-----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, VovBTBAWk4QNqUXoLriQaBDkMr9Q6jFEynMWl0W4gcOFKbilqB/O8WXgzusDXucg 4QgvRGuDL8PJZiYo7URmxg== 0000950123-03-007714.txt : 20030630 0000950123-03-007714.hdr.sgml : 20030630 20030630145947 ACCESSION NUMBER: 0000950123-03-007714 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030630 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INNOVA S DE RL CENTRAL INDEX KEY: 0001044884 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 333-07484 FILM NUMBER: 03763998 BUSINESS ADDRESS: STREET 1: INSURGENTES SUR 694 STREET 2: PISO 8 COL DEL VALLE 03100 CITY: MEXICO STATE: O5 BUSINESS PHONE: 5254484000 20-F 1 y87959e20vf.txt INNOVA, S. DE R.L. DE C.V. ================================================================================ UNITED STATES 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, 2002 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 333-7484 INNOVA, S. de R.L. de C.V. (Exact name of Registrant as specified in its charter) N/A (Translation of Registrant's name into English) UNITED MEXICAN STATES (Jurisdiction of incorporation or organization) INSURGENTES SUR 694, PISO 8 COLONIA DEL VALLE 03100 MEXICO, D.F. MEXICO (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act: None Securities registered or to be registered pursuant to Section 12(g) of the Act: None Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None The number of outstanding shares of each of the issuer's classes of capital or common stock as of December 31, 2002 was: One Series A-1 Social Part, One Series B-1 Social Part, and One Series B-2 Social Part 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 which financial statement item the registrant has elected to follow. Item 17 [ ] Item 18 [X] ================================================================================ TABLE OF CONTENTS
PAGE ---- PART I ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS........................................ 1 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE...................................................... 1 ITEM 3. KEY INFORMATION.............................................................................. 1 Selected Financial Data............................................................... 1 Risk Factors.......................................................................... 4 ITEM 4. INFORMATION ON THE COMPANY................................................................... 16 History and Development of the Company................................................ 16 Business Overview..................................................................... 18 Organizational Structure.............................................................. 38 Property, Plant and Equipment......................................................... 39 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS................................................. 39 Operating Results..................................................................... 45 Liquidity and Capital Resources....................................................... 52 Contractual Obligations and Commercial Commitments.................................... 54 Research and Development, Patents and Licenses, etc................................... 55 Trend Information..................................................................... 55 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES................................................... 57 Directors and Senior Management....................................................... 57 Compensation.......................................................................... 60 Board Practices....................................................................... 60 Employees............................................................................. 61 Share Ownership....................................................................... 61 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS............................................ 61 Major Shareholders.................................................................... 61 Related Party Transactions............................................................ 62 ITEM 8. FINANCIAL INFORMATION........................................................................ 64 Item 9. The OFFER AND LISTING........................................................................ 64 ITEM 10. ADDITIONAL INFORMATION...................................................................... 65 Bylaws................................................................................ 65 Material Contracts.................................................................... 68 Exchange Controls..................................................................... 70 Taxation.............................................................................. 70 Documents on Display.................................................................. 76 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................. 76 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES...................................... 78 PART II ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES............................................. 78 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS.................................... 78 ITEM 15. CONTROLS AND PROCEDURES..................................................................... 79
- i - ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT........................................................... 79 ITEM 16B. CODE OF ETHICS............................................................................. 79 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES..................................................... 79 PART III ITEM 17. FINANCIAL STATEMENTS........................................................................ 79 ITEM 18. FINANCIAL STATEMENTS........................................................................ 79 ITEM 19. EXHIBITS.................................................................................... 79
- ii - The terms "we", "us", "our" and "Innova" are used in this annual report to refer to Innova, S. de R.L. de C.V and its consolidated subsidiaries. We maintain our books and records in pesos and present our financial statements in conformity with generally accepted accounting principles in Mexico, or Mexican GAAP. Mexican GAAP differ in some significant respects from generally accepted accounting principles in the United States, or U.S. GAAP, and generally accepted accounting principles adopted in other countries. Under Mexican GAAP, we must account for the effects of inflation. Accordingly, we have restated all data in our consolidated financial statements and the notes thereto, as well as our selected financial information, in constant pesos in purchasing power as of December 31, 2002, unless otherwise indicated. See Note 3 to our consolidated financial statements. We use the Mexican Interbank free market exchange rate, commonly known as the Interbank Rate, as reported by Banco Nacional de Mexico, S.A., to prepare our financial statements. Unless otherwise indicated, references to "Ps." or "pesos" in this annual report are to Mexican pesos and references to "U.S. dollars," "US$" or "$," are to United States dollars. As of December 31, 2002, the Interbank Rate was Ps. 10.464 per US$1.00. We use the Interbank Rate as of December 31, 2002 to translate pesos into U.S. dollars in this report, unless otherwise indicated. See "Item 3: Key Information--Exchange Rate Information" for information regarding the rates of exchange between the peso and the U.S. dollar for specified periods. You should not construe the exchange rate translations in this report as representations that the peso amounts represent actual dollar amounts or that they could be converted into U.S. dollars at the rate indicated or at any other rate. - iii - PART I ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not applicable. ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. ITEM 3. KEY INFORMATION SELECTED FINANCIAL DATA The following table presents selected consolidated financial data for Innova and its subsidiaries. You should read this information in conjunction with our audited consolidated financial statements and the notes to those financial statements. Our financial statements have been prepared in accordance with Mexican GAAP, which differ in some significant respects from U.S. GAAP and generally accepted accounting principles adopted in other countries. Note 21 to our financial statements describes the principal differences between Mexican GAAP and U.S. GAAP as they relate to Innova and reconciles net loss and total stockholders' deficit to U.S. GAAP.
AS OF AND FOR THE YEAR ENDED DECEMBER 31 -------------------------------------------------------------------------------- 1998 1999 2000 2001 2002 ------------- ------------- ------------- -------------- ------------- (IN THOUSANDS OF MEXICAN PESOS IN PURCHASING POWER AS OF DECEMBER 31, 2002) STATEMENT OF OPERATIONS DATA: Net sales ................................ Ps. 975,450 Ps. 1,818,748 Ps. 2,560,159 Ps. 3,266,037 Ps. 3,432,872 Depreciation and amortization ............ (484,592) (686,129) (844,580) (948,335) (925,078) Operating (loss) profit .................. (1,515,875) (1,152,571) (1,075,591) (278,925) 9,021 Total integral results of financing (1)... (757,800) 140,295 (352,022) (70,661) (1,647,800) Other (expenses) income, net ............. (8,024) 11,702 -- -- (22,126) Transponder services - Solidaridad 2 and repointing costs (2) .............. -- -- (430,916) -- (25,933) Restructuring charges (3) ................ -- -- -- (13,576) (6,495) Loss before provisions for taxes ......... (2,281,699) (1,000,574) (1,858,529) (363,162) (1,693,333) Provisions for taxes (4) ................. (7) (36) (130) (46,283) (75,530) Net loss ................................. (2,281,707) (1,000,610) (1,858,659) (409,445) (1,768,863) Net sales (U.S. GAAP) (5) ................ Ps. 995,820 Ps. 1,871,574 Ps. 2,559,502 Ps. 3,140,996 Ps. 3,315,976 Operating (loss) (U.S. GAAP) (5) ......... (2,823,320) (992,734) (1,050,993) (791,319) (76,471) Net (loss) income (U.S. GAAP) (5) ........ (3,218,113) 205,678 (1,408,456) (930,659) (1,799,801) OTHER DATA: Capital expenditures ..................... Ps. 803,245 Ps. 621,420 Ps. 686,130 Ps. 802,722 Ps. 317,512 BALANCE SHEET DATA: Property and equipment, net (6) .......... Ps. 1,874,772 Ps. 1,912,071 Ps. 1,908,759 Ps. 1,952,176 Ps. 1,544,905 Satellite transponders, net (7) .......... -- -- 1,400,722 1,215,450 1,240,997 Total other non-current assets ........... 999,185 560,236 348,739 217,865 104,928 Total assets ............................. 4,061,656 3,288,200 3,949,773 3,774,327 3,441,543 Total assets (U.S. GAAP) ................. 4,492,453 3,231,926 4,018,517 4,099,139 3,679,766 Net liabilities .......................... 2,394,805 2,877,900 4,763,418 5,301,180 6,905,899 Net liabilities (U.S. GAAP) (5) .......... 3,482,449 2,711,814 4,120,190 5,050,833 6,850,753 Due to affiliated companies and related parties (8) ................... 300,520 243,283 244,129 349,626 433,420 Senior notes (9) ......................... 5,001,751 4,281,409 3,976,797 3,637,930 3,924,000 Owners' loans (10) ....................... 333,505 760,378 1,565,268 2,720,201 3,242,793 Satellite transponders obligation (7) .... -- -- 1,472,221 1,358,277 1,421,655 Stockholders' deficit .................... (2,394,805) (2,877,900) (4,763,224) (5,301,180) (6,905,899) Capital stock ............................ 1,348,201 1,913,116 1,913,116 1,913,116 1,913,116 Stockholders' deficit (U.S. GAAP) (5) .... (3,482,449) (2,711,814) (4,120,190) (5,050,833) (6,850,753)
(1) Includes interest expense, interest income, foreign exchange gains and (losses), net gain from monetary position and other net. Note 3 to our consolidated financial statements. (2) See Note 15 to our consolidated financial statements. (3) See Note 16 to our consolidated financial statements. (4) See Note 18 to our consolidated financial statements. (5) The principal differences between Mexican GAAP and U.S. GAAP as they relate to us consist of differences in the capitalization and amortization of pre-operating expenses, the provision for costs associated with re-pointing our subscriber's antennas from the Solidaridad 2 satellite to the PAS-9 satellite, the provision for the redundant use of Solidaridad Satellite, the reversal of certain other accruals, the capitalization of financing costs, the restatement of property and equipment, and the recognition of revenue. See Note 21 to our consolidated financial statements. (6) See Note 5 to our consolidated financial statements. (7) Beginning in 2000, we accounted for the agreement for the use of 12 transponders on the PAS-9 satellite as a capital lease, recognizing a satellite transponder asset and corresponding liability equal to the net present value of the monthly payments over the lease term. The satellite transponder asset is depreciated on a straight-line-basis over the lease term. Part of the monthly payments are recognized in our income statements as interest expense and part as a reduction of the satellite obligation. Our income statement also recognizes on a monthly basis the amortization of the net present value of our satellite transponder asset. Our other satellite transponder agreements have been accounted for as operating leases. See Note 6 to our consolidated financial statements. (8) See Note 9 to our consolidated financial statements. (9) See Note 10 to our consolidated financial statements. (10) See Note 11 to our consolidated financial statements. EXCHANGE RATE INFORMATION Since November 1991, Mexico has had a free market for foreign exchange, and since December 1994, the Mexican government has allowed the Peso to float freely against the U.S. Dollar. The Peso declined sharply in December 1994 and continued to fall under conditions of high volatility in 1995. In 1996, the Peso fell more slowly and was less volatile. Relative stability characterized the foreign exchange markets during the first three quarters of 1997. The fall of the Hang Seng Index of the Hong Kong Stock Exchange on October 24, 1997 marked the beginning of a period of increased volatility in the foreign exchange markets with the Peso falling over 10% in just a few days. During 1998, the foreign exchange markets experienced volatility as a result of the financial crises in Asia and Russia and the financial turmoil in countries such as Brazil and Venezuela. More recently, the economic and financial crises in Argentina and Venezuela have resulted in volatility in the foreign exchange markets, have caused instability in the Latin American financial markets and could continue to have a negative impact on the value of the Peso. See "-- Risk Factors -- Risk Factors Related to Mexico -- Developments in Other Emerging Markets Countries or the United States May Affect Us and the Prices for Our Securities." We cannot assure you that the Mexican government will maintain its current policies with regard to the Peso or that the Peso will not further depreciate or appreciate significantly in the future. - 2 - The following table sets forth, for the periods indicated, the high, low, average and period end free market exchange rate for the purchase of U.S. Dollars, expressed in nominal Pesos per U.S. Dollar. All amounts are stated in Pesos per U.S. Dollar. As of June 25, 2003, the free market exchange rate for the purchase of U.S. Dollars as reported by the Board of Governors of the Federal Reserve Bank was Ps.10.48 per U.S. Dollar.
EXCHANGE RATE(1) ---------------- HIGH LOW AVERAGE(2) PERIOD END ---- --- ---------- ---------- YEAR ENDED DECEMBER 31, 1998................................... 10.63 8.04 9.24 9.90 1999................................... 10.60 9.24 9.56 9.48 2000................................... 10.09 9.18 9.47 9.62 2001................................... 9.97 8.95 9.33 9.16 2002................................... 10.43 9.00 9.75 10.43 MONTH ENDED December 31, 2002...................... 10.43 10.10 10.23 10.43 January 31, 2003....................... 10.98 10.32 10.62 10.90 February 28, 2003...................... 11.06 10.77 10.95 11.03 March 31, 2003......................... 11.24 10.66 10.91 10.78 April 30, 2003......................... 10.77 10.31 10.59 10.31 May 31, 2003........................... 10.42 10.11 10.25 10.34 June 25, 2003.......................... 10.74 10.24 10.51 10.48
(1) The free market exchange rate is the Noon Buying Rate for Pesos reported by the Board of Governors of the Federal Reserve Bank. (2) Annual average rates reflect the average of month-end rates. Monthly average rates reflect the average of daily rates. The Mexican economy has suffered balance of payment deficits and shortages in foreign exchange reserves. While the Mexican government does not currently restrict the ability of Mexican or foreign persons or entities to convert Pesos to U.S. Dollars, we cannot assure you that the Mexican government will not institute restrictive exchange control policies in the future, as has occurred from time to time in the past. To the extent that the Mexican government institutes restrictive exchange control policies in the future, our ability to transfer or to convert Pesos into U.S. Dollars and other currencies for the purpose of making timely payments of interest and principal of indebtedness, as well as obtaining foreign programming and other goods, would be adversely affected. See "-- Risk Factors -- Risk Factors Related to Mexico -- Currency Fluctuations or the Devaluation and Depreciation of the Peso Could Limit the Ability of Us and Others to Convert Pesos into U.S. Dollars or Other Currencies and/or Adversely Affect Our Financial Condition." DIVIDENDS We have not declared or paid any dividends. Under our Social Part Holders Agreement and bylaws, dividends may be paid in pesos or U.S. dollars as determined by our equity holders. The dollar value of any dividends would be affected by the exchange rate if paid in pesos. The indenture governing our 12 7/8 % senior notes due 2007, or senior notes, restricts our ability to declare dividends under certain conditions. - 3 - RISK FACTORS The following is a discussion of risks associated with our company and an investment in our securities. Some of the risks of investing in our securities are general risks associated with doing business in Mexico. Other risks are specific to our business. The discussion below contains information about the Mexican government and the Mexican economy obtained from official statements of the Mexican government as well as other public sources. We have not independently verified this information. Any of the following risks, if they actually occur, could materially and adversely affect our business, financial condition or results of operations, or the price of our securities. RISK FACTORS RELATED TO MEXICO ECONOMIC AND POLITICAL DEVELOPMENTS IN MEXICO MAY ADVERSELY AFFECT OUR BUSINESS. Substantially all of our revenues are denominated in Mexican pesos and are generated in Mexico. Our management and many of our assets are located in Mexico. As a result, our business, financial condition, and results of operations may be affected by the general condition of the Mexican economy, the devaluation of the Mexican peso as compared to the U.S. dollar, Mexican inflation, interest rates, regulation, taxation, social instability and other political, social and economic developments in or affecting Mexico. MEXICO HAS EXPERIENCED ADVERSE ECONOMIC CONDITIONS Mexico has experienced a prolonged period of slow economic growth since 2001, primarily as a result of the downturn in the U.S. economy. In 2000, Mexico's gross domestic product, or GDP, increased 6.6%. According to Mexican government estimates, GDP decreased 0.3% in 2001 and increased 0.9% and 2.3% in 2002 and the three month period ended March 31, 2003, respectively. Inflation in 2000, 2001, 2002 and the three month period ended March 31, 2003 was 9.0%, 4.4%, 5.7% and 1.3%, respectively. Nonetheless, at approximately 4.7% per annum (as measured from May 2002 to May 2003), Mexico's current level of inflation remains higher than the annual inflation rates of its main trading partners. GDP growth fell short of Mexican government estimates in 2002 due primarily to the slowdown in the growth of the U.S. economy, the reduction of investments, the increase in unemployment and a decrease in exports as a result of the 13.9% depreciation of the Peso as compared to the U.S. Dollar. According to Mexican government estimates, GDP in Mexico is expected to grow by approximately 2.25%, while inflation is expected to be less than 4.0%, in 2003. We cannot assure you that these estimates will prove to be accurate. During the first quarter of 2003, the Mexican economy continued to slow, in large part, as a result of the continued weakness of the U.S. economy, the uncertainty generated by the continued hostilities in the Middle East and the related potential impacts on oil prices and consumer confidence, uncertainty caused by the continuing threat of large scale international terrorist attacks and a decrease in consumption as a result of the recent depreciation of the Mexican Peso as compared to the U.S. Dollar. We believe that the economic slowdown has negatively affected and could continue to negatively affect our revenues. If the Mexican economy falls into a recession or if other economic events such as increased inflation and interest rates or deflation occur, our business, financial condition and results of operations may be adversely affected for the following reasons: - demand for DTH satellite services, pay-per-view programming and other services may decrease; - demand for advertising may decrease both because consumers may reduce expenditures for our advertisers' products and because advertisers may reduce advertising expenditures; - to the extent inflation exceeds our price increases, our prices and revenues will be adversely affected in "real" terms; and - if the rate of Mexican inflation exceeds the rate of devaluation of the Peso against the U.S. Dollar, our U.S. Dollar-denominated sales, if any, would decrease in relative terms when stated in constant Pesos. - 4 - CURRENCY FLUCTUATIONS OR THE DEVALUATION AND DEPRECIATION OF THE PESO COULD LIMIT THE ABILITY OF US AND OTHERS TO CONVERT PESOS INTO U.S. DOLLARS OR OTHER CURRENCIES AND/OR ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS Most of our indebtedness and a significant amount of our costs are U.S. Dollar-denominated, while our revenues are primarily Peso-denominated. As a result, decreases in the value of the Peso against the U.S. Dollar could cause us to incur foreign exchange losses, which would reduce our net income. Severe devaluation or depreciation of the Peso may also result in governmental intervention, as has resulted in Argentina, or disruption of international foreign exchange markets. This may limit our ability to transfer or convert Pesos into U.S. Dollars and other currencies for the purpose of making timely payments of interest and principal on our indebtedness and adversely affect our ability to pay our satellite and other dollar-denominated costs, obtain foreign programming and other imported goods. While the Mexican government does not currently restrict, and for many years has not restricted, the right or ability of Mexican or foreign persons or entities to convert Pesos into U.S. Dollars or to transfer other currencies outside of Mexico, the Mexican government could institute restrictive exchange control policies in the future. Devaluation or depreciation of the Peso against the U.S. Dollar may also adversely affect U.S. Dollar prices for our securities. HIGH INTEREST RATES IN MEXICO COULD INCREASE OUR FINANCING COSTS Mexico historically has had, and may continue to have, high real and nominal interest rates. The interest rates on 28-day Mexican government treasury securities averaged 15.2%, 11.3%, 7.1% and 8.8% for 2000, 2001, 2002 and the three month period ended March 31, 2003. Accordingly, if we need to incur Peso-denominated debt in the future, it will likely be at high interest rates. POLITICAL EVENTS IN MEXICO COULD AFFECT MEXICAN ECONOMIC POLICY AND OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS In the Mexican national elections held on July 2, 2000, Vicente Fox of the opposition party, the Partido Accion Nacional, or the National Action Party, won the presidency. His victory ended more than 70 years of presidential rule by the Partido Revolucionario Institucional, or the Institutional Revolutionary Party. Neither the Institutional Revolutionary Party nor the National Action Party succeeded in securing a majority in the Chamber of Deputies or the Senate, the two houses of the Mexican Congress. Although members of the National Action Party have governed several states and municipalities, the National Action Party had not previously governed on a federal level. President Fox has encountered strong opposition to a number of his proposed reforms in both the Chamber of Deputies and the Senate, where opposition forces have frequently joined to block his initiatives. This legislative deadlock could slow down the progress of reforms in Mexico. In addition, new legislative elections will be held in July 2003, which may further hinder President Fox's ability to implement his initiatives. The effects on the social and political situation in Mexico, as well as currency instability in Mexico, could adversely affect the Mexican economy, which in turn could have a material adverse effect on our business, financial condition and results of operations, as well as market conditions and prices for our securities. DEVELOPMENTS IN OTHER EMERGING MARKET COUNTRIES OR THE UNITED STATES MAY AFFECT US AND THE PRICES FOR OUR SECURITIES In the past, economic crises in Asia, Russia, Brazil and other areas and slowdowns in the U.S. economy adversely affected the Mexican economy, and thus, future economic developments in other emerging markets such as Argentina and Venezuela , as well as recessions in the United States, could adversely affect the Mexican economy in future periods. The market value of securities of Mexican companies, the economic and political situation in Mexico and our financial condition and results of operations are, to varying degrees, affected by economic and market conditions in other emerging market countries and in the U.S. Although economic conditions in other emerging market countries and the U.S. may differ significantly from economic conditions in Mexico, investors' reactions to developments in any of these other countries may have an adverse effect on Mexico, the market value or trading price of securities of Mexican issuers, including ours, or our business. In particular, Argentina's insolvency and default on its public debt, which deepened the existing financial, economic and political crises in that country, could adversely affect Mexico, the market value of our securities or - 5 - our business. The former Argentine President, Eduardo Duhalde, took office on January 6, 2002 in the midst of significant political unrest after a series of interim presidents and administrations took office following the resignation of President Fernando de la Rua in December 2001. On May 15, 2003, a new President, Nestor Kirchner, took office in Argentina and is expected to retain the same economy minister and continue the fiscal and monetary policies initiated by former President Duhalde The devaluation of the Argentine peso may have a material adverse effect on Argentina and presents risks that the Argentine financial system may collapse and that substantial inflation may occur. The rapid and radical nature of changes in the Argentine social, political, economic and legal environment have continued to create significant uncertainty. To the extent that the new Argentine government is unsuccessful in preventing further economic decline via this and other measures, this crisis may adversely affect the market value and trading price of our securities. In addition, on April 12, 2002, following a week of strikes, demonstrations and riots, Venezuelan President Hugo Chavez was forced to resign from office by Venezuela's military commanders in an attempted coup d'etat. Although Mr. Chavez was restored to power on April 14, 2002, the political and economic future of Venezuela remains uncertain. More recently, a nationwide general strike that occurred between December 2002 and January 2003 caused a significant reduction in oil production in Venezuela, and has had a material adverse effect on Venezuela's oil-dependent economy. In response to the general strike and in an effort to shore up the economy and control inflation, in February 2003 Venezuelan authorities imposed foreign exchange and price controls on specified products. We cannot predict what effect, if any, these events will have on the economies of other emerging market countries, Mexico, the price of our securities or our business. In late October 1997, prices of both Mexican debt securities and Mexican equity securities dropped substantially, precipitated by a sharp drop in Asian securities markets. Similarly, in the second half of 1998 and in early 1999, prices of Mexican securities were adversely affected by the economic crises in Russia and Brazil. The price of our securities has also historically been adversely affected by increases in interest rates in the United States and elsewhere. THE SEPTEMBER 11, 2001 TERRORIST ATTACKS ON THE UNITED STATES, AND MORE RECENTLY THE UNITED STATES INVASION OF IRAQ, HAVE NEGATIVELY AFFECTED INDUSTRY AND ECONOMIC CONDITIONS GLOBALLY, AND THESE CONDITIONS HAVE HAD, AND MAY CONTINUE TO HAVE, A NEGATIVE EFFECT ON OUR BUSINESS Our net sales are affected by numerous factors, including changes in viewing preferences, programming costs and consumers' purchasing power. Historically, these factors correlate with the general condition of the economy and thus, are subject to the risks that arise from adverse changes in domestic and global economic conditions, as well as fluctuations in consumer confidence and spending, which may decline as a result of numerous factors outside of our control, such as terrorist attacks and acts of war. The terrorist attacks on September 11, 2001 depressed economic activity in the U.S. and globally, including the Mexican economy. Since those attacks, there have been terrorist attacks abroad and ongoing threats of future terrorist attacks in the United States and abroad. In response to these terrorist attacks and threats, the United States has instituted several anti-terrorism measures, most notably, the formation of the Office of Homeland Security, a declaration of war against terrorism and the invasion of Iraq. Although it is not possible at this time to determine the long-term effect of these terrorist threats and attacks and the consequent response by the United States, there can be no assurance that there will not be other attacks or threats in the United States or abroad that will lead to a further economic contraction in the United States or any other major markets. In the short term, however, terrorist activity against the United States and the consequent response by the United States has contributed to the uncertainty of the stability of the United States economy as well as global capital markets. It is not certain how long these economic conditions will continue. If terrorist attacks continue or worsen, if the weak economic conditions in the U.S. continue or worsen, or if a global recession materializes, our business, financial condition and results of operations may be materially and adversely affected. DIFFERENCES BETWEEN MEXICAN GAAP AND U.S. GAAP MAY HAVE AN IMPACT ON THE PRESENTATION OF OUR FINANCIAL INFORMATION Our annual audited consolidated financial statements are prepared in accordance with Mexican GAAP, which differ in some significant respects from U.S. GAAP. We are required, however, to file an annual report on Form 20-F containing financial statements reconciled to U.S. GAAP, although this filing only contains year-end financial statements reconciled to U.S. GAAP for certain fiscal years. See Note 21 to our consolidated financial statements. - 6 - RISK FACTORS RELATED TO OUR BUSINESS WE MAY NEVER GENERATE REVENUE SUFFICIENT TO COVER OUR COSTS AND SERVICE OUR DEBT We have experienced substantial net losses and substantial negative cash flow from operations and we expect to continue to experience substantial net losses and substantial negative cash flow for at least the next several years while we develop and expand our DTH service and increase our subscriber base. We may encounter difficulties breaking even, particularly in light of the intense competition we face in the pay television industry in Mexico and our substantial level of debt. We cannot assure you that increases in our subscriber base will result in profitability or positive cash flow in future years. OUR SIGNIFICANT DEBT LEVELS LIMIT OUR ABILITY TO FUND OUR OPERATIONS, AFFECT OUR PROFITABILITY AND COULD LEAD TO DIFFICULTIES IN OBTAINING NEW SOURCES OF FINANCING REQUIRED TO CONTINUE OPERATIONS As of December 31, 2002, we had indebtedness of approximately US$750.1 million (not including normal operational liabilities), consisting of the US$375 million represented by our senior notes, long-term loans of US$309.9 million provided by Innova's owners and the interest on these loans in the amount of US$65.2 million. We anticipate incurring substantial net losses and substantial negative cash flow for at least the next several years as we service our indebtedness and fund continuing operations, including the monthly US$1.7 million we must pay to PanAmSat Corporation, or PanAmSat, for satellite signal reception and retransmission services. We therefore may require additional financing in the future and cannot assure you that any such financing will be available at all or on terms acceptable to us. For much of the past four years, we have depended on financing from our owners, and they are not obligated to continue lending to us. In addition, the indenture governing our senior notes restricts our ability to incur additional indebtedness for borrowed money, thus making us more vulnerable in the event of a substantial downturn in general economic conditions in Mexico. Moreover, our ability to satisfy our obligations depends upon our future performance, which is subject to economic conditions in Mexico and to financial, business and other factors, including factors beyond our control, such as the willingness of our owners to contribute or support any additional capital to finance cash flow deficiencies. For a discussion of the amounts invested and loaned by our owners, see "Item 5: Operating and Financial Review and Prospects--Liquidity and Capital Resources." THE IMPOSITION OF A 10% EXCISE TAX ON REVENUES FROM PAY TELEVISION SERVICES HAS ADVERSELY AFFECTED AND COULD CONTINUE TO ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS At the end of December 2001, the Mexican Congress passed a series of tax reforms. As a result of these tax reforms, subject to certain exceptions, revenues from our pay television services are now subject to a 10% excise tax. In February 2002, Cablevision, Innova, Skytel and a number of other companies in the telecommunications and pay television industries filed amparo injunctive proceedings challenging the constitutionality of this excise tax. Nonetheless, we implemented rate increases on January 1, 2002 and took other actions including lay-offs and reduction of capital expenditures and expenses in an effort to mitigate, in part, the impact of this tax on our results of operations and financial condition. We obtained a favorable ruling in this proceeding regarding our 2002 liability for this tax, but this ruling does not entitle us to recover any amounts paid for this tax in 2002, and we cannot assure you that we will be able to recover any portion of the approximately US$18 million paid for this excise tax during 2002. In December 2002 the Congress again acted to make this special tax effective during fiscal year 2003, by adding or modifying some provisions included in the original text of the law. The Congress does not need to ratify this special tax every year, but modifications to the law could be made. In response, we have filed a new amparo proceeding challenging the constitutionality of the tax. We cannot assure you that we will obtain a favorable resolution in these proceedings or that we will be able to recover the amounts that have been or will be paid for this tax. See "Item 4: Information on the Company -- Business Overview --Mexican Regulation of DTH Services--Telecommunications Tax." We believe that the imposition of this tax and the resultant rate increases could negatively affected our results of operations and financial condition as well as our ability to attract and retain subscribers in 2002. So far this year, we have not increased prices in response to the tax, but we will continue to evaluate the impact of this tax on our results of operations and financial condition and we will consider measures, including rate increases to mitigate the impact of this tax. If, as a result of the imposition of the tax, we further increase the rates we charge our customers, such rate increases could adversely affect consumer demand for our services, which could result in loss of subscribers and a decrease in revenues, and could adversely impact our ability to attract new subscribers. - 7 - WE MAY NOT BE SUCCESSFUL IN EXPANDING OR MAINTAINING OUR SUBSCRIBER BASE WHICH WE MUST DO TO SERVICE OUR DEBT AND ACHIEVE PROFITABILITY Our ability to generate subscription revenue depends in particular, upon subscribers' acceptance of our programming and consumer confidence and purchasing power. Acceptance of our programming will, in turn, depend on the availability of programming at a competitive cost, the popularity of such programming, and our ability to reach our targeted market through successful advertising campaigns. We lost broadcast rights to the World Cup soccer games in 2002 to DIRECTV Latin America, a shareholder of our DTH competitor, and we believe this negatively affected our ability to attract and retain subscribers. On March 18, 2003, DIRECTV filed a voluntary petition for reorganization under Chapter 11 and subsequently rejected its contract for the pay-TV exclusive rights to broadcast for the 2006 FIFA World Cup soccer tournament to certain Latin American countries. We cannot predict what effect this will have on our ability to attract new subscribers or retain existing subscribers. Other factors beyond our control will affect the success of this operating strategy and are impossible for us to predict due, in part, to the limited history of DTH services in Mexico. The market for DTH services will continue to be affected by the recession and comparatively weak recovery and by general economic conditions in Mexico, as well as competition, new technology and government taxation and regulation. Consequently, we believe there is a significant degree of uncertainty about the DTH business in Mexico including the size of the Mexican market for DTH television services, the sensitivity of potential subscribers to changes in the price of installation and subscription fees, the evolution of the competitive environment and government regulation. For additional discussion of our competitive environment, see "--We face competition in the pay television market in Mexico that we expect will intensify" and "Item 4: Information on the Company--Business Overview--Competition." We cannot assure you that we will successfully expand or maintain our subscriber base or that it will generate sufficient revenues, when taken together with other sources of financing, to service our indebtedness, including our senior notes, and to fund our operations and achieve profitability. WE MAY NOT SUCCESSFULLY MANAGE THE GROWTH OF OUR BUSINESS As our business continues to develop and expand, we will need to further enhance operational and financial systems, and will likely require additional employees and management, operational, financial and other resources. Though we believe we have operated appropriately for over six years, we cannot assure you that we will successfully enhance and maintain such operational and financial systems or successfully obtain, integrate and utilize the required employees and management, operational and financial resources to manage a developing and expanding business in our dynamic and challenging industry. If we fail to implement such systems successfully and use our resources effectively our results of operations and financial condition could be adversely affected. OUR ABILITY TO PROVIDE BILLING AND ORDER MANAGEMENT TO OUR SUBSCRIBERS DEPENDS ON THE FUNCTIONALITY AND FLEXIBILITY OF OUR SUBSCRIBER MANAGEMENT SYSTEM, WHICH IS CURRENTLY BEING REPLACED WITH A NEW SYSTEM FROM A NEW SUPPLIER We are currently implementing a new Subscriber Management System, or SMS, to support the growth of our subscriber base. We believe that the subscriber management system is an essential tool for providing pay television services because it provides us with marketing, customer service and administrative operations support. We expect the new SMS will be placed in service and become operational in late August 2003. If we fail to implement and utilize the new SMS successfully, our results of operations and financial condition could be adversely affected. See "Item 4. Information on the Company--History and Development of the Company--Capital Expenditures;" "--Subscriber Management System;" and "Item 10: Additional Information--Material Contracts--New Subscriber Management System Contract." - 8 - WE FACE INTENSE COMPETITION IN THE PAY TELEVISION MARKET IN MEXICO The pay television industry in Mexico has been, and we expect it to remain, highly competitive. We believe competition in the pay television business is primarily based upon the quality of programming, customer service, enhanced TV features, value-added services, distribution networks, advertising and promotion, and price. We presently compete with, or expect to compete with, among others: - DIRECTV Mexico, another DTH service in Mexico; - more than 400 cable systems, including Cablevision, the largest cable system in Mexico (which is majority owned and controlled by Grupo Televisa S.A., or Televisa an indirect majority owner of Innova); - multi-channel, multi-point distribution systems, known as MMDS; - national broadcast networks, including the four networks owned and operated by Televisa, and regional and local broadcast stations; - unauthorized and pirated C-band and Ku-band television signals obtained by Mexican viewers on the gray market; - unauthorized and pirated cable television signals; and - radio, movie theaters, video rental stores, internet and other entertainment and leisure activities generally. Consolidation in the pay television industry, and the possible merger of Mexico's second and third largest cable operators could further intensify competitive pressures. Some of our competitors are, and entities resulting from any mergers may be, better capitalized than we are or have greater operational resources than we do. See "Item 4: Information on the Company--Business Overview--Competition." As the pay television market in Mexico develops, we expect to face competition from an increasing number of sources, including emerging technologies that provide new services to pay television customers and require us to make significant capital expenditures in new technologies. While we believe our programming package is competitive overall, our subscribers must make an up-front investment to initiate our service and obtain, install and activate the necessary equipment, and this up-front investment is not required in all of our competitors' systems. While we believe our current prices combined with the quality of our service, are attractive to subscribers, we cannot assure you that we will continue to attract and maintain a substantial number of subscribers. Intense competition and general economic factors have driven us to lower our subscription fee several times and to offer special promotions on several occasions. ONE OF OUR OWNERS, NEWS CORPORATION, MAY ACQUIRE SIGNIFICANT INTERESTS IN DIRECTV, OUR DTH COMPETITOR IN MEXICO, AND PANAMSAT, OUR SOLE SATELLITE PROVIDER, AND WE CANNOT PREDICT WHAT EFFECT THIS WILL HAVE ON US On March 18, 2003, DIRECTV Latin America, LLC, or DLA, announced that it had filed a voluntary petition for bankruptcy protection, under chapter 11 of the U.S. Bankruptcy Code, in the U.S. Bankruptcy Court in Wilmington, Delaware. DLA cited its debt burden and high fixed costs and listed liabilities of US$1.6 billion as of the end of 2002. DLA also reported a loss of 54,000 net subscribers in the first quarter of 2003 or 7% of its subscriber base. DLA is a competitor of ours which provides DTH programming and services in Mexico through an affiliated Mexican operating company, DIRECTV Mexico. According to its 2002 annual report, Hughes Electronics Corporation, or Hughes, owns approximately 75% of DLA and holds an indirect interest in DIRECTV Mexico. On April 9, 2003, News Corporation announced that it reached a definitive agreement with General Motors Corporation and Hughes in which News Corporation would acquire General Motors' 19.9% stake in Hughes and a further 14.1% of Hughes from public shareholders and General Motors' pension and other benefit plans, for a total of 34% of Hughes. If the agreement is consummated, a subsidiary of News Corporation will transfer its ownership interest in - 9 - Hughes' common stock to Fox Entertainment Group, Inc., an 80.6% owned News Corporation subsidiary. The businesses contained in Hughes include a leading U.S. satellite broadcaster DIRECTV, which has more than 11 million subscribers; an 81% equity holding in satellite operator PanAmSat; and Hughes Network Systems, a provider of broadband satellite network solutions. This agreement is subject to a number of conditions including the receipt of required regulatory approvals in the United States and elsewhere, and no assurance can be given that this acquisition will be consummated, or, if consummated, that it will occur on the terms announced on April 9, 2003. Additionally, our Social Part Holders Agreement provides that neither Televisa nor News Corporation may directly or indirectly operate or acquire an interest in any business that operates a DTH satellite system in Mexico (subject to certain limited exceptions). If News Corporation were to consummate the proposed acquisition of an interest in Hughes while Hughes continued to own an interest in DIRECTV, News Corporation would become an indirect owner of DIRECTV Mexico, our DTH competitor. Accordingly, under our Social Part Holders Agreement any such acquisition of an indirect interest in the Mexican operations of DLA would require the consent of us and Televisa. We cannot predict what impact either the DLA bankruptcy or, if consummated, News Corporation's acquisition of an interest in Hughes, will have on the competitive environment for DTH in Mexico or on our business, financial condition or results of operations. See "Item 4: Information on the Company -- Business Overview -- Competition." Increased competition could result in a loss of subscribers or pricing pressure, which may adversely affect our business, financial condition or results of operations. OUR ABILITY TO ATTRACT SUBSCRIBERS DEPENDS ON THE AVAILABILITY OF DESIRABLE PROGRAMMING FROM THIRD PARTY PROGRAMMERS We compete in part on the quality of our programming. Our ability to attract and retain subscribers depends on our continued ability to obtain desirable programming, particularly Spanish-language programming from Televisa and others, soccer and special events, and to offer that programming to customers at competitive prices. We obtain, and anticipate that we will continue to obtain, significant programming on an exclusive DTH basis from Televisa and News Corporation, each an indirect owner of the Company. DIRECTV has petitioned the Mexican government to require Televisa to allow its programming material to be transmitted through DIRECTV's DTH service in Mexico. If the Mexican government requires Televisa to permit our DTH competitors to broadcast Televisa's programming, over which we currently have exclusive DTH rights, we may lose customers. We also depend on agreements with third parties to provide us with other high quality programming for mass audiences. We directly negotiate with programming providers including with our owners and other affiliates. We have entered into definitive agreements with many programming providers, while other providers supply programming under letters of intent, invoices or other less formal arrangements. We have no reason to believe that any of our programming agreements will be canceled or will not be renewed upon expiration, however, if these arrangements are canceled or not renewed, we would have to seek programming material from other sources. In early 2002 Television Azteca, S.A. de C.V., or TV Azteca, demanded that we (and other pay television service providers) pay a fee to carry its over-the-air channels. In June 2002, we reached an agreement with TV Azteca to carry channels 7 and 13 for a period of three years for a fee. Obtaining over-the-air programming from third party providers could increase our costs. We cannot assure you that third-party program services that appeal to our subscribers will be available to us on acceptable terms, or, if available, that such program services will be acceptable to our subscribers. See "Item 4: Information on the Company--Business Overview--Programming and Services." WE DEPEND ON OUR PRINCIPAL SUPPLIERS FOR KEY EQUIPMENT Expansion of our Ku-band DTH service depends, in part, on our obtaining adequate supplies of components, tailored for Ku-band transmissions from a limited