<PAGE>
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-22267
PROSPECTUS
US$250,000,000
Offer for all Outstanding
12 5/8% Senior Notes due 2004
in Exchange for
[LOGO]
up to US$250,000,000 principal amount of
12 5/8% Senior Notes due 2004
of
TEVECAP S.A.
The Exchange Offer
will expire at 5:00 P.M., New York City time,
on May 23, 1997, unless extended.
------------------------
Tevecap S.A., a Brazilian corporation ("Tevecap" and, together with its
consolidated subsidiaries and affiliates, "TVA" or the "Company"), hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (which together constitute
the "Registered Exchange Offer"), to exchange an aggregate principal amount of
up to US$250,000,000 of its 12 5/8% Senior Notes due 2004 (the "Exchange Notes")
together with the Subsidiary Guarantees (as defined and together with the
Exchange Notes, the "Exchange Securities"), which have been registered under the
Securities Act of 1933 (the "Securities Act"), pursuant to a Registration
Statement of which this Prospectus constitutes a part, for a like principal
amount of its outstanding 12 5/8% Senior Notes due 2004 (the "Old Notes"), of
which US$250,000,000 aggregate principal amount is outstanding, together with
the Subsidiary Guarantees of the Old Notes (such Subsidiary Guarantees together
with the Old Notes, the "Old Securities").
The terms of the Exchange Notes are identical in all material respects to
the terms of the Old Securities, except for certain transfer restrictions and
registration rights relating to the Old Securities and except that, if the
Registered Exchange Offer is not consummated by May 23, 1997, Tevecap will be
obligated to pay each holder of the Old Notes an amount equal to $0.192 per week
per $1,000 of the Old Notes until the Registered Exchange Offer is consummated.
The Exchange Securities are being offered hereunder in order to satisfy certain
obligations of Tevecap under the Purchase Agreement dated as of November 21,
1996 (the "Purchase Agreement") between Tevecap, the Guarantors (as defined) and
the initial purchasers of the Old Notes (the "Initial Purchasers") and the
Exchange and Registration Rights Agreement dated November 26, 1996 (the
"Exchange and Registration Rights Agreement") among Tevecap, the Guarantors and
the Initial Purchasers. The Exchange Notes will evidence the same debt as the
Old Notes and will be issued under and be entitled to the same benefits under
the Indenture (as defined) as the Old Notes. In addition, the Exchange Notes and
the Old Notes will be treated as one series of securities under the Indenture.
The Exchange Notes and the Old Notes are collectively referred to herein as the
"Notes." See "Description of the Notes."
Interest on the Notes will be payable in cash in US dollars semi-annually on
May 26 and November 26 of each year, commencing on May 26, 1997. The Notes will
mature on November 26, 2004. Except as described below, Tevecap may not redeem
the Notes prior to November 26, 2004. In the event Tevecap receives Net Cash
Proceeds (as defined) at any time on or prior to November 26, 2000 from one or
more specified sales of equity, it may redeem up to $75.0 million of the
aggregate principal amount of the Notes at a price equal to 112.625% of the
principal amount to be redeemed, together with accrued and unpaid interest, if
any, to the date of redemption. In addition, Tevecap may redeem the Notes at any
time, in whole but not in part, at a price equal to 100% of their principal
amount, together with accrued and unpaid interest, if any, to the date of
redemption, in the event of certain changes affecting the withholding tax
treatment of the Notes, with the occurrence of such events to be determined by
the Company in accordance with the terms of the Notes. See "Description of the
Notes-Redemption for Changes in Withholding Taxes." The Notes will not be
subject to any sinking fund requirement. Upon the occurrence of a Change of
Control (as defined), each holder will have the right to require Tevecap to make
an offer to repurchase the Notes held by such holder at a price equal to 101% of
the principal amount thereof, together with accrued and unpaid interest, if any,
to the date of repurchase. See "Description of Notes."
(CONTINUED ON NEXT PAGE)
--------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 22 FOR A DISCUSSION OF CERTAIN FACTORS
THAT HOLDERS OF THE OLD NOTES SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE
OFFER AND THAT PROSPECTIVE INVESTORS IN THE EXCHANGE NOTES SHOULD CONSIDER IN
CONNECTION WITH SUCH INVESTMENT.
---------------------
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
--------------------------
THE DATE OF THIS PROSPECTUS IS APRIL 22, 1997.
<PAGE>
The Notes will be unsecured, senior obligations of Tevecap ranking PARI
PASSU in right of payment with all other existing and future unsecured, senior
Indebtedness (as defined) of Tevecap and senior in right of payment to all other
existing and future subordinated Indebtedness of Tevecap. The Notes will be
jointly and severally guaranteed (the "Subsidiary Guarantees") by each
Restricted Subsidiary (as defined) of Tevecap (the "Guarantors"). The Subsidiary
Guarantees will be unsecured, senior obligations of the Guarantors ranking PARI
PASSU in right of payment with all other existing and future unsecured, senior
Indebtedness of the Guarantors and senior in right of payment to all other
existing and future subordinated Indebtedness of the Guarantors. However,
subject to certain limitations set forth in the Indenture, Tevecap and its
Subsidiaries may incur other senior Indebtedness, including Indebtedness that is
secured by the assets of Tevecap and its Subsidiaries. At September 30, 1996,
after giving effect to the sale of the Old Securities and the application of the
net proceeds therefrom, Tevecap would not have had any outstanding senior
Indebtedness, other than the Notes (exclusive of unused commitments) and the
aggregate principal amount of outstanding senior Indebtedness of the Guarantors,
other than the Subsidiary Guarantees, would have been $4.6 million (exclusive of
unused commitments and short term debt) all of which would have ranked pari
passu with the Subsidiary Guarantees, but none of which was secured
Indebtedness. As of April 1, 1997, Tevecap did not have any outstanding senior
Indebtedness other than the Notes (exclusive of unused commitments and short
term debt), and the aggregate principal amount of outstanding senior
Indebtedness of the Guarantors was $6.1 million (exclusive of unused commitments
and short term debt) all of which ranks pari passu with the Subsidiary
Guarantees, and none of which is secured. Although the Notes are titled "senior"
securities, Tevecap has not issued any Indebtedness to which the Notes would
rank senior. See "Description of Notes--Ranking" and "Certain Other
Indebtedness."
The Indenture (as defined) under which the Old Securities were issued and
the Exchange Securities would be issued contains covenants which, among other
limitations, will limit the incurrence of additional indebtedness by Tevecap and
its Restricted Subsidiaries. This limitation is subject to a number of important
qualifications and exceptions. Absent access by the Company to additional
financing (whether debt or equity) this limitation could, in circumstances in
which the Company is unable to incur additional debt under this covenant, and
has fully utilized the available exceptions, limit the ability of the Company to
acquire future network assets, inventory and equipment. However, the Company
retains the option to obtain additional equity financing through capital
contributions from its shareholders, or by means of a public offering in the
international capital markets.
Tevecap's operations are conducted through, and substantially all of
Tevecap's assets are owned by, Tevecap's direct and indirect subsidiaries. The
ability of Tevecap to meet its obligations in respect of the Notes and any
future indebtedness of Tevecap and the ability of Tevecap to refinance the Notes
at their maturity (or upon early redemption or otherwise) will depend on, among
other things, the future performance of such subsidiaries (including the
Guarantors). In addition, the ability of Tevecap's subsidiaries to pay dividends
and make other payments to Tevecap may be restricted by, among other things,
applicable corporate and other laws and regulations and by the terms of
agreements to which such subsidiaries become subject. Also, the property and
assets of certain of such subsidiaries have had, or in the future may have,
liens placed upon them pursuant to existing and future financings of such
subsidiaries. Although the Indenture limits the ability of such subsidiaries to
enter into consensual restrictions on their ability to pay dividends and make
other payments to Tevecap and to permit liens to exist on their property and
assets, such limitations are subject to a number of significant qualifications.
See "Description of Notes--Certain Covenants." A portion of the Company's total
assets (13.4% at September 30, 1996) represents interests in entities that are
not majority-owned subsidiaries of Tevecap. The ability of Tevecap to receive
funds from these entities may be limited by, among other things, shareholder
agreements with the other investors in those entities, credit arrangements at
those entities and the need of those entities to reinvest their cash flow in
their own operations. In addition, applicable Brazilian law limits the amount of
dividends which may be paid by Tevecap's minority-owned subsidiaries to the
extent they do not have profits available for distribution. Other statutory and
general law obligations may also affect the ability of those entities to make
payments to Tevecap on account of intercompany loans.
Tevecap is making the Registered Exchange Offer in reliance on the position
of the staff of the Securities and Exchange Commission (the "Commission") as set
forth in certain no-action letters addressed to other parties in other
transactions. However, Tevecap has not sought its own no-action letter and there
can be no assurance that the staff of the Commission would make a similar
determination with respect to the Registered Exchange Offer as in such other
circumstances. Based upon these interpretations by the staff of the Commission,
Tevecap believes that Exchange Securities issued pursuant to this Registered
Exchange Offer in exchange for Old Securities may be offered for resale, resold
and otherwise transferred by a holder thereof (other than (i) a broker-dealer
who acquired the Old Securities as a result of market making activities or other
trading activities, (ii) an Initial Purchaser who acquired the Old Securities
directly from the Company solely in order to resell pursuant to Rule 144A of the
Securities Act or any other available exemption under the Securities Act, or
(iii) a person that is an "affiliate" (as defined in Rule 405 of the Securities
Act) of Tevecap) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such Exchange
Securities are acquired in the ordinary course of such holder's business and
that such holder is not participating, and has no arrangement or understanding
with any person to participate, in the distribution of such Exchange Securities.
Holders of Old Securities accepting the Registered Exchange Offer will represent
to Tevecap in the Letter of Transmittal that such conditions have been met. Any
holder who participates in the Registered Exchange Offer for the purpose of
participating in a distribution of the Exchange Securities may not rely on the
position of the staff of the Commission as set forth in these no-action letters
and would have to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction.
Each broker-dealer who receives Exchange Securities for its own account
pursuant to the Registered Exchange Offer must acknowledge that it acquired the
Old Securities as a result of market-making activities or other trading
activities and will deliver a prospectus in connection with any resale of such
Exchange Securities. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Securities received in
exchange for Old Securities where such Old Securities were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. Each of Tevecap and the Subsidiary Guarantors has agreed that, for a
period of 90 days after the date of this Prospectus, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "Exchange Offer," and "Plan of Distribution."
The Exchange Securities are new securities for which there is currently no
market. Tevecap presently does not intend to apply for listing of the Exchange
Securities on any securities exchange or for quotation through the National
Association of Securities Dealers Automated Quotation (Nasdaq) system. Tevecap
has been advised by the Initial Purchasers, Chase
2
<PAGE>
Securities Inc., Donaldson Lufkin & Jenrette Securities Corporation, Bear,
Stearns & Co. Inc. and Bozano, Simonsen Securities, Inc., that, following
completion of the Exchange Offer, they presently intend to make a market in the
Exchange Securities and any Old Securities remaining outstanding; however, the
Initial Purchasers are not obligated to do so and any market-making activities
with respect to the Exchange Securities may be discontinued at any time without
notice. There can be no assurance that an active public market for the Exchange
Securities will develop.
Any Old Securities not tendered and accepted in the Exchange Offer will
remain outstanding and will be entitled to all the rights and preferences and
will be subject to the limitations applicable thereto under the Indenture.
Following consummation of the Registered Exchange Offer, the holders of Old
Securities will continue to be subject to the existing restrictions upon
transfer thereof. Except for certain limited shelf registration rights of the
holders of Old Securities, Tevecap will have no further obligation to such
holders to provide for the registration under the Securities Act of the Old
Securities held by them. To the extent that Old Securities are tendered and
accepted in the Registered Exchange Offer, a holder's ability to sell untendered
Old Securities could be adversely affected. It is not expected that an active
market for the Old Securities will develop while they are subject to
restrictions on transfer.
Tevecap will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn on or prior to 5:00 p.m., New York City time, on the
date the Registered Exchange Offer expires, which will be May 23, 1997 (the
"Expiration Date"), unless the Registered Exchange Offer is extended by the
Company in its sole discretion, in which case the term "Expiration Date" shall
mean the latest date and time to which the Registered Exchange Offer is
extended. Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date. The Registered Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange. However, the Registered Exchange Offer is subject to certain
conditions which may be waived by Tevecap and to the terms and provisions of the
Exchange and Registration Rights Agreement. Tevecap has agreed to pay the
expenses of the Registered Exchange Offer. See "The Registered Exchange Offer."
The Exchange Notes will bear interest from the last interest payment date of the
Old Notes to occur prior to the issue date of the Exchange Notes or, if no such
interest has been paid, from November 26, 1996. Holders of the Old Notes whose
Old Notes are accepted for exchange will not receive interest on such Old Notes
for any period subsequent to the last interest payment date to occur prior to
the issue date of the Exchange Notes, if any, and will be deemed to have waived
the right to receive any interest payment on the Old Notes accrued from and
after such interest payment date or, if not such interest has been paid, from
November 26, 1996.
This Prospectus, together with the Letter of Transmittal, is being sent to
all registered holders of Old Securities as of April 22, 1997.
Tevecap will not receive any proceeds from this Registered Exchange Offer.
No dealer-manager is being used in connection with this Registered Exchange
Offer. See "Use of Proceeds" and "Plan of Distribution."
3
<PAGE>
THE EXCHANGE SECURITIES MAY NOT BE OFFERED OR SOLD IN BRAZIL, EXCEPT UNDER
CIRCUMSTANCES WHICH DO NOT CONSTITUTE A PUBLIC OFFERING OR DISTRIBUTION OF
SECURITIES UNDER BRAZILIAN LAWS AND REGULATIONS. THE EXCHANGE SECURITIES HAVE
NOT BEEN, AND WILL NOT BE, REGISTERED WITH THE COMISSAO DE VALORES MOBILIARIOS
("CVM"), THE SECURITIES COMMISSION OF BRAZIL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Enforceability of Civil Liabilities........................................................................ 5
Presentation of Certain Information........................................................................ 5
Summary.................................................................................................... 7
Summary Historical Financial and Other Data................................................................ 20
Risk Factors............................................................................................... 22
Use of Proceeds............................................................................................ 36
Exchange Rate Data......................................................................................... 36
Capitalization............................................................................................. 38
Selected Historical Financial and Other Data............................................................... 39
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 41
The Registered Exchange Offer.............................................................................. 54
Business................................................................................................... 62
Management................................................................................................. 90
Principal Shareholders..................................................................................... 95
Certain Transactions With Related Parties.................................................................. 98
Description of Certain Indebtedness........................................................................ 101
Description of Notes....................................................................................... 103
Income Tax Considerations.................................................................................. 137
Plan Of Distribution....................................................................................... 141
Experts.................................................................................................... 141
Legal Matters.............................................................................................. 142
Available Information...................................................................................... 142
Public Documents........................................................................................... 143
Report on Financial Statements............................................................................. F-1
The Federative Republic of Brazil.......................................................................... A-1
The Brazilian Economy...................................................................................... B-1
Glossary................................................................................................... C-1
</TABLE>
Until July 21, 1997, broker-dealers effecting transactions in the Exchange
Notes, whether or not participating in the Registered Exchange Offer, may be
required to deliver a Prospectus. This is in addition to the obligation of
broker-dealers to deliver a Prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
No broker-dealer, salesperson or other individual has been authorized to
give any information or to make any representations in connection with the
Registered Exchange Offer other than those contained in this Prospectus and
Letter of Transmittal and, if given or made, such information or representation
must not be relied upon as having been authorized by the Company. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy the Exchange Notes in any jurisdiction to any person to whom it is unlawful
to make such offer or solicitation in such jurisdiction. The delivery of this
Prospectus shall not, under any circumstances, create any implication that the
information herein is correct at any time subsequent to its date.
4
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ENFORCEABILITY OF CIVIL LIABILITIES
Tevecap and each of the Guarantors are Brazilian corporations (other than
TVA Communications Ltd., which is a corporation organized under the laws of the
British Virgin Islands) with substantially all of their assets and operations
located, and substantially all of their revenues derived, outside the United
States. Each of Tevecap and the Guarantors has appointed CT Corporation System,
New York, New York, as its agent to receive service of process with respect to
any action brought against it in any federal or state court in the State of New
York arising from the Registered Exchange Offer. However, it may not be possible
for investors to enforce outside the United States judgments against Tevecap and
the Guarantors obtained in the United States in any such actions, including
actions predicated upon the civil liability provisions of the US federal and
state securities laws. In addition, certain of the directors and officers of
Tevecap and the Guarantors, and certain of their advisors named herein, are
residents of Brazil, and all or substantially all of the assets of such persons
may be located outside the United States. As a result, it may not be possible
for investors to effect service of process within the United States upon such
persons, or to enforce against them judgments obtained in United States courts,
including judgments predicated upon the civil liability provisions of the US
federal and state securities laws.
Tevecap has been advised by its Brazilian counsel, Basch & Rameh--Advogados
e Consultores, that judgments of US courts for civil liabilities predicated upon
the federal securities laws of the United States, subject to certain
requirements described below, may be enforced in Brazil. A judgment against the
directors and officers of Tevecap and the Guarantors or the advisors named
herein who are residents of Brazil or against Tevecap or the Guarantors obtained
outside of Brazil would be enforceable in Brazil against such persons or Tevecap
or the Guarantors without reconsideration of the merits upon confirmation of
that judgment by the Brazilian Supreme Court. That confirmation, generally, will
occur if the foreign judgment (i) fulfills all formalities required for its
enforceability under the laws of the country where the foreign judgment is
granted, (ii) is issued by a competent court after proper service of process,
(iii) is not subject to appeal, (iv) is authenticated by a Brazilian consular
office in the country where the foreign judgment is issued and is accompanied by
a certified Portuguese translation and (v) is not contrary to Brazilian national
sovereignty or public policy or "good morals" (as set forth in Brazilian law).
Notwithstanding the foregoing, no assurance can be given that confirmation would
be obtained, that the process described above can be conducted in a timely
manner or that a Brazilian court would enforce a monetary judgment for violation
of the US securities laws with respect to the Notes or the Subsidiary
Guarantees. Tevecap has been further advised by its Brazilian counsel that
original actions predicated on the federal securities laws of the United States
may be brought in Brazilian courts and that Brazilian courts may enforce civil
liabilities in such actions against Tevecap or the Guarantors, their respective
directors, certain of their respective officers and the advisors named herein. A
plaintiff (whether Brazilian or non-Brazilian) who resides outside Brazil during
the course of litigation in Brazil must provide a bond to guarantee court costs
and legal fees if the plaintiff owns no real property in Brazil.
PRESENTATION OF CERTAIN INFORMATION
The accounts of the Company, which are maintained in Brazilian REAIS, were
prepared in accordance with the accounting principles generally accepted in the
United States of America and translated into United States dollars on the basis
set forth in Note 2.3 of the Financial Statements of Tevecap and Subsidiaries
(the "Tevecap Financial Statements" and together with the Financial Statements
of TVA Sistema de Televisao S.A., TVA Sul Participacoes S.A., and the Unaudited
Financial Information included elsewhere in this Prospectus, the "Financial
Statements") of the Company. Certain amounts stated herein in U.S. dollars
(other than as set forth in the Financial Statements and financial information
derived therefrom) have been translated, for the convenience of the reader, from
REAIS at the rate in effect on September 30, 1996 of R$1.0272 = US$1.00. Such
translations should not be construed as a representation that REAIS could have
been converted at such rate on such date or at any other date. See "Exchange
Rate Data." All references in this Prospectus to (i) "US dollars," "$" or "US$"
are to United
5
<PAGE>
States dollars and (ii) "REAIS," "REAL" or "R$" are to Brazilian REAIS.
Capitalized terms used in this Prospectus are defined, unless the context
otherwise requires, in the Glossary attached hereto as Appendix C. Unless
otherwise specified, data regarding population or homes in a licensed area are
projections based on 1991 population census figures compiled by the Instituto
Brasileiro de Geografia e Estastica ("IBGE"). There can be no assurance that the
number of people or the number of households in a specified area has not
increased or decreased by a higher or lower rate than those estimated by the
IBGE since the 1991 census. Unless otherwise indicated, references to the number
of the Company's subscribers are based on Company data as of September 30, 1996.
The term DIRECTV-Registered Trademark- ("DIRECTV")
(DIRECTV-Registered Trademark- is a registered trademark of Hughes Electronics
Corporation ("Hughes Electronics")) refers to the Ku-Band service provided by
Galaxy Brasil in conjunction with Galaxy Latin America. Data concerning total
MMDS, Cable, C-Band or Ku-Band subscribers and penetration rates represent
estimates made by the Company based on the January 1996 data of Kagan World
Media, Inc., the Company's knowledge of the pay television systems of the
Company and the Operating Ventures, and public statements of other Brazilian pay
television providers. Although the Company believes such estimates are
reasonable, no assurance can be made as to their accuracy.
6
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION INCLUDING THE FINANCIAL
STATEMENTS OF TEVECAP AND ITS SUBSIDIARIES (TOGETHER "TVA" OR THE "COMPANY")
INCLUDED ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
TVA is a leading pay television operator in Brazil and is the country's
largest pay television programming distributor. In 1989, TVA was the first to
provide pay television services in Brazil and, in July 1996, the Company
launched DIRECTV, Brazil's first digital Ku-Band service. With over 335,000
subscribers, TVA is the only operator in Brazil to offer pay television services
utilizing five distribution technologies: MMDS, Cable, digital Ku-Band, digital
C-Band and UHF. TVA believes that its ability to strategically deploy
alternative technologies provides it with significant competitive advantages,
including the ability to rapidly enter new markets, maximize penetration of
existing markets and deliver service in the most cost effective manner.
Additionally, TVA has interests in HBO Brasil Partners and ESPN Brasil Ltda.,
two programming joint ventures (the "Programming Ventures"). Through owned,
affiliated and independent pay television operators, TVA programming reaches
over 955,000 pay television households. TVA is a majority owned subsidiary of
Abril, S.A. ("Abril"), Latin America's leading magazine publishing, printing and
distribution company. TVA's other shareholders are Falcon International
Communications (Bermuda) L.P. ("Falcon International"), The Hearst Corporation
("Hearst"), ABC, Inc. ("ABC") and Chase Manhattan International Finance Ltd.
("CMIF").
The Company conducts its pay television operations through three owned
operating systems (the "Owned Systems"): TVA Sistema, TVA Sul and Galaxy Brasil.
Through the MMDS and Cable systems of TVA Sistema and TVA Sul, the Company
serves six cities with a combined population of approximately 18 million,
including three of the seven largest cities in Brazil: Sao Paulo (population of
10.2 million), Rio de Janeiro (population of 5.7 million) and Curitiba
(population of 1.5 million). The Company also holds minority interests in
Canbras TVA and TV Filme (the "Operating Ventures"), which together provide pay
television services to an additional seven cities with a total population of 6.5
million. In addition, the Company sells programming to, and receives a per
subscriber fee from, unaffiliated pay television operators ("Independent
Operators").
The Company, through Galaxy Brasil, is Brazil's exclusive provider of the
premium programming service, DIRECTV. Galaxy Brasil receives programming,
scheduling and related services for DIRECTV from Galaxy Latin America ("GLA"),
in which TVA holds a 10.0% equity interest. The other owners of GLA are a unit
of Hughes Electronics, a member of the Cisneros Group and a subsidiary of Grupo
MVS. Through local operating companies such as Galaxy Brasil, GLA plans to
provide DIRECTV service throughout much of Latin America and the Caribbean. The
Company, through TVA Sistema, also currently provides Brazil's only digital
C-Band television service (together with Galaxy Brasil, the "DBS Systems"). The
DBS Systems enable the Company to deliver a greater number of channels than any
other television operator in Brazil and provide TVA with access to substantially
all of Brazil's 33.9 million TV Homes.
7
<PAGE>
ORGANIZATIONAL STRUCTURE
The organizational structure of the Company, including the Owned Systems,
the Operating Ventures, the Programming Ventures and the License Subsidiaries,
is summarized in the following chart. Percentages represent Tevecap's ownership
interest in each entity.
Organizational Chart
- ------------------------
(a) License subsidiaries hold pay television licenses for the operation of
certain of the Owned Systems.
(b) TV Filme is publicly traded under the symbol "PYTV." TV Filme's market
capitalization, as of September 30, 1996, was $139.8 million. Upon exercise
of a warrant with a nominal exercise price, Tevecap's ownership interest
will increase to 16.7%.
(c) Equity interest held through TVA Communications Ltd., a wholly owned
subsidiary of Tevecap ("TVA Communications"), and TVA Communications Aruba
N.V., a wholly-owned subsidiary of TVA Communications.
(d) Hughes Electronics and the Cisneros Group have a right to purchase, and have
expressed an interest in purchasing, 25.0% of Galaxy Brasil.
(e) Equity interest held through TVA Communications.
(f) The capital stock of each of these companies is currently held by
affiliates of TVA. Each company has agreed to transfer the licenses held by
it to TVA at nominal cost.
8
<PAGE>
OWNERSHIP
Tevecap is a majority owned subsidiary of Abril, the leading magazine
publishing, printing and distribution company in Latin America. Abril publishes
over 266 weekly, bi-weekly and monthly titles. During 1995, the combined monthly
paid circulation of Abril and its affiliates averaged 15.6 million copies. TVA
benefits from Abril's extensive experience in the business of subscriptions and
distribution, advertising synergies, common research resources and financial
analysis and support. Certain of Tevecap's other shareholders provide the
Company with access to additional international programming and certain
technical and financial expertise. The Company's shareholders have invested, in
aggregate, approximately $288 million in the Company. Tevecap's current
ownership is as follows: Abril, 56.5%; Falcon International, 14.2%; Hearst,
10.0%; ABC, 10.0%; and CMIF, 9.3%. Each of Tevecap's corporate shareholders has
agreed, with certain exceptions, to a reorganization of the ownership of
Tevecap. As a result of the proposed reorganization a new Brazilian corporation
would become an 80.0% shareholder in Tevecap and Hearst/ABC would remain a 20.0%
shareholder in Tevecap. The new structure would not result in any change in the
current beneficial equity participation of the Stockholders in Tevecap, and the
transactions establishing the new structure and the new structure itself would
have to conform to the restrictions of the Indenture. As of the date hereof, the
timing of the restructuring is under discussion by the Stockholders. See
"Principal Shareholders."
THE BRAZILIAN PAY TELEVISION MARKET
Brazil is the largest television and video market in Latin America with an
estimated 33.9 million TV Homes which, as of December 31, 1995, watched on
average more than 4.0 hours of television per day, as compared to an average of
4.5 hours in the United States. Approximately 6.2 million television sets and
1.9 million VCR units were sold in Brazil during 1995. The pay television
industry in Brazil began in 1989 with the commencement by the Company of UHF
service in Sao Paulo. As of September 30, 1996, there were an estimated 1.6
million pay television subscribers, representing approximately 4.7% of Brazilian
TV Homes. By comparison, as of December 31, 1995, 51.1% of TV Homes in
Argentina, 12.6% of TV Homes in Mexico, 21.7% of TV Homes in the United Kingdom
and 69.2% of TV Homes in the United States subscribed to pay television.
Management believes that the number of pay television subscribers in Brazil will
continue to grow as pay television reaches more households both through the
expansion of existing and new MMDS and Cable systems and through development of
nationwide DBS systems. The Ministry of Communications estimates that Brazil
will have 16.5 million pay television subscribers by 2003.
COMPANY OPERATIONS
MMDS AND CABLE SYSTEMS. TVA's strategy of rapidly deploying an extensive
MMDS network has allowed it to enter new markets quickly and develop broad
geographic coverage which the Company may expand utilizing signal repeaters. TVA
has developed Brazil's largest MMDS network and, with the Operating Ventures,
serves the country's major metropolitan areas. MMDS systems are typically easier
to deploy and require relatively little capital investment for construction and
maintenance as compared to Cable systems. The MMDS systems of the Company and
the Operating Ventures currently provide 15 to 18 channels of programming.
Management expects this number to increase to 31 soon after the Ministry of
Communications grants additional channel rights as allowed under recently passed
regulations. See "Business--Regulatory Framework."
TVA has recently emphasized the strategic deployment of Cable service and
currently operates Cable systems in Sao Paulo, Curitiba and three other cities.
As of September 30, 1996, TVA had deployed approximately 900 kilometers of
cable, including 80 kilometers of fiber optic cable, that passed approximately
270,000 homes. By the end of 1996, the Company added an additional 890
kilometers to its Cable systems. As part of this buildout plan, the Company
constructed a 281 kilometer fiber optic network, including a 57 kilometer fiber
optic loop in Sao Paulo and a 28 kilometer fiber optic network in
9
<PAGE>
Curitiba and began upgrading or constructing four recently acquired Cable
systems. As a result, management believes that TVA Cable systems, as of the end
of 1996, passed more than 494,000 homes. Additionally, Canbras TVA is
constructing Cable networks in ten cities within the greater Sao Paulo area with
a combined population of over 2.8 million. All of these Cable systems have been
designed for or are being upgraded to either 750 or 550 MHz bandwidth capacity,
the latter of which is readily upgradeable to 750 MHz bandwidth capacity. The
Cable systems of TVA and Canbras TVA currently offer between 31 and 44 analog
channels of programming (including off-air channels).
DBS SYSTEMS. In July 1996, the Company, through Galaxy Brasil, launched
DIRECTV, Brazil's first Ku-Band service. GLA provides Galaxy Brasil with
programming, scheduling and related services for Galaxy Brasil's DIRECTV service
and Galaxy Brasil exclusively markets and sells the DIRECTV service in Brazil.
With DIRECTV service, TVA provided 49 channels of video programming (including
19 pay-per-view channels) as of September 30, 1996, with the intention to
provide up to 70 channels of video programming and 30 channels of audio
programming. Since September 30, 1996, the number of channels offered by the
Company with DIRECTV service has increased to 56. In addition, since September
30, 1996, a competitor has entered the Ku-Band market, but currently offers only
26 channels of programming (including four pay-per-view channels). As of
September 30, 1996, the Company had commenced only a limited regional roll-out
in the Sao Paulo area. The Company began a nationwide rollout of DIRECTV in
November 1996, at which time TVA initiated a publicity campaign supported by a
nationwide network of trained installers. By comparison, DIRECTV, Inc., a unit
of Hughes Electronics, started its DIRECTV service in the United States in June
1994 and, as of September 30, 1996, had approximately 1.9 million subscribers.
During 1997, management expects that a new Delaware limited liability company
will be established, the principal asset of which will be GLA's satellite uplink
facility. The new company will be owned by two subsidiaries of Hughes
Electronics. In connection with the establishment of the new company, TVA
Communications and Tevecap have agreed, pursuant to the Indemnification
Agreement, to provide certain indemnities in favor of GLA, Hughes Communications
GLA, the newly-established company and its shareholders. To secure its
obligations under the Indemnification Agreement, Tevecap has agreed to pledge
its equity interest in GLA, as well as any future notes or interests it may hold
relating to the uplink facility.
TVA has offered a C-Band service since 1993, and is the only pay television
operator to deliver a digital C-Band signal in Brazil. Currently, TVA's C-Band
service delivers 26 channels (including nine Second Audio Programming ("SAP")
channels) and, with further digital compression, TVA expects to increase the
number of channels to 38 (including SAP channels). By comparison, TVA's only
significant C-Band competitor offers six analog channels. As of September 30,
1996, there were over 3.7 million C-Band dish antennae in Brazil, most of which
were used to receive only off-air channels. This installed base represents the
Company's target market for its digital C-Band service and the Company expects
to attract these viewers through marketing and promotional initiatives.
PROGRAMMING. Management believes its programming provides a significant
competitive advantage by attracting and retaining subscribers. TVA holds equity
interests in two Programming Ventures, ESPN Brasil Ltda. and HBO Brasil
Partners, both of which provide programming to TVA. ESPN Brasil Ltda. produces
and packages Brazilian sporting events and holds exclusive rights, as of January
1997, to many major Brazilian soccer championships. ESPN Brasil Ltda. also
packages international sporting events and ESPN2 programming specifically for
the Brazilian market. HBO Brasil Partners packages and distributes HBO Brasil,
which airs popular first-run movies 24 hours a day, either dubbed or subtitled
in Portuguese. TVA has exclusive distribution rights to ESPN Brasil in Sao
Paulo, Rio de Janeiro, Curitiba, Brasilia, Belem and Goiania and is currently
the sole distributor of HBO Brasil and has exclusive distribution rights to this
channel in TVA's served markets.
TVA, in addition to its interests in the Programming Ventures, has entered
into agreements with international programmers such as ABC, Hearst, Time Warner
and Sony to gain the rights to sports, movies, news, arts and entertainment
programming for distribution in Brazil. Management expects TVA
10
<PAGE>
to soon offer Cinemax as part of its DIRECTV service and to introduce CNA, a
Brazilian news channel to be produced by Abril. TVA also generates revenue by
selling its programming to the Operating Ventures and the Independent Operators
as well as to GLA (to be packaged as part of GLA's DIRECTV service) and by
selling advertising spots to be aired on its programming.
SUBSCRIBERS AND HOUSEHOLDS RECEIVING TVA PROGRAMMING
Through the Owned Systems, TVA directly serves over 335,000 subscribers.
Together, these subscribers represent approximately 21.0% of all Brazilian pay
television subscribers.
<TABLE>
<CAPTION>
DECEMBER SEPTEMBER
31, 30, %
SUBSCRIBERS--OWNED SYSTEMS 1995 1996 CHANGE
----------- ------------ -----------
<S> <C> <C> <C>
MMDS(a).................................................. 188,893 229,656 21.6%
Cable(b)................................................. 15,129 39,253 159.5
DIRECTV and Digital C-Band............................... 15,126 47,436 213.6
----------- ------------
219,148 316,345 44.4
Paid Subscribers Awaiting Installation(c)................ 18,343 19,691 7.3
----------- ------------
Total Subscribers--Owned Systems......................... 237,491 336,036 41.5
----------- ------------
----------- ------------
</TABLE>
- ------------------------
(a) Includes UHF subscribers which, as of September 30, 1996, totaled 11,453.
(b) Reflects the purchase by the Company of existing cable systems in Curitiba,
Foz do Iguacu and Camboriu, during 1996.
(c) Subscribers who have paid an installation fee but are awaiting the
installation of service.
Through the Operating Ventures, TVA has minority interests in two pay
television operators which, together, serve over 66,000 subscribers.
<TABLE>
<CAPTION>
SEPTEMBER 30,
SUBSCRIBERS--OPERATING VENTURES DECEMBER 31, 1995 1996 % CHANGE
----------------- ----------------- -----------
<S> <C> <C> <C>
MMDS........................................... 35,572 62,774 76.5%
Cable.......................................... -- 3,614 --
------- -------
Total Subscribers--Operating Ventures.......... 35,572 66,388 86.6
------- -------
------- -------
</TABLE>
Through the Owned Systems and the Operating Ventures, and through sales of
programming to the Independent Operators, TVA's programming reaches over 955,000
pay television households, which represent approximately 60.0% of all Brazilian
pay television households.
<TABLE>
<CAPTION>
DECEMBER SEPTEMBER
31, 30,
HOUSEHOLDS RECEIVING TVA PROGRAMMING 1995 1996 % CHANGE
----------- ------------ -----------
<S> <C> <C> <C>
Owned Systems.......................................... 237,491 336,036 41.5%
Operating Ventures..................................... 35,572 66,388 86.6
Independent Operators.................................. 341,699 555,049 62.4
----------- ------------
Total.................................................. 614,762 957,473 55.7
----------- ------------
----------- ------------
</TABLE>
11
<PAGE>
COMPETITIVE ADVANTAGES
Management believes that the Company has the following competitive
advantages:
SUPERIOR QUALITY PROGRAMMING LINEUP. TVA's programming line-up includes
exclusive rights to ESPN Brasil in the Company's major markets, with exclusive
coverage, as of January 1997, of many of Brazil's most important soccer
championships, including the Brasil Cup, the Brazilian Championship and the Sao
Paulo and Rio de Janeiro State Championships. The Company exclusively offers CMT
Brasil and Bravo Brasil and is also the only pay television provider offering
HBO programming in TVA's served markets. Management believes that as the pay
television industry grows, programming will become the critical factor driving
consumer selection of a pay television provider, and that with TVA's
relationships with strong international partners and its exclusive soccer
coverage, TVA will continue to offer superior quality programming.
STRATEGIC DEPLOYMENT OF ALTERNATIVE DISTRIBUTION TECHNOLOGIES. The Company
is the only pay television operator utilizing five distribution technologies:
MMDS, Cable, Ku-Band, C-Band and UHF. The availability of multiple distribution
technologies enables the Company to capitalize on the population and income
characteristics, topography and competitive dynamics of each of its targeted
markets. The Company has the ability to penetrate new markets quickly and
efficiently and to offer tiered programming at low cost with MMDS. The Company
is expanding its Cable systems, where warranted by economic and competitive
conditions, to build its subscriber base and to prepare for future opportunities
in interactive services and telecommunications. Additionally, management
believes the Company can rapidly penetrate virtually any market through the
continued deployment of its DBS Systems.
DBS SYSTEMS: NATIONWIDE COVERAGE AND DIGITAL SERVICE. Through its DBS
Systems, TVA is capable of offering programming to nearly all of Brazil's 33.9
million TV Homes, including those households in markets where Cable or MMDS
systems are either not developed or not economically viable. Through its DIRECTV
service, TVA was the first provider of Ku-Band pay television services in Brazil
and expects to enroll as subscribers a significant share of those who are
interested in broader, digital quality programming and pay-per-view services.
Through its digital C-Band system, the Company provides 26 channels of
programming (including nine SAP channels) and is capable of providing up to 38
channels of programming (including SAP channels). The Company's only significant
competitor in C-Band pay television service provides six analog channels of
programming in addition to off-air channels. The Company currently targets its
C-Band service to the over 3.7 million C-Band satellite dish owners in Brazil,
most of whom currently receive only the off-air channels.
MODERN CABLE INFRASTRUCTURE. The Company's Cable systems are constructed
with, or are being upgraded to, either 750 MHz or 550 MHz bandwidth capacity,
the latter of which is readily upgradeable to 750 Mhz bandwidth capacity with
only moderate investment. This Cable technology will enable the Company to
provide data transmission and interactive services, including
telecommunications, in the future. Management believes that the Company's major
competitors for Cable service use narrower bandwidths over portions of their
Cable systems and have installed certain types of Cable in households which
currently may prevent them from providing telecommunications or high speed data
delivery through these portions of their systems until substantial additional
investments have been made for system reconstruction or upgrade.
STRONG STRATEGIC PARTNERS. The Company's strategic equity partners continue
to offer valuable expertise. TVA benefits from Abril's extensive experience in
the business of subscriptions and distribution and from the collective
experience of Falcon International, Hearst and ABC with regard to pay television
operations and from access to programming.
12
<PAGE>
BUSINESS STRATEGY
TVA seeks to be Brazil's largest and most profitable pay television operator
and programming distributor and intends to capitalize on the convergence and
development of voice, video and telecommunications services. The Company intends
to achieve these goals through the following strategies:
MAXIMIZE PENETRATION IN EXISTING MARKETS. The Company seeks to increase its
penetration of existing markets by: (i) expanding the range of TVA's Cable
systems by extending its fiber optic and coaxial cable network and by seeking
prewiring arrangements with residential housing developers, (ii) improving the
signal quality and coverage of TVA's MMDS systems by using signal repeater
technology, (iii) maximizing penetration by offering tiered subscription options
and developing programming packages to appeal to more households and (iv)
expanding its penetration in ABC Class households through its scheduled
nationwide rollout of DIRECTV service and the continued development of C-Band
service.
MAXIMIZE CUSTOMER RETENTION THROUGH SUPERIOR CUSTOMER SERVICE. In order to
maximize customer retention, the Company aims to provide a consistently high
level of customer service. The Company has developed or has acquired the right
to use proprietary management information systems which, among other things,
provide Company representatives immediate access to customer records and
correspondence history. This enables TVA to provide high quality service to its
clients while monitoring subscriber payment patterns. The Company's Churn rate,
which reflects the ability of the Company to retain subscribers, averaged
approximately 2.0% per month during the nine month period ended September 30,
1996. The average monthly Churn rate for MMDS service in 1994 was 1.6%, in 1995
was 1.3%, and for the nine month period ended September 30, 1996, was 2.1%. The
average monthly Churn rate for Cable service in 1994 (the year Cable service was
initiated) was less than 1.0%, in 1995 was 1.1%, and for the nine month period
ended September 30, 1996, was 0.7%. The average monthly Churn rate for C-Band
service in 1994 was 5.3%, in 1995 was 0.1% and for the nine month period ended
September 30, 1996, was 2.0%. Ku-Band service was initiated in July 1996.
ENHANCE TVA'S PROGRAMMING PACKAGE. In order to maintain and enhance its
position as a provider of superior programming in Brazil, TVA is developing new
programming through the programming Ventures, as well as through Abril and other
partners. TVA frequently evaluates the demographics of its subscribers and
potential subscribers and seeks to provide programming most in demand. The
Company also takes advantage of opportunities to enter into exclusive
distribution agreements for popular television programming in Brazil. Management
believes that its DIRECTV service, which includes both basic and premium
channels, as well as pay-per-view movies and events from Brazil, other Latin
American countries, Europe, Asia and the United States, further enhances TVA's
programming offerings and positions the Company to be the provider of the widest
selection of popular programming in Brazil.
ENTER NEW MARKETS. The Company intends to enter new markets by: (i)
acquiring existing MMDS and Cable operations, (ii) applying either
independently, or in conjunction with the Operating Ventures, independent pay
television providers or other appropriate third parties, for new MMDS and Cable
licenses offered by the Brazilian Government, (iii) initiating the nationwide
rollout of DIRECTV service and (iv) investing in new operating ventures with
other MMDS and Cable operators. The Brazilian Government has recently announced
its intention to auction MMDS licenses in 15 state capitals. Although no date
has been set for these auctions, management expects them to occur during 1997.
The Company has submitted proposals, either individually or in conjunction with
local partners, for all such licenses, as well as for additional licenses
throughout Brazil.
CONTINUE NETWORK ENHANCEMENT. The Company is positioning itself to provide
high-speed data transmission, interactive and other telecommunications service
over its systems and to take advantage of possible deregulation and the growing
demand for these services in Brazil. The Company is expanding its Cable systems
with fiber optic and coaxial cable capable of being upgraded to provide such
enhanced services. In addition, the Company continues to explore the development
of digital compression of MMDS signals.
13
<PAGE>
THE EXCHANGE OFFER
<TABLE>
<S> <C>
The Exchange Offer.................. Tevecap is offering to exchange pursuant to the
Exchange Offer an aggregate principal amount of up to
US$250,000,000 principal amount of its 12 5/8% Senior
Notes due 2004 (the "Exchange Notes") together with
the Subsidiary Guarantees of the Exchange Notes (such
Subsidiary Guarantees and the Exchange Notes
together, the "Exchange Securities"), for a like
principal amount of its 12 5/8% Senior Notes due 2004
(the "Old Notes") together with the Subsidiary
Guarantees of the Old Notes (such Subsidiary
Guarantees and Old Notes together, the "Old
Securities"). Tevecap will issue the Exchange
Securities on or promptly after the Expiration Date.
As of the date of this Prospectus, US$250,000,000
aggregate principal amount of Old Notes is
outstanding. The terms of the Exchange Securities are
identical in all material respects to the terms of
the Old Securities for which they may be exchanged
pursuant to this offer, except that the Exchange
Securities have been registered under the Securities
Act and are issued free from any covenant regarding
registration, and except that if the Registered
Exchange Offer is not consummated by May 23, 1997,
Tevecap will be obligated to pay each holder of the
Old Notes an amount equal to $0.192 per week per
$1000 of the Old Notes until the Registered Exchange
Offer is consummated. The Exchange Securities will
evidence the same debt as the Old Securities and will
be issued under and be entitled to the same benefits
under the Indenture as the Old Securities. The
Issuance of the Exchange Securities and the
Registered Exchange Offer is intended to satisfy
certain obligations of Tevecap and the Subsidiary
Guarantors under the Purchase Agreement and pursuant
to certain registration rights granted under the
Exchange and Registration Rights Agreement. See "The
Registered Exchange Offer" and "Description of the
Notes."
Interest Payments................... Interest on the Exchange Notes shall accrue from the
last Interest Payment Date (May 26 or November 26) on
which interest was paid on the Old Notes surrendered
or, if no interest has been paid on such Old Notes,
from November 26, 1996. See "The Exchange
Offer--Interest on the Exchange Notes."
Expiration Date..................... The Registered Exchange Offer will expire at 5:00
p.m., New York City time, on May 23, 1997, unless
extended by Tevecap in its sole discretion. See "The
Registered Exchange Offer--Expiration Date;
Extensions."
Exchange Date....................... The date of acceptance for exchange of the Old Notes
and the consummation of the Registered Exchange Offer
will be the first business day following the
Expiration Date unless
</TABLE>
14
<PAGE>
<TABLE>
<S> <C>
extended. See "The Registered Exchange Offer--Terms
of the Exchange."
Withdrawal Rights................... Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date;
otherwise, all tenders will be irrevocable. See "The
Registered Exchange Offer--Withdrawal of Tenders."
Procedures for Tendering Notes...... See "The Registered Exchange Offer--Exchange Offer
Procedures."
Federal Income Tax Consequences..... The exchange of Old Securities for the Exchange
Securities pursuant to the Registered Exchange Offer
will not result in any income, gain or loss to
holders who participate in the Registered Exchange
Offer or to Tevecap for U.S. income tax purposes. See
"Income Tax Considerations."
Resale.............................. Tevecap is making the Registered Exchange Offer in
reliance on the position of the staff of the
Commission as set forth in certain no-action letters
addressed to other parties in other transactions.
However, Tevecap has not sought its own no-action
letter and there can be no assurance that the staff
of the Commission would make a similar determination
with respect to the Registered Exchange Offer as in
such other circumstances. Based on these
interpretations by the staff of the Commission,
Tevecap believes that Exchange Securities issued
pursuant to this Registered Exchange Offer in
exchange for Old Securities may be offered for
resale, resold and otherwise transferred by a holder
thereof (other than (i) a broker-dealer who acquired
the Old Securities as a result of market making
activities or other trading activities, (ii) an
Initial Purchaser who acquired the Old Securities
directly from the Company solely in order to resell
pursuant to Rule 144A of the Securities Act or any
other available exemption under the Securities Act,
or (iii) a person that is an "affiliate" (as defined
in Rule 405 of the Securities Act) of Tevecap)
without compliance with the registration and
prospectus delivery provisions of the Securities Act,
provided that such Exchange Securities are acquired
in the ordinary course of such holder's business and
that such holder is not participating, and has no
arrangement or understanding with any person to
participate, in the distribution of such Exchange
Securities. Holders of Old Securities accepting the
Registered Exchange Offer will represent to Tevecap
in the Letter of Transmittal that such conditions
have been met. Any holder who participates in the
Registered Exchange Offer for the purpose of
participating in a distribution of the Exchange
Securities may not rely on the position of the staff
of the Commission as set forth in these no-action
letters and would have to comply with the
registration and prospectus delivery requirements of
the Securities Act in connection with any secondary
resale transaction. Each broker-dealer who
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
receives Exchange Securities for its own account
pursuant to the Registered Exchange Offer must
acknowledge that it acquired the Old Securities as
the result of market-making activities or other
trading activities and will deliver a prospectus in
connection with any resale of such Exchange
Securities. The Letter of Transmittal states that by
so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities
Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a
broker-dealer in connection with resales of Exchange
Securities received in exchange for Old Securities
where such Old Securities were acquired by such
broker-dealer as a result of market-making activities
or other trading activities. In addition, pursuant to
Section 4(3) under the Securities Act, until July 21,
1997, all dealers effecting transactions in the
Exchange Securities, whether or not participating in
the Registered Exchange Offer, may be required to
deliver a Prospectus. Each of Tevecap and the
Subsidiary Guarantors has agreed that, for a period
of 90 days after the date of this Prospectus, it will
make this Prospectus available to any broker-dealer
for use in connection with any such resale. See "The
Registered Exchange Offer" and "Plan of
Distribution."
Remaining Old Notes................. Holders of Old Securities who do not tender their Old
Securities in the Registered Exchange Offer or whose
Old Securities are not accepted for exchange will
continue to hold such Old Securities and will be
entitled to all the rights and preferences, and will
be subject to the limitations, applicable thereto
under the Indenture. All untendered and tendered but
unaccepted Old Securities (collectively, the
"Remaining Old Securities") will continue to bear
legends restricting their transfer. In general, the
Old Securities may not be offered or sold, unless
registered under the Securities Act, except pursuant
to an exemption from, or in a transaction not subject
to, the Securities Act and applicable state
securities laws. To the extent that the Registered
Exchange Offer is effected, the trading market, if
any, for Remaining Old Securities could be adversely
affected. See "Risk Factors--Factors Relating to the
Company and the Exchange Securities--Consequences of
Failure to Properly Tender Old Securities Pursuant to
the Registered Exchange Offer." See "The Registered
Exchange Offer--Terms of the Exchange."
Exchange Agent...................... The exchange agent with respect to the Exchange Offer
is The Chase Manhattan Bank (the "Exchange Agent").
The address and telephone number of the Exchange
Agent are set forth in "The Exchange Offer--Exchange
Agent."
</TABLE>
16
<PAGE>
<TABLE>
<S> <C>
Use of Proceeds..................... There will be no proceeds to Tevecap from the
exchange pursuant to the Exchange Offer. See "Use of
Proceeds."
</TABLE>
THE EXCHANGE NOTES
<TABLE>
<S> <C>
Issuer.............................. Tevecap S.A.
Notes Offered....................... $250,000,000 aggregate principal amount of 12 5/8%
Senior Notes due 2004 (the "Exchange Notes" and,
together with the Old Notes, the "Notes").
Maturity............................ November 26, 2004.
Interest Payment Dates.............. May 26 and November 26 of each year, commencing on
May 26, 1997.
Withholding Taxes; Additional
Amounts........................... Payments in respect of the Notes are not subject to
withholding taxes imposed by Brazil, provided that
the Notes are not redeemed prior to November 26,
2004. If the Notes are redeemed for any reason prior
to November 26, 2004, then Brazilian withholding
taxes will be imposed retroactively on interest, fees
and commissions paid by Tevecap in connection with
the Notes from the date of issuance through the date
of such redemption. Tevecap and the Guarantors have
agreed to pay such Additional Amounts (as defined) in
respect of such Brazilian withholding taxes as will
result in receipt by the holders of Notes of such
amounts as would have been received by them had no
such withholding or deduction been required, except
to the extent set forth under "Description of Notes--
Additional Amounts." See also "Income Tax
Considerations--Brazil."
Sinking Fund........................ None.
Optional Redemption................. Except as described below, Tevecap may not redeem the
Notes prior to November 26, 2004. In the event
Tevecap receives Net Cash Proceeds (as defined) at
any time, on or prior to November 26, 2000, from one
or more (i) Significant Equity Offerings (as defined)
or (ii) sales of Tevecap's Capital Stock to a
Strategic Investor (as defined), Tevecap may redeem
up to $75.0 million of the aggregate principal amount
of the Notes at a price equal to 112.625% of the
principal amount to be redeemed, together with
accrued and unpaid interest, if any, to the date of
redemption, provided that at least $175.0 million of
the aggregate principal amount of the Notes remains
outstanding after each such redemption. In addition,
Tevecap may redeem the Notes at any time, in whole
but not in part, at a price equal to 100% of their
principal amount, together with accrued and unpaid
interest, if any, to the date of redemption, in the
event of certain changes affecting the withholding
tax treatment of the Notes with the occurrence
</TABLE>
17
<PAGE>
<TABLE>
<S> <C>
of such events to be determined by the Company in
accordance with the terms of the Notes. See
"Description of Notes--Optional Redemption" and
"--Redemption for Changes in Withholding Taxes."
Change of Control................... Upon the occurrence of a Change of Control (as
defined), each holder will have the right to require
Tevecap to make an offer to repurchase the Notes held
by such holder at a price equal to 101% of the
principal amount thereof, together with accrued and
unpaid interest, if any, to the date of repurchase.
See "Description of Notes--Change of Control."
Subsidiary Guarantees............... The Notes are jointly and severally guaranteed (the
"Subsidiary Guarantees"), on a senior basis, by all
of Tevecap's Restricted Subsidiaries (as defined)
existing on the date the Notes were issued and each
Restricted Subsidiary acquired thereafter (the
"Guarantors"). See "Description of Notes--Subsidiary
Guarantees."
Ranking............................. The Notes are unsecured, senior obligations of
Tevecap ranking PARI PASSU in right of payment with
all other existing and future unsecured, senior
Indebtedness (as defined) of Tevecap and senior in
right of payment to all other existing and future
subordinated Indebtedness of Tevecap. The Subsidiary
Guarantees are unsecured, senior obligations of the
Guarantors ranking PARI PASSU in right of payment
with all other existing and future unsecured, senior
Indebtedness of the Guarantors and senior in right of
payment to all other existing and future subordinated
Indebtedness of the Guarantors. However, subject to
certain limitations set forth in the Indenture,
Tevecap and its Subsidiaries may incur other senior
Indebtedness, including Indebtedness that is secured
by the assets of Tevecap and its Subsidiaries. At
September 30, 1996, after giving effect to the
issuance of the Old Notes and the application of the
net proceeds therefrom, the Tevecap would not have
had any outstanding senior Indebtedness of Tevecap,
other than the Notes (exclusive of unused
commitments) and the aggregate principal amount of
outstanding senior Indebtedness of the Guarantors,
other than the Subsidiary Guarantees, would have been
$4.6 million (exclusive of unused commitments and
short term indebtedness) all of which ranks pari
passu with the Subsidiary Guarantees, but none of
which was secured Indebtedness. As of April 1, 1997,
Tevecap did not have any outstanding senior
Indebtedness other than the Notes (exclusive of
unused commitments and short term indebtedness), and
the aggregate principal amount of outstanding senior
Indebtedness of the Guarantors was $6.1 million
(exclusive of unused commitments and short term
indebtedness) all of which ranks pari passu with the
Subsidiary Guarantees, and none of which is secured.
</TABLE>
18
<PAGE>
<TABLE>
<S> <C>
Although the Notes are titled "senior" securities,
Tevecap has not issued any Indebtedness to which the
Notes would rank senior.
Restrictive Covenants............... The Indenture under which the Notes are issued (the
"Indenture") contains certain covenants which will
limit (i) the incurrence of additional indebtedness
and the issuance of Disqualified Stock by Tevecap and
its Restricted Subsidiaries, (ii) the payment of
dividends on, and the redemption of, capital stock of
Tevecap and the redemption of certain subordinated
obligations of Tevecap, (iii) investments, (iv) sales
of assets and stock of Restricted Subsidiaries, (v)
transactions with affiliates, (vi) the creation and
existence of liens, (vii) investments in Unrestricted
Subsidiaries (as defined), (viii) the types of
businesses Tevecap and its Restricted Subsidiaries
may conduct and (ix) consolidations, mergers and
transfers of all or substantially all of Tevecap's
assets. The Indenture also prohibits certain
restrictions on distributions from Restricted
Subsidiaries. However, all of these limitations and
prohibitions are subject to a number of important
qualifications and exceptions. See "Descriptions of
Notes-- Certain Covenants."
</TABLE>
RISK FACTORS
Prospective investors in the Notes should carefully consider all of the
information set forth in this Prospectus and, in particular, should evaluate the
specific factors set forth under "Risk Factors."
19
<PAGE>
SUMMARY HISTORICAL FINANCIAL AND OTHER DATA
The historical data as of December 31, 1995 and 1994, and for the three
years in the period ended December 31, 1995 have been derived from, and should
be read in conjunction with, the audited Financial Statements of the Company
included elsewhere in this Prospectus. The unaudited financial data set forth
below as of and for the nine month period ended September 30, 1996 and for the
nine month period ended September 30, 1995 have been derived from the unaudited
Financial Statements of the Company. The historical data as of December 31, 1992
and 1993 and for the year ended December 31, 1992 are derived from the audited
Financial Statements of the Company that are not included elsewhere in this
Prospectus. The historical data as of September 30, 1995 are derived from the
unaudited Financial Statements of the Company that are not included elsewhere in
this Prospectus.
As required by Brazilian law, and in accordance with local accounting
practices, the financial records of Tevecap and its subsidiaries are maintained
in the applicable Brazilian currency (the REAL). However, the Financial
Statements are presented in US dollars. 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 Financial
Statements. Because of the differences between the evolution of the rates of
inflation in Brazil and the changes in the rates of devaluation, amounts
presented in US dollars may show distortions when compared on a period-to-period
basis.
The results of operations for the nine month period ended September 30, 1996
are not necessarily indicative of the results expected for the year ending
December 31, 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ --------------------
<S> <C> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SELECTED OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATING DATA:
Gross revenues
Monthly subscriptions.................................... $ 7,070 $ 12,544 $ 27,976 $ 62,496 $ 41,296 $ 85,301
Installation............................................. 1,857 4,350 6,997 26,045 17,995 39,396
Indirect programming(a).................................. 512 530 1,626 2,866 2,114 5,278
Other(b)................................................. 1,322 2,468 7,173 10,603 7,699 10,657
Revenue taxes(c)........................................... (305) (371) (872) (7,506) (5,171) (8,881)
--------- --------- --------- --------- --------- ---------
Total net revenue.......................................... 10,456 19,521 42,900 94,504 63,933 131,751
--------- --------- --------- --------- --------- ---------
Direct operating expenses(d)............................... 32,905 29,779 28,659 62,026 42,279 75,557
Selling, general and administrative expenses............... 17,834 19,957 24,370 46,902 30,787 53,710
Depreciation and Amortization.............................. 2,704 4,813 6,177 13,268 8,865 18,547
Allowance for inventory obsolescence....................... -- -- -- -- -- 2,493
--------- --------- --------- --------- --------- ---------
Total operating expenses................................... 53,443 54,549 59,206 122,196 81,931 150,307
--------- --------- --------- --------- --------- ---------
Operating loss............................................. (42,987) (35,028) (16,306) (27,692) (17,998) (18,556)
Nonoperating expenses
Interest expense......................................... (13,538) (8,492) (16,413) (17,745) (12,493) (10,125)
Equity in income (losses) of affiliates(e)............... -- -- 383 (3,672) (2,084) (6,642)
Other nonoperating (expenses) income, net(f)............. 2,232 5,892 20,339 8,039 5,158 (1,592)
Income tax expense....................................... -- -- -- -- -- (105)
--------- --------- --------- --------- --------- ---------
Net loss................................................... $ (54,293) $ (37,628) $ (11,997) $ (41,070) $ (27,417) $ (37,020)
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
OTHER DATA:
EBITDA--TV Group(g)........................................ $ (40,283) $ (30,215) $ (10,129) $ (13,318) $ (8,462) $ 8,533
EBITDA--Galaxy Brasil(g)................................... -- -- -- (1,106) (671) (6,049)
--------- --------- --------- --------- --------- ---------
EBITDA(g)(h)............................................... (40,283) (30,215) (10,129) (14,424) (9,133) 2,484
Pro forma interest expense(i).............................. 38,623 29,940
Purchase of fixed assets................................... 7,627 11,379 22,369 93,029 52,987 72,538
Ratio of earnings to fixed charges(j)...................... -- -- -- -- -- --
CASH FLOW DATA:
Cash provided by (used in) operating activities (h)........ (32,633) (19,180) (9,707) 22,989 1,099 (5,385)
Cash provided by (used in) investing activities............ (11,761) (13,190) (24,334) (119,661) (68,541) (111,800)
Cash provided by (used in) financing activities............ 44,088 32,348 38,666 116,229 62,837 93,603
SELECTED OPERATING DATA:
Number of Subscribers to Owned Systems(k).................. 42,924 82,985 114,853 219,148 198,157 316,345
Average monthly revenue per Subscriber(l).................. $ 18.64 $ 21.30 $ 27.80 $ 33.24 $ 33.48 $ 37.66
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents................................ $ 41 $ 19 $ 4,644 $ 24,201 $ 39 $ 619
Property, plant and equipment............................ 29,561 35,859 51,426 131,266 95,756 188,063
Total assets............................................. 40,779 45,529 80,441 218,848 148,473 291,154
Loans from affiliated companies.......................... 42,577 89,769 -- 586 22,301 91,926
Long-term liabilities.................................... 67,736 97,105 4,523 9,604 29,816 105,330
Redeemable common shares................................. -- -- 19,754 149,534 69,754 163,225
Total shareholders' equity............................... (54,483) (92,111) 27,590 (18,260) 173 (68,971)
</TABLE>
See accompanying Notes to Summary Historical Financial And Other Data
20
<PAGE>
NOTES TO SUMMARY HISTORICAL FINANCIAL AND OTHER DATA
(a) Represents revenues received by the Company for selling programming to the
Independent Operators.
(b) Includes Advertising and Other revenues.
(c) Represents various non-income based taxes paid on certain of the Company's
gross revenue items with rates ranging from 2.65% to 7.65%.
(d) Represents costs directly related to Monthly subscriptions, and a portion of
Installation, Indirect programming and Other revenues.
(e) Represents the Company's pro rata share of the Net loss or income of its
equity investments.
(f) Includes Interest income, Translation gain or loss, Other nonoperating
(expenses) income, net, and Minority interest. The amount included for the
year ended December 31, 1994 includes Interest income totaling $21,806.
During that year, the Company received capital contributions from
stockholders which resulted in a surplus of cash invested during such
period.
(g) EBITDA represents the sum of (i) net income (loss), plus, without
duplication, (ii) income tax expense, (iii) interest expense (income), net,
(iv) other nonoperating (expenses) income, net (v) depreciation,
amortization and all other non-cash charges, less (vi) non-cash items
increasing net income (loss) (with the exception of amortized deferred
sign-on and hookup fee revenue), in each case determined in accordance with
GAAP. EBITDA-TV Group and EBITDA-Galaxy Brasil represent operating loss plus
depreciation and amortization. The term "TV Group" refers to the operations
of TVA, excluding the operations of Galaxy Brasil. The TV Group, which
constitutes the operations of TVA, excluding the operations of Galaxy
Brasil, represents the more mature operations of the Group while Galaxy
Brasil remains in a start up phase and has yet to collect material revenues
to offset the costs of initiating the Ku-Band service. EBITDA has been
presented separately for the TV Group and Galaxy Brasil to take account of
the different stages of development of these operations.
(h) Cash provided by (used in) operating activities (hereinafter referred to as
cash flows from operating activities) has been determined in accordance with
GAAP while EBITDA has been calculated in accordance with the definition in
footnote (g). In accordance with GAAP, cash flows from operating activities
generally reflect the cash effects of transactions and other events that
enter into the determination of net income. The principal difference between
EBITDA and cash flows from operating activities arise as a result of the
treatment of the changes in the balances of operating assets and liabilities
from the beginning to the end of a reporting period. That is, in accordance
with GAAP, such changes are components of cash flows from operating
activities while there is no similar adjustment in the calculation of
EBITDA. EBITDA has been presented as it is a financial measure commonly used
in the Company's industry. EBITDA should not be considered as an alternative
to cash provided by (used in) operating activities, as an indicator of
operating performance or as a measure of liquidity.
(i) Represents interest expense on a pro forma basis, resulting from the
offering of Old Securities and the application of the net proceeds therefrom
as follows:
<TABLE>
<CAPTION>
NINE MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
--------------- ---------------
<S> <C> <C>
Historical interest expense...................................... $ 17,745 $ 10,125
Elimination of interest expense related to certain related
indebtedness................................................... (11,788) (4,684)
Interest resulting from the Notes based on an interest rate of
12.625%........................................................ 31,563 23,672
Amortization of deferred financing costs relating to the Notes... 1,103 827
--------------- ---------------
$ 38,623 $ 29,940
--------------- ---------------
--------------- ---------------
</TABLE>
(j) For the four years ended December 31, 1995 and the nine months ended
September 30, 1995 and 1996, earnings were insufficient to cover fixed
charges by $54,487, $37,920, $13,100, $38,269, $25,905 and $31,911,
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).
(k) Represents the number of Owned Systems' Subscribers as of the last day of
each period.
(l) Average monthly revenue per subscriber refers to the average monthly
subscription fee as of the last day of each period.
21
<PAGE>
RISK FACTORS
BEFORE TENDERING OLD SECURITIES FOR EXCHANGE SECURITIES, PROSPECTIVE
INVESTORS SHOULD CONSIDER CAREFULLY ALL THE INFORMATION SET FORTH HEREIN AND, IN
PARTICULAR, THE SPECIAL FACTORS APPLICABLE TO AN INVESTMENT IN BRAZIL AND
APPLICABLE TO AN INVESTMENT IN THE COMPANY, INCLUDING THOSE SET FORTH BELOW. IN
GENERAL, INVESTING IN THE SECURITIES OF ISSUERS IN DEVELOPING COUNTRIES, SUCH AS
BRAZIL, INVOLVES A HIGHER DEGREE OF RISK THAN INVESTING IN THE SECURITIES OF
ISSUERS IN THE UNITED STATES AND OTHER JURISDICTIONS. FOR ADDITIONAL INFORMATION
CONCERNING BRAZIL AND CERTAIN MATTERS DISCUSSED BELOW, SEE "ANNEX A--THE
FEDERATIVE REPUBLIC OF BRAZIL."
RISKS RELATING TO THE COMPANY
LIMITED OPERATING HISTORY; EARLY STAGE COMPANY
The Company, which began operating in 1989, has a limited operating history.
Accordingly, prospective investors have limited historical financial information
about the Company upon which to base an evaluation of the Company's performance
and an investment in the Notes. Since inception, the Company has sustained
substantial losses, due primarily to start-up costs, interest expense and
charges for depreciation and amortization arising from the development of its
pay television systems. Prospective investors should be aware of the
difficulties encountered by enterprises in the early stages of development,
particularly in light of the competitive nature of the Brazilian pay television
industry.
The Company derives most of its revenue from subscription revenue and
installation revenue. Subscriber penetration rates and subscriber sensitivity to
the price of installation and subscription fees will materially affect the
Company's results of operations. As TVA's networks mature, installation fees
will represent a declining portion of the Company's total revenues. The ability
of the Company to generate subscription revenue will depend on the acceptance of
its programming, which in turn will depend on the availability of programming at
a competitive cost and the relative appeal to subscribers of such programming.
There can be no assurance that the Company will be successful in establishing
and maintaining a substantial subscriber base or that it will generate revenues
which, when taken together with its sources of financing, will be sufficient to
meet its operating needs or capital requirements or to service its indebtedness,
including the Notes. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
OPERATING LOSSES AND NEGATIVE CASH FLOW
As of September 30, 1996, the Company had incurred cumulative net losses of
approximately $193 million since 1991 and as of September 30, 1996 the Company
had negative working capital of $45,773. The Company may continue to generate
net losses and negative funds from operations during the period in which the
Company develops and expands its pay television distribution systems and builds
its subscriber base. The Company's future operating profitability will depend
upon many factors, including, among others, its ability to market its products
and services successfully, achieve its projected market penetration, manage
subscriber turnover rates effectively and price its pay television services
competitively.
There can be no assurance that the Company will achieve or sustain operating
profitability and positive cash flows in the future. If the Company does not
achieve and maintain operating profitability and positive cash flows on a timely
basis, it may not be able to satisfy its future liquidity needs including
funding its working capital requirements and capital expenditures and meeting
its debt service requirements. Future capital expenditure requirements relate
primarily to: (i) the construction of cable networks and the installation of
equipment at subscribers' locations, (ii) the construction of additional
transmission and headend facilities and related equipment purchases, and (iii)
investments in, and maintenance of vehicles and administrative offices. In
addition, the Company has certain commitments that must be, or have been funded,
in connection with its Operating and Programming Ventures and minority
interests.
22
<PAGE>
These requirements and commitments are important to the future development of
the business. To date, the Company has relied on contributions and loans from
Abril and investments made by its other shareholders to fund its operations.
The Company has net operating loss carryforwards ("NOLs") totaling
approximately $118.6 million which are unexpirable. Although management believes
the Company will be profitable in the future and will be able to realize the
benefits from a portion of the NOLs, in accordance with Statement of Financial
Accounting Standards No. 109 (Accounting for Income Taxes), the Company has
established a valuation allowance for all of these net deferred tax assets due
to its cumulative losses. See Note 12 to the Tevecap Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ADDITIONAL FINANCING
If the Company fails to meet its projected operating results or its capital
needs exceed its projected requirements, the Company may require substantial
investment on a continuing basis to finance its corresponding capital
expenditures. The Company may also require substantial additional capital for
any new pay television license acquisitions or investments or acquisitions of
entities holding such licenses, or for any investments in or acquisitions of
other existing pay television operations in order to further expand the
Company's operations. The amount and timing of the Company's future capital
requirements will depend upon a number of factors, many of which are not within
the Company's control, including subscriber growth and retention, programming
costs, capital costs, marketing expenses, staffing levels, and competitive
conditions. There can be no assurance that the Company's future cash
requirements will not increase as a result of unexpected developments in the
Brazilian pay television industry. Due to its highly leveraged capital
structure, there can be no assurance that the Company will be able to arrange
additional financing to fund capital or other requirements until the Company
maintains positive operating cash flow or that any such financing will be on
terms acceptable to the Company. Following the receipt of any additional
financing, there can be no assurance that the Company will be able to generate
sufficient funds to meet its fixed charges and other obligations. The Indenture
restricts the amount of additional indebtedness the Company may incur, subject
to certain qualifications and exceptions. Failure to obtain any required
additional financing could adversely affect the growth of the Company and,
ultimately, could have a material adverse effect on the Company. See
"Description of Notes--Certain Covenants."
COMPETITIVE INDUSTRY
The pay television industry in Brazil is, and is expected to continue to be,
highly competitive. The Company competes with providers of pay television
services utilizing Cable, MMDS, C-Band technology and, in the near future,
Ku-Band delivery systems and any new delivery systems which may be introduced,
as well as existing off-air broadcast television networks, movie theaters, video
rental stores and other entertainment and leisure activities generally. A number
of the Company's current and potential competitors have greater experience in
the television industry and greater resources, including financial resources,
than the Company.
TVA's principal competitors in Cable service are operations owned or
controlled by Multicanal, Net Brasil, Globo Cabo and RBS. Multicanal and Net
Brasil operate Cable service systems throughout much of Brazil, including Sao
Paulo Rio de Janeiro, Curitiba and several other large metropolitan areas. Globo
Cabo and RBS operate Cable systems in numerous smaller cities, including
Brasilia. RBS also provides MMDS service in Porto Alegre. Net Brasil also
provides MMDS service in Recife and has a license to provide MMDS service in
Curitiba. Globo Par and TV Globo, the owners of Brazil's most popular off-air
channels, control, or have significant interests, in each of Multicanal, Net
Brasil and Globo Cabo. RBS also holds an interest in Multicanal. Management
believes that the Company's only competitor in DBS service is Net Sat, which has
a C-Band and has recently begun a Ku-Band service. TVA's C-Band service
23
<PAGE>
offers a greater number of channels of programming than Net Sat's C-Band
service. However, while monthly charges are comparable and TVA's digital C-Band
service offers more channels, often with better picture quality, the analog
decoder necessary for Net Sat's service is significantly less expensive than the
digital decoder necessary for TVA's service. With respect to Ku-Band service,
Net Sat uses a satellite which provides broader coverage of Brazil. The orbital
location of the Galaxy III-R satellite enables GLA to offer DIRECTV service to
substantially all of the TV Homes in Brazil. However, in the less populated
northern and western regions of Brazil, reception of DIRECTV programming
requires a dish antenna 1.1 meters in diameter and in the western third of
Brazil (a sparsely populated area when compared to the southern and eastern
regions) reception may not be practical due to the size of the antenna necessary
for reception. Globo Par has a controlling interest in Net Sat while News
Corporation plc, a subsidiary of The News Corporation Limited, and Grupo
Televisa, S.A. of Mexico, also hold equity interests in Net Sat.
The Company expects that a number of new MMDS and Cable licenses will be
granted by the Brazilian Ministry of Communications beginning in the first half
of 1997. It is possible that new licenses will be granted to competitors in
areas in which the Company operates. Such awarding of competing licenses could
result in further competition which, in turn, may materially adversely affect
the Company's subscriber base, results of operations and financial condition.
New competitors are likely to emerge in markets in which the Company operates or
intends to operate and may include additional Cable, MMDS, C-Band service and
other competitors. For additional information regarding the competitive
environment in which the Company conducts its business, see
"Business--Competition."
The success of the Company's operating strategies is subject to factors that
are beyond the control of the Company and difficult to predict due, in part, to
the limited history of pay television services in Brazil. Consequently, the size
of the Brazilian market for pay television, the rates of penetration of that
market, the acceptance of pay television by subscribers and commercial
advertisers, the sensitivity of potential subscribers to the price of
installation and subscription fees, the extent and nature of the competitive
environment and the long-term viability of pay television services in Brazil are
uncertain.
HUGHES ELECTRONICS INTEREST IN PANAMSAT
Hughes Electronics, the majority owner of GLA and possible future
shareholder of GLB, agreed in August 1996 to acquire a majority interest in
PanAmSat Corporation ("PanAmSat") from PanAmSat's shareholders, pending
regulatory approval. PanAmSat is the owner and operator of the PAS-3 satellite.
Net Sat has leased transponder space on PAS-3 from PanAmSat to provide a
competing Ku-Band service in Brazil. The ownership by Hughes Electronics of a
majority interest in PanAmSat could have the potential of creating a conflict of
interest, since Hughes Electronics will have an interest in the financial
success of Net Sat's Ku-Band service. However, PanAmSat is not itself engaged in
providing pay television service in conflict with the Company's Ku-Band service,
but is only engaged in providing satellite transponders, on a leased basis, to
third parties for a variety of uses. Furthermore, under the terms of the
agreements among GLA and its partners, Hughes Electronics is only allowed to
provide additional services to PanAmSat with the approval of the other GLA
partners. As a consequence there are limitations on the extent to which Hughes
Electronics may engage in activities which may compete with the Company. No
assurances can be given as to the effect, if any, that the acquisition of a
majority interest in PanAmSat by Hughes Electronics may have on the operations
of the Company.
CURRENCY RISK
The Company expects substantially all of its long term debt obligations
(including the Notes) to be denominated in US dollars while the Company
generates revenues only in Brazilian reais. The Company also expects to incur a
significant portion of its equipment costs, and most of its programming costs,
in US dollars. Consequently, the devaluation of the REAL against the US dollar
could significantly affect the Company's ability to meet its obligations and
fund its capital expenditures, and could adversely affect its
24
<PAGE>
results of operations. While the Company may consider entering into transactions
to hedge the risk of exchange rate fluctuations, the Company, as of April 9,
1997, has not entered into any such transactions, and it may not be possible for
the Company to obtain hedging arrangements on commercially satisfactory terms.
In addition, shifts in currency exchange rates may have a material adverse
effect on the Company and may force the Company to seek additional capital,
which may not be available to it. Similarly, the Company expects that those
entities in which it does not have a majority interest may incur a significant
portion of their debt obligations and equipment and programming costs in US
dollars and generate revenues only in Brazilian reais. Shifts in currency
exchange rates may have a material adverse effect on those entities or make it
necessary for those entities to request additional equity or debt contributions
from the Company.
CHANGE IN TECHNOLOGY
The pay television industry as a whole is, and is likely to continue to be,
subject to rapid and significant changes in technology. Although the Company
believes that, for the foreseeable future, these existing and developing
alternative technologies will not materially adversely affect the viability or
competitiveness of its pay television business, there can be no assurance as to
the effect of such technological changes on the Company or that the Company will
not be required to expend substantial financial resources in the development or
implementation of new competitive technologies.
MMDS TRANSMISSION ISSUES
Reception of MMDS programming generally requires a direct, unobstructed
line-of-sight ("LOS") from the Company's headend to the subscriber's antenna.
MMDS service can also be provided by use of signal repeaters. If the LOS is
obstructed, the Company may not be able to supply service to certain potential
subscribers or may be required to install additional signal repeaters. In
addition to limitations resulting from terrain, extremely adverse weather can,
in limited circumstances, damage transmission and receive-site antennas as well
as other transmission equipment.
Interference from other transmission systems can limit the ability of an
MMDS system to serve any particular point, just as interference from one
television station limits the ability of a viewer to receive another television
station signal broadcasting on the same frequency. Under current regulations of
the Ministry of Communications in Brazil, an MMDS license holder is generally
protected from interference within a radius of up to 50 kilometers of the
transmission site, depending on the technical capability of the operator. A
prospective operator must demonstrate that its signal will not cause
interference with the reception of other permitted channels. In the event that
the Company acquires any new MMDS licenses, there can be no assurance that the
Company will be allowed to transmit such MMDS signals up to the full 50
kilometer radius.
DEPENDENCE UPON SATELLITES
The Company's C-Band and Ku-Band service and the delivery of programming to
the MMDS and Cable systems of the Owned Systems and the Operating Ventures
outside Sao Paulo are dependent upon the operation of satellites by third
parties. To deliver programming to the Owned Systems and the Operating Ventures
and provide its C-Band service, the Company utilizes transponders on Brasilsat,
a satellite owned and operated by Embratel, a Brazilian Government owned
company. The Company uses the Galaxy III-R satellite, which is leased and
operated by a unit of Hughes Electronics, to provide its Ku-Band service.
Although the Company has not experienced any significant disruption of its
transmissions to date, satellites are subject to significant risks that may
prevent or impair proper commercial operations, including satellite defects,
destruction and damage and incorrect orbital placement. On occasion, satellite
launches have resulted in a total or constructive total loss due to launch
failure, failure to achieve proper orbit or failure to operate upon reaching
orbit. For example, the original PAS-3 satellite, which Net Sat originally
planned to use for its Ku-Band service, was destroyed upon launch as a result of
a
25
<PAGE>
malfunction of the Ariane space launch vehicle. Disruption of the transmission
of the Galaxy III-R satellite or the failure of the launch of any replacement
satellite could have a material adverse effect on the Company. The ability of
the Company to transmit its programming following the expected useful life of
the Galaxy III-R satellite, which currently is approximately nine years, and to
broadcast additional channels, will depend upon the ability of the Company to
obtain rights to utilize transponders on other satellites.
RISK OF SIGNAL THEFT
The delivery of pay television programming requires the use of encryption
technology to prevent signal theft. Historically, piracy in the cable television
and DBS industries has been widely reported. With each of its services, the
Company uses an access control system to prevent unauthorized reception of its
programming. The Company's MMDS and Cable systems use various decoder
technologies, and the Company's Ku-Band receiver employs Smart Card technology,
allowing the Company to change the access control system in the event of a
security breach. There can be no assurance, however, that the access control
technology used in connection with each of the Company's delivery services will
be, or remain, effective. If the access control technology is compromised and
not promptly corrected, the Company's revenues and the Company's ability to
market its pay television services would be adversely affected.
REGULATION
Substantially all of the Company's business activities are regulated by the
Brazilian Ministry of Communications. Such regulation relates to, among other
things, licensing, local access to Cable and MMDS systems, commercial
advertising, and foreign investment in Cable and MMDS systems. Changes in the
regulation of the Company's business activities, including decisions by
regulators affecting the Company's operations (such as the granting or renewal
of licenses or decisions as to the subscription rates the Company may charge its
customers) or changes in interpretations of existing regulations by courts or
regulators, could adversely affect the Company. The Company's Cable and MMDS
licenses may not be transferred without regulatory approval. Under current
regulations, the Brazilian Ministry of Communications will grant Cable and MMDS
licenses pursuant to a public bidding process. The Company is unable to predict
what impact, if any, such public bidding will have on its ability to launch and
operate new systems. Any new regulations could have a material adverse effect on
the subscription television industry as a whole and on the Company in
particular. See "Business--Regulatory Framework."
The construction and launch of broadcasting satellites and the operation of
satellite broadcasting systems are subject to substantial regulation by the
Brazilian Ministry of Communications. Ministry of Communications rules are
subject to change in response to industry developments, new technology and
political considerations. Certain aspects of television and telecommunications
operations and ownership are governed by the Brazilian Constitution. It is
expected that a new law enacting constitutional amendments, along with possible
regulations thereunder, will be passed in 1996 or 1997. The Brazilian Government
may enact additional or new regulations applicable to the activities of the
Company's C-Band and Ku-Band satellite services. The Company's business and
business prospects could be adversely affected by the adoption of new
constitutional amendments, laws, policies or regulations or changes in the
interpretation or application of existing laws, policies and regulations. There
can be no assurance that the Company will succeed in obtaining all requisite
regulatory approvals for its operations without the imposition of restrictions
on, or adverse consequences to, the Company. There can also be no assurance that
material adverse changes in regulations affecting the Company's C-Band and
Ku-Band satellite services will not occur in the future. See
"Business--Regulatory Framework."
26
<PAGE>
AVAILABILITY OF PROGRAMMING AND EQUIPMENT
The success of the Company's business will be dependent on its ability to
obtain programming that is appealing to subscribers at commercially reasonable
costs. The Company is dependent on third party suppliers for a significant
amount of its programming. Most of the Company's programming is purchased from
programming providers in the United States and Europe pursuant to contracts some
of which will begin expiring within one year. Although the Company has no reason
to believe that such contracts will be cancelled or will not be renewed upon
expiration, in the event such contracts are cancelled or not renewed, the
Company will have to seek programming from other sources. Such other sources
include a large number of international programming providers as well as the
Company's own programming production capabilities. There can be no assurance
that other programming will be available to the Company on acceptable terms or
at all or, if so available, that such programming will be acceptable to the
Company's subscribers. See "Business--Programming."
The Company currently purchases decoders and antennas from a limited number
of sources. The inability to obtain sufficient components as required, or to
develop alternative sources if and when required in the future, could result in
delays or reductions in customer installations which, in turn, could have a
material adverse effect on the results of operations and financial condition of
the Company.
MANAGEMENT OF GROWTH
The Company is growing rapidly, which could place a significant strain on
its operational and personnel resources. As the Company's business develops and
expands, the Company will need to implement enhanced operational and financial
systems and will require additional employees and management, operational and
financial resources. There can be no assurance that the Company will
successfully implement and maintain such operational and financial systems or
successfully obtain, integrate and utilize the required employees and management
or operational and financial resources in order to manage a developing and
expanding business in a new industry. Failure to implement such systems
successfully and use resources effectively could have a material adverse effect
on the Company's results of operations and financial condition.
TRANSACTIONS WITH RELATED PARTIES; RIGHTS TO PUT THE COMPANY'S STOCK
Tevecap currently engages in, and expects from time to time to engage in,
financial and commercial transactions with its shareholders, subsidiaries and
other affiliates. Although transactions with affiliated persons are subject to
the terms of the Indenture, the Company may continue to enter into certain
transactions with affiliates in the future. While the Company believes that such
transactions in the past have generally had a beneficial effect on the Company,
no assurance can be given that any such transaction, or combination of
transactions, will not have a material adverse effect on the Company in the
future. See "Certain Transactions with Related Parties."
Pursuant to a Stockholders Agreement among Tevecap and its stockholders,
upon the occurrence of certain defined "triggering events," each of the
Stockholders, other than Abril, may demand that Tevecap buy all or a portion of
the shares of capital stock of Tevecap held by such Stockholder, unless the
shares of capital stock held by such Stockholder are publicly registered, listed
or traded (collectively referred to as an "Event Put"). The Indenture, however,
contains restrictions on the ability of Tevecap to purchase shares of its
capital stock. See "Description of Notes--Certain Covenants--Limitation on
Restricted Payments." Accordingly, the parties to the Stockholders Agreement
have unanimously amended the Stockholders Agreement to provide that if the terms
of the Indenture prohibit Tevecap from purchasing shares that are subject to an
Event Put ("Event Put Shares"), in whole or in part, the Company shall not be
obligated to purchase such shares to the extent it is so restricted. However, in
such event, the Company shall, subject to the terms of the Indenture, have the
obligation to issue shares of preferred stock of the Company ("Special Preferred
Shares") should the Tevecap stockholder elect to
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convert Event Put Shares to Special Preferred Shares. The holders of Special
Preferred Shares will be entitled to dividends required by law and a cumulative
dividend equal to LIBOR plus a 4.0% margin, provided that if the terms of the
Indenture prohibit the payment of dividends on the Special Preferred Shares, the
Company shall not be obligated to make such dividend payments to the extent so
restricted. However, under the terms of the Special Preferred Shares such unpaid
dividends shall cumulate and will be paid in full when permissible under the
Indenture or when the Indenture no longer restricts the payment of such
dividends. After the payment of all dividends on the Special Preferred Shares,
the Company must use any remaining profit or reserve to purchase the largest
number of Event Put Shares and Special Preferred Shares, provided that, if the
terms of the Indenture prohibit the purchasing of such shares, the Company shall
not be obligated to make such purchases until permitted by the terms of the
Indenture.
In addition, pursuant to the Stockholders Agreement, Falcon International
may demand that Tevecap buy all or any portion of the shares of capital stock of
Tevecap held by Falcon International if such shares are not publicly registered,
listed or traded by September 22, 2002 (the "Falcon Time Put"). If the terms of
the Indenture prohibit it from purchasing such shares, Tevecap may, subject to
the terms of the Indenture, delay the payment of such purchase price with three
annual payments ("Put Annual Payments") or issue promissory notes denominated in
US dollars for the amount of such price ("Put Promissory Notes"). The Put
Promissory Notes would mature three years after issuance with interest payments
due quarterly in arrears. The interest rate on the Put Promissory Notes would be
equal to the rate applicable to US Treasury obligations of similar maturity plus
a margin to be negotiated with the parties taking into account the risks
associated with the type of obligor, Tevecap's creditworthiness and investments
in Brazil. Under the provisions of the Stockholders Agreement, as amended, while
the Put Promissory Notes are outstanding, Tevecap may not pay any dividends or
make distributions with respect to its capital stock, including the Special
Preferred Shares should they exist. To the extent dividends and distributions of
payments under the Put Promissory Notes may be made under the Indenture,
payments must be made first to satisfy the obligations under the outstanding Put
Promissory Notes. If the terms of the Indenture prohibit the Company from making
the Put Annual Payments, the Company shall not be required to make such payment,
but shall be required to deliver Put Promissory Notes in the principal amount of
the affected Put Annual Payments. The Indenture does not restrict the principal
amount of Put Promissory Notes which the Company may issue, but does restrict
the ability of the Company to make interest and principal payments on the Put
Promissory Notes. If the terms of the Indenture prohibit the Company from making
an interest payment required under any Put Promissory Note, the Company shall
not be required to make such payment at such time, provided that any accrued and
unpaid interest shall accumulate and interest on such unpaid amount shall
compound quarterly and the Company shall make payments of interest as soon as
such payment is no longer restricted under the Indenture. Pursuant to the terms
of the proposed amendment to the Stockholders Agreement, payment of the
principal and interest on the Put Promissory Notes would be subordinated to the
prior payment in full of the Notes. See "Description of Notes--Certain
Covenants--Limitation on Restricted Payments," "--Limitation on Indebtedness"
and "Principal Shareholders."
OWNERSHIP OF FUTURE CABLE TELEVISION LICENSES
The Company holds a 36.0% equity interest in Canbras TVA Cabo and TV Cabo
Santa Branca (the "Canbras TVA Companies"), two Cable operators holding Cable
licenses for a number of smaller cities within the greater Sao Paulo
metropolitan area. Canbras, a publicly-traded Canadian company and Canbras-Par,
a Brazilian company, own the remaining interest in Canbras TVA Cabo, and
Canbras-Par owns the remaining interest in TV Cabo Santa Branca. BCI, an
affiliate of BCE, Inc., Canada's largest telecommunications group, holds a $27.0
million convertible debenture that, upon conversion, would permit BCI to become,
INTER ALIA, a majority shareholder of Canbras-Par. Pursuant to the Canbras
Association Agreement, dated June 14, 1995, among TVA, the Canbras TVA
Companies, Canbras and Canbras-Par, the Company agreed to grant to Canbras-Par a
"right of first refusal" to participate in other
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Cable licenses that the Company may obtain, directly or indirectly, and
Canbras-Par granted to the Company a similar "right of first refusal" to
participate in Cable licenses acquired by Canbras-Par. The term of the Canbras
Association Agreement is for so long as Canbras-Par or its assignee owns shares
"in companies which have the objective of engaging in the cable TV business."
The Canbras Association Agreement does not specify the terms and conditions on
which any co-investments in Cable licenses are to be made, and the Company
expects that such terms and conditions will be negotiated in good faith, on a
case-by-case basis, in connection with any future Cable license investments. The
Company does not believe that the implementation of the Canbras Association
Agreement will have a material adverse effect on the Company and its on-going
operations.
Subsequent to the date of the Canbras Association Agreement, the Company,
through TVA Sul, acquired two new Cable systems in Camboriu and Foz do Iguacu.
Under the terms of the Canbras Association Agreement, the Company is required to
offer to Canbras-Par the right to participate in these Cable systems. Although
Canbras-Par has indicated a preliminary interest in participating in these two
Cable systems, the Company has not yet made a formal offer to Canbras and,
therefore, Canbras' precise level of participation is uncertain at this time.
Additionally, Canbras-Par and the Company are contemplating Canbras-Par
investing directly in TVA Sul, on terms to be agreed upon.
The Canbras Association Agreement provides that to the extent programming is
owned exclusively by TVA, programming will be supplied to the Canbras TVA
Companies on an exclusive basis, and that TVA will not supply such programming
to any other party within the geographic territories covered by the licenses
held by the Canbras TVA Companies. The Canbras Association Agreement does not,
by its terms, refer to Ku-Band or C-Band service. Canbras has taken exception to
the Company's view that the programming provisions do not limit the Company's
ability to offer such services in such geographic territories. The Company
believes its on-going discussions with Canbras will lead to a clarification of
these provisions in a manner which will have no material adverse effect on the
Company or its on-going operations. However, there can be no assurance of such
an outcome, and as of April 10, 1997, the Company and Canbras had not reached an
agreement on such a clarification.
DIVIDENDS TO SHAREHOLDERS
Brazilian corporation law and the Stockholders Agreement among Tevecap and
its stockholders require Tevecap to distribute to its shareholders a mandatory
dividend equal to 25.0% of its net profits. Net profits are defined under the
Brazilian corporation law as the income remaining after the deduction of
payments due to employees, managers and individual shareholders in the service
of the applicable company. In addition, a Brazilian company is allowed to
distribute dividends only if, after a given fiscal year, its net profits exceed
its accumulated losses. However, in accordance with Brazilian corporation law,
Tevecap may suspend the mandatory dividend upon a unanimous decision of its
shareholders. Pursuant to the terms of an amendment to the Stockholders
Agreement, Tevecap's stockholders have unanimously agreed not to exercise their
right to receive such mandatory dividends (without limiting their right to
receive dividends payable in compliance with the "Limitation on Restricted
Payments" covenant in the Indenture) until the first to occur of (x) the date
that shares of Capital Stock of the Company are issued and listed on a Brazilian
or United States securities exchange in connection with a bona fide public
offering of such shares or the date that any shares of the Capital Stock of the
Company are otherwise effectively listed and traded on any Brazilian or United
States securities exchange, (y) the date that none of the Notes remain
outstanding or (z) the date that such commitment is no longer effective,
enforceable or legal under applicable Brazilian laws and regulations (including
without limitation any construction or interpretation thereof by CVM, any court
or any other governmental authority). Accordingly, although the Stockholders
Agreement and Brazilian corporate law would allow Tevecap to pay certain
dividends, the stockholders have waived their right to the payment of such
dividends as described above, and such dividends shall not be paid to the extent
such payment is restricted by the
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Indenture as described above. The common stock dividends provided for by the
Stockholders Agreement will cumulate and are required to be paid to the extent
such payment is not restricted by the Indenture. See "Description of
Notes--Certain Covenants--Limitation on Restricted Payments."
RIGHTS TO DIRECTV PROGRAMMING
Upon the occurrence of certain stipulated events, GLA, in which TVA has a
10.0% equity interest, has the right to terminate the Local Operating Agreement,
dated March 3, 1995, between GLA and Galaxy Brasil (the "Local Operating
Agreement"). Such termination would result in a cessation of the supply of
programming from GLA to Galaxy Brasil. The events that would entitle GLA to
terminate the Local Operating Agreement include breach of any material
obligation of Galaxy Brasil under the Local Operating Agreement, failure to meet
certain annual subscriber goals beginning August 1, 2000, and revocation of any
required governmental licenses. In addition, GLA has the right to terminate
Galaxy Brasil's exclusive rights to DIRECTV programming if Galaxy Brasil were to
fail to reach certain annual subscriber goals beginning August 1, 1998. The loss
of DIRECTV programming could have a material adverse effect on the revenues and
business of the Company.
RISKS RELATING TO THE NOTES
LIMITED ASSETS OF TEVECAP AND DEPENDENCE ON SUBSIDIARIES FOR REPAYMENT OF
NOTES
Tevecap's operations are conducted through, and substantially all of
Tevecap's assets are owned by, Tevecap's direct and indirect subsidiaries. The
ability of Tevecap to meet its obligations in respect of the Notes and any
future indebtedness of Tevecap will depend on, among other things, the future
performance of such subsidiaries (including the Guarantors) and the ability of
Tevecap to refinance the Notes at their maturity (or upon early redemption or
otherwise). In addition, the ability of Tevecap's subsidiaries to pay dividends
and make other payments to Tevecap may be restricted by, among other things,
applicable corporate and other laws and regulations and by the terms of
agreements to which such subsidiaries become subject. Also, the property and
assets of certain of such subsidiaries have had, or in the future may have,
liens placed upon them pursuant to existing and future financings of such
subsidiaries. Although the Indenture limits the ability of such subsidiaries to
enter into consensual restrictions on their ability to pay dividends and make
other payments to Tevecap and to permit liens to exist on their property and
assets, such limitations are subject to a number of significant qualifications.
"See Description of the Notes--Certain Covenants--Limitations on Restrictions on
Distributions from Restricted Subsidiaries," and "--Limitations on Liens".
A portion of the Company's total assets (13.4% at September 30, 1996)
represents interests in entities that are not majority-owned subsidiaries of
Tevecap. The ability of Tevecap to receive funds from these entities may be
limited by, among other things, shareholder agreements with the other investors
in those entities, credit arrangements at those entities and the need of those
entities to reinvest their cash flow in their own operations. In addition,
applicable Brazilian law limits the amount of dividends which may be paid by
Tevecap's minority-owned subsidiaries to the extent they do not have profits
available for distribution. Other statutory and general law obligations may also
affect the ability of those entities to declare dividends or the ability of
those entities to make payments to Tevecap on account of intercompany loans.
FRAUDULENT CONVEYANCE CONSIDERATIONS
The Company has been advised by its Brazilian counsel, Basch & Rameh
Advogados e Consultores, that, to the extent that the Subsidiary Guarantees
given by the Guarantors are valid and enforceable in accordance with the laws of
the State of New York and the United States, the laws of Brazil do not prevent
such Subsidiary Guarantees from being valid, binding and enforceable against the
Guarantors in accordance with their terms. In the event US federal and state
fraudulent conveyance or
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similar laws were applied to the issuance of a Subsidiary Guarantee, if any
Guarantor, at the time it incurs such Subsidiary Guarantee, (a) (i) was or is
insolvent or rendered insolvent by reason of such incurrence, (ii) was or is
engaged in a business or transaction for which the assets remaining with such
Guarantor constituted unreasonably small capital or (iii) intended or intends to
incur, or believed or believes that it would incur, debts beyond its ability to
pay such debts as they mature and (b) received or receives less than reasonably
equivalent value or fair consideration, the obligations of such Guarantor under
its Subsidiary Guarantee could be avoided, or claims in respect of such
Subsidiary Guarantee could be subordinated to all other debts of such Guarantor.
