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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 20-F
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[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number _______________
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Tevecap S.A.
(Exact name of Registrant as specified in its charter)
TEVECAP INC. THE FEDERATIVE REPUBLIC OF BRAZIL
(Translation of Registrant's (Jurisdiction of incorporation
name into English) or organization)
Rua do Rocio, 313
Sao Paulo, SP Brazil
04552-904
(Telephone: 55-11-821-8550)
(Address and telephone number of principal executive offices)
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Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
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(Title of Class)
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
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(Title of Class)
Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act:
12-5/8% Senior Notes due 2004 of Tevecap S.A. and guarantees thereof by
each of TVA Sistema de Televisao S.A., Galaxy Brasil S.A., TVA Sul Participacoes
S.A., Comercial Cabo TV Sao Paulo Ltda., TVA Sul Parana Ltda., CCS Camboriu
Cable System de Telecomunicacoes Ltda., TVA Sul Santa Catarina Ltda., TVA Sul
Foz do Iguacu Ltda, TVA Distribuidora S.A., TVA Programadora Ltda. and TVA
Satelite Ltda.
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report:
196,712,855 Common Shares
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
YES _X_ NO ___
Indicate by check mark which financial statements item the registrant has
elected to follow:
ITEM 17 ____ ITEM 18 __X__
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<PAGE>
TABLE OF CONTENTS
PART I
ITEM 1. DESCRIPTION OF BUSINESS..........................................1
ITEM 2. DESCRIPTION OF PROPERTY.........................................25
ITEM 3. LEGAL PROCEEDINGS...............................................25
ITEM 4. CONTROL OF REGISTRANT...........................................26
ITEM 5. NATURE OF TRADING MARKET........................................29
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY
HOLDERS.........................................................29
ITEM 7. TAXATION........................................................31
ITEM 8. SELECTED FINANCIAL DATA.........................................34
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................................37
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT........................51
ITEM 11. COMPENSATION FOR DIRECTORS AND OFFICERS.........................52
ITEM 12. OPTIONS TO PURCHASE SECURITIES..................................52
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS..................52
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED......................55
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES.................................56
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES......................................................56
ITEM 17. FINANCIAL STATEMENTS............................................56
ITEM 18. FINANCIAL STATEMENTS............................................56
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS...............................56
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS...................................F-1
GLOSSARY.....................................................................A-1
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Presentation of Certain Information
Tevecap S.A. ("Tevecap" and, together with its subsidiaries, "TVA" or the
"Company") is a corporation (sociedade anonima) organized under the laws of the
Federative Republic of Brazil. The accounts of the Company, which are maintained
in Brazilian reais, were prepared in accordance with the accounting principles
generally accepted in the United States of America and translated into United
States dollars on the basis set forth in Note 2.3 of the consolidated Financial
Statements of Tevecap and Subsidiaries (the "Tevecap Financial Statements" and
together with the Financial Statements of TVA Sistema de Televisao S.A., TVA Sul
Participacoes S.A., CCS Camboriu Cable System de Telecomunicacoes Ltda., TVA Sul
Parana Ltda., TVA Sul Foz do Iguacu Ltda. and TVA Sul Santa Catarina Ltda.
included elsewhere in this Annual Report on Form 20-F for the Year ended
December 31, 1997 (the "Annual Report"), the "Financial Statements") of the
Company. Certain amounts stated herein in U.S. dollars (other than as set forth
in the Financial Statements and financial information derived therefrom) have
been translated, for the convenience of the reader, from reais at the rate in
effect on December 31, 1997 of R$1.1164 = US$1.000. Such translations should not
be construed as a representation that reais could have been converted at such
rate on such date or at any other date. See "Item 6: Exchange Controls and Other
Limitations Affecting Security Holders." All references in this Annual Report to
(i) "US Dollars," "$" or "US$" are to United States dollars and (ii) "reais,"
"real" or "R$" are to Brazilian reais. Capitalized terms used in this Annual
Report are defined, unless the context otherwise requires, in the Glossary
attached hereto. Unless otherwise specified, data regarding population or homes
in a licensed area are projections based on 1991 population census figures
compiled by the Instituto Brasileiro de Geografia e Estatistica ("IBGE"). There
can be no assurance that the number of people or the number of households in a
specified area has not increased or decreased by a higher or lower rate than
those estimated by the IBGE since the 1991 census. Unless otherwise indicated,
references to the number of the Company's subscribers are based on Company data
as of December 31, 1997. The term DIRECTV(R) ("DIRECTV") (DIRECTV(R) is a
registered trademark of Hughes Electronics Corporation ("Hughes Electronics"))
refers to the Ku-Band service provided by Galaxy Brasil in conjunction with
Galaxy Latin America. Data concerning total MMDS, Cable, C-Band or Ku-Band
subscribers and penetration rates represent estimates made by the Company based
on the data of Kagan World Media, Inc., IBGE data, the Company's knowledge of
the pay television systems of the Company and the Operating Ventures, and public
statements of other Brazilian pay television providers. Although the Company
believes such estimates are reasonable, no assurance can be made as to their
accuracy.
ii
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
TVA is a leading pay television operator in Brazil and is one of the
country's largest pay television programming distributors. In 1989, TVA was the
first to provide pay television services in Brazil and, in July 1996, the
Company launched DIRECTV, Brazil's first digital Ku-Band service. With
approximately 564,000 subscribers, TVA offers pay television services utilizing
four distribution technologies: MMDS, Cable, digital Ku-Band and digital C-Band.
TVA believes that its ability to strategically deploy alternative technologies
provides it with significant competitive advantages, including the ability to
rapidly enter new markets, maximize penetration of existing markets and deliver
service in the most cost effective manner. Additionally, TVA has interests in
HBO Brasil Partners and ESPN Brasil Ltda., two programming joint ventures (the
"Programming Ventures"). Through owned, affiliated and independent pay
television operators, TVA programming reaches approximately 1.4 million pay
television households. TVA is a majority owned subsidiary of Abril, S.A.
("Abril"), Latin America's leading magazine publishing, printing and
distribution company. TVA's other shareholders are Falcon International
Communications (Bermuda) L.P. ("Falcon International"), The Hearst Corporation
("Hearst"), ABC, Inc. ("ABC") and Chase Manhattan International Finance Ltd.
("CMIF").
The Company conducts its pay television operations through three owned
operating systems (the "Owned Systems"): TVA Sistema, TVA Sul and Galaxy Brasil.
Through the MMDS and Cable systems of TVA Sistema and TVA Sul, the Company
serves six cities with a combined population of approximately 18 million,
including three of the seven largest cities in Brazil: Sao Paulo (population of
10.2 million), Rio de Janeiro (population of 5.7 million) and Curitiba
(population of 1.5 million). The Company also holds minority interests in
Canbras TVA and TV Filme (the "Operating Ventures"), which together provide pay
television services to an additional seven cities with a total population of 6.5
million. In addition, the Company sells programming to, and receives a per
subscriber fee from, unaffiliated pay television operators ("Independent
Operators").
The Company, through Galaxy Brasil, is Brazil's exclusive provider of the
premium programming service, DIRECTV, Brazil's first digital direct broadcast
satellite Ku-Band service. Galaxy Brasil receives programming, scheduling and
related services for DIRECTV from Galaxy Latin America ("GLA"), in which TVA
holds a 10.0% equity interest. The other owners of GLA are a unit of Hughes
Electronics, a member of the Cisneros Group and a subsidiary of Grupo MVS.
Through local operating companies such as Galaxy Brasil, GLA plans to provide
DIRECTV service throughout much of Latin America and the Caribbean. The Company,
through TVA Sistema, also currently provides Brazil's only digital C-Band
television service (together with Galaxy Brasil, the "DBS Systems"). The DBS
Systems enable the Company to deliver a greater number of channels than any
other television operator in Brazil and provide TVA with access to substantially
all of Brazil's 36.4 million TV Homes.
In 1998 the Company expects to complete a corporate reorganization pursuant
to which three recently-created wholly-owned subsidiaries, TVA Distribuidora
S.A., TVA Programadora Ltda. and TVA Satelite Ltda., will serve as holding
companies for the Company's interests in its Cable and MMDS operations, the
Programming Ventures and the DBS systems, respectively. This corporate
reorganization is not expected to result in any change in the Company's
beneficial interests in its current subsidiaries and affiliates.
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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>
Average
Revenue Pay
per Month Television
Service Launch TV Class ABC per Programming
Date Homes(a) TV Homes(a) Subscribers Subscriber Channels
---- -------- ----------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Owned Systems
MMDS
TVA Sistema
Sao Paulo .................. September 1991 4,400,650 1,917,608 117,304 $40.03 27
Rio de Janeiro ............. March 1992 2,659,472 964,804 99,874 39.63 26
TVA Sul
Curitiba ................... March 1992 568,048 236,560 23,735 35.26 15
Cable(b)
TVA Sistema
Sao Paulo .................. October 1994 4,400,650 1,917,608 58,541 37.51 53
TVA Sul
Curitiba ................... January 1995 568,048 263,560 15,169 35.57 45
Camboriu ................... June 1996 37,618 22,686 6,144 30.88 49
Foz do Iguacu .............. June 1996 46,669 29,151 8,541 24.96 50
Florianopolis .............. September 1996 155,382 53,001 5,866 33.25 48
---------
Total MMDS and Cable
Subscribers ...................... -- -- -- 335,174 -- --
---------
DBS
TVA Sistema/Galaxy
Brasil(c) .......................... March 1995 36,400,000 15,238,518 211,209 44.05 52 (d)
Subscribers Awaiting
Installation ..................... -- -- -- 17,963 -- --
---------
Total Subscribers-Owned
Systems .......................... -- -- -- 564,346 -- --
=========
Households Receiving
TVA Programming
Owned Systems ...................... -- -- -- 564,346 -- --
---------
Operating Ventures
MMDS
TV Filme, Inc.
Brasilia ................... July 1993 424,542 273,135 63,047 $47.78 24
Goiania .................... December 1994 319,434 140,498 29,875 43.95 24
Belem ...................... December 1994 193,106 123,820 18,322 46.57 24
Cable
Canbras TVA
Four cities(e) ............. April 1996 222,358 152,773 30,904 -- 45
---------
Total-Operating Ventures ........... -- -- -- 142,148 -- --
=========
Independent Operators
(53 Independent
Operators) ....................... -- -- -- 669,543 -- --
---------
Total .............................. -- -- -- 1,376,037 -- --
=========
</TABLE>
- - --------------------
(a) This data is based on information provided by Pay TV Survey and IBGE.
(b) The Company's Cable Systems in Sao Paulo, Curitiba, Camboriu, Foz do Iguacu
and Florianopolis had approximately 457,313, 115,302, 18,055, 19,900 and
29,822 Homes Passed, respectively, as of December 31, 1997.
(c) This data reflects the Company's digital Ku-Band and digital C-Band
operations. TV Homes and Class ABC TV Homes information is national
information for all of Brazil.
(d) The number includes nine SAP channels.
(e) 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 36.4 million TV Homes which, as of December 31, 1997, watched on
average approximately 4.0 hours of television per day, figure comparable to that
of the United States. Approximately 7.8 million television sets and 2.4 million
VCR units were sold in Brazil during 1995. The pay television industry in Brazil
began in 1989 with the commencement by the Company of UHF service in Sao Paulo.
As of December 31, 1997, there were an estimated 2.6 million pay television
subscribers, representing approximately 7.0% of Brazilian TV Homes. By
comparison, as of December 31, 1997, 53.5% of TV Homes in Argentina, 14.1% of TV
Homes in Mexico and 72.5% of TV Homes in the United States subscribed to pay
television. Management believes that the number of pay television subscribers in
Brazil will continue to grow as pay television reaches more households both
through the expansion of existing and new MMDS and Cable systems and through
development of nationwide DBS systems. The Ministry of Communications estimates
that Brazil will have 16.5 million pay television subscribers by 2003.
<TABLE>
<CAPTION>
United
Brazil(a) Argentina(b) Mexico(b) States(c)
--------- ------------ --------- ---------
(Numbers in Thousands, except percentages)
<S> <C> <C> <C> <C>
TV Homes ............................................. 36,400 9,500 15,900 95,950
------ ------ ------ ------
Cable Subscribers ............................ 1,758 4,999 1,634 64,375
MMDS Subscribers ............................. 420 78 454 1,120
C-Band Subscribers ........................... 165 -- -- 4,135(d)
Ku-Band Subscribers .......................... 227 35 150 4,135(d)
------ ------ ------ ------
Total Subscribers .................................... 2,571 5,112 2,238 69,630
====== ====== ====== ======
Total Subscribers/TV Homes (%) ....................... 7.0% 53.5% 14.1% 72.5%
</TABLE>
- - --------------------
(a) Pay TV Survey (March 1998).
(b) Kagan World Media, Inc. (1997).
(c) National Cable Television Association (1996).
(d) The number represents C-Band and Ku-Band subscribers collectively.
Competitive Advantages
Management believes that the Company has the following competitive
advantages:
Superior Quality Programming Lineup. TVA's programming line-up includes
exclusive rights to ESPN Brasil in the Company's major markets, with coverage of
many of Brazil's most important soccer championships, including the Brazilian
Cup and the Sao Paulo and Rio de Janeiro State Championships. The Company
exclusively offers Eurochannel and Bravo Brasil and is also the only Cable and
MMDS operator offering HBO, E! Entertainment Television, Mundo and CBS
Telenoticias in its 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
utilizes four distribution technologies: MMDS, Cable, digital Ku-Band and
digital C-Band. 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
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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 36.4
million TV Homes, including those households in markets where Cable or MMDS
systems are either not developed or not economically viable. Through its DIRECTV
service, TVA is the first provider of Ku-Band pay television services in Brazil
and expects to enroll as subscribers a significant share of those who are
interested in broader, digital quality programming and pay-per-view services.
Through its digital C-Band system, the Company provides 26 channels of
programming (including nine SAP channels) and is capable of providing up to 38
channels of programming (including SAP channels). The Company's only significant
competitor in C-Band pay television service provides six analog channels of
programming in addition to off-air channels. The Company currently targets its
C-Band service to the estimated 4.5 million parabolic C-Band antennae owners in
Brazil, most of whom currently receive only the off-air channels.
Modern Cable Infrastructure. The Company's Cable systems are constructed
with, or are being upgraded to, either 750 MHz or 550 MHz bandwidth capacity,
the latter of which is readily upgradeable to 750 MHz bandwidth capacity with
only moderate investment. This Cable technology will enable the Company to
provide data transmission and interactive services, including
telecommunications, in the future. Management believes that the Company's major
competitors for Cable service use narrower bandwidths over portions of their
Cable systems and have installed certain types of Cable in households which
currently may prevent them from providing telecommunications or high speed data
delivery through these portions of their systems until substantial additional
investments have been made for system reconstruction or upgrade.
Strong Strategic Partners. The Company's strategic equity partners continue
to offer valuable expertise. TVA benefits from Abril's extensive experience in
the business of subscriptions and distribution and from the collective
experience of Falcon International, Hearst and ABC with regard to pay television
operations and from access to programming.
Business Strategy
TVA seeks to be Brazil's largest and most profitable pay television
operator and programming distributor and intends to capitalize on the
convergence and development of voice, video and telecommunications services. The
Company intends to achieve these goals through the following strategies:
Maximize Penetration in Existing Markets. The Company seeks to increase its
penetration of existing markets by: (i) expanding the range of TVA's Cable
systems by extending its fiber optic and coaxial cable network and by seeking
pre-wiring arrangements with residential housing developers, (ii) improving the
signal quality and coverage of TVA's MMDS systems by using signal repeater
technology, (iii) maximizing penetration by offering tiered subscription options
and developing programming packages to appeal to more households and (iv)
expanding its penetration in ABC Class households through its scheduled
nationwide rollout of DIRECTV service and the continued development of C-Band
service.
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 2.9% per month during the year ended December 31, 1997. The
average monthly Churn rate for MMDS service in 1994 was 1.6%, in 1995
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<PAGE>
was 1.3%, in 1996 was 2.4% and in 1997 was 4.0%. The average monthly Churn rate
for Cable service in 1994 was less than 1.0%, in 1995 was 1.1%, in 1996 (the
year Cable service was initiated) was 0.8% and in 1997 was 2.1%. The average
monthly Churn rate for C-Band service in 1994 was 5.3%, in 1995 was 0.1%, in
1996 was 2.0% and in 1997 was 2.1%. The average monthly Churn rate for Ku-Band
service was 0.9% in 1997.
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) continuing the nationwide
rollout of DIRECTV service and (iii) investing in new operating ventures with
other MMDS and Cable operators.
Continue Network Enhancement. The Company is positioning itself to provide
high speed data transmission, interactive and other telecommunications services
over its systems and to take advantage of possible deregulation and the growing
demand for these services in Brazil. The Company is expanding its Cable systems
with fiber optic and coaxial cable capable of being upgraded to provide such
enhanced services. In addition, the Company continues to explore the development
of digital compression of MMDS signals.
Through the implementation of the Company's strategy, the Company has been
able to achieve rapid subscriber growth. The following chart sets forth
information regarding (i) the number of subscribers to the Company's Owned
Systems at December 31, 1994, 1995, 1996 and 1997, (ii) the number of new
installations during the years ended December 31, 1994, 1995, 1996 and 1997, and
(iii) the average installation fee for the year ended December 31, 1997.
5
<PAGE>
<TABLE>
<CAPTION>
Average
Installation
Fee for the
Subscribers at New Installations Year
End of Period (a) During Period Ended
------------------------------------- ------------------------------------- Dec. 31,
1994 1995 1996 1997 1994 1995 1996 1997 1997
------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MMDS
Sao Paulo ................ 72,425 121,969 126,797 117,304 34,372 75,332 61,235 67,132 $ 65.95
Rio de Janeiro ........... 28,234 51,664 79,928 99,874 13,855 31,733 48,928 55,707 167.64
Curitiba ................. 11,112 15,260 23,595 23,735 5,972 10,513 17,117 28,890 84.18
------- ------- ------- ------- ------- ------- ------- ------- -------
Total MMDS ....................... 111,771 188,893 230,320 240,913 54,199 117,578 127,280 151,729 --
------- ------- ------- ------- ------- ------- ------- ------- -------
CABLE
Sao Paulo ................ 1,007 13,885 21,352 58,541 482 6,546 6,907 27,307 $ 29.14
Curitiba ................. -- 1,244 10,377 15,169 -- 434 3,794 6,111 40.86
Foz do Iguacu ............ -- -- 7,157 6,144 -- -- 2,275 2,576 47.16
Camboriu ................. -- -- 5,209 8,541 -- -- 1,596 4,636 91.53
Florianopolis ............ -- -- 1,916 5,866 -- -- 1,966 5,514 10.51
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Cable ...................... 1,007 15,129 46,011 94,261 482 6,980 16,538 46,144 --
------- ------- ------- ------- ------- ------- ------- ------- -------
DBS
C-Band/DIRECTV ................... 2,075 15,126 73,180 211,209 1,914 16,873 66,085 169,755 $481.74
------- ------- ------- ------- ------- ------- ------- ------- -------
Total Subscribers-Owned
Systems ........................ 114,853 219,148 349,511 546,383 56,595 141,431 209,903 367,628 --
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- - --------------------
(a) Excludes backlog, reconnected and disconnected subscribers.
Ownership
Tevecap is a majority owned subsidiary of Abril, the leading magazine
publishing, printing and distribution company in Latin America. Abril publishes
approximately 200 weekly, bi-weekly and monthly titles. During 1997, the
combined monthly paid circulation of Abril and its affiliates averaged 190
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. As of December 31,
1997, the Company's shareholders had invested, in aggregate, approximately
$288.0 million in the Company, and Tevecap's ownership was as follows: Abril,
56.5%; Falcon International, 14.2%; Hearst, 10.0%; ABC, 10.0%; and CMIF, 9.3%.
Following a $100 million capital contribution by Abril in February 1998,
Tevecap's current ownership is as follows: Abril, 62.2%; Falcon International,
12.3%; Hearst, 8.7%; ABC, 8.7%; and CMIF, 8.1%.
Distribution Operating Systems
TVA and the Operating Ventures distribute programming through four
different technologies: MMDS, Cable, digital Ku-Band and digital C-Band. The
availability of multiple distribution technologies enables the Company to
exploit the population and income characteristics, topography and competitive
dynamics of each of its markets.
MMDS
TVA'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
6
<PAGE>
air from microwave transmitters to a small receiving antenna located at a
subscriber's home or dwelling unit. At the subscriber's location, the microwave
signals are converted to frequencies that can pass through a conventional
coaxial cable into a decoder located near a television set. All of the Company's
MMDS systems use addressable converters, which permit the Company to offer
tiered pricing options that are expected to attract new customers, retain
existing customers and reduce Churn. In accordance with Brazilian regulations,
each MMDS license allows an MMDS operator to provide service to households in a
circular area within a radius of up to 50 kilometers, depending on the technical
capability of the operator. It is expected that expansion into such newly
available territory would require minimal additional capital spending by the
Company. However, tall buildings and other tall structures may block reception
of an MMDS signal. See "--Regulatory Framework." MMDS is being used in other
emerging pay television markets such as Venezuela and Hong Kong, and in Mexico,
where Cable has a strong incumbent position.
TVA owns five MMDS licenses and operates MMDS systems in Sao Paulo, Rio de
Janeiro and Curitiba, which have an aggregate population of approximately 17.4
million. TVA serves 240,913 MMDS subscribers in these three cities. During the
year ended December 31, 1997, TVA averaged approximately 900 net new MMDS
subscribers per month. The MMDS systems of TVA offer between 15 and 27 channels
of programming. TVA also holds interests in three MMDS licenses through TV
Filme, an Operating Venture, which operates MMDS systems in Brasilia, Goiania
and Belem and has 111,244 MMDS subscribers. See "--Regulatory Framework--MMDS
Regulations." During the year ended December 31, 1997, the Operating Ventures
averaged approximately 2,800 net new MMDS subscribers per month.
Cable
TVA has recently emphasized the strategic deployment of Cable service and
currently operates Cable systems in Sao Paulo, Curitiba and three other cities.
Cable service involves a broad band network employing radio frequency
transmission through coaxial and/or fiber optic cable. Cable systems consist of
four major parts: a headend, a distribution network, a subscriber network and a
house terminal. The programming is collected from the headend, then processed
and fed into the distribution path consisting of trunk and distribution cable,
which consists of coaxial and/or fiber optic cables. The signal is then fed into
a subscriber network that is either located in an apartment building or a
subscriber's home. Most of the Company's systems are constructed with either 750
MHz or 550 MHz bandwidth capacity, the latter of which is readily upgradeable to
750 MHz bandwidth capacity. The Company's four newly acquired systems in
Curitiba (2), Camboriu (1) and Foz do Iguacu (1) are being upgraded to 550 MHz
bandwidth capacity. The Company's new system in Florianopolis is being
constructed to 550 MHz bandwidth capacity. It is expected that this technology
will enable the Company to provide interactive services, including
telecommunications in the future. In addition, the Company's Cable systems
generally use addressable converters, which allow the provision of pay-per-view
services and enable TVA to upgrade, downgrade or disconnect a subscriber's
service from the headend on short notice.
TVA, through TVA Sistema and TVA Sul, owns six Cable licenses and operates
Cable systems in Sao Paulo, Curitiba (where TVA originally owned three licenses
that were later merged into one license), Camboriu, Florianopolis and Foz do
Iguacu, which have an aggregate population of approximately 11.9 million and
94,261 subscribers. As of December 31, 1997, TVA had deployed approximately
2,500 kilometers of its Cable network, including 444 kilometers of fiber optic
cable, including a 395 kilometer fiber optic loop in Sao Paulo and a 49
kilometer fiber optic network in Curitiba. The Company is also upgrading or
constructing the three recently acquired Cable systems. As a result of this
buildout, as of December 31, 1997, TVA Cable systems passed 457,313 homes in Sao
Paulo, approximately 115,302 homes in Curitiba and a total of 640,392 homes
throughout all of the Company's Cable systems. As of December 31, 1997, Canbras
TVA, an Operating Venture, had an existing Cable network of 628 kilometers, with
186,237 Homes Passed and 30,904 subscribers. Canbras TVA is constructing Cable
networks in ten cities in the greater Sao Paulo area with a combined population
of over 2.8 million. By comparison, TVA's largest competitor in Sao Paulo for
Cable service had, as of the same date, 1.0 million Homes
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Passed. TVA and Canbras TVA currently offer between 45 and 53 analog channels of
programming (including off-air channels) on their Cable systems, depending on
the market, and have the capability of offering up to 78 analog channels. During
the year ended December 31, 1997, TVA and Canbras TVA averaged approximately
4,000 and 1,900 net new Cable subscribers per month, respectively.
DIRECTV
In July 1996, TVA launched, on a limited basis, Brazil's DIRECTV service,
Brazil's first Ku-Band service. A nationwide rollout of DIRECTV was launched in
November 1996, at which time TVA initiated a publicity campaign supported by a
nationwide network of trained installers. By comparison, DIRECTV, Inc., a unit
of Hughes Electronics, started its DIRECTV service in the United States in June
1994 and had, as of December 31, 1997, approximately 3.6 million subscribers for
this service.
Galaxy Brasil receives programming from GLA, including programming which
GLA purchases from TVA. Additionally, GLA provides scheduling and related
services to Galaxy Brasil for use with DIRECTV. GLA distributes programming to
Brazil through the transmission of an encoded signal via the Galaxy VIII-i
(launched in December 1997 and replacing the Galaxy III-R satellite) satellite
utilizing 32 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 VIII-i 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
VIII-i satellite enables the Company to offer more than 150 channels through
DIRECTV service to substantially all of the TV Homes in Brazil, substantially
all of which are able to use a 60-centimeter dish antenna due to the Galaxy
VIII-i's expanded footprint. In addition, the Galaxy VIII-i satellite provides a
significant improvement in signal quality, even under adverse weather
conditions, although tall buildings and other tall structures may block
reception of the DIRECTV programming signal. With DIRECTV service, TVA provided
76 channels of video programming (including 24 pay-per-view channels) and 33
channels of audio programming as of April 1, 1998. In addition, since December
31, 1996 a competitor has entered the Ku-Band market, but offers only 26
channels of programming (including four pay-per-view channels). TVA owns and has
made a substantial investment in a satellite uplink center for the Brazilian
DIRECTV service in Tambore in greater Sao Paulo (the "Tambore Facility"). The
Tambore Facility is used to uplink programming to the Galaxy III-R satellite.
In August 1997, DIRECTV, after a significant reduction of operational costs
and the consummation of the Galaxy Brasil Leasing Facility and certain
financings under the SurFin Credit Facility, reduced its installation fee to
$399 (as compared to an original installation price of $990), making the product
more competitive compared with other technologies. This new price expanded the
market of potential subscribers, as the monthly subscription cost became
substantially similar to, and competitive with, that of other pay television
operators in the same market. In early 1999, the decoders used by DIRECTV will
be manufactured in Brazil, which will generate additional cost savings. Antennas
used by DIRECTV are already being produced in Brazil at competitive prices.
DIRECTV created a new regional structure in February 1998, with regional
managers, supervisors and sales teams. New sales points have been set up at
locations where distributors are located and which attract a large volume of
customers, such as shopping centers and hypermarkets. In addition, the Company
is installing multipoint distribution units in buildings in large cities,
allowing residents in such buildings to share access to such units, thereby
encouraging sales in such cities.
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C-Band
TVA has offered C-Band service since 1993, and is the only pay television
operator to deliver a digital C-Band signal in Brazil. TVA's C-Band service
consists of the transmission of a digital encoded signal via the Brasilsat
satellite utilizing four transponders to a satellite antenna 1.1 meters in
diameter located at a subscriber's home, where the signal passes through an
integrated receiver decoder. A single antenna may serve a single family dwelling
or a multifamily dwelling, such as an apartment building, in which case each
apartment needs to be equipped with a decoder. The Brasilsat satellite was
launched in July 1994 and is owned by Empresa Brasileira de Telecomunicacoes
(Brazilian Telecommunications Company, or "Embratel"), the Brazilian
Government-owned company authorized to provide satellite telecommunications
services utilizing the Sistema Brasileiro de Telecomunicacoes por Satelite
(Brazilian Satellite Telecommunications System, or "SBTS"). TVA utilizes the
Brasilsat satellite pursuant to three satellite transponder leases that expire
on May 30, 2002, November 20, 2003, and November 24, 2003, respectively. The
orbital location of the Brasilsat satellite enables TVA to provide C-Band
service throughout Brazil with little or no interference. However, tall
buildings and other tall structures may block reception of C-Band programming.
The Brasilsat satellite has an expected useful life of approximately 12 to 15
years from the date of launch.
TVA's C-Band service provides the Company with national coverage via
satellite transmission and a large preinstalled market. As of December 31, 1997,
there were approximately 4.5 million parabolic C-Band antennae in use in Brazil,
most of which receive only off-air channels. This installed base represents the
Company's target market for its digital C-Band service and the Company expects
to attract these viewers through marketing and promotional initiatives. TVA is
able to deliver 38 channels of programming (including nine SAP channels) in
addition to the off-air channels and currently delivers 26 channels (including
nine SAP channels) as compared to the six channels in addition to the off-air
channels offered by its only significant competitor for this service. As of
December 31, 1997, TVA provided service to 68,309 C-Band subscribers throughout
much of Brazil. During the year ended December 31, 1997, TVA averaged
approximately 1,500 net new C-Band subscribers per month.
Recent Acquisitions
Since January 1996, TVA has purchased four existing Cable systems, two in
Curitiba and one in each of two other cities in southern Brazil, and has
purchased a license to operate a Cable system in a fourth city. As of the
respective dates of their acquisitions, the two systems in Curitiba had a total
of 4,515 subscribers, and the systems in the two other cities had a total of
8,298 subscribers. The four acquired systems had in the aggregate, as of
December 31, 1996, Cable networks comprising approximately 482 kilometers. The
Company is upgrading the operations of the four existing Cable systems and is
constructing a cable system in the fourth city.
The Owned Systems
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 Robert Civita,
a Brazilian national, holds the remaining 2.0% equity interest. The Company
holds an 86.0% equity interest in TVA Sul, and Abril holds the remaining 14.0%.
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GLA and Galaxy Brasil
Pursuant to a Partnership Agreement, dated February 13, 1995, GLA was
formed as a general partnership. As of April 11, 1997, GLA was converted into a
Delaware limited liability company. Such conversion did not materially affect
the governance of GLA or TVA's ownership interest in GLA. Under a Limited
Liability Company Agreement, dated April 11, 1997 (the "GLA Agreement"), GLA is
managed by a seven-member Executive Committee to which DIRECTV Latin America,
Inc. ("DLA") can appoint four members and each of the other partners, including
Tevecap, can appoint one member as long as such partner holds at least an eight
percent equity interest in GLA. The GLA Agreement provides for local operating
agreements between GLA and local operators throughout South America, Central
America, Mexico and the Caribbean which will govern the relationship between GLA
and such local operator. The GLA Agreement stipulates that the local operator in
Brazil shall be Galaxy Brasil, 100.0% of the equity interest of which is
currently owned by Tevecap, but up to 12.5% of which may be purchased by DTI and
up to 12.5% of which may be purchased by Darlene Investments, a member of the
Cisneros Group. Tevecap, in turn, has an option to purchase up to 15.0% of the
equity interest of the local operator in Venezuela, all of which is currently
owned by Darlene Investments. The current partners in GLA have also agreed to
"seek and maintain" equity positions in other local operators. The Company has
agreed to make capital contributions under the GLA Agreement of $33.5 million,
of which $27.8 million had been contributed as of July 1, 1997. The GLA
Agreement places restrictions, including first negotiation, approval and
tag-along rights, on the transfer of capital stock or voting securities of each
of the current partners in GLA and in certain circumstances their parent
entities. In connection with the conversion of GLA into a limited liability
company, GLA's uplink facility was transferred to California Broadcast Center,
LLC, a Delaware limited liability company formed on April 11, 1997 and owned by
two units of Hughes Electronics.
Pursuant to a Local Operating Agreement (the "Local Operating Agreement")
between GLA and Galaxy Brasil, dated July 29, 1996, GLA has agreed to provide to
Galaxy Brasil the exclusive right and ability to supply the DIRECTV service in
Brazil. In accordance with a formula based on the number of subscribers, Galaxy
Brasil is obligated to pay a periodic royalty to GLA. In addition, TVA may not
own or engage in any other Ku-Band service and GLA may not own or engage in any
other pay television service in Brazil. GLA, upon the occurrence of certain
events, has the right to terminate the Local Operating Agreement, or to
terminate Galaxy Brasil's exclusive rights to distribute DIRECTV programming.
Such events include breach of any material obligation of Galaxy Brasil to GLA
and the failure of Galaxy Brasil to meet certain specified performance goals.
The Operating Ventures
The Operating Ventures also operate MMDS (TV Filme) or Cable (Canbras TVA)
systems. TVA holds a 36.0% equity interest in each of Canbras TVA Cabo and TV
Cabo Santa Branca (the "Canbras TVA Companies"). Canbras Participacoes Ltda., a
Brazilian company ("Canbras-Par") holds the remaining interests in Canbras TVA
Cabo and TV Cabo Santa Branca. Canbras-Par is an affiliate of Canbras Holdings
Ltd. and Canbras Communications Corp., a publicly-traded Canadian company, which
are affiliates of Bell Canada International, Inc., an affiliate of BCE Inc.,
Canada's largest telecommunications group. The Canbras Association Agreement
provides for each of the Canbras TVA companies to be governed by a management
committee of three members, one of which TVA has the right to designate. In
addition, TVA agreed to supply to the Canbras TVA companies all programming
regularly supplied to the Owned Systems at "most favored prices" and other terms
at which programming is provided to the Owned Systems or to third parties in
arm's-length transactions. TVA will continue to provide MMDS service, where
possible, to customers in the Santo Andre and Sao Bernardo operating area of the
Canbras TVA Companies until cable service is available in these areas. Canbras
TVA Cabo and TV Cabo Santa Branca will compensate TVA for each subscriber that
transfers from TVA's MMDS system to a Canbras TVA Cable system. The Company
agreed to grant to Canbras-Par a "right of first refusal" to participate in
Cable licenses that the Company may obtain, directly or indirectly, and
Canbras-Par granted to the Company a similar "right of first refusal" to
participate in Cable licenses acquired by Canbras-Par. The term of the Canbras
Association Agreement is for so long as Canbras-Par or its assignee owns shares
"in companies which have the objective of
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engaging in the cable TV business." The Canbras Association Agreement does not
specify the terms and conditions on which any co-investments in Cable licenses
are to be made, and such terms and conditions will be negotiated in good faith,
on a case-by-case basis, in connection with any future cable license
investments.
TVA holds a 14.7% equity interest in TV Filme. The remaining interests are
held by Warburg, Pincus Investors, L.P., which currently holds a 38.8% equity
interest; members of the Lins family, Brazilian nationals, who currently hold a
16.2% equity interest; public shareholders, who currently hold a 28.15% equity
interest; and certain individuals with a combined 2.15% equity interest. On July
29, 1996, TV Filme completed a public offering of 2.5 million shares of its
common stock in the United States at an initial price of $10.00 per share.
Pursuant to a programming agreement, TVA provides programming to TV Filme, and
TV Filme has agreed to use 50.0% of the channel capacity of each of its MMDS
systems in Brasilia, Goiania and Belem (the "TV Filme Service Area") to
broadcast TVA programming so long as (i) the quality of TVA programming, in the
reasonable judgment of TV Filme, remains compatible with the taste and standards
of TV Filme's subscribers, (ii) TVA continues to own, directly or indirectly,
10.0% of TV Filme's common stock and (iii) TVA remains a subsidiary of Abril.
Within the TV Filme Service Area, TVA may not provide TVA programming to any
Cable or other MMDS pay television service provider and TVA may not compete with
TV Filme as an MMDS service provider. TV Filme also has a nonexclusive license
to TVA programming in 19 cities in which TV Filme has pending license
applications, subject to any exclusive license previously granted by TVA to
other pay television service providers in such cities and which exclusive
license TVA, using its best efforts, is unable to renegotiate to allow TVA to
provide for TV Filme to have a nonexclusive license. TVA may not charge TV Filme
an amount greater than the minimum rates charged by TVA to other subscription
television operators, nor may such charges exceed comparable rates for other
programming of a similar nature. The terms of the programming agreement
terminate on July 20, 2004. From time to time, in connection with the
programming agreement, TV Filme has agreed to enter into additional agreements
with the Company regarding specified channels. The agreements typically have two
year terms and determine the monthly fees which TV Filme pays for such channels.
Programming
TVA
TVA, through its MMDS, Cable and C-Band systems, currently provides a
programming package consisting of 15 to 53 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 markets, TVA is currently
the sole provider of ESPN Brasil, HBO Brasil, E! Entertainment Television,
Mundo, CBS Telenoticias, Bravo Brasil, RTPi and Eurochannel. In addition, TVA
has distribution rights to certain of Brazil's most important soccer
championships, including the Brazilian Cup and the Sao Paulo and Rio de Janeiro
State Championships. TVA has entered into two Programming Ventures, ESPN do
Brasil Ltda. ("ESPN Brasil Ltda.") and HBO Brasil Partners, through which it
distributes a large volume of programming which management believes is
especially important to its subscribers. ESPN Brasil Ltda. is a joint venture
between Tevecap and ESPN Brazil, Inc. (a subsidiary of ESPN, Inc.), each of
which holds a 50.0% equity interest. ESPN, Inc. is a joint venture between ABC
and Hearst. ESPN, Inc. provides the programming of the 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
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acquired by the Company after February 24, 1995. ESPN Brazil, Inc. has the right
to terminate the ESPN Agreement and dissolve ESPN Brasil Ltda. in the event that
a Brazilian court issues a non-appealable decision that the Company did not have
the right to grant these rights to ESPN Brasil. TVA's mandatory capital
contributions to ESPN Brasil Ltda. are subject to a maximum aggregate amount of
$5.0 million, whether in the form of loans or subscriptions for additional
quotas. The ESPN Agreement is effective until June 17, 2045 and automatically
renewable for a 50-year period.
HBO Brasil Partners is a joint venture between TVA, which as of December
31, 1997, held a 24.0% equity interest, and HBO Ole Partners, a joint venture
among Time-Warner, Sony, Ole Communications, Inc. and BVI Television
Investments, Inc. (an affiliate of Disney Enterprises, Inc.), which as of the
same date held the remaining 76.0% equity interest. HBO Brasil Partners has
exclusive programming contracts with Sony, Time-Warner and certain independent
programming distributors. HBO Brasil Partners, through an affiliate, provides
the programming for HBO Brasil to TVA. Pursuant to a Partnership Agreement dated
April 15, 1994 (the "HBO Agreement"), HBO Brasil Partners is managed by a
Partners' Committee comprised of an equal number of agents appointed by TVA and
HBO Ole Partners, the other partner. The HBO Agreement provides for the Company
to enter into an affiliation agreement with HBO Brasil Partners, pursuant to
which the Company pays a monthly fee per subscriber to the partnership.
In addition to the Programming Ventures, TVA has entered into a number of
other programming agreements. 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. Eurochannel is a channel assembled exclusively by TVA with
programming from the German channel Deutsche Welle, the Spanish channel
Radiotelevision Espanola, the French channel TF1, European movies, and series
acquired from the BBC. 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. TVA also offers HBO Brasil2, transmitting
HBO Brasil films with a six hour time shift. Recently, in some locations, TVA
began offering Cinemax, an HBO premium movie channel with a film library
complimentary to that of HBO.
ESPN Brasil, offered exclusively by TVA, began transmission on June 17,
1995. TVA negotiated agreements with the major Brazilian soccer confederations,
providing TVA, as of the 1997 season, exclusive first choice coverage of soccer
games of the Brazilian Cup, 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
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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. Recently, TVA began offering Discovery
Kids, a 24-hour channel featuring the best of Discovery programming for
children.
The Fox Channel presents movies, as well as programs from the 2,000 titles
in Fox's library. Fox also presents American television series, such as L.A.
Law, M*A*S*H, and The Simpsons, among many others. Recently, TVA began offering
Fox Kids, a 24-hour channel featuring the best of Fox programming for children.
Eurochannel is specially assembled and packaged by TVA and offers
subscribers European programming. The channel presents programs from the Spanish
Radiotelevision Espanola, the German Deutsche Welle, the BBC, the news from the
French TF1, as well as a variety of quality European films. News, sports, music
and variety shows are also offered.
MTV Brasil is a 24-hour channel produced by MTV Brasil, a joint venture
company owned by Abril and an indirect subsidiary of Viacom International. MTV
Brasil is entirely produced in Brazil in Portuguese. MTV Brasil has licensing
agreements with the MTV Network, a division of Viacom International, and
transmits a combination of music and other video clips, cartoons and local
programming.
Sony Entertainment is primarily a situation-comedy channel, consisting of
Sony's film library, including Friends, Seinfeld, Mad About You and E.R.
The Warner Channel is a family entertainment channel, with new and classic
cartoons, children's programs and movies.
Bravo Brasil is an arts and movie channel, following the same concept as
the 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.
CMT-Country Music Television is a 24-hour channel with the best of country
music programming, including videoclips, shows and interviews with the famous
American country artists.
Mundo presents 24 hours per day of documentaries, biographies and great
moments in sports, music and history, including selected programming from the
History Channel.
Cinemax is a 24-hour movie channel offering a different variety of movie
each day of the week.
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E! Entertainment Television presents 24 hours per day of reports regarding
movies, television, fashion and the arts.
CBS Telenoticias is the first international news channel in the Portuguese
language. Its programming includes international news, the most important news
from Brazil and other Latin American countries, as well as selected programs and
documentaries from CBS/Eye on People.
MGM Gold is a movie and series channel with selected productions from the
Metro-Goldwin-Mayer studios.
The New Travel Channel/People+Arts is a 24-hour channel presenting
documentaries about arts, personalities and cultures from different countries
around the world.
Nickelodeon is a 24 hour channel for children offering programs such as
Rugrats and Bananas in Pijamas.
RTPi, Radiotelevisao Portuguesa Internacional, is a Portuguese state-owned
general entertainment channel produced and assembled in Portugal, airing music
events, talk shows, movies, news and documentaries, exclusive to TVA.
TVA's complete channel offerings as of April 1, 1998 are as follows:
Channel Description
- - ------- -----------
HBO Brasil.............................. movie channel
HBO Brasil 2............................ HBO Brasil with a six-hour time shift
ESPN Brasil............................. sports channel
ESPN International...................... sports channel
CNN .................................... news channel
TNT..................................... movie channel
Cartoon Network......................... cartoon channel
Discovery Brasil........................ science and documentary channel
Fox Channel............................. movie channel
Eurochannel............................. European variety programming channel
MTV Brasil.............................. music channel
RTPi.................................... Portugal's state television channel
CMT..................................... music channel
TV5..................................... French variety programming channel
WorldNet................................ American news and variety channel
RTVE.................................... Spanish variety channel
Deutsche Welle.......................... German variety channel
America 2............................... Argentine variety channel
TeleUno................................. Spanish variety channel
Sony Entertainment...................... situation comedy channel
The Warner Channel...................... family entertainment channel
Bravo Brasil............................ arts and movies channel
Cinemax................................. movie channel
Mundo................................... documentary channel
E! Entertainment Television............. American variety channel
MGM Gold................................ movies and series channel
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Channel Description
- - ------- -----------
NHK....................................... Japanese variety programming channel
RAI....................................... Italian variety programming channel
ART....................................... Arabian variety programming channel
CBS Telenoticias.......................... news channel
Discovery Kids............................ documentary channel
Nickelodeon............................... cartoon channel
Travel Channel/People+Arts................ documentary channel
Fox Kids.................................. cartoon channel
CNN Espanol............................... news channel
CV Sports ................................ Argentine sports channel
CV Noticias .............................. Argentine news channel
Dubai .................................... Arabian variety programming channel
Hallmark ................................. movie channel
Adulto ................................... adult movie channel
SBT....................................... national off-air channel
Globo .................................... national off-air channel
CNT/Gazeta................................ national off-air channel
Bandeirantes.............................. national off-air channel
Record.................................... national off-air channel
Manchete.................................. national off-air channel
Cultura................................... national off-air channel
CBI....................................... local off-air channel
Rede Mulher............................... local off-air channel
Rede Vida................................. local off-air channel
TV Senado................................. local off-air channel
TV Educativa Rio.......................... local off-air channel
TV Camara................................. local off-air channel
TV Legislativa............................ local off-air channel
Canal Comunitario......................... local off-air channel
Canal Universitario....................... local off-air channel
Canal de Sao Paulo........................ local off-air channel
Canal 21.................................. local off-air channel
Rede Gospel............................... local off-air channel
TV Educacao .............................. local off-air channel
DIRECTV
The DIRECTV programming package offered by Galaxy Brasil as of April 1,
1998 consisted of 76 video channels (including 24 pay-per-view channels),
certain of which, such as Bravo Brasil, CMT Brasil and Eurochannel, are provided
by TVA, and 33 audio channels. Programming includes movies, news, athletic
events and other programs available on a pay-per-view basis. The complete
DIRECTV service channel offerings, other than pay-per-view, as of April 1, 1998,
were as follows:
Channel Description
- - ------- -----------
HBO Brasil............................... movie channel
HBO Brasil 2............................. HBO Brasil with a six-hour time shift
ESPN Brasil.............................. sports channel
ESPN International....................... sports channel
Eurochannel.............................. European variety programming channel
CMT Brasil............................... music channel
E! Entertainment Television.............. American variety channel
Mundo.................................... documentary channel
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Channel Description
- - ------- -----------
MGM Gold................................ movies and series channel
MTV Brasil.............................. music channel
MTV Latino.............................. music channel
RTPi.................................... Portugal's state television channel
CNN International....................... news channel
CNN Espanol............................. news channel
CBS Telenoticias........................ news channel
TNT..................................... movie channel
Cartoon Network......................... cartoon channel
Discovery Brasil........................ science and documentary channel
Sony Entertainment...................... situation comedy channel
Bravo Brasil............................ art and movie channel
Deutsche Welle.......................... German variety channel
TVE..................................... Spanish variety channel
Tele Uno................................ Spanish variety channel
Warner Channel.......................... family entertainment channel
CBS Telenoticias........................ CBS news channel in Spanish
Bloomberg............................... business news channel
Multipremier............................ Mexican movie channel
ZAZ..................................... Mexican children's programming channel
Travel Channel.......................... travel programming channel
NHK..................................... Japanese general entertainment channel
TV Chile International.................. Chilean programming channel
CNT/Gazeta.............................. national off-air channel
TV Senado............................... local off-air channel
TV Educativa Rio........................ local off-air channel
TV Cultura.............................. local off-air channel
Nickelodeon............................. children's programming channel
Discovery Kids.......................... children's programming channel
Locomotion.............................. children's programming channel
Disney Weekend.......................... children's programming channel
BBC World............................... world news channel
TV Chile................................ Chilean programming channel
Playboy TV.............................. adult programming channel
AdulTVision............................. adult programming channel
Adult Weekend........................... adult programming channel
Classe.................................. education channel
Hallmark................................ television movie channel
Travel Channel/People & Arts............ documentary channel
RAI International....................... Italian variety channel
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
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programming, seeking to provide programming most in demand. In each market,
TVA's marketing staff typically applies one or more of the following programs to
attract subscribers: (i) extensive marketing tied to regional events such as
soccer matches, (ii) neighborhood promotional events featuring large screen
broadcasts of its channel offerings, (iii) direct mailings, (iv) telemarketing,
(v) television, billboard, magazine and newspaper advertisements, (vi) prewiring
arrangements with residential housing developers and (vii) other promotional
marketing activities, including referral programs and promotional gifts.
Installation. The installation package delivered to a new subscriber
depends upon the type of programming delivery service chosen by the subscriber.
The MMDS installation package features a standard rooftop mount linked to an
antenna and related equipment, including a decoder, located at the subscriber's
location. Cable service requires the installation of a cable line and a decoder
at the subscriber's dwelling. Ku-Band satellite service typically involves
installation of a 60-centimeter dish antenna, which can be mounted outside a
subscriber's window or on the rooftop of a subscriber's building or house,
together with a decoder located at the subscriber's dwelling. As with Ku-Band
service, C-Band service installation includes the installation of a dish
antenna, although of a greater size (1.1 meters in diameter) and a decoder and
related equipment at the subscriber's home. DBS installations at single-family
homes require an entire installation package, while installations at multiple
dwelling units in which drop lines are installed require only a decoder at each
subscriber's location and therefore are less costly to the Company. Once a new
subscriber has requested service, the amount of time a subscriber waits for the
commencement of service depends on several factors, including type of service,
whether the subscriber has access to Cable, whether the subscriber is in a
single family home or multiple dwelling unit, whether the topography of the
surrounding area makes MMDS service viable and whether the subscriber is located
in an area of Brazil that can be reached by C-Band or Ku-Band service. TVA
provides installation service with its own personnel and through local
subcontractors. TVA or such subcontractor attempts to complete installation and
begin service within 30 days of a subscription order.
