83 $ 138
Accounts receivable, net (Footnote 3) 574 599
Inventories, net (Footnote 4) 1,088 1,915
Prepaid and other assets 90 190
Accounts receivable from related parties (Footnote 5) 103 235
Recoverable taxes 155 210
Other accounts receivable 230 429
------- -------
Total current assets 2,323 3,716
------- -------
Property, plant and equipment, net (Footnote 7) 22,384 28,839
Concessions, net (Footnote 8) 3,098 4,459
Judicial deposits 2,827 2,153
Other -- 17
------- -------
Total assets $30,632 $39,184
======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
F-77
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Consolidated Balance Sheets, Continued
December 31, 2001 and 2000
(in thousands of U.S. dollars)
December 31,
2001 2000
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Loans $ 360 $ --
Film suppliers 1,728 541
Other suppliers 209 708
Taxes payable other than income taxes (Footnote 10) 561 532
Accrued payroll and related liabilities 143 214
Accounts payable to related companies (Footnote 5) 32 --
Rent payable 232 193
Other accounts payable 223 45
-------- --------
Total current liabilities 3,488 2,233
-------- --------
Long-term liabilities
Loans payable to related companies (Footnote 5) 21,197 27,708
Taxes payable other than income taxes (Footnote 10) 3,818 2,985
Provision for claims (Footnotes 12 and 15) 452 697
-------- --------
Total long-term liabilities 25,467 31,390
-------- --------
Commitments and contingencies (Footnotes 9 and 12)
Minority interest 1,194 1,467
Shareholders' equity
Common stock, no par value, 17,543,926 shares authorized,
issued and outstanding 44,213 44,213
Accumulated other comprehensive loss (2,547) (860)
Accumulated deficit (41,183) (39,259)
-------- --------
Total shareholders' equity 483 4,094
-------- --------
Total liabilities and shareholders' equity $ 30,632 $ 39,184
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-78
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Consolidated Statements of Operations
for the years ended December 31, 2001, 2000 and 1999
(in thousands of U.S. dollars)
Year Ended December 31,
--------------------------------
2001 2000 1999
-------- -------- --------
Gross revenues
Monthly subscriptions $ 12,919 $ 13,673 $ 14,268
Installation 55 93 185
Advertising 54 -- --
Additional services 1,486 1,380 596
-------- -------- --------
14,514 15,146 15,049
-------- -------- --------
Direct operating expenses (excluding depreciation and
amortization stated separately below)
Payroll and benefits 811 1,038 776
Programming 3,914 3,643 4,104
Technical assistance 218 295 253
Taxes on revenue 2,322 1,719 1,702
Other costs 1,900 1,875 1,304
-------- -------- --------
9,165 8,570 8,139
-------- -------- --------
Selling, general and administrative expenses
Payroll and benefits 688 1,762 1,392
Advertising and promotion 365 454 180
Rent 41 69 153
Other, selling, general and administrative expenses 1,758 298 161
-------- -------- --------
2,852 2,583 1,886
-------- -------- --------
Depreciation and amortization 4,063 5,253 6,626
Write-off of assets related to subscriber cancellations -- -- 1,930
Other operating expense, net 202 1,781 1,655
-------- -------- --------
Loss from operations (1,768) (3,041) (5,187)
-------- -------- --------
Interest income (337) (362) (218)
Interest expense 433 407 819
Foreign currency translation loss -- -- 233
Foreign currency transaction loss 87 348 --
-------- -------- --------
Loss before income taxes and minority
interest (1,951) (3,434) (6,021)
Income tax expense - current (Footnote 6) -- 273 106
-------- -------- --------
Loss before minority interest (1,951) (3,707) (6,127)
Minority interest 27 32 208
-------- -------- --------
Net loss $ (1,924) $ (3,739) $ (6,335)
-------- -------- --------
Other comprehensive loss -
Foreign currency translation adjustment (1,687) (860) --
-------- -------- --------
Comprehensive loss $ (3,611) $ (4,599) $ (6,335)
======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-79
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2001, 2000 and 1999
(in thousands of U.S. dollars)
Accumulated
Other
Common Accumulated Comprehensive
Stock Deficit loss Total
--------- ------------- ------------- ----------
Balance as of January 1, 1999 $ 44,213 $(29,185) $ -- $ 15,028
Net loss for the year (6,335) -- (6,335)
-------- -------- ------- --------
Balance as of December 31, 1999 44,213 (35,520) -- 8,693
Foreign currency translation adjustment,
net of tax -- -- (860) (860)
Net loss for the year -- (3,739) -- (3,739)
-------- -------- ------- --------
Balance as of December 31, 2000 44,213 (39,259) (860) 4,094
Foreign currency translation adjustment,
net of tax -- -- (1,687) (1,687)
Net loss for the year -- (1,924) -- (1,924)
-------- -------- ------- --------
Balance as of December 31, 2001 $ 44,213 $(41,183) $(2,547) $ 483
======== ======== ======= ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-80
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
for the years ended December 31, 2001, 2000 and 1999
(in thousands of U.S. dollars)
Year Ended December 31,
-----------------------------
2001 2000 1999
------- ------- -------
Cash flows from operating activities:
Net loss $(1,924) $(3,739) $(6,335)
Adjustments to reconcile net loss to net cash from operating
activities
Depreciation 3,398 4,407 5,761
Amortization 665 846 865
Provision (reversal of provision) for doubtful accounts 464 (499) 30
Provision (reversal of provision) for inventory obsolescence (233) (34) 403
Provision (reversal of provision) for claims (245) 589 (143)
Minority interest (27) 32 208
Disposal and write-off of property, plant and equipment (131) 1,676 2,635
Foreign currency transaction loss 87 348 --
Changes in operating assets and liabilities
Accounts receivable (439) 763 275
Prepaid and other assets 100 14 (172)
Other accounts receivable (271) (1,656) (78)
Inventories 1,060 503 1,338
Film suppliers and others suppliers 688 (353) (1,309)
Taxes payable other than income taxes 862 703 1,320
Accrued payroll and related liabilities (71) (90) (175)
Other 249 (588) (660)
------- ------- -------
Net cash provided by operating activities 4,232 2,922 3,963
------- ------- -------
Cash flows from investing activities
Purchases of property, plant and equipment (1,979) (2,090) (2,121)
------- ------- -------
Net cash used in investing activities (1,979) (2,090) (2,121)
------- ------- -------
Cash flows from financing activities
Proceeds from bank loans 448 -- --
Repayments of loans from banks (89) (1,134) (4,552)
Proceeds from loans from related companies 1,827 4,311 5,222
Repayments of loans from related companies (3,980) (3,855) (1,858)
------- ------- -------
Net cash provided by financing activities (1,794) (678) (1,188)
------- ------- -------
Effect of exchange rate changes on cash and cash equivalents (514) (975) --
------- ------- -------
Net increase (decrease) in cash and cash equivalents (55) (821) 654
Cash and cash equivalents at beginning of the period 138 959 305
------- ------- -------
Cash and cash equivalents at end of the period $ 83 $ 138 $ 959
======= ======= =======
The accompanying notes are an integral part of these
consolidated financial statements.