Among other things, a legal challenge of a Subsidiary Guarantee on fraudulent
conveyance grounds may focus on the benefits, if any, realized by such Guarantor
as a result of the issuance by Tevecap of the Notes. To the extent that any
Subsidiary Guarantee were held to be a fraudulent conveyance or unenforceable
for any other reason, the holders of the Notes would cease to have any claim in
respect of the Guarantor issuing such Subsidiary Guarantee and would be solely
creditors of Tevecap and any other Guarantors whose Subsidiary Guarantees were
not avoided or held unenforceable. There can be no assurance that, after
providing for all prior claims, there would be sufficient assets to satisfy
claims of the holders of the Notes relating to any avoided portion of a
Subsidiary Guarantee.
ENFORCEABILITY OF JUDGMENTS
The Company has been advised by its Brazilian counsel, Basch & Rameh
Advogados e Consultores, that judgments for monetary claims obtained in US
courts arising out of or in relation to the obligations of Tevecap and the
Guarantors under the Indenture, the Notes or the Subsidiary Guarantees will be
enforceable in Brazil, provided that such judgment has been previously confirmed
by the Brazilian Federal Supreme Court. In order to be confirmed by the
Brazilian Federal Supreme Court, such foreign judgment must meet the following
conditions: (a) it must comply with all formalities required for its
enforceability under the laws of the country where it was issued, (b) it must
have been given by a competent court after the proper service of process on the
parties, (c) it must not be subject to appeal, (d) it must not offend Brazilian
national sovereignty, public policy or good morals and (e) it must be duly
authenticated by a competent Brazilian consulate and be accompanied by a sworn
translation thereof into Portuguese. No assurance can be given that such
confirmation will be obtained, that the process described above can be conducted
in a timely manner or that a Brazilian court will enforce such monetary
judgment.
Any judgment obtained against Tevecap or the Guarantors in a court in Brazil
under the Notes, the Subsidiary Guarantees or under the Indenture will be
expressed in the Brazilian currency equivalent of the US dollar judgment amount
at the commercial exchange rate on the date on which such judgment is obtained,
and such Brazilian currency amount will be adjusted in accordance with the
exchange variation until the judgment holder receives effective payment.
ABSENCE OF PUBLIC MARKET FOR THE EXCHANGE SECURITIES; RESTRICTIONS ON RESALE
The Exchange Securities will be new securities for which there currently is
no market. The Initial Purchasers have informed Tevecap that they currently
intend to make a market in the Old Securities and, if issued, the Exchange
Securities, but they are not obligated to do so, and any such market making may
be discontinued at any time without notice. There can be no assurance as to the
development or liquidity of any market for the Exchange Securities. Tevecap does
not intend to apply for listing of the Notes or, if issued, the Exchange Notes
on any securities exchange or for quotation through the National Association of
Securities Dealers Automated Quotation (Nasdaq) system.
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CONSEQUENCES OF FAILURE TO PROPERLY TENDER OLD NOTES IN THE EXCHANGE
Issuance of the Exchange Securities in exchange for the Old Securities
pursuant to the Registered Exchange Offer will be made only after timely receipt
by the Exchange Agent of such Old Securities, a properly completed and duly
executed Letter of Transmittal and all other required documents. Therefore,
holders of the Old Securities desiring to tender such Old Securities in exchange
for Exchange Securities should allow sufficient time to ensure timely delivery.
Tevecap is under no duty to give notification of defects or irregularities with
respect to tenders of Old Securities for exchange. Old Securities that are not
tendered or that are tendered but not accepted by Tevecap for exchange, will,
following consummation of the Registered Exchange Offer, continue to be subject
to the existing restrictions upon transfer thereof under the Securities Act and,
upon consummation of the Registered Exchange Offer, certain registration rights
under the Exchange and Registration Rights Agreement will terminate.
In the event the Registered Exchange Offer is consummated, Tevecap will not
be required to register the Remaining Old Securities. Remaining Old Securities
will continue to be subject to the following restrictions on transfer: (i) the
Remaining Old Securities may be resold only if registered pursuant to the
Securities Act, if any exemption from registration is available thereunder, or
if neither such registration nor such exemption is required by law, and (ii) the
Remaining Old Securities will bear a legend restricting transfer in the absence
of registration or an exemption therefrom. Tevecap does not currently anticipate
that it will register the Old Securities under the Securities Act. To the extent
that Old Securities are tendered and accepted in connection with the Registered
Exchange Offer, any trading market for Remaining Old Securities could be
adversely affected.
CONTROLS AND RESTRICTIONS ON US DOLLAR REMITTANCES; EXCHANGE REGULATION
Brazilian law provides whenever there is, or is a serious risk of, a
material imbalance in Brazil's balance of payments, the Brazilian Government
may, for a limited period of time, impose restrictions on the remittance to
foreign investors of the proceeds of their investments in Brazil. For
approximately six months in 1989 and early 1990, for example, the Brazilian
Government froze all dividend and capital repatriations that were owed to
foreign equity investors and held by the Central Bank of Brazil (the "Central
Bank") in order to conserve Brazil's foreign currency reserves. These amounts
were subsequently released in accordance with Brazilian Government directives.
There can be no assurance that similar measures will not be taken by the
Brazilian Government in the future.
The Brazilian Government currently restricts the ability of Brazilian or
foreign persons or entities to convert Brazilian currency into US dollars or
other currencies other than in connection with certain authorized transactions.
The issuance of the Notes has been approved by the Central Bank. The Central
Bank has issued a certificate of registration authorizing each of the scheduled
payments of principal at maturity and interest on the Notes. Consent from the
Central Bank will be needed for the payment of principal of and interest on the
Notes upon acceleration of the Notes following an Event of Default (as defined)
and for certain late payments of the Notes (i.e., payments made 181 days or more
after a scheduled payment date). In addition, consent from the Central Bank will
be needed for redemption of the Notes upon certain optional redemption events.
See "Description of Notes." There can be no assurance that the Company will
obtain the necessary consents and certificates from the Central Bank for the
foregoing payments or redemptions.
There can be no assurance that the Brazilian Government will not in the
future impose more restrictive foreign exchange regulations that would have the
effect of eliminating or restricting the Company's access to foreign currency
that it would require to meet its foreign currency obligations, including its
obligations under the Notes. The likelihood of the imposition of such
restrictions by the Brazilian Government may be affected by, among other
factors, the extent of Brazil's foreign currency reserves, the availability of
foreign currency in the foreign exchange markets on the date a payment is
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due, the size of Brazil's debt service burden relative to the economy as a
whole, Brazil's policy towards the International Monetary Fund and political
constraints to which Brazil may be subject.
In addition, there are two legal foreign exchange markets in Brazil: the
commercial rate exchange market (the "Commercial Market") and the floating rate
exchange market (the "Floating Market"). The Commercial Market is reserved
primarily for foreign trade transactions and transactions that generally require
prior approval from Brazilian monetary authorities, such as the purchase and
sale of registered investments by foreign persons and related remittances of
funds abroad, such as a repurchase by the Company of the Notes. Purchases of
foreign exchange in the Commercial Market may be carried out only through a
financial institution in Brazil authorized to buy and sell currency in that
market. The "Commercial Market Rate" is the commercial selling rate for
Brazilian currency into US dollars, as reported by the Central Bank. The
"Floating Market Rate" generally applies to transactions to which the Commercial
Market Rate does not apply. Prior to the implementation of the Real Plan, the
Commercial Market Rate and the Floating Market Rate differed significantly at
times. Since the introduction of the REAL, the two rates have not differed
significantly, although there can be no assurance that there will not be
significant differences between the two rates in the future. Both the Commercial
Market Rate and Floating Market Rate are reported by the Central Bank on a daily
basis.
Both the Commercial Market Rate and the Floating Market Rate are freely
negotiated but are strongly influenced by the Central Bank, which typically
intervened in the Commercial Market, prior to the implementation of the Real
Plan, in order to control fluctuations and to regulate disparities between the
Commercial Market Rate and the Floating Market Rate. After implementation of the
Real Plan, the Central Bank allowed the real to float with minimal intervention.
However, on March 6, 1995, the Central Bank announced its intention to intervene
in the foreign exchange markets and has subsequently intervened in the markets
and taken other actions affecting such markets.
On March 6, 1995, the Central Bank announced that it would intervene in the
market and buy or sell US dollars, establishing a band (faixa de flutuacao) in
which the exchange rate between the REAL and the US dollar could fluctuate. The
Central Bank initially set the band with a floor of R$0.86 per US$1.00 and a
ceiling of R$0.90 per US$1.00 and provided that, from and after May 2, 1995, the
band would fluctuate between R$0.86 and R$0.98 per US$1.00. Shortly thereafter,
the Central Bank issued a new directive providing that the band would be between
R$0.88 and R$0.93 per US$1.00. On June 22, 1995, the Central Bank issued another
directive providing that the band would be between R$0.91 and R$0.99 per US$1.00
and subsequently reset the band on January 30, 1996 to between R$0.97 and R$1.06
per US$1.00. Upon resetting the band on January 30, 1996, the Central Bank
adjusted the exchange rate within such band on a number of occasions, generally
in increments of R$0.001, by means of buying and selling US dollars in
electronic auctions. On February 18, 1997, the band was reset by the Central
Bank to float between R$1.05 and $R1.14 per US$1.00. On April 7, 1997, the
Commercial Market Rate was R$1.06 per US$1.00.
RISKS RELATING TO BRAZIL
GENERAL
Social, economic or political instability, among other developments in
Brazil, could adversely affect the financial condition and results of operations
of the Company, the ability of the Company to repay the Notes and the market
value and liquidity of the Notes. In the past, Brazil has suffered from high
levels of inflation, low real growth rates and political uncertainty. Brazil is
generally considered by investors to be an "emerging market" and thus political,
economic, social or other developments in other such markets may adversely
affect the market value and liquidity of the Notes. For example, in December
1994, the Mexican government sharply devalued the peso, resulting in an economic
crisis in Mexico. The Mexican peso crisis adversely affected the market value
and liquidity of securities issued by companies in many
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of the "emerging markets," including Brazil. There can be no assurance that
events in other such markets will not adversely affect the market value and
liquidity of the Notes.
POLITICAL AND ECONOMIC CONDITIONS
During the past several years, the Brazilian economy has been affected by
significant intervention by the Brazilian Government. The Brazilian Government
has changed monetary, credit, tariff and other policies to influence the course
of Brazil's economy. The Brazilian Government's actions to control inflation and
effect other policies have often involved wage and price controls (including
controls on the price of food and general merchandise) as well as other
interventionist measures, such as freezing bank accounts and imposing capital
controls. The stated policy of the present Government is to reduce gradually
governmental control of the economy. However, Government policies involving
tariffs, exchange controls, regulations and taxation may adversely affect the
Company's business and financial condition, as could the Brazilian Government's
response to inflation, devaluation, social instability and other political,
economic or diplomatic developments. Brazilian politics have been marked by
uncertainty since the country returned to civilian rule in 1985 after 20 years
of military government. The death of a President-elect in 1985 and the
resignation of another President in 1992 in the midst of his impeachment trial,
and frequent turnovers at and below the cabinet level, particularly in the
economic area, historically have resulted in the absence of a coherent and
sustained policy to confront Brazil's economic problems. The election of
Fernando Henrique Cardoso to the presidency of Brazil in 1994 and the reduction
of the level of inflation in Brazil following the introduction of the Real Plan
in 1994 have resulted in a more stable political and economic environment.
However, there can be no assurance that future developments in Brazil will not
result in a recurrence of political and economic instability.
IMPACT OF EXTREME INFLATION
Brazil in the past 20 years has experienced extremely high rates of
inflation. In 1993, the annual rate of inflation in Brazil exceeded 2,700%.
Inflation and certain governmental measures to fight inflation have in the past
significantly and negatively affected the Brazilian economy. See "Annex A--The
Federative Republic of Brazil." Actions taken to combat inflation and public
speculation about possible future actions have contributed significantly to
economic uncertainty in Brazil and the heightened volatility in the Brazilian
securities markets. Future measures to combat inflation could materially and
adversely affect the Brazilian economy and the Company. Prior to 1994, none of
the numerous economic stabilization plans enacted by the Brazilian Government
successfully reduced inflation over the long term. In 1994, the Brazilian
Government introduced the Real Plan. The Real Plan has resulted in a sustained
reduction in the level of Brazilian inflation. The annual rate of inflation for
1995 and 1996 was 14.8% and 9.34%, respectively. There can be no assurance,
however, that inflation will not increase as a result of future Brazilian
governmental actions or for other reasons.
EFFECTS OF EXCHANGE RATE FLUCTUATIONS
Primarily as a result of inflationary pressures, the Brazilian currency has
been devalued repeatedly during the last four decades. Throughout this period,
the Brazilian Government has implemented various economic plans and utilized a
number of exchange rate policies, including sudden devaluations, periodic
mini-devaluations (with the frequency of adjustments ranging from daily to
monthly), floating exchange rate systems, exchange controls and dual exchange
rate markets. Although over long periods of time devaluations of the Brazilian
currency generally have correlated with the rate of inflation in Brazil, such
governmental actions over shorter periods have resulted in significant
fluctuations in the real exchange rate between the Brazilian currency and the US
dollar. See "Exchange Rate Data."
Substantially all of the Company's revenues are denominated in Brazilian
reais. A substantial portion of the Company's indebtedness is, and may be
expected to continue to be, denominated in US dollars (including the Notes). In
addition, a portion of the Company's operating expenses, including
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those relating to programming commitments and cable television equipment costs,
are denominated in or indexed to US dollars. Any devaluation of the Brazilian
currency relative to any foreign currency in which debt or other obligations of
the Company are denominated, if such devaluation were in excess of inflation,
would result in a foreign exchange loss with respect to such indebtedness and
obligations. As a result, the relationship of Brazil's currency to the value of
the US dollar and other currencies, and the rates of devaluation of Brazil's
currency relative to the prevailing rates of inflation, may adversely affect the
Company's financial condition and results of operations, as well as its ability
to meet its debt service obligations (including payment of principal of,
premium, if any, and interest on the Notes) and operating costs. If the Company
cannot increase its prices to match the rate of inflation, even if the rate of
inflation matches the rate of devaluation, the Company's ability to meet its
debt service obligations and operating costs may be impaired.
In addition, the financial records of Tevecap and its subsidiaries have been
maintained in Brazilian reais. However, the Financial Statements are presented
in US dollars. In order to prepare the Financial Statements, Tevecap's accounts
have been translated from the applicable Brazilian currency on the basis
described in Note 2.3 to the Tevecap Financial Statements. Because of
differences between the evolution of the rates of inflation in Brazil and
changes in the rates of devaluation, amounts presented in US dollars will show
distortions when compared on a period-to-period basis.
CONTROLS AND RESTRICTIONS ON US DOLLAR REMITTANCES
Brazilian law provides that whenever there is, or is a serious risk of, a
material imbalance in Brazil's balance of payments, the Brazilian Government
may, for a limited period of time, impose restrictions on the remittance to
foreign investors of the proceeds of their investments in Brazil. For
approximately six months in 1989 and early 1990, for example, the Brazilian
Government froze all dividend and capital repatriations that were owed to
foreign equity investors and held by the Central Bank of Brazil (the "Central
Bank") in order to conserve Brazil's foreign currency reserves. These amounts
were subsequently released in accordance with Brazilian Government directives.
There can be no assurance that similar measures will not be taken by the
Brazilian Government in the future.
The Brazilian Government currently restricts the ability of Brazilian or
foreign persons or entities to convert Brazilian currency into US dollars or
other currencies other than in connection with certain authorized transactions.
The issuance of the Notes has been approved by the Central Bank. After the Notes
are issued, the Central Bank is expected in due course to issue a certificate of
registration authorizing each of the scheduled payments of principal at maturity
and interest on the Notes. In addition, consent from the Central Bank will be
needed for the payment of principal of and interest on the Notes upon
acceleration of the Notes following an Event of Default (as defined) and for
certain late payments of the Notes (I.E., payments made 181 days or more after a
scheduled payment date). In addition, consent from the Central Bank will be
needed for redemption of the Notes upon certain optional redemption events. See
"Description of Notes." There can be no assurance that the Company will obtain
the necessary consents and certificates from the Central Bank for the foregoing
payments or redemptions.
There can be no assurance that the Brazilian Government will not in the
future impose more restrictive foreign exchange regulations that would have the
effect of eliminating or restricting the Company's access to foreign currency
that it would require to meet its foreign currency obligations, including its
obligations under the Notes. The likelihood of the imposition of such
restrictions by the Brazilian Government may be affected by, among other
factors, the extent of Brazil's foreign currency reserves, the availability of
foreign currency in the foreign exchange markets on the date a payment is due,
the size of Brazil's debt service burden relative to the economy as a whole,
Brazil's policy towards the International Monetary Fund and political
constraints to which Brazil may be subject.
35
<PAGE>
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Exchange Securities offered hereby. In consideration for issuing the Exchange
Securities as described in this Prospectus, the Company will receive in exchange
Old Securities in like principal amount, the terms of which are identical in all
material respects to those of the Exchange Securities, except that the Exchange
Securities have been registered under the Securities Act and are issued free of
any covenant regarding transfer restrictions. The Old Securities surrendered in
exchange for the Exchange Securities will be retired and cancelled and cannot be
reissued. Accordingly, the issuance of the Exchange Securities will not result
in any change in the indebtedness of the Company.
The net proceeds to the Company from the offering of the Old Securities was
approximately $241.2 million after deducting discounts, commissions and
estimated expenses of the Offering payable by the Company. The Company used the
net proceeds of the offering of the Old Securities as follows:
<TABLE>
<CAPTION>
(IN
MILLIONS)
------------
<S> <C>
Repayment of Short-term bank loans(a)........................................... $ 5.4
Repayment of Loans from affiliated companies(b)................................. 107.9
Capital expenditures, investments and general corporate purposes(c)............. 127.9
------------
$ 241.2
------------
------------
</TABLE>
- ------------------------
(a) The Company repaid all of its Short-term bank loans which it incurred in
connection with the refinancing of certain deferred obligations for the
purchase of property. The annual interest rate on such short-term debt is
LIBOR plus a 1.5% margin.
(b) Includes repayment of all outstanding indebtedness under the Abril Credit
Facility ($105.8 million outstanding as of October 31, 1996). During the
period from September 30, 1996 through October 31, 1996, the Company paid
$16.8 million in connection with its capital spending program. As of April
10, 1997, the Company had not redrawn any amounts under the Abril Credit
Facility. See "Description of Certain Indebtedness." The interest rate
payable by the Company to Abril has ranged from 1.79% to 3.01% per month.
(c) The Company used this portion of the net proceeds to fund its capital
spending needs in connection with its ongoing operations, including
subscriber additions, subscriber equipment purchases, system construction,
installation labor and other expansion activities and, pending such
application, invested such amounts in short-term instruments. Additionally,
based on its business plans and plans supplied by the Operating Ventures and
Programming Ventures, management expects that an aggregate of approximately
$13.2 million of this amount will be invested in HBO Brasil Partners,
Canbras TVA and CNBC for the purpose of funding the Company's PRO RATA share
of these entities' capital spending needs and operating losses, as well as
in the California Broadcast Center (in the form of debt). See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
EXCHANGE RATE DATA
There are two legal foreign exchange markets in Brazil: the commercial rate
exchange market (the "Commercial Market") and the floating rate exchange market
(the "Floating Market"). The Commercial Market is reserved primarily for foreign
trade transactions and transactions that generally require prior approval from
Brazilian monetary authorities, such as the purchase and sale of registered
investments by foreign persons and related remittances of funds abroad, such as
a repurchase by the Company of the Notes. Purchases of foreign exchange in the
Commercial Market may be carried out only through a financial institution in
Brazil authorized to buy and sell currency in that market. The "Commercial
Market Rate" is the commercial selling rate for Brazilian currency into US
dollars, as reported by the Central Bank. The "Floating Market Rate" generally
applies to transactions to which the Commercial Market Rate does not apply.
Prior to the implementation of the Real Plan, the Commercial Market Rate and the
Floating Market Rate differed significantly at times. Since the introduction of
the REAL, the two rates have not differed significantly, although there can be
no assurance that there will not be significant differences between the two
rates in the future. Both the Commercial Market Rate and the Floating Market
Rate are reported by the Central Bank on a daily basis.
36
<PAGE>
Both the Commercial Market Rate and the Floating Market Rate are freely
negotiated but are strongly influenced by the Central Bank, which typically
intervened in the Commercial Market, prior to the implementation of the Real
Plan, in order to control fluctuations and to regulate disparities between the
Commercial Market Rate and the Floating Market Rate. After implementation of the
Real Plan, the Central Bank allowed the real to float with minimal intervention.
However, as described below, on March 6, 1995, the Central Bank announced its
intention to intervene in the foreign exchange markets and has subsequently
intervened in the markets and taken other actions affecting such markets.
On August 1, 1993, the CRUZEIRO REAL replaced the CRUZEIRO as the unit of
Brazilian currency, with each CRUZEIRO REAL being equal to 1,000 CRUZEIROS.
Beginning in December 1993, the Brazilian Government began implementation of the
Real Plan, which was intended to reduce inflation. On July 1, 1994, the REAL
replaced the CRUZEIRO REAL as the unit of Brazilian currency, with each REAL
being equal to 2,750 CRUZEIROS REAIS and having an exchange rate of R$1.00 to
US$1.00. According to Brazilian law, the issuance of REAIS is controlled by
quantitative limits backed by a corresponding amount of US dollars in reserves,
but the Brazilian Government subsequently expanded those quantitative limits and
allowed the REAL to float, with parity between the REAL and the US dollar
(R$1.00 to US$1.00) as a ceiling.
On March 6, 1995, the Central Bank announced that it would intervene in the
market and buy or sell US dollars, establishing a band (FAIXA DE FLUTUACAO) in
which the exchange rate between the REAL and the US dollar could fluctuate. The
Central Bank initially set the band with a floor of R$0.86 per US$1.00 and a
ceiling of R$0.90 per US$1.00 and provided that, from and after May 2, 1995, the
band would fluctuate between R$0.86 and R$0.98 per US$1.00. Shortly thereafter,
the Central Bank issued a new directive providing that the band would be between
R$0.88 and R$0.93 per US$1.00. On June 22, 1995, the Central Bank issued another
directive providing that the band would be between R$0.91 and R$0.99 per US$1.00
and subsequently reset the band on January 30, 1996 to between R$0.97 and R$1.06
per US$1.00. Upon resetting the band on January 30, 1996, the Central Bank
adjusted the exchange rate within such band on a number of occasions, generally
in increments of R$.001, by means of buying and selling US dollars in electronic
auctions. On February 18, 1997, the band was reset by the Central Bank to float
between R$1.05 and R$1.14 per US$1.00. On April 7, 1997, the Commercial Market
Rate was R$1.06 per US$1.00. There can be no assurance that the band will not be
altered in the future. See "Risk Factors -- Risks Relating to the Notes --
Controls and Restrictions on US Dollar Remittances; Exchange Regulation" -- and
"--Risks Relating to Brazil--Effects of Exchange Fluctuations" and "--Controls
and Restrictions on US Dollar Restrictions."
The following table sets forth the Commercial Market Rate for the periods
indicated.
<TABLE>
<CAPTION>
EXCHANGE RATES OF BRAZILIAN CURRENCY PER US$1.00(A)
------------------------------------------------------
<S> <C> <C> <C> <C>
PERIOD(B) LOW HIGH AVERAGE PERIOD END
- ---------------------------------------------- ------------ ------------ ------------ ------------
1991......................................... 0.000062 0.000389 0.000149 0.000389
1992......................................... 0.000393 0.004505 0.001655 0.004505
1993......................................... 0.004557 0.118584 0.032809 0.118584
1994......................................... 0.120444 0.940000 0.645000 0.846000
1995......................................... 0.834000 0.972600 0.917742 0.972500
1996......................................... 0.972600 1.040700 1.005000 1.039400
</TABLE>
- ------------------------
(a) The information set forth in this table is based on information published by
the Central Bank.
(b) The historical information from 1991 through 1994 represents the nominal
Brazilian currency expressed in current REAIS adjusted for depreciation and
currency substitution. The exchange rates have been translated at the rates
of exchange at the time the successor currencies took effect.
37
<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual cash balance and
capitalization of the Company at September 30, 1996 and (ii) the cash balance
and capitalization of the Company at September 30, 1996 as adjusted to give
effect to the offering of the Old Securities and the application of the net
proceeds therefrom. This table should be read in conjunction with the Financial
Statements of the Company appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
---------- ------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash & cash equivalents............................................ $ 619 $ 128,432(a)
---------- ------------
---------- ------------
Short-term bank loans.............................................. $ 5,441 $ --
---------- ------------
---------- ------------
Long-term liabilities
Loans from affiliated companies.................................. $ 91,926 $ --(b)
Loans from shareholders.......................................... 4,607 4,607
Senior Notes due 2004............................................ -- 250,000
---------- ------------
Total long-term liabilities........................................ 96,533 254,607(c)
Redeemable common shares........................................... 163,225 163,225
Shareholders' equity
Paid-in capital.................................................. 142,495 142,495
Accumulated deficit.............................................. (211,466) (211,466)
---------- ------------
Total shareholders' equity......................................... (68,971) (68,371)
---------- ------------
Total capitalization............................................... $ 190,787 $ 348,861
---------- ------------
---------- ------------
</TABLE>
- ------------------------
(a) A portion of the net proceeds from the offering of the Old Securities was
invested in short-term instruments pending application as described under
"Use of Proceeds."
(b) Represents the repayment of all outstanding indebtedness under the Abril
Credit Facility ($105,800 outstanding as of October 31, 1996) and the
repayment of $2,121 of other related party indebtedness. During the period
from September 30, 1996 through October 31, 1996, the Company paid $16,844
in connection with its capital spending program. The Abril Credit Facility
will remain in place, with availability of up to $60,000, until December
1998. As of April 10, 1997, the Company had not redrawn any amounts under
the Abril Credit Facility. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Description of Certain Indebtedness."
(c) Does not reflect the Company's unused availability under either (i) the
pending Galaxy Brasil Leasing Facility, under which a maximum of $49,900 may
be drawn, or (ii) the EximBank Facility, under which a maximum of
approximately $29,350 may be drawn. The Company expects to draw during 1997
approximately $11,400 under the EximBank Facility and $19,599 under the
Galaxy Brasil Leasing Facility. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Description of Certain Indebtedness."
38
<PAGE>
SELECTED HISTORICAL FINANCIAL AND OTHER DATA
The historical data as of December 31, 1995 and 1994 and for the three years
in the period ended December 31, 1995 have been derived from, and should be read
in conjunction with, the audited Financial Statements of the Company included
elsewhere in this Prospectus. The unaudited financial data set forth below as of
and for the nine month period ended September 30, 1996 and for the nine month
period ended September 30, 1995 have been derived from the unaudited Financial
Statements of the Company. The historical data as of December 31, 1992 and 1993
and for the year ended December 31, 1992 are derived from the audited Financial
Statements of the Company that are not included elsewhere in this Prospectus.
The historical data as of September 30, 1995 are derived from the unaudited
Financial Statements of the Company that are not included elsewhere in this
Prospectus.
As required by Brazilian law, and in accordance with local accounting
practices, the financial records of Tevecap and its subsidiaries are maintained
in the applicable Brazilian currency (the REAL). However, the Financial
Statements are presented in US dollars. 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 audited Financial
Statements. Because of the differences between the evolution of the rates of
inflation in Brazil and the changes in the rates of devaluation, amounts
presented in US dollars may show distortions when compared on a period-to-period
basis.
The results of operations for the nine month period ended September 30, 1996
are not necessarily indicative of the results expected for the year ending
December 31, 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ --------------------
<S> <C> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SELECTED OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATING DATA:
Gross revenues
Monthly subscriptions.................................. $ 7,070 $ 12,544 $ 27,976 $ 62,496 $ 41,296 $ 85,301
Installation........................................... 1,857 4,350 6,997 26,045 17,995 39,396
Indirect programming(a)................................ 512 530 1,626 2,866 2,114 5,278
Other(b)............................................... 1,322 2,468 7,173 10,603 7,699 10,657
Revenue taxes(c)....................................... (305) (371) (872) (7,506) (5,171) (8,881)
--------- --------- --------- --------- --------- ---------
Total net revenue........................................ 10,456 19,521 42,900 94,504 63,933 131,751
--------- --------- --------- --------- --------- ---------
Direct operating expenses(d)............................. 32,905 29,779 28,659 62,026 42,279 75,557
Selling, general and administrative expenses............. 17,834 19,957 24,370 46,902 30,787 53,710
Depreciation and Amortization............................ 2,704 4,813 6,177 13,268 8,865 18,547
Allowance for inventory obsolescence .................... -- -- -- -- -- 2,493
--------- --------- --------- --------- --------- ---------
Total operating expenses................................. 53,443 54,549 59,206 122,196 81,931 150,307
--------- --------- --------- --------- --------- ---------
Operating loss........................................... (42,987) (35,028) (16,306) (27,692) (17,998) (18,556)
Nonoperating expenses....................................
Interest expense....................................... (13,538) (8,492) (16,413) (17,745) (12,493) (10,125)
Equity in (losses) income of affiliates(e)............. -- -- 383 (3,672) (2,084) (6,642)
Other nonoperating (expenses) income, net(f)........... 2,232 5,892 20,339 8,039 5,158 (1,592)
Income tax expense..................................... -- -- -- -- -- (105)
--------- --------- --------- --------- --------- ---------
Net loss................................................. $ 54,293 $ (37,628) $ (11,997) $ (41,070) $ (27,417) $ (37,020)
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
OTHER DATA:
EBITDA--TV Group(g)...................................... $ (40,283) $ (30,215) $ (10,129) $ (13,318) $ (8,462) $ 8,533
EBITDA--Galaxy Brasil(g)................................. -- -- -- (1,106) (671) (6,049)
--------- --------- --------- --------- --------- ---------
EBITDA(g)................................................ (40,283) (30,215) (10,129) (14,424) (9,133) 2,484
Pro forma interest expense(h)............................ 38,623 29,940
Purchase of fixed assets................................. 7,627 11,379 22,369 38,629 52,987 72,538
Ratio of earnings to fixed charges(i).................... -- -- -- -- -- --
CASH FLOW DATA:
Cash provided by (used in) operating activities (h)...... (32,633) (19,180) (9,707) 22,989 1,099 (5,385)
Cash provided by (used in) investing activities.......... (11,761) (13,190) (24,334) (119,661) (68,541) (111,800)
Cash provided by (used in) financing activities.......... 44,088 32,348 38,666 116,229 62,837 93,603
SELECTED OPERATING DATA:
Number of Subscribers to Owned Systems(j)................ 42,924 82,985 114,853 219,148 198,157 316,345
Average monthly revenue per Subscriber(k)................ $ 18.64 $ 21.30 $ 27.80 $ 33.24 $ 33.48 $ 37.66
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents................................ $ 41 $ 19 $ 4,644 $ 24,201 $ 39 $ 619
Property, plant and equipment............................ 29,561 35,859 51,426 131,266 95,756 188,063
Total assets............................................. 40,779 45,529 80,441 218,848 148,473 291,154
Loans from affiliated companies.......................... 42,577 89,769 -- 586 22,301 91,926
Long-term liabilities.................................... 67,736 97,105 4,523 9,604 29,816 105,330
Redeemable common shares................................. -- -- 19,754 149,534 69,754 163,225
Total shareholders' equity............................... (54,483) (92,111) 27,590 (18,260) 173 (68,971)
<CAPTION>
<S> <C>
<S> <C>
STATEMENT OF OPERATING DATA:
Gross revenues
Monthly subscriptions..................................
Installation...........................................
Indirect programming(a)................................
Other(b)...............................................
Revenue taxes(c).......................................
-
Total net revenue........................................
-
Direct operating expenses(d).............................
Selling, general and administrative expenses.............
Depreciation and Amortization............................
Allowance for inventory obsolescence ....................
-
Total operating expenses.................................
-
Operating loss...........................................
Nonoperating expenses....................................
Interest expense.......................................
Equity in (losses) income of affiliates(e).............
Other nonoperating (expenses) income, net(f)...........
Income tax expense.....................................
-
Net loss.................................................
-
-
OTHER DATA:
EBITDA--TV Group(g)......................................
EBITDA--Galaxy Brasil(g).................................
-
EBITDA(g)................................................
Pro forma interest expense(h)............................
Purchase of fixed assets.................................
Ratio of earnings to fixed charges(i)....................
CASH FLOW DATA:
Cash provided by (used in) operating activities (h)......
Cash provided by (used in) investing activities..........
Cash provided by (used in) financing activities..........
SELECTED OPERATING DATA:
Number of Subscribers to Owned Systems(j)................
Average monthly revenue per Subscriber(k)................
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents................................
Property, plant and equipment............................
Total assets.............................................
Loans from affiliated companies..........................
Long-term liabilities....................................
Redeemable common shares.................................
Total shareholders' equity...............................
</TABLE>
See accompanying Notes to Selected Historical Financial And Other Data
39
<PAGE>
NOTES TO SELECTED HISTORICAL FINANCIAL AND OTHER DATA
(a) Represents revenues received by the Company for selling programming to the
Independent Operators.
(b) Includes Advertising and Other revenues.
(c) Represents various non-income based taxes paid on certain of the Company's
gross revenue items with rates ranging from 2.65% to 7.65%.
(d) Represents costs directly related to Monthly subscriptions, and a portion of
Installation, Indirect programming and Other revenues.
(e) Represents the Company's pro rata share of the Net loss or income of its
equity investments.
(f) Includes Interest income, Translation gain or loss, Other nonoperating
(expenses) income, net, and Minority interest. The amount included for the
year ended December 31, 1994 includes Interest income totaling $21,806.
During that year, the Company received capital contributions from
stockholders which resulted in a surplus of cash invested during such
period.
(g) EBITDA represents the sum of (i) net income (loss), plus, without
duplication (ii) income tax expense, (iii) interest expense (income), net,
(iv) other nonoperating (expenses) income, net (v) depreciation,
amortization and all other non-cash charges, less (vi) non-cash items
increasing net income (loss) with the exception of amortized deferred
sign-on and hookup fee revenue, in each case determined in accordance with
GAAP. EBITDA-TV Group and EBITDA-Galaxy Brasil represent operating loss plus
depreciation and amortization. The term "TV Group" refers to the operations
of TVA, excluding the operations of Galaxy Brasil. The TV Group, which
constitutes the operations of TVA, excluding the operations of Galaxy
Brasil, represents the more mature operations of the Group while Galaxy
Brasil remains in a start up phase and has yet to collect material revenues
to offset the costs of initiating the Ku-Band service. EBITDA has been
presented separately for the TV Group and Galaxy Brasil to take account of
the different stages of development of these operations.
(h) Cash provided by (used in) operating activities (hereinafter referred to as
cash flows from operating activities) has been determined in accordance with
GAAP while EBITDA has been calculated in accordance with the definition in
footnote (g). In accordance with GAAP, cash flows from operating activities
generally reflect the cash effects of transactions and other events that
enter into the determination of net income. The principal difference between
EBITDA and cash flows from operating activities arise as a result of the
treatment of the changes in the balances of operating assets and liabilities
from the beginning to the end of a reporting period. That is, in accordance
with GAAP, such changes are components of cash flows from operating
activities while there is no similar adjustment in the calculation of
EBITDA. EBITDA has been presented as it is a financial measure commonly used
in the Company's industry. EBITDA should not be considered as an alternative
to cash provided by (used in) operating activities, as an indicator of
operating performance or as a measure of liquidity.
(i) Represents interest expense on a pro forma basis, resulting from the
offering of Old Securities and the application of the net proceeds therefrom
as follows:
<TABLE>
<CAPTION>
NINE MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
--------------- ---------------
<S> <C> <C>
Historical interest expense...................................... $ 17,745 $ 10,125
Elimination of interest expense related to certain affiliated
indebtedness................................................... (11,788) (4,684)
Interest resulting from the Notes based on an interest rate of
12.625%........................................................ 31,563 23,672
Amortization of deferred financing costs relating to the Notes... 1,103 827
--------------- ---------------
$ 38,623 $ 29,940
--------------- ---------------
--------------- ---------------
</TABLE>
(j) For the four years ended December 31, 1995 and the nine months ended
September 30, 1995 and 1996, earnings were insufficient to cover fixed
charges by $54,487, $37,920, $13,100, $38,269, $25,905 and $31,911,
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).
(k) Represents the number of Owned Systems' Subscribers as of the last day of
each period.
(l) Average monthly revenue per subscriber refers to the average monthly
subscription fee as of the last day of each period.
40
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements (including the notes thereto) included elsewhere in this Prospectus.
For the purposes of the following discussion, all dollar amounts are set forth
in thousands of US dollars.
This Management's Discussion and Analysis of Financial Condition and Results
of Operations reflects the historical results of the Company. Due to the limited
operating history, startup nature, translations of Brazilian currency into US
dollars, and rapid growth of the Company, period-to-period comparisons of
financial data are not necessarily indicative, and should not be relied upon as
an indicator of the future performance of the Company.
OVERVIEW
Since its inception in 1989, the Company has been in a developmental or
buildout stage. The TV Group, representing the more mature operations of the
Company, has experienced, and continues to experience, rapid growth. In
addition, the Company, through Galaxy Brasil, initiated Ku-Band DIRECTV service
on a limited basis in July 1996. Despite its growth, the Company has sustained
substantial net losses due primarily to insufficient revenue with which to fund
startup costs, interest expense and charges for depreciation and amortization.
However, the TV Group has been generating positive operating cash flow beginning
with the three month period ended June 30, 1996, while Galaxy Brasil,
representing the Company's less mature operations, remains in a start-up phase
and has not yet collected material revenues to offset the costs of initiating
the Ku-Band service. Net losses incurred by the Company since inception have
been funded principally by (i) net contributions of approximately $288,000 from
the Company's shareholders, (ii) borrowings from Abril under the Abril Credit
Facility and (iii) short term borrowings made from time to time. Management
expects the financial results of the Company to improve as the operation of the
Ku-Band service matures and the number of subscribers for the Company's Ku-Band
service and TV Group services continues to grow. There can be no assurance,
however, that the number of the Company's subscribers will grow, or that the
Company's financial performance will improve.
41
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain statements
of operations data expressed in US dollar amounts and as a percentage of net
revenue:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------------------------- ------------------------
1993 1994 1995 1995
---------------------- ---------------------- ---------------------- ------------------------
(DOLLARS IN THOUSANDS)
% OF NET % OF NET % OF NET UNAUDITED % OF NET
AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE AMOUNT REVENUE
--------- ----------- --------- ----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Gross revenues
Monthly subscriptions......... $ 12,544 64.3% $ 27,976 65.2% $ 62,496 66.1% $ 41,296 64.6%
Installation.................. 4,350 22.3 6,997 16.3 26,045 27.6 17,995 28.1
Indirect programming.......... 530 2.7 1,626 3.8 2,866 3.0 2,114 3.3
Other......................... 2,468 12.6 7,173 16.7 10,603 11.2 7,699 12.0
Revenue taxes................. (371) (1.9) (872) (2.0) (7,506) (7.9) (5,171) (8.0)
--------- ----------- --------- ----------- --------- ----------- ----------- -----------
Net revenue................... 19,521 100.0 42,900 100.0 94,504 100.0 63,933 100.0
--------- ----------- --------- ----------- --------- ----------- ----------- -----------
Direct operating expenses..... 29,779 152.5 28,659 66.8 62,026 65.6 42,279 66.1
Selling, general and
administrative expenses..... 19,957 102.2 24,370 56.8 46,902 49.6 30,787 48.2
Depreciation and
Amortization................ 4,813 24.7 6,177 14.4 13,268 14.0 8,865 13.9
Allowance for inventory
obsolescence................ -- -- -- -- -- -- -- --
--------- ----------- --------- ----------- --------- ----------- ----------- -----------
Total operating expenses...... 54,549 279.4 59,206 138.0 122,196 129.2 81,931 128.2
--------- ----------- --------- ----------- --------- ----------- ----------- -----------
Operating loss................ (35,028) (179.4) (16,306) (38.0) (27,692) (29.2) (17,998) (28.2)
--------- ----------- --------- ----------- --------- ----------- ----------- -----------
Interest income............... 5,369 27.5 21,806 50.8 3,118 3.3 1,360 2.1
Interest expense.............. (8,492) (43.5) (16,413) (38.3) (17,745) (18.8) (12,493) (19.5)
Translation (loss) gain....... 788 4.0 (914) (2.1) (339) (0.4) (41) (0.1)
Equity in (losses) income of
affiliates.................. -- -- 383 0.9 (3,672) (3.9) (2,084) (3.3)
Other nonoperating (expenses)
income, net................. (557) (2.9) (1,273) (3.0) 4,389 4.6 3,267 5.1
Minority interest............. 292 1.5 720 1.7 871 0.9 572 0.9
Income tax expense............ -- -- -- -- -- -- -- --
--------- ----------- --------- ----------- --------- ----------- ----------- -----------
Net loss...................... $ (37,628) (192.8)% $ (11,997) (28.0 )% $ (41,070) (43.5 )% $ (27,417 ) (42.8)%
--------- ----------- --------- ----------- --------- ----------- ----------- -----------
--------- ----------- --------- ----------- --------- ----------- ----------- -----------
<CAPTION>
1996
------------------------
UNAUDITED % OF NET
AMOUNT REVENUE
----------- -----------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Gross revenues
Monthly subscriptions......... $ 85,301 64.7%
Installation.................. 39,396 29.9
Indirect programming.......... 5,278 4.0
Other......................... 10,657 8.1
Revenue taxes................. (8,881) (6.7)
----------- -----
Net revenue................... 131,751 100.0
----------- -----
Direct operating expenses..... 75,557 57.3
Selling, general and
administrative expenses..... 53,710 40.8
Depreciation and
Amortization................ 18,547 14.1
Allowance for inventory
obsolescence................ 2,493 1.9
----------- -----
Total operating expenses...... 150,307 114.1
----------- -----
Operating loss................ (18,556) (14.1)
----------- -----
Interest income............... 3,650 2.8
Interest expense.............. (10,125) (7.7)
Translation (loss) gain....... 243 0.2
Equity in (losses) income of
affiliates.................. (6,642) (5.0)
Other nonoperating (expenses)
income, net................. (7,018) (5.3)
Minority interest............. 1,533 1.2
Income tax expense............ (105) (0.1)
----------- -----
Net loss...................... $ (37,020) (28 )%
----------- -----
----------- -----
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1995
The table below sets forth the number of subscribers at September 30, 1995
and September 30, 1996 for the Owned Systems.
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
OWNED SYSTEMS SUBSCRIBERS 1995 1996
- ------------------------------------------------------------- -------------- --------------
<S> <C> <C>
MMDS(a)...................................................... 177,089 229,656
Cable........................................................ 11,087 39,253
DIRECTV and Digital C-Band................................... 9,981 47,436
-------------- --------------
198,157 316,345
Paid Subscribers Awaiting Installation(b).................... 18,460 19,691
-------------- --------------
Total Owned Systems.......................................... 216,617 336,036
-------------- --------------
-------------- --------------
</TABLE>
- ------------------------
(a) Includes UHF subscribers.
(b) Subscribers who have paid an installation fee but are awaiting the
installation of service.
42
<PAGE>
The table below sets forth at September 30, 1995 and September 30, 1996 the
approximate number of television households which received TVA's programming
through the Owned Systems and the Operating Ventures and through sales of
programming to the Independent Operators.
HOUSEHOLDS RECEIVING TVA PROGRAMMING
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1995 1996
-------------- --------------
<S> <C> <C>
Total Owned Systems.......................................... 216,617 336,036
Operating Ventures........................................... 27,027 66,388
Independent Operators........................................ 252,000 555,049
-------------- --------------
Total........................................................ 495,644 957,473
-------------- --------------
-------------- --------------
</TABLE>
REVENUES. Revenues consist primarily of Monthly subscriptions revenue
(which principally consists of monthly fees paid by subscribers to the Company
for programming services, including equipment use), Installation revenue,
Indirect programming revenue (which consists of payments made to the Company for
the sale of its programming to the Independent Operators) and Other revenue
(which consists of Advertising revenues and Other revenues). Revenue taxes
consist of a 2.65% tax on Advertising revenue and a 7.65% tax on the balance of
revenues, in each case charged by the Brazilian Government.
Monthly subscriptions revenue for the nine months ended September 30, 1996
was $85,301, as compared to $41,296 for the comparable period in 1995, an
increase of $44,005. This increase was principally attributable to an increase
in subscriber base and an increase in the amount of average monthly fees from
$33.48 to $37.66 per subscriber. The average monthly subscription price during
the nine month period ended September 30, 1996, was $46.83 for MMDS service,
$39.84 for Cable service and, $37.89 for C-Band service, as compared to $44.32,
$35.75 and $32.57 respectively, for the nine month period ended September 30,
1995. The average monthly subscription price for Ku-Band service from its
introduction in July 1996 to September 30, 1996, was $56.40. Galaxy Brasil
contributed $502 to monthly subscription revenue for the nine months ended
September 30, 1996, as compared to $0 for the comparable period in 1996.
Installation revenue for the nine months ended September 30, 1996 was
$39,396, as compared to $17,995 for the comparable period in 1995, an increase
of $21,401. This increase was principally attributable to the increase in the
number of new subscribers and also to an increase in the average installation
fee for C-Band service from $500.00 to $707.24. The average installation fee
during the nine month period ended September 30, 1996, was $124.95 for MMDS
service, $40.40 for Cable service, $569.01 for C-Band service, as compared to
$187.63, $78.74 and $589.56, respectively, for the nine month period ended
September 30, 1995. The average installation fee for Ku-Band service from its
introduction in July 1996 to September 30, 1996, was $943.00. The net number of
subscribers added to the Company's Owned Systems during the nine months ended
September 30, 1996 was 97,197, as compared to 83,304 added during the same
period of 1995. Galaxy Brasil contributed $3,200 to Installation revenue for the
nine months ended September 30, 1996, as compared to $0 for the comparable
period in 1995. After an initial rollout in July 1996 Galaxy Brasil began
enrolling subscribers.
Indirect programming revenue for the nine months ended September 30, 1996
was $5,278, as compared to $2,114 for the comparable period of 1995, an increase
of $3,164. This increase was principally attributable to the increase in the
number of Independent Operators' subscribers for the period. The number of
Independent Operators' subscribers increased by 213,350 during the nine month
period ended September 30, 1996, as compared to an increase of 162,327 during
the same period of the prior year. Independent Operators pay a fee to the
Company based on the number of subscribers to such Independent Operator's system
and the number of channels purchased from the Company. The
43
<PAGE>
average monthly fee paid to the Company by an Independent Operator during the
nine months ended September 30, 1996 was $1.64 per subscriber.
Other revenue for the nine months ended September 30, 1996 was $10,657, as
compared to $7,699 for the comparable period of 1995, an increase of $2,958.
This change included a decrease in Advertising revenue to $5,362 from $5,505, a
decrease of $143, and an increase in Other to $5,295 from $2,194, an increase of
$3,101. The decrease in Advertising revenue was attributable to a shift in
advertising sales from advertising on ESPN International programming (the
Advertising revenues from which were reported as Advertising revenues in the
Company's consolidated financial statements), to advertising sales on ESPN
Brasil Ltda. programming (the Advertising revenues from which were not reported
in the Advertising revenues line of the Company's consolidated financial
statements but as part of the Company's Equity in (losses) income of
affiliates).
Revenue taxes for the nine months ended September 30, 1996 were $8,881, as
compared to $5,171 for the same period of the prior year, an increase of $3,710.
Galaxy Brazil contributed $508 to revenue taxes for the nine months ended
September 30, 1996, as compared to $0 for the comparable period of 1995. Galaxy
Brazil began enrolling subscribers and collecting revenue in July 1996.
For the reasons noted above, Net revenue for the nine months ended September
30, 1996 was $131,751, as compared to $63,933 for the comparable period in the
previous year, an increase of $67,818. Galaxy Brasil contributed $3,194 to Net
revenue for the nine months ended September 30, 1996, as compared to $0 for the
comparable period in the previous year.
DIRECT OPERATING EXPENSES. Direct operating expenses include Payroll and
benefits, Programming, Transponder lease cost, Technical assistance expense,
Vehicle rentals expense, TVA Magazine and Other expenses. These expenses, with
the exception of Transponder lease costs, are variable expenses which increase
as the number of subscribers increases and the Company's systems grow, and are
also dependent on the type of service subscribers select. Direct operating
expenses for the nine months ended September 30, 1996 were $75,557, as compared
to $42,279 for the same period in 1995, an increase of $33,278. This increase
was primarily attributable to expenses incurred to service the increase in the
number of subscribers for such period in 1996 compared to the same period in
1995. Payroll and benefits expense increased to $19,467 from $8,868, an increase
of $10,599, as a result of the hiring of more than 537 new employees.
Programming costs increased to $25,477 from $14,105, an increase of $11,372, as
a result of changes implemented in the programming purchased by the Company.
Transponder lease cost increased to $6,575 from $5,357, an increase of $1,218,
as a result of leasing a third transponder in 1996. Technical assistance costs
increased to $4,923 from $3,913, an increase of $1,010; Vehicle rentals expense
increased to $1,252 from $1,114, an increase of $138; and the expense of
publishing TVA Magazine increased to $4,680 from $2,164, an increase of $2,516.
Other costs include third party services, maintenance and other miscellaneous
expenses. For the nine months ended September 30, 1996, Other costs were
$13,183, as compared to $6,758 for the same period the prior year, an increase
of $6,425. Galaxy Brasil contributed $5,111 to Direct operating expenses, as
compared to $665 for the comparable period in 1995, an increase of $4,446 as
Galaxy Brasil incurred Payroll and benefits, Vehicle rentals and other costs
consistent with starting this operation.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses include Payroll and benefits expense for selling,
administrative, financial, legal and human resources, Advertising and promotion,
Rent expense, Other administrative expenses, and Other general expenses.
Selling, general and administrative expenses for the nine months ended September
30, 1996 were $53,710, as compared to $30,787 for the same period of 1995, an
increase of $22,923. The Company has experienced increasing Selling, general and
administrative expenses as a result of its increased pay television activities
and the associated administrative costs, including costs related to opening and
maintaining additional facilities and an overall increase in Payroll and
benefits expense resulting from an increase in the number of employees.
Advertising and promotion expense increased to $12,794 from
44
<PAGE>
$5,882, an increase of $6,912, as a result of an increase in the number of
subscribers and promotional activity. Galaxy Brasil contributed $4,132 to
Selling, general and administrative expenses for the nine months ended September
30, 1996, as compared to $6 for the comparable period in 1995, an increase of
$4,126. Such increase at Galaxy Brasil was due to increases in Payroll and
benefits expense and Other administrative expenses.
DEPRECIATION, AMORTIZATION AND ALLOWANCE FOR INVENTORY
OBSOLESCENCE. Depreciation and Amortization includes depreciation of systems,
equipment, installation materials, installation personnel and organizational
costs and amortization of concessions. Allowance for inventory obsolescence
represents charges for obsolescence of certain equipment and material.
Depreciation and Amortization for the nine months ended September 30, 1996 was
$18,547, as compared to $8,865 for the same period of 1995, an increase of
$9,682. Allowance for inventory obsolescence for the nine months ended September
30, 1996 was $2,493 as compared to $0 for the comparable period in 1995, an
increase of $2,493. Galaxy Brasil contributed $1,059 to Depreciation,
Amortization and Allowance for inventory obsolescence for the nine months ended
September 30, 1996, as compared to $0 for the comparable period in 1995, an
increase of $1,059. Such increase was due to depreciation expenses associated
with the Tambore Facility.
For the reasons noted above, Operating loss for the nine months ended
September 30, 1996 was $18,556, as compared to $17,998 for the comparable period
in 1995, an increase of $558. Galaxy Brasil contributed $7,108 of this loss for
the nine months ended September 30, 1996, as compared to $671 for the comparable
period in 1995, an increase of $6,437.
INTEREST INCOME. Interest income for the nine months ended September 30,
1996 was $3,650, as compared to $1,360 for the same period in 1995, an increase
of $2,290.
INTEREST EXPENSE. Interest expense for the nine months ended September 30,
1996 was $10,125, as compared to $12,493 for the same period of 1995, a decrease
of $2,368. This decrease was due primarily to the utilization of capital
contributed to the Company by Falcon, Hearst and ABC, which occurred in the
second half of 1995, to repay outstanding debt.
EQUITY IN LOSSES (INCOME) OF AFFILIATES. For the nine months ended
September 30, 1996, Equity in losses (income) of affiliates amounted to a loss
of $6,642, as compared to a loss of $2,084 in the same period of 1995, an
increase in loss of $4,558. The primary reason for this increase in loss was
sustained losses at ESPN Brasil, which was formed on June 15, 1995.
OTHER NON-OPERATING (EXPENSES) INCOME. Other non-operating (expenses)
income for the nine months ended September 30, 1996 was an expense of $7,018, as
compared to income of $3,267 in the same period in 1995, an increase in expense
of $10,285. The Other non-operating expenses for the nine months ended September
30, 1996, consisted primarily of fees paid in connection with the investment of
Falcon International and Hearst/ABC Parties in the Company. The Other
non-operating income for the comparable period of 1995 consisted primarily of
income from the sale of movie inventory and other assets.
MINORITY INTEREST. The Minority interest of $1,533 for the nine months
ended September 30, 1996 represents Mr. Leonardo Petrelli's 13.0% share of the
$11,792 in aggregate losses of TVA Sul.
NET LOSS. For the reasons noted above, Net loss for the nine months ended
September 30, 1996 was $37,020, as compared to $27,417 for the comparable period
in 1995, an increase of $9,603.
45
<PAGE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The table below sets forth the number of subscribers at December 31, 1995
and December 31, 1994 for the Owned Systems.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
OWNED SYSTEM SUBSCRIBERS 1994 1995
- -------------------------------------------------------------- -------------- --------------
<S> <C> <C>
MMDS(a)....................................................... 111,771 188,893
Cable......................................................... 1,007 15,129
Digital C-Band................................................ 2,075 15,126
-------------- --------------
114,853 219,148
Paid Subscribers Awaiting Installation(b)..................... 13,956 18,343
-------------- --------------
Total Owned Systems........................................... 128,809 237,491
-------------- --------------
-------------- --------------
</TABLE>
- ------------------------
(a) Includes UHF subscribers.
(b) Subscribers who have paid an installation fee but are awaiting the
installation of service.
The table below sets forth at December 31, 1995 and December 31, 1994 the
approximate number of television households which received TVA's programming
through the Owned Systems and the Operating Ventures and through sales of
programming to the Independent Operators.
HOUSEHOLDS RECEIVING TVA PROGRAMMING
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
-------------- --------------
<S> <C> <C>
Total Owned Systems........................................... 128,809 237,491
Operating Ventures............................................ 7,640 35,572
Independent Operators......................................... 89,673 341,699
-------------- --------------
Total................................................... 226,122 614,762
-------------- --------------
-------------- --------------
</TABLE>
REVENUES. Monthly subscriptions revenue for the year ended December 31,
1995 was $62,496, as compared to $27,976 for the comparable period in 1994, an
increase of $34,520. This increase was attributable to the net addition of
104,295 subscribers to the Company's Owned Systems, and the increase in the
average monthly fee for existing subscribers to $33.24 from $27.80, an increase
of $5.44, and for new subscribers to $39.48 from $31.87, an increase of $7.61.
The average monthly subscription price during the year ended December 31, 1995
was $44.04 for MMDS service and $38.12 for Cable service, as compared to $42.48
and $26.26, respectively, for the year ended December 31, 1994. The average
monthly subscription price for C-Band service for the year ended December 31,
1995 was $41.37. In 1994, the Company's C-Band service was in its initial phase
of operations. In addition, Galaxy Brasil's Ku-Band service was under
development in 1995. The Company was able to increase the monthly fee as the
market price for pay television increased. The increase in the number of
subscribers was due to (i) the continued expansion and penetration of the
Company's MMDS service, including the introduction of signal repeaters in Sao
Paulo and Rio de Janeiro, (ii) the full year benefit of Cable system
construction in Sao Paulo and (iii) the net addition of 13,051 C-Band
subscribers through an aggressive national marketing campaign timed to coincide
with the Company's main competitor focusing on its Cable systems. During each
year, all revenues came from the operation of the TV Group as the operations of
Galaxy Brasil were in development.
Installation revenue for the year ended December 31, 1995 was $26,045, as
compared to $6,997 for the comparable period in 1994, an increase of $19,048.
This increase was principally attributable to the
46
<PAGE>
increase in the number of installations and to the increase in the average fees
for installations. The average fee for MMDS service installation increased to
$169.70 from $119.75, an increase of $49.95, and the average fee for Cable
service installation increased to $81.87 from $44.69, an increase of $37.18. The
C-Band average installation fee increased to $586.79 from $500.00, an increase
of $86.79. The growth in installations was aided by the continued growing
awareness of pay television in Brazil and the Company's start-up of live
broadcasts of the Brazilian National Soccer Championship, the Sao Paulo State
Championship and other soccer events through ESPN Brasil. As with Monthly
subscriptions revenue, all Installation revenue during each year came from the
operations of the TV Group.
Indirect programming revenue for the year ended December 31, 1995 was
$2,866, as compared to $1,626 for the comparable period of 1994, an increase of
$1,240. This increase was principally attributable to the increase in the number
of Independent Operators' subscribers for the period, as compared to the same
period in 1994. Such Independent Operators' subscribers increased to 341,699 at
December 31, 1995, as compared to 89,673 at December 31, 1994, an increase of
252,026. The average fee paid during both 1995 and 1994 was $1.50 per subscriber
per month.
Other revenue for the year ended December 31, 1995 was $10,603, as compared
to $7,173 for the comparable period of 1994, an increase of $3,430. This
increase included an increase in Advertising revenue to $8,377 from $5,727, an
increase of $2,650. The growth in Advertising revenue was due to the increase in
the subscriber base, an increase in the amount of advertising time sold by the
Company per hour of programming and an increase in the rate charged for
advertising time.
Revenue taxes for 1995 were $7,506, as compared to $872 for the prior year,
an increase of $6,634. This increase was primarily attributable to a Government
imposed 5.0% increase in the tax rate, which increased Revenue taxes to 7.65%
from 2.65%, imposed on the Company's Gross revenues (excluding Advertising
revenue, which is taxed at 2.65%).
For the reasons noted above, Net revenue for the year ended December 31,
1995 was $94,504, as compared to $42,900 for the comparable period the previous
year, an increase of $51,604.
DIRECT OPERATING EXPENSES. Direct operating expenses for the year ended
December 31, 1995 were $62,026, as compared to $28,659 for the same period of
1994, an increase of $33,367. This increase was attributable primarily to the
increase in the number of subscribers to the Company's systems which led to
increases in Payroll and benefits expense, Programming expense, Transponder
lease cost, Technical assistance expense, Vehicle rentals expense, TVA Magazine
expense and Other costs. Payroll and benefits expense increased to $12,520 from
$8,022, an increase of $4,498, as the Company added approximately 450 employees.
Programming costs increased to $21,609 from $12,133, an increase of $9,476, as
the Company's subscriber base grew and the Company added four new channels to
each of its distribution systems. Transponder lease cost increased to $7,568
from $1,555, an increase of $6,013, due to an increase in the cost of satellite
transponder leases and the application of a 25.0% tax charged by the Brazilian
Government on transponder lease payments beginning in June 1995. Technical
assistance expense increased to $5,152 from $1,622, an increase of $3,530, due
to an increase in the subscriber base and the upgrade of existing systems for
the receipt of additional channels by subscribers, Vehicle rentals expense
increased to $1,732 from $788, an increase of $944, and TVA Magazine expense
increased to $3,318 from $1,430, an increase of $1,888. These expenses are
variable and increased due to the costs associated with servicing the larger
subscriber base and installing new subscribers. For the year ended December 31,
1995, Other costs were $10,127, as compared to $3,109 for the same period the
prior year, an increase of $7,018. The Company experienced increased expenses as
a result of its increased television activities and associated costs, including
costs related to opening and maintaining additional facilities. Galaxy Brasil
contributed $1,027 to Direct operating expenses for the year ended December 31,
1995, as compared to $0 for the same period of 1994. Galaxy Brasil incurred
Payroll and benefits expense, Vehicle rentals expense and Other costs consistent
with starting its DIRECTV service.
47
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended December 31, 1995 were $46,902, as
compared to $24,370 for the same period of 1994, an increase of $22,532. The
Company experienced increased Selling, general and administrative expenses as a
result of its increased pay television activities and associated administrative
costs, including costs related to opening and maintaining additional facilities
and an overall increase in payroll expenses resulting from an increase in the
number of employees. Advertising and promotion expense increased to $11,122 from
$3,540, an increase of $7,582, largely due to the Company's increased
promotional activity, including nationwide C-Band promotion. Galaxy Brasil
contributed $79 to Selling, general and administrative expenses for the year
ended December 31, 1995, all of which constituted Advertising and rent expenses,
as compared to $0 for the same period of 1994.
DEPRECIATION AND AMORTIZATION. Depreciation and Amortization expense for
the year ended December 31, 1995 was $13,268, as compared to $6,177 for the same
period of 1994, an increase of $7,091. The increase was due primarily to
increased capitalization of the costs associated with building the MMDS, Cable
and C-Band systems and with the installation of new subscribers. Galaxy Brasil
contributed $127 to Depreciation and Amortization expense (all of which
constituted Depreciation expense) for the year ended December 31, 1995, as
compared to $0 for the comparable period in 1994.
For the reasons noted above, Operating loss for the year ended December 31,
1995 was $27,692, as compared to $16,306 for the comparable period in 1994, an
increase in loss of $11,386. Galaxy Brasil contributed $1,233 to this loss for
the year ended December 31, 1995, as compared to $0 for the comparable period in
1994.
INTEREST INCOME. For the year ended December 31, 1995, Interest income
totaled $3,118, as compared to $21,806 in the similar period in 1994, a decrease
of $18,688. This reduction in Interest income was a result of the shorter period
in which a capital contribution of $125,000 in 1995 earned interest relative to
the length of time a capital contribution of $151,452 earned interest in 1994,
as well as due to the sharp appreciation of the Brazilian real versus the US
dollar upon introduction of the real in late 1994.
INTEREST EXPENSE. Interest expense for the year ended December 31, 1995 was
$17,745, as compared to $16,413 for the year ended December 31, 1994, an
increase of $1,332.
EQUITY IN LOSSES (INCOME) OF AFFILIATES. For the year ended December 31,
1995, Equity in losses (income) of affiliates was a loss of $3,672, as compared
to income of $383 for the same period in 1994, a decrease of $4,055. The
principal reasons for this reduction were the losses sustained by ESPN Brasil
Ltda. which came into existence during June 1995, and HBO Brasil Partners, which
came into existence in 1994.
OTHER NON-OPERATING (EXPENSES) INCOME. For the year ended December 31,
1995, Other non-operating (expenses) income was income of $4,389, as compared to
an expense of $1,273 for the same period of 1994, an increase of $5,662. The
primary reasons for this increase were equipment rental income, sales of assets
and a release of certain obligations, among others.
MINORITY INTEREST. The Minority interest of $871 for the twelve months
ended December 31, 1995 represents Mr. Leonardo Petrelli's 20.0% share of the
$4,355 in aggregate losses of TVA Curitiba.
NET LOSS. For the reasons noted above, Net loss for the year ended December
31, 1995 was $41,070, as compared to $11,997 for the comparable period in 1994,
an increase of $29,073.
48
<PAGE>
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
The table below sets forth the number of subscribers at December 31, 1994
and December 31, 1993 for the Owned Systems.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
OWNED SYSTEM SUBSCRIBERS 1993 1994
- -------------------------------------------------------------- -------------- --------------
<S> <C> <C>
MMDS(a)....................................................... 82,474 111,771
Cable......................................................... 0 1,007
Digital C-Band................................................ 511 2,075
------- --------------
82,985 114,853
Paid Subscribers Awaiting Installation(b)..................... 7,438 13,956
------- --------------
Total Owned Systems........................................... 90,423 128,809
------- --------------
------- --------------
</TABLE>
- ------------------------
(a) Includes UHF subscribers.
(b) Subscribers who have paid an installation fee but are awaiting the
installation of service.
The table below sets forth at December 31, 1994 and December 31, 1993 the
approximate number of television households which received TVA's programming
through the Owned Systems and the Operating Ventures and through sales of
programming to the Independent Operators.
HOUSEHOLDS RECEIVING TVA PROGRAMMING
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1993 1994
-------------- --------------
<S> <C> <C>
Total Owned Systems........................................... 90,423 128,809
Operating Ventures............................................ 1,505 7,640
Independent Operators......................................... 36,659 89,673
-------------- --------------
Total................................................... 128,587 226,122
-------------- --------------
-------------- --------------
</TABLE>
REVENUES. Monthly subscriptions revenue for the year ended December 31,
1994 was $27,976, as compared to $12,544 for the comparable period of 1993, an
increase of $15,432. This increase was attributable to the net addition of
31,868 subscribers to the Company's Owned Systems and the increase in the
average monthly fee for existing subscribers to $27.80 from $21.30, an increase
of $6.50, and for new subscribers to $31.87 from $23.63 over the same period, an
increase of $8.24. The Company added three premium channels, including HBO
Brasil, and suspended its "a la carte" channel offerings. The increase in the
number of subscribers was due to the continued expansion and penetration of the
Company's MMDS service, principally in Sao Paulo, Rio de Janeiro and Curitiba,
the launch of a Cable system in Sao Paulo, and the net addition (after the
December 1993 launch) of 1,564 C-Band subscribers.
Installation revenue for the year ended December 31, 1994 was $6,997, as
compared to $4,350 for the comparable period of 1993, an increase of $2,647.
This increase was principally attributable to the growing number of subscriber
installations and to the increase in the average revenue for installation of
MMDS service, which increased to $119.75 from $91.33, an increase of $28.42. The
growth in installations was aided by the growing awareness of pay television in
Brazil, the Company's larger sales force and increased promotional activities,
especially with respect to single family homes.
Indirect programming revenue for the year ended December 31, 1994 was
$1,626, as compared to $530 for the previous year, an increase of $1,096. This
increase was principally attributable to the increase in the number of
Independent Operators' subscribers for the period, as compared to the same
period in 1994. Such subscribers increased to 89,673 at December 31, 1994, as
compared to 36,659 at
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December 31, 1993, an increase of 53,014. The average fee paid by the
Independent Operators during both 1993 and 1994 was $1.50 per Independent
Operator subscriber per month.
Other revenue for the year ended December 31, 1994 was $7,173, as compared
to $2,468 for the comparable period of 1993, an increase of $4,705. This
increase included an increase in Advertising and promotion revenue to $5,727
from $2,099, an increase of $3,628. The growth in Advertising and promotion
revenue was due to the increase in the subscriber base, an increase in the
amount of advertising time sold by the Company per hour of programming and an
increase in the rate charged for advertising time.
Revenue taxes were $872 for the period ending December 31, 1994, as compared
to $371 for the comparable period of 1993, an increase of $501. This increase
was based on the growth of the subscriber base and an increase in revenue.
For the reasons noted above, Net revenue for the year ended December 31,
1994 was $42,900, as compared to $19,521 for the previous year, an increase of
$23,379.
DIRECT OPERATING EXPENSES. Direct operating expenses for the year ended
December 31, 1994 were $28,659, as compared to $29,779 for the same period of
1993, a decrease of $1,120. This decrease was attributable primarily to a
decrease in Programming expense which was partially offset by the increase in
the number of subscribers to the Company's systems, including the increase in
Payroll and benefits expense. Payroll and benefits expense increased to $8,022
from $6,079, an increase of $1,943 as the Company added approximately 200
employees. Programming costs decreased to $12,133, from $18,156, a decrease of
$6,023. This decrease was attributable to the termination of the production of
the Showtime channel (a 24 hour per day movie channel), which was expensive
relative to other channels, and the renegotiation of several other programming
contracts. Transponder lease cost increased to $1,555 from $1,262, an increase
of $293. Technical assistance expense decreased to $1,622 from $1,773, a
decrease of $151. Vehicle rentals expense increased to $788 from $597, an
increase of $191 and TVA Magazine expense increased to $1,430 from $725, an
increase of $705. Other costs were $3,109, as compared to $1,187 for the same
period the prior year, an increase of $1,922. The Company experienced increased
expenses as a result of its increased television activities and associated
costs, including costs related to opening and maintaining additional facilities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended December 31, 1994 were $24,370, as
compared to $19,957 for 1993, an increase of $4,413. Selling, general and
administrative expenses, excluding Advertising and promotion expenses, remained
essentially unchanged due to the ability of the Company to increase its
subscriber base without increasing Selling, general and administrative expenses,
including human resource expense. Advertising and promotion expense increased to
$3,540 from $2,205, an increase of $1,335. The increase was due to the Company's
increase in promotional activity.
DEPRECIATION AND AMORTIZATION. Depreciation and Amortization expense for
the year ended December 31, 1994 was $6,177, as compared to $4,813 for the same
period of 1993, an increase of $1,364 due primarily to increased capitalization
of the costs associated with building the MMDS and Cable systems and installing
new subscribers.
For the reasons noted above, Operating loss for the year ended December 31,
1994 was $16,306, as compared to $35,028 for the year ended December 31, 1993, a
decrease of $18,722.
INTEREST INCOME. Interest income for the year ended December 31, 1994 was
$21,806, as compared to $5,369 for the previous year, an increase of $16,437.
This increase was due primarily to the contribution to the capital of the
Company by Abril and CMIF of $151,452 in the aggregate and the investment of
surplus funds from such contribution.
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INTEREST EXPENSE. Interest expense for the year ended December 31, 1994 was
$16,413, as compared to $8,492 for the previous year, an increase of $7,921.
This increase was primarily due to increased borrowing from Abril to fund
ongoing operations.
EQUITY IN LOSSES (INCOME) OF AFFILIATES. For the year ended December 31,
1994, Equity in losses (income) of affiliates was income of $383, as compared to
$0 in the same period in 1993. This increase was the result of the formation of
Tevecap as the holding company of its various operating subsidiaries which
became effective on June 30, 1994 and Equity in losses in HBO Brasil Partners,
which came into existence in 1994.
OTHER NON-OPERATING (EXPENSES) INCOME. For the year ended December 31,
1994, Other non-operating income and expenses was an expense of $1,273, as
compared to an expense of $557 for the same period in 1993, an increase in
expense of $716. The reasons for this increase in expense were the negative
results of TVA Sistema prior to its acquisition by Tevecap.
MINORITY INTEREST. The Minority interest of $720 for the twelve months
ended December 31, 1994 represents Mr. Leonardo Petrelli's 20.0% share of the
$3,601 in aggregate losses of TVA Parana.
NET LOSS. For the reasons noted above, Net loss for the year ended December
31, 1994 was $11,997, as compared to $37,628 for the comparable period in 1993,
a decrease of $25,631.
SEASONALITY
The Company's revenues are seasonal. Generally, during the Brazilian summer
months of December and January the Company experiences lower demand for
installation for each of its services and lower rates of retention of existing
subscribers for each of its services.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has sustained losses primarily due to
insufficient revenue to fund start-up costs, interest expense and charges for
depreciation and amortization arising from the development of its pay television
systems. As of September 30, 1996, the Company had incurred cumulative net
losses of approximately $193,000. 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 ($90,205 outstanding as of September 30, 1996 which was
repaid with the proceeds of the sale of the Old Securities and none of which has
been redrawn), (ii) short-term borrowings under short-term lines of credit
($5,441 outstanding as of September 30, 1996 and $30.8 million outstanding as of
April 1, 1997), (iii) net capital contributions of approximately $288,000 from
shareholders and (iv) borrowings from shareholders (approximately $4,607
outstanding as of September 30, 1996 and $0 outstanding as of December 31,
1996). Although the Company had negative working capital of $45,773 at September
30, 1996, management believes that the Company has the ability to function on a
going concern basis. See Note 23 to the Tevecap Financial Statements.
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 September 30, 1996, on a pro forma basis
after giving effect to the sale of the Old Securities and the application of the
net proceeds therefrom, the Company would have had approximately $255,000 of
indebtedness outstanding, primarily consisting of $250,000 principal amount of
the Notes.
In addition to debt service, the Company will require substantial amounts of
capital for (i) the construction of cable networks and the installation of
equipment at subscribers' locations, (ii) the construction of additional
transmission and headend facilities and related equipment purchases, (iii) the
continued funding of losses and working capital requirements and (iv)
investments in, and maintenance of, vehicles and administrative offices. In
addition, the Company continually evaluates opportunities to acquire, either
directly or indirectly, pay television licenses and programming rights.
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The Company made purchases of fixed assets of $11,379, $22,639, $93,029 and
$72,538 in 1993, 1994, 1995 and in the nine month period ended September 30,
1996, respectively. The Company estimates that for the remaining three months of
1996, approximately $93,230 of capital expenditures will be required, primarily
for subscriber installations, system construction and development and other
expansion activities. Management also estimates that $292,708 and $239,202 of
capital expenditures will be required in 1997 and 1998, respectively. Of these
balances, management anticipates deferring payment of $108 million and $39
million respectively, for a period of 360 days. This is standard practice in
Brazil.
The Company also has certain commitments that must be, or have been, funded,
including capital contributions of approximately $26,992 prior to December 1997
to GLA, TV Filme, ESPN Brasil Ltda., HBO Brasil Partners, Canbras TVA and CNBC,
and programming payments of approximately $12,895 for the two-year period
beginning January 1, 1997 and ending December 31, 1998. Actual amounts of funds
required may vary materially from these estimates and additional funds could be
required in the event of cost overruns, unanticipated expenses, regulatory
changes, engineering design changes and other technological-driven changes. In
connection therewith, the Company invested $13,273 in the Operating Ventures,
the Programming Ventures and in other minority investments in the last quarter
of 1996, and management expects to invest $13,719 and $0 in the Operating
Ventures, the Programming Ventures and in other minority investments in 1997 and
1998, respectively.
After application of the proceeds from the sale of the Old Securities the
Company's principal sources of liquidity will be the Abril Credit Facility, the
EximBank Facility, the Galaxy Brasil Leasing Facility and the Company's
short-term line of credit (each as described below), together with net cash
provided by operating activities. However, until sufficient cash flow is
generated from operations, the Company will be required to utilize its current
sources of debt funding to satisfy its liquidity needs. The Company would have
had approximately $153,000 of cash and cash equivalents as of September 30, 1996
after consummation of the sale of the Old Securities and application of the
proceeds therefrom. See "Use of Proceeds" and "Capitalization."
For the nine months ended September 30, 1996, net cash used by operating
activities was $5,385, primarily as the result of an increase in accounts
receivable of $13,432, an increase in payments to suppliers of $1,177 and an
increase in inventories of $5,257. The increase was partially offset by $17,436
of depreciation, a non-cash item. For the nine months ended September 30, 1996,
cash used in investing activities was $111,800, primarily as the result of
capital expenditures of $72,538 for the purchase of fixed assets and investments
in equity and cost investments of $30,201. The purchases of fixed assets were
principally related to the purchase of decoders, equipment, hardware and
materials and labor used for new subscriber installations and the investments
related to TVA Sul. For the nine month period ended September 30, 1996, net cash
provided by financing activities was $93,603, consisting principally of $86,656
in net proceeds from loans under the Abril Credit Facility.
The Abril Credit Facility allows the Company to borrow up to $60,000 on a
revolving basis until December 1998. Since June 1996, the Company has from time
to time requested, and Abril has provided, funds in excess of $60,000. The loans
are generally denominated in reais and bear interest at a rate equal to 99.5% of
the CDI rate, the Brazilian interbank lending rate, adjusted at the beginning of
each month. During September 1996, the applicable interest rate was 1.79% per
month. Since the application of the proceeds from the sale of the Old Securities
the Company has not had any amounts outstanding under the Abril Credit Facility.
However, the Company will be able to re-borrow the full amount of such facility,
as required. See "Description of Certain Indebtedness."
On December 9, 1996, TVA Sistema, as Borrower, and Tevecap, as Guarantor,
entered into a credit agreement with The Chase Manhattan Bank for the financing
of C-Band decoders and other related equipment (the "EximBank Facility"). The
Export-Import Bank of the United States of America ("EximBank") will guarantee
85.0% of the amount of the loan. The loan is to be made on terms customary for
credits supported by EximBank to Brazilian borrowers. The interest rate will be
LIBOR plus
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a specified margin. The principal amount of the loan will be $29,350, which will
be dispersed in two tranches, the first in the principal amount of $11,400 with
a term of five years and the second in the principal amount of $17,950 with a
term of 4.5 years. Neither tranche has been dispersed.
In addition, Galaxy Brasil expects to enter into the Galaxy Brasil Leasing
Facility, a five-year $49,900 sale leaseback facility, during the fourth quarter
of 1996. Under the Galaxy Brasil Leasing Facility, Galaxy Brasil will have
access to financing for the purpose of acquiring dish antennae, decoder boxes
and other equipment for its Ku-Band service. This facility will be available
until 2002 and will bear interest at a margin over LIBOR. See "Description of
Certain Indebtedness."
The Company has also from time to time received contributions and loans from
its shareholders to fund liquidity needs and may continue to receive such
contributions and loans in the future. See "Description of Certain Indebtedness"
and "Certain Transactions with Related Parties." In addition, as is standard
business practice in Brazil, the Company frequently finances a portion of its
working capital through the deferment of payment terms for the purchase price of
property (typically up to 360 days). These amounts have often subsequently been
refinanced by the Company with short-term bank indebtedness. The Company
currently has lines of credit with terms of 360 days which will continue to be
available after the Offering.
The Company believes, based on management's internal forecasts and
assumptions relating to its operations, that the aggregate net proceeds from the
sale of the Old Securities, together with proceeds from the deferral of payments
to suppliers of fixed assets, the Eximbank Facility, the Galaxy Brasil Leasing
Facility, the Abril Credit Facility, and funds generated from operations will be
sufficient to meet its working capital and capital expenditure requirements for
at least the period through December 31, 1997. In the long term, the Company
believes, based on management's internal forecasts and assumptions relating to
its operations, that its existing cash and funds generated from operations,
together with its existing financing facilities agreements, will be sufficient
to meet its working capital and capital expenditure requirements. In the event
that the Company's plans change, its assumptions change or prove inaccurate, or
if the proceeds from the Offering, the Eximbank Facility, the Galaxy Brasil
Leasing Facility, the Abril Credit Facility and projected cash flows otherwise
prove insufficient to fund operations (due to unanticipated expenses, technical
problems, difficulties or otherwise), the Company could be required to seek
additional sources of financing. The Company has no current arrangements with
respect to sources of additional financing and there can be no assurance that
the Company would be able to obtain additional financing on terms acceptable to
the Company, or at all. See "Risk Factors--Additional Financing" and "Risk
Factors--Transactions with Related Parties; Rights to Put the Company's Stock."
In addition, the Company's liquidity may also be adversely affected by
statutory minimum dividend requirements under applicable Brazilian law. See
"Risk Factors--Dividends to Shareholders" and "Description of Notes."
ACCOUNTING FOR INCOME TAXES
The Company has approximately $118,600 of net operating losses ("NOLs") to
offset against regular taxes. These NOLs are unexpirable. Statement of Financial
Accounting Standards No. 109 (Accounting for Income Taxes) ("SFAS 109") requires
that the Company determine whether it is "more-likely-than-not" that the Company
will realize the benefits associated with such losses and provides that in
making such a determination, all negative and positive evidence should be
considered (with more weight given to evidence that is "objective and
verifiable"). SFAS No. 109 indicates that "forming a conclusion that a valuation
allowance is not needed is difficult when there is negative evidence such as
cumulative losses in recent years". The Company has a limited operating history
and has generated losses since its inception. In view of this, the Company has
established a full valuation allowance for the amount of NOL carryforwards in
excess of net taxable temporary differences. This determination was based
primarily on historical losses. Management does, however, believe that the
Company will be profitable in the future and, as such, will be able to utilize
these NOLs.
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THE REGISTERED EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
In connection with the sale of the Old Securities, Tevecap and the
Subsidiary Guarantors entered into the Exchange and Registration Rights
Agreement with the Initial Purchasers, pursuant to which Tevecap and each of the
Subsidiary Guarantors agreed to use its best efforts to file with the Commission
a registration statement with respect to the exchange of the Old Securities for
a series of registered debt securities with terms identical in all material
respects to the terms of the Old Securities, except that the Exchange Securities
are issued free from any covenant regarding transfer restrictions, and except
that if the Registered Exchange Offer is not consummated by May 23, 1997,
Tevecap will be obligated to pay each holder of Old Notes an amount equal to
$0.192 per week per $1,000 of the Old Notes until the Registered Exchange Offer
is consummated.
Tevecap together with the Subsidiary Guarantors is making the Registered
Exchange Offer in reliance on the position of the staff of the Commission as set
forth in certain no-action letters addressed to other parties in other
transactions. However, Tevecap has not sought its own no-action letter and there
can be no assurance that the staff of the Commission would make a similar
determination with respect to the Registered Exchange Offer as in such other
circumstances. Based upon these interpretations by the staff of the Commission,
Tevecap believes that the Exchange Securities issued pursuant to this Registered
Exchange Offer in exchange for Old Securities may be offered for resale, resold
and otherwise transferred by a holder thereof (other than (i) a broker-dealer
who acquired the Old Securities as a result of market making activities or other
trading activities, (ii) an Initial Purchaser who acquired the Old Securities
directly from the Company solely in order to resell pursuant to Rule 144A of the
Securities Act or any other available exemption under the Securities Act, or
(iii) a person that is an "affiliate" (as defined in Rule 405 of the Securities
Act) of Tevecap) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such Exchange
Securities are acquired in the ordinary course of such holder's business and
that such holder is not participating, and has no arrangement or understanding
with any person to participate, in the distribution of such Exchange Securities.
Holders of Old Securities accepting the Registered Exchange Offer will represent
to Tevecap in the Letter of Transmittal that such conditions have been met. Any
holder who participates in the Registered Exchange Offer for the purpose of
participating in a distribution of the Exchange Securities may not rely on the
position of the staff of the Commission as set forth in these no-action letters
and would have to comply with the registration and prospectus delivery
requirements of the Securities Act in connection any secondary resale
transaction.
Each broker-dealer that receives Exchange Securities for its own account in
exchange for Old Securities, where such Old Securities were acquired by such
broker-dealer as a result of market-making activities or other trading
activities must acknowledge that it will deliver a prospectus in connection with
any resale of such Exchange Securities. See "Plan of Distribution." This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Securities received in
exchange for Old Securities where such Old Securities were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Letter of Transmittal states that by acknowledging and
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. Tevecap has agreed
that for a period of 90 days after the Expiration Date, it will make this
Prospectus available to broker-dealers for use in connection with any such
resale. See "Plan of Distribution."
Except as aforesaid, this Prospectus may not be used for an offer to resell,
resale or other retransfer of Exchange Securities.
The Registered Exchange Offer is not being made to, nor will Tevecap accept
tenders for exchange from, holders of Old Securities in any jurisdiction in
which the Registered Exchange Offer or the acceptance thereof would not be in
compliance with the securities or blue sky laws of such jurisdiction.
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The Exchange and Registration Rights Agreement also provides that, if (i)
because of any change in law or applicable interpretations thereof by the
Commission's staff, the Company and the Subsidiary Guarantors determine that
they are not permitted to effect the Registered Exchange Offer or (ii) any
holder (including any Initial Purchaser but excluding a broker-dealer who
acquired the Old Securities as a result of market making activities or other
trading activities) either (A) is not eligible to participate in the Registered
Exchange Offer or (B) participates in the Registered Exchange Offer and does not
receive freely transferable Exchange Securities in exchange for tendered
Securities (in each case under this clause (ii) other than as a result of
applicable interpretations of the Commission's staff or applicable law in effect
as of November 26, 1996 or (iii) if the Company so elects, then the following
provisions shall apply: The Company and the Subsidiary Guarantors shall use all
reasonable efforts to as promptly as practicable file with the Commission and
thereafter shall use their best efforts to cause to be declared effective a
shelf registration statement on an appropriate form under the Securities Act
relating to the offer and sale of the Transfer Restricted Securities (as defined
below) by the holders from time to time in accordance with the methods of
distribution set forth in such registration statement (hereafter, a "Shelf
Registration Statement"); PROVIDED, HOWEVER, that no holder of Old Securities or
Exchange Securities (other than the Initial Purchasers) shall be entitled to
have Securities or Exchange Securities held by it covered by such Shelf
Registration Statement unless such holder agrees in writing to be bound by all
the provisions of the Exchange and Registration Rights Agreement applicable to
such holder. The Company and the Subsidiary Guarantors shall use their best
efforts to keep the Shelf Registration Statement continuously effective in order
to permit the prospectus forming part thereof to be usable by holders for a
period of three years from November 26, 1996, or such shorter period that will
terminate when all the Old Securities and Exchange Securities covered by the
Shelf Registration Statement have been sold pursuant to the Shelf Registration
Statement or pursuant to Rule 144 under the Securities Act (in any such case,
such period being called the "Shelf Registration Period"). The Company and the
Subsidiary Guarantors shall be deemed not to have used their best efforts to
keep the Shelf Registration Statement effective during the requisite period if
any of them voluntarily takes any action that would result in holders of Old
Securities or Exchange Securities covered thereby not being able to offer and
sell such Old Securities or Exchange Securities during that period, unless such
action is required by applicable law. Notwithstanding any other provisions
hereof, the Company and the Subsidiary Guarantors will ensure that (i) any Shelf
Registration Statement and any amendment thereto and any prospectus forming part
thereof and any supplement thereto complies in all material respects with the
Securities Act and the rules and regulations thereunder, (ii) any Shelf
Registration Statement and any amendment thereto (in either case, other than
with respect to information included therein in reliance upon or in conformity
with written information furnished to the Company by or on behalf of any holder
specifically for use therein (the "Holders' Information")) does not, when it
become effective, contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading and (iii) any prospectus forming part of any
Shelf Registration Statement, and any supplement to such prospectus (in either
case, other than with respect to Holders' Information), does not include an
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
TERMS OF THE EXCHANGE
Upon the terms and subject to the conditions of the Registered Exchange
Offer, Tevecap will, unless such Old Securities are withdrawn in accordance with
the withdrawal rights specified in "--Withdrawal of Tenders" below, accept any
and all Old Securities validly tendered prior to 5:00 p.m., New York City time,
on the Expiration Date. Tevecap will issue, on or promptly after the Expiration
Date, an aggregate principal amount of up to US$250,000,000 of Exchange Notes in
exchange for a like principal amount of outstanding Old Notes tendered and
accepted in connection with the Registered Exchange Offer. The Exchange Notes
issued in connection with the Registered Exchange Offer will be delivered on the
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earliest practicable date on or following the Expiration Date. Holders may
tender some or all of their Old Notes in connection with the Registered Exchange
Offer.
The terms of the Exchange Securities are identical in all material respects
to the terms of the Old Securities, except that the Exchange Securities have
been registered under the Securities Act and are issued free from any covenant
regarding transfer restrictions, and except that if the Registered Exchange
Offer is not consummated by May 23, 1997, Tevecap will be obligated to pay each
holder of the Old Notes an amount equal to $0.192 per week per $1,000 of the Old
Notes until the Registered Exchange Offer is consummated. The Exchange Notes
will evidence the same debt as the Old Notes and will be issued under and be
entitled to the same benefits under the Indenture as the Old Notes. As of the
date of this Prospectus, US$250,000,000 aggregate principal amount of the Old
Notes is outstanding.
In connection with the issuance of the Old Notes, Tevecap arranged for the
Old Notes originally purchased by qualified institutional buyers to be issued
and transferable in book-entry form through the facilities of The Depository
Trust Company ("DTC"), acting as depositary. Except as described in "Description
of the Notes--Book-Entry; Delivery and Form," the Exchange Notes will be issued
in the form of a global note registered in the name of DTC or its nominee and
each holder's interest therein will be transferable in book-entry form through
DTC. See "Description of the Notes--Book-Entry; Delivery and Form."
Holders of Old Securities do not have any appraisal or dissenters' rights in
connection with the Registered Exchange Offer. Old Securities which are not
tendered for exchange or are tendered but not accepted in connection with the
Registered Exchange Offer will remain outstanding and be entitled to the
benefits of the Indenture, but will not be entitled to any registration rights
under the Exchange and Registration Rights Agreement.
Tevecap shall be deemed to have accepted validly tendered Old Securities
when, as and if Tevecap has given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering holders for the
purposes of receiving the Exchange Securities from Tevecap.
If any tendered Old Securities are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Securities will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Old Securities in connection with the Registered Exchange
Offer will not be required to pay brokerage commissions or fees or, subject to
the instructions in the Letter of Transmittal, transfer taxes with respect to
the exchange of Old Securities in connection with the Registered Exchange Offer.
Tevecap and the Guarantors will pay all charges and expenses, other than certain
applicable taxes described below, in connection with the Registered Exchange
Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on May
23, 1997, unless extended by the Company in its sole discretion, in which case
the term "Expiration Date" shall mean the latest date and time to which the
Registered Exchange Offer is extended.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at the rate of 12 5/8% per annum.
Interest on the Exchange Notes shall accrue from the last Interest Payment Date
on which interest was paid on the Old Notes surrendered or, if no interest has
been paid on the Old Notes, from November 26, 1996.
Interest on the Exchange Notes will be payable semiannually on May 26 or
November 26 of each year, commencing on the first Interest Payment Date
following the issuance thereof.
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Holders of Old Notes whose Old Notes are accepted for exchange will not
receive interest on such Old Notes for any period subsequent to the last
interest payment date to occur prior to the issue date of the Exchange Notes,
and will be deemed to have waived the right to receive any interest payment on
the Old Notes accrued from and after such interest payment date.
EXCHANGE OFFER PROCEDURES
Only a holder of record of Old Securities on April 22, 1997, may tender such
Old Securities in connection with the Registered Exchange Offer. The tender to
the Company of Old Securities by a holder thereof as set forth below and the
acceptance thereof by the Company will constitute a binding agreement between
the tendering holder and the Company upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal. Except as set forth below, a holder who wishes to tender Old
Securities for exchange pursuant to the Registered Exchange Offer must transmit
a properly completed and duly executed Letter of Transmittal, including all
other documents required by such Letter of Transmittal, to the Exchange Agent at
one of the addresses set forth below under "Exchange Agent" prior to 5:00 p.m.
New York City time on the Expiration Date. In addition, either (i) certificates
for such Old Securities must be received by the Exchange Agent along, with the
Letter of Transmittal, or (ii) a timely confirmation of a book-entry transfer (a
"Book-Entry Confirmation") of such Old Securities, if such procedure is
available, into the Exchange Agent's account at DTC pursuant to the procedure
for book-entry transfer described below, must be received by the Exchange Agent
prior to 5:00 p.m. New York City time on the Expiration Date, or (iii) the
holder must comply with the guaranteed delivery procedures described below. THE
METHOD OF DELIVERY OF OLD SECURITIES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY
IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD SECURITIES
SHOULD BE SENT TO THE COMPANY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Old Securities surrendered for exchange
pursuant thereto are tendered (i) by a registered holder of the Old Securities
who has not completed the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution (as defined below). In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case may
be, are required to be guaranteed, such guarantees must be by a firm which is a
member of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust company
having an office or correspondent in the United States (collectively, "Eligible
Institutions"). If Old Securities are registered in the name of a person other
than the signer of a Letter of Transmittal, the Old Securities surrendered for
exchange must be endorsed by, or be accompanied by a written instrument or
instruments of transfer or exchange, in satisfactory form as determined by the
Company in its sole discretion, duly executed by the registered holder with the
signature thereon guaranteed by an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Securities tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and all
tenders of any particular Old Securities not properly tendered or to not accept
any particular Old Securities which acceptance might, in the judgment of the
Company or its counsel, be unlawful. The Company also reserves the absolute
right to waive any defects or irregularities or conditions of the Registered
Exchange Offer as to any particular Old Securities either before or after the
Expiration Date (including the right to waive the ineligibility of any holder
who seeks to tender Old Securities in the Registered Exchange Offer). The
interpretation of the terms and conditions of the Registered Exchange Offer as
to any particular Old Securities either before or after the Expiration Date
(including the Letter of
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Transmittal and the instructions thereto) by the Company shall be final and
binding on all parties. Unless waived, all defects or irregularities in
connection with tenders of Old Securities for exchange must be cured within such
reasonable period of time as the Company shall determine. Neither the Company,
the Exchange Agent nor any other person shall be under any duty to give
notification of any defect or irregularity with respect to any tender of Old
Securities for exchange, nor shall any of them incur any liability for failure
to give such notification. The Exchange Agent intends to use reasonable efforts
to give notification of such defects or irregularities.
If the Letter of Transmittal is signed by a person or persons other than the
registered holder or holders of Old Securities, such Old Securities must be
endorsed or accompanied by appropriate powers of attorney, in either case signed
exactly as the name of names of the registered holder or holders that appear on
the Old Securities.
If the Letter of Transmittal or any Old Securities or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of a corporation or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
By tendering, each holder will represent to the Company that, among other
things, the Exchange Securities acquired pursuant to the Registered Exchange
Offer are being obtained in the ordinary course of business of the person
receiving such Exchange Securities, whether or not such person is the holder and
such person has no arrangement with any person to participate in the
distribution of the Exchange Securities. If any holder or any such other person
is an "affiliate," as defined under Rule 405 of the Securities Act, of the
Company, is engaged in or intends to engage in or has an arrangement or
understanding with any person to participate in a distribution of such Exchange
Securities to be acquired pursuant to the Registered Exchange Offer, or acquired
the Old Securities as a result of market making or other trading activities,
such holder or any such other person (i) could not rely on the applicable
interpretations of the staff of the Commission and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives
Exchange Securities for its own account in exchange for Old Securities, where
such Old Securities were acquired as a result of market making activities or
other trading activities must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Securities. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
ACCEPTANCE OF OLD SECURITIES FOR EXCHANGE; DELIVERY OF EXCHANGE SECURITIES
The Company will accept, promptly after the Expiration Date, all Old
Securities properly tendered and will issue the Exchange Securities promptly
after acceptance of the Old Securities. For purposes of the Registered Exchange
Offer, the Company shall be deemed to have accepted properly tendered Old
Securities for exchange when, as and if the Company has given oral or written
notice thereof to the Exchange Agent, with written confirmation of any oral
notice to be given promptly thereafter.