Uplink Facilities. A major part of the delivery of TVA's DBS service,
whether Ku-Band or C-Band, is the collection of programming and the
transmission, or uplinking, of such programming to the Galaxy III-R satellite
and the Brasilsat satellite, respectively. Upon receipt of programming, the
Company processes, compresses, encrypts, multiplexes (combines with other
channels) and modulates (prepares for transmission to the satellite at a
designated carrier frequency) such programming. The Company uses uplink
facilities of Embratel in Sao Paulo to service its existing C-Band service. TVA
delivers its programming to the Embratel uplink center via microwave
transmission, where it is prepared for transmission to the Brasilsat satellite
using equipment provided by TVA. For its DIRECTV service, the Company has built
the Tambore Facility, an uplink center, for a total cost of approximately $20
million in Tambore in the State of Sao Paulo consisting of an uplink antenna and
ancillary equipment. The Tambore Facility has operated since June 1996 and is
used to uplink Brazilian programming to the Galaxy III-R satellite. Through the
Galaxy III-R satellite, programming from Galaxy Brasil is mixed with programming
from the California Broadcast Center (the "CBC") in Long Beach and with
programming provided by members of the Cisneros Group through an uplink facility
in Venezuela and by Grupo Frequencia Modulada Television through its uplink
facility in Mexico, for delivery to subscribers in Brazil and other countries to
which GLA provides DIRECTV service. The Tambore Facility and the uplink
facilities in Venezuela, Mexico and the United States are equipped with full
emergency power generation equipment and other emergency facilities to enable
GLA to avoid signal disruptions. As of April 11, 1997, California Broadcast
Center, LLC, a new Delaware limited liability company, was established, the
principal asset of which is GLA's satellite uplink facility. The new company is
owned by two subsidiaries of Hughes Electronics. In connection with the
establishment of the new company, TVA Communications and Tevecap have agreed,
pursuant to an Indemnification Agreement, dated April 11, 1997 (the
"Indemnification Agreement"), to provide certain indemnities in favor of GLA,
DLA, 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
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the quality of the picture and sound, and delivers the material to the
multiplexing system. For programming delivered to TVA as taped material, the
programming equipment also compiles the various programming segments, inserting
commercial and promotional material.
Compression System. The Company also uses its programming facilities to
digitize the programming signals used in TVA's Cable and Ku-Band service.
Digital technology permits the compression and transmission of a digital signal
to facilitate multiple channel transmission through a single channel's
bandwidth, thereby giving broadcasters the ability to offer significantly more
channels than is currently the case with analog systems. Digitized signals are
compressed using the MPEG-1 and MPEG-2 standards. (Moving Pictures Expert Group,
the international video compression standard).
Conditional Access System. GLA and News Digital Systems Limited ("NDS"), a
wholly-owned subsidiary of News Corporation, are parties to a System
Implementation and License Agreement. Under the Local Operating Agreement, GLA
provides to Galaxy Brasil the use of the access control system licensed from NDS
and the Smart Cards provided by NDS. The Company expects the access control
system to adequately protect DIRECTV programming from unauthorized access. With
Smart Card technology, it is possible to change the access control system in the
event of a security breach allowing TVA to reestablish security. Management
believes that the ability to take electronic measures and to replace the Smart
Cards will provide an effective means to combat unauthorized programming access.
Subscriber Service. Management believes that delivering high levels of
subscriber service in installation and maintenance enables it to maintain high
levels of subscriber satisfaction and to maximize subscriber retention. To this
end, TVA attempts to promptly schedule installations, provides a subscriber
service hotline in each of the metropolitan areas in which TVA operates,
attempts to promptly provide response repair service, and attempts to make
follow-up calls to new subscribers shortly after installation to ensure
subscriber satisfaction. TVA seeks to instill a subscriber service focus in all
its employees through ongoing training and has established an intra-company
electronic mail system to provide a forum for employees to exchange ideas
concerning ways to increase subscriber satisfaction. TVA also has various
employee bonus programs linked to measures of subscriber satisfaction. To enable
its employees to provide quicker service, TVA is working to decentralize its
subscriber service operations by opening small service offices throughout TVA's
served markets.
Management Information Systems and Billing. Management believes that TVA's
proprietary management information systems enable TVA to deliver superior
subscriber service, monitor subscriber payment patterns and facilitate the
efficient management of each of its operating systems. Management believes that
TVA's billing procedures are an integral part of its strategy to maintain high
levels of subscriber satisfaction and to maximize subscriber retention.
Subscribers select the day of the month on which payment for that month's
service is due, and pay their bills at a bank through direct transfers, which is
the standard payment method in Brazil.
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
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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. TVA's Ku-Band service currently offers 110 channels of audio and video
programming, including 24 pay-per-view channels, as compared to the 101 audio
and video channels of programming offered by Net Sat (including pay-per-view
channels). In addition, Tectelcom-Tecnica em Telecomunicacoes announced its
intention to provide Ku-Band service of up to 76 audio and video channels in the
second quarter of 1998.
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.
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Programming Sales
TVA competes with a variety of Brazilian and international programming
providers for sales of its programming to the Operating Ventures and Independent
Operators. In addition, TVA competes with other pay television operators to
purchase programming from some of these Brazilian and international sources.
Regulatory Framework
The subscription television industry in Brazil is subject to regulation by
the Brazilian Ministry of Communications pursuant to Law No. 9472/97 ("Law
9472") and Law No. 9295/96 ("Law 9295"). The Ministry of Communications has to
date granted concessions for MMDS, Cable, DBS, and UHF licenses. This authority
was delegated in July 1997 to the Agencia Nacional de Telecomunicacoes
("ANATEL"), a division of the Ministry of Communications.
MMDS Regulations
General. Law 9472 authorizes ANATEL, among other things, to issue, revoke,
modify and renew licenses within the spectrum available to MMDS systems, to
approve the assignments and transfer of control of such licenses, to approve the
location of channels that comprise MMDS systems, to regulate the kind,
configuration and operation of equipment used by MMDS systems, and to impose
certain other reporting requirements on channel license holders and MMDS
operators. The licensing and operation of MMDS channels are currently governed
by Decree No. 2196/97 ("Decree 2196"), Ordinance No. 254/97 (as amended by
Ordinance No. 319/97, "Ordinance 254") and Rule No. 002/Rev. 97 ("Rule 002").
Under these regulations, MMDS is defined as the special service of
telecommunication which uses microwaves to transmit codified signals to be
received in pre-established points on a contractual basis.
Licenses. ANATEL grants licenses and regulates the use of channels by MMDS
operators to transmit video programming, entertainment services and other
information. A maximum of 31 MMDS channels (constituting a spectrum bandwidth of
186 MHz) may be authorized for use in an MMDS market. While licenses are usually
granted for the use of up to 16 channels, depending on technical feasibility and
the existence of competition, ANATEL can grant a license for all 31 channels
available in one specific area. If the license is for 16 or more channels, at
least two channels must be reserved for educational and cultural programming. If
the license involves 15 or fewer channels, there is no obligation to reserve any
channel for educational and cultural purposes. In each of the Company's Sao
Paulo and Rio de Janeiro markets, up to 31 MMDS channels are available for MMDS
(in addition to any local off-air VHF/UHF channels which are offered).
An MMDS license is granted for a renewable period of 15 years. The
application for renewal of a license must be filed with ANATEL during the period
from 18 months before the end of the license term. To renew the license, the
license holder must (i) meet applicable legal and regulatory requirements, (ii)
have complied with all legal and contractual obligations during the term of such
license and (iii) meet certain technical and financial requirements.
Under the most recently promulgated provisions of Rule 002, each license
holder and its affiliates may be granted permission to operate MMDS systems in
different areas of Brazil, provided that no holder may be granted licenses for
(i) more than seven municipalities with a population equal to or exceeding
700,000 inhabitants and (ii) more than 12 municipalities with a population
between 300,000 and 700,000 inhabitants. The restrictions only apply to areas in
which the MMDS system operator (or an affiliate thereof) faces no competition
from other pay television services, excluding services that utilize a satellite
to transmit their signal. Rule 002 grants the Ministry of Communications full
discretion to alter or eliminate the restrictions. The term affiliate is defined
by Rule 002 as any legal entity that directly or indirectly holds at least 20%
of the voting capital. The Company currently controls five MMDS licenses in
cities of more than 700,000 inhabitants (Sao Paulo (2), Rio de Janeiro, Curitiba
and Porto
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Alegre), but in each such city TVA has at least one competitor. Prices for pay
television services may be freely established by the system operator, although
ANATEL may interfere in the event of abusive pricing. 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.
ANATEL 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
commercial operations, the applicant's commitment to local programming and the
extent to which the applicant provides free programming to local cultural and
educational institutions. Once an MMDS license application is granted by the
Ministry of Communications, the license holder must finalize construction and
begin operations within 12 months, which period may be extended by an additional
12 months.
In addition to qualifying under the application process described above, a
license holder must also demonstrate that its proposed signal does not violate
interference standards in the area of another MMDS channel license holder. To
this end, existing license holders are given a 30-day period in which to
ascertain and comment to the Ministry of Communications whether the new license
holder's proposed signal will interfere with existing signals. The area covered
by the services is exclusive to a radius of five to 50 kilometers around the
transmission site, depending on the technical capability of the operator.
Other Regulations. MMDS license holders are subject to regulation with
respect to the construction, marketing and lighting of transmission towers
pursuant to the Brazilian Aviation Code and certain local zoning regulations
affecting construction of towers and other facilities. There may also be
restrictions imposed by local authorities. The subscription television industry
also is subject to the Brazilian Consumer Code. The Consumer Code entitles the
purchasers of goods or services to certain rights, including the right to
discontinue a service and obtain a refund if the services are deemed to be of
low quality or not rendered adequately. For instance, in case of a suspension of
the transmission for a given period, the subscriber shall be entitled to a
discount on the monthly fees. Rule No. 002 contains certain provisions relating
to consumer rights, including a provision for mandatory discounts in the event
of interruption of service. The Company, as of December 31, 1997, had not been
required to repay any amounts or provide any discounts due to interruptions of
service. However, the Company does refund prepaid installation service fees when
the Company discovers such service is unavailable for whatever reason.
Due to the regulated nature of the subscription television industry, the
adoption of new, or changes to existing, laws or regulations or the
interpretations thereof may impede the Company's growth and may otherwise have a
material adverse effect on the Company's results of operations and financial
condition.
Cable Regulation
General. Cable services in Brazil are licensed and regulated by the
Ministry of Communications pursuant to Law No. 8977/95 ("Law 8977"), Decree No.
2206/97 ("Decree 2206"), which authorized the regulation of Cable Services, and
Ordinance 256/97 ("Ordinance 256"), which approved the Norma Compementar do
Servico de TV a Cabo regulating the granting of licenses for, and the operation
of, Cable services. Until Law 8977 was enacted in 1995, the Brazilian Cable
industry had been governed by two principal regulatory measures since its
inception in 1989: Ordinance No. 250, issued by the Ministry of Communications
on December 13, 1989 ("Ordinance 250"),
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and its successor, Ordinance No. 36, issued by the Ministry of Communications on
March 21, 1991 ("Ordinance 36").
Ordinance 250 regulated the distribution of television signals ("DISTV") by
physical means (i.e., by Cable) to end-users. DISTV services generally are
limited only to the reception and transmission of signals without any
interference by a DISTV operator with the signal content. Under Ordinance 250,
101 authorizations were granted by the Ministry of Communications to local
operators to commercially exploit DISTV services. Although Ordinance 250 did not
specifically address Cable services, a number of DISTV operators (including the
Company's Cable systems) began to offer Cable services based on DISTV
authorizations.
Licenses. Under Law 8977, a Cable operator must obtain a license from
ANATEL in order to provide Cable services in Brazil. All Cable licenses are
nonexclusive licenses to provide Cable services in a service area. Cable
licenses are granted by ANATEL for a period of 15 years and are renewable for
equal and successive periods. Renewal of the Cable license by ANATEL is
mandatory if the Cable system operator has (i) complied with the terms of the
license grant and applicable governmental regulations and (ii) agrees to meet
certain technical and economic requirements relating to the furnishing of
adequate service to subscribers, including system modernization standards.
Ordinance No. 256/97 ("Ordinance 256") imposes restrictions on the number
of areas that can be served by a Cable television system operator (or an
affiliate thereof). Pursuant to Ordinance 256, a Cable system operator (or an
affiliate thereof) may only hold licenses with respect to (i) a maximum of seven
areas with a population of 700,000 and above and (ii) a maximum of 12 areas with
a population of 300,000 or more and less than 700,000. The restrictions only
apply to areas in which the Cable system operator (or an affiliate thereof)
faces no competition from other pay television services, excluding services that
utilize a satellite to transmit their signal. Ordinance 256 grants the Ministry
of Communications full discretion to alter or eliminate the restrictions. The
term affiliate is defined by Ordinance 256 as any legal entity that directly or
indirectly holds at least 20% of the voting capital of another legal entity or
any of two legal entities under common ownership of at least 20% of their
respective voting capital. The Company currently controls two Cable licenses in
cities of more than 700,000 inhabitants (Sao Paulo and Curitiba), but in each
such city TVA has at least one competitor.
Generally, only legal entities that are headquartered in Brazil and that
have 51.0% of their voting capital by Brazilian-born citizens or persons who
have held Brazilian citizenship for more than 10 years are eligible to receive a
license to operate Cable systems in Brazil. In the event that no private entity
displays an interest in providing Cable services in a particular service area,
ANATEL may grant the local public telecommunications operator a license to
provide Cable services.
Cable operators that previously provided Cable services under a DISTV
authorization granted under Ordinance 250 were required under Law 8977 to file
applications to have their DISTV authorizations converted into Cable licenses.
Ordinance 256 grants a one year period from the date a DISTV authorization is
converted into a cable television license for any Cable system operator to
comply with the restrictions. The Company's Cable systems, all of which were
operating under DISTV authorizations, applied for conversion of their DISTV
authorizations and received approval for such conversion from the Ministry of
Communications.
Cable licenses for service areas not covered by existing authorizations
will be granted pursuant to a public bidding process administered by ANATEL
after prior public consultation. All such licenses shall be nonexclusive
licenses. In order to submit a bid for a license, a bidder must meet certain
financial and legal prerequisites. After such prerequisites are met, a bidder
must then submit a detailed bid describing its plan to provide Cable services in
the service area. In the qualification phase of the bidding process, ANATEL
assigns a number of points to each bid based on certain weighted criteria,
including the timetable for offering subscription programming; the time
allocated to local public interest programming; the number of channels allocated
to educational and cultural programming; and the number of establishments, such
as schools, hospitals and community centers, to which basic
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service programming will be offered free of charge. After calculating the number
of points awarded to each bidder, ANATEL will then apply a formula based on the
population of the service area to select the winning bid from among those
bidders that meet certain defined minimum qualifying thresholds. For service
areas with a population of 700,000 or more inhabitants, the qualified bidder
that submits the highest bid for the license will be selected. For service areas
with a population between 300,000 and 700,000 inhabitants, the winning bid is
selected based on the highest product obtained by multiplying the number of
points awarded in the qualification phase and the amount bid for the license.
For service areas with less than 300,000 inhabitants, the winning bid is
selected on the basis of the number of points awarded in the qualification phase
and the payment of a fixed fee.
Once a Cable license is granted, the licensee has an 18 month period from
the date of the license grant to complete the initial stage of the installation
of the Cable system and to commence providing Cable services to subscribers in
the service area. The 18 month period is subject to a single 12 month extension
for cause at the discretion of ANATEL.
Any transfer of a Cable license is subject to the prior approval of ANATEL.
A license generally may not be transferred by a licensee until it has commenced
providing Cable services in its service area. Transfers of shares causing a
change in the control of a license or the legal entity which controls a license
also is subject to the prior approval of ANATEL. ANATEL must receive notice of
any change in the capital structure of a licensee, including any transfer of
shares or increase of capital that do not result in a change of control.
A license can be revoked, upon the issue of a judicial decision, in the
event the licensee lacks technical, financial or legal capacity to continue to
operate a Cable system; is under the management of individuals, or under the
control of individuals or corporations who, according to Law 8977, do not
qualify for such positions; has its license transferred, either directly or by
virtue of a change in control, without the prior consent of ANATEL; does not
start to provide Cable services within the time limit specified by Law 8977; or
suspends its activities for more than thirty consecutive days without
justification, unless previously authorized by ANATEL.
Cable Related Service Regulation
General. Brazilian telecommunications services are governed primarily by
(i) Article 21 of the Federal Constitution, as amended by Amendment No. 8 of
August 15, 1995 ("Amendment 8"), (ii) the Telecommunications Code (Law No. 4117
of August 27, 1962, as amended), (iii) Law 9472 and (iv) Law 9295. The Brazilian
Government also has issued detailed regulations covering specific areas of
telecommunications services, including radio broadcasting, paging, trunking,
subscription television, Cable television and cellular telephony. ANATEL is
responsible for the regulation of telecommunications services in Brazil. Prior
to its amendment in 1995, Article 21 of the Federal Constitution required the
Brazilian Government to operate directly, or through concessions granted to
companies whose shares are controlled by the Brazilian Government, all
telephone, telegraph, data transmission and other public telecommunications
services. This constitutional requirement was the basis for the establishment of
the state-owned telephone monopoly, Telebras, which holds controlling interests
in 27 regional telephone operating companies. With the adoption of Amendment 8,
Article 21 was modified to permit the Brazilian Government to operate
telecommunications services either directly or through authorizations,
concessions or permissions granted to private entities. In particular, Amendment
8 removed the constitutional requirement that the Brazilian Government must
either directly operate or control the shares of companies which operate
telecommunications services. Even with the adoption of Amendment 8, the
Brazilian Government still retains broad regulatory powers over
telecommunications services. Notwithstanding the existence of the Telebras
monopoly, private companies have been permitted under Brazilian law to provide a
number of telecommunications services other than telephony, including radio
broadcasting, paging, trunking, subscription television and cable television
services. However, fixed public telephony and cellular telephony were
exclusively provided by Telebras through its regional telephone operating
companies. 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.
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High-Speed Cable Data Services. Law 8977 and Decree 2208, among other
things, authorize cable television operators, such as the Company, in addition
to furnishing video and audio signals on their cable networks, to utilize their
networks for the transmission of meteorological, banking, financial, cultural,
prices and other data. This broad grant of authority is understood to permit
Cable television operators to furnish services such as interactive home banking
and high-speed Cable data services to subscribers through their cable television
networks, although a simplified licensing procedure for high-speed Cable data
services may be installed by ANATEL in the future.
Cable Telephony. In accordance with Law 8977, the Company is not permitted
to furnish fixed telephone services in Brazil without a specific license to do
so. Therefore, absent a change in Brazilian law, the Company would not be
permitted to furnish cable telephony on its network. There are, however, certain
limited regulatory exceptions pursuant to which private entities other than
Telebras and the regional telephone operating companies have been permitted to
provide limited fixed telephony services in Brazil. Under one particular
exception, certain private telephone networks (Centrais Privadas de Comutacao
Telefonica or "CPCT") serving "condominiums" (as such term is defined under
Brazilian law) have been permitted to interconnect their private telephone
networks to the public telephone network operated by the local telephone
operating company. A CPCT is comparable to a private branch exchange (PBX) found
in some larger apartment complexes, hotels and businesses in the United States.
Under Brazilian law, the term "condominium" refers to residential and
nonresidential buildings or building complexes that have entered into a legal
association. In practice, a condominium desiring to establish a CPCT will
generally contract with a private service provider to install, operate and
maintain the CPCT and to secure interconnection with the public telephone
network. Ordinance No. 119/90 of 10 December 1990 ("Ordinance 119"), which was
issued by the predecessor to the Ministry of Communications, sets forth
requirements for the interconnection of CPCTs with the public telephone network.
In general the installation, operation and maintenance of a CPCT does not
require any authorization from the Ministry of Communications or Telebras. In
order to interconnect with the public telephone network, a CPCT must comply with
the requirements set forth in Ordinance 119. Such requirements primarily relate
to meeting technical equipment certification and acceptance standards. Assuming
that such standards are met, the regional telephone operating company is
required under Ordinance 119 to interconnect the CPCT requesting interconnection
to the public telephone network. The Company believes that, under current
Brazilian law, Cable television operators can utilize their Cable television
networks in order to facilitate the installation and operation of a CPCT.
Furthermore, under the authority granted by Ordinance 119, CPCTs may be
interconnected through Cable television networks to the public telephone
network.
Satellite Service Regulation. On October 1, 1991, the Ministry of
Communications enacted Ordinance No. 230 to regulate telecommunications services
via satellite in Brazil ("Ordinance 230"). Under Ordinance 230 any company
authorized to broadcast television by any means is also authorized to broadcast
by satellite transmission. The Company has operated satellite pay-television
services since 1993 through a contract signed with Embratel.
Ordinance No. 281, issued by the Ministry of Communications on November 28,
1995, partially amended Ordinance 230 allowing only companies to which a
concession, permission or authorization had been granted previously by the
Ministry of Communications to provide telecommunications services via satellite.
Companies that were already operating satellite telecommunications services
without such authorization were given a period of 60 days to seek such
authorization. The Company applied for such authorization within the 60-day
period, and on April 23, 1996, the Ministry of Communications issued Ordinance
No. 87/96 ("Ordinance 87"), granting TVA the non-exclusive permission to operate
a pay television service via satellite. Such authorization is valid for a term
of fifteen years, commencing October 26, 1994. Ordinance 87 further provides
that TVA has the obligation to (a) render services continuously and efficiently
in order to fully satisfy users, (b) in an emergency or disaster, render
services to the entities that require services without charge, and (c) meet the
technical adequacy requirements which the Ministry of Communications considers
essential to guarantee fulfillment of the obligations under the permission
granted. In addition, on April 23, 1996, Galaxy Brasil received approval from
the Ministry of Communications, pursuant to Ordinance No. 86/96 ("Ordinance
86"), to operate satellite services via the Galaxy III-R satellite, leased
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by Hughes Electronics. Galaxy Brasil also received approval to operate the
corresponding ground transmission station pursuant to Ordinance 86.
Satellite-based pay television services are today regulated by Law 9295/96
("Law 9295"), Law 9472/97 (the "General Law"), Decree 2196/97, which regulates
special telecommunications services, including DBS services, Decree 2195/97,
which regulates the transmission of signals via satellite, and Ordinance 321/97,
which relates specifically to satellite-based pay television services. Law 9295
authorizes the Executive branch of the Brazilian federal Government, within
three years, to limit the ownership by non-Brazilian entities of the voting
capital of entities providing satellite-based pay television services to a
maximum of 49%. In addition, the General Law broadly authorizes the Executive
branch to limit non-Brazilian ownership of telecommunications service providers.
Law 9295 also provides that the granting of concessions for the transmission of
signals via satellite by private companies will occur after December 31, 1997.
On May 21, 1997, the Ministry of Communications issued Ordinance No. 321
("Ordinance 321") governing the granting of licenses to provide satellite pay
television services.
ITEM 2. DESCRIPTION OF PROPERTY
The Company owns most of the assets essential to its operations. The major
fixed assets of the Company are coaxial and fiber optic cable, converters for
subscribers' homes, electronic transmission, receiving, processing and
distribution equipment, microwave equipment and antennae. The Company leases
certain distribution facilities from third parties, including space on utility
poles, roof rights and land leases for the placement of certain of its hub
sights and head ends and space for other portions of its distribution system.
The Company leases its offices from third parties, with the exception of certain
offices of TVA Sul, located in Curitiba, State of Parana, and the offices and
uplink facility for Galaxy Brasil, located in Tambore, Sao Paulo State, all of
which are owned by the Company. The Company also owns its data processing
facilities and test equipment.
ITEM 3. LEGAL PROCEEDINGS
The Company is party to certain legal actions arising in the ordinary
course of its business which, individually or in the aggregate, are not expected
to have a material adverse effect on the combined financial position of the
Company. As of December 31, 1997, 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 $2.7 million) and claims
relating to the payment by the Company of certain taxes on imported materials
(approximately $1.1 million). See Note 19 to the Tevecap Financial Statements
included herein.
The Company's operating companies are currently defending a lawsuit brought
by the Escritorio Central de Arrecadacao e Distribuicao (Central Collection and
Distribution Office, or "ECAD"), a government-created entity authorized to
enforce copyright laws relating to musical works. ECAD filed a lawsuit in 1993
against all pay-television operators in Brazil seeking to collect royalty
payments in connection with musical works broadcast by the operators. The suit
was filed against TVA in the Tribunal de Justica do Estado de Sao Paulo, the 16
Vara Civel do Estado de Sao Paulo, the Tribunal de Justica do Estado do Parana
and the Tribunal de Justica do Estado de Santa Catarina. The suit was filed
against TV Filme in the Tribunal de Justica do Estado de Goias, the Tribunal de
Justica do Distrito Federal and the Tribunal de Justica do Estado do Para and
against Canbras TVA in the Tribunal de Justica do Estado de Sao Paulo. In
December 1997, a similar lawsuit was filed against Galaxy Brasil in the 20 Vara
Civel do Estado de Sao Paulo. ECAD is seeking a judgment award of 2.55% of all
past and present revenues generated by the operators. The suits are currently
being examined by court experts with the objective of determining the amounts in
controversy with respect thereto. Although the Company intends to vigorously
defend
25
<PAGE>
these suits, the loss of such suits may have a material adverse effect on the
consolidated financial position of the Company. Based on agreements reached by
ECAD with other Brazilian television operators, however, management believes
that it can reach a negotiated settlement to these suits whereby the Company
would make monthly payments to ECAD in an amount significantly lower than that
sought by ECAD. As of December 31, 1997, the Company had reserved approximately
$2.0 million for claims related to the ECAD suits.
The Company is also involved in a judicial dispute with Globo Par in connection
with the exclusive right to broadcast the Brazilian Soccer Championship. Both
TVA and Globo Par filed suits in the 1, 2 and 17 Varas Civeis do Estado de Sao
Paulo and the 2 and 16 Varas Civeis do Estado do Rio de Janeiro requesting an
injunction to prevent the other party from broadcasting the championship. In
1997 the Tribunal de Justica do Rio de Janeiro ruled in favor of Globo Par,
thereby preventing TVA from broadcasting the championship. TVA is currently
challenging this ruling, and bringing forth its own claims, in the Tribunal de
Justica do Estado de Sao Paulo. The Company believes that it has a valid right
to exclusively broadcast the championship pursuant to its agreements with the
Confederacao Brasileira de Futebol (the Brazilian Soccer Federation) and the
Clube dos Treze, a group of soccer teams, and therefore considers the likelihood
of its success in this suit, or a negotiated settlement to the suit, to be
favorable. The loss of such suit, however, may have a material adverse effect on
the consolidated financial position of the Company.
ITEM 4. CONTROL OF REGISTRANT
Tevecap has one class of capital stock, common shares, authorized and
outstanding. As of December 31, 1997, 196,712,855 common shares were outstanding
representing authorized social capital of R$366,000,715. Following a capital
increase on February 17, 1998, 226,338,285 common shares were outstanding
representing authorized social capital of R$478,740,715. The following table
sets forth, as of December 31, 1997 and April 30, 1998, information regarding
the beneficial ownership of Tevecap's common shares:
<TABLE>
<CAPTION>
December 31, 1997 April 30, 1998
---------------------------- ----------------------------
Number of Common Number of Common
Shareholder Shares Owned Percentage Shares Owned Percentage
- - ----------- ------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Abril S.A ...................................................... 111,075,318 56.47% 140,700,748 62.2%
Falcon International Communications (Bermuda) L.P.(a) .......... 27,930,827 14.20 27,930,827 12.3
Hearst/ABC Video Services II(b) ................................ 34,714,031 17.65 34,714,031 15.3
Cable Participacoes Ltda.(b) ................................... 4,628,536 2.35 4,628,536 2.0
Chase Manhattan International Finance Ltd.(c) .................. 18,364,122 9.33 18,364,122 8.1
All directors and executive officers as a group ................ 21 --(d) 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
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<PAGE>
Company, and (iii) the price for sale to such third party is at least 90.0% of
the price offered to the Company and the other Stockholders. The provisions
regarding transfers of shares do not apply to transfers to certain affiliates of
the Stockholders. In addition, the Stockholders have preference over all other
persons or entities to subscribe for new issuances of capital stock by the
Company in proportion to their existing ownership of capital stock.
Event Put Options. Upon the occurrence of certain defined "triggering
events" each of the Stockholders, other than Abril, may demand that Tevecap buy
all or a portion of the shares of capital stock of Tevecap held by such
Stockholder, unless the shares of capital stock held by such Stockholder are
publicly registered, listed or traded (collectively referred to as an "Event
Put"). The triggering events are: (i) the amount of capital stock held by such
Stockholder exceeds the amount allowed under any legal restriction to which such
Stockholder may be subject ("Regulatory Put"); (ii) a breach without cure within
a designated period by Robert Civita, Abril, any of the respective affiliates of
Robert Civita or Abril or Tevecap of any representation, warranty, covenant or
duty made or owed pursuant to the Stockholders Agreement, the Stock Purchase
Agreement, dated August 25, 1995, among Robert Civita, Abril, the Chase Parties,
and certain other parties, or the Stock Purchase Agreement, dated December 6,
1995, among Tevecap, Robert Civita, Abril, HABC Parties, the Chase Parties,
Falcon International and certain other parties; (iii) a breach without cure
within a designated period by Abril of the Abril Credit Facility; (iv) Robert
Civita ceases to directly or indirectly hold without the approval of the
Stockholders 31.258% of the capital stock and voting capital stock of Tevecap or
he ceases to control the voting capital stock held by his affiliates
representing 50% or more of the voting capital stock of Tevecap; (v) the Service
Agreement, dated July 22, 1994, as amended, among Tevecap, Televisao Show Time
Ltda. ("TV Show Time"), TVA Brasil Radioenlaces Ltda. ("TVA Brasil") and Abril,
each of which holds certain licenses covering certain operations of TVA, ceases
to be valid or effective or TV Show Time, TVA Brasil or Abril is liquidated or
dissolved or files voluntarily, or has filed against it involuntarily, any
petition in bankruptcy or (vi) another Stockholder exercises an Event Put, other
than a Regulatory Put. The price to be paid in connection with an Event Put is
set at fair market value determined by appraisal or by a multiple of Tevecap's
most recent quarterly earnings. The Indenture, however, contains restrictions on
the ability of Tevecap to purchase shares of its capital stock. Accordingly, the
parties to the Stockholders Agreement have agreed to amend the Stockholders
Agreement prior to the Offering to provide that if the terms of the Indenture
prohibit the Company from purchasing shares that are subject to an Event Put
("Event Put Shares"), in whole or in part, the Company shall not be obligated to
purchase such shares to the extent it is so restricted. However, in such event,
the Company shall, subject to the terms of the Indenture, have the obligation to
issue shares of preferred stock of the Company ("Special Preferred Shares")
should the Tevecap Stockholder elect to convert Event Put Shares to Special
Preferred Shares. The holders of Special Preferred Shares will be entitled to
dividends required by law and a cumulative dividend equal to LIBOR plus a 4.0%
margin, provided that if the terms of the Indenture prohibit the payment of
dividends on the Special Preferred Shares, the Company shall not be obligated to
make such dividend payments to the extent so restricted. However, under the
terms of the Special Preferred Shares such unpaid dividends shall cumulate and
will be paid in full when permissible under the Indenture or when the Indenture
no longer restricts the payment of such dividends. After the payment of all
dividends on the Special Preferred Shares, the Company must use any remaining
profit or reserve to purchase the largest number of Event Put Shares and Special
Preferred Shares, provided that, if the terms of the Indenture prohibit the
purchase of such shares, the Company shall not be obligated to make such
purchases until permitted by the terms of the Indenture.
Time Put Options. In addition, pursuant to the Stockholders Agreement,
Falcon International may demand that Tevecap buy all or any portion of the
shares of capital stock of Tevecap held by Falcon International if such shares
are not publicly registered, listed or traded by September 22, 2002 (the "Falcon
Time Put"). The price to be paid in connection with the Falcon Time Put is fair
market value determined in the same manner as an Event Put. If Tevecap
determines that the terms of the Indenture prohibit it from purchasing such
shares, Tevecap may, subject to the terms of the Indenture, delay the payment of
such purchase price with three annual payments ("Put Annual Payments") or issue
promissory notes denominated in US dollars for the amount of such price ("Put
Promissory Notes"). The Put Promissory Notes would mature three years after
issuance with interest payments due quarterly in arrears. The interest rate on
the Put Promissory Notes would be equal to the rate applicable to US
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<PAGE>
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 payment sunder the Put
Promissory Notes may be made under the Indenture, payments must be made first to
satisfy the obligations under the outstanding Put Promissory Notes. If the terms
of the Indenture prohibit the Company from making the Put Annual Payments, the
Company shall not be required to make such payment, but shall be required to
deliver Put Promissory Notes in the principal amount of the affected Put Annual
Payments. If the terms of Indenture prohibit the Company from making an interest
payment required under any Put Promissory Note, the Company shall not be
required to make such payment at such time, provided that any accrued and unpaid
interest shall accumulate and interest on such unpaid amount shall compound
quarterly and the Company shall make payments of interest as soon as such
payment is no longer restricted under the Indenture. Pursuant to the terms of
the proposed amendment to the Stockholders Agreement, payment of the principal
and interest on the Put Promissory Notes would be subordinated to the prior
payment in full of the Notes.
Registration Rights. At any time after December 6, 1997, the Chase Parties,
considered together, the Hearst/ABC Parties or Falcon International may request
that the Company effect the registration of any or all of the capital stock held
by such Stockholder. However, the Company is not obligated to effect more than
one registration requested by a Stockholder in any 12 month period or more than
three registrations requested by a Stockholder in total. Also, the capital stock
that is the subject of the registration demand must be of a certain minimum
amount. In addition, Tevecap must offer each Stockholder other than Abril the
opportunity to register capital stock held by such Stockholder, subject to
standard reductions in amount such Stockholder may register as recommended by
the managing underwriter. Tevecap is obligated to pay all registration expenses
other than underwriting discounts and commissions or transfer taxes, and Tevecap
is only obligated to pay for the fees and expenses of Tevecap's counsel and
accountants.
Board of Directors and Advisory Board. Tevecap is governed by a board of
directors with 11 members. Under the Stockholders Agreement, Abril designates
six members, Falcon International designates two members, the Chase Parties
together designate one member, and Hearst/ABC Parties designates 2 members. The
affirmative vote of members of the board representing the Chase Parties, Falcon
International and Hearst/ABC Parties is required for: acquisition of ownership
interests in other companies; acquisition or liens on equity in other companies
or liens on assets other than in ordinary course and in aggregate less than
$500,000; incurrence of indebtedness of less than one year maturity and in an
amount greater than $1,000,000; incurrence of indebtedness of greater than one
year maturity except trade debt and in an aggregate amount of less than
$500,000; loans on advance payments; non-financial guarantees in aggregate
totaling more than $100,000; transactions with affiliates; and modifications to
Service Agreement. Tevecap must get the approval of Hearst/ABC Parties before
entering into contracts in excess of $1,000,000 in value and making any material
programming decisions. Tevecap must get the approval of Falcon International
before entering into contracts in excess of $1,000,000. Tevecap must get the
approval of each of Hearst/ABC Parties, the Chase Parties and Falcon
International before any corporate restructuring or any public offering of
securities of Tevecap.
Required Dividend. Tevecap is required by the terms of the Stockholders
Agreement to pay annual dividends equal to the net cash flow of Tevecap or 25.0%
of the net consolidated profit (as defined by Brazilian law) of Tevecap.
However, Tevecap may delay the payment of such dividends to the extent the
payment of such dividends is prohibited by the Indenture, and such dividends
will accumulate and be payable to the extent allowed under the Indenture.
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<PAGE>
ITEM 5. NATURE OF TRADING MARKET
The Company's outstanding registered securities consist solely of the
Company's 125/8% Senior Notes due 2004 that were registered under the Securities
Act pursuant to an Exchange Offer which expired on May 23, 1997 and a subsequent
Exchange Offer which expired on December 10, 1997. There is no formal trading
market for such securities.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
There are two legal foreign exchange markets in Brazil: the commercial rate
exchange market (the "Commercial Market") and the floating rate exchange market
(the "Floating Market"). The Commercial Market is reserved primarily for foreign
trade transactions and transactions that generally require prior approval from
Brazilian monetary authorities, such as the purchase and sale of registered
investments by foreign persons and related remittances of funds abroad, such as
a repurchase by the Company of the Notes. Purchases of foreign exchange in the
Commercial Market may be carried out only through a financial institution in
Brazil authorized to buy and sell currency in that market. The "Commercial
Market Rate" is the commercial selling rate for Brazilian currency into US
dollars, as reported by the Central Bank. The "Floating Market Rate" generally
applies to transactions to which the Commercial Market Rate does not apply.
Prior to the implementation of the Real Plan, the Commercial Market Rate and the
Floating Market Rate differed significantly at times. Since the introduction of
the real, the two rates have not differed significantly, although there can be
no assurance that there will not be significant differences between the two
rates in the future. Both the Commercial Market Rate and the Floating Market
Rate are reported by the Central Bank on a daily basis.
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
29
<PAGE>
buying and selling US dollars in electronic auctions. The band has been adjusted
from time to time and, since January 20, 1998, has been between R$1.12 and
R$1.22 per U.S.$1.00. There can be no assurance that a new band will not be
reset in the future or that the real will maintain its current exchange rate in
future periods.
On December 31, 1997 and May 7, 1998, the Commercial Market rate as
reported by the Central Bank was R$1.1164 per U.S.$1.00 and R$1.1451 per
U.S.$1.00, respectively.
The following table provides the Commercial Market rate for the purchase of
U.S. dollars expressed in reais per U.S. dollar for the periods and dates
indicated.
<TABLE>
<CAPTION>
Exchange Rates of reais per U.S. $1.00(1)
-----------------------------------------------------------------------
Year Ended: Low High Average(2) Period End
-------- -------- -------- --------
<S> <C> <C> <C> <C>
December 31, 1992 .............................. 0.000392 0.004505 0.001810 0.004505
December 31, 1993 .............................. 0.004557 0.118584 0.032342 0.118584
December 31, 1994 .............................. 0.120444 1.000000 0.458968 0.848000
December 31, 1995 .............................. 0.834000 0.972600 0.921583 0.972500
December 31, 1996 .............................. 0.972500 1.039400 1.007992 1.039400
December 31, 1997 .............................. 1.039500 1.116400 1.079058 1.116400
Three Months Ended:
March 31, 1998 ................................. 1.116500 1.141800 1.130500 1.137400
</TABLE>
- - -----------
(1) Amounts have been translated from the predecessor currencies in effect
during the relevant period, at the buying rates of exchange at the time the
successor currency became the lawful currency of Brazil. The exchange rates
at which the predecessor currencies were converted are described herein.
(2) Calculated as the average of the month-end exchange rates during the
relevant period. Source: Central Bank of Brazil.
Brazilian law provides that, whenever there is, or is a serious risk of, a
material imbalance in Brazil's balance of payments, the Brazilian Government
may, for a limited period of time, impose restrictions on the remittance to
foreign investors of the proceeds of their investments in Brazil, as it did for
approximately six months in 1989 and early 1990, as well as on the conversion of
the Brazilian currency into foreign currencies.
The Brazilian Government currently restricts the ability of Brazilian or
foreign persons or entities to convert Brazilian currency into US dollars or
other currencies other than in connection with certain authorized transactions.
The can be no assurance that the Brazilian Government will not in the future
impose more restrictive foreign exchange regulations that would have the effect
of eliminating or restricting the Company's access to foreign currency that
would be required to meet its foreign currency obligations, including payments
under the 12-5/8% Senior Notes due 2004 issued by Tevecap in November 1996. The
likelihood of the imposition of such restrictions by the Brazilian Government
may be affected by, among other factors, the extent of Brazil's foreign currency
reserves, the availability of sufficient foreign currency on the date a payment
is due, the size of Brazil's debt service burden relative to the economy as a
whole, Brazil's policy towards the International Monetary Fund and political
constraints to which Brazil may be subject.
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<PAGE>
ITEM 7. TAXATION
Brazil
The following is a summary of the material Brazilian income tax
consequences to Tevecap in connection with the sale and repayment of Tevecap's
12 5/8% Senior Notes due 2004 (the "Notes") including any interest thereon) and
to beneficial owners of the Notes that are non-residents of Brazil in connection
with the purchase, ownership and disposition of such Notes. This summary is
limited to Tevecap and to non-residents of Brazil which acquire the Notes at the
original issue price, and does not address investors who purchase Notes at a
premium or market discount. In addition, this summary is based on the Brazilian
tax regulations as presently in effect and does not take into account possible
future changes in such tax laws.
Individuals domiciled in Brazil and Brazilian companies are taxed in Brazil
on the basis of their worldwide income (which includes earnings of Brazilian
companies' foreign subsidiaries, branches and affiliates). The earnings of
branches of foreign companies and non- Brazilian residents in general are taxed
in Brazil only when derived from Brazilian sources. Interest, fees, commissions
and any other income (which for the purposes of this paragraph includes any
deemed income on the difference between the issue price of the Notes and the
price at which the Notes are redeemed) payable by a Brazilian obligor to an
individual, company, entity, trust or organization domiciled outside Brazil is
considered derived from Brazilian sources and is therefore subject to income tax
withheld at the source. Brazilian tax laws expressly authorize the paying source
to pay the income or earnings net of taxes and, therefore, to assume the cost of
the applicable tax. The rate of withholding is 15.0% or such other lower rate as
is provided for in an applicable tax treaty between Brazil and such other
country where the recipient of the payment has its domicile. Notwithstanding the
foregoing, the applicable withholding tax rate for negotiable instruments such
as the Notes was reduced to zero, pursuant to Resolutions 1853 of July 31, 1991
and 644 of October 22, 1980 of the Central Bank, subject to Central Bank
Circular 2661 of February 8, 1996, which restricts such withholding tax
reductions to negotiable instruments having a minimum maturity of 96 months. As
a result, since the Notes have an original maturity of 96 months, such reduction
will apply to payments of interest and other income with respect to the Notes.
If, however, any Note is redeemed prior to November 26, 2004, such
reduction will not apply and, therefore, upon such redemption the Brazilian
withholding tax will be imposed on the amount of interest, fees and commissions
paid on such Notes from the date of issue through the date of redemption. Based
on the advice of its Brazilian tax counsel, Tevecap believes and intends to take
the position for tax reporting purposes that, in the event of any such early
redemption to which such withholding tax applies, so long as the paying agent
through which such payment is made is located in Japan and payment to such
paying agent discharges the obligations of Tevecap to make payments in respect
of the Notes, interest and other income with respect to the Notes will be
subject to Brazilian withholding tax at a rate of 12.5% under the tax treaty in
effect between Brazil and Japan. In any event, under the terms of the Notes,
Tevecap would be required to gross up Noteholders for any Brazilian withholding
tax, subject to customary exceptions. Tevecap has the right to redeem the Notes
at par in the event that it is required to gross up for Brazilian withholding
tax imposed at a rate in excess of 15.0%.
Any earnings or capital gains resulting from the sale (whether inside or
outside Brazil) of any Notes by a non-resident of Brazil to another non-resident
of Brazil are not subject to tax in Brazil. Earnings or capital gains resulting
from the sale (whether inside or outside Brazil) of any Notes by a non-resident
of Brazil to a resident of Brazil should not be subject to tax in Brazil,
although the matter is not free from doubt.
On February 8, 1996, the Brazilian Federal Government issued Decree No.
1,815, which imposed a tax on Brazilian issuers with respect to foreign exchange
transactions ("IOF tax") related to the entering into Brazil of proceeds
resulting from foreign loans (including the issue of securities such as the
Notes). The rate of IOF tax paid by the Company with respect to the issuance of
the Notes was zero %. Decree No. 1,815 was revoked by Decree No. 2,219 of May 2,
1997 which currently regulates the IOF tax. The IOF tax rate was reduced to zero
upon the
31
<PAGE>
adoption of Ordinance No. 85 on April 24, 1997. However, under Law No. 8.894
dated June 21, 1994, such tax rate may be increased up to 25%.
On August 15, 1996, the Brazilian Congress approved Constitutional
Amendment No. 12 creating a new temporary tax, the Contribuicao Provisoria sobre
Movimentacao Financeira ("CPMF"). Based on such Amendment, Law No. 9,311 of
October 24, 1996 ("Law 9,311") was enacted, creating the CPMF tax. Under Law No.
9,311, as amended, all financial debit and money transfers through Brazilian
bank accounts effected as from January 23, 1997 until December 31, 1998,
including payments made by the Company with respect to the Notes, will be
subject to the assessment of the CPMF tax at the rate of 0.2%.
There is no stamp, transfer or other similar tax in Brazil with respect to
the transfer, assignment or sale of any debt instrument outside Brazil
(including the Notes).
United States
The following is a summary of the material United States Federal income tax
consequences to a beneficial owner of the Notes that is a citizen or resident of
the United States, a corporation, partnership or other entity created or
organized in or under the laws of the United States or any State thereof, an
estate the income of which is subject to United States Federal income taxation
regardless of its source or a trust for which a court within the United States
is able to exercise primary supervision over its administration and for which
one or more U.S. fiduciaries have the authority to control all substantive
decisions, as well as other persons subject to United States Federal income
taxation on a net income basis in respect of the purchase, ownership and
disposition of a Note ("US Holders"). Such tax treatment may vary depending upon
the particular situation of a US Holder. This summary does not discuss all of
the tax consequences that may be relevant to certain types of investors subject
to special treatment under the United States Federal income tax laws (such as
individual retirement accounts and other tax deferred accounts, banks,
securities broker-dealers, life insurance companies, tax-exempt organizations,
foreign persons, persons whose "functional currency" is other than the US dollar
or persons that hold Notes as part of a "straddle" or "conversion transaction"
or otherwise as part of a "synthetic asset") and is limited to investors which
hold Notes as capital assets. In addition, this summary is limited to US Holders
that acquire the Notes at their issue price and does not address investors that
purchase Notes at a premium or market discount. This summary is based on the
Internal Revenue Code of 1986, as amended (the "Code"), final, temporary and
proposed Treasury regulations thereunder (the "Regulations"), revenue rulings,
court cases, and other legal authorities as now in effect (or proposed) and as
currently interpreted, and does not take into account possible changes in such
tax laws or other legal authorities or such interpretations. No rulings on any
of the issues discussed below will be sought from the United States Internal
Revenue Service (the "IRS").
PROSPECTIVE PURCHASERS OF THE NOTES ARE ADVISED TO CONSULT THEIR TAX
ADVISERS AS TO THE CONSEQUENCES OF A PURCHASE AND SALE OF NOTES, INCLUDING,
WITHOUT LIMITATION, (I) THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR
NON-US TAX LAWS TO WHICH THEY MAY BE SUBJECT, AND OF ANY POSSIBLE LEGISLATIVE OR
ADMINISTRATIVE CHANGES IN LAW, (II) THE UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES OF THE POSSIBLE DEDUCTION BY THE ISSUER OF BRAZILIAN TAXES (AND OF
THE PAYMENT BY THE ISSUER OF ADDITIONAL AMOUNTS WITH RESPECT THERETO) FROM
PAYMENTS ON THE NOTES, (III) THE AVAILABILITY FOR UNITED STATES FEDERAL INCOME
TAX PURPOSES OF A CREDIT OR DEDUCTION FOR ANY BRAZILIAN TAXES SO DEDUCTED AND
(IV) THE CONSEQUENCES OF PURCHASING THE NOTES AT A PRICE OTHER THAN THEIR ISSUE
PRICE.
32
<PAGE>
Interest on the Notes
Interest on the Notes will be taxable to a US Holder as ordinary income at the
time it accrues or is received in accordance with the US Holder's method of
accounting for tax purposes. The amount includible in the income of a US Holder
will be the gross amount of interest, including any Additional Amounts, if any,
payable to holders of Notes (i.e., the amount before deduction of any Brazilian
withholding taxes).
Disposition of a Note
Generally, any sale, redemption or other taxable disposition of a Note by a
US Holder will result in taxable gain or loss equal to the difference between
(1) the sum of the amount of cash and the fair market value of other property
received with respect to such taxable sale, redemption or other distribution
(other than consideration attributable to accrued interest not previously taken
into account, which consideration would be treated as interest received) and (2)
the US Holder's tax basis in the Note. Any gain or loss upon a sale or other
disposition of a Note will be capital gain or loss (which will be long-term if
the Note is held for more than one year).