number of third parties. If our principal suppliers fail to provide needed components on a timely basis, we may not be able to replace those suppliers without delay or additional expense which we cannot assure you we will be able to do. See "Item 4: Information on the Company--Business Overview - --Operations--Integrated Receiver/Decoder System." - 10 - WE DEPEND ON THE AVAILABILITY OF SATELLITE TRANSPONDER SERVICES FROM PANAMSAT We currently receive DTH signal reception and retransmission services solely from PanAmSat's PAS-9 satellite. We no longer use Satelites Mexicanos, S.A. de C.V.'s, or SatMex's, Solidaridad 2 satellite for any retransmission of our services. Our agreement with PanAmSat allows us to use the PAS-9 satellite's services for the next 12 years or the date PAS-9 is taken out of service, whichever happens first. The estimated remaining useful life of the PAS-9 satellite is projected to be approximately 14 to 16 years but PAS-9 could fail before then. Further updates to the lifetime estimate may become available when additional data is collected to characterize the satellite's actual on-orbit performance. Given the orbital location and footprint of the PAS-9 satellite, however, it is possible that some of our current and potential subscribers located in parts of Mexico might not receive a high quality signal. Following the termination of broadcasts from Solidaridad 2, we lost the ability to send signals to approximately 13,000 subscribers despite efforts to re-orient all subscribers' antennas to PAS-9 prior to the shutdown. See "Item 4: Information on the Company--Business Overview--Operations--Satellites." Communications satellites such as PAS-9 use highly complex technology and operate in the harsh environment of space. In general, these satellites are subject to significant operational risks that may prevent or impair proper commercial operations, including satellite manufacturing defects, power and electrical failures, computer and controls failures, incorrect orbital placement, and destruction and damage from collisions with orbital debris and objects, interstellar radiation and other causes. Historically, approximately 15% of all commercial geosynchronous satellite launches have resulted in a total or constructive total loss due to launch failure, failure to achieve proper orbit or failure to operate upon reaching orbit. Future disruption of PAS-9 or the transmissions from PAS-9 would prevent us from being able to operate our business and would have a material adverse effect on our operations. We do not carry insurance that would specifically cover any of our losses due to an interruption in service from PAS-9, nor are we aware of any insurance that PanAmSat carries on PAS-9 that would cover us for such loss. We do not currently have any arrangement for alternate service from other satellites should we experience an interruption of service on PAS-9, nor do we have plans to re-orient our subscribers' antennas to alternate satellites in the event of an interruption of service from PAS-9. We cannot assure you that we would be able to obtain transponder services from an alternate satellite or provider at a commercially viable cost, if we lose the ability to receive signals from PAS-9. Furthermore, our ability to transmit programming after the PAS-9 satellite is no longer available and to broadcast additional channels depends on our ability to obtain rights to utilize transponders on other newer satellites. SERVICE INTERRUPTIONS ARISING FROM NATURAL DISASTERS, TECHNICAL PROBLEMS, TERRORIST ACTIVITIES OR WAR, MAY CAUSE CUSTOMER CANCELLATIONS OR OTHERWISE HARM OUR BUSINESS Currently, most of our business and technical operations are centrally located or concentrated in a few geographical areas. The occurrence of natural disasters, technical problems, terrorist activities or war could result in the loss of customers which would adversely affect our business, revenue and results of operations. We do not currently have a disaster recovery plan to mitigate the effects of such an occurrence on our business. We continue to review and evaluate the steps we might take, including creating a disaster recovery plan to prepare to respond to natural disasters, technical emergencies, terrorist attacks and war. THE OPERATION OF OUR BUSINESS MAY BE TERMINATED OR INTERRUPTED IF THE MEXICAN GOVERNMENT DOES NOT RENEW OR REVOKES OUR CONCESSIONS The operation of satellite broadcasting systems is subject to substantial regulation by the Secretaria de Comunicaciones y Transportes, or SCT. The SCT has granted us two concessions to operate satellite broadcasting systems using Mexican satellite until 2026 and a concession to broadcast using services from PAS-9 until 2020. Currently, we only depend on the latter. The concessions can be renewed with the SCT's approval and can be revoked prior to the end of their terms if we do not comply with their terms and conditions. In addition, the Mexican government has the right to expropriate the concessions for reasons of public need or interest. We cannot assure you that the SCT will renew the concessions on expiration or not expropriate or revoke them prior to expiration. The SCT's rules may change in response to industry developments, new technology and political considerations. Without our concessions, we would not be able to deliver our services or operate our business. See - 11 - "Item 4: Information on the Company--Business Overview --Mexican Regulation of DTH Services-Our Concessions." WE COULD LOSE SUBSCRIBERS AND REVENUE IF OTHERS ARE ABLE TO STEAL OUR SIGNALS We use encryption technology to prevent signal theft or `piracy.' Piracy in the C-band DTH, cable television and Latin American and European DTH industries has been widely reported. We are aware of reports of signal theft in Mexico although we cannot accurately measure the amount of the theft. We use Smart Card technology in our Ku-band receivers so we can change the conditional access system in the event of a security breach. During 2001, we exchanged our subscribers' Smart Cards as a routine security measure to reduce the risk of piracy. We expect to continue to exchange subscribers' Smart Cards every three to four years or when we have strong evidence of signal theft. We expect the protections in our conditional access system, subscriber management system, and the Smart Card technology to adequately prevent unauthorized access to programming. In late 2002 we initiated several actions against piracy of our signals in Mexico, with the support of Mexican government agencies. We cannot assure you that the encryption technology we use will effectively prevent security breaches and signal piracy, or that our efforts against pirates will be successful. If our encryption technology is materially compromised in a manner that we fail to correct promptly, our revenues could decrease and our ability to contract for programming could be adversely affected. In addition, we believe that the pirating of cable television signals in several cities and small towns across Mexico presents a major challenge to the pay-TV market in Mexico. Although we cannot estimate the number of households that receive cable television via pirated signals in Mexico, we believe the number is significant. The pirating of pay-TV signals of all types reduces the number of potential subscribers available to us and, if unchecked, could affect our ability to attract and retain subscribers. CHANGES IN TECHNOLOGY COULD RENDER OUR SERVICE OBSOLETE OR INCREASE OUR COSTS Historically, pay television services industry as a whole has been, and will likely continue to be, subject to rapid and significant changes in technology such as digital compression technology or high definition video. Digital compression technology allows transmission of multiple channels on the same frequency, and could allow the industry to field lower cost delivery systems. We use digital compression technology in our Ku-band DTH business. Other transmission media, including cable and MMDS, are also developing this technology. If our competitors deploy lower cost, digitally-compressed systems, we may not be able to provide the same volume of programming at a competitive price and could lose subscriber revenue. New asynchronous digital subscriber line, or ADSL, technology is being used to provide high-speed internet access and could be used in the future for broadband transmissions. These and other technological changes could impact us and we may need to expend substantial financial resources to develop and implement new competitive technologies. In addition, we may, from time to time, explore alternative technologies to deliver our programming and alternative methods to allow our subscribers to receive signals from multiple satellites. WE HAVE SIGNIFICANT TRANSACTIONS WITH OUR OWNERS WHO ARE INVOLVED IN RELATED BUSINESSES WHICH CREATES THE POTENTIAL FOR CONFLICTS OF INTEREST Innova currently engages in, and expects from time to time to engage in, transactions with Televisa, News Corporation, Liberty Media International Inc., or Liberty Media (each an indirect owner of Innova), and their subsidiaries and other affiliates. These transactions present potential conflicts of interest. Currently: - We obtain significant programming content from our owners and their programming affiliates. Televisa and News Corporation offer us all of their existing program services (i.e., channels) and must offer us their future program services pursuant to our Social Part Holders Agreement. We have the exclusive DTH broadcast rights to Televisa and News Corporation's programming channels in Mexico, subject to certain, preexisting, third party agreements. Televisa, News Corporation and their programming affiliates, however, provide and will continue to provide programming to other, non-DTH pay television businesses, such as cable and MMDS operators, which compete with us. - 12 - - We obtain our conditional access and subscriber management systems and most components of our broadcast system from NDS Group plc, a British public company and News Corporation subsidiary. - We obtain play-out and uplink functions and related services from DTH TechCo Partners, or DTH TechCo., a joint venture in which each of Televisa, News Corporation and Globo Comunicacoes e Participacoes Ltda., or Globopar, indirectly holds a 30% interest and Liberty Media indirectly holds a 10% interest. In addition, we obtain from Televisa similar services relating to locally-sourced programming. The programming and systems we obtain from affiliates are critical to our business. If some or all of our contracts with these parties were terminated, we cannot assure you that we could obtain comparable programming and services from unaffiliated third parties on similar terms. Disputes concerning these contracts could have a material adverse effect on our business. We currently receive satellite transmission and distribution services exclusively from 12 Ku-band transponders on the PAS-9 satellite owned and operated by PanAmSat, which is 81% owned by Hughes. If News Corporation acquires 34% of Hughes, then News Corporation would indirectly own a significant interest in PanAmSat, our sole satellite services provider. In addition, as described above, we expect to continue to enter into many transactions with our affiliates, which may create the potential for conflicts of interest. We have not established specific procedures applicable to transactions with affiliates to guard against conflicts of interest. IF OUR AFFILIATE DTH TECHCO IS UNABLE TO OBTAIN FUNDING, IT MAY NOT BE ABLE TO PROVIDE A NECESSARY SERVICE FOR OUR OPERATIONS, WHICH COULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS We depend on DTH TechCo for uplink, downlink and related services relating to all of our programming other than local programming, as to which uplink and downlink services are provided by Televisa. DTH TechCo also provides these services to Sky Multi-Country Partners, or MCOP (a U.S. partnership in which Televisa, News Corporation and Globopar each indirectly holds a 30% interest, while Liberty Media indirectly holds a 10% interest), and Sky Brasil Servicos Ltda., or Sky Brasil (a DTH service owned indirectly by Globopar, News Corporation and Liberty Media). DTH TechCo depends on payments from us, MCOP and Sky Brasil to fund its operations. In October 2002, Globopar announced that it would reevaluate its capital structure due to significant devaluation of the Real, deteriorating economic conditions in Brazil and significant reduction in credit available to Brazilian companies. Globopar and certain of its subsidiaries are rescheduling their financial debt obligations and currently reviewing their business plans together with holders of Globopar's bank debt and bonds. As a result of Globopar's financial condition, since September 2002, Globopar has ceased providing financial support to DTH TechCo and MCOP, and MCOP, in turn, has ceased making payments to DTH TechCo, which payments, we believe, previously accounted for over 50% of DTH TechCo's revenue. As a result, Televisa, News Corporation and Liberty Media have begun funding DTH TechCo's operating cash shortfall through loans and we understand that they currently intend to continue doing so. However, our owners are not obligated to provide funding to DTH TechCo and we cannot assure you that continued funding will be available. If (i) Globopar fails to make its contributions to DTH TechCo and MCOP, (ii) MCOP fails to make required payments to DTH TechCo or (iii) Sky Brasil fails to continue making its required payments to DTH TechCo, and if DTH TechCo's owners fail to make up the shortfall, then DTH TechCo would be unable to provide services to us. We have not currently identified possible replacement services providers and, if DTH TechCo were unable to provide services to us, we would be unable to provide a substantial portion of our programming services to our customers, which would materially and adversely affect our business. OUR EQUITY HOLDERS HAVE, OR MAY ACQUIRE, INTERESTS IN BUSINESSES WHICH COMPETE WITH US FOR CUSTOMERS AND BUSINESS OPPORTUNITIES Televisa, indirectly, owns approximately 60% of Innova's total voting power, subject to certain provisions of our bylaws and the Social Part Holders Agreement. For more information on these provisions, see "Item 7: Major Shareholders and Related Party Transactions--Major Shareholders." Televisa has agreed not to engage in the DTH business in Mexico except through Innova. However, Televisa competes with Innova for customers in the Mexican pay television market since it controls and owns a majority - 13 - interest in Cablevision, the operator of Mexico's largest cable television system. See "Item 4: Information on the Company--Business Overview--Competition--Cable Television and MMDS." Innova intends to compete in all markets it serves regardless of whether Televisa, or an entity in which Televisa has an interest, competes in those markets. However, Cablevision could attract potential or existing subscribers from us given its significantly greater capital and operational resources and familiarity with our business strategy and customer information as a result of Televisa's majority interest. Televisa could also commit greater resources to Cablevision or its other subsidiaries and affiliates than to Innova, giving those competitors a financial advantage. News Corporation, through its subsidiaries, indirectly holds approximately 30% of Innova's total voting power, subject to certain provisions of our bylaws and the Social Part Holders Agreement. News Corporation has also agreed not to engage in the DTH business in Mexico except through Innova. On April 9, 2003, News Corporation announced that it reached a definitive agreement with General Motors Corporation and Hughes in which News Corporation would acquire General Motors' 19.9% stake in Hughes and a further 14.1% of Hughes from public shareholders and General Motors' pension and other benefit plans, for a total of 34% of Hughes. For a description of this proposed transaction and some possible implications of the transaction, if it is consummated, see "--We Face Intense Competition in the Pay Television Market in Mexico;" "--One of Our Owners, News Corporation, May Acquire Significant Interests in DIRECTV, Our DTH Competitor in Mexico, and PanAmSat, Our Sole Satellite Provider, and We Cannot Predict What Effect This Will Have On Us" and "Item 4: Information on the Company -- Business Overview -- Competition." We cannot predict what impact either the DLA bankruptcy or, if consummated, News Corporation's acquisition of an interest in Hughes, will have on the pay television market in Mexico. CERTAIN PARTIES COULD FORCE US TO DISSOLVE THE BUSINESS According to our bylaws, we must be dissolved and placed in liquidation if a person deemed an "interested party" so requests upon the occurrence of any of the following events: - if all but one of our members withdraws; - if our term of corporate existence expires and it is not extended; - if we cannot continue to fulfill our corporate purpose; - by resolution taken at a members' meeting; or - the loss of two-thirds of our capital, unless the capital is increased by the required amount. Our Mexican legal counsel, Mijares, Angoitia, Cortes y Fuentes, S.C., has advised us that, although there is no court precedent, it believes that Mexican courts would restrict the recognition of "interested parties" to: (a) the members of Innova, some of whom currently compete with us or may compete with us in the future, and (b) our creditors that provide evidence of their interest in dissolving Innova and liquidating our assets. We cannot assure you that a court would permit dissolution only upon request from the parties mentioned above or that upon occurrence of the events described above another party would not seek to dissolve us. U.S. INVESTORS MAY RECEIVE LESS CORPORATE AND FINANCIAL DISCLOSURE FROM US THAN U.S. PUBLIC COMPANIES A principal objective of the securities laws of the United States, Mexico and other countries is to promote full and fair disclosure of all material corporate information. As a foreign private issuer, we are generally not required to provide as much publicly available information as is regularly published by or about U.S. companies that have securities listed in the United States. IT MAY BE DIFFICULT TO ENFORCE CIVIL LIABILITIES AGAINST US OR OUR DIRECTORS, EXECUTIVE OFFICERS AND CONTROLLING PERSONS We are organized under the laws of Mexico. Most of our directors, executive officers and controlling persons reside outside of the United States, all or a significant portion of the assets of our directors, executive officers and controlling persons, and substantially all of our assets, are located outside of the United States. As a result, it may be difficult for you to effect service of process within the United States upon these persons or to enforce against - 14 - them or us in U.S. courts judgments predicated upon the civil liability provisions of the federal securities laws of the United States. We have been advised by our Mexican counsel, Mijares, Angoitia, Cortes y Fuentes, S.C., that there is doubt as to the enforceability, in original actions in Mexican courts, of liabilities predicated solely on U.S. federal securities laws and as to the enforceability in Mexican courts of judgments of U.S. courts obtained in actions predicated upon the civil liability provisions of the U.S. federal securities laws. FORWARD-LOOKING STATEMENTS This annual report and the documents incorporated by reference into this annual report contain forward-looking statements. These forward-looking statements reflect our views with respect to future events and financial performance. We may from time to time make forward-looking statements in our periodic reports to the U.S. Securities and Exchange Commission, or SEC, on Form 6-K, in our future annual reports to members or shareholders, in our offering circulars and prospectuses, in our press releases and other written materials, and in oral statements made by our officers, directors or employees to analysts, institutional investors, representatives of the media and others. Examples of these forward-looking statements include: - statements concerning our ability to increase subscribers, our cash requirements, financing sources, cost-containment efforts, advertising rates and revenues, DTH satellite and capital expenditures, potential audience size; - statements concerning the construction, launch, performance and operation of broadcast satellites, renewal of concessions upon their expiration and other regulatory approvals; - projections of operating revenues, net income (loss), dividends, capital structure or other financial items relating to us, our owners, or our competitors; - the impact that recently issued U.S. GAAP and Mexican GAAP pronouncements will have on our operating revenues, net income (loss), dividends, capital structure or other financial items; - statements of our plans to develop customer interactive systems; - statements about our new subscriber management system, including our expectation of its operational date; - statements of our or our owners' plans, objectives or goals, including those relating to anticipated trends, competition, regulation and rates; - statements about our future economic performance or that of Mexico or other countries that affect the Mexican economy and consumer purchasing power in Mexico; and - statements of assumptions underlying these statements. Words such as "believe," "anticipate," "plan," "expect," "intend," "target," "estimate," "project," "predict," "forecast," "guideline," "should" and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements involve inherent risks and uncertainties. We caution you that a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements. These factors, some of which are discussed under "--Risk Factors", include economic and political conditions and government policies in Mexico or elsewhere, inflation rates, exchange rates, regulatory developments, customer demand and competition. We caution you that the foregoing list of factors is not exclusive and that other risks and uncertainties may cause actual results to differ materially from those in forward-looking statements. Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them in light of new information or future developments. - 15 - ITEM 4. INFORMATION ON THE COMPANY HISTORY AND DEVELOPMENT OF THE COMPANY Innova, S. de R.L. de C.V. is a Mexican limited liability company with variable capital or sociedad de responsabilidad limitada de capital variable Innova was formed on July 25, 1996 as a Mexican limited liability company or sociedad de responsabilidad limitada and converted to a limited liability company with variable capital on July 2, 1998 under Mexico's Ley General de Sociedades Mercantiles (General Law of Mercantile Organizations). The company was registered with the Public Registry of Commerce in Mexico City under the commercial File (folio mercantile) No. 213223. Under the terms of our estatutos sociales, or bylaws, our corporate existence continues for 99 years through 2095 unless terminated earlier. Our principal address is Insurgentes Sur 694, Piso 8, Colonia del Valle, 03100 Mexico D.F. in the United Mexican States. Our telephone number at that address is (52-55)-5448-4000. The trustee for our senior notes is The Bank of New York, 101 Barclay Street, New York, NY 10286, and can be contacted by requesting the Corporate Trust Department at (212) 815-3290. We provide digital Ku-band direct-to-home or DTH broadcast satellite pay television services in Mexico under the name "Sky." DTH satellite systems use medium or high-powered satellites to deliver signals to satellite antennas installed at homes, hotels and apartment buildings. In contrast to the locally-transmitted signals of multi-channel, multi-point distribution systems, known as MMDS, a DTH satellite footprint can cover large land areas. DTH satellite transmission can also reach land areas with either weak cable infrastructure or no cable television access, such as the mountainous, rural areas of Mexico. We believe that DTH satellite service is one of the most cost-effective ways to distribute programming. We launched our DTH service on December 15, 1996 and as of March 31, 2003 we were broadcasting up to 168 digital channels (107 video, 29 pay per view and 32 audio) to approximately 779,700 subscribers, including approximately 41,400 non-residential subscribers. See "Item 5: Operating and Financial Review and Prospects -- Operating Results - -- Overview;" and "--Trend Information." Innova was formed as a result of strategic alliances between four entities: Televisa, News Corporation, Liberty Media and Globopar, the largest television broadcaster and media group in Brazil. Innova is one of several Sky DTH platforms created by the partners and is a joint venture indirectly owned by Televisa, News Corporation and Liberty Media. The other Sky DTH platforms provide service to Brazil and other regions in Latin America while additional joint ventures provide specific support services to the Sky DTH platforms. Sky Brasil Servicos Ltda., or Sky Brasil, a DTH service owned indirectly by Globopar, News Corporation and Liberty Media, launched its digital Ku-band DTH service in Brazil in November 1996. Prior to 2003, it was known as Net Sat Servicos Ltda. In October 1997, the four partners formed Sky Multi-Country Partners, or MCOP, a U.S. partnership in which Televisa, News Corporation and Globopar each indirectly holds a 30% interest while Liberty Media indirectly holds a 10% interest. MCOP invests in, and supplies programming and other services to the Sky DTH platforms in Latin America outside of Mexico and Brazil, including Sky Colombia and Sky Chile. Each of the four partners also holds indirect interests, individually, in the same proportion as their interests in MCOP, in two service entities: (i) Sky Latin America Partners, or ServiceCo, a U.S. partnership formed to provide certain business and management services; and (ii) DTH TechCo Partners, or TechCo, a U.S. partnership formed to provide certain technical services from a main uplink facility in Miami Lakes, Florida and a redundancy site in Port St. Lucie, Florida. See "Item 3: Key Information--Risk Factors--Risk Factors Related to Our Business--We Have Significant Transactions With Our Owners Who Are Involved in Related Businesses Which Creates the Potential for Conflicts of Interest" and "--If Our Affiliate DTH TechCo is Unable to Obtain Funding, It May Not Be Able to Provide a Necessary Service for our Operations, Which Could Adversely Affect Our Business, Financial Condition and Results of Operations." Between December 1998 and March 2003, Innova's three owners contributed US$49.0 million in equity and loaned a total of US$309.9 million to us and our subsidiary, Novavision, in proportion to their equity interests in Innova. Prior to these contributions and loans, Televisa and News Corporation contributed US$50 million in capital and debt forgiveness to us. In April 1998, we received an additional aggregate amount of US$50 million in equity from our sponsors. For a more detailed discussion of these transactions, see "Item 7: Major Shareholders and Related Party Transactions." We also completed an offering for US$375 million of our 12 7/8% senior notes, or senior notes, in exchange for our privately placed 12 7/8% senior notes both of which were issued in 1997. We used the net proceeds from the offering of our senior notes primarily to finance start-up operations. For a more detailed discussion of this transaction, see, "Item 5: Operating and Financial Review and Prospects--Liquidity and Capital Resources." - 16 - STRONG SPONSORSHIP Innova is owned indirectly by Televisa (60%), News Corporation (30%) and Liberty Media (10%). We believe that the experience, expertise and resources of our owners in the entertainment and media industries increases our access to programming, technology and distribution services and helps us compete in the Mexican Ku-band DTH satellite pay television market. Televisa is the largest television broadcaster in Mexico. We believe that Televisa produces and owns the largest library of Spanish-language television programming in the world. Televisa owns and operates four television networks in Mexico including Televisa's flagship Channel 2 network known as "The Channel of the Stars." Channel 2 is the leading television network in Mexico and the leading Spanish-language television network in the world in terms of the potential worldwide audience that can receive its signal. In addition to its Mexican television production and broadcasting activities, Televisa has interests in international television programming distribution, publishing, radio production and broadcasting, cable television, internet services, professional sports promotion, nationwide paging, feature film production and distribution, special events promotion and dubbing. News Corporation is a diversified international media and entertainment company which operates in a number of industry segments including filmed entertainment television cable network programming, magazines and inserts, newspaper and book publishing . The activities of News Corporation are conducted principally in the United States, the United Kingdom, Italy, Asia, Australia and the Pacific Basin. Liberty Media owns and operates broadband cable television and telephony distribution networks and provides diversified programming services in Europe, Latin America and Asia. Liberty Media is a wholly owned subsidiary of Liberty Media Corporation. Until August 10, 2001, Liberty Media Corporation was a wholly owned indirect subsidiary of AT&T Corporation. On August 10, 2001 AT&T Corporation spun-off Liberty Media Corporation, which is now an independent, publicly-traded company. CAPITAL EXPENDITURES The table below sets forth our capital expenditures for the years ended December 31, 2000, 2001 and 2002 and for the five months ended May 31, 2003. See "Item 5: Operating and Financial Review and Prospects--Liquidity and Capital Resources."
FOR THE YEAR ENDED DECEMBER 31 FOR THE FIVE ------------------------------ MONTHS ENDED 2000 2001 2002 MAY 31, 2003 ---- ---- ---- ------------ (IN THOUSANDS OF U.S. DOLLARS) SkyKits..................... $ 55,210 $ 59,135 $37,803 $16,051 New Subscriber Management System......... _ _ $ 7,078 $ 3,703 Transmission, Computer and Other Equipment....... $ 7,308 $ 12,175 $ 4,850 $ 945
The principal items included under capital expenditures during 2000, 2001 and 2002 and capital expenditures through May 31, 2003 were Integrated Receiver/Decoder systems, or IRDs, transmission equipment, computers and software and, more recently, our new subscriber management system, or SMS. These capital expenditures are directly related to the growth of the DTH platform and an increasing number of subscribers. In 2000, 2001 and 2002, we relied on a combination of operating revenues and borrowings to fund our capital expenditures, acquisitions and investments. We expect to fund our capital expenditures for the rest of 2003 through a combination of cash from operations and, if needed, loans from our owners. The amount of such borrowings in 2003, if any, will depend upon the timing of revenues and expenditures. In that connection, our owners have - 17 - informally committed to lend us up to an aggregate of US$25.0 million during 2003 in proportion to each partner's respective equity interests in Innova. See "Item 7: Major Shareholders and Related Party Transactions." We currently intend to finance any significant investments or acquisitions through a combination of available cash from operations and long-term debt from our owners. We are currently implementing a new Subscriber Management System, or SMS, to support the growth of our subscriber base. We believe this new SMS will allow us to provide more effective management and billing services to our subscribers. Among other things, we believe the new SMS will: - give us greater flexibility to control different variables that are part of our service than our current SMS, - improve our ability to respond to our subscribers' account management needs and aid them in reporting on their service, - provide greater billing flexibility, - improve overall system efficiency; and - offer more options for marketing our services. This project includes the purchase of software, licenses, hardware, implementation and advisory services and related personnel costs. As an initial step, on June 12, 2002, we entered into two related agreements with CSG Software, Inc., or CSG, through our subsidiary, Novavision. Under these agreements CSG provides us: (a) a non-exclusive, perpetual license for the use of the software "Kenan" to provide billing and order management to licensed subscribers, (b) installation and implementation of the system within the framework of our business, (c) training and support services, and (d) consulting services. We are working with Siebel Systems, Inc. to develop and support certain software applications and advisory services and with NDS Group plc (a British public company and New Coporation subsidiary), or NDS, to complete the requirements of the new system. We are now using a subscriber management system called Provider II that we obtained from NDS. NDS will continue to support Provider II until we complete the switch-over to the new SMS. We expect the new SMS to be operational and placed in service in late August 2003. See "Item 3: Key Information--Risk Factors--Risk Factors Related to Our Business-- Our Ability to Provide Billing and Order Management to Our Subscribers Depends on the Functionality and Flexibility of Our Subscriber Management System, Which is Currently Being Replaced with a New System from a New Supplier;" "Item 4: Information on the Company--Business Overview--Capital Expenditures;" "--Subscriber Management System;" and "Item 10: Additional Information-Material Contracts-New Subscriber Management System Contract." We have made significant investments in hardware and software to manage growth of our DTH platform and to enhance customer service. These include our current and new subscriber management systems, a customer relations management system and an integrated voice response system. We believe that our principal capital investments will continue to be IRDs, antennas and LNBs, transmission equipment and the hardware and software required to manage the growth of our DTH platform. Antennas and low noise blocks, or LNBs were not part of capital expenditures before October 1, 2000 because prior to that date, our master wholesalers purchased that equipment to resell directly to subscribers. Because we now retain ownership of these assets, they are recorded in our property, plant and equipment and amortized over a period of three years. Prior to this change, we sold the LNBs, antennas and accessories to master wholesalers and included the costs of these items in cost of sales upon our sale of the equipment to our distributors. In general, we own IRDs and rent them to subscribers for a monthly IRD rental fee. - 18 - BUSINESS OVERVIEW TELEVISION MARKET IN MEXICO We believe that Mexico is the second largest television market in Latin America after Brazil with approximately 19.6 million television households as of December 31, 2002. The television industry in Mexico has expanded from broadcast television to pay television, including cable, MMDS, and DTH satellite services. Watching television is a significant leisure activity in Mexico. The average television household in Mexico watches more than seven hours of television daily, according to figures from the IBOPE, the Instituto Brasilero de Opinion Publica y Estadistica. We estimate that, as of December 31, 2002, 3.6 million households in Mexico, excluding households receiving unauthorized Ku-band and C-band services, received pay television services. These households represented approximately 18.4% of the Mexican television market as of that date. In addition, we estimate that approximately 2.4 million of these 3.6 million households subscribe to cable television, while approximately 0.2 million households subscribe to MMDS, and approximately 1.0 million households subscribe to DTH. In the past we had estimated that there were some 1.0 million households that received C-band DTH satellite signals on the gray market, however we believe this number may be decreasing due to technological advances that make receiving and decoding unauthorized DTH signals more costly and difficult. Additional households receive unauthorized, gray market Ku-band DTH satellite signals from the United States, while still others receive pirated DTH signals from within Mexico. We believe that piracy of cable television signals, in cities and small towns across Mexico, presents a major challenge to the pay-TV market in Mexico. We cannot estimate the number of households that receive pirated cable television signals in Mexico, but we believe the number is significant. We believe that our potential subscriber base principally consists of households with an annual household income of at least Ps. 202,945 and commercial establishments such as hotels, restaurants and bars. We estimate that, as of December 31, 2002, Mexico had approximately 4.5 to 5.0 million households with annual income of at least Ps. 202,945, representing approximately 23% to 25.5% of the country's total television households. Of these households, we believe that 3.5 million to 4.0 million could receive DTH service. BROADCAST TELEVISION INDUSTRY OVERVIEW The television industry in Mexico began in the early 1950s when the Mexican Government granted licenses for the operation of three television channels in Mexico City. The first three channels, Channels 2, 4 and 5, were all indirectly owned by Televisa. The Mexican Government has since granted licenses for six additional channels in Mexico City and numerous other licenses for channels elsewhere in Mexico. The metropolitan area of Mexico City has a population of approximately 23.0 million people, representing nearly 22% of Mexico's total population. As a result, the television stations broadcasting in Mexico City have historically dominated the industry and have acted as anchors for stations located outside of Mexico City by providing these stations with all or a portion of their programming. Currently, there are nine commercial television stations operating in Mexico City (besides channel 52 from MVS, the leading MMDS operator in Mexico, and private channels 28 and 34) and approximately 462 other television stations elsewhere in Mexico. Most stations outside Mexico City re-transmit programming originating on one of the Mexico City stations. Televisa owns and operates four television stations in Mexico City, Channels 2, 4, 5, and 9, which collectively are affiliated with 221 other repeater stations and 32 local stations outside of Mexico City. In addition, Televisa operates an English-language television station on the Mexico-California border. Televisa's channels are also carried on 87 "complementary" stations, which facilitate the transmission of signals throughout Televisa's concession areas. The Mexican Government currently operates two stations in Mexico City, Channel 11 (with 5 repeaters) and Channel 22, and repeater stations outside Mexico City. Television Azteca owns VHF Channels 7 and 13 in Mexico City, which are affiliated with 87 and 89 stations, respectively, outside of Mexico City. TV Azteca and Televisora del Valle de Mexico, or Televisora, which operates CNI Channel 40 are partners in an arrangement where, until recently, TV Azteca rendered promotion, broadcast and commercialization services for channel 40. Recently, however, due to several conflicts and litigation between TV Azteca and Televisora, CNI Channel 40 has been operating as an independent television station pending final resolution of the litigation. There are 19 independent stations outside of Mexico City, which are unaffiliated. PAY TELEVISION INDUSTRY OVERVIEW CABLE TELEVISION Cable television offers multiple channels of entertainment, news and informational programming to subscribers who pay a monthly fee based upon the package of channels they receive. Cable subscribers in Mexico generally pay - 19 - a monthly subscription fee equal to Ps. 245 for a basic package (calculated as a weighted average) and as much as Ps. 579 for premium and digital packages. These prices do not take into account promotions cable operators may offer from time to time. According to Mexico's cable television trade organization, Camara Nacional de la Industria de Television por Cable or CANITEC, there were approximately 414 cable networks operating in Mexico as of December 31, 2002. Under Mexican law, all licenses to provide cable television services in a specific service area are non-exclusive licenses. More than 53 groups operate cable systems in Mexico. Cablevision, Mexico's largest cable system operator, holds a franchise for Mexico City and the surrounding areas and had over 412,000 household subscribers as of December 31, 2002. Televisa owns 51% of Cablevision following an offering that took place in April 2002. Currently, Cablevision is the only major cable television operator that also offers high speed Internet access through cable modems in Mexico City. Cablevision is also the only provider of digital cable television services in Mexico. Cablevision offers basic and premium packages to its subscribers, as well as a news channels package and adult oriented channels that are available "a la carte." Megacable is the second largest cable operator in Mexico with approximately 317,000 subscribers as of December 31, 2002. It serves the Pacific coast, Jalisco, Puebla and the Veracruz area. It is followed by Grupo Cablemas with approximately 299,000 household subscribers as of December 31, 2002 located in several regions in the country, including Veracruz, the Yucatan, Campeche and Chiapas peninsular region, central Mexico, Tijuana, Mexicali, Chihuahua, Juarez, Baja California and other cities on the United States-Mexico border. Press reports indicated during 2002 that Grupo Cablemas and Megacable were negotiating a potential merger of the two groups, but these negotiations were suspended. However, if negotiations are revived and a merger is successfully completed and approved by regulatory authorities, the new group would become the largest cable operator in Mexico, as measured by the number of subscribers and geographic coverage. It could become our largest competitor and, as a result, we believe competition would intensify if the merged group invests significant capital to upgrade infrastructure and enhance programming content. We believe that rural areas provide a market for our DTH satellite services. Many rural areas of Mexico either have a weak cable infrastructure or cannot be accessed by cable television. The mountainous Mexican landscape impedes cable wiring of the country. Due to the competitive business environment, cable providers find the significant cost of upgrading existing or establishing new cable infrastructure to be economically infeasible in many cases. We estimate that the metropolitan Mexico City area alone contains approximately 25% of the households with television sets in the country. We estimate that approximately 9.0% of households with a television set in the metropolitan Mexico City area already receive cable television from Cablevision. While recent, comparable data for all of Mexico is not available, we believe that the percentage of homes that own television sets and receive cable service is generally higher in metropolitan Mexico City than in other areas of Mexico (excluding the U.S.-Mexican border). We have based our estimates on information obtained from the directory published by CANITEC. MMDS OR WIRELESS CABLE MMDS, commonly called wireless cable, uses a microwave transmission system, operating from a head-end, similar to the head-end of a cable system. The head-end receives programming, generally via a satellite antenna. Microwave transmitters then send this programming, via an antenna located on a tower or on top of a building, to a small, receiving antenna at a subscriber's premises. At the subscriber's location, microwave signals are converted to frequencies that pass through a conventional coaxial cable into a decoder located near a television. Sometimes signals are sent directly from the antenna converter to the television set. MMDS requires a clear line-of-sight because microwave signals will not pass through obstructions, unless mechanisms are used to retransmit signals around obstructions such as hills and tall buildings. MMDS offers cost advantages over traditional hard-wire cable technology because it does not require the construction and maintenance of a fiber or coaxial cable network. MMDS is being used in other emerging pay television markets where cable does not have a strong established position. Subscription services introduced MMDS technology in Mexico in 1989, initially targeting the largest urban areas of the country. Generally, MMDS subscribers receive, upon payment of an installation fee, an antenna and decoder and must thereafter pay a monthly programming fee for any programming package or "a la carte" channels they select. The principal advantage of MMDS systems is their accessibility in portions of metropolitan areas where cable for television services has not yet - 20 - been installed. However, the frequency band allocated to MMDS transmission accommodates a maximum of approximately 32 analog television channels. We estimate that, of the approximately 19.6 million television households in Mexico as of December 31, 2002, less than 260,000 of them subscribed to MMDS. At least thirteen companies currently operate MMDS systems in Mexico. MVS Multivision, S.A. de C.V., or Multivision, is the leading MMDS operator in Mexico and provides MMDS services in the Mexico City area and 22 other cities across the country. MMDS systems do not rebroadcast the main over-the-air channels. DIRECT-TO-HOME OR DTH DTH systems use medium or high-power satellites to deliver signals to satellite antennas at homes, hotels, restaurants and apartment buildings and other locations. In contrast to MMDS signals, which are locally transmitted, a DTH satellite footprint can cover large land areas. DTH systems in Mexico have the following advantages: - the capital investment, although initially high for the satellite and uplink segment of a DTH system, is fixed and does not increase with the number of subscribers receiving satellite transmissions; - the licenses granted by the Mexican Government cover the entire country; and - the capital costs for the ground segment of a DTH system, the reception equipment, are directly related to, and limited by, the number of service subscribers. The disadvantages of DTH systems in Mexico as compared to other forms of television delivery presently include: - the limited ability to tailor programming packages to the interests of different geographic markets, such as providing local news; - the fact that signal reception is subject to line-of-sight requirements, though generally less stringent than those typical of MMDS systems; - intermittent interference from atmospheric conditions and terrestrially generated radio frequency noise; and - the possibility that the Mexican regulatory environment may change in an adverse manner in response to industry developments, new technology or political considerations. Gray Market C-Band and Ku-band DTH. The Mexican Government does not authorize services utilizing C-band DTH technology. However, we believe there were some 1.0 million households receiving C-band DTH signals on the gray market although this number may be decreasing due to technological advances that make it more difficult and costly to receive unauthorized DTH signals. We cannot estimate the number of channels that C-band DTH customers receive. Some households also receive unauthorized Ku-band DTH signals from the United States on the gray market, while still others receive pirated DTH signals from within Mexico. We cannot estimate the number of these households. Ku-Band DTH. Ku-band DTH satellite pay television services became available for the first time in Mexico in late 1996. The Ku-band DTH service's higher power allows subscribers to receive programming with low cost antennas as small as 60 centimeters to 1.2 meters in diameter. Our subscribers receive transmissions from the more powerful Ku-band PAS-9 which requires antennas no larger than 80-centimeters in diameter. This small antenna size compares favorably with the 1.8 to 5.0 meter antennas typically used for C-band reception. We believe that Ku-band DTH technology currently provides the most cost efficient, national, point-to-multi-point transmission of video, audio, and data services. Our Ku-band service uses digital compression technology that in comparison to analog technology provides increased channel capacity per transponder and improved audio and video quality. Our digital compression technology currently permits the broadcast of up to 10 to 12 video channels of programming per Ku-band transponder. Nine of our 12 transponders use this technology. We have invested in compression technology that allows us to increase the number of channels and services we offer without increasing satellite costs. - 21 - This compression technology allows us to increase our capacity to up to 15 to 18 video channels per transponder, but currently we only have this technology for three of our 12 transponders. Technological developments have also enabled us to start offering a variety of auxiliary services, including the "Sky Interactive" services introduced in late 2000. PROGRAMMING AND SERVICES RATES AND FEES In general, we currently charge our residential subscribers: - a one-time fee for subscription, installation and activation equal to approximately Ps. 1,099 (discounted to Ps. 99 if the subscriber agrees to pay monthly programming fees via automatic charge to a credit card); - a monthly programming fee ranging from Ps. 174 to Ps. 611, depending on the programming package the subscriber chooses and whether the subscriber pays within 12 days of the billing date; - a monthly rental fee of Ps. 138 (Ps. 125 if the subscriber pays within 12 days of the billing date) for rental of the IRD, LNB, Smart Card, remote control and related components; and - an annual membership fee of Ps. 268. We also offer promotions intended to attract subscribers from other pay TV systems, for free subscription, installation or activation. These rates and fees do not generally apply to our non-residential, or commercial, subscribers, whose rate packages and arrangements are negotiated on a case-by-case basis. Our commercial subscribers consist primarily of hotels (where each room capable of receiving our service is counted as a separate subscriber), restaurants and bars. While we negotiate rates with our commercial subscribers on a case-by-case basis, these rates are substantially lower than our residential rates. As a result, our commercial subscribers have a substantially lower average revenue as compared to residential subscribers and we believe that the revenue we receive from commercial subscribers is immaterial to our results of operations. PROGRAMMING PACKAGES On October 14, 2002, we re-launched our programming packages by reducing the number of packages offered to five (from 14), simplifying choices to the subscriber. As part of this strategy, we distributed 20 channels that were previously available as "a la carte" channels among the five packages. We now offer only six adult-oriented channels on an "a la carte" basis. The descriptions of our rate packages set forth below do not apply to our commercial subscribers. As of May 31, 2003, we offered subscribers the choice of five programming packages: Sky Basic (60 video channels, 32 audio channels and 29 pay-per-view); Sky Fun (78 video channels, 32 audio channels and 29 pay-per-view); Sky Movie City (91 video channels, 32 audio channels and 29 pay-per-view); Sky HBO (similar to Sky Movie City but with different movie channels including a total of 91 video channels, 32 audio channels and 29 pay-per-view) and Sky Universe (107 video channels, 32 audio channels and 29 pay-per-view). - 22 - The current prices for residential subscribers for our five programming packages are as follows:
MONTHLY PRICE WITH NUMBER OF PROGRAMMING PROMPT PAYMENT VIDEO PROGRAMMING PACKAGE PRICE(1) DISCOUNT(2) CHANNELS(3) - ------------------- -------- ----------- ----------- Sky Basic........................... Ps. 251.00 Ps. 174.00 60 Sky Fun............................. Ps. 301.00 Ps. 264.00 78 Sky Movie City...................... Ps. 421.00 Ps. 374.00 91 Sky HBO............................. Ps. 471.00 Ps. 424.00 91 Sky Universe........................ Ps. 611.00 Ps. 564.00 107
- ---------------------------- (1) Not including the monthly IRD rental fee described above, but including value-added tax and tax on telecommunication services. (2) If payment is made within 12 days of the billing date a subscriber receives a discount on his or her monthly subscription. We instituted this policy in October 2000 after raising our monthly subscriptions by about 8%. (3) Each package includes 32 audio channels From time to time, we offer special promotions targeted at particular local areas in response to local competitive conditions. PAY-PER-VIEW AND SPECIAL EVENTS We launched our pay-per-view services in 1997 and currently offer 29 pay-per-view channels. We devote 24 of these channels to family entertainment and movies and five channels to adult entertainment. We set aside five extra channels exclusively for special events, known as Sky Events, which include boxing matches, concerts, sports and movies. We provide some Sky Events at no additional cost while we sell others on a pay-per-view basis. SKY INTERACTIVE Sky Interactive allows subscribers to watch different content on the same channel and to select the content they prefer to display on the full screen. As part of our regular service we offer four channels with interactive features: Interactive News, Interactive Financial News, Interactive Sports and Interactive Kids. Some events are broadcasted using these features to show camera angles for auto races, reality shows and certain soccer matches, as well as to watch instant replays of sporting events. We expect further technology will be developed and become available to allow us to offer customers the use of an HTML or Java browser to run certain applications to enhance the viewer's experience. We believe this technology may also enable us to offer more value-added services in the future, such as T-commerce (television-commerce), games and information services, including news. PROGRAMMING ACQUISITION We currently negotiate directly for programming with international suppliers from the United States, Europe and Latin America and have the option to negotiate through an affiliate that also services the other SKY platforms. We have entered into definitive agreements with many programming providers, while other providers supply programming under letters of intent, invoices or other less formal arrangements. Our suppliers include, but are not limited to: DMS Media Services LLC (which offers Warner, Sony, E! entertainment, A&E Mundo, the History Channel, AXN, Fox Kids, HBO and Cinemax), LAPTV (Movie City and Cinecanal), Turner Broadcasting System Latin America, Inc. (TNT, CNN and Cartoon Network), Discovery Networks, Fox Latin America Channels Inc. (National Geographic, Canal Fox, Fox Sports, Fox News and Speed), Pramer (Film & Arts, Gourmet, Private Gold, Private Blue, Magic Kids, Europa Europa and Cosmopolitan), MTV Networks (MTV and Nickelodeon), Claxon (Playboy, Locomotion, Fashion TV and Infinito) and Bloomberg LP. We regularly negotiate new agreements with our programming suppliers. We also have arrangements with the following studios to show films on an as needed basis: Dreamworks, Warner Bros. International, 20th Century Fox, Universal Studios International, Walt Disney - 23 - Pictures, MGM, Paramount Pictures, CPT Holdings Inc (Sony), PWI Films, Inc., Baywood Enterprises, Nuvision and Independent Studios. Televisa and News Corporation provide us with significant programming content, some of which we distribute on an exclusive DTH basis in Mexico. We have the exclusive right to distribute, via DTH in Mexico, all program services or channels over which Televisa and News Corporation have control, subject in each case to certain pre-existing third party agreements. Televisa and News Corporation guarantee our access to the same program services or channels made available to cable and MMDS systems in Mexico. We may access these services and channels at a price not to exceed that extended to cable or MMDS systems. Televisa's right to grant us an exclusive license was recently challenged by DIRECTV. See "Item 3 - Key Information Risk Factors - Risk Factors Related to Our Business-Our Ability to Attract Subscribers Depends on the Availability of Desirable Programming from Third Party Programmers." Televisa also provides us with a variety of signals that include domestic and foreign programs. Among these programs are: musical programs, situation comedies, stand-up comedy shows, game shows, children's programs, talk and variety shows, movies, sports, special cultural events and musicals. We have exclusive DTH broadcast rights in Mexico to Canal Fox, which is one of the leading general entertainment pay television channels in Mexico and Latin America, along with Fox News, a 24-hour news channel in English and Fox Sports Argentina. We have agreed to reserve a portion of our available video channels for program services owned by our sponsors. Televisa has the right to require us to carry its program services on 10% of the total number of available video channels. In addition, News Corporation has the right to require us to carry its program services on 6 2/3% of the total available channels. Liberty Media has the right to require us to carry its program services on 4% of the available channels. In June 2002, we entered into an agreement with TV Azteca to begin paying them for the rights to rebroadcast their over-the-air Channels 7 and 13. We have also committed to purchase up to US$10.6 million in advertising from TV Azteca over the three years from the date of the agreement and have received rights to broadcast certain soccer matches. Prior to May 1, 2002, we were permitted to rebroadcast these channels at no cost. For more information, see "Item 3 - Key Information Risk Factors - Risk Factors Related to Our Business--Our Ability to Attract Subscribers Depends on the Availability of Desirable Programming from Third Party Programmers" and "Item 5: Operating and Financial Review and Prospects--Trend Information." During 2002 we entered into an agreement with Televisa to contribute funds for the production of, and to obtain the exclusive pay-TV transmission rights to, the reality shows Big Brother VIP and Operacion Triunfo, which were produced by Endemol Mexico, S.A. de C.V. See "Item 7: Major Shareholders and Related Party Transactions-Related Party Transactions- Programming Arrangements with Related Parties." We have no other current plans to develop or produce our own programming, except for Mosaic, the promotional channel featuring our programming services. DISTRIBUTION, SALES AND MARKETING In October 2000, we formed our own sales force in order to complement our existing distribution network, increase market penetration in Mexico's main cities, improve the quality of our subscriber base and reduce the acquisition cost of new subscribers. We have established direct sales forces in Mexico City in 2000; in Guadalajara, Monterrey, Puebla, Tijuana, Culiacan and Leon in 2001; in Queretaro, Merida, Acapulco, Hermosillo and La Paz in 2002; and Torreon in 2003, in order to strengthen our market penetration and direct distribution network in those cities as well. As of May 31, 2003 we sold and distributed our services through a network of 12 wholesalers and 14 direct sales offices that control over 3,600 points of sale. These locations include leading malls, department stores, popular retailers, supermarkets and consumer electronics outlets. We offer commissions to our wholesalers, who, in turn, pay commissions to their retailers and distributors. Our direct sales force employees are also paid by commission, in addition to their salary and benefits. We also have control over some direct distributors, who receive commissions but are not employees. We believe our subscription fee and programming prices are competitive with those offered by other pay television platforms. Our entry-level product is the Sky Kit, which includes a satellite antenna, low noise block or - 24 - LNB, as well as installation and activation, the right to rent an IRD, and to use a Smart Card, remote control and related components. From the second quarter of 1997 through September 30, 2000, we sold Sky Kits exclusively through our wholesale distribution network. Since October 1, 2000, however, we have retained ownership over the antenna and LNB and the subscriber initiation fee now covers installation and activation. We rent the IRD and Smart Card to our subscribers, and provide them with the remote control and related components free of charge. Our first 130,000 subscribers received their IRDs, Smart Card, and remote controls on a bailment basis. However, since February 23, 1998, substantially all of our subscribers (residential and commercial) rent their IRDs under an indefinite term rental plan. We chose to retain ownership of the Sky Kit equipment, including the antenna, Smart Card and LNB, rather than selling them to our distributors, in order to facilitate repossession of the equipment if a subscriber terminates service or defaults on its obligations. This change has had no material impact on the revenues we receive from our distribution network. We focus on promoting our superior programming content, customer service and system quality, rather than the number of channels we offer. Our programming includes Spanish-language over-the-air channels, exclusive soccer games, special events, reality shows and other sports and entertainment programming. Our marketing strategy includes advertising through national and regional television, radio, newspapers, magazines, billboards, direct mail, internet, movie and airport advertising, sponsorship of special events (such as boxing matches, golf and soccer tournaments) and promotional activities at restaurants, bars, cultural and other social events. For a more detailed discussion of our program offerings and packages, see "--Programming and Services," below. Intense competition and general market conditions have driven us to lower our monthly subscription fee and to offer special discounts and promotions on several occasions. In the last three years, we have maintained a special promotion aimed at children known as Sky Kids using remote controls designed especially for children. We also have targeted soccer fans by offering certain pay-TV exclusive soccer matches. In 2002 we broadcasted 40 of the soccer matches for which Televisa had the exclusive broadcast rights, as well as 22 of the soccer matches for which TV Azteca had exclusive broadcast rights. We reward long-term subscribers with a loyalty program known as Sky Value offered without cost which includes prizes, trips, programming and special events, such as concerts and sporting events. We monitor our nationwide installation service through a centralized operations office. This enables us to monitor the quality of service being provided to our customers. After obtaining the Sky Kit equipment, the installer or the subscriber contacts our call center to activate the Ku-band DTH service. Activation typically occurs within minutes of the call. We provide customer service to our subscribers through our own, specialized telephone call center, staffed by approximately 760 people who answer general questions and provide basic information as well as personalized service to solve more complex customer problems. Some of our customer service personnel also carry out subscriber retention and collection activities over the phone. In June 2001, we purchased from Merkatel, our former call center service provider, the equipment Merkatel used to provide call center services to us, including computers, telephones, furniture, and fixtures along with other software, training materials and significant transition support for a total of Ps. 24.2 million plus value-added tax, or VAT. We also hired the telephone operators involved in operating the call center. Merkatel is a wholly owned subsidiary of Televisa and provided call center services to us from our inception through June 30, 2001. Starting July 1, 2001, the call center functions have been provided in-house. We have improved the efficiency of the call center operations using our infrastructure in our existing customer service center, including our interactive voice response, predictive dialer and customer relationship management systems. We engage a third party to publish and distribute SKY VIEW, our monthly magazine detailing all of the channels and program listings available on SKY. SKY VIEW includes weekend programming, a guide to movies, general interest articles about actors, actresses, entertainment, sports, life style, culture, games, quizzes and general information about SKY packages, enhanced TV features and promotions. SKY VIEW is one of the most important magazines in Mexico, as measured by the number of published copies with a monthly production of approximately 300,000 units. Since January 2001, we have used our own advertising sales force, supported by Grupo Medios, to sell advertising in the SKY VIEW magazine. We offer a variety of advertising sales packages and volume discounts to match customers' needs. - 25 - We sell advertising on our broadcasts to corporate and other clients and advertising agencies. We use both our own advertising sales force and the services of a wholly owned subsidiary of Televisa to promote and sell advertising time. OPERATIONS Our digital video, audio and data signals are encoded, processed, compressed, encrypted, multiplexed (i.e., combined with other channels), modulated (i.e., applied to the designated carrier frequencies for transmission to the satellite) and transmitted through our Ku-band DTH service, from uplink facilities in Mexico and the United States. Geosynchronous satellite transponders receive, convert and amplify the signals and retransmit them to the earth in a manner that allows individual subscribers to receive and be billed for the particular program services to which they have subscribed. UPLINK FACILITIES AND PLAY-OUT FACILITIES We use play-out equipment to prepare the programming material for compression and subsequent transmission to the satellite. The play-out equipment digitizes the programming for channels provided by third party programmers, inserts commercial or promotional material where appropriate, monitors the quality of the picture and sound, and delivers the material to the compression and multiplexing system. In the case of channels originating from taped material, the play-out equipment also compiles the various programming segments and inserts commercial and promotional material where necessary. For near video-on-demand movies, the play-out equipment stores movies and plays them out as appropriate to provide the desired frequency of service. We use uplink and play-out facilities in Mexico City, Mexico and in Miami Lakes, Florida and Port St. Lucie, Florida. We own the uplink and play-out equipment located in Mexico City, which is housed in facilities owned by Televisa. Televisa operates the equipment to provide us with uplink services. In addition, TechCo provides us with uplink services at its facilities in Florida. All of the uplink facilities we use have full emergency power generation equipment to allow uplinks to continue operations without any disruption of service in the event of a power failure. We also use the TechCo facilities to handle programming delivered from outside Latin America. SATELLITES We currently receive satellite signal reception and retransmission services from 12 Ku-band transponders on PanAmSat's PAS-9 satellite under an agreement executed with PanAmSat on February 8, 1999. PAS-9 was launched on July 28, 2000 and became operational on September 8, 2000. The term of the PAS-9 agreement ends on the earlier of: (a) September, 2015 or (b) the date PAS-9 is taken out of service. We pay a monthly service fee of US$1.7 million for service from all 12 transponders. Televisa, News Corporation and Liberty Media have guaranteed our payments to PanAmSat in proportion to their respective beneficial interests in us. PAS-9 was manufactured by Hughes and is operated by PanAmSat Corporation, which is 81% owned by Hughes. On April 9, 2003 News Corporation announced that it reached a definitive agreement to acquire a 34% interest in Hughes. Hughes holds an indirect interest in PanAmSat and DIRECTV Mexico, our DTH competitor. We do not yet know the possible implications of this event for our satellite operations. The remaining useful life of PAS-9 is expected to be approximately 14 to 16 years. PAS-9 is located at 58.0(degree) West longitude, and we believe its footprint covers virtually all of Mexico's television households as well as other areas in the Caribbean basin and portions of the United States and Central America. However, we believe that in a few instances some of our potential subscriber base may experience some signal degradation as a result of their particular location and PAS-9's orbital location. Each transponder is capable of handling analog channels or multiple digital channels. Service from PAS-9 is not subject to pre-emption except in limited instances with respect to spare transponder capacity. We do not currently have contingency arrangements in case we lose satellite service from PAS-9, nor are we insured against such an event. See "Item 3. Key Information--Risk Factors--Risk Factors Related to Our Business--We Depend on the Availability of Satellite Transponder Services from PanAmSat." We had previously entered into an agreement with SatMex on April 1, 1999 to allow us to use 12 Ku-Band transponders on Solidaridad 2 for signal reception and retransmission. The agreement expired on December 31, 2001 but was extended to March 31, 2002 to avoid interrupting service to those subscribers whose antennas had not - 26 - been re-pointed to the new satellite, PAS-9. Extending the service agreement enabled us to re-point the antennas of approximately 30,000 additional subscribers to the new PAS-9 satellite without interrupting their service. We paid SatMex a monthly service fee of US$1.752 million for satellite signal reception and retransmission service from 12 transponders on Solidaridad 2 through December 31, 2001, and a flat fee of US$1.5 million for the use of up to eight transponders from January 1, 2002 through April 3, 2002. The process of migrating customers from Solidaridad 2 to PAS-9 started in November 2000 and ended in March 2002. The shutdown of this process and the termination service from the Solidaridad 2 satellite caused us to lose approximately 13,000 subscribers. Re-pointing costs were approximately US$35 million. We had also previously agreed to use services from 12 transponders on PanAmSat's PAS-5 satellite for service fees of at least US$1.5 million per transponder per year plus additional fees based on average gross subscriber revenues. PAS-5 was launched in August 1997 and became operational in October 1997. However, signals from the transponders on PAS-5 experienced terrestrial interference in Mexico and the PAS-5 satellite batteries failed. As a result, we never used the services on PAS-5 and we terminated the PAS-5 agreement and replaced it with the PAS-9 agreement. We made total payments of US$23.4 million for the availability of PAS-5, but we received a credit against the first US$11.7 million of service fees otherwise payable under the PAS-9 agreement. We do not owe any further payments for PAS-5. Our DTH concessions granted by the Mexican Government currently authorize us to offer DTH services using Mexican satellites, including current and future satellites operated by SatMex, as well as PanAmSat's PAS-9, which is considered a foreign satellite under Mexican law. For a more detailed discussion of our concessions, see "--Mexican Regulation of DTH Services--Concessions; Revocation; Expropriation." INTEGRATED RECEIVER/DECODER SYSTEM Depending on a subscriber's location within the country, a subscriber may use a 60-centimeter, 75-centimeter, or 80-centimeter satellite receiver antenna to receive our signal. Our subscribers currently pay the same initial fee for installation and activation, regardless of the size of the satellite receiver antenna they require. The IRD we currently rent to subscribers provides the interface between the reception equipment and the subscriber's video and audio equipment. In addition, connection to external data processing or data storage equipment is enabled via the provision of a serial data output port in the IRD. An internal modem in the IRD allows the on-line report-back or call-back of the subscriber's impulse pay-per-view records to the subscriber management system. Authorizing information for subscription programming and the access control algorithm are stored on a microchip imbedded in a credit card-size Smart Card. The Smart Card, which can be updated or replaced periodically, provides a simple and effective method to authorize and de-authorize subscription programming. A Smart Card enables the IRD to descramble the program only when the subscriber is entitled to view the program. If the Smart Card assigned to a particular IRD is authorized for a particular channel, the data is decrypted and passed on for audio and video decompression. After decompression, the digital audio and digital video signals are reconstructed into analog format for display on a standard television set. During the fourth quarter of 2001 we completed the process of replacing our subscribers' Smart Cards as a regular security measure intended to reduce the risk of piracy. The IRDs have been designed to be easy to use. Subscribers can quickly and easily access desired programming, using a remote control device via an on-screen electronic program guide. Our subscribers have access to a channel guide, five promotional mosaic channels and an icon-driven menu system. Our customers also have access to their account statement on-screen. In 2002, we purchased IRDs from two manufacturers: (1) Pace Microtechnology plc, a U.K. manufacturer which assembles IRDs for the Mexican market in Puebla, Mexico; and (2) Motorola, Inc which operates a manufacturing plant in Sonora, Mexico. At least two other suppliers, affiliates of Philips Consumer Electronics Corporation N,V. and Thomson Commercial Electronics, also manufacture IRD equipment that is compatible with our system. During 2002 and 2003, we continued to purchase the set-top box type "World Box2", from Motorola to provide our Sky Interactive service. The box and service allow subscribers to choose camera angles for soccer matches, - 27 - watch instant replays and obtain statistics about favorite teams and players. We expect further technology will be developed and become available to allow us to offer customers the use of an HTML or Java browser to run applications to enhance the viewer's experience. We believe this technology may also enable us to offer more value-added services in the future, such as T-commerce (television-commerce), games and information services including news, weather, and events. We rent the IRD, and provide the remote control and Smart Card, to subscribers but retain title over them to help facilitate repossession of the equipment if a subscriber terminates service or defaults on its obligations. BROADCAST AND CONDITIONAL ACCESS SYSTEMS Digital technology permits the compression and transmission of digital signals to facilitate multiple channel transmission through the bandwidth used by a single channel, giving broadcasters the ability to offer significantly more channels than analog systems. NDS Group plc, or NDS, a majority owned subsidiary of News Corporation, previously provided the necessary equipment to digitize, compress, encrypt and multiplex the signals transmitted to the satellite by Innova's uplink facilities. Digitized signals are compressed using the MPEG-2 standard, encrypted and multiplexed into a Digital Video Broadcasting transport stream of the DVB standard and modulated for transmission to the satellite transponders we use. Currently, these technologies are provided by Tandberg Television, a third party Norwegian company, which provides open solutions for the digital broadcasting of audio, data and video, and has operations in Asia, Australia, Europe and the USA. NDS provides our conditional access system, including the Smart Cards necessary to decode the signal at the subscriber's home, and certain other security services related to the Smart Card. NDS provides conditional access services to other DTH providers including British Sky Broadcasting plc in the United Kingdom, DIRECTV in the United States, Sky Italia Sp.A.(previously, STREAM) in Italy, MATAV in Israel and STAR in Asia. The basic purpose of the conditional access system is to ensure that each program can be viewed only by those subscribers who have paid for that program. Accordingly, the conditional access system is central to the security network that prevents unauthorized viewing of programming. Our Ku-band receiver employs Smart Card technology, making it possible to change and enhance the conditional access algorithm in the event of a security breach. We believe that our ability to take electronic countermeasures and to replace the Smart Cards when necessary provides an effective means to combat sustained piracy. We and NDS are parties to a System Implementation and License Agreement dated September 20, 1996, pursuant to which NDS designed, developed and implemented our conditional access and broadcast systems. In exchange, we purchased certain equipment, and license the proprietary information and rights necessary to operate NDS's conditional access and broadcast systems. From time to time we may explore alternative technologies for delivering our programming. During 2001, we replaced all the Smart Cards that were used by our subscribers with new ones that include new technology and enhanced security as a part of our continuous efforts to improve security against piracy. This measure cost approximately Ps. 33 million. SUBSCRIBER MANAGEMENT SYSTEM We currently provide subscriber management, billing and remittance services for our own subscribers. Once a subscriber orders programming from us, we transmit an authorization code to the subscriber's IRD and Smart Card, permitting the subscriber to receive programming within moments of placing the order. The subscriber management system runs the billing process for monthly charges over-the-air via the IRD in most cases. We accept bill payment by cash or check through a bank deposit or by credit or debit card. We believe that our subscriber management system, or SMS, is essential to providing pay television services because it provides us with marketing, customer service and administrative operations support. These elements include: billing and collection of subscription fees; handling service difficulties and other inquiries; handling disconnection, alteration, reconnection and relocation of services; and marketing of additional services. The subscriber management system also maintains records for each receiver and Smart Card, to maintain security and prevent piracy. In the past, we have used an SMS that we obtained from NDS under a Subscriber Management System Implementation and License Agreement, dated October 29, 1996. Under that agreement, NDS designed, developed and implemented our current subscriber management system. We entered into a second License - 28 - Agreement with NDS, dated August 3, 1998, for the design, development and implementation of our current SMS called Provider II We are currently implementing a new Subscriber Management System, or SMS, to support the growth of our subscriber base. We believe this new SMS will allow us to provide more effective management and billing services to our subscribers. Among other things, we believe the new SMS will: - give us greater flexibility to control different variables that are part of our service than does our current SMS, - improve our ability to respond to our subscribers' account management needs and aid them in reporting on their service, - provide greater billing flexibility, - improve overall system efficiency, and - offer options for marketing our services. This project includes the purchase of software, licenses, hardware, implementation and advisory services as well as the incurring of personnel costs. As an initial step, on June 12, 2002, we entered into two related agreements with CSG through our operating subsidiary, Corporacion Novavision, S. de R.L. de C.V., or Novavision. Under these agreements CSG provides us: (a) a non-exclusive, perpetual license for the use of the software "Kenan" to provide billing and order management to licensed subscribers, (b) installation and implementation of the system within the framework of our business, (c) training and support services and, (d) consulting services. CSG is an enterprise with more than 20 years of customer care and billing expertise, providing its services in more than 265 companies in more than 40 countries. We also requested the development and support of certain software applications and advisory services from Siebel and NDS to complete the requirements of the new system. NDS will continue to support Provider II until we complete the switch-over to the new SMS. Once the new SMS implemented by CSG is placed in service, our current agreements with NDS related to maintenance of Provider II will be terminated. We expect the new SMS will be operational and placed in service in late August 2003. See "Item 3: Key Information--Risk Factors--Risk Factors Related to Our Business-- Our Ability to Provide Billing and Order Management to Our Subscribers Depends on the Functionality and Flexibility of Our Subscriber Management System, Which is Currently Being Replaced with a New System from a New Supplier;" "Item 4: Information on the Company--Business Overview--Capital Expenditures;" "--Subscriber Management System;" and "Item 10: Additional Information-Material Contracts-New Subscriber Management System Contract." TRADEMARKS The Sky trademarks are trademarks of British Sky Broadcasting Limited, in which News Corporation has an approximate 35.4% interest, and are licensed to us on a perpetual, exclusive basis, for a nominal fee, pursuant to an agreement between a subsidiary of News Corporation and us. There are numerous trademarks in the process of being registered in Mexico, some of which involve the Sky name, which are used in the ordinary course of business but are not material to our results of operations. COMPETITION GENERAL Our business competes with providers of pay television services using cable, MMDS, and Ku-band DTH transmission technologies. We also compete with gray market and pirated DTH signals from the United States and from within Mexico. We believe that competition is primarily based upon programming, customer service, distribution network, advertising and promotion and price. We cannot assure you that, based on its potential size, the Mexican pay television industry will be able to sustain a number of competing pay television providers. We also - 29 - compete with national broadcast networks and regional and local broadcast stations, movie theaters, video rental stores, radio stations, and other entertainment and leisure activities generally. We believe we successfully compete by offering superior programming content, including a number of exclusive channels with proven market appeal, and high-quality service based on optimal technology throughout Mexico. We also believe that we have a number of competitive advantages. We currently broadcast 168 digital channels (107 video, 32 audio and 29 pay-per-view), including Channel 2, the most popular broadcast channel in Mexico, which in the past has not been available in all areas outside of Mexico City. We also offer local programming as well as several specialized channels targeted to particular communities, including RAI (Italian), TV5 (French), DeutscheWelle (German), Galicia TV (Spanish), and NHK (Japanese). Our digital Ku-band DTH satellite technology offers larger coverage, greater channel selection, and enhanced video and audio quality as compared to existing terrestrial broadcast, cable, and MMDS television services. We believe that our competitors' existing and potential alternative technologies will not materially adversely affect the viability or competitiveness of our service package in the foreseeable future. For example, new ADSL technology is being used to provide high-speed internet access and could be used in the future for broadband transmissions, but this technology is currently more expensive than other alternatives and we do not believe that providers have shown significant interest in it, other than for internet services. However, these and other technological changes could impact us, and, depending on the technological developments, we may need to expend substantial financial resources to develop and implement new competitive technologies. Our service is supported by an extensive distribution network, a comprehensive marketing campaign and a well-trained customer service group. We believe that the collective experience and expertise of Televisa, News Corporation and Liberty Media in the media and entertainment industries helps us to compete successfully in the Ku-band DTH market and increases our access to programming, technology and distribution services. Televisa's extensive network of open over-the-air television, pay television, radio stations, and publications provides us with significant cross-promotional opportunities. CABLE TELEVISION AND MMDS We expect to continue to encounter a number of challenges in competing with cable television providers. For example: - cable television providers benefit from their established position in the domestic consumer marketplace; - cable subscribers generally face lower up-front costs than DTH subscribers, who must pay initial start-up fees, including installation of relevant equipment and activation of service; - households that subscribe to our programming may pay higher monthly charges than they would pay for cable service because of the greater number of channels and greater variety of programming offered; and - several cable operators, including Cablevision, have already, or are in the process of upgrading, their plant and facilities to the digital technology that will allow them to offer digital set-top boxes with new value-added services, including Internet access. We believe our programming content has proven market appeal, in comparison to our competitors. We distinguish our service from other existing pay television operators in Mexico by offering more channel capacity than conventional over-the-air television, cable, or MMDS, and providing exclusive programming and specially-produced channels. Televisa grants us four over-the-air broadcast channels as part of the exclusive Mexican DTH program rights described above. These channels are among the most popular television channels in Mexico. We are the only DTH service offering all the over-the-air broadcast signals from Mexico City, as well as signals from the State of Mexico, Guadalajara, Mexicali, Monterrey, Puebla and Tijuana. While we do not compete directly with over-the-air broadcast channels for pay TV subscribers, we do emphasize our exclusive DTH rights to broadcast some of Televisa's over-the-air channels and their programming. These channels do compete in terms of programming with other over-the-air channels, such as those broadcast by - 30 - TV Azteca. The group of private investors that controls TV Azteca, led by Mr. Ricardo Salinas Pliego, also owns several media outlets: a local television station in Chihuahua; a movie distribution business, including a chain of movie theatres, a movie studio, a record company, an Internet shopping site, a high-speed Internet access company, a cellular phone company, chain stores, a financial services company and a TV network focused on the Hispanic audience in the United States, which currently reaches 53% of the Hispanic audience according to press reports. TV Azteca also has an ownership interest in an El Salvadorian television station, and a music company, and it owns a Mexican soccer team. Prior to 2002, we were able to re-broadcast TV Azteca's over-the-air channels free of charge. In June 2002 we concluded a series of agreements with TV Azteca giving us the right to re-broadcast channels 7 and 13 for a period of three years with an option for DTH-exclusive rights after 2004, as well as access to certain soccer matches for which TV Azteca has broadcast rights. If we do not renew this agreement, TV Azteca and its related interests could provide this programming to others on an exclusive basis and it would then be unavailable to us. While viewers in Mexico City have access to a number of free-over-the-air channels, viewers in certain rural areas of Mexico have limited access to free over-the-air channels and reduced picture quality. Televisa holds a controlling, majority interest in Cablevision, Mexico's largest cable system, which competes directly with us for customers in the pay television market in the Mexico City area. Cablevision offers a basic package with 49 channels consisting of nine television channels broadcast in Mexico City, 40 additional basic channels, four digital premium packages and 23 pay-per-view channels. Some of these channels compete directly with channels we carry and our pay-per-view channels. For a more detailed discussion of the impact of this relationship, see "Item 3: Key Information--Risk Factors--Risk Factors Related to Our Business--Our Equity Holders Have, or May Acquire, Interests in Which Compete with Us for Customers and Business Opportunities." Furthermore Cablevision is a major cable television operator and high speed Internet access provider (through cable modem) in Mexico City, as well as the only provider of digital cable television services and television-based Internet access services in Mexico. Its network consists principally of fiber optic and coaxial cable and it is expanding and upgrading its existing cable network into a broadband bi-directional network. Cablevision plans to deliver a broad range of services including enhanced television and other interactive programming services, near-video-on-demand services, video-on-demand services, e-commerce applications and IP telephony services. Cablevision is currently rolling out digital set top boxes to its subscriber base, allowing it to offer new pay television, digital and interactive products and services, including video navigators, electronic programming guides and television-based Internet access. Megacable is the second largest cable operator in Mexico with approximately 317,000 subscribers as of December 31, 2002. It serves the Pacific coast, Jalisco, Puebla and the Veracruz area. It is followed by Grupo Cablemas with approximately 299,000 household subscribers as of December 31, 2002 located in several regions in the country, including Veracruz, the Yucatan, Campeche and Chiapas peninsular region, central Mexico, Tijuana, Mexicali, Chihuahua, Juarez, Baja California and other cities on the United States-Mexico border. Press reports indicated during 2002 that Grupo Cablemas and Megacable were negotiating a potential merger of the two groups, but these negotiations were suspended. However, if negotiations are successfully completed and approved by regulatory authorities, the new group would become the largest cable operator in Mexico, as measured by the number of subscribers and geographic coverage. This group could become our largest competitor and, as a result, we believe that competition would intensify if the merged group invests significant amounts to upgrade infrastructure and enhance programming content. Multivision, a MMDS operator in Mexico City, offers services in 22 other cities such as Guadalajara, Monterrey, Leon, Merida, Villahermosa, Tijuana and the main cities in the Pacific Coast. Multivision's customers currently can receive up to 23 channels, but they do not have pay-per-view channels and they do not broadcast conventional "over-the-air" channels. During 2002, Multivision re-launched its programming packages, offering now only two packages, "MASTV" and the premium package, including 15 or 23 channels respectively. Multivision's subscribers currently pay an average initial one-time installation charge equal to Ps. 299.0 and a monthly fee of Ps. 75 for 15 channels of its "MASTV" programming package or Ps. 285.0 for 23 channels in the premium package, which includes 8 channels of movies (Cinecanal, Movie City, Cinemax and HBO). Conventional over-the-air channels are not broadcast through the MMDS system. We believe that our programming content has proven market appeal in comparison to our MMDS competitors. We distinguish our service from MMDS by offering nation wide services, more channel capacity and providing exclusive programming and specially produced channels. See "Item 3: Key Information--Risk Factors--Risk Factors Related to Our Business--We Face Intense Competition in the Pay Television Market in Mexico." - 31 - C-BAND DTH Pay television services utilizing C-band DTH technology are not authorized by the Mexican Government in Mexico. Accordingly, while there is a C-band market in Mexico, there are no official statistics regarding the size of this market. However, we have estimated in the past that there were some 1.0 million households that received C-band DTH signals on the gray market. However, we believe Ku-band DTH services will decrease the size of any C-band market in the long term. KU-BAND DTH Currently, only we and DIRECTV Mexico, the digital Ku-band DTH service controlled, operated and managed by Grupo Galaxy Mexicana, S. de R.L. de C.V. ("Galaxy"), operate DTH satellite services in Mexico. Galaxy launched DIRECTV Mexico in November 1996. Galaxy was originally a joint venture between Hughes Communications, Inc. and three Latin American media companies, Venevision, owned by the Organizacion Cisneros, Televisao Abril and Multivision. In 1999, Hughes and Venevision bought Televisao Abril's stake in Galaxy. DIRECTV offered 133 channels (75 video, 32 audio, and 26 pay-per-view channels) as of May 31, 2003. According to Hughes's 2002 annual report, DIRECTV Latin America, L.L.C., or DLA, is owned by Hughes (approximately 75%), Darlene Investments L.L.C., an affiliate of the Cisneros Group subsidiary (21%) and the Clarin Group of Argentina (under 4%). DLA provides DTH television and radio services in Mexico and has operations in other countries in Latin America including Brazil, Argentina, Venezuela, Chile, Colombia, Ecuador, Guatemala, Puerto Rico and Trinidad and Tobago. See "Item 3: Key Information--Risk Factors--Risk Factors Related to Our Business--We Face Intense Competition in the Pay Television Market in Mexico." On March 18, 2003, DLA announced that it had filed a voluntary petition for bankruptcy protection, under Chapter 11 of the U.S. Bankruptcy Code, in the U.S. Bankruptcy Court in Wilmington, Delaware. DLA cited its debt burden and high fixed costs and listed liabilities of US$1.6 billion as of the end of 2002. DLA also reported a loss of 54,000 net subscribers in the first quarter of 2003 or 7% of its subscriber base. DLA is a competitor of ours that provides DTH programming and services in Mexico through an affiliated Mexican operating company, DIRECTV Mexico. According to its 2002 annual report, Hughes Electronics Corporation, or Hughes, owns approximately 75% of DLA and also owns a significant interest in the operating company DIRECTV Mexico. On April 9, 2003, News Corporation announced that it reached a definitive agreement with General Motors Corporation and Hughes in which a subsidiary of News Corporation would acquire General Motors' 19.9% stake in Hughes and a further 14.1% of Hughes from public shareholders and General Motors' pension and other benefit plans, for a total of 34% of Hughes. If the agreement is consummated, a subsidiary of News Corporation's will transfer its 34% ownership interest in Hughes' common stock to Fox Entertainment Group, Inc., an 80.6% owned News Corporation subsidiary. The businesses contained in Hughes include a leading U.S. satellite broadcaster DIRECTV, which has more than 11 million subscribers; an 81% equity holding in satellite operator PanAmSat; and Hughes Network Systems, a provider of broadband satellite network solutions. This agreement is subject to a number of conditions including the receipt of required regulatory approvals in the United States and elsewhere, and no assurance can be given that this acquisition will be consummated, or, if consummated, that it will occur on the terms announced on April 9, 2003. Additionally, our Social Part Holders Agreement provides that neither Televisa nor News Corporation may directly or indirectly operate or acquire an interest in any business that operates a DTH satellite system in Mexico (subject to certain limited exceptions). If News Corporation were to consummate the proposed acquisition of an interest in Hughes while Hughes continued to own an interest in DIRECTV, News Corporation would become an indirect owner of DIRECTV Mexico, our DTH competitor. Accordingly, under our Social Part Holders Agreement any such acquisition of an indirect interest in the Mexican operations of DLA would require the consent of us and Televisa. We cannot predict what impact either the DLA bankruptcy or, if consummated, News Corporation's acquisition of an interest in Hughes, will have on the competitive environment for pay television in Mexico. See "Item 3: Key Information--Risk Factors--Risk Factors Related to Our Business--We face Intense Competition in the Pay Television Market in Mexico," and "--We Have Significant Transactions With Our Owners Who Are Involved in Related Businesses Which Creates the Potential for Conflicts of Interest," "--One of Our Owners, News Corporation, May Acquire Significant Interests in DIRECTV, Our DTH Competitor in Mexico, and PanAmSat, Our Sole Satellite Provider, and We Cannot Predict What Effect This Will Have On Us" and "--Our Equity Holders Have, or May Acquire, Interests in Other Pay Television Operations in Mexico Which Compete with Us for Customers and Business Opportunities." We believe that our programming content has proven market appeal, in comparison to our competitors. Galaxy is our sole operating Ku-band DTH competitor at this time. We distinguish our service from the DIRECTV service - 32 - offered by Galaxy by offering more channel capacity and providing exclusive programming and specially produced channels. Televisa grants us four over-the-air broadcast channels as part of the exclusive Mexican DTH program rights. These channels are among the most popular television channels in Mexico. We are the only DTH service offering all the over-the-air broadcast signals from Mexico City, as well as signals from the State of Mexico, Guadalajara, Mexicali, Monterrey, Puebla and Tijuana. Galaxy also has some exclusive DTH offerings. On April 21, 2003 a U.S. Bankruptcy Judge authorized DLA to reject its agreement for exclusive rights, in several Latin American countries including Mexico, to broadcast the 2006 FIFA World Cup soccer tournament. As a result, we believe the programming disadvantage we faced in 2002, when DIRECTV Latin America had the exclusive rights to the World Cup tournament, may be reduced. We cannot predict what impact DLA's rejection of the FIFA world cup contract will have on our ability to obtain the rights to broadcast the World Cup soccer tournament in the future should we decide to pursue these rights. While Grupo Acir and PCTV have also received licenses to offer DTH services in Mexico, and the Mexican Government may grant additional licenses for DTH satellite operations in Mexico, our management is not aware of any group preparing to launch DTH services in Mexico in competition with Sky and DIRECTV. We also compete with unauthorized Ku-band DTH signals from the United States. In addition, we may face increased competition for DTH subscribers in Mexico from U.S. DTH satellite providers authorized to provide service under a treaty and protocol. The Agreement Between the United States and Mexico Concerning the Transmission and Reception of Signals from Satellites for the Provision of Satellite Services to Users in the United States and Mexico, signed on April 28, 1996, created a framework that enables entities utilizing U.S.