In all cases, issuance of Exchange Securities for Old Securities that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of (i) certificates for such Old Securities
or a timely confirmation of such Old Securities into the Exchange Agent's
account at DTC, (ii) a properly completed and duly executed Letter of
Transmittal and (iii) all other required documents. If any tendered Old
Securities are not accepted for any reason set forth in the terms and conditions
of the Exchange Offer, or if Old Securities are submitted for a greater amount
than the holder desires to exchange, such unaccepted or unexchanged Old
Securities will be returned without expense to the tendering holder thereof (or,
in the case of Old Securities tendered by book-entry
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<PAGE>
transfer into the Exchange Agent's account at DTC pursuant to the book-entry
procedures described below, such nonexchanged Old Securities will be credited to
an account maintained with DTC) designated by the tendering holder as promptly
as practicable after the expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Securities at DTC for purposes of the Registered Exchange Offer
within two business days after the date of this Prospectus, and any financial
institution that is a participant in the DTC systems may make book-entry
delivery of Old Securities by causing DTC to transfer such Old Securities into
the Exchange Agent's account at DTC in accordance with such DTC's procedures for
transfer. However, although delivery of Old Securities may be effected through
book-entry transfer at DTC, the Letter of Transmittal or facsimile thereof, with
any required signature guarantees and any other required documents, must, in any
case, be transmitted to and received by the Exchange Agent at one of the
addresses set forth below under "--Exchange Agent" on or prior to the Expiration
Date or the guaranteed delivery procedures described below must be complied
with.
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Securities desires to tender such Old
Securities and the Old Securities are not immediately available, or time will
not permit such holder's Old Securities or other required documents to reach the
Exchange Agent before the Expiration Date, or the procedure for book-entry
transfer cannot be completed on a timely basis, a tender may be effected if (i)
the tender is made through an Eligible Institution, (ii) prior to the Expiration
Date, the Exchange Agent has received from such Eligible Institution a properly
completed and duly executed Letter of Transmittal (or a facsimile thereof) and
Notice of Guaranteed Delivery, substantially in the form of the corresponding
exhibit to the Registration Statement of which this Prospectus constitutes a
part (by telegram, telex, facsimile transmission, mail or hand delivery),
setting forth the name and address of the holder of Old Securities and the
amount of Old Securities tendered, stating that the tender is being made thereby
and guaranteeing that within three New York Stock Exchange ("NYSE") trading days
after the date of execution of the Notice of Guaranteed Delivery, the
certificates for all physically tendered Old Securities, in proper form for
transfer, or a Book-Entry Confirmation, as the case may be, and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent, and (iii) the certificates for all
physically tendered Old Securities, in proper form for transfer, or a Book-Entry
Confirmation, as the case may be, and all other documents required by the Letter
of Transmittal, are received by the Exchange Agent within three NYSE trading
days after the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Securities may be withdrawn at any time prior to the
Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Old Securities to be withdrawn, identify the Old
Securities to be withdrawn (including the amount of such Old Securities), and
(where certificates for Old Securities have been transmitted) specify the name
in which such Old Securities are registered, if different from that of the
withdrawing holder. If certificates for Old Securities have been delivered or
otherwise identified to the Exchange Agent, then, prior to the release of such
certificates the withdrawing holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such holder is an
Eligible Institution. If Old Securities have been tendered pursuant to the
procedure for book-entry
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<PAGE>
transfer described above, any notice of withdrawal must specify the name and
number of the account at DTC to be credited with the withdrawn Old Securities
and otherwise comply with the procedures of such facility. All questions as to
the validity, form and eligibility (including time of receipt) of such notices
will be determined by the Company, whose determination shall be final and
binding on all parties. Any Old Securities so withdrawn will be deemed not to
have been validly tendered for exchange for purposes of the Exchange Offer. Any
Old Securities which have been tendered for exchange but which are not exchanged
for any reason will be returned to the holder thereof without cost to such
holder (or, in the case of Old Securities tendered by book-entry transfer into
the Exchange Agent's account at DTC pursuant to the book-entry transfer
procedures described above, such Old Securities will be credited to an account
with DTC specified by the Holder) as soon as practicable after withdrawal,
rejection of tender or termination of the Registered Exchange Offer. Properly
withdrawn Old Securities may be retendered by following one of the procedures
described under "--Exchange Offer Procedures" above at any time on or prior to
the Expiration Date.
EXCHANGE AGENT
The Chase Manhattan Bank has been appointed as Exchange Agent in connection
with the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent, at its offices at 450 West 33rd Street, 15th
Floor, New York, New York 10001. The Exchange Agent's telephone number is (212)
946-3009 and facsimile number is (212) 946-8177.
FEES AND EXPENSES
Tevecap will not make any payment to brokers, dealers or others soliciting
acceptances of the Registered Exchange Offer.
Tevecap will pay certain other expenses to be incurred in connection with
the Registered Exchange Offer, including the fees and expenses of the Trustee,
accounting and certain legal fees.
Holders who tender their Old Securities for exchange will not be obligated
to pay any transfer taxes in connection therewith. If, however, Exchange
Securities are to be delivered to, or are to be issued in the name of, any
person other than the registered holder of the Old Securities tendered, or if
tendered Old Securities are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Securities in connection with the
Registered Exchange Offer, then the amount of any such transfer taxes (whether
imposed on the registered holder or any other persons) will be payable by the
tendering holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendered holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the Old
Notes as reflected in Tevecap's accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by
Tevecap upon the consummation of the Exchange Offer. Any expenses of the
Registered Exchange Offer that are paid by Tevecap will be amortized by Tevecap
over the term of the Exchange Notes under generally accepted accounting
principles.
CONSEQUENCES OF FAILURE TO PROPERLY TENDER OLD NOTES IN THE EXCHANGE
Issuance of the Exchange Securities in exchange for the Old Securities
pursuant to the Registered Exchange Offer will be made only after timely receipt
by the Exchange Agent of such Old Securities, a properly completed and duly
executed Letter of Transmittal and all other required documents. Therefore,
holders of the Old Securities desiring to tender such Old Securities in exchange
for Exchange Securities
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<PAGE>
should allow sufficient time to ensure timely delivery. Tevecap is under no duty
to give notification of defects or irregularities with respect to tenders of Old
Securities for exchange. Old Securities that are not tendered or that are
tendered but not accepted by Tevecap for exchange, will, following consummation
of the Registered Exchange Offer, continue to be subject to the existing
restrictions upon transfer thereof under the Securities Act and, upon
consummation of the Registered Exchange Offer, certain registration rights under
the Exchange and Registration Rights Agreement will terminate.
In the event the Registered Exchange Offer is consummated, Tevecap will not
be required to register the Remaining Old Securities. Remaining Old Securities
will continue to be subject to the following restrictions on transfer: (i) the
Remaining Old Securities may be resold only if registered pursuant to the
Securities Act, if any exemption from registration is available thereunder, or
if neither such registration nor such exemption is required by law, and (ii) the
Remaining Old Securities will bear a legend restricting transfer in the absence
of registration or an exemption therefrom. Tevecap does not currently anticipate
that it will register the Old Securities under the Securities Act. To the extent
that Old Securities are tendered and accepted in connection with the Registered
Exchange Offer, any trading market for Remaining Old Securities could be
adversely affected.
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BUSINESS
TVA is a leading pay television operator in Brazil and is the country's
largest pay television programming distributor. In 1989, TVA was the first to
provide pay television services in Brazil and, in July 1996, the Company
launched DIRECTV, Brazil's first digital Ku-Band service. With over 335,000
subscribers, TVA is the only operator in Brazil to offer pay television services
utilizing five distribution technologies: MMDS, Cable, digital Ku-Band, digital
C-Band and UHF. TVA believes that its ability to strategically deploy
alternative technologies provides it with significant competitive advantages,
including the ability to rapidly enter new markets, maximize penetration of
existing markets and deliver service in the most cost effective manner.
Additionally, TVA has interests in HBO Brasil Partners and ESPN Brasil Ltda.,
two programming joint ventures (the "Programming Ventures"). Through owned,
affiliated and independent pay television operators, TVA programming reaches
over 955,000 pay television households. TVA is a majority owned subsidiary of
Abril, S.A. ("Abril"), Latin America's leading magazine publishing, printing and
distribution company. TVA's other shareholders are Falcon International
Communications (Bermuda) L.P. ("Falcon International"), The Hearst Corporation
("Hearst"), ABC, Inc. ("ABC") and Chase Manhattan International Finance Ltd.
("CMIF").
The Company conducts its pay television operations through three owned
operating systems (the "Owned Systems"): TVA Sistema, TVA Sul and Galaxy Brasil.
Through the MMDS and Cable systems of TVA Sistema and TVA Sul, the Company
serves six cities with a combined population of approximately 18 million,
including three of the seven largest cities in Brazil: Sao Paulo (population of
10.2 million), Rio de Janeiro (population of 5.7 million) and Curitiba
(population of 1.5 million). The Company also holds minority interests in
Canbras TVA and TV Filme (the "Operating Ventures"), which together provide pay
television services to an additional seven cities with a total population of 6.5
million. In addition, the Company sells programming to, and receives a per
subscriber fee from, unaffiliated pay television operators ("Independent
Operators").
The Company, through Galaxy Brasil, is Brazil's exclusive provider of the
premium programming service, DIRECTV, Brazil's first digital direct broadcast
satellite Ku-Band service. Galaxy Brasil receives programming, scheduling and
related services for DIRECTV from Galaxy Latin America ("GLA"), in which TVA
holds a 10.0% equity interest. The other owners of GLA are a unit of Hughes
Electronics, a member of the Cisneros Group and a subsidiary of Grupo MVS.
Through local operating companies such as Galaxy Brasil, GLA plans to provide
DIRECTV service throughout much of Latin America and the Caribbean. The Company,
through TVA Sistema, also currently provides Brazil's only digital C-Band
television service (together with Galaxy Brasil, the "DBS Systems"). The DBS
Systems enable the Company to deliver a greater number of channels than any
other television operator in Brazil and provide TVA with access to substantially
all of Brazil's 33.9 million TV Homes.
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PROGRAMMING DISTRIBUTION AND MARKETS
The following table sets forth information regarding the markets in which
TVA operates systems and distributes programming:
<TABLE>
<CAPTION>
PAY TELEVISION
AVERAGE REVENUE PROGRAMMING
SERVICE LAUNCH CLASS ABC PER MONTH PER CHANNELS
DATE TV HOMES HOUSEHOLDS(A) SUBSCRIBERS SUBSCRIBER(B) OFFERED
--------------- ---------- --------------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
OWNED SYSTEMS
MMDS
TVA Sistema
Sao Paulo(c)........... September 1991 3,978,096 2,732,686 133,005 $ 39.98 18
Rio de Janeiro......... March 1992 2,659,472 1,694,193 75,921 38.61 15
TVA Sul Curitiba......... March 1992 502,512 364,707 20,730 32.90 15
CABLE(D)
TVA Sistema
Sao Paulo.............. October 1994 3,978,096 2,732,686 19,575 35.66 44
TVA Sul Curitiba......... January 1995 502,512 364,707 9,545 27.93 44
Camboriu............... June 1996 37,618 22,686 3,949 38.27 31
Foz do Iguacu.......... June 1996 46,669 28,145 6,184 29.17 34
Florianopolis.......... September 1996 155,382 93,706 -- -- --
-------------
TOTAL MMDS AND CABLE
SUBSCRIBERS............ -- -- -- 268,909 -- --
-------------
DBS
TVA Sistema/Galaxy
Brasil(e)................ March 1995 33,900,000 19,568,310 47,436 $ 32.62 26(f)
SUBSCRIBERS AWAITING
INSTALLATION........... -- -- -- 19,691 -- --
-------------
TOTAL SUBSCRIBERS-OWNED
SYSTEMS................ -- -- -- 336,036 -- --
-------------
-------------
HOUSEHOLDS RECEIVING TVA
PROGRAMMING
OWNED SYSTEMS............ -- -- -- 336,036 -- --
-------------
OPERATING VENTURES
MMDS
TV Filme, Inc.
Brasilia............... July 1993 412,996 308,677 41,668 $ 44.49 16
Goiania................ December 1994 319,434 179,542 8,107 43.41 16
Belem.................. December 1994 221,370 135,020 12,999 46.49 15
CABLE
Canbras TVA
Four cities(g)......... April 1996 222,358 152,773 3,614 -- 38
-------------
TOTAL-OPERATING
VENTURES............... -- -- -- 66,388 -- --
-------------
-------------
INDEPENDENT OPERATORS (53
Independent
Operators)............. -- -- -- 555,049 -- --
-------------
TOTAL.................... -- -- -- 957,473 -- --
-------------
-------------
</TABLE>
- ------------------------
(a) The number of Class ABC Households is based on information provided by Grupo
Midia, IBGE and IBOPE.
(b) As of September 30, 1996. Amount does not include installation fees paid.
(c) The number of MMDS subscribers includes 11,453 UHF subscribers in the Sao
Paulo metropolitan area. UHF subscribers are provided two channels of
programming, HBO Brasil and ESPN Brasil. The average revenue per month per
UHF subscriber, as of September 30, 1996, was approximately $22.80.
(d) The Company's Cable Systems in Sao Paulo, Curitiba, Camboriu, Foz do Iguacu
and Florianopolis had approximately 126,877, 92,550, 25,722, 20,404 and
6,069 Homes Passed, respectively, as of September 30, 1996.
(e) This data principally reflects the Company's digital C-Band operations. TVA
launched DIRECTV service, on a limited basis, in July 1996. As of September
30, 1996, the DIRECTV service offered 49 channels of programming at an
average per month subscriber fee of $56.00. Since that date the number of
channels offered through the DIRECTV service has increased to 56. TV Homes
and Class ABC Households information is national information for all of
Brazil.
(f) The number includes nine SAP channels.
(g) The four cities served by Canbras TVA are Santo Andre, Sao Bernardo, Guaruja
and Sao Vicente.
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BRAZILIAN PAY TELEVISION MARKET
Brazil is the largest television and video market in Latin America with an
estimated 33.9 million TV Homes which, as of December 31, 1995, watched on
average more than 4.0 hours of television per day, as compared to an average of
4.5 hours in the United States. Approximately 6.2 million television sets and
1.9 million VCR units were sold in Brazil during 1995. The pay television
industry in Brazil began in 1989 with the commencement by the Company of UHF
service in Sao Paulo. As of September 30, 1996, there were an estimated 1.6
million pay television subscribers, representing approximately 4.7% of Brazilian
TV Homes. By comparison, as of December 31, 1995, 51.1% of TV Homes in
Argentina, 12.6% of TV Homes in Mexico, 21.7% of TV Homes in the United Kingdom
and 69.2% of TV Homes in the United States subscribed to pay television.
Management believes that the number of pay television subscribers in Brazil will
continue to grow as pay television reaches more households both through the
expansion of existing and new MMDS and Cable systems and through development of
nationwide DBS systems. The Ministry of Communications estimates that Brazil
will have 16.5 million pay television subscribers by 2003.
The following table sets forth, as of December 31, 1995, TV Homes, Cable
subscribers, MMDS subscribers, C-Band subscribers, Ku-Band subscribers, total
subscribers and the ratio of total subscribers to TV Homes in Brazil, Argentina,
Mexico, the United Kingdom and the United States.
<TABLE>
<CAPTION>
UNITED UNITED
BRAZIL(A) ARGENTINA(B) MEXICO(B) KINGDOM(B) STATES(C)
----------- ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
(NUMBERS IN THOUSANDS, EXCEPT PERCENTAGES)
TV Homes....................................... 33,900 9,000 13,200 22,347 95,000
----------- ----- ----------- ------------ -----------
Cable Subscribers............................ 560 4,410 1,257 1,400 62,500
MMDS Subscribers............................. 295(d) 189 406 -- 800
C-Band Subscribers........................... 125 -- -- 3,447 2,460(e)
Ku-Band Subscribers.......................... -- -- -- -- 2,460(e)
----------- ----- ----------- ------------ -----------
Total Subscribers.............................. 980 4,599 1,663 4,847 65,760
----------- ----- ----------- ------------ -----------
----------- ----- ----------- ------------ -----------
Total Subscribers/TV Homes (%)................. 2.9% 51.1% 12.6% 21.7% 69.2%
</TABLE>
- ------------------------
(a) The information set forth for Brazil represents estimates made by the
Company based upon figures compiled and published by the IBGE, management's
knowledge of the Company's pay television systems and those of the Operating
Ventures, and public statements of other pay television providers.
Management believes such estimates are reasonable, but neither management
nor any other party can provide assurances as to their accuracy. Kagan World
Media, Inc. reports that there were, as of December 31, 1995, 464 MMDS
subscribers, and 654 Cable subscribers and 100 C-Band subscribers in Brazil.
(b) The information set forth for Argentina, Mexico and the United Kingdom is
based on December 1995 data of Kagan World Media, Inc. and 1996 data of Paul
Kagan Associates, Inc.
(c) Source: National Cable Television Association.
(d) The number of MMDS subscribers includes UHF subscribers.
(e) The number represents C-Band and Ku-Band subscribers collectively.
COMPETITIVE ADVANTAGES
Management believes that the Company has the following competitive
advantages:
SUPERIOR QUALITY PROGRAMMING LINEUP. TVA's programming line-up includes
exclusive rights to ESPN Brasil in the Company's major markets, with exclusive
coverage, as of January 1997, of many of Brazil's most important soccer
championships, including the Brasil Cup, the Brazilian Championship and the Sao
Paulo and Rio de Janeiro State Championships. The Company exclusively offers CMT
Brasil and Bravo Brasil and is also the only pay television provider offering
HBO programming in TVA's served markets. Management believes that as the pay
television industry grows, programming will become the
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critical factor driving consumer selection of a pay television provider, and
that with TVA's relationships with strong international partners and its
exclusive soccer coverage, TVA will continue to offer superior quality
programming.
STRATEGIC DEPLOYMENT OF ALTERNATIVE DISTRIBUTION TECHNOLOGIES. The Company
is the only pay television operator utilizing five distribution technologies:
MMDS, Cable, Ku-Band, C-Band and UHF. The availability of multiple distribution
technologies enables the Company to capitalize on the population and income
characteristics, topography and competitive dynamics of each of its targeted
markets. The Company has the ability to penetrate new markets quickly and
efficiently and to offer tiered programming at low cost with MMDS. The Company
is expanding its Cable systems, where warranted by economic and competitive
conditions, to build its subscriber base and to prepare for future opportunities
in interactive services and telecommunications. Additionally, management
believes the Company can rapidly penetrate virtually any market through the
continued deployment of its DBS Systems.
DBS SYSTEMS: NATIONWIDE COVERAGE AND DIGITAL SERVICE. Through its DBS
Systems, TVA is capable of offering programming to nearly all of Brazil's 33.9
million TV Homes, including those households in markets where Cable or MMDS
systems are either not developed or not economically viable. Through its DIRECTV
service, TVA is the first provider of Ku-Band pay television services in Brazil
and expects to enroll as subscribers a significant share of those who are
interested in broader, digital quality programming and pay-per-view services.
Through its digital C-Band system, the Company provides 26 channels of
programming (including nine SAP channels) and is capable of providing up to 38
channels of programming (including SAP channels). The Company's only significant
competitor in C-Band pay television service provides six analog channels of
programming in addition to off-air channels. The Company currently targets its
C-Band service to the estimated 3.7 million C-Band satellite dish owners in
Brazil, most of whom currently receive only the off-air channels.
MODERN CABLE INFRASTRUCTURE. The Company's Cable systems are constructed
with, or are being upgraded to, either 750 MHz or 550 MHz bandwidth capacity,
the latter of which is readily upgradeable to 750 MHz bandwidth capacity with
only moderate investment. This Cable technology will enable the Company to
provide data transmission and interactive services, including
telecommunications, in the future. Management believes that the Company's major
competitors for Cable service use narrower bandwidths over portions of their
Cable systems and have installed certain types of Cable in households which
currently may prevent them from providing telecommunications or high speed data
delivery through these portions of their systems until substantial additional
investments have been made for system reconstruction or upgrade.
STRONG STRATEGIC PARTNERS. The Company's strategic equity partners continue
to offer valuable expertise. TVA benefits from Abril's extensive experience in
the business of subscriptions and distribution and from the collective
experience of Falcon International, Hearst and ABC with regard to pay television
operations and from access to programming.
BUSINESS STRATEGY
TVA seeks to be Brazil's largest and most profitable pay television operator
and programming distributor and intends to capitalize on the convergence and
development of voice, video and telecommunications services. The Company intends
to achieve these goals through the following strategies:
MAXIMIZE PENETRATION IN EXISTING MARKETS. The Company seeks to increase its
penetration of existing markets by: (i) expanding the range of TVA's Cable
systems by extending its fiber optic and coaxial cable network and by seeking
pre-wiring arrangements with residential housing developers, (ii) improving the
signal quality and coverage of TVA's MMDS systems by using signal repeater
technology, (iii) maximizing penetration by offering tiered subscription options
and developing programming packages to appeal to more households and (iv)
expanding its penetration in ABC Class households
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through its scheduled nationwide rollout of DIRECTV service and the continued
development of C-Band service.
MAXIMIZE CUSTOMER RETENTION THROUGH SUPERIOR CUSTOMER SERVICE. In order to
maximize customer retention, the Company aims to provide a consistently high
level of customer service. The Company has developed or has acquired the right
to use proprietary management information systems which, among other things,
provide Company representatives immediate access to customer records and
correspondence history. This enables TVA to provide high quality service to its
clients while monitoring subscriber payment patterns. The Company's Churn rate,
which reflects the ability of the Company to retain subscribers, averaged
approximately 2.0% per month during the nine month period ended September 30,
1996. The average monthly Churn rate for MMDS service in 1994 was 1.6%, in 1995
ws 1.3% and for the nine month period ended September 30, 1996, was 2.1%. The
average monthly Churn rate for Cable service in 1994 was less than 1.0%, in 1995
was 1.1%, and for the nine month period ended September 30, 1996 (the year Cable
service was initiated), was 0.7%. The average monthly Churn rate for C-Band
service in 1994 was 5.3%, in 1995 was 0.1% and for the nine month period ended
September 30, 1996, was 2.0%. DIRECTV service was only initiated in July 1996.
Ku-Band service was initiated in July 1996.
ENHANCE TVA'S PROGRAMMING PACKAGE. In order to maintain and enhance its
position as a provider of superior programming in Brazil, TVA is developing new
programming through the Programming Ventures, as well as through Abril and other
partners. TVA frequently evaluates the demographics of its subscribers and
potential subscribers and seeks to provide programming most in demand. The
Company also takes advantage of opportunities to enter into exclusive
distribution agreements for popular television programming in Brazil. Management
believes that its DIRECTV service, which includes both basic and premium
channels, as well as pay-per-view movies and events from Brazil, other Latin
American countries, Europe, Asia and the United States, further enhances TVA's
programming offerings and positions the Company to be the provider of the widest
selection of popular programming in Brazil.
ENTER NEW MARKETS. The Company intends to enter new markets by: (i)
acquiring existing MMDS and Cable operations, (ii) applying either
independently, or in conjunction with the Operating Ventures, independent pay
television providers or other appropriate third parties, for new MMDS and Cable
licenses offered by the Brazilian Government, (iii) initiating the nationwide
rollout of DIRECTV service and (iv) investing in new operating ventures with
other MMDS and Cable operators. The Brazilian Government has recently announced
its intention to auction MMDS licenses in 15 state capitals. Although no date
has been set for these auctions, management expects them to occur during 1997.
The Company has submitted proposals, either individually or in conjunction with
local partners, for all such licenses, as well as for additional licenses
throughout Brazil.
CONTINUE NETWORK ENHANCEMENT. The Company is positioning itself to provide
high speed data transmission, interactive and other telecommunications services
over its systems and to take advantage of possible deregulation and the growing
demand for these services in Brazil. The Company is expanding its Cable systems
with fiber optic and coaxial cable capable of being upgraded to provide such
enhanced services. In addition, the Company continues to explore the development
of digital compression of MMDS signals.
Through the implementation of the Company's strategy, the Company has been
able to achieve rapid subscriber growth. The following chart sets forth
information regarding (i) the number of subscribers to the Company's Owned
Systems at December 31, 1993, 1994, 1995 and at September 30, 1996, (ii) the
number of new installations during the years ended December 31, 1993, 1994, and
1995, and the nine month period ended September 30, 1996, and (iii) the average
installation fee for the year ended December 31, 1995.
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<TABLE>
<CAPTION>
SUBSCRIBERS AT
END OF PERIOD(A) NEW INSTALLATIONS
------------------------------------------------ DURING PERIOD
SEPTEMBER 30, --------------------------------------------
1993 1994 1995 1996 1993 1994 1995 1996(B)
--------- --------- --------- --------------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MMDS
Sao Paulo................... 54,183 72,425 121,969 133,005 33,966 34,372 75,332 45,098
Rio de Janeiro.............. 20,490 28,234 51,664 75,921 12,961 13,855 31,733 36,952
Curitiba.................... 7,801 11,112 15,260 20,730 5,965 5,972 10,513 11,220
--------- --------- --------- --------------- --------- --------- --------- -----------
Total MMDS.................... 82,474 111,771 188,893 229,656 52,892 54,199 117,578 93,270
--------- --------- --------- --------------- --------- --------- --------- -----------
CABLE
Sao Paulo................... -- 1,007 13,885 19,575 -- 482 6,546 5,082
Curitiba.................... -- -- 1,244 9,545 -- -- 434 2,712
Foz do Iguacu(c)............ -- -- -- 6,184 -- -- -- 1,325
Camboriu(c)................. -- -- -- 3,949 -- -- -- 436
Florianopolis(c)............ -- -- -- -- -- -- -- --
--------- --------- --------- --------------- --------- --------- --------- -----------
Total Cable................... -- 1,007 15,129 39,253 -- 482 6,980 9,555
--------- --------- --------- --------------- --------- --------- --------- -----------
DBS
C--Band/DIRECTV(d)............ 511 2,075 15,126 47,436 511 1,914 16,873 36,834
--------- --------- --------- --------------- --------- --------- --------- -----------
TOTAL SUBSCRIBERS-OWNED
SYSTEMS..................... 82,985 114,853 219,148 316,345 53,403 56,595 141,431 139,659
--------- --------- --------- --------------- --------- --------- --------- -----------
--------- --------- --------- --------------- --------- --------- --------- -----------
<CAPTION>
AVERAGE
INSTALLATION
FEE FOR THE
YEAR ENDED
DEC. 31,
1995
-----------
<S> <C>
MMDS
Sao Paulo................... $ 180.30
Rio de Janeiro.............. 163.52
Curitiba.................... 122.45
-----------
Total MMDS.................... --
-----------
CABLE
Sao Paulo................... $ 81.97
Curitiba.................... 80.02
Foz do Iguacu(c)............ 150.00
Camboriu(c)................. 150.00
Florianopolis(c)............ 150.00
-----------
Total Cable................... --
-----------
DBS
C--Band/DIRECTV(d)............ $ 586.79
-----------
TOTAL SUBSCRIBERS-OWNED
SYSTEMS..................... --
-----------
-----------
</TABLE>
- ------------------------
(a) Excludes backlog, reconnected and disconnected subscribers.
(b) Includes installations for the nine months ended September 30, 1996.
(c) Average Installation Fee for the period ended September 30, 1996.
(d) DIRECTV service was launched, on a limited basis, in July 1996. The full
list price for initiation of the service is $990.00.
OWNERSHIP
Tevecap is a majority owned subsidiary of Abril, the leading magazine
publishing, printing and distribution company in Latin America. Abril publishes
over 266 weekly, bi-weekly and monthly titles. During 1995, the combined monthly
paid circulation of Abril and its affiliates averaged 15.6 million copies. TVA
benefits from Abril's extensive experience in the business of subscriptions and
distribution, advertising synergies, common research resources and financial
analysis and support. Certain of Tevecap's other shareholders provide the
Company with access to additional international programming and certain
technical and financial expertise. The Company's shareholders have invested, in
aggregate, approximately $288.0 million in the Company. Tevecap's current
ownership is as follows: Abril, 56.5%; Falcon International, 14.2%; Hearst,
10.0%; ABC, 10.0%; and CMIF, 9.3%. Each of Tevecap's corporate shareholders has
agreed, with certain exceptions, to a reorganization of the ownership of
Tevecap. As a result of the proposed reorganization a new Brazilian corporation
would become an 80.0% shareholder in Tevecap and Hearst/ABC would remain a 20.0%
shareholder in Tevecap. The new structure would not result in any change in the
current beneficial equity participation of the Stockholders in Tevecap, and the
transactions establishing the new structure and the new structure itself would
have to conform to the restrictions of the Indenture. As of the date hereof, the
timing of the restructuring is under discussion by the Stockholders. See
"Principal Shareholders."
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DISTRIBUTION OPERATING SYSTEMS
TVA and the Operating Ventures distribute programming through five different
technologies: MMDS, Cable, Ku-Band, C-Band, and UHF. The availability of
multiple distribution technologies enables the Company to exploit the population
and income characteristics, topography and competitive dynamics of each of its
markets.
MMDS
TVA's strategy of rapidly deploying an extensive MMDS network has allowed it
to enter new markets quickly and develop broad geographic coverage which the
Company may expand utilizing signal repeaters. TVA has developed Brazil's
largest MMDS network, and with the Operating Ventures, serves the country's
major metropolitan areas. MMDS systems are typically easier to deploy and
require relatively little capital investment for construction and maintenance as
compared to Cable systems. Programming is transmitted by signals through the air
from microwave transmitters to a small receiving antenna located at a
subscriber's home or dwelling unit. At the subscriber's location, the microwave
signals are converted to frequencies that can pass through a conventional
coaxial cable into a decoder located near a television set. Under recently
passed Brazilian regulations, each MMDS license allows an MMDS operator to
provide service to households in a circular area within a radius of up to 50
kilometers, depending on the technical capability of the operator. It is
expected that expansion into such newly available territory would require
minimal additional capital spending by the Company. However, tall buildings and
other tall structures may block reception of an MMDS signal. See
"Business--Regulatory Framework." MMDS is being used in other emerging pay
television markets such as Venezuela and Hong Kong, and in Mexico, where Cable
has a strong incumbent position.
TVA owns eight MMDS licenses and operates MMDS systems in Sao Paulo, Rio de
Janeiro and Curitiba, which have an aggregate population of approximately 17.4
million. TVA serves 229,656 MMDS subscribers in these three cities. During the
12-month period ended September 30, 1996, TVA averaged approximately 4,000 net
new MMDS subscribers per month. The MMDS systems of TVA offer between 15 to 18
channels of programming. Management intends to increase its channel offerings to
31 soon after the Ministry of Communications grants additional channel rights as
allowed under recently passed regulations. See "Business--Regulatory Framework."
TV Filme, an Operating Venture, operates MMDS systems in Brasilia, Goiania and
Belem and has 62,774 MMDS subscribers. See "Regulatory Framework--MMDS
Regulation." During the 12-month period ended September 30, 1996, the Operating
Ventures averaged approximately 2,700 net new MMDS subscribers per month. In
addition, TVA provides UHF service to 11,453 subscribers in the Sao Paulo
metropolitan area.
CABLE
TVA has recently emphasized the strategic deployment of Cable service and
currently operates Cable systems in Sao Paulo, Curitiba and three other cities.
Cable service involves a broad band network employing radio frequency
transmission through coaxial and/or fiber optic cable. Cable systems consist of
four major parts: a headend, a distribution network, a subscriber network and a
house terminal. The programming is collected from the headend, then processed
and fed into the distribution path consisting of trunk and distribution cable,
which consists of coaxial and/or fiber optic cables. The signal is then fed into
a subscriber network that is either located in an apartment building or a
subscriber's home. Most of the Company's systems are constructed with either 750
MHz or 550 MHz bandwidth capacity, the latter of which is readily upgradeable to
750 MHz bandwidth capacity. The Company's four newly acquired systems in
Curitiba (2), Camboriu and Foz do Iguacu are being upgraded to 550 MHz bandwidth
capacity. The Company's new system in Florianopolis is being constructed to 550
MHz bandwidth capacity. It is expected that this technology will enable the
Company to provide interactive services, including telecommunications in the
future. In addition, the Company's Cable systems generally use addressable
converters, which allow the provision of pay-per-view services
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and enable TVA to upgrade, downgrade or disconnect a subscriber's service from
the headend on short notice.
TVA, through TVA Sistema and TVA Sul, owns eight Cable licenses and operates
Cable systems in Sao Paulo, Curitiba, Camboriu, Florianopolis and Foz do Iguacu,
which have an aggregate population of approximately 11.9 million and 39,253
subscribers. As of September 30, 1996, TVA had deployed approximately 900
kilometers of its Cable network, including 80 kilometers of fiber optic cable,
and passed approximately 270,000 homes. By the end of 1996, the Company added an
additional 890 kilometers to its Cable systems. As part of this build-out plan,
the Company constructed a 281 kilometer fiber optic network, including a 57
kilometer fiber optic loop in Sao Paulo and a 28 kilometer fiber optic network
in Curitiba, and is upgrading or constructing the three recently acquired Cable
systems. As a result of this buildout, by the end of 1996, TVA Cable systems
passed approximately 300,000 homes in Sao Paulo, approximately 118,000 homes in
Curitiba and a total of 494,000 throughout all of the Company's Cable systems.
As of September 30, 1996, Canbras TVA, an Operating Venture, had an existing
Cable network of approximately 151 kilometers, with approximately 22,200 Homes
Passed and approximately 3,614 subscribers. Canbras TVA is constructing Cable
networks in ten cities in the greater Sao Paulo area with a combined population
of over 2.8 million. By comparison, TVA's largest competitor in Sao Paulo for
Cable service had, as of June 30, 1996, a Cable network in Sao Paulo of
approximately 1,225 miles (including approximately 151 miles of fiber optic
cable) with 463,900 Homes Passed. TVA and Canbras TVA currently offer between 31
and 44 analog channels of programming (including off-air channels) on their
Cable systems, depending on the market, and have the capability of offering up
to 78 analog channels. During the 12-month period ended September 30, 1996, TVA
averaged approximately 2,200 net new Cable subscribers per month, and Canbras
TVA, after its first five months of operation ended September 30, 1996, had
3,614 subscribers.
DIRECTV
In July 1996, TVA launched, on a limited basis, Brazil's DIRECTV service,
Brazil's first Ku-Band service. A nationwide rollout of DIRECTV was launched in
November 1996, at which time TVA initiated a publicity campaign supported by a
nationwide network of trained installers. By comparison, DIRECTV, Inc., a unit
of Hughes Electronics, started its DIRECTV service in the United States in June
1994 and had, as of September 30, 1996, approximately 1.9 million subscribers
for this service.
Galaxy Brasil receives programming from GLA, including programming which GLA
purchases from TVA. Additionally, GLA provides scheduling and related services
to Galaxy Brasil for use with DIRECTV. GLA distributes programming to Brazil
through the transmission of an encoded signal via the Galaxy III-R satellite
utilizing 12 transponders to a subscriber's 60 centimeter dish antenna which can
be mounted outside a window or on a rooftop. The signal is then transmitted to
an integrated receiver decoder in the subscriber's home. A single antenna may
serve a single family dwelling or a multifamily dwelling, such as an apartment
building, in which case each apartment needs to be equipped with a decoder. A
unit of Hughes Electronics leases the Galaxy III-R satellite and provides the
use of the satellite and related services to GLA pursuant to a technical service
agreement, the term of which extends until October 31, 2010. GLA, in turn,
charges Galaxy Brasil a royalty on a per subscriber basis for the use of the
satellite transponders and related services. The orbital location of the Galaxy
III-R satellite enables the Company to offer DIRECTV service to substantially
all of the TV Homes in Brazil. However, in the less populated northern and
western regions of Brazil, reception of DIRECTV programming requires a dish
antenna 1.1 meters in diameter and in the western third of Brazil (a sparsely
populated area when compared to the southern and eastern regions) reception may
require an even larger antenna. In addition, tall buildings and other tall
structures may block reception of the DIRECTV programming signal. The Galaxy
III-R satellite was launched in December 1995 and has an expected useful life of
nine years from the date of launch. Hughes Electronics expects to launch within
the next 12 months a second satellite to provide
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additional transponders for transmission of DIRECTV programming. With DIRECTV
service, TVA provided 49 channels of video programming (including 19
pay-per-view channels) as of September 30, 1996, and is capable of, and expects
to eventually distribute, up to 70 channels of video programming and 30 channels
of audio programming. Since September 30, 1996, the number of channels offered
by the Company with DIRECTV service has increased to 56. In addition, since
September 30, 1996 a competitor has entered the Ku-Band market, but offers only
26 channels of programming (including four pay-per-view channels). TVA owns and
has made a substantial investment in a satellite uplink center for the Brazilian
DIRECTV service in Tambore in greater Sao Paulo (the "Tambore Facility"). The
Tambore Facility is used to uplink programming to the Galaxy III-R satellite.
At the original full installation price of $990, the purchase of DIRECTV
service was affordable only for the affluent Class A households in Brazil.
However, TVA expects to be able to reduce the installation fee after
consummation of the Galaxy Brasil Leasing Facility and the consummation of
financings under the SurFin Credit Facility and additional financings in the
future. Management expects these financing arrangements to enable the Company to
finance the acquisition and lease of antennae decoder boxes and other equipment,
thereby permitting TVA to reduce the initial installation fee and to spread the
expense to subscribers of installing such equipment over time. Management also
expects the cost of decoders and associated equipment to decline as new
manufacturers enter the market and proposed manufacturing facilities in Brazil
open. Accordingly, as the cost of DIRECTV service is reduced, management expects
the purchase of DIRECTV service to become more affordable to a broader segment
of Class ABC Households including Class ABC Households outside the more affluent
urban areas of Brazil. In addition, management expects to offer different tiers
of service, charging different installation and subscription prices for each
tier of service. Such tiered service will also allow the Company to offer
DIRECTV service to a broader segment of Class ABC Households. In any case,
management believes DIRECTV service may be profitable for the Company, even if
purchase of DIRECTV service remains feasible only for affluent Brazilians.
However, no assurances can be given that Galaxy Brasil Leasing Facility and the
SurFin Credit Facility will provide the Company with the ability to reduce the
installation fees for DIRECTV service to the extent necessary to attract less
affluent purchasers, or that DIRECTV service will be attractive to a large
segment of Brazilians whether or not affluent.
C-BAND
TVA has offered C-Band service since 1993, and is the only pay television
operator to deliver a digital C-Band signal in Brazil. TVA's C-Band service
consists of the transmission of a digital encoded signal via the Brasilsat
satellite utilizing four transponders to a satellite antenna 1.1 meters in
diameter located at a subscriber's home, where the signal passes through an
integrated receiver decoder. A single antenna may serve a single family dwelling
or a multifamily dwelling, such as an apartment building, in which case each
apartment needs to be equipped with a decoder. The Brasilsat satellite was
launched in July 1994 and is owned by EMPRESA BRASILEIRA DE TELECOMUNICACOES
(Brazilian Telecommunications Company, or "Embratel"), the Brazilian
Government-owned company authorized to provide satellite telecommunications
services utilizing the SISTEMA BRASILEIRO DE TELECOMUNICACOES POR SATELITE
(Brazilian Satellite Telecommunications System, or "SBTS"). TVA utilizes the
Brasilsat satellite pursuant to three satellite transponder leases that expire
on May 30, 2002, November 20, 2003, and November 24, 2003, respectively. The
orbital location of the Brasilsat satellite enables TVA to provide C-Band
service throughout Brazil with little or no interference. However, tall
buildings and other tall structures may block reception of C-Band programming.
The Brasilsat satellite has an expected useful life of approximately 12 to 15
years from the date of launch.
TVA's C-Band service provides the Company with national coverage via
satellite transmission and a large preinstalled market. As of September 30,
1996, there were approximately 3.7 million parabolic C-Band antennae in use in
Brazil, most of which receive only off-air channels. This installed base
represents the Company's target market for its digital C-Band service and the
Company expects to attract
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these viewers through marketing and promotional initiatives. TVA is able to
deliver 38 channels of programming (including nine SAP channels) in addition to
the off-air channels and currently delivers 26 channels (including nine SAP
channels) as compared to the six channels in addition to the off-air channels
offered by its only significant competitor for this service. TVA provides
service to 41,637 C-Band subscribers throughout much of Brazil. During the
twelve-month period ended September 1996, TVA averaged approximately 2,600 net
new C-Band subscribers per month.
UHF SERVICE
TVA's UHF service is the broadcast of an encoded UHF signal over a
geographic area. TVA provides UHF service only in Sao Paulo and has 11,453
subscribers for such service. TVA's UHF service provides two channels of
programming, HBO Brasil and ESPN Brasil. This service is provided to subscribers
who are unable to receive or have chosen not to have access to other pay
television services. UHF subscribers pay on average approximately $22.80 per
month for this limited service.
RECENT ACQUISITIONS AND LICENSE APPLICATIONS
TVA's expansion into new metropolitan areas is limited by the number of MMDS
and Cable licenses held by TVA. In order to expand, TVA seeks to purchase
existing operations and licenses, form new ventures such as the Operating
Ventures to offer pay television in markets for which TVA does not hold a
license, find new Independent Operators to purchase TVA programming, and, either
individually or along with various partners and affiliated parties, apply for
new MMDS and Cable licenses.
Since January 1996, TVA has purchased four existing Cable systems, two in
Curitiba and one in each of two other cities in southern Brazil, and has
purchased a license to operate a Cable system in a fourth city. As of the
respective dates of their acquisitions, the two systems in Curitiba had a total
of 4,515 subscribers, and the systems in the two other cities had a total of
8,298 subscribers. The four acquired systems had in the aggregate, as of
September 30, 1996, Cable networks comprising approximately 490 kilometers. The
Company is upgrading the operations of the four existing Cable systems and is
constructing a cable system in the fourth city.
In addition, TVA has submitted proposals to the Ministry of Communications
for concessions to provide service in numerous locations, including the 15 state
capitals, currently being evaluated by the Ministry of Communications for pay
television service (none of which currently receive either MMDS or Cable
service). No date has been set for the auction of these concessions, in which
TVA intends to participate either individually or in conjunction with local
partners. See "Business--Regulatory Framework." Management expects the bidding
process for new Cable licenses to begin in 1997.
TVA SISTEMA AND TVA SUL
TVA Sistema and TVA Sul operate the Company's MMDS, Cable and C-Band
businesses. TVA holds a 98.0% equity interest in TVA Sistema, and the estate of
Matias Machline, a Brazilian national, holds the remaining 2.0% equity interest.
The Company holds an 87.0% equity interest in TVA Sul, and Leonardo Petrelli, a
Brazilian national, holds the remaining 13.0%. Pursuant to an Association
Agreement, dated February 15, 1996 (the "TVA Sul Agreement"), for so long as Mr.
Petrelli controls at least 8.0% of the voting capital of TVA Sul, he is allowed
to exercise veto power over a number of decisions relating to TVA Sul,
including: any merger, split, liquidation or dissolution of TVA Sul; any sale,
purchase of or lien on property of over R$50,000 in value; any acquisition or
transfer of any debt of over R$50,000 in value; any guaranty or surety given by
TVA Sul; approval of budget and business plans; approval of dividends of over
25.0% of net profit; and any modifications to TVA Sul's ESTATUTO SOCIAL
(BYLAWS). Mr. Petrelli has irrevocably waived his veto rights and consented to
the execution and delivery by TVA Sul of the Indenture and the Subsidiary
Guarantee by TVA Sul and such other documents and agreements as may be required
under the Indenture and the Subsidiary Guarantee and the performance by TVA Sul
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of its rights and obligations under the Indenture, the Subsidiary Guarantee and
such other documents and agreements to which TVA Sul may be a party pursuant to
the Indenture. The TVA Sul Agreement has a term equal to the longer of 10 years
or the duration of the licenses required to operate TVA Sul, and for equal
successive periods thereafter.
GLA AND GALAXY BRASIL
Pursuant to a Partnership Agreement, dated February 13, 1995, GLA was formed
as a general partnership. As of April 11, 1997, GLA was converted into a
Delaware limited liability company. Such conversion did not materially affect
the governance of GLA or TVA's ownership interest in GLA. Under a Limited
Liability Company Agreement, dated April 11, 1997 (the "GLA Agreement"), GLA is
managed by a seven-member Executive Committee to which Hughes Communications GLA
("HCGLA") can appoint four members and each of the other partners, including
Tevecap, can appoint one member as long as such partner holds at least an eight
percent equity interest in GLA. The GLA Agreement provides for local operating
agreements between GLA and local operators throughout South America, Central
America, Mexico and the Caribbean which will govern the relationship between GLA
and such local operator. The GLA Agreement stipulates that the local operator in
Brazil shall be Galaxy Brasil, 100.0% of the equity interest of which is
currently owned by Tevecap, but up to 12.5% of which may be purchased by HCGLA
and up to 12.5% of which may be purchased by Darlene Investments, a member of
the Cisneros Group. Tevecap, in turn, has an option to purchase up to 15.0% of
the equity interest of the local operator in Venezuela, all of which is
currently owned by Darlene Investments. The current members of GLA have also
agreed to "seek and maintain" equity positions in other local operators. The
Company has agreed to make capital contributions under the GLA Agreement of
$33.5 million, which amount was paid in quarterly installments ending on January
1, 1997. The GLA Agreement places restrictions, including first negotiation,
approval and tag-along rights, on the transfer of capital stock or voting
securities of each of the current members of GLA and in certain circumstances
their parent entities. In connection with the conversion of GLA into a limited
liability company, GLA's uplink facility was transferred to California Broadcast
Center, LLC, a Delaware limited liability company formed on April 11, 1997 and
owned by two units of Hughes Electronics.
Pursuant to a Local Operating Agreement (the "Local Operating Agreement")
between GLA and Galaxy Brasil, dated March 3, 1995, GLA has agreed to provide to
Galaxy Brasil the exclusive right and ability to supply the DIRECTV service in
Brazil. In accordance with a formula based on the number of subscribers, Galaxy
Brasil is obligated to pay a periodic royalty to GLA. In addition, TVA may not
own or engage in any other Ku-Band service and GLA may not own or engage in any
other pay television service in Brazil. GLA, upon the occurrence of certain
events, has the right to terminate the Local Operating Agreement, or to
terminate Galaxy Brasil's exclusive rights to distribute DIRECTV programming.
Such events include breach of any material obligation of Galaxy Brasil to GLA
and the failure of Galaxy Brasil to meet certain specified performance goals.
See "Description of Certain Indebtedness" and "Risk Factors--Rights to DIRECTV
Programming."
THE OPERATING VENTURES
The Operating Ventures also operate MMDS (TV Filme) or Cable (Canbras TVA)
systems. TVA holds a 36.0% equity interest in each of Canbras TVA Cabo and TV
Cabo Santa Branca (the "Canbras TVA Companies"). Canbras Communications Corp., a
publicly-traded Canadian company ("Canbras"), and Canbras Participacoes Ltda., a
Brazilian company ("Canbras-Par") hold the remaining interests in Canbras TVA
Cabo and Canbras-Par owns the remaining interest in TV Cabo Santa Branca. Bell
Canada International, Inc. ("BCI"), an affiliate of BCE Inc., Canada's largest
telecommunications group, holds a $27.0 million convertible debenture that upon
conversion, would permit BCI to become, inter alia, a majority shareholder of
Canbras-Par. The Canbras Association Agreement provides for each of the Canbras
TVA companies to be governed by a management committee of three members, one of
which
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TVA has the right to designate. In addition, TVA agreed to supply to the Canbras
TVA companies all programming regularly supplied to the Owned Systems at "most
favored prices" and other terms at which programming is provided to the Owned
Systems or to third parties in arm's- length transactions. TVA will continue to
provide MMDS service, where possible, to customers in the Santo Andre and Sao
Bernardo operating area of the Canbras TVA Companies until cable service is
available in these areas. Canbras TVA Cabo and TV Cabo Santa Branca will
compensate TVA for each subscriber that transfers from TVA's MMDS system to a
Canbras TVA Cable system. The Company agreed to grant to Canbras-Par a "right of
first refusal" to participate in Cable licenses that the Company may obtain,
directly or indirectly, and Canbras-Par granted to the Company a similar "right
of first refusal" to participate in Cable licenses acquired by Canbras-Par. The
term of the Canbras Association Agreement is for so long as Canbras-Par or its
assignee owns shares "in companies which have the objective of engaging in the
cable TV business." The Canbras Association Agreement does not specify the terms
and conditions on which any co-investments in Cable licenses are to be made, and
such terms and conditions will be negotiated in good faith, on a case-by-case
basis, in connection with any future cable license investments. See "Risk
Factors--Ownership of Future Cable Television Licenses."
TVA holds a 14.3% equity interest (not including a 2.4% interest which may
be acquired by TVA under an outstanding warrant having a nominal exercise price)
in TV Filme. The remaining interests are held by Warburg, Pincus Investors,
L.P., which currently holds a 41.2% equity interest; members of the Lins family,
Brazilian nationals, who currently hold a 16.2% equity interest; and public
shareholders, who currently hold a 28.3% equity interest. On July 29, 1996, TV
Filme completed a public offering of 2.5 million shares of its common stock in
the United States at an initial price of $10.00 per share. Pursuant to a
programming agreement, TVA provides programming to TV Filme, and TV Filme has
agreed to use 50.0% of the channel capacity of each of its MMDS systems in
Brasilia, Goiania and Belem (the "TV Filme Service Area") to broadcast TVA
programming so long as (i) the quality of TVA programming, in the reasonable
judgment of TV Filme, remains compatible with the taste and standards of TV
Filme's subscribers, (ii) TVA continues to own, directly or indirectly, 10.0% of
TV Filme's common stock and (iii) TVA remains a subsidiary of Abril. Within the
TV Filme Service Area, TVA may not provide TVA programming to any Cable or other
MMDS pay television service provider and TVA may not compete with TV Filme as an
MMDS service provider. TV Filme also has a nonexclusive license to TVA
programming in 19 cities in which TV Filme has pending license applications,
subject to any exclusive license previously granted by TVA to other pay
television service providers in such cities and which exclusive license TVA,
using its best efforts, is unable to renegotiate to allow TVA to provide for TV
Filme to have a nonexclusive license. TVA may not charge TV Filme an amount
greater than the minimum rates charged by TVA to other subscription television
operators, nor may such charges exceed comparable rates for other programming of
a similar nature. The terms of the programming agreement terminate on July 20,
2004. From time to time, in connection with the programming agreement, TV Filme
has agreed to enter into additional agreements with the Company regarding
specified channels. The agreements typically have two year terms and determine
the monthly fees which TV Filme pays for such channels.
PROGRAMMING
TVA
TVA, through its MMDS, Cable and C-Band systems, currently provides a
programming package consisting of 15 to 44 television channels. TVA programming
emphasizes sports, movies, and news with a secondary emphasis on general
entertainment.
With respect to MMDS and Cable service in TVA's market, TVA is currently the
sole provider of ESPN Brasil, HBO Brasil, CMT Brasil, Bravo Brasil, the
Superstation, RTPi and Eurochannel. In addition, as of January 1997, TVA has
exclusive distribution rights to certain of Brazil's most important soccer
championships, including the Brasil Cup, the Brazilian Championship and the Sao
Paulo and Rio de Janeiro State Championships. TVA has entered into two
Programming Ventures, ESPN do Brasil Ltda. ("ESPN
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Brasil Ltda.") and HBO Brasil Partners, through which it distributes a large
volume of programming which management believes is especially important to its
subscribers. ESPN Brasil Ltda. is a joint venture between Tevecap and ESPN
Brazil, Inc. (a subsidiary of ESPN, Inc.), each of which holds a 50.0% equity
interest. ESPN, Inc. is a joint venture between ABC and Hearst. ESPN, Inc.
provides the programming of the US channel ESPN2 to ESPN Brasil Ltda., which
packages such programming with Brazilian and other international content and
provides such packaged programming to TVA. Pursuant to a Quotaholders Agreement,
dated June 26, 1995 (the "ESPN Agreement"), ESPN Brasil has the right to
transmit "ESPN2 Service" programming as well as all library programming of ESPN.
The Company has the exclusive right to broadcast the programming of ESPN Brasil
Ltda. in Sao Paulo, Rio de Janeiro, Curitiba, Brasilia, Belem and Goiania. The
Company also acts as the exclusive sales representative of ESPN Brasil
programming with respect to sales to other Brazilian pay television providers
and receives a commission in connection therewith. The Company is also the sole
advertising agent for ESPN Brasil until June 1999 and receives a commission on
advertising sales. ESPN Brasil Ltda., in turn, receives on an exclusive basis
from the Company all rights to soccer and other sporting events acquired by the
Company after February 24, 1995. ESPN Brazil, Inc. has the right to terminate
the ESPN Agreement and dissolve ESPN Brasil Ltda. in the event that a Brazilian
court issues a non-appealable decision that the Company did not have the right
to grant these rights to ESPN Brasil. TVA's mandatory capital contributions to
ESPN Brasil Ltda. are subject to a maximum aggregate amount of $5.0 million,
whether in the form of loans or subscriptions for additional quotas. The ESPN
Agreement is effective until June 17, 2045 and automatically renewable for a
50-year period.
HBO Brasil Partners is a joint venture between TVA, which holds a 33.3%
equity interest, and HBO Ole Partners, which holds the remaining 66.7% equity
interest. HBO Ole Partners is, in turn, a joint venture among Time-Warner, Sony
and Ole Communications, Inc. HBO Brasil Partners has exclusive programming
contracts with Sony, Time-Warner and certain independent programming
distributors. HBO Brasil Partners, through an affiliate, provides the
programming for HBO Brasil to TVA. Pursuant to a Partnership Agreement dated
April 15, 1994 (the "HBO Agreement"), HBO Brasil Partners is managed by a
Partners' Committee comprised of an equal number of agents appointed by TVA and
HBO Ole Partners, the other partner. The HBO Agreement provides for the Company
to enter into an affiliation agreement with HBO Brasil Partners, pursuant to
which the Company pays a monthly fee per subscriber to the partnership.
In addition to the Programming Ventures, TVA has entered into a number of
other programming agreements. Since June 1991, TVA has had a programming
agreement with De Santi & Vallone to broadcast SuperStation programming in
Brazil, with exclusivity in Sao Paulo, Rio de Janeiro, Curitiba, Brasilia, Belem
and Goiania, as well as throughout all of Brazil via C-Band. Through the
SuperStation, TVA provides exclusive attractions from the news departments of
two major US television networks (CBS and NBC) as well as general interest
programming. In December 1996, TVA began transmitting programming from the
History Channel on the SuperStation. TVA acquired the rights to transmit the
History Channel programming through an agreement with A&E Networks Television.
The Bravo Company, a joint venture among NBC and certain other parties, provides
international movies and arts programming for the Bravo Brasil channel on an
exclusive basis to TVA for distribution in Brazil. TVA customizes Bravo Brasil
with the insertion of Brazilian arts and movie programming. Country Music
Television, which is owned by Group W Broadcasting, Inc. and Gaylord
Entertainment Company, provides programming for CMT Brasil, which TVA customizes
with Brazilian content. Pursuant to a Letter of Understanding, dated January 18,
1996, TVA and Country Music Television ("CMT") agreed to form CMT Brasil as a
joint venture entity, in which TVA will hold a 75.0% equity interest and CMT
will hold the remaining 25.0% equity interest. The formation of this joint
venture is still under discussion by the parties. Eurochannel is a channel
assembled exclusively by TVA with programming from the German channel Deutsche
Welle, the Spanish channel Radiotelevision Espanola, European movies, and series
acquired from the BBC. Additionally, pursuant to existing agreements, TVA is
planning, through DIRECTV service, to become the first provider of Cinemax
programming in Brazil (expected by March 1997). TVA also plans to transmit
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CNA, a Brazilian news channel to be produced by Abril with programming from SBT,
a Brazilian off-air channel. TVA distributes its programming through its own
operations and through sales of programming to the Operating Ventures, Galaxy
Latin America, the Independent Operators and, to a lesser extent, to competing
pay television providers.
In addition, TVA offers non-exclusive programming from major international
subscription television programming providers, including such channels as ESPN
International, CNN, TNT, Fox, and the Discovery Channel.
TVA currently offers subscribers the following channels, among others:
HBO BRASIL is the dominant first-run pay television movie channel in Brazil.
HBO Brasil airs 24 hours a day offering an average of 12 different films per day
with limited commercial slots. All films are either subtitled or dubbed into
Portuguese. In the case of dubbed versions, viewers can listen to the original
soundtrack on an SAP channel. Recently, in some locations, TVA began offering
HBO Brasil2, transmitting HBO Brasil films with a six hour time shift.
ESPN BRASIL, offered exclusively by TVA, began transmission on June 17,
1995. TVA negotiated agreements with the major Brazilian soccer confederations,
providing TVA, as of the 1997 season, exclusive first choice coverage of soccer
games of the Brazilian Soccer Championship, the Sao Paulo State Championship and
the Brazil Cup. ESPN Brasil's programming centers around these exclusive soccer
games and other exclusive Brazilian and international sports entertainment
programs, mixed with programming from ESPN2.
ESPN INTERNATIONAL is the second sports channel offered by TVA, for which
TVA recently signed a new non-exclusive 50-year contract automatically renewable
for another 50-year period. ESPN International offers a number of different
sporting events, which include auto racing, National Football League games,
professional tennis matches, Major League Baseball games, and National
Basketball Association games. ESPN International also currently provides
Portuguese language commentaries exclusively to TVA.
CNN INTERNATIONAL features news and information programming, offering
international news coverage concerning politics, business, financial and
economic developments, 24 hours a day.
TNT is a movie channel which, pursuant to a non-exclusive agreement with
Turner International, Inc., offers the Turner Network Television movie
collection, including over 5,000 classic movie titles from MGM. In addition, TNT
airs children's programming, documentaries and sporting events. The movies
presented by TNT are broadcast in stereo sound and subtitled or dubbed in
Portuguese or Spanish. In the case of dubbed versions, viewers can listen to the
original soundtrack on a SAP channel.
CARTOON NETWORK is an animated cartoon channel targeted to children that
offers programs such as THE FLINTSTONES, THE JETSONS, THE SMURFS, YOGI BEAR and
other classic series.
DISCOVERY BRASIL is comprised of programming shown on the US Discovery
Channel, based on topics in the areas of nature, science and technology,
history, adventure and world cultures.
THE FOX CHANNEL presents movies, as well as programs from the 2,000 titles
in Fox's library. Fox also presents American television series, such as L.A.
LAW, M*A*S*H, and THE SIMPSONS, among many others.
THE SUPERSTATION is a general entertainment channel programmed by a third
party for TVA's distribution in Brazil. This third party has entered into
exclusive contracts with leading American networks for the transmission of
documentary, variety, music and news programming. The SuperStation offers
popular programs, such as THE LATE SHOW WITH DAVID LETTERMAN, E! ENTERTAINMENT
programs, NBC and CBS news, as well as a variety of other programs, including
programming from the History Channel, interviews, and programs on such topics as
food and cooking, travel and fashion.
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EUROCHANNEL is specially assembled and packaged by TVA and offers
subscribers European programming. The channel presents programs from the Spanish
Radiotelevision Espanola, the German Deutsche Welle, the BBC, the news from the
French TF1, as well as a variety of quality European films. News, sports, music
and variety shows are also offered.
MTV BRASIL is a 24-hour channel produced by MTV Brasil, a joint venture
company owned by Abril and an indirect subsidiary of Viacom International. MTV
Brasil is entirely produced in Brazil in Portuguese. MTV Brasil has licensing
agreements with the MTV Network, a division of Viacom International, and
transmits a combination of music and other video clips, cartoons and local
programming.
MTV LATINO presents original programming from MTV Latin America, which
includes music and other video clips and cartoons in Spanish.
CMT BRASIL is a country music channel with programming supplied from the US
version of Country Music Television channel exclusively to TVA and customized
for Brazil with Brazilian country music and local events.
SONY ENTERTAINMENT is primarily a situation-comedy channel, consisting of
Sony's film library, including FRIENDS, SEINFELD, MAD ABOUT YOU and E.R.
THE WARNER CHANNEL is a family entertainment channel, with new and classic
cartoons, children's programs and movies.
BRAVO BRASIL is an arts and movie channel, following the same concept as the
US version of the Bravo channel, showing high quality, cultural events, such as
classical music, jazz, opera, ballet and European movies. TVA inserts local
programming, such as Brazilian music and movies, as well as shows performed in
Brazil by international artists.
RTPI, Radiotelevisao Portuguesa Internacional, is a Portuguese state-owned
general entertainment channel produced and assembled in Portugal, airing music
events, talk shows, movies, news, documentaries, exclusive to TVA.
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TVA's complete channel offerings as of September 1996 were as follows:
<TABLE>
<CAPTION>
CHANNEL DESCRIPTION
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
HBO Brasil.............................................. movie channel
HBO Brasil 2............................................ HBO Brasil with a six-hour time shift
ESPN Brasil............................................. sports channel
ESPN International...................................... sports channel
CNN International....................................... news channel
TNT..................................................... movie channel
Cartoon Network......................................... cartoon channel
Discovery Brasil........................................ science and documentary channel
Fox Channel............................................. movie channel
SuperStation............................................ variety programming channel
Eurochannel............................................. European variety programming channel
MTV Brasil.............................................. music channel
MTV Latino.............................................. music channel
RTPi.................................................... Portugal's state television channel
CMT Brasil.............................................. music channel
TV5..................................................... French variety programming channel
WorldNet................................................ American news and variety channel
RTVE.................................................... Spanish variety channel
Deutsche Welle.......................................... German variety channel
America 2............................................... Argentine variety channel
CV Noticias............................................. Argentine news channel
CV Sports............................................... Argentine sports channel
Canal de Noticias NBC................................... NBC news channel in Spanish
TeleUno................................................. Spanish variety channel
Sony Entertainment...................................... situation comedy channel
The Warner Channel...................................... family entertainment channel
Bravo Brasil............................................ arts and movie channel
Globo................................................... national off-air channel
SBT..................................................... national off-air channel
Gazeta/CNT.............................................. national off-air channel
Bandeirantes............................................ national off-air channel
Record.................................................. national off-air channel
Manchete................................................ national off-air channel
Cultura................................................. national off-air channel
CBI..................................................... local off-air channel
Rede Mulher............................................. local off-air channel
Rede Vida............................................... local off-air channel
TV Senado............................................... local off-air channel
TV Educativa Rio........................................ local off-air channel
</TABLE>
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The following additional channels are under development and are expected to
be offered by TVA to the Brazilian subscription television marketplace.
<TABLE>
<CAPTION>
CHANNEL DESCRIPTION
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Cinemax................................................. movie channel
CNA..................................................... news channel
Mundo................................................... variety channel
E! Entertainment........................................ entertainment news channel
</TABLE>
DIRECTV
The DIRECTV programming package currently offered by Galaxy Brasil as of
September 30, 1996 consisted of 49 video channels (including 19 pay-per-view
channels), certain of which, such as Bravo Brasil and CMT Brasil, are provided
by TVA. Since September 30, 1996, the number of channels offered by Galaxy
Brasil has increased to 56. The Company expects that the number of channels will
increase to approximately 70 video and 30 audio channels in the first quarter of
1997. Programming includes movies, news, athletic events and other programs
available on a pay-per-view basis. The complete DIRECTV service channel
offerings, other than pay-per-view, as of September 1996 were as follows:
<TABLE>
<CAPTION>
CHANNEL DESCRIPTION
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
HBO Brasil.............................................. movie channel
HBO Brasil 2............................................ HBO Brasil with a six-hour time shift
ESPN Brasil............................................. sports channel
ESPN International...................................... sports channel
Eurochannel............................................. European variety programming channel
CMT Brasil.............................................. music channel
MTV Brasil.............................................. music channel
MTV Latino.............................................. music channel
RTPi.................................................... Portugal's state television channel
CNN International....................................... news channel
TNT..................................................... movie channel
Cartoon Network......................................... cartoon channel
Discovery Brasil........................................ science and documentary channel
Sony Entertainment...................................... sit-com channel
Bravo Brasil............................................ art and movie channel
Deutsche Welle.......................................... German variety channel
RTVE.................................................... Spanish variety channel
Tele Uno................................................ Spanish variety channel
Warner Channel.......................................... family entertainment channel
CBS Telenoticias........................................ CBS news channel in Spanish
Bloomberg............................................... business news channel
Multipremier............................................ Mexican movie channel
ZAZ..................................................... Mexican children's programming channel
Travel Channel.......................................... travel programming channel
NHK..................................................... Japanese general entertainment channel
BBC..................................................... U.K. news channel
TVN..................................................... Chilean programming channel
Gazeta/CNT.............................................. national off-air channel
TV Senado............................................... local off-air channel
TV Educativa Rio........................................ local off-air channel
TV Cultura.............................................. local off-air channel
</TABLE>
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Since September 30, 1996, the Company has added the following channels to
the DIRECTV service:
<TABLE>
<CAPTION>
CHANNEL DESCRIPTION
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Nickelodeon............................................. children's programming channel
Discovery Kids.......................................... children's programming channel
Locomotion.............................................. children's programming channel
BBC World............................................... world news channel
TV Chile................................................ Chilean programming channel
Playboy TV.............................................. adult programming channel
AdulTVision............................................. adult programming channel
</TABLE>
OPERATIONS
MARKETING. The Company periodically conducts marketing surveys to gauge
consumer preferences and evaluate new and existing markets. TVA also frequently
evaluates the demographics of the subscribers to its programming, seeking to
provide programming most in demand. In each market, TVA's marketing staff
typically applies one or more of the following programs to attract subscribers:
(i) extensive marketing tied to regional events such as soccer matches, (ii)
neighborhood promotional events featuring large screen broadcasts of its channel
offerings, (iii) direct mailings, (iv) telemarketing, (v) television, billboard,
magazine and newspaper advertisements, (vi) prewiring arrangements with
residential housing developers and (vii) other promotional marketing activities,
including referral programs and promotional gifts.
INSTALLATION. The installation package delivered to a new subscriber
depends upon the type of programming delivery service chosen by the subscriber.
The MMDS installation package features a standard rooftop mount linked to an
antenna and related equipment, including a decoder, located at the subscriber's
location. Cable service requires the installation of a cable line and a decoder
at the subscriber's dwelling. Ku-Band satellite service typically involves
installation of a 60-centimeter dish antenna, which can be mounted outside a
subscriber's window or on the rooftop of a subscriber's building or house,
together with a decoder located at the subscriber's dwelling. As with Ku-Band
service, C-Band service installation includes the installation of a dish
antenna, although of a greater size (1.1 meters in diameter) and a decoder and
related equipment at the subscriber's home. DBS installations at single-family
homes require an entire installation package, while installations at multiple
dwelling units in which drop lines are installed require only a decoder at each
subscriber's location and therefore are less costly to the Company. Once a new
subscriber has requested service, the amount of time a subscriber waits for the
commencement of service depends on several factors, including type of service,
whether the subscriber has access to Cable, whether the subscriber is in a
single family home or multiple dwelling unit, whether the topography of the
surrounding area makes MMDS service viable and whether the subscriber is located
in an area of Brazil that can be reached by C-Band or Ku-Band service. TVA
provides installation service with its own personnel and through local
subcontractors. TVA or such subcontractor attempts to complete installation and
begin service within 30 days of a subscription order.
UPLINK FACILITIES. A major part of the delivery of TVA's DBS service,
whether Ku-Band or C-Band, is the collection of programming and the
transmission, or uplinking, of such programming to the Galaxy III-R satellite
and the Brasilsat satellite, respectively. Upon receipt of programming, the
Company processes, compresses, encrypts, multiplexes (combines with other
channels) and modulates (prepares for transmission to the satellite at a
designated carrier frequency) such programming. The Company uses uplink
facilities of Embratel in Sao Paulo to service its existing C-Band service. TVA
delivers its programming to the Embratel uplink center via microwave
transmission, where it is prepared for transmission to the Brasilsat satellite
using equipment provided by TVA. For its DIRECTV service, the Company has built
the Tambore Facility, an uplink center, for a total cost of approximately $20
million in
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Tambore in the State of Sao Paulo consisting of an uplink antenna and ancillary
equipment. The Tambore Facility has operated since June 1996 and is used to
uplink Brazilian programming to the Galaxy III-R satellite. Through the Galaxy
III-R satellite, programming from Galaxy Brasil is mixed with programming from
the California Broadcast Center (the "CBC") in Long Beach and with programming
provided by members of the Cisneros Group through an uplink facility in
Venezuela and by Grupo Frequencia Modulada Television through its uplink
facility in Mexico, for delivery to subscribers in Brazil and other countries to
which GLA provides DIRECTV service. The Tambore Facility and the uplink
facilities in Venezuela, Mexico and the United States are equipped with full
emergency power generation equipment and other emergency facilities to enable
GLA to avoid signal disruptions. As of April 11, 1997, California Broadcast
Facility, LLC, a new Delaware limited liability company, was established, the
principal asset of which is GLA's satellite uplink facility. The new company is
owned by two subsidiaries of Hughes Electronics. In connection with the
establishment of the new company, TVA Communications and Tevecap have agreed,
pursuant to the Indemnification Agreement, to provide certain indemnities in
favor of GLA, Hughes Communications GLA, the newly-established company and its
shareholders. To secure its obligations under the Indemnification Agreement,
Tevecap has agreed to pledge its equity interest in GLA, as well as any future
notes or interest it may hold relating to the uplink facility.
PROGRAMMING FACILITIES. Programming equipment is used to prepare the
programming material for transmission via the Company's MMDS, Cable or DBS
systems, including compression with respect to Cable and Ku-Band service. The
programming equipment inserts commercial or promotional material, if
appropriate, monitors the quality of the picture and sound, and delivers the
material to the multiplexing system. For programming delivered to TVA as taped
material, the programming equipment also compiles the various programming
segments, inserting commercial and promotional material.
COMPRESSION SYSTEM. The Company also uses its programming facilities to
digitize the programming signals used in TVA's Cable and Ku-Band service.
Digital technology permits the compression and transmission of a digital signal
to facilitate multiple channel transmission through a single channel's
bandwidth, thereby giving broadcasters the ability to offer significantly more
channels than is currently the case with analog systems. Digitized signals are
compressed using the MPEG-2 standard. (Moving Pictures Expert Group-2, the
international video compression standard).
CONDITIONAL ACCESS SYSTEM. GLA and News Digital Systems Limited ("NDS"), a
wholly-owned subsidiary of News Corporation, are parties to a System
Implementation and License Agreement. Under the Local Operating Agreement, GLA
provides to Galaxy Brasil the use of the access control system licensed from NDS
and the Smart Cards provided by NDS. The Company expects the access control
system to adequately protect DIRECTV programming from unauthorized access. With
Smart Card technology, it is possible to change the access control system in the
event of a security breach allowing TVA to reestablish security. Management
believes that the ability to take electronic measures and to replace the Smart
Cards will provide an effective means to combat unauthorized programming access.
SUBSCRIBER SERVICE. Management believes that delivering high levels of
subscriber service in installation and maintenance enables it to maintain high
levels of subscriber satisfaction and to maximize subscriber retention. To this
end, TVA attempts to promptly schedule installations, provides a subscriber
service hotline in each of the metropolitan areas in which TVA operates,
attempts to promptly provide response repair service, and attempts to make
follow-up calls to new subscribers shortly after installation to ensure
subscriber satisfaction. TVA seeks to instill a subscriber service focus in all
its employees through ongoing training and has established an intra-company
electronic mail system to provide a forum for employees to exchange ideas
concerning ways to increase subscriber satisfaction. TVA also has various
employee bonus programs linked to measures of subscriber satisfaction. To enable
its employees to provide quicker service, TVA is working to decentralize its
subscriber service operations by opening small service offices throughout TVA's
served markets.
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MANAGEMENT INFORMATION SYSTEMS AND BILLING. Management believes that TVA's
proprietary management information systems enable TVA to deliver superior
subscriber service, monitor subscriber payment patterns and facilitate the
efficient management of each of its operating systems. Management believes that
TVA's billing procedures are an integral part of its strategy to maintain high
levels of subscriber satisfaction and to maximize subscriber retention.
Subscribers select the day of the month on which payment for that month's
service is due, and pay their bills at a bank through direct transfers, which is
the standard payment method in Brazil. After disconnection and the removal of
the delinquent subscribers decoder box, the Company generally offers to
reconnect the delinquent subscribers for a fee of approximately $50.00.
COMPETITION
GENERAL
TVA and the Operating Ventures compete with pay television service providers
using Cable, MMDS and DBS transmission technologies. The Company expects to
continue to face competition from a number of existing and future sources,
including potential competition as a result of new and developing technologies
and the easing of regulation in the pay television industry. TVA believes that
competition is and will continue to be primarily based upon program offerings,
customer satisfaction, quality of the system network and price. Since there is a
very limited history of pay television services in Brazil, there can be no
assurance that, based on the potential size of the Brazilian pay television
industry, the pay television market will be able to sustain a number of
competing pay television providers. The Company and the Operating Ventures also
compete with national broadcast networks and regional and local broadcast
stations. TVA's MMDS and Cable operations and its C-Band satellite service and
Ku-Band satellite service may compete for the same subscribers.
MMDS AND CABLE SERVICE
TVA's principal competitors in Cable service are operations owned or
controlled by Multicanal Participacoes S.A. ("Multicanal"), Net Brasil S.A.
("Net Brasil"), Globo Cabo S.A. ("Globo Cabo") and RBS Participacoes S.A.
("RBS"). Multicanal and Net Brasil operate Cable systems throughout much of
Brazil, including Sao Paulo, Rio de Janeiro, Curitiba and several other large
metropolitan areas. Globo Cabo has Cable systems in approximately 18 cities
including Brasilia. RBS operates Cable services in 19 cities in Brazil and
provides MMDS service in Porto Alegre. Net Brasil also provides MMDS service in
Recife, and has a license to provide MMDS service in Curitiba. Globo
Comunicacoes e Participacoes Ltda. ("Globo Par") and TV Globo, the owners of
Brazil's most popular off-air channels (together, "Globo"), control, or have
significant interests, in each of Multicanal, Net Brasil and Globo Cabo. RBS
also holds an interest in Multicanal. The systems controlled by Multicanal, Net
Brasil, Globo Cabo and RBS offer a similar number of channels of programming at
prices comparable to those charged for TVA's MMDS and Cable Service. Each of
these systems broadcasts programming purchased from TVA as well as from other
services.
DBS SERVICE
Management believes its only competitor in DBS service is Net Sat Servicos
Ltda. ("Net Sat") in which Globo Par also has a controlling interest and whose
other equity holders include News Corporation plc, a subsidiary of The News
Corporation Limited and Grupo Televisa, S.A., of Mexico. TVA offers 26 channels
of programming with its C-Band service, compared to the six channels offered by
Net Sat's C-Band service. However, while monthly charges are comparable and
TVA's digital C-Band service offers more channels, often with better picture
quality, the analog decoder necessary for Net Sat's C-Band service is
significantly less expensive than the digital decoder TVA's subscribers must
purchase. With respect to Ku-Band service, Net Sat uses a satellite which
provides broader coverage of Brazil. The orbital location of the Galaxy III-R
satellite enables GLA to offer DIRECTV service to substantially all of the
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TV Homes in Brazil. However, in the less populated northern and western regions
of Brazil, reception of DIRECTV programming requires a dish antenna up to 1.1
meters in diameter and in the western third of Brazil (a sparsely populated area
when compared to the southern and eastern regions) reception may not be
practical due to the size of the antenna necessary for reception. TVA's Ku-Band
service currently offers 56 channels of programming, including 9 SAP channels
and 19 pay-per-view channels, as compared to the 26 channels of programming,
including 4 pay-per-view channels, offered by Net Sat.
OFF-AIR BROADCAST TELEVISION
Broadcasting services are currently available to substantially all of the
Brazilian population without payment of a subscription fee by six
privately-owned national broadcast television networks and a government-owned
national public television network. The six national broadcast television
networks and their local affiliates currently provide services to nearly all
Brazilian TV Homes without payment of a subscription fee. The national broadcast
television networks and local broadcast stations receive a significant portion
of their revenues from the sale of television advertising, which revenues are
based in part on the audience share and ratings for the networks' programs.
Programming offered by pay television providers, including TVA, directly
competes for audience share and ratings with the programming offered by
broadcast television networks as well as regional and local television
broadcasters. The six national broadcast television networks are Globo, SBT,
Bandeirantes, TV Manchete, TV Record and Gazeta/CNT. The national television
networks utilize one or more satellites to retransmit their signals to their
local affiliates throughout Brazil.
PROGRAMMING SALES
TVA competes with a variety of Brazilian and international programming
providers for sales of its programming to the Operating Ventures and Independent
Operators. In addition, TVA competes with other pay television operators to
purchase programming from some of these Brazilian and international sources.
REGULATORY FRAMEWORK
The subscription television industry in Brazil is subject to regulation by
the Brazilian Ministry of Communications pursuant to the Brazilian
Telecommunications Code of 1962, as amended (the "Telecommunications Code"). The
Ministry of Communications grants concessions for MMDS, Cable, DBS, and UHF
licenses.
MMDS REGULATIONS
GENERAL. The Telecommunications Code empowers the Ministry of
Communications, among other things, to issue, revoke, modify and renew licenses
within the spectrum available to MMDS systems, to approve the assignments and
transfer of control of such licenses, to approve the location of channels that
comprise MMDS systems, to regulate the kind, configuration and operation of
equipment used by MMDS systems, and to impose certain other reporting
requirements on channel license holders and MMDS operators. The licensing and
operation of MMDS channels are currently governed by Rule No. 002/94 ("Rule
002/94"), adopted by Ministry of Communications Administrative Rule No. 043/94
("Rule 043/94"). Under Rule 002/94, 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. On September 9, 1996,
the Ministry of Communications issued Ordinance No. 1,085 ("Ordinance 1085"),
which revised Rule 002/94 and imposed restrictions on the granting and use of
MMDS licenses.
LICENSES. The Ministry of Communications grants licenses and regulates the
use of channels by MMDS operators to transmit video programming, entertainment
services and other information. A
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maximum of 31 MMDS channels (constituting a spectrum bandwidth of 186 MHz) may
be authorized for use in an MMDS market. While licenses are usually granted for
the use of up to 16 channels, depending on technical feasibility and the
existence of competition, the Ministry of Communications can grant a license for
all 31 channels available in one specific area. If the license is for 16 or more
channels, at least two channels must be reserved for educational and cultural
programming. If the license involves less than 15 channels, only one channel
must be reserved for educational and cultural purposes. If a license is for
fewer than 15 channels, there is no obligation to reserve any channel for
educational and cultural purposes. In each of the Company's operating or
targeted markets, up to 31 MMDS channels are available for MMDS (in addition to
any local off-air VHF/UHF channels which are offered).
Any company in which nationals of Brazil own at least 51.0% of the voting
capital is eligible to be granted a license to operate an MMDS service. For
purposes of this regulation, "national" means any native Brazilian or a
naturalized Brazilian who has held Brazilian citizenship for at least ten years.
The license is granted for a renewable period of 15 years. The application for
renewal of a license must be filed with the Ministry of Communications during
the period from 180 to 120 days before the end of the license term. To renew the
license, the license holder must (i) meet applicable legal and regulatory
requirements, (ii) have complied with all legal and contractual obligations
during the term of such license, (iii) meet certain technical and financial
requirements and (iv) provide educational and cultural programming.
Under the most recently promulgated rules of Ordinance 1085, 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. Ordinance 1085 grants the Ministry of Communications
full discretion to alter or eliminate the restrictions. The term affiliate is
defined by Ordinance 1085 as "(i) any legal entity that directly or indirectly
holds at least 20% of the voting capital of another legal entity or any of two
legal entities under common ownership of at least 20% of their respective voting
capital, (ii) any of two legal entities that have at least one officer or
director in common, (iii) any of two legal entities when, due to a financial
relationship between them, one entity is dependent on the other." The Company
currently controls four MMDS licenses in cities of more than 700,000 inhabitants
(Sao Paulo, Rio de Janeiro, Curitiba and Porto Alegre), but in each such city
TVA has at least one competitor. No assurance can be given as to the number of
licenses that will be granted, if any. Prices for pay television services may be
freely established by the system operator, although the Ministry of
Communications may interfere in the event of abusive pricing. The Ministry of
Communications may impose penalties including fines, suspension or revocation of
the license if the license holder fails to comply with applicable regulations or
becomes legally, technically or financially unable to provide MMDS service. The
Ministry of Communications also may intervene to the extent operators engage in
unfair practices intended to eliminate competition.
The Ministry of Communications awards licenses to use MMDS channels based
upon applications demonstrating that the applicant is qualified to hold the
license, that the proposed market is viable and that the operation of the
proposed channels will not cause impermissible interference to other permitted
channels. After the Ministry of Communications determines that an application
has met these requirements, it publishes a notice requesting comments from all
parties interested in providing the same services in the same or a near area.
Depending on the comments received, the Ministry of Communications may decide to
open a public bid for the service in that area, although it has not done so in
the past. In the case of a public bid, applicants would be evaluated based on a
number of factors including the applicant's proposed schedule for implementing
service aspects of the applicant's community relations, such as involvement of
local residents as stockholders of the applicant, the applicant's commitment to
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local programming and the extent to which the applicant provides free
programming to local cultural and educational institutions. Once an MMDS license
application is granted by the Ministry of Communications, the license holder
must finalize construction and begin operations within 12 months, which period
may be extended by an additional 12 months.
In addition to qualifying under the application process described above, a
license holder must also demonstrate that its proposed signal does not violate
interference standards in the area of another MMDS channel license holder. To
this end, existing license holders are given a 30-day period in which to
ascertain and comment to the Ministry of Communications whether the new license
holder's proposed signal will interfere with existing signals. The area covered
by the services is exclusive to a radius of five to 50 kilometers around the
transmission site, depending on the technical capability of the operator.
On November 28, 1995, the President of Brazil enacted Decree No. 1719, which
provides that all granting of concessions and licenses for the rendering of
commercial telecommunications services in Brazil shall be made through bidding
procedures. As of March 31, 1996, the Ministry of Communications had not granted
any new licenses for the operation of MMDS systems pursuant to such Decree.
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. 002/94 and Ordinance 1085 have certain
provisions relating to consumer rights, including a provision for mandatory
discounts in the event of interruption of service. The Company, as of April 21,
1997, has not been required to repay any amounts or provide any discounts due to
interruptions of service. However, the Company does refund prepaid installation
service fees, when the Company discovers such service is unavailable for
whatever reason. Due to the regulated nature of the subscription television
industry, the adoption of new, or changes to existing, laws or regulations or
the interpretations thereof may impede the Company's growth and may otherwise
have a material adverse effect on the Company's results of operations and
financial condition. See "Risk Factors--Risk Factors Relating to the
Company--Government Regulation."
CABLE REGULATION
GENERAL. Cable services in Brazil are licensed and regulated by the
Ministry of Communications pursuant to Law No. 8977, enacted by the Brazilian
National Congress on January 6, 1995 ("Law 8977"), and Decree No. 1718, enacted
by the President of Brazil on November 28, 1995 ("Decree 1718"). Until Law 8977
was enacted in 1995, the Brazilian Cable industry had been governed by two
principal regulatory measures since its inception in 1989: Ordinance No. 250,
issued by the Ministry of Communications on December 13, 1989 ("Ordinance 250"),
and its successor, Ordinance No. 36, issued by the Ministry of Communications on
March 21, 1991 ("Ordinance 36"). On September 9, 1996, the Ministry of
Communications issued Ordinance 1086 ("Ordinance 1086") regulating the granting
and use of Cable Licenses.
Ordinance 250 regulated the distribution of television signals ("DISTV") by
physical means (I.E., by Cable) to end-users. DISTV services generally are
limited only to the reception and transmission of signals without any
interference by a DISTV operator with the signal content. Under Ordinance 250,
101 authorizations were granted by the Ministry of Communications to local
operators to commercially exploit DISTV services. Although Ordinance 250 did not
specifically address Cable services, a number of DISTV operators (including the
Company's Cable systems) began to offer Cable services based on DISTV
authorizations.
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By issuing Ordinance 36 in March 1991, the Ministry of Communications
suspended Ordinance 250, although it allowed the DISTV authorizations issued
during the preceding 15 months to remain valid. The Ministry of Communications
submitted proposed regulations relating to Cable services for public comment at
the same time Ordinance 36 was issued. These proposed regulations were never
adopted and no further regulatory action was taken until the enactment of Law
8977 in 1995. Currently Law 8977, together with Decree 1718 (which provides the
implementing procedures for Law 8977) and Ordinance 1086, constitute the
regulatory framework for Cable services in Brazil.
LICENSES. Under Law 8977, a Cable operator must obtain a license from the
Ministry of Communications in order to provide Cable services in Brazil. All
Cable licenses are nonexclusive licenses to provide Cable services in a service
area. Cable licenses are granted by the Ministry of Communications for a period
of 15 years and are renewable for equal and successive periods. Renewal of the
Cable license by the Ministry of Communications is mandatory if the Cable system
operator has (i) complied with the terms of the license grant and applicable
governmental regulations and (ii) agrees to meet certain technical and economic
requirements relating to the furnishing of adequate service to subscribers,
including system modernization standards.
Ordinance 1086 imposes restrictions on the number of areas that can be
served by a Cable television system operator (or an affiliate thereof). Pursuant
to Ordinance 1086, 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 1086 grants the Ministry of Communications full
discretion to alter or eliminate the restrictions. The term affiliate is defined
by Ordinance 1086 as "(i) any legal entity that directly or indirectly holds at
least 20% of the voting capital of another legal entity or any of two legal
entities under common ownership of at least 20% of their respective voting
capital, (ii) any of two legal entities that have at least one officer or
director in common, (iii) any of two legal entities when, due to a financial
relationship between them, one entity is dependent on the other." The Company
currently controls four Cable licenses in cities of more than 700,000
inhabitants (Sao Paulo and Curitiba), but in each such city TVA has at least one
competitor.
Generally, only legal entities that are headquartered in Brazil and that
have 51.0% of their voting capital by Brazilian-born citizens or persons who
have held Brazilian citizenship for more than 10 years are eligible to receive a
license to operate Cable systems in Brazil. In the event that no private entity
displays an interest in providing Cable services in a particular service area,
the Ministry of Communications may grant the local public telecommunications
operator a license to provide Cable services.
Cable operators that presently provide Cable services under a DISTV
authorization granted under Ordinance 250 are required under Law 8977 to file
applications to have their DISTV authorizations converted into Cable licenses.
Ordinance 1086 grants a one year period from the date a DISTV authorization is
converted into a cable television license for any Cable system operator to
comply with the restrictions. The Company's Cable systems, all of which are
operating under DISTV authorizations, have applied for conversion of their DISTV
authorizations.
Cable licenses for service areas not covered by existing authorizations will
be granted pursuant to a public bidding process administered by the Ministry of
Communications after prior public consultation. All such licenses shall be
nonexclusive licenses. In order to submit a bid for a license, a bidder must
meet certain financial and legal prerequisites. After such prerequisites are
met, a bidder must then submit a detailed bid describing its plan to provide
Cable services in the service area. In the qualification phase of the bidding
process, the Ministry of Communications assigns a number of points to each bid
based on certain weighted criteria, including the degree of ownership of the
bidder by residents of the local service area; the channel capacity of the
proposed system; the timetable for installing the Cable
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system; the timetable for offering subscription programming and amount of such
programming; the time allocated to local public interest programming; the number
of channels allocated to educational and cultural programming; the number of
establishments, such as schools, hospitals and community centers, to which basic
service programming will be offered free of charge; and the proposed basic
subscription rate. After calculating the number of points awarded to each
bidder, the Ministry of Communications will then apply a formula based on the
population of the service area to select the winning bid from among those
bidders that meet certain defined minimum qualifying thresholds. For service
areas with a population of 700,000 or more inhabitants, the qualified bidder
that submits the highest bid for the license will be selected. For service areas
with a population between 300,000 and 700,000 inhabitants, the winning bid is
selected based on the highest product obtained by multiplying the number of
points awarded in the qualification phase and the amount bid for the license.
For service areas with less than 300,000 inhabitants, the winning bid is
selected on the basis of the number of points awarded in the qualification phase
and the payment of a fixed fee.
Once a Cable license is granted, the licensee has an 18 month period from
the date of the license grant to complete the initial stage of the installation
of the Cable system and to commence providing Cable services to subscribers in
the service area. The 18 month period is subject to a single 12 month extension
for cause at the discretion of the Ministry of Communications.
Any transfer of a Cable license is subject to the prior approval of the
Ministry of Communications. A license generally may not be transferred by a
licensee until it has commenced providing Cable services in its service area.
Transfers of shares causing a change in the control of a license or the legal
entity which controls a license also is subject to the prior approval of the
Ministry of Communications. The Ministry of Communications must receive notice
of any change in the capital structure of a licensee, including any transfer of
shares or increase of capital that do not result in a change of control.
A license can be revoked, upon the issue of a judicial decision, in the
event the licensee lacks technical, financial or legal capacity to continue to
operate a Cable system; is under the management of individuals, or under the
control of individuals or corporations who, according to Law 8977, do not
qualify for such positions; has its license transferred, either directly or by
virtue of a change in control, without the prior consent of the Ministry of
Communications; does not start to provide Cable services within the time limit
specified by Law 8977; or suspends its activities for more than thirty
consecutive days without justification, unless previously authorized by the
Ministry of Communications.
CABLE RELATED SERVICE REGULATION
GENERAL. Brazilian telecommunications services are governed primarily by
(i) Article 21 of the Federal Constitution, as amended by Amendment No. 8 of
August 15, 1995 ("Amendment 8"), and (ii) the Telecommunications Code (Law No.
4117 of August 27, 1962, as amended). The Brazilian Government also has issued
detailed regulations covering specific areas of telecommunications services,
including radio broadcasting, paging, trunking, subscription television, Cable
television and cellular telephony. The Ministry of Communications presently is
responsible for the regulation of telecommunications services in Brazil. Prior
to its amendment in 1995, Article 21 of the Federal Constitution required the
Brazilian Government to operate directly, or through concessions granted to
companies whose shares are controlled by the Brazilian Government, all
telephone, telegraph, data transmission and other public telecommunications
services. This constitutional requirement was the basis for the establishment of
the state-owned telephone monopoly, Telebras, which holds controlling interests
in 27 regional telephone operating companies. With the adoption of Amendment 8,
Article 21 was modified to permit the Brazilian Government to operate
telecommunications services either directly or through authorizations,
concessions or permissions granted to private entities. In particular, Amendment
8 removed the constitutional requirement that the Brazilian Government must
either directly operate or control the shares of companies which operate
telecommunications services. Even with the adoption of Amendment 8, the
Brazilian Government still retains broad regulatory powers over
telecommunications
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services. Notwithstanding the existence of the Telebras monopoly, private
companies have been permitted under Brazilian law to provide a number of
telecommunications services other than telephony, including radio broadcasting,
paging, trunking, subscription television and cable television services.
However, fixed public telephony and cellular telephony were exclusively provided
by Telebras through its regional telephone operating companies. While Amendment
8 permits the Brazilian Government to authorize private companies to provide
such services, further action on the part of the Brazilian legislature will be
required before private entities may actually provide fixed telephony services.
HIGH-SPEED CABLE DATA SERVICES. Law 8977 and Decree 1718, among other
things, authorize cable television operators, such as the Company, in addition
to furnishing video and audio signals on their cable networks, to utilize their
networks for the transmission of meteorological, banking, financial, cultural,
prices and other data. This broad grant of authority by the Ministry of
Communications is understood to permit Cable television operators to furnish
services such as interactive home banking and high-speed Cable data services to
subscribers through their cable television networks.
CABLE TELEPHONY. Under present Brazilian law, only Telebras' regional
telephone operating companies are permitted to furnish fixed telephone services
in Brazil. Therefore, absent a change in Brazilian law, the Company would not be
permitted to furnish cable telephony on its network. There are, however, certain
limited regulatory exceptions pursuant to which private entities other than
Telebras and the regional telephone operating companies have been permitted to
provide limited fixed telephony services in Brazil. Under one particular
exception, certain private telephone networks (CENTRAIS PRIVADAS DE COMUTACAO
TELEFONICA or "CPCT") serving "condominiums" (as such term is defined under
Brazilian law) have been permitted to interconnect their private telephone
networks to the public telephone network operated by the local telephone
operating company. A CPCT is comparable to a private branch exchange (PBX) found
in some larger apartment complexes, hotels and businesses in the United States.
Under Brazilian law, the term "condominium" refers to residential and
nonresidential buildings or building complexes that have entered into a legal
association. In practice, a condominium desiring to establish a CPCT will
generally contract with a private service provider to install, operate and
maintain the CPCT and to secure interconnection with the public telephone
network. Ordinance No. 119/90 of the 10 December 1990 ("Ordinance 119"), which
was issued by the predecessor to the Ministry of Communications, sets forth
requirements for the interconnection of CPCTs with the public telephone network.
In general the installation, operation and maintenance of a CPCT does not
require any authorization from the Ministry of Communications or Telebras. In
order to interconnect with the public telephone network, a CPCT must comply with
the requirements set forth in Ordinance 119. Such requirements primarily relate
to meeting technical equipment certification and acceptance standards. Assuming
that such standards are met, the regional telephone operating company is
required under Ordinance 119 to interconnect the CPCT requesting interconnection
to the public telephone network. The Company believes that, under current
Brazilian law, Cable television operators can utilize their Cable television
networks in order to facilitate the installation and operation of a CPCT.
Furthermore, under the authority granted by Ordinance 119, CPCTs may be
interconnected through Cable television networks to the public telephone
network.
SATELLITE SERVICE REGULATION. On October 1, 1991, the Ministry of
Communications enacted Ordinance No. 230 to regulate telecommunications services
via satellite in Brazil ("Ordinance 230"). Under Ordinance 230 any company
authorized to broadcast television by any means is also authorized to broadcast
by satellite transmission. The Company has operated satellite pay-television
services since 1993 through a contract signed with Embratel.
Ordinance No. 281, issued by the Ministry of Communications on November 28,
1995, partially amended Ordinance 230 allowing only companies to which a
concession, permission or authorization had been granted previously by the
Ministry of Communications to provide telecommunications services via satellite.
Companies that were already operating satellite telecommunications services
without
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such authorization were given a period of 60 days to seek such authorization.
The Company applied for such authorization within the 60-day period, and on
April 23, 1996, the Ministry of Communications issued Ordinance No. 87/96
("Ordinance 87"), granting TVA the non-exclusive permission to operate a pay
television service via satellite. Such authorization is valid for a term of
fifteen years, commencing October 26, 1994. Ordinance 87 further provides that
TVA has the obligation to (a) render services continuously and efficiently in
order to fully satisfy users, (b) in an emergency or disaster, render services
to the entities that require services without charge, and (c) meet the technical
adequacy requirements which the Ministry of Communications considers essential
to guarantee fulfillment of the obligations under the permission granted. In
addition, on April 23, 1996, Galaxy Brasil received approval from the Ministry
of Communications, pursuant to Ordinance No. 86/96 ("Ordinance 86"), to operate
satellite services via the Galaxy III-R satellite, leased by Hughes Electronics.
Galaxy Brasil also received approval to operate the corresponding ground
transmission station pursuant to Ordinance 86.
On May 31, 1996, the Ministry of Communications presented Ordinance No. 23
("Ordinance 23") for a 30-day period of public review and comment. Ordinance 23
is a proposed general rule which would govern the granting of licenses to
provide satellite pay television services. Under the proposed rule,
licenseholders would be required to be legal entities at least 51.0% of whose
voting capital is owned by (a) Brazilian citizens who are either born in Brazil
or naturalized for at least ten years or (b) a corporation organized in Brazil
and controlled by Brazilian citizens who are either born in Brazil or
naturalized for at least ten years. Furthermore, licenses would be granted for a
renewable period of ten years, and could be transferred only with prior approval
of the Ministry of Communications. If issued as currently drafted, these
proposed rules will not have a material impact on the Ku-Band and C-Band
operations of TVA.
