-----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, NV5/JbkoI1oxeCyrmzE8hWD4dkqlddxNm6Vlh3FTnFEZOXgnzK3tjB7x6RCrzTDT CB2sE/nVfiu1v1MwLo0/mA== 0001169232-02-000150.txt : 20020715 0001169232-02-000150.hdr.sgml : 20020715 20020715173814 ACCESSION NUMBER: 0001169232-02-000150 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020715 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TVAPAR SA CENTRAL INDEX KEY: 0001086634 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 000000000 STATE OF INCORPORATION: D5 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 333-22267-17 FILM NUMBER: 02703394 BUSINESS ADDRESS: STREET 1: RUA DO ROCIO, 313 STREET 2: SAO POULO SP 04552-904 BRAZIL CITY: BRAZIL STATE: D5 ZIP: 00000 MAIL ADDRESS: STREET 1: TVAPAR SA RUA DO ROCIO, 313 STREET 2: SAO POULO SP 04552-904 BRAZIL CITY: BRAZIL STATE: D5 ZIP: 00000 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CCS CAMBORIU CABLE SYSTEM DE TELECOMUNICACOES LTD CENTRAL INDEX KEY: 0001034038 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 333-22267-08 FILM NUMBER: 02703396 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 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 333-22267-06 FILM NUMBER: 02703397 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 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 333-22267-05 FILM NUMBER: 02703398 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 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 333-22267-02 FILM NUMBER: 02703399 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 SISTEMA DE TELEVISAO S A CENTRAL INDEX KEY: 0001034031 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 333-22267-01 FILM NUMBER: 02703400 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: TEVECAP S A CENTRAL INDEX KEY: 0001034029 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 333-22267 FILM NUMBER: 02703393 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 PROGRAMADORA LTDA CENTRAL INDEX KEY: 0001061172 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 333-22267-14 FILM NUMBER: 02703395 BUSINESS ADDRESS: STREET 1: RUA DO ROCCIO, 313 11TH FL STREET 2: CEP 04552-904 CITY: SAO PAULO STATE: D5 BUSINESS PHONE: 0115511821 MAIL ADDRESS: STREET 1: RUA DO ROCCIO, 313 11TH FL STREET 2: CEP 04552-904 CITY: SAO PAULO STATE: D5 20-F 1 d51081_20-f.txt ANNUAL REPORT As Filed with the Securities and Exchange Commission on July 15, 2002. ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------- Form 20-F -------------- |_| REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 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) Av. das Nacoes Unidas, 7221 - 7 andar Sao Paulo, SP Brazil 05425-902 (Telephone: 55-11-3037-4690) (Address and telephone number of principal executive offices) -------------------- Securities registered or to be registered pursuant to Section 12(b) of the Act: None (Title of Class) Securities registered or to be registered pursuant to Section 12(g) of the Act: None (Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: 12-5/8% Senior Notes due 2004 of Tevecap S.A. and guarantees thereof by each of TVA Sistema de Televisao S.A., TVA Communications Ltd., Comercial Cabo TV Sao Paulo Ltda., TVA Sul Parana Ltda., CCS Camboriu Cable System de Telecomunicacoes Ltda., TVA Programadora Ltda. and TVAPAR S.A. Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report: 485,220,440 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_ ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS.................1 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE...............................1 ITEM 3. KEY INFORMATION.......................................................1 ITEM 4. INFORMATION ON THE COMPANY...........................................11 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.........................27 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES...........................40 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS....................45 ITEM 8. FINANCIAL INFORMATION................................................48 ITEM 9. THE OFFER AND LISTING................................................49 ITEM 10.ADDITIONAL INFORMATION................................................49 ITEM 11.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............56 ITEM 12.DESCRIPTION OF SECURITIES OTHER THAN DEBT SECURITIES..................57 ITEM 13.DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.......................57 ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.......................................................57 ITEM 15.[RESERVED]............................................................57 ITEM 16.[RESERVED]............................................................57 ITEM 17.FINANCIAL STATEMENTS..................................................57 ITEM 18.FINANCIAL STATEMENTS..................................................58 ITEM 19.EXHIBITS..............................................................58 GLOSSARY Presentation of Certain Information This Annual Report on Form 20-F for the year ended December 31, 2001 is referred to herein as the "Annual Report." Tevecap S.A. ("Tevecap" and, together with its subsidiaries, "TVA" or the "Company") is a corporation (sociedade anonima) organized under the laws of the Federative Republic of Brazil. The accounts of the Company, which are maintained in Brazilian reais, were prepared in accordance with the accounting principles generally accepted in the United States of America ("U.S. GAAP") and translated into United States dollars on the basis set forth in Note 2.3 of the consolidated financial statements of Tevecap and its subsidiaries (the "Tevecap Financial Statements" and, together with the financial statements of TVA Sistema de Televisao S.A., CCS Camboriu Cable System de Telecomunicacoes Ltda. and TVA Sul Parana Ltda. included in Item 19 of this Annual Report, the "Financial Statements"). Certain amounts stated herein in U.S. dollars (other than as set forth in the Financial Statements and financial information derived therefrom) have been translated, for the convenience of the reader, from reais at the rate in effect on December 31, 2001 of R$2.3204 = U.S.$1.00. Such translations should not be construed as a representation that reais could have been converted at such rate on such date or at any other date. See Item 3, "Key Information--Selected Financial Data--Exchange Rates." Capitalized terms used in this Annual Report are defined, unless the context otherwise requires, in the Glossary attached hereto. All references in this Annual Report to (i) "U.S. Dollars," "dollars," "$" or "U.S.$" are to United States dollars and (ii) "reais," "real" or "R$" are to Brazilian reais. Unless otherwise specified, data regarding population or homes in a licensed area are projections based on 1996 population census figures compiled by the Instituto Brasileiro de Geografia e Estatistica ("IBGE") and the Company's knowledge of its markets. There can be no assurance that the number of people or the number of households in a specified area has not increased or decreased by a higher or lower rate than those estimated by the IBGE since the 1996 census. Unless otherwise indicated, references to the number of the Company's subscribers are based on Company data as of December 31, 2001. Data concerning total MMDS and Cable subscribers and penetration rates represent estimates made by the Company based on the data of Pay TV Survey, Associacao Brasileira de Telecomunicacoes por Assinatura (ABTA), Kagan World Media, Inc., IBGE data, the Company's knowledge of its pay television systems and those of the Operating Ventures, and public statements of other Brazilian pay television providers. Although the Company believes such estimates are reasonable, no assurance can be made as to their accuracy. The term DIRECTV(R) ("DIRECTV") is a registered trademark of Hughes Electronics Corporation and refers to the Ku-Band service provided by Galaxy Brasil in conjunction with Galaxy Latin America. Forward-Looking Statements This Annual Report contains statements which are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this Annual Report and include statements regarding the intent, belief or current expectations of the Company or its officers. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those in the forward-looking statements as a result of various factors. Neither the Company's independent auditors, nor any other independent accountants, have compiled, examined, or performed any procedures, with respect to the prospective financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, the prospective financial information. PART I ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS. A. Directors and Senior Management. Not applicable. B. Advisers Not applicable. C. Auditors On June 1, 2002, the partners and employees of Arthur Andersen S/C in Brazil, the former auditors of the Company, joined Deloitte Touche Tohmatsu in Brazil. The audit reports for the Financial Statements as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001, included in this Annual Report, were issued by Deloitte Touche Tohmatsu. ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE. Not applicable. ITEM 3. KEY INFORMATION A. Selected Financial Data The selected financial data as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001 have been derived from, and should be read in conjunction with, the Tevecap Financial Statements included in this Annual Report. The selected financial data as of December 31, 1999, 1998 and 1997 and for each of the two years in the period ended December 31, 1998 have been derived from audited financial statements of the Company that are not included elsewhere in this Annual Report. In July 1999 the Company consummated the sale of the DBS Systems and certain assets related thereto. These operations have been classified as "Discontinued Operations" as of and for the periods discussed herein. See Item 4, "Information on the Company--History and Development of the Company." As required by Brazilian law, and in accordance with local accounting practices, the financial records of Tevecap and its subsidiaries are maintained in the applicable Brazilian currency (the real). However, the Financial Statements are presented in U.S. dollars in accordance with U.S. GAAP. In order to prepare the Financial Statements, the Company's accounts have been translated from the applicable Brazilian currency, on the basis described in Note 2.3 to the Tevecap Financial Statements included in this Annual Report. Because of the differences between the evolution of the rates of inflation in Brazil and the changes in the rates of devaluation, amounts presented in U.S. dollars may show distortions when compared on a period-to-period basis. 1 SELECTED FINANCIAL AND OTHER DATA
Year Ended December 31, 2001 2000 1999 1998 1997 --------- --------- --------- --------- --------- (Dollars in Thousands) Consolidated Statement of Operation: Gross revenues Monthly subscriptions $ 88,246 $ 97,134 $ 94,055 $ 136,278 $ 142,700 Installation 270 968 1,900 2,886 12,941 Indirect programming (a) 357 3,722 19,580 22,810 Advertising 1,005 2,503 1,597 3,544 4,947 Additional services and others (b) 16,413 20,049 14,924 14,893 13,649 Total gross revenue 105,934 121,011 116,198 177,181 197,047 --------- --------- --------- --------- --------- Direct operating expenses (d) 51,296 55,402 45,638 93,356 103,216 Taxes on revenues 15,636 13,145 12,782 12,533 13,315 Selling, general and administrative expenses 29,448 33,483 25,590 56,517 64,844 Depreciation and amortization 34,364 43,290 56,879 48,107 35,461 Other operating expense (income), net 1,762 (2,611) 19,012 1,940 3,944 --------- --------- --------- --------- --------- Total operating expenses 132,506 142,709 159,901 212,453 220,780 --------- --------- --------- --------- --------- Operating loss from continuing operations (26,572) (21,698) (43,703) (35,272) (23,733) Interest expense 37,849 45,069 22,254 51,665 44,541 Other nonoperating expenses (income), net (e) 9,021 (38,433) 7,024 (3,806) (15,146) Income tax expense -- 2,517 106 24 -- Equity in losses of affiliates, net (f) 2,375 2,004 5,238 12,139 6,851 Income (loss) from discontinued operations -- -- 94,344 (52,773) (21,438) Extraordinary item - gain on debt repurchase -- -- 53,857 -- -- --------- --------- --------- --------- --------- Net income (loss) (75,817) (32,855) 69,876 (148,067) (81,417) ========= ========= ========= ========= =========
2
Year Ended December 31, 2001 2000 1999 1998 1997 ------------ ------------ ------------ ------------ ------------ (Dollars in Thousands, Except Selected Operating Data) Other data: EBITDA-Continuing operations (g) 9,554 18,981 32,188 14,775 15,672 EBITDA-Discontinued operations (g) -- -- -- 16,968 19,458 ------------ ------------ ------------ ------------ ------------ EBITDA (g) 9,554 18,981 32,188 31,743 35,130 Purchase of fixed assets - Continuing operations 30,639 26,716 25,927 81,392 118,909 Purchase of fixed assets - Discontinued operations -- -- -- 61,967 128,958 ------------ ------------ ------------ ------------ ------------ Purchase of fixed assets 30,639 26,716 25,927 143,359 247,867 Ratio of earnings to fixed charges(i) -- -- -- -- -- Cash Flow Data: Net cash provided by (used in) operating activities (h) 11,612 2,954 (18,435) 2,675 (30,134) Net cash provided by (used in) investing activities 3,906 6,030 152,006 (162,556) (224,903) Net cash (used in) provided by financing activities (33,739) (2,746) (133,022) 160,289 151,287 Selected Operating Data: Continuing operations Number of Subscribers to Owned Systems (j) 359,282 345,823 309,663 315,813 335,174 Average monthly revenue per Subscriber (k) $24.56 $28.08 $30.37 $43.15 $42.57 Discontinued operations Number of Subscribers to Owned Systems (j) -- -- -- 296,847 211,209 Average monthly revenue per Subscriber (k) -- -- -- $43.15 $37.18 Consolidated Balance Sheet Data (at period end): Cash and cash equivalents 634 1,609 1,946 1,397 989 Property, plant and equipment, net 149,594 182,511 211,729 298,004 266,518 Total assets 198,834 279,357 289,948 447,927 442,011 Loans payable to related companies 6,729 141,122 137,168 88,740 54,321 Long-term liabilities 89,255 230,765 225,743 359,543 335,882 Equity (deficit) in discontinued operations -- -- -- (21,858) 13,904 Redeemable common stock 115,252 151,260 178,002 178,002 189,034 Common Stock 371,026 242,342 242,342 242,342 142,495 Total shareholders' deficit (54,764) (162,049) (154,381) (224,257) (187,069)
Notes to Selected Financial and Other Data (a) Represents revenues received by the Company for selling programming to the Independent Operators. (b) Includes Advertising and Other revenues. (c) Represents various non-income based taxes paid on certain of the Company's gross revenue items with rates ranging from 3.65% to 15.15%. (d) Represents costs directly related to Monthly subscriptions, and a portion of installation, indirect programming and Additional services and others. (e) Includes interest income, Foreign currency translation loss, Foreign currency transaction loss, Other nonoperating (expenses) income, net, and Minority interest. (f) Represents the Company's pro rata share of the Net loss or income of its equity investments. (g) EBITDA represents the sum of (i) net loss, plus, without duplication (ii) income tax expense, (iii) interest expense (income), net, (iv) other nonoperating (expenses) income, net (v) depreciation, amortization and all other non-cash charges, less (vi) non-cash items increasing net income (loss) with the exception of amortized deferred sign-on and hook-up fee revenue, in each case determined in accordance with GAAP. The term "EBITDA-Discontinued operations" refers to the operations of Galaxy Brasil and TVA Banda C. The term "EBITDA- Continuing operations" refers to the Company's remaining operations subsequent to the disposition of Galaxy Brasil and TVA Banda C. See "Item 4--Information on the Company--History and Development of the Company." (h) Cash provided by (used in) operating activities (hereinafter referred to as cash flows from operating activities) has been determined in accordance with GAAP while EBITDA has been calculated in accordance with the definition in footnote (g). In accordance with GAAP, cash flows from 3 operating activities generally reflect the cash effects of transactions and other events that enter into the determination of net income. The principal difference between EBITDA and cash flows from operating activities arise as a result of the treatment of the changes in the balances of operating assets and liabilities from the beginning to the end of a reporting period. That is, in accordance with GAAP, such changes are components of cash flows from operating activities while there is no similar adjustment in the calculation of EBITDA. EBITDA, as adjusted, has been presented as it is a financial measure commonly used in the Company's industry. As such, management of the Company believes EBITDA, as adjusted, is a relevant indicator in measuring the financial condition of the Company in relation to other companies in its industry. EBITDA should not be considered as an alternative to cash provided by (used in) operating activities, as an indicator of operating performance or as a measure of liquidity. (i) For the five years ended December 31, 2001, earnings were insufficient to cover fixed charges by $35,877, $13,727, $42,833, $32,828 and $38,269, respectively. In calculating the Ratio of earnings to fixed charges, earnings represents Net loss before minority interest, Equity in (losses) income of affiliates, less fixed charges. Fixed charges consist of the sum of interest expense paid or accrued on indebtedness of the Company and its subsidiaries and affiliates and one third of operating rental expenses (such amount having been deemed by the Company to represent the interest portion of such payments). (j) Represents the number of Owned Systems' subscribers as of the last day of each period. (k) Average monthly revenue per subscriber refers to the average monthly subscription fee as of the last day of each period. Exchange Rates There are two legal foreign exchange markets in Brazil: the commercial rate exchange market (the "Commercial Market") and the floating rate exchange market (the "Floating Market"). The Commercial Market is reserved primarily for foreign trade transactions and transactions that generally require prior approval from Brazilian monetary authorities, such as the purchase and sale of registered investments by foreign persons and related remittances of funds abroad, such as a repurchase by the Company of the Senior Notes. Purchases of foreign exchange in the Commercial Market may be carried out only through a financial institution in Brazil authorized to buy and sell currency in that market. The "Commercial Market Rate" is the commercial selling rate for Brazilian currency into U.S. dollars, as reported by the Central Bank. The "Floating Market Rate" generally applies to transactions to which the Commercial Market Rate does not apply. Prior to the implementation of the Real Plan, the Commercial Market Rate and the Floating Market Rate differed significantly at times. Since the introduction of the real, the two rates have not differed significantly, although there can be no assurance that there will not be significant differences between the two rates in the future. Both the Commercial Market Rate and the Floating Market Rate are reported by the Central Bank on a daily basis. Both the Commercial Market Rate and the Floating Market Rate are freely negotiated but are strongly influenced by the Central Bank. After the implementation of the Real Plan, the Central Bank initially allowed the real to float with minimal intervention. On March 6, 1995, the Central Bank announced that it would intervene in the market and buy or sell U.S. dollars, establishing a trading band (faixa de flutuacao) in which the exchange rate between the real and the U.S. dollar would fluctuate. From 1995 through 1998, the Central Bank periodically adjusted the trading band upward. On January 13, 1999, the Central Bank attempted a limited devaluation of the real by modestly elevating the band width in which the real was allowed to trade. When this limited devaluation proved unsuccessful, the Central Bank announced that it would no longer use its foreign currency reserves to protect the value of the real (with the exception of limited interventions to restrain abrupt fluctuations in the exchange rate), thereby allowing the real to float freely against other currencies. Consequently, in the weeks following the initial devaluation, the real has lost more than 40% of its value against the U.S. dollar. There can be no assurance that the Central Bank will not institute a new band in the future or that the real will not devalue further. On January 25, 1999, in the wake of the devaluation and the adoption of a floating exchange regime, the National Monetary Council adopted Resolution No. 2588, effective as of February 1, 1999. Pursuant to such resolution, banks that are authorized to operate in the Commercial Market are required to unify their positions in the two different markets. These markets are now differentiated solely for regulatory purposes. As a result of Resolution No. 2588, since February 1, 1999 the Commercial Market rate and the Floating Market rate have offered identical pricing and liquidity, despite the potential for distinct treatment for regulatory purposes in the future. Certain specific foreign exchange transactions are carried out through the Commercial Market and registered with the Central Bank through its electronic systems. Such registration allows the remittance of funds abroad through the Commercial Market. 4 The following table provides the Commercial Market rate for the purchase of U.S. dollars expressed in reais per U.S. dollar for the periods and dates indicated. Exchange Rates of reais per U.S. $1.00 ----------------------------------------------- Low High Average(1) Period End Year Ended: December 31, 1997.......... 1.039500 1.116400 1.079058 1.116400 December 31, 1998.......... 1.116500 1.208700 1.162110 1.208700 December 31, 1999.......... 1.207800 2.164700 1.816200 1.789000 December 31, 2000.......... 1.723400 1.984700 1.830200 1.955400 December 31, 2001.......... 1.935700 2.800700 2.350600 2.320400 Month Ended: January 31, 2002........... 2.293200 2.438400 2.377900 2.418300 February 28, 2002.......... 2.348200 2.619100 2.419600 2.348200 March 31, 2002............. 2.323600 2.406000 2.346600 2.323600 April 30, 2002............. 2.270900 2.368900 2.320400 2.362500 May 31, 2002............... 2.362500 2.529600 2.480300 2.522000 June 30, 2002.............. 2.522000 2.859300 2.714000 2.844400 - ---------- (1) Calculated as the average of the month-end exchange rates during the relevant period. Source: Central Bank of Brazil. On July 9, 2002, the Commercial Market rate (sell) as reported by the Central Bank was R$2.8540 per U.S.$1.00. For a description of certain applicable exchange controls, see Item 10, "Additional Information--Exchange Controls." See also Item 3, "Key Information--Risk Factors--Factors Relating to Brazil." B. Capitalization and Indebtedness Not applicable. C. Reasons for the Offer and Use of Proceeds. Not applicable. D. Risk Factors Before making any investment decision, investors should carefully read this entire Annual Report and should consider carefully, in light of their own financial circumstances and investment objectives, all the information set forth herein and, in particular, certain matters with respect to debt securities issued by Brazilian companies, including, without limitation, those set forth below. Factors Relating to the Company The Company has incurred substantial operating losses. 5 Since its inception in 1989, the Company has been developing its businesses and continues to sustain substantial operating 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 have been funded principally by capital contributions from shareholders, borrowings under shareholder loans, dispositions of non-strategic assets, bank loans and other borrowings made from time to time. Management of the Company has undertaken efforts to generate the cash flow necessary to meet the Company's cost structure, including the sale of non-strategic assets, the reduction of indebtedness and internal cost-cutting measures. Although the Company has generated positive cash flow from operating activities in recent years, Management cannot assure that the Company will achieve or sustain operating profitability in the near future. The failure of the Company to achieve and maintain operating profitability on a timely basis could impair its ability to make payments under the Senior Notes. The Company operates in a competitive pay television industry. The pay television industry in Brazil is, and is expected to continue to be, highly competitive. The Company competes with providers of pay television services utilizing Cable, MMDS and DBS technology delivery systems and any new delivery systems which may be introduced, as well as existing off-air broadcast television networks, movie theaters, video rental stores, internet service providers and other entertainment and leisure activities generally. The success of the Company's operating strategies is subject to factors that are beyond the control of the Company and difficult to predict due, in part, to the limited history of pay television services in Brazil. Consequently, the size of the Brazilian market for pay television, the rates of penetration of that market, the acceptance of pay television by subscribers and commercial advertisers, the sensitivity of potential subscribers to the price of installation and subscription fees and the extent and nature of the competitive environment in the Brazilian pay television industry are uncertain. The Company's activities are extensively regulated. Substantially all of the Company's business activities are regulated by the federal Agencia Nacional de Telecomunicacoes (Brazilian Telecommunications Agency, or "ANATEL"). Such regulation relates to, among other things, licensing, local access to Cable and MMDS systems, commercial advertising, and foreign investment in Cable and MMDS systems. Changes in the regulation of the Company's business activities, including decisions by regulators affecting the Company's operations (such as the granting or renewal of licenses or decisions as to the subscription rates the Company may charge its customers) or changes in interpretations of existing regulations by courts or regulators, could adversely affect the Company. ANATEL has the authority to grant Cable and MMDS licenses pursuant to public bidding processes. The Company is unable to predict what impact, if any, such public bidding will have on its ability to launch and operate new systems. Any new regulations could have a material adverse effect on the subscription television industry as a whole and on the Company in particular. The Company may require additional financing. If the Company fails to meet its projected operating results or its capital needs exceed its projected requirements, the Company may require substantial investment on a continuing basis to finance its corresponding capital expenditures. The Company may also require substantial additional capital for any new pay television license acquisitions or investments or acquisitions of entities holding such licenses, or for any investments in or acquisitions of other existing pay television operations in order to further expand the Company's operations. The amount and timing of the Company's future capital requirements will depend upon a number of factors, many of which are not within the Company's control, including subscriber growth and retention, programming costs, capital costs, marketing expenses, staffing levels, and competitive conditions. There can be no assurance that the Company's future cash requirements will not increase as a result of unexpected developments in the Brazilian pay television industry. Failure to obtain any required additional financing to meet these requirements could adversely affect the growth of the Company and, ultimately, could have a material adverse effect on the Company. The Company's debt obligations are subject to foreign exchange risk. 6 A significant portion of the debt obligations (including the Senior Notes) of the Company are denominated in U.S. dollars, while the Company generates revenues only in Brazilian reais. The Company also incurs a significant portion of its equipment costs, and most of its programming costs, in U.S. dollars. Consequently, a significant devaluation of the real against the U.S. dollar can significantly affect the Company's ability to meet its obligations and fund its capital expenditures, and could adversely affect its results of operations. In addition, shifts in currency exchange rates may have a material adverse effect on the Company and may force the Company to seek additional capital, which may not be available to it. While the Company may consider entering into transactions to hedge the risk of exchange rate fluctuations, it may not be possible for the Company to obtain hedging arrangements on commercially satisfactory terms. The Company's industry is subject to rapid changes in technology. The pay television industry as a whole is, and is likely to continue to be, subject to rapid and significant changes in technology. The Company is presently upgrading its Cable and MMDS systems and believes that, for the foreseeable future, existing and developing alternative technologies will not materially adversely affect the viability or competitiveness of its pay television business. However, there can be no assurance as to the effect of such technological changes on the Company or that the Company will not be required to expend substantial financial resources in the development or implementation of new competitive technologies. The Company has limited assets and depends on its subsidiaries to repay indebtedness. Tevecap's operations are conducted through, and substantially all of Tevecap's assets are owned by, Tevecap's direct and indirect subsidiaries. The ability of Tevecap to meet its obligations in respect of its indebtedness, including the Senior Notes, will depend on, among other things, the future performance of such subsidiaries (including the Guarantors) and the ability of Tevecap to refinance such indebtedness at maturity (or upon early redemption or otherwise). In addition, the ability of Tevecap's subsidiaries to pay dividends and make other payments to Tevecap may be restricted by, among other things, applicable corporate and other laws and regulations and by the terms of agreements to which such subsidiaries may become subject. In particular, Brazilian companies are allowed to distribute dividends only if, after a given fiscal year, its net profits exceed accumulated losses. In addition, the property and assets of certain of Tevecap's subsidiaries have had, or in the future may have, liens placed upon them pursuant to existing and future financings. Factors Relating to Brazil The Brazilian government has often intervened in Brazil's economy. Over the past 15 years, the Brazilian Government has intervened on many occasions to change monetary, credit, tariff and other policies in order to influence the course of Brazil's economy. Examples of such interventions include: o controlling wages and prices; o freezing bank accounts; o imposing capital controls; and o inhibiting exports from Brazil. The Brazilian Government has in the recent past taken actions to slow or halt economic growth in order to control inflation and to reduce the budget deficits. It may take further similar actions in the future. On July 1, 1994 the Brazilian Government implemented an economic stabilization plan known as the Real Plan to reduce the size of Brazil's federal budget deficit, lower inflation and introduce a new, stable currency, the real. Through the Real Plan, the Government intended to reduce certain public expenditures, collect liabilities owed to the Government and increase tax revenues. Following implementation of the Real Plan, the rate of inflation in Brazil, as measured by the Indice Geral de Precos - Disponibilidade Interna (the general price index - internal availability or "IGP-DI") fell from 1,093.8% for 1994 to 1.71% for 1998. The IGP-DI increased to 19.98% in 1999 following the devaluation of the real in January 1999, decreased to 9.81% in 2000 and reached 10.40% in 2001. The Real Plan does 7 not contain any wage or price controls. The Real Plan was adopted when President Fernando Henrique Cardoso was serving as Finance Minister. Since his election as the President, Mr. Cardoso's government has supported the Real Plan. In October 1998, President Cardoso was re-elected for an additional four year term, expiring in January 2003. Following re-election his government proposed a Fiscal Stability Program. The Program includes cuts in discretionary governmental spending, increases in government revenues and savings through social security reforms. Through this Program, the Government intends to stabilize the ratio of debt to gross domestic product ("GDP") and thus create a more favorable economic environment. Implementing certain measures under the Fiscal Stability Program has proved to be difficult due to the considerable legislative action required to do so. There can be no assurance that the Brazilian Government will be able to continue passing measures necessary to successfully implement the Real Plan. In October 2002, Brazilians will elect a new president. As of the date of this Annual Report, the front-running presidential candidate is Luiz Inacio Lula da Silva, a workers' party candidate that has in the past voiced opposition to market reforms and the repayment of Brazil's external debt. No assurance can be given that, if elected, Mr. da Silva will not implement policies that will negatively affect Brazil's markets and economy. Devaluations of the Brazilian real may negatively affect the financial results of the Company. The exchange rate between the real and the U.S. dollar, the relative rates of real devaluation and the prevailing rates of inflation have affected the Company's financial results and may continue to do so in the future. After its introduction on July 1, 1994, the real initially appreciated against the U.S. dollar, and concerns arose about the overvaluation of the real relative to the U.S. dollar. To address such concerns and to avoid a rapid devaluation of the real, in March 1995 the Brazilian Government established a trading band for the real against the U.S. dollar with a view to a gradual devaluation of the real. As a result of economic instability in Brazil in late 1998 and early 1999, the trading band was abandoned, resulting in a significant devaluation of the real against the U.S. dollar. Since January 1, 1999, the real/U.S. dollar exchange rate has ranged from a low of R$1.21 per U.S.$1.00 on January 4, 1999 to a high of R$2.80 per U.S.$1.00 on September 21, 2001. On December 31, 2001, the rate was R$1.96 per U.S.$1.00. There can be no assurance that the real will maintain its current value. It is uncertain whether the Brazilian Government will reimplement the trading band policy or any other type of currency exchange control mechanism. See "Additional Information - Exchange Controls." Devaluations of the real relative to the U.S. dollar also create additional inflationary pressures in Brazil that may negatively affect the Company. In addition, a significant devaluation generally results in a curtailment of access to foreign financial markets for the Company and can lead to government intervention, including recessionary government policies. The purchase and sale of foreign currency in Brazil is subject to governmental control. The purchase and sale of foreign currency in Brazil is subject to governmental control. Since 1983, the Central Bank has centralized certain payments of principal on external obligations. The Central Bank also assumed responsibility for the external obligations in connection with the formal restructuring of Brazilian sovereign debt. It is uncertain whether in the future the Brazilian Government will institute a more restrictive exchange control policy. Such a policy could affect the ability of Brazilian debtors (including the Company) to make payments outside of Brazil to meet foreign currency obligations under foreign currency-denominated liabilities, including the Senior Notes. Many factors beyond the control of the Company may affect the likelihood of the Government's imposition of such restrictions at any time. Among such factors are: o the extent of Brazil's foreign currency reserves; o the availability of sufficient foreign exchange on the date a payment is due; o the size of Brazil's debt service burden relative to the economy as a whole; o Brazil's policy towards the International Monetary Fund; and o political constraints to which Brazil may be subject. 8 The Government has not imposed any restrictions on payments by Brazilian issuers in respect of securities issued in the international capital markets to date. However, it may choose to impose such restrictions in the future if necessary. See Item 10, "Additional Information - Exchange Controls." Brazil has experienced periods of extreme inflation. Until mid-1994 Brazil experienced extremely high rates of inflation. The inflation contributed materially to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets. After the introduction of the Real Plan, the rate of inflation as measured by the IGP-DI fell steadily to 1.71% in 1998. Inflation increased to 19.98% in 1999 as a result of the devaluation of the real in January 1999, decreased to 9.81% for 2000 and reached 10.40% in 2001. It is uncertain whether future actions of the Government (including any further action to adjust the value of the Brazilian currency) will cause inflation at a higher rate those experienced since the introduction of the Real Plan or whether any increase in inflation will have a material adverse effect on the results of operations and financial condition of the Company. The availability of credit in the Brazilian market may be limited by external events. A number of developments or conditions have significantly affected the availability of credit in the Brazilian economy. External events have from time to time resulted in considerable outflows of funds and declines in the amount of foreign currency invested in Brazil. Such events include the devaluation of the Mexican peso in December 1994, the Asian economic crisis of 1997, the Russian currency crisis of 1998, the currency instability that Brazil faced in 1999, and the ongoing recession in Argentina. To defend the real during such events and to control inflation, the Government has maintained a tight monetary policy, with associated high interest rates, and has constrained the growth of credit. It is uncertain whether these disruptions in the Brazilian economy will adversely affect the Company's financial condition or results of operations. Brazil must with comply with performance guidelines under an IMF financial package. As a result of economic uncertainty and significant outflows of capital in late 1998, the Brazilian Government concluded an agreement with the IMF in November 1998 on a U.S.$41.5 billion aid package. The first tranche of the package was disbursed in December 1998. The agreement reached between the IMF and the Government, contained in a Technical Memorandum of Understanding, sets out the guidelines and the targets (including fiscal, monetary and external borrowing limits) in respect of the Brazilian economy. The Memorandum of Understanding is subject to periodic review. In the event that the goals contained in the Memorandum of Understanding are not achieved, the IMF automatically suspends the next tranche due under the loan until a new set of guidelines has been agreed. As a result of continuing Brazilian economic uncertainty and the Government's decision to adopt a floating exchange rate regime in January 1999, the Government and the IMF negotiated a new set of guidelines prior to the release of the second tranche and formally reached an agreement in March 1999. The IMF reviewed and approved the Memorandum of Understanding for the first time on July 2, 1999. The guidelines of the Memorandum of Understanding were amended on December 2, 1999. Brazil has successfully completed the first series of reviews under the agreement. There is no assurance, however, that the Brazilian Government will be able to maintain this performance in the future. Failure to do so may lead to adverse effects on the Brazilian economy and on the Company's financial condition or results of operations. Brazil has experienced an energy crisis. Brazil has recently experienced a crisis in its electric energy sector. As a result, Brazilian industrial, commercial and residential customers in certain regions experienced energy rationing, which negatively affected economic growth for the country as a whole. The Company relies on electric energy to conduct its operations, including the transmission of broadcast signals throughout its MMDS and Cable systems and Internet services. Should it reoccur, 9 future electricity rationing could adversely affect the principal activities of the Company because of shortages or price increases and, therefore, negatively impact the business, results of operations and financial condition of the Company. 10 ITEM 4. INFORMATION ON THE COMPANY A. History and Development of the Company TVA is a major pay television operator in Brazil and one of the country's primary pay television programming distributors. In 1989, TVA was the first to provide pay television services in Brazil. With more than 359,000 direct subscribers, TVA offers pay television services utilizing cable and MMDS distribution technologies. Through owned and affiliated pay television operators, TVA programming reaches more than 569,000 pay television households. TVA is a majority-owned subsidiary of Abril S.A. ("Abril"). TVA's other beneficial shareholders are Falcon International Communications (Bermuda) L.P. ("Falcon International"), The Hearst Corporation ("Hearst"), ABC, Inc. ("ABC") and JP Morgan Partners LLC ("JPM"). TVA conducts its pay television operations through two owned operating systems: TVA Sistema de Televisao S.A. ("TVA Sistema") and TVA Sul Parana Ltda. ("TVA Sul") (together, the "Owned Systems"). Through the MMDS and Cable systems of the Owned Systems, TVA serves six cities with a combined population of approximately 31 million, including three of the seven largest cities in Brazil: Sao Paulo (population of 10.4 million), Rio de Janeiro (population of 5.9 million) and Curitiba (population of 1.6 million). TVA also holds minority interests in each of Canbras TVA Cabo Ltda. and TV Cabo Santa Branca Comercio Ltda. (collectively, "Canbras TVA") and TV Filme, Inc. ("TV Filme" and, together with Canbras TVA, the "Operating Ventures"), which together provide pay television services to an additional 22 cities with a total population of 12.5 million. In addition, TVA provides high speed Internet services in the Sao Paulo and Rio de Janeiro metropolitan areas through TVA Sistema and Rede Ajato Ltda. ("Rede Ajato"), a wholly owned subsidiary. TVA Sistema's "Acesso" service offers high speed broadband internet access to pay television subscribers utilizing TVA's Cable and MMDS technologies. In addition, Rede Ajato's "Ajato" service, the first broadband high speed internet service provider created in Brazil, is a Portuguese language content and service portal offering multimedia, real video and music and video conferencing services, among others. TVA is actively pursuing alliances with content and e-commerce providers in order to provide a diverse and competitive portfolio of services through Ajato. Until July 1999, TVA, through Galaxy Brasil Ltda. ("Galaxy Brasil"), was the exclusive provider in Brazil of DIRECTV, a digital direct broadcast satellite Ku-Band service. Galaxy Brasil receives programming, scheduling and related services for DIRECTV from Galaxy Latin America, LLC ("GLA"), in which TVA held a 10% equity interest. The current owners of GLA are a unit of Hughes Electronics Corporation and a member of the Cisneros Group. Through local operating companies such as Galaxy Brasil, GLA provides DIRECTV service throughout much of Latin America and the Caribbean. TVA, through TVA Banda C Ltda. ("TVA Banda C"), also provided digital C-Band television service. In July 1999 TVA consummated the sale of Galaxy Brasil, TVA Banda C and certain assets related thereto, including its interest in GLA, to GLA and the members thereof (such sale, the "DBS Sale"). The net cash proceeds to TVA at the closing of the DBS Sale were approximately U.S.$177.6 million. The total consideration received by TVA was comprised of the net cash proceeds received at closing, a promissory note in the principal amount of U.S.$25.5 million (which was subsequently paid), the assumption of certain dollar and real-denominated indebtedness and the release of certain guarantees given by TVA and one of its subsidiaries in respect of certain obligations of Galaxy Brasil. After the consummation of the DBS Sale, TVA significantly lowered its total indebtedness, which decreased from U.S.$392.1 million as of December 31, 1998 to U.S.$223.9 million as of December 31, 2000. TVA also significantly reduced its indebtedness in 2001 through the capitalization of loans in the aggregate principal amount of $123,159 made to TVA under the Abril Credit Facility. As a result of these measures, TVA's indebtedness was reduced to U.S.$77.1 million as of December 31, 2001. See Item 5, "Operating and Financial Review and Prospects--Liquidity and Capital Resources." Since 1999 the Company has also concluded the sale of its interests in programming ventures in order to focus its activities primarily on the distribution of programming through Cable and MMDS systems. In November 1999, TVA concluded the sale of its 50% equity interest in ESPN Brasil, the provider of ESPN Brasil programming, to ESPN Brazil, Inc., which previously held the remaining 50% equity interest. ESPN Brazil, Inc. is indirectly held by ABC (80%) and 11 Hearst (20%). In July 2000, TVA concluded the sale of its 24.0% equity interest in HBO Brasil Partners, the provider of HBO Brasil programming, to the remaining holders of HBO Brasil Partners. Finally, in November 2000, the Company concluded the sale of its Eurochannel operations to Multithematiques, a European programming operator. In consideration for the sale of these programming-related assets, the Company received net proceeds of approximately $54.9 million. During the three years ended December 31, 2001, the Company incurred capital expenditures of approximately $83.3 million, primarily in connection with the purchase of reception equipment, converters for installation throughout its Cable and MMDS systems in Brazil, other equipment required to upgrade its Cable and MMDS networks and, most recently, the development of its internet operations. Management estimates that $15,404 and $10,971 of capital expenditures will be required in 2002 and 2003, respectively, principally in connection with the purchase of materials and equipment, Cable and MMDS network upgrades and the development of its internet operations. Tevecap S.A. was founded on June 28, 1991 as a corporation of unlimited duration under the laws of the Federative Republic of Brazil. Tevecap's registered office is located at Av. das Nacoes Unidas, 7221 - 7(0)andar, Sao Paulo, 05425-902 SP, Brazil (telephone: +55-11-3037-4690). B. Business Overview Business Strategy Management of the Company has determined that the concentration by the Company on its core Cable and MMDS businesses offers the Company the best opportunity to achieve long term profitability. In addition, the Company is taking advantage of technological developments to use its Cable and MMDS infrastructure to provide high speed data transmission, interactive services and other telecommunications services over its Cable and MMDS systems and to take advantage of possible deregulation and the growing demand for these services in Brazil. The Company is expanding its Cable systems with fiber optic and coaxial cable capable of being upgraded to provide such enhanced services, and, through Ajato and Acesso, has already begun providing high-speed internet services through its Cable network in the Sao Paulo and Rio de Janeiro metropolitan areas. The Company also continues to explore the development of digital compression of MMDS signals. In addition, the Company seeks to increase its penetration in existing markets by: (i) expanding the range of TVA's Cable systems by extending its fiber optic and coaxial cable network and by seeking pre-wiring arrangements with residential housing developers, (ii) improving the signal quality and coverage of TVA's MMDS systems by using signal repeater technology and (iii) maximizing penetration by offering tiered subscription options and developing programming packages to appeal to more households. TVA's programming, unlike that of its primary competitors, is provided through encoded signals and addressable converters, thereby permitting the creation of a variety of programming packages. Tiered programming packages allow subscribers a greater number of choices in terms of pricing and types of programming. The Company expects that these tiered programming packages will attract new subscribers, including members of the C class, as well as retain current subscribers, thereby reducing Churn. 12 Programming Distribution and Markets The following table sets forth information regarding the markets in which TVA operates pay television systems and distributes programming, as of December 31, 2001:
Pay Television Average Revenue Programming Service Launch TV Class ABC per Month per Channels Date Homes(a) TV Homes(a) Subscribers Subscriber Offered -------------- -------- ----------- ----------- --------------- -------------- Owned Systems: MMDS TVA Sistema Sao Paulo........ September 1991 4,501,036 3,128,356 53,909 $22.82 28 Rio de Janeiro... March 1992 2,829,744 1,470,121 98,044 22.90 28 TVA Sul Curitiba......... March 1992 547,953 345,208 10,474 19.57 15 Cable(b) TVA Sistema Sao Paulo........ October 1994 2,823,337 2,017,078 150,309 25.01 57 TVA Sul Curitiba......... January 1995 407,551 227,221 22,794 23.39 51 Camboriu......... June 1996 13,497 9,111 9,308 21.01 49 Foz do Iguacu.... June 1996 55,244 30,663 8,237 17.03 51 Florianopolis.... September 1996 81,047 55,750 6,207 22.01 49 Total MMDS and Cable Subscribers......... -- -- -- 359,282 -- Subscribers Awaiting Installation........ -- -- -- 307 -- -- Total Subscribers-Owned Systems............. -- -- -- 359,589 -- -- ======= Households Receiving TVA Programming Owned Systems......... -- -- -- 359,589 -- -- ------- Operating Ventures: MMDS TV Filme, Inc. Brasilia......... July 1993 447,465 286,987 35,960 28.29 Goiania.......... December 1994 272,255 147,786 9,010 22.83 Belem............ December 1994 261,246 130,243 14,234 30.96 Campina Grande... August 1999 85,748 24,342 3,946 16.63 Cable Canbras TVA & Parana Fourteen cities(c) April 1996 767,054 527,254 147,256 20.40 ------- Total-Operating -- -- -- 210,406 -- -- ======= Total................. -- -- -- 569,995 -- -- =======