F-81
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
for the years ended December 31, 2001, 2000 and 1999
(in thousands of U.S. dollars)
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Supplemental cash disclosure
Cash paid for income taxes $ -- $ 273 $ 106
Cash paid for interest -- 13 --
Supplemental noncash financing activities
Accrued interest on related company loans refinanced
as principal balance $ 21 $ -- $ --
The accompanying notes are an integral part of these
consolidated financial statements
F-82
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(in thousands of U.S. dollars)
1. The Company and its principal operations
The accompanying financial statements have been prepared to reflect the
results of TVA Sul Parana Ltda. and its subsidiary (the "Company").
TVA Sul Parana Ltda. is a holding company, the subsidiary of which renders
services related to wireless cable and cable television systems, including
marketing and advertising, production, distribution and licensing of
domestic and foreign television programs. The Company has wireless cable
channel rights primarily in major urban markets in the South of Brazil.
The Company's operations are substantially dependent on the Tevecap Group
regarding programming, marketing, financial and administrative systems.
2. Summary of significant accounting policies
Significant policies followed in the preparation of the consolidated
financial statements are described below:
2.1. Basis of presentation and consolidation
a) Basis of presentation
The consolidated financial statements are presented in United States
dollars and have been prepared in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP"), which
differ in certain respects from accounting principles applied by the
Company in its local currency financial statements, which are prepared in
accordance with accounting principles generally accepted in Brazil
("Brazilian GAAP").
The preparation of financial statements in accordance with U.S. GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities as of the financial statement dates and the
reported amount of revenues and expenses during the reporting periods.
Since management's judgment involves making estimates concerning the
likelihood of future events, the actual results could differ from these
estimates.
b) Principles of consolidation
The consolidated financial statements include the accounts of TVA Sul
Parana Ltda. and its 60% owned subsidiary CCS Camboriu Cale System de
Telecomunicacoes Ltda. All significant intercompany balances and
transactions have been eliminated in consolidation.
F-83
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars)
2.2. Accounting records
As required by Brazilian Law, and in accordance with local accounting
practices, the accounting records of the Company are maintained in
Brazilian currency ("reais" or "R$"). In order to present the financial
statements in conformity with U.S. GAAP, the Company maintains additional
accounting records which are used solely for this purpose.
2.3. Currency remeasurement
On January 1, 2000, Tevecap S.A. ("Tevecap"), TVA Sul Parana Ltda.'s
parent company, changed its functional currency from the United States
dollar to the Brazilian real. As the Company uses the functional currency
of its parent, the Company also changed its functional currency from the
United States dollar to the Brazilian real on January 1, 2000. This change
was performed in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 52, "Foreign Currency Translation".
Assets and liabilities are translated into U.S. dollars at the exchange
rate in effect at the end of the reporting period, and revenues, expenses
gain and losses are translated into U.S. dollars at the averages rates
prevailing in the period. The resulting net translation gains and losses
are reported, net of tax, in accumulated other comprehensive loss in
shareholders' equity
2.4. Cash and cash equivalents
Cash and cash equivalents are defined as cash and cash in banks and
investments in interest-bearing securities. Short-term investments with
original maturities of three months or less at the time of purchase are
considered cash equivalents.
F-84
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars)
2.5. Financial instruments
In accordance with SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments" ("SFAS 107"), 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 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 following methods and assumptions were used to
estimate the fair value of each class of financial instrument for which it
is practicable to estimate that value:
o The fair value of short-term assets and liabilities, including cash
and cash equivalents, accounts receivable, accounts receivable from
related parties, other accounts receivable, film suppliers, other
supplies and other accounts payable approximates their respective
carrying value due to their short-term nature.
o The fair value of loans from related companies approximates their
respective carrying values, as interest on these loans is variable
and based on market rates.
2.6. Accounts receivable
A provision for doubtful accounts is established on the basis of an
analysis of the accounts receivable, in light of the risks involved and is
considered sufficient to cover any losses incurred in realization of
credits.
2.7 Inventories
Inventories consist of materials and supplies and imports in transit.
Materials and supplies are used to provide service to new customers and to
ensure continuity of service to existing customers. Imports in transit
represent materials purchased from foreign countries that have not yet
been received.
Inventories are stated at the lower of cost or market. Cost is determined
principally under the average cost method.
A provision for obsolescence has been established on the basis of an
analysis of slow moving materials and supplies.
F-85
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars)
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 7.
2.9. Recoverability of long-lived assets to be held and used in the business
The Company evaluates its long-lived assets and identifiable intangible
assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of the asset to future undiscounted net cash flows
expected to be generated by the asset. In estimating future undiscounted
net cash flows, assets are grouped at the level of each cable television
system. If an asset is considered to be impaired, the impairment to be
recognized is measured as the amount by which the carrying amount of the
asset exceeds the fair value of the asset. There were no impairment
write-downs made during the years ended December 31, 2001, 2000 and 1999.
2.10. Revenue recognition
Subscription revenues are recognized monthly at the amount billed to
subscribers for service subscribed to and earned during the month.
Installation fees are recognized as revenue on the equipment installation
date to the extent of direct selling costs incurred which are higher than
the revenue.
