As Filed with the Securities and Exchange Commission on June 21, 2000.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number _______________
------------------
Tevecap S.A.
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
TEVECAP INC. THE FEDERATIVE REPUBLIC OF BRAZIL
(Translation of Registrant's name into English) (Jurisdiction of incorporation or organization)
</TABLE>
Rua do Rocio, 313
Sao Paulo, SP Brazil
04552-904
(Telephone: 55-11-3046-8537)
(Address and telephone number of principal executive offices)
------------------
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
---------
(Title of Class)
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
---------
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
12-5/8% Senior Notes due 2004 of Tevecap S.A. and guarantees thereof by
each of TVA Sistema de Televisao S.A., TVA Communications Ltd., Comercial Cabo
TV Sao Paulo Ltda., TVA Sul Parana Ltda., CCS Camboriu Cable System de
Telecomunicacoes Ltda., TVA Distribuidora S.A., TVA Programadora Ltda., TVA
Network Ltda. and TVAPAR S.A.
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report:
226,338,285 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....................................17
ITEM 3. LEGAL PROCEEDINGS..........................................17
ITEM 4. CONTROL OF REGISTRANT......................................17
ITEM 5. NATURE OF TRADING MARKET...................................19
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING
SECURITY HOLDERS...........................................20
ITEM 7. TAXATION...................................................22
ITEM 8. SELECTED FINANCIAL DATA....................................25
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................29
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.......................................................40
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT...................40
ITEM 11. COMPENSATION FOR DIRECTORS AND OFFICERS....................41
ITEM 12. OPTIONS TO PURCHASE SECURITIES.............................41
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.............42
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED.................44
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES............................44
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR
REGISTERED SECURITIES......................................44
ITEM 17. FINANCIAL STATEMENTS.......................................44
ITEM 18. FINANCIAL STATEMENTS.......................................44
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS..........................45
INDEX TO THE FINANCIAL STATEMENTS..........................................45
GLOSSARY..................................................................A-1
ii
<PAGE>
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., CCS
Camboriu Cable System de Telecomunicacoes Ltda., and TVA Sul Parana Ltda.
included elsewhere in this Annual Report on Form 20-F for the Year ended
December 31, 1999 (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, 1999 of R$1.789 = US$1.00. Such translations should not
be construed as a representation that reais could have been converted at such
rate on such date or at any other date. See Item 6, "Exchange Controls and Other
Limitations Affecting Security Holders." All references in this Annual Report to
(i) "US Dollars,""dollars," "$" 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 1996 population census
figures compiled by the Instituto Brasileiro de Geografia e Estatistica ("IBGE")
and the Company's knowledge of its markets. There can be no assurance that the
number of people or the number of households in a specified area has not
increased or decreased by a higher or lower rate than those estimated by the
IBGE since the 1996 census. Unless otherwise indicated, references to the number
of the Company's subscribers are based on Company data as of December 31, 1999.
Data concerning total MMDS and Cable subscribers and penetration rates represent
estimates made by the Company based on the data of Pay TV Survey, Associacao
Brasileira de Telecomunicacoes por Assinatura (ABTA), Kagan World Media, Inc.,
IBGE data, the Company's knowledge of its pay television systems and those of
the Operating Ventures, and public statements of other Brazilian pay television
providers. Although the Company believes such estimates are reasonable, no
assurance can be made as to their accuracy. The term DIRECTV(R) ("DIRECTV") is a
registered trademark of Hughes Electronics Corporation and refers to the Ku-Band
service provided by Galaxy Brasil in conjunction with Galaxy Latin America.
Forward-Looking Statements
THIS ANNUAL REPORT CONTAINS STATEMENTS WHICH ARE FORWARD-LOOKING WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE
STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS ANNUAL REPORT AND INCLUDE
STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY
OR ITS OFFICERS. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH
FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE
RISKS AND UNCERTAINTIES, AND THAT ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS. THE
ACCOMPANYING INFORMATION CONTAINED IN THIS ANNUAL REPORT, INCLUDING, WITHOUT
LIMITATION, THE INFORMATION UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," AND "DESCRIPTION OF BUSINESS,"
IDENTIFIES IMPORTANT FACTORS THAT COULD CAUSE SUCH DIFFERENCES.
iii
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
TVA is a major pay television operator in Brazil and one of the country's
primary pay television programming distributors. In 1989, TVA was the first to
provide pay television services in Brazil. With more than 309,000 subscribers,
TVA offers pay television services utilizing cable and MMDS distribution
technologies. Additionally, TVA has interests in HBO Brasil Partners, a
programming partnership, and @Jato, a high-speed internet service provider.
Through owned, affiliated and independent pay television operators, TVA
programming reaches more than 671,000 pay television households. TVA is a
majority-owned subsidiary of Abril S.A. ("Abril"). TVA's other beneficial
shareholders are Falcon International Communications (Bermuda) L.P. ("Falcon
International"), The Hearst Corporation ("Hearst"), ABC, Inc. ("ABC") and Chase
Manhattan International Finance Ltd. ("CMIF").
The Company conducts its pay television operations through two owned
operating systems (the "Owned Systems"): TVA Sistema and TVA Sul. Through the
MMDS and Cable systems of TVA Sistema and TVA Sul, the Company serves six cities
with a combined population of approximately 29 million, including three of the
seven largest cities in Brazil: Sao Paulo (population of 9.8 million), Rio de
Janeiro (population of 5.6 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 fourteen cities with a total population of 7.1 million. In addition,
the Company sells programming to, and receives a per subscriber fee from,
unaffiliated pay television operators ("Independent Operators").
Sale of Non-Strategic Assets
Sale of DBS Systems and GLA Interest
Until July 1999, the Company, through Galaxy Brasil Ltda. ("Galaxy Brasil"
or "GLB"), was the exclusive provider in Brazil of DIRECTV, a digital direct
broadcast satellite Ku-Band service. Galaxy Brasil receives programming,
scheduling and related services for DIRECTV from Galaxy Latin America ("GLA"),
in which TVA held a 10% equity interest. The current owners of GLA are a unit of
Hughes Electronics and a member of the Cisneros Group. Through local operating
companies such as Galaxy Brasil, GLA provides DIRECTV service throughout much of
Latin America and the Caribbean. The Company, through TVA Banda C Ltda. ("TVA
Banda C"), also provided digital C-Band television service (together with Galaxy
Brasil, the "DBS Systems").
As of May 18, 1999, the Company entered into the following agreements: (i)
a Master Agreement (the "Master Agreement") relating to the sale of the
Company's equity interests in Galaxy Brasil and TVA Banda C, among the Company,
Galaxy Brasil and TVA Banda C, as Sellers, Abril, as a Seller-related entity,
and GLA, as Purchaser, and (ii) a GLA Purchase Agreement relating to the sale of
the Company's indirect equity interests in GLA and certain assets related
thereto, among the Company, TVA Communications Ltd. and TVA Finco Ltd., as
Sellers, and Abril as a Seller-related entity, and Directv Latin America, Inc.
("DLA") and Darlene Investments (an affiliate of the Cisneros Group) as
Purchasers (the "GLA Purchase Agreement" and, together with the Master
Agreement, the "Purchase Agreements"). The sale of these assets is referred to
in this Annual Report as the "DBS Sale."
Pursuant to the Master Agreement, the Company agreed to sell all of its
interests in the following entities to GLA:
<PAGE>
o Galaxy Brasil, a wholly-owned subsidiary of the Company and exclusive
local operator of DIRECTV Ku-Band service in Brazil; and
o TVA Banda C, a wholly-owned subsidiary of the Company and operator of
TVA's C-Band service.
Pursuant to the GLA Purchase Agreement, the Company agreed to sell all of
its interests in the following entities and assets to DLA and Darlene
Investments:
o a 10% equity interest in GLA, which the Company owned through its
British Virgin Islands subsidiary, TVA Communications Ltd.;
o a 20.5% equity interest in SurFin Ltd. ("SurFin"), a Bahamian limited
liability company engaged in financing activities related to DIRECTV
service throughout Latin America;
o certain promissory notes (the "CBC Notes") in the aggregate principal
amount of $7,124,800, representing indebtedness of California
Broadcast Center LLC ("CBC"), a Delaware limited liability company the
principal asset of which is a GLA satellite uplink facility; and
o the CBC Class B Unit Purchase Warrants (# W-3) (the "CBC Warrants"),
dated as of April 11, 1997, convertible into equity interests in CBC.
The net cash proceeds to the Company at the closing of the DBS Sale, which
occurred in July 1999, were approximately $177.6 million. The total
consideration received by the Company was comprised of cash, a promissory note
in the principal amount of $25.5 million, the assumption of certain dollar and
real-denominated indebtedness and the release of certain guarantees given by the
Company and one of its subsidiaries in respect of certain obligations of Galaxy
Brasil.
Tender Offer and Consent Solicitation
Concurrently with the consummation of the DBS Sale, the net proceeds to the
Company from the DBS Sale were delivered to The Chase Manhattan Bank, as
Depositary, to fund a tender offer and consent solicitation (the "Offer")
relating to TVA's $250,000,000 12 5/8% Senior Notes due 2004 (the "Senior
Notes"). Pursuant to the Offer, the Company repurchased Senior Notes in the
aggregate principal amount of $201,978,000 and obtained a consent from holders
of the Senior Notes to broadly amend the restrictive covenants contained in the
terms of the Senior Notes.
Company Rationale for the DBS Sale
The DBS Sale represented, in management's opinion, the best opportunity for
addressing the Company's liquidity difficulties. Development of the Ku-Band
business requires significant capital investment to achieve profitability, and
from 1996 to 1999 the Company committed significant financial resources to the
development and operation of its Ku-Band service. The recent changes in the
Brazilian economy, together with the relatively high cost of developing and
operating the Company's Ku-Band service, adversely affected the Company's cash
flow, and caused the Company to suffer a significant liquidity shortage, leading
to a deficiency in its net working capital and resulting in the Company being
unable to meet certain of its obligations with respect to certain operating and
financing agreements relating to GLB.
The financial crises in Brazil and other emerging markets contributed to,
and aggravated, the Company's liquidity difficulties resulting from its Ku-Band
operations. Financial crises in Southeast Asia and Russia in the fourth quarters
of 1997 and 1998, respectively, together with domestic economic difficulties,
resulted in a
2
<PAGE>
significant devaluation of the real in the first quarter of 1999 by the Central
Bank of Brazil, which allowed the real to float freely against major foreign
currencies. The devaluation, followed by a recession in Brazil, had a
significant adverse effect upon the operations of the Company, and materially
raised the cost of debt financing for the Company. In addition, the recession of
the Brazilian economy created difficulties in maintaining and attracting new
subscribers and maintaining existing subscribers, in particular for Ku-Band
services, which require a more expensive up-front equipment investment than
other distribution technologies and which require subscribers to make monthly
decoder lease payments.
Sale of ESPN Brasil
Until November 1999, the Company held a 50% equity interest in ESPN Brasil
Ltda., the provider of ESPN Brasil programming. Launched in 1995, ESPN Brasil is
an all-sports channel offering 24-hour coverage of Brazilian sporting events. In
November 1999, the Company concluded the sale of its interest in ESPN Brasil
Ltda. to ESPN Brazil, Inc., which previously held the remaining 50% equity
interest. ESPN Brazil, Inc. is indirectly held by ABC (80%) and Hearst (20%). As
part of this sale, the Company and ESPN Brasil Ltda. entered into a carriage
agreement under which the Company will continue to have the non-exclusive right
to transmit ESPN Brasil programming in Brazil for a period of five years. This
carriage agreement is automatically renewable for successive one-year periods.
Business Strategy
Management of the Company has determined that the concentration by the
Company on its core Cable and MMDS businesses offers the Company the best
opportunity to achieve long-term profitability. The Company is positioning
itself to provide high speed data transmission, interactive and other
telecommunications services over its Cable and MMDS systems and to take
advantage of possible deregulation and the growing demand for these services in
Brazil. The Company is expanding its Cable systems with fiber optic and coaxial
cable capable of being upgraded to provide such enhanced services, and has
already begun providing high-speed internet services through its Cable network
in certain areas. The Company also continues to explore the development of
digital compression of MMDS signals.
In addition, the Company seeks to increase its penetration in existing
markets by: (i) expanding the range of TVA's Cable systems by extending its
fiber optic and coaxial cable network and by seeking pre-wiring arrangements
with residential housing developers, (ii) improving the signal quality and
coverage of TVA's MMDS systems by using signal repeater technology and (iii)
maximizing penetration by offering tiered subscription options and developing
programming packages to appeal to more households. TVA's programming, unlike
that of its primary competitors, is provided through encoded signals and
addressable converters, thereby permitting the creation of a variety of
programming packages. Tiered programming packages allow subscribers a greater
number of choices in terms of pricing and types of programming. TVA expects that
these tiered programming packages will attract new subscribers, including
members of the C class, as well as retain current subscribers, thereby reducing
Churn.
Programming Distribution and Markets
The following table sets forth information regarding the markets in which
TVA operates pay television systems and distributes programming, as of December
31, 1999:
3
<PAGE>
<TABLE>
<CAPTION>
Average Pay Television
Revenue per Programming
Service Launch TV Class ABC Month per Channels
Date Homes(a) TV Homes(a) Subscribers Subscriber Offered
-------------- --------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Owned Systems:
MMDS
TVA Sistema
Sao Paulo ................. September 1991 4,367,286 2,955,793 58,581 $25.42 29
Rio de Janeiro ............ March 1992 3,015,016 1,397,624 91,367 25.34 29
TVA Sul
Curitiba .................. March 1992 639,794 328,184 11,471 21.43 15
Cable(b)
TVA Sistema
Sao Paulo ................. October 1994 4,367,286 1,917,608 106,954 26.62 57
TVA Sul
Curitiba .................. January 1995 639,794 263,560 19,441 23.92 52
Camboriu .................. June 1996 37,618 22,686 6,942 22.61 52
Foz do Iguacu ............. June 1996 155,382 53,001 5,364 24.26 53
Florianopolis ............. September 1996 46,669 29,151 9,543 13.94 55
Total MMDS and Cable
Subscribers ................. -- -- -- 309,663 --
Subscribers Awaiting
Installation ................ -- -- -- 1,513 -- --
Total
Subscribers-Owned
Systems ..................... -- -- -- 311,176 -- --
=========
Households Receiving
TVA Programming
Owned Systems ................. -- -- -- 311,176 -- --
---------
Operating Ventures:
MMDS
TV Filme, Inc.
Brasilia .................. July 1993 464,473 272,835 39,233 30.36
Goiania ................... December 1994 319,434 140,498 8,188 24.69
Belem ..................... December 1994 197,293 123,820 18,741 31.35
Campina Grande ............ August 1999 81,519 23,142 2,460 15.14
Cable
Canbras TVA
Ten cities(c) ............. April 1996 849,360 574,032 89,918 24.17
---------
Total-Operating -- -- -- 158,540 -- --
=========
Independent Operators
(52 Independent
Operators) .................. -- -- -- 201,448 -- --
---------
Total ......................... -- -- -- 671,164 -- --
=========
</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 751,318, 196,223, 18,055, 19,900 and
29,822 Homes Passed, respectively, as of December 31, 1999.
(c) The ten cities served by Canbras TVA are Santo Andre, Sao Bernardo, Mogi
das Cruzes, Santa Branca, Sao Vicente, Praia Grande, Santos, Cubatao,
Guaruja and Bertioga.
4
<PAGE>
Brazilian Pay Television Market
Brazil is the largest television and video market in Latin America with an
estimated 38 million TV Homes which, as of December 31, 1999, watched on average
approximately 2.5 hours of television per day. Approximately 5.8 million
television sets and 2.0 million VCR units were sold in Brazil during 1999. 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, 1999, there were an
estimated 2.9 million pay television subscribers, representing approximately
7.3% of Brazilian TV Homes. By comparison, as of December 31, 1999, 49% of TV
Homes in Argentina, 11% of TV Homes in Mexico and 77% 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.
Distribution Operating Systems
TVA and the Operating Ventures distribute programming through Cable and
MMDS distribution technologies. The availability of these two distribution
technologies enables the Company to exploit the population and income
characteristics, topography and competitive dynamics of each of its markets.
MMDS
TVA operates Brazil's largest MMDS network, and with the Operating
Ventures, serves the country's major metropolitan areas. In 1998 and 1999 the
Company accelerated efforts to convert MMDS subscribers to the Company's Cable
services. MMDS systems are typically easier to deploy and require relatively
little capital investment for construction and maintenance as compared to Cable
systems. Programming is transmitted by signals through the air from microwave
transmitters to a small receiving antenna located at a subscriber's home or
dwelling unit. At the subscriber's location, the microwave signals are converted
to frequencies that can pass through a conventional coaxial cable into a decoder
located near a television set. All of 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.
However, tall buildings and other tall structures may block reception of an MMDS
signal. MMDS is being used in other emerging pay television markets such as
Venezuela, Hong Kong and Mexico, where Cable has a strong incumbent position.
TVA owns four MMDS licenses and operates MMDS systems in Sao Paulo, Rio de
Janeiro and Curitiba, which have an aggregate population of approximately 17.4
million. TVA serves 161,419 MMDS subscribers in these three cities. TVA's MMDS
systems offer between 15 and 29 channels of programming. TVA also holds
interests in four MMDS licenses through TV Filme, an Operating Venture which
operates MMDS systems in Brasilia, Goiania, Belem and Campina Grande and has
68,622 MMDS subscribers as of December 31, 1999.
Cable
TVA has recently emphasized the strategic deployment of Cable service and
currently operates Cable systems in Sao Paulo, Curitiba and three other cities
in southern Brazil. Cable service involves a broad band network employing radio
frequency transmission through coaxial and/or fiber optic cable. Cable systems
consist of four major parts: a headend, a distribution network, a subscriber
network and a house terminal. The programming is collected from the headend,
then processed and fed into the distribution path (trunk and distribution
cable), which consists of coaxial and/or fiber optic cables. The signal is then
fed into a subscriber network that is either located in an apartment building or
a subscriber's home. Most of the Company's systems are constructed with either
750 MHz or 550 MHz bandwidth capacity, the latter of which is readily
upgradeable to
5
<PAGE>
750 MHz bandwidth capacity. The Company's systems in Curitiba, Camboriu and Foz
do Iguacu are being upgraded to 750 MHz bandwidth capacity. The Company's system
in Florianopolis is being constructed to 550 MHz bandwidth capacity. This
technology enables the Company to provide interactive services, including
internet service and, in the future, telecommunications. The Company recently
launched its @Jato high-speed internet service through its Cable system to
subscribers in Sao Paulo. 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
148,244 subscribers. As of December 31, 1999, TVA had deployed approximately
5,183 kilometers of its Cable network, including 1,103 kilometers of fiber optic
cable, consisting of a 986 kilometer fiber optic loop in Sao Paulo and a 117
kilometer fiber optic network serving Curitiba, Camboriu, and Foz do Iguacu. The
Company is also upgrading or constructing the Cable systems in Curitiba,
Camboriu and Foz do Iguacu. As a result of this buildout, as of December 31,
1999, TVA Cable systems passed 751,318 homes in Sao Paulo, approximately 196,233
homes in Curitiba and a total of 1,015,318 homes throughout all of the Company's
Cable systems. As of December 31, 1999, Canbras TVA, an Operating Venture 36%
owned by TVA, had an existing Cable network of 1,823 kilometers, with 456,382
Homes Passed and 89,918 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. TVA and Canbras TVA currently offer between 50 and 57 analog
channels of programming (including off-air channels) on their Cable systems,
depending on the market, and have the capability of offering up to 78 analog
channels. During the twelve months ended December 31, 1999, TVA and Canbras TVA
averaged approximately 1,554 and 2,574 net new Cable subscribers per month,
respectively.
The Owned Systems
TVA Sistema and TVA Sul operate the Company's MMDS and Cable businesses.
TVA Sistema operates the Company's MMDS operations in Sao Paulo and Rio de
Janeiro and Cable operations in Sao Paulo. TVA Sul operates the Company's MMDS
operations in Curitiba and Cable operations in Curitiba, Camboriu, Foz do Iguacu
and Florianopolis.
TVA holds a 98% equity interest in TVA Sistema, and Robert Civita, a
Brazilian national and the beneficial owner of 99.99% of the equity interest of
Abril, holds the remaining 2% equity interest. The Company holds an 86% equity
interest in TVA Sul, and Abril holds the remaining 14%. TVA Sul, in turn, holds
a 60% equity interest in CCS-Camboriu Cable System Telecomunicacoes Ltda., the
operating company for TVA Sul's services in Camboriu, and an unaffiliated third
party holds the remaining 40%.
The Operating Ventures
The Operating Ventures also operate Cable (Canbras TVA) and MMDS (TV Filme)
systems. TVA holds a 36% equity interest (and 51% of the total voting capital)
in each of 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.
The Company agreed to grant to Canbras-Par a "right of first refusal" to
participate in
6
<PAGE>
Cable licenses that the Company may obtain, directly or indirectly, and
Canbras-Par granted to the Company a similar "right of first refusal" to
participate in Cable licenses acquired by Canbras-Par. The term of the Canbras
Association Agreement is for so long as Canbras-Par or its assignee owns shares
"in companies which have the objective of engaging in the cable TV business."
The Canbras Association Agreement does not specify the terms and conditions on
which any co-investments in Cable licenses are to be made, and such terms and
conditions will be negotiated in good faith, on a case-by-case basis, in
connection with any future cable license investments.
As of December 31, 1999, TVA held a 14.7% equity interest in TV Filme. The
remaining interests were held by Warburg, Pincus Investors, L.P., which held a
38.8% equity interest; members of the Lins family, Brazilian nationals, who held
a 16.2% equity interest; public shareholders, who held a 28.15% equity interest;
and certain individuals with a combined 2.15% equity interest (on July 29, 1996,
TV Filme completed a public offering of 2.5 million shares of its common stock
in the United States at an initial price of $10.00 per share). In August 1999,
TV Filme entered into an agreement with a committee representing a majority of
the holders of TV Filme's 12.875% Notes due 2004 pursuant to which these
Noteholders will receive (i) a $25 million cash payment, (ii) $35 million in new
five-year 12% notes and (iii) 80% of the new common shares of the reorganized
company. The consummation of this agreement is dependent on necessary government
approvals, including the approval of a U.S. bankruptcy court under Chapter 11 of
the U.S. bankruptcy code, and the execution of definitive documentation. The
Company expects that, should this agreement be approved and executed, the
Company's equity interest in TV Filme will be reduced to less than 1%.
Programming
TVA, through its MMDS and Cable systems, currently provides a programming
package consisting of 15 to 57 television channels. TVA programming emphasizes
sports, movies, children's programming and news with a secondary emphasis on
general entertainment.
With respect to MMDS and Cable service in TVA's markets, TVA is currently
the sole provider of ESPN Brasil, HBO Brasil, HBO Brasil 2, Cinemax, E!
Entertainment Television, Mundo, Eurochannel, Film and Art, Locomotion, NHK and
ART. In addition, TVA has distribution rights to certain of Brazil's most
important soccer championships, including the Sao Paulo and Rio de Janeiro State
Championships. TVA is a partner in HBO Brasil Partners, through which it
distributes a large volume of programming which management believes is
especially important to its subscribers.
HBO Brasil Partners is a joint venture between TVA, which as of December
31, 1998, held a 24% 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% 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, TVA has entered into a number of programming agreements with
international programming providers. For example, TVA has entered into
agreements with Turner Broadcasting Systems Latin America Inc. (Cartoon Network,
TNT, CNN International, CNN Espanol), Fox Latin American Channel Inc. (Fox Latin
America, Fox Kids) and Discovery Latin America (People & Arts, Discovery Brasil,
Discovery Kids).
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Eurochannel is a channel assembled and distributed exclusively by TVA with
respect to Cable and MMDS, with programming acquired from prominent European
distributors, such as Canal +, BBC, Channel 4, TF1, France 2/3, Europe Images
and Gaumont. Eurochannel's programs, which include European movies, series,
mini-series, music specials, concerts, interviews, news, fashion shows, drama
and comedies, are broadcast in the original European language with subtitles in
Portuguese.
TVA distributes its programming through its own operations and through
sales of programming to the Operating Ventures, the Independent Operators and,
to a lesser extent, to competing pay television providers.
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 (second audio program) channel. TVA also
offers HBO Brasil 2, 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, a popular sports channel, provides coverage of Brazilian
soccer games and other Brazilian and international sports entertainment
programs, mixed with programming from ESPN2.
ESPN International is the second sports channel offered by TVA, for which
TVA recently signed a new non-exclusive 50-year contract automatically renewable
for another 50-year period. ESPN International offers a number of different
sporting events, which include auto racing, National Football League games,
professional tennis matches, Major League Baseball games, and National
Basketball Association games. ESPN International also currently provides
Portuguese language commentaries exclusively to TVA.
CNN International features news and information programming, offering
international news coverage concerning politics, business, financial and
economic developments, 24 hours a day.
TNT is a movie channel which, pursuant to a non-exclusive agreement with
Turner International, Inc., offers the Turner Network Television movie
collection, including over 5,000 classic movie titles from MGM. In addition, TNT
airs children's programming, documentaries and sporting events. The movies
presented by TNT are broadcast in stereo sound and subtitled or dubbed in
Portuguese or Spanish. In the case of dubbed versions, viewers can listen to the
original soundtrack on a SAP channel.
Cartoon Network is an animated cartoon channel targeted to children that
offers programs such as The Flintstones, The Jetsons, The Smurfs, Yogi Bear and
other classic series.
Discovery Brasil is comprised of programming shown on the US Discovery
Channel, based on topics in the areas of nature, science and technology,
history, adventure and world cultures. 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. Eurochannel also
offers news, sports, music and variety shows.
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MTV Brasil is a 24-hour channel produced by MTV Brasil, a joint venture
company owned by Abril and an indirect subsidiary of Viacom International. MTV
Brasil is entirely produced in Brazil in Portuguese. MTV Brasil has licensing
agreements with the MTV Network, a division of Viacom International, and
transmits a combination of music and other video clips, cartoons and local
programming.
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.
Film and Art is an arts and movie channel, following the same concept as
the U.S. version of the Bravo channel, showing high quality, cultural events,
such as classical music, jazz, opera, ballet and European movies. 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. CMT programming contains a special block featuring
Brazilian 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.
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.
People and 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.
Locomotion is an animation channel with programming targeted to adolescents
and adults, such as Dr. Keds and South Park.
AXN is a films and series channel with emphasis on action and adventure.
Hallmark features mainly original TV movies.
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Operations
Marketing. The Company periodically conducts marketing surveys to gauge
consumer preferences and evaluate new and existing markets. TVA also frequently
evaluates the demographics of the subscribers to its programming, seeking to
provide programming most in demand. In each market, TVA's marketing staff
typically applies one or more of the following programs to attract subscribers:
(i) extensive marketing tied to regional events such as soccer matches, (ii)
neighborhood promotional events featuring large screen broadcasts of its channel
offerings, (iii) direct mailings, (iv) telemarketing, (v) television, billboard,
magazine and newspaper advertisements, (vi) pre-wiring arrangements with
residential housing developers and (vii) other promotional marketing activities,
including referral programs and promotional gifts.
Installation. The installation package delivered to a new subscriber
depends upon the type of programming delivery service chosen by the subscriber.
The MMDS installation package features a standard rooftop mount linked to an
antenna and related equipment, including a decoder, located at the subscriber's
location. Cable service requires the installation of a cable line and a decoder
at the subscriber's dwelling. Once a new subscriber has requested service, the
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 and whether the topography of the surrounding area makes MMDS service
viable. TVA provides installation service to subscribers, either with its own
personnel or through local subcontractors. In approximately 80% of all cases,
TVA installs its service and begins transmitting programing on the same day in
which subscription orders are received.
Programming Facilities. Programming equipment is used to prepare the
programming material for transmission via the Company's MMDS and Cable systems,
including compression with respect to Cable service. The programming equipment
inserts commercial or promotional material, if appropriate, monitors the quality
of the picture and sound, and delivers the material to the multiplexing system.
For programming delivered to TVA as taped material, the programming equipment
also compiles the various programming segments, inserting commercial and
promotional material.
Compression System. The Company also uses its programming facilities to
digitize the programming signals used in TVA's Cable 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).
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 service more quickly, TVA is working to decentralize
its subscriber service operations.
Management Information Systems and Billing. Management believes that TVA's
proprietary management information systems enable TVA to deliver superior
subscriber service, monitor subscriber payment patterns and facilitate the
efficient management of each of its operating systems. Management believes that
TVA's billing procedures are an integral part of its strategy to maintain high
levels of subscriber satisfaction and to maximize
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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 regional
and local broadcast stations.
MMDS and Cable Service
The Company competes with other major Cable and MMDS operators in each of
its principal markets. TVA's principal competitors in Cable service are
operations owned or controlled by Globo Cabo S.A. and Net Sul Comunicacoes S.A.
("Net Sul"). On September 4, 1998, the shareholders of Multicanal Participacoes
("Multicanal") approved a transaction with Globo Cabo Holding ("GC Holding"),
its controlling shareholder, pursuant to which the cable television and MMDS
operations of Globo Cabo Participacoes ("GC Par"), a wholly- owned subsidiary of
GC Holding, were merged with an into Multicanal in a share-for-share exchange.
Concurrently, the merged company was renamed Globo Cabo S.A. ("Globo Cabo"). At
the time of the merger, GC Par controlled three cable television systems and one
MMDS operation: Net Sao Paulo, Net Rio, Net Brasilia, and Net Recife.
Additionally, GC Par held an unconsolidated 50% stake in Unicabo, which provides
cable television services to six medium-sized cities in the interior of the
state of Sao Paulo. At the time of the merger, Multicanal controlled cable
operations in eleven cities, including Sao Paulo, Belo Horizonte, Goiania,
Anapolis, Campo Grande and several cities in the interior of the state of Sao
Paulo. Net Sul operates Cable services in 25 cities in the southern of Brazil
and provides MMDS service in Porto Alegre and 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 Globo Cabo and Net Sul. The systems controlled by Globo Cabo and
Net Sul 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 sources.
DBS Service
The Company also competes with providers of Ku-Band service in Brazil,
principally Net Sat Servicos Ltda. ("Net Sat") and DIRECTV. Globo Par has a
controlling interest in Net Sat, whose other equity holders include News
Corporation plc, a subsidiary of The News Corporation Limited. Net Sat currently
offers 110 audio and video channels of programming (including pay-per-view
channels), while DIRECTV currently offers 128 channels of audio and video
programming, including 35 pay-per-view channels. In addition, Tectelcom-Tecnica
em Telecomunicacoes launched its Ku-Band service with 91 audio and video
channels in the second quarter of 1998. DIRECTV is also the sole provider of
digital C-Band service in Brazil, offering a package of 26 channels (including
nine SAP channels).