- ---------- (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 721,069, 201,615, 19,890, 18,060 and 29,822 Homes Passed, respectively, as of December 31, 2001. (c) Canbras TVA serves ten cities in Sao Paulo State (Santo Andre, Sao Bernardo, Mogi das Cruzes, Santa Branca, Sao Vicente, Praia Grande, Santos, Cubatao, Guaruja and Bertioga), and four cities in Parana state (Cianorte, Guarapuava, Cascavel and Ponta Grossa). 13 Brazilian Pay Television Market Brazil is the largest television and video market in Latin America with an estimated 39.5 million TV Homes which, as of December 31, 2001, watched on average approximately 2.5 hours of television per day. Approximately 4.7 million television sets and 1.5 million VCR and DVD units were sold in Brazil during 2001. The pay television industry in Brazil began in 1989 with the commencement by TVA of UHF service in Sao Paulo. As of December 31, 2001, there were an estimated 3.6 million pay television subscribers, representing approximately 9.0% of Brazilian TV Homes. By comparison, as of December 31, 2001, 65% of TV Homes in Argentina, 16% of TV Homes in Mexico and 88% of TV Homes in the United States of America 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 Ku-Band transmission system. Distribution Operating Systems TVA and the Operating Ventures distribute programming through Cable and MMDS distribution technologies. The availability of these two distribution technologies enables TVA to exploit the income and population characteristics, topography and competitive dynamics of each of its markets. MMDS TVA operates Brazil's largest MMDS network, and with the Operating Ventures, serves the country's major metropolitan areas. MMDS systems are typically easier to deploy and require relatively little capital investment for construction and maintenance as compared to Cable systems. Programming is transmitted by signals through the air from microwave transmitters to a small receiving antenna located at a subscriber's home or dwelling unit. At the subscriber's location, the microwave signals are converted to frequencies that can pass through a conventional coaxial cable into a decoder located near a television set. All of TVA's MMDS systems use addressable converters, which permit TVA to offer tiered pricing options that are expected to attract new customers, retain existing customers and reduce Churn. In accordance with Brazilian regulations, each MMDS license allows an MMDS operator to provide service to households in a circular area within a radius of up to 50 kilometers, depending on the technical capability of the operator. However, tall buildings and other tall structures may block reception of an MMDS signal. MMDS is being used in other emerging pay television markets such as Venezuela, Hong Kong and Mexico, where Cable has a strong incumbent position. TVA owns four MMDS licenses and operates MMDS systems in Sao Paulo, Rio de Janeiro and Curitiba, which have an aggregate population of approximately 17.9 million. TVA serves 162,427 MMDS subscribers in these three cities. TVA's MMDS systems offer between 15 and 28 channels of programming. TVA also holds interests in other MMDS licenses through TV Filme, an Operating Venture which operates MMDS systems in Brasilia, Goiania, Belem and Campina Grande and which had 63,150 MMDS subscribers as of December 31, 2001. TV Filme also has licenses to operate in eight other cities, including Belo Horizonte and Vitoria. In 2000 ANATEL authorized TVA to utilize, under TVA's MMDS licenses, the frequencies corresponding to the return channels of its MMDS systems. TVA presently uses these frequencies, which range from 2170 to 2182 MHz, to provide bi-directional broadband Internet services. Cable TVA has recently emphasized the strategic deployment of Cable service and currently operates Cable systems in Sao Paulo, Curitiba and three other cities in southern Brazil (Camboriu, Foz do Iguacu and Florianopolis). Cable service involves a broad band network employing radio frequency transmission through coaxial and/or fiber optic cable. Cable systems consist of four major parts: a headend, a distribution network, a subscriber network and a house terminal. The programming is collected from the headend, then processed and fed into the distribution path (trunk and distribution cable), which consists of coaxial and/or fiber optic cables. The signal is then fed into a subscriber network that is either located in an apartment building or a subscriber's home. Most of TVA'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. TVA's 14 systems in Curitiba, Camboriu and Foz do Iguacu are being upgraded to 750 MHz bandwidth capacity. TVA's system in Florianopolis is being constructed to 550 MHz bandwidth capacity. This technology enables TVA to provide interactive services, including internet service and, in the future, telecommunications. TVA recently launched its Ajato high-speed internet service through its Cable system to subscribers in Sao Paulo. In addition, TVA'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 12.7 million and 196,855 subscribers. As of December 31, 2001, TVA had deployed approximately 5,233 kilometers of its Cable network, including 1,289 kilometers of fiber optic cable, consisting of a 1,154 kilometer fiber optic loop in Sao Paulo and a 135 kilometer fiber optic network serving Curitiba, Camboriu, and Foz do Iguacu. TVA is also upgrading or constructing the Cable systems in Curitiba, Camboriu, Foz do Iguacu and Florianopolis. As a result of this build-out, as of December 31, 2001, TVA Cable systems passed 721,069 homes in Sao Paulo, 201,615 homes in Curitiba and a total of 990,456 homes throughout all of TVA's Cable systems. As of December 31, 2001, Canbras TVA, an Operating Venture 36% owned by TVA, had an existing Cable network of 2,838 kilometers, with 549,898 Homes Passed and 147,256 subscribers. Canbras TVA is constructing Cable networks in ten cities in the greater Sao Paulo area and four cities in the state of Parana with a combined population of over 3.1 million. TVA and Canbras TVA currently offer between 48 and 57 analog channels of programming (including off-air channels) on their Cable systems, depending on the market, and have the capability of offering up to 77 analog channels using up to 550 MHz and 110 analog channels using up to 750 MHz. During the twelve months ended December 31, 2001, TVA and Canbras TVA averaged approximately 1,571 and 1,495 net new Cable subscribers per month, respectively. Internet TVA, through TVA Sistema and Rede Ajato, provides high speed Internet services in the Sao Paulo and Rio de Janeiro metropolitan areas. TVA Sistema's "Acesso" service offers high speed broadband Internet access to pay television subscribers utilizing TVA's Cable network. TVA provides bi-directional Internet services through both its Cable and MMDS systems. TVA's "Ajato" service, provided through Rede Ajato, was the first broadband high speed Internet service provider created in Brazil. Ajato is a Portuguese language content and service portal offering multimedia, real video and music and video conferencing services, among others. TVA is actively pursuing alliances with content and e-commerce providers in order to provide a diverse and competitive portfolio of services through Ajato. As a result of certain regulatory requirements, TVA has entered into agreements with other major Internet access providers (including Virtua, a Globo affiliate, and Speedy, a Telefonica affiliate) and Internet service providers (including Globo.com, a Globo affiliate, and Terra, a Telefonica affiliate) pursuant to which Ajato's services are offered through these access providers and the services of these service providers are offered through Acesso. As of December 31, 2001, Ajato and Acesso had 10,283 and 9,657 subscribers (including backlog), respectively. Ajato and Acesso subscribers currently pay a monthly subscription fee of R$36 and R$33, respectively, for unlimited internet service. The Owned Systems TVA Sistema and TVA Sul operate TVA's MMDS and Cable businesses. TVA Sistema operates TVA's MMDS operations in Sao Paulo and Rio de Janeiro and Cable operations in Sao Paulo. TVA Sistema also operates the business of Acesso, TVA's Internet access provider. TVA Sul operates TVA's MMDS operations in Curitiba and Cable operations in Curitiba, Camboriu, Foz do Iguacu and Florianopolis. TVA holds a 100% equity interest in TVA Sistema and in TVA Sul. TVA Sul, in turn, holds a 60% equity interest in CCS-Camboriu Cable System Telecomunicacoes Ltda. ("CCS Camboriu"), the operating company for TVA Sul's services in Camboriu, and an unaffiliated third party holds the remaining 40%. 15 The Operating Ventures The Operating Ventures operate Cable (Canbras TVA) and MMDS (TV Filme) systems. TVA holds a 36% equity interest (and 51% of the total voting capital) in each of the Canbras TVA companies (Canbras TVA Cabo, TV Cabo Santa Branca and Canbras Parana). Canbras Participacoes Ltda., a Brazilian company ("Canbras-Par") holds the remaining interests in Canbras TVA. 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 Association Agreement, dated June 14, 1995, among TVA, TVA Sistema, the Canbras TVA companies, Canbras and Canbras Participacoes Ltda. (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 has agreed to supply to Canbras TVA 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 agreed to grant to Canbras-Par a "right of first refusal" to participate in Cable licenses that TVA may obtain, directly or indirectly, and Canbras-Par granted to TVA a similar "right of first refusal" to participate in Cable licenses acquired by Canbras-Par. The term of the Canbras Association Agreement is for so long as Canbras-Par or its assignee owns shares "in companies which have the objective of engaging in the cable TV business." The Canbras Association Agreement does not specify the terms and conditions on which any co-investments in Cable licenses are to be made, and such terms and conditions have been negotiated in good faith, on a case-by-case basis, in connection with any future cable license investments. Prior to July 2000, TVA held a 14.7% equity interest in TV Filme. The remaining interests were held by Warburg, Pincus Investors, L.P., which held a 38.8% equity interest; members of the Lins family, Brazilian nationals, who held a 16.2% equity interest; public shareholders, who held a 28.15% equity interest; and certain individuals with a combined 2.15% equity interest (on July 29, 1996, TV Filme completed a public offering of 2.5 million shares of its common stock in the United States at an initial price of U.S.$10.00 per share). In August 1999, TV Filme entered into an agreement with a committee representing a majority of the holders of TV Filme's 12.875% Notes due 2004 pursuant to which these noteholders would receive (i) a U.S.$25 million cash payment, (ii) U.S.$35 million in new five-year 12% secured notes and (iii) 80% of the new common shares of the reorganized company. This agreement received court approval under Charter 11 of the U.S. bankruptcy code in April 2000 and was implemented in July 2000, following approval from ANATEL and the Central Bank of Brazil. Following implementation of the reorganization plan, TVA's equity interest in TV Filme was reduced to approximately 0.7%. Programming TVA, through its MMDS and Cable systems, currently provides a programming package consisting of 15 to 57 television channels. TVA programming emphasizes sports, movies, children's programming and news with a secondary emphasis on general entertainment. With respect to MMDS and Cable service in TVA's markets, TVA is currently the sole provider of HBO Brasil, HBO Brasil 2, Cinemax, Cinemax Prime, Disney Channel Brasil, E! Entertainment Television, Mundo, BandNews, Eurochannel, Film and Arts, Locomotion, NHK and ART. In addition, TVA has entered into a number of programming agreements with other international programming providers. For example, TVA has entered into agreements with Turner Broadcasting Systems Latin America Inc. (Cartoon Network, TNT, CNN International, CNN Espanol), Fox Latin American Channel Inc. (Fox Latin America, Fox Kids), Discovery Latin America (People & Arts, Discovery Brasil, Discovery Kids) and the Disney Channel. TVA currently offers subscribers the following channels, among others: Movies and Series HBO Brasil is the dominant first-run pay television movie channel in Brazil. HBO Brasil airs 24 hours a day, offering an average of 12 different films per day with limited commercial slots. All films are either subtitled or dubbed into Portuguese. In the case of dubbed versions, viewers can listen to the original soundtrack on an SAP (second audio program) channel. TVA also offers HBO Brasil 2, transmitting HBO Brasil with a six hour time shift. 16 AXN is a films and series channel with emphasis on action, adventure, extreme sports and reality shows. Cinemax is a premium 24-hour movie channel with a film library complementary to that of HBO Brasil. Cinemax features a different variety of movie each day of the week. Cinemax Prime is a 24-hour movie channel offering classic movies, "making-of" features and other award-winning movies. Disney Channel offers children's and family-oriented movies, locally-produced live shows, series, cartoons and specials in Portuguese. Eurochannel offers subscribers programs from major European programming distributors, such us Canal +, BBC, Channel 4, TF1, France 2/3, Europe Images and Gaumont. Eurochannel also offers news, series, mini-series, documentaries, music and variety shows. Film and Arts is an arts and movie channel, following the same concept as the U.S. version of the Bravo channel, showing high quality, cultural events, such as classical music, jazz, opera, ballet and European movies. Fox presents movies, as well as programs from the 2,000 titles in the library of Twentieth Century Fox Television International ("Fox"). Fox also presents American television series, such as L.A. Law, M*A*S*H, and The Simpsons, among many others. TVA also offers Fox Kids, a 24-hour channel featuring the best of Fox programming for children. Hallmark features mainly original TV movies. Sony Entertainment is primarily a comedy channel, produced by Sony Pictures Entertainment, Inc., exhibiting series such as Friends, Seinfeld and Mad About You. TNT is a movie channel that offers the Turner Network Television movie collection, including over 5,000 classic movie titles from Metro Goldwyn Mayer, Inc. pursuant to a non-exclusive agreement with Turner International, Inc. 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. Warner is a family entertainment channel, with new and classic cartoons, children's programs, situation comedies, movies and series. Sports ESPN Brasil, a popular sports channel, provides coverage of Brazilian soccer games and other Brazilian and international sports entertainment programs, mixed with programming from ESPN2. ESPN International is the second sports channel offered by TVA. ESPN International offers a number of different sporting events, which include auto racing, National Football League games, professional tennis matches, Major League Baseball games, and National Basketball Association games. News BandNews is the first Brazilian headline news program. Produced locally by TV Band, BandNews presents news 24 hours per day in 30 minute blocks, featuring the most recent events and relevant news in Brazil and abroad. CNN International features news and information programming, offering international news coverage concerning politics, business, financial and economic developments, 24 hours a day. CNN Espanol is the Spanish version of CNN International. 17 Educational Programming Discovery Brasil is comprised of programming shown on the U.S. Discovery Channel, based on topics in the areas of nature, science and technology, history, adventure and world cultures. Mundo presents 24 hours per day of documentaries, biographies, mini-series and great moments in sports, music and history, including selected programming from the History Channel. People and Arts is a 24-hour channel presenting documentaries about arts, personalities and cultures from different countries around the world. Music and Entertainment E! Entertainment Television presents 24 hours per day of reports regarding movies, television, fashion and the arts. MTV Brasil is a 24-hour channel produced by MTV Brasil Ltda., a joint venture company owned by Abril and an indirect subsidiary of Viacom International (Netherlands B.V.). 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. Children's Programming 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 Kids is a 24-hour channel featuring the best of Discovery programming for children. Fox Kids is a 24-hour channel featuring the best of Fox programming for children. Locomotion is an animation channel with programming targeted to adolescents and adults, such as Dr. Keds and South Park. Nickelodeon is a 24-hour channel for children offering programs such as Rugrats and Bananas in Pijamas. Ethnic Programming ART features programming directed at Brazil's Arab community, including news, sports, films entertainment programs and other programs from Lebanese television. Deutsche Welle features programming in German, English and Spanish for the German community in Brazil. NHK offers programming in Japanese for Brazil's Japanese community. RAI offers programming in Italian for Brazil's Italian community. 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. Operations Marketing. TVA periodically conducts marketing surveys to gauge consumer preferences and evaluate new and existing markets. TVA also frequently evaluates the demographics of the subscribers to its programming, seeking to provide programming most in demand. In each market, TVA's marketing staff typically applies one or more of the 18 following programs to attract subscribers: (i) extensive marketing tied to regional events such as soccer matches, (ii) neighborhood promotional events featuring large screen broadcasts of its channel offerings, (iii) direct mailings, (iv) telemarketing, (v) television, billboard, magazine and newspaper advertisements, (vi) pre-wiring arrangements with residential housing developers and (vii) other promotional marketing activities, including referral programs and promotional gifts. Installation. The installation package delivered to a new subscriber depends upon the type of programming delivery service chosen by the subscriber. The MMDS installation package features a standard rooftop mount linked to an antenna and related equipment, including a decoder, located at the subscriber's location. Cable service requires the installation of a cable line and a decoder at the subscriber's dwelling. Once a new subscriber has requested service, the time a subscriber waits for the commencement of service depends on several factors, including type of service, whether the subscriber has access to Cable, whether the subscriber is in a single family home or multiple dwelling unit and whether the topography of the surrounding area makes MMDS service viable. TVA provides installation service to subscribers, either with its own personnel or through local subcontractors. In approximately 80% of all cases, TVA installs its service and begins transmitting programming on the same day in which subscription orders are received. Programming Facilities. Programming equipment is used to prepare the programming material for transmission via TVA's MMDS and Cable systems. The programming equipment inserts commercial or promotional material, if appropriate, monitors the quality of the picture and sound, and delivers the material to the multiplexing system. For programming delivered to TVA as taped material, the programming equipment also compiles the various programming segments, inserting commercial and promotional material. 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. In addition, in 2001 TVA completed the establishment of a centralized call center in order to provide uniform and consistent customer service in connection with all of its operations. Management Information Systems and Billing. Management believes that TVA's proprietary management information systems enable TVA to deliver superior subscriber service, monitor subscriber payment patterns and facilitate the efficient management of each of its operating systems. Management believes that TVA's billing procedures are an integral part of its strategy to maintain high levels of subscriber satisfaction and to maximize subscriber retention. Subscribers have the option to select the day on which payment for that month's service is due, out of ten possible dates each month, and pay their bills through payment at a bank, deduction from checking account or with a credit card. Competition General TVA and the Operating Ventures compete with pay television service providers using Cable, MMDS and DBS transmission technologies. TVA 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 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. TVA and the Operating Ventures also compete with national broadcast networks and regional and local broadcast stations. MMDS and Cable Service 19 TVA competes with other major Cable and MMDS operators in each of its principal markets. TVA's principal competitors are Cable and MMDS systems operated by Net, which is controlled by Globo Par. Net operates Cable systems in the metropolitan areas of Sao Paulo, Rio de Janeiro, Curitiba and Florianopolis. In each of these areas, Net Cable systems have more subscribers than TVA's Cable systems, although Management of TVA believes TVA has a higher share of subscribers in areas of these markets where the competing Cable systems overlap. Net also operates an MMDS system in Curitiba, although TVA is the MMDS market leader in that metropolitan area, with a market share of 85%, as compared with 15% for Net's service. TVA also competes with the Cable system of TV Cidade in the Rio de Janeiro metropolitan area. TV Cidade, owned by affiliates of SBT, TV Band, Hicks Muse Furst & Tate and GE Capital. TV Cidade currently has a 4% share of the Cable market in the Rio de Janeiro metropolitan area. The systems operated by Net and TV Cidade offer a similar number of channels of programming at prices comparable to those charged for TVA's MMDS and Cable services. Each of these systems broadcasts programming purchased from TVA as well as from other sources. DBS Service TVA also competes with providers of Ku-Band service in Brazil, principally Net Sat and DIRECTV. Globo Par has a controlling interest in Net Sat, whose other equity holders include News Corporation plc, a subsidiary of The News Corporation Limited. Net Sat currently offers 110 audio and video channels of programming (including pay-per-view channels), while DIRECTV currently offers 128 channels of audio and video programming, including 35 pay-per-view channels. 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, TV Band, Rede TV, TV Record and Gazeta. The national television networks utilize one or more satellites to retransmit their signals to their local affiliates throughout Brazil. Regulatory Framework The subscription television industry in Brazil is subject to regulation by the Agencia Nacional de Telecomunicacoes ("ANATEL"), an independent federal agency, pursuant to Law No. 9472/97 ("Law 9472"), Law No. 9295/96 ("Law 9295") and Law No. 8977/95 ("Law 8977"). ANATEL is authorized to grant concessions for MMDS, Cable, DBS, and UHF licenses. MMDS Regulations General. Law 9472 authorizes ANATEL, among other things, to issue, revoke, modify and renew licenses within the spectrum available to MMDS systems, to approve the assignments and transfer of control of such licenses, to approve the location of channels that comprise MMDS systems, to regulate the kind, configuration and operation of equipment used by MMDS systems, and to impose certain other reporting requirements on channel license holders and MMDS operators. The licensing and operation of MMDS channels are currently governed by Decree No. 2196/97 ("Decree 2196"), Ordinance No. 254/97 (as amended by Ordinance No. 319/97, "Ordinance 254") and Rule No. 002/Rev. 97 ("Rule 002"). Under these regulations, MMDS is defined as the special service of telecommunication which uses microwaves to transmit codified signals to be received in pre-established points on a contractual basis. Licenses. ANATEL grants licenses and regulates the use of channels by MMDS operators to transmit video programming, entertainment services and other information. A maximum of 31 MMDS channels (constituting a 20 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 ANATEL full discretion to alter or eliminate the restrictions. The term affiliate is defined by Rule 002 as any legal entity that directly or indirectly holds at least 20% of the voting capital. The Company currently controls five MMDS licenses in cities of more than 700,000 inhabitants (Sao Paulo (2), Rio de Janeiro, Curitiba and Porto Alegre), but in each such city TVA has at least one competitor. Prices for pay television services may be freely established by the system operator, although ANATEL may interfere in the event of abusive pricing. ANATEL may impose penalties including fines, suspension or revocation of the license if the license holder fails to comply with applicable regulations or becomes legally, technically or financially unable to provide MMDS service. ANATEL also may intervene to the extent operators engage in unfair practices intended to eliminate competition. ANATEL awards licenses to use MMDS channels based upon applications demonstrating that the applicant is qualified to hold the license, that the proposed market is viable and that the operation of the proposed channels will not cause impermissible interference to other permitted channels. After ANATEL determines that an application has met these requirements, it publishes a notice requesting comments from all parties interested in providing the same services in the same or a near area. Depending on the comments received, ANATEL may decide to open a public bid for the service in that area, although it has not done so in the past. In the case of a public bid, applicants would be evaluated based on a number of factors including the applicant's proposed schedule for implementing commercial operations, the applicant's commitment to local programming and the extent to which the applicant provides free programming to local cultural and educational institutions. Once an MMDS license application is granted by ANATEL, the license holder must finalize construction and begin operations within 12 months, which period may be extended by an additional 12 months. In addition to qualifying under the application process described above, a license holder must also demonstrate that its proposed signal does not violate interference standards in the area of another MMDS channel license holder. To this end, existing license holders are given a 30-day period in which to ascertain and comment to ANATEL whether the new license holder's proposed signal will interfere with existing signals. The area covered by the services is to a radius of five to 50 kilometers around the transmission site, depending on the technical capability of the operator. Other Regulations. MMDS license holders are subject to regulation with respect to the construction, marketing and lighting of transmission towers pursuant to the Brazilian Aviation Code and certain local zoning regulations affecting construction of towers and other facilities. There may also be restrictions imposed by local authorities. The subscription television industry also is subject to the Brazilian Consumer Code. The Consumer Code entitles the purchasers of goods or services to certain rights, including the right to discontinue a service and obtain a refund if the services are deemed to be of low quality or not rendered adequately. For instance, in case of a suspension of the transmission for a given period, the subscriber shall be entitled to a discount on the monthly fees. Rule No. 002 contains certain provisions relating to consumer rights, including a provision for mandatory discounts in the event of interruption of service. The Company, as of December 31, 1998, had not been required to repay any amounts or provide any 21 discounts due to interruptions of service. However, the Company does refund prepaid installation service fees when the Company discovers such service is unavailable for whatever reason. Due to the regulated nature of the subscription television industry, the adoption of new, or changes to existing, laws or regulations or the interpretations thereof may impede the Company's growth and may otherwise have a material adverse effect on the Company's results of operations and financial condition. Cable Regulation General. Cable services in Brazil are licensed and regulated by ANATEL pursuant to Law No. 8977/95 ("Law 8977"), Decree No. 2206/97 ("Decree 2206"), which authorized the regulation of Cable Services, and Ordinance 256/97 ("Ordinance 256"), which approved the Norma Complementar do Servico de TV a Cabo regulating the granting of licenses for, and the operation of, Cable services. Until Law 8977 was enacted in 1995, the Brazilian Cable industry had been governed by two principal regulatory measures since its inception in 1989: Ordinance No. 250, issued by the Ministry of Communications on December 13, 1989 ("Ordinance 250"), and its successor, Ordinance No. 36, issued by the Ministry of Communications on March 21, 1991 ("Ordinance 36"). Ordinance 250 regulated the distribution of television signals ("DISTV") by physical means (i.e., by Cable) to end-users. DISTV services generally are limited only to the reception and transmission of signals without any interference by a DISTV operator with the signal content. Under Ordinance 250, 101 authorizations were granted by the Ministry of Communications to local operators to commercially exploit DISTV services. Although Ordinance 250 did not specifically address Cable services, a number of DISTV operators (including the Company's Cable systems) began to offer Cable services based on DISTV authorizations. Licenses. Under Law 8977, a Cable operator must obtain a license from ANATEL in order to provide Cable services in Brazil. All Cable licenses are nonexclusive licenses to provide Cable services in a service area. Cable licenses are granted by ANATEL for a period of 15 years and are renewable for equal and successive periods. Renewal of the Cable license by ANATEL is mandatory if the Cable system operator has (i) complied with the terms of the license grant and applicable governmental regulations and (ii) agrees to meet certain technical and economic requirements relating to the furnishing of adequate service to subscribers, including system modernization standards. Ordinance No. 256/97 ("Ordinance 256") imposes restrictions on the number of areas that can be served by a Cable television system operator (or an affiliate thereof). Pursuant to Ordinance 256, a Cable system operator (or an affiliate thereof) may only hold licenses with respect to (i) a maximum of seven areas with a population of 700,000 and above and (ii) a maximum of 12 areas with a population of 300,000 or more and less than 700,000. The restrictions only apply to areas in which the Cable system operator (or an affiliate thereof) faces no competition from other pay television services, excluding services that utilize a satellite to transmit their signal. Ordinance 256 grants ANATEL full discretion to alter or eliminate the restrictions. The term affiliate is defined by Ordinance 256 as any legal entity that directly or indirectly holds at least 20% of the voting capital of another legal entity or any of two legal entities under common ownership of at least 20% of their respective voting capital. The Company currently controls two Cable licenses in cities of more than 700,000 inhabitants (Sao Paulo and Curitiba), but in each such city TVA has at least one competitor. Generally, only legal entities that are headquartered in Brazil and that have 51% of their voting capital by Brazilian-born citizens or persons who have held Brazilian citizenship for more than 10 years are eligible to receive a license to operate Cable systems in Brazil. In the event that no private entity displays an interest in providing Cable services in a particular service area, ANATEL may grant the local public telecommunications operator a license to provide Cable services. Cable operators that previously provided Cable services under a DISTV authorization granted under Ordinance 250 were required under Law 8977 to file applications to have their DISTV authorizations converted into Cable licenses. Ordinance 256 grants a one year period from the date a DISTV authorization is converted into a cable television license for any Cable system operator to comply with the restrictions. The Company's 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. 22 Cable licenses for service areas not covered by existing authorizations will be granted pursuant to a public bidding process administered by ANATEL after prior public consultation. All such licenses shall be nonexclusive licenses. In order to submit a bid for a license, a bidder must meet certain financial and legal prerequisites. After such prerequisites are met, a bidder must then submit a detailed bid describing its plan to provide Cable services in the service area. In the qualification phase of the bidding process, ANATEL assigns a number of points to each bid based on certain weighted criteria, including the timetable for offering subscription programming; the time allocated to local public interest programming; the number of channels allocated to educational and cultural programming; and the number of establishments, such as schools, hospitals and community centers, to which basic service programming will be offered free of charge. After calculating the number of points awarded to each bidder, ANATEL will then apply a formula based on the population of the service area to select the winning bid from among those bidders that meet certain defined minimum qualifying thresholds. For service areas with a population of 700,000 or more inhabitants, the qualified bidder that submits the highest bid for the license will be selected. For service areas with a population between 300,000 and 700,000 inhabitants, the winning bid is selected based on the highest product obtained by multiplying the number of points awarded in the qualification phase and the amount bid for the license. For service areas with less than 300,000 inhabitants, the winning bid is selected on the basis of the number of points awarded in the qualification phase and the payment of a fixed fee. Once a Cable license is granted, the licensee has an 18 month period from the date of the license grant to complete the initial stage of the installation of the Cable system and to commence providing Cable services to subscribers in the service area. The 18 month period is subject to a single 12 month extension for cause at the discretion of ANATEL. Any transfer of a Cable license is subject to the prior approval of ANATEL. A license generally may not be transferred by a licensee until it has commenced providing Cable services in its service area. Transfers of shares causing a change in the control of a license or the legal entity which controls a license also is subject to the prior approval of ANATEL. ANATEL must receive notice of any change in the capital structure of a licensee, including any transfer of shares or increase of capital that do not result in a change of control. A license can be revoked, upon the issue of a judicial decision, in the event the licensee lacks technical, financial or legal capacity to continue to operate a Cable system; is under the management of individuals, or under the control of individuals or corporations who, according to Law 8977, do not qualify for such positions; has its license transferred, either directly or by virtue of a change in control, without the prior consent of ANATEL; does not start to provide Cable services within the time limit specified by Law 8977; or suspends its activities for more than thirty consecutive days without justification, unless previously authorized by ANATEL. Cable Related Service Regulation General. Brazilian telecommunications services are governed primarily by (i) Article 21 of the Federal Constitution, as amended by Amendment No. 8 of August 15, 1995 ("Amendment 8"), (ii) the Telecommunications Code (Law No. 4117 of August 27, 1962, as amended), (iii) Law 9472, (iv) Law 9295 and (v) Law 8977. The Brazilian Government also has issued detailed regulations covering specific areas of telecommunications services, including radio broadcasting, paging, trunking, subscription television, Cable television and cellular telephony. ANATEL is responsible for the regulation of telecommunications services in Brazil. Prior to its amendment in 1995, Article 21 of the Federal Constitution required the Brazilian Government to operate directly, or through concessions granted to companies whose shares are controlled by the Brazilian Government, all telephone, telegraph, data transmission and other public telecommunications services. This constitutional requirement was the basis for the establishment of the state-owned telephone monopoly, Telebras, which held controlling interests in 27 regional telephone operating companies. With the adoption of Amendment 8, Article 21 was modified to permit the Brazilian Government to operate telecommunications services either directly or through authorizations, concessions or permissions granted to private entities. In particular, Amendment 8 removed the constitutional requirement that the Brazilian Government must either directly operate or control the shares of companies which operate telecommunications services. Even with the adoption of Amendment 8, the Brazilian Government still retains broad regulatory powers over telecommunications services. Notwithstanding the existence of the Telebras monopoly, private companies have been permitted under Brazilian law to provide a number of telecommunications services other than telephony, including radio broadcasting, paging, trunking, subscription television and cable television services. However, fixed public telephony and cellular telephony were exclusively provided by 23 Telebras through its regional telephone operating companies. In 1998 the Ministry of Communications and ANATEL concluded the privatization of all public fixed and cellular telephone companies. High-Speed Cable Data Services. Law 8977 and Decree 2208, among other things, authorize cable television operators, such as the Company, in addition to furnishing video and audio signals on their cable networks, to utilize their networks for the transmission of meteorological, banking, financial, cultural, price and other data. This broad grant of authority is understood to permit Cable television operators to furnish services such as interactive home banking and high-speed Cable data services to subscribers through their cable television networks, although a simplified licensing procedure for high-speed Cable data services may be installed by ANATEL in the future. On November 29, 1999, ANATEL issued Regulation 190, which authorized the use of subscriber communication networks (such as Cable systems) by unidirectional or bi-directional value-added service providers. Regulation 190 also regulates certain terms between value-added service providers and subscriber network operators. TVA is subject to Resolution 190 both as a cable operator (through TVA Sistema) and a provider of high speed internet service (through Ajato). 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. In November 2001 Anatel revised regulations concerning the provision of fixed telephony services to the general public (Servico Telefonico Fixo Comutado, or "STFC"). These regulations provide that any company meeting certain criteria can provide STFC services throughout Brazil. In March 2002 TVA requested authorizations to provide STFC services in the cities of Sao Paulo, Rio de Janeiro, Curitiba and Porto Alegre. In August 2001 Anatel revised regulations concerning the provision of telecommunications services other than STFC, radio and television broadcasting, pay television and cellular services to the general public (Servico de Comunicacao Multimidia, or "SCM"). In January 2002 TVA requested that its existing license for such services be converted into an SCM license. Other. On November 24, 1999, ANATEL and ANEEL (Agencia Nacional de Energia Eletrica, or National Electric Energy Agency) published Joint Resolution No. 001, which sets guidelines for the use of infrastructure among the electric energy, telecommunications and oil industries in order to maximize the use of resources and reduce operating costs. TVA has initiated an arbitration proceeding with Centrais Eletricas de Santa Catarina--CELESC and Companhia Paranaense de Energia Eletrica--COPEL in order to resolve certain questions relating to TVA's contracts with these 24 entities, particularly with respect to pole rental fees. In November 2001 TVA also initiated a legal proceeding against Eletropaulo Metropolitana de Sao Paulo seeking to reduce pole rental fees in the city of Sao Paulo. Legal Proceedings The Company is party to certain legal actions arising in the ordinary course of its business which, individually or in the aggregate, are not expected to have a material adverse effect on the consolidated financial position of the Company. As of December 31, 2001, the Company had reserved approximately $1.7 million as contingent liabilities in connection with certain litigation contingencies, involving primarily claims by persons arising in connection with the termination of their employment. The Company's operating companies are currently defending a lawsuit brought by the Escritorio Central de Arrecadacao e Distribuicao (Central Collection and Distribution Office, or "ECAD"), a government-created entity authorized to enforce copyright laws relating to musical works. ECAD filed a lawsuit in 1993 against all pay-television operators in Brazil seeking to collect royalty payments in connection with musical works broadcast by the operators. Suits were filed against TVA in the 14 Vara Civel Forum Central de Sao Paulo (against TVA Brasil), the 1 Vara Civel Forum Central de Curitiba (against TVA Sul) and the 2 Vara de Balneario Camboriu (against CCS-Camboriu Cable System de Telecomunicacoes Ltda.). ECAD is seeking a judgment award of 2.55% of all past and present revenues generated by the operators. The suits are currently being submitted to the Superior Tribunal de Justica in order to determine whether ECAD is entitled to benefit from the copyrights relating to musical works broadcast on pay television. Although the Company intends to continue to vigorously defend these suits, the loss of such suits may have a material adverse effect on the consolidated financial position of the Company. Based on agreements reached by ECAD with other Brazilian television operators, however, management believes that it can reach a negotiated settlement to these suits whereby the Company would make monthly payments to ECAD in an amount significantly lower than that sought by ECAD. C. The following chart sets forth the significant subsidiaries comprising the corporate structure of TVA's Cable, MMDS and Internet businesses. Except as indicated otherwise, each of the subsidiaries listed below is incorporated in the Federative Republic of Brazil. See "Business Overview--Owned Systems" and "--Operating Ventures." 25 -------------- Tevecap S.A. (TVA) -------------- | | | --------------------------------------------------------------------- | | | | 100% | 100% | 36% | 100% | | | | | - ------------ ------------- ------------ ------------ TVA Sistema TVA Sul Canbras TVA Rede Ajato - ------------ ------------- ------------ ------------ | 60% | | ------------- CCS Camboriu ------------- D. Property, Plant and Equipment The Company owns most of the assets essential to its operations. The major fixed assets of the Company are coaxial and fiber optic cable, converters for subscribers' homes, electronic transmission, receiving, processing and distribution equipment, microwave equipment and antennae. The Company leases certain distribution facilities from third parties, including space on utility poles, roof rights and land leases for the placement of certain of its hub sights and head ends and space for other portions of its distribution system. The Company leases its offices from third parties, with the exception of certain offices of TVA Sul, located in Curitiba, State of Parana, which are owned by the Company. The Company also owns its data processing facilities and test equipment. 26 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS The following discussion should be read in conjunction with the Financial Statements (including the notes thereto) included in Appendix F hereto. 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 U.S. dollars. This discussion of the Company's operating review and prospects reflects the historical results of TVA. Due to the limited operating history, startup nature, translations of Brazilian currency into U.S. dollars, and rapid growth of TVA, 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 TVA. A. Results of Operations Overview Since its inception in 1989, TVA has been developing its businesses. Despite its growth and positive operating cash flow for the year ended December 31, 1999, TVA 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 TVA since inception have been funded principally by (i) net contributions of $521,130 from TVA's shareholders, (ii) borrowings from Editora Abril S.A. ("Abril") under a revolving credit facility, dated December 6, 1995, between TVA, as the borrower, and Editora Abril S.A., as the lender (the "Abril Credit Facility"), (iii) dispositions of non-strategic assets and (iv) bank loans and other borrowings made from time to time. In November 2001, TVA's shareholders agreed to capitalize outstanding loans in the aggregate principal amount of $123,159 made to TVA by Editora Abril under the Abril Credit Facility. In July 1999 TVA consummated the sale of Galaxy Brasil, TVA Banda C and certain assets related thereto, including its interest in GLA to GLA and the members thereof (such sale, the "DBS Sale"). These dispositions were conducted as a result of Management's review of TVA's operations and investment needs and the resulting intention to concentrate TVA's businesses on the distribution of pay television and other services through Cable and MMDS operations. See "Information on the Company--History and Development of the Company." As a result of these dispositions, TVA's DBS operations have been classified as "Discontinued Operations." In addition, in the third quarter of 1999, TVA began offering the services of Ajato, TVA's high speed internet service provider, which was followed in the second quarter of 2000 by the services of Acesso, TVA's high speed internet access provider. The costs and expenses associated with the start-up nature of these businesses significantly affected the Company's results of operations for the years ended December 31, 2000 and 1999. The Company's results of operations for the year ended December 31, 2001 were significantly affected by the following factors: (i) the depreciation of investments in the construction and modernization of infrastructure used to improve current services and develop new services, (ii) loans under the Abril Credit Facility that were capitalized in November 2001, (iii) the contribution by Abril to TVA of its equity interest in Canbras Parana and (iv) the impact of the devaluation of the real in 2001, as discussed below. Critical Accounting Policies The Financial Statements are presented in accordance with U.S. GAAP. As such, the Company is required to make certain estimates, judgments and assumptions that management believes are reasonable based upon the information available. These estimates, judgments and assumptions affect the reported amounts of assets and liabilities at the dates of the Financial Statements and the reported amounts of revenues and expenses during the periods presented. The significant accounting policies which management believes are the most critical to aid in fully understanding and evaluating the Company's reported financial results include the following: 27 Revenue Recognition. Subscription revenues are recognized monthly at the amount billed to subscribers for service subscribed to and earned during the month. Installation fees are recognized as revenue on the equipment installation date to the extent of direct selling costs incurred which are higher than the revenue. Advertising revenues are recognized, and the production cost of commercials and programming are charged to expense, when the commercial is telecast. Other revenues are recognized as services are rendered. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected. Deferred Income Taxes. The Company recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities as well as operating loss and tax credit carryforwards. The Company regularly reviews the deferred tax assets for recoverability and establishes a valuation allowance if it is more likely than not that the deferred tax assets will not be realized, based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences. As of December 31, 2001, the Company has approximately $219,630 of net operating losses ("NOLs") to offset against regular taxes. These NOLs do not expire. 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 the deferred tax assets attributable to the NOL carryforwards and other deductible differences. Management believes that, should the Company be profitable in the future, it will be able to utilize these NOLs. Impairment of Long-Lived Assets. The Company evaluates its long-lived assets and identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset. In estimating future undiscounted net cash flows, assets are grouped at the level of each cable television system. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for these assets not previously recorded. Depreciation of Property, Plant and Equipment. Depreciation of property, plant and equipment is provided using the straight-line method based on the estimated useful lives of the underlying assets disclosed in Note 10 to the Tevecap Financial Statements. Given the complex nature of the Company's property, plant and equipment, the estimates of useful lives require considerable judgment and are inherently uncertain. If the Company materially changes the assumptions of useful lives, depreciation expense and net book value of property, plant and equipment could be materially different. Provision for Doubtful Accounts. A provision for doubtful accounts is established on the basis of an analysis of the accounting receivable, in light of the risks involved, and is considered sufficient to cover any losses incurred in realization of credits. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Recent Accounting Pronouncements Effective January 1, 2001, the Company adopted Statements of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138 (collectively, "SFAS 133"). SFAS 133 establishes accounting and reporting standards requiring that all derivative financial instruments (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. Additionally, SFAS 133 requires that changes in the fair value of derivatives be recognized in earnings unless specific hedge accounting criteria are met. As the Company does not utilize derivative financial instruments, the effect of adopting SFAS 133 on January 1, 2001 did not have a material impact on the Company's consolidated financial statements. In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. Recorded goodwill and intangibles will be evaluated against this new criteria and may result in certain intangibles being subsumed into goodwill, 28 or alternatively, amounts initially recorded as goodwill may be separately identified and recognized apart from goodwill. SFAS 142 requires the use of a nonamortization approach to account for purchased goodwill and certain intangibles. Under a nonamortization approach, goodwill and certain intangibles will not be amortized into results of operations, but instead would be reviewed for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles is more than its fair value. The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. Effective January 1, 2002, the Company adopted the provisions of each statement that apply to goodwill and intangible assets acquired prior to June 30, 2001. Based on the Company's initial analysis of SFAS 141 and SFAS 142, management believes that the implementation of these pronouncements will not have a material impact on the Company's consolidated results of operations or financial condition. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 requires that the market value of the liabilities related to obligations due to the retirement of assets be recognized in the period in which they occur, if a reasonable estimate of market value is possible. Costs of asset retirement are capitalized as part of the permanent asset cost. In accordance with SFAS 143, the asset retirement obligation is discounted and an increase is recognized by using the "credit adjusted risk-free" interest rate in effect when the obligation was initially recognized. The Company is required to adopt SFAS 143 effective January 1, 2003. Based on an initial analysis of SFAS 143 requirements, management believes that the implementation of this statement will not have a material impact on the Company's consolidated results of operations or financial condition. In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121") but maintains the fundamental provisions of SFAS 121 for (a) recognition/valuation of the provision for impairment of permanent assets to be maintained and used and (b) valuation of permanent assets to be written off due to their sale. SFAS 144 also supersedes the provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business" ("APB 30") with regard to reporting the effects of a disposal of a segment of a business. The Company adopted SFAS 144 effective January 1, 2002. Based on the Company's initial analysis of the SFAS 144 requirements, management believes that the implementation of this pronouncement will not have a material impact on the Company's consolidated results of operations or financial condition. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections." SFAS 145 rescinds SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt," which required that all gains and losses from extinguishment of debt to be aggregated and classified as an extraordinary item if material. SFAS 145 requires that gains and losses from extinguishment of debt be classified as extraordinary only if they meet criteria in APB 30, thus distinguishing transactions that are part of recurring operations from those that are unusual or infrequent, or that meet the criteria for classification as an extraordinary item. SFAS 145 also amends SFAS No. 13, "Accounting for Leases", to require that lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. In addition, SFAS 145 rescinds SFAS 44, "Accounting for Intangible Assets of Motor Carriers," and SFAS 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements," which are not currently applicable to us. The provisions of SFAS 145 as they relate to the rescission of SFAS 4 will be applied effective January 1, 2003. Certain provisions related to SFAS 13 are effective for transactions occurring after May 15, 2002. Management does not expect SFAS 145 to have a material impact on the Company's consolidated results of operations or financial condition. Impact of Real Devaluation All forms of TVA's revenue were affected adversely in dollar terms as a result of the significant devaluation in the Brazilian real against other major currencies that occurred primarily in January 1999 and continued in subsequent years. The devaluation resulted in a loss in the value of the real against the dollar of approximately 48% during the year ended December 31, 1999. In addition, the real devalued approximately 9% during the year ended December 31, 2000 and approximately 19% during the year ended December 31, 2001. This devaluation also resulted in an increase in TVA's dollar-denominated liabilities. See Item 3, "Key Information--Risk Factors--Factors Relating to the Company" and "--Factors Relating to Brazil." 29 Change in Functional Currency As of January 1, 2000, TVA changed its functional currency from the U.S. dollar to the Brazilian real. This change was made as a result of changes in the Company's capital and operational structure and a move to using the Brazilian real for a substantial portion of the Company's business. See Note 2.3 to the Company's Financial Statements. Seasonality The Company's revenues are seasonal. Generally, during the Brazilian summer months of January and February the Company experiences lower demand for installation for each of its services. As a result, the Company experiences a decrease in Installation revenue of approximately 25% in these months, which decrease is offset by corresponding decreases in Payroll and benefits expense (i.e., sales commissions), Advertising and promotional expense and Other costs. 30 Consolidated Statements of Operations Data
Year Ended December 31, ----------------------------------------------------------------------------- 2001 2000 1999 ----------------------- ----------------------- ----------------------- % of Gross % of Gross % of Gross Amount Revenue Amount Revenue Amount Revenue ----------------------- ----------------------- ----------------------- Gross revenues Monthly subscriptions $ 88,246 83.3% $ 97,134 80.3% $ 94,055 80.9% Installation 270 0.3% 968 0.8% 1,900 1.6% Indirect Programming -- -- 357 0.3% 3,722 3.2% Additional services and others 17,418 16.4% 22,552 18.6% 16,521 14.2% Gross revenue 105,934 100.0% 121,011 100.0% 116,198 100.0% --------- ----- --------- ----- --------- ----- Direct operating expenses 51,296 48.4% 55,402 45.8% 45,638 39.3% Taxes on Revenue 15,636 14.8% 13,145 10.9% 12,782 11.0% Selling, general and administrative Expense 29,448 27.8% 33,483 27.7% 25,590 22.0% Depreciation and amortization 34,364 32.4% 43,290 35.8% 56,879 49.0% Other operating expense, net 1,762 1.7% (2,611) (2.2)% 19,012 16.4% --------- ----- --------- ----- --------- ----- Total operating expenses 132,506 125.1% 142,709 117.9% 159,901 137.6% --------- ----- --------- ----- --------- ----- Operating loss (26,572) (25.1)% (21,698) (17.9)% (43,703) (37.6)% --------- ----- --------- ----- --------- ----- Interest income (4,200) (3.9)% (5,374) (4.4)% (5,896) (5.1)% Interest expense 37,849 35.7% 45,069 37.2% 22,254 19.2% Foreign currency transaction loss, net 11,067 10.4% 4,816 3.9% -- -- Foreign currency translation loss, net -- -- -- -- 2,543 2.2% Other nonoperating expenses (income), net 2,438 2.3% (37,384) (30.9)% 11,055 9.5% Minority interest (284) (0.3)% (491) (0.4)% (678) (0.6)% Income taxes -- -- 2,517 2.1% 106 0.1% --------- ----- --------- ----- --------- ----- Equity in (losses) income of affiliates, net 2,375 2.2% 2,004 1.7% 5,238 4.5% Income (loss) from continuing operations before extraordinary item (75,817) (71.6)% (32,855) (27.2)% (78,325) (67.4)% --------- ----- --------- ----- --------- ----- Income (loss) from discontinued operations -- -- -- -- 94,344 81.2% --------- ----- --------- ----- --------- ----- Extraordinary item - gain on debt repurchase -- -- -- -- 53,857 46.3% --------- ----- --------- ----- --------- ----- Net income (loss) (75,817) (71.6)% (32,855) (27.2)% 69,876 60.1% ========= ===== ========= ===== ========= =====
31 Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 The table below sets forth the number of subscribers at December 31, 2001 and December 31, 2000 for the Owned Systems.