Others revenues are recognized as services are rendered.
2.11. Concessions
Concessions represent the right to engage in various telecommunications
services in defined areas or cities in Brazil. The cost of these
concessions is being amortized on the straight-line basis over 10 years.
2.12. Advertising and promotion costs
Costs of advertising and promotion are expensed as incurred.
F-86
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars)
2.13 Deferred tax and liabilities
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases as well as operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. Valuation
allowances are established when it is more likely than not that some or
all of the deferred tax assets will not be realized.
2.14 Concentration of credit risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts
receivable. Such concentrations of credit risk are limited due to the
large numbers comprising the Company's subscriber and customer base and
their dispersion across different geographic regions. As of December 31,
2001 and 2000, the Company had no other significant concentrations of
credit risk.
2.15 Reclassifications
Certain prior year amounts have been reclassified for comparative
purposes.
3 Accounts receivable, net
As of December 31, 2001 and 2000, accounts receivable were comprised of:
December 31,
--------------------
2001 2000
------- -------
Subscriptions and installation fees $ 2,242 $ 1,805
Advertising 5 6
Programming 11 8
Provision for doubtful accounts (1,684) (1,220)
------- -------
$ 574 $ 599
======= =======
No single customer accounted for more than 10% of total accounts
receivable as of December 31, 2001 and 2000.
F-87
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars)
4. Inventories
As of December 31, 2001 and 2000, inventories were comprised of:
December 31,
----------------------
2001 2000
------- -------
Materials and suppliers $ 1,205 $ 2,188
Imports in transit 19 96
Provision for obsolescence (136) (369)
------- -------
$ 1,088 $ 1,915
======= =======
5. Related party transactions
The following tables summarize the transactions between the Company and
related parties as of December 31, 2001 and 2000.
December 31,
---------------------
2001 2000
------- -------
TVA Sistema de Televisao S.A. (subsidiary of
parent company)
Accounts payable $ 32 $ --
Accounts receivable 103 218
TVA Distribuidora S.A. (subsidiary of parent
company)
Loans payable -- 27,708
Tevecap S.A. (parent company)
Loans payable 21,197 --
Editora Abril S.A. (under commom control with
major shareholder of parent company)
Accounts receivable -- 8
TVA Network Participacoes S.A. (subsidiary
of parent company)
Accounts receivable -- 9
The Company and its related parties maintain a cash management system
centralized at Tevecap. The centralized cash management system results in
accounts receivable from and payable to related parties depending on the
cash needs of the companies.
F-88
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars)
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 1.01% to 1.53% per month as of December 31,
2001 (1.63% to 1.90% per month as of December 31, 2000). Such loans are
renewable every year on December 31.
6. Income taxes
The tax effects of temporary differences that give rise to deferred tax
assets as of December 31, 2001 and 2000 are as follows:
December 31,
------------------
2001 2000
-------- --------
Deferred tax assets
Net operating loss carryforwards $ 5,638 $ 6,315
Provision for claims 890 498
Provision for obsolescence 374 338
Other 335 670
------- -------
Total gross deferred tax asset 7,237 7,821
------- -------
Less valuation allowance (7,237) (7,821)
------- -------
Net deferred tax asset/liability $ -- $ --
======= =======
There were no deferred tax liabilities as of December 31, 2001 and 2000.
The Company has a limited operating history and has generated losses since
its inception. As such, management has established a full valuation
allowance against the deferred tax assets as it is more likely than not
that the deferred tax assets will not be realized.
As of December 31, 2001, the Company has unexpirable accumulated tax
losses of $16,582.
F-89
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars)
6. Income taxes (Continued)
The consolidated 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,
-------------------------------
2001 2000 1999
------- ------- -------
Loss before income taxes and minority interest $(1,951) $(3,434) $(6,021)
Statutory income tax rate 34% 34% 37%
------- ------- -------
Computed income tax benefit (663) (1,168) (2,227)
Change in the income tax rate -- (225) (150)
Translation loss on tax losses 993 533 2,512
Write-off assets related to cancellations of
subscriptions -- 165 --
Depreciation 219 515 499
Other 26 (7) 479
Tax loss carryforward used 9 63 --
Increase (decrease) in valuation allowance (584) 397 (1,007)
------- ------- -------
Income tax expense per consolidated statements of
operations $ -- $ 273 $ 106
======= ======= =======
Income tax expense represents amounts owed by the subsidiary calculated on
a stand-alone basis, as Brazilian income tax law does not allow
consolidated tax returns.
F-90
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars)
7. Property, plant and equipment, net
As of December 31, 2001 and 2000, property, plant and equipment were
comprised of:
Annual
Depreciation December 31,
Rate ---------------------
% 2001 2000
--------- ---------
Reception equipment 20 $ 7,776 $ 8,366
Cable plant 10 12,500 14,587
Machinery and equipment 10 3,411 3,980
Converters 10 9,406 10,532
Leasehold improvements 25 109 130
Furniture and fixtures 10 389 461
Premises 10 630 712
Vehicles 20 459 557
Software 20 183 216
Tools 10 62 68
Building 4 2,920 3,462
Other 307 346
--------- ---------
38,152 43,417
Accumulated depreciation (15,768) (14,578)
--------- ---------
$ 22,384 $ 28,839
========= =========
8. Concessions, net
As of December 31, 2001 and 2000, concessions were comprised of:
December 31,
------------------
2001 2000
------- -------
CCS - Camboriu Cable System Telecomunicacoes Ltda $ 648 $ 769
TVA Sul Parana Ltda. (Stations in south of Brazil) 6,018 7,139
Accumulated amortization (3,568) (3,449)
------- -------
$ 3,098 $ 4,459
======= =======
F-91
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars)
9. Loan guarantees
In November 1996, Tevecap, the majority shareholder, issued $250,000
12-5/8% Senior Notes to institutional buyers in a private placement. The
Notes, which mature in November 2004, were subsequently registered with
the Securities and Exchange Commission in May 1997. These Notes are
jointly and severally, irrevocably and fully unconditionally guaranteed,
on a senior basis, by Tevecap's direct and indirect subsidiaries,
including the Company. On July 28, 1999 the related company TVA
Communications Ltd. repurchased 80.79% of these Notes.
