-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NXNx3S9JKmhxyZ4+BeXXx2AjAbhAp3DzcJiVT4bNEXfN1lUjVzUKN2y/uepiGFpL fVprleFBPk/o0cTICToqRg== 0001005477-99-002551.txt : 19990520 0001005477-99-002551.hdr.sgml : 19990520 ACCESSION NUMBER: 0001005477-99-002551 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990519 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEVECAP S A CENTRAL INDEX KEY: 0001034029 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: SEC FILE NUMBER: 333-22267 FILM NUMBER: 99630542 BUSINESS ADDRESS: STREET 1: RUA DO ROCIO 313 CITY: SAO PAOLO BRAZIL ZIP: 04552-904 BUSINESS PHONE: 2126641666 MAIL ADDRESS: STREET 1: RUA DO ROCIO 313 CITY: SAO PAOLO BRAZIL ZIP: 04552-904 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TVA SISTEMA DE TELEVISAO S A CENTRAL INDEX KEY: 0001034031 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: SEC FILE NUMBER: 333-22267-01 FILM NUMBER: 99630543 BUSINESS ADDRESS: STREET 1: RUA DO ROCIO 313 CITY: SAO PAOLO BRAZIL ZIP: 04552-904 MAIL ADDRESS: STREET 1: RUA DO ROCIO 313 CITY: SAO PAOLO BRAZIL ZIP: 04552-904 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TVA COMMUNICATIONS LTD CENTRAL INDEX KEY: 0001034032 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: 20-F SEC ACT: SEC FILE NUMBER: 333-22267-02 FILM NUMBER: 99630544 BUSINESS ADDRESS: STREET 1: RUA DO ROCIO 313 CITY: SAO PAOLO BRAZIL ZIP: 04552-904 MAIL ADDRESS: STREET 1: RUA DO ROCIO 313 CITY: SAO PAOLO BRAZIL ZIP: 04552-904 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GALAXY BRASIL S A CENTRAL INDEX KEY: 0001034033 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: 20-F SEC ACT: SEC FILE NUMBER: 333-22267-03 FILM NUMBER: 99630545 BUSINESS ADDRESS: STREET 1: RUA DO ROCIO 313 CITY: SAO PAOLO BRAZIL ZIP: 04552-904 MAIL ADDRESS: STREET 1: RUA DO ROCIO 313 CITY: SAO PAOLO BRAZIL ZIP: 04552-904 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMERCIAL CABLE TV SAO PAULO LTD CENTRAL INDEX KEY: 0001034035 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: 20-F SEC ACT: SEC FILE NUMBER: 333-22267-05 FILM NUMBER: 99630546 BUSINESS ADDRESS: STREET 1: RUA DO ROCIO 313 CITY: SAO PAOLO BRAZIL ZIP: 04552-904 MAIL ADDRESS: STREET 1: RUA DO ROCIO 313 CITY: SAO PAOLO BRAZIL ZIP: 04552-904 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TVA PARANA LTD CENTRAL INDEX KEY: 0001034036 STANDARD INDUSTRIAL CLASSIFICATION: [] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: SEC FILE NUMBER: 333-22267-06 FILM NUMBER: 99630547 BUSINESS ADDRESS: STREET 1: RUA DO ROCIO 313 CITY: SAO PAOLO BRAZIL ZIP: 04552-904 MAIL ADDRESS: STREET 1: RUA DO ROCIO 313 CITY: SAO PAOLO BRAZIL ZIP: 04552-904 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CCS CAMBORIU CABLE SYSTEM DE TELECOMUNICACOES LTD CENTRAL INDEX KEY: 0001034038 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: 20-F SEC ACT: SEC FILE NUMBER: 333-22267-08 FILM NUMBER: 99630548 BUSINESS ADDRESS: STREET 1: RUA DO ROCIO 313 CITY: SAO PAOLO BRAZIL ZIP: 04552-904 MAIL ADDRESS: STREET 1: RUA DO ROCIO 313 CITY: SAO PAOLO BRAZIL ZIP: 04552-904 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TVA DISTRIBUIDORA SA CENTRAL INDEX KEY: 0001061171 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: 20-F SEC ACT: SEC FILE NUMBER: 333-22267-13 FILM NUMBER: 99630549 BUSINESS ADDRESS: STREET 1: RUA DO ROCCIO, 313 11TH FL STREET 2: CEP 04552-904 CITY: SAO PAULO STATE: D5 BUSINESS PHONE: 0115511821 MAIL ADDRESS: STREET 1: RUA DO ROCCIO, 313 11TH FL STREET 2: CEP 04552-904 CITY: SAO PAULO STATE: D5 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TVA PROGRAMADORA LTDA CENTRAL INDEX KEY: 0001061172 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: 20-F SEC ACT: SEC FILE NUMBER: 333-22267-14 FILM NUMBER: 99630550 BUSINESS ADDRESS: STREET 1: RUA DO ROCCIO, 313 11TH FL STREET 2: CEP 04552-904 CITY: SAO PAULO STATE: D5 BUSINESS PHONE: 0115511821 MAIL ADDRESS: STREET 1: RUA DO ROCCIO, 313 11TH FL STREET 2: CEP 04552-904 CITY: SAO PAULO STATE: D5 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TVA SATELITE LTDA CENTRAL INDEX KEY: 0001061173 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: 20-F SEC ACT: SEC FILE NUMBER: 333-22267-15 FILM NUMBER: 99630551 BUSINESS ADDRESS: STREET 1: RUA DO ROCCIO, 313 11TH FL STREET 2: CEP 04552-904 CITY: SAO PAULO STATE: D5 BUSINESS PHONE: 0115511821 MAIL ADDRESS: STREET 1: RUA DO ROCCIO, 313 11TH FL STREET 2: CEP 04552-904 CITY: SAO PAULO STATE: D5 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TVA BANDA-CLTDA CENTRAL INDEX KEY: 0001081912 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 000000000 FILING VALUES: FORM TYPE: 20-F SEC ACT: SEC FILE NUMBER: 333-22267-16 FILM NUMBER: 99630668 BUSINESS ADDRESS: STREET 1: RUA DO ROCIA, 313 STREET 2: SAO PAULO, SA BRAZIL MAIL ADDRESS: STREET 1: RUA DO ROCIA, 313 STREET 2: SAO PAULO, SA BRAZIL FILER: COMPANY DATA: COMPANY CONFORMED NAME: TVAPAR SA CENTRAL INDEX KEY: 0001086634 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 000000000 STATE OF INCORPORATION: D5 FILING VALUES: FORM TYPE: 20-F SEC ACT: SEC FILE NUMBER: 333-22267-17 FILM NUMBER: 99630669 BUSINESS ADDRESS: STREET 1: RUA DO ROCIO, 313 STREET 2: SAO POULO SP 04552-904 BRAZIL CITY: BRAZIL STATE: D5 ZIP: 00000 MAIL ADDRESS: STREET 1: TVAPAR SA RUA DO ROCIO, 313 STREET 2: SAO POULO SP 04552-904 BRAZIL CITY: BRAZIL STATE: D5 ZIP: 00000 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TVA NETWORK LTDA CENTRAL INDEX KEY: 0001086635 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 000000000 STATE OF INCORPORATION: D5 FILING VALUES: FORM TYPE: 20-F SEC ACT: SEC FILE NUMBER: 333-22267-18 FILM NUMBER: 99630670 BUSINESS ADDRESS: STREET 1: RUA DO ROCIO, 313 STREET 2: SAO POULO SP 04552-904 BRAZIL CITY: BRAZIL STATE: D5 ZIP: 00000 MAIL ADDRESS: STREET 1: TVA NETWORK LTDA RUA DO ROCIO, 313 STREET 2: SAO POULO SP 04552-904 BRAZIL CITY: BRAZIL STATE: D5 ZIP: 00000 20-F 1 FORM 20-F As Filed with the Securities and Exchange Commission on May 19, 1999. ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------ Form 20-F ------------------ |_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number _______________ ------------------ Tevecap S.A. (Exact name of Registrant as specified in its charter) TEVECAP INC. THE FEDERATIVE REPUBLIC OF BRAZIL (Translation of Registrant's (Jurisdiction of incorporation or name into English) organization) Rua do Rocio, 313 Sao Paulo, SP Brazil 04552-904 (Telephone: 55-11-821-8550) (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., Galaxy Brasil Ltda., 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 Satelite Ltda., TVA Banda C 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| ================================================================================ TABLE OF CONTENTS PART I ITEM 1. DESCRIPTION OF BUSINESS..............................................1 ITEM 2. DESCRIPTION OF PROPERTY.............................................21 ITEM 3. LEGAL PROCEEDINGS...................................................21 ITEM 4. CONTROL OF REGISTRANT...............................................22 ITEM 5. NATURE OF TRADING MARKET............................................24 ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS...........................................................25 ITEM 7. TAXATION............................................................26 ITEM 8. SELECTED FINANCIAL DATA.............................................30 ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........................................35 ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..........51 ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT............................52 ITEM 11. COMPENSATION FOR DIRECTORS AND OFFICERS.............................53 ITEM 12. OPTIONS TO PURCHASE SECURITIES......................................54 ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS......................54 PART II ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED..........................56 PART III ITEM 15. DEFAULTS UPON SENIOR SECURITIES.....................................57 ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES.............................57 ITEM 17. FINANCIAL STATEMENTS................................................57 ITEM 18. FINANCIAL STATEMENTS................................................57 ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS...................................57 INDEX TO THE FINANCIAL STATEMENTS.............................................58 GLOSSARY.....................................................................A-1 ii 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, 1998 (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, 1998 of R$1.2087 = 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 1991 population census figures compiled by the Instituto Brasileiro de Geografia e Estatistica ("IBGE"). There can be no assurance that the number of people or the number of households in a specified area has not increased or decreased by a higher or lower rate than those estimated by the IBGE since the 1991 census. Unless otherwise indicated, references to the number of the Company's subscribers are based on Company data as of December 31, 1998. The term DIRECTV(R) ("DIRECTV") (DIRECTV(R) is a registered trademark of Hughes Electronics Corporation ("Hughes Electronics")) refers to the Ku-Band service provided by Galaxy Brasil in conjunction with Galaxy Latin America. Data concerning total MMDS, Cable, C-Band or Ku-Band subscribers and penetration rates represent estimates made by the Company based on the data of Pay TV Survey, Associacao Brasileira de Telecomunicacoes por Assinatura (ABTA), Kagan World Media, Inc., IBGE data, the Company's knowledge of the pay television systems of the Company and the Operating Ventures, and public statements of other Brazilian pay television providers. Although the Company believes such estimates are reasonable, no assurance can be made as to their accuracy. 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 PART I ITEM 1. DESCRIPTION OF BUSINESS The following description is qualified in its entirety by reference to the agreements entered into as of May 18, 1999 among the Company, Abril and certain subsidiaries of the Company to sell the Company's DBS Systems to Galaxy Latin America, DIRECTV Latin America, Inc. and Darlene Investments Ltd. On the date hereof, the Company initiated a tender offer for all of the Notes, together with a consent solicitation for consent by Noteholders to eliminate the restrictive covenants contained in the Indenture. See "Recent Developments." General TVA is a leading pay television operator in Brazil and is one of the country's largest pay television programming distributors. In 1989, TVA was the first to provide pay television services in Brazil. With approximately 620,000 subscribers, TVA offers pay television services utilizing four distribution technologies: MMDS, Cable, digital Ku-Band and digital C-Band. Additionally, TVA has interests in HBO Brasil Partners and ESPN Brasil Ltda., two programming joint ventures (the "Programming Ventures"). Through owned, affiliated and independent pay television operators, TVA programming reaches approximately 1.2 million pay television households. TVA is a majority owned subsidiary of Abril, S.A. ("Abril"), Latin America's leading magazine publishing, printing and distribution company. TVA's other 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 four owned operating systems (the "Owned Systems"): TVA Sistema, TVA Sul, TVA Banda C and Galaxy Brasil. Through the MMDS and Cable systems of TVA Sistema and TVA Sul, the Company serves six cities with a combined population of approximately 18 million, including three of the seven largest cities in Brazil: Sao Paulo (population of 10.2 million), Rio de Janeiro (population of 5.7 million) and Curitiba (population of 1.5 million). The Company also holds minority interests in Canbras TVA and TV Filme (the "Operating Ventures"), which together provide pay television services to an additional seven cities with a total population of 6.5 million. In addition, the Company sells programming to, and receives a per subscriber fee from, unaffiliated pay television operators ("Independent Operators"). The Company, through Galaxy Brasil, is the exclusive provider 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 holds a 10.0% equity interest (subject to dilution as described below). The other 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, also provides digital C-Band television service (together with Galaxy Brasil, the "DBS Systems"). In 1998 the Company completed a corporate reorganization pursuant to which three new wholly-owned subsidiaries, TVA Distribuidora S.A., TVA Programadora Ltda. and TVA Satelite Ltda., became holding companies for the Company's interests in its Cable and MMDS operations, the Programming Ventures and the DBS Systems, respectively. This corporate reorganization did not result in any change in the Company's beneficial interests in its subsidiaries and affiliates. Recent Developments Sale of DBS Systems and GLA Interest As of May 18, 1999 the Company entered into two agreements, referred to below, to sell its DBS Systems to Galaxy Latin America, and to sell its equity interest in Galaxy Latin America, Inc. and certain related assets to DIRECTV Latin America and Darlene Investments Ltd. (collectively, the "Proposed Sale"). At the same time, the Company is initiating a tender offer to purchase all of the Notes (the "Offer"), together with a consent solicitation (the "Solicitation") for consent by Noteholders to broadly amend the restrictive covenants contained in the Indenture. The Proposed Sale represents, in management's opinion, the best opportunity for addressing the Company's current financial situation. In recent years the Company has suffered recurring operating losses and has substantial negative working capital. These developments have been exacerbated by recent negative events occurring in the Brazilian economy, in particular a currency devaluation in the first quarter of 1999 and a general recession. As described below, the Company has failed to comply with certain obligations under its debt agreements and material contracts, which failures may result in the termination of certain of the Company's material agreements, acceleration of indebtedness, and the exercise of other remedies by the Company's creditors. As further discussed below, Arthur Andersen S/C, the Company's independent public accountants, has indicated in its audit report for the year ended December 31, 1998 that these factors "raise substantial doubt about [the Company's] ability to continue as a going concern". The Proposed Sale is subject to a number of conditions, including the execution of a Supplemental Indenture. Proceeds from the Proposed Sale will be used to fund the Offer and Solicitation. See "Company Rationale for the Proposed Sale" below. On May 18, 1999, a Master Agreement (the "Master Agreement") relating to the sale of the Company's equity interests in Galaxy Brasil Ltda. and TVA Banda C Ltda. was entered into among the Company, Galaxy Brasil Ltda. and TVA Banda C Ltda., as Sellers, Abril S.A., as a Seller-related entity, and GLA, as Purchaser. In addition, on May 18, 1999, the GLA Purchase Agreement relating to the sale of the Company's equity interests in GLA and SurFin Ltd, and certain assets related thereto, was entered into among the Company, TVA Communications Ltd. and TVA Finco Ltd., as Sellers, and Abril S.A. as Seller-related entity, and DIRECTV and Darlene as Purchasers (the "GLA Purchase Agreement" and, together with the Master Agreement, the "Agreements"). For purposes of this discussion, (i) GLA, DIRECTV and Darlene are referred to as the "Purchasers" and (ii) the Company, Galaxy Brasil Ltda., TVA Banda C Ltda, TVA Communications Ltd. and TVA Finco Ltd. are referred to as the "Sellers". Pursuant to the Master Agreement, the Company has agreed to sell all of its interests in the following entities to GLA: o Galaxy Brasil Ltda. ("Galaxy Brasil" or "GLB"), a wholly-owned subsidiary of the Company and exclusive local operator of DIRECTV Ku-Band service in Brazil; and o TVA Banda C Ltda. ("TVA Banda C"), a subsidiary of the Company and operator of TVA's C-Band service. Pursuant to the GLA Purchase Agreement, the Company has agreed to sell all of its interests in the following entities and assets to DIRECTV and Darlene: o a 10% equity interest in GLA (subject to dilution as discussed below), which the Company owns 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. Galaxy Brasil and TVA Banda C are defined herein as the "Purchased Entities", and those entities and the assets referred to above are referred to collectively herein as the "Purchased Interests". Pursuant to the Agreements, the obligation of the Purchasers to complete the transactions contemplated by the Agreements is subject to the satisfaction or waiver of a number of conditions precedent on or prior to the Closing Date, including, but not limited to, the following: o Compliance with Indenture. The Proposed Sale must comply in all respects with the terms of the Indenture (as amended and supplemented by the Supplemental Indenture) relating to the Notes. In order to execute the Supplemental Indenture, the Company must receive the consent of bondholders representing at least a majority in aggregate principal amount of Notes (the "Requisite Consents") prior to June 3, 1999, unless extended (the "Consent Expiration Date"). Holders may not revoke their Consents or withdraw their tenders of Notes after the Consent Expiration Date. o Release of Subsidiary Guarantors. Upon the consummation of the Proposed Sale, all obligations of each of GLB and TVA Banda C, as Subsidiary Guarantors under the Indenture, must be automatically and unconditionally released and discharged, and each of GLB and TVA Banda C must cease to be a Subsidiary Guarantor under the Indenture. In addition, the Purchasers must receive an Acknowledgment of Release and Discharge, executed by the Trustee, acknowledging the release of each of GLB and TVA Banda C from all of their obligations as Subsidiary Guarantors under the Indenture. o Approval of ANATEL. The Proposed Sale, which involves a transfer of telecommunications assets and licenses related thereto, must be approved by the Agencia Nacional de Telecomunicacoes (National Telecommunications Agency or "ANATEL"), a regulatory body of the Brazilian federal government. o Absence of Material Adverse Change. The absence of any material adverse change in relation to the business, operations or condition of any of the Purchased Interests. A devaluation of the Brazilian real may be deemed to be a material adverse change if either (a) the closing spot exchange rate as of the day preceding the Closing Date or (b) the average closing spot exchange rate for the period of five business days preceding the Closing Date results in an exchange rate of the Brazilian real to the U.S. dollar greater than R$2.39. The Agreements are also subject to termination in certain circumstances, including the following: o Failure to Consummate the Consent Solicitation by June 15, 1999. The Agreements may be terminated by the Purchaser if the Requisite Consents pursuant to the Solicitation shall not have been obtained on or prior to June 15, 1999. o Failure of Closing to Occur by September 30, 1999. Either Agreement may be terminated by any party thereto if the Closing shall not have occurred on or before September 30, 1999. o Failure to Consummate the Consent Solicitation by July 15, 1999. The Agreements may be terminated by the Company if the Requisite Consents pursuant to the Solicitation shall not have been obtained on or prior to July 15, 1999. On the Consent Expiration Date, assuming the Company has received the Requisite Consents, in anticipation of the Closing GLA shall assume certain management responsibilities in connection with the operation of GLB, which may include providing or arranging financing for GLB, on a secured basis (to the extent that secured financing can be incurred under the terms of the Indenture). If the Closing of the Proposed Sale does not occur, GLA will relinquish such management responsibilities back to the Company. Pursuant to the terms of the Supplemental Indenture, the restrictive covenants will be substantially eliminated, so that the Proposed Sale will not result in any violation of, the Indenture. Upon consummation of the Proposed Sale, all obligations of each of GLB and TVA Banda C under the Indenture shall be automatically and unconditionally released and discharged in accordance with Section 10.3(b) of the Indenture, and each of GLB and TVA Banda C shall cease to be a Subsidiary Guarantor under the Indenture, in each case effective immediately upon consummation of the Proposed Sale. Sources of Funding for Payment of Tendered Notes The net cash proceeds of the Proposed Sale to the Company at the closing of the Proposed Sale (the "Closing") is expected to be approximately $140 million. The total consideration received by the Company will be comprised of the following main components: o in consideration for the Company's interests in GLA, SurFin, the CBC Notes and the CBC Warrants, the Company will receive a cash payment of $130 million; o in consideration for the equity interests of the Company in GLB and TVA Banda C, the Company will receive the following: (a) a cash payment currently estimated to be $10 million (consisting of a cash payment of $66.75 million, offset by certain royalties and other amounts due to GLA through the Consent Expiration Date under the Local Operating Agreement, dated July 29, 1996, between GLA and GLB, and to Hughes Electronics, in the amount of approximately $51 million as of April 30, 1999, which amount is expected to increase to approximately $57 million by the Consent Expiration Date); (b) a promissory note issued by GLA to the Company in the principal amount of $22.25 million, to bear interest at LIBID, which shall be payable only at maturity of the Note in one single payment two years from the Closing Date; (c) the release and/or amendment of certain guarantees given by the Company and TVA Sistema de Televisao S.A., a wholly-owned subsidiary of the Company, in respect of certain GLB obligations; (d) the Purchasers shall acquire GLB and TVA Banda C subject to the aggregate of dollar-denominated indebtedness of GLB and TVA Banda C, up to a maximum of $111.2 million; and (e) the Purchasers shall acquire GLB and TVA Banda C subject to the aggregate of real-denominated indebtedness of GLB to Abril, up to a maximum of R$70.9 million, to be repaid by GLB to Abril in cash immediately following the Closing. The consideration received by the Company for its equity interests in GLB and TVA Banda C will be subject to an upward or downward adjustment in accordance with certain purchase price adjustments based on the indebtedness and working capital of GLB and TVA Banda C as of the Consent Expiration Date, and for indemnification claims. Such adjustments may reduce the amount payable at Closing and under the GLA Promissory Note. Prior to the Consent Expiration Date the Company will have received from Bear, Stearns & Co. an opinion indicating that the total consideration received by the Company for the Purchased Interests is fair to the Company from a financial point of view. Concurrently with the consummation of the Proposed Sale, the net proceeds to the Company from the Proposed Sale will be delivered to The Chase Manhattan Bank, as Depositary, to fund the Total Consideration payable pursuant to the Offer. To the extent that the net proceeds to the Company from the Proposed Sale are less than the Total Consideration, the Company will obtain the remaining funds required to satisfy the Total Consideration from either the net proceeds of the sale of other assets of the Company or from a loan from its majority shareholder, Abril. Company Rationale for the Proposed Sale The Proposed Sale represents, in management's opinion, the best opportunity for addressing the Company's current financial situation. Development of the Ku-Band business requires significant capital investment to achieve profitability, and over the last three years the Company has committed significant financial resources to the development and operation of its Ku-Band service. The recent changes in the Brazilian economy coupled with the relatively high cost of developing and operating the Company's Ku-Band service has adversely affected the Company's cash flow, and has 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, as more particularly described below. The early stages of the development of a Ku-Band service in a developing market such as Brazil require a substantial level of capital expenditures. Acquiring Ku-Band subscribers requires high levels of advertising to educate consumers about the characteristics and advantages of a satellite television service, a well-developed sales network to market the product to prospective subscribers, a customer service infrastructure capable of delivering a high level of service and the ability to provide financing of consumer equipment (mainly decoders), to subscribers. In the case of decoder costs, the devaluation of the dollar against the real in the first quarter of 1999 caused a significant increase in the cost in reais of equipment. These factors have adversely affected the Company's cash requirements and liquidity and have caused the Company's management to conclude that continued ownership of the Purchased Entities would require levels of future operating and capital expenditures that would be unduly burdensome for the Company to bear in the current financial environment. Arthur Andersen, the Company's independent accountants, has included in its audit report of the Company's financial statements for the year ended December 31, 1998 an "emphasis paragraph" which states that the Company's financial statements have been prepared on the assumption that the Company will continue as a going concern. In its report, Arthur Andersen has stated that the Company has suffered recurring losses and has a negative working capital that "raise substantial doubt about its ability to continue as a going concern". In a footnote to the Company's financial statements relating to its working capital deficiency, Arthur Andersen acknowledges that management's plans to continue as a going concern include efforts to generate the necessary cash flow to meet the Company's cost structure through sales of non-strategic assets, and an administrative cost reduction program implemented in the fourth quarter of 1998. As a result of the Company's allocation of financial resources in support of the development and operation of its Ku-Band service, the Company lacks the financial resources required to meet certain of its obligations. Beyond financial support from its majority shareholder, Abril, the Company has lacked access to alternative sources of funding. The Company has, since 1998, relied upon Abril for loans to cover the cash demands, including interest payment on the Notes. In early 1998 Abril capitalized $100 million previously lent to the Company. Since that time Abril has lent more than $100 million. Despite these injections of capital, the Company had negative working capital in excess of $82 million for the year ended December 31, 1998. As indicated above, Abril has been a crucial source of financial support and funding for the Company. However, so long as the financing markets limit both the affordability and accessibility of capital for Abril, management of Abril has indicated that it will not continue to fund the Company's capital requirements and cash flow needs in the same manner as it has in the past. Non-compliance by the Company with Certain Obligations and Restrictions, and Non-payment of Capital Contributions The Company has, as a consequence of its negative cash flow, liquidity shortage and its lack of access to sources of capital, failed to comply with certain obligations, including certain payment obligations and certain financial covenants, and has not made several non-mandatory capital contributions to GLA, which are summarized below. As discussed below, some of these failures may result in the termination of certain material agreements, and may subject the Company to the exercise of certain remedies, or the acceleration of certain indebtedness, of the Company or GLB, or other consequences that could affect the Company's ability to continue as a going concern. o Accrued Royalty Payments to GLA. The Company has not made royalty payments to GLA in accordance with the terms of the Local Operating Agreement since August 1998. As of April 30, 1999 such unpaid amount totaled approximately $51 million. Under the terms of the Local Operating Agreement, GLA is entitled to terminate the Agreement for failure by GLB to make royalty payments when due. If GLA were to validly terminate the Local Operating Agreement, GLB would no longer be entitled to operate the DIRECTV Service in Brasil, and would be unable to service its current and future subscribers. o Failure by GLB to Achieve Certain Subscriber Targets. The Local Operating Agreement provides that if GLB does not reach certain subscriber targets within prescribed time periods GLA has the right to terminate GLB's exclusive right to operate the DIRECTV Service in Brazil, or potentially the right to terminate the Local Operating Agreement. At the present time GLB does not have the number of subscribers prescribed by the Local Operating Agreement. The potential consequence of this circumstance, at this time, would be a loss of exclusivity to operate the DIRECTV Service in Brazil. There is no assurance that GLA will not seek to terminate the exclusivity GLB has enjoyed since initiating DIRECTV Service in Brazil in 1996. If GLA were to validly terminate GLB's exclusivity, then GLB might be forced to compete with another operator of DIRECTV Service in Brazil, which could have a severe impact on GLB's ability to maintain its current subscribers and to attract new subscribers. o Indebtedness Payable to SurFin. GLB has incurred indebtedness to SurFin in the aggregate outstanding principal amount of approximately $71 million. Of that amount, approximately $60 million was due and payable in August 1998. Since that time, SurFin has granted to GLB successive extensions of the maturity date for such indebtedness. Such extensions are, however, terminable at any time in SurFin's sole discretion, and there is no assurance that SurFin will continue to grant such extensions. o Noncompliance With Certain Financial Covenants. GLB is currently not in compliance with certain financial covenants (specifically the debt to tangible net worth ratio covenant and the tangible net worth covenant) contained in the Equipment Lease Agreement and the Equipment Lease and Saleback Agreement, each dated as of July 30, 1996 between Citibank, N.A., as Lessor and GLB, as Lessee. Citibank issued a waiver of those covenant defaults, valid for a period of six months, from December 31, 1998 until June 30, 1999. However, there is no assurance that Citibank would be willing to grant further waivers at the end of such six-month period. In the event that Citibank were to refuse to grant further waivers, Citibank may have the right to exercise its remedies under the equipment lease agreements. Currently the aggregate principal amount due to Citibank under the two equipment lease agreements referred to above totals approximately $30 million. Although GLB may be able to raise certain defenses in the event of legal actions arising out of any of the foregoing events, the outcome of any such actions would be uncertain. In addition most of GLB's financing documents (including the Indenture) contain cross-default provisions that could be triggered by the enforcement by any of the creditors mentioned above. o Non-Contribution of Capital of GLA. The Company has not made non-mandatory capital contributions to GLA in the amount of $12 million since November, 1998. Since that time, the other members of GLA have made equity contributions to GLA on five separate occasions. It is currently expected that additional capital contributions to GLA will be requested of the Company in the amount of an additional $11 million by the end of 1999, which amounts the Company does not presently intend to fund. The consequence of this is that the Company's equity interest in GLA is now subject to dilution from its initial 10% interest and is likely to be subject to further dilution during the remainder of 1999. The financial crises in Brazil and other emerging markets have contributed to, and aggravated, the Company's financial difficulties. Financial crises in Southeast Asia and Russia in the fourth quarters of 1997 and 1998, respectively, together with domestic economic difficulties, resulted in a 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, have had a significant adverse effect upon the operations of the Company, and have materially raised the cost of debt financing for the Company. First, the devaluation of the real has caused a substantial increase in local currency terms of the U.S. dollar-denominated debt burden of the Company. Second, the new market conditions have significantly impaired the ability of the Company to obtain financing on acceptable terms. Finally, the recession of the Brazilian economy has 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. For all the reasons set forth above, Management has concluded that the Proposed Sale represents the best solution to resolve the financial situation of the Company. If the Proposed Sale is not consummated, it is expected that the Company would continue to suffer recurring losses and increasing negative working capital. This would force the Company to seek to renegotiate its obligations with its principal creditors, the failure of which could jeopardize the Company's ability to continue as a going concern. Programming Distribution and Markets The following table sets forth information regarding the markets in which TVA operates systems and distributes programming:
Pay Television Average Revenue Programming Service Launch TV Class ABC per Month per Channels Date Homes(a) TV Homes(a) Subscribers Subscriber Offered ---- -------- ----------- ----------- ---------- ------- Owned Systems MMDS TVA Sistema Sao Paulo ............ September 1991 4,367,286 1,917,608 76,920 $38.23 30 Rio de Janeiro ....... March 1992 3,015,016 964,804 94,578 38.35 29 TVA Sul Curitiba ............. March 1992 639,794 236,560 14,718 31.67 15 Cable(b) TVA Sistema Sao Paulo ............ October 1994 4,367,286 1,917,608 90,233 39.95 56 TVA Sul Curitiba ............. January 1995 639,794 263,560 18,076 34.02 44 Camboriu ............. June 1996 37,618 22,686 6,892 36.54 51 Foz do Iguacu ........ June 1996 46,669 29,151 8,285 30.58 55 Florianopolis ........ September 1996 155,382 53,001 6,111 35.64 49 --------- Total MMDS and Cable Subscribers .......... -- 315,813 -- -- DBS TVA Banda C/Galaxy Brasil(c) .............. March 1995 37,000,000 15,238,518 296,847 44.25 93(d) Subscribers Awaiting Installation ......... -- -- 13,766 -- -- --------- Total Subscribers-Owned Systems .............. -- -- 626,426 -- -- ========= Households Receiving TVA Programming Owned Systems .......... -- -- 626,426 -- -- --------- Operating Ventures MMDS TV Filme, Inc. ......... Brasilia ............. July 1993 464,473 273,135 47,733 $38.60 24 Goiania .............. December 1994 319,434 140,498 8,951 26.64 24 Belem ................ December 1994 197,293 123,820 20,385 33.15 24 Cable Canbras TVA Four cities(e) ....... April 1996 222,358 152,773 59,036 -- 50 --------- Total-Operating Ventures Independent Operators .. -- -- -- 136,105 -- -- ========= (52 Independent Operators) ........... -- -- -- 449,008 -- -- --------- Total .................. -- -- -- 1,211,539 -- -- =========
(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 701,859, 196,223, 18,055, 19,900 and 29,822 Homes Passed, respectively, as of December 31, 1998. (c) This data reflects the Company's digital Ku-Band and digital C-Band operations. TV Homes and Class ABC TV Homes information is national information for all of Brazil. (d) Represents Ku-Band operations. C-Band operations provide 26 channels (including nine SAP channels). (e) The four cities served by Canbras TVA are Santo Andre, Sao Bernardo, Guaruja and Sao Vicente. 2 Brazilian Pay Television Market Brazil is the largest television and video market in Latin America with an estimated 37.0 million TV Homes which, as of December 31, 1998, watched on average approximately 2.5 hours of television per day. Approximately 7.8 million television sets and 2.4 million VCR units were sold in Brazil during 1997. 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, 1998, there were an estimated 2.6 million pay television subscribers, representing approximately 7.0% of Brazilian TV Homes. By comparison, as of December 31, 1998, 56.1% of TV Homes in Argentina, 14.0% of TV Homes in Mexico and 76.5% of TV Homes in the United States subscribed to pay television. Management believes that the number of pay television subscribers in Brazil will continue to grow as pay television reaches more households both through the expansion of existing and new MMDS and Cable systems and through development of nationwide DBS Systems. The Ministry of Communications estimates that Brazil will have 6.0 million pay television subscribers by 2003. Ownership Tevecap is a majority owned subsidiary of Abril S.A. ("Abril") and benefits from Abril's extensive experience in the business of subscriptions and distribution, advertising synergies, common research resources and financial analysis and support. Certain of Tevecap's other shareholders provide the Company with access to additional international programming and certain technical and financial expertise. As of December 31, 1998, the Company's shareholders had invested, in aggregate, approximately $388.0 million in the Company, and Tevecap's ownership was as follows: Abril, 62.2%; Falcon International, 12.3%; Hearst, 8.7%; ABC, 8.7%; and CMIF, 8.1%. Distribution Operating Systems The following description is qualified in its entirety by reference to the agreements entered into as of May 18, 1999 among the Company, Abril and certain subsidiaries of the Company to sell the Company's DBS Systems to Galaxy Latin America, DIRECTV Latin America, Inc. and Darlene Investments Ltd. See "Recent Developments." TVA and the Operating Ventures distribute programming through four different technologies: MMDS, Cable, digital Ku-Band and digital C-Band. The availability of multiple distribution technologies enables the Company to exploit the population and income characteristics, topography and competitive dynamics of each of its markets. MMDS TVA operates Brazil's largest MMDS network, and with the Operating Ventures, serves the country's major metropolitan areas. In 1998 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. See "--Regulatory Framework." MMDS is being used in other emerging pay television markets such as Venezuela, Hong Kong and Mexico, where Cable has a strong incumbent position. 3 TVA owns five MMDS licenses and operates MMDS systems in Sao Paulo, Rio de Janeiro and Curitiba, which have an aggregate population of approximately 17.4 million. TVA serves 186,214 MMDS subscribers in these three cities. The MMDS systems of TVA offer between 15 and 27 channels of programming. TVA also holds interests in three MMDS licenses through TV Filme, an Operating Venture, which operates MMDS systems in Brasilia, Goiania and Belem and has 77,519 MMDS subscribers. See "--Regulatory Framework--MMDS Regulations." Cable TVA has recently emphasized the strategic deployment of Cable service and currently operates Cable systems in Sao Paulo, Curitiba and three other cities. Cable service involves a broad band network employing radio frequency transmission through coaxial and/or fiber optic cable. Cable systems consist of four major parts: a headend, a distribution network, a subscriber network and a house terminal. The programming is collected from the headend, then processed and fed into the distribution path consisting of trunk and distribution cable, which consists of coaxial and/or fiber optic cables. The signal is then fed into a subscriber network that is either located in an apartment building or a subscriber's home. Most of the Company's systems are constructed with either 750 MHz or 550 MHz bandwidth capacity, the latter of which is readily upgradeable to 750 MHz bandwidth capacity. The Company's 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. It is expected that this technology will enable the Company to provide interactive services, including telecommunications in the future. In addition, the Company's Cable systems generally use addressable converters, which allow the provision of pay-per-view services and enable TVA to upgrade, downgrade or disconnect a subscriber's service from the headend on short notice. TVA, through TVA Sistema and TVA Sul, owns six Cable licenses and operates Cable systems in Sao Paulo, Curitiba (where TVA originally owned three licenses that were later merged into one license), Camboriu, Florianopolis and Foz do Iguacu, which have an aggregate population of approximately 11.9 million and 129,597 subscribers. As of December 31, 1998, TVA had deployed approximately 3,865 kilometers of its Cable network, including 1,057 kilometers of fiber optic cable, including a 940 kilometer fiber optic loop in Sao Paulo and a 117 kilometer fiber optic network in Curitiba. 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, 1998, TVA Cable systems passed 712,855 homes in Sao Paulo, approximately 194,517 homes in Curitiba and a total of 976,854 homes throughout all of the Company's Cable systems. As of December 31, 1998, Canbras TVA, an Operating Venture, had an existing Cable network of 1,407 kilometers, with 356,478 Homes Passed and 59,306 subscribers. Canbras TVA is constructing Cable networks in ten cities in the greater Sao Paulo area with a combined population of over 2.8 million. By comparison, TVA's largest competitor in Sao Paulo for Cable service had, as of the same date, 1.0 million Homes Passed. TVA and Canbras TVA currently offer between 50 and 56 analog channels of programming (including off-air channels) on their Cable systems, depending on the market, and have the capability of offering up to 78 analog channels. During the year ended December 31, 1998, TVA and Canbras TVA averaged approximately 3,000 and 2,300 net new Cable subscribers per month, respectively. DIRECTV The following description is qualified in its entirety by reference to the agreements entered into as of May 18, 1999 among the Company, Abril and certain subsidiaries of the Company to sell the Company's DBS Systems to Galaxy Latin America, DIRECTV Latin America, Inc. and Darlene Investments Ltd. See "Recent Developments." In July 1996, TVA launched Brazil's DIRECTV service, Brazil's first Ku-Band service, operated by Galaxy Brasil. Galaxy Brasil receives programming from GLA, including programming which GLA purchases from TVA. Additionally, GLA provides scheduling and related services to Galaxy Brasil for use with DIRECTV. GLA distributes programming to Brazil through the transmission of an encoded signal via the Galaxy VIII-i satellite (launched in December 1997 and replacing the Galaxy III-R satellite) utilizing 32 transponders to a 4 subscriber's 60 centimeter dish antenna which can be mounted outside a window or on a rooftop. The signal is then transmitted to an integrated receiver decoder (an "IRD") in the subscriber's home. A single antenna may serve a single family dwelling or a multifamily dwelling, such as an apartment building, in which case each apartment needs to be equipped with a decoder. A unit of Hughes Electronics leases the Galaxy VIII-i satellite and provides the use of the satellite and related services to GLA, which, in turn, charges Galaxy Brasil a royalty on a per subscriber basis for the use of the satellite transponders and related services. The orbital location of the Galaxy VIII-i satellite enables the Company to offer more than 150 channels through DIRECTV service to substantially all of the TV Homes in Brazil, substantially all of which are able to use a 60-centimeter dish antenna due to the Galaxy VIII-i's expanded footprint. In addition, the Galaxy VIII-i satellite provides a significant improvement in signal quality, even under adverse weather conditions, although tall buildings and other tall structures may block reception of the DIRECTV programming signal. With DIRECTV service, TVA provided 93 channels of video programming (including 35 pay-per-view channels) and 35 channels of audio programming as of December 31, 1998. TVA owns a satellite uplink center for the Brazilian DIRECTV service in Tambore in greater Sao Paulo (the "Tambore Facility"). The Tambore Facility is used to uplink programming to the Galaxy VIII-i satellite. C-Band TVA has offered C-Band service since 1993, and is the only pay television operator to deliver a digital C-Band signal in Brazil. TVA's C-Band service consists of the transmission of a digital encoded signal via the Brasilsat satellite utilizing four transponders to a satellite antenna 1.1 meters in diameter located at a subscriber's home, where the signal passes through an integrated receiver decoder. A single antenna may serve a single family dwelling or a multifamily dwelling, such as an apartment building, in which case each apartment needs to be equipped with a decoder. The Brasilsat satellite was launched in July 1994 and is owned by Empresa Brasileira de Telecomunicacoes (Brazilian Telecommunications Company, or "Embratel"), the recently-privatized national long-distance carrier authorized to provide satellite telecommunications services utilizing the Sistema Brasileiro de Telecomunicacoes por Satelite (Brazilian Satellite Telecommunications System, or "SBTS"). TVA utilizes the Brasilsat satellite pursuant to three satellite transponder leases that expire on May 30, 2002, November 20, 2003, and November 24, 2003, respectively. The orbital location of the Brasilsat satellite enables TVA to provide C-Band service throughout Brazil with little or no interference. However, tall buildings and other tall structures may block reception of C-Band programming. The Brasilsat satellite has an expected useful life of approximately 12 to 15 years from the date of launch. TVA's C-Band service provides the Company with national coverage via satellite transmission and a large preinstalled market. As of December 31, 1998, there were approximately 4.5 million parabolic C-Band antennae in use in Brazil, most of which receive only off-air channels. TVA is able to deliver 38 channels of programming (including nine SAP channels) in addition to the off-air channels and currently delivers 26 channels (including nine SAP channels) as compared to the six channels in addition to the off-air channels offered by its only significant competitor for this service. As of December 31, 1998, TVA provided service to 70,403 C-Band subscribers throughout much of Brazil. The Owned Systems The following description is qualified in its entirety by reference to the agreements entered into as of May 18, 1999 among the Company, Abril and certain subsidiaries of the Company to sell the Company's DBS Systems to Galaxy Latin America, DIRECTV Latin America, Inc. and Darlene Investments Ltd. See "Recent Developments." TVA Sistema, TVA Sul and TVA Banda C TVA Sistema and TVA Sul operate the Company's MMDS and Cable businesses. TVA holds a 98.0% equity interest in TVA Sistema, and Robert Civita, a Brazilian national, holds the remaining 2.0% equity interest. The Company holds an 86.0% equity interest in TVA Sul, and Abril holds the remaining 14.0%. In November 1998, TVA's C-Band operations were transferred to TVA Banda C, in which TVA holds a 100% equity interest. 