Owned Systems Subscribers December 31, 2001 December 31, 2000 ------------------------- ----------------- ----------------- MMDS(a) .................................... 162,427 167,819 Cable ...................................... 196,855 178,004 ------- ------- 359,282 345,823 Paid Subscribers Awaiting Installation ..... 307 648 ------- ------- Total Owned Systems ........................ 359,589 346,471 ======= =======
- ---------- (a) Includes UHF subscribers The table below sets forth the number of Internet subscribers at December 31, 2001 and December 31, 2000.
Internet Subscribers December 31, 2001 December 31, 2000 -------------------- ----------------- ----------------- Ajato and Acceso ........................... 19,649 11,480 Paid Subscribers Awaiting Installation ..... 291 1,431 ------ ------ Total Internet Subscribers ................. 19,940 12,911 ====== ======
The table below sets forth at December 31, 2001 and December 31, 2000 the approximate number of television households which received TVA programming through the Owned Systems and the Operating Ventures. Households Receiving TVA Programming
December 31, 2001 December 31, 2000 ----------------- ----------------- Total Owned Systems ........................ 359,589 346,471 Operating Ventures ......................... 210,406 186,951 Total ...................................... ------- ------- 569,995 533,422 ======= =======
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 and Additional services and others (which consists of Advertising revenues and Other revenues). Monthly subscriptions revenue for the year ended December 31, 2001 was $88,246, as compared to $97,134 for the comparable period in 2000. This decrease is primarily attributable to a 19% devaluation of the real against the U.S. dollar in 2001, which was slightly offset by an increase in the Company's pay television subscriber base of approximately 4% and an increase in the Company's Internet subscriber base by approximately 71%. Average monthly fees for existing pay television subscribers decreased from $25.87 to $20.56 per subscriber and for new subscribers decreased from $23.10 to $19.01 per subscriber, largely due to the increased popularity of lower-priced programming packages and the effect of the real devaluation in 2001. Without taking into account the real devaluation, average monthly fees for pay television subscribers would have been $24.72 for existing subscribers and $19.32 for new subscribers. The average monthly subscription price during the year ended December 31, 2001 was $19.32 for MMDS service, $21.66 for Cable service and $28.92 for Internet service, as compared to $25.36, $26.38 and $36,83, respectively, for the year ended December 31, 2000. 32 Installation revenue for the year ended December 31, 2000 was $270, as compared to $968 for the same period of 2000, a decrease of $698 or 72.1%. This decrease was primarily due to the lower numbers of installations (81,729 in 2001 as compared with 105,888 in 2000) and a write-off of overdue accounts, also reflected in a reduction in the provision for doubtful accounts (thereby not affecting EBITDA). The average installation fee during the year ended December 31, 2000 was $10.15 for MMDS service and $9.22 for Cable service, as compared to $7.77 and $9.71, respectively, during the year ended December 31, 2000. Additional services and other revenues for the year ended December 31, 2001 was $17,418, as compared to $22,552 for the comparable period of 2000, a decrease of 22.7%. Advertising revenue decreased from $2,503 to $1,005, largely due to an industry-wide reduction in advertising expenditures by large advertisers. Other revenue decreased from $20,049 to $16,413, principally due to the provision in 2000 of non-recurring administrative services and equipment rentals to Galaxy Brasil (following the sale of Galaxy Brasil in 1999) and engineering services to ESPN Brasil (following the sale of the Company's interests in ESPN Brasil in 1999). The lack of non-recurring services in 2001 was offset by an increase in the provision of ancillary services to subscribers (such as technical assistance, decoder rental and magazine sales), which increased by approximately 83%, from $5,861 in 2000 to $10,727 in 2001. For the reasons noted above, and in particular the real devaluation in 2001and certain non-recurring revenues in 2000, Gross revenue for the year ended December 31, 2001 was $105,934, as compared to $121,011 for the comparable period in the previous year, a decrease of $15,077. Direct operating expenses. Direct operating expenses include Payroll and benefits, Programming, Transponder lease cost, Technical assistance, Vehicle rentals, TVA magazine, Pole rental and Other costs. These expenses are variable and related to the growth in subscribers and in the Company's systems, and are also dependent on the type of service subscribers select. Direct operating expenses for the year ended December 31, 2001 were $51,296, as compared to $55,402 for the same period in 2000, a decrease of $4,106, or 7.4%. As a percentage of gross revenues, direct operating expenses represented 48.4% in 2001 as compared with 45.8% in the prior year. This decrease in Direct operating expenses is attributable principally to a restructuring plan initiated in the second half of 2001 for the purpose of adjusting to adverse market conditions, including the effects of the real devaluation (which increased in reais the costs of dollar-denominated expenses) and an increase in unemployment in TVA's markets. Direct operating expenses also decreased as a result of the devaluation of the real, which was 19% in 2001, as compared to 9% in 2000. Payroll and benefits expense decreased to $8,504 from $9,229, a decrease of $725, primarily due to a reduction in the number of employees from 1,200 in 2000 to 873 in 2001. Programming costs decreased to $25,749 from $26,104, a decrease of $355 or 1.4%, primarily as a result of programming agreements entered into with certain programming providers that placed ceilings on the dollar/real exchange rate used to calculate monthly programming costs. Technical assistance decreased to $1,868 from $2,415, a decrease of $547 or 22.7%, largely as a result of improvements in the installation process which reduced the number of requests for technical assistance. Transponder lease cost dropped to $22 from $2,408 due to the cancellation in 2000 of the transponder lease agreement, which was no longer required after the sale of the DBS Systems. Pole rental decreased to $2,814 from $3,535, an decrease of $721, due to a reduction in the unit pole cost in the last quarter of 2001 and the effects of the real devaluation. Other costs includes acquisition of backbone IP/internet, billing costs , third party services, transportation of equipment and materials, maintenance and other miscellaneous expenses. For the year ended December 31, 2001, Other costs were $9,950, as compared to $9,136 for the prior year, an increase of $814, primarily due to increased communication and production costs associated with Ajato and Acesso (backbone IP), an increase in billing costs (due to the 4% increase in the pay television subscriber base), an increase in maintenance costs, and an increase in contracted electricity costs, all partially offset by the devaluation of the real. Taxes on revenue consist of a 3.65% tax on Advertising revenue and an 15.15% tax on the balance of revenues, in each case charged by the Brazilian Government. Taxes on revenue for the year ended December 31, 2001 were $15,636, as compared to $13,145 for the same period of the prior year, an increase of 19.0%. The increase in Taxes on revenue is attributable to the increase in the tax rates from 11.65% in 2000 to 15.15% in 2001, primarily due to the introduction of new taxes that cannot be passed on to consumers. 33 Selling, general and administrative expenses. Selling, general and administrative expenses include Payroll and benefits, Advertising and promotion expense, Rent, and Other general and administrative expenses. Selling, general and administrative expenses for the year ended December 31, 2001 were $29,448, as compared to $33,483 for the same period of 2000, a decrease of $4,035 or 12.1%. Payroll and benefits decreased from $14,942 in 2000 to $9,795 in 2001, a decrease of $5,147, or 34.4%, largely due to the decrease in the number of employees, which was partially offset by annual salary increases of approximately 5% for unionized employees. Advertising and promotion expense decreased from $7,330 in 2000 to $5,778 in 2001, a decrease of $1,552 or 21.2%, largely due to the lower number of installations in 2001. Depreciation and Amortization. Depreciation and amortization includes depreciation of systems, equipment, installation materials, installation personnel and amortization of concessions. Depreciation and Amortization for the year ended December 31, 2001 was $34,364, as compared to $43,290 for the same period of 2000, a decrease of $8,926, due primarily to the disposal of certain equipment and devaluation of the real. Other operating expense (income), net. Other operating expense, net for the year ended December 31, 2001 was $1,762 as compared to other operating income, net of $2,611 in the same period in 2000, an increase of $4,373. Other operating expense, net for 2001 consists primarily of the loss on disposal of property and equipment and loss on sale of obsolete inventories, partially offset by other miscellaneous income. The other operating income, net in 2000 consists primarily of the gain from the sale of the Company's Eurochannel operations in November 2000 ($6,902), partially offset by the write-off of assets related to cancellation of subscriptions. For the reasons noted above, Operating loss for the year ended December 31, 2001 was $26,572 compared to $21,698 for the comparable period in 2000, an increase of $4,874 or 22.5%. Interest income. Interest income for the year ended December 31, 2001 was $4,200, as compared to $5,374 for the same period in 2000, a decrease of $1,174, or 21.8%, primarily as a result of the effect of inflation on inflation-indexed obligations. Interest expense. Interest expense for the year ended December 31, 2001 was $37,849, as compared to $45,069 for the same period of 2000, a decrease of $7,220, principally attributable to $21,508 in interest due to Abril under the Abril Credit Facility in 2001 (as opposed to $29,690 in 2000). Other non-operating expense (income) net. Other non-operating expense, net for the year ended December 31, 2001 was $2,438, as compared to other non-operating income, net of $37,384 in the same period in 2000, a decrease of $39,822. Other non-operating income for the year ended December 31, 2000 consisted primarily of the gain from the sale of the Company's minority interests in HBO Brasil (July 2000). Minority interest. The Minority interest was $284 for the year ended December 31, 2001, as compared with $491 for the same period in 2000. In November 2001 Abril's 14% equity interest in TVA Sul was exchanged for an increase in Abril's equity interest in TVA. See Item 7, "Major Shareholders and Related Party Transactions." Equity in losses of affiliates, net. For the year ended December 31, 2001, Equity in losses of affiliates amounted to a loss of $2,375, as compared to a loss of $2,004 in the same period of 2000, an increase of $371. This loss originated in the operations of Canbras TVA. Net income (loss). For the reasons noted above, net loss for the year ended December 31, 2001 was $75,817, as compared to a Net loss of $32,855 for the comparable period in 2000. Net loss in 2001, which was due primarily to depreciation of infrastructure and the impact of the real devaluation, did not impact the cash flow of the Company. Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 The table below sets forth the number of subscribers at December 31, 2000 and December 31, 1999 for the Owned Systems. 34
Owned Systems Subscribers December 31, 2000 December 31, 1999 ------------------------- ----------------- ----------------- MMDS(a) .................................... 167,819 161,419 Cable ...................................... 178,004 148,244 ------- ------- 345,823 309,663 Paid Subscribers Awaiting Installation ..... 648 1,513 ------- ------- Total Owned Systems ........................ 346,471 311,176 ======= =======
- ---------- (a) Includes UHF subscribers The table below sets forth the number of Internet subscribers at December 31, 2000 and December 31, 1999.
Internet Subscribers December 31, 2000 December 31, 1999 -------------------- ----------------- ----------------- Ajato and Acceso ........................... 11,480 1,524 Paid Subscribers Awaiting Installation ..... 1,431 -- ------ ----- Total Internet Subscribers ................. 12,911 1,524 ====== =====
The table below sets forth at December 31, 2000 and December 31, 1999 the approximate number of television households which received TVA programming through the Owned Systems and the Operating Ventures and through sales of programming to the Independent Operators (which sales were discontinued in 2000). Households Receiving TVA Programming
December 31, 2000 December 31, 1999 ----------------- ----------------- Total Owned Systems ........................ 346,471 311,176 Operating Ventures ......................... 186,951 158,540 Independent Operators ...................... -- 201,448 ------- ------- Total ...................................... 533,422 671,164 ======= =======
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 and Additional services & others (which consists of Advertising revenues and Other revenues). Monthly subscriptions revenue for the year ended December 31, 2000 was $97,134, as compared to $94,055 for the comparable period in 1999. This increase is primarily attributable to an increase in the Company's subscriber base of approximately 12%, which was offset by a 9% devaluation of the real against the U.S. dollar in 2000. Average monthly fees for existing subscribers increased from $25.13 to $ 25.87 per subscriber and for new subscribers decreased from $25.35 to $23.10 per subscriber, largely due to the increased popularity of lower-priced programming packages. The average monthly subscription price during the year ended December 31, 2000 was $25.36 for MMDS service and $26.38 for Cable service, as compared to $25.09 and $25.18, respectively, for the year ended December 31, 1999. Installation revenue for the year ended December 31, 2000 was $968, as compared to $1,900 for the same period of 1999, a decrease of $932 or 49.1%. This decrease was primarily due to the Company's policy of reducing installation fees in order to facilitate the entry of new subscribers into the Company's subscriber base. The average installation fee during the year ended December 31, 2000 was $7.77 for MMDS service and $9.71 for Cable service, as compared to $28.41 and $17.83, respectively, during the year ended December 31, 1999. Indirect programming revenue for the year ended December 31, 2000 was $357, as compared to $3,722 for the comparable period of 1999, a decrease of $3,365, or 90.4%. This revenue in 1999 was primarily attributable to the 35 Company's Eurochannel operations, which were sold in November 2000. See Item 4, "Information on the Company--History and Development of the Company." In 2000, the Company virtually discontinued the collection of programming fees from the Operating Ventures and Independent Operators, a process which was begun in 1998 (as discussed more fully below in the comparison of the Company's results of operations for the years ended December 31, 1999 and 1998). Additional services and other revenues for the year ended December 31, 2000 was $22,552, as compared to $16,521 for the comparable period of 1999, an increase of 36.5%. Advertising revenue increased from $1,597 to $2,503, largely due to a more efficient utilization of advertising space available in the Company's offered channels and monthly programming magazine. Other revenue increased from $14,924 to $20,049, principally due to the provision of ancillary services to subscribers (such as technical assistance, decoder rental and magazine sales), administrative services and rental of equipment to Galaxy Brasil (after the sale of Galaxy Brasil in July 1999) and engineering services to ESPN Brasil (after the sale of the Company's equity interests in ESPN Brasil in November 1999). For the reasons noted above, gross revenue for the year ended December 31, 2000 was $121,011, as compared to $116,198 for the comparable period in the previous year, an increase of $4,813. Direct operating expenses. Direct operating expenses include Payroll and benefits, Programming, Transponder lease cost, Technical assistance, Vehicle rentals, TVA magazine, Pole rental and Other costs. These expenses are variable and related to the growth in subscribers and in the Company's systems, and are also dependent on the type of service subscribers select. Direct operating expenses for the year ended December 31, 2000 were $55,402, as compared to $45,638 for the same period in 1999, an increase of $9,764, or 21.4%. As a percentage of gross revenues, direct operating expenses represented 45.8% in 2000 as compared with 39.3% in the prior year. This increase in Direct operating expenses is attributable principally to the costs associated with the development of the Company's Internet businesses (Ajato and Acesso). Payroll and benefits expense increased to $9,229 from $7,857, an increase of $1,372, primarily due to the increase in the number of Ajato and Acesso employees. Programming costs increased to $26,104 from $24,166, an increase of $1,938 or 8.0%, as a result of the 12% increase in the Company's pay television subscribers in 2000. Technical assistance increased to $ 2,415 from $1,311, an increase of $1,104 or 84.2% , largely as a result of a change in the criteria for the conversion of reais-denominated expenses into U.S. dollars, which in 2000 utilized the average monthly dollar/real exchange rate and in 1999 utilized historical rates, together with the change in functional currency to reais as of January 1, 2000. Transponder lease cost increased to $2,408 from $1,975, an increase of $433, due to an annual increase in contracted rates. Pole rental increased to $3,535 from $2,935, an increase of $600, due to an increase in unit costs in 2000. Other costs includes acquisition of backbone IP/internet, billing costs , third party services, transportation of equipment and materials, maintenance and other miscellaneous expenses. For the year ended December 31, 2000, Other costs were $9,136 as compared to $4,912 for the prior year, an increase of $4,224, primarily due to increased communication and production costs associated with Ajato and Acesso (backbone IP), an increase in billing costs (due to the 12% increase in the pay television subscriber base), an increase in maintenance costs (largely impacted by the real devaluation), and in increase in contracted electricity costs. Taxes on revenue consist of a 3.65% tax on Advertising revenue and an 11.15% tax on the balance of revenues, in each case charged by the Brazilian Government. Taxes on revenue for the year ended December 31, 2000 were $13,145, as compared to $12,782 for the same period of the prior year, an increase of 2.8%. As a percentage of gross revenue, Taxes on revenue represents 10.9% of gross revenues. The increase in Taxes on revenue is attributable to the increase in the tax rates from 8.65% in 1999 to 11.15% in 2000. Selling, general and administrative expenses. Selling, general and administrative expenses include Payroll and benefits, Advertising and promotion expense, Rent, and Other general and administrative expenses. Selling, general and administrative expenses for the year ended December 31, 2000 were $33,483, as compared to $25,590 for the same period of 1999, an increase of $7,893 or 30.8%. Payroll and benefits increased from $11,425 in 1999 to $14,942 in 2000, an increased of $3,517, or 30.8%, largely due to the increase in the number of Ajato and Acesso employees and annual salary increases of approximately 7% for unionized employees. Advertising and promotion expense increased from $3,645 in 1999 to $7,330 in 2000, an increase of $3,685, or 101.1%, largely due to increased marketing efforts to increase the Company's subscriber base, strengthen the TVA name as a provider of multiple services, and establish the Ajato brand. 36 Depreciation and Amortization. Depreciation and amortization includes depreciation of systems, equipment, installation materials, installation personnel and amortization of concessions. Depreciation and Amortization for the year ended December 31, 2000 was $43,290, as compared to $56,879 for the same period of 1999, a decrease of $13,589, due primarily to the write-off in December 1999 of certain decoders and assets related to the cancellation of subscriptions. Other operating expense (income), net. Other operating income net for the year ended December 31, 2000 was $2,611 as compared to other non-operating expense, net of $19,012 in the same period in 1999, a decrease of $21,623. Other operating expense,net for 1999 consisted primarily of the high write-off related to cancellations of subscriptions. In 2000, other operating income, net consists primarily of the gain from the sale of the Company's Eurochannel operations in November 2000 ($6,902), partially offset by the write-off of assets related to cancellation of subscriptions. For the reasons noted above, Operating loss for the year ended December 31, 2000 was $21,698 compared to $43,703 for the comparable period in 1999, a decrease of $22,005 or 50.4%. Interest income. Interest income for the year ended December 31, 2000 was $5,374, as compared to $5,896 for the same period in 1999, a decrease of $522, or 8.9%, primarily as a result of a change in the criteria for the conversion of reais-denominated income into U.S. dollars, which in 2000 utilized the average monthly dollar/real exchange rate and in 1999 utilized historical rates. Interest expense. Interest expense for the year ended December 31, 2000 was $45,069, as compared to $22,254 for the same period of 1999, an increase of $22,815, principally attributable to the change in functional currency to the real in 2000, which resulted in the full recognition of $29,690 in interest due to Abril under the Abril Credit Facility, and the issuance by a wholly-owned subsidiary of dollar-denominated notes, resulting in additional interest expense of $2,409. These effects were offset by a reduction in interest expense under the Senior Notes from $15,445 in 1999 to $8,000 in 2000, due to the purchase of 81% of the Senior Notes by a wholly-owned subsidiary of the Company in July 1999. Other non-operating expense (income) net. Other non-operating income, net for the year ended December 31, 2000 was $37,384, as compared to other non-operating expense, net of $(11,055) in the same period in 1999, an increase of $48,439. Other non-operating income for the year ended December 31, 2000 consisted primarily of the gain from the sale of the Company's minority interests in HBO Brasil (July 2000). In 1999 other non-operating expense consisted primarily of the write-off of the Company's investment in TV Filme Inc and the loss on sale of the Company's equity interests in ESPN Brasil (November 1999). Minority interest. The Minority interest of $491 for the year ended December 31, 2000, as compared with $678 for the same period in 1999, represents Abril's 14% share in the aggregate losses of TVA Sul. Equity in losses of affiliates, net. For the year ended December 31, 2000, Equity in losses of affiliates amounted to $2,004, as compared to $5,238 in the same period of 1999, a decrease of $3,234. This loss originated in the operations of Canbras TVA. The reduction in losses reflects the sale of the Company's minority equity interests in HBO Brasil (July 2000) and ESPN Brasil (November 1999). Income from discontinued operations. The income from discontinued operations for the year ended December 31, 1999 consisted of the gain from the DBS sale (July 1999), partially offset by the loss from operations of the DBS business during 1999 through the date of disposal. In 2000 the Company did not have any discontinued operations. Extraordinary item - gain on debt repurchase. The extraordinary gain of $53,857 in 1999 reflects the gain (net of transaction fees and write-off of unamortized debt issuance costs) resulting from the repurchase by a wholly-owned subsidiary in July 1999 of the Company's Senior Notes in the aggregate principal amount of $201,978. In 2000 the Company did not engage in any transactions resulting in extraordinary items. Net income (loss). For the reasons noted above, Net loss for the year ended December 31, 2000 was $32,855, as compared to Net income of $69,876 for the comparable period in 1999. 37 B. 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, 2001, the Company had cumulative net losses of $219,630. During the periods under review, the Company required external funds to finance its capital expenditures, operating activities and make payments of principal and interest on its indebtedness. The sources of such funds have been as follows: (i) borrowings from Abril under the Abril Credit Facility, of which $6,729 was outstanding as of December 31, 2001, (ii) borrowings under lines of credit, of which $20,640 was outstanding as of December 31, 2001, (iii) net capital contributions of approximately $521,130 from shareholders, (iv) the EximBank Facility, of which $1,674 was outstanding as of December 31, 2001 (which amount was fully repaid in April 2002), (v) the Senior Notes, of which $48,022 was outstanding to unaffiliated parties as of December 31, 2001, (vi) the issuance of short term notes from time to time by an offshore subsidiary under a short term note program, of which $11,363 was outstanding as of December 31, 2001 (which amount was fully repaid in January 2002) and (vii) the disposition of non-strategic assets, including the DBS Systems and certain assets related thereto and the Company's programming-related assets, for which the Company received net cash proceeds in 1999 and 2000 of approximately $177,600 and $51,070, respectively. 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, 2001, the Company had approximately $77,065 of indebtedness outstanding, primarily consisting of the Senior Notes in the aggregate principal amount of $48,022, $6,729 outstanding under the Abril Credit Facility, and short term notes in an aggregate principal amount of $11,363 (fully repaid in January 2002). In addition to debt service, the Company will require capital for (i) the continued funding of losses and working capital requirements, (ii) the construction and upgrade of cable networks and the installation of equipment at subscribers' locations, (iii) the construction of additional transmission and headend facilities and related equipment purchases, (iv) the development of its Internet businesses and (iv) investments in, and maintenance of, vehicles and administrative offices. The Company made purchases of fixed assets of $25,927, $26,716 and $30,639 in 1999, 2000 and 2001, respectively. Management estimates that $15,405 and $10,971 of capital expenditures will be required in 2002 and 2003, respectively, principally in connection with the purchase of materials and equipment, Cable and MMDS network upgrades and the development of its Internet operations. The actual amount of funds required in 2002 and 2003 may vary materially from these estimates, as a result of which additional funds could be required in the event of cost overruns, unanticipated expenses, regulatory changes, engineering design changes and other technology-driven changes. The Company's principal sources of liquidity are borrowings from Editora Abril and the Company's short-term borrowings (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. In November 2001, the Company's shareholders approved the capitalization of outstanding loans in the aggregate principal amount of $123,159 under the Abril Credit Facility. This capitalization lowered the Company's leverage ratio and improved its borrowing capacity under existing and new lines of credit. The Company had approximately $634 of cash and cash equivalents as of December 31, 2001. For the year ended December 31, 2001, net cash provided by operating activities was $11,612, primarily as the result of the net loss for the year of $75,817, which was partially offset by $33,053 of Depreciation and a foreign currency transaction loss of $11,067. For the year ended December 31, 2001, net cash provided by investing activities was $3,906, as the result of the collection of a $28,236 promissory note attributable to the DBS sale and $14,554 net repayments of loans to related companies, partially offset by capital expenditures for the purchase of fixed assets of $30,639. The purchases of fixed assets were principally related to the expansion of Cable and MMDS networks, the purchase of reception equipment, which includes hardware, materials and labor used for new subscriber installations and decoders, and the development of the Company's Internet operations. For the year ended December 31, 2001, net cash used in financing activities was $33,739, consisting principally of repayments of loans from banks, shareholders and related companies. 38 The Abril Credit Facility allows the Company to borrow up to $60,000 on a revolving basis. Since June 1996, the Company has from time to time requested, and Abril has provided, funds in excess of $60,000. The loans are generally denominated in reais and bear interest at a rate equal to a percentage of the CDI rate, the Brazilian interbank lending rate, adjusted at the beginning of each month. In November 2001, the Company's shareholders approved the capitalization of outstanding loans in the aggregate principal amount of $123,159 under the Abril Credit Facility. As of December 31, 2001, the Company had $6,729 outstanding under the Abril Credit Facility. On December 9, 1996, TVA Sistema, as Borrower, and Tevecap, as Guarantor, entered into a credit agreement with The Chase Manhattan Bank for the financing of C-Band decoders and other related equipment (the "EximBank Facility"). The Export-Import Bank of the United States of America ("EximBank") also guaranteed 85% of the amount of the loan. The loan was made on terms customary for credits supported by EximBank to Brazilian borrowers with an interest rate of LIBOR plus a specified margin. The principal amount of the loan was $29,350, which was dispersed in two tranches, the first in April 1997 in the principal amount of $11,400 with a term of five years and the second in August 1997 in the principal amount of $17,950 with a term of 4.5 years. As of December 31, 2001, the principal amount outstanding under the EximBank Facility was $1,674. This amount was fully repaid in April 2002. On November 26, 1996, Tevecap raised funds in foreign markets through a private placement of $250,000 12 5/8% Senior Notes (the "Senior Notes") maturing on November 26, 2004 and guaranteed by certain of Tevecap's subsidiaries. The Senior Notes were subsequently registered under the Securities Act pursuant to Exchange Offers in May and December 1997. Concurrently with the consummation of the DBS Sale in July 1999, as described above, the net proceeds to the Company from the DBS Sale were used by the Company to repurchase, through a wholly-owned subsidiary, Senior Notes in the aggregate principal amount of $201,978. In addition, the Company obtained a consent from holders of the Senior Notes to amend the restrictive covenants contained in the terms of the Senior Notes. See Item 10, "Additional Information--Material Contracts--DBS Sale, Tender Offer and Consent Solicitation." In December 2000, the Company, through TVA Inc., a wholly-owned subsidiary established a $50,000 Guaranteed Short Term Note Program under which TVA Inc. may issue notes (guaranteed by the Company) in the international capital markets from time to time. Notes issued under the program can have maturities of up to two years. Since inception of the Program, TVA has issued a total of $10,443 under the program. As of December 31, 2001, $11,363 was outstanding under the Program (including accrued but unpaid interest), which amount was fully repaid in January 2002. During the periods under review the Company has also raised funds through the disposition of non-strategic assets, including the DBS Systems and certain assets related thereto and the Company's programming-related assets (ESPN Brasil, HBO Brasil and Eurochannel), for which the Company received net cash proceeds in 1999 and 2000 of approximately $177,542 and $51,070, respectively. See Item 4, "Information on the Company--History and Development of the Company." The Company's liquidity may also be adversely affected by statutory minimum dividend requirements under applicable Brazilian law. C. Research and Development The Company is not engaged in significant research and development operations. However, the Company continues to consider the utilization of its Cable and MMDS networks for the provision of other services, such as telephony services. Current ANATEL regulations permit any company meeting certain criteria to provide telephony services beginning in 2002. In addition, the Company continues to monitor the development of compression technology that would permit the Company to significantly increase the number of channels provided by its Cable and MMDS networks. D. Trend Information The Company's results of operations for the three years ended December 31, 2001 have been affected by Brazilian economic conditions, including a significant devaluation of the real in 1999 and a continued devaluation through 2001. This devaluation, together with a recession in Brazil, had a significant adverse effect on the operations of 39 the Company, and materially raised the cost of financing for the Company. In addition, the recessionary environment created difficulties in maintaining existing subscribers. These factors led the Company to implement a strategy focused on the sale of non-strategic assets, including the Company's DBS and programming-related assets. See Item 4, "Information on the Company--History and Development of the Company." During the year ended December 31, 2001, due to an electricity rationing program that limited economic growth in Brazil and the effects on the Brazilian economy of the Argentine economic crisis, the Brazilian economy experienced a recession, high rates of inflation and increased levels of unemployment. Despite this adverse economic environment, the Company was able to increase its pay television subscriber base by approximately 4%. The Company's results of operations for the year ending December 31, 2002 will be influenced generally by Brazilian economic conditions, including the possibility of adverse effects arising from Brazilian presidential elections in October 2002 and the potential implementation of additional electricity rationing programs by the Brazilian government. See Item 3, "Key Information--Risk Factors--Factors Relating to Brazil." The Company's sales are also subject to seasonality. See "--Overview--Seasonality." ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A. Directors and Senior Management The Company is managed by its Conselho de Administracao ("Board of Directors") and Diretoria ("Committee of Officers"). Day-to-day operations of the Company are managed by the Company's Executivos ("Executive Officers"). See Item 10, "Additional Information--Estatuto Social." Board of Directors
Member Position Current Position Held Since - ------ -------- --------------------------- Robert Civita............................. President 1994 Jose Augusto P. Moreira................... Member 1994 Robert Hefley Blocker..................... Member 1995 Roger Philip Hipskind..................... Member 1998 Giancarlo Francesco Civita................ Member 1999 Francisco Savio Couto Pinheiro............ Member 1995 Robert R. Ruggiero Jr..................... Member 2000 Marc Nathanson............................ Member 2000 Mitchell R. Cohen......................... Member 2001 Raymond E. Joslin......................... Member 2000 Edgardo del Valle Rosso................... Member 2000
Committee of Officers
Member Position Current Position Held Since - ------ -------- --------------------------- Jose Augusto P. Moreira................... Member 1992 Antonio Valdemir Pereira Ramos............ Member 1999 Marcelo Vaz Bonini........................ Member 2001
Executive Officers
Member Position Current Position Held Since - ------ -------- --------------------------- Jose Augusto P. Moreira................... President 1998 Leila Abraham Loria....................... Chief Executive Officer 1999 Marcelo Vaz Bonini........................ Chief Financial Officer 1999 Vito Chiarella Neto....................... Customer Relationship Officer 2001 Amilton Lucca............................. Internet Operations Officer 2001 Kunio Ohara............................... Information Technology Officer 1999
40 Roberto Civita has been President of the Board of Directors since 1994. Mr. Civita has been Chairman and Chief Executive Officer of Abril since 1990 and previously served as its President for eight years. Mr. Civita attended Columbia University's graduate program in sociology, and holds a degree in economics, with a minor in publishing, from the University of Pennsylvania. In 1991 Mr. Civita was elected "Person of the Year" by the Brazilian American Chamber of Commerce in New York. Mr. Civita is the father of Giancarlo Francesco Civita. Jose Augusto P. Moreira has been a member of the Board of Directors since 1994 and a member of the Committee of Officers since July 1992. Mr. Moreira has been associated with Abril since 1965, and currently serves as Vice-Chairman of the Abril Group. Mr. Moreira has a degree in Economics from the Faculdade de Economia Sao Luis in Sao Paulo and is a graduate of the Program for Management Development at Harvard Business School. Robert Hefley Blocker has been a member of the Board of Directors since 1995. Mr. Blocker was associated with the Chase Manhattan Bank for 22 years, the last nine of which he served as President Director. Mr. Blocker is currently President and Managing Partner of Blocker Assessoria de Investimentos e Participacoes S.A., a consulting firm for national and multinational companies. Mr. Blocker is also a member of several other Boards of Directors, including those of Arno S.A. and the American Chamber of Commerce in Sao Paulo. Roger P. Hipskind has been a member of the Board of Directors since 1998. Mr. Hipskind is a member of the Board of Directors of Banco Sul America S.A. (Brazil) and a partner in Blocker Investment Advisory Ltda. Prior to his joining TVA, Mr. Hipskind served as President and member of the Board of the U.S. Brazilian Chambers of Commerce in Rio de Janeiro and Sao Paulo, respectively, and Executive Vice President of the Chase Manhattan Bank in Brazil. Mr. Hiskind holds B.A. from St. Mary's College, a Masters in Political Science from Notre Dame University and a post-graduation Economics Certificate from the U.S. Foreign Institute at the University of Wisconsin. He also has a degree in Advanced Marketing Management from the Instituto Pour L'Etude des Methodes de Direction de L'Enterprise in Switzerland. Giancarlo Francesco Civita has been a member of the Board of Directors since 1994. Mr. Civita has been associated with Abril since 1986, and currently oversees magazine publication operations. Mr. Civita has also served a General Director of the Programming Unit at TVA. Mr. Civita holds an M.B.A. from the Harvard Graduate School of Business Administration, as well as an undergraduate degree in Social Communication from the Escola Superior de Propaganda e Marketing in Sao Paulo. Mr. Civita is the son of Robert Civita. Francisco Savio Couto Pinheiro has been a member of the Board of Directors since 1995. Mr. Pinheiro is a former Secretary of Communications who has also held posts at Embratel and Radiobras, the Brazilian government-owned broadcasting company. Mr. Pinheiro is currently a consultant and General Manager of SP Communications. Mr. Pinheiro holds undergraduate and graduate degrees in telecommunications. Robert R. Ruggiero Jr. has been a member of the Board of Directors since 2000. Mr. Ruggiero Jr. is a member of the Investment Committee of the Compass Capital Fund and previously served as Vice President in the Chase Manhattan Bank's Merchant Banking Group. His previous experience includes assignments in the Mergers & Acquisitions Group., Mexico Corporate Finance Group and the Global Chemicals Group. Mr. Ruggiero Jr. holds a B.A. from Connecticut College and an M.A. from the Columbia University School of International Affairs. Marc Nathanson has been a member of the Board of Directors since 2000 and was previously a member of the Advisory Board. Mr. Nathanson is the Chairman and Chief Executive Officer of Falcon International and Falcon Holding Group, L.P., one of the largest cable TV operators in the United States. Mr. Nathanson is a 32 year veteran of the cable TV industry and a Director and member of the Executive Committee of the National Cable Television Association. He was appointed by President Clinton and confirmed by the U.S. Senate for a three year term as a member of the International Broadcasting Board of Governors of the United States Information Agency. He holds an M.A. from the University of California and a B.A. from the University of Denver. Mitchell R. Cohen is a managing director at Hellman & Friedman. Mr. Cohen's primary areas of focus are the media an telecommunications industries. Prior to joining the firm in 1989, Mr. Cohen was an associate in the Merchant Banking Department and the Office of the Chairman at Shearson Lehman Hutton Inc. Mr. Cohen is a director of Eastern Wireless Corporation and Falcon International Communications L.P., and a former director of VoiceStream Wireless 41 Corporation and Avanstar, Inc. Mr. Cohen graduated from the McIntire School of Commerce at the University of Virginia. Raymond E. Joslin has been a member of the Board of Directors since 2000 and was previously a member of the Advisory Board. Mr. Joslin is group head of Hearst Entertainment & Syndication and is a vice president and member of the board of directors of The Hearst Corporation. Mr. Joslin has 35 years of experience in the cable communications industry, and holds executive positions at The A&E Television Networks, The History Channel, Lifetime Television and ESPN. Mr. Joslin attended the Carnegie Institute of Technology and Harvard Business School, and holds a B.A. in Economics from Trinity College. Edgardo del Valle Rosso has been a member of the Board of Directors since 2000. Mr. Rosso is the Finance Vice President of Walt Disney Brasil, where he is responsible for managing and directing the finance, operations and business planning functions of the company. Mr. Rosso has worked for multinational companies, including PricewaterhouseCoopers, Pepsi-Cola and Ericsson in countries such as England, Brazil and Argentina. Mr. holds an undergraduate degree in accounting. Antonio Valdemir Pereira Ramos has been a member of the Committee of Officers since 1999. Mr. Pereira joined Abril in 1968 and is currently the Audit Officer of Editora Abril S.A. Mr. Pereira is also a member of the Tax Committee responsible for the corporate reorganizations and fiscal orientation for the operations of Editora Abril. Mr. Pereira graduated in Accounting and Actuarial Sciences from the Fundacao Armando Alvares Penteado, with a specialization in the areas of Auditing and Accounting. Leila Abraham Loria has been the Chief Executive Office of TVA since June 1999. Previously, Mrs. Loria was Business Director at the retail operation of Mesbla Lojas de Departamentos S.A. Ms. Loria also held managing positions at Wal-Mart Brasil and Galaxy Brasil and was responsible for the development and implementation of these operations in Brazil. Mrs. Loria graduated with a degree in Administration from the Fundacao Getulio Vargas Foundation in 1976. Mrs. Loria also graduated with a Masters in Administration from COPPEAD-UFRJ and an Executive MBA from APG-Amana. Marcelo Vaz Bonini has been the Chief Financial Officer of TVA since 1999. Mr. Bonini joined TVA in 1993 and has since then participated in joint ventures with strategic partners, the launching of bond offerings in the American market, and various corporate reorganizations (mergers, acquisitions and takeovers). Prior to his involvement in TVA, he was an auditor at Cooper & Lybrand. Mr. Bonini graduated with a degree in Accounting Sciences from the Pontificia Universidade Catolica de Sao Paulo. Vito Chiarella Neto has been the Customer Relationship Officer of TVA since March 2002. Mr. Neto joined the Abril Group in 1992 and worked in the comptroller's department until 1999 when he became General Manager of operations at TVA Sul. In 2000 and 2001, he was the Director of TVA's operations in Sao Paulo. Mr. Neto graduated with a degree in Accounting from the Faculdades Tibirica. Amilton Lucca has been the Internet Operations Officer of TVA since August 2001. Prior to his association with TVA, beginning in 1997, Mr. Lucca was responsible for telecom operations at EDS. Mr. Lucca graduated with a degree in Electric Engineering and a masters degree in Telecommunications from FAAP. Kunio Ohara has been the Information Technology Officer since September 1999. Mr. Ohara joined the Abril Group 1996 and worked in the areas of Technology and Production. Mr. Ohara began work as Information Technology Officer for Galaxy Brasil in 1999. Mr. Ohara has 10 years of experience working with USWEST and Abril. Mr. Ohara graduated with a masters in Administration from FGV and with an Electronic Engineering degree from ITA. B. Compensation For the year ended December 31, 2001, the aggregate compensation, including bonuses, of all Directors, Officers and Executive Officers of the Company was $0.8 million. Members of the Board of Directors and the Committee of Officers do not receive a salary from the Company. 42 For the year ended December 31, 2001, the aggregate amount set aside by the Company to provide pension, retirement or similar benefits to Directors, Officers and Executive Officers was $75,802. C. Board Practices Members of the Board of Directors and Committee of Officers are elected for a two-year period, currently expiring on March 2004. Executive Officers are appointed and removed by the Board of Directors and do not have a stated term of office. Directors, Officers and Executive Officers do not enter into service contracts with the Company. See Item 7, "Major Shareholders and Related Party Transactions--Major Shareholders--Board of Directors" and Item 10, "Additional Information--Estatuto Social." 43 D. Employees The following table sets forth the number of officers, managers and other permanent employees of the Company as of the dates indicated.