10. Taxes payable other than income taxes
As of December 31, 2001 and 2000, taxes payable other than income taxes
were comprised of:
December 31,
----------------------
2001 2000
------- -------
COFINS $ 101 $ 135
ICMS 3,196 1,899
PIS 19 40
Tax Recovery Program - REFIS 1,041 1,260
Other 22 183
------- -------
4,379 3,517
( - ) current liabilities (561) (532)
------- -------
$ 3,818 $ 2,985
======= =======
On April 5, 2000, the Company opted for the REFIS (Federal Government Tax
Recovery Program), established by Decree N(Degree) 3.342/00 of January 25,
2000, later changed into Law N(Degree) 9.964/00 of April 10, 2000.
With the option for the REFIS, the Company will be able to pay such taxes
based on 1.2% of its monthly revenues. Based on its revenue projections,
the approximate timing for paying the total account is about 5 years. The
restatement of the tax debt included in the REFIS is made based on the
TJLP (Brazilian long term interest rate).
During 2000, the Company also renegotiated with Sao Paulo State Government
the ICMS (a state value-added tax) due. Based on the agreement, the
Company is able to finance its taxes payable for five years.
F-92
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars)
11. Shareholders' equity
Common stock as of December 31, 2001 and 2000 was comprised of:
2001 2000
-------------------------- -------------------------
$ Shares $ Shares
----------- ----------- ----------- ----------
Tevecap
S.A $ 44,213 17,543,926 -- --
Abril S.A -- -- $ 6,190 2,456,150
TVA Distribuidora S.A -- -- 38,023 15,087,776
----------- ----------- ----------- ----------
$ 44,213 17,543,926 $ 44,213 17,543,926
=========== =========== =========== ==========
The Company's shareholders are entitled to a minimum dividend of 25% of
net income for the year, adjusted according to the Brazilian Corporation
Law. As the Company has not recorded net income under Brazilian
Corporation Law since its inception, no such dividends payable.
12. 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.
The Company has provided for losses on all cases where the assessment of
management and legal counsel indicates that a loss is probable. Management
believes that such legal matters will not have a material adverse effect
on the Company's consolidated results of operations, financial condition
or cash flows.
13. Pension Plan
In April 1996, the Company became a co-sponsor of the private pension
entity named Abrilprev Sociedade de Previdencia Privada ("Abrilprev"), the
primary objective of which is to grant employees benefits other than those
provided by Social Security. The plan is optional to all employees of the
sponsoring entities. Abrilprev operates as a Defined Contribution Plan.
Company contributions are made based on a fixed percentage applied to the
payroll of the sponsoring entities based on actuarial calculations.
Contribution expenses amounted to $ 8 for the year ended December 31, 2001
($11 in 2000 and $10 in 1999).
F-93
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars)
14. 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. Group employees and their dependents. Both the companies
forming part of the Abril Group and the employees thereof contribute
monthly to the Health Care Plan, which is responsible for the management
of the plan. In 2001, contributions made by the Company to the Health Care
Plan and certain affiliate companies to Associacao Abril de Beneficios
amounted to $116 ($128 for 2000 and $97 for 1999).
15. Supplementary information - valuation and qualifying accounts and reserves
Deferred
Provision Provision Taxation Provision
For Doubtful for Valuation for
Accounts Obsolescence Allowance claims
-------------- -------------- ----------- -----------
Balance as of January 1, 1999 $ 1,689 $-- $ 8,431 $ 251
Additions -- 403 -- --
Deductions 30 -- (1,007) (143)
------- ----- ------- -----
Balance as of December 31, 1999 1,719 403 7,424 108
Additions -- -- 397 589
Deductions (499) (34) -- --
------- ----- ------- -----
Balance as of December 31, 2000 1,220 369 7,821 697
Additions 464 -- -- --
Deductions -- (233) (584) (245)
------- ----- ------- -----
Balance as of December 31, 2001 $ 1,684 $ 136 $ 7,237 $ 452
======= ===== ======= =====
F-94
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars)
16. Recent accounting pronouncements
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No.
137 and SFAS No. 138 (collectively, "SFAS 133"). SFAS 133 establishes
accounting and reporting standards requiring that all derivative financial
instruments (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. Additionally, SFAS 133 requires that
changes in the fair value of derivatives be recognized in earnings unless
specific hedge accounting criteria are met. As the Company does not
utilize derivative financial instruments, the effect of adopting SFAS 133
on January 1, 2001 did not have a material impact on the Company's
consolidated financial statements.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations" ("SFAS 141") and SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires
business combinations initiated after June 30, 2001 to be accounted for
using the purchase method of accounting, and broadens the criteria for
recording intangible assets separate from goodwill. Recorded goodwill and
intangibles will be evaluated against these new criteria and may result in
certain intangibles being subsumed into goodwill, or alternatively,
amounts initially recorded as goodwill may be separately identified and
recognized apart from goodwill. SFAS 142 requires the use of a
nonamortization approach to account for purchased goodwill and certain
intangibles. Under a nonamortization approach, goodwill and certain
intangibles will not be amortized into results of operations, but instead
would be reviewed for impairment and written down and charged to results
of operations only in the periods in which the recorded value of goodwill
and certain intangibles is more than its fair value. The amortization
provisions of SFAS 142 apply to goodwill and intangible assets acquired
after June 30, 2001. Effective January 1, 2002, the Company adopted the
provisions of each statement that apply to goodwill and intangible assets
acquired prior to June 30, 2001. Based on the Company's initial analysis
of SFAS 141 and SFAS 142, management believes that the implementation of
these pronouncements will not have a material impact on the Company's
consolidated results of operations or financial condition.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 requires that the market
value of the liabilities related to obligations due to the retirement of
assets be recognized in the period in which they occur, if a reasonable
estimate of market value is possible. Costs of asset retirement are
capitalized as part of the permanent asset cost. In accordance with SFAS
143, the asset retirement obligation is discounted and an increase is
recognized by using the "credit adjusted risk-free" interest rate in
effect when the obligation was initially recognized. The Company is
required to adopt SFAS 143 effective January 1, 2003. Based on an initial
analysis of SFAS 143 requirements,
F-95
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars)
management believes that the implementation of this statement will not
have a material impact on the Company's consolidated results of operations
or financial condition.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121") but
maintains the fundamental provisions of SFAS 121 for (a)
recognition/valuation of the provision for impairment of permanent assets
to be maintained and used and (b) valuation of permanent assets to be
written off due to their sale. SFAS 144 also supersedes the provisions of
Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business"
("APB 30") with regard to reporting the effects of a disposal of a segment
of a business. The Company adopted SFAS 144 effective January 1, 2002.