5 GLA and Galaxy Brasil Pursuant to a Partnership Agreement, dated February 13, 1995, GLA was formed as a general partnership. As of April 11, 1997, GLA was converted into a Delaware limited liability company. Such conversion did not materially affect the governance of GLA or TVA's ownership interest in GLA. Under a Limited Liability Company Agreement, dated April 11, 1997 (the "GLA Agreement"), GLA is managed by a seven-member Executive Committee to which DIRECTV Latin America, Inc. ("DLA") can appoint five members and each of the other partners, including Tevecap, can appoint one member as long as such partner holds at least an eight percent equity interest in GLA. The GLA Agreement provides for local operating agreements between GLA and local operators throughout South America, Central America, Mexico and the Caribbean which govern the relationship between GLA and such local operator. The GLA Agreement stipulates that the local operator in Brazil shall be Galaxy Brasil, 100.0% of the equity interest of which is owned by Tevecap. The Company has made a total of $42.4 million in capital contributions under the GLA Agreement as of December 31, 1998. The GLA Agreement places restrictions, including first negotiation, approval and tag-along rights, on the transfer of capital stock or voting securities of each of the current partners in GLA and in certain circumstances their parent entities. GLA's uplink facility is owned and operated by California Broadcast Center, LLC ("CBC"), a Delaware limited liability company formed on April 11, 1997 and owned by two units of Hughes Electronics. Pursuant to a Local Operating Agreement (the "Local Operating Agreement") between GLA and Galaxy Brasil, dated July 29, 1996, GLA has agreed to provide to Galaxy Brasil the exclusive right and ability to supply the DIRECTV service in Brazil. In accordance with a formula based on the number of subscribers, Galaxy Brasil is obligated to pay a periodic royalty to GLA. In addition, TVA may not own or engage in any other Ku-Band service and GLA may not own or engage in any other pay television service in Brazil. GLA, upon the occurrence of certain events, has the right to terminate the Local Operating Agreement, or to terminate Galaxy Brasil's exclusive rights to distribute DIRECTV programming. Such events include breach of any material obligation of Galaxy Brasil to GLA and the failure of Galaxy Brasil to meet certain specified performance goals. As of April 30, 1999 Galaxy Brasil had failed to make royalty payments of approximately $51 million to GLA. For a more detailed discussion of Galaxy Brasil's failure to make these royalty payments, and to meet certain subscriber targets, see "Recent Developments". The Operating Ventures The Operating Ventures also operate MMDS (TV Filme) or Cable (Canbras TVA) systems. TVA holds a 36.0% equity interest in each of Canbras TVA Cabo and TV Cabo Santa Branca (the "Canbras TVA Companies"). Canbras Participacoes Ltda., a Brazilian company ("Canbras-Par") holds the remaining interests in Canbras TVA Cabo and TV Cabo Santa Branca. Canbras-Par is an affiliate of Canbras Holdings Ltd. and Canbras Communications Corp., a publicly-traded Canadian company, which are affiliates of Bell Canada International, Inc., an affiliate of BCE Inc., Canada's largest telecommunications group. The Canbras Association Agreement provides for each of the Canbras TVA companies to be governed by a management committee of three members, one of which TVA has the right to designate. In addition, TVA agreed to supply to the Canbras TVA companies all programming regularly supplied to the Owned Systems at "most favored prices" and other terms at which programming is provided to the Owned Systems or to third parties in arm's-length transactions. TVA will continue to provide MMDS service, where possible, to customers in the Santo Andre and Sao Bernardo operating area of the Canbras TVA Companies until cable service is available in these areas. Canbras TVA Cabo and TV Cabo Santa Branca will compensate TVA for each subscriber that transfers from TVA's MMDS system to a Canbras TVA Cable system. The Company agreed to grant to Canbras-Par a "right of first refusal" to participate in Cable licenses that the Company may obtain, directly or indirectly, and Canbras-Par granted to the Company a similar "right of first refusal" to participate in Cable licenses acquired by Canbras-Par. The term of the Canbras Association Agreement is for so long as Canbras-Par or its assignee owns shares "in companies which have the objective of 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. 6 TVA holds a 14.7% equity interest in TV Filme. The remaining interests are held by Warburg, Pincus Investors, L.P., which currently holds a 38.8% equity interest; members of the Lins family, Brazilian nationals, who currently hold a 16.2% equity interest; public shareholders, who currently hold a 28.15% equity interest; and certain individuals with a combined 2.15% equity interest. On July 29, 1996, TV Filme completed a public offering of 2.5 million shares of its common stock in the United States at an initial price of $10.00 per share. Pursuant to a programming agreement, TVA provides programming to TV Filme, and TV Filme has agreed to use 50.0% of the channel capacity of each of its MMDS systems in Brasilia, Goiania and Belem (the "TV Filme Service Area") to broadcast TVA programming so long as (i) the quality of TVA programming, in the reasonable judgment of TV Filme, remains compatible with the taste and standards of TV Filme's subscribers, (ii) TVA continues to own, directly or indirectly, 10.0% of TV Filme's common stock and (iii) TVA remains a subsidiary of Abril. Within the TV Filme Service Area, TVA may not provide TVA programming to any Cable or other MMDS pay television service provider and TVA may not compete with TV Filme as an MMDS service provider. TV Filme also has a nonexclusive license to TVA programming in 19 cities in which TV Filme has pending license applications, subject to any exclusive license previously granted by TVA to other pay television service providers in such cities and which exclusive license TVA, using its best efforts, is unable to renegotiate to allow TVA to provide for TV Filme to have a nonexclusive license. TVA may not charge TV Filme an amount greater than the minimum rates charged by TVA to other subscription television operators, nor may such charges exceed comparable rates for other programming of a similar nature. The terms of the programming agreement terminate on July 20, 2004. From time to time, in connection with the programming agreement, TV Filme has agreed to enter into additional agreements with the Company regarding specified channels. The agreements typically have two year terms and determine the monthly fees which TV Filme pays for such channels. Programming TVA TVA, through its MMDS, Cable and C-Band systems, currently provides a programming package consisting of 15 to 56 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, Bravo Brasil, Locomotion, NHK, ART and CMT. In addition, TVA has distribution rights to certain of Brazil's most important soccer championships, including the Brazilian Cup and the Sao Paulo and Rio de Janeiro State Championships. TVA has entered into two Programming Ventures, ESPN do Brasil Ltda. ("ESPN Brasil Ltda.") and HBO Brasil Partners, through which it distributes a large volume of programming which management believes is especially important to its subscribers. ESPN Brasil Ltda. is a joint venture between Tevecap and ESPN Brazil, Inc. (a subsidiary of ESPN, Inc.), each of which holds a 50.0% equity interest. ESPN, Inc. is a joint venture between ABC and Hearst. ESPN, Inc. provides the programming of the U.S. channel ESPN2 to ESPN Brasil Ltda., which packages such programming with Brazilian and other international content and provides such packaged programming to TVA. Pursuant to a Quotaholders Agreement, dated June 26, 1995 (the "ESPN Agreement"), ESPN Brasil has the right to transmit "ESPN2 Service" programming as well as all library programming of ESPN. The Company has the exclusive right to broadcast the programming of ESPN Brasil Ltda. in Sao Paulo, Rio de Janeiro, Curitiba, Brasilia, Belem and Goiania. The Company also acts as the exclusive sales representative of ESPN Brasil programming with respect to sales to other Brazilian pay television providers and receives a commission in connection therewith. The Company is also the sole advertising agent for ESPN Brasil until June 1999 and receives a commission on advertising sales. ESPN Brasil Ltda., in turn, receives on an exclusive basis from the Company all rights to soccer and other sporting events acquired by the Company after February 24, 1995. ESPN Brazil, Inc. has the right to terminate the ESPN Agreement and dissolve ESPN Brasil Ltda. in the event that a Brazilian court issues a non-appealable decision that the Company did not have the right to grant these rights to ESPN Brasil. TVA's mandatory capital contributions to ESPN Brasil Ltda. are subject to a maximum aggregate amount of $5.0 million, whether in the form of loans or subscriptions for additional quotas. The ESPN Agreement is effective until June 17, 2045 and automatically renewable for a 50-year period. 7 HBO Brasil Partners is a joint venture between TVA, which as of December 31, 1998, held a 24.0% equity interest, and HBO Ole Partners, a joint venture among Time-Warner, Sony, Ole Communications, Inc. and BVI Television Investments, Inc. (an affiliate of Disney Enterprises, Inc.), which as of the same date held the remaining 76.0% equity interest. HBO Brasil Partners has exclusive programming contracts with Sony, Time-Warner and certain independent programming distributors. HBO Brasil Partners, through an affiliate, provides the programming for HBO Brasil to TVA. Pursuant to a Partnership Agreement dated April 15, 1994 (the "HBO Agreement"), HBO Brasil Partners is managed by a Partners' Committee comprised of an equal number of agents appointed by TVA and HBO Ole Partners, the other partner. The HBO Agreement provides for the Company to enter into an affiliation agreement with HBO Brasil Partners, pursuant to which the Company pays a monthly fee per subscriber to the partnership. In addition to the Programming Ventures, TVA has entered into a number of 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). Eurchannel is a channel assembled and distributed exclusively by TVA 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 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, offered exclusively by TVA, began transmission on June 17, 1995. TVA negotiated agreements with the major Brazilian soccer confederations, providing TVA coverage of soccer games of the Sao Paulo State Championship and the Brazil Cup. ESPN Brasil's programming centers around these 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 8 broadcast in stereo sound and subtitled or dubbed in Portuguese or Spanish. In the case of dubbed versions, viewers can listen to the original soundtrack on a SAP channel. Cartoon Network is an animated cartoon channel targeted to children that offers programs such as The Flintstones, The Jetsons, The Smurfs, Yogi Bear and other classic series. Discovery Brasil is comprised of programming shown on the US Discovery Channel, based on topics in the areas of nature, science and technology, history, adventure and world cultures. Recently, TVA began offering Discovery Kids, a 24-hour channel featuring the best of Discovery programming for children. The Fox Channel presents movies, as well as programs from the 2,000 titles in Fox's library. Fox also presents American television series, such as L.A. Law, M*A*S*H, and The Simpsons, among many others. Recently, TVA began offering Fox Kids, a 24-hour channel featuring the best of Fox programming for children. Eurochannel is specially assembled and packaged by TVA and offers subscribers European programming. The channel presents programs from the Spanish Radiotelevision Espanola, the German Deutsche Welle, the BBC, the news from the French TF1, as well as a variety of quality European films. News, sports, music and variety shows are also offered. MTV Brasil is a 24-hour channel produced by MTV Brasil, a joint venture company owned by Abril and an indirect subsidiary of Viacom International. MTV Brasil is entirely produced in Brazil in Portuguese. MTV Brasil has licensing agreements with the MTV Network, a division of Viacom International, and transmits a combination of music and other video clips, cartoons and local programming. Sony Entertainment is primarily a situation-comedy channel, consisting of Sony's film library, including Friends, Seinfeld, Mad About You and E.R. The Warner Channel is a family entertainment channel, with new and classic cartoons, children's programs and movies. Bravo Brasil is an arts and movie channel, following the same concept as the 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. 9 MGM Gold is a movie and series channel with selected productions from the Metro-Goldwin-Mayer studios. People+Arts is a 24-hour channel presenting documentaries about arts, personalities and cultures from different countries around the world. Nickelodeon is a 24 hour channel for children offering programs such as Rugrats and Bananas in Pijamas. RTPi, Radiotelevisao Portuguesa Internacional, is a Portuguese state-owned general entertainment channel produced and assembled in Portugal, airing music events, talk shows, movies, news and documentaries, exclusive to TVA. Locomotion is an animation channel with programming targeted to adolescents and adults, such as Dr Keds and South Park. Teleuno is a films and series channel with emphasis on action and adventure. Hallmark features mainly original TV movies. Adulto is an adult entertainment assembled locally. TVA's channel offerings as of December 31, 1998 included the following: Channel Description - ------- ----------- HBO Brasil................................ movie channel HBO Brasil 2.............................. HBO Brasil with a six-hour time shift ESPN Brasil............................... sports channel ESPN International........................ sports channel CNN....................................... news channel TNT....................................... movie channel Cartoon Network........................... cartoon channel Discovery Brasil.......................... science and documentary channel Fox Channel............................... movie channel Eurochannel............................... European variety programming channel MTV Brasil................................ music channel RTPi...................................... Portugal's state television channel CMT....................................... music channel TV5....................................... French variety programming channel WorldNet.................................. American news and variety channel RTVE...................................... Spanish variety channel Deutsche Welle............................ German variety channel America 2................................. Argentine variety channel TeleUno................................... Variety channel Sony Entertainment........................ situation comedy channel The Warner Channel........................ family entertainment channel Bravo Brasil.............................. arts and movies channel Cinemax................................... movie channel Mundo..................................... documentary channel E! Entertainment Television............... American variety channel 10 Channel Description - ------- ----------- MGM Gold.................................. movies and series channel NHK....................................... Japanese variety programming channel RAI....................................... Italian variety programming channel ART....................................... Arabian variety programming channel CBS Telenoticias.......................... news channel Discovery Kids............................ documentary channel Nickelodeon............................... cartoon channel People+Arts............................... documentary channel Fox Kids.................................. cartoon channel CNN Espanol............................... news channel America 2................................. Argentine sports channel CV Noticias............................... Argentine news channel Dubai..................................... Arabian variety programming channel Hallmark.................................. movie channel Adulto.................................... adult movie channel Locomotion................................ animation channel SBT....................................... national off-air channel Globo..................................... national off-air channel CNT/Gazeta................................ national off-air channel Bandeirantes.............................. national off-air channel Record.................................... national off-air channel Manchete.................................. national off-air channel Cultura................................... national off-air channel CBI....................................... local off-air channel Rede Mulher............................... local off-air channel Rede Vida................................. local off-air channel TV Senado................................. local off-air channel TV Educativa Rio.......................... local off-air channel TV Camara................................. local off-air channel TV Legislativa............................ local off-air channel Canal Comunitario......................... local off-air channel Canal Universitario....................... local off-air channel Canal de Sao Paulo........................ local off-air channel Canal 21.................................. local off-air channel Rede Gospel............................... local off-air channel TV Educacao............................... local off-air channel TV no ar.................................. preview channel DIRECTV The following description is qualified in its entirety by reference to the agreements entered into as of May 18, 1999 among the Company, Abril and certain subsidiaries of the Company to sell the Company's DBS Systems to Galaxy Latin America, DIRECTV Latin America, Inc. and Darlene Investments Ltd. See "Recent Developments." The DIRECTV programming package offered by Galaxy Brasil as of April 1, 1999 consisted of 93 video channels (including 35 pay-per-view channels), certain of which, such as Bravo Brasil, CMT Brasil and 11 Eurochannel, are provided by TVA, and 33 audio channels. Programming includes movies, news, athletic events and other programs available on a pay-per-view basis. The DIRECTV service channel offerings, other than pay-per-view, as of December 31, 1998, included the following: Channel Description - ------- ----------- HBO Brasil............................... movie channel HBO Brasil 2............................. HBO Brasil with a six-hour time shift ESPN Brasil.............................. sports channel ESPN International....................... sports channel Eurochannel.............................. European variety programming channel CMT Brasil............................... music channel E! Entertainment Television.............. American variety channel Mundo.................................... documentary channel MGM Gold................................. movies and series channel MTV Brasil............................... music channel MTV Latino............................... music channel RTPi..................................... Portugal's state television channel CNN International........................ news channel CNN Espanol.............................. news channel CBS Telenoticias......................... news channel TNT...................................... movie channel Cartoon Network.......................... cartoon channel Discovery Brasil......................... science and documentary channel Sony Entertainment....................... situation comedy channel Bravo Brasil............................. art and movie channel Deutsche Welle........................... German variety channel TVE...................................... Spanish variety channel Tele Uno................................. Spanish variety channel Warner Channel........................... family entertainment channel CBS Telenoticias......................... CBS news channel in Spanish Bloomberg................................ business news channel Multipremier............................. Mexican movie channel ZAZ...................................... Mexican children's programming channel Travel Channel........................... travel programming channel NHK...................................... Japanese general entertainment channel TV Chile International................... Chilean programming channel Locomotion............................... children's programming channel Disney Weekend........................... children's programming channel BBC World................................ world news channel TV Chile................................. Chilean programming channel Playboy TV............................... adult programming channel AdulTVision.............................. adult programming channel Venus.................................... adult programming channel Classe................................... education channel Hallmark................................. television movie channel People & Arts............................ documentary channel RAI International........................ Italian variety channel 12 Channel Description - ------- ----------- TV Senac.................................. educational channel Animal Planet............................. wildlife programming channel Rede Vida................................. religious channel Clima Brasil.............................. weather channel Clima Mercosul............................ weather channel Directv Sports............................ sports channel CNN FN.................................... news channel CNN SI.................................... news channel TV5....................................... French language programming ART....................................... Arabian variety programming channel MCM....................................... music channel 35 audio channels......................... music channels Operations Marketing. The Company periodically conducts marketing surveys to gauge consumer preferences and evaluate new and existing markets. TVA also frequently evaluates the demographics of the subscribers to its programming, seeking to provide programming most in demand. In each market, TVA's marketing staff typically applies one or more of the following programs to attract subscribers: (i) extensive marketing tied to regional events such as soccer matches, (ii) neighborhood promotional events featuring large screen broadcasts of its channel offerings, (iii) direct mailings, (iv) telemarketing, (v) television, billboard, magazine and newspaper advertisements, (vi) prewiring arrangements with residential housing developers and (vii) other promotional marketing activities, including referral programs and promotional gifts. Installation. The installation package delivered to a new subscriber depends upon the type of programming delivery service chosen by the subscriber. The MMDS installation package features a standard rooftop mount linked to an antenna and related equipment, including a decoder, located at the subscriber's location. Cable service requires the installation of a cable line and a decoder at the subscriber's dwelling. Ku-Band satellite service typically involves installation of a 60-centimeter dish antenna, which can be mounted outside a subscriber's window or on the rooftop of a subscriber's building or house, together with a decoder located at the subscriber's dwelling. As with Ku-Band service, C-Band service installation includes the installation of a dish antenna, although of a greater size (1.1 meters in diameter) and a decoder and related equipment at the subscriber's home. DBS installations at single-family homes require an entire installation package, while installations at multiple dwelling units in which drop lines are installed require only a decoder at each subscriber's location and therefore are less costly to the Company. Once a new subscriber has requested service, the amount of time a subscriber waits for the commencement of service depends on several factors, including type of service, whether the subscriber has access to Cable, whether the subscriber is in a single family home or multiple dwelling unit, whether the topography of the surrounding area makes MMDS service viable and whether the subscriber is located in an area of Brazil that can be reached by C-Band or Ku-Band service. TVA provides installation service with its own personnel and through local subcontractors. TVA or such subcontractor attempts to complete installation and begin service within 30 days of a subscription order. Uplink Facilities. A major part of the delivery of TVA's DBS service, whether Ku-Band or C-Band, is the collection of programming and the transmission, or uplinking, of such programming to the Galaxy VIII-i satellite and the Brasilsat satellite, respectively. Upon receipt of programming, the Company processes, compresses, encrypts, multiplexes (combines with other channels) and modulates (prepares for transmission to the satellite at a designated carrier frequency) such programming. The Company uses the uplink facilities of Embratel in Sao Paulo to service its existing C-Band service. TVA delivers its programming to the Embratel uplink center via microwave transmission, where it is prepared for transmission to the Brasilsat satellite using equipment provided by TVA. With respect to DIRECTV service, TVA constructed the Tambore Facility, an uplink center in Tambore in the State of Sao Paulo. 13 The Tambore Facility, which consists of an uplink antenna and ancillary equipment, has operated since June 1996 and is used to uplink Brazilian programming to the Galaxy VIII-i satellite. Through the Galaxy VIII-i satellite, programming from Brazil is mixed with programming from provided by GLA through the California Broadcast Center in Long Beach and with programming provided by GLA's local operating companies through uplink facilities in Mexico, Venezuela and Argentina for delivery to subscribers in Brazil and other countries to which GLA provides DIRECTV service. The Tambore Facility and the uplink facilities in Venezuela, Mexico and the United States are equipped with full emergency power generation equipment and other emergency facilities to enable GLA to avoid signal disruptions. In connection with the establishment of CBC, TVA Communications and Tevecap have agreed, pursuant to an Indemnification Agreement, dated April 11, 1997 (the "Indemnification Agreement"), to provide certain indemnities in favor of GLA, CBC and its shareholders. To secure its obligations under the Indemnification Agreement, Tevecap has agreed to pledge its equity interest in GLA, as well as any future notes or interest it may hold relating to the uplink facility. Programming Facilities. Programming equipment is used to prepare the programming material for transmission via the Company's MMDS, Cable or DBS Systems, including compression with respect to Cable and Ku-Band service. The programming equipment inserts commercial or promotional material, if appropriate, monitors the quality of the picture and sound, and delivers the material to the multiplexing system. For programming delivered to TVA as taped material, the programming equipment also compiles the various programming segments, inserting commercial and promotional material. Compression System. The Company also uses its programming facilities to digitize the programming signals used in TVA's Cable and Ku-Band service. Digital technology permits the compression and transmission of a digital signal to facilitate multiple channel transmission through a single channel's bandwidth, thereby giving broadcasters the ability to offer significantly more channels than is currently the case with analog systems. Digitized signals are compressed using the MPEG-1 and MPEG-2 standards. (Moving Pictures Expert Group, the international video compression standard). Conditional Access System. GLA and News Digital Systems Limited ("NDS"), a wholly-owned subsidiary of News Corporation, are parties to a System Implementation and License Agreement. Under the Local Operating Agreement, GLA provides to Galaxy Brasil the use of the access control system licensed from NDS and the Smart Cards provided by NDS. The Company expects the access control system to adequately protect DIRECTV programming from unauthorized access. With Smart Card technology, it is possible to change the access control system in the event of a security breach allowing TVA to reestablish security. Management believes that the ability to take electronic measures and to replace the Smart Cards will provide an effective means to combat unauthorized programming access. Subscriber Service. Management believes that delivering high levels of subscriber service in installation and maintenance enables it to maintain high levels of subscriber satisfaction and to maximize subscriber retention. To this end, TVA attempts to promptly schedule installations, provides a subscriber service hotline in each of the metropolitan areas in which TVA operates, attempts to promptly provide response repair service, and attempts to make follow-up calls to new subscribers shortly after installation to ensure subscriber satisfaction. TVA seeks to instill a subscriber service focus in all its employees through ongoing training and has established an intra-company electronic mail system to provide a forum for employees to exchange ideas concerning ways to increase subscriber satisfaction. TVA also has various employee bonus programs linked to measures of subscriber satisfaction. To enable its employees to provide quicker service, TVA is working to decentralize its subscriber service operations by opening small service offices throughout TVA's served markets. Management Information Systems and Billing. Management believes that TVA's proprietary management information systems enable TVA to deliver superior subscriber service, monitor subscriber payment patterns and facilitate the efficient management of each of its operating systems. Management believes that TVA's billing procedures are an integral part of its strategy to maintain high levels of subscriber satisfaction and to maximize subscriber retention. Subscribers select the day of the month on which payment for that month's service is due, and pay their bills at a bank through direct transfers, which is the standard payment method in Brazil. 14 Competition General TVA and the Operating Ventures compete with pay television service providers using Cable, MMDS and DBS transmission technologies. The Company expects to continue to face competition from a number of existing and future sources, including potential competition as a result of new and developing technologies and the easing of regulation in the pay television industry. TVA believes that competition is and will continue to be primarily based upon program offerings, customer satisfaction, quality of the system network and price. Since there is a very limited history of pay television services in Brazil, there can be no assurance that, based on the potential size of the Brazilian pay television industry, the pay television market will be able to sustain a number of competing pay television providers. The Company and the Operating Ventures also compete with national broadcast networks and regional and local broadcast stations. TVA's MMDS and Cable operations and its C-Band satellite service and Ku-Band satellite service may compete for the same subscribers. MMDS and Cable Service 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's principal competitor in Ku-Band service is Net Sat Servicos Ltda. ("Net Sat") in which Globo Par also has a controlling interest and whose other equity holders include News Corporation plc, a subsidiary of The News Corporation Limited. TVA's Ku-Band service currently offers 128 channels of audio and video programming, including 35 pay-per-view channels, as compared to the 110 audio and video channels of programming offered by Net Sat (including 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. With respect to C-Band service, after the implementation of a conversion program by Net Sat in which its C-Band subscribers were converted to Ku-Band service, TVA became the sole provider of C-Band service in Brazil. 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 15 from the sale of television advertising, which revenues are based in part on the audience share and ratings for the networks' programs. Programming offered by pay television providers, including TVA, directly competes for audience share and ratings with the programming offered by broadcast television networks as well as regional and local television broadcasters. The six national broadcast television networks are Globo, SBT, Bandeirantes, TV Manchete, TV Record and Gazeta/CNT. The national television networks utilize one or more satellites to retransmit their signals to their local affiliates throughout Brazil. Programming Sales TVA competes with a variety of Brazilian and international programming providers for sales of its programming to the Operating Ventures and Independent Operators. In addition, TVA competes with other pay television operators to purchase programming from some of these Brazilian and international sources. Regulatory Framework The subscription television industry in Brazil is subject to regulation by the 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 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 16 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. 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: 17 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 51.0% of their voting capital by Brazilian- born citizens or persons who have held Brazilian citizenship for more than 10 years are eligible to receive a license to operate Cable systems in Brazil. In the event that no private entity displays an interest in providing Cable services in a particular service area, ANATEL may grant the local public telecommunications operator a license to provide Cable services. Cable operators that previously provided Cable services under a DISTV authorization granted under Ordinance 250 were required under Law 8977 to file applications to have their DISTV authorizations converted into Cable licenses. Ordinance 256 grants a one year period from the date a DISTV authorization is converted into a cable television license for any Cable system operator to comply with the restrictions. The Company's Cable systems, all of which were operating under DISTV authorizations, applied for conversion of their DISTV authorizations and received approval for such conversion from the Ministry of Communications. Cable licenses for service areas not covered by existing authorizations will be granted pursuant to a public bidding process administered by ANATEL after prior public consultation. All such licenses shall be nonexclusive licenses. In order to submit a bid for a license, a bidder must meet certain financial and legal prerequisites. After such prerequisites are met, a bidder must then submit a detailed bid describing its plan to provide Cable services in the service area. In the qualification phase of the bidding process, ANATEL assigns a number of points to each bid based on certain weighted criteria, including the timetable for offering subscription programming; the time allocated to local public interest programming; the number of channels allocated to educational and cultural programming; and the number of establishments, such as schools, hospitals and community centers, to which basic 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 18 inhabitants, the qualified bidder that submits the highest bid for the license will be selected. For service areas with a population between 300,000 and 700,000 inhabitants, the winning bid is selected based on the highest product obtained by multiplying the number of points awarded in the qualification phase and the amount bid for the license. For service areas with less than 300,000 inhabitants, the winning bid is selected on the basis of the number of points awarded in the qualification phase and the payment of a fixed fee. Once a Cable license is granted, the licensee has an 18 month period from the date of the license grant to complete the initial stage of the installation of the Cable system and to commence providing Cable services to subscribers in the service area. The 18 month period is subject to a single 12 month extension for cause at the discretion of ANATEL. Any transfer of a Cable license is subject to the prior approval of ANATEL. A license generally may not be transferred by a licensee until it has commenced providing Cable services in its service area. Transfers of shares causing a change in the control of a license or the legal entity which controls a license also is subject to the prior approval of ANATEL. ANATEL must receive notice of any change in the capital structure of a licensee, including any transfer of shares or increase of capital that do not result in a change of control. A license can be revoked, upon the issue of a judicial decision, in the event the licensee lacks technical, financial or legal capacity to continue to operate a Cable system; is under the management of individuals, or under the control of individuals or corporations who, according to Law 8977, do not qualify for such positions; has its license transferred, either directly or by virtue of a change in control, without the prior consent of ANATEL; does not start to provide Cable services within the time limit specified by Law 8977; or suspends its activities for more than thirty consecutive days without justification, unless previously authorized by ANATEL. Cable Related Service Regulation General. Brazilian telecommunications services are governed primarily by (i) Article 21 of the Federal Constitution, as amended by Amendment No. 8 of August 15, 1995 ("Amendment 8"), (ii) the Telecommunications Code (Law No. 4117 of August 27, 1962, as amended), (iii) Law 9472, (iv) Law 9295 and (v) Law 8977. The Brazilian Government also has issued detailed regulations covering specific areas of telecommunications services, including radio broadcasting, paging, trunking, subscription television, Cable television and cellular telephony. ANATEL is responsible for the regulation of telecommunications services in Brazil. Prior to its amendment in 1995, Article 21 of the Federal Constitution required the Brazilian Government to operate directly, or through concessions granted to companies whose shares are controlled by the Brazilian Government, all telephone, telegraph, data transmission and other public telecommunications services. This constitutional requirement was the basis for the establishment of the state-owned telephone monopoly, Telebras, which holds controlling interests in 27 regional telephone operating companies. With the adoption of Amendment 8, Article 21 was modified to permit the Brazilian Government to operate telecommunications services either directly or through authorizations, concessions or permissions granted to private entities. In particular, Amendment 8 removed the constitutional requirement that the Brazilian Government must either directly operate or control the shares of companies which operate telecommunications services. Even with the adoption of Amendment 8, the Brazilian Government still retains broad regulatory powers over telecommunications services. Notwithstanding the existence of the Telebras monopoly, private companies have been permitted under Brazilian law to provide a number of telecommunications services other than telephony, including radio broadcasting, paging, trunking, subscription television and cable television services. However, fixed public telephony and cellular telephony were exclusively provided by Telebras through its regional telephone operating companies. 