As of December 31, --------------------------------------------------------------------------------------------------- 2001(*) 2000 1999 ------------------------------ ------------------------------ ------------------------------ City Officers Management Others Officers Management Others Officers Management Others - ---- -------- ---------- ------ -------- ---------- ------ -------- ---------- ------ Sao Paulo 8 27 643 9 35 719 9 26 678 Rio de Janeiro -- 2 88 1 4 253 2 4 209 Curitiba -- 2 64 -- 3 121 -- 3 110 Camboriu -- 1 11 -- 1 19 -- 2 24 Florianopolis -- 1 12 -- -- 20 -- -- 27 Foz do Iguacu -- 1 13 -- -- 15 -- -- 19 ----- ------ ------- ------ ------ ----- ------ ------ ----- Total 8 34 831 10 43 1,147 11 35 1,067 ===== ====== ======= ====== ====== ===== ====== ====== =====
- ---------- * As of December 31, 2001, the Company also employed 12 interns and 52 temporary employees compared to 47 interns and 82 temporary employees as of December 31, 2000, most of whom were located in Sao Paulo and Rio de Janeiro. These figures are not available as of the same date in 1999. E. Share Ownership No Director, Officer or Executive Officer listed above owns more than 1% of the common shares of Tevecap S.A. However, Robert Civita is the owner of 99.99% of the share capital of Abril S.A., which in turn holds of 82.3% of the common shares of Tevecap S.A. See Item 7, "Major Shareholders and Related Party Transactions." 44 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A. Major Shareholders Tevecap has one class of capital stock, common shares, authorized and outstanding. As of December 31, 2001, 485,220,440 common shares were outstanding, representing authorized social capital of R$837,601,700. The following table sets forth, as of December 31, 2001, information regarding the beneficial ownership of Tevecap's common shares:
Number of Common Shares Shareholder Owned Percentage ----------- ------------- ---------- Abril S.A................................................... 399,582,903,748 82.3% Falcon International Communications (Bermuda) L.P.(a)....... 27,930,827 5.7 Hearst/ABC Video Services II(b)............................. 39,342,567 8.1 JP Morgan Partners LLC (c).................................. 18,364,122 3.7 All directors and executive officers as a group............. 21 -(d)
(a) A subsidiary of Falcon International Communications L.L.C. (b) Each of Hearst and ABC indirectly holds a 50% equity interest in Hearst/ABC Video Services II. (c) 11,496,329 and 6,867,793 of the shares beneficially owned by JP Morgan Partners LLC ("JPM") are held of record by two wholly-owned subsidiaries of CMIF (the "Chase Parties"). In December 1995, CMIF sold a portion of the shares beneficially owned by it to Hearst and ABC. (d) Less than 1%. On February 17, 1998, the shareholders approved a capital increase whereby the number of shares held by Abril increased from 111,075,318 to 140,700,748 (thereby increasing its ownership interest from 56.5% to 62.2% and reducing the ownership interests of the remaining shareholders commensurately). In addition, on November 19, 2001, the shareholders approved a capital increase whereby the number of shares held by Abril increased from 140,700,748 to 399,582,903 (thereby increasing its ownership interest from 62.2% to 82.3% and reducing the ownership interests of the remaining shareholders commensurately). Both capital increases were paid through the capitalization of loans owed by the Company to Abril under the Abril Credit Facility. In addition, the 2001 capital increase was paid through contributions of the minority interests of Abril in TVA Sul and Canbras Parana and Roberto Civita in TVA Sistema. See Item 5, "Operating and Financial Review and Prospects--Liquidity and Capital Resources." The relations among the Company's equity holders are governed by a Stockholders Agreement (the "Stockholders Agreement"), dated December 6, 1995, among Tevecap, Robert Civita, Abril, the Chase Parties, Falcon International and HABC II and CPL (together with HABC II, "Hearst/ABC Parties" and together with Robert Civita, Abril, the Chase Parties and Falcon International, the "Stockholders"). The following describes certain terms of the Stockholders Agreement, as amended. Transfer of Shares. Any Stockholder desiring to transfer shares of capital stock to any third party, including another Stockholder, must first offer such shares to Tevecap and all of the other Stockholders. Tevecap has the right to determine first whether to purchase such shares; if Tevecap elects not to exercise its right to purchase the shares, the other Stockholders may elect to purchase such shares. If Tevecap or the other Stockholders decide to purchase the offered shares, all of such shares must be purchased. If neither Tevecap nor the other Stockholders offer to purchase all of the offered shares, the Stockholder desiring to sell such shares may sell the shares to any person, provided that (i) all of the shares are sold simultaneously within six months after the decision by Tevecap and the Stockholders not to purchase the shares, (ii) Tevecap has not determined that the person making such purchase is a stockholder of undesirable character, lacks necessary financial capacity or competes with the Company, and (iii) the price for sale to such third party is at least 90% of the price offered to the Company and the other Stockholders. The provisions regarding transfers of shares do not apply to transfers to certain affiliates of the Stockholders. In addition, the Stockholders have preference over all other persons or entities to subscribe for new issuances of capital stock by the Company in proportion to their existing ownership of capital stock. 45 Event Put Options. Upon the occurrence of certain defined "triggering events" each of the Stockholders, other than Abril, may demand that Tevecap buy all or a portion of the shares of capital stock of Tevecap held by such Stockholder, unless the shares of capital stock held by such Stockholder are publicly registered, listed or traded (collectively referred to as an "Event Put"). The triggering events are: (i) the amount of capital stock held by such Stockholder exceeds the amount allowed under any legal restriction to which such Stockholder may be subject ("Regulatory Put"); (ii) a breach without cure within a designated period by Robert Civita, Abril, any of the respective affiliates of Robert Civita or Abril or Tevecap of any representation, warranty, covenant or duty made or owed pursuant to the Stockholders Agreement, the Stock Purchase Agreement, dated August 25, 1995, among Robert Civita, Abril, the Chase Parties, and certain other parties, or the Stock Purchase Agreement, dated December 6, 1995, among Tevecap, Robert Civita, Abril, HABC Parties, the Chase Parties, Falcon International and certain other parties; (iii) a breach without cure within a designated period by Abril of the Abril Credit Facility; (iv) Robert Civita ceases to directly or indirectly hold without the approval of the Stockholders 31.258% of the capital stock and voting capital stock of Tevecap or he ceases to control the voting capital stock held by his affiliates representing 50% or more of the voting capital stock of Tevecap; (v) the Service Agreement, dated July 22, 1994, as amended, among Tevecap, Televisao Show Time Ltda. ("TV Show Time"), TVA Brasil Radioenlaces Ltda. ("TVA Brasil") and Abril, each of which holds certain licenses covering certain operations of TVA, ceases to be valid or effective or TV Show Time, TVA Brasil or Abril is liquidated or dissolved or files voluntarily, or has filed against it involuntarily, any petition in bankruptcy or (vi) another Stockholder exercises an Event Put, other than a Regulatory Put. The price to be paid in connection with an Event Put is set at fair market value determined by appraisal or by a multiple of Tevecap's most recent quarterly earnings. However, in the event Tevecap does not have the funds to satisfy its payment obligations under an Event Put, then, subject to a number of conditions, exercising Stockholders may elect to receive special voting or non-voting preferred shares of Tevecap. These preferred shares will have priority with respect to the distribution of dividends and repurchases of shares by Tevecap. The carrying value of the redeemable shares subject to an Event Put reflect the capital contributions made by the Stockholders (other than Falcon shares also subject to a Time Put, as described below, the carrying value of which is adjusted to fair value in accordance with the probability of redemption). See Note 17 to the Company's Financial Statements. Time Put Options. In addition, pursuant to the Stockholders Agreement, Falcon International may demand that Tevecap buy all or any portion of the shares of capital stock of Tevecap held by Falcon International if such shares are not publicly registered, listed or traded by September 22, 2002 (the "Falcon Time Put"). The price to be paid in connection with the Falcon Time Put is fair market value determined in the same manner as an Event Put. However, in the event Tevecap does not have the funds to satisfy its payment obligations under the Time Put, then, subject to a number of conditions, Tevecap may deliver to Falcon promissory notes payable three years from the issue date thereof. In the event Tevecap is unable to satisfy its payment obligations under these promissory notes, Falcon may be entitled, subject to a number of conditions, to sell its shares of Tevecap to a third party. Registration Rights. The Chase Parties, considered together, the Hearst/ABC Parties or Falcon International may request that the Company effect the registration of any or all of the capital stock held by such Stockholder. However, the Company is not obligated to effect more than one registration requested by a Stockholder in any 12 month period or more than three registrations requested by a Stockholder in total. The capital stock that is the subject of the registration demand must be of a certain minimum amount. In addition, Tevecap must offer each Stockholder other than Abril the opportunity to register capital stock held by such Stockholder, subject to standard reductions in amount such Stockholder may register as recommended by the managing underwriter. Tevecap is obligated to pay all registration expenses other than underwriting discounts and commissions or transfer taxes, and Tevecap is only obligated to pay for the fees and expenses of Tevecap's counsel and accountants. Board of Directors. Tevecap is governed by a board of directors with 11 members. Under the Stockholders Agreement, Abril designates six members, Falcon International designates two members, the Chase Parties together designate one member, and Hearst/ABC Parties designates one member. The final member is an independent member nominated by Abril and designated by an affirmative vote of all shareholders entitled to designate a director. The affirmative vote of members of the board representing the Chase Parties, Falcon International and Hearst/ABC Parties is required for: acquisition of ownership interests in other companies; acquisition or liens on equity in other companies or liens on assets other than in ordinary course and in aggregate less than $500,000; incurrence of indebtedness of less than one year maturity and in an amount greater than $1,000,000; incurrence of indebtedness of greater than one year maturity except trade debt and in an aggregate amount of less than $500,000; loans on advance payments; non-financial 46 guarantees in aggregate totaling more than $100,000; transactions with affiliates; and modifications to the Service Agreement. Tevecap must obtain the approval of Hearst/ABC Parties before entering into contracts in excess of $1,000,000 in value and making any material programming decisions. Tevecap must obtain the approval of Falcon International before entering into contracts in excess of $1,000,000. Tevecap must obtain the approval of each of Hearst/ABC Parties, the Chase Parties and Falcon International before any corporate restructuring or any public offering of securities of Tevecap. Required Dividend. Tevecap is required by the terms of the Stockholders Agreement to pay annual dividends equal to the net cash flow of Tevecap or 25% of the net consolidated profit (as defined by Brazilian law) of Tevecap. Since inception, Tevecap has never declared a dividend. B. Related Party Transactions Overview Tevecap has engaged in a significant number and variety of related party transactions, including, without limitation, the transactions described below. Tevecap has not performed any studies or analyses to determine whether the terms of past transactions with related parties have been equivalent to arm's-length transactions and cannot state with any certainty the extent to which such transactions are comparable to those which might have been obtained from a non-affiliated third party. Transactions Among Shareholders On December 6, 1995, Tevecap's shareholders executed a Stock Purchase Agreement and a Stockholders Agreement relating to the investment of ABC and Hearst in the Company through Hearst/ABC Parties. See Item 7, "Major Shareholders and Related Party Transactions--Major Shareholders." On that date, the Tevecap shareholders also executed a series of inter-shareholder agreements relating to, among other things, the provision of services and programming among the Company and the shareholders. These agreements supplemented other existing agreements among Shareholders. The following contracts are the principal agreements among the Company and the Tevecap shareholders (each of which, unless specified otherwise, is dated as of December 6, 1995). General and Advisory Services Under an Advisory Services Agreement, each of Hearst, ABC and HABC II has agreed, upon a request from the Company, to use its reasonable efforts to arrange for the investors to furnish personnel to provide advisory services to the Company. To date, the Company and Hearst, ABC and HABC II have not entered into a supplemental agreement to provide specific personnel or services at a particular cost. Programming In connection with the investment by Hearst and ABC in Tevecap, Tevecap and these two parties entered into a Programming Agreement (the "Hearst/ABC Programming Agreement"). Pursuant to the Hearst/ABC Programming Agreement, each of Hearst and ABC has agreed to offer first to Tevecap pay programming that Hearst or ABC (or any subsidiary of which either Hearst or ABC owns at least 80% of the outstanding equity interests) intends to license for use in Brazil in the pay television markets served by TVA. The parties also agreed to consider future co-production activities which could enhance TVA's business and competitive position. Tevecap agreed to pay to each of Hearst and ABC such fees and expenses as are agreed upon at the time such programming or co-production services are provided. The Hearst/ABC Programming Agreement does not apply to The Walt Disney Company or its subsidiaries other than ABC and ABC's subsidiaries. In addition, the Hearst/ABC Programming Agreement does not apply to the activities of The A&E Television Networks, Lifetime Television and ESPN, including agreements relating to ESPN Brasil. Transactions Among Related Parties Publishing and Advertising 47 The Company publishes a monthly magazine detailing the Company's programming options in a given month. In connection with this magazine, TVA Sistema has entered into an agreement with Abril, dated September 1992, pursuant to which Abril publishes approximately 290,000 copies of the Company's monthly magazine in return for a monthly payment of approximately $151,000. The monthly magazine was distributed in accordance with a distribution agreement, dated September 1992, between the Company and Abril, pursuant to which the Company paid Abril approximately $40,000 per month. In October 2001, the Company discontinued its distribution agreement with Abril and contracted with an independent third party to provide these services. TVA Sistema and Abril also have a reciprocal advertising agreement in which the Company publishes advertisements for Abril in the Company's monthly magazine in exchange for advertisements for the Company (and third parties through the Company) in the magazines published by Abril. Abril Credit Facility Tevecap has entered, as the borrower, into a revolving credit facility (the "Abril Credit Facility") with Editora Abril S.A., as the lender. The Abril Credit Facility, effective December 6, 1995, allows the Company to draw down amounts not to exceed a maximum aggregate principal amount of $60,000,000. Since June 1996, Tevecap has from time to time requested, and Abril has provided, funding in excess of the aggregate maximum principal amount. The loans provided under the Abril Credit Facility are denominated in reais, unless the loan is a pass-through loan that Abril has funded in U.S. dollars, in which case the loan is funded in a real-equivalent amount. Abril has agreed to use its reasonable commercial efforts to obtain the lowest possible interest rates for its loans to Tevecap under the Abril Credit Facility. As of December 31, 2001, the aggregate principal amount outstanding under the Abril Credit Facility was $6.7 million. In November 2001, Tevecap's shareholders approved the capitalization of outstanding loans in the aggregate principal amount of $123,159,000 under the Abril Credit Facility. Other Intercompany/Shareholder Loans Tevecap has used the proceeds from the Abril Credit Facility to make capital contributions to TVA Sistema, as well as to extend loans to various interrelated companies. The aggregate outstanding amounts under these loans as of December 31, 2001 were: $11.2 million to TVA Brasil; $8.0 million to Canbras TVA and its affiliates in Parana state; and $30.5 million to TVA Communications. In addition, TV Show Time has loans outstanding to Abril, which loans, as of December 31, 2001, had an aggregate outstanding amount of approximately $1.3 million. Service Agreement with Licenseholders Pursuant to a Service Agreement, dated July 22, 1994, as amended, TVA Brasil and TV Show Time (the "Licenseholders") agreed to transfer to TVA all the rights and benefits associated with their current and future pay-television licenses, with the exception of licenses operated by companies in which TVA has minority interests. While the Licenseholders retained the title to such licenses, the Licenseholders promised to take all steps necessary to transfer the title of such licenses to Tevecap. Such steps included the appropriate procedures required by the Ministry of Communications and any other governmental authority regulating the transfers. The transfer of the title to such licenses is currently either pending, subject to approval by the Ministry of Communications, or waiting for the passage of certain statutory or regulatory waiting periods. ITEM 8. FINANCIAL INFORMATION Item 19 contains all financial statements required to be filed as part of this Annual Report. 48 ITEM 9. THE OFFER AND LISTING A. Offer Listing and Details. Tevecap has one class of capital stock, common shares, authorized and outstanding. The Company's common stock are not listed on any exchange and are not publicly traded. See Item 7, "Major Shareholders and Related Party Transactions--Major Shareholders." B. Plan of Distribution Not applicable. C. Markets The Company's outstanding registered securities consist solely of the Company's 12"% Senior Notes due 2004 (referred to herein as the "Senior Notes") that were registered under the Securities Act pursuant to an Exchange Offer which expired on May 23, 1997 and a subsequent Exchange Offer which expired on December 10, 1997. There is no formal trading market for such securities. The Company does not have any publicly traded class of equity securities. See Item 9(A) above. D. Selling Shareholders Not applicable. E. Dilution Not applicable. F. Expenses of the Issue Not applicable. ITEM 10. ADDITIONAL INFORMATION A. Share Capital Not applicable. B. Estatuto Social 1. The Company's object, as set forth in Subsection 3 of Chapter I of its Estatuto Social, is as follows: (i) the production, acquisition, licensing, distribution, import and export of television programs; (ii) the rendering of telecommunication services, in particular pay television services, as well as other services relating to signal transmission, reception and distribution systems and television programs; (iii) advertisement and publicity exploitation; and (iv) investment in other companies, especially those in the telecommunication field. 2. The Company is managed by the Board of Directors and the Committee of Officers. Day to day management, however, is carried out by the Executive Officers. See Item 6, "Directors, Senior Management and Employees." The Board of Directors is composed of 11 regular members and 11 alternates, each elected by the general shareholders meeting. The Board of Directors shall meet whenever necessary and at least every three months, 49 upon request in writing by any of its regular or alternate Directors (such request to be delivered at least ten business days before the date of the meeting and upon presentation of the agenda to be discussed). The meeting of the Board of Directors shall be convened only with the attendance of at least six of its regular members, in person or as represented by their respective alternates. The resolutions shall be taken by the favorable vote of the majority of the Directors present at the meeting. The Committee of Officers comprises a minimum of two and a maximum of five members. The Committee of Officers manages the business of the Company in general and practices any and all acts necessary or advisable, except those which, pursuant to applicable law, the Estatuto Social or the Stockholders Agreement, are the responsibility of the shareholders or the Board of Directors. (a) There are no provisions in the Estatuto Social relating to the power of Directors or Officers to vote on a proposal in which a conflict of interest exists or may exist. (b) The aggregate compensation of the Board of Directors and the Committee of Officers is fixed pursuant to a General Shareholders Meeting and is distributed among the Directors and Officers as determined by the Board of Directors at a duly convened meeting. (c) Pursuant to Subsection 20 of Chapter V of the Estatuto Social and the Stockholders Agreement, the incurrence of the following indebtedness must be approved by all Directors appointed by minority shareholders: (i) indebtedness with a maturity of less than one year and in an amount greater than U.S.$1,000,000; and (ii) indebtedness with a maturity of more than one year (except trade debt in an aggregate amount lower than U.S.$500,000). Any other incurrence of indebtedness can be approved by a majority of the Directors present at a meeting of the Board of Directors or by any two Officers in the ordinary course of business. (d) There are no provisions in the Estatuto Social setting forth age limits or retirement requirements for Directors and Officers. Directors are elected for a period of two years (with the opportunity of reelection) by a shareholders meeting and remain as Directors until the appointment of their respective successors. In case of a vacancy, a general shareholders meeting shall be called to elect a substitute. Officers are elected by the Board of Directors for a period of two years and can be reelected. In case of a vacancy, a meeting of the Board of Directors shall be immediately called to elect the substitute, who shall complete the term of the Officer so replaced. (e) All Directors, whether regular or alternates, must be shareholders of the Company, although the Estatuto Social does not require ownership of a minimum number of shares to qualify as a Director. Officers do not need to be shareholders of the Company. 3. The Company's capital is divided into and represented by 485,220,440 shares, all of which are common shares entitled to one vote in shareholders meetings. (a) There are no provisions in the Estatuto Social setting forth a time limit for dividend entitlements to lapse. All shares are entitled to the same dividend payments. Under Brazilian law, the Company is required to pay dividends in an amount equal to 25% of its net consolidated profit (as defined by Brazilian law). In addition, upon resolution of the Board of Directors, interim dividends may be distributed out of net profits declared in annual or semiannual financial statements. (b) There are no provisions in the Estatuto Social concerning staggered intervals for the reelection of Directors or permitting or requiring cumulative voting. (c) All shares have the right to share in the Company's net profits. At the end of any fiscal year, from the net profits earned, 5% shall be deducted to from the legal reserve (which shall not exceed 20% of outstanding social capital). 50 (d) All shares have the same right to share any surplus in case of a liquidation of the Company after settlement of all outstanding debts. In the event of liquidation, a general shareholders meeting shall determine the form of liquidation, appoint the liquidator and an audit committee to operate during the liquidation period. (e) The resolutions of a general shareholders meeting authorizing the purchase or redemption of the Company shares shall comply with the provisions in the Stockholders Agreement governing resolutions at general shareholders meetings. (f) There are no sinking fund provisions in the Estatuto Social. (g) All of the Company's shares are issued and fully paid. Consequently, the shareholders are not subject to further capital calls. (h) There are no provisions in the Estatuto Social discriminating against any existing or prospective holder of such securities as a result of such shareholder owning a substantial number of shares. 4. In order to modify the rights of shareholders, the Estatuto Social must be amended to reflect such modification. The Estatuto Social can be amended only through a resolution passed at a general shareholders meeting. 5. General shareholders meetings can be ordinary or extraordinary. Ordinary general shareholders meetings shall be held within four months following the closing of the fiscal year, whereas the extraordinary general shareholders meetings are held whenever necessary. All general shareholders meetings shall be called by the Board of Directors. Only the shareholders whose shares are subscribed to in their respective names, in the applicable register, up to three days before the date fixed for the general shareholders meeting, may participate and vote in such meeting. 6. Under Brazilian law, non-Brazilians are not entitled to own on a combined basis more than 49% of the voting stock of the Company. 7. There are no provisions in the Estatuto Social that would have the effect of delaying, deferring or preventing a change in control of the Company. However, pursuant to the Stockholders Agreement, any existing shareholder desiring to sell its shares must first offer its shares to the remaining shareholders. The Stockholders Agreement also contains other transfer restrictions relating to the Company's shares. See Item 7, "Major Shareholders and Related Party Transactions--Major Shareholders." 8. There are no provisions in the Estatuto Social governing the ownership threshold above which shareholders ownership must be disclosed. 9. Brazilian corporate law is significantly different from U.S. corporate law in a number of areas. The Brazilian form of Articles of Incorporation (Estatuto Social) includes both the Anglo-Saxon concept of Articles of Incorporation and the concept of "by-laws." Tevecap S.A., like other large Brazilian companies, has a two-tier governance system, which typically involves a management or executive board (Committee of Officers) and a supervisory board (Board of Directors). The Committee of Officers is the executive body. Its members are appointed by the Board of Directors and are employed by the Company. The Board of Directors has supervising and advising functions only. Its members are representatives of shareholders and cannot be employed by the Company. The Board of Directors' duties include supervision of the Committee of Officers and the general course of business of the Company. The Board of Directors also performs advisory functions vis-a-vis the Committee of Officers. 10. There are no provisions in the Estatuto Social imposing more stringent conditions than those required by law to change the capital of the Company. However, pursuant to the Stockholders Agreement, any existing shareholder desiring to sell its shares must first offer its shares to the remaining shareholders. The Stockholders Agreement also contains other transfer restrictions relating to the Company's shares. See Item 7, "Major Shareholders and Related Party Transactions--Major Shareholders." 51 C. Material Contracts DBS Sale As of May 18, 1999, the Company entered into the following agreements: (i) a Master Agreement (the "Master Agreement") relating to the sale of the Company's equity interests in Galaxy Brasil and TVA Banda C, among the Company, Galaxy Brasil and TVA Banda C, as Sellers, Abril, as a Seller-related entity, and GLA, as Purchaser, and (ii) a GLA Purchase Agreement relating to the sale of the Company's indirect equity interests in GLA and certain assets related thereto, among the Company, TVA Communications Ltd. and TVA Finco Ltd., as Sellers, and Abril as a Seller-related entity, and Directv Latin America, Inc. ("DLA") and Darlene Investments (an affiliate of the Cisneros Group) as Purchasers (the "GLA Purchase Agreement" and, together with the Master Agreement, the "Purchase Agreements"). The sale of these assets is referred to in this Annual Report as the "DBS Sale." Pursuant to the Master Agreement, the Company agreed to sell all of its interests in the following entities to GLA: o Galaxy Brasil, a wholly-owned subsidiary of the Company and exclusive local operator of DIRECTV Ku-Band service in Brazil; and o TVA Banda C, a wholly-owned subsidiary of the Company and operator of TVA's C-Band service. Pursuant to the GLA Purchase Agreement, the Company agreed to sell all of its interests in the following entities and assets to DLA and Darlene Investments: o a 10% equity interest in LA, which the Company owned through its British Virgin Islands subsidiary, TVA Communications Ltd.; o a 20.5% equity interest in SurFin Ltd. , a Bahamian limited liability company engaged in financing activities related to DIRECTV service throughout Latin America; o certain promissory notes in the aggregate principal amount of $7,124,800, representing indebtedness of California Broadcast Center LLC ("CBC"), a Delaware limited liability company the principal asset of which is a GLA satellite uplink facility; and o the CBC Class B Unit Purchase Warrants (# W-3), dated as of April 11, 1997, convertible into equity interests in CBC. The net cash proceeds to the Company at the closing of the DBS Sale, which occurred in July 1999, were approximately $177.6 million. The total consideration received by the Company was comprised of the net cash received at closing, a promissory note in the principal amount of $25.5 million (which was fully paid in August 2001), the assumption of certain dollar and real-denominated indebtedness and the release of certain guarantees given by the Company and one of its subsidiaries in respect of certain obligations of Galaxy Brasil. Tender Offer and Consent Solicitation Concurrently with the consummation of the DBS Sale, the net proceeds to the Company from the DBS Sale were delivered to The Chase Manhattan Bank, as Depositary, to fund a tender offer and consent solicitation (the "Offer") relating to TVA's $250,000,000 12 5/8% Senior Notes due 2004 (the "Senior Notes"). Pursuant to the Offer, a wholly-owned subsidiary of the Company purchased Senior Notes in the aggregate principal amount of $201,978,000 and the Company obtained a consent from holders of the Senior Notes to broadly amend the restrictive covenants contained in the terms of the Senior Notes. D. Exchange Controls Brazilian law provides that, whenever there is, or is a serious risk of, a material imbalance in Brazil's balance of payments, the Brazilian Government may, for a limited period of time, impose restrictions on the remittance to foreign 52 investors of the proceeds of their investments in Brazil, as it did for approximately six months in 1989 and early 1990, as well as on the conversion of the Brazilian currency into foreign currencies. The Brazilian Government currently restricts the ability of Brazilian or foreign persons or entities to convert reais into foreign currencies other than in connection with certain authorized transactions. There can be no assurance that the Brazilian Government will not in the future impose more restrictive foreign exchange regulations that would have the effect of eliminating or restricting the Company's access to foreign currency that would be required to meet its foreign currency obligations, including payments under the 12 5/8% Senior Notes due 2004 issued by Tevecap in November 1996. The likelihood of the imposition of such restrictions by the Brazilian Government may be affected by, among other factors, the extent of Brazil's foreign currency reserves, the availability of sufficient foreign currency on the date a payment is due, the size of Brazil's debt service burden relative to the economy as a whole, Brazil's policy towards the International Monetary Fund and political constraints to which Brazil may be subject. For a description of the foreign exchange markets in Brazil, see Item 3, "Key Information--Selected Financial Data--Exchange Rates." See also "Risk Factors--Factors Relating to Brazil." E. Taxation Brazil The following is a summary of the material Brazilian income tax consequences to Tevecap in connection with the sale and repayment of Tevecap's 12 5/8% Senior Notes due 2004 (the "Senior Notes") including any interest thereon) and to beneficial owners of the Senior Notes that are non-residents of Brazil in connection with the purchase, ownership and disposition of such Senior Notes. This summary is limited to Tevecap and to non-residents of Brazil which acquire the Senior Notes at the original issue price, and does not address investors who purchase Senior Notes at a premium or market discount. In addition, this summary is based on the Brazilian tax regulations as presently in effect and does not take into account possible future changes in such tax laws. Individuals domiciled in Brazil and Brazilian companies are taxed in Brazil on the basis of their worldwide income (which includes earnings of Brazilian companies' foreign subsidiaries, branches and affiliates). The earnings of branches of foreign companies and non-Brazilian residents in general are taxed in Brazil only when derived from Brazilian sources. Interest, fees, commissions and any other income (which for the purposes of this paragraph includes any deemed income on the difference between the issue price of the Senior Notes and the price at which the Senior Notes are redeemed) payable by a Brazilian obligor to an individual, company, entity, trust or organization domiciled outside Brazil is considered derived from Brazilian sources and is therefore subject to income tax withheld at the source. Brazilian tax laws expressly authorize the paying source to pay the income or earnings net of taxes and, therefore, to assume the cost of the applicable tax. The rate of withholding is 15% or such other lower rate as is provided for in an applicable tax treaty between Brazil and such other country where the recipient of the payment has its domicile. If the beneficiary of the payment is located in a country in which the effective tax rate on net income is lower than 20%, the withholding rate is 25%. Notwithstanding the foregoing, the applicable withholding tax rate for negotiable instruments such as the Senior Notes was reduced to zero, pursuant to Resolutions 1853 of July 31, 1991 and 644 of October 22, 1980 of the Central Bank, subject to Central Bank Circular 2661 of February 8, 1996, which restricts such withholding tax reductions to negotiable instruments having a minimum maturity of 96 months. As a result, since the Senior Notes have an original maturity of 96 months, such reduction will apply to payments of interest and other income with respect to the Senior Notes. If, however, any Note is redeemed prior to November 26, 2004, such reduction will not apply and, therefore, upon such redemption the Brazilian withholding tax will be imposed on the amount of interest, fees and commissions paid on such Senior Notes from the date of issue through the date of redemption. Based on the advice of its Brazilian tax counsel, Tevecap believes and intends to take the position for tax reporting purposes that, in the event of any such early redemption to which such withholding tax applies, so long as the paying agent through which such payment is made is located in Japan and payment to such paying agent discharges the obligations of Tevecap to make payments in respect of the Senior Notes, interest and other income with respect to the Senior Notes will be subject to Brazilian withholding tax at a rate of 12.5% under the tax treaty in effect between Brazil and Japan. In any event, under the terms of the Senior Notes, Tevecap would be required to gross up Noteholders for any Brazilian withholding tax, subject to customary 53 exceptions. Tevecap has the right to redeem the Senior Notes at par in the event that it is required to gross up for Brazilian withholding tax imposed at a rate in excess of 15%. Any earnings or capital gains resulting from the sale (whether inside or outside Brazil) of any Senior Notes by a non-resident of Brazil to another non-resident of Brazil are not subject to tax in Brazil. Earnings or capital gains resulting from the sale (whether inside or outside Brazil) of any Senior Notes by a non-resident of Brazil to a resident of Brazil should not be subject to tax in Brazil, although the matter is not free from doubt. On February 8, 1996, the Brazilian Federal Government issued Decree No. 1,815, which imposed a tax on Brazilian issuers with respect to foreign exchange transactions ("IOF tax") related to the entering into Brazil of proceeds resulting from foreign loans (including the issue of securities such as the Senior Notes). The rate of IOF tax paid by the Company with respect to the issuance of the Senior Notes was zero %. Decree No. 1,815 was revoked by Decree No. 2,219 of May 2, 1997 which currently regulates the IOF tax. The IOF tax rate was reduced to zero upon the adoption of Ordinance No. 85 on April 24, 1997. However, under Law No. 8.894 dated June 21, 1994, such tax rate may be increased up to 25%. On August 15, 1996, the Brazilian Congress approved Constitutional Amendment No. 12 creating a new temporary tax, the Contribuicao Provisoria sobre Movimentacao Financeira ("CPMF"). Based on such Amendment, Law No. 9,311 of October 24, 1996 ("Law 9,311") was enacted, creating the CPMF tax. Under Law No. 9,311, as amended, all financial debit and money transfers through Brazilian bank accounts effected as from January 23, 1997 until December 31, 1998, including payments made by the Company with respect to the Senior Notes, will be subject to the assessment of the CPMF tax at the rate of 0.2%. Funds arising from the collection of CPMF tax will be applied only in the public health system. Since January 23, 1999, CPMF was extinguished and Congress approved Constitutional Amendment No. 21, on March 19, 1999, in order to reestablish CPMF at the rate of 0.38%, starting on June 19, 1999, for a period of one year, and subsequently at the rate of 0.38%, for a period of two years. The Constitutional Amendment No. 37 of June 2001 extended the CPMF leviance until December 31, 2004 at 0.38%. There is no stamp, transfer or other similar tax in Brazil with respect to the transfer, assignment or sale of any debt instrument outside Brazil (including the Senior Notes). United States The following is a summary of the material United States Federal income tax consequences to a beneficial owner of the Senior Notes that is a citizen or resident of the United States, a corporation, partnership or other entity created or organized in or under the laws of the United States or any State thereof, an estate the income of which is subject to United States Federal income taxation regardless of its source or a trust for which a court within the United States is able to exercise primary supervision over its administration and for which one or more U.S. fiduciaries have the authority to control all substantive decisions, as well as other persons subject to United States Federal income taxation on a net income basis in respect of the purchase, ownership and disposition of a Note ("U.S. Holders"). Such tax treatment may vary depending upon the particular situation of a U.S. Holder. This summary does not discuss all of the tax consequences that may be relevant to certain types of investors subject to special treatment under the United States Federal income tax laws (such as individual retirement accounts and other tax deferred accounts, banks, securities broker-dealers, life insurance companies, tax-exempt organizations, foreign persons, persons whose "functional currency" is other than the U.S. dollar or persons that hold Senior Notes as part of a "straddle" or "conversion transaction" or otherwise as part of a "synthetic asset") and is limited to investors which hold Senior Notes as capital assets. In addition, this summary is limited to U.S. Holders that acquire the Senior Notes at their issue price and does not address investors that purchase Senior Notes at a premium or market discount. This summary is based on the Internal Revenue Code of 1986, as amended (the "Code"), final, temporary and proposed Treasury regulations thereunder (the "Regulations"), revenue rulings, court cases, and other legal authorities as now in effect (or proposed) and as currently interpreted, and does not take into account possible changes in such tax laws or other legal authorities or such interpretations. No rulings on any of the issues discussed below will be sought from the United States Internal Revenue Service (the "IRS"). PROSPECTIVE PURCHASERS OF THE NOTES ARE ADVISED TO CONSULT THEIR TAX ADVISERS AS TO THE CONSEQUENCES OF A PURCHASE AND SALE OF NOTES, INCLUDING, WITHOUT 54 LIMITATION, (I) THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR NON-U.S. TAX LAWS TO WHICH THEY MAY BE SUBJECT, AND OF ANY POSSIBLE LEGISLATIVE OR ADMINISTRATIVE CHANGES IN LAW, (II) THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE POSSIBLE DEDUCTION BY THE ISSUER OF BRAZILIAN TAXES (AND OF THE PAYMENT BY THE ISSUER OF ADDITIONAL AMOUNTS WITH RESPECT THERETO) FROM PAYMENTS ON THE NOTES, (III) THE AVAILABILITY FOR UNITED STATES FEDERAL INCOME TAX PURPOSES OF A CREDIT OR DEDUCTION FOR ANY BRAZILIAN TAXES SO DEDUCTED AND (IV) THE CONSEQUENCES OF PURCHASING THE NOTES AT A PRICE OTHER THAN THEIR ISSUE PRICE. Interest on the Senior Notes Interest on the Senior Notes will be taxable to a U.S. Holder as ordinary income at the time it accrues or is received in accordance with the U.S. Holder's method of accounting for tax purposes. The amount includible in the income of a U.S. Holder will be the gross amount of interest, including any Additional Amounts, if any, payable to holders of Senior Notes (i.e., the amount before deduction of any Brazilian withholding taxes). Disposition of a Note Generally, any sale, redemption or other taxable disposition of a Note by a U.S. Holder will result in taxable gain or loss equal to the difference between (1) the sum of the amount of cash and the fair market value of other property received with respect to such taxable sale, redemption or other distribution (other than consideration attributable to accrued interest not previously taken into account, which consideration would be treated as interest received) and (2) the U.S. Holder's tax basis in the Note. Any gain or loss upon a sale or other disposition of a Note will be capital gain or loss (which will be long-term if the Note is held for more than one year). Effect of Brazilian Withholding Taxes It is believed that payments with respect to a Note will not be subject to Brazilian withholding tax unless the Note is redeemed prior to November 26, 2004. See "--Brazil." In the case of any Note which is so redeemed, withholding taxes in respect of interest previously paid may be imposed by Brazil at the time of redemption. Any Brazilian tax withheld generally will be treated as a foreign income tax that U.S. Holders may elect to deduct in computing their taxable income or, subject to the limitations on foreign tax credits generally, to credit against their United States Federal income tax liability. No such deduction or credit will be available to the extent Brazil pays a subsidy to a U.S. Holder, a related person or Tevecap, the amount of which is determined (directly or indirectly) by reference to the amount of the withholding tax. While Brazil does not have a program or policy of paying such subsidies at present, it has had programs of that nature in the past and could implement such programs again in the future. For purposes of determining a U.S. Holder's United States foreign tax credit, the gain or loss on the sale, redemption or other taxable disposition of a Note will generally constitute United States source income. Interest (including any Additional Amounts payable by Tevecap) will generally constitute foreign source passive income or financial services income for United States foreign tax credit purposes. However, if a Note is redeemed prior to November 26, 2004, and payments with respect to the Note are subject to Brazilian withholding tax imposed at a rate of 5% or more, the IRS might retroactively treat interest paid with respect to the Note as high withholding tax interest. In any event, because the amount of foreign taxes for which the foreign tax credit may be taken for the taxable year is generally limited to an amount equal to the U.S. Holder's United States Federal income tax rate multiplied by its foreign source income for the taxable year, a U.S. Holder may have insufficient foreign source income to utilize fully any foreign tax credit attributable to such Brazilian withholding taxes (but such U.S. Holder may be entitled to utilize the foreign tax credit attributable to such withholding taxes for the holders' previous two or succeeding five taxable years, or such withholding taxes may instead be deductible by the U.S. Holder). A U.S. Holder may be required to provide the IRS with a certified copy of the receipt evidencing payment of withholding tax imposed in respect of payments on the Senior Notes in order to claim a foreign tax credit in respect of such withholding tax. Information Reporting and Backup Withholding For each calendar year in which the Senior Notes are outstanding, each DTC participant or indirect participant holding an interest in a Note on behalf of a U.S. Holder and each paying agent making payments in respect of a Note will 55 generally be required to provide the IRS with certain information, including such U.S. Holder's name, address and taxpayer identification number (either such U.S. Holder's Social Security number or its employer identification number, as the case may be), and the aggregate amount of interest and principal paid to such U.S. Holder during the calendar year. These reporting requirements, however, do not apply with respect to certain U.S. Holders, including corporations, securities dealers, other financial institutions, tax-exempt organizations, qualified pension and profit sharing trusts, individual retirement accounts. In the event that a U.S. Holder fails to establish its exemption from such information reporting requirements or is subject to the reporting requirements described above and fails to supply its correct taxpayer identification number in the manner required by applicable law, or underreports its tax liability, the direct or indirect DTC participant holding such interest on behalf of such U.S. Holder or paying agent making payments in respect of a Note may be required to "backup" withhold a tax equal to 31% of each payment of interest and principal with respect to the Senior Notes. This backup withholding tax is not an additional tax and may be credited against the U.S. Holder's United States Federal income tax liability if the required information is furnished to the IRS. F. Dividends and Paying Agents Not applicable. G. Statement by Experts Not applicable. H. Documents on Display The Company is a foreign issuer subject to the reporting requirements of the Exchange Act and the rules and regulations thereunder. The Company files reports with the Securities and Exchange Commission (the "Commission") in electronic format via EDGAR. These reports can be accessed through the Commission's website (www.sec.gov) and can also be inspected at the public reference facilities maintained by the Commission at 450 Fifth Street N.W., Room 1024, Washington, DC 20549, and at the SEC's regional offices located at the Woolworth Building, 233 Broadway, New York, New York 10279 and 175 W. Jackson Boulevard, Suite 900, Chicago, Illinois 60604. Copies of such materials may be obtained at prescribed rates. Other information regarding the Company can be accessed through the Company's website (www.tva.com.br). All information obtained through the Company's website is expressly not incorporated by reference herein. I. Subsidiary Information Not applicable. ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to foreign currency exchange rate risk and interest rate risk. As of December 31, 2001, Tevecap had dollar-denominated debt of U.S.$64.7 million which is due as follows: Principal ---------------------- (thousands of dollars) 2002 15,652 2003 1,073 2004 48,022 2005 -- 2006 and thereafter -- ------- $64,747 ======= 56 During January 1999, the Brazilian real experienced a significant devaluation after the Central Bank abandoned the exchange band within which the real was permitted to trade. Since that time, the exchange rate has been volatile, ranging up to R$2.80 per U.S. dollar. See Item 3, "Key Information--Selected Financial Data--Exchange Rates." Although the Company's reporting currency is the U.S. dollar, the cash flow required to service its indebtedness is generated in local currency, Brazilian reais (R$). Using the year end 2001 exchange rate (R$2.3204 per U.S.$1.00), the cash flow in reais to pay the interest (U.S.$1.4 million) and principal due in 2002 would be R$3.3 million and R$33.0 million, respectively. A devaluation of the real to R$2.70 per U.S. dollar would require cash flow of R$3.9 million and R$38.4 million, respectively. If the real devalued to R$3.00 per U.S. dollar, the cash flow in reais to pay the interest and principal due in 2002 would be R$4.3 million and R$42.6 million, respectively. The Company is also subject to interest rate risk on its loans in local currency. As of December 31, 2001, the Company had $6.7 million of loans from an affiliate denominated in Brazilian reais, which bears interest at the average cost of funds of the affiliate. The majority of the affiliate's debt is in reais and bears interest at the CDI rate (the interbank certificate of deposit rate in Brazil), plus 0.5%. During 2001, the CDI rate ranged from 15.1% to 17.3%. The average rate for the year was 16.2%, and the rate at December 31, 2001 was 17.29%. If the CDI rate rose to 25%, interest payments on the $6.7 million would be approximately $1.7 million annually. If the CDI rate rose to 30%, the annual interest payments would be $2.0 million. Most of the interest due on these loans in the past has been added to principal rather than paid in cash. The Company does not hedge any of its market risks (other than entering into certain programming agreements that place ceilings on the dollar/real exchange rate used to calculate monthly programming costs) and does not utilize derivative financial instruments. ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN DEBT SECURITIES Not applicable. PART II ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES Not applicable. ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS Not applicable. ITEM 15. [RESERVED] ITEM 16. [RESERVED] PART III 57 ITEM 17. FINANCIAL STATEMENTS The Company is furnishing financial statements pursuant to the instructions in Item 18 of Form 20-F. ITEM 18. FINANCIAL STATEMENTS See Item 19(a) for a list of financial statements filed as part of this Form 20-F. ITEM 19. EXHIBITS (a) Financial Statements. The following financial statements and schedules are filed as part of this annual report, together with the report of the independent public accountants. 58 INDEX TO THE FINANCIAL STATEMENTS