Based on the Company's initial analysis of the SFAS 144 requirements,
management believes that the implementation of this pronouncement will not
have a material impact on the Company's consolidated results of operations
or financial condition.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and
Technical Corrections." SFAS 145 rescinds SFAS 4, "Reporting Gains and
Losses from Extinguishment of Debt," which required that all gains and
losses from extinguishment of debt to be aggregated and classified as an
extraordinary item if material. SFAS 145 requires that gains and losses
from extinguishment of debt be classified as extraordinary only if they
meet criteria in APB 30, thus distinguishing transactions that are part of
recurring operations from those that are unusual or infrequent, or that
meet the criteria for classification as an extraordinary item. SFAS 145
also amends SFAS No. 13, "Accounting for Leases", to require that lease
modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback
transactions. In addition, SFAS 145 rescinds SFAS 44, "Accounting for
Intangible Assets of Motor Carriers," and SFAS 64, "Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements," which are not currently
applicable to us. The provisions of SFAS 145 as they relate to the
rescission of SFAS 4 will be applied effective January 1, 2003. Certain
provisions related to SFAS 13 are effective for transactions occurring
after May 15, 2002. Management does not expect SFAS 145 to have a material
impact on the Company's consolidated results of operations or financial
condition
* * * * * * * *
F-96
CCS - CAMBORIU CABLE SYSTEM
TELECOMUNICACOES LTDA.
Financial Statements Together with
Independent Auditors' Report
As of December 31, 2001 and 2000 and for each of the three years in the period
ended December 31, 2001
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
INDEX TO FINANCIAL STATEMENTS
Contents
Page
Independent Auditors' Report F-98
Balance Sheets as of December 31, 2001 and 2000 F-99
Statements of Operations for each of the three years in the period
ended December 31, 2001 F-101
Statements of Changes in Shareholders' Equity for each of the three
years in the period ended December 31, 2001 F-102
Statements of Cash Flows for each of the three years in the period
ended December 31, 2001 F-103
Notes to Financial Statements F-104
F-97
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Independent Auditors' Report
To the Shareholders and Directors of
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
We have audited the accompanying balance sheets of CCS - CAMBORIU CABLE SYSTEM
TELECOMUNICACOES LTDA. (the "Company") as of December 31, 2001 and 2000, and the
related statements of operations, changes in shareholder's equity and cash flows
for each of the three years in the period ended December 31, 2001, all expressed
in United States dollars. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CCS - CAMBORIU CABLE SYSTEM
TELECOMUNICACOES LTDA. as of December 31, 2001 and 2000, and the results of its
operations and cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.
Deloitte Touche Tohmatsu
Sao Paulo, Brazil
June 17, 2002
The accompanying notes are an integral part of the financial statements
F-98
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Balance Sheets
December 31, 2001 and 2000
(in thousands of U.S. dollars)
December 31,
----------------
2001 2000
------ ------
ASSETS
Current assets
Cash and cash equivalents $ 20 $ 2
Accounts receivable, net (Footnote 3) 50 72
Inventories 74 104
Prepaid and other assets 2 14
Recoverable taxes 84 136
Accounts receivable from related parties (Footnote 4) 5 18
Other accounts receivable 32 37
------ ------
Total current assets 267 383
------ ------
Property, plant and equipment, net (Footnote 7) 3,079 3,899
Loans to related companies (Footnote 4) 565 --
Judicial deposits 199 305
------ ------
Total assets $4,110 $4,587
====== ======
The accompanying notes are an integral part of the financial statements
F-99
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Balance Sheets, continued
December 31, 2001 and 2000
(in thousands of U.S. dollars)
December 31,
------------------
2001 2000
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Film suppliers $ 275 $ 90
Other suppliers 30 92
Taxes payable other than income taxes 155 91
Accrued payroll and related liabilities 18 22
Income taxes payable -- 134
Accounts payable to related companies (Footnote 4) 5 --
Rent payable 101 79
Other accounts payable 49 28
------- -------
Total current liabilities 633 536
------- -------
Long-term liabilities
Loans payable to related companies (Footnote 4) -- 126
Taxes payable other than income taxes 488 244
Provision for claims (Footnotes 10 and 12) 3 13
------- -------
Total long-term liabilities 491 383
------- -------
Commitments and contingencies (Footnotes 9 and 10)
Shareholders' equity
Common stock, no par value, 4,850,000 shares authorized,
issued and outstanding (Footnote 7) 4,012 4,012
Accumulated other comprehensive loss (949) (335)
Accumulated deficit (77) (9)
------- -------
Total shareholders' equity 2,986 3,668
------- -------
Total liabilities and shareholders' equity $ 4,110 $ 4,587
======= =======
The accompanying notes are an integral part of the financial statements
F-100
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Statements of Operations
for the years ended December 31, 2001 , 2000 and 1999
(in thousands of U.S. dollars)
Year ended December 31,
-----------------------------
2001 2000 1999
------- ------- -------
Gross revenues
Monthly subscriptions $ 2,025 $ 2,106 $ 1,833
Installation 20 11 32
Additional services 130 96 20
------- ------- -------
2,175 2,213 1,885
------- ------- -------
Direct operating expenses (excluding depreciation
stated separately below)
Taxes on revenues 553 249 184
Payroll and benefits 58 93 84
Programming 655 491 528
Other costs 198 223 93
------- ------- -------
1,464 1,056 889
------- ------- -------
Selling, general and administrative expenses
Payroll and benefits 80 176 147
Advertising and promotion 32 19 6
Other selling, general and administrative expenses 237 98 59
------- ------- -------
349 293 212
------- ------- -------
Depreciation 356 403 229
Other operating expense (income) (74) 119 17
------- ------- -------
Operating income 80 342 538
------- ------- -------
Interest income (65) (37) (226)
Interest expense 207 94 --
Foreign currency translation loss, net -- -- 135
Foreign currency transaction loss, net 6 -- --
------- ------- -------
Income (loss) before income taxes (68) 285 629
Income tax expense - current ( Footnote 5) -- 206 106
------- ------- -------
Net income (loss) $ (68) $ 79 $ 523