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, prices and other data. This broad grant of authority is understood to permit Cable television operators to furnish services such as interactive home banking and high-speed Cable data services to subscribers through their cable television networks, 19 although a simplified licensing procedure for high-speed Cable data services may be installed by ANATEL in the future. Cable Telephony. In accordance with Law 8977, the Company is not permitted to furnish fixed telephone services in Brazil without a specific license to do so. Therefore, absent a change in Brazilian law, the Company would not be permitted to furnish cable telephony on its network. There are, however, certain limited regulatory exceptions pursuant to which private entities other than Telebras and the regional telephone operating companies have been permitted to provide limited fixed telephony services in Brazil. Under one particular exception, certain private telephone networks (Centrais Privadas de Comutacao Telefonica or "CPCT") serving "condominiums" (as such term is defined under Brazilian law) have been permitted to interconnect their private telephone networks to the public telephone network operated by the local telephone operating company. A CPCT is comparable to a private branch exchange (PBX) found in some larger apartment complexes, hotels and businesses in the United States. Under Brazilian law, the term "condominium" refers to residential and nonresidential buildings or building complexes that have entered into a legal association. In practice, a condominium desiring to establish a CPCT will generally contract with a private service provider to install, operate and maintain the CPCT and to secure interconnection with the public telephone network. Ordinance No. 119/90 of 10 December 1990 ("Ordinance 119"), which was issued by the predecessor to the Ministry of Communications, sets forth requirements for the interconnection of CPCTs with the public telephone network. In general the installation, operation and maintenance of a CPCT does not require any authorization from the Ministry of Communications or Telebras. In order to interconnect with the public telephone network, a CPCT must comply with the requirements set forth in Ordinance 119. Such requirements primarily relate to meeting technical equipment certification and acceptance standards. Assuming that such standards are met, the regional telephone operating company is required under Ordinance 119 to interconnect the CPCT requesting interconnection to the public telephone network. The Company believes that, under current Brazilian law, Cable television operators can utilize their Cable television networks in order to facilitate the installation and operation of a CPCT. Furthermore, under the authority granted by Ordinance 119, CPCTs may be interconnected through Cable television networks to the public telephone network. Satellite Service Regulation. On October 1, 1991, the Ministry of Communications enacted Ordinance No. 230 to regulate telecommunications services via satellite in Brazil ("Ordinance 230"). Under Ordinance 230 any company authorized to broadcast television by any means is also authorized to broadcast by satellite transmission. The Company has operated satellite pay-television services since 1993 through a contract signed with Embratel. Ordinance No. 281, issued by the Ministry of Communications on November 28, 1995, partially amended Ordinance 230 allowing only companies to which a concession, permission or authorization had been granted previously by the Ministry of Communications to provide telecommunications services via satellite. Companies that were already operating satellite telecommunications services without such authorization were given a period of 60 days to seek such authorization. The Company applied for such authorization within the 60-day period, and on April 23, 1996, the Ministry of Communications issued Ordinance No. 87/96 ("Ordinance 87"), granting TVA the non-exclusive permission to operate a pay television service via satellite. Such authorization is valid for a term of fifteen years, commencing October 26, 1994. Ordinance 87 further provides that TVA has the obligation to (a) render services continuously and efficiently in order to fully satisfy users, (b) in an emergency or disaster, render services to the entities that require services without charge, and (c) meet the technical adequacy requirements which the Ministry of Communications considers essential to guarantee fulfillment of the obligations under the permission granted. In addition, on April 23, 1996, Galaxy Brasil received approval from the Ministry of Communications, pursuant to Ordinance No. 86/96 ("Ordinance 86"), to operate satellite services via the Galaxy III-R satellite, leased by Hughes Electronics. Galaxy Brasil also received approval to operate the corresponding ground transmission station pursuant to Ordinance 86. Satellite-based pay television services are today regulated by Law 9295/96 ("Law 9295"), Law 9472/97 (the "General Law"), Decree 2196/97, which regulates special telecommunications services, including DBS services, Decree 2195/97, which regulates the transmission of signals via satellite, and Ordinance 321/97, which relates specifically to satellite-based pay television services. Law 9295 authorizes the Executive branch of the Brazilian federal Government, within three years, to limit the ownership by non-Brazilian entities of the voting capital of 20 entities providing satellite-based pay television services to a maximum of 49%. In addition, the General Law broadly authorizes the Executive branch to limit non-Brazilian ownership of telecommunications service providers. Law 9295 also provided that the granting of concessions for the transmission of signals via satellite by private companies would occur after December 31, 1997. On May 21, 1997, the Ministry of Communications issued Ordinance No. 321 ("Ordinance 321") governing the granting of licenses to provide satellite pay television services. ITEM 2. DESCRIPTION OF PROPERTY The Company owns most of the assets essential to its operations. The major fixed assets of the Company are coaxial and fiber optic cable, converters for subscribers' homes, electronic transmission, receiving, processing and distribution equipment, microwave equipment and antennae. The Company leases certain distribution facilities from third parties, including space on utility poles, roof rights and land leases for the placement of certain of its hub sights and head ends and space for other portions of its distribution system. The Company leases its offices from third parties, with the exception of certain offices of TVA Sul, located in Curitiba, State of Parana, and the offices and uplink facility for Galaxy Brasil, located in Tambore, Sao Paulo State, all of which are owned by the Company. The Company also owns its data processing facilities and test equipment. ITEM 3. LEGAL PROCEEDINGS The Company is party to certain legal actions arising in the ordinary course of its business which, individually or in the aggregate, are not expected to have a material adverse effect on the consolidated financial position of the Company. As of December 31, 1998, the Company had reserved approximately $7.4 million as contingent liabilities in connection with certain litigation contingencies, including a number of claims by persons arising in connection with the termination of their employment (approximately $3.8 million) and claims relating to the payment by the Company of certain taxes (approximately $0.8 million). In particular, the Company is currently seeking confirmation from state tax authorities of the non-assessment of certain value-added taxes (Imposto Sobre Circulacao de Mercadoria e Servicos or "ICMS"). The Company has also obtained an injunction against the federal imposition of certain social contribution taxes (Contribuicao Social para a Seguridade Social or "COFINS"), the final determination of which is pending a judgment from the Brazilian Supreme Court. The Company's operating companies are currently defending a lawsuit brought by the Escritorio Central de Arrecadacao e Distribuicao (Central Collection and Distribution Office, or "ECAD"), a government-created entity authorized to enforce copyright laws relating to musical works. ECAD filed a lawsuit in 1993 against all pay-television operators in Brazil seeking to collect royalty payments in connection with musical works broadcast by the operators. The suit was filed against TVA in the Tribunal de Justica do Estado de Sao Paulo, the 16 Vara Civel do Estado de Sao Paulo, the Tribunal de Justica do Estado do Parana and the Tribunal de Justica do Estado de Santa Catarina. The suit was filed against TV Filme in the Tribunal de Justica do Estado de Goias, the Tribunal de Justica do Distrito Federal and the Tribunal de Justica do Estado do Para and against Canbras TVA in the Tribunal de Justica do Estado de Sao Paulo. In December 1997, a similar lawsuit was filed against Galaxy Brasil in the 20 Vara Civel do Estado de Sao Paulo. ECAD is seeking a judgment award of 2.55% of all past and present revenues generated by the operators. The suits are currently being examined by court experts with the objective of determining the amounts in controversy with respect thereto. Although the Company intends to vigorously defend these suits, the loss of such suits may have a material adverse effect on the consolidated financial position of the Company. Based on agreements reached by ECAD with other Brazilian television operators, however, management believes that it can reach a negotiated settlement to these suits whereby the Company would make monthly payments to ECAD in an amount significantly lower than that sought by ECAD. As of December 31, 1998, the Company had reserved approximately $2.7 million for claims related to the ECAD suits. 21 The Company is also involved in a judicial dispute with Globo Par in connection with the exclusive right to broadcast the Brazilian Soccer Championship. Both TVA and Globo Par filed suits in the 1, 2 and 17 Varas Civeis do Estado de Sao Paulo and the 2 and 16 Varas Civeis do Estado do Rio de Janeiro requesting an injunction to prevent the other party from broadcasting the championship. In 1997 the Tribunal de Justica do Rio de Janeiro ruled in favor of Globo Par, thereby preventing TVA from broadcasting the championship. TVA is currently challenging this ruling, and bringing forth its own claims, in the Tribunal de Justica do Estado de Sao Paulo. The Company believes that it has a valid right to exclusively broadcast the championship pursuant to its agreements with the Confederacao Brasileira de Futebol (the Brazilian Soccer Federation) and the Clube dos Treze, a group of soccer teams, and therefore considers the likelihood of its success in this suit, or a negotiated settlement to the suit, to be favorable. The loss of such suit, however, may have a material adverse effect on the consolidated financial position of the Company. ITEM 4. CONTROL OF REGISTRANT Tevecap has one class of capital stock, common shares, authorized and outstanding. As of December 31, 1998, 226,338,285 common shares were outstanding, representing authorized social capital of R$478,740,715. The following table sets forth, as of December 31, 1998, information regarding the beneficial ownership of Tevecap's common shares: Number of Common Shareholder Shares Owned Percentage - ----------- ------------ ---------- 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) - ---------- (a) A subsidiary of Falcon International Communications L.L.C. (b) Each of Hearst and ABC indirectly holds a 50.0% equity interest in each of Hearst/ABC Video Services II and Cable Participacoes Ltda. (c) 11,496,329 and 6,867,793 of the shares beneficially owned by Chase Manhattan International Finance Ltd. ("CMIF") are held of record by two wholly-owned subsidiaries of CMIF (the "Chase Parties"). In December 1995, CMIF sold a portion of the shares beneficially owned by it to Hearst and ABC. (d) Less than 1.0%. The relations among the Company's equity holders are governed by a Stockholders Agreement (the "Stockholders Agreement"), dated December 6, 1995, among Tevecap, Robert Civita, Abril, the Chase Parties, Falcon International and HABC II and CPL (together with HABC II, "Hearst/ABC Parties" and together with Robert Civita, Abril, the Chase Parties and Falcon International, the "Stockholders"). The following describes certain terms of the Stockholders Agreement, as amended. Transfer of Shares. Any Stockholder desiring to transfer shares of capital stock to any third party, including another Stockholder, must first offer such shares to Tevecap and all of the other Stockholders. Tevecap has the right to determine first whether to purchase such shares; if Tevecap elects not to exercise its right to purchase the shares, the other Stockholders may elect to purchase such shares. If Tevecap or the other Stockholders decide to purchase the offered shares, all of such shares must be purchased. If neither Tevecap nor the other Stockholders offer to purchase all of the offered shares, the Stockholder desiring to sell such shares may sell the shares to any person, provided that (i) all of the shares are sold simultaneously within six months after the decision by Tevecap and the Stockholders not to purchase the shares, (ii) Tevecap has not determined that the person making such purchase is a stockholder of undesirable character, lacks necessary financial capacity or competes with the Company, and (iii) the price for sale to such third party is at least 90.0% of the price offered to the Company and the other Stockholders. The provisions regarding transfers of shares do not apply to transfers to certain affiliates of the 22 Stockholders. In addition, the Stockholders have preference over all other persons or entities to subscribe for new issuances of capital stock by the Company in proportion to their existing ownership of capital stock. Event Put Options. Upon the occurrence of certain defined "triggering events" each of the Stockholders, other than Abril, may demand that Tevecap buy all or a portion of the shares of capital stock of Tevecap held by such Stockholder, unless the shares of capital stock held by such Stockholder are publicly registered, listed or traded (collectively referred to as an "Event Put"). The triggering events are: (i) the amount of capital stock held by such Stockholder exceeds the amount allowed under any legal restriction to which such Stockholder may be subject ("Regulatory Put"); (ii) a breach without cure within a designated period by Robert Civita, Abril, any of the respective affiliates of Robert Civita or Abril or Tevecap of any representation, warranty, covenant or duty made or owed pursuant to the Stockholders Agreement, the Stock Purchase Agreement, dated August 25, 1995, among Robert Civita, Abril, the Chase Parties, and certain other parties, or the Stock Purchase Agreement, dated December 6, 1995, among Tevecap, Robert Civita, Abril, HABC Parties, the Chase Parties, Falcon International and certain other parties; (iii) a breach without cure within a designated period by Abril of the Abril Credit Facility; (iv) Robert Civita ceases to directly or indirectly hold without the approval of the Stockholders 31.258% of the capital stock and voting capital stock of Tevecap or he ceases to control the voting capital stock held by his affiliates representing 50% or more of the voting capital stock of Tevecap; (v) the Service Agreement, dated July 22, 1994, as amended, among Tevecap, Televisao Show Time Ltda. ("TV Show Time"), TVA Brasil Radioenlaces Ltda. ("TVA Brasil") and Abril, each of which holds certain licenses covering certain operations of TVA, ceases to be valid or effective or TV Show Time, TVA Brasil or Abril is liquidated or dissolved or files voluntarily, or has filed against it involuntarily, any petition in bankruptcy or (vi) another Stockholder exercises an Event Put, other than a Regulatory Put. The price to be paid in connection with an Event Put is set at fair market value determined by appraisal or by a multiple of Tevecap's most recent quarterly earnings. The Indenture, however, contains restrictions on the ability of Tevecap to purchase shares of its capital stock. Accordingly, the parties to the Stockholders Agreement have agreed to amend the Stockholders Agreement prior to the Offering to provide that if the terms of the Indenture prohibit the Company from purchasing shares that are subject to an Event Put ("Event Put Shares"), in whole or in part, the Company shall not be obligated to purchase such shares to the extent it is so restricted. However, in such event, the Company shall, subject to the terms of the Indenture, have the obligation to issue shares of preferred stock of the Company ("Special Preferred Shares") should the Tevecap Stockholder elect to convert Event Put Shares to Special Preferred Shares. The holders of Special Preferred Shares will be entitled to dividends required by law and a cumulative dividend equal to LIBOR plus a 4.0% margin, provided that if the terms of the Indenture prohibit the payment of dividends on the Special Preferred Shares, the Company shall not be obligated to make such dividend payments to the extent so restricted. However, under the terms of the Special Preferred Shares such unpaid dividends shall cumulate and will be paid in full when permissible under the Indenture or when the Indenture no longer restricts the payment of such dividends. After the payment of all dividends on the Special Preferred Shares, the Company must use any remaining profit or reserve to purchase the largest number of Event Put Shares and Special Preferred Shares, provided that, if the terms of the Indenture prohibit the purchase of such shares, the Company shall not be obligated to make such purchases until permitted by the terms of the Indenture. Time Put Options. In addition, pursuant to the Stockholders Agreement, Falcon International may demand that Tevecap buy all or any portion of the shares of capital stock of Tevecap held by Falcon International if such shares are not publicly registered, listed or traded by September 22, 2002 (the "Falcon Time Put"). The price to be paid in connection with the Falcon Time Put is fair market value determined in the same manner as an Event Put. If Tevecap determines that the terms of the Indenture prohibit it from purchasing such shares, Tevecap may, subject to the terms of the Indenture, delay the payment of such purchase price with three annual payments ("Put Annual Payments") or issue promissory notes denominated in US dollars for the amount of such price ("Put Promissory Notes"). The Put Promissory Notes would mature three years after issuance with interest payments due quarterly in arrears. The interest rate on the Put Promissory Notes would be equal to the rate applicable to US Treasury obligations of similar maturity plus a margin to be negotiated, with the parties taking into account the risks associated with the type of obligor, Tevecap's creditworthiness and investments in Brazil. Under the provisions of the Stockholders Agreement, as amended, while the Put Promissory Notes are outstanding, Tevecap may not pay any dividends or make distributions with respect to its capital stock, including the Special Preferred Shares, should 23 they exist. To the extent dividends, distributions or payment sunder the Put Promissory Notes may be made under the Indenture, payments must be made first to satisfy the obligations under the outstanding Put Promissory Notes. If the terms of the Indenture prohibit the Company from making the Put Annual Payments, the Company shall not be required to make such payment, but shall be required to deliver Put Promissory Notes in the principal amount of the affected Put Annual Payments. If the terms of Indenture prohibit the Company from making an interest payment required under any Put Promissory Note, the Company shall not be required to make such payment at such time, provided that any accrued and unpaid interest shall accumulate and interest on such unpaid amount shall compound quarterly and the Company shall make payments of interest as soon as such payment is no longer restricted under the Indenture. Pursuant to the terms of the proposed amendment to the Stockholders Agreement, payment of the principal and interest on the Put Promissory Notes would be subordinated to the prior payment in full of the Notes. Registration Rights. At any time after December 6, 1997, the Chase Parties, considered together, the Hearst/ABC Parties or Falcon International may request that the Company effect the registration of any or all of the capital stock held by such Stockholder. However, the Company is not obligated to effect more than one registration requested by a Stockholder in any 12 month period or more than three registrations requested by a Stockholder in total. Also, the capital stock that is the subject of the registration demand must be of a certain minimum amount. In addition, Tevecap must offer each Stockholder other than Abril the opportunity to register capital stock held by such Stockholder, subject to standard reductions in amount such Stockholder may register as recommended by the managing underwriter. Tevecap is obligated to pay all registration expenses other than underwriting discounts and commissions or transfer taxes, and Tevecap is only obligated to pay for the fees and expenses of Tevecap's counsel and accountants. Board of Directors and Advisory Board. Tevecap is governed by a board of directors with 11 members. Under the Stockholders Agreement, Abril designates six members, Falcon International designates two members, the Chase Parties together designate one member, and Hearst/ABC Parties designates 2 members. The affirmative vote of members of the board representing the Chase Parties, Falcon International and Hearst/ABC Parties is required for: acquisition of ownership interests in other companies; acquisition or liens on equity in other companies or liens on assets other than in ordinary course and in aggregate less than $500,000; incurrence of indebtedness of less than one year maturity and in an amount greater than $1,000,000; incurrence of indebtedness of greater than one year maturity except trade debt and in an aggregate amount of less than $500,000; loans on advance payments; non-financial guarantees in aggregate totaling more than $100,000; transactions with affiliates; and modifications to Service Agreement. Tevecap must get the approval of Hearst/ABC Parties before entering into contracts in excess of $1,000,000 in value and making any material programming decisions. Tevecap must get the approval of Falcon International before entering into contracts in excess of $1,000,000. Tevecap must get the approval of each of Hearst/ABC Parties, the Chase Parties and Falcon International before any corporate restructuring or any public offering of securities of Tevecap. Required Dividend. Tevecap is required by the terms of the Stockholders Agreement to pay annual dividends equal to the net cash flow of Tevecap or 25.0% of the net consolidated profit (as defined by Brazilian law) of Tevecap. However, Tevecap may delay the payment of such dividends to the extent the payment of such dividends is prohibited by the Indenture, and such dividends will accumulate and be payable to the extent allowed under the Indenture. ITEM 5. NATURE OF TRADING MARKET The Company's outstanding registered securities consist solely of the Company's 125/8% Senior Notes due 2004 that were registered under the Securities Act pursuant to an Exchange Offer which expired on May 23, 1997 and a subsequent Exchange Offer which expired on December 10, 1997. There is no formal trading market for such securities. 24 ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS There are two legal foreign exchange markets in Brazil: the commercial rate exchange market (the "Commercial Market") and the floating rate exchange market (the "Floating Market"). The Commercial Market is reserved primarily for foreign trade transactions and transactions that generally require prior approval from Brazilian monetary authorities, such as the purchase and sale of registered investments by foreign persons and related remittances of funds abroad, such as a repurchase by the Company of the Notes. Purchases of foreign exchange in the Commercial Market may be carried out only through a financial institution in Brazil authorized to buy and sell currency in that market. The "Commercial Market Rate" is the commercial selling rate for Brazilian currency into US dollars, as reported by the Central Bank. The "Floating Market Rate" generally applies to transactions to which the Commercial Market Rate does not apply. Prior to the implementation of the Real Plan, the Commercial Market Rate and the Floating Market Rate differed significantly at times. Since the introduction of the real, the two rates have not differed significantly, although there can be no assurance that there will not be significant differences between the two rates in the future. Both the Commercial Market Rate and the Floating Market Rate are reported by the Central Bank on a daily basis. 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 U.S.$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 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. 25 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, 1998 and May 18, 1998, the Commercial Market rate as reported by the Central Bank was R$1.2087 per U.S.$1.00 and R$1.665100 per U.S.$1.00, respectively. The following table provides the Commercial Market rate for the purchase of U.S. dollars expressed in reais per U.S. dollar for the periods and dates indicated. Exchange Rates of reais per U.S. $1.00(1) ---------------------------------------------------- Year Ended: Low High Average(2) Period End ---------------------------------------------------- December 31, 1992 0.000392 0.004505 0.001810 0.004505 December 31, 1993 0.004557 0.118584 0.032342 0.118584 December 31, 1994 0.120444 1.000000 0.458968 0.848000 December 31, 1995 0.834000 0.972600 0.921583 0.972500 December 31, 1996 0.972500 1.039400 1.007992 1.039400 December 31, 1997 1.039500 1.116400 1.079058 1.116400 December 31, 1998 1.116500 1.208700 1.162110 1.208700 - ---------- (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. ITEM 7. TAXATION Brazil The following is a summary of the material Brazilian income tax consequences to Tevecap in connection with the sale and repayment of Tevecap's 12 5/8% Senior Notes due 2004 (the "Notes") including any interest thereon) and to beneficial owners of the Notes that are non-residents of Brazil in connection with the purchase, ownership and disposition of such Notes. This summary is limited to Tevecap and to non-residents of Brazil which 26 acquire the Notes at the original issue price, and does not address investors who purchase Notes at a premium or market discount. In addition, this summary is based on the Brazilian tax regulations as presently in effect and does not take into account possible future changes in such tax laws. Individuals domiciled in Brazil and Brazilian companies are taxed in Brazil on the basis of their worldwide income (which includes earnings of Brazilian companies' foreign subsidiaries, branches and affiliates). The earnings of branches of foreign companies and non- Brazilian residents in general are taxed in Brazil only when derived from Brazilian sources. Interest, fees, commissions and any other income (which for the purposes of this paragraph includes any deemed income on the difference between the issue price of the Notes and the price at which the Notes are redeemed) payable by a Brazilian obligor to an individual, company, entity, trust or organization domiciled outside Brazil is considered derived from Brazilian sources and is therefore subject to income tax withheld at the source. Brazilian tax laws expressly authorize the paying source to pay the income or earnings net of taxes and, therefore, to assume the cost of the applicable tax. The rate of withholding is 15.0% or such other lower rate as is provided for in an applicable tax treaty between Brazil and such other country where the recipient of the payment has its domicile. Notwithstanding the foregoing, the applicable withholding tax rate for negotiable instruments such as the Notes was reduced to zero, pursuant to Resolutions 1853 of July 31, 1991 and 644 of October 22, 1980 of the Central Bank, subject to Central Bank Circular 2661 of February 8, 1996, which restricts such withholding tax reductions to negotiable instruments having a minimum maturity of 96 months. As a result, since the Notes have an original maturity of 96 months, such reduction will apply to payments of interest and other income with respect to the Notes. If, however, any Note is redeemed prior to November 26, 2004, such reduction will not apply and, therefore, upon such redemption the Brazilian withholding tax will be imposed on the amount of interest, fees and commissions paid on such Notes from the date of issue through the date of redemption. Based on the advice of its Brazilian tax counsel, Tevecap believes and intends to take the position for tax reporting purposes that, in the event of any such early redemption to which such withholding tax applies, so long as the paying agent through which such payment is made is located in Japan and payment to such paying agent discharges the obligations of Tevecap to make payments in respect of the Notes, interest and other income with respect to the Notes will be subject to Brazilian withholding tax at a rate of 12.5% under the tax treaty in effect between Brazil and Japan. In any event, under the terms of the Notes, Tevecap would be required to gross up Noteholders for any Brazilian withholding tax, subject to customary exceptions. Tevecap has the right to redeem the Notes at par in the event that it is required to gross up for Brazilian withholding tax imposed at a rate in excess of 15.0%. Any earnings or capital gains resulting from the sale (whether inside or outside Brazil) of any Notes by a non-resident of Brazil to another non-resident of Brazil are not subject to tax in Brazil. Earnings or capital gains resulting from the sale (whether inside or outside Brazil) of any Notes by a non-resident of Brazil to a resident of Brazil should not be subject to tax in Brazil, although the matter is not free from doubt. On February 8, 1996, the Brazilian Federal Government issued Decree No. 1,815, which imposed a tax on Brazilian issuers with respect to foreign exchange transactions ("IOF tax") related to the entering into Brazil of proceeds resulting from foreign loans (including the issue of securities such as the Notes). The rate of IOF tax paid by the Company with respect to the issuance of the Notes was zero %. Decree No. 1,815 was revoked by Decree No. 2,219 of May 2, 1997 which currently regulates the IOF tax. The IOF tax rate was reduced to zero upon the adoption of Ordinance No. 85 on April 24, 1997. However, under Law No. 8.894 dated June 21, 1994, such tax rate may be increased up to 25%. On August 15, 1996, the Brazilian Congress approved Constitutional Amendment No. 12 creating a new temporary tax, the Contribuicao Provisoria sobre Movimentacao Financeira ("CPMF"). Based on such Amendment, Law No. 9,311 of October 24, 1996 ("Law 9,311") was enacted, creating the CPMF tax. Under Law No. 9,311, as amended, all financial debit and money transfers through Brazilian bank accounts effected as from January 23, 1997 until December 31, 1998, including payments made by the Company with respect to the Notes, will be subject to the assessment of the CPMF tax at the rate of 0.2%. 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 27 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 Notes). United States The following is a summary of the material United States Federal income tax consequences to a beneficial owner of the Notes that is a citizen or resident of the United States, a corporation, partnership or other entity created or organized in or under the laws of the United States or any State thereof, an estate the income of which is subject to United States Federal income taxation regardless of its source or a trust for which a court within the United States is able to exercise primary supervision over its administration and for which one or more U.S. fiduciaries have the authority to control all substantive decisions, as well as other persons subject to United States Federal income taxation on a net income basis in respect of the purchase, ownership and disposition of a Note ("US Holders"). Such tax treatment may vary depending upon the particular situation of a US Holder. This summary does not discuss all of the tax consequences that may be relevant to certain types of investors subject to special treatment under the United States Federal income tax laws (such as individual retirement accounts and other tax deferred accounts, banks, securities broker-dealers, life insurance companies, tax-exempt organizations, foreign persons, persons whose "functional currency" is other than the US dollar or persons that hold Notes as part of a "straddle" or "conversion transaction" or otherwise as part of a "synthetic asset") and is limited to investors which hold Notes as capital assets. In addition, this summary is limited to US Holders that acquire the Notes at their issue price and does not address investors that purchase Notes at a premium or market discount. This summary is based on the Internal Revenue Code of 1986, as amended (the "Code"), final, temporary and proposed Treasury regulations thereunder (the "Regulations"), revenue rulings, court cases, and other legal authorities as now in effect (or proposed) and as currently interpreted, and does not take into account possible changes in such tax laws or other legal authorities or such interpretations. No rulings on any of the issues discussed below will be sought from the United States Internal Revenue Service (the "IRS"). PROSPECTIVE PURCHASERS OF THE NOTES ARE ADVISED TO CONSULT THEIR TAX ADVISERS AS TO THE CONSEQUENCES OF A PURCHASE AND SALE OF NOTES, INCLUDING, WITHOUT LIMITATION, (I) THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR NON-US TAX LAWS TO WHICH THEY MAY BE SUBJECT, AND OF ANY POSSIBLE LEGISLATIVE OR ADMINISTRATIVE CHANGES IN LAW, (II) THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE POSSIBLE DEDUCTION BY THE ISSUER OF BRAZILIAN TAXES (AND OF THE PAYMENT BY THE ISSUER OF ADDITIONAL AMOUNTS WITH RESPECT THERETO) FROM PAYMENTS ON THE NOTES, (III) THE AVAILABILITY FOR UNITED STATES FEDERAL INCOME TAX PURPOSES OF A CREDIT OR DEDUCTION FOR ANY BRAZILIAN TAXES SO DEDUCTED AND (IV) THE CONSEQUENCES OF PURCHASING THE NOTES AT A PRICE OTHER THAN THEIR ISSUE PRICE. Interest on the Notes Interest on the Notes will be taxable to a US Holder as ordinary income at the time it accrues or is received in accordance with the US Holder's method of accounting for tax purposes. The amount includible in the income of a US Holder will be the gross amount of interest, including any Additional Amounts, if any, payable to holders of Notes (i.e., the amount before deduction of any Brazilian withholding taxes). Disposition of a Note Generally, any sale, redemption or other taxable disposition of a Note by a US Holder will result in taxable gain or loss equal to the difference between (1) the sum of the amount of cash and the fair market value of other property received with respect to such taxable sale, redemption or other distribution (other than consideration attributable to accrued interest not previously taken into account, which consideration would be treated as interest 28 received) and (2) the US Holder's tax basis in the Note. Any gain or loss upon a sale or other disposition of a Note will be capital gain or loss (which will be long-term if the Note is held for more than one year). Effect of Brazilian Withholding Taxes It is believed that payments with respect to a Note will not be subject to Brazilian withholding tax unless the Note is redeemed prior to November 26, 2004. See "--Brazil." In the case of any Note which is so redeemed, withholding taxes in respect of interest previously paid may be imposed by Brazil at the time of redemption. Any Brazilian tax withheld generally will be treated as a foreign income tax that US Holders may elect to deduct in computing their taxable income or, subject to the limitations on foreign tax credits generally, to credit against their United States Federal income tax liability. No such deduction or credit will be available to the extent Brazil pays a subsidy to a US Holder, a related person or Tevecap, the amount of which is determined (directly or indirectly) by reference to the amount of the withholding tax. While Brazil does not have a program or policy of paying such subsidies at present, it has had programs of that nature in the past and could implement such programs again in the future. For purposes of determining a US Holder's United States foreign tax credit, the gain or loss on the sale, redemption or other taxable disposition of a Note will generally constitute United States source income. Interest (including any Additional Amounts payable by Tevecap) will generally constitute foreign source passive income or financial services income for United States foreign tax credit purposes. However, if a Note is redeemed prior to November 26, 2004, and payments with respect to the Note are subject to Brazilian withholding tax imposed at a rate of 5.0% or more, the IRS might retroactively treat interest paid with respect to the Note as high withholding tax interest. In any event, because the amount of foreign taxes for which the foreign tax credit may be taken for the taxable year is generally limited to an amount equal to the US Holder's United States Federal income tax rate multiplied by its foreign source income for the taxable year, a US Holder may have insufficient foreign source income to utilize fully any foreign tax credit attributable to such Brazilian withholding taxes (but such US Holder may be entitled to utilize the foreign tax credit attributable to such withholding taxes for the holders' previous two or succeeding five taxable years, or such withholding taxes may instead be deductible by the US Holder). A US Holder may be required to provide the IRS with a certified copy of the receipt evidencing payment of withholding tax imposed in respect of payments on the Notes in order to claim a foreign tax credit in respect of such withholding tax. Information Reporting and Backup Withholding For each calendar year in which the Notes are outstanding, each DTC participant or indirect participant holding an interest in a Note on behalf of a US Holder and each paying agent making payments in respect of a Note will generally be required to provide the IRS with certain information, including such US Holder's name, address and taxpayer identification number (either such US Holder's Social Security number or its employer identification number, as the case may be), and the aggregate amount of interest and principal paid to such US Holder during the calendar year. These reporting requirements, however, do not apply with respect to certain US Holders, including corporations, securities dealers, other financial institutions, tax-exempt organizations, qualified pension and profit sharing trusts, individual retirement accounts. In the event that a US Holder fails to establish its exemption from such information reporting requirements or is subject to the reporting requirements described above and fails to supply its correct taxpayer identification number in the manner required by applicable law, or underreports its tax liability, the direct or indirect DTC participant holding such interest on behalf of such US Holder or paying agent making payments in respect of a Note may be required to "backup" withhold a tax equal to 31.0% of each payment of interest and principal with respect to the Notes. This backup withholding tax is not an additional tax and may be credited against the US Holder's United States Federal income tax liability if the required information is furnished to the IRS. 29 ITEM 8. SELECTED FINANCIAL DATA The selected financial data as of December 31, 1998, 1997 and 1996 and for each of the three years in the period ended December 31, 1998 have been derived from, and should be read in conjunction with, the Tevecap Financial Statements included in this Annual Report. The selected financial data as of December 31, 1995 and 1994 and for each of the two years in the period ended December 31, 1995 have been derived from the audited financial statements of the Company that are not included elsewhere in this Annual Report. In October 1998 the Board of Directors of the Company approved a plan of disposition of the Company's DBS operations, including the Ku-Band operations of Galaxy Brasil. This decision was based on Management's review of operations and investment needs and the resulting intention to concentrate the Company's businesses on the distribution of pay television services through Cable and MMDS operations. As of December 31, 1998, Management of the Company was negotiating the terms of the disposition of the DBS operations, which disposition is not expected to result in a loss to the Company. Management expects to conclude and approve the terms of the disposition by the end of the second quarter of 1999. As a result of the anticipated disposition described above, the Company's DBS operations have been classified as "Discontinued Operations," the selected financial data of which is discussed separately in "Selected Financial and Other Data--Discontinued Operations" below. 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. 30 SELECTED FINANCIAL AND OTHER DATA
Year Ended December 31, 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (Dollars in Thousands, Except Selected Operating Data) Statements of Operating Data: Gross revenues Monthly subscriptions $136,278 $142,700 $107,692 $ 62,496 $27,976 Installation 2,886 12,941 22,281 26,045 6,997 Indirect programming (a) 19,580 22,810 11,377 2,866 1,626 Other (b) 18,437 18,596 15,527 10,603 7,173 Taxes on revenue(c) (12,533) (13,315) (10,557) (7,506) (872) -------- -------- -------- -------- -------- Total net revenue 164,648 183,732 146,320 94,504 42,900 -------- -------- -------- -------- -------- Direct operating expenses (d) 93,356 103,216 93,846 62,026 28,659 Selling, general and administrative expenses 56,517 64,844 62,468 46,902 24,370 Depreciation and amortization 48,107 35,461 24,350 13,268 6,177 Provision for equipment and inventory obsolescence 1,940 3,944 3,621 0 0 -------- -------- -------- -------- -------- Total operating expenses 199,920 207,465 184,285 122,196 59,206 -------- -------- -------- -------- -------- Operating loss from continuing operations (35,272) (23,733) (37,965) (27,692) (16,306) Nonoperating expenses Interest expense (51,665) (44,541) (16,287) (17,745) (16,413) Equity in (losses) income of affiliates (e) (12,139) (6,851) (8,532) (3,672) 383 Other nonoperating (expenses) income, net (f) 3,806 15,146 5,891 8,039 20,339 Income tax expense (24) 0 (156) 0 0 Income (loss) from discontinued operations (52,773) (21,438) 9,157 0 0 -------- -------- -------- -------- -------- Net loss (148,067) (81,417) (47,892) (41,070) (11,997) ======== ======== ======== ======== ======== Other data: EBITDA-Continuing operations (g) 14,775 15,672 (9,994) (13,318) (10,129) EBITDA-Discontinued operations (g) 16,968 19,458 14,333 (1,106) 0 -------- -------- -------- -------- -------- EBITDA (g) 31,743 35,130 4,339 (14,424) (10,129) Purchase of fixed assets - Continuing operations 81,392 118,909 87,867 93,029 22,369 Purchase of fixed assets - Discontinued operations 61,967 128,958 37,645 0 0 -------- -------- -------- -------- -------- Purchase of fixed assets 143,359 247,867 125,612 93,029 22,369 Ratio of earnings to fixed charges(i) -- -- -- -- -- Cash Flow Data: Net cash (used in) provided by operating activities (h) 2,675 (30,134) (23,108) 22,989 (9,707) Net cash used in investing activities (162,556) (224,903) (218,405) (119,661) (24,334) Net cash provided by financing activities 160,289 151,287 322,051 116,229 38,666
31
Year Ended December 31, 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- (Dollars in Thousands, Except Selected Operating Data) Selected Operating Data: Continuing operations Number of Subscribers to Owned Systems (j) 315,813 335,174 276,331 219,148 114,853 Average monthly revenue per Subscriber (k) $ 43.15 $ 42.57 $ 38.97 $ 33.24 27.80 Discontinued operations Number of Subscribers to Owned Systems (j) 296,847 211,209 73,180 0 0 Average monthly revenue per Subscriber (k) $ 43.78 $ 37.18 $ 20.95 0 0 Balance Sheet Data (at period end): Cash and cash equivalents 1,397 989 104,739 24,201 4,644 Property, plant and equipment 298,004 266,518 182,683 131,266 51,426 Total assets 447,927 442,011 434,749 216,848 80,441 Loans from shareholders 88,740 54,321 4,360 586 0 Long-term liabilities 359,543 335,882 264,901 9,604 4,523 Equity (deficit) in discontinued operations (21,858) 13,904 17,313 0 0 Redeemable common shares 178,002 189,034 164,910 149,534 19,754 Total shareholders' equity (deficit) (224,257) (187,069) (81,528) (18,260) 27,590
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 Other revenues. (e) Represents the Company's pro rata share of the Net loss or income of its equity investments. (f) Includes interest income, Translation gain or loss, Other nonoperating (expenses) income, net, and Minority interest. The amount included for the year ended December 31, 1994 includes interest income totaling $21,806. During that year, the Company received capital contributions from stockholders which resulted in a surplus of cash invested during such period. (g) EBITDA represents the sum of (i) net 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 32 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, 1998, earnings were insufficient to cover fixed charges by $13,100, $38,269, $50,366, $54,044 and $84,493, 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. 33 SELECTED FINANCIAL AND OTHER DATA - DISCONTINUED OPERATIONS Because operations of Galaxy Brasil were begun in 1996, and the Company's C-Band operations were not significant in 1995, the following discussion does not present information for the years ended December 31, 1995 or 1994.
Year Ended December 31, 1998 1997 1996 ------- ------- ------- (Dollars in Thousands, Except Selected Operating Data) Statements of Operating Data: Gross revenues Monthly subscriptions $129,961 $ 78,534 $ 15,328 Installation 59,382 77,865 39,436 Other 580 0 197 Taxes on revenue (a) (13,664) (11,789) (3,190) -------- -------- -------- Total net revenue 176,259 144,610 51,771 -------- -------- -------- Direct operating expenses (b) 112,622 73,742 18,451 Selling, general and administrative expenses 46,669 51,410 18,987 Depreciation and amortization 39,185 20,920 3,866 Provision for equipment and inventory obsolescence 3,321 5,275 0 -------- -------- -------- Total operating expenses 201,797 151,347 41,304 -------- -------- -------- Operating income (loss) (25,538) (6,737) 10,467 -------- -------- -------- Nonoperating expenses Interest expense (25,048) (16,316) (1,476) Other nonoperating (expenses) income, net (c) (2,187) 1,615 166 Income tax expense 0 0 0 -------- -------- -------- Net income (loss) (52,773) (21,438) 9,157 ======== ======== ======== Other data: EBITDA (d) 16,968 19,458 14,333 Purchase of fixed assets 61,967 128,958 37,645 Selected Operating Data: Number of Subscribers to Owned Systems (e) 296,847 211,209 73,180 Average monthly revenue per Subscriber (f) 43.78 37.18 20.95 Balance Sheet Data (at period end): Cash and cash equivalents 1,308 35 59 Property, plant and equipment 181,740 155,454 50,910 Total assets 217,654 170,777 69,743 Loans from shareholders 58,905 46,090 23,226 Long-term liabilities 63,425 91,655 28,573 Total shareholders' equity (deficit) (21,858) 13,904 17,313
34 Notes to Selected Financial and Other Data (a) 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%. (b) Represents costs directly related to Monthly subscriptions, and a portion of installation revenues. (c) Includes interest income, Translation gain or loss, Other nonoperating (expenses) income, net. (d) EBITDA represents the sum of (i) net income (loss), plus, without duplication (ii) income tax expense, (iii) interest expense (income), net, (iv) other nonoperating (expenses) income, net (v) depreciation, amortization and all other non-cash charges, less (vi) non-cash items increasing net income (loss) with the exception of amortized deferred sign-on and hook-up fee revenue, in each case determined in accordance with GAAP. (e) Represents the number of Owned Systems' subscribers as of the last day of each period. (f) Average monthly revenue per subscriber refers to the average monthly subscription fee as of the last day of each period. ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 1998, the Company continues to sustain substantial net losses due primarily to insufficient revenue with which to fund build-out, interest expense and charges for depreciation and amortization. Net losses incurred by the Company since inception have been funded principally by (i) net contributions of approximately $388,000 from the Company's shareholders (consisting of $288,000 as of December 31, 1997 and a $100,000 capital increase in February 1998) (ii) borrowings from Abril under the Abril Credit Facility and a shareholder loan to Galaxy Brasil and (iii) bank loans and other borrowings made from time to time. In October 1998 the Board of Directors of the Company approved a plan of disposition of the Company's DBS operations, including the Ku-Band operations of Galaxy Brasil. This decision was based on Management's review of operations and investment needs and the resulting intention to concentrate the Company's businesses on the distribution of pay television services through Cable and MMDS operations. As of December 31, 1998, Management of the Company was negotiating the terms of the disposition of the DBS operations, which disposition is not expected to result in a loss to the Company. Management expects to conclude and approve the terms of the disposition by the end of the second quarter of 1999. See "Recent Developments." 35 As a result of the anticipated disposition described above, the Company's DBS operations have been classified as "Discontinued Operations," the financial condition and results of operations of which are discussed separately in "Management's Discussion and Analysis of Financial Condition and Results of Operations of Discontinued Operations" below.
