-----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, GIG+NbKcD78QTuUKFy+ssYReiyzHfTMOzAO0eQN++s5kQkhxzVvpZbofoiJzzcEr ef+95CfWgonLQJHDkvTklw== 0000891554-98-000724.txt : 19980616 0000891554-98-000724.hdr.sgml : 19980616 ACCESSION NUMBER: 0000891554-98-000724 CONFORMED SUBMISSION TYPE: 20-F/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980615 SROS: NONE 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/A SEC ACT: SEC FILE NUMBER: 333-22267 FILM NUMBER: 98647857 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/A SEC ACT: SEC FILE NUMBER: 333-22267-01 FILM NUMBER: 98647858 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/A SEC ACT: SEC FILE NUMBER: 333-22267-02 FILM NUMBER: 98647859 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/A SEC ACT: SEC FILE NUMBER: 333-22267-03 FILM NUMBER: 98647860 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 SUL PARTICIPACOES S A CENTRAL INDEX KEY: 0001034034 STANDARD INDUSTRIAL CLASSIFICATION: [] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F/A SEC ACT: SEC FILE NUMBER: 333-22267-04 FILM NUMBER: 98647861 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/A SEC ACT: SEC FILE NUMBER: 333-22267-05 FILM NUMBER: 98647862 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/A SEC ACT: SEC FILE NUMBER: 333-22267-06 FILM NUMBER: 98647863 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/A SEC ACT: SEC FILE NUMBER: 333-22267-08 FILM NUMBER: 98647864 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 SUL FOZ DO IGUACU LTD CENTRAL INDEX KEY: 0001034040 STANDARD INDUSTRIAL CLASSIFICATION: [] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F/A SEC ACT: SEC FILE NUMBER: 333-33367-10 FILM NUMBER: 98647865 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 SOUTH SANTA CATARINA LTD CENTRAL INDEX KEY: 0001037386 STANDARD INDUSTRIAL CLASSIFICATION: [] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F/A SEC ACT: SEC FILE NUMBER: 333-22267-12 FILM NUMBER: 98647866 BUSINESS ADDRESS: STREET 1: RODOVIA SC 401 STREET 2: NO 867 CITY: FLORIANOPOLIS BUSINESS PHONE: 0115511821 MAIL ADDRESS: STREET 1: RUA DO ROCIO 313 CITY: SAO PAULO SP FILER: COMPANY DATA: COMPANY CONFORMED NAME: TVA DISTRIBUIDORA SA CENTRAL INDEX KEY: 0001061171 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: 20-F/A SEC ACT: SEC FILE NUMBER: 333-22267-13 FILM NUMBER: 98647867 BUSINESS ADDRESS: STREET 1: RUA DO ROCCIO, 313 11TH FL STREET 2: CEP 04552-904 CITY: SAO PAULO STATE: D5 BUSINESS PHONE: 01155118218550 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/A SEC ACT: SEC FILE NUMBER: 333-22267-14 FILM NUMBER: 98647868 BUSINESS ADDRESS: STREET 1: RUA DO ROCCIO, 313 11TH FL STREET 2: CEP 04552-904 CITY: SAO PAULO STATE: D5 BUSINESS PHONE: 01155118218550 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/A SEC ACT: SEC FILE NUMBER: 333-22267-15 FILM NUMBER: 98647869 BUSINESS ADDRESS: STREET 1: RUA DO ROCCIO, 313 11TH FL STREET 2: CEP 04552-904 CITY: SAO PAULO STATE: D5 BUSINESS PHONE: 01155118218550 MAIL ADDRESS: STREET 1: RUA DO ROCCIO, 313 11TH FL STREET 2: CEP 04552-904 CITY: SAO PAULO STATE: D5 20-F/A 1 FORM 20-F/A ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------------ Form 20-F/A ------------------------------------ [ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number _______________ ------------------------------------ Tevecap S.A. (Exact name of Registrant as specified in its charter) TEVECAP INC. THE FEDERATIVE REPUBLIC OF BRAZIL (Translation of Registrant's (Jurisdiction of incorporation name into English) or organization) Rua do Rocio, 313 Sao Paulo, SP Brazil 04552-904 (Telephone: 55-11-821-8550) (Address and telephone number of principal executive offices) ------------------------------------ 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 S.A., TVA Sul Participacoes S.A., Comercial Cabo TV Sao Paulo Ltda., TVA Sul Parana Ltda., CCS Camboriu Cable System de Telecomunicacoes Ltda., TVA Sul Santa Catarina Ltda., TVA Sul Foz do Iguacu Ltda, TVA Distribuidora S.A., TVA Programadora Ltda. and TVA Satelite Ltda. Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report: 196,712,855 Common Shares Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES _X_ NO ___ Indicate by check mark which financial statements item the registrant has elected to follow: ITEM 17 ____ ITEM 18 __X__ ================================================================================ TABLE OF CONTENTS PART I ITEM 1. DESCRIPTION OF BUSINESS..........................................1 ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................................37 GLOSSARY.....................................................................A-1 i PART I ITEM 1. DESCRIPTION OF BUSINESS General TVA is a leading pay television operator in Brazil and is one of the country's largest pay television programming distributors. In 1989, TVA was the first to provide pay television services in Brazil and, in July 1996, the Company launched DIRECTV, Brazil's first digital Ku-Band service. With approximately 564,000 subscribers, TVA offers pay television services utilizing four distribution technologies: MMDS, Cable, digital Ku-Band and digital C-Band. TVA believes that its ability to strategically deploy alternative technologies provides it with significant competitive advantages, including the ability to rapidly enter new markets, maximize penetration of existing markets and deliver service in the most cost effective manner. Additionally, TVA has interests in HBO Brasil Partners and ESPN Brasil Ltda., two programming joint ventures (the "Programming Ventures"). Through owned, affiliated and independent pay television operators, TVA programming reaches approximately 1.4 million pay television households. TVA is a majority owned subsidiary of Abril, S.A. ("Abril"), Latin America's leading magazine publishing, printing and distribution company. TVA's other shareholders are Falcon International Communications (Bermuda) L.P. ("Falcon International"), The Hearst Corporation ("Hearst"), ABC, Inc. ("ABC") and Chase Manhattan International Finance Ltd. ("CMIF"). The Company conducts its pay television operations through three owned operating systems (the "Owned Systems"): TVA Sistema, TVA Sul and Galaxy Brasil. Through the MMDS and Cable systems of TVA Sistema and TVA Sul, the Company serves six cities with a combined population of approximately 18 million, including three of the seven largest cities in Brazil: Sao Paulo (population of 10.2 million), Rio de Janeiro (population of 5.7 million) and Curitiba (population of 1.5 million). The Company also holds minority interests in Canbras TVA and TV Filme (the "Operating Ventures"), which together provide pay television services to an additional seven cities with a total population of 6.5 million. In addition, the Company sells programming to, and receives a per subscriber fee from, unaffiliated pay television operators ("Independent Operators"). The Company, through Galaxy Brasil, is Brazil's exclusive provider of the premium programming service, DIRECTV, Brazil's first digital direct broadcast satellite Ku-Band service. Galaxy Brasil receives programming, scheduling and related services for DIRECTV from Galaxy Latin America ("GLA"), in which TVA holds a 10.0% equity interest. The other owners of GLA are a unit of Hughes Electronics, a member of the Cisneros Group and a subsidiary of Grupo MVS. Through local operating companies such as Galaxy Brasil, GLA plans to provide DIRECTV service throughout much of Latin America and the Caribbean. The Company, through TVA Sistema, also currently provides Brazil's only digital C-Band television service (together with Galaxy Brasil, the "DBS Systems"). The DBS Systems enable the Company to deliver a greater number of channels than any other television operator in Brazil and provide TVA with access to substantially all of Brazil's 36.4 million TV Homes. In 1998 the Company expects to complete a corporate reorganization pursuant to which three recently-created wholly-owned subsidiaries, TVA Distribuidora S.A., TVA Programadora Ltda. and TVA Satelite Ltda., will serve as holding companies for the Company's interests in its Cable and MMDS operations, the Programming Ventures and the DBS systems, respectively. This corporate reorganization is not expected to result in any change in the Company's beneficial interests in its current subsidiaries and affiliates. 1 Programming Distribution and Markets The following table sets forth information regarding the markets in which TVA operates systems and distributes programming:
Average Revenue Pay per Month Television Service Launch TV Class ABC per Programming Date Homes(a) TV Homes(a) Subscribers Subscriber Channels ---- -------- ----------- ----------- ---------- -------- Owned Systems MMDS TVA Sistema Sao Paulo .................. September 1991 4,400,650 1,917,608 117,304 $40.03 27 Rio de Janeiro ............. March 1992 2,659,472 964,804 99,874 39.63 26 TVA Sul Curitiba ................... March 1992 568,048 236,560 23,735 35.26 15 Cable(b) TVA Sistema Sao Paulo .................. October 1994 4,400,650 1,917,608 58,541 37.51 53 TVA Sul Curitiba ................... January 1995 568,048 263,560 15,169 35.57 45 Camboriu ................... June 1996 37,618 22,686 6,144 30.88 49 Foz do Iguacu .............. June 1996 46,669 29,151 8,541 24.96 50 Florianopolis .............. September 1996 155,382 53,001 5,866 33.25 48 --------- Total MMDS and Cable Subscribers ...................... -- -- -- 335,174 -- -- --------- DBS TVA Sistema/Galaxy Brasil(c) .......................... March 1995 36,400,000 15,238,518 211,209 44.05 76 (d) Subscribers Awaiting Installation ..................... -- -- -- 17,963 -- -- --------- Total Subscribers-Owned Systems .......................... -- -- -- 564,346 -- -- ========= Households Receiving TVA Programming Owned Systems ...................... -- -- -- 564,346 -- -- --------- Operating Ventures MMDS TV Filme, Inc. Brasilia ................... July 1993 424,542 273,135 63,047 $47.78 24 Goiania .................... December 1994 319,434 140,498 29,875 43.95 24 Belem ...................... December 1994 193,106 123,820 18,322 46.57 24 Cable Canbras TVA Four cities(e) ............. April 1996 222,358 152,773 30,904 -- 45 --------- Total-Operating Ventures ........... -- -- -- 142,148 -- -- ========= Independent Operators (53 Independent Operators) ....................... -- -- -- 669,543 -- -- --------- Total .............................. -- -- -- 1,376,037 -- -- =========
- -------------------- (a) This data is based on information provided by Pay TV Survey and IBGE. (b) The Company's Cable Systems in Sao Paulo, Curitiba, Camboriu, Foz do Iguacu and Florianopolis had approximately 457,313, 115,302, 18,055, 19,900 and 29,822 Homes Passed, respectively, as of December 31, 1997. (c) This data reflects the Company's digital Ku-Band and digital C-Band operations. TV Homes and Class ABC TV Homes information is national information for all of Brazil. (d) 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 36.4 million TV Homes which, as of December 31, 1997, watched on average approximately 4.0 hours of television per day, figure comparable to that of the United States. Approximately 7.8 million television sets and 2.4 million VCR units were sold in Brazil during 1995. The pay television industry in Brazil began in 1989 with the commencement by the Company of UHF service in Sao Paulo. As of December 31, 1997, there were an estimated 2.6 million pay television subscribers, representing approximately 7.0% of Brazilian TV Homes. By comparison, as of December 31, 1997, 53.5% of TV Homes in Argentina, 14.1% of TV Homes in Mexico and 72.5% of TV Homes in the United States subscribed to pay television. Management believes that the number of pay television subscribers in Brazil will continue to grow as pay television reaches more households both through the expansion of existing and new MMDS and Cable systems and through development of nationwide DBS systems. The Ministry of Communications estimates that Brazil will have 16.5 million pay television subscribers by 2003.
United Brazil(a) Argentina(b) Mexico(b) States(c) --------- ------------ --------- --------- (Numbers in Thousands, except percentages) TV Homes ............................................. 36,400 9,500 15,900 95,950 ------ ------ ------ ------ Cable Subscribers ............................ 1,758 4,999 1,634 64,375 MMDS Subscribers ............................. 420 78 454 1,120 C-Band Subscribers ........................... 165 -- -- 4,135(d) Ku-Band Subscribers .......................... 227 35 150 4,135(d) ------ ------ ------ ------ Total Subscribers .................................... 2,571 5,112 2,238 69,630 ====== ====== ====== ====== Total Subscribers/TV Homes (%) ....................... 7.0% 53.5% 14.1% 72.5%
- -------------------- (a) Pay TV Survey (March 1998). (b) Kagan World Media, Inc. (1997). (c) National Cable Television Association (1996). (d) The number represents C-Band and Ku-Band subscribers collectively. Competitive Advantages Management believes that the Company has the following competitive advantages: Superior Quality Programming Lineup. TVA's programming line-up includes exclusive rights to ESPN Brasil in the Company's major markets, with coverage of many of Brazil's most important soccer championships, including the Brazilian Cup and the Sao Paulo and Rio de Janeiro State Championships. The Company exclusively offers Eurochannel and Bravo Brasil and is also the only Cable and MMDS operator offering HBO, E! Entertainment Television, Mundo and CBS Telenoticias in its served markets. Management believes that as the pay television industry grows, programming will become the critical factor driving consumer selection of a pay television provider, and that with TVA's relationships with strong international partners and its exclusive soccer coverage, TVA will continue to offer superior quality programming. Strategic Deployment of Alternative Distribution Technologies. The Company utilizes four distribution technologies: MMDS, Cable, digital Ku-Band and digital C-Band. The availability of multiple distribution technologies enables the Company to capitalize on the population and income characteristics, topography and competitive dynamics of each of its targeted markets. The Company has the ability to penetrate new markets quickly 3 and efficiently and to offer tiered programming at low cost with MMDS. The Company is expanding its Cable systems, where warranted by economic and competitive conditions, to build its subscriber base and to prepare for future opportunities in interactive services and telecommunications. Additionally, management believes the Company can rapidly penetrate virtually any market through the continued deployment of its DBS Systems. DBS Systems: Nationwide Coverage and Digital Service. Through its DBS Systems, TVA is capable of offering programming to nearly all of Brazil's 36.4 million TV Homes, including those households in markets where Cable or MMDS systems are either not developed or not economically viable. Through its DIRECTV service, TVA is the first provider of Ku-Band pay television services in Brazil and expects to enroll as subscribers a significant share of those who are interested in broader, digital quality programming and pay-per-view services. Through its digital C-Band system, the Company provides 26 channels of programming (including nine SAP channels) and is capable of providing up to 38 channels of programming (including SAP channels). The Company's only significant competitor in C-Band pay television service provides six analog channels of programming in addition to off-air channels. The Company currently targets its C-Band service to the estimated 4.5 million parabolic C-Band antennae owners in Brazil, most of whom currently receive only the off-air channels. Modern Cable Infrastructure. The Company's Cable systems are constructed with, or are being upgraded to, either 750 MHz or 550 MHz bandwidth capacity, the latter of which is readily upgradeable to 750 MHz bandwidth capacity with only moderate investment. This Cable technology will enable the Company to provide data transmission and interactive services, including telecommunications, in the future. Management believes that the Company's major competitors for Cable service use narrower bandwidths over portions of their Cable systems and have installed certain types of Cable in households which currently may prevent them from providing telecommunications or high speed data delivery through these portions of their systems until substantial additional investments have been made for system reconstruction or upgrade. Strong Strategic Partners. The Company's strategic equity partners continue to offer valuable expertise. TVA benefits from Abril's extensive experience in the business of subscriptions and distribution and from the collective experience of Falcon International, Hearst and ABC with regard to pay television operations and from access to programming. Business Strategy TVA seeks to be Brazil's largest and most profitable pay television operator and programming distributor and intends to capitalize on the convergence and development of voice, video and telecommunications services. The Company intends to achieve these goals through the following strategies: Maximize Penetration in Existing Markets. The Company seeks to increase its penetration of existing markets by: (i) expanding the range of TVA's Cable systems by extending its fiber optic and coaxial cable network and by seeking pre-wiring arrangements with residential housing developers, (ii) improving the signal quality and coverage of TVA's MMDS systems by using signal repeater technology, (iii) maximizing penetration by offering tiered subscription options and developing programming packages to appeal to more households and (iv) expanding its penetration in ABC Class households through its scheduled nationwide rollout of DIRECTV service and the continued development of C-Band service. Maximize Customer Retention Through Superior Customer Service. In order to maximize customer retention, the Company aims to provide a consistently high level of customer service. The Company has developed or has acquired the right to use proprietary management information systems which, among other things, provide Company representatives immediate access to customer records and correspondence history. This enables TVA to provide high quality service to its clients while monitoring subscriber payment patterns. The Company's Churn rate, which reflects the ability of the Company to retain subscribers, averaged approximately 2.9% per month during the year ended December 31, 1997. The average monthly Churn rate for MMDS service in 1994 was 1.6%, in 1995 4 was 1.3%, in 1996 was 2.4% and in 1997 was 4.0%. The average monthly Churn rate for Cable service in 1994 was less than 1.0%, in 1995 was 1.1%, in 1996 (the year Cable service was initiated) was 0.8% and in 1997 was 2.1%. The average monthly Churn rate for C-Band service in 1994 was 5.3%, in 1995 was 0.1%, in 1996 was 2.0% and in 1997 was 2.1%. The average monthly Churn rate for Ku-Band service was 0.9% in 1997. Enhance TVA's Programming Package. In order to maintain and enhance its position as a provider of superior programming in Brazil, TVA is developing new programming through the Programming Ventures, as well as through Abril and other partners. TVA frequently evaluates the demographics of its subscribers and potential subscribers and seeks to provide programming most in demand. The Company also takes advantage of opportunities to enter into exclusive distribution agreements for popular television programming in Brazil. Management believes that its DIRECTV service, which includes both basic and premium channels, as well as pay-per-view movies and events from Brazil, other Latin American countries, Europe, Asia and the United States, further enhances TVA's programming offerings and positions the Company to be the provider of the widest selection of popular programming in Brazil. Enter New Markets. The Company intends to enter new markets by: (i) acquiring existing MMDS and Cable operations, (ii) continuing the nationwide rollout of DIRECTV service and (iii) investing in new operating ventures with other MMDS and Cable operators. Continue Network Enhancement. The Company is positioning itself to provide high speed data transmission, interactive and other telecommunications services over its systems and to take advantage of possible deregulation and the growing demand for these services in Brazil. The Company is expanding its Cable systems with fiber optic and coaxial cable capable of being upgraded to provide such enhanced services. In addition, the Company continues to explore the development of digital compression of MMDS signals. Through the implementation of the Company's strategy, the Company has been able to achieve rapid subscriber growth. The following chart sets forth information regarding (i) the number of subscribers to the Company's Owned Systems at December 31, 1994, 1995, 1996 and 1997, (ii) the number of new installations during the years ended December 31, 1994, 1995, 1996 and 1997, and (iii) the average installation fee for the year ended December 31, 1997. 5