======= ======= =======
Other comprehensive loss -
Foreign currency translation adjustment (614) (335) --
------- ------- -------
Comprehensive income (loss) $ (682) $ (256) $ 523
======= ======= =======
The accompanying notes are an integral part of the financial statements
F-101
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Statements of Changes in Shareholders' Equity
for the years ended December 31, 2001, 2000 and 1999
(in thousands of U.S. dollars)
Accumulated
Other
Common Accumulated Comprehensive
Stock Deficit Loss Total
------ ----------- ------------- -----
Balance as of January 1, 1999 $4,012 $(611) $-- $ 3,401
Net income for the year -- 523 -- 523
------ ----- ----- -------
Balance as of December 31, 1999 4,012 (88) -- 3,924
Foreign currency translation adjustment,
net of tax -- -- (335) (335)
Net income for the year -- 79 -- 79
------ ----- ----- -------
Balance as of December 31, 2000 4,012 (9) (335) 3,668
Foreign currency translation adjustment,
net of tax -- -- (614) (614)
Net loss for the year -- (68) -- (68)
------ ----- ----- -------
Balance as of December 31, 2001 $4,012 $ (77) $(949) $ 2,986
====== ===== ===== =======
The accompanying notes are an integral part of the financial statements
F-102
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Statements of Cash Flows
for the years ended December 31, 2001 ,2000 and 1999
(in thousands of U.S. dollars)
Year Ended December 31,
---------------------------
2001 2000 1999
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ (68) $ 79 $ 523
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation 356 403 229
Provision (reversal of provision) for doubtful accounts 60 (3) (14)
Provision (reversal of provision) for claims (10) 13 --
Foreign currency transaction loss, net 6 -- --
Changes in operating assets and liabilities
Accounts receivable (38) 109 (59)
Prepaid and other assets 12 (14) --
Inventories 25 23 2
Suppliers 123 (12) 8
Taxes payable other than income taxes 174 103 140
Income taxes payable -- 53 57
Accrued payroll and related liabilities (4) (25) 1
Other 230 (397) (12)
------- ----- -----
Net cash provided by operating activities 866 460 421
------- ----- -----
Cash flows from investing activities:
Purchases of property, plant and equipment (151) (203) (132)
Loans to related companies (1,032) (677) --
Repayments of loans to related companies 467 -- --
------- ----- -----
Net cash used in investing activities (761) (880) (132)
------- ----- -----
Cash flows from financing activities:
Proceeds from loans from related companies 246 412 --
Repayments of loans from related companies (387) -- (673)
------- ----- -----
Net cash provided by (used in) financing activities (141) 412 (673)
------- ----- -----
Effect of exchange rate changes on cash and cash equivalents 9 9 --
------- ----- -----
Net increase (decrease) in cash and cash equivalents 18 (127) 70
Cash and cash equivalents at beginning of year 2 129 59
------- ----- -----
Cash and cash equivalents at end of the year $ 20 $ 2 $ 129
======= ===== =====
Cash paid for interest $ -- $-- $--
Cash paid for income taxes -- 206 106
The accompanying notes are an integral part of the financial statements
F-103
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements
(in thousands of U.S. dollars)
1. The Company and its principal operations
CCS - Camboriu Cable System Telecomunicacoes Ltda. (the "Company") renders
services related to wireless cable and cable television systems, including
marketing and advertising, production, distribution and licensing of
domestic and foreign television programs. The Company has wireless cable
channel rights primarily in the city of Camboriu. The Company's operations
are substantially dependent on the Tevecap Group regarding programming,
marketing, financial and administrative systems.
2. Summary of significant accounting policies
Significant policies followed in the preparation of the financial
statements are described below:
2.1. Basis of presentation
The financial statements are presented in United States dollars and have
been prepared in accordance with accounting principles generally accepted
in the United States of America ("U.S. GAAP"), which differ in certain
respects from accounting principles applied by the Company in its local
currency financial statements, which are prepared in accordance with
accounting principles generally accepted in Brazil ("Brazilian GAAP").
The preparation of financial statements in accordance with U.S. GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities as of the financial statement dates and the
reported amount of revenues and expenses during the reporting periods.
Since management's judgment involves making estimates concerning the
likelihood of future events, the actual results could differ from these
estimates.
2.2. Accounting records
As required by Brazilian Law, and in accordance with local accounting
practices, the accounting records of the Company are maintained in
Brazilian currency ("real"). In order to present the financial statements
in conformity with U.S. GAAP, the Company maintains additional accounting
records that are used solely for this purpose.
F-104
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements (Continued)
(in thousands of U.S. dollars)
2.3. Currency remeasurement
On January 1, 2000, Tevecap S.A. ("Tevecap"), parent company of the
Company's major shareholder TVA Sul Parana Ltda., changed its functional
currency from the United States dollar to the Brazilian real. As the
Company uses the functional currency of Tevecap, the Company also changed
its functional currency from the United States dollar to the Brazilian
real on January 1, 2000. This change was performed in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign
Currency Translation".
2.4. Cash and cash equivalents
Cash and cash equivalents are defined as cash and cash in banks and
investments in interest-bearing securities. 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" ("SFAS 107"), 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 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 following methods and assumptions were used to
estimate the fair value of each class of financial instrument for which it
is practicable to estimate that value:
o The fair value of current financial assets and liabilities,
including cash and cash equivalents, accounts receivable, other
accounts receivable, accounts receivable from related parties, film
suppliers, and other accounts payable approximates their respective
carrying value due to their short-term nature.
o The fair value of loans to and from related companies approximates
their respective carrying value as interest on these loans is at
market rates.