Year Ended December 31, -------------------------------------------------------------------------- 1996 1997 1998 ---------------------- ---------------------- -------------------- % of Net % of Net % of Net Amount Revenue Amount Revenue Amount Revenue -------- -------- -------- -------- -------- -------- (U.S. $ thousands, except percentages) Statement of Operations Data: Gross revenues Monthly subscriptions $107,692 73.6% $142,700 77.7% $136,278 82.8% Installation 22,281 15.2% 12,941 7.0% 2,886 1.8% Indirect programming 11,377 7.8% 22,810 12.4% 19,580 11.9% Other 15,527 10.6% 18,596 10.1% 18,437 11.2% Taxes on revenue (10,557) (7.2)% (13,315) (7.2)% (12,533) (7.6)% -------- -------- -------- -------- -------- -------- Net revenue 146,320 100.0% 183,732 100.0% 164,648 100.0% -------- -------- -------- -------- -------- -------- Direct operating expenses 93,846 64.1% 103,216 56.2% 93,356 56.7% Selling, general and administrative expense 62,468 42.7% 64,844 35.3% 56,517 34.3% Depreciation and amortization 24,350 16.6% 35,461 19.3% 48,107 29.2% Provision for equipment and inventory obsolescence 3,621 2.5% 3,944 2.1% 1,940 1.2% -------- -------- -------- -------- -------- -------- Total operating expenses 184,285 125.9% 207,465 112.9% 199,920 121.4% -------- -------- -------- -------- -------- -------- Operating loss (37,965) (25.9)% (23,733) (12.9)% (35,272) (21.4)% -------- -------- -------- -------- -------- -------- Interest income 5,896 4.0% 14,205 7.7% 6,718 4.1% Interest expense (16,287) (11.1)% (44,541) (24.2)% (51,665) (31.4)% Translation (loss) gain 473 0.3% (902) (0.5)% (17) 0.0% Equity in (losses) income of affiliates (8,532) (5.8)% (6,851) (3.7)% (12,139) (7.4)% Other nonoperating (expenses) income, net (2,327) (1.6)% 927 0.5% (4,233) (2.6)% Minority interest 1,849 1.3% 916 0.5% 1,338 0.8% Income taxes (156) (0.1)% 0 0.0% (24) 0.0% -------- -------- -------- -------- -------- -------- Loss from continuing operations (57,049) (39.0)% (59,979) (32.6)% (95,294) (57.9)% -------- -------- -------- -------- -------- -------- Income (loss) from discontinued operations 9,157 6.3% (21,438) (11.7)% (52,773) (32.1)% -------- -------- -------- -------- -------- -------- Net loss (47,892) (32.7)% (81,417) (44.3)% (148,067) (89.9)% ======== ======== ======== ======== ======== ========
36 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. December 31, December 31, ------------ ------------ Owned Systems Subscribers 1997 1998 ------------------------- ------- ------- 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 ======= ======= - ---------- (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. Households Receiving TVA Programming December 31, December 31, ------------ ------------ 1997 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. Revenues consist primarily of Monthly subscriptions revenue (which principally consists of monthly fees paid by subscribers to the Company for programming services, including equipment use), Installation revenue, Indirect programming revenue (which consists of payments made to the Company for the sale of its programming to the Independent Operators) and Other revenue (which consists of Advertising revenues and Other revenues). Taxes on revenue consist of a 2.65% tax on Advertising revenue and a 7.65% tax on the balance of revenues, in each case charged by the Brazilian Government. Monthly subscriptions revenue for the year ended December 31, 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 37 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 the year. 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 220,535 (all of whom were non-revenue generating subscribers) during the year ended December 31, 1998. 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, 1998 was $2.92 per subscriber, as compared with $2.60 per subscriber for the comparable period in 1997. Other revenue 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 due to the infancy of the industry and the lack of reliable ratings measures, the sales of Pay TV advertising in Brazil are still very low, representing less than 1% of all the advertising market. The increase in Other revenues was principally due to increased commissions for sales of HBO Brasil and ESPN Brasil advertising as well as sales of TVA magazine to independent programming providers. 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. 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 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 dependent on the type of service subscribers select. 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. 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, 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 include payroll and benefits, expense for selling, administrative, financial and human resources, advertising and promotion, rent 38 expense, other administrative expenses, and other general 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 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, 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 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 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. Minority interest. The Minority interest of $1,338 for the year ended December 31, 1998 represents Abril's 14.0% 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations of Discontinued Operations." 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. 39 Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 The table below sets forth the number of subscribers at December 31, 1996 and December 31, 1997 for the Owned Systems. December 31, December 31, ------------ ------------ Owned Systems Subscribers 1996 1997 ------------------------- ------- ------- MMDS(a) ..................................... 230,320 240,913 Cable ....................................... 46,011 94,261 ------- ------- 276,331 335,174 Paid Subscribers Awaiting Installation(b).... 31,124 17,963 ------- ------- Total Owned Systems ......................... 307,455 353,137 ======= ======= - ---------- (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, 1996 and December 31, 1997 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 December 31, December 31, ------------ ------------ 1996 1997 --------- --------- Total Owned Systems(a) ......... 307,455 353,137 Operating Ventures ............. 85,256 142,148 Independent Operators .......... 564,499 669,543 --------- --------- Total .......................... 957,210 1,164,828 ========= ========= - ---------- (a) Excludes Ku-Band and C-Band operations Monthly subscriptions revenue for the year ended December 31, 1997 was $142,700, as compared to $107,692 for the comparable period in 1996, an increase of $35,008 or 32.5%. This increase was principally attributable to a 21.3% increase in the subscriber base. The average monthly fees for existing subscribers decreased from $39.07 in 1996 to $38.26 in 1997 and for new subscribers decreased from $43.82 in 1996 to $43.41 in 1997 per subscriber. The average monthly subscription price during the year ended December 31, 1997, was $39.39 for MMDS service and $35.36 for Cable service, as compared to $40.33 and $32.80, respectively, for the year ended December 31, 1996. Installation revenue for the year ended December 31, 1997 was $12,941, as compared to $22,281 for the same period of 1996, a decrease of $9,340. This decrease was basically the result of a decrease in average installation fees and in net sales. The average installation fee during the year ended December 31, 1997 was $103.58 for MMDS service and $35.89 for Cable service, as compared to $134.48 and $36.61 respectively, during the year ended December 31, 1996. Indirect programming revenue for the year ended December 31, 1997 was $22,810, as compared to $11,377 for the comparable period of 1996, an increase of $11,443, or approximately 100%. This increase was principally attributable to the increase in the number of Independent Operators' subscribers for the period. The number of Independent Operators' subscribers increased by 105,044 during the year ended December 31, 1997, as compared to an increase of 222,800 during the same period of the prior year. The average monthly fee paid to the Company by an Independent Operator during the year ended December 31, 1998 was $2.60 per subscriber. 40 Other revenue for the year ended December 31, 1997 was $18,596, as compared to $15,527 for the comparable period of 1996, an increase of $3,069. This change included a decrease in Advertising revenue to $4,947 from $7,532, and an increase in Other to $13,649 from $7,995, an increase of $5,654. The decrease in Advertising revenue was attributable to a shift in advertising on ESPN International programming (the Advertising revenues from which were reported as Advertising revenues in the Company's consolidated financial statements), to advertising sales on ESPN Brasil Ltda programming (the Advertising revenues from which were not reported in the Advertising revenues line of the Company's consolidated financial statements but as part of the Company's Equity in (losses) income of affiliates). The increase in Other revenues was principally due to increased commissions for sales of HBO Brasil and ESPN Brasil advertising as well as sales of TVA magazine to independent programming providers. Taxes on revenue for the year ended December 31, 1997 were $13,315, as compared to $10,557 for the same period of the prior year, an increase of $2,758. As a percentage of net revenue taxes on revenue, represents 7.2% of net revenues and are consistent with the prior year. For the reasons noted above, Net revenue for the year ended December 31, 1997 was $183,732, as compared to $146,320 for the comparable period in the previous year, an increase of $37,412. Direct operating expenses. Direct operating expenses for the year ended December 31, 1997 were $103,216, as compared to $93,846 for the same period in 1996, an increase of $9,370. As a percentage of net revenues, direct operating expenses represents 56.2% as compared with 64.1% in the prior year. Payroll and benefits expense decreased to $22,593 from $23,324, a decrease of $731. Programming costs increased to $56,394 from $42,315, an increase of $14,079 or 33.3%, approximately the same variation as occurred in monthly subscription revenue. Transponder lease cost increased to $6,312 from $5,737, an increase of $575, as a result of the leasing of a fourth transponder in the fourth quarter of 1997. Technical assistance costs decreased from $5,507 to $1,832, a decrease of $3,675. Vehicle rentals expense decreased from $1,772 to $1,075, a decrease of $697; and the expense of publishing TVA Magazine decreased from $6,311 to $5,827. Pole rental increased to $2,157 from $448, an increase of $1,709, due to the expansion of TVA's cable plant during the year. For the year ended December 31, 1997, Other costs were $7,026, as compared to $8,432 for the same period the prior year, a decrease of $1.406. Selling, general and administrative expenses. Selling, general and administrative expenses for the year ended December 31, 1997 were $64,844, as compared to $62,468 for the same period of 1996, an increase of $2,376 or 3.8%. Advertising and promotion expense increased to $18,367 from $11,445 an increase of $6,922, as a result of an increase in the number of subscribers and promotional activity. Depreciation, Amortization and Provision for equipment and inventory obsolescence. Depreciation and Amortization for the year ended December 31, 1997 was $35,461, as compared to $24,350 for the same period of 1996, an increase of $11,111. Provision for equipment and inventory obsolescence for the year ended December 31, 1997 was $3,944 as compared to $3,621 for the comparable period in 1996, an increase of $323. For the reasons noted above, Operating loss for the year ended December 31, 1997 was $23,733 compared to $37,965 for the comparable period in 1996, a decrease of $14,232. Interest income. Interest income for the year ended December 31, 1997 was $14,205, as compared to $5,896, an increase of $8,309, principally due to interest received on invested portions of the proceeds of the Notes. Interest expense. Interest expense for the year ended December 31, 1997 was $44,541, as compared to $16,287 for the same period of 1996, an increase of $28,254 principally attributable to the interest paid on the Notes. Equity in (losses) income of affiliates. For the year ended December 31, 1997, Equity in (losses) income of affiliates amounted to a loss of $6,851, as compared to a loss of $8,532 in the same period of 1996, a decrease in loss of $1,681. The loss was principally related to the sustained losses at ESPN Brasil. 41 Other non-operating (expenses) income net. Other non-operating (expenses) income net for the year ended December 31, 1997 was income of $927, as compared to a loss of $2,327 in the same period in 1996, an increase of $3,254 primarily attributable to a capital gain arising from an increase in the value of the Company's interest in HBO Brasil Partners following the entry of BVI Television Investments, Inc. as an equityholder in HBO Brasil Partners. Minority interest. The Minority interest of $916 for the year ended December 31, 1997 represents Mr. Leonardo Petrelli's 14.0% share in aggregate losses of TVA Sul. Income (loss) from discontinued operations. Loss from discontinued operations for the year ended December 31, 1997 was a loss of $21,438 as compared to income of $9,157 for the comparable period in 1996, an increase of $30,595. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of Discontinued Operations." Net loss. For the reasons noted above, Net loss for the year ended December 31, 1997 was $81,417 as compared to $47,892 for the comparable period in 1996, an increase of $33,525. Management's Discussion and Analysis of Financial Condition and Results of Operations of Discontinued Operations
Year Ended December 31, -------------------------------------------------------------------------------- 1996 1997 1998 ---------------------- ----------------------- ----------------------- % of Net % of Net % of Net Amount Revenue Amount Revenue Amount Revenue -------- -------- -------- -------- -------- -------- (U.S. $ thousands, except percentages) Statement of Operations Data: Gross revenues Monthly subscriptions $ 15,328 29.6% $ 78,534 54.3% $129,961 73.7% Installation 39,436 76.2% 77,865 53.8% 59,382 33.7% Other 197 0.4% 0 580 0.3% Taxes on revenue (3,190) (6.2)% (11,789) (8.2)% (13,664) (7.8)% -------- -------- -------- -------- -------- -------- Net revenue 51,771 100.0% 144,610 100.0% 176,259 100.0% -------- -------- -------- -------- -------- -------- Direct operating expenses 18,451 35.6% 73,742 51.0% 112,622 63.9% Selling, general and administrative expense 18,987 36.7% 51,410 35.6% 46,669 26.5% Depreciation and amortization 3,866 7.5% 20,920 14.5% 39,185 22.2% Provision for equipment and inventory obsolescence 0 5,275 3.6% 3,321 1.9% -------- -------- -------- -------- -------- -------- Total operating expenses 41,304 79.8% 151,347 104.7% 201,797 114.5% -------- -------- -------- -------- -------- -------- Operating income (loss) 10,467 20.2% (6,737) (4.7)% (25,538) (14.5)% -------- -------- -------- -------- -------- -------- Interest income 160 0.3% 863 0.6% 109 0.1% Interest expense (1,476) (2.9)% (16,316) (11.3)% (25,048) (14.2)% Translation (loss) gain 0 0.0% 767 0.5% (2,713) (1.5)% Other nonoperating (expenses) income, net 6 0.0% (15) 0.0% 417 0.2% Income taxes 0 0.0% 0 0.0% 0 -------- -------- -------- -------- -------- -------- Net income (loss) 9,157 17.7% (21,438) (14.8)% (52,773) (29.9)% ======== ======== ======== ======== ======== ========
42 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 Discontinued Operations. Discontinued Operations December 31, 1997 December 31, 1998 ----------------------- ----------------- ----------------- DIRECTV and Digital C-Band 211,209 296,847 Revenues. Monthly subscriptions revenue for the year ended December 31, 1998 was $129,961, as compared to $78,534 for the comparable period in 1997, an increase of $51,427. This increase was principally attributable to an increase in the subscriber base, offset by decreases in average monthly fees for new subscribers from $47.10 in 1997 to $45.54 in 1998 per subscriber. Monthly fees from new subscribers increased slightly from $44.05 to $44.25. The average monthly subscription price during the year ended December 31, 1998 was $48.46 for Ku-Band service and $30.72 for C-band service, as compared to $49.69 and $32.24, respectively, for the year ended December 31, 1997. Installation revenue for the year ended December 31, 1998 was $59,382, as compared to $77,865 for the same period of 1997, a decrease of $18,483. This decrease was the result of a 19.1% sales reduction performance during the year of 1998 when compared with the same period of 1997 and the significant reduction in the average installation fee, which, during the year ended December 31, 1998 was $309.20 for Ku-Band service and $54.46 for C-band service, as compared to $513.12 and $347.03 respectively, during the year ended December 31, 1997. Taxes on revenue for the year ended December 31, 1998 were $13,664, as compared to $11,789 for the same period of the prior year, an increase of $1,875. As a percentage of net revenue taxes on revenue, represents 7.8% of net revenue and are consistent with the prior year. For the reasons noted above, Net revenue for the year ended December 31, 1998 was $176,259, as compared to $144,610 for the comparable period in the previous year, an increase of $31,649. Direct operating expenses. Direct operating expenses for the year ended December 31, 1998 were $112,622, as compared to $73,742 for the same period in 1997, an increase of $38,880. Payroll and benefits expense increased to $8,818 from $7,311, an increase of $1,507, as a result of the hiring of employees. Programming costs increased to $73,535 from $38,837, an increase of $34,698 due to the increase in the subscriber base and in the number of channels for the Ku-Band operations. Transponder lease cost increased to $10,998 from $7,583, an increase of $3,415. For the year ended December 31, 1998, Other costs were $17,472, as compared to $18,070 for the same period the prior year, a decrease of $598. Selling, general and administrative expenses. Selling, general and administrative expenses for the year ended December 31, 1998 were $46,669, as compared to $51,410 for the same period of 1997, a decrease of $4,741 or 9.2%. Payroll and benefits expense which, for the year ended December 31, 1998 were $8,809 as compared to $5,452 for the same period of 1997, resulting from an increase in the number of sales department employees. Advertising and promotion for the year ended December 31, 1998 was $14,830, as compared to $19,158 for the same period in 1997, a decrease of $4,328 as a result of reduced advertising efforts in light of the Brazilian economic crisis. Depreciation and Provision for equipment and inventory obsolescence. Depreciation includes depreciation of systems and equipment and organizational costs. Provision for equipment and inventory obsolescence represents charges for lost and obsolete equipment and material. Depreciation for the year ended December 31, 1998 was $39,185, as compared to $20,920 for the same period of 1997, an increase of $18,265. Provision for equipment and inventory obsolescence for the year ended December 31, 1998 was $3,321 as compared to $5,275 for the comparable period in 1997. 43 For the reasons noted above, Operating loss for the year ended December 31, 1998 was $25,538 compared to $6,737 for the comparable period in 1997, an increase of $18,801. Interest income. Interest income for the year ended December 31, 1998 was $109, as compared to $863 for the same period in 1997, a decrease of $754. Interest expense. Interest expense for the year ended December 31, 1998 was $25,048, as compared to $16,316 for the same period of 1997, an increase of $8,732 principally attributable to the interest related to the Galaxy Brasil Leasing Facility and loans from shareholders. Other non-operating (expenses) income. Other non-operating (expenses) income for the year ended December 31, 1998 was income of $417, as compared to expense of $15 in the same period in 1997, an increase of $432. Net loss. For the reasons noted above, Net loss 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. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 The table below sets forth the number of subscribers at December 31, 1996 and December 31, 1997 for the Discontinued Operations. Discontinued Operations December 31, 1996 December 31, 1997 ----------------------- ----------------- ----------------- DIRECTV and Digital C-Band 73,180 211,209 Monthly subscriptions revenue for the year ended December 31, 1997 was $78,534, as compared to $15,328 for the comparable period in 1996, an increase of $63, 206. This increase was principally attributable to an increase in the subscriber base and average monthly fees for existing subscribers to $44.05 in 1998 from $39.72 in 1997 and for new subscribers from $38.85 in 1997 to $47.10 in 1998 per subscriber. The average monthly subscription price during the year ended December 31, 1998, was $49.69 for Ku-Band service and $32.24 for C-band service, as compared to $49.05 and $35.36, respectively, for the year ended December 31, 1997. Installation revenue for the year ended December 31, 1997 was $77,865, as compared to $39,436 for the same period of 1996, an increase of $38,429. This increase was the result of a strong sales performance during the year ended December 31, 1997, principally for the Company's Ku-Band operations and occurred in spite of a decrease in average installation fees. The average installation fee during the year ended December 31, 1997 was $513.12 for Ku-Band service and $347.03 for C-band service, as compared to $877.00 and $649.98 respectively, during the year ended December 31, 1996. Taxes on revenue for the year ended December 31, 1997 were $11,789, as compared to $3,190 for the same period of the prior year, an increase of $8,599. As a percentage of net revenue, Taxes on revenue represents 8.2% of net revenues. For the reasons noted above, Net revenue for the year ended December 31, 1997 was $144,610, as compared to $51,771 for the comparable period in the previous year, an increase of $92,839. Direct operating expenses. Direct operating expenses for the year ended December 31, 1997 were $73,742, as compared to $18,451 for the same period in 1996, an increase of $55,291. Payroll and benefits expense increased to $7,311 from $3,879, an increase of $3,432, as a result of the hiring of new employees. Programming costs increased to $38,837 from $981, due to the initiation of Ku-Band commercial operations, the nationwide roll-out of which occurred in the fourth quarter of 1996 and became substantial in 1997. Transponder lease cost, which is a 44 variable cost, increased to $7,583 from $4,205, an increase of $3,378, as a result of an increase in subscribers of the Ku-Band operation. For the year ended December 31, 1997, Other costs were $18,070, as compared to $8,765 for the same period the prior year, an increase of $9,305. Selling, general and administrative expenses. Selling, general and administrative expenses for the year ended December 31, 1997 were $51,410, as compared to $18,987 for the same period of 1996, an increase of $32,423. The DBS business experienced increasing Selling, general and administrative expenses as a result of its increased pay television activities and the associated administrative costs, including costs related to opening and maintaining additional facilities and an overall increase in Payroll and benefits expense resulting from an increase in the number of employees. Advertising and promotion expense increased to $19,158 from $9,910, an increase of $9,248, as result of an increase in the number of subscriber and promotional activity. Depreciation and Provision for equipment and inventory obsolescence. Depreciation and provision for equipment and inventory obsolescence for the year ended December 31, 1997 was $20,920 as compared to $3,866 for the comparable period in 1996, an increase of $17,054. This was basically due to the start up of operations in 1996 and the acquistion and utilization of such equipment and inventory in 1997. For the reasons noted above, Operating income (loss) for the year ended December 31, 1997 was a loss of $6,737 compared to income of $10,467, for the comparable period in 1996. Interest expense. Interest expense for the year ended December 31, 1997 was $16,316, as compared to $1,476 for the same period of 1996, an increase of $14,840 attributable to principally the interest related to the Galaxy Brasil Leasing Facility and loans from shareholders. Net income (loss). For the reasons noted above, Net loss for the year ended December 31, 1997 was $21,438 as compared to a Net income of $9,157 for the comparable period in 1996, a decrease of $30,595. Liquidity and Capital Resources The following discussion is qualified in its entirety by the information contained in "Recent Developments". 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, 1998, the Company had cumulative net losses of over $433,351. During the periods under review, the Company required external funds to finance its capital expenditures, operating activities and make payments of principal and interest on its indebtedness. The sources of such funds have been as follows: (i) cash and cash equivalents of $104,798 at December 31, 1996, (ii) borrowings from Abril under the Abril Credit Facility, of which $88,740 was outstanding as of December 31, 1998 and a shareholder loan of $58,671 outstanding as of December 31, 1998 to Galaxy Brasil, (iii) borrowings under lines of credit, of which $34,917 was outstanding as of December 31, 1998, (iv) net capital contributions of approximately $388,000 from shareholders, (v) the EximBank Facility, of which $18,123 was outstanding as of December 31, 1998, (vi) the Galaxy Brasil Leasing Facility, of which $33,483 was outstanding as of December 31, 1998, and (vii) the Notes, of which $250,000 was outstanding as of December 31, 1998. The Company had negative working capital of $82,171 at December 31, 1998. Arthur Andersen, the Company's independent accountants, has included in its audit report of the Company's financial statements for the year ended December 31, 1998 an "emphasis paragraph" which states that the Company's financial statements have been prepared on the assumption that the Company will continue as a going concern. In its report, Arthur Andersen has stated that the Company has suffered recurring losses and has a negative working capital that "raise substantial doubt about its ability to continue as a going concern". In a footnote to the Company's financial statements relating to its working capital deficiency, Arthur Andersen acknowledges that management's plans to continue as a going 45 concern include efforts to generate the necessary cash flow to meet the Company's cost structure through sales of non-strategic assets, and an administrative cost reduction program implemented in the fourth quarter of 1998. 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, 1998, the Company had approximately $486,913 of indebtedness outstanding, primarily consisting of $250,000 principal amount of the Notes and loans from shareholders. In addition to debt service, the Company will require capital for (i) the continued funding of losses and working capital requirements, (ii) the construction 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 has, as a consequence of its negative cash flow, liquidity shortage and its lack of access to sources of capital, failed to comply with certain obligations, including certain payment obligations and certain financial covenants, summarized below. As discussed below, some of these failures may result in the termination of certain material agreements, and may subject the Company to the exercise of certain remedies, or the acceleration of certain indebtedness, of the Company or GLB, or other consequences that could affect the Company's ability to continue as a going concern. o Accrued Royalty Payments to GLA. The Company has not made royalty payments to GLA in accordance with the terms of the Local Operating Agreement since August 1998. As of April 30, 1999 such unpaid amount totaled approximately $51 million. Under the terms of the Local Operating Agreement, GLA is entitled to terminate the Agreement for failure by GLB to make royalty payments when due. If GLA were to validly terminate the Local Operating Agreement, GLB would no longer be entitled to operate the DIRECTV Service in Brasil, and would be unable to service its current and future subscribers. o Indebtedness Payable to SurFin. GLB has incurred indebtedness to SurFin in the aggregate outstanding principal amount of approximately $71 million. Of that amount, approximately $60 million was due and payable in August 1998. Since that time, SurFin has granted to GLB successive extensions of the maturity date for such indebtedness. Such extensions are, however, terminable at any time in SurFin's sole discretion, and there is no assurance that SurFin will continue to grant such extensions. o Noncompliance With Certain Financial Covenants. In connection with the Galaxy Brasil Leasing Facility, GLB is currently not in compliance with certain financial covenants (specifically the debt to tangible net worth ratio covenant and the tangible net worth covenant) contained in the Equipment Lease Agreement and the Equipment Lease and Saleback Agreement, each dated as of July 30, 1996 between Citibank, N.A., as Lessor and GLB, as Lessee. Citibank issued a waiver of those covenant defaults, valid for a period of six months, from December 31, 1998 until June 30, 1999. However, there is no assurance that Citibank would be willing to grant further waivers at the end of such six-month period. In the event that Citibank were to refuse to grant further waivers, Citibank may have the right to exercise its remedies under the equipment lease agreements. Currently the aggregate principal amount due to Citibank under the two equipment lease agreements referred to above totals approximately $30 million. Although GLB may be able to raise certain defenses in the event of legal actions arising out of any of the foregoing events, the outcome of any such actions would be uncertain. In addition most of GLB's financing documents (including the Indenture) contain cross-default provisions that could be triggered by the enforcement by any of the creditors mentioned above. The Company made purchases of fixed assets of $22,369, $93,029, $87,867, $118,909 and $81,392 in 1994, 1995, 1996, 1997 and 1998, respectively (not including $37,645, $128,958 and $61,967 in connection discontinued operations in 1996, 1997 and 1998 respectively). Management estimates that $29,292 and $22,502 of capital expenditures will be required in 1999 and 2000, respectively, principally in connection with the purchase of 46 materials and equipment. The Company also has certain commitments that must be funded, including investments of $23,954 prior to December 31, 1999 in GLA ($18,000), Surfin ($2,000) and ESPN Brasil Ltda ($3,954). Actual amounts of funds required may vary materially from these estimates and additional funds could be required in the event of cost overruns, unanticipated expenses, regulatory changes, engineering design changes and other technological-driven changes. In addition, these commitments may be eliminated as a result of the consummation of the sales of assets described above. 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. In addition, in 1999 the Company expects to consummate sales of certain non-strategic assets described above, thereby eliminating the Company's need to finance the operations related to such assets. The Company had approximately $1,397 of cash and cash equivalents as of December 31, 1998. For the year ended December 31, 1998, net cash provided by operating activities was $2,675, primarily as the result of the net loss for the year of $148,067, which was partially offset by $46,402 of depreciation, discontinued operations result $52,773 and equity in losses of affiliates $12,139. For the year ended December 31, 1998, the net cash used in investing activities was $162,556, as the result of capital expenditures for the purchase of fixed assets of $81,392, loans to related companies of $44,071, investments in equity and cost investments of $20,082 and to discontinued operations of $17,011. The purchases of fixed assets were principally related to the purchase of expansion of cable networks and reception equipment, which includes hardware, materials and labor used for new subscriber installations, and decoders. For the year ended December 31, 1998, net cash provided by financing activities was $160,289, consisting principally of borrowings from the Abril Credit Facility and capital contributions. The Abril Credit Facility allows the Company to borrow up to $60,000 on a revolving basis until December 1998. Since June 1996, the Company has from time to time requested, and Abril has provided, funds in excess of $60,000. The loans are generally denominated in reais and bear interest at a rate equal to a percentage of the CDI rate, the Brazilian interbank lending rate, adjusted at the beginning of each month. As of December 31, 1998, the Company had $88,740 outstanding under the Abril Credit Facility. In addition, in 1997 Abril made a subordinated shareholder loan of $61,725 to Galaxy Brasil, of which $58,671 was outstanding as of December 31, 1998. On December 9, 1996, TVA Sistema, as Borrower, and Tevecap, as Guarantor, entered into a credit agreement with The Chase Manhattan Bank for the financing of C-Band decoders and other related equipment (the "EximBank Facility"). The Export-Import Bank of the United States of America ("EximBank") also guaranteed 85.0% of the amount of the loan. The loan was made on terms customary for credits supported by EximBank to Brazilian borrowers with an interest rate of LIBOR plus a specified margin. The principal amount of the loan was $29,350, which was dispersed in two tranches, the first in April 1997 in the principal amount of $11,400 with a term of five years and the second in August 1997 in the principal amount of $17,950 with a term of 4.5 years. As of December 31, 1998, the principal amount outstanding under the EximBank Facility was $18,123. Galaxy Brasil entered into the Galaxy Brasil Leasing Facility, a five-year $49,900 sale leaseback facility, during the first quarter of 1997. Under the Galaxy Brasil Leasing Facility, Galaxy Brasil has access to financing for the purpose of acquiring dish antennae, decoder boxes and other equipment for its Ku-Band service. This facility will be available until 2002 and bear interest at a fixed rate of 12.5% per year. During 1997 Galaxy Brasil drew down the entire amount available under the Galaxy Brasil Leasing Facility, and had $33,483 outstanding as of December 31, 1998. Galaxy Brasil's payment obligations under the Galaxy Brasil Leasing Facility are guaranteed by Tevecap and Abril. In connection with the Galaxy Brasil Leasing Facility, GLB is currently not in compliance with certain financial covenants (specifically the debt to tangible net worth ratio covenant and the tangible net worth covenant) contained 47 in the Equipment Lease Agreement and the Equipment Lease and Saleback Agreement, each dated as of July 30, 1996 between Citibank, N.A., as Lessor and GLB, as Lessee. Citibank issued a waiver of those covenant defaults, valid for a period of six months, from December 31, 1998 until June 30, 1999. However, there is no assurance that Citibank would be willing to grant further waivers at the end of such six-month period. In the event that Citibank were to refuse to grant further waivers, Citibank may have the right to exercise its remedies under the equipment lease agreements. Currently the aggregate principal amount due to Citibank under the two equipment lease agreements referred to above totals approximately $30 million. Although GLB may be able to raise certain defenses in the event of legal actions arising out of any of the foregoing events, the outcome of any such actions would be uncertain. In addition most of GLB's financing documents (including the Indenture) contain cross-default provisions that could be triggered by the enforcement by any of the creditors mentioned above. On November 26, 1996, Tevecap raised funds in foreign markets through a private placement amounting to $250,000 12 5/8% Senior Notes (the "Notes"). These Notes mature on November 26, 2004 and are guaranteed by certain of Tevecap's subsidiaries. The Indenture relating to the Notes contains certain restrictive covenants which relate to, among others, the ability of Tevecap and the Guarantors to incur additional indebtedness, declare dividends, effect asset dispositions, enter into new liens, sell capital stock, enter into mergers and/or consolidations, invest in non-guarantor subsidiaries that are not Guarantors and transfer existing businesses. As of December 31, 1998, the Company was in compliance with all restrictive covenants contained in the Indenture. In addition, the Company's liquidity may also be adversely affected by statutory minimum dividend requirements under applicable Brazilian law. Accounting for Income Taxes The Company has approximately $274,070 of net operating losses ("NOLs") to offset against regular taxes. These NOLs are unexpirable. Statement of Financial Accounting Standards No. 109 (Accounting for Income Taxes) ("SFAS 109") requires that the Company determine whether it is "more-likely-than-not" that the Company will realize the benefits associated with such losses and provides that in making such a determination, all negative and positive evidence should be considered (with more weight given to evidence that is "objective and verifiable"). SFAS No. 109 indicates that "forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years". The Company has a limited operating history and has generated losses since its inception. In view of this, the Company has established a full valuation allowance for the amount of NOL carryforwards in excess of net taxable temporary differences. This determination was based primarily on historical losses. Management believes that, should the Company be profitable in the future, it will be able to utilize these NOLs. Year 2000 Compliance Many computer systems, including some of those used by the Company in the past, identify dates using only the last two digits of the year. These systems are unable to distinguish between dates in the year 2000 and dates in the year 1900. That inability (referred to as the "Year 2000 issue"), if not addressed, could cause these systems to fail or provide incorrect information after December 31, 1999 or when using dates after December 31, 1999. In 1998 the Company established a program for identifying, prioritizing and replacing or modifying systems and processes that may be affected by the Year 2000 issue (the "Year 2000 Program") and that could, consequently, affect the Company's business, operations and exposure to liability from third parties. These areas primarily covered by the Year 2000 Program are: 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 48 and service providers) In addition, in 1998 the Company established a Year 2000 Committee, comprised of the Company's Chief Information Technology Officer, Information Technology Manager and a team of independent consultants. The principal functions of the Year 2000 Committee are to coordinate the testing and implementation of Year 2000 compliant systems and to report to Management the Company's progress in these areas. In addition, the Company is participating in the Year 2000 compliance program adopted by Abril S.A., the Company's majority shareholder. All Company employees were made aware of potential Year 2000 issues in a letter from the President of the Company circulated to all employees concerning potential Year 2000 issues and the need for the Company to promptly and diligently address these issues. The Company's Year 2000 Program is being executed in the following stages, all of which the Company expects to complete on or prior to July 31, 1999: Stage: Target Completion Month ------ ----------------------- o awareness August 1998 o systems inventory July 1998 o software inventory September 1998 o equipment inventory October 1998 o personal applications inventory March 1999 o external contacts March 1999 o replacement or modification of systems June 1999 o testing June 1999 o evaluation of results June 1999 o Year 2000 certification July 1999 o contingency plans July 1999 As of May 17, 1999, the Company had completed several phases of the Year 2000 Program and was in the process of completing the phases relating to replacement or modification of systems, testing and evaluation of results. The Company expects these phases to be completed on or prior to June 30, 1999. In addition, as of May 17, 1999, the Company was commencing the development of contingency plans in the event of a "worst case" scenario, as described more fully below, which phase is scheduled to be completed on or prior to July 31, 1999. With respect to IT systems, the Company has replaced or modified the following three primary software systems with Year 2000 compliant systems: o An in-house intellicable system handling billing and customer service was replaced by a Year 2000 compliant Cable Data system with the assistance of the consulting firm Integris. As of May 17, 1999, this new system had been installed in each of the Company's principal offices, with the exception of the Rio de Janeiro and Curitiba offices, where the Company has experienced some delays in installing the new system. Nevertheless, the Company expects that the installation of the new system in the remaining offices will be completed on or prior to June 30, 1999. o The Company's in-house finance system, which consisted of 15 separate systems, was replaced by a comprehensive Year 2000 compliant Oracle financial system. o A Placomp system handling materials and supplies was refurbished to comply with Year 2000 issues. With respect to non-IT systems, the Company has replaced all systems requiring modification, installing IBM Risk 6000, AIX and Oracle database hardware systems. As of May 17, 1999, approximately 70% of the Company's IT systems and 60% of the Company's non-IT 49 systems had been fully tested or otherwise validated as Year 2000 compliant. The Company expects that the remaining systems will be fully tested or otherwise validated as compliant on or prior to June 30, 1999. Of the systems tested thus far, certain minor compliance difficulties were encountered with respect to the refurbishing of the Placomp system described above. These problems were promptly resolved by the Company with the assistance of independent consultants. With respect to external contacts, the Company established a formal communications process with its financial institutions, programming providers, vendors, service providers and other third party contacts to determine the extent to which such parties are addressing Year 2000 issues. In connection with the process, the Company sent approximately 20 questionnaires requesting information regarding the Year 2000 compliance status of these parties. The Company has received responses from all such parties indicating that all are Year 2000 compliant or expect to be Year 2000 compliant on a timely basis. The Company expects to incur total costs of approximately $8.3 million 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. Approximately $1.2 million of these costs relate to the replacement and modification of systems that were planned prior to the implementation of the Year 2000 Program. Approximately $1.2 million of total Year 2000 Program costs relate to the engagement by the Company of the services of external consultants to assist in the implementation, replacement, modification and testing of systems. The Company has funded, and will fund, the costs for the Year 2000 Program through cash flow from operations and shareholder loans. Overall, approximately $7.5 million of total costs will be capitalized and $0.8 million will be expensed. The $8.3 million total costs have been or are expected to be spent in accordance with the Year 2000 Program stages described above and in the following amounts: Quarter Amount ------- ------ First quarter 1998 $0.8 million Second quarter 1998 $1.2 million Third quarter 1998 $1.9 million Fourth quarter 1998 $1.7 million First quarter 1999 $1.1 million Second quarter 1999 $0.8 million (estimated) Third quarter 1999 $0.6 million (estimated) Fourth quarter 1999 $0.2 million (estimated) The Company's estimates of the costs associated with the Year 2000 Program are based on the best estimates of the Company derived by utilizing numerous assumptions of future events, including the continued availability of resources, third-party Year 2000 compliance modification plans and other factors. The Company expects the necessary modifications will be made on a timely basis and does not believe that the cost of these modifications or the Year 2000 Program as a whole will have a material adverse effect on the business, financial condition and results of operations of the Company. Although all critical systems over which the Company has control are expected to be Year 2000 compliant and tested before the Year 2000, the Company has identified certain areas of concern in a worst possible scenario. These areas include a systems failure beyond the control of the Company impeding the ability of the Company to transmit programming to subscribers and to submit monthly statements to subscribers. Such a failure could lead to lost revenues, increased operating costs, a loss of subscribers and other business interruptions of a material nature. In addition, such a failure could lead to potential claims of mismanagement, misrepresentation and breach of contract. As of May 17, 1999, the Company was in the process of preparing contingency plans to be implemented in 50 the event of any material systems failure on or after December 31, 1999. These contingency plans are expected to be completed on or prior to July 31, 1999. The Company's Year 2000 Committee is working with each of the Company's business units to review existing business continuity plans and to modify these plans to include Year 2000 contingency plans for the business processes, systems and third-party interfaces that may experience delays due to Year 2000 issues. The Company's contingency plans will be developed in accordance with the following stages: o assessment of each business process for business risk and potential need for contingency plans o creation of contingency plans as necessary in accordance with risk analysis o testing of contingency plans o evaluation of test results o revision of contingency plans as necessary as a result of evaluation of test results o review and modification of contingency plans as part of ongoing management process The Company expects to have completed all stages of its Year 2000 Program, including the testing of all systems and the establishment of appropriate contingency plans, on or prior to July 31, 1999. Upon the completion of the Year 2000 Program, Management expects that the Company's business and operations will not be materially adversely affected as a result of identified Year 2000 issues. Due to the general uncertainty inherent in evaluating Year 2000 issues and the inability to anticipate all potential risks associated with such issues, however, the Company cannot ensure its ability to resolve on a timely and cost-effective manner all difficulties that may arise in connection with Year 2000 issues and that may affect the Company's operations, business and exposure to third party liability. The discussion regarding Year 2000 issues above contains forward-looking statements, including, without limitation, statements relating to the Company's business plans, strategies, objectives, expectations, intentions and resources, made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. The Company cautions all readers that forward-looking statements contained in this Year 2000 discussion are based on certain assumptions that may vary from actual results. In particular, the dates on which the Company anticipates the completion and implementation of Year 2000 compliant systems and contingency plans are based on the best estimates of Company Management. These estimates were derived by utilizing numerous assumptions of future events, including the continued availability of resources, third-party Year 2000 compliance modification plans and other factors. As a result, the Company cannot ensure that the estimates and objectives described herein will be achieved, or that all stages of the Year 2000 Program will be implemented on schedule. In addition, for the same reasons, the Company cannot ensure that the costs associated with the Year 2000 Program will remain at the levels described herein. 