-licensed satellite facilities to provide services in Mexico, and entities utilizing Mexican-licensed satellites to provide services in the United States. On November 8, 1996, pursuant to the U.S.-Mexico Satellite Agreement and the North American Free Trade Agreement, the Protocol Concerning the Transmission and Reception of Signals from Satellites for the Provision of Direct-To-Home Satellite Services in the United States and Mexico was executed to facilitate the provision of cross-border, direct-to-home satellite services. In the DTH Protocol, the United States and Mexico each agreed to permit satellites licensed by the other nation to be used to provide encrypted video or video/audio signals for direct reception by subscribers to, from, and within its own territories, subject to certain conditions. MEXICAN REGULATION OF DTH SERVICES CONCESSIONS; REVOCATION; EXPROPRIATION In June 1995, a federal telecommunications law was enacted in Mexico (Ley Federal de Telecomunicaciones), which regulates the telecommunications industry, including concessions and permits granted in connection with the installation, operation and exploitation of public and private telecommunications networks. In order to install, operate or exploit a DTH broadcast satellite pay television service in Mexico for which subscriber fees are charged (which is considered for purposes of Mexican law a public telecommunications network), an applicant must be an individual or entity deemed to be of Mexican nationality and must obtain a concession from the SCT. Applications are submitted to the SCT, and after a formal review process, a concession is granted to the applicant with an initial term of up to 30 years, which may be renewed for terms of up to the length of the initial term. Concessions are not exclusive and the SCT may grant other concessions to third parties in the same geographical area or for the same type of services. Any party rendering telecommunication services without a concession from the SCT forfeits to the Mexican government all the goods, facilities and equipment it may have used in providing such services. A concession may be revoked prior to its stated term in certain circumstances, such as: - failure to use the concession within 180 days after it was granted unless permitted by the SCT based on a justifiable cause; - failure to comply with the obligations or conditions specified in the concession: - unlawful assignment, transfer or encumbrance of the concession, any rights thereunder or assets used for the exploitation of the concession; - failure to pay to the Mexican Government the required fees; - 33 - - interruption of service or operation of the general means of communication without authorization from the SCT, or interruption thereof without justifiable cause; - change of the concessionaire's Mexican nationality; or - performance of acts preventing other concessionaires or those with permission from the SCT from doing business. In addition, the Mexican Government has the right to expropriate the concession for reasons of public need or interest. In such a case, compensation must be paid to the concessionaire in an amount equal to the amount determined by designated appraisers. Although the North American Free Trade Agreement, or NAFTA, includes rules that aim to add certainty to the expropriation process and specify that compensation shall be equivalent to the fair market value immediately prior to the expropriation, NAFTA rules may not generally apply to the expropriation of our concessions. CONSIDERATION PAYABLE TO SCT The Mexican statute does not mandate the payment of fees as consideration for the granting of a concession. However, the SCT has the discretion to require the concessionaire to pay fees to the SCT as part of a concession as specified in our concessions. Such fees may be calculated based upon certain of the concessionaire's revenues. See "--Our Concessions." RATES; CROSS-SUBSIDIES Under Mexican law, DTH concessionaires may freely set customer rates, but are required to file such rates in advance with the Telecommunications Registry maintained by the SCT. The statute prohibits concessionaires from discriminating when setting rates. The concessionaires may not cross-subsidize their services directly or through a subsidiary or affiliate. The SCT may impose upon a concessionaire having substantial market power specific obligations related to rates, quality of service and information. FOREIGN OWNERSHIP Under Mexican law, non-Mexican investors may currently own up to 49% of the outstanding equity of DTH system concessionaires. Foreign investors may increase their economic participation in the equity of a concessionaire through neutral investment mechanisms under the Foreign Investment Law (e.g., non-voting equity), provided that Mexican investors maintain control of the operation. TEMPORARY SEIZURE; PREEMPTIVE RIGHT OF GOVERNMENT TO PURCHASE ASSETS Under Mexican and other applicable laws, the Mexican Government may temporarily seize all assets related to a concession in the event of a natural disaster, war, significant public disturbance or threats to internal peace and for other reasons related to preserving public order or for economic reasons. Under Mexican law, the Mexican Government is obligated, except in the event of war, to compensate the owner of such assets in the case of such temporary seizure for damages at their actual value. If there is no agreement upon the amount of the compensation, damages will be appraised by non-related experts appointed by the parties; in the case of loss of profit, the net income of the preceding year will be the basis for such calculation. Upon termination of a concession, the Mexican Government has the preemptive right to acquire the assets of a DTH concessionaire. MONITORING AND INFORMATION The SCT monitors compliance with Mexican law and other applicable legislation through periodic inspections. Concessionaires must file annual and quarterly reports with the SCT which include financial statements, and provide any other information required by the SCT. - 34 - SUPERVISION OF OPERATIONS Concessionaires, as a part of their agreement with the government and as established in the relevant concession, are required to: - develop training programs for their personnel; - enter into contracts with their subscribers and file the forms of such contracts with the SCT; - obtain SCT approval of their billing systems; - observe the intellectual property rights of the programming providers; - execute research and development activities in Mexico in coordination with the Mexican Institute of Communications or other institutions dedicated to the research and development of technology; and - appoint a person responsible for the technical operation of the network who has the appropriate administrative powers to represent the concessionaire before the SCT with respect to the network's technical operation. In addition, concessionaires must comply with certain SCT guidelines with respect to their operations, including billing, service calls and emergency plans for service failure. RESTRICTIONS ON ADVERTISING Mexican law also regulates the type and content of advertising which may be broadcast on television. Under the DTH protocol with the U.S., non-discriminatory restrictions on programming and advertising content can be established. Under new rules enacted in February 2000, a concessionaire has the exclusive responsibility to ensure that the commercial advertising it broadcasts complies with any applicable regulations. See "--Pay TV and Audio Services Rules." PROGRAMMING Under Mexican law, television programming is not subject to judicial or administrative censorship, except that programming is subject to various regulations, including prohibitions on foul language and programming, which is against good manners and customs, or is against the national security or against public order. Under rules enacted in February 2000, a concessionaire has the exclusive responsibility to ensure that the programming it broadcasts complies with any applicable regulations. See "--Pay TV and Audio Services Rules." SUBSCRIPTION AND SALE OF STOCK According to our concession, we must file with the SCT, no later than April 30 of each year, a list of their ten principal shareholders and their corresponding ownership percentages. In the event of any proposed new issuance of stock or sale of stock or interests in a transaction or series of transactions representing 10% or more of Innova's equity: - we must notify the SCT of the planned issuance or sale, including information relating to the purchasers; - the SCT shall have a period of 90 calendar days from the date it is notified to object to the transaction in writing and state the reasons for the objection; and - if the transaction has not been objected to by the SCT within such period, the transaction shall be deemed approved. In the event that the party interested in purchasing our shares or interests is a corporation, the notice must include information with respect to the purchaser's shareholders who hold 10% or more of the purchaser's equity. - 35 - PROTECTION OF RIGHTS Under Mexican law, including the Federal Criminal Code and the Federal Copyright law, certain prison sentences and fines may be imposed on any person who violates intellectual or industrial property rights or copyright. Such violations may include the manufacture, import, sale, or lease of any device or system, or any activity that involves decoding a program carrier encrypted satellite signal without the permission of the lawful distributor of such signal. TELECOMMUNICATIONS TAX At the end of December 2001, the Mexican Congress passed a series of tax reforms. As a result of these tax reforms, subject to certain exceptions, revenues from our pay television services are now subject to a 10% excise tax. The new tax became effective beginning on January 1, 2002. This new tax is in addition to a 15% VAT, paid by subscribers, and the 3.5% fee we pay to the Ministry of Communications and Transportation for our concessions. In February 2002, Cablevision, Innova, Skytel and a number of other companies in the telecommunications and pay television industries filed amparo injunctive proceedings challenging the constitutionality of this excise tax. Nonetheless, we implemented rate increases on January 1, 2002 and took other actions including lay-offs and reduction of capital expenditures and expenses in an effort to mitigate, in part, the impact of this tax on our results of operations and financial condition. We obtained a favorable ruling in this proceeding regarding our 2002 liability for this tax, but this ruling does not entitle us to recover any amounts paid for this tax in 2002, and we cannot assure you that we will be able to recover any portion of the approximately US$18 million paid for this excise tax during 2002. In December 2002 the Congress again acted to make this special tax effective during fiscal year 2003, by adding or modifying some concepts included in the original text of the law. In response, we have filed a new amparo proceeding challenging the constitutionality of the tax. Our action challenges the tax on grounds similar to those we raised last year and we plan to follow a similar strategy as last year. We cannot assure you that we will obtain a favorable resolution in these proceedings or that we will be able to recover the amounts that have been or will be paid for this tax. So far this year, we have not increased prices in response to the tax, but we will continue to evaluate the impact of this tax on our results of operations and financial condition and we will consider measures, including rate increases, that we might implement to mitigate the impact of the continued imposition of this tax. If, as a result of the imposition of the tax, we further increase the rates we charge our customers such rate increases could adversely affect consumer demand for our services, which could result in a loss of subscribers and a decrease in revenues, and could adversely impact our ability to attract new subscribers. OTHER FEES We are required by the Mexican Federal Rights of the Author Law to pay a percentage of our programming revenues to the Sociedad General de Escritores de Mexico (SOGEM) and the Sociedad de Autores y Compositores de Musica (SACM), non-profit organizations that support and protect Mexican writers and artists. We currently pay the standard rate of 1.15% of programming revenues. In addition, under Mexican law, we are required to pay to the Mexican Government a fee of Ps. 5,195 each time that government agents inspect Innova's facilities. PAY TV AND AUDIO SERVICES RULES In February 2000, rules applicable to pay television and audio services were enacted in Mexico (Reglamento del Servicio de Television y Audio Restringidos). These rules imposed new requirements, such as the concessionaires' obligations to: - classify their programs according to their content and the specifications of the Internal Affairs Ministry (Secretaria de Gobernacion); - create a database with subscriber information, including name, address, services equipment serial numbers and specific passwords selected in order to obtain pay-per-view, or PPV; - comply with Mexican regulations regarding the content of programming and commercial advertising; and - 36 - - encrypt and promote restricted audience programs (i.e. adult programming) as premium channels or events. OUR CONCESSIONS We have received two concessions authorizing the installation, operation, and exploitation of our telecommunications and broadcast network. The concessions deal with domestic and foreign source satellite signals, respectively. Our first concession to install, operate and exploit a public telecommunications network providing DTH services was granted on May 24, 1996, to our subsidiary, Corporacion de Radio y Television del Norte de Mexico, S. de R.L. de C.V., and expires in 2026. This concession authorizes the operation of a DTH system using Mexican satellites, including Solidaridad 2. The concession covers satellite television services, which consist of broadcasting video and related audio codified signals by satellite and the direct receipt of these signals at the domiciles of subscribers through terminal equipment that allows access to the signals. We obtained the second concession from the SCT on November 27, 2000 in order to use services over Mexican territory from PAS-9 which Mexican law considers a foreign satellite. The SCT granted the concession to our subsidiary, Corporacion de Radio y Television del Norte de Mexico, and it expires in 2020. The concession covers satellite DTH television services, consisting of broadcast video and related audio codified signals by satellite and the direct receipt of these signals at the domiciles of subscribers through terminal equipment that allows access to the signals. If we eventually desire to use PAS-9 for other services, we must request an additional authorization from the SCT for those purposes. Under both concessions, we and our foreign indirect owners, News and Liberty Media, have agreed not to invoke or accept the diplomatic intervention of any foreign country under penalty of forfeiting to the Mexican government all the goods and rights we may have acquired for the installation, operation and exploitation of our telecommunications public network and use of foreign satellite services. Under our first concession, we were obliged to pay the Mexican Government a percentage of our revenues and fees, on a monthly basis. We were required to pay 1.5% and 2.5% of programming revenues and maintenance fees paid by subscribers in 1997 and 1998 respectively. In 1999 and through to November 27, 2000 we paid 3.5% of our programming revenues and fees under our first concession. From November 27, 2000, when our second concession was granted, and going forward, we will continue to pay 3.5% of our programming revenues and fees as a combined payment for both concessions for the term of the concessions. Under both concessions, we will be able to broadcast up to six minutes of commercial advertising per transmission hour on any channel as long as at least 20% of the channel's programming is domestically produced and our agreements with our programming providers allow us to do so. We were required to post a bond with an approved bonding institution in the amount of Ps. 1.5 million for the benefit of the Mexican Treasury of the Federation (Tesoreria de la Federacion) to secure the payment of any monetary sanctions imposed by the SCT in the event of any revocation of the first concession. Under the new concession, we replaced the bond we posted under the original concession with a Ps. 6.3 million bond posted with an approved bonding institution to secure the payment of any monetary sanctions imposed by the SCT in the event of any revocation of either concession. The amount of the bond is adjusted annually for inflation in accordance with the Mexican national consumer price index. We are obliged to obtain authorization in advance to utilize those signals that are transmitted from a country other than Mexico or the United States of America. We must also prevent our subscribers from receiving signals from countries where Mexican satellite services are not permitted, if the SCT so requests. To use foreign satellite signals in Mexico, a concessionaire must be an entity organized and existing under Mexican law, must hold a concession, and there must be a reciprocity agreement between Mexico and the relevant country. Under the satellite agreement and DTH protocol currently in force, if, during our new concession, the SCT identifies a "lack of reciprocation" between Mexico and the United States' satellites services practices, the SCT may terminate our second concession by declaration. The SCT may find a lack of reciprocity: - if the US government denies "most favored nation" treatment to Mexican satellite services in the United States satellite market; - 37 - - if either the agreement or protocol mentioned above is partially restricted, suspended or terminated; or - for any other reason that undermines the principle of reciprocity in the SCT's judgment. Under the second concession, we must provide our DTH broadcast satellite pay television services by November 2003 to at least those areas of Mexico where 40% of the total population lives, according to the last available census information. We must make the necessary investments to fulfill this obligation; otherwise the second concession could be revoked by the SCT. As of December 31, 2002 more than 50% of our subscriber base resided in States that together have approximately the 58% of total population, and therefore we believe we are currently providing our DTH broadcast satellite pay television services in accordance with our obligations. ORGANIZATIONAL STRUCTURE Innova, S. de R.L. de C.V., is a joint venture indirectly owned by Televisa, News Corporation and Liberty Media, through their respective investment vehicles, SKY DTH, S. de R.L. de C.V. (formerly Galavision DTH, S. de R.L. de C.V.), News DTH (Mexico) Investment Ltd., and Liberty Mexico DTH, Inc. On March 5, 2002 Galavision DTH, S. de R.L. de C.V. spun-off part of its assets, liabilities and equity, including its participation on Innova, S. de R.L. de C.V., into the new company SKY DTH, S. de R.L. de C.V., which is a wholly owned subsidiary of Televisa and is registered with the Public Registry of Commerce in Mexico City under the commercial File (folio mercantile) No. 290987. Televisa is the leading television broadcaster in Mexico that we believe produces and owns the largest library of Spanish-language television programming in the world. News Corporation is a diversified international media and entertainment company with operations in a number of industry segments, including filmed entertainment, television, cable network programming, magazines and inserts, newspapers and book publishing. The activities of News Corporation are conducted principally in the United States, the United Kingdom, Italy, Asia, Australia, and the Pacific Basin. Liberty Media owns and operates broadband cable television and telephony distribution networks and provides diversified programming services in Europe, Latin America and Asia. Liberty Media is a wholly owned subsidiary of Liberty Media Corporation. Prior to August 10, 2001, Liberty Media Corporation was a wholly owned indirect subsidiary of AT&T Corp. On August 10, 2001, AT&T Corp. spun-off Liberty Media Corporation, which is now an independent, publicly-traded company. We have five wholly owned subsidiaries: Corporacion de Radio y Television del Norte de Mexico, S. de R.L. de C.V., Corporacion Novavision, S. de R.L. de C.V., Corporacion Novaimagen, S. de R.L. de C.V. , Servicios Novasat, S. de R.L. de C.V. and Servicios Corporativos de Telefonia, S. de R.L. de C.V. The latter was formed in July 2001 to house the call center operations we acquired from Merkatel. We own all of the voting interests in these subsidiaries, and each is incorporated in Mexico. We are a holding company and almost all of our operations occur in, and almost all of our assets are held by, our subsidiaries. - 38 - GROUP STRUCTURE OF INNOVA [GROUP STRUCTURE OF INNOVA CHART] PROPERTY, PLANT AND EQUIPMENT Our properties consist primarily of office and call center facilities located in Mexico City, uplink facilities located in Mexico City, our DTH concessions and certain rights to use satellite transponder capacity. We lease our principal corporate office space in Mexico City from an unaffiliated third party where our call center is also located. In addition to corporate activities, we conduct several technical activities at our principal corporate office, including downlink monitoring, "black box" recording and subscription management. We also lease from an unaffiliated third party additional space from which our programming and scheduling operations are conducted. We lease all of these properties through wholly owned subsidiaries. These properties consist of approximately 180,000 square feet in the aggregate and are located throughout Mexico. In June 2001, we purchased from Merkatel, our former call center service provider, the equipment Merkatel used to provide call center services to Innova, including computers, telephones, furniture and fixtures. We also hired the telephone operators involved in operating the call center. Merkatel is a wholly owned subsidiary of Televisa and provided call center services to Innova from its inception through June 30, 2001. Since July 1, 2001, the call center functions have been provided in-house in a facility adjacent to our principal corporate offices. We believe that the facilities we use in Mexico City and the United States are currently adequate for our technical activities. We currently use transponder capacity on the PAS-9 satellite. For a description of our agreements with respect to transponder capacity, see "Item 4: Information on the Company--Business Overview--Operations--Satellites." ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS You should read the following discussion in conjunction with our audited financial statements and the accompanying notes, which appear elsewhere in this annual report. This discussion is qualified in its entirety by reference to our financial statements. The following discussion includes certain forward-looking statements. See "Item 3: Key Information-Risk Factors--Forward-Looking Statements" for a discussion of important factors which could cause our actual results to differ materially from the forward-looking statements contained in this discussion. Unless otherwise stated, all amounts denominated in Mexican pesos and U.S. dollars have been rounded to the nearest one hundred thousand Mexican pesos or U.S. dollars. - 39 - PREPARATION OF FINANCIAL STATEMENTS Our financial statements have been prepared in accordance with Mexican GAAP, which differ in some significant respects from U.S. GAAP and generally accepted accounting principles adopted in other countries. Note 21 to our financial statements describes the principal differences between Mexican GAAP and U.S. GAAP as they relate to us and reconciles net loss and total stockholders' deficit to U.S. GAAP. CRITICAL ACCOUNTING POLICIES We have identified certain key accounting policies and estimates on which our consolidated financial condition and results of operations are dependent. The application of these key accounting policies often involves complex considerations and assumptions and the making of subjective judgments or decisions on the part of our management. In the opinion of our management, our most critical accounting policies under both Mexican GAAP and U.S. GAAP are those related to the allowance for doubtful accounts receivable, the carrying value and valuation of long-lived assets, the recognition of certain reserves and accruals under Mexican GAAP, and deferred income taxes. For a description of our principal accounting policies, see Notes 2, 3 and 21 to our consolidated financial statements. ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE We maintain allowances for doubtful accounts receivable for estimated credit losses based upon our historical experience and specific customer collection issues that we identify. We recognize an allowance for all accounts receivable outstanding greater than 90 days and write-off all receivables outstanding greater than 120 days against the allowance. During 2002, we recorded additional allowances for doubtful accounts to reflect the increased risk of uncollectibility resulting from: - cancellations due to the increase in our prices as a result of 10% consumer tax on telecommunication services effective January 1, 2002; - cancellations by subscribers who did not have their satellite antenna re-pointed to the PAS-9 satellite; and - the general deterioration in economic conditions in Mexico. In order to mitigate the risk of uncollectibility, we perform credit checks on all customers, bill one month in advance and have implemented a "blocking" system for late paying customers. A significant difference between the amount of the reserve that we establish based on our estimates of uncollectible accounts and actual amounts of unpaid receivables could have a material adverse impact on our future operating results. CARRYING VALUE AND VALUATION OF LONG-LIVED ASSETS We have recognized on our balance sheet certain long-lived assets including our satellite transponder asset, which was recognized in 2000. These long-lived assets are evaluated for impairment when events and circumstances indicate that the asset's carrying value may not be recoverable. We recognize impairment losses to the extent we believe that the carrying value exceeds the anticipated estimated future net cash flows generated by the asset. Different assumptions regarding such cash flows could materially affect our analysis of recoverability. Further, as discussed in Risk Factors and elsewhere, currently and in the past we have not generated positive cash flows from operations and we depend on funding from our stockholders. If we do not receive such funding, or if our assumptions regarding future positive cash flows are not correct, we may need to recognize significant impairment losses and accelerated depreciation of the carrying value of these assets. During the years ended December 31, 2002 and 2000, we recorded an impairment loss on certain transmission equipment and other equipment not in use of Ps. 30.8 million (which was included in the "Transponder services- - 40 - Solidaridad 2 and reorientation cost" line item) and Ps.11.5 million (included in the "Depreciation and amortization" line item), respectively. No impairment was recorded during 2001. As of April 2002, we stopped utilizing the service of the Solidaridad 2 satellite, continuing only with the service of the PAS-9 satellite. At that date, transmission equipment with a book value of Ps. 38.3 million were associated with Solidaridad 2 and we decided to recognize an impairment charge amounting to Ps.30.8 million for the equipment that could not be utilized by the PAS-9 satellite, and to create a spare-part inventory for the remaining Ps. 7.6 million transmission equipment that could be utilized by the PAS-9 satellite. This impairment loss, together with the payments for the use of Solidaridad 2 in the first quarter of 2002 amounting to Ps.14.1 million was reflected as a nonrecurring charge of Ps.25.9 million in 2002. The charge was partially offset by the reversal of unutilized provisions recorded in 2000 amounting to Ps.19.0 million. See Notes 5 and 15 to our consolidated financial statements. RESERVES FOR TRANSPONDER SERVICES FROM SOLIDARIDAD AND SATELLITE ANTENNA REORIENTATION AND SMART CARD REPLACEMENT In 2000, we recognized a reserve of Ps. 430.9 million representing the estimated costs to be incurred in future periods related to the migration of subscribers from the Solidaridad 2 satellite to the PAS-9 satellite. We estimated that we would incur costs relating to the migration including: the redundant satellite lease payments being made for the use of Solidaridad 2 and costs related to reorienting subscribers' satellite antennas to accept the feed from PAS-9. In making these estimates, we used internal and external analyses taking into consideration the expected timing of the reorientation, and the number and location of subscribers involved. In 2001, we realized that the expected timing of the completion of the reorientation would be extended into March 2002 but this change in timing did not significantly affect the amount previously estimated. At March 2002, the reorientation was completed and as of December 31, 2002, we have no remaining reserve related to this project. In addition, in 2000 we recognized a reserve of Ps. 32.6 million for the estimated costs to be incurred to replace our customer's smart cards. The smart card replacement was substantially completed in 2001 and we have no remaining reserve related to this project. DEFERRED INCOME TAXES Under both Mexican and U.S. GAAP, we are required to record deferred income tax assets and liabilities by using enacted tax rates in order to give effect to temporary differences between the book and tax basis of assets and liabilities. If enacted tax rates change, we adjust the deferred tax assets and liabilities, through the provision for income taxes in the period of change, to reflect the enacted tax rate expected to be in effect when the deferred tax items reverse. We also record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and tax planning strategies in assessing the need for the valuation allowance, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. EFFECTS OF INFLATION, CURRENCY EXCHANGE FLUCTUATIONS AND TRANSLATION EFFECTS The following table sets forth, for the periods indicated: - the percentage that the peso devalued or appreciated against the U.S. dollar; - the Mexican inflation rate; - the U.S. inflation rate; and - the percentage change in Mexican GDP compared to the prior period. - 41 -
YEAR ENDED DECEMBER 31, ---------------------------------------- 1999 2000 2001 2002 ---- ---- ---- ---- (Appreciation) devaluation of the Mexican peso as compared to the U.S. dollar(1)........................................ (3.9)% 1.2% (4.6)% 13.9% Mexican inflation rate(2)...................................... 12.3 9.0 4.4 5.7 U.S. inflation rate(3)......................................... 2.7 3.4 1.6 2.5 Increase (decrease) in Mexican GDP(4).......................... 3.8 6.9 (0.3) 0.9
- ------------- (1) Based on changes in the Interbank Rates, as reported by Banamex, as of the end of each period, which were as follows: Ps.9.88 as of December 31, 1998; Ps.9.50 as of December 31, 1999; Ps.9.62 per U.S. dollar as of December 31, 2000; Ps.9.18 per U.S. dollar as of December 31, 2001; and Ps.10.46 per U.S. dollar as of December 31, 2002. (2) Based on changes in the NCPI from the previous period, as reported by the Mexican Central Bank, which were as follows: 76.195 in 1998; 85.581 in 1999; 93.248 in 2000; 97.354 in 2001; and 102.904 in 2002. (3) As reported by the Federal Reserve Bank of New York. (4) As reported by the Instituto Nacional de Estadistica, Geografia e Informatica, or INEGI, and, in the case of GDP information for 2001 and 2002, as estimated by INEGI. Mexican GAAP requires that our financial statements recognize the effects of inflation. Financial data for all periods presented in our financial statements and this annual report have been restated in constant pesos in purchasing power as of December 31, 2002 in accordance with the third amendment to Bulletin B-10. Accordingly, the comparative increases set forth below are adjusted for the general effects of inflation to permit period to period comparison. See Note 3 to our financial statements. In 2000, inflation in Mexico was 9.0%. In nominal terms, the peso depreciated against the U.S. dollar by 1.2% in 2000. In 2001 and 2002, the rate of inflation in Mexico was 4.4% and 5.7%, respectively, and the peso appreciated 4.6% in 2001 against the U.S. dollar in nominal terms while it depreciated 13.9% against the U.S. dollar in 2002. The rate of inflation in Mexico has declined substantially during the last few years as compared to historical rates. Nonetheless, at approximately 4.7% per annum (as measured from May 2002 to May 2003), Mexico's current level of inflation remains higher than the annual inflation rates of its main trading partners. See "Item 3: Key Information--Risk Factors--Risk Factors Related to Mexico--Mexico Has Experienced Adverse Economic Conditions." Inflation has led to high interest rates, devaluations of the peso, and during the 1980s, substantial government control over exchange rates and prices. If Mexico were to experience high levels of inflation, our revenues and financial condition could be impacted by the resultant decreases in effective purchasing power among current and potential subscribers and the prospect of a currency devaluation that could make it more difficult for us to repay our U.S. dollar denominated debt and obligations as discussed below. A robust U.S. economy, rising oil prices, the tight monetary policy established by Mexico's central bank, Banco de Mexico, and fiscal discipline each contributed to economic growth and currency stability in Mexico in 2000. But, economic growth slowed precipitously in 2001 due in part to the recession in the United States, which continued during 2002. Under Mexican GAAP, through December 31, 2002, U.S. dollar-denominated sales, costs and expenses are translated into pesos at the exchange rate in effect when the operations are recognized and are subsequently restated in constant pesos using the Mexican national consumer price index. If the devaluation of the peso against the dollar is greater than inflation in Mexico during a period, U.S. dollar-denominated sales, costs and expenses increase in relative terms when compared to prior periods. Conversely, if inflation exceeds the devaluation rate during a period, U.S. dollar-denominated sales, costs and expenses decrease in relative terms when compared to prior periods. In 2001, we had favorable effects due to peso appreciation and low inflation as compared to previous years. In 2002, the translation effect and devaluation increased our cost of sales in comparison to previous years. Adverse economic conditions in Mexico, as well as social instability or other adverse social, political or economic developments in or affecting Mexico, would generally have an adverse effect on the Mexican economy and consumer purchasing power, thereby potentially decreasing our revenues while increasing our nominal peso-denominated costs and expenses. See "Item 3: Key Information--Risk Factors--Risk Factors Related to Our Business--Mexico Has Experienced Adverse Economic Conditions." - 42 - U.S. DOLLAR DENOMINATED OBLIGATIONS, COSTS AND EXPENSES Any devaluation of the peso will likely adversely affect our liquidity and results of operations by increasing the peso equivalent of U.S. dollar-denominated operating costs and expenses. We have incurred and expect to continue to incur more than 70% of our obligations payable in U.S. dollars, while our revenues will be generated primarily in Mexican pesos. Therefore, we are subject to currency exchange rate risk. In addition to our obligations with respect to our senior notes, our dollar-denominated obligations will also continue to include satellite signal reception and retransmission fees, programming commitments and equipment costs. We did not have any U.S. dollar-denominated revenues from 1998 through 2002 other than interest income on certain restricted investments, while our U.S. dollar-denominated operating costs and expenses were significant and are expected to continue to exceed U.S. dollar-denominated revenues, if any. During 2000, 2001 and 2002, approximately 41.7%, 42.5% and 48.5% of our total operating expenses, not considering interest expense of Ps. 742.6 million, Ps. 903.9 million and Ps. 983.1 million respectively, were U.S. dollar-denominated. In 2000, 2001 and 2002, we did not engage in any hedging or other transactions to manage the risks associated with foreign currency or interest rate fluctuations. Because we do not currently engage in hedging activity, shifts in currency exchange rates could decrease the value of our revenues relative to our costs, resulting in a material adverse effect on our financial position. See "Item 3: Key Information--Risk Factors--Risk Factors Related to Mexico--Currency Fluctuations or the Devaluation or Depreciation of the Peso Could Limit the Ability of Us and Others to Convert Pesos into U.S. Dollars or Other Currencies and/or Adversely Affect Our Financial Condition." We may consider entering into transactions to hedge the risk of exchange rate fluctuations if we are able to obtain hedging arrangements on commercially satisfactory terms. NEW ACCOUNTING PRONOUNCEMENTS In December 2001, the MIPA issued Bulletin C-9, "Liability, Provisions, Contingent Assets and Liabilities, and Commitments." Bulletin C-9 provides guidance for the valuation, presentation and disclosure of liabilities and provisions (other than income taxes, employee benefit plans, financial instruments to be valued on a fair value basis and asset allowances), including contingent assets and liabilities, as well as disclosure guidelines for commitments incurred by an entity as a part of its operations. Bulletin C-9 is effective as of January 1, 2003, with earlier adoption permitted. In January 2002, the MIPA issued Bulletin C-8, "Intangible Assets", which defines intangible assets as costs incurred and rights or privileges acquired that will generate a future economic benefit. Bulletin C-8 provides a definition of research and development costs requiring that only development costs can be deferred to a future period. Furthermore, Bulletin C-8 states that pre-operating costs should be expensed as a period cost, unless they can be classified as development costs. Bulletin C-8 requires that intangible assets with indefinite useful lives should be tested for impairment annually rather than amortized. Intangible assets with finite useful lives should be amortized over their useful lives. The provisions of Bulletin C-8 became effective as of January 1, 2003. In March 2003, the MIPA issued Bulletin C-15 "Impairment and Disposition of Long-Lived Assets." Bulletin C-15 requires (i) the recognition and measurement of the impairment of long-lived assets to held and used, including goodwill, and (ii) the measurement of long-lived assets to be disposed of by sale. Bulletin C-15 is effective for periods beginning on January 1, 2004, with early adoption recommended. We are currently evaluating the impact of these Bulletins on our results of operation and financial position. However, we do not believe that the adoption of these Bulletins will have a material impact on our results of operation and financial position. RECENTLY ISSUED U.S. GAAP PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligation" ("SFAS 143"). SFAS 143 establishes accounting standards for recognition and measurement of a liability at fair value for an asset retirement obligation and an addition to the associated asset retirement cost. The accretion of interest expense each period is subsequently recorded as an expense and added to the liability. We are required to adopt SFAS 143 effective January 1, 2003. - 43 - We do not expect that the adoption of FAS 143 will have a material impact on our results of operation and financial position. In April 2002, the FASB issued Statements of Accounting Standards No. 145, "Rescission of SFAS Nos. 4, 44 and 64, Amendment of SFAS 13, and Technical Corrections as of April 2002" ("SFAS 145"). SFAS 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers", and SFAS 64, "Extinguishments of Debt made to satisfy Sinking-Fund requirements". As a result, gains and losses from extinguishment of debt will no longer be classified as extraordinary items unless they meet the criteria of unusual or infrequent as described in Accounting Principles Boards Opinion 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". In addition, SFAS 145 amends SFAS 13, "Accounting for Leases", to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. SFAS 145 is effective for fiscal years beginning after May 15, 2002. We do not believe that the adoption of FAS 145 will have a material impact on our results of operation and financial position. In June 2002, the FASB issued Statement of Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exist an Activity (including Certain Costs Incurred in a Restructuring)" ("EITF 94-3"). SFAS 146 eliminates the definition and requirements for recognition of exit costs in EITF 94-3. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entity's commitment to an exit plan. SFAS 146 also concludes that an entity's commitment to a plan, by itself, does not create a present obligation to others that meets the definition of a liability. SFAS 146 also establishes that fair value is the objective for initial measurement of the liability. SFAS 146 is effective for exist or disposal activities initiated after December 31, 2002. We are currently evaluating the impact that the adoption of SFAS 146 will have on our consolidated financial statements. However, we do not believe that the adoption of FAS 146 will have a material impact on our results of operation and financial position. In April 2003 the Financial Accounting Standards Board (FASB) issued Statement No. 149 ("SFAS 149"), Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities. The Statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. In particular, it (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in SFAS 133, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an underlying to conform it to the language used in FIN 45 and (4) amends certain other existing pronouncements. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003. The provisions of SFAS 149 that relate to SFAS 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. In addition, certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to existing contracts as well as new contracts entered into after June 30, 2003. SFAS 149 should be applied prospectively. We do not expect that the adoption of this Statement will have a material impact on our results of operations and financial position. In May 2003 the FASB issued Statement of Financial Accounting Standards No. 150 ("SFAS 150"), Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 modifies the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. The Statement requires that those instruments be classified as liabilities in statements of financial position. SFAS 150 affects an issuer's accounting for three types of freestanding financial instruments, namely: - 44 - - Mandatorily redeemable shares, which the issuing company is obligated to buy back in exchange for cash or other assets. - Financial instruments, other than outstanding shares, that do or may require the issuer to buy back some of its equity shares in exchange for cash or other assets. - Unconditional obligations that can be settled with equity shares, the monetary value of which is fixed, tied solely or predominantly to a variable such as a market index, or varies inversely with the value of the issuer's equity shares. SFAS 150 does not apply to features embedded in financial instruments that are not derivatives in their entirety. In addition to its requirements for the classification and measurement of financial instruments within its scope, SFAS 150 also requires disclosures about alternative ways of settling such instruments and the capital structure of entities, all of whose shares are mandatorily redeemable. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We are currently evaluating the impact of SFAS 150 on our results of operations and financial position. RESULTS OF OPERATIONS OVERVIEW We operate a digital Ku-band DTH satellite pay television service in Mexico. The company was formed on July 25, 1996 and we launched our digital Ku-band DTH service on December 15, 1996. From our inception to the launch of DTH services, we were engaged principally in development and start-up activities. Since our inception, we have sustained substantial net losses and substantial negative cash flow. These losses are due primarily to start-up costs we incurred to develop our DTH service, satellite transponder commitments, expenses of increasing our subscriber base and financing costs. While we began receiving revenues from subscriptions in 1997, our operating costs, expenses and financing costs incurred exceeded these revenues during each of our six full years of operations. We expect to continue to experience net losses and negative cash flow for the next several years while we develop and expand our DTH service. See "Item 3: Key Information--Risk Factors--Risk Factors Related to Our Business--We May Never Generate Revenue Sufficient to Cover Our Costs". Since our inception, we have relied substantially upon proceeds from our senior notes and loans and capital contributions by Televisa, News Corporation and Liberty Media to fund our operations. Our expansion plans will continue to require substantial capital expenditures and investments, and we cannot assure you that our business will generate net profits or positive cash flow. See "--Liquidity and Capital Resources." During the years ended December 31, 2002, 2001 and 2000 we concentrated on managing and expanding our subscriber base and its quality, further developing the infrastructure and points of sale for distribution of our DTH service and acquiring quality programming. In 2002, we increased our subscriber base 2.0% from over 692,000 subscribers as of December 31, 2001 to approximately 705,900 subscribers as of December 31, 2002, even while facing several adverse situations such as the new 10% tax on telecommunication services, the repointing of antennas process, the lack of rights to transmit the World Cup soccer tournament in June 2002 and the economic recession. In 2001, we increased our subscriber base 17.2% from over 590,300 subscribers as of December 31, 2000 to approximately 692,000 subscribers as of December 31, 2001. In 2000, we increased our subscriber base approximately 44% from over 410,000 subscribers as of December 31, 1999. The above subscriber base figures do not include commercial subscribers, which are included as part of our subscriber base beginning only in the first quarter of 2003, as explained below. We believe four elements continue to drive the strong growth in our subscriber base: - our superior programming content; - 45 - - our extensive distribution network and direct sales force; - our competitive pricing policy; and - our enhanced TV features. Our programming includes Televisa's four over-the-air channels, which we offer on a DTH exclusive basis and certain pay-TV exclusive soccer games and special events. Our distribution network includes an in-house sales force and 12 external, third-party master wholesalers, incorporating more than 3,600 points of sale. In addition to our basic programming costs, we incurred further costs during 2001 and 2002 in order to feature a number of free special events for subscribers to introduce them to Sky's new product offerings as well as high profile sporting events and reality shows. In our six full years of operations, we have derived most of our revenues from DTH programming fees, subscription fees, installation fees, rental fees and membership fees all paid by our subscribers. We are renting IRDs to our subscribers, and starting in October 2000 we began retaining title to the antennas and LNBs, and providing them to our subscribers to use as part of their subscriptions. Until we began retaining title to this equipment in October 2000, the various fees were equivalent to our Sky Kit sales. IRD rental fees, subscription fees, membership fees along with advertising sales revenue, accounted for approximately 36%, 29% and 30% of our revenues in the years ended December 31, 2002, 2001 and 2000, respectively. Programming fees, channel fees, pay-per-view fees, and special events fees accounted for approximately 67%, 70% and 68% of our revenue in the years ended December 31, 2002, 2001 and 2000, respectively. All of our revenues are generated in Mexico, principally from consumers. Our DTH revenues are principally a function of the number of subscribers, the mix of programming packages selected by the subscribers and the rates charged. Our principal operating costs and expenses originate from: - programming costs, - subscriber management (including call center costs), - the costs of providing, replacing and refurbishing equipment for subscribers, - transmission and related functions, including uplink and downlink services, and - marketing and administration. Programming represents our largest cost at the present time. Subscriber management expenditures include our costs to operate our subscriber management system and conditional access system, both of which are largely dependent on DTH subscriber levels. Transmission and related costs, including technical costs, are largely dependent upon the number of transponders serving Innova. See "Item 4: Information on the Company--Business Overview--Operations--Satellites." Our capital expenditures include the purchase of technical equipment, software and systems and IRDs. Our operating costs and capital expenditures from inception through fiscal year 2002 were financed by capital contributions and loans made by Televisa, News Corporation and Liberty Media, the proceeds of our senior notes and lately partially by our own generated cash flow. See "- Liquidity and Capital Resources." NET SALES Our recurring revenues consist of fees paid by subscribers to receive one of our programming packages and pay-per-view services. Net sales for the year ended December 31, 2002 were Ps. 3,432.9 million, an increase of Ps. 166.9 million as compared with the year ended December 31, 2001. This increase was due primarily to the increase in the number of subscribers in 2002. We have experienced a continued upward trend in the number of subscribers each year since our inception, which generally increases our net sales. Our subscriber growth slowed during 2002, however, due primarily to: - 46 - - the slowdown of the Mexican economy and consequent loss of consumer purchasing power; - cancellations due to the increase in our prices as a result of the 10% tax on telecommunications services effective January 2002; - cancellations by subscribers who did not have their satellite antenna re-pointed to the PAS-9 satellite; and - the lack of rights to broadcast the FIFA World Cup soccer tournament in June 2002. Nevertheless, our subscriber base experienced a 2% growth during 2002, as compared to 17.2% in 2001 and 44.2% in 2000. As of December 31, 2002, we had approximately 705,900 gross active residential subscribers as compared to approximately 692,000 at the end of fiscal year 2001, approximately 590,300 at December 31, 2000 and over 410,000 at December 31, 1999. In prior years, under Mexican GAAP, concession fees paid to the Mexican Government and to the actors and artists guild were recorded as a reduction in net sales. From January 1, 2002, these fees have been recorded in cost of sales, consistent with the accounting treatment under U.S. GAAP. Revenues under Mexican GAAP for the years ended December 31, 2001 and 2000 have been reclassified to conform with the presentation in the current year. Effective in the third quarter of 2002, in light of recent accounting guidance issued internationally as well as the increased acceptance by our subscribers of our prompt payment discount policy, we elected to reclassify the presentation of customer discounts in our consolidated statements of income. As a result of this reclassification, we now reflect such discount as a reduction of net sales. Previously, these discounts were recorded as financial expenses. Consequently, all prior comparative periods have been reclassified to conform with the current period's presentation. We recorded Ps. 3,432.9 million in net sales for the year ended December 31, 2002; Ps. 3,266.0 million for the year ended December 31, 2001 and Ps. 2,560.2 million for the year ended December 31, 2000. The 5.1% increase in net sales in 2002 and 27.6% increase in net sales in 2001 as compared to the respective prior year was the result of growth in our subscriber base and price increases. Effective January 15, 2002, we increased the prices of our programming packages, the IRD rental fee and other related services by approximately 12.5% on a weighted-average basis primarily to minimize the negative impact of the new 10% tax on telecommunication services. So far in 2003 we have not increased prices for our services. For more information regarding the new telecommunications tax, see "Item 4: Information on the Company--Overview of Business--Mexican Regulation of DTH Services--Telecommunications Tax." OPERATING EXPENSES From the Company's inception through December 31, 2001, the Company classified certain expenses directly related to operations such as the costs of the call center and personnel who repair and refurbish IRDs' within the "Selling and Administration" expense line. As of January 1, 2002, the Company began classifying all these expenses within the "other operating expenses" line item along with those expenses previously classified within this line item, including the costs of repairs, refurbishment of IRD's and maintenance. As a result of this new classification, the Selling and Administrative expenses line items reflect only expenses related to those functions. In order to facilitate a meaningful comparison of 2002 with the prior years, we have reclassified the presentation of those expenses for the prior years as well. There is no impact on "Total Expenses" as a result of this new expense classification. COST OF SALES From our inception through September 30, 2000, cost of sales had included all direct and indirect costs of transmitting our DTH service to subscribers. These costs principally included payments for satellite signal reception and retransmission service fees, fees/royalties paid to acquire programming, certain portions of sales commissions, fees paid to the Ministry of Communications and Transportation, payments to acquire Sky Kit components, fees paid to uplink, downlink and retransmit our signal to subscribers, and subscriber management fees. As of October 1, - 47 - 2000, we began accounting for satellite transmission fees and the costs of Sky Kits differently as a result of operational changes. Cost of sales for the year ended December 31, 2002 was Ps. 1,062.8 million, a decrease of Ps. 160.1 million or 13.1% as compared with the year ended December 31, 2001 primarily due to fewer new subscriber activations in 2002 as compared with 2001 and resulting from our inclusion as part of our cost of sales the activation commissions that we pay to our sales network and master distributors. The cost of sales for the year ended December 31, 2001 was Ps. 1,222.9 million, a decrease of Ps. 135.7 million or 10.0% as compared to the cost of sales of Ps. 1,358.6 million for the year ended December 31, 2000, due primarily to transponder services costs that were recorded as part of cost of sales for nine months in 2000, while such costs were not recorded in 2001. As previously described, we used both PAS-9 and Solidaridad 2 to transmit our signals simultaneously between September 2000 and March 31, 2002. During that period, the use of Solidaridad 2 was redundant. In the fourth quarter of 2000, we recorded within the Ps. 430.9 million non-recurring non operating charge, the estimated redundancy costs of using Solidaridad 2 for the period from October 1, 2000 through December 31, 2001 (which was the date that we estimated that we would cease using this satellite). In 2002, we extended the use of Solidaridad 2 through March 31, 2002 and the additional Ps.14.1 million in rent payments was offset against the remaining unused reserve established in 2000 and also presented in non-recurring non operating charges. The PAS-9 arrangement has been recorded as a capital lease and consequently, the amortization of the lease asset is presented within the "depreciation and amortization" line item in the statement of operations. For the use of the PAS-9 satellite during the years ended December 31, 2002, 2001 and 2000 we recognized total satellite costs of Ps. 257.8 million, of which Ps. 98.0 million was recognized as depreciation expense and Ps. 159.8 million as interest expense; Ps. 252.4 million, of which Ps. 88.9 million was recognized as depreciation expense and Ps. 163.5 million as interest expense; and Ps. 84.0 million, of which Ps. 31.8 million was recognized as depreciation expense and Ps. 52.2 million as interest expense, respectively. For the use of the Solidaridad 2 satellite during the year ended December 31, 2000 we recognized total satellite costs of Ps. 205.4 million in cost of sales. In addition, in the year ended December 31, 2000 we recognized an extraordinary loss of Ps. 333.5 million for the redundant use of the Solidaridad 2 satellite corresponding to the remaining payments under the lease agreement through December 31, 2001. For the years ended December 31, 2002, 2001 and 2000, we incurred a total of Ps. 657.3 million, Ps. 650.3 million and Ps. 517.4 million in programming fees, respectively, representing an increase of Ps. 7.0 million or 1.1% from 2001 to 2002, and Ps. 132.9 million or 25.7% from 2000 to 2001. These increases resulted primarily from the growth in the number of our subscribers. Most of our programming agreements require us to pay a fee based upon the number of subscribers receiving the programming service. As our subscriber base increases, we experience an overall increase in our programming fees, but, in some cases, benefit from volume based discount rates. Programming fees are expected to increase in 2003, albeit at a slower rate, as the number of subscribers and audience levels increase and we receive the benefit of larger volume based discounts. We receive uplink and downlink services from TechCo at its Florida facilities and from Televisa at its Mexico City facility. In 2002, we expensed approximately Ps. 120.6 million for these costs as compared to approximately Ps. 128.4 million for the year ended December 31, 2001 and Ps. 135.3 million for the year ended December 31, 2000. Under the terms of the agreement between Innova and TechCo, we will pay TechCo. Ps. 99.4 million (approximately US$9.5 million) per year for uplink and downlink services over the ten-year life of the agreement. We have also entered into an agreement with Televisa for the provision of uplink and downlink, play out and compression services relating to locally-sourced programming, at its Mexico City facility. We estimate that our future annual commitments under these arrangements with Televisa will be Ps. 45.0 million (approximately US$4.3 million ) per year. We negotiate these fees with Televisa on at least an annual basis and we believe that the fees we paid for these services are comparable to what we would have paid an unaffiliated third party for similar services. From inception through September 30, 2000, we sold our entry level product, the Sky Kit, through our distribution network. The Sky Kit includes a satellite antenna and a low noise block, as well as installation and activation, the right to rent an IRD, and use a Smart Card, remote control and related components. We formerly recorded these costs as part of the cost of sales upon the sale to our distributors. As of October 1, 2000, however, we now retain ownership of all of the Sky Kit equipment, including the antenna, Smart Card and low noise block, in - 48 - order to more easily remove the equipment when a subscriber cancels the service or we cancel the service for lack of payment. Because we now retain ownership of these assets, we record them in property, plant and equipment and amortize them over three years. For the year ended December 31, 2000, the cost of the Sky Kit equipment (antennas, low noise blocks, accessories and related equipment), including installation and warehouse costs, totaled Ps. 189.1 million. As described above, since January 1, 2002, concession fees paid to the Mexican Government and to the actors and artists guild are recorded in cost of sales. Our payment of 3.5% of programming revenues and subscriber maintenance fees each year to the Mexican government under the terms of our concessions, is included in our cost of sales. This payment will continue through the remainder of our concessions. See "Item 4: Information on the Company--Business Overview--Mexican Regulation of DTH Services--Our Concessions." ADMINISTRATIVE EXPENSES Administrative expenses include all costs associated with our finance and administrative functions. These costs include labor, salaries and benefits, insurance, and professional fees. In the year ended December 31, 2002, our administrative expenses decreased Ps. 29.9 million or 19.7% to Ps. 121.5 million from Ps. 151.4 million for the year ended December 31, 2001. Administrative expenses increased Ps. 33.2 million or 28.1% to Ps. 151.4 million for the year ended December 31, 2001 from Ps. 118.2 million for the year ended December 31, 2000. These variances were due to the direct and indirect costs of hiring more personnel to service a greater number of subscribers during 2001 and reductions in costs as a result of other expense reductions during 2002. SELLING EXPENSES Selling expenses consist of direct and indirect personnel costs for our sales force, commissions and bonuses we pay to distributors and independent sales agents, advertising and marketing costs, bad debt expenses and expenses associated with promotional materials. In the year ended December 31, 2002, our selling expenses increased Ps. 14.0 million or 1.7% to Ps. 832.8 million from Ps. 818.8 million for the year ended December 31, 2001. This increase was principally due to (i) more special events offered to subscribers at no cost, (ii) higher promotional costs resulting from discounts given to subscribers, increased commissions we paid and internal costs relating to subscribers paying by credit card, and (iii) an increase in collections' commissions paid to banks. In the year ended December 31, 2001, our selling expenses increased Ps. 41.3 million or 5.3% to Ps. 818.8 million from Ps. 777.5 million for the year ended December 31, 2000. This increase was due to three factors: additional free special events offered to subscribers including certain exclusive sporting matches; an increase in commissions paid to our distribution network in order to maintain the wholesaler's margin reduced by lower subscription fees; and an increase in the reserve for costs, such as the write-off of accounts receivable and equipment of those subscribers whose antennas could not be re-pointed to the PAS-9 satellite during the first quarter of 2002. The reserve for charges incurred in connection with subscribers cancelled as a result of repointing amounted to approximately Ps. 21.1 million and our total allowance for doubtful accounts rose from Ps. 14.8 million to Ps. 84.8 million for the year ended December 31, 2001 as compared to the prior year. OTHER OPERATING EXPENSES Other operating expenses include direct and indirect customer service costs, as call center and repair service personnel, equipment maintenance and repairs and IRD refurbishment costs. In the years ended December 31, 2002, 2001 and 2000, we recorded Ps. 481.8 million, Ps. 403.6 million and Ps. 536.8 million, respectively, in operating expenses. The increase of Ps. 78.6 million or 19.4% in 2002 was mainly due to higher recovery and repair of IRDs, technical equipment maintenance and the irrecoverable IRDs provision in connection with those subscribers cancelled as a result of the termination of the repointing process in the first quarter of 2002. Other operating expenses were substantially reduced in 2001 as compared with 2000 by Ps. 133.2 or 24.8%, since the costs of the substitution of smart cards were expensed in fiscal year 2000. We expect other operating expenses, including maintenance and repair of equipment such as IRDs, to continue to increase as a result of increases in the number of our subscribers and as a result of our increased successes in recovering and repairing IRDs which, in some instances, enables us to avoid purchasing new IRDs at higher costs. - 49 - DEPRECIATION AND AMORTIZATION Depreciation and amortization includes depreciation of property and equipment and amortization of intangible assets and pre-operating expenses. We recorded Ps. 925.1 million in depreciation and amortization for the year ended December 31, 2002, as compared to Ps. 948.3 million for the year ended December 31, 2001 and Ps. 844.6 million for the year ended December 31, 2000. The decrease of Ps. 23.2 million from 2001 to 2002 was mainly due to the full depreciation of our pre-operating expense amortization in November of 2001, thus reducing the amount of total amortization during 2002. The increase of Ps. 103.7 million from 2000 to 2001 reflects the depreciation and amortization of additional investments in property and equipment, mainly IRDs, that we purchased for rental to subscribers and the impact of the capitalization of the fees for services from the PAS-9 satellite as required under both Mexican and U.S. GAAP. In October 2000, we began providing antennas, LNBs, Smart Cards and remote controls to our customers to use free of charge whereas prior to October 2000, we sold those items to our wholesalers, who in turn provided them to subscribers. Because we will now retain title to this equipment, we capitalize and amortize it over three years. As a result, the overall amounts we amortize will continue to rise over the next few years as we cumulatively amortize more antennas, LNBs and accessories. Those amounts will also increase as the number of our subscribers increases. However, the increases in amortization are largely offset by decreases in our cost of sales now that the purchases of these items are no longer recorded as cost of sales. INTEGRAL RESULT OF FINANCING The integral result of financing can have a significant impact on the financial statements of a company in periods of high inflation. Mexican GAAP requires companies to present all financial effects of operating and financing the business under inflationary conditions in their income statements. Integral result of financing primarily includes: - interest earned on cash and temporary investments, interest paid on borrowed funds and interest earned and paid on accounts of affiliated companies; - foreign exchange gains or losses associated with monetary assets and liabilities denominated in foreign currencies; and - net gains or losses resulting from holding monetary assets and liabilities exposed to inflation. Our foreign currency-denominated assets and liabilities affect our foreign exchange position. We record a foreign exchange gain or loss if the exchange rate of the peso rises or falls compared to the other currencies in which our monetary assets or liabilities are denominated. On the other hand, if we have monetary liabilities that exceed our monetary assets during period of inflation, we will generate a monetary gain. We reported a negative integral result of financing of Ps. 1,647.8 million, Ps. 70.7 million and Ps. 352.0 million for the years ended December 31, 2002, 2001 and 2000, respectively. The increase in cost in 2002 mainly resulted from a foreign exchange loss of Ps. 1,174.4 million for the year, due to the 13.9% devaluation of the peso versus the US dollar during 2002. The decrease in the integral cost of financing in 2001 as compared to 2000, is due to the 4.6% appreciation of the Mexican peso versus the U.S. dollar which resulted in an exchange gain of Ps. 371.0 million. This exchange gain in 2001 was offset primarily because of the increase in interest expense due to additional loans received from our owners and the interest expense related to the PAS-9 satellite that was expensed from September 2000 on. We generated monetary gains for the years ended December 31, 2002, 2001 and 2000, of Ps. 498.6 million, Ps. 442.4 million and Ps. 522.2 million, respectively. The increase in the gain from monetary position for 2002 as compared to 2001 was due to an increase in the net monetary liabilities in peso terms which more than offset the decrease in the Mexican inflation rate. The decrease in the gain from monetary position for 2001 as compared to 2000 was due to the decrease in net monetary liabilities in peso terms and a decrease in Mexican inflation. - 50 - PROVISION FOR TAXES Provision for taxes includes reserves for corporate income tax, asset tax, deferred income tax and employees' statutory profit sharing. We have not been required to make any provision for income taxes due to operating losses and we do not expect to make such provisions until we earn profits that exceed our offsetting tax loss carry-forwards. As of December 31, 2002, we had total tax loss carry-forwards of Ps. 7,217.5 million that we may, under certain circumstances, carry forward over ten years from the period they were generated. See Note 18 to our financial statements. The corporate income tax rate in Mexico was 35% in 2002, and is expected to decrease 1% each year in each of the following three years. From January 1, 2002 on, Mexican entities may no longer defer 5% of their corporate income tax on reinvested earnings. Also, from January 1, 2002 on, dividends, either in cash or in any other form, are not subject to Mexican withholding tax. We are also subject to an asset tax on the book value of certain assets. However, any income tax payments can be credited against asset tax payments. In 2000, 2001 and 2002 the asset tax rate was 1.8%. Under Mexican law, taxpayers cannot deduct from their asset tax basis debt contracted with nonresident companies or financial intermediaries. We challenged these provisions of Mexico's asset tax law but at the same time, and in order to avoid penalties and interest payments in the event we could lose the appeal, we paid approximately Ps. 43.2 million nominal (including interest) of tax on assets for the year ended December 31, 2001 in March of 2002; approximately Ps. 45.2 million nominal in monthly payments during the year ended December 31, 2002; and approximately Ps. 7.5 million nominal for the months of January and February 2003. On March 19, 2003, the court issued a resolution in our favor. Because the declaratory judgment was favorable to us, to the extent that the Asset Tax Law is not amended, we will be able to deduct debts payable to nonresidents from the asset tax basis. We are analyzing the alternatives open to us to recover the amount of Ps.88.4 million (plus interest and inflation effects) of payments made for the tax years 2001 and 2002. However, we cannot assure you that we will be successful in recovering this amount. The Ps. 7.5 million that was paid for the months of January and February of 2003, has already been recovered or credited to us. We were exempt from the asset tax in 1999, and only a minimal amount was due in 2000. For more information on this proceeding, see "Item 10: Additional Information-Legal Proceedings." Mexican law requires Mexican entities to pay employees profit sharing in an aggregate amount equal to 10% of our taxable income (calculated without reference to inflation adjustments or tax loss carry forwards). This profit sharing is in addition to agreed compensation and benefits. We have not been required to pay employee profit sharing because we have not generated taxable income. U.S. GAAP RECONCILIATION Our consolidated financial statements are prepared in accordance with Mexican GAAP, which differs in certain significant respects from U.S. GAAP. Net (loss) under U.S. GAAP for the years ended December 31, 2002, 2001 and 2000 was (Ps. 1,799.8 million), (Ps. 930.7 million) and (Ps.1,408.5 million), respectively. Stockholders' deficit under U.S. GAAP as of December 31, 2002 and 2001 was (Ps. 6,850.8 million) and (Ps. 5,050.8 million), respectively. Differences between Mexican GAAP and U.S. GAAP for the years ended December 31, 2002, 2001 and 2000 include, but are not limited to: adjustments for the capitalization and amortization of pre-operating expenses; the provision for costs associated with re-pointing our subscribers' antennas from Solidaridad 2 to PAS-9, reversal of the accrual for the redundant use of Solidaridad 2 and the reversal of certain other accruals recorded under Mexican GAAP. Our most significant differences between Mexican GAAP and U.S. GAAP are summarized below. For a detailed discussion of the principal differences between Mexican GAAP and U.S. GAAP as they relate to us for each of the years in the three year period ended December 31, 2002, see Note 21 to our consolidated financial statements. - 51 - Under U.S. GAAP, cash flows provided by (used in) operating activities were Ps. 305.7 million, (Ps. 538.6 million) and (Ps. 734.5 million) as compared to resources provided by (used in) operating activities of (Ps. 333.1 million), Ps. 96.8 million and (Ps. 393.9 million) under Mexican GAAP for the years ended December 31, 2002, 2001 and 2000, respectively. The differences in determining resources provided by (used in) operating activities under Mexican GAAP and cash flow provided by (used in) operating activities under U.S. GAAP, as it relates to us, is primarily due to the requirement to exclude non-cash items in presenting cash flows under U.S. GAAP, whereas, the statement of changes in financial position under Mexican GAAP is determined based upon differences between beginning and ending financial statement balances in constant pesos. Among other differences, for U.S. GAAP purposes, we have excluded from operating cash flows gains from monetary position of Ps. 498.6 million, Ps. 432.2 million and Ps. 495.8 million for the years ended December 31, 2002, 2001 and 2000, respectively, and unrealized foreign currency gains and (losses) of (Ps. 1,022.9 million), Ps. 303.1 million and (Ps. 84.4 million), respectively. Cash flows provided by financing activities under U.S. GAAP were Ps. 263.6 million, Ps. 1,258.4 million and Ps. 859.0 million as compared to resources provided by financing activities of Ps. 872.0 million, Ps. 702.2 million and Ps. 2,249.9 million under Mexican GAAP for the years ended December 31, 2002, 2001 and 2000, respectively. U.S. GAAP financing activities primarily represent actual cash inflows and outflows from our receipt of cash. Under Mexican GAAP, resources provided by financing activities reflect changes in the balance sheet accounts, which include gains or losses from foreign currency fluctuations and gains from monetary position. In addition, the proceeds from the sale of restricted investments in 2000 were classified as financing activities under Mexican GAAP but as investing activities under US GAAP. Cash flows (used in) investing activities under U.S. GAAP were (Ps. 337.1 million), (Ps. 719.9 million) and (Ps. 366.3 million) as compared to resources (used in) investing activities of (Ps. 317.5 million), (Ps. 802.7 million) and (Ps. 2,118.7 million) under Mexican GAAP for the years ended December 31, 2002, 2001 and 2000, respectively. The difference in 2000 is primarily related to the satellite transponder obligation liability of (Ps. 1,432.5 million) recognized as a resource from investing activity under Mexican GAAP, but is considered a non-cash investing activity under U.S. GAAP. In addition, as noted above, in 2000 we recognized the cash inflow of Ps. 277.2 million from the sale of restricted investments as an investing activity under U.S. GAAP but as a financing activity under Mexican GAAP. LIQUIDITY AND CAPITAL RESOURCES Since our inception, we have been funded principally with capital contributions and loans from our owners as well as the proceeds from our senior notes. We have experienced, and expect to continue experiencing during the next few years, negative cash flow in our operations and to require continued access to financing sources. The roll-out and expansion of our Ku-band DTH pay television service has required substantial amounts of capital from inception through December 31, 2002 for: - satellite transponder capacity; - uplink and downlink services; - the construction of additional transmission facilities and related equipment and acquisition of call center and subscriber management assets; - the acquisition of Sky Kit components and the installation of the equipment at subscribers' locations; - the acquisition of assets from Grupo Medcom, S.A. de C.V., Imbursa, S.A. de C.V., Sociedad de Inversion de Capitales and Alejandro Palma; and - the funding of other operating losses and working capital requirements. In 2002, we used our capital, received primarily from our owners, for the funding of operating losses and other working capital requirements, including satellite transponder service costs, for payment of interest to bondholders and for the acquisition of Sky Kit components. - 52 - We hold our cash and cash equivalent assets in both pesos and U.S. dollars. For the years ended December 31, 2002, 200, and 2000, resources provided by (used in) operating activities amounted to (Ps. 333.1 million), Ps. 96.8 million and (Ps. 393.9 million), respectively. The substantial increase in 2001 as compared to 2000 and 2002 was primarily due to our operating results. At the same time, net resources provided by financing activities totaled Ps. 872.0 million, Ps. 702.2 million and Ps. 2,249.9 million, respectively, for the years ended December 31, 2002, 2001 and 2000, consisting primarily of funds provided by our owners as capital increases and loans. The amount for 2000 includes Ps. 1,472.2 million due to the recording of the satellite transponder obligation. Resources used in investing activities represented Ps. 317.5 million for the year ended December 31, 2002, as compared to Ps. 802.7 million for the year ended December 31, 2001 and Ps. 2,118.7 million from the year ended December 31, 2000. The variance from 2000 to 2001 was principally due to the recording of our PAS-9 satellite arrangement as a capital lease in 2000. See "Contractual Obligations and Commercial Commitments" table below. We incurred total capital expenditures of approximately Ps. 317.5 million, Ps. 802.7 million and Ps. 686.1 million in fiscal years 2002, 2001 and 2000, respectively, which included transmission equipment, IRDs, computers, motor vehicles, low noise blocks and antennas. In 2001, we acquired approximately Ps. 13.7 million in call center equipment from Merkatel (which was part of a Ps. 24.2 million (plus VAT) transaction that also included substantial training materials and transitional support). The amount of our capital expenditures in the long term will depend on numerous factors beyond our control or ability to predict, including the availability of financing, nature of future expansion and acquisition opportunities, economic conditions, subscriber demand, competition and regulatory developments. The capital expenditures described above do not include acquisitions, which we could make to expand our business and/or to enter into complementary businesses. In the future, we may consider acquisitions of, investments in, or joint ventures with, other companies. In 2000, 2001 and 2002 we continued to rely principally on capital contributions and loans from Televisa, News Corporation, Liberty Media and their affiliates to fund our operating costs. From our inception through March 31, 2003, our owners have contributed an aggregate of US$458.9 million to us, including US$149.0 million in the form of equity and US$309.9 million in the form of long-term loans, with the last loan made in March 2002. In the past three years, our owners have made amounts in loans and equity available to us, depending on our monthly funding requirements for capital expenditures and operations. Our owners increased our equity capital by US$49.0 million in 1999 pro-rata, based on their respective equity interests in the Company. Our owners also loaned us and, in one instance, our subsidiary Novavision, a total of US$41.6 million in 1999. The owners lent us another US$81.0 million in 2000, US$132.8 million in 2001 and US$29.5 million in 2002. On July 22, 2002, we entered into a credit agreement with our owners to memorialize the terms of certain of the loans described above. This credit agreement also requires us to execute promissory notes to evidence the loans we received from our owners from 2000 to 2002 as well as to evidence any new loans we obtain from our owners. The loans each bear a fixed interest rate of 9% per annum and are payable at maturity, including any applicable withholding taxes, and mature ten years from the date of disbursement. We may be required to make periodic payments of interest or principal on these loans if we jointly agree with our owners to modify or accelerate their maturity dates. In addition, the indenture governing our senior notes restricts the amount of indebtedness we can incur and in some instances restricts how we can use the amounts we receive in loans from our owners. For further discussion of our indebtedness to our owners, see "Item 7: Major Shareholders and Related Party Transactions-Related Party Transactions-Loans and Capital Contributions from Our Owners." We expect to continue to meet our additional ordinary course financing requirements principally through cash flow from operations and, if needed, additional capital contributions or loans from our owners. In the event of significant expenditures or acquisitions, we could make use of other sources of liquidity such as public or private offerings of equity and/or debt securities, and/or commercial bank loans if they come available. Our owners have informally committed to lend us up to approximately US$25.0 million during fiscal year 2003, based on our business plan. So far in 2003, we have not required any of this funding, as our cash flow from operations has met our current needs. We cannot assure you, however, that we will not require this funding from our owners later this year, or that we will not require additional loans from our owners in future years. We have no current arrangements with respect to sources of additional financing other than our owners. We cannot assure you that additional financing will be available to us or, if available, that such financing can be obtained on terms acceptable to us. Our ability to obtain future financing is limited by the terms of the indenture governing our 12 7/8 % senior notes and - 53 - may be further limited by the terms of any future financing arrangements. Failure to obtain future financing could delay or prevent our development and expansion plans, impair our ability to meet our debt service requirements (including our obligations with respect to the senior notes) or other obligations (such as transponder service commitments), and have a material adverse effect on our business. See "Item 3: Key Information-Risk Factors--Risk Factors Related to Our Business--Our Significant Debt Levels Limit Our Ability to Fund Our Operations and Could Lead to Difficulties in Obtaining New Sources of Financing Required to Continue Operations." CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS Innova's contractual obligations and commercial commitments consist primarily of credit facilities, as described above. The following table provides details regarding Innova's contractual and commercial obligations subsequent to December 31, 2002: PAYMENTS DUE BY PERIOD (IN THOUSANDS)
LESS THAN 12-36 36-60 AFTER 60 TOTAL 12 MONTHS MONTHS MONTHS MONTHS ----- --------- ------ ------ ------ 2004- 2006- BEYOND 2003 2005 2007 2007 LONG-TERM LOANS Senior Exchange Notes(1) ............. $375,000 - - $375,000 - Stockholders loans(2) ................ $309,900 - - - $309,900 OTHER LONG-TERM OBLIGATIONS Capital lease - satellite transponder(3) ..................... $258,800 $ 20,400 $ 40,800 $ 40,800 $156,800 Advertising agreement with Televisa(4) ........................ $ 11,500 $ 11,500 - - - Advertising agreement with TV Azteca(5) .......................... $ 7,900 $ 3,700 $ 4,200 - - Software and License agreement with CSG (New SMS)(6) .............. $ 6,949 $ 2,058 $ 1,147 $ 1,021 $ 2,723 Soccer games exclusive rights from Televisa(7) ................... $ 3,000 $ 3,000 - - - Reality shows BigBrother2 and BigBrother VIP2 from Televisa(7) ... $ 2,100 $ 2,100 - - - Rights to rebroadcast TV Azteca channels(5) ................. $ 600 $ 300 $ 300 - - Other liabilities .................... - - - - - -------------------------------------------------------- TOTAL CONTRACTUAL OBLIGATIONS ........... $975,749 $ 43,058 $ 46,447 $416,821 $469,423 --------------------------------------------------------
(1) In April 1997, Innova issued U.S. Dollar denominated senior unsecured fixed rate notes in an aggregate principal amount of US$375 million, with semi-annual interest payable at a rate of 12 7/8% per annum. See "Item 5. Operating and Financial Review and Prospects -- Liquidity and Capital Resources." (2) In 1998, 1999, 2000, 2001 and 2002 we received funding from our stockholders as long-term loans of US$25.0 million, US$41.6 million, US$81.0 million, US$132.8 million and US$29.5 million respectively. These loans accrue interest at a fixed rate of 9% per annum (plus any applicable withholding taxes) and mature in 10 years from the date on which the funds were received. See "Item 5. Operating and Financial Review and Prospects -- Liquidity and Capital Resources." - 54 - (3) In February 1999, Innova entered into a U.S. Dollar denominated agreement with PanAmSat for the use of 12 transponders on the PAS-9 satellite. The term of the agreement is for the expected economic useful life of the satellite, which was approximately 15 years at launch. Accordingly, under generally accepted accounting principles the agreement is accounted for as a capital lease, and we recognized on our balance sheet a satellite transponder asset and a corresponding liability equal to the net present value of the monthly payments of US$1.7 million over the 15 year term of the agreement. See "Item 5. Operating and Financial Review and Prospects -- Results of Operations -- Cost of Sales." (4) See "Item 7. Major Shareholders and Related Party Transactions -- Related Party Transactions -- Ongoing Service Arrangements with Other Related Parties -- Advertising." (5) See "-Trend Information" below for more details. (6) Includes license fees and technical support services. See "Item 10: Additional Information-- Material Contracts-- New Subscriber Management System Contract." (7) See "Item 7. Major Shareholders and Related Party Transactions-- Related Party Transactions-- Programming Arrangements with Related Parties." AMOUNT OF COMMITMENTS EXPIRING BY PERIOD (IN THOUSANDS)
LESS THAN 12-36 36-60 AFTER 60 TOTAL 12 MONTHS MONTHS MONTHS MONTHS ----- --------- ------ ------ ------ 2003 2004- 2006- SUBSEQUENT 2005 2007 TO 2007 Systems agreement with NDS(1)................. $11,000 $11,000 - - - Consulting services agreement with CSG(2)..... $ 3,865 $ 3,865 - - - ------------------------------------------------------------- $14,865 $14,865 - - - -------------------------------------------------------------
(1) See "Item 7. Major Shareholders and Related Party Transactions -- Related Party Transactions -- Ongoing Service Arrangements with Other Related Parties -- Systems Agreement between Innova and NDS." (2) See "Item 10: Additional Information-- Material Contracts-- New Subscriber Management System Contract." RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC. We do not have any significant internal research and development programs. We generally purchase any new technologies used to upgrade our services from our suppliers. TREND INFORMATION During the first quarter of 2003, we continued to grow our subscriber base. As of March 31, 2003, we had approximately 779,700 subscribers, an increase of 7.3% as compared with approximately 726,700 subscribers as of March 31, 2002. These subscriber numbers include approximately 41,400 commercial subscribers as of March 31, 2003 and approximately 25,400 commercial subscribers as of March 31, 2002. Our commercial subscribers generate substantially less revenue per subscriber than our residential subscribers. We believe the increase in subscriber activations is due to the quality of our programming content and our promotional programs. We believe the main factor causing subscriber cancellations during the first quarter of 2003, as with the last quarter of 2002, was the continuing weakness in the Mexican economy. Nevertheless, we experienced a decrease in the rate of subscriber cancellations as compared to the last four quarters. We believe the main events causing subscriber cancellations during 2002 were the new 10% tax on telecommunication services, the process of repointing of antennas, the lack of rights to transmit the World Cup in June 2002 and the economic recession. - 55 - On June 2002 we executed an agreement with TV Azteca for the rights to rebroadcast their over-the-air Channels 7 and 13 (including the right to delay the broadcast of channel 13 on other DTH systems for up to 2 hours) for a monthly fee of US$25,000 through the end of 2004. We also committed to purchase up to US$10.6 million in advertising from them over three years in addition to the Ps. 120.0 million in advertising we are paying to Televisa in 2003. Additionally, we have the option to purchase from TV Azteca the right to broadcast certain soccer matches for the soccer seasons 2002 through 2004 at a price to be determined before initiation of each season and a non-exclusive right to broadcast such matches on a delayed basis. We challenged certain provisions of Mexico's asset tax law that prohibit us from deducting loans from non-Mexican sources from our asset tax basis and in order to avoid penalties and interest payments in the event we could lose the appeal, we paid approximately Ps. 43.2 million nominal (including interest) of tax on assets for the year ended December 31, 2001 in March of 2002; approximately Ps. 45.2 million nominal in monthly payments during the year ended December 31, 2002; and approximately Ps. 7.5 million nominal for the months of January and February 2003. On March 19, 2003, the court issued a resolution in our favor. Since the declaratory judgment was favorable to us, to the extent that the Asset Tax Law is not amended, we will be able to deduct debts payable to nonresidents from the asset tax basis. We are analyzing the alternatives available to us to recover the amount of Ps.88.4 million (plus interest and inflation effects) of payments made for the tax years 2001 and 2002; however, we can not assure you that we will successfully recover this amount. Amounts paid for the months of January and February of 2003, have already been recovered or credited to us. See "Item 10: Additional Information--Taxation--Mexican Taxation" and "Item 5: Operating and Financial Review and Prospects--Results of Operations - Provision for Taxes". On March 18, 2003, DIRECTV Latin America, LLC, or DLA, announced that it had filed a voluntary petition for bankruptcy protection, under Chapter 11 of the U.S. Bankruptcy Code, in the U.S. Bankruptcy Court in Wilmington, Delaware. DLA cited its debt burden and high fixed costs and listed liabilities of US$1.6 billion as of the end of 2002. DLA also reported a loss of 54,000 net subscribers in the first quarter of 2003 or 7% of its subscriber base. DLA is a competitor of ours that provides DTH programming and services in Mexico through an affiliated Mexican operating company, DIRECTV Mexico. According to its 2002 annual report, Hughes Electronics Corporation, or Hughes, owns approximately 75% of DLA and holds significant indirect interest in DIRECTV Mexico. On April 9, 2003, News Corporation announced that it reached a definitive agreement with General Motors Corporation and Hughes in which a subsidiary of News Corporation would acquire General Motors' 19.9% stake in Hughes and a further 14.1% of Hughes from public shareholders and General Motors' pension and other benefit plans, for a total of 34% of Hughes. If the agreement is consummated a subsidiary of News Corporation will transfer its 34% ownership interest in Hughes' common stock to Fox Entertainment Group, Inc., an 80.6% owned News Corporation subsidiary. The businesses contained in Hughes include a leading U.S. satellite broadcaster DIRECTV, which has more than 11 million subscribers; an 81% equity holding in satellite operator PanAmSat; and Hughes Network Systems, a provider of broadband satellite network solutions. This agreement is subject to a number of conditions including the receipt of required regulatory approvals in the United States and elsewhere, and no assurance can be given that this acquisition will be consummated, or, if consummated, that it will occur on the terms announced on April 9, 2003. Additionally, our Social Part Holders Agreement provides that neither Televisa nor News Corporation may directly or indirectly operate or acquire an interest in any business that operates a DTH satellite system in Mexico (subject to certain limited exceptions). If News Corporation were to consummate the proposed acquisition of an interest in Hughes while Hughes continued to own an interest in DIRECTV, News Corporation would become an indirect owner of DIRECTV Mexico, our DTH competitor. Accordingly, under our Social Part Holders Agreement any such acquisition of an indirect interest in the Mexican operations of DLA would require the consent of us and Televisa. We cannot predict what impact either the DLA bankruptcy or, if consummated, News Corporation's acquisition of an interest in Hughes, will have on the competitive environment for DTH in Mexico. See "Item 3: Key Information--Risk Factors--Risk Factors Related to Our Business--We face Intense Competition in the Pay Television Market in Mexico," and "--We Have Significant Transactions With Our Owners Who Are Involved in Related Businesses Which Creates the Potential for Conflicts of Interest," "--One of Our Owners, News Corporation, May Acquire Significant Interests in DIRECTV, Our DTH Competitor in Mexico, and PanAmSat, Our Sole Satellite Provider, and We Cannot Predict What Effect This Will Have On Us" and "--Our Equity Holders Have, or May Acquire, Interests in Other Pay Television Operations in Mexico Which Compete with Us for Customers and Business Opportunities," and "Item 4: Information on the Company--Business Overview--Competition." In October 2002, Globopar announced that it will reevaluate its capital structure due to significant devaluation of the Real, deteriorating economic conditions in Brazil and significant reduction in credit available to Brazilian - 56 - companies. Globopar and certain of its subsidiaries are rescheduling their financial debt obligations and currently reviewing its business plans together with certain holders of Globopar's bank debt and bonds. As a result of Globopar's financial condition, since September 2002, Globopar has ceased providing financial support to DTH TechCo and MCOP, and MCOP, in turn, has ceased making payments to DTH TechCo, which payments, we believe, previously accounted for over 50% of DTH TechCo's revenue. Televisa, News Corporation and Liberty Media have begun funding DTH TechCo's operating cash shortfall through loans and we understand that they currently intend to continue doing so. However, our owners are not obligated to provide funding to DTH TechCo and we cannot assure you that continued funding will be available. If, as a result of its financial condition and restructuring, Globopar fails to make its contributions to DTH TechCo, and its other owners, including Televisa, do not make up the shortfall, then DTH TechCo's ability to provide service to us, and our ability to provide services to our customers could be compromised. See "Item 3: Key Information--Risk Factors--Risk Factors Related to Our Business-- If Our Affiliate DTH TechCo is Unable to Obtain Funding, It May Not Be Able to Provide a Necessary Service for our Operations, Which Could Adversely Affect Our Business, Financial Condition and Results of Operations." On April 21, 2003 a U.S. Bankruptcy Judge authorized DLA to reject its agreement for the exclusive rights, in several Latin America countries including Mexico, to broadcast the 2006 FIFA World Cup soccer tournament. As a result, we believe the programming disadvantage we faced in 2002, when DIRECTV Latin America had the exclusive Latin American rights to broadcast the World Cup soccer tournament, may be reduced. We cannot predict what effect this will have on our ability to attract new subscribers or retain existing subscribers. See "Item 3: Key Information--Risk Factors--Risk Factors Related to Our Business--We face Intense Competition in the Pay Television Market in Mexico," and "--We May Not Be Successful in Expanding or Maintaining Our Subscriber Base." ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES DIRECTORS AND SENIOR MANAGEMENT DIRECTORS The management of our business is vested in our Board of Directors. Under our bylaws, our Board of Directors currently consists of ten directors (and up to ten alternate directors), including six directors (and up to six alternate directors) selected by Televisa and four directors (and up to four alternate directors) selected by News Corporation. Our Directors serve until they are replaced. The following table sets forth the names of our current directors and their alternates, their dates of birth, their principal occupation, their business experience, including other directorships, and their years of service as directors or alternate directors.