PROPERTIES
The Company owns most of the assets essential to its operations. The major
fixed assets of the Company are coaxial and fiber optic cable, converters for
subscribers' homes, electronic transmission, receiving, processing and
distribution equipment, microwave equipment and antennae. The Company leases
certain distribution facilities from third parties, including space on utility
poles, roof rights and land leases for the placement of certain of its hub
sights and head ends and space for other portions of its distribution system.
The Company leases its offices from third parties, with the exception of certain
offices of TVA Sul, located in Curitiba, State of Parana, and the offices and
uplink facility for Galaxy Brasil, located in Tambore, Sao Paulo State, all of
which are owned by the Company. The Company also owns its data processing
facilities and test equipment.
EMPLOYEES
TVA had 1,666 employees as of September 30, 1996. TVA utilizes third-party
contract employees in connection with the construction of its broadcast system
network and certain other activities. Substantially all of the employees of TVA
are represented by unions. TVA believes that it has good employee and labor
relations.
LEGAL PROCEEDINGS
The Company is party to certain legal actions arising in the ordinary course
of its business which, individually or in the aggregate, are not expected to
have a material adverse effect on the combined financial position of the
Company. As of September 30, 1996, the Company had reserved approximately $5.9
million as contingent liabilities in connection with certain litigation
contingencies, including a number of claims by persons arising in connection
with the termination of their employment (approximately $1.8 million) and claims
relating to the payment by the Company of certain taxes on imported materials
(approximately $4.1 million). See Note 21 to the Financial Statements of the
Company. As a result of an agreement between the Company and governmental
authorities regarding an installment payment schedule for one such tax (the
IMPOSTO SOBRE CIRCULACAO DE MERCADORIAS E SERVICOS, or
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"ICMS"), the Company reduced its reserve for litigation contingencies to
approximately $4.3 million as of December 31, 1996, which amount includes a
provision for claims described in the succeeding paragraph.
The Company's operating companies are currently defending a lawsuit brought
by the Escritorio Central de Arrecadacao e Distribuicao (Central Collection and
Distribution Office, or "ECAD"), a government-created entity authorized to
enforce copyright laws relating to musical works. ECAD filed a lawsuit in 1993
against all pay-television operators in Brazil seeking to collect royalty
payments in connection with musical works broadcast by the operators. The suit
was filed against TVA in the Tribunal de Justica do Estado de Sao Paulo, the 16
Vara Civil do Estado de Sao Paulo, the Tribunal de Justica do Estado do Parana
and the Tribunal de Justica do Estado de Santa Catarina. The suit was filed
against TV Filme in the Tribunal de Justica do Estado de Goias, the Tribunal de
Justica do Distrito Federal and the Tribunal de Justica do Estado do Para and
against Canbras TVA in the Tribunal de Justica do Estado de Sao Paulo. ECAD is
seeking a judgment award of 2.55% of all past and present revenues generated by
the operators. The Company and all such cable operators are currently in the
process of responding to this suit. Although the Company intends to vigorously
defend this suit, the loss of such suit may have a material adverse effect on
the consolidated financial position of the Company. Based on agreements reached
by ECAD with other Brazilian television operators, however, management believes
that it can reach a negotiated settlement to this suit whereby the Company would
make monthly payments to ECAD in an amount significantly lower than that sought
by ECAD. As of December 31, 1996, the Company had reserved approximately
$770,000 for claims related to the ECAD suit.
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MANAGEMENT
The Company is managed by its CONSELHO DE ADMINISTRACAO ("Board of
Directors"), CONSELHO CONSULTIVO ("Advisory Board") and DIRETORIA ("Committee of
Officers"). Members of the Board of Directors and Committee of Officers are
elected for a two-year period, currently expiring on April 30, 1998. Day-to-day
operations of the Company are managed by the Company's EXECUTIVOS ("Executive
Officers").
BOARD OF DIRECTORS
<TABLE>
<CAPTION>
MEMBER AGE POSITION
- ---------------------------------------------------------------------------------------------- --- -----------
<S> <C> <C>
Robert Civita................................................................................. 60 President
Jose Augusto P. Moreira....................................................................... 53 Member
Robert Hefley Blocker......................................................................... 61 Member
Giancarlo Francesco Civita.................................................................... 33 Member
Thomaz Souza Correa Neto...................................................................... 58 Member
Francisco Savio Couto Pinheiro................................................................ 43 Member
Arnaldo Bonoldi Dutra......................................................................... 44 Member
Sergio Vladimirschi Junior.................................................................... 31 Member
Jose Luis de Salles Freire.................................................................... 48 Member
Jorge Fernando Koury Lopes.................................................................... 46 Member
Oswaldo Leite de Moraes Filho................................................................. 47 Member
</TABLE>
ADVISORY BOARD
<TABLE>
<CAPTION>
MEMBER AGE POSITION
- ---------------------------------------------------------------------------------------------- --- -----------
<S> <C> <C>
Robert Civita................................................................................. 60 President
Jose Augusto P. Moreira....................................................................... 53 Member
Robert Hefley Blocker......................................................................... 61 Member
Claudio Dascal................................................................................ 53 Member
Angelo Silvio Rossi........................................................................... 50 Member
Francisco Savio Couto Pinheiro................................................................ 43 Member
Stephen Vaccaro............................................................................... 42 Member
Marc Nathanson................................................................................ 51 Member
Tully M. Friedman............................................................................. 54 Member
Raymond E. Joslin............................................................................. 60 Member
Herbert A. Granath............................................................................ 68 Member
</TABLE>
COMMITTEE OF OFFICERS
<TABLE>
<CAPTION>
MEMBER AGE POSITION
- ----------------------------------------------------------------------------------------------- --- ----------
<S> <C> <C>
Jose Augusto Pinto Moreira..................................................................... 53 Member
Angelo Silvio Rossi............................................................................ 50 Member
Claudio Cesar D`Emilio......................................................................... 46 Member
Sergio Vladimirschi Junior..................................................................... 31 Member
</TABLE>
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EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
MEMBER AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Gene Musselman....................................... 52 Executive Vice President and Chief Operating Officer
Douglas Duran........................................ 43 Chief Financial Officer
Jose Antonio de Camargo Barros....................... 50 Development Officer
Luis Alberto Villaca Leao............................ 38 Management Information System Officer
Virgilio Jose Carreira Amaral........................ 43 Engineering Officer
Jose Luiz Navarro Frauendorf......................... 51 Operations Officer
Antonio Alberto Teixeira Filho....................... 43 Technology Officer
Roseli Terezinha Parrella............................ 38 Human Resources Officer
Jacques Wladimirski.................................. 35 Galaxy Brasil Officer
Leonardo Petrelli Neto............................... 36 Curitiba Officer
Luiz Eduardo B.P. Rocha.............................. 36 Rio de Janeiro Officer
</TABLE>
ROBERT CIVITA has been President of the Board of Directors since July 1994
and President of the Advisory Board since September 1995. Mr. Civita has been
Chairman and Chief Executive Officer of Abril since 1990 and previously served
as its President for eight years. Mr. Civita attended Columbia University's
graduate program in sociology, and holds a degree in economics, with a minor in
publishing, from the University of Pennsylvania. In 1991 Mr. Civita was elected
"Person of the Year" by the Brazilian American Chamber of Commerce in New York.
Mr. Civita is the father of Giancarlo Francesco Civita.
JOSE AUGUSTO P. MOREIRA has been a member of the Board of Directors since
July 1994, a member of the Advisory Board since September 1995 and a member of
the Committee of Officers since July 1992. Mr. Moreira has been associated with
Abril since 1965, and currently serves as Abril's Vice President of Finance and
Administration. Mr. Moreira has a degree in Economics from the Faculdade de
Economia Sao Luis in Sao Paulo, and participates in the Program for Management
Development at Harvard Business School.
ROBERT HEFLEY BLOCKER has been a member of the Board of Directors since
April 1995 and a member of the Advisory Board since September 1995. Mr. Blocker
was associated with the Chase Manhattan Bank for 22 years, the last nine of
which he served as President Director. Mr. Blocker is currently President and
Managing Partner of Blocker Assessoria de Investimentos e Participacoes S.A., a
consulting firm for national and multinational companies. Mr. Blocker is also a
member of several other Boards of Directors, including those of Arno S.A. and
the American Chamber of Commerce in Sao Paulo.
GIANCARLO FRANCESCO CIVITA has been a member of the Board of Directors since
August 1994. Mr. Civita has been associated with Abril since 1986, and currently
serves as the General Director of MTV Brasil. From 1992 to 1994 Mr. Civita was
the General Director of the Programming Unit at TVA Brasil. Mr. Civita holds an
M.B.A. from Harvard Graduate School of Business Administration, as well as an
undergraduate degree in Social Communication from the Escola Superior de
Propaganda e Marketing in Sao Paulo. Mr. Civita is the son of Robert Civita.
THOMAZ SOUTO CORREA NETO has been a member of the Board of Directors since
November 1995. Mr. Correa is Executive Vice President and Editorial Director of
Abril, and has served as Editor-in-Chief of several of Abril's major magazines.
Mr. Correa is also the President of the Brazilian Publishers Association. Mr.
Correa studied Economics at Universidade MacKenzie.
FRANCISCO SAVIO COUTO PINHEIRO has been a member of the Board of Directors
since September 1995 and a member of the Advisory Board since September 1995.
Mr. Pinheiro is a former Secretary of Communications who has also held posts at
Embratel and Radiobras, the Brazilian government-
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owned broadcasting company. Mr. Pinheiro is currently a consultant and General
Manager of SP Communications. Mr. Pinheiro holds undergraduate and graduate
degrees in Telecommunications.
ARNALDO BONOTRI DUTRA has been a member of the Board of Directors since
April 1996. Mr. Dutra is the Country General Counsel of Banco Chase Manhattan
S.A., an affiliate of The Chase Manhattan Bank. Mr. Dutra is also the legal
advisor to all the Chase companies in Brazil. Mr. Dutra holds a law degree from
the Pontificia Universidade Catolica de Sao Paulo and a master of laws degree
from the Universidade de Sao Paulo.
SERGIO VLADIMIRSCHI JUNIOR has been a member of the Board of Directors since
September 1995 and a member of the Committee of Officers since April 1996. Mr.
Vladimirschi was associated with Drexel Burnham Lambert, where he worked as an
analyst for two years, and is an executive with Fechaduras Brasil S.A., one of
Brazil's leading hardware manufacturers, where he served as Marketing Officer
for seven years. Mr. Vladimirschi holds a B.S. in Finance from the Wharton
School at the University of Pennsylvania. Mr. Vladimirschi is the nephew of Marc
Nathanson.
JOSE LUIS DE SALLES FREIRE has been a member of the Board of Directors since
September 1995. Mr. Freire has been active in the areas of banking, corporate
finance and corporate law, and is a member of the Board of Directors of the
BOLSA DE VALORES DE SAO PAULO (Sao Paulo Stock Exchange). Mr. Freire holds a law
degree from the Universidade de Sao Paulo and a master of laws degree in
Comparative Law from New York University Law School.
JORGE FERNANDO KOURY LOPES has been a member of the Board of Directors since
November 1995. Mr. Lopes holds a law degree from the Faculdade de Direito
Sorocaba and a master of laws degree in Corporate Jurisprudence from New York
University.
OSWALDO LEITE DE MORAES FILHO has been a member of the Board of Directors
since November 1995. Mr. Moraes holds a law degree from the Universidade de Sao
Paulo and a master of laws degree in Corporate Jurisprudence from New York
University. Mr. Moraes is a member of the Instituto Brasileiro de Direitos
Tributarios (Brazilian Tax Law Institute).
ANGELO SILVIO ROSSI has been a member of the Advisory Board since April 1996
and a member of the Committee of Officers since July 1994. Mr. Rossi has been
associated with Abril since 1968, and holds a graduate degree in Economics from
the Fundacao Getulio Vargas, as well as an undergraduate degree in Economics
from Universidade MacKenzie.
STEPHEN VACCARO has been a member of the Advisory Board since April 1996.
Mr. Vaccaro has been a Managing Director of The Chase Manhattan Bank since
February 1990 and is currently responsible for the bank's Media and
Telecommunications business in Latin America. Mr. Vaccaro has been employed by
The Chase Manhattan Bank in various positions since 1977. He is a graduate of
Cornell University with a B.A. in Economics.
MARC NATHANSON has been a member of the Advisory Board since September 1995.
Mr. Nathanson is the Chairman and Chief Executive Officer of Falcon
International and Falcon Holding Group, L.P., one of the largest cable TV
operators in the United States. Mr. Nathanson is a 27 year veteran of the cable
TV industry and a Director and member of the Executive Committee of the National
Cable Television Association. He was appointed by President Clinton and
confirmed by the U.S. Senate for a three year term as a member of the
International Broadcasting Board of Governors of the United States Information
Agency. He holds an M.A. from the University of California and a B.A. from the
University of Denver. Mr. Nathanson is the uncle of Sergio Vladimirschi Junior.
TULLY M. FRIEDMAN has been a member of the Advisory Board since September
1995. Mr. Friedman is a General Partner of Hellman & Friedman. He is currently a
member of the board of directors of: Falcon International Communications LLC,
APL Limited, Levi Strauss & Co., Mattel, Inc., McKesson Corporation and
MobileMedia Corporation. Mr. Friedman is a member of the Executive Committee and
a Trustee of
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the American Enterprise Institute, and a Director of the Stanford Management
Company. Mr. Friedman holds a J.D. from Harvard Law School and a B.A. from
Stanford University.
RAYMOND E. JOSLIN has been a member of the Advisory Board since April 1996.
Mr. Joslin is group head of Hearst Entertainment & Syndication and is a vice
president and member of the board of directors of The Hearst Corporation. Mr.
Joslin has 30 years of experience in the cable communications industry, and
holds executive positions at The A&E Television Networks, The History Channel,
Lifetime Television and ESPN. Mr. Joslin attended the Carnegie Institute of
Technology and Harvard Business School, and holds a B.A. in Economics from
Trinity College.
HERBERT A. GRANATH has been a member of the Advisory Board since April 1996.
Mr. Granath was recently promoted to Chairman, Disney/ABC International
Television; before that he was President of ABC Cable and International
Broadcast Group. Mr. Granath is also the Chairman of the Board of ESPN and A&E
Television Networks. From 1982 to 1993, Mr. Granath served as President of
Capital Cities/ABC Video Enterprises. Mr. Granath holds a B.S. degree from
Fordham University's College of Arts and Sciences. He later did graduate work in
communication arts.
CLAUDIO CESAR D`EMILIO has been a member of the Committee of Officers since
July 1992. Mr. D`Emilio has been associated with Abril since 1975, and currently
holds the position of Finance Officer of Abril. Mr. D`Emilio holds undergraduate
degrees in Corporate Management and Accounting and a master's degree in Finance
from the Universidade de Sao Paulo.
CLAUDIO DASCAL has been a member of the Advisory Board since April 1996. Mr.
Dascal has also been an Executive Vice President of Abril since April 1996. Mr.
Dascal served as Access General Director at Alcatel Standard Electrica in Spain
and Chief Operating Officer of Alcatel Telecommunicacoes in Brazil and Senior
Vice President of Alcatel Access Business Division Worldwide, before joining the
Company. Mr. Dascal holds a degree in Electrical Engineering and Electronics
from the Polytechnic School at the Universidade de Sao Paulo and the IESE of
Navarra University in Madrid, Spain.
GENE MUSSELMAN has been Executive Vice President and Chief Operating Officer
of the Company since January 1996. Mr. Musselman, who is also a Managing
Director of Falcon International, has been involved in the Cable industry since
1974, and has held positions such as Executive Vice President of Hearst
CableVision of California, Inc. and Director of New Business Development for the
Hearst Corporation. Mr. Musselman has also spent five years developing
pay-television systems throughout Eastern Europe. Mr. Musselman holds a master's
degree from Loyola College of Chicago.
DOUGLAS DURAN has been the Chief Financial Officer of the Company since
April 1992. Mr. Duran has 25 years of experience in corporate finance, and has
held positions at Abril such as Manager of Financial Operations and Corporate
Treasury Officer. Mr. Duran holds a degree in Business Administration from
Amador Aguiar College and has completed several extension courses in Finance at
the Universidade de Sao Paulo.
JOSE ANTONIO DE CAMARGO BARROS has been the Development Officer of the
Company since March 1996. Mr. Camargo has extensive experience as a journalist,
administrator and marketing and sales executive. Mr. Camargo has worked at
various Brazilian newspapers as a reporter and editor, and as a director of
marketing and sales at Gazeta Mercantil, Brazil's leading financial newspaper.
Mr. Camargo holds a B.A. in Communication and Arts from the Universidade de Sao
Paulo.
LUIZ ALBERTO VILLACA LEAO has been the Management Information System Officer
of the Company since December 1995. Mr. Leao was associated for six years with
Citibank, N.A. as a vice-president, as well as another six years with Banco Itau
S.A., the third-largest commercial bank in Brazil. Mr. Leao has an undergraduate
degree in Electronic Engineering from the Instituto Tecnologico de Aeronautica
and a master's degree from Carnegie-Mellon University.
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VIRGILIO JOSE CARREIRA AMARAL has been the Engineering Officer of the
Company since February 1995. Mr. Amaral has extensive experience in the field of
broadcasting technology, including 18 years developing and installing television
transmission systems for TV Globo. Mr. Amaral holds a degree in Electronic
Engineering from the Universidade de Sao Paulo.
JOSE LUIZ NAVARRO FRAUENDORF has been the Operations Officer of the Company
since August 1994. Mr. Frauendorf has held technical and executive positions at
various telecommunications-related companies, including Phillips do Brasil and
Digital do Brasil. Mr. Frauendorf holds degrees in Industrial Management from
the Universidade de Sao Paulo and Electronic Engineering from the Escola de
Engenharia Maua.
ANTONIO ALBERTO TEIXEIRA FILHO has been the Technology Officer of the
Company since August 1994. Mr. Teixeira has held various positions in the field
of telecommunications, including that of Division Chief at Light Servicos de
Eletricidade S.A. Mr. Teixeira holds a degree in Electrical/Telecommunication
Engineering.
ROSELI TEREZINHA PARRELLA has been the Human Resources Officer of the
Company since February 1997. Ms. Parrella has been associated with Abril since
1991 and has 16 years of experience in the human resources area, having held
management positions at several multinational companies. Ms. Parrella holds an
undergraduate degree in Psychology from the Pontificia Universidade Catolica de
Sao Paulo and has also studied at Stanford Business School.
JACQUES WLADIMIRSKI has been the Galaxy Brasil Officer of the Company since
February 1996. Mr. Wladimirski has 12 years of experience in business,
marketing, and the development of new companies in Latin America, the United
States and Europe. Mr. Wladimirski holds an undergraduate degree in Corporate
Management from Universidade MacKenzie and a graduate degree in Marketing from
the Fundacao Getulio Vargas.
LEONARDO PETRELLI NETO has been the Curitiba Officer of the Company since
March 1992. Mr. Petrelli has extensive experience in the telecommunication
industry, and is currently a shareholder and officer of TVA Sul and SSC--Sistema
Sul de Comunicacao, a radio and television holding company. Mr. Petrelli holds
degrees in Telecommunications from Grossmont College in San Diego, California
and Cinema from the University of Sound and Arts in Hollywood, California.
LUIZ EDUARDO B. P. ROCHA has been the Rio de Janeiro Officer of the Company
since March 1996. Mr. Rocha has held several high-level positions, such as
Superintendent of Purchasing, at two of the largest department store chains in
Brazil: Lojas Americanas S.A. and Mesbla Lojas de Departamento, with which he
was associated for 11 years. Mr. Rocha holds an undergraduate degree in Civil
Engineering from the Universidade Federal do Rio de Janeiro and a masters degree
in Finance and Marketing from COPPEAD.
COMPENSATION FOR DIRECTORS, OFFICERS AND EXECUTIVE OFFICERS
For the year ended December 31, 1995, the aggregate compensation, including
bonuses, of all Directors, Officers and Executive Officers of the Company was
R$2,317,688. Members of the Board of Directors, the Advisory Board and the
Committee of Officers do not receive a salary from the Company.
For the year ended December 31, 1995, the aggregate amount set aside by the
Company to provide pension, retirement or similar benefits to Directors,
Officers and Executive Officers was approximately $64,000.
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PRINCIPAL SHAREHOLDERS
Tevecap has one class of capital stock, common shares, authorized and
outstanding. As of September 30, 1996, 196,712,855 common shares were
outstanding representing authorized social capital of R$366,000,715. The
following table sets forth as of September 30, 1996, information regarding the
beneficial ownership of Tevecap's common shares:
<TABLE>
<CAPTION>
NUMBER OF COMMON
SHAREHOLDER SHARES OWNED PERCENTAGE
- ------------------------------------------------------------------------------ -------------------- -------------
<S> <C> <C>
Abril S.A..................................................................... 111,075,318 56.47%
Falcon International Communications (Bermuda) L.P.(a)......................... 27,930,827 14.20
Hearst/ABC Video Services II(b)............................................... 34,714,031 17.65
Cable Participacoes Ltda.(b).................................................. 4,628,536 2.35
Chase Manhattan International Finance Ltd.(c)................................. 18,364,122 9.33
All directors and executive officers as a group............................... 21 --(d)
</TABLE>
- ------------------------
(a) A subsidiary of Falcon International Communications L.L.C.
(b) Each of Hearst and ABC indirectly holds a 50.0% equity interest in each of
Hearst/ABC Video Services II and Cable Participacoes Ltda.
(c) 11,496,329 and 6,867,793 of the shares beneficially owned by Chase Manhattan
International Finance Ltd. ("CMIF") are held of record by two wholly-owned
subsidiaries of CMIF (the "Chase Parties"). In December 1995, CMIF sold a
portion of the shares beneficially owned by it to Hearst and ABC.
(d) Less than 1.0%.
The relations among the Company's equity holders are governed by a
Stockholders Agreement (the "Stockholders Agreement"), dated December 6, 1995,
among Tevecap, Robert Civita, Abril, the Chase Parties, Falcon International and
HABC II and CPL (together with HABC II, "Hearst/ABC Parties" and together with
Robert Civita, Abril, the Chase Parties and Falcon International, the
"Stockholders"). The following describes certain terms of the Stockholders
Agreement, as amended.
TRANSFER OF SHARES. Any Stockholder desiring to transfer shares of capital
stock to any third party, including another Stockholder, must first offer such
shares to Tevecap and all of the other Stockholders. Tevecap has the right to
determine first whether to purchase such shares; if Tevecap elects not to
exercise its right to purchase the shares, the other Stockholders may elect to
purchase such shares. If Tevecap or the other Stockholders decide to purchase
the offered shares, all of such shares must be purchased. If neither Tevecap nor
the other Stockholders offer to purchase all of the offered shares, the
Stockholder desiring to sell such shares may sell the shares to any person,
provided that (i) all of the shares are sold simultaneously within six months
after the decision by Tevecap and the Stockholders not to purchase the shares,
(ii) Tevecap has not determined that the person making such purchase is a
stockholder of undesirable character, lacks necessary financial capacity or
competes with the Company, and (iii) the price for sale to such third party is
at least 90.0% of the price offered to the Company and the other Stockholders.
The provisions regarding transfers of shares do not apply to transfers to
certain affiliates of the Stockholders. In addition, the Stockholders have
preference over all other persons or entities to subscribe for new issuances of
capital stock by the Company in proportion to their existing ownership of
capital stock.
EVENT PUT OPTIONS. Upon the occurrence of certain defined "triggering
events" each of the Stockholders, other than Abril, may demand that Tevecap buy
all or a portion of the shares of capital stock of Tevecap held by such
Stockholder, unless the shares of capital stock held by such Stockholder are
publicly registered, listed or traded (collectively referred to as an "Event
Put"). The triggering events are: (i) the amount of capital stock held by such
Stockholder exceeds the amount allowed under any legal restriction to which such
Stockholder may be subject ("Regulatory Put"); (ii) a breach without cure within
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a designated period by Robert Civita, Abril, any of the respective affiliates of
Robert Civita or Abril or Tevecap of any representation, warranty, covenant or
duty made or owed pursuant to the Stockholders Agreement, the Stock Purchase
Agreement, dated August 25, 1995, among Robert Civita, Abril, the Chase Parties,
and certain other parties, or the Stock Purchase Agreement, dated December 6,
1995, among Tevecap, Robert Civita, Abril, HABC Parties, the Chase Parties,
Falcon International and certain other parties; (iii) a breach without cure
within a designated period by Abril of the Abril Credit Facility; (iv) Robert
Civita ceases to directly or indirectly hold without the approval of the
Stockholders 31.258% of the capital stock and voting capital stock of Tevecap or
he ceases to control the voting capital stock held by his affiliates
representing 50% or more of the voting capital stock of Tevecap; (v) the Service
Agreement, dated July 22, 1994, as amended, among Tevecap, Televisao Show Time
Ltda. ("TV Show Time"), TVA Brasil Radioenlaces Ltda. ("TVA Brasil") and Abril,
each of which holds certain licenses covering certain operations of TVA, ceases
to be valid or effective or TV Show Time, TVA Brasil or Abril is liquidated or
dissolved or files voluntarily, or has filed against it involuntarily, any
petition in bankruptcy or (vi) another Stockholder exercises an Event Put, other
than a Regulatory Put. The price to be paid in connection with an Event Put is
set at fair market value determined by appraisal or by a multiple of Tevecap's
most recent quarterly earnings. The Indenture, however, contains restrictions on
the ability of Tevecap to purchase shares of its capital stock. See "Description
of Notes--Certain Covenants-- Limitation on Restricted Payments." Accordingly,
the parties to the Stockholders Agreement have agreed to amend the Stockholders
Agreement prior to the Offering to provide that if the terms of the Indenture
prohibit the Company from purchasing shares that are subject to an Event Put
("Event Put Shares"), in whole or in part, the Company shall not be obligated to
purchase such shares to the extent it is so restricted. However, in such event,
the Company shall, subject to the terms of the Indenture, have the obligation to
issue shares of preferred stock of the Company ("Special Preferred Shares")
should the Tevecap Stockholder elect to convert Event Put Shares to Special
Preferred Shares. The holders of Special Preferred Shares will be entitled to
dividends required by law and a cumulative dividend equal to LIBOR plus a 4.0%
margin, provided that if the terms of the Indenture prohibit the payment of
dividends on the Special Preferred Shares, the Company shall not be obligated to
make such dividend payments to the extent so restricted. However, under the
terms of the Special Preferred Shares such unpaid dividends shall cumulate and
will be paid in full when permissible under the Indenture or when the Indenture
no longer restricts the payment of such dividends. After the payment of all
dividends on the Special Preferred Shares, the Company must use any remaining
profit or reserve to purchase the largest number of Event Put Shares and Special
Preferred Shares, provided that, if the terms of the Indenture prohibit the
purchase of such shares, the Company shall not be obligated to make such
purchases until permitted by the terms of the Indenture.
TIME PUT OPTIONS. In addition, pursuant to the Stockholders Agreement,
Falcon International may demand that Tevecap buy all or any portion of the
shares of capital stock of Tevecap held by Falcon International if such shares
are not publicly registered, listed or traded by September 22, 2002 (the "Falcon
Time Put"). The price to be paid in connection with the Falcon Time Put is fair
market value determined in the same manner as an Event Put. If Tevecap
determines that the terms of the Indenture prohibit it from purchasing such
shares, Tevecap may, subject to the terms of the Indenture, delay the payment of
such purchase price with three annual payments ("Put Annual Payments") or issue
promissory notes denominated in US dollars for the amount of such price ("Put
Promissory Notes"). The Put Promissory Notes would mature three years after
issuance with interest payments due quarterly in arrears. The interest rate on
the Put Promissory Notes would be equal to the rate applicable to US Treasury
obligations of similar maturity plus a margin to be negotiated, with the parties
taking into account the risks associated with the type of obligor, Tevecap's
creditworthiness and investments in Brazil. Under the provisions of the
Stockholders Agreement, as amended, while the Put Promissory Notes are
outstanding, Tevecap may not pay any dividends or make distributions with
respect to its capital stock, including the Special Preferred Shares, should
they exist. To the extent dividends, distributions or payments under the Put
Promissory Notes may be made under the Indenture, payments must
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be made first to satisfy the obligations under the outstanding Put Promissory
Notes. If the terms of the Indenture prohibit the Company from making the Put
Annual Payments, the Company shall not be required to make such payment, but
shall be required to deliver Put Promissory Notes in the principal amount of the
affected Put Annual Payments. If the terms of Indenture prohibit the Company
from making an interest payment required under any Put Promissory Note, the
Company shall not be required to make such payment at such time, provided that
any accrued and unpaid interest shall accumulate and interest on such unpaid
amount shall compound quarterly and the Company shall make payments of interest
as soon as such payment is no longer restricted under the Indenture. Pursuant to
the terms of the proposed amendment to the Stockholders Agreement, payment of
the principal and interest on the Put Promissory Notes would be subordinated to
the prior payment in full of the Notes. See "Description of Notes--Certain
Covenants--Limitation on Restricted Payments" and "--Limitation on
Indebtedness."
REGISTRATION RIGHTS. At any time after December 6, 1997, the Chase Parties,
considered together, the Hearst/ABC Parties or Falcon International may request
that the Company effect the registration of any or all of the capital stock held
by such Stockholder. However, the Company is not obligated to effect more than
one registration requested by a Stockholder in any 12 month period or more than
three registrations requested by a Stockholder in total. Also, the capital stock
that is the subject of the registration demand must be of a certain minimum
amount. In addition, Tevecap must offer each Stockholder other than Abril the
opportunity to register capital stock held by such Stockholder, subject to
standard reductions in amount such Stockholder may register as recommended by
the managing underwriter. Tevecap is obligated to pay all registration expenses
other than underwriting discounts and commissions or transfer taxes, and Tevecap
is only obligated to pay for the fees and expenses of Tevecap's counsel and
accountants.
BOARD OF DIRECTORS AND ADVISORY BOARD. Tevecap is governed by a board of
directors with 11 members. Under the Stockholders Agreement, Abril designates
six members, Falcon International designates two members, the Chase Parties
together designate one member, and Hearst/ABC Parties designates 2 members. The
affirmative vote of members of the board representing the Chase Parties, Falcon
International and Hearst/ABC Parties is required for: acquisition of ownership
interests in other companies; acquisition or liens on equity in other companies
or liens on assets other than in ordinary course and in aggregate less than
$500,000; incurrence of indebtedness of less than one year maturity and in an
amount greater than $1,000,000; incurrence of indebtedness of greater than one
year maturity except trade debt and in an aggregate amount of less than
$500,000; loans on advance payments; non-financial guarantees in aggregate
totalling more than $100,000; transactions with affiliates; and modifications to
Service Agreement. Tevecap must get the approval of Hearst/ABC Parties before
entering into contracts in excess of $1,000,000 in value and making any material
programming decisions. Tevecap must get the approval of Falcon International
before entering into contracts in excess of $1,000,000. Tevecap must get the
approval of each of Hearst/ABC Parties, the Chase Parties and Falcon
International before any corporate restructuring or any public offering of
securities of Tevecap.
REQUIRED DIVIDEND. Tevecap is required by the terms of the Stockholders
Agreement to pay annual dividends equal to the net cash flow of Tevecap or 25.0%
of the net consolidated profit (as defined by Brazilian law) of Tevecap.
However, Tevecap may delay the payment of such dividends to the extent the
payment of such dividends is prohibited by the Indenture, and such dividends
will accumulate and be payable to the extent allowed under the Indenture. See
"Risk Factors--Risks Relating to the Company-- Dividends to Shareholders."
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CERTAIN TRANSACTIONS WITH RELATED PARTIES
OVERVIEW
Tevecap has engaged in a significant number and variety of related party
transactions, including, without limitation, the transactions described below.
Tevecap has not performed any studies or analyses to determine whether the terms
of past transactions with related parties have been equivalent to arm's-length
transactions and cannot state with any certainty the extent to which such
transactions are comparable to those which might have been obtained from a
non-affiliated third party.
TRANSACTIONS AMONG SHAREHOLDERS
On December 6, 1995, Tevecap's shareholders executed a Stock Purchase
Agreement and a Stockholders Agreement relating to the investment of ABC and
Hearst in the Company through Hearst/ ABC Parties. See "Principal Shareholders."
On that date, the Tevecap shareholders also executed a series of
inter-shareholder agreements relating to, among other things, the provision of
services and programming among the shareholders. These agreements supplemented
other existing agreements among Shareholders. The following contracts are the
principal agreements among the Company and the Tevecap shareholders (each of
which, unless specified otherwise, is dated as of December 6, 1995).
GENERAL AND ADVISORY SERVICES
Under an Advisory Services Agreement, each of Hearst, ABC and HABC II has
agreed, upon a request from the Company, to use its reasonable efforts to
arrange for the investors to furnish personnel to provide advisory services to
the Company. To date, the Company and Hearst, ABC and HABC II have not entered
into a supplemental agreement to provide specific personnel or services at a
particular cost.
In addition, on April 1, 1996, Tevecap entered into a separate Advisory
Services Agreement with Falcon International Communications, L.L.C. Pursuant to
this agreement, which has a renewable two-year term, Falcon International
Communications, L.L.C. has agreed to provide a range of advisory services to the
Company, encompassing such areas as accounting, budget and billing procedures,
financial and operation statements, customer, employee and government relations,
the design, purchase and maintenance of equipment and supplies, negotiations
with programmers and other such matters as the Company may reasonably request.
In exchange for such services, the Company has agreed to pay Falcon
International Communications, L.L.C. an annual fee of $200,000, which amount may
be revised on each anniversary of the agreement.
PROGRAMMING
In connection with the investment by Hearst and ABC in Tevecap, Tevecap and
these two parties entered into a Programming Agreement (the "Hearst/ABC
Programming Agreement"). Pursuant to the Hearst/ABC Programming Agreement, each
of Hearst and ABC has agreed to offer first to Tevecap pay programming that
Hearst or ABC (or any subsidiary of which either Hearst or ABC owns at least
80.0% of the outstanding equity interests) intends to license for use in Brazil
in the pay television markets served by TVA. The parties also agreed to consider
future co-production activities which could enhance TVA's business and
competitive position. Tevecap agreed to pay to each of Hearst and ABC such fees
and expenses as are agreed upon at the time such programming or co-production
services are provided. The Hearst/ABC Programming Agreement does not apply to
The Walt Disney Company or its subsidiaries other than ABC and ABC's
subsidiaries. In addition, the Hearst/ABC Programming Agreement does not apply
to the activities of The A&E Television Networks, Lifetime Television and ESPN,
including agreements relating to ESPN Brasil.
OTHER TRANSACTIONS AMONG SHAREHOLDERS
Each of Tevecap's corporate shareholders has entered into a side letter to
the Stock Purchase Agreement and the Stockholders Agreement pursuant to which
each of Abril, Falcon and the Chase
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Parties agreed, with certain exceptions, to exchange all of its respective
shares in Tevecap for a corresponding number of shares of a newly-formed
Brazilian corporation. The new corporation would become an 80.0% shareholder in
Tevecap and Hearst/ABC would remain a 20.0% shareholder in Tevecap, which would
be reorganized as a Brazilian limitada. This new structure would not result in
any change in the current beneficial equity participation of the Stockholders in
Tevecap. In addition, the transactions in establishing the new structure and the
new structure itself would have to conform to the restrictions of the Indenture.
As of the date hereof, the timing of the restructuring is under discussion by
the Stockholders.
TRANSACTIONS AMONG RELATED PARTIES
GENERAL AND ADVISORY SERVICES
TVA Sistema and MTV Brasil have entered into various agreements, dated
August 27, 1996, governing reciprocal services between the Company and MTV
Brasil. The services covered by the agreement include billing, subleasing,
equipment use, administrative, financial, accounting, human resources,
engineering, infrastructure and satellite services. TVA Sistema and Abril have
also entered into an agreement, dated January 1995, with Uniser, a division of
Abril, pursuant to which Uniser provides telecommunications, maintenance, human
resources, travel, legal other services in exchange for a monthly payment of
approximately $20,000.
In addition, pursuant to an agreement dated January 10, 1995, Tevecap has
agreed to provide various financial services to Canbras, in return for which
Tevecap receives a monthly payment of approximately $5,000. Tevecap provides
similar financial services to Galaxy Brasil, in return for which the Company
receives a monthly payment of $5,000 pursuant to an agreement dated March 9,
1995. Tevecap also provides to ESPN Brasil Ltda. financial services, for which
it receives a payment of approximately $7,500 per month, and satellite and other
engineering services, for which it receives a payment of approximately $78,000
per month, pursuant to an agreement dated June 26, 1995.
The Company has also entered into an agreement with SMC Marketing Ltda.
("SMC"), dated September 1, 1995, to provide space, equipment and personnel to
SMC, in return for which the Company receives a monthly payment of approximately
US$29,000.
PUBLISHING AND ADVERTISING
The Company publishes a monthly magazine detailing the Company's programming
options in a given month. In connection with this magazine, TVA Sistema has
entered into an agreement with Abril, dated September 1992, pursuant to which
Abril publishes approximately 300,000 copies of the Company's monthly magazine
in return for a monthly payment of approximately $240,000. The monthly magazine
is distributed in accordance with a distribution agreement, dated September
1992, between the Company and Irmaos Reis, pursuant to which the Company pays
Irmaos Reis approximately $60,000 per month.
TVA Sistema and Abril also have a reciprocal advertising agreement in which
the Company publishes advertisements for Abril in the Company's monthly magazine
in exchange for advertisements for the Company (and third parties through the
Company) in the magazines published by Abril.
In addition, the Company has an agreement with SMC, dated September 1, 1995,
pursuant to which the Company assists SMC in selling advertising, in return for
which the Company receives 25.0% of SMC's advertising revenues.
INSURANCE
TVA currently reimburses TVA Sistema for payments made by TVA Sistema
pursuant to an insurance policy covering the operations of TVA Sistema, TVA
Brasil Abril Video da Amazonia and the former MTV Division of Abril
(collectively, the "Insureds"). TVA Sistema makes such payments pursuant to an
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agreement among the Insureds dated September 30, 1996. The annual premiums paid
by TVA Sistema and reimbursed by the Company amount to approximately $84,000.
ABRIL CREDIT FACILITY
Tevecap has entered, as the borrower, into a revolving credit facility (the
"Abril Credit Facility") with Abril, as the lender. The Abril Credit Facility,
effective December 6, 1995 and valid for a period of 36 months, allows the
Company to draw down amounts not to exceed a maximum aggregate principal amount
of $60,000,000. Since June 1996, Tevecap has from time to time requested, and
Abril has provided, funding in excess of the aggregate maximum principal amount.
The loans provided under the Abril Credit Facility are denominated in reais,
unless the loan is a pass-through loan that Abril has funded in US dollars, in
which case the loan is funded in a real-equivalent amount. Abril has agreed to
use its reasonable commercial efforts to obtain the lowest possible interest
rates for its loans to Tevecap under the Abril Credit Facility. As of October
31, 1996, the aggregate principal amount of loans outstanding under the Abril
Credit Facility was approximately $105.8 million, which was fully repaid to
Abril with the proceeds of the offering of the Old Securities. As of April 10,
1997, the Company had not redrawn any amounts under the Abril Credit Facility.
See Note 11 to the Consolidated Financial Statements of the Company.
OTHER INTERCOMPANY/SHAREHOLDER LOANS
Tevecap has used the proceeds from the Abril Credit Facility to make capital
contributions to TVA Sistema and Galaxy Brasil, as well as to extend loans to
various interrelated companies. The aggregate outstanding amounts under these
loans as of September 30, 1996 were: $12.7 million to TVA Communications; $14.1
million to TVA Sul; $304,000 to Canbras-Par; and $179,000 to Comercial Cabo Sao
Paulo.
In addition to the funding from Abril under the Abril Credit Facility,
Tevecap has received loans from Canbras TVA, which loans, as of September 30,
1996, had an aggregate outstanding amount of $1.7 million. Furthermore, Abril
has received loans from ESPN Brasil Ltda., which loans, as of September 30,
1996, had an aggregate principal outstanding amount of $1.6 million.
In addition, TVA Sistema has made loans to various interrelated companies.
The aggregate principal outstanding amounts under these loans as of September
30, 1996 were $2.8 million to TVA Sul and $126,000 to TV Show Time. TV Show Time
has loans outstanding to Abril, which loans, as of September 30, 1996, had an
aggregate outstanding amount of approximately $2.8 million.
All other Intercompany and shareholder loans outstanding as of September 30,
1996 equalled an aggregate principal amount of approximately $283,000.
ADVANCES OF CAPITAL CONTRIBUTIONS
As of September 30, 1996, the Company had made advance capital contributions
to Canbras TVA of approximately $1.7 million.
SERVICE AGREEMENT WITH LICENSEHOLDERS
Pursuant to a Service Agreement, dated July 22, 1994, as amended, TVA Brasil
and TV Show Time (the "Licenseholders") agreed to transfer to TVA all the rights
and benefits associated with their current and future pay-television licenses,
with the exception of licenses operated by companies in which TVA has minority
interests. While the Licenseholders retained the title to such licenses, the
Licenseholders promised to take all steps necessary to transfer the title of
such licenses to Tevecap. Such steps included the appropriate procedures
required by the Ministry of Communications and any other governmental authority
regulating the transfers. The transfer of the title to such licenses is
currently either pending, subject to approval by the Ministry of Communications,
or waiting for the passage of certain statutory or regulatory waiting periods.
AFFILIATE INTERESTS IN THE OFFERING
The Company used a portion of the proceeds from the sale of the Old
Securities to repay the amount then outstanding under the Abril Credit Facility.
See "Use of Proceeds" and "Description of Certain Indebtedness."
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The Company has entered into, or will soon enter into, certain arrangements
for the purpose of obtaining financing for its operations, including the
purchase of decoders for use in its DBS operations and for working capital. Set
forth below is a summary of these arrangements.
The Abril Credit Facility allows the Company to borrow up to $60.0 million
on a revolving basis until December 1998. Since June 1996, the Company has from
time to time requested, and Abril has provided, funds in excess of $60.0
million. The loans are generally denominated in reais and bear interest at a
rate equal to 99.5% of the CDI rate, the Brazilian interbank lending rate,
adjusted at the beginning of each month. During June 1996, the applicable
interest rate was 2.013% per month. As of September 30, 1996, after giving
effect to the Offering and the application of approximately $105.78 million of
the proceeds from the Notes to reduce the amounts outstanding thereunder, the
Company had no amounts outstanding under the Abril Credit Facility. As of April
10, 1997, the Company had not redrawn any amounts under the Abril Credit
Facility. However, the Company will be able to re-borrow the full amount of such
facility, as required.
On December 9, 1996, TVA Sistema, as Borrower, and Tevecap, as Guarantor,
entered into a credit agreement with The Chase Manhattan Bank to finance the
acquisition of C-Band decoders and other related equipment. The Export-Import
Bank of the United States (the "EximBank") will guarantee 85.0% of amounts
borrowed under the credit facility (the "EximBank Facility"). The credit
facility will be made available to TVA on terms customary for credits to
Brazilian companies that are supported by the EximBank, and will bear interest
at LIBOR plus a specified margin. The EximBank Facility is in the amount of
$29,349,780, which will be dispersed in two tranches, the first in the principal
amount of $11,400,000, with a term of 4.5 years, and the second in the principal
amount of $17,949,780, with a term of five years. TVA Sistema's obligations
under the EximBank Facility will be unconditionally guaranteed by Tevecap.
In March 1997, Galaxy Brasil entered into a five-year, $49.9 million lease
and sale-leaseback facility (the "Galaxy Brasil Leasing Facility") with
Citibank, N.A. Management expects the first fundings under the Galaxy Brasil
Leasing Facility to occur in May 1997. No assurances can be given that such
fundings will occur. Under the Galaxy Brasil Leasing Facility, Galaxy Brasil
obtained financing for the purpose of acquiring dish antennas, decoder boxes and
other equipment for Ku-Band service. The amount financed under the Galaxy Brasil
Leasing Facility bears interest at a margin over LIBOR. The lease payment
obligation of Galaxy Brasil is secured by a pledge of subscriber revenues,
together with a secured guarantee by the partners of GLA. The terms of the
Galaxy Brasil Leasing Facility (i) prohibit the payment of dividends by Galaxy
Brasil if, after giving effect to such payment, Galaxy Brasil's ratio of debt
(including capital lease obligations and guarantees) to tangible net worth would
be greater than three to one (3:1) and (ii) prohibit the incurrence of debt to
third parties and affiliates if such ratio would be greater than four to one
(4:1) and three to one (3:1), respectively. However, Citibank N.A. has provided
exceptions to these provisions to allow the guarantee of the Notes by Galaxy
Brasil.
The partners of GLA severally guarantee the obligations of Galaxy Brasil
under the Galaxy Brasil Leasing Facility, in each case up to a negotiated limit.
The obligations of Tevecap under the guarantee are limited to approximately
$25.5 million of principal and a proportionate share of interest, fees, and
other amounts. The guarantors, including Tevecap, have entered into a
contribution agreement, pursuant to which each partner agrees to contribute to
payments required to be made by any partner under the guaranty. Under the
contribution agreement, the obligations of Tevecap are limited to $25.5 million
of principal and a proportionate share of interest, fees, and other amounts.
Tevecap's obligations under the contribution agreement are secured by a pledge
of its equity interests in GLA and SurFin, as well as by an agreement to pledge
any future debt or equity interests it may hold relating to CBC.
In connection with the operations of GLA and Galaxy Brasil, TVA and the
other members of GLA have formed SurFin Ltd. ("SurFin"), a corporation organized
under the laws of the Bahamas, to provide
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financing to local operating companies for the purchase of equipment provided to
subscribers. TVA owns 20.5% of the capital stock of SurFin. The other (direct
and indirect) shareholders of SurFin Ltd. are affiliates of (i) Hughes
Electronics, with 39.3% of the capital stock, (ii) Darlene Investments, with
20.4% of the capital stock, and (iii) Grupo MVS, with 19.8% of the capital
stock.
On September 24, 1996, SurFin entered into a syndicated credit agreement
with Citicorp USA, Inc., as administrative agent, which establishes a
three-year, $150.0 million revolving credit facility (the "SurFin Credit
Facility"). Proceeds from the SurFin Credit Facility will be used by SurFin to
provide financing to DIRECTV local operating companies in Latin America, which
are (in most cases) affiliates of GLA and/or one or more of GLA's shareholders,
including Galaxy Brasil. Such local operating companies will use the funds
borrowed from SurFin for the purpose of financing the acquisition of dish
antennas, decoder boxes and other equipment for Ku-Band service. Loans under the
SurFin Credit Facility will bear interest, at SurFin's option, at a rate equal
to LIBOR plus a specified margin, or at a rate equal to Citibank's prime rate.
Loans made by SurFin to such local operating companies will bear interest at
rates to be negotiated.
Each of the partners of GLA (other than TVA) has jointly and severally
guaranteed the full amount of the obligations of SurFin under the SurFin Credit
Facility. TVA has also guaranteed the obligations of SurFin to the syndicate of
lenders, but TVA's obligations under such guaranty are limited to $10.5 million
of principal and a proportionate share of interest, fees, and other amounts. The
guarantors, including TVA, have entered into a contribution agreement, setting
forth their obligations to contribute to each other in connection with their
respective obligations under their respective guarantees. Under the contribution
agreement, the obligations of TVA are limited to $10.5 million of principal and
a proportionate share of interest, fees, and other amounts. TVA's obligations
under the contribution agreement are secured by a pledge of its equity interests
in GLA and SurFin, as well as by an agreement to pledge any future debt or
equity interests it may hold relating to CBC. Management expects the SurFin
Credit Facility to facilitate the expansion of GLA by enabling local operating
companies (including, possibly, Galaxy Brasil) to finance the acquisition of
dish antennae decoder boxes and other equipment, thereby permitting subscribers
to spread the expense of installing such equipment over time.
On April 11, 1997, a new Delaware limited liability company was established,
the principal asset of which is GLA's uplink facility, CBC. The new company is
owned by two subsidiaries of Hughes Electronics. In connection with the
establishment of the new company, TVA Communications and Tevecap have agreed,
pursuant to the Indemnification Agreement, to provide certain indemnities in
favor of GLA, Hughes Communications GLA, the newly-established company and its
shareholders. To secure its obligations under the Indemnification Agreement,
Tevecap has agreed to pledge its equity interest in GLA, as well as any future
notes or interests it may hold relating to CBC.
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DESCRIPTION OF NOTES
GENERAL
The Old Notes were issued and the Exchange Notes are to be issued under an
Indenture, dated as of November 26, 1996 and amended as of March 19, 1997 and
supplemented as of April 10, 1997 (the "Indenture"), between the Company, the
Guarantors, The Chase Manhattan Bank, as Trustee (the "Trustee") and Chase Trust
Bank, as Paying Agent, a copy of which is available upon request to the Company.
The terms of the Exchange Notes are identical in all material respects to the
terms of the Old Notes, except for certain transfer restrictions and
registration rights relating to the Old Notes and except that, if the Registered
Exchange Offer is not consummated by May 23, 1997, Tevecap will be obligated to
pay each holder of the Old Notes an amount equal to $0.192 per week per $1,000
of the Old Notes until the Registered Exchange Offer is consummated. The
Exchange Notes and the Old Notes are deemed the same class of notes under the
Indenture and are entitled to the benefit thereof. Unless specifically stated
otherwise, this description applies to both the Exchange Notes and the Old
Notes. The statements under this caption relating to the Notes and the Indenture
are summaries and do not purport to be complete, and where reference is made to
particular provisions of the Indenture, such provisions, including the
definitions of certain terms, are incorporated by reference as a part of such
summaries or terms, which are qualified in their entirety by such reference. A
summary of certain defined terms used in the Indenture and referred to in the
following summary description of the Notes is set forth under "Certain
Definitions." The Indenture was amended by Amendment No. 1 to Indenture, dated
as of March 19, 1997, to clarify language in the definition of Permitted Liens
and was supplemented by Supplement to Indenture, dated as of April 10, 1997, to
provide for TVA Sul Santa Catarina Ltd. to be a Guarantor.
Principal of, premium, if any, and interest on, the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company in the Borough of Manhattan, The City of New York (which initially shall
be the corporate trust office of the Trustee in New York, New York), except
that, at the option of the Company, payment of interest may be made by check
mailed to the address of the holders as such address appears in the Note
Register.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
The Notes have been designated for trading in the PORTAL market.
TERMS OF THE NOTES
The Notes will be unsecured, senior obligations of the Company, limited to
$250 million aggregate principal amount, and will mature on November 26, 2004.
Each Note will bear interest at the rate per annum shown on the front cover of
this Prospectus from the date of issuance, or from the most recent date to which
interest has been paid or provided for, payable semiannually in cash on May 26
and November 26 of each year commencing May 26, 1997 to holders of record at the
close of business on the May 1 or November 1 immediately preceding the interest
payment date.
OPTIONAL REDEMPTION
At any time and from time to time prior to November 26, 2000, if the Company
receives Net Cash Proceeds from one or more (i) Significant Equity Offerings or
(ii) sales of the Company's Capital Stock to a Strategic Investor, the Company
may redeem in the aggregate up to $75.0 million principal amount of Notes, at a
redemption price (expressed as a percentage of principal amount) of 112.625%,
plus accrued and unpaid interest, if any, to the redemption date (subject to the
right of holders of record on
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the relevant record date to receive interest due on the relevant interest
payment date); PROVIDED, HOWEVER, that at least $175.0 million aggregate
principal amount of the Notes must remain outstanding after each such
redemption.
ADDITIONAL AMOUNTS
All payments made by the Company or any Guarantor under or with respect to
the Notes or any Guarantee will be made free and clear of and without
withholding or deduction for or on account of any present or future taxes,
duties, assessments or governmental charges of whatever nature imposed or levied
by or on behalf of the Federative Republic of Brazil or Japan or any political
subdivision or taxing authority thereof or therein ("Taxes"), unless the Company
or such Guarantor, as the case may be, is required to withhold or deduct any
amount for or on account of Taxes by law or by the interpretation or
administration thereof. If the Company or any Guarantor is so required to
withhold or deduct any amount for or on account of Taxes from any payment made
under or with respect to the Notes or the Subsidiary Guarantee of such
Guarantor, the Company or such Guarantor, as the case may be, will pay such
additional amounts ("Additional Amounts") as may be necessary so that the net
amount received by each holder of Notes (including Additional Amounts) after
such withholding or deduction will not be less than the amount the holder would
have received if such Taxes had not been withheld or deducted. Provided,
however, that no such Additional Amounts will be payable with respect to a
payment made to a holder of Notes with respect to any Tax which would not have
been imposed, payable or due (i) but for the fact that the holder or a
beneficial owner of a Note is or was a domiciliary, national or resident of, or
engages or engaged in business, maintains or maintained a permanent
establishment or is or was physically present in Brazil or Japan, or otherwise
has some present or former connection with Brazil or Japan other than the mere
holding of such Notes or the receipt of principal or interest in respect
thereof; (ii) but for the failure of the holder or beneficial owner of Notes to
comply with a request by the Company or any Guarantor to satisfy any
certification, identification or other reporting requirements which the holder
or such beneficial owner is legally entitled to satisfy, whether imposed by
statute, treaty, regulation or administrative practices, concerning the
nationality, residence or connection with Brazil or Japan of such holder or
beneficial owner; or (iii) if, where presentation is required, the presentation
for payment had occurred within 30 days after the date such payment was due and
payable or was provided for, whichever is later. Notwithstanding the preceding
sentence, the limitations on the Company's obligation to pay Additional Amounts
set forth in clause (ii) of the preceding sentence shall not apply if a
certification, identification, or other reporting requirement described in
clause (ii) would be materially more onerous, in form, in procedure or in the
substance of information disclosed, to such Holders or beneficial owners (taking
into account any relevant differences between U.S. and Brazilian law, regulation
or administrative practice) than comparable information or other reporting
requirements imposed under U.S. tax law, regulation (including proposed
regulations) and administrative practice or other reporting requirements imposed
as of the date of this Prospectus under U.S. tax law, regulation (including
proposed regulations) and administrative practice (such as IRS Forms 1001, W-8
and W-9). The obligation of the Company or any Guarantor to pay Additional
Amounts in respect of Taxes shall not apply with respect to (x) any estate,
inheritance, gift, sales, transfer, personal property or any similar Tax or (y)
any Tax which is payable otherwise than by deduction or withholding from
payments made under or with respect to the Notes. The Company and the Guarantor,
as applicable, will (i) make any required withholding or deduction, (ii) remit
the full amount deducted or withheld to the relevant authority (the "Taxing
Authority") in accordance with applicable law, (iii) use their best efforts to
obtain certified copies of tax receipts evidencing the payment of any Taxes so
deducted or withheld from each Taxing Authority imposing such Taxes and (iv) in
the event that such certified copies of tax receipts are obtained, promptly send
such certified copies of tax receipts to the Principal Paying Agent for prompt
forwarding to any holder that has made a written demand therefor of the
Principal Paying Agent. The Company or the Guarantor will attach to each
certified copy a certificate stating (x) that the amount of withholding tax
evidenced by the certified copy was paid in connection with payments in respect
of the principal amount
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of Notes then outstanding and (y) the amount of such withholding tax paid per
US$1,000 of principal amount of the Notes. See "Income Tax
Considerations--United States--Effect of Brazilian Withholding Taxes." If,
notwithstanding the Company's or such Guarantor's efforts to obtain such
receipts, the same are not obtainable, the Company or such Guarantor will
provide to the Principal Paying Agent such other evidence of such payments as
the Company or such Guarantor may reasonably obtain.
At least 30 days prior to each date on which any payment under or with
respect to the Notes is due and payable (unless such obligation to pay
Additional Amounts arises after the 30th day prior to such date, in which case
it shall be promptly thereafter), if the Company or any Guarantor will be
obligated to pay Additional Amounts with respect to such payment, the Company or
such Guarantor will deliver to the Trustee and each Paying Agent an Officers'
Certificate stating the fact that such Additional Amount will be payable and the
amounts so payable and will set forth such other information necessary to enable
the Trustee and each Paying Agent to pay such Additional Amounts to holders of
Notes on the payment date. Each Officers' Certificate shall be relied upon until
receipt of a further Officers' Certificate addressing such matters.
Whenever in the Indenture or in this "Description of Notes" there is
mentioned, in any context, the payment of amounts based upon the payment of
principal, premium, if any, interest or of any other amount payable under or
with respect to any Note, such mention shall be deemed to include mention of the
payment of Additional Amounts as are, were or would be payable in respect
thereof.
REDEMPTION FOR CHANGES IN WITHHOLDING TAXES
The Notes may be redeemed at the option of the Company, in whole but not in
part, at any time prior to maturity if (i) there is any change in or amendment
to the Treaty to Avoid Double Taxation entered into between Brazil and Japan,
approved by Legislative Decree No. 43 dated November 23, 1967, and enacted in
Brazil by Decree No. 61,899 dated December 14, 1967, as amended by Decree No.
81,194 dated January 9, 1978, which has the effect of increasing the rate of tax
applicable under such treaty to a rate exceeding 15.0% of interest payable; or
(ii) as the result of any change in or amendment to the laws, regulations or
rulings of Brazil or Japan or any political subdivision or taxing authority
thereof or therein, or any change in the application or official interpretation
of such laws, regulations or rulings (including the holding of a court of
competent jurisdiction), the Company or any Guarantor has or will become
obligated to pay Additional Amounts (excluding interest and penalties) in excess
of the Additional Amounts that the Company or any Guarantor would be obligated
to pay if Taxes (excluding interest and penalties) were imposed with respect to
such payments of interest at a rate of 15.0%, and such obligation cannot be
avoided by the Company or the Guarantors, as the case may be, taking reasonable
measures available to them, then the Company may, at its option, redeem or cause
the redemption of the Notes, as a whole but not in part, upon not more than 60
nor less than 30 days' notice to the holders of such Notes (with copies to the
Trustee and each Paying Agent) at 100.0% of their principal amount, together
with accrued interest to (but excluding) the date fixed for redemption, plus any
such Additional Amounts payable with respect to such principal amount and
interest as provided under "--Additional Amounts." Prior to the giving of notice
of redemption of the Notes as described herein and as a condition to any such
redemption, the Company will deliver to the Trustee an Officers' Certificate
(together with a copy of the written opinion of counsel to the effect that the
applicable rate has so increased, or the Company or any Guarantor has or will
become so obligated to pay Additional Amounts as a result of such change or
amendment), stating that the Company is entitled to effect such redemption and
setting forth in reasonable detail a statement of facts relating thereto. No
notice of redemption shall be given earlier than 90 days prior to the earliest
date on which the Company or any Guarantor would be obligated to pay such
Additional Amounts were a payment in respect of the Notes then due and, at the
time such notice of redemption is given, such obligation to pay such Additional
Amounts remains in effect.
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SELECTION
In the case of any partial redemption or repurchase, selection of the Notes
for redemption or repurchase will be made by the Trustee on a pro rata basis, by
lot or by such other method as the Trustee in its sole discretion shall deem to
be fair and appropriate, although no Note of $1,000 in original principal amount
or less will be redeemed or repurchased in part. If any Note is to be redeemed
or repurchased in part only, the notice of redemption or repurchase relating to
such Note shall state the portion of the principal amount thereof to be redeemed
or repurchased. A new Note in principal amount equal to the unredeemed or
unrepurchased portion thereof will be issued in the name of the holder thereof
upon cancellation of the original Note.
RANKING
The Notes will be unsecured, senior obligations of the Company ranking PARI
PASSU in right of payment with all other existing and future unsecured, senior
Indebtedness of the Company and senior in right of payment to all other existing
and future subordinated Indebtedness of the Company. The Subsidiary Guarantees
will be unsecured, senior obligations of the Guarantors ranking PARI PASSU in
right of payment with all other existing and future unsecured, senior
Indebtedness of the Guarantors and senior in right of payment to all other
existing and future subordinated Indebtedness of the Guarantors. Subject to
certain limitations set forth in the Indenture, the Company and its Subsidiaries
may Incur other senior Indebtedness, including Indebtedness that is secured by
certain assets of the Company and its Subsidiaries. At September 30, 1996, after
giving effect to the sale of the Old Securities and the application of the net
proceeds therefrom, Tevecap would not have had any outstanding senior
Indebtedness Tevecap, other than the Notes (exclusive of unused commitments and
short term debt) and the aggregate principal amount of outstanding senior
Indebtedness of the Guarantors, other than the Subsidiary Guarantees, would have
been $4.6 million (exclusive of unused commitments and short term debt) all of
which ranks pari passu with the Subsidiary Guarantees, but none of which was
secured Indebtedness. As of April 1, 1997, Tevecap did not have any outstanding
senior Indebtedness other than the Notes (exclusive of unused commitments and
short term debt), and the aggregate principal amount of outstanding senior
Indebtedness of the Guarantors was $6.1 million (exclusive of unused commitments
and short term debt) all of which ranks pari passu with the Subsidiary
Guarantees, and none of which is secured. See "Certain Other Indebtedness."
SUBSIDIARY GUARANTEES
Each of the Company's existing and future Restricted Subsidiaries (the
"Guarantors"), as primary obligor and not merely as surety, will jointly and
severally, irrevocably and fully and unconditionally Guarantee, on a senior
basis, the performance and punctual payment when due, whether at Stated
Maturity, by acceleration or otherwise, of all obligations of the Company under
the Indenture and the Notes, whether for principal of or interest on the Notes,
expenses, indemnification or otherwise (all such obligations guaranteed by such
Guarantors being herein called the "Guaranteed Obligations"). Such Guarantors
will agree to pay, in addition to the amount stated above, any and all expenses
(including reasonable counsel fees and expenses) incurred by the Trustee or the
Holders in enforcing any rights under the Subsidiary Guarantees.
Each Subsidiary Guarantee will be limited to an amount not to exceed the
maximum amount that can be Guaranteed, as it relates to such Guarantor, voidable
under applicable law relating to fraudulent conveyance or fraudulent transfer or
similar laws affecting the rights of creditors generally. See "Risk
Factors--Fraudulent Conveyance Considerations."
Each Subsidiary Guarantee is a continuing Guarantee and shall (i) remain in
full force and effect until payment in full of all the Guaranteed Obligations,
(ii) be binding upon such Guarantor and (iii) inure
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to the benefit of and be enforceable by the Trustee, the Holders and their
successors, transferees and assigns.
The Indenture provides that, subject to the provisions described in the next
succeeding paragraph, no Guarantor may consolidate or merge with or into
(whether or not such Guarantor is the surviving entity or Person) another
corporation, entity or Person unless (i) the entity or Person formed by or
surviving any such consolidation or merger (if other than such Guarantor)
assumes all the obligations of such Guarantor under the Subsidiary Guarantee and
the Indenture pursuant to a supplemental indenture, in form satisfactory to the
Trustee, (ii) immediately after such transaction, no Default or Event of Default
exists, (iii) immediately after such transaction, the Company will have
Consolidated Net Worth equal to or greater than the Consolidated Net Worth of
the Company immediately preceding such transaction and (iv) the Company will, at
the time of such transaction after giving pro forma effect thereto, be permitted
to Incur at least $1.00 of additional Indebtedness pursuant to paragraph (a)
under "Certain Covenants--Limitation on Indebtedness."
Notwithstanding the preceding paragraph, if no Default exists or would exist
under the Indenture, concurrently with any sale or disposition (by merger or
otherwise) of any Guarantor in accordance with the terms of the Indenture
(including the covenant described under "Certain Covenants--Limitation on Sales
of Assets and Subsidiary Stock") (other than a transaction subject to the
provisions described under "Merger and Consolidation") by the Company or a
Restricted Subsidiary to any Person that is not an Affiliate of the Company or
any of the Restricted Subsidiaries, such Guarantor will automatically and
unconditionally be released from all obligations under its Subsidiary Guarantee;
PROVIDED, HOWEVER, that any such release shall occur only to the extent that all
obligations of such Guarantor under, and all of its guarantees of, and all of
its pledges of assets or other security interests which secure, any other
Indebtedness of the Company shall also terminate upon such release, sale or
transfer.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each holder will have the right to require the Company to repurchase
all or any part of such holder's Notes at a purchase price in cash equal to 101%
of the principal amount thereof plus accrued and unpaid interest, if any, to the
date of purchase (subject to the right of holders of record on the relevant
record date to receive interest due on the relevant interest payment date):
(i) an event or series of events by which any "person" or "group" (as
such terms are used in Sections 13(d) and 14(d) of the Exchange Act), other
than one or more Permitted Holders, is or becomes after the date of issuance
of the Notes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5
under the Exchange Act as in effect on the date of the Indenture), of more
than 35.0% of the total voting power of all Voting Stock of the Company
outstanding;
(ii) (A) another corporation merges into the Company or the Company
consolidates with or merges into any other corporation or (B) the Company
conveys, transfers or leases all or substantially all its assets to any
person or group (other than any conveyance, transfer or lease between the
Company and a Wholly-Owned Subsidiary of the Company), in each case, in one
transaction or a series of related transactions with the effect that a
person or group other than one or more Permitted Holders becomes the
"beneficial owner" of more than 35.0% of all Voting Stock of the Company
then outstanding;
(iii) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors (or equivalent
governing body) of the Company (together with any new Directors (or
equivalent persons) whose election by the Company's Board of Directors (or
equivalent governing body), or whose nomination for election by such
entity's shareholders, was approved by a vote of a majority of the Directors
(or equivalent persons) then still in office who were either Directors (or
equivalent persons) at the beginning of such period or whose election or
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nomination for election was previously so approved) cease for any reason to
constitute a majority of the Directors (or equivalent persons) then in
office; or
(iv) the Permitted Holders collectively shall fail to beneficially own
at least 35.0% of all Voting Stock of the Company then outstanding.
The Company's other senior Indebtedness may contain prohibitions of certain
events that would constitute a Change of Control. In addition, the exercise by
the Holders of Notes of their right to require the Company to repurchase the
Notes could cause a default under such other senior Indebtedness, even if the
Change of Control itself does not, due to the financial effect of such
repurchases on the Company. Finally, the Company's ability to pay cash to the
Holders of Notes upon a repurchase may be limited by the Company's then existing
financial resources. The consent of the Brazilian Central Bank will be required
prior to the funding of the repurchase of the Notes.
Within 30 days following any Change of Control, unless the Company has
mailed a redemption notice with respect to all the outstanding Notes after such
Change of Control, the Company shall mail a notice to each holder with a copy to
the Trustee stating: (i) that a Change of Control has occurred and that such
holder has the right to require the Company to purchase such holder's Notes at a
purchase price in cash equal to 101% of the principal amount thereof plus
accrued and unpaid interest, if any, to the date of purchase (subject to the
right of Holders of record on a record date to receive interest on the relevant
interest payment date); (ii) the circumstances and relevant facts and financial
information concerning such Change of Control; (iii) the repurchase date (which
shall be no earlier than 30 days nor later than 60 days from the date such
notice is mailed); and (iv) the procedures determined by the Company, consistent
with the Indenture, that a Holder must follow in order to have its Notes
purchased.
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of the Indenture, the Company will comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations described in the Indenture by virtue thereof.
The definition of "Change of Control" includes a disposition of all or
substantially all of the property and assets of the Company and its
Subsidiaries. With respect to the disposition of property or assets, the phrase
"all or substantially all" as used in the Indenture varies according to the
facts and circumstances of the subject transaction, has no clearly established
meaning under New York law (which is the choice of law under the Indenture) and
is subject to judicial interpretation. Accordingly, in certain circumstances
there may be a degree of uncertainty in ascertaining whether a particular
transaction would involve a disposition of "all or substantially all" of the
property or assets of a Person, and therefore it may be unclear as to whether a
Change of Control has occurred and whether the Company is required to make an
offer to repurchase the Notes as described above.
CERTAIN COVENANTS
The Indenture contains certain covenants including, among others, the
following:
LIMITATION ON INDEBTEDNESS. (a) The Company shall not, and shall not permit
any of its Restricted Subsidiaries to, directly or indirectly, Incur any
Indebtedness, and the Company shall not issue any Disqualified Stock; PROVIDED,
HOWEVER, that the Company and any Restricted Subsidiary may Incur Indebtedness,
and the Company may issue shares of Disqualified Stock, if on the date thereof
the Indebtedness to Annualized Operating Cash Flow Ratio of the Company would
have been less than or equal to (i) 6.5 to 1.0 in the case of Indebtedness
Incurred prior to November 26, 1999 and (ii) 6.0 to 1.0 in the case of
Indebtedness Incurred on and after November 26, 1999, in each case determined on
a pro forma basis.
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(b) The foregoing limitation shall not apply to the Incurrence of: (i)
Indebtedness of the Company or any Restricted Subsidiary under any Senior Credit
Facility or the Abril Credit Facility in an aggregate principal amount at any
one time outstanding not to exceed $50.0 million; (ii) Indebtedness of the
Company to any Restricted Subsidiary and Indebtedness of a Restricted Subsidiary
to the Company or another Restricted Subsidiary; PROVIDED, HOWEVER, that any
subsequent issuance or transfer of any Capital Stock which results in any such
Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent
transfer of such Indebtedness (other than to another Restricted Subsidiary) will
be deemed, in each case, to constitute the Incurrence of such Indebtedness by
the issuer thereof; (iii) Indebtedness represented by the Notes (including the
Subsidiary Guarantees); (iv) Indebtedness outstanding on the Issue Date (other
than Indebtedness described in clause (i), (ii) or (iii) of this paragraph); (v)
Refinancing Indebtedness in respect of Indebtedness of the Company or any
Restricted Subsidiary Incurred pursuant to clauses (i) through (iv) above, this
clause (v), or clause (xiv) below in a principal amount (or, for original issue
discount Indebtedness, the accredited principal thereof) so refinanced; (vi)
Hedging Obligations consisting of Interest Rate Agreements and Currency
Agreements related to Indebtedness otherwise permitted to be Incurred pursuant
to the Indenture or otherwise entered into in the ordinary course of business,
PROVIDED that in each case the notional amount shall not exceed the underlying
obligations or assets; (vii) Guarantees by the Company of Indebtedness or other
obligations of any of its Restricted Subsidiaries so long as the Incurrence of
such Indebtedness or obligations by such Restricted Subsidiary is permitted
under the terms of the Indenture; (viii) Indebtedness of Galaxy Brasil in an
aggregate principal amount at any one time outstanding not to exceed the lesser
of (A) an amount equal to the sum of (I) the product of (1) $480.0 multiplied by
(2) the number of Galaxy Brasil Subscribers at the date of Incurrence plus (II)
$20 million and (B) $130.0 million; (ix) Indebtedness of any Special Restricted
Subsidiary if, after giving effect to such Incurrence, the ratio of (A) the
aggregate principal amount of all Indebtedness of such Special Restricted
Subsidiary outstanding as of the date of determination to (B) the total
shareholders' equity (excluding any retained earnings or accumulated deficit) of
such Special Restricted Subsidiary as of the date of determination is less than
or equal to 2:1; (x) Indebtedness of the Company represented by Subordinated
Shareholder Loans in an aggregate principal amount at any one time outstanding
not to exceed $100.0 million; (xi) Indebtedness consisting of performance and
other similar bonds and reimbursement obligations Incurred in the ordinary
course of business securing the performance of contractual, franchise or license
obligations of the Company or a Restricted Subsidiary, or in respect of a letter
of credit obtained to secure such performance; (xii) Indebtedness arising from
agreements providing for indemnification, adjustment of purchase price or
similar obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of the Company or any Restricted
Subsidiary pursuant to such agreements, Incurred in connection with any Asset
Disposition; (xiii) Indebtedness of the Company represented by the SurFin
Guarantee in an aggregate principal amount at any one time outstanding not to
exceed $25.0 million; (xiv) Indebtedness of TVA Sistema under the EximBank
Credit Agreement in an aggregate principal amount at any one time outstanding
not to exceed $30.0 million; (xv) Indebtedness of the Company represented by the
Put Promissory Notes; (xvi) Indebtedness of Galaxy Brasil in an aggregate
principal amount at any one time outstanding not to exceed $25.0 million; and
(xvii) other Indebtedness in an aggregate principal amount which, together with
all other Indebtedness of the Company then outstanding (other than Indebtedness
permitted by clauses (i) through (xvi) above or the preceding paragraph) does
not exceed $50.0 million.
LIMITATION ON RESTRICTED PAYMENTS. (a) The Company shall not, and shall not
permit any Restricted Subsidiary, directly or indirectly, to (i) declare or pay
any dividend or make any distribution on or in respect of its Capital Stock
(including any payment in connection with any merger or consolidation involving
the Company) except (1) dividends or distributions payable in its Capital Stock
(other than Disqualified Stock) and (2) dividends or distributions payable
solely to the Company or another Restricted Subsidiary (and, if such Restricted
Subsidiary is not a Wholly-Owned Subsidiary, to its other stockholders on a PRO
RATA basis), (ii) purchase, redeem, retire or otherwise acquire for value any
Capital
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Stock (including options or warrants to acquire such Capital Stock) of the
Company or any Restricted Subsidiary, (iii) purchase, repurchase, redeem, prepay
interest, defease or otherwise acquire or retire for value, prior to scheduled
maturity, scheduled repayment, scheduled interest payment date or scheduled
sinking fund payment, any Subordinated Obligations, or make any cash interest
payment on Subordinated Shareholder Loans or (iv) make any Investment (other
than a Permitted Investment) in any Person (any such dividend, distribution,
purchase, redemption, repurchase, defeasance, other acquisition, retirement,
interest payment or Investment being herein referred to as a "Restricted
Payment"), if at the time the Company or such Restricted Subsidiary makes such
Restricted Payment: (x) after giving effect to such Restricted Payment, a
Default shall have occurred and be continuing (or would result therefrom); or
(y) the Company could not incur at least an additional $1.00 of Indebtedness
under the covenant described under "Certain Covenants--Limitation on
Indebtedness"; or (z) the aggregate amount of such Restricted Payment and all
other Restricted Payments declared (the amount so expended, if other than in
cash, to be determined in good faith by the Board of Directors, whose
determination shall be conclusive and evidenced by a resolution of the Board of
Directors) or made subsequent to the Issue Date would exceed the sum of: (A) an
amount equal to the Company's Cumulative Operating Cash Flow less 1.6 times the
Company's Cumulative Consolidated Interest Expense; plus (B) the aggregate Net
Cash Proceeds received by the Company from the issue or sale of its Capital
Stock (other than Disqualified Stock) or other cash contributions to its capital
subsequent to the Issue Date (other than an issuance or sale to a Subsidiary of
the Company or an employee stock ownership plan or other trust established by
the Company or any of its Subsidiaries); plus (C) the amount by which
Indebtedness of the Company is reduced on the Company's balance sheet upon
conversion or exchange (other than by a Restricted Subsidiary of the Company)
subsequent to the Issue Date of any Indebtedness of the Company convertible or
exchangeable for Capital Stock (other than Disqualified Stock) of the Company
(less the amount of any cash or other property distributed by the Company upon
such conversion or exchange); and plus (D) in the case of the disposition or
repayment of any Investment constituting a Restricted Payment other than an
Investment made pursuant to clause (v) of paragraph (b) below made after the
Issue Date, an amount equal to the lesser of the return of capital with respect
to such Investment and the cost of such Investment, in either case, less the
cost of the disposition of such Investment. For purposes of determining the
amount expended for Restricted Payments, cash distributed shall be valued at the
face amount thereof and property or services distributed or transferred other
than cash shall be valued at its Fair Market Value.
(b) So long as there is no Default or Event of Default continuing, the
provisions of paragraph (a) shall not prohibit: (i) any purchase or redemption
of Capital Stock or Subordinated Obligations of the Company or Capital Stock of
any Restricted Subsidiary made by exchange for, or out of the Net Cash Proceeds
from a substantially concurrent sale (other than to a Restricted Subsidiary of
the Company) of, Capital Stock of the Company (other than Disqualified Stock) or
any purchase of Capital Stock made with Put Promissory Notes; PROVIDED, HOWEVER,
that (A) such purchase or redemption shall be excluded in the calculation of the
amount of Restricted Payments and (B) the Net Cash Proceeds from such sale shall
be excluded from the calculation of amounts under clause (B) of paragraph (a);
(ii) any purchase or redemption of Subordinated Obligations of the Company made
by exchange for, or out of the proceeds from a substantially concurrent sale of,
Subordinated Obligations of the Company; PROVIDED, HOWEVER, that (A) the final
maturity date of such Subordinated Obligations, determined as of the date of
Incurrence, occurs not earlier than the Stated Maturity of the Notes and (B) the
Average Life of such Subordinated Obligations is equal to or greater than the
Average Life of the Subordinated Obligations being purchased or redeemed; and
PROVIDED, FURTHER, that such purchase or redemption shall be excluded in the
calculation of the amount of Restricted Payments; (iii) dividends paid within 60
days after the date of declaration if at such date of declaration such dividend
would have complied with this provision; PROVIDED, HOWEVER, that such dividends
shall be included in the calculation of the amount of Restricted Payments; (iv)
Investments in Galaxy Latin America or its Affiliates made subsequent to the
Issue Date in an aggregate amount at any time outstanding not to exceed $15.0
million; (v) Investments
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in a Permitted Business financed with the net proceeds of this Offering as
described under "Use of Proceeds"; and (vi) Minority Investments made subsequent
to the Issue Date constituting a Restricted Payment by the Company or any
Restricted Subsidiary in any Person that operates principally, or has been
formed to operate principally, a Permitted Business in an aggregate amount at
any time outstanding not to exceed $45.0 million.
The Indenture will provide that the Company will be required, as a condition
to the issuance of the Notes, and to thereafter maintain enforceable written
commitments (the Shareholder Commitments") from each shareholder of the Company
agreeing that such shareholder will not exercise its voting rights to receive
mandatory statutory dividends (without limiting such shareholder's right
otherwise to receive dividends pursuant to and in compliance with this covenant
"Limitation on Restricted Payments"), PROVIDED that the Shareholder Commitments
will cease to be effective on the first to occur of (x) the date that shares of
Capital Stock of the Company are issued and listed on a Brazilian or United
States securities exchange in connection with a bona fide public offering of
such shares or the date that any shares of the Capital Stock of the Company are
otherwise effectively listed and traded on any Brazilian or United States
securities exchange, (y) the date that none of the Notes remain outstanding or
(z) the date that such commitment is no longer effective, enforceable or legal
under applicable Brazilian laws and regulations (including without limitation
any construction or interpretation thereof by CVM, any court or any other
governmental authority). The Indenture will provide that the Company will obtain
Shareholder Commitments in connection with any future issuances of Capital Stock
to the extent the Shareholder Commitments would then be effective, enforceable
and legal under the terms of the foregoing proviso. Notwithstanding the
foregoing, but provided it would not render any of the other Shareholder
Commitments unenforceable, the Company need not obtain and/or maintain
Shareholder Commitments from persons that are not shareholders of the Company on
the Issue Date or any Affiliate of any such shareholder to the extent it does
not relate to more than 10.0% of the outstanding shares of Capital Stock of the
Company.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED
SUBSIDIARIES. The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, create or permit to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any such Restricted
Subsidiary to (i) pay dividends or make any other distributions on its Capital
Stock or pay any Indebtedness or other obligation owed to the Company or another
Restricted Subsidiary of the Company, (ii) make any Investment in the Company or
another Restricted Subsidiary of the Company or (iii) transfer any of its
property or assets to the Company or another Restricted Subsidiary of the
Company; except: (A) any encumbrance or restriction pursuant to an agreement in
effect on the date of Issuance of the Notes and described in this Prospectus;
(B) any encumbrance or restriction with respect to a Restricted Subsidiary
pursuant to an agreement relating to any Indebtedness Incurred by a Restricted
Subsidiary prior to the date on which such Restricted Subsidiary was acquired by
the Company (other than Indebtedness Incurred as consideration in, or to provide
all or any portion of the funds or credit support utilized to consummate, the
transaction or series of related transactions pursuant to which such Restricted
Subsidiary was acquired by the Company) and outstanding on such date; (C) any
encumbrance or restriction with respect to a Restricted Subsidiary pursuant to
an agreement effecting a refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clauses (A) or (B) or this clause (C) or contained in
any amendment to an agreement referred to in clauses (A) or (B) or this clause
(C); PROVIDED, HOWEVER, that the encumbrances and restrictions contained in any
such refinancing agreement or amendment are no less favorable to the holders of
the Notes than encumbrances and restrictions contained in such agreements; (D)
any such customary encumbrance or restriction contained in a security document
creating a Lien permitted under the Indenture to the extent relating to the
property or asset subject to such Lien following a default in respect of the
applicable obligation; (E) in the case of clause (iii), any encumbrance or
restriction (1) that restricts in a customary manner the subletting, assignment
or transfer of any property or asset that is subject to a lease, license, or
similar contract, or (2) contained in security agreements securing Indebtedness
of a Restricted Subsidiary to the extent such encumbrance
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or restrictions restrict the transfer of the property subject to such security
agreements; (F) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement in effect for the sale or disposition thereof and the
duration of which does not exceed 60 days; or (G) any encumbrance or restriction
contained in an agreement pursuant to which Galaxy Brasil Incurs Indebtedness in
compliance with the terms of the Indenture, PROVIDED, HOWEVER, that the terms of
such encumbrance or restriction are no more restrictive than those contained in
the Equipment Agreements as they exist on the Issue Date.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK. (a) The Company shall
not, and shall not permit any Restricted Subsidiary to, make any Asset
Disposition, unless (i) the Company or such Restricted Subsidiary receives
consideration (including by way of relief from, or by any other Person assuming
sole responsibility for, any liabilities, contingent or otherwise) at the time
of such Asset Disposition at least equal to the Fair Market Value of the shares
and assets subject to such Asset Disposition, (ii)(A) at least 75.0% of the
consideration thereof received by the Company or such Restricted Subsidiary is
in the form of cash or Cash Equivalents or (B) at least 75.0% of the
consideration thereof received by the Company or such Restricted Subsidiary
consists of assets used in connection with a Permitted Business; and (iii) an
amount equal to 100.0% of the Net Available Cash from such Asset Disposition is
applied by the Company (or such Restricted Subsidiary, as the case may be) (A)
FIRST, to the extent the Company elects (or is required by the terms of any
senior Indebtedness of the Company or Indebtedness of a Restricted Subsidiary),
to prepay, repay or purchase such senior Indebtedness, or such Indebtedness of a
Restricted Subsidiary (in each case other than Indebtedness owed to the Company
or an Affiliate of the Company) within 365 days from the later of the date of
such Asset Disposition or the receipt of such Net Available Cash; (B) SECOND, to
the extent of the balance of Net Available Cash after application in accordance
with clause (A), to the extent the Company or such Restricted Subsidiary elects,
to reinvest in Additional Assets (including by means of an Investment in
Additional Assets by a Restricted Subsidiary with Net Available Cash received by
the Company or another Restricted Subsidiary) within 365 days from the later of
the date of such Asset Disposition or the receipt of such Net Available Cash;
(C) THIRD, to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A) and (B) ("Excess Proceeds"), to make
an offer ("Asset Sale Offer") to purchase Notes pursuant and subject to the
conditions of the Indenture to the Noteholders at a purchase price of 100.0% of
the principal amount thereof plus accrued and unpaid interest to the purchase
date, and (D) FOURTH, to the extent of the balance of such Net Available Cash
after application in accordance with clauses (A), (B) and (C), for general
corporate purposes. Notwithstanding the foregoing provisions, the Company and
its Restricted Subsidiaries shall not be required to apply any Net Available
Cash in accordance herewith except to the extent that the aggregate Net
Available Cash from all Asset Dispositions which are not applied in accordance
with this covenant at any time exceed $10 million. Upon completion of any Asset
Sale Offer, the amount of Excess Proceeds shall be reset at zero.
For the purposes of this covenant, the following will be deemed to be cash
or Cash Equivalents: (i) the assumption of Indebtedness (other than Disqualified
Stock) of the Company or any Restricted Subsidiary and the release of the
Company or such Restricted Subsidiary from all liability on such Indebtedness in
connection with such Asset Disposition and (ii) securities received by the
Company or any Restricted Subsidiary of the Company from the transferee that are
promptly converted by the Company or such Restricted Subsidiary into cash at its
face value.
(b) In the event of an Asset Disposition that requires the purchase of Notes
pursuant to clause (a)(iii)(C), the Company will be required to purchase Notes
tendered pursuant to an offer by the Company for the Notes at a purchase price
of 100.0% of their principal amount plus accrued interest to the purchase date
in accordance with the procedures (including prorating in the event of
oversubscription) set forth in the Indenture. If the aggregate purchase price of
the Notes tendered pursuant to the offer is less than the Net Available Cash
allotted to the purchase of the Notes, the Company will apply the remaining Net
Available Cash in accordance with clause (a)(iii)(D) above.
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(c) The Company will comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Notes pursuant to the
Indenture. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company will comply
with the applicable securities laws and regulations and will not be deemed to
have breached its obligations under the Indenture by virtue thereof.
LIMITATION ON AFFILIATE TRANSACTIONS. (a) The Company will not, and will
not permit any Restricted Subsidiary to, directly or indirectly, enter into or
conduct any transaction (including the purchase, sale, lease or exchange of any
property, or the rendering of any service) with any Affiliate of the Company (an
"Affiliate Transaction") unless: (i) the terms of such Affiliate Transaction are
no less favorable to the Company or such Restricted Subsidiary, as the case may
be, than those that could be obtained at the time of such transaction in
arm's-length dealings with a Person who is not such an Affiliate; (ii) in the
event such Affiliate Transaction involves an aggregate amount in excess of $2.0
million, the terms of such transaction have been approved by a majority of the
members of the Board of Directors of the Company and by a majority of the
members of such Board having no personal stake in such Affiliate Transaction, if
any; and (iii) in the event such Affiliate Transaction involves an aggregate
amount in excess of $10.0 million, the Company has received a written opinion
from an independent investment banking firm of nationally recognized standing in
the United States that such Affiliate Transaction is fair to the Company or such
Restricted Subsidiary, as the case may be, from a financial point of view;
PROVIDED that, in the case of an Affiliate Transaction described in clause (ii)
or (iii), the Company shall promptly after consummation thereof deliver an
Officers' certificate to the Trustee certifying as to the compliance by the
Company with clauses (i) and (ii) or (i) and (iii) as the case may be, of this
covenant; and PROVIDED FURTHER that in the case of an Affiliate Transaction with
Galaxy Latin America, the Company or such Restricted Subsidiary shall only be
required to obtain the opinion described in clause (iii) if such Affiliate
Transaction involves an aggregate amount in excess of $20.0 million.
(b) The provisions of the foregoing paragraph (a) will not apply to (i)
transactions with or among the Company and/or any of the Restricted
Subsidiaries; PROVIDED in any such case, no officer, director or beneficial
holder of 5% or more of any class of Capital Stock of the Company shall
beneficially own any Capital Stock of any such Restricted Subsidiary, (ii)
transactions between the Company and any Restricted Subsidiary that are solely
for the benefit of the Company or a Subsidiary Guarantor, (iii) transactions
between or among Unrestricted Subsidiaries, (iv) any dividend permitted by the
covenant described under "Certain Covenants--Limitation on Restricted Payments,"
(v) directors' fees, indemnification and similar arrangements, officers'
indemnification, employee stock option or employee benefit plans, employee
salaries and bonuses or legal fees paid or created in the ordinary course of
business and (vi) transactions and arrangements pursuant to agreements in
existence on the Issue Date and described in the Prospectus. In addition,
paragraph (a) shall not apply (x) to Indebtedness Incurred by the Company from
Abril under the Abril Credit Facility or from shareholders pursuant to
Subordinated Shareholder Loans and (y) to any transaction entered into in
connection with the reorganization of the Company's ownership structure or the
restructuring of its legal form described under "Certain Transactions with
Related Parties--Transactions Among Shareholders" in the Prospectus.
LIMITATION ON LIENS. The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, create or permit to exist any
Lien, other than Permitted Liens, on any of its property or assets (including
Capital Stock of any Restricted Subsidiary), whether owned on the Issue Date or
thereafter acquired, securing any obligation, unless the obligations due under
the Indenture and the Notes and the Subsidiary Guarantees are secured, on an
equal and ratable basis (or on a senior basis, in the case of Indebtedness
subordinated in right of payment to the Notes or the Subsidiary Guarantees),
with the obligations so secured.
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LIMITATION ON SALES OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES. The
Company will not (i) sell, and will not permit any Restricted Subsidiary of the
Company to issue, sell or transfer, any Capital Stock of a Restricted Subsidiary
or (ii) permit any Person (other than the Company or a Wholly-Owned Restricted
Subsidiary) to acquire Capital Stock of any Restricted Subsidiary, if in either
case as the result thereof such Restricted Subsidiary would no longer be a
Restricted Subsidiary of the Company, except for (A) Capital Stock issued, sold
or transferred to the Company or a Wholly-Owned Restricted Subsidiary and (B)
Capital Stock issued by a Person prior to the time (1) such Person becomes a
Restricted Subsidiary, (2) such Person merges with or into a Restricted
Subsidiary or (3) a Restricted Subsidiary merges with or into such Person,
PROVIDED, that such Capital Stock was not issued by such Person in anticipation
of the type of transaction contemplated by subclause (1), (2) or (3). This
provision shall not prohibit the Company or any of its Restricted Subsidiaries
from selling or otherwise disposing of all of the Capital Stock of any
Restricted Subsidiary; PROVIDED that any such sale constitutes an Asset
Disposition for purposes of, and the Net Cash Proceeds from any such sale are
applied in accordance with, the covenant described under "Certain
Covenants--Limitation on Sales of Assets and Subsidiary Stock."
ADDITIONAL SUBSIDIARY GUARANTEES. The Indenture will provide that if the
Company or any of its Restricted Subsidiaries shall acquire or create another
Restricted Subsidiary after the Issue Date, then such newly acquired or created
Restricted Subsidiary shall execute a Subsidiary Guarantee and deliver an
opinion of counsel, in accordance with the terms of the Indenture.
MERGER AND CONSOLIDATION. The Company shall not consolidate with or merge
with or into, or convey, transfer or lease all or substantially all its assets
to, any Person and the Company will not permit any of its Restricted
Subsidiaries to enter into such a transaction if such transaction, in the
aggregate, would result in the conveyance or transfer of all or substantially
all of the assets of the Company and its Restricted Subsidiaries taken as a
whole, to any Person, unless: (i) the resulting, surviving or transferee Person
(the "Successor Company") is a corporation organized and existing under the laws
of the Federative Republic of Brazil or any State or political subdivision
thereof and the Successor Company (if not the Company) expressly assumes, by
supplemental indenture, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company under the Notes
and the Indenture; (ii) immediately after giving effect to such transaction (and
treating any Indebtedness that becomes an obligation of the Successor Company or
any Restricted Subsidiary of the Successor Company as a result of such
transaction as having been Incurred by the Successor Company or such Restricted
Subsidiary at the time of such transaction), no Default shall have occurred and
be continuing; (iii) immediately after giving effect to such transaction, the
Successor Company would be able to Incur at least an additional $1.00 of
Indebtedness pursuant to paragraph (a) of the covenant described under "Certain
Covenants--Limitation on Indebtedness"; (iv) immediately after giving effect to
such transaction, the Successor Company will have Consolidated Net Worth in an
amount which is not less than the Consolidated Net Worth of the Company
immediately prior to such transaction; (v) each Guarantor shall have delivered a
written instrument in form satisfactory to the Trustee confirming its Guarantee;
and (vi) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger or transfer and such supplemental indenture (if any) comply with the
Indenture; PROVIDED, HOWEVER, that clause (iii) shall not apply to the merger of
Cable Participacoes Ltda., or Hearst/ABC Video Services II, each an entity owned
by The Hearst Corporation and ABC, Inc., or Falcon International Communications
(Bermuda) L.P. with and into the Company in connection with the reorganization
of the Company's ownership structure described under "Certain Transactions with
Related Parties--Transactions Among Shareholders" in the Prospectus.
The Successor Company will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture, but the
Company, in the case of a lease of all or substantially all its assets, will not
be released from the obligation to pay the principal of and interest on the
Notes.
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SEC REPORTS. The Indenture will provide that, whether or not the Company
has a class of securities registered under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), following any Exchange Offer or the
effectiveness of any Shelf Registration Statement, the Company shall furnish
without cost to each holder of Notes, the Trustee and the Initial Purchasers and
file with the Commission (whether or not the Company is a public reporting
company at the time): (i) within 140 days after the end of each fiscal year of
the Company, annual reports on Form 20-F (or any successor form) containing the
information required to be contained therein (or required in such successor
form); (ii) within 60 days after the end of each of the first three fiscal
quarters of each fiscal year, reports on Form 6-K (or any successor form)
containing substantially the same information required to be contained therein;
and (iii) promptly from time to time after the occurrence of an event required
to be therein reported, such other reports on Form 6-K (or any successor form)
containing substantially the same information required to be contained in Form
8-K (or required in any successor form). Prior to the effectiveness of the
Exchange Offer Registration Statement with the Commission, the Company will file
with the Trustee and provide the Initial Purchasers, all of the information that
would have been required to have been filed with the Commission pursuant to
clauses (i), (ii) and (iii) above. Each of the reports will be prepared in
accordance with US GAAP consistently applied, will include the amounts of EBITDA
(as defined herein), based on US GAAP financial data and will be prepared in
accordance with the applicable rules and regulations of the Commission. The
Company will agree to use its reasonable best efforts to schedule, disseminate
in a customary manner for public companies information concerning, and conduct a
conference call for holders of Notes to discuss with appropriate senior officers
of the Company the results of operating and financial conditions of the Company
within 30 days of filing any reports described in clause (i) and (ii) above with
the Commission.
LIMITATION ON DESIGNATIONS OF SPECIAL RESTRICTED SUBSIDIARIES. The
Indenture will provide that the Company may designate any Restricted Subsidiary
as a "Special Restricted Subsidiary" under the Indenture (a "Special
Designation") if such Special Restricted Subsidiary engages in, or will engage
principally in, a Permitted Business in a Newly-Licensed Service Area. Such
Special Designation may be revoked at any time if all Indebtedness of such
Special Restricted Subsidiary that is outstanding immediately following such
revocation would, if Incurred at such time, have been permitted to be Incurred
for all purposes under the Indenture. All Special Designations and revocations
thereof must be evidenced by Board Resolutions of the Company delivered to the
Trustee certifying compliance with the foregoing provisions. In any event, a
Special Restricted Subsidiary will remain a Restricted Subsidiary for all
purposes of the Indenture, except that a Special Restricted Subsidiary shall be
treated as an Unrestricted Subsidiary for purposes of calculating Operating Cash
Flow, Consolidated Income Tax Expense, Consolidated Interest Expense and
Consolidated Net Income.
LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES. The Indenture will
provide that the Board of Directors may designate any Subsidiary of the Company
(other than a Guarantor, but including any newly acquired or newly formed
Subsidiary) (a "Designation") to be an Unrestricted Subsidiary if: (a) no
Default shall have occurred and be continuing at the time of or after giving
effect to such Designation; (b) the Company would be permitted under the
Indenture to make an Investment under all applicable provisions of the covenant
described under "Certain Covenants--Limitation on Restricted Payments" at the
time of Designation (assuming the effectiveness of such Designation) in an
amount (the "Designation Amount") equal to the Fair Market Value of such
Subsidiary on such date; and (c) such Subsidiary and its Subsidiaries own no
Capital Stock or Indebtedness of, and hold no Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated. The Board of Directors may designate any
Unrestricted Subsidiary to be a Restricted Subsidiary (a "Revocation");
PROVIDED, HOWEVER, that immediately after giving effect to such designation (x)
no Default shall have occurred and be continuing and (y) all Liens and
Indebtedness of such Unrestricted Subsidiary outstanding immediately following
such Revocation would, if Incurred at such time, have been permitted to be
Incurred for all purposes of the Indenture. Any such Designation and Revocation
by the Board of Directors shall be evidenced to the Trustee by promptly filing
with the Trustee
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a copy of the board resolution giving effect thereto and an Officers'
Certificate certifying that such action complied with the foregoing provisions.
LIMITATION ON INVESTMENTS IN UNRESTRICTED SUBSIDIARIES. The Company will
not make, and will not permit its Restricted Subsidiaries to make, any
Investment in Unrestricted Subsidiaries if, at the time thereof, such
Investment, together with the aggregate amount of all Investments previously
made (other than Permitted Investments), would exceed the amount of Restricted
Payments then permitted to be made pursuant to the covenant described under
"Certain Covenants--Limitation on Restricted Payments". Any Investments in
Unrestricted Subsidiaries permitted to be made pursuant to this covenant (i)
will be treated as a Restricted Payment in calculating the amount of Restricted
Payments made by the Company and (ii) may be made in cash or property.
BUSINESS OF THE COMPANY; RESTRICTIONS ON TRANSFERS OF EXISTING
BUSINESS. The Indenture will provide that the Company will not, and will not
permit any of the Restricted Subsidiaries to, be principally engaged in any
business or activity other than a Permitted Business. In addition, the Company
and the Restricted Subsidiaries will not be permitted to, directly or
indirectly, transfer to any Unrestricted Subsidiary (i) any of the licenses,
permits or authorizations used in the Permitted Business of the Company and the
Restricted Subsidiaries on the Issue Date or (ii) any material portion of the
"property and equipment" (as such term is used in the Company's consolidated
financial statements) of the Company or any Restricted Subsidiary used in the
licensed service areas of the Company and the Restricted Subsidiaries as they
exist on the Issue Date; PROVIDED that the Company and the Restricted
Subsidiaries may make Asset Dispositions in compliance with the covenant
described under "Certain Covenants--Limitation on Sales of Assets and Subsidiary
Stock" and pledge property and assets to the extent permitted in the covenant
described under "Certain Covenants--Limitations on Liens."
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in any
payment of interest on any Note when due, continued for 30 days, (ii) a default
in the payment of principal or premium, if any, of any Note when due at its
Stated Maturity, upon optional redemption, upon required repurchase, upon
declaration or otherwise, (iii) the failure by the Company or any Restricted
Subsidiary to comply with its obligations under "Certain Covenants--Merger and
Consolidation" above, (iv) the failure by the Company or any Restricted
Subsidiary to comply with any covenants (other than the covenant described under
"Certain Covenants--Merger and Consolidation") or any other agreements contained
in the Indenture for 45 days after notice (in each case, other than a failure to
purchase Notes which shall constitute an Event of Default under clause (ii)
above), (v) Indebtedness of the Company or any Restricted Subsidiary is not paid
within any applicable grace period after failure to pay when due or is
accelerated by the holders thereof because of a default and the total amount of
such Indebtedness unpaid or accelerated exceeds $10.0 million (or the US Dollar
Equivalent) (the "cross acceleration provision"), (vi) certain events of
bankruptcy, insolvency or reorganization of the Company or a Restricted
Subsidiary (the "bankruptcy provisions"), (vii) any judgment or decree for the
payment of money in excess of $10.0 million (or the US Dollar Equivalent) (to
the extent not covered by insurance as acknowledged in writing by the insurer)
is rendered against the Company or a Restricted Subsidiary and such judgment or
decree shall remain undischarged or unstayed for a period of 60 days after such
judgment becomes final and non-appealable (the "judgment default provision"),
(viii) there shall have occurred any seizure, compulsory acquisition,
expropriation or nationalization of material assets of the Company and its
Subsidiaries or (ix) the failure of any Subsidiary Guarantee to be in full force
and effect (except as contemplated by the terms thereof) or the denial or
disaffirmation by any Guarantor of its obligations under the Indenture or any
Subsidiary Guarantee if such default continues for 10 days, unless otherwise
released from such Guarantee obligation pursuant to the Indenture. However, a
default under clause (iv) will not constitute an Event of Default until the
Trustee or the holders of 25.0% in principal amount of the outstanding Notes
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notify the Company of the default and the Company does not cure such default
within the time specified in clause (iv) hereof after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the holders
of at least 25.0% in principal amount of the outstanding Notes by notice to the
Company may declare the principal of and accrued and unpaid interest on all the
Notes to be due and payable. Upon such a declaration, such principal and accrued
and unpaid interest shall be due and payable immediately. If an Event of Default
relating to certain events of bankruptcy, insolvency or reorganization of the
Company occurs and is continuing, the principal of and accrued and unpaid
interest on all the Notes will become and be immediately due and payable without
any declaration or other act on the part of the Trustee or any holders. Under
certain circumstances, the holders of a majority in principal amount of the
outstanding Notes may rescind any such acceleration with respect to the Notes
and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default occurs and is continuing, the Trustee will be
under no obligation to exercise any of the rights or powers under the Indenture
at the request or direction of any of the holders unless such holders have
offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no holder may pursue any
remedy with respect to the Indenture or the Notes unless (i) such holder has
previously given the Trustee notice that an Event of Default is continuing, (ii)
holders of at least 25.0% in principal amount of the outstanding Notes have
requested the Trustee to pursue the remedy, (iii) such holders have offered the
Trustee reasonable security or indemnity against any loss, liability or expense,
(iv) the Trustee has not complied with such request within 60 days after the
receipt of the request and the offer of security or indemnity and (v) the
holders of a majority in principal amount of the outstanding Notes have not
given the Trustee a direction that, in the opinion of the Trustee, is
inconsistent with such request within such 60-day period. Subject to certain
restrictions, the holders of a majority in principal amount of the outstanding
Notes are given the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or of exercising any trust or
power conferred on the Trustee. The Trustee, however, may refuse to follow any
direction that conflicts with law or the Indenture or that the Trustee
determines is unduly prejudicial to the rights of any other holder or that would
involve the Trustee in personal liability. Prior to taking any action under the
Indenture, the Trustee shall be entitled to indemnification satisfactory to it
in its sole discretion against all losses and expenses caused by taking or not
taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder notice of the Default
within 90 days after it occurs. Except in the case of a Default in the payment
of principal of, premium (if any) or interest on any Note, the Trustee may
withhold notice if and so long as a committee of its Trust officers in good
faith determines that withholding notice is in the interests of the Noteholders.
In addition, the Company is required to deliver to the Trustee, within 120 days
after the end of each fiscal year, a certificate indicating whether the signers
thereof know of any Default that occurred during the previous year. The Company
also is required to deliver to the Trustee, within 30 days after the occurrence
thereof, written notice of any events which would constitute certain Defaults,
their status and what action the Company is taking or proposes to take in
respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the consent
of the holders of a majority in principal amount of the Notes then outstanding
and any past default or compliance with any provisions may be waived with the
consent of the holders of a majority in principal amount of the Notes then
outstanding. However, without the consent of each holder of an outstanding Note
affected, no amendment may, among other things, (i) reduce the amount of Notes
whose holders must consent to an amendment, (ii) reduce the rate of or extend
the time for payment of interest on any Note, (iii) reduce the
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principal of or extend the Stated Maturity of any Note, (iv) reduce the premium
payable upon the redemption or repurchase of any Note or change the time at
which any Note may be redeemed as described under "Optional Redemption" above,
(v) make any Note payable in money other than that stated in the Note, (vi)
amend or modify any of the provisions of the Indenture relating to the ranking
of the Notes or the Subsidiary Guarantees in any manner that adversely affects
the rights of any holder of the Notes, (vii) impair the right of any holder to
receive payment of principal of and interest on such holder's Notes on or after
the due dates therefor or to institute suit for the enforcement of any payment
on or with respect to such holder's Notes, (viii) release any Guarantor from any
of its obligations under its Subsidiary Guarantee or the Indenture, except in
compliance with the terms thereof or (ix) make any change in the amendment
provisions which require each holder's consent or in the waiver provisions.
Without the consent of any holder, the Company and the Trustee may amend the
Indenture to cure any ambiguity, omission, defect or inconsistency, to provide
for the assumption by a successor corporation of the obligations of the Company
under the Indenture, to provide for uncertificated Notes in addition to or in
place of certificated Notes (provided that the uncertificated Notes are issued
in registered form for purposes of Section 163(f) of the Code, to secure the
Notes, to add to the covenants of the Company for the benefit of the Noteholders
or to surrender any right or power conferred upon Company, to make any change
that does not adversely affect the rights of any holder or to comply with any
requirement of the Commission in connection with the qualification of the
Indenture under the Trust Indenture Act.
The consent of the holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment. After an amendment under the
Indenture becomes effective, the Company is required to mail to the holders a
notice briefly describing such amendment. However, the failure to give such
notice to all the holders, or any defect therein, will not impair or affect the
validity of the amendment.
TRANSFER AND EXCHANGE
A Noteholder may transfer or exchange Notes in accordance with the
Indenture. Upon any transfer or exchange, the registrar and the Trustee may
require a Noteholder, among other things, to furnish appropriate endorsements
and transfer documents and the Company may require a Noteholder to pay any taxes
or other charges required by law. The Company is not required to transfer or
exchange any Note selected for redemption or to transfer or exchange any Note
for a period of 15 days prior to a selection of Notes to be redeemed. The Notes
will be issued in registered form and the registered holder of a Note will be
treated as the owner of such Note for all purposes.
DEFEASANCE
The Company at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Company at any time may terminate its obligations under the covenants
described under "--Certain Covenants" (other than the covenant described under
"Certain Covenants--Merger and Consolidation"), the operation of the cross
acceleration provision, the bankruptcy provisions with respect to Restricted
Subsidiaries and the judgment default provision described under "Defaults" above
and the limitations contained in clauses (iii) and (iv) under "Certain
Covenants--Merger and Consolidation" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If the Company exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
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Event of Default specified in clause (iv), (v) and (vi) (with respect only to
Restricted Subsidiaries), or (vii) or (ix) under "Defaults" above or because of
the failure of the Company to comply with clause (iii) or (iv) under "Certain
Covenants--Merger and Consolidation" above.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or US
Government Obligations for the payment of principal, premium (if any) and
interest on the Notes to redemption or maturity, as the case may be, and must
comply with certain other conditions, including delivery to the Trustee of an
Opinion of Counsel to the effect that holders of the Notes will not recognize
income, gain or loss for U.S. Federal income tax purposes as a result of such
deposit and defeasance and will be subject to U.S. Federal income tax on the
same amount and in the same manner and at the same times as would have been the
case if such deposit and defeasance had not occurred (and, in the case of legal
defeasance only, such Opinion of Counsel must be based on a ruling of the
Internal Revenue Service or other change in applicable Federal income tax law).
FOREIGN EXCHANGE RESTRICTIONS; CURRENCY INDEMNITY
Payments in respect of the Notes or any Subsidiary Guarantee shall be made
in US dollars as shall be legal tender at the time of payment for the payment of
public and private debts in that currency. In the event that on any payment date
in respect of the Notes or any Subsidiary Guarantee, any restrictions or
prohibition of access to the Brazilian foreign exchange market exists, the
Company and each Guarantor agree to pay all amounts payable under the Notes in
the currency of such Notes by means of any legal procedure existing in Brazil
(except commencing legal proceedings against the Brazilian Central Bank), on any
due date for payment under the Notes. All costs and taxes payable in connection
with the procedures referred to in this covenant shall be borne by the Company
and the Guarantors.
US dollars are the sole currency of account and payment for all sums payable
by the Company and the Guarantors under or in connection with the Notes and the
Subsidiary Guarantees, including damages. Any amount received or recovered in a
currency other than US dollars (whether as a result of, or of the enforcement
of, a judgment or order of a court of any jurisdiction, in the winding-up or
dissolution of the Company and the Guarantors or otherwise) by any holder of a
Note in respect of any sum expressed to be due to it from the Company and the
Guarantors shall only constitute a discharge to the Company and the Guarantors
to the extent of the dollar amount which the recipient is able to purchase with
the amount so received or recovered in that other currency on the date of that
receipt or recovery (or, if it is not practicable to make that purchase on that
date, on the first date on which it is practicable to do so). If that dollar
amount is less than the dollar amount expressed to be due to the recipient under
any Note, the Company and the Guarantors shall, jointly and severally, indemnify
it against any loss sustained by it as a result. In any event the Company and
the Guarantors shall, jointly and severally, indemnify the recipient against the
cost of making any such purchase. For the purposes of this paragraph, it will be
sufficient for the holder of a Note to certify in a satisfactory manner
(indicating sources of information used) that it would have suffered a loss had
an actual purchase of dollars been made with the amount so received in that
other currency on the date of receipt or recovery (or, if a purchase of dollars
on such date had not been practicable, on the first date on which it would have
been practicable, it being required that the need for a change of date be
certified in the manner mentioned above). These indemnities constitute a
separate and independent obligation from other obligations of the Company and
the Guarantors, shall give rise to a separate and independent cause of action,
shall apply irrespective of any indulgence granted by any holder of a Note and
shall continue in full force and effect despite any other judgment, order, claim
or proof for a liquidated amount in respect of any sum due under any Note.
ENFORCEABILITY OF JUDGMENTS WITH RESPECT TO THE NOTES AND SUBSIDIARY GUARANTEES
Service of process upon the Company or any Guarantor in an action (other
than an insolvency, liquidation or bankruptcy proceeding or any other proceeding
in the nature of an IN REM or QUASI IN REM
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proceeding) to enforce their obligations under the Indenture, the Notes or the
Subsidiary Guarantees may be obtained within the United States by service upon
CT Corporation System. See "Risk Factors-- Risks Relating to the
Notes--Enforceability of Judgments." Since substantially all of the assets of
the Company and its subsidiaries are outside the United States, any judgment
obtained in the United States against the Company or any Guarantor, including
judgments with respect to the payment of amounts owing with respect to the Notes
or the Subsidiary Guarantees, may not be collectible within the United States.
Judgments for monetary claims obtained in US courts arising out of or in
relation to the obligations of the Company and the Guarantors under the
Indenture and the Notes will be enforceable in Brazil, provided that such
judgment has been previously confirmed by the Brazilian Federal Supreme Court.
In order to be confirmed by the Brazilian Federal Supreme Court of Brazil, such
foreign judgment must meet the following conditions: (a) it must comply with all
formalities required for its enforceability under the laws of the country where
it was issued; (b) it must have been given by a competent court after the proper
service of process on the parties; (c) it must not be subject to appeal; (d) it
must not offend Brazilian national sovereignty, public policy or good morals;
and (e) it must be duly authenticated by a competent Brazilian consulate and be
accompanied by a sworn translation thereof into Portuguese. Notwithstanding the
foregoing, no assurance can be given that such confirmation will be obtained,
that the process described above can be conducted in a timely manner or that a
Brazilian court will enforce such monetary judgment. See "Enforceability of
Civil Liabilities."
Any judgment obtained against the Company or the Guarantors in a court in
Brazil under any Note or under the Indenture will be expressed in the Brazilian
currency equivalent to the US dollar amount of such sum at the commercial
exchange rate of the date at which such judgment is obtained, and such Brazilian
currency amount will be corrected in accordance with the exchange variation
until the judgment holder receives effective payment.
CERTAIN BANKRUPTCY LAW CONSIDERATIONS
Brazilian Bankruptcy Law (Decree-law No. 7,661, of June 21, 1945, the
"Brazilian Bankruptcy Law") establishes two different proceedings for the
resolution of debts of commercial companies which are insolvent or do not pay
their obligations when due; the bankruptcy proceeding ("FALENCIA") and the
reorganization proceeding ("CONCORDATA"). Both proceedings apply to all
unsecured creditors of a company which is declared bankrupt or which is under a
reorganization proceeding. In the event that the Company or any of the
Guarantors is declared bankrupt or enters into a CONCORDATA, the Notes will be
considered general unsecured indebtedness of the Company and the Guarantors and
therefore will be subject to such proceedings.
Under a bankruptcy proceeding (essentially a liquidation proceeding),
payments in respect of the Notes will be subject to an order of priority.
Generally, Brazilian Bankruptcy Law and other applicable rules establish that
claims of employees for wages or indemnity and tax claims have priority over
other claims against the bankrupt estate. Other claims are subject to the
following order of priority: (i) secured credits, (ii) credits with special
privileges over certain assets, (iii) credits with general privilege and (iv)
unsecured credits (including the Notes). Credits in foreign currency are
converted into Brazilian currency on the date the company is declared bankrupt
and are not subject to adjustment in accordance with the exchange variation.
Such amount in Brazilian currency must be monetarily adjusted to account for
inflation (in accordance with the rules applicable from time to time) and bear
no interest.
Under a CONCORDATA proceeding, which is a protection available under the
Brazilian Bankruptcy Law for commercial companies experiencing financial
distress to avoid the declaration of bankruptcy, the company's unsecured credits
existing at the time the CONCORDATA is declared are rescheduled for one of the
periods defined in the law which in virtually all cases is 24 months (in which
event 40.0% of the debt must be paid in the first year). The benefit may be
given by the court without any prior consultation with
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or manifestation by the creditors, so long as the beneficiary demonstrates,
INTER ALIA, that its assets are worth at least 50.0% of its unsecured
indebtedness. The CONCORDATA proceeding has the following basic characteristics:
(i) it only affects unsecured creditors; (ii) it does not affect the day-to-day
management of the company, the other commercial obligations of the company and
the obligations assumed after the date on which the CONCORDATA is declared;
(iii) amounts due in foreign currency subject to the CONCORDATA are converted
into local currency on the date on which the CONCORDATA is accepted by the court
and are not subject to adjustment in accordance with the exchange variation;
(iv) amounts due under the CONCORDATA, either in local currency or converted
into local currency, must be monetarily adjusted to account for inflation (in
accordance with the rules applicable from time to time) and bear interest at the
rate of 12.0% per annum; and (v) a company under CONCORDATA which fails to meet
its rescheduled obligations will be declared bankrupt.
CONSENT TO JURISDICTION AND SERVICE
The Indenture will provide that the Company and the Guarantors will appoint
CT Corporation System as their agent for service of process in any suit, action
or proceeding with respect to the Indenture, the Notes or the Subsidiary
Guarantees and for actions brought under Federal or state securities laws
brought in any Federal or state court located in the City of New York and will
submit to such jurisdiction. See "Risk Factors--Risks Relating to the
Notes--Enforceability of Judgments."
CONCERNING THE TRUSTEE
The Chase Manhattan Bank is to be the Trustee under the Indenture and has
been appointed by the Company as Registrar, and Chase Trust Bank has been
appointed as Paying Agent with regard to the Notes. Affiliates of the Trustee
own approximately 9.3% of the common shares of the Company.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
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CERTAIN DEFINITIONS
For purposes of the following definitions and the Indenture generally, all
calculations and determinations shall be made in accordance with US GAAP and
shall be based upon the consolidated financial statements of the Company and its
Subsidiaries prepared in accordance with US GAAP. For purposes of this
"Description of Notes," the term "Company" means Tevecap S.A. excluding its
Subsidiaries.
"Abril Credit Facility" means the Revolving Credit Agreement, dated December
6, 1995 between the Company and Abril S.A., as lender, as amended, refinanced or
replaced from time to time.
"Acquired Indebtedness" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such Person merges with or
into or consolidates with or becomes a Restricted Subsidiary of such specified
Person and (ii) Indebtedness secured by a Lien encumbering any asset acquired by
such specified Person, which Indebtedness was not incurred in anticipation of,
and was outstanding prior to, such merger, consolidation or acquisition.
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) to be used by the Company or a Restricted
Subsidiary in a Permitted Business; (ii) the Capital Stock of a Person that
becomes a Restricted Subsidiary as a result of the acquisition of such Capital
Stock by the Company or another Restricted Subsidiary; or (iii) Capital Stock
constituting a minority interest in any Person that at such time is a Restricted
Subsidiary; PROVIDED, HOWEVER, that, in the case of clauses (ii) and (iii), such
Restricted Subsidiary is primarily engaged in a Permitted Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the covenants described under "Certain Covenants-- Limitation on
Sales of Assets and Subsidiary Stock" and "Certain Covenants--Limitation on
Affiliate Transactions", "Affiliate" shall also include any beneficial owner of
shares representing 10.0% or more of the total voting power of the Voting Stock
(on a fully diluted basis) of the Company or of rights or warrants to purchase
such Voting Stock (whether or not currently exercisable) and any Person who
would be an Affiliate of any such beneficial owner pursuant to the first
sentence hereof, and for the purposes of the covenant described under "Certain
Covenants--Limitation on Affiliate Transactions" only, shall include (i) Bell
Canada, (ii) Canbras Communications Corp., (iii) Canbras Participacoes Ltda.,
(iv) Canbras TVA Cabo Ltda., (v) TV Cabo Santa Branca Comercio Ltda. and (vi)
Galaxy Latin America.
"Asset Disposition" means any sale, lease, transfer, issuance or other
disposition (or series of related sales, leases, transfers, issuances or
dispositions that are part of a common plan) of shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares), property,
services or other assets (each referred to for the purposes of this definition
as a "disposition") by the Company or any of its Restricted Subsidiaries
(including any disposition by means of a merger, consolidation or similar
transaction) other than (i) a disposition by a Restricted Subsidiary to the
Company or by the Company or a Restricted Subsidiary to a Wholly-Owned
Restricted Subsidiary, (ii) a disposition of inventory, services or accounts
receivable in the ordinary course of business consistent with market practice,
(iii) a disposition of obsolete or worn out equipment or equipment that is no
longer useful in the conduct of the business of the Company and its Subsidiaries
and that is disposed of in each case in the ordinary course of business, and
(iv) a disposition by Galaxy Brasil of up to 25.0% of its Capital Stock to
Hughes Communications GLA and Darlene Investments, a member of the Cisneros
Group, or their respective affiliates, pursuant to the Galaxy Latin America
Partnership Agreement as it exists on the Issue Date.
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"Attributable Indebtedness" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
interest rate borne by the Notes, compounded annually) of the total obligations
of the lessee for rental payments during the remaining term of the lease
included in such Sale/Leaseback Transaction (including any period for which such
lease has been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"California Broadcast Center" or "CBC" means the California Broadcast Center
LLC, the owner of an uplink center located in Long Beach, California, which
provides certain uplink services to Galaxy Latin America.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations or other equivalents of or interests
in (however designated) equity of such Person, including any Preferred Stock and
Disqualified Stock, but excluding any debt securities convertible into such
equity.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP, and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date such lease may be terminated without penalty.
"Cash Equivalents" means, at any time, (i) any direct obligations (or
certificates representing an ownership interest in such obligations) of the
United States of America or the Federative Republic of Brazil (including any
agency or instrumentality thereof) for the payment of which the full faith and
credit of the United States of America or the Federative Republic of Brazil is
pledged and which are not callable or redeemable at the issuer's option, each
with a maturity of 180 days or less from the date of acquisition; (ii)
certificates of deposit, money market deposit accounts and acceptances with a
maturity of 180 days or less from the date of acquisition of any financial
institution that is a Brazilian regulated Bank or a member of the Federal
Reserve System having combined capital and surplus and undivided profits of not
less than $500.0 million (or the US dollar equivalent); and (iii) commercial
paper with a maturity of 180 days or less from the date of acquisition issued by
a corporation that is not an Affiliate of the Company or any of its Subsidiaries
and is organized under the laws of any state of the United States or the
District of Columbia whose debt rating, at the time as of which such investment
is made, is at least "A-1" by Standard & Poor's Corporation or at least "P-1" by
Moody's Investors Service, Inc. or rated at least an equivalent rating category
of another nationally recognized securities rating agency.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Income Tax Expense" means, with respect to any Person, for any
period the aggregate of the federal, state, local and foreign income tax expense
of such Person and its Subsidiaries for such period, on a consolidated basis as
determined in accordance with GAAP.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such total interest expense, and to the extent
incurred by the Company or its Restricted Subsidiaries, (i) interest expense
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attributable to Capitalized Lease Obligations, (ii) amortization of debt
discount, (iii) capitalized interest, (iv) non-cash interest expenses, (v)
commissions, discounts and other fees and charges owed with respect to letters
of credit and bankers' acceptance financing, (vi) the net costs associated with
Hedging Obligations (including amortization of fees), (vii) Preferred Stock
dividends in respect of all Preferred Stock of the Company or a Wholly-Owned
Restricted Subsidiary, (viii) interest accruing on any Indebtedness of any other
Person to the extent such Indebtedness is Guaranteed by the Company or any
Restricted Subsidiary and (ix) the cash contributions to any employee stock
ownership plan or similar trust to the extent such contributions are used by
such plan or trust to pay interest or fees to any Person (other than the
Company) in connection with Indebtedness Incurred by such plan or trust.
"Consolidated Net Income" means, for any period, the net income (loss) of
the Company and its consolidated Subsidiaries; PROVIDED, HOWEVER, that there
shall not be included in such Consolidated Net Income: (i) any net income (loss)
of any Person if such Person is not a Restricted Subsidiary, except that (A)
subject to the limitations contained in clause (iv) below, the Company's equity
in the net income of any such Person for such period shall be included in such
Consolidated Net Income up to the aggregate amount of cash actually distributed
by such Person during such period to the Company or a Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or other
distribution paid to a Restricted Subsidiary, to the limitations contained in
clause (iii) below) and (B) the Company's equity in a net loss of any such
Person (other than an Unrestricted Subsidiary) for such period shall be included
in determining such Consolidated Net Income; (ii) any net income (loss) of any
person acquired by the Company or a Subsidiary in a pooling of interests
transaction for any period prior to the date of such acquisition; (iii) any net
income (loss) of any Restricted Subsidiary if such Restricted Subsidiary is
subject to restrictions, directly or indirectly, on the payment of dividends or
the making of distributions by such Restricted Subsidiary, directly or
indirectly, to the Company, except that (A) subject to the limitations contained
in (iv) below, the Company's equity in the net income of any such Restricted
Subsidiary for such period shall be included in such Consolidated Net Income up
to the aggregate amount of cash that could have been distributed by such
Restricted Subsidiary during such period to the Company or another Restricted
Subsidiary as a dividend (subject, in the case of a dividend that could have
been made to another Restricted Subsidiary, to the limitation contained in this
clause) and (B) the Company's equity in a net loss of any such Restricted
Subsidiary for such period shall be included in determining such Consolidated
Net Income; (iv) any gain (but not loss) realized upon the sale or other
disposition of any assets of the Company or its consolidated Subsidiaries which
are not sold or otherwise disposed of in the ordinary course of business and any
gain (but not loss) realized upon the sale or other disposition of any Capital
Stock of any Person; (v) any extraordinary gain or loss; and (vi) the cumulative
effect of a change in accounting principles.
"Consolidated Net Worth" means the total of the amounts shown on the balance
sheet of the Company and the Restricted Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending at least 45 days prior to the taking of any
action for the purpose of which the determination is being made as (i) the par
or stated value of all outstanding Capital Stock of the Company plus (ii) paid
in capital or capital surplus relating to such Capital Stock plus (iii) any
retained earnings or earned surplus less (A) any accumulated deficit and (B) any
amounts attributable to Disqualified Stock.
"Cumulative Consolidated Interest Expense" means, as of any date of
determination, Consolidated Interest Expense from October 1, 1996 to the end of
the Company's most recently ended full fiscal quarter for which financial
statements are available prior to such date, taken as a single accounting
period.
"Cumulative Operating Cash Flow" means, as of any date of determination,
Operating Cash Flow from October 1, 1996 to the end of the Company's most
recently ended full fiscal quarter for which financial statements are available
prior to such date, taken as a single accounting period.
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"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock of
such Person which by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable) or upon the happening of any event
(i) matures or is mandatorily redeemable pursuant to a sinking fund obligation
or otherwise, (ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock or (iii) is redeemable at the option of the holder thereof,
in whole or in part, in each case on or prior to the first anniversary of the
Stated Maturity of the Notes.
"Equipment Agreements" means the Equipment Lease Agreement, dated as of July
30, 1996, between Citibank N.A., as lessor, and Galaxy Brasil, as lessee, and
related agreements, and the Equipment Sale and Leaseback Agreement, dated as of
July 30, 1996, between Citibank N.A., as lessor, and Galaxy Brasil, as lessee,
and related agreements, as each such agreement may be amended, supplemented or
otherwise modified from time to time.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"EximBank Credit Agreement" mean the Credit Agreement to be entered into
among the Company, The Chase Manhattan Bank, as lender, and the Export-Import
Bank of the United States, as amended, supplemented or otherwise modified from
time to time.
"Fair Market Value" means, with respect to any asset, the price which could
be negotiated in an arm's-length free market transaction, for cash, between a
willing seller and a willing buyer, neither of which is under compulsion to
complete the transaction. The Fair Market Value of any asset or assets shall be
determined by the Board of Directors of the Company, acting in good faith, and
shall be evidenced by a resolution of such Board of Directors provided to the
Trustee; PROVIDED that, solely for purposes of clause (i) of the covenant
described under "Certain Covenants--Limitation on Sales of Assets and Subsidiary
Stock" the Company shall be deemed not to have received Fair Market Value for an
Asset Disposition unless (a) in the event such Asset Disposition involves an
aggregate amount in excess of $2.0 million, the terms of such transaction have
been approved by a majority of the members of the Board of Directors of the
Company and by a majority of the members of such Board having no personal stake
in such Asset Disposition, if any, and (b) in the event such Asset Disposition
involves an aggregate amount in excess of $20.0 million, the Company has
received a written opinion from an independent investment banking firm of
nationally recognized standing in the United States that such Asset Disposition
is fair to the Company or such Restricted Subsidiary, as the case may be, from a
financial point of view (except that no such opinion shall be required in
connection with a public offering of common stock of a Restricted Subsidiary
either (A) registered under the Securities Act and/or (B) registered with the
CVM and listed on the Sao Paulo Stock Exchange or Rio de Janeiro Stock
Exchange).
"Galaxy Brasil" means Galaxy Brasil S.A., a Restricted Subsidiary of the
Company on the Issue Date.
"Galaxy Brasil Subscribers" means, as of any date, the number of subscribers
to the pay television services offered by Galaxy Brasil, excluding subscribers
who have paid an installation fee to Galaxy Brasil at such date but who are
awaiting installation of such services.
"Galaxy Latin America" means Galaxy Latin America, a Delaware general
partnership in which the Company holds a 10% equity interest on the Issue Date.
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"Galaxy Latin America Partnership Agreement" means the Partnership
Agreement, dated February 13, 1995, as in effect on the Issue Date, among Galaxy
Brasil and a unit of Hughes Electronics, a member of the Cisneros Group and a
subsidiary of Grupo MVS.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect from time to time, including those set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting profession.
All ratios and computations based on GAAP contained in the Indenture shall be
computed in conformity with GAAP as in effect on the Issue Date.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation of any other Person (whether arising by virtue
of partnership arrangements, or by agreement to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Indebtedness of the payment thereof or
to protect such obligee against loss in respect thereof (in whole or in part);
PROVIDED, HOWEVER, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Guarantor" means any Subsidiary that has issued a Guarantee.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder," "holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
"Incur" or "incur" means issue, assume, Guarantee, incur or otherwise become
liable for; PROVIDED, HOWEVER, that any Indebtedness or Capital Stock of a
Person existing at the time such person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be incurred by such
Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used
as a noun shall have a correlative meaning.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of indebtedness of such Person for borrowed money, (ii) the principal
of and premium (if any) in respect of obligations of such Person evidenced by
bonds, debentures, notes or other similar instruments, (iii) all obligations of
such Person in respect of letters of credit or other similar instruments
(including reimbursement obligations with respect thereto), (iv) all obligations
of such Person to pay the deferred and unpaid purchase price of property or
services, which purchase price is due more than six months after the date of
placing such property in service or taking delivery and title thereto or the
completion of such services, (v) all Capitalized Lease Obligations of such
Person and all Attributable Indebtedness of such Person, (vi) all Indebtedness
of other Persons secured by a Lien on any asset of such Person, whether or not
such Indebtedness is assumed by such Person, PROVIDED, HOWEVER, that the amount
of Indebtedness of such Person shall be the lesser of (A) the fair market value
of such asset at such date of determination and (B) the amount of such
Indebtedness of such other Persons, (vii) all Indebtedness of other Persons to
the extent Guaranteed by such Person, (viii) the amount of all obligations of
such Person with respect to the redemption, repayment or other repurchase of any
Disqualified Stock or, with respect to any Subsidiary of the Company, any
Preferred Stock (but excluding, in each case, any accrued dividends) and (ix) to
the extent not otherwise included
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in this definition, Hedging Obligations of such Person; PROVIDED, HOWEVER, that
in no event shall Indebtedness include Trade Payables not overdue or being
contested in good faith. The amount of Indebtedness of any Person at any date
shall be the outstanding balance at such date of all unconditional obligations
as described above and the maximum liability, upon the occurrence of the
contingency giving rise to the obligation, of any contingent obligations at such
date.
"Indebtedness to Annualized Operating Cash Flow Ratio" means, as of any date
of determination, the ratio of (i) the aggregate principal amount of all
outstanding Indebtedness of the Company and its Restricted Subsidiaries as of
such date plus, without duplication, the aggregate liquidation preference or
redemption amount of all Disqualified Stock of the Company (excluding any such
Disqualified Stock (x) held by the Company or a Wholly-Owned Restricted
Subsidiary of the Company or (y) outstanding on the Issue Date), to (ii)
Operating Cash Flow of the Company and its Restricted Subsidiaries for the most
recently ended fiscal quarter for which financial statements are available prior
to such date multiplied by four, determined on a pro forma basis (and after
giving pro forma effect to (A) the incurrence of such Indebtedness and (if
applicable) the application of the net proceeds therefrom, including to
refinance other Indebtedness, as if such Indebtedness was incurred, and the
application of such proceeds occurred, at the beginning of such period; (B) the
incurrence, repayment or retirement of any other Indebtedness by the Company and
its Restricted Subsidiaries since the first day of such period as if such
Indebtedness was incurred, repaid or retired at the beginning of such period
(except that, in making such computation, the amount of Indebtedness under any
revolving credit facility shall be computed based upon the average balance of
such Indebtedness at the end of each month during such period); (C) in the case
of Acquired Indebtedness, the related acquisition as if such acquisition had
occurred at the beginning of such period; and (D) any acquisition or disposition
by the Company and its Restricted Subsidiaries (or by any Person that
subsequently became a Restricted Subsidiary or was merged with or into the
Company or any Restricted Subsidiary since the beginning of such period) of any
company or any business or any assets out of the ordinary course of business, or
any related repayment of Indebtedness, in each case since the first day of such
period, assuming such acquisition or disposition had been consummated on the
first day of such period). For purposes of this definition, whenever pro forma
effect is to be given to a transaction, the pro forma calculation shall be made
in good faith by a responsible financial or accounting officer of the Company.
"Indemnification Agreement" means the Indemnification Agreement to be
entered into among the Company, Galaxy Latin America, Hughes Communications GLA
and affiliates thereof, California Broadcast Center, TVA Communications Ltd.,
Darlene Investments, Inversiones Divtel, D.T., C.A., Grupo Frecuencia Modulada
Television and Grupo MVS.
"Interest Rate Agreement" means with respect to any Person any interest rate
protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan (other
than advances to customers in the ordinary course of business that are recorded
as accounts receivable on the balance sheet of such Person) or other extension
of credit (including by way of Guarantee or similar arrangement, but excluding
any debt or extension of credit represented by a bank deposit other than a time
deposit) or capital contribution to (by means of any transfer of cash or other
property to others or any payment for property or services for the account or
use of others), or any purchase or acquisition of Capital Stock, Indebtedness or
other similar instruments issued by such Person.
"Issue Date" means the date on which the Notes are originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
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"Minority Investment" means any Investment by the Company or any Restricted
Subsidiary in an entity or Person in which the Company or such Restricted
Subsidiary owns or controls 50.0% or less of the total voting power of the
Capital Stock or other equity interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees of any such entity or Person.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise, but only as and when
received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to the properties or assets that are the subject of such Asset Disposition or
received in any other noncash form) therefrom, in each case net of (i) all
legal, title and recording tax expenses, commissions and other fees and expenses
incurred, and all Federal, state, foreign and local taxes required to be paid or
accrued as a liability under GAAP, as a consequence of such Asset Disposition,
(ii) all payments made on any Indebtedness which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any Lien upon
such assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Disposition, or by applicable law, be repaid out of the
proceeds from such Asset Disposition, (iii) all distributions and other payments
required to be made to any Person owning a beneficial interest in assets subject
to sale or minority interest holders in Subsidiaries or joint ventures as a
result of such Asset Disposition and (iv) the deduction of appropriate amounts
to be provided by the seller as a reserve, in accordance with GAAP, against any
liabilities associated with the assets disposed of in such Asset Disposition and
retained by the Company or any Restricted Subsidiary of the Company after such
Asset Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result of such issuance or sale.
"Newly-Licensed Service Area" means a service area in which (i) such Special
Restricted Subsidiary is licensed to provide any of Cable or MMDS service and
(ii) neither the Company nor any Restricted Subsidiary is then licensed to
provide such Cable or MMDS service in such service area on the Issue Date.
"Officers' Certificate" means a certificate signed by two Officers.
"Operating Cash Flow" means, for any period, the Consolidated Net Income
(Loss) of the Company and its Restricted Subsidiaries for such period, plus,
without duplication, (i) extraordinary net losses and net losses on sales of
assets outside the ordinary course of business during such period, to the extent
such losses were deducted in computing Consolidated Net Income (Loss), plus (ii)
Consolidated Income Tax Expense, and any provision for taxes utilized in
computing the net losses under clause (i) hereof, plus (iii) Consolidated
Interest Expense (income), net, plus (iv) Other nonoperating (expenses) income,
net (v) depreciation, amortization and all other non-cash charges, to the extent
such depreciation, amortization and other non-cash charges were deducted in
computing such Consolidated Net Income (Loss) (including amortization of
goodwill and other intangibles) (other than non-cash charges which require an
accrual or reserve for cash charges in future periods), less (vi) non-cash items
increasing Consolidated Net Income (Loss) of such Person for such period
(excluding any items which represent the reversal of any accrual of, or cash
reserve for, anticipated cash charges in any prior period and excluding the
amortization of deferred sign-on and hook-up fee revenue).
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
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"Permitted Business" means (i) the delivery or distribution of television,
radio, paging or other telecommunications services in Latin America and Portugal
and (ii) any business or activity reasonably related thereto, including, without
limitation, any business conducted by the Company or any Restricted Subsidiary
on the Issue Date, the acquisition, holding or exploitation of any license
relating to the delivery of the services described in clause (i) of this
definition, the development or acquisition of rights to programming for delivery
or distribution in accordance with clause (i) of this definition and any other
business involving voice, data or video telecommunications services.
"Permitted Holders" means each of Abril S.A., Falcon International
Communications LLC, Falcon International Communications L.P., Falcon
International Communications (Bermuda) L.P., The Hearst Corporation, ABC, Inc.
and Chase Manhattan International Finance Ltd. and any entity of which any of
the foregoing, individually or collectively, beneficially owns more than 50.0%
of the Voting Stock.
"Permitted Investment" means (i) an Investment by the Company or any of its
Restricted Subsidiaries in the Company or a Restricted Subsidiary of the Company
or a Person which will, upon making such Investment, become a Restricted
Subsidiary; PROVIDED, HOWEVER, that the primary business of such Restricted
Subsidiary is a Permitted Business; (ii) any Investment in the California
Broadcast Center by the Company or a Restricted Subsidiary in an amount not to
exceed $10.0 million and, upon the repayment in full of such Investment by the
California Broadcast Center to the Company, the Investment of such amount in
Galaxy Latin America; and (iii) Temporary Cash Investments.
"Permitted Liens" means, (i) Liens for taxes, assessments or other
governmental charges not yet delinquent or which are being contested in good
faith and by appropriate proceedings if adequate reserves with respect thereto
are maintained on the books of the Company or such Subsidiary, as the case may
be, in accordance with GAAP; (ii) carriers', warehousemen's, mechanics',
landlords', materialmen's, repairmen's or other like Liens arising in the
ordinary course of business in respect of obligations which are not yet due or
which are bonded or which are being contested in good faith and by appropriate
proceedings if adequate reserves with respect thereto are maintained on the
books of the Company or such Restricted Subsidiary, as the case may be, in
accordance with GAAP; (iii) pledges or deposits in connection with workmen's
compensation, unemployment insurance and other social security legislation; (iv)
deposits to secure the performance of bids, tenders, trade or government
contracts (other than for borrowed money), leases, licenses, statutory
obligations, surety and appeal bonds, performance bonds and other obligations of
a like nature incurred in the ordinary course of business; (v) judgment or
attachment Liens against the Company or any of its Restricted Subsidiaries not
giving rise to an Event of Default; (vi) Liens arising by operation of law;
(vii) Liens in favor of the Company or any Wholly-Owned Restricted Subsidiary of
the Company; (viii) Liens securing Indebtedness Incurred by the Company in
compliance with to clause (i) of paragraph (b) of the covenant described under
"Certain Covenants--Limitation on Indebtedness"; (ix) Liens on property and
assets (together with accounts receivable arising from such property and assets)
of Galaxy Brasil acquired with the proceeds of Indebtedness Incurred by Galaxy
Brasil in compliance with clause (viii) of paragraph (b) of the covenant
described under "Certain Covenants--Limitation on Indebtedness" or with the
proceeds of other Indebtedness Incurred in compliance with the Indenture,
PROVIDED that such Liens may not secure Indebtedness exceeding an amount equal
to the greater of (A) the amount permitted to be Incurred pursuant to such
clause (viii) and (B) an amount equal to the Operating Cash Flow of Galaxy
Brasil for the four most recent fiscal quarters for which financial statements
are available prior to the date of Incurrence; (x) Liens on real or personal
property of the Company or a Restricted Subsidiary of the Company acquired,
constructed or constituting improvements made after the Issue Date to secure
Purchase Money Indebtedness Incurred after the Issue Date in compliance with the
Indenture; PROVIDED, that (A) such Liens do not extend to any assets other than
the assets so acquired, (B) such Liens shall be created no later than 10 days
after the acquisition of such assets and (C) the principal amount of such
Indebtedness secured by such a Lien does not exceed 80% of such purchase price
or cost of construction or improvement of the property subject to such Lien;
(xi) Liens existing on the Issue Date; (xii) the
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pledge by the Company (A) to the other members of Galaxy Latin America of
warrants and promissory notes the Company holds in the California Broadcast
Center and the Company's equity interest in Galaxy Latin America and SurFin to
secure its obligations under the Equipment Agreements and the contribution
agreements to be entered into in connection with the Equipment Agreements and
the SurFin Guarantee, and the pledge of such warrants and promissory notes in
the California Broadcast Center, and equity interest in Galaxy Latin America to
secure the Company's tax indemnity obligations under the Indemnification
Agreement and (B) to Falcon International of the shares of Capital Stock of the
Company purchased with Put Promissory Notes; and (xiii) Liens to secure
Indebtedness Incurred to extend, renew, refinance or refund (or successive
extensions, renewals, refinancings or refundings), in whole or in part,
Indebtedness secured by any Lien referred to in the foregoing clauses (vii),
(viii), (ix), (x) and (xi) so long as such Lien does not extend to any other
property and the principal amount of Indebtedness so secured is not increased
except as otherwise permitted under the definition of Refinancing Indebtedness.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision hereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the note which is due or overdue or is to become due at the
relevant time.
"Purchase Money Indebtedness" means Indebtedness (i) consisting of the
deferred purchase price of property, conditional sale obligations, obligations
under any title retention agreement and other purchase money obligations, in
each case where the maturity of such Indebtedness does not exceed the
anticipated useful life of the asset being financed, and (ii) incurred to
finance the acquisition by the Company or a Restricted Subsidiary of such asset,
including additions or improvements.
"Put Promissory Notes" means any promissory notes which may be issued by the
Company to Falcon International pursuant to the Stockholders Agreement, as
amended, in the event the Indenture prohibits the Company from purchasing shares
of Capital Stock held by such stockholder; PROVIDED that (a) such notes have
been expressly subordinated in right of payment in full to the Notes (including
principal, interest and premium, if any, and as a consequence of any repurchase,
redemption, or other repayment of the Notes, by way of optional redemption,
Asset Sale Offer or Change of Control Offer to the extent any applicable rights
to repayment are exercised by the Noteholders), (b) such notes are not
Guaranteed by any of the Company's Subsidiaries and are not secured by any Lien
on any property or asset of the Company or any Restricted Subsidiary (other than
by the pledge of the shares of Capital Stock of the Company purchased with Put
Promissory Notes), (c) such notes do not have a Stated Maturity of principal or
any redemption or repurchase or other similar provision (upon a default or
otherwise) earlier than a date at least one year after the final Stated Maturity
of the Notes; and (d) such notes bear interest at a rate consistent with the
terms of the Stockholders Agreement, as amended; PROVIDED, FURTHER, that
payments of interest on such notes may be made solely to the extent Restricted
Payments in like amount may then be made in accordance with the covenant
described under "Certain Covenants--Limitation on Restricted Payments," with any
such interest payment being included in the calculation of whether the
conditions of clause (z) of paragraph (a) of such covenant have been met with
respect to any subsequent Restricted Payments.
"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, renew, repay or extend (including pursuant to any defeasance
or discharge mechanism) (collectively, "refinances," and "refinanced" shall have
a correlative meaning) any Indebtedness existing on the date
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of the Indenture or Incurred in compliance with the Indenture (including
Indebtedness of the Company that refinances Indebtedness of any Restricted
Subsidiary and Indebtedness of any Restricted Subsidiary that refinances
Indebtedness of another Restricted Subsidiary) including Indebtedness that
refinances Refinancing Indebtedness, PROVIDED, HOWEVER, that (i) in respect of
Indebtedness having a Stated Maturity after the Stated Maturity of the Notes,
the Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being refinanced, (ii) in respect of Indebtedness
having a Stated Maturity prior to the Stated Maturity of the Notes, the
Refinancing Indebtedness bears an interest rate materially lower than that of
the Indebtedness being refinanced, (iii) the Refinancing Indebtedness has an
Average Life at the time such Refinancing Indebtedness is Incurred that is equal
to or greater than the Average Life of the Indebtedness being refinanced, (iv)
such Refinancing Indebtedness is Incurred in an aggregate principal amount (or
if issued with original issue discount, an aggregate issue price) that is equal
to or less than the sum of the aggregate principal amount (or if issued with
original issue discount, the aggregate accredited value) then outstanding of the
Indebtedness being refinanced and (v) the Refinancing Indebtedness shall be
subordinated or PARI PASSU (whichever is applicable) in right of payment to the
Notes to the same extent as the Indebtedness being refinanced is subordinated or
PARI PASSU in right of payment to the Notes; PROVIDED, FURTHER, that Refinancing
Indebtedness shall not include Indebtedness of a Restricted Subsidiary which
refinances Indebtedness of the Company or Indebtedness of the Company or a
Restricted Subsidiary that refinances Indebtedness of an Unrestricted
Subsidiary. Notwithstanding the foregoing, in the case of Indebtedness
represented by obligations described in clause (iv) of the definition of
"Indebtedness," the re-incurrence of such Indebtedness within 60 days after the
repayment thereof shall be deemed to be Refinancing Indebtedness for purposes of
this definition; PROVIDED, HOWEVER, that it otherwise complies with the terms of
this definition and that the amount of such Indebtedness deemed to be
Refinancing Indebtedness hereunder shall not exceed $50.0 million at any one
time.
"Representative" means any trustee, agent or representative (if any) of an
issue of Senior Indebtedness.
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Person owning such property transfers
such property to another Person and leases it back from such Person.
"SEC" or "Commission" means the Securities and Exchange Commission.
"Senior Credit Facility" means any senior credit facility (whether a term or
a revolving facility) as such credit facility may be amended, modified,
supplemented, restated or replaced from time to time.
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"Significant Equity Offering" means either (i) a public offering of Common
Stock of the Company either (A) registered under the Securities Act and/or (B)
registered with the CVM and listed on the Sao Paulo Stock Exchange or Rio de
Janeiro Stock Exchange or (ii) an offering on behalf of the Company pursuant to
Rule 144A under the Securities Act of Common Stock of the Company to 100 or more
beneficial holders if such Common Stock is thereafter included for trading
privileges in the PORTAL trading system of Nasdaq.
"Special Restricted Subsidiary" means any Restricted Subsidiary of the
Company that has been designated by the Board of Directors, by a Board
Resolution delivered to the Trustee, as a Special Restricted Subsidiary and as
to which there has not been an effective revocation, in each case in accordance
with the covenant under "Certain Covenants--Limitation on Designations of
Special Restricted Subsidiaries."
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable.
"Strategic Investor" means any Person engaged in a Permitted Business that
as of the date of determination has a Total Equity Market Capitalization of at
least $1.0 billion.
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Notes pursuant to a written agreement.
"Subordinated Shareholder Loans" means Indebtedness of the Company for money
borrowed from a shareholder beneficially owning at least 5.0% of the issued and
outstanding shares of common stock of the Company (or any Affiliate of such
shareholder), PROVIDED that (A) such Indebtedness (and any refinancing thereof)
has been expressly subordinated in right of payment to the prior payment in full
of all Indebtedness (including principal, interest and premium, if any, under
the Notes and the Indenture) of the Company (including as a consequence of any
repurchase, redemption or other repayment of the Notes, by way of optional
redemption, Asset Sale Offer, or Change of Control Offer to the extent any
applicable rights to repayment are exercised by the Noteholders), (B) such
Indebtedness (and any refinancing thereof) is not Guaranteed by any of the
Company's Subsidiaries and is not secured by any Lien on any property or asset
of the Company or any Restricted Subsidiary, (C) such Indebtedness (and any
refinancing thereof) does not have a Stated Maturity of principal or any
redemption or repurchase or other similar provision (upon a default or
otherwise) earlier than a date at least one year after the final Stated Maturity
of the Notes and (D) such Indebtedness bears interest at a rate consistent with
prevailing market practice for subordinated loans; PROVIDED FURTHER that
payments of interest on such Indebtedness (and any refinancing thereof) may be
made solely to the extent Restricted Payments in like amount may then be made in
accordance with the covenant described under "Certain Covenants--Limitation on
Restricted Payments," with any such interest payment being included in the
calculation of whether the conditions of clause (z) of paragraph (a) of such
covenant have been met with respect to any subsequent Restricted Payments.
"Subsidiary" of any Person means any corporation, association, partnership,
joint venture or other business entity (i) of which more than 50.0% of the total
voting power of shares of Capital Stock or other interests (including
partnership interests) entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by (A) such Person,
(B) such Person and one or more Subsidiaries of such Person or (C) one or more
Subsidiaries of such Person and (ii) which is controlled by such Person. Unless
otherwise specified herein, each reference to a Subsidiary shall refer to a
Subsidiary of the Company.
"Subsidiary Guarantee" means, individually, any Guarantee of payment of the
Notes which may from time to time be executed and delivered by a Subsidiary or
affiliate of the Company pursuant to the
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terms of the Indenture, and, collectively, all such Guarantees. Each such
Subsidiary Guarantee will be in the form prescribed in the Indenture.
"SurFin Guarantee" means the Guarantee, dated as of September 18, 1996, by
the Company in favor of Citicorp USA, Inc. as such guarantee may be amended,
modified, supplemented or restated from time to time.
"Temporary Cash Investments" means any of the following: (i) any Investment
in direct obligations of the United States of America or any agency thereof or
obligations Guaranteed by the United States of America or any agency thereof,
(ii) Investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States of America having capital, surplus and undivided profits
aggregating in excess of $250 million (or the foreign currency equivalent
thereof) and whose long-term debt, or whose parent holding company's long-term
debt, is rated "A" (or such similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined in Rule 436
under the Securities Act), (iii) repurchase obligations with a term of not more
than seven days for underlying securities of the types described in clause (i)
above entered into with a bank meeting the qualifications described in clause
(ii) above, (iv) Investments in commercial paper, maturing not more than 180
days after the date of acquisition, issued by a corporation (other than an
Affiliate of the Company) organized and in existence under the laws of the
United States of America or any foreign country recognized by the United States
of America with a rating at the time as of which any investment therein is made
of "P-1" (or higher) according to Moody's Investors Service, Inc. or "A-1" (or
higher) according to Standard and Poor's Ratings Group.
"Total Equity Market Capitalization" of any Person means, as of any date of
determination, the product of (i) the aggregate number of outstanding shares of
Common Stock of such Person on such date (which shall not include any options or
warrants on, or securities convertible or exchangeable into, shares of Common
Stock of such Person) and (ii) the average closing price of such Common Stock
over the 20 consecutive trading days immediately preceding such date. If no such
closing price exists with respect to shares of any such class, the value of such
shares shall be determined by the Board of Directors in good faith and evidenced
by a resolution of the Board of Directors filed with the Trustee.
"Trade Payables" means, with respect to any Person, any accounts payable or
any indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by such Person (including letters of credit issued in respect
thereof) arising in the ordinary course of business in connection with the
acquisition of either (x) current assets as characterized in accordance with
GAAP or (y) services which are currently expensed in accordance with GAAP.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company (other
than a Guarantor) designated as such pursuant to and in compliance with the
covenant described under "Certain Covenants--Limitation on Designations of
Unrestricted Subsidiaries" and (ii) any Subsidiary of an Unrestricted
Subsidiary.
"US Dollar Equivalent" means, with respect to any monetary amount in a
currency other than the US dollar at any one time for the determination thereof,
the amount of US dollars obtained by converting such foreign currency involved
in such computation into US dollars at the spot rate for the purchase of US
dollars with the applicable foreign currency as quoted by Reuters at
approximately 11:00 a.m. (New York time) on the date not more than two business
days prior to such determination. For purposes of determining whether any
Indebtedness can be incurred (including Permitted Indebtedness), any Investment
can be made and any Affiliate Transaction can be undertaken (a "Tested
Transaction"), the "US Dollar Equivalent" of such Indebtedness, Investment or
Affiliate Transaction shall be determined on the date incurred, made or
undertaken and no subsequent change in the US Dollar Equivalent shall cause such
Tested Transaction to have been incurred, made or undertaken in violation of the
Indenture.
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"US Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Wholly-Owned Subsidiary" means a Subsidiary of the Company, at least 95.0%
of the Capital Stock of which (other than directors' qualifying shares) is owned
by the Company or another Wholly-Owned Subsidiary of the Company.
BOOK-ENTRY; DELIVERY AND FORM
Except as set forth below, the Exchange Notes will be issued in the form of
one or more registered notes in global form without coupons (each a "Global
Note"). Upon issuance, each Global Note will be deposited with, or on behalf of,
The Depository Trust Company ("DTC") and registered in the name of Cede & Co.,
as nominee of DTC.
Old Notes originally purchased by or transferred to (i) institutional
"accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act) who are not "qualified institutional buyers" (as defined in Rule
144A under the Securities Act and referred to as "QIBs"), (ii) QIBs who elected
to take physical delivery of their certificates instead of holding their
interest in Global Notes, or (iii) any other holders who are not QIBs, which Old
Notes were issued in registered form without coupons (the "Old Certificated
Notes") are exchangeable for Exchange Notes in registered form without coupons
(the "Exchange Certificated Notes").
Interests in the Global Notes will be exchangeable or transferable, as the
case may be, for Exchange Certificated Notes if (i) DTC notifies Tevecap that it
is unwilling or unable to continue as depositary for such Global Notes, or DTC
ceases to be a "Clearing Agency" registered under the Exchange Act, and a
successor depositary is not appointed by Tevecap within 90 days, or (ii) an
Event of Default has occurred and is continuing with respect to such Notes. Upon
the occurrence of any of the events described in the preceding sentence, Tevecap
will cause the appropriate Exchange Certificated Notes to be delivered.
The Depository has advised the Company that it is (i) a limited purpose
trust company organized under the laws of the State of New York, (ii) a member
of the Federal Reserve System, (iii) a "clearing corporation" within the meaning
of the Uniform Commercial Code, as amended, and (iv) a "Clearing Agency"
registered pursuant to Section 17A of the Exchange Act. The Depository was
created to hold securities for its participants (collectively, the
"Participants") and facilitates the clearance and settlement of securities
transactions between Participants through electronic book entry changes to the
accounts of its Participants, thereby eliminating the need for physical transfer
and delivery of certificates. The Depository's Participants include securities
brokers and dealers (including the Initial Purchasers), banks and trust
companies, clearing corporations and certain other organizations. Access to the
Depository's system is also available to other entities such as banks, brokers,
dealers and trust companies (collectively, the "Indirect Participants") that
clear through or maintain a custodial relationship with a Participant, either
directly or indirectly. QIBs who are not Participants may beneficially own
securities held by or on behalf of the Depository only through Participants or
Indirect Participants.
The Company expects that pursuant to procedures established by the
Depository (i) upon deposit of the Global Notes, the Depository or its custodian
will credit the accounts of Participants designated by the Initial Purchasers
with an interest in a Global Note and (ii) ownership of the Notes will be shown
on, and the transfer of ownership thereof will be effected only through, records
maintained by the Depository (with respect to the interest of Participants), the
Participants and the Indirect Participants. The laws of some states require that
certain persons take physical delivery in definitive form of securities that
they
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own and that security interests in negotiable instruments can only be perfected
by delivery of certificates representing the instruments. Consequently, the
ability to transfer Notes or to pledge the Notes as collateral will be limited
to such extent.
So long as the Depository or its nominee is the registered owner of a Global
Note, the Depository or such nominee, as the case may be, will be considered the
sole owner or Holder of the Notes represented by such Global Note for all
purposes under the Indenture. Except as provided below, owners of beneficial
interests in a Global Note will not be entitled to have Notes represented by
such Global Note registered in their names, will not receive or be entitled to
receive physical delivery of Certificated Securities, and will not be considered
the owners or holders thereof under the Indenture for any purpose, including
with respect to giving of any directions, instruction or approval to the Trustee
thereunder. As a result, the ability of a person having a beneficial interest in
Notes represented by a Global Note to pledge such interest to persons or
entities that do not participate in the Depository's system or to otherwise take
action with respect to such interest, may be affected by the lack of a physical
certificate evidencing such interest.
Accordingly, each person owning a beneficial interest in a Global Note must
rely on the procedures of the Depository and, if such beneficial owner is not a
Participant or an Indirect Participant, on the procedures of the Participant
through which such person owns its interest, to exercise any rights of a Holder
under the Indenture or such Global Note. The Company understands that under
existing industry practice, in the event the Company requests any action of
holders or a person that is an owner of a beneficial interest in a Global Note
desires to take any action that the Depository, as the Holder of such Global
Note, is entitled to take, the Depository would authorize the Participants to
take such action and the Participant would authorize beneficial owners owning
through such Participants to take such action or would otherwise act upon the
instruction of such beneficial owners. Neither the Company nor the Trustee will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of Notes by the Depository, or for maintaining,
supervising or reviewing any records of the Depository relating to such Notes.
Payments with respect to the principal of, premium, if any, and interest on
any Notes represented by a Global Note registered in the name of the Depository
or its nominee on the applicable record date will be payable by the Trustee to
or at the direction of the Depository or its nominee in its capacity as the
registered Holder of such Global Note representing such Notes under the
Indenture. Under the terms of the Indenture, the Company and the Trustee may
treat the persons in whose names the Notes, including the Global Notes, are
registered as the owners thereof for the purpose of receiving such payment and
for any and all other purposes whatsoever. Consequently, neither the Company nor
the Trustee has or will have any responsibility or liability for the payment of
such amounts to beneficial owners of Notes (including principal, premium, if
any, and interest), or to immediately credit the accounts of the relevant
Participants with such payment, in amounts proportionate to their respective
holdings in principal amount of beneficial interest in a Global Note as shown on
the records of the Depository. Payments by the Participants and the Indirect
Participants to the beneficial owners of Notes will be governed by standing
instructions and customary practice and will be the responsibility of the
Participants or the Indirect Participants.
CERTIFICATED SECURITIES
If (i) the Company notifies the Trustee in writing that the Depository is no
longer willing or able to act as a depository and the Company is unable to
locate a qualified successor within 90 days, (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Notes in
definitive form under the Indenture, or (iii) upon the occurrence of certain
other events, then, upon surrender by the Depository of its Global Notes,
Certificated Securities will be issued to each person that the Depository
identifies as the beneficial owner of the Notes represented by the Global Note.
In addition, subject to certain conditions, any person having a beneficial
interest in a Global Note may,
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upon request to the Trustee, exchange such beneficial interest for Certificated
Securities. Upon any such issuance, the Trustee is required to register such
Certificated Securities in the name of such person or persons (or the nominee of
any thereof), and cause the same to be delivered thereto.
Neither the Company nor the Trustee shall be liable for any delay by the
Depository or any Participant or Indirect Participant in identifying the
beneficial owners of the related Notes and each such person may conclusively
rely on, and shall be protected in relying on, instructions from the Depository
for all purposes (including with respect to the registration and delivery, and
the respective principal amounts, of the Notes to be issued).
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Notes will be made in immediately available funds. So
long as the Notes are represented by a permanent Global Note or Notes, all
payments of principal, premium, if any, and interest will be made by the Company
in immediately available funds.
Secondary trading in long-term notes and debentures of corporate issuers is
generally settled in clearing-house or next-day funds. So long as the Notes are
represented by a permanent Global Note or Notes registered in the name of the
Depositary or its nominee, except for trades between Euroclear and Cedel
participants, interests in the Notes are expected to trade in the Depositary's
Same-Day Funds Settlement System, and secondary market trading activity in the
Notes will therefore be required by the Depositary to settle in immediately
available funds. No assurance can be given as to the effect, if any, of
settlement in immediately available funds on the trading activity in the Notes.
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INCOME TAX CONSIDERATIONS
BRAZIL
The following is a summary of the material Brazilian income tax consequences
to Tevecap in connection with the sale and repayment of the Notes (including any
interest thereon) and to beneficial owners of the Notes that are non-residents
of Brazil in connection with the purchase, ownership and disposition of such
Notes. This summary is limited to Tevecap and to non-residents of Brazil which
acquire the Notes at the issue price from the Initial Purchasers, and does not
address investors who purchase Notes at a premium or market discount. In
addition, this summary is based on the Brazilian tax regulations as presently in
effect and does not take into account possible future changes in such tax laws.
Prospective purchasers of the Notes are advised to consult their tax advisers as
to the consequences of a purchase and sale of the Notes.
Individuals domiciled in Brazil and Brazilian companies are taxed in Brazil
on the basis of their worldwide income (which includes earnings of Brazilian
companies' foreign subsidiaries, branches and affiliates). The earnings of
branches of foreign companies and non- Brazilian residents in general are taxed
in Brazil only when derived from Brazilian sources. Interest, fees, commissions
and any other income (which for the purposes of this paragraph includes any
deemed income on the difference between the issue price of the Notes and the
price at which the Notes are redeemed) payable by a Brazilian obligor to an
individual, company, entity, trust or organization domiciled outside Brazil is
considered derived from Brazilian sources and is therefore subject to income tax
withheld at the source. Brazilian tax laws expressly authorize the paying source
to pay the income or earnings net of taxes and, therefore, to assume the cost of
the applicable tax. The rate of withholding is 15.0% or such other lower rate as
is provided for in an applicable tax treaty between Brazil and such other
country where the recipient of the payment has its domicile. Notwithstanding the
foregoing, the applicable withholding tax rate for negotiable instruments such
as the Notes was reduced to zero, pursuant to Resolutions 1853 of July 31, 1991
and 644 of October 22, 1980 of the Central Bank, subject to Central Bank
Circular 2661 of February 8, 1996, which restricts such withholding tax
reductions to negotiable instruments having a minimum maturity of 96 months. As
a result, since the Notes have an original maturity of 96 months, such reduction
will apply to payments of interest and other income with respect to the Notes.
If, however, any Note is redeemed prior to November 26, 2004, such reduction
will not apply and, therefore, upon such redemption the Brazilian withholding
tax will be imposed on the amount of interest, fees and commissions paid on such
Notes from the date of issue through the date of redemption. Based on the advice
of its Brazilian tax counsel, Tevecap believes and intends to take the position
for tax reporting purposes that, in the event of any such early redemption to
which such withholding tax applies, so long as the Principal Paying Agent is
located in Japan and payment to the Principal Paying Agent discharges the
obligations of Tevecap to make payments in respect of the Notes, interest and
other income with respect to the Notes will be subject to Brazilian withholding
tax at a rate of 12.5% under the tax treaty in effect between Brazil and Japan.
In any event, under the terms of the Notes, Tevecap would be required to gross
up Noteholders for any Brazilian withholding tax, subject to customary
exceptions. See "Description of the Notes--Additional Amounts." Tevecap has the
right to redeem the Notes at par in the event that it is required to gross up
for Brazilian withholding tax imposed at a rate in excess of 15.0%. See
"Description of the Notes--Redemption for Changes in Withholding Taxes."
Any earnings or capital gains resulting from the sale (whether inside or
outside Brazil) of any Notes by a non-resident of Brazil to another non-resident
of Brazil are not subject to tax in Brazil. Earnings or capital gains resulting
from the sale (whether inside or outside Brazil) of any Notes by a non-resident
of Brazil to a resident of Brazil should not be subject to tax in Brazil,
although the matter is not free from doubt.
On February 8, 1996, the Brazilian Federal Government issued Decree No.
1815, implemented by Portaria No. 28 (as amended from time to time), which
imposed a tax on Brazilian issuers with respect to
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foreign exchange transactions ("IOF Tax") related to the entering into Brazil of
proceeds resulting from foreign loans (including the issuance of securities such
as the Notes). The IOF Tax has varying rates depending on the final maturity of
the transaction as follows: (i) foreign loans with a minimum average maturity of
less than 3 years are subject to a 3.0% IOF Tax; (ii) foreign loans with a
minimum average maturity of 3 years or more but less than 4 years are subject to
a 2.0% IOF Tax; (iii) foreign loans with a minimum average maturity of 4 years
or more but less than 5 years are subject to a 1.0% IOF Tax; and (iv) foreign
loans with a minimum average maturity of 5 years or more are not subject to IOF
Tax. Only Brazilian issuers, and not holders of foreign loans such as the Notes
are liable for payment of IOF Tax.
There is no stamp, transfer or other similar tax in Brazil with respect to
the transfer, assignment or sale or any debt instrument--outside Brazil
(including the Notes).
UNITED STATES
The following is a summary of the material United States Federal income tax
consequences to beneficial owners of the Notes that are citizens or residents of
the United States, corporations, partnerships or other entities created or
organized in or under the laws of the United States or any State thereof, as
well as other persons subject to United States Federal income taxation on a net
income basis in respect of the purchase, ownership and disposition of a Note
("US Holders"). Such tax treatment may vary depending upon the particular
situation of a US Holder. This summary does not discuss all of the tax
consequences that may be relevant to certain types of investors subject to
special treatment under the United States Federal income tax laws (such as
individual retirement accounts and other tax deferred accounts, banks,
securities broker- dealers, life insurance companies, tax-exempt organizations,
foreign persons, persons whose "functional currency" is other than the US dollar
or persons which hold Notes as part of a "straddle" or "conversion transaction"
or otherwise as part of a "synthetic asset") and is limited to investors which
hold Notes as capital assets. In addition, this summary is limited to US Holders
which acquire the Notes at their issue price from the Initial Purchasers and
does not address investors who purchase Notes at a premium or market discount.
This summary is based on the Internal Revenue Code of 1986, as amended (the
"Code"), final, temporary and proposed Treasury regulations thereunder (the
"Regulations"), revenue rulings, court cases, and other legal authorities as now
in effect (or proposed) and as currently interpreted, and does not take into
account possible changes in such tax laws or other legal authorities or such
interpretations. No rulings on any of the issues discussed below will be sought
from the United States Internal Revenue Service (the "IRS").
PROSPECTIVE PURCHASERS OF THE NOTES ARE ADVISED TO CONSULT THEIR TAX
ADVISERS AS TO THE CONSEQUENCES OF A PURCHASE AND SALE OF NOTES, INCLUDING,
WITHOUT LIMITATION, (I) THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR
NON-US TAX LAWS TO WHICH THEY MAY BE SUBJECT, AND OF ANY POSSIBLE LEGISLATIVE OR
ADMINISTRATIVE CHANGES IN LAW, (II) THE UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES OF THE POSSIBLE DEDUCTION BY THE ISSUER OF BRAZILIAN TAXES (AND OF
THE PAYMENT BY THE ISSUER OF ADDITIONAL AMOUNTS WITH RESPECT THERETO) FROM
PAYMENTS ON THE NOTES, (III) THE AVAILABILITY FOR UNITED STATES FEDERAL INCOME
TAX PURPOSES OF A CREDIT OR DEDUCTION FOR ANY BRAZILIAN TAXES SO DEDUCTED AND
(IV) THE CONSEQUENCES OF PURCHASING THE NOTES AT A PRICE OTHER THAN THEIR ISSUE
PRICE.
INTEREST ON THE NOTES
Interest on the Notes will be taxable to a US Holder as ordinary income at
the time it accrues or is received in accordance with the US Holder's method of
accounting for tax purposes. The amount includible in the income of a US Holder
will be the gross amount of interest, including any Additional Amounts, if any,
payable to holders of Notes (i.e., the amount before deduction of any Brazilian
withholding taxes).
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DISPOSITION OF A NOTE
Generally, any sale, redemption or other taxable disposition of a Note by a
US Holder will result in taxable gain or loss equal to the difference between
(1) the sum of the amount of cash and the fair market value of other property
received with respect to such taxable sale, redemption or other distribution
(other than consideration attributable to accrued interest not previously taken
into account, which consideration would be treated as interest received) and (2)
the US Holder's tax basis in the Note. Any gain or loss upon a sale or other
disposition of a Note will be capital gain or loss (which will be long-term if
the Note is held for more than one year).
EXCHANGE OFFER
The exchange of Old Notes for Exchange Notes pursuant to the Exchange Offer
will not be considered a recognition event for United States Federal income tax
purposes and accordingly a US Holder will not recognize taxable gain or loss as
a result thereof. For the purposes of determining the amount and character of
gain or loss upon the subsequent sale or exchange of Exchange Notes, a US Holder
would have the same tax basis and holding period in an Exchange Note as such US
Holder's tax basis and holding period in the Note exchanged therefor.
EFFECT OF BRAZILIAN WITHHOLDING TAXES
It is believed that payments with respect to a Note will not be subject to
Brazilian withholding tax unless the Note is redeemed prior to November 26,
2004. See "--Brazil." In the case of any Note which is so redeemed, withholding
taxes in respect of interest previously paid may be imposed by Brazil at the
time of redemption. Any Brazilian tax withheld generally will be treated as a
foreign income tax that US Holders may elect to deduct in computing their
taxable income or, subject to the limitations on foreign tax credits generally,
to credit against their United States Federal income tax liability. No such
deduction or credit will be available to the extent Brazil pays a subsidy to a
US Holder, a related person or Tevecap, the amount of which is determined
(directly or indirectly) by reference to the amount of the withholding tax.
While Brazil does not have a program or policy of paying such subsidies at
present, it has had programs of that nature in the past and could implement such
programs again in the future. For purposes of determining a US Holder's United
States foreign tax credit, the gain or loss on the sale, redemption or other
taxable disposition of a Note will generally constitute United States source
income. Interest (including any Additional Amounts payable by Tevecap) will
generally constitute foreign source passive income or financial services income
for United States foreign tax credit purposes. However, if a Note is redeemed
prior to November 26, 2004, and payments with respect to the Note are subject to
Brazilian withholding tax imposed at a rate of 5.0% or more, the IRS might
retroactively treat interest paid with respect to the Note as high withholding
tax interest. In any event, because the amount of foreign taxes for which the
foreign tax credit may be taken for the taxable year is generally limited to an
amount equal to the US Holder's United States Federal income tax rate multiplied
by its foreign source income for the taxable year, a US Holder may have
insufficient foreign source income to utilize fully any foreign tax credit
attributable to such Brazilian withholding taxes (but such US Holder may be
entitled to utilize the foreign tax credit attributable to such withholding
taxes for the holders' previous two or succeeding five taxable years, or such
withholding taxes may instead be deductible by the US Holder). A US Holder may
be required to provide the IRS with a certified copy of the receipt evidencing
payment of withholding tax imposed in respect of payments on the Notes (a
"Certified Copy") in order to claim a foreign tax credit in respect of such
withholding tax. A US Holder (or its agent) may obtain a Certified Copy by
providing written demand therefor to the Principal Paying Agent. The Principal
Paying Agent will contact Tevecap, which will provide such Certified Copy to the
Principal Paying Agent for prompt forwarding to the relevant US Holder. Tevecap
will attach to each Certified Copy a certificate stating (x) that the amount of
withholding tax evidenced by the Certified Copy was paid in connection with
payments in respect of
139
<PAGE>
the principal amount of Notes then outstanding and (y) the amount of such
withholding tax paid per US$1,000 of principal amount of the Notes.
INFORMATION REPORTING AND BACKUP WITHHOLDING
For each calendar year in which the Notes are outstanding, each DTC
participant or indirect participant holding an interest in a Note on behalf of a
US Holder and each paying agent making payments in respect of a Note will
generally be required to provide the IRS with certain information, including
such US Holder's name, address and taxpayer identification number (either such
US Holder's Social Security number or its employer identification number, as the
case may be), and the aggregate amount of interest and principal paid to such US
Holder during the calendar year. These reporting requirements, however, do not
apply with respect to certain US Holders, including corporations, securities
dealers, other financial institutions, tax-exempt organizations, qualified
pension and profit sharing trusts, individual retirement accounts.
In the event that a US Holder fails to establish its exemption from such
information reporting requirements or is subject to the reporting requirements
described above and fails to supply its correct taxpayer identification number
in the manner required by applicable law, or underreports its tax liability, the
direct or indirect DTC participant holding such interest on behalf of such US
Holder or paying agent making payments in respect of a Note may be required to
"backup" withhold a tax equal to 31.0% of each payment of interest and principal
with respect to the Notes. This backup withholding tax is not an additional tax
and may be credited against the US Holder's United States Federal income tax
liability if the required information is furnished to the IRS.
140
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Securities for its own account
pursuant to the Registered Exchange Offer must acknowledge that it will deliver
a prospectus in connection with any resales of such Exchange Securities. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Securities received in
exchange for Securities where such Securities were acquired as a result of
market-making activities or other trading activities. Each of the Company and
the Subsidiary Guarantors has agreed that, for a period of 90 days after the
Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until July 21, 1997, all dealers effecting transactions in the
Exchange Securities may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of Exchange
Securities by broker-dealers. Exchange Securities received by broker-dealers for
their own account pursuant to the Registered Exchange Offer may be sold from
time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Exchange
Securities or a combination of such methods of resale, at market prices
prevailing at the time of resale, at prices related to such prevailing market
prices or at negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer or the
purchasers of any such Exchange Securities. Any broker-dealer that resells
Exchange Securities that were received by it for its own account pursuant to the
Registered Exchange Offer and any broker or dealer that participates in a
distribution of such Exchange Securities may be deemed to be an "underwriter"
within the meaning of the Securities Act and any profit on any such resale of
Exchange Securities and any commission or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The Letter of Transmittal states that, by acknowledging that it will deliver and
by delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
For a period of 90 days after the Expiration Date the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the Letter
of Transmittal. The Company and the Subsidiary Guarantors have jointly and
severally agreed to pay all expenses incident to the Registered Exchange Offer
(including the expenses of one counsel for the Holders of the Securities) other
than commissions or concessions of any broker-dealers and will indemnify the
Holders of the Securities (including any broker-dealers) against certain
liabilities, including liabilities under the Securities Act.
EXPERTS
The consolidated balance sheets of Tevecap S.A. and subsidiaries as of
December 31, 1995 and 1994 and the related statements of income, changes in
shareholders' equity and cash flows for the two years in the period ended
December 31, 1995 and the combined statements of income, shareholders' equity
and cash flows of the Tevecap S.A. and subsidiaries for the year ended December
31, 1993 have been included herein in reliance on the report of Coopers &
Lybrand, independent public accountants, given on the authority of that firm as
experts in auditing and accounting.
The balance sheets of TVA Sistema De Televisao S.A. as of December 31, 1995
and 1994 and the related statements of income, changes in shareholders' equity
and cash flows for the three years in the period ended December 31, 1995 have
been included herein in reliance on the report of Coopers & Lybrand, independent
public accountants, given on the authority of that firm as experts in auditing
and accounting.
The combined balance sheets of TVA Sul Participacoes S.A. and subsidiaries
as of December 31, 1995 and 1994 and the related statements of income, changes
in shareholders' equity and cash flows for
141
<PAGE>
the three years in the period ended December 31, 1995 have been included herein
in reliance on the report of Coopers & Lybrand, independent public accountants,
given on the authority of that firm as experts in auditing and accounting.
The Statements of Revenues and Direct Operating Expenses of TVA Alfa Cabo
Ltda., TCC TV a Cabo Ltda., CCS Camboriu Cable System de Telecommunicacoes
Ltda., TVA Sul Foz do Iguacu Ltda., and TVA Sul Santa Catarina Ltda. for the
three years in the period ended December 31, 1995 have been included herein in
reliance on the reports of Coopers & Lybrand, independent public accountants,
given on the authority of that firm as experts in auditing and accounting.
With respect to the unaudited interim financial information of Tevecap S.A.
and subsidiaries for the nine-months ended September 30, 1995 and 1996, Coopers
& Lybrand reported that they have applied limited procedures in accordance with
professional standards for a review of such information. However, their report
dated November 21, 1996, states that they did not audit and they do not express
opinions on the aforementioned unaudited interim financial information.
Accordingly, the degree of reliance on their report on such information should
be restricted in light of the limited nature of the review procedures applied.
Coopers & Lybrand are not subject to the liability provisions of Section 11 of
the Securities Act of 1933 (the "Act") for their report on the aforementioned
unaudited interim condensed financial statements because this report is not a
"report" or a "part" of the registration statement prepared or certified by
Coopers & Lybrand within the meaning of Sections 7 and 11 of the Act.
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the
Exchange Notes being offered hereby will be passed upon for the Company by Basch
& Rameh--Advogados e Consultores, Sao Paulo, with respect to matters of
Brazilian law, and by Mayer, Brown & Platt, New York, with respect to matters of
United States federal law and New York law. The matters referred to under
"Income Tax Considerations--United States" will be passed upon for the Company
by Mayer, Brown & Platt, New York.
AVAILABLE INFORMATION
Tevecap and the Guarantors have filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement on Form F-4 under the
Securities Act of 1933 (the "Securities Act"), with respect to the Exchange
Securities offered hereby (the "Exchange Offer Registration Statement"). This
Prospectus, which constitutes a part of the Exchange Offer Registration
Statement, does not contain all the information set forth in the Exchange Offer
Registration Statement, certain parts of which have been omitted from the
Prospectus in accordance with the rules and regulations of the Commission. For
further information with respect to Tevecap, the Guarantors and the Exchange
Securities offered hereby, reference is made to the Exchange Offer Registration
Statement, including the exhibits and schedules filed therewith, and the
financial statements and notes filed as a part thereof. Statements made in the
Prospectus concerning the contents of any document referred to herein are not
necessarily complete. With respect to each such document filed with the
Commission as an exhibit to the Exchange Offer Registration Statement, reference
is made to the exhibit for a more complete description of the matter involved,
and each such statement shall be deemed qualified in its entirely by such
reference.
Tevecap is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith is required to file reports with the Commission. All reports and other
information filed by Tevecap, and the Exchange Offer Registration Statement,
including the exhibits and schedules thereto, may be inspected and copied at the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission located at Seven World Trade Center, New York, New York 10048, and
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
142
<PAGE>
Illinois 60661. Copies of such materials may be obtained from the Public
Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and its public reference facilities in New
York, New York, and Chicago, Illinois, at the prescribed rates.
As a result of the filing of the Exchange Offer Registration Statement with
the Commission, the Guarantors will become subject to the informational
requirements of the Exchange Act, and in accordance therewith will be required
to file reports and other information with the Commission. The Indenture
provides that, whether or not Tevecap has a class of securities registered under
the Exchange Act, Tevecap shall furnish without cost to each holder of Notes and
file with the Commission (whether or not Tevecap is a public reporting company
at the time), the Trustee and the Initial Purchasers: (i) within 140 days after
the end of each fiscal year of Tevecap, annual reports on Form 20-F (or any
successor form) containing the information required to be contained therein (or
required in such successor form); (ii) within 60 days after the end of each of
the first three fiscal quarters of each fiscal year, reports on Form 6-K (or any
successor form); and (iii) promptly from time to time after the occurrence of
any event required to be therein reported, such other reports on Form 6-K (or
any successor form) containing substantially the same information required to be
contained in Form 8-K (or required in any successor form). Each of the reports
will be prepared in accordance with US GAAP consistently applied and will be
prepared in accordance with the applicable rules and regulations of the
Commission.
As foreign private issuers, Tevecap and the Guarantors are exempt from
certain provisions of the Exchange Act prescribing the furnishing and content of
proxy statements.
PUBLIC DOCUMENTS
The information presented in the section entitled "Annex A--The Federative
Republic of Brazil" is based upon material obtained from the Central Bank of
Brazil, the Sao Paulo and Rio de Janeiro Stock Exchanges, the IBGE and from
other publicly available information referred to therein. The information is
believed to be accurate but has not been independently verified by Tevecap or
any of its advisors in connection with the Offering.
143
<PAGE>
TEVECAP S.A. AND
SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<S> <C>
Report of Independent Accountants.................................................... F- 3
Balance Sheets at September 30, 1996 (unaudited) and December 31, 1995 and 1994...... F- 4
Statements of Operations for the nine months ended September 30, 1996 (unaudited),
and September 30, 1995 (unaudited) and each of the three years ended December 31,
1995............................................................................... F- 6
Statements of Changes in Shareholders' Equity and Statement of Redeemable Common
Stock for the nine months ended September 30, 1996 (unaudited), and September 30,
1995 (unaudited) and each of the three years ended December 31, 1995............... F- 7
Statements of Cash Flows for the nine months ended September 30, 1996 (unaudited) and
September 30, 1995 (unaudited) and each of the three years ended December 31,
1995............................................................................... F- 8
Notes to these Financial Statements.................................................. F-10
</TABLE>
TVA SISTEMA DE TELEVISAO S.A.
CONTENTS
<TABLE>
<S> <C>
Report of Independent Accountants.................................................... F-43
Balance Sheets at September 30, 1996 (unaudited) and December 31, 1995 and 1994...... F-44
Statements of Operations for the nine months ended September 30, 1996 (unaudited) and
September 30, 1995 (unaudited) and each of the three years ended December 31,
1995............................................................................... F-46
Statements of Changes in Shareholders' Equity for the nine months ended September 30,
1996 (unaudited) and September 30, 1995 (unaudited) and each of the three years
ended December 31, 1995............................................................ F-47
Statements of Cash Flows for the nine months ended September 30, 1996 (unaudited) and
September 30, 1995 (unaudited) and each of the three years ended December 31,
1995............................................................................... F-48
Notes to these Financial Statements.................................................. F-49
</TABLE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
CONTENTS
<TABLE>
<S> <C>
Report of Independent Accountants.................................................... F-61
Balance Sheets at September 30, 1996 (unaudited) and December 31, 1995 and 1994...... F-62
Statements of Operations for the nine months ended September 30, 1996 (unaudited) and
September 30, 1995 (unaudited) and each of the three years in the period ended
December 31, 1995.................................................................. F-64
Statements of Changes in Shareholders' Equity for the nine months ended September 30,
1996 (unaudited) and September 30, 1995 (unaudited) and each of the three years in
the period ended December 31, 1995................................................. F-65
Statements of Cash Flows for the nine months ended September 30, 1996 (unaudited) and
September 30, 1995 (unaudited) and each of the three years in the period ended
December 31, 1995.................................................................. F-66
Notes to these Financial Statements.................................................. F-68
</TABLE>
TV ALFA CABO LTDA.
CONTENTS
<TABLE>
<S> <C>
Report of Independent Accountants.................................................... F-78
Statements of Revenues and Direct Operating Expenses................................. F-79
Notes to Statements of Revenues and Direct Operating Expenses........................ F-80
</TABLE>
TCC TV A CABO LTDA.
CONTENTS
<TABLE>
<S> <C>
Report of Independent Accountants.................................................... F-81
Statements of Revenues and Direct Operating Expenses................................. F-82
Notes to Statements of Revenues and Direct Operating Expenses........................ F-83
</TABLE>
F-1
<PAGE>
CSS CAMBORIU CABLE SYSTEMS DE TELECOMUNICACOES LTDA.
CONTENTS
<TABLE>
<S> <C>
Report of Independent Accountants.................................................... F-84
Statements of Revenues and Direct Operating Expenses................................. F-85
Notes to Statements of Revenues and Direct Operating Expenses........................ F-86
</TABLE>
TVA SUL FOZ DO IGUACU LTDA.
(FORMERLY TCI TV A CABO IGUACU LTDA.)
CONTENTS
<TABLE>
<S> <C>
Report of Independent Accountants.................................................... F-87
Statements of Revenues and Direct Operating Expenses................................. F-88
Notes to Statements of Revenues and Direct Operating Expenses........................ F-89
</TABLE>
TVA SUL SANTA CATARINA LTDA.
(FORMERLY TV CABO SERVICOS SANTA CATARINA LTDA.
CONTENTS
<TABLE>
<S> <C>
Report of Independent Accountants.................................................... F-90
Statements of Revenues and Direct Operating Expenses................................. F-91
Notes to Statements of Revenues and Direct Operating Expenses........................ F-92
</TABLE>
TVA ALFA CABO LTDA.("TV ALFA"); TCC TV A CABO LTDA. ("TCC"); CCS CAMBORIU CABLE
SYSTEM DE TELECOMUNICACOES LTDA. ("CCS");TVA SUL PARANA LTDA.("TVA PARANA); TVA
SUL FOZ DO IGUACU LTDA.("FOZ DO IGUACU");AND, TVA SUL SANTA
CATARINA LTDA ("SSC")
(UNAUDITED FINANCIAL INFORMATION)
CONTENTS
<TABLE>
<S> <C>
Balance Sheets at September 30, 1996 (unaudited)..................................... F-93
Statements of Income for the nine months ended September 30, 1996 (unaudited)........ F-94
Statements of Changes in Shareholders' Equity for the nine months ended September 30,
1996 (unaudited)................................................................... F-95
Statements of Cash Flows for the nine months ended September 30, 1996 (unaudited).... F-96
Notes to these Unaudited Financial Information....................................... F-97
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
TEVECAP S.A.
We have audited the accompanying a) consolidated balance sheets of TEVECAP
S.A. and subsidiaries (the "Company") as of December 31, 1995 and 1994 and the
related consolidated statements of operations, changes in shareholders' equity
and redeemable common stock and cash flows for the two years in the period ended
December 31, 1995; and, b) combined statements of operations, shareholders'
equity and cash flows of the Company for the year ended December 31, 1993, 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 audit 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, a) the consolidated financial position of the Company
as of December 31, 1995 and 1994 and the consolidated results of operations and
cash flows for the two years in the period ended December 31, 1995; and, b) the
combined results of operations and cash flows of the Company for the year ended
December 31, 1993, in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note 3 to these financial statements, the Company has
retroactively changed its method of accounting for installation equipment costs
and operating costs incurred during the period of constructing their television
systems.
As discussed in Note 4, the previously issued financial statements as of
December 31, 1994 and 1995 and for each of the two years in the period ended
December 31, 1995 have been restated to reflect the reclassification of common
stock subject to redemption separately from equity and the reporting of an
investment on the equity method.
Coopers & Lybrand
Sao Paulo, Brazil
August 23, 1996, except as to the information presented
in Notes 4, 20, 25 and 26 for which the date is February 5, 1997.
F-3
<PAGE>
TEVECAP S.A. AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 (UNAUDITED), AND DECEMBER 31, 1995 AND 1994
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ----------------------
1996 1995 1994
-------------- ----------- ---------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents (Note 5).................................... $ 619 $ 24,201 $ 4,644
Accounts receivable, net (Note 6)..................................... 21,645 11,253 7,541
Inventories (Note 7).................................................. 15,840 13,076 5,703
Film exhibition rights (Note 8)....................................... 725 30 1,417
Prepaid and other assets (Note 9)..................................... 2,511 2,968 1,699
Other accounts receivable (Note 10)................................... 2,259 985 384
-------------- ----------- ---------
Total current assets................................................ 43,599 52,513 21,388
-------------- ----------- ---------
Property, plant and equipment (Note 14)................................. 188,063 131,266 51,426
Investments (Note 13)
Equity affiliates..................................................... 6,231 3,462 1,856
Cost basis investees.................................................. 16,371 11,240 39
Concessions, net...................................................... 18,743 7,978 2,035
Loans to related companies (Note 11).................................... 15,793 6,732 1,019
Other................................................................... 2,354 3,657 2,678
-------------- ----------- ---------
Total assets........................................................ $ 291,154 $ 216,848 $ 80,441
-------------- ----------- ---------
-------------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
TEVECAP S.A. AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 (UNAUDITED), AND DECEMBER 31, 1995, 1994
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------------
1996 1995 1994
-------------- ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term bank loans (Note 15).................................... $ 5,441 -- --
Film suppliers..................................................... 5,738 $ 5,892 $ 6,586
Other suppliers.................................................... 51,055 52,078 15,109
Taxes payable other than income taxes.............................. 8,205 6,171 1,290
Accrued payroll and related liabilities............................ 7,777 4,571 2,935
Advance payments received from subscribers......................... 7,473 3,986 1,030
Other accounts payable (Note 16)................................... 3,683 3,272 1,624
-------------- ------------ ------------
Total current liabilities........................................ 89,372 75,970 28,574
-------------- ------------ ------------
Long-term liabilities
Loans from related companies (Note 11)............................. 91,926 586 --
Loans from shareholders (Note 17).................................. 4,607 3,086 2,864
Provision for claims (Note 21)..................................... 5,854 3,763 1,075
Liability to fund equity investee (Note 13)........................ -- 2,169 584
Deferred hook up fee revenue....................................... 2,943 -- --
-------------- ------------ ------------
Total long-term liabilities...................................... 105,330 9,604 4,523
-------------- ------------ ------------
Commitments and contingencies (Note 19)
Minority interest.................................................... 2,198 -- --
Redeemable common stock, no par value, 85,637,516, 85,637,516 and
22,992,650 shares issued and outstanding........................... 163,225 149,534 19,754
Shareholders' equity
Common stock, no par value, 111,075,339 shares issued and
outstanding (Note 20)............................................ 142,495 142,495 142,495
Accumulated deficit................................................ (211,466) (160,755) (114,905)
-------------- ------------ ------------
Total shareholders' equity....................................... (68,971) (18,260) 27,590
-------------- ------------ ------------
Total liabilities and shareholders' equity....................... $ 291,154 $ 216,848 $ 80,441
-------------- ------------ ------------
-------------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
TEVECAP S.A. AND
SUBSIDIARIES
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND SEPTEMBER 30, 1995
(UNAUDITED) AND YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------------------------ -------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1995 1994 1993
(CONSOLIDATED) (CONSOLIDATED) (CONSOLIDATED) (CONSOLIDATED) (COMBINED)
-------------- -------------- -------------- -------------- -----------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Gross revenues
Monthly subscriptions........... $ 85,301 $ 41,296 $ 62,496 $ 27,976 $ 12,544
Installation.................... 39,396 17,995 26,045 6,997 4,350
Advertising..................... 5,362 5,505 8,377 5,727 2,099
Indirect programming............ 5,278 2,114 2,866 1,626 530
Other........................... 5,295 2,194 2,226 1,446 369
Revenue taxes................... (8,881) (5,171) (7,506) (872) (371)
-------------- -------------- -------------- -------------- -----------
Net revenue............... 131,751 63,933 94,504 42,900 19,521
-------------- -------------- -------------- -------------- -----------
Direct operating expenses
Payroll and benefits............ 19,467 8,868 12,520 8,022 6,079
Programming..................... 25,477 14,105 21,609 12,133 18,156
Transponder lease cost.......... 6,575 5,357 7,568 1,555 1,262
Technical assistance............ 4,923 3,913 5,152 1,622 1,773
Vehicle rentals................. 1,252 1,114 1,732 788 597
TVA magazine.................... 4,680 2,164 3,318 1,430 725
Other costs..................... 13,183 6,758 10,127 3,109 1,187
-------------- -------------- -------------- -------------- -----------
75,557 42,279 62,026 28,659 29,779
-------------- -------------- -------------- -------------- -----------
Selling, general and
administrative expenses
Payroll and benefits............ 21,521 15,790 21,627 14,241 10,945
Advertising and promotion....... 12,794 5,882 11,122 3,540 2,205
Rent............................ 2,323 770 1,073 656 847
Other administrative expenses... 9,989 4,557 6,673 2,206 2,265
Other general expenses.......... 7,083 3,788 6,407 3,727 3,695
-------------- -------------- -------------- -------------- -----------
53,710 30,787 46,902 24,370 19,957
-------------- -------------- -------------- -------------- -----------
Allowance for obsolescence........ 2,493 -- -- -- --
Depreciation...................... 17,436 8,657 12,848 6,177 4,813
Amortization...................... 1,111 208 420 -- --
-------------- -------------- -------------- -------------- -----------
Operating loss............ (18,556) (17,998) (27,692) (16,306) (35,028)
-------------- -------------- -------------- -------------- -----------
Interest income................... 3,650 1,360 3,118 21,806 5,369
Interest expense.................. (10,125) (12,493) (17,745) (16,413) (8,492)
Translation (loss) gain........... 243 (41) (339) (914) 788
Equity in (losses) income of
affiliates...................... (6,642) (2,084) (3,672) 383 --
Other nonoperating (expenses)
income, net..................... (7,018) 3,267 4,389 (1,273) (557)
-------------- -------------- -------------- -------------- -----------
Loss before income taxes
and minority interest... (38,448) (27,989) (41,941) (12,717) (37,920)
Income taxes (Note 12).......... (105) -- -- -- --
-------------- -------------- -------------- -------------- -----------
Net loss before minority
interest........................ (38,553) (27,989) (41,941) (12,717) (37,920)
Minority interest................. 1,533 572 871 720 292
-------------- -------------- -------------- -------------- -----------
Net loss.................. $ (37,020) $ (27,417) $ (41,070) $ (11,997) $ (37,628)
-------------- -------------- -------------- -------------- -----------
-------------- -------------- -------------- -------------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
TEVECAP S.A AND
SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND
STATEMENT OF REDEEMABLE COMMON STOCK
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND
SEPTEMBER 30, 1995 (UNAUDITED) AND YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
REDEEMABLE
PAID-IN TOTAL COMMON
CAPITAL ACCUMULATED SHAREHOLDERS STOCK
(NOTE 19) DEFICIT EQUITY (NOTE 19)
----------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1992 (combined)................ $ 10,797 $ (65,280) $ (54,483) --
Net loss for the year.................................. -- (37,628) (37,628) --
----------- ------------- ------------- ------------
Balance at December 31, 1993 (combined)............ 10,797 (102,908) (92,111) --
----------- ------------- ------------- ------------
Capital contributed on:
June 30, 1994........................................ 131,698 -- 131,698 --
July 25, 1994........................................ -- -- -- $ 19,754
Net loss for the period................................ -- (11,997) (11,997) --
----------- ------------- ------------- ------------
Balance at December 31, 1994 (consolidated).......... 142,495 (114,905) 27,590 19,754
----------- ------------- ------------- ------------
Capital contributed on:
September 22, 1995................................... -- -- -- 2,000
September 25, 1995................................... -- -- -- 8,000
September 26, 1995................................... -- -- -- 40,000
December 8, 1995..................................... -- -- -- 75,000
Net loss for the period................................ -- (41,070) (41,070) --
Accretion related to Redeemable Common Stock........... -- (4,780) (4,780) 4,780
----------- ------------- ------------- ------------
Balance at December 31, 1995 (consolidated).......... 142,495 (160,755) (18,260) 149,534
Net loss for the period (unaudited).................... -- (37,020) (37,020) --
Accretion related to Redeemable Common Stock........... -- (13,691) (13,691) 13,691
----------- ------------- ------------- ------------
Balance at September 30, 1996 (consolidated)......... $ 142,495 $ (211,466) $ (68,971) $ 163,225
----------- ------------- ------------- ------------
----------- ------------- ------------- ------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
(UNAUDITED):
Balance at December 31, 1994 (consolidated).......... $ 142,495 $ (114,905) $ 27,590 19,754
Capital contributed on:
September 22, 1995................................... -- -- -- 2,000
September 25, 1996................................... -- -- -- 8,000
September 26, 1995................................... -- -- -- 40,000
Net loss for the period (unaudited).................... -- (27,417) (27,417) --
----------- ------------- ------------- ------------
Balance at September 30, 1995 (consolidated)......... $ 142,495 $ (142,322) $ 173 $ 69,754
----------- ------------- ------------- ------------
----------- ------------- ------------- ------------
</TABLE>
On June 30, 1994 the paid in capital of the entities previously under common
control was transferred to Tevecap in exchange for shares in Tevecap.