Average Installation Fee for the Subscribers at New Installations Year End of Period (a) During Period Ended ------------------------------------- ------------------------------------- Dec. 31, 1994 1995 1996 1997 1994 1995 1996 1997 1997 ------- ------- ------- ------- ------- ------- ------- ------- ------- MMDS Sao Paulo ................ 72,425 121,969 126,797 117,304 34,372 75,332 61,235 67,132 $ 65.95 Rio de Janeiro ........... 28,234 51,664 79,928 99,874 13,855 31,733 48,928 55,707 167.64 Curitiba ................. 11,112 15,260 23,595 23,735 5,972 10,513 17,117 28,890 84.18 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total MMDS ....................... 111,771 188,893 230,320 240,913 54,199 117,578 127,280 151,729 -- ------- ------- ------- ------- ------- ------- ------- ------- ------- CABLE Sao Paulo ................ 1,007 13,885 21,352 58,541 482 6,546 6,907 27,307 $ 29.14 Curitiba ................. -- 1,244 10,377 15,169 -- 434 3,794 6,111 40.86 Foz do Iguacu ............ -- -- 7,157 6,144 -- -- 2,275 2,576 47.16 Camboriu ................. -- -- 5,209 8,541 -- -- 1,596 4,636 91.53 Florianopolis ............ -- -- 1,916 5,866 -- -- 1,966 5,514 10.51 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total Cable ...................... 1,007 15,129 46,011 94,261 482 6,980 16,538 46,144 -- ------- ------- ------- ------- ------- ------- ------- ------- ------- DBS C-Band/DIRECTV ................... 2,075 15,126 73,180 211,209 1,914 16,873 66,085 169,755 $481.74 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total Subscribers-Owned Systems ........................ 114,853 219,148 349,511 546,383 56,595 141,431 209,903 367,628 -- ======= ======= ======= ======= ======= ======= ======= ======= =======
- -------------------- (a) Excludes backlog, reconnected and disconnected subscribers. Ownership Tevecap is a majority owned subsidiary of Abril, the leading magazine publishing, printing and distribution company in Latin America. Abril publishes approximately 200 weekly, bi-weekly and monthly titles. During 1997, the combined monthly paid circulation of Abril and its affiliates averaged 190 million copies. TVA benefits from Abril's extensive experience in the business of subscriptions and distribution, advertising synergies, common research resources and financial analysis and support. Certain of Tevecap's other shareholders provide the Company with access to additional international programming and certain technical and financial expertise. As of December 31, 1997, the Company's shareholders had invested, in aggregate, approximately $288.0 million in the Company, and Tevecap's ownership was as follows: Abril, 56.5%; Falcon International, 14.2%; Hearst, 10.0%; ABC, 10.0%; and CMIF, 9.3%. Following a $100 million capital contribution by Abril in February 1998, Tevecap's current ownership is as follows: Abril, 62.2%; Falcon International, 12.3%; Hearst, 8.7%; ABC, 8.7%; and CMIF, 8.1%. Distribution Operating Systems TVA and the Operating Ventures distribute programming through four different technologies: MMDS, Cable, digital Ku-Band and digital C-Band. The availability of multiple distribution technologies enables the Company to exploit the population and income characteristics, topography and competitive dynamics of each of its markets. MMDS TVA's strategy of rapidly deploying an extensive MMDS network has allowed it to enter new markets quickly and develop broad geographic coverage which the Company may expand utilizing signal repeaters. TVA has developed Brazil's largest MMDS network, and with the Operating Ventures, serves the country's major metropolitan areas. MMDS systems are typically easier to deploy and require relatively little capital investment for construction and maintenance as compared to Cable systems. Programming is transmitted by signals through the 6 air from microwave transmitters to a small receiving antenna located at a subscriber's home or dwelling unit. At the subscriber's location, the microwave signals are converted to frequencies that can pass through a conventional coaxial cable into a decoder located near a television set. All of the Company's MMDS systems use addressable converters, which permit the Company to offer tiered pricing options that are expected to attract new customers, retain existing customers and reduce Churn. In accordance with Brazilian regulations, each MMDS license allows an MMDS operator to provide service to households in a circular area within a radius of up to 50 kilometers, depending on the technical capability of the operator. It is expected that expansion into such newly available territory would require minimal additional capital spending by the Company. However, tall buildings and other tall structures may block reception of an MMDS signal. See "--Regulatory Framework." MMDS is being used in other emerging pay television markets such as Venezuela and Hong Kong, and in Mexico, where Cable has a strong incumbent position. TVA owns five MMDS licenses and operates MMDS systems in Sao Paulo, Rio de Janeiro and Curitiba, which have an aggregate population of approximately 17.4 million. TVA serves 240,913 MMDS subscribers in these three cities. During the year ended December 31, 1997, TVA averaged approximately 900 net new MMDS subscribers per month. The MMDS systems of TVA offer between 15 and 27 channels of programming. TVA also holds interests in three MMDS licenses through TV Filme, an Operating Venture, which operates MMDS systems in Brasilia, Goiania and Belem and has 111,244 MMDS subscribers. See "--Regulatory Framework--MMDS Regulations." During the year ended December 31, 1997, the Operating Ventures averaged approximately 2,800 net new MMDS subscribers per month. Cable TVA has recently emphasized the strategic deployment of Cable service and currently operates Cable systems in Sao Paulo, Curitiba and three other cities. Cable service involves a broad band network employing radio frequency transmission through coaxial and/or fiber optic cable. Cable systems consist of four major parts: a headend, a distribution network, a subscriber network and a house terminal. The programming is collected from the headend, then processed and fed into the distribution path consisting of trunk and distribution cable, which consists of coaxial and/or fiber optic cables. The signal is then fed into a subscriber network that is either located in an apartment building or a subscriber's home. Most of the Company's systems are constructed with either 750 MHz or 550 MHz bandwidth capacity, the latter of which is readily upgradeable to 750 MHz bandwidth capacity. The Company's four newly acquired systems in Curitiba (2), Camboriu (1) and Foz do Iguacu (1) are being upgraded to 550 MHz bandwidth capacity. The Company's new system in Florianopolis is being constructed to 550 MHz bandwidth capacity. It is expected that this technology will enable the Company to provide interactive services, including telecommunications in the future. In addition, the Company's Cable systems generally use addressable converters, which allow the provision of pay-per-view services and enable TVA to upgrade, downgrade or disconnect a subscriber's service from the headend on short notice. TVA, through TVA Sistema and TVA Sul, owns six Cable licenses and operates Cable systems in Sao Paulo, Curitiba (where TVA originally owned three licenses that were later merged into one license), Camboriu, Florianopolis and Foz do Iguacu, which have an aggregate population of approximately 11.9 million and 94,261 subscribers. As of December 31, 1997, TVA had deployed approximately 2,500 kilometers of its Cable network, including 444 kilometers of fiber optic cable, including a 395 kilometer fiber optic loop in Sao Paulo and a 49 kilometer fiber optic network in Curitiba. The Company is also upgrading or constructing the three recently acquired Cable systems. As a result of this buildout, as of December 31, 1997, TVA Cable systems passed 457,313 homes in Sao Paulo, approximately 115,302 homes in Curitiba and a total of 640,392 homes throughout all of the Company's Cable systems. As of December 31, 1997, Canbras TVA, an Operating Venture, had an existing Cable network of 628 kilometers, with 186,237 Homes Passed and 30,904 subscribers. Canbras TVA is constructing Cable networks in ten cities in the greater Sao Paulo area with a combined population of over 2.8 million. By comparison, TVA's largest competitor in Sao Paulo for Cable service had, as of the same date, 1.0 million Homes 7 Passed. TVA and Canbras TVA currently offer between 45 and 53 analog channels of programming (including off-air channels) on their Cable systems, depending on the market, and have the capability of offering up to 78 analog channels. During the year ended December 31, 1997, TVA and Canbras TVA averaged approximately 4,000 and 1,900 net new Cable subscribers per month, respectively. DIRECTV In July 1996, TVA launched, on a limited basis, Brazil's DIRECTV service, Brazil's first Ku-Band service. A nationwide rollout of DIRECTV was launched in November 1996, at which time TVA initiated a publicity campaign supported by a nationwide network of trained installers. By comparison, DIRECTV, Inc., a unit of Hughes Electronics, started its DIRECTV service in the United States in June 1994 and had, as of December 31, 1997, approximately 3.6 million subscribers for this service. Galaxy Brasil receives programming from GLA, including programming which GLA purchases from TVA. Additionally, GLA provides scheduling and related services to Galaxy Brasil for use with DIRECTV. GLA distributes programming to Brazil through the transmission of an encoded signal via the Galaxy VIII-i (launched in December 1997 and replacing the Galaxy III-R satellite) satellite utilizing 32 transponders to a subscriber's 60 centimeter dish antenna which can be mounted outside a window or on a rooftop. The signal is then transmitted to an integrated receiver decoder in the subscriber's home. A single antenna may serve a single family dwelling or a multifamily dwelling, such as an apartment building, in which case each apartment needs to be equipped with a decoder. A unit of Hughes Electronics leases the Galaxy VIII-i satellite and provides the use of the satellite and related services to GLA, 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 76 channels of video programming (including 24 pay-per-view channels) and 33 channels of audio programming as of April 1, 1998. TVA owns and has made a substantial investment in a satellite uplink center for the Brazilian DIRECTV service in Tambore in greater Sao Paulo (the "Tambore Facility"). The Tambore Facility is used to uplink programming to the Galaxy VIII-i satellite. In August 1997, DIRECTV, after a significant reduction of operational costs and the consummation of the Galaxy Brasil Leasing Facility and certain financings under the SurFin Credit Facility, reduced its installation fee to $399 (as compared to an original installation price of $990), making the product more competitive compared with other technologies. This new price expanded the market of potential subscribers, as the monthly subscription cost became substantially similar to, and competitive with, that of other pay television operators in the same market. In early 1999, the decoders used by DIRECTV will be manufactured in Brazil, which will generate additional cost savings. Antennas used by DIRECTV are already being produced in Brazil at competitive prices. DIRECTV created a new regional structure in February 1998, with regional managers, supervisors and sales teams. New sales points have been set up at locations where distributors are located and which attract a large volume of customers, such as shopping centers and hypermarkets. In addition, the Company is installing multipoint distribution units in buildings in large cities, allowing residents in such buildings to share access to such units, thereby encouraging sales in such cities. 8 C-Band TVA has offered C-Band service since 1993, and is the only pay television operator to deliver a digital C-Band signal in Brazil. TVA's C-Band service consists of the transmission of a digital encoded signal via the Brasilsat satellite utilizing four transponders to a satellite antenna 1.1 meters in diameter located at a subscriber's home, where the signal passes through an integrated receiver decoder. A single antenna may serve a single family dwelling or a multifamily dwelling, such as an apartment building, in which case each apartment needs to be equipped with a decoder. The Brasilsat satellite was launched in July 1994 and is owned by Empresa Brasileira de Telecomunicacoes (Brazilian Telecommunications Company, or "Embratel"), the Brazilian Government-owned company authorized to provide satellite telecommunications services utilizing the Sistema Brasileiro de Telecomunicacoes por Satelite (Brazilian Satellite Telecommunications System, or "SBTS"). TVA utilizes the Brasilsat satellite pursuant to three satellite transponder leases that expire on May 30, 2002, November 20, 2003, and November 24, 2003, respectively. The orbital location of the Brasilsat satellite enables TVA to provide C-Band service throughout Brazil with little or no interference. However, tall buildings and other tall structures may block reception of C-Band programming. The Brasilsat satellite has an expected useful life of approximately 12 to 15 years from the date of launch. TVA's C-Band service provides the Company with national coverage via satellite transmission and a large preinstalled market. As of December 31, 1997, there were approximately 4.5 million parabolic C-Band antennae in use in Brazil, most of which receive only off-air channels. This installed base represents the Company's target market for its digital C-Band service and the Company expects to attract these viewers through marketing and promotional initiatives. TVA is able to deliver 38 channels of programming (including nine SAP channels) in addition to the off-air channels and currently delivers 26 channels (including nine SAP channels) as compared to the six channels in addition to the off-air channels offered by its only significant competitor for this service. As of December 31, 1997, TVA provided service to 68,309 C-Band subscribers throughout much of Brazil. During the year ended December 31, 1997, TVA averaged approximately 1,500 net new C-Band subscribers per month. Recent Acquisitions Since January 1996, TVA has purchased four existing Cable systems, two in Curitiba and one in each of two other cities in southern Brazil, and has purchased a license to operate a Cable system in a fourth city. As of the respective dates of their acquisitions, the two systems in Curitiba had a total of 4,515 subscribers, and the systems in the two other cities had a total of 8,298 subscribers. The four acquired systems had in the aggregate, as of December 31, 1996, Cable networks comprising approximately 482 kilometers. The Company is upgrading the operations of the four existing Cable systems and is constructing a cable system in the fourth city. The Owned Systems TVA Sistema and TVA Sul TVA Sistema and TVA Sul operate the Company's MMDS, Cable and C-Band businesses. TVA holds a 98.0% equity interest in TVA Sistema, and Robert Civita, a Brazilian national, holds the remaining 2.0% equity interest. The Company holds an 86.0% equity interest in TVA Sul, and Abril holds the remaining 14.0%. 9 GLA and Galaxy Brasil Pursuant to a Partnership Agreement, dated February 13, 1995, GLA was formed as a general partnership. As of April 11, 1997, GLA was converted into a Delaware limited liability company. Such conversion did not materially affect the governance of GLA or TVA's ownership interest in GLA. Under a Limited Liability Company Agreement, dated April 11, 1997 (the "GLA Agreement"), GLA is managed by a seven-member Executive Committee to which DIRECTV Latin America, Inc. ("DLA") can appoint four members and each of the other partners, including Tevecap, can appoint one member as long as such partner holds at least an eight percent equity interest in GLA. The GLA Agreement provides for local operating agreements between GLA and local operators throughout South America, Central America, Mexico and the Caribbean which will govern the relationship between GLA and such local operator. The GLA Agreement stipulates that the local operator in Brazil shall be Galaxy Brasil, 100.0% of the equity interest of which is currently owned by Tevecap, but up to 12.5% of which may be purchased by DTI and up to 12.5% of which may be purchased by Darlene Investments, a member of the Cisneros Group. Tevecap, in turn, has an option to purchase up to 15.0% of the equity interest of the local operator in Venezuela, all of which is currently owned by Darlene Investments. The current partners in GLA have also agreed to "seek and maintain" equity positions in other local operators. The Company has agreed to make capital contributions under the GLA Agreement of $33.5 million, of which $27.8 million had been contributed as of July 1, 1997. The GLA Agreement places restrictions, including first negotiation, approval and tag-along rights, on the transfer of capital stock or voting securities of each of the current partners in GLA and in certain circumstances their parent entities. In connection with the conversion of GLA into a limited liability company, GLA's uplink facility was transferred to California Broadcast Center, LLC, a Delaware limited liability company formed on April 11, 1997 and owned by two units of Hughes Electronics. Pursuant to a Local Operating Agreement (the "Local Operating Agreement") between GLA and Galaxy Brasil, dated July 29, 1996, GLA has agreed to provide to Galaxy Brasil the exclusive right and ability to supply the DIRECTV service in Brazil. In accordance with a formula based on the number of subscribers, Galaxy Brasil is obligated to pay a periodic royalty to GLA. In addition, TVA may not own or engage in any other Ku-Band service and GLA may not own or engage in any other pay television service in Brazil. GLA, upon the occurrence of certain events, has the right to terminate the Local Operating Agreement, or to terminate Galaxy Brasil's exclusive rights to distribute DIRECTV programming. Such events include breach of any material obligation of Galaxy Brasil to GLA and the failure of Galaxy Brasil to meet certain specified performance goals. The Operating Ventures The Operating Ventures also operate MMDS (TV Filme) or Cable (Canbras TVA) systems. TVA holds a 36.0% equity interest in each of Canbras TVA Cabo and TV Cabo Santa Branca (the "Canbras TVA Companies"). Canbras Participacoes Ltda., a Brazilian company ("Canbras-Par") holds the remaining interests in Canbras TVA Cabo and TV Cabo Santa Branca. Canbras-Par is an affiliate of Canbras Holdings Ltd. and Canbras Communications Corp., a publicly-traded Canadian company, which are affiliates of Bell Canada International, Inc., an affiliate of BCE Inc., Canada's largest telecommunications group. The Canbras Association Agreement provides for each of the Canbras TVA companies to be governed by a management committee of three members, one of which TVA has the right to designate. In addition, TVA agreed to supply to the Canbras TVA companies all programming regularly supplied to the Owned Systems at "most favored prices" and other terms at which programming is provided to the Owned Systems or to third parties in arm's-length transactions. TVA will continue to provide MMDS service, where possible, to customers in the Santo Andre and Sao Bernardo operating area of the Canbras TVA Companies until cable service is available in these areas. Canbras TVA Cabo and TV Cabo Santa Branca will compensate TVA for each subscriber that transfers from TVA's MMDS system to a Canbras TVA Cable system. The Company agreed to grant to Canbras-Par a "right of first refusal" to participate in Cable licenses that the Company may obtain, directly or indirectly, and Canbras-Par granted to the Company a similar "right of first refusal" to participate in Cable licenses acquired by Canbras-Par. The term of the Canbras Association Agreement is for so long as Canbras-Par or its assignee owns shares "in companies which have the objective of 10 engaging in the cable TV business." The Canbras Association Agreement does not specify the terms and conditions on which any co-investments in Cable licenses are to be made, and such terms and conditions will be negotiated in good faith, on a case-by-case basis, in connection with any future cable license investments. TVA holds a 14.7% equity interest in TV Filme. The remaining interests are held by Warburg, Pincus Investors, L.P., which currently holds a 38.8% equity interest; members of the Lins family, Brazilian