Effect of Brazilian Withholding Taxes
It is believed that payments with respect to a Note will not be subject to
Brazilian withholding tax unless the Note is redeemed prior to November 26,
2004. See "--Brazil." In the case of any Note which is so redeemed, withholding
taxes in respect of interest previously paid may be imposed by Brazil at the
time of redemption. Any Brazilian tax withheld generally will be treated as a
foreign income tax that US Holders may elect to deduct in computing their
taxable income or, subject to the limitations on foreign tax credits generally,
to credit against their United States Federal income tax liability. No such
deduction or credit will be available to the extent Brazil pays a subsidy to a
US Holder, a related person or Tevecap, the amount of which is determined
(directly or indirectly) by reference to the amount of the withholding tax.
While Brazil does not have a program or policy of paying such subsidies at
present, it has had programs of that nature in the past and could implement such
programs again in the future. For purposes of determining a US Holder's United
States foreign tax credit, the gain or loss on the sale, redemption or other
taxable disposition of a Note will generally constitute United States source
income. Interest (including any Additional Amounts payable by Tevecap) will
generally constitute foreign source passive income or financial services income
for United States foreign tax credit purposes. However, if a Note is redeemed
prior to November 26, 2004, and payments with respect to the Note are subject to
Brazilian withholding tax imposed at a rate of 5.0% or more, the IRS might
retroactively treat interest paid with respect to the Note as high withholding
tax interest. In any event, because the amount of foreign taxes for which the
foreign tax credit may be taken for the taxable year is generally limited to an
amount equal to the US Holder's United States Federal income tax rate multiplied
by its foreign source income for the taxable year, a US Holder may have
insufficient foreign source income to utilize fully any foreign tax credit
attributable to such Brazilian withholding taxes (but such US Holder may be
entitled to utilize the foreign tax credit attributable to such withholding
taxes for the holders' previous two or succeeding five taxable years, or such
withholding taxes may instead be deductible by the US Holder). A US Holder may
be required to provide the IRS with a certified copy of the receipt evidencing
payment of withholding tax imposed in respect of payments on the Notes in order
to claim a foreign tax credit in respect of such withholding tax.
Information Reporting and Backup Withholding
For each calendar year in which the Notes are outstanding, each DTC
participant or indirect participant holding an interest in a Note on behalf of a
US Holder and each paying agent making payments in respect of a Note will
generally be required to provide the IRS with certain information, including
such US Holder's name, address and taxpayer identification number (either such
US Holder's Social Security number or its employer identification number, as the
case may be), and the aggregate amount of interest and principal paid to such US
Holder during the calendar year. These reporting requirements, however, do not
apply with respect to certain US Holders, including
33
<PAGE>
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.
ITEM 8. SELECTED FINANCIAL DATA
The selected financial data as of December 31, 1997 and 1996 and for each
of the three years in the period ended December 31, 1997 have been derived from,
and should be read in conjunction with, the Tevecap Financial Statements
included in this Annual Report. The selected financial data as of December 31,
1995, 1994 and 1993 and for each of the two years in the period ended December
31, 1994 have been derived from the audited financial statements of the Company
that are not included elsewhere in this Annual Report.
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 Tevecap Financial
Statements included in this Annual Report. Because of the differences between
the evolution of the rates of inflation in Brazil and the changes in the rates
of devaluation, amounts presented in US dollars may show distortions when
compared on a period-to-period basis.
34
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(Dollars in Thousands, Except Selected Operating Data)
<S> <C> <C> <C> <C> <C>
Statements of Operating Data:
Gross Revenues
Monthly subscriptions .................................. $ 12,544 $ 27,976 $ 62,496 $ 123,020 $ 221,234
Installation ........................................... 4,350 6,997 26,045 61,717 90,806
Indirect programming (a) ............................... 530 1,626 2,866 11,377 22,810
Other (b) .............................................. 2,468 7,173 10,603 15,724 18,596
Revenue taxes (c) ...................................... (371) (872) (7,506) (13,747) (25,104)
--------- --------- --------- --------- ---------
Total net revenue ............................................ 19,521 42,900 94,504 198,091 328,342
--------- --------- --------- --------- ---------
Direct operating expenses (d) ................................ 29,779 28,659 62,026 112,297 176,958
Selling, general and administrative expenses ................. 19,957 24,370 46,902 81,455 116,254
Depreciation and amortization ................................ 4,813 6,177 13,268 28,216 56,381
Allowance for inventory obsolescence ......................... -- -- -- 2,250 7,438
--------- --------- --------- --------- ---------
Total operating expenses ..................................... 54,549 59,206 122,196 224,218 357,031
--------- --------- --------- --------- ---------
Operating loss ............................................... (35,028) (16,306) (27,692) (26,127) (28,689)
Non operating expenses
Interest expense ....................................... (8,492) (16,413) (17,745) (17,520) (56,553)
Equity in income (losses) of affiliates (e) ............ -- 383 (3,672) (8,532) (6,851)
Other nonoperating income, net (f) ..................... 5,892 20,339 8,039 4,443 10,676
Income tax expense ..................................... -- -- -- (156) --
--------- --------- --------- --------- ---------
Net loss ..................................................... $ (37,628) $ (11,997) $ (41,070) $ (47,892) $ (81,417)
========= ========= ========= ========= =========
Other Data:
EBITDA-TV Group (g) .......................................... $ (30,215) $ (10,129) $ (13,318) $ 8,991 $ 22,675
EBITDA-Galaxy Brasil (g) ..................................... -- -- (1,106) (4,652) 12,455
--------- --------- --------- --------- ---------
EBITDA (g) ................................................... (30,215) (10,129) (14,424) 4,339 35,130
Pro forma interest expense (h) ............................... -- -- 38,623 45,502 84,566
Purchase of fixed assets ..................................... 11,379 22,369 93,029 125,612 247,867
Ratio of earnings to fixed charges (i) ....................... -- -- -- -- --
Cash Flow Data:
Cash provided by (used in) operating activities (j) .......... (19,180) (9,707) 22,989 (17,696) (13,727)
Cash provided by (used in) investing activities .............. (13,190) (24,334) (119,661) (163,900) (277,117)
Cash provided by (used in) financing activities .............. 32,348 38,666 116,229 262,193 187,070
Selected Operating Data:
Number of subscribers to owned systems (k) ................... 82,985 114,853 219,148 349,511 546,383
Average monthly revenue per Subscriber (l) ................... $ 21.30 $ 27.80 $ 33.24 $ 39.15 $ 40.49
Balance Sheet Data (at period end):
Cash and cash equivalents .................................... $ 19 $ 4,644 $ 24,201 $ 104,798 $ 1,024
Property, plant and equipment ................................ 35,859 51,426 131,266 233,593 421,972
Total assets ................................................. 45,529 80,441 216,848 459,122 607,731
Loans from affiliated companies .............................. 89,769 0 586 2,721 95,232
Long-term liabilities ........................................ 97,105 4,523 9,604 265,860 422,976
Redeemable common shares ..................................... -- 19,754 149,534 164,910 189,034
Total shareholders equity .................................... (92,111) 27,590 (18,260) (81,528) (187,069)
</TABLE>
See accompanying Notes to Selected Historical Financial And Other Data
35
<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 investment.
(f) Includes interest income, Gain on issuance of shares by equity investees,
Translation gain or loss, Other nonoperating (expenses) income, net, and
Minority interest. The amount for the year ended December 31, 1994 includes
Interest income totaling $21,806. During that year, the Company received capital
contributions from stockholders which resulted in a surplus of cash invested
during such period.
(g) EBITDA represents the sum of (i) net income (loss), plus, without
duplication (ii) income tax expense, (iii) interest expense (income), net, (iv)
other nonoperating (expenses) income, net (v) depreciation, amortization and all
other non-cash charges, less (vi) non-cash items increasing net income (loss)
with the exception of amortized deferred sign-on and hookup fee revenue, in each
case determined in accordance with GAAP. EBITDA-TV Group and EBITDA-Galaxy
represent operating loss plus depreciation and amortization. The term "TV Group"
refers to the operations of TVA, excluding the operations of Galaxy Brasil. The
TV Group, which constitutes the operations of TVA, excluding the operations of
Galaxy Brasil, represents the more mature operations of the group while Galaxy
Brasil remains in a startup phase and has yet to collect material revenues to
offset the costs of initiating the Ku-Band service. EBITDA has been presented
separately for the TV Group and Galaxy Brasil to take account of the different
stages of development of these operations.
(h) Represents interest expense on a pro forma basis, resulting from the
offering of the 12.625% Senior Notes due 2004 (the "Notes") and the application
of the net proceeds therefrom as follows:
<TABLE>
<CAPTION>
Year ended
December 31
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Historical interest expense 17,745 17,520 56,553
Elimination of interest expense related to certain affiliated indebtedness (11,788) (4,684) (4,653)
Interest resulting from the Notes based on an interest rate of 12.625% 31,563 31,563 31,563
Amortization of deferred financing costs relating to the Notes 1,103 1,103 1,103
------- ------- -------
38,623 45,502 84,566
======= ======= =======
</TABLE>
(i) For the five years ended December 31, 1997, earnings were insufficient to
cover fixed charges by $37,920, $13,100, $38,268, $41,209 and $75,482,
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
36
<PAGE>
subsidiaries and affiliates and one-third of operating rental expenses (such
amount having been deemed by the Company to represent the interest portion of
such payments).
(j) Cash provided by (used in) operating activities (hereinafter referred to as
cash flows from operating activities) has been determined in accordance with
GAAP while EBITDA has been calculated in accordance with the definition in
footnote (g). In accordance with GAAP, cash flows from operating activities
generally reflect the cash effects of transactions and other events that enter
into the determination of net income. The principal difference between EBITDA
and cash flows from operating activities arise as a result of the treatment of
the changes in the balances of operating assets and liabilities from the
beginning to the end of a reporting period. That is, in accordance with GAAP,
such changes are components of cash flows from operating activities while there
is no similar adjustment in the calculation of EBITDA. EBITDA has been presented
as it is a financial measure commonly used in the Company's industry. EBITDA
should not be considered as an alternative to cash provided by (used in)
operating activities, as an indicator of operating performance or as a measure
of liquidity.
(k) Represents the number of Owned Systems' subscribers as of the last day of
each period.
(l) Average monthly revenue per subscriber refers to the average monthly
subscription fee as of the last day of each period.
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements (including the notes thereto) included in this Annual Report. For the
purposes of the following discussion, all dollar amounts, with the exception of
average installation and subscriber fees, are set forth in thousands of US
dollars.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations reflects the historical results of the Company. Due to the
limited operating history, startup nature, translations of Brazilian currency
into US dollars, and rapid growth of the Company, period-to-period comparisons
of financial data are not necessarily indicative, and should not be relied upon
as an indicator of the future performance of the Company.
Overview
Since its inception in 1989, the Company has been in a developmental or
buildout stage. The TV Group, representing the more mature operations of the
Company, has experienced, and continues to experience, rapid growth. In
addition, the Company, through Galaxy Brasil, initiated Ku-Band DIRECTV service
on a limited basis in July 1996. Despite its growth and positive operating cash
flow for the year ended December 31, 1997, the Company continues to sustain
substantial net losses due primarily to insufficient revenue with which to fund
build-out, interest expense and charges for depreciation and amortization. Net
losses incurred by the Company since inception have been funded principally by
(i) net contributions of approximately $388,000 from the Company's shareholders
(consisting of $288,000 as of December 31, 1997 and a $100,000 capital increase
in February 1998), (ii) borrowings from Abril under the Abril Credit Facility
and subordinated shareholder loan to Galaxy Brasil and (iii) bank loans and
other 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.
37
<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>
Year Ended December 31,
-----------------------------------------------------------------
1995 1996 1997
------------------ ------------------- ------------------
% of Net % of Net % of Net
Amount Revenue Amount Revenue Amount Revenue
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Gross revenues
Monthly subscriptions ....... $ 62,496 66.1% $ 123,020 62.1% $ 221,234 67.4%
Installation ................ 26,045 27.6 61,717 31.2 90,806 27.7
Indirect programming ........ 2,866 3.0 11,377 5.7 22,810 6.9
Other ....................... 10,603 11.2 15,724 7.9 18,596 5.7
Revenue taxes ............... (7,506) (7.9) (13,747) (6.9) (25,104) (7.6)
--------- ------ --------- ------ --------- ------
Net revenue ................. 94,504 100.0 198,091 100.0 328,342 100.00
--------- ------ --------- ------ --------- ------
Direct operating expenses ... 62,026 65.6 112,297 56.7 176,958 53.9
Selling, general and
administrative expenses ... 46,902 49.6 81,455 41.1 116,254 35.4
Depreciation and
Amortization .............. 13,268 14.0 28,216 14.2 56,381 17.2
Allowance for inventory
obsolescence .............. -- -- 2,250 1.1 7,438 2.3
--------- ------ --------- ------ --------- ------
Total operating expenses .... 122,196 129.3 224,218 113.2 357,031 108.7
--------- ------ --------- ------ --------- ------
Operating loss .............. (27,692) (29.3) (26,127) (13.2) (28,689) (8.7)
--------- ------ --------- ------ --------- ------
Interest income ............. 3,118 3.3 5,813 2.9 10,764 3.3
Interest expense ............ (17,745) (18.8) (17,520) (8.8) (56,553) (17.2)
Translation (loss) gain ..... (339) (0.4) 473 0.2 (136) 0.0
Equity in (losses) income
of affiliates ............. (3,672) (3.9) (8,532) (4.3) (6,851) (2.1)
Gain on issuance of shares by
equity investees .......... 0 0.0 2,317 1.2 1,160 0.4
Other nonoperating
(expenses) income, net .... 4,389 4.6 (6,009) (3.0) (2,028) (0.6)
Minority interest ........... 871 0.9 1,849 0.9 916 0.3
Income tax expense .......... 0 0.0 (156) (0.1) 0.0
--------- ------ --------- ------ --------- ------
Net loss .................... $(41,070) (43.5)% (47,892) (24.2)% (81,417) (24.8)%
========= ====== ========= ====== ========= ======
</TABLE>
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
The table below sets forth the number of subscribers at December 31, 1996
and December 31, 1997 for the Owned Systems.
December 31, December 31,
Owned Systems Subscribers 1996 1997
------- -------
MMDS(a) ....................................... 230,320 240,913
Cable ......................................... 46,011 94,261
DIRECTV and Digital C-Band .................... 73,180 211,209
------- -------
349,511 546,383
Paid Subscribers Awaiting Installation(b) ..... 31,124 17,963
------- -------
Total Owned Systems ........................... 380,635 564,346
======= =======
- - --------------------
(a) Includes UHF subscribers
(b) Subscribers who have paid an installation fee but are awaiting the
installation of service.
38
<PAGE>
The table below sets forth at December 31, 1997 and December 31, 1996 the
approximate number of television households which received TVA's programming
through the Owned Systems and the Operating Ventures and through sales of
programming to the Independent Operators.
Households Receiving TVA Programming
December 31, December 31,
1996 1997
--------- ---------
Total Owned Systems ...................... 380,635 564,346
Operating Ventures ....................... 85,256 142,148
Independent Operators .................... 564,499 669,543
--------- ---------
Total .................................... 1,030,390 1,376,037
========= =========
Revenues. Revenues consist primarily of Monthly subscriptions revenue
(which principally consists of monthly fees paid by subscribers to the Company
for programming services, including equipment use), Installation revenue,
Indirect programming revenue (which consists of payments made to the Company for
the sale of its programming to the Independent Operators) and Other revenue
(which consists of Advertising revenues and Other revenues). Revenue taxes
consist of a 2.65% tax on Advertising revenue and a 7.65% tax on the balance of
revenues, in each case charged by the Brazilian Government.
Monthly subscriptions revenue for the year ended December 31, 1997 was
$221,234, as compared to $123,020 for the comparable period in 1996, an increase
of $98,214 or 79.8%. This increase was principally attributable to an increase
in the subscriber base and average monthly fees for existing subscribers from
$39.15 to $40.50 and for new subscribers from $43.70 to $45.05 per
subscriber. The average monthly subscription price during the year ended
December 31, 1997, was $43.82 for MMDS service, $42.01 for Cable service, $34.66
for C-Band service and $50.00 for the Ku-band service, as compared to $44.94,
$38.59, $38.02, and $40.20, respectively, for the year ended December 31, 1996.
Installation revenue for the year ended December 31, 1997 was $90,806, as
compared to $61,717 for the same period of 1996, an increase of $29,089 or
47.1%. This increase was the result of a strong sales performance during the
year of 1997, principally for the Company's Ku-band operation, and occurred in
spite of a decrease in average installation fees. The average installation fee
during the year ended December 31, 1997 was $103.58 for MMDS service, $35.89 for
Cable service, $347.03 for C-Band service and $513.12 for Ku-Band service, as
compared $134.48, $36.61, $649.98 and $877.00 respectively, during the year
ended December 31, 1996. The decrease in average installation fees was
attributable primarily to reduced equipment costs and increased competition.
Indirect programming revenue for the year ended December 31, 1997 was
$22,810, as compared to $11,377 for the comparable period of 1996, an increase
of $11,443, or approximately 100%. This increase was principally attributable to
the increase in the number of Independent Operators' subscribers for the period.
The number of Independent Operators' subscribers increased by 104,954 during the
year ended December 31, 1997, as compared to an increase of 222,800 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 Operators' systems and
the number of channels purchased from the Company. The average monthly fee paid
to the Company by an Independent Operator during the year ended December 31,
1997 was $2.60 per subscriber.
Other revenue for the year ended December 31, 1997 was $18,596, as compared
to $15,724 for the comparable period of 1996, an increase of $2,872. This change
included a decrease in Advertising revenue to $4,947 from $7,532, a decrease of
$2,585, and an increase in Other to $13,649 from $8,192, an increase of $5,457.
The decrease in Advertising revenue was attributable to a shift in advertising
on ESPN International programming (the Advertising revenues from which were
reported as Advertising revenues in the Company's consolidated financial
statements), to advertising sales on ESPN Brasil Ltda. programming (the
Advertising revenues from which
39
<PAGE>
were not reported in the Advertising revenues line of the Company's consolidated
financial statements but as part of the Company's Equity in (losses) income of
affiliates). The increase in Other revenues was principally due to increased
commissions for sales of HBO Brasil and ESPN Brasil advertising as well as sales
of TVA magazine to independent programming providers.
Revenue taxes for the year ended December 31, 1997 were $25,104, as
compared to $13,747 for the same period of the prior year, an increase of
$11,357.
For the reasons noted above, Net revenue for the year ended December 31,
1997 was $328,342, as compared to $198,091 for the comparable period in the
previous year, an increase of $130,251.
Direct operating expenses. Direct operating expenses include Payroll and
benefits, Programming, Transponder lease cost, Technical assistance, Vehicle
rentals, TVA magazine and Other costs. These expenses, with the exception of
C-Band Transponder lease costs, are variable expenses which increase as the
number of subscribers increases and the Company's systems grow, and are also
dependent on the type of service subscribers select. Direct operating expenses
for the year ended December 31, 1997 were $176,958, as compared to $112,297 for
the same period in 1996, an increase of $64,661. This increase was primarily
attributable to expenses incurred to service the increase in the number of
subscribers for such period in 1997 compared to the same period in 1996. Payroll
and benefits expense increased to $29,904 from $27,203, an increase of $2,701,
as a result of the hiring of more than 95 new employees and an increase in the
amounts of commissions paid to employees. Programming costs increased to $95,231
from $42,391, an increase of $52,840, as a result of changes implemented in the
programming purchased by the Company. Transponder lease cost increased to
$13,895 from $10,847, an increase of $3,048, as a result of an increase in
subscribers of the Company's Ku-Band operation, which cost is variable, and the
leasing of a fourth transponder in 1997. Technical assistance costs decreased
from $5,507 to $1,863, a decrease of $3,644; Vehicle rentals expense decreased
from $1,862 to $1,075, a decrease of $787; and the expense of publishing TVA
Magazine increased to $7,737 from $6,842, an increase of $895. Other costs
include commissions for third party sales, transportation of equipment and
materials, third party services, maintenance and other miscellaneous expenses.
For the year ended December 31, 1997, Other costs were $27,253, as compared to
$17,645 for the same period the prior year, an increase of $9,608.
Selling, general and administrative expenses. Selling, general and
administrative expenses include Payroll and benefits expense for selling,
administrative, financial and human resources, Advertising and promotion, Rent
expense, Other administrative expenses, and Other general expenses. Selling,
general and administrative expenses for the year ended December 31, 1997 were
$116,254, as compared to $81,455 for the same period of 1996, an increase of
$34,799. 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 $37,525 from $21,355, an increase
of $16,170, as a result of an increase in the number of subscribers and
promotional activity.
Depreciation, Amortization and Provision for equipment and inventory
obsolescence. Depreciation and Amortization includes depreciation of systems,
equipment, installation materials, installation personnel and organizational
costs and amortization of concessions. Provision for equipment and inventory
obsolescence represents charges for lost and obsolete equipment and material.
Depreciation and Amortization for the year ended December 31, 1997 was $56,381,
as compared to $28,216 for the same period of 1996, an increase of $28,165.
Provision for equipment and inventory obsolescence for the year ended December
31, 1997 was $7,438 as compared to $2,250 for the comparable period in 1996, an
increase of $5,188.
For the reasons noted above, Operating loss for the year ended December 31,
1997 was $28,689 compared to $26,127 for the comparable period in 1996, an
increase of $2,562.
40
<PAGE>
Interest income. Interest income for the year ended December 31, 1997 was
$10,764, as compared to $5,813 for the same period in 1996, an increase of
$4,951, principally due to interest received on invested portions of the
proceeds of the Senior Notes due 2004 issued in November 1996 (the "Notes").
Interest expense. Interest expense for the year ended December 31, 1997 was
$56,553, as compared to $17,520 for the same period of 1996, an increase of
$39,033 principally attributable to the interest paid on the Notes.
Equity in losses (income) of affiliates and Gain on issuance of shares by
equity investee. For the year ended December 31, 1997, Equity in losses (income)
of affiliates amounted to a loss of $6,215, as compared to a loss of $6,215 in
the same period of 1996, a decrease in loss of $2,543. The loss was principally
related to the sustained losses at ESPN Brasil. The Gain on issuance of shares
by equity investees amounted to $1,160 for the year ended December 31, 1997 and
was due to a capital gain from HBO Brasil Partners in connection with the
entrance of Buena Vista Investments, Inc. (an affilate of Disney Enterprises
Inc.) as a partner in HBO Ole Partners.
Other non-operating (expenses) income. Other non-operating (expenses)
income for the year ended December 31, 1997 was an expense of $2,028, as
compared to $6,009 in the same period in 1996, a decrease of $3,981. The Other
non-operating expenses for the year ended December 31, 1997 consisted primarily
of charges for provision of certain equipment and material installed in the
homes of subscribers whose service was terminated.
Minority interest. The Minority interest of $916 for the year ended
December 31, 1997 represents Mr. Leonardo Petrelli's 14.0% share in aggregate
losses of TVA Sul.
Net loss. For the reasons noted above, Net loss for the year ended December
31, 1997 was $81,417, as compared to $47,892 for the comparable period in 1996,
an increase of $33,525.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
The table below sets forth the number of subscribers at December 31, 1995
and December 31, 1996 for the Owned Systems.
December 31, December 31,
Owned Systems Subscribers 1995 1996
- - ------------------------- ------- -------
MMDS(a) ...................................... 188,893 230,320
Cable ........................................ 15,129 46,011
DIRECTV and Digital C-Band ................... 15,126 73,180
------- -------
219,148 349,511
Paid Subscribers Awaiting Installation(b) .... 18,343 31,124
------- -------
Total Owned Systems .......................... 237,491 380,635
======= =======
- - --------------------
(a) Includes UHF subscribers.
(b) Subscribers who have paid an installation fee but are awaiting the
installation of service.
The table below sets forth at December 31, 1995 and December 31, 1996 the
approximate number of television households which received TVA's programming
through the Owned Systems and the Operating Ventures and through sales of
programming to the Independent Operators.
41
<PAGE>
Households Receiving TVA Programming
December 31, December 31,
1995 1996
--------- ---------
Total Owned Systems ...................... 237,491 380,635
Operating Ventures ....................... 35,572 85,256
Independent Operators .................... 341,699 564,499
--------- ---------
Total .................................... 614,762 1,030,390
========= =========
Revenues. Monthly subscriptions revenue for the year ended December 31,
1996 was $123,020, as compared to $62,496 for the comparable period in 1995, an
increase of $60,524. This increase was principally attributable to an increase
in subscriber base and an increase in the amount of average monthly fees for
existing subscribers from $30.43 to $39.15 per subscriber and for new
subscribers from $39.48 to $43.70 per subscriber. The average monthly
subscription price during the year ended December 31, 1996, was $44.94 for MMDS
service, $38.59 for Cable service and $38.02 for C-Band service, as compared to
$44.04, $38.12 and $41.37, respectively, for the year ended December 31, 1995.
The average monthly subscription price for Ku-Band service from its introduction
in July 1996 to December 31, 1996, was $40.20. Galaxy Brasil contributed $2,266
to monthly subscription revenue for the year ended December 31, 1996.
Installation revenue for the year ended December 31, 1996 was $61,717, as
compared to $26,045 for the comparable period in 1995, an increase of $35,672.
This increase was principally attributable to the increase in the number of new
subscribers and also to an increase in the average installation fee for C-Band
service from $586.79 to $649.98. The average installation fee during the year
ended December 31, 1996 was $134.48 for MMDS service, $36.61 for Cable service
and $649.98 for C-Band service, as compared to $169.70, $81.87 and $586.79
respectively, for the year ended December 31, 1995. The average installation fee
for Ku-Band service from its introduction in July 1996 to December 31, 1996, was
$877. The net number of subscribers added to the Company's Owned Systems during
the year ended December 31, 1996 was 130,363, as compared to 104,295 added
during the same period of 1995. Galaxy Brasil contributed $15,609 to
Installation revenue for the year ended December 31, 1996. After an initial
rollout in July 1996, Galaxy Brasil began enrolling subscribers.
Indirect programming revenue for the year ended December 31, 1996 was
$11,377, as compared to $2,866 for the comparable period of 1995, an increase of
$8,511. This increase was principally attributable to the increase in the number
of Independent Operators' subscribers for the period. The number of Independent
Operators' subscribers increased by 222,800 during the year ended December 31,
1996, as compared to an increase of 252,026 during the same period of the prior
year. Independent Operators pay a fee to the Company based on the number of
subscribers to such Independent Operators' systems and the number of channels
purchased from the Company. The average monthly fee paid to the Company by an
Independent Operator during the year ended December 31, 1996 was $1.44 per
subscriber.
Other revenue for the year ended December 31, 1996 was $15,724, as compared
to $10,603 for the comparable period of 1995, an increase of $5,121. This change
included a decrease in Advertising revenue to $7,532 from $8,377, a decrease of
$845, and an increase in Other to $8,192 from $2,226, an increase of $5,966. The
decrease in Advertising revenue was attributable to a shift in advertising sales
from advertising on ESPN International programming (the Advertising revenues
from which were reported as Advertising revenues in the Company's consolidated
financial statements), to advertising sales on ESPN Brasil Ltda. programming
(the Advertising revenues from which were not reported in the Advertising
revenues line of the Company's consolidated financial statements but as part of
the Company's Equity in (losses) income of affiliates). The increase in Other
revenues was principally due to the increase in sales of TVA magazine, technical
assistance, commissions for sales of HBO Brasil and ESPN Brasil advertising as
well as sales of ESPN Brasil programming to independent programming providers.
42
<PAGE>
Revenue taxes for the year ended December 31, 1996 were $13,747, as
compared to $7,506 for the same period of the prior year, an increase of $6,241.
Galaxy Brasil contributed $1,488 to revenue taxes for the year ended December
31, 1996. Galaxy Brasil began enrolling subscribers and collecting revenue in
July 1996.
For the reasons noted above, Net revenue for the year ended December 31,
1996 was $198,091, as compared to $94,504 for the comparable period in the
previous year, an increase of $103,587. Galaxy Brasil contributed $16,530 to Net
revenue for the year ended December 31, 1996.
Direct operating expenses. Direct operating expenses for the year ended
December 31, 1996 were $112,297, as compared to $62,026 for the same period in
1995, an increase of $50,271. This increase was primarily attributable to
expenses incurred to service the increase in the number of subscribers for such
period in 1996 compared to the same period in 1995. Payroll and benefits expense
increased to $27,203 from $12,520 an increase of $14,683, as a result of the
hiring of more than 217 new employees and an increase in the amounts of
commissions paid to employees. Programming costs increased to $42,391 from
$21,609, an increase of $20,782, as a result of changes implemented in the
programming purchased by the Company. Transponder lease cost increased to
$10,847 from $7,568, an increase of $3,279, as a result of leasing a third
transponder in 1996. Technical assistance costs increased to $5,507 from $5,152,
an increase of $355; Vehicle rentals expense increased to $1,862 from $1,732, an
increase of $130; and the expense of publishing TVA Magazine increased to $6,842
from $3,318, an increase of $3,524. This increase was principally due to the
increase in the number of subscribers. Other costs include commissions for third
party sales, transportation of equipment and materials, third party services,
maintenance and other miscellaneous expenses. For the year ended December 31,
1996, Other costs were $17,645, as compared to $10,127 for the same period the
prior year, an increase of $7,518. Galaxy Brasil contributed $5,854 to Direct
operating expenses, as compared to $1,027 for the comparable period in 1995, an
increase of $4,827 as Galaxy Brasil incurred Payroll and benefits, Vehicle
rentals and other costs consistent with starting this operation.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the year ended December 31, 1996 were $81,455, as
compared to $46,902 for the same period of 1995, an increase of $34,553. The
Company has experienced increasing Selling, general and administrative expenses
as a result of its increased pay television activities and the associated
administrative costs, including costs related to opening and maintaining
additional facilities and an overall increase of $5,804 in Payroll and benefits
expense, which, for the year ended December 31, 1996 were $27,431, as compared
to $21,627 for the same period of 1995, resulting from an increase in the number
of employees and sales commissions. Advertising and promotion expense increased
to $21,355 from $11,122, an increase of $10,233, as a result of an increase in
the number of subscribers and promotional activity. Galaxy Brasil contributed
$15,328 to Selling, general and administrative expenses for the year ended
December 31, 1996, as compared to $79 for the comparable period in 1995, an
increase of $15,249. Such 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 for the year ended December 31, 1996 was $28,216,
as compared to $13,268 for the same period of 1995, an increase of $14,948. This
increase was principally due to the depreciation of additional reception
equipment acquired during 1996, including equipment used in the expansion of the
Company's cable systems and decoders used for DIRECTV and C-Band service.
Allowance for inventory obsolescence for the year ended December 31, 1996 was
$2,250 as compared to $0 for the comparable period in 1995, an increase of
$2,250. This increase was principally due to advances in MMDS reception
equipment technology which resulted in the obsolescence of MMDS reception
equipment previously installed by the Company. Galaxy Brasil contributed $2,858
to Depreciation, Amortization and Allowance for inventory obsolescence for the
year ended December 31, 1996, as compared to $127 for the comparable period in
1995, an increase of $2,731. Such increase was due to depreciation expenses
associated with the Tambore Facility.
For the reasons noted above, Operating loss for the year ended December 31,
1996 was $26,127, as compared to $27,692 for the comparable period in 1995, a
decrease of $1,565. Galaxy Brasil contributed $7,510
43
<PAGE>
of this loss for the year ended December 31, 1996, as compared to $1,233 for the
comparable period in 1995, an increase of $6,277.
Interest income. Interest income for the year ended December 31, 1996 was
$5,813, as compared to $3,118 for the same period in 1995, an increase of
$2,695. This increase was principally due to interest received by the Company in
connection with temporarily invested portions of the proceeds of the Notes and
capital contributions in December 1995.
Interest expense. Interest expense for the year ended December 31, 1996 was
$17,520, as compared to $17,745 for the same period of 1995, a decrease of $225.
In November 1996 the Company issued the Notes and used some of the proceeds to
repay certain outstanding indebtedness bearing interest rates greater than that
applicable to the Notes.
Equity in losses (income) of affiliates and Gain on issuance of shares by
equity investee. For the year ended December 31, 1996, Equity in losses (income)
of affiliates amounted to a loss of $8,532, as compared to a loss of $3,672 in
the same period of 1995, an increase in loss of $4,860. The primary reason for
this increase in loss was sustained losses at ESPN Brasil, which was formed on
June 15, 1995. The Gain on issuance of shares by equity investees amounted to
$2,317 for the year ended December 31, 1996 and was due to a capital gain from
TV Filme's equity offering in 1996.
Other non-operating (expenses) income. Other non-operating (expenses)
income for the year ended December 31, 1996 was an expense of $6,009, as
compared to income of $4,389 in the same period in 1995, an increase in expense
of $10,398. This increase was primarily due to costs incurred in 1996 in
connection with the negotiations resulting in the investment in the Company by
certain shareholders in December 1995, a loss of unrecovered decoders installed
in the homes of subscribers whose service was terminated, and the organization
of TVA Sul as a holding company. The Other non-operating expenses for the year
ended December 31, 1996 consisted primarily of fees paid in connection with the
investment of Falcon International and Hearst/ABC Parties in the Company. The
Other non-operating income for the comparable period of 1995 consisted primarily
of income from the sale of movie inventory and other assets.
Minority interest. The Minority interest of $1,849 for the year ended
December 31, 1996 represents Mr. Leonardo Petrelli's 13.0% share of the
aggregate losses of TVA Sul.
Net loss. For the reasons noted above, Net loss for the year ended December
31, 1996 was $47,892, as compared to $41,070 for the comparable period in 1995,
an increase of $6,822.
44
<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.
December 31, December 31,
Owned System Subscribers 1994 1995
------- -------
MMDS(a) ........................................ 111,771 188,893
Cable .......................................... 1,007 15,129
Digital C-Band ................................. 2,075 15,126
------- -------
114,853 219,148
Paid Subscribers Awaiting Installation(b) ...... 13,956 18,343
------- -------
Total Owned Systems ............................ 128,809 237,491
======= =======
- - --------------------
(a) Includes UHF subscribers.
(b) Subscribers who have paid an installation fee but are awaiting the
installation of service.
The table below sets forth at December 31, 1995 and December 31, 1994 the
approximate number of television households which received TVA's programming
through the Owned Systems and the Operating Ventures and through sales of
programming to the Independent Operators.
Households Receiving TVA Programming
December 31, December 31,
1994 1995
------- -------
Total Owned Systems ........................ 128,809 237,491
Operating Ventures ......................... 7,640 35,572
------- -------
Independent Operators ...................... 89,673 341,699
Total .................... 226,122 614,762
======= =======
Revenues. Monthly subscriptions revenue for the year ended December 31,
1995 was $62,496, as compared to $27,976 for the comparable period in 1994, an
increase of $34,520. This increase was attributable to the net addition of
104,295 subscribers to the Company's Owned Systems, and the increase in the
average monthly fee for existing subscribers to $33.24 from $27.80, an increase
of $5.44, and for new subscribers to $39.48 from $31.87, an increase of $7.61.
The average monthly subscription price during the year ended December 31, 1995
was $44.04 for MMDS service and $38.12 for Cable service, as compared to $42.48
and $26.26, respectively, for the year ended December 31, 1994. The average
monthly subscription price for C-Band service for the year ended December 31,
1995 was $41.37. In 1994, the Company's C-Band service was in its initial phase
of operations. In addition, Galaxy Brasil's Ku-Band service was under
development in 1995. The Company was able to increase the monthly fee as the
market price for pay television increased. The increase in the number of
subscribers was due to (i) the continued expansion and penetration of the
Company's MMDS service, including the introduction of signal repeaters in Sao
Paulo and Rio de Janeiro, (ii) the full year benefit of Cable system
construction in Sao Paulo and (iii) the net addition of 13,051 C-Band
subscribers through an aggressive national marketing campaign timed to coincide
with the Company's main competitor focusing on its Cable systems. During each
year, all revenues came from the operation of the TV Group as the operations of
Galaxy Brasil were in development.
Installation revenue for the year ended December 31, 1995 was $26,045, as
compared to $6,997 for the comparable period in 1994, an increase of $19,048.
This increase was principally attributable to the increase in the number of
installations and to the increase in the average fees for installations. The
average fee for MMDS service installation increased to $169.70 from $119.75, an
increase of $49.95, and the average fee for Cable service
45
<PAGE>
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.
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
46
<PAGE>
increased pay television activities and associated administrative costs,
including costs related to opening and maintaining additional facilities and an
overall increase in payroll expenses resulting from an increase in the number of
employees. Advertising and promotion expense increased to $11,122 from $3,540,
an increase of $7,582 largely due to the Company's increased promotional
activity, including nationwide C-Band promotion. Galaxy Brasil contributed $79
to Selling, general and administrative expenses for the year ended December 31,
1995, all of which constituted Advertising and rent expenses, as compared to $0
for the same period of 1994.
Depreciation and Amortization. Depreciation and Amortization expense for
the year ended December 31, 1995 was $13,268, as compared to $6,177 for the same
period of 1994, an increase of $7,091. The increase was due primarily to
increased capitalization of the costs associated with building the MMDS, Cable
and C-Band systems and with the installation of new subscribers. Galaxy Brasil
contributed $127 to Depreciation and Amortization expense (all of which
constituted Depreciation expense) for the year ended December 31, 1995, as
compared to $0 for the comparable period in 1994.
For the reasons noted above, Operating loss for the year ended December 31,
1995 was $27,692, as compared to $16,306 for the comparable period in 1994, an
increase in loss of $9,303. Galaxy Brasil contributed $11,386 to this loss for
the year ended December 31, 1995, as compared to $0 for the comparable period in
1994.
Interest income. For the year ended December 31, 1995, Interest income
totaled $3,118, as compared to $21,806 in the similar period in 1994, a decrease
of $18,688. This reduction in Interest income was a result of the shorter period
in which a capital contribution of $125,000 in 1995 earned interest relative to
the length of time a capital contribution of $151,452 earned interest in 1994,
as well as due to the sharp appreciation of the Brazilian real versus the US
dollar upon introduction of the real in late 1994.
Interest expense. Interest expense for the year ended December 31, 1995 was
$17,745, as compared to $16,413 for the year ended December 31, 1994, an
increase of $1,332.
Equity in losses (income) of affiliates. For the year ended December 31,
1995, Equity in losses (income) of affiliates was a loss of $3,672, as compared
to income of $383 for the same period in 1994, a decrease of $4,055. The
principal reasons for this reduction were the loss sustained by ESPN Brasil
Ltda. which came into existence during June 1995, and HBO Brasil Partners, which
came into existence in 1994.
Other non-operating (expenses) income. For the year ended December 31,
1995, Other non-operating (expenses) income was income of $4,389, as compared to
an expense of $1,273 for the same period of 1994, an increase of $5,662. The
primary reasons for this increase were equipment rental income, sales of assets
and a release of certain obligations, among others.
Minority interest. The Minority interest of $871 for the twelve months
ended December 31, 1995 represents Mr. Leonardo Petrelli's 20.0% share of the
$4,355 in aggregate losses of TVA Curitiba.
Net loss. For the reasons noted above, Net loss for the year ended December
31, 1995 was $41,070, as compared to $11,997 for the comparable period in 1994,
an increase of $29,073.
47
<PAGE>
Seasonality
The Company's revenues are seasonal. Generally, during the Brazilian summer
months of January and February the Company experiences lower demand for
installation for each of its services. As a result, the Company experiences a
decrease in Installation revenue of approximately 25% in these months, which
decrease is offset by corresponding decreases in Payroll and benefits expense
(i.e. sales commissions), Advertising and promotion expense and Other costs.
Liquidity and Capital Resources
Since inception, the Company has sustained losses primarily due to
insufficient revenue to fund start-up costs, interest expense and charges for
depreciation and amortization arising from the development of its pay television
systems. As of December 31, 1997, the Company had incurred cumulative net losses
of over $285,284. During the periods under review, the Company required external
funds to finance its capital expenditures, operating activities and make
payments of principal and interest on its indebtedness. The sources of such
funds have been as follows: (i) cash and cash equivalents of $104,798 at
December 31, 1996, (ii) borrowings from Abril under the Abril Credit Facility,
of which $54,323 was outstanding as of December 31, 1997 (which amount was
subsequently repaid in connection with a capital increase in February 1998) and
a subordinated shareholder loan of $43,963 to Galaxy Brasil, of which $40,909
remained outstanding as of December 31,1997, (iii) borrowings under lines of
credit, of which $50,317 was outstanding as of December 31, 1997, (iv) net
capital contributions of approximately $388,000 from shareholders (consisting of
$288,000 as of December 31, 1997 and a $100,000 capital increase in February
1998), (v) the EximBank Facility, of which $23,277 was outstanding as of
December 31, 1997, (vi) the Galaxy Brasil Leasing Facility, of which $43,463 was
outstanding as of December 31, 1997 and (vii) the Notes, of which $250,000 was
outstanding as of December 31, 1997.
The Company's liquidity needs will arise primarily from capital
expenditures, debt service requirements and, in certain periods, the funding of
its working capital requirements. As of December 31, 1997, the Company had
approximately $465,009 of indebtedness outstanding, primarily consisting of
$250,000 principal amount of the Notes and loans from shareholders.
In addition to debt service, the Company will require 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
48
<PAGE>
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.
The Company made purchases of fixed assets of $22,639, $93,029, $125,612
and $247,867, in 1994, 1995, 1996 and 1997 respectively. Management estimates
that $150,930 and $113,762 of capital expenditures will be required in 1998 and
1999, respectively, principally in connection with the purchase of materials and
equipment.
The Company also has certain commitments that must be funded, including
investments of approximately $35,786 prior to December 31, 1998 in GLA
($15,014), Surfin ($10,000), ESPN Brasil Ltda., ($8,718) and HBO Brasil
Partners, ($2,054). 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.
The Company's principal sources of liquidity are borrowings from Abril, the
EximBank Facility, the Galaxy Brasil Leasing Facility, the Notes and the
Company's short-term line of credit (each as described below), together with net
cash provided by operating activities. However, until sufficient cash flow is
generated from operations, the Company will be required to utilize its current
sources of debt funding to satisfy its liquidity needs. The Company had
approximately $1,024 of cash and cash equivalents as of December 31, 1997.
For the year ended December 31, 1997, net cash used in operating activities
was $13,727, primarily as the result of a net loss for the year of $81,417, an
increase in accounts receivable of $22,475, an increase in pre-paid and other
assets of $11,199 and an increase in inventories of $11,365. The increase was
partially offset by $54,624 of depreciation, a non-cash item and a decrease in
accounts payable to suppliers of $32,989. For the year ended December 31, 1997,
cash used in investing activities was $277,117, primarily as the result of
capital expenditures of $247,867 for the purchase of fixed assets and
investments in equity and cost investments and concessions of $24,877. The
purchases of fixed assets were principally related to the purchase of decoders,
equipment, hardware and materials and labor used for new subscriber
installations. For the year ended December 31, 1997, net cash provided by
financing activities was $187,070, consisting principally of borrowings from the
Abril Credit Facility, the EximBank Facility, the Galaxy Brasil Leasing Facility
and the April subordinated shareholder loan to Galaxy Brasil.
The Abril Credit Facility allows the Company to borrow up to $60,000 on a
revolving basis until December 1998. Since June 1996, the Company has from time
to time requested, and Abril has provided, funds in excess of $60,000. The loans
are generally denominated in reais and bear interest at a rate equal to a
percentage of the CDI rate, the Brazilian interbank lending rate, adjusted at
the beginning of each month. The Company currently has no amounts outstanding
under the Abril Credit Facility. However, the Company will be able to re-borrow
the full amount of such facility, as required. In addition , in 1997 Abril made
a subordinated shareholder loan of $43,963 to Galaxy Brasil, of which $40,909
was outstanding as of December 31,1997.
On December 9, 1996, TVA Sistema, as Borrower, and Tevecap, as Guarantor,
entered into a credit agreement with The Chase Manhattan Bank for the financing
of C-Band decoders and other related equipment (the "EximBank Facility"). The
Export-Import Bank of the United States of America ("EximBank") also guaranteed
85.0% of the amount of the loan. The loan was made on terms customary for
credits supported by EximBank to Brazilian borrowers with an interest rate of
LIBOR plus a specified margin. The principal amount of the loan was $29,350,
which was dispersed in two tranches, the first in April 1997 in the principal
amount of $11,400 with a term of five years and the second in August 1997 in the
principal amount of $17,950 with a term of 4.5 years. As of December 31, 1997,
the principal amount outstanding under the EximBank Facility was $23,277.
49
<PAGE>
Galaxy Brasil entered into the Galaxy Brasil Leasing Facility, a five-year
$49,900 sale leaseback facility, during the first quarter of 1997. Under the
Galaxy Brasil Leasing Facility, Galaxy Brasil has access to financing for the
purpose of acquiring dish antennae, decoder boxes and other equipment for its
Ku-Band service. This facility will be available until 2002 and bear interest at
a fixed rate of 12.5% per year. During 1997 Galaxy Brasil drew down the entire
amount available under the Galaxy Brasil Leasing Facility, and had $43,463
outstanding as of December 31, 1997. Galaxy Brasil's payment obligations under
the Galaxy Brasil Leasing Facility are guaranteed by Tevecap.
On November 26, 1996, Tevecap raised funds in foreign markets through a
private placement amounting to $250,000 12 5/8% Senior Notes (the "Notes").
These Notes mature on November 26, 2004 and are guaranteed by certain of
Tevecap's subsidiaries. The Indenture relating to the Notes contains certain
restrictive covenants which relate to, among others, the ability of Tevecap and
the Guarantors to incur additional indebtedness, declare dividends, effect asset
dispositions, enter into new liens, sell capital stock, enter into mergers
and/or consolidations, invest in non-guarantor subsidiaries that are not
Guarantors and transfer existing businesses. As of December 31, 1997, the
Company was in compliance with all restrictive covenants contained in the
Indenture.
The Company has also from time to time received contributions and loans
from its shareholders to fund liquidity needs and may continue to receive such
contributions and loans in the future. In addition, as is standard business
practice in Brazil, the Company frequently finances a portion of its working
capital through the deferment of payment terms for the purchase price of
property (typically up to 360 days). These amounts have often subsequently been
refinanced by the Company with short-term bank indebtedness. The Company
currently has lines of credit with terms of 360 days which will continue to be
available after the Offering.
The Company believes, based on management's internal forecasts and
assumptions relating to its operations, that the aggregate net proceeds from the
sale of the Notes, together with the proceeds from the deferral of payments to
suppliers of fixed assets, the EximBank Facility, the Galaxy Brasil Leasing
Facility, the Abril Credit Facility, the Abril subordinated shareholder loan to
Galaxy Brasil, the $100,000 capital increase in February 1998, additional
leasings and financings 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, 1998. In the long term, the Company believes,
based on management's internal forecasts and assumptions relating to its
operations, that its existing cash and funds generated from operations, together
with its existing financing facilities agreements, will be sufficient to meet
its working capital and capital expenditure requirements. In the event that the
Company's plans change, its assumptions change or prove inaccurate, or if the
proceeds from the sale of the Notes, the EximBank Facility, the Galaxy Brasil
Leasing Facility, the Abril Credit Facility and projected cash flows otherwise
prove insufficient to fund operations (due to unanticipated expenses, technical
problems, difficulties or otherwise), the Company could be required to seek
additional sources of financing. The Company has no current arrangements with
respect to sources of additional financing and there can be no assurance that
the Company would be able to obtain additional financing on terms acceptable to
the Company, or at all.
In addition, the Company's liquidity may also be adversely affected by
statutory minimum dividend requirements under applicable Brazilian law.
Accounting for Income Taxes
The Company has approximately $194,850 of net operating losses ("NOLs") to
offset against regular taxes. These NOLs are unexpirable. Statement of Financial
Accounting Standards No. 109 (Accounting for Income Taxes) ("SFAS 109") requires
that the Company determine whether it is "more-likely-than-not" that the Company
will realize the benefits associated with such losses and provides that in
making such a determination, all negative and positive evidence should be
considered (with more weight given to evidence that is "objective and
verifiable"). SFAS No. 109 indicates that "forming a conclusion that a valuation
allowance is not needed is difficult when there is negative evidence such as
cumulative losses in recent years". The Company has a limited operating history
and has generated losses since its inception. In view of this, the Company has
established a full valuation allowance for the amount of NOL carryforwards in
excess of net taxable temporary differences. This determination was based
primarily on historical losses. Management does, however, believe that the
Company will be profitable in the future and, as such, will be able to utilize
these NOLs.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Management does not believe
that SFAS No. 130 will have a material effect on the Company's consolidated
financial statements, and it has not determined whether the new reporting
provisions under SFAS No. 131 will require supplemental disclosures by the
Company. See Note 23 to the Tevecap Financial Statements.