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Off-Air Broadcast Television
Broadcasting services are currently available to substantially all of the
Brazilian population without payment of a subscription fee by six
privately-owned national broadcast television networks and a government-owned
national public television network. The six national broadcast television
networks and their local affiliates currently provide services to nearly all
Brazilian TV Homes without payment of a subscription fee. The national broadcast
television networks and local broadcast stations receive a significant portion
of their revenues from the sale of television advertising, which revenues are
based in part on the audience share and ratings for the networks' programs.
Programming offered by pay television providers, including TVA, directly
competes for audience share and ratings with the programming offered by
broadcast television networks as well as regional and local television
broadcasters. The six national broadcast television networks are Globo, SBT,
Bandeirantes, Rede TV, TV Record and Gazeta/CNT. The national television
networks utilize one or more satellites to retransmit their signals to their
local affiliates throughout Brazil.
Programming Sales
TVA competes with a variety of Brazilian and international programming
providers for sales of its programming to the Operating Ventures and Independent
Operators. In addition, TVA competes with other pay television operators to
purchase programming from some of these Brazilian and international sources.
Regulatory Framework
The subscription television industry in Brazil is subject to regulation by
the Agencia Nacional de Telecomunicacoes ("ANATEL"), an independent federal
agency, pursuant to Law No. 9472/97 ("Law 9472"), Law No. 9295/96 ("Law 9295")
and Law No. 8977/95 ("Law 8977"). ANATEL is authorized to grant concessions for
MMDS, Cable, DBS, and UHF licenses.
MMDS Regulations
General. Law 9472 authorizes ANATEL, among other things, to issue, revoke,
modify and renew licenses within the spectrum available to MMDS systems, to
approve the assignments and transfer of control of such licenses, to approve the
location of channels that comprise MMDS systems, to regulate the kind,
configuration and operation of equipment used by MMDS systems, and to impose
certain other reporting requirements on channel license holders and MMDS
operators. The licensing and operation of MMDS channels are currently governed
by Decree No. 2196/97 ("Decree 2196"), Ordinance No. 254/97 (as amended by
Ordinance No. 319/97, "Ordinance 254") and Rule No. 002/Rev. 97 ("Rule 002").
Under these regulations, MMDS is defined as the special service of
telecommunication which uses microwaves to transmit codified signals to be
received in pre-established points on a contractual basis.
Licenses. ANATEL grants licenses and regulates the use of channels by MMDS
operators to transmit video programming, entertainment services and other
information. A maximum of 31 MMDS channels (constituting a 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
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renew the license, the license holder must (i) meet applicable legal and
regulatory requirements, (ii) have complied with all legal and contractual
obligations during the term of such license and (iii) meet certain technical and
financial requirements.
Under the most recently promulgated provisions of Rule 002, each license
holder and its affiliates may be granted permission to operate MMDS systems in
different areas of Brazil, provided that no holder may be granted licenses for
(i) more than seven municipalities with a population equal to or exceeding
700,000 inhabitants and (ii) more than 12 municipalities with a population
between 300,000 and 700,000 inhabitants. The restrictions only apply to areas in
which the MMDS system operator (or an affiliate thereof) faces no competition
from other pay television services, excluding services that utilize a satellite
to transmit their signal. Rule 002 grants ANATEL full discretion to alter or
eliminate the restrictions. The term affiliate is defined by Rule 002 as any
legal entity that directly or indirectly holds at least 20% of the voting
capital. The Company currently controls five MMDS licenses in cities of more
than 700,000 inhabitants (Sao Paulo (2), Rio de Janeiro, Curitiba and Porto
Alegre), but in each such city TVA has at least one competitor. Prices for pay
television services may be freely established by the system operator, although
ANATEL may interfere in the event of abusive pricing. ANATEL may impose
penalties including fines, suspension or revocation of the license if the
license holder fails to comply with applicable regulations or becomes legally,
technically or financially unable to provide MMDS service. ANATEL also may
intervene to the extent operators engage in unfair practices intended to
eliminate competition.
ANATEL awards licenses to use MMDS channels based upon applications
demonstrating that the applicant is qualified to hold the license, that the
proposed market is viable and that the operation of the proposed channels will
not cause impermissible interference to other permitted channels. After ANATEL
determines that an application has met these requirements, it publishes a notice
requesting comments from all parties interested in providing the same services
in the same or a near area. Depending on the comments received, ANATEL may
decide to open a public bid for the service in that area, although it has not
done so in the past. In the case of a public bid, applicants would be evaluated
based on a number of factors including the applicant's proposed schedule for
implementing commercial operations, the applicant's commitment to local
programming and the extent to which the applicant provides free programming to
local cultural and educational institutions. Once an MMDS license application is
granted by ANATEL, the license holder must finalize construction and begin
operations within 12 months, which period may be extended by an additional 12
months.
In addition to qualifying under the application process described above, a
license holder must also demonstrate that its proposed signal does not violate
interference standards in the area of another MMDS channel license holder. To
this end, existing license holders are given a 30-day period in which to
ascertain and comment to ANATEL whether the new license holder's proposed signal
will interfere with existing signals. The area covered by the services is to a
radius of five to 50 kilometers around the transmission site, depending on the
technical capability of the operator.
Other Regulations. MMDS license holders are subject to regulation with
respect to the construction, marketing and lighting of transmission towers
pursuant to the Brazilian Aviation Code and certain local zoning regulations
affecting construction of towers and other facilities. There may also be
restrictions imposed by local authorities. The subscription television industry
also is subject to the Brazilian Consumer Code. The Consumer Code entitles the
purchasers of goods or services to certain rights, including the right to
discontinue a service and obtain a refund if the services are deemed to be of
low quality or not rendered adequately. For instance, in case of a suspension of
the transmission for a given period, the subscriber shall be entitled to a
discount on the monthly fees. Rule No. 002 contains certain provisions relating
to consumer rights, including a provision for mandatory discounts in the event
of interruption of service. The Company, as of December 31, 1998, had not been
required to repay any amounts or provide any 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.
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Due to the regulated nature of the subscription television industry, the
adoption of new, or changes to existing, laws or regulations or the
interpretations thereof may impede the Company's growth and may otherwise have a
material adverse effect on the Company's results of operations and financial
condition.
Cable Regulation
General. Cable services in Brazil are licensed and regulated by ANATEL
pursuant to Law No. 8977/95 ("Law 8977"), Decree No. 2206/97 ("Decree 2206"),
which authorized the regulation of Cable Services, and Ordinance 256/97
("Ordinance 256"), which approved the Norma Complementar do Servico de TV a Cabo
regulating the granting of licenses for, and the operation of, Cable services.
Until Law 8977 was enacted in 1995, the Brazilian Cable industry had been
governed by two principal regulatory measures since its inception in 1989:
Ordinance No. 250, issued by the Ministry of Communications on December 13, 1989
("Ordinance 250"), and its successor, Ordinance No. 36, issued by the Ministry
of Communications on March 21, 1991 ("Ordinance 36").
Ordinance 250 regulated the distribution of television signals ("DISTV") by
physical means (i.e., by Cable) to end-users. DISTV services generally are
limited only to the reception and transmission of signals without any
interference by a DISTV operator with the signal content. Under Ordinance 250,
101 authorizations were granted by the Ministry of Communications to local
operators to commercially exploit DISTV services. Although Ordinance 250 did not
specifically address Cable services, a number of DISTV operators (including the
Company's Cable systems) began to offer Cable services based on DISTV
authorizations.
Licenses. Under Law 8977, a Cable operator must obtain a license from
ANATEL in order to provide Cable services in Brazil. All Cable licenses are
nonexclusive licenses to provide Cable services in a service area. Cable
licenses are granted by ANATEL for a period of 15 years and are renewable for
equal and successive periods. Renewal of the Cable license by ANATEL is
mandatory if the Cable system operator has (i) complied with the terms of the
license grant and applicable governmental regulations and (ii) agrees to meet
certain technical and economic requirements relating to the furnishing of
adequate service to subscribers, including system modernization standards.
Ordinance No. 256/97 ("Ordinance 256") imposes restrictions on the number
of areas that can be served by a Cable television system operator (or an
affiliate thereof). Pursuant to Ordinance 256, a Cable system operator (or an
affiliate thereof) may only hold licenses with respect to (i) a maximum of seven
areas with a population of 700,000 and above and (ii) a maximum of 12 areas with
a population of 300,000 or more and less than 700,000. The restrictions only
apply to areas in which the Cable system operator (or an affiliate thereof)
faces no competition from other pay television services, excluding services that
utilize a satellite to transmit their signal. Ordinance 256 grants ANATEL full
discretion to alter or eliminate the restrictions. The term affiliate is defined
by Ordinance 256 as any legal entity that directly or indirectly holds at least
20% of the voting capital of another legal entity or any of two legal entities
under common ownership of at least 20% of their respective voting capital. The
Company currently controls two Cable licenses in cities of more than 700,000
inhabitants (Sao Paulo and Curitiba), but in each such city TVA has at least one
competitor.
Generally, only legal entities that are headquartered in Brazil and that
have 51% of their voting capital by Brazilian-born citizens or persons who have
held Brazilian citizenship for more than 10 years are eligible to receive a
license to operate Cable systems in Brazil. In the event that no private entity
displays an interest in providing Cable services in a particular service area,
ANATEL may grant the local public telecommunications operator a license to
provide Cable services.
Cable operators that previously provided Cable services under a DISTV
authorization granted under Ordinance 250 were required under Law 8977 to file
applications to have their DISTV authorizations converted into Cable licenses.
Ordinance 256 grants a one year period from the date a DISTV authorization is
converted into a cable television license for any Cable system operator to
comply with the restrictions. The Company's
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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 service programming
will be offered free of charge. After calculating the number of points awarded
to each bidder, ANATEL will then apply a formula based on the population of the
service area to select the winning bid from among those bidders that meet
certain defined minimum qualifying thresholds. For service areas with a
population of 700,000 or more inhabitants, the qualified bidder that submits the
highest bid for the license will be selected. For service areas with a
population between 300,000 and 700,000 inhabitants, the winning bid is selected
based on the highest product obtained by multiplying the number of points
awarded in the qualification phase and the amount bid for the license. For
service areas with less than 300,000 inhabitants, the winning bid is selected on
the basis of the number of points awarded in the qualification phase and the
payment of a fixed fee.
Once a Cable license is granted, the licensee has an 18 month period from
the date of the license grant to complete the initial stage of the installation
of the Cable system and to commence providing Cable services to subscribers in
the service area. The 18 month period is subject to a single 12 month extension
for cause at the discretion of ANATEL.
Any transfer of a Cable license is subject to the prior approval of ANATEL.
A license generally may not be transferred by a licensee until it has commenced
providing Cable services in its service area. Transfers of shares causing a
change in the control of a license or the legal entity which controls a license
also is subject to the prior approval of ANATEL. ANATEL must receive notice of
any change in the capital structure of a licensee, including any transfer of
shares or increase of capital that do not result in a change of control.
A license can be revoked, upon the issue of a judicial decision, in the
event the licensee lacks technical, financial or legal capacity to continue to
operate a Cable system; is under the management of individuals, or under the
control of individuals or corporations who, according to Law 8977, do not
qualify for such positions; has its license transferred, either directly or by
virtue of a change in control, without the prior consent of ANATEL; does not
start to provide Cable services within the time limit specified by Law 8977; or
suspends its activities for more than thirty consecutive days without
justification, unless previously authorized by ANATEL.
Cable Related Service Regulation
General. Brazilian telecommunications services are governed primarily by
(i) Article 21 of the Federal Constitution, as amended by Amendment No. 8 of
August 15, 1995 ("Amendment 8"), (ii) the Telecommunications Code (Law No. 4117
of August 27, 1962, as amended), (iii) Law 9472, (iv) Law 9295 and (v) Law 8977.
The Brazilian Government also has issued detailed regulations covering specific
areas of telecommunications services, including radio broadcasting, paging,
trunking, subscription television, Cable television and cellular telephony.
ANATEL is responsible for the regulation of telecommunications services in
Brazil. Prior to its amendment in 1995, Article 21 of the Federal Constitution
required the Brazilian Government to operate directly, or through concessions
granted to companies whose shares are controlled by the Brazilian Government,
all telephone, telegraph, data transmission and other public telecommunications
services. This constitutional requirement was the basis for the establishment of
the state-owned telephone monopoly, Telebras,
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which held controlling interests in 27 regional telephone operating companies.
With the adoption of Amendment 8, Article 21 was modified to permit the
Brazilian Government to operate telecommunications services either directly or
through authorizations, concessions or permissions granted to private entities.
In particular, Amendment 8 removed the constitutional requirement that the
Brazilian Government must either directly operate or control the shares of
companies which operate telecommunications services. Even with the adoption of
Amendment 8, the Brazilian Government still retains broad regulatory powers over
telecommunications services. Notwithstanding the existence of the Telebras
monopoly, private companies have been permitted under Brazilian law to provide a
number of telecommunications services other than telephony, including radio
broadcasting, paging, trunking, subscription television and cable television
services. However, fixed public telephony and cellular telephony were
exclusively provided by Telebras through its regional telephone operating
companies. In 1998 the Ministry of Communications and ANATEL concluded the
privatization of all public fixed and cellular telephone companies.
High-Speed Cable Data Services. Law 8977 and Decree 2208, among other
things, authorize cable television operators, such as the Company, in addition
to furnishing video and audio signals on their cable networks, to utilize their
networks for the transmission of meteorological, banking, financial, cultural,
price and other data. This broad grant of authority is understood to permit
Cable television operators to furnish services such as interactive home banking
and high-speed Cable data services to subscribers through their cable television
networks, although a simplified licensing procedure for high-speed Cable data
services may be installed by ANATEL in the future.
On November 29, 1999, ANATEL issued Regulation 190, which authorized the
use of subscriber communication networks (such as Cable systems) by
unidirectional or bidirectional value-added service providers. Regulation 190
also regulates certain terms between value-added service providers and
subscriber network operators. TVA is subject to Resolution 190 both as a cable
operator (through TVA Sistema) and a provider of high speed internet service
(through @Jato).
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.
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<PAGE>
Other. On November 24, 1999, ANATEL and ANEEL (Agencia Nacional de Energia
Eletrica, or National Electric Energy Agency) published Joint Resolution No.
001, which sets guidelines for the use of infrastructure among the electric
energy, telecommunications and oil industries in order to maximize the use of
resources and reduce operating costs. TVA has initiated an arbitration
proceeding with Centrais Eletricas de Santa Catarina--CELESC and Companhia
Paranaense de Energia Eletrica--COPEL in order to resolve certain questions
relating to TVA's contracts with these entities, particularly with respect to
pole rental fees.
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, 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 consolidated financial position of the
Company. As of December 31, 1999, the Company had reserved approximately $2.4
million as contingent liabilities in connection with certain litigation
contingencies, involving primarily claims by persons arising in connection with
the termination of their employment.
The Company's operating companies are currently defending a lawsuit brought
by the Escritorio Central de Arrecadacao e Distribuicao (Central Collection and
Distribution Office, or "ECAD"), a government-created entity authorized to
enforce copyright laws relating to musical works. ECAD filed a lawsuit in 1993
against all pay-television operators in Brazil seeking to collect royalty
payments in connection with musical works broadcast by the operators. 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. ECAD is
seeking a judgment award of 2.55% of all past and present revenues generated by
the operators. The suits are currently being submitted to the Superior Tribunal
de Justica in order to determine whether ECAD is entitled to benefit from the
copyrights relating to musical works broadcast on pay television. Although the
Company intends to continue to vigorously defend these suits, the loss of such
suits may have a material adverse effect on the consolidated financial position
of the Company. Based on agreements reached by ECAD with other Brazilian
television operators, however, management believes that it can reach a
negotiated settlement to these suits whereby the Company would make monthly
payments to ECAD in an amount significantly lower than that sought by ECAD.
ITEM 4. CONTROL OF REGISTRANT
Tevecap has one class of capital stock, common shares, authorized and
outstanding. As of December 31, 1999, 226,338,285 common shares were
outstanding, representing authorized social capital of R$478,740,715.
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The following table sets forth, as of December 31, 1999, information regarding
the beneficial ownership of Tevecap's common shares:
<TABLE>
<CAPTION>
Number of Common
Shareholder Shares Owned Percentage
----------- ---------------- ----------
<S> <C> <C>
Abril S.A ................................................. 140,700,748 62.2%
Falcon International Communications (Bermuda) L.P.(a) ..... 27,930,827 12.3
Hearst/ABC Video Services II(b) ........................... 34,714,031 15.3
Cable Participacoes Ltda.(b) .............................. 4,628,536 2.0
Chase Manhattan International Finance Ltd.(c) ............. 18,364,122 8.1
All directors and executive officers as a group ........... 21 --(d)
</TABLE>
(a) A subsidiary of Falcon International Communications L.L.C.
(b) Each of Hearst and ABC indirectly holds a 50% 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%.
The relations among the Company's equity holders are governed by a
Stockholders Agreement (the "Stockholders Agreement"), dated December 6, 1995,
among Tevecap, Robert Civita, Abril, the Chase Parties, Falcon International and
HABC II and CPL (together with HABC II, "Hearst/ABC Parties" and together with
Robert Civita, Abril, the Chase Parties and Falcon International, the
"Stockholders"). The following describes certain terms of the Stockholders
Agreement, as amended.
Transfer of Shares. Any Stockholder desiring to transfer shares of capital
stock to any third party, including another Stockholder, must first offer such
shares to Tevecap and all of the other Stockholders. Tevecap has the right to
determine first whether to purchase such shares; if Tevecap elects not to
exercise its right to purchase the shares, the other Stockholders may elect to
purchase such shares. If Tevecap or the other Stockholders decide to purchase
the offered shares, all of such shares must be purchased. If neither Tevecap nor
the other Stockholders offer to purchase all of the offered shares, the
Stockholder desiring to sell such shares may sell the shares to any person,
provided that (i) all of the shares are sold simultaneously within six months
after the decision by Tevecap and the Stockholders not to purchase the shares,
(ii) Tevecap has not determined that the person making such purchase is a
stockholder of undesirable character, lacks necessary financial capacity or
competes with the Company, and (iii) the price for sale to such third party is
at least 90% of the price offered to the Company and the other Stockholders. The
provisions regarding transfers of shares do not apply to transfers to certain
affiliates of the Stockholders. In addition, the Stockholders have preference
over all other persons or entities to subscribe for new issuances of capital
stock by the Company in proportion to their existing ownership of capital stock.
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
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<PAGE>
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.
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.
Registration Rights. The Chase Parties, considered together, the Hearst/ABC
Parties or Falcon International may request that the Company effect the
registration of any or all of the capital stock held by such Stockholder.
However, the Company is not obligated to effect more than one registration
requested by a Stockholder in any 12 month period or more than three
registrations requested by a Stockholder in total. The capital stock that is the
subject of the registration demand must be of a certain minimum amount. In
addition, Tevecap must offer each Stockholder other than Abril the opportunity
to register capital stock held by such Stockholder, subject to standard
reductions in amount such Stockholder may register as recommended by the
managing underwriter. Tevecap is obligated to pay all registration expenses
other than underwriting discounts and commissions or transfer taxes, and Tevecap
is only obligated to pay for the fees and expenses of Tevecap's counsel and
accountants.
Board of Directors. Tevecap is governed by a board of directors with 11
members. Under the Stockholders Agreement, Abril designates five members, Falcon
International designates two members, the Chase Parties together designate one
member, and Hearst/ABC Parties designates 2 members. The final member is an
independent member nominated by Abril and designated by an affirmative vote of
all shareholders entitled to designate a director. The affirmative vote of
members of the board representing the Chase Parties, Falcon International and
Hearst/ABC Parties is required for: acquisition of ownership interests in other
companies; acquisition or liens on equity in other companies or liens on assets
other than in ordinary course and in aggregate less than $500,000; incurrence of
indebtedness of less than one year maturity and in an amount greater than
$1,000,000; incurrence of indebtedness of greater than one year maturity except
trade debt and in an aggregate amount of less than $500,000; loans on advance
payments; non-financial guarantees in aggregate totaling more than $100,000;
transactions with affiliates; and modifications to the Service Agreement.
Tevecap must obtain the approval of Hearst/ABC Parties before entering into
contracts in excess of $1,000,000 in value and making any material programming
decisions. Tevecap must obtain the approval of Falcon International before
entering into contracts in excess of $1,000,000. Tevecap must obtain the
approval of each of Hearst/ABC Parties, the Chase Parties and Falcon
International before any corporate restructuring or any public offering of
securities of Tevecap.
Required Dividend. Tevecap is required by the terms of the Stockholders
Agreement to pay annual dividends equal to the net cash flow of Tevecap or 25%
of the net consolidated profit (as defined by Brazilian law) of Tevecap. Since
inception, Tevecap has never declared a dividend.
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,
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<PAGE>
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 Senior Notes. Purchases of foreign exchange
in the Commercial Market may be carried out only through a financial institution
in Brazil authorized to buy and sell currency in that market. The "Commercial
Market Rate" is the commercial selling rate for Brazilian currency into 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.
On August 1, 1993, the cruzeiro real replaced the cruzeiro as the unit of
Brazilian currency, with each cruzeiro real being equal to 1,000 cruzeiros.
Beginning in December 1993, the Brazilian Government began implementation of the
Real Plan, which was intended to reduce inflation. On July 1, 1994, the real
replaced the cruzeiro real as the unit of Brazilian currency, with each real
being equal to 2,750 cruzeiros reais and having an exchange rate of R$1.00 to
US$1.00. According to Brazilian law, the issuance of reais is controlled by
quantitative limits backed by a corresponding amount of US dollars in reserves,
but the Brazilian Government subsequently expanded those quantitative limits and
allowed the real to float, with parity between the real and the US dollar
(R$1.00 to US$1.00) as a ceiling.
On March 6, 1995, the Central Bank announced that it would intervene in the
market and buy or sell US dollars, establishing a band (faixa de flutuacao) in
which the exchange rate between the real and the US dollar could fluctuate. The
Central Bank initially set the band with a floor of R$0.86 per US$1.00 and a
ceiling of R$0.90 per US$1.00 and provided that, from and after May 2, 1995, the
band would fluctuate between R$0.86 and R$0.98 per US$1.00. Shortly thereafter,
the Central Bank issued a new directive providing that the band would be between
R$0.88 and R$0.93 per US$1.00. On June 22, 1995, the Central Bank issued another
directive providing that the band would be between R$0.91 and R$0.99 per US$1.00
and subsequently reset the band on January 30, 1996 to between R$0.97 and R$1.06
per US$1.00. Upon resetting the band on January 30, 1996, the Central Bank
adjusted the exchange rate within such band on a number of occasions, generally
in increments of R$.001, by means of buying and selling US dollars in electronic
auctions. The band was adjusted from time to time and, throughout 1998, the real
traded generally between R$1.12 and R$1.22 per $1.00.
On January 13, 1999, the Central Bank attempted a limited devaluation of
the real by modestly elevating the band width in which the real was allowed to
trade. When this limited devaluation proved unsuccessful, the Central Bank
announced that it would no longer use its foreign currency reserves to protect
the value of the real (with the exception of limited interventions to restrain
abrupt fluctuations in the exchange rate), thereby allowing the real to float
freely against other currencies. Consequently, in the weeks following the
initial devaluation, the real has lost more than 40% of its value against the
U.S. dollar. There can be no assurance that the Central Bank will not institute
a new band in the future or that the real will not devalue further.
On January 25, 1999, in the wake of the devaluation and the adoption of a
floating exchange regime, the National Monetary Council adopted Resolution No.
2588, effective as of February 1, 1999. Pursuant to such resolution, banks that
are authorized to operate in the Commercial Market are required to unify their
positions in
20
<PAGE>
the two different markets. These markets are now differentiated solely for
regulatory purposes. As a result of Resolution No. 2588, since February 1, 1999
the Commercial Market rate and the Floating Market rate have offered identical
pricing and liquidity, despite the potential for distinct treatment for
regulatory purposes in the future. Certain specific and liquidity, despite the
potential for distinct treatment for regulatory purposes in the future. Certain
specific foreign exchange transactions are carried out through the Commercial
Market and registered with the Central Bank, which issues a Certificate of
Registration. Such Certificate of Registration allows the remittance of funds
abroad as authorized by such Certificate of Registration.
On December 31, 1999 and June 15, 2000, the Commercial Market rate as
reported by the Central Bank was R$1.789 per $1.00 and R$1.808 per $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, 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
December 31, 1998 ...... 1.116500 1.208700 1.162110 1.208700
December 31, 1999 ...... 1.207800 2.164700 1.816200 1.789000
</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 "Senior Notes") including any interest
thereon) and to beneficial owners of the Senior Notes that are non-residents of
Brazil in connection with the purchase, ownership and disposition of such Senior
Notes. This summary is limited to Tevecap and to non-residents of Brazil which
acquire the Senior Notes at the original issue price, and does not address
investors who purchase Senior Notes at a premium or market discount. In
addition, this summary is based on the Brazilian tax regulations as presently in
effect and does not take into account possible future changes in such tax laws.
Individuals domiciled in Brazil and Brazilian companies are taxed in Brazil
on the basis of their worldwide income (which includes earnings of Brazilian
companies' foreign subsidiaries, branches and affiliates). The earnings of
branches of foreign companies and non- Brazilian residents in general are taxed
in Brazil only when derived from Brazilian sources. Interest, fees, commissions
and any other income (which for the purposes of this paragraph includes any
deemed income on the difference between the issue price of the Senior Notes and
the price at which the Senior Notes are redeemed) payable by a Brazilian obligor
to an individual, company, entity, trust or organization domiciled outside
Brazil is considered derived from Brazilian sources and is therefore subject to
income tax withheld at the source. Brazilian tax laws expressly authorize the
paying source to pay the income or earnings net of taxes and, therefore, to
assume the cost of the applicable tax. The rate of withholding is 15% or such
other lower rate as is provided for in an applicable tax treaty between Brazil
and such other country where the recipient of the payment has its domicile.
Notwithstanding the foregoing, the applicable withholding tax rate for
negotiable instruments such as the Senior Notes was reduced to zero, pursuant to
Resolutions 1853 of July 31, 1991 and 644 of October 22, 1980 of the Central
Bank, subject to Central Bank Circular 2661 of February 8, 1996, which restricts
such withholding tax reductions to negotiable instruments having a minimum
maturity of 96 months. As a result, since the Senior Notes have an original
maturity of 96 months, such reduction will apply to payments of interest and
other income with respect to the Senior Notes.
If, however, any Note is redeemed prior to November 26, 2004, such
reduction will not apply and, therefore, upon such redemption the Brazilian
withholding tax will be imposed on the amount of interest, fees and commissions
paid on such Senior Notes from the date of issue through the date of redemption.
Based on the advice of its Brazilian tax counsel, Tevecap believes and intends
to take the position for tax reporting purposes that, in the event of any such
early redemption to which such withholding tax applies, so long as the paying
agent through which such payment is made is located in Japan and payment to such
paying agent discharges the obligations of Tevecap to make payments in respect
of the Senior Notes, interest and other income with respect to the Senior Notes
will be subject to Brazilian withholding tax at a rate of 12.5% under the tax
treaty in effect between Brazil and Japan. In any event, under the terms of the
Senior Notes, Tevecap would be required to gross up Noteholders for any
Brazilian withholding tax, subject to customary exceptions. Tevecap has the
right to redeem the Senior Notes at par in the event that it is required to
gross up for Brazilian withholding tax imposed at a rate in excess of 15%.
Any earnings or capital gains resulting from the sale (whether inside or
outside Brazil) of any Senior Notes by a non-resident of Brazil to another
non-resident of Brazil are not subject to tax in Brazil. Earnings or capital
gains resulting from the sale (whether inside or outside Brazil) of any Senior
Notes by a non-resident of Brazil to a resident of Brazil should not be subject
to tax in Brazil, although the matter is not free from doubt.
On February 8, 1996, the Brazilian Federal Government issued Decree No.
1,815, which imposed a tax on Brazilian issuers with respect to foreign exchange
transactions ("IOF tax") related to the entering into Brazil of proceeds
resulting from foreign loans (including the issue of securities such as the
Senior Notes). The rate of IOF tax paid by the Company with respect to the
issuance of the Senior Notes was zero %. Decree No. 1,815 was
22
<PAGE>
revoked by Decree No. 2,219 of May 2, 1997 which currently regulates the IOF
tax. The IOF tax rate was reduced to zero upon the adoption of Ordinance No. 85
on April 24, 1997. However, under Law No. 8.894 dated June 21, 1994, such tax
rate may be increased up to 25%.
On August 15, 1996, the Brazilian Congress approved Constitutional
Amendment No. 12 creating a new temporary tax, the Contribuicao Provisoria sobre
Movimentacao Financeira ("CPMF"). Based on such Amendment, Law No. 9,311 of
October 24, 1996 ("Law 9,311") was enacted, creating the CPMF tax. Under Law No.
9,311, as amended, all financial debit and money transfers through Brazilian
bank accounts effected as from January 23, 1997 until December 31, 1998,
including payments made by the Company with respect to the Senior Notes, will be
subject to the assessment of the CPMF tax at the rate of 0.2%. Funds arising
from the collection of CPMF tax will be applied only in the public health
system. Since January 23, 1999, CPMF was extinguished and Congress approved
Constitutional Amendment No. 21, on March 19, 1999, in order to reestablish CPMF
at the rate of 0.38%, starting on June 19, 1999, for a period of one year, and
subsequently at the rate of 0.30%, for a period of two years.
There is no stamp, transfer or other similar tax in Brazil with respect to
the transfer, assignment or sale of any debt instrument outside Brazil
(including the Senior Notes).
United States
The following is a summary of the material United States Federal income tax
consequences to a beneficial owner of the Senior Notes that is a citizen or
resident of the United States, a corporation, partnership or other entity
created or organized in or under the laws of the United States or any State
thereof, an estate the income of which is subject to United States Federal
income taxation regardless of its source or a trust for which a court within the
United States is able to exercise primary supervision over its administration
and for which one or more U.S. fiduciaries have the authority to control all
substantive decisions, as well as other persons subject to United States Federal
income taxation on a net income basis in respect of the purchase, ownership and
disposition of a Note ("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 Senior Notes as part of a "straddle" or "conversion
transaction" or otherwise as part of a "synthetic asset") and is limited to
investors which hold Senior Notes as capital assets. In addition, this summary
is limited to US Holders that acquire the Senior Notes at their issue price and
does not address investors that purchase Senior Notes at a premium or market
discount. This summary is based on the Internal Revenue Code of 1986, as amended
(the "Code"), final, temporary and proposed Treasury regulations thereunder (the
"Regulations"), revenue rulings, court cases, and other legal authorities as now
in effect (or proposed) and as currently interpreted, and does not take into
account possible changes in such tax laws or other legal authorities or such
interpretations. No rulings on any of the issues discussed below will be sought
from the United States Internal Revenue Service (the "IRS").