nationals, who currently hold a 16.2% equity interest; public shareholders, who currently hold a 28.15% equity interest; and certain individuals with a combined 2.15% equity interest. On July 29, 1996, TV Filme completed a public offering of 2.5 million shares of its common stock in the United States at an initial price of $10.00 per share. Pursuant to a programming agreement, TVA provides programming to TV Filme, and TV Filme has agreed to use 50.0% of the channel capacity of each of its MMDS systems in Brasilia, Goiania and Belem (the "TV Filme Service Area") to broadcast TVA programming so long as (i) the quality of TVA programming, in the reasonable judgment of TV Filme, remains compatible with the taste and standards of TV Filme's subscribers, (ii) TVA continues to own, directly or indirectly, 10.0% of TV Filme's common stock and (iii) TVA remains a subsidiary of Abril. Within the TV Filme Service Area, TVA may not provide TVA programming to any Cable or other MMDS pay television service provider and TVA may not compete with TV Filme as an MMDS service provider. TV Filme also has a nonexclusive license to TVA programming in 19 cities in which TV Filme has pending license applications, subject to any exclusive license previously granted by TVA to other pay television service providers in such cities and which exclusive license TVA, using its best efforts, is unable to renegotiate to allow TVA to provide for TV Filme to have a nonexclusive license. TVA may not charge TV Filme an amount greater than the minimum rates charged by TVA to other subscription television operators, nor may such charges exceed comparable rates for other programming of a similar nature. The terms of the programming agreement terminate on July 20, 2004. From time to time, in connection with the programming agreement, TV Filme has agreed to enter into additional agreements with the Company regarding specified channels. The agreements typically have two year terms and determine the monthly fees which TV Filme pays for such channels. Programming TVA TVA, through its MMDS, Cable and C-Band systems, currently provides a programming package consisting of 15 to 53 television channels. TVA programming emphasizes sports, movies, and news with a secondary emphasis on general entertainment. With respect to MMDS and Cable service in TVA's markets, TVA is currently the sole provider of ESPN Brasil, HBO Brasil, E! Entertainment Television, Mundo, CBS Telenoticias, Bravo Brasil, RTPi and Eurochannel. In addition, TVA has distribution rights to certain of Brazil's most important soccer championships, including the Brazilian Cup and the Sao Paulo and Rio de Janeiro State Championships. TVA has entered into two Programming Ventures, ESPN do Brasil Ltda. ("ESPN Brasil Ltda.") and HBO Brasil Partners, through which it distributes a large volume of programming which management believes is especially important to its subscribers. ESPN Brasil Ltda. is a joint venture between Tevecap and ESPN Brazil, Inc. (a subsidiary of ESPN, Inc.), each of which holds a 50.0% equity interest. ESPN, Inc. is a joint venture between ABC and Hearst. ESPN, Inc. provides the programming of the US channel ESPN2 to ESPN Brasil Ltda., which packages such programming with Brazilian and other international content and provides such packaged programming to TVA. Pursuant to a Quotaholders Agreement, dated June 26, 1995 (the "ESPN Agreement"), ESPN Brasil has the right to transmit "ESPN2 Service" programming as well as all library programming of ESPN. The Company has the exclusive right to broadcast the programming of ESPN Brasil Ltda. in Sao Paulo, Rio de Janeiro, Curitiba, Brasilia, Belem and Goiania. The Company also acts as the exclusive sales representative of ESPN Brasil programming with respect to sales to other Brazilian pay television providers and receives a commission in connection therewith. The Company is also the sole advertising agent for ESPN Brasil until June 1999 and receives a commission on advertising sales. ESPN Brasil Ltda., in turn, receives on an exclusive basis from the Company all rights to soccer and other sporting events 11 acquired by the Company after February 24, 1995. ESPN Brazil, Inc. has the right to terminate the ESPN Agreement and dissolve ESPN Brasil Ltda. in the event that a Brazilian court issues a non-appealable decision that the Company did not have the right to grant these rights to ESPN Brasil. TVA's mandatory capital contributions to ESPN Brasil Ltda. are subject to a maximum aggregate amount of $5.0 million, whether in the form of loans or subscriptions for additional quotas. The ESPN Agreement is effective until June 17, 2045 and automatically renewable for a 50-year period. HBO Brasil Partners is a joint venture between TVA, which as of December 31, 1997, held a 24.0% equity interest, and HBO Ole Partners, a joint venture among Time-Warner, Sony, Ole Communications, Inc. and BVI Television Investments, Inc. (an affiliate of Disney Enterprises, Inc.), which as of the same date held the remaining 76.0% equity interest. HBO Brasil Partners has exclusive programming contracts with Sony, Time-Warner and certain independent programming distributors. HBO Brasil Partners, through an affiliate, provides the programming for HBO Brasil to TVA. Pursuant to a Partnership Agreement dated April 15, 1994 (the "HBO Agreement"), HBO Brasil Partners is managed by a Partners' Committee comprised of an equal number of agents appointed by TVA and HBO Ole Partners, the other partner. The HBO Agreement provides for the Company to enter into an affiliation agreement with HBO Brasil Partners, pursuant to which the Company pays a monthly fee per subscriber to the partnership. In addition to the Programming Ventures, TVA has entered into a number of other programming agreements. The Bravo Company, a joint venture among NBC and certain other parties, provides international movies and arts programming for the Bravo Brasil channel on an exclusive basis to TVA for distribution in Brazil. TVA customizes Bravo Brasil with the insertion of Brazilian arts and movie programming. Eurochannel is a channel assembled exclusively by TVA with programming from the German channel Deutsche Welle, the Spanish channel Radiotelevision Espanola, the French channel TF1, European movies, and series acquired from the BBC. TVA distributes its programming through its own operations and through sales of programming to the Operating Ventures, Galaxy Latin America, the Independent Operators and, to a lesser extent, to competing pay television providers. In addition, TVA offers non-exclusive programming from major international subscription television programming providers, including such channels as ESPN International, CNN, TNT, Fox, and the Discovery Channel. TVA currently offers subscribers the following channels, among others: HBO Brasil is the dominant first-run pay television movie channel in Brazil. HBO Brasil airs 24 hours a day offering an average of 12 different films per day with limited commercial slots. All films are either subtitled or dubbed into Portuguese. In the case of dubbed versions, viewers can listen to the original soundtrack on an SAP channel. TVA also offers HBO Brasil2, transmitting HBO Brasil films with a six hour time shift. Recently, in some locations, TVA began offering Cinemax, an HBO premium movie channel with a film library complimentary to that of HBO. ESPN Brasil, offered exclusively by TVA, began transmission on June 17, 1995. TVA negotiated agreements with the major Brazilian soccer confederations, providing TVA, as of the 1997 season, exclusive first choice coverage of soccer games of the Brazilian Cup, the Sao Paulo State Championship and the Brazil Cup. ESPN Brasil's programming centers around these exclusive soccer games and other exclusive Brazilian and international sports entertainment programs, mixed with programming from ESPN2. ESPN International is the second sports channel offered by TVA, for which TVA recently signed a new non-exclusive 50-year contract automatically renewable for another 50-year period. ESPN International offers a number of different sporting events, which include auto racing, National Football League games, professional tennis 12 matches, Major League Baseball games, and National Basketball Association games. ESPN International also currently provides Portuguese language commentaries exclusively to TVA. CNN International features news and information programming, offering international news coverage concerning politics, business, financial and economic developments, 24 hours a day. TNT is a movie channel which, pursuant to a non-exclusive agreement with Turner International, Inc., offers the Turner Network Television movie collection, including over 5,000 classic movie titles from MGM. In addition, TNT airs children's programming, documentaries and sporting events. The movies presented by TNT are broadcast in stereo sound and subtitled or dubbed in Portuguese or Spanish. In the case of dubbed versions, viewers can listen to the original soundtrack on a SAP channel. Cartoon Network is an animated cartoon channel targeted to children that offers programs such as The Flintstones, The Jetsons, The Smurfs, Yogi Bear and other classic series. Discovery Brasil is comprised of programming shown on the US Discovery Channel, based on topics in the areas of nature, science and technology, history, adventure and world cultures. Recently, TVA began offering Discovery Kids, a 24-hour channel featuring the best of Discovery programming for children. The Fox Channel presents movies, as well as programs from the 2,000 titles in Fox's library. Fox also presents American television series, such as L.A. Law, M*A*S*H, and The Simpsons, among many others. Recently, TVA began offering Fox Kids, a 24-hour channel featuring the best of Fox programming for children. Eurochannel is specially assembled and packaged by TVA and offers subscribers European programming. The channel presents programs from the Spanish Radiotelevision Espanola, the German Deutsche Welle, the BBC, the news from the French TF1, as well as a variety of quality European films. News, sports, music and variety shows are also offered. MTV Brasil is a 24-hour channel produced by MTV Brasil, a joint venture company owned by Abril and an indirect subsidiary of Viacom International. MTV Brasil is entirely produced in Brazil in Portuguese. MTV Brasil has licensing agreements with the MTV Network, a division of Viacom International, and transmits a combination of music and other video clips, cartoons and local programming. Sony Entertainment is primarily a situation-comedy channel, consisting of Sony's film library, including Friends, Seinfeld, Mad About You and E.R. The Warner Channel is a family entertainment channel, with new and classic cartoons, children's programs and movies. Bravo Brasil is an arts and movie channel, following the same concept as the US version of the Bravo channel, showing high quality, cultural events, such as classical music, jazz, opera, ballet and European movies. TVA inserts local programming, such as Brazilian music and movies, as well as shows performed in Brazil by international artists. CMT-Country Music Television is a 24-hour channel with the best of country music programming, including videoclips, shows and interviews with the famous American country artists. Mundo presents 24 hours per day of documentaries, biographies and great moments in sports, music and history, including selected programming from the History Channel. Cinemax is a 24-hour movie channel offering a different variety of movie each day of the week. 13 E! Entertainment Television presents 24 hours per day of reports regarding movies, television, fashion and the arts. CBS Telenoticias is the first international news channel in the Portuguese language. Its programming includes international news, the most important news from Brazil and other Latin American countries, as well as selected programs and documentaries from CBS/Eye on People. MGM Gold is a movie and series channel with selected productions from the Metro-Goldwin-Mayer studios. The New Travel Channel/People+Arts is a 24-hour channel presenting documentaries about arts, personalities and cultures from different countries around the world. Nickelodeon is a 24 hour channel for children offering programs such as Rugrats and Bananas in Pijamas. RTPi, Radiotelevisao Portuguesa Internacional, is a Portuguese state-owned general entertainment channel produced and assembled in Portugal, airing music events, talk shows, movies, news and documentaries, exclusive to TVA. TVA's complete channel offerings as of April 1, 1998 are as follows: Channel Description - ------- ----------- HBO Brasil.............................. movie channel HBO Brasil 2............................ HBO Brasil with a six-hour time shift ESPN Brasil............................. sports channel ESPN International...................... sports channel CNN .................................... news channel TNT..................................... movie channel Cartoon Network......................... cartoon channel Discovery Brasil........................ science and documentary channel Fox Channel............................. movie channel Eurochannel............................. European variety programming channel MTV Brasil.............................. music channel RTPi.................................... Portugal's state television channel CMT..................................... music channel TV5..................................... French variety programming channel WorldNet................................ American news and variety channel RTVE.................................... Spanish variety channel Deutsche Welle.......................... German variety channel America 2............................... Argentine variety channel TeleUno................................. Spanish variety channel Sony Entertainment...................... situation comedy channel The Warner Channel...................... family entertainment channel Bravo Brasil............................ arts and movies channel Cinemax................................. movie channel Mundo................................... documentary channel E! Entertainment Television............. American variety channel MGM Gold................................ movies and series channel 14 Channel Description - ------- ----------- NHK....................................... Japanese variety programming channel RAI....................................... Italian variety programming channel ART....................................... Arabian variety programming channel CBS Telenoticias.......................... news channel Discovery Kids............................ documentary channel Nickelodeon............................... cartoon channel Travel Channel/People+Arts................ documentary channel Fox Kids.................................. cartoon channel CNN Espanol............................... news channel CV Sports ................................ Argentine sports channel CV Noticias .............................. Argentine news channel Dubai .................................... Arabian variety programming channel Hallmark ................................. movie channel Adulto ................................... adult movie channel SBT....................................... national off-air channel Globo .................................... national off-air channel CNT/Gazeta................................ national off-air channel Bandeirantes.............................. national off-air channel Record.................................... national off-air channel Manchete.................................. national off-air channel Cultura................................... national off-air channel CBI....................................... local off-air channel Rede Mulher............................... local off-air channel Rede Vida................................. local off-air channel TV Senado................................. local off-air channel TV Educativa Rio.......................... local off-air channel TV Camara................................. local off-air channel TV Legislativa............................ local off-air channel Canal Comunitario......................... local off-air channel Canal Universitario....................... local off-air channel Canal de Sao Paulo........................ local off-air channel Canal 21.................................. local off-air channel Rede Gospel............................... local off-air channel TV Educacao .............................. local off-air channel DIRECTV The DIRECTV programming package offered by Galaxy Brasil as of April 1, 1998 consisted of 76 video channels (including 24 pay-per-view channels), certain of which, such as Bravo Brasil, CMT Brasil and Eurochannel, are provided by TVA, and 33 audio channels. Programming includes movies, news, athletic events and other programs available on a pay-per-view basis. The complete DIRECTV service channel offerings, other than pay-per-view, as of April 1, 1998, were as follows: Channel Description - ------- ----------- HBO Brasil............................... movie channel HBO Brasil 2............................. HBO Brasil with a six-hour time shift ESPN Brasil.............................. sports channel ESPN International....................... sports channel Eurochannel.............................. European variety programming channel CMT Brasil............................... music channel E! Entertainment Television.............. American variety channel Mundo.................................... documentary channel 15 Channel Description - ------- ----------- MGM Gold................................ movies and series channel MTV Brasil.............................. music channel MTV Latino.............................. music channel RTPi.................................... Portugal's state television channel CNN International....................... news channel CNN Espanol............................. news channel CBS Telenoticias........................ news channel TNT..................................... movie channel Cartoon Network......................... cartoon channel Discovery Brasil........................ science and documentary channel Sony Entertainment...................... situation comedy channel Bravo Brasil............................ art and movie channel Deutsche Welle.......................... German variety channel TVE..................................... Spanish variety channel Tele Uno................................ Spanish variety channel Warner Channel.......................... family entertainment channel CBS Telenoticias........................ CBS news channel in Spanish Bloomberg............................... business news channel Multipremier............................ Mexican movie channel ZAZ..................................... Mexican children's programming channel Travel Channel.......................... travel programming channel NHK..................................... Japanese general entertainment channel TV Chile International.................. Chilean programming channel CNT/Gazeta.............................. national off-air channel TV Senado............................... local off-air channel TV Educativa Rio........................ local off-air channel TV Cultura.............................. local off-air channel Nickelodeon............................. children's programming channel Discovery Kids.......................... children's programming channel Locomotion.............................. children's programming channel Disney Weekend.......................... children's programming channel BBC World............................... world news channel TV Chile................................ Chilean programming channel Playboy TV.............................. adult programming channel AdulTVision............................. adult programming channel Adult Weekend........................... adult programming channel Classe.................................. education channel Hallmark................................ television movie channel Travel Channel/People & Arts............ documentary channel RAI International....................... Italian variety channel Operations Marketing. The Company periodically conducts marketing surveys to gauge consumer preferences and evaluate new and existing markets. TVA also frequently evaluates the demographics of the subscribers to its 16 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 uplink facilities of Embratel in Sao Paulo to service its existing C-Band service. TVA delivers its programming to the Embratel uplink center via microwave transmission, where it is prepared for transmission to the Brasilsat satellite using equipment provided by TVA. For its DIRECTV service, the Company has built the Tambore Facility, an uplink center, for a total cost of approximately $20 million in Tambore in the State of Sao Paulo consisting of an uplink antenna and ancillary equipment. The Tambore Facility has operated since June 1996 and is used to uplink Brazilian programming to the Galaxy VIII-i satellite. Through the Galaxy VIII-i satellite, programming from Galaxy Brasil is mixed with programming from the California Broadcast Center (the "CBC") in Long Beach and with programming provided by members of the Cisneros Group through an uplink facility in Venezuela and by Grupo Frequencia Modulada Television through its uplink facility in Mexico, for delivery to subscribers in Brazil and other countries to which GLA provides DIRECTV service. The Tambore Facility and the uplink facilities in Venezuela, Mexico and the United States are equipped with full emergency power generation equipment and other emergency facilities to enable GLA to avoid signal disruptions. As of April 11, 1997, California Broadcast Center, LLC, a new Delaware limited liability company, was established, the principal asset of which is GLA's satellite uplink facility. The new company is owned by two subsidiaries of Hughes Electronics. In connection with the establishment of the new company, TVA Communications and Tevecap have agreed, pursuant to an Indemnification Agreement, dated April 11, 1997 (the "Indemnification Agreement"), to provide certain indemnities in favor of GLA, DLA, the newly-established company and its shareholders. To secure its obligations under the Indemnification Agreement, Tevecap has agreed to pledge its equity interest in GLA, as well as any future notes or interest it may hold relating to the uplink facility. Programming Facilities. Programming equipment is used to prepare the programming material for transmission via the Company's MMDS, Cable or DBS systems, including compression with respect to Cable and Ku-Band service. The programming equipment inserts commercial or promotional material, if appropriate, monitors 17 the quality of the picture and sound, and delivers the material to the multiplexing system. For programming delivered to TVA as taped material, the programming equipment also compiles the various programming segments, inserting commercial and promotional material. Compression System. The Company also uses its programming facilities to digitize the programming signals used in TVA's Cable and Ku-Band service. Digital technology permits the compression and transmission of a digital signal to facilitate multiple channel transmission through a single channel's bandwidth, thereby giving broadcasters the ability to offer significantly more channels than is currently the case with analog systems. Digitized signals are compressed using the MPEG-1 and MPEG-2 standards. (Moving Pictures Expert Group, the international video compression standard). Conditional Access System. GLA and News Digital Systems Limited ("NDS"), a wholly-owned subsidiary of News Corporation, are parties to a System Implementation and License Agreement. Under the Local Operating Agreement, GLA provides to Galaxy Brasil the use of the access control system licensed from NDS and the Smart Cards provided by NDS. The Company expects the access control system to adequately protect DIRECTV programming from unauthorized access. With Smart Card technology, it is possible to change the access control system in the event of a security breach allowing TVA to reestablish security. Management believes that the ability to take electronic measures and to replace the Smart Cards will provide an effective means to combat unauthorized programming access. Subscriber Service. Management believes that delivering high levels of subscriber service in installation and maintenance enables it to maintain high levels of subscriber satisfaction and to maximize subscriber retention. To this end, TVA attempts to promptly schedule installations, provides a subscriber service hotline in each of the metropolitan areas in which TVA operates, attempts to promptly provide response repair service, and attempts to make follow-up calls to new subscribers shortly after installation to ensure subscriber satisfaction. TVA seeks to instill a subscriber service focus in all its employees through ongoing training and has established an intra-company electronic mail system to provide a forum for employees to exchange ideas concerning ways to increase subscriber satisfaction. TVA also has various employee bonus programs linked to measures of subscriber satisfaction. To enable its employees to provide quicker service, TVA is working to decentralize its subscriber service operations by opening small service offices throughout TVA's served markets. Management Information Systems and Billing. Management believes that TVA's proprietary management information systems enable TVA to deliver superior subscriber service, monitor subscriber payment patterns and facilitate the efficient management of each of its operating systems. Management believes that TVA's billing procedures are an integral part of its strategy to maintain high levels of subscriber satisfaction and to maximize subscriber retention. Subscribers select the day of the month on which payment for that month's service is due, and pay their bills at a bank through direct transfers, which is the standard payment method in Brazil. Competition General TVA and the Operating Ventures compete with pay television service providers using Cable, MMDS and DBS transmission technologies. The Company expects to continue to face competition from a number of existing and future sources, including potential competition as a result of new and developing technologies and the easing of regulation in the pay television industry. TVA believes that competition is and will continue to be primarily based upon program offerings, customer satisfaction, quality of the system network and price. Since there is a very limited history of pay television services in Brazil, there can be no assurance that, based on the potential size of the Brazilian pay television industry, the pay television market will be able to sustain a number of competing pay television providers. The Company and the Operating Ventures also compete with national broadcast networks and 18 regional and local broadcast stations. TVA's MMDS and Cable operations and its C-Band satellite service and Ku-Band satellite service may compete for the same subscribers. MMDS and Cable Service TVA's principal competitors in Cable service are operations owned or controlled by Multicanal Participacoes S.A. ("Multicanal"), Net Brasil S.A. ("Net Brasil"), Globo Cabo S.A. ("Globo Cabo") and RBS Participacoes S.A. ("RBS"). Multicanal and Net Brasil operate Cable systems throughout much of Brazil, including Sao Paulo, Rio de Janeiro, Curitiba and several other large metropolitan areas. Globo Cabo has Cable systems in approximately 18 cities including Brasilia. RBS operates Cable services in 19 cities in Brazil and provides MMDS service in Porto Alegre. Net Brasil also provides MMDS service in Recife, and has a license to provide MMDS service in Curitiba. Globo Comunicacoes e Participacoes Ltda. ("Globo Par") and TV Globo, the owners of Brazil's most popular off-air channels (together, "Globo"), control, or have significant interests, in each of Multicanal, Net Brasil and Globo Cabo. RBS also holds an interest in Multicanal. The systems controlled by Multicanal, Net Brasil, Globo Cabo and RBS offer a similar number of channels of programming at prices comparable to those charged for TVA's MMDS and Cable Service. Each of these systems broadcasts programming purchased from TVA as well as from other services. DBS Service Management believes its only competitor in DBS service is Net Sat Servicos Ltda. ("Net Sat") in which Globo Par also has a controlling interest and whose other equity holders include News Corporation plc, a subsidiary of The News Corporation Limited and Grupo Televisa, S.A., of Mexico. TVA offers 26 channels of programming with its C-Band service, compared to the six channels offered by Net Sat's C-Band service. However, while monthly charges are comparable and TVA's digital C-Band service offers more channels, often with better picture quality, the analog decoder necessary for Net Sat's C-Band service is significantly less expensive than the digital decoder TVA's subscribers must purchase. TVA's Ku-Band service currently offers 110 channels of audio and video programming, including 24 pay-per-view channels, as compared to the 101 audio and video channels of programming offered by Net Sat (including pay-per-view channels). In addition, Tectelcom-Tecnica em Telecomunicacoes announced its intention to provide Ku-Band service of up to 76 audio and video channels in the second quarter of 1998. Off-Air Broadcast Television Broadcasting services are currently available to substantially all of the Brazilian population without payment of a subscription fee by six privately-owned national broadcast television networks and a government-owned national public television network. The six national broadcast television networks and their local affiliates currently provide services to nearly all Brazilian TV Homes without payment of a subscription fee. The national broadcast television networks and local broadcast stations receive a significant portion of their revenues from the sale of television advertising, which revenues are based in part on the audience share and ratings for the networks' programs. Programming offered by pay television providers, including TVA, directly competes for audience share and ratings with the programming offered by broadcast television networks as well as regional and local television broadcasters. The six national broadcast television networks are Globo, SBT, Bandeirantes, TV Manchete, TV Record and Gazeta/CNT. The national television networks utilize one or more satellites to retransmit their signals to their local affiliates throughout Brazil. 19 Programming Sales TVA competes with a variety of Brazilian and international programming providers for sales of its programming to the Operating Ventures and Independent Operators. In addition, TVA competes with other pay television operators to purchase programming from some of these Brazilian and international sources. Regulatory Framework The subscription television industry in Brazil is subject to regulation by the Brazilian Ministry of Communications pursuant to Law No. 9472/97 ("Law 9472") and Law No. 9295/96 ("Law 9295"). The Ministry of Communications has to date granted concessions for MMDS, Cable, DBS, and UHF licenses. This authority was delegated in July 1997 to the Agencia Nacional de Telecomunicacoes ("ANATEL"), a division of the Ministry of Communications. MMDS Regulations General. Law 9472 authorizes ANATEL, among other things, to issue, revoke, modify and renew licenses within the spectrum available to MMDS systems, to approve the assignments and transfer of control of such licenses, to approve the location of channels that comprise MMDS systems, to regulate the kind, configuration and operation of equipment used by MMDS systems, and to impose certain other reporting requirements on channel license holders and MMDS operators. The licensing and operation of MMDS channels are currently governed by Decree No. 2196/97 ("Decree 2196"), Ordinance No. 254/97 (as amended by Ordinance No. 319/97, "Ordinance 254") and Rule No. 002/Rev. 97 ("Rule 002"). Under these regulations, MMDS is defined as the special service of telecommunication which uses microwaves to transmit codified signals to be received in pre-established points on a contractual basis. Licenses. ANATEL grants licenses and regulates the use of channels by MMDS operators to transmit video programming, entertainment services and other information. A maximum of 31 MMDS channels (constituting a spectrum bandwidth of 186 MHz) may be authorized for use in an MMDS market. While licenses are usually granted for the use of up to 16 channels, depending on technical feasibility and the existence of competition, ANATEL can grant a license for all 31 channels available in one specific area. If the license is for 16 or more channels, at least two channels must be reserved for educational and cultural programming. If the license involves 15 or fewer channels, there is no obligation to reserve any channel for educational and cultural purposes. In each of the Company's Sao Paulo and Rio de Janeiro markets, up to 31 MMDS channels are available for MMDS (in addition to any local off-air VHF/UHF channels which are offered). An MMDS license is granted for a renewable period of 15 years. The application for renewal of a license must be filed with ANATEL during the period from 18 months before the end of the license term. To renew the license, the license holder must (i) meet applicable legal and regulatory requirements, (ii) have complied with all legal and contractual obligations during the term of such license and (iii) meet certain technical and financial requirements. Under the most recently promulgated provisions of Rule 002, each license holder and its affiliates may be granted permission to operate MMDS systems in different areas of Brazil, provided that no holder may be granted licenses for (i) more than seven municipalities with a population equal to or exceeding 700,000 inhabitants and (ii) more than 12 municipalities with a population between 300,000 and 700,000 inhabitants. The restrictions only apply to areas in which the MMDS system operator (or an affiliate thereof) faces no competition from other pay television services, excluding services that utilize a satellite to transmit their signal. Rule 002 grants the Ministry of Communications full discretion to alter or eliminate the restrictions. The term affiliate is defined by Rule 002 as any legal entity that directly or indirectly holds at least 20% of the voting capital. The Company currently controls five MMDS licenses in cities of more than 700,000 inhabitants (Sao Paulo (2), Rio de Janeiro, Curitiba and Porto 20 Alegre), but in each such city TVA has at least one competitor. Prices for pay television services may be freely established by the system operator, although ANATEL may interfere in the event of abusive pricing. The Ministry of Communications may impose penalties including fines, suspension or revocation of the license if the license holder fails to comply with applicable regulations or becomes legally, technically or financially unable to provide MMDS service. ANATEL also may intervene to the extent operators engage in unfair practices intended to eliminate competition. The Ministry of Communications awards licenses to use MMDS channels based upon applications demonstrating that the applicant is qualified to hold the license, that the proposed market is viable and that the operation of the proposed channels will not cause impermissible interference to other permitted channels. After the Ministry of Communications determines that an application has met these requirements, it publishes a notice requesting comments from all parties interested in providing the same services in the same or a near area. Depending on the comments received, the Ministry of Communications may decide to open a public bid for the service in that area, although it has not done so in the past. In the case of a public bid, applicants would be evaluated based on a number of factors including the applicant's proposed schedule for implementing commercial operations, the applicant's commitment to local programming and the extent to which the applicant provides free programming to local cultural and educational institutions. Once an MMDS license application is granted by the Ministry of Communications, the license holder must finalize construction and begin operations within 12 months, which period may be extended by an additional 12 months. In addition to qualifying under the application process described above, a license holder must also demonstrate that its proposed signal does not violate interference standards in the area of another MMDS channel license holder. To this end, existing license holders are given a 30-day period in which to ascertain and comment to the Ministry of Communications whether the new license holder's proposed signal will interfere with existing signals. The area covered by the services is exclusive to a radius of five to 50 kilometers around the transmission site, depending on the technical capability of the operator. Other Regulations. MMDS license holders are subject to regulation with respect to the construction, marketing and lighting of transmission towers pursuant to the Brazilian Aviation Code and certain local zoning regulations affecting construction of towers and other facilities. There may also be restrictions imposed by local authorities. The subscription television industry also is subject to the Brazilian Consumer Code. The Consumer Code entitles the purchasers of goods or services to certain rights, including the right to discontinue a service and obtain a refund if the services are deemed to be of low quality or not rendered adequately. For instance, in case of a suspension of the transmission for a given period, the subscriber shall be entitled to a discount on the monthly fees. Rule No. 002 contains certain provisions relating to consumer rights, including a provision for mandatory discounts in the event of interruption of service. The Company, as of December 31, 1997, had not been required to repay any amounts or provide any discounts due to interruptions of service. However, the Company does refund prepaid installation service fees when the Company discovers such service is unavailable for whatever reason. Due to the regulated nature of the subscription television industry, the adoption of new, or changes to existing, laws or regulations or the interpretations thereof may impede the Company's growth and may otherwise have a material adverse effect on the Company's results of operations and financial condition. Cable Regulation General. Cable services in Brazil are licensed and regulated by the Ministry of Communications pursuant to Law No. 8977/95 ("Law 8977"), Decree No. 2206/97 ("Decree 2206"), which authorized the regulation of Cable Services, and Ordinance 256/97 ("Ordinance 256"), which approved the Norma Compementar do Servico de TV a Cabo regulating the granting of licenses for, and the operation of, Cable services. Until Law 8977 was enacted in 1995, the Brazilian Cable industry had been governed by two principal regulatory measures since its inception in 1989: Ordinance No. 250, issued by the Ministry of Communications on December 13, 1989 ("Ordinance 250"), 21 and its successor, Ordinance No. 36, issued by the Ministry of Communications on March 21, 1991 ("Ordinance 36"). Ordinance 250 regulated the distribution of television signals ("DISTV") by physical means (i.e., by Cable) to end-users. DISTV services generally are limited only to the reception and transmission of signals without any interference by a DISTV operator with the signal content. Under Ordinance 250, 101 authorizations were granted by the Ministry of Communications to local operators to commercially exploit DISTV services. Although Ordinance 250 did not specifically address Cable services, a number of DISTV operators (including the Company's Cable systems) began to offer Cable services based on DISTV authorizations. Licenses. Under Law 8977, a Cable operator must obtain a license from ANATEL in order to provide Cable services in Brazil. All Cable licenses are nonexclusive licenses to provide Cable services in a service area. Cable licenses are granted by ANATEL for a period of 15 years and are renewable for equal and successive periods. Renewal of the Cable license by ANATEL is mandatory if the Cable system operator has (i) complied with the terms of the license grant and applicable governmental regulations and (ii) agrees to meet certain technical and economic requirements relating to the furnishing of adequate service to subscribers, including system modernization standards. Ordinance No. 256/97 ("Ordinance 256") imposes restrictions on the number of areas that can be served by a Cable television system operator (or an affiliate thereof). Pursuant to Ordinance 256, a Cable system operator (or an affiliate thereof) may only hold licenses with respect to (i) a maximum of seven areas with a population of 700,000 and above and (ii) a maximum of 12 areas with a population of 300,000 or more and less than 700,000. The restrictions only apply to areas in which the Cable system operator (or an affiliate thereof) faces no competition from other pay television services, excluding services that utilize a satellite to transmit their signal. Ordinance 256 grants the Ministry of Communications full discretion to alter or eliminate the restrictions. The term affiliate is defined by Ordinance 256 as any legal entity that directly or indirectly holds at least 20% of the voting capital of another legal entity or any of two legal entities under common ownership of at least 20% of their respective voting capital. The Company currently controls