Page ---- TEVECAP S.A. AND SUBSIDIARIES - Consolidated Financial Statements Together with Independent Auditors' Report - December 31, 2001 and 2000...........................F-1 TVA SISTEMA DE TELEVISAO S.A. - Financial Statements Together with Independent Auditors' Report - December 31, 2001 and 2000...........................F-50
59 TVA SUL PARANA LTDA. AND SUBSIDIARY - Consolidated Financial Statements Together with Independent Auditors' Report - December 31, 2001 and 2000...........................F-75 CCS--CAMBORIU CABLE SYSTEM DE TELECOMUNICACOES LTDA. - Financial Statements Together with Independent Auditors' Report - December 31, 2001 and 2000............................................................................F-97
60 SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized. TEVECAP S.A. By: /s/ Marcelo Vaz Bonini ------------------------------- Name: Marcelo Vaz Bonini Title: Officer By: /s/ Vito Chiarella Neto ------------------------------- Name: Vito Chiarella Neto Title: Officer Date: July 15, 2002 61 GLOSSARY ABC: ABC, Inc., formerly known as "Capital Cities/ABC, Inc." Abril: Abril S.A. Abril Credit Facility: A revolving credit facility, dated December 6, 1995, between Tevecap, as the borrower, and Abril, as the lender. ANATEL: Agencia Nacional de Telecomunicacoes (National Telecommunications Agency), an independent Brazilian federal agency authorized to regulate the Brazilian subscription television industry. BBC: British Broadcasting Corporation. C-Band: A satellite transmission system which provides a signal on the "c" bandwidth. Cable: A Cable network employs electromagnetic transmission over coaxial and/or fiber-optic cable to transmit multiple channels carrying images, sound and data between a central facility and individual customers' television sets. Networks may allow one-way (from a headend to a residence and/or business) or two-way transmission from a headend to a residence and/or business with a data return path for the headend. Cable license: A license that is granted by the applicable governing body pursuant to its authority under the communications laws of a particular country for the purpose of providing Cable services for a specific franchise/license area. Canbras: Canbras Communications Corp., a Canadian corporation. Canbras Association Agreement: Association Agreement dated June 14, 1995, among Tevecap, TVA Sistema, the Canbras TVA companies, Canbras and Canbras-Par. Canbras Parana: Canbras Parana Ltda., a Brazilian limitada, in which Tevecap holds a 36% equity interest and Canbras Par holds a 64% equity interest. Canbras TVA: The operations of Canbras TVA Cabo, TV Cabo Santa Branca and Canbras Parana, in each of which Tevecap holds a 36% equity interest and Canbras Par holds a 64% equity interest. Canbras TVA Cabo: Canbras TVA Cabo Ltda., a Brazilian limitada, in which Tevecap holds a 36% equity interest and Canbras Par holds a 64% equity interest. Canbras-Par: Canbras Participacoes, Ltda., a Brazilian limitada wholly-owned by Canbras. Central Bank: Central Bank of Brazil (Banco Central do Brasil) Chase Parties: Two wholly owned subsidiaries of CMIF through which CMIF holds its equity interest in Tevecap. Churn: With respect to a pay television system for a given period, the quotient expressed as a percentage of (i) the number of subscribers disconnected from such system less the number of formerly disconnected subscribers reconnected to the system divided by (ii) the number of subscribers to the system as of the beginning of the period plus the number of subscribers added to the system. A-1 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. Company: Tevecap, together with its consolidated subsidiaries. CPL: Cable Participacoes Ltda., a Brazilian limitada, jointly owned by Hearst and ABC, which limitada holds a 2% equity interest in Tevecap. CPCT: Centrais Privadas de Comutacao Telefonica, certain private telephone networks comparable to private branch exchanges (PBX) found in larger apartment complexes, hotels and businesses in the United States. Darlene Investments: Darlene Investments Ltd., a Cayman Islands limited liability company which is part of the Cisneros Group of Companies. DBS: Direct broadcast satellite service, operating in C-Band or Ku-Band width, by which television programming is transmitted to individual dwellings, each served by a single satellite dish. DBS Sale: The sale by the Company of the DBS Systems and certain assets related thereto in July 1999. DBS Systems: Ku-Band and C-Band operations of Galaxy Brasil and TVA Banda C, respectively. DIRECTV: Brazil's first digital Ku-Band service, which is operated by Galaxy Brasil and Galaxy Latin America. DISTV: The distribution of television signals by physical means (i.e., by Cable) to end users, generally limited to signals without interference by a DISTV operator with the signal content. DLA: DIRECTV Latin America, Inc. a California corporation wholly-owned by Hughes Communications Inc. that holds a 77.8% equity interest in GLA. ESPN Brasil: Programming provided by ESPN Brasil Ltda., an indirect subsidiary of ESPN, Inc. , in which ABC has an 80% equity interest and Hearst has a 20% 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. 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. A-2 Financial Statements: The audited financial statements of Tevecap and its subsidiaries and the notes thereto included herein. Fox: Twentieth Century Fox Television International. Galaxy Brasil: Galaxy Brasil S.A., a wholly-owned subsidiary of Tevecap that was sold to Galaxy Latin America in July 1999. Galaxy Latin America: Galaxy Latin America, LLC, a Delaware limited liability company the members of which are DLA, which holds a 77.8% equity interest and Darlene Investments, which holds a 22.2% equity interest. Globo: Globo Par and TV Globo, the owners of a number of Brazil's over the air channels. Globo Par: Globo Comunicacoes e Participacoes Ltda. Guarantors: TVA Sistema de Televisao S.A., TVA Communications Ltd., Comercial Cabo TV Sao Paulo Ltda., TVA Sul Parana Ltda., CCS Camboriu Cable System de Telecomunicacoes Ltda., TVA Programadora Ltda., TVA Network Ltda. and TVAPAR S.A. HABC II: Hearst/ABC Video Services II, a Delaware general partnership jointly owned by Hearst and ABC, which partnership holds a 15.3% equity interest in Tevecap. HBO Brasil: Programming provided by HBO Brasil Partners. HBO Brasil Ltda: A Brazilian limitada, wholly owned by HBO Brasil Partners, that distributes HBO programming in Brazil. Headend: A collection of hardware, typically including satellite receivers, modulators, amplifiers and videocassette playback machines. Signals, when processed, are then combined for distribution within the Cable network. Hearst: The Hearst Corporation. Hearst/ABC Parties: HABC II and CPL. Hearst/ABC Programming Agreement: Programming Agreement, dated December 6, 1995, among Tevecap, Hearst and ABC. Homes Passed: Homes that can be connected to a Cable distribution system without further extension of the distribution network. IBGE: Instituto Brasileiro de Geografia e Estatistica. Indenture: The Indenture, dated as of November 26, 1996 and as amended and supplemented from time to time, among Tevecap, the Guarantors, Chase Manhattan Bank, as trustee, and Chase Trust Bank, as principal paying agent in connection with the Senior Notes. Independent Operators: Independent pay television system operators to which TVA sells programming. A-3 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. Ku-Band: A satellite transmission system which provides a signal over the "ku" bandwidth. MMDS (Multi-channel multi-point distribution system): A one-way radio transmission of television channels over microwave frequencies from a fixed station transmitting to multiple receiving facilities located at fixed points. MMDS license: A license that is granted by the applicable governing body pursuant to its authority under the communications laws of a particular country for the purpose of providing MMDS services for a specific franchise/license area. MTV Brasil: MTV Brasil Ltda., a Brazilian limitada in which Abril holds a 50% equity interest and Viasem Brasil Holdings Ltda. (an indirect subsidiary of Viacom International) holds the remaining 50% equity interest. Net Sat: Net Sat Servicos Ltda., in which Globo Par has a controlling interest and whose other equity holders include News Corporation, a subsidiary of The News Corporation Limited. News Corporation: News Corporation plc. Operating Ventures: Canbras TVA and TV Filme, two of TVA's minority-owned ventures. Owned Systems: TVA Sistema and TVA Sul. Pay-per-view: Payment made for individual programs rather than a monthly subscription for a whole channel or group of channels. Pay-per-view channels currently provide certain popular sporting events or major motion pictures for which customers may be prepared to make a special payment. Penetration rate: The measurement of the take-up of Cable services. The penetration rate as of a given date is calculated by dividing the number of subscribers connected to a system on such date by the total number of homes passed in such system. Real Plan: A Brazilian Government stabilization program, announced in December 1993, aimed at curtailing inflation and building a foundation for sustained economic growth. Regulatory Put: A provision in the Stockholders Agreement pursuant to which an Event Put is triggered if the amount of capital stock held by a Stockholder (other than Abril) exceeds the amount allowed under an appropriate legal restriction. Revenue per subscriber: Total revenue derived from a subscriber television system divided by the average number of subscribers for that period. SAP: Second Audio Programming, which provides the option of audio in a second language for the programming on channels for which it is offered. Securities Act: United States Securities Act of 1933, as amended. Senior Notes: Tevecap's 250,000,000 12 5/8% Senior Notes due 2004 issued on November 26, 1996. A-4 Stockholders: HABC II, CPL, Robert Civita, Abril, the Chase Parties and Falcon International. Stockholders Agreement: Stockholders Agreement, dated December 6, 1995, among the Stockholders. Telecommunications Code: The Brazilian Telecommunications Code of 1962, as amended. Tevecap: Tevecap S.A. TV Cabo Santa Branca: TV Cabo Santa Branca Comercio Ltda., a Brazilian limitada, in which Tevecap holds a 36% equity interest and Canbras Par holds a 64% equity interest. TV Filme: TV Filme, Inc., a Delaware corporation in which, as of December 31, 1999, Tevecap held a 14.7% equity interest, Warburg, Pincus Investors, L.P. held a 38.8% equity interest, members of the Lins family held a 16.2% equity interest, public stockholders held a 28.15% equity interest and certain individuals held the remaining 2.15% equity interest. Upon the implementation of a restructuring agreement with creditors, Tevecap's equity interest in TV Filme was reduced to approximately 0.7%. TV Homes: The number of households in a given area possessing at least one television set. TV Show Time: Televisao Show Time Ltda., a Brazilian limitada in which the estate of Matias Machline and an associate currently hold a 53% equity interest and in which the remaining 47% is currently held by various Abril shareholders. TVA: Tevecap S.A. and its consolidated subsidiaries and affiliates. TVA Banda C: TVA Banda C Ltda., a Brazilian limitada in which TVA held a 100% equity interest prior to the sale of TVA Banda C to Galaxy Latin America in July 1999. TVA Brasil: TVA Brasil Radioenlaces S.A., a Brazilian limitada in which the estate of Matias Machline currently holds a 50% equity interest and in which the remaining 50% is currently held by various Abril shareholders. TVA Sistema: TVA Sistema de Televisao S.A., a Brazilian corporation in which Tevecap holds a 100% equity interest. TVA Sul: The operations of TVA Sul Parana Ltda., a Brazilian limitada in which TVA holds a 100% equity interest, and CCS-Camboriu Cable System de Telecomunicacoes Ltda., a Brazilian limitada in which TVA Sul Parana Ltda. holds a 60% equity interest and an unaffiliated third party holds the remaining 40% equity interest. UHF: Broadcast of a television signal at an ultra-high frequency over a given geographical area. VCR: Video cassette recorders. A-5 Tevecap S.A. and Subsidiaries Consolidated Financial Statements Together with Independent Auditors' Report As of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001 TEVECAP S.A. AND SUBSIDIARIES Index to Consolidated Financial Statements Contents Page Independent Auditors' Report F-2 Consolidated Balance Sheets as of December 31, 2001 and 2000 F-3 Consolidated Statements of Operations for each of the three years in the period ended December 31, 2001 F-5 Consolidated Statements of Changes in Shareholders' Deficit and Redeemable Common Stock for each of the three years in the period ended December 31, 2001 F-7 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2001 F-8 Notes to The Consolidated Financial Statements F-10 F-1 Independent Auditors' Report To the Shareholders and Directors of TEVECAP S.A. We have audited the accompanying consolidated balance sheets of TEVECAP S.A. and subsidiaries (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in shareholders' deficit and redeemable common stock and cash flows for each of the three years in the period ended December 31, 2001, all expressed in United States dollars. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tevecap S.a. and subsidiaries as of December 31, 2001 and 2000, and the consolidated results of its operations and cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Deloitte Touche Tohmatsu Sao Paulo, Brazil, June 17, 2002 F-2 TEVECAP S.A. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 2001 and 2000 in thousands of U.S. dollars
December 31, ---------------------- 2001 2000 -------- -------- ASSETS Current assets Cash and cash equivalents $ 634 $ 1,609 Accounts receivable, net (Footnote 3) 6,474 7,737 Inventories, net (Footnote 4) 11,117 12,501 Prepaid and other assets (Footnote 5) 2,198 4,063 Accounts receivable from related parties (Footnote 6) 232 96 Promissory note -- 27,744 Other accounts receivable (Footnote 7) 1,431 8,813 -------- -------- Total current assets 22,086 62,563 -------- -------- Property, plant and equipment, net (Footnote 10) 149,594 182,511 Investments (Footnote 9) Equity basis 549 -- Concessions, net 5,365 7,919 Loans receivable from related companies (Footnote 6) 6,911 17,532 Debt issuance costs, net (accumulated amortization; 2001- $ 3,905; 2000- $ 3,416) 937 640 Judicial deposits 13,028 8,192 Other 364 -- -------- -------- Total assets $198,834 $279,357 ======== ========
See accompanying notes to consolidated financial statements F-3 TEVECAP S.A. AND SUBSIDIARIES Consolidated Balance Sheets, continued December 31, 2001 and 2000 in thousands of U.S. dollars
December 31, ------------------------- 2001 2000 --------- --------- LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities Loans (Footnote 11) $ 21,241 $ 33,071 Film suppliers 11,458 5,122 Other suppliers 6,206 9,004 Taxes payable other than income taxes (Footnote 13) 5,209 5,457 Accrued payroll and related liabilities 1,560 2,470 Advance payments received from subscribers 204 253 Other accounts payable (Footnote 12) 2,019 1,963 --------- --------- Total current liabilities 47,897 57,340 --------- --------- Long-term liabilities Loans (Footnote 11) 49,095 49,691 Loans payable to related companies (Footnote 6) 6,729 141,122 Taxes payable other than income taxes (Footnote 13) 28,515 29,468 Provision for claims (Footnote 18) 1,697 2,546 Liability to fund equity investees (Footnote 9) 3,219 7,938 --------- --------- Total long-term liabilities 89,255 230,765 --------- --------- Commitments and contingencies (Footnotes 16 and 18) Minority interest 1,194 2,041 Redeemable common stock, no par value, 85,637,526 shares authorized, issued and outstanding as of December 31, 2001 and 2000 115,252 151,260 Shareholders' deficit Common stock, no par value, 399,582,914 and 140,700,759 shares authorized, issued and outstanding as of December 31, 2001 and 2000, respectively 371,026 242,342 Accumulated other comprehensive income (loss) 16,855 (1,555) Accumulated deficit (442,645) (402,836) --------- --------- Total shareholders' deficit (54,764) (162,049) --------- --------- Total liabilities and shareholders' deficit $ 198,834 $ 279,357 ========= =========
See accompanying notes to consolidated financial statements F-4 TEVECAP S.A. AND SUBSIDIARIES Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 in thousands of U.S. dollars
Year ended December 31, ----------------------------------------- 2001 2000 1999 --------- --------- --------- Gross revenues Monthly subscriptions $ 88,246 $ 97,134 $ 94,055 Installation 270 968 1,900 Advertising 1,005 2,503 1,597 Indirect programming -- 357 3,722 Additional services 16,413 20,049 14,924 --------- --------- --------- 105,934 121,011 116,198 --------- --------- --------- Direct operating expenses (excluding depreciation and amortization stated separately below) Taxes on revenues 15,636 13,145 12,782 Payroll and benefits 8,504 9,229 7,857 Programming 25,749 26,104 24,166 Transponder lease cost 22 2,408 1,975 Technical assistance 1,868 2,415 1,311 TVA magazine 2,389 2,575 2,482 Pole rental 2,814 3,535 2,935 Other costs 9,950 9,136 4,912 --------- --------- --------- 66,932 68,547 58,420 --------- --------- --------- Selling, general and administrative expenses Payroll and benefits 9,795 14,942 11,425 Advertising and promotion 5,778 7,330 3,645 Rent 1,777 2,022 2,005 Other selling, general and administrative expenses 12,098 9,189 8,515 --------- --------- --------- 29,448 33,483 25,590 --------- --------- --------- Depreciation 33,053 41,622 55,174 Amortization 1,311 1,668 1,705 Other operating expense (income), net (Footnote 14) 1,762 (2,611) 19,012 --------- --------- --------- Loss from operations (26,572) (21,698) (43,703) --------- --------- --------- Interest income (4,200) (5,374) (5,896) Interest expense 37,849 45,069 22,254 Foreign currency translation loss, net -- -- 2,543 Foreign currency transaction loss, net 11,067 4,816 -- Other nonoperating expense (income), net (Footnote 15) 2,438 (37,384) 11,055 --------- --------- --------- Loss before income taxes, equity in affiliates, minority interest, discontinued operations and extraordinary (73,726) (28,825) (73,659) item Income tax expense - current (Footnote 8) -- 2,517 106 --------- --------- --------- Loss before equity in affiliates, minority interest, (73,726) (31,342) (73,765) discontinued operations and extraordinary item Equity in losses of affiliates, net 2,375 2,004 5,238 --------- --------- --------- Loss before minority interest, discontinued operations and extraordinary item (76,101) (33,346) (79,003) Minority interest (284) (491) (678) --------- --------- --------- Loss before discontinued operations and extraordinary item (75,817) (32,855) (78,325) --------- --------- ---------
See accompanying notes to consolidated financial statements F-5 TEVECAP S.A. AND SUBSIDIARIES Consolidated Statements of Operations, continued for the years ended December 31, 2001, 2000 and 1999 in thousands of U.S. dollars
Year ended December 31, -------------------------------------- 2001 2000 1999 -------- -------- -------- Discontinued operations (Footnote 23) Gain on sale of discontinued operations of DBS business, including loss from operations during phase-out period, net of tax of $0 -- -- (94,344) -------- -------- -------- Income (loss) before extraordinary item (75,817) (32,855) 16,019 Extraordinary item - gain on debt repurchase, net of tax of $0 -- -- (53,857) -------- -------- -------- Net income (loss) $(75,817) $(32,855) $ 69,876 ======== ======== ======== Other comprehensive income (loss) - Foreign currency translation adjustment $ 18,410 $ (1,555) $ -- -------- -------- -------- Comprehensive income (loss) $(57,407) $(34,410) $ 69,876 ======== ======== ========
See accompanying notes to consolidated financial statements F-6 TEVECAP S.A. AND SUBSIDIARIES Consolidated Statements of Changes in Shareholders' Deficit and Redeemable Common Stock for the years ended December 31, 2001, 2000 and 1999 in thousands of U.S. dollars
Accumulated Other Total Redeemable Common Accumulated Comprehensive Shareholders' Common Stock Deficit Income (Loss) Deficit Stock --------- ----------- ------------- ------------- ---------- Balance as of January 1, 1999 $ 242,342 $(466,599) $ $(224,257) $ 178,002 Net income for the year 69,876 69,876 --------- --------- --------- --------- --------- Balance as of December 31, 1999 242,342 (396,723) (154,381) 178,002 Foreign currency translation adjustment, net of tax of $0 (1,555) (1,555) Net loss for the year (32,855) (32,855) Adjustment of redeemable common stock to redemption price 26,742 26,742 (26,742) --------- --------- --------- --------- --------- Balance as of December 31, 2000 242,342 (402, 836) (1,555) (162,049) 151,260 Capital contribution (Footnote 6) 128,684 128,684 Foreign currency translation adjustment, net of tax of $0 18,410 18,410 Net loss for the year (75,817) (75,817) Adjustment of redeemable common stock to redemption price 36,008 36,008 (36,008) --------- --------- --------- --------- --------- Balance as of December 31, 2001 $ 371,026 $(442,645) $ 16,855 $ (54,764) $ 115,252 ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements F-7 TEVECAP S.A. AND SUBSIDIARIES Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 in thousands of U.S. dollars
Year Ended December 31, --------------------------------------- 2001 2000 1999 -------- -------- --------- Cash flows from operating activities: Net income (loss) $(75,817) $(32,855) $ 69,876 Adjustments to reconcile net income (loss) to net cash from operating activities Depreciation 33,053 41,622 55,174 Amortization 1,311 1,668 1,705 Amortization of debt issuance costs 192 219 219 Write off unamortized debt issuance costs -- -- 5,185 Provision for doubtful accounts 43 (3,775) 196 Provision for equipment and inventory obsolescence (3,021) (365) 605 Provision for claims (849) 129 (4,004) Minority interest (284) (491) (678) Disposal and write-off of property, plant and equipment 1,074 2,046 57,028 Gain on sale of assets -- (40,454) (159,638) Write-off of investments -- 8 6,668 Buy back gain of Senior Notes -- -- (70,692) Equity in losses of affiliates 2,375 2,004 5,238 Foreign currency transaction loss, net 11,067 4,816 -- Changes in operating assets and liabilities: Film exhibition rights -- 1,278 290 Accounts receivable 1,220 3,600 12,921 Prepaid and other assets 1,865 (451) 1,564 Accrued interest 29,337 32,615 14,334 Inventories 4,405 (1,823) 3,982 Suppliers 3,538 (3,248) (25,910) Taxes payable other than income taxes (1,201) 6,178 14,513 Accrued payroll and related liabilities (910) 81 (1,568) Advances received from subscribers (49) (685) (1,064) Other 4,263 (9,163) (4,379) -------- -------- --------- Net cash provided by (used in) operating activities 11,612 2,954 (18,435) -------- -------- --------- Cash flows from investing activities: Purchases of property, plant and equipment (30,639) (26,716) (25,927) Proceeds from sales of property, plant and equipment and other assets -- 43,000 177,542 Collection of promissory note 28,236 -- -- Loans to related companies (10,696) (19,205) -- Repayment of loans to related companies 25,250 8,951 2,180 Purchases of investments (8,245) -- (1,789) -------- -------- --------- Net cash provided by investing activities 3,906 6,030 152,006 -------- -------- --------- Cash flows from financing activities: Proceeds from bank loans 21.291 26,752 6,661 Repayment of loans from banks (44,842) (17,375) (191,948) Proceeds from loans from shareholders 13,306 25,219 63,695 Repayments of loans from shareholders (23,494) (37,342) (11,430) -------- -------- --------- Net cash used in financing activities (33,739) (2,746) (133,022) -------- -------- --------- Effect of exchange rate changes on cash and cash equivalents 17,246 (6,575) -- -------- -------- --------- Net increase (decrease) in cash and cash equivalents (975) (337) 549 Cash and cash equivalents at beginning of the period 1,609 1,946 1,397 -------- -------- --------- Cash and cash equivalents at end of the period $ 634 $ 1,609 $ 1,946 ======== ======== ========= Supplemental cash disclosure: Cash paid for interest $ 7,671 $ 6,073 $ 15,784 Cash paid for income taxes -- 2,517 106
See accompanying notes to consolidated financial statements F-8 TEVECAP S.A. AND SUBSIDIARIES Consolidated Statements of Cash Flows, continued for the years ended December 31, 2001, 2000 and 1999 in thousands of U.S. dollars
Year Ended December 31, ------------------------------------ 2001 2000 1999 -------- -------- -------- Supplemental noncash financing and investing activities: Accrued interest on related company loans refinanced as principal balance $ 21,666 $ 27,808 $ 3,835 Transfer of monetary assets and capitalization of loans in exchange for shares 128,684 -- -- Promissory note received in sale of DBS business -- -- 25,500
See accompanying notes to consolidated financial statements F-9 TEVECAP S.A. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of U.S. dollars, unless otherwise indicated) 1. The Company and its principal operations 1.1. General The consolidated financial statements have been prepared to reflect the consolidated results of Tevecap S.A. ("Tevecap") and its subsidiaries (the "Company"). Tevecap is a holding company, the subsidiaries of which render services related to wireless cable, cable and high-speed internet, including marketing and advertising, production, distribution and licensing of domestic and foreign television programs. The Company has wireless cable channel rights primarily in major urban markets in Brazil. As of December 31, 2001, Abril S.A. ("Abril"), a printing and distribution company, was the majority shareholder of the Company. 1.2 Significant risks and uncertainties The Company's consolidated financial statements for the year ended December 31, 2001 were prepared on a going concern basis which contemplates the realization of assets and settlement of liabilities and commitments in the normal course of business. The Company incurred a net loss of $75,817 during the year ended December 31, 2001 and had negative working capital of $25,811 and a shareholders' deficit of $54,764 at December 31, 2001. The continuation of the Company as a going concern is dependent upon its ability to generate sufficient cash from operating and financing activities. In this regard, managements' plans include: (i) improvement in the generation of cash from operations, including a cost reduction program which was implemented in 2001; (ii) securitization of accounts receivable as a source of financing; and (iii) sales of nonstrategic assets and the discontinuation of noncompetitive businesses. The consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. 2. Summary of significant accounting policies Significant policies followed in the preparation of the consolidated financial statements are described below: F-10 TEVECAP S.A. AND SUBSIDIARIES 2.1. Basis of presentation and consolidation a) Basis of presentation The consolidated financial statements are presented in United States dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"), which differ in certain respects from accounting principles applied by the Company in its local currency financial statements, which are prepared in accordance with accounting principles generally accepted in Brazil ("Brazilian GAAP"). The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the financial statement dates and the reported amount of revenues and expenses during the reporting periods. Since management's judgment involves making estimates concerning the likelihood of future events, the actual results could differ from these estimates. b) Principles of consolidation The consolidated financial statements include the accounts of Tevecap and all majority-owned subsidiaries. Investments in affiliated companies, owned 20% to 50% inclusive, are carried at cost and adjusted for the Company's equity in undistributed earnings or losses and dividends received since acquisition. Investments in less than 20% owned affiliates are accounted for under the cost method. Intercompany transactions and accounts are eliminated in consolidation. 2.2. Accounting records As required by Brazilian Law and in accordance with local accounting practices, the accounting records of the Company are maintained in Brazilian currency (real). In order to present the consolidated financial statements in conformity with U.S. GAAP, the Company maintains additional accounting records that are used solely for this purpose. 2.3. Currency remeasurement As of January 1, 2000, based on changes in the Company's capital and operational structure and a move to using the Brazilian real for a substantial portion of the Company's business, the Company changed its functional currency from the United States dollar to the Brazilian real (R$). This change was made in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation." F-11 TEVECAP S.A. AND SUBSIDIARIES Assets and liabilities are translated into U.S. dollars at the exchange rate in effect at the end of the reporting period, and revenues, expenses, gains and losses are translated into U.S. dollars at the average rates prevailing in the period. The resulting net translation gains and losses are reported, net of tax, in accumulated other comprehensive income (loss) in shareholders' deficit. 2.4 Consolidated financial statements The Company's operating subsidiaries included in the consolidated financial statements are:
Ownership Interest as of December 31, ------------------------ 2001 2000 -------- -------- Owned Systems TVA Distribuidora S.A. (c) -- 100.00% TVA Sistema de Televisao S.A 100.00% 98.00% TVA Sul Parana Ltda 100.00% 86.00% CCS Camboriu Cable Systems de Telecomunicacoes Ltda 60.00% 51.60% TVAPar S.A. (c) -- 100.00% Rede Ajato Ltda. (b) 100.00% 100.00% License Subsidiary Comercial Cabo TV Sao Paulo Ltda. (a) 100.00% 100.00% Ype Radio e Televisao Ltda. (c) -- 100.00% TVA Sistema de Televisao de Porto Alegre S.A. (c) -- 100.00% Programming Ventures TVA Programadora Ltda. (c) -- 100.00% TVA Channels Ltda. (c) -- 100.00% TVA Inc. 100.00% 100.00% TVA Overseas Ltd. 100.00% 100.00% TVA Communications Ltd. 100.00% 100.00% TVA Communications Aruba N.V. (c) -- 100.00% TVA Continental S.A. (d) 100.00% -- TVA Pelicano S.A. (d) 100.00% -- TVA Network Participacoes S.A. (d) 100.00% --
a. 0.00149% of the common shares in this entity are owned by the controlling shareholder of the parent company pursuant to local legislative requirements. b. On August 1, 1999, the company Rede Ajato Ltda. was created to operate in the high-speed internet market. F-12 TEVECAP S.A. AND SUBSIDIARIES c. In July 2001, the Company began the corporate restructuring process by merging direct subsidiaries TVA Distribuidora S.A. and TVA Programadora Ltda., and, subsequently, indirect subsidiaries Ype Radio e Televisao Ltda., TVA Sistema de Televisao de Porto Alegre S.A., TVA Communications Aruba N.V., and TVAPar S.A. The investment acquired in TVA Channels Ltda., through the merger of TVA Programadora Ltda., was transferred to TVA Sistema de Televisao S.A., which subsequently merged that entity. d. In September 2001, as part of the corporate restructuring process, the parent company Abril and related company Editora Abril S.A. (a company under common control with Abril) transferred their respective ownership interest in TVA Sul Parana Ltda. and TVA Sistema de Televisao S.A. to the Company. Additionally, Abril S.A. also transferred to the Company its ownership interest in TVA Continental S.A., which is the sole owner of TVA Pelicano S.A. and TVA Network Participacoes S.A. 2.5 Cash and cash equivalents Cash and cash equivalents are defined as cash and cash in banks and investments in interest-bearing securities. Short-term investments with original maturities of three months or less at the time of purchase are considered cash equivalents. 2.6 Financial instruments In accordance with SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" ("SFAS 107"), information is provided about the fair value of certain financial instruments for which it is practicable to estimate that value. For the purposes of SFAS 107, the estimated fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value: o The fair value of certain financial assets carried at cost, including cash and cash equivalents, accounts receivable, other accounts receivable and certain other short-term assets, is considered to approximate their respective carrying value due to their short-term nature. o The fair value of payables to film suppliers and other suppliers, other accounts payable and certain other short-term liabilities are considered to approximate their respective carrying value due to their short-term nature. o The fair value of loans receivable from and loans payable to related companies approximates the carrying value, as interest on these loans is variable and based on market rates. o The fair value of third party loans, except for Senior Notes, approximates the carrying value as the interest rates on these loans are either fixed at a rate comparable with the current market rate or variable and based on market rates. F-13 TEVECAP S.A. AND SUBSIDIARIES o The fair value of Senior Notes represents 85% of its carrying value as of December 31, 2001 (90% of its carrying value as of December 31, 2000). Fair value is estimated based on quoted market prices. 2.7 Accounts receivable A provision for doubtful accounts is established on the basis of an analysis of the accounts receivable, in light of the risks involved, and is considered sufficient to cover any losses incurred in realization of credits. 2.8 Inventories Inventories consist of materials and supplies and imports in transit. Materials and supplies are used to provide service to new customers, and to ensure continuity of service to existing customers. Imports in transit represent materials purchased from foreign countries that have not yet been received. Inventories are stated at the lower of cost or market. Cost is determined principally under the average cost method. A provision for obsolescence has been established on the basis of an analysis of slow-moving materials and supplies. 2.9 Property, plant and equipment Property, plant and equipment are stated at cost and depreciated using the straight-line method, over the remaining useful lives, as described in Note 10. 2.10 Advertising and promotion costs Costs of advertising and promotion are expensed as incurred. 2.11 Recoverability of long-lived assets to be held and used The Company evaluates its long-lived assets and identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset. In estimating future undiscounted net cash flows, assets are grouped at the level of each cable television system. If an asset is F-14 TEVECAP S.A. AND SUBSIDIARIES considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. 2.12 Revenue recognition Subscription revenues are recognized monthly at the amount billed to subscribers for service subscribed to and earned during the month. Installation fees are recognized as revenue on the equipment installation date to the extent of direct selling costs incurred which are higher than the revenue. Advertising revenues are recognized, and the production cost of commercials and programming are charged to expense, when the commercial is telecast. Others revenues are recognized as services are rendered. 2.13 Licenses Televisao Show Time Ltda. ("TV Show Time") and TVA Brasil Radioenlaces Ltda. ("TVA Brasil") hold licenses covering certain operations of the Company. The use of such licenses is provided to the Company, for a nominal fee, under a Service Agreement dated July 22, 1994, as amended, among Tevecap, TV Show Time, TVA Brasil and Abril S.A. Pursuant to the Service Agreement, TV Show Time and TVA Brasil have agreed to transfer the licenses in the future, which are carried at nil value, to Tevecap at nominal cost. 2.14 Concessions Concessions represent the right to engage in various telecommunications services in defined areas or cities in Brazil. The cost of these concessions is being amortized on the straight-line basis over 10 years. F-15 TEVECAP S.A. AND SUBSIDIARIES 2.15 Deferred income taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when it is more likely than not that some or all of the deferred tax assets will not be realized. 2.16 Debt issuance costs Debt issuance costs are amortized over the term of the underlying debt on a straight-line basis. The results of amortization on a straight-line basis do not differ materially from those obtained by using the interest method. 2.17 Concentrations of credit risk Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable. Such concentrations of credit risk are limited due to the large numbers comprising the Company's subscriber and customer base and their dispersion across different geographic regions. As of December 31, 2001 and 2000, the Company had no other significant concentrations of credit risk. 2.18 Reclassifications Certain prior years amounts have been reclassified for comparative purposes. F-16 TEVECAP S.A. AND SUBSIDIARIES 3. Accounts receivable, net As of December 31, 2001 and 2000, accounts receivable were comprised of: 2001 2000 -------- -------- Subscriptions and installation fees $ 11,934 $ 11,368 Advertising 501 1,022 Programming 182 694 Other 1,495 2,248 Provision for doubtful accounts (7,638) (7,595) -------- -------- $ 6,474 $ 7,737 ======== ======== No single customer accounted for more than 10% of total accounts receivable as of December 31, 2001 and 2000. 4. Inventories, net As of December 31, 2001 and 2000, inventories were comprised of: 2001 2000 -------- -------- Materials and supplies $ 9,012 $ 15,645 Imports in transit 2,454 226 Provision for obsolescence (349) (3,370) -------- -------- $ 11,117 $ 12,501 ======== ======== 5. Prepaid and other assets As of December 31, 2001 and 2000, prepaid expenses were comprised of: 2001 2000 -------- -------- Advances to suppliers $ 170 $ 1,107 Prepaid meals and transportation 69 227 Advances for imports 1,354 1,437 Other 605 1,292 -------- -------- $ 2,198 $ 4,063 ======== ======== F-17 TEVECAP S.A. AND SUBSIDIARIES 6. Related party transactions The following tables summarize the transactions between the Company and its related parties as of December 31, 2001 and 2000 and for the three years ended December 31, 2001: December 31, --------------------------- 2001 2000 -------- -------- Abril (parent company) Accounts receivable $ 73 $ 1 Loans receivable -- 11,481 Loans payable 1,292 -- Accounts payable 2 -- Editora Abril S.A. (under common control with Abril) Accounts receivable 69 49 Loans payable 5,437 141,122 Accounts payable 264 250 Canbras TVA Cabo Ltda. (equity affiliate) Accounts receivable 6 -- Loans receivable 27 5,892 Accounts payable -- 7 Parana Participacoes Ltda. (under common control with Abril) Loans receivable 4,721 -- Zerelda Participacoes S/C Ltda. (equity affiliate) Loans receivable 1,022 -- TV Jacaranda Ltda. (equity affiliate) Loans receivable 1,007 -- Others Accounts receivable 84 46 Loans receivable 134 159 Accounts payable 20 15 F-18 TEVECAP S.A. AND SUBSIDIARIES 6. Related party transactions (Continued) 2001 2000 1999 ------- ------- ------- Abril S.A. (parent company) Net interest income (expense) $21,508 $29,690 $(3,835) Printing costs 3,087 2,763 1,447 Falcon International Communications Services Inc. (shareholder) Consulting fees -- 200 196 TV Filme Inc. (cost method investment) Programming revenue -- -- 184 Canbras TVA Cabo Ltda. (equity affiliate) Programming revenue -- -- 216 California Broadcast Center L.L.C. (cost method investment) Net interest income -- -- 197 The Company and its related parties maintain a cash management system centralized at Editora Abril S.A. The centralized cash management system results in accounts receivable from and payable to related parties depending on the cash needs of the companies. Loans granted to or obtained from related companies, under loan agreements, are denominated in reais and subject to variable interest of 1.01% to 1.53% per month as of December 31, 2001 (1.19 % to 1.44% per month as of December 31, 2000). There is not a defined maturity date for the loans. Tevecap has a credit facility with Abril and Editora Abril S.A. ("Abril Credit Facility") under which Tevecap is allowed to borrow up to $60,000 on a revolving basis. Since June 1996, Tevecap has from time to time requested, and Abril has provided, funding in excess of the aggregate maximum principal amount. On November 19, 2001, Abril increased the Company's capital through the capitalization of $123,159 of such borrowings and the transfer of certain monetary assets and liabilities amounting to $5,525, increasing Abril's ownership interest in the Company from 62.17% to 82.35%. As of December 31, 2001, $6,729 was outstanding under the Abril Credit Facility. Abril has provided a guarantee for equipment imported by TVA Sistema de Televisao S.A., Rede Ajato Ltda. and TVA Sul Parana Ltda. The amount outstanding pursuant to this guarantee as of December 31, 2001 was $2,173. F-19 TEVECAP S.A. AND SUBSIDIARIES 7. Other accounts receivable As of December 31, 2001 and 2000, other accounts receivable were comprised of: 2001 2000 -------- -------- Galaxy Brasil Ltda $ -- $ 1,265 TVA Banda C Ltda -- 945 Multithematiques - Sale of Eurochannel -- 4,036 Tax recoverable 559 802 Other 872 1,765 -------- -------- $ 1,431 $ 8,813 ======== ======== 8. Income taxes The tax effects of temporary differences that give rise to deferred tax assets as of December 31, 2001 and 2000 are as follows: 2001 2000 -------- -------- Deferred tax assets: Net operating loss carryforwards $ 74,674 $102,122 Provision for obsolescence 704 894 Provision for claims 4,281 4,877 Other 398 2,214 -------- -------- Total gross deferred tax asset 80,057 110,107 -------- -------- Less valuation allowance (80,057) (110,107) -------- -------- Net deferred tax asset $ -- $ -- ======== ======== There were no deferred tax liabilities as of December 31, 2001 and 2000. F-20 TEVECAP S.A. AND SUBSIDIARIES 8. Income taxes (Continued) Management has established a full valuation allowance against the deferred tax assets as it is more likely than not that the deferred tax assets will not be realized. As of December 31, 2001, the Company and subsidiaries have unexpirable accumulated tax losses of $219,630. The consolidated income taxes are different from the amount computed using the Brazilian statutory income tax rate for the reasons set forth in the following table:
2001 2000 1999 -------- -------- -------- Income (loss) before income taxes $(73,726) $(28,825) $(73,659) Statutory income tax rate 34% 34% 37% -------- -------- -------- Computed income tax benefit (25,067) (9,801) (27,254) Amortization of deferred charges (1,898) (2,415) (2,750) Translation loss on tax losses 15,676 6,552 34,209 Equity in (income) losses of affiliates (18,067) (27,370) 341 Capital loss on acquisition of investments 2,480 -- -- (Deductible) taxable devaluation gain (loss) for Brazilian statutory purposes 230 1,707 (27,839) Depreciation 2,017 4,371 9,300 Net loss of merged companies 3,069 -- -- Proposed dividend 38,022 -- -- Adjustment to accumulated tax losses 15,013 -- -- Discontinued operations -- -- 54,791 Other (1,425) 506 (1,500) Tax loss carryforward used -- 4,903 -- Increase (decrease) in valuation allowance (30,050) 24,064 (39,192) -------- -------- -------- Total income tax expense per consolidated statements of operations $ -- $ 2,517 $ 106 ======== ======== ========
Income tax expense represents amounts owed by subsidiaries calculated on a stand-alone basis, as Brazilian income tax law does not allow consolidated tax returns. F-21 TEVECAP S.A. AND SUBSIDIARIES 9. Investments Investments as of December 31, 2001 and 2000 were comprised of:
Percentage of Control 2001 2000 ---------- -------- -------- Equity method investments $ 549 $ -- Liability to fund equity method investments Canbras TVA Cabo Ltda 36 $ 2,610 $ 7,938 Tv Jacaranda Ltda 21 11 -- Zerelda Participacoes S/C Ltda 36 598 -- -------- -------- $ 3,219 $ 7,938 ======== ======== Concessions, net: Stations in South of Brazil $ 6,664 $ 7,908 Ype Radio e Televisao Ltda 4,906 5,822 Comercial Cabo Ltda 1,519 1,803 Other 57 60 Accumulated amortization (7,781) (7,674) -------- -------- $ 5,365 $ 7,919 ======== ========
F-22 TEVECAP S.A. AND SUBSIDIARIES 10. Property, plant and equipment, net As of December 31, 2001 and 2000, property, plant and equipment were comprised of:
Annual Depreciation Rate December 31, ------------------------- % 2001 2000 ------------------------ --------- --------- Reception equipment 20 $ 108,399 $ 116,519 Cable plant 10 66,360 79,854 Machinery and equipment 10 55,144 58,386 Decoders 10 64,100 72,710 Leasehold improvements 25 1,199 2,891 Furniture and fixtures 10 1,588 1,871 Premises 10 3,490 3,901 Vehicles 20 1,978 2,592 Software 20 10,465 5,751 Tools 10 743 838 Building 4 2,920 3,462 Other 3,734 4,176 Accumulated depreciation (170,526) (170,440) --------- --------- $ 149,594 $ 182,511 ========= =========
11. Loans As of December 31, 2001 and 2000, loans were comprised of:
------------------------ ------------------------ December 31, 2001 December 31, 2000 ------------------------ ------------------------ Short-term Long-term Short-term Long-term ---------- ---------- ---------- ---------- Senior Notes due 2004 (a) $ -- $ 48,022 $ -- $ 48,022 Participation Certificates (b) -- -- 25,500 -- Euro notes (c) 10,443 -- -- -- Bank loans (d) 9,113 1,073 5,974 1,669 Accrued interest 1,685 -- 1,597 -- ---------- ---------- ---------- ---------- $ 21,241 $ 49,095 $ 33,071 $ 49,691 ========== ========== ========== ==========