Year 2000 Date Conversion
The Company has evaluated the implementation of changes to computer systems
and applications necessary to achieve a year 2000 date conversion with no effect
on customers or disruption to business operations. These actions are necessary
to ensure that the systems and applications will recognize and process the year
2000 and beyond. The Company expects that the implementation of such changes
will be completed during the first quarter of 1999, and will cost approximately
$3,000.
50
<PAGE>
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The Company is managed by its Conselho de Administracao ("Board of
Directors"), Conselho Consultivo ("Advisory Board") and Diretoria ("Committee of
Officers"). Members of the Board of Directors and Committee of Officers are
elected for a two-year period, currently expiring on April 30, 2000. Day-to-day
operations of the Company are managed by the Company's Executivos ("Executive
Officers").
<TABLE>
<CAPTION>
Board of Directors
Member Position Current Position Held Since
- - ------ ---------- ---------------------------
<S> <C> <C>
Robert Civita............................. President 1994
Jose Augusto P. Moreira................... Member 1994
Robert Hefley Blocker..................... Member 1995
Roger Philip Hipskind..................... Member 1998
Thomaz Souto Correa Neto.................. Member 1995
Francisco Savio Couto Pinheiro............ Member 1995
Arnaldo Bonoldi Dutra..................... Member 1996
Sergio Vladimirschi Junior................ Member 1995
Jose Luis de Salles Freire................ Member 1995
Jorge Fernando Koury Lopes................ Member 1995
Oswaldo Leite de Moraes Filho............. Member 1995
<CAPTION>
Advisory Board
Member Position Current Position Held Since
- - ------ ---------- ---------------------------
<S> <C> <C>
Robert Civita............................. President 1995
Jose Augusto P. Moreira................... Member 1995
Robert Hefley Blocker..................... Member 1995
Roger Philip Hipskind..................... Member 1998
Thomaz Souto Correa Neto.................. Member 1998
Francisco Savio Couto Pinheiro............ Member 1995
Stephen Vaccaro........................... Member 1996
Marc Nathanson............................ Member 1995
Tully M. Friedman......................... Member 1995
Raymond E. Joslin......................... Member 1996
Herbert A. Granath........................ Member 1996
<CAPTION>
Committee of Officers
Member Position Current Position Held Since
- - ------ ---------- ---------------------------
<S> <C> <C>
Jose Augusto Pinto Moreira................ Member 1992
Angelo Silvio Rossi....................... Member 1996
Claudio Cesar D`Emilio.................... Member 1992
Sergio Vladimirschi Junior................ Member 1996
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Executive Officers
Member Position Current Position Held Since
- - ------ ---------- ---------------------------
<S> <C> <C>
Raul Rosenthal............................ Chief Executive Officer 1997
Douglas Duran............................. Chief Financial Officer 1992
Jeremiah Patrick Ryan..................... Planning and Control Officer 1997
Alexandre Annemberg....................... Development Officer 1997
Marcus Vinicius Althoff Rizzo............. Curitiba Operations Officer 1997
Luiz Eduardo B.P. Rocha................... Sao Paulo Operations Officer 1997
Luiz Gleiser.............................. Programming Officer 1997
Roberto Rio Branco Nabuco de Gouvea....... Rio de Janeiro Operations 1997
Officer
Virgilio Jose Carreira Amaral............. Engineering Officer 1995
Jose Carlos Romero Alves.................. Management Information 1997
System Officer
Leila Abraham Loria....................... Galaxy Brasil Officer 1997
Walter Barbosa de Sousa Jr................ Digisat Officer 1997
Roseli Parrella........................... Human Resources Officer 1997
</TABLE>
Marc Nathanson is the uncle of Sergio Vladimirschi Junior.
ITEM 11. COMPENSATION FOR DIRECTORS AND OFFICERS
For the year ended December 31, 1997, the aggregate compensation, including
bonuses, of all Directors, Officers and Executive Officers of the Company was
$5,067,511 million. 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, 1997, the aggregate amount set aside by the
Company to provide pension, retirement or similar benefits to Directors,
Officers and Executive Officers was $103,381.
ITEM 12. OPTIONS TO PURCHASE SECURITIES
Not applicable.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Overview
Tevecap has engaged in a significant number and variety of related party
transactions, including, without limitation, the transactions described below.
Tevecap has not performed any studies or analyses to determine whether the terms
of past transactions with related parties have been equivalent to arm's-length
transactions and cannot state with any certainty the extent to which such
transactions are comparable to those which might have been obtained from a
non-affiliated third party.
Transactions Among Shareholders
On December 6, 1995, Tevecap's shareholders executed a Stock Purchase
Agreement and a Stockholders Agreement relating to the investment of ABC and
Hearst in the Company through Hearst/ABC Parties. See "Item
52
<PAGE>
4: Control of Registrant." On that date, the Tevecap shareholders also executed
a series of inter-shareholder agreements relating to, among other things, the
provision of services and programming among the Company and the shareholders.
These agreements supplemented other existing agreements among Shareholders. The
following contracts are the principal agreements among the Company and the
Tevecap shareholders (each of which, unless specified otherwise, is dated as of
December 6, 1995).
General and Advisory Services
Under an Advisory Services Agreement, each of Hearst, ABC and HABC II has
agreed, upon a request from the Company, to use its reasonable efforts to
arrange for the investors to furnish personnel to provide advisory services to
the Company. To date, the Company and Hearst, ABC and HABC II have not entered
into a supplemental agreement to provide specific personnel or services at a
particular cost.
In addition, on April 1, 1996, Tevecap entered into a separate Advisory
Services Agreement with Falcon International Communications, L.L.C. Pursuant to
this agreement, which has a renewable two-year term, Falcon International
Communications, L.L.C. has agreed to provide a range of advisory services to the
Company, encompassing such areas as accounting, budget and billing procedures,
financial and operation statements, customer, employee and government relations,
the design, purchase and maintenance of equipment and supplies, negotiations
with programmers and other such matters as the Company may reasonably request.
In exchange for such services, the Company has agreed to pay Falcon
International Communications, L.L.C. an annual fee of $200,000, which amount may
be revised on each anniversary of the agreement.
Programming
In connection with the investment by Hearst and ABC in Tevecap, Tevecap and
these two parties entered into a Programming Agreement (the "Hearst/ABC
Programming Agreement"). Pursuant to the Hearst/ABC Programming Agreement, each
of Hearst and ABC has agreed to offer first to Tevecap pay programming that
Hearst or ABC (or any subsidiary of which either Hearst or ABC owns at least
80.0% of the outstanding equity interests) intends to license for use in Brazil
in the pay television markets served by TVA. The parties also agreed to consider
future co-production activities which could enhance TVA's business and
competitive position. Tevecap agreed to pay to each of Hearst and ABC such fees
and expenses as are agreed upon at the time such programming or co-production
services are provided. The Hearst/ABC Programming Agreement does not apply to
The Walt Disney Company or its subsidiaries other than ABC and ABC's
subsidiaries. In addition, the Hearst/ABC Programming 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 Parties agreed, with certain exceptions, to
exchange all of its respective shares in Tevecap for a corresponding number of
shares of a newly-formed Brazilian corporation. The new corporation would become
an 80.0% shareholder in Tevecap and Hearst/ABC would remain a 20.0% shareholder
in Tevecap, which would be reorganized as a Brazilian limitada. This new
structure would not result in any change in the current beneficial equity
participation of the Stockholders in Tevecap. In addition, the transactions in
establishing the new structure and the new structure itself would have to
conform to the terms of the Indenture. As of the date hereof, the timing of the
restructuring is under discussion by the Stockholders.
53
<PAGE>
Transactions Among Related Parties
General and Advisory Services
TVA Sistema and MTV Brasil have entered into various agreements, dated
August 27, 1996, governing reciprocal services between the Company and MTV
Brasil. The services covered by the agreement include billing, subleasing,
equipment use, administrative, financial, accounting, human resources,
engineering, infrastructure and satellite services. TVA Sistema and Abril have
also entered into an agreement, dated January 1995, with Uniser, a division of
Abril, pursuant to which Uniser provides telecommunications, maintenance, human
resources, travel, legal other services in exchange for a monthly payment of
approximately $57,000.
Tevecap provides financial and administrative services to Galaxy Brasil, in
return for which the Company receives a monthly payment of $46,000 pursuant to
an agreement dated March 9, 1995. Tevecap also provides to ESPN Brasil Ltda.
satellite and other engineering services, for which it receives a payment of
approximately $78,000 per month, pursuant to an agreement dated June 26, 1995.
The Company has also entered into an agreement with HBO Brasil Ltda., dated
September 1, 1995, to provide space, equipment and engineering services to HBO
Brasil Ltda., in return for which the Company receives a monthly payment of
approximately US$140,000.
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 350,000 copies of the Company's monthly
magazine in return for a monthly payment of approximately $353,000. The monthly
magazine is distributed in accordance with a distribution agreement, dated
September 1992, between the Company and Irmaos Reis, pursuant to which the
Company pays Irmaos Reis approximately $72,000 per month.
TVA Sistema and Abril also have a reciprocal advertising agreement in which
the Company publishes advertisements for Abril in the Company's monthly magazine
in exchange for advertisements for the Company (and third parties through the
Company) in the magazines published by Abril.
In addition, the Company has an agreement with HBO Brasil Ltda., dated
September 1, 1995, pursuant to which the Company assists HBO Brasil Ltda. in
selling advertising, in return for which the Company receives 25.0% of HBO
Brasil Ltda.'s advertising revenues.
Insurance
TVA currently reimburses TVA Sistema for payments made by TVA Sistema
pursuant to an insurance policy covering the operations of TVA Sistema, TVA
Brasil Abril Video da Amazonia and the former MTV Division of Abril
(collectively, the "Insureds"). TVA Sistema makes such payments pursuant to an
agreement among the Insureds dated September 30, 1997. The annual premiums paid
by TVA Sistema and reimbursed by the Company amount to approximately $86,000.
54
<PAGE>
Abril Loans
Tevecap has entered, as the borrower, into a revolving credit facility (the
"Abril Credit Facility") with Abril, as the lender. The Abril Credit Facility,
effective December 6, 1995 and valid for a period of 36 months, allows the
Company to draw down amounts not to exceed a maximum aggregate principal amount
of $60,000,000. Since June 1996, Tevecap has from time to time requested, and
Abril has provided, funding in excess of the aggregate maximum principal amount.
The loans provided under the Abril Credit Facility are denominated in reais,
unless the loan is a pass-through loan that Abril has funded in 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 December
31, 1997, the aggregate principal amount outstanding under the Abril Credit
Facility was $54.3 million, although such amount was fully repaid in connection
with a capital contribution by Abril to Tevecap in February 1998. In addition,
in 1997 Abril made a $43.5 million subordinated shareholder loan to Galaxy
Brasil, of which $40.9 million was outstanding as of December 31, 1997. See Note
9 to the Financial Statements included in this Annual Report.
Other Intercompany/Shareholder Loans
Tevecap has used the proceeds from the Abril Credit Facility to make
capital contributions to TVA Sistema and Galaxy Brasil, as well as to extend
loans to various interrelated companies. The aggregate outstanding amounts under
these loans as of December 31, 1997 were: $23.9 million to TVA Brasil; $1.7
million to Galaxy Brasil; $12.3 million to HBO Brasil Ltda.; $16.6 million to
TVA Sul; $5.5 million to Canbras TVA; $256,000 to Comercial Cabo Sao Paulo; and
$214,000 to other affiliates.
In addition, TVA Sistema has made loans to various interrelated companies.
The aggregate principal outstanding amounts under these loans as of December 31,
1997 were $3.5 million to TVA Sul and $159,000 to TV Show Time. TV Show Time has
loans outstanding to Abril, which loans, as of December 31, 1997, had an
aggregate outstanding amount of approximately $2.5 million.
Service Agreement with Licenseholders
Pursuant to a Service Agreement, dated July 22, 1994, as amended, TVA
Brasil and TV Show Time (the "Licenseholders") agreed to transfer to TVA all the
rights and benefits associated with their current and future pay-television
licenses, with the exception of licenses operated by companies in which TVA has
minority interests. While the Licenseholders retained the title to such
licenses, the Licenseholders promised to take all steps necessary to transfer
the title of such licenses to Tevecap. Such steps included the appropriate
procedures required by the Ministry of Communications and any other governmental
authority regulating the transfers. The transfer of the title to such licenses
is currently either pending, subject to approval by the Ministry of
Communications, or waiting for the passage of certain statutory or regulatory
waiting periods.
55
<PAGE>
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
Not applicable.
56
<PAGE>
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES
Not applicable.
ITEM 17. FINANCIAL STATEMENTS
The Company is furnishing financial statements pursuant to the instructions
in Item 18 of Form 20-F.
ITEM 18. FINANCIAL STATEMENTS
See Item 19(a) for a list of financial statements filed as part of this
Form 20-F.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements. The following financial statements and schedules
are filed as part of this annual report, together with the report of the
independent accountants.
INDEX TO THE FINANCIAL STATEMENTS
Page
----
Report on Consolidated Financial Statements of Tevecap S.A.
and Subsidiaries as of December 31, 1997 and 1996 and
for each of the three years in the period ended December 31, 1997.........F-1
Report of Independent Accountants...................................F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996........F-3
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1997................F-5
Consolidated Statements of Changes in Shareholders' Equity and
Statement of Redeemable Common Stock for each of the three
years in the period ended December 31, 1997......F-6
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1997................F-7
57
<PAGE>
Notes to these Consolidated Financial Statements....................F-9
Page
----
Report on Financial Statements of TVA Sistema de Televisao S.A.
as of December 31, 1997 and 1996 and for each of the three
years in the period ended December 31, 1997..............................F-49
Report of Independent Accountants..................................F-50
Balance Sheets as of December 31, 1997 and 1996....................F-51
Statements of Operations for each of the three
years in the period ended December 31, 1997.....................F-53
Statements of Changes in Shareholders' Equity for
each of the three years in the period ended December 31, 1997...F-54
Statements of Cash Flows for each of the three
years in the period ended December 31, 1997.....................F-55
Notes to these Financial Statements................................F-56
Report on Financial Statements of TVA Sul Participacoes S.A. and Subsidiaries
as of December 31, 1997 and 1996 and for each of the three years
in the period ended December 31, 1997....................................F-72
Report of Independent Accountants..................................F-73
Consolidated Balance Sheets as of December 31, 1997 and 1996.......F-74
Consolidated and Combined Statements of Operations
for the years ended December 31, 1997, 1996 and 1995............F-76
Consolidated and Combined Statements of Changes
in Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995................................F-77
Consolidated and Combined Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995..........................F-78
Notes to Consolidated and Combined Financial Statements............F-80
58
<PAGE>
Page
----
Report on Financial Statements of TVA Sul Parana Ltda. as of and
for the periods ended December 31, 1997 and 1996.........................F-96
Report of Independent Accountants..................................F-97
Balance Sheets as of December 31, 1997 and 1996....................F-98
Statements of Operations for the years ended
December 31, 1997 and 1996.....................................F-100
Statements of Changes in Shareholders' Equity for
the years ended December 31, 1997 and 1996...............F-101
Statements of Cash Flows for the periods ended
December 31, 1997 and 1996...............................F-102
Notes to Financial Statements.....................................F-103
Report on Financial Statements of CCS--Camboriu Cable System de
Telecomunicacoes Ltda. as of and for the periods ended
December 31, 1997 and 1996..............................................F-116
Report of Independent Accountants.................................F-117
Balance Sheets as of December 31, 1997 and 1996...................F-118
Statements of Operations for the year ended
December 31, 1997 and the period since inception,
May 30, 1996 to December 31, 1996..............................F-120
Statements of Changes in Shareholders' Equity for the year
ended December 31, 1997 and the period since
inception, May 30, 1996 to December 31, 1996...................F-121
Statements of Cash Flows for the year ended
December 31, 1997 and the period since inception,
May 30, 1996 to December 31, 1996..............................F-122
Notes to Financial Statements.....................................F-123
Report on Financial Statements of TVA Sul Foz do Iguacu Ltda.
as of and for the periods ended December 31, 1997 and 1996..............F-135
Report of Independent Accountants.................................F-136
Balance Sheets as of December 31, 1997 and 1996...................F-137
Statements of Operations for the year ended December 31, 1997
and for the period since inception, May 30, 1996
to December 31, 1996...........................................F-139
Statements of Changes in Shareholders' Equity for the
year ended December 31, 1997 and for the period since
inception, May 30, 1996 to December 31, 1996...................F-140
59
<PAGE>
Statements of Cash Flows for the year ended
December 31, 1997 and for the period since inception,
May 30, 1996 to December 31, 1996..............................F-141
Notes to Financial Statements.....................................F-142
Report on Financial Statements of TVA Sul Santa Catarina Ltda. as of
and for the periods ended December 31, 1997 and 1996....................F-153
Report of Independent Accountants.................................F-154
Balance Sheets as of December 31, 197 and 1996....................F-155
Statements of Operations for the year ended
December 31, 1997 and for the period from inception,
February 28, 1996 to December 31, 1996.........................F-157
Statements of Changes in Shareholders' Equity for the year
ended December 31, 1997 and for the period from
inception, February 28, 1996 to December 31, 1996..............F-158
Statements of Cash Flows for the year ended December 31, 1997
and for the period from inception, February 28, 1996
to December 31, 1996...........................................F-159
Notes to Financial Statements.....................................F-160
60
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorized.
TEVECAP S.A.
By: /s/ Jose Augusto P. Moreira
--------------------------------------
Name: Jose Augusto P. Moreira
Title: Officer
By: /s/ Claudio Cesar D'Emilio
--------------------------------------
Name: Claudio Cesar D'Emilio
Title: Officer
Date: May 20, 1998
61
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Index to Consolidated Financial Statements
Contents
Page
----
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1997 F-5
Consolidated Statements of Changes in Shareholders' Equity and
Statements of Redeemable Common Stock for each of the three years
in the period ended December 31, 1997 F-6
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1997 F-7
Notes to these Consolidated Financial Statements F-9
F-1
<PAGE>
Report of Independent Accountants
To the Shareholders and Directors of
TEVECAP S.A.
We have audited the accompanying consolidated balance sheets of TEVECAP S.A. and
subsidiaries (the "Company") as of December 31, 1997 and 1996, and the related
consolidated statements of operations, changes in shareholders' equity and
redeemable common stock and cash flows for each of the three years in the period
ended December 31, 1997, all expressed in United States dollars. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of TEVECAP S.A. and
subsidiaries as of December 31, 1997 and 1996, and the consolidated results of
operations and cash flows for each of the three years in the period ended
December 31, 1997, in conformity with accounting principles generally accepted
in the United States of America.
Coopers & Lybrand
Sao Paulo, Brazil
March 18, 1998
F-2
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
(in thousands of U.S. dollars)
December 31,
--------------------
1997 1996
-------- --------
ASSETS
Current assets
Cash and cash equivalents (Note 3) $ 1,024 $104,798
Accounts receivable, net (Note 4) 47,002 32,296
Inventories, net (Note 5) 23,590 13,095
Film exhibition rights, net (Note 6) 1,291 1,061
Prepaid and other assets (Note 7) 14,028 2,829
Other accounts receivable (Note 8) 12,984 3,008
-------- --------
Total current assets 99,919 157,087
-------- --------
Property, plant and equipment, net (Note 12) 379,834 233,593
Equipment under capital Lease, net (Note 24) 42,138 --
Investments (Note 11)
Equity basis 5,168 7,667
Cost basis investments 36,904 16,326
Concessions, net 13,775 17,574
Loans to related companies (Note 9) 19,566 15,308
Debt issuance costs, net (accumulated amortization;
1997- $1,428; 1996 - $ 96)
7,813 9,145
Others 2,614 2,422
-------- --------
Total assets $607,731 $459,122
======== ========
The accompanying notes are an integral part of these
consolidated financial statements
F-3
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
--------- ---------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Loans (Note 13) $ 50,058 $ 18,039
Obligations under capital leases (Note 24) 9,980 --
Film suppliers 26,184 7,012
Other suppliers 66,749 52,932
Taxes payable other than income taxes 12,837 8,953
Accrued payroll and related liabilities 6,589 6,141
Advance payments received from subscribers 745 10,482
Other accounts payable (Note 14) 4,846 4,543
--------- ---------
Total current liabilities 177,988 108,102
--------- ---------
Long-term liabilities
Loans (Note 13) 276,256 250,464
Obligations under capital leases (Note 24) 33,483 --
Loans from shareholders (Note 15) 95,232 4,361
Provision for claims (Note 22) 5,907 5,045
Liability to fund equity investee (Note 11) -- 1,107
Deferred hook-up fee revenue 12,098 4,883
--------- ---------
Total long-term liabilities 422,976 265,860
--------- ---------
Commitments and contingencies (Notes 17 and 19)
Minority interest 4,802 1,778
Redeemable common stock, no par value, 85,637,516 shares
issued and outstanding (Note 18) 189,034 164,910
Shareholders' equity
Common stock, no par value, 111,075,339
shares issued and outstanding (Note 18) 142,495 142,495
Accumulated deficit (329,564) (224,023)
--------- ---------
Total shareholders' deficit (187,069) (81,528)
--------- ---------
Total liabilities and shareholders' deficit $ 607,731 $ 459,122
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-4
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Consolidated Statements of Operations
for the years ended December 31, 1997, 1996 and 1995
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Gross revenues
Monthly subscriptions $ 221,234 $ 123,020 $ 62,496
Installation 90,806 61,717 26,045
Advertising 4,947 7,532 8,377
Indirect programming 22,810 11,377 2,866
Other 13,649 8,192 2,226
Revenue taxes (25,104) (13,747) (7,506)
--------- --------- ---------
Net revenue 328,342 198,091 94,504
--------- --------- ---------
Direct operating expenses
Payroll and benefits 29,904 27,203 12,520
Programming 95,231 42,391 21,609
Transponder lease cost 13,895 10,847 7,568
Technical assistance 1,863 5,507 5,152
Vehicle rentals 1,075 1,862 1,732
TVA magazine 7,737 6,842 3,318
Other costs 27,253 17,645 10,127
--------- --------- ---------
176,958 112,297 62,026
--------- --------- ---------
Selling, general and administrative expenses
Payroll and benefits 29,884 27,431 21,627
Advertising and promotion 37,525 21,355 11,122
Rent 4,078 3,422 1,073
Other administrative expenses 22,402 18,910 6,673
Other general expenses 22,365 10,337 6,407
--------- --------- ---------
116,254 81,455 46,902
--------- --------- ---------
Provision for equipment and inventory obsolescence 7,438 2,250 --
Depreciation 54,624 26,539 12,848
Amortization 1,757 1,677 420
--------- --------- ---------
Operating loss (28,689) (26,127) (27,692)
--------- --------- ---------
Interest income 10,764 5,813 3,118
Interest expense (56,553) (17,520) (17,745)
Translation gain (loss) (136) 473 (339)
Equity in losses of affiliates (6,851) (8,532) (3,672)
Gain on issuance of shares by equity investees 1,160 2,317 --
Other nonoperating (expenses) income, net (2,028) (6,009) 4,389
--------- --------- ---------
Loss before income taxes and minority interest (82,333) (49,585) (41,941)
Income taxes (Note 10) -- (156) --
--------- --------- ---------
Loss before minority interest (82,333) (49,741) (41,941)
Minority interest 916 1,849 871
--------- --------- ---------
Net loss $ (81,417) $ (47,892) $ (41,070)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-5
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity and Statement of
Redeemable Common Stock
for the years ended December 31, 1997, 1996 and 1995
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Total Redeemable
Paid-in Share- Common
Capital Accumulated holders' Stock
(Note 18) Deficit Equity (Note 18)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance as of December 31, 1994 $ 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 year -- (41,070) (41,070) --
Accretion related to Redeemable Common Stock -- (4,780) (4,780) 4,780
--------- --------- --------- ---------
Balance as of December 31, 1995 142,495 (160,755) (18,260) 149,534
Net loss for the year -- (47,892) (47,892) --
Accretion related to Redeemable Common Stock -- (15,376) (15,376) 15,376
--------- --------- --------- ---------
Balance as of December 31, 1996 142,495 (224,023) (81,528) 164,910
Net loss for the year -- (81,417) (81,417) --
Accretion related to Redeemable Common Stock -- (24,124) (24,124) 24,124
--------- --------- --------- ---------
Balance as of December 31, 1997 $ 142,495 $(329,564) $(187,069) $ 189,034
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-6
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the years ended December 31, 1997, 1996 and 1995 (in thousands of U.S.
dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (81,417) $ (47,892) $ (41,070)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation 54,624 26,539 12,848
Amortization 1,757 1,677 420
Amortization of debt issuance cost 1,332 -- --
Provision for exhibition costs -- -- 827
Provision for doubtful accounts 7,769 2,352 2,196
Provision for equipment and inventory obsolescence 7,438 2,250 --
Provision for claims 862 1,276 2,688
Minority interest (916) (1,849) (871)
Disposal and write-off of property, plant and equipment 338 1,005 341
Gain on issuance of shares by equity investees (1,160) (2,317) --
Equity in losses of affiliates 6,851 8,532 3,672
Changes in operating assets and liabilities:
Film exhibition rights (230) (1,031) 560
Accounts receivable (22,475) (23,395) (5,908)
Prepaid and other assets (11,199) (8,973) (1,269)
Other accounts receivable (10,168) (775) (709)
Accrued interest 9,130 5,908 9,241
Inventories (11,365) (2,227) (7,373)
Suppliers 32,989 1,549 36,275
Taxes payable other than income taxes 3,884 2,665 4,881
Accrued payroll and related liabilities 448 1,371 1,636
Advances received from subscribers (9,737) 6,451 2,956
Deferred hook-up fee revenue 7,215 4,883 --
Other accounts payable 303 4,305 1,648
--------- --------- ---------
Net cash (used in) provided by operating
activities (13,727) (17,696) 22,989
--------- --------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment (247,867) (125,612) (93,029)
Loans to related companies (14,172) (39,181) (7,967)
Repayments of loans to related companies 9,799 31,696 2,591
Purchases of concessions -- (14,235) (6,393)
Investments in equity and cost investments (24,877) (16,568) (14,863)
--------- --------- ---------
Net cash used in investing activities (277,117) (163,900) (119,661)
--------- --------- ---------
Cash flows from financing activities:
Bank loans 114,570 268,503 --
Principal payments on capital leases (6,437) -- --
Capital contributions -- -- 125,000
Repayments of loans from shareholders (4,165) (2,929) --
Loans from shareholders 2,525 -- --
Loans from related companies 89,490 168,414 131,860
Repayments of loans from related companies (1,630) (171,795) (140,631)
Repayment of loans from banks (10,307) -- --
Minority interest 3,024 -- --
--------- --------- ---------
Net cash provided by financing activities 187,070 262,193 116,229
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (103,774) 80,597 19,557
Cash and cash equivalents at beginning of the period 104,798 24,201 4,644
--------- --------- ---------
Cash and cash equivalents at end of the period $ 1,024 $ 104,798 $ 24,201
========= ========= =========
Supplemental cash disclosure:
Cash paid for interest $ 32,038 $ 7,312 $ 8,390
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-7
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Consolidated statements of Cash Flows
for the years ended December 31, 1997 and 1996 (in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Supplemental noncash financing and investing activities:
Accrued interest on related company loans refinanced
as principal balance $ 9,097 $ 354 $ 9,355
Capital lease obligations incurred 49,900 -- --
Details of acquisitions:
Fair value of assets acquired -- 15,701 --
Liabilities assumed -- (1,385) --
-------- -------- --------
Cash paid -- 14,316 --
Less: cash acquired -- (81) --
-------- -------- --------
Net cash paid for acquisitions $ -- $ 14,235 $ --
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-8
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements
(in thousands of U.S. dollars)
1. The Company and its principal operations
The consolidated financial statements have been prepared to reflect the
consolidated results of TEVECAP S.A. and its subsidiaries (the "Company").
TEVECAP S.A. is a holding company, the subsidiaries of which render
services related to wireless cable and cable and parabolic antenna
television systems, including marketing and advertising, production,
distribution and licensing of domestic and foreign television programs. The
Company has wireless cable channel rights primarily in major urban markets
in Brazil.
As of December 31, 1997, Abril S.A. ("Abril"), a printing and distribution
company, was the majority shareholder of the Company.
2. Summary of significant accounting policies
Significant policies followed in the preparation of the consolidated
financial statements are described below:
2.1 Basis of presentation and consolidation
a) Basis of presentation
The consolidated financial statements are presented in U.S. dollars and
have been prepared in accordance with accounting principles generally
accepted in the United States of America ("U.S. GAAP"), which differ in
certain respects from accounting principles applied by the Company in its
local currency financial statements, which are prepared in accordance with
accounting principles generally accepted in Brazil ("Brazilian GAAP").
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
financial statement dates and the reported amount of revenues and expenses
during the reporting periods. Since management's judgment involves making
estimates concerning the likelihood of future events, the actual results
could differ from these estimates.
b) Principles of consolidation
The consolidated financial statements include the accounts of TEVECAP S.A.
and all majority-owned subsidiaries.
Investments in affiliated companies, owned 20% to 50% inclusive, are
carried at cost plus the Company's equity in undistributed earnings since
acquisition. Investments in less than 20% owned affiliates are accounted
for under the cost method. Intercompany transactions and accounts are
eliminated in consolidation.
F-9
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
2.2 Accounting records
As required by Brazilian Law and in accordance with local accounting
practices, the accounting records of the Company are maintained in
Brazilian currency (real). In order to present the consolidated financial
statements in conformity with accounting principles generally accepted in
the United States of America, the Company maintains additional accounting
records which are used solely for this purpose.
2.3 Currency remeasurement
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
52, "Foreign Currency Transactions", the United States dollar has been
assumed to be the functional currency as Brazil is a "hyperinflationary"
country. As such, the local accounts of the Company are translated into
United States dollars as follows:
o Nonmonetary assets and liabilities are translated at historical rates.
All other assets and liabilities are translated at the official rate
of exchange of R$1.1164 to US$1 in effect on December 31, 1997; and
R$1.0394 to US$1 in effect on December 31, 1996. Translation
gains/losses are recognized in the income statement.
o Income and expenses are translated at the average exchange rates in
effect each month, except for those related to assets and liabilities
which are translated at historical exchange rates, and deferred income
taxes, which are translated at the current rate. Translation
gains/losses are recognized in the income statement.
F-10
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
2.4 Consolidated financial statements
The Company's operating subsidiaries included in the consolidated financial
statements are:
Ownership Interest as of
December 31,
------------------
1997 1996
------ ------
Owned Systems
TVA Sistema de Televisao S.A. 98.00% 98.00%
TVA Sul Participacoes S.A. (e) 86.00% 87.00%
TVA Sul Parana Ltda. (a), (b) 86.00% 87.00%
TVA Sul Santa Catarina Ltda. (b) 86.00% 87.00%
TVA Sul Foz do Iguacu Ltda. (b) 86.00% 87.00%
TCC TV a Cabo Ltda. (b), (d) -- 87.00%
TV Alfa Cabo Ltda. (b), (d) -- 87.00%
CCS Camboriu Cable Systems
de Telecomunicacoes Ltda. 51.60% 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% 100.00%
(a) In August 1996, TVA Curitiba Servicos Telecomunicacoes Ltda. changed its
name to TVA Parana Ltda. ("Parana"). The Company's initial investment in
Parana together with its contributions of $18,454 relating to the
acquisition of 27,712,345 shares during the year ended December 31, 1996,
was in excess of the Company's share of the book value of Parana after the
contribution. This resulted in a loss of $2,727.
(b) One common share in each of these entities is owned by a Brazilian national
pursuant to local legislative requirements.
(c) 0.00149% of the common shares in this entity are owned by the controlling
shareholder of the parent company pursuant to local legislative
requirements.
(d) During 1997, TCC TV a Cabo Ltda. and TV Alfa Cabo Ltda. were merged into
TVA Sul Parana Ltda.
(e) During 1997, the Company's shareholding in TVA Sul and its subsidiaries was
reduced by 1.0% as a result of the exercise of an option by the minority
shareholder.
F-11
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
2.5 Acquisitions
During the year ended December 31, 1996, the Company acquired control of
the following entities which were accounted for under the purchase method
of accounting: i) in February 1996, the Company acquired TVA Sul Santa
Catarina Ltda. ("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
represented the value of concessions of certain television stations. These
concessions are being amortized on a straight line basis over ten years.
The purchase prices have been allocated to the assets purchased and the
liabilities assumed based upon the fair values on the dates of acquisition,
as follows:
<TABLE>
<CAPTION>
TVA SSC TVA SF CCS TCC Alfa TV Alfa
------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Current assets, other than cash $ -- $ 23 $ 7 $ 51 $ 5
Property, plant and equipment 25 319 3,501 238 176
Other assets -- 3 -- -- --
Concessions 45 5,346 841 2,622 2,418
Other liabilities (55) (377) (139) (127) (687)
------- ------- ------- ------- -------
Purchase price, net of cash received $ 15 $ 5,314 $ 4,210 $ 2,784 $ 1,912
======= ======= ======= ======= =======
Total purchase price $ 15 $ 5,324 $ 4,210 $ 2,834 $ 1,933
======= ======= ======= ======= =======
</TABLE>
The operating results of these acquired businesses were included in the
consolidated statements of operations from the dates of acquisition. On the
basis of a pro forma consolidation of the results of operations as if the
acquisitions had taken place on January 1, 1995, consolidated net revenues
would have been $98,147 for the year ended December 31, 1995. Such pro
forma amount does not purport to be indicative of results that would have
occurred had the acquisition been in effect for the periods presented, nor
does it purport to be indicative of the results that will be obtained in
the future.
The Company is unable to present pro forma amounts for income before
extraordinary items and net income as, although management attempted to
obtain such information from the owners, it was not available. These
entities were acquired for the purpose of expanding the cable TV system
penetration for the Company. The assets purchased will be operated under
the Company's management, using the Company's programming and employees.
F-12
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
2.6 Cash and cash equivalents
Cash and cash equivalents are defined as cash and cash in banks and
investments in interest-bearing securities and are carried at cost plus
accrued interest. Short-term investments with original maturities of three
months or less at the time of purchase are considered cash equivalents.
2.7 Financial instruments
In accordance with SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments", information is provided about the fair value of certain
financial instruments for which it is practicable to estimate that value.
For the purposes of SFAS No. 107, the estimated fair value of a financial
instrument is the amount at which the instrument could be exchanged in a
current transaction between willing parties, other than in a forced or
liquidation sale. The carrying values of the Company's financial
instruments as of December 31, 1997 and 1996 approximate management's best
estimate of their fair values. The following methods and assumptions were
used to estimate the fair value of each class of financial instrument for
which it is practicable to estimate that value:
o The fair value of certain financial assets carried at cost, including
cash, accounts receivable, other accounts receivable, and certain
other short-term assets, is considered to approximate their respective
carrying value due to their short-term nature.
o The fair value of payables to film suppliers and other suppliers,
other accounts payable, loans to related companies and certain other
short-term liabilities is considered to approximate their respective
carrying value due to their short-term nature.
o The fair value of loans from related companies approximates their
respective carrying values as interest on these loans is variable and
based on market rates.
o The fair value of third party loans including the Senior Notes
approximates fair value as the interest rates on these loans are
either fixed at a rate comparable with the current market rate or
variable and based on market rates.
2.8 Accounts receivable
A provision for doubtful accounts is established on the basis of an
analysis of the accounts receivable, in light of the risks involved, and is
considered sufficient to cover any losses incurred in realization of
credits.
F-13
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
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.
A provision 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 charged
to expense as the films and/or programs are exhibited. An allowance for
exhibition expiration is determined based on management's estimate of the
Company's capacity to telecast the films and projected revenue streams.
2.11 Property, plant and equipment
Property, plant and equipment are stated at cost and depreciated using the
straight-line method, over the remaining useful lives, as described in Note
12.
2.12 Advertising
Advertising revenues are recognized, and the production cost of commercials
and programming are charged to expense, when the commercial is telecast.
2.13 Recoverability of long-lived assets to be held and used in the business
Management reviews long-lived assets, primarily the Company's licenses and
its property and equipment to be held and used in the business, for the
purposes of determining and measuring impairment on a recurring basis or
when events or changes in circumstances indicate that the carrying value of
an asset or group of assets may not be recoverable. Assets are grouped and
evaluated for possible impairment at the level of each cable television
system; impairment is assessed on the basis of the forecasted undiscounted
cash flows of the businesses over the estimated remaining lives of the
assets related to those systems. A write-down of the carrying value of the
assets or group of assets to estimated fair value will be made when
appropriate.
F-14
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
2.14 Revenue recognition
Hook-up fees are recognized as revenue on the equipment installation date
to the extent of direct selling costs incurred. The remainder is deferred
and amortized to income over the estimated average period that subscribers
are expected to remain connected to the system. Subscription revenues are
recognized as earned on an accrual basis.
2.15 Licenses
Televisao Show Time Ltda. ("TV Show Time") and TVA Brasil Radioenlaces
Ltda. ("TVA Brasil") hold licenses covering certain operations of the
Company. The use of such licenses is provided to the Company, for a nominal
fee, under a Service Agreement dated July 22, 1994, as amended, among
TEVECAP S.A., TV Show Time, TVA Brasil and Abril S.A.
Pursuant to the Service Agreement, TV Show Time and TVA Brasil have agreed
to transfer the licenses, which are carried at nil value, to TEVECAP S.A.
at nominal cost.
2.16 Accounting for issuances of stock by subsidiaries and equity investees
Gains or losses arising from the issuances of shares by subsidiaries and
equity investees are recognized in income to the extent that the net book
value of the shares owned after the sale exceeds or is lower than the net
book value per share immediately prior to the sale of the shares by the
subsidiary or equity investees.
3. Cash and cash equivalents
As of December 31, 1997 and 1996, cash and cash equivalents were comprised
of:
1997 1996
-------- --------
Cash on hand and in banks $ 104 $ 1,296
Short-term investments 920 103,502
-------- --------
$ 1,024 $104,798
======== ========
Short-term investments as of December 31, 1996 were comprised principally
of short-term term deposits.
F-15
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
4. Accounts receivable, net
As of December 31, 1997 and 1996, accounts receivable were comprised of:
1997 1996
-------- --------
Subscriptions $ 28,235 $ 8,798
Installation fees 20,092 19,020
Advertising and programming 4,958 4,511
Barter 5,857 5,248
Others 1,388 478
Provision for doubtful accounts (13,528) (5,759)
-------- --------
$ 47,002 $ 32,296
======== ========
5. Inventories, net
As of December 31, 1997 and 1996, inventories were comprised of:
1997 1996
-------- --------
Materials and supplies $ 25,192 $ 14,323
Imports in transit 1,518 1,022
Provision for obsolescence (3,120) (2,250)
-------- --------
$ 23,590 $ 13,095
======== ========
6. Film exhibition rights, net
As of December 31, 1997 and 1996, film exhibition rights were comprised of:
1997 1996
-------- --------
Exhibition rights $ 1,291 $ 2,223
Provision for exhibition expiration -- (1,162)
-------- --------
$ 1,291 $ 1,061
======== ========
F-16
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
7. Prepaid and other assets
As of December 31, 1997 and 1996, prepaid expenses were comprised of:
1997 1996
-------- --------
Advances to suppliers $ 12,337 $ 1,973
Prepaid TVA magazine publishing expenses 104 510
Prepaid meals and transportation 92 227
Debt issuance costs 1,332 --
Others 163 119
-------- --------
$ 14,028 $ 2,829
======== ========
8. Other accounts receivable
As of December 31, 1997 and 1996, other accounts receivable were comprised
of:
1997 1996
-------- --------
Advances to employees $ 415 $ 476
Accounts receivable from related companies (Note 9) 7,729 1,460
Others 4,840 1,072
-------- --------
$ 12,984 $ 3,008
======== ========
F-17
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
8. Related party transactions
The following tables summarize the transactions between the Company and its
related parties as of December 31, 1997 and 1996 and for the three years
ended December 31, 1997:
December 31,
-------------------------
1997 1996
-------- --------
TVA Finco Ltda.
Loans receivable $ 4,100 $ --
Abril S.A.
Accounts payable $ 612 $ 104
Loans payable
Credit facility (see Note 15) 54,323 2,721
Other 40,909 --
Accounts receivable 34 --
Televisao Abril Ltda.
Accounts receivable $ -- $ 136
ESPN do Brasil Ltda.
Accounts receivable $ 31 $ 28
Accounts payable 671 367
Canbras TV a Cabo Ltda.
Accounts receivable $ 10 $ 70
Loans receivable 5,879 3,710
HBO Brasil Partners Ltda.
Accounts receivable $ -- $ 271
Loans receivable 1,792 1,792
California Broadcast Center L.L.C.
Loans receivable $ 7,314 $ 7,100
Galaxy Latin America L.L.C.
Accounts payable $ 1,093 $ 769
Accounts receivable 5,442 --
TVA Network Participacoes S.A.
Accounts receivable $ 2,188 $ --
TVA Communications Aruba N.V. ("TVAICO")
Loans receivable $ -- $ 1,640
Abril Investments Corporation ("AICO")
Loans receivable $ -- $ 1,059
F-18
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
9. Related-party transactions (Continued)
Year ended December 31,
----------------------------------
1997 1996 1995
-------- -------- --------
Abril S.A.
Net interest expense $ 4,653 $ 7,196 $ 16,566
Printing costs 4,389 4,516 2,723
ESPN do Brasil Ltda.
Programming costs $ 5,213 $ 3,850 $ 646
Net interest (income) expense (1,720) (773) 330
Abril Investments Corporation
Net interest income $ -- $ (354) $ --
TV Filme Inc.
Programming revenue $ (8,629) $ (6,435) $ (742)
Canbras TV a Cabo Ltda.
Net interest expense $ -- $ 150 $ --
Programming revenue (1,837) (207) --
California Broadcast Center L.L.C.
Net interest income $ (551) $ -- $ --
LEONarDO PETRELLI
Accounts receivable $ -- $ 906 $ --
Loans payable (Note 15) -- 1,640 --
Others
Accounts receivable $ 24 $ 49 $ --
Loans receivable 481 7 --
Accounts payable 14 4 --
Loans granted to or obtained from related companies, under loan agreements,
are denominated in reais and subject to variable interest of 3.85% to 4.45%
per month as of December 31, 1997 (1.80% to 2.50% per month as of December
31, 1996).
TEVECAP S.A. has a credit facility with Abril S.A. under which TEVECAP S.A.
is allowed to borrow up to $60,000 on a revolving basis until December
1998. As of December 31, 1997 $54,323 was drawn down under the facility.
The credit facility is subject to a variable interest rate (3.85% to 4.45%
per month as of December 31, 1997; 1.80% to 2.50% per month as of December
31, 1996.)
F-19
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
9. Related-party transactions (Continued)
Additionally, Abril S.A. provided a guarantee in the course of the year for
equipment imported by Galaxy Brasil S.A., TVA Sistema de Televisao S.A.
("TVAST"), TV Filme Inc. ("TV Filme") and TVA Sul Parana Ltda. The amount
outstanding pursuant to this guarantee as of December 31, 1997 was
$52,139.The Company and Falcon International Communications Services Inc.,
one of the Company's shareholders, signed a consulting service agreement on
April 1, 1996 related to the Company's operations and technologies.
Initially, the duration of this agreement was two years, renewable every
subsequent two-year period thereafter. The payment for the consulting
services amounts to $200 per annum.
Related-party transactions relating to programming sales and costs and
printing services costs were carried out at usual market rates and terms.
10. Income taxes
The tax effects of temporary differences that give rise to a significant
portion of the deferred tax asset and deferred tax liability as of December
31, 1997 and 1996 are as follows:
1997 1996
-------- --------
Deferred tax assets:
Net operating loss carryforwards $ 64,191 $ 44,562
Deferred charges 4,818 7,536
Deferred hook-up fee revenue 2,614 1,611
Provision for obsolescence 871 437
Provision for claims 5,097 1,528
Provision for decoders 904 438
Provision for doubtful accounts 3,159 --
Others -- 148
-------- --------
Total gross deferred tax asset 81,654 56,260
-------- --------
Less valuation allowance (78,509) (50,274)
-------- --------
Net deferred tax asset 3,145 5,986
Deferred tax liability:
Installation costs (3,145) (5,986)
-------- --------
Total gross deferred tax liability (3,145) (5,986)
-------- --------
Net deferred tax asset/liability $ -- $ --
======== ========
F-20
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
10. Income taxes (Continued)
The Company has a limited operating history and has generated losses since
its inception. The valuation allowance has been established in accordance
with the requirements of SFAS No. 109, "Accounting for Income Taxes".
As of December 31, 1997, the Company and subsidiaries have unexpirable
accumulated tax losses of $194,850.
The consolidated income tax benefit was different from the amount computed
using the Brazilian statutory income tax for the reasons set forth in the
following table:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Loss before income taxes and minority interest $ 82,333 $ 49,585 $ 41,941
Statutory income tax rate 33% 33% 30.56%
-------- -------- --------
27,170 16,363 12,817
Increase (decrease) in the income tax rate -- 2,644 (8,466)
Unallowable amortization 738 2,088 (308)
Deferred charges amortization 4,230 4,996 (5,576)
Translation rate difference on exhibition rights -- -- 381
Translation (loss) gain of tax losses (3,089) (2,103) 1,896
Monetary correction of shareholders' equity -- -- 5,889
Installation materials depreciation 107 3,648 (314)
Equity in losses of affiliate (2,261) (2,816) (1,122)
Net loss of TVAICO (1,957) (1,436) (6)
Others (3,297) (6,377) (1,345)
-------- -------- --------
Net income tax benefit for the period 28,235 17,007 3,846
Increase in valuation allowance (28,235) (17,163) (3,846)
-------- -------- --------
$ -- $ (156) $ --
======== ======== ========
</TABLE>
Income tax payable represents amounts owned by subsidiaries calculated on a
unitary basis.
F-21
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
11. Investments
Investments as of December 31, 1997 and 1996 were comprised of:
<TABLE>
<CAPTION>
Percentage
of Control 1997 1996
---------- ------------ -------------
<S> <C> <C> <C>
Joint ventures and equity basis investments:
TV Filme, Inc 14.3 (a) $ -- $ 6,840
ESPN do Brasil Ltda. 50 2,748 827
HBO Brasil Partners Ltda. 24 (b) 2,325 --
Canbras TV a Cabo Ltda. 36 95 --
------------- --------------
$ 5,168 $ 7,667
============= ==============
Liability to fund joint ventures and
equity basis investments:
Canbras TV a Cabo Ltda. 36 $ -- $ (997)
HBO Brasil Partners Ltda. 33 -- (110)
============= ==============
$ -- $ (1,107)
------------- --------------
Cost basis investments:
TV Filme, Inc. 14.3 (a) $ 6,667 $ --
Galaxy Latin America L.L.C. 10 30,220 16,320
Others 17 6
------------- --------------
$ 36,904 $ 16,326
============= ==============
Concessions, net:
Stations in South of Brazil (c) $ 8,646 $ 10,688
Ype Radio e Televisao Ltda. concessions 6,363 6,363
Comercial Cabo Ltda 1,970 1,970
Others 65 65
Amortization (3,269) (1,512)
------------- --------------
$ 13,775 $ 17,574
============ =============
</TABLE>
F-22
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
11. Investments (Continued)
(a) TV Filme, Inc. ("TV Filme") was accounted for under the equity method
until December 31, 1996. Up until that time, the Company had the right
to elect two of six members of the Board of Directors and,
additionally, a significant proportion of TV Filme's business was
transacted with the Company. In 1997, the number of members on the
Board of Directors of TV Filme increased to seven while the Company's
representation was unchanged. In addition, the level of transactions
effected between TV Filme and Tevecap decreased substantially. The
Company therefore reassessed this treatment resulting in a change to
the cost method of accounting.
(b) During 1997, HBO Brazil Partners Ltda. issued shares at a price above
book value.The Company did not contribute this issuance on a basis
proportionate with is ownership interest in HBO Brazil Partners Ltda.
and, consequently, the Company's equity interest fell from 33% to 24%.
The Company recorded a gain of $1,140 resulting from these issuance
representing the increase in the book value of its share holding.
(c) The movement of $2,042 represents a reclassification to property,
plant and equipments.
On February 3, 1995, an agreement was signed between TEVECAP S.A., Directv
L.A. Inc. (Hughes Partner), Darlene Investments Ltd.(ODC Partner) and Grupo
Frequencia Modulada Television S.A., CV (MVS Partner) for the incorporation
of Galaxy Latin America L.L.C. ("Galaxy Latin America") in August 1995. On
March 3, 1995, an operational agreement between Galaxy Latin America and
TEVECAP S.A. was formalized with the purchase of 10% of the shares of
Galaxy Latin America for $7,194.