PROSPECTIVE PURCHASERS OF THE NOTES ARE ADVISED TO CONSULT THEIR TAX
ADVISERS AS TO THE CONSEQUENCES OF A PURCHASE AND SALE OF NOTES, INCLUDING,
WITHOUT 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
23
<PAGE>
(IV) THE CONSEQUENCES OF PURCHASING THE NOTES AT A PRICE OTHER THAN THEIR ISSUE
PRICE.
Interest on the Senior Notes
Interest on the Senior Notes will be taxable to a 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 Senior Notes (i.e., the amount before
deduction of any Brazilian withholding taxes).
Disposition of a Note
Generally, any sale, redemption or other taxable disposition of a Note by a
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% 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 Senior Notes in
order to claim a foreign tax credit in respect of such withholding tax.
Information Reporting and Backup Withholding
For each calendar year in which the Senior Notes are outstanding, each DTC
participant or indirect participant holding an interest in a Note on behalf of a
US Holder and each paying agent making payments in
24
<PAGE>
respect of a Note will generally be required to provide the IRS with certain
information, including such US Holder's name, address and taxpayer
identification number (either such US Holder's Social Security number or its
employer identification number, as the case may be), and the aggregate amount of
interest and principal paid to such US Holder during the calendar year. These
reporting requirements, however, do not apply with respect to certain US
Holders, including corporations, securities dealers, other financial
institutions, tax-exempt organizations, qualified pension and profit sharing
trusts, individual retirement accounts.
In the event that a US Holder fails to establish its exemption from such
information reporting requirements or is subject to the reporting requirements
described above and fails to supply its correct taxpayer identification number
in the manner required by applicable law, or underreports its tax liability, the
direct or indirect DTC participant holding such interest on behalf of such US
Holder or paying agent making payments in respect of a Note may be required to
"backup" withhold a tax equal to 31% of each payment of interest and principal
with respect to the Senior Notes. This backup withholding tax is not an
additional tax and may be credited against the 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, 1999, 1998, and 1997 and for
each of the three years in the period ended December 31, 1999 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,
1996 and 1995 and for each of the two years in the period ended December 31,
1996 have been derived from the audited financial statements of the Company that
are not included elsewhere in this Annual Report.
In July 1999 the Company consummated the sale of the DBS Systems and
certain assets related thereto. These operations have been classified as
"Discontinued Operations" as of and for the periods discussed herein. See Item
1, "Description of Business--Sale of Non-Strategic Assets."
As required by Brazilian law, and in accordance with local accounting
practices, the financial records of Tevecap and its subsidiaries are maintained
in the applicable Brazilian currency (the real). However, the Financial
Statements are presented in U.S. dollars in accordance with U.S. generally
accepted accounting principles ("U.S. GAAP"). In order to prepare the Financial
Statements, the Company's accounts have been translated from the applicable
Brazilian currency, on the basis described in Note 2.3 to the Tevecap Financial
Statements included in this Annual Report. Because of the differences between
the evolution of the rates of inflation in Brazil and the changes in the rates
of devaluation, amounts presented in U.S. dollars may show distortions when
compared on a period-to-period basis.
25
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997 1996 1995
------------------------------------------------------------------------
(Dollars in Thousands, Except Selected Operating Data)
<S> <C> <C> <C> <C> <C>
Statements of Operating Data:
Gross revenues
Monthly subscriptions $ 94,055 $ 136,278 $ 142,700 $ 107,692 $ 62,496
Installation 1,900 2,886 12,941 22,281 26,045
Indirect programming (a) 3,722 19,580 22,810 11,377 2,866
Additional services and others (b) 16,521 18,437 18,596 15,527 10,603
Taxes on revenue(c) (12,782) (12,533) (13,315) (10,557) (7,506)
------------ ------------ ------------ ------------ ------------
Total Net Revenue 103,416 164,648 183,732 146,320 94,504
Direct operating expenses (d) 45,638 93,356 103,216 93,846 62,026
Selling, general and administrative expenses 25,590 56,517 64,844 62,468 46,902
Depreciation and amortization 56,879 48,107 35,461 24,350 13,268
Provision for equipment and inventory obsolescenc 605 1,940 3,944 3,621 0
------------ ------------ ------------ ------------ ------------
Total operating expenses 128,712 199,920 207,465 184,285 122,196
------------ ------------ ------------ ------------ ------------
Operating loss from continuing operations (25,296) (35,272) (23,733) (37,965) (27,692)
Nonoperating income (expenses)
Interest expense (22,254) (51,665) (44,541) (16,287) (17,745)
Equity in (losses) income of affiliates (e) (5,238) (12,139) (6,851) (8,532) (3,672)
Other nonoperating (expenses) income, net (f) 68,913 3,806 15,146 5,891 8,039
Income tax expense (106) (24) 0 (156) 0
Income (loss) from discontinued operations -- (52,773) (21,438) 9,157 0
Extraordinary item - gain on debt repurchase 53,857 -- -- -- --
------------ ------------ ------------ ------------ ------------
Net income (loss) 69,876 (148,067) (81,417) (47,892) (41,070)
============ ============ ============ ============ ============
Net income (loss) per share for continuing operations
before extraordinary item 0.07 (0.42) (0.30) (0.24) (0.21)
Net loss per share for discontinued operations -- (0.23) (0.11) -- --
Net income per share for extraordinary item 0.24 -- -- -- --
Net income (loss) per share 0.31 (0.65) (0.41) (0.24) (0.21)
Weighted average shares outstanding 226,338,285 226,338,285 196,712,865 196,712,865 196,712,865
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(Dollars in Thousands, Except Selected Operating Data)
<S> <C> <C> <C> <C> <C>
Other data:
EBITDA-Continuing operations (g) 32,188 14,775 15,672 (9,994) (13,318)
EBITDA-Discontinued operations (g) -- 16,968 19,458 14,333 (1,106)
--------- --------- --------- --------- ---------
EBITDA (g) 32,188 31,743 35,130 4,339 (14,424)
Purchase of fixed assets - Continuing operations 25,927 81,392 118,909 87,867 93,029
Purchase of fixed assets - Discontinued operations -- 61,967 128,958 37,645 0
--------- --------- --------- --------- ---------
Purchase of fixed assets 25,927 143,359 247,867 125,612 93,029
Ratio of earnings to fixed charges(i) -- -- -- -- --
Cash Flow Data:
Net cash (used in) provided by operating activities (h) (18,435) 2,675 (30,134) (23,108) 22,989
Net cash used in investing activities (149,826) (162,556) (224,903) (218,405) (119,661)
Net cash provided by financing activities (130,842) 160,289 151,287 322,051 116,229
Selected Operating Data:
Continuing operations
Number of Subscribers to Owned Systems (j) 309,663 315,813 335,174 276,331 219,148
Average monthly revenue per Subscriber (k) $ 30.37 $ 43.15 $ 42.57 $ 38.97 $ 33.24
Discontinued operations
Number of Subscribers to Owned Systems (j) -- 296,847 211,209 73,180 0
Average monthly revenue per Subscriber (k) -- $ 43.15 $ 37.18 $ 20.95 $ 0
Balance Sheet Data (at period end):
Cash and cash equivalents 1,946 1,397 989 104,739 24,201
Property, plant and equipment 211,729 298,004 266,518 182,683 131,266
Total assets 289,948 447,927 442,011 434,749 216,848
Loans from shareholders 137,168 88,740 54,321 4,360 586
Long-term liabilities 225,743 359,543 335,882 264,901 9,604
Equity (deficit) in discontinued operations -- (21,858) 13,904 17,313 0
Redeemable common shares 178,002 178,002 189,034 164,910 149,534
Total shareholders' equity (deficit) (154,381) (224,257) (187,069) (81,528) (18,260)
</TABLE>
Notes to Selected Financial and Other Data
(a) Represents revenues received by the Company for selling programming to the
Independent Operators.
(b) Includes Advertising and Other revenues.
(c) Represents various non-income based taxes paid on certain of the Company's
gross revenue items with rates ranging from 2.65% to 7.65%.
(d) Represents costs directly related to Monthly subscriptions, and a portion of
installation, indirect programming and Additional services and others.
(e) Represents the Company's pro rata share of the Net loss or income of its
equity investments.
(f) Includes interest income, Translation gain or loss, Other nonoperating
(expenses) income, net, and Minority interest. The amount included for the year
ended December 31, 1994 includes interest income totaling $21,806. During that
year, the Company received capital contributions from stockholders which
resulted in a surplus of cash invested during such period.
27
<PAGE>
(g) EBITDA represents the sum of (i) net loss, plus, without duplication (ii)
income tax expense, (iii) interest expense (income), net, (iv) other
nonoperating (expenses) income, net (v) depreciation, amortization and all other
non-cash charges, less (vi) non-cash items increasing net income (loss) with the
exception of amortized deferred sign-on and hook-up fee revenue, in each case
determined in accordance with GAAP. The term "EBITDA Discontinued operations"
refers to the operations of Galaxy Brasil and TVA Banda C. The "EBITDA Continued
operations", represent the Company`s remaining operations subsequent to an
eventual disposition of Galaxy Brasil and TVA Banda C.
(h) Cash provided by (used in) operating activities (hereinafter referred to as
cash flows from operating activities) has been determined in accordance with
GAAP while EBITDA has been calculated in accordance with the definition in
footnote (g). In accordance with GAAP, cash flows from operating activities
generally reflect the cash effects of transactions and other events that enter
into the determination of net income. The principal difference between EBITDA
and cash flows from operating activities arise as a result of the treatment of
the changes in the balances of operating assets and liabilities from the
beginning to the end of a reporting period. That is, in accordance with GAAP,
such changes are components of cash flows from operating activities while there
is no similar adjustment in the calculation of EBITDA. EBITDA has been presented
as it is a financial measure commonly used in the Company's industry. EBITDA
should not be considered as an alternative to cash provided by (used
in)operating activities, as an indicator of operating performance or as a
measure of liquidity.
(i) For the five years ended December 31, 1999, earnings were insufficient to
cover fixed charges by $74,542, $13,100, $38,269, $50,366, and $54,044,
respectively. In calculating the Ratio of earnings to fixed charges, earnings
represents Net loss before minority interest, Equity in (losses) income of
affiliates, less fixed charges. Fixed charges consist of the sum of interest
expense paid or accrued on indebtedness of the Company and its subsidiaries and
affiliates and one third of operating rental expenses (such amount having been
deemed by the Company to represent the interest portion of such payments).
(j) Represents the number of Owned Systems' subscribers as of the last day of
each period.
(k) Average monthly revenue per subscriber refers to the average monthly
subscription fee as of the last day of each period.
28
<PAGE>
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. Despite its growth and positive operating cash flow for the year
ended December 31, 1999, 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, (ii)
borrowings from Abril under the Abril Credit Facility, (iii) dispositions of
non-strategic assets and (iv) bank loans and other borrowings made from time to
time.
In July 1999 the Company consummated the sale of the DBS Systems, including
the Ku-Band operations of Galaxy Brasil and the C-Band operations of TVA Banda
C, and certain assets related thereto. These dispositions were conducted as a
result of Management's review of the Company's operations and investment needs
and the resulting intention to concentrate the Company's businesses on the
distribution of pay television and other services through Cable and MMDS
operations. See Item 1, "Description of Business--Sale of Non- Strategic
Assets."
As a result of these dispositions, the Company's DBS operations have been
classified as "Discontinued Operations" for the years ended December 31, 1997,
1998 and 1999. In addition, the proceeds from these sales have been classified
as other non-operating income for the year ended December 31, 1999.
29
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------
1997 1998 1999
----------------------------------------------------------------------------------
% 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 $ 142,700 77.7% $ 136,278 82.8% 94,055 91.0%
Installation 12,941 7.0% 2,886 1.8% 1,900 1.8%
Indirect programming 22,810 12.4% 19,580 11.9% 3,722 3.6%
Additional services and others 18,596 10.1% 18,437 11.2% 16,521 16.0%
Taxes on revenue (13,315) (7.2)% (12,533) (7.6)% (12,782) (12.4)%
--------- --------- --------- --------- --------- ---------
Net revenue 183,732 100.0% 164,648 100.0% 103,416 100.0%
--------- --------- --------- --------- --------- ---------
Direct operating expenses 103,216 56.2% 93,356 56.7% 45,638 44.1%
Selling, general and administrative
expense 64,844 35.3% 56,517 34.3% 25,590 24.7%
Depreciation and amortization 35,461 19.3% 48,107 29.2% 56,879 55.0%
Provision for equipment and
inventory obsolescence 3,944 2.1% 1,940 1.2% 605 (0.6)%
--------- --------- --------- --------- --------- ---------
Total operating expenses 207,465 112.9% 199,920 121.4% 128,712 124.5%
--------- --------- --------- --------- --------- ---------
Operating loss (23,733) (12.9)% (35,272) (21.4%) (25,296) (24.5)%
--------- --------- --------- --------- --------- ---------
Interest income 14,205 7.7% 6,718 4.1% 5,896 5.7%
Interest expense (44,541) (24.2)% (51,665) (31.4)% (22,254) (21.5)%
Translation (loss) gain (902) (0.5)% (17) 0.0% (2,543) (2.5)%
Equity in (losses) income of affiliates (6,851) (3.7)% (12,139) (7.4)% (5,238) (5.1)%
Other nonoperating (expenses)
income, net 927 0.5% (4,233) (2.6)% 64,882 62.7%
Minority interest 916 0.5% 1,338 0.8% 678 0.7%
Income taxes 0 0.0% (24) 0.0% (106) (0.1)%
--------- --------- --------- --------- --------- ---------
Income (loss) from continuing operations
before extraordinary item (59,979) (32.6)% (95,294) (57.9)% 16,019 15.5%
--------- --------- --------- --------- --------- ---------
Income (loss) from discontinued
operations (21,438) (11.7)% (52,773) (32.1)% -- --
--------- --------- --------- --------- --------- ---------
Extraordinary item - gain on debt
repurchase -- -- -- -- 53,857 52.1%
--------- --------- --------- --------- --------- ---------
Net income (loss) (81,417) (44.3)% (148,067) (89.9)% 69,876 67.6%
========= ========= ========= ========= ========= =========
</TABLE>
30
<PAGE>
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
The table below sets forth the number of subscribers at December 31, 1998
and December 31, 1999 for the Owned Systems.
<TABLE>
<CAPTION>
Owned Systems Subscribers December 31, 1998 December 31, 1999
------------------------- ----------------- -----------------
<S> <C> <C>
MMDS(a) ............................................ 186,216 161,419
Cable .............................................. 129,597 148,244
------- -------
315,813 309,663
Paid Subscribers Awaiting Installation(b) .......... 13,766 1,513
------- -------
Total Owned Systems ................................ 329,579 311,176
======= =======
</TABLE>
----------
(a) Includes UHF subscribers
(b) Subscribers who have paid an installation fee but are awaiting the
installation of service.
The table below sets forth at December 31, 1998 and December 31, 1999 the
approximate number of television households which received TVA programming
through the Owned Systems and the Operating Ventures and through sales of
programming to the Independent Operators.
Households Receiving TVA Programming
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1999
----------------- -----------------
<S> <C> <C>
Total Owned Systems(a) ..................... 329,579 311,176
Operating Ventures ......................... 136,105 158,540
Independent Operators ...................... 449,008 201,448
------- -------
Total ...................................... 914,692 671,164
======= =======
</TABLE>
----------
(a) Excludes Ku-Band and C-Band operations
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 Additional
services and others (which consists of Advertising revenues and Other revenues).
Taxes on revenue consist of a 3.65% tax on Advertising revenue and an 8.65% tax
on the balance of revenues, in each case charged by the Brazilian Government.
All forms of the Company's revenue were affected adversely in dollar terms as a
result of the devaluation in the Brazilian real against other major currencies
that occurred primarily in January 1999. The devaluation resulted in a loss in
the value of the real against the dollar of approximately 48% during the year
ended December 31, 1999. See Item 6, "Exchange Controls and Other Limitations
Affecting Security Holders."
Monthly subscriptions revenue for the year ended December 31, 1999 was
$94,055, as compared to $136,278 for the comparable period in 1998. Although
this decrease was partially attributable to the effects of the real devaluation,
the decrease was mitigated by an increase in subscriber fees, as measured in
reais. Average monthly fees for existing subscribers declined from $37.92 to
$25.13 and for new subscribers from $39.21 to $25.35 per subscriber. The average
monthly subscription price during the year ended December 31, 1999 was $25.09
for MMDS service and $25.18 for Cable service, as compared to $37.77 and $38.14,
respectively, for the
31
<PAGE>
year ended December 31, 1998. Average monthly fees declined due to the same
factors that affected Monthly subscriptions revenue.
Installation revenue for the year ended December 31, 1999 was $1,900, as
compared to $2,886 for the same period of 1998, a decrease of $986 or 34.2%.
This decrease was the result of a 31% sales reduction performance during the
year of 1999 when compared with the same period of 1998, again due to the
recessionary environment described above. The average installation fee during
the year ended December 31, 1999 was $28.41 for MMDS service and $17.83 for
Cable service, as compared to $72.85 and $38.62, respectively, during the year
ended December 31, 1998. This decrease was due to the Company's policy of
reducing installation fees in order to facilitate the entry of new subscribers
into the Company's subscriber base.
Indirect programming revenue for the year ended December 31, 1999 was
$3,722, as compared to $19,580 for the comparable period of 1998, a decrease of
$15,858, or approximately 61%. This decrease was principally attributable to a
change in the billing process between programming suppliers and the Operating
Ventures and the Independent Operators initiated in the second quarter of 1998.
Certain programming providers began billing the Operating Ventures and the
Independent Operators directly for their programming fees. Consequently, the
Company, instead of collecting programming fees from the Operating Ventures and
remitting such fees to programming providers, currently collects a fee solely
for arranging for such programming to be provided to the Operating Ventures and
Independent Operators. The reduction in Indirect programming revenue
attributable to this change in billing procedure is also reflected as a
reduction in the Company's Programming cost, as described below. The number of
Independent Operators' subscribers decreased by 247,560 (the majority of whom
were non-revenue generating subscribers) during the year ended December 31,
1999. 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, 1999 was $1.64 per
subscriber, as compared with $2.92 per subscriber for the comparable period in
1998.
Additional services and others for the year ended December 31, 1999 was
$16,521, as compared to $18,347 for the comparable period of 1998, a decrease of
10%. Excluding the impact of the real devaluation, Additional services and
others increased approximately 18% (measured in reais). Advertising revenue
decreased from $3,544 to $1,597, reflecting the infancy of the Brazilian pay
television industry and the lack of reliable ratings measures, as a result of
which the sale of pay television advertising in Brazil is relatively low,
representing less than 2% of the Brazilian advertising market in 1999. Other
revenue increased slightly from $14,893 to $14,924, principally due to the
provision of administrative services and rental of equipment to Galaxy Brasil
(after the sale of Galaxy Brasil in July 1999), engineering services to ESPN
Brasil (after the sale of the Company's equity interests in ESPN Brasil in
November 1999) and certain other ancillary services to subscribers (such as
technical assistance, decoder rental and magazine sales). The Company does not
expect to provide a significant amount of services to Galaxy Brasil and ESPN
Brasil in 2000.
Taxes on revenue for the year ended December 31, 1999 were $12,782, as
compared to $12,533 for the same period of the prior year, an increase of 2%. As
a percentage of net revenue, Taxes on revenue represents 12.4% of net revenues.
The increase in Taxes on revenue is primarily attributable to the increase in
the tax rates on non-advertising revenue (from 7.65% in 1998 to 8.65% in 1999)
and advertising revenue (from 2.65% in 1998 to 3.65% in 1999).
For the reasons noted above, Net revenue for the year ended December 31,
1999 was $103,416, as compared to $164,648 for the comparable period in the
previous year, a decrease of $61,232.
Direct operating expenses. Direct operating expenses include Payroll and
benefits, Programming, Transponder lease cost, Technical assistance, Vehicle
rentals, TVA magazine, pole rental and Other costs. These expenses are variable
and relate to subscribers variation and the growth in the Company's systems, and
are also
32
<PAGE>
dependent on the type of service subscribers select. Direct operating expenses
for the year ended December 31, 1999 were $45,638, as compared to $93,356 for
the same period in 1998, a decrease of $47,718. As a percentage of net revenues,
direct operating expenses represented 44.1% in 1999 as compared with 56.7% in
the prior year. This decrease in Direct operating expenses is attributable to a
company-wide reorganization initiated in the fourth quarter of 1998 that reduced
the number of employees and increased productivity and efficiency in all areas
of the Company's operations. Payroll and benefits expense decreased to $7,857
from $15,968, a decrease of $8,111, as a result of the lay-off of more than 172
employees. Programming costs decreased to $24,166 from $54,282, a decrease of
$30,116 or 55.5%, primarily due to the renegotiation of Programing costs, which
effectively reduced the Company's dollar-denominated programing costs, a revised
billing procedure for Operating Ventures and Independent Operators, as described
above, and the application of bulk rates in connection with MDUs (multiple
dwelling units). Transponder lease cost decreased to $1,975 from $2,336, a
decrease of $361. Pole rental increased to $2,935 from $3,247, a decrease of
$321. 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, 1999, Other costs were
$4,812, as compared to $8,975 for the same period the prior year, a decrease of
$4,613.
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, 1999 were
$25,590, as compared to $56,517 for the same period of 1998, a decrease of
$30,927 or 54.7%. This decrease was due in large part to an internal
restructuring that resulted in, among other effects, the centralization of
certain operations, the simplification of integrated software installation and a
reduction in workforce. Advertising and promotion expense decreased from $9,335
in 1998 to $3,645 in 1999, a decrease of 60.1%, as a result of the Company's
reduced advertising efforts in light of the Brazilian economic crisis.
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, 1999 was $56,879,
as compared to $48,107 for the same period of 1998, an increase of $8,772, due
primarily to higher fixed asset balances as a result of purchases of cable
networks, decoders, installation equipment and other fixed assets in 1998, the
depreciation of which was recognized in 1999. Provision for equipment and
inventory obsolescence for the year ended December 31, 1999 was $605 as compared
to $1,940 for the comparable period in 1998, a decrease of $1,335,due primarily
to the classification of fewer inventory as obsolete in 1999 as compared to
1998.
For the reasons noted above, Operating loss for the year ended December 31,
1999 was $25,296 compared to $35,272 for the comparable period in 1998, an
decrease of $9,976.
Interest income. Interest income for the year ended December 31, 1999 was
$5,896, as compared to $6,718 for the same period in 1998, a decrease of $822,
primarily due to short term loans extended to discontinued operations in 1998
that were not extended in 1999.
Interest expense. Interest expense for the year ended December 31, 1999 was
$22,254, as compared to $51,665 for the same period of 1998, an decrease of
$29,411, principally attributable to the repurchase by the Company, through a
wholly-owned subsidiary, of its Senior Notes in the aggregate principal amount
of $201,978 and the impact of the real devaluation on intercompany loans
denominated in reais.
33
<PAGE>
Equity in (losses) income of affiliates. For the year ended December 31,
1999, Equity in (losses) income of affiliates amounted to a loss of $5,238, as
compared to a loss of $12,139 in the same period of 1998, an decrease of $6,901.
This loss was comprised of Canbras TVA ($4,909) and HBO Brasil ($329).
Other non-operating (expenses) income net. Other non-operating (expenses)
income net for the year ended December 31, 1999 was $64,882, as compared to
($4,233) in the same period in 1998, an increase of $69,115. Other non-operating
income for the year ended December 31, 1999 consisted primarily of the proceeds
from the July 1999 sale of the DBS Systems, together with certain assets related
thereto, and the November 1999 sale of the Company's equity interests in ESPN
Brasil. See Item 1, "Description of Business--Sale of Non- Strategic Assets."
Minority interest. The Minority interest of $678 for the year ended
December 31, 1999, as compared with $1,338 for the same period in 1998,
represents Abril's 14% share in the aggregate losses of TVA Sul.
Income (loss) from discontinued operations. Loss from discontinued
operations for the year ended December 31, 1999 was $0 as compared to $52,773
for the comparable period in 1998. This decrease was due to the sale of the DBS
Systems, the proceeds of which are recognized as non-operating income. See Item
1, "Description of Business--Sale of Non-Strategic Assets."
Extraordinary item - gain on debt repurchase. The extraordinary gain of
$53,857 in 1999 reflects the gain (net of transaction fees) resulting from the
repurchase by a wholly-owned subsidiary in July 1999 of the Company's Senior
Notes in the aggregate principal amount of $201,978.
Net income (loss). For the reasons noted above, Net income for the year
ended December 31, 1999 was $69,876, as compared to a Net loss of $148,067 for
the comparable period in 1998, an increase in income of $217,943.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
The table below sets forth the number of subscribers at December 31, 1997
and December 31, 1998 for the Owned Systems.
<TABLE>
<CAPTION>
Owned Systems Subscribers December 31, 1997 December 31, 1998
------------------------- ----------------- -----------------
<S> <C> <C>
MMDS(a) ............................................ 240,913 186,216
Cable .............................................. 94,261 129,597
------- -------
335,174 315,813
Paid Subscribers Awaiting Installation(b) .......... 17,963 13,766
------- -------
Total Owned Systems ................................ 353,137 329,579
======= =======
</TABLE>
----------
(a) Includes UHF subscribers
(b) Subscribers who have paid an installation fee but are awaiting the
installation of service.
The table below sets forth at December 31, 1997 and December 31, 1998 the
approximate number of television households which received TVA programming
through the Owned Systems and the Operating Ventures and through sales of
programming to the Independent Operators.
34
<PAGE>
Households Receiving TVA Programming
December 31, 1997 December 31, 1998
----------------- -----------------
Total Owned Systems(a) ....... 353,137 329,579
Operating Ventures ........... 142,148 136,105
Independent Operators ........ 669,543 449,008
--------- ---------
Total ........................ 1,164,828 914,692
========= =========
----------
(a) Excludes Ku-Band and C-Band operations
Revenues. Monthly subscriptions revenue for the year ended December 31,
1998 was $136,278, as compared to $142,700 for the comparable period in 1997, a
decrease of $6,422 or 4.5%. This decrease was principally attributable to a
decrease in the subscriber base and average monthly fees for existing
subscribers from $38.26 to $37.92 and for new subscribers from $43.41 to $39.21
per subscriber. The average monthly subscription price during the year ended
December 31, 1998, was $37.77 for MMDS service and $38.14 for Cable service, as
compared to $39.39, $35.36, respectively, for the year ended December 31, 1997.
The decrease in subscriber base and resulting reduction in Revenues and average
monthly subscription prices were due primarily to the economic crisis that
affected the Brazilian economy, and in particular the pay television sector, in
the second semester of 1998.
Installation revenue for the year ended December 31, 1998 was $2,886, as
compared to $12,941 for the same period of 1997, a decrease of $10,055 or 77.7%.
This decrease was the result of a 42% sales reduction performance during the
year of 1998 when compared with the same period of 1997, again due to the
economy's crisis as mentioned above. The average installation fee during the
year ended December 31, 1998 was $72.85 for MMDS service, $38.62 for Cable
service, as compared to $103.58 and $35.89, respectively, during the year ended
December 31, 1997.
Indirect programming revenue for the year ended December 31, 1998 was
$19,580, as compared to $22,810 for the comparable period of 1997, a decrease of
$3,230, or approximately 14.2%. This decrease was principally attributable to a
change in the billing process between programming suppliers and the Operating
Ventures and the Independent Operators initiated in the second quarter of 1998,
as described above. The number of Independent Operators' subscribers decreased
by 220,535 (all of whom were non-revenue generating subscribers) during the year
ended December 31, 1998. The average monthly fee paid to the Company by an
Independent Operator during the year ended December 31, 1998 was $2.92 per
subscriber, as compared with $2.60 per subscriber for the comparable period in
1997.
Additional services and others for the year ended December 31, 1998 was
$18,437, as compared to $18,596 for the comparable period of 1997, a decrease of
0.9%. This change included a decrease in Advertising revenue to $3,544 from
$4,947, a decrease of $1,403, and an increase in Other to $14,893 from $13,649,
an increase of $1,244. The decrease in Advertising revenue reflected the infancy
of the Brazilian pay television industry and the lack of reliable ratings
measures, as a result of which the sale of pay television advertising in Brazil
is relatively low, representing less than 1% of the Brazilian advertising market
in 1998. The increase in Other revenues was principally due to increases in
commissions for sales of HBO Brasil and ESPN Brasil advertising as well as sales
of TVA magazine to independent programming providers.
Taxes on revenue for the year ended December 31, 1998 were $12,533, as
compared to $13,315 for the same period of the prior year, a decrease of 5.9%.
As a percentage of net revenue taxes on revenue represents 7.6% of net revenues
and are consistent with the prior year.
35
<PAGE>
For the reasons noted above, Net revenue for the year ended December 31,
1998 was $164,648, as compared to $183,732 for the comparable period in the
previous year, a decrease of $19,084.
Direct operating expenses. Direct operating expenses for the year ended
December 31, 1998 were $93,356, as compared to $103,216 for the same period in
1997, a decrease of $9,860. As a percentage of net revenues, direct operating
expenses represents 56.7% as compared with 56.2% in the prior year. Payroll and
benefits expense decreased to $15,968 from $22,593, a decrease of $6,625, as a
result of the lay-off of more than 194 employees. Programming costs decreased to
$54,282 from $56,394, a decrease of $2,112 or 3.8%, primarily due to a revised
billing procedure for Operating Ventures and Independent Operators as described
above. Transponder lease cost decreased to $2,336 from $6,312, a decrease of
$3,976, as a result of the renegotiation of transponder costs. Pole rental
increased from $2,157 to $3,247, an increase of $1,090 due to the expansion of
TVA's cable network during the year. For the year ended December 31, 1998, Other
costs were $8.975, as compared to $7,026 for the same period the prior year, an
increase of $1,949.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the year ended December 31, 1998 were $56,517, as
compared to $64,844 for the same period of 1997, a decrease of $8,327 or 12.8%.