a. On November 26, 1996, Tevecap raised funds in a foreign market through a private placement of Senior Notes amounting to $250,000. These Senior Notes mature on November 26, 2004 and are guaranteed by certain of Tevecap's subsidiaries (see Note 25). Interest thereon is at 12.625% per annum and is payable on May 25 and November 25 of each year commencing on May 25, 1997. F-23 TEVECAP S.A. AND SUBSIDIARIES 11. Loans (Continued) On July 28, 1999, the subsidiary TVA Communications Ltd. repurchased in the foreign market $201,978 aggregate principal amount of Tevecap's Senior Notes at a price of $131,201. The purchase was made at 35% less than the carrying value of the notes, which resulted in an extraordinary gain of $70,692 ($53,857 net of bank fees and write-off of unamortized debt issuance costs). As a consequence of this event, the repurchased notes are kept in the portfolio for future placement in the secondary market. At the time the Senior Notes were repurchased, Tevecap obtained consent from the remaining note holders to eliminate the significant restrictive covenants in the Senior Notes agreements. b. On February 7, 2000, the Company, through its wholly-owned subsidiary, TVA Overseas Ltd. raised funds in foreign markets through a private placement of $25,500, 11.5% guaranteed participation certificates ("the participation certificates"). Each participation certificate represented a fractional undivided interest in a $25,500 promissory note ("the GLA Promissory Note") issued by GLA in favor of the Company as partial consideration for the sale by the Company to GLA of the Company's entire equity interest in Galaxy Brasil and TVA Banda C. Holders of the participation certificates, however, had no recourse to GLA for any amounts payable under the participation certificates or the GLA Promissory Note. The participation certificates were repaid at maturity in August 2001. c. In December 2000, the Company, through TVA Inc., a wholly-owned subsidiary, established a $50,000 Guaranteed Short Term Note Program under which TVA Inc. may issue notes (guaranteed by the Company) in the international capital markets from time to time. Since inception of the program, TVA Inc. has issued a total of $10,443 Euro notes under the program. These notes have a single maturity on January 28, 2002. Interest thereon is at 11.25% per year, plus exchange rate variation, payable semiannually. The principal and accrued but unpaid interest were fully repaid in January 2002. F-24 TEVECAP S.A. AND SUBSIDIARIES d. Bank loans are comprised of the following:
2001 2000 ------------------------- ------------------------- Short-Term Long Term Short-Term Long-Term ---------- ---------- ---------- ---------- Banco Bradesco - revolving credit facility, interest of 2.20% per month $ 2,598 -- $ 1,337 -- Banco Daycoval - revolving credit facility, interest of 0.0985% plus Selic (Special system for settlement and custody) rate 1,416 -- -- -- (0.0691% as of December 31, 2001) per month Banco Rural -revolving credit facility, interest of 0.91% plus CDI (Interbank Deposit Certificate) rate (0.0615% as of December 2,339 -- -- -- 31, 2001) per month Banco do Brasil - revolving credit facility, interest of 0.6% plus CDI rate per month 529 -- -- -- Citibank - financial leasing, fixed in U.S. dollars, due August 28, 2004, interest of 13% per annum 749 1,073 -- -- Eximbank - annual interest of LIBOR (4.88% as of December 31, 2001) plus 0.0025%, repaid in full in April 2002 1,674 -- 4,684 1,669 Less: Accrued interest (192) -- (47) ---------- ---------- ---------- ---------- Total $ 9,113 1,073 $ 5,974 1,669 ========== ========== ========== ==========
e. Annual maturities of long-term debt are as follows: 2003 $ 762 2004 48,333 ------- Total $49,095 ======= 12. Other accounts payable As of December 31, 2001 and 2000, other accounts payable were comprised of: 2001 2000 -------- -------- Accounts payable to related companies $ 286 $ 272 Other 1,733 1,691 -------- -------- $ 2,019 $ 1,963 ======== ======== F-25 TEVECAP S.A. AND SUBSIDIARIES 13. Taxes payable other than income taxes As of December 31, 2001 and 2000, taxes payable other than income taxes were comprised of: 2001 2000 -------- -------- COFINS $ 413 $ 564 ICMS 21,968 19,225 PIS 73 2,458 Tax Recovery Program - REFIS 10,926 12,229 Other 344 449 -------- -------- 33,724 34,925 ( - ) current liabilities (5,209) (5,457) -------- -------- $ 28,515 $ 29,468 ======== ======== As a result of the agreement for sale of 100% in Galaxy Brasil Ltda. and TVA Banda C Ltda., the Company assumed liabilities on the negotiation date referring to taxes that were accrued as a charge to the gain determined on the sale of interest in these companies. The balance related to these taxes as of December 31, 2001 is $5,124 classified as ICMS ($8,103 as of December 31, 2000, being $6,848 classified as ICMS and $1,255 as PIS). On April 5, 2000, the Company opted for the REFIS (Federal Government Tax Recovery Program), established by Decree N(Degree) 3.342/00 of January 25, 2000, later changed into Law N(Degree) 9.964/00 of April 10, 2000. With the option for the REFIS, Tevecap is able to finance its taxes payable ($2,177) to the Federal Government for five years and its subsidiaries are able to pay such taxes ($11,138) based on 1.2% of their monthly revenues. Based on their revenue projections, the approximate timing for paying the total account is about five years. The restatement of the tax payable included in the REFIS is made based on the TJLP (Brazilian long-term interest rate). During the year ended December 31, 2000, the Company also renegotiated the ICMS (a state value-added tax) due with the Sao Paulo State Government. Based on the agreement, the Company will finance its taxes payable for five years. F-26 TEVECAP S.A. AND SUBSIDIARIES 14. Other operating expense (income), net
2001 2000 1999 -------- -------- -------- Write-off of assets related to cancellation of subscriptions $ -- $ 4,656 $ 18,407 Loss on disposal of property and equipment 3,763 -- -- Loss on sale of obsolete inventories 1,106 -- -- Provision (reversal of provision) for inventory obsolescence (528) (365) 605 Gain on sale of Eurochannel -- (6,902) -- Other (2,579) -- -- -------- -------- -------- $ 1,762 $ (2,611) $ 19,012 ======== ======== ========
F-27 TEVECAP S.A. AND SUBSIDIARIES 15. Other nonoperating expense (income), net
2001 2000 1999 -------- -------- -------- Write-off of investment in TV Filme Inc -- -- 6,668 Gain on sale of 24% equity interest in HBO Brazil Partners -- (40,454) -- Loss on sale of 50% equity interest in ESPN do -- Brasil Ltda -- 2,139 Other 2,438 3,070 2,248 -------- -------- -------- $ 2,438 $(37,384) $ 11,055 ======== ======== ========
16. Commitments The Company has rented its office space through the year 2006. As of December 31, 2001, future minimum rental payments applicable to operating leases in respect of this space aggregate approximately $3,160, as follows: 2002 $ 632 2003 632 2004 632 2005 632 2006 632 ------ Total $3,160 ====== During the year ended December 31, 1999, the Company's 36%-owned equity investment Canbras TVA Cabo Ltda. issued $30,000 of debt. Such debt is guaranteed by the Company. As of December 31, 2001, $18,500 of the debt is outstanding. F-28 TEVECAP S.A. AND SUBSIDIARIES 17. Shareholders' equity The changes in the number of shares of common stock and redeemable common stock during the years ended December 31, 2001, 2000 and 1999 were as follows: Redeemable common Common stock stock Total ------------ ----------- ----------- Shares as of January 1, 1999 140,700,759 85,637,526 226,338,285 Increase of capital -- -- -- ------------ ----------- ----------- Shares as of December 31, 1999 140,700,759 85,637,526 226,338,285 Increase of capital -- -- -- ------------ ----------- ----------- Shares as of December 31, 2000 140,700,759 85,637,526 226,338,285 Increase of capital 258,882,155 -- 258,882,155 ------------ ----------- ----------- Shares as of December 31, 2001 399,582,914 85,637,526 485,220,440 ============ =========== =========== a) Common stock subject to redemption As of December 31, 2001, 17.6% of the common stock of Tevecap was subject to an Event Put (37.7% in 2000), i.e., a "triggering event" under the Stockholders' Agreement pursuant to which each of the shareholders (other that Abril) may, in certain circumstances, demand that Tevecap purchase all or a portion of its shares, unless the shares of capital stock held by such stockholders are publicly registered, listed or traded. In addition, as of December 31, 2001, 5.8% of these shares are also subject to a Time Put (12.3% in 2000) whereby, pursuant to the Stockholders' Agreement, shareholder Falcon International Communications ("Falcon") may demand that Tevecap buy all or a portion of Falcon's shares of capital stock held in Tevecap if such shares are not publicly registered, listed or traded by September 22, 2002. For purposes of the Event Put, triggering events are: (i) the amount of the capital stock held by a stockholder with an Event Put exceeds the amount allowed under any legal restriction to which such stockholder may be subject ("Regulatory Put"); (ii) a breach without cure within a designated period by certain specified entities/individuals of any representation, warranty, covenant or duty made or owed pursuant to certain agreements; (iii) a breach without cure within a designated period by Abril of the Abril Credit Facility; (iv) the controlling shareholder of Abril ceases to directly or indirectly hold a specified percentage of Tevecap without the approval of the stockholders or ceases to control the voting capital stock held by its affiliates representing 50% or more of the voting capital stock of Tevecap; (v) the Service Agreement as amended, among Tevecap, TV Show Time, TVA Brasil and F-29 TEVECAP S.A. AND SUBSIDIARIES 17. Shareholders' equity (Continued) Abril ceases to be valid or effective or TV Show Time, TVA Brasil and Abril is liquidated or dissolved or files voluntarily, or has filed against it involuntarily, any petition in bankruptcy; or (vi) another stockholder exercises an Event Put other than a Regulatory Put. The Company's management believes that the probability of occurrence of the triggering events, which would permit any of its shareholders to exercise their Event Put, is remote. However, a company that has public debt or equity in the United States of America, and which therefore is required to register its securities with the United States Securities and Exchange Commission, is required for accounting purposes to present redeemable equity securities separately from shareholders' equity, if redemption of such securities is beyond the control of the registrant. That presentation is required even if the likelihood of redemption is remote. The common shares subject to the Time Put are redeemable at fair value as determined by appraisal. Accordingly, the carrying value of such redeemable common stock is adjusted to the fair value when redemption appears probable. In the event Tevecap does not have the funds to satisfy its payment obligations under the Time Put, then, subject to a number of conditions, Tevecap may deliver to Falcon promissory notes payable three years from the issue date thereof. In the event Tevecap is unable to satisfy its payment obligations under these promissory notes, Falcon may be entitled, subject to a number of conditions, to sell its shares of Tevecap to a third party. b) Dividends The Company's shareholders are entitled to minimum dividends of 25% of net income for the year, adjusted according to Brazilian Corporation Law. As the Company has not recorded net income under Brazilian Corporation Law since its inception, no such dividends are payable. 18. Litigation contingencies The Company is party to certain legal actions arising in the ordinary course of its business which, individually or in the aggregate, are not expected to have a material adverse effect on the consolidated financial position of the Company. As of December 31, 2001, the Company had reserved $1,697 as contingent liabilities in connection with certain litigation contingencies where management and legal counsel believe that the risk of loss is probable, primarily involving claims by persons arising in connection with the termination of their employment. F-30 TEVECAP S.A. AND SUBSIDIARIES 18. Litigation contingencies (Continued) The Company's operating companies are currently defending a lawsuit brought by the Escritorio Central de Arrecadacao e Distribuicao (Central Collection and Distribution Office, or "ECAD"), a government-created entity authorized to enforce copyright laws relating to musical works. ECAD filed a lawsuit in 1993 against all pay-television operators in Brazil seeking to collect royalty payments in connection with musical works broadcast by the operators. ECAD is seeking a judgment award of 2.55% of all past and present revenues generated by the operators. The suits are currently being submitted to the Superior Tribunal de Justica in order to determine whether ECAD is entitled to benefit from the copyrights relating to musical works broadcast on pay television. Although the Company intends to continue to vigorously defend these suits, the loss of such suits may have a material adverse effect on the consolidated financial position of the Company. Based on agreements reached by ECAD with other Brazilian television operators, however, management believes that it can reach a negotiated settlement to these suits whereby the Company would make monthly payments to ECAD in an amount significantly lower than that sought by ECAD. 19. Pension plan In April 1996, the Company became a co-sponsor of the private pension entity named Abrilprev Sociedade de Previdencia Privada ("Abrilprev"), the primary objective of which is to grant employees benefits other than those provided by Social Security. The plan is optional to all employees of the sponsoring entities. Abrilprev operates as a Defined Contribution Plan. Company contributions are made based on a fixed percentage applied to the payroll of the sponsoring entities based on actuarial calculations. Contribution expenses amounted to $221 for the year ended December 31, 2001 ($262 in 2000 and $201 in 1999). 20. Abril Health Care Plan In February 1996, the Abril Health Care Plan, Associacao Abril de Beneficios (the "Health Care Plan"), was created to provide health care to Abril companies' employees and their dependents. Both the companies forming part of the Abril Group and the employees thereof contribute monthly to Associacao Abril de Beneficios, the company responsible for management of the plan. In 2001, contributions made by Tevecap and certain affiliates of Associacao Abril de Beneficios amounted to $883 ($939 in 2000 and $933 in 1999). F-31 TEVECAP S.A. AND SUBSIDIARIES 21. Valuation and qualifying accounts and reserves
Provision Deferred For Provision for Provision Taxation Provision Doubtful Inventory For Valuation For Accounts Obsolescence Decoders Allowance Claims ------------ ------------- ------------ ------------ ------------ Balance as of January 1, 1999 $ 11,174 $ 3,130 $ 6,375 $ 125,235 $ 6,421 Additions 196 605 -- -- -- Deductions -- -- (6,375) (39,192) (4,004) ------------ ------------- ------------ ------------ ------------ Balance as of December 31, 1999 $ 11,370 $ 3,735 $ -- $ 86,043 $ 2,417 Additions -- -- -- 24,064 129 Deductions (3,775) (365) -- -- -- ------------ ------------- ------------ ------------ ------------ Balance as of December 31, 2000 $ 7,595 $ 3,370 $ -- $ 110,107 $ 2,546 Additions 43 -- -- -- -- Deductions -- (3,021) -- (30,050) (849) ------------ ------------- ------------ ------------ ------------ Balance as of December 31, 2001 $ 7,638 $ 349 $ -- $ 80,057 $ 1,697 ============ ============= ============ ============ ============
22. Recent accounting pronouncements Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138 (collectively, "SFAS 133"). SFAS 133 establishes accounting and reporting standards requiring that all derivative financial instruments (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. Additionally, SFAS 133 requires that changes in the fair value of derivatives be recognized in earnings unless specific hedge accounting criteria are met. As the Company does not utilize derivative financial instruments, the effect of adopting SFAS 133 on January 1, 2001 did not have a material impact on the Company's consolidated financial statements In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. Recorded goodwill and intangibles will be evaluated against this new criteria and may result in certain intangibles being subsumed into goodwill, or alternatively, amounts initially recorded as goodwill may be separately identified and recognized apart from goodwill. SFAS 142 requires the use of a nonamortization approach to account for purchased goodwill and certain intangibles. Under a nonamortization approach, goodwill and certain intangibles will not be amortized into results of operations, but instead would be reviewed for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles is more than its fair value. The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. Effective January 1, 2002, the Company adopted the provisions of each statement that apply to goodwill and intangible assets acquired prior to June 30, 2001. Based on the Company's initial analysis of SFAS 141 and SFAS 142, management believes that the implementation of these F-32 TEVECAP S.A. AND SUBSIDIARIES pronouncements will not have a material impact on the Company's consolidated results of operations or financial condition. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 requires that the market value of the liabilities related to obligations due to the retirement of assets be recognized in the period in which they occur, if a reasonable estimate of market value is possible. Costs of asset retirement are capitalized as part of the permanent asset cost. In accordance with SFAS 143, the asset retirement obligation is discounted and an increase is recognized by using the "credit adjusted risk-free" interest rate in effect when the obligation was initially recognized. The Company is required to adopt SFAS 143 effective January 1, 2003. Based on an initial analysis of SFAS 143 requirements, management believes that the implementation of this statement will not have a material impact on the Company's consolidated results of operations or financial condition. In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121") but maintains the fundamental provisions of SFAS 121 for (a) recognition/valuation of the provision for impairment of permanent assets to be maintained and used and (b) valuation of permanent assets to be written off due to their sale. SFAS 144 also supersedes the provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business" ("APB 30") with regard to reporting the effects of a disposal of a segment of a business. The Company adopted SFAS 144 effective January 1, 2002. Based on the Company's initial analysis of the SFAS 144 requirements, management believes that the implementation of this pronouncement will not have a material impact on the Company's consolidated results of operations or financial condition. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections." SFAS 145 rescinds SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt," which required that all gains and losses from extinguishment of debt to be aggregated and classified as an extraordinary item if material. SFAS 145 requires that gains and losses from extinguishment of debt be classified as extraordinary only if they meet criteria in APB 30, thus distinguishing transactions that are part of recurring operations from those that are unusual or infrequent, or that meet the criteria for classification as an extraordinary item. SFAS 145 also amends SFAS No. 13, "Accounting for Leases", to require that lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. In addition, SFAS 145 rescinds SFAS 44, "Accounting for Intangible Assets of Motor Carriers," and SFAS 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements," which are not currently applicable to us. The provisions of SFAS 145 as they relate to the rescission of F-33 TEVECAP S.A. AND SUBSIDIARIES SFAS 4 will be applied effective January 1, 2003. Certain provisions related to SFAS 13 are effective for transactions occurring after May 15, 2002. Management does not expect SFAS 145 to have a material impact on the Company's consolidated results of operations or financial condition 23. Discontinued Operations In July 1999, Tevecap consummated the sale of the DBS business, consisting of Galaxy Brasil, TVA Banda C and certain assets related thereto, including its interest in GLA, to GLA and the members thereof Tevecap received net proceeds of $177,600, comprised of cash, a promissory note in the principal amount of $25,500 (which was subsequently paid in 2001), the assumption of certain dollar and real-denominated indebtedness and the release of certain guarantees given by Tevecap and one of its subsidiaries in respect to certain obligations of Galaxy Brasil. 24. Segments Segment information has been prepared in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company's reportable segments are determined based on products and services provided by each segment: a. Pay Tv - programming packages consisting of 15 to 57 television channels; b. Internet - high speed broadband internet access; and c. Programming - programming which concentrates Tevecap's programming interest at TVA Channels Ltda. During 1999 and 2000, the Company sold certain operations of the Programming segment. As a result, management changed the structure of its internal organization and transferred the remaining operations of the Programming segment to the Pay TV segment, thereby eliminating the Programming segment for 2000. It was impracticable to restate prior periods to conform to the current year presentation. F-34 TEVECAP S.A. AND SUBSIDIARIES 2001
Pay Tv Internet TOTAL -------- -------- -------- Gross revenues 101,572 4,362 105,934 Direct operating expenses and SG&A expenses 87,502 8,878 96,380 Depreciation and amortization 32,969 1,395 34,364 Other operating expense, net 1,762 -- 1,762 Interest income (4,182) (18) (4,200) Interest expense 37,830 19 37,849 Foreign currency transaction loss, net 11,038 29 11,067 Other nonoperating expense, net 2,379 59 2,438 Income tax expense -- -- -- Equity in losses of affiliates 2,375 -- 2,375 Minority interest (284) -- (284) Net loss (69,817) (6,000) (75,817) Capital expenditures 30,029 610 30,639 Total assets 195,852 2,982 198,834
F-35 TEVECAP S.A. AND SUBSIDIARIES 24. Segments (Continued) 2000
Pay Tv Internet TOTAL -------- -------- -------- Gross revenues 119,030 1,981 121,011 Direct operating expenses and SG&A expenses 90,571 11,459 102,030 Depreciation and amortization 42,802 488 43,290 Other operating income, net 2,611 -- 2,611 Interest income 5,355 19 5,374 Interest expense 45,067 2 45,069 Foreign currency transaction loss, net 4,816 -- 4,816 Other nonoperating income (expense), net 37,427 (43) 37,384 Income tax expense 2,517 -- 2,517 Equity in losses of affiliates 2,004 -- 2,004 Minority interest 491 -- 491 Net loss (22,863) (9,992) (32,855) Capital expenditures 24,232 2,465 26,716 Total assets 230,016 3,594 279,357
F-36 TEVECAP S.A. AND SUBSIDIARIES 1999
Discontinued Pay Tv Internet Programming Operations TOTAL -------- -------- ----------- ------------ -------- Gross revenues 111,357 112 4,729 -- 116,198 Direct operating expenses and SG&A expenses 75,559 1,649 6,802 -- 84,010 Depreciation and amortization 55,427 139 1,313 -- 56,879 Other operating expense, net 19,012 -- -- 19,012 Interest income 5,793 1 102 -- 5,896 Interest expense 22,230 -- 24 -- 22,254 Foreign currency translation loss, net 2,702 -- (159) -- 2,543 Other nonoperating expense, net 11,045 -- 10 -- 11,055 Income tax expense 106 -- -- 106 Equity in losses of affiliates 4,909 -- 329 -- 5,238 Minority interest 678 -- -- 678 Discontinued operations - gain on sale -- -- 94,344 94,344 Extraordinary item - gain on debt repurchase 53,857 -- -- 53,857 Net income (loss) (19,305) (1,675) (3,488) 94,344 69,876 Capital expenditures 25,878 -- 49 25,927 Total assets 278,928 1,622 9,398 289,948
F-37 TEVECAP S.A. AND SUBSIDIARIES 25. Financial information for subsidiary guarantors and non-guarantor subsidiaries Tevecap conducts a significant portion of its business through subsidiaries. The $250,000 12 5/8% Senior Notes issued to institutional buyers in November 1996 are jointly and severally, irrevocably and fully and unconditionally guaranteed on a senior basis by all of Tevecap's direct and indirect subsidiaries except for TVA Communications Aruba N.V., TVA Channels Ltda., Rede Ajato Ltda., Ype Radio and Televisao Ltda., TVA Inc, TVA Overseas Ltd. and TVA TCG Sistema de Televisao Porto Alegre. Presented below is condensed consolidating financial information for: i) Tevecap on a parent company only basis; ii) the Wholly Owned Guarantor Subsidiaries; iii) the Majority-Owned Guarantor Subsidiaries; iv) Non-guarantor Subsidiaries; v) Eliminations; and vi) Consolidated Tevecap S.A. and subsidiaries. The equity method has been used by Tevecap, the Wholly Owned Guarantor Subsidiaries and the Majority-Owned Guarantor Subsidiaries with respect to investments in their subsidiaries. The following sets forth the Wholly Owned Guarantor Subsidiaries, the Majority-Owned Guarantor Subsidiaries and the Non-Guarantor Subsidiaries: a) Wholly-Owned Guarantor Subsidiaries - TVA Distribuidora S.A. - TVA Programadora Ltda. - TVA PAR S.A. - TVA Communications Ltd. - Comercial Cabo TV Sao Paulo Ltda. - TVA Sistema de Televisao S.A. (majority-owned in 2000 and 1999) - TVA Sul Parana Ltda. (majority-owned in 2000 and 1999) b) Majority-Owned Guarantor Subsidiaries - CCS Camboriu Cable System de Telecomunicacoes Ltda. F-38 TEVECAP S.A. AND SUBSIDIARIES 25. Financial information for subsidiary guarantors and non-guarantor subsidiaries (Continued) c) Non-Guarantor Subsidiaries - TVA Communications Aruba N.A. - TVA TCG Sistema de Televisao de Porto Alegre S.A. - Rede Ajato Ltda. - TVA Channels Ltda. - Ype Radio e Televisao Ltda. - TVA Overseas Ltd. - TVA Inc Separate financial statements have been presented for TVA Sistema de Televisao S.A., TVA Sul Parana Ltda and CCS Camboriu Cable System Telecomunicacoes Ltda. as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001. During 1999, TVA Sul Participacoes S.A, TVA Sul Foz do Iguacu Ltda. and TVA Sul Santa Catarina Ltda. were merged into TVA Sul Parana Ltda. F-39 TEVECAP S.A. AND SUBSIDIARIES 25. Financial information for subsidiary guarantors and non-guarantor subsidiaries (Continued) Consolidated Balance Sheets as of December 31, 2001
Wholly- Majority- Owned Owned Non- Parent Guarantor Guarantor guarantor Assets Company Subsidiaries Subsidiaries subsidiaries Eliminations Consolidated ----------- ----------- ----------- ----------- ----------- ----------- Current assets Cash and cash equivalents $ 9 $ 603 $ 20 $ 2 $ $ 634 Accounts receivable, net -- 6,283 50 147 (6) 6,474 Inventories, net -- 11,043 74 -- 11,117 Prepaid and other assets 489 1,705 2 2 2,198 Accounts receivable from related parties 378 71 5 161 (383) 232 Other accounts receivable 123 67,296 116 54 (66,158) 1,431 ----------- ----------- ----------- ----------- ----------- ----------- Total current assets 999 87,001 267 366 (66,547) 22,086 ----------- ----------- ----------- ----------- ----------- ----------- Property, plant and equipment, net -- 145,859 3,079 2,796 (2,140) 149,594 Investments Equity basis 63,684 1,792 -- 549 (65,476) 549 Concessions, net 2,267 3,098 -- -- -- 5,365 Loans to related companies 456,843 20,246 566 65,518 (536,262) 6,911 Debt Issuance costs, net 937 -- -- -- 937 Dividends receivable 184,107 -- -- -- (184,107) -- Judicial deposits -- 12,829 199 -- 13,028 Other -- 202,342 -- -- (201,978) 364 ----------- ----------- ----------- ----------- ----------- ----------- Total assets $ 708,837 $ 473,167 $ 4,111 $ 69,229 $(1,056,510) $ 198,834 =========== =========== =========== =========== =========== ===========
F-40 TEVECAP S.A. AND SUBSIDIARIES 25. Financial information for subsidiary guarantors and non-guarantor subsidiaries (Continued) Consolidated Balance Sheets as of December 31, 2001
Wholly- Majority- Owned Owned Non- Parent Guarantor Guarantor Guarantor Liabilities and Shareholders' Equity Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated ----------- ------------ ------------ ------------ ------------ ------------ Current Liabilities Loans 66,730 9,248 -- 11,421 (66,158) 21,241 Film suppliers -- 11,182 276 -- -- 11,458 Other suppliers 251 5,714 30 218 (7) 6,206 Taxes payable other than income taxes 1,703 3,280 155 71 -- 5,209 Accrued payroll and related liabilities -- 1,443 17 100 -- 1,560 Advance payments received from subscribers -- 199 8 (3) -- 204 Other accounts payable 359 1,830 147 65 (382) 2,019 ----------- ----------- ----------- ----------- ----------- ----------- Total current liabilities 69,043 32,896 633 11,872 (66,547) 47,897 ----------- ----------- ----------- ----------- ----------- ----------- Long-term liabilities Loans 250,000 996 -- 77 (201,978) 49,095 Loans from related companies 18,878 487,189 -- 36,923 (536,261) 6,729 Taxes payable other than income taxes 5,341 22,685 489 -- -- 28,515 Provision for claims -- 1,689 3 5 -- 1,697 Dividends payable -- 145,361 -- 38,746 (184,107) -- Liability to fund equity investee 289,850 -- -- 11 (286,642) 3,219 ----------- ----------- ----------- ----------- ----------- ----------- Total long-term liabilities 564,069 657,920 492 75,762 (1,208,988) 89,255 ----------- ----------- ----------- ----------- ----------- ----------- Minority interest -- -- 1,194 -- -- 1,194 Redeemable common stock 115,252 -- -- -- -- 115,252 Shareholders' deficit Common stock 370,313 100,899 2,817 3,388 (106,391) 371,026 Accumulated other comprehensive income (loss) 15,381 59,748 (949) 2,081 (59,406) 16,855 Accumulated deficit (425,221) (378,296) (76) (23,874) 384,822 (442,645) ----------- ----------- ----------- ----------- ----------- ----------- Total shareholders' deficit (39,527) (217,649) 1,792 (18,405) 219,025 (54,764) ----------- ----------- ----------- ----------- ----------- ----------- Total liabilities and shareholders' deficit 708,837 473,167 4,111 69,229 (1,056,510) 198,834 =========== =========== =========== =========== =========== ===========
F-41 TEVECAP S.A. AND SUBSIDIARIES 25. Financial information for subsidiary guarantors and non-guarantor Subsidiaries (Continued) Consolidated Statements of Operations for the year ended December 31, 2001
Wholly- Owned Majority- Non- Parent Guarantor Owned Guarantor Description Company Subsidiaries Guarantor Subsidiaries Eliminations Consolidated ----------- ------------ ----------- ------------ ------------ ------------ Gross revenues Monthly subscriptions -- 84,192 2,025 2,029 -- 88,246 Installation -- 200 20 50 -- 270 Advertising -- 1,005 -- -- -- 1,005 Other -- 17,033 130 302 (1,052) 16,413 ----------- ----------- ----------- ----------- ----------- ----------- Net revenue -- 102,430 2,175 2,381 (1,052) 105,934 ----------- ----------- ----------- ----------- ----------- ----------- Direct operating expenses Taxes on revenue -- 14,926 553 157 -- 15,636 Payroll and benefits (132) 6,669 58 1,909 -- 8,504 Programming 24 24,577 655 493 -- 25,749 Transponder lease cost -- 22 -- -- -- 22 Technical assistance -- 1,839 24 5 -- 1,868 TVA Magazine -- 2,369 20 -- -- 2,389 Pole rental -- 2,779 35 -- -- 2,814 Other costs 22 6,983 118 3,879 (1,052) 9,950 ----------- ----------- ----------- ----------- ----------- ----------- (86) 60,164 1,463 6,443 (1,052) 66,932 ----------- ----------- ----------- ----------- ----------- ----------- Selling, general and administrative expenses Payroll and benefits 22 9,586 80 107 -- 9,795 Advertising and promotion 9 5,378 32 359 -- 5,778 Rent -- 1,739 4 34 -- 1,777 Other general and administrative expenses 1,239 10,569 233 57 -- 12,098 ----------- ----------- ----------- ----------- ----------- ----------- 1,270 27,272 349 557 -- 29,448 ----------- ----------- ----------- ----------- ----------- ----------- Depreciation and amortization 646 33,159 356 580 (377) 34,364 Other operating expense, net -- 1,757 5 -- -- 1,762 ----------- ----------- ----------- ----------- ----------- ----------- Operating loss (1,830) (19,922) 2 (5,199) (377) (26,572) ----------- ----------- ----------- ----------- ----------- ----------- Interest income (3,046) (26,607) (65) (19) 25,537 (4,200) Interest expense 55,247 3,530 213 4,396 (25,537) 37,849 Transaction 44,407 (24,226) -- (9,114) -- 11,067 Other nonoperating (expenses) income, net 5,445 329 5 (3,341) -- 2,438 ----------- ----------- ----------- ----------- ----------- ----------- Income (loss) before income taxes, equity and minority interest (103,883) 27,052 (151) 2,879 (377) (73,726) Income taxes -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- Income ( loss) before equity and minority interest (103,883) 27,052 (151) 2,879 (377) (73,726) Equity in (losses) of affiliates (22,247) -- -- 315 24,307 2,375 ----------- ----------- ----------- ----------- ----------- ----------- Income (loss) before minority interest (81,636) 27,052 (151) 2,564 23,930 (76,101) Minority interest -- -- (27) -- (257) (284) ----------- ----------- ----------- ----------- ----------- ----------- Net income (loss) (81,636) 27,052 (124) 2,564 23,673 (75,817) =========== =========== =========== =========== =========== ===========
F-42 TEVECAP S.A. AND SUBSIDIARIES 25. Financial information for subsidiary guarantors and non-guarantor subsidiaries (Continued) Consolidated Statement's of Cash Flows for the year ended December 31, 2001
Wholly- Majority- Non- Parent Owned Owned Guarantor Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------ ------------ ------------ ------------ Cash flows from operating activities: Net loss (75,814) 25,372 (68) (1,702) (23,605) (75,817) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation -- 32,493 357 580 (377) 33,053 Amortization 646 665 -- -- 1,311 Amortization of debt issuance cost 192 -- -- -- 192 Provision for doubtful accounts -- 7,460 (7,281) (136) -- 43 Provision for equipment and inventory obsolescence -- 344 (3,365) -- -- (3,021) Provision for claims -- 1,689 (2,019) (519) -- (849) Minority interest -- -- -- (284) (284) Disposal and write-off of property, plant and 10 877 2 185 -- 1,074 equipment Write-off of investments (6,620) (544) 5,516 1,648 -- -- Equity in losses of affiliates (22,248) 41 315 24,267 2,375 Foreign currency transaction loss, net 44,407 (24,231) 5 (9,114) 11,067 Changes in operating assets and liabilities: Accounts receivable -- (13,743) 16,152 979 (2,168) 1,220 Prepaid and other assets 291 (1,705) 2,936 343 -- 1,865 Accrued interest 45,347 (23,787) (36) 7,813 -- 29,337 Inventories -- (11,387) 15,792 -- -- 4,405 Suppliers (275) 16,896 (13,890) (1,358) 2,165 3,538 Taxes payable other than income taxes (3,282) 25,965 (23,459) (425) -- (1,201) Accrued payroll and related liabilities -- 1,443 (1,923) (430) -- (910) Advances received from subscribers -- 199 (239) (9) -- (49) Other 4,176 (12,618) 11,974 729 (2) 4,263 --------- --------- --------- --------- --------- --------- Net cash (used in) provided by operating activities (13,170) 25,429 454 (1,101) -- 11,612 --------- --------- --------- --------- --------- --------- Cash flows from investing activities: Purchase of property, plant and equipment -- (31,857) (151) 1,369 -- (30,639) Collection of promissory note -- -- 28,236 -- 28,236 Loans to related companies (79,489) (19,853) (1,032) (11,145) 100,823 (10,696) Repayment of loans to related companies 83,187 4,516 467 11,531 (74,451) 25,250 Purchases of investments (7,393) -- (852) -- (8,245) --------- --------- --------- --------- --------- --------- Net cash used in investing activities (3,695) (47,194) (716) 29,139 26,372 3,906 --------- --------- --------- --------- --------- --------- Cash flows from financing activities: Bank loans -- 10,078 11,213 -- 21,291 Dividends receivable and payable (137,782) 99,036 38,746 -- -- Transfer of investments to dividends 188,991 (141,806) (47,185) -- -- Loans from shareholders 13,306 71,153 29,669 (100,822) 13,306 Repayments of loans from shareholders (23,494) (39,752) (34,698) (74,450) (23,494) Repayments of loans from banks (6,391) (9,155) (29,296) -- (44,842) --------- --------- --------- --------- --------- --------- Net cash provided by financing activities 34,630 (10,446) (31,551) (26,372) (33,739) --------- --------- --------- --------- --------- --------- Effect of exchange rate changes (17,782) 32,792 26 2,210 -- 17,246 --------- --------- --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents (17) 581 (236) (1,303) -- (975) Cash and cash equivalents at beginning of the period 26 22 256 1,305 -- 1,609 --------- --------- --------- --------- --------- --------- Cash and cash equivalents at end of the period 9 603 20 2 -- 634 ========= ========= ========= ========= ========= =========
F-43 TEVECAP S.A. AND SUBSIDIARIES 25. Financial information for subsidiary guarantors and non-guarantor subsidiaries (Continued) Consolidated Balance Sheets as of December 31, 2000
Wholly- Majority- Owned Owned Non- Parent Guarantor Guarantor guarantor Assets company Subsidiaries Subsidiaries subsidiaries Eliminations Consolidated ------------ ------------ ------------ ------------ ------------ ------------ Current assets Cash and cash equivalents $ 26 $ 22 $ 256 $ 1,305 $ -- $ 1,609 Accounts receivable, net -- -- 8,919 990 (2,172) 7,737 Inventories, net -- -- 12,501 -- -- 12,501 Prepaid and other assets 780 -- 2,938 345 -- 4,063 Accounts receivable from related parties 674 3 2,535 3,181 (6,297) 96 Promissory note -- -- -- 27,744 27,744 Other accounts receivable 1,636 40,658 6,987 190 (40,658) 8,813 ------------ ------------ ------------ ------------ ------------ ------------ Total current assets 3,116 40,683 34,136 33,755 (49,127) 62,563 ------------ ------------ ------------ ------------ ------------ ------------ Property, plant and equipment, net 10 325 179,307 5,856 (2,987) 182,511 Investments Equity basis 180,576 42,368 -- -- (222,944) -- Concessions, net -- 3,460 4,459 -- -- 7,919 Loans to related companies 527,513 455,364 -- 58,928 (1,024,273) 17,532 Debt Issuance costs, net 640 -- -- -- -- 640 Dividends receivable 46,325 -- -- -- (46,325) -- Judicial deposits 201,978 7,934 258 (201,978) 8,192 ------------ ------------ ------------ ------------ ------------ ------------ Total assets $ 758,180 $ 744,178 $ 225,836 $ 98,797 $ (1,547,634) $ 279,357 ============ ============ ============ ============ ============ ============
F-44 TEVECAP S.A. AND SUBSIDIARIES 25. Financial information for subsidiary guarantors and non-guarantor subsidiaries (Continued) Consolidated Balance Sheets as of December 31, 2000
Wholly- Majority- Owned Owned Non- Parent Guarantor Guarantor Guarantor Liabilities and Shareholders' Equity Company Subsidiaries Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------ ------------ ------------ ------------ Current Liabilities Loans 572 -- 6,021 26,478 -- 33,071 Film suppliers -- -- 5,103 19 -- 5,122 Other suppliers 526 -- 9,093 1,557 (2,172) 9,004 Taxes payable other than income taxes 1,858 -- 3,439 160 -- 5,457 Accrued payroll and related liabilities -- -- 1,940 530 -- 2,470 Advance payments received from subscribers -- -- 247 6 -- 253 Other accounts payable 40,811 49 5,308 2,750 (46,955) 1,963 -------- ------------ ------------ ------------ ------------ ------------ Total current liabilities 43,767 49 31,151 31,500 (49,127) 57,340 -------- ------------ ------------ ------------ ------------ ------------ Long-term liabilities Loans 250,000 -- 1,669 -- (201,978) 49,691 Loans from related companies 151,732 506,460 465,699 41,504 (1,024,273) 141,122 Taxes payable other than income taxes 8,468 -- 20,664 336 -- 29,468 Provision for claims -- -- 2,022 524 -- 2,546 Dividends payable -- 46,325 -- -- (46,325) -- Liability to fund equity investee 299,738 298,249 -- -- (590,049) 7,938 -------- ------------ ------------ ------------ ------------ ------------ Total long-term liabilities 709,938 851,034 490,054 42,364 (1,862,625) 230,765 -------- ------------ ------------ ------------ ------------ ------------ Minority interest -- -- 2,041 -- -- 2,041 Redeemable common stock, no par value 151,260 -- -- -- -- 151,260 Shareholders' deficit Paid-in capital 241,629 87,247 55,040 11,260 (152,834) 242,342 Accumulated other comprehensive loss Cumulative translation adjustment (2,999) 11,695 27,913 (3,894) (34,270) (1,555) Accumulated deficit (385,415) (205,847) (380,363) 17,567 551,222 (402,836) -------- ------------ ------------ ------------ ------------ ------------ Total shareholders' deficit (146,785) (106,905) (297,410) 24,933 364,118 (162,049) -------- ------------ ------------ ------------ ------------ ------------ Total liabilities and shareholders' Deficit 758,180 744,178 225,836 98,797 (1,547,634) 279,357 ======== ============ ============ ============ ============ ============
F-45 TEVECAP S.A. AND SUBSIDIARIES 25. Financial information for subsidiary guarantors and non-guarantor Subsidiaries (Continued) Consolidated Statements of Operations for the year ended December 31, 2000
Wholly- Owned Majority- Non- Parent Guarantor Owned Guarantor Description Company Subsidiaries Guarantor Subsidiaries Eliminations Consolidated -------- ------------ --------- ------------ ------------ ------------ Gross revenues Monthly subscriptions 96,140 994 97,134 Installation 901 67 968 Advertising 2,503 2,503 Indirect programming 357 357 Other 21,304 (1,255) 20,049 -------- ------------ -------- ------------ ------------ -------- Net revenue 121,205 1,061 (1,255) 121,011 -------- ------------ -------- ------------ ------------ -------- Direct operating expenses Taxes on revenue 13,130 15 13,145 Payroll and benefits 6,522 2,707 9,229 Programming 25,994 110 26,104 Transponder lease cost 2,283 125 2,408 Technical assistance 2,415 -- 2,415 TVA Magazine 2,679 (104) 2,575 Pole rental 3,535 -- 3,535 Other costs 6,369 2,767 9,136 -------- ------------ -------- ------------ ------------ -------- 62,927 5,620 68,547 -------- ------------ -------- ------------ ------------ -------- Selling, general and administrative expenses Payroll and benefits 13,817 1,125 14,942 Advertising and promotion 5,193 2,137 7,330 Rent 1,935 87 2,022 Other general and administrative expenses 1,181 7,627 1,636 1,255 9,189 -------- ------------ -------- ------------ ------------ -------- 1,181 28,572 4,985 1,255 33,483 -------- ------------ -------- ------------ ------------ -------- Depreciation -- -- 40,783 1,290 451 41,622 Amortization -- 822 846 -- -- 1,668 Other -- -- 4,291 (6,902) -- (2,611) -------- ------------ -------- ------------ ------------ -------- Operating loss (1,181) (822) (16,214) (3,932) 451 (21,698) -------- ------------ -------- ------------ ------------ -------- Interest income (2,124) (25,632) (1,321) (1,865) 25,568 (5,374) Interest expense 63,643 195 3,725 3,074 (25,568) 45,069 Transaction 21,690 (20,208) 1,414 1,920 -- 4,816 Other nonoperating (expenses) income, net 1,685 78 2,256 (41,403) -- (37,384) -------- ------------ -------- ------------ ------------ -------- Income (loss) before income taxes, equity, discontinued operations and minority interest (86,075) 44,745 (22,288) 34,342 451 (28,825) Income taxes 2,244 -- 273 -- -- 2,517 -------- ------------ -------- ------------ ------------ -------- Income (loss) before equity, discontinued operations and minority interest (88,319) 44,745 (22,561) 34,342 451 (31,342) Equity in (losses) of affiliates (55,412) (22,288) -- -- 79,704 2,004 -------- ------------ -------- ------------ ------------ -------- Income (loss) before discontinued operations and minority interest (32,907) 67,033 (22,561) 34,342 (79,253) (33,346) Minority interest -- -- (491) -- -- (491) -------- ------------ -------- ------------ ------------ -------- Net income (loss) (32,907) 67,033 (22,070) 34,342 (79,253) (32,855) ======== ============ ======== ============ ============ ========
F-46 TEVECAP S.A. AND SUBSIDIARIES 25. Financial information for subsidiary guarantors and non-guarantor subsidiaries (Continued) Consolidated Statement's of Cash Flows for the year ended December 31, 2000
Wholly- Owned Majority- Non- Parent Guarantor Owned Guarantor Parent Company Subsidiaries Guarantor Subsidiaries Eliminations Consolidated --------- ------------ --------- ------------ ------------ ------------ Cash flows from operating activities: Net loss (32,907) 67,033 (14,917) 27,189 (79,253) (32,855) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation 40,783 1,290 (451) 41,622 Amortization 822 846 1,668 Amortization of debt issuance cost 219 219 Provision for doubtful accounts (3,771) (4) (3,775) Provision for equipment and inventory obsolescence (365) (365) Provision for claims 209 (80) 129 Minority interest (745) 254 (491) Disposal and write-off of property, plant and 2,046 1,493 (1,493) 2,046 equipment Gain on sales of assets (40,454) (40,454) Write-off of investments (5,124) 5,132 8 Equity in losses of affiliates (55,412) (22,288) 79,704 2,004 Foreign currency transactions loss, net 21,690 (20,208) 1,414 1,920 4,816 Changes in operating assets and liabilities: Film exhibition rights 1,278 1,278 Accounts receivable 2,472 (494) 1,622 3,600 Prepaid and other assets 354 (473) (332) (451) Promissory notes 25,500 (25,500) -- Accrued interest 56,734 (25,500) 1,885 (502) (2) 32,615 Inventories (1,823) (1,823) Suppliers (281) (1) (671) (531) (1,764) (3,248) Taxes payable other than income taxes 2,445 3,548 185 6,178 Accrued payroll and related liabilities 72 9 81 Advances received from subscribers (686) 1 (685) Other 915 76 (6,806) (3,490) 142 (9,163) -------- -------- -------- -------- -------- -------- Net cash (used in) provided by operating activities 19,257 (5,190) 23,018 (32,890) (1,241) 2,954 -------- -------- -------- -------- -------- -------- Cash flows from investing activities: Purchase of property, plant and equipment (313) (25,410) (2,484) 1,491 (26,716) Cash received on sale of assets 43,000 43,000 Loans to related companies (99,335) (40,958) (58,928) 180,016 (19,205) Repayments of loans to related companies 59,355 29,507 (79,911) 8,951 Investments in equity and cost investments (9) 9 -------- -------- -------- -------- -------- -------- Net cash used in investing activities (39,980) (11,773) (25,410) (18,412) 101,605 6,030 -------- -------- -------- -------- -------- -------- Cash flows from financing activities: Bank loans 1,252 25,500 26,752 Capital contributions (2,546) 2,546 Dividends receivable and payable 23,597 (23,597) Loans from shareholders 37,364 92,981 37,106 38,217 (180,449) 25,219 Repayments of loans from shareholders (37,342) (50,574) (21,844) (7,833) 80,251 (37,342) Repayments of loans from banks (6,060) (11,315) (17,375) -------- -------- -------- -------- -------- -------- Net cash provided by financing activities 17,559 16,264 5,199 58,430 (100,198) (2,746) -------- -------- -------- -------- -------- -------- Effect of exchange rate changes 3,179 711 (4,332) (5,967) (166) (6,575) -------- -------- -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents 15 12 (1,525) 1,161 (337) Cash and cash equivalents at beginning of the period 11 10 1,781 144 1,946 -------- -------- -------- -------- -------- -------- Cash and cash equivalents at end of the period 26 22 256 1,305 1,609 ======== ======== ======== ======== ======== ========
F-47 TEVECAP S.A. AND SUBSIDIARIES 25. Financial information for subsidiary guarantors and non-guarantor Subsidiaries (Continued) Consolidated Statements of Operations for the year ended December 31, 1999
Wholly- Owned Majority- Non- Parent Guarantor Owned Guarantor Description Company Subsidiaries Guarantor Subsidiaries Eliminations Consolidated --------- ------------ --------- ------------ ------------ ------------ Gross revenues Monthly subscriptions 93,989 66 94,055 Installation 1,872 28 1,900 Advertising 1,361 236 1,597 857 2,865 3,722 Other 13,191 1,733 14,924 -------- ------------ -------- -------- ------------ -------- Net revenue 111,270 4,928 116,198 -------- ------------ -------- -------- ------------ -------- Direct operating expenses Taxes on revenue 12,381 401 12,782 Payroll and benefits 5,036 2,821 7,857 Programming 22,907 1,259 24,166 Transponder lease cost 1,449 526 1,975 Technical assistance 1,311 1,311 TVA Magazine 2,162 320 2,482 Pole rental 2,935 2,935 Other costs 1,754 2,040 1,118 4,912 -------- ------------ -------- -------- ------------ -------- 1,754 50,221 6,445 58,420 -------- ------------ -------- -------- ------------ -------- Selling, general and administrative expenses Payroll and benefits 10,611 814 11,425 Advertising and promotion 2,487 1,158 3,645 Rent 1,958 47 2,005 Other selling, general and administrative expenses 3,430 4,820 265 8,515 -------- ------------ -------- -------- ------------ -------- 3,430 19,876 2,284 25,590 -------- ------------ -------- -------- ------------ -------- Depreciation 54,215 1,451 (492) 55,174 Amortization 840 865 1,705 Other 18,407 605 19,012 -------- ------------ -------- -------- ------------ -------- Operating loss (23,591) (840) (14,512) (5,252) 492 (43,703) -------- ------------ -------- -------- ------------ -------- Interest income (3,188) (26,724) (10,692) (165) 34,873 (5,896) Interest expense 50,687 1,201 5,215 24 (34,873) 22,254 Translation gain (loss) 80 190 2,399 (126) 2,543 Other nonoperating (expenses) income, net 28,363 (69,856) 52,538 10 11,055 Dividends (76,426) 76,426 -------- ------------ -------- -------- ------------ -------- Income (loss) before income taxes, equity, discontinued operations and minority interest (23,107) 17,923 (63,972) (4,995) 492 (73,659) Income taxes 106 106 -------- ------------ -------- -------- ------------ -------- Income (loss) before equity, discontinued operations and minority interest (23,107) 17,923 (64,078) (4,995) 492 (73,765) Equity in (losses) of affiliates 9,123 78,998 329 (83,212) 5,238 -------- ------------ -------- -------- ------------ -------- Income (loss) before discontinued operations and minority interest (32,230) (61,075) (64,078) (5,324) 83,704 (79,003) Minority interest (678) (678) -------- ------------ -------- -------- ------------ -------- Income (loss/) before discontinued operations and extraordinary item (32,230) (61,075) (63,400) (5, 324) 83,704 (78,325) Discontinue operations (94,344) (94,344) -------- ------------ -------- -------- ------------ -------- Income (loss) from continuing operations before extraordinary item 62,114 (61,075) (63,400) (5, 324) 83,704 16,019 Extraordinary item - gain on debt repurchase (53,857) (53,857) -------- ------------ -------- -------- ------------ -------- Net income (loss) 62,114 (7,218) (63,400) (5, 324) 83,704 69,876 ======== ============ ======== ======== ============ ========