On March 3, 1995, Galaxy Brasil S.A. ("Galaxy Brasil") was created, with
99.5% of the shares held by TEVECAP S.A. Galaxy Brasil provides
distribution services of multichannel TV programs to all national regions.
The transmission commenced February 1996. Galaxy Latin America charges
Galaxy Brasil for the use of a satellite.
F-23
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
11. Investments (Continued)
The ESPN do Brasil Ltda. ("ESPN Brasil") joint venture was formed in June
1995, with TEVECAP S.A. and ESPN Brazil, Inc. ("ESPN") each holding 50% of
ESPN Brasil's shares. Operations representing the transmission of ESPN's
international sport programs commenced on June 15, 1995. Condensed
financial information of the joint venture as of and for the years ended
December 31, 1997 and 1996 are as follows:
1997 1996 1995
-------- -------- --------
Current assets $ 9,702 $ 3,640
Non-current assets $ 1,278 $ 2,107
Current liabilities $ 5,003 $ 3,663
Long term liabilities $ -- $ --
Revenues $ 18,031 $ 12,733 $ 4,748
Gross losses $(11,992) $ (9,785) $ (2,884)
Loss before income Taxes $(11,715) $(10,715) $ (4,020)
Net loss $(11,715) $(10,715) $ (4,020)
HBO Brazil Partners Ltda. ("HBO Brazil") is a joint venture between TVAICO,
which as of December 31, 1997 held a 24% equity interest, (1996:33.3%), and
HBO Brazil and HBO SOUTH B.V., which as of the same date held the remaining
76% (1996:66.7%).
HBO Brazil , Disney Enterprises, Inc., provides the programming to TVA
Sistema de Televisao S.A.
The operations of HBO Brazil. commenced in 1994 and condensed financial
information as of and for the years ended December 31, 1997 and 1996 are as
follows:
1997 1996 1995
-------- -------- --------
Current assets $ 18,518 $ 10,080
Non-current assets $ -- $ 1,659
Current liabilities $ 10,631 $ 11,615
Long-term liabilities $ 961 $ --
Revenues $ 32,678 $ 20,867 $ 11,354
Gross income (Losses) $ (4,411) $ (3,072) $ (4,384)
Income (loss) before income Taxes $ (4,338) $ (3,168) $ (4,323)
Net income (Loss) $ (2,291) $ (3,168) $ (4,323)
F-24
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
12. Property, plant and equipment, net
As of December 31, 1997 and 1996, property, plant and equipment were
comprised of:
<TABLE>
<CAPTION>
Annual
Depreciation December 31,
Rate ----------------------------
% 1997 1996
---------------- -------------- ------------
<S> <C> <C> <C>
Machinery and equipment 10 $ 77,483 $ 47,784
Converters 10 177,367 103,208
Leasehold improvements 25 3,889 2,111
Furniture and fixtures 10 2,108 2,089
Premises 10 3,785 2,730
Vehicles 20 3,486 1,257
Software 20 5,018 2,949
Tools 10 843 696
Reception equipment 20 120,413 73,330
Cable plant 10 30,018 25,385
Building 4 13,311 11,734
-------------- ------------
437,721 273,273
Trademarks, patents and others 179 165
Telephone line use rights 2,844 2,320
Others 2,338 950
Provision for decoders and machinery
and equipment (7,939) (1,371)
Accumulated depreciation (97,523) (50,661)
Fixed assets in transit 42,214 8,917
-------------- ------------
$ 379,834 $ 233,593
============= ===========
</TABLE>
F-25
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
13. Loans
As of December 31, 1997, loans were comprised of:
Short-term Long-term
--------- ----------
Senior Notes due 2004 $ -- $250,000
Supplier loans and other 8,111 17,886
Bank loans 41,947 8,370
-------- --------
$ 50,058 $276,256
======== ========
As of December 31, 1996 $ 18,039 $250,464
======== ========
On November 26, 1996, TEVECAP S.A. raised funds in foreign markets through
a private placement amounting to $250,000 of Senior Notes. These Senior
Notes mature on November 26, 2004 and are guaranteed by certain of TEVECAP
S.A.'s subsidiaries. Interest thereon is at 12.625% per annum and is
payable on May 25 and November 25 of each year commencing on May 25, 1997.
Debt issuance costs associated with the 12.625% senior notes amounted to
$9,241 and are being amortized over the term of the Senior Notes.
Amortization costs for the year ended December 31, 1997 amounted to $1,332.
The Senior Notes Indenture contains certain restrictive covenants which
relate to, inter alia, the ability of TEVECAP S.A. and the guarantor
subsidiaries to incur additional indebtedness, declare dividends, effect
asset dispositions, enter into new liens, sell capital stock, enter into
mergers and/or consolidations, invest in non-guarantor subsidiaries,
tranfer existing business etc. As of December 31, 1997, the Company was in
compliance with all restrictive covenants contained in the Senior Notes
Indenture.
Supplier loans as of December 31, 1997 represent the refinancing of certain
supplier payables. The average interest rate on such loans is based on the
one year London Inter-Bank Offered Rate ("LIBOR") which was 6.25 % as of
December 31, 1997 plus 2%. Other consists of accrued interest on the Senior
Notes.
Bank loans in local currency are secured by promissory notes and chattel
mortgages; interest rates on these loans vary from 8.5% to 10% per year.
F-26
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
13. Loans (Continued)
Annual maturities of long-term debt, including the current component, for
the five years subsequent to December 31, 1997 are as follows:
1998 $ 50,048
1999 13,559
2000 5,548
2001 4,307
2002 and thereafter 252,842
--------------------
Total 276,256
====================
14. Other accounts payable
As of December 31, 1997 and 1996, other accounts payable were comprised of:
1997 1996
------ ------
Accounts payable to related companies (Note 9) $2,390 $1,244
Advertising 165 265
Importation expenses payable 564 1,627
Others 1,727 1,407
------ ------
$4,846 $4,543
====== ======
15. Loans from shareholders
Loans from shareholders as of December 31, 1997 and 1996 were comprised of:
1997 1996
------- -------
Abril S.A $95,232 $ 2,721
Leonardo Petrelli -- 1,640
------- -------
$95,232 $ 4,361
======= =======
The 1996 loan balance from Leonardo Petrelli represented an advance from a
shareholder and was not subject to interest.
F-27
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
16. Insurance
The Company maintains insurance coverage for its fixed assets and
inventories in an amount considered sufficient to cover the risks involved.
17. Leased assets and commitments
The Company has funding commitments related to Galaxy Latin America, TV
Filme, ESPN Brasil, HBO Brasil Partners Ltda., Canbras TV a Cabo Ltda., TVA
Sistema de Televisao S.A. and Surfin Ltd. of approximately $36,000 which
must be met prior to December, 1998.
The Company has rented its office space until the year 2002. As of December
31, 1997, future minimum rental payments applicable to operating leases in
respect of this space aggregate approximately $4,730, as follows:
1998 $ 2,074
1999 798
2000 656
2001 601
2002 601
------------
Total $ 4,730
===========
As of December 31, 1997, the Company had contractual commitments with
Empresa Brasileira de Telecomunicacoes ("Embratel") for the use of a
transponder until the year 2004. Based on the contract provisions, these
commitments are currently estimated to aggregate approximately $93,072, as
follows:
1998 $ 13,296
1999 13,296
2000 13,296
2001 13,296
2002 and thereafter 39,888
---------------
Total $ 93,072
==============
F-28
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
18. Common stock
Common stock as of December 31, 1997 and 1996 was comprised of:
<TABLE>
<CAPTION>
1997 1996
------------------------- -------------------------
US$ Shares US$ Shares
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Redeemable Common Stock (including
accretion) $ 189,034 85,637,516 $ 164,910 85,637,516
=========== =========== =========== ===========
Paid-in capital $ 142,495 111,075,339 $ 142,495 111,075,339
=========== =========== =========== ===========
</TABLE>
a) Common stock subject to redemption
As of December 31, 1997 and 1996, 43.5% of the common stock of TEVECAP S.A.
was subject to an Event Put, i.e., a "triggering event" under the
Stockholders Agreement pursuant to which each of the shareholders (other
that Abril) may, in certain circumstances, demand that TEVECAP S.A.
purchase all or a portion of its shares, unless the shares of capital stock
held by such Stockholder are publicly registered, listed or traded. In
addition, as of December 31, 1997 and 1996, 14.2% of these shares are also
subject to Time Put whereby, pursuant to the Stockholders Agreement, Falcon
International Communications may demand that TEVECAP S.A. buy all or a
portion of Falcon's shares of capital stock held in TEVECAP S.A. if such
shares are not publicly registered, listed or traded by September 22, 2002.
For purposes of the Event Put, triggering events are: (i) the amount of the
capital stock held by a stockholder with an Event Put exceeds the amount
allowed under any legal restriction to which such Stockholder may be
subject ("Regulatory Put"); (ii) a breach without cure within a designated
period by certain specified entities/individuals of any representation,
warranty, covenant or duty made or owed pursuant to certain agreements;
(iii) a breach without cure within a designated period by Abril of the
Abril Credit Facility; (iv) the controlling shareholder of Abril ceases to
directly or indirectly hold a specified percentage of TEVECAP S.A. without
the approval of the Stockholders or ceases to control the voting capital
stock held by his affiliates representing 50% or more of the voting capital
stock of TEVECAP S.A.; (v) the Service Agreement as amended, among TEVECAP
S.A., TV Show Time, TVA Brasil and Abril ceases to be valid or effective or
TV Show Time, TVA Brasil and Abril is liquidated or dissolved or files
voluntarily, or has filed against it involuntarily, any petition in
bankruptcy; or (vi) another Stockholder exercises an Event Put other than a
Regulatory Put.
The Company's management believes that the probability of occurrence of the
triggering events which would permit any of its shareholders to exercise
their Event Put is remote. However, a company that is public in the United
States, and which therefore is required to
F-29
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
18. Common stock (Continued)
register its securities with the United States Securities and Exchange
Commission (the "SEC"),is required for accounting purposes to present
redeemable equity securities separately from shareholders' equity, if
redemption of such securities is beyond the control of the registrant. That
presentation is required even if the likelihood of redemption is remote.
The Common Shares subject to the Time Put are redeemable at fair value as
determined by appraisal or by a multiple of the Company's most recent
quarterly earnings. The Company has recorded an accretion on these shares
to fair market value of $24,124 and $15,376 with respect to the years ended
December 31, 1997 and 1996, determined by Company management.
b) Paid-in capital
Paid-in capital represents registered common shares without par value.
The Company's shareholders are entitled to minimum dividends of 25% of net
income for the year, adjusted according to Brazilian Corporation Law. As
the Company has not recorded net income since its inception, no such
dividends are payable.
19. Litigation contingencies
Certain claims and lawsuits arising in the ordinary course of business have
been filed or are pending against the Company which were not recognized in
the consolidated financial statements. The Company has also recorded
provisions related to certain claims in amounts that management considers
to be adequate after considering a number of factors including (but not
limited to) the views of legal counsel, the nature of the claims and the
prior experience of the Company.
In Management's opinion, all contingencies have been adequately provided
for or are without merit, or are of such kind that if disposed of
unfavorably, would not have a material adverse effect on the financial
position or future results of operations of the Company.
20. Pension plan
In April 1996, the Company became a co-sponsor of the private pension
entity named Abrilprev Sociedade de Previdencia Privada ("Abrilprev"), the
primary objective of which is to grant employees benefits other than those
provided by Social Security. The plan is optional to all employees of the
sponsoring entities. Abrilprev operates as a Defined Contribution Plan.
Company contributions are made based on a fixed percentage applied to the
payroll of the sponsoring entities based on actuarial calculations. Plan
expenses amounted to $662 for the year ended December 31, 1997 ($368 in
1996).
F-30
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
21. Abril Health Care Plan
In February 1996, the Abril Health Care Plan was created to provide health
care to Abril S.A. companies' employees and their dependents. Both the
companies forming part of the Abril Group and the employees thereof
contribute monthly to Associacao Abril de Beneficios, the company
responsible for management of the plan.
In 1997, contributions made by TEVECAP S.A. and certain affiliated to
Associacao Abril de Beneficios amounted to $2,918 ($2,088 in 1996).
22. Supplementary information - valuation and qualifying accounts and reserves
<TABLE>
<CAPTION>
Provision
Provision Provision for Deferred
for for Decoders Taxation Provision
Doubtful Provision for Exhibition and Valuation for
Accounts Obsolescence Expiration Equipment Allowance Claims
-------- ------------ ---------- --------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1994 $ 1,211 $ -- $ 335 $ -- $29,265 $ 1,075
Additions charged to expense 2,196 -- 827 -- 3,846 2,688
------- ------- ------- ------- ------- -------
Balance as of December 31, 1995 3,407 -- 1,162 -- 33,111 3,763
Additions charged to expense 2,352 2,250 -- 1,371 17,163 1,282
------- ------- ------- ------- ------- -------
Balance as of December 31, 1996 5,759 2,250 1,162 1,371 50,274 5,045
Additions charged to expense 7,769 870 -- 6,568 28,235 862
Reduction -- -- (1,162) -- -- --
------- ------- ------- ------- ------- -------
Balance as of December 31, 1997 $13,528 $ 3,120 $ -- $ 7,939 $78,509 $ 5,907
======= ======= ======= ======= ======= =======
</TABLE>
F-31
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
23. Recent accounting pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income", which establishes standards for
reporting and display of comprehensive income and its components in a full
set of financial statements. Comprehensive income is the total of reported
net income and all other revenues, expenses, gains and losses that under
generally accepted accounting principles bypass reported net income. SFAS
No. 130 requires that comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements and requires an entity to (a) classify items of other
comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately
from retained earnings and surplus in the equity section of the balance
sheet. SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. Companies are also required to report comparative totals for
comprehensive income in interim reports. Management is currently
considering the impact of SFAS No. 130, but does not believe it will have a
material effect on the Company's consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information", which establishes standards for
public companies to report certain financial information about operating
segments in interim and annual financial statements. Operating segments are
components of a business about which separate financial information is
available and that are evaluated regularly by the chief operating decision
maker in assessing performance and deciding how to allocate resources. The
statement also requires public companies to report certain information
about their products and services and the geographic areas in which they
operate. SFAS No. 131 is effective for financial statements for fiscal
years beginning after December 15, 1997. At this time, management is
assessing this statement and has not determined whether the new reporting
provisions will require supplemental disclosures by the Company.
F-32
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
24. Capital leases
In 1997, the Company acquired equipment (decoders) through a capital lease
contract with Citibank, N.A. . Such contract has a five-year term with
interest at LIBOR plus 2.5 % per year.
Following is an analysis of this equipment :
1997
--------
Equipment (decoders) $ 49,900
Less: accumulated amortization (7,762)
--------
$ 42,138
========
Following is a schedule by years of future minimum lease payments under
these capital leases with the present value of the net minimum lease
payments as of December 31, 1997:
1998 $ 13,215
1999 12,370
2000 11,550
2001 10,732
2002 3,630
------------
Total minimum lease payments $ 51,497
Less: amount representing interest (8,034)
------------
Present value of net minimum lease payment $ 43,463
============
25. Financial information for subsidiary guarantors and non-guarantor
subsidiaries
TEVECAP S.A. conducts a significant portion of its business through
subsidiaries. The $250,000 12 5/8% Senior Notes issued to institutional
buyers in November, 1996 are jointly and severally, irrevocably and fully
and unconditionally guaranteed on a senior basis by all of Tevecap's direct
and indirect subsidiaries except for TVA Communications Aruba N.A. and TVA
TCG Sistema TV.
F-33
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
25. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (Continued)
Presented below is condensed consolidating and combined financial
information for: i) TEVECAP S.A. on a parent company only basis; ii) the
Wholly-Owned Guarantor Subsidiaries; iii) the Majority-Owned Guarantor
Subsidiaries; iv) Non-guarantor Subsidiaries; v) Eliminations; and vi)
Consolidated Tevecap S.A. and subsidiaries.
The equity method has been used by TEVECAP S.A., the Wholly-Owned Guarantor
Subsidiaries and the Majority-Owned 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. (during 1997, TCC TV a Cabo Ltda. and
TVA Alfa Cabo Ltda. were merged into TVA Sul Parana Ltda.)
- CCS Camboriu Cable System de Telecomunicacoes 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 December 31, 1997 and 1996 and the related statements of
operations, changes in shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1997.
F-34
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
25. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (Continued)
Separate consolidated and combined financial statements for TVA Sul
Participacoes S.A. have also been presented as of December 31, 1997 and
1996, and the related statements of operations, changes in shareholders'
equity and cash flows for each of the three years in the period ended
December 31, 1997.
Separate financial statements for TVA SUL PARANA LTDA. as of December 31,
1997 and 1996, and the related statements of operations, changes in
shareholders' equity and cash flows for each of two years in the period
ended December 31, 1997.
Separate financial statements for CCS - CAMBORIU CABLE SYSTEM
TELECOMUNICACOES LTDA. as of December 31, 1997 and 1996, and the related
statements of operations, changes in shareholders' equity and cash flows
for the year ended December 31, 1997 and the period since inception, May
30, 1996 to December 31, 1996.
Separate financial statements for TVA SUL FOZ DO IGUACU LTDA. as of
December 31, 1997 and 1996, and the related statements of operations,
changes in shareholders' equity and cash flows for the year ended December
31, 1997 and the period since inception, May 30, 1996 to December 31, 1996.
Separate financial statements for TVA SUL SANTA CATARINA LTDA., as of
December 31, 1997 and 1996, and the related statements of operations,
changes in shareholders' equity and cash flows for the year ended December
31, 1997 and the period since inception, February 28, 1996 to December 31,
1996.
Separate financial statements for the Wholly-Owned Guarantor Subsidiaries
have not been presented based on m anagement's determination that they do
not provide additional information that is material to investors.
F-35
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
25. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (Continued)
Condensed Consolidated Balance Sheets
As of December 31, 1997
<TABLE>
<CAPTION>
Majority- Wholly-
Owned Owned Non-
Parent Guarantor Guarantor Guarantor
Assets Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
- - ------ ------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Current assets
Cash and cash equivalents $ 20 $ 455 $ 547 $ 2 $ -- $ 1,024
Accounts receivable, net -- 18,723 29,659 -- (1,380) 47,002
Inventories -- -- 23,590 -- -- 23,590
Film exhibition rights -- -- 1,291 -- -- 1,291
Prepaid and other assets 1,320 195 12,513 -- -- 14,028
Other accounts receivable 2,759 5,895 5,639 22 (1,331) 12,984
--------- --------- --------- --------- --------- ---------
Total current assets 4,099 25,268 73,239 24 (2,711) 99,919
--------- --------- --------- --------- --------- ---------
Property, plant and equipment, net -- 111,274 273,260 42 (4,742) 379,834
Equipment under capital leases, net -- 42,138 -- -- -- 42,138
Investments
Equity affiliates 75,113 -- -- 2,325 (72,270) 5,168
Cost basis investees 6,667 30,220 9 8 -- 36,904
Concessions, net 6,298 -- 7,477 -- -- 13,775
Loans to affiliated companies 437,044 21,075 4,227 -- (442,780) 19,566
Prepaid expenses 7,813 -- -- -- -- 7,813
Other -- 701 2,420 -- (507) 2,614
--------- --------- --------- --------- --------- ---------
Total assets $ 537,034 $ 230,676 $ 360,632 $ 2,399 $(523,010) $ 607,731
========= ========= ========= ========= ========= =========
</TABLE>
F-36
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
25. Financial information for subsidiary guarantors and non-guarantor
Subsidiaries (continued)
Condensed Consolidated Balance Sheets
As of December 31, 1997
<TABLE>
<CAPTION>
Wholly- Majority-
Owned Owned Non-
Parent Guarantor Guarantor Guarantor
Liabilities and Shareholders' Equity Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Short-term bank loans $ 2,720 $ 9,086 $ 38,252 $ -- $ -- $ 50,058
Obligations under capital leases -- 9,980 -- -- -- 9,980
Film suppliers -- 14,097 25,229 -- (13,142) 26,184
Other suppliers -- 35,657 32,098 -- (1,006) 66,749
Taxes payable other than income taxes 5 3,616 9,216 -- -- 12,837
Accrued payroll and related liabilities -- 1,048 5,541 -- -- 6,589
Advance payments received from subscribers -- -- 745 -- -- 745
Other accounts payable 263 2,054 3,904 3,496 (4,871) 4,846
--------- --------- --------- --------- --------- ---------
Total current liabilities 2,988 75,538 114,985 3,496 (19,019) 177,988
--------- --------- --------- --------- --------- ---------
Financing 250,000 357 25,899 -- -- 276,256
Obligations under capital leases -- 33,483 -- -- -- 33,483
Loans from affiliated companies 51,794 58,471 411,733 214 (426,980) 95,232
Provision for claims -- 252 5,655 -- -- 5,907
Liability to fund equity investee 203,828 -- -- -- (203,828) --
Deferred hook up fee revenue -- 12,098 -- -- -- 12,098
--------- --------- --------- --------- --------- ---------
Total long-term liabilities 505,622 104,661 443,287 214 (630,808) 422,976
--------- --------- --------- --------- --------- ---------
Minority interest -- -- 4,802 -- -- 4,802
Redeemable common stock, net par value 189,034 -- -- -- -- 189,034
Shareholders' equity
Paid-in capital 141,782 89,814 56,089 105 (145,295) 142,495
Retained earnings (302,392) (39,337) (258,531) (1,416) 272,112 (329,564)
Total shareholders' equity (160,610) 50,477 (202,442) (1,311) 126,817 (187,069)
--------- --------- --------- --------- --------- ---------
Total liabilities and
shareholders' equity $ 537,034 $ 230,676 $ 360,632 $ 2,399 $(523,010) $ 607,731
========= ========= ========= ========= ========= =========
</TABLE>
F-37
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
25. Financial information for subsidiary guarantors and non-guarantor
Subsidiaries (continued)
Condensed Consolidated Statements of Operations
for the year ended December 31, 1997
<TABLE>
<CAPTION>
Wholly- Majority-
Owned Owned Non-
Parent Guarantor Guarantor Guarantor
Description Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Gross Revenues
Monthly subscriptions $ -- $ 52,468 $ 168,766 $ -- $ -- $ 221,234
Installation -- 67,658 23,148 -- -- 90,806
Advertising -- -- 4,947 -- -- 4,947
Indirect programming -- -- 22,810 -- -- 22,810
Other -- -- 13,649 -- -- 13,649
Revenue taxes -- (9,300) (15,804) -- -- (25,104)
--------- --------- --------- --------- --------- ---------
Net Revenue -- 110,826 217,516 -- -- 328,342
--------- --------- --------- --------- --------- ---------
Direct operating expenses
Payroll and benefits -- (5,727) (24,177) -- -- (29,904)
Programming -- (32,044) (63,187) -- -- (95,231)
Transponder lease cost -- (3,490) (10,405) -- -- (13,895)
Technical assistance -- (31) (1,832) -- -- (1,863)
Vehicle rentals -- -- (1,075) -- -- (1,075)
TVA Magazine -- -- (7,737) -- -- (7,737)
Other costs -- (11,978) (15,275) -- -- (27,253)
--------- --------- --------- --------- --------- ---------
-- (53,270) (123,688) -- -- (176,958)
--------- --------- --------- --------- --------- ---------
Selling, general and administrative
expenses
Payroll and benefits -- (3,930) (25,954) -- -- (29,884)
Advertising and promotion -- (17,226) (20,299) -- -- (37,525)
Rent -- (357) (3,721) -- -- (4,078)
Other administrative expenses (2,857) (6,001) (13,544) -- -- (22,402)
Other general expenses -- (17,587) (4,778) -- -- (22,365)
--------- --------- --------- --------- --------- ---------
(2,857) (45,101) (68,296) -- -- (116,254)
--------- --------- --------- --------- --------- ---------
Depreciation -- (17,685) (37,431) -- 492 (54,624)
Amortization (840) -- (917) -- -- (1,757)
Provision for Equipment, Inventory
and obsolescence -- -- (7,438) -- -- (7,438)
--------- --------- --------- --------- --------- ---------
Operating loss (3,697) (5,230) (20,254) -- 492 (28,689)
--------- --------- --------- --------- --------- ---------
Interest income 44,226 1,636 14,769 -- (49,867) 10,764
Interest expense (42,888) (16,681) (46,744) (107) 49,867 (56,553)
Translation loss 91 760 (949) (38) -- (136)
Equity in (losses) of affiliates (76,401) 127 -- 550 68,873 (6,851)
Gain on issuance of shares
by equity investees -- -- 1,160 -- -- 1,160
Other nonoperating (expenses) income, net (3,207) (2,468) 2,248 1,399 -- (2,028)
--------- --------- --------- --------- --------- ---------
Loss before income taxes and
minority interest (81,876) (21,856) (49,770) 1,804 69,365 (82,333)
Income taxes -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Net loss before minority interest (81,876) (21,856) (49,770) 1,804 69,365 (82,333)
Minority interest -- -- 916 -- -- 916
--------- --------- --------- --------- --------- ---------
Net loss $ (81,876) $ (21,856) $ (48,854) $ 1,804 $ 69,365 $ (81,417)
========= ========= ========= ========= ========= =========
</TABLE>
F-38
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
25. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (continued)
Condensed Consolidated Statement's of Cash Flows
for the year ended December 31, 1997
<TABLE>
<CAPTION>
Wholly- Majority- Non-
Parent Owned Owned Guarantor
Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (81,876) $ (21,856) $ (49,227) $ 1,804 $ 69,738 $ (81,417)
Adjustments to reconcile net loss
to net cash (used in) provided by
operating activities:
Depreciation -- 17,685 36,939 -- -- 54,624
Amortization 840 -- 917 -- -- 1,757
Amortization of debt insuance cost 1,332 -- -- -- -- 1,332
Provision for doubtful accounts -- 4,034 3,735 -- -- 7,769
Provision for equipment and
inventory obsolescence -- 6,568 870 -- -- 7,438
Provision for claims -- 252 618 -- (8) 862
Minority interest -- -- (52) -- (864) (916)
Disposal and write-off of property,
plant and equipment -- -- 338 -- -- 338
Gain on issuance of shares by
equity investees 1,995 (2,947) -- (1,068) 860 (1,160)
Equity in losses (earnings) of affiliates 76,401 (127) -- (550) (68,873) 6,851
Changes in operating assets and liabilities:
Film exhibition rights -- -- (230) -- -- (230)
Accounts receivable -- (12,390) (10,116) -- 31 (22,475)
Prepaid and other assets (1,320) 52 (10,039) -- 108 (11,199)
Other accounts receivable (1,727) (5,653) (1,855) (22) (911) (10,168)
Accrued interest (30,377) 9,094 30,402 17 (6) 9,130
Inventories -- -- (11,365) -- -- (11,365)
Suppliers (163) 44,829 (10,629) (1) (1,047) 32,989
Taxes payable other than income taxes 5 2,653 1,226 -- -- 3,884
Accrued payroll and related liabilities -- 412 38 -- (2) 448
Advances received from subscribers -- (2,973) (6,748) -- (16) (9,737)
Deferred accounts payable -- 7,215 -- -- -- 7,215
Other accounts payable 83 1,050 (1,829) 3,496 (2,497) 303
--------- --------- --------- --------- --------- ---------
Net cash (used in) provided by
operating activities (34,807) 47,898 (27,007) 3,676 (3,487) (13,727)
--------- --------- --------- --------- --------- ---------
Cash flows from investing activities:
Purchase of property, plant and equipment -- (127,921) (119,948) -- 2 (247,867)
Loans to related companies (169,223) (14,908) (199) -- 170,158 (14,172)
Repayments of loans to related companies 101,306 9,799 -- -- (101,306) 9,799
Investments in equity and cost investments (51,578) (10,826) (9) (3,789) 41,325 (24,877)
--------- --------- --------- --------- --------- ---------
Net cash used in investing activities (119,495) (143,856) (120,156) (3,789) 110,179 (277,117)
--------- --------- --------- --------- --------- ---------
Cash flows from financing activities:
Bank loans -- 54,489 59,144 -- 937 114,570
Principal payments on capital leases -- (6,437) -- -- -- (6,437)
Capital contributions -- 18,324 27,899 -- (46,223)
Repayments of loans from shareholders -- -- (4,165) -- -- (4,165)
Loans from shareholders -- -- 2,525 -- -- 2,525
Loans from related companies 53,119 107,175 95,863 102 (166,769) 89,490
Repayments of loans from related companies (1,633) (72,984) (28,319) -- 101,306 (1,630)
Repayments of loans from banks (446) (4,211) (6,681) -- 1,031 (10,307)
Minority interest -- -- -- -- 3,024 3,024
--------- --------- --------- --------- --------- ---------
Net cash provided by financing activities 51,040 96,356 146,266 102 (106,694) 187,070
--------- --------- --------- --------- --------- ---------
Net increase (decrease) in cash
and cash equivalents (103,262) 398 (897) (11) (2) (103,774)
Cash and cash equivalents at
beginning of the period 103,282 59 1,444 13 -- 104,798
--------- --------- --------- --------- --------- ---------
Cash and cash equivalents at end of the period $ 20 $ 457 $ 547 $ 2 $ (2) $ 1,024
========= ========= ========= ========= ========= =========
</TABLE>
F-39
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
25. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (continued)
Condensed Consolidated Balance Sheets
as of December 31, 1996
<TABLE>
<CAPTION>
Wholly- Majority-
Owned Owned Non-
Parent Guarantor Guarantor Guarantor
Assets Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
- - ------ ------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 103,282 $ 59 $ 1,444 $ 13 $ -- $ 104,798
Accounts receivable, net -- 10,367 22,568 -- (639) 32,296
Inventories -- -- 13,095 -- -- 13,095
Film exhibition rights -- -- 1,061 -- -- 1,061
Prepaid expenses and other assets -- 71 2,758 -- -- 2,829
Other accounts receivable 1,032 242 4,372 -- (2,638) 3,008
--------- --------- --------- --------- --------- ---------
Total current assets 104,314 10,739 45,298 13 (3,277) 157,087
--------- --------- --------- --------- --------- ---------
Property, plant and equipment -- 49,745 184,376 42 (570) 233,593
Investments - equity affiliates 64,844 -- -- -- (57,177) 7,667
Cost basis investees -- 16,326 -- -- -- 16,326
Concessions, net 7,138 -- 10,436 -- -- 17,574
Advances payments for investments -- -- -- -- -- --
Loans to affiliated companies 338,442 16,278 3,027 -- (342,439) 15,308
Debt issuance costs 9,145 -- -- -- -- 9,145
Other -- 877 1,545 -- -- 2,422
--------- --------- --------- --------- --------- ---------
Total assets $ 523,883 $ 93,965 $ 244,682 $ 55 $(403,463) $ 459,122
========= ========= ========= ========= ========= =========
</TABLE>
F-40
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
25. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (continued)
Condensed Consolidated Balance Sheets
as of December 31, 1996
<TABLE>
<CAPTION>
Wholly- Majority-
Owned Owned Non-
Parent Guarantor Guarantor Guarantor
Liabilities and Shareholders' Equity Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Short-term bank loans $ 3,166 $ 6,789 $ 8,084 $ -- $ -- $ 18,039
Film suppliers -- -- 19,828 -- (12,816) 7,012
Other suppliers 163 4,925 48,127 -- (283) 52,932
Taxes payable other than income taxes -- 964 7,989 -- -- 8,953
Accrued payroll and related liabilities -- 637 5,504 -- -- 6,141
Advances payments received from -- 3,685 6,797 -- -- 10,482
subscribers
Other accounts payable 180 900 5,951 -- (2,488) 4,543
--------- --------- --------- --------- --------- ---------
Total current liabilities 3,509 17,900 102,280 -- (15,587) 108,102
--------- --------- --------- --------- --------- ---------
Financing 250,000 464 -- -- -- 250,464
Loans from affiliated companies -- 16,600 316,154 96 (330,129) 2,721
Loans from shareholders -- -- 1,640 -- -- 1,640
Provision from claims -- -- 5,039 -- 6 5,045
Liability to fund equity investee 160,067 110 -- 110 (159,180) 1,107
Deferred hook-up fee revenue -- 4,883 -- -- -- 4,883
--------- --------- --------- --------- --------- ---------
Total long-term liabilities 410,067 22,057 322,833 206 (489,303) 265,860
--------- --------- --------- --------- --------- ---------
Minority interest -- -- 1,310 -- 468 1,778
Redeemable common stock, no par value 164,910 -- -- -- -- 164,910
Shareholders' equity
Paid-in capital 142,495 71,489 33,837 3,216 (108,542) 142,495
Retained earnings (197,098) (17,481) (215,578) (3,367) 209,501 (224,023)
--------- --------- --------- --------- --------- ---------
Total shareholders' equity (54,603) 54,008 (181,741) (151) 100,959 (81,528)
--------- --------- --------- --------- --------- ---------
Total liabilities and
shareholders' equity $ 523,883 $ 93,965 $ 244,682 $ 55 $(403,463) $ 459,122
========= ========= ========= ========= ========= =========
</TABLE>
F-41
<PAGE>
25. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (continued)
Condensed Consolidated Statements of Operations
for the year ended December 31, 1996
<TABLE>
<CAPTION>
Wholly- Majority-
Owned Owned Non-
Parent Guarantor Guarantor Guarantor
Description Company Subsidiaries Subsidiaries Subsidiaries Eliminations Total
------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Gross revenues
Monthly subscription $ -- $ 2,266 $120,754 $ -- $ -- $ 123,020
Installation -- 15,609 46,108 -- -- 61,717
Advertising revenue -- -- 7,532 -- -- 7,532
Indirect programming -- -- 11,377 -- -- 11,377
Other -- 143 8,049 -- -- 8,192
Revenue taxes -- (1,488) (12,259) -- -- (13,747)
-------- -------- -------- -------- -------- --------
Net revenue -- 16,530 181,561 -- -- 198,091
-------- -------- -------- -------- -------- --------
Direct operating expenses -- -- -- -- -- --
Payroll and benefits -- 2,781 24,422 -- -- 27,203
Programming -- -- 42,391 -- -- 42,391
Transponder lease cost -- 905 9,942 -- -- 10,847
Technical assistance -- -- 5,507 -- -- 5,507
Vehicle rentals -- 90 1,772 -- -- 1,862
TVA Magazine -- -- 6,842 -- -- 6,842
Other costs -- 2,078 15,567 -- -- 17,645
-------- -------- -------- -------- -------- --------
-- 5,854 106,443 -- -- 112,297
-------- -------- -------- -------- -------- --------
Selling, general and
administrative expenses -- -- -- -- -- --
Payroll and benefits -- 1,491 25,940 -- -- 27,431
Advertising and promotion -- 7,369 13,986 -- -- 21,355
Rent -- 177 3,245 -- -- 3,422
Other administrative expenses 836 6,316 11,758 -- -- 18,910
Other general expenses -- -- 10,337 -- -- 10,337
-------- -------- -------- -------- -------- --------
836 15,353 65,266 -- -- 81,455
-------- -------- -------- -------- -------- --------
Allowance for obsolescence -- -- 2,250 -- -- 2,250
Depreciation -- 2,858 23,681 -- -- 26,539
Amortization 840 -- 837 -- -- 1,677
-------- -------- -------- -------- -------- --------
-- -- -- -- -- --
Operating loss (1,676) (7,535) (16,916) -- -- (26,127)
-------- -------- -------- -------- -------- --------
Interest income 1,995 596 7,590 -- (4,368) 5,813
Interest expenses (12,751) (1,770) (7,270) (97) 4,368 (17,520)
Translation (218) 292 399 -- -- 473
Equity in (losses) income of
affiliates (44,751) (1,220) (883) (1,220) 39,542 (8,532)
Other nonoperating, net 9,243 (1,884) 278 -- (11,329) (3,692)
-------- -------- -------- -------- -------- --------
Loss before income tax and (48,158) (11,521) (16,802) (1,317) 28,213 (49,585)
minority interest
Income taxes -- -- (156) -- -- (156)
-------- -------- -------- -------- -------- --------
Net loss before minority
interest (48,158) (11,521) (16,958) (1,317) 28,213 (49,741)
-------- -------- -------- -------- -------- --------
Minority interest -- -- 38 -- 1,811 1,849
-------- -------- -------- -------- -------- --------
Net loss $(48,158) $(11,521) $(16,920) $ (1,317) $ 30,024 $(47,892)
======== ======== ======== ======== ======== ========
</TABLE>
F-42
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
25. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (continued)
Condensed Consolidated Statements of Cash Flows
for the year ended December 31, 1996
<TABLE>
<CAPTION>
Wholly- Majority-
Owned Owned Non-
Parent Guarantor Guarantor Guarantor
Company Subsidiaries Subsidiaries Subsidiaries Eliminations Total
------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (48,158) $ (11,521) $ (16,920) $ (1,317) $ 30,024 $ (47,892)
Adjustment to reconcile net loss to
net cash (used in) provided by
operating activities:
Depreciation -- 2,858 23,681 -- -- 26,539
Amortization 840 -- 837 -- -- 1,677
Provision for exhibition costs -- -- -- -- -- 0
Provision for doubtful accounts -- -- 2,352 -- -- 2,352
Provision for obsolescence -- -- 2,250 -- -- 2,250
Provision for claims -- -- 1,276 -- -- 1,276
Minority interest -- -- (38) -- (1,811) (1,849)
Disposal and write-off of fixed assets -- -- 1,005 -- -- 1,005
Capital gain (2,317) -- -- -- -- (2,317)
Equity in losses (earnings) of affiliates 44,751 1,220 -- 1,220 (38,659) 8,532
Changes in operating assets and liabilities: -- -- -- -- -- 0
Film exhibition rights -- -- (1,031) -- -- (1,031)
Accounts receivable -- (10,368) (13,666) -- 639 (23,395)
Prepaid and other assets (9,145) (877) 188 -- 861 (8,973)
Other accounts receivable (1,030) (278) (2,816) -- 3,349 (775)
Other -- -- -- -- -- 0
Accrued interest 8,062 (888) (2,107) -- 841 5,908
Inventories -- -- (2,227) -- -- (2,227)
Legal deposits -- -- (30) -- 30 0
Suppliers 163 (934) 11,798 -- (9,478) 1,549
Taxes payable other than income taxes -- (130) 2,795 -- -- 2,665
Accrued payroll and related liabilities -- 569 802 -- -- 1,371
Advances received from subscribers -- 3,685 2,766 -- -- 6,451
Deferred accounts payable -- 4,883 -- -- -- 4,883
Other accounts payable 5 645 4,550 -- (895) 4,305
--------- --------- --------- --------- --------- ---------
Net cash (used in) provided by
operating activities (6,829) (11,136) 15,465 (97) (15,099) (17,696)
--------- --------- --------- --------- --------- ---------
Cash flows from investing activities
Business acquisition
Purchase of fixed assets -- (41,152) (84,454) -- (6) (125,612)
Loans to affiliated companies (112,557) (17,675) (508) -- 91,559 (39,181)
Cash received on loans to affiliated companies 54,445 8,205 9,315 -- (40,269) 31,696
Purchase of concessions -- -- (14,235) -- -- (14,235)
Investments in equity and cost investments (100,452) (5,100) -- -- 88,984 (16,568)
--------- --------- --------- --------- --------- ---------
Net cash used in investing activities (158,564) (55,722) (89,882) -- 140,268 (163,900)
--------- --------- --------- --------- --------- ---------
Cash flows from financing activities:
Short-term bank loans 253,166 7,253 7,406 -- 678 268,503
Capital contributions -- 65,359 17,533 15 (82,907) --
Repayments of loans from shareholders -- -- (2,929) -- -- (2,929)
Loans from shareholders -- -- -- -- --
Loans to shareholders -- -- -- -- --
Loans from affiliated companies 163,858 28,835 62,423 95 (86,797) 168,414
Repayments of loans from affiliated companies (171,795) (34,542) (9,315) -- 43,857 (171,795)
Repayments of loans from banks -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Net cash provided by financing activities 245,229 66,905 75,118 110 (125,169) 262,193
--------- --------- --------- --------- --------- ---------
Net (decrease) increase in cash
and cash equivalents 79,836 47 701 13 -- 80,597
Cash and cash equivalents at
beginning of the period 23,446 12 743 -- -- 24,201
--------- --------- --------- --------- --------- ---------
Cash and cash equivalents at end of the period $ 103,282 $ 59 $ 1,444 $ 13 $ -- $ 104,798
========= ========= ========= ========= ========= =========
</TABLE>
F-43
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
25. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (continued)
Condensed Consolidated Statements of Cash Flows
for the year ended December 31, 1996 (Concluded)
<TABLE>
<CAPTION>
Wholly- Majority-
Owned Owned Non-
Parent Guarantor Guarantor Guarantor
Company Subsidiaries Subsidiaries Subsidiaries Eliminations Total
------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Supplemental cash disclosure:
Cash paid for interest $ 7,312 $ -- $ -- $ -- $ -- $ 7,312
-------- -------- -------- -------- -------- --------
Supplemental noncash financing activities:
Accrued interest on related company loans
refinanced as principal balance -- 648 1,497 -- (1,791) 354
-------- -------- -------- -------- -------- --------
Details of acquisitions:
Fair value of assets acquired -- -- 15,701 -- -- 15,701
Liabilities assumed -- -- (1,385) -- -- (1,385)
-------- -------- -------- -------- -------- --------
Cash paid -- -- 14,316 -- -- 14,316
Less: cash acquired -- -- (81) -- -- (81)
-------- -------- -------- -------- -------- --------
Net cash paid for acquisitions $ -- $ -- $ 14,235 $ -- $ -- $ 14,235
======== ======== ======== ======== ======== ========
</TABLE>
F-44
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
25. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (continued)
Condensed Consolidated Statements of Operations
for the year ended December 31, 1995
<TABLE>
<CAPTION>
Wholly- Majority-
Owned Owned Non-
Parent Guarantor Guarantor Guarantor
Description 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-45
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
25. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (continued)
Condensed Consolidated Statements of Cash Flows
for the year ended December 31, 1995
<TABLE>
<CAPTION>
Majority- Wholly-
Owned Owned Non-
Parent Guarantor Guarantor Guarantor
Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated
------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (36,940) $ (3,083) $ (26,989) $ (1,427) $ 27,369 $ (41,070)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation -- 127 12,721 -- -- 12,848
Amortization 420 -- -- -- -- 420
Provision for exhibition costs -- -- 827 -- -- 827
Provision for doubtful accounts -- -- 2,196 -- -- 2,196
Provision for claims -- -- 2,688 -- -- 2,688
Minority interest -- -- -- -- (871) (871)
Disposal and write-off of fixed assets -- 4,352 474 -- (4,485) 341
Equity in losses (earnings) of affiliates 27,316 (1,427) -- 1,427 (23,644) 3,672
Changes in operating assets and liabilities:
Film exhibition rights -- -- 560 -- -- 560
Accounts receivable -- -- (5,908) -- -- (5,908)
Prepaid and other assets -- (55) (1,214) -- -- (1,269)
Other accounts receivable (2) -- (599) -- -- (601)
Accrued interest 8,473 244 5,395 -- (4,871) 9,241
Inventories -- 333 (7,706) -- -- (7,373)
Legal deposits -- -- (108) -- -- (108)
Suppliers -- 5,385 34,004 -- (3,114) 36,275
Taxes payable other than income taxes -- 1,095 3,786 -- -- 4,881
Accrued payroll and related liabilities -- 68 1,568 -- -- 1,636
Deferred accounts payable -- -- 2,956 -- -- 2,956
Other accounts payable 3 273 1,372 -- -- 1,648
--------- --------- --------- --------- --------- ---------
Net cash (used in) provided by
operating activities (730) 7,312 26,023 -- (9,616) 22,989
--------- --------- --------- --------- --------- ---------
Cash flows from investing activities:
Purchase of fixed assets -- (11,619) (86,470) -- 5,060 (93,029)
Loans to related companies (115,498) (6,709) (8,220) -- 122,460 (7,967)
Cash received on loans to related companies 34,220 -- 26 -- (31,655) 2,591
Purchase of concessions (6,393) -- -- -- -- (6,393)
Investments in equity and cost investments (4,382) (13,763) -- (3,117) 6,399 (14,863)
--------- --------- --------- --------- --------- ---------
Net cash used in investing activities (92,053) (32,091) (94,664) (3,117) 102,264 (119,661)
--------- --------- --------- --------- --------- ---------
Cash flows from financing activities:
Capital contributions 125,000 2,154 -- 3,117 (5,271) 125,000
Repayments of loans from shareholders -- 2,154 -- -- (2,154) --
Loans from related companies 131,858 22,848 97,218 -- (120,064) 131,860
Repayments of loans from related companies (140,629) (2,365) (32,477) -- 34,840 (140,631)
--------- --------- --------- --------- --------- ---------
Net cash provided by financing activities 116,229 24,791 64,741 3,117 (92,649) 116,229
--------- --------- --------- --------- --------- ---------
Net increase (decrease) in cash and
cash equivalents 23,446 12 (3,901) -- -- 19,557
Cash and cash equivalents at beginning
of the period -- -- 4,644 -- -- 4,644
--------- --------- --------- --------- --------- ---------
Cash and cash equivalents at end of the period 23,446 12 743 -- -- 24,201
--------- --------- --------- --------- --------- ---------
Supplemental cash disclosure:
Cash paid for interest 8,390 -- 2,708 -- (2,708) 8,390
--------- --------- --------- --------- --------- ---------
Supplemental non-cash financing activities:
Accrued interest on related company loans
refinanced as principal balance $ 9,355 $ 34 $ 4,754 -- $ (4,788) $ 9,355
========= ========= ========= ========= ========= =========
</TABLE>
F-46
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
26. Working capital deficiency
The Company's financial statements for the year ended December 31, 1997
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 $81,417 and $47,892
for the two years in the period ended December 31, 1997 and 1996,
respectively. In addition, the Company had negative working capital of
$78,069 at December 31, 1997.
The Company is endeavoring to reverse its pattern of losses and effectively
meet its liquidity needs through increasing the revenue base and other
means.
The Company's continuation as a going concern is dependent upon its ability
to generate sufficient cash flow to meet its obligations on a timely basis.
These obligations include, inter alia, interest payments on the Company's
Senior Notes and other indebtedness, commitments to finance equity
investees and capital expenditure requirements.
Management's plans to continue as a going concern include the following
efforts to generate the necessary cash flow to meet the Company's cost
structure: i) capital increases - in February 1998, capital contributions
of $100,000 were received from shareholders; ii) credit facilities - the
Company has a $60,000 credit facility with Abril S.A. As of December 31,
1997, $5,677 of this facility was unutilized; and, iii) leasing and other
financing - the Company is in the process of seeking additional financing
to cover projected capital expenditures.
The consolidated financial statements do not include any adjustments
related to the recoverability and classification of recorded assets amounts
or the amounts and classifications of liabilities that might be necessary
should the Company be unable to continue as a going concern.
F-47
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to these Consolidated Financial Statements, Continued
(in thousands of U.S. dollars)
27. Subsequent events
Management of the Company have completed an evaluation of its operations
and determined that Brazil no longer contitutes a highly inflationary
economy. The effective date of this change is January 1, 1998. Management
of the Company is currently performing an assessment in order to determine
the functional currency of the Company.
F-48
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
Index to Financial Statements
Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants F-50
Balance Sheets as of December 31, 1997 and 1996 F-51
Statements of Operations for each of the three years in the period ended December 31, 1997 F-53
Statements of Changes in Shareholders' Equity for each of the three years in the period
ended December 31, 1997 F-54
Statements of Cash Flows for each of the three years in the period ended December 31, 1997 F-55
Notes to these Financial Statements F-56
</TABLE>
F-49
<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, 1997 and 1996, and the related statements of
operations, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1997, all expressed in United States
dollars. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TVA SISTEMA DE TELEVISAO S.A.
as of December 31, 1997 and 1996, and the related results of operations and cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with accounting principles generally accepted in the United States of
America.