FIRST NAME AND DATE OF BIRTH PRINCIPAL OCCUPATION BUSINESS EXPERIENCE ELECTED - ----------------------------- ---------------------------- ---------------------------- --------- DIRECTORS APPOINTED BY TELEVISA: Emilio Azcarraga Jean Chairman of the Board, Member of the Boards of 1996 (02/21/68) President and Chief Executive Telefonos de Mexico, S.A. de Officer and President of the C.V. and Banco Nacional de Executive Committee of Grupo Mexico, S.A. and Vice Televisa Chairman of the Board of Univision Alexandre Moreira Penna Vice President of Corporate Former Managing Director of 2002 da Silva Finance of Grupo Televisa JPMorgan Chase (12/25/54)
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FIRST NAME AND DATE OF BIRTH PRINCIPAL OCCUPATION BUSINESS EXPERIENCE ELECTED - ----------------------------- ---------------------------- ---------------------------- --------- Alfonso de Angoitia Noriega Executive Vice President and Alternate Member of the Board 1998 (01/17/62) Chief Financial Officer and of Univision and Partner, Member of the Executive Mijares, Angoitia, Cortes y Committee of Grupo Televisa Fuentes, S.C. (1994 - 1999) Jose Antonio Baston Patino Corporate Vice President of Former Vice President of 2000 (04/13/68) Television and Member of the Operations of Grupo Televisa, Executive Committee of Grupo former General Director of Televisa Programming of Grupo Televisa and former Member of the Board of Univision Juan Sebastian Mijares Ortega Secretary of the Board, Partner, Mijares, Angoitia, 2000 (10/04/59) Secretary of the Executive Cortes y Fuentes, S.C. (1994 Committee and Vice President-- -2000), Member and Secretary Legal and General Counsel of of the Board of Bank of Grupo Televisa Tokyo-Mitsubishi Bank-Mexico and Member of the Boards of Afore Banamex, S.A. de C.V. and Union de Telecomunicaciones de Iberoamerica, A.C. Pablo Abel Vazquez Oria Chief Executive Officer of Former Chief Executive 2002 (06/29/67) Innova Officer of Cablevision, former General Manager of national subsidiaries of Televisa and former General Manager of AhorraSi, S.A. de C.V. DIRECTORS APPOINTED BY NEWS CORPORATION: Paul Haggerty Executive Vice President - Former Executive Vice 1999 (11/03/59) Finance of News Corporation President and Chief Financial Officer of Fox Television (1997-2001). Lawrence Jacobs Executive Vice President and Senior Vice President and 2002 (05/04/55) Deputy General Counsel of News Deputy General Counsel of Corporation News Corporation Romulo Pontual Executive Vice President, Former Executive Vice 2000 (12/13/59) Television Platforms of News President, News Technology Corporation; Vice Chairman of (1999-2002), Senior Vice the Board of Directors of Innova President (1998-1999) and Vice President of Space Technology (1996-1998) of News Corporation
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FIRST NAME AND DATE OF BIRTH PRINCIPAL OCCUPATION BUSINESS EXPERIENCE ELECTED - ----------------------------- ---------------------------- ---------------------------- --------- Jacopo Bracco Vice President , Television Former Vice President, 2002 (3/12/68) Platforms of News Corporation Satellite Distribution and Business Development for Fox Entertainment Group (2001-2002), previously Director (1999-2001) ALTERNATE DIRECTORS APPOINTED BY TELEVISA: Rafael Carabias Principe Vice President of Former Member of the Boards 2000 (11/13/44) Administration of Grupo of Promecap, S.C., Grupo Televisa Financiero del Sureste, S.A. and former Director of Corporate Finance of Scotiabank Inverlat, S.A. Jose Antonio Lara del Vice President-- Tax of Grupo Former Tax Director of Grupo 2002 Olmo Televisa Televisa and former Associate (09/02/70) of Chevez, Ruiz, Zamarripa y Cia, S.C. Jorge Lutteroth Echegoyen Controller and Vice President Former Senior Partner of 2000 (01/24/53) of Grupo Televisa Coopers & Lybrand Despacho Roberto Casas Alatriste, S.C. Salvi Folch Viadero Vice President of Financial Former Chief Executive 2002 (08/16/67) Planning of Grupo Televisa Officer and Chief Financial Officer of Comercio MAS, S.A. de C.V. and former Vice Chairman of Banking Supervision of the National Banking and Securities Commission Maria Azucena Dominguez Legal Corporate Director of Former Legal Corporate 2000 Cobian Televisa Corporacion Director of Innova (07/30/57) Joaquin Balcarcel Santa Cruz Director-- Legal Department of Former associate at Martinez, 2000 (01/04/69) Grupo Televisa Algaba, Estrella, De Haro y Galvan-Duque, S.C. ALTERNATE DIRECTORS APPOINTED BY NEWS CORPORATION: Michael Doodan Executive Vice President of 1997 (6/26/46) Legal and Business Affairs of Twentieth Century Fox Film Corporation Emilio Carrillo Gamboa Senior Partner at Bufete 1997 (10/16/37) Carrillo Gamboa, S.C. Paula Wardynski Vice President-Treasurer of 1998 (3/23/58) News America Incorporated
- 59 - SENIOR MANAGEMENT Under our bylaws, our Chief Executive Officer and Chief Financial Officer are appointed by Televisa, subject to the approval of News Corporation, and may be removed by mutual agreement of Televisa and News Corporation without cause or by either of them with reasonable cause. The Chief Executive Officer has broad responsibility for the day-to-day operations of Innova. The Chief Financial Officer or the Executive Director of Finance and Administration has responsibility for all budgetary, financial and cash management duties. The following table sets forth the names of our executive officers, their dates of birth, their current position, their prior business experience and the year in which they were appointed to their current positions:
FIRST NAME AND DATE OF BIRTH CURRENT POSITION BUSINESS EXPERIENCE APPOINTED - -------------------------- ------------------------ --------------------------- --------- Pablo Abel Vazquez Oria Chief Executive Officer Former Chief Executive 2002 (06/29/67) Officer of Cablevision, former General Manager of national subsidiaries of Televisa and former General Manager of AhorraSi, S.A. de C.V. Carlos Ferreiro Rivas Chief Financial Officer and Former Director of 2002 (11/19/68) Executive Director of Corporate Finance of Finance and Administration Televisa, former Director of Credit Risk at Banco Santander, and former Manager in Corporate Banking of Grupo Financiero Inverlat Jorge Todd Alvarez Chief Commercial Officer Former Director of Sales 1996 (07/18/56) and Distribution of Innova and former Director of Sales of Multivision
COMPENSATION For the year ended December 31, 2002, we paid Ps. 14.4 million (nominal) in aggregate compensation to our executive officers for their services in all capacities. We did not pay any compensation to our directors and alternate directors of the Board in 2002. We did not issue any stock options or provide any pension, retirement or similar benefits to our directors, alternate directors and executive officers in 2002. BOARD PRACTICES Our directors and alternate directors do not serve on the Board for limited terms. They generally serve until replaced. Our directors and alternate directors are not entitled to receive any benefits from Innova or its subsidiaries upon their termination. EXECUTIVE COMMITTEE The Board has delegated certain responsibilities to an Executive Committee that consists of Messrs. Azcarraga Jean, de Angoitia N., Vazquez O., Pontual, Haggerty and Bracco. The alternate members of the committee are Messrs. Mijares O., Balcarcel S., Lara del O., Jacobs, Carrillo G. and Ms. Wardynski. The Executive Committee generally acts on matters in the absence of the Board of Directors. Our equity holders must approve our annual audited financial statements. Questions of executive compensation are considered, reviewed and approved by the entire Board of Directors. - 60 - EMPLOYEES As of December 31, 2002, we employed 1,834 people in Mexico, including full-time and part-time employees, with approximately 87 in transmission and technology related functions, approximately 510 in marketing and sales, approximately 1,017 in client services and subscriber handling and approximately 220 in management, finance, personnel and administration. This represents an overall decrease of 532 employees as compared to the end of December 2001. In 2002, we reduced the number of employees, primarily due to the end of special projects such as the repointing of antennas and the Smart Card changeover, as well as other adjustments in order to improve efficiency in our platform. SHARE OWNERSHIP All of our social parts are owned by subsidiaries of Televisa, News Corporation, and Liberty Media. None of our directors, alternate directors or officers own any direct equity interest in Innova, although they may own indirect interests through their ownership of interests of Televisa, News Corporation or Liberty Media. We do not sponsor any program whereby our directors, alternate directors, officers, or employees may participate in our capital. ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS MAJOR SHAREHOLDERS The following table sets forth certain information with respect to the current beneficial ownership of our equity interests:
AMOUNT AND NATURE PERCENTAGE NAME OF BENEFICIAL OWNER OF OWNERSHIP OWNERSHIP - ------------------------ ------------ --------- SKY DTH, S. de R.L. de C.V........................... Series A-1 Social Part 60% News DTH (Mexico) Investment Ltd..................... Series B-1 Social Part 30% Liberty Mexico DTH, Inc. ............................ Series B-2 Social Part 10%
SKY DTH is an indirect, wholly owned subsidiary of Televisa. News DTH is an indirect, wholly owned subsidiary of News Corporation. Liberty Mexico is an indirect, wholly owned subsidiary of Liberty Media. The relations between our equity owners are governed by our bylaws and a Social Part Holders Agreement among Televisa, News Corporation, Innova and its owners, dated March 6, 1997. Our bylaws were amended on December 22, 1998 to convert Innova into a limited liability company with variable capital and to reflect the sale of a ten percent interest represented by the Series B-2 Social Parts to Liberty Mexico. SECURITIES HELD IN HOST COUNTRY All of our senior notes are held of record in the United States by one record holder. CONTROL Televisa, through its subsidiaries, owns approximately 60% of Innova's total voting power, subject to certain provisions of the bylaws and the Social Part Holders Agreement (discussed below). Our owners may only take significant actions with the affirmative vote of both Televisa and News Corporation under the bylaws and Social Part Holders Agreements. For a description, see "Item 10: Additional Information--Bylaws." Under our Social Part Holders Agreement, Televisa and News Corporation have agreed not to engage in the DTH business in Mexico except through us. Televisa also owns interests in businesses that compete with us for customers in the Mexican pay television market. Specifically, Televisa controls and owns a majority interest in Cablevision, the operator of Mexico's largest cable television system. See "Item 4: Information on the Company--Business Overview--Competition--Cable Television and MMDS." - 61 - RELATED PARTY TRANSACTIONS We have engaged in, and expect to continue to engage in, a significant number and variety of related party transactions, including, but not limited to, the transactions summarized in Note 9 of our financial statements. Note 9 to the financial statements provides other information required to be made publicly available in Mexico with regard to the interest of management in certain transactions. Several other related party transactions not required to be listed here are included as Exhibits to this document. We have not performed any studies or analyses to determine whether the terms of past transactions with related parties have been on an arms' length basis. Although we believe that transactions with our affiliates are generally conducted on an arms' length basis and at market prices, conflicts of interest are inherent in such transactions. See "Item 3: Key Information-Risk Factors-Risk Factors Related to Our Business-Our Equity Holders Have, or May Acquire, Interests in Other Pay Television Operations in Mexico Which Compete with Us for Customers and Business Opportunities;" and "--We Have Significant Transactions With Our Owners Who Are Involved in Related Businesses Which Creates the Potential for Conflicts of Interest." LOANS AND CAPITAL CONTRIBUTIONS FROM OUR OWNERS We, and our subsidiary Novavision, owe our owners a total of US$309.9 million plus accrued and unpaid interest for loans extended to us by our owners since our inception through March 31, 2003 (including a total of US$8.3 million that has been loaned to Novavision). The loans were made by our owners in proportion to each of their respective equity interests in Innova over the period 1998 through 2002. The loans bear a fixed interest rate of 9% per annum payable at maturity, including any applicable withholding taxes, and mature between 2008 and 2012. We may be required to make periodic payments of interest or principal on these loans if we jointly agree with our owners to modify or accelerate their maturity dates. In June 2002, we entered into a credit agreement with our owners to memorialize the terms of certain of these loans. This credit agreement also requires us to execute promissory notes to evidence the loans we received from our owners from 2000 to 2002 as well as to evidence any new loans we obtain from our owners. We expect that our owners will provide, if necessary, up to an aggregate amount of US$25.0 million to meet our cash requirements during 2003, although they are not obligated to do so. During the period 1996 to 1999, we received capital contributions from our owners in proportion to their respective equity interests in Innova in an aggregate amount equal to US$149.0 million. This amount included forgiveness of debt amounting to Ps. 424.0 million. PROGRAMMING ARRANGEMENTS WITH RELATED PARTIES We obtain, and anticipate that we will continue to obtain, significant programming on an exclusive DTH basis from Televisa and News Corporation under our Social Part Holders' Agreement. We compete, in part, based on this exclusive programming. In 2002 and 2001, we paid Ps. 179.0 million and Ps. 143.5 million to News Corporation and Televisa affiliates for the exclusive broadcast of their programming. We also have the option to engage the services of Sky Entertainment Programming Latin America, a News Corporation affiliate, to acquire certain programming products and services on a region-wide basis in Latin America, under an Agency Agreement, dated July 3, 1997. For a description of the risks associated with our programming arrangements, see "Item 3: Key Information--Risk Factors--Risk Factors Related to Our Business--Our Ability To Attract Subscribers Depends on the Availability of Desirable Programming from Third Party Programmers" and "Item 4: Information on the Company-Business Overview-Programming and Services." In addition, we had and continue to have the exclusive rights to rebroadcast and distribute certain Mexican Soccer League programming from the 2001-2003 seasons and Mexican Boxing programming from the 2001-2002 seasons under a separate agreement with Televisa. Specifically, these included the exclusive transmission rights with respect to all TV media and local block-out rights over 20% of the professional Mexican Soccer League programming during the summer and winter seasons of 2001 and 2002; exclusive transmission rights with respect to all TV media and local block-out rights over 10% of the professional Mexican Soccer League programming during the summer season of 2003; exclusive local block-out rights, limited to the relevant territory (Monterrey, Puebla or Guadalajara), with respect to all TV media for all soccer matches where any of the Monterrey, Puebla or Atlas teams is playing; and exclusive transmission rights with respect to all TV media to all Mexican Boxing programming during the calendar years 2001 and 2002. We paid and will pay Televisa a total of US$15 million over three years for the license to these events: US$6 million for all programming which was licensed during 2001; US$6 million for all programming which was licensed during 2002; and US$3 million for all programming licensed through the end of the soccer summer season for the year 2003, subject to set-off pursuant to all or agreement by the parties. - 62 - During 2002 we entered in two separate agreements with Televisa to obtain the exclusive pay-TV transmission rights of the reality shows Big Brother, Big Brother VIP and Operacion Triunfo and to help fund the production of Big Brother VIP and Operacion Triunfo. We broadcasted these reality shows through our interactive channels 24 hours-per-day. We paid Televisa a total of US$6.0 million for the license to these events. During 2003 we negotiated again the exclusive pay-TV transmission rights for the reality shows Big Brother 2 and Big Brother VIP 2 with Televisa for a total amount of Ps. 28.0 million. COMPETITIVE ACTIVITIES Under our Social Part Holders Agreement, subject to certain exceptions, , Televisa and News Corporation have agreed not to directly or indirectly own, manage, operate, control or finance and business or enterprise which operates a competing DTH service in Mexico. ONGOING SERVICE ARRANGEMENTS WITH OTHER RELATED PARTIES UPLINK SERVICES AGREEMENT DTH TechCo Partners, or TechCo, provides us with play-out and uplink functions and related services such as head-end operation from two sites in the United States: a main uplink facility in Miami Lakes, Florida and a redundancy site in Port St. Lucie, Florida. In 2002, we paid Ps. 82.1 million to TechCo for their services. TechCo is a partnership formed by Televisa, News Corporation Globopar and Liberty Media, each of which indirectly holds a 30% interest in the partnership, except Liberty Media, which indirectly holds a 10% interest. See "Item 3: Key Information--Risk Factors--Risk Factors Related to Our Business--If Our Affiliate DTH TechCo is Unable to Obtain Funding, It May Not Be Able to Provide a Necessary Service for our Operations, Which Could Adversely Affect Our Business, Financial Condition and Results of Operations." In addition, Televisa provides us with uplink, downlink, playout and compression services relating to locally-sourced programming from its Mexico City facility. In 2002, we paid Ps. 38.5 million for these services. SYSTEMS AGREEMENTS BETWEEN INNOVA AND NDS We have ongoing agreements with NDS Group plc, or NDS, a public company and majority owned subsidiary of News Corporation, to provide us with several key systems. First, under a September 1996 agreement, NDS provides us the conditional access system, including the Smart Cards necessary to decode the signal at the subscriber's home, and equipment needed to digitize, compress, encrypt and multiplex the signals transmitted to the satellite by our uplink facilities. This agreement was amended in February 2000 to settle a dispute over payment for certain software and to include new interactive television technology. NDS also provides us with our current subscriber management system under agreements dated October 29, 1996 and August 3, 1998. In 2002, we incurred expenses of US$5.9 million with NDS for these systems and related services under our agreements with them and we estimate our commitment under these arrangements in 2003 will be approximately US$11.0 million. We are currently implementing a new Subscriber Management System, or SMS, by using the software "Kenan" from CSG Software, Inc. Once the new SMS is placed in service, our current agreements with NDS related to maintenance of Provider II will terminate. We expect the new SMS will be placed in service in late August 2003. See "Item 10: Additional Information-Material Contracts-New Subscriber Management System Contract." GUARANTEES Televisa, News Corporation and Liberty Media have guaranteed our payments to PanAmSat for transponder services on PAS-9 in proportion to their respective beneficial interests in Innova. Corporacion de Radio y Television del Norte, S. de R.L. de C.V., our subsidiary, entered a satellite services agreement with PanAmSat on February 8, 1999. Under that agreement, we are obligated to pay a monthly service fee of US$1.7 million to PanAmSat for satellite signal reception and retransmission service from transponders on their PAS-9 satellite through September 2015. The largest amount of this obligation outstanding through December 31, 2002 was US$238.4 million and the amount outstanding as of June 1, 2003 was US$229.9 million. If we do not pay these fees in a timely manner, our owners will be required to pay these fees. For more information about our satellite operations, see "Item 4: Information on the Company-Business Overview-Operations-Satellites." - 63 - LEGAL SERVICES We have engaged the law firm of Mijares, Angoitia, Cortes y Fuentes, S.C., to advise us on various legal issues. Two of their partners, currently on leave from the partnership, Alfonso de Angoitia Noriega and Juan Sebastian Mijares Ortega, serve as members of our Board. Mr. de Angoitia is also the Secretary of our Board, a member of our Executive Committee and the Executive Vice President-Chief Financial Officer of our 60% owner, Televisa. Mr. Mijares is also the Vice President -- General Counsel of Televisa. Neither Alfonso de Angoitia Noriega nor Juan Mijares Ortega currently receive any form of compensation from, or participate in any way in the profits of, Mijares, Angoitia, Cortes y Fuentes, S.C. We believe that the fees we paid for these services were comparable to those that we would have paid another law firm for similar services. ADVERTISING We engage the services of VISAT, a wholly owned subsidiary of Televisa, for certain advertising and promotional efforts and to pool advertising time with channels broadcast commonly among Televisa, Cablevision and Innova. VISAT negotiates most of our advertising contracts with third party advertisers. Under our agreement with VISAT, we receive from VISAT the amount of the advertising sold on our behalf net of a commission that ranges from 18% to 21% for their promotion, selling and collection services. In 2002, we paid VISAT an aggregate of US$0.7 million in commissions on advertising sales of approximately US$3.6 million. We estimate that advertising sales generated by VISAT will total approximately US$3.5 million in 2003. We also purchase magazine advertising space and television and radio advertising time from Televisa in connection with the promotion of our DTH satellite services and expect to continue to do so in the future. We paid Ps. 128.0 million for these services in 2002 and expect to pay Ps. 120 million for similar services in 2003. W RADIO CHANNEL In February 2003, we entered into a one-year agreement with Televisa Radio, a subsidiary of Televisa, to broadcast, on a pay-television exclusive basis, W Radio Channel, a news and entertainment radio station channel. The agreement contemplates that each party will receive 50% of the advertising revenues generated by W Radio Channel. TAX SHARING AGREEMENT BETWEEN INNOVA AND TELEVISA Innova and Televisa are parties to a Tax Sharing Agreement dated March 6, 1997 which sets forth certain rights and obligations of Innova and Televisa in respect of Innova's liability for taxes imposed pursuant to Mexico's Income Tax and Asset Tax Law. Televisa received authorization from Mexican tax authorities to include Innova's results in the consolidated tax return of Televisa and its consolidated subsidiaries for purposes of determining income taxes and assets tax beginning January 1, 1997. The tax profits or losses obtained by Innova are consolidated with the tax profits or losses of Televisa up to 60% of Televisa's percentage ownership of Innova. Pursuant to the tax sharing agreement, in no event shall Innova be required to remit to Televisa an amount in respect of its federal income and assets taxes that is in excess of the product of (x) the amount that Innova would be required to pay on an individual basis, as if Innova had filed a separate tax return, and (y) with respect to asset taxes, Televisa's direct or indirect percentage ownership of Innova's capital stock, and with respect to income taxes, 60% of Televisa's direct or indirect percentage ownership in Innova's capital stock, as determined by applicable law. CALL CENTER AGREEMENT In June 2001, we purchased from Merkatel, our former call center service provider and wholly owned subsidiary of Televisa, the equipment Merkatel used to provide call center services to us, including computers, telephones, furniture, and fixture along with other software, training materials and significant transitional support for a total of Ps. 24.2 million plus value-added tax. ITEM 8. FINANCIAL INFORMATION See "Item 18-Financial Statements" and pages F-1 through F-42, which are incorporated herein by reference. ITEM 9. THE OFFER AND LISTING Although our senior notes are listed on the Luxembourg Stock Exchange, there is no active trading market for the senior notes. We believe there is a limited over-the-counter trading market for the senior notes in the United - 64 - States. We also believe that more than one brokerage firm currently makes a market in the senior notes in the over-the-counter trading market, although both bid and ask quotations may be limited at times. Only limited trading data for our notes has been publicly available since their original issuance in 1997. See "Item 3: Key Information-Risk Factors-Risk Factors Related to Our Business-Investors May Not Be Able to Easily Buy and Sell Our Senior Notes Because Only a Limited Trading Market Exists for Our Securities." ITEM 10. ADDITIONAL INFORMATION BYLAWS Set forth below is a brief summary of some significant provisions of our bylaws and Mexican law. This description does not purport to be complete, and is qualified by reference in its entirety to our bylaws, which have been filed as an exhibit to this annual report and Mexican law. PURPOSE We are registered with the Public Registry of Commerce in Mexico City under the commercial File (folio mercantile) No. 213223. Our corporate purposes are enumerated in Article II of our bylaws. These include the installation, operation and commercial exploitation of public telecommunications networks that provide any type of public services, among them DTH television services. Our corporate purposes also include general corporate actions such as investing in other companies, acquiring securities, issuing bonds, contracting loans, leasing or acquiring property, representing other entities as an agent, providing or receiving technical services, producing works that may be subject to intellectual property right protection, acquiring and granting permits and concessions and executing agreements and contracts. EQUITY AND VOTING RIGHTS Our equity consists of two series of partes sociales or social parts, the Series A and the Series B. Only Mexican investors may acquire the Series A, whereas Mexican and foreign investors may acquire the Series B. The Series A must always represent at least the percentage of capital required to be held by Mexican investors under Mexican law. Each social part must represent Ps. 100.00 of capital or a multiple thereof. Each member or social part holder is entitled to one vote per Ps. 100.00 of capital represented by its social part. Our owners are identified as social part holders in our bylaws, which are publicly filed in Mexico. Under both Mexican law and our bylaws, there is no threshold at which a social part holder or its holdings need be disclosed. In accordance with the authorization of the Secretary of Economy, dated as of November 30, 2001, the company may issue Series N quotas representing up to 80% of the capital stock of the company, Series N quotas are considered as neutral investment for the purposes of the Foreign Investment Law, previous authorization of the Secretary of Economy, and that Series N bidders have economic rights and the right to vote at shareholder's meetings only the following matters: - to extend the corporate existence; - to dissolve the company; - to change the corporate purposes or company's nationality; and - to approve any transformation or merger involving the company. Afterwards, on July 30, 2002 our shareholders resolved to modify the Article Sixth of the corporate by-laws of the company (Capital, Series and Classes), adding the Series N, integrated by special quotas that may be issued and considered as neutral investment for purposes of the Foreign Investment Law. As of May 31, 2003 no social part of Series N has been issued. Generally, a vote of the majority of the social parts is sufficient to adopt a resolution of our company's equity holders. However, the approval of both the Series A and Series B-1 social part holders is required: - 65 - - to approve the audited financial statements; - to declare and pay dividends; - to name and remove Directors from the Board of Directors and establish, appoint, remove or dissolve any committees; - to divide or redeem any social part interest; - to require contributions or payments outside the Annual Budget or Business Plan; - to issue warrants or other equity equivalents; - to admit new members and assign any capital interests; - to amend the bylaws; - to approve capital increases and decreases or sales of capital interests; - to dissolve the company; - to appoint liquidators; - to issue bonds; and - to approve any transformation, merger or spin-off involving the company. The majority of the social part holders are entitled to determine how earnings may be distributed, after legal reserves and capital reserves are established. Any surplus left over after liquidation shall be distributed among our members in proportion to their capital interest. Any changes in capital and the admission of new members must be approved by both the Series A and Series B-1 social part holders. Each member is entitled to subscribe for any increase in capital in the same proportion as their percentage ownership interest prior to the capital call. The rights of social part holders as defined in our bylaws may not be changed without the approval of both the Series A and Series B-1 members. Additionally, an equity owner may not transfer its equity stake without the consent of the Series A and Series B-1 members. For additional information on regulatory matters that could affect the rights of social part holders, see "Item 4: Information On the Company--Business Overview--Mexican Regulation of DTH Services." MEETINGS Our members must meet at least once a year within four months of the close of the fiscal year. Other meetings may be held at any time. The meetings are convoked held after notice is issued by any of our Directors pursuant to Mexico's General Law of Commercial Corporations. At least 15 days' notice is required, unless waived by all members. BOARD OF DIRECTORS The Series A member is entitled to appoint six members of the Board of Directors while the Series B-1 member is entitled to appoint four members of the Board of Directors. Directors serve until they are replaced; our directors do not stand for re-election in staggered terms. Pursuant to our bylaws, a majority vote of our Board of Directors is generally sufficient for our Board of Directors to take action. However, the approval of a majority, including at least two directors selected by Televisa and two directors selected by News Corporation, is currently required in order to authorize a number of significant actions, including the following actions, subject to certain exceptions: - the appointment of the Chief Executive Officer; - 66 - - the appointment of the Chief Financial Officer; - the selection of local distributors and the terms of the agreements executed in connection therewith; - the acceptance of pricing, tiering and other material terms relating to the distribution of programming services; - entering into agreements having a term in excess of three years or involving amounts in excess of US$1 million; - the incurrence of indebtedness for borrowed money, the granting of loans and the incurrence or allowance of encumbrances on our assets involving amounts in excess of US$1 million; - the sale of assets outside the ordinary course of business; - the purchase, lease or acquisition of assets involving amounts in excess of US$1 million; - the acquisition of, investment in, or merger or joint venture with, any other entity other than a wholly owned subsidiary; - the commencement or settlement of any suit, action or proceeding involving amounts in excess of US$100,000; - the appointment or dismissal of Innova's auditors or the adoption or modification of any material accounting or tax principle or practice; - the appointment or dismissal of our legal counsel; - settling or contesting of proposed tax audit adjustments involving amounts in excess of US$100,000; - the approval of the location of our principal offices and our subsidiaries; - the entering into agreements or transactions with Televisa, News Corporation, Liberty Media or their affiliates; - the approval of certain actions by us in our capacity as stockholder of our subsidiaries; - the approval of the business plan and any material amendments thereto; - the approval of the annual budget and any amendments thereto; - the approval of any material waiver or amendment of an agreement otherwise subject to supermajority approval; - the incorporation, formation or organization of subsidiaries; - the filing of a voluntary petition in bankruptcy; - the granting or revocation of powers of attorney; and - the entering into of consulting agreements which are not on arms' length terms, have a term in excess of one year or provide for payments in excess of US$250,000. - 67 - ENFORCEABILITY OF CIVIL LIABILITIES We are organized under the laws of Mexico. Substantially all of our directors, executive officers and controlling persons reside outside of the United States, all or a significant portion of the assets of our directors, executive officers and controlling persons, and substantially all of our assets, are located outside of the United States and some of the experts named in this annual report also reside outside of the United States. As a result, it may not be possible for you to effect service of process within the United States upon these persons or to enforce against them or us in U.S. courts judgments predicated upon the civil liability provisions of the federal securities laws of the United States. We have been advised by our Mexican counsel, Mijares, Angoitia, Cortes y Fuentes, S.C., that there is doubt as to the enforceability, in original actions in Mexican courts, of liabilities predicated solely on U.S. federal securities laws and as to the enforceability in Mexican courts of judgments of U.S. courts obtained in actions predicated upon the civil liability provisions of U.S. federal securities laws. See "Key Information -- Risk Factors - -- Risks Factors Related to Our Business -- It May Be Difficult to Enforce Civil Liabilities Against Us or Our Directors, Executive Officers and Controlling Persons." MATERIAL CONTRACTS Our agreements with related parties are described in "Item 7: Major Shareholders and Related Party Contracts." NEW SUBSCRIBER MANAGEMENT SYSTEM CONTRACT Through our subsidiary, Novavision, we entered into two related agreements with CSG Software, Inc. (CSG), on June 12, 2002 under which CSG will provide: (a) a non-exclusive, perpetual License for the use of the software "Kenan" to provide billing and order management to licensed subscribers, besides installation and implementation of the system to our business, training and support services and, (b) consulting services. Under the Software License and Service agreement, we must pay US$3.4 million to CSG for a license capacity of up to 1,125,000 subscribers. However, we can purchase additional capacity according to our subscriber base growth at additional cost per every 100,000 subscribers. Technical support in Mexico will be available for the first 24 months following the date on which we begin live production of the system; the annual cost for these services is US$510,600 plus US$75,000 for a 24x7 basis support. We are allowed to use the Kenan system to provide billing and order management to licensed subscribers from other Latin American DTH platform in case of merger, acquisition or combination of platforms (except Sky Brazil). On December 27, 2002 we agreed to remove some applications of the Kenan software, reducing the total license fees in US$500,000. We are currently using a SMS called Provider II that we obtained from NDS. NDS will continue to support Provider II until we complete the switch-over to the new SMS. We expect the new SMS will be placed in service in late August 2003. Under the Consulting Services agreement, CSG will provide management and technology consulting, advisory and integration services related to the implementation of the Kenan end-to-end integrated solution, as well as the required interfaces with our Siebel and NDS software currently on operation, accordingly with an Implementation Planning and Analysis process (IPA), previously agreed with Novavision. Total cost of US$4.4 million for these services, will be payable upon completion of certain agreed milestones. CSG is an enterprise with more than 20 years as customer care and billing expertise, providing its services in more than 265 companies, and more than 40 countries. For additional information about how we use the SMS and our agreement with CSG, see "Item 3: Key Information--Risk Factors--Risk Factors Related to Our Business-- Our Ability to Provide Billing and Order Management to Our Subscribers Depends on the Functionality and Flexibility of Our Subscriber Management System, Which is Currently Being Replaced with a New System from a New Supplier;" and "Item 4: Information on the Company--Business Overview--Capital Expenditures" and "--Subscriber Management System." ANTENNA RE-POINTING CONTRACT Through our subsidiary, Novavision, we entered into an agreement with NCR de Mexico, on October 3, 2000 under which NCR re-pointed our existing subscribers' antennas from Solidaridad 2, a satellite we no longer use for signal reception and retransmission, to PAS-9, the newer satellite we currently use for our satellite services. We paid NCR US$28.0 million under this agreement. NCR began re-pointing our subscribers' antennas under this agreement in November 2000 and finished in March 2002. The shutdown of this process and Solidaridad 2 satellite, - 68 - caused us to lose approximately 13,000 subscribers, we do not know how many reconnected back. Re-pointing costs were approximately US$35 million (NCR and internal costs). We have no more obligations related with this agreement with NCR. SATELLITE TRANSPONDER SERVICES AGREEMENTS We currently receive satellite signal reception and retransmission services from 12 Ku-band transponders on the PAS-9 satellite, owned by PanAmSat Corporation. AGREEMENT WITH PANAMSAT. We entered an agreement with PanAmSat on February 8, 1999 for signal reception and retransmission services from PAS-9. PAS-9 was launched on July 28, 2000 and became operational on September 8, 2000. The service term of the PAS-9 agreement ends at the earlier of: (a) September 2015 or (b) the date PAS-9 is taken out of service. We must pay a monthly service fee of US$1.7 million for service from all 12 transponders. We received a credit against the first US$11.7 million of service fees otherwise payable under the PAS-9 agreement. Televisa, News Corporation and Liberty Media have guaranteed Innova's payments to PanAmSat in proportion to their respective beneficial interests in Innova. PAS-9 was manufactured by Hughes and its remaining useful life is estimated to be approximately 14 to 16 years. Hughes (which holds an indirect interest in DIRECTV Mexico, our DTH competitor) owns 81% of PanAmSat, while the original founders own 10% and the remaining 9% is publicly held. Our service on PAS-9 is not subject to pre-emption except in limited instances with respect to spare transponder capacity. We have migrated our subscribers to PAS-9 for service by re-pointing their antennas to this satellite. For more information about our satellite operations, see "Item 4: Information on the Company--Business Overview--Operations--Satellites." AGREEMENT WITH SATMEX We entered into an agreement with SatMex on April 1, 1999 to allow us to use 12 Ku-Band transponders on Solidaridad 2 for signal reception and retransmission. The agreement expired on December 31, 2001 but the Company negotiated an extension from January 1 to March 31, 2002 in order to avoid an interruption of service to those subscribers whose antennas had not been re-pointed to the newer satellite, PAS-9. The extension of the service agreement enabled us to arrange to have the antennas of approximately 30,000 additional subscribers re-pointed to PAS-9 without an interruption in service. We were obligated to pay SatMex a monthly service fee of US$1.752 million for satellite signal reception and retransmission service from transponders on Solidaridad 2 through December 31, 2001. For the extension of the service, we paid to SatMex US$1.5 million for the use of up to eight Ku-band transponders. Service from the Solidaridad 2 satellite ceased on March 31, 2002. CONCESSIONS We have been granted two concessions by the Mexican government that authorize us to operate our DTH systems. These concessions are described under the caption "Item 4: Information on the Company--Business Overview--Mexican Regulation of DTH Services--Our Concessions." If we are unable to renew, or if the Mexican government revokes either concession, we would not be able to deliver our services. See "Item 3: Key Information--Risk Factors--Risk Factors Related to Our Business-- The Operation of Our Business May Be Terminated or Interrupted if the Mexican Government Does Not Renew or Revokes Our Concessions." LEGAL PROCEEDINGS We challenged certain provisions of Mexico's asset tax law that prohibit us from deducting loans from non-Mexican sources from our asset tax basis and in order to avoid penalties and interest payments in the event we could lose the appeal, we paid approximately Ps. 43.2 million nominal (including interest) of tax on assets for the year ended December 31, 2001 in March of 2002; approximately Ps. 45.2 million nominal in monthly payments during the year ended December 31, 2002; and approximately Ps. 7.5 million nominal for the months of January and February 2003. On March 19, 2003, the court issued a resolution rendering part of article 5 of the Mexican Asset Tax Law unconstitutional. This law had prohibited taxpayers from deducting debts payable to nonresidents from the taxable asset's value. Since the declaratory judgment was favorable to us, to the extent that the Asset Tax Law is not amended, we will be able to deduct debts payable to nonresidents from the asset tax basis. We are analyzing the alternatives to