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, 1998, Tevecap has dollar denominated debt of US$303,380, which is due as follows: (In Thousands of US dollars) Principal ---------------------------- 1999 $ 41,028 2000 6,478 2001 4,876 2002 998 2003 and thereafter 250,000 ---------------------------- $303,380 ============================ The amounts above do not include the debt balances of Galaxy Brasil, as it is the Company's intention to dispose of Galaxy Brasil and C-Band operations, which are accounted for as discontinued operations. 51 During January 1999, the Brazilian Real experienced a devaluation after the Central Bank abandoned the exchange bond within which the real was permitted to trade. Since that time, the exchange rate has been volatile, ranging up to R$2.10 per U.S. dollar. Although the Company's functional currency and its reporting currency is the U.S. dollar, the cash flow required to service the debt is generated in local currency, Brazilian reais (R$). Using the year end 1998 exchange rate (R$1.208 per U.S. dollar), the cash flow in reais to pay the interest and principal due in 1999 would have been R$88,838 and R$49,561, respectively. A devaluation of the real to R$2.00 per U.S. dollar would require cash flow of R$147,082 to pay the interest due in 1999 of US$73,541. Cash flow in reais to pay the principal due in U.S. dollars would be R$82,056. 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 1999 would be R$183,853 and R$102,570, respectively. The Company is also subject to interest rate risk on its loans in local currency. At December 31, 1998, the Company had $88,740 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 CDI (the interbank certificate of deposit rate in Brazil) plus 1/2%. During 1998, the CDI Rate ranged from 19.0% to 42.3%. The average rate for the year was 28.5%. If the CDI rate rose to 40%, interest payments on the $88,740 would be approximately $35,496 annually. If the CDI rate rose to 50%, the annual interest payments would be $44,370. It is the intention of the Company and its affiliates to convert these loans to equity during 1999 if necessary. In addition, 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"), Conselho Consultivo ("Advisory Board") and Diretoria ("Committee of Officers"). Members of the Board of Directors and Committee of Officers are elected for a two-year period, currently expiring on April 30, 2000. Day-to-day operations of the Company are managed by the Company's Executivos ("Executive Officers"). Board of Directors Current Position Member Position Held Since - ------ -------- ---------- Robert Civita.......................... President 1994 Jose Augusto P. Moreira................ Member 1994 Robert Hefley Blocker.................. Member 1995 Roger Philip Hipskind.................. Member 1998 Thomaz Souto Correa Neto............... Member 1995 Francisco Savio Couto Pinheiro......... Member 1995 Arnaldo Bonoldi Dutra.................. Member 1996 Sergio Vladimirschi Junior............. Member 1995 Jose Luis de Salles Freire............. Member 1995 Jorge Fernando Koury Lopes............. Member 1995 Oswaldo Leite de Moraes Filho.......... Member 1995 52 Advisory Board Current Position Member Position Held Since - ------ -------- ---------- Robert Civita.......................... President 1995 Jose Augusto P. Moreira................ Member 1995 Robert Hefley Blocker.................. Member 1995 Roger Philip Hipskind.................. Member 1998 Thomaz Souto Correa Neto............... Member 1998 Francisco Savio Couto Pinheiro......... Member 1995 Stephen Vaccaro........................ Member 1996 Marc Nathanson......................... Member 1995 Tully M. Friedman...................... Member 1995 Raymond E. Joslin...................... Member 1996 Herbert A. Granath..................... Member 1996 Committee of Officers Current Position Member Position Held Since - ------ -------- ---------- Jose Augusto Pinto Moreira............. Member 1992 Angelo Silvio Rossi.................... Member 1996 Claudio Cesar D`Emilio................. Member 1992 Sergio Vladimirschi Junior............. Member 1996 Executive Officers
Current Position Member Position Held Since - ------ -------- ---------- Jose Augusto P. Moreira................ President 1998 Douglas Duran.......................... Chief Financial Officer 1992 Luiz Eduardo B.P. Rocha................ Brazil Chief Operations Officer 1997 Alexandre Annemberg.................... Chief Technology Officer 1997 Guilherme Marconi...................... South Operations Officer 1997 Roberto Rio Branco Nabuco de Gouvea.... Sao Paulo Operations Officer 1997 Paulo de Toledo Barros................. Rio de Janeiro Operations 1997 Officer Jose Carlos R.H. Alves................. Chief Information Technology 1997 Officer Leila Abraham Loria.................... Galaxy Brasil Officer 1997 Roseli Parrella........................ Human Resources Officer 1997 Andre Muller Borges.................... General Counsel 1998 Marcelo Vaz Bonini..................... Controller 1994
Marc Nathanson is the uncle of Sergio Vladimirschi Junior. ITEM 11. COMPENSATION FOR DIRECTORS AND OFFICERS For the year ended December 31, 1998, the aggregate compensation, including bonuses, of all Directors, Officers and Executive Officers of the Company was $4,345,725. Members of the Board of Directors, the Advisory Board and the Committee of Officers do not receive a salary from the Company. For the year ended December 31, 1998, the aggregate amount set aside by the Company to provide pension, retirement or similar benefits to Directors, Officers and Executive Officers was $128,818. 53 ITEM 12. OPTIONS TO PURCHASE SECURITIES Not applicable. ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS Overview Tevecap has engaged in a significant number and variety of related party transactions, including, without limitation, the transactions described below. Tevecap has not performed any studies or analyses to determine whether the terms of past transactions with related parties have been equivalent to arm's-length transactions and cannot state with any certainty the extent to which such transactions are comparable to those which might have been obtained from a non-affiliated third party. Transactions Among Shareholders On December 6, 1995, Tevecap's shareholders executed a Stock Purchase Agreement and a Stockholders Agreement relating to the investment of ABC and Hearst in the Company through Hearst/ABC Parties. See "Item 4: Control of Registrant." On that date, the Tevecap shareholders also executed a series of inter-shareholder agreements relating to, among other things, the provision of services and programming among the Company and the shareholders. These agreements supplemented other existing agreements among Shareholders. The following contracts are the principal agreements among the Company and the Tevecap shareholders (each of which, unless specified otherwise, is dated as of December 6, 1995). General and Advisory Services Under an Advisory Services Agreement, each of Hearst, ABC and HABC II has agreed, upon a request from the Company, to use its reasonable efforts to arrange for the investors to furnish personnel to provide advisory services to the Company. To date, the Company and Hearst, ABC and HABC II have not entered into a supplemental agreement to provide specific personnel or services at a particular cost. In addition, on April 1, 1996, Tevecap entered into a separate Advisory Services Agreement with Falcon International Communications, L.L.C. Pursuant to this agreement, which has a renewable two-year term, Falcon International Communications, L.L.C. has agreed to provide a range of advisory services to the Company, encompassing such areas as accounting, budget and billing procedures, financial and operation statements, customer, employee and government relations, the design, purchase and maintenance of equipment and supplies, negotiations with programmers and other such matters as the Company may reasonably request. In exchange for such services, the Company has agreed to pay Falcon International Communications, L.L.C. an annual fee of $200,000, which amount may be revised on each anniversary of the agreement. Programming In connection with the investment by Hearst and ABC in Tevecap, Tevecap and these two parties entered into a Programming Agreement (the "Hearst/ABC Programming Agreement"). Pursuant to the Hearst/ABC Programming Agreement, each of Hearst and ABC has agreed to offer first to Tevecap pay programming that Hearst or ABC (or any subsidiary of which either Hearst or ABC owns at least 80.0% of the outstanding equity interests) intends to license for use in Brazil in the pay television markets served by TVA. The parties also agreed to consider future co-production activities which could enhance TVA's business and competitive position. Tevecap agreed to pay to each of Hearst and ABC such fees and expenses as are agreed upon at the time such programming or co-production services are provided. The Hearst/ABC Programming Agreement does not apply to The Walt Disney Company or its subsidiaries other than ABC and ABC's subsidiaries. In addition, the Hearst/ABC Programming 54 Agreement does not apply to the activities of The A&E Television Networks, Lifetime Television and ESPN, including agreements relating to ESPN Brasil. Other Transactions Among Shareholders In 1995 each of Tevecap's corporate shareholders entered into a side letter to the Stock Purchase Agreement and the Stockholders Agreement pursuant to which each of Abril, Falcon and the Chase Parties agreed, with certain exceptions, to exchange all of its respective shares in Tevecap for a corresponding number of shares of a newly-formed Brazilian corporation. The new corporation would become an 80.0% shareholder in Tevecap and Hearst/ABC would remain a 20.0% shareholder in Tevecap, which would be reorganized as a Brazilian limitada. This new structure would not result in any change in the current beneficial equity participation of the Stockholders in Tevecap. In addition, the transactions in establishing the new structure and the new structure itself would have to conform to the terms of the Indenture. Transactions Among Related Parties General and Advisory Services TVA Sistema and MTV Brasil have entered into various agreements, dated August 27, 1996, governing reciprocal services between the Company and MTV Brasil. The services covered by the agreement include billing, subleasing, equipment use, administrative, financial, accounting, human resources, engineering, infrastructure and satellite services. TVA Sistema and Abril have also entered into an agreement, dated January 1995, with Uniser, a division of Abril, pursuant to which Uniser provides telecommunications, maintenance, human resources, travel, legal other services in exchange for a monthly payment of approximately $57,000. Tevecap provides financial and administrative services to Galaxy Brasil, in return for which the Company receives a monthly payment of $47,000 pursuant to an agreement dated March 9, 1995. Tevecap also provides to ESPN Brasil Ltda. satellite and other engineering services, for which it receives a payment of approximately $263,000 per month, pursuant to an agreement dated June 26, 1995. The Company has also entered into an agreement with HBO Brasil Ltda., dated September 1, 1995, to provide space, equipment and engineering services to HBO Brasil Ltda., in return for which the Company receives a monthly payment of approximately US$111,000. Publishing and Advertising The Company publishes a monthly magazine detailing the Company's programming options in a given month. In connection with this magazine, TVA Sistema has entered into an agreement with Abril, dated September 1992, pursuant to which Abril publishes approximately 435,000 copies of the Company's monthly magazine in return for a monthly payment of approximately $257,000. The monthly magazine is distributed in accordance with a distribution agreement, dated September 1992, between the Company and Irmaos Reis, pursuant to which the Company pays Irmaos Reis approximately $72,000 per month. TVA Sistema and Abril also have a reciprocal advertising agreement in which the Company publishes advertisements for Abril in the Company's monthly magazine in exchange for advertisements for the Company (and third parties through the Company) in the magazines published by Abril. In addition, the Company has an agreement with HBO Brasil Ltda., dated September 1, 1995, pursuant to which the Company assists HBO Brasil Ltda. in selling advertising, in return for which the Company receives 25.0% of HBO Brasil Ltda.'s advertising revenues. 55 Insurance TVA currently reimburses TVA Sistema for payments made by TVA Sistema pursuant to an insurance policy covering the operations of TVA Sistema, TVA Brasil Abril Video da Amazonia and the former MTV Division of Abril (collectively, the "Insureds"). TVA Sistema makes such payments pursuant to an agreement among the Insureds dated September 30, 1997. The annual premiums paid by TVA Sistema and reimbursed by the Company amount to approximately $86,000. Abril Loans Tevecap has entered, as the borrower, into a revolving credit facility (the "Abril Credit Facility") with Abril, as the lender. The Abril Credit Facility, effective December 6, 1995 and valid for a period of 36 months, allows the Company to draw down amounts not to exceed a maximum aggregate principal amount of $60,000,000. Since June 1996, Tevecap has from time to time requested, and Abril has provided, funding in excess of the aggregate maximum principal amount. The loans provided under the Abril Credit Facility are denominated in reais, unless the loan is a pass-through loan that Abril has funded in 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, 1998, the aggregate principal amount outstanding under the Abril Credit Facility was $88.7 million. In addition, in 1997 and 1998 Abril made a shareholder loan to Galaxy Brasil, of which $58.6 million was outstanding as of December 31, 1998. Other Intercompany/Shareholder Loans Tevecap has used the proceeds from the Abril Credit Facility to make capital contributions to TVA Sistema and Galaxy Brasil, as well as to extend loans to various interrelated companies. The aggregate outstanding amounts under these loans as of December 31, 1998 were: $21.6 million to TVA Brasil; $12.3 to SMC; $26.4 million to TVA Sul; $6.0 million to Canbras TVA; $36.7 to TVA Communciations; and $0.9 million to other affiliates. In addition, TV Show Time has loans outstanding to Abril, which loans, as of December 31, 1998, had an aggregate outstanding amount of approximately $2.5 million. Service Agreement with Licenseholders Pursuant to a Service Agreement, dated July 22, 1994, as amended, TVA Brasil and TV Show Time (the "Licenseholders") agreed to transfer to TVA all the rights and benefits associated with their current and future pay-television licenses, with the exception of licenses operated by companies in which TVA has minority interests. While the Licenseholders retained the title to such licenses, the Licenseholders promised to take all steps necessary to transfer the title of such licenses to Tevecap. Such steps included the appropriate procedures required by the Ministry of Communications and any other governmental authority regulating the transfers. The transfer of the title to such licenses is currently either pending, subject to approval by the Ministry of Communications, or waiting for the passage of certain statutory or regulatory waiting periods. PART II ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED Not applicable. 56 PART III ITEM 15. DEFAULTS UPON SENIOR SECURITIES The Company is not in default on any of its debt instruments. However, the Company is not in compliance with certain terms thereof. See "Recent Developments." ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED SECURITIES Not applicable. ITEM 17. FINANCIAL STATEMENTS The Company is furnishing financial statements pursuant to the instructions in Item 18 of Form 20-F. ITEM 18. FINANCIAL STATEMENTS See Item 19(a) for a list of financial statements filed as part of this Form 20-F. ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements. The following financial statements and schedules are filed as part of this annual report, together with the report of the independent accountants. 57 INDEX TO THE FINANCIAL STATEMENTS Page ---- Report on Consolidated Financial Statements of Tevecap S.A. and Subsidiaries as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998.......................F-1 Report of Independent Accountants................................F-2 Consolidated Balance Sheets as of December 31, 1998 and 1997.....F-3 Consolidated Statements of Operations for each of the three years in the period ended December 31, 1998...................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, 1998......................................................F-6 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1998...................F-7 Notes to the Consolidated Financial Statements...................F-9 Report on Financial Statements of TVA Sistema de Televisao S.A. as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998............................F-53 Report of Independent Accountants...............................F-55 Balance Sheets as of December 31, 1998 and 1997.................F-56 Statements of Operations for each of the three years in the period ended December 31, 1998..................F-58 Statements of Changes in Shareholders' Deficit for each of the three years in the period ended December 31, 1998............................................F-59 Statements of Cash Flows for each of the three years in the period ended December 31, 1998..................F-60 Notes to the Financial Statements...............................F-61 Report on Financial Statements of TVA Sul Parana Ltda. and subsidiary as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998.........................................F-77 Report of Independent Accountants...............................F-79 Consolidated Balance Sheets as of December 31, 1998 and 1997....F-80 Consolidated Statements of Operations for each of the three years in the period ended December 31, 1998..................F-82 58 Page ---- Consolidated Statements of Changes in Shareholders' Equity for each of the three years in the period ended December 31, 1998............................................F-83 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1998..................F-84 Notes to Consolidated Financial Statements......................F-86 Report on Financial Statements of CCS--Camboriu Cable System de Telecomunicacoes Ltda. as of December 31, 1998 and 1997 and for each of the two years in the period ended December 31, 1998 and the period from inception, May 30, 1996 to December 31, 1996..........F-100 Report of Independent Accountants..............................F-102 Balance Sheets as of December 31, 1998 and 1997................F-103 Statements of Operations for each of the two years in the period ended December 31, 1998 and the period from inception, May 30, 1996 to December 31, 1996................F-105 Statements of Changes in Shareholders' Equity for each of the two years in the period ended December 31, 1998 and the period from inception, May 30, 1996 to December 31, 1996........................................F-106 Statements of Cash Flows for each of the two years in the period ended December 31, 1998 and the period from inception, May 30, 1996 to December 31, 1996...........F-107 Notes to Financial Statements..................................F-108 59 SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized. TEVECAP S.A. By: /s/ Jose Augusto P. Moreira ----------------------------- Name: Jose Augusto P. Moreira Title: Officer By: /s/ Claudio Cesar D'Emilio ----------------------------- Name: Claudio Cesar D'Emilio Title: Officer Date: May 19, 1999 60 GLOSSARY ABC: ABC, Inc., formerly known as "Capital Cities/ABC, Inc." Abril: Abril S.A., the leading magazine publishing, printing and distribution company in Latin America. Abril Credit Facility: A revolving credit facility, dated December 6, 1995, between Tevecap, as the borrower, and Abril, as the lender. BBC: British Broadcasting Corporation. Brasilsat: A satellite operated by Embratel through which the Company provides C-Band service. C-Band: A satellite transmission system which provides a signal on the "c" bandwidth. Cable: A Cable network employs electromagnetic transmission over coaxial and/or fiber-optic cable to transmit multiple channels carrying images, sound and data between a central facility and individual customers' television sets. Networks may allow one-way (from a headend to a residence and/or business) or two-way transmission from a headend to a residence and/or business with a data return path for the headend. Cable license: A license that is granted by the applicable governing body pursuant to its authority under the communications laws of a particular country for the purpose of providing Cable services for a specific franchise/license area. Canbras: Canbras Communications Corp., a Canadian corporation. Canbras Association Agreement: Association Agreement dated June 14, 1995, among Tevecap, TVA Sistema, the Canbras TVA Companies, Canbras and Canbras-Par. Canbras TVA Companies: Canbras TVA Cabo and TV Cabo Santa Branca. Canbras TVA Cabo: Canbras TVA Cabo Ltda., a Brazilian limitada. Canbras TVA: The operations of Canbras TVA Cabo and TV Cabo Santa Branca, in each of which Tevecap holds a 36.0% equity interest and Canbras Par holds a 64.0% equity interest. Canbras-Par: Canbras Participacoes, Ltda., a Brazilian limitada wholly-owned by Canbras. CBC: California Broadcasting Center, an uplink center for GLA located in Long Beach, California. CBS: CBS, Inc. Central Bank: Central Bank of Brazil (Banco Central do Brasil) 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 Cisneros Group: Cisneros Group of Companies, which holds a 10% interest in GLA through Darlene Investments. CMIF: Chase Manhattan International Finance Ltd., an affiliate of The Chase Manhattan Bank which holds a 8.1% interest in Tevecap through two wholly owned subsidiaries. Coaxial cable: Cable consisting of a central conductor surrounded by and insulated from another conductor. It is the standard material used in traditional Cable systems. Signals are transmitted through it at different frequencies, giving greater channel capacity than is possible with twisted pair cable, but less than is allowed by optical fiber. Comercial Cabo Sao Paulo: Comercial Cabo TV Sao Paulo Ltda., a Brazilian limitada in which Tevecap holds a 99% equity interest. Company: Tevecap, together with its consolidated subsidiaries. CPL: Cable Participacoes Ltda., a Brazilian limitada, jointly owned by Hearst and ABC, which limitada holds a 2.0% equity interest in Tevecap. CPCT: Centrais Privadas de Comutacao Telefonica, certain private telephone networks comparable to private branch exchanges (PBX) found in larger apartment complexes, hotels and businesses in the United States. 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 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 70% equity interest in GLA. Embratel: Empresa Brasileira de Telecomunicacoes, the recently-privatized Brazilian national telephone carrier authorized to provide satellite telecommunications services utilizing the Sistema Brasiliero de Telecomunicacoes por Satelite (Brazilian Satellite Telecommunications System). ESPN: ESPN, Inc., in which ABC has an 80.0% equity interest and Hearst has a 20.0% equity interest. ESPN Agreement: Quotaholders Agreement, dated June 26, 1995, among Tevecap, TVA Sistema, ESPN Brazil, Inc. and ESPN Brasil Ltda. ESPN Brasil: Programming provided by ESPN Brasil Ltda. ESPN Brazil, Inc.: A Delaware corporation wholly owned by ESPN. ESPN Brasil Ltda.: ESPN do Brasil Ltda., a Brazilian limitada in which Tevecap holds a 50.0% equity interest A-2 and ESPN Brazil, Inc., holds a 50.0% equity interest. Event Put: A triggering event under the Stockholders Agreement pursuant to which each of the Stockholders (other than Abril) may, in certain circumstances, demand that Tevecap purchase all or a portion of its shares. EximBank: The Export-Import Bank of the United States. EximBank Facility: A credit facility, dated December 9, 1996, among Tevecap, as Guarantor, TVA Sistema, as borrower, and The Chase Manhattan Bank, N.A., as lender. The EximBank guarantees 85% of amounts borrowed under the EximBank Facility. Falcon International: Falcon International Communications (Bermuda L.P.), a subsidiary of Falcon International Communications, L.L.C., a Delaware limited liability company. Falcon Time Put: A provision of the Stockholders Agreement pursuant to which Falcon International may, in certain circumstances, demand that Tevecap purchase all or a portion of the shares held by Falcon International. Fiber-optic cable: Cable made of glass fibers through which signals are transmitted as pulses of light. Fiber-optic cable has the capacity for a large number of channels. Financial Statements: The audited financial statements of Tevecap and its subsidiaries and the notes thereto included herein. Fox: Twentieth Century Fox Television International. Galaxy Brasil: Galaxy Brasil S.A., a wholly-owned subsidiary of Tevecap which operates Brazil's first Ku-Band system. Galaxy Brasil Leasing Facility: A five-year, $49.9 million lease and sale-leaseback facility entered into in March 1997 by Galaxy Brasil, as lessee, and Citibank, N.A., as lessor. Galaxy Latin America: Galaxy Latin America, LLC, a Delaware limited liability company the members of which are DLA, which holds a 70% equity interest, Darlene Investments, which holds a 20% equity interest and TVA Communications, which holds a 10% equity interest. Galaxy VIII-i: A satellite owned and operated by Hughes Communications through which Galaxy Brasil provides DIRECTV service. Galaxy VIII-i was launched in December 1997 and replaced the Galaxy III-R satellite with respect to the transmission of GLA programming. GLA: Galaxy Latin America. GLA Agreement: Limited Liability Company Agreement of Galaxy Latin America, LLC, dated April 11, 1997. Globo: Globo Par and TV Globo, the owners of a number of Brazil's over the air channels. Globo Cabo: Globo Cabo S.A., a Cable service provider in Brazil. Globo Par: Globo Comunicacoes e Participacoes Ltda. Grupo Frecuencia Modulada Television: Grupo Frecuencia Modulada Television, S.A. de C.V., a Mexican corporation wholly owned by Grupo MVS. A-3 Guarantors: TVA Sistema de Televisao S.A., Galaxy Brasil 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 Satelite Ltda, TVA Banda C 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 24.0% equity interest, and HBO Ole Partners, which holds a 76.0% equity interest. HBO Ole Partners: A partnership among Time Warner Entertainment Company, L.P., SPE Latin American Acquisition Corporation, Ole Communications, Inc. and BVI Television Investments, Inc. Headend: A collection of hardware, typically including satellite receivers, modulators, amplifiers and videocassette playback machines. Signals, when processed, are then combined for distribution within the Cable network. Hearst: The Hearst Corporation. Hearst/ABC Parties: HABC II and CPL. 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, Chase Manhattan Bank, as trustee, and Chase Trust Bank, as principal paying agent in connection with the Notes. Independent Operators: Independent pay television system operators to which TVA sells programming. 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. A-4 Local Operating Agreement: Local Operating Agreement, dated July 26, 1996, between GLA and Galaxy Brasil. MGM: Metro Goldwyn Mayer, Inc. Ministry of Communications: The Brazilian Ministry of Communications, authorized to regulate the Brazilian subscription television industry pursuant to the Brazilian Telecommunications Code of 1962. MMDS (Multi-channel multi-point distribution system): A one-way radio transmission of television channels over microwave frequencies from a fixed station transmitting to multiple receiving facilities located at fixed points. MMDS license: A license that is granted by the applicable governing body pursuant to its authority under the communications laws of a particular country for the purpose of providing MMDS services for a specific franchise/license area. MTV Brasil: MTV Brasil Ltda., a Brazilian limitada in which Abril holds a 50.0% equity interest and Viasem Brasil Holdings Ltda. (an indirect subsidiary of Viacom International) holds the remaining 50% equity interest. Multicanal: Multicanal Participacoes S.A., a Cable service provider in Brazil. NBC: National Broadcasting Company, Inc. NDS: News Digital Systems Limited, a wholly-owned subsidiary of News Corporation. Net Brasil: Net Brasil S.A., a Cable and MMDS service provider in Brazil. Net Sat: Net Sat Servicos Ltda., TVA's competitor in DBS service, in which Globo Par has a controlling interest and whose other equity holders include News Corporation, a subsidiary of The News Corporation Limited. News Corporation: News Corporation plc. the Notes: Tevecap's 250,000,000 12 5/8% Senior Notes due 2004 issued on November 26, 1996. Operating Ventures: Canbras TVA and TV Filme, two of TVA's minority-owned ventures. Owned Systems: TVA Sistema, TVA Sul and Galaxy Brasil. 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. Programming Ventures: HBO Brasil Partners and ESPN Brasil Ltda. 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 A-5 the amount of capital stock held by a Stockholder (other than Abril) exceeds the amount allowed under an appropriate legal restriction. Revenue per subscriber: Total revenue derived from a subscriber television system divided by the average number of subscribers for that period. SAP: Second Audio Programming, which provides the option of audio in a second language for the programming on channels for which it is offered. SBT: TVSBT--Canal 4 de Sao Paulo S.A., a Brazilian national off-air channel. Securities Act: United States Securities Act of 1933, as amended. Smart Card: Encoded card placed in a decoder used for Ku-Band service. The Smart Card is used to regulate access to Ku-Band services. 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. SurFin: SurFin Ltd., a corporation organized under the laws of the Bahamas, the (direct and indirect) shareholders of which are Tevecap, holding 20.5%, DIRECTV International Inc., a subsidiary of Hughes Communications, holding 39.3%, Darlene Investments, holding 20.4%, and Grupo Frecuencia Modulada Television, holding 19.8%. SurFin Credit Facility: A three year $150.0 million credit facility between SurFin and Citicorp USA, Inc., as administrative agent, under a syndicated credit agreement, dated September 24, 1996. Tambore Facility: TVA's Ku-Band uplink center located in the city of Tambore in greater Sao Paulo. Telecommunications Code: The Brazilian Telecommunications Code of 1962, as amended. Telephony: The provision of telephone service. Tevecap: Tevecap S.A. Time Warner: Time Warner Entertainment Company, L.P. TV Cabo Santa Branca: TV Cabo Santa Branca Comercio Ltda., a Brazilian limitada, in which Tevecap holds a 36% equity interest and Canbras Par holds a 64.0% equity interest. TV Filme: TV Filme, Inc., a Delaware corporation in which Tevecap currently holds a 14.7% equity interest, Warburg, Pincus Investors, L.P. currently holds a 38.8% equity interest, members of the Lins family currently hold a 16.2% equity interest, public stockholders currently hold a 28.15% equity interest and certain individuals own the remaining 2.15% equity interest. TV Filme Service Area: Brasilia, Belem and Goiania. TV Group: The operations of TVA excluding the operations and results of Galaxy Brasil. A-6 TV Homes: The number of households in a given area possessing at least one television set. TV Show Time: Televisao Show Time Ltda., a Brazilian limitada in which the estate of Matias Machline and an associate currently hold a 53.0% equity interest and in which the remaining 47.0% is currently held by various Abril shareholders. TVA: Tevecap S.A. and its consolidated subsidiaries and affiliates. TVA Banda C: TVA Banda C Ltda., a Brazilian limitada in which TVA holds a 100% equity interest. TVA Brasil: TVA Brasil Radioenlaces S.A., a Brazilian limitada in which the estate of Matias Machline currently holds a 50.0% equity interest and in which the remaining 50.0% is currently held by various Abril shareholders. TVA Communications: TVA Communications Ltd., a British Virgin Islands company wholly-owned by Tevecap, through which Tevecap holds a 10.0% equity interest in Galaxy Latin America. TVA Curitiba: TVA Curitiba Servicos em Telecommunicacoes Ltda., a Brazilian limitada in which Tevecap held an 80.0% equity interest and Leonardo Petrelli held a 20.0% equity interest prior to TVA Curitiba's merger into TVA Parana Ltda. and the reorganization of TVA Parana Ltda. as a subsidiary of TVA Sul Participacoes S.A. in October 1996. TV Globo: A provider of off-air programming in Brazil and an affiliate of Globo. TVA Sistema: TVA Sistema de Televisao S.A., a Brazilian corporation in which Tevecap holds a 98.0% equity interest Robert Civita, a Brazilian national, holds a 2.0% equity interest. TVA Sul: The operations of TVA Sul Parana Ltda., a Brazilian limitada in which TVA holds an 86.0% equity interest and Abril holds the remaining 14.0% 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.). A-7 TEVECAP S.A. AND SUBSIDIARIES REPORT ON CONSOLIDATED FINANCIAL STATEMENTS as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998 TEVECAP S.A. AND SUBSIDIARIES Index to Consolidated Financial Statements Contents Page Report of Independent Accountants F-2 Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3 Consolidated Statements of Operations for each of the three years in the period ended December 31, 1998 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, 1998 F-6 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1998 F-7 Notes to The Consolidated Financial Statements F-9 F-1 ARTHUR ANDERSEN S/C Report of Independent Accountants To the Shareholders and Directors of TEVECAP S.A. We have audited the accompanying consolidated balance sheets of TEVECAP S.A. and subsidiaries (the "Company") as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in shareholders' equity and redeemable common stock and cash flows for each of the three years in the period ended December 31, 1998, 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, 1998 and 1997, and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 1998, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered recurring losses and has negative net working capital and a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's actions in regard to these matters include the sale of certain assets, as discussed in Note 24 and Note 25b. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Arthur Andersen Sao Paulo, Brazil March 5, 1999 (Except for Note 25b as to which the date is May 18, 1999) F-2 TEVECAP S.A. AND SUBSIDIARIES Consolidated Balance Sheet December 31, 1998 and 1997 (In thousands of U.S. dollars) December 31, ---------------------- 1998 1997 -------- -------- ASSETS Current assets Cash and cash equivalents $ 1,397 $ 989 Accounts receivable, net 20,679 24,139 Inventories, net 14,900 23,590 Film exhibition rights 1,568 1,291 Prepaid and other assets 5,176 13,833 Accounts receivable from related parties 1,052 2,622 Other accounts receivable 4,232 4,807 -------- -------- Total current assets 49,004 71,271 -------- -------- Property, plant and equipment, net 298,004 266,518 Investments in and advances to discontinued operations -- 13,904 Investments Equity basis 1,944 5,168 Cost basis investments 49,096 36,904 Concessions, net 12,070 13,775 Loans to related companies 29,416 24,745 Debt issuance costs, net (accumulated amortization; 1998- $2,978; 1997 - $ 1,428) 6,263 7,813 Other 2,130 1,913 -------- -------- Total assets $447,927 $442,011 ======== ======== F-3 TEVECAP S.A. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1998 and 1997 (in thousands of U.S. dollars) December 31, ----------------------- 1998 1997 --------- --------- LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities Loans $ 41,028 $ 40,600 Film suppliers 17,568 12,087 Other suppliers 25,715 29,265 Deficit in discontinued operations 21,858 -- Taxes payable other than income taxes 13,229 9,034 Accrued payroll and related liabilities 3,957 5,339 Advance payments received from subscribers 2,002 34 Other accounts payable 5,818 3,003 --------- --------- Total current liabilities 131,175 99,362 --------- --------- Long-term liabilities Loans 262,352 275,899 Loans from shareholders 88,740 54,321 Provision for claims 7,426 5,662 Liability to fund equity investee 1,025 -- --------- --------- Total long-term liabilities 359,543 335,882 --------- --------- Commitments and contingencies (Note 16) Minority interest 3,464 4,802 Redeemable common stock, no par value, 85,637,526 shares Issued and outstanding 178,002 189,034 Shareholders' deficit Common stock, no par value, 140,700,759 Shares issued and outstanding 242,342 142,495 Accumulated deficit (466,599) (329,564) --------- --------- Total shareholders' deficit (224,257) (187,069) --------- --------- Total liabilities and shareholders' deficit $ 447,927 $ 442,011 ========= ========= F-4 TEVECAP S.A. AND SUBSIDIARIES Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996 (in thousands of U.S. dollars)