F-105
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements (Continued)
(in thousands of U.S. dollars)
2.6. Accounts receivable
A provision for doubtful accounts was established on the basis of an
analysis of the accounts receivable, in light of the risks involved, and
is considered sufficient to cover any losses incurred in realization of
credits.
2.7. Inventories
Inventories consist of materials and supplies 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.
2.8. Property, plant and equipment
Property, plant and equipment are stated at cost and depreciated using the
straight-line method, over the remaining useful lives, as described in
Note 6.
2.9. Recoverability of long-lived assets to be held and used
The Company evaluates its long-lived assets and identifiable intangible
assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of the asset to future undiscounted net cash flows
expected to be generated by the asset. In estimating future undiscounted
net cash flows, assets are grouped at the level of each cable television
system. If an asset is considered to be impaired, the impairment to be
recognized is measured as the amount by which the carrying amount of the
asset exceeds the fair value of the asset. There were no impairment
write-downs made during the years ended December 31, 2001, 2000 and 1999.
F-106
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements (Continued)
(in thousands of U.S. dollars)
2.10. Revenue recognition
Subscription revenues are recognized monthly at the amount billed to
subscribers for service subscribed to and earned during the month.
Installation fees are recognized as revenue on the equipment installation
date to the extent of direct selling costs incurred which are higher than
the revenue.
Other revenues are recognized as services are rendered.
2.11 Advertising and promotion costs
Costs of advertising and promotion are expensed as incurred
2.12 Deferred income taxes
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases as well as operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. Valuation
allowances are established when it is more likely than not that some or
all of the deferred tax assets will not be realized.
2.13 Concentrations of credit risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts
receivable. Such concentrations of credit risk are limited due to the
large numbers comprising the Company's subscriber and customer base and
their dispersion across different geographic regions. As of December 31,
2001 and 2000, the Company had no other significant concentrations of
credit risk.
2.14 Reclassifications
Certain prior years amounts have been reclassified for comparative
purposes.
F-107
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements (Continued)
(in thousands of U.S. dollars)
3. Accounts receivable, net
As of December 31, 2001 and 2000, accounts receivable were comprised of:
December 31,
----------------------
2001 2000
------- -------
Subscriptions and installation $ 152 $ 112
Advertising 5 6
Programming -- 1
Provision for doubtful accounts (107) (47)
------- -------
$ 50 $ 72
======= =======
No single customer accounted for more than 10% of total accounts
receivable as of December 31, 2001 and 2000.
4. Related party transactions
The following tables summarize the transactions between the Company and
related parties as of December 31, 2001 and 2000:
December 31,
----------------------
2001 2000
------- -------
TVA Sistema de Televisao S.A. (under common
control with parent company)
Accounts receivable $ 5 $ 11
Accounts payable 5 --
TVA Sul Parana Ltda. (parent company)
Accounts receivable -- 7
Loans receivable 565 --
Loans payable -- 126
The Company and its related parties maintain a cash management system
centralized at TVA Sul Parana Ltda. The centralized cash management system
results in accounts receivable from and payable to related parties
depending on the cash needs of the companies.
F-108
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements (Continued)
(in thousands of U.S. dollars)
4. Related party transactions (Continued)
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 1.01% to 1.53% per month as of December 31,
2001 (1.63% to 1.90% per month as of December 31, 2000).
5. Income taxes
Deferred income taxes reflect the future tax consequences of net operating
loss carryforwards and differences between the tax basis and the financial
reporting basis of assets and liabilities. A valuation allowance has been
established against the net deferred tax asset (primarily consisting of
net operating loss carryforwards and provisions) as management believes it
is more likely than not that the deferred tax assets will not be realized.
Accordingly, no benefit has been recognized for the Company's net
operating losses and other deferred tax assets. As of December 31, 2001,
the Company has unexpirable net operating loss carryforwards of $66.
F-109
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements (Continued)
(in thousands of U.S. dollars)
5. Income taxes (continued)
The income tax expense was different from the amount computed using the
Brazilian statutory income tax for the reasons set forth in the following
table:
2001 2000 1999
---- ---- ----
Income (loss) before income taxes $(68) $ 285 $ 629
Statutory income tax rate 34% 34% 37%
---- ----- -----
Computed income tax expense (benefit) (23) 97 233
Change in the income tax rate -- 1 22
Translation loss of tax losses 1 3 30
Deductible devaluation loss for Brazilian statutory purposes 22 150 (169)
Change in valuation allowance -- (45) (10)
---- ----- -----
Income tax expense per statements of operations $-- $ 206 $ 106
==== ===== =====
6. Property, plant and equipment, net
As of December 31, 2001 and 2000, property, plant and equipment were
comprised of:
Annual
Depreciation December 31,
Rate ---------------------
% 2001 2000
------- -------
Reception equipment 20 $ 598 $ 585
Cable plant 10 765 893
Machinery and equipment 10 310 343
Converters 10 38 26
Leasehold improvements 25 3 4
Building 25 2,658 3,154
Furniture and fixtures 10 67 79
Vehicles 20 12 15
Software 20 6 7
Tools 10 3 2
Other 3 9
Accumulated depreciation (1,384) (1,218)
------- -------
$ 3,079 $ 3,899
======= =======
F-110
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements (Continued)
(in thousands of U.S. dollars)
7. Shareholder's equity
Common stock as of December 31, 2001 and 2000 was comprised of:
2001 2000
------------------------ -----------------------
$ Shares $ Shares
---------- ---------- ---------- ---------
Construtora ENE ESSE Ltda $ 1,605 1,940,000 $ 1,605 1,940,000
TVA Sul Parana Ltda 2,407 2,910,000 2,407 2,910,000
---------- ---------- ---------- ---------
$ 4,012 4,850,000 $ 4,012 4,850,000
========== ========== ========== =========
8. Loan guarantees
In November 1996, Tevecap issued $250,000 12-5/8% Senior Notes to
institutional buyers in a private placement. The Notes, which mature in
November 2004, were subsequently registered with the Securities and
Exchange Commission in May 1997. These Notes are jointly and severally,
irrevocably and fully unconditionally guaranteed, on a senior basis, by
Tevecap's direct and indirect subsidiaries, including the Company. On July
28, 1999 the related company TVA Communications Ltd. 80.79% of these
Notes.