Accordingly, the paid in capital of the combined entities became that of
Tevecap.
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
TEVECAP S.A. AND
SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED), AND SEPTEMBER 30, 1995
(UNAUDITED) AND YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (IN THOUSANDS OF
U.S. DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
---------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1995 1994 1993
CONSOLIDATED CONSOLIDATED CONSOLIDATED CONSOLIDATED COMBINED
------------- ------------- ------------- ------------- ------------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................... $ (37,020) $ (27,417) $ (41,070) $ (11,997) $ (37,628)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES:
Depreciation........................... 17,436 8,657 12,848 6,141 5,081
Amortization........................... 1,111 208 420 -- --
Allowance for exhibition costs......... -- -- 827 -- --
Allowance for doubtful accounts........ 3,040 -- 2,196 848 --
Allowance for obsolescence............. 2,493 -- -- -- --
Provision for claims................... 2,091 2,411 2,688 864 (131)
Minority interest...................... (1,533) (571) (871) (721) (292)
Disposal and write-off of fixed
assets............................... 1,163 -- 341 662 --
Equity in losses (earnings) of
affiliates........................... 6,642 2,084 3,672 (383) --
CHANGES IN OPERATING ASSETS AND
LIABILITIES:
Film exhibition rights................. (695) 213 560 (114) 4,843
Accounts receivable.................... (13,432) (4,899) (5,908) (7,007) (181)
Prepaid and other assets............... 457 (1,496) (1,269) (1,364) 113
Other accounts receivable.............. (1,188) (947) (601) (199) (90)
Other.................................. 5,168 856 -- (2,450) (221)
Accrued Interest....................... 4,700 9,509 9,241 723 8,368
Inventories............................ (5,257) (6,716) (7,373) (2,383) (533)
Legal deposits......................... (134) (953) (108) (154) (415)
Suppliers.............................. (1,177) 14,807 36,275 5,309 40
Taxes payable other than income
taxes................................ 2,034 466 4,881 685 167
Accrued payroll and related
liabilities.......................... 3,206 2,681 1,636 1,454 140
Advances received from subscribers..... 3,487 (127) 2,956 (496) 1,415
Deferred accounts payable.............. 2,943 -- -- -- --
Other accounts payable................. (920) 2,333 1,648 1,341 144
------------- ------------- ------------- ------------- ------------
Net cash (used in) provided by
operating activities............... (5,385) 1,099 22,989 (9,707) (19,180)
------------- ------------- ------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets................... (72,538) (52,987) (93,029) (22,369) (11,379)
Loans to related companies................. (22,669) (3,501) (7,967) (3,482) (1,811)
Cash received on loans to affiliated
companies................................ 13,608 1,981 2,591 4,481 --
Acquisiton of businesses, net of cash
acquired................................. (13,490) (8,398) (6,393) (2,035) --
Investments in equity and cost
investments.............................. (16,711) (5,636) (14,863) (929) --
------------- ------------- ------------- ------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
TEVECAP S.A. AND
SUBSIDIARIES
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED), AND SEPTEMBER 30, 1995
(UNAUDITED) AND YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 (IN THOUSANDS OF
U.S. DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
---------------------------- ------------------------------------------
1996 1995 1995 1994 1993
CONSOLIDATED CONSOLIDATED CONSOLIDATED CONSOLIDATED COMBINED
------------- ------------- ------------- ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net cash used in investing
activities......................... (111,800) (68,541) (119,661) (24,334) (13,190)
------------- ------------- ------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term bank loans...................... $ 5,441 $ -- $ -- $ -- $ --
Capital contributions...................... -- 49,998 125,000 151,452 --
Repayments of loans from shareholders...... -- -- -- (3,082) --
Loans from shareholders.................... 1,522 -- -- -- 3,299
Loans to shareholders...................... -- -- -- -- (3,298)
Loans from related companies............... 116,178 103,284 131,860 96,986 106,023
Repayments of loans from related
companies................................ (29,538) (90,445) (140,631) (186,755) (67,056)
Repayments of loans from banks............. -- -- -- (19,935) (6,620)
------------- ------------- ------------- ------------- ------------
Net cash provided by financing
activities......................... 93,603 62,837 116,229 38,666 32,348
------------- ------------- ------------- ------------- ------------
Net (decrease) increase in cash and cash
equivalents................................ (23,582) (4,605) 19,557 4,625 (22)
Cash and cash equivalents at beginning of the
period..................................... 24,201 4,644 4,644 19 41
------------- ------------- ------------- ------------- ------------
Cash and cash equivalents at end of
the period......................... $ 619 $ 39 $ 24,201 $ 4,644 $ 19
------------- ------------- ------------- ------------- ------------
------------- ------------- ------------- ------------- ------------
SUPPLEMENTAL CASH DISCLOSURE:
Cash paid for interest..................... $ -- $ 2,435 $ 8,390 $ 16,413 $ 1,183
------------- ------------- ------------- ------------- ------------
------------- ------------- ------------- ------------- ------------
SUPPLEMENTAL NON CASH FINANCING ACTIVITIES:
Accrued interest on related company loans
refinanced as principal balance.......... $ 4,684 $ 7,027 $ 9,355 $ -- $ 8,225
------------- ------------- ------------- ------------- ------------
------------- ------------- ------------- ------------- ------------
DETAILS OF ACQUISITIONS:
Fair value of assets acquired.............. 14,895 -- -- -- --
Liabilities assumed........................ (1,330) -- -- -- --
------------- ------------- ------------- ------------- ------------
Cash paid.................................. 13,565 -- -- -- --
Less: cash acquired........................ (75) -- -- -- --
------------- ------------- ------------- ------------- ------------
Net cash paid for acquisitions............. $ 13,490 -- -- -- --
------------- ------------- ------------- ------------- ------------
------------- ------------- ------------- ------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
TEVECAP S.A. AND
SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS
1. THE COMPANY AND ITS PRINCIPAL OPERATIONS
The accompanying financial statements have been prepared to reflect the
consolidated results of TEVECAP S.A. and its subsidiaries (the "Company") and
the combined results of commonly controlled entities which became subsidiaries
of TEVECAP S.A. ("Tevecap") on June 30, 1994 (see Note 2.1).
TEVECAP is a holding company, the subsidiaries of which render services
related to wireless cable and cable and parabolic antenna television systems,
including marketing and advertising, production, distribution and licensing of
domestic and foreign television programs. The Company has wireless cable channel
rights primarily in major urban markets in Brazil.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant policies followed in the preparation of the accompanying
consolidated and combined financial statements are described below:
2.1 BASIS OF PRESENTATION; CONSOLIDATION AND COMBINED
A) BASIS OF PRESENTATION
The consolidated and combined financial statements are presented in US
Dollars and have been prepared in accordance with accounting principles
generally accepted in the United States of America (U.S. GAAP), which differ in
certain respects from accounting principles applied by the Company in its local
currency financial statements, which are prepared in accordance with accounting
principles generally accepted in Brazil ("Brazilian GAAP").
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
financial statement dates and the reported amount of revenues and expenses
during the reporting periods. Since management's judgment involves making
estimates concerning the likelihood of future events, the actual results could
differ from those estimates which will have a positive or negative effect on
future period results.
B) CONSOLIDATION AS OF AND FOR THE TWO YEARS ENDED DECEMBER 31, 1995
On June 30, 1994, Tevecap was established as a holding company for certain
entities which were under common control. Subsequent to this date, additional
entities were formed under, or acquired by Tevecap, as described elsewhere in
these financial statements. Accordingly, the financial statements as of and for
the year ended December 31, 1994 and thereafter are prepared on a consolidated
basis.
The consolidated financial statements include the accounts of all
majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated on consolidation.
C) COMBINED PRESENTATION FOR THE YEAR ENDED DECEMBER 31, 1993
The combined financial statements for the year ended December 31, 1993,
reflect the results of certain entities which were under common control and
which were acquired by Tevecap on June 30, 1994.
All significant intercompany balances have been eliminated on combination.
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
F-10
<PAGE>
TEVECAP S.A. AND
SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
statements in conformity with accounting principles generally accepted in the
United States of America, the Company maintains additional accounting records
which are used solely for this purpose.
2.3 CURRENCY REMEASUREMENT
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
52, "Foreign Currency Transactions," the United States dollar has been assumed
to be the functional currency as Brazil is a "hyperinflationary" country. As
such, the local accounts of the Company are translated into United States
dollars as follows:
- Nonmonetary assets and liabilities are translated at historical rates. All
other assets and liabilities are translated at the official rate of
exchange of R$1.022 to US$1 in effect on September 30, 1996; R$0.973 to
US$1 in effect on December 31, 1995; and, R$0.846 to US$1 on December 31,
1994.
- Income and expenses are translated at the average exchange rates in effect
each month, except for those related to assets and liabilities which are
translated at historical exchange rates, and deferred income taxes, which
are translated at the current rate. Translation gains/losses are
recognized in the income statement.
2.4 CONSOLIDATED FINANCIAL STATEMENTS
The Company's consolidated operating subsidiaries included in the
consolidated financial statements are:
<TABLE>
<CAPTION>
OWNERSHIP INTEREST AS OF
-------------------------------
<S> <C> <C>
SEPTEMBER 30, DECEMBER 31,
1996 1995
--------------- --------------
OWNED SYSTEMS:
TVA Sistema de Televisao S.A........................... 98.00% 98.00%
TVA Sul Participacoes S.A.............................. 87.00% --
TVA Sul Parana Ltda.(a), (b)......................... 87.00% 80.00%
TVA Sul Santa Catarina Ltda. (b)..................... 87.00% --
TVA Sul Foz do Iguacu Ltda. (b)...................... 87.00% --
TCC TV a Cabo Ltda. (b).............................. 100.00% --
TV Alfa Cabo Ltda. (b)............................... 100.00% --
CCS Camboriu Cable Systems de Telecomunicacoes
Ltda................................................. 52.20% --
Galaxy Brasil S.A...................................... 100.00% 100.00%
LICENSE SUBSIDIARY:
Comercial Cabo TV Sao Paulo Ltda. (c).................. 100.00% 100.00%
PROGRAMMING VENTURES:
TVA Communications Ltd 100.00% 100.00%
TVA Communications Aruba N.V. 100.00% --
</TABLE>
- ------------------------
(a) In August 1996, TVA Curitiba Servicos Telecomunicacoes Ltda. changed its
name to TVA Parana Ltda. ("Parana"). The Company's initial investment in
Parana together with its contributions of $18,963 relating to the
acquisition of 27,212,345 shares during the nine months ended September 30,
1996, was in excess of the Company's share of the book value of Parana after
the contribution. This resulted in a loss of $2,727.
F-11
<PAGE>
TEVECAP S.A. AND
SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
2.4 CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(b) One common share in each of these entities is owned by a Brazilian National
pursuant to local legislative requirements.
(c) 0.00149% of the common shares in this entity are owned by the controlling
shareholder of the parent company pursuant to local legislative
requirements.
2.5 ACQUISITIONS
During the nine month period ending September 30, 1996 (unaudited), the
Company acquired control of the following entities which were accounted for
under the purchase method of accounting: i) In February 1996, the Company
acquired TVA Sul Santa Catarina ("TVA SSC"); ii) In March 1996, the Company
acquired TCC TV a Cabo Ltda. ("TCC") and TV Alfa Cabo Ltda. ("TV Alfa"); and
iii) In May 1996, the Company acquired TVA Sul Foz do Iguacu Ltda ("TVA SF") and
CCS Camboriu Cable Systems de Telecomunicacoes Ltda. ("CCS"). In each case, the
excess of the purchase price over the fair value of assets acquired represents
the value of concessions of certain television stations. These concessions are
being amortized on a straight line basis over 10 years.
The operating results of these acquired businesses, which hold licenses to
operate cable TV, have been included in the consolidated statements of
operations from the dates of acquisition.
The purchase prices have been allocated to the assets purchased and the
liabilities assumed based upon the fair values on the dates of acquisition, as
follows:
<TABLE>
<CAPTION>
TVA SSC TVA SF CCS TCC TV ALFA
----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Current assets, other than cash.............................. $ -- $ 23 $ 4 $ 51 $ 5
Property, plant and equipment................................ 25 319 2,101 238 176
Other assets................................................. -- 3 -- -- --
Concessions.................................................. 45 5,348 1,424 2,629 2,429
Other liabilities............................................ (55) (377) (84) (127) (687)
----------- --------- --------- --------- ---------
Purchase price, net of cash received......................... $ 15 $ 5,316 $ 3,445 $ 2,791 $ 1,923
----------- --------- --------- --------- ---------
----------- --------- --------- --------- ---------
Total purchase price......................................... $ 15 $ 5,326 $ 3,445 $ 2,841 $ 1,939
----------- --------- --------- --------- ---------
----------- --------- --------- --------- ---------
</TABLE>
The Company is unable to present pro forma results as if the acquisitions
had taken place at the beginning of 1995 and 1996 because, although management
attempted to obtain such information from the owners, it was not available.
These entities were acquired for the purpose of expanding the cable TV system
penetration of the Company. The assets purchased will be operated under the
Company's management, using the Company's programming and employees.
2.6 CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as cash and cash in banks and
investments in interest-bearing securities and are carried at cost plus accrued
interest. Short-term investments with original maturities of three months or
less at the time of purchase are considered cash equivalents.
2.7 FINANCIAL INSTRUMENTS
In accordance with SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments," information is provided about the fair value of certain financial
instruments for which it is practicable to estimate that value.
F-12
<PAGE>
TEVECAP S.A. AND
SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
2.7 FINANCIAL INSTRUMENTS (CONTINUED)
For the purposes of SFAS No. 107, the estimated fair value of a financial
instrument is the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
The carrying values of the Company's financial instruments as of September 30,
1996, December 31, 1995 and December 31, 1994 approximate management's best
estimate of their estimated fair values. The following methods and assumptions
were used to estimate the fair value of each class of financial instrument for
which it is practicable to estimate that value:
- The fair value of certain financial assets carried at cost, including
cash, accounts receivable, other accounts receivables, and certain other
short-term assets is considered to approximate their respective carrying
value due to their short-term nature.
- The fair value of payables to film suppliers and other suppliers, other
accounts payable, loans to related companies and certain other short-term
liabilities are considered to approximate their respective carrying values
due to their short-term nature.
- The fair value of loans from related companies approximates their
respective carrying values as interest on these loans is at market rates.
2.8 ACCOUNTS RECEIVABLE
Accounts receivable are stated at their estimated realizable values. An
allowance for doubtful accounts is established on the basis of an analysis of
the accounts receivable, in light of the risks involved, and is considered
sufficient to cover any losses incurred in realization of credits.
2.9 INVENTORIES
Inventories consist of materials and supplies and imports in transit.
Materials and supplies are used to provide service to new customers, and to
ensure continuity of service to existing customers. Imports in transit represent
materials purchased from foreign countries that have not yet been received.
Inventories are stated at the lower of cost or market. Cost is determined
principally under the average cost method.
An allowance for obsolescence has been established on the basis of an
analysis of slow-moving materials and supplies.
2.10 FILM EXHIBITION RIGHTS AND PROGRAM LICENSING
Film exhibition rights and program licensing costs are deferred and
recognized as the films and/or programs are exhibited. The allowance for
exhibition expiration is determined based on management's estimate of the
Company's capacity to telecast the films and projected revenue streams.
2.11 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated using the
straight-line method, over the remaining useful lives, as described in Note 14.
2.12 ADVERTISING
Advertising revenues are recognized, and the production cost of commercials
and programming are charged to expense, when the commercial is telecast.
F-13
<PAGE>
TEVECAP S.A. AND
SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
2.13 RECOVERABILITY OF LONG-LIVED ASSETS TO BE HELD AND USED IN THE BUSINESS
Management reviews long-lived assets, primarily the Company's licenses and
its property and equipment to be held and used in the business, for the purposes
of determining and measuring impairment on a recurring basis or when events or
changes in circumstances indicate that the carrying value of an asset or group
of assets may not be recoverable. Assets are grouped and evaluated for possible
impairment at the level of each cable television system; impairment is assessed
on the basis of the forecasted undiscounted cash flows of the businesses over
the estimated remaining lives of the assets related to those systems. A
write-down of the carrying value of the assets or group of assets to estimated
fair value will be made, when appropriate.
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be disposed of", from January 1,
1996, and the effect on the consolidated financial statements as a result of the
adoption was not significant.
2.14 SUBSCRIPTIONS
Installation fees are recognized as revenue on the equipment installation
date to the extent of direct selling costs incurred. The remainder is deferred
and amortized to income over the estimated average period that subscribers are
expected to remain connected to the system. Subscription revenues are recognized
as earned on an accrual basis.
2.15 LICENSES
Televisao Show Time Ltda. ("TV Show Time") and TVA Brasil Radioenlaces Ltda.
("TVA Brasil") hold certain licenses covering certain operations of the Company.
The use of such licenses is provided to the Company, for a nominal fee, under a
Service Agreement dated July 22, 1994, as amended, among Tevecap, TV Show Time,
TVA Brasil and Abril.
Pursuant to the Service Agreement, TV Show Time and TVA Brasil have agreed
to transfer the licenses, which are carried at nil value, to Tevecap at nominal
cost.
2.16 ACCOUNTING FOR SALES OF STOCK BY SUBSIDIARIES
Gains or losses arising from the sale of shares by subsidiaries are
recognized in the profit and loss account as non-operating income to the extent
that the net book value of the shares owned by the parent after the sale exceeds
or is lower than the net book value per share immediately prior to the sale of
the shares by the subsidiary.
2.17 FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1995 (UNAUDITED)
The unaudited consolidated financial statements as of September 30, 1996 and
for the nine months ended September 30, 1996 and 1995 have been derived from the
Company's records and reflect all
F-14
<PAGE>
TEVECAP S.A. AND
SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial data.
3. ACCOUNTING CHANGES
To more appropriately account for the cost of (i) installation equipment and
(ii) operating costs incurred during the period of constructing their television
systems, the Company has restated all prior year amounts as compared to those
previously reported by the separate combined and consolidating entities:
(i) Installation equipment
The Company has changed the estimated useful life of installation
equipment to five years. The costs of such equipment had previously been
accounted for as period costs.
(ii) Operating costs incurred during the period of construction of
television systems
The Company has changed its policy of deferring operating costs during
the period of construction of its television systems, to treat such costs
as period costs.
4. RESTATEMENT
The Company's financial statements as of and for the two years in the period
ended December 31, 1995 and as of and for the nine months ended September 30,
1996 (unaudited) have been restated to reflect the reclassification of common
stock subject to redemption separately from equity. See also Note 20.
In addition, the Company's financial statements as of and for the two years
in the period ended December 31, 1995 and as of and for the nine months ended
September 30, 1996 (unaudited) have been restated to reflect the recognition of
the Company's share in the earnings and losses of HBO Brasil Partners after the
date of acquisition. The Company holds a 33.33% interest in this partnership.
Historically, such interest was accounted for at cost as financial information
on the performance of the venture was unavailable. In January 1997, the Company
received audited financial statements covering the two years in the period
ending December 31, 1995.
The Company's financial statements for the nine months ended September 30,
1996 (unaudited) have also been restated to reflect the consolidation of
subsidiaries previously treated as advances for investments. The net impact of
this change on the result for this period was a loss of $555,000.
F-15
<PAGE>
TEVECAP S.A. AND
SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
4. RESTATEMENT (CONTINUED)
The following summarizes the impact on previously issued financial
statements resulting from the adjustments as of and for the two years in the
period ended December 31, 1995 and as of and for the nine months ended September
30, 1996 (unaudited):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1996 1995 1994
----------------------------- ----------------------------- -----------------------------
AS PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY
REPORTED AS RESTATED REPORTED AS RESTATED REPORTED AS RESTATED
-------------- ------------- -------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEETS
Equity affiliates.. 5,946 6,231 2,352 3,462 1,856 1,856
Advances payments
for investments... 16,683 -- 3,117 -- -- --
Liability to fund
equity investee... -- -- 2,169 2,169 4 584
Redeemable Common
Stock............. -- 163,225 -- 149,534 -- 19,754
Common Stock....... 287,962 142,495 287,962 142,495 162,962 142,495
STATEMENTS OF
OPERATIONS
Equity in (losses)
income of
affiliates........ (5,817) (6,642) (2,245) (3,672) 963 383
Net loss........... (35,460) (37,020) (39,643) (41,070) (13,500) (11,997)
Accretion related
to Redeemable
Common Stock...... -- 13,691 -- 4,780 -- --
</TABLE>
5. CASH AND CASH EQUIVALENTS
At September 30, 1996, December 31, 1995 and 1994, cash was comprised of:
<TABLE>
<CAPTION>
1996 1995 1994
------------ --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Cash on hand and in banks..................................................... $ 609 $ 640 $ 178
Short-term investments........................................................ 10 23,561 4,466
------------ --------- ---------
$ 619 $ 24,201 $ 4,644
------------ --------- ---------
------------ --------- ---------
</TABLE>
F-16
<PAGE>
TEVECAP S.A. AND
SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
6. ACCOUNTS RECEIVABLE
At September 30, 1996, December 31, 1995 and 1994, accounts receivable were
comprised of:
<TABLE>
<CAPTION>
1996 1995 1994
------------ --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Subscriptions................................................................. $ 6,521 $ 5,154 $ 1,879
Installation fees............................................................. 10,425 4,637 1,686
Advertising & programming..................................................... 2,359 1,810 1,560
Barter........................................................................ 4,977 2,989 3,627
Others........................................................................ 200 70 --
Allowance for doubtful accounts............................................... (2,837) (3,407) (1,211)
------------ --------- ---------
$ 21,645 $ 11,253 $ 7,541
------------ --------- ---------
------------ --------- ---------
</TABLE>
7. INVENTORIES
At September 30, 1996, December 31, 1995 and 1994, inventories were
comprised of:
<TABLE>
<CAPTION>
1996 1995 1994
------------ --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Materials and supplies........................................................ $ 16,660 $ 10,913 $ 4,985
Imports in transit............................................................ 1,673 2,163 718
Allowance for obsolescence.................................................... (2,493) -- --
------------ --------- ---------
$ 15,840 $ 13,076 $ 5,703
------------ --------- ---------
------------ --------- ---------
</TABLE>
8. FILM EXHIBITION RIGHTS
At September 30, 1996, December 31, 1995 and 1994, film exhibition rights
were comprised of:
<TABLE>
<CAPTION>
1996 1995 1994
------------ --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Exhibition rights.............................................................. $ 1,887 $ 1,192 $ 1,752
Allowance for exhibition expiration............................................ (1,162) (1,162) (335)
------------ --------- ---------
$ 725 $ 30 $ 1,417
------------ --------- ---------
------------ --------- ---------
</TABLE>
9. PREPAID AND OTHER ASSETS
At September 30, 1996, December 31, 1995 and 1994, prepaid expenses were
comprised of:
<TABLE>
<CAPTION>
1996 1995 1994
------------ --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Advances to suppliers.......................................................... $ 1,124 $ 2,078 $ 977
Prepaid TVA magazine publishing expenses....................................... 845 562 379
Prepaid meals and transportation............................................... 189 171 197
Others......................................................................... 353 157 146
------------ --------- ---------
$ 2,511 $ 2,968 $ 1,699
------------ --------- ---------
------------ --------- ---------
</TABLE>
F-17
<PAGE>
TEVECAP S.A. AND
SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
10. OTHER ACCOUNTS RECEIVABLE
At September 30, 1996, December 31, 1995 and 1994, other accounts receivable
were comprised of:
<TABLE>
<CAPTION>
1996 1995 1994
------------ --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Advances to employees.............................................................. $ 805 $ 491 $ 58
Accounts receivable from related companies (Note 11)............................... 953 389 281
Others............................................................................. 501 105 45
------------ --------- ---------
$ 2,259 $ 985 $ 384
------------ --------- ---------
------------ --------- ---------
</TABLE>
11. RELATED-PARTY TRANSACTIONS
The following tables summarize the transactions between the Company and
related companies at September 30, 1996 (unaudited) and December 31, 1995, and
1994 and for the nine month periods ended September 30, 1996 (unaudited) and
1995 (unaudited) and the three years ended December 31, 1995:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------
1995 1994
AT SEPTEMBER 30, --------- ---------
-----------------
1996
-----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Abril S.A.
Loans payable ................................................. $ 90,205 $ 39 --
ESPN do Brasil Ltda
Loans receivable .............................................. -- 3,913 --
Accounts payable .............................................. -- 963 --
Canbras TV a Cabo Ltda
Loans receivable .............................................. 3,000 815 $ 33
Accounts payable .............................................. 1,721 -- --
Canbras Partcipacoes
Loans receivable .............................................. 304 -- --
HBO Partners
Loans receivable .............................................. 1,792 -- --
Aico
Loans receivable .............................................. 7,930 -- --
TV Aico
Loans receivable .............................................. 1,640 -- --
</TABLE>
F-18
<PAGE>
TEVECAP S.A. AND
SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
11. RELATED-PARTY TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTH PERIOD
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------- -------------------------------
1996 1995 1995 1994 1993
----------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Abril S.A.
Net interest expense.................................... $ 4,684 $ 9,461 $ 9,324 -- --
ESPN do Brasil Ltda
Programming costs....................................... 2,560 851 646 -- --
Net interest expense.................................... -- -- 330 -- --
Abril Communications Ltda
Net interest expense.................................... -- -- -- -- $ 8,379
</TABLE>
The Abril S.A. and other related company loans receivable are denominated in
REAIS and are subject to monetary restatement plus interest charges at the
market rate which was 1.79% per month in September 1996 (3.44% per month in
December 1995).
The loans payable to Abril S.A. are pursuant to a revolving credit facility.
This facility, effective December 31, 1995, is valid for a period of 36 months.
Additionally, Abril S.A. provided a guarantee in the amount of $28,847 on
September 30, 1996, for equipment imported by Galaxy Brasil S.A., TVAST, TV
Filme and TVA Parana.
The Company and Falcon International Communications Services Inc., one of
the Company's shareholders, signed a consulting service agreement on April 1,
1996 related to the Company's operations and technologies. Initially, the
duration of this agreement is two years, renewable every subsequent two-year
period thereafter. The payment for the consulting services amounts to $200 per
annum.
12. DEFERRED INCOME TAX
The tax effects of temporary differences that give rise to a significant
portion of the deferred tax asset and deferred tax liability at September 30,
1996 and at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Deferred tax assets:
Net operating loss carryforwards........................................... $ 37,981 $ 33,964 $ 22,764
Deferred charges........................................................... 7,485 7,720 11,818
Deferred hook-up fee revenue............................................... 1,030 -- --
Others..................................................................... 1,015 175 920
----------- --------- ---------
Total gross deferred tax asset......................................... 47,511 41,859 35,502
----------- --------- ---------
Less, valuation allowance................................................ (42,610) (34,568) (28,913)
----------- --------- ---------
Net deferred tax asset....................................................... 4,901 7,291 6,589
Deferred tax liability:
Inflationary profit........................................................ -- -- (4,107)
Installation costs......................................................... (4,901) (7,291) (2,482)
----------- --------- ---------
Total gross deferred tax liability..................................... (4,901) (7,291) (6,589)
----------- --------- ---------
Net deferred tax asset................................................... $ -- $ -- $ --
----------- --------- ---------
----------- --------- ---------
</TABLE>
F-19
<PAGE>
TEVECAP S.A. AND
SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
12. DEFERRED INCOME TAX (CONTINUED)
The Company has a limited operating history and has generated losses since
its inception. The valuation allowance has been established in accordance with
the requirements of SFAS No. 109 and relates to the amount of net operating loss
carryforwards in excess of net taxable temporary differences.
As of September 30, 1996, the Company has unexpirable accumulated tax losses
of $118,569.
The consolidated and combined income tax credit was different from the
amount computed using the Brazilian statutory income tax for the reasons set
forth in the following table:
<TABLE>
<CAPTION>
DECEMBER, 31
SEPTEMBER 30, ------------------------------------
1996 1995 1994 1993
-------------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
(UNAUDITED)
Loss before income taxes and minority interest............ $ 38,448 $ 41,941 $ 12,717 $ 37,920
Statutory income tax rate................................. 30.56% 30.56% 43.0% 35.2%
-------------- ------------ ---------- ----------
11,750 12,817 5,468 13,348
Profit on intercompany transaction not eliminated on
fiscal books............................................ -- -- -- (7,762)
Expiration of tax losses.................................. -- -- -- (691)
Increase (decrease) in the income tax rate................ -- (8,639) 3,373 --
Monetary correction net of unallowable amortization....... (1,129) 308 -- --
Monetary correction of deferred charges................... (905) 1,342 4,899 3,003
Translation rate difference on exhibition rights.......... -- 381 (476) --
Monetary correction over U.S. Dollar on tax losses........ -- -- 1,668 --
Others.................................................... (1,779) (554) (1,964) (620)
-------------- ------------ ---------- ----------
Net income tax benefit for the period..................... 7,937 5,655 12,968 7,278
Increase in valuation allowance........................... (8,042) (5,655) (12,968) (7,278)
-------------- ------------ ---------- ----------
$ (105) $ -- $ -- $ --
-------------- ------------ ---------- ----------
-------------- ------------ ---------- ----------
</TABLE>
Income tax payable represents amounts owing by subsidiaries calculated on a
unitary basis.
F-20
<PAGE>
TEVECAP S.A. AND
SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
13. INVESTMENTS
Investments at September 30, 1996, December 31, 1995 and 1994 were comprised
of:
<TABLE>
<CAPTION>
PERCENTAGE
OF CONTROL 1996 1995 1994
------------- ----------- --------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED)
Equity basis investments:
TV Filme, Inc. ............................................... 14.3(a) $ 4,628 $ 2,352 $ 1,856
ESPN Brasil Ltda.............................................. 50 1,234 -- --
Canbras TV a Cabo............................................. 36 84 -- --
HBO Brasil Partners........................................... 33 285 1,110 --
----------- --------- ---------
$ 6,231 $ 3,462 $ 1,856
----------- --------- ---------
----------- --------- ---------
Liability to Fund Joint Venture and Equity Investee:
ESPN Brasil Ltda.............................................. 50 $ -- $ (2,009) --
Canbras TV a Cabo............................................. -- (160) (4)
HBO Brasil Partners........................................... -- -- (580)
----------- --------- ---------
$ -- $ (2,169) $ (584)
----------- --------- ---------
----------- --------- ---------
Cost Basis Investments:
Galaxy Latin America.......................................... 10 $ 16,320 $ 11,220 $ --
Others........................................................ 51 20 39
----------- --------- ---------
$ 16,371 $ 11,240 $ 39
----------- --------- ---------
----------- --------- ---------
Concessions, net:
Stations in south of Brazil................................... $ 11,876 $ -- $ --
Ype Radio e Televisao Ltda Concessions........................ 6,363 6,363 --
Comercial Cabo Ltda........................................... 1,970 1,970 1,970
Other......................................................... 65 65 65
Amortization.................................................. (1,531) (420) --
----------- --------- ---------
$ 18,743 $ 7,978 $ 2,035
----------- --------- ---------
----------- --------- ---------
</TABLE>
- ------------------------
(a) Accounted for under the equity method because the Company has one seat out
of six on the Board of Directors, is dependent on the Company for a
substantial portion of its revenue and has an option to acquire an
additional 2% interest.
On February 3, 1995, an agreement was signed between Tevecap, Hughes (GLA
Inc./USA), Inversiones Divtel (ODC Cisneiros/Venezuela) and Multivision
(MVS/Mexico) for the incorporation of Galaxy Latin America in August 1995. On
March 3, 1995, the operational agreement between Galaxy Latin America and
Tevecap was formalized with the purchase of 10% of the shares of Galaxy Latin
America for $7,194. On March 9, 1995, Galaxy Brasil S.A. was created, with 99.5%
of the shares held by Tevecap. Galaxy Brasil S.A. provides distribution services
of multichannel TV programs to all national regions. The transmission commenced
February 1996. Galaxy Latin America will charge Galaxy Brasil for the use of a
satellite.
The ESPN Brasil joint venture was formed in June 1995, with Tevecap and ESPN
International each holding 50% of ESPN Brasil's shares. Operations commenced on
June 15, 1995, and the objective of
F-21
<PAGE>
TEVECAP S.A. AND
SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
13. INVESTMENTS (CONTINUED)
ESPN Brasil is the transmission of ESPN's international sport programs.
Condensed financial information of the joint venture as of and for the nine
month period ended September 30, 1996 and as of and for the year ended December
31, 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Current Assets.......................................................... $ 3,546 $ 2,905
Non-current Assets...................................................... 2,163 262
Current Liabilities..................................................... 3,241 3,272
Long-Term Liabilities................................................... -- 3,913
Revenues................................................................ 8,538 4,748
Gross Losses............................................................ (9,536) (2,884)
Loss before Taxes....................................................... (10,330) (4,020)
Net Loss................................................................ (10,330) (4,020)
</TABLE>
On April 3, 1995, Tevecap acquired 49% of the common shares and 49% of the
preferred shares of Ype Radio e Televisao Ltda., for $6,363, obtaining the
concession of certain television channels. The concessions are being amortized
over 10 years.
In previous years the Company acquired Comercial Cabo Ltda., obtaining the
concessions for certain television channels and other minor investments. The
consessions are being amortized over ten years.
F-22
<PAGE>
TEVECAP S.A. AND
SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
14. PROPERTY, PLANT AND EQUIPMENT
At September 30, 1996, December, 31, 1995 and 1994, property, plant and
equipment were comprised of:
<TABLE>
<CAPTION>
ANNUAL
DEPRECIATION
RATE
% 1996 1995 1994
------------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
(UNAUDITED)
Machinery and Equipment.................................... 10 $ 46,613 $ 37,877 $ 25,512
Converters................................................. 10 76,067 36,485 10,809
Leasehold Improvements..................................... 25 5,449 1,830 1,477
Furniture and Fixtures..................................... 10 2,136 1,226 704
Premises................................................... 10 2,286 1,116 559
Vehicles................................................... 20 1,404 457 161
Software................................................... 20 2,646 1,529 472
Tools...................................................... 10 715 621 439
Reception Equipment........................................ 20 65,470 45,711 19,265
Cable Plant................................................ 10 11,482 6,513 --
Building................................................... 4 8,326 342 155
----------- ----------- ----------
222,594 133,707 59,553
Accumulated Depreciation................................... (41,448) (23,373) (10,184)
Telephone Line Use Rights.................................. 2,219 1,453 787
Trademarks, Patents and Others............................. 164 577 186
Fixed Assets in Transit.................................... 3,779 18,902 1,084
Others..................................................... 755 -- --
----------- ----------- ----------
$ 188,063 $ 131,266 $ 51,426
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
15. SHORT-TERM BANK LOANS
Short-term bank loans at September 30, 1996 represent the refinancing of
certain supplier payables. The average short-term interest rate on such loans is
LIBOR plus 1.5%.
16. OTHER ACCOUNTS PAYABLE
At September 30, 1996, December, 31, 1995 and 1994, other accounts payable
were comprised of:
<TABLE>
<CAPTION>
1996 1995 1994
----------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Accounts payable to related companies (Note 11)................................ $ 252 $ 1,122 $ 13
Advertising.................................................................... 1,088 427 851
Importation expenses payable................................................... 667 599 86
Others......................................................................... 1,676 1,124 674
----------- --------- ---------
$ 3,683 $ 3,272 $ 1,624
----------- --------- ---------
----------- --------- ---------
</TABLE>
F-23
<PAGE>
TEVECAP S.A. AND
SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
17. LOANS FROM SHAREHOLDERS
Loans from shareholders at September 30, 1996, December 31, 1995 and 1994,
were comprised of:
<TABLE>
<CAPTION>
1996 1995 1994
----------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Roberto Civita................................................................. $ 2,490 $ 2,616 $ 2,455
Maricla I. R. Rossi............................................................ 59 61 58
Edgard Silvio Faria............................................................ 175 184 174
Angelo Silvio Rossi............................................................ 42 45 42
Leonardo Petrelli.............................................................. 1,841 180 135
----------- --------- ---------
$ 4,607 $ 3,086 $ 2,864
----------- --------- ---------
----------- --------- ---------
</TABLE>
Interest on loans from shareholders is based on the UFIR (Fiscal Reference
Unit) variation which was 0% during the nine-month period ended September 30,
1996 (22.46% in December 1995).
18. INSURANCE
The Company maintains insurance coverage for its fixed assets and
inventories in an amount considered sufficient to cover the risks involved.
19. LEASED ASSETS AND COMMITMENTS
The Company has entered into film distribution contracts and licensing
agreements with film producers for programming for future periods. Such
contracts and agreements, which range in life from 1 to 9 years with the
exception of a specific contract with ESPN which has a life of 50 years, require
a per-subscriber fee to be paid by the Company on a monthly basis.
The Company has funding commitments related to Galaxy Latin America, TV
Filme, ESPN Brasil Ltda., HBO Brasil Partners, Canbras TVA and CNBC of
approximately $26,992 which must be met prior to December, 1997.
The Company has rented its office space until the year 2001. At December 31,
1995 future minimum rental payments applicable to operating leases in respect of
this space aggregate approximately $4,874 as follows:
<TABLE>
<S> <C>
1996............................................................... $ 1,588
1997............................................................... 769
1998............................................................... 663
1999............................................................... 643
2000............................................................... 608
2001............................................................... 603
---------
Total.............................................................. $ 4,874
---------
---------
</TABLE>
F-24
<PAGE>
TEVECAP S.A. AND
SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
19. LEASED ASSETS AND COMMITMENTS (CONTINUED)
At December 31, 1995, the Company had contractual commitments with Embratel
for transponder use until the year 2003. Based on the contract provisions, these
commitments are currently estimated to aggregate approximately $52,361, as
follows:
<TABLE>
<S> <C>
1996.............................................................. $ 8,302
1997.............................................................. 8,302
1998.............................................................. 8,302
1999.............................................................. 8,035
2000.............................................................. 7,768
2001.............................................................. 7,768
2002.............................................................. 3,884
---------
Total............................................................. $ 52,361
---------
---------
</TABLE>
20. COMMON STOCK
Common stock at September 30, 1996, December 31, 1995 and 1994, was
comprised of:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------ ------------------------ ------------------------
US$ SHARES US$ SHARES US$ SHARES
--------- ------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Common stock subject to
redemption....................... 144,754 85,637,516 144,754 85,637,516 19,754 22,992,650
--------- ------------- --------- ------------- --------- -------------
--------- ------------- --------- ------------- --------- -------------
Paid-in capital.................... 142,495 111,075,339 142,495 111,075,339 142,495 111,075,339
--------- ------------- --------- ------------- --------- -------------
--------- ------------- --------- ------------- --------- -------------
</TABLE>
(a) COMMON STOCK SUBJECT TO REDEMPTION
As at September 30, 1996 and December 31, 1995, 43.5% of the common stock of
Tevecap was subject to an Event Put i.e. a "triggering event" under the
Stockholders Agreement pursuant to which each of the 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
Stockholder are publicly registered, listed or traded. In addition, as at
September 30, 1996 and December 31, 1995, 14.2% of these shares are also subject
to Time Put whereby, pursuant to the Stockholders Agreement, Falcon
International may demand that Tevecap buy all or a portion of their 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 his 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 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
F-25
<PAGE>
TEVECAP S.A. AND
SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
20. COMMON STOCK (CONTINUED)
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 its
Event Put is remote. However, a company that is public in the United States, and
which therefore is required to register its securities with the United States
Securities and Exchange Commission (the "SEC"), is required for accounting
purposes to present redeemable equity securities separately from shareholders'
equity, if redemption of such securities is beyond the control of the
registrant. That presentation is required even if the likelihood of redemption
is remote.
As the Company's financial statements are to be included in a registration
statement to be filed with the SEC, the presentation of redeemable common stock
separately from shareholders' equity differs from the presentation of such stock
in the Company's previously issued financial statements.
The Common Shares subject to the Time Put are redeemable at fair value
determined by appraisal or by a multiple of the Company's most recent quarterly
earnings. The Company has recorded an accretion on these shares to fair market
value of $4,780 and $13,691 with respect to the year ended December 31, 1995 and
the nine months ended September 30, 1996.
(b) PAID-IN CAPITAL
Paid-in capital represents registered common shares without par value.
The Company's shareholders are entitled to minimum dividends of 25% of net
income for the year, adjusted according to Corporation Law. As the Company has
not recorded net income since its inception, no such dividends are payable.
21. LITIGATION CONTINGENCIES
Certain claims and lawsuits arising in the ordinary course of business have
been filed or are pending against the Company which were not recognized in the
financial statements. The Company has also recorded provisions related to
certain claims in amounts that management considers to be adequate after
considering a number of factors including (but not limited to) the views of
legal counsel, the nature of the claims and the prior experience of the Company.
In management's opinion, all contingencies have been adequately provided for
or are without merit, or are of such kind that if disposed of unfavorably, would
not have a material adverse effect on the financial position or future results
of operations of the Company.
22. PENSION PLAN
In April 1996, the Company became a co-sponsor of the private pension entity
named Abrilprev Sociedade de Previdencia Privada, the primary objective of which
is to grant employees benefits other than those provided by Social Security. The
plan is optional to all employees of the sponsoring entities. Abrilprev operates
as a Defined Contribution Plan. Company contributions are made based on a fixed
percentage applied to the payroll of the sponsoring entities based on actuarial
calculations. Plan expenses amounted to $263 in 1996.
23. WORKING CAPITAL DEFICIENCY
The Company's consolidated financial statements for the period ended
September 30, 1996 were prepared on a going concern basis which contemplates the
realization of assets and settlement of
F-26
<PAGE>
TEVECAP S.A. AND
SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
23. WORKING CAPITAL DEFICIENCY (CONTINUED)
liabilities and commitments in the normal course of business. The Company
incurred net losses of $37,020, $41,070 and $11,997 and cash (used in)/provided
by operating activities was $(5,385), $22,989 and $(9,474) for the nine months
ended September 30, 1996 and the two years in the period ended December 31,
1995, respectively. In addition, the Company had negative working capital of
$45,773 at September 30, 1996. The continuation of the Company as a going
concern is dependent upon its ability to generate sufficient cash from
operations and financing activities. In this regard, managements' plans include:
(i) raising additional debt financing through a private placement of Senior
Notes; (ii) entering into a credit agreement for a total of $29,350 with a Bank;
and, (iii) entering into a five-year $49,900 sale leaseback of certain assets.
The financial statements do not include any adjustments related to the
recoverability and classification of recorded amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
24. SUPPLEMENTARY INFORMATION--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
DEFERRED
ALLOWANCE FOR ALLOWANCE FOR TAXATION
DOUBTFUL ALLOWANCE FOR EXHIBITION VALUATION PROVISION
ACCOUNTS OBSOLESCENCE EXPIRATION ALLOWANCE FOR CLAIMS
-------------- -------------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
December 31, 1993 (combined)............. $ 363 $ 91 $ 3,367 $ 15,251 210
Additions Charged to expense............. 848 -- -- -- 920
Reduction................................ -- (91) (3,032) 12,968 (55)
------- ------- ------- ----------- -----------
Balance at December 31, 1994
(consolidated)......................... 1,211 -- 335 28,219 1,075
Additions Charged to expense............. 2,196 -- 827 5,655 2,688
------- ------- ------- ----------- -----------
Balance at December 31, 1995
(consolidated)......................... 3,407 -- 1,162 33,874 3,763
Additions Charged to expense
(unaudited)............................ 3,040 2,493 -- 7,937 1,940
Reduction (unaudited).................... (3,610) -- -- -- --
------- ------- ------- ----------- -----------
Balance at September 30, 1996 (unaudited)
(consolidated)......................... $ 2,837 $ 2,493 $ 1,162 $ 41,811 $ 5,703
------- ------- ------- ----------- -----------
------- ------- ------- ----------- -----------
</TABLE>
25. SUBSEQUENT EVENTS.
The Company generated additional debt financing of approximately $241,200
(net proceeds) in November, 1996 through a private placement of $250 million
12 5/8% Senior Notes issued to certain qualified institutional buyers. These
proceeds were used to repay short term loans from affiliated companies. It is
management's intention to use the remaining proceeds for capital expenditures,
investments and other general corporate purposes. In addition, management
entered into a credit agreement for a total of $29,350 with a Bank.
26. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES
Tevecap conducts a significant portion of its business through subsidiaries.
The $250 million 12 5/8% Senior Notes issued to certain qualified institutional
buyers in November, 1996 are jointly and severally, irrevocably and fully and
unconditionally guaranteed, on a senior basis, by all of Tevecap's direct and
indirect subsidiaries except for TVA Communications Aruba N.A. and TVA TCG
Sistema TV.
F-27
<PAGE>
TEVECAP S.A. AND
SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
26. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
Presented below is condensed consolidating and combined 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 Communications Ltd.
Galaxy Brasil S.A.
Comercial Cabo TV Sao Paulo Ltda.
B) MAJORITY-OWNED GUARANTOR SUBSIDIARIES
TVA Sistema de Televisao S.A.
TVA Sul Participacoes S.A.
TVA Parana Ltda.
TVA Alfa Cabo Ltda.
CCS Camboriu Cable System de Telecomunicacoes Ltda.
TCC TV a Cabo Ltda.
TVA Sul Foz do Iguacu Ltda.
TVA Sul Santa Catarina Ltda.
C) NON-GUARANTOR SUBSIDIARIES
TVA Communications Aruba N.A
TVA TCG Sistema de Televisao de Porto Alegre S.A.
Separate financial statements for TVA Sistema de Televisao S.A. have been
presented as of September 30, 1996 (unaudited) and 1995 (unaudited) and December
31, 1995 and 1994, and the related statements of operations, changes in
shareholders' equity and cash flows for the nine months ended September 30, 1996
(unaudited) and 1995 (unaudited) and the three years in the period ended
December 31, 1995.
Separate consolidated and combined financial statements for TVA Sul
Partipacoes S.A. have also been presented as of September 30, 1996 and 1995
(unaudited) and December 31, 1995 and 1994, and the related statements of
operations, changes in shareholders' equity and cash flows for the nine months
ended September 30, 1996 (unaudited) and 1995 (unaudited) and the three years in
the period ended December 31, 1995.
TVA Sul Participacoes S.A. was incorporated on March 3, 1996. In September
1996, TVA Sul Participacoes S.A. became a holding company for certain entities
which were under common control, namely, TVA Sul Parana Ltda.; TV Alfa Cabo
Ltda.; TCC TV a Cabo Ltda.; CCS Camboriu Cable Systems de Telecomunicacoes
Ltda.; TVA Sul Foz do Iguacu Ltda., and TVA Sul Santa Catarina Ltda. With the
exception of TVA Sul Parana Ltda., each of these entities was acquired in 1996
and hence does not form part of the combined financial statements of TVA Sul
Participacoes S.A. for the periods ended December 31, 1995 and prior. Therefore,
the financial statements of TVA Sul Participacoes S.A. for the three
F-28
<PAGE>
TEVECAP S.A. AND
SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
26. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
years in the period ended December 31, 1995 and the nine months ended September
30, 1995 (unaudited), represent the financial statements of TVA Sul Parana Ltda.
Separate Statements of Revenues and Direct Operating Expenses have been
presented for each of the three years in the period ended December 31, 1995 for
TV Alfa Cabo Ltda., TCC TV a Cabo Ltda., CCS Camboriu Cable Systems de
Telecomunicacoes Ltda., TVA Sul Foz do Iguacu Ltda. and TVA Sul Santa Cartarina
Ltda.
Unaudited financial information has also been included for TVA Alfa Cabo
Ltda., CCS Camboriu Cable System de Telecomunicacoes Ltda, TVA Sul Santa
Catarina Ltda., TCC TV a Cabo Ltda, TVA Sul Parana Ltda, and TVA Sul Foz do
Iguacu Ltda of as and for the nine months ended September 30, 1996.
Separate financial statements for the Wholly-Owned Guarantor Subsidiaries
have not been presented based on management's determination that they do not
provide additional information that is material to investors.
F-29
<PAGE>
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
26. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AT SEPTEMBER 30, 1996
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
MAJORITY- NON-
PARENT WHOLLY-OWNED OWNED GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- --------------- ------------ --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash
equivalents........... $ 1 $ 26 $ 592 -- -- $ 619
Accounts receivable,
net................... -- 2,922 18,909 -- $ (186) 21,645
Accounts receivable from
related companies..... -- -- 2,639 -- (2,639) --
Inventories............. -- -- 15,840 -- 15,840
Film exhibition
rights................ -- -- 725 -- -- 725
Prepaid and other
assets................ -- 284 2,227 -- -- 2,511
Other accounts
receivable............ 117 -- 1,950 -- 192 2,259
----------- --------------- ------------ ----- ------------ -------------
Total current assets...... 118 3,232 42,882 -- (2,633) 43,599
----------- --------------- ------------ ----- ------------ -------------
Property, plant and
equipment............... -- 33,552 154,255 -- 256 188,063
Investments
Equity affiliates....... 22,685 240 -- $ 285 (16,979) 6,231
Cost basis investees.... -- 16,371 -- -- -- 16,371
Concessions, net........ 7,348 -- 11,395 -- -- 18,743
Loans to related
companies............... 344,272 16,125 2,953 -- (347,557) 15,793
Other..................... -- -- 2,642 -- (288) 2,354
----------- --------------- ------------ ----- ------------ -------------
Total assets.............. $ 374,423 $ 69,520 $ 214,127 $ 285 $ (367,201) $ 291,154
----------- --------------- ------------ ----- ------------ -------------
----------- --------------- ------------ ----- ------------ -------------
</TABLE>
F-30
<PAGE>
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
26. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AT SEPTEMBER 30, 1996
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
MAJORITY- NON-
PARENT WHOLLY-OWNED OWNED GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- -------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short term bank loan.... -- -- $ 5,441 -- -- $ 5,441
Film suppliers.......... -- 18,544 $ (12,806) 5,738
Other suppliers......... -- $ 14,757 36,298 -- -- 51,055
Taxes payable other than
income taxes.......... -- 1,338 6,867 -- -- 8,205
Accrued payroll and
related liabilities... -- 623 7,154 -- -- 7,777
Advance payments
received from
subscribers........... -- -- 7,473 -- -- 7,473
Other accounts payable.. $ 790 25 4,341 -- (1,473) 3,683
----------- -------------- ------------ ------------- ------------ -------------
Total current
liabilities......... 790 16,743 86,118 -- (14,279) 89,372
----------- -------------- ------------ ------------- ------------ -------------
Long-term liabilities
Loans from related
companies............. 91,324 44,274 291,695 -- (335,367) 91,926
Loans from
shareholders.......... -- -- 4,607 -- -- 4,607
Provision for claims.... -- -- 5,854 -- -- 5,854
Deferred hook up fee.... -- 2,943 -- -- -- 2,943
Liability to Fund Equity
investee.............. 160,484 -- -- -- (160,484) --
----------- -------------- ------------ ------------- ------------ -------------
Total long-term
liabilities......... 251,808 47,217 302,156 -- (495,851) 105,330
----------- -------------- ------------ ------------- ------------ -------------
Commitments and
contingencies
Minority interest......... -- -- 1,361 -- 837 2,198
Redeemable common stock,
no par value............ 144,754 -- -- -- -- 144,754
Shareholders' equity
Paid-in capital......... 142,495 22,251 35,267 $ 3,117 (60,635) 142,495
Accumulated deficit..... (165,424) (16,691) (210,775) (2,832) 202,727 (192,995)
----------- -------------- ------------ ------------- ------------ -------------
Total shareholders'
equity.............. (22,929) 5,560 (175,508) 285 142,092 (50,500)
----------- -------------- ------------ ------------- ------------ -------------
Total liabilities and
shareholders'
equity.............. $ 374,423 $ 69,520 $ 214,127 $ 285 $ (367,201) $ 291,154
----------- -------------- ------------ ------------- ------------ -------------
----------- -------------- ------------ ------------- ------------ -------------
</TABLE>
F-31
<PAGE>
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
26. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
MAJORITY- NON-
PARENT WHOLLY-OWNED OWNED GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- -------------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Gross revenues
Monthly subscriptions......... -- $ 501 $ 84,800 -- -- $ 85,301
Installation.................. -- 3,200 36,196 -- -- 39,396
Advertising................... -- -- 5,362 -- -- 5,362
Indirect programming.......... -- -- 5,278 -- -- 5,278
Other......................... -- 1 5,294 -- -- 5,295
Revenue taxes................. -- (508) (8,373) -- -- (8,881)
----------- -------------- ------------- ------------- ------------ -------------
Net revenue................. -- 3,194 128,557 -- -- 131,751
----------- -------------- ------------- ------------- ------------ -------------
Direct operating expenses
Payroll and benefits.......... -- 2,100 17,367 -- -- 19,467
Programming................... -- -- 25,477 -- -- 25,477
Transponder lease cost........ -- 4 6,571 -- -- 6,575
Technical assistance.......... -- -- 4,923 -- -- 4,923
Vehicle rentals............... -- -- 1,252 -- -- 1,252
TVA magazine.................. -- -- 4,680 -- -- 4,680
Other costs................... -- 3,006 10,177 -- -- 13,183
----------- -------------- ------------- ------------- ------------ -------------
-- 5,110 70,447 -- -- 75,557
----------- -------------- ------------- ------------- ------------ -------------
Selling, general and
administrative expenses
Payroll and benefits.......... -- 525 20,996 -- -- 21,521
Advertising and promotion..... -- 1,761 11,033 -- -- 12,794
Rent.......................... -- -- 2,323 -- -- 2,323
Other administrative
expenses.................... $ 463 1,871 7,655 -- -- 9,989
Other general expenses........ -- -- 7,083 -- -- 7,083
----------- -------------- ------------- ------------- ------------ -------------
463 4,157 49,090 -- -- 53,710
Allowance for obsolescence...... -- -- 2,493 -- -- 2,493
Depreciation.................... -- 1,059 16,377 -- -- 17,436
Amortization.................... 630 -- 481 -- -- 1,111
----------- -------------- ------------- ------------- ------------ -------------
Operating loss.............. (1,093) (7,132) (10,331) -- -- (18,556)
Interest income................. 358 8 5,779 -- $ (2,495) 3,650
Interest expense................ (6,095) (890) (5,635) -- 2,495 (10,125)
Translation (loss) gain......... 275 (168) 136 -- -- 243
Equity in (losses) income of
affiliates.................... (26,703) (825) -- $ (825) 21,711 (6,642)
Other nonoperating (expenses)
income, net................... (3,382) (1,689) (1,947) -- -- (7,018)
----------- -------------- ------------- ------------- ------------ -------------
Loss before income taxes and
minority interest......... (36,640) (10,696) (11,998) (825) 21,711 (38,448)
Income taxes.................... -- -- (105) -- -- (105)
----------- -------------- ------------- ------------- ------------ -------------
Net loss before minority
interest...................... (36,640) (10,696) (12,103) (825) 21,711 (38,553)
Minority interest............... -- -- (14) -- 1,547 1,533
----------- -------------- ------------- ------------- ------------ -------------
Net loss.................... $ (36,640) $ (10,696) $ (12,117) $ (825) $ 23,258 $ (37,020)
----------- -------------- ------------- ------------- ------------ -------------
----------- -------------- ------------- ------------- ------------ -------------
</TABLE>
F-32
<PAGE>
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
26. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
MAJORITY- NON-
PARENT WHOLLY-OWNED OWNED GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- -------------- ------------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net Loss...................... $ (36,640) $ (10,696) $ (12,117) $ (825) $ 23,258 $ (37,020)
ADJUSTMENTS TO RECONCILE NET
LOSS TO NET CASH (USED IN)
PROVIDED BY OPERATING
ACTIVITIES:
Depreciation................ -- 1,059 16,377 -- -- 17,436
Amortization................ 630 -- 481 -- -- 1,111
Allowance for exhibition
costs..................... -- -- -- -- -- --
Allowance for doubtful
accounts.................. -- -- 3,040 -- -- 3,040
Allowance for obsolescence.. -- -- 2,493 -- -- 2,493
Provision for claims........ -- -- 2,091 -- -- 2,091
Minority interest........... -- -- -- -- (1,533) (1,533)
Disposal and write-off of
fixed assets.............. -- -- 1,163 -- -- 1,163
Equity in losses (earnings)
of affiliates............. 6,682 825 -- 825 (1,690) 6,642
CHANGES IN OPERATING ASSETS AND
LIABILITIES:
Film exhibition rights...... -- -- (695) -- -- (695)
Accounts receivable......... -- (2,922) (10,696) -- 186 (13,432)
Prepaid and other assets.... -- -- 686 -- (229) 457
Other accounts receivable... (115) (228) (3,013) -- 2,168 (1,188)
Other....................... -- -- 190 -- 4,978 5,168
Accrued Interest............ 5,461 (491) (1,675) -- 1,405 4,700
Inventories................. -- -- (5,257) -- (5,257)
Legal deposits.............. -- -- (306) -- 172 (134)
Suppliers................... -- 8,898 (891) -- (9,184) (1,177)
Taxes payable other than
income taxes.............. -- 243 1,791 -- -- 2,034
Accrued payroll and related
liabilities............... -- 555 2,651 -- -- 3,206
Advances received from
subscribers............... -- -- 3,487 -- -- 3,487
Deferred hook up fee........ -- 2,943 -- -- -- 2,943
Other accounts payable...... 13 (235) 184 -- (882) (920)
----------- -------------- ------------- ------ ------------ -------------
Net cash (used in) provided by
operating activities.......... (23,969) (49) (16) -- 18,649 (5,385)
----------- -------------- ------------- ------ ------------ -------------
</TABLE>
F-33
<PAGE>
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
26. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
MAJORITY- NON-
PARENT WHOLLY-OWNED OWNED GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- -------------- ------------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of fixed assets...... -- (21,956) (50,835) -- 253 (72,538)
Loans to related companies.... (77,586) (10,700) (1,468) -- 67,085 (22,669)
Cash received on loans to
affiliated companies........ 3,333 1,474 9,315 -- (514) 13,608
Purchase of concessions....... 13,490 -- (13,490) -- (13,490) (13,490)
Investments in equity and cost
investments................. (24,474) (5,100) -- -- 12,863 (16,711)
----------- -------------- ------------- ------ ------------ -------------
Net cash used in investing
activities.................... (85,237) (36,282) (56,478) -- 67,197 (111,800)
----------- -------------- ------------- ------ ------------ -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Short term bank loans......... -- -- 5,441 -- -- 5,441
Capital contributions......... -- 16,036 18,964 -- (35,000) --
Repayments of loans from
shareholders................ -- -- (162) -- 1,684 1,522
Loans from shareholders....... -- 3,963 1,822 -- (5,785) --
Loans from related companies.. 126,227 17,349 38,232 -- (65,630) 116,178
Repayments of loans from
related companies........... (40,466) (1,003) (9,315) -- 21,246 (29,538)
Minority interest............. -- -- 1,361 -- (1,361) --
----------- -------------- ------------- ------ ------------ -------------
Net cash provided by financing
activities.................... 85,761 36,345 56,343 -- (84,846) 93,603
----------- -------------- ------------- ------ ------------ -------------
Net (decrease) increase in cash
and cash equivalents (23,445) 14 (151) -- -- (23,582)
Cash and cash equivalents at
beginning of the period....... 23,446 12 743 -- -- 24,201
----------- -------------- ------------- ------ ------------ -------------
Cash and cash equivalents at end
of the period................. $ 1 $ 26 $ 592 $ -- $ -- $ 619
----------- -------------- ------------- ------ ------------ -------------
----------- -------------- ------------- ------ ------------ -------------
SUPPLEMENTAL CASH DISCLOSURE:
Cash paid for interest........ -- -- -- -- -- --
----------- -------------- ------------- ------ ------------ -------------
----------- -------------- ------------- ------ ------------ -------------
SUPPLEMENTAL NON CASH FINANCING
ACTIVITIES:
Accrued interest on related
company loans refinanced as
principal balance........... 4,684 -- 1,272 -- (1,272) 4,684
----------- -------------- ------------- ------ ------------ -------------
----------- -------------- ------------- ------ ------------ -------------
DETAILS OF ACQUISITIONS:
Fair value of assets
acquired.................... -- -- 14,895 -- -- --
Liabilities assumed........... -- -- (1,330) -- -- --
----------- -------------- ------------- ------ ------------ -------------
Cash paid..................... -- -- (13,565) -- -- --
Less: cash acquired........... -- -- (75) -- -- --
Net cash paid for
acquisitions................ -- -- $ 13,490 -- -- --
----------- -------------- ------------- ------ ------------ -------------
----------- -------------- ------------- ------ ------------ -------------
</TABLE>
F-34
<PAGE>
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
26. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AT DECEMBER 31, 1995
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
MAJORITY - NON-
PARENT WHOLLY-OWNED OWNED GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- --------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash
equivalents........... $ 23,446 $ 12 $ 743 -- -- $ 24,201
Accounts receivable,
net................... -- -- 11,253 -- -- 11,253
Inventories............. -- -- 13,076 -- -- 13,076
Film exhibition
rights................ -- -- 30 -- -- 30
Prepaid and other
assets................ -- 55 2,913 -- -- 2,968
Other accounts
receivable............ 2 -- 1,490 -- $ (507) 985
----------- --------------- ------------ ------------- ------------ -------------
Total current
assets.............. 23,448 67 29,505 $ -- (507) 52,513
----------- --------------- ------------ ------------- ------------ -------------
Property, plant and
equipment............... -- 11,492 120,350 -- (576) 131,266
Investments
Equity affiliates....... 7,252 1,110 -- 1,110 (6,010) 3,462
Cost basis investees.... 15 11,225 -- -- -- 11,240
Concessions, net........ 7,978 -- -- -- -- 7,978
Loans to related
companies............... 281,034 6,786 10,480 -- (291,568) 6,732
Other..................... -- -- 1,568 -- 2,089 3,657
----------- --------------- ------------ ------------- ------------ -------------
Total assets.......... $ 319,727 $ 30,680 $ 161,903 $ 1,110 $ (296,572) $ 216,848
----------- --------------- ------------ ------------- ------------ -------------
----------- --------------- ------------ ------------- ------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Film suppliers.......... -- -- $ 9,512 -- $ (3,620) $ 5,892
Other suppliers......... -- $ 5,859 46,219 -- -- 52,078
Taxes payable other than
income taxes.......... -- 1,095 5,076 -- -- 6,171
Accrued payroll and
related liabilities... -- 68 4,503 -- -- 4,571
Advance payments
received from
subscribers........... -- -- 3,986 -- -- 3,986
Other accounts payable.. $ 169 273 2,830 -- -- 3,272
----------- --------------- ------------ ------------- ------------ -------------
Total current
liabilities......... 169 7,295 72,126 $ -- (3,620) 75,970
----------- --------------- ------------ ------------- ------------ -------------
Long-term liabilities
Loans from related
companies............. 585 23,174 265,282 -- (288,455) 586
Loans from
shareholders.......... -- -- 3,086 -- -- 3,086
Provision for claims.... -- -- 3,763 -- -- 3,763
Liability to Fund Equity
investee.............. 160,508 -- -- -- (158,339) 2,169
----------- --------------- ------------ ------------- ------------ -------------
Total long-term
liabilities......... 161,093 23,174 272,131 -- (446,794) 9,604
----------- --------------- ------------ ------------- ------------ -------------
Redeemable common stock,
no par value............ 144,754 -- -- -- -- 144,754
Shareholders' equity
Paid-in capital......... 142,495 6,214 17,017 3,117 (26,348) 142,495
Accumulated deficit..... (128,784) (6,003) (199,371) (2,007) 180,190 (155,975)
----------- --------------- ------------ ------------- ------------ -------------
Total shareholders'
equity.............. 13,711 211 (182,354) 1,110 153,842 (13,480)
----------- --------------- ------------ ------------- ------------ -------------
Total liabilities and
shareholders'
equity.............. $ 319,727 $ 30,680 $ 161,903 $ 1,110 $ (296,572) $ 216,848
----------- --------------- ------------ ------------- ------------ -------------
----------- --------------- ------------ ------------- ------------ -------------
</TABLE>
F-35
<PAGE>
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
26. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
WHOLLY- MAJORITY- NON-
PARENT OWNED OWNED GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Gross revenues
Monthly subscriptions......................... -- -- $ 62,496 -- -- $ 62,496
Installation.................................. -- -- 26,045 -- -- 26,045
Advertising................................... -- -- 8,377 -- -- 8,377
Indirect programming.......................... -- -- 2,866 -- -- 2,866
Other......................................... -- -- 2,226 -- -- 2,226
Revenue taxes................................. -- -- (7,506) -- -- (7,506)
---------- ------------ ------------ ------------ ------------ -------------
Net revenue................................. $ -- $ -- 94,504 $ -- $ -- 94,504
---------- ------------ ------------ ------------ ------------ -------------
Direct operating expenses
Payroll and benefits.......................... -- 315 12,205 -- -- 12,520
Programming................................... -- -- 21,609 -- -- 21,609
Transponder lease cost........................ -- -- 7,568 -- -- 7,568
Technical assistance.......................... -- -- 5,152 -- -- 5,152
Vehicle rentals............................... -- 7 1,725 -- -- 1,732
TVA magazine.................................. -- -- 3,318 -- -- 3,318
Other costs................................... -- 705 9,422 -- -- 10,127
---------- ------------ ------------ ------------ ------------ -------------
-- 1,027 60,999 -- -- 62,026
---------- ------------ ------------ ------------ ------------ -------------
Selling, general and administrative expenses
Payroll and benefits.......................... -- -- 21,627 -- -- 21,627
Advertising and promotion..................... -- 62 11,060 -- -- 11,122
Rent.......................................... -- 18 1,055 -- -- 1,073
Other administrative expenses................. 198 202 6,273 -- -- 6,673
Other general expenses........................ -- 4 6,403 -- -- 6,407
---------- ------------ ------------ ------------ ------------ -------------
198 286 46,418 -- -- 46,902
---------- ------------ ------------ ------------ ------------ -------------
Depreciation.................................... -- 127 12,721 -- -- 12,848
Amortization.................................... 420 -- -- -- -- 420
---------- ------------ ------------ ------------ ------------ -------------
Operating loss.............................. (618) (1,440) (25,634) -- -- (27,692)
---------- ------------ ------------ ------------ ------------ -------------
Interest income................................. 6,772 350 7,965 -- (11,969) 3,118
Interest expense................................ (15,273) (1,226) (13,215) -- 11,969 (17,745)
Translation loss................................ (28) (151) (160) -- -- (339)
Equity in (losses) of affiliates................ (27,316) (1,427) -- (1,427) 26,498 (3,672)
Other nonoperating (expenses) income, net....... (477) 811 4,055 -- -- 4,389
---------- ------------ ------------ ------------ ------------ -------------
Loss before income taxes and minority
interest.................................. (36,940) (3,083) (26,989) (1,427) 26,498 (41,941)
Income taxes -- -- -- -- -- --
---------- ------------ ------------ ------------ ------------ -------------
Net loss before minority interest............... (36,940) (3,083) (26,989) (1,427) 26,498 (41,941)
Minority interest............................... -- -- -- -- 871 871
---------- ------------ ------------ ------------ ------------ -------------
Net loss.................................... $ (36,940) $ (3,083) $ (26,989) $ (1,427) $ 27,369 $ (41,070)
---------- ------------ ------------ ------------ ------------ -------------
---------- ------------ ------------ ------------ ------------ -------------
</TABLE>
F-36
<PAGE>
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
26. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
WHOLLY- MAJORITY- NON-
PARENT OWNED OWNED GUARANTOR
COMPANY SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES ELIMINATIONS
----------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss......................................... $ (36,940) $ (3,083) $ (26,989) $ (1,427) $ 27,369
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
(USED IN) PROVIDED BY OPERATING ACTIVITIES:
Depreciation................................. -- 127 12,721 -- --
Amortization................................. 420 -- -- -- --
Allowance for exhibition costs............... -- -- 827 -- --
Allowance for doubtful accounts.............. -- -- 2,196 -- --
Provision for claims......................... -- -- 2,688 -- --
Minority interest............................ -- -- -- -- (871)
Disposal and write-off of fixed assets....... -- 4,352 474 -- (4,485)
Equity in losses (earnings) of affiliates.... 27,316 (1,427) -- 1,427 (23,644)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Film exhibition rights....................... -- -- 560 -- --
Accounts receivable.......................... -- -- (5,908) -- --
Prepaid and other assets..................... -- (55) (1,214) -- --
Other accounts receivable.................... (2) -- (599) -- --
Accrued Interest............................. 8,473 244 5,395 -- (4,871)
Inventories.................................. -- 333 (7,706) -- --
Legal deposits............................... -- -- (108) -- --
Suppliers.................................... -- 5,385 34,004 -- (3,114)
Taxes payable other than income taxes........ -- 1,095 3,786 -- --
Accrued payroll and related liabilities...... -- 68 1,568 -- --
Deferred accounts payable.................... -- -- 2,956 -- --
Other accounts payable....................... 3 273 1,372 -- --
----------- ------------- ------------- ------------- ------------
Net cash (used in) provided by operating
activities............................... (730) 7,312 26,023 -- (9,616)
----------- ------------- ------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets....................... -- (11,619) (86,470) -- 5,060
Loans to related companies..................... (115,498) (6,709) (8,220) -- 122,460
Cash received on loans to related companies.... 34,220 -- 26 -- (31,655)
Purchase of concessions........................ (6,393) -- -- -- --
Investments in equity and cost investments..... (4,382) (13,763) -- (3,117) 6,399
----------- ------------- ------------- ------------- ------------
Net cash used in investing activities...... (92,053) (32,091) (94,664) (3,117) 102,264
----------- ------------- ------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions.......................... 125,000 2,154 -- 3,117 (5,271)
Repayments of loans from shareholders.......... -- 2,154 -- -- (2,154)
Loans from related companies................... 131,858 22,848 97,218 -- (120,064)
Repayments of loans from related companies..... (140,629) (2,365) (32,477) -- 34,840
----------- ------------- ------------- ------------- ------------
Net cash provided by financing
activities............................... 116,229 24,791 64,741 3,117 (92,649)
----------- ------------- ------------- ------------- ------------
Net increase (decrease) in cash and cash
equivalents.................................... 23,446 12 (3,901) -- --
Cash and cash equivalents at beginning of the
period......................................... -- -- 4,644 -- --
----------- ------------- ------------- ------------- ------------
Cash and cash equivalents at end of the
period................................... $ 23,446 $ 12 $ 743 $ -- $ --
----------- ------------- ------------- ------------- ------------
----------- ------------- ------------- ------------- ------------
SUPPLEMENTAL CASH DISCLOSURE:
Cash paid for interest......................... $ 8,390 $ -- $ 2,708 $ -- $ (2,708)
----------- ------------- ------------- ------------- ------------
----------- ------------- ------------- ------------- ------------
SUPPLEMENTAL NON-CASH FINANCINGactivities:
Accrued interest on related company loans
refinanced as principal balance.............. $ 9,355 $ 34 $ 4,754 $ -- $ (4,788)
----------- ------------- ------------- ------------- ------------
----------- ------------- ------------- ------------- ------------
<CAPTION>
CONSOLIDATED
-------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss......................................... $ (41,070)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
(USED IN) PROVIDED BY OPERATING ACTIVITIES:
Depreciation................................. 12,848
Amortization................................. 420
Allowance for exhibition costs............... 827
Allowance for doubtful accounts.............. 2,196
Provision for claims......................... 2,688
Minority interest............................ (871)
Disposal and write-off of fixed assets....... 341
Equity in losses (earnings) of affiliates.... 3,672
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Film exhibition rights....................... 560
Accounts receivable.......................... (5,908)
Prepaid and other assets..................... (1,269)
Other accounts receivable.................... (601)
Accrued Interest............................. 9,241
Inventories.................................. (7,373)
Legal deposits............................... (108)
Suppliers.................................... 36,275
Taxes payable other than income taxes........ 4,881
Accrued payroll and related liabilities...... 1,636
Deferred accounts payable.................... 2,956
Other accounts payable....................... 1,648
-------------
Net cash (used in) provided by operating
activities............................... 22,989
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets....................... (93,029)
Loans to related companies..................... (7,967)
Cash received on loans to related companies.... 2,591
Purchase of concessions........................ (6,393)
Investments in equity and cost investments..... (14,863)
-------------
Net cash used in investing activities...... (119,661)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions.......................... 125,000
Repayments of loans from shareholders.......... --
Loans from related companies................... 131,860
Repayments of loans from related companies..... (140,631)
-------------
Net cash provided by financing
activities............................... 116,229
-------------
Net increase (decrease) in cash and cash
equivalents.................................... 19,557
Cash and cash equivalents at beginning of the
period......................................... 4,644
-------------
Cash and cash equivalents at end of the
period................................... $ 24,201
-------------
-------------
SUPPLEMENTAL CASH DISCLOSURE:
Cash paid for interest......................... $ 8,390
-------------
-------------
SUPPLEMENTAL NON-CASH FINANCINGactivities:
Accrued interest on related company loans
refinanced as principal balance.............. $ 9,355
-------------
-------------
</TABLE>
F-37
<PAGE>
TEVECAP S.A. AND
SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
26. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET AT DECEMBER 31, 1994
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
WHOLLY- MAJORITY-
PARENT OWNED OWNED
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.............. -- -- $ 4,644 -- $ 4,644
Accounts receivable, net............... -- -- 7,541 -- 7,541
Inventories............................ -- $ 333 5,370 -- 5,703
Film exhibition rights................. -- -- 1,417 -- 1,417
Prepaid and other assets............... -- -- 1,699 -- 1,699
Other accounts receivable.............. -- -- 891 $ (507) 384
----------- ------------- ------------ ------------ -------------
Total current assets................. $ -- 333 21,562 (507) 21,388
----------- ------------- ------------ ------------ -------------
Property, plant and equipment............ -- 4,352 47,074 -- 51,426
Investments............................ -- -- -- -- --
Equity affiliates...................... 3,664 -- -- (1,808) 1,856
Cost basis investees................... 39 -- -- -- 39
Concessions, net....................... 2,035 -- -- -- 2,035
Loans to related companies............... 196,504 33 103 (195,621) 1,019
Other.................................... -- -- 1,357 1,321 2,678
----------- ------------- ------------ ------------ -------------
Total assets......................... $ 202,242 $ 4,718 $ 70,096 $ (196,615) $ 80,441
----------- ------------- ------------ ------------ -------------
----------- ------------- ------------ ------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Film suppliers......................... -- -- $ 7,093 $ (507) $ 6,586
Other suppliers........................ -- $ 474 14,635 -- 15,109
Taxes payable other than income
taxes................................ -- -- 1,290 -- 1,290
Accrued payroll and related
liabilities.......................... -- -- 2,935 -- 2,935
Advance payments received from
subscribers.......................... -- -- 1,030 -- 1,030
Other accounts payable................. $ 166 -- 1,458 -- 1,624
----------- ------------- ------------ ------------ -------------
Total current liabilities............ 166 474 28,441 (507) 28,574
----------- ------------- ------------ ------------ -------------
Long-term liabilities
Loans from related companies........... -- 2,436 193,082 (195,518) --
Loans from shareholders................ -- -- 2,864 -- 2,864
Provision for claims................... -- -- 1,075 -- 1,075
Liability to Fund Equity investee...... 131,672 -- -- (131,088) 584
----------- ------------- ------------ ------------ -------------
Total long-term liabilities.......... 131,672 2,436 197,021 (326,606) 4,523
----------- ------------- ------------ ------------ -------------
Redeemable common stock, no par value.... 19,754 -- -- -- 19,754
Shareholders' equity
Paid-in capital........................ 142,495 1,823 17,017 (18,840) 142,495
Accumulated deficit.................... (91,845) (15) (172,383) 149,338 (114,905)
----------- ------------- ------------ ------------ -------------
Total shareholders' equity........... 50,650 1,808 (155,366) 130,498 27,590
----------- ------------- ------------ ------------ -------------
----------- ------------- ------------ ------------ -------------
Total liabilities and shareholders'
equity........................... $ 202,242 $ 4,718 $ 70,096 $ (196,615) $ 80,441
----------- ------------- ------------ ------------ -------------
----------- ------------- ------------ ------------ -------------
</TABLE>
F-38
<PAGE>
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
26. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
MAJORITY-
PARENT OWNED
COMPANY SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Gross revenues
Monthly subscriptions.................................. -- $ 27,976 -- $ 27,976
Installation........................................... -- 6,997 -- 6,997
Advertising............................................ -- 5,727 -- 5,727
Indirect programming................................... -- 1,626 -- 1,626
Other.................................................. -- 1,446 -- 1,446
Revenue taxes.......................................... -- (872) -- (872)
---------- ------------ ------------ -------------
Net revenue........................................ $ -- 42,900 $ -- 42,900
---------- ------------ ------------ -------------
Direct operating expenses
Payroll and benefits................................... -- 8,022 -- 8,022
Programming............................................ -- 12,133 -- 12,133
Transponder lease cost................................. -- 1,555 -- 1,555
Technical assistance................................... -- 1,622 -- 1,622
Vehicle rentals........................................ -- 788 -- 788
TVA magazine........................................... -- 1,430 -- 1,430
Other costs............................................ -- 3,109 -- 3,109
---------- ------------ ------------ -------------
-- 28,659 -- 28,659
---------- ------------ ------------ -------------
Selling, general and administrative expenses
Payroll and benefits................................... -- 14,241 -- 14,241
Advertising and promotion.............................. -- 3,540 -- 3,540
Rent................................................... -- 656 -- 656
Other administrative expenses.......................... -- 2,206 -- 2,206
Other general expenses................................. 143 3,584 -- 3,727
---------- ------------ ------------ -------------
143 24,227 -- 24,370
---------- ------------ ------------ -------------
Depreciation............................................. -- 6,177 -- 6,177
Operating loss........................................... (143) (16,163) (16,306)
---------- ------------ ------------ -------------
Interest income.......................................... 64,360 8,479 (51,033) 21,806
Interest expense......................................... (5,279) (62,166) 51,032 (16,413)
Translation loss......................................... (231) (683) -- (914)
Equity in (losses) income of affiliates.................. (61,063) -- 61,446 383
Other nonoperating expenses, net......................... (1,228) (45) -- (1,273)
---------- ------------ ------------ -------------
Loss before income taxes and minority interest......... (3,584) (70,578) 61,445 (12,717)
Income taxes (Note 11)
---------- ------------ ------------ -------------
Net loss before minority interest........................ (3,584) (70,578) 61,445 (12,717)
Minority interest........................................ -- -- 720 720
---------- ------------ ------------ -------------
Net loss............................................... $ (3,584) $ (70,578) $ 62,165 $ (11,997)
---------- ------------ ------------ -------------
---------- ------------ ------------ -------------
</TABLE>
F-39
<PAGE>
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
26. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
WHOLLY- MAJORITY-
PARENT OWNED OWNED
COMPANY SUBSIDIARIES SUBSIDIARIES ELIMINATIONS
----------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................................... $ (3,584) -- $ (70,578) $ 62,165
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH (USED IN)
PROVIDED BY OPERATING ACTIVITIES:
Depreciation................................................ -- -- 6,141 --
Allowance for doubtful accounts............................. -- -- 848 --
Provision for claims........................................ -- -- 864 --
Minority interest........................................... -- -- -- (721)
Disposal and write-off of fixed assets...................... -- -- 662 --
Equity in losses (earnings) of affiliates................... 61,063 -- -- (61,446)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Film exhibition rights...................................... -- -- (114) --
Accounts receivable......................................... -- -- (7,007) --
Prepaid and other assets.................................... -- -- (1,364) --
Other accounts receivable................................... -- -- (706) 507
Other....................................................... -- -- (2,683) (233)
Accrued Interest............................................ (74,306) -- 57,221 17,808
Inventories................................................. -- $ (333) (2,050) --
Legal deposits.............................................. -- -- (154) --
Suppliers................................................... -- 474 5,342 (507)
Taxes payable other than income taxes....................... -- -- 685 --
Accrued payroll and related liabilities..................... -- -- 1,454 --
Advances received from subscribers.......................... -- -- (496) --
Other accounts payable...................................... 166 -- 1,175 --
----------- ------------- ------------- ------------
Net cash (used in) provided by operating activities..... (16,661) 141 (10,761) 17,574
----------- ------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets.................................... -- (4,362) (18,007) --
Loans to related companies.................................. (148,622) (33) (2,098) 147,271
Cash received on loans to related companies................. 5,997 -- 4,019 (5,535)
Purchase of concessions..................................... (2,035) -- -- --
Investments in equity and cost investments.................. (929) -- -- --
----------- ------------- ------------- ------------
Net cash used in investing activities................... (145,589) (4,395) (16,086) 141,736
----------- ------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions....................................... 162,250 1,808 7,588 (20,194)
Repayments of loans from shareholders....................... -- -- (3,082) --
Loans from related companies................................ -- 2,446 225,581 (131,041)
Repayments of loans from related companies.................. -- -- (178,680) (8,075)
Repayments of loans from banks.............................. -- -- (19,935) --
----------- ------------- ------------- ------------
Net cash provided by financing activities............... 162,250 4,254 31,472 (159,810)
----------- ------------- ------------- ------------
Net increase in cash and cash equivalents..................... -- -- 4,625 --
Cash and cash equivalents at beginning of the period.......... -- -- 19 --
----------- ------------- ------------- ------------
Cash and cash equivalents at end of the period.......... $ -- $ -- $ 4,644 $ --
----------- ------------- ------------- ------------
----------- ------------- ------------- ------------
SUPPLEMENTAL CASH DISCLOSURE:
Cash paid for interest...................................... $ 16,413 $ -- $ 8,583 $ (8,583)
----------- ------------- ------------- ------------
----------- ------------- ------------- ------------
SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES:
Accrued interest on related company loans refinanced as
principal balance......................................... $ -- $ -- $ 56,427 $ (56,427)
----------- ------------- ------------- ------------
----------- ------------- ------------- ------------
<CAPTION>
CONSOLIDATED
-------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................................... $ (11,997)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH (USED IN)
PROVIDED BY OPERATING ACTIVITIES:
Depreciation................................................ 6,141
Allowance for doubtful accounts............................. 848
Provision for claims........................................ 864
Minority interest........................................... (721)
Disposal and write-off of fixed assets...................... 662
Equity in losses (earnings) of affiliates................... (383)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Film exhibition rights...................................... (114)
Accounts receivable......................................... (7,007)
Prepaid and other assets.................................... (1,364)
Other accounts receivable................................... (199)
Other....................................................... (2,450)
Accrued Interest............................................ 723
Inventories................................................. (2,383)
Legal deposits.............................................. (154)
Suppliers................................................... 5,309
Taxes payable other than income taxes....................... 685
Accrued payroll and related liabilities..................... 1,454
Advances received from subscribers.......................... (496)
Other accounts payable...................................... 1,341
-------------
Net cash (used in) provided by operating activities..... (9,707)
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets.................................... (22,369)
Loans to related companies.................................. (3,482)
Cash received on loans to related companies................. 4,481
Purchase of concessions..................................... (2,035)
Investments in equity and cost investments.................. (929)
-------------
Net cash used in investing activities................... (24,334)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions....................................... 151,452
Repayments of loans from shareholders....................... (3,082)
Loans from related companies................................ 96,986
Repayments of loans from related companies.................. (186,755)
Repayments of loans from banks.............................. (19,935)
-------------
Net cash provided by financing activities............... 38,666
-------------
Net increase in cash and cash equivalents..................... 4,625
Cash and cash equivalents at beginning of the period.......... 19
-------------
Cash and cash equivalents at end of the period.......... $ 4,644
-------------
-------------
SUPPLEMENTAL CASH DISCLOSURE:
Cash paid for interest...................................... $ 16,413
-------------
-------------
SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES:
Accrued interest on related company loans refinanced as
principal balance......................................... $ --
-------------
-------------
</TABLE>
F-40
<PAGE>
TEVECAP S.A. AND
SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
26. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
MAJORITY-
OWNED
SUBSIDIARIES ELIMINATIONS COMBINED
------------ ------------ -------------
<S> <C> <C> <C>
Gross revenues
Monthly subscriptions.............................................. $ 12,544 -- $ 12,544
Installation....................................................... 4,350 -- 4,350
Advertising........................................................ 2,099 -- 2,099
Indirect programming............................................... 530 -- 530
Other.............................................................. 369 -- 369
Revenue taxes...................................................... (371) -- (371)
------------ ------------ -------------
Net revenue...................................................... 19,521 $ -- 19,521
------------ ------------ -------------
Direct operating expenses
Payroll and benefits............................................... 6,079 -- 6,079
Programming........................................................ 18,156 -- 18,156
Transponder lease cost............................................. 1,262 -- 1,262
Technical assistance............................................... 1,773 -- 1,773
Vehicle rentals.................................................... 597 -- 597
TVA magazine....................................................... 725 -- 725
Other costs........................................................ 1,187 -- 1,187
------------ ------------ -------------
29,779 -- 29,779
------------ ------------ -------------
Selling, general and administrative expenses
Payroll and benefits............................................... 10,945 -- 10,945
Advertising and promotion.......................................... 2,205 -- 2,205
Rent............................................................... 847 -- 847
Other administrative expenses...................................... 2,265 -- 2,265
Other general expenses............................................. 3,695 -- 3,695
------------ ------------ -------------
19,957 -- 19,957
------------ ------------ -------------
Depreciation......................................................... 4,813 -- 4,813
------------ ------------ -------------
Operating loss................................................... (35,028) -- (35,028)
Interest income...................................................... 5,369 -- 5,369
Interest expense..................................................... (8,492) -- (8,492)
Translation gain..................................................... 788 -- 788
Other nonoperating expenses, net..................................... (557) -- (557)
------------ ------------ -------------
Loss before income taxes and minority interest................... (37,920) -- (37,920)
Income taxes..................................................... -- -- --
------------ ------------ -------------
Net loss before minority interest.................................... (37,920) -- (37,920)
Minority interest.................................................... -- 292 292
------------ ------------ -------------
Net loss......................................................... $ (37,920) 292 $ (37,628)
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
F-41
<PAGE>
TEVECAP S.A. AND SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
26. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTOR
SUBSIDIARIES (CONTINUED)
CONDENSED COMBINED CASH FLOW STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
MAJORITY-
OWNED
SUBSIDIARIES ELIMINATIONS COMBINED
------------- --------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................... $ (37,920) $ 292 $ (37,628)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES:
Depreciation..................................................... 5,081 -- 5,081
Provision for claims............................................. (131) -- (131)
Minority interest................................................ -- (292) (292)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Film exhibition rights........................................... 4,843 -- 4,843
Accounts receivable.............................................. (181) -- (181)
Prepaid and other assets......................................... 113 -- 113
Other accounts receivable........................................ (90) -- (90)
Other............................................................ (221) -- (221)
Accrued Interest................................................. 8,368 -- 8,368
Inventories...................................................... (533) -- (533)
Legal deposits................................................... (415) -- (415)
Suppliers........................................................ 40 -- 40
Taxes payable other than income taxes............................ 167 -- 167
Accrued payroll and related liabilities.......................... 140 -- 140
Advances received from subscribers............................... 1,415 -- 1,415
Other accounts payable........................................... 144 -- 144
------------- ------ -------------
Net cash used in operating activities.......................... (19,180) -- (19,180)
------------- ------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets........................................... (11,379) -- (11,379)
Loans to related companies......................................... (1,811) -- (1,811)
------------- ------ -------------
Net cash used in investing activities.......................... (13,190) -- (13,190)
------------- ------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans from shareholders............................................ 3,299 -- 3,299
Loans to shareholders.............................................. (3,298) -- (3,298)
Loans from related companies....................................... 106,023 -- 106,023
Repayments of loans from related companies......................... (67,056) -- (67,056)
Repayments of loans from banks..................................... (6,620) -- (6,620)
------------- ------ -------------
Net cash provided by financing activities...................... 32,348 -- 32,348
------------- ------ -------------
Net (decrease) increase in cash and cash equivalents................. (22) -- (22)
Cash and cash equivalents at beginning of the period................. 41 -- 41
------------- ------ -------------
Cash and cash equivalents at end of the period................. $ 19 $ -- $ 19
------------- ------ -------------
------------- ------ -------------
SUPPLEMENTAL CASH DISCLOSURE:
Cash paid for interest............................................. $ 1,183 $ -- $ 1,183
------------- ------ -------------
------------- ------ -------------
SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES:
Accrued interest on related company loans refinanced as principal
balance.......................................................... $ 8,225 $ -- $ 8,225
------------- ------ -------------
------------- ------ -------------
</TABLE>
F-42
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
TVA SISTEMA DE TELEVISAO S.A.
We have audited the accompanying balance sheets of TVA SISTEMA DE TELEVISAO
S.A. (the "Company") as of December 31, 1995 and 1994, and the related
statements of operations, changes in shareholders' equity and cash flows for the
three years in the period ended December 31, 1995, 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 audit 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, 1995 and 1994, and the related results of their
operations and cash flows for the three years in the period ended December 31,
1995, in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 3 to financial statements, the Company has
retroactively changed its method of accounting for installation equipment costs
and operating costs incurred during the period of constructing their television
systems.