recover the amount of Ps.88.4 million (plus interest and inflation effects) of amounts paid for the tax - 69 - years 2001 and 2002; however, we can not assure you that we will be successful in recovering this amount. Amounts paid for the months of January and February of 2003, have already been recovered or credited to us. At the end of December 2001, the Mexican Congress passed a series of tax reforms. As a result of these tax reforms, subject to certain exceptions, revenues from our pay television services are now subject to a 10% excise tax. In February 2002, Cablevision, Innova, Skytel and a number of other companies in the telecommunications and pay television industries filed amparo injunctive proceedings challenging the constitutionality of this excise tax. Nonetheless, we implemented rate increases on January 1, 2002 and took other actions including lay-offs and reduction of capital expenditures and expenses in an effort to mitigate, in part, the impact of this tax on our results of operations and financial condition. We obtained a favorable ruling in this proceeding regarding our 2002 liability for this tax, but this ruling does not entitle us to recover any amounts paid for this tax in 2002, and we cannot assure you that we will be able to recover any portion of the approximately US$18 million paid for this excise tax during 2002. In December 2002 the Congress again acted to make this special tax effective during fiscal year 2003, by adding or modifying some concepts included in the original text of the law. The Congress does not need to ratify this special tax every year, but modifications to the law could be made. In response, we have filed a new amparo proceeding challenging the constitutionality of the tax. Our action challenges the tax on grounds similar to those we raised last year and we plan to follow a similar strategy as last year. We have been informed that similar proceedings were also filed by Cablevision. We cannot assure you that we will obtain a favorable resolution in these proceedings or that we will be able to recover the amounts that have been or will be paid for this tax. See "Item 4: Information on the Company -- Business Overview --Mexican Regulation of DTH Services--Telecommunications Tax." In 2001, we decided to settle our suit for declaratory judgment regarding the withholding tax on the interest paid to our bondholders given the complexity of the subject matter and the potential tax liability if the declaratory judgments (amparos) were not resolved in our favor. As a result, we withdrew the declaratory judgments (amparos) and paid US$4.1 million of surcharges and penalties in order to obtain a favorable resolution to apply the reduced rate of 4.9% withholding tax on the interest paid to bondholders. On January 24, 2001, the tax authorities officially confirmed our right to apply the reduced rate of 4.9% withholding tax on interest paid to bondholders. For more information see, "Item 10: Additional Information-Taxation-Mexican Taxation." There are other various legal actions and other claims pending against us that are incidental to our ordinary course of our business. Our management does not consider these actions or claims to be material. EXCHANGE CONTROLS For a description of exchange controls and exchange rate information, see "Key Information--Exchange Rate Information." TAXATION The following is a general summary of certain anticipated U.S. federal income and Mexican federal tax consequences of the ownership and disposition of the senior notes, but it does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to own and dispose of the senior notes. This summary does not describe any tax consequences arising under the laws of any state, locality or taxing jurisdiction other than the United States and Mexico. This summary is based on the federal tax laws of the United States and Mexico as in effect on the date of this Annual Report, as well as regulations, rulings and decisions of the United States and rules and regulations of Mexico available on or before such date and now in effect. All of the foregoing is subject to change, possibly for U.S. federal income tax purposes with retroactive effect. This summary does not constitute, and should not be considered as, legal or tax advice to holders. Tax consequences of each individual holder of the senior notes will depend upon the particular facts and circumstances of each such holder. Accordingly, each person should consult with his or her own professional advisor with respect to the tax consequences of his or her ownership and disposition of the senior notes. - 70 - UNITED STATES/MEXICO TAX TREATY A convention for the Avoidance of Double Taxation between Mexico and the United States and a protocol to that convention (collectively referred to herein as the "Tax Treaty"), are in effect. However, as discussed below under " -- Mexican Taxation", as of the date of this Annual Report, the Tax Treaty is not generally expected to have any material effect on the Mexican tax consequences described in this Annual Report. The United States and Mexico have also entered into an agreement that covers the exchange of information with respect to tax matters. UNITED STATES FEDERAL INCOME TAXATION This summary of certain U.S. federal income tax consequences of the ownership and disposition of the senior notes is limited to holders of senior notes that are U.S. Holders and will hold the senior notes as capital assets. As used herein, a "U.S. Holder" includes a holder or beneficial owner of the senior notes who is, for U.S. federal income tax purposes, a citizen or individual resident of the United States, a corporation or partnership created or organized in or under the laws of the United States, or of any political subdivision thereof, an estate, the income of which is includable in its gross income for U.S. federal income tax purposes without regard to its source or a trust subject to the primary supervision of a court within the United States and the control of one or more U.S. persons, but excludes persons subject to special provisions of U.S. federal income tax law, such as tax-exempt organizations, financial institutions, insurance companies, broker-dealers, traders in securities, persons having a "functional currency" other than the U.S. dollar, U.S. expatriates, persons subject to the alternative minimum tax, and holders that will hold the senior notes as part of a straddle, hedging or conversion transaction or other integrated investment comprised of the senior notes and one or more other investments. Further, the discussion below does not address the effect of any U.S. state or local tax law on a holder of the senior notes. This discussion assumes that each holder of the senior notes will comply with the certification procedures described below as may be necessary to obtain a reduced rate of withholding under Mexican law. Each holder of a note should consult a tax advisor as to the particular tax consequences to such holder of the ownership and disposition of the note, including the applicability and effect of any state, local or foreign tax laws. INTEREST AND ADDITIONAL AMOUNTS Interest on the senior notes and additional amounts paid in respect of Mexican withholding taxes imposed on payments on the senior notes ("Additional Amounts") will be taxable to a U.S. Holder as ordinary income. The amount of income taxable to a U.S. Holder will include the amount of all Mexican taxes withheld (as described below under "--Mexican Taxation") by the Company in respect thereof. Thus, a U.S. Holder will be required to report income in an amount greater than the cash it receives in respect of payments on its note. However, a U.S. Holder may, subject to certain limitations, be eligible to claim as a credit or deduction for purposes of computing its U.S. federal income tax liability the Mexican taxes withheld, notwithstanding that the payment of such taxes will be made by the Company. The rules relating to foreign tax credits and the timing thereof are extremely complex and depend upon a U.S. Holder's particular circumstances. In addition, under guidance released by the U.S. Treasury Department, foreign tax credits will not be allowed for withholding taxes imposed on an arrangement in which a U.S. Holder's reasonably expected economic profit, after non-U.S. taxes, is insubstantial compared to the value of the foreign tax credits expected to be obtained as a result of the arrangement. The Internal Revenue Service has identified such an agreement as a "listed transaction" (as defined below under "Tax Shelter Disclosure Regulations"). U.S. Holders should consult with their own tax advisors with regard to the availability of a foreign tax credit or deduction and the application of the foreign tax credit rules to their particular situations. CONTINGENT PAYMENT DEBT INSTRUMENT REGULATIONS In general, if a debt instrument is subject to the U.S. Treasury regulations governing the treatment of "contingent payment debt instruments" (the "contingent debt regulations"), a U.S. Holder, including a U.S. Holder using the cash method of tax accounting, must accrue interest income as "original issue discount" over the term of the debt instrument based upon a projected payment schedule (subject to later adjustments) provided by the issuer and any gain and (subject to certain limitations) loss recognized by a holder with respect to such instrument will be ordinary, rather than capital, in nature. The application of the contingent debt regulations to instruments such as the senior notes, which generally provide for interest payable at a fixed rate, but also provide for Additional Amounts, is uncertain. If the contingent debt regulations apply to the senior notes, U.S. Holders of senior notes would be subject to the projected interest - 71 - accruals rules and ordinary income and loss treatment on dispositions as summarized above. The Company believes that the contingent debt regulations were not intended to apply to instruments such as the senior notes and, subject to further clarification of the contingent debt regulations, intends to take the position that the senior notes are not subject to those regulations. It is conceivable, however, that the Internal Revenue Service could take the position that Additional Amounts payable with respect to the senior notes constitute contingent payments to which the contingent debt regulations apply. Under certain characterizations, a U.S. Holder would be required to treat the senior notes consistently with the Company's treatment, unless the holder files a statement (disclosing the inconsistent treatment and the reason for such inconsistent treatment) with its timely filed U.S. federal income tax return for the taxable year that includes the date of acquisition. Holders are urged to consult their tax advisors to determine the possible application of the contingent debt regulations to the senior notes. MARKET DISCOUNT AND BOND PREMIUM If a U.S. Holder purchases a 12 7/8% senior note at a price that is less than its principal amount, the excess of the principal amount over the U.S. Holder's purchase price will be treated as "market discount." However, such market discount will be considered to be zero if it is less than 1/4 of 1% of the note's principal amount multiplied by the number of complete years to maturity from the date the U.S. Holder purchased such note. Under the market discount rules, a U.S. Holder generally will be required to treat any partial principal payment on, and any gain realized on the sale, exchange, retirement or other disposition of, a 12 7/8% senior note as ordinary income (generally treated as interest income) to the extent of the market discount which accrued but was not previously included in income during the period the U.S. Holder held such note. If such note is disposed of in a nontaxable transaction, for example, by gift (other than a non-recognition transaction described in section 1276(c) of the Internal Revenue Code of 1986, as amended), accrued market discount will be includible as ordinary income as if the note had been sold at its then fair market value. In addition, the U.S. Holder may be required to defer, until the maturity of the note or its earlier disposition in a taxable transaction, the deduction of all or a portion of the interest expense on any indebtedness incurred or continued to purchase or carry such note. In general, market discount will be considered to accrue ratably during the period from the date of acquisition to the maturity date of the note, unless the U.S. Holder makes an irrevocable election (on an instrument-by-instrument basis) to accrue market discount under a constant yield method. A U.S. Holder of a 12 7/8% senior note may elect to include market discount in income currently as it accrues (under either a ratable or constant yield method), in which case the rules described above regarding the treatment as ordinary income of gain upon the disposition of the note and upon the receipt of certain payments and the deferral of interest deductions will not apply. The election to include market discount in income currently, once made, applies to all market discount obligations acquired on or after the first day of the first taxable year to which the election applies, and may not be revoked without the consent of the Internal Revenue Service. Such currently included market discount will increase the U.S. Holder's tax basis in the note and generally is treated as ordinary interest income for U.S. federal income tax purposes. A U.S. Holder that purchases a 12 7/8% senior note for an amount in excess of the amount payable at maturity of the note will be considered to purchase the note with "bond premium" equal to the excess of the U.S. Holder's purchase price over the amount payable at maturity (or on an earlier call date if it results in a smaller amortizable bond premium). A U.S. Holder of a 12 7/8% senior note may elect to amortize such premium using a constant yield method over the remaining term of the note (or until an earlier call date if it resulted in a smaller amortizable bond premium) and to offset interest otherwise required to be included in income in respect of such note by the amortized amount of such excess for such taxable year. Such election, once made, is irrevocable without the consent of the Internal Revenue Service and applies to all taxable bonds held during the taxable year for which the election is made or subsequently acquired. A U.S. Holder which does not make this election will be required to include in gross income the full amount of interest on the note in accordance with its regular method of tax accounting, and will include the premium in its tax basis for the note for purposes of computing the amount of its gain or loss recognized on the sale, exchange or retirement of the note. A U.S. Holder may elect to include in gross income under a constant yield method all amounts that accrue on a 12 7/8% senior note that are treated as interest for tax purposes (i.e., stated interest, market discount and de minimis market discount, as adjusted by any amortizable bond premium). U.S. Holders should consult their tax advisors as to the desirability, mechanics and collateral consequences of making this election. - 72 - If the senior notes are subject to the contingent debt regulations, described above, the foregoing market discount and bond premium rules will not apply. Rather, upon the purchase of a 12 7/8% senior note at other than the note's adjusted issue price, a U.S. Holder would be required to reasonably allocate any difference between the "adjusted issue price" and the basis of the note to the daily portions of interest or projected payments over the remaining term of the note. Because of the complexity of the rules relating to bond premium and market discount, U.S. Holders should consult their tax advisors as to application of these rules and as to the desirability, mechanics and collateral consequences of making any elections in connection therewith. DISPOSITIONS Upon the sale, exchange, retirement or other taxable disposition of a 12 7/8% senior note, a U.S. Holder will recognize taxable gain or loss in an amount equal to the difference, if any, between such holder's adjusted basis in the note and the amount realized on such sale, exchange or retirement. A U.S. Holder's adjusted tax basis in a 12 7/8% senior note will generally equal the cost of such note, increased by the amount of any market discount previously included in the U.S. Holder's gross income, and reduced by the amount of any amortizable bond premium applied to offset interest on the note (unless a 12 7/8% senior note is subject to the contingent debt regulations, described above, in which case a U.S. Holder's basis in a note would be increased by interest previously accrued on the note and decreased by the amount of any non-contingent payment and the projected amount of any contingent payment previously made on the note). A gain or loss recognized by a U.S. Holder on the sale, exchange, retirement or other taxable disposition of a 12 7/8% senior note generally will be a capital gain or loss (except with respect to amounts received upon a disposition attributable to accrued but unpaid interest, which will be taxable as ordinary income, and except if the senior notes are subject to the contingent debt regulations, described above), and will be a long-term capital gain or loss, if, at the time of the disposition, the note has been held for more than one year. Any gain recognized by a non-corporate U.S. Holder on the sale, exchange, redemption, retirement or other disposition of a note generally will be subject to a maximum tax rate of 15%, which maximum tax rate will increase under current law to 20% for dispositions occurring during taxable years beginning on or after January 1, 2009. U.S. Holders should consult their own tax advisors as to the foreign tax credit implications of a disposition of the senior notes. BACKUP WITHHOLDING In general, "backup withholding" at a rate of 28% (which rate will increase under current law to 31% for taxable years beginning on or after January 1, 2011) may apply to payments of principal and interest made on a 12 7/8% senior note, and to the proceeds of a sale or exchange of a 12 7/8% senior note before maturity within the United States, that are made to a non-corporate holder if such holder fails to provide a correct taxpayer identification number or otherwise comply with applicable requirements of the backup withholding rules. The backup withholding tax is not an additional tax and may be credited against a U.S. Holder's U.S. federal income tax liability, provided that correct information is provided to the Internal Revenue Service. NON-U.S. HOLDERS A holder or beneficial owner of senior notes that is, with respect to the United States, a foreign corporation or a nonresident alien individual (a "non-U.S. Holder") generally will not be subject to U.S. federal income or withholding tax on: (a) interest and Additional Amounts received in respect of the senior notes, unless such payments are effectively connected with the conduct by the non-U.S. Holder of a trade or business in the United States or (b) gains realized on the sale, exchange or retirement of the senior notes, unless: (i) such gain is effectively connected with the conduct by the non-U.S. Holder of a trade or business in the United States or (ii) in the case of a gain realized by an individual non-U.S. Holder, the non-U.S. Holder is present in the United States for 183 days or more in the taxable year of the disposition and certain other conditions are met. TAX SHELTER DISCLOSURE REGULATIONS Recently issued U.S. Treasury regulations directed at tax shelter activity require persons filing U.S. federal income tax returns to disclose certain information if they participate in a "reportable transaction." A transaction will be a "reportable transaction" if it is described in any of several categories of transactions, which include transactions that are the same or substantially similar to a transaction identified in a public IRS pronouncement as a tax avoidance transaction (a "listed transaction"), transactions that result in the incurrence of a loss or losses exceeding certain thresholds, transactions that result in the existence of significant book-tax differences, and transactions that - 73 - are offered under conditions of confidentiality. Each holder of a note should consult with their tax advisors concerning such possible disclosure obligations. There are pending in Congress legislative proposals that, if enacted, would impose significant penalties for failure to comply with these disclosure requirements. MEXICAN TAXATION The following is a general summary of the principal consequences, under Mexico's Income Tax Law (Ley del Impuesto sobre la Renta) (the "Law") and rules as currently in effect, and under the Tax Treaty, of the ownership and disposition of the senior notes by a holder that is not a resident of Mexico for tax purposes and that will not hold the senior notes or a beneficial interest therein in connection with the conduct of a trade or business through a permanent establishment in Mexico (a "Foreign Holder") and such Foreign Holder is not: - holder of 10% or more of Innova's voting stock, directly or indirectly, jointly or individually, or - a corporation or other entity, 20% or more of whose stock is owned, directly or indirectly, jointly or individually, by persons related to Innova, that in either case is the effective beneficiary, directly or indirectly, jointly or individually, of 5% or more of the aggregate amount of any interest payment on senior notes. For these purposes, persons will be related if: - one person holds an interest in the business of the other person and both persons have common interests; or - a third party has an interest in the business or assets of both persons. For purposes of Mexican taxation: - an individual is a resident of Mexico if such person has established his home in Mexico, unless such person has resided in another country for more than 183 days, whether consecutive or not, during a calendar year and can demonstrate that such person has become a resident of that country for tax purposes. - A legal entity is a resident of Mexico if it is incorporated under Mexican law or if it maintains the main administration of its head office or business or the effective location of its management in Mexico. - A Mexican citizen is presumed to be a resident of Mexico unless such person can demonstrate the contrary. - A permanent establishment of a foreign person will be regarded as a resident of Mexico, and such permanent establishment will be required to pay taxes in Mexico for income attributable to it, in accordance with applicable law under a regime that differs from that applied to Foreign Holders. This summary is based upon the tax laws of Mexico as in effect on the date of this Annual Report, as well as judicial and administrative interpretations thereof available on or before such date. All of the foregoing are subject to interpretations and to change, possibly with retroactive effect, and could affect the continued validity of this summary. Each Foreign Holder should consult a tax advisor as to the particular Mexican or other tax consequences to such Foreign Holder of owning, purchasing and disposing of the senior notes, including the applicability and effect of any state, local or foreign tax laws. This summary does not address the tax consequences of the ownership, purchase or disposition of the senior notes by Foreign Holders that do not fulfill the requirements described above. This summary does not address all of the tax consequences that may be applicable to Foreign Holders of the senior notes and does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision by the Foreign Holder in respect of the owning, purchasing or disposing such senior notes. - 74 - INTEREST AND PRINCIPAL Under the Law, payments of interest (including amounts paid by Innova in excess of the issue price of the senior notes or premiums which, under the Law, are deemed to be interest) made by Innova in respect of the senior notes to a Foreign Holder will be subject to a Mexican withholding tax assessed at a rate of 4.9% if all of the following requirements are met: - the senior notes are placed outside of Mexico through banks or brokerage houses, in a country with which Mexico has entered into a treaty for the avoidance of double taxation and such treaty is in effect; - the senior notes are registered in the Special Section of the Mexican National Registry of Securities, and copies of such registration are provided to the Mexican Ministry of Finance and Public Credit; - Innova timely files with the Mexican Ministry of Finance and Public Credit, certain information relating to the original issuance of the senior notes and the related prospectus; and - Innova timely files with the Mexican Ministry of Finance and Public Credit, on a quarterly basis, information representing that no party related to Innova jointly or individually, directly or indirectly, is the effective beneficiary of 5% or more of the aggregate amount of each interest payment, and Innova maintains records that evidence compliance with this requirement. Innova has met the first three requirements and expects to timely file all of the periodic information required by the fourth. Accordingly, Innova expects to withhold Mexican tax from interest payments on the senior notes made to Foreign Holders at the 4.9% rate in accordance with the Law rather than a 10% rate that could apply under other circumstances. On January 24, 2001, the tax authorities officially confirmed Innova's right to apply the 4.9% withholding tax on interest paid to our bondholders. In the event that any of the above information requirements are not met, under the Law, payments of interest on the senior notes made by Innova to a Foreign Holder will be subject to a Mexican withholding tax assessed at a rate of 10%. As of the date of this Annual Report, neither the Tax Treaty nor any other tax treaty entered into by Mexico is expected generally to have any material effect on the Mexican income tax consequences described in this Annual Report, because, as discussed above, we expect that the 4.9% rate will apply in the future and, therefore, that Innova will continue to be entitled to withhold taxes in connection with interest payments under the senior notes at the 4.9% rate. Foreign holders residing in the United States should nonetheless be aware that under the Tax Treaty, the Mexican withholding tax rate applicable to interest payments made to U.S. holders which are eligible for benefits under the Tax Treaty will be limited to either: - 15% generally; or - 4.9% in the event that the senior notes are considered to be "regularly and substantially traded on a recognized securities market" or "loans granted by banks including investment banks and savings banks and insurance companies" within the meaning of the Tax Treaty. Other Foreign Holders should consult their tax advisors regarding whether they reside in a country that has entered into a treaty for avoidance of double taxation with Mexico which is effective, and, if so, the conditions and requirements for obtaining benefits under such treaty. As of January 1, 2002, the Mexican income tax law provides that in order for a Foreign Holder to be entitled to the benefits under the treaties entered into by Mexico, it is necessary for the Foreign Holder to meet the procedural requirements established in the law. Foreign Holders or beneficial owners of the senior notes may be requested, subject to specified exceptions and limitations, to provide certain information or documentation necessary to enable Innova to apply the appropriate Mexican withholding tax rate applicable to such Foreign Holders or beneficial owners. In the event that the specified information or documentation concerning the Foreign Holder or beneficial owner, if requested, is not provided prior to the payment of any interest to that Foreign Holder or beneficial owner, Innova may withhold Mexican tax from - 75 - that interest payment to that Foreign Holder or beneficial owner at the maximum applicable rate, but Innova's obligation to pay Additional Amounts relating to those withholding taxes will be limited. Under the Law, payments of interest made by Innova with respect to the senior notes to non-Mexican pension or retirement funds will be exempt from Mexican income tax and withholding taxes, provided that the fund: (i) is duly organized pursuant to the laws of its country of origin (and is the effective beneficiary of such interest), (ii) is exempt from income tax in such country and (iii) is registered with the Mexican Ministry of Finance and Public Credit for that purpose. Innova has agreed, subject to certain exceptions and limitations, to pay Additional Amounts in respect of the above-mentioned Mexican withholding taxes to Foreign Holders. Under the Law and the rules thereunder, a Foreign Holder will not be subject to any Mexican withholding or similar taxes in connection with payments of principal made by Innova in connection with the senior notes. DISPOSITIONS Capital gains resulting from the sale or other disposition of senior notes by a Foreign Holder will not be subject to Mexican income or other taxes. OTHER TAXES A Foreign Holder will not be liable for Mexican estate, gift, inheritance or similar taxes with respect to its holding, nor will it be liable for Mexican stamp, registration or similar taxes. DOCUMENTS ON DISPLAY We submit and file reports, including annual reports on Form 20-F, and other information with the SEC. These reports and other information, as well as any related exhibits and schedules, may be inspected, without charge, at the public reference facility maintained by the SEC at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices located at the Woolworth Building, 233 Broadway, 13th Floor, New York, New York, 10007, and Northwestern Atrium Center, 500 West Madison Street, Suite 1400 Chicago, Illinois 60661-2511. Copies of these reports and other information may also be obtained from the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. These reports and other information may also be inspected at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005. Our current reports on Form 6-K and Form 20-F are available through the SEC website, since we are filing our reports electronically through EDGAR. We furnish the Bank of New York, as the trustee for our outstanding 12 7/8% senior notes, or senior notes, with annual reports in English. These reports contain audited consolidated financial statements that have been prepared in accordance with Mexican GAAP, and reconciled as to net income and stockholders' equity to U.S. GAAP. These reports have been examined and reported on, with an opinion expressed by, an independent auditor. The trustee is required to mail our annual reports to all holders of record of our senior notes. The indenture for the senior notes also requires us to furnish the depositary with English translations of all other reports and communications that we send to holders of our senior notes. The trustee is required to mail these notices, reports and communications to holders of record of our senior notes. We also furnish the Luxembourg Stock Exchange with a copy of our annual report as required by their rules. Statements contained in this annual report concerning the contents of any contract or any other document, are not necessarily complete. If a contract or document has been filed as an exhibit to any filing we have made with the SEC, we refer you to the copy of the contract or document that has been filed. Each statement in this annual report relating to a contract or document filed as an exhibit is qualified in its entirety by the filed exhibit. ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is the exposure to an adverse change in the value of financial instruments caused by interest rate changes, foreign currency fluctuations and changes in the market value of investments. The following information - 76 - includes "forward-looking statements" that involve risks and uncertainties. Actual results could differ from those presented. Unless otherwise indicated, all information below is presented on a Mexican GAAP basis in constant Pesos in purchasing power as of December 31, 2002. INTEREST RATE RISK We currently believe that any increase in interest rates in international money markets is not likely to have a direct adverse impact on our financial results or cash flows because our total debt, including the senior notes and the loans received from stockholders, is U.S. dollar-denominated and bears fixed rates of interest. Our results and cash flow could be affected if additional financing is required in the future when interest rates are high in relation to current market conditions. As of December 31, 2002 and 2001, we were not a party to any interest rate risk management transactions. We will evaluate from time to time specific actions to cover our exposure to interest rate risk on commercially acceptable terms. FOREIGN EXCHANGE RATE RISK The devaluation of the peso adversely affects our liquidity and results of operations by increasing the peso equivalent of our U.S. dollar-denominated indebtedness, operating costs and expenses. Our ability to meet our U.S. dollar-denominated obligations is affected by changes in the relative values of the peso against the U.S. dollar. To the extent that we are not able to obtain dollars from our operations, capital contributions or borrowings in order to meet our dollar-denominated obligations, we would be required to purchase U.S. dollars on foreign exchange markets with pesos. We have substantial indebtedness and operating costs denominated in U.S. dollars. As of December 31, 2002 and 2001, the Company had US$ 936.0 million and US$880.5 million of liabilities denominated in U.S. dollars, respectively. Each percentile point devaluation of the peso against the U.S. dollar and British Pound Sterling would increase our current costs in pesos by an amount equivalent to approximately Ps. 17.8 million and Ps. 0.1 million respectively. Also, under this scenario, the exchange loss in pesos for the total U.S. dollar-denominated indebtedness would amount to approximately Ps. 97.9 million and Ps. 85.4 million for the years ended December 31, 2002 and 2001, respectively. It is unlikely that we would be able to fully recover the negative impact in the costs and expenses by increasing prices for our services when a devaluation of the peso exceeds the annual rate of inflation. Our exposure to changes in exchange rates for currencies other than the U.S. dollar and British Pound Sterling is not material. CURRENCY HEDGING In 2002, 2001 and 2000, we did not engage in any hedging or other transactions related to the management of risks associated with foreign currency or interest rate fluctuations. We may consider entering into transactions to hedge the risk of exchange rate fluctuations in the future if we are able to obtain hedging arrangements on commercially satisfactory terms. INFLATION RISKS In general, the purchasing power of consumers tends to decrease during high inflation periods since wages and salaries tend to rise less quickly than the cost of living. This could adversely impact our revenues and cash flow as a result of lower purchasing power of current or future potential subscribers and decreased advertising revenues. In addition, we, like most companies in our sector, may not be able to fully recover our rising costs and compensate for increases in interest rates during high inflationary periods through raising our prices. The potential adverse impact of a hyper-inflationary environment on the results has not been evaluated in light of the success of the Mexican Government's current anti-inflationary policy. - 77 - ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. PART II ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES Not applicable. ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS Not applicable. - 78 - ITEM 15. CONTROLS AND PROCEDURES Within the 90-day period prior to the date of this Form 20-F, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-14(c) and 15d-14(c) of the Exchange Act. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in our periodic filings under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. There have been no significant changes in our internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation, including any significant deficiencies or material weaknesses of internal controls that would require corrective action. ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT Not applicable. ITEM 16B. CODE OF ETHICS Not applicable. ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES Not applicable. PART III ITEM 17. FINANCIAL STATEMENTS We have responded to Item 18 in lieu of Item 17. ITEM 18. FINANCIAL STATEMENTS See pages F-1 through F-42 which are incorporated by reference herein. ITEM 19. EXHIBITS Documents filed as exhibits to this annual report appear on the Exhibit Index beginning on the following page. All financial statement schedules relating to the registrant are omitted because they are not required or because the required information, if material, is contained in the audited year-end financial statement or the notes thereto. - 79 - EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------ ---------------------- 1.1 Amended and Restated By-laws (Estatutos Sociales) of the Registrant, dated December 22, 1998. (7) 1.2. English language translation of resolutions amending the Amended and Restated By-Laws of the Registrant, dated August 21, 2002. (11) 1.3 English language translation of resolutions amending the Amended and Restated By-Laws of the Registrant, dated August 21, 2002. (11) 2.1 Indenture, dated as of April 1, 1997, for the Senior 12 7/8% senior notes between the Registrant and The Bank of New York as Trustee. (2) 2.2 Form of Senior Exchange Note (included in Exhibit 2.1) (2) 4.1 Form of Indemnity Agreement between the Registrant and its directors and its executive officers (2) 4.2 Memorandum of Understanding dated February 29, 1996 between PanAmSat Corporation and Grupo Televisa, S.A., Globo Participacoes, Ltda., and The News Corporation Limited (1) 4.3 System Implementation and License Agreement by and between the Registrant and News Digital Systems Limited ("NDS") dated September 20, 1996 (the "System Implementation Agreement") (2) 4.4 Subscriber Management System Implementation and License Agreement between the Registrant and NDS dated October 29, 1996 (the "Subscriber Management Agreement," the System Implementation Agreement together with the Subscriber Management Agreement, the "NDS Agreements") (2)(3) 4.5 Agreement by and among Telecomunicaciones de Mexico and Corporacion de Radio y Television Norte de Mexico, S. de C.V. dated October 1, 1996 (2) 4.6 Agreement by and among Telecomunicaciones de Mexico and Corporacion Medcom, S.A. de C.V. dated November 1, 1996 (2) 4.7 Social Part Holders Agreement by and among Grupo Televisa, S.A., Galavision DTH, S. de R.L., Alejandro Sada, The News Corporation Limited, News DTH (Mexico) Investment Limited and David Evans dated March 6, 1997 (2) 4.8 Tax-Sharing Agreement effective as of March 6, 1997 between Grupo Televisa, S.A. and the Registrant (2) 4.9 Trademark License Agreement by and between News America Publishing Incorporated and the Registrant dated March 6, 1997 (2) 4.10 Agreement by and among Telecomunicaciones de Mexico and Corporacion de Radio y Television Norte de Mexico, S.A. de C.V. dated September 9, 1997 (No. TVDP-1191/97). (6) 4.11 Agreement by and among Telecomunicaciones de Mexico and Corporacion de Radio y Television Norte de Mexico, S.A. de C.V. dated September 9, 1997 (No. TVDP-007/96). (6)
- 80 -
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------ ---------------------- 4.13 Transponder Service Agreement by and among PanAmSat International Systems, Inc. and Corporacion de Radio y Television del Norte, S.A. de C.V. dated February 8, 1999. (5) 4.14 Subscriber Management System (SMS) Agreement by and between NDS and Innova, dated August 3, 1998. (7) 4.15 Agreement by and among Innova, S. de R.L. de C.V., on the one hand and Grupo Televisa, S.A., Galavision, DTH, S. de R.L., News America, Inc., News DTH (Mexico) Investment Ltd., and TCI DTH Mexico, dated December 3, 1998. (7) 4.16 Amendment Letter to the Interim Agreement dated December 3, 1998 by and among Innova, S. de R.L. de C.V., on the one hand and Grupo Televisa, S.A., Galavision, DTH, S. de R.L., News America, Inc., News DTH (Mexico) Investment Ltd., and TCI DTH Mexico, dated as of December 22, 1998. (8) 4.17 Second Amendment Letter to the Interim Agreement dated December 3, 1998 by and among Innova, S. de R.L. de C.V., on the one hand and Grupo Televisa, S.A., Galavision, DTH, S. de R.L., News America, Inc., News DTH (Mexico) Investment Ltd., and TCI DTH Mexico, dated May 8, 2000. (8) 4.18 Amendment to the System Implementation and License Agreement by and between the Innova, S. de R.L. de C.V., on the one hand and News Digital Systems Limited ("NDS") dated February 29, 2000 (the "NDS SILA Amendment") (Note: confidential portions omitted pursuant to a request for confidential treatment under Rule 24b-2 which was granted on May 3, 2002, and the confidential portions are separately filed with the Commission. (9) 4.19 DTH Concession granted to Corporacion de Radio y Television del Norte de Mexico, S. de R.L. de C.V. by the Mexican Secretary of Communications and Transport, dated November 27, 2000, along with an English language translation of the agreement. (10) 4.21 Purchase and Sale Contract, dated July 31, 2001, by and between Merkatel, S.A. de C.V. and Corporacion Novavision, S. de R.L. de C.V., along with an English language translation of the agreement. (10) 4.22 Advertising Agreement, dated October 31, 2001, by and between Televimex, S.A. de C.V. and Corporacion Novavision, S. de R.L. de C.V., along with an English language summary. (10) 4.23 Advertising Agreement, dated November 15, 2001, by and between Televimex, S.A. de C.V. and Corporacion Novavision, S. de R.L. de C.V., along with an English language summary. (10) 4.24 Credit Agreement, dated as of July 22, 2002, by and among Innova, S. de R.L. de C.V., as Borrower, and Grupo Televisa, S.A., Sky DTH, S. de. R. L. de C.V., News America Incorporated and Liberty Mexico DTH, Inc., as Lenders, News DTH (Mexico) Investment Limited, as partner at Borrower, and Corporacion Novavision, S. de. R.L. de C.V., as Issuer. 4.25 Technical Services Agreement, dated as of January 1, 1998, by and between DTH TechCo. Partners and Corporacion Novavision S. de. R.L. de C.V. (11)
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EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------ ---------------------- 8.1 List of Subsidiaries of Registrant.