Year ended December 31, ------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Gross revenues Monthly subscriptions $ 136,278 $ 142,700 $ 107,692 Installation 2,886 12,941 22,281 Advertising 3,544 4,947 7,532 Indirect programming 19,580 22,810 11,377 Other 14,893 13,649 7,995 Taxes on revenues (12,533) (13,315) (10,557) ----------- ----------- ----------- Net revenue 164,648 183,732 146,320 ----------- ----------- ----------- Direct operating expenses Payroll and benefits 15,968 22,593 23,324 Programming 54,282 56,394 42,315 Transponder lease cost 2,336 6,312 6,737 Technical assistance 1,212 1,832 5,507 Vehicle rentals 178 1,075 1,772 TVA magazine 7,158 5,827 6,311 Pole rental 3,247 2,157 448 Other costs 8,975 7,026 8,432 ----------- ----------- ----------- 93,356 103,216 93,846 ----------- ----------- ----------- Selling, general and administrative expenses Payroll and benefits 24,849 24,432 24,885 Advertising and promotion 9,335 18,367 11,445 Rent 3,976 3,721 3,245 Other administrative expenses 16,100 16,407 12,619 Other general expenses 2,257 1,917 10,274 ----------- ----------- ----------- 56,517 64,844 62,468 ----------- ----------- ----------- Provision for equipment and inventory obsolescence 1,940 3,944 3,621 Depreciation 46,402 33,704 22,673 Amortization 1,705 1,757 1,677 ----------- ----------- ----------- Operating loss from continuing operations (35,272) (23,733) (37,965) ----------- ----------- ----------- Interest income 6,718 14,205 5,896 Interest expense (51,665) (44,541) (16,287) Translation gain (loss) (17) (902) 473 Equity in losses of affiliates (12,139) (6,851) (8,532) Other nonoperating (expenses) income, net (4,233) 927 (2,327) ----------- ----------- ----------- Loss from continuing operations before income taxes and minority interest (96,608) (60,895) (58,742) Income taxes (24) -- (156) ----------- ----------- ----------- Loss from continuing operations before minority interest (96,632) (60,895) (58,898) Minority interest 1,338 916 1,849 ----------- ----------- ----------- Loss from continuing operations (95,294) (59,979) (57,049) Income (loss) from discontinued operations (52,773) (21,438) 9,157 ----------- ----------- ----------- Net loss $ (148,067) $ (81,417) $ (47,892) =========== =========== =========== Net loss per share for continuing operations (0,43) (0,30) (0,29) Net income (loss) per share for discontinued operations (0,23) (0,11) 0,05 Net loss per share (0,66) (0,41) (0,24) Weighted average shares outstanding 223,659,822 196,712,865 596,712,865
F-5 TEVECAP S.A. AND SUBSIDIARIES Consolidated Statements of Changes in Shareholders' Deficit and Statement of Redeemable Common Stock for the years ended December 31, 1998, 1997 and 1996 (in thousands of U.S. dollars)
Total Redeemable Paid-in Accumulated Shareholders' Common Capital Deficit Deficit Stock --------- --------- --------- --------- Balance as of December 31, 1995 $ 142,495 $(160,755) $ (18,260) $ 149,534 Net loss for the year (47,892) (47,892) Accretion related to redeemable common stock (15,376) (15,376) 15,376 --------- --------- --------- --------- Balance as of December 31, 1996 $ 142,495 $(224,023) $ (81,528) $ 164,910 --------- --------- --------- --------- Net loss for the year (81,417) (81,417) Accretion related to redeemable common stock (24,124) (24,124) 24,124 --------- --------- --------- --------- Balance as of December 31, 1997 $ 142,495 $(329,564) $(187,069) $ 189,034 --------- --------- --------- --------- 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 ========= ========= ========= =========
F-6 TEVECAP S.A. AND SUBSIDIARIES Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 (in thousands of U.S. dollars)
Year Ended December 31, ----------------------------------- 1998 1997 1996 --------- --------- --------- Cash flows from operating activities: Net loss $(148,067) $ (81,417) (47,892) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation 46,402 33,704 22,673 Amortization 1,705 1,757 1,677 Amortization of debt issuance cost 1,550 1,332 96 Provision for doubtful accounts 3,407 3,334 1,381 Provision for equipment and inventory obsolescence 1,940 3,944 3,521 Provision for claims 1,764 611 1,282 Minority interest (1,338) 3,024 1,778 Disposal and write-off of property, plant and equipment 1,574 338 1,005 Discontinued operations 52,773 21,438 (9,157) Equity in losses of affiliates 12,139 6,851 11,285 Changes in operating assets and liabilities: Film exhibition rights (277) (230) (1,031) Accounts receivable 53 (13,914) (7,742) Prepaid and other assets 8,657 (11,075) (7,226) Other accounts receivable 1,928 (4,587) (1,972) Accrued interest 258 26,659 2,720 Inventories 8,680 (11,365) (2,269) Suppliers 1,931 (13,666) 2,898 Taxes payable other than income taxes 4,195 1,669 2,329 Accrued payroll and related liabilities (1,382) 6 947 Advances received from subscribers 1,968 (2,411) 81 Other accounts payable 2,815 3,864 508 --------- --------- --------- Net cash (used in) provided by operating activities 2,675 (30,134) (23,108) --------- --------- --------- Cash flows used in investing activities: Purchases of property, plant and equipment (81,392) (118,909) (87,867) Discontinued operations (17,011) 295 (11,106) Loans to related companies (44,071) (61,939) (89,270) Purchases of concessions -- -- (11,273) Investments in equity and cost investments (20,082) (44,350) (18,889) --------- --------- --------- Net cash used in investing activities (162,556) (224,903) (218,405) --------- --------- --------- Cash flows from financing activities: Bank loans 14,549 59,509 258,026 Capital contributions 99,847 -- -- Loans from shareholders 126,084 54,908 202,417 Repayments of loans to related companies (83,696) (4,442) (201,042) Repayments of loans from related companies 31,429 45,724 62,650 Repayment of loans from banks (27,924) (4,412) -- --------- --------- --------- Net cash provided by financing activities 160,289 151,287 322,051 --------- --------- --------- Net increase (decrease) in cash and cash equivalents 408 (103,750) 80,538 Cash and cash equivalents at beginning of the period 989 104,739 24,201 Cash and cash equivalents at end of the period $ 1,397 989 104,739 ========= ========= ========= Supplemental cash disclosure: Cash paid for interest $ 31,712 32,038 7,312 ========= ========= =========
F-7 TEVECAP S.A. AND SUBSIDIARIES Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 (in thousands of U.S. dollars) Year Ended December 31, ------------------------------ 1998 1997 1996 -------- -------- -------- Supplemental noncash financing and investing activities: Accrued interest on related company loans refinanced as principal balance $ 10,930 $ 4,599 $ 354 Details of acquisitions: Fair value of assets acquired -- -- 12,739 Liabilities assumed -- -- (1,385) -------- -------- -------- Cash paid -- -- 11,354 Less: cash acquired -- -- (81) -------- -------- -------- Net cash paid for acquisitions $ -- $ -- $ 11,273 ======== ======== ======== F-8 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 and cable and parabolic antenna television systems, including marketing and advertising, production, distribution and licensing of domestic and foreign television programs. The Company has wireless cable channel rights primarily in major urban markets in Brazil. As of December 31, 1998, 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. During 1998, the Company's Board of Directors approved a plan of disposition of the DTH Division (Direct to Home). As a result, the financial statements have been retroactively restated to present the DTH Division as discontinued operations. See Note 3 for further discussion. F-9 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 2.1. Basis of presentation and consolidation 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$1.2087 to US$1 in effect on December 31, 1998 and R$1.1164 to US$1 in effect on December 31, 1997. 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 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 2.4 Consolidated financial statements The Company's operating subsidiaries included in the consolidated financial statements are:
Ownership Interest as of December 31, ------------------------------- 1998 1997 ------------- ------------- Owned Systems TVA Distribuidora S.A. (c) 100.00% -- TVA Sistema de Televisao S.A 98.00% 98.00% TVA Sul Participacoes S.A. (b) -- 86.00% TVA Sul Parana Ltda. (b) 86.00% 86.00% TVA Sul Santa Catarina Ltda. (b) -- 86.00% TVA Sul Foz do Iguacu Ltda. (b) -- 86.00% CCS Camboriu Cable Systems de Telecomunicacoes Ltda 52.20% 52.20% TVA PAR S.A 100.00% 100.00% TVA Finco Ltda 100.00% 100.00% License Subsidiary Comercial Cabo TV Sao Paulo Ltda. (a) 100.00% 100.00% TVA Satelite S.A. (c) 100.00% -- Galaxy Brasil S.A. (e) 100.00% 100.00% TVA Banda C Ltda. (d) 99.99% -- Ipe Radio e Televisao Ltda 100.00% 100.00% TVA TCG Sistema de Televisao de Porto Alegre S.A 100.00% 100.00% Programming Ventures TVA Programadora S.A. (c) 100.00% -- TVA Channels Ltda. (d) 100.00% -- TVA Communications Ltd. 100.00% 100.00% TVA Communications Aruba N.V 100.00% 100.00%
(a) 0.00149% of the common shares in this entity are owned by the controlling shareholder of the parent company pursuant to local legislative requirements. (b) During 1998, TVA Sul Participacoes S.A., TVA Sul Santa Catarina, Ltda and TVA Sul Foz do Iguacu Ltda. were merged into TVA Sul Parana Ltda. (c) In March 1998, these holding companies were created due to a business reorganization. (d) In March 1998, these companies were created from the spin-off of TVA Sistema de Televisao's satelite and programming divisions. (e) Subsequent to December 31, 1998, Galaxy Brasil was converted to a "Limitada", a limited liability corporation. F-11 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (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, 1998 and 1997 approximate management's best estimate of their fair values. The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value: o The fair value of certain financial assets carried at cost, including cash, accounts receivable, other accounts receivable, and certain other short-term assets, is considered to approximate their respective carrying value due to their short-term nature. o The fair value of payables to film suppliers and other suppliers, other accounts payable, loans to related companies and certain other short-term liabilities is considered to approximate their respective carrying value due to their short-term nature. o The fair value of loans from related companies approximates their respective carrying values as interest on these loans is variable and based on market rates. o The fair value of third party loans, 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, 1998. F-12 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (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 11. 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 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (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. The remainder is deferred and amortized to income over the estimated average period that subscribers are expected to remain connected to the system. Subscription revenues are recognized as earned on an accrual basis. 2.14 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. F-14 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 3. Discontinued Operations In October 1998 the Company announced that its Board of Directors had approved a plan of disposition of the DBS Systems, which comprises the Galaxy Brasil S.A. operations (KU-Band) and C-Band operations. This decision was based upon management's review of operations, investments needs and focus of the Company's business on the distribution of pay television services through cable and MMDS operations. As of December 31, 1998, the Company was negotiating to dispose of the DBS Systems and no losses are expected on this transaction. Company's management expects to conclude and approve the negotiation by the end of the first semester of 1999. The summarized balance sheet of the DBS Systems as of December 31 was as follows: 1998 1997 Assets Accounts receivable, net $ 23,793 $ 23,032 Inventories 156 -- Other current assets 11,988 6,119 Property, plant and equipment, net 149,300 113,316 Equipment under capital lease, net 32,440 42,138 Other non-current assets 526 701 --------- --------- 218,203 185,306 ========= ========= Liabilities and Equity Loans 2,402 9,458 Capital leases 33,483 9,980 Suppliers 116,477 51,580 Other current liabilities 19,067 8,104 Capital leases - long-term -- 33,483 Loans from related companies 58,905 46,090 Deferred hook up fees 8,464 12,098 Other long-term liabilities 1,263 609 Equity (deficit) (21,858) 13,904 --------- --------- $ 218,203 $ 185,306 ========= ========= F-15 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 3. Discontinued Operations (Continued) The following is a summary of the operating results of the DBS Systems for the three years ended December 31:
1998 1997 1996 Revenues $ 176,259 $ 144,610 $ 51,771 Operating costs and expenses (201,797) (151,347) (41,304) --------- --------- --------- Income (loss) from operations (25,538) (6,737) 10,467 Interest income (expense) (27,652) (14,686) (1,316) Other nonoperating (expense) income, net 417 (15) 6 --------- --------- --------- Net income (loss) from operations $ (52,773) $ (21,438) $ 9.157 ========= ========= =========
4. Cash and cash equivalents As of December 31, 1998 and 1997, cash and cash equivalents were comprised of: 1998 1997 ------ ------ Cash on hand and in banks $1,388 $ 69 Short-term investments 9 920 ------ ------ $1,397 $ 989 ====== ====== Short-term investments as of December 31, 1998 were comprised principally of short-term deposits. F-16 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 5. Accounts receivable, net As of December 31, 1998 and 1997, accounts receivable were comprised of: 1998 1997 -------- -------- Subscriptions $ 16,182 $ 11,695 Installation fees 5,362 8,565 Advertising and programming 5,807 4,958 Barter 4,406 5,857 Other 96 831 Provision for doubtful accounts (11,174) (7,767) -------- -------- $ 20,679 $ 24,139 ======== ======== 6. Inventories, net As of December 31, 1998 and 1997, inventories were comprised of: 1998 1997 -------- -------- Materials and supplies $ 16,420 $ 25,192 Imports in transit 1,610 1,518 Provision for obsolescence (3,130) (3,120) -------- -------- $ 14,900 $ 23,590 ======== ======== 7. Prepaid and other assets As of December 31, 1998 and 1997, prepaid expenses were comprised of: 1998 1997 ------- ------- Advances to suppliers $ 1,965 $12,249 Prepaid meals and transportation 38 89 Debt issuance costs 1,274 1,332 Other 1,899 163 ------- ------- $ 5,176 $13,833 ======= ======= F-17 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 8. Related party transactions The following tables summarize the transactions between the Company and its related parties as of December 31, 1998 and 1997 and for the three years ended December 31, 1997: December 31, ------------------- 1998 1997 ------- ------- TVA Finco Ltda Loans receivable $14,117 $ 4,100 Abril S.A Accounts payable $ 399 $ 430 Loans payable 88,740 54,321 Accounts receivable -- 34 Televisao Abril Ltda Accounts receivable $ 98 $ -- ESPN do Brasil Ltda Accounts receivable $ 131 $ 31 Accounts payable 26 489 Canbras TV a Cabo Ltda Accounts receivable $ 39 $ 10 Loans receivable 5,955 6,160 HBO Brasil Partners Ltda Loans receivable $ 1,792 $ 1,792 California Broadcast Center L.L.C Loans receivable $ 7,315 $ 7,314 TVA Network Ltda Accounts receivable $ -- $ 2,138 Galaxy do Brasil S.A Accounts receivable $ 153 $ -- TVA Banda C Ltda Accounts receivable $ 545 $ -- Loans receivable 234 5,179 Others Accounts receivable $ 86 $ 409 Loans receivable 3 200 Accounts payable -- 14 F-18 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 8. Related-party transactions (Continued) 1998 1997 1996 ------- ------- ------- Abril S.A Net interest expense $17.154 $ 4,653 $ 7,196 Printing costs 3,301 4,389 4,516 ESPN do Brasil Ltda Programming costs $ 5.188 $ 5,213 $ 3,850 Programming revenue (1,120) -- -- Net interest (income) expense -- (1,720) (773) TV Filme Inc. Programming revenue $(3,010)) $(8,629) $(6,435) Canbras TV a Cabo Ltda Programming revenue $(2,185) $(1,837) $ (207) Net interest expense -- -- 150 California Broadcast Center L.L.C Net interest income $ (769) $ (551) $ -- Abril Investments Corporation Net interest income $ -- $ -- $ (354) Loans granted to or obtained from related companies, under loan agreements, are denominated in reais and subject to variable interest of 1.76% to 3.23% per month as of December 31, 1998 (3.85% to 4.45% per month as of December 31, 1997). TEVECAP S.A. has a credit facility with Abril S.A. under which TEVECAP S.A. is allowed to borrow up to $60,000 on a revolving basis until December 1998. As of December 31, 1998 $88,740 was drawn down under the facility. The credit facility is subject to a variable interest rate of 1.76% to 3.23% per month as of December 31, 1998 (3.85% to 4.45% per month as of December 31, 1997) and will be paid after December 31, 1999. F-19 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 8. Related-party transactions (Continued) Additionally, Abril S.A. provided a guarantee in the course of the year for equipment imported by Galaxy Brasil S.A., TVA Sistema de Televisao S.A. ("TVAST"), TV Filme Inc. ("TV Filme") and TVA Sul Parana Ltda. The amount outstanding pursuant to this guarantee as of December 31, 1998 was $34,853. The Company and Falcon International Communications Services Inc., one of the Company's shareholders, signed a consulting service agreement on April 1, 1996 related to the Company's operations and technologies. Initially, the duration of this agreement was two years, renewable every subsequent two-year period thereafter. The payment for the consulting services amounts to $200 per annum. Related-party transactions relating to programming sales and costs and printing services costs were carried out at usual market rates and terms. 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, 1998 and 1997 are as follows:
1998 1997 --------- --------- Deferred tax assets: Net operating loss carryforwards $ 106,141 $ 64,191 Deferred charges 2,219 4,818 Provision for obsolescence 1,901 871 Provision for claims 8,253 5,097 Provision for decoders 866 904 Hook up fee 1,425 2,624 Other 4,939 3,159 --------- --------- Total gross deferred tax asset 125,744 81,664 --------- --------- Less valuation allowance for continuing operations (95,100) (67,209) Less valuation allowance for discontinued operations (30,135) (11,300) --------- --------- Net deferred tax asset 509 3,155 Deferred tax liability: Installation costs (509) (3,155) --------- --------- Total gross deferred tax liability $ (509) $ (3,155) ========= ========= Net deferred tax asset/liability $ -- $ -- ========= =========
F-20 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 9. Income taxes (Continued) The Company has a limited operating history and has generated losses since its inception. The valuation allowance has been established in accordance with the requirements of SFAS No. 109, "Accounting for Income Taxes". As of December 31, 1998, the Company and subsidiaries have unexpirable accumulated tax losses of $274,070. 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:
1998 1997 1996 Loss before income taxes and minority interest $ 149,381 $ 82,333 $ 49,585 Statutory income tax rate 33% 33% 33% --------- --------- --------- 49,296 27,170 16,363 Increase (decrease) in the income tax rate -- -- 2,644 Unallowable amortization 724 738 2,088 Deferred charges amortization 3,972 4,230 4,996 Translation (loss) gain of tax losses (4,902) (3,089) (2,103) Installation materials depreciation 125 107 3,648 Equity in losses of affiliate (4,006) (2,261) (2,816) Net loss of TVA Communication Aruba (139) (1,957) (1,436) Other 1,632 3,297 (6,377) --------- --------- --------- Net income tax benefit for the period 46,702 28,235 17,007 Increase in valuation allowance for continuing operations (27,891) (20,205) (14,342) Increase in valuation allowance for discontinued operations (18,835) (8,030) (2,821) --------- --------- --------- $ (24) $ -- $ (156) ========= ========= =========
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-21 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 10. Investments Investments as of December 31, 1998 and 1997 were comprised of:
Percentage of Control 1998 1997 ---------- ------- ------- Joint ventures and equity basis investments: ESPN do Brasil Ltda. 50 $ 1,213 $ 2,748 HBO Brasil Partners Ltda. 24 (b) 731 2,325 Canbras TV a Cabo Ltda. 36 -- 95 ------- ------- $ 1,944 $ 5,168 ======= ======= Liability to fund joint ventures and Equity basis investments: Canbras TV a Cabo Ltda. 36 $ 1,025 $ -- ------- ------- $ 1,025 $ -- ======= ======= Cost basis investments: TV Filme, Inc. 14.7 (a) $ 6,667 $ 6,667 Galaxy Latin America L.L.C. 10 42,421 30,220 Other 8 17 ------- ------- $49,096 $36,904 ======= ======= 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 65 65 Amortization (4,974) (3,269) ------- ------- $12,070 $13,775 ======= =======
F-22 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 10. Investments (Continued) a) TV Filme, Inc. ("TV Filme") was accounted for under the equity method until December 31, 1996. Until that time, the Company had the right to elect two of six members of the Board of Directors and, additionally, a significant proportion of TV Filme's business was transacted with the Company. In 1997, the number of members on the Board of Directors of TV Filme increased to seven while the Company's representation was unchanged. In addition, the level of transactions effected between TV Filme and Tevecap decreased substantially. The Company therefore reassessed this treatment resulting in a change to the cost method of accounting. b) During 1997, HBO Brazil Partners Ltda. issued shares at a price above book value. The Company did not contribute capital for this issuance on a basis proportionate with its ownership interest in HBO Brazil Partners Ltda. and, consequently, the Company's equity interest fell from 33% to 24%. The Company recorded a gain of $1,140 resulting from this issuance representing the increase in the book value of its shareholding. F-23 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 10. Investments (Continued) The ESPN do Brasil Ltda. ("ESPN Brasil") joint venture was formed in June 1995, with TEVECAP S.A. and ESPN Brazil, Inc. ("ESPN") each holding 50% of ESPN Brasil's shares. Operations representing the transmission of ESPN's international sports programs commenced on June 15, 1995. Condensed financial information of the joint venture as of and for the years ended December 31, 1998, 1997 and 1996 is as follows: 1998 1997 1996 -------- -------- -------- Current assets $ 6,326 $ 9,702 $ 3,640 Non-current assets 1,875 1,278 2,107 Current liabilities 5,774 5,003 3,663 Long term liabilities -- -- -- Revenues 21,061 18,031 12,733 Gross losses (17,906) (11,992) (9,785) Loss before income taxes (17,876) (11,715) (10,715) Net loss (17,876) (11,715) (10,715) HBO Brazil Partners Ltda. ("HBO Brazil") is a joint venture between TVAICO, which as of December 31, 1998 and 1997 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. The operations of HBO Brazil commenced in 1994 and condensed financial information as of and for the years ended December 31, 1998, 1997 and 1996 are as follows: 1998 1997 1996 -------- -------- -------- Current assets $ 22,951 $ 27,826 $ 12,271 Non-current assets 2,500 2,570 1,944 Current liabilities 23,343 26,681 14,470 Long-term liabilities -- -- -- Revenues 63,698 48,790 22,563 Gross losses (3,974) (2,779) (3,203) Loss before income taxes (4,026) (2,844) (3,247) Net Loss (5,038) (3,830) (3,547) F-24 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 11. Property, plant and equipment, net As of December 31, 1998 and 1997, property, plant and equipment were comprised of:
Annual Depreciation December 31, Rate ----------------------- % 1998 1997 ------------ --------- --------- Machinery and equipment 10 $ 55,708 $ 42,032 Decoders 10 120,434 105,156 Leasehold improvements 25 3,020 3,821 Furniture and fixtures 10 1,907 1,693 Premises 10 3,957 2,662 Vehicles 20 3,095 3,344 Software 20 2,511 4,647 Tools 10 878 831 Reception equipment 20 153,614 123,765 Cable plant 10 83,671 30,593 Building 4 3,784 3,783 --------- --------- 432,579 322,327 Trademarks, patents and others 186 179 Telephone line use rights 2,978 2,372 Other 691 4,434 Provision for decoders and machinery and equipment (6,375) (4,445) Accumulated depreciation (134,398) (83,287) Fixed assets in transit 2,343 24,938 --------- --------- $ 298,004 $ 266,518 ========= =========
F-25 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 12. Loans As of December 31, 1998 and 1997, loans were comprised of: December 31, 1998 Short-term Long-term ---------- --------- Senior Notes due 2004 $ 2,981 $250,000 Bank loans 38,047 12,352 -------- -------- $ 41,028 $262,352 ======== ======== December 31, 1997 $ 40,600 $275,899 ======== ======== 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. 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, 1998 amounted to $1,550. The Senior Notes Indenture contains certain restrictive covenants which relate to, inter alia, the ability of TEVECAP S.A. and the guarantor subsidiaries to incur additional indebtedness, declare dividends, effect asset dispositions, enter into new liens, sell capital stock, enter into mergers and/or consolidations, invest in non-guarantor subsidiaries, transfer existing businesses, etc. As of December 31, 1998, the Company was in compliance with all restrictive covenants contained in the Senior Notes Indenture. Bank loans in local currency are secured by promissory notes and chattel mortgages; interest rates on these loans vary from 8.5% to 10% per year. F-26 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 12. Loans (Continued) Annual maturities of long-term debt, including the current component, for the five years subsequent to December 31, 1998 are as follows: 1999 $ 41,028 2000 6,478 2001 4,876 2002 998 2003 and thereafter 250,000 -------- Total $303,380 ======== 13. Other accounts payable As of December 31, 1998 and 1997, other accounts payable were comprised of: 1998 1997 ------ ------ Accounts payable to related companies $ 425 $ 933 Advertising 1,619 165 Importation expenses payable 45 564 Other 3,729 1,341 ------ ------ $5,818 $3,003 ====== ====== F-27 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 14. Leased assets and commitments The Company has funding commitments related to Galaxy Latin America, TV Filme, ESPN Brasil, HBO Brasil Partners Ltda., Canbras TV a Cabo Ltda., TVA Sistema de Televisao S.A. and Surfin Ltd. of approximately $24,000, which must be met prior to December 1999. The Company has rented its office space until the year 2003. As of December 31, 1998, future minimum rental payments applicable to operating leases in respect of this space aggregate approximately $9,213, as follows: 1999 $1,956 2000 1,848 2001 1,803 2002 1,803 2003 1,803 ------ Total $9,213 ====== As of December 31, 1998, the Company had contractual commitments with Empresa Brasileira de Telecomunicacoes ("Embratel") for the use of a transponder until the year 2004. Based on the contract provisions, these commitments are currently estimated to aggregate approximately $79,776, as follows: 1999 $13,296 2000 13,296 2001 13,296 2002 13,296 2003 13,296 2004 13,296 ------- Total $79,776 ======= F-28 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 15. Common stock Common stock as of December 31, 1998 and 1997 was comprised of:
1998 1997 ------------------------- ------------------------- US$ Shares US$ Shares ----------- ----------- ----------- ----------- Redeemable common stock (including accretion) $ 178,002 85,637,526 $ 189,034 85,637,526 ----------- ----------- ----------- ----------- Paid-in capital $ 242,342 140,700,759 $ 142,495 111,075,339 =========== =========== =========== ===========
a) Common stock subject to redemption As of December 31, 1998 and 1997, 43.5% of the common stock of TEVECAP S.A. was subject to an Event Put, i.e., a "triggering event" under the Stockholders' Agreement pursuant to which each of the shareholders (other that Abril) may, in certain circumstances, demand that TEVECAP S.A. purchase all or a portion of its shares, unless the shares of capital stock held by such Stockholder are publicly registered, listed or traded. In addition, as of December 31, 1998 and 1997, 14.2% 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-29 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 15. 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 an accretion of $24,124 with respect to the year ended December 31, 1997, determined by Company management. b) Paid-in capital Paid-in capital represents registered common shares without par value. The Company's shareholders are entitled to minimum dividends of 25% of net income for the year, adjusted according to Brazilian Corporation Law. As the Company has not recorded net income since its inception, no such dividends are payable. 16. 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-30 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 17. 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 $511 for the year ended December 31, 1998 ($1,070 in 1997 and $303 in 1996). 18. Abril Health Care Plan In February 1996, the Abril Health Care Plan was created to provide health care to Abril S.A. companies' employees and their dependents. Both the companies forming part of the Abril Group and the employees thereof contribute monthly to Associacao Abril de Beneficios, the company responsible for management of the plan. In 1998, contributions made by TEVECAP S.A. and certain affiliates of Associacao Abril de Beneficios amounted to $2,046 ($1,988 in 1997 and $1,864 in 1996). 19. Supplementary information - valuation and qualifying accounts and reserves
Provision Provision For Provision Deferred For Provision Decoders For Taxation Provision Doubtful for And Exhibition Valuation for Accounts Obsolescence Equipment Expiration Allowance Claims ------------ ------------ ------------ ------------ ------------ ------------ Balance as of December 31, 1995 $ 3,052 $ -- $ -- $ 1,162 $ 32,662 $ 3,763 Additions charged to expense 1,381 2,250 1,371 14,342 1,282 ------------ ------------ ------------ ------------ ------------ ------------ Balance as of December 31, 1996 $ 4,433 $ 2,250 $ 1,371 $ 1,162 $ 47,004 $ 5,045 Additions charged to expense 3,334 870 3,074 -- 20,205 617 Reduction -- -- -- (1,162) -- -- ------------ ------------ ------------ ------------ ------------ ------------ Balance as of December 31, 1997 $ 7,767 $ 3.120 $ 4,445 $ -- $ 67,209 $ 5,662 Additions charged to expense 3,407 10 1,930 -- 27,891 1,584 ------------ ------------ ------------ ------------ ------------ ------------ Balance as of December 31, 1998 $ 11,174 $ 3.130 $ 6,375 $ -- $ 95,100 $ 7,246 ============ ============ ============ ============ ============ ============
F-31 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 20. 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 March 1998, the AICPA issued Statement of position 98-1 (SOP 98-1), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". SOP 98-1 requires capitalization of certain direct costs and interest costs after preliminary development efforts have been made. SOP 98-1 is effective for fiscal year beginning after December 15, 1998. At this time, management is considering the impact of this pronouncement, but does not believe it will have a material effect on the Company's consolidated financial statements. F-32 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 21. Capital leases In 1997, the Company through its subsidiary Galaxy Brasil S.A. acquired equipment (decoders) through a capital lease contract with Citibank, N.A. Such contract has a five-year term with interest at LIBOR plus 2,5 % per year. Following is an analysis of this equipment: 1998 -------- Equipment (decoders) $ 49,900 Less: accumulated amortization (17,460) -------- $ 32,440 ======== Following is a schedule by year of future minimum lease payments under these capital leases with the present value of the net minimum lease payments as of December 31, 1998: 1999 12,988 2000 11,945 2001 10,905 2002 3,625 -------- Total minimum lease payments $ 39,463 Less: amount representing interest (5,980) -------- Present value of net minimum lease payment $ 33,483 ======== Galaxy Brasil S.A. is currently not in compliance with certain financial covenants (specifically the debt to tangible net worth ratio covenant and the tangible net worth covenant) contained in the Equipment Lease Agreement and the Equipment Lease and Saleback Agreement, each dated as of July 30, 1996 between Citibank, N.A., as Lessor and the Company, as Lessee. Citibank issued a waiver of those covenant defaults, valid for a period of six months, from December 31, 1998 until June 30, 1999. However, there is no assurance that Citibank would be willing to grant further waivers at the end of such six-month period. In the event that Citibank were to refuse to grant further waivers, Citibank may have the right to exercise its remedies under the equipment lease agreements. Consequently, the present value of net minimum lease payment was reclassified to current liabilities as presented in the summarized balance sheet of the discontinued operations in Note 3. F-33 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 22. Segments of Business Tevecap's corporate structure was completed by dividing the Company into three distinct operating divisions: a. Distribution which includes Cable and MMDS operations; b. Programming which concentrates Tevecap's programming interest at ESPN Brasil and HBO Brasil, as well as other own channel; c. Satellite or DTH Division which holds the C Band and DirecTV operations. December 31, 1998
Total Discontinued MMDS Continuing Operations & Cable Programming Others Operations (DTH) TOTAL 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) affiliates (1,119) (11,020) -- (12,139) -- (12,139) 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
F-34 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 22. Segments of Business (Continued) December 31, 1997
Total Discontinued MMDS Continuing Operations & Cable Programming Others Operations (DTH) TOTAL 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) affiliates (1,543) (5,308) -- (6,851) -- (6,851) Other Nonoperating (4,475) 5,402 927 (15) 912 -------- -------- -------- -------- -------- -------- Loss before Income Taxes And minority interest (9,982) (13,722) (37,191) (60,895) (21,438) (82,333) 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 December 31, 1996
Total Discontinued MMDS Continuing Operations & Cable Programming Others Operations (DTH) TOTAL Net Revenue 119,096 19,811 7,413 146,320 51,771 198,091 Operating Expenses 68,014 56,501 35,420 159,935 37,438 197,373 Depreciation and Amortization 16,672 5,012 2,666 24,350 3,866 28,216 -------- -------- -------- -------- -------- -------- Operating Income (Loss) 34,410 (41,702) (30,673) (37,965) 10,467 (27,498) Interest expense, net (3,474) (239) (6,205) (9,918) (1,316) (11,234) Equity income (losses) affiliates -- -- (8,532) (8,532) -- (8,532) Other Nonoperating (8,603) (1,483) 7,759 (2,327) 6 (2,321) -------- -------- -------- -------- -------- -------- Income (Loss) before Income Taxes and minority interest 22,333 (43,424) (37,651) (58,742) 9,157 (49,585) Income Tax -- -- (156) (156) -- (156) Minority interest 357 -- 1,492 1,849 -- 1,849 -------- -------- -------- -------- -------- -------- Net Loss 22,690 (43,424) (36,315) (57,049) 9,157 (47,892) ======== ======== ======== ======== ======== ======== Capital Expenditures 75,286 157 12,524 87,967 37,645 125,612 Total assets 242,409 0 192,340 434,749 69,743 504,492
F-35 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 23. 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 Satelite Ltda. - TVA PAR S.A. - TVA Banda C Ltda. - TVA Communications Ltd. - Galaxy Brasil S.A. - Comercial Cabo TV Sao Paulo Ltda. b) Majority-Owned Guarantor Subsidiaries - TVA Sistema de Televisao S.A. - TVA Sul Parana Ltda. (during 1998, TVA Sul Participacoes S.A., TVA Sul Santa Catarina Ltda. and TVA Sul Foz do Iguacu Ltda. were merged into TVA Sul Parana Ltda.) - CCS Camboriu Cable System de Telecomunicacoes Ltda. F-36 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 23. 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. - TVA Finco 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, 1998 and 1997 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, 1998. 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, 1998 and 1997, 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, 1998. Separate financial statements for CCS Camboriu Cable System Telecomunicacoes Ltda. as of December 31, 1998 and 1997, and the related statements of operations, changes in shareholder's equity and cash flows for each of two years in the period ended December 31, 1998 and the period from inception, May 30, 1996 to December 31, 1996. F-37 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 23. Financial information for subsidiary guarantors and non-guarantor subsidiaries (Continued) Condensed Consolidated Balance Sheets as of December 31, 1998
Wholly- Majority- Owned owned Non- Parent Guarantor Guarantor guarantor Assets company Subsidiaries subsidiaries subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------ ------------ 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 12 295,808 6,435 (4,251) 298,004 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 ========== ========== ========== ========== =========== ===========
F-38 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 23. Financial information for subsidiary guarantors and non-guarantor subsidiaries (Continued) Condensed Consolidated Balance Sheets as of December 31, 1998
Wholly- Majority- Owned owned Non- Parent Guarantor Guarantor Guarantor Liabilities and Shareholders' deficit Company Subsidiaries subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------ ------------ Loans 2,981 38,047 41,028 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 related companies 86,256 36,722 456,283 6,407 (496,928) 88,740 Provision for claims 6,569 857 7,426 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 ======== ======== ======== ======== ======== ========
F-39 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 23. Financial information for subsidiary guarantors and non-guarantor subsidiaries (continued) Condensed Consolidated Statements of Operations for the year ended December 31, 1998
Wholly- Majority- owned Owned Non- Parent guarantor Guarantor Guarantor Description Company Subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ --------- ------------ ------------ ------------ 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 Taxes on revenue (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) --------- --------- --------- --------- --------- --------- 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) --------- --------- --------- --------- --------- --------- 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 ---------- ---------- ---------- ---------- --------- ---------- Loss from continuing operations (150,005) (261,822) (44,290) (8,018) 368,841 (95,294) Income (loss) from discontinued operations (52,970) 197 (52,773) --------- --------- --------- --------- --------- --------- Net loss (150,005) (314,792) (44,093) (8,018) 368,841 (148,067) ========= ========= ========= ========= ========= =========
F-40 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 23. Financial information for subsidiary guarantors and non-guarantor subsidiaries (continued) Condensed Consolidated Statement's of Cash Flows for the year ended December 31, 1998
Wholly- Majority- Non- Parent owned Owned Guarantor Company subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------ ------------ 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 907 857 1,764 Minority interest (1,338) (1,338) Disposal and write-off of property, plant and equipment 1,574 1,574 Discontinued operations 52,970 (197) 52,773 Equity in losses 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 3,936 259 4,195 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 ======== ======== ======== ======== ======== ========
F-41 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 23. Financial information for subsidiary guarantors and non-guarantor subsidiaries (Continued) Condensed Consolidated Balance Sheets as of December 31, 1997
Wholly- Majority- Owned owned Non- Parent Guarantor Guarantor guarantor Assets company Subsidiaries subsidiaries subsidiaries Eliminations Consolidated - ------ ------- ------------ ------------ ------------ ------------ ------------ Current assets Cash and cash equivalents $ 20 $ 421 $ 546 $ 2 $ $ 989 Accounts receivable, net 25,351 (1,212) 24,139 Inventories, net 23,590 23,590 Film exhibition rights 1,291 1,291 Prepaid and other assets 1,320 12,513 13,833 Accounts receivable from related parties 359 6 3,231 22 (996) 2,622 Other accounts receivable 2,400 2,407 4,807 ---------- ---------- ---------- ---------- ---------- ---------- Total current assets 4,099 427 68,929 24 (2,208) 71,271 ---------- ---------- ---------- ---------- ---------- ---------- Property, plant and equipment 267,047 42 (571) 266,518 Investments in and advances to discontinued operations 14,529 (625) 13,904 Investments Equity basis 60,584 2,325 (57,741) 5,168 Cost basis investments 6,667 30,220 9 8 36,904 Concessions, net 6,298 7,477 13,775 Loans to related companies 437,044 21,075 3,591 (436,965) 24,745 Debt Issuance costs, net 7,813 7,813 Other 2,420 (507) 1,913 ---------- ---------- ---------- ---------- ---------- ---------- Total assets $ 537,034 $ 51,722 $ 348,848 $ 2,399 $ (497,992) $ 442,011 ========== ========== ========== ========== ========== ==========