While the Company's general and administrative expenses remained relatively
unchanged in the year ended December 31, 1998 as compared to the year ended
December 31, 1997, Advertising and promotion expense decreased from $18,367 in
1997 to $9,335 in 1998, a decrease of 49.2%, as a result of the Company's
reduced advertising efforts in light of the Brazilian economic crisis.
Depreciation, Amortization and Provision for equipment and inventory
obsolescence. Depreciation and Amortization for the year ended December 31, 1998
was $48,107, as compared to $35,461 for the same period of 1997, an increase of
$12,646, due primarily to higher fixed asset balances as a result of purchases
of cable networks, decoders, installation equipment and other fixed assets in
1997, the depreciation of which was recognized in 1998. Provision for equipment
and inventory obsolescence for the year ended December 31, 1998 was $1,940 as
compared to $3,944 for the comparable period in 1997, a decrease of $2,004.
For the reasons noted above, Operating loss for the year ended December 31,
1998 was $35,272 compared to $23,733 for the comparable period in 1997, an
increase of $11,539.
Interest income. Interest income for the year ended December 31, 1998 was
$6,718, as compared to $14,205 for the same period in 1997, a decrease of $7,487
principally attributable to the application by the Company of the proceeds of
the Senior Notes in 1997.
Interest expense. Interest expense for the year ended December 31, 1998 was
$51,665, as compared to $44,541 for the same period of 1997, an increase of
$7,124, principally attributable to the interest paid on the Senior Notes and
loans from shareholders.
Equity in (losses) income of affiliates. For the year ended December 31,
1998, Equity in (losses) income of affiliates amounted to a loss of $12,139, as
compared to a loss of $6,851 in the same period of 1997, an increase of $5,288.
This loss was comprised of ESPN Brasil ($8,938), HBO Brasil ($2,081) and Canbras
TVA ($1,120).
Other non-operating (expenses) income net. Other non-operating (expenses)
income net for the year ended December 31, 1998 was an expense of $4,233, as
compared to income of $927 in the same period in 1997, an increase in expense of
$5,160. Other non-operating expenses for the year ended December 31, 1998
consisted primarily of charges for provision of certain equipment and material
installed in the homes of subscribers whose service was terminated.
36
<PAGE>
Minority interest. The Minority interest of $1,338 for the year ended
December 31, 1998 represents Abril's 14% share in aggregate losses of TVA Sul.
Income (loss) from discontinued operations. Loss from discontinued
operations for the year ended December 31, 1998 was $52,773 as compared to
$21,438 for the comparable period in 1997, an increase of $31,335. See Item 1,
"Description of Business--Sale of Non-Strategic Assets."
Net loss. For the reasons noted above, Net loss for the year ended December
31, 1998 was $148,067 as compared to $81,417 for the comparable period in 1997,
an increase of $66,650.
Seasonality
The Company's revenues are seasonal. Generally, during the Brazilian summer
months of January and February the Company experiences lower demand for
installation for each of its services. As a result, the Company experiences a
decrease in Installation revenue of approximately 25% in these months, which
decrease is offset by corresponding decreases in Payroll and benefits expense
(i.e., sales commissions), Advertising and promotional expense and Other costs.
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, 1999, the Company had cumulative net losses of over
$364,182. During the periods under review, the Company required external funds
to finance its capital expenditures, operating activities and make payments of
principal and interest on its indebtedness. The sources of such funds have been
as follows: (i) borrowings from Abril under the Abril Credit Facility, of which
$137,168 was outstanding as of December 31, 1999, (ii) borrowings under lines of
credit, of which $5,208 was outstanding as of December 31, 1999, (iii) net
capital contributions of approximately $388,000 from shareholders, (iv) the
EximBank Facility, of which $12,135 was outstanding as of December 31, 1999, (v)
the Senior Notes, of which $48,022 was outstanding to unaffiliated parties as of
December 31, 1999 and (vi) the disposition on non-strategic assets, including
the DBS Systems and certain assets related thereto, for which the Company
received net cash proceeds in 1999 of approximately $177,600.
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, 1999, the Company had
approximately $203,106 of indebtedness outstanding, primarily consisting of
loans from shareholders and Senior Notes in the aggregate principal amount of
$48,022.
In addition to debt service, the Company will require capital for (i) the
continued funding of losses and working capital requirements, (ii) the
construction and upgrade of cable networks and the installation of equipment at
subscribers' locations, (iii) the construction of additional transmission and
headend facilities and related equipment purchases and (iv) investments in, and
maintenance of, vehicles and administrative offices.
The Company made purchases of fixed assets of $93,029, $87,867, $118,909,
$81,392 and $25,927 in 1995, 1996, 1997, 1998 and 1999, respectively (not
including $37,645, $128,958 and $61,967 in connection with discontinued
operations in 1996, 1997 and 1998, respectively). Management estimates that
$41,836 and $50,360 of capital expenditures will be required in 2000 and 2001,
respectively, principally in connection with the purchase of materials and
equipment, Cable and MMDS network upgrades and the development of its internet
37
<PAGE>
operations. The actual amount of funds required in 2000 and 2001 may vary
materially from these estimates, as a result of which additional funds could be
required in the event of cost overruns, unanticipated expenses, regulatory
changes, engineering design changes and other technology-driven changes.
The Company's principal sources of liquidity are borrowings from Abril 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 the operations, the Company will be required to utilize its
current sources of debt funding to satisfy its liquidity needs. The Company had
approximately $1,946 of cash and cash equivalents as of December 31, 1999.
For the year ended December 31, 1999, net cash provided by operating
activities was ($18,435), primarily as the result of the net income for the year
of $69,876, which was partially offset by $55,174 of depreciation and Disposal
and write-off of property, plant and equipment of $57,028. For the year ended
December 31, 1999, net cash used in investing activities was $149,826, as the
result of capital expenditures for the purchase of fixed assets of ($25,927),
cash received on sale of assets of $177,542 and investments in equity and cost
investments of ($1,788). The purchases of fixed assets were principally related
to the expansion of cable networks and the purchase of reception equipment,
which includes hardware, materials and labor used for new subscriber
installations and decoders. For the year ended December 31, 1999, net cash
provided by financing activities was ($130,842), consisting principally of
repayments of loans from banks and the repurchase by the Company, through a
wholly-owned subsidiary, of Senior Notes in the aggregate principal amount of
$201,978.
The Abril Credit Facility allows the Company to borrow up to $60,000 on a
revolving basis. Since June 1996, the Company has from time to time requested,
and Abril has provided, funds in excess of $60,000. The loans are generally
denominated in reais and bear interest at a rate equal to a percentage of the
CDI rate, the Brazilian interbank lending rate, adjusted at the beginning of
each month. As of December 31, 1999, the Company had $137,168 outstanding under
the Abril Credit Facility.
On December 9, 1996, TVA Sistema, as Borrower, and Tevecap, as Guarantor,
entered into a credit agreement with The Chase Manhattan Bank for the financing
of C-Band decoders and other related equipment (the "EximBank Facility"). The
Export-Import Bank of the United States of America ("EximBank") also guaranteed
85% of the amount of the loan. The loan was made on terms customary for credits
supported by EximBank to Brazilian borrowers with an interest rate of LIBOR plus
a specified margin. The principal amount of the loan was $29,350, which was
dispersed in two tranches, the first in April 1997 in the principal amount of
$11,400 with a term of five years and the second in August 1997 in the principal
amount of $17,950 with a term of 4.5 years. As of December 31, 1999, the
principal amount outstanding under the EximBank Facility was $12,135.
On November 26, 1996, Tevecap raised funds in foreign markets through a
private placement of $250,000 12 5/8% Senior Notes (the "Senior Notes") maturing
on November 26, 2004 and guaranteed by certain of Tevecap's subsidiaries. The
Senior Notes were subsequently registered under the Securities Act pursuant to
Exchange Offers in May and December 1997. Concurrently with the consummation of
the DBS Sale in July 1999, as described above, the net proceeds to the Company
from the DBS Sale were used by the Company to repurchase, through a wholly-owned
subsidiary, Senior Notes in the aggregate principal amount of $201,978. In
addition, the Company obtained a consent from holders of the Senior Notes to
amend the restrictive covenants contained in the terms of the Senior Notes. See
Item 1, "Description of Business--Sales of Non-Strategic Assets--Tender Offer
and Consent Solicitation."
On February 7, 2000, the Company, through a wholly-owned subsidiary, raised
funds in foreign markets through a private placement of $25,500 11.5% Guaranteed
Participation Certificates (the "Participation Certificates") maturing on August
6, 2001. Each Participation Certificate represents a fractional undivided
interest in a $25,500 promissory note (the "GLA Promissory Note") issued by GLA
in favor of the Company as partial consideration for the sale by the Company to
GLA of the Company's entire equity interests in Galaxy Brasil and
38
<PAGE>
TVA Banda C. Holders of the Participation Certificates, however, have no
recourse to GLA for any amounts payable under the Participation Certificates or
the GLA Promissory Note.
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 $226,500 of net operating losses ("NOLs") to
offset against regular taxes. These NOLs do not expire. 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 believes that, should the Company be
profitable in the future, it will be able to utilize these NOLs.
Year 2000 Compliance
In 1998 the Company established a program (the "Year 2000 Program") for
identifying, prioritizing and replacing or modifying systems and processes that
were potentially unable to distinguish between dates in the year 2000 and dates
in the year 1900 and that could, consequently, affect the Company's business,
operations and exposure to liability from third parties. The areas primarily
covered by the Year 2000 Program were:
o information technology ("IT") systems (software systems relating to
billing, customer service, corporate finance, supplies and other
areas)
o non-IT systems (hardware, telecommunications and other systems)
o external interfaces with third parties (including financial
institutions, programming providers, vendors and service providers)
As of December 31, 1999, the Company had completed all phases of its Year
2000 Program, including the testing of all systems and the establishment of
appropriate contingency plans. The Company incurred total costs of approximately
$941.5 to address year 2000 issues, including the replacement and modification
of IT and non-IT systems, the conducting of testing to evaluate the compliance
of systems and the hiring of consultants to install and oversee the testing of
such systems. Overall, approximately $864.2 of these costs were capitalized and
$77.3 were expensed. The Company will continue to monitor its own systems and
those of its suppliers to identify and address any problems related to the year
2000.
39
<PAGE>
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to foreign currency exchange rate risk and interest
rate risk. At December 31, 1999, Tevecap has dollar denominated debt of
US$62,764, which is due as follows:
(In Thousands of US dollars)
Principal
----------------------------
2000 $ 7,205
2001 5,868
2002 1,669
2003 0
2004 and thereafter 48,022
-------
$62,764
=======
During January 1999, the Brazilian Real experienced a devaluation after the
Central Bank abandoned the exchange band within which the real was permitted to
trade. Since that time, the exchange rate has been volatile, ranging up to
R$2.10 per U.S. dollar. See Item 6, "Exchange Controls and Other Limitations
Affecting Security Holders."
Although the Company's functional currency and its reporting currency is
the U.S. dollar, the cash flow required to service the debt is generated in
local currency, Brazilian reais (R$). Using the year end 1999 exchange rate
(R$1,7890 per U.S.$1.00), the cash flow in reais to pay the interest and
principal due in 2000 would have been R$12,526 and R$12,889, respectively. A
devaluation of the real to R$2.00 per U.S. dollar would require cash flow of
R$14,004 to pay the interest due in 2000 of US$7,002. Cash flow in reais to pay
the principal due in U.S. dollars would be R$14,410. If the real devalued to
R$2.50 per U.S. dollar, the cash flow in reais to pay the interest and principal
due in 2000 would be R$17,505 and R$18,012, respectively.
The Company is also subject to interest rate risk on its loans in local
currency. At December 31, 1999, the Company had $137,168 of loans from an
affiliate denominated in Brazilian reais, which bears interest at the average
cost of funds of the affiliate. The majority of the affiliate's debt is in reais
and bears interest at the CDI rate (the interbank certificate of deposit rate in
Brazil) plus 1/2%.
During 1999, the CDI rate ranged from 31.1% to 18.8%. The average rate for
the year was 26.6%. If the CDI rate rose to 40%, interest payments on the
$137,168 would be approximately $54,867 annually. If the CDI rate rose to 50%,
the annual interest payments would be $68,584. Most of the interest due on these
loans in the past has been added to principal rather than paid in cash.
The Company does not hedge any of its market risks and does not have
derivatives.
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The Company is managed by its Conselho de Administracao ("Board of
Directors") 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, 2001. Day-to-day operations of the Company are managed by
the Company's Executivos ("Executive Officers").
40
<PAGE>
<TABLE>
<CAPTION>
Board of Directors
Member Position Current Position Held Since
------ -------- ---------------------------
<S> <C> <C> <C>
Robert Civita........................................... President 1994
Jose Augusto P. Moreira................................. Member 1994
Robert Hefley Blocker................................... Member 1995
Roger Philip Hipskind................................... Member 1998
Giancarlo Francesco Civita.............................. Member 1999
Francisco Savio Couto Pinheiro.......................... Member 1995
Ana Carolina Ferraz Aidar............................... Member 1999
Marc Nathanson.......................................... Member 2000
Joseph Yang............................................. Member 2000
Raymond E. Joslin....................................... Member 2000
Simon Kenny............................................. Member 2000
Committee of Officers
Member Position Current Position Held Since
------ -------- ---------------------------
Jose Augusto P. Moreira................................. Member 1992
Claudio Cesar D`Emilio.................................. Member 1992
Antonio Valdemir Pereira Ramos.......................... Member 1999
Executive Officers
Member Position Current Position Held Since
------ -------- ---------------------------
Jose Augusto P. Moreira................................. President 1998
Leila Abraham Loria..................................... Chief Executive Officer 1999
Luiz Eduardo B.P. Rocha................................. Chief Operations Officer 1997
Marcelo Vaz Bonini...................................... Chief Financial Officer 1999
Alexandre Annemberg..................................... Technology Officer 1997
Vito Chiarella Neto..................................... South Operations Officer 2000
Roberto Rio Branco Nabuco de Gouvea..................... Sao Paulo Operations Officer 1997
Paulo de Toledo Barros.................................. Rio de Janeiro Operations Officer 1997
Kunio Ohara............................................. Chief Information Technology Officer 1999
Roseli Parrella......................................... Human Resources Officer 1997
Luis Carlos Giuzelini Balieiro.......................... General Counsel 1998
Jose Carlos Henrique Romeiro Alves...................... Ajato Chief Operations Officer 1999
</TABLE>
Robert Civita is the father of Giancarlo Francesco Civita.
ITEM 11. COMPENSATION FOR DIRECTORS AND OFFICERS
For the year ended December 31, 1999, the aggregate compensation, including
bonuses, of all Directors, Officers and Executive Officers of the Company was
$2,884,572. Members of the Board of Directors and the Committee of Officers do
not receive a salary from the Company.
For the year ended December 31, 1999, the aggregate amount set aside by the
Company to provide pension, retirement or similar benefits to Directors,
Officers and Executive Officers was $27,844.
ITEM 12. OPTIONS TO PURCHASE SECURITIES
Not applicable.
41
<PAGE>
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 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.
Programming
In connection with the investment by Hearst and ABC in Tevecap, Tevecap and
these two parties entered into a Programming Agreement (the "Hearst/ABC
Programming Agreement"). Pursuant to the Hearst/ABC Programming Agreement, each
of Hearst and ABC has agreed to offer first to Tevecap pay programming that
Hearst or ABC (or any subsidiary of which either Hearst or ABC owns at least 80%
of the outstanding equity interests) intends to license for use in Brazil in the
pay television markets served by TVA. The parties also agreed to consider future
co-production activities which could enhance TVA's business and competitive
position. Tevecap agreed to pay to each of Hearst and ABC such fees and expenses
as are agreed upon at the time such programming or co-production services are
provided. The Hearst/ABC Programming Agreement does not apply to The Walt Disney
Company or its subsidiaries other than ABC and ABC's subsidiaries. In addition,
the Hearst/ABC Programming Agreement does not apply to the activities of The A&E
Television Networks, Lifetime Television and ESPN, including agreements relating
to ESPN Brasil.
Transactions Among Related Parties
Publishing and Advertising
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 465,000 copies of the Company's monthly
magazine in return for a monthly payment of approximately $165,000. 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 $50,000 per month.
42
<PAGE>
TVA Sistema and Abril also have a reciprocal advertising agreement in which
the Company publishes advertisements for Abril in the Company's monthly magazine
in exchange for advertisements for the Company (and third parties through the
Company) in the magazines published by Abril.
Abril Credit Facility
Tevecap has entered, as the borrower, into a revolving credit facility (the
"Abril Credit Facility") with Abril, as the lender. The Abril Credit Facility,
effective December 6, 1995, allows the Company to draw down amounts not to
exceed a maximum aggregate principal amount of $60,000,000. Since June 1996,
Tevecap has from time to time requested, and Abril has provided, funding in
excess of the aggregate maximum principal amount. The loans provided under the
Abril Credit Facility are denominated in reais, unless the loan is a
pass-through loan that Abril has funded in U.S. dollars, in which case the loan
is funded in a real-equivalent amount. Abril has agreed to use its reasonable
commercial efforts to obtain the lowest possible interest rates for its loans to
Tevecap under the Abril Credit Facility. As of December 31, 1999, the aggregate
principal amount outstanding under the Abril Credit Facility was $137.2 million.
Other Intercompany/Shareholder Loans
Tevecap has used the proceeds from the Abril Credit Facility to make
capital contributions to TVA Sistema, as well as to extend loans to various
interrelated companies. The aggregate outstanding amounts under these loans as
of December 31, 1999 were: $14.6 million to TVA Brasil; $29.8 million to TVA
Sul; $5.8 million to Canbras TVA; $32.6 to TVA Communciations; and $3.3 million
to other affiliates. In addition, TV Show Time has loans outstanding to Abril,
which loans, as of December 31, 1999, had an aggregate outstanding amount of
approximately $1.7 million.
Service Agreement with Licenseholders
Pursuant to a Service Agreement, dated July 22, 1994, as amended, TVA
Brasil and TV Show Time (the "Licenseholders") agreed to transfer to TVA all the
rights and benefits associated with their current and future pay-television
licenses, with the exception of licenses operated by companies in which TVA has
minority interests. While the Licenseholders retained the title to such
licenses, the Licenseholders promised to take all steps necessary to transfer
the title of such licenses to Tevecap. Such steps included the appropriate
procedures required by the Ministry of Communications and any other governmental
authority regulating the transfers. The transfer of the title to such licenses
is currently either pending, subject to approval by the Ministry of
Communications, or waiting for the passage of certain statutory or regulatory
waiting periods.
43
<PAGE>
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
Not applicable.
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.
44
<PAGE>
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 public accountants.
<TABLE>
<CAPTION>
INDEX TO THE FINANCIAL STATEMENTS
Page
----
<S> <C>
TEVECAP S.A. AND SUBSDIARIES - Consolidated Financial Statements Together
with Report of Independent Public Accountants - December 31, 1999 and 1998............... F-1
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998.............. F-3
Consolidated Statements of Operations for each of the three
years in the period ended December 31, 1999........................... F-5
Consolidated Statements of Changes in Shareholders' Deficit
and Statement of Redeemable Common Stock for each of
the three years in the period ended December 31, 1999................. F-6
Consolidated Statements of Cash Flows for each of the three
years in the period ended December 31, 1999........................... F-7
Notes to the Consolidated Financial Statements............................ F-9
TVA SISTEMA DE TELEVISAO S.A. - Financial Statements Together
with Report of Independent Public Accountants - December 31, 1999 and 1998............... F-48
Report of Independent Public Accountants.................................. F-49
Balance Sheets as of December 31, 1999 and 1998........................... F-50
Statements of Operations for each of the three
years in the period ended December 31, 1999........................... F-52
Statements of Changes in Shareholders' Deficit for
each of the three years in the period ended December 31, 1999......... F-53
Statements of Cash Flows for each of the three
years in the period ended December 31, 1999........................... F-54
Notes to the Financial Statements......................................... F-55
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
TVA SUL PARANA LTDA. AND SUBSIDIARY - Consolidated Financial Statements Together
with Report of Independent Public Accountants - December 31, 1999 and 1998............... F-70
Report of Independent Public Accountants.................................. F-71
Consolidated Balance Sheets as of December 31, 1999 and 1998.............. F-72
Consolidated Statements of Operations for each of the three years in the
period ended December 31, 1999........................................ F-74
Consolidated Statements of Changes in Shareholders' Equity for each of
the three years in the period ended December 31, 1999................. F-75
Consolidated Statements of Cash Flows for each of the three years
in the period ended December 31, 1999................................. F-76
Notes to Financial Statements............................................. F-78
CCS--CAMBORIU CABLE SYSTEM DE TELECOMUNICACOES LTDA. -
Financial Statements Together with Report of Independent Public Accountants -
December 31, 1999 and 1998............................................................... F-91
Report of Independent Public Accountants.................................. F-92
Balance Sheets as of December 31, 1999 and 1998........................... F-93
Statements of Operations for each of the three years in the period ended
December 31, 1999..................................................... F-95
Statements of Changes in Shareholders' Equity for each of the three years
in the period ended December 31, 1999................................. F-96
Statements of Cash Flows for each of the three years in the period ended
December 31, 1999..................................................... F-97
Notes to Financial Statements............................................. F-98
</TABLE>
46
<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: June 21, 2000
47
<PAGE>
Tevecap S.A. and Subsidiaries
Consolidated Financial Statements Together with
Report of Independent Public Accountants
December 31, 1999 and 1998
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Contents
Page
<S> <C>
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for each of the three years in the period ended
December 31, 1999 F-5
Consolidated Statements of Changes in Shareholders' Deficit and Statements of
Redeemable Common Stock for each of the three years in the period ended
December 31, 1999 F-6
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 1999 F-7
Notes to The Consolidated Financial Statements F-9
</TABLE>
F-1
<PAGE>
Report of Independent Public 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, 1999 and 1998, and the related
consolidated statements of operations, changes in shareholders' deficit and
redeemable common stock and cash flows for each of the three years in the period
ended December 31, 1999, 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, 1999 and 1998, and the consolidated results of
their operations and cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States of America.
Arthur Andersen
Sao Paulo, Brazil
May 5, 2000
F-2
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
(in thousands of U.S. dollars)
December 31,
--------------------
1999 1998
-------- --------
ASSETS
Current assets
Cash and cash equivalents $ 1,946 $ 1,397
Accounts receivable, net 7,562 20,679
Inventories, net 10,313 14,900
Film exhibition rights 1,278 1,568
Prepaid and other assets 3,612 5,176
Accounts receivable from related parties 155 1,052
Judicial deposits 832 --
Other accounts receivable 5,496 4,232
-------- --------
Total current assets 31,194 49,004
-------- --------
Property, plant and equipment, net 211,729 298,004
Investments
Equity basis 2,190 1,944
Cost basis investments 8 49,096
Concessions, net 10,366 12,070
Loans to related companies 5,973 29,416
Debt issuance costs, net (accumulated amortization;
1999- $ 8,382; 1998 - $ 2,978) 859 6,263
Promissory note 25,500 --
Other 2,129 2,130
-------- --------
Total assets $289,948 $447,927
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
--------- ---------
LIABILITIES AND SHAREHOLDERS' DEFICIT
<S> <C> <C>
Current liabilities
Loans $ 8,492 $ 41,028
Film suppliers 8,711 17,568
Other suppliers 8,662 25,715
Deficit in discontinued operations -- 21,858
Taxes payable other than income taxes 5,969 13,229
Accrued payroll and related liabilities 2,389 3,957
Advance payments received from subscribers 938 2,002
Other accounts payable 2,637 5,818
--------- ---------
Total current liabilities 37,798 131,175
--------- ---------
Long-term liabilities
Loans 57,446 262,352
Loans from shareholders 137,168 88,740
Taxes payable other than income taxes 22,778 1,005
Provision for claims 2,417 6,421
Liability to fund equity investee 5,934 1,025
--------- ---------
Total long-term liabilities 225,743 359,543
--------- ---------
Commitments and contingencies (Notes 16 and 18)
Minority interest 2,786 3,464
Redeemable common stock, no par value, 85,637,526 shares
Issued and outstanding 178,002 178,002
Shareholders' deficit
Common stock, no par value, 140,700,759
Shares issued and outstanding 242,342 242,342
Accumulated deficit (396,723) (466,599)
--------- ---------
Total shareholders' deficit (154,381) (224,257)
--------- ---------
Total liabilities and shareholders' deficit $ 289,948 $ 447,927
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Consolidated Statements of Operations
for the years ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------
1999 1998 1997
------------- ------------- -------------
Gross revenues
<S> <C> <C> <C>
Monthly subscriptions $ 94,055 $ 136,278 $ 142,700
Installation 1,900 2,886 12,941
Advertising 1,597 3,544 4,947
Indirect programming 3,722 19,580 22,810
Additional services & others 14,924 14,893 13,649
Taxes on revenues (12,782) (12,533) (13,315)
------------- ------------- -------------
Net revenue 103,416 164,648 183,732
------------- ------------- -------------
Direct operating expenses
Payroll and benefits 7,857 15,968 22,593
Programming 24,166 54,282 56,394
Transponder lease cost 1,975 2,336 6,312
Technical assistance 1,311 1,212 1,832
Vehicle rentals 100 178 1,075
TVA magazine 2,482 7,158 5,827
Pole rental 2,935 3,247 2,157
Other costs 4,812 8,975 7,026
------------- ------------- -------------
45,638 93,356 103,216
------------- ------------- -------------
Selling, general and administrative expenses
Payroll and benefits 11,425 24,849 24,432
Advertising and promotion 3,645 9,335 18,367
Rent 2,005 3,976 3,721
Other administrative expenses 7,556 16,100 16,407
Other general expenses 959 2,257 1,917
------------- ------------- -------------
25,590 56,517 64,844
------------- ------------- -------------
Provision for equipment and inventory obsolescence 605 1,940 3,944
Depreciation 55,174 46,402 33,704
Amortization 1,705 1,705 1,757
------------- ------------- -------------
Operating loss from continuing operations (25,296) (35,272) (23,733)
------------- ------------- -------------
Interest income 5,896 6,718 14,205
Interest expense (22,254) (51,665) (44,541)
Translation loss (2,543) (17) (902)
Equity in losses of affiliates (5,238) (12,139) (6,851)
Other nonoperating income (expenses), net 64,882 (4,233) 927
------------- ------------- -------------
Income (loss) from continuing operations before
income taxes and minority interest 15,447 (96,608) (60,895)
Income taxes (106) (24) --
------------- ------------- -------------
Income (loss) from continuing operations before 15,341 (96,632) (60,895)
minority interest
Minority interest 678 1,338 916
------------- ------------- -------------
Income (loss) from continuing operations before 16,019 (95,294) (59,979)
extraordinary item
Loss from discontinued operations -- (52,773) (21,438)
Extraordinary item - gain on debt repurchase 53,857 -- --
------------- ------------- -------------
Net income (loss) $ 69,876 $ (148,067) $ (81,417)
============= ============= =============
Net income (loss) per share for continuing
operations before extraordinary item 0.07 (0.42) (0.30)
Net loss per share for discontinued operations -- (0.23) (0.11)
Net income per share for extraordinary item 0.24 -- --
Net income (loss) per share 0.31 (0.65) (0.41)
Weighted average shares outstanding 226,338,285 226,338,285 196,712,865
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Deficit and Statement of
Redeemable Common Stock
for the years ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Total Redeemable
Paid-in Accumulated Shareholders' Common
Capital Deficit Deficit Stock
---------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
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
---------- --------- --------- ---------
Capital contributed on February 2, 1998 99,847 99,847
Net loss for the year (148,067) (148,067)
Reversal related to redeemable common stock 11,032 11,032 (11,032)
---------- --------- --------- ---------
Balance as of December 31, 1998 $ 242,342 $(466,599) $(224,257) $ 178,002
---------- --------- --------- ---------
Net income for the year 69,876 69,876
---------- --------- --------- ---------
Balance as of December 31, 1999 $ 242,342 $(396,723) $(154,381) $ 178,002
========== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the years ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 69,876 $(148,067) (81,417)
Adjustments to reconcile net income (loss) to net cash (used
in) provided by operating activities:
Depreciation 55,174 46,402 33,704
Amortization 1,705 1,705 1,757
Amortization of debt issuance cost 5,404 1,550 1,332
Provision for doubtful accounts 196 3,407 3,334
Provision for equipment and inventory obsolescence 605 1,940 3,944
Provision for claims (4,004) 1,617 (241)
Minority interest (678) (1,338) 3,024
Disposal and write-off of property, plant and equipment 57,028 1,574 338
Gain on sale of assets (134,138) -- --
Write-off of investments in TV Filme Inc. 6,668 -- --
Buy back gain of Senior Notes (70,692) -- --
Discontinued operations -- 52,773 21,438
Equity in losses of affiliates 5,238 12,139 6,851
Changes in operating assets and liabilities:
Film exhibition rights 290 (277) (230)
Accounts receivable 12,921 53 (13,914)
Prepaid and other assets 1,564 8,657 (11,075)
Promissory note (25,500)
Other accounts receivable (1,198) 1,928 (4,587)
Accrued interest 14,334 258 26,659
Inventories 3,982 8,680 (11,365)
Suppliers (25,910) 1,931 (13,666)
Taxes payable other than income taxes 14,513 4,342 2,521
Accrued payroll and related liabilities (1,568) (1,382) 6
Advances received from subscribers (1,064) 1,968 (2,411)
Other accounts payable (3,181) 2,815 3,864
--------- --------- ---------
Net cash (used in) provided by operating activities (18,435) 2,675 (30,134)
--------- --------- ---------
Cash flows (used in) provided by investing activities:
Purchases of property, plant and equipment (25,927) (81,392) (118,909)
Discontinued operations -- (17,011) 295
Cash received on sale of assets 177,542 -- --
Loans to related companies -- (44,071) (61,939)
Purchase of concessions (1) -- --
Investments in equity and cost investments (1,788) (20,082) (44,350)
--------- --------- ---------
Net cash (used in) provided by investing activities 149,826 (162,556) (224,903)
--------- --------- ---------
Cash flows (used in) provided by financing activities:
Bank loans 6,661 14,549 59,509
Capital contributions -- 99,847 --
Loans from shareholders 63,695 126,084 54,908
Repayments of loans from shareholders (11,430) -- --
Repayments of loans to related companies 2,180 31,429 45,724
Repayments of loans from related companies -- (83,696) (4,442)
Repayment of loans from banks (191,948) (27,924) (4,412)
--------- --------- ---------
Net cash (used in) provided by financing activities (130,842) 160,289 151,287
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 549 408 (103,750)
Cash and cash equivalents at beginning of the period 1,397 989 104,739
--------- --------- ---------
Cash and cash equivalents at end of the period $ 1,946 1,397 989
========= ========= =========
Supplemental cash disclosure:
Cash paid for interest $ 15,784 31,712 32,038
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the years ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Supplemental noncash financing and investing activities:
Accrued interest on related company loans refinanced
as principal balance $ (3,835) $ 10,930 $ 4,599
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
(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,cable and high-speed internet, including
marketing and advertising, production, distribution and licensing of
domestic and foreign television programs. The Company has wireless cable
channel rights primarily in major urban markets in Brazil.