Coopers & Lybrand
Sao Paulo, Brazil
August 23, 1996
F-43
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
BALANCE SHEETS
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ----------------------
1996 1995 1994
-------------- ----------- ---------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents (Note 4).................................... $ 178 $ 698 $ 4,644
Accounts receivable, net (Note 5)..................................... 18,160 11,221 7,541
Accounts receivable from related companies (Note 9)................... 2,639 945 707
Inventories (Note 6).................................................. 14,464 13,076 5,370
Film exhibition rights (Note 7)....................................... 725 30 1,417
Prepaid and other assets (Note 8)..................................... 1,639 2,845 1,654
Other accounts receivable............................................. 834 543 177
-------------- ----------- ---------
Total current assets................................................ 38,639 29,358 21,510
-------------- ----------- ---------
Property, plant and equipment (Note 12)................................. 140,706 118,884 46,877
Loans to related companies (Note 9)..................................... 2,953 10,480 --
Other................................................................... 1,665 1,559 1,452
-------------- ----------- ---------
Total assets........................................................ $ 183,963 $ 160,281 $ 69,839
-------------- ----------- ---------
-------------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of the financial statements
F-44
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
BALANCE SHEETS
AT SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER --------------------------
30, 1996 1995 1994
-------------- ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term bank loans (Note 13)..................................... $ 5,441 -- --
Film suppliers...................................................... 18,544 $ 9,512 $ 7,093
Other suppliers..................................................... 35,546 46,123 14,532
Taxes payable other than income taxes............................... 6,659 5,020 1,261
Accrued payroll and related liabilities............................. 6,549 4,250 2,795
Advance payments received from subscribers.......................... 7,473 3,986 1,031
Other accounts payable (Note 14).................................... 1,913 1,828 1,402
-------------- ------------ ------------
Total current liabilities....................................... 82,125 70,719 28,114
-------------- ------------ ------------
Long-term liabilities
Loans from shareholders (Note 10)................................... 2,767 2,906 2,729
Loans from related companies (Note 9)............................... 274,719 254,802 187,196
Provision for claims (Note 18)...................................... 5,704 3,763 1,075
-------------- ------------ ------------
Total long-term liabilities..................................... 283,190 261,471 191,000
-------------- ------------ ------------
Commitments and contingencies (Note 18)
Shareholders' equity
Common shares, no par value, 6,980,764 shares issued and outstanding
(Note 17)......................................................... 16,303 16,303 16,303
Accumulated deficit................................................. (197,655) (188,212) (165,578)
-------------- ------------ ------------
Total shareholders' equity...................................... (181,352) (171,909) (149,275)
-------------- ------------ ------------
Total liabilities and shareholders' equity...................... $ 183,963 $ 160,281 $ 69,839
-------------- ------------ ------------
-------------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements
F-45
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND
SEPTEMBER 30, 1995 (UNAUDITED) AND THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------------------ ----------------------------------
1996 1995 1995 1994 1993
----------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Gross revenues
Monthly subscriptions................................. $ 76,588 $ 39,106 $ 59,263 $ 26,584 $ 12,147
Installation.......................................... 35,377 17,995 26,045 6,997 4,350
Advertising........................................... 5,362 5,505 8,377 5,721 2,099
Indirect programming.................................. 5,278 2,114 2,866 1,626 628
Other................................................. 5,229 2,194 2,226 1,446 271
Revenue taxes......................................... (8,065) (5,018) (7,280) (801) (352)
----------- ----------- ---------- ---------- ----------
Net revenue......................................... 119,769 61,896 91,497 41,573 19,143
----------- ----------- ---------- ---------- ----------
Direct operating expenses
Payroll and benefits.................................. 14,600 7,742 10,749 7,017 5,152
Programming........................................... 24,336 14,105 21,609 12,133 18,156
Transponder lease cost................................ 6,571 5,357 7,568 1,555 1,262
Technical assistance.................................. 4,219 3,753 4,937 1,607 1,692
Vehicle rentals....................................... 1,014 941 1,478 767 525
TVA magazine.......................................... 4,522 2,164 3,318 1,430 725
Other costs........................................... 9,047 5,961 9,190 2,677 932
----------- ----------- ---------- ---------- ----------
64,309 40,023 58,849 27,186 28,444
----------- ----------- ---------- ---------- ----------
Selling, general and administrative expenses
Payroll and benefits.................................. 20,032 15,396 21,089 14,034 10,699
Advertising and promotion............................. 10,711 5,702 10,793 3,540 2,163
Rent.................................................. 2,165 688 941 656 837
Other administrative expenses......................... 6,535 4,134 5,981 2,205 2,265
Other general expenses................................ 6,752 3,522 5,917 2,782 3,697
----------- ----------- ---------- ---------- ----------
46,195 29,442 44,721 23,217 19,661
----------- ----------- ---------- ---------- ----------
Allowance for obsolescence.............................. 2,493 -- -- -- --
Depreciation............................................ 15,980 8,544 12,535 6,141 4,793
----------- ----------- ---------- ---------- ----------
Operating loss...................................... (9,208) (16,113) (24,608) (14,971) (33,755)
----------- ----------- ---------- ---------- ----------
Interest income......................................... 5,612 5,388 7,800 8,298 5,331
Interest expense........................................ (3,894) (6,724) (9,687) (59,598) (7,997)
Translation gain (loss)................................. 236 14 (167) (662) 506
Other nonoperating (expenses) income, net............... (2,189) 3,032 4,028 (45) (557)
----------- ----------- ---------- ---------- ----------
Loss before income taxes and minority interest...... (9,443) (14,403) (22,634) (66,978) (36,472)
Income taxes (Note 11) -- -- -- -- --
----------- ----------- ---------- ---------- ----------
Net loss............................................ $ (9,443) $ (14,403) $ (22,634) $ (66,978) $ (36,472)
----------- ----------- ---------- ---------- ----------
----------- ----------- ---------- ---------- ----------
</TABLE>
F-46
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
AND SEPTEMBER 30, 1995 (UNAUDITED) AND THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
PAID-IN
CAPITAL ACCUMULATED
(NOTE 17) DEFICIT TOTAL
---------- ------------- ------------
<S> <C> <C> <C>
Balance at December 31, 1992............................................ $ 10,797 $ (62,128) $ (51,331)
Net loss for the year................................................... -- (36,472) (36,472)
---------- ------------- ------------
Balance at of December 31, 1993..................................... 10,797 (98,600) (87,803)
Capital contributed on:
February 28, 1994..................................................... 5,432 -- 5,432
April 4, 1994......................................................... 74 -- 74
Net loss for the year................................................... (66,978) (66,978)
---------- ------------- ------------
Balance at December 31, 1994...................................... 16,303 (165,578) (149,275)
Net loss for the year................................................... -- (22,634) (22,634)
---------- ------------- ------------
Balance at December 31, 1995...................................... 16,303 (188,212) (171,909)
Net loss for the period (unaudited)..................................... -- (9,443) (9,443)
---------- ------------- ------------
Balance at September 30, 1996 (unaudited)......................... $ 16,303 $ (197,655) $ (181,352)
---------- ------------- ------------
---------- ------------- ------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995:
Balance at December 31, 1994...................................... $ 16,303 $ (165,578) $ (149,275)
Net loss for the period (unaudited)..................................... -- (14,403) (14,403)
---------- ------------- ------------
Balance at September 30, 1995 (unaudited)......................... $ 16,303 $ (179,981) $ (163,678)
---------- ------------- ------------
---------- ------------- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-47
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
AND SEPTEMBER 30, 1995 (UNAUDITED) AND THE YEARS ENDED
DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------------------ -------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1995 1994 1993
----------- ----------- --------- --------- ---------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (9,443) $ (14,403) $ (22,634) $ (66,978) $ (36,472)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH (USED IN)
PROVIDED BY OPERATING ACTIVITIES:
Depreciation.............................................. 15,980 8,544 12,535 6,141 4,793
Allowance for exhibition costs............................ -- -- 827 -- --
Allowance for doubtful accounts........................... 3,040 -- 2,196 848 --
Allowance for obsolescence................................ 2,493 -- -- -- --
Provision for claims...................................... 1,941 2,411 2,688 865 (133)
Minority interest......................................... -- -- -- -- (331)
Loss on disposal of fixed assets.......................... 368 -- 474 629 --
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Film exhibition rights.................................... (695) 213 560 (114) 4,843
Accounts receivable....................................... (9,979) (4,899) (5,876) (7,007) (181)
Prepaid and other assets.................................. 1,206 949 (1,191) (1,330) 117
Other accounts receivable................................. (1,985) (2,854) (604) (712) (77)
Other..................................................... 200 (507) -- (600) 107
Accrued Interest.......................................... (2,974) (48) 356 54,019 7,994
Inventories............................................... (3,881) (7,049) (7,706) (2,050) (533)
Legal deposits............................................ (306) (83) (107) (149) (413)
Suppliers................................................. (1,545) 16,057 34,010 5,270 46
Taxes payable other than income taxes..................... 1,639 448 3,759 662 161
Accrued payroll and related liabilities................... 2,299 2,468 1,453 1,394 123
Advances received from subscribers........................ 3,487 1,005 2,955 (495) 1,415
Other accounts payable.................................... 85 999 426 1,128 148
----------- ----------- --------- --------- ---------
Net cash provided by (used in) operating activities..... 1,930 3,251 24,121 (8,479) (18,393)
----------- ----------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets.................................... (38,170) (56,332) (85,016) (17,938) (11,061)
Loans to affiliated companies............................... (508) (7,633) (8,220) (2,098) (1,811)
Cash received on loans to related companies................. 9,315 26 26 3,942
----------- ----------- --------- --------- ---------
Net cash used in investing activities................... (29,363) (63,939) (93,210) (16,094) (12,872)
----------- ----------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term bank loans....................................... 5,441 -- -- -- --
Capital contributions....................................... -- -- -- 5,506 --
Repayments of loans from shareholders....................... -- -- -- (3,082) --
Loans from shareholders..................................... -- -- -- -- 3,298
Loans to shareholders....................................... -- -- -- -- (3,298)
Loans from related companies................................ 21,472 71,785 89,000 227,188 104,863
Repayments of loans from related companies.................. -- (15,734) (23,857) (180,477) (67,002)
Repayments of loans from banks.............................. -- -- -- (19,935) (6,620)
----------- ----------- --------- --------- ---------
Net cash provided by financing activities............... 26,913 56,051 65,143 29,200 31,241
----------- ----------- --------- --------- ---------
Net (decrease) increase in cash and cash equivalents.......... (520) (4,637) (3,946) 4,627 (24)
Cash and cash equivalents at beginning of the period.......... 698 4,644 4,644 17 41
----------- ----------- --------- --------- ---------
Cash and cash equivalents at end of the period.......... $ 178 $ 7 $ 698 $ 4,644 $ 17
----------- ----------- --------- --------- ---------
----------- ----------- --------- --------- ---------
SUPPLEMENTAL CASH DISCLOSURE:
Cash paid for interest...................................... $ -- $ -- $ -- $ 8,583 $ --
----------- ----------- --------- --------- ---------
----------- ----------- --------- --------- ---------
SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES:
Accrued interest on related company loans refinanced
as principal balance........................................ $ -- $ 1,597 $ 2,468 $ 54,158 $ 7,862
----------- ----------- --------- --------- ---------
----------- ----------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-48
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
NOTES TO THE FINANCIAL STATEMENTS
1. THE COMPANY AND ITS PRINCIPAL OPERATIONS
The Company renders services related to wireless cable and cable and
parabolic antenna television systems, including marketing and advertising,
production, distribution and licensing of domestic and foreign television
programs. The Company has wireless cable channel rights primarily in major urban
markets in Brazil.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant policies followed in the preparation of the accompanying
financial statements are described below:
2.1 BASIS OF PRESENTATION
The financial statements are presented in US 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 Company was formed on July 31, 1993 by transferring net assets, at book
value, from TVA Brasil, an entity under common control. Results for the year
ended December 31, 1993 include those of TVA Brasil for the period from January
1, 1993 to July 31, 1993 and those of TVA Sistema, therafter.
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
financial statement dates and the reported amount of revenues and expenses
during the reporting periods. Since management's judgment involves making
estimates concerning the likelihood of future events, the actual results could
differ from those estimates which will have a positive or negative effect on
future period results.
2.2 ACCOUNTING RECORDS
As required by Brazilian Law, and in accordance with local accounting
practices, the accounting records of the Company are maintained in Brazilian
currency (REAL). In order to present the financial statements in conformity with
U.S. GAAP, the Company maintains additional accounting records which are used
solely for this purpose.
2.3 CURRENCY REMEASUREMENT
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
52, "Foreign Currency Transactions", the United States dollar has been assumed
to be the functional currency as Brazil is a "hyperinflationary" country. As
such, the local accounts of the Company are translated into United States
dollars as follows:
- Nonmonetary assets and liabilities are translated at historical rates. All
other assets and liabilities are translated at the official rate of
exchange of R$1.022 to US$1 in effect on September 30, 1996; R$0.973 to
US$1 in effect on December 31, 1995; and, R$0.846 to US$1 on December 31,
1994.
- Income and expenses are translated at the average exchange rates in effect
each month, except for those related to assets and liabilities which are
translated at historical exchange rates, and
F-49
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
2.3 CURRENCY REMEASUREMENT (CONTINUED)
deferred income taxes, which are translated at the current rate.
Translation gains/losses are recognized in the income statement.
2.4 CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as cash and cash in banks and
investments in interest-bearing securities and are carried at cost plus accrued
interest. Short-term investments with original maturities of three months or
less at the time of purchase are considered cash equivalents.
2.5 FINANCIAL INSTRUMENTS
In accordance with SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments," information is provided about the fair value of certain financial
instruments for which it is practicable to estimate that value.
For the purposes of SFAS No. 107, the estimated fair value of a financial
instrument is the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
The carrying values of the Company's financial instruments as of September 30,
1996, December 31, 1995 and December 31, 1994 approximate management's best
estimate of their estimated fair values. The following methods and assumptions
were used to estimate the fair value of each class of financial instrument for
which it is practicable to estimate that value:
- The fair value of certain financial assets carried at cost, including
cash, accounts receivable, other accounts receivable, and certain other
short-term assets is considered to approximate their respective carrying
value due to their short-term nature.
- The fair value of payables to film suppliers and other suppliers, other
accounts payable, loans to related companies and certain other short-term
liabilities is considered to approximate their respective carrying value
due to their short-term nature.
- The fair value of loans from related companies approximates their
respective carrying values, as interest on these loans is at market rates.
2.6 ACCOUNTS RECEIVABLE
Accounts receivable are stated at their estimated realizable values. An
allowance for doubtful accounts is established on the basis of an analysis of
the accounts receivable, in light of the risks involved, and is considered
sufficient to cover any losses incurred in realization of credits.
2.7 INVENTORIES
Inventories consist of materials and supplies and imports in transit.
Materials and supplies are used to provide service to new customers, and to
ensure continuity of service to existing customers. Imports in transit represent
materials purchased from foreign countries that have not yet been received.
Inventories are stated at the lower of cost or market. Cost is determined
principally under the average cost method. An allowance for obsolescence has
been established on the basis of an analysis of slow-moving materials and
supplies.
F-50
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
2.8 FILM EXHIBITION RIGHTS AND PROGRAM LICENSING
Film exhibition rights and program licensing costs are deferred and
recognized as the films and/or programs are exhibited. The allowance for
exhibition expiration is determined based on management's estimate of the
Company's capacity to telecast the films and projected revenue streams.
2.9 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated using the
straight-line method, over the remaining useful lives, as described in Note 12.
2.10 ADVERTISING
Advertising revenues are recognized, and the production cost of commercials
and programming are charged to expense, when the commercial is telecast.
2.11 RECOVERABILITY OF LONG-LIVED ASSETS TO BE HELD AND USED IN THE BUSINESS
Management reviews long-lived assets, primarily the Company's licenses and
its property and equipment to be held and used in the business, for the purposes
of determining and measuring impairment on a recurring basis or when events or
changes in circumstances indicate that the carrying value of an asset or group
of assets may not be recoverable. Assets are grouped and evaluated for possible
impairment at the level of each cable television system; impairment is assessed
on the basis of the forecasted undiscounted cash flows of the businesses over
the estimated remaining lives of the assets related to those systems. A
write-down of the carrying value of the assets or group of assets to estimated
fair value will be made, when appropriate.
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be disposed of", from January 1,
1996 and the effect on the financial statements as a result of the adoption was
not significant.
2.12 SUBSCRIPTIONS
Installation fees are recognized as revenue on the equipment installation
date to the extent of direct selling costs incurred. Subscription revenues are
recognized as earned on an accrual basis.
2.13 LICENSES
Televisao Show Time Ltda. ("TV Show Time") and TVA Brasil Radioenlaces Ltda.
("TVA Brasil") hold certain licenses covering certain operations of the Company.
The use of such licenses is provided to the Company, for a nominal fee, under a
Service Agreement dated July 22, 1994, as amended, among TEVECAP, TV Show Time,
TVA Brasil and Abril.
Pursuant to the Service Agreement, TV Show Time and TVA Brasil have agreed
to transfer the licenses, which are carried at nil value, to TEVECAP at nominal
cost.
F-51
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
2.14 FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
The unaudited financial statements for the nine months ended September 30,
1996 and 1995 have been derived from the Company's records and reflect all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial data.
3. ACCOUNTING CHANGES
To more appropriately account for the cost of (i) installation equipment and
(ii) operating costs incurred during the period of constructing their television
systems, the Company has restated all prior-year amounts as compared to those
previously reported by the separate combining entities:
(i) Installation equipment
The Company has changed the estimated useful life of installation
equipment to five years. The costs of such equipment had previously been
accounted for as period costs.
(ii) Operating costs incurred during the period of construction of
television systems
The Company has changed its policy of deferring operating costs during
the period of construction of its television systems, to treat such costs
as period costs.
4. CASH AND CASH EQUIVALENTS
At September 30, 1996 (unaudited), December 31, 1995 and 1994, cash was
comprised of:
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, --------------------
1996 1995 1994
------------------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Cash on hand and in banks................................................... $ 129 $ 582 $ 178
Short-term investments...................................................... 49 116 4,466
----- --------- ---------
$ 178 $ 698 $ 4,644
----- --------- ---------
----- --------- ---------
</TABLE>
5. ACCOUNTS RECEIVABLE
At September 30, 1996 (unaudited), December 31, 1995 and 1994, accounts
receivable were comprised of:
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, --------------------
1996 1995 1994
----------------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Subscriptions........................................................... $ 5,978 $ 5,154 $ 1,879
Installation fees....................................................... 7,508 4,605 1,686
Advertising & programming............................................... 2,359 1,810 1,560
Barter.................................................................. 4,976 2,989 3,627
Others.................................................................. 176 70 --
Allowance for doubtful accounts......................................... (2,837) (3,407) (1,211)
-------- --------- ---------
$ 18,160 $ 11,221 $ 7,541
-------- --------- ---------
-------- --------- ---------
</TABLE>
F-52
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
6. INVENTORIES
At September 30, 1996 (unaudited), December 31, 1995 and 1994, inventories
were comprised of:
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, --------------------
1996 1994 1995
----------------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Materials and supplies.................................................. $ 15,284 $ 10,913 $ 4,652
Imports in transit...................................................... 1,673 2,163 718
Allowance for obsolescence.............................................. (2,493) -- --
-------- --------- ---------
$ 14,464 $ 13,076 $ 5,370
-------- --------- ---------
-------- --------- ---------
</TABLE>
7. FILM EXHIBITION RIGHTS
At September 30, 1996 (unaudited), December 31, 1995 and 1994, film
exhibition rights were comprised of:
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, --------------------
1996 1995 1994
----------------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Exhibition rights........................................................ $ 1,887 $ 1,192 $ 1,752
Allowance for exhibition expiration...................................... (1,162) (1,162) (335)
------- --------- ---------
$ 725 $ 30 $ 1,417
------- --------- ---------
------- --------- ---------
</TABLE>
8. PREPAID AND OTHER ASSETS
At September 30, 1996, December 31, 1995 and 1994, prepaid expenses were
comprised of:
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, --------------------
1996 1995 1994
----------------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Advances to suppliers..................................................... $ 470 $ 2,022 $ 954
Prepaid TVA magazine publishing expenses.................................. 822 562 379
Prepaid meals and transportation.......................................... 189 147 186
Others.................................................................... 158 114 135
------- --------- ---------
$ 1,639 $ 2,845 $ 1,654
------- --------- ---------
------- --------- ---------
</TABLE>
9. RELATED-PARTY TRANSACTIONS
The following tables summarize the transactions between the Company and
related companies at September 30, 1996 (unaudited) and December 31, 1995, 1994
and for the nine month periods ended
F-53
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
9. RELATED-PARTY TRANSACTIONS (CONTINUED)
September 30, 1996 (unaudited) and 1995 (unaudited) and the three years in the
period ended December 31, 1995:
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, ------------------------
1996 1995 1994
----------------- ----------- -----------
<S> <C> <C> <C>
(UNAUDITED)
TVA Parana
Loans receivable.................................................. $ 2,878 $ 10,480
Accounts receivable............................................... 1,546
TV Cabo Santa Catarina
Loans receivable.................................................. 75
Tevecap S.A
Loans payable..................................................... 270,014 249,885 $ 187,196
Coml. Cabo
Loans payable..................................................... 4,705 4,917
HBO Brasil
Accounts receivable............................................... 786 507 507
Televisao Abril Ltda.
Accounts receivable............................................... 178
ESPN Brasil Ltda.
Accounts receivable............................................... 438
Accounts payable.................................................. 29 510
Editora Abril S.A.
Accounts payable.................................................. 78 108
Others
Accounts receivable............................................... 129 200
Accounts payable.................................................. 7 9
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- --------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Tevecap
Net interest expense.................................. $ 1,299 $ 1,595 $ 2,465 $ 54,143 $ 831
Abril Comunicacoes
Net interest expense.................................. 8,505
Abrilpar
Net interest expense.................................. 78
Coml. Cabo
Net interest expense.................................. 256
TV Cabo Santa Catarina
Net interest income................................... (8)
ESPN do Brasil Ltda.
Programming (income) costs, net....................... (2,576) (851) 646
TVA Parana
Net interest income................................... (1,272) (1,661) (2,286)
</TABLE>
F-54
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
9. RELATED-PARTY TRANSACTIONS (CONTINUED)
The related company loans are denominated in REAIS and are subject to
monetary restatement plus interest charges at the market rate which was 1.79%
per month in September 1996 (3.44% per month in December 1995).
The Company's parent, TEVECAP S.A. ("Tevecap"), and Falcon International
Communications Services Inc., one of Tevecap's shareholders, signed a consulting
service agreement on April 1, 1996 related to the Company's operations and
technologies. Initially, the duration of this agreement is two years, renewable
every subsequent two-year period thereafter. The payment for the consulting
services amounts to $200 per annum.
10. LOANS FROM SHAREHOLDERS
Loans from shareholders at September 30, 1996, December 31, 1995 and 1994,
were comprised of:
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER --------------------
30, 1996 1995 1994
-------------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Roberto Civita............................................................... $ 2,490 $ 2,616 $ 2,455
Maricla I. Rossi............................................................. 59 61 58
Edgard Silvio Faria.......................................................... 175 184 174
Angelo Silvio Rossi.......................................................... 43 45 42
------- --------- ---------
$ 2,767 $ 2,906 $ 2,729
------- --------- ---------
------- --------- ---------
</TABLE>
Interest on loans from shareholders is based on the Ufir (Fiscal Reference
Unit), the variation of which was 0% during the nine-month period ended
September 30, 1996 (unaudited) (22.46% in December 1995).
F-55
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
11. DEFERRED INCOME TAX
The tax effects of temporary differences that give rise to a significant
portion of the deferred tax asset and deferred tax liability at September 30,
1996 (unaudited) and at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER ----------------------
30, 1996 1995 1994
-------------- ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
Deferred tax assets:
Net operating loss carryforwards....................................... $ 25,751 $ 24,267 $ 20,937
Deferred charges....................................................... 5,649 7,238 11,818
Others................................................................. 976 165 796
-------------- ---------- ----------
Total gross deferred tax asset..................................... 32,376 31,670 33,551
Less, valuation allowance................................................ (27,720) (24,693) (26,962)
-------------- ---------- ----------
Net deferred tax asset................................................... 4,656 6,977 6,589
Deferred tax liability:
Inflationary profit.................................................... -- -- (4,107)
Installation costs..................................................... (4,656) (6,977) (2,482)
-------------- ---------- ----------
Total gross deferred tax liability................................. (4,656) (6,977) (6,589)
-------------- ---------- ----------
Net deferred tax asset................................................... $ -- $ -- $ --
-------------- ---------- ----------
-------------- ---------- ----------
</TABLE>
The Company has a limited operating history and has generated losses since
its inception. The valuation allowance has been established in accordance with
the requirements of SFAS No. 109 and relates to the amount of net operating loss
carryforwards in excess of net taxable temporary differences. As of September
30, 1996, the Company has unexpirable accumulated tax losses of $84,264.
F-56
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
11. DEFERRED INCOME TAX (CONTINUED)
Income tax was different from the amount computed using the Brazilian
statutory income tax for the reasons set forth in the following table:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, --------------------------------
1996 1995 1994 1993
-------------- --------- ---------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED)
Loss before income taxes and minority interest............... $ 9,447 $ 22,635 $ 66,979 $ 36,473
Statutory income tax rate.................................... 30.56% 30.56% 43.0% 35.2%
------- --------- ---------- ---------
2,887 6,917 28,801 12,838
Profit on intercompany transaction not eliminated on fiscal
books...................................................... -- -- -- (7,834)
(Decrease) increase in the income tax rate................... -- (7,800) 3,161 --
Monetary correction of deferred charges...................... -- 1,342 (19,031) 3,003
Translation rate difference on exhibition rights............. -- 381 -- --
Others....................................................... 140 1,429 198 (1,311)
------- --------- ---------- ---------
Income tax benefit for the period............................ 3,027 2,269 13,129 6,696
Increase in valuation allowance.............................. (3,027) (2,269) (13,129) (6,696)
------- --------- ---------- ---------
$ -- $ -- $ -- $ --
------- --------- ---------- ---------
------- --------- ---------- ---------
</TABLE>
F-57
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
12. PROPERTY, PLANT AND EQUIPMENT
At September 30, 1996, December, 31, 1995 and 1994, property, plant and
equipment were comprised of:
<TABLE>
<CAPTION>
ANNUAL
DEPRECIATION AT DECEMBER 31,
RATE AT SEPTEMBER 30, -----------------------
% 1996 1995 1994
----------------- ----------------- ----------- ----------
<S> <C> <C> <C> <C>
(UNAUDITED)
Machinery and Equipment............................... 10 $ 31,608 $ 29,598 $ 21,095
Converters............................................ 10 63,588 36,485 10,809
Leasehold Improvements................................ 25 1,950 1,795 1,463
Furniture and Fixtures................................ 10 1,239 1,032 626
Premises.............................................. 10 1,232 1,066 551
Vehicles.............................................. 20 1,013 442 147
Software.............................................. 20 2,379 1,360 388
Tools................................................. 10 621 621 439
Reception Equipment................................... 20 62,159 44,508 19,265
Cable Plant........................................... 10 8,178 7,089 --
Building.............................................. 4 -- 342 155
----------------- ----------- ----------
173,967 124,338 54,938
Accumulated Depreciation.............................. (39,120) (23,114) (10,105)
Telephone Line Use Rights............................. 1,718 1,370 773
Trademarks, Patents and Others........................ 165 164 186
Fixed Assets in Transit............................... 3,285 16,126 1,085
Others................................................ 691 -- --
----------------- ----------- ----------
$ 140,706 $ 118,884 $ 46,877
----------------- ----------- ----------
----------------- ----------- ----------
</TABLE>
13. SHORT-TERM BANK LOANS
Short-term bank loans at September 30, 1996 represent the refinancing of
certain supplier payables. The average short-term interest rate on such loans is
Libor Plus 1.5%.
14. OTHER ACCOUNTS PAYABLE
At September 30, 1996 (unaudited), December, 31, 1995 and 1994, other
accounts payable were comprised of:
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER --------------------
30, 1996 1995 1994
-------------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Accounts payable to related Companies (Note 9)............................... $ 114 $ 627 $ 13
Advertising.................................................................. 751 427 851
Importation expenses payable................................................. 580 328 86
Others....................................................................... 468 446 452
------- --------- ---------
$ 1,913 $ 1,828 $ 1,402
------- --------- ---------
------- --------- ---------
</TABLE>
F-58
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
15. INSURANCE
The Company maintains insurance coverage for its fixed assets and
inventories in an amount considered sufficient to cover the risks involved.
16. LEASED ASSETS AND COMMITMENTS
The Company has entered into film distribution contracts and licensing
agreements with film producers for programming for future periods. Such
contracts and agreements, which range in life from 1 to 9 years with the
exception of a specific contract with ESPN, which has a life of 50 years,
require a per-subscriber fee to be paid by the Company on a monthly basis.
The Company has rented its office space until the year 2001. At December 31,
1995, future minimum rental payments applicable to operating leases in respect
of this space aggregate approximately $4,874 as follows:
<TABLE>
<S> <C>
1996............................................................... $ 1,588
1997............................................................... 769
1998............................................................... 663
1999............................................................... 643
2000............................................................... 608
2001............................................................... 603
---------
Total.............................................................. 4,874
---------
---------
</TABLE>
At December 31, 1995, the Company had contractual commitments with Embratel
for transponder use until the year 2003. Based on estimated to aggregate
approximately $52,361, as follows:
<TABLE>
<S> <C>
1996.............................................................. $ 8,302
1997.............................................................. 8,302
1998.............................................................. 8,302
1999.............................................................. 8,035
2000.............................................................. 7,768
2001.............................................................. 7,768
2002.............................................................. 3,884
---------
Total............................................................. $ 52,361
---------
---------
</TABLE>
17. PAID-IN CAPITAL
Paid-in capital represents registered common shares without par value.
The Company's shareholders are entitled to minimum dividends of 25% of net
income for the year, adjusted according to Corporation Law. As the Company has
not recorded net income since its inception, no such dividends are payable.
18. 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-59
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
18. LITIGATION CONTINGENCIES (CONTINUED)
In management's opinion, all contingencies have been adequately provided for
or are without merit, or are of such kind that if disposed of unfavorably, would
not have a material adverse effect on the financial position or future results
of operations of the Company.
19. PENSION PLAN
In April 1996, the Company became a co-sponsor of the private pension entity
named Abrilprev Sociedade de Previdencia Privada, the primary objective of which
is to grant employees benefits other than those provided by Social Security. The
plan is optional to all employees of the sponsoring entities. Abrilprev operates
as a Defined Contribution Plan. Company contributions are made based on a fixed
percentage applied to the payroll of the sponsoring entities based on actuarial
calculations. Plan expenses amounted to $263 in 1996.
20. WORKING CAPITAL DEFICIENCY
The Company's financial statements for the period ended September 30,1996
were prepared on a going concern basis which contemplates the realization of
assets and settlement of liabilities and commitments in the normal course of
business. The company incurred net losses of $9,433, $22,634 and $66,978 for the
nine months ended September 30,1996 and the two years in the period ended
December 31,1995 respectively. In addition, the Company had negative working
capital of $44,319 at September 30,1996.
The Company is endeavoring to reverse its pattern of losses and effectively
meet its liquidity needs through increasing the revenue base and other means.
In the event that these steps prove to be inadequate to maintain Sistema's
operating cash flow, the Company's principal shareholder, Tevecap, intends to
maintain the company as a going concern. Tevecap's support may be in the form of
cash advances, loans, equity infusions or external guarantees.
21. SUPPLEMENTARY INFORMATION--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
DEFERRED
ALLOWANCE ALLOWANCE FOR TAXATION PROVISION
FOR DOUBTFUL ALLOWANCE FOR EXHIBITION VALUATION FOR
ACCOUNTS OBSOLESCENCE EXPIRATION ALLOWANCE CLAIMS
------------ --------------- -------------- --------- -----------
<S> <C> <C> <C> <C> <C>
December 31, 1993................................. $ 363 $ 91 $ 3,367 $ 13,833 $ 210
Additions Charged to Expense...................... 848 -- -- 13,129 920
Reduction......................................... -- (91) (3,032) -- (55)
------------ ------- ------- --------- -----------
Balance at December 31, 1994...................... 1,211 -- 335 26,962 1,075
Additions Charged to Expense...................... 2,196 -- 827 (2,269) 2,688
------------ ------- ------- --------- -----------
Balance at December 31, 1995...................... 3,407 -- 1,162 24,693 3,763
Additions Charged to Expense...................... 3,040 2,493 -- 3,027 1,940
Reduction......................................... (3,610) -- -- -- --
------------ ------- ------- --------- -----------
Balance at September 30, 1996..................... $ 2,837 $ 2,493 $ 1,162 $ 27,720 $ 5,703
------------ ------- ------- --------- -----------
------------ ------- ------- --------- -----------
</TABLE>
F-60
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
TVA SUL PARTICIPACOES S.A.
We have audited the accompanying combined balance sheets of TVA SUL
PARTICIPACOES S.A., and subsidiaries (the "Company") as of December 31, 1995 and
1994, and the related combined statements of operations, changes in
shareholders' equity and cash flows for the three years in the period ended
December 31, 1995, 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 audit 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of TVA SUL
PARTICIPACOES S.A., and subsidiaries as of December 31, 1995 and 1994, and the
related combined results of their operations and cash flows for the three years
in the period ended December 31, 1995, in conformity with accounting principles
generally accepted in the United States of America.
Coopers & Lybrand
Sao Paulo, Brazil
August 23, 1996
F-61
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
BALANCE SHEETS
AT SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
(IN THOUSANDS OF US. DOLLARS)
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, ---------------------------
1996 1995 1994
(CONSOLIDATED) (COMBINED) (COMBINED)
----------------- ------------ -------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents (Note 3).............................. $ 414 $ 45 --
Accounts receivable, net (Note 4)............................... 749 32 --
Inventories..................................................... 1,376 -- --
Prepaid and other assets (Note 5)............................... 588 68 $ 45
Other accounts receivable (Note 6).............................. 1,116 2 7
-------- ------------ -----
Total current assets........................................ 4,243 147 52
Property, plant and equipment, net (Note 9)....................... 13,549 1,466 198
Concessions, less accumulated amortization ($481)................. 11,395 -- --
Other............................................................. 977 9 8
-------- ------------ -----
Total assets................................................ $ 30,164 $ 1,622 $ 258
-------- ------------ -----
-------- ------------ -----
</TABLE>
The accompanying notes are an integral part of these financial statements
F-62
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
BALANCE SHEETS
AT SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
(IN THOUSANDS OF US. DOLLARS)
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, --------------------------
1996 1995 1994
(CONSOLIDATED) (COMBINED) (COMBINED)
----------------- ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Suppliers....................................................... $ 751 $ 97 $ 103
Taxes payable other than income taxes........................... 208 56 29
Accrued payroll and related liabilities......................... 605 253 140
Other accounts payable.......................................... 990 18 56
Accounts payable to related companies (Note 7).................. 1,438 983 --
-------- ------------ ------------
Total current liabilities................................... 3,992 1,407 328
-------- ------------ ------------
Long-term liabilities
Loans from related companies (Note 7)........................... 16,976 10,480 5,886
Loans from shareholders......................................... 1,840 180 135
Other........................................................... 151 -- --
-------- ------------ ------------
Total long-term liabilities................................. 18,967 10,660 6,021
-------- ------------ ------------
Minority interest................................................. 1,361 -- --
Shareholders' equity
Paid in capital (Note 11)....................................... 18,964 1 1
Accumulated deficit............................................. (13,120) (10,446) (6,092)
-------- ------------ ------------
Total shareholders' equity.................................. 5,844 (10,445) (6,091)
-------- ------------ ------------
Total liabilities and shareholders' equity.................. $ 30,164 $ 1,622 $ 258
-------- ------------ ------------
-------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-63
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND SEPTEMBER 30, 1995
(UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS OF US. DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1995 1994 1993
(CONSOLIDATED) (COMBINED) (COMBINED) (COMBINED) (COMBINED)
--------------- ------------ ------------ ------------ ------------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Gross revenues
Monthly subscriptions......................... $ 8,212 $ 2,189 $ 3,233 $ 1,392 $ 397
Installation.................................. 819 -- -- -- --
Advertising................................... -- -- -- 6 --
Other......................................... 65 -- -- -- --
Revenue taxes................................. (308) (153) (227) (71) (19)
------- ------------ ------------ ------------ ------------
Net revenue................................. 8,788 2,036 3,006 1,327 378
------- ------------ ------------ ------------ ------------
Direct operating expenses
Payroll and benefits.......................... 2,767 1,073 1,456 1,005 927
Programming................................... 1,141 -- -- -- --
Technical assistance.......................... 704 160 215 15 81
Vehicle rentals............................... 239 173 247 21 72
TVA magazine.................................. 158 -- -- -- --
Other costs................................... 1,129 181 232 432 253
------- ------------ ------------ ------------ ------------
6,138 1,587 2,150 1,473 1,333
------- ------------ ------------ ------------ ------------
Selling, general and administrative expenses
Payroll and benefits.......................... 964 393 538 207 246
Advertising and promotion..................... 322 174 267 -- 42
Rent.......................................... 158 82 114 -- 10
Other administrative expenses................. 1,120 206 292 1 --
Other general expenses........................ 331 266 486 802 --
------- ------------ ------------ ------------ ------------
2,895 1,121 1,697 1,010 298
------- ------------ ------------ ------------ ------------
Depreciation.................................... 397 112 186 36 20
Amortization.................................... 481 -- -- -- --
------- ------------ ------------ ------------ ------------
Operating loss.............................. (1,123) (784) (1,027) (1,192) (1,273)
------- ------------ ------------ ------------ ------------
Interest income................................. 167 133 165 181 38
Interest expense................................ (1,741) (2,195) (3,527) (2,568) (495)
Translation gain (loss)......................... (100) (11) 8 (22) 282
Other nonoperating (expenses) income, net....... 242 -- 27 -- --
------- ------------ ------------ ------------ ------------
Loss before income taxes and minority
interest.................................. (2,555) (2,857) (4,354) (3,601) (1,448)
Income taxes (Note 8)........................... (105) -- -- -- --
------- ------------ ------------ ------------ ------------
Net loss before minority interest........... (2,660) (2,857) (4,354) (3,601) (1,448)
Minority interest............................... (14) -- -- -- --
------- ------------ ------------ ------------ ------------
Net loss.................................... (2,674) (2,857) (4,354) (3,601) (1,448)
------- ------------ ------------ ------------ ------------
------- ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-64
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND
SEPTEMBER 30, 1995 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND
1993
(IN THOUSANDS OF US. DOLLARS)
<TABLE>
<CAPTION>
PAID-IN
CAPITAL ACCUMULATED
(NOTE 11) DEFICIT TOTAL
--------- ------------- ----------
<S> <C> <C> <C>
Balance at December 31, 1992 (Combined)................................... $ 1 $ (1,043) $ (1,042)
Net loss for the year..................................................... -- (1,448) (1,448)
--------- ------------- ----------
Balance at December 31, 1993 (Combined)........................... 1 (2,491) (2,490)
Net loss for the year..................................................... -- (3,601) (3,601)
--------- ------------- ----------
Balance at December 31, 1994 (Combined)........................... 1 (6,092) (6,091)
Net loss for the year..................................................... -- (4,354) (4,354)
--------- ------------- ----------
Balance as of December 31, 1995 (Combined)........................ 1 (10,446) (10,445)
Capital contributed on:
April 30, 1996 (unaudited).............................................. 14,865 -- 14,865
August 30, 1996 (unaudited)............................................. 4,098 -- 4,098
Net loss for the period (unaudited)....................................... -- (2,674) (2,674)
--------- ------------- ----------
Balance at September 30, 1996 (Consolidated) (unaudited).......... $ 18,964 $ (13,120) $ 5,844
--------- ------------- ----------
--------- ------------- ----------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995:
Balance at December 31, 1994 (Combined)................................... $ 1 $ (6,092) $ (6,091)
Net loss for the period (unaudited)....................................... -- (2,857) (2,857)
--------- ------------- ----------
Balance at September 30, 1995 (Combined).................................. $ 1 $ (8,949) $ (8,948)
--------- ------------- ----------
--------- ------------- ----------
</TABLE>
- ------------------------
In September 1996, the paid in capital of the entities previously under common
control was transferred by Tevecap S.A. to TVA Sul Participacoes S.A in exchange
for shares in TVA Sul Participacoes S.A. Accordingly, the paid in capital of the
combined entities became that of TVA Sul Participacoes S.A.
The accompanying notes are an integral part of these financial statements
F-65
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND
SEPTEMBER 30, 1995 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND
1993
(IN THOUSANDS OF US. DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------------- ----------------------------------------
1996 1995 1995 1994 1993
(CONSOLIDATED) (COMBINED) (COMBINED) (COMBINED) (COMBINED)
--------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................... $ (2,674) $ (2,857) $ (4,354) $ (3,601) $ (1,448)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
(USED IN) PROVIDED BY OPERATING ACTIVITIES:
Depreciation................................ 397 112 186 36 20
Amortization................................ 481 -- -- -- --
Provision for claims........................ 151 -- -- -- --
Disposal of fixed assets.................... 795 (6) (15) 4
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable......................... (717) -- (32) -- --
Prepaid and other assets.................... (520) (12) (23) (34) (4)
Other accounts receivable................... (1,028) (18) 5 6 (13)
Accrued Interest............................ 1,299 1,695 2,331 2,328 454
Inventories................................. (1,376) -- -- -- --
Other assets................................ (10) (13) (1) (5) (3)
Suppliers................................... 654 (20) (6) 72 (5)
Taxes payable other than income taxes....... 152 17 27 22 7
Accrued payroll and related liabilities..... 352 192 113 59 18
Other accounts payable...................... 99 280 945 47 (6)
--------------- ------------ ------------ ------------ ------------
Net cash used in operating activities... (1,945) (630) (809) (1,085) (976)
--------------- ------------ ------------ ------------ ------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of fixed assets...................... (12,665) (1,074) (1,454) (69) (54)
Loans to related companies.................... (960) -- -- -- --
Acquisition of businesses, net of cash
acquired.................................... (13,490) -- -- -- --
--------------- ------------ ------------ ------------ ------------
Net cash provided by (used in) investing
activities............................ (27,115) (1,074) (1,454) (69) (54)
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions......................... 18,963 -- -- -- --
Repayments of loans from shareholders......... (162) -- -- -- --
Loans from shareholders....................... 1,822 -- -- -- --
Loans from related companies.................. 16,760 7,633 8,220 1,152 1,086
Repayments of loans from related companies.... (9,315) (5,912) (5,912) -- (54)
Minority Interest............................. 1,361
--------------- ------------ ------------ ------------ ------------
Net cash provided by financing
activities............................ 29,429 1,721 2,308 1,152 1,032
--------------- ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents................................... 369 17 45 (2) 2
Cash and cash equivalents at beginning of the
period........................................ 45 -- -- 2 --
--------------- ------------ ------------ ------------ ------------
Cash and cash equivalents at end of the
period................................ $ 414 $ 17 $ 45 $ -- $ 2
--------------- ------------ ------------ ------------ ------------
--------------- ------------ ------------ ------------ ------------
</TABLE>
The acompanying notes are an integral part of these financial statements
F-66
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED) AND
SEPTEMBER 30, 1995 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1995, 1994 AND
1993
(IN THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1995 1994 1993
(CONSOLIDATED) (COMBINED) (COMBINED) (COMBINED) (COMBINED)
--------------- ----------- ------------ ------------ ------------
<CAPTION>
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL CASH DISCLOSURE:
Cash paid for interest................. $ -- $ 2,708 $ 2,708 $ -- $ --
--------------- ----------- ------------ ------------ ------------
--------------- ----------- ------------ ------------ ------------
SUPPLEMENTAL NON-CASH FINANCING
ACTIVITIES:
Accrued interest on related company
loans refinanced as principal
balance.............................. $ 1,272 $ 1,659 $ 2,286 $ 2,269 $ 439
--------------- ----------- ------------ ------------ ------------
--------------- ----------- ------------ ------------ ------------
DETAILS OF ACQUISITIONS:
Fair value of assets acquired.......... 14,895 -- -- -- --
Liabilities assumed.................... (1,330) -- -- -- --
--------------- ----------- ------------ ------------ ------------
Cash paid.............................. 13,565 -- -- -- --
Less: cash acquired.................... (75) -- -- -- --
--------------- ----------- ------------ ------------ ------------
Net cash paid for acquisitions......... 13,490 -- -- -- --
--------------- ----------- ------------ ------------ ------------
--------------- ----------- ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-67
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS
1. THE COMPANY AND ITS PRINCIPAL OPERATIONS
The accompanying financial statements reflect the consolidated results of
operations of TVA Sul Participacoes S.A and its subsidiaries (the "Company") and
the combined results of commonly controlled entities which became subsidiaries
of TVA Sul Participacoes S.A. in September, 1996 (see Note 2.1).
TVA Sul Participacoes S.A. was incorporated on March 3, 1996. In September
1996, TVA Sul Participacoes S.A. became a holding company for certain entities
which were under common control, namely, TVA Sul Parana Ltda.; TV Alfa Cabo
Ltda.; TCC TV a Cabo Ltda.; CCS Camboriu Cable Systems de Telecomunicacoes
Ltda.; TVA Sul Foz do Iguacu Ltda.; and TVA Sul Santa Catarina Ltda. With the
exception of TVA Sul Parana Ltda., each of these entities was acquired in 1996
and hence does not form part of the combined financial statements of TVA Sul
Participacoes S.A. for the periods ended December 31, 1995 and prior. Therefore,
the financial statements of TVA Sul Participacoes S.A. for the three years in
the period ended December 31, 1995 and the nine months ended September 30, 1995
(unaudited), represent the financial statements of TVA Sul Parana Ltda.
TVA Sul Participacoes S.A is a holding company, the subsidiaries of which
render services related to wireless cable and cable television systems,
including marketing and advertising, production, distribution and licensing of
domestic and foreign television programs. The Company has wireless cable channel
rights primarily in major urban markets in the South of Brazil.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant policies followed in the preparation of the accompanying
consolidated and combined financial statements are described below:
2.1 BASIS OF PRESENTATION; COMBINED AND CONSOLIDATION
A) BASIS OF PRESENTATION
The combined and consolidated financial statements are presented in US
Dollars and have been prepared in accordance with accounting principles
generally accepted in the United States of America (U.S. GAAP), which differ in
certain respects from accounting principles applied by the Company in its local
currency financial statements, which are prepared in accordance with accounting
principles generally accepted in Brazil ("Brazilian GAAP").
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
financial statement dates and the reported amount of revenues and expenses
during the reporting periods. Since management's judgment involves making
estimates concerning the likelihood of future events, the actual results could
differ from those estimates which will have a positive or negative effect on
future period results.
B) CONSOLIDATION AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
TVA Sul Participacoes S.A was incorporated on March 3, 1996 as a holding
company for certain entities which were under common control. Accordingly, the
financial statements as of and for the nine months ended September 30, 1996
(unaudited) are prepared on a consolidated basis.
F-68
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
2.1 BASIS OF PRESENTATION; COMBINED AND CONSOLIDATION (CONTINUED)
The consolidated financial statements include the accounts of all
majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated on consolidation.
C) COMBINED PRESENTATION FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER
31, 1995 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED)
The combined financial statements for the three years in the period ended
December 31, 1995 and the nine months ended September 30, 1995 (unaudited),
reflect the results of TVA Parana (formerly TVA Curitiba Servicos
Telecomunicacoes Ltda.).
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). In order to present the financial statements in conformity
with accounting principles generally accepted in the United States of America,
the Company maintains additional accounting records which are used solely for
this purpose.
2.3 CURRENCY REMEASUREMENT
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
52, "Foreign Currency Transactions", the United States dollar has been assumed
to be the functional currency as Brazil is a "hyperinflationary" country. As
such, the local accounts of the Company are translated into United States
dollars as follows:
- Nonmonetary assets and liabilities are translated at historical rates. All
other assets and liabilities are translated at the official rate of
exchange of R$1.022 to US$1 in effect on September 30, 1996; R$0.973 to
US$1 in effect on December 31, 1995; and, R$0.846 to US$1 on December 31,
1994.
- Income and expenses are translated at the average exchange rates in effect
each month, except for those related to assets and liabilities which are
translated at historical exchange rates, and deferred income taxes, which
are translated at the current rate. Translation gains/losses are
recognized in the income statement.
2.4 CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as cash and cash in banks and
investments in interest-bearing securities and are carried at cost plus accrued
interest. Short-term investments with original maturities of three months or
less at the time of purchase are considered cash equivalents.
F-69
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
2.5 COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
The Company's combined and consolidated operating subsidiaries included in
the financial statements are:
<TABLE>
<CAPTION>
OWNERSHIP INTEREST AT
----------------------------------------
<S> <C> <C>
DECEMBER 31,1995
SEPTEMBER 30,1996 AND 1994
(CONSOLIDATED) (COMBINED)
------------------- -------------------
<CAPTION>
(UNAUDITED)
<S> <C> <C>
TVA Sul Parana Ltda. (a), (b)........................................... 100.00% 80.00%
TVA Sul Santa Catarina Ltda (b)......................................... 99.50% --
TVA Sul Foz do Iguacu Ltda (b).......................................... 100.00% --
CCS Camboriu Cable System de Telecomunicacoes Ltda...................... 60.00% --
TCC TV a Cabo Ltda. (b)................................................. 100.00% --
TV Alfa Cabo Ltda. (b).................................................. 100.00% --
</TABLE>
- ------------------------
(a) In August 1996, TVA Curitiba Sevicos Telecommunications Ltda. changed its
name to TVA Parana Ltda ("Parana"). The Company's capital contribution of
$18,963 relating to the acquisition of 27,712,345 shares during the nine
months ended September 30, 1996 (unaudited) to the equity of Parana was in
excess of the Company's share of the book value prior to the contribution,
resulting in a loss of $2,727.
(b) One common share in each of these entities is owned by a Brazilian National
pursuant to local legislation.
2.6 ACQUISITIONS
During the nine month period ending September 30, 1996 (unaudited), the
Company acquired the entities described below which were accounted for under the
purchase method of accounting: i) In February 1996, the Company acquired control
of TVA Sul Santa Catarina ("TVA SSC"); ii) In March 1996, the Company acquired
control of TCC TV a Cabo Ltda. ("TCC") and TV Alfa Cabo Ltda. ("TV Alfa") ; and
iii) In May 1996, the Company acquired control of TVA Sul Foz do Iguacu Ltda
("TVA SF") and CCS Camboriu Cable Systems de Telecomunicacoes Ltda. ("CCS"). In
each case, the excess of the purchase price over the fair value of the net
assets acquired represents the value of concessions of certain television
stations. These concessions are being amortized on a straight line basis over 10
years.
The operating results of these acquired businesses, which hold licenses to
operate cable TV, have been included in the consolidated statement of income
from the dates of acquisition.
F-70
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
2.6 ACQUISITIONS (CONTINUED)
The purchase prices have been allocated to the assets purchased and the
liabilities assumed based upon the fair values on the dates of acquisition, as
follows:
<TABLE>
<CAPTION>
TVA SSC TVA SF CCS TCC TV ALFA
----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Current assets, other than cash..................................... $ -- 23 $ 4 $ 51 $ 5
Property, plant and equipment....................................... 25 319 2,101 238 176
Other assets........................................................ -- 3 -- -- --
Concessions......................................................... 45 5,348 1,424 2,629 2,429
Other liabilties.................................................... (55) (377) (84) (127) (687)
----- --------- --------- --------- ---------
Purchase price, net of cash received................................ $ 15 5,316 $ 3,445 $ 2,791 $ 1,923
----- --------- --------- --------- ---------
----- --------- --------- --------- ---------
Total purchase price................................................ $ 15 $ 5,326 $ 3,445 $ 2,841 $ 1,939
----- --------- --------- --------- ---------
----- --------- --------- --------- ---------
</TABLE>
The Company is unable to present pro forma results as if the acquisitions
had taken place at the beginning of 1995 and 1996 because, although management
attempted to obtain such information from the owners, it was not available.
These entities were acquired for the purpose of expanding the cable TV system
penetration of the Company and that of its parent, TEVECAP S.A. ("Tevecap"). The
assets purchased will be operated under Tevecap's management, using Tevecap and
the Company's programming and employees.
2.7 FINANCIAL INSTRUMENTS
In accordance with SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments," information is provided about the fair value of certain financial
instruments for which it is practicable to estimate that value.
For the purposes of SFAS No. 107, the estimated fair value of a financial
instrument is the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
The carrying values of the Company's financial instruments as of September 30,
1996 (unaudited), December 31, 1995 and December 31, 1994 approximate
management's best estimate of their estimated fair values. The following methods
and assumptions were used to estimate the fair value of each class of financial
instrument for which it is practicable to estimate that value:
- The fair value of certain financial assets carried at cost, including
cash, accounts receivable, other accounts receivable, and certain other
short-term assets is considered to approximate their respective carrying
value due to their short-term nature.
- The fair value of payables to suppliers, other accounts payable, loans to
related companies and certain other short-term liabilities is considered
to approximate their respective carrying value due to their short-term
nature.
- The fair value of loans from related companies approximates their
respective carrying values as interest on these loans is at market rates.
F-71
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
2.8 ACCOUNTS RECEIVABLE
Accounts receivable are stated at their estimated realizable values. An
allowance for doubtful accounts will be established on the basis of an analysis
of the accounts receivable, in light of the risks involved, in an amount
sufficient to cover any losses incurred in realization of credits when
necessary.
2.9 INVENTORIES
Inventories consist of materials and supplies used to provide service to new
customers, and to ensure continuity of service to existing customers.
Inventories are stated at the lower of cost or market. Cost is determined
principally under the average cost method.
2.10 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated using the
straight-line method, over the remaining useful lives, as described in Note 9.
2.11 RECOVERABILITY OF LONG-LIVED ASSETS TO BE HELD AND USED IN THE BUSINESS
Management reviews long-lived assets, primarily the Company's concessions
and its property and equipment to be held and used in the business, for the
purposes of determining and measuring impairment on a recurring basis or when
events or changes in circumstances indicate that the carrying value of an asset
or group of assets may not be recoverable. Assets are grouped and evaluated for
possible impairment at the level of each cable television system; impairment is
assessed on the basis of the forecasted undiscounted cash flows of the
businesses over the estimated remaining lives of the assets related to those
systems. A write-down of the carrying value of the assets or group of assets to
estimated fair value will be made, when appropriate.
The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be disposed of", from January 1,
1996 and the effect on the financial statements as a result of the adoption was
not significant.
2.12 SUBSCRIPTIONS
Installation fees are recognized as revenue on the equipment installation
date to the extent of direct selling costs incurred. Subscription revenues are
recognized as earned on an accrual basis.
2.13 ACCOUNTING FOR SALES OF STOCK BY SUBSIDIARIES
Gains or losses arising from the sale of previously unissued shares to an
unrelated party by a subsidiary are recognized in the profit and loss account as
non-operating income to the extent that the net book value of the shares owned
by the parent after the sale exceeds or is lower than the net book value per
share immediately prior to the sale of the shares by the subsidiary.
F-72
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
2.14 FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
The unaudited financial statements for the nine months ended September 30,
1996 and 1995 have been derived from the Company's records and reflect all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial data.
3. CASH AND CASH EQUIVALENTS
At September 30, 1996 (unaudited), December 31, 1995 and 1994, cash and cash
equivalents were comprised of:
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, ----------------------
1996 1995 1994
------------------- ----- ---------
<S> <C> <C> <C>
(UNAUDITED)
Cash on hand and in banks............................... $ 380 $ 45 --
Short-term investments.................................. 34 -- --
----- --- ---------
$ 414 $ 45 --
----- --- ---------
----- --- ---------
</TABLE>
4. ACCOUNTS RECEIVABLE
At September 30, 1996 (unaudited), December 31, 1995 and 1994, accounts
receivable were comprised of:
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, ----------------------
1996 1995 1994
------------------- ----- ---------
<S> <C> <C> <C>
(UNAUDITED)
Subscriptions........................................... $ 286 -- --
Installation fees....................................... 329 $ 32 --
Others.................................................. 134 -- --
----- --- ---------
$ 749 $ 32 --
----- --- ---------
----- --- ---------
</TABLE>
5. PREPAID AND OTHER ASSETS
At September 30, 1996 (unaudited), December 31, 1995 and 1994, prepaid
expenses were comprised of:
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, ------------------------
1996 1995 1994
------------------- ----- -----
<S> <C> <C> <C>
(UNAUDITED)
Advances to suppliers.................................. $ 544 $ 22 $ 23
Prepaid meals and transportation....................... 32 20 11
Others................................................. 12 26 11
----- --- ---
$ 588 $ 68 $ 45
----- --- ---
----- --- ---
</TABLE>
F-73
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
6. OTHER ACCOUNTS RECEIVABLE
At September 30, 1996 (unaudited), December 31, 1995 and 1994, other
accounts receivable were comprised of:
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, ------------------------
1996 1995 1994
----------------- ----- -----
<S> <C> <C> <C>
(UNAUDITED)
Advances to employees.................................. $ 119 -- $ 7
Accounts receivable from Related Companies (Note 7).... 765 -- --
Others................................................. 232 $ 2 --
--
------- ---
$ 1,116 $ 2 $ 7
--
--
------- ---
------- ---
</TABLE>
7. RELATED-PARTY TRANSACTIONS
The following tables summarize the transactions between the Company and
related companies at September 30, 1996 (unaudited) and December 31, 1995, 1994
and for the nine month periods ended September 30, 1996 (unaudited) and 1995
(unaudited) and the three years in the period ended December 31, 1995 :
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
----------------- --------------------
<S> <C> <C> <C>
1996 1995 1994
----------------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C>
TVA Sistema
Loans payable................................. $ 2,877 $ 10,480 --
Accounts Payable.............................. 1,438 983 --
Tevecap S.A.
Loans payable................................. 14,099 -- $ 5,886
</TABLE>
F-74
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
7. RELATED-PARTY TRANSACTIONS (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------- -------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1995 1994 1993
--------- ----------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Tevecap
Net interest expense............... $ -- $ -- $ -- $ (2,269) $ (439)
TVA Sistema de Televisao S.A.
Net interest expense............... (1,272) (1,659) (2,286) -- --
</TABLE>
The related company loans are denominated in reais and are subject to
monetary restatement plus interest charges at the market rate which was 1.79%
per month in September 1996 (3.44% per month in December 1995).
8. DEFERRED INCOME TAX
The tax effects of temporary differences that give rise to a significant
portion of the deferred tax asset and deferred tax liability at September 30,
1996 (unaudited) and at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, --------------------
1996 1995 1994
----------------- --------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Deferred tax assets:
Net operating loss carryforwards...................................... $ 4,057 $ 3,425 $ 2,509
Others................................................................ 38 11 61
-------- --------- ---------
Total gross deferred tax asset.................................... 4,095 3,436 2,570
Less, valuation allowance............................................. (3,850) (3,122) (2,570)
-------- --------- ---------
Net deferred tax asset.................................................. 245 314 --
Deferred tax liability:
Installation costs.................................................... (245) (314) --
-------- --------- ---------
Total gross deferred tax liability................................ (245) (314) --
-------- --------- ---------
Net deferred tax asset.................................................. $ -- $ -- $ --
-------- --------- ---------
-------- --------- ---------
</TABLE>
The Company has a limited operating history and has generated losses since
its inception. The valuation allowance has been established in accordance with
the requirements of SFAS No. 109 and relates to the amount of net operating loss
carryforwards in excess of net taxable temporary differences.
As of September 30, 1996 (unaudited), the Company has unexpirable
accumulated tax losses of $13,276.
F-75
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
8. DEFERRED INCOME TAX (CONTINUED)
The combined income tax credit was different from the amount computed using
the Brazilian statutory income tax for the reasons set forth in the following
table:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C> <C>
NINE MONTHS
ENDED
SEPTEMBER 30,
1996 1995 1994 1993
--------------- --------- --------- ---------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
Loss before income taxes and minority
interest................................... $ 2,555 $ 4,354 $ 3,601 $ 1,448
Statutory income tax rate.................... 30.56% 30.56% 43.0% 35.2%
------- --------- --------- ---------
781 1,331 1,548 509
Increase (decrease) in the income tax rate... -- (753) 212 --
Others....................................... (158) (26) (116) 157
------- --------- --------- ---------
Net income tax benefit for the period........ 623 552 1,644 666
Increase in valuation allowance.............. (728) (552) (1,644) (666)
------- --------- --------- ---------
$ (105) $ -- $ -- $ --
------- --------- --------- ---------
------- --------- --------- ---------
</TABLE>
Income tax payable represents amounts owing by subsidiaries calculated on an
unitary basis.
9. PROPERTY, PLANT AND EQUIPMENT
At September 30, 1996 (unaudited), December, 31, 1995 and 1994, property,
plant and equipment were comprised of:
<TABLE>
<CAPTION>
ANNUAL
DEPRECIATION AT DECEMBER 31,
RATE AT SEPTEMBER 30, --------------------
% 1996 1995 1994
----------------- --------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED)
Machinery and Equipment...................................... 10 $ 1,436 172 $ 112
Converters................................................... 10 3,532 -- --
Leasehold Improvements....................................... 25 3,499 35 14
Furniture and Fixtures....................................... 10 567 164 78
Premises..................................................... 10 23 3 3
Vehicles..................................................... 20 129 15 14
Software..................................................... 20 80 45 31
Tools........................................................ 10 86 -- --
Reception Equipment.......................................... 20 4,170 1,203 --
Cable Plant.................................................. 10 1,440 -- --
Building..................................................... 4 355 -- --
-------- --------- ---------
15,317 1,637 252
Accumulated Depreciation..................................... (2,056) (254) (68)
Telephone Line Use Rights.................................... 158 83 14
Fixed Assets in Transit...................................... 130 -- --
-------- --------- ---------
$ 13,549 $ 1,466 $ 198
-------- --------- ---------
-------- --------- ---------
</TABLE>
F-76
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
NOTES TO THESE FINANCIAL STATEMENTS (CONTINUED)
10. INSURANCE
The Company maintains insurance coverage for its fixed assets and
inventories in an amount considered sufficient to cover the risks involved.
11. PAID-IN CAPITAL
Paid-in capital at September 30, 1996 (unaudited), December 31, 1995 and
1994, was comprised of:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------ ------------------------ -----------
US$ SHARES US$ SHARES US$
--------- ------------- --- ----------- ---
<S> <C> <C> <C> <C> <C>
TVA Parana..................................................... -- -- $ 1 1,000 $ 1
-- --
-- --
--------- ------------- -----
--------- ------------- -----
TVA Sul Participacoes S.A. .................................... $ 18,964 18,470,825 -- -- --
-- --
-- --
--------- ------------- -----
--------- ------------- -----
<CAPTION>
SHARES
-----------
<S> <C>
TVA Parana..................................................... 1,000
-----
-----
TVA Sul Participacoes S.A. .................................... --
-----
-----
</TABLE>
Paid-in capital represents registered common shares without par value.
The Company's shareholders are entitled a minimum dividend of 25% of net
income for the year, adjusted according to Corporation Law. As the Company has
not recorded net income since its inception, no such dividends are payable.
12. SUPPLEMENTARY INFORMATION--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
<TABLE>
<CAPTION>
DEFERRED TAXATION
VALUATION
ALLOWANCE
-----------------
<S> <C>
December 31, 1993.......................................................... $ 926
Additions Charged to Expense............................................... 1,644
Reduction.................................................................. --
-------
Balance at December 31, 1994............................................... 2,570
Additions Charged to Expense............................................... 552
-------
Balance at December 31, 1995............................................... 3,122
Additions Charged to Expense............................................... 490
Reduction.................................................................. --
-------
Balance at September 30, 1996.............................................. $ 3,612
-------
-------
</TABLE>
F-77
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
TV ALFA CABO LTDA.
We have audited the accompanying statements of revenues and direct operating
expenses of TV ALFA CABO LTDA. (the "Company") for each of the three years in
the period ended December 31, 1995, 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 audit 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 revenues and direct operating expenses of TV ALFA
CABO LTDA., for each of the three years in the period ended December 31, 1995,
in conformity with accounting principles generally accepted in the United States
of America.
Coopers & Lybrand
Sao Paulo, Brazil
March 31, 1997
F-78
<PAGE>
TV ALFA CABO LTDA.
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Sales................................................................ $ 803 $ 347 $ 80
Cost of Sales........................................................ (457) (232) (71)
--------- --------- ---
346 115 9
--------- --------- ---
Administrative and Selling Expenses.................................. (605) (131) (9)
Depreciation......................................................... (19) (17) (14)
--------- --------- ---
Sales insufficient to cover direct operating expenses................ $ (278) $ (33) $ (14)
--------- --------- ---
--------- --------- ---
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-79
<PAGE>
TV ALFA CABO LTDA.
NOTES TO THE STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
1. THE COMPANY AND ITS PRINCIPAL OPERATIONS
The Company renders services related to cable television system. The Company
has cable channel rights in Curitiba in the South of Brazil.
2. BASIS OF PRESENTATION
The accompanying statements of revenues and direct operating expenses (the
"financial statements") were prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission for inclusion in
a registration statement on Form F-4. Accordingly, certain expenses which may
not be comparable to the expenses expected to be incurred in the future
operations of the Company have been excluded. Such expenses consist of interest
expenses (net), translation gains (losses), other nonoperating expenses and
income taxes.
The financial statements are presented in US Dollars and have been prepared
in accordance with accounting principles generally accepted in the United States
of America (U.S. GAAP), which differ in certain respects from accounting
principles applied by the Company in its local currency financial statements,
which are prepared in accordance with accounting principles generally accepted
in Brazil ("Brazilian GAAP").
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
financial statement dates and the reported amount of revenues and expenses
during the reporting periods. Since management's judgment involves making
estimates concerning the likelihood of future events, the actual results could
differ from those estimates which will have a positive or negative effect on
future period results.
2.1 ACCOUNTING RECORDS
As required by Brazilian Law, and in accordance with local accounting
practices, the accounting records of the Company are maintained in Brazilian
currency (REAL). In order to present the financial statements in conformity with
accounting principles generally accepted in the United States of America, the
Company maintains additional accounting records which are used solely for this
purpose.
2.2 CURRENCY REMEASUREMENT
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
52, "Foreign Currency Transactions", the United States dollar has been assumed
to be the functional currency as Brazil is a "hyper inflationary" country. As
such, the local accounts of the Company are translated into United States
dollars as follows:
- Income and expenses are translated at the average exchange rates in effect
each month, except for those related to assets and liabilities which are
translated at historical exchange rates.
2.3 SUBSCRIPTIONS
Installation fees are recognized as revenue on the equipment installation
date to the extent of direct selling costs incurred. Subscription revenues are
recognized as earned on an accrual basis.
2.4 DEPRECIATION OF FIXED ASSETS
Depreciation has been determined following the straight line method based on
the estimated useful lives of assets.
F-80
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
TCC TV A CABO LTDA.
We have audited the accompanying statements of revenues and direct operating
expenses of TCC TV A CABO LTDA. (the "Company") for each of the three years in
the period ended December 31, 1995, 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 audit 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 revenues and direct operating expenses of TCC TV A
CABO LTDA., for each of the three years in the period ended December 31, 1995,
in conformity with accounting principles generally accepted in the United States
of America.
Coopers & Lybrand
Sao Paulo, Brazil
March 31, 1997
F-81
<PAGE>
TCC TV A CABO LTDA.
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Sales................................................................ $ 729 $ 392 $ 313
Cost of Sales........................................................ (187) (161) (180)
--------- --------- ---------
542 231 133
--------- --------- ---------
Administrative and Selling Expenses.................................. (397) (216) (120)
Depreciation......................................................... (21) (19) (17)
--------- --------- ---------
Sales in excess of (insufficient to cover ) direct operating
expenses........................................................... $ 124 $ (4) $ (4)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-82
<PAGE>
TCC TV A CABO LTDA.
NOTES TO THE STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
1. THE COMPANY AND ITS PRINCIPAL OPERATIONS
The Company renders services related to cable television system. The Company
has cable channel rights in Curitiba in the South of Brazil.
2. BASIS OF PRESENTATION
The accompanying statements of revenues and direct operating expenses (the
"financial statements") were prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission for inclusion in
a registration statement on Form F-4. Accordingly, certain expenses which may
not be comparable to the expenses expected to be incurred in the future
operations of the Company have been excluded. Such expenses consist of interest
expenses (net), translation gains (losses), other nonoperating expenses and
income taxes.
The financial statements are presented in US Dollars and have been prepared
in accordance with accounting principles generally accepted in the United States
of America (U.S. GAAP), which differ in certain respects from accounting
principles applied by the Company in its local currency financial statements,
which are prepared in accordance with accounting principles generally accepted
in Brazil ("Brazilian GAAP").
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
financial statement dates and the reported amount of revenues and expenses
during the reporting periods. Since management's judgment involves making
estimates concerning the likelihood of future events, the actual results could
differ from those estimates which will have a positive or negative effect on
future period results.
2.1 ACCOUNTING RECORDS
As required by Brazilian Law, and in accordance with local accounting
practices, the accounting records of the Company are maintained in Brazilian
currency (REAL). In order to present the financial statements in conformity with
accounting principles generally accepted in the United States of America, the
Company maintains additional accounting records which are used solely for this
purpose.
2.2 CURRENCY REMEASUREMENT
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
52, "Foreign Currency Transactions", the United States dollar has been assumed
to be the functional currency as Brazil is a "hyper inflationary" country. As
such, the local accounts of the Company are translated into United States
dollars as follows:
- Income and expenses are translated at the average exchange rates in effect
each month, except for those related to assets and liabilities which are
translated at historical exchange rates.
2.3 SUBSCRIPTIONS
Installation fees are recognized as revenue on the equipment installation
date to the extent of direct selling costs incurred. Subscription revenues are
recognized as earned on an accrual basis.
2.4 DEPRECIATION OF FIXED ASSETS
Depreciation has been determined following the straight line method based on
the estimated useful lives of assets.
F-83
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
CCS CAMBORIU CABLE SYSTEM DE TELECOMUNICACOES LTDA.
We have audited the accompanying statements of revenues and direct operating
expenses of CCS CAMBORIU CABLE SYSTEM DE TELECOMUNICACOES LTDA. (the "Company")
for each of the three years in the period ended December 31, 1995, 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 audit 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 revenues and direct operating expenses of CCS
CAMBORIU CABLE SYSTEM DE TELECOMUNICACOES LTDA., for each of the three years in
the period ended December 31, 1995, in conformity with accounting principles
generally accepted in the United States of America.
Coopers & Lybrand
Sao Paulo, Brazil
March 31, 1997
F-84
<PAGE>
CCS CAMBORIU CABLE SYSTEM DE TELECOMUNICACOES LTDA.
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1995 1994 1993
-------------- --------- ---------
<S> <C> <C> <C>
Sales....................................................... $ 1245 $ 528 $ 212
Cost of Sales............................................... (460) (330) (258)
-------------- --------- ---------
785 198 (46)
-------------- --------- ---------
Administrative and Selling Expenses......................... (399) (240) (75)
Depreciation................................................ (8) (5) (3)
-------------- --------- ---------
Sales in excess of (insufficient to cover ) direct operating
expenses.................................................. $ 378 $ (47) $ (124)
-------------- --------- ---------
-------------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-85
<PAGE>
CCS CAMBORIU CABLE SYSTEM DE TELECOMUNICACOES LTDA.
NOTES TO THE STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
1. THE COMPANY AND ITS PRINCIPAL OPERATIONS
The Company renders services related to cable television system. The Company
has cable channel rights in Camboriu in the South of Brazil.
2. BASIS OF PRESENTATION
The accompanying statements of revenues and direct operating expenses (the
"financial statements") were prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission for inclusion in
a registration statement on Form F-4. Accordingly, certain expenses which may
not be comparable to the expenses expected to be incurred in the future
operations of the Company have been excluded. Such expenses consist of interest
expenses (net), translation gains (losses), other nonoperating expenses and
income taxes.
The financial statements are presented in US Dollars and have been prepared
in accordance with accounting principles generally accepted in the United States
of America (U.S. GAAP), which differ in certain respects from accounting
principles applied by the Company in its local currency financial statements,
which are prepared in accordance with accounting principles generally accepted
in Brazil ("Brazilian GAAP").
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
financial statement dates and the reported amount of revenues and expenses
during the reporting periods. Since management's judgment involves making
estimates concerning the likelihood of future events, the actual results could
differ from those estimates which will have a positive or negative effect on
future period results.
2.1 ACCOUNTING RECORDS
As required by Brazilian Law, and in accordance with local accounting
practices, the accounting records of the Company are maintained in Brazilian
currency (REAL). IN ORDER TO PRESENT THE FINANCIAL STATEMENTS IN CONFORMITY WITH
ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA, THE
COMPANY MAINTAINS ADDITIONAL ACCOUNTING RECORDS WHICH ARE USED SOLELY FOR THIS
PURPOSE.
2.2 CURRENCY REMEASUREMENT
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
52, "Foreign Currency Transactions", the United States dollar has been assumed
to be the functional currency as Brazil is a "hyper inflationary" country. As
such, the local accounts of the Company are translated into United States
dollars as follows:
- Income and expenses are translated at the average exchange rates in effect
each month, except for those related to assets and liabilities which are
translated at historical exchange rates.
2.3 SUBSCRIPTIONS
Installation fees are recognized as revenue on the equipment installation
date to the extent of direct selling costs incurred. Subscription revenues are
recognized as earned on an accrual basis.
2.4 DEPRECIATION OF FIXED ASSETS
Depreciation has been determined following the straight line method based on
the estimated useful lives of assets.
F-86
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
TVA SUL FOZ DO IGUACU LTDA.
We have audited the accompanying statements of revenues and direct operating
expenses of TVA SUL FOZ DO IGUACU LTDA. (the "Company") for each of the three
years in the period ended December 31, 1995, 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 audit 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 revenues and direct operating expenses of TVA SUL
FOZ DO IGUACU LTDA., for each of the three years in the period ended December
31, 1995, in conformity with accounting principles generally accepted in the
United States of America.
Coopers & Lybrand
Sao Paulo, Brazil
March 31, 1997
F-87
<PAGE>
TVA SUL FOZ DO IGUACU LTDA.
(FORMERLY TCI TV A CABO IGUACU LTDA.)
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Sales................................................................ $ 866 $ 504 $ 257
Cost of Sales........................................................ (669) (330) (154)
--------- --------- ---------
197 174 103
--------- --------- ---------
Administrative and Selling Expenses.................................. (14) (49) (1)
Depreciation......................................................... (39) (23) (17)
--------- --------- ---------
Sales in excess of direct operating expenses......................... $ 144 $ 102 $ 85
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-88
<PAGE>
TVA SUL FOZ DO IGUACU LTDA.
(FORMERLY TCI TV A CABO IGUACU LTDA.)
NOTES TO THE STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
1. THE COMPANY AND ITS PRINCIPAL OPERATIONS
The Company renders services related to cable television system. The Company
has cable channel rights in Foz do Iguacu in the South of Brazil.
2. BASIS OF PRESENTATION
The accompanying statements of revenues and direct operating expenses (the
"financial statements") were prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission for inclusion in
a registration statement on Form F-4. Accordingly, certain expenses which may
not be comparable to the expenses expected to be incurred in the future
operations of the Company have been excluded. Such expenses consist of interest
expenses (net), translation gains (losses), other nonoperating expenses and
income taxes.
The financial statements are presented in US Dollars and have been prepared
in accordance with accounting principles generally accepted in the United States
of America (U.S. GAAP), which differ in certain respects from accounting
principles applied by the Company in its local currency financial statements,
which are prepared in accordance with accounting principles generally accepted
in Brazil ("Brazilian GAAP").
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
financial statement dates and the reported amount of revenues and expenses
during the reporting periods. Since management's judgment involves making
estimates concerning the likelihood of future events, the actual results could
differ from those estimates which will have a positive or negative effect on
future period results.
2.1 ACCOUNTING RECORDS
As required by Brazilian Law, and in accordance with local accounting
practices, the accounting records of the Company are maintained in Brazilian
currency (REAL). In order to present the financial statements in conformity with
accounting principles generally accepted in the United States of America, the
Company maintains additional accounting records which are used solely for this
purpose.
2.2 CURRENCY REMEASUREMENT
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
52, "Foreign Currency Transactions", the United States dollar has been assumed
to be the functional currency as Brazil is a "hyper inflationary" country. As
such, the local accounts of the Company are translated into United States
dollars as follows:
- Income and expenses are translated at the average exchange rates in effect
each month, except for those related to assets and liabilities which are
translated at historical exchange rates.
2.3 SUBSCRIPTIONS
Installation fees are recognized as revenue on the equipment installation
date to the extent of direct selling costs incurred. Subscription revenues are
recognized as earned on an accrual basis.
2.4 DEPRECIATION OF FIXED ASSETS
Depreciation has been determined following the straight line method based on
the estimated useful lives of assets.
F-89
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Directors of
TVA SUL SANTA CATARINA LTDA.
We have audited the accompanying statement of revenues and direct operating
expenses of TVA SUL SANTA CATARINA LTDA. (the "Company") for the year ended
December 31, 1995, expressed in United States dollars. This financial statement
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the revenues and direct operating expenses of TVA SUL
SANTA CATARINA LTDA., for the year ended December 31, 1995, in conformity with
accounting principles generally accepted in the United States of America.
Coopers & Lybrand
Sao Paulo, Brazil
March 31, 1997
F-90
<PAGE>
TVA SUL SANTA CATARINA LTDA.
(FORMERLY TV CABO SERVICOS SANTA CATARINA LTDA.)
STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
1995
---------------
<S> <C>
Sales......................................................................... $ --
Cost of Sales................................................................. --
-----
--
-----
Administrative and Selling Expenses........................................... (5)
Depreciation.................................................................. --
-----
Direct operating expenses in excess of sales.......................... $ (5)
-----
-----
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-91
<PAGE>
TVA SUL SANTA CATARINA LTDA
(FORMERLY TV CABO SERVICOS SANTA CATARINA LTDA.)
NOTES TO THE STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
1. THE COMPANY AND ITS PRINCIPAL OPERATIONS
The Company started its operations in November 1995 rendering services
related to cable television system. The Company has cable channel rights in
Florianopolis in the South of Brazil.
2. BASIS OF PRESENTATION
The accompanying statement of revenues and direct operating expenses (the
"financial statement") was prepared for the purpose of complying with the rules
and regulations of the Securities and Exchange Commission for inclusion in a
registration statement on Form F-4. Accordingly, certain expenses which may not
be comparable to the expenses expected to be incurred in the future operations
of the Company have been excluded. Such expenses consist of interest expenses
(net), translation gains (losses), and other nonoperating expenses.
The financial statement is presented in US Dollars and has 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 statement, which is
prepared in accordance with accounting principles generally accepted in Brazil
("Brazilian GAAP").
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
financial statement dates and the reported amount of revenues and expenses
during the reporting periods. Since management's judgment involves making
estimates concerning the likelihood of future events, the actual results could
differ from those estimates which will have a positive or negative effect on
future period results.
2.1 ACCOUNTING RECORDS
As required by Brazilian Law, and in accordance with local accounting
practices, the accounting records of the Company are maintained in Brazilian
currency (REAL). In order to present the financial statements in conformity with
accounting principles generally accepted in the United States of America, the
Company maintains additional accounting records which are used solely for this
purpose.
2.2 CURRENCY REMEASUREMENT
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
52, "Foreign Currency Transactions", the United States dollar has been assumed
to be the functional currency as Brazil is a "hyper inflationary" country. As
such, the local accounts of the Company are translated into United States
dollars as follows:
- Income and expenses are translated at the average exchange rates in effect
each month, except for those related to assets and liabilities which are
translated at historical exchange rates.
F-92
<PAGE>
TV ALFA, TCC, CCS, TVA PARANA, FOZ DO
IGUACU AND SSC
BALANCE SHEET AT SEPTEMBER 30, 1996 (UNAUDITED)
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
FOZ DO
TV ALFA TCC CCS SSC IGUACU
----------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
<CAPTION>
ASSETS
<S> <C> <C> <C> <C> <C>
Current assets
Cash and cash equivalents(Note 3)........................... $ 19 $ 162 $ 68 $ -- $ 50
Accounts receivable, net (Note 4)........................... 124 45 3 12 22
Inventories................................................. -- 44 78 54 81
Prepaid and other assets (Note 5)........................... -- 9 -- 128 55
Other accounts receivable (Note 6).......................... 294 45 53 12 169
----------- --------- --------- --------- -----
Total current assets.................................... 437 305 202 206 377
Property, plant and equipment (Note 8)........................ 160 225 3,491 750 316
Loans to related companies (Note 7)........................... -- -- -- -- 42
Other......................................................... -- -- -- -- 3
----------- --------- --------- --------- -----
Total assets.................................................. $ 597 $ 530 $ 3,693 $ 956 $ 738
----------- --------- --------- --------- -----
----------- --------- --------- --------- -----
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C>
Current liabilities
Suppliers................................................... $ 117 $ 102 $ 98 $ 64 $ 10
Taxes payable other than income taxes....................... 106 42 34 1 19
Accrued payroll and related liabilities..................... 14 -- 18 33 69
Other accounts payable (Note 9)............................. 82 2 141 -- 337
----------- --------- --------- --------- -----
Total current liabilities............................... 319 146 291 98 435
----------- --------- --------- --------- -----
Long-term liabilities
Loans from related companies (Note 7)....................... 497 -- -- 1,669 83
Loans from shareholders..................................... -- -- -- -- --
Other....................................................... -- -- -- -- --
----------- --------- --------- --------- -----
Total long-term liabilities............................. 497 -- -- 1,669 83
----------- --------- --------- --------- -----
Shareholders' equity
Paid in capital............................................. 344 47 4,012 1 5
Accumulated deficit......................................... (563) 337 (610) (812) 215
----------- --------- --------- --------- -----
Total shareholders' equity.............................. (219) 384 3,402 (811) 220
----------- --------- --------- --------- -----
Total liabilities and shareholders' equity.............. $ 597 $ 530 $ 3,693 $ 956 $ 738
----------- --------- --------- --------- -----
----------- --------- --------- --------- -----
<CAPTION>
TVA
PARANA
----------
<S> <C>
ASSET
<S> <C>
Current assets
Cash and cash equivalents(Note 3)........................... $ 114
Accounts receivable, net (Note 4)........................... 543
Inventories................................................. 1,119
Prepaid and other assets (Note 5)........................... 396
Other accounts receivable (Note 6).......................... 543
----------
Total current assets.................................... 2,715
Property, plant and equipment (Note 8)........................ 10,856
Loans to related companies (Note 7)........................... --
Other......................................................... 931
----------
Total assets.................................................. $ 14,502
----------
----------
LIABILITIES AND SHAR
<S> <C>
Current liabilities
Suppliers................................................... $ 360
Taxes payable other than income taxes....................... 471
Accrued payroll and related liabilities..................... 6
Other accounts payable (Note 9)............................. 1,866
----------
Total current liabilities............................... 2,703
----------
Long-term liabilities
Loans from related companies (Note 7)....................... 5,223
Loans from shareholders..................................... 27
Other....................................................... 151
----------
Total long-term liabilities............................. 5,401
----------
Shareholders' equity
Paid in capital............................................. 18,964
Accumulated deficit......................................... (12,566)
----------
Total shareholders' equity.............................. 6,398
----------
Total liabilities and shareholders' equity.............. $ 14,502
----------
----------
</TABLE>
The accompanying notes are an integral part of the Unaudited Financial
Information
F-93
<PAGE>
TVA ALFA, TCC, CCS, TVA PARANA, FOZ DO
IGUACU AND SSC
STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
(IN THOUSANDS OF US DOLLARS)
<TABLE>
<CAPTION>
TV FOZ DO
ALFA TCC CCS SSC IGUACU
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Gross revenues
Monthly subscriptions............................................ $ 768 $ 625 $ 642 $ 16 $ 784
Installation..................................................... 6 -- -- 7 50
Other............................................................ -- 2 29 -- --
Revenue taxes.................................................... (20) (17) (17) -- (15)
--------- --------- --------- --------- -----
Net revenue.................................................... 754 610 654 23 819
--------- --------- --------- --------- -----
Direct operating expenses
Payroll and benefits............................................. -- 3 91 82 94
Programming...................................................... 159 146 155 -- 271
Technical assistance............................................. -- -- -- 44 --
Vehicle rentals.................................................. -- -- -- -- --
TVA magazine..................................................... 2 -- -- -- 20
Other costs...................................................... -- 40 101 567 59
--------- --------- --------- --------- -----
161 189 347 693 444
--------- --------- --------- --------- -----
Selling, general and administrative expenses
Payroll and benefits............................................. 143 4 77 -- 116
Advertising and promotion........................................ -- 3 14 -- 16
Rent............................................................. 35 13 4 45 --
Other administrative expenses.................................... 33 42 77 -- 53
Other general expenses........................................... 52 -- -- -- 5
--------- --------- --------- --------- -----
263 62 172 45 190
--------- --------- --------- --------- -----
Depreciation....................................................... 22 -- 75 17 20
--------- --------- --------- --------- -----
Operating income/(loss)........................................ 308 359 60 (732) 165
--------- --------- --------- --------- -----
Interest income.................................................... 14 2 12 -- 4
Interest expense................................................... (8) (12) (7) -- (1)
Translation (loss) gain............................................ (43) (128) (13) (49) 113
Other nonoperating income, net..................................... -- -- -- -- --
--------- --------- --------- --------- -----
Loss before income taxes....................................... 271 221 52 (781) 281
Income taxes (Note 10)............................................. -- (48) (18) -- (39)
--------- --------- --------- --------- -----
Net income (loss).............................................. 271 173 34 (781) 242
--------- --------- --------- --------- -----
--------- --------- --------- --------- -----
<CAPTION>
TVA
PARANA
---------
<S> <C>
Gross revenues
Monthly subscriptions............................................ $ 5,377
Installation..................................................... 756
Other............................................................ 34
Revenue taxes.................................................... (239)
---------
Net revenue.................................................... 5,928
---------
Direct operating expenses
Payroll and benefits............................................. 2,497
Programming...................................................... 410
Technical assistance............................................. 660
Vehicle rentals.................................................. 239
TVA magazine..................................................... 136
Other costs...................................................... 362
---------
4,304
---------
Selling, general and administrative expenses
Payroll and benefits............................................. 624
Advertising and promotion........................................ 244
Rent............................................................. 106
Other administrative expenses.................................... 915
Other general expenses........................................... 274
---------
2,163
---------
Depreciation....................................................... 263
---------
Operating income/(loss)........................................ (802)
---------
Interest income.................................................... 135
Interest expense................................................... (1,713)
Translation (loss) gain............................................ 18
Other nonoperating income, net..................................... 242
---------
Loss before income taxes....................................... (2,120)
Income taxes (Note 10)............................................. --
---------
Net income (loss).............................................. (2,120)
---------
---------
</TABLE>
The accompanying notes are an integral part of the Unaudited Financial
Information
F-94
<PAGE>
TV ALFA, TCC, CCS, TVA PARANA, FOZ DO
IGUACU AND SSC
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
TVA PARANA
------------------------------------
<S> <C> <C> <C>
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
--------- ------------- ----------
Balance at January 1, 1996................................................ $ 1 $ (10,446) $ (10,445)
Capital contributed on:
April 30, 1996.......................................................... 14,865 -- 14,865
August 30, 1996......................................................... 4,098 -- 4,098
Net loss for the period................................................... -- (2,120) (2,120)
--------- ------------- ----------
Balance at September 30, 1996......................................... $ 18,964 (12,566) (6,398)
--------- ------------- ----------
--------- ------------- ----------
<CAPTION>
SSC
------------------------------------
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
--------- ------------- ----------
<S> <C> <C> <C>
Balance at February 28, 1996.............................................. $ 1 $ (31) $ (30)
Net loss for the period................................................... -- (781) (781)
--------- ------------- ----------
Balance at September 30, 1996......................................... $ 1 (812) (811)
--------- ------------- ----------
--------- ------------- ----------
</TABLE>
<TABLE>
<CAPTION>
TV ALFA TCC
------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
PAID-IN ACCUMULATED PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL CAPITAL DEFICIT
--------- --------------- --------- ----------- ---------------
Balance at March 30, 1996............................ $ 344 $ (834) $ (490) $ 47 $ 164
Net loss for the period.............................. -- 271 271 -- 173
--------- ------ --------- --- -----
Balance at September 30, 1996.................... $ 344 (563) (219) 47 337
--------- ------ --------- --- -----
--------- ------ --------- --- -----
<CAPTION>
CCS FOZ DO IGUACU
------------------------------------- ----------------------------
PAID-IN ACCUMULATED PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL CAPITAL DEFICIT
--------- --------------- --------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at May 30, 1996.............................. $ 4,012 $ (644) $ 3,368 $ 5 $ (27)
Net loss for the period.............................. -- 34 34 -- 242
--------- ------ --------- --- -----
Balance at September 30, 1996.................... $ 4,012 (610) 3,402 5 215
--------- ------ --------- --- -----
--------- ------ --------- --- -----
<CAPTION>
<S> <C>
TOTAL
---------
Balance at March 30, 1996............................ $ 211
Net loss for the period.............................. 173
---------
Balance at September 30, 1996.................... 384
---------
---------
TOTAL
---------
<S> <C>
Balance at May 30, 1996.............................. $ (22)
Net loss for the period.............................. 242
---------
Balance at September 30, 1996.................... 220
---------
---------
</TABLE>
The accompanying notes are an integral part of the Unaudited Financial
Information
F-95
<PAGE>
TV ALFA, TCC, CCS, TVA PARANA, FOZ DO
IGUACU AND SSC
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
TV FOZ DO
ALFA TCC CCS SSC IGUACU
----------- --------- ----- --------- -----------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................... $ 271 $ 173 $ 34 $ (781) $ 242
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH (USED IN)
PROVIDED BY OPERATING ACTIVITIES:
Depreciation............................................. -- 13 75 14 20
Amortization............................................. 22 -- -- -- --
Provision for claims..................................... -- -- -- -- --
Disposal and write-off of fixed assets................... -- -- -- -- --
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable...................................... (123) (45) (3) (12) (22)
Prepaid and other assets................................. 1 -- -- (125) (32)
Other accounts receivable................................ (291) (44) (46) (12) (169)
Accrued interest......................................... -- -- -- -- --
Inventories.............................................. -- (2) (78) (54) (81)
Legal Deposits...........................................
Suppliers................................................ (111) (5) 8 64 10
Taxes payable other than income taxes.................... 14 38 11 1 19
Accrued payroll and related liabilities.................. (124) (13) (7) 33 47
Advances received from subscribers....................... (45) -- -- -- --
Other accounts payable................................... (102) (2) 139 -- (18)
----------- --------- --- --------- -----------
Net cash (used in) operating activities................ (488) 113 133 (872) 16
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of fixed assets................................... (6) -- (65) (742) (17)
Loans to related companies................................. -- -- -- -- (42)
Goodwill................................................... -- -- -- -- --
----------- --------- --- --------- -----------
Net cash provided by (used in) investing activities.... (6) -- (65) (742) (59)
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions...................................... -- -- -- -- --
Repayments of loans from shareholders...................... -- -- -- -- --
Loans from shareholders.................................... -- -- -- -- --
Loans from related companies............................... 497 -- -- 1,614 83
Repayment of loans from related companies.................. -- -- -- -- --
----------- --------- --- --------- -----------
Net cash provided by financing activiites.............. 497 -- -- 1,614 83
----------- --------- --- --------- -----------
Net increase (decrease) in cash and cash equivalents......... 3 113 68 -- 40
Cash and cash equivalents at beginning of year............... 16 49 -- -- 10
----------- --------- --- --------- -----------
Cash and cash equivalents at end of year............... $ 19 $ 162 $ 68 $ -- $ 50
----------- --------- --- --------- -----------
----------- --------- --- --------- -----------
SUPPLEMENTAL CASH DISCLOSURE:
Cash paid for interest..................................... $ -- $ -- $ -- $ -- $ --
----------- --------- --- --------- -----------
----------- --------- --- --------- -----------
SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES:
Accrued interest on related company loans refinanced as
principal balance........................................ $ -- $ -- $ -- $ -- $ --
----------- --------- --- --------- -----------
----------- --------- --- --------- -----------
<CAPTION>
TVA
PARANA
---------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................... $ (2,120)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH (USED IN)
PROVIDED BY OPERATING ACTIVITIES:
Depreciation............................................. 263
Amortization............................................. --
Provision for claims..................................... 151
Disposal and write-off of fixed assets................... 795
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable...................................... (511)
Prepaid and other assets................................. (328)
Other accounts receivable................................ (541)
Accrued interest......................................... 1,281
Inventories.............................................. (1,119)
Legal Deposits........................................... (4)
Suppliers................................................ 263
Taxes payable other than income taxes.................... (50)
Accrued payroll and related liabilities.................. 218
Advances received from subscribers....................... --
Other accounts payable................................... 864
---------
Net cash (used in) operating activities................ (838)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of fixed assets................................... (10,448)
Loans to related companies................................. (918)
Goodwill................................................... --
---------
Net cash provided by (used in) investing activities.... (11,366)
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contributions...................................... 18,963
Repayments of loans from shareholders...................... (162)
Loans from shareholders.................................... --
Loans from related companies............................... 2,786
Repayment of loans from related companies.................. (9,314)
---------
Net cash provided by financing activiites.............. 12,273
---------
Net increase (decrease) in cash and cash equivalents......... 69
Cash and cash equivalents at beginning of year............... 45
---------
Cash and cash equivalents at end of year............... $ 114
---------
---------
SUPPLEMENTAL CASH DISCLOSURE:
Cash paid for interest..................................... $ --
---------
---------
SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES:
Accrued interest on related company loans refinanced as
principal balance........................................ $ 1,272
---------
---------
</TABLE>
The accompanying notes are an integral part of the Unaudited Financial
Information
F-96
<PAGE>
TV ALFA, TCC, CCS, TVA PARANA, FOZ DO
IGUACU AND SSC
NOTES TO UNAUDITED FINANCIAL INFORMATION
1. PRINCIPAL OPERATIONS
The accompanying Unaudited Financial Information reflects the results of
operations of Alfa Cabo Ltda. ("TV Alfa"), CCS Camboriu Cable System De
Telecomunicacoes Ltda. ("CCS"), TVA Sul Parana Ltda. ("TVA Parana"), TVA Sul Foz
Do Iguacu Ltda.("Foz do Iguacu") and, TVA Sul Santa Catarina Ltda. ("SSC"), all
subsidiaries of TVA Sul Participacoes S.A ("the Subsidiaries").
These subsidiaries render services related to wireless cable and cable
television systems, including marketing and advertising, production,
distribution and licensing of domestic and foreign television programs. The
Company has wireless cable channel rights primarily in major urban markets in
the South of Brazil.
Comparative Unaudited Financial Information has not been presented as part
of this Unaudited Financial Information for TVA Sul Parana Ltda. as such
comparative Financial Information is the same as that presented in the Combined
Financial Statements of TVA Sul Participacoes S.A. which are included elsewhere
in this Registration Statement for the following reason: TVA Sul Participacoes
S.A. was incorporated on March 3, 1996. In September 1996, TVA Sul Participacoes
S.A. became a holding company for certain entities which were under common
control, namely, TVA Sul Parana Ltda.; TV Alfa Cabo Ltda.; TCC TV a Cabo Ltda.;
CCS Camboriu Cable Systems de Telecomunicacoes Ltda.; TVA Sul Foz do Iguacu
Ltda.; and TVA Sul Santa Catarina Ltda. With the exception of TVA Sul Parana
Ltda., each of these entities was acquired in 1996 and hence does not form part
of the combined financial statements of TVA Sul Participacoes S.A. for the
periods ended December 31, 1995 and prior. Therefore, the financial statements
of TVA Sul Participacoes S.A. for the nine months ended September 30, 1995
(unaudited), represent the financial statements of TVA Sul Parana Ltda.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant policies followed in the preparation of the accompanying
Unaudited Financial Information are described below:
2.1 BASIS OF PRESENTATION
The accompanying Unaudited Financial Information are presented in U.S.
Dollars and have been prepared in accordance with accounting principles
generally accepted in the United States of America (U.S. GAAP), which differ in
certain respects from accounting principles applied by the Company in its local
currency financial statements, which are prepared in accordance with accounting
principles generally accepted in Brazil ("Brazilian GAAP").
The Unaudited financial information has been derived from the Company's
records and reflects all adjustments which are, in the opinion of management,
necessary for a fair presentation of the financial information.
The preparation of Condensed Financial Information requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
Financial Information dates and the reported amount of revenues and expenses
during the reporting periods. Since management's judgment involves making
estimates concerning the likelihood of future events, the actual results could
differ from those estimates which will have a positive or negative effect on
future period results.
F-97
<PAGE>
TV ALFA, TCC, CCS, TVA PARANA, FOZ DO
IGUACU AND SSC
NOTES TO UNAUDITED FINANCIAL INFORMATION
2.2 ACCOUNTING RECORDS
As required by Brazilian Law, and in accordance with local accounting
practices, the accounting records of the Subsidiaries are maintained in
Brazilian currency (reais). In order to present the Financial Information in
conformity with accounting principles generally accepted in the United States of
America, the subsidiaries maintain additional accounting records which are used
solely for this purpose.
2.3 CURRENCY REMEASUREMENT
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
52, "Foreign Currency Transactions", the United States dollar has been assumed
to be the functional currency as Brazil is a "hyperinflationary" country. As
such, the local Financial Information of the Subsidiaries is translated into
United States dollars as follows:
- Nonmonetary assets and liabilities are translated at historical rates. All
other assets and liabilities are translated at the official rate of
exchange of R$1,022 to US$1 in effect on September 30, 1996.
- Income and expenses are translated at the average exchange rates in effect
each month, except for those related to assets and liabilities which are
translated at historical exchange rates, and deferred income taxes, which
are translated at the current rate. Translation gains/losses are
recognized in the income statement.
2.4 CASH AND CASH EQUIVALENTS
Cash and cash equivalents are defined as cash and cash in banks and
investments in interest-bearing securities and are carried at cost plus accrued
interest. Short-term investments with original maturities of three months or
less at the time of purchase are considered cash equivalents.
2.5 FINANCIAL INSTRUMENTS
In accordance with SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments," information is provided about the fair value of certain financial
instruments for which it is practicable to estimate that value.
For the purposes of SFAS No. 107, the estimated fair value of a financial
instrument is the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
The carrying values of the Subsidiarys' financial instruments as of September
30, 1996 (unaudited) approximate management's best estimate of their estimated
fair values. The following methods and assumptions were used to estimate the
fair value of each class of financial instrument for which it is practicable to
estimate that value:
- The fair value of certain financial assets carried at cost, including
cash, accounts receivable, other accounts receivable, and certain other
short-term assets is considered to approximate their respective carrying
value due to their short-term nature.
- The fair value of payables to suppliers, other accounts payable, loans to
affiliated companies and certain other short-term liabilities is
considered to approximate their respective carrying value due to their
short-term nature.