two Cable licenses in cities of more than 700,000 inhabitants (Sao Paulo and Curitiba), but in each such city TVA has at least one competitor. Generally, only legal entities that are headquartered in Brazil and that have 51.0% of their voting capital by Brazilian-born citizens or persons who have held Brazilian citizenship for more than 10 years are eligible to receive a license to operate Cable systems in Brazil. In the event that no private entity displays an interest in providing Cable services in a particular service area, ANATEL may grant the local public telecommunications operator a license to provide Cable services. Cable operators that previously provided Cable services under a DISTV authorization granted under Ordinance 250 were required under Law 8977 to file applications to have their DISTV authorizations converted into Cable licenses. Ordinance 256 grants a one year period from the date a DISTV authorization is converted into a cable television license for any Cable system operator to comply with the restrictions. The Company's Cable systems, all of which were operating under DISTV authorizations, applied for conversion of their DISTV authorizations and received approval for such conversion from the Ministry of Communications. Cable licenses for service areas not covered by existing authorizations will be granted pursuant to a public bidding process administered by ANATEL after prior public consultation. All such licenses shall be nonexclusive licenses. In order to submit a bid for a license, a bidder must meet certain financial and legal prerequisites. After such prerequisites are met, a bidder must then submit a detailed bid describing its plan to provide Cable services in the service area. In the qualification phase of the bidding process, ANATEL assigns a number of points to each bid based on certain weighted criteria, including the timetable for offering subscription programming; the time allocated to local public interest programming; the number of channels allocated to educational and cultural programming; and the number of establishments, such as schools, hospitals and community centers, to which basic 22 service programming will be offered free of charge. After calculating the number of points awarded to each bidder, ANATEL will then apply a formula based on the population of the service area to select the winning bid from among those bidders that meet certain defined minimum qualifying thresholds. For service areas with a population of 700,000 or more inhabitants, the qualified bidder that submits the highest bid for the license will be selected. For service areas with a population between 300,000 and 700,000 inhabitants, the winning bid is selected based on the highest product obtained by multiplying the number of points awarded in the qualification phase and the amount bid for the license. For service areas with less than 300,000 inhabitants, the winning bid is selected on the basis of the number of points awarded in the qualification phase and the payment of a fixed fee. Once a Cable license is granted, the licensee has an 18 month period from the date of the license grant to complete the initial stage of the installation of the Cable system and to commence providing Cable services to subscribers in the service area. The 18 month period is subject to a single 12 month extension for cause at the discretion of ANATEL. Any transfer of a Cable license is subject to the prior approval of ANATEL. A license generally may not be transferred by a licensee until it has commenced providing Cable services in its service area. Transfers of shares causing a change in the control of a license or the legal entity which controls a license also is subject to the prior approval of ANATEL. ANATEL must receive notice of any change in the capital structure of a licensee, including any transfer of shares or increase of capital that do not result in a change of control. A license can be revoked, upon the issue of a judicial decision, in the event the licensee lacks technical, financial or legal capacity to continue to operate a Cable system; is under the management of individuals, or under the control of individuals or corporations who, according to Law 8977, do not qualify for such positions; has its license transferred, either directly or by virtue of a change in control, without the prior consent of ANATEL; does not start to provide Cable services within the time limit specified by Law 8977; or suspends its activities for more than thirty consecutive days without justification, unless previously authorized by ANATEL. Cable Related Service Regulation General. Brazilian telecommunications services are governed primarily by (i) Article 21 of the Federal Constitution, as amended by Amendment No. 8 of August 15, 1995 ("Amendment 8"), (ii) the Telecommunications Code (Law No. 4117 of August 27, 1962, as amended), (iii) Law 9472 and (iv) Law 9295. The Brazilian Government also has issued detailed regulations covering specific areas of telecommunications services, including radio broadcasting, paging, trunking, subscription television, Cable television and cellular telephony. ANATEL is responsible for the regulation of telecommunications services in Brazil. Prior to its amendment in 1995, Article 21 of the Federal Constitution required the Brazilian Government to operate directly, or through concessions granted to companies whose shares are controlled by the Brazilian Government, all telephone, telegraph, data transmission and other public telecommunications services. This constitutional requirement was the basis for the establishment of the state-owned telephone monopoly, Telebras, which holds controlling interests in 27 regional telephone operating companies. With the adoption of Amendment 8, Article 21 was modified to permit the Brazilian Government to operate telecommunications services either directly or through authorizations, concessions or permissions granted to private entities. In particular, Amendment 8 removed the constitutional requirement that the Brazilian Government must either directly operate or control the shares of companies which operate telecommunications services. Even with the adoption of Amendment 8, the Brazilian Government still retains broad regulatory powers over telecommunications services. Notwithstanding the existence of the Telebras monopoly, private companies have been permitted under Brazilian law to provide a number of telecommunications services other than telephony, including radio broadcasting, paging, trunking, subscription television and cable television services. However, fixed public telephony and cellular telephony were exclusively provided by Telebras through its regional telephone operating companies. While Amendment 8 permits the Brazilian Government to authorize private companies to provide such services, further action on the part of the Brazilian legislature will be required before private entities may actually provide fixed telephony services. 23 High-Speed Cable Data Services. Law 8977 and Decree 2208, among other things, authorize cable television operators, such as the Company, in addition to furnishing video and audio signals on their cable networks, to utilize their networks for the transmission of meteorological, banking, financial, cultural, prices and other data. This broad grant of authority is understood to permit Cable television operators to furnish services such as interactive home banking and high-speed Cable data services to subscribers through their cable television networks, although a simplified licensing procedure for high-speed Cable data services may be installed by ANATEL in the future. Cable Telephony. In accordance with Law 8977, the Company is not permitted to furnish fixed telephone services in Brazil without a specific license to do so. Therefore, absent a change in Brazilian law, the Company would not be permitted to furnish cable telephony on its network. There are, however, certain limited regulatory exceptions pursuant to which private entities other than Telebras and the regional telephone operating companies have been permitted to provide limited fixed telephony services in Brazil. Under one particular exception, certain private telephone networks (Centrais Privadas de Comutacao Telefonica or "CPCT") serving "condominiums" (as such term is defined under Brazilian law) have been permitted to interconnect their private telephone networks to the public telephone network operated by the local telephone operating company. A CPCT is comparable to a private branch exchange (PBX) found in some larger apartment complexes, hotels and businesses in the United States. Under Brazilian law, the term "condominium" refers to residential and nonresidential buildings or building complexes that have entered into a legal association. In practice, a condominium desiring to establish a CPCT will generally contract with a private service provider to install, operate and maintain the CPCT and to secure interconnection with the public telephone network. Ordinance No. 119/90 of 10 December 1990 ("Ordinance 119"), which was issued by the predecessor to the Ministry of Communications, sets forth requirements for the interconnection of CPCTs with the public telephone network. In general the installation, operation and maintenance of a CPCT does not require any authorization from the Ministry of Communications or Telebras. In order to interconnect with the public telephone network, a CPCT must comply with the requirements set forth in Ordinance 119. Such requirements primarily relate to meeting technical equipment certification and acceptance standards. Assuming that such standards are met, the regional telephone operating company is required under Ordinance 119 to interconnect the CPCT requesting interconnection to the public telephone network. The Company believes that, under current Brazilian law, Cable television operators can utilize their Cable television networks in order to facilitate the installation and operation of a CPCT. Furthermore, under the authority granted by Ordinance 119, CPCTs may be interconnected through Cable television networks to the public telephone network. Satellite Service Regulation. On October 1, 1991, the Ministry of Communications enacted Ordinance No. 230 to regulate telecommunications services via satellite in Brazil ("Ordinance 230"). Under Ordinance 230 any company authorized to broadcast television by any means is also authorized to broadcast by satellite transmission. The Company has operated satellite pay-television services since 1993 through a contract signed with Embratel. Ordinance No. 281, issued by the Ministry of Communications on November 28, 1995, partially amended Ordinance 230 allowing only companies to which a concession, permission or authorization had been granted previously by the Ministry of Communications to provide telecommunications services via satellite. Companies that were already operating satellite telecommunications services without such authorization were given a period of 60 days to seek such authorization. The Company applied for such authorization within the 60-day period, and on April 23, 1996, the Ministry of Communications issued Ordinance No. 87/96 ("Ordinance 87"), granting TVA the non-exclusive permission to operate a pay television service via satellite. Such authorization is valid for a term of fifteen years, commencing October 26, 1994. Ordinance 87 further provides that TVA has the obligation to (a) render services continuously and efficiently in order to fully satisfy users, (b) in an emergency or disaster, render services to the entities that require services without charge, and (c) meet the technical adequacy requirements which the Ministry of Communications considers essential to guarantee fulfillment of the obligations under the permission granted. In addition, on April 23, 1996, Galaxy Brasil received approval from the Ministry of Communications, pursuant to Ordinance No. 86/96 ("Ordinance 86"), to operate satellite services via the Galaxy III-R satellite, leased 24 by Hughes Electronics. Galaxy Brasil also received approval to operate the corresponding ground transmission station pursuant to Ordinance 86. Satellite-based pay television services are today regulated by Law 9295/96 ("Law 9295"), Law 9472/97 (the "General Law"), Decree 2196/97, which regulates special telecommunications services, including DBS services, Decree 2195/97, which regulates the transmission of signals via satellite, and Ordinance 321/97, which relates specifically to satellite-based pay television services. Law 9295 authorizes the Executive branch of the Brazilian federal Government, within three years, to limit the ownership by non-Brazilian entities of the voting capital of entities providing satellite-based pay television services to a maximum of 49%. In addition, the General Law broadly authorizes the Executive branch to limit non-Brazilian ownership of telecommunications service providers. Law 9295 also provides that the granting of concessions for the transmission of signals via satellite by private companies will occur after December 31, 1997. On May 21, 1997, the Ministry of Communications issued Ordinance No. 321 ("Ordinance 321") governing the granting of licenses to provide satellite pay television services. ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Financial Statements (including the notes thereto) included in this Annual Report. For the purposes of the following discussion, all dollar amounts, with the exception of average installation and subscriber fees, are set forth in thousands of US dollars. This Management's Discussion and Analysis of Financial Condition and Results of Operations reflects the historical results of the Company. Due to the limited operating history, startup nature, translations of Brazilian currency into US dollars, and rapid growth of the Company, period-to-period comparisons of financial data are not necessarily indicative, and should not be relied upon as an indicator of the future performance of the Company. Overview Since its inception in 1989, the Company has been in a developmental or buildout stage. The TV Group, representing the more mature operations of the Company, has experienced, and continues to experience, rapid growth. In addition, the Company, through Galaxy Brasil, initiated Ku-Band DIRECTV service on a limited basis in July 1996. Despite its growth and positive operating cash flow for the year ended December 31, 1997, the Company continues to sustain substantial net losses due primarily to insufficient revenue with which to fund build-out, interest expense and charges for depreciation and amortization. Net losses incurred by the Company since inception have been funded principally by (i) net contributions of approximately $388,000 from the Company's shareholders (consisting of $288,000 as of December 31, 1997 and a $100,000 capital increase in February 1998), (ii) borrowings from Abril under the Abril Credit Facility and subordinated shareholder loan to Galaxy Brasil and (iii) bank loans and other borrowings made from time to time. Management expects the financial results of the Company to improve as the operation of the Ku-Band service matures and the number of subscribers for the Company's Ku-Band service and TV Group services continues to grow. There can be no assurance, however, that the number of the Company's subscribers will grow, or that the Company's financial performance will improve. 25 Results of Operations The following table sets forth for the periods indicated certain statements of operations data expressed in US dollar amounts and as a percentage of net revenue:
Year Ended December 31, ----------------------------------------------------------------- 1995 1996 1997 ------------------ ------------------- ------------------ % of Net % of Net % of Net Amount Revenue Amount Revenue Amount Revenue ------ ------- ------ ------- ------ ------- Statement of Operations Data: Gross revenues Monthly subscriptions ....... $ 62,496 66.1% $ 123,020 62.1% $ 221,234 67.4% Installation ................ 26,045 27.6 61,717 31.2 90,806 27.7 Indirect programming ........ 2,866 3.0 11,377 5.7 22,810 6.9 Other ....................... 10,603 11.2 15,724 7.9 18,596 5.7 Revenue taxes ............... (7,506) (7.9) (13,747) (6.9) (25,104) (7.6) --------- ------ --------- ------ --------- ------ Net revenue ................. 94,504 100.0 198,091 100.0 328,342 100.00 --------- ------ --------- ------ --------- ------ Direct operating expenses ... 62,026 65.6 112,297 56.7 176,958 53.9 Selling, general and administrative expenses ... 46,902 49.6 81,455 41.1 116,254 35.4 Depreciation and Amortization .............. 13,268 14.0 28,216 14.2 56,381 17.2 Allowance for inventory obsolescence .............. -- -- 2,250 1.1 7,438 2.3 --------- ------ --------- ------ --------- ------ Total operating expenses .... 122,196 129.3 224,218 113.2 357,031 108.7 --------- ------ --------- ------ --------- ------ Operating loss .............. (27,692) (29.3) (26,127) (13.2) (28,689) (8.7) --------- ------ --------- ------ --------- ------ Interest income ............. 3,118 3.3 5,813 2.9 10,764 3.3 Interest expense ............ (17,745) (18.8) (17,520) (8.8) (56,553) (17.2) Translation (loss) gain ..... (339) (0.4) 473 0.2 (136) 0.0 Equity in (losses) income of affiliates ............. (3,672) (3.9) (8,532) (4.3) (6,851) (2.1) Gain on issuance of shares by equity investees .......... 0 0.0 2,317 1.2 1,160 0.4 Other nonoperating (expenses) income, net .... 4,389 4.6 (6,009) (3.0) (2,028) (0.6) Minority interest ........... 871 0.9 1,849 0.9 916 0.3 Income tax expense .......... 0 0.0 (156) (0.1) 0.0 --------- ------ --------- ------ --------- ------ Net loss .................... $(41,070) (43.5)% (47,892) (24.2)% (81,417) (24.8)% ========= ====== ========= ====== ========= ======
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 The table below sets forth the number of subscribers at December 31, 1996 and December 31, 1997 for the Owned Systems. December 31, December 31, Owned Systems Subscribers 1996 1997 ------- ------- MMDS(a) ....................................... 230,320 240,913 Cable ......................................... 46,011 94,261 DIRECTV and Digital C-Band .................... 73,180 211,209 ------- ------- 349,511 546,383 Paid Subscribers Awaiting Installation(b) ..... 31,124 17,963 ------- ------- Total Owned Systems ........................... 380,635 564,346 ======= ======= - -------------------- (a) Includes UHF subscribers (b) Subscribers who have paid an installation fee but are awaiting the installation of service. 26 The table below sets forth at December 31, 1997 and December 31, 1996 the approximate number of television households which received TVA's programming through the Owned Systems and the Operating Ventures and through sales of programming to the Independent Operators. Households Receiving TVA Programming December 31, December 31, 1996 1997 --------- --------- Total Owned Systems ...................... 380,635 564,346 Operating Ventures ....................... 85,256 142,148 Independent Operators .................... 564,499 669,543 --------- --------- Total .................................... 