As of December 31, 1999, 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.
F-9
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
2.1. Basis of presentation and consolidation (Continued)
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.
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 a substantial portion of
Company's business is conducted in United States dollars. 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$1.7890 to US$1 in effect on December 31, 1999 and
R$1.2087 to US$1 in effect on December 31, 1998. 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 the 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:
<TABLE>
<CAPTION>
Ownership Interest as of
December 31,
------------------------------
1999 1998
------- -------
<S> <C> <C>
Owned Systems
TVA Distribuidora S.A 100.00% 100.00%
TVA Sistema de Televisao S.A 98.00% 98.00%
TVA Sul Parana Ltda 86.00% 86.00%
CCS Camboriu Cable Systems de Telecomunicacoes Ltda 51.60% 51.60%
TVAPar S.A 100.00% 100.00%
TVA Finco Ltda -- 100.00%
Rede Ajato Ltda. (c) 100.00% --
License Subsidiary
Comercial Cabo TV Sao Paulo Ltda. (a) 100.00% 100.00%
TVA Satelite Ltda. (b) -- 100.00%
Galaxy Brasil Ltda. (b) -- 100.00%
TVA Banda C Ltda. (b) -- 99.99%
Ype Radio e Televisao Ltda 100.00% 100.00%
TVA Sistema de Televisao de Porto Alegre S.A 100.00% 100.00%
Programming Ventures
TVA Programadora Ltda 100.00% 100.00%
TVA Channels Ltda 100.00% 100.00%
TVA Communications Ltd. 100.00% 100.00%
TVA Communications Aruba N.V 100.00% 100.00%
</TABLE>
a. 0.00149% of the common shares in this entity are owned by the controlling
shareholder of the parent company pursuant to local legislative
requirements.
b. In July 1999, the Company sold its interest on these companies.
c. On August 1, 1999, the company Rede Ajato Ltda. was created to operate in
the high-speed internet market.
F-11
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
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, 1999 and 1998 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 are 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, except for Senior Notes,
approximates their carrying value as the interest rates on these loans
are either fixed at a rate comparable with the current market rate or
variable and based on market rates.
o The fair value of Senior Notes represents 59% of its carrying value as
of December 31, 1999.
F-12
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
2.7 Accounts receivable
A provision for doubtful accounts is established on the basis of an
analysis of the accounts receivable, in light of the risks involved, and is
considered sufficient to cover any losses incurred in realization of
credits.
2.8 Inventories
Inventories consist of materials and supplies and imports in transit.
Materials and supplies are used to provide service to new customers, and to
ensure continuity of service to existing customers. Imports in transit
represent materials purchased from foreign countries that have not yet been
received.
Inventories are stated at the lower of cost or market. Cost is determined
principally under the average cost method.
A provision for obsolescence has been established on the basis of an
analysis of slow-moving materials and supplies.
2.9 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.
2.10 Property, plant and equipment
Property, plant and equipment are stated at cost and depreciated using the
straight-line method, over the remaining useful lives, as described in Note
10.
2.11 Advertising
Advertising revenues are recognized, and the production cost of commercials
and programming are charged to expense, when the commercial is telecast.
2.12 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 if and when
appropriate.
F-13
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
2.13 Revenue recognition
Hook-up fees are recognized as revenue on the equipment installation date
to the extent of direct selling costs incurred which are generally higher
than the revenues. Subscription revenues are recognized as earned on an
accrual basis.
2.14 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.
2.15 Accounting for issuance of stock by subsidiaries and equity investees
Gains or losses arising from the issuance 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.
2.16 Concessions
Concessions represent the right to engage in various telecommunications
services in defined areas or cities in Brazil. The cost of these
concessions is being amortized on the straight-line basis over 10 years.
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
3. Accounts receivable, net
As of December 31, 1999 and 1998, accounts receivable were comprised of:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Subscriptions and installation fees $ 14,375 $ 21,544
Advertising and affiliates 1,437 5,807
Programming 1,000 --
Other 2,120 4,502
Provision for doubtful accounts (11,370) (11,174)
-------- --------
$ 7,562 $ 20,679
======== ========
<CAPTION>
4 Inventories, net
As of December 31, 1999 and 1998, inventories were comprised of:
1999 1998
-------- --------
<S> <C> <C>
Materials and supplies $ 13,431 $ 16,420
Imports in transit 617 1,610
Provision for obsolescence (3,735) (3,130)
-------- --------
$ 10,313 $ 14,900
======== ========
<CAPTION>
5 Prepaid and other assets
As of December 31, 1999 and 1998, prepaid expenses were comprised of:
1999 1998
-------- --------
<S> <C> <C>
Advances to suppliers $ 1,088 $ 1,965
Prepaid meals and transportation 106 38
Debt issuance costs 220 1,274
Other 2,198 1,899
-------- --------
$ 3,612 $ 5,176
======== ========
</TABLE>
F-15
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
6. Related party transactions
The following tables summarize the transactions between the Company and
its related parties as of December 31, 1999 and 1998 and for the three
years ended December 31, 1999:
December 31,
-------------------------------------
1999 1998
----------------- -----------------
TVA Finco Ltda
Loans receivable $ -- $ 14,117
Abril S.A
Accounts receivable $ 47 $ --
Loans payable 137,168 88,740
Accounts payable 291 399
Televisao Abril Ltda
Accounts receivable $ -- $ 98
ESPN do Brasil Ltda
Accounts receivable $ -- $ 131
Accounts payable -- 26
Canbras TVA Cabo Ltda
Accounts receivable $ 11 $ 39
Loans receivable 5,799 5,955
HBO Brazil Partners Ltda
Loans receivable $ -- $ 1,792
California Broadcast Center L.L.C
Loans receivable $ -- $ 7,315
Galaxy Brasil Ltda
Accounts receivable $ -- $ 153
TVA Banda C Ltda
Accounts receivable $ -- $ 545
Loans receivable -- 234
Others
Accounts receivable $ 97 $ 86
Loans receivable 174 3
Accounts payable 27 --
F-16
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
6. Related-party transactions (Continued)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Abril S.A
Net interest expense $ (3,835) $ 17,154 $ 4,653
Printing costs 1,447 3,301 4,389
ESPN do Brasil Ltda
Programming costs $ -- $ 5,188 $ 5,213
Programming revenue -- (1,120) --
Net interest (income) expense -- -- (1,720)
TV Filme Inc.
Programming revenue $ (184) $ (3,010) $ (8,629)
Canbras TVA Cabo Ltda
Programming revenue $ (216) $ (2,185) $ (1,837)
Net interest expense -- --
California Broadcast Center L.L.C
Net interest income $ (197) $ (769) $ (551)
</TABLE>
Loans granted to or obtained from related companies, under loan agreements,
are denominated in reais and subject to variable interest of 2.17 % to
1.58% per month as of December 31, 1999 (1.76% to 3.23% per month as of
December 31, 1998).
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
1999. Since June 1996, TEVECAP S.A., has from time to time requested, and
Abril S.A. has provided, funding in excess of the aggregate maximum
principal amount. As of December 31, 1999 $137,168 was drawn down under the
facility. The credit facility is subject to a variable interest rate of
2.17% to 1.58% per month as of December 31, 1999 (1.76% to 3.23% per month
as of December 31, 1998) and will be paid after December 31, 2000.
F-17
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
6. Related-party transactions (Continued)
Additionally, Abril S.A. provided a guarantee in the course of the year for
equipment imported by TVA Sistema de Televisao S.A., TV Filme Inc. ("TV
Filme") and TVA Sul Parana Ltda. The amount outstanding pursuant to this
guarantee as of December 31, 1999 was $ 6,463. The Company and Falcon
Internacional Communications Services Inc., one of the Company's
shareholders, signed a consulting service agreement on April, 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 $ 196 per
annum.
Related-party transactions relating to programming sales and costs and
printing services costs were carried out at usual market rates and terms.
7. Other accounts receivable
As of December 31, 1999 and 1998, other accounts receivable were comprised
of :
1999 1998
------ ------
Galaxy Brasil Ltda $2,015 $ --
TVA Banda C Ltda 471 --
ESPN do Brasil Ltda 145 --
Tax recoverable 1,246 1,740
Other 1,619 2,492
------ ------
$5,496 $4,232
====== ======
F-18
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
8. 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, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 74,731 $ 106,141
Deferred charges -- 2,219
Provision for obsolescence 784 1,901
Provision for claims 8,270 8,253
Provision for decoders 673 866
Hook up fee -- 1,425
Other 1,639 4,939
--------- ---------
Total gross deferred tax asset 86,097 125,744
--------- ---------
Deferred tax liability:
Installation costs (54) (509)
--------- ---------
Total gross deferred tax liability (54) (509)
--------- ---------
Net deferred tax asset 86,043 125,235
--------- ---------
Less valuation allowance for continuing operations (86,043) (95,100)
Less valuation allowance for discontinued operations -- (30,135)
--------- ---------
Net deferred tax asset/liability $ -- $ --
========= =========
</TABLE>
F-19
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
8. Income taxes (Continued)
The valuation allowance has been established in accordance with the
requirements of SFAS No. 109, "Accounting for Income Taxes".
As of December 31, 1999, the Company and subsidiaries have unexpirable
accumulated tax losses of $ 226,455.
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>
1999 1998 1997
<S> <C> <C> <C>
Income (loss) before income taxes and minority $ 69,304 $(149,381) $ (82,333)
interest
Statutory income tax rate 37% 33% 33%
--------- --------- ---------
25,642 (49,296) (27,170)
Increase (decrease) in the income tax rate (5,661) -- --
Unallowable amortization (349) (724) (738)
Deferred charges amortization (2,750) (3,972) (4,230)
Translation loss on tax losses 34,209 4,902 3,089
Installation materials depreciation 867 (125) (107)
Equity in losses of affiliate 219 4,006 2,261
Net loss of TVA Communication Aruba 122 139 1,957
Deductible devaluation loss for Brazilian Statutory
Purposes (27,839) (11,351) (7,434)
Depreciation 9,300 4,988 4,664
Write-off of assets related to cancellations of
subscriptions and decoders 8,864 -- --
Net loss of merged companies -- 1,273 --
Other (3,326) 3,458 (527)
--------- --------- ---------
Net income tax benefit for the period 39,298 (46,702) (28,235)
Increase(decrease) in valuation allowance for
continuing operations (39,192) 27,891 20,205
Increase (decrease) in valuation allowance for
discontinued operations -- 18,835 8,030
--------- --------- ---------
$ 106 $ 24 $ --
========= ========= =========
</TABLE>
Income tax payable represents amounts owed by subsidiaries calculated on a
stand-alone basis, as Brazilian income tax law does not allow consolidated
tax returns.
F-20
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
9. Investments
Investments as of December 31, 1999 and 1998 were comprised of:
<TABLE>
<CAPTION>
Percentage
of Control 1999 1998
----------- -------- --------
<S> <C> <C> <C>
Joint ventures and equity basis investments:
ESPN do Brasil Ltda (a) $ -- $ 1,213
HBO Brazil Partners Ltda 24 (d) 2,190 731
-------- --------
$ 2,190 $ 1,944
======== ========
Liability to fund joint ventures and
Equity basis investments:
Canbras TVA Cabo Ltda 36 $ 5,934 $ 1,025
-------- --------
$ 5,934 $ 1,025
======== ========
Cost basis investments:
TV Filme, Inc. 14.7 (b) $ -- $ 6,667
Galaxy Latin America L.L.C (c) -- 42,421
Other 8 8
-------- --------
$ 8 $ 49,096
======== ========
Concessions, net:
Stations in South of Brazil $ 8,646 $ 8,646
Ype Radio e Televisao Ltda. concessions 6,363 6,363
Comercial Cabo Ltda 1,970 1,970
Other 66 65
Amortization (6,679) (4,974)
-------- --------
$ 10,366 $ 12,070
======== ========
</TABLE>
a) In November, 1999, the Company concluded the sale of ESPN do Brasil Ltda.,
generating a loss of $ 2,139, accounted for as a nonoperating income.
F-21
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
9. Investments (Continued)
b) As of December 31, 1999, TVA held a 14.7% equity interest in TV Filme. The
remaining interests were held by Warburg, Pincus Investors, L.P., which
held a 38.8% equity interest; members of the Lins family, Brazilian
nationals, who held a 16.2% equity interest; public shareholders, who held
a 28.15% equity interest; and certain individuals with a combined 2.15%
equity interest (on July 29, 1996, TV Filme completed a public offering of
2.5 million shares of its common stock in the United States at an initial
price of $10.00 per share). In August 1999, TV Filme entered into an
agreement with a committee representing a majority of the holders of TV
Filme's 12.875% Notes due 2004 pursuant to which these Noteholders will
receive (i) a $25 million cash payment, (ii) $35 million in new five-year
12% notes and (iii) 80% of the new common shares of the reorganized
company. The consummation of this agreement is dependent on necessary
government approvals, including the approval of a U.S. bankruptcy court
under Chapter 11 of the U.S. bankruptcy code, and the execution of
definitive documentation. The Company expects that, should this agreement
be approved and executed, the Company's equity interest in TV Filme will be
reduced to less than 1%. Accordingly, as of December 31, 1999 the Company
write off the amount of this investment.
c) On July 28, 1999, the Company and its subsidiary TV Communications Ltd.
(TVAICO), after approval of ANATEL - National Telecommunications Agency,
concluded the sales agreement dated May 18, 1999, related to its entire
interest in Galaxy Brasil Ltda., TVA Banda C Ltda., Galaxy Latin America
L.L.C. and Surfin Ltd. These transactions generated a gain of US$125,873
accounted for as nonoperating income. Additionally, as part of the sales
agreement of these investments, with the proceeds from these transactions,
on July 28, 1999, the subsidiary TVAICO repurchased in the foreign market
the Company' Senior Notes at a price of US$131,201. The purchase was made
at 35% less than the carrying value of the notes, which resulted in an
extraordinary gain of US$ 70,692 ( US$ 53,857 net of bank fees and
amortization of debt issuance cost). As a consequence of this event, from
the total amount of US$250,000 of Senior Notes issued, US$201,978, is kept
in the portfolio for future placement in the secondary market.
d) HBO Brazil Partners Ltda. ("HBO Brazil") is a joint venture between TVAICO,
which as of December 31, 1999 and 1998 held a 24% equity interest, and HBO
Brazil and HBO SOUTH B.V., which as of the same dates held the remaining
76%. HBO Brazil, Disney Enterprises, Inc., provides the programming to TVA
Sistema de Televisao S.A.
F-22
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
9. Investments (Continued)
The operations of HBO Brazil commenced in 1994 and condensed financial
information as of and for the years ended December 31, 1999, 1998 and 1997
are as follows:
1999 1998 1997
-------- -------- --------
Current assets $ 21,870 $ 22,951 $ 27,826
Non-current assets 2,363 2,500 2,570
Current liabilities 17,668 23,343 26,681
Revenues 64,646 63,698 48,790
Income (loss) from operations 2,827 (3,974) (2,779)
Income (loss) before income taxes 666 (4,026) (2,844)
Net Loss $ (2,987) $ (5,038) $ (3,830)
F-23
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
10. Property, plant and equipment, net
As of December 31, 1999 and 1998, property, plant and equipment were
comprised of:
<TABLE>
<CAPTION>
Annual
Depreciation December 31,
Rate ----------------------------
% 1999 1998
------------ --------- ---------
<S> <C> <C> <C>
Machinery and equipment 10 $ 58,823 $ 55,708
Decoders 10 72,294 120,434
Leasehold improvements 25 3,020 3,020
Furniture and fixtures 10 1,989 1,907
Premises 10 4,040 3,957
Vehicles 20 2,900 3,095
Software 20 2,225 2,511
Tools 10 878 878
Reception equipment 20 121,250 153,614
Cable plant 10 85,207 83,671
Building 4 3,784 3,784
--------- ---------
356,410 432,579
Trademarks, patents and others 186 186
Telephone line use rights 2,995 2,978
Other 1,120 691
Provision for decoders and machinery
and equipment -- (6,375)
Accumulated depreciation (149,020) (134,398)
Fixed assets in transit 38 2,343
--------- ---------
$ 211,729 $ 298,004
========= =========
</TABLE>
F-24
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
11. Promissory note
On February 7, 2000, the Company, through a wholly-owned subsidiary, raised
funds in foreign markets through a private placement of $25,500, 11.5%
guaranteed participation certificates ("the participation certificates")
maturing on August 6, 2001. Each participation certificate represents a
fractional undivided interest in a $25,500 promissory note ("the GLA
Promissory Note") issued by GLA in favor of the Company as partial
consideration for the sale by the Company to GLA of the Companys entire
equity interests in Galaxy Brasil and TVA Banda C. Holders of the
participation certificates, however, have no recourse to GLA for any
amounts payable under the participation certificates or the GLA Promissory
Note.
12. Loans
As of December 31, 1999 and 1998, loans were comprised of:
December 31, 1999 Short-term Long-term
---------- ---------
Senior Notes due 2004 $ 572 $ 48,022
Bank loans 7,920 9,424
-------- --------
$ 8,492 $ 57,446
======== ========
December 31, 1998 $ 41,028 $262,352
======== ========
On November 26, 1996, Tevecap S.A. raised funds in foreign markets through
a private placement of Senior Notes amounting to $250,000. These Senior
Notes mature on November 26, 2004 and are guaranteed by certain of Tevecap
S.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.
At the time the Senior Notes were repurchased the Company obtained a
consent from the remaining noteholders to eliminate the majority of the
restrictive covenants in the Senior Notes agreements.
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, 1999 amounted to $ 5,404
including the write-off of the costs related to the repurchased notes.
F-25
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
12. Loans (Continued)
Bank loans in local currency are secured by promissory notes and chattel
mortgages; interest thereon is at 8.36% per year.
Annual maturities of long-term debt, for the four years subsequent to
December 31, 1999 are as follows:
2001 $ 4,622
2002 4,802
2003 --
2004 48,022
-------
Total $57,446
=======
13. Other accounts payable
As of December 31, 1999 and 1998, other accounts payable were comprised of:
1999 1998
------ ------
Accounts payable to related companies $ 318 $ 425
Advertising 85 1,619
Importation expenses payable 116 45
Other 2,118 3,729
------ ------
$2,637 $5,818
====== ======
F-26
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
14. Taxes payable other than income taxes
As of December 31, 1999 and 1998, taxes payable other than income taxes
were comprised of :
1999 1998
-------- --------
COFINS $ 11,082 $ 11,337
ICMS 6,654 2,532
PIS 3,193 41
Other 284 324
-------- --------
21,213 14,234
Liabilities assumed from Galaxy Brasil Ltda. and
TVA Banda C Ltda
ICMS 6,437 --
PIS 1,097 --
-------- --------
7,534 --
-------- --------
28,747 14,234
======== ========
( - ) current liabilities (5,969) (13,229)
-------- --------
$ 22,778 $ 1,005
======== ========
On April 5, 2000, the Company opted for the REFIS (Tax Recovery Program),
established by Decree No. 3.342/00 of January 25, 2000, later changed into Law
No. 9.964/00 of April 10, 2000.
With the option for the REFIS, the Company will be able to finance its taxes
payable to the Federal Government for five years. Taxes payable are restated for
taxes incurred through February 29, 2000. The Company has 60 days, as from the
option formalization date, to present the calculation of the the amounts due for
the taxes to be paid in installments. The restatement of the tax debts included
in the REFIS is made based on the TJLP (Brazilian long-term interest rate).
The classification of such taxes between current and long-term liabilities take
into account the option for the REFIS mentioned above.
F-27
<PAGE>
TEVECAP S.A
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
15. Other nonoperating, income (expenses), net
As of December 31, 1999 and 1998, nonoperating were comprised of :
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Extraordinary losses on transmission rights $ -- $ (2,690) $ --
Capital gain (loss):
on sale of DTH operation 125,873 -- --
on sale of ESPN do Brasil Ltda (2,139) -- --
on TVA Communications Aruba N.V. referring to
affiliate HBO Brazil Partners Ltda -- (1,550) --
Write-off of investment in TV Filme Inc (6,668) -- --
Write-off of assets related to cancellations of
subscriptions (18,407) -- --
Write-off of decoders - Digisat sale (31,529) -- --
Other (2,248) 7 927
--------- --------- ---------
$ 64,882 $ (4,233) $ 927
========= ========= =========
</TABLE>
F-28
<PAGE>
TEVECAP S.A
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
16. Leased assets and commitments
The Company has rented its office space through the year 2004. As of
December 31, 1999, future minimum rental payments applicable to operating
leases in respect of this space aggregate approximately $ 9,666, as
follows:
2000 $ 3,026
2001 1,660
2002 1,660
2003 1,660
2004 1,660
--------
Total $ 9,666
========
As of December 31, 1999, the Company had contractual commitments with
Empresa Brasileira de Telecomunicacoes ("Embratel") for the use of a
transponder until the year 2003. Based on the contract provisions, these
commitments are currently estimated to aggregate approximately $18,031 as
follows:
2000 5,277
2001 5,277
2002 5,277
2003 2,200
--------
Total $ 18,031
========
F-29
<PAGE>
TEVECAP S.A
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
17. Common stock
Common stock as of December 31, 1999 and 1998 was comprised of:
<TABLE>
<CAPTION>
1999 1998
------------------------------- ---------------------------
US$ Shares US$ Shares
------------ --------------- ---------- -------------
<S> <C> <C> <C> <C>
Redeemable common stock
(including accretion) $ 178,002 85,637,526 $ 178,002 85,637,526
------------ --------------- ---------- -------------
Paid-in capital $ 242,342 140,700,759 $ 242,342 140,700,759
============ =============== ========== =============
</TABLE>
a) Common stock subject to redemption
As of December 31, 1999 and 1998, 37.7% 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, 1999 and 1998, 12.3% of these shares are also
subject to a 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 its 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.
F-30
<PAGE>
TEVECAP S.A
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
17. Common stock (Continued)
The Company's management believes that the probability of occurrence of the
triggering events, which would permit any of its shareholders to exercise
their Event Put, is remote.
However, a company that is public in the United States, and which therefore
is required to register its securities with the United States Securities
and Exchange Commission (the "SEC"), is required for accounting purposes to
present redeemable equity securities separately from shareholders' equity,
if redemption of such securities is beyond the control of the registrant.
That presentation is required even if the likelihood of redemption is
remote.
The Common Shares subject to the Time Put are redeemable at fair value as
determined by appraisal or by a multiple of the Company's most recent
quarterly earnings. The Company has recorded a reversal on these shares to
fair market value of $11,032 with respect to the year ended December 31,
1998 and the market value was maintained for December 31, 1999.
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.
18. Litigation contingencies
Certain claims and lawsuits arising in the ordinary course of business have
been filed or are pending against the Company, which were not recognized in
the 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.
F-31
<PAGE>
TEVECAP S.A
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
19. Pension plan
In April 1996, the Company became a co-sponsor of the private pension
entity named Abrilprev Sociedade de Previdencia Privada ("Abrilprev"), the
primary objective of which is to grant employees benefits other than those
provided by Social Security. The plan is optional to all employees of the
sponsoring entities. Abrilprev operates as a Defined Contribution Plan.
Company contributions are made based on a fixed percentage applied to the
payroll of the sponsoring entities based on actuarial calculations.
Contribution expenses amounted to $201 for the year ended December 31, 1999
($511 in 1998 and $1,070 in 1997).
20. Abril Health Care Plan
In February 1996, the Abril Health Care Plan, Associacao Abril de
Beneficios (the "Health Care Plan"), was created to provide health care to
Abril 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 1999, contributions made by Tevecap S.A. and certain affiliates of
Associacao Abril de Beneficios amounted to $933 ($2,046 in 1998 and $1,988
in 1997).
21. Supplementary information - valuation and qualifying accounts and reserves
<TABLE>
<CAPTION>
Provision
Provision For Provision Deferred
For Decoders For Taxation Provision
Doubtful Provision for And Exhibition Valuation for
Accounts Obsolescence Equipment Expiration Allowance Claims
-------- ------------ --------- ---------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance as of December 31, 1996 $ 4,433 $ 2,250 $ 1,371 $ 1,162 $ 50,274 $ 5,045
Additions charged to expense 3,334 870 3,074 -- 28,235 --
Reduction -- -- -- (1,162) -- (241)
--------- --------- --------- --------- --------- ---------
Balance as of December 31, 1997 $ 7,767 $ 3,120 $ 4,445 $ -- $ 78,509 $ 4,804
Additions charged to expense 3,407 10 1,930 -- 46,726 1,617
--------- --------- --------- --------- --------- ---------
Balance as of December 31, 1998 $ 11,174 $ 3,130 $ 6,375 $ -- $ 125,235 $ 6,421
Additions charged to expense 196 605 -- -- -- --
Reduction -- -- (6,375) -- (39,192) (4,004)
--------- --------- --------- --------- --------- ---------
Balance as of December 31,1999 $ 11,370 $ 3,735 $ -- $ -- $ 86,043 $ 2,417
========= ========= ========= ========= ========= =========
</TABLE>
F-32
<PAGE>
TEVECAP S.A
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
22. Recent accounting pronouncements
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The standard requires that all
derivative instruments (1) be recognized as assets or liabilities and (2)
be adjusted to fair value each period. SFAS 133 is effective for fiscal
year beginning after June 15, 2000. As of December 31, 1999 the Company has
no operations with hedging activities.
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, "Views on Selected Revenue
Recognition Issues" ("SAB 101"), which sets forth the staff's views in
applying generally accepted accounting principles to selected revenue
recognition issues. SAB 101 is effective for the second quarter of 2000.
The Company will assess the effect of this new standard during 2000 fiscal
year. The Company does not believe there will be any significant effect on
its financial statements.
F-33
<PAGE>
TEVECAP S.A
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
23. Segments of Business
Tevecap's corporate structure was completed by dividing the Company into
two distinct operating divisions:
a. Distribution which includes Cable and MMDS operations;
b. Programming which concentrates Tevecap's programming interest at TVA
Channels Ltda.;
December 31, 1999
<TABLE>
<CAPTION>
MMDS
& Cable Programming Others TOTAL
<S> <C> <C> <C> <C>
Net Revenue 98,879 4,409 128 103,416
Operating Expenses 58,304 6,482 7,047 71,833
Depreciation and Amortization 55,425 1,313 141 56,879
-------- -------- -------- --------
Operating Loss (14,850) (3,386) (7,060) (25,296)
Interest expense, net (5,871) 237 (13,267) (18,901)
Equity income (losses) affiliates (4,909) (329) -- (5,238)
Other Nonoperating (59,190) (10) 124,082 64,882
-------- -------- -------- --------
Income (loss) before Income taxes
And minority interest (84,820) (3,488) 103,755 15,447
Income Tax (106) -- -- (106)
Minority interest 678 -- -- 678
-------- -------- -------- --------
Net Income (loss) before extraordinary
item (84,248) (3,488) 103,755 16,019
Extraordinary item - gain on debt
repurchase -- -- 53,857 53,857
-------- -------- -------- --------
Net income (loss) (84,248) (3,488) 157,612 69,876
======== ======== ======== ========
Capital Expenditures 24,269 49 1,609 25,927
Total assets 246,843 9,398 33,707 289,948
</TABLE>
F-34
<PAGE>
TEVECAP S.A
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
23. Segments of Business (Continued)
<TABLE>
<CAPTION>
December 31, 1998
Total
MMDS Continuing Discontinued
& Cable Programming Others Operations Operations(DTH) TOTAL
<S> <C> <C> <C> <C> <C> <C>
Net Revenue 134,004 30,071 573 164,648 176,259 340,907
Operating Expenses 93,348 33,500 24,965 151,813 162,612 314,425
Depreciation and
Amortization 43,063 2,584 2,460 48,107 39,185 87,292
-------- -------- -------- -------- -------- --------
Operating Loss (2,407) (6,013) (26,852) (35,272) (25,538) (60,810)
Interest expense, net (13,926) (96) (30,942) (44,964) (27,652) (72,616)
Equity income (losses) (1,119) (11,020) -- (12,139) -- (12,139)
affiliates
Other Nonoperating 1,889 (1,550) (4,572) (4,233) 417 (3,816)
-------- -------- -------- -------- -------- --------
Loss before Income Taxes
And minority interest (15,563) (18,679) (62,366) (96,608) (52,773) (149,381)
Income Tax (24) -- -- (24) -- (24)
Minority interest 1,338 -- -- 1,338 -- 1,338
-------- -------- -------- -------- -------- --------
Net Loss (14,249) (18,679) (62,366) (95,294) (52,773) (148,067)
======== ======== ======== ======== ======== ========
Capital Expenditures 68,906 1,414 11,072 81,392 61,967 143,359
Total assets 353,326 12,351 82,250 447,927 217,654 665,581
<CAPTION>
December 31, 1997
Total
MMDS Continuing Discontinued
& Cable Programming Others Operations Operations (DTH) TOTAL
<S> <C> <C> <C> <C> <C> <C>
Net Revenue 147,919 35,260 553 183,732 144,610 328,342
Operating Expenses 111,491 41,788 18,725 172,004 130,427 302,431
Depreciation and
Amortization 32,737 1,886 838 35,461 20,920 56,381
-------- -------- -------- -------- -------- --------
Operating Income (Loss) 3,691 (8,414) (19,010) (23,733) (6,737) (30,470)
Interest expense, net (7,655) (23,583) (31,238) (14,686) (45,924)
Equity income (losses) (1,543) (5,308) -- (6,851) -- (6,851)
affiliates
Other Nonoperating (4,475) 5,402 927 (15) 912
-------- -------- -------- -------- -------- --------
Loss before Income Taxes (9,982) (13,722) (37,191) (60,895) (21,438) (82,333)
And minority interest
Income Tax -- -- -- -- -- --
Minority interest 916 -- -- 916 -- 916
-------- -------- -------- -------- -------- --------
Net Loss (9,066) (13,722) (37,191) (59,979) (21,438) (81,417)
======== ======== ======== ======== ======== ========
Capital Expenditures 106,137 3,166 9,606 118,909 128,958 247,867
Total assets 350,545 20,268 71,198 442,011 170,777 612,788
</TABLE>
F-35
<PAGE>
TEVECAP S.A
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
24. Financial information for subsidiary guarantors and non-guarantor
subsidiaries
Tevecap S.A. conducts a significant portion of its business through
subsidiaries. The $250,000 12 5/8% Senior Notes issued to institutional
buyers in November 1996 are jointly and severally, irrevocably and fully
and unconditionally guaranteed on a senior basis by all of Tevecap's direct
and indirect subsidiaries except for TVA Communications Aruba N.A, TVA
Channels Ltda., TVA Finco Ltda., Ype Radio e Televisao Ltda. and TVA TCG
Sistema de Televisao Porto Alegre.