F-48 TEVECAP S.A. AND SUBSIDIARIES 25. Financial information for subsidiary guarantors and non-guarantor subsidiaries (Continued) Consolidated Statement's of Cash Flows for the year ended December 31, 1999
Wholly- Owned Majority- Non- Parent Guarantor Owned Guarantor Parent Company Subsidiaries Guarantor Subsidiaries Eliminations Consolidated ------- ------------ --------- ------------ ------------- ------------ Cash flows from operating activities: Net loss 62,114 (7,218) (63,400) (5,324) 83,704 69,876 Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation 54,215 1,451 (492) 55,174 Amortization 840 865 1,705 Amortization of debt issuance cost 219 219 Write off debt issuance cost 5,185 5,185 Provision for doubtful accounts 162 34 196 Provision for equipment and inventory obsolescence 605 605 Provision for claims (3,751) (253) (4,004) Minority interest (678) (678) Disposal and write-off of property, plant and 57,028 57,028 equipment Gain on sale of assets (93,689) (65,949) (159,638) Write-off of investments in TV Filme Inc. 6,668 6,668 Buy back gain of Senior Notes (70,692) (70,692) Equity in losses of affiliates 9,123 78,998 329 (83,212) 5,238 Changes in operating assets and liabilities: Film exhibition rights 290 290 Accounts receivable 10,207 2,690 24 12,921 Prepaid and other assets 1,171 133 260 1,564 Accrued interest 46,552 (25,506) (6,820) 109 (1) 14,334 Inventories 3,982 3,982 Suppliers 22 1 (36,551) (1,280) 11,898 (25,910) Taxes payable other than income taxes 7,877 6,584 52 14,513 Accrued payroll and related liabilities (1,251) (317) (1,568) Advances received from subscribers (1,066) 2 (1,064) Other (280) (52) (4,976) 580 349 (4,379) -------- -------- -------- -------- ------------ -------- Net cash (used in) provided by operating activities 38,294 (82,910) 15,288 (1,377) 12,270 (18,435) -------- -------- -------- -------- ------------ -------- Cash flows from investing activities: Purchase of property, plant and equipment (10) (24,260) (1,657) (25,927) Loans to related companies (81,214) (67,107) (117) 148,438 Cash received on sale of assets 47,542 130,000 177,542 Repayments of loans to related companies 39,172 20,988 218 (58,198) 2,180 Purchase of investments (840) (1) (1,788) 840 (1,789) -------- -------- -------- -------- ------------ -------- Net cash used in investing activities 4,650 83,881 (24,160) (3,445) 91,080 152,006 -------- -------- -------- -------- ------------ -------- Cash flows from financing activities: Bank loans 6,661 6,661 Capital contributions 840 (840) Dividends payable (76,426) 76,426 Repayments of loans from shareholders (11,430) (23,387) (18,571) (3,971) 45,929 (11,430) Loans from shareholders 63,695 76,711 63,634 6,306 (146,651) 63,695 Loans from related companies 1,788 (1,788) Repayments of loans from banks (18,811) (131,286) (41,851) (191,948) -------- -------- -------- -------- ------------ -------- Net cash provided by financing activities (42,972) (1,536) 9,873 4,963 (103,350) (133,022) -------- -------- -------- -------- ------------ -------- Net increase (decrease) in cash and cash equivalents (28) (565) 1,001 141 549 Cash and cash equivalents at beginning of the period 39 575 780 3 1,397 -------- -------- -------- -------- ------------ -------- Cash and cash equivalents at end of the period 11 10 1,781 144 1,946 ======== ======== ======== ======== ============ ========
* * * * * * * * F-49 TVA SISTEMA DE TELEVISAO S.A. Financial Statements Together with Independent Auditors' Report As of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001 TVA SISTEMA DE TELEVISAO S.A. Index to Financial Statements Page Independent Auditors' Report F-51 Balance Sheets as of December 31, 2001 and 2000 F-52 Statements of Operations for each of the three years in the period ended December 31, 2001 F-54 Statements of Changes in Shareholders' Deficit for each of the three years in the period ended December 31, 2001 F-55 Statements of Cash Flows for each of the three years in the period ended December 31, 2001 F-56 Notes to the Financial Statements F-57 The accompanying notes are an integral part of the financial statements. F-50 TVA SISTEMA DE TELEVISAO S.A. Independent Auditors' Report To the Shareholders and Directors of TVA SISTEMA DE TELEVISAO S.A. We have audited the accompanying balance sheets of TVA SISTEMA DE TELEVISAO S.A. (the "Company") as of December 31, 2001 and 2000, and the related statements of operations, changes in shareholders' deficit and cash flows for each of the three years in the period ended December 31, 2001, all expressed in United States dollars. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of TVA SISTEMA DE TELEVISAO S.a. as of December 31, 2001 and 2000, and the results of its operations and cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Deloitte Touche Tohmatsu Sao Paulo, Brazil, June 17, 2002 The accompanying notes are an integral part of the financial statements. F-51 TVA SISTEMA DE TELEVISAO S.A. Balance Sheets December 31, 2001 and 2000 (in thousands of U.S. dollars) December 31, ------------------- 2001 2000 -------- -------- ASSETS Current assets Cash and cash equivalents $ 535 $ 118 Accounts receivable, net (Footnote 3) 5,856 8,351 Inventories, net (Footnote 4) 10,029 10,586 Prepaid and other assets (Footnote 5) 1,617 2,748 Accounts receivable from related companies (Footnote 6) 193 2,518 Other accounts receivable (Footnote 7) 869 6,348 -------- -------- Total current assets 19,099 30,669 -------- -------- Property, plant and equipment, net (Footnote 10) 124,631 147,781 Judicial deposits 10,201 5,764 -------- -------- Total assets $153,931 $184,214 ======== ======== F-52 TVA SISTEMA DE TELEVISAO S.A. Balance Sheets, Continued December 31, 2001 and 2000 (in thousands of U.S. dollars)
December 31, ---------------------- 2001 2000 --------- --------- LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities Loans (Footnote 11) $ 8,888 $ 6,021 Film suppliers 9,730 4,562 Other suppliers 5,632 8,503 Taxes payable other than income taxes (Footnote 13) 2,874 2,909 Accrued payroll and related liabilities 1,317 1,725 Accounts payable to related companies (Footnote 6) 611 3,927 Advance payments received from subscribers 168 194 Other accounts payable (Footnote 12) 1,129 1,326 --------- --------- Total current liabilities 30,349 29,167 --------- --------- Long-term liabilities Loans (Footnote 11) 996 1,669 Loans payable to related companies (Footnote 6) 382,808 437,991 Taxes payable other than income taxes (Footnote 13) 19,356 17,679 Provision for claims (Footnotes 17 and 20) 1,240 1,325 --------- --------- Total long-term liabilities 404,400 458,664 --------- --------- Commitments and contingencies (Footnotes 8, 15 and 17) Shareholders' deficit Common stock, no par value, 6,980,764 shares authorized, issued and outstanding 16,303 16,303 Accumulated other comprehensive income 75,573 28,802 Accumulated deficit (372,694) (348,722) --------- --------- Total shareholders' deficit (280,818) (303,617) --------- --------- Total liabilities and shareholders' deficit $ 153,931 $ 184,214 ========= =========
The accompanying notes are an integral part of the financial statements. F-53 TVA SISTEMA DE TELEVISAO S.A. Statements of Operations for the years ended December 31, 2001, 2000 and 1999 (in thousands of U.S. dollars)
Year Ended December 31, ------------------------------------ 2001 2000 1999 --------- --------- -------- Gross revenues Monthly subscriptions $ 71,875 $ 82,467 $ 79,721 Installation 164 808 1,687 Advertising 951 2,505 1,342 Indirect programming 108 689 857 Additional services 16,992 19,878 12,614 --------- --------- -------- 90,090 106,347 96,221 --------- --------- -------- Direct operating expenses (excluding depreciation stated separately below) Taxes on revenues 13,157 11,411 10,678 Payroll and benefits 5,916 5,484 4,260 Programming 21,318 22,351 18,803 Transponder lease cost 22 2,283 1,449 Technical assistance 1,646 2,120 1,058 TVA magazine 2,165 2,427 1,872 Pole rentals 2,451 3,052 2,501 Other costs 5,788 5,229 1,460 --------- --------- -------- 52,463 54,357 42,081 --------- --------- -------- Selling, general and administrative expenses Payroll and benefits 8,978 12,055 9,219 Advertising and promotion 5,045 4,739 2,307 Rent 1,702 1,866 1,805 Other selling, general and administrative expenses 9,035 7,329 4,659 --------- --------- -------- 24,760 25,989 17,990 --------- --------- -------- Depreciation 29,111 35,972 47,988 Others operating expense (income), net (Footnote 14) 3,105 (2,099) 49,558 --------- --------- -------- Loss from operations (19,349) (7,872) (61,396) --------- --------- -------- Interest income (785) (959) (10,474) Interest expense 3,146 3,318 4,396 Foreign currency translation loss, net -- -- 2,168 Foreign currency transaction loss, net 2,262 1,066 -- --------- --------- -------- Loss before income taxes (23,972) (11,297) (57,486) Income taxes -- -- -- --------- --------- -------- Net loss $ (23,972) $ (11,297) $(57,486) ========= ========= ======== Other comprehensive income- Foreign currency translation adjustment $ 46,771 $ 28,802 $ -- --------- --------- -------- Comprehensive income (loss) $ 22,799 $ 17,505 $(57,486) ========= ========= ========
The accompanying notes are an integral part of the financial statements. F-54 TVA SISTEMA DE TELEVISAO S.A. Statements of Changes in Shareholders' Deficit for the years ended December 31, 2001, 2000 and 1999 (in thousands of U.S. dollars)
Accumulated Other Total Common Accumulated Comprehensive Shareholders' Stock Deficit Income (loss) Deficit ------ ----------- ------------- ------------- Balance as of January 1, 1999 $16,303 $(279,939) $ $(263,636) Net loss for the year (57,486) (57,486) ------- --------- --------- --------- Balance as of December 31, 1999 16,303 (337,425) (321,122) Foreign currency translation adjustment, net of tax 28,802 28,802 Net loss for the year (11,297) (11,297) ------- --------- --------- --------- Balance as of December 31, 2000 16,303 (348,722) 28,802 (303,617) Foreign currency translation adjustment, net of tax 46,771 46,771 Net loss for the year (23,972) (23,972) ------- --------- --------- --------- Balance as of December 31, 2001 $16,303 $(372,694) $ 75,573 $(280,818) ======= ========= ========= =========
The accompanying notes are an integral part of the financial statements. F-55 TVA SISTEMA DE TELEVISAO S.A. Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 (in thousands of U.S. dollars)
Year Ended December 31, -------------------------------- 2001 2000 1999 -------- -------- -------- Cash flows from operating activities: Net loss $(23,972) $(11,297) $(57,486) Adjustments to reconcile net loss to net cash from operating activities Depreciation 29,111 35,972 47,988 Reversal of provision for doubtful accounts (284) (3,273) (173) Provision (reversal of provision) for inventory obsolescence (2,788) (331) 202 Reversal of provision for claims (85) (380) (3,608) Disposal and write-off of property, plant and equipment 685 496 54,403 Foreign currency transaction loss, net 2,262 1,066 -- Changes in operating assets and liabilities: Accounts receivable 2,779 (1,446) 10,227 Prepaid and other assets 1,131 (484) 303 Inventories 3,345 (2,658) 2,645 Suppliers 2,297 (340) (36,883) Taxes payable other than income taxes 1,642 2,842 5,266 Accrued payroll and related liabilities (408) 163 (1,078) Advances received from subscribers (26) (676) (1,014) Other (146) (6,293) (2,637) -------- -------- -------- Net cash used in operating activities 15,543 13,361 18,155 -------- -------- -------- Cash flows from investing activities: Purchases of property, plant and equipment (30,029) (23,319) (22,149) -------- -------- -------- Net cash provided by investing activities (30,029) (23,319) (22,149) -------- -------- -------- Cash flows from financing activities: Proceeds from bank loans 11,307 3,124 4,697 Repayments of loans from bank (9,066) (10,168) (37,124) Proceeds from loans from related companies 26,226 35,495 53,482 Repayments of loans from related companies (12,512) (20,688) (16,714) -------- -------- -------- Net cash provided by financing activities 15,955 7,763 4,341 -------- -------- -------- Effect of exchange rate changes on cash and cash equivalents (1,052) 1,491 -- -------- -------- -------- Net increase (decrease) in cash and cash equivalents 417 (704) 347 Cash and cash equivalents at beginning of the period 118 822 475 -------- -------- -------- Cash and cash equivalents at end of the period $ 535 $ 118 $ 822 ======== ======== ======== Supplemental non-cash financing activities: ======== ======== ======== Accrued interest on related company loans refinanced as principal balance $ 1,656 $ 1,871 $ 9,042 ======== ======== ======== Cash paid for interest $ -- $ -- $ -- Cash paid for income taxes -- -- --
The accompanying notes are an integral part of the financial statements. F-56 TVA SISTEMA DE TELEVISAO S.A. Notes to the Financial Statements (in thousands of U.S. dollars) 1. The Company and its principal operations TVA Sistema de Televisao S.A. ("the Company") renders services related to wireless cable and cable television systems, including marketing and advertising, production, distribution and licensing of domestic and foreign television programs. The Company has wireless cable channel rights primarily in major urban markets in Brazil. 2. Summary of significant accounting policies Significant policies followed in the preparation of the financial statements are described below: 2.1. Basis of presentation The financial statements are presented in U.S. dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"), which differ in certain respects from accounting principles applied by the Company in its local currency financial statements, which are prepared in accordance with accounting principles generally accepted in Brazil ("Brazilian GAAP"). The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the financial statement dates and the reported amount of revenues and expenses during the reporting periods. Since management's judgment involves making estimates concerning the likelihood of future events, the actual results could differ from these estimates. 2.2. Accounting records As required by Brazilian Law, and in accordance with local accounting practices, the accounting records of the Company are maintained in Brazilian currency (real). In order to present the financial statements in conformity with U.S. GAAP, the Company maintains additional accounting records, which are used solely for this purpose. F-57 TVA SISTEMA DE TELEVISAO S.A. Notes to the Financial Statements, (Concluded) (in thousands of U.S. dollars) 2.3. Currency remeasurement As of January 1, 2000, Tevecap S.A. ("Tevecap"), the Company's parent, changed its functional currency from the United States dollar to the Brazilian real. As the Company uses the functional currency of its parent, the Company also changed its functional currency from the United States dollar to the Brazilian real on January 1, 2000. This change was made in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation". 2.4. Cash and cash equivalents Cash and cash equivalents are defined as cash and cash in banks and investments in interest-bearing securities and are carried at cost plus accrued interest. Short-term investments with original maturities of three months or less at the time of purchase are considered cash equivalents. 2.5. Financial instruments In accordance with SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" ("SFAS 107") information is provided about the fair value of certain financial instruments for which it is practicable to estimate that value. For the purposes of SFAS 107, the estimated fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value: o The fair value of certain short-term financial assets and liabilities, including cash and cash equivalents, accounts receivable, accounts receivable from related parties, other accounts receivable, film suppliers, other suppliers and other accounts payable approximate their respective carrying value due to their short-term nature. o The fair value of loans payable to related companies approximates their respective carrying values, as interest on these loans is variable and based on market rates. o The fair value of third party loans approximates the carrying value as the substantial majority of the loans are due in less than one year. F-58 TVA SISTEMA DE TELEVISAO S.A. Notes to the Financial Statements, (Concluded) (in thousands of U.S. dollars) 2.6. Accounts receivable A provision for doubtful accounts is established on the basis of an analysis of the accounts receivable, in light of the risks involved, and is considered sufficient to cover any losses incurred in realization of credits. 2.7. Inventories Inventories consist of materials and supplies and imports in transit. Materials and supplies are used to provide service to new customers, and to ensure continuity of service to existing customers. Imports in transit represent materials purchased from foreign countries that have not yet been received. Inventories are stated at the lower of cost or market. Cost is determined principally under the average cost method. A provision for obsolescence has been established on the basis of an analysis of slow-moving materials and supplies. 2.8. Property, plant and equipment Property, plant and equipment are stated at cost and depreciated using the straight-line method, over the remaining useful lives, as described in Note 10. F-59 TVA SISTEMA DE TELEVISAO S.A. Notes to the Financial Statements, (Concluded) (in thousands of U.S. dollars) 2.9 Recoverability of long-lived assets The Company evaluates its long-lived assets and identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset. In estimating future undiscounted net cash flows, assets are grouped at the level of each cable television system. If an asset is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. 2.10. Revenue recognition Subscription revenues are recognized monthly at the amount billed to subscribers for service subscribed to and earned during the month. Installation fees are recognized as revenue on the equipment installation date to the extent of direct selling costs incurred which are higher than the revenue. Advertising revenues are recognized, and the production cost of commercials and programming are charged to expense, when the commercial is telecast. Revenues from indirect programming and additional services recognized as services are rendered. 2.11. Licenses Televisao Show Time Ltda. ("TV Show Time") and TVA Brasil Radioenlaces Ltda. ("TVA Brasil") hold licenses covering certain operations of the Company. The use of such licenses is provided to the Company, for a nominal fee, under a Service Agreement dated July 22, 1994, as amended, among Tevecap, TV Show Time, TVA Brasil and Abril S.A. Pursuant to the Service Agreement, TV Show Time and TVA Brasil have agreed to transfer the licenses in the future, which are carried at nil value, to Tevecap at nominal cost. F-60 TVA SISTEMA DE TELEVISAO S.A. Notes to the Financial Statements, (Concluded) (in thousands of U.S. dollars) 2.12. Deferred income taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when it is more likely than not that some or all of the deferred tax assets will not be realized. 2.13. Concentrations of credit risk Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable. Such concentrations of credit risk are limited due to the large numbers comprising the Company's subscriber and customer base and their dispersion across different geographic regions. As of December 31, 2001 and 2000, the Company had no other significant concentrations of credit risk. 2.14. Reclassifications Certain prior years amounts have been reclassified for comparative purposes. F-61 3. Accounts receivable, net As of December 31, 2001 and 2000, accounts receivable were comprised of: December 31, ------------------ 2001 2000 ------- ------- Subscriptions and installation fee $ 9,514 $ 9,476 Advertising 376 624 Programming and services 354 2,172 Other 1,496 2,247 Provision for doubtful accounts (5,884) (6,168) -------- -------- $ 5,856 $ 8,351 ======== ======== No single customer accounted for more than 10% of total accounts receivable as of December 31, 2001 and 2000. 4 Inventories, net As of December 31, 2001 and 2000, inventories were comprised of: December 31, ------------------- 2001 2000 -------- -------- Materials and supplies $ 7,807 $ 13,457 Imports in transit 2,435 130 Provision for obsolescence (213) (3,001) -------- -------- $ 10,029 $ 10,586 ======== ======== 5. Prepaid and other assets As of December 31, 2001 and 2000, prepaid expenses were comprised of: December 31, ------------------- 2001 2000 -------- -------- Advances to suppliers $ 1,450 $ 2,385 Prepaid meals and transportation 50 180 Other 117 183 -------- -------- $ 1,617 $ 2,748 ======== ======== F-62 TVA SISTEMA DE TELEVISAO S.A. Notes to the Financial Statements, (Concluded) (in thousands of U.S. dollars) 6. Related-party transactions The following tables summarize the transactions between the Company and its related parties as of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001.
December 31, --------------------- 2001 2000 ---------- --------- TVA Sul Parana Ltda. (subsidiary of parent company) Accounts receivable 122 1 Accounts payable 200 128 TVA Distribuidora S.A (subsidiary of parent company) Loans payable -- 420,820 Tevecap S.A. (parent company) Accounts receivable 9 -- Loans payable 379,587 13,348 Accounts payable 333 360 Comercial Cabo Ltda. (subsidiary of parent company) Loans payable 1,928 2,288 Editora Abril (under common control with Abril S.A.) Accounts receivable 37 -- Accounts payable 49 250 Abril S.A. (major shareholder of parent company) Accounts receivable 1 1 Loans payable 1,293 1,535 TVA Network Participacoes S.A. (subsidiary of parent company) Accounts receivable 1 6 Accounts payable 2 -- TVA Channels Ltda. (subsidiary of parent company) Accounts receivable -- 2,460 Accounts payable -- 3,109 Others Accounts receivable 23 50 Accounts payable 27 80
F-63 TVA SISTEMA DE TELEVISAO S.A. Notes to the Financial Statements, (Concluded) (in thousands of U.S. dollars) 6. Related-party transactions (Continued) Year ended December 31, ------------------------------ 2001 2000 1999 -------- -------- -------- Abril S.A Printing costs 2,132 2,763 1,447 Comercial Cabo Ltda Net interest income -- -- 1,201 The Company and its related parties maintain a cash management system centralized at Tevecap . The centralized cash management system results in accounts receivable from and payable to related parties depending on the cash needs of the companies. The related company loans are denominated in reais and are subject to monetary restatement until December 31, 1995 plus interest charges at the market rate, which ranged from 1.01% to 1.53% per month in December 2001 (1.19% to 1.44% per month in December 2000). Such loans are renewable every year on December 31. The Company received guarantees in the course of the year from Tevecap and Abril S.A. in the form of collateral and letters of credit. The amount outstanding pursuant to these guarantees as of December 31, 2001 and 2000 was $3,211 and $3,249, respectively. 7. Other accounts receivable As of December 31, 2001 and 2000, other accounts receivable were comprised of: 2001 2000 ------ ------ Multimatiques - Sale of Eurochannell $ -- $4,036 Galaxy Brasil Ltda -- 29 TVA Banda C Ltda -- 898 ESPN do Brasil Ltda -- 34 Taxes recoverable 293 252 Other 576 1,099 ------ ------ $ 869 $6,348 ====== ====== F-64 TVA SISTEMA DE TELEVISAO S.A. Notes to the Financial Statements, (Concluded) (in thousands of U.S. dollars) 8. Loan guarantees In November 1996, Tevecap issued $250,000 12-5/8% Senior Notes to institutional buyers in a private placement. The Notes, which mature in November 2004, were subsequently registered with the Securities and Exchange Commission in May 1997. These Notes are jointly and severally, irrevocably and fully unconditionally guaranteed, on a senior basis, by Tevecap's direct and indirect subsidiaries, including the Company. On July 28, 1999 the related company TVA Communications Ltd. repurchased 80.79% of these Notes. 9. Income taxes The tax effects of temporary differences that give rise to deferred tax assets as of December 31, 2001 and 2000 are as follows: December 31, -------------------- 2001 2000 -------- -------- Deferred tax assets: Net operating loss carryforwards $ 54,441 $ 53,377 Provision for obsolescence 331 557 Provision for claims 2,253 2,625 Other 34 1,439 -------- -------- Total deferred tax asset 57,059 57,998 -------- -------- Less valuation allowance (57,059) (57,998) -------- -------- Net deferred tax asset $ -- $ -- ======== ======== There were no deferred tax liabilities as of December 31, 2001 and 2000. The Company has a limited operating history and has generated losses since its inception. Management has established a full valuation allowance against the deferred tax assets as it is more likely than not that the deferred tax will not be realizable. As of December 31, 2001, the Company has unexpirable accumulated tax losses of $160,120. F-65 TVA SISTEMA DE TELEVISAO S.A. Notes to the Financial Statements, (Concluded) (in thousands of U.S. dollars) 9. Income taxes (Continued) Income tax was different from the amount computed using the Brazilian statutory income tax for the reasons set forth in the following table:
Year Ended December 31, ---------------------------------- 2001 2000 1999 -------- -------- -------- Loss before income taxes $(23,972) $(11,297) $(57,486) Statutory income tax rate 34% 34% 37% -------- -------- -------- Computed income tax benefit (8,150) (3,841) (21,270) Change in the income tax rate -- (1,948) (2,352) Deferred charges amortization (1,898) (2,415) (2,686) Translation loss of tax losses 8,394 4,954 22,225 Depreciation 1,976 3,613 8,647 Write-off of assets related to cancellations of subscriptions and decoders -- 8,347 Other 617 1,078 (400) Tax loss carryfoward used -- 4,840 -- Decrease in valuation allowance (939) (6,281) (12,511) -------- -------- -------- Income taxes per statements of operations $ -- $ -- $ -- ======== ======== ========
F-66 TVA SISTEMA DE TELEVISAO S.A. Notes to the Financial Statements, (Concluded) (in thousands of U.S. dollars) 10. Property, plant and equipment, net As of December 31, 2001 and 2000, property, plant and equipment were comprised of: Annual Depreciation December 31, Rate ----------------------- % 2001 2000 ------------ --------- --------- Reception equipment 20 $ 98,447 $ 105,976 Cable plant 10 57,001 68,408 Machinery and equipment 10 43,084 41,783 Decoders 10 54,933 62,338 Leasehold improvements 25 2,162 2,359 Furniture and fixtures 10 1,153 1,170 Premises 10 1,731 2,021 Vehicles 20 1,343 1,714 Software 20 13,730 8,635 Tools 10 675 764 Other 2,293 2,688 Accumulated depreciation (152,663) (150,472) Fixed assets in transit 742 397 --------- --------- $ 124,631 $ 147,781 ========= ========= F-67 TVA SISTEMA DE TELEVISAO S.A. Notes to the Financial Statements, (Concluded) (in thousands of U.S. dollars) 11. Loans Bank loans are comprised of the following:
2001 2000 ------------------------- ------------------------- Short-Term Long-Term Short-Term Long-Term ------------ ----------- ------------ ----------- Banco Bradesco - revolving credit facility, interest of 2.20% per month $2,598 $ -- $1,337 $ -- Banco Daycoval -revolving credit facility, interest of 0.0985% plus Selic (Special system for settlement and custody) rate (0.0691% as of December 31, 2001) per month 1,056 -- -- -- Banco Rural -revolving credit facility, interest of 0.91% plus CDI (Interbank Deposit Certificate) rate (0.0615% as of December 31, 2001) per month 2,339 -- -- -- Banco do Brasil - revolving credit facility, interest of 0.6% plus CDI rate per month 529 -- -- -- Citibank - financial leasing, fixed in U.S. dollars, due August 28, 2004, interest of 13% per annum 692 996 -- -- Eximbank - annual interest of LIBOR (4.88% as of December 31, 2001) plus 0.0025%, repaid in full in April 2002 1,674 -- 4,684 1,669 ------ ------ ------ ------ Total 8,888 996 6,021 1,669 ====== ====== ====== ======
F-68 TVA SISTEMA DE TELEVISAO S.A. Notes to the Financial Statements, (Concluded) (in thousands of U.S. dollars) 12. Other accounts payable As of December 31, 2001 and 2000, other accounts payable were comprised of: December 31, ------------------- 2001 2000 ------ ------ Advertising $ 113 $ 44 Importation expenses payable 54 40 Other 962 1,242 ------ ------ $1,129 $1,326 ====== ====== 13. Taxes payable other than income taxes As of December 31, 2001 and 2000, taxes payable other than income taxes were comprised of: December 31, ----------------------- 2001 2000 -------- -------- COFINS $ 295 $ 403 ICMS 13,589 10,011 PIS 51 72 Tax Recovery Program - REFIS 7,987 9,877 Other 308 225 -------- -------- 22,230 20,588 (-) Current liabilities (2,874) (2,909) -------- -------- $ 19,356 $ 17,679 ======== ======== On April 5, 2000, the Company opted for the REFIS (Federal Government Tax Recovery Program), established by Decree N(Degree) 3.342/00 of January 25, 2000, later changed into Law N(Degree) 9.964/00 of April 10, 2000. With the option for the REFIS, the Company will be able to pay such taxes based on 1.2% of its monthly revenues. Based on its revenue projections, the approximate timing for paying the total account is about five years. The restatement of the tax debt included in the REFIS is made based on the TJLP (Brazilian long term interest rate). During year 2000, the Company also renegotiated with Sao Paulo State Government the ICMS (stated value-added tax) due. Based on the agreement, the Company is able to finance its taxes payable for five years. F-69 TVA SISTEMA DE TELEVISAO S.A. Notes to the Financial Statements, (Concluded) (in thousands of U.S. dollars) 14. Other operating expense (income), net
Year Ended December 31, ------------------------------- 2001 2000 1999 ------- -------- -------- Write-off of assets related to cancellations of subscriptions $ -- $ 2,589 $ 16,477 Loss on disposal of property and equipment 3,439 -- -- Loss on sale of obsolete inventory 1,064 -- -- Write-off of digisat decoders -- 31,529 Gain on sale Eurochannel -- (5,105) -- Other (1,398) 417 (1,552) ------- -------- -------- $ 3,105 $ (2,099) $ 49,558 ======= ======== ========
15. Commitments The Company has rented its office space until the year 2006. As of December 31, 2000, future minimum rental payments applicable to operating leases in respect of this space aggregate approximately $3,160, as follows: 2002 632 2003 632 2004 632 2005 632 2006 632 ------ Total $3,160 ====== 16. Dividends The Company's shareholders are entitled to minimum dividends of 25% of net income for the year, adjusted according to Brazilian Corporation Law. As the Company has not recorded net income under Brazilian Corporation Law since its inception, no such dividends are payable. 17. Litigation contingencies Certain claims and lawsuits arising in the ordinary course of business have been filed or are pending against the Company, which were not recognized in the financial statements. The Company has also recorded provisions related to certain claims in amounts that management considers to be adequate after considering a number of factors including (but not limited to) the views of legal counsel, the nature of the claims and the prior experience of the Company. F-70 TVA SISTEMA DE TELEVISAO S.A. Notes to the Financial Statements, (Concluded) (in thousands of U.S. dollars) The Company has provided for losses on all cases where the assessment of management and legal counsel indicates that a loss is probable. Management believes that such legal matters will not have a material adverse effect on the Company's results of operations, financial condition or cash flows. 18. Pension plan In April 1996, the Company became a co-sponsor of the private pension entity named Abrilprev Sociedade de Previdencia Privada ("Abrilprev"), the primary objective of which is to grant employees benefits other than those provided by Social Security. The plan is optional to all employees of the sponsoring entities. Abrilprev operates as a Defined Contribution Plan. Company contributions are made based on a fixed percentage applied to the payroll of the sponsoring entities based on actuarial calculations. Contribution expenses amounted to $183 for the year ended December 31, 2001 ($198 in 2000 and $162 in 1999). 19. Abril Health Care Plan In February 1996, the Abril Health Care Plan, Associacao Abril de Beneficios (the "Health Care Plan"), was created to provide health care to Abril S.A. Group employees and their dependents. Both the companies forming part of the Abril Group and the employees thereof contribute monthly to the Health Care Plan, which is responsible for the management of the plan. In 2001, contributions made by the Company to Associacao Abril de Beneficios amounted to $708 ($681 in 2000 and $642 in 1999). F-71 TVA SISTEMA DE TELEVISAO S.A. Notes to the Financial Statements, (Concluded) (in thousands of U.S. dollars) 20. Supplementary information - valuation and qualifying accounts and reserves
Deferred Provision Provision Tax Provision for Doubtful For Valuation for Accounts Obsolescence Allowance Claims ------------ ------------ --------- --------- Balance as of January 1, 1999 $ 9,614 $ 3,130 $ 76,790 $ 5,313 Additions -- 202 -- -- Deductions (173) -- (12,511) (3,608) ------- ------- -------- ------- Balance as of December 31, 1999 9,441 3,332 64,279 1,705 Additions -- -- -- -- Deductions (3,273) (331) (6,281) (380) ------- ------- -------- ------- Balance as of December 31, 2000 6,168 3,001 57,998 1,325 Additions -- -- -- -- Deductions (284) (2,788) (939) (85) ------- ------- -------- ------- Balance as of December 31, 2001 $ 5,884 $ 213 $ 57,059 $ 1,240 ======= ======= ======== =======
21. Recent accounting pronouncements Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138 (collectively, "SFAS 133"). SFAS 133 establishes accounting and reporting standards requiring that all derivative financial instruments (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. Additionally, SFAS 133 requires that changes in the fair value of derivatives be recognized in earnings unless specific hedge accounting criteria are met. As the Company does not utilize derivative financial instruments, the effect of adopting SFAS 133 on January 1, 2001 did not have a material impact on the Company's financial statements. In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. Recorded goodwill and intangibles will be evaluated against these new criteria and may result in certain intangibles being subsumed into goodwill, or alternatively, amounts initially recorded as goodwill may be separately identified and recognized apart from goodwill. SFAS 142 requires the use of a nonamortization approach to account for purchased goodwill and certain intangibles. Under a nonamortization approach, goodwill and certain intangibles will not be amortized into results of operations, but instead would be reviewed for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles is more than its fair value. The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. Effective January 1, 2002, the Company adopted the provisions of each F-72 TVA SISTEMA DE TELEVISAO S.A. Notes to the Financial Statements, (Concluded) (in thousands of U.S. dollars) statement that apply to goodwill and intangible assets acquired prior to June 30, 2001. As the Company has not entered into business combinations, management believes that the implementation of these pronouncements will not have a material impact on the Company's results of operations or financial condition. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 requires that the market value of the liabilities related to obligations due to the retirement of assets be recognized in the period in which they occur, if a reasonable estimate of market value is possible. Costs of asset retirement are capitalized as part of the permanent asset cost. In accordance with SFAS 143, the asset retirement obligation is discounted and an increase is recognized by using the "credit adjusted risk-free" interest rate in effect when the obligation was initially recognized. The Company is required to adopt SFAS 143 effective January 1, 2003. Based on an initial analysis of SFAS 143 requirements, management believes that the implementation of this statement will not have a material impact on the Company's results of operations or financial condition. In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121") but maintains the fundamental provisions of SFAS 121 for (a) recognition/valuation of the provision for impairment of permanent assets to be maintained and used and (b) valuation of permanent assets to be written off due to their sale. SFAS 144 also supersedes the provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business" ("APB 30") with regard to reporting the effects of a disposal of a segment of a business. The Company adopted SFAS 144 effective January 1, 2002. Based on the Company's initial analysis of the SFAS 144 requirements, management believes that the implementation of this pronouncement will not have a material impact on the Company's results of operations or financial condition. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections." SFAS 145 rescinds SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt," which required that all gains and losses from extinguishment of debt to be aggregated and classified as an extraordinary item if material. SFAS 145 requires that gains and losses from extinguishment of debt be classified as extraordinary only if they meet criteria in APB 30, thus distinguishing transactions that are part of recurring operations from those that are unusual or infrequent, or that meet the criteria for classification as an extraordinary item. SFAS 145 also amends SFAS No. 13, "Accounting for Leases", to require that lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. F-73 TVA SISTEMA DE TELEVISAO S.A. Notes to the Financial Statements, (Concluded) (in thousands of U.S. dollars) In addition, SFAS 145 rescinds SFAS 44, "Accounting for Intangible Assets of Motor Carriers," and SFAS 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements," which are not currently applicable to us. The provisions of SFAS 145 as they relate to the rescission of SFAS 4 will be applied effective January 1, 2003. Certain provisions related to SFAS 13 are effective for transactions occurring after May 15, 2002. Management does not expect SFAS 145 to have a material impact on the Company's results of operations or financial condition * * * * * * * F-74 TVA SUL PARANA LTDA. and Subsidiary Consolidated Financial Statements Together with Independent Auditors' Report As of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001 TVA SUL PARANA LTDA. AND SUBSIDIARY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Contents Page Independent Auditors' Report F-76 Consolidated Balance Sheets as of December 31, 2001 and 2000 F-77 Consolidated Statements of Operations for each of the three years in the period ended December 31, 2001 F-79 Consolidated Statements of Changes in Shareholders' Equity for each of the three years in the period ended December 31, 2001 F-80 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2001 F-81 Notes to Consolidated Financial Statements F-83 F-75 Independent Auditors' Report To the Shareholders and Directors of TVA SUL PARANA LTDA. We have audited the accompanying consolidated balance sheets of TVA SUL PARANA LTDA. and subsidiary (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001, all expressed in United States dollars. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of TVA SUL PARANA LTDA. and subsidiary as of December 31, 2001 and 2000, and the consolidated results of its operations and cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Deloitte Touche Tohmatsu Sao Paulo, Brazil, June 17, 2002 F-76 TVA SUL PARANA LTDA. AND SUBSIDIARY Consolidated Balance Sheets December 31, 2001 and 2000 (in thousands of U.S. dollars) December 31, ----------------- 2001 2000 ------- ------- ASSETS Current assets Cash and cash equivalents $ 83 $ 138 Accounts receivable, net (Footnote 3) 574 599 Inventories, net (Footnote 4) 1,088 1,915 Prepaid and other assets 90 190 Accounts receivable from related parties (Footnote 5) 103 235 Recoverable taxes 155 210 Other accounts receivable 230 429 ------- ------- Total current assets 2,323 3,716 ------- ------- Property, plant and equipment, net (Footnote 7) 22,384 28,839 Concessions, net (Footnote 8) 3,098 4,459 Judicial deposits 2,827 2,153 Other -- 17 ------- ------- Total assets $30,632 $39,184 ======= ======= The accompanying notes are an integral part of these consolidated financial statements. F-77 TVA SUL PARANA LTDA. AND SUBSIDIARY Consolidated Balance Sheets, Continued December 31, 2001 and 2000 (in thousands of U.S. dollars)
December 31, 2001 2000 -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Loans $ 360 $ -- Film suppliers 1,728 541 Other suppliers 209 708 Taxes payable other than income taxes (Footnote 10) 561 532 Accrued payroll and related liabilities 143 214 Accounts payable to related companies (Footnote 5) 32 -- Rent payable 232 193 Other accounts payable 223 45 -------- -------- Total current liabilities 3,488 2,233 -------- -------- Long-term liabilities Loans payable to related companies (Footnote 5) 21,197 27,708 Taxes payable other than income taxes (Footnote 10) 3,818 2,985 Provision for claims (Footnotes 12 and 15) 452 697 -------- -------- Total long-term liabilities 25,467 31,390 -------- -------- Commitments and contingencies (Footnotes 9 and 12) Minority interest 1,194 1,467 Shareholders' equity Common stock, no par value, 17,543,926 shares authorized, issued and outstanding 44,213 44,213 Accumulated other comprehensive loss (2,547) (860) Accumulated deficit (41,183) (39,259) -------- -------- Total shareholders' equity 483 4,094 -------- -------- Total liabilities and shareholders' equity $ 30,632 $ 39,184 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-78 TVA SUL PARANA LTDA. AND SUBSIDIARY Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999 (in thousands of U.S. dollars)
Year Ended December 31, -------------------------------- 2001 2000 1999 -------- -------- -------- Gross revenues Monthly subscriptions $ 12,919 $ 13,673 $ 14,268 Installation 55 93 185 Advertising 54 -- -- Additional services 1,486 1,380 596 -------- -------- -------- 14,514 15,146 15,049 -------- -------- -------- Direct operating expenses (excluding depreciation and amortization stated separately below) Payroll and benefits 811 1,038 776 Programming 3,914 3,643 4,104 Technical assistance 218 295 253 Taxes on revenue 2,322 1,719 1,702 Other costs 1,900 1,875 1,304 -------- -------- -------- 9,165 8,570 8,139 -------- -------- -------- Selling, general and administrative expenses Payroll and benefits 688 1,762 1,392 Advertising and promotion 365 454 180 Rent 41 69 153 Other, selling, general and administrative expenses 1,758 298 161 -------- -------- -------- 2,852 2,583 1,886 -------- -------- -------- Depreciation and amortization 4,063 5,253 6,626 Write-off of assets related to subscriber cancellations -- -- 1,930 Other operating expense, net 202 1,781 1,655 -------- -------- -------- Loss from operations (1,768) (3,041) (5,187) -------- -------- -------- Interest income (337) (362) (218) Interest expense 433 407 819 Foreign currency translation loss -- -- 233 Foreign currency transaction loss 87 348 -- -------- -------- -------- Loss before income taxes and minority interest (1,951) (3,434) (6,021) Income tax expense - current (Footnote 6) -- 273 106 -------- -------- -------- Loss before minority interest (1,951) (3,707) (6,127) Minority interest 27 32 208 -------- -------- -------- Net loss $ (1,924) $ (3,739) $ (6,335) -------- -------- -------- Other comprehensive loss - Foreign currency translation adjustment (1,687) (860) -- -------- -------- -------- Comprehensive loss $ (3,611) $ (4,599) $ (6,335) ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-79 TVA SUL PARANA LTDA. AND SUBSIDIARY Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2001, 2000 and 1999 (in thousands of U.S. dollars)
Accumulated Other Common Accumulated Comprehensive Stock Deficit loss Total --------- ------------- ------------- ---------- Balance as of January 1, 1999 $ 44,213 $(29,185) $ -- $ 15,028 Net loss for the year (6,335) -- (6,335) -------- -------- ------- -------- Balance as of December 31, 1999 44,213 (35,520) -- 8,693 Foreign currency translation adjustment, net of tax -- -- (860) (860) Net loss for the year -- (3,739) -- (3,739) -------- -------- ------- -------- Balance as of December 31, 2000 44,213 (39,259) (860) 4,094 Foreign currency translation adjustment, net of tax -- -- (1,687) (1,687) Net loss for the year -- (1,924) -- (1,924) -------- -------- ------- -------- Balance as of December 31, 2001 $ 44,213 $(41,183) $(2,547) $ 483 ======== ======== ======= ========
The accompanying notes are an integral part of these consolidated financial statements. F-80 TVA SUL PARANA LTDA. AND SUBSIDIARY Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999 (in thousands of U.S. dollars)
Year Ended December 31, ----------------------------- 2001 2000 1999 ------- ------- ------- Cash flows from operating activities: Net loss $(1,924) $(3,739) $(6,335) Adjustments to reconcile net loss to net cash from operating activities Depreciation 3,398 4,407 5,761 Amortization 665 846 865 Provision (reversal of provision) for doubtful accounts 464 (499) 30 Provision (reversal of provision) for inventory obsolescence (233) (34) 403 Provision (reversal of provision) for claims (245) 589 (143) Minority interest (27) 32 208 Disposal and write-off of property, plant and equipment (131) 1,676 2,635 Foreign currency transaction loss 87 348 -- Changes in operating assets and liabilities Accounts receivable (439) 763 275 Prepaid and other assets 100 14 (172) Other accounts receivable (271) (1,656) (78) Inventories 1,060 503 1,338 Film suppliers and others suppliers 688 (353) (1,309) Taxes payable other than income taxes 862 703 1,320 Accrued payroll and related liabilities (71) (90) (175) Other 249 (588) (660) ------- ------- ------- Net cash provided by operating activities 4,232 2,922 3,963 ------- ------- ------- Cash flows from investing activities Purchases of property, plant and equipment (1,979) (2,090) (2,121) ------- ------- ------- Net cash used in investing activities (1,979) (2,090) (2,121) ------- ------- ------- Cash flows from financing activities Proceeds from bank loans 448 -- -- Repayments of loans from banks (89) (1,134) (4,552) Proceeds from loans from related companies 1,827 4,311 5,222 Repayments of loans from related companies (3,980) (3,855) (1,858) ------- ------- ------- Net cash provided by financing activities (1,794) (678) (1,188) ------- ------- ------- Effect of exchange rate changes on cash and cash equivalents (514) (975) -- ------- ------- ------- Net increase (decrease) in cash and cash equivalents (55) (821) 654 Cash and cash equivalents at beginning of the period 138 959 305 ------- ------- ------- Cash and cash equivalents at end of the period $ 83 $ 138 $ 959 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-81 TVA SUL PARANA LTDA. AND SUBSIDIARY Consolidated Statements of Cash Flows, Continued for the years ended December 31, 2001, 2000 and 1999 (in thousands of U.S. dollars)
Year Ended December 31, ----------------------- 2001 2000 1999 ---- ---- ---- Supplemental cash disclosure Cash paid for income taxes $ -- $ 273 $ 106 Cash paid for interest -- 13 -- Supplemental noncash financing activities Accrued interest on related company loans refinanced as principal balance $ 21 $ -- $ --