1,030,390 1,376,037 ========= ========= Revenues. Revenues consist primarily of Monthly subscriptions revenue (which principally consists of monthly fees paid by subscribers to the Company for programming services, including equipment use), Installation revenue, Indirect programming revenue (which consists of payments made to the Company for the sale of its programming to the Independent Operators) and Other revenue (which consists of Advertising revenues and Other revenues). Revenue taxes consist of a 2.65% tax on Advertising revenue and a 7.65% tax on the balance of revenues, in each case charged by the Brazilian Government. Monthly subscriptions revenue for the year ended December 31, 1997 was $221,234, as compared to $123,020 for the comparable period in 1996, an increase of $98,214 or 79.8%. This increase was principally attributable to an increase in the subscriber base and average monthly fees for existing subscribers from $39.15 to $40.50 and for new subscribers from $43.70 to $45.05 per subscriber. The average monthly subscription price during the year ended December 31, 1997, was $43.82 for MMDS service, $42.01 for Cable service, $34.66 for C-Band service and $50.00 for the Ku-band service, as compared to $44.94, $38.59, $38.02, and $40.20, respectively, for the year ended December 31, 1996. Installation revenue for the year ended December 31, 1997 was $90,806, as compared to $61,717 for the same period of 1996, an increase of $29,089 or 47.1%. This increase was the result of a strong sales performance during the year of 1997, principally for the Company's Ku-band operation, and occurred in spite of a decrease in average installation fees. The average installation fee during the year ended December 31, 1997 was $103.58 for MMDS service, $35.89 for Cable service, $347.03 for C-Band service and $513.12 for Ku-Band service, as compared $134.48, $36.61, $649.98 and $877.00 respectively, during the year ended December 31, 1996. The decrease in average installation fees was attributable primarily to reduced equipment costs and increased competition. Indirect programming revenue for the year ended December 31, 1997 was $22,810, as compared to $11,377 for the comparable period of 1996, an increase of $11,443, or approximately 100%. This increase was principally attributable to the increase in the number of Independent Operators' subscribers for the period. The number of Independent Operators' subscribers increased by 104,954 during the year ended December 31, 1997, as compared to an increase of 222,800 during the same period of the prior year. Independent Operators pay a fee to the Company based on the number of subscribers to such Independent Operators' systems and the number of channels purchased from the Company. The average monthly fee paid to the Company by an Independent Operator during the year ended December 31, 1997 was $2.60 per subscriber. Other revenue for the year ended December 31, 1997 was $18,596, as compared to $15,724 for the comparable period of 1996, an increase of $2,872. This change included a decrease in Advertising revenue to $4,947 from $7,532, a decrease of $2,585, and an increase in Other to $13,649 from $8,192, an increase of $5,457. The decrease in Advertising revenue was attributable to a shift in advertising on ESPN International programming (the Advertising revenues from which were reported as Advertising revenues in the Company's consolidated financial statements), to advertising sales on ESPN Brasil Ltda. programming (the Advertising revenues from which 27 were not reported in the Advertising revenues line of the Company's consolidated financial statements but as part of the Company's Equity in (losses) income of affiliates). The increase in Other revenues was principally due to increased commissions for sales of HBO Brasil and ESPN Brasil advertising as well as sales of TVA magazine to independent programming providers. Revenue taxes for the year ended December 31, 1997 were $25,104, as compared to $13,747 for the same period of the prior year, an increase of $11,357. For the reasons noted above, Net revenue for the year ended December 31, 1997 was $328,342, as compared to $198,091 for the comparable period in the previous year, an increase of $130,251. Direct operating expenses. Direct operating expenses include Payroll and benefits, Programming, Transponder lease cost, Technical assistance, Vehicle rentals, TVA magazine and Other costs. These expenses, with the exception of C-Band Transponder lease costs, are variable expenses which increase as the number of subscribers increases and the Company's systems grow, and are also dependent on the type of service subscribers select. Direct operating expenses for the year ended December 31, 1997 were $176,958, as compared to $112,297 for the same period in 1996, an increase of $64,661. This increase was primarily attributable to expenses incurred to service the increase in the number of subscribers for such period in 1997 compared to the same period in 1996. Payroll and benefits expense increased to $29,904 from $27,203, an increase of $2,701, as a result of the hiring of more than 95 new employees and an increase in the amounts of commissions paid to employees. Programming costs increased to $95,231 from $42,391, an increase of $52,840, as a result of changes implemented in the programming purchased by the Company. Transponder lease cost increased to $13,895 from $10,847, an increase of $3,048, as a result of an increase in subscribers of the Company's Ku-Band operation, which cost is variable, and the leasing of a fourth transponder in 1997. Technical assistance costs decreased from $5,507 to $1,863, a decrease of $3,644; Vehicle rentals expense decreased from $1,862 to $1,075, a decrease of $787; and the expense of publishing TVA Magazine increased to $7,737 from $6,842, an increase of $895. Other costs include commissions for third party sales, transportation of equipment and materials, third party services, maintenance and other miscellaneous expenses. For the year ended December 31, 1997, Other costs were $27,253, as compared to $17,645 for the same period the prior year, an increase of $9,608. Selling, general and administrative expenses. Selling, general and administrative expenses include Payroll and benefits expense for selling, administrative, financial and human resources, Advertising and promotion, Rent expense, Other administrative expenses, and Other general expenses. Selling, general and administrative expenses for the year ended December 31, 1997 were $116,254, as compared to $81,455 for the same period of 1996, an increase of $34,799. The Company has experienced increasing Selling, general and administrative expenses as a result of its increased pay television activities and the associated administrative costs, including costs related to opening and maintaining additional facilities and an overall increase in Payroll and benefits expense resulting from an increase in the number of employees. Advertising and promotion expense increased to $37,525 from $21,355, an increase of $16,170, as a result of an increase in the number of subscribers and promotional activity. Depreciation, Amortization and Provision for equipment and inventory obsolescence. Depreciation and Amortization includes depreciation of systems, equipment, installation materials, installation personnel and organizational costs and amortization of concessions. Provision for equipment and inventory obsolescence represents charges for lost and obsolete equipment and material. Depreciation and Amortization for the year ended December 31, 1997 was $56,381, as compared to $28,216 for the same period of 1996, an increase of $28,165. Provision for equipment and inventory obsolescence for the year ended December 31, 1997 was $7,438 as compared to $2,250 for the comparable period in 1996, an increase of $5,188. For the reasons noted above, Operating loss for the year ended December 31, 1997 was $28,689 compared to $26,127 for the comparable period in 1996, an increase of $2,562. 28 Interest income. Interest income for the year ended December 31, 1997 was $10,764, as compared to $5,813 for the same period in 1996, an increase of $4,951, principally due to interest received on invested portions of the proceeds of the Senior Notes due 2004 issued in November 1996 (the "Notes"). Interest expense. Interest expense for the year ended December 31, 1997 was $56,553, as compared to $17,520 for the same period of 1996, an increase of $39,033 principally attributable to the interest paid on the Notes. Equity in losses (income) of affiliates and Gain on issuance of shares by equity investee. For the year ended December 31, 1997, Equity in losses (income) of affiliates amounted to a loss of $6,851, 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. The Gain on issuance of shares by equity investees amounted to $1,160 for the year ended December 31, 1997 and was due to a capital gain from HBO Brasil Partners in connection with the entrance of Buena Vista Investments, Inc. (an affilate of Disney Enterprises Inc.) as a partner in HBO Ole Partners. Other non-operating (expenses) income. Other non-operating (expenses) income for the year ended December 31, 1997 was an expense of $2,028, as compared to $6,009 in the same period in 1996, a decrease of $3,981. The Other non-operating expenses for the year ended December 31, 1997 consisted primarily of charges for provision of certain equipment and material installed in the homes of subscribers whose service was terminated. Minority interest. The Minority interest of $916 for the year ended December 31, 1997 represents Mr. Leonardo Petrelli's 14.0% share in aggregate losses of TVA Sul. Net loss. For the reasons noted above, Net loss for the year ended December 31, 1997 was $81,417, as compared to $47,892 for the comparable period in 1996, an increase of $33,525. Year Ended December 31, 1996 Compared to Year Ended December 31, 1995 The table below sets forth the number of subscribers at December 31, 1995 and December 31, 1996 for the Owned Systems. December 31, December 31, Owned Systems Subscribers 1995 1996 - ------------------------- ------- ------- MMDS(a) ...................................... 188,893 230,320 Cable ........................................ 15,129 46,011 DIRECTV and Digital C-Band ................... 15,126 73,180 ------- ------- 219,148 349,511 Paid Subscribers Awaiting Installation(b) .... 18,343 31,124 ------- ------- Total Owned Systems .......................... 237,491 380,635 ======= ======= - -------------------- (a) Includes UHF subscribers. (b) Subscribers who have paid an installation fee but are awaiting the installation of service. The table below sets forth at December 31, 1995 and December 31, 1996 the approximate number of television households which received TVA's programming through the Owned Systems and the Operating Ventures and through sales of programming to the Independent Operators. 29 Households Receiving TVA Programming December 31, December 31, 1995 1996 --------- --------- Total Owned Systems ...................... 237,491 380,635 Operating Ventures ....................... 35,572 85,256 Independent Operators .................... 341,699 564,499 --------- --------- Total .................................... 614,762 1,030,390 ========= ========= Revenues. Monthly subscriptions revenue for the year ended December 31, 1996 was $123,020, as compared to $62,496 for the comparable period in 1995, an increase of $60,524. This increase was principally attributable to an increase in subscriber base and an increase in the amount of average monthly fees for existing subscribers from $30.43 to $39.15 per subscriber and for new subscribers from $39.48 to $43.70 per subscriber. The average monthly subscription price during the year ended December 31, 1996, was $44.94 for MMDS service, $38.59 for Cable service and $38.02 for C-Band service, as compared to $44.04, $38.12 and $41.37, respectively, for the year ended December 31, 1995. The average monthly subscription price for Ku-Band service from its introduction in July 1996 to December 31, 1996, was $40.20. Galaxy Brasil contributed $2,266 to monthly subscription revenue for the year ended December 31, 1996. Installation revenue for the year ended December 31, 1996 was $61,717, as compared to $26,045 for the comparable period in 1995, an increase of $35,672. This increase was principally attributable to the increase in the number of new subscribers and also to an increase in the average installation fee for C-Band service from $586.79 to $649.98. The average installation fee during the year ended December 31, 1996 was $134.48 for MMDS service, $36.61 for Cable service and $649.98 for C-Band service, as compared to $169.70, $81.87 and $586.79 respectively, for the year ended December 31, 1995. The average installation fee for Ku-Band service from its introduction in July 1996 to December 31, 1996, was $877. The net number of subscribers added to the Company's Owned Systems during the year ended December 31, 1996 was 130,363, as compared to 104,295 added during the same period of 1995. Galaxy Brasil contributed $15,609 to Installation revenue for the year ended December 31, 1996. After an initial rollout in July 1996, Galaxy Brasil began enrolling subscribers. Indirect programming revenue for the year ended December 31, 1996 was $11,377, as compared to $2,866 for the comparable period of 1995, an increase of $8,511. This increase was principally attributable to the increase in the number of Independent Operators' subscribers for the period. The number of Independent Operators' subscribers increased by 222,800 during the year ended December 31, 1996, as compared to an increase of 252,026 during the same period of the prior year. Independent Operators pay a fee to the Company based on the number of subscribers to such Independent Operators' systems and the number of channels purchased from the Company. The average monthly fee paid to the Company by an Independent Operator during the year ended December 31, 1996 was $1.44 per subscriber. Other revenue for the year ended December 31, 1996 was $15,724, as compared to $10,603 for the comparable period of 1995, an increase of $5,121. This change included a decrease in Advertising revenue to $7,532 from $8,377, a decrease of $845, and an increase in Other to $8,192 from $2,226, an increase of $5,966. The decrease in Advertising revenue was attributable to a shift in advertising sales from advertising on ESPN International programming (the Advertising revenues from which were reported as Advertising revenues in the Company's consolidated financial statements), to advertising sales on ESPN Brasil Ltda. programming (the Advertising revenues from which were not reported in the Advertising revenues line of the Company's consolidated financial statements but as part of the Company's Equity in (losses) income of affiliates). The increase in Other revenues was principally due to the increase in sales of TVA magazine, technical assistance, commissions for sales of HBO Brasil and ESPN Brasil advertising as well as sales of ESPN Brasil programming to independent programming providers. 30 Revenue taxes for the year ended December 31, 1996 were $13,747, as compared to $7,506 for the same period of the prior year, an increase of $6,241. Galaxy Brasil contributed $1,488 to revenue taxes for the year ended December 31, 1996. Galaxy Brasil began enrolling subscribers and collecting revenue in July 1996. For the reasons noted above, Net revenue for the year ended December 31, 1996 was $198,091, as compared to $94,504 for the comparable period in the previous year, an increase of $103,587. Galaxy Brasil contributed $16,530 to Net revenue for the year ended December 31, 1996. Direct operating expenses. Direct operating expenses for the year ended December 31, 1996 were $112,297, as compared to $62,026 for the same period in 1995, an increase of $50,271. This increase was primarily attributable to expenses incurred to service the increase in the number of subscribers for such period in 1996 compared to the same period in 1995. Payroll and benefits expense increased to $27,203 from $12,520 an increase of $14,683, as a result of the hiring of more than 217 new employees and an increase in the amounts of commissions paid to employees. Programming costs increased to $42,391 from $21,609, an increase of $20,782, as a result of changes implemented in the programming purchased by the Company. Transponder lease cost increased to $10,847 from $7,568, an increase of $3,279, as a result of leasing a third transponder in 1996. Technical assistance costs increased to $5,507 from $5,152, an increase of $355; Vehicle rentals expense increased to $1,862 from $1,732, an increase of $130; and the expense of publishing TVA Magazine increased to $6,842 from $3,318, an increase of $3,524. This increase was principally due to the increase in the number of subscribers. Other costs include commissions for third party sales, transportation of equipment and materials, third party services, maintenance and other miscellaneous expenses. For the year ended December 31, 1996, Other costs were $17,645, as compared to $10,127 for the same period the prior year, an increase of $7,518. Galaxy Brasil contributed $5,854 to Direct operating expenses, as compared to $1,027 for the comparable period in 1995, an increase of $4,827 as Galaxy Brasil incurred Payroll and benefits, Vehicle rentals and other costs consistent with starting this operation. Selling, general and administrative expenses. Selling, general and administrative expenses for the year ended December 31, 1996 were $81,455, as compared to $46,902 for the same period of 1995, an increase of $34,553. The Company has experienced increasing Selling, general and administrative expenses as a result of its increased pay television activities and the associated administrative costs, including costs related to opening and maintaining additional facilities and an overall increase of $5,804 in Payroll and benefits expense, which, for the year ended December 31, 1996 were $27,431, as compared to $21,627 for the same period of 1995, resulting from an increase in the number of employees and sales commissions. Advertising and promotion expense increased to $21,355 from $11,122, an increase of $10,233, as a result of an increase in the number of subscribers and promotional activity. Galaxy Brasil contributed $15,328 to Selling, general and administrative expenses for the year ended December 31, 1996, as compared to $79 for the comparable period in 1995, an increase of $15,249. Such increase at Galaxy Brasil was due to increases in Payroll and benefits expense and Other administrative expenses. Depreciation, Amortization and Allowance for inventory obsolescence. Depreciation and Amortization for the year ended December 31, 1996 was $28,216, as compared to $13,268 for the same period of 1995, an increase of $14,948. This increase was principally due to the depreciation of additional reception equipment acquired during 1996, including equipment used in the expansion of the Company's cable systems and decoders used for DIRECTV and C-Band service. Allowance for inventory obsolescence for the year ended December 31, 1996 was $2,250 as compared to $0 for the comparable period in 1995, an increase of $2,250. This increase was principally due to advances in MMDS reception equipment technology which resulted in the obsolescence of MMDS reception equipment previously installed by the Company. Galaxy Brasil contributed $2,858 to Depreciation, Amortization and Allowance for inventory obsolescence for the year ended December 31, 1996, as compared to $127 for the comparable period in 1995, an increase of $2,731. Such increase was due to depreciation expenses associated with the Tambore Facility. For the reasons noted above, Operating loss for the year ended December 31, 1996 was $26,127, as compared to $27,692 for the comparable period in 1995, a decrease of $1,565. Galaxy Brasil contributed $7,510 31 of this loss for the year ended December 31, 1996, as compared to $1,233 for the comparable period in 1995, an increase of $6,277. Interest income. Interest income for the year ended December 31, 1996 was $5,813, as compared to $3,118 for the same period in 1995, an increase of $2,695. This increase was principally due to interest received by the Company in connection with temporarily invested portions of the proceeds of the Notes and capital contributions in December 1995. Interest expense. Interest expense for the year ended December 31, 1996 was $17,520, as compared to $17,745 for the same period of 1995, a decrease of $225. In November 1996 the Company issued the Notes and used some of the proceeds to repay certain outstanding indebtedness bearing interest rates greater than that applicable to the Notes. Equity in losses (income) of affiliates and Gain on issuance of shares by equity investee. For the year ended December 31, 1996, Equity in losses (income) of affiliates amounted to a loss of $8,532, as compared to a loss of $3,672 in the same period of 1995, an increase in loss of $4,860. The primary reason for this increase in loss was sustained losses at ESPN Brasil, which was formed on June 15, 1995. The Gain on issuance of shares by equity investees amounted to $2,317 for the year ended December 31, 1996 and was due to a capital gain from TV Filme's equity offering in 1996. Other non-operating (expenses) income. Other non-operating (expenses) income for the year ended December 31, 1996 was an expense of $6,009, as compared to income of $4,389 in the same period in 1995, an increase in expense of $10,398. This increase was primarily due to costs incurred in 1996 in connection with the negotiations resulting in the investment in the Company by certain shareholders in December 1995, a loss of unrecovered decoders installed in the homes of subscribers whose service was terminated, and the organization of TVA Sul as a holding company. The Other non-operating expenses for the year ended December 31, 1996 consisted primarily of fees paid in connection with the investment of Falcon International and Hearst/ABC Parties in the Company. The Other non-operating income for the comparable period of 1995 consisted primarily of income from the sale of movie inventory and other assets. Minority interest. The Minority interest of $1,849 for the year ended December 31, 1996 represents Mr. Leonardo Petrelli's 13.0% share of the aggregate losses of TVA Sul. Net loss. For the reasons noted above, Net loss for the year ended December 31, 1996 was $47,892, as compared to $41,070 for the comparable period in 1995, an increase of $6,822. 32 Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 The table below sets forth the number of subscribers at December 31, 1995 and December 31, 1994 for the Owned Systems. December 31, December 31, Owned System Subscribers 1994 1995 ------- ------- MMDS(a) ........................................ 