F-42 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 23. Financial information for subsidiary guarantors and non-guarantor subsidiaries (Continued) Condensed Consolidated Balance Sheets as of December 31, 1997
Wholly- Majority- Owned Owned Non- Parent Guarantor Guarantor Guarantor Liabilities and Shareholders' deficit Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated ------------------------------------- ------- ------------ ------------ ------------ ------------ ------------ Loans 2,720 37,880 40,600 Obligations under capital leases Film suppliers 25,229 (13,142) 12,087 Other suppliers 30,269 (1,004) 29,265 Taxes payable other than income taxes 5 9,029 9,034 Accrued payroll and related liabilities 5,339 5,339 Advance payments received from subscribers 34 34 Other accounts payable 256 3,617 3,496 (4,366) 3,003 -------- -------- -------- -------- -------- -------- Total current liabilities 2,981 111,397 3,496 (18,512) 99,362 -------- -------- -------- -------- -------- -------- Loans 250,000 25,899 275,899 Obligations under capital leases Loans from affiliated companies 51,794 15,774 407,704 214 (421,165) 54,321 Provision for claims 5,662 5,662 Liability to fund equity investee 203,828 (203,828) -------- -------- -------- -------- -------- -------- Total long-term liabilities 505,622 15,774 439,265 214 (624,993) 335,882 -------- -------- -------- -------- -------- -------- Minority interest 4,802 4,802 Redeemable common stock, no par value 189,034 189,034 Shareholders' deficit Paid-in capital 141,789 39,669 55,356 105 (94,424) 142,495 Accumulated deficit (302,392) (3,721) (261,972) (1,416) 239,937 (329,564) -------- -------- -------- -------- -------- -------- Total shareholders' deficit (160,603) 35,948 (206,616) (1,311) 145,513 (187,069) -------- -------- -------- -------- -------- -------- Total liabilities and shareholders' Deficit 537,034 51,722 348,848 2,399 (497,992) 442,011 ======== ======== ======== ======== ======== ========
F-43 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 23. Financial information for subsidiary guarantors and non-guarantor subsidiaries (continued) Condensed Consolidated Statements of Operations for the year ended December 31, 1997
Wholly- Majority- owned owned Non- Parent guarantor guarantor Guarantor Description Company Subsidiaries subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------ ------------ 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 (7,026) (7,026) Other costs (2,157) (2,157) --------- --------- --------- --------- --------- --------- (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 --------- --------- --------- --------- --------- --------- Income (loss) from continuing operations before Income taxes and minority interest (60,438) 3,641 (49,278) 1,804 43,376 (60,895) Income taxes --------- --------- --------- --------- --------- --------- Income (loss) from continuing operations before Minority interest (60,438) 3,641 (49,278) 1,804 43,376 (60,895) Minority interest 916 916 --------- --------- --------- --------- --------- --------- Income (loss) from continuing operations (60,438) 3,641 (48,362) 1,804 43,376 (59,979) Loss from discontinued operations (21,438) (21,438) --------- --------- --------- --------- --------- --------- Net income (loss) (81,876) 3,641 (48,362) 1,804 43,376 (81,417) ========= ========= ========= ========= ========= =========
F-44 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 23. Financial information for subsidiary guarantors and non-guarantor subsidiaries (continued) Condensed Consolidated Statement's of Cash Flows for the year ended December 31, 1997
Wholly- Majority- Non- Parent owned owned Guarantor Company subsidiaries subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------ ------------ 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) 617 611 Minority interest 3,024 3,024 Disposal and write-off of property, plant and equipment 338 338 Gain on issuance of shares by equity investees Discontinued operations 21,438 21,438 Equity in losses (earnings) 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 1,669 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 Principal payments on capital leases Capital contributions 23,962 (2,965) (20,997) Repayments of loans from shareholders Loans from shareholders 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) Minority interest --------- --------- --------- --------- --------- --------- 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 ========= ========= ========= ========= ========= =========
F-45 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 23. Financial information for subsidiary guarantors and non-guarantor subsidiaries (continued) Condensed Consolidated Statements of Operations for the year ended December 31, 1996
Wholly- Majority- owned Owned Non- Parent guarantor Guarantor Guarantor Description Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------ ------------ Gross revenues Monthly subscriptions 107,692 107,692 Installation 22,281 22,281 Advertising 7,532 7,532 Indirect programming 11,377 11,377 Other 7,995 7,995 Revenue taxes (10,557) (10,557) -------- -------- -------- -------- -------- -------- Net revenue 146,320 146,320 -------- -------- -------- -------- -------- -------- Direct operating expenses Payroll and benefits (23,324) (23,324) Programming (42,315) (42,315) Transponder lease cost (5,737) (5,737) Technical assistance (5,507) (5,507) Vehicle rentals (1,772) (1,772) TVA Magazine (6,311) (6,311) Pole rental (448) (448) Other costs (8,432) (8,432) -------- -------- -------- -------- -------- -------- (93,846) (93,846) -------- -------- -------- -------- -------- -------- Selling, general and administrative expenses Payroll and benefits (24,885) (24,885) Advertising and promotion (11,445) (11,445) Rent (3,245) (3,245) Other administrative expenses (836) (25) (11,758) (12,619) Other general expenses (10,274) (10,274) -------- -------- -------- -------- -------- -------- (836) (25) (61,607) (62,468) -------- -------- -------- -------- -------- -------- Provision for equipment, inventory and Obsolescence (3,621) (3,621) Depreciation (22,673) (22,673) Amortization (840) (837) (1,677) -------- -------- -------- -------- -------- -------- Operating loss from continuing operations (1,676) (25) (36,264) (37,965) -------- -------- -------- -------- -------- -------- Interest income 1,995 436 7,590 (4,125) 5,896 Interest expense (12,751) (338) (7,226) (97) 4,125 (16,287) Translation gain (loss) (218) (3) 398 296 473 Equity in (losses) of affiliates (53,908) (1,220) (1,220) 47,816 (8,532) Other nonoperating (expenses) income, net 9,243 (1,890) (9,680) (2,327) -------- -------- -------- -------- -------- -------- Loss from continuing operations before income taxes and minority interest (57,315) (3,040) (45,182) (1,317) 48,112 (58,742) Income taxes (156) (156) -------- -------- -------- -------- -------- -------- Loss from continuing operations before minority Interest (57,315) (3,040) (45,338) (1,317) 48,112 (58,898) Minority interest (306) 2,155 1,849 -------- -------- -------- -------- -------- -------- Loss from continuing operations (57,315) (3,040) (45,644) (1,317) 50,267 (57,049) Income (loss) from discontinued operations 9,157 17,933 (17,933) 9,157 -------- -------- -------- -------- -------- -------- Net loss (48,158) (3,040) (27,711) (1,317) 32,334 (47,892) ======== ======== ======== ======== ======== ========
F-46 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 23. Financial information for subsidiary guarantors and non-guarantor subsidiaries (continued) Condensed Consolidated Statement's of Cash Flows for the year ended December 31, 1996
Wholly- Majority- Non- Parent owned owned Guarantor Company subsidiaries subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------ ------------ Cash flows from operating activities: Net loss (48,158) (3,040) (27,711) (1,317) 32,334 47,892 Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation 22,673 22,673 Amortization 840 637 1,677 Amortization of debt issuance cost 96 96 Provision for doubtful accounts 1,381 1,381 Provision for equipment and inventory obsolescence 3,521 3,521 Provision for claims 1,282 1,282 Minority interest 1,309 469 1,778 Disposal and write-off of property, plant and equipment 1,005 1,005 Discontinued operations (9,157) (17,933) 17,933 (9,157) Capital gain (2,317) 2,317 -- Equity in losses of affiliates 52,278 1,220 4,385 1,220 (47,818) 11,285 Changes in operating assets and liabilities: Film exhibition rights (1,031) (1,031) Accounts receivable (8,381) 639 (7,742) Prepaid and other assets (9,241) 237 1,778 (7,226) Other accounts receivable (1,030) (2,937) 1,995 (1,972) Accrued interest 2,720 2,720 Inventories (2,269) (2,269) Suppliers 163 (10) 12,223 (9,478) 2,898 Taxes payable other than income taxes 2,329 2,329 Accrued payroll and related liabilities 947 947 Advances received from subscribers 81 81 Other accounts payable 11 (8) 2,545 (2,040) 508 -------- ------- -------- ------ -------- -------- Net cash (used in) provided by operating activities (13,795) (1,838) (5,507) (97) (1,871) (23,108) -------- ------- -------- ------ -------- -------- Cash flows from investing activities: Purchase of property, plant and equipment (87,861) (42) 36 (87,867) Discontinued operations (12,545) 19,372 (17,933) (11,106) Loans to related companies (112,557) (17,675) (6,812) 47,774 (89,270) Purchase of concessions (11,273) (11,273) Investments in equity and cost investments (86,283) (5,100) 72,494 (18,889) -------- ------- -------- ------ -------- -------- Net cash used in investing activities (211,385) (22,775) (86,574) (42) 102,371 (218,405) -------- ------- -------- ------ -------- -------- Cash flows from financing activities: Bank loans 250,446 7,580 258,026 Principal payments on capital leases Capital contributions 33,539 28,317 57 (61,913) -- Loans from shareholders Loans from related companies 163,858 17,399 59,652 95 (38,587) 202,417 Repayments of loans to related companies 54,445 8,205 62,650 Repayments of loans from related companies (163,733) (34,542) (2,767) (201,042) Repayments of loans from banks Minority interest -------- ------- -------- ------ -------- -------- Net cash provided by financing activities 305,016 24,601 92,782 152 (100,500) 322,051 -------- ------- -------- ------ -------- -------- Net increase (decrease) in cash and cash equivalents 79,836 (12) 701 13 -- 80,538 Cash and cash equivalents at beginning of the period 23,446 12 743 -- -- 24,201 -------- ------- -------- ------ -------- -------- Cash and cash equivalents at end of the period 103,282 -- 1,444 13 -- 104,739 ======== ======= ======== ====== ======== ========
F-47 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 24. Working capital deficiency The Company's financial statements for the year ended December 31, 1998 were prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities and commitments in the normal course of business. The Company incurred net losses of $148,067 and $81,417 for the two years in the period ended December 31, 1998. In addition, the Company had negative working capital of $82,171 at December 31, 1998. In addition, the Company has failed to comply with certain obligations under its debts agreements and material contracts, which failures may result in the termination of certain of the Company's material agreements acceleration of indebtedness, and the exercise of other remedies by the Company's creditors. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis. These obligations include interest payments on the Company's Senior Notes and other indebtedness, commitments to finance equity investees and capital expenditure requirements. Management's plans to continue as a going concern include efforts to generate the necessary cash flow to meet the Company's cost structure through sales of non-strategic assets and an administrative cost reduction program implemented in the fourth quarter of 1998. Management of the Company is contemplating sales of certain non-strategic assets in order to concentrate the business of the Company in the distribution of pay television services through cable and MMDS operations. Consummation of these asset sales will, in some circumstances, be subject to the approval of ANATEL (Agencia Nacional de Telecomunicacoes), which management believes will occur within 90 days of the signing of the relevant agreements relating to such sales. Management anticipates that, upon the consummation of the asset sales described above, the Company's cash flow will be sufficient to allow it to operate and expand its continuing businesses. Nevertheless, should the Company experience difficulties in generating cash flow sufficient to meet its cash needs subsequent to the consummation of such sales, the Company has received a written commitment from Abril S.A. to provide guarantees in relation to the raising of necessary funds and, if necessary, to capitalize certain loans made by Abril S.A. to the Company, all conditioned upon the consummation of the sales of assets described above. F-48 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 25. Subsequent events a. In mid-January 1999, the Central Bank of Brazil changed its exchange policy and extinguished the so-called exchange band, through which it managed the margin of the fluctuation of the real in relation to the U.S. dollar, allowing the market to freely negotiate the exchange rate. The real devalued from R$1,208 per US$ on December 31, 1998 to R$ 1,9934 per US$ on March 5, 1999. A large portion of the Company's operating expenses, principally programming, is denominated in U.S. dollars. The Company is currently negotiating with its suppliers of programming. In addition, the Company has net U.S. dollar denominated liabilities of US$303,380 at December 31, 1998. b. On May 18, 1999 the Company entered into two agreements, referred to below, to sell its DBS Systems to Galaxy Latin America, and to sell its equity interest in Galaxy Latin America and certain related assets to DIRECTV Latin America and Darlene Investments (collectively, the "Proposed Sale"). At the same time, the Company is initiating a tender offer to purchase all of the Senior Notes (the "Offer"), together with a consent solicitation (the "Solicitation") for consent by Noteholders to eliminate the restrictive covenants contained in the Indenture. The Proposed Sale represents, in management's opinion, the best opportunity for addressing the Company's current financial situation. The Proposed Sale is subject to a number of conditions, including the execution of a Supplemental Indenture. Proceeds from the Proposed Sale will be used to fund the Offer. Pursuant to these agreements, the Company has agreed to sell all of its interests in the following entities to GLA: - Galaxy Brasil Ltda. ("GLB", formerly Galaxy Brasil S.A.), a wholly-owned subsidiary of the Company and exclusive local operator of DIRECTV Ku-Band service in Brazil; - TVA Banda C Ltda. ("TVA Banda C"), a subsidiary of the Company and operator of TVA's C-Band service; - a 10% equity interest in GLA (subject to dilution as discussed below), which the Company owns through its British Virgin Islands subsidiary TVA Communications Ltd.; F-49 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 25. Subsequent events (Continued) - 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; - certain promissory notes (the "CBC Notes") in the aggregate principal amount of $7,125, 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 - the CBC Class B Unit Purchase Warrants (the "CBC Warrants"), dated as of April 11, 1997, convertible into equity interests in CBC, which is accounted for the cost basis with zero value. Pursuant to the Agreements, the obligation of the Purchasers to complete the transactions contemplated by the Agreements is subject to the satisfaction or waiver of a number of conditions precedent on or prior to the Closing Date, including, but not limited to, the following: - The Proposed Sale must comply in all respects with the terms of the Indenture (as amended and supplemented by the Supplemental Indenture) relating to the Notes. In order to execute the Supplemental Indenture, the Company must receive the consent of bondholders representing at least a majority in aggregate principal amount of Notes (the "Requisite Consents") prior to June 3, 1999, unless extended (the "Consent Expiration Date"). Holders may not revoke their Consents or withdraw their tenders of Notes after the Consent Expiration Date. - Upon the consummation of the Proposed Sale, all obligations of each of GLB and TVA Banda C, as Subsidiary Guarantors under the Indenture, must be automatically and unconditionally released and discharged, and each of GLB and TVA Banda C must cease to be a Subsidiary Guarantor under the Indenture. In addition, the Purchasers must receive an Acknowledgment of Release and Discharge, executed by the Trustee, acknowledging the release of each of GLB and TVA Banda C from all of their obligations as subsidiary guarantors under the Indenture. - The Proposed Sale, which involves a transfer of telecommunications assets and licenses related thereto, must be approved by the Agencia Nacional de Telecomunicacoes (National Telecommunications Agency or "ANATEL"), a regulatory body of the Brazilian federal government. F-50 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 25. Subsequent events (Continued) - The absence of any material adverse change in relation to the business, operations or condition of any of the Purchased Interests. A devaluation of the Brazilian real may be deemed to be a material adverse change if either (a) the closing spot exchange rate as of the day preceding the Closing Date or (b) the average closing spot exchange rate for the period of five business days preceding the Closing Date results in an exchange rate of the Brazilian real to the U.S. dollar greater than R$2.39. The Agreements are also subject to termination in certain circumstances, including the following: - The Agreements may be terminated by the Purchaser if the Requisite Consents pursuant to the Solicitation shall not have been obtained on or prior to June 15, 1999. - Either Agreement may be terminated by any party thereto if the Closing shall not have occurred on or before September 30, 1999. Sources of Funding for Payment of Tendered Notes The net cash proceeds of the Proposed Sale to the Company at Closing is expected to be approximately $140,000. The total consideration received by the Company will be comprised of the following main components: - in consideration for the Company's interests in GLA, SurFin, the CBC Notes and the CBC Warrants, the Company will receive a cash payment of $130,000; - in consideration for the equity interests of the Company in Galaxy do Brasil Ltda. and TVA Banda C, the Company will receive the following: (a) a cash payment currently estimated to be $10,000 (consisting of a cash payment of $66,750, offset by certain royalties and other amounts due to GLA through the Consent Expiration Date under the Local Operating Agreement, dated July 29, 1996, between GLA and Galaxy do Brasil Ltda, and to Hughes Electronics, in the amount of approximately $51,000 as of April 30, 1999, which amount is expected to increase to approximately $57,000 by the Consent Expiration Date); (b) a promissory note issued by GLA to the Company in the principal amount of $22,250, to bear interest at LIBID, which shall be payable only at maturity of the Note in one single payment two years from the Closing Date; F-51 TEVECAP S.A. AND SUBSIDIARIES Notes to the Consolidated Financial Statements (in thousands of U.S. dollars) 25. Subsequent events (Continued) (c) the release and/or amendment of certain guarantees given by the Company and TVA Sistema de Televisao S.A., a wholly-owned subsidiary of the Company, in respect of certain Galaxy Brasil obligations; (d) the Purchasers shall acquire Galaxy Brasil and TVA Banda C subject to the aggregate of dollar-denominated indebtedness of Galaxy Brasil and TVA Banda C, up to a maximum of $111,200; and (e) the Purchasers shall acquire Galaxy Brasil and TVA Banda C subject to the aggregate of real-denominated indebtedness of Galaxy Brasil to Abril, up to a maximum of R$70,900, to be repaid by Galaxy Brasil to Abril in cash immediately following the Closing. The consideration received by the Company for its equity interests in Galaxy do Brasil Ltda and TVA Banda C will be subject to an upward or downward adjustment in accordance with certain purchase price adjustments based on the indebtedness and working capital of Galaxy Brasil and TVA Banda C as of the Consent Expiration Date, and for indemnification claims. Such adjustment may reduce the amount payable under the GLA Promissory Note. * * * * * * * F-52 TVA SISTEMA DE TELEVISAO S.A. REPORT ON FINANCIAL STATEMENTS as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998 F-53 TVA SISTEMA DE TELEVISAO S.A. Index to Financial Statements Contents Page Report of Independent Accountants F-55 Balance Sheets as of December 31, 1998 and 1997 F-56 Statements of Operations for each of the three years in the period ended December 31, 1998 F-58 Statements of Changes in Shareholders' Deficit for each of the three years in the period ended December 31, 1998 F-59 Statements of Cash Flows for each of the three years in the period ended December 31, 1998 F-60 Notes to the Financial Statements F-61 F-54 ARTHUR ANDERSEN S/C Report of Independent Accountants To the Shareholders and Directors of TVA SISTEMA DE TELEVISAO S.A. We have audited the accompanying balance sheets of TVA SISTEMA DE TELEVISAO S.A. (the "Company") as of December 31, 1998 and 1997, 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, 1998, 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, 1998 and 1997, and the related results of its operations and cash flows for each of the three years in the period ended December 31, 1998, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered recurring losses and has negative net working capital and a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's actions in regard to these matters are discusssed in Note 18. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Arthur Andersen Sao Paulo, Brazil March 5, 1999 F-55 TVA SISTEMA DE TELEVISaO S.A. Balance Sheets December 31, 1998 and 1997 (in thousands of U.S. dollars) December 31, --------------------- 1998 1997 -------- -------- ASSETS Current assets Cash and cash equivalents $ 475 $ 66 Accounts receivable, net 16,959 22,570 Accounts receivable from related companies 3,617 3,207 Inventories, net 10,775 12,139 Film exhibition rights -- 1,291 Prepaid and other assets 2,567 12,244 Other accounts receivable 1,854 2,203 -------- -------- Total current assets 36,247 53,720 -------- -------- Property, plant and equipment, net 250,488 229,136 Investments - cost basis investments -- 9 Loans to related companies 158 7,097 Other 2,122 2,090 -------- -------- Total assets $289,015 $292,052 ======== ======== The accompanying notes are an integral part of the financial statements. F-56 TVA SISTEMA DE TELEVISaO S.A. Balance Sheets December 31, 1998 and 1997 (in thousands of U.S. dollars) December 31, ----------------------- 1998 1997 --------- --------- LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities Loans $ 32,256 $ 29,880 Film suppliers 26,906 25,229 Other suppliers 23,382 25,703 Deficit in discontinued operations -- (625) Taxes payable other than income taxes 11,472 7,982 Accrued payroll and related liabilities 2,641 4,816 Advance payments received from subscribers 1,884 1,616 Other accounts payable 5,579 2,178 --------- --------- Total current liabilities 104,120 96,779 --------- --------- Long-term liabilities Loans 12,351 25,899 Loans from related companies 429,861 391,177 Provision for claims 6,319 5,334 --------- --------- Total long-term liabilities 448,531 422,410 --------- --------- Commitments and contingencies Shareholders' deficit Common shares, no par value, 6,980,764 shares issued and outstanding 16,303 16,303 Accumulated deficit (279,939) (244,690) --------- --------- Total shareholders' deficit (263,636) (228,387) --------- --------- Total liabilities and shareholders' deficit $ 289,015 $ 292,052 ========= ========= The accompanying notes are an integral part of the financial statements. F-57 TVA SISTEMA DE TELEVISaO S.A. Statements of Operations for the years ended December 31, 1998, 1997 and 1996 (in thousands of U.S. dollars) Year Ended December 31, ----------------------------------- 1998 1997 1996 --------- --------- --------- Gross revenues Monthly subscriptions $ 115,175 $ 117,507 $ 95,712 Installation 2,334 10,142 20,127 Advertising 2,649 4,947 7,532 Indirect programming 11,460 22,810 11,377 Other 8,016 13,142 7,929 Taxes on revenues (9,920) (11,357) (10,139) --------- --------- --------- Net revenue 129,714 157,191 132,538 --------- --------- --------- Direct operating expenses Payroll and benefits 10,924 17,967 19,483 Programming 42,950 47,472 38,991 Transponder lease cost 1,157 6,312 5,737 Technical assistance 1,981 1,630 5,261 Vehicle rentals 178 889 1,452 TVA magazine 4,558 5,120 5,870 Other costs 6,434 6,782 7,075 --------- --------- --------- 68,182 86,172 83,869 --------- --------- --------- Selling, general and administrative expenses Payroll and benefits 19,270 23,035 23,607 Advertising and promotion 7,481 17,538 10,841 Rent 3,217 3,639 2,998 Other administrative expenses 8,267 7,961 9,772 Other general expenses 4,774 3,883 9,437 --------- --------- --------- 43,009 56,056 56,655 --------- --------- --------- Provision for equipment, inventory and 1,940 2,666 3,621 obsolescence Depreciation 39,484 30,251 21,120 --------- --------- --------- Operating loss from continuing (22,901) (17,954) (32,727) operations Interest income 5,840 6,920 7,365 Interest expense (16,496) (34,888) (5,183) Translation (loss) gain (642) (92) 26 Other nonoperating (expenses) income, net (1,060) (796) (846) --------- --------- --------- Loss from continuing operations before income taxes (35,259) (46,810) (31,365) Income taxes -- -- -- --------- --------- --------- Loss from continuing operations $ (35,259) $ (46,810) $ (31,365) Income from discontinued operations 10 3,764 17,933 --------- --------- --------- Net loss $ (35,249) $ (43,046) $ (13,432) ========= ========= ========= Net loss per share for (5,05) (6,71) (4,49) continuing operations Net income per share for 0 0,54 2,57 discontinued operations Net loss per share (5,05) (6,17) (1,92) The accompanying notes are an integral part of the financial statements. F-58 TVA SISTEMA DE TELEVISaO S.A. Statements of Changes in Shareholders' Deficit for the years ended December 31, 1998, 1997 and 1996 (in thousands of U.S. dollars) Paid-in Accumulated Capital Deficit Total --------- --------- --------- Balance as of December 31, 1995 $ 16,303 $(188,212) $(171,909) Net loss for the period (13,432) (13,432) --------- --------- --------- Balance as of December 31, 1996 16,303 (201,644) (185,341) Net loss for the period (43,046) (43,046) --------- --------- --------- Balance as of December 31, 1997 16,303 (244,690) (228,387) Net loss for the period (35,249) (35,249) --------- --------- --------- Balance as of December 31, 1998 $ 16,303 $(279,939) $(263,636) ========= ========= ========= The accompanying notes are an integral part of the financial statements. F-59 TVA SISTEMA DE TELEVISaO S.A. Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 (in thousands of U.S. dollars)
Year Ended December 31, ----------------------------------- 1998 1997 1996 --------- --------- --------- Cash flows from operating activities: Net loss $ (35,249) $ (43,046) $ (13,432) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation 39,484 30,251 21,120 Provision for doubtful accounts 3,334 1,847 1,381 Provision for equipment and inventory 1,940 2,666 3,621 obsolescence Provision for claims 985 295 1,276 Disposal of property, plant and equipment 1,574 338 1,005 Discontinued operations (10) (3,764) (17,933) Changes in operating assets and liabilities: Film exhibition rights 1,291 (230) (1,031) Accounts receivable 2,277 (10,009) (7,470) Prepaid and other assets 9,677 (8,587) 690 Other accounts receivable including related (93) (4,030) (2,363) companies Accrued interest 9,170 26,076 (3,604) Inventories 1,354 (3,882) 1,700 Suppliers (644) (13,836) 9,133 Taxes payable other than income taxes 3,490 1,084 1,918 Accrued payroll and related liabilities (2,175) (69) 753 Advances received from subscribers 268 (814) (200) Other accounts payable 3,401 (202) 990 --------- --------- --------- Net cash (used in) provided by 40,074 (25,912) (2,446) operating activities --------- --------- --------- Cash flows used in investing activities: Purchases of property, plant and equipment (64,340) (97,143) (69,041) Loans to related companies (158) (199) (7,320) Discontinued operations (615) -- 23,761 Repayments of loans to related companies (36,949) (3,149) -- Others 9 (9) -- --------- --------- --------- Net cash used in investing activities (102,053) (100,500) (52,600) --------- --------- --------- Cash flows from financing activities: Bank loans 11,652 51,841 7,580 Repayments of loans from shareholders -- (2,767) Loans from related companies 70,314 76,972 40,970 Repayments of loans from related companies 7,441 3,420 9,315 Repayments of loans from bank (27,019) (6,505) -- --------- --------- --------- Net cash provided by financing 62,388 125,728 55,098 activities --------- --------- --------- Net (decrease) increase in cash and cash 409 (684) 52 equivalents Cash and cash equivalents at beginning of the 66 750 698 period --------- --------- --------- Cash and cash equivalents at end of the $ 475 $ 66 $ 750 period ========= ========= ========= Supplemental cash disclosure: Cash paid for interest $ -- $ -- 317 ========= ========= ========= Supplemental non-cash financing activities: Accrued interest on related company loans refinanced as principal balance $ 7,664 23,515 $ -- ========= ========= =========
The accompanying notes are an integral part of the financial statements. F-60 TVA SISTEMA DE TELEVISaO S.A. Notes to the Financial Statements, Continued (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. During 1998, the Company's Board of Directors approved a plan of disposition of the C-Band Division. As a result, the financial statements have been retroactively restated to present the C-Band Division as discontinued operations. See Note 3 for further discussion. 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-61 TVA SISTEMA DE TELEVISaO S.A. Notes to the 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 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$1.2087 to US$1 in effect on December 31, 1998, and R$1.1164 to US$1 in effect on December 31, 1997. 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, 1998 and 1997 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-62 TVA SISTEMA DE TELEVISaO S.A. Notes to the Financial Statements, Continued (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 is considered to approximate their respective carrying value due to their short-term nature. o The fair value of loans from related companies approximates their respective carrying values, as interest on these loans is variable and based on market rates. 2.6. Accounts receivable A provision for doubtful accounts 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-63 TVA SISTEMA DE TELEVISaO S.A. Notes to the Financial Statements, Continued (in thousands of U.S. dollars) 2.11. Recoverability of long-lived assets to be held and used in the business Management reviews long-lived assets, primarily the Company's licenses and its property and equipment to be held and used in the business, for the purposes of determining and measuring impairment on a recurring basis or when events or changes in circumstances indicate that the carrying value of an asset or group of assets may not be recoverable. Assets are grouped and evaluated for possible impairment at the level of each cable television system; impairment is assessed on the basis of the forecasted undiscounted cash flows of the businesses over the estimated remaining lives of the assets related to those systems. A write-down of the carrying value of the assets or group of assets to estimated fair value will be made 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. 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. Discontinued Operations In October 1998 the Company announced that its Board of Directors had approved a plan of disposition of the C-Band Division. This decision was based upon management's review of operations, investments needs and focus of the Company's business on the distribution of pay television services through cable and MMDS operations. In October 1998, the Company spun-off its C-Band operation, creating TVA Banda C entity, wholly owned by Tevecap. F-64 TVA SISTEMA DE TELEVISaO S.A. Notes to the Financial Statements, Continued (in thousands of U.S. dollars) 3. Discontinued Operations (Continued) The summarized balance sheet of C-Band operations as of December 31 was as follows: 1998 1997 Assets Accounts receivable, net $ -- $3,598 Property, plant and equipment, net -- 2,042 Company's investment and advances -- 625 --------- ------ -- 6,265 ========= ====== Liabilities and Equity Loans -- 372 Other current liabilities -- 2,501 Loans from related companies -- 3,392 --------- ------ $ -- $6,265 ========= ====== The following is a summary of the results of the C-Band operations for the three years ended December 31: 1998 1997 1996 Revenues $ 21,759 $ 33,784 $ 35,241 Operating costs and expenses (20,729) (30,020) (17,264) -------- -------- -------- Income (loss) from operations 1,030 3,764 17,977 Interest income (expense) (1,020) -- (44) -------- -------- -------- Net income (loss) from operations $ 10 $ 3,764 $ 17,933 ======== ======== ======== Continued F-65 TVA SISTEMA DE TELEVISaO S.A. Notes to the Financial Statements, Continued (in thousands of U.S. dollars) 4. Accounts receivable, net As of December 31, 1998 and 1997, accounts receivable were comprised of: December 31, ---------------------- 1998 1997 -------- -------- Subscriptions $ 14,269 $ 9,024 Installation fees 4,653 7,040 Advertising and programming 3,212 4,887 Barter 4,406 5,857 Other 33 2,042 Provision for doubtful accounts (9,614) (6,280) -------- -------- $ 16,959 $ 22,570 ======== ======== 5. Inventories, net As of December 31, 1998 and 1997, inventories were comprised of: December 31, ------------------------ 1998 1997 -------- -------- Materials and supplies $ 12,308 $ 13,835 Imports in transit 1,597 1,424 Provision for obsolescence (3,130) (3,120) -------- -------- $ 10,775 $ 12,139 ======== ======== 6. Prepaid and other assets As of December 31, 1998 and 1997, prepaid expenses were comprised of: December 31, -------------------- 1998 1997 ------- ------- Advances to suppliers $ 749 $11,980 Prepaid meals and transportation 24 89 Other 1,794 175 ------- ------- $ 2,567 $12,244 ======= ======= Continued F-66 TVA SISTEMA DE TELEVISaO S.A. Notes to the Financial Statements, Continued (in thousands of U.S. dollars) 7. Related-party transactions The following tables summarize the transactions between the Company and its related parties as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998: December 31, ----------------------- 1998 1997 ------ -------- TVA Sul Parana Ltda Loans receivable $ -- $ 3,705 Accounts receivable 1,448 541 Accounts payable -- 21 Tevecap S.A Loans payable 423,676 384,324 Accounts payable 428 -- Comercial Cabo Ltda Loans payable 3,702 4,320 ESPN do Brasil Ltda Accounts receivable 131 31 Accounts payable -- 489 Abril S.A Accounts receivable 97 34 Accounts payable $ 399 $ 430 Loans payable 2,483 2,533 TV Filme Inc. Accounts receivable 64 19 TVA Network S.A Accounts receivable 20 2,138 Galaxy Brasil S.A Accounts receivable 235 26 SMC Maketing Accounts receivable 275 -- TVA Channel Accounts receivable 762 -- TVA Banda C Accounts receivable 545 -- Loans receivable 158 3,392 Others Accounts receivable 40 88 Loans receivable -- 22 Accounts payable 16 8 Continued F-67 TVA SISTEMA DE TELEVISaO S.A. Notes to the Financial Statements, Continued (in thousands of U.S. dollars) 7. Related-party transactions, continued December 31, -------------------------------- 1998 1997 1996 -------- -------- -------- Tevecap S.A Net interest (income) expense $ 7,664 $ 27,768 $ (1,749) Abril S.A Printing cost 1,521 4,389 4,516 Net interest (income) expense -- (188) 46 Comercial Cabo Ltda Net interest income (318) (322) (319) TV Cabo Santa Branca Ltda Net interest income -- (14) (21) ESPN do Brasil Ltda Programming costs, net 5,188 3,493 3,850 TVA Sul Parana Ltda Net interest income (295) (469) (1,330) TV Filme Inc. Programming revenue (2,424) (8,629) (6,435) Canbras TVA Cabo Ltda Programming revenue -- (1,837) (207) The related company loans are denominated in reais and are subject to monetary restatement until December 31, 1995 plus interest charges at the market rate which ranged from 1.76% to 3.23% per month in December 1998 (3.85% to 4.45% per month in December 1997). 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 $200 per annum. Related-party transactions relating to programming sales and costs and printing service costs were carried out at usual market rates and terms. The Company received guarantees in the course of the year from its parent company Tevecap S.A. and from Abril S.A. in the form of collateral and letters of credit. The amount outstanding pursuant to these guarantees as of December 31, 1998 was $29,807 and $29,350, respectively. Continued F-68 TVA SISTEMA DE TELEVISaO S.A. Notes to the 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. 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, 1998 and 1997 are as follows: December 31, -------------------- 1998 1997 -------- -------- Deferred tax assets: Net operating loss carryforwards $ 68,517 $ 50,981 Deferred charges 1,467 3,458 Provision for obsolescence 1,251 732 Provision for claims 4,812 3,011 Provision for decoders 866 904 Others 151 1,076 -------- -------- Total gross deferred tax asset 77,064 60,162 Less valuation allowance (76,790) (57,386) -------- -------- Net deferred tax asset 274 2,776 Deferred tax liability: Installation costs (274) (2,776) -------- -------- Total gross deferred tax liability $ (274) $ (2,776) ======== ======== Net deferred tax asset $ -- $ -- ======== ======== The Company has a limited operating history and has generated losses since its inception. The valuation allowance has been established in accordance with the requirements of SFAS No. 109 "Accounting for Income Taxes". As of December 31, 1998, the Company has unexpirable accumulated tax losses of $194,916. Continued F-69 TVA SISTEMA DE TELEVISaO S.A. Notes to the Financial Statements, Continued (in thousands of U.S. dollars) 9. Income taxes (Continued) Income tax was different from the amount computed using the Brazilian statutory income tax for the reasons set forth in the following table:
Year Ended December 31, ---------------------------------- 1998 1997 1996 -------- -------- -------- Loss before income taxes and minority interest $ 35,249 $ 43,047 $ 13,432 Statutory income tax rate 33% 33% 33% -------- -------- -------- 11,632 14,206 4,433 Increase (decrease) in the income tax rate -- -- 1,957 Deferred charges amortization 3,546 3,839 5,102 Translation (loss) gain of tax losses (3,893) (2,069) (2,054) Installation materials depreciation -- 69 3,761 Translation gain on loans from related companies 10,339 8,910 -- Others (2,220) (254) (5,375) -------- -------- -------- Net income tax benefit (provision) for the period 19,404 24,701 7,824 (Increase) decrease in valuation allowance (19,404) (24,701) (7,824) -------- -------- -------- $ -- $ -- $ -- ======== ======== ========
Continued F-70 TVA SISTEMA DE TELEVISaO S.A. Notes to the Financial Statements, Continued (in thousands of U.S. dollars) 10. Property, plant and equipment, net As of December 31, 1998 and 1997, property, plant and equipment were comprised of: Annual Depreciation December 31, Rate ---------------------- % 1998 1997 ------------ --------- --------- Machinery and equipment 10 $ 35,990 $ 39,704 Decoders 10 107,730 94,586 Leasehold improvements 25 2,342 3,715 Furniture and fixtures 10 1,207 1,328 Premises 10 2,135 2,005 Vehicles 20 2,243 2,706 Software 20 6,932 4,449 Tools 10 798 761 Reception equipment 20 132,900 107,251 Cable plant 10 24,735 24,650 --------- --------- 317,012 281,155 Telephone line use rights 2,024 2,031 Trademarks, patents and others 179 179 Other 691 2,672 Accumulated depreciation (118,802) (77,915) Fixed assets in transit 49,384 21,014 --------- --------- $ 250,488 $ 229,136 ========= ========= 11. Loans The loans as of December 31, 1998 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: 1999 $ 32,256 2000 6,478 2001 4,875 2002 998 --------- Total $ 44,607 ========= Continued F-71 TVA SISTEMA DE TELEVISaO S.A. Notes to the Financial Statements, Continued (in thousands of U.S. dollars) 12. Other accounts payable As of December 31, 1998 and 1997, other accounts payable were comprised of: December 31, ----------------- 1998 1997 ------ ------ Accounts payable to related companies $ 843 $ 970 Advertising 3,437 165 Importation expenses payable 31 398 Other 1,268 645 ------ ------ $5,579 $2,178 ====== ====== 13. Leased assets and commitments The Company has rented its office space until the year 2003. As of December 31, 1998, future minimum rental payments applicable to operating leases in respect of this space aggregate approximately $9,213 as follows: 1999 $ 1,956 2000 1,848 2001 1,803 2002 1,803 2003 1,803 --------- Total $ 9,213 ========= Continued F-72 TVA SISTEMA DE TELEVISaO S.A. Notes to the Financial Statements, Continued (in thousands of U.S. dollars) 13. Leased assets and commitments (Continued) As of December 31, 1998, the Company had contractual commitments with Empresa Brasileira de Telecomunicacoes ("Embratel") for the use of a transponder until the year 2004. Based on the contract provisions, these operating lease commitments are currently estimated to aggregate approximately $79,776, as follows: 1999 $13,296 2000 13,296 2001 13,296 2002 13,296 2003 13,296 2004 13,296 -------- Total $79,776 ======== 14. 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. 15. 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. Continued F-73 TVA SISTEMA DE TELEVISaO S.A. Notes to the Financial Statements, Continued (in thousands of U.S. dollars) 16. 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 $313 for the year ended December 31, 1998 ($425 in 1997 and $308 in 1996). 17. 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 1998, contributions made by the Company to Associacao Abril de Beneficios amounted to $1,365 ($1,485 in 1997 and $1,288 in 1996). 18. Working capital deficiency The Company's financial statements for the year ended December 31, 1998 were prepared on a going concern basis which contemplates the realization of assets and settlement of liabilities and commitments in the normal course of business. The Company incurred net losses of $35,249 and $43,046 for the two years in the period ended December 31, 1998 and 1997, respectively. In addition, the Company had negative working capital of $67,873 and a net capital deficiency of $263,636 at December 31, 1998. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis. These obligations include mainly capital expenditure requirements and interest payments on the Company's loans. Management's plans to continue as a going concern include efforts to generate the necessary cash flow to meet the Company's cost structure through an administrative cost reduction program implemented in the fourth quarter of 1998. The Company is concentrating the business of the Company in the distribution of pay television services through cable and MMDS operations. Continued F-74 TVA SISTEMA DE TELEVISaO S.A. Notes to the Financial Statements, Continued (in thousands of U.S. dollars) Management anticipates that, upon the full implementation of the plans described above, the Company's cash flow will be sufficient to allow it to operate and expand its continuing businesses. In addition, the Company's principal shareholders, Tevecap is contemplating the sale of certain non-strategic assets in order to concentrate its businness on distribution of pay television services. 19. Supplementary information - valuation and qualifying accounts and reserves