F-98
<PAGE>
TV ALFA, TCC, CCS, TVA PARANA, FOZ DO
IGUACU AND SSC
NOTES TO UNAUDITED FINANCIAL INFORMATION
2.5 FINANCIAL INSTRUMENTS (CONTINUED)
- The fair value of loans from affiliated companies approximates their
respective carrying values as interest on these loans is at market rates.
2.8 ACCOUNTS RECEIVABLE
Accounts receivable are stated at their estimated realizable values. An
allowance for doubtful accounts will be established on the basis of an analysis
of the accounts receivable, in light of the risks involved, in an amount
sufficient to cover any losses incurred in realization of credits when
necessary.
2.9 INVENTORIES
Inventories consist of materials and supplies used to provide service to new
customers, and to ensure continuity of service to existing customers.
Inventories are stated at the lower of cost or market. Cost is determined
principally under the average cost method.
2.10 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated using the
straight-line method, over the remaining useful lives, as described in Note 8.
2.11 RECOVERABILITY OF LONG-LIVED ASSETS TO BE HELD AND USED IN THE BUSINESS
Management reviews long-lived assets, primarily the Subsidiaries property
and equipment to be held and used in the business, for the purposes of
determining and measuring impairment on a recurring basis or when events or
changes in circumstances indicate that the carrying value of an asset or group
of assets may not be recoverable. Assets are grouped and evaluated for possible
impairment at the level of each cable television system; impairment is assessed
on the basis of the forecasted undiscounted cash flows of the businesses over
the estimated remaining lives of the assets related to those systems. A
write-down of the carrying value of the assets or group of assets to estimated
fair value will be made, when appropriate.
The subsidiaries adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be disposed of", from January 1,
1996, and the effect on the Unaudited Financial Information as a result of the
adoption was not significant.
2.12 SUBSCRIPTIONS
Installation fees are recognized as revenue on the equipment installation
date to the extent of direct selling costs incurred. Subscription revenues are
recognized as earned on an accrual basis.
F-99
<PAGE>
TV ALFA, TCC, CCS, TVA PARANA, FOZ DO
IGUACU AND SSC
NOTES TO UNAUDITED FINANCIAL INFORMATION
3. CASH AND CASH EQUIVALENTS
At September 30, 1996 (unaudited) cash and cash equivalents were comprised
of:
<TABLE>
<CAPTION>
FOZ DO
TV ALFA TCC CCS SSC IGUACU
----------- --------- ----- --------- -----------
<S> <C> <C> <C> <C> <C>
Cash on hand and in banks............................................. $ 13 $ 160 $ 68 $ -- $ 50
Short-term investments................................................ 6 2
--- --------- --- --------- ---
$ 19 $ 162 $ 68 $ -- $ 50
--- --------- --- --------- ---
--- --------- --- --------- ---
<CAPTION>
TVA
PARANA
-----------
<S> <C>
Cash on hand and in banks............................................. $ 91
Short-term investments................................................ 23
-----
$ 114
-----
-----
</TABLE>
4. ACCOUNTS RECEIVABLE
At September 30, 1996 (unaudited) accounts receivable, net, were comprised
of:
<TABLE>
<CAPTION>
TV ALFA TCC CCS SSC
----------- ----- ----- -----
<S> <C> <C> <C> <C>
Subscriptions............................................................ $ -- $ 45 $ -- $ 10
Installation fees........................................................ 4 -- -- 2
Other.................................................................... 120 -- 3 --
----- --- --- ---
$ 124 $ 45 $ 3 $ 12
----- --- --- ---
----- --- --- ---
<CAPTION>
FOZ DO TVA
IGUACU PARANA
----------- -----------
<S> <C> <C>
Subscriptions............................................................ $ 22 $ 209
Installation fees........................................................ -- 323
Other.................................................................... -- 11
--- -----
$ 22 $ 543
--- -----
--- -----
</TABLE>
5. PREPAID AND OTHER ASSETS
At September 30, 1996 (unaudited) prepaid expenses were comprised of:
<TABLE>
<CAPTION>
TV ALFA TCC CCS SSC
----------- ----- ----- ---------
<S> <C> <C> <C> <C>
Advances to suppliers................................................... $ -- $ 8 $ -- $ 126
Prepaid meals and transportation........................................ -- -- -- --
Other................................................................... -- 1 -- 2
--
--- --- ---------
$ -- $ 9 $ -- $ 128
--
--
--- --- ---------
--- --- ---------
<CAPTION>
FOZ DO TVA
IGUACU PARANA
----------- -----------
<S> <C> <C>
Advances to suppliers................................................... $ 46 $ 364
Prepaid meals and transportation........................................ -- 32
Other................................................................... 9 --
--- -----
$ 55 $ 396
--- -----
--- -----
</TABLE>
6. OTHER ACCOUNTS RECEIVABLE
At September 30, 1996 (unaudited) other accounts receivable were comprised
of:
<TABLE>
<CAPTION>
TV ALFA TCC CCS SSC
----------- ----- ----- -----
<S> <C> <C> <C> <C>
Advances to employees.................................................... $ -- $ -- $ 32 $ --
Accounts receivable from related Company................................. 294 -- 21 11
Other.................................................................... -- 45 -- 1
----- --- --- ---
$ 294 $ 45 $ 53 $ 12
----- --- --- ---
----- --- --- ---
<CAPTION>
FOZ DO TVA
IGUACU PARANA
----------- -----------
<S> <C> <C>
Advances to employees.................................................... $ 5 $ 82
Accounts receivable from related Company................................. 164 461
Other.................................................................... -- --
----- -----
$ 169 $ 543
----- -----
----- -----
</TABLE>
F-100
<PAGE>
TV ALFA, TCC, CCS, TVA PARANA, FOZ DO
IGUACU AND SSC
NOTES TO UNAUDITED FINANCIAL INFORMATION
7. RELATED-PARTY TRANSACTIONS
The following tables summarize the transactions between the Subsidiaries and
related companies at and for the nine months ended September 30, 1996
(unaudited):
<TABLE>
<CAPTION>
FOZ DO TVA
TVA ALFA IGUACU SSC PARANA
--------- ----------- --------- ---------
<S> <C> <C> <C> <C>
TVA BRASIL
Loans payable.......................................... -- -- $ 1,584 --
TEVECAP
Loans payable.......................................... -- -- 85 --
TVA SISTEMA
Loans payable.......................................... -- -- -- $ 2,877
TVA PARANA
Loans receivable....................................... -- $ 42 -- --
TVA SUL
Loans payable.......................................... 497 63 -- 2,346
CCS CAMBORIU
Loans payable.......................................... -- 20 -- --
</TABLE>
The related company loans are denominated in reais and are subject to
monetary restatement plus interest charges at the market rate which was 1.79%
per month in September 1996.
8. PROPERTY, PLANT AND EQUIPMENT
At September 30, 1996 (unaudited) property, plant and equipment were
comprised of:
<TABLE>
<CAPTION>
FOZ DO
TV ALFA TCC CCS SSC IGUACU
----------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Machinery and equipment......................................... $ -- $ 81 $ 26 $ 156 $ 73
Converters...................................................... -- 29 -- 66 --
Leasehold improvements.......................................... -- -- 3,447 2 --
Furniture and fixtures.......................................... 270 2 56 25 17
Premises........................................................ -- 3 6 --
Vehicles........................................................ -- -- 19 51 20
Software........................................................ -- -- 8 12 15
Tools........................................................... -- -- 2 -- --
Reception equipment............................................. -- -- -- -- --
Cable plant..................................................... -- 186 -- 396 280
Building........................................................ -- -- -- -- --
----------- --------- --------- --------- -----------
270 301 3,558 714 405
----------- --------- --------- --------- -----------
Accumulated depreciation........................................ (110) (76) (77) (16) (110)
Telephone line use rights....................................... -- -- 10 -- 9
Fixed asset in transit.......................................... -- -- -- -- --
Other........................................................... -- -- -- 52 12
----------- --------- --------- --------- -----------
$ 160 $ 225 $ 3,491 $ 750 $ 316
----------- --------- --------- --------- -----------
----------- --------- --------- --------- -----------
<CAPTION>
TVA
PARANA
----------
<S> <C>
Machinery and equipment......................................... $ 1,100
Converters...................................................... 5,684
Leasehold improvements.......................................... 52
Furniture and fixtures.......................................... 197
Premises........................................................ 14
Vehicles........................................................ 39
Software........................................................ 45
Tools........................................................... 84
Reception equipment............................................. 4,170
Cable plant..................................................... 578
Building........................................................ 355
----------
12,318
----------
Accumulated depreciation........................................ (1,667)
Telephone line use rights....................................... 139
Fixed asset in transit.......................................... 66
Other........................................................... --
----------
$ 10,856
----------
----------
</TABLE>
F-101
<PAGE>
TV ALFA, TCC, CCS, TVA PARANA, FOZ DO
IGUACU AND SSC
NOTES TO UNAUDITED FINANCIAL INFORMATION
9. OTHER ACCOUNTS PAYABLE
At September 30, 1996 (unaudited) other accounts payable were comprised of:
<TABLE>
<CAPTION>
FOZ DO
TV ALFA TCC CCS SSC IGUACU
----------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Accounts payable to related companies............................... $ -- $ -- $ 138 $ -- $ 3
Advertising......................................................... -- -- 1 -- --
Other............................................................... 82 2 2 334
----- --------- --------- --------- -----
$ 82 $ 2 $ 141 $ -- $ 337
----- --------- --------- --------- -----
----- --------- --------- --------- -----
<CAPTION>
TVA
PARANA
---------
<S> <C>
Accounts payable to related companies............................... $ 1,438
Advertising......................................................... --
Other............................................................... 428
---------
$ 1,866
---------
---------
</TABLE>
10. INCOME TAXES
The subsidiaries income tax was different from the amount computed using the
Brazilian statutory income tax for the reasons set forth in the following table:
<TABLE>
<CAPTION>
FOZ DO TVA
TV ALFA TCC CCS SSC IGUACU PARANA
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before income tax....................... 271 221 51 (781) 283 (2,120)
Statutory income tax rate............................. 30.56% 30.56% 30.56% 30.56% 30.56% 30.56%
--------- --------- --------- --------- --------- ---------
83 67 16 (239) 86 (648)
Utilization of tax loss carryforwards................. (83) -- -- -- (54) --
Others................................................ -- (19) 2 35 7 158
--------- --------- --------- --------- --------- ---------
-- 48 18 (204) 39 (490)
Increase in valuation allowance....................... -- -- -- 204 -- 490
--------- --------- --------- --------- --------- ---------
$ -- $ 48 $ 18 -- $ 39 --
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
11. INSURANCE
The Subsidiaries maintain insurance coverage for their fixed assets and
inventories in an amount considered sufficient to cover the risks involved.
12. PAID-IN CAPITAL
Paid-in capital at September 30, 1996 (unaudited) was comprised of:
<TABLE>
<CAPTION>
FOZ DO TVA
TV ALFA TCC CCS SSC IGUACU PARANA
--------- --------- ----------- ----- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
US$......................................... 344 47 4,012 1 4,771 18,964
--------- --------- ----------- --- ----- -------------
--------- --------- ----------- --- ----- -------------
Shares...................................... 278,000 250,000 4,850,000 200 5,000 27,712,345
--------- --------- ----------- --- ----- -------------
--------- --------- ----------- --- ----- -------------
</TABLE>
F-102
<PAGE>
ANNEX A
THE FEDERATIVE REPUBLIC OF BRAZIL
THE INFORMATION SET FORTH BELOW IS BASED ON MATERIAL OBTAINED FROM VARIOUS
SOURCES BELIEVED TO BE ACCURATE BUT HAS NOT BEEN INDEPENDENTLY VERIFIED.
GENERAL
GEOGRAPHY AND DEMOGRAPHY. Brazil is the fifth largest country in the world
and the largest country in Latin America, occupying approximately 3.3 million
square miles and 60% of South America's land mass.
Brazil's population in 1995 was approximately 157 million, the sixth largest
in the world. The population is currently growing at a rate of approximately
1.9% per year and is expected to reach 172 million by the end of this century.
Brazil is comprised of 26 states and the federal district in which Brasilia,
the capital, is located. The largest cities in Brazil are Sao Paulo and Rio de
Janeiro with metropolitan area populations of 10.2 million and 5.7 million,
respectively. Brasilia, Belem, Belo Horizonte, Curitiba, Fortaleza, Porto
Alegre, Recife and Salvador also have populations of more than one million each.
GOVERNMENT. Brazil is a federative republic with a representative form of
federal government. In October 1988, a new constitution was enacted, and the
presidential form of government consisting of three independent branches
executive, legislative and judicial was maintained. The constitutional review
prescribed by the Constitution of 1988 was initiated by the Brazilian National
Congress ("Congress") in October 1993 and resulted in the creation of the Social
Emergency Fund outlined below and the reduction of the presidential term from
five years to four years. See Appendix B, "The Brazilian Economy." In addition,
on April 21, 1993, a national referendum was held to decide whether Brazil
should continue as a presidential republic or should become a parliamentary
republic or parliamentary monarchy. Brazilians voted to continue the current
presidential republic form of government.
Executive power is vested in the President, who is elected by popular vote
for a term of four years and currently cannot be reelected for successive terms.
The President has the power to appoint Ministers and to appoint other executives
in selected administrative and political posts. The presidential powers are
limited by the Constitution. Under certain circumstances, the President may
issue provisional measures which, to be effective beyond 30 days, need the
approval of the Brazilian Congress. The legislative branch is composed of a
Senate consisting of 81 Senators elected for eight-year terms, and a Chamber of
Deputies consisting of 513 Deputies elected for four-year terms. Senators and
Deputies are elected directly by popular vote. The judicial branch is headed by
the Federal Supreme Court, which is, in constitutional matters, the court of
final appeal from both federal and state courts. The judicial branch also
includes the Superior Court of Justice and various lower federal courts. On the
state level, executive power is vested in Governors who are elected for
four-year terms; legislative power is vested in State Deputies who are also
elected for four years. Judicial power is vested in state courts; however,
judicial proceedings in which the Federal Government is involved must be
submitted to federal courts sitting in each state.
RECENT POLITICAL HISTORY. The Brazilian military ruled the country from
1964 to 1985, when a series of political reforms were enacted culminating in the
reintroduction of direct elections for President and the convening of a
Constitutional Assembly to adopt a new Brazilian Constitution. During this
period, Brazil solidified its position as one of the 10 largest economies in the
world in terms of gross domestic product ("GDP") with an industrial base focused
on exports.
A-1
<PAGE>
On December 17, 1989, Fernando Collor de Mello became the first President of
Brazil elected by direct popular vote since 1960. Elections were held in late
1990 for state governorships, one-third of the federal Senate and all of the
federal Chamber of Deputies. As a result of these elections, the Brazilian
Democratic Movement Party, which had won a majority in the federal legislature
and most of the state governorships in the 1986 elections, lost its majority in
the legislature as many of its seats were lost to several other parties.
On September 29, 1992, Brazil's lower house of Congress voted to authorize
the Senate to begin an impeachment trial against President Collor based on
corruption charges. At that time, the members of the President's cabinet
submitted their resignations. According to Brazilian law, Mr. Collor was
required to step down from office for a period of 180 days while the trial
proceeded. During this 180-day period, Vice President Itamar Franco became
acting President while the Senate decided whether to convict or to acquit the
President. On December 29, 1992, Mr. Collor submitted his official resignation
as President of Brazil. Consequently, Mr. Franco, as elected Vice President,
assumed the position of President for the remainder of Mr. Collor's term in
office, which concluded on January 1, 1995.
General elections were held on October 3, 1994 to elect a new President, all
state governors, and to renew the federal Chamber of Deputies and the federal
Senate. Fernando Henrique Cardoso (who served as Finance Minister under Mr.
Franco's administration and is generally viewed as the architect of the Real
Plan), representing the Partido Social Democrata Brasileiro (the Brazilian
Social Democratic Party or the "PSDB"), was elected in the first round with 54%
of the valid vote. Luis Inacio da Silva, of the Worker's Party, was his closest
contender. Mr. Cardoso's presidential campaign received a strong boost from the
rapid fall in the rate of inflation which followed the introduction of the new
currency in July 1994. See Appendix B, "The Brazilian Economy."
Since his election Mr. Cardoso has appointed Mr. Pedro Malan, the former
President of the Central Bank of Brazil, as the new Finance Minister. In May
1995, the President of the Central Bank, Mr. Persio Arida resigned and in June
1995 Mr. Gustavo Loyola was appointed as the new President of the Central Bank.
President Cardoso has indicated that the overriding goals of his economic
policies will be to continue the effort to combat inflation while negotiating
with Congress for permanent fiscal reforms.
THE CARDOSO ADMINISTRATION
Mr. Cardoso took office on January 1, 1995, and has concentrated his efforts
on two main issues: making structural reforms and completing the anti-inflation
program. Those efforts have demanded extensive political negotiations with the
various parties in and outside the Government.
The objectives of the structural reforms are to provide the Government with
a sound fiscal budget by revamping the tax and social security systems, and to
enhance and create incentives to stimulate private sector participation in
former Government monopolies such as telecommunications, oil and infrastructure
in general.
AMENDMENTS TO BRAZILIAN CONSTITUTION
On August 15, 1995, four amendments to the Brazilian Constitution were
approved by Congress which allow greater competition in the Brazilian economy:
(i) Constitutional Amendment no. 5/95 altered Article 25, paragraph 2 of the
Constitution by extinguishing the monopoly over pipeline distribution of gas;
(ii) Constitutional Amendment no. 6/95 altered Article 175, paragraph 1 and
Article 170, item IX of the Constitution by removing the distinction between
Brazilian companies capitalized from domestic sources (capital nacional) and
those capitalized from foreign sources (capital estrangeiro) and granting both
types of company mineral exploration rights; (iii) Constitutional Amendment no.
7/95 altered Article 78 of the Constitution by permitting foreign vessels to
engage in inland and coastal shipping; and
A-2
<PAGE>
(iv) Constitutional Amendment no. 8/95 altered Article 21 items XI and XII(a) of
the Constitution by opening the telecommunications sector to private sector
companies.
On November 9, 1995, Congress enacted Constitutional Amendment no. 9 which
altered Article 177 of the Brazilian Constitution allowing the Republic to
contract state owned or private companies in order to carry out, in accordance
with a law which has not yet been enacted, certain oil-related activities, such
as (i) prospecting for and exploitation of deposits of oil and natural gas; (ii)
refining of national or foreign oil; imports and exports of oil, natural gas and
its basic by-products; (iii) oceanic transportation of crude oil of national
origin or of basic oil by-products produced in Brazil; and (iv) pipeline
transportation of crude oil, its by-products and natural gas of any origin.
Presently, Congress is discussing a constitutional amendment proposing
changes in the social security system, which is considered to be one of Brazil's
greatest fiscal problems. The proposed changes are aimed at stabilizing the
system's financial condition through modifications in the pension benefit
structure, increases in mandatory contributions, changes in retirement criteria,
and the elimination of certain privileges such as the federal civil servant
retirement plan. The Cardoso administration has also sent to Congress a
proposal, presently being discussed by a special commission in the Chamber of
Deputies, for administrative reforms aimed at increasing management efficiency
and extinguishing the job stability presently granted to public sector
employees, thereby allowing a reduction of payroll expenses.
In addition, the Government has stated that it intends to propose a new tax
system which would attempt to simplify and enhance the efficiency of the current
tax structure. The proposed system would shift allocations from the Government
to the states and municipalities, in order to reduce the allocation of
expenditures on the federal level. In addition, the proposed system would lower
taxes on investments and exports from their current levels.
A-3
<PAGE>
ANNEX B
THE BRAZILIAN ECONOMY
THE INFORMATION SET FORTH BELOW IS BASED ON MATERIAL OBTAINED FROM VARIOUS
SOURCES BELIEVED TO BE ACCURATE BUT HAS NOT BEEN INDEPENDENTLY VERIFIED.
RECENT PERFORMANCE
Throughout the 1980s and into the early 1990s, the Brazilian economy
experienced periods of high inflation and recession. Recently, however, the
Brazilian economy has shown improvement in a number of areas. Gross domestic
product ("GDP") grew in constant real terms by 4.2% in 1995, 5.9% in 1994 and
4.2% in 1993, compared with a decrease of 0.8% in 1992. Industrial production
increased by 2.0% in 1995, 7.0% in 1994 and 6.9% in 1993, compared with declines
of 3.8%, 1.8% in 1992 and 1991, respectively. In 1995, the service sector
experienced an overall growth rate of 5.7% in real terms as a result of
increases in retail services of 7.4%, transportation of 3.9% and communications
of 24.3%.
Exports in 1995 increased by 6.8% over 1994 while imports grew by 50.4% in
the same period. The trade balance presented a deficit of the equivalent of
US$3.2 billion in 1995 compared to a surplus of the equivalent of US$10.6
billion in 1994. Through July 1996, the trade balance has shown a modest US$600
million (0.1% of GDP) deficit, compared to a US$4.3 billion deficit during the
same period in 1995. For the first seven months of the year, export growth has
exceeded that of 1995, while the growth of imports has lagged behind that of the
previous year, thereby narrowing the trade deficit.
Brazil registered significant growth in international currency reserves in
1995, despite the instability which followed the Mexican peso crisis. After a
sharp decline in the first four months of the year, an increase in foreign
capital inflows was registered which replenished reserves to the equivalent of
US$51.8 billion at year-end 1995, up from US$38.8 billion at year-end 1994 and
US$32.2 billion at year-end 1993. By July 31, 1996, reserves totaled more than
the equivalent of US$58 billion. After a fine-tuning of the management of the
foreign exchange rate regime during 1994, the Central Bank has pursued a policy
of gradually depreciating the currency against the dollar. In 1995, the real
fell in value against the US dollar from R$0.844 to R$0.972 per US dollar and
has since depreciated to 1.015 on August 23, 1996, reflecting this policy of
gradual depreciation.
In 1995, Brazil experienced an average monthly rate of inflation of 1.75%,
as measured by the FIPE (Foundation for Economic Research) consumer price index.
In the period from January 1994 through June 1994, average monthly inflation, as
measured by the FIPE, was 43.75%, but declined to 2.86% in the period from July
1994 through December 1994. This reduction resulted from the implementation of
the third phase of the Real Plan and occurred without the price, wage or asset
freezing mechanisms previously utilized in prior stabilization programs. See
"Real Plan and Current Economic Policy."
The sharp decline of inflation during the second half of 1994 contributed to
a considerable recovery of domestic demand and coincided with a significant
acceleration of the growth rate of the Brazilian economy. The twelve-month GDP
growth rate increased to 7.7% in the second quarter of 1995 from 4.1% in the
second quarter of 1994. As a result, the trade balance deteriorated and
government was forced to implement deflationary measures which reduced GDP
growth to 4.2% in the fourth quarter of 1995.
B-1
<PAGE>
The following table sets forth selected Brazilian economic indicators for
the years indicated:
SELECTED BRAZILIAN ECONOMIC INDICATORS
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
THE ECONOMY
Gross domestic product ("GDP"):.......................... $ 330.7 328.2 341.7 355.6 370.5
(in billions of constant 1994 REAIS(a)
(in billions of dollars)(b)............................ 436.8 449.9 484.9 528.0 650.0
Real GDP growth (decline)(a)............................. 0.3% (0.8)% 4.2% 5.9% 4.2%
Population (millions).................................... 147.1 149.4 151.6 153.7 156.6
GDP per capita (in US$)(c)............................... $ 2,970.0 3,012.0 3,199.0 3,435.0 4,151.0
Unemployment rate(d)..................................... 4.83% 5.76% 5.31% 5.06% 4.7%
Consumer price increase (FIPE) (rate of change)(e)....... 458.6% 1,129.4% 2,491.0% 941.3% 23.1%
Nominal devaluation rate(f).............................. 528.5% 1,059.0% 2,532.5% 613.4% 15.0%
Domestic real interest rate(g)........................... 6.7% 30.2% 7.1% 24.8% 33.4%
Balance of payments (in billions of dollars):
Exports.................................................. $ 31.6 35.8 38.6 43.5 46.5
Imports.................................................. 21.0 20.6 25.3 33.1 49.6
Current account.......................................... (1.4) 6.1 (0.6) (1.5) N.A.
Capital account.......................................... 0.8 10.3 10.7 9.2 N.A.
Change in total reserves(h).............................. (0.6) 14.4 8.4 6.6 13
Total official reserves.................................. 9.4 23.8 32.2 38.8 51.8
PUBLIC FINANCE
Primary surplus (deficit) as % of GDP(i)................. 2.9 1.6 2.3 5.1 0.4
Real interest expense as % of GDP........................ (1.6) (4.6) (2.4) (3.7) 5.4
Operational surplus (deficit) as % of GDP(j)............. (.2) (2.8) (1.2) 1.3 (5.0)
PUBLIC DEBT (in billions of US dollars)
Gross internal debt (nominal)(k)......................... 71.6 97.6 101.0 191.3 256.4
Gross external debt (nominal)(l)......................... 100.8 99.6 104.5 118.2 130.9
Net Public debt.......................................... 144.3 150.6 149.4 181.5 217.1
Internal............................................... 52.9 74.8 84.0 128.9 176.3
External............................................... 91.4 75.8 65.4 52.6 40.9
</TABLE>
- ------------------------
Notes:
(a) Calculated based upon constant average 1994 REAIS.
(b) Converted to dollars based on the weighted average exchange rate for each
year.
(c) Not adjusted for purchasing parity.
(d) Average annual unemployment rate of the metropolitan regions of Belo
Horizonte, Porto Alegre, Recife, Rio de Janeiro, Salvador and Sao Paulo.
(e) The FIPE index is one indicator of inflation. While many inflation
indicators are used in Brazil, the FIPE is calculated by the Foundation for
Economic Research at the University of Sao Paulo, an independent research
organization, and is one of the most widely utilized indices.
(f) Year on year percentage devaluation of the REAL against the US dollar (sell
side).
(g) Brazilian federal treasury securities deflated by the GPI-DS., General Price
Index-Domestic Supply calculated by the Getulio Vargas Foundation.
(h) Because of the impact of "Errors and omissions" and adjustments for
valuation/devaluation of other currencies against the US dollar,
monetization/demonetization of gold and reclassified assets, figures
regarding changes in total reserves do not reflect the sum of the "Current
account" and the "Capital account." See "Balance of Payments and Foreign
Trade--Balance of Payments."
(i) The primary surplus results represent Government revenues less
expenditures, excluding interest expenditures on public debt.
(j) The operational balance reflects the consolidated fiscal balance less
interest expenditures, adjusted for the effects of inflation.
(k) Consolidated debt, calculated as the gross internal debt less credits
between governmental entities.
(l) Gross external debt less total reserves.
SOURCES: IBGE; GETULIO VARGAS FOUNDATION; CENTRAL BANK.
B-2
<PAGE>
REAL PLAN AND CURRENT ECONOMIC POLICY
In December 1993, the Federal Government announced a stabilization program,
known as the Real Plan, aimed at curtailing inflation and building a foundation
for sustained economic growth. The Real Plan was designed to address persistent
deficits in the Federal Government's accounts, expansive credit policies and
widespread, backward-looking indexation.
The Real Plan was formulated as a three-stage process: the first stage
included a fiscal adjustment proposal for 1994, consisting of a combination of
spending cuts and an increase in tax rates and collections intended to eliminate
a budget deficit originally projected at US$22.0 billion (4.2% of GDP). Elements
of the proposal included (i) cuts in current expenditures and investment through
the transfer of some activities from the Federal Government to the states and
municipalities, (ii) establishment of the Emergency Social Fund ("ESF"),
financed by reductions in constitutionally mandated transfers of Federal
Government revenues to the states and municipalities, to ensure financing of
social welfare spending by the Federal Government, (iii) a prohibition on sales
of public bonds by the Federal Government except to refinance existing debt and
for certain expenditures and investment, (iv) new taxes, including a new levy on
financial transactions and (v) recovery of mandatory Social Security
Contributions ("COFINS"), due to judicial acknowledgment that such contributions
were permissible under the Constitution.
The centerpiece of the first stage of the Real Plan was the creation in 1994
of the ESF, the mandate for which has been renewed for the current year through
1997. The ESF enables the Federal Government to temporarily break certain
constitutionally mandated links between revenue and expenditure. Pursuant to
this amendment, 20.0% of Federal Government revenues otherwise earmarked for
specific purposes were released and deposited into the ESF to ensure financing
of social welfare spending by the Federal Government for 1994 and 1995. In
adopting this constitutional amendment, however, Congress did not modify the
existing provisions requiring the Federal Government to share a significant
portion of its revenues with the States and municipalities.
The second stage of the Real Plan, initiated on March 1, 1994, began the
process of reform of the Brazilian monetary system. Brazil's long history of
high inflation had led to the continuous and systematic deterioration of the
domestic currency, which no longer served as a store of value and had lost its
utility as a unit of account. Because inflation had reduced dramatically the
information content of prices quoted in local currency, economic agents had
included in their contracts a number of mechanisms for indexation and
denomination of obligations in Indexed units of account. The process of
rehabilitation of the national currency began with the creation and
dissemination of the UNIDADE REAL DE VALOR (the Unit of Real Value, or "URV") as
a unit of account. The second stage of the Real Plan was designed to eliminate
the indexation of prices to prior inflation and link indexation to the URV, a
unit of account.
The introduction of the URV was premised on the theory that a reference unit
with a nominal value corrected frequently and based on the best estimate of
current inflation would express values more realistically than traditional
indexing methods. The URV, therefore, was calculated daily based on estimates
drawn from three price indices: the National Consumer Price Index (Extended)
developed by the IBGE; the General Price Index (Market) calculated by the FGV
and the Consumer Price Index developed by the Institute of Economic Research
Foundation ("FlPE"). The URV index was designed to track the loss in the
purchasing power of the CRUZEIRO REAL, the legal currency at the time.
The third stage of the Real Plan began on July 1, 1994, with the
introduction of the REAL as Brazil's currency. All contracts denominated in URVs
were automatically converted into REAIS at a conversion rate of one to one, and
the URV, together with the CRUZEIRO REAL, ceased to exist (although the CRUZEIRO
REAL was generally accepted until August 31, 1994). Just after its introduction,
the REAL appreciated significantly; the REAIS/US dollar exchange rate (sell
side) in the commercial market, set at 1.00 REAL/1.00 US dollar when the REAL
was introduced, stood at 0.846 REAIS/US dollar on December 31, 1994. In March
1995, the government adopted an exchange rate band and since then a policy to
avoid further exchange rate
B-3
<PAGE>
overvaluation has been followed. The REAL/US dollar exchange rate was set at
0.973 on December 31, 1995 (sell side), which meant a devaluation of 15% of the
REAL against the US dollar. On August 23, 1996 the REAL/US rate was set at 1.015
(sell side).
In the beginning of 1995, in an effort to control the burgeoning rate of
economic activity which followed the sharp decline in inflation, the Federal
Government took several measures to control monetary growth, including strict
credit control and a significant increase in real interest rates. In the third
quarter of 1995 the economy returned to a level of sustainable economic growth
and credit control was partially released while interest rates began to fall.
Finally, in order to consolidate the Real Plan the Federal Government has
introduced a series of proposals to reform the Constitution that will provide
the structural changes necessary for long-term economic stability.
The five "economic order" amendments proposed by the government have been
approved by Congress and are now awaiting implementing regulatory legislation.
These amendments eliminate the Federal Government's monopoly in the areas of
telecommunications, distribution of natural gas, oil and coastal and fluvial
shipping and change the definition of what constitutes a Brazilian company to
any company registered in Brazil. The extension of the ESF until June 1997 was
also approved early in 1996. The social security reform and the administrative
reform are presently being considered for approval by Congress.
The Federal Government has stated that it intends to propose several other
amendments to Brazilian legislation to further consolidate the Real Plan.
GROSS DOMESTIC PRODUCT
Brazil's economic growth has fluctuated greatly in recent years. The average
real growth rate of GDP during the six-year period from 1990 to 1995 was 1.5%,
but real GDP growth was negative in both 1990, when it declined by 4.4%, and
1992, when it declined by 0.8%. During this period, the services and agriculture
sectors grew at average rates of 2.3% and 2.8%, respectively, while the
industrial sector increased by 0.2%. During 1993, the Brazilian economy
recovered: real GDP grew by 4.2%, the industrial sector grew by 6.9% and the
services sector grew by 3.5%. Agriculture was the only principal sector to
decline during 1993, by 1%. In 1994, the agricultural sector recovered,
registering a growth rate of 8.1%, due primarily to the record grain harvest,
which reached 75.2 million tons. In 1994, the industrial and services sectors
grew at rates of 7.0% and 4.1%, respectively, and GDP grew 5.9%. In 1995,
overall GDP growth was 4.2%, with agriculture and services growing 5.9% and
5.7%, respectively, and industry growing 2%.
B-4
<PAGE>
The following table sets forth Brazil's real GDP for each of the years
indicated:
REAL GROWTH (DECLINE) OF GDP PER SECTORS (% OF CHANGE)
<TABLE>
<CAPTION>
1991 1992 1993 1994
--------- ----- --------- ---------
<S> <C> <C> <C> <C>
Total GDP................................................................... 0.3 (0.8) 4.2 5.9
Agriculture................................................................. 2.8 5.4 (1.0) 8.1
Industry.................................................................... (1.8) (3.8) 6.9 7.0
Mining.................................................................... 0.9 0.8 0.6 4.7
Manufacture
Building.................................................................. (3.5) (6.6) 4.8 6.1
Public Utilities.......................................................... 4.3 1.6 3.7 2.4
Services.................................................................... 1.6 0.0 3.5 4.1
Retail Sales.............................................................. 0.0 (2.5) 6.7 5.9
Transportation............................................................ 2.5 2.4 4.2 4.3
Communication............................................................... 19.6 5.7 10.7 13.6
Financial Institutions...................................................... (8.0) (4.6) (2.2) (2.8)
Public Administration....................................................... 1.6 1.5 1.5 1.4
<CAPTION>
1995
---------
<S> <C>
Total GDP................................................................... 4.2
Agriculture................................................................. 5.9
Industry.................................................................... 2.0
Mining.................................................................... 3.1
Manufacture
Building.................................................................. 0.1
Public Utilities.......................................................... 7.5
Services.................................................................... 5.7
Retail Sales.............................................................. 7.4
Transportation............................................................ 3.9
Communication............................................................... 24.3
Financial Institutions...................................................... (7.4)
Public Administration....................................................... 1.4
</TABLE>
- ------------------------
SOURCE: IBGE and Central Bank.
PRIVATIZATION PROGRAM
The Federal Government, directly or through various state-owned enterprises,
owns many companies and controls a major portion of activities in the mining and
oil and gas sectors. Energy production, rail transport, postal services and
telecommunications are all directly or indirectly controlled by the Federal
Government. The public sector grew very rapidly during the 1970s and continues
to play a significant role in Brazil's economy.
To reduce its participation in the economy, the Federal Government has
engaged in the privatization of certain State enterprises. The objectives of the
privatization program are (i) to reduce the role of the State in the economy and
allocate more resources to social investment, (ii) to reduce the public sector
debt, (iii) to encourage increased competition and thereby raise the standards
and efficiency of Brazilian industry and (iv) to strengthen the capital markets
and promote wider share ownership. As originally presented, the PLANO REAL
contemplated constitutional amendments which would permit private participation
in the State-controlled petroleum and telecommunication sectors and in other
areas that had constitutionally mandated monopolies, such as pipeline
distribution of gas and the shipping industry. These amendments were not adopted
during the constitutional review that concluded on May 31, 1994, but the
amendments were presented to Congress again in 1995 and all have been approved.
A council directly subordinate to the President (the CONSELHO NACIONAL DE
DESESTATIZACAO or "Privatization Council") along with BNDES are responsible for
administering the privatization program. To date, privatizations have, for the
most part, been effected through share auctions conducted on Brazil's stock
exchanges.
As of February 29, 1996, a total of 42 State enterprises had been
privatized, and several minority interests held by Government companies had been
sold for nominal consideration (consisting of Brazilian currency or devalued
debt issued by the Federal Government, its agencies or State- controlled
enterprises and redeemable at face value) totaling US$9.6 billion.
For 1996, plans are to privatize electric utilities and rail transport
services companies. In February 1995, the LEI DE CONCESSOES DE SERVICOS PUBLICOS
("Public Services Concessions Law") was enacted permitting investment in the
electricity sector by private companies or individuals. In addition,
B-5
<PAGE>
on July 7, 1995, Congress approved Law No. 9074, which permits independent,
third-party producers of electricity to compete with the State monopolies. The
President has also sent to Congress a constitutional amendment that would allow
the private sector to build and operate hydroelectric plants. Within the
electricity sector, priority is being given to the privatization of Light S.A.,
the auction of which took place in May 1996. Escelsa, the other distribution
company owned by the Federal Government, was privatized on July 11, 1995. During
the first quarter of 1997, the government plans to privatize the Companhia Vale
do Rio Doce ("CVRD") conglomerate, one of the largest corporations in Brazil and
the largest explorer of iron ore in the world.
Several Brazilian labor unions have opposed certain of the privatization
measures proposed by the Federal Government, but the Federal Government has to
date been able to move forward with its program despite such opposition.
In addition to the privatization program, the Federal Government has sought
to reduce the regulation of economic activity generally. Important developments
in this regard include the trade liberalization and the termination of most
price controls. The Federal Government has also acted to deregulate certain
segments of the economy, including fuel and oil derivatives, airlines, shipping
and steel, and is introducing measures designed to increase competition in areas
such as highway maintenance and transportation, areas which were previously
controlled, in most cases, by Government enterprises.
PRICES
Brazil has experienced high and chronic inflation for many years, which
hindered investment and economic growth and contributed to income inequality.
Inflation and certain Federal Government measures taken to combat inflation have
had significant negative effects on the Brazilian economy generally, on the
fiscal accounts of the Federal Government and on its ability to service its
external debt. See "Public Finance" and "Public Debt."
B-6
<PAGE>
The following table sets forth consumer price increases in the city of Sao
Paulo, as measured by the FIPE price index.
<TABLE>
<CAPTION>
FIPE CONSUMER PRICES
--------------------------
<C> <S> <C> <C>
TRAILING
PERIOD MONTHLY 12 MONTHS(A)
- ----------- ----------- -------------
1989 December....................................................................... 1,635.90%
1990 December....................................................................... 1,639.10
1991 December....................................................................... 458.60
1992 December....................................................................... 1,129.50
1993 December....................................................................... 2,490.10
1994 December....................................................................... 941.30
1995 January........................................................................ 0.80 648.10
February....................................................................... 1.32 448.50
March.......................................................................... 1.93 293.89
April.......................................................................... 2.64 176.49
May............................................................................ 1.97 94.31
June........................................................................... 2.66 32.32
July........................................................................... 3.72 28.33
August......................................................................... 1.43 27.67
September...................................................................... 0.74 27.57
October........................................................................ 1.48 25.48
November....................................................................... 1.14 23.19
December....................................................................... 1.21 23.14
1996 January........................................................................ 1.82 24.39
February....................................................................... 0.40 23.26
March.......................................................................... 0.23 21.20
April.......................................................................... 1.62 20.00
May............................................................................ 1.34 19.26
June........................................................................... 1.41 17.81
July........................................................................... 1.31 15.07
</TABLE>
- ------------------------
Notes:
(a) Annual figures for each month from January 1995 represent trailing 12-month
inflation rates.
SOURCE: Institute for Economic Research (FIPE).
Throughout the 1980s Brazil experienced periods of severe inflation. In
1986, President Jose Sarney's government endeavored to confront the problem with
the Cruzado Plan, which sought to end inflation via a general price and wage
freeze and the introduction of a new currency. The plan succeeded in bringing
down inflation for the year to 68.1% as measured by the FIPE index of consumer
prices in Sao Paulo and was very popular for a time. The Cruzado Plan, however,
eventually created serious distortions in the economy as well as shortages and
finally failed, resulting in renewed high inflation.
From 1987 through 1990, annual inflation rates rose from a year-end low of
367.2% in 1987 to close 1990 at 1,639.1% for the year. The new government of
President Fernando Collor de Mello tried a number of plans to ameliorate the
situation but, after some success at first with inflation falling to 458.6% in
1991, failed to stabilize prices.
During the planning stages of the current Real Plan in 1993, inflation rose
to levels around 30% per month and 2,490.1% for the year. In the implementation
of the Real Plan in mid-1993, the Unit of Real Value ("URV") was implemented as
a general price and wage index that would peg real prices to the value of the
dollar and adjusted based on depreciation of the currency as well as inflation.
This served to
B-7
<PAGE>
downplay the effects of inflation to the public since both prices and wages
would be adjusted automatically to compensate. This allowed the nominal
currency, the CRUZEIRO REAL to become de-linked from price expectations allowing
inflation measured in the nominal currency to reach 50% per month while the real
value of wages and prices were kept constant by the URV.
Since the implementation of the third phase of the Real Plan, including the
introduction of the real, in July 1994, the rate of inflation has decreased
significantly. See "Real Plan and Current Economic Policy." The high monthly
rates of inflation experienced in the first half of 1994 have fallen to single
digits. Residual inflation from the end of the first six months of 1994 resulted
in a monthly inflation rate of approximately 5.5% for July. The gradual decline
of the impact of these factors resulted in decreasing inflation rates, reaching
1.55% for the month of September. In October and November, the inflation rate
moved upward approximately one percentage point due to seasonal factors,
accentuated by a long period of drought in the producer regions. In December,
the inflation rate dropped to 0.57% as the supply of farm products normalized.
In January 1995, the inflation rate reached 1.36% impacted by rises in natural
resource products prices and costs of building. Less intense upwards movement in
these factors caused the rate of inflation to decrease to 1.15% in February
1995. The inflation rate reached 1.8% and 2.3% in March and April 1995,
respectively. The acceleration in the rate of inflation was caused primarily by
the increase in industrial prices, housing and clothing costs. After another
decline in May to 0.4%, inflation rose to 2.62% and 2.24% in June and July 1995,
respectively. This acceleration resulted from a rise in public transport fares.
In September and October a sharp decline in farm product prices reduced
inflation significantly. In January 1996, the increase in inflation was caused
by a rise in electricity and telephone prices.
BALANCE OF PAYMENTS AND FOREIGN TRADE
GENERAL
Like other countries in Latin America, Brazil's balance of payments
deteriorated in the early 1980s as the result of a series of adverse economic
developments. These developments were further exacerbated by rising US dollar
interest rates, which increased the cost of servicing Brazil's external debt and
led to current account deficits, the debt crisis and curtailment of Brazil's
access to international financial markets.
Since 1992, however, Brazil has experienced an increase in capital inflows,
as foreign investments, have surged. Net direct investments increased to over
US$2.9 billion from in 1995, from US$1.7 billion in 1994 and US$901 million in
1990. For the period of January 1996 through June 1996, foreign direct
investment totaled US $4.5 billion. Foreign reserves edged up during the 1990s.
From December 31, 1990 to December 31, 1995, the foreign reserves maintained by
the Central Bank increased by 451%, totaling US$51.8 billion at December 31,
1995, which covered approximately 13 months of imports of goods, or 8 months of
imports of goods and services.
Since 1990, the Federal Government's economic policies have increased the
importance of the external sector of the economy. Recent reforms directly
affecting the external sector include a reduction in import tariffs, the
negotiation of the Mercosul free trade agreement among Brazil, Argentina,
Uruguay and Paraguay, the liberalization of certain foreign exchange
transactions and the liberalization of foreign investment regulations.
B-8
<PAGE>
BALANCE OF PAYMENTS
The following table sets forth information regarding Brazil's balance of
payments for each of the years indicated:
BALANCE OF PAYMENTS
IN US$ MILLION
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995
--------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
CURRENT ACCOUNT..................................... $ (1,407) $ 6,143 $ (592) $ (1,689) $ (17,784)
Trade balance..................................... 10,579 15,239 13,307 10,466 (3,157)
Exports......................................... 31,620 35,793 38,563 43,545 46,506
Imports......................................... 21,041 20,554 25,256 33,079 49,663
Services (net).................................... (13,542) (11,339) (15,585) (14,743) (18,600)
Interest.......................................... (8,621) (7,253) (8,280) (5,668) (8,158)
Other............................................. (4,921) (4,086) (7,305) (8,405) (10,442)
Unilateral transfers.............................. 1,558 2,243 1,686 2,568 3,973
Revenues........................................ 1,599 2,315 1,792 2,751 4,224
Expenditures.................................... 43 72 106 183 251
CAPITAL ACCOUNT..................................... (4,148) 25,271 10,115 14,294 29,820
Investment (net).................................. 170 2,972 6,170 8,131 4,670
Reinvestment...................................... 365 175 100 83 200
Financing......................................... 2,026 13,258 2,380 1,939 2,641
Foreign......................................... 2,125 13,191 2,625 2,389 3,487
Brazilian....................................... (99) 67 (245) (450) (845)
Amortizations..................................... (7,830) (8,572) (9,978) (50,411) (11,026)
Paid............................................ (7,830) (7,147) (9,288) (11,001) (11,026)
Refinanced (incl. Paris Club)................... 0 1,425 (710) (39,410) 0
Currency loans.................................... 964 17,577 11,659 53,802 34,403
Short-term...................................... (3,033) 2,602 869 909 19,667
Long-term....................................... 3,997 14,975 10,790 52,893 14,736
Other capital..................................... 157 (139) (215) 750 (1,068)
ERRORS AND OMISSIONS................................ 876 (1,386) (1,119) 334 1,444
SURPLUS (DEFICIT)................................... (4,679) 30,028 8,404 12,939 13,480
FINANCING........................................... 4,679 (30,028) (8,404) (12,939) (13,480)
Assets (increase)................................. 369 (14,670) (8,709) (7,215) (12,919)
Use of IMF credit................................. (590) (406) (495) (129) (47)
Short-term liabilities............................ 4,900 (14,952) 800 (5,593) (514)
Arrears........................................... 5,621 (14,259) 1,133 (5,535) (510)
Others............................................ (721) (699) (333) 58 (4)
</TABLE>
In 1995, Brazil's balance of payments registered a surplus of US$13.5
billion. In 1994 and 1993 the surplus in Brazil's balance of payments reached
US$12.9 billion and US$8.4 billion, respectively.
After recording a US$6.1 billion current account surplus in 1992, Brazil
registered a US$592 million Current account deficit in 1993. Among the factors
that led to that decline were reductions of 12.7% and 24.8% in the trade surplus
and the net inflow of Unilateral transfers, respectively, and an increase of
37.4% in the service deficit, reflecting an increase both in external debt
service costs and expenses related to other services. In 1994, the Current
account registered a deficit of US$1.7 billion due to a decrease of 21.3% in the
trade surplus. The reduction in the trade surplus resulted from a 31.0% increase
in imports, which totaled US$33.1 billion, caused by a significant increase in
imports of consumer goods and capital goods as a result of the Real Plan.
Exports increased by 12.9% in 1994, totaling US$43.6 billion. In 1995 the
Current account turned sharply negative as imports grew 50.1% while exports grew
B-9
<PAGE>
by a mere 6.8%. This growth in imports was primarily the result of an
appreciation of the real and the release of pent-up demand from the stability in
the new currency. Overall trade balance figures for 1995 showed a deficit of
US$3.2 billion, with exports of US$46.5 billion and imports of US$49.7 billion.
Despite the development of a the first trade deficit in many years, Brazil's
Capital account surplus grew to a record US$29.8 billion.
Brazil's Capital account includes direct investments, portfolio investments
and short, medium and long-term indebtedness. The Capital account has registered
a surplus since 1992 and in 1995 the surplus climbed 108.6% to reach US$29.8
billion. In 1994, the Capital account rose to US$14.3 billion mainly as a result
of the Brady program which resulted in a 361.4% increase in Currency loans to
US$52.9 billion. During 1995, although Currency loans declined when compared to
the previous year, the rise in short-term inflows by US$18.8 billion was still
impressive when compared to 1993. Overall Currency loans totaled US$34.4 billion
in 1995.
FOREIGN TRADE
The following table sets forth certain details regarding Brazil's foreign
trade for the years indicated:
PRINCIPAL FOREIGN TRADE INDICATORS
<TABLE>
<CAPTION>
1991 1992 1993 1994
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Exports as % of GDP........................................... 7.2% 8.0% 8.0% 8.2%
Imports as % of GDP........................................... 4.8 4.6 5.3 6.2
Trade balance as % of GDP..................................... 2.4 3.4 2.7 2.0
Growth (decline) in foreign trade(a).......................... 1.1 7.0 13.7 19.7
Exports: % increase (decrease)(b)............................. 0.7 13.2 7.8 12.9
Imports: % increase (decrease)(b)............................. 1.8 (2.3) 24.0 30.2
Trade balance: % change from prior period..................... (1.6) 44.0 (13.9) (20.8)
Exports/Imports(c)............................................ 1.5x 1.7x 1.5x 1.3x
<CAPTION>
1995
-------------
<S> <C>
Exports as % of GDP........................................... 7.0%
Imports as % of GDP........................................... 8.0
Trade balance as % of GDP..................................... (0.5)
Growth (decline) in foreign trade(a).......................... 25.5
Exports: % increase (decrease)(b)............................. 7.0
Imports: % increase (decrease)(b)............................. 50.0
Trade balance: % change from prior period..................... (131)
Exports/Imports(c)............................................ 0.94x
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
EXPORTS:
US$ in millions................................. $ 31,620 $ 35,793 $ 38,563 $ 43,545 $ 46,506
1,000 tons...................................... 165,974 167,295 182,323 194,880 N.A.
% change from period(d)......................... (1.3)% 0.8% 9.0% 6.9% N.A.
IMPORTS:
US$ in millions................................. $ 21,041 $ 20,554 $ 25,256 $ 33,079 $ 49,663
1,000 tons...................................... 63,278 68,057 77,813 84,819 N.A.
% change from prior period(d)................... 10.7% 7.6% 14.7% 8.6% N.A.
Trade balance..................................... $ 10,579 $ 15,239 $ 13,307 $ 10,466 $ (3,157)
</TABLE>
- ------------------------
Notes:
(a) Percentage change in exports and imports from previous year.
(b) Percentage change from previous year.
(c) Exports divided by imports.
(d) Percentage change in volume, by weight.
SOURCE: Central Bank
Overall trade flows in 1995 totaled a record US$96.2 billion, representing
an increase of 25.5% over those of the previous year.
In addition to maintaining an export financing program, PROEX, which in 1991
replaced the previous FINEX program, the Federal Government has adopted a series
of measures aimed at promoting foreign trade. The Federal Government has
attempted to encourage domestic competition by liberalizing imports through the
elimination of certain non-tariff restrictions, such as the list of goods with
B-10
<PAGE>
respect to which the issuance of import licenses had been suspended, the
requirement that traders submit their import requirements to the Federal
Government in advance and the linking of certain imports to exports.
In 1991, the Federal Government announced a schedule for tariff reductions
for a three-year period ending in January 1994, aimed at attaining rates varying
from zero to 40%, with an average tariff of 14.2%. As of February 1992, further
tariff reductions were made, with adjustments every nine months instead of at
one-year intervals. Accordingly, the reduction in tariffs to an average rate of
16.8% from 20.8% originally scheduled for January 1, 1993 was implemented on
October 1, 1992. The Federal Government implemented the last set of scheduled
tariff reductions on July 1, 1993, when the average duty and the maximum tariff
were reduced to 14.2% and 40%, respectively.
The Federal Government also reduced tariffs to moderate domestic price
increases to support the Real Plan. In September and October 1994 it implemented
significant new tariff reductions, covering over 5,000 products and reducing the
average tariff to 11.32%. In September 1996, the government removed the ICMS
export tax. This tax was applied to a broad range of mostly primary goods and
its removal is expected to boost export competitiveness.
Average tariffs are also being reduced as a result of Brazil's
implementation of a schedule of preferences from its current tariffs applicable
to imports from Mercosul countries. The preference, which was a 75% reduction
from otherwise applicable rates during the second half of 1993 and 82% during
the first half of 1994, was raised to 89% beginning on July 1, 1994 and to 100%
beginning on January 1, 1995, although certain products were excepted from this
discount. In December 1994, the four member countries of Mercosul established
January 1, 1995 as the date for the implementation of the Common External Tariff
("CET"), intended to transform the region into a customs union. The CET ranges
from 0.0% to a maximum of 20.0%, but each member country was allowed a list of
300 exceptions (399 in the case of Paraguay) to the CET. The products on each
country's list of exceptions have tariffs varying from the CET, but such tariffs
are scheduled to be reduced automatically each year until 2001, at which time
such tariffs will equal the CET rates. The introduction of the CET has raised
Brazil's average tariffs slightly, to 11.99%.
In February 1995, the Minister of Finance increased the import tariff on
passenger cars to 32.0% from 20.0%, with a scheduled reduction of 2.0 percentage
points each year until reaching 20.0% again in 2001. In addition, in order to
reduce the current account deficit, in March 1995, the Minister of Finance
increased to 70.0% the import tariff on roughly 100 durable consumer goods,
including passenger cars (but not utility vehicles), home appliances and
electric and electronic equipment, to be in effect for a period of one year. In
May 1995, the tariff on utility vehicles was raised to 70.0%. In April 1995,
approximately 20 of such durable goods had their tariffs reduced to a range
between 40.0% and 63.0% to meet the tariff level established in GATT
negotiations. Passenger cars and utility vehicles will also have their maximum
tariffs reduced to 63.0% as of January 1, 1997, 49% as of January 1, 1998, 35%
as of January 1, 1999 and 20% as of January 1, 2000, which is the CET level. A
recent agreement with the European Union, Japan and the Republic of Korea will
result in a reduction to 30% in the import tariff on up to 50,000 vehicles per
year.
Brazil's list of exceptions to the CET was published in April 1995 revised
in May 1995, encompassing 460 products (including those that had their tariffs
increased in March and May 1995), some of which are expected to remain on the
list until 2001, while others of which may be withdrawn or have their tariffs
altered in order to assure domestic supply or to prevent domestic speculative
price movements.
Brazil is a signatory to the Final Act of the GATT Uruguay Round, pursuant
to which it is committed to staged reductions in tariffs beginning in 1995, over
five years with respect to industrial products and over ten years with respect
to agricultural products.
B-11
<PAGE>
FOREIGN INVESTMENT
Foreign investment in Brazil has traditionally focused on direct investment
in the manufacturing sector. Beginning in 1991, foreign investment increased
substantially, surpassing the levels reached during the period from 1973 to
1982, before the debt crisis. In 1994, net foreign direct investment increased
by more than US$1 billion, to reach US$1.7 billion, while the net portfolio
investment decreased US$1.9 billion, reaching US$11.6 billion. Figures indicate
that in 1995 net foreign direct investment reached US$3.0 billion while net
portfolio investment was US$4.8 billion.
The following table sets forth information regarding foreign investment in
Brazil for each of the years indicated.
FOREIGN INVESTMENT IN BRAZIL (IN US$)
<TABLE>
<CAPTION>
INFLOWS OUTFLOWS NET INFLOWS
----------------------------------- ------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PORTFOLIO(A) DIRECT(B) TOTAL PORTFOLIO(A) DIRECT(B) TOTAL PORTFOLIO(A) DIRECT(B)
----------- ----------- --------- ----------- ------------- --------- ----------- -----------
1990................. 824 1,131 1,955 245 230 475 579 901
1991................. 4,187 1,095 5,282 378 123 601 3,809 972
1992................. 9,930 1,749 11,709 2,594 189 2,763 7,366 1,580
1993................. 23,554 1,302 24,854 10,019 580 10,599 13,451 722
1994................. 32,621 2,356 30,265 21,046 618 21,664 11,575 1,738
1995................. 25,559 3,285 25,844 17,806 315 18,121 4,753 2,970
<CAPTION>
<S> <C>
TOTAL
---------
1990................. 1,480
1991................. 4,781
1992................. 8,946
1993................. 14,173
1994................. 9,837
1995................. 7,723
</TABLE>
- ------------------------
Notes:
(a) Includes bonds, commercial paper and notes, except those related to external
debt restructuring bonds.
(b) Includes reinvestment of earnings.
SOURCE: Central Bank.
In March 1995, the Federal Government eased certain restrictions on foreign
lending and investment in response to the deterioration in the current account.
Such measures included the reduction of the IOF on foreign capital inflows, if
over a certain maturity, to 0.0% from 7.0% on loans, to 5.0% from 9.0% on
investments in foreign capital fixed income funds and to 0.0% from 1.0% on
portfolio investments. In August 1995, responding to the strong capital inflows
of the end of the second quarter of 1995, the government increased restrictions
on foreign lending and investments. The IOF charged on bonds and loans issued
abroad was increased to 5% and the IOF charged on fixed income funds was
increased to 7%. In February 1996, the Government increased to 3 years the
minimum term for the issuance of bonds, and in October 1996 established the
following IOF charges:
(i) 3% for loans with a minimum maturity of less than 3 years;
(ii) 2% for loans with a minimum maturity of or in excess of 3 years but
less than 4 years;
(iii) 1% for loans with a minimum maturity of or in excess of 4 years
but less than 5 years; and
(iv) 0% for loans with a minimum maturity of or in excess of 5 years.
PUBLIC FINANCE
CONSOLIDATED PUBLIC SECTOR FISCAL PERFORMANCE
The consolidated public sector is comprised of the Federal Government, the
several State enterprises, and State and local governments. In turn, the Federal
Government consolidates the accounts of the National Treasury, the social
security system, and the income and loss statement of the Central Bank, but not
the proceeds from privatization. With the adoption of several important
structural reforms in recent years, the Federal Government has established as
its objective a substantial improvement in the fiscal performance of the
consolidated public sector as measured by the operational results.
Brazil reports its fiscal balance using two principal measures, all of which
are calculated according to the official statistical guidelines of the IMF:
B-12
<PAGE>
- PRIMARY BALANCE, which is the financial balance less net borrowing costs
of the Federal Government.
- OPERATIONAL BALANCE, which is similar to primary balance but excludes the
inflationary component of interest payments on domestic debt of the
non-financial public sector. This balance is the primary balance plus
accrued real interest on the external and domestic debt. This balance is
used to correct the distortions which affect the measurement of public
finances in an inflationary environment.
Brazil generated a consolidated primary surplus in each year from 1990 to
1995. However, real interest expense (both domestic and external) on the public
debt accounted for the operational deficits registered during most of the
period. In 1994, a significant increase in tax revenues, due to the reduction in
inflation and to the economic boom, increased the primary surplus to 5.1% of GDP
while the real interest expense on the public debt reached 3.7% of GDP.
Consequently, Brazil posted an operational surplus of 1.1% of GDP in 1994
compared with a deficit of 2.2% in 1992 and a surplus of 0.2% in 1993. In 1995,
the operational deficit reached 4.95% of GDP due to real interest expenses which
totaled 5.4% of GDP while in the primary concept a surplus of 0.45% of GDP was
registered.
Set forth below are the public sector borrowing requirements since 1990:
PUBLIC SECTOR BORROWING REQUIREMENTS HISTORICAL SUMMARY(A)
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
SELECTED ECONOMIC INDICATORS(b)
Real GDP growth (decline).......................................... 0.2% (0.8)% 4.2% 5.9% 4.2%
Monetary base (end of period) change............................... 291.2 991.3 1,953.2 308 22.60
Real interest rate(c).............................................. 6.7 30.1 7.1 24.8 33.5
PUBLIC FINANCE(d)
Financial result................................................... (24.4)% (44.3)% (58.4)% (44.4)% 7.4%
Primary result..................................................... 3.0 2.4 2.6 5.1 0.4
Real interest...................................................... (1.6) (4.6) (2.4) (3.7) (5.4)
Domestic........................................................... 0.4 (3.2) (0.9) (3.0) (4.7)
External........................................................... (2.0) (1.4) (1.5) (0.7) (0.7)
Operational result................................................. 1.4 (2.2) 0.2 1.1 (5.0)
Domestic financing................................................. 3.7 (3.3) 0.2 2.4 7.8
External financing................................................. 0.0 2.8 2.4 2.7 (3.3)
Issue of money..................................................... (2.3) (2.7) (2.4) (4.1) 0.5
</TABLE>
- ------------------------
Notes:
(a) Surplus (deficit).
(b) Deflated by official government deflator.
(c) Implicit real interest rate on public sector internal debt.
(d) All figures expressed as a percentage of GDP.
SOURCE: Central Bank.
PUBLIC DEBT
GENERAL
Public sector debt ("public debt") in Brazil consists of the internal and
external debt of the Federal Government, State and local governments and public
sector enterprises. Pursuant to the Constitution, the Brazilian Senate is vested
with powers to establish, upon a request by the President, (i) global limits for
the consolidated debt of the Government, States, and municipalities, (ii) the
terms and conditions of the internal and external financial transactions of the
Federal Government, including public sector enterprises, at all levels of
government, and (iii) the terms and conditions for guarantees of the Government
of any internal and external financial transaction. Furthermore, any external
financial transaction entered into at any level of government must be authorized
by the Senate.
B-13
<PAGE>
The following table sets forth the consolidated gross and net debt of the
public sector as at December 31 for each of the years 1991 through 1995:
PUBLIC SECTOR DEBT
IN US$ MILLION
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED GROSS PUBLIC SECTOR DEBT(a)........ $ 172,371 $ 196,733 $ 205,460 $ 309,530 $ 387,340
Internal...................................... 71,557 97,159 100,990 91,340 256,420
External(b)................................... 100,834 99,574 104,470 118,190 130,920
BY SECTOR, FEDERAL GOVERNMENT AND CENTRAL BANK
Gross debt.................................... 99,904 120,105 124,820 203,840 247,920
Internal...................................... 33,965 52,039 57,160 126,600 170,650
Securities debt............................. 11,561 36,403 42,060 71,400 116,340
Other debt(c)............................. 22,404 15,636 15,100 55,200 54,310
External...................................... 65,939 69,663 67,660 74,240 77,270
Credits
Internal.................................... (41,480) (49,128) (48,810) (87,060) (104,270)
Public sector(d).......................... (26,179) (27,697) (34,440) (30,780) (32,830)
Other(e).................................. (15,301) (21,431) (14,470) (56,280) (71,440)
External(f)................................. (9,406) (23,754) (32,210) (38,810) (51,260)
STATE AND LOCAL GOVERNMENT
Gross debt.................................... 29,098 39,263 43,540 63,520 81,750
Internal.................................... 24,887 34,861 38,940 61,380 79,350
External.................................... 4,211 4,402 4,600 2,140 2,400
Credits
Internal.................................... (1,103) (1,843) (1,370) (2,990) (4,580)
Public sector(d).......................... 0 0 0 0 0
Other(e).................................. (1,103) (1,843) 1,370 (2,990) (4,580)
External(f)................................. 0 0 0 0 0
STATE ENTERPRISES
Gross debt.................................... 69,568 65,062 64,650 46,140 51,730
Internal.................................... 38,884 39,549 39,330 34,140 39,250
External.................................... 30,684 25,510 25,320 11,980 12,480
Credits
Internal.................................... (935) (1,131) (1,240) (3,183) (4,150)
Public sector(d).......................... (692) (870) (1,090) (2,735) (3,800)
Other(e).................................. (243) (261) (15) (45) (35)
External(f)................................. 0 0 0 0 0
NET PUBLIC SECTOR DEBT(g)....................... 144,286 150,594 149,390 181,500 217,140
Internal...................................... 52,858 74,776 84,000 128,900 176,250
External...................................... 91,428 75,818 65,390 52,600 40,890
</TABLE>
- ------------------------
Notes:
(a) Consolidated gross public sector debt consolidates debts between public
sector entities.
(b) Includes short-term debt obligations.
(c) Includes monetary base, CRUZADOS NOVOS in accounts frozen under the Collor
Plan, compulsory deposits required upon release of frozen accounts, other
deposits of the financial system with the Central Bank and federal
securities that can be used in the national privatization program.
(d) Internal public sector credits owed by other public sector entities. These
amounts are consolidated into the consolidated gross public sector debt
amounts above.
(e) Other internal credits consist primarily of deposits at private sector
financial institutions.
(f) External credits are equivalent to the Federal Government's international
reserves. The external credits of the Federal Government and Central Bank
include collateral acquired in connection with the April 1994 debt
restructuring.
(g) Net public sector debt is consolidated gross public sector debt less
aggregate credits of the Federal Government and Central Bank, State and
local governments and state enterprises (excluding internal public sector
credits that have been excluded from the consolidated gross public sector
debt).
SOURCE: Central Bank.
B-14
<PAGE>
In 1994, net public sector debt was approximately US$182 billion, of which
US$129 billion represented domestic indebtedness. Net public debt in 1995
reached US$217 billion, an increase of 20% from the December 1994 figure. This
result was mainly due to a 36.7% rise in the net internal debt which is related
to a significant increase registered by the federal security debt. The rise of
net public debt is also attributable in large part to the substantial increase
in the net debt of State and local governments, which stood at US$60.5 billion
in 1994 and US$77.2 billion in 1995. On the other hand, in the same period, net
external debt decreased by 22% to US$41 billion due a significant accumulation
of international reserves.
EXTERNAL DEBT
As of December 31, 1995, Brazilian foreign debt was US$159 billion.
Approximately US$125 billion of the total represented medium and long-term debt,
of which US$25 billion was owned to foreign commercial banks, US$32 billion to
international entities and government agencies, US$54 billion to bond holders
and US$14 billion to suppliers and other creditors. Most of the commercial bank
debt was denominated in US dollars and bore interest at floating rates. The
"Brady Plan"-type debt restructuring of April 1994 substantially altered
Brazil's external debt profile. While the interest arrears were capitalized, the
restructuring reduced previously outstanding principal obligations by about US$4
billion. See "Public Debt--Debt Crisis and Restructuring."
The following table sets forth details of Brazil's public sector external
debt by type of borrower for each of the years indicated:
PUBLIC SECTOR EXTERNAL DEBT BY TYPE OF BORROWER(A)
(US DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Public sector.......................................... 94,627 93,437 90,613 87,330 87,455
Registered(a)........................................ 75,423 86,669 83,515 86,864 87,168
Non registered....................................... 19,204 6,768 7,098 466 287
Private sector......................................... 29,283 42,512 55,113 60,965 71,550
Registered(a)........................................ 17,573 24,166 30,755 32,804 42,145
Non registered....................................... 11,710 18,346 24,358 28,161 29,405
Total.................................................. 123,910 135,949 145,726 148,295 159,005
External debt/% of GDP................................. 28.35% 31.11% 33.35% 33.93% 42.97%
</TABLE>
- ------------------------------
Notes:
(a) Debt with an original maturity of one year or more.
SOURCE: Central Bank.
DEBT CRISIS AND RESTRUCTURING
With the inception of the debt crisis in 1982, voluntary lending to Brazil
by commercial banks ceased. With its foreign reserves in decline, Brazil
struggled to make debt service payments by achieving substantial trade
surpluses. Emergency lending by commercial banks and multilateral organizations
in 1983 and 1984, together with rescheduling of outstanding commercial bank
debt, helped to stem the loss of reserves. In 1983, the IMF undertook to provide
Brazil with R$2 billion of Special Drawing Rights ("SDRs") (approximately US$4.6
billion, as at December 31, 1982) over a three-year period, and commercial bank
creditors agreed to reschedule US$4.5 billion in principal payments and provide
US$4.4 billion in new money. Agreement was also reached with the country's
foreign governmental (Paris Club) creditors that year, resulting in the
restructuring of 95% of Brazil's principal and interest obligations falling due
during the period from August 31, 1983 through December 31, 1984, as well as
arrearages relating to the period from January 1, 1983 through July 1, 1983 in
the aggregate amount of approximately US$3 billion. In 1984, commercial bank
creditors agreed to an additional rollover of
B-15
<PAGE>
US$5.2 billion in principal and a new money facility for US$6.5 billion in
additional funds. Brazil's subsequent inability to meet all of the lending
conditions established by the IMF led to a succession of new letters of intent
and periodic suspensions of IMF disbursements.
Brazil did not seek new money from commercial banks in a 1986 debt
rescheduling covering approximately US$16 billion of 1985 and 1986 medium and
long-term maturities and approximately US$15 billion of short-term trade and
interbank lines. A sharp drop in reserves in 1986 as a result of a large capital
account deficit and a sizable current account shortfall led the Federal
Government to declare a moratorium on principal and interest payments to
commercial banks in February 1987.
1988 FINANCING PLAN
In September 1988, Brazil's bank creditors agreed, among other things, to
reschedule approximately US$61 billion over a 20-year period pursuant to a
Multi-Year Deposit Facility Agreement ("MYDFA") and to provide an additional
US$5.2 billion in new money pursuant to a Parallel Financing Agreement (a
syndicated term loan), a Commercial Bank Co-financing Agreement (a parallel
co-financing with certain World Bank project and sector loans), a New Money
Trade Deposit Facility Agreement (to be used for medium-term trade finance
starting one year after original disbursement) and 1988 New Money Bonds.
Approximately US$1 billion of Brazil Investment Bonds were also issued as part
of this package, and approximately US$15 billion of short-term lines were
extended. The deal was accompanied by an IMF standby arrangement of US$1.44
billion agreed in August 1988. The IMF suspended disbursements in 1989, however,
because of the Federal Government's inability to meet public-sector deficit
targets. As a result, the third tranche (US$600 million) of the US$5.2 billion
new money package was not disbursed. With reserves once again under pressure,
the Federal Government imposed new limitations on interest payments to holders
of external commercial bank debt in July 1989.
Brazil initiated formal negotiations with commercial bank creditors in
August 1990. As of January 1991, the Federal Government permitted the full
payment of external debts owed by private sector and financial institution
borrowers and the servicing of 30.0% of interest payments due and payable by
public sector obligors. Following the promulgation of CMN Resolution 1,812, as
of April 1, 1991, the treatment previously accorded to private sector debt was
extended to the external debt obligations of Petrobras and CVRD and their
subsidiaries. In April 1991, Brazil and the Bank Advisory Committee ("BAC"),
consisting of approximately 20 of Brazil's largest commercial bank creditors,
reached agreement on the treatment of approximately US$9.1 billion in interest
arrears accrued on Brazil's external commercial bank debt up to December 31,
1990. Under the agreement, the commercial banks received US$2 billion of such
amount in 1991, and the remainder of such past due interest was exchanged for
approximately US$7.1 billion aggregate principal amount of IDU Bonds on November
20, 1992 and March 18, 1993.
1992 ARRANGEMENTS WITH IMF AND PARIS CLUB
In January 1992, Brazil reached agreement with the IMF on a standby facility
of 1.5 billion SDR (approximately US$2 billion). Of this amount, 75.0% was to
have entered the country in the form of new money, while the remaining 25.0% was
to have been used to finance the acquisition of collateral for the proposed
restructuring of Brazil's medium and long-term public sector indebtedness
described below. The standby arrangement was subsequently suspended, however,
because of Brazil's inability to meet agreed performance criteria targets,
leaving 1.37 billion SDR undrawn as of the August 31, 1993 facility expiration
date.
On February 26, 1992, Brazil reached agreement with Paris Club creditors for
the rescheduling of debt owed to other governments and governmental agencies
totaling US$12.1 billion. The agreement required Brazil to make approximately
US$4.1 billion in debt service payments in 1992 and 1993 and provided for the
rescheduling of approximately US$11 billion over a 14-year period, with a grace
period of three years. Although Brazil has completed bilateral agreements
implementing the February 1992 accord with all countries except Italy, debt
relief for some maturities was conditional on continued
B-16
<PAGE>
performance under the IMF standby facility, and Brazil continues to discuss the
impact, if any, of this condition with some countries.
1992 FINANCING PLAN
On July 9, 1992, Brazil and the BAC reached an agreement-in-principle on the
restructuring of Brazil's medium and long- term public sector indebtedness owed
to commercial banks, as well as on a parallel arrangement for interest arrears
accrued in respect of such indebtedness since January 1, 1991. Pursuant to that
agreement, on April 15, 1994, Brazil issued approximately US$43.1 billion
principal amount of bonds to holders of certain medium and long-term public
sector debt ("Eligible Debt") of Brazil or guaranteed by Brazil owed to
commercial banks and certain other private sector creditors in consideration for
the tender by such holders of their Eligible Debt and interest arrears accrued
in respect thereof since January 1, 1991 ("Eligible Interest"). The bonds were
issued pursuant to exchange agreements, implementing the Republica Federativa do
Brazil 1992 Financing Plan (the "Financing Plan"), which provided for the
restructuring of approximately US$41.6 billion of Eligible Debt and arrangements
for approximately US$5.5 billion of Eligible Interest. The Financing Plan was a
"Brady Plan"-type restructuring, the term coined for debt restructuring based on
the policy articulated by US Treasury Secretary Nicholas Brady in a speech
before the Third World Debt Conference in March 1989. The Brady Plan advocated
restructuring which would, among other things, (i) exchange debt for freely
transferable bonds, (ii) result in significant reductions in the level of debt
and the rate of interest payable thereon, and (iii) collateralize some types of
new bonds with the pledge of US Treasury zero-coupon obligations.
Holders of Eligible Debt exchanged their Eligible Debt for the following
types of bonds: (i) Par Bonds ("Par Bonds"), (ii) Discount Bonds ("Discount
Bonds"), (iii) Front-Loaded Interest Reduction Bonds ("FLIRBs"), (iv)
Front-Loaded Interest Reduction with Capitalization Bonds ("C-Bonds"), and (v) a
combination of New Money Bonds ("New Money Bonds"), and Debt Conversion Bonds
("Debt Conversion Bonds"). Eligible Interest was exchanged (after giving effect
to certain interest rate adjustments and cash interest payments made by Brazil
pursuant to the Financing Plan) for EI Bonds (the "EI Bonds"). The Par Bonds,
Discount Bonds, FLIRBs, C-Bonds, New Money Bonds, Debt Conversion Bonds and EI
Bonds are referred to herein collectively as the "Brady Bonds." Subject to their
respective terms, each of the Brady Bonds is eligible for use as currency in the
Brazilian privatization program.
The Financing Plan produced a reduction of US$4 billion in the stock of
Eligible Debt: the US$11.20 billion allocated to Discount Bonds will result in
the issuance of US$7.28 billion of such bonds (assuming the exchange of Phase-In
Bonds for Discount Bonds). In addition, the Federal Government estimates that
the Financing Plan will generate another US$4 billion in interest savings over
the 30-year repayment period. Upon completion of the phased delivery of
collateral (scheduled for April 15, 1996), Brazil will have defeased
approximately US$17.8 billion of its external debt in the form of Par and
Discount Bonds. The total cost of collateral to the Republic will be
approximately US$3.9 billion, of which US$2.8 billion was delivered on April 15,
1994 from the Republic's own resources; the Republic subsequently delivered
US$251.9 million of collateral as scheduled on 17th October, 1994 and US$237.1
million as scheduled on April 18, 1995.
At the Republic's option, the Brady Bonds may be redeemed at par in whole or
in part prior to their maturity. The EI Bonds and New Money Bonds also include a
mandatory redemption provision under which the Republic is required to redeem
the EI Bonds and New Money Bonds at par if the Republic prepays certain
obligations.
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ANNEX C
GLOSSARY
ABC: ABC, Inc., formerly known as "Capital Cities/ABC, Inc."
ABC CLASS HOUSEHOLDS: The highest three classes of Brazilian households
based upon the achievement of a total of 10 points or higher on the
classification scale used by the Associacao Brasileira de Anunciantes (Brazilian
Advertisers Association) to determine a household's socio-economic class, which
ranges from A to E depending on the education level of the head of the
household, the possession by the household of certain items of material comfort,
including automobiles, television sets and other household items, and the hiring
of domestic servants by the household.
ABRIL: Abril S.A., the leading magazine publishing, printing and
distribution company in Latin America.
ABRIL CREDIT FACILITY: A revolving credit facility, dated December 6, 1995,
between Tevecap, as the borrower, and Abril, as the lender.
BBC: British Broadcasting Corporation.
BCE: BCE, Inc., an affiliate of Bell Canada Inc., Canada's largest
telecommunications group.
BCI: Bell Canada International, Inc., an affiliate of BCE.
BNDES: Banco National de Desenolvimento Economico e Social, the national
development bank owned by the Brazilian Government.
BRASILSAT: A satellite operated by Embratel through which the Company
provides C-Band service.
C-BAND: A satellite transmission system which provides a signal on the "c"
bandwidth.
CABLE: A Cable network employs electromagnetic transmission over coaxial
and/or fiber-optic cable to transmit multiple channels carrying images, sound
and data between a central facility and individual customers' television sets.
Networks may allow one-way (from a headend to a residence and/or business) or
two-way transmission from a headend to a residence and/or business with a data
return path for the headend.
CABLE LICENSE: A license that is granted by the applicable governing body
pursuant to its authority under the communications laws of a particular country
for the purpose of providing Cable services for a specific franchise/license
area.
CANBRAS: Canbras Communications Corp., a Canadian corporation.
CANBRAS ASSOCIATION AGREEMENT: Association Agreement dated June 14, 1995,
among Tevecap, TVA Sistema, the Canbras TVA Companies, Canbras and Canbras-Par.
CANBRAS TVA COMPANIES: Canbras TVA Cabo and TV Cabo Santa Branca.
CANBRAS TVA CABO: Canbras TVA Cabo Ltda., a Brazilian limitada.
CANBRAS TVA: The operations of Canbras TVA Cabo and TV Cabo Santa Branca, in
each of which Tevecap holds a 36.0% equity interest and Canbras Par holds a
64.0% equity interest.
CANBRAS-PAR: Canbras Participacoes, Ltda., a Brazilian limitada wholly-owned
by Canbras.
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CBC: California Broadcasting Center, an uplink center for GLA located in
Long Beach, California.
CBS: CBS, Inc.
CENTRAL BANK: Central Bank of Brazil (Banco Central do Brasil)
CHASE PARTIES: Two wholly owned subsidiaries of CMIF through which CMIF
holds its equity interest in Tevecap.
CHURN: With respect to a pay television system for a given period, the
quotient expressed as a percentage of (i) the number of subscribers disconnected
from such system less the number of formerly disconnected subscribers
reconnected to the system divided by (ii) the number of subscribers to the
system as of the beginning of the period plus the number of subscribers added to
the system.
CISNEROS GROUP: Cisneros Group of Companies, which holds a 10% interest in
GLA through Darlene Investments.
CMIF: Chase Manhattan International Finance Ltd., an affiliate of The Chase
Manhattan Bank which holds a 9.3% interest in Tevecap through two wholly owned
subsidiaries.
COAXIAL CABLE: Cable consisting of a central conductor surrounded by and
insulated from another conductor. It is the standard material used in
traditional Cable systems. Signals are transmitted through it at different
frequencies, giving greater channel capacity than is possible with twisted pair
cable, but less than is allowed by optical fiber.
COMERCIAL CABO SAO PAULO: Comercial Cabo TV Sao Paulo Ltda., a Brazilian
limitada in which Tevecap holds a 99% equity interest.
COMPANY: Tevecap, together with its consolidated subsidiaries.
CONSOLIDATED FINANCIAL STATEMENTS: The audited and unaudited consolidated
financial statements of Tevecap and its subsidiaries and the notes thereto
included herein.
CPL: Cable Participacoes Ltda., a Brazilian limitada, jointly owned by
Hearst and ABC, which limitada holds a 2.35% equity interest in Tevecap.
CPCT: Centrais Privadas de Comutacao Telefonica, certain private telephone
networks comparable to private branch exchanges (PBX) found in larger apartment
complexes, hotels and businesses in the United States.
CVM: Comissao de Valores Mobiliarios, the securities commission of Brazil.
DARLENE INVESTMENTS: Darlene Investments, LLC, a Cayman Islands limited
liability company which is part of the Cisneros Group of Companies.
DBS: Direct broadcast satellite service, operating in C-Band or Ku-Band
width, by which television programming is transmitted to individual dwellings,
each served by a single satellite dish.
DBS SYSTEMS: Ku-Band and C-Band operations of Galaxy Brasil and TVA Sistema,
respectively.
DE SANTI & VALLONE: De Santi & Vallone Antennas & Telecommunications
Consultants.
DIRECTV: Brazil's first digital Ku-Band service, which is operated by Galaxy
Brasil and Galaxy Latin America.
DISTV: The distribution of television signals by physical means (i.e., by
Cable) to end users, generally limited to signals without interference by a
DISTV operator with the signal content.
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EMBRATEL: Empresa Brasileira de Telecommunicacoes, the Brazilian
government-owned company authorized to provide satellite telecommunications
services utilizing the Sistema Brasiliero de Telecomunicacoes por Satelite
(Brazilian Satellite Telecommunications System).
EQUITY SUBSCRIBERS: Subscribers to the Operating Ventures adjusted for the
Company's equity ownership in the Operating Ventures.
ESPN: ESPN, Inc., in which ABC has an 80.0% equity interest and Hearst has a
20.0% equity interest.
ESPN AGREEMENT: Quotaholders Agreement, dated June 26, 1995, among Tevecap,
TVA Sistema, ESPN Brazil, Inc. and ESPN Brasil Ltda.
ESPN BRASIL: Programming provided by ESPN Brasil Ltda.
ESPN BRAZIL, INC.: A Delaware corporation wholly owned by ESPN.
ESPN BRASIL LTDA.: ESPN do Brasil Ltda., a Brazilian limitada in which
Tevecap holds a 50.0% equity interest and ESPN Brazil, Inc., holds a 50.0%
equity interest.
EVENT PUT: A triggering event under the Stockholders Agreement pursuant to
which each of the Stockholders (other than Abril) may, in certain circumstances,
demand that Tevecap purchase all or a portion of its shares.
EXIMBANK: The Export-Import Bank of the United States.
EXIMBANK FACILITY: A credit facility, dated December 9, 1996, among TVA
Sistema, as Borrower, Tevecap, as Guarantor, and The Chase Manhattan Bank, N.A.,
as lender. The EximBank will guarantee 85% of amounts borrowed under the
EximBank Facility.
FALCON INTERNATIONAL: Falcon International Communications (Bermuda L.P.), a
subsidiary of Falcon International Communications, L.L.C., a Delaware limited
liability company.
FALCON TIME PUT: A provision of the Stockholders Agreement pursuant to which
Falcon International may, in certain circumstances, demand that Tevecap purchase
all or a portion of the shares held by Falcon International.
FIBER-OPTIC CABLE: Cable made of glass fibers through which signals are
transmitted as pulses of light. Fiber-optic cable has the capacity for a large
number of channels.
FOX: Twentieth Century Fox Television International.
GALAXY BRASIL: Galaxy Brasil S.A., a wholly-owned subsidiary of Tevecap
which operates Brazil's first Ku-Band system.
GALAXY BRASIL LEASING FACILITY: A five-year, $49.9 million lease and
sale-leaseback facility entered into in March 1997 by Galaxy Brasil, as lessee,
and Citibank, N.A., as lessor.
GALAXY LATIN AMERICA: Galaxy Latin America, LLC, a Delaware limited
liability company the members of which are Hughes Communications GLA, which
holds a 60.0% equity interest, Darlene Investments, which holds a 20.0% equity
interest, TVA Communications, which holds a 10% equity interest, and Grupo
Frecuencia Modulada Television, which holds a 10.0% equity Interest.
GALAXY III-R: A satellite owned and operate by Hughes Communications through
which Galaxy Brasil provides DIRECTV service.
GLA: Galaxy Latin America, LLC.
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GLA AGREEMENT: Limited Liability Company Agreement of Galaxy Latin America,
LLC, dated April 11, 1997.
GLOBO: Globo Par and TV Globo, the owners of a number of Brazil's over the
air channels.
GLOBO CABO: Globo Cabo S.A., a Cable service provider in Brazil.
GLOBO PAR: Globo Comunicacoes e Participacoes Ltda.
GRUPO MIDIA: Grupo de Midia Sao Paulo.
GRUPO FRECUENCIA MODULADA TELEVISION: Grupo Frecuencia Modulada Television,
S.A. de C.V., a Mexican corporation wholly owned by Grupo MVS.
GRUPO MVS: Grupo MVS, S.A. de C.V., a Mexican corporation.
GUARANTORS: Tevecap's Restricted Subsidiaries (as defined in the Indenture).
HABC II: Hearst/ABC Video Services II, a Delaware general partnership
jointly owned by Hearst and ABC, which partnership holds a 17.65% equity
interest in Tevecap.
HBO BRASIL: Programming provided by HBO Brasil Partners.
HBO BRASIL PARTNERS: HBO Brasil Partners Ltd., a joint venture between TVA,
which holds a 33% equity interest, and HBO Ole Partners, which holds a 66.7%
equity interest.
HBO OLE PARTNERS: A partnership among Time Warner Entertainment Company,
L.P., SPE Latin American Acquisition Corporation and Ole Communications, Inc.
HEADEND: A collection of hardware, typically including satellite receivers,
modulators, amplifiers and videocassette playback machines. Signals, when
processed, are then combined for distribution within the Cable network.
HEARST: The Hearst Corporation.
HEARST/ABC PARTIES: HABC II and CPL.
HEARST/ABC PROGRAMMING AGREEMENT: Programming Agreement, dated December 6,
1995, among Tevecap, Hearst and ABC.
HOMES PASSED: Homes that can be connected to a Cable distribution system
without further extension of the distribution network.
HUGHES COMMUNICATIONS: Hughes Communications, Inc.
HUGHES COMMUNICATIONS GLA: Hughes Communications GLA, Inc., a California
corporation, wholly-owned by Hughes Communications, that holds a 60.0% equity
interest in GLA.
HUGHES ELECTRONICS: Hughes Electronics Corporation.
IBGE: Instituto Brasileiro de Geografia e Estatistica.
IBOPE: Instituto Brasileiro de Opiniao Publica e Estatistica.
INDEMNIFICATION AGREEMENT: Indemnification Agreement entered into among the
Company, GLA, Hughes Communications and affiliates thereof, CBC, TVA
Communications, Darlene Investments, Inversiones Divtel, D.T., C.A., Grupo
Frecuencia Modulada Television and Grupo MVS.
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INDENTURE: The indenture, dated as of November 26, 1996, executed by
Tevecap, certain of Tevecap's subsidiaries, Chase Manhattan Bank Trustee Ltd.,
as trustee, and Chase Trust Bank, as paying agent in connection with the Notes.
INDEPENDENT OPERATORS: Independent pay television system operators to which
TVA sells programming.
INITIAL PURCHASERS: Chase Securities Inc., Donaldson, Lufkin & Jenrette
Securities Corporation, Bear Stearns & Co. Inc. and Bozano, Simonsen Securities
Inc.
INTERACTIVE SERVICES: Services commonly referred to as pay-on-demand,
shop-at-home, video games, ATM services, or such other interactive services as
video phone and telephony which can be more easily provided with the development
of high-capacity hybrid fiber optic/coaxial distribution networks.
IRMAOS REIS: Distribuidora Irmaos Reis S.A., a Brazilian corporation in
which Abril holds a 30.5% equity interest.
KU-BAND: A satellite transmission system which provides a signal over the
"ku" bandwidth.
LICENSE SUBSIDIARIES: Companies that hold pay television licenses covering
the operation of certain of the Owned Systems.
LOCAL OPERATING AGREEMENT: Local Operating Agreement, dated March 3, 1995,
between GLA and Tevecap.
LOS: An unobstructed "Line of Sight" from any of the Company's MMDS headends
to a subscriber's antenna.
MGM: Metro Goldwyn Mayer, Inc.
MINISTRY OF COMMUNICATIONS: The Brazilian Ministry of Communications,
authorized to regulate the Brazilian subscription television industry pursuant
to the Brazilian Telecommunications Code of 1962.
MMDS (MULTI-CHANNEL MULTI-POINT DISTRIBUTION SYSTEM): A one-way radio
transmission of television channels over microwave frequencies from a fixed
station transmitting to multiple receiving facilities located at fixed points.
MMDS LICENSE: A license that is granted by the applicable governing body
pursuant to its authority under the communications laws of a particular country
for the purpose of providing MMDS services for a specific franchise/license
area.
MTV BRASIL: MTV Brasil Ltda., a Brazilian LIMITADA in which Abril holds a
50.0% equity interest and Viasem Brasil Holdings Ltda. (an indirect subsidiary
of Viacom International) holds the remaining 50% equity interest.
MULTICANAL: Multicanal Participacoes S.A., a Cable service provider in
Brazil.
NBC: National Broadcasting Company, Inc.
NDS: News Digital Systems Limited, a wholly-owned subsidiary of News
Corporation.
NET BRASIL: Net Brasil S.A., a Cable and MMDS service provider in Brazil.
NET SAT: Net Sat Servicos Ltda., TVA's prospective competitor in DBS
Service, in which Globo Par has a controlling interest and whose other equity
holders include News Corporation, a subsidiary of The News Corporation Limited,
and Grupo Televisa, S.A. of Mexico.
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NEWS CORPORATION: News Corporation plc.
OPERATING VENTURES: Canbras TVA and TV Filme, two of TVA's minority-owned
ventures.
OWNED SYSTEMS: TVA Sistema, TVA Sul and Galaxy Brasil.
PANAMSAT: PanAmSat Corporation, the current owner and operator of the
PAS-III satellite.
PAY-PER-VIEW: Payment made for individual programs rather than a monthly
subscription for a whole channel or group of channels. Currently only offered in
Brazil by TVA through DIRECTV, and envisioned as a means of providing certain
popular sporting events or major motion pictures for which customers may be
prepared to make a special payment.
PENETRATION RATE: The measurement of the take-up of Cable services. The
penetration rate as of a given date is calculated by dividing the number of
subscribers connected to a system on such date by the total number of homes
passed in such system.
PROGRAMMING VENTURES: HBO Brasil Partners and ESPN Brasil Ltda.
RBS: RBS Participacoes S.A., a Cable and MMDS service provider in Brazil.
REAL PLAN: A Brazilian Government stabilization program, announced in
December 1993, aimed at curtailing inflation and building a foundation for
sustained economic growth.
REGISTRATION RIGHTS AGREEMENT: The Registration Rights Agreement pursuant to
which Tevecap and the Guarantors agree to file with the United States Securities
and Exchange Commission the Exchange Offer Registration Statement on an
appropriate form under the Securities Act with respect to an offer to exchange
the Notes for Exchange Notes.
REGULATORY PUT: A provision in the Stockholders Agreement pursuant to which
an Event Put is triggered if the amount of capital stock held by a Stockholder
(other than Abril) exceeds the amount allowed under an appropriate legal
restriction.
REVENUE PER SUBSCRIBER: Total revenue derived from a subscriber television
system divided by the average number of subscribers for that period.
SAP: Second Audio Programming, which provides the option of audio in a
second language for the programming on channels for which it is offered.
SBT: TVSBT--Canal 4 de Sao Paulo S.A., a Brazilian national off-air channel.
SECURITIES ACT: United States Securities Act of 1933, as amended.
SMART CARD: Encoded card placed in a decoder used for Ku-Band service. The
Smart Card is used to regulate access to Ku-Band services.
SMC: SMC Marketing Ltda., a Brazilian limitada, wholly owned by HBO
Partners, that distributes HBO programming in Brazil.
SONY: Sony Pictures Entertainment, Inc.
STOCKHOLDERS: HABC II, CPL, Robert Civita, Abril, the Chase Parties and
Falcon International.
STOCKHOLDERS AGREEMENT: Stockholders Agreement, dated December 6, 1995,
among the Stockholders.
SUBSIDIARY GUARANTEES: Guarantees executed by each of Tevecap's Restricted
Subsidiaries (as defined in the Indenture).
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SURFIN: SurFin Ltd., a corporation organized under the laws of the Bahamas,
the (direct and indirect) shareholders of which are Tevecap, holding 20.5%,
DIRECTV International Inc., a subsidiary of Hughes Communications, holding
39.3%, Darlene Investments, holding 20.4%, and Grupo Frecuencia Modulada
Television, holding 19.8%.
SURFIN CREDIT FACILITY: A three year $150.0 million credit facility between
SurFin and Citicorp USA, Inc., as administrative agent, under a syndicated
credit agreement, dated September 24, 1996.
TAMBORE FACILITY: TVA's Ku-Band uplink center located in the city of Tambore
in greater Sao Paulo.
TELECOMMUNICATIONS CODE: The Brazilian Telecommunications Code of 1962, as
amended.
TELEPHONY: The provision of telephone service.
TEVECAP: Tevecap S.A.
TIME WARNER: Time Warner Entertainment Company, L.P.
TRUNK: The "transportation" component within a Cable and/or broadband
network architecture that carries the system product to the distribution portion
of the architecture, which in turn goes to customers' homes.
TV CABO SANTA BRANCA: TV Cabo Santa Branca Comercio Ltda., a Brazilian
limitada, in which Tevecap holds a 36% equity interest and Canbras Par holds a
64.0% equity interest.
TV FILME: TV Filme, Inc., a Delaware corporation in which Tevecap currently
holds a 14.3% equity interest, Warburg, Pincus Investors, L.P. currently holds a
41.2% equity interest, members of the Lins family currently hold a 16.2% equity
interest, and public stockholders currently hold a 28.3% equity interest. Upon
exercise of a warrant with a nominal exercise price, Tevecap's ownership
interest will increase to 16.7%.
TV FILME SERVICE AREA: Brasilia, Belem and Goiania.
TV GROUP: The operations of TVA excluding the operations and results of
Galaxy Brasil.
TV HOMES: The number of households in a given area possessing at least one
television set.
TV SHOW TIME: Televisao Show Time Ltda., a Brazilian limitada in which the
estate of Matias Machline and an associate currently hold a 53.0% equity
interest and in which the remaining 47.0% is currently held by various Abril
shareholders.
TVA: Tevecap S.A. and its consolidated subsidiaries and affiliates.
TVA BRASIL: TVA Brasil Radioenlaces S.A., a Brazilian corporation in which
the estate of Matias Machline currently holds a 50.0% equity interest and in
which the remaining 50.0% is currently held by various Abril shareholders.
TVA COMMUNICATIONS: TVA Communications Ltd., a British Virgin Islands
company wholly-owned by Tevecap, through which Tevecap holds a 10.0% equity
interest in Galaxy Latin America.
TVA CURITIBA: TVA Curitiba Servicos em Telecommunicacoes Ltda., a Brazilian
limitada in which Tevecap held an 80.0% equity interest and Leonardo Petrelli
held a 20.0% equity interest prior to TVA Curitiba's merger into TVA Parana
Ltda. and the reorganization of TVA Parana Ltda. as a subsidiary of TVA Sul
Participacoes S.A. in October 1996.
TV GLOBO: A provider of off-air programming in Brazil and an affiliate of
Globo.
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TVA SISTEMA: TVA Sistema de Televisao S.A., a Brazilian corporation in which
Tevecap holds a 98.0% equity interest and the estate of Matias Machline holds a
2.0% equity interest.
TVA SUL: The operations of TVA Parana Ltda., TVA Alfa Cabo Ltda., TVA Cabo
Camboriu Ltda., TCC TV a Cabo Ltda, TVA Sul Santa Catarina Ltda. and TVA Sul Foz
do Iguacu Ltda., which are wholly-owned subsidiaries of TVA Sul Participacoes
S.A., a Brazilian corporation in which Tevecap holds an 87.0% equity interest
and Leonardo Petrelli Neto holds the remaining 13.0% equity interest.
UHF: Broadcast of a television signal at an ultra-high frequency over a
given geographical area.
VCR: Video cassette recorders.
VIACOM INTERNATIONAL: Viacom International (Netherlands B.V.).
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