111,771 188,893 Cable .......................................... 1,007 15,129 Digital C-Band ................................. 2,075 15,126 ------- ------- 114,853 219,148 Paid Subscribers Awaiting Installation(b) ...... 13,956 18,343 ------- ------- Total Owned Systems ............................ 128,809 237,491 ======= ======= - -------------------- (a) Includes UHF subscribers. (b) Subscribers who have paid an installation fee but are awaiting the installation of service. The table below sets forth at December 31, 1995 and December 31, 1994 the approximate number of television households which received TVA's programming through the Owned Systems and the Operating Ventures and through sales of programming to the Independent Operators. Households Receiving TVA Programming December 31, December 31, 1994 1995 ------- ------- Total Owned Systems ........................ 128,809 237,491 Operating Ventures ......................... 7,640 35,572 ------- ------- Independent Operators ...................... 89,673 341,699 Total .................... 226,122 614,762 ======= ======= Revenues. Monthly subscriptions revenue for the year ended December 31, 1995 was $62,496, as compared to $27,976 for the comparable period in 1994, an increase of $34,520. This increase was attributable to the net addition of 104,295 subscribers to the Company's Owned Systems, and the increase in the average monthly fee for existing subscribers to $33.24 from $27.80, an increase of $5.44, and for new subscribers to $39.48 from $31.87, an increase of $7.61. The average monthly subscription price during the year ended December 31, 1995 was $44.04 for MMDS service and $38.12 for Cable service, as compared to $42.48 and $26.26, respectively, for the year ended December 31, 1994. The average monthly subscription price for C-Band service for the year ended December 31, 1995 was $41.37. In 1994, the Company's C-Band service was in its initial phase of operations. In addition, Galaxy Brasil's Ku-Band service was under development in 1995. The Company was able to increase the monthly fee as the market price for pay television increased. The increase in the number of subscribers was due to (i) the continued expansion and penetration of the Company's MMDS service, including the introduction of signal repeaters in Sao Paulo and Rio de Janeiro, (ii) the full year benefit of Cable system construction in Sao Paulo and (iii) the net addition of 13,051 C-Band subscribers through an aggressive national marketing campaign timed to coincide with the Company's main competitor focusing on its Cable systems. During each year, all revenues came from the operation of the TV Group as the operations of Galaxy Brasil were in development. Installation revenue for the year ended December 31, 1995 was $26,045, as compared to $6,997 for the comparable period in 1994, an increase of $19,048. This increase was principally attributable to the increase in the number of installations and to the increase in the average fees for installations. The average fee for MMDS service installation increased to $169.70 from $119.75, an increase of $49.95, and the average fee for Cable service 33 installation increased to $81.87 from $44.69, an increase of $37.18. The C-Band average installation fee increased to $586.79 from $500.00, an increase of $86.79. The growth in installations was aided by the continued growing awareness of pay television in Brazil and the Company's start-up of live broadcasts of the Brazilian National Soccer Championship, the Sao Paulo State Championship and other soccer events through ESPN Brasil. As with Monthly subscriptions revenue, all Installation revenue during each year came from the operations of the TV Group. Indirect programming revenue for the year ended December 31, 1995 was $2,866, as compared to $1,626 for the comparable period of 1994, an increase of $1,240. This increase was principally attributable to the increase in the number of Independent Operators' subscribers for the period, as compared to the same period in 1994. Such Independent Operators' subscribers increased to 341,699 at December 31, 1995, as compared to 89,673 at December 31, 1994, an increase of 252,026. The average fee paid during both 1995 and 1994 was $1.50 per subscriber per month. Other revenue for the year ended December 31, 1995 was $10,603, as compared to $7,173 for the comparable period of 1994, an increase of $3,430. This increase included an increase in Advertising revenue to $8,377 from $5,727, an increase of $2,650. The growth in Advertising revenue was due to the increase in the subscriber base, an increase in the amount of advertising time sold by the Company per hour of programming and an increase in the rate charged for advertising time. Revenue taxes for 1995 were $7,506, as compared to $872 for the prior year, an increase of $6,634. This increase was primarily attributable to a Government imposed 5.0% increase in the tax rate, which increased Revenue taxes to 7.65% from 2.65%, imposed on the Company's Gross revenues (excluding Advertising revenue, which is taxed at 2.65%). For the reasons noted above, Net revenue for the year ended December 31, 1995 was $94,504, as compared to $42,900 for the comparable period the previous year, an increase of $51,604. Direct operating expenses. Direct operating expenses for the year ended December 31, 1995 were $62,026, as compared to $28,659 for the same period of 1994, an increase of $33,367. This increase was attributable primarily to the increase in the number of subscribers to the Company's systems which led to increases in Payroll and benefits expense, Programming expense, Transponder lease cost, Technical assistance expense, Vehicle rentals expense, TVA Magazine expense and Other costs. Payroll and benefits expense increased to $12,520 from $8,022, an increase of $4,498, as the Company added approximately 450 employees. Programming costs increased to $21,609 from $12,133, an increase of $9,476, as the Company's subscriber base grew and the Company added four new channels to each of its distribution systems. Transponder lease cost increased to $7,568 from $1,555, an increase of $6,013, due to an increase in the cost of satellite transponder leases and the application of a 25.0% tax charged by the Brazilian Government on transponder lease payments beginning in June 1995. Technical assistance expense increased to $5,152 from $1,622, an increase of $3,530, due to an increase in the subscriber base and the upgrade of existing systems for the receipt of additional channels by subscribers, Vehicle rentals expense increased to $1,732 from $788, an increase of $944, and TVA Magazine expense increased to $3,318 from $1,430, an increase of $1,888. These expenses are variable and increased due to the costs associated with servicing the larger subscriber base and installing new subscribers. For the year ended December 31, 1995, Other costs were $10,127, as compared to $3,109 for the same period the prior year, an increase of $7,018. The Company experienced increased expenses as a result of its increased television activities and associated costs, including costs related to opening and maintaining additional facilities. Galaxy Brasil contributed $1,027 to Direct operating expenses for the year ended December 31, 1995, as compared to $0 for the same period of 1994. Galaxy Brasil incurred Payroll and benefits expense, Vehicle rentals expense and Other costs consistent with starting its DIRECTV service. Selling, general and administrative expenses. Selling, general and administrative expenses for the year ended December 31, 1995 were $46,902, as compared to $24,370 for the same period of 1994, an increase of $22,532. The Company experienced increased Selling, general and administrative expenses as a result of its 34 increased pay television activities and associated administrative costs, including costs related to opening and maintaining additional facilities and an overall increase in payroll expenses resulting from an increase in the number of employees. Advertising and promotion expense increased to $11,122 from $3,540, an increase of $7,582 largely due to the Company's increased promotional activity, including nationwide C-Band promotion. Galaxy Brasil contributed $79 to Selling, general and administrative expenses for the year ended December 31, 1995, all of which constituted Advertising and rent expenses, as compared to $0 for the same period of 1994. Depreciation and Amortization. Depreciation and Amortization expense for the year ended December 31, 1995 was $13,268, as compared to $6,177 for the same period of 1994, an increase of $7,091. The increase was due primarily to increased capitalization of the costs associated with building the MMDS, Cable and C-Band systems and with the installation of new subscribers. Galaxy Brasil contributed $127 to Depreciation and Amortization expense (all of which constituted Depreciation expense) for the year ended December 31, 1995, as compared to $0 for the comparable period in 1994. For the reasons noted above, Operating loss for the year ended December 31, 1995 was $27,692, as compared to $16,306 for the comparable period in 1994, an increase in loss of $9,303. Galaxy Brasil contributed $11,386 to this loss for the year ended December 31, 1995, as compared to $0 for the comparable period in 1994. Interest income. For the year ended December 31, 1995, Interest income totaled $3,118, as compared to $21,806 in the similar period in 1994, a decrease of $18,688. This reduction in Interest income was a result of the shorter period in which a capital contribution of $125,000 in 1995 earned interest relative to the length of time a capital contribution of $151,452 earned interest in 1994, as well as due to the sharp appreciation of the Brazilian real versus the US dollar upon introduction of the real in late 1994. Interest expense. Interest expense for the year ended December 31, 1995 was $17,745, as compared to $16,413 for the year ended December 31, 1994, an increase of $1,332. Equity in losses (income) of affiliates. For the year ended December 31, 1995, Equity in losses (income) of affiliates was a loss of $3,672, as compared to income of $383 for the same period in 1994, a decrease of $4,055. The principal reasons for this reduction were the loss sustained by ESPN Brasil Ltda. which came into existence during June 1995, and HBO Brasil Partners, which came into existence in 1994. Other non-operating (expenses) income. For the year ended December 31, 1995, Other non-operating (expenses) income was income of $4,389, as compared to an expense of $1,273 for the same period of 1994, an increase of $5,662. The primary reasons for this increase were equipment rental income, sales of assets and a release of certain obligations, among others. Minority interest. The Minority interest of $871 for the twelve months ended December 31, 1995 represents Mr. Leonardo Petrelli's 20.0% share of the $4,355 in aggregate losses of TVA Curitiba. Net loss. For the reasons noted above, Net loss for the year ended December 31, 1995 was $41,070, as compared to $11,997 for the comparable period in 1994, an increase of $29,073. 35 Seasonality The Company's revenues are seasonal. Generally, during the Brazilian summer months of January and February the Company experiences lower demand for installation for each of its services. As a result, the Company experiences a decrease in Installation revenue of approximately 25% in these months, which decrease is offset by corresponding decreases in Payroll and benefits expense (i.e. sales commissions), Advertising and promotion expense and Other costs. Liquidity and Capital Resources Since inception, the Company has sustained losses primarily due to insufficient revenue to fund start-up costs, interest expense and charges for depreciation and amortization arising from the development of its pay television systems. As of December 31, 1997, the Company had incurred cumulative net losses of over $285,284. During the periods under review, the Company required external funds to finance its capital expenditures, operating activities and make payments of principal and interest on its indebtedness. The sources of such funds have been as follows: (i) cash and cash equivalents of $104,798 at December 31, 1996, (ii) borrowings from Abril under the Abril Credit Facility, of which $54,323 was outstanding as of December 31, 1997 (which amount was subsequently repaid in connection with a capital increase in February 1998) and a subordinated shareholder loan of $43,963 to Galaxy Brasil, of which $40,909 remained outstanding as of December 31,1997, (iii) borrowings under lines of credit, of which $50,317 was outstanding as of December 31, 1997, (iv) net capital contributions of approximately $388,000 from shareholders (consisting of $288,000 as of December 31, 1997 and a $100,000 capital increase in February 1998), (v) the EximBank Facility, of which $23,277 was outstanding as of December 31, 1997, (vi) the Galaxy Brasil Leasing Facility, of which $43,463 was outstanding as of December 31, 1997 and (vii) the Notes, of which $250,000 was outstanding as of December 31, 1997. The Company's liquidity needs will arise primarily from capital expenditures, debt service requirements and, in certain periods, the funding of its working capital requirements. As of December 31, 1997, the Company had approximately $465,009 of indebtedness outstanding, primarily consisting of $250,000 principal amount of the Notes and loans from shareholders. In addition to debt service, the Company will require substantial amounts of capital for (i) the construction of cable networks and the installation of equipment at subscribers' locations, (ii) the construction of additional transmission and headend facilities and related equipment purchases, (iii) the continued funding of losses and 36 working capital requirements and (iv) investments in, and maintenance of, vehicles and administrative offices. In addition, the Company continually evaluates opportunities to acquire, either directly or indirectly, pay television licenses and programming rights. The Company made purchases of fixed assets of $22,639, $93,029, $125,612 and $247,867, in 1994, 1995, 1996 and 1997 respectively. Management estimates that $150,930 and $113,762 of capital expenditures will be required in 1998 and 1999, respectively, principally in connection with the purchase of materials and equipment. The Company also has certain commitments that must be funded, including investments of approximately $35,786 prior to December 31, 1998 in GLA ($15,014), Surfin ($10,000), ESPN Brasil Ltda., ($8,718) and HBO Brasil Partners, ($2,054). Actual amounts of funds required may vary materially from these estimates and additional funds could be required in the event of cost overruns, unanticipated expenses, regulatory changes, engineering design changes and other technological-driven changes. The Company's principal sources of liquidity are borrowings from Abril, the EximBank Facility, the Galaxy Brasil Leasing Facility, the Notes and the Company's short-term line of credit (each as described below), together with net cash provided by operating activities. However, until sufficient cash flow is generated from operations, the Company will be required to utilize its current sources of debt funding to satisfy its liquidity needs. The Company had approximately $1,024 of cash and cash equivalents as of December 31, 1997. For the year ended December 31, 1997, net cash used in operating activities was $13,727, primarily as the result of a net loss for the year of $81,417, an increase in accounts receivable of $22,475, an increase in pre-paid and other assets of $11,199 and an increase in inventories of $11,365. The increase was partially offset by $54,624 of depreciation, a non-cash item and a decrease in accounts payable to suppliers of $32,989. For the year ended December 31, 1997, cash used in investing activities was $277,117, primarily as the result of capital expenditures of $247,867 for the purchase of fixed assets and investments in equity and cost investments and concessions of $24,877. The purchases of fixed assets were principally related to the purchase of decoders, equipment, hardware and materials and labor used for new subscriber installations. For the year ended December 31, 1997, net cash provided by financing activities was $187,070, consisting principally of borrowings from the Abril Credit Facility, the EximBank Facility, the Galaxy Brasil Leasing Facility and the April subordinated shareholder loan to Galaxy Brasil. The Abril Credit Facility allows the Company to borrow up to $60,000 on a revolving basis until December 1998. Since June 1996, the Company has from time to time requested, and Abril has provided, funds in excess of $60,000. The loans are generally denominated in reais and bear interest at a rate equal to a percentage of the CDI rate, the Brazilian interbank lending rate, adjusted at the beginning of each month. The Company currently has no amounts outstanding under the Abril Credit Facility. However, the Company will be able to re-borrow the full amount of such facility, as required. In addition , in 1997 Abril made a subordinated shareholder loan of $43,963 to Galaxy Brasil, of which $40,909 was outstanding as of December 31,1997. On December 9, 1996, TVA Sistema, as Borrower, and Tevecap, as Guarantor, entered into a credit agreement with The Chase Manhattan Bank for the financing of C-Band decoders and other related equipment (the "EximBank Facility"). The Export-Import Bank of the United States of America ("EximBank") also guaranteed 85.0% of the amount of the loan. The loan was made on terms customary for credits supported by EximBank to Brazilian borrowers with an interest rate of LIBOR plus a specified margin. The principal amount of the loan was $29,350, which was dispersed in two tranches, the first in April 1997 in the principal amount of $11,400 with a term of five years and the second in August 1997 in the principal amount of $17,950 with a term of 4.5 years. As of December 31, 1997, the principal amount outstanding under the EximBank Facility was $23,277. 37 Galaxy Brasil entered into the Galaxy Brasil Leasing Facility, a five-year $49,900 sale leaseback facility, during the first quarter of 1997. Under the Galaxy Brasil Leasing Facility, Galaxy Brasil has access to financing for the purpose of acquiring dish antennae, decoder boxes and other equipment for its Ku-Band service. This facility will be available until 2002 and bear interest at a fixed rate of 12.5% per year. During 1997 Galaxy Brasil drew down the entire amount available under the Galaxy Brasil Leasing Facility, and had $43,463 outstanding as of December 31, 1997. Galaxy Brasil's payment obligations under the Galaxy Brasil Leasing Facility are guaranteed by Tevecap. On November 26, 1996, Tevecap raised funds in foreign markets through a private placement amounting to $250,000 12 5/8% Senior Notes (the "Notes"). These Notes mature on November 26, 2004 and are guaranteed by certain of Tevecap's subsidiaries. The Indenture relating to the Notes contains certain restrictive covenants which relate to, among others, the ability of Tevecap and the Guarantors to incur additional indebtedness, declare dividends, effect asset dispositions, enter into new liens, sell capital stock, enter into mergers and/or consolidations, invest in non-guarantor subsidiaries that are not Guarantors and transfer existing businesses. As of December 31, 1997, the Company was in compliance with all restrictive covenants contained in the Indenture. The Company has also from time to time received contributions and loans from its shareholders to fund liquidity needs and may continue to receive such contributions and loans in the future. In addition, as is standard business practice in Brazil, the Company frequently finances a portion of its working capital through the deferment of payment terms for the purchase price of property (typically up to 360 days). These amounts have often subsequently been refinanced by the Company with short-term bank indebtedness. The Company currently has lines of credit with terms of 360 days which will continue to be available after the Offering. The Company believes, based on management's internal forecasts and assumptions relating to its operations, that the aggregate net proceeds from the sale of the Notes, together with the proceeds from the deferral of payments to suppliers of fixed assets, the EximBank Facility, the Galaxy Brasil Leasing Facility, the Abril Credit Facility, the Abril subordinated shareholder loan to Galaxy Brasil, the $100,000 capital increase in February 1998, additional leasings and financings and funds generated from operations will be sufficient to meet its working capital and capital expenditure requirements for at least the period through December 31, 1998. In the long term, the Company believes, based on management's internal forecasts and assumptions relating to its operations, that its existing cash and funds generated from operations, together with its existing financing facilities agreements, will be sufficient to meet its working capital and capital expenditure requirements. In the event that the Company's plans change, its assumptions change or prove inaccurate, or if the proceeds from the sale of the Notes, the EximBank Facility, the Galaxy Brasil Leasing Facility, the Abril Credit Facility and projected cash flows otherwise prove insufficient to fund operations (due to unanticipated expenses, technical problems, difficulties or otherwise), the Company could be required to seek additional sources of financing. The Company has no current arrangements with respect to sources of additional financing and there can be no assurance that the Company would be able to obtain additional financing on terms acceptable to the Company, or at all. In addition, the Company's liquidity may also be adversely affected by statutory minimum dividend requirements under applicable Brazilian law. Accounting for Income Taxes The Company has approximately $194,850 of net operating losses ("NOLs") to offset against regular taxes. These NOLs are unexpirable. Statement of Financial Accounting Standards No. 109 (Accounting for Income Taxes) ("SFAS 109") requires that the Company determine whether it is "more-likely-than-not" that the Company will realize the benefits associated with such losses and provides that in making such a determination, all negative and positive evidence should be considered (with more weight given to evidence that is "objective and verifiable"). SFAS No. 109 indicates that "forming a conclusion that a valuation allowance is not needed is difficult when there is negative evidence such as cumulative losses in recent years". The Company has a limited operating history and has generated losses since its inception. In view of this, the Company has established a full valuation allowance for the amount of NOL carryforwards in excess of net taxable temporary differences. This determination was based primarily on historical losses. Management does, however, believe that the Company will be profitable in the future and, as such, will be able to utilize these NOLs. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Management does not believe that SFAS No. 130 will have a material effect on the Company's consolidated financial statements, and it has not determined whether the new reporting provisions under SFAS No. 131 will require supplemental disclosures by the Company. See Note 23 to the Tevecap Financial Statements. Year 2000 Date Conversion The Company has evaluated the implementation of changes to computer systems and applications necessary to achieve a year 2000 date conversion with no effect on customers or disruption to business operations. These actions are necessary to ensure that the systems and applications will recognize and process the year 2000 and beyond. The Company expects that the implementation of such changes will be completed during the first quarter of 1999, and will cost approximately $3,000. 38 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/A and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized. TEVECAP S.A. By: /s/ Jose Augusto P. Moreira -------------------------------------- Name: Jose Augusto P. Moreira Title: Officer By: /s/ Claudio Cesar D'Emilio -------------------------------------- Name: Claudio Cesar D'Emilio Title: Officer Date: June 12, 1998 39 GLOSSARY ABC: ABC, Inc., formerly known as "Capital Cities/ABC, Inc." ABC Class households: The highest three classes of Brazilian households based upon the achievement of a total of 10 points or higher on the classification scale used by the Associacao Brasileira de Anunciantes (Brazilian Advertisers Association) to determine a household's socio-economic class, which ranges from A to E depending on the education level of the head of the household, the possession by the household of certain items of material comfort, including automobiles, television sets and other household items, and the hiring of domestic servants by the household. Abril: Abril S.A., the leading magazine publishing, printing and distribution company in Latin America. Abril Credit Facility: A revolving credit facility, dated December 6, 1995, between Tevecap, as the borrower, and Abril, as the lender. BBC: British Broadcasting Corporation. BNDES: Banco National de Desenolvimento Economico e Social, the national development bank owned by the Brazilian Government. Brasilsat: A satellite operated by Embratel through which the Company provides C-Band service. C-Band: A satellite transmission system which provides a signal on the "c" bandwidth. Cable: A Cable network employs electromagnetic transmission over coaxial and/or fiber-optic cable to transmit multiple channels carrying images, sound and data between a central facility and individual customers' television sets. Networks may allow one-way (from a headend to a residence and/or business) or two-way transmission from a headend to a residence and/or business with a data return path for the headend. Cable license: A license that is granted by the applicable governing body pursuant to its authority under the communications laws of a particular country for the purpose of providing Cable services for a specific franchise/license area. Canbras: Canbras Communications Corp., a Canadian corporation. Canbras Association Agreement: Association Agreement dated June 14, 1995, among Tevecap, TVA Sistema, the Canbras TVA Companies, Canbras and Canbras-Par. Canbras TVA Companies: Canbras TVA Cabo and TV Cabo Santa Branca. Canbras TVA Cabo: Canbras TVA Cabo Ltda., a Brazilian limitada. Canbras TVA: The operations of Canbras TVA Cabo and TV Cabo Santa Branca, in each of which Tevecap holds a 36.0% equity interest and Canbras Par holds a 64.0% equity interest. Canbras-Par: Canbras Participacoes, Ltda., a Brazilian limitada wholly-owned by Canbras. CBC: California Broadcasting Center, an uplink center for GLA located in Long Beach, California. A-1 CBS: CBS, Inc. Central Bank: Central Bank of Brazil (Banco Central do Brasil) Chase Parties: Two wholly owned subsidiaries of CMIF through which CMIF holds its equity interest in Tevecap. Churn: With respect to a pay television system for a given period, the quotient expressed as a percentage of (i) the number of subscribers disconnected from such system less the number of formerly disconnected subscribers reconnected to the system divided by (ii) the number of subscribers to the system as of the beginning of the period plus the number of subscribers added to the system. Cisneros Group: Cisneros Group of Companies, which holds a 10% interest in GLA through Darlene Investments. CMIF: Chase Manhattan International Finance Ltd., an affiliate of The Chase Manhattan Bank which holds a 8.1% interest in Tevecap through two wholly owned subsidiaries. Coaxial cable: Cable consisting of a central conductor surrounded by and insulated from another conductor. It is the standard material used in traditional Cable systems. Signals are transmitted through it at different frequencies, giving greater channel capacity than is possible with twisted pair cable, but less than is allowed by optical fiber. Comercial Cabo Sao Paulo: Comercial Cabo TV Sao Paulo Ltda., a Brazilian limitada in which Tevecap holds a 99% equity interest. Company: Tevecap, together with its consolidated subsidiaries. CPL: Cable Participacoes Ltda., a Brazilian limitada, jointly owned by Hearst and ABC, which limitada holds a 2.0% equity interest in Tevecap. CPCT: Centrais Privadas de Comutacao Telefonica, certain private telephone networks comparable to private branch exchanges (PBX) found in larger apartment complexes, hotels and businesses in the United States. CVM: Comissao de Valores Mobiliarios, the securities commission of Brazil. Darlene Investments: Darlene Investments, LLC, a Cayman Islands limited liability company which is part of the Cisneros Group of Companies. DBS: Direct broadcast satellite service, operating in C-Band or Ku-Band width, by which television programming is transmitted to individual dwellings, each served by a single satellite dish. DBS Systems: Ku-Band and C-Band operations of Galaxy Brasil and TVA Sistema, respectively. 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. A-2 DLA: DIRECTV Latin America, a California corporation wholly-owned by Hughes Communications that holds a 60% equity interest in GLA. Embratel: Empresa Brasileira de Telecomunicacoes, the Brazilian government-owned company authorized to provide satellite telecommunications services utilizing the Sistema Brasiliero de Telecomunicacoes por Satelite (Brazilian Satellite Telecommunications System). Equity Subscribers: Subscribers to the Operating Ventures adjusted for the Company's equity ownership in the Operating Ventures. ESPN: ESPN, Inc., in which ABC has an 80.0% equity interest and Hearst has a 20.0% equity interest. ESPN Agreement: Quotaholders Agreement, dated June 26, 1995, among Tevecap, TVA Sistema, ESPN Brazil, Inc. and ESPN Brasil Ltda. ESPN Brasil: Programming provided by ESPN Brasil Ltda. ESPN Brazil, Inc.: A Delaware corporation wholly owned by ESPN. ESPN Brasil Ltda.: ESPN do Brasil Ltda., a Brazilian limitada in which Tevecap holds a 50.0% equity interest and ESPN Brazil, Inc., holds a 50.0% equity interest. Event Put: A triggering event under the Stockholders Agreement pursuant to which each of the Stockholders (other than Abril) may, in certain circumstances, demand that Tevecap purchase all or a portion of its shares. EximBank: The Export-Import Bank of the United States. EximBank Facility: A credit facility, dated December 9, 1996, among Tevecap, as Guarantor, TVA Sistema, as borrower, and The Chase Manhattan Bank, N.A., as lender. The EximBank will guarantee 85% of amounts borrowed under the EximBank Facility. Falcon International: Falcon International Communications (Bermuda L.P.), a subsidiary of Falcon International Communications, L.L.C., a Delaware limited liability company. Falcon Time Put: A provision of the Stockholders Agreement pursuant to which Falcon International may, in certain circumstances, demand that Tevecap purchase all or a portion of the shares held by Falcon International. Fiber-optic cable: Cable made of glass fibers through which signals are transmitted as pulses of light. Fiber-optic cable has the capacity for a large number of channels. Financial Statements: The audited financial statements of Tevecap and its subsidiaries and the notes thereto included herein. Fox: Twentieth Century Fox Television International. Galaxy Brasil: Galaxy Brasil S.A., a wholly-owned subsidiary of Tevecap which operates Brazil's first Ku-Band system. Galaxy Brasil Leasing Facility: A five-year, $49.9 million lease and sale-leaseback facility entered into in March 1997 by Galaxy Brasil, as lessee, and Citibank, N.A., as lessor. A-3 Galaxy Latin America: Galaxy Latin America, LLC, a Delaware limited liability company the members of which are DLA, which holds a 60.0% equity interest, Darlene Investments, which holds a 20.0% equity interest, TVA Communications, which holds a 10% equity interest, and Grupo Frecuencia Modulada Television, which holds a 10.0% equity Interest. Galaxy 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 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 Midia: Grupo de Midia Sao Paulo. Grupo Frecuencia Modulada Television: Grupo Frecuencia Modulada Television, S.A. de C.V., a Mexican corporation wholly owned by Grupo MVS. Grupo MVS: Grupo MVS, S.A. de C.V., a Mexican corporation. Guarantors: TVA Sistema de Televisao S.A., Galaxy Brasil S.A., TVA Sul Participacoes S.A., Comercial Cabo TV Sao Paulo Ltda., TVA Sul Parana Ltda., CCS Camboriu Cable System de Telecomunicacoes Ltda., TVA Sul Santa Catarina Ltda., TVA Sul Foz do Iguacu Ltda, TVA Distribuidora S.A., TVA Programadora Ltda. and TVA Satelite Ltda. HABC II: Hearst/ABC Video Services II, a Delaware general partnership jointly owned by Hearst and ABC, which partnership holds a 15.3% equity interest in Tevecap. HBO Brasil: Programming provided by HBO Brasil Partners. HBO Brasil Ltda: A Brazilian limitada, wholly owned by HBO Partners, that distributes HBO programming in Brazil. HBO Brasil Partners: HBO Brasil Partners Ltd., a joint venture between TVA, which holds a 24.0% equity interest, and HBO Ole Partners, which holds a 76.0% equity interest. HBO Ole Partners: A partnership among Time Warner Entertainment Company, L.P., SPE Latin American Acquisition Corporation, Ole Communications, Inc. and BVI Television Investments, Inc. Headend: A collection of hardware, typically including satellite receivers, modulators, amplifiers and videocassette playback machines. Signals, when processed, are then combined for distribution within the Cable network. Hearst: The Hearst Corporation. Hearst/ABC Parties: HABC II and CPL. A-4 Hearst/ABC Programming Agreement: Programming Agreement, dated December 6, 1995, among Tevecap, Hearst and ABC. Homes Passed: Homes that can be connected to a Cable distribution system without further extension of the distribution network. Hughes Communications: Hughes Communications, Inc. Hughes Electronics: Hughes Electronics Corporation. IBGE: Instituto Brasileiro de Geografia e Estatistica. IBOPE: Instituto Brasileiro de Opiniao Publica e Estatistica. Indenture: The Indenture, dated as of November 26, 1996, among Tevecap, Tevecap's Restricted Subsidiaries, Chase Manhattan Bank, 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. License Subsidiaries: Companies that hold pay television licenses covering the operation of certain of the Owned Systems. Local Operating Agreement: Local Operating Agreement, dated July 26, 1996, between GLA and Tevecap. LOS: An unobstructed "Line of Sight" from any of the Company's MMDS headends to a subscriber's antenna. MGM: Metro Goldwyn Mayer, Inc. Ministry of Communications: The Brazilian Ministry of Communications, authorized to regulate the Brazilian subscription television industry pursuant to the Brazilian Telecommunications Code of 1962. MMDS (Multi-channel multi-point distribution system): A one-way radio transmission of television channels over microwave frequencies from a fixed station transmitting to multiple receiving facilities located at fixed points. MMDS license: A license that is granted by the applicable governing body pursuant to its authority under the communications laws of a particular country for the purpose of providing MMDS services for a specific franchise/license area. A-5 MTV Brasil: MTV Brasil Ltda., a Brazilian limitada in which Abril holds a 50.0% equity interest and Viasem Brasil Holdings Ltda. (an indirect subsidiary of Viacom International) holds the remaining 50% equity interest. Multicanal: Multicanal Participacoes S.A., a Cable service provider in Brazil. NBC: National Broadcasting Company, Inc. NDS: News Digital Systems Limited, a wholly-owned subsidiary of News Corporation. Net Brasil: Net Brasil S.A., a Cable and MMDS service provider in Brazil. Net Sat: Net Sat Servicos Ltda., TVA's competitor in DBS Service, in which Globo Par has a controlling interest and whose other equity holders include News Corporation, a subsidiary of The News Corporation Limited, and Grupo Televisa, S.A. of Mexico. News Corporation: News Corporation plc. the Notes: Tevecap's 250,000,000 12 5/8% Senior Notes due 2004 issued on November 26, 1996. Operating Ventures: Canbras TVA and TV Filme, two of TVA's minority-owned ventures. Owned Systems: TVA Sistema, TVA Sul and Galaxy Brasil. PanAmSat: PanAmSat Corporation, the current owner and operator of the PAS-III satellite. Pay-per-view: Payment made for individual programs rather than a monthly subscription for a whole channel or group of channels. 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. RBS: RBS Participacoes S.A., a Cable and MMDS service provider in Brazil. Real Plan: A Brazilian Government stabilization program, announced in December 1993, aimed at curtailing inflation and building a foundation for sustained economic growth. Regulatory Put: A provision in the Stockholders Agreement pursuant to which an Event Put is triggered if the amount of capital stock held by a Stockholder (other than Abril) exceeds the amount allowed under an appropriate legal restriction. Revenue per subscriber: Total revenue derived from a subscriber television system divided by the average number of subscribers for that period. SAP: Second Audio Programming, which provides the option of audio in a second language for the programming on channels for which it is offered. SBT: TVSBT--Canal 4 de Sao Paulo S.A., a Brazilian national off-air channel. A-6 Securities Act: United States Securities Act of 1933, as amended. Smart Card: Encoded card placed in a decoder used for Ku-Band service. The Smart Card is used to regulate access to Ku-Band services. Sony: Sony Pictures Entertainment, Inc. Stockholders: HABC II, CPL, Robert Civita, Abril, the Chase Parties and Falcon International. Stockholders Agreement: Stockholders Agreement, dated December 6, 1995, among the Stockholders. Subsidiary Guarantees: Guarantees executed by each of Tevecap's Restricted Subsidiaries (as defined in the Indenture). SurFin: SurFin Ltd., a corporation organized under the laws of the Bahamas, the (direct and indirect) shareholders of which are Tevecap, holding 20.5%, DIRECTV International Inc., a subsidiary of Hughes Communications, holding 39.3%, Darlene Investments, holding 20.4%, and Grupo Frecuencia Modulada Television, holding 19.8%. SurFin Credit Facility: A three year $150.0 million credit facility between SurFin and Citicorp USA, Inc., as administrative agent, under a syndicated credit agreement, dated September 24, 1996. Tambore Facility: TVA's Ku-Band uplink center located in the city of Tambore in greater Sao Paulo. Telecommunications Code: The Brazilian Telecommunications Code of 1962, as amended. Telephony: The provision of telephone service. Tevecap: Tevecap S.A. Time Warner: Time Warner Entertainment Company, L.P. Trunk: The "transportation" component within a Cable and/or broadband network architecture that carries the system product to the distribution portion of the architecture, which in turn goes to customers' homes. TV Cabo Santa Branca: TV Cabo Santa Branca Comercio Ltda., a Brazilian limitada, in which Tevecap holds a 36% equity interest and Canbras Par holds a 64.0% equity interest. TV Filme: TV Filme, Inc., a Delaware corporation in which Tevecap currently holds a 14.7% equity interest, Warburg, Pincus Investors, L.P. currently holds a 38.8% equity interest, members of the Lins family currently hold a 16.2% equity interest, public stockholders currently hold a 28.15% equity interest and certain individuals own the remaining 2.15% equity interest. TV Filme Service Area: Brasilia, Belem and Goiania. TV Group: The operations of TVA excluding the operations and results of Galaxy Brasil. TV Homes: The number of households in a given area possessing at least one television set. A-7 TV Show Time: Televisao Show Time Ltda., a Brazilian limitada in which the estate of Matias Machline and an associate currently hold a 53.0% equity interest and in which the remaining 47.0% is currently held by various Abril shareholders. TVA: Tevecap S.A. and its consolidated subsidiaries and affiliates. TVA Brasil: TVA Brasil Radioenlaces S.A., a Brazilian limitada in which the estate of Matias Machline currently holds a 50.0% equity interest and in which the remaining 50.0% is currently held by various Abril shareholders. TVA Communications: TVA Communications Ltd., a British Virgin Islands company wholly-owned by Tevecap, through which Tevecap holds a 10.0% equity interest in Galaxy Latin America. TVA Curitiba: TVA Curitiba Servicos em Telecommunicacoes Ltda., a Brazilian limitada in which Tevecap held an 80.0% equity interest and Leonardo Petrelli held a 20.0% equity interest prior to TVA Curitiba's merger into TVA Parana Ltda. and the reorganization of TVA Parana Ltda. as a subsidiary of TVA Sul Participacoes S.A. in October 1996. TV Globo: A provider of off-air programming in Brazil and an affiliate of Globo. TVA Sistema: TVA Sistema de Televisao S.A., a Brazilian corporation in which Tevecap holds a 98.0% equity interest Robert Civita, a Brazilian national, holds a 2.0% equity interest. TVA Sul: The operations of TVA Sul Parana Ltda., CCS Camboriu Cable System de Telecomunicacoes Ltda., TVA Sul Santa Catarina, Ltda. and TVA Sul Foz do Iguacu Ltda., which are wholly-owned subsidiaries of TVA Sul Participacoes S.A., a Brazilian corporation in which Tevecap holds an 86.0% equity interest and Abril holds the remaining 14.0% equity interest. UHF: Broadcast of a television signal at an ultra-high frequency over a given geographical area. VCR: Video cassette recorders. Viacom International: Viacom International (Netherlands B.V.). A-8 -----END PRIVACY-ENHANCED MESSAGE-----