Provision Deferred Provision Provision for Tax Provision for Doubtful For Exhibition Valuation for Accounts Obsolescence Expiration Allowance Claims ------------ ------------ ---------- --------- --------- Balance as of December 31, 1995 $ 3,052 $ -- $ 1,162 $ 24,861 $ 3,763 Additions charged to expense 1,381 2,250 -- 7,824 1,276 -------- -------- -------- -------- -------- 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 -- 19,404 985 -------- -------- -------- -------- -------- Balance as of December 31, 1998 $ 9,614 $ 3,130 $ -- $ 76,790 $ 6,319 ======== ======== ======== ======== ========
20. 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 March 1998, the AICPA issued Statement of position 98-1 (SOP 98-1), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". SOP 98-1 requires capitalization of certain direct costs and interest costs after preliminary development efforts have been made. SOP 98-1 is effective for fiscal year beginning after December 15, 1998. At this time, management is considering the impact of this pronouncement, but does not believe it will have a material effect on the Company's consolidated financial statements. Continued F-75 TVA SISTEMA DE TELEVISaO S.A. Notes to the Financial Statements, Continued (in thousands of U.S. dollars) 21. Subsequent events In mid-January 1999, the Central Bank of Brazil changed its exchange policy and extinguished the so-called exchange band, through which it managed the margin of the fluctuation of the real in relation to the U.S. dollar, allowing the market to freely negotiate the exchange rate. The real devalued from R$1,208 per US$ on December 31, 1998 to R$ 1,9934 per US$ on March 5, 1999. A large portion of the Company's operating expenses, principally programming, is denominated in U.S. dollars. The Company is currently negotiating with its suppliers of programming. In addition, the Company has net U.S. dollar denominated liabilities of US$44,607 at December 31, 1998. * * * * * * * F-76 TVA SUL PARANA LTDA. AND SUBSIDIARY REPORT ON CONSOLIDATED FINANCIAL STATEMENTS as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998 F-77 TVA SUL PARANA LTDA. AND SUBSIDIARY INDEX TO FINANCIAL STATEMENTS Contents Page Report of Independent Accountants F-79 Consolidated Balance Sheets as of December 31, 1998 and 1997 F-80 Consolidated Statements of Operations for each of the three years in the period ended December 31, 1998 F-82 Consolidated Statements of Changes in Shareholders' Equity for each of the three years in the period ended December 31, 1998 F-83 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 1998 F-84 Notes to Consolidated Financial Statements F-86 F-78 [logo of ARTHUR ANDERSEN S/C] Report of Independent Accountants To the Shareholders and Directors of TVA SUL PARANA S.A. We have audited the accompanying consolidated balance sheet of TVA SUL PARANA S.A. and subsidiary (the "Company") as of December 31, 1998 and 1997, 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, 1998, 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, 1998 and 1997, and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 1998, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered recurring losses and has negative net working capital that raise substantial doubt about its ability to continue as a going concern. Management's actions in regard to these matters are discussed in note 17. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Arthur Andersen Sao Paulo, Brazil March 5, 1999 F-79 TVA SUL PARANA S.A. AND SUBSIDIARY Consolidated Balance Sheets as of December 31, 1998 and 1997 (in thousands of U.S. dollars) December 31, ---------------------- 1998 1997 ------- ------- ASSETS Current assets Cash and cash equivalents $ 305 $ 481 Accounts receivable, net 1,168 2,781 Inventories 4,125 11,451 Prepaid and other assets 32 269 Other accounts receivable 288 228 ------- ------- Total current assets 5,918 15,210 ------- ------- Property, plant and equipment, net 41,615 37,911 Concessions, net 6,612 7,477 Other 438 330 ------- ------- Total assets $54,583 $60,928 ======= ======= The accompanying notes are an integral part of the financial statements. F-80 TVA SUL PARANA S.A. AND SUBSIDIARY Consolidated Balance Sheets as of December 31, 1998 and 1997 (in thousands of U.S. dollars) December 31, 1998 1997 -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Loans $ 5,791 $ 2,719 Film suppliers 947 -- Others suppliers 1,964 6,394 Taxes payable other than income taxes 1,494 1,046 Accrued payroll and related liabilities 479 523 Advances payments received from subscribers 115 -- Accounts payable to related companies 586 753 Other accounts payable 143 920 -------- -------- Total current liabilities 11,519 12,355 -------- -------- Long-term liabilities Loans -- 1,640 Loans from related companies 26,424 20,039 Provision for claims 251 323 -------- -------- Total long-term liabilities 26,675 22,002 -------- -------- Commitments and contingencies (Note 13) Minority interest 1,361 1,258 Shareholders' equity Paid-in capital 44,213 44,213 Accumulated deficit (29,185) (18,900) -------- -------- Total shareholders' equity 15,028 25,313 -------- -------- Total liabilities and shareholders' equity $ 54,583 $ 60,928 ======== ======== The accompanying notes are an integral part of the financial statements. F-81 TVA SUL PARANA S.A. AND SUBSIDIARY Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996 (in thousands of U.S. dollars)
Year Ended December 31, -------------------------------- 1998 1997 1996 -------- -------- -------- Gross revenues Monthly subscriptions $ 21,009 $ 25,193 $ 11,980 Installation 518 2,799 2,154 Other 650 506 66 Taxes on revenue (1,620) (1,958) (418) -------- -------- -------- Net revenue 20,557 26,540 13,782 -------- -------- -------- Direct operating expenses Payroll and benefits 1,019 4,626 3,841 Programming 6,515 8,922 3,324 Technical assistance (769) 202 246 Vehicle rentals -- 186 320 TVA magazine 683 707 441 Other costs 1,515 2,402 1,805 -------- -------- -------- 8,963 17,045 9,977 -------- -------- -------- Selling, general and administrative expenses Payroll and benefits 3,793 1,397 1,278 Advertising and promotion 348 824 604 Rent 372 82 247 Other administrative expenses 4,034 2,723 1,987 Other general expenses 416 896 837 -------- -------- -------- 8,963 5,922 4,953 -------- -------- -------- Depreciation 6,021 3,455 1,553 Amortization 865 917 837 -------- -------- -------- Operating loss (4,255) (799) (3,538) -------- -------- -------- Interest income 407 631 225 Interest expense (6,799) (5,440) (2,043) Translation (loss) gain 205 (58) 374 Other nonoperating (expense) income, net 284 (567) 1,612 -------- -------- -------- Loss before income taxes and minority interest (10,158) (6,233) (3,370) Income taxes (24) -- (156) -------- -------- -------- Loss before minority interest (10,182) (6,233) (3,526) Minority interest (103) 52 38 -------- -------- -------- Net loss $(10,285) $ (6,181) $ (3,488) Net loss per share (0,23) (0,14) (0,19)
The accompanying notes are an integral part of the financial statements. F-82 TVA SUL PARANA S.A. AND SUBSIDIARY Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996 (in thousands of U.S. dollars) Paid-in Accumulated Capital Deficit Total ------- ----------- --------- Balance as of December 31, 1995 $ 1 $(13,939) $(13,938) Capital contributed on: August 30, 1996 17,533 $ 17,533 Dissolution of capital (1,220) 1,220 -- ------- -------- -------- 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 ======= ======== ======== The accompanying notes are an integral part of the financial statements. F-83 TVA SUL PARANA S.A. AND SUBSIDIARY Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 (in thousands of U.S. dollars)
Year Ended December 31, -------------------------------- 1998 1997 1996 -------- -------- -------- Cash flows from operating activities: Net loss $(10,285) $ (6,181) $ (3,488) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation 6,021 3,455 1,553 Amortization 865 917 837 Provision for doubtful accounts 202 1,101 386 Provision for claims (72) 323 -- Minority interest 103 (52) (38) Changes in operating assets and liabilities Accounts receivable 1,411 (2,939) (1,296) Prepaid and other assets 237 334 (502) Other accounts receivable (60) 673 (891) Accrued interest 5,095 3,816 1,497 Inventories 7,326 (7,482) (3,927) Other assets (108) (284) (30) Film suppliers and others suppliers (3,483) 3,207 2,665 Taxes payable other than income taxes 448 579 293 Accrued payroll and related liabilities (44) 76 (4) Advances received from subscribers 115 (1,026) 796 Other accounts payable (944) (580) 838 -------- -------- -------- Net cash used in operating activities 6,827 (4,063) (1,311) -------- -------- -------- Cash flows used in investing activities Purchases of property, plant and equipment (9,725) (20,491) (17,624) Acquisition of businesses, net of cash acquired -- (11,273) -------- -------- -------- Net cash used in investing activities (9,725) (20,491) (28,897) -------- -------- -------- Cash flows from financing activities Bank Loans 2,897 4,359 -- Capital contributions -- 27,899 17,533 Repayments of loans from shareholders -- -- (162) Loans from related companies 9,353 6,302 8,672 Advances from shareholders -- (12,781) 12,781 Repayments of loans from related companies (8,064) (1,438) (9,315) Repayments of loans from banks (1,464) -- -- Minority interest -- -- 1,348 -------- -------- -------- Net cash provided by financing activities 2,722 24,341 30,857 -------- -------- -------- Net (decrease) increase in cash and cash equivalents (176) (213) 649 Cash and cash equivalents at beginning of the period 481 694 45 -------- -------- -------- Cash and cash equivalents at end of the period $ 305 $ 481 $ 694 ======== ======== ========
The accompanying notes are an integral part of the financial statements. F-84 TVA SUL PARANA S.A. AND SUBSIDIARY Consolidated Statements of Cash Flows, Continued for the years ended December 31, 1998, 1997 and 1996 (in thousands of U.S. dollars)
Year Ended December 31, ------------------------------ 1998 1997 1996 -------- -------- -------- 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 $ 1,497 ======== ======== ======== Details of acquisitions Fair value of assets acquired -- -- 12,739 Liabilities assumed -- -- (1,385) -------- -------- -------- Cash paid -- -- 11,354 Less: cash acquired -- -- (81) -------- -------- -------- Net cash paid for acquisitions $ -- $ -- $ 11,273 ======== ======== ========
The accompanying notes are an integral part of the financial statements. F-85 TVA SUL PARANA S.A. 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 S.A. and its subsidiary (the "Company"). TVA Sul Parana S.A. 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) Consolidated presentation as of and for the years ended December 31, 1998 and 1997 TVA Sul Parana S.A. was incorporated on October 30, 1998 as a holding company for certain entities, which were under common control. Accordingly, the financial statements as of F-86 TVA SUL PARANA S.A. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (in thousands of U.S. dollars) 2.2. Basis of presentation and consolidation (Continued) and for the years ended December 31, 1998 and 1997 are prepared on a consolidated basis. The consolidated financial statements include the accounts of all majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated on consolidation. 2.3. 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. 2.4. 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$1.2087 to US$1 in effect on December 31, 1998, and R$1.1164 to US$1 in effect on December 31, 1997. Translation gains and losses are recognized in the income statement. o Income and expenses are translated at the average exchange rates in effect each month, except for those related to assets and liabilities which are translated at historical exchange rates and deferred income taxes, which are translated at the current rate. Translation gains and losses are recognized in the income statement. F-87 TVA SUL PARANA S.A. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (in thousands of U.S. dollars) 2.5. Consolidated financial statements The Company's consolidated financial statements as of December 31,1998 and 1997 includes TVA Sul Parana S.A. as a parent company and its 60% ownership interest in CCS Camboriu Cable System de Telecomunicacoes Ltda. 2.6. Cash and cash equivalents Cash and cash equivalents are defined as cash and cash in banks and investments in interest-bearing securities and are carried at cost plus accrued interest. Short-term investments with original maturities of three months or less at the time of purchase are considered cash equivalents. 2.7. Financial instruments In accordance with SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", information is provided about the fair value of certain financial instruments for which it is practicable to estimate that value. For the purposes of SFAS No. 107, the estimated fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The carrying values of the Company's financial instruments as of December 31, 1998 and 1997 approximate management's best estimate of their fair values. The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value: o The fair value of certain financial assets carried at cost, including cash, accounts receivable, other accounts receivable, and certain other short-term assets is considered to approximate their respective carrying value due to their short-term nature. o The fair value of payables to suppliers, other accounts payable, loans to related companies and certain other short-term liabilities is considered to approximate their respective carrying value due to their short-term nature. o The fair value of loans from related companies approximates their respective carrying values, as interest on these loans is variable and based on market rates. 2.9. Accounts receivable A provision for doubtful accounts was established on the basis of an analysis of the accounts receivable, in light of the risks involved, in an amount sufficient to cover any losses incurred in realization of credits. F-88 TVA SUL PARANA S.A. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (in thousands of U.S. dollars) 2.10. 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. 2.11. Property, plant and equipment Property, plant and equipment are stated at cost and depreciated using the straight-line method, over the remaining useful lives, as described in Note 8. 2.12. 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. 2.13. Revenue recognition Hook up fees are recognized as revenue on the equipment installation date to the extent of direct selling costs incurred. Subscription revenues are recognized as earned on an accrual basis. 2.14. 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. 2.15 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-89 TVA SUL PARANA S.A. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (in thousands of U.S. dollars) 3. Cash and cash equivalents As of December 31, 1998 and 1997, cash and cash equivalents were comprised of: December 31, ------------------- 1998 1997 -------- -------- Cash on hand and in banks $ 298 $ 463 Short-term investments 7 18 -------- -------- $ 305 $ 481 ======== ======== 4. Accounts receivable, net As of December 31, 1998 and 1997, accounts receivable were comprised of: December 31, ------------------- 1998 1997 -------- -------- Subscriptions $ 1,915 $ 2,671 Installation fees 709 1,526 Advertasing 233 71 Provision for doubtful accounts (1,689) (1,487) -------- -------- $ 1,168 $ 2,781 ======== ======== 5. Inventories As of December 31, 1998 and 1997, inventories were comprised of: December 31, ------------------- 1998 1997 -------- -------- Materials and suppliers $ 4,111 $ 11,357 Imports in transit 14 94 -------- -------- $ 4,125 $ 11,451 ======== ======== F-90 TVA SUL PARANA S.A. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (in thousands of U.S. dollars) 6. Related party transactions The following tables summarize the transactions between the Company and related parties as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998: December 31, 1998 1997 -------- -------- TVA Sistema de Televisao S.A Loans payable -- 3,705 Accounts payable $ 586 $ 753 Accounts receivable 12 21 Tevecap S.A Accounts receivable -- -- Loans payable $ 26,424 $ 16,334 1998 1997 1996 -------- -------- -------- TVA Sistema de Televisao S.A Net interest expense $ 295 $ 483 $ 1,330 Tevecap S.A Net interest expense $ 4,764 $ 3,333 $ 166 The related company loans are denominated in reais and are subject to monetary restatement until December 31, 1995 plus interest charges at the market rate which ranged from 3.85% to 4,45% per month as of December 1998 (3,85% to 4,45% per month as of December 1997). Such loans are renewable every year on December 31. F-91 TVA SUL PARANA S.A. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (in thousands of U.S. dollars) 7. Income taxes The tax effects of temporary differences that give rise to a significant portion of the deferred tax asset and deferred tax liability as of December 31, 1998 and 1997 are as follows: December 31, ------------------- 1998 1997 -------- -------- Deferred tax assets Net operating loss carryforwards $ 7,743 $ 6,552 Deferred charges -- 71 Provision for claims 104 104 Provision for obsolescence 139 139 Others 505 449 -------- -------- Total gross deferred tax asset 8,491 7,315 -------- -------- Less valuation allowance (8,431) (7,167) -------- -------- Net deferred tax asset 60 148 Deferred tax liability Installation costs 60 148 -------- -------- Total gross deferred tax liability (60) (148) -------- -------- Net deferred tax asset $ -- $ -- ======== ======== The Company has a limited operating history and has generated losses since its inception. The valuation allowance has been established in accordance with the requirements of SFAS No. 109, "Accounting for Income Taxes". As of December 31, 1998, the Company and subsidiaries have unexpirable accumulated tax losses of $23,464. F-92 TVA SUL PARANA S.A. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (in thousands of U.S. dollars) 7. 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:
Year Ended December 31, ---------------------------------- 1998 1997 1996 -------- -------- -------- Loss before income taxes and minority interest $ 10,158 $ 6,233 $ 3,370 Statutory income tax rate 33.00% 33.00% 33.00% -------- -------- -------- 3,352 2,057 1,112 (Decrease) Increase in the income tax rate -- -- 76 Deferred charges (372) (341) (198) Losses of tax carryforward on incorporated companies (1,273) -- -- Unallowable amortization 62 110 486 Others (529) 269 317 -------- -------- -------- Consolidated income tax benefit for the period 1,240 2,095 1,793 Increase in valuation allowance (1,264) (2,095) (1,949) -------- -------- -------- $ (24) $ -- $ (156) ======== ======== ========
Income tax payable represents amounts owed by subsidiaries calculated on a unitary basis. F-93 TVA SUL PARANA S.A. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (in thousands of U.S. dollars) 8. Property, plant and equipment, net As of December 31, 1998 and 1997, property, plant and equipment were comprised of: Annual Depreciation December 31, Rate --------------------- % 1998 1997 --------- -------- Machinery and equipment 10 $ 4,089 $ 2,858 Converters 10 11,919 9,393 Leasehold improvements 25 138 106 Furniture and fixtures 10 491 365 Premises 10 696 657 Vehicles 20 589 638 Software 20 227 197 Tools 10 73 70 Reception equipment 20 15,278 13,246 Cable plant 10 10,501 5,943 Building 4 3,784 3,783 --------- -------- 47,785 37,256 Telephone line use rights 377 341 Fixed assets in transit 4,846 5,686 Accumulated depreciation (11,393) (5,372) --------- -------- $ 41,615 $ 37,911 ========= ======== 9. Concessions, net As of December 31, 1998 and 1997, concessions were comprised of: December 31, --------------------- 1998 1997 -------- -------- CCS - Camboriu Cable System Telecomunicacoes Ltda. $ 841 $ 841 TVA Sul Parana Ltda. (Stations in south of Brazil) 7,805 7,805 Accumulated amortization (2,034) (1,169) -------- -------- $ 6,612 $ 7,477 ======== ======== F-94 TVA SUL PARANA S.A. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (in thousands of U.S. dollars) 10. Loans As of December 31, 1998, loans were comprised of: Short-term Long-term ---------- ---------- Loans $ 5,791 -- ---------- ---------- $ 2,719 1,640 ========== ========== Loans as of December 31, 1998 represent the refinancing of certain suppliers' payables. They bear interest at rates varying from 8.26% to 9.29% per year. 11. Loan guarantees In November 1996, Tevecap S.A., issued $250,000 12-5/8% Senior Notes to institutional buyers in a private placement. The Notes, which mature in November 2004, were subsequently registered with the Securities and Exchange Commission in May 1997. These Notes are jointly and severally, irrevocably and fully unconditionally guaranteed, on a senior basis, by Tevecap's direct and indirect subsidiaries, including the Company. F-95 TVA SUL PARANA S.A. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (in thousands of U.S. dollars) 12. Paid-in capital Paid-in capital as of December 31, 1998 and 1997 was comprised of: 1998 1997 ------------------------ ------------------------ US$ Shares US$ Shares ------------------------ ------------------------ Abril S.A $ 6,190 2,456,150 $ 6,190 6,919,869 TVA Distribuidora S.A 38,023 15,087,776 38,023 42,507,763 ----------- ----------- ----------- ----------- $ 44,213 17,543,926 $ 44,213 49,427,632 =========== =========== =========== =========== 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. 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. F-96 TVA SUL PARANA S.A. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (in thousands of U.S. dollars) 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 $18 for the year ended December 31, 1998 ($2 in 1997). 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 1998, contributions made by the Company to the Health Care Plan and certain affiliates companies to Associacao Abril de Beneficios amounted to $212 ($115 for 1997). 16. Supplementary information - valuation and qualifying accounts and reserves
Deferred Taxation Provision for Provision Valuation Doubtful for Allowance Accounts Claims ------------- ------------- --------------- Balance as of December 31, 1995 $ 3,123 $ -- $ -- Additions charged to expense 1,949 386 -- ------------- ------------- --------------- Balance as of December 31, 1996 $ 5.072 $ 386 $ -- Additions charged to expense 2,095 1,101 323 ------------- ------------- --------------- Balance as of December 31, 1997 $ 7,167 $ 1,487 $ 323 Additions charged to expense 1,264 202 (72) ------------- ------------- --------------- Balance as of December 31, 1998 $ 8,431 $ 1,689 $ 251 ============= ============= ===============
F-97 TVA SUL PARANA S.A. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (in thousands of U.S. dollars) 17. Working capital deficiency The Company's financial statements for the year ended December 31, 1998 were prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities and commitments in the normal course of business. The Company incurred net losses of $10,285 for the period ended December 31, 1998. In addition, as described in Note 1, the Company has significant dependency on TVA Group operations. The Company is endeavoring to reverse its pattern of losses and effectively meet its liquidity needs through increasing the revenue base and other means. In the event that these steps prove to be inadequate to maintain the Company's operating cash flow, the Company's principal shareholder, TEVECAP, intends to maintain the Company as a going concern. TEVECAP's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis. The management plans of TEVECAP are fully disclosed in its financial statements. 18. 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 March 1998, the AICPA issued Statement of position 98-1 (SOP 98-1), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". SOP 98-1 requires capitalization of certain direct costs and interest costs after preliminary development efforts have been made. SOP 98-1 is effective for fiscal year beginning after December 31, 1998. At this time, management is considering the impact of this pronouncement, but does not believe it will have a material effect on the Company's consolidated financial statements. F-98 TVA SUL PARANA S.A. AND SUBSIDIARY Notes to Consolidated Financial Statements, Continued (in thousands of U.S. dollars) 19. Subsequent events - Change in the Central Bank of Brazil's Exchange Policy In mid-January 1999, the Central Bank of Brazil changed its exchange policy and extinguished the so-called exchange band, through which it managed the margin of the fluctuation of the real in relation to the U.S. dollar, allowing the market to freely negotiate the exchange rate. The real devalued from R$1,208 per US$ on December 31, 1998 to R$ 1,9934 per US$ on March 5, 1999. A large portion of the Company's operating expenses, principally programming, is denominated in U.S. dollars. The Company is currently negotiating with its suppliers of programming. In addition, the Company has net U.S. dollar denominated liabilities of US$5,719 at December 31, 1998. F-99 CCS - CAMBORIU SYSTEM TELECOMUNICACOES LTDA. REPORT ON FINANCIAL STATEMENTS as of December 31, 1998 and 1997 and for each of the two years in the period ended December 31, 1998 and the period from inception, May 30, 1996 to December 31, 1996 F-100 CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. INDEX TO FINANCIAL STATEMENTS Contents Page Report of Independent Accountants F-102 Balance Sheets as of December 31, 1998 and 1997 F-103 Statements of Operations for each of the two years in the period ended December 31, 1998 and the period from inception, May 30, 1996 to December 31, 1996 F-105 Statements of Changes in Shareholders' Equity for each of the two years in the period ended December 31, 1998 and the period from inception, May 30, 1996 to December 31, 1996. F-106 Statements of Cash Flows for each of the two years in the period ended December 31, 1998 and the period from inception, May 30, 1996 to December 31, 1996 F-107 Notes to Financial Statements F-108 F-101 ARTHUR ANDERSEN S/C Report of Independent Accountants To the Shareholders and Directors of CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. We have audited the accompanying balance sheet of CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. (the "Company") as of December 31, 1998 and 1997, and the related statements of operations, changes in shareholders' equity and cash flows for each of the two years in the period ended December 31, 1998 and the period from inception, May 30, 1996 to December 31, 1996, all expressed in United States dollars. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. as of December 31, 1998 and 1997, and the related statements of its operations, changes in shareholders' equity and cash flows for each of the two years in the period ended December 31, 1998 and the period from inception, May 30, 1996 to December 31, 1996, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered recurring losses and has negative net working capital that raise substantial doubt about its ability to continue as a going concern. Management's actions in regard to these matters are discussed in note 12. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Arthur Andersen S/C Sao Paulo, Brazil March 5, 1999 F-102 CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. Notes to Financial Statements (in thousands of U.S. dollars) Balance Sheets as of December 31, 1998 and 1997 (in thousands of U.S. dollars) December 31, ------------------- 1998 1997 ------ ------ ASSETS Current assets Cash on hand and in banks $ 59 $ 57 Accounts receivable, net 108 140 Inventories 129 366 Recoverable Taxes 47 40 Accounts receivable from related parties 16 4 Other accounts receivable 16 2 ------ ------ Total current assets 375 609 ------ ------ Property, plant and equipment, net 4,550 4,681 ------ ------ Total assets $4,925 $5,290 ====== ====== Continued F-103 CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. Notes to Financial Statements (in thousands of U.S. dollars) Balance Sheets as of December 31, 1998 and 1997 (in thousands of U.S. dollars) December 31, ------------------ 1998 1997 ------- ------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Loans $ -- $ 116 Film Suppliers 109 -- Others suppliers 77 47 Taxes payable other than income taxes 92 90 Accrued payroll and related liabilities 46 39 Income taxes 24 -- Accounts payable to related companies 42 91 Others accounts payable 35 56 ------- ------- Total current liabilities 425 439 ------- ------- Long-term liabilities Loans from related companies 1,099 1,701 Provision from claims -- 4 ------- ------- Total long-term liabilities 1,099 1,705 ------- ------- Shareholders' equity Paid-in capital 4,012 4,012 Accumulated deficit (611) (866) ------- ------- Total shareholders' equity 3,401 3,146 ------- ------- Total liabilities and shareholders' equity $ 4,925 $ 5,290 ======= ======= Continued F-104 CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. Notes to Financial Statements (in thousands of U.S. dollars) Statements of Operations for the years ended December 31, 1998 and 1997 and the period from inception, May 30, 1996 to December 31, 1996 (in thousands of U.S. dollars)
Year ended December 31, --------------------------------- 1998 1997 1996 ------- ------- ------- Gross revenues Monthly subscriptions $ 2,454 $ 2,522 $ 943 Installation 90 145 -- Other 51 106 30 Taxes on revenue (71) (88) (26) ------- ------- ------- Net revenue 2,524 2,685 947 ------- ------- ------- Direct operating expenses Payroll and benefits 105 243 120 Programming 740 920 286 Other costs 178 459 215 ------- ------- ------- 1,023 1,622 621 ------- ------- ------- Selling, general and administrative expenses Payroll and benefits 286 249 123 Advertising and promotion 2 82 23 Rent 91 -- 6 Other administrative expenses 394 268 111 ------- ------- ------- 773 599 263 ------- ------- ------- Depreciation 338 264 99 ------- ------- ------- Operating income (loss) 390 200 (36) ------- ------- ------- Interest income 50 85 12 Interest expenses (242) (355) (34) Translation gain (loss) 23 10 (2) Other nonoperating (expense) income, net 58 (68) -- ------- ------- ------- Income (loss) before income taxes 279 (128) (60) ------- ------- ------- Income taxes (24) -- (34) ------- ------- ------- Net income (Ioss) $ 255 $ (128) $ (94) ======= ======= ======= Net income (loss) per share 0.05 (0.03) (0.02)
Continued F-105 CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. Notes to Financial Statements (in thousands of U.S. dollars) Statements of Changes in Shareholders' Equity for the years ended December 31, 1998 and 1997 and the period from inception, May 30, 1996 to December 31, 1996 (in thousands of U.S. dollars) Paid-in Accumulated Capital Deficit Total ------- ------- ------- Balance as of May 30, 1996 $ 4,012 $ (644) $ 3,368 Net loss for the period -- (94) (94) ------- ------- ------- Balance as of December 31, 1996 4,012 (738) 3,274 ------- ------- ------- Net loss for the period -- (128) (128) ------- ------- ------- Balance as of December 31, 1997 4,012 (866) 3,146 ------- ------- ------- Net income for the period -- 255 255 ------- ------- ------- Balance as of December 31, 1998 $ 4,012 $ (611) $ 3,401 ======= ======= ======= Continued F-106 CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. Notes to Financial Statements (in thousands of U.S. dollars) Statements of Cash Flows for the years ended December 31, 1998 and 1997 and the period from inception, May 30, 1996 to December 31, 1996 (in thousands of U.S. dollars)
Year Ended December 31, ------------------------------------------- 1998 1997 1996 ------- ------- ------- Cash flows from operating activities: Net income (loss) $ 255 $ (128) $ (94) Adjustments to reconcile net loss to net cash Provided by operating activities: Depreciation 338 264 99 Provision for doubtful accounts (278) 342 -- Provision for claims (4) 4 -- Accounts receivable 310 (479) (3) Other accounts receivable including recoverable taxes and accounts receivable from related parties (33) 8 (49) Inventories 237 541 (907) Suppliers 139 (373) 388 Taxes payable other than income taxes 2 56 11 Income Taxes 24 -- -- Accrued payroll and related liabilities 7 28 (12) Other accounts payable (70) 85 -- ------- ------- ------- Net cash provided by operating activities 927 348 (567) ------- ------- ------- Cash flows from investing activities: Purchase of fixed assets (207) (1,488) (53) ------- ------- ------- Net cash used in investing activities (207) (1,488) (53) ------- ------- ------- Cash flows from financing activities: Loans from banks (116) 116 -- Loans from related companies (602) 995 706 ------- ------- ------- Net cash provided by financing activities (718) 1,111 706 ------- ------- ------- Net increase (decrease) in cash and cash equivalents 2 (29) 86 Cash and cash equivalents at beginning of the period 57 86 -- ------- ------- ------- Cash on hand and in banks at end of the period $ 59 $ 57 $ 86 ======= ======= ======= Suplemental cash disclosure: Cash paid for interest -- -- -- ======= ======= ======= Suplemental non-cash financing activities: Accrued interest on related company loans refinanced As principal -- -- -- ======= ======= =======
Continued F-107 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. Continued F-108 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$1.2087 to US$1 in effect on December 31, 1998, and R$1.1164 to US$1 in effect on December 31, 1997. 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, 1998 and 1997 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. Continued F-109 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 is considered to approximate their respective carrying value due to their short-term nature. o The fair value of loans from related companies approximates their respective carrying values as interest on these loans is at market rates. 2.6. Accounts receivable A provision for doubtful accounts was established on the basis of an analysis of the accounts receivable, in light of the risks involved, in an amount sufficient to cover any losses incurred in realization of credits. 2.7. Inventories Inventories consist of materials and supplies used to provide service to new customers, and to ensure continuity of service to existing customers. Inventories are stated at the lower of cost or market. Cost is determined principally under the average cost method. 2.8. Property, plant and equipment Property, plant and equipment are stated at cost and depreciated using the straight-line method, over the remaining useful lives, as described in Note 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. Continued F-110 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. Subscription revenues are recognized as earned on an accrual basis. 3. Accounts receivable, net As of December 31, 1998 and 1997, accounts receivable were comprised of: December 31, ------------------- 1998 1997 ----- ----- Subscriptions $ 116 $ 474 Installation fees 23 8 Advertising 33 -- Provision for doubtful accounts (64) (342) ----- ----- $ 108 $ 140 ===== ===== 4. Related party transactions The following tables summarize the transactions between the Company and related parties as of December 31, 1998 and 1997: December 31, -------------------- 1998 1997 ------ ------ TVA Sistema de Televisao S.A Accounts payable $ $ 56 Accounts receivable 12 TVA Sul Parana Ltda Accounts payable $ 42 $ 35 Accounts receivable 4 4 Loans payable 1,099 1,701 Continued F-111 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, 1998 and 1997 are as follows: December 31, ---------------- 1998 1997 ----- ----- Deferred tax assets: Net operating loss carryforwards $ 92 $ 150 Others (37) 60 ----- ----- Total gross deferred tax asset 55 210 ----- ----- Less valuation allowance (55) (210) ----- ----- Net deferred tax asset -- -- ===== ===== The Company has a limited operating history and has generated losses since its inception. The valuation allowance has been established in accordance with the requirements of SFAS No. 109, "Accounting for Income Taxes". The income tax expense was different from the amount computed using the Brazilian statutory income tax for the reasons set forth in the following table:
Year Ended December 31, ------------------------------- 1998 1997 1996 ------- ------- ------- Income (loss) before income taxes and minority interest $ 279 $ (128) $ (60) Statutory income tax rate 33.00% 33.00% 33.00% ------- ------- ------- 92 (42) (20) Deferred charges 11 15 -- Others 76 26 54 ------- ------- ------- Consolidated income tax provision (benefit) for the period 179 (1) 34 Increase (decrease) in valuation allowance (155) 1 -- ------- ------- ------- $ 24 $ -- $ 34 ======= ======= =======
Continued F-112 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, 1998 and 1997, property, plant and equipment were comprised of: Annual Depreciation December 31, Rate -------------------- % 1998 1997 ------- ------- Machinery and equipment 10 $ 294 $ 248 Building 25 3,447 3,447 Furniture and fixtures 10 83 79 Vehicles 20 15 15 Software 20 8 8 Tools 10 2 2 Reception equipment 20 443 278 Cable plant 10 937 936 ------- ------- 5,229 5,013 Telephone line use rights 4 4 Accumulated depreciation (689) (351) Fixed assets in transit 6 15 ------- ------- $ 4,550 $ 4,681 ======= ======= 7. Paid-in capital Paid-in capital as of December 31, 1998 and 1997 was comprised of:
1998 1997 ------------------------- ------------------------- US$ Shares US$ Shares ---------- ---------- ---------- ---------- Construtora ENE ESSE Ltda $ 1,605 1,940,000 $ 1,605 1,940,000 TVA Sul Participacoes S.A -- -- 2,407 2,910,000 TVA Sul Parana S.A 2,407 2,910,000 -- -- ---------- ---------- ---------- ---------- $ 4,012 4,850,000 $ 4,012 4,850,000 ========== ========== ========== ==========
Paid-in capital represents registered common shares without par value. Continued F-113 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 1998, contributions made by the Company to the Health Care Plan amounted to $21 ($18 in 1997). Continued F-114 CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. Notes to Financial Statements, Continued (in thousands of U.S. dollars) 11. Supplementary information - valuation and qualifying accounts and reserves Deferred Provision Taxation for Provision Valuation Doubtful For Allowance Accounts Claims ---------- ---------- ---------- Balance as of May 30, 1996 $ -- $ -- $ -- Additions charged to expense 209 ---------- ---------- ---------- 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 $ -- ========== ========== ========== 12. Working capital deficiency The Company's financial statements for the year ended December 31, 1998 were prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities and commitments in the normal course of business. The Company has negative working capital as of December 31, 1998. In addition as described in Note 1, the Company has significant dependency on TVA Group operations. The Company is endeavoring to reverse its pattern of losses and effectively meet its liquidity needs through increasing the revenue base and other means. In the event that these steps prove to be inadequate to maintain the Company's operating cash flow, the Company's principal shareholder, TEVECAP, intends to maintain the Company as a going concern. TEVECAP's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis. The management plans of TEVECAP are fully disclosed in its financial statements. Continued F-115 CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. Notes to Financial Statements, Concluded (in thousands of U.S. dollars) 13. 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 March 1998, the AICPA issued Statement of position 98-1 (SOP 98-1), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". SOP 98-1 requires capitalization of certain direct costs and interest costs after preliminary development efforts have been made. SOP 98-1 is effective for fiscal year beginning after December 15, 1998. At this time, management is considering the impact of this pronouncement, but does not believe it will have a material effect on the Company's consolidated financial statements. 14. Subsequent events In mid-January 1999, the Central Bank of Brazil changed its exchange policy and extinguished the so-called exchange band, through which it managed the margin of the fluctuation of the real in relation to the U.S. dollar, allowing the market to freely negotiate the exchange rate. The real devalued from R$1,208 per US$ on December 31, 1998 to R$ 1,9934 per US$ on March 5, 1999. A large portion of the Company's operating expenses, principally programming, is denominated in U.S. dollars. The Company is currently negotiating with its suppliers of programming. Concluded F-116
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