Coopers & Lybrand
Sao Paulo, Brazil
March 18, 1998
F-50
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
Balance Sheets
December 31, 1997 and 1996
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1996
-------- --------
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents (Note 3) $ 66 $ 750
Accounts receivable, net (Note 4) 26,168 21,625
Accounts receivable from related companies (Note 8) 3,207 2,582
Inventories, net (Note 5) 12,139 9,126
Film exhibition rights, net (Note 6) 1,291 1,061
Prepaid and other assets (Note 7) 12,244 2,155
Other accounts receivable 2,203 888
-------- --------
Total current assets 57,318 38,187
-------- --------
Property, plant and equipment, net (Note 11) 231,178 165,543
Investments - cost basis investments 9 --
Loans to related companies (Note 8) 3,705 3,024
Other 2,090 1,502
-------- --------
Total assets $294,300 $208,256
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-51
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
Balance Sheets
December 31, 1997 and 1996
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
--------- ---------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Loans (Note 12) $ 33,660 $ 8,084
Film suppliers 25,229 19,828
Other suppliers 25,703 44,940
Taxes payable other than income taxes 8,169 7,522
Accrued payroll and related liabilities 5,018 5,057
Advance payments received from subscribers 34 6,782
Other accounts payable (Note 13) 2,464 2,687
--------- ---------
Total current liabilities 100,277 94,900
--------- ---------
Long-term liabilities
Loans (Note 12) 25,899 --
Loans from related companies (Note 8) 391,177 293,658
Provision for claims (Note 21) 5,334 5,039
--------- ---------
Total long-term liabilities 422,410 298,697
--------- ---------
Commitments and contingencies (Notes 15 and 17)
Shareholders' equity
Common shares, no par value, 6,980,764
shares issued and outstanding (Note 16) 16,303 16,303
Accumulated deficit (244,690) (201,644)
--------- ---------
Total shareholders' equity (228,387) (185,341)
--------- ---------
Total liabilities and shareholders' equity $ 294,300 $ 208,256
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-52
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
Statements of Operations
for the years ended
December 31, 1997, 1996 and 1995
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Gross revenues
Monthly subscriptions $ 143,573 $ 108,774 $ 59,263
Installation 20,349 43,954 26,045
Advertising 4,947 7,532 8,377
Indirect programming 22,810 11,377 2,866
Other 13,142 7,983 2,226
Revenue taxes (13,846) (11,841) (7,280)
--------- --------- ---------
Net revenue 190,975 167,779 91,497
--------- --------- ---------
Direct operating expenses
Payroll and benefits 19,551 20,581 10,749
Programming 54,265 39,067 21,609
Transponder lease cost 10,405 9,942 7,568
Technical assistance 1,630 5,261 4,937
Vehicle rentals 889 1,452 1,478
TVA magazine 7,030 6,401 3,318
Other costs 12,874 13,762 9,190
--------- --------- ---------
106,644 96,466 58,849
--------- --------- ---------
Selling, general and administrative expenses
Payroll and benefits 24,557 24,662 21,089
Advertising and promotion 19,470 13,382 10,793
Rent 3,639 2,998 941
Other administrative expenses 10,822 9,772 5,981
Other general expenses 3,883 9,500 5,917
--------- --------- ---------
62,371 60,314 44,721
--------- --------- ---------
Provision for equipment, inventory and obsolescence 869 2,250 --
Depreciation 33,484 22,128 12,535
--------- --------- ---------
Operating loss (12,393) (13,379) (24,608)
Interest income 6,920 7,365 7,800
Interest expense (34,888) (5,227) (9,687)
Translation (loss) gain (92) 26 (167)
Other nonoperating (expenses) income, net (2,593) (2,217) 4,028
--------- --------- ---------
Loss before income taxes (43,046) (13,432) (22,634)
Income taxes (Note 10) -- -- --
--------- --------- ---------
Net loss $ (43,046) $ (13,432) $ (22,634)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-53
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
Statements of Changes in Shareholders' Equity
for the years ended
December 31, 1997, 1996 and 1995
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Paid-in
Capital Accumulated
(Note 16) Deficit Total
--------- ----------- ---------
<S> <C> <C> <C>
Balance as of December 31, 1994 $ 16,303 $(165,578) $(149,275)
Net loss for the period -- (22,634) (22,634)
--------- --------- ---------
Balance as of December 31, 1995 16,303 (188,212) (171,909)
Net loss for the period -- (13,432) (13,432)
--------- --------- ---------
Balance as of December 31, 1996 16,303 (201,644) 185,341
Net loss for the period -- (43,046) (43,046)
--------- --------- ---------
Balance as of December 31, 1997 $ 16,303 $(244,690) $(228,387)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-54
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
Statements of Cash Flows
for the years ended
December 31, 1997, 1996 and 1995
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (43,046) $ (13,432) $ (22,634)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation 33,484 22,128 12,535
Provision for doubtful accounts 2,634 1,966 2,196
Provision for obsolescence 870 2,250 --
Provision for exhibition costs -- -- 827
Provision for claims 295 1,276 2,688
Disposal of property, plant and equipment 338 1,005 474
Changes in operating assets and liabilities:
Film exhibition rights (230) (1,031) 560
Accounts receivable (7,177) (12,370) (5,876)
Prepaid and other assets (10,089) 690 (1,191)
Other accounts receivable including related companies (2,528) (1,925) (711)
Accrued interest 26,586 (3,604) 356
Inventories (3,883) 1,700 (7,706)
Suppliers (13,836) 9,133 34,010
Taxes payable other than income taxes 647 2,502 3,759
Accrued payroll and related liabilities (38) 807 1,453
Advances received from subscribers (6,748) 2,796 2,955
Other accounts payable (223) 1,537 426
--------- --------- ---------
Net cash (used in) provided by operating activities (22,944) 15,428 24,121
--------- --------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment (99,457) (69,792) (85,016)
Loans to related companies (199) (508) (8,220)
Repayments of loans to related companies -- 9,315 26
Others (9) -- --
--------- --------- ---------
Net cash used in investing activities (99,665) (60,985) (93,210)
--------- --------- ---------
Cash flows from financing activities:
Bank loans 54,785 7,406 --
Repayments of loans from shareholders -- (2,767) --
Loans from related companies 76,971 40,970 89,000
Repayments of loans from related companies (3,150) -- (23,857)
Repayments of loans from bank (6,681) -- --
--------- --------- ---------
Net cash provided by financing activities 121,925 45,609 65,143
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (684) 52 (3,946)
Cash and cash equivalents at beginning of the period 750 698 4,644
========= ========= =========
Cash and cash equivalents at end of the period $ 66 $ 750 $ 698
========= ========= =========
Supplemental cash disclosure:
Cash paid for interest -- $ 317 --
========= ========= =========
Supplemental non-cash financing activities:
Accrued interest on related company loans refinanced
as principal balance $ 26,580 -- $ 2,468
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-55
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
Notes to these Financial Statements
(in thousands of U.S. dollars)
1. TVA Sistema de Televisao S.A. (the "Company") and its principal operations
The Company renders services related to wireless cable and cable and
parabolic antenna television systems, including marketing and advertising,
production, distribution and licensing of domestic and foreign television
programs. The Company has wireless cable channel rights primarily in major
urban markets in Brazil.
2. Summary of significant accounting policies
Significant policies followed in the preparation of the financial
statements are described below:
2.1 Basis of presentation
The financial statements are presented in U.S. dollars and have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP"), which differ in certain respects
from accounting principles applied by the Company in its local currency
financial statements, which are prepared in accordance with accounting
principles generally accepted in Brazil ("Brazilian GAAP").
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
financial statement dates and the reported amount of revenues and expenses
during the reporting periods. Since management's judgment involves making
estimates concerning the likelihood of future events, the actual results
could differ from these estimates.
2.2 Accounting records
As required by Brazilian Law, and in accordance with local accounting
practices, the accounting records of the Company are maintained in
Brazilian currency ("real" or "R$"). In order to present the financial
statements in conformity with accounting principles generally accepted in
the United States of America, the Company maintains additional accounting
records which are used solely for this purpose.
2.3 Currency remeasurement
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
52, "Foreign Currency Translations", the United States dollar has been
assumed to be the functional currency as Brazil is a "hyperinflationary"
country. As such, the local accounts of the Company are translated into
United States dollars as follows:
F-56
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
2.3 Currency remeasurement (Continued)
o Nonmonetary assets and liabilities are translated at historical rates.
All other assets and liabilities are translated at the official rate
of exchange of R$1.1164 to US$1 in effect on December 31, 1997, and
R$1.0394 to US$1 in effect on December 31, 1996. Translation gains and
losses are recognized in the income statement.
o Income and expenses are translated at the average exchange rates in
effect each month, except for those related to assets and liabilities
which are translated at historical exchange rates, and deferred income
taxes, which are translated at the current rate. Translation
gains/losses are recognized in the income statement.
2.4 Cash and cash equivalents
Cash and cash equivalents are defined as cash and cash in banks and
investments in interest-bearing securities and are carried at cost plus
accrued interest. Short-term investments with original maturities of three
months or less at the time of purchase are considered cash equivalents.
2.5 Financial instruments
In accordance with SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments" information is provided about the fair value of certain
financial instruments for which it is practicable to estimate that value.
For the purposes of SFAS No. 107, the estimated fair value of a financial
instrument is the amount at which the instrument could be exchanged in a
current transaction between willing parties, other than in a forced or
liquidation sale. The carrying values of the Company's financial
instruments as of December 31, 1997 and 1996 approximate management's best
estimate of their fair values. The following methods and assumptions were
used to estimate the fair value of each class of financial instrument for
which it is practicable to estimate that value:
o The fair value of certain financial assets carried at cost, including
cash, accounts receivable, other accounts receivable, and certain
other short-term assets is considered to approximate their respective
carrying value due to their short-term nature.
o The fair value of payables to film suppliers and other suppliers,
other accounts payable, loans to related companies and certain other
short-term liabilities is considered to approximate their respective
carrying value due to their short-term nature.
o The fair value of loans from related companies approximates their
respective carrying values, as interest on these loans is variable and
based on market rates.
F-57
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
2.6 Accounts receivable
A provision for doubtful accounts is established on the basis of an
analysis of the accounts receivable, in light of the risks involved, and is
considered sufficient to cover any losses incurred in realization of
credits.
2.7 Inventories
Inventories consist of materials and supplies and imports in transit.
Materials and supplies are used to provide service to new customers, and to
ensure continuity of service to existing customers. Imports in transit
represent materials purchased from foreign countries that have not yet been
received.
Inventories are stated at the lower of cost or market. Cost is determined
principally under the average cost method.
A provision for obsolescence has been established on the basis of an
analysis of slow-moving materials and supplies.
2.8 Film exhibition rights and program licensing
Film exhibition rights and program licensing costs are deferred and charged
to expense as the films and/or programs are exhibited. A provision for
exhibition expiration is determined based on management's estimate of the
Company's capacity to telecast the films and projected revenue streams.
2.9 Property, plant and equipment
Property, plant and equipment are stated at cost and depreciated using the
straight-line method, over the remaining useful lives, as described in Note
11.
2.10 Advertising
Advertising revenues are recognized, and the production cost of commercials
and programming are charged to expense, when the commercial is telecast.
F-58
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
2.11 Recoverability of long-lived assets to be held and used in the business
Management reviews long-lived assets, primarily the Company's licenses and
its property and equipment to be held and used in the business, for the
purposes of determining and measuring impairment on a recurring basis or
when events or changes in circumstances indicate that the carrying value of
an asset or group of assets may not be recoverable. Assets are grouped and
evaluated for possible impairment at the level of each cable television
system; impairment is assessed on the basis of the forecasted undiscounted
cash flows of the businesses over the estimated remaining lives of the
assets related to those systems. A write-down of the carrying value of the
assets or group of assets to estimated fair value will be made when
appropriate.
2.12 Revenue recognition
Hook up fees are recognized as revenue on the equipment installation date
to the extent of direct selling costs incurred. Subscription revenues are
recognized as earned on an accrual basis.
2.13 Licenses
Televisao Show Time Ltda. ("TV Show Time") and TVA Brasil Radioenlaces
Ltda. ("TVA Brasil") hold licenses covering certain operations of the
Company. The use of such licenses is provided to the Company, for a nominal
fee, under a Service Agreement dated July 22, 1994, as amended, among
TEVECAP, TV Show Time, TVA Brasil and Abril S.A.
Pursuant to the Service Agreement, TV Show Time and TVA Brasil have agreed
to transfer the licenses, which are carried at nil value, to TEVECAP at
nominal cost.
3. Cash and cash equivalents
As of December 31, 1997 and 1996, cash and cash equivalents were comprised
of:
December 31,
-------------------
1997 1996
---- ----
Cash on hand and in banks $ 22 $721
Short-term investments 44 29
---- ----
$ 66 $750
==== ====
F-59
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
4. Accounts receivable, net
As of December 31, 1997 and 1996, accounts receivable were comprised of:
December 31,
-------------------------
1997 1996
-------- --------
Subscriptions $ 11,084 $ 7,294
Installation fees 10,305 9,789
Advertising and programming 4,887 4,511
Barter 5,857 5,248
Others 2,042 156
Provision for doubtful accounts (8,007) (5,373)
-------- --------
$ 26,168 $ 21,625
======== ========
5. Inventories, net
As of December 31, 1997 and 1996, inventories were comprised of:
December 31,
--------------------------
1997 1996
-------- --------
Materials and supplies $ 13,835 $ 10,544
Imports in transit 1,424 832
Provision for obsolescence (3,120) (2,250)
-------- --------
$ 12,139 $ 9,126
======== ========
6. Film exhibition rights, net
As of December 31, 1997 and 1996, film exhibition rights were comprised of:
December 31,
----------------------
1997 1996
------- -------
Exhibition rights $ 1,291 $ 2,223
Provision for exhibition expiration -- (1,162)
------- -------
$ 1,291 $ 1,061
======= =======
F-60
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
7. Prepaid and other assets
As of December 31, 1997 and 1996, prepaid expenses were comprised of:
December 31,
---------------------
1997 1996
------- -------
Advances to suppliers $11,980 $ 1,411
Prepaid TVA magazine publishing expenses -- 510
Prepaid meals and transportation 89 194
Others 175 40
------- -------
$12,244 $ 2,155
======= =======
8. Related-party transactions
The following tables summarize the transactions between the Company and its
related parties as of December 31, 1997 and 1996 and for each of the three
years in the period ended December 31, 1997:
December 31,
-------------------------
1997 1996
-------- --------
TVA Parana Ltda
Loans receivable $ 3,404 $ 2,936
Accounts receivable 541 1,343
Accounts payable -- 580
TV Cabo Santa Catarina Ltda
Accounts payable 21 --
Loans receivable 101 88
Tevecap S.A
Loans payable 384,326 286,284
Coml. Cabo Ltda
Loans payable 4,320 4,642
HBO Brasil Ltda
Accounts receivable 330 778
Televisao Abril Ltda
Accounts receivable 34 136
ESPN do Brasil Ltda
Accounts receivable 31 55
Accounts payable 489 337
F-61
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
8. Related-party transactions (Continued)
December 31,
-----------------------
1997 1996
------ ------
Abril S.A
Accounts receivable $ -- $ 19
Accounts payable 430 104
Loans payable 2,531 2,721
TV Filme Inc.
Accounts receivable 19 --
Loans receivable 200 --
TVA Network S.A
Accounts receivable 2,138 --
Galaxy Brasil S.A
Accounts receivable 26 136
Others
Accounts receivable 88 115
Accounts payable 30 32
Loans payable -- 11
Year Ended December 31,
------------------------------------
1997 1996 1995
-------- -------- --------
Tevecap S.A
Net interest (income) expense $ 27,768 $ (1,749) $ 2,465
Abril S.A
Printing cost 4,389 4,516 2,723
Net interest (income) expense (188) 46 --
Coml. Cabo Ltda
Net interest income (322) (319) --
TV Cabo Santa Catarina Ltda
Net interest income (14) (21) --
ESPN do Brasil Ltda
Programming costs, net 3,493 3,850 646
TVA Parana Ltda
Net interest income (469) (1,330) (2,286)
TV Filme Inc.
Programming revenue (8,629) (6,435) (742)
Canbras TVA Cabo Ltda
Programming revenue (1,837) (207) --
F-62
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
8. Related-party transactions (Continued)
The related company loans are denominated in reais and are subject to
monetary restatement until December 31, 1995 plus interest charges at the
market rate which ranged from 3.85% to 4.05% per month in December 1997
(1.80% to 2.50% per month in December 1996). Such loans are renewable every
year on December 31.
The Company's parent, TEVECAP S.A. ("Tevecap"), and Falcon International
Communications Services Inc., one of Tevecap's shareholders, signed a
consulting service agreement on April 1, 1996 related to the Company's
operations and technologies. Initially, the duration of this agreement was
two years, renewable every subsequent two-year period thereafter. The
payment for the consulting services amounts to $200 per annum.
Related-party transactions relating to programming sales and costs and
printing service costs were carried out at usual market rates and terms.
The Company received guarantees in the course of the year from its parent
company Tevecap S.A. and from Abril S.A. in the form of collateral and
letters of credit. The amount outstanding pursuant to these guarantees as
of December 31, 1997 was $61,862 and $3,198, respectively.
9. Loan guarantees
In November 1996, Tevecap S.A., the Company's parent, issued $250,000
12-5/8% Senior Notes to institutional buyers in a private placement. The
Notes which mature in November 2004 were subsequently registered with the
Securities and Exchange Commission in May 1997. These Notes are jointly and
severally, irrevocably and fully unconditionally guaranteed, on a senior
basis, by Tevecap's direct and indirect subsidiaries including the Company.
F-63
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
10. Income taxes
The tax effects of temporary differences that give rise to a significant
portion of the deferred tax asset and deferred tax liability as of December
31, 1997 and 1996 are as follows:
December 31,
----------------------
1997 1996
-------- --------
Deferred tax assets:
Net operating loss carryforwards $ 50,981 $ 29,845
Deferred charges 3,458 5,581
Provision for obsolescence 732 437
Provision for claims 3,011 1,461
Provision for decoders 904 438
Others 1,076 379
-------- --------
Total gross deferred tax asset 60,162 38,141
Less valuation allowance (57,386) (32,685)
-------- --------
Net deferred tax asset 2,776 5,456
Deferred tax liability:
Installation costs (2,776) (5,456)
-------- --------
Total gross deferred tax liability $ (2,776) $ (5,456)
======== ========
Net deferred tax asset $ -- $ --
======== ========
The Company has a limited operating history and has generated losses since
its inception. The valuation allowance has been established in accordance
with the requirements of SFAS No. 109 "Accounting for Income Taxes".
As of December 31, 1997, the Company has unexpirable accumulated tax losses
of $154,486.
F-64
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
10. Income taxes (Continued)
Income tax was different from the amount computed using the Brazilian
statutory income tax for the reasons set forth in the following table:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Loss before income taxes and minority interest $ 43,047 $ 13,432 $ 22,635
Statutory income tax rate 33% 33% 30.56%
-------- -------- --------
14,206 4,433 6,917
Increase (decrease) in the income tax rate -- 1,957 (7,670)
Deferred charges amortization 3,839 5,102 (5,634)
Translation rate difference on exhibition rights -- -- 381
Translation (loss) gain of tax losses (2,069) (2,054) 1,718
Monetary correction of shareholders' equity -- -- (449)
Installation materials depreciation 69 3,761 (452)
Translation gain on loans from related companies 8,910 -- --
-------- -------- --------
Others (254) (5,375) 3,198
Net income tax benefit (provision) for the period 24,701 7,824 (1,991)
(Increase) Decrease in valuation allowance (24,701) (7,824) 1,991
-------- -------- --------
$ -- $ -- $ --
======== ======== ========
</TABLE>
F-65
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
11. Property, plant and equipment, net
As of December 31, 1997 and 1996, property, plant and equipment were
comprised of:
Annual
Depreciation December 31,
Rate ----------------------
% 1997 1996
------------ --------- ---------
Machinery and equipment 10 $ 41,785 $ 32,417
Converters 10 94,586 68,078
Leasehold improvements 25 3,783 2,007
Furniture and fixtures 10 1,371 1,199
Premises 10 2,070 1,376
Vehicles 20 2,706 1,044
Software 20 4,497 2,626
Tools 10 761 632
Reception equipment 20 107,251 68,637
Cable plant 10 24,650 21,931
--------- ---------
283,460 199,947
Telephone line use rights 2,070 1,888
Trademarks, patents and others 179 165
Others 2,747 691
Accumulated depreciation (78,292) (45,727)
Fixed assets in transit 21,014 8,579
-- --
$ 231,178 $ 165,543
========= =========
12. Loans
The loans as of December 31, 1997 represent the refinancing of certain
supplier payables. The average interest rate on such loans is LIBOR plus
2.0%, and the principals will be paid following:
1999 $13,559
2000 5,548
2001 4,307
2002 2,485
-------
Total $25,899
=======
F-66
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
13. Other accounts payable
As of December 31, 1997 and 1996, other accounts payable were comprised of:
December 31,
----------------
1997 1996
------ ------
Accounts payable to related companies (Note 8) $ 970 $1,053
Advertising 165 265
Importation expenses payable 398 1,330
Others 931 39
------ ------
$2,464 $2,687
====== ======
14. Insurance
The Company maintains insurance coverage for its fixed assets and
inventories in an amount considered sufficient to cover the risks involved.
15. Leased assets and commitments
The Company has rented its office space until the year 2002. As of December
31, 1997, future minimum rental payments applicable to operating leases in
respect of this space aggregate approximately $4,730 as follows:
1998 $2,074
1999 798
2000 656
2001 601
2002 601
------
Total $4,730
======
F-67
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
15. Leased assets and commitments (Continued)
As of December 31, 1997, the Company had contractual commitments with
Empresa Brasileira de Telecomunicacoes ("Embratel") for the use of a
transponder until the year 2004. Based on the contract provisions, these
operating lease commitments are currently estimated to aggregate
approximately $93,072, as follows:
1998 $ 13,296
1999 13,296
2000 13,296
2001 13,296
2002 and thereafter 39,888
------
Total 93,072
======
16. Common shares
Common shares represent registered shares without par value.
The Company's shareholders are entitled to minimum dividends of 25% of net
income for the year, adjusted according to Brazilian Corporation Law. As
the Company has not recorded net income since its inception, no such
dividends are payable.
17. Litigation contingencies
Certain claims and lawsuits arising in the ordinary course of business have
been filed or are pending against the Company which were not recognized in
the financial statements. The Company has also recorded provisions related
to certain claims in amounts that management considers to be adequate after
considering a number of factors including (but not limited to) the views of
legal counsel, the nature of the claims and the prior experience of the
Company.
In management's opinion, all contingencies have been adequately provided
for or are without merit, or are of such kind that, if disposed of
unfavorably, would not have a material adverse effect on the financial
position or future results of operations of the Company.
F-68
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
18. Pension plan
In April 1996, the Company became a co-sponsor of the private pension
entity named Abrilprev Sociedade de Previdencia Privada ("Abrilprev"), the
primary objective of which is to grant employees benefits other than those
provided by Social Security. The plan is optional to all employees of the
sponsoring entities. Abrilprev operates as a Defined Contribution Plan.
Company contributions are made based on a fixed percentage applied to the
payroll of the sponsoring entities based on actuarial calculations. Plan
expenses amounted to $425 for the year ended December 31, 1997 ($308 in
1996).
19. Abril Health Care Plan
In February 1996, the Abril Health Care Plan, Associacao Abril de
Beneficios (the "Health Care Plan"), was created to provide health care to
Abril S.A. companies' employees and their dependents. Both the companies
forming part of the Abril Group and the employees thereof contribute
monthly to the Health Care Plan which is responsible for the management of
the plan. In 1997, contributions made by the Company to the Health Care
Plan and certain affiliated companies to Associacao Abril de Beneficios
amounted to $1,485 ($1,288 in 1996).
20. Working capital deficiency
The Company's financial statements for the year ended December 31, 1997
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 $43,046 and $13,432
for the two years in the period ended December 31, 1997 and 1996,
respectively. In addition, the Company had negative working capital of
$42,959 at December 31, 1997.
The Company is endeavoring to reverse its pattern of losses and effectively
meet its liquidity needs through increasing the revenue base and other
means.
In the event that these steps prove to be inadequate to maintain Sistema's
operating cash flow, the Company's principal shareholder, TEVECAP, intends
to maintain the Company as a going concern. TEVECAP's support may be in the
form of cash advances, loans, equity infusions or external guarantees.
F-69
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
21. Supplementary information - valuation and qualifying accounts and reserves
<TABLE>
<CAPTION>
Provision Deferred
Provision Provision for Taxation Provision
for Doubtful for Exhibition Valuation for
Accounts Obsolescence Expiration Allowance Claims
------------ ------------ ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1994 $ 1,211 $ -- $ 335 $ 26,852 $ 1,075
Additions (Reductions) charged to 2,196 -- 827 (1,991) 2,688
expense
-------- -------- -------- -------- --------
Balance as of December 31, 1995 $ 3,407 $ -- $ 1,162 $ 24,861 $ 3,763
Additions charged to expense 1,966 2,250 -- 7,824 1,276
-------- -------- -------- -------- --------
Balance as of December 31, 1996 $ 5,373 $ 2,250 $ 1,162 $ 32,685 $ 5,039
-------- -------- -------- -------- --------
Additions charged to expense 2,634 870 -- 24,701 295
Reduction -- -- (1,162) -- --
-------- -------- -------- -------- --------
Balance as of December 31, 1997 $ 8,007 $ 3,120 $ -- $ 57,386 $ 5,334
======== ======== ======== ======== ========
</TABLE>
22. Recent accounting pronouncements
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"), which establishes standards for reporting and display of
comprehensive income and its components in a full set of financial
statements. Comprehensive income is the total of reported net income and
all other revenues, expenses, gains and losses that under generally
accepted accounting principles bypass reported net income. SFAS No. 130
requires that comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements
and requires an entity to (a) classify items of other comprehensive income
by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
surplus in the equity section of the balance sheet. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. Companies are
also required to report comparative totals for comprehensive income in
interim reports. Management is currently considering the impact of SFAS No.
130, but does not believe it will have a material effect on the Company's
consolidated financial statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information"("SFAS No. 131"), which establishes
standards for public companies to report certain financial information
about operating segments in interim and annual financial statements.
Operating segments are components of a business about which separate
financial information is available and that are evaluated regularly by the
chief operating decision maker in assessing performance and deciding how to
allocate resources. SFAS No. 131 also requires
F-70
<PAGE>
TVA SISTEMA DE TELEVISaO S.A.
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
22. Recent accounting pronouncements (Continued)
public companies to report certain information about their products and
services and the geographic areas in which they operate. SFAS No. 131 is
effective for financial statements for fiscal years beginning after
December 15, 1997. SFAS No. 131 does not need to be applied to interim
financial statements in the initial year of its application, but such
comparative information will be required in interim statements in the
second year. At this time, management is assessing the impact of SFAS No.
131 and has not determined whether the new reporting provisions will
require supplemental disclosures by the Company.
23. Subsequent events
Until 1997, the Company was responsible for signal distribution and
programming. In January 1998, the Company's parent, Tevecap S.A.,
established a separate company to perform programming functions.
Accordingly, going forward the Company will be responsible for signal
distribution. As a result, there will be no costs and revenues related to
programming recorded in the 1998 financial statements of the Company.
Management of the Company have completed an evaluating of its operations
and determined that Brazil no longer constitutes a highly inflationary
economy. The effective date of this change is January 1, 1998. Management
of the Company is currently performing an assessment in order to determine
the functional currency of the Company.
F-71
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants F-73
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-74
Consolidated and Combined Statements of Operations for the years ended December 31,
1997, 1996 and 1995 F-76
Consolidated and Combined Statements of Changes in Shareholders' Equity for the years
ended December 31, 1997, 1996 and 1995 F-77
Consolidated and Combined Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995 F-78
Notes to Consolidated and Combined Financial Statements F-80
</TABLE>
F-72
<PAGE>
Report of Independent Accountants
To the Shareholders and Directors of
TVA SUL PARTICIPACOES S.A.
We have audited the accompanying consolidated balance sheet of TVA SUL
PARTICIPACOES S.A. and subsidiaries (the "Company") as of December 31, 1997 and
1996, and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the two years in the period
ended December 31, 1997, and the related combined statements of operations,
changes in shareholders' equity and cash flows for the year 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 audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of TVA SUL
PARTICIPAcoES S.A. and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of operations and cash flows for each of the two years in
the period ended December 31, 1997, and the combined results of operations and
cash flows 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 17, 1998
F-73
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
Consolidated Balance Sheets
as of December 31, 1997 and 1996
(in thousands of U.S. dollars)
December 31,
------------------
1997 1996
------- -------
ASSETS
Current assets
Cash and cash equivalents (Note 3) $ 481 $ 694
Accounts receivable, net (Note 4) 2,781 943
Inventories (Note 5) 11,451 3,969
Prepaid and other assets (Note 6) 269 603
Other accounts receivable (Note 7) 228 901
------- -------
Total current assets 15,210 7,110
------- -------
Property, plant and equipment, net (Note 12) 37,911 18,833
Concessions, net (Note 13) 7,477 10,436
Other 330 46
------- -------
Total assets $60,928 $36,425
======= =======
The accompanying notes are an integral part of these financial statements
F-74
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
Consolidated Balance Sheets
as of December 31, 1997 and 1996
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C> <C>
Current liabilities
Loans (Note 8) $ 2,719 $ --
Suppliers 6,394 3,187
Taxes payable other than income taxes 1,046 467
Accrued payroll and related liabilities 523 447
Other accounts payable (Note 9) 920 1,500
Accounts payable to related companies (Note 10) 753 1,779
-------- --------
Total current liabilities 12,355 7,380
-------- --------
Long-term liabilities
Loans $ 1,640 --
Loans from related companies (Note 10) 20,034 11,354
Advances from shareholders (Note 10) -- 12,781
Provision for claims (Note 20) 323 --
-------- --------
Total long-term liabilities 21,997 24,135
-------- --------
Commitments and contingencies (Note 19)
Minority interest 1,258 1,310
Shareholders' equity
Paid-in capital (Note 16) 45,433 17,534
Accumulated deficit (20,115) (13,934)
-------- --------
Total shareholders' equity 25,318 3,600
-------- --------
Total liabilities and shareholders' equity $ 60,928 $ 36,425
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-75
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
Statements of Operations
for the years ended
December 31, 1997, 1996 and 1995
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1997 1996 1995
(Consolidated) (Consolidated) (Combined)
-------------- -------------- ----------
<S> <C> <C> <C>
Gross revenues
Monthly subscriptions $ 25,193 $ 11,980 $ 3,233
Installation 2,799 2,154 --
Other 506 66 --
Revenue taxes (1,958) (418) (227)
-------- -------- --------
Net revenue 26,540 13,782 3,006
-------- -------- --------
Direct operating expenses
Payroll and benefits 4,626 3,841 1,456
Programming 8,922 3,324 --
Technical assistance 202 246 215
Vehicle rentals 186 320 247
TVA magazine 707 441 --
Other costs 2,402 1,805 232
-------- -------- --------
17,045 9,977 2,150
-------- -------- --------
Selling, general and administrative expenses
Payroll and benefits 1,397 1,278 538
Advertising and promotion 824 604 267
Rent 82 247 114
Other administrative expenses 2,723 1,986 292
Other general expenses 896 837 486
-------- -------- --------
5,922 4,952 1,697
-------- -------- --------
Depreciation 3,455 1,553 186
Amortization 917 837 --
-------- -------- --------
Operating loss (799) (3,537) (1,027)
-------- -------- --------
Interest income 631 225 165
Interest expense (5,440) (2,043) (3,527)
Translation (loss) gain (58) 373 8
Other nonoperating (expense) income, net (567) 1,612 27
-------- -------- --------
Loss before income taxes and minority interest (6,233) (3,370) (4,354)
Income taxes (Note 11) -- (156) --
-------- -------- --------
Loss before minority interest (6,233) (3,526) (4,354)
Minority interest 52 38 --
-------- -------- --------
Net loss $ (6,181) $ (3,488) $ (4,354)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-76
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
Statements of Changes in Shareholders' Equity
for the years ended
December 31, 1997, 1996 and 1995
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Paid-in
Capital Accumulated
(Note 13) Deficit Total
--------- ----------- --------
<S> <C> <C> <C>
Balance as of December 31, 1994 (combined) $ 1 $ (6,092) $ (6,091)
Net loss for the period -- (4,354) (4,354)
-------- -------- --------
Balance as of December 31, 1995 (combined) 1 (10,446) (10,445)
Capital contributed on:
August 30, 1996 17,533 -- 17,533
Net loss for the period -- (3,488) (3,488)
-------- -------- --------
Balance as of December 31, 1996 (consolidated) $ 17,534 $(13,934) $ 3,600
Capital contributed on:
December 2, 1997 27,899 -- 27,899
Net loss for the period -- (6,181) (6,181)
-------- -------- --------
Balance as of December 31, 1997 (consolidated) $ 45,433 $(20,115) $ 25,318
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-77
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
Statements of Cash Flows
for the years ended
December 31, 1997, 1996 and 1995
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1997 1996 1995
(Consolidated) (Consolidated) (Combined)
-------------- -------------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (6,181) $ (3,488) $ (4,354)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 3,455 1,553 186
Amortization 917 837 --
Provision for doubtful accounts 1,101 386 --
Provision for claims 323 -- --
Minority interest (52) (38) --
Changes in operating assets and liabilities
Accounts receivable (2,939) (1,296) (32)
Prepaid and other assets 334 (502) (23)
Other accounts receivable 673 (891) 5
Accrued interest 3,816 1,497 2,331
Inventories (7,482) (3,927) --
Other assets (284) (30) (1)
Suppliers 3,207 2,665 (6)
Taxes payable other than income taxes 579 293 27
Accrued payroll and related liabilities 76 (4) 113
Account payable to related companies (1,026) 796 927
Other accounts payable (580) 838 18
-------- -------- --------
Net cash used in operating activities (4,063) (1,311) (809)
-------- -------- --------
Cash flows from investing activities
Purchases of property, plant and equipment (20,491) (14,662) (1,454)
Acquisition of businesses, net of cash acquired -- (14,235) --
-------- -------- --------
Net cash used in investing activities (20,491) (28,897) (1,454)
-------- -------- --------
Cash flows from financing activities
Bank Loans 4,359 -- --
Capital contributions 27,899 17,533 --
Repayments of loans from shareholders -- (162) --
Loans from related companies 6,302 8,672 8,220
Advances from shareholders (12,781) 12,781 --
Repayments of loans from related companies (1,438) (9,315) (5,912)
Minority interest -- 1,348 --
-------- -------- --------
Net cash provided by financing activities 24,341 30,857 2,308
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (213) 649 45
Cash and cash equivalents at beginning of the period 694 45 --
-------- -------- --------
Cash and cash equivalents at end of the period $ 481 $ 694 $ 45
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-78
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
Statements of Cash Flows
for the years ended
December 31, 1997, 1996 and 1995
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1997 1996 1995
(Consolidated) (Consolidated) (Combined)
-------------- -------------- ----------
<S> <C> <C> <C>
Supplemental cash disclosure
Cash paid for interest $ -- $ -- $ 2,708
=========== ======== ========
Supplemental noncash financing activities
Accrued interest on related company loans refinanced
as principal balance $ 3,816 $ 1,497 $ 2,286
=========== ======== ========
Details of acquisitions
Fair value of assets acquired -- 15,701 --
Liabilities assumed -- (1,385) --
----------- -------- --------
Cash paid -- 14,316 --
Less: cash acquired -- (81) --
----------- -------- --------
Net cash paid for acquisitions $ -- $ 14,235 $ --
=========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-79
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
Notes to these Financial Statements
(in thousands of U.S. dollars)
1. The Company and its principal operations
The accompanying financial statements have been prepared to reflect the
results of TVA Sul Participacoes S.A. and its subsidiaries (the "Company").
TVA Sul Participacoes S.A. is a holding company, the subsidiaries of which
render services related to wireless cable and cable television systems,
including marketing and advertising, production, distribution and licensing
of domestic and foreign television programs. The Company has wireless cable
channel rights primarily in major urban markets in the South of Brazil.
2. Summary of significant accounting policies
Significant policies followed in the preparation of the accompanying
consolidated and combined financial statements are described below:
2.1 Basis of presentation, consolidation and combination
a) Basis of presentation
The consolidated and combined financial statements are presented in U.S.
dollars and have been prepared in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP"), which
differ in certain respects from accounting principles applied by the
Company in its local currency financial statements, which are prepared in
accordance with accounting principles generally accepted in Brazil
("Brazilian GAAP").
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
financial statement dates and the reported amount of revenues and expenses
during the reporting periods. Since management's judgment involves making
estimates concerning the likelihood of future events, the actual results
could differ from these estimates.
b) Consolidated presentation as of and for the years ended December 31,
1997 and 1996
TVA Sul Participacoes S.A. was incorporated on March 3, 1996 as a holding
company for certain entities which were under common control. Accordingly,
the financial statements as of
F-80
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
2.1 Basis of presentation, consolidated and combined (Continued)
and for the years ended December 31, 1997 and 1996 are prepared on a
consolidated basis.
The consolidated financial statements include the accounts of all
majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated on consolidation.
c) Combined presentation for the period ended December 31, 1995
The combined financial statements for the period ended December 31, 1995
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" or "R$"). In order to present the financial
statements in conformity with accounting principles generally accepted in
the United States of America, the Company maintains additional accounting
records which are used solely for this purpose.
2.3 Currency remeasurement
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
52, "Foreign Currency Transactions", the United States dollar has been
assumed to be the functional currency as Brazil is a "hyperinflationary"
country. As such, the local accounts of the Company are translated into
United States dollars as follows:
o Nonmonetary assets and liabilities are translated at historical rates.
All other assets and liabilities are translated at the official rate
of exchange of R$1.1164 to US$1 in effect on December 31, 1997, and
R$1.0394 to US$1 in effect on December 31, 1996. Translation gains and
losses are recognized in the income statement.
o Income and expenses are translated at the average exchange rates in
effect each month, except for those related to assets and liabilities
which are translated at historical exchange rates and deferred income
taxes, which are translated at the current rate. Translation gains and
losses are recognized in the income statement.
F-81
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
2.4 Consolidated financial statements
The Company's consolidated operating subsidiaries included in the financial
statements are:
<TABLE>
<CAPTION>
Ownership Interest as of
December 31,
------------------------
1997 1996
------ ------
% %
------ ------
<S> <C> <C>
TVA Sul Parana Ltda. (a) 100.00 100.00
TVA Sul Santa Catarina Ltda. (a) 99.50 99.50
TVA Sul Foz do Iguacu Ltda. (a) 100.00 100.00
CCS Camboriu Cable System de Telecomunicacoes Ltda 60.00 60.00
TCC TV a Cabo Ltda. (a) (b) -- 100.00
TV Alfa Cabo Ltda. (a) (b) -- 100.00
------
</TABLE>
----------
a) One common share in each of these entities is owned by a Brazilian
National pursuant to local legislation.
b) In June 1997, the Company merged the operations of TCC TV a Cabo Ltda.
("TCC") and TV Alfa Cabo Ltda. ("TV Alfa") into TVA Sul Parana Ltda.
2.5 Cash and cash equivalents
Cash and cash equivalents are defined as cash and cash in banks and
investments in interest-bearing securities and are carried at cost plus
accrued interest. Short-term investments with original maturities of three
months or less at the time of purchase are considered cash equivalents.
2.6 Financial instruments
In accordance with SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments", information is provided about the fair value of certain
financial instruments for which it is practicable to estimate that value.
For the purposes of SFAS No. 107, the estimated fair value of a financial
instrument is the amount at which the instrument could be exchanged in a
current transaction between willing parties, other than in a forced or
liquidation sale. The carrying values of the Company's financial
instruments as of December 31, 1997 and 1996 approximate management's best
estimate of their fair values. The following methods and assumptions were
used to estimate the fair value of each class of financial instrument for
which it is practicable to estimate that value:
o The fair value of certain financial assets carried at cost, including
cash, accounts receivable, other accounts receivable, and certain
other short-term assets is considered to approximate their respective
carrying value due to their short-term nature.
F-82
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
2.6 Financial instruments (Continued)
o The fair value of payables to suppliers, other accounts payable, loans
to related companies and certain other short-term liabilities is
considered to approximate their respective carrying value due to their
short-term nature.
o The fair value of loans from related companies approximates their
respective carrying values as interest on these loans is variable and
based on market rates.
2.7 Accounts receivable
A provision for doubtful accounts was established on the basis of an
analysis of the accounts receivable, in light of the risks involved, in an
amount sufficient to cover any losses incurred in realization of credits.
2.8 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.
2.9 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 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.
F-83
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
2.11 Revenue recognition
Hook up fees are recognized as revenue on the equipment installation date
to the extent of direct selling costs incurred. Subscription revenues are
recognized as earned on an accrual basis.
2.12 Accounting for issuances of stock by subsidiaries
Gains and losses arising from the issuances of previously unissued shares
to unrelated parties by subsidiaries are recognized in income as
nonoperating income to the extent that the net book value of the shares
owned by the parent after the sale exceed or is lower than the net book
value per share immediately prior to the sale of the shares by the
subsidiary.
3. Cash and cash equivalents
As of December 31, 1997 and 1996, cash and cash equivalents were comprised
of:
December 31,
-------------------
1997 1996
---- ----
Cash on hand and in banks $463 $502
Short-term investments 18 192
---- ----
$481 $694
==== ====
4. Accounts receivable, net
As of December 31, 1997 and 1996, accounts receivable were comprised of:
December 31,
----------------------
1997 1996
------- -------
Subscriptions $ 2,671 $ 612
Installation fees 1,526 539
Others 71 178
Provision for doubtful accounts (1,487) (386)
------- -------
$ 2,781 $ 943
======= =======
F-84
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
5. Inventories
As of December 31, 1997 and 1996, inventories were comprised of:
December 31,
-----------------------
1997 1996
------- -------
Materials and suppliers $11,357 $ 3,779
Import in transit 94 190
------- -------
$11,451 $ 3,969
======= =======
6. Prepaid and other assets
As of December 31, 1997 and 1996, prepaid expenses were comprised of:
December 31,
-------------------
1997 1996
---- ----
Advances to suppliers $269 $563
Others -- 40
---- ----
$269 $603
==== ====
7. Other accounts receivable
As of December 31, 1997 and 1996, other accounts receivable were comprised
of:
December 31,
-------------
1997 1996
---- ----
Advances to employees $ 23 $ 79
Accounts receivable from related companies (Note 9) 21 610
Others 184 212
---- ----
$228 $901
==== ====
F-85
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
8. Loans
As of December 31, 1997, loans were comprised of:
Short-term Long-term
---------- ----------
Loans $2,719 $1,640
====== ======
Loans as of December 31, 1997 represent the refinancing of certain
suppliers' payables. They bear interest at rates varying from 8.26% to
9.29% per year.
9. Other accounts payable
As of December 31, 1997 and 1996, other accounts payable were comprised of:
December 31,
-----------------
1997 1996
------ ------
Advances payments received from subscribers $ 233 $ --
Pledges and guarantees 38 332
Bank loans -- 427
Accounts payable - imports 167 297
Others 482 444
------ ------
$ 920 $1,500
====== ======
F-86
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
10. Related party transactions
The following tables summarize the transactions between the Company and
related parties as of December 31, 1997 and 1996 and for each of the two
years in the period ended December 31, 1997:
December 31,
----------------------
1997 1996
------- -------
Leonardo Petrelli
Advance from shareholder $ -- $ 1,643
TVA Sistema de Televisao S.A
Loans payable $ 3,505 $ 3,025
Accounts payable 753 1,343
Accounts receivable 21 603
Tevecap S.A
Advance from shareholder $ -- $11,138
Accounts receivable -- 6
Loans payable 16,529 8,329
TVA Parana Ltda
Accounts receivable $ -- $ 1
ESPN do Brasil Ltda
Accounts payable $ -- $ 30
Others
Accounts payable $ -- $ 406
Year Ended December 31,
-----------------------
1997 1996
------ ------
TVA Sistema de Televisao S.A $ 483 $1,330
Net interest expense
Tevecap S.A
Net interest expense $3,333 $ 166
The related company loans are denominated in reais and are subject to
monetary restatement until December 31, 1995 plus interest charges at the
market rate which ranged from 3.85% to
F-87
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
10. Related party transactions (Continued)
3.93% per month in December 1997 (1.8% to 2.2% per month in December 1996).
Such loans are renewable every year on December 31.
11. Income taxes
The tax effects of temporary differences that give rise to a significant
portion of the deferred tax asset and deferred tax liability as of December
31, 1997 and 1996 are as follows:
December 31,
--------------------
1997 1996
------- -------
Deferred tax assets
Net operating loss carryforwards $ 6,552 $ 5,044
Deferred charges 71 97
Provision for claims 104 --
Provision for obsolescence 139 --
Others 449 171
------- -------
Total gross deferred tax asset 7,315 5,312
------- -------
Less valuation allowance (7,167) (5,071)
------- -------
Net deferred tax asset 148 241
Deferred tax liability
Installation costs 148 241
------- -------
Total gross deferred tax liability (148) (241)
------- -------
Net deferred tax asset $ -- $ --
======= =======
The Company has a limited operating history and has generated losses since
its inception. The valuation allowance has been established in accordance
with the requirements of SFAS No. 109, "Accounting for Income Taxes".
As of December 31, 1997, the Company and subsidiaries have unexpirable
accumulated tax losses of $19,854.
F-88
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
11. Income taxes (Continued)
The consolidated and combined income tax expense was different from the
amount computed using the Brazilian statutory income tax for the reasons
set forth in the following table:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Loss before income taxes and minority interest $ 6,232 $ 3,370 $ 4,354
Statutory income tax rate 33.00% 33.00% 30.56%
------- ------- -------
2,057 1,112 1,331
(Decrease) Increase in the income tax rate -- 76 (753)
Deferred charges (341) (198) --
Unallowable amortization 110 486 --
Others 269 317 (26)
------- ------- -------
Consolidated income tax benefit for the period 2,095 1,793 552
Increase in valuation allowance (2,095) (1,949) (552)
------- ------- -------
$ -- $ (156) $ --
======= ======= =======
</TABLE>
Income tax payable represents amounts owed by subsidiaries calculated on a
unitary basis.
F-89
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
12. Property, plant and equipment, net
As of December 31, 1997 and 1996, property, plant and equipment were
comprised of:
<TABLE>
<CAPTION>
Annual December 31,
Depreciation Rate --------------------------------
% 1997 1996
-------- --------
<S> <C> <C> <C>
Machinery and equipment 10 $ 2,858 $ 1,847
Converters 10 9,393 5,412
Leasehold improvements 25 106 104
Furniture and fixtures 10 365 548
Premises 10 657 320
Vehicles 20 638 126
Software 20 197 116
Tools 10 70 65
Reception equipment 20 13,246 4,693
Cable plant 10 5,943 3,454
Building 4 3,783 3,765
-------- --------
37,256 20,450
Telephone line use rights 341 60
Others -- 56
Accumulated depreciation (5,372) (1,917)
Fixed assets in transit 5,686 184
$ 37,911 $ 18,833
======== ========
</TABLE>
13. Concessions, net
As of December 31, 1997 and 1996, concessions were comprised of:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1997 1996
-------- --------
<S> <C> <C>
CCS - Camboriu Cable System Telecomunicacoes Ltda $ 841 $ 841
TVA Sul Foz do Iguacu Ltda 5,346 5,346
TVA Sul Parana Ltda 45 45
TCC TV a Cabo Ltda 2,414 2,414
TV Alfa Ltda. (a) -- 2,042
Accumulated amortization (1,169) (252)
-------- --------
$ 7,477 $ 10,436
======== ========
</TABLE>
F-90
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
13. Concessions, net (Continued)
(a) The movement of $ 2,042 represents a reclassification to property,
plant and equipment.
14. Loan guarantees
In November 1996, Tevecap S.A., the Company's parent, issued $250,000
12-5/8% Senior Notes to institutional buyers in a private placement. The
Notes, which mature in November 2004, were subsequently registered with the
Securities and Exchange Commission in May 1997. These Notes are jointly and
severally, irrevocably and fully unconditionally guaranteed, on a senior
basis, by Tevecap's direct and indirect subsidiaries, including the
Company.
15. Insurance
The Company maintains insurance coverage for its fixed assets and
inventories in an amount considered sufficient to cover the risks involved.
16. Paid-in capital
Paid-in capital as of December 31, 1997 and 1996 was comprised of:
<TABLE>
<CAPTION>
1997 1996
-------------------------------- --------------------------------
US$ Shares US$ Shares
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Leonardo Petrelli Neto $ 6,361 6,919,869 $ 2,455 2,585,916
Tevecap S.A 39,072 42,507,763 15,079 15,884,909
----------- ----------- ----------- -----------
$ 45,433 49,427,632 $ 17,534 18,470,825
=========== =========== =========== ===========
</TABLE>
Paid-in capital represents registered common shares without par value.
The Company's shareholders are entitled to a minimum dividend of 25% of net
income for the year, adjusted according to the Brazilian Corporation Law.
As the Company has recorded no net income since its inception, no such
dividends are payable.
F-91
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
17. Litigation contingencies
Certain claims and lawsuits arising in the ordinary course of business have
been filed or are pending against the Company which were not recognized in
the consolidated financial statements. The Company has also recorded
provisions related to certain claims in amounts that management considers
to be adequate after considering a number of factors including (but not
limited to) the views of legal counsel, the nature of the claims and the
prior experience of the Company.