Presented below is condensed consolidating 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 Distribuidora S.A.
- TVA Programadora Ltda.
- TVA PAR S.A.
- TVA Communications Ltd.
- Comercial Cabo TV Sao Paulo Ltda.
b) Majority-Owned Guarantor Subsidiaries
- TVA Sistema de Televisao S.A.
- TVA Sul Parana Ltda.
- CCS Camboriu Cable System de Telecomunicacoes Ltda.
F-36
<PAGE>
TEVECAP S.A
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
24. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (Continued)
c) Non-Guarantor Subsidiaries
- TVA Communications Aruba N.A.
- TVA TCG Sistema de Televisao de Porto Alegre S.A.
- Rede Ajato Ltda.
- TVA Channels Ltda.
- Ype Radio e Televisao Ltda.
Separate financial statements for TVA Sistema de Televisao S.A. have been
presented as of December 31, 1999 and 1998 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, 1999.
During 1998, TVA Sul Participacoes S.A, TVA Sul Foz do Iguacu Ltda. and TVA
Sul Santa Catarina Ltda. were merged into TVA Sul Parana Ltda.
Separate financial statements for TVA Sul Parana Ltda have been presented
as of December 31, 1999 and 1998, and the related statements of operations,
changes in shareholder's equity and cash flows for each of three years in
the period ended December 31, 1999.
Separate financial statements for CCS Camboriu Cable System
Telecomunicacoes Ltda. as of December 31, 1999 and 1998, and the related
statements of operations, changes in shareholder's equity and cash flows
for each of three years in the period ended December 31, 1999.
F-37
<PAGE>
TEVECAP S.A
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
24. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (Continued)
<TABLE>
<CAPTION>
Consolidated Balance Sheets
as of December 31, 1999
Wholly- Majority-
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 $ 11 $ 10 $ 1,781 $ 144 $ -- $ 1,946
Accounts receivable, net 7,620 492 (550) 7,562
Inventories, net 10,313 10,313
Film exhibition rights 1,278 1,278
Prepaid and other assets 1,134 2,465 13 3,612
Accounts receivable from
related parties 676 6 2,866 215 (3,608) 155
Judicial deposits 832 832
Other accounts receivable 2,537 15,219 2,812 87 (15,159) 5,496
----------- ----------- ----------- ----------- ----------- -----------
Total current assets 4,358 15,235 28,689 2,229 (19,317) 31,194
----------- ----------- ----------- ----------- ----------- -----------
Property, plant and equipment, 10 12 208,825 6,640 (3,758) 211,729
net
Investments
Equity basis 115,556 7,813 2,190 (123,369) 2,190
Cost basis investments 8 8
Concessions, net 4,618 5,748 10,366
Loans to related companies 529,964 484,522 (1,008,513) 5,973
Debt Issuance costs, net 859 859
Dividends receivable 76,426 (76,426)
Promissory note 25,500 25,500
Other 1 201,978 2,128 (201,978) 2,129
----------- ----------- ----------- ----------- ----------- -----------
Total assets $ 752,674 $ 714,178 $ 245,390 $ 11,067 $(1,433,361) $ 289,948
=========== =========== =========== =========== =========== ===========
</TABLE>
F-38
<PAGE>
TEVECAP S.A
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
24. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (Continued)
Consolidated Balance Sheets
as of December 31, 1999
<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>
Loans 15,730 7,920 (15,158) 8,492
Film suppliers -- 7,143 1,568 8,711
Other suppliers 807 1 7,724 539 (409) 8,662
Taxes payable other than income taxes 1,582 4,334 53 5,969
Accrued payroll and related
liabilities -- 1,868 521 2,389
Advance payments received from
subscribers -- 933 5 938
Other accounts payable 142 37 3,296 2,913 (3,751) 2,637
---------- ---------- ---------- ---------- ---------- ----------
Total current liabilities 18,261 38 33,218 5,599 (19,318) 37,798
---------- ---------- ---------- ---------- ---------- ----------
Loans 250,000 9,424 (201,978) 57,446
Loans f4om related companies 135,491 507,217 492,334 10,639 (1,008,513) 137,168
Taxes payable other than income taxes 6,299 16,221 258 22,778
Provision for claims 1,813 604 2,417
Dividends payable 76,426 (76,426)
Liability to fund equity investee 302,242 316,130 (612,438) 5,934
---------- ---------- ---------- ---------- ---------- ----------
Total long-term liabilities 694,032 899,773 519,792 11,501 (1,899,355) 225,743
---------- ---------- ---------- ---------- ---------- ----------
Minority interest 2,786 2,786
Redeemable common stock, no par value 178,002 178,002
Shareholders' deficit
Paid-in capital 241,629 87,247 55,040 8,714 (150,288) 242,342
Accumulated deficit (379,250) (272,880) (365,446) (14,747) 635,600 (396,723)
---------- ---------- ---------- ---------- ---------- ----------
Total shareholders' deficit (137,621) (185,633) (310,406) (6,033) 485,312 (154,381)
---------- ---------- ---------- ---------- ---------- ----------
Total liabilities and
shareholders'
Deficit 752,674 714,178 245,390 11,067 (1,433,361) 289,948
========== ========== ========== ========== ========== ==========
</TABLE>
F-39
<PAGE>
TEVECAP S.A
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
24. Financial information for subsidiary guarantors and non-guarantor
Subsidiaries (Continued)
Consolidated Statements of Operations
for the year ended December 31, 1999
<TABLE>
<CAPTION>
Wholly- Majority-
owned Owned Non-
Parent guarantor Guarantor Guarantor
Description Company Subsidiaries Subsidiaries Eliminations Consolidated
------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gross revenues
Monthly subscriptions 93,989 66 94,055
Installation 1,872 28 1,900
Advertising 1,361 236 1,597
Indirect programming 857 2,865 3,722
Other 13,191 1,733 14,924
Taxes on revenue (12,381) (401) (12,782)
------------ ------------ ----------- ------------- ----------- -------------
Net revenue 98,889 4,527 103,416
------------ ------------ ----------- ------------- ----------- -------------
Direct operating expenses
Payroll and benefits 5,036 2,821 7,857
Programming 22,907 1,259 24,166
Transponder lease cost 1,449 526 1,975
Technical assistance 1,311 1,311
Vehicle rentals 100 100
TVA Magazine 2,162 320 2,482
Pole rental 2,935 2,935
Other costs 1,754 1,940 1,118 4,812
------------ ------------ ----------- ------------- ----------- -------------
1,754 37,840 6044 45,638
------------ ------------ ----------- ------------- ----------- -------------
Selling, general and administrative
expenses
Payroll and benefits 10,611 814 11,425
Advertising and promotion 2,487 1,158 3,645
Rent 1,958 47 2,005
Other administrative expenses 3,430 4,106 20 7,556
Other general expenses 714 245 959
------------ ------------ ----------- ------------- ----------- -------------
3,430 19,876 2,284 25,590
------------ ------------ ----------- ------------- ----------- -------------
Provision for equipment, inventory
and Obsolescence 605 605
Depreciation 54,215 1,451 (492) 55,174
Amortization 840 865 1,705
------------ ------------ ----------- ------------- ----------- -------------
Operating loss (5,184) (840) (14,512) 492 (25,296)
(5,252)
------------ ------------ ----------- ------------- ----------- -------------
Interest income 3,188 26,724 10,692 165 (34,873) 5,896
Interest expense (50,687) (1,201) (5,215) (24) 34,873 (22,254)
Translation gain (loss) (80) (190) (2,399) 126 (2,543)
Equity in (losses) of affiliates (9,123) (329) 83,212 (5,238)
(78,998)
Other nonoperating (expenses) income, 47,574 69,856 (52,538) (10) 64,882
net
Dividends 76,426 (76,426)
------------ ------------ ----------- ------------- ----------- -------------
Income (loss) before income
Taxes and minority interest 62,114 (61,075) (63,972) (5,324) 83,704 15,447
Income taxes (106) (106)
------------ ------------ ----------- ------------- ----------- -------------
Income (loss) before minority
Interest 62,114 (61,075) (64,078) (5,324) 83,704 15,341
Minority interest 678 678
------------ ------------ ----------- ------------- ----------- -------------
Income (loss) from continuing
operations before
Extraordinary item 62,114 (61,075) (63,400) (5,324) 83,704 16,019
------------ ------------ ----------- ------------- ----------- -------------
Extraordinary item - gain on debt
repurchase 53,857 53,857
------------ ------------ ----------- ------------- ----------- -------------
Net income (loss) 62,114 (7,218) (63,400) (5,324) 83,704 69,876
============ ============ =========== ============= =========== =============
</TABLE>
F-40
<PAGE>
TEVECAP S.A
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
24. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (Continued)
Consolidated Statement's of Cash Flows
for the year ended December 31, 1999
<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 62,114 (7,218) (63,400) (5,324) 83,704 69,876
Adjustments to reconcile net loss to net cash
(used in) provided by operating
activities:
Depreciation 54,215 1,451 (492) 55,174
Amortization 840 865 1,705
Amortization of debt issuance cost 5,404 5,404
Provision for doubtful accounts 162 34 196
Provision for equipment and inventory
obsolescence 605 605
Provision for claims (3,751) (253) (4,004)
Minority interest (678) (678)
Disposal and write-off of property, plant
and equipment 57,028 57,028
Gain on sale of assets (68,189) (65,949) (134,138)
Write-off of investments in TV Filme Inc. 6,668 6,668
Buy back gain of Senior Notes (70,692) (70,692)
Equity in losses of affiliates 9,123 78,998 329 (83,212) 5,238
Changes in operating assets and liabilities:
Film exhibition rights 290 290
Accounts receivable 10,207 2,690 24 12,921
Prepaid and other assets 1,171 133 260 1,564
Promissory notes (25,500) (25,500)
Other accounts receivable (247) (61) (2,533) (142) 1,785 (1,198)
Accrued interest 46,552 (25,506) (6,820) 109 (1) 14,334
Inventories 3,982 3,982
Suppliers 22 1 (36,551) (1,280) 11,898 (25,910)
Taxes payable other than income taxes 7,877 6,584 52 14,513
Accrued payroll and related liabilities (1,251) (317) (1,568)
Advances received from subscribers (1,066) 2 (1,064)
Other accounts payable (33) 9 (2,443) 722 (1,436) (3,181)
-------- -------- -------- -------- -------- --------
Net cash (used in) provided by operating
activities 38,294 (82,910) 15,288 (1,377) 12,270 (18,435)
-------- -------- -------- -------- -------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment (10) (24,260) (1,657) (25,927)
Loans to related companies (81,214) (67,107) (117) 148,438
Cash received on sale of assets 47,542 130,000 177,542
Purchase of concessions (1) (1)
Investments in equity and cost investments (840) (1,788) 840 (1,788)
-------- -------- -------- -------- -------- --------
Net cash used in investing activities (34,522) 62,893 (24,378) (3,445) 149,278 149,826
-------- -------- -------- -------- -------- --------
Cash flows from financing activities:
Bank loans 6,661 6,661
Capital contributions 840 (840)
Dividends payable (76,426) 76,426
Repayments of loans from shareholders (11,430) (23,387) (18,571) (3,971) 45,929 (11,430)
Loans from shareholders 63,634 76,711 63,634 6,306 (146,651) 63,695
Loans from related companies 1,788 (1,788)
Repayments of loans to related companies 39,172 20,988 218 (58,198) 2,180
Repayments of loans from banks (18,811) (131,286) (41,851) (191,948)
-------- -------- -------- -------- -------- --------
Net cash provided by financing activities (3,800) 19,452 10,091 4,963 (161,548) (130,842)
-------- -------- -------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents (28) (565) 1,001 141 549
Cash and cash equivalents at beginning of
the period 39 575 780 3 1,397
-------- -------- -------- -------- -------- --------
Cash and cash equivalents at end of the
period 11 10 1,781 144 1,946
======== ======== ======== ======== ======== ========
</TABLE>
F-41
<PAGE>
TEVECAP S.A
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
24. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (Continued)
Consolidated Balance Sheets
as of December 31, 1998
<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>
Current assets
Cash and cash equivalents $ 39 $ 575 $ 780 $ 3 $ $ 1,397
Accounts receivable, net 17,989 3,216 (526) 20,679
Inventories, net 14,900 14,900
Film exhibition rights 1,568 1,568
Prepaid and other assets 2,305 2,598 273 5,176
Accounts receivable from
related parties 884 7 1,922 64 (1,825) 1,052
Other accounts receivable 2,005 2,131 96 4,232
--------- --------- --------- --------- --------- ---------
Total current assets 5,233 582 40,320 5,220 (2,351) 49,004
--------- --------- --------- --------- --------- ---------
Property, plant and equipment, net 12 295,808 6,435 (4,251) 298,004
Investments in and advances to
discontinued operations
Investments
Equity basis 14,392 16,956 731 (30,135) 1,944
Cost basis investments 49,088 8 49,096
Concessions, net 5,458 6,612 12,070
Loans to related companies 505,944 32,512 158 (509,198) 29,416
Debt Issuance costs, net 6,263 6,263
Other 78 2,052 2,130
--------- --------- --------- --------- --------- ---------
Total assets $ 531,910 $ 104,608 $ 344,950 $ 12,394 $(545,935) $ 447,927
========= ========= ========= ========= ========= =========
</TABLE>
F-42
<PAGE>
TEVECAP S.A
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Continued)
(in thousands of U.S. dollars)
24. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (Continued)
Consolidated Balance Sheets
as of December 31, 1998
<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>
Loans 2,981 38,047 41,028
Obligations under capital leases
Film suppliers 27,071 2,803 (12,306) 17,568
Other suppliers 784 24,347 584 25,715
Deficit in discontinued operations 21,858 21,858
Taxes payable other than income taxes 4 12,966 259 13,229
Accrued payroll and related liabilities 3,119 838 3,957
Advance payments received from
subscribers 1,999 3 2,002
Other accounts payable 174 28 5,739 2,203 (2,326) 5,818
---------- ----------- ------------ ------------ ------------ ------------
Total current liabilities 3,943 21,886 113,288 6,690 (14,632) 131,175
---------- ----------- ------------ ------------ ------------ ------------
Loans 250,000 12,352 262,352
Obligations under capital leases
Loans from affiliated companies 86,256 36,722 456,283 6,407 (496,928) 88,740
Taxes payable other than income taxes 1,005 1,005
Provision for claims 5,564 857 6,421
Liability to fund equity investee 213,444 246,265 (458,684) 1,025
---------- ----------- ------------ ------------ ------------ ------------
Total long-term liabilities 549,700 282,987 475,204 7,264 (955,612) 359,543
---------- ----------- ------------ ------------ ------------ ------------
Minority interest 3,464 3,464
Redeemable common stock, no
par value 178,002 178,002
Shareholders' deficit
Paid-in capital 241,629 114,527 54,327 7,874 (176,015) 242,342
Accumulated deficit (441,364) (314,792) (301,333) (9,434) 600,324 (466,599)
-------- ---------- ---------- ---------- ---------- ----------
Total shareholders' deficit (199,735) (200,265) (247,006) (1,560) 424,309 (224,257)
---------- ----------- ------------ ------------ ------------ ------------
Total liabilities and
shareholders'
Deficit 531,910 104,608 344,950 12,394 (545,935) 447,927
========== =========== ============ ============ ============ ============
</TABLE>
F-43
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Concluded)
(in thousands of U.S. dollars)
24. Financial information for subsidiary guarantors and non-guarantor
Subsidiaries (Continued)
Consolidated Statements of Operations
for the year ended December 31, 1998
<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 136,278 136,278
Installation 2,886 2,886
Advertising 2,649 895 3,544
Indirect programming 11,460 8,120 19,580
Other 8,669 6,224 14,893
Revenue taxes (11,540) (993) (12,533)
-------- -------- ------- ------ ------- --------
Net revenue 150,402 14,246 164,648
-------- -------- ------- ------ ------- --------
Direct operating expenses
Payroll and benefits 11,669 4,299 15,968
Programming 49,531 4,751 54,282
Transponder lease cost 1,157 1,179 2,336
Technical assistance 1,212 1,212
Vehicle rentals 178 178
TVA Magazine 5,241 1,917 7,158
Pole rental 3,247 3,247
Other costs 7,186 1,789 8,975
-------- -------- ------- ------ ------- --------
79,421 13,935 93,356
-------- -------- ------- ------ ------- --------
Selling, general and administrative expenses
Payroll and benefits 23,334 1,515 24,849
Advertising and promotion 7,829 1,506 9,335
Rent 3,589 387 3,976
Other administrative expenses 2,050 18 13,762 270 16,100
Other general expenses 2,085 172 2,257
-------- -------- ------- ------ ------- --------
2,050 18 50,599 3,850 56,517
-------- -------- ------- ------ ------- --------
Provision for equipment, inventory and
Obsolescence 1,940 1,940
Depreciation 45,541 889 (28) 46,402
Amortization 840 865 1,705
-------- -------- ------- ------ ------- --------
Operating loss from continuing operations (2,050) (858) (27,964) (4,428) 28 (35,272)
-------- -------- ------- ------ ------- --------
Interest income 14,635 3,029 6,291 46 (17,283) 6,718
Interest expense (45,031) (371) (23,140) (408) 17,285 (51,665)
Translation gain (loss) 101 (46) (437) 365 (17)
Equity in (losses) of affiliates (323,730) (55,138) (2,082) 368,811 (12,139)
Other nonoperating (expenses) income, net 206,070 (208,438) (354) (1,511) (4,233)
-------- -------- ------- ------ ------- --------
Income (loss) from continuing operations before
Income taxes and minority interest (150,005) (261,822) (45,604) (8,018) 368,841 (96,608)
Income taxes (24) (24)
-------- -------- ------- ------ ------- --------
Income (loss) from continuing operations before
Minority interest (150,005) (261,822) (45,628) (8,018) 368,841 (96,632)
Minority interest 1,338 1,338
-------- -------- ------- ------ ------- --------
Income (loss) from continuing operations (150,005) (261,822) (44,290) (8,018) 368,841 (95,294)
Loss from discontinued operations (52,970) 197 (52,773)
-------- -------- ------- ------ ------- --------
Net income (loss) (150,005) (314,792) (44,093) (8,018) 368,841 (148,067)
======== ======== ======= ====== ======= ========
</TABLE>
F-44
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Concluded)
(in thousands of U.S. dollars)
24. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (Continued)
Consolidated Statement's of Cash Flows
for the year ended December 31, 1998
<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 (150,005) (314,792) (44,093) (8,018) 368,841 (148,067)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation 45,541 889 (28) 46,402
Amortization 840 865 1,705
Amortization of debt issuance cost 1,550 1,550
Provision for doubtful accounts 3,407 3,407
Provision for equipment and inventory obsolescence 1,940 1,940
Provision for claims 760 857 1,617
Minority interest (1,338) (1,338)
Disposal and write-off of property, plant and equipment 1,574 1,574
Gain on issuance of shares by equity investees
Discontinued operations 52,970 (197) 52,773
Equity in losses (earnings) of affiliates 323,730 55,138 2,082 (368,811) 12,139
Changes in operating assets and liabilities:
Film exhibition rights 1,291 (1,568) (277)
Accounts receivable 3,955 (3,216) (686) 53
Prepaid and other assets (985) 9,915 (273) 8,657
Other accounts receivable (209) (1) 1,951 (138) 325 1,928
Accrued interest 257 6 (5) 258
Inventories 8,680 8,680
Suppliers 784 (4,080) 3,387 1,840 1,931
Taxes payable other than income taxes 4,083 259 4,342
Accrued payroll and related liabilities (2,220) 838 (1,382)
Advances received from subscribers 1,965 3 1,968
Other accounts payable (82) 28 2,124 (1,293) 2,038 2,815
-------- -------- -------- -------- -------- --------
Net cash (used in) provided by operating activities 175,040 (205,817) 36,123 (6,185) 3,514 2,675
-------- -------- -------- -------- -------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment (12) (74,101) (7,283) 4 (81,392)
Discontinued Operations 14,529 (31,112) (428) (17,011)
Loans to related companies (136,956) (12,257) (158) 105,300 (44,071)
Investments in equity and cost investments (254,959) 227,584 4 7,281 8 (20,082)
-------- -------- -------- -------- -------- --------
Net cash used in investing activities (377,386) 184,203 (74,683) (2) 105,312 (162,556)
-------- -------- -------- -------- -------- --------
Cash flows from financing activities:
Bank loans 14,549 14,549
Principal payments on capital leases
Capital contributions 99,847 99,847
Repayments of loans from shareholders
Loans from shareholders
Loans from related companies 128,573 21,204 79,671 6,641 (110,005) 126,084
Repayments of loans to related companies 68,056 820 7,097 (44,544) 31,429
Repayments of loans from related companies (94,111) (256) (34,599) (453) 45,723 (83,696)
Repayments of loans from banks (27,924) (27,924)
Minority interest
-------- -------- -------- -------- -------- --------
Net cash provided by financing activities 202,365 21,768 38,794 6,188 (108,826) 160,289
-------- -------- -------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents 19 154 234 1 -- 408
Cash and cash equivalents at beginning of the period 20 421 546 2 -- 989
-------- -------- -------- -------- -------- --------
Cash and cash equivalents at end of the period 39 575 780 3 -- 1,397
======== ======== ======== ======== ======== ========
</TABLE>
F-45
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Concluded)
(in thousands of U.S. dollars)
24. Financial information for subsidiary guarantors and non-guarantor
Subsidiaries (Continued)
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 142,700 142,700
Installation 12,941 12,941
Advertising 4,947 4,947
Indirect programming 22,810 22,810
Other 13,649 13,649
Revenue taxes (13,315) (13,315)
-------- -------- -------- -------- -------- --------
Net revenue 183,732 183,732
-------- -------- -------- -------- -------- --------
Direct operating expenses
Payroll and benefits 22,593 22,593
Programming 56,394 56,394
Transponder lease cost 6,312 6,312
Technical assistance 1,832 1,832
Vehicle rentals 1,075 1,075
TVA Magazine 5,827 5,827
Pole rental 2,157 2,157
Other costs 7,026 7,026
-------- -------- -------- -------- -------- --------
103,216 103,216
-------- -------- -------- -------- -------- --------
Selling, general and administrative expenses
Payroll and benefits 24,432 24,432
Advertising and promotion 18,367 18,367
Rent 3,721 3,721
Other administrative expenses 2,857 6 13,544 16,407
Other general expenses 1,917 1,917
-------- -------- -------- -------- -------- --------
2,857 6 61,981 64,844
-------- -------- -------- -------- -------- --------
Provision for equipment, inventory and
Obsolescence 3,944 3,944
Depreciation 33,704 33,704
Amortization 840 917 1,757
-------- -------- -------- -------- -------- --------
Operating loss from continuing operations (3,697) (6) (20,030) (23,733)
-------- -------- -------- -------- -------- --------
Interest income 44,226 773 8,350 (39,144) 14,205
Interest expense (42,888) (365) (40,325) (107) 39,144 (44,541)
Translation gain (loss) (204) 290 (950) (38) (902)
Equity in (losses) of affiliates (54,668) 127 3,764 550 43,376 (6,851)
Other nonoperating (expenses) income, net (3,207) 2,822 (87) 1,399 927
-------- -------- -------- -------- -------- --------
Loss from continuing operations before income
taxes and minority interest Income taxes (60,438) 3,641 (49,278) 1,804 43,376 (60,895)
-------- -------- -------- -------- -------- --------
Loss from continuing operations before minority
Interest (60,438) 3,641 (49,278) 1,804 43,376 (60,895)
Minority interest 916 916
-------- -------- -------- -------- -------- --------
Loss from continuing operations (60,438) 3,641 (48,362) 1,804 43,376 (59,979)
Income (loss) from discontinued operations (21,438) (21,438)
-------- -------- -------- -------- -------- --------
Net income (loss) (81,876) 3,641 (48,362) 1,804 43,376 (81,417)
======== ======== ======== ======== ======== ========
</TABLE>
F-46
<PAGE>
TEVECAP S.A.
AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, (Concluded)
(in thousands of U.S. dollars)
24. Financial information for subsidiary guarantors and non-guarantor
subsidiaries (Continued)
Consolidated Statement's of Cash Flows
for the year ended December 31, 1997
<TABLE>
<CAPTION>
Wholly- Majority- Non-
Parent owned owned Guarantor Elimina- Consolid-
Company subsidiaries subsidiaries Subsidiaries tions ated
--------- ------------ ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss (81,876) 3,641 (48,362) 1,804 43,376 (81,417)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation 33,704 33,704
Amortization 840 917 1,757
Amortization of debt issuance cost 1,332 1,332
Provision for doubtful accounts 3,334 3,334
Provision for equipment and inventory obsolescence 3,944 3,944
Provision for claims (6) 617 (241)
Minority interest 3,024 3,024
Disposal and write-off of property, plant and equipment 338 338
Discontinued operations 21,438 21,438
Equity in losses of affiliates 54,668 (127) (3,764) (550) (43,376) 6,851
Changes in operating assets and liabilities:
Film exhibition rights (230) (230)
Accounts receivable (13,334) (580) (13,914)
Prepaid and other assets (1,320) (9,755) (11,075)
Other accounts receivable (1,727) (6) (2,140) (22) (692) (4,587)
Accrued interest 26,642 17 26,659
Inventories (11,365) (11,365)
Suppliers (163) (12,456) (1,047) (13,666)
Taxes payable other than income taxes 5 1,664 2,521
Accrued payroll and related liabilities 6 6
Advances received from subscribers (2,411) (2,411)
Other accounts payable 76 (2,029) 3,498 2,319 3,864
-------- -------- -------- -------- -------- --------
Net cash (used in) provided by operating activities (6,733) 3,508 (31,656) 4,747 (30,134)
-------- -------- -------- -------- -------- --------
Cash flows from investing activities:
Purchase of property, plant and equipment (118,909) (118,909)
Discontinued operations 295 295
Loans to related companies (169,224) (4,797) (200) 112,282 (61,939)
Investments in equity and cost investments (49,570) (13,876) (8) (1,894) 20,998 (44,350)
-------- -------- -------- -------- -------- --------
Net cash used in investing activities (218,499) (18,673) (119,117) (1,894) 133,280 (224,903)
-------- -------- -------- -------- -------- --------
Cash flows from financing activities:
Bank loans 59,509 59,509
Capital contributions 23,962 (2,965) (20,997)
Loans from related companies 53,111 15,586 98,391 101 (112,281) 54,908
Repayments of loans to related companies 70,622 3,421 (28,319) 45,724
Repayments of loans from related companies (1,317) (31,442) 28,317 (4,442)
Repayments of loans from banks (446) (3,966) (4,412)
-------- -------- -------- -------- -------- --------
Net cash provided by financing activities 121,970 15,586 149,875 (2,864) (133,280) 151,287
-------- -------- -------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents (103,262) 421 (898) (11) -- (103,750)
Cash and cash equivalents at beginning of the period 103,282 -- 1,444 13 -- 104,739
-------- -------- -------- -------- -------- --------
Cash and cash equivalents at end of the period 20 421 546 2 -- 989
======== ======== ======== ======== ======== ========
</TABLE>
* * * * * * *
F-47
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
Financial Statements Together with
Report of Independent Public Accountants
December 31, 1999 and 1998
<PAGE>
TVA SISTEMA DE TELEVISAO S.A.
Index to Financial Statements
Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Public Accountants F-49
Balance Sheets as of December 31, 1999 and 1998 F-50
Statements of Operations for each of the three years in the period ended December 31, 1999 F-52
Statements of Changes in Shareholders' Deficit for each of the three years in the period
ended December 31, 1999 F-53
Statements of Cash Flows for each of the three years in the period ended December 31, 1999 F-54
Notes to the Financial Statements F-55
</TABLE>
F-48
<PAGE>
Report of Independent Public 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, 1999 and 1998, 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, 1999, 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, 1999 and 1998, and the related results of its operations and
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States of
America.
Arthur Andersen
Sao Paulo, Brazil
May 5, 2000
F-49
<PAGE>
TVA Sistema de Televisao S.A.
Balance Sheets
December 31, 1999 and 1998
(in thousands of U.S. dollars)
December 31,
----------------------
1999 1998
-------- --------
ASSETS
Current assets
Cash and cash equivalents $ 822 $ 475
Accounts receivable, net 6,905 16,959
Accounts receivable from related companies 3,436 3,617
Inventories, net 7,928 10,775
Prepaid and other assets 2,264 2,567
Judicial deposits 744 --
Other accounts receivable 2,539 1,854
-------- --------
Total current assets 24,638 36,247
-------- --------
Property, plant and equipment, net 170,246 250,488
Loans to related companies -- 158
Other 1,106 2,122
-------- --------
Total assets $195,990 $289,015
======== ========
The accompanying notes are an integral part of the financial statements.
F-50
<PAGE>
TVA Sistema de Televisao S.A.
Balance Sheets
December 31, 1999 and 1998
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Loans $ 6,681 $ 32,256
Film suppliers 6,286 26,906
Other suppliers 7,119 23,382
Taxes payable other than income taxes 3,662 11,472
Accrued payroll and related liabilities 1,563 2,641
Accounts payable to related companies 1,183 843
Advance payments received from subscribers 870 1,884
Other accounts payable 1,991 4,736
--------- ---------
Total current liabilities 29,355 104,120
--------- ---------
Long-term liabilities
Loans 9,424 12,351
Loans from related companies 462,546 429,861
Taxes payable other than income taxes 14,082 1,006
Provision for claims 1,705 5,313
--------- ---------
Total long-term liabilities 487,757 448,531
--------- ---------
Commitments and contingencies (Notes 15 and 17)
Shareholders' deficit
Common shares, no par value, 6,980,764
shares issued and outstanding 16,303 16,303
Accumulated deficit (337,425) (279,939)
--------- ---------
Total shareholders' deficit (321,122) (263,636)
--------- ---------
Total liabilities and shareholders' deficit $ 195,990 $ 289,015
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-51
<PAGE>
TVA Sistema de Televisao S.A.