The accompanying notes are an integral part of these consolidated financial statements F-82 TVA SUL PARANA LTDA. AND SUBSIDIARY Notes to Consolidated Financial Statements (in thousands of U.S. dollars) 1. The Company and its principal operations The accompanying financial statements have been prepared to reflect the results of TVA Sul Parana Ltda. and its subsidiary (the "Company"). TVA Sul Parana Ltda. is a holding company, the subsidiary of which renders services related to wireless cable and cable television systems, including marketing and advertising, production, distribution and licensing of domestic and foreign television programs. The Company has wireless cable channel rights primarily in major urban markets in the South of Brazil. The Company's operations are substantially dependent on the Tevecap Group regarding programming, marketing, financial and administrative systems. 2. Summary of significant accounting policies Significant policies followed in the preparation of the consolidated financial statements are described below: 2.1. Basis of presentation and consolidation a) Basis of presentation The consolidated financial statements are presented in United States dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"), which differ in certain respects from accounting principles applied by the Company in its local currency financial statements, which are prepared in accordance with accounting principles generally accepted in Brazil ("Brazilian GAAP"). The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the financial statement dates and the reported amount of revenues and expenses during the reporting periods. Since management's judgment involves making estimates concerning the likelihood of future events, the actual results could differ from these estimates. b) Principles of consolidation The consolidated financial statements include the accounts of TVA Sul Parana Ltda. and its 60% owned subsidiary CCS Camboriu Cale System de Telecomunicacoes Ltda. All significant intercompany balances and transactions have been eliminated in consolidation. F-83 TVA SUL PARANA LTDA. AND SUBSIDIARY Notes to Consolidated Financial Statements (Continued) (in thousands of U.S. dollars) 2.2. Accounting records As required by Brazilian Law, and in accordance with local accounting practices, the accounting records of the Company are maintained in Brazilian currency ("reais" or "R$"). In order to present the financial statements in conformity with U.S. GAAP, the Company maintains additional accounting records which are used solely for this purpose. 2.3. Currency remeasurement On January 1, 2000, Tevecap S.A. ("Tevecap"), TVA Sul Parana Ltda.'s parent company, changed its functional currency from the United States dollar to the Brazilian real. As the Company uses the functional currency of its parent, the Company also changed its functional currency from the United States dollar to the Brazilian real on January 1, 2000. This change was performed in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation". Assets and liabilities are translated into U.S. dollars at the exchange rate in effect at the end of the reporting period, and revenues, expenses gain and losses are translated into U.S. dollars at the averages rates prevailing in the period. The resulting net translation gains and losses are reported, net of tax, in accumulated other comprehensive loss in shareholders' equity 2.4. Cash and cash equivalents Cash and cash equivalents are defined as cash and cash in banks and investments in interest-bearing securities. Short-term investments with original maturities of three months or less at the time of purchase are considered cash equivalents. F-84 TVA SUL PARANA LTDA. AND SUBSIDIARY Notes to Consolidated Financial Statements (Continued) (in thousands of U.S. dollars) 2.5. Financial instruments In accordance with SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" ("SFAS 107"), information is provided about the fair value of certain financial instruments for which it is practicable to estimate that value. For the purposes of SFAS 107, the estimated fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value: o The fair value of short-term assets and liabilities, including cash and cash equivalents, accounts receivable, accounts receivable from related parties, other accounts receivable, film suppliers, other supplies and other accounts payable approximates their respective carrying value due to their short-term nature. o The fair value of loans from related companies approximates their respective carrying values, as interest on these loans is variable and based on market rates. 2.6. Accounts receivable A provision for doubtful accounts is established on the basis of an analysis of the accounts receivable, in light of the risks involved and is considered sufficient to cover any losses incurred in realization of credits. 2.7 Inventories Inventories consist of materials and supplies and imports in transit. Materials and supplies are used to provide service to new customers and to ensure continuity of service to existing customers. Imports in transit represent materials purchased from foreign countries that have not yet been received. Inventories are stated at the lower of cost or market. Cost is determined principally under the average cost method. A provision for obsolescence has been established on the basis of an analysis of slow moving materials and supplies. F-85 TVA SUL PARANA LTDA. AND SUBSIDIARY Notes to Consolidated Financial Statements (Continued) (in thousands of U.S. dollars) 2.8. Property, plant and equipment Property, plant and equipment are stated at cost and depreciated using the straight-line method, over the remaining useful lives, as described in Note 7. 2.9. Recoverability of long-lived assets to be held and used in the business The Company evaluates its long-lived assets and identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset. In estimating future undiscounted net cash flows, assets are grouped at the level of each cable television system. If an asset is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. There were no impairment write-downs made during the years ended December 31, 2001, 2000 and 1999. 2.10. Revenue recognition Subscription revenues are recognized monthly at the amount billed to subscribers for service subscribed to and earned during the month. Installation fees are recognized as revenue on the equipment installation date to the extent of direct selling costs incurred which are higher than the revenue. Others revenues are recognized as services are rendered. 2.11. Concessions Concessions represent the right to engage in various telecommunications services in defined areas or cities in Brazil. The cost of these concessions is being amortized on the straight-line basis over 10 years. 2.12. Advertising and promotion costs Costs of advertising and promotion are expensed as incurred. F-86 TVA SUL PARANA LTDA. AND SUBSIDIARY Notes to Consolidated Financial Statements (Continued) (in thousands of U.S. dollars) 2.13 Deferred tax and liabilities Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when it is more likely than not that some or all of the deferred tax assets will not be realized. 2.14 Concentration of credit risk Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable. Such concentrations of credit risk are limited due to the large numbers comprising the Company's subscriber and customer base and their dispersion across different geographic regions. As of December 31, 2001 and 2000, the Company had no other significant concentrations of credit risk. 2.15 Reclassifications Certain prior year amounts have been reclassified for comparative purposes. 3 Accounts receivable, net As of December 31, 2001 and 2000, accounts receivable were comprised of: December 31, -------------------- 2001 2000 ------- ------- Subscriptions and installation fees $ 2,242 $ 1,805 Advertising 5 6 Programming 11 8 Provision for doubtful accounts (1,684) (1,220) ------- ------- $ 574 $ 599 ======= ======= No single customer accounted for more than 10% of total accounts receivable as of December 31, 2001 and 2000. F-87 TVA SUL PARANA LTDA. AND SUBSIDIARY Notes to Consolidated Financial Statements (Continued) (in thousands of U.S. dollars) 4. Inventories As of December 31, 2001 and 2000, inventories were comprised of: December 31, ---------------------- 2001 2000 ------- ------- Materials and suppliers $ 1,205 $ 2,188 Imports in transit 19 96 Provision for obsolescence (136) (369) ------- ------- $ 1,088 $ 1,915 ======= ======= 5. Related party transactions The following tables summarize the transactions between the Company and related parties as of December 31, 2001 and 2000. December 31, --------------------- 2001 2000 ------- ------- TVA Sistema de Televisao S.A. (subsidiary of parent company) Accounts payable $ 32 $ -- Accounts receivable 103 218 TVA Distribuidora S.A. (subsidiary of parent company) Loans payable -- 27,708 Tevecap S.A. (parent company) Loans payable 21,197 -- Editora Abril S.A. (under commom control with major shareholder of parent company) Accounts receivable -- 8 TVA Network Participacoes S.A. (subsidiary of parent company) Accounts receivable -- 9 The Company and its related parties maintain a cash management system centralized at Tevecap. The centralized cash management system results in accounts receivable from and payable to related parties depending on the cash needs of the companies. F-88 TVA SUL PARANA LTDA. AND SUBSIDIARY Notes to Consolidated Financial Statements (Continued) (in thousands of U.S. dollars) The related company loans are denominated in reais and are subject to monetary restatement until December 31, 1995 plus interest charges at the market rate which ranged from 1.01% to 1.53% per month as of December 31, 2001 (1.63% to 1.90% per month as of December 31, 2000). Such loans are renewable every year on December 31. 6. Income taxes The tax effects of temporary differences that give rise to deferred tax assets as of December 31, 2001 and 2000 are as follows: December 31, ------------------ 2001 2000 -------- -------- Deferred tax assets Net operating loss carryforwards $ 5,638 $ 6,315 Provision for claims 890 498 Provision for obsolescence 374 338 Other 335 670 ------- ------- Total gross deferred tax asset 7,237 7,821 ------- ------- Less valuation allowance (7,237) (7,821) ------- ------- Net deferred tax asset/liability $ -- $ -- ======= ======= There were no deferred tax liabilities as of December 31, 2001 and 2000. The Company has a limited operating history and has generated losses since its inception. As such, management has established a full valuation allowance against the deferred tax assets as it is more likely than not that the deferred tax assets will not be realized. As of December 31, 2001, the Company has unexpirable accumulated tax losses of $16,582. F-89 TVA SUL PARANA LTDA. AND SUBSIDIARY Notes to Consolidated Financial Statements (Continued) (in thousands of U.S. dollars) 6. Income taxes (Continued) The consolidated income tax expense was different from the amount computed using the Brazilian statutory income tax for the reasons set forth in the following table:
Year Ended December 31, ------------------------------- 2001 2000 1999 ------- ------- ------- Loss before income taxes and minority interest $(1,951) $(3,434) $(6,021) Statutory income tax rate 34% 34% 37% ------- ------- ------- Computed income tax benefit (663) (1,168) (2,227) Change in the income tax rate -- (225) (150) Translation loss on tax losses 993 533 2,512 Write-off assets related to cancellations of subscriptions -- 165 -- Depreciation 219 515 499 Other 26 (7) 479 Tax loss carryforward used 9 63 -- Increase (decrease) in valuation allowance (584) 397 (1,007) ------- ------- ------- Income tax expense per consolidated statements of operations $ -- $ 273 $ 106 ======= ======= =======
Income tax expense represents amounts owed by the subsidiary calculated on a stand-alone basis, as Brazilian income tax law does not allow consolidated tax returns. F-90 TVA SUL PARANA LTDA. AND SUBSIDIARY Notes to Consolidated Financial Statements (Continued) (in thousands of U.S. dollars) 7. Property, plant and equipment, net As of December 31, 2001 and 2000, property, plant and equipment were comprised of: Annual Depreciation December 31, Rate --------------------- % 2001 2000 --------- --------- Reception equipment 20 $ 7,776 $ 8,366 Cable plant 10 12,500 14,587 Machinery and equipment 10 3,411 3,980 Converters 10 9,406 10,532 Leasehold improvements 25 109 130 Furniture and fixtures 10 389 461 Premises 10 630 712 Vehicles 20 459 557 Software 20 183 216 Tools 10 62 68 Building 4 2,920 3,462 Other 307 346 --------- --------- 38,152 43,417 Accumulated depreciation (15,768) (14,578) --------- --------- $ 22,384 $ 28,839 ========= ========= 8. Concessions, net As of December 31, 2001 and 2000, concessions were comprised of: December 31, ------------------ 2001 2000 ------- ------- CCS - Camboriu Cable System Telecomunicacoes Ltda $ 648 $ 769 TVA Sul Parana Ltda. (Stations in south of Brazil) 6,018 7,139 Accumulated amortization (3,568) (3,449) ------- ------- $ 3,098 $ 4,459 ======= ======= F-91 TVA SUL PARANA LTDA. AND SUBSIDIARY Notes to Consolidated Financial Statements (Continued) (in thousands of U.S. dollars) 9. Loan guarantees In November 1996, Tevecap, the majority shareholder, issued $250,000 12-5/8% Senior Notes to institutional buyers in a private placement. The Notes, which mature in November 2004, were subsequently registered with the Securities and Exchange Commission in May 1997. These Notes are jointly and severally, irrevocably and fully unconditionally guaranteed, on a senior basis, by Tevecap's direct and indirect subsidiaries, including the Company. On July 28, 1999 the related company TVA Communications Ltd. repurchased 80.79% of these Notes. 10. Taxes payable other than income taxes As of December 31, 2001 and 2000, taxes payable other than income taxes were comprised of: December 31, ---------------------- 2001 2000 ------- ------- COFINS $ 101 $ 135 ICMS 3,196 1,899 PIS 19 40 Tax Recovery Program - REFIS 1,041 1,260 Other 22 183 ------- ------- 4,379 3,517 ( - ) current liabilities (561) (532) ------- ------- $ 3,818 $ 2,985 ======= ======= On April 5, 2000, the Company opted for the REFIS (Federal Government Tax Recovery Program), established by Decree N(Degree) 3.342/00 of January 25, 2000, later changed into Law N(Degree) 9.964/00 of April 10, 2000. With the option for the REFIS, the Company will be able to pay such taxes based on 1.2% of its monthly revenues. Based on its revenue projections, the approximate timing for paying the total account is about 5 years. The restatement of the tax debt included in the REFIS is made based on the TJLP (Brazilian long term interest rate). During 2000, the Company also renegotiated with Sao Paulo State Government the ICMS (a state value-added tax) due. Based on the agreement, the Company is able to finance its taxes payable for five years. F-92 TVA SUL PARANA LTDA. AND SUBSIDIARY Notes to Consolidated Financial Statements (Continued) (in thousands of U.S. dollars) 11. Shareholders' equity Common stock as of December 31, 2001 and 2000 was comprised of:
2001 2000 -------------------------- ------------------------- $ Shares $ Shares ----------- ----------- ----------- ---------- Tevecap S.A $ 44,213 17,543,926 -- -- Abril S.A -- -- $ 6,190 2,456,150 TVA Distribuidora S.A -- -- 38,023 15,087,776 ----------- ----------- ----------- ---------- $ 44,213 17,543,926 $ 44,213 17,543,926 =========== =========== =========== ==========
The Company's shareholders are entitled to a minimum dividend of 25% of net income for the year, adjusted according to the Brazilian Corporation Law. As the Company has not recorded net income under Brazilian Corporation Law since its inception, no such dividends payable. 12. Litigation contingencies Certain claims and lawsuits arising in the ordinary course of business have been filed or are pending against the Company, which were not recognized in the consolidated financial statements. The Company has also recorded provisions related to certain claims in amounts that management considers to be adequate after considering a number of factors including (but not limited to) the views of legal counsel, the nature of the claims and the prior experience of the Company. The Company has provided for losses on all cases where the assessment of management and legal counsel indicates that a loss is probable. Management believes that such legal matters will not have a material adverse effect on the Company's consolidated results of operations, financial condition or cash flows. 13. Pension Plan In April 1996, the Company became a co-sponsor of the private pension entity named Abrilprev Sociedade de Previdencia Privada ("Abrilprev"), the primary objective of which is to grant employees benefits other than those provided by Social Security. The plan is optional to all employees of the sponsoring entities. Abrilprev operates as a Defined Contribution Plan. Company contributions are made based on a fixed percentage applied to the payroll of the sponsoring entities based on actuarial calculations. Contribution expenses amounted to $ 8 for the year ended December 31, 2001 ($11 in 2000 and $10 in 1999). F-93 TVA SUL PARANA LTDA. AND SUBSIDIARY Notes to Consolidated Financial Statements (Continued) (in thousands of U.S. dollars) 14. Abril Health Care Plan In February 1996, the Abril Health Care Plan, Associacao Abril de Beneficios (the "Health Care Plan"), was created to provide health care to Abril S.A. Group employees and their dependents. Both the companies forming part of the Abril Group and the employees thereof contribute monthly to the Health Care Plan, which is responsible for the management of the plan. In 2001, contributions made by the Company to the Health Care Plan and certain affiliate companies to Associacao Abril de Beneficios amounted to $116 ($128 for 2000 and $97 for 1999). 15. Supplementary information - valuation and qualifying accounts and reserves
Deferred Provision Provision Taxation Provision For Doubtful for Valuation for Accounts Obsolescence Allowance claims -------------- -------------- ----------- ----------- Balance as of January 1, 1999 $ 1,689 $-- $ 8,431 $ 251 Additions -- 403 -- -- Deductions 30 -- (1,007) (143) ------- ----- ------- ----- Balance as of December 31, 1999 1,719 403 7,424 108 Additions -- -- 397 589 Deductions (499) (34) -- -- ------- ----- ------- ----- Balance as of December 31, 2000 1,220 369 7,821 697 Additions 464 -- -- -- Deductions -- (233) (584) (245) ------- ----- ------- ----- Balance as of December 31, 2001 $ 1,684 $ 136 $ 7,237 $ 452 ======= ===== ======= =====
F-94 TVA SUL PARANA LTDA. AND SUBSIDIARY Notes to Consolidated Financial Statements (Continued) (in thousands of U.S. dollars) 16. Recent accounting pronouncements Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138 (collectively, "SFAS 133"). SFAS 133 establishes accounting and reporting standards requiring that all derivative financial instruments (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. Additionally, SFAS 133 requires that changes in the fair value of derivatives be recognized in earnings unless specific hedge accounting criteria are met. As the Company does not utilize derivative financial instruments, the effect of adopting SFAS 133 on January 1, 2001 did not have a material impact on the Company's consolidated financial statements. In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. Recorded goodwill and intangibles will be evaluated against these new criteria and may result in certain intangibles being subsumed into goodwill, or alternatively, amounts initially recorded as goodwill may be separately identified and recognized apart from goodwill. SFAS 142 requires the use of a nonamortization approach to account for purchased goodwill and certain intangibles. Under a nonamortization approach, goodwill and certain intangibles will not be amortized into results of operations, but instead would be reviewed for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles is more than its fair value. The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. Effective January 1, 2002, the Company adopted the provisions of each statement that apply to goodwill and intangible assets acquired prior to June 30, 2001. Based on the Company's initial analysis of SFAS 141 and SFAS 142, management believes that the implementation of these pronouncements will not have a material impact on the Company's consolidated results of operations or financial condition. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 requires that the market value of the liabilities related to obligations due to the retirement of assets be recognized in the period in which they occur, if a reasonable estimate of market value is possible. Costs of asset retirement are capitalized as part of the permanent asset cost. In accordance with SFAS 143, the asset retirement obligation is discounted and an increase is recognized by using the "credit adjusted risk-free" interest rate in effect when the obligation was initially recognized. The Company is required to adopt SFAS 143 effective January 1, 2003. Based on an initial analysis of SFAS 143 requirements, F-95 TVA SUL PARANA LTDA. AND SUBSIDIARY Notes to Consolidated Financial Statements (Continued) (in thousands of U.S. dollars) management believes that the implementation of this statement will not have a material impact on the Company's consolidated results of operations or financial condition. In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121") but maintains the fundamental provisions of SFAS 121 for (a) recognition/valuation of the provision for impairment of permanent assets to be maintained and used and (b) valuation of permanent assets to be written off due to their sale. SFAS 144 also supersedes the provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business" ("APB 30") with regard to reporting the effects of a disposal of a segment of a business. The Company adopted SFAS 144 effective January 1, 2002. Based on the Company's initial analysis of the SFAS 144 requirements, management believes that the implementation of this pronouncement will not have a material impact on the Company's consolidated results of operations or financial condition. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections." SFAS 145 rescinds SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt," which required that all gains and losses from extinguishment of debt to be aggregated and classified as an extraordinary item if material. SFAS 145 requires that gains and losses from extinguishment of debt be classified as extraordinary only if they meet criteria in APB 30, thus distinguishing transactions that are part of recurring operations from those that are unusual or infrequent, or that meet the criteria for classification as an extraordinary item. SFAS 145 also amends SFAS No. 13, "Accounting for Leases", to require that lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. In addition, SFAS 145 rescinds SFAS 44, "Accounting for Intangible Assets of Motor Carriers," and SFAS 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements," which are not currently applicable to us. The provisions of SFAS 145 as they relate to the rescission of SFAS 4 will be applied effective January 1, 2003. Certain provisions related to SFAS 13 are effective for transactions occurring after May 15, 2002. Management does not expect SFAS 145 to have a material impact on the Company's consolidated results of operations or financial condition * * * * * * * * F-96 CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. Financial Statements Together with Independent Auditors' Report As of December 31, 2001 and 2000 and for each of the three years in the period ended December 31, 2001 CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. INDEX TO FINANCIAL STATEMENTS Contents Page Independent Auditors' Report F-98 Balance Sheets as of December 31, 2001 and 2000 F-99 Statements of Operations for each of the three years in the period ended December 31, 2001 F-101 Statements of Changes in Shareholders' Equity for each of the three years in the period ended December 31, 2001 F-102 Statements of Cash Flows for each of the three years in the period ended December 31, 2001 F-103 Notes to Financial Statements F-104 F-97 CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. Independent Auditors' Report To the Shareholders and Directors of CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. We have audited the accompanying balance sheets of CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. (the "Company") as of December 31, 2001 and 2000, and the related statements of operations, changes in shareholder's equity and cash flows for each of the three years in the period ended December 31, 2001, all expressed in United States dollars. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. as of December 31, 2001 and 2000, and the results of its operations and cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. Deloitte Touche Tohmatsu Sao Paulo, Brazil June 17, 2002 The accompanying notes are an integral part of the financial statements F-98 CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. Balance Sheets December 31, 2001 and 2000 (in thousands of U.S. dollars) December 31, ---------------- 2001 2000 ------ ------ ASSETS Current assets Cash and cash equivalents $ 20 $ 2 Accounts receivable, net (Footnote 3) 50 72 Inventories 74 104 Prepaid and other assets 2 14 Recoverable taxes 84 136 Accounts receivable from related parties (Footnote 4) 5 18 Other accounts receivable 32 37 ------ ------ Total current assets 267 383 ------ ------ Property, plant and equipment, net (Footnote 7) 3,079 3,899 Loans to related companies (Footnote 4) 565 -- Judicial deposits 199 305 ------ ------ Total assets $4,110 $4,587 ====== ====== The accompanying notes are an integral part of the financial statements F-99 CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. Balance Sheets, continued December 31, 2001 and 2000 (in thousands of U.S. dollars) December 31, ------------------ 2001 2000 ------- ------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Film suppliers $ 275 $ 90 Other suppliers 30 92 Taxes payable other than income taxes 155 91 Accrued payroll and related liabilities 18 22 Income taxes payable -- 134 Accounts payable to related companies (Footnote 4) 5 -- Rent payable 101 79 Other accounts payable 49 28 ------- ------- Total current liabilities 633 536 ------- ------- Long-term liabilities Loans payable to related companies (Footnote 4) -- 126 Taxes payable other than income taxes 488 244 Provision for claims (Footnotes 10 and 12) 3 13 ------- ------- Total long-term liabilities 491 383 ------- ------- Commitments and contingencies (Footnotes 9 and 10) Shareholders' equity Common stock, no par value, 4,850,000 shares authorized, issued and outstanding (Footnote 7) 4,012 4,012 Accumulated other comprehensive loss (949) (335) Accumulated deficit (77) (9) ------- ------- Total shareholders' equity 2,986 3,668 ------- ------- Total liabilities and shareholders' equity $ 4,110 $ 4,587 ======= ======= The accompanying notes are an integral part of the financial statements F-100 CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. Statements of Operations for the years ended December 31, 2001 , 2000 and 1999 (in thousands of U.S. dollars)
Year ended December 31, ----------------------------- 2001 2000 1999 ------- ------- ------- Gross revenues Monthly subscriptions $ 2,025 $ 2,106 $ 1,833 Installation 20 11 32 Additional services 130 96 20 ------- ------- ------- 2,175 2,213 1,885 ------- ------- ------- Direct operating expenses (excluding depreciation stated separately below) Taxes on revenues 553 249 184 Payroll and benefits 58 93 84 Programming 655 491 528 Other costs 198 223 93 ------- ------- ------- 1,464 1,056 889 ------- ------- ------- Selling, general and administrative expenses Payroll and benefits 80 176 147 Advertising and promotion 32 19 6 Other selling, general and administrative expenses 237 98 59 ------- ------- ------- 349 293 212 ------- ------- ------- Depreciation 356 403 229 Other operating expense (income) (74) 119 17 ------- ------- ------- Operating income 80 342 538 ------- ------- ------- Interest income (65) (37) (226) Interest expense 207 94 -- Foreign currency translation loss, net -- -- 135 Foreign currency transaction loss, net 6 -- -- ------- ------- ------- Income (loss) before income taxes (68) 285 629 Income tax expense - current ( Footnote 5) -- 206 106 ------- ------- ------- Net income (loss) $ (68) $ 79 $ 523 ======= ======= ======= Other comprehensive loss - Foreign currency translation adjustment (614) (335) -- ------- ------- ------- Comprehensive income (loss) $ (682) $ (256) $ 523 ======= ======= =======
The accompanying notes are an integral part of the financial statements F-101 CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. Statements of Changes in Shareholders' Equity for the years ended December 31, 2001, 2000 and 1999 (in thousands of U.S. dollars)
Accumulated Other Common Accumulated Comprehensive Stock Deficit Loss Total ------ ----------- ------------- ----- Balance as of January 1, 1999 $4,012 $(611) $-- $ 3,401 Net income for the year -- 523 -- 523 ------ ----- ----- ------- Balance as of December 31, 1999 4,012 (88) -- 3,924 Foreign currency translation adjustment, net of tax -- -- (335) (335) Net income for the year -- 79 -- 79 ------ ----- ----- ------- Balance as of December 31, 2000 4,012 (9) (335) 3,668 Foreign currency translation adjustment, net of tax -- -- (614) (614) Net loss for the year -- (68) -- (68) ------ ----- ----- ------- Balance as of December 31, 2001 $4,012 $ (77) $(949) $ 2,986 ====== ===== ===== =======
The accompanying notes are an integral part of the financial statements F-102 CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. Statements of Cash Flows for the years ended December 31, 2001 ,2000 and 1999 (in thousands of U.S. dollars)
Year Ended December 31, --------------------------- 2001 2000 1999 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ (68) $ 79 $ 523 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 356 403 229 Provision (reversal of provision) for doubtful accounts 60 (3) (14) Provision (reversal of provision) for claims (10) 13 -- Foreign currency transaction loss, net 6 -- -- Changes in operating assets and liabilities Accounts receivable (38) 109 (59) Prepaid and other assets 12 (14) -- Inventories 25 23 2 Suppliers 123 (12) 8 Taxes payable other than income taxes 174 103 140 Income taxes payable -- 53 57 Accrued payroll and related liabilities (4) (25) 1 Other 230 (397) (12) ------- ----- ----- Net cash provided by operating activities 866 460 421 ------- ----- ----- Cash flows from investing activities: Purchases of property, plant and equipment (151) (203) (132) Loans to related companies (1,032) (677) -- Repayments of loans to related companies 467 -- -- ------- ----- ----- Net cash used in investing activities (761) (880) (132) ------- ----- ----- Cash flows from financing activities: Proceeds from loans from related companies 246 412 -- Repayments of loans from related companies (387) -- (673) ------- ----- ----- Net cash provided by (used in) financing activities (141) 412 (673) ------- ----- ----- Effect of exchange rate changes on cash and cash equivalents 9 9 -- ------- ----- ----- Net increase (decrease) in cash and cash equivalents 18 (127) 70 Cash and cash equivalents at beginning of year 2 129 59 ------- ----- ----- Cash and cash equivalents at end of the year $ 20 $ 2 $ 129 ======= ===== ===== Cash paid for interest $ -- $-- $-- Cash paid for income taxes -- 206 106
The accompanying notes are an integral part of the financial statements F-103 CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. Notes to Financial Statements (in thousands of U.S. dollars) 1. The Company and its principal operations CCS - Camboriu Cable System Telecomunicacoes Ltda. (the "Company") renders services related to wireless cable and cable television systems, including marketing and advertising, production, distribution and licensing of domestic and foreign television programs. The Company has wireless cable channel rights primarily in the city of Camboriu. The Company's operations are substantially dependent on the Tevecap Group regarding programming, marketing, financial and administrative systems. 2. Summary of significant accounting policies Significant policies followed in the preparation of the financial statements are described below: 2.1. Basis of presentation The financial statements are presented in United States dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"), which differ in certain respects from accounting principles applied by the Company in its local currency financial statements, which are prepared in accordance with accounting principles generally accepted in Brazil ("Brazilian GAAP"). The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the financial statement dates and the reported amount of revenues and expenses during the reporting periods. Since management's judgment involves making estimates concerning the likelihood of future events, the actual results could differ from these estimates. 2.2. Accounting records As required by Brazilian Law, and in accordance with local accounting practices, the accounting records of the Company are maintained in Brazilian currency ("real"). In order to present the financial statements in conformity with U.S. GAAP, the Company maintains additional accounting records that are used solely for this purpose. F-104 CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. Notes to Financial Statements (Continued) (in thousands of U.S. dollars) 2.3. Currency remeasurement On January 1, 2000, Tevecap S.A. ("Tevecap"), parent company of the Company's major shareholder TVA Sul Parana Ltda., changed its functional currency from the United States dollar to the Brazilian real. As the Company uses the functional currency of Tevecap, the Company also changed its functional currency from the United States dollar to the Brazilian real on January 1, 2000. This change was performed in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation". 2.4. Cash and cash equivalents Cash and cash equivalents are defined as cash and cash in banks and investments in interest-bearing securities. Short-term investments with original maturities of three months or less at the time of purchase are considered cash equivalents. 2.5. Financial instruments In accordance with SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" ("SFAS 107"), information is provided about the fair value of certain financial instruments for which it is practicable to estimate that value. For the purposes of SFAS 107, the estimated fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value: o The fair value of current financial assets and liabilities, including cash and cash equivalents, accounts receivable, other accounts receivable, accounts receivable from related parties, film suppliers, and other accounts payable approximates their respective carrying value due to their short-term nature. o The fair value of loans to and from related companies approximates their respective carrying value as interest on these loans is at market rates. F-105 CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. Notes to Financial Statements (Continued) (in thousands of U.S. dollars) 2.6. Accounts receivable A provision for doubtful accounts was established on the basis of an analysis of the accounts receivable, in light of the risks involved, and is considered sufficient to cover any losses incurred in realization of credits. 2.7. Inventories Inventories consist of materials and supplies and imports in transit. Materials and supplies are used to provide service to new customers, and to ensure continuity of service to existing customers. Imports in transit represent materials purchased from foreign countries that have not yet been received. Inventories are stated at the lower of cost or market. Cost is determined principally under the average cost method. 2.8. Property, plant and equipment Property, plant and equipment are stated at cost and depreciated using the straight-line method, over the remaining useful lives, as described in Note 6. 2.9. Recoverability of long-lived assets to be held and used The Company evaluates its long-lived assets and identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected to be generated by the asset. In estimating future undiscounted net cash flows, assets are grouped at the level of each cable television system. If an asset is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. There were no impairment write-downs made during the years ended December 31, 2001, 2000 and 1999. F-106 CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. Notes to Financial Statements (Continued) (in thousands of U.S. dollars) 2.10. Revenue recognition Subscription revenues are recognized monthly at the amount billed to subscribers for service subscribed to and earned during the month. Installation fees are recognized as revenue on the equipment installation date to the extent of direct selling costs incurred which are higher than the revenue. Other revenues are recognized as services are rendered. 2.11 Advertising and promotion costs Costs of advertising and promotion are expensed as incurred 2.12 Deferred income taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases as well as operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when it is more likely than not that some or all of the deferred tax assets will not be realized. 2.13 Concentrations of credit risk Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable. Such concentrations of credit risk are limited due to the large numbers comprising the Company's subscriber and customer base and their dispersion across different geographic regions. As of December 31, 2001 and 2000, the Company had no other significant concentrations of credit risk. 2.14 Reclassifications Certain prior years amounts have been reclassified for comparative purposes. F-107 CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. Notes to Financial Statements (Continued) (in thousands of U.S. dollars) 3. Accounts receivable, net As of December 31, 2001 and 2000, accounts receivable were comprised of: December 31, ---------------------- 2001 2000 ------- ------- Subscriptions and installation $ 152 $ 112 Advertising 5 6 Programming -- 1 Provision for doubtful accounts (107) (47) ------- ------- $ 50 $ 72 ======= ======= No single customer accounted for more than 10% of total accounts receivable as of December 31, 2001 and 2000. 4. Related party transactions The following tables summarize the transactions between the Company and related parties as of December 31, 2001 and 2000: December 31, ---------------------- 2001 2000 ------- ------- TVA Sistema de Televisao S.A. (under common control with parent company) Accounts receivable $ 5 $ 11 Accounts payable 5 -- TVA Sul Parana Ltda. (parent company) Accounts receivable -- 7 Loans receivable 565 -- Loans payable -- 126 The Company and its related parties maintain a cash management system centralized at TVA Sul Parana Ltda. The centralized cash management system results in accounts receivable from and payable to related parties depending on the cash needs of the companies. F-108 CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. Notes to Financial Statements (Continued) (in thousands of U.S. dollars) 4. Related party transactions (Continued) The related company loans are denominated in reais and are subject to monetary restatement until December 31, 1995 plus interest charges at the market rate which ranged from 1.01% to 1.53% per month as of December 31, 2001 (1.63% to 1.90% per month as of December 31, 2000). 5. Income taxes Deferred income taxes reflect the future tax consequences of net operating loss carryforwards and differences between the tax basis and the financial reporting basis of assets and liabilities. A valuation allowance has been established against the net deferred tax asset (primarily consisting of net operating loss carryforwards and provisions) as management believes it is more likely than not that the deferred tax assets will not be realized. Accordingly, no benefit has been recognized for the Company's net operating losses and other deferred tax assets. As of December 31, 2001, the Company has unexpirable net operating loss carryforwards of $66. F-109 CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. Notes to Financial Statements (Continued) (in thousands of U.S. dollars) 5. Income taxes (continued) The income tax expense was different from the amount computed using the Brazilian statutory income tax for the reasons set forth in the following table:
2001 2000 1999 ---- ---- ---- Income (loss) before income taxes $(68) $ 285 $ 629 Statutory income tax rate 34% 34% 37% ---- ----- ----- Computed income tax expense (benefit) (23) 97 233 Change in the income tax rate -- 1 22 Translation loss of tax losses 1 3 30 Deductible devaluation loss for Brazilian statutory purposes 22 150 (169) Change in valuation allowance -- (45) (10) ---- ----- ----- Income tax expense per statements of operations $-- $ 206 $ 106 ==== ===== =====
6. Property, plant and equipment, net As of December 31, 2001 and 2000, property, plant and equipment were comprised of: Annual Depreciation December 31, Rate --------------------- % 2001 2000 ------- ------- Reception equipment 20 $ 598 $ 585 Cable plant 10 765 893 Machinery and equipment 10 310 343 Converters 10 38 26 Leasehold improvements 25 3 4 Building 25 2,658 3,154 Furniture and fixtures 10 67 79 Vehicles 20 12 15 Software 20 6 7 Tools 10 3 2 Other 3 9 Accumulated depreciation (1,384) (1,218) ------- ------- $ 3,079 $ 3,899 ======= ======= F-110 CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. Notes to Financial Statements (Continued) (in thousands of U.S. dollars) 7. Shareholder's equity Common stock as of December 31, 2001 and 2000 was comprised of:
2001 2000 ------------------------ ----------------------- $ Shares $ Shares ---------- ---------- ---------- --------- Construtora ENE ESSE Ltda $ 1,605 1,940,000 $ 1,605 1,940,000 TVA Sul Parana Ltda 2,407 2,910,000 2,407 2,910,000 ---------- ---------- ---------- --------- $ 4,012 4,850,000 $ 4,012 4,850,000 ========== ========== ========== =========
8. Loan guarantees In November 1996, Tevecap issued $250,000 12-5/8% Senior Notes to institutional buyers in a private placement. The Notes, which mature in November 2004, were subsequently registered with the Securities and Exchange Commission in May 1997. These Notes are jointly and severally, irrevocably and fully unconditionally guaranteed, on a senior basis, by Tevecap's direct and indirect subsidiaries, including the Company. On July 28, 1999 the related company TVA Communications Ltd. 80.79% of these Notes. 9. Litigation contingencies Certain claims and lawsuits arising in the ordinary course of business have been filed or are pending against the Company which were not recognized in the financial statements. The Company has also recorded provisions related to certain claims in amounts that management considers to be adequate after considering a number of factors including (but not limited to) the views of legal counsel, the nature of the claims and the prior experience of the Company. The Company has provided for losses on all cases where the assessment of management and legal counsel indicates that a loss is probable. Management believes that such legal matters will not have a material adverse effect on the Company's results of operations, financial condition or cash flows. F-111 CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. Notes to Financial Statements (Continued) (in thousands of U.S. dollars) 10. Abril Health Care Plan In February 1996, the Abril Health Care Plan, Associacao Abril de Beneficios (the "Health Care Plan"), was created to provide health care to Abril S.A. Group employees and their dependents. Both the companies forming part of the Abril Group and the employees thereof contribute monthly to the Health Care Plan, which is responsible for the management of the plan. In 2001, contributions made by the Company to the Health Care Plan amounted to $14 ( $17 in 2000 and $16 in 1999). 11. Supplementary information - valuation and qualifying accounts and reserves Deferred Provision Taxation for Provision Valuation Doubtful for Allowance Accounts Claims ----------- ----------- ----------- Balance as of January 1, 1999 $ 55 $ 64 $ -- Additions -- -- -- Deductions (10) (14) -- ------- ------- ------- Balance as of December 31, 1999 45 50 -- Additions -- -- 13 Deductions (45) (3) -- ------- ------- ------- Balance as of December 31, 2000 -- $ 47 $ 13 Additions -- 60 -- Deductions -- -- (10) ------- ------- ------- Balance as of December 31, 2001 $ -- 107 3 ======= ======= ======= 12. Recent accounting pronouncements Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138 (collectively, "SFAS 133"). SFAS 133 establishes accounting and reporting standards requiring that all derivative financial instruments (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. Additionally, SFAS 133 requires that changes in the fair value of derivatives be recognized in earnings unless specific hedge accounting criteria are met. As the Company does not utilize derivative financial instruments, the effect of adopting SFAS 133 on Jaunary 1, 2001 did not have a material impact on the Company's financial statements. F-112 CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. Notes to Financial Statements (Continued) (in thousands of U.S. dollars) In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" ("SFAS 141") and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting, and broadens the criteria for recording intangible assets separate from goodwill. Recorded goodwill and intangibles will be evaluated against this new criteria and may result in certain intangibles being subsumed into goodwill, or alternatively, amounts initially recorded as goodwill may be separately identified and recognized apart from goodwill. SFAS 142 requires the use of a nonamortization approach to account for purchased goodwill and certain intangibles. Under a nonamortization approach, goodwill and certain intangibles will not be amortized into results of operations, but instead would be reviewed for impairment and written down and charged to results of operations only in the periods in which the recorded value of goodwill and certain intangibles is more than its fair value. The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. Effective January 1, 2002, the Company adopted the provisions of each statement that apply to goodwill and intangible assets acquired prior to June 30, 2001. As the Company has not entered into any business combinations, management believes that the implementation of these pronouncements will not have a material impact on the Company's results of operations or financial condition. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 requires that the market value of the liabilities related to obligations due to the retirement of assets be recognized in the period in which they occur, if a reasonable estimate of market value is possible. Costs of asset retirement are capitalized as part of the permanent asset cost. In accordance with SFAS 143, the asset retirement obligation is discounted and an increase is recognized by using the "credit adjusted risk-free" interest rate in effect when the obligation was initially recognized. The Company is required to adopt SFAS 143 effective January 1, 2003. Based on an initial analysis of SFAS 143 requirements, management believes that the implementation of this statement will not have a material impact on the Company's results of operations or financial condition. In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121") but maintains the fundamental provisions of SFAS 121 for (a) recognition/valuation of the provision for impairment of permanent assets to be maintained and used and (b) valuation of permanent assets to be written off due to their sale. SFAS F-113 CCS - CAMBORIU CABLE SYSTEM TELECOMUNICACOES LTDA. Notes to Financial Statements (Continued) (in thousands of U.S. dollars) 144 also supersedes the provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business" ("APB 30") with regard to reporting the effects of a disposal of a segment of a business. The Company adopted SFAS 144 effective January 1, 2002. Based on the Company's initial analysis of the SFAS 144 requirements, management believes that the implementation of this pronouncement will not have a material impact on the Company's results of operations or financial condition. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections." SFAS 145 rescinds SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt," which required that all gains and losses from extinguishment of debt to be aggregated and classified as an extraordinary item if material. SFAS 145 requires that gains and losses from extinguishment of debt be classified as extraordinary only if they meet criteria in APB 30, thus distinguishing transactions that are part of recurring operations from those that are unusual or infrequent, or that meet the criteria for classification as an extraordinary item. SFAS 145 also amends SFAS No. 13, "Accounting for Leases", to require that lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. In addition, SFAS 145 rescinds SFAS 44, "Accounting for Intangible Assets of Motor Carriers," and SFAS 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements," which are not currently applicable to us. The provisions of SFAS 145 as they relate to the rescission of SFAS 4 will be applied effective January 1, 2003. Certain provisions related to SFAS 13 are effective for transactions occurring after May 15, 2002. Management does not expect SFAS 145 to have a material impact on the Company's results of operations or financial condition * * * * * * * F-114 -----END PRIVACY-ENHANCED MESSAGE-----