9. Litigation contingencies
Certain claims and lawsuits arising in the ordinary course of business
have been filed or are pending against the Company which were not
recognized in the financial statements. The Company has also recorded
provisions related to certain claims in amounts that management considers
to be adequate after considering a number of factors including (but not
limited to) the views of legal counsel, the nature of the claims and the
prior experience of the Company.
The Company has provided for losses on all cases where the assessment of
management and legal counsel indicates that a loss is probable. Management
believes that such legal matters will not have a material adverse effect
on the Company's results of operations, financial condition or cash flows.
F-111
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements (Continued)
(in thousands of U.S. dollars)
10. Abril Health Care Plan
In February 1996, the Abril Health Care Plan, Associacao Abril de
Beneficios (the "Health Care Plan"), was created to provide health care to
Abril S.A. Group employees and their dependents. Both the companies
forming part of the Abril Group and the employees thereof contribute
monthly to the Health Care Plan, which is responsible for the management
of the plan. In 2001, contributions made by the Company to the Health Care
Plan amounted to $14 ( $17 in 2000 and $16 in 1999).
11. Supplementary information - valuation and qualifying accounts and reserves
Deferred Provision
Taxation for Provision
Valuation Doubtful for
Allowance Accounts Claims
----------- ----------- -----------
Balance as of January 1, 1999 $ 55 $ 64 $ --
Additions -- -- --
Deductions (10) (14) --
------- ------- -------
Balance as of December 31, 1999 45 50 --
Additions -- -- 13
Deductions (45) (3) --
------- ------- -------
Balance as of December 31, 2000 -- $ 47 $ 13
Additions -- 60 --
Deductions -- -- (10)
------- ------- -------
Balance as of December 31, 2001 $ -- 107 3
======= ======= =======
12. Recent accounting pronouncements
Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended by SFAS No.
137 and SFAS No. 138 (collectively, "SFAS 133"). SFAS 133 establishes
accounting and reporting standards requiring that all derivative financial
instruments (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. Additionally, SFAS 133 requires that
changes in the fair value of derivatives be recognized in earnings unless
specific hedge accounting criteria are met. As the Company does not
utilize derivative financial instruments, the effect of adopting SFAS 133
on Jaunary 1, 2001 did not have a material impact on the Company's
financial statements.
F-112
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements (Continued)
(in thousands of U.S. dollars)
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations" ("SFAS 141") and SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires
business combinations initiated after June 30, 2001 to be accounted for
using the purchase method of accounting, and broadens the criteria for
recording intangible assets separate from goodwill. Recorded goodwill and
intangibles will be evaluated against this new criteria and may result in
certain intangibles being subsumed into goodwill, or alternatively,
amounts initially recorded as goodwill may be separately identified and
recognized apart from goodwill. SFAS 142 requires the use of a
nonamortization approach to account for purchased goodwill and certain
intangibles. Under a nonamortization approach, goodwill and certain
intangibles will not be amortized into results of operations, but instead
would be reviewed for impairment and written down and charged to results
of operations only in the periods in which the recorded value of goodwill
and certain intangibles is more than its fair value. The amortization
provisions of SFAS 142 apply to goodwill and intangible assets acquired
after June 30, 2001. Effective January 1, 2002, the Company adopted the
provisions of each statement that apply to goodwill and intangible assets
acquired prior to June 30, 2001. As the Company has not entered into any
business combinations, management believes that the implementation of
these pronouncements will not have a material impact on the Company's
results of operations or financial condition.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 requires that the market
value of the liabilities related to obligations due to the retirement of
assets be recognized in the period in which they occur, if a reasonable
estimate of market value is possible. Costs of asset retirement are
capitalized as part of the permanent asset cost. In accordance with SFAS
143, the asset retirement obligation is discounted and an increase is
recognized by using the "credit adjusted risk-free" interest rate in
effect when the obligation was initially recognized. The Company is
required to adopt SFAS 143 effective January 1, 2003. Based on an initial
analysis of SFAS 143 requirements, management believes that the
implementation of this statement will not have a material impact on the
Company's results of operations or financial condition.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121") but
maintains the fundamental provisions of SFAS 121 for (a)
recognition/valuation of the provision for impairment of permanent assets
to be maintained and used and (b) valuation of permanent assets to be
written off due to their sale. SFAS
F-113
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements (Continued)
(in thousands of U.S. dollars)
144 also supersedes the provisions of Accounting Principles Board Opinion
No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business" ("APB 30") with regard to reporting
the effects of a disposal of a segment of a business. The Company adopted
SFAS 144 effective January 1, 2002. Based on the Company's initial
analysis of the SFAS 144 requirements, management believes that the
implementation of this pronouncement will not have a material impact on
the Company's results of operations or financial condition.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and
Technical Corrections." SFAS 145 rescinds SFAS 4, "Reporting Gains and
Losses from Extinguishment of Debt," which required that all gains and
losses from extinguishment of debt to be aggregated and classified as an
extraordinary item if material. SFAS 145 requires that gains and losses
from extinguishment of debt be classified as extraordinary only if they
meet criteria in APB 30, thus distinguishing transactions that are part of
recurring operations from those that are unusual or infrequent, or that
meet the criteria for classification as an extraordinary item. SFAS 145
also amends SFAS No. 13, "Accounting for Leases", to require that lease
modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback
transactions. In addition, SFAS 145 rescinds SFAS 44, "Accounting for
Intangible Assets of Motor Carriers," and SFAS 64, "Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements," which are not currently
applicable to us. The provisions of SFAS 145 as they relate to the
rescission of SFAS 4 will be applied effective January 1, 2003. Certain
provisions related to SFAS 13 are effective for transactions occurring
after May 15, 2002. Management does not expect SFAS 145 to have a material
impact on the Company's results of operations or financial condition
* * * * * * *
F-114