Statements of Operations
for the years ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Gross revenues
Monthly subscriptions $ 79,721 $ 115,175 $ 117,507
Installation 1,687 2,334 10,142
Advertising 1,342 2,649 4,947
Indirect programming 857 11,460 22,810
Additional services & others 12,614 8,016 13,142
Taxes on revenues (10,678) (9,920) (11,357)
----------- ----------- -----------
Net revenue 85,543 129,714 157,191
----------- ----------- -----------
Direct operating expenses
Payroll and benefits 4,260 10,924 17,967
Programming 18,803 42,950 47,472
Transponder lease cost 1,449 1,157 6,312
Technical assistance 1,058 1,981 1,630
Vehicle rentals 95 178 889
TVA magazine 1,872 4,558 5,120
Other costs 3,866 6,434 6,782
----------- ----------- -----------
31,403 68,182 86,172
----------- ----------- -----------
Selling, general and administrative expenses
Payroll and benefits 9,219 19,270 23,035
Advertising and promotion 2,307 7,481 17,538
Rent 1,805 3,217 3,639
Other administrative expenses 4,027 8,267 7,961
Other general expenses 632 4,774 3,883
----------- ----------- -----------
17,990 43,009 56,056
----------- ----------- -----------
Provision for equipment, inventory and obsolescence 202 1,940 2,666
Depreciation 47,988 39,484 30,251
----------- ----------- -----------
Operating loss from continuing operations (12,040) (22,901) (17,954)
----------- ----------- -----------
Interest income 10,474 5,840 6,920
Interest expense (4,396) (16,496) (34,888)
Translation loss (2,168) (642) (92)
Other nonoperating expenses, net (49,356) (1,060) (796)
----------- ----------- -----------
Loss from continuing operations before income taxes (57,486) (35,259) (46,810)
Income taxes -- -- --
----------- ----------- -----------
Loss from continuing operations $ (57,486) $ (35,259) $ (46,810)
Income from discontinued operations -- 10 3,764
----------- ----------- -----------
Net loss $ (57,486) $ (35,249) $ (43,046)
=========== =========== ===========
Net loss per share for continuing operations (8.23) (5.05) (6.71)
Net income per share for discontinued operations 0 0 0.54
Net loss per share (8.23) (5.05) (6.17)
Weighted average shares outstanding 6,980,764 6,980,764 6,980,764
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-52
<PAGE>
TVA Sistema de Televisao S.A.
Statements of Changes in Shareholders' Deficit
for the years ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars)
Paid-in Accumulated
Capital Deficit Total
--------- --------- ---------
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)
Net loss for the period (35,249) (35,249)
--------- --------- ---------
Balance as of December 31, 1998 $ 16,303 $(279,939) $(263,636)
--------- --------- ---------
Net loss for the period (57,486) (57,486)
--------- --------- ---------
Balance as of December 31, 1999 $ 16,303 $(337,425) $(321,122)
========= ========= =========
The accompanying notes are an integral part of the financial statements.
F-53
<PAGE>
TVA Sistema de Televisao S.A.
Statements of Cash Flows
for the years ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (57,486) $ (35,249) $ (43,046)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation 47,988 39,484 30,251
Provision for doubtful accounts (173) 3,334 1,847
Provision for equipment and inventory obsolescence 202 1,940 2,666
Provision for claims (3,608) (21) 295
Disposal of property, plant and equipment 54,403 1,574 338
Discontinued operations -- (10) (3,764)
Changes in operating assets and liabilities:
Film exhibition rights -- 1,291 (230)
Accounts receivable 10,227 2,277 (10,009)
Prepaid and other assets 303 9,677 (8,587)
Other accounts receivable including related companies (232) (93) (4,030)
Accrued interest (6,890) 9,170 26,076
Inventories 2,645 1,354 (3,882)
Suppliers (36,883) (644) (13,836)
Taxes payable other than income taxes 5,266 4,496 1,084
Accrued payroll and related liabilities (1,078) (2,175) (69)
Advances received from subscribers (1,014) 268 (814)
Other accounts payable (2,405) 3,401 (202)
--------- --------- ---------
Net cash (used in) provided by operating activities 11,265 40,074 (25,912)
--------- --------- ---------
Cash flows used in investing activities:
Purchases of property, plant and equipment (22,149) (64,340) (97,143)
Loans to related companies -- (158) (199)
Discontinued operations -- (615) --
Repayments of loans to related companies -- (36,949) (3,149)
Others -- 9 (9)
--------- --------- ---------
Net cash used in investing activities (22,149) (102,053) (100,500)
--------- --------- ---------
Cash flows from financing activities:
Bank loans 6,659 11,652 51,841
Repayments of loans from shareholders (16,714) -- --
Loans from related companies 58,410 70,314 76,972
Repayments of loans from related companies -- 7,441 3,420
Repayments of loans from bank (37,124) (27,019) (6,505)
--------- --------- ---------
Net cash provided by financing activities 11,231 62,388 125,728
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents 347 409 (684)
Cash and cash equivalents at beginning of the period 475 66 750
--------- --------- ---------
Cash and cash equivalents at end of the period $ 822 $ 475 $ 66
========= ========= =========
Supplemental cash disclosure:
Cash paid for interest $ -- $ -- --
========= ========= =========
Supplemental non-cash financing activities:
Accrued interest on related company loans refinanced as principal balance
$ 9,042 $ 7,664 $ 23,515
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-54
<PAGE>
TVA Sistema de Televisao S.A.
Notes to the Financial Statements
(in thousands of U.S. dollars)
1. The Company and its principal operations
TVA Sistema de Televisao S.A. ("the Company") renders services related to
wireless cable and cable 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). 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-55
<PAGE>
TVA Sistema de Televisao S.A.
Notes to the Financial Statements, (Concluded)
(in thousands of U.S. dollars)
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 a substantial portion of Company's
operations is conducted in United States dollars. 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$1.7890 to US$1 in effect on December 31, 1999, and
R$1.2087 to US$1 in effect on December 31, 1998. 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, 1999 and 1998 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-56
<PAGE>
TVA Sistema de Televisao S.A.
Notes to the Financial Statements, (Concluded)
(in thousands of U.S. dollars)
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 are 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 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.
2.9. Property, plant and equipment
Property, plant and equipment are stated at cost and depreciated using the
straight-line method, over the remaining useful lives, as described in Note
10.
2.10. Advertising
Advertising revenues are recognized, and the production cost of commercials
and programming are charged to expense, when the commercial is telecast.
F-57
<PAGE>
TVA Sistema de Televisao S.A.
Notes to the Financial Statements, (Concluded)
(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 if and 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, which are generally higher
than the revenues. 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. Accounts receivable, net
As of December 31, 1999 and 1998, accounts receivable were comprised of:
December 31,
----------------------
1999 1998
-------- --------
Subscriptions and installation fee $ 11,821 $ 18,922
Advertising and programming 2,153 3,212
Other 2,372 4,439
Provision for doubtful accounts (9,441) (9,614)
-------- --------
$ 6,905 $ 16,959
======== ========
F-58
<PAGE>
TVA Sistema de Televisao S.A.
Notes to the Financial Statements, (Concluded)
(in thousands of U.S. dollars)
4. Inventories, net
As of December 31, 1999 and 1998, inventories were comprised of:
December 31,
------------------------
1999 1998
-------- --------
Materials and supplies $ 10,653 $ 12,308
Imports in transit 607 1,597
Provision for obsolescence (3,332) (3,130)
-------- --------
$ 7,928 $ 10,775
======== ========
5. Prepaid and other assets
As of December 31, 1999 and 1998, prepaid expenses were comprised of:
December 31,
-------------------
1999 1998
------ ------
Advances to suppliers $1,411 $ 749
Prepaid meals and transportation 92 24
Other 761 1,794
------ ------
$2,264 $2,567
====== ======
F-59
<PAGE>
TVA Sistema de Televisao S.A.
Notes to the Financial Statements, (Concluded)
(in thousands of U.S. dollars)
6. Related-party transactions
The following tables summarize the transactions between the Company and its
related parties as of December 31, 1999 and 1998 and for each of the three
years in the period ended December 31, 1999:
December 31,
----------------------
1999 1998
------- -------
TVA Sul Parana Ltda
Accounts receivable 531 1,448
TVA Distribuidora S.A
Loans payable 443,778 --
Tevecap S.A
Loans payable 14,590 423,676
Accounts payable 393 428
Comercial Cabo Ltda
Loans payable 2,501 3,702
ESPN do Brasil Ltda
Accounts receivable -- 131
Abril S.A
Accounts receivable -- 97
Accounts payable 315 399
Loans payable 1,677 2,483
TV Filme Inc.
Accounts receivable 80 64
TVA Network Participacoes S.A
Accounts receivable 215 20
Accounts payable 56 --
Galaxy Brasil Ltda
Accounts receivable -- 235
SMC Marketing Promocional Ltda
Accounts receivable 44 275
TVA Channels Ltda
Accounts receivable 2,542 762
Accounts payable 414 --
TVA Banda C Ltda
Accounts receivable -- 545
Loans receivable -- 158
Others
Accounts receivable 24 40
Accounts payable 5 16
F-60
<PAGE>
TVA Sistema de Televisao S.A.
Notes to the Financial Statements, (Concluded)
(in thousands of U.S. dollars)
6. Related-party transactions (Continued)
December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
Tevecap S.A
Net interest (income) expense $ -- $ 7,664 $ 27,768
Abril S.A
Printing cost 1,447 1,521 4,389
Net interest (income) expense -- -- (188)
Comercial Cabo Ltda
Net interest income (1,201) (318) (322)
TV Cabo Santa Branca Ltda
Net interest income -- -- (14)
ESPN do Brasil Ltda
Programming costs, net -- 5,188 3,493
TVA Sul Parana Ltda
Net interest income -- (295) (469)
TV Filme Inc.
Programming revenue -- (2,424) (8,629)
Canbras TVA Cabo Ltda
Programming revenue -- -- (1,837)
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 2.17% to 1,58% per month in December 1999
(1.76% to 3.23% per month in December 1998). Such loans are renewable every
year on December 31.
TEVECAP S.A. ("Tevecap"), and Falcon International Communications Services
Inc., one of Tevecap's shareholders, signed a consulting service agreement
on April 1, 1997 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 $196 per annum.
Related-party transactions relating to programming sales and costs and
printing service costs were carried out at usual market rates and terms.
F-61
<PAGE>
TVA Sistema de Televisao S.A.
Notes to the Financial Statements, (Concluded)
(in thousands of U.S. dollars)
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, 1999 was $12,256 and $4,230, respectively.
7. Other accounts receivable
As of December 31, 1999 and 1998, other accounts payable were comprised of
:
1999 1998
------ ------
Galaxy Brasil Ltda $ 15 $ --
TVA Banda C Ltda 418 --
ESPN do Brasil Ltda 145 --
Taxes recoverable 734 355
Other 1,227 1,499
------ ------
$2,539 $1,854
====== ======
8. Loan guarantees
In November 1996, Tevecap 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.
F-62
<PAGE>
TVA Sistema de Televisao S.A.
Notes to the Financial Statements, (Concluded)
(in thousands of U.S. dollars)
9. 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, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
December 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 56,504 $ 68,517
Deferred charges -- 1,467
Provision for obsolescence 525 1,251
Provision for claims 5,935 4,812
Provision for decoders 673 866
Other 642 151
-------- --------
Total gross deferred tax asset 64,279 77,064
-------- --------
Deferred tax liability:
Installation costs -- (274)
-------- --------
Total gross deferred tax liability $ -- $ (274)
-------- --------
Net deferred tax asset 64,279 76,790
-------- --------
Less valuation allowance (64,279) (76,790)
-------- --------
Net deferred tax asset/liability $ -- $ --
======== ========
</TABLE>
The Company has a limited operating history and has generated losses since
its inception. The valuation allowance has been established in accordance
with the requirements of SFAS No. 109 "Accounting for Income Taxes".
As of December 31, 1999, the Company has unexpirable accumulated tax losses
of $171,225.
F-63
<PAGE>
TVA Sistema de Televisao S.A.
Notes to the Financial Statements, (Concluded)
(in thousands of U.S. dollars)
9. Income taxes (Continued)
Income tax was different from the amount computed using the Brazilian
statutory income tax for the reasons set forth in the following table:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Loss before income taxes and minority interest $(57,486) $(35,249) $(43,046)
Statutory income tax rate 37% 33% 33%
-------- -------- --------
(21,270) (11,632) (14,206)
Increase (decrease) in the income tax rate (2,352) -- --
Deferred charges amortization (2,686) (3,546) (3,839)
Translation loss of tax losses 22,225 3,893 2,069
Installation materials 867 -- --
Deductible devaluation loss for Brazilian Statutory Purporses
(6,057) (10,339) (10,494)
Depreciation 8,647 4,539 3,057
Write-off of assets related to cancellations of subscriptions
and decoders 8,347 -- --
Other 4,790 (2,319) (1,288)
-------- -------- --------
Net income tax benefit (provision) for the period 12,511 (19,404) (24,701)
(Increase) decrease in valuation allowance (12,511) 19,404 24,701
-------- -------- --------
$ -- $ -- $ --
======== ======== ========
</TABLE>
F-64
<PAGE>
TVA Sistema de Televisao S.A.
Notes to the Financial Statements, (Concluded)
(in thousands of U.S. dollars)
10. Property, plant and equipment, net
As of December 31, 1999 and 1998, property, plant and equipment were
comprised of:
<TABLE>
<CAPTION>
Annual
Depreciation December 31,
Rate -----------------------------
% 1999 1998
---------- ------------ -----------
<S> <C> <C> <C>
Machinery and equipment 10 $ 39,649 $ 35,990
Decoders 10 61,606 107,730
Leasehold improvements 25 2,342 2,342
Furniture and fixtures 10 1,235 1,207
Premises 10 2,174 2,135
Vehicles 20 2,006 2,243
Software 20 6,632 6,932
Tools 10 798 798
Reception equipment 20 107,324 132,900
Cable plant 10 49,808 24,735
----------- -----------
273,574 317,012
Telephone line use rights 2,041 2,024
Trademarks, patents and others 179 179
Other 1,121 691
Accumulated depreciation (129,843) (118,802)
Fixed assets in transit 23,174 49,384
----------- -----------
$ 170,246 $ 250,488
=========== ===========
</TABLE>
11. Loans
The loans as of December 31, 1999 represent the refinancing of certain
supplier payables. The average interest rate on such loans is Libor plus
2.0%, and the principal will be paid as follows:
2000 6,681
2001 4,579
2002 4,845
-------
Total $16,105
=======
F-65
<PAGE>
TVA Sistema de Televisao S.A.
Notes to the Financial Statements, (Concluded)
(in thousands of U.S. dollars)
12. Other accounts payable
As of December 31, 1999 and 1998, other accounts payable were comprised of:
December 31,
---------------------
1999 1998
------ ------
Advertising $ 93 $3,437
Importation expenses payable 107 31
Other 1,791 1,268
------ ------
$1,991 $4,736
====== ======
13. Taxes payable other than income taxes
As of December 31, 1999 and 1998, taxes payable other than income taxes
were comprised of :
December 31,
------------------------
1999 1998
-------- --------
COFINS $ 9,597 $ 10,164
ICMS 5,395 2,093
PIS 2,602 --
Other 150 221
-------- --------
$ 17,744 $ 12,478
(-) Current liabilities (3,662) (11,472)
-------- --------
$ 14,082 $ 1,006
======== ========
On April 5, 2000, the Company opted for the REFIS (Tax Recovery Program),
established by Decree N(Degree) 3.342/00 of January 25, 2000, later changed
into Law N(Degree) 9.964/00 of April 10, 2000.
With the option for the REFIS, the Company will be able to finance its
taxes payable to the Federal Government for 5 years. Taxes payable are
restated for taxes incurred through February 29, 2000. The Company has 60
days, as from the option formalization date, to present the calculation of
the amounts due for the taxes to be paid in installments. The restatement
of the tax debts included in the REFIS is made based on the TJLP (Brazilian
long-term interest rate).
The classification of such taxes between current and long-term liabilities
take into account the option for the REFIS mentioned above.
F-66
<PAGE>
TVA Sistema de Televisao S.A.
Notes to the Financial Statements, (Concluded)
(in thousands of U.S. dollars)
14. Other nonoperating, income (expenses), net
As of December 31, 1999 and 1998, nonoperating were comprised of:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Write-off of assets related to cancellations of subscriptions $(16,477) $ -- $ --
Write-off of decoders - Digisat operation (31,529) -- --
Other (1,350) (1,060) (796)
-------- -------- --------
$(49,356) $ (1,060) $ (796)
======== ======== ========
</TABLE>
15. Leased assets and commitments
The Company has rented its office space until the year 2003. As of December
31, 1999, future minimum rental payments applicable to operating leases in
respect of this space aggregate approximately $ 9,666, as follows:
2000 3,026
2001 1,660
2002 1,660
2003 1,660
2004 1,660
------
Total $9,666
======
As of December 31, 1999, the Company had contractual commitments with
Empresa Brasileira de Telecomunicacoes ("Embratel") for the use of a
transponder until the year 2003. Based on the contract provisions, these
operating lease commitments are currently estimated to aggregate
approximately $18,031, as follows:
2000 5,277
2001 5,277
2002 5,277
2003 2,200
-------
Total $18,031
=======
F-67
<PAGE>
TVA Sistema de Televisao S.A.
Notes to the Financial Statements, (Concluded)
(in thousands of U.S. dollars)
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.
18. Pension plan
In April 1996, the Company became a co-sponsor of the private pension
entity named Abrilprev Sociedade de Previdencia Privada ("Abrilprev"), the
primary objective of which is to grant employees benefits other than those
provided by Social Security. The plan is optional to all employees of the
sponsoring entities. Abrilprev operates as a Defined Contribution Plan.
Company contributions are made based on a fixed percentage applied to the
payroll of the sponsoring entities based on actuarial calculations.
Contribution expenses amounted to $162 for the year ended December 31, 1999
($313 in 1998 and $425 in 1997).
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.
F-68
<PAGE>
TVA Sistema de Televisao S.A.
Notes to the Financial Statements, (Concluded)
(in thousands of U.S. dollars)
In 1999, contributions made by the Company to Associacao Abril de
Beneficios amounted to $642 ($1,365 in 1998 and $1,485 in 1997).
20. Supplementary information - valuation and qualifying accounts and reserves
<TABLE>
<CAPTION>
Provision Deferred
Provision Provision for Tax Provision
for Doubtful For Exhibition Valuation for
Accounts Obsolescence Expiration Allowance Claims
-------- ------------ ---------- --------- ------
<S> <C> <C> <C> <C> <C>
Balance as of December 31, 1996 $ 4,433 $ 2,250 $ 1,162 $ 32,685 $ 5,039
Additions charged to expense 1,847 870 -- 24,701 295
Reduction -- -- (1,162) -- --
-------- -------- -------- -------- --------
Balance as of December 31, 1997 $ 6,280 $ 3,120 $ -- $ 57,386 $ 5,334
Additions charged to expense 3,334 10 -- 19,404 --
Reduction -- -- -- -- (21)
-------- -------- -------- -------- --------
Balance as of December 31, 1998 $ 9,614 $ 3,130 $ -- $ 76,790 $ 5,313
Additions charged to expense -- 202 -- -- --
Reduction (173) -- -- (12,511) (3,608)
======== ======== ======== ======== ========
Balance as of December 31, 1999 $ 9,441 3,332 -- 64,279 1,705
======== ======== ======== ======== ========
</TABLE>
21. Recent accounting pronouncements
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The standard requires that all
derivative instruments (1) be recognized as assets or liabilities and (2)
be adjusted to fair value each period. SFAS 133 is effective for fiscal
year beginning after June 15, 1999. As of December 31, 1998 the Company has
no operations with hedging activities.
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, "Views on Selected Revenue
Recognition Issues" ("SAB 101"), which sets forth the staff's views in
applying generally accepted accounting principles to selected revenue
recognition issues. SAB 101 is effective for the second quarter of 2000.
The Company will assess the effect of this new standard during 2000 fiscal
year. The Company does not believe there will be any significant effect on
its financial statements.
* * * * * * *
<PAGE>
TVA SUL PARANA LTDA. and Subsidiary
Consolidated Financial Statements Together with
Report of Independent Public Accountants
December 31, 1999 and 1998
<PAGE>
TVA SUL PARANA LTDA.
AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Public Accountants F-71
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-72
Consolidated Statements of Operations for each of the three years in the period ended
December 31, 1999
F-74
Consolidated Statements of Changes in Shareholders' Equity for each of the three years in the
period ended December 31, 1999
F-75
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 1999
F-76
Notes to Consolidated Financial Statements F-78
</TABLE>
F-70
<PAGE>
Report of Independent Public Accountants
To the Shareholders and Directors of
TVA SUL PARANA LTDA.
We have audited the accompanying consolidated balance sheet of TVA SUL PARANA
LTDA. and subsidiary (the "Company") as of December 31, 1999 and 1998, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1999, 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 PARANA
LTDA. and subsidiary as of December 31, 1999 and 1998, and the consolidated
results of their operations and cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States of America.
Arthur Andersen
Sao Paulo, Brazil
May 5, 2000
F-71
<PAGE>
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1999 and 1998
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
------- -------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 959 $ 305
Accounts receivable, net 863 1,168
Inventories, net 2,384 4,125
Prepaid and other assets 204 32
Other accounts receivable 366 288
------- -------
Total current assets 4,776 5,918
------- -------
Property, plant and equipment, net 35,340 41,615
Concessions, net 5,747 6,612
Other 1,022 438
------- -------
Total assets $46,885 $54,583
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-72
<PAGE>
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1999 and 1998
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
December 31,
1999 1998
-------- --------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Loans $ 1,239 $ 5,791
Film suppliers 857 947
Others suppliers 745 1,964
Taxes payable other than income taxes 673 1,494
Accrued payroll and related liabilities 304 479
Advances payments received from subscribers 64 115
Accounts payable to related companies 551 586
Other accounts payable 153 143
-------- --------
Total current liabilities 4,586 11,519
-------- --------
Long-term liabilities
Loans from related companies 29,788 26,424
Taxes payable other than income taxes 2,141 --
Provision for claims 108 251
-------- --------
Total long-term liabilities 32,037 26,675
-------- --------
Commitments and contingencies (Note 13)
Minority interest 1,569 1,361
Shareholders' equity
Paid-in capital 44,213 44,213
Accumulated deficit (35,520) (29,185)
-------- --------
Total shareholders' equity 8,693 15,028
-------- --------
Total liabilities and shareholders' equity $ 46,885 $ 54,583
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-73
<PAGE>
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Consolidated Statements of Operations
for the years ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Gross revenues
Monthly subscriptions $ 14,268 $ 21,009 $ 25,193
Installation 185 518 2,799
Additional services & others 596 650 506
Taxes on revenue (1,702) (1,620) (1,958)
------------ ------------ ------------
Net revenue 13,347 20,557 26,540
------------ ------------ ------------
Direct operating expenses
Payroll and benefits 776 1,019 4,626
Programming 4,104 6,515 8,922
Technical assistance 253 (769) 202
Vehicle rentals 5 -- 186
TVA magazine 290 683 707
Other costs 1,009 1,515 2,402
------------ ------------ ------------
6,437 8,963 17,045
------------ ------------ ------------
Selling, general and administrative expenses
Payroll and benefits 1,392 3,793 1,397
Advertising and promotion 180 348 824
Rent 153 372 82
Other administrative expenses 79 4,034 2,723
Other general expenses 82 416 896
------------ ------------ ------------
1,886 8,963 5,922
------------ ------------ ------------
Provision for equipment, inventory and obsolescence 403 -- --
Depreciation 5,761 6,021 3,455
Amortization 865 865 917
------------ ------------ ------------
Operating loss (2,005) (4,255) (799)
------------ ------------ ------------
Interest income 218 407 631
Interest expense (819) (6,799) (5,440)
Translation (loss) gain (233) 205 (58)
Other nonoperating (expense) income, net (3,182) 284 (567)
------------ ------------ ------------
Loss before income taxes and minority interest (6,021) (10,158) (6,233)
Income taxes (106) (24) --
------------ ------------ ------------
Loss before minority interest (6,127) (10,182) (6,233)
Minority interest (208) (103) 52
------------ ------------ ------------
Net loss $ (6,335) $ (10,285) $ (6,181)
Net loss per share (0.14) (0.23) (0.14)
Weighted average shares outstanding 44,099,122 44,099,122 46,883,237
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-74
<PAGE>
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars)
Paid-in Accumulated
Capital Deficit Total
-------- -------- --------
Balance as of December 31, 1996 $ 16,314 $(12,719) $ 3,595
Capital contributed on:
December 2, 1997 27,899 27,899
Net loss for the year (6,181) (6,181)
-------- -------- --------
Balance as of December 31, 1997 $ 44,213 $(18,900) $ 25,313
Net loss for the year (10,285) (10,285)
-------- -------- --------
Balance as of December 31, 1998 $ 44,213 $(29,185) $ 15,028
-------- -------- --------
Net loss for the year (6,335) (6,335)
-------- -------- --------
Balance as of December 31, 1999 $ 44,213 $(35,520) 8,693
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-75
<PAGE>
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Consolidated Statements of Cash Flows
for the years ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (6,335) $(10,285) $ (6,181)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation 5,761 6,021 3,455
Amortization 865 865 917
Provision for doubtful accounts 30 202 1,101
Provision for inventory obsolescence 403 -- --
Provision for claims (143) (72) 323
Minority interest 208 103 (52)
Disposal and write-off of property, plant and equipment 2,635
Changes in operating assets and liabilities
Accounts receivable 275 1,411 (2,939)
Prepaid and other assets (172) 237 334
Other accounts receivable (78) (60) 673
Accrued interest 174 5,095 3,816
Inventories 1,338 7,326 (7,482)
Other assets (584) (108) (284)
Film suppliers and others suppliers (1,309) (3,483) 3,207
Taxes payable other than income taxes 1,320 448 579
Accrued payroll and related liabilities (175) (44) 76
Advances received from subscribers (51) 115 (1,026)
Other accounts payable (25) (944) (580)
-------- -------- --------
Net cash (used in) provided by operating activities 4,137 6,827 (4,063)
-------- -------- --------
Cash flows used in investing activities
Purchases of property, plant and equipment (2,121) (9,725) (20,491)
Acquisition of businesses, net of cash acquired -- -- --
-------- -------- --------
Net cash used in investing activities (2,121) (9,725) (20,491)
-------- -------- --------
Cash flows (used in) provided by financing activities
Bank Loans -- 2,897 4,359
Capital contributions -- -- 27,899
Repayments of loans from shareholders (1,858) -- --
Loans from related companies 5,222 9,353 6,302
Advances from shareholders -- -- (12,781)
Repayments of loans from related companies -- (8,064) (1,438)
Repayments of loans from banks (4,726) (1,464) --
Minority interest -- -- --
-------- -------- --------
Net cash (used in) provided by financing activities (1,362) 2,722 24,341
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 654 (176) (213)
Cash and cash equivalents at beginning of the period 305 481 694
-------- -------- --------
Cash and cash equivalents at end of the period $ 959 $ 305 $ 481
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-76
<PAGE>
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
for the years ended December 31, 1999, 1998 and 1997
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
---- ------ ------
<S> <C> <C> <C>
Supplemental cash disclosure
Cash paid for interest $-- $ 295 $ --
==== ====== ======
Supplemental noncash financing activities
Accrued interest on related company loans refinanced
as principal balance $-- $4,764 $3,816
==== ====== ======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-77
<PAGE>
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Notes to Consolidated Financial Statements
(in thousands of U.S. dollars)
1. The Company and its principal operations
The accompanying financial statements have been prepared to reflect the
results of TVA Sul Parana Ltda. and its subsidiary (the "Company").
TVA Sul Parana Ltda.. is a holding company, the subsidiary of which 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. The
Company's operations are substantially dependent on TVA Group regarding
programming, marketing, financial and administrative systems.
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 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 all
majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated on consolidation.
F-78
<PAGE>
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars)
2.2. Accounting records
As required by Brazilian Law, and in accordance with local accounting
practices, the accounting records of the Company are maintained in
Brazilian currency ("reais" or "R$"). In order to present the financial
statements in conformity with 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 a substantial portion of the
Company's operations are conducted in United States dollar. 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$1.7890 to US$1 in effect on December 31, 1999, and
R$1.2087 to US$1 in effect on December 31, 1998. 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. Consolidated financial statements
The Company's consolidated financial statements as of December 31,1999 and
1998 includes TVA Sul Parana Ltda. as a parent company and its 60%
ownership interest in CCS Camboriu Cable System de Telecomunicacoes 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.
F-79
<PAGE>
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Notes to Consolidated 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, 1999 and 1998 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 are
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 is established on the basis of an
analysis of the accounts receivable, in light of the risks involved, in an
amount sufficient to cover any losses incurred in realization of credits.
2.8. 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. A provision for obsolescence has
been established on the basis of an analysis of slow-moving materials and
suppliers.
F-80
<PAGE>
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars)
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
7.
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 if and 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 which are generally higher
than the revenues. Subscription revenues are recognized as earned on an
accrual basis.
2.12. Accounting for issuance of stock by subsidiaries
Gains and losses arising from the issuance 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 exceeds or is lower than the net book value per share
immediately prior to the sale of the shares by the subsidiary.
2.13 Concessions
Concessions represent the right to engage in various telecommunications
services in defined areas or cities in Brazil. The cost of these
concessions is being amortized on the straight-line basis over 10 years.
F-81
<PAGE>
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars)
3. Accounts receivable, net
As of December 31, 1999 and 1998, accounts receivable were comprised of:
December 31,
------------------------
1999 1998
------- -------
Subscriptions and Hook up fee $ 2,519 $ 2,624
Advertising 63 233
Provision for doubtful accounts (1,719) (1,689)
------- -------
$ 863 $ 1,168
======= =======
4. Inventories
As of December 31, 1999 and 1998, inventories were comprised of:
December 31,
-------------------------
1999 1998
------- -------
Materials and suppliers $ 2,778 $ 4,111
Imports in transit 9 14
Provision for obsolescence (403) --
------- -------
$ 2,384 $ 4,125
======= =======
F-82
<PAGE>
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Notes to Consolidated 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, 1999 and 1998 and for each of the three
years in the period ended December 31, 1999:
December 31,
---------------------
1999 1998
------- -------
TVA Sistema de Televisao S.A
Accounts payable $ 531 $ 586
Accounts receivable -- 12
TVA Distribuidora S.A
Loans payable 29,788 --
Abril S.A
Accounts payable 20 --
Tevecap S.A
Loans payable -- 26,424
TVA Network Participacoes S.A
Accounts receivable $ 7 $ --
December 31,
--------------------------------
1999 1998 1997
------------ ------ ------
TVA Sistema de Televisao S.A
Net interest expense $ -- $ 295 $ 483
Tevecap S.A
Net interest expense $ -- $4,764 $3,333
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 2.17% to 1.58% per month as of December 1999
(3.85% to 4.45% per month as of December 1998). Such loans are renewable
every year on December 31.