In management's opinion, all contingencies have been adequately provided
for or are without merit, or are of such kind that, if disposed of
unfavorably, would not have a material adverse effect on the financial
position or future results of operations of the Company.
18. Pension Plan
In July 1996, the Company became a co-sponsor of the private pension entity
named Abrilprev Sociedade de Previdencia Privada ("Abrilprev"), the primary
objective of which is to grant employees benefits other than those provided
by Social Security. The plan is optional to all employees of the sponsoring
entities. Abrilprev operates as a Defined Contribution Plan. Company
contributions are made based on a fixed percentage applied to the payroll
of the sponsoring entities based on actuarial calculations. Plan expenses
amounted to $18 for the year ended December 31, 1997 ($2 in 1996).
19. Abril Health Care Plan
In February 1996, the Abril Health Care Plan, Associacao Abril de
Beneficios (the "Health Care Plan"), was created to provide health care to
Abril S.A. companies' employees and their dependents. Both the companies
forming part of the Abril Group and the employees thereof contribute
monthly to the Health Care Plan which is responsible for the management of
the plan. In 1997, contributions made by the Company to the Health Care
Plan and certain affiliated companies to Associacao Abril de Beneficios
amounted to $212 ($115 for 1996).
F-92
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
20. Supplementary information - valuation and qualifying accounts and reserves
<TABLE>
<CAPTION>
Deferred
Taxation Provision for Provision
Valuation Doubtful for
Allowance Accounts Claims
---------- ------------- ----------
<S> <C> <C> <C>
Balance as of December 31, 1994 $2,570 $ -- $ --
Additions charged to expense 552 -- --
------ ------ ------
Balance as of December 31, 1995 $3,122 $ -- $ --
Additions charged to expense 1,949 386 --
------ ------ ------
Balance as of December 31, 1996 $5,071 $ 386 $ --
Additions charged to expense 2,096 1,101 323
------ ------ ------
Balance as of December 31, 1997 $7,167 $1,487 $ 323
====== ====== ======
</TABLE>
21. Working capital deficiency
The Company's financial statements for the year ended December 31, 1997
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 $6,181 and $3,488
for the two years in the period ended December 31, 1997 and 1996,
respectively.
The Company is endeavoring to reverse its pattern of losses and effectively
meet its liquidity needs through increasing the revenue base and other
means.
In the event that these steps prove to be inadequate to maintain the
Company's operating cash flow, the Company's principal shareholder,
TEVECAP, intends to maintain the Company as a going concern. TEVECAP's
support may be in the form of cash advances, loans, equity infusions or
external guarantees.
F-93
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
22. Recent accounting pronoucements
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"), which establishes standards for reporting and display of
comprehensive income and its components in a full set of financial
statements. Comprehensive income is the total of reported net income and
all other revenues, expenses, gains and losses that under generally
accepted accounting principles bypass reported net income. SFAS No. 130
requires that comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements
and requires an entity to (a) classify items of other comprehensive income
by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
surplus in the equity section of the balance sheet. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. Companies are
also required to report comparative totals for comprehensive income in
interim reports. Management is currently considering the impact of SFAS No.
130, but does not believe it will have a material effect on the Company's
consolidated financial statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which establishes
standards for public companies to report certain financial information
about operating segments in interim and annual financial statements.
Operating segments are components of a business about which separate
financial information is available and that are evaluated regularly by the
chief operating decision maker in assessing performance and deciding how to
allocate resources. SFAS No. 130 also requires public companies to report
certain information about their products and services and the geographic
areas in which they operate. SFAS No. 131 is effective for financial
statements for fiscal years beginning after December 15, 1997. SFAS No. 130
does not need to be applied to interim financial statements in the initial
year of its application, but such comparative information will be required
in interim statements in the second year. At this time, management is
assessing the impact of SFAS No. 130 and has not determined whether the new
reporting provisions will require supplemental disclosures by the Company.
23. Subsequent events
Management of the Company have completed an evaluating of its operations
and determined that Brazil no longer constitutes a highly inflationary
economy. The effective date of this
F-94
<PAGE>
TVA SUL PARTICIPACOES S.A.
AND SUBSIDIARIES
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
23. Subsequent events (Continued)
change is January 1, 1998. Management of the Company is currently
performing an assessment in order to determine the functional currency of
the Company.
F-95
<PAGE>
TVA SUL PARANA LTDA.
INDEX TO FINANCIAL STATEMENTS
Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants F-97
Balance Sheets as of December 31, 1997 and 1996 F-98
Statements of Operations for the years ended December 31, 1997 and 1996 F-100
Statements of Changes in Shareholders' Equity for the years ended
December 31, 1997 and 1996 F-101
Statements of Cash Flows for the years ended December 31, 1997 and 1996 F-102
Notes to Financial Statements F-103
</TABLE>
F-96
<PAGE>
Report of Independent Accountants
To the Quotaholders and Directors of TVA SUL PARANA LTDA.
We have audited the accompanying balance sheets of TVA SUL PARANA LTDA. (the
"Company") as of December 31, 1997 and 1996, and the related statements of
operations, changes in shareholders' equity and cash flows for each of two years
in the period ended December 31, 1997, all expressed in United States dollars.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TVA SUL PARANA LTDA. as of
December 31, 1997 and 1996 and the related statements of operations, changes in
shareholders' equity and cash flows for each of the two years in the period
ended December 31, 1997, in conformity with accounting principles generally
accepted in the United States of America.
Coopers & Lybrand
Sao Paulo, Brazil
March 17, 1998
F-97
<PAGE>
TVA SUL PARANA LTDA.
Balance Sheets
as of December 31, 1997 and 1996
(in thousands of U.S. dollars)
December 31,
-----------------
1997 1996
------- -------
ASSETS
Current assets
Cash and cash equivalents (Note 3) $ 384 $ 406
Accounts receivable, net (Note 4) 2,254 876
Inventories (Note 5) 10,312 2,058
Prepaid expenses and other assets (Note 6) 220 408
Accounts receivable from related companies (Note 10) 154 1,291
Other accounts receivable (Note 7) 110 58
------- -------
Total current assets 13,434 5,097
Property, plant and equipment, net (Note 12) 27,149 12,406
Concessions, net (Note 13) 2,232 --
Loans to related companies (Note 10) 1,937 2,066
Other 323 19
------- -------
Total assets $45,075 $19,588
======= =======
The accompanying notes are an integral part of these financial statements
F-98
<PAGE>
TVA SUL PARANA LTDA.
Balance Sheets
as of December 31, 1997 and 1996
(in thousands of U.S. dollars)
December 31,
--------------------
1997 1996
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Loans (Note 8) $ 2,196 $ --
Suppliers 5,901 1,795
Taxes payable other than income taxes 778 378
Accrued payroll and related liabilities 401 335
Accounts payable to related companies (Note 10) 6,254 1,806
Other accounts payable (Note 9) 792 1,052
-------- --------
Total current liabilities 16,322 5,366
-------- --------
Long-term liabilities
Loans (Note 8) 1,639 --
Loans from related companies (Note 10) 21,509 9,683
Provision from claims (Note 20) 281 --
-------- --------
Total long-term liabilities 23,429 9,683
-------- --------
Shareholders' equity
Paid-in capital (Note 16) 24,224 18,454
Accumulated deficit (18,900) (13,915)
-------- --------
Total shareholders' equity 5,324 4,539
-------- --------
Total liabilities and shareholders' equity $ 45,075 $ 19,588
======== ========
The accompanying notes are an integral part of these financial statements
F-99
<PAGE>
TVA SUL PARANA LTDA.
Statements of Operations
for the years ended
December 31, 1997 and 1996
(in thousands of U.S. dollars)
Year Ended December 31,
----------------------
1997 1996
-------- --------
Gross revenues
Monthly subscriptions $ 15,785 $ 9,854
Installation 2,096 2,073
Other 358 36
Revenue taxes (1,297) (366)
-------- --------
Net revenue 16,942 11,597
-------- --------
Direct operating expenses
Payroll and benefits 3,570 3,398
Programming 5,521 2,511
Technical assistance 152 246
Vehicle rentals 186 320
TVA magazine 564 379
Other costs 404 905
-------- --------
10,397 7,759
-------- --------
Selling, general and administrative expenses
Payroll and benefits 893 996
Advertising and promotion 489 437
Rent 82 181
Other administrative expenses 1,889 1,704
Other general expenses 869 832
-------- --------
4,222 4,150
-------- --------
Depreciation and amortization 2,909 1,370
-------- --------
Operating loss (586) (1,682)
-------- --------
Interest income 326 321
Interest expense (3,903) (1,947)
Translation gain 310 117
Other nonoperating income, net (1,132) 127
-------- --------
Loss before income taxes (4,985) (3,064)
Income taxes (Note 11) -- (64)
-------- --------
Net loss $ (4,985) $ (3,128)
======== ========
The accompanying notes are an integral part of these financial statements
F-100
<PAGE>
TVA SUL PARANA LTDA.
Statements of Changes in Shareholders' Equity
for the years ended
December 31, 1997 and 1996
(in thousands of U.S. dollars)
Paid-in
Capital Accumulated
(Note 16) Deficit Total
-------- ----------- --------
Balance as of December 31, 1995 $ 1 $(10,787) $(10,786)
Capital contributed on:
April 30, 1996 14,896 -- 14,895
August 30, 1996 3,558 -- 3,558
Net loss for the period -- (3,128) (3,128)
-------- -------- --------
Balance as of December 31, 1996 18,454 (13,915) 4,539
Capital contributed on:
June 30, 1997 5,770 -- 5,770
Net loss for the period -- (4,985) (4,985)
-------- -------- --------
Balance as of December 31, 1997 $ 24,224 $(18,900) $ 5,324
======== ======== ========
The accompanying notes are an integral part of these financial statements
F-101
<PAGE>
TVA SUL PARANA LTDA.
Statements of Cash Flows
for the years ended
December 31, 1997 and 1996
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996
---------- ---------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (4,985) $ (3,128)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Depreciation 2,728 1,370
Amortization 181 --
Provision for doubtful accounts 102 --
Provision for claims 281 --
Changes in operating assets and liabilities
Accounts receivable (1,570) (843)
Prepaid and other assets 188 (336)
Other accounts receivable, including accounts receivable from related companies 593 (1,207)
Other (309) --
Accrued interest 2,839 1,549
Inventories (8,254) (2,016)
Legal deposits -- (10)
Suppliers 4,411 1,363
Taxes payable other than income taxes 540 226
Accrued payroll and related liabilities 80 (69)
Other accounts payable including accounts payable to related companies 4,270 1,619
-------- --------
Net cash provided by (used in) operating activities 1,095 (1,482)
-------- --------
Cash flows from investing activities
Purchase of property, plant and equipment (17,895) (11,896)
Loans to related companies 129 (2,193)
Purchase of concessions (2,413) --
-------- --------
Net cash used in investing activities (20,179) (14,089)
-------- --------
Cash flows from financing activities
Loans from banks 3,835 --
Capital contributions 5,770 18,453
Repayments of loans from shareholders -- (180)
Loans from related companies 9,457 7,418
Repayments of loans from related companies -- (9,794)
Repayments of loans to related companies -- (30)
-------- --------
Net cash provided by financing activities 19,062 15,867
-------- --------
Net (decrease) increase in cash and cash equivalents (22) 296
Cash and cash equivalents at beginning of the period 406 110
-------- --------
Cash and cash equivalents at end of the period $ 384 $ 406
======== ========
Supplemental cash disclosure:
Accrued interest on related company loans refinanced as principal balance $ 2,839 $ --
</TABLE>
The accompanying notes are an integral part of these financial statements
F-102
<PAGE>
TVA SUL PARANA LTDA.
Notes to Financial Statements
(in thousands of U.S. dollars)
1. The Company and its principal operations
The financial statements have been prepared to reflect the results of TVA
Sul Parana Ltda. (the "Company").
TVA Sul Parana Ltda. is a company which renders services related to
wireless cable and cable television systems, including marketing and
advertising, production, distribution and licensing of domestic and foreign
television programs. The Company has wireless cable channel rights
primarily in major urban markets in the South of Brazil.
2. Summary of significant accounting policies
Significant accounting policies followed by the Company as summarized
below.
2.1 Basis of presentation
The statements are presented in U.S. dollars and have been prepared in
accordance with accounting principles generally accepted in the United
States of America ("U.S. GAAP"), which differ in certain respects from
accounting principles applied by the Company in its local currency
financial statements, which are prepared in accordance with accounting
principles generally accepted in Brazil ("Brazilian GAAP").
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
financial statement dates and the reported amount of revenues and expenses
during the reporting periods. Since management's judgment involves making
estimates concerning the likelihood of future events, the actual results
could differ from these estimates.
2.2 Accounting records
As required by Brazilian Law, and in accordance with local accounting
practices, the accounting records of the Company are maintained in
Brazilian currency ("reais" or "R$"). In order to present the financial
statements in conformity with accounting principles generally accepted in
the United States of America, the Company maintains additional accounting
records which are used solely for this purpose.
F-103
<PAGE>
TVA SUL PARANA LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
2.3 Currency remeasurement
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
52, "Foreign Currency Transactions", the United States dollar has been
assumed to be the functional currency as Brazil is a "hyperinflationary"
country. As such, the local accounts of the Company are translated into
United States dollars as follows:
o Nonmonetary assets and liabilities are translated at historical rates.
All other assets and liabilities are translated at the official rate
of exchange of R$1.1164 to US$1 in effect on December 31, 1997, and
R$1.0394 to US$1 in effect on December 31, 1996. Translation gains and
losses are recognized in the income statement.
o Income and expenses are translated at the average exchange rates in
effect each month, except for those related to assets and liabilities
which are translated at historical exchange rates and deferred income
taxes, which are translated at the current rate. Translation gains and
losses are recognized in the income statement.
2.4 Cash and cash equivalents
Cash and cash equivalents are defined as cash and cash in banks and
investments in interest-bearing securities and are carried at cost plus
accrued interest. Short-term investments with original maturities of two
months or less at the time of purchase are considered cash equivalents.
2.5 Acquisition of companies undes common control
In June 1997, the Company acquired TCC TV a Cabo Ltda. ("TCC") and TV Alfa
Cabo Ltda. ("TV Alfa") from TVA Sul Participacoes S.A., a related company.
Subsequently, both companies were merged into TVA Sul Parana Ltda.. The
acquisitions of TCC and TV Alfa have been accounted for in a manner similar
to a pooling of interests. Prior period financial statements of the Company
have been restated to include TCC and TV Alfa and since inception.
F-104
<PAGE>
TVA SUL PARANA LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
2.6 Financial instruments
In accordance with SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments", information is provided about the fair value of certain
financial instruments for which it is practicable to estimate that value.
For the purposes of SFAS No. 107, the estimated fair value of a financial
instrument is the amount at which the instrument could be exchanged in a
current transaction between willing parties, other than in a forced or
liquidation sale. The carrying values of the Company's financial
instruments as of December 31, 1997 and 1996 approximate management's best
estimate of their fair values. The following methods and assumptions were
used to estimate the fair value of each class of financial instrument for
which it is practicable to estimate that value:
o The fair value of certain financial assets carried at cost, including
cash, accounts receivable, other accounts receivable, and certain
other short-term assets is considered to approximate their respective
carrying value due to their short-term nature.
o The fair value of payables to suppliers, other accounts payable, loans
to related companies and certain other short-term liabilities is
considered to approximate their respective carrying value due to their
short-term nature.
o The fair value of loans from related companies approximates their
respective carrying values as interest on these loans is variable and
based on market rates.
2.7 Accounts receivable
A provision for doubtful accounts was established on the basis of an
analysis of the accounts receivable, in light of the risks involved, in an
amount sufficient to cover any losses incurred in realization of credits.
2.8 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.
2.9 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.
F-105
<PAGE>
TVA SUL PARANA LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
2.10 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.
2.11 Revenue recognition
Hook up fees are recognized as revenue on the equipment installation date
to the extent of direct selling costs incurred. Subscription revenues are
recognized as earned on an accrual basis.
2.12 Accounting for issuances of stock by subsidiaries
Gains and losses arising from the issuances of previously unissued shares
to unrelated parties by subsidiaries are recognized in income as
nonoperating income to the extent that the net book value of the shares
owned by the parent after the sale exceed or is lower than the net book
value per share immediately prior to the sale of the shares by the
subsidiary.
3. Cash and cash equivalents
As of December 31, 1997 and 1996, cash and cash equivalents were comprised
of:
December 31,
-----------------
1997 1996
---- ----
Cash on hand and in banks $384 $309
Short-term investments -- 97
---- ----
$384 $406
==== ====
F-106
<PAGE>
TVA SUL PARANA LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
4. Accounts receivable, net
As of December 31, 1997 and 1996, accounts receivable were comprised of:
December 31,
---------------------
1997 1996
------- -------
Subscriptions $ 1,295 $ 648
Installation fees 1,307 535
Advertising & programming 71 10
Provision for doubtful accounts (419) (317)
------- -------
$ 2,254 $ 876
======= =======
5. Inventories
As of December 31, 1997 and 1996, inventories were comprised of:
December 31,
-----------------------
1997 1996
------- -------
Materials and suppliers $10,217 $ 2,058
Import in transit 95 --
------- -------
$10,312 $ 2,058
======= =======
6. Prepaid and other assets
As of December 31, 1997 and 1996, prepaid expenses were comprised of:
December 31,
------------------
1997 1996
---- ----
Materials and suppliers $220 $369
Import in transit -- 39
---- ----
$220 $408
==== ====
F-107
<PAGE>
TVA SUL PARANA LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
7. Other accounts receivable
As of December 31, 1997 and 1996, other accounts receivable were comprised
of:
December 31,
------------------
1997 1996
---- ----
Advances to employees $ 21 $ 45
Others 89 13
---- ----
$110 $ 58
==== ====
8. Loans
As of December 31, 1997, loans were comprised of:
Short-term Long-term
---------- -----------
Loans $2,196 $1,639
====== ======
Loans as of December 31, 1997 represent the refinancing of certain
suppliers payables. The bear interest at rates varying from 8.26% to 9.29%
per year.
9. Other accounts payable
As of December 31, 1997 and 1996, other accounts payable were comprised of:
December 31,
-----------------
1997 1996
------ ------
Advance payment received from subscribers $ 188 $ --
Importation expenses payable 166 205
Others 438 847
------ ------
$ 792 $1,052
====== ======
F-108
<PAGE>
TVA SUL PARANA LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
10. Related party transactions
The following tables summarize the transactions between the Company and its
related parties as of December 31, 1997 and 1996 and for each of the two
years in the period ended December 31, 1997:
December 31,
-----------------
1997 1996
------- -------
TVA Sistema de Televisao S.A
Accounts receivable $ -- $ 580
Accounts payable 746 1,346
Loans payable 3,405 2,915
Net interest expense -- 469
TVA Sul Participacoes S.A
Accounts receivable -- 584
Accounts payable 5,494 401
Loans payable 18,104 6,768
Net interest expense -- 2,227
TVA Sul Santa Catarina Ltda
Accounts receivable 119 127
Loans receivable 1,937 2,066
Net interest expense -- 143
TVA Sul Foz do Iguacu Ltda
Accounts payable 14 29
ESPN do Brasil Ltda
Accounts payable -- 30
CCS - Camboriu Cable Systems de Telecomunicacoes Ltda
Accounts receivable 35 --
The related company loans are denominated in reais and are subject to
monetary restatement until December 31, 1995 plus interest charges at the
market rate which ranged from 3.85% to 3.93% per month in December 1997
(1.88 to 2.2% per month in December 1996). Such loans are renewable every
year on December 31.
F-109
<PAGE>
TVA SUL PARANA LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
11. Income taxes
The tax effects of temporary differences that give rise to a significant
portion of the deferred tax asset and deferred tax liability as of December
31, 1997 and 1996 are as follows:
December 31,
------------------
1997 1996
------- -------
Deferred tax assets
Net operating loss carryforwards $ 5,647 $ 4,338
Provisions for claims 104 --
Provisions for obsolescence 139 --
Others 261 172
------- -------
Total gross deferred tax asset 6,151 4,510
------- -------
Less valuation allowance (6,002) (4,269)
Net deferred tax asset 149 241
------- -------
Deferred tax liability
Installation costs 149 241
------- -------
Total gross deferred tax liability (149) (241)
------- -------
Net deferred tax asset $ -- $ --
======= =======
The Company has a limited operating history and has generated losses since
its inception. The valuation provision has been established in accordance
with the requirements of SFAS No. 109, "Accounting for Income Taxes".
The income tax expense was different from the amount computed using the
Brazilian statutory income tax for the reasons set forth in the following
table:
F-110
<PAGE>
TVA SUL PARANA LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
11. Income taxes (Continued)
Year Ended December 31,
-----------------------
1997 1996
-------- ----------
Loss before income taxes and minority interest $ 4,985 $ 3,064
Statutory income tax rate 33.00% 33.00%
------- -------
1,645 1,011
Translation loss of tax losses (301) --
Unallowable amortization 60 --
Others 329 168
------- -------
Income tax benefit for the period 1,733 1,179
Increase in valuation provision (1,733) (1,179)
------- -------
$ -- $ --
======= =======
12. Property, plant and equipment, net
As of December 31, 1997 and 1996, property, plant and equipment were
comprised of:
Annual
Depreciation December 31,
Rate -----------------------
% 1997 1996
--------- ----------
Machinery and equipment 10 $ 1,874 $ 1,350
Converters 10 9,024 5,316
Leasehold improvements 25 53 378
Furniture and fixtures 10 212 481
Premises 10 21 23
Vehicles 20 527 39
Software 20 149 81
Tools 10 65 62
Reception equipment 20 12,386 4,689
Cable plant 10 4,777 1,188
Building 4 330 330
-------- --------
10 29,418 13,937
Telephone line use rights 10 280 189
Accumulated depreciation 25 (4,311) (1,780)
Fixed assets in transit 10 1,762 60
-------- --------
20 $ 27,149 $ 12,406
======== ========
F-111
<PAGE>
TVA SUL PARANA LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
13. Concessions, net
As of December 31, 1997 and 1996, concessions were comprised of:
December 31,
-------------------------
1997 1996
------- --------
TCC TV a Cabo Ltda $ 2,413 $ --
Accumulated amortization (181) --
------- --------
$ 2,232 $ --
======= ========
Concessions are being amortized on a straight-line basis over ten years.
14. Loan guarantees
In November 1996, Tevecap S.A., the parent of the Company's parent, TVA Sul
Participacoes S.A., issued $250,000 12-5/8% Senior Notes to institutional
buyers in a private placement. The Notes, which mature in November 2004,
were subsequently registered with the Securities and Exchange Commission in
May 1997. These Notes are jointly and severally, irrevocably and fully
unconditionally guaranteed, on a senior basis, by Tevecap's direct and
indirect subsidiaries, including the Company.
15. Insurance
The Company maintains insurance coverage for its fixed assets and
inventories in an amount considered sufficient to cover the risks involved.
16. Paid-in capital
Paid-in capital as of December 31, 1997 and 1996 was comprised of:
<TABLE>
<CAPTION>
1997 1996
--------------------------- ---------------------------
US$ Shares US$ Shares
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Leonardo Petrelli Neto $ 1 1 $ 1 1
TVA Sul Participacoes S.A 24,223 36,600,419 18,453 27,712,344
----------- ----------- ----------- -----------
$ 24,224 36,600,420 $ 18,454 27,712,345
=========== =========== =========== ===========
</TABLE>
Paid-in capital represents registered common shares without par value.
F-112
<PAGE>
TVA SUL PARANA LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
17. Litigation contingencies
Certain claims and lawsuits arising in the ordinary course of business have
been filed or are pending against the Company which were not recognized in
the financial statements. The Company has also recorded provisions related
to certain claims in amounts that management considers to be adequate after
considering a number of factors including (but not limited to) the views of
legal counsel, the nature of the claims and the prior experience of the
Company.
In management's opinion, all contingencies have been adequately provided
for or are without merit, or are of such kind that, if disposed of
unfavorably, would not have a material adverse effect on the financial
position or future results of operations of the Company.
18. Pension plan
In July 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 $18 for the year ended December 31, 1997 ($2 in 1996).
19. Abril Health Care Plan
In February 1996, the Abril Health Care Plan, Associacao Abril de
Beneficios (the Health Care Plan), was created to provide health care to
Abril S.A. companies' employees and their dependents. Both the companies
forming part of the Abril Group and the employees thereof contribute
monthly to the Health Care Plan which is responsible for the management of
the plan. In 1997, contributions made by the Company to the Health Care
Plan and certain affiliated companies to Associacao Abril de Beneficios
amounted to $146.
F-113
<PAGE>
TVA SUL PARANA LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
20. Supplementary information - valuation and qualifying accounts and reserves
<TABLE>
<CAPTION>
Deferred Provision
Taxation for Provision
Valuation Doubtful for
Provision Accounts Claims
--------- --------- ---------
<S> <C> <C> <C>
Balance as of December 31, 1996 $4,269 $ 317 $ --
------ ------ ------
Additions charged to expense 1,733 102 281
------ ------ ------
Balance as of December 31, 1997 $6,002 $ 419 $ 281
====== ====== ======
</TABLE>
21. Working capital deficiency
The Company's financial statements for the year ended December 31, 1997
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 $2,888 and $310 for
the two years in the period ended December 31, 1997 and 1996, respectively.
The Company is endeavoring to reverse its pattern of losses and effectively
meet its liquidity needs through increasing the revenue base and other
means.
In the event that these steps prove to be inadequate to maintain the
Company's operating cash flow, the Company's principal shareholder,
TEVECAP, intends to maintain the Company as a going concern. TEVECAP's
support may be in the form of cash advances, loans, equity infusions or
external guarantees.
22. Recent accounting pronoucements
The Financial Accounting Standards Board has issued certain Statements of
Financial Accounting Standards which are not effective with respect to the
fiscal years presented in the consolidated financial statements.
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"), which establishes standards for reporting and display of
comprehensive income and its components in a full set of financial
statements. Comprehensive income is the total of reported net income and
all other revenues, expenses, gains and losses that under generally
accepted
F-114
<PAGE>
TVA SUL PARANA LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
22. Recent accounting pronoucements (Continued)
accounting principles bypass reported net income. SFAS No. 130 requires
that comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements and
requires an entity to (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
surplus in the equity section of the balance sheet. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. Companies are
also required to report comparative totals for comprehensive income in
interim reports. Management is currently considering the impact of SFAS No.
130, but does not believe it will have a material effect on the Company's
consolidated financial statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which establishes
standards for public companies to report certain financial information
about operating segments in interim and annual financial statements.
Operating segments are components of a business about which separate
financial information is available and that are evaluated regularly by the
chief operating decision maker in assessing performance and deciding how to
allocate resources. SFAS No. 131 also requires public companies to report
certain information about their products and services and the geographic
areas in which they operate. SFAS No. 131 is effective for financial
statements for fiscal years beginning after December 15, 1997. SFAS No. 131
does not need to be applied to interim financial statements in the initial
year of its application, but such comparative information will be required
in interim statements in the second year. At this time, management is
assessing the impact of SFAS No. 131 and has not determined whether the new
reporting provisions will require supplemental disclosures by the Company.
23. Subsequent events
Management of the Company have completed an evaluation of its operations
and determined that Brazil no longer constitutes a highly inflationary
economy. The effective date of this change is January 1, 1998. Management
of the Company is currently performing an assessment in order to determine
the functional currency of the Company.
F-115
<PAGE>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
INDEX TO FINANCIAL STATEMENTS
Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants F-117
Balance Sheets as of December 31, 1997 and 1996 F-118
Statements of Operations for the year ended December 31, 1997 and the period
since inception, May 30, 1996 to December 31, 1996 F-120
Statements of Changes in Shareholders' Equity for the year ended December 31,
1997 and the period since inception, May 30, 1996 to December 31, 1996 F-121
Statements of Cash Flows for the year ended December 31, 1997 and the period
since inception, May 30, 1996 to December 31, 1996 F-122
Notes to Financial Statements F-123
</TABLE>
F-116
<PAGE>
Report of Independent Accountants
To the Shareholders and Directors of CCS - CAMBORIU CABLE SYSTEM
TELECOMUNICACOES LTDA.
We have audited the accompanying balance sheet of CCS - CAMBORIU CABLE SYSTEM
TELECOMUNICACOES LTDA. (the "Company") as of December 31, 1997 and 1996, and the
related statements of operations, changes in shareholders' equity and cash flows
for the year ended December 31, 1997 and the period since inception, May 30,
1996 to December 31, 1996, all expressed in United States dollars. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CCS - CAMBORIU CABLE SYSTEM
TELECOMUNICACOES LTDA. as of December 31, 1997 and 1996, and the related
statements of operations, changes in shareholders' equity and cash flows for the
year ended December 31, 1997 and the period since inception, May 30, 1996 to
December 31, 1996, in conformity with accounting principles generally accepted
in the United States of America.
Coopers & Lybrand
Sao Paulo, Brazil
March 17, 1998
F-117
<PAGE>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Balance Sheets
as of December 31, 1997 and 1996
(in thousands of U.S. dollars)
December 31,
--------------------
1997 1996
------ ------
ASSETS
Current assets
Cash on hand and in banks $ 57 $ 86
Accounts receivable, net (Note 3) 140 3
Materials and suppliers 366 907
Prepaid and other assets -- 31
Other accounts receivable (Note 4) 46 25
------ ------
Total current assets 609 1,052
Property, plant and equipment, net (Note 8) 4,679 3,455
Other 2 --
------ ------
Total assets $5,290 $4,507
====== ======
The accompanying notes are an integral part of these financial statements
F-118
<PAGE>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Balance Sheets
as of December 31, 1997 and 1996
(in thousands of U.S. dollars)
December 31,
--------------------
1997 1996
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Loans (Note 9) $ 116 $ --
Suppliers 104 477
Taxes payable other than income taxes 90 34
Accrued payroll and related liabilities 39 11
Other accounts payable (Note 5) 55 3
Accounts payable to related companies (Note 6) 35 2
------- -------
Total current liabilities 439 525
------- -------
Long-term liabilities
Loans from related companies (Note 9) 1,701 706
------- -------
Provision from claims (Note 15) 4 --
------- -------
Total long-term liabilities 1,705 706
------- -------
Shareholders' equity
Paid-in capital (Note 11) 4,012 4,012
Accumulated deficit (866) (738)
------- -------
Total shareholders' equity 3,146 3,274
------- -------
Total liabilities and shareholders' equity $ 5,290 $ 4,507
======= =======
The accompanying notes are an integral part of these financial statements
F-119
<PAGE>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Statements of Operations
for the year ended December 31, 1997 and the period since
inception, May 30, 1996 to December 31, 1996
(in thousands of U.S. dollars)
Year Ended December 31,
----------------------
1997 1996
------- -------
Gross revenues
Monthly subscriptions $ 2,522 $ 943
Installation 145 --
Other 106 30
Revenue taxes (88) (26)
------- -------
Net revenue 2,685 947
------- -------
Direct operating expenses
Payroll and benefits 243 120
Programming 920 286
Other costs 459 215
------- -------
1,622 621
------- -------
Selling, general and administrative expenses
Payroll and benefits 249 123
Advertising and promotion 82 23
Rent -- 6
Other administrative expenses 268 111
------- -------
599 263
------- -------
Depreciation 264 99
------- -------
Operating gain (loss) 200 (36)
------- -------
Interest income 85 12
Interest expenses (355) (34)
Translation gain (loss) 10 (2)
Other nonoperating, net (68) --
------- -------
Loss before income taxes (128) (60)
------- -------
Income tax (Note 7) -- (34)
------- -------
Net loss $ (128) $ (94)
======= =======
The accompanying notes are an integral part of these financial statements
F-120
<PAGE>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Statements of Changes in Shareholders' Equity
for the year ended December 31, 1997 and the period since
inception, May 30, 1996 to December 31, 1996
(in thousands of U.S. dollars)
Paid-in Accumulated
Capital Deficit Total
------- ----------- -------
Balance as of May 30, 1996 $ 4,012 $ (644) $ 3,368
Net loss for the period -- (94) (94)
------- ------- -------
Balance as of December 31, 1996 4,012 (738) 3,274
Net loss for the period -- (128) (128)
------- ------- -------
Balance as of December 31, 1997 $ 4,012 $ (866) $ 3,146
======= ======= =======
The accompanying notes are an integral part of these financial statements
F-121
<PAGE>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Statements of Cash Flows
for the year ended December 31, 1997 and the period since
inception, May 30, 1996 to December 31, 1996
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (128) $ (94)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 264 99
Provision for doubtful accounts 342 --
Provision for claims 4 --
Accounts receivable (479) (3)
Prepaid and other assets 31 (34)
Other accounts receivable (23) (15)
Inventories 541 (907)
Suppliers (373) 388
Taxes payable other than income taxes 56 11
Accrued payroll and related liabilities 28 (12)
Other accounts payable, including loans from related companies 1,080 706
------- -------
Net cash provided by operating activities 1,343 139
------- -------
Cash flows from investing activities:
Purchase of fixed assets (1,488) (53)
------- -------
Net cash used in investing activities (1,488) (53)
------- -------
Cash flows from financing activities:
Loans from banks 116 --
------- -------
Net cash provided by financing activities 116 --
------- -------
Net decrease (increase) in cash and cash equivalents (29) 86
Cash and cash equivalents at beginning of the period 86 --
------- -------
Cash on hand and in banks at end of the period $ 57 $ 86
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
F-122
<PAGE>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements
(in thousands of U.S. dollars)
1. The Company and its principal operations
The financial statements have been prepared to reflect the results of CCS -
Camboriu Cable System Telecomunicacoes Ltda. (the "Company").
CCS - Camboriu which renders services related to wireless cable and cable
television systems, including marketing and advertising, production,
distribution and licensing of domestic and foreign television programs. The
Company has wireless cable channel rights primarily in major urban markets
in the South of Brazil.
2. Summary of significant accounting policies
Significant policies followed in the preparation of the financial
statements are described below:
2.1 Basis of presentation
The financial statements are presented in U.S. dollars and have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP"), which differ in certain respects
from accounting principles applied by the Company in its local currency
financial statements, which are prepared in accordance with accounting
principles generally accepted in Brazil ("Brazilian GAAP").
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
financial statement dates and the reported amount of revenues and expenses
during the reporting periods. Since management's judgment involves making
estimates concerning the likelihood of future events, the actual results
could differ from these estimates.
2.2 Accounting records
As required by Brazilian Law, and in accordance with local accounting
practices, the accounting records of the Company are maintained in
Brazilian currency ("reais" or "R$"). In order to present the financial
statements in conformity with accounting principles generally accepted in
the United States of America, the Company maintains additional accounting
records which are used solely for this purpose.
F-123
<PAGE>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
2.3 Currency remeasurement
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
52, "Foreign Currency Transactions", the United States dollar has been
assumed to be the functional currency as Brazil is a "hyperinflationary"
country. As such, the local accounts of the Company are translated into
United States dollars as follows:
o Nonmonetary assets and liabilities are translated at historical rates.
All other assets and liabilities are translated at the official rate
of exchange of R$1.1164 to US$1 in effect on December 31, 1997, and
R$1.0394 to US$1 in effect on December 31, 1996. Translation gains and
losses are recognized in the income statement.
o Income and expenses are translated at the average exchange rates in
effect each month, except for those related to assets and liabilities
which are translated at historical exchange rates and deferred income
taxes, which are translated at the current rate. Translation gains and
losses are recognized in the income statement.
2.4 Cash and cash equivalents
Cash and cash equivalents are defined as cash and cash in banks and
investments in interest-bearing securities and are carried at cost plus
accrued interest. Short-term investments with original maturities of three
months or less at the time of purchase are considered cash equivalents.
2.5 Financial instruments
In accordance with SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments", information is provided about the fair value of certain
financial instruments for which it is practicable to estimate that value.
For the purposes of SFAS No. 107, the estimated fair value of a financial
instrument is the amount at which the instrument could be exchanged in a
current transaction between willing parties, other than in a forced or
liquidation sale. The carrying values of the Company's
F-124
<PAGE>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
2.5 Financial instruments (Continued)
financial instruments as of December 31, 1997 and 1996 approximate
management's best estimate of their fair values. The following methods and
assumptions were used to estimate the fair value of each class of financial
instrument for which it is practicable to estimate that value:
o The fair value of certain financial assets carried at cost, including
cash, accounts receivable, other accounts receivable, and certain
other short-term assets is considered to approximate their respective
carrying value due to their short-term nature.
o The fair value of payables to suppliers, other accounts payable, loans
to related companies and certain other short-term liabilities is
considered to approximate their respective carrying value due to their
short-term nature.
o The fair value of loans from related companies approximates their
respective carrying values as interest on these loans is at market
rates.
2.6 Accounts receivable
A provision for doubtful accounts was established on the basis of an
analysis of the accounts receivable, in light of the risks involved, in an
amount sufficient to cover any losses incurred in realization of credits.
2.7 Inventories
Inventories consist of materials and supplies used to provide service to
new customers, and to ensure continuity of service to existing customers.
Inventories are stated at the lower of cost or market. Cost is determined
principally under the average cost method.
2.8 Property, plant and equipment
Property, plant and equipment are stated at cost and depreciated using the
straight-line method, over the remaining useful lives, as described in Note
8.
2.9 Recoverability of long-lived assets to be held and used in the business
Management reviews long-lived assets, primarily the Company's concessions
and its property and equipment to be held and used in the business, for the
purposes of determining and measuring impairment on a recurring basis or
when events or changes in circumstances indicate that the carrying value of
an asset or group of assets may not be recoverable.
F-125
<PAGE>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
2.9 Recoverability of long-lived assets to be held and used in the business
(Continued)
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.
2.10 Revenue recognition
Hook up fees are recognized as revenue on the equipment installation date
to the extent of direct selling costs incurred. Subscription revenues are
recognized as earned on an accrual basis.
3. Accounts receivable, net
As of December 31, 1997 and 1996, accounts receivable were comprised of:
December 31,
----------------------
1997 1996
----- -----
Subscriptions $ 474 $--
Installation fees 8 --
Others -- 3
Provision for doubtful accounts (342) --
----- -----
$ 140 $ 3
===== =====
F-126
<PAGE>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
4. Other accounts receivable
As of December 31, 1997 and 1996, other accounts receivable were comprised
of:
December 31,
----------------
1997 1996
--- ---
Advances to employees $ 1 $--
Accounts receivable from related (Note 6) 4 19
Others 41 6
--- ---
$46 $25
=== ===
5. Other accounts payable
As of December 31, 1997 and 1996, other accounts payable were comprised of:
December 31,
----------------
1997 1996
---- ----
Advance payments received from subscribers $ 25 $ --
Others 30 3
---- ----
$ 55 $ 3
==== ====
F-127
<PAGE>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
6. Related party transactions
The following tables summarize the transactions between the Company and
related parties as of December 31, 1997 and 1996:
December 31,
-----------------------
1997 1996
------ ------
TVA Sistema de Televisao S.A
Accounts payable $ -- $ 2
TVA Sul Participacoes S.A
Accounts payable 1,701 706
TVA Sul Foz do Iguacu Ltda
Accounts receivable -- 19
TVA Sul Parana Ltda
Accounts payable 35 --
TVA Santa Catarina Ltda
Accounts receivable 4 --
7. Income taxes
The tax effects of temporary differences that give rise to a significant
portion of the deferred tax asset and deferred tax liability as of December
31, 1997 and 1996 are as follows:
December 31,
------------------
1997 1996
----- -----
Deferred tax assets:
Net operating loss carryforwards $ 150 $ 209
Others 60 --
----- -----
Total gross deferred tax asset 210 209
----- -----
Less valuation allowance (210) (209)
----- -----
Net deferred tax asset $ -- $ --
===== =====
F-128
<PAGE>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
7. Income taxes (Continued)
The Company has a limited operating history and has generated losses since
its inception. The valuation allowance has been established in accordance
with the requirements of SFAS No. 109, "Accounting for Income Taxes".
The income tax expense was different from the amount computed using the
Brazilian statutory income tax for the reasons set forth in the following
table:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996
--------- --------
<S> <C> <C>
Loss before income taxes and minority interest $ 128 $ 60
Statutory income tax rate 33.00% 33.00%
----- -----
42 20
Monetary correction over U.S. dollar on tax losses (15) --
Others (26) (54)
----- -----
Consolidated income tax benefit (provision) for the period 1 (34)
Increase in valuation allowance (1) --
----- -----
$-- $ (34)
===== =====
</TABLE>
F-129
<PAGE>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
8. Property, plant and equipment, net
As of December 31, 1997 and 1996, property, plant and equipment were
comprised of:
<TABLE>
<CAPTION>
Annual
Depreciation December 31,
Rate --------------------
% 1997 1996
------- -------
<S> <C> <C> <C>
Machinery and equipment 10 $ 248 $ 7
Leasehold improvements 25 3,447 3,447
Furniture and fixtures 10 79 74
Vehicles 20 15 3
Software 20 8 5
Tools 10 2 2
Reception equipment 20 278 --
Cable plant 10 936 --
------- -------
5,013 3,538
Telephone line use rights 4 4
Accumulated depreciation (351) (101)
Fixed assets in transit 13 14
-- --
$ 4,679 $ 3,455
======= =======
</TABLE>
9. Loans
As of December 31, 1997, loans were comprised of:
Short-term Long-term
----------- ----------
Loans $ 116 $1,701
====== ======
Loans as of December 31, 1997 represent the refinancing of certain
suppliers payables.The bear interest at rates varying from 8.26% to 9.29%
per year.
F-130
<PAGE>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
10. Insurance
The Company maintains insurance coverage for its fixed assets and
inventories in an amount considered sufficient to cover the risks involved.
11. Paid-in capital
Paid-in capital as of December 31, 1997 and 1996 was comprised of:
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
US$ Shares US$ Shares
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Construtora ENE ESSE Ltda $ 1,605 1,940,000 $ 1,605 1,940,000
TVA Sul Participacoes S.A 2,407 2,910,000 2,407 2,910,000
--------- --------- --------- ---------
$ 4,012 4,850,000 $ 4,012 4,850,000
========= ========= ========= =========
</TABLE>
Paid-in capital represents registered common shares without par value.
12. Loan guarantees
In November 1996, Tevecap S.A., the parent of the Company's parent, TVA Sul
Participacoes S.A., issued $250,000 12-5/8% Senior Notes to institutional
buyers in a private placement. The Notes, which mature in November 2004,
were subsequently registered with the Securities and Exchange Commission in
May 1997. These Notes are jointly and severally, irrevocably and fully
unconditionally guaranteed, on a senior basis, by Tevecap's direct and
indirect subsidiaries, including the Company.
13. Litigation contingencies
Certain claims and lawsuits arising in the ordinary course of business have
been filed or are pending against the Company which were not recognized in
the 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-131
<PAGE>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
13. 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.
14. Abril Health Care Plan
In February 1996, the Abril Health Care Plan, Associacao Abril de
Beneficios (the "Health Care Plan"), was created to provide health care to
Abril S.A. companies' employees and their dependents. Both the companies
forming part of the Abril Group and the employees thereof contribute
monthly to the Health Care Plan which is responsible for the management of
the plan. In 1997, contributions made by the Company to the Health Care
Plan and certain affiliated companies amounted to $18.
15. Supplementary information - valuation and qualifying accounts and reserves
<TABLE>
<CAPTION>
Deferred
Taxation Provision for Provision
Valuation Doubtful for
Allowance Accounts Claims
-------------- -------------- -------------
<S> <C> <C> <C>
Balance as of December 31, 1996 $-- $-- $--
Additions charged to expense 1 342 4
---- ---- ----
Balance as of December 31, 1997 $ 1 $342 $ 4
==== ==== ====
</TABLE>
16. Working capital deficiency
The Company's financial statements for the year ended December 31, 1997
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 $128 and $94 for the
year ended in December 31, 1997 and for the period since inception, May 30,
1996 to December 31, 1996, respectively.
F-132
<PAGE>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
16. Working capital deficiency (Continued)
The Company is endeavoring to reverse its pattern of losses and effectively
meet its liquidity needs through increasing the revenue base and other
means.
In the event that these steps prove to be inadequate to maintain the
Company's operating cash flow, the Company's principal shareholder,
TEVECAP, intends to maintain the Company as a going concern. TEVECAP's
support may be in the form of cash advances, loans, equity infusions or
external guarantees.
17. Recent accounting pronoucements
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"), which establishes standards for reporting and display of
comprehensive income and its components in a full set of financial
statements. Comprehensive income is the total of reported net income and
all other revenues, expenses, gains and losses that under generally
accepted accounting principles bypass reported net income. SFAS No. 130
requires that comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements
and requires an entity to (a) classify items of other comprehensive income
by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
surplus in the equity section of the balance sheet. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. Companies are
also required to report comparative totals for comprehensive income in
interim reports. Management is currently considering the impact of SFAS No.
130, but does not believe it will have a material effect on the Company's
consolidated financial statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which establishes
standards for public companies to report certain financial information
about operating segments in interim and annual financial statements.
Operating segments are components of a business about which separate
financial information is available and that are evaluated regularly by the
chief operating decision maker in assessing performance and deciding how to
allocate resources. SFAS No. 131 also requires public companies to report
certain information about their products and services and the geographic
areas in which they operate. SFAS No. 131 is effective for financial
statements for
F-133
<PAGE>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
17. Recent accounting pronoucements (Continued)
fiscal years beginning after December 15, 1997. SFAS No. 131 does not need
to be applied to interim financial statements in the initial year of its
application, but such comparative information will be required in interim
statements in the second year. At this time, management is assessing the
impact of SFAS No. 131 and has not determined whether the new reporting
provisions will require supplemental disclosures by the Company.
18. Subsequent events
Management of the Company have completed an evaluation of its operations
and determined that Brazil no longer constitutes a highly inflationary
economy. The effective date of this change is January 1, 1998. Management
of the Company is currently performing an assessment in order to determine
the functional currency of the Company.
F-134
<PAGE>
TVA SUL FOZ DO IGUACU LTDA.
INDEX TO FINANCIAL STATEMENTS
Contents
Page
Report of Independent Accountants F-136
Balance Sheets as of December 31, 1997 and 1996 F-137
Statements of Operations for the year ended December 31, 1997
and for the period since inception, May 30, 1996
to December 31, 1996 F-139
Statements of Changes in Shareholders' Equity for the year
ended December 31, 1997 and for the period since inception,
May 30, 1996 to December 31, 1996 F-140
Statements of Cash Flows for the year ended December 31, 1997
and for the period since inception, May 30, 1996 to December 31, 1996 F-141
Notes to Financial Statements F-142
F-135
<PAGE>
Report of Independent Accountants
To the Shareholders and Directors of
TVA SUL FOZ DO IGUACU LTDA.
We have audited the accompanying balance sheet of TVA SUL FOZ DO IGUACU LTDA.
(the "Company"), as of December 31, 1997 and 1996, and the related statements of
operations, changes in shareholders' equity and cash flows for the year ended
December 31, 1997 and the period since inception, May 30, 1996 to December 31,
1996, all expressed in United States dollars. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TVA SUL FOZ DO IGUACU LTDA. as
of December 31, 1997 and 1996, and the related statements of operations, changes
in shareholders' equity and cash flows for the year ended December 31, 1997 and
the period since inception, May 30, 1996 to December 31, 1996, in conformity
with accounting principles generally accepted in the United States of America.
Coopers & Lybrand
Sao Paulo, Brazil
March 17, 1998
F-136
<PAGE>
TVA SUL FOZ DO IGUACU LTDA.
Balance Sheets
as of December 31, 1997 and 1996
(in thousands of U.S. dollars)
December 31,
----------------
1997 1996
------ ------
ASSETS
Current assets
Cash and cash equivalents (Note 3) $ 21 $ 34
Accounts receivable, net (Note 4) 256 15
Materials and supplies 363 584
Advances to suppliers 38 144
Accounts receivable to affiliated companies (Note 6) 14 29
Other accounts receivable (Note 5) 54 195
------ ------
Total current assets 746 1,001
------ ------
Property, plant and equipment, net (Note 8) 1,652 502
Other 2 25
------ ------
Total assets $2,400 $1,528
====== ======
The accompanying notes are an integral part of these financial statements
F-137
<PAGE>
TVA SUL FOZ DO IGUACU LTDA.
Balance Sheets
as of December 31, 1997 and 1996
(in thousands of U.S. dollars)
December 31,
------------------
1997 1996
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Loans (Note 9) $ 166 $ --
Suppliers 184 580
Taxes payable other than income taxes 161 50
Accrued payroll and related liabilities 37 56
Accounts payable to related companies (Note 6) -- 21
Other accounts payable 31 336
------- -------
Total current liabilities 579 1,043
------- -------
Long-term liabilities
Loans from related companies (Note 6) 2,474 579
Provision for claims (Note 15) 31 --
------- -------
Total long-term liabilities 2,505 579
------- -------
Shareholders' equity
Paid-in capital (Note 12) 5 5
Accumulated deficit (689) (99)
------- -------
Total shareholders' equity (684) (94)
------- -------
Total liabilities and shareholders' equity $ 2,400 $ 1,528
======= =======
The accompanying notes are an integral part of these financial statements
F-138
<PAGE>
TVA SUL FOZ DO IGUACU LTDA.
Statements of Operations
for the year ended December 31, 1997 and the period since
inception, May 30, 1996 to December 31, 1996
(in thousands of U.S. dollars)
Year Ended December 31,
-----------------------
1997 1996
------- -------
Gross revenues
Monthly subscriptions $ 2,992 $ 1,080
Installation 431 70
Other 36 --
Revenue taxes (275) (23)
------- -------
Net revenue 3,184 1,127
------- -------
Direct operating expenses
Payroll and benefits 202 125
Programming 1,092 507
TVA magazine 74 53
Other costs 803 150
------- -------
2,171 835
------- -------
Selling, general and administrative expenses
Payroll and benefits 255 159
Advertising and promotion 84 50
Other administrative expenses 387 65
Other general expenses 26 5
------- -------
752 279
------- -------
Depreciation 184 40
------- -------
Operating gain (loss) 77 (27)
------- -------
Interest income 79 11
Interest expense (834) (27)
Translation 37 32
Other nonoperating income, net 51 --
------- -------
Loss before income taxes (590) (11)
Income taxes (Note 7) -- (58)
------- -------
Loss before minority interest (590) (69)
------- -------
Net loss $ (590) $ (69)
======= =======
The accompanying notes are an integral part of these financial statements
F-139
<PAGE>
TVA SUL FOZ DO IGUACU LTDA.
Statements of Changes in Shareholders' Equity
for the year ended December 31, 1997 and the period since
inception, May 30, 1996 to December 31, 1996
(in thousands of U.S. dollars)
Paid-in Accumulated
Capital Deficit Total
------- ------- -----
Balance as of May 30, 1996 $ 5 $ (30) $ (25)
Net loss for the period -- (69) (69)
----- ----- -----
Balance as of December 31, 1996 5 (99) (94)
Net loss for the period -- (590) (590)
----- ----- -----
Balance as of December 31, 1997 $ 5 $(689) $(684)
===== ===== =====
The accompanying notes are an integral part of these financial statements
F-140
<PAGE>
TVA SUL FOZ DO IGUACU LTDA.
Statements of Cash Flows
for the year ended December 31, 1997 and the period since
inception, May 30, 1996 to December 31, 1996
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (590) $ (69)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 184 40
Provision for doubtful accounts 595 --
Provision for claims 31 --
Changes in operating assets and liabilities:
Accounts receivable (836) (15)
Advances to suppliers 106 (120)
Other accounts receivable 156 (256)
Accrued interest -- (23)
Inventories 221 (584)
Other 23 --
Suppliers (396) 579
Taxes payable other than income taxes 111 50
Accrued payroll and related liabilities (19) 33
Other accounts payable 2,148 2
------- -------
Net cash provided by (used in) operating activities 1,734 (363)
------- -------
Cash flows from investing activities:
Purchase of property, plant and equipment (1,334) (215)
------- -------
Net cash used in investing activities (1,334) (215)
------- -------
Cash flows from financing activities:
Loans from banks 166 --
Loans from related companies -- 826
Repayments of loans from related companies (579) (224)
------- -------
Net cash (used in) provided by financing activities (413) 602
------- -------
Net (decrease) increase in cash and cash equivalents (13) 24
Cash and cash equivalents at beginning of the period 34 10
------- -------
Cash and cash equivalents at end of the period $ 21 $ 34
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
F-141
<PAGE>
TVA SUL FOZ DO IGUACU LTDA.
Notes to Financial Statements
(in thousands of U.S. dollars)
1. The Company and its principal operations
The financial statements have been prepared to reflect the results of TVA
Sul Foz do Iguacu Ltda. (the "Company").
TVA Sul Foz do Iguacu Ltda. renders services related to wireless cable and
cable television systems, including marketing and advertising, production,
distribution and licensing of domestic and foreign television programs. The
Company has wireless cable channel rights primarily in major urban markets
in the South of Brazil.
2. Summary of significant accounting policies
Significant policies followed in the preparation of the financial
statements are described below:
2.1 Basis of presentation
The financial statements are presented in U.S. dollars and have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP"), which differ in certain respects
from accounting principles applied by the Company in its local currency
financial statements, which are prepared in accordance with accounting
principles generally accepted in Brazil ("Brazilian GAAP").
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
financial statement dates and the reported amount of revenues and expenses
during the reporting periods. Since management's judgment involves making
estimates concerning the likelihood of future events, the actual results
could differ from these estimates.
2.2 Accounting records
As required by Brazilian Law, and in accordance with local accounting
practices, the accounting records of the Company are maintained in
Brazilian currency ("reais" or "R$"). In order to present the financial
statements in conformity with accounting principles generally accepted in
the United States of America, the Company maintains additional accounting
records which are used solely for this purpose.
F-142
<PAGE>
TVA SUL FOZ DO IGUACU LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
2.3 Currency remeasurement
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
52, "Foreign Currency Transactions", the United States dollar has been
assumed to be the functional currency as 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$1.1164 to US$1 in effect on December 31, 1997, and R$1.0394
to US$1 in effect on December 31, 1996. Translation gains and losses are
recognized in the income statement.
Income and expenses are translated at the average exchange rates in effect
each month, except for those related to assets and liabilities which are
translated at historical exchange rates and deferred income taxes, which
are translated at the current rate. Translation gains and losses are
recognized in the income statement.
2.4 Cash and cash equivalents
Cash and cash equivalents are defined as cash and cash in banks and
investments in interest-bearing securities and are carried at cost plus
accrued interest. Short-term investments with original maturities of three
months or less at the time of purchase are considered cash equivalents.
2.5 Financial instruments
In accordance with SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments", information is provided about the fair value of certain
financial instruments for which it is practicable to estimate that value.
For the purposes of SFAS No. 107, the estimated fair value of a financial
instrument is the amount at which the instrument could be exchanged in a
current transaction between willing parties, other than in a forced or
liquidation sale. The carrying values of the Company's financial
instruments as of December 31, 1997 and 1996 approximate management's best
F-143
<PAGE>
TVA SUL FOZ DO IGUACU LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
2.5 Financial instruments (Continued)
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:
o The fair value of certain financial assets carried at cost, including
cash, accounts receivable, other accounts receivable, and certain
other short-term assets is considered to approximate their respective
carrying value due to their short-term nature.
o The fair value of payables to suppliers, other accounts payable, loans
to related companies and certain other short-term liabilities is
considered to approximate their respective carrying value due to their
short-term nature.
o The fair value of loans from related companies approximates their
respective carrying values as interest on these loans is variable and
based on market rates.
2.6 Accounts receivable
A provision for doubtful accounts was established on the basis of an
analysis of the accounts receivable, in light of the risks involved, in an
amount sufficient to cover any losses incurred in realization of credits.
2.7 Inventories
Inventories consist of materials and supplies used to provide service to
new customers, and to ensure continuity of service to existing customers.
Inventories are stated at the lower of cost or market. Cost is determined
principally under the average cost method.
2.8 Property, plant and equipment
Property, plant and equipment are stated at cost and depreciated using the
straight-line method, over the remaining useful lives, as described in Note
8.
2.9 Recoverability of long-lived assets to be held and used in the business
Management reviews long-lived assets, primarily the Company's concessions
and its property and equipment to be held and used in the business, for the
purposes of determining and measuring impairment on a recurring basis or
when events or changes in circumstances
F-144
<PAGE>
TVA SUL FOZ DO IGUACU LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
2.9 Recoverability of long-lived assets to be held and used in the business
(Continued)
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.
2.10 Revenue recognition
Hook up fees are recognized as revenue on the equipment installation date
to the extent of direct selling costs incurred. Subscription revenues are
recognized as earned on an accrual basis.
3. Cash and cash equivalents
As of December 31, 1997 and 1996, cash and cash equivalents were comprised
of:
December 31,
-----------------
1997 1996
---- ----
Cash on hand and in banks $ 3 $34
Short-term investments 18 --
--- ---
$21 $34
=== ===
4. Accounts receivable, net
As of December 31, 1997 and 1996, accounts receivable were comprised of:
December 31,
------------------
1997 1996
----- -----
Subscriptions $ 663 $--
Installation fees 188 --
Others -- 15
Provision for doubtful accounts (595) --
----- -----
$ 256 $ 15
===== =====
F-145
<PAGE>
TVA SUL FOZ DO IGUACU LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
5. Other accounts receivable
As of December 31, 1997 and 1996, other accounts receivable were comprised
of:
December 31,
------------------------------------
1997 1996
----------------- ----------------
Advances to employees $ 1 $ --
Others 53 195
----------------- ----------------
$ 54 $ 195
================= ================
6. Related party transactions
The following tables summarize the transactions between the Company and
related parties as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1996
----------------- ----------------
<S> <C> <C>
TVA Sistema de Televisao S.A.
Accounts payable $ -- $ 1
TVA Sul Parana Ltda.
Accounts receivable 14 29
TVA Sul Participacoes S.A.
Loans payable 2,474 579
CCS - Camboriu Cable Systems de
Telecomunicacoes Ltda. Accounts payable -- 20
</TABLE>
The related company loans are denominated in reais and are subject to
interest charges at the market rate which ranged from 3.85% to 3.93% per
month in December 1997 (1.8% to 2.2% per month in December 1996). Such
loans are renewable every year on December 31.
F-146
<PAGE>
TVA SUL FOZ DO IGUACU LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
7. Income taxes
The tax effects of temporary differences that give rise to a significant
portion of the deferred tax asset and deferred tax liability as of December
31, 1997 and 1996 are as follows:
December 31,
---------------
1997 1996
----- -----
Deferred tax assets:
Net operating loss carryforwards $ 128 $ 185
Others 188 --
----- -----
Total gross deferred tax asset 316 185
----- -----
Less valuation allowance (316) (185)
----- -----
Net deferred tax asset $ -- $ --
===== =====
The Company has a limited operating history and has generated losses since
its inception. The valuation allowance has been established in accordance
with the requirements of SFAS No. 109, "Accounting for Income Taxes".
The combined income tax expense was different from the amount computed
using the Brazilian statutory income tax for the reasons set forth in the
following table:
Year Ended December 31,
-----------------------
1997 1996
----- -----
Loss before income taxes and minority interest $ 595 $ 11
Statutory income tax rate 33.00% 33.00%
----- -----
196 4
Translatio loss on tax losses carryfoward (13) --
Others (52) (62)
----- -----
Income tax benefit ( provision) for the period 131 (58)
Increase in valuation allowance (131) --
----- -----
$-- $ (58)
===== =====
F-147
<PAGE>
TVA SUL FOZ DO IGUACU LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
8. Property, plant and equipment, net
As of December 31, 1997 and 1996, property, plant and equipment were
comprised of:
<TABLE>
<CAPTION>
Annual
Depreciation
Rate December 31,
------------ -------------------------------
% 1997 1996
------------- --------------
<S> <C> <C> <C>
Machinery and equipment 10 $ 352 $ 232
Converters 10 54 --
Furniture and fixtures 10 24 22
Premises 10 351 5
Vehicles 20 45 33
Software 20 20 16
Cable plant 10 1,092 280
Building 4 2 --
------------- -------------
1,940 588
------------- -------------
Telephone line use rights 17 12
Others -- 23
Accumulated depreciation (305) (121)
------------- -------------
$ 1,652 $ 502
============= =============
</TABLE>
9. Loans
As of December 31, 1997, loans were comprised of:
Short-term Long-term
-------------- ------------
Loans $ 166 $ 2,474
============== ============
10. Loan guarantees
In November 1996, Tevecap S.A., the parent of the Company's parent, TVA Sul
Participacoes S.A., issued $250,000 12-5/8% Senior Notes to institutional
buyers in a private placement. The Notes, which mature in November 2004,
were subsequently registered with the Securities and Exchange Commission in
May 1997. These Notes are jointly and severally, irrevocably and fully
F-148
<PAGE>
TVA SUL FOZ DO IGUACU LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
10. Loan guarantees (Continued)
unconditionally guaranteed, on a senior basis, by Tevecap's direct and
indirect subsidiaries, including the Company.
11. Insurance
The Company maintains insurance coverage for its fixed assets and
inventories in an amount considered sufficient to cover the risks involved.
12. Paid-in capital
Paid-in capital as of December 31, 1997 and 1996 was comprised of:
<TABLE>
<CAPTION>
1997 1996
------------------------------------ ------------------------------------
US$ Share US$ Share
----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Leonardo Petrelli Neto $ -- 1 $ -- 1
TVA Sul Participacoes 5 4,999 5 4,999
---------------- --------------- ---------------- ----------------
$ 5 5,000 $ 5 5,000
================ =============== ================ ================
</TABLE>
Paid-in capital represents registered common shares without par value.
13. Litigation contingencies
Certain claims and lawsuits arising in the ordinary course of business have
been filed or are pending against the Company which were not recognized in
the financial statements. The Company has also recorded provisions related
to certain claims in amounts that management considers to be adequate after
considering a number of factors including (but not limited to) the views of
legal counsel, the nature of the claims and the prior experience of the
Company.
In management's opinion, all contingencies have been adequately provided
for or are without merit, or are of such kind that, if disposed of
unfavorably, would not have a material adverse effect on the financial
position or future results of operations of the Company.
F-149
<PAGE>
TVA SUL FOZ DO IGUACU LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
14. Abril Health Care Plan
In February 1996, the Abril Health Care Plan, Associacao Abril de
Beneficios (the "Health Care Plan"), was created to provide health care to
Abril S.A. companies' employees and their dependents. Both the companies
forming part of the Abril Group and the employees thereof contribute
monthly to the Health Care Plan which is responsible for the management of
the plan. In 1997, contributions made by the Company to the Health Care
Plan and certain affiliated companies to Associacao Abril de Beneficios
amounted to $26.
15. Supplementary information - valuation and qualifying accounts and reserves
<TABLE>
<CAPTION>
Deferred
Taxation Provision for Provision
Valuation Doubtful for
Allowance Accounts Claims
--------------- ------------ - -----------
<S> <C> <C> <C>
Balance as of December 31, 1996 $ -- $ -- $ --
--------------- ------------ - -----------
Additions charged to expense $ 131 $ 595 $ 31
--------------- ------------ - -----------
Balance as of December 31, 1997 $ 131 $ 595 $ 31
=============== ============ = ===========
</TABLE>
F-150
<PAGE>
TVA SUL FOZ DO IGUACU LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
16. Working capital deficiency
The Company's financial statements for the year ended December 31, 1997
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 $590 and $69 for the
year ended in December 31, 1997 and for the period since inception, May 30,
1996 to December 31, 1996, respectively.
The Company is endeavoring to reverse its pattern of losses and effectively
meet its liquidity needs through increasing the revenue base and other
means.
In the event that these steps prove to be inadequate to maintain the
Company's operating cash flow, the Company's principal shareholder,
TEVECAP, intends to maintain the Company as a going concern. TEVECAP's
support may be in the form of cash advances, loans, equity infusions or
external guarantees.
17. Recent accounting pronoucements
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"), which establishes standards for reporting and display of
comprehensive income and its components in a full set of financial
statements. Comprehensive income is the total of reported net income and
all other revenues, expenses, gains and losses that under generally
accepted accounting principles bypass reported net income. SFAS No. 130
requires that comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements
and requires an entity to (a) classify items of other comprehensive income
by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
surplus in the equity section of the balance sheet. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. Companies are
also required to report comparative totals for comprehensive income in
interim reports. Management is currently considering the impact of SFAS No.
130, but does not believe it will have a material effect on the Company's
consolidated financial statements.
F-151
<PAGE>
TVA SUL FOZ DO IGUACU LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
17. Recent accounting pronoucements (Continued)
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which establishes
standards for public companies to report certain financial information
about operating segments in interim and annual financial statements.
Operating segments are components of a business about which separate
financial information is available and that are evaluated regularly by the
chief operating decision maker in assessing performance and deciding how to
allocate resources. SFAS No. 131 also requires public companies to report
certain information about their products and services and the geographic
areas in which they operate. SFAS No. 131 is effective for financial
statements for fiscal years beginning after December 15, 1997. SFAS No. 131
does not need to be applied to interim financial statements in the initial
year of its application, but such comparative information will be required
in interim statements in the second year. At this time, management is
assessing the impact of SFAS No. 131 and has not determined whether the new
reporting provisions will require supplemental disclosures by the Company.
18. Subsequent events
Management of the Company have completed an evaluation of its operations
and determined that Brazil no longer constitutes a highly inflationary
economy. The effective date of this change is January 1, 1998. Management
of the Company is currently performing an assessment in order to determine
the functional currency of the Company.
F-152
<PAGE>
TVA SUL SANTA CATARINA LTDA.
Index to Financial Statements
Contents
Page
Report of Independent Accountants F-154
Balance Sheets as of December 31, 1997 and 1996 F-155
Statements of Operations for the year ended December 31, 1997
and for the period from inception, February 28, 1996
to December 31, 1996 F-157
Statements of Changes in Shareholders' Equity for the year
ended December 31, 1997 and for the period from inception,
February 28, 1996 to December 31, 1996 F-158
Statements of Cash Flows for the year ended December 31, 1997
and for the period from inception, February 28, 1996 to
December 31, 1996 F-159
Notes to Financial Statements F-160
F-153
<PAGE>
Report of Independent Accountants
To the Shareholders and Directors of
TVA SUL SANTA CATARINA LTDA.
We have audited the accompanying balance sheet of TVA SUL SANTA CATARINA LTDA.
(the "Company"), as of December 31, 1997 and 1996, and the related statements of
operations, changes in shareholders' equity and cash flows for the year ended
December 31, 1997 and period since inception, February 28, 1996 to December 31,
1996, all expressed in United States dollars. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of TVA SUL SANTA CATARINA LTDA. as
of December 31, 1997 and 1996, and the related statements of operations, changes
in shareholders' equity and cash flows for the year ended December 31, 1997 and
period since inception, February 28, 1996 to December 31, 1996, in conformity
with accounting principles generally accepted in the United States of America.
Coopers & Lybrand
Sao Paulo, Brazil
March 17, 1998
F-154
<PAGE>
TVA SUL SANTA CATARINA LTDA.
Balance Sheets
December 31, 1997 and 1996
(in thousands of U.S. dollars)
December 31,
---------------
1997 1996
------ ------
ASSETS
Current assets
Cash on hand and in banks $ 16 $ --
Accounts receivable, net (Note 3) 131 49
Materials and supplies 410 420
Advances to suppliers 11 19
Accounts receivable from affiliated companies (Note 5) 22 23
Other accounts receivable 1 31
------ ------
Total current assets 591 542
------ ------
Property, plant and equipment, net (Note 7) 4,431 2,470
Other 3 --
------ ------
Total assets $5,025 $3,012
====== ======
The accompanying notes are an integral part of these financial statements
F-155
<PAGE>
TVA SUL SANTA CATARINA LTDA.
Balance Sheets
December 31, 1997 and 1996
(in thousands of U.S. dollars)
December 31,
------------------
1997 1996
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Loans $ 241 $ --
Suppliers 312 335
Taxes payable other than income taxes 17 5
Accrued payroll and related liabilities 45 45
Accounts payable to affiliated companies (Note 8) 4,465 1,256
Other accounts payable (Note 4) 42 107
------- -------
Total current liabilities 5,122 1,748
------- -------
Long-term liabilities
Loans from related companies (Note 8) 2,037 2,153
Provision from claims (Note 13) 8 --
------- -------
Total long-term liabilities 2,045 2,153
------- -------
Shareholders' equity
Paid-in capital (Note 9) 1 1
Accumulated deficit (2,143) (890)
------- -------
Total shareholders' equity (2,142) (889)
------- -------
Total liabilities and shareholders' equity $ 5,025 $ 3,012
======= =======
The accompanying notes are an integral part of these financial statements
F-156
<PAGE>
TVA SUL SANTA CATARINA LTDA.
Statements of Operations
for the year ended December 31, 1997 and for the period since
inception, February 28, 1996 to December 31, 1996
(in thousands of U.S. dollars)
Year Ended December 31,
-----------------------
1997 1996
------- -------
Gross revenues
Monthly subscriptions $ 1,979 $ 103
Installation 101 11
Other 3 --
Revenue taxes (155) (3)
------- -------
Net revenue 1,928 111
------- -------
Direct operating expenses
Payroll and benefits 611 198
Programming 711 20
Technical assistance 47 --
TVA magazine 69 9
Other costs 634 535
------- -------
2,072 762
------- -------
Selling, general and administrative expenses
Advertising and promotion 174 94
Rent 91 60
Other administrative expenses 163 106
------- -------
428 260
------- -------
Depreciation 263 44
------- -------
Operating loss (835) (955)
------- -------
Interest income 182 --
Interest expense (643) --
Translation 59 95
Other nonoperating, net (16) --
------- -------
Loss before income taxes (1,253) (860)
Income taxes -- --
------- -------
Net loss $(1,253) $ (860)
======= =======
The accompanying notes are an integral part of these financial statements
F-157
<PAGE>
TVA SUL SANTA CATARINA LTDA.
Statements of Changes in Shareholders' Equity
for the year ended December 31, 1997 and for the period since
inception, February 28, 1996 to December 31, 1996
(in thousands of U.S. dollars)
Paid-in
Capital Accumulated
(Note 9) Deficit Total
------- ------- -------
Balance as of February 28, 1996 $ 1 $ (30) $ (29)
Net loss for the period -- (860) (860)
------- ------- -------
Balance as of December 31, 1996 1 (890) (889)
Net loss for the period -- (1,253) (1,253)
------- ------- -------
Balance as of December 31, 1997 $ 1 $(2,143) $(2,142)
======= ======= =======
The accompanying notes are an integral part of these financial statements
F-158
<PAGE>
TVA SUL SANTA CATARINA LTDA.
Statements of Cash Flows
for the year ended December 31, 1997 and for the period since
inception, February 28, 1996 to December 31, 1996
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,253) $ (860)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 263 44
Provision for doubtful accounts 130 --
Provision for claims 8 --
Changes in operating assets and liabilities:
Accounts receivable (212) (49)
Advances to suppliers 8 (19)
Other accounts receivable 30 (53)
Accrued interest (143) (31)
Materials and supplies 10 (420)
Other (2) --
Suppliers (23) 335
Taxes payable other than income taxes 12 5
Accrued payroll and related liabilities -- 46
Other accounts payable 3,144 1,363
------- -------
Net cash provided by operating activities 1,972 361
------- -------
Cash flows from investing activities:
Purchase of property, plant and equipment (2,224) (2,490)
------- -------
Net cash used in investing activities (2,224) (2,490)
------- -------
Cash flows from financing activities:
Loans from banks 241 --
Loans from related companies 27 2,177
Repayments of loans from related companies -- (48)
------- -------
Net cash provided by financing activities 268 2,129
------- -------
Net increase in cash on hand and in banks 16 --
Cash on hand and in banks at beginning of the period -- --
------- -------
Cash on hand and in banks at end of the period $ 16 $ --
======= =======
Supplemental cash disclosure
Cash paid for interest -- --
------- -------
Supplemental noncash financial activities
Accrued interest on related company loans refinanced as principal balance $ 143 $ --
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements
F-159
<PAGE>
TVA SUL SANTA CATARINA LTDA.
Notes to Financial Statements
(in thousands of U.S. dollars)
1. The Company and its principal operations
The financial statements have been prepared to reflect the results of TVA
Sul Santa Catarina Ltda. (the "Company").
TVA Sul Santa Catarina Ltda. renders services related to wireless cable and
cable television systems, including marketing and advertising, production,
distribution and licensing of domestic and foreign television programs. The
Company has wireless cable channel rights primarily in major urban markets
in the South of Brazil.
2. Summary of significant accounting policies
Significant policies followed in the preparation of the financial
statements are described below:
2.1 Basis of presentation
The financial statements are presented in U.S. dollars and have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP"), which differ in certain respects
from accounting principles applied by the Company in its local currency
financial statements, which are prepared in accordance with accounting
principles generally accepted in Brazil ("Brazilian GAAP").
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
financial statement dates and the reported amount of revenues and expenses
during the reporting periods. Since management's judgment involves making
estimates concerning the likelihood of future events, the actual results
could differ from these estimates.
2.2 Accounting records
As required by Brazilian Law, and in accordance with local accounting
practices, the accounting records of the Company are maintained in
Brazilian currency ("reais" or "R$"). In order to present the financial
statements in conformity with U.S. GAAP, the Company maintains additional
accounting records which are used solely for this purpose.
2.3 Currency remeasurement
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:
F-160
<PAGE>
TVA SUL SANTA CATARINA LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
2.3 Currency remeasurement (Continued)
Nonmonetary assets and liabilities are translated at historical rates. All
other assets and liabilities are translated at the official rate of
exchange of R$1.1164 to US$1 in effect on December 31, 1997, and R$1.0394
to US$1 in effect on December 31, 1996. Translation gains and losses are
recognized in the income statement.
Income and expenses are translated at the average exchange rates in effect
each month, except for those related to assets and liabilities which are
translated at historical exchange rates and deferred income taxes, which
are translated at the current rate. Translation gains and losses are
recognized in the income statement.
2.4 Cash and cash equivalents
Cash and cash equivalents are defined as cash and cash in banks and
investments in interest-bearing securities and are carried at cost plus
accrued interest. Short-term investments with original maturities of three
months or less at the time of purchase are considered cash equivalents.
2.5 Financial instruments
In accordance with SFAS No. 107, "Disclosures about Fair Value of Financial
Instruments", information is provided about the fair value of certain
financial instruments for which it is practicable to estimate that value.
For the purposes of SFAS No. 107, the estimated fair value of a financial
instrument is the amount at which the instrument could be exchanged in a
current transaction between willing parties, other than in a forced or
liquidation sale. The carrying values of the Company's financial
instruments as of December 31, 1997 and 1996 approximate management's best
estimate of their fair values. The following methods and assumptions were
used to estimate the fair value of each class of financial instrument for
which it is practicable to estimate that value:
o The fair value of certain financial assets carried at cost, including
cash, accounts receivable, other accounts receivable, and certain
other short-term assets is considered to approximate their respective
carrying value due to their short-term nature.
o The fair value of payables to suppliers, other accounts payable and
certain other short-term liabilities is considered to approximate
their respective carrying value due to their short-term nature.
F-161
<PAGE>
TVA SUL SANTA CATARINA LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
o The fair value of loans from related companies approximates their
respective carrying values as interest on these loans is variable and
based on market rates.
2.6 Accounts receivable
A provision for doubtful accounts was established on the basis of an
analysis of the accounts receivable, in light of the risks involved, in an
amount sufficient to cover any losses incurred in realization of credits.
2.7 Inventories
Inventories consist of materials and supplies used to provide service to
new customers, and to ensure continuity of service to existing customers.
Inventories are stated at the lower of cost or market. Cost is determined
principally under the average cost method.
2.8 Property, plant and equipment
Property, plant and equipment are stated at cost and depreciated using the
straight-line method, over the remaining useful lives, as described in Note
7.
2.9 Recoverability of long-lived assets to be held and used in the business
Management reviews long-lived assets, primarily the Company's concessions
and its property and equipment to be held and used in the business, for the
purposes of determining and measuring impairment on a recurring basis or
when events or changes in circumstances indicate that the carrying value of
an asset or group of assets may not be recoverable. Assets are grouped and
evaluated for possible impairment at the level of each cable television
system; impairment is assessed on the basis of the forecasted undiscounted
cash flows of the businesses over the estimated remaining lives of the
assets related to those systems. A write-down of the carrying value of the
assets or group of assets to estimated fair value will be made when
appropriate.
F-162
<PAGE>
TVA SUL SANTA CATARINA LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
2.10 Revenue recognition
Hook up fees are recognized as revenue on the equipment installation date
to the extent of direct selling costs incurred. Subscription revenues are
recognized as earned on an accrual basis.
3. Accounts receivable, net
As of December 31, 1997 and 1996, accounts receivable were comprised of:
December 31,
------------------
1997 1996
----- -----
Subscriptions $ 239 $ 47
Installation fees 24 4
Provision for doubtful accounts (132) (2)
----- -----
$ 131 $ 49
===== =====
4. Other accounts payable
As of December 31, 1997 and 1996, other accounts payable were comprised of:
December 31,
------------------
1997 1996
----- -----
Advance payments received from customers $ 4 $--
Importation expenses payable -- 93
Others 38 14
----- -----
$ 42 $ 107
===== =====
F-163
<PAGE>
TVA SUL SANTA CATARINA LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
5. Related party transactions
The following tables summarize the transactions between the Company and
related parties as of December 31, 1997 and 1996 and for each of the two
years in the period ended December 31, 1997:
December 31,
------------------
1997 1996
----- -----
Tevecap S.A
Loans payable $-- $ 87
TVA Sistema de Televisao S.A
Accounts receivable 22 23
Accounts payable -- 2
Loans payable 101 --
TVA Parana Ltda
Accounts payable 13 126
Loans payable 1,936 2,066
Net interest income -- (143)
TVA Sul Participacoes S.A
Accounts payable 4,447 1,128
CCS - Camboriu Cable Systems de
Telecomunicacoes Ltda.
Accounts payable 5 --
The related company loans are denominated in reais and are subject to
interest charges at the market rate which ranged from 3.85% to 3.93% per
month in December 1997 (1.8% to 2.2% per month in December 1996). Such
loans are renewable every year on December 31.
F-164
<PAGE>
TVA SUL SANTA CATARINA LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
6. Income taxes
The tax effects of temporary differences that give rise to a significant
portion of the deferred tax asset and deferred tax liability as of December
31, 1997 and 1996 are as follows:
December 31,
------------------
1997 1996
----- -----
Deferred tax assets:
Net operating loss carryforwards $ 604 $ 188
Deferred charges 71 97
----- -----
Total gross deferred tax asset 675 285
----- -----
Less valuation allowance (675) (285)
----- -----
Net deferred tax asset $-- $--
===== =====
The Company has a limited operating history and has generated losses since
its inception. The valuation allowance has been established in accordance
with the requirements of SFAS No. 109, "Accounting for Income Taxes".
The income tax expense was different from the amount computed using the
Brazilian statutory income tax for the reasons set forth in the following
table:
Year Ended December 31,
-----------------------
1997 1996
------- -------
Loss before income taxes and minority interest $ 1,253 $ 860
Statutory income tax rate 33.00% 33.00%
------- -------
413 284
Monetary correction over U.S. dollar on tax losses (13) --
Others (10) 1
------- -------
Consolidated income tax benefit for the period 390 285
Increase in valuation allowance (390) (285)
------- -------
$ -- $ --
======= =======
F-165
<PAGE>
TVA SUL SANTA CATARINA LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
7. Property, plant and equipment, net
As of December 31, 1997 and 1996, property, plant and equipment were
comprised of:
<TABLE>
<CAPTION>
Annual
Depreciation
Rate December 31,
-----------------------------
% 1997 1996
------------- -------------
<S> <C> <C> <C>
Machinery and equipment 10 $ 384 $ 192
Converters 10 315 98
Leasehold improvements 25 53 2
Furniture and fixtures 10 50 47
Premises 10 285 6
Vehicles 20 51 51
Software 20 20 14
Tools 10 3 --
Reception equipment 20 582 --
Cable plant 10 3,052 2,052
------------ -------------
4,795 2,462
------------ -------------
Telephone line use rights 41 --
Others -- 53
Accumulated depreciation (405) (45)
------------ -------------
$ 4,431 $ 2,470
============ =============
</TABLE>
8. Insurance
The Company maintains insurance coverage for its fixed assets and
inventories in an amount considered sufficient to cover the risks involved.
F-166
<PAGE>
TVA SUL SANTA CATARINA LTDA.
Notes to Financial Statements, Continued
(in thousands of U.S. dollars)
9. Paid-in capital
Paid-in capital as of December 31, 1997 and 1996 was comprised of:
<TABLE>
<CAPTION>
1997 1996
------------------------------------- ------------------------------------
US$ Shares US$ Shares
------------------ ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Leonardo Petrelli Neto $ -- 1 $ -- 1
TVA Sul Participacoes S.A. 1 199 1 199
------------------ ---------------- --------------- -----------------
$ 1 200 $ 1 200
================== ================ =============== =================
</TABLE>
Paid-in capital represents registered common shares without par value.
10. Loan guarantees
In November 1996, Tevecap S.A., the parent of the Company's parent, TVA Sul
Participacoes S.A., issued $250,000 12-5/8% Senior Notes to institutional
buyers in a private placement. The Notes, which mature in November 2004,
were subsequently registered with the Securities and Exchange Commission in
May 1997. These Notes are jointly and severally, irrevocably and fully
unconditionally guaranteed, on a senior basis, by Tevecap's direct and
indirect subsidiaries, including the Company.
11. 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.
F-167
<PAGE>
TVA SUL SANTA CATARINA LTDA.
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
12. Abril Health Care Plan
In February 1996, the Abril Health Care Plan, Associacao Abril de
Beneficios (the "Health Care Plan"), was created to provide health care to
Abril S.A. companies' employees and their dependents. Both the companies
forming part of the Abril Group and the employees thereof contribute
monthly to the Health Care Plan which is responsible for the management of
the plan. In 1997, contributions made by the Company to the Health Care
Plan and certain affiliated companies to Associacao Abril de Beneficios
amounted to $22.
13. Supplementary information - valuation and qualifying accounts and reserves
<TABLE>
<CAPTION>
Deferred
Taxation Provision for Provision
Valuation Doubtful for
Allowance Accounts Claims
-------------- -------------- ------------
<S> <C> <C> <C>
Balance as of December 31, 1996 $ 285 $ 2 $ --
Additions charged to expense 390 130 8
------------- ------------- ------------
Balance as of December 31, 1997 $ 675 $ 132 $ 8
============= ============= ============
</TABLE>
14. Working capital deficiency
The Company's financial statements for the year ended December 31, 1997
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 $1,253 and $860 for
the year ended in December 31, 1997 and for the period since inception,
February 28, 1996 to December 31, 1996, respectively. In addition, the
Company had negative working capital of $4.531 at December 31, 1997.
The Company is endeavoring to reverse its pattern of losses and effectively
meet its liquidity needs through increasing the revenue base and other
means.
In the event that these steps prove to be inadequate to maintain the
Company's operating cash flow, the Company's principal shareholder,
TEVECAP, intends to maintain the Company as a going concern. TEVECAP's
support may be in the form of cash advances, loans, equity infusions or
external guarantees.
F-168
<PAGE>
TVA SUL SANTA CATARINA LTDA.
Notes to these Financial Statements, Continued
(in thousands of U.S. dollars)
15. Recent accounting pronouncements
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"), which establishes standards for reporting and display of
comprehensive income and its components in a full set of financial
statements. Comprehensive income is the total of reported net income and
all other revenues, expenses, gains and losses that under generally
accepted accounting principles bypass reported net income. SFAS No. 130
requires that comprehensive income be reported in a financial statement
that is displayed with the same prominence as other financial statements
and requires an entity to (a) classify items of other comprehensive income
by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
surplus in the equity section of the balance sheet. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997. Companies are
also required to report comparative totals for comprehensive income in
interim reports. Management is currently considering the impact of SFAS No.
130, but does not believe it will have a material effect on the Company's
consolidated financial statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which establishes
standards for public companies to report certain financial information
about operating segments in interim and annual financial statements.
Operating segments are components of a business about which separate
financial information is available and that are evaluated regularly by the
chief operating decision maker in assessing performance and deciding how to
allocate resources. SFAS No. 131 also requires public companies to report
certain information about their products and services and the geographic
areas in which they operate. SFAS No. 131 is effective for financial
statements for fiscal years beginning after December 15, 1997. SFAS No. 131
does not need to be applied to interim financial statements in the initial
year of its application, but such comparative information will be required
in interim statements in the second year. At this time, management is
assessing the impact of SFAS No. 131 and has not determined whether the new
reporting provisions will require supplemental disclosures by the Company.
16. Subsequent events
Management of the Company have completed an evaluating of its operations
and determined that Brazil no longer constitutes a highly inflationary
economy. The effective date of this change is January 1, 1998. Management
of the Company is currently performing an assessment in order to determine
the functional currency of the Company.
F-169
<PAGE>
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.
BNDES: Banco National de Desenolvimento Economico e Social, the national
development bank owned by the Brazilian Government.
Brasilsat: A satellite operated by Embratel through which the Company
provides C-Band service.
C-Band: A satellite transmission system which provides a signal on the "c"
bandwidth.
Cable: A Cable network employs electromagnetic transmission over coaxial
and/or fiber-optic cable to transmit multiple channels carrying images, sound
and data between a central facility and individual customers' television sets.
Networks may allow one-way (from a headend to a residence and/or business) or
two-way transmission from a headend to a residence and/or business with a data
return path for the headend.
Cable license: A license that is granted by the applicable governing body
pursuant to its authority under the communications laws of a particular country
for the purpose of providing Cable services for a specific franchise/license
area.
Canbras: Canbras Communications Corp., a Canadian corporation.
Canbras Association Agreement: Association Agreement dated June 14, 1995,
among Tevecap, TVA Sistema, the Canbras TVA Companies, Canbras and Canbras-Par.
Canbras TVA Companies: Canbras TVA Cabo and TV Cabo Santa Branca.
Canbras TVA Cabo: Canbras TVA Cabo Ltda., a Brazilian limitada.
Canbras TVA: The operations of Canbras TVA Cabo and TV Cabo Santa Branca,
in each of which Tevecap holds a 36.0% equity interest and Canbras Par holds a
64.0% equity interest.
Canbras-Par: Canbras Participacoes, Ltda., a Brazilian limitada
wholly-owned by Canbras.
CBC: California Broadcasting Center, an uplink center for GLA located in
Long Beach, California.
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<PAGE>
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 8.1% interest in Tevecap through two wholly owned
subsidiaries.
Coaxial cable: Cable consisting of a central conductor surrounded by and
insulated from another conductor. It is the standard material used in
traditional Cable systems. Signals are transmitted through it at different
frequencies, giving greater channel capacity than is possible with twisted pair
cable, but less than is allowed by optical fiber.
Comercial Cabo Sao Paulo: Comercial Cabo TV Sao Paulo Ltda., a Brazilian
limitada in which Tevecap holds a 99% equity interest.
Company: Tevecap, together with its consolidated subsidiaries.
CPL: Cable Participacoes Ltda., a Brazilian limitada, jointly owned by
Hearst and ABC, which limitada holds a 2.0% equity interest in Tevecap.
CPCT: Centrais Privadas de Comutacao Telefonica, certain private telephone
networks comparable to private branch exchanges (PBX) found in larger apartment
complexes, hotels and businesses in the United States.
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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<PAGE>
DLA: DIRECTV Latin America, a California corporation wholly-owned by Hughes
Communications that holds a 60% equity interest in GLA.
Embratel: Empresa Brasileira de Telecomunicacoes, 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
Tevecap, as Guarantor, TVA Sistema, as borrower, and The Chase Manhattan Bank,
N.A., as lender. The EximBank will guarantee 85% of amounts borrowed under the
EximBank Facility.
Falcon International: Falcon International Communications (Bermuda L.P.), a
subsidiary of Falcon International Communications, L.L.C., a Delaware limited
liability company.
Falcon Time Put: A provision of the Stockholders Agreement pursuant to
which Falcon International may, in certain circumstances, demand that Tevecap
purchase all or a portion of the shares held by Falcon International.
Fiber-optic cable: Cable made of glass fibers through which signals are
transmitted as pulses of light. Fiber-optic cable has the capacity for a large
number of channels.
Financial Statements: The audited financial statements of Tevecap and its
subsidiaries and the notes thereto included herein.
Fox: Twentieth Century Fox Television International.
Galaxy Brasil: Galaxy Brasil S.A., a wholly-owned subsidiary of Tevecap
which operates Brazil's first Ku-Band system.
Galaxy Brasil Leasing Facility: A five-year, $49.9 million lease and
sale-leaseback facility entered into in March 1997 by Galaxy Brasil, as lessee,
and Citibank, N.A., as lessor.
A-3
<PAGE>
Galaxy Latin America: Galaxy Latin America, LLC, a Delaware limited
liability company the members of which are DLA, which holds a 60.0% equity
interest, Darlene Investments, which holds a 20.0% equity interest, TVA
Communications, which holds a 10% equity interest, and Grupo Frecuencia Modulada
Television, which holds a 10.0% equity Interest.
Galaxy III-R: A satellite owned and operate by Hughes Communications
through which Galaxy Brasil provides DIRECTV service.
GLA: Galaxy Latin America.
GLA Agreement: 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: TVA Sistema de Televisao S.A., Galaxy Brasil S.A., TVA Sul
Participacoes S.A., Comercial Cabo TV Sao Paulo Ltda., TVA Sul Parana Ltda., CCS
Camboriu Cable System de Telecomunicacoes Ltda., TVA Sul Santa Catarina Ltda.,
TVA Sul Foz do Iguacu Ltda, TVA Distribuidora S.A., TVA Programadora Ltda. and
TVA Satelite Ltda.
HABC II: Hearst/ABC Video Services II, a Delaware general partnership
jointly owned by Hearst and ABC, which partnership holds a 15.3% equity interest
in Tevecap.
HBO Brasil: Programming provided by HBO Brasil Partners.
HBO Brasil Ltda: A Brazilian limitada, wholly owned by HBO Partners, that
distributes HBO programming in Brazil.
HBO Brasil Partners: HBO Brasil Partners Ltd., a joint venture between TVA,
which holds a 24.0% equity interest, and HBO Ole Partners, which holds a 76.0%
equity interest.
HBO Ole Partners: A partnership among Time Warner Entertainment Company,
L.P., SPE Latin American Acquisition Corporation, Ole Communications, Inc. and
BVI Television Investments, Inc.
Headend: A collection of hardware, typically including satellite receivers,
modulators, amplifiers and videocassette playback machines. Signals, when
processed, are then combined for distribution within the Cable network.
Hearst: The Hearst Corporation.
Hearst/ABC Parties: HABC II and CPL.
A-4
<PAGE>
Hearst/ABC Programming Agreement: Programming Agreement, dated December 6,
1995, among Tevecap, Hearst and ABC.
Homes Passed: Homes that can be connected to a Cable distribution system
without further extension of the distribution network.
Hughes Communications: Hughes Communications, Inc.
Hughes Electronics: Hughes Electronics Corporation.
IBGE: Instituto Brasileiro de Geografia e Estatistica.
IBOPE: Instituto Brasileiro de Opiniao Publica e Estatistica.
Indenture: The Indenture, dated as of November 26, 1996, among Tevecap,
Tevecap's Restricted 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.
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 July 26, 1996,
between GLA and Tevecap.
LOS: An unobstructed "Line of Sight" from any of the Company's MMDS
headends to a subscriber's antenna.
MGM: Metro Goldwyn Mayer, Inc.
Ministry of Communications: The Brazilian Ministry of Communications,
authorized to regulate the Brazilian subscription television industry pursuant
to the Brazilian Telecommunications Code of 1962.
MMDS (Multi-channel multi-point distribution system): A one-way radio
transmission of television channels over microwave frequencies from a fixed
station transmitting to multiple receiving facilities located at fixed points.
MMDS license: A license that is granted by the applicable governing body
pursuant to its authority under the communications laws of a particular country
for the purpose of providing MMDS services for a specific franchise/license
area.
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<PAGE>
MTV Brasil: MTV Brasil Ltda., a Brazilian limitada in which Abril holds a
50.0% equity interest and Viasem Brasil Holdings Ltda. (an indirect subsidiary
of Viacom International) holds the remaining 50% equity interest.
Multicanal: Multicanal Participacoes S.A., a Cable service provider in
Brazil.
NBC: National Broadcasting Company, Inc.
NDS: News Digital Systems Limited, a wholly-owned subsidiary of News
Corporation.
Net Brasil: Net Brasil S.A., a Cable and MMDS service provider in Brazil.
Net Sat: Net Sat Servicos Ltda., TVA's competitor in DBS Service, in which
Globo Par has a controlling interest and whose other equity holders include News
Corporation, a subsidiary of The News Corporation Limited, and Grupo Televisa,
S.A. of Mexico.
News Corporation: News Corporation plc.
the Notes: Tevecap's 250,000,000 12 5/8% Senior Notes due 2004 issued on
November 26, 1996.
Operating Ventures: Canbras TVA and TV Filme, two of TVA's minority-owned
ventures.
Owned Systems: TVA Sistema, TVA Sul and Galaxy Brasil.
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.
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.
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Securities Act: United States Securities Act of 1933, as amended.
Smart Card: Encoded card placed in a decoder used for Ku-Band service. The
Smart Card is used to regulate access to Ku-Band services.
Sony: Sony Pictures Entertainment, Inc.
Stockholders: HABC II, CPL, Robert Civita, Abril, the Chase Parties and
Falcon International.
Stockholders Agreement: Stockholders Agreement, dated December 6, 1995,
among the Stockholders.
Subsidiary Guarantees: Guarantees executed by each of Tevecap's Restricted
Subsidiaries (as defined in the Indenture).
SurFin: SurFin Ltd., a corporation organized under the laws of the Bahamas,
the (direct and indirect) shareholders of which are Tevecap, holding 20.5%,
DIRECTV International Inc., a subsidiary of Hughes Communications, holding
39.3%, Darlene Investments, holding 20.4%, and Grupo Frecuencia Modulada
Television, holding 19.8%.
SurFin Credit Facility: A three year $150.0 million credit facility between
SurFin and Citicorp USA, Inc., as administrative agent, under a syndicated
credit agreement, dated September 24, 1996.
Tambore Facility: TVA's Ku-Band uplink center located in the city of
Tambore in greater Sao Paulo.
Telecommunications Code: The Brazilian Telecommunications Code of 1962, as
amended.
Telephony: The provision of telephone service.
Tevecap: Tevecap S.A.
Time Warner: Time Warner Entertainment Company, L.P.
Trunk: The "transportation" component within a Cable and/or broadband
network architecture that carries the system product to the distribution portion
of the architecture, which in turn goes to customers' homes.
TV Cabo Santa Branca: TV Cabo Santa Branca Comercio Ltda., a Brazilian
limitada, in which Tevecap holds a 36% equity interest and Canbras Par holds a
64.0% equity interest.
TV Filme: TV Filme, Inc., a Delaware corporation in which Tevecap currently
holds a 14.7% equity interest, Warburg, Pincus Investors, L.P. currently holds a
38.8% equity interest, members of the Lins family currently hold a 16.2% equity
interest, public stockholders currently hold a 28.15% equity interest and
certain individuals own the remaining 2.15% equity interest.
TV Filme Service Area: Brasilia, Belem and Goiania.
TV Group: The operations of TVA excluding the operations and results of
Galaxy Brasil.
TV Homes: The number of households in a given area possessing at least one
television set.
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TV Show Time: Televisao Show Time Ltda., a Brazilian limitada in which the
estate of Matias Machline and an associate currently hold a 53.0% equity
interest and in which the remaining 47.0% is currently held by various Abril
shareholders.
TVA: Tevecap S.A. and its consolidated subsidiaries and affiliates.
TVA Brasil: TVA Brasil Radioenlaces S.A., a Brazilian limitada in which the
estate of Matias Machline currently holds a 50.0% equity interest and in which
the remaining 50.0% is currently held by various Abril shareholders.
TVA Communications: TVA Communications Ltd., a British Virgin Islands
company wholly-owned by Tevecap, through which Tevecap holds a 10.0% equity
interest in Galaxy Latin America.
TVA Curitiba: TVA Curitiba Servicos em Telecommunicacoes Ltda., a Brazilian
limitada in which Tevecap held an 80.0% equity interest and Leonardo Petrelli
held a 20.0% equity interest prior to TVA Curitiba's merger into TVA Parana
Ltda. and the reorganization of TVA Parana Ltda. as a subsidiary of TVA Sul
Participacoes S.A. in October 1996.
TV Globo: A provider of off-air programming in Brazil and an affiliate of
Globo.
TVA Sistema: TVA Sistema de Televisao S.A., a Brazilian corporation in
which Tevecap holds a 98.0% equity interest Robert Civita, a Brazilian national,
holds a 2.0% equity interest.
TVA Sul: The operations of TVA Sul Parana Ltda., CCS Camboriu Cable System
de Telecomunicacoes 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 86.0% equity interest and
Abril holds the remaining 14.0% equity interest.
UHF: Broadcast of a television signal at an ultra-high frequency over a
given geographical area.
VCR: Video cassette recorders.
Viacom International: Viacom International (Netherlands B.V.).
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