F-83
<PAGE>
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Notes to Consolidated 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, 1999 and 1998 are as follows:
December 31,
------------------
1999 1998
------- -------
Deferred tax assets
Net operating loss carryforwards $ 6,076 $ 7,743
Provision for claims 377 104
Provision for obsolescence 259 139
Other 766 505
------- -------
Total gross deferred tax asset 7,478 8,491
------- -------
Deferred tax liability
Installation costs (54) (60)
------- -------
Total gross deferred tax liability (54) (60)
------- -------
Net deferred tax asset 7,424 8,431
------- -------
Less valuation allowance (7,424) (8,431)
------- -------
Net deferred tax asset/liability $ -- $ --
======= =======
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, 1999, the Company and subsidiaries have unexpirable
accumulated tax losses of $18,411.
F-84
<PAGE>
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars)
6. 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,
----------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Loss before income taxes and minority interest $ (6,021) $(10,158) $ (6,233)
Statutory income tax rate 37% 33% 33%
-------- -------- --------
(2,227) (3,352) (2,057)
Increase (decrease) in the income tax rate (150) -- --
Deferred charges amortization (51) (71) --
Translation loss of tax losses 2,512 443 341
Net loss of merged companies -- 1,273 --
Unallowable amortization 151 (62) 110
Installation materials 236
Deductible devaluation loss for Brazilian Statutory
Purposes (620) (245) (113)
Depreciation 499 454 16
Other 763 320 (392)
-------- -------- --------
Consolidated income tax benefit for the period 1,113 (1,240) (2,095)
Increase (decrease) in valuation allowance (1,007) 1,264 2,095
-------- -------- --------
$ 106 $ 24 $ --
======== ======== ========
</TABLE>
Income tax payable represents amounts owed by subsidiaries calculated on a
unitary basis.
F-85
<PAGE>
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars)
7 Property, plant and equipment, net
As of December 31, 1999 and 1998, property, plant and equipment were
comprised of:
<TABLE>
<CAPTION>
Annual
Depreciation December 31,
Rate --------------------------
% 1999 1998
---------- ----------
<S> <C> <C> <C>
Machinery and equipment 10 $ 4,156 $ 4,089
Converters 10 10,823 11,919
Leasehold improvements 25 138 138
Furniture and fixtures 10 502 491
Premises 10 715 696
Vehicles 20 608 589
Software 20 231 227
Tools 10 73 73
Reception equipment 20 11,747 15,278
Cable plant 10 10,830 10,501
Building 4 3,784 3,784
---------- -----------
43,607 47,785
Telephone line use rights 378 377
Fixed assets in transit 4,884 4,846
Accumulated depreciation (13,529) (11,393)
---------- -----------
$ 35,340 $ 41,615
========== ===========
</TABLE>
8. Concessions, net
As of December 31, 1999 and 1998, concessions were comprised of:
December 31,
------------------
1999 1998
------- -------
CCS - Camboriu Cable System Telecomunicacoes Ltda $ 841 $ 841
TVA Sul Parana Ltda. (Stations in south of Brazil) 7,805 7,805
Accumulated amortization (2,899) (2,034)
------- -------
$ 5,747 $ 6,612
======= =======
F-86
<PAGE>
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars)
9. Loan guarantees
In November 1996, Tevecap 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.
10. Taxes payable other than income taxes
As of December 31, 1999 and 1998, taxes payable other than income taxes
were comprised of:
1999 1998
------- -------
COFINS $ 1,419 $ 1,151
ICMS 979 275
PIS 308 --
Other 108 68
------- -------
2,814 1,494
( - ) current liabilities (673) (1,494)
------- -------
$ 2,141 $ --
======= =======
On April 5, 2000, the Company opted for the REFIS (Tax Recovery Program),
established by Decree No. 3.342/00 of January 25, 2000, later changed into Law
No. 9.964/00 of April 10, 2000.
With the option for the REFIS, the Company will be able to finance its taxes
payable to the Federal Government for five years. Taxes payable are restated for
taxes incurred through February 29, 2000. The Company has 60 days, as from the
option formalization date, to present the calculation of the the amounts due for
the taxes to be paid in installments. The restatement of the tax debts included
in the REFIS is made based on the TJLP (Brazilian long-term interest rate).
The classification of such taxes between current and long-term liabilities take
into account the option for the REFIS mentioned above.
F-87
<PAGE>
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars)
11. Other nonoperating, income (expenses), net
As of December 31, 1999 and 1998, nonoperating were comprised of:
1999 1998 1997
------- ------- -------
Write-off of assets related to
cancellations of subscriptions $(1,930) $ -- $ --
Write-off of decoders (705) -- --
(547) 284 (567)
------- ------- -------
$(3,182) $ 284 $ (567)
======= ======= =======
12. Paid-in capital
Paid-in capital as of December 31, 1999 and 1998 was comprised of:
<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
US$ Shares US$ Shares
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Abril S.A $ 6,190 2,456,150 $ 6,190 2,456,150
TVA Distribuidora S.A 38,023 15,087,776 38,023 15,087,776
----------- ----------- ----------- -----------
$ 44,213 17,543,926 $ 44,213 17,543,926
=========== =========== =========== ===========
</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-88
<PAGE>
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (Continued)
(in thousands of U.S. dollars)
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 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.
14. Pension Plan
In April 1996, the Company became a co-sponsor of the private pension
entity named Abrilprev Sociedade de Previdencia Privada ("Abrilprev"), the
primary objective of which is to grant employees benefits other than those
provided by Social Security. The plan is optional to all employees of the
sponsoring entities. Abrilprev operates as a Defined Contribution Plan.
Company contributions are made based on a fixed percentage applied to the
payroll of the sponsoring entities based on actuarial calculations.
Contribution expenses amounted to $ 10 for the year ended December 31, 1999
($18 in 1998).
15. 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 1999, contributions made by the Company to the Health Care
Plan and certain affiliates companies to Associacao Abril de Beneficios
amounted to $97 ($212 for 1998).
F-89
<PAGE>
TVA SUL PARANA LTDA.
AND SUBSIDIARY
Notes to Consolidated Financial Statements (Concluded)
(in thousands of U.S. dollars)
16. Supplementary information - valuation and qualifying accounts and reserves
<TABLE>
<CAPTION>
Provision Provision Deferred Provision
for Doubtful for Taxation for
Accounts Obsolescence Valuation claims
Allowance
<S> <C> <C> <C> <C>
Balance as of December 31, 1996 $ 386 $ -- $ 5,072 $ --
Additions charged to expense 1,101 -- 2,095 323
------- ------- ------- -------
Balance as of December 31, 1997 $ 1,487 $ -- $ 7,167 $ 323
Additions charged to expense 202 -- 1,264 (72)
------- ------- ------- -------
Balance as of December 31, 1998 $ 1,689 $ -- $ 8,431 $ 251
Additions charged to expense -- 403 -- --
Reduction 30 -- (1,007) (143)
------- ------- ------- -------
Balance as of December 31, 1999 $ 1,719 $ 403 $ 7,424 $ 108
======= ======= ======= =======
</TABLE>
17. Recent accounting pronouncements
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The standard requires that all
derivative instruments (1) be recognized as assets or liabilities and (2)
be adjusted to fair value each period. SFAS 133 is effective for fiscal
year beginning after June 15, 1999. As of December 31,1999 the Company has
no operations with hedging activities.
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, "Views on Selected Revenue
Recognition Issues" ("SAB 101"), which sets forth the staff's views in
applying generally accepted accounting principles to selected revenue
recognition issues. SAB 101 is effective for the second quarter of 2000.
The Company will assess the effect of this new standard during 2000 fiscal
year. The Company does not believe there will be any significant effect on
its financial statements.
* * * * * * *
F-90
<PAGE>
CCS - CAMBORIU CABLE SYSTEM
TELECOMUNICACOES LTDA.
Financial Statements Together with
Report of Independent Public Accountants
December 31, 1999 and 1998
<PAGE>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
INDEX TO FINANCIAL STATEMENTS
Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Public Accountants F-92
Balance Sheets as of December 31, 1999 and 1998 F-93
Statements of Operations for each of the three years in the period ended December 31, 1999 F-95
Statements of Changes in Shareholders' Equity for each of the three years in the
period ended December 31, 1999 F-96
Statements of Cash Flows for each of the three years in the period ended
December 31, 1999 F-97
Notes to Financial Statements F-98
</TABLE>
F-91
<PAGE>
Report of Independent Public 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, 1999 and 1998, 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, 1999 , 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, 1999 and 1998, and the related
statements of its operations and cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States of America.
Arthur Andersen
Sao Paulo, Brazil
May 5, 2000
F-92
<PAGE>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Balance Sheets
December 31, 1999 and 1998
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------ ------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 129 $ 59
Accounts receivable, net 181 108
Inventories 127 129
Recoverable taxes 41 47
Accounts receivable from related parties 17 16
Other accounts receivable 17 16
------ ------
Total current assets 512 375
------ ------
Property, plant and equipment, net 4,453 4,550
------ ------
Total assets $4,965 $4,925
====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-93
<PAGE>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Balance Sheets
December 31, 1999 and 1998
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities
Film Suppliers $ 109 $ 109
Others suppliers 85 77
Taxes payable other than income taxes 80 92
Accrued payroll and related liabilities 47 46
Income taxes 81 24
Advance payments received from subscribers 18 26
Accounts payable to related companies 1 42
Others accounts payable 42 9
------- -------
Total current liabilities 463 425
------- -------
Long-term liabilities
Loans from related companies 426 1,099
Taxes payable other than income taxes 152 --
------- -------
Total long-term liabilities 578 1,099
------- -------
Shareholders' equity
Paid-in capital 4,012 4,012
Accumulated deficit (88) (611)
------- -------
Total shareholders' equity 3,924 3,401
------- -------
Total liabilities and shareholders' equity $ 4,965 $ 4,925
======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-94
<PAGE>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Statements of Operations
for the years ended December 31, 1999 , 1998 and 1997
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Gross revenues
Monthly subscriptions $ 1,833 $ 2,454 $ 2,522
Installation 32 90 145
Additional services & others 20 51 106
Taxes on revenue (184) (71) (88)
----------- ----------- -----------
Net revenue 1,701 2,524 2,685
----------- ----------- -----------
Direct operating expenses
Payroll and benefits 84 105 243
Programming 528 740 920
Other costs 93 178 459
----------- ----------- -----------
705 1,023 1,622
----------- ----------- -----------
Selling, general and administrative expenses
Payroll and benefits 147 286 249
Advertising and promotion 6 2 82
Rent 9 91 --
Other administrative expenses 50 394 268
----------- ----------- -----------
212 773 599
----------- ----------- -----------
Depreciation 229 338 264
----------- ----------- -----------
Operating income 555 390 200
----------- ----------- -----------
Interest income 226 50 85
Interest expenses -- (242) (355)
Translation gain (loss) (135) 23 10
Other nonoperating (expense) income, net (17) 58 (68)
----------- ----------- -----------
Income (loss) before income taxes 629 279 (128)
----------- ----------- -----------
Income taxes (106) (24) --
----------- ----------- -----------
Net income (Ioss) $ 523 $ 255 $ (128)
=========== =========== ===========
Net income (loss) per share 0.11 0.05 (0.03)
Weighted average shares outstanding 4,850,000 4,850,000 4,850,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-95
<PAGE>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Statements of Changes in Shareholders' Equity
for the years ended December 31, 1999 ,December 31 1998 and 1997
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Paid-in Accumulated
Capital Deficit Total
------- ------- -------
<S> <C> <C> <C>
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
------- ------- -------
Net income for the period -- 255 255
------- ------- -------
Balance as of December 31, 1998 $ 4,012 $ (611) $ 3,401
------- ------- -------
Net income for the period -- 523 523
------- ------- -------
Balance as of December 31, 1999 $ 4,012 $ (88) $ 3,924
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-96
<PAGE>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Statements of Cash Flows
for the years ended December 31, 1999 ,1998 and 1997
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 523 $ 255 $ (128)
Adjustments to reconcile net loss to net cash
Provided by operating activities:
Depreciation 229 338 264
Provision for doubtful accounts (14) (278) 342
Provision for claims -- (4) 4
Accounts receivable (59) 310 (479)
Other accounts receivable including recoverable taxes
and accounts receivable from related parties 4 (33) 8
Accrued interest (227) -- --
Inventories 2 237 541
Suppliers 8 139 (373)
Taxes payable other than income taxes 140 2 56
Income Taxes 57 24 --
Accrued payroll and related liabilities 1 7 28
Other accounts payable (16) (70) 85
------- ------- -------
Net cash provided by operating activities 648 927 348
------- ------- -------
Cash flows used in investing activities:
Purchase of property, plan and equipment (132) (207) (1,488)
------- ------- -------
Net cash used in investing activities (132) (207) (1,488)
------- ------- -------
Cash flows (used in) provided by financing activities:
Loans from banks -- (116) 116
Loans from related companies (446) (602) 995
------- ------- -------
Net cash (used in) provided by financing activities (446) (718) 1,111
------- ------- -------
Net increase (decrease) in cash and cash equivalents 70 2 (29)
Cash and cash equivalents at beginning of the period 59 57 86
------- ------- -------
Cash and cash equivalents at end of the period $ 129 $ 59 $ 57
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-97
<PAGE>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements
(in thousands of U.S. dollars)
1. The Company and its principal operations
CCS - Camboriu renders services related to wireless cable and cable
television systems, including marketing and advertising, production,
distribution and licensing of domestic and foreign television programs. The
Company has wireless cable channel rights primarily in the city of
Camboriu. The Company's operations are substantially dependent on TVA Group
regarding programming, marketing, financial and administrative systems.
2. Summary of significant accounting policies
Significant policies followed in the preparation of the financial
statements are described below:
2.1. Basis of presentation
The financial statements are presented in U.S. dollars and have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP"), which differ in certain respects
from accounting principles applied by the Company in its local currency
financial statements, which are prepared in accordance with accounting
principles generally accepted in Brazil ("Brazilian GAAP").
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the
financial statement dates and the reported amount of revenues and expenses
during the reporting periods. Since management's judgment involves making
estimates concerning the likelihood of future events, the actual results
could differ from these estimates.
2.2. Accounting records
As required by Brazilian Law, and in accordance with local accounting
practices, the accounting records of the Company are maintained in
Brazilian currency ("real"). In order to present the financial statements
in conformity with accounting principles generally accepted in the United
States of America, the Company maintains additional accounting records
which are used solely for this purpose.
F-98
<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 a substantial portion of the
Company's operations are conducted in United States dollars. 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$1.7890 to US$1 in effect on December 31, 1999, and
R$1.2087 to US$1 in effect on December 31, 1998. 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 financial
instruments as of December 31, 1999 and 1998 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-99
<PAGE>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements (Continued)
(in thousands of U.S. dollars)
2.5. Financial instruments (Continued)
o The fair value of payables to suppliers, other accounts payable, loans
to related companies and certain other short-term liabilities are
considered to approximate their respective carrying value due to their
short-term nature.
o The fair value of loans 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, and is
considered 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
6.
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 if and when
appropriate.
F-100
<PAGE>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES 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 which are generally higher
than the revenues. Subscription revenues are recognized as earned on an
accrual basis.
3. Accounts receivable, net
As of December 31, 1999 and 1998, accounts receivable were comprised of:
December 31,
------------------
1999 1998
----- -----
Subscriptions and installation $ 224 $ 139
Advertising 7 33
Provision for doubtful accounts (50) (64)
----- -----
$ 181 $ 108
===== =====
4. Related party transactions
The following tables summarize the transactions between the Company and
related parties as of December 31, 1999 and 1998:
December 31,
------------------
1999 1998
------ ------
TVA Sistema de Televisao S.A
Accounts receivable $ 16 $ 12
TVA Sul Parana Ltda
Accounts receivable 1 4
Accounts payable -- 42
Loans payable 426 1,099
Abril S.A
Accounts payable $ 1 $ --
F-101
<PAGE>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements (Continued)
(in thousands of U.S. dollars)
5. 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, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
December 31,
--------------
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 39 $ 92
Other 6 (37)
---- ----
Total gross deferred tax asset 45 55
---- ----
Less valuation allowance (45) (55)
---- ----
Net deferred tax asset -- --
==== ====
</TABLE>
The Company has a limited operating history and has generated losses since
its inception. The valuation allowance has been established in accordance
with the requirements of SFAS No. 109, "Accounting for Income Taxes".
As of December 31, 1999, the Company has unexpirable accumulated tax losses
of $119.
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>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Income (loss) before income taxes and minority interest $ 629 $ 279 $(128)
Statutory income tax rate 37% 33% 33%
----- ----- -----
233 92 (42)
Increase (decrease) in the income tax rate 22 -- --
Translation loss of tax losses 30 11 15
Deductible devaluation loss for Brazilian Statutory Purposes (169) 76 26
----- ----- -----
Income tax provision (benefit) for the period 116 179 (1)
Increase (decrease) in valuation allowance (10) (155) 1
----- ----- -----
$ 106 $ 24 $--
===== ===== =====
</TABLE>
F-102
<PAGE>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements (Continued)
(in thousands of U.S. dollars)
6. Property, plant and equipment, net
As of December 31, 1999 and 1998, property, plant and equipment were
comprised of:
Annual
Depreciation December 31,
Rate -----------------------------
% 1999 1998
-------- -------
Machinery and equipment 10 $ 312 $ 294
Building 25 3,447 3,447
Furniture and fixtures 10 86 83
Vehicles 20 16 15
Software 20 8 8
Tools 10 2 2
Reception equipment 20 513 443
Cable plant 10 977 937
------- --------
5,361 5,229
Telephone line use rights 4 4
Accumulated depreciation (918) (689)
Fixed assets in transit 6 6
------- --------
$4,453 $ 4,550
======= ========
7. Paid-in capital
Paid-in capital as of December 31, 1999 and 1998 was comprised of:
<TABLE>
<CAPTION>
1999 1998
------------------------- ------------------------
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 Parana Ltda 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.
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.
F-103
<PAGE>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements (Continued)
(in thousands of U.S. dollars)
8. Loan guarantees
In November 1996, Tevecap 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.
9. Litigation contingencies
Certain claims and lawsuits arising in the ordinary course of business have
been filed or are pending against the Company which were not recognized in
the financial statements. The Company has also recorded provisions related
to certain claims in amounts that management considers to be adequate after
considering a number of factors including (but not limited to) the views of
legal counsel, the nature of the claims and the prior experience of the
Company.
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.
10. Abril Health Care Plan
In February 1996, the Abril Health Care Plan, Associacao Abril de
Beneficios (the "Health Care Plan"), was created to provide health care to
Abril S.A. 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 1999, contributions made by the Company to the Health Care
Plan amounted to $15 ($21 in 1998).
F-104
<PAGE>
CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA.
Notes to Financial Statements (Concluded)
(in thousands of U.S. dollars)
11. Supplementary information - valuation and qualifying accounts and reserves
<TABLE>
<CAPTION>
Deferred Provision
Taxation for Provision
Valuation Doubtful for
Allowance Accounts Claims
----- ----- -----
<S> <C> <C> <C>
Balance as of December 31, 1996 $ 209 $-- $--
Additions charged to expense 1 342 4
----- ----- -----
Balance as of December 31, 1997 $ 210 $ 342 $ 4
Reduction (155) (278) (4)
----- ----- -----
Balance as of December 31, 1998 $ 55 $ 64 $--
Additions charged to expense
Reduction (10) (14)
----- ----- -----
Balance as of December 31, 1999 $ 45 50 --
===== ===== =====
</TABLE>
12. Recent accounting pronouncements
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The standard requires that all
derivative instruments (1) be recognized as assets or liabilities and (2)
be adjusted to fair value each period. SFAS 133 is effective for fiscal
year beginning after June 15, 1999. As of December 31,1998 the Company has
no operations with hedging activities.
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101, "Views on Selected Revenue
Recognition Issues" ("SAB 101"), which sets forth the staff's views in
applying generally accepted accounting principles to selected revenue
recognition issues. SAB 101 is effective for the second quarter of 2000.
The Company will assess the effect of this new standard during 2000 fiscal
year. The Company does not believe there will be any significant effect on
its financial statements.
* * * * * * *
F-105
<PAGE>
GLOSSARY
ABC: ABC, Inc., formerly known as "Capital Cities/ABC, Inc."
Abril: Abril S.A.
Abril Credit Facility: A revolving credit facility, dated December 6, 1995,
between Tevecap, as the borrower, and Abril, as the lender.
ANATEL: Agencia Nacional de Telecomunicacoes (National Telecommunications
Agency), an independent Brazilian federal agency authorized to regulate the
Brazilian subscription television industry.
BBC: British Broadcasting Corporation.
C-Band: A satellite transmission system which provides a signal on the "c"
bandwidth.
Cable: A Cable network employs electromagnetic transmission over coaxial
and/or fiber-optic cable to transmit multiple channels carrying images, sound
and data between a central facility and individual customers' television sets.
Networks may allow one-way (from a headend to a residence and/or business) or
two-way transmission from a headend to a residence and/or business with a data
return path for the headend.
Cable license: A license that is granted by the applicable governing body
pursuant to its authority under the communications laws of a particular country
for the purpose of providing Cable services for a specific franchise/license
area.
Canbras: Canbras Communications Corp., a Canadian corporation.
Canbras Association Agreement: Association Agreement dated June 14, 1995,
among Tevecap, TVA Sistema, the Canbras TVA Companies, Canbras and Canbras-Par.
Canbras 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% equity interest and Canbras Par holds a 64%
equity interest.
Canbras-Par: Canbras Participacoes, Ltda., a Brazilian limitada
wholly-owned by Canbras.
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.
A-1
<PAGE>
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% equity interest in Tevecap.
CPCT: Centrais Privadas de Comutacao Telefonica, certain private telephone
networks comparable to private branch exchanges (PBX) found in larger apartment
complexes, hotels and businesses in the United States.
Darlene Investments: Darlene Investments Ltd., a Cayman Islands limited
liability company which is part of the Cisneros Group of Companies.
DBS or DTH: Direct broadcast satellite service, operating in C-Band or
Ku-Band width, by which television programming is transmitted to individual
dwellings, each served by a single satellite dish.
DBS Sale: The sale by the Company of the DBS Systems and certain assets
related thereto in July 1999.
DBS Systems: Ku-Band and C-Band operations of Galaxy Brasil and TVA Banda
C, respectively.
DIRECTV: Brazil's first digital Ku-Band service, which is operated by
Galaxy Brasil and Galaxy Latin America.
DISTV: The distribution of television signals by physical means (i.e., by
Cable) to end users, generally limited to signals without interference by a
DISTV operator with the signal content.
DLA: DIRECTV Latin America, Inc. a California corporation wholly-owned by
Hughes Communications that holds a 77.8% equity interest in GLA.
ESPN: ESPN, Inc., in which ABC has an 80% equity interest and Hearst has a
20% equity interest.
ESPN Brasil: Programming provided by ESPN Brasil Ltda, an indirect
subsidiary of ESPN.
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.
A-2
<PAGE>
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
that was sold to Galaxy Latin America in July 1999.
Galaxy Latin America: Galaxy Latin America, LLC, a Delaware limited
liability company the members of which are DLA, which holds a 77.8% equity
interest and Darlene Investments, which holds a 22.2% equity interest.
Globo: Globo Par and TV Globo, the owners of a number of Brazil's over the
air channels.
Globo Cabo: Globo Cabo S.A., a Cable service provider in Brazil.
Globo Par: Globo Comunicacoes e Participacoes Ltda.
Guarantors: TVA Sistema de Televisao S.A., TVA Communications Ltd.,
Comercial Cabo TV Sao Paulo Ltda., TVA Sul Parana Ltda., CCS Camboriu Cable
System de Telecomunicacoes Ltda.,TVA Distribuidora S.A., TVA Programadora Ltda.,
TVA Network Ltda. and TVAPAR S.A.
HABC II: Hearst/ABC Video Services II, a Delaware general partnership
jointly owned by Hearst and ABC, which partnership holds a 15.3% equity interest
in Tevecap.
HBO Brasil: Programming provided by HBO Brasil Partners.
HBO Brasil Ltda: A Brazilian limitada, wholly owned by HBO Partners, that
distributes HBO programming in Brazil.
HBO Brasil Partners: HBO Brasil Partners Ltd., a joint venture between TVA,
which holds a 24% equity interest, and HBO Ole Partners, which holds a 76%
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.
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Hearst/ABC Parties: HABC II and CPL.
Hearst/ABC Programming Agreement: Programming Agreement, dated December 6,
1995, among Tevecap, Hearst and ABC.
Homes Passed: Homes that can be connected to a Cable distribution system
without further extension of the distribution network.
Hughes Communications: Hughes Communications, Inc.
Hughes Electronics: Hughes Electronics Corporation.
IBGE: Instituto Brasileiro de Geografia e Estatistica.
Indenture: The Indenture, dated as of November 26, 1996 and as amended and
supplemented from time to time, among Tevecap, the Guarantors, Chase Manhattan
Bank, as trustee, and Chase Trust Bank, as principal paying agent in connection
with the Senior Notes.
Independent Operators: Independent pay television system operators to which
TVA sells programming.
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.
MGM: Metro Goldwyn Mayer, Inc.
MMDS (Multi-channel multi-point distribution system): A one-way radio
transmission of television channels over microwave frequencies from a fixed
station transmitting to multiple receiving facilities located at fixed points.
MMDS license: A license that is granted by the applicable governing body
pursuant to its authority under the communications laws of a particular country
for the purpose of providing MMDS services for a specific franchise/license
area.
MTV Brasil: MTV Brasil Ltda., a Brazilian limitada in which Abril holds a
50% equity interest and Viasem Brasil Holdings Ltda. (an indirect subsidiary of
Viacom International) holds the remaining 50% equity interest.
Multicanal: Multicanal Participacoes S.A., a Cable service provider in
Brazil.
Net Brasil: Net Brasil S.A., a Cable and MMDS service provider in Brazil.
Net Sat: Net Sat Servicos Ltda., in which Globo Par has a controlling
interest and whose other equity holders include News Corporation, a subsidiary
of The News Corporation Limited.
News Corporation: News Corporation plc.
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Operating Ventures: Canbras TVA and TV Filme, two of TVA's minority-owned
ventures.
Owned Systems: TVA Sistema and TVA Sul.
Pay-per-view: Payment made for individual programs rather than a monthly
subscription for a whole channel or group of channels. Pay-per-view channels
currently provide certain popular sporting events or major motion pictures for
which customers may be prepared to make a special payment.
Penetration rate: The measurement of the take-up of Cable services. The
penetration rate as of a given date is calculated by dividing the number of
subscribers connected to a system on such date by the total number of homes
passed in such system.
Real Plan: A Brazilian Government stabilization program, announced in
December 1993, aimed at curtailing inflation and building a foundation for
sustained economic growth.
Regulatory Put: A provision in the Stockholders Agreement pursuant to which
an Event Put is triggered if the amount of capital stock held by a Stockholder
(other than Abril) exceeds the amount allowed under an appropriate legal
restriction.
Revenue per subscriber: Total revenue derived from a subscriber television
system divided by the average number of subscribers for that period.
SAP: Second Audio Programming, which provides the option of audio in a
second language for the programming on channels for which it is offered.
SBT: TVSBT--Canal 4 de Sao Paulo S.A., a Brazilian national off-air
channel.
Securities Act: United States Securities Act of 1933, as amended.
Senior Notes: Tevecap's 250,000,000 12 5/8% Senior Notes due 2004 issued on
November 26, 1996.
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 or assumed by each of the
Guarantors.
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.
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TV Cabo Santa Branca: TV Cabo Santa Branca Comercio Ltda., a Brazilian
limitada, in which Tevecap holds a 36% equity interest and Canbras Par holds a
64% equity interest.
TV Filme: TV Filme, Inc., a Delaware corporation in which, as of December
31, 1999, Tevecap held a 14.7% equity interest, Warburg, Pincus Investors, L.P.
held a 38.8% equity interest, members of the Lins family held a 16.2% equity
interest, public stockholders held a 28.15% equity interest and certain
individuals held the remaining 2.15% equity interest. Upon the implementation of
a restructuring agreement with creditors, Tevecap's equity interest in TV Filme
is expected to be reduced to less that 1%.
TV Filme Service Area: Brasilia, Belem and Goiania.
TV Globo: A provider of off-air programming in Brazil and an affiliate of
Globo.
TV Homes: The number of households in a given area possessing at least one
television set.
TV Show Time: Televisao Show Time Ltda., a Brazilian limitada in which the
estate of Matias Machline and an associate currently hold a 53% equity interest
and in which the remaining 47% is currently held by various Abril shareholders.
TVA: Tevecap S.A. and its consolidated subsidiaries and affiliates.
TVA Banda C: TVA Banda C Ltda., a Brazilian limitada in which TVA held a
100% equity interest prior to the sale of TVA Banda C to Galaxy Latin America in
July 1999.
TVA Brasil: TVA Brasil Radioenlaces S.A., a Brazilian limitada in which the
estate of Matias Machline currently holds a 50% equity interest and in which the
remaining 50% is currently held by various Abril shareholders.
TVA Sistema: TVA Sistema de Televisao S.A., a Brazilian corporation in
which Tevecap holds a 98% equity interest Robert Civita, a Brazilian national,
holds a 2% equity interest.
TVA Sul: The operations of TVA Sul Parana Ltda., a Brazilian limitada in
which TVA holds an 86% equity interest and Abril holds the remaining 14% equity
interest, and CCS-Camboriu Cable System de Telecomunicacoes Ltda., a Brazilian
limitada in which TVA Sul Parana holds a 60% equity interest and Construtora ENE
ESSE Ltda. holds the remaining 40% equity interest.
UHF: Broadcast of a television signal at an ultra-high frequency over a
given geographical area.
VCR: Video cassette recorders.
Viacom International: Viacom International (Netherlands B.V.).
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