- ------------------------------------------ (1) Previously filed with the Securities and Exchange Commission on May 3, 1996 as Exhibit 10.15 to PanAmSat Corporation's 10-Q (No. 000-26712) for the quarterly period ended March 31, 1996. (2) Previously filed with the Securities and Exchange Commission on August 22, 1997 as an Exhibit to Innova's Registration Statement on Form F-4, (No. 333-7484). (3) Portions of these exhibits have been omitted pursuant to an order, dated August 25, 1997, by the Securities and Exchange Commission granting confidential treatment. (4) Previously filed with the Securities and Exchange Commission on June 24, 1998 as Exhibit 10.52 to PanAmSat International Systems' Registration Statement on Form S-4, (No. 333-56227). Portions of this exhibit have been omitted pursuant to an application for confidential treatment filed with the Securities and Exchange Commission by PanAmSat. (5) Previously filed with the Securities and Exchange Commission on May 17, 1999 as Exhibit 10.56 to PanAmSat Corporation's Quarterly Report on Form 10-Q, (No. 000-22531). Portions of this exhibit have been omitted pursuant to an application for confidential treatment filed with the Securities and Exchange Commission by PanAmSat. (6) Previously filed with the Securities and Exchange Commission on June 30, 1998 as an Exhibit to Innova's Annual Report on Form 20-F (the "1997 Annual Report"). (7) Previously filed with the Securities and Exchange Commission on June 30, 1999 as an Exhibit to Innova's Annual Report on Form 20-F (the "1998 Annual Report"). (8) Previously filed with the Securities and Exchange Commission on June 28, 2000 as an Exhibit to Innova's Annual Report on Form 20-F (the "1999 Annual Report"). (9) Previously filed with the Securities and Exchange Commission on August 28, 2001 as an Exhibit to Amendment One to Innova's Annual Report for the year ended Dec. 31, 2000 on Form 20-F/A. Portions of this exhibit have been omitted pursuant to an application for confidential treatment filed with the Securities and Exchange Commission by Innova and which was granted by an Order on May 3, 2002. (10) Previously filed with the Securities and Exchange Commission on June 13, 2002 as an Exhibit to Innova's Annual Report on Form 20-F (the "2001 Annual Report"). (11) Filed herewith. - 82 - SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf. INNOVA, S. DE R.L. DE C.V. (Registrant) By: /s/ Pablo Abel Vazquez Oria ------------------------------------- Name: Pablo Abel Vazquez Oria Title: Chief Executive Officer By: /s/ Carlos Ferreiro Rivas ------------------------------------- Name: Carlos Ferreiro Rivas Title: Chief Financial Officer Dated: June 30, 2003 - 83 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Pablo Abel Vazquez Oria, Chief Executive Officer of Innova, S. de R.L. de C.V., certify that: 1. I have reviewed this annual report on Form 20-F of Innova, S. de R.L. de C.V.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated this 30th day of June, 2003 /s/ Pablo Abel Vazquez Oria - --------------------------- Pablo Abel Vazquez Oria Chief Executive Officer - 84 - CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Carlos Ferreiro Rivas, Chief Financial Officer of Innova, S. de R.L. de C.V., certify that: 1. I have reviewed this annual report on Form 20-F of Innova, S. de R.L. de C.V.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated this 30th day of June, 2003 /s/ Carlos Ferreiro Rivas - ------------------------- Carlos Ferreiro Rivas Chief Financial Officer - 85 - INNOVA, S DE R.L. DE C.V. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Report of Independent Accountants........................................................... F-2 Consolidated Balance Sheets as of December 31, 2002 and 2001................................ F-4 Consolidated Statements of Loss for the years ended December 31, 2002, 2001 and 2000...................................................... F-5 Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 2002, 2001 and 2000........................ F-6 Consolidated Statements of Changes in Financial Position for the years ended December 31, 2002, 2001 and 2000...................................... F-7 Notes to Consolidated Financial Statements.................................................. F-8
Schedules other than those listed above are omitted for the reason that they are not required or are not applicable, or the required information is shown in the respective financial statements or notes thereto. INNOVA, S. DE R. L. DE C. V. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 INNOVA, S. DE R. L. DE C. V. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 INDEX
Contents Page - -------- ---- Report of independent accountants 2 and 3 Financial statements: Consolidated balance sheets 4 Consolidated statements of loss 5 Consolidated statements of changes in stockholder's equity (deficit) 6 Consolidated statements of changes in financial position 7 Notes to the consolidated financial statements 8 to 42
REPORT OF INDEPENDENT ACCOUNTANTS Mexico, D. F., January 31, 2003, except for Note 13.c, for which the date is March 19, 2003. To the Stockholders of Innova, S. de R. L. de C. V.: We have audited the accompanying consolidated balance sheets of Innova, S. de R. L. de C. V. and its subsidiaries (collectively the "Group") as of December 31, 2002 and 2001, and the related consolidated statements of loss, of changes in stockholders' (deficit) and of changes in financial position for each of the three years in the period ended December 31, 2002 all expressed in Mexican pesos. These financial statements are the responsibility of the Group'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 and Mexico. Those standards require that we plan and perform the audit 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 financial position of Innova, S. de R. L. de C. V. and its subsidiaries at December 31, 2002 and 2001, and the results of their operations, the changes in their stockholders' (deficit) and the changes in their financial position for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in Mexico. F-2 Accounting principles generally accepted in Mexico vary in certain significant respects from accounting principles generally accepted in the United States of America. The application of the latter would have affected the determination of the consolidated net loss for each of the three years in the period ended December 31, 2002, and the determination of consolidated stockholders' (deficit) at December 31, 2002 and 2001 to the extent summarized in Note 21 to the consolidated financial statements. PricewaterhouseCoopers /s/ Felipe Perez Cervantes, C.P.C. - ------------------------------------ Felipe Perez Cervantes, C.P.C. F-3 INNOVA, S. DE R. L. DE C. V. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Expressed in thousands of Mexican Pesos in purchasing power as of December 31, 2002)
December 31, ------------ 2002 2001 ---- ---- Assets - ------ CURRENT ASSETS: Cash and cash equivalents Ps. 266,631 Ps. 45,180 Trade accounts receivable, net (Note 4) 103,782 128,123 Value added tax credit and other 1,230 9,362 Spare parts 13,019 8,441 Prepaid advertising (Note 9) 122,035 159,741 Other current assets 44,016 37,989 ------------- ------------- Total current assets 550,713 388,836 Property and equipment, net (Note 5) 1,544,905 1,952,176 Satellite transponders, net (Note 6) 1,240,997 1,215,450 Deferred costs, net (Note 7) 82,398 106,633 Intangible assets, net (Note 8) 12,956 110,462 Other non-current assets 9,574 770 ------------- ------------- Total assets Ps. 3,441,543 Ps. 3,774,327 ============= ============= Liabilities and Stockholders' Deficit CURRENT LIABILITIES: Trade accounts payable Ps. 99,585 Ps. 85,956 Accrued expenses 268,498 252,474 Satellite reorientation reserve - 51,881 Satellite transponders obligation (Note 6) 52,812 44,085 Due to affiliated companies and other related parties (Note 9) 433,420 349,626 Accrued interest 132,812 117,096 Asset tax 31,551 46,380 Deferred income 109,498 108,411 ------------- ------------- Total current liabilities 1,128,176 1,055,909 NON-CURRENT LIABILITIES: Senior notes (Note 10) 3,924,000 3,637,930 Stockholders' loans (Note 11) 3,242,793 2,720,201 Satellite transponders obligation (Note 6) 1,368,843 1,314,192 Accrued interest 682,451 346,547 Other liabilities 1,179 728 ------------- ------------- Total liabilities 10,347,442 9,075,507 ------------- ------------- Commitments and contingencies (Note 13) - - STOCKHOLDERS' DEFICIT: Contributed capital: Capital stock (Note 14) 1,913,116 1,913,116 ------------- ------------- Earned capital: Accumulated losses (Note 17) (7,018,675) (6,609,230) Loss for the period (1,768,863) (409,445) Deficit from restatement (31,343) (195,606) ------------- ------------- (8,818,881) (7,214,281) ------------- ------------- Supplementary liability for labor obligations (134) (15) Total stockholders' deficit (6,905,899) (5,301,180) ------------- ------------- Total liabilities and stockholders' deficit Ps. 3,441,543 Ps. 3,774,327 ============= =============
The accompanying notes are an integral part of these consolidated financial statements. F-4 INNOVA, S. DE R. L. DE C. V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF LOSS (Expressed in thousands of Mexican Pesos in purchasing power as of December 31, 2002)
Years ended December 31, ------------------------ 2002 2001 2000 ---- ---- ---- Net sales Ps. 3,432,872 Ps. 3,266,037 Ps. 2,560,159 Operating expenses: Cost of sales 1,062,761 1,222,857 1,358,609 Administrative expenses 121,474 151,415 118,229 Selling expenses 832,751 818,777 777,518 Other operating expenses 481,787 403,578 536,814 ---------------- ---------------- ---------------- Total operating expenses 2,498,773 2,596,627 2,791,170 Depreciation and amortization 925,078 948,335 844,580 ---------------- ---------------- ---------------- Operating profit (loss) 9,021 (278,925) (1,075,591) ---------------- ---------------- ---------------- Integral results of financing (Note 3): Interest expense (983,057) (903,853) (742,589) Interest income 11,064 19,779 30,204 Foreign exchange (losses) gains, net (1,174,422) 371,001 (118,814) Gain from monetary position 498,615 442,412 522,194 Other, net - - (43,017) ---------------- ---------------- ---------------- Total integral results of financing (1,647,800) (70,661) (352,022) Other expenses - Net (22,126) - - Transponder services - Solidaridad 2 and reorientation costs (Note 15) (25,933) - (430,916) Restructuring charges (Note 16) (6,495) (13,576) - ---------------- ---------------- ---------------- Loss before taxes (1,693,333) (363,162) (1,858,529) Provision for income and assets taxes (Note 18) (75,530) (46,283) (130) ---------------- ---------------- ---------------- Net loss (Ps. 1,768,863) (Ps. 409,445) (Ps. 1,858,659) ================ ================ ================
The accompanying notes are an integral part of these consolidated financial statements. F-5 INNOVA, S. DE R. L. DE C. V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLERS' DEFICIT FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (Expressed in thousands of Mexican Pesos in purchasing power as of December 31, 2002)
Supplementary Deficit liability Capital from for labor Accumulated stock restatement obligations losses ----- ----------- ----------- ------ Balance at December 31, 1999 Ps. 1,913,116 (Ps. 40,445) Ps. - (Ps. 3,749,968) Transfer of net loss to accumulated losses (1,000,603) Comprehensive loss (Note 19) (26,665) -------------- -------------- ------------- ---------------- Balance at December 31, 2000 1,913,116 (67,110) - (4,750,571) Transfer of net loss to accumulated losses (1,858,659) Comprehensive loss (Note 19) (128,496) (15) -------------- -------------- ------------- ---------------- Balance at December 31, 2001 1,913,116 (195,606) (15) (6,609,230) Transfer of net loss to accumulated losses (409,445) Comprehensive loss (Note 19) 164,263 (119) -------------- -------------- ------------- ---------------- Balance at December 31, 2002 Ps. 1,913,116 (Ps. 31,343) (Ps. 134) (Ps. 7,018,675) ============== ============== ============= ================ Total Net stockholders' loss deficit ---- ------- Balance at December 31, 1999 (Ps. 1,000,603) (Ps. 2,877,900) Transfer of net loss to accumulated losses 1,000,603 - Comprehensive loss (Note 19) (1,858,659) (1,885,324) -------------- -------------- Balance at December 31, 2000 (1,858,659) (4,763,224) Transfer of net loss to accumulated losses 1,858,659 - Comprehensive loss (Note 19) (409,445) (537,956) -------------- -------------- Balance at December 31, 2001 (409,445) (5,301,180) Transfer of net loss to accumulated losses 409,445 - Comprehensive loss (Note 19) (1,768,863) (1,604,719) -------------- -------------- Balance at December 31, 2002 (Ps. 1,768,863) (Ps. 6,905,899) ============== ==============
The accompanying notes are an integral part of these consolidated financial statements. F-6 INNOVA, S. DE R. L. DE C. V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION (Expressed in thousands of Mexican Pesos in purchasing power as of December 31, 2002)
Years ended December 31, ------------------------ Operating activities: 2002 2001 2000 - -------------------- ---- ---- ---- Net loss (Ps. 1,768,863) (Ps. 409,445) (Ps. 1,858,659) Adjustments to reconcile net loss to resources (used in) provided by operating activities: Depreciation and amortization 925,078 948,335 833,122 Impairment of fixed assets 30,776 - 11,458 Satellite reorientation reserve and maintenance reserve 7,082 4,884 210,190 Transponder Services - Solidaridad 2 - - 222,953 Smart cards reserve - - 32,647 -------------- -------------- -------------- (805,927) 543,774 (548,289) -------------- -------------- -------------- Changes in operating assets and liabilities: Trade accounts receivable 24,341 53,991 (72,357) Value added tax credit and other 8,132 13,879 (5,930) Inventories and spare parts (4,578) (2,224) 32,857 Prepaid advertising and other current assets 31,680 (166,664) 29,838 Deferred costs 14,718 5,301 7,539 Intangible and other assets 5,863 (6,710) 53,905 Trade accounts payable 13,629 (41,267) (6,981) Accrued expenses and Satellite reorientation reserve (57,768) (374,069) 213,972 Due to affiliated companies and other related parties 83,794 105,499 854 Transponder Services - Solidaridad 2 - (222,953) - Accrued interest 351,620 182,521 82,283 Deferred income 1,087 5,339 33,003 Supplementary liability for labor obligations (119) (15) - Other 451 412 (214,569) -------------- -------------- -------------- Resources (used in) provided by operating activities (333,077) 96,814 (393,875) -------------- -------------- -------------- Financing activities: Stockholders' loans 522,592 1,154,945 804,910 Senior notes 286,070 (338,837) (304,466) Satellite transponders obligation 63,378 (113,932) 1,472,209 Sale of restricted investments, net - - 277,197 -------------- -------------- -------------- Resources provided by financing activities 872,040 702,176 2,249,850 -------------- -------------- -------------- Investing activities: Investment in property and equipment (317,512) (802,722) (686,130) Satellite transponders - - (1,432,546) -------------- -------------- -------------- Resources used in investing activities (317,512) (802,722) (2,118,676) -------------- -------------- -------------- Cash and cash equivalents: Increase (decrease) for the period 221,451 (3,732) (262,701) At the beginning of the period 45,180 48,912 311,613 -------------- -------------- -------------- At the end of the period Ps. 266,631 Ps. 45,180 Ps. 48,912 ============== ============== ==============
The accompanying notes are an integral part of these consolidated financial statements. F-7 INNOVA, S. DE R.L. DE C.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Expressed in thousands of Mexican Pesos in purchasing power as of December 31, 2002) NOTE 1 - THE COMPANY AND ITS PRINCIPAL OPERATIONS: Description of business: Innova, S. de R.L. de C.V. ("Innova" or the "Company"), a Mexican company with limited liability and variable capital, provides direct-to-home ("DTH") broadcast satellite pay television services in Mexico under the SKY brand name. Innova is a joint venture indirectly owned by Grupo Televisa, S. A. ("Televisa") (60%), The News Corporation Limited ("News Corporation") (30%) and Liberty Media International, Inc. ("LMI") (10%). The Company and its subsidiaries are collectively referred to as the Group. The Group's business requires a concession (license granted by the Mexican federal government) to operate. On May 24, 1996, the Ministry of Communications and Transportation (the "SCT") ratified the concession granted to a wholly-owned subsidiary of the Company to offer DTH satellite broadcasting services in Mexico using domestic satellites. The concession is for a period of thirty years, beginning May 24, 1996, and renewable in accordance with Mexican Communications Law. On November 27, 2000, the SCT, granted to a wholly-owned subsidiary of the Company a concession to provide its broadcasting services using foreign satellites. The concession is for a 20-year period, effective November 27, 2000 and may be extended in accordance with Mexican Communications Law. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in Mexico ("Mexican GAAP") as promulgated by the Mexican Institute of Public Accountants ("MIPA"). A reconciliation from Mexican GAAP to United States generally accepted accounting principles ("U.S. GAAP") is included in Note 21. The principal accounting policies followed by the Group are as follows: a. Basis of presentation - The financial statements of the Group are presented on a consolidated basis. All significant intercompany balances and transactions have been eliminated. F-8 The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain prior period amounts have been reclassified to conform with the current year basis of presentation. b. Members of the Group - At December 31, 2002, the Group consists of the Company and the following wholly-owned subsidiaries: - - Corporacion de Radio y Television del Norte de Mexico, S. de R.L. de C.V. - - Corporacion Novavision, S. de R. L. de C.V. - - Corporacion Novaimagen, S. de R. L. de C.V. - - Servicios Novasat, S. de R.L. de C.V. - - Servicios Corporativos de Telefonia, S. de R. L. de C.V. ("SECOTEL") SECOTEL was formed in July 2001, when the Company purchased from Televisa the call center which was providing services to the Group (Note 8). c. Cash and cash equivalents - The Group considers all highly liquid temporary cash investments with original maturities of three months or less, consisting primarily of overnight deposits, obligations of the Mexican Government, deposits and bonds in US financial institutions to be cash equivalents. d. Property and equipment - Property and equipment are recorded at acquisition cost and thereafter are restated using the National Consumer Price Index ("NCPI"), except for equipment of a non-Mexican origin, which are restated using an index which reflects the inflation in the respective country of origin and the exchange rate of the Mexican peso against the currency of such country at the balance sheet date ("Specific Index"). Maintenance costs for technical equipment are reserved based on management estimates. Actual costs are applied against the applicable reserve when incurred. Repair and maintenance costs for computer equipment and integrated receiver/decoder ("IRDs") are expensed as incurred. Installation costs of antennas, low noise block ("LNB") and accessories in subscribers' homes or businesses are capitalized in the line item antennas, LNBs and accessories, and are amortized over the useful life of the asset, which is three years. F-9 When assets are retired or otherwise disposed of, the cost and the accumulated depreciation are removed from the appropriate accounts and any gain or loss is included in results of operations. External costs incurred for internal use software are capitalized in computer equipment and depreciated over three years. e. Spare parts - Spare parts inventory are recorded at the lower of cost or net realizable value. The cost of spare parts utilized is charged to income when utilized. f. Depreciation - Depreciation of property and equipment is based upon the restated carrying value of the assets and is recognized using the straight-line method over the estimated useful lives of the assets, which range from 3 to 10 years. Land, equipment in progress and advances to suppliers are not depreciated. g. Preoperating expenses - The Group deferred preoperating expenses incurred prior to the launch of its satellite pay television services in December 1996. Amortization was calculated using the straight-line method over a term of five years and was first recorded in December 1996, with the commencement of operations. The preoperating expenses were fully amortized in November 2001. h. Seniority premiums and indemnities - The Group established, in accordance with Mexican law, a seniority premium liability for its employees. The liability is calculated by an independent actuary using the projected unit credit method. The labor obligation is calculated using real rates of interest (net of inflation) and the resulting asset or liability is considered a non-monetary item. The seniority premium liability is unfunded. Seniority premium payments are charged to the liability at the time they are made. Severance obligations to dismissed personnel are charged to income in the year in which they are incurred. i. Foreign currency - Monetary assets and liabilities denominated in foreign currencies are reported at the prevailing exchange rate at the balance sheet date. Exchange differences on monetary assets and liabilities are included in income for the period and reflected in the integral result of financing. Revenues and expenses denominated in foreign currencies are reported at the exchange rates in effect when recognized. F-10 j. Revenue recognition - Program service revenues are recognized on a monthly basis as DTH service is provided. Program service revenues paid in advance are deferred until earned. Through September 30, 2000, the Group sold the DTH antenna, LNB and remote control to wholesale distributers, who inturn sold the unit to customers. Revenue was recognized upon the sale of the unit to the wholesale distributer. Beginning October 1, 2000, the Group began providing the DTH antenna, LNB and remote control to customers along with the IRD, but has retained title to the equipment. The IRD is included in fixed assets and is rented to customers under an operating lease. Rental revenues are recognized on a monthly basis. Advertising revenues are recognized at the time the advertising services are rendered. k. Capitalized financing costs - The Group capitalizes the integral financing costs attributable to acquired assets during installation and preoperating expenses. Capitalized integral financing costs include interest costs, gains from monetary position and foreign exchange gains or losses, and are determined by reference to the Group's average interest cost for outstanding borrowings. No amounts were capitalized in 2002, 2001 and 2000. l. Concentrations - Financial instruments which potentially subject the Group to significant concentrations of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. The Group maintains its cash and cash equivalents with various major financial institutions and are principally invested in obligations of the U.S. and Mexican governments. Concentration of credit risk with respect to trade accounts receivable is limited due to the large number of customers throughout Mexico. The Group's policy is to require one month's payment in advance, to reserve for all accounts receivable greater than ninety days and to write off against the reserve all receivables greater than 120 days. Bad debt expense was Ps.110,827 in 2002, Ps.174,058 in 2001 and Ps.37,893 in 2000 (Note 4). In order to provide DTH service to customers, the Group relies on the use of 12 KU-band transponders on the PAS 9 satellite. The use of these transponders is unprotected and, as a result, any long term disruption to one or more of the transmission signals could have a material adverse effect on the Group. m. Comprehensive loss - Comprehensive loss represents the net loss for the period presented in the income statement plus other results for the period reflected in stockholders' equity which are from non-owner sources (Note 19). F-11 n. Evaluation of long-lived assets The Group evaluates the recoverability of its long-lived assets to determine whether current events or circumstances warrant adjustment to the carrying value. Such evaluation may be based on current and projected income and cash flows from operations as well as other economic and market variables. o. Income tax - Beginning January 1, 2000, the Group adopted the guidelines of amended Bulletin D-4, "Accounting Treatment of Income Tax, Tax on Assets and Employee Statutory Profit Sharing", issued by the MIPA. Under Bulletin D-4, deferred income taxes are calculated using the comprehensive asset and liability method, which consists of calculating deferred income tax by applying the respective income tax rate to the temporary differences between the accounting and tax values of assets and liabilities at the date of the financial statements. In accordance with the guidelines established in Bulletin D-4, the net accrued effect as of January 1, 2000 was recorded directly to stockholders' deficit. The accrued effect required the recognition of a net deferred tax asset and corresponding valuation allowance of Ps.2,170,028, at January 1, 2000, because available evidence did not indicate that there was a high probability of future taxable income to realize the deferred tax asset. Subsequent changes in deferred tax assets and liabilities and valuation allowances are recognized in income. p. New accounting bulletins - In December 2001, the MIPA issued Bulletin C-9, "Liability, Provisions, Contingent Assets and Liabilities, and Commitments". Bulletin C-9 provides guidance for the valuation, presentation and disclosure of liabilities and provisions (other than income taxes, employee benefit plans, financial instruments to be valued on a fair value basis and asset allowances), including contingent assets and liabilities, as well as disclosure guidelines for commitments incurred by an entity as a part of its operations. Bulletin C-9 is effective as of January 1, 2003, with earlier adoption permitted. In January 2002, the MIPA issued Bulletin C-8, "Intangible Assets", which defines intangible assets as costs incurred and rights or privileges acquired that will generate a future economic benefit. Bulletin C-8 provides a definition of research and development costs requiring that only development costs could be deferred to a future period. Furthermore, Bulletin C-8 states that preoperating costs should be expensed as a period cost, unless they can be classified as development costs. Bulletin C-8 requires that intangible assets, including previously existing intangible assets, with indefinite useful lives not be amortized, but be tested for impairment annually. Intangible assets with finite lives continue to be amortized over their economic life. Bulletin C-8 is required to be applied on January 1, 2003, although early adoption is recommended. F-12 The Group is currently evaluating the impact of these Bulletins on its results of operation and financial position. However, the Group does not believe that the adoption of these Bulletins will have a material impact on its results of operations and financial position. NOTE 3 - EFFECTS OF INFLATION ON THE FINANCIAL STATEMENTS: The consolidated financial statements of the Group have been prepared in accordance with Bulletin B-10, "Recognition of the Effects of Inflation on Financial Information", as amended, ("Bulletin B-10"), which provides guidance for recognizing the effects of inflation. The financial statements of the Group are presented in Mexican Pesos in purchasing power as of December 31, 2002 in order to be comparable to financial information as of that date, as follows: - - The balance sheets have been restated in Mexican Pesos in purchasing power as of December 31, 2002 using the NCPI as of December 31, 2002. - - The statements of loss and changes in stockholders' deficit have been restated in Mexican Pesos in purchasing power as of December 31, 2002 using the NCPI for the month in which the transactions occurred. The restatement of the financial statements has been applied in accordance with Bulletin B-10 guidelines as described below: Restatement of non-monetary assets - Property and equipment, except for equipment of non-Mexican origin, are restated using the NCPI. Equipment of non-Mexican origin is restated by the Specific Index. The Specific Index is derived from inflation in the country of the assets' origin and the foreign currency exchange rate of the Mexican Peso against the currency of such country. Property and equipment in use at the beginning of the year is depreciated based upon the restated carrying value of the assets and is recognized using the straight-line method over the estimated useful lives of the assets. Additions during the year are depreciated based on the restated value. Restatement of satellite transponders - Satellite transponders are restated using the Specific Index. Restatement of stockholders' deficit - Capital stock and other stockholders' deficit accounts (other than deficit from restatement) include the effect of restatement, determined by applying the NCPI factor to the applicable period. The restatement represents the amount required to maintain the contributions and the accumulated results in Mexican Pesos in purchasing power as of December 31, 2002. The deficit / surplus from restatement includes the result from holding non-monetary assets and is the F-13 cumulative difference between the cost of the non-monetary assets restated using NCPI and the restatement of such assets using the Specific Index. Integral results of financing - The gain or loss from monetary position represents the effects of inflation, as measured by the NCPI, on the monetary assets and liabilities of the Group at the beginning of each month. For the years ended December 31, 2002, 2001 and 2000, monetary liabilities exceeded monetary assets, resulting in gains from monetary position during the periods. Statement of changes in financial position - Bulletin B-12, "Statements of Changes in Financial Position" ("Bulletin B-12"), issued by the MIPA, specifies the appropriate presentation of the statement of changes in financial position when the financial statements have been restated in constant monetary units in accordance with the Third Amendment to Bulletin B-10. Bulletin B-12 identifies the generation and application of resources as the differences between beginning and ending financial statement balances in constant monetary units. The Bulletin also requires that monetary and foreign exchange gains and losses not be treated as non-cash items in the determination of resources provided by operations. The translation effects of operating assets and liabilities are included in the stated change of the related item. Other accounts - The following accounts are restated using the NCPI: Preoperating expenses and related amortization Debt issuance costs and related amortization Leasehold improvements and related amortization Intangible assets and related amortization National Consumer Price Index (NCPI) - Restatement of the financial statements to Mexican pesos in purchasing power as of December 31, 2002, in accordance with the Third Amendment to Bulletin B-10, requires restatement of the results for each month during each year using a factor derived from the change in the NCPI. The NCPI as of December 31, 2002, 2001 and 2000 was 102.904, 97.354 and 93.248, respectively. F-14 NOTE 4 - TRADE ACCOUNTS RECEIVABLE, NET: Trade accounts receivable, net includes the receivables from DTH services provided to subscribers, from the rental of IRD's and from the sale of advertising. Balances as of December 31, consist of:
2002 2001 ---- ---- Trade accounts receivable Ps. 176,917 Ps. 212,898 Allowance for doubtful accounts (73,135) (84,775) ------------- ------------- Ps. 103,782 Ps. 128,123 ============= =============
The allowance for doubtful accounts for the years ended December 31, 2002, 2001 and 2000, was as follows:
2002 2001 2000 ---- ---- ---- Beginning balance Ps. 84,775 Ps. 14,841 Ps. 13,114 Additions 110,827 174,058 37,893 Write offs (122,467) (104,124) (36,166) ------------ ------------- ------------- Ending balance Ps. 73,135 Ps. 84,775 Ps. 14,841 ============ ============= =============
NOTE 5 - PROPERTY AND EQUIPMENT, NET: Property and equipment, net as of December 31, consists of:
2002 2001 ---- ---- Integrated receiver/decoders Ps. 2,548,573 Ps. 2,793,895 Transmission equipment 342,660 363,762 Antennas, LNBs and accessories 554,516 344,803 Computer equipment 305,837 241,735 Furniture 19,514 17,957 Transportation equipment 20,976 19,650 Buildings 2,036 2,036 ------------- ------------- 3,794,112 3,783,838 Accumulated depreciation (2,377,149) (1,985,849) ------------- ------------- 1,416,963 1,797,989 Land 8,744 8,744 Equipment in progress 116,778 145,161 Advances to suppliers 2,420 282 ------------- ------------- Ps. 1,544,905 Ps. 1,952,176 ============= =============
F-15 Depreciation expense for the years ended December 31, 2002, 2001 and 2000 was Ps.734,748, Ps.713,235 and Ps.651,244, respectively. The Group recorded an impairment loss on certain transmission equipment and other equipment not in use of Ps.30,776 (which was included in "Transponder services -Solidaridad 2 and reorientation cost" line item) and Ps.11,458 (included in "Depreciation and amortization" line item) during the years ended December 31, 2002 and 2000, respectively. No impairment was needed during 2001. As of April 2002, the Group stopped utilizing the service of the Solidaridad 2 satellite, continuing only with the services provided by the PAS-9 satellite. At that date, transmission equipment with a book value of Ps.38,342 associated with Solidaridad 2 was held by the Group and the Group decided to recognize an impairment charge amounting to Ps.30,776 for the equipment that could not be utilized by the PAS-9 satellite, and to create a spare-part inventory for the remaining Ps.7,566 of transmission equipment that could be utilized by the PAS-9 satellite. At December 31, 2002 and 2001, IRDs, transmission equipment, computer equipment and transportation equipment include restated assets which are of a non-Mexican origin of Ps.425,112 and Ps.711,061, respectively, net of accumulated depreciation. Computer equipment includes Ps.16,301 and Ps.42,815 of capitalized software costs as of December 31, 2002 and 2001, respectively. NOTE 6 - SATELLITE TRANSPONDERS: On February 8, 1999, the Group and PanAmSat Corporation ("PanAmSat") entered into a new agreement for satellite signal reception and retransmission service from 12 KU-band transponders on a new satellite ("PAS-9"), which became operational in September 2000. The service term for PAS-9 will end at the earlier of (a) the end of 15 years or (b) the date PAS-9 is taken out of service. The Group is committed to pay a monthly fee of U.S.$1.7 million. The Group received a credit against the initial service fees of U.S.$11.7 million paid under the new agreement. The concession authorizing the use of PAS-9 was granted by the Federal Government through the SCT in November 2000. Under the terms of this concession, the Group is bound to offer the service of paid television via DTH satellite for a three-year term starting in November 2000, in the Municipalities or City Districts where 40% of the total population of the coverage area dwells in, as per the most recent census information available. The process of migrating customers from Solidaridad 2 to PAS-9 started in November 2000 and ended in March 2002. The Group stopped using the services of Solidaridad 2 in early April 2002. F-16 The Group recorded an asset equal to the net present value of the U.S.$1.7 million per month payments and the U.S.$11.7 million credit. The balance of the satellite transponders as of December 31, is as follows:
2002 2001 ---- ---- Satellite transponders Ps. 1,469,602 Ps. 1,334,030 Accumulated depreciation (228,605) (118,580) --------------- --------------- Ps. 1,240,997 Ps. 1,215,450 =============== ===============
Amortization of satellite transponders in 2002, 2001 and 2000 was Ps.97,974, Ps.88,935 and Ps.31,835, respectively. The Group's future obligation from the PAS-9 agreement, determined using the Group's incremental borrowing rate at the lease commencement date of 11.5%, is as follows:
Total ----- 2003 Ps. 213,466 2004 213,466 2005 213,466 2006 213,466 2007 213,466 Thereafter 1,640,718 --------------- 2,708,048 Less: amount representing interest (1,286,393) --------------- Ps. 1,421,655 ===============
Interest expense recognized during the years ended December 31, 2002, 2001 and 2000 was Ps.159,760, Ps.163,534 and Ps.52,172, respectively. The obligation is reflected on the consolidated balance sheet as of December 31, as follows:
December 31, ------------ 2002 2001 ---- ---- Current portion Ps. 52,812 Ps. 44,085 Long-term portion 1,368,843 1,314,192 --------------- --------------- Ps. 1,421,655 Ps. 1,358,277 =============== ===============
F-17 The obligations of the Group under the PAS-9 agreement are proportionately guaranteed by the Group's stockholders in relation to their respective ownership interests. NOTE 7 - DEFERRED COSTS, NET: Deferred costs, net as of December 31, consist of:
2002 2001 ---- ---- Preoperating expenses (a) Ps. - Ps. - Debt issuance costs (b) 73,771 91,015 Leasehold improvements (c) 8,627 15,618 ------------ ------------- Ps. 82,398 Ps. 106,633 ============ =============
a. Preoperating expenses Preoperating expenses specifically included the capitalization of advertising costs incurred prior to the launch of the Group's DTH service, which was also amortized over five years. Advertising expenses after the launch of the Group's DTH service have been expensed as incurred and amounted to Ps.204,004, Ps.226,837 and Ps.229,727 during the years ended December 31, 2002, 2001 and 2000 respectively. Amortization of preoperating expenses in 2001 amounted to Ps.47,255 and Ps.51,551 in 2000. The preoperating expenses were fully amortized in November 2001. b. Debt issuance costs Debt issuance costs represent expenses incurred for the issuance of the Senior Notes during 1997. These costs are amortized on a straight-line basis over the term of the Senior Notes. Amortization expense of Ps.17,250 during each of 2002, 2001 and 2000 is included in interest expense. c. Leasehold improvements Amortization of leasehold improvements was Ps.9,517, Ps.6,082 and Ps.5,531 in 2002, 2001 and 2000, respectively. F-18 NOTE 8 - INTANGIBLE AND OTHER ASSETS, NET: Intangible assets, net are amortized using the straight-line method over a period of five years. Balances as of December 31, consist of:
2002 2001 ---- ---- Noncompetition agreement (a) Ps. 174,287 Ps. 466,184 Call Center Operations (b) 18,078 18,078 ------------- ------------- 192,365 484,262 Accumulated amortization (179,409) (373,800) ------------- ------------- Ps. 12,956 Ps. 110,462 ============= =============
(a) Consists mainly of a noncompetition agreement and certain rights for the use of transponders acquired in 1997, both of which were fully amortized in 2002. (b) Consist mainly of software and other licenses for the Call Center operation that was acquired from Televisa in 2001. NOTE 9 - TRANSACTIONS WITH AFFILIATED COMPANIES AND OTHER RELATED PARTIES: The principal transactions of the Group with affiliated companies and related parties are:
2002 2001 2000 ---- ---- ---- Borrowings and accrued interest from stockholders (Note 11) Ps. 3,925,244 Ps. 3,066,748 Ps. 1,718,375 Broadcasting services, Florida (a) 82,107 92,118 97,353 Programming (b) 178,973 143,522 130,037 Special events programming (c) (i) 183,202 142,089 83,293 Advertising costs (d) 128,000 140,616 128,683 Royalties (e) 44,223 95,432 72,619 Call Center services (f) - 71,672 71,163 Broadcasting services, Mexico City (g) 38,532 36,252 37,977 Fixed asset acquisitions 11,739 23,067 44,800 Acquisition of smart cards 10,085 52,117 66,547 Finance costs (Note 11) 285,256 213,861 98,472 Management and administrative services 7,242 20,513 12,946 Maintenance services 12,603 11,244 9,426 Advertising revenue 28,711 31,635 - Transmission services, income 7,172 6,436 6,907 Other 7,829 2,222 1,424
F-19 (a) The Group has an informal agreement with DTH TechCo Partners, an affiliate of both Televisa and News Corporation, for play-out, uplink and downlink of signals and compression services. Costs for these services are anticipated to be approximately U.S.$9.5 million annually. (b) The Group purchases the rights to broadcast certain popular channels through affiliates of Televisa and News Corporation. Fees for this programming are based upon the number of subscribers. (c) The Group purchases, on occasion, the rights to broadcast certain special events programming from Televisa and its affiliates. (d) The Group purchases advertising time from Televisa on an as needed basis and creative services from DTH TechCo Partners. (e) Royalties paid to an affiliate of News Corporation consist of license, security and access fees and charges for the use of certain technology. The monthly fees and charges are based on the total number of subscribers, new subscribers during the period and the number of IRD's purchased. (f) Until June 30, 2001, the Group received call processing services and customer care from an affiliate of Televisa. As described in Note 2.b., the Group purchased the call center operations from Televisa for Ps.24,161. Due to the satellite repointing and price increases, costs during the first six months of 2001 increased significantly. (g) The Group purchases uplink and downlink, playout and compression services from an affiliate of Televisa for operations conducted in the Mexico City broadcast facility. The outstanding balances due to affiliates and other related parties, excluding stockholders' loans and accrued interest, as of December 31, are as follows:
2002 2001 ---- ---- Televisa and subsidiaries (h) Ps. 377,804 Ps. 304,478 News Corporation and subsidiaries 55,616 45,148 ------------- ------------- Ps. 433,420 Ps. 349,626 ============= =============
(h) Amount includes the liability for the prepaid advertising to Televisa. On October 31, 2001 and November 15, 2001, the Group entered into one-year advertising agreements with a subsidiary of Televisa for Ps.110 million and Ps.18 million respectively, covering the period January 1, 2002 to December 31, 2002. In December 2002, the Group entered into another one-year advertising agreement amounting to Ps.120 million, covering the period January 1, 2003 to December 31, 2003. The prepaid advertising is amortized as the advertising is aired. F-20 (i) The Company has an informal agreement with Televisa for the purchase of exclusive rights to exhibit and distribute through SKY certain of the professional Mexican Soccer League programming and Mexican Boxing programming during the 2001 through 2003 seasons, as follows: - Exclusive transmission rights and local block-out rights over 20% of the professional Mexican Soccer League programming during the summer and winter seasons of 2001 and 2002; - Exclusive transmission rights and local block-out rights over 10% of the professional Mexican Soccer League programming during the summer season of 2003; and - Exclusive transmission rights to all Mexican Boxing programming during the calendar years 2001 and 2002. In consideration for the right to distribute all of the licensed events, the Group will pay to Televisa a total license fee amounting to US$15 million pro rata during the term as follows: - US$6 million for all programing to be licensed during 2001; - US$6 million for all programing to be licensed during 2002; and - The remaining US$3 million for all programing to be licensed thereafter until the end of the summer soccer season for 2003. NOTE 10 - SENIOR NOTES: In 1997, the Group concluded an offering of senior debt securities, priced to yield gross proceeds of U.S.$375 million, which mature in April 2007 ("Senior Notes"). The Senior Notes bear interest at a rate of 12 7/8% and are redeemable at the option of the Group, in whole or in part, at any time on or after April 1, 2002, initially at 106.4375% of their principal amount, plus accrued interest, declining ratably to 100% of their principal amount, plus accrued interest, on or after April 1, 2004. Interest on the Senior Notes is payable semi-annually on April 1 and October 1 of each year, commencing October 1, 1997. The Senior Notes, which are uncollateralized, unsubordinated indebtedness of the Group, contain certain covenants which, among other things, restrict the ability of the Company and certain subsidiaries to incur or guarantee additional indebtedness, make certain dividend, investment or other restricted payments, issue or sell stock of certain subsidiaries, enter into certain transactions with stockholders or affiliates, create liens, engage in sales-leaseback transactions, sell assets (except IRDs), or with respect to the Group, consolidate, merge, or sell all or substantially all of its assets. The indenture agreement required the Group to purchase and pledge as security for the benefit of the holders of the Senior Notes a portfolio of U.S. Government Securities for a three-year period which ended in March 2000. F-21 NOTE 11 - STOCKHOLDERS' LOANS: During 1999, the Group's stockholders agreed to make available to the Group up to U.S.$67.5 million in loans and up to U.S.$64.5 million in capital contributions. The loans and capital contributions were based on the monthly funding requirements of the Group, but were not to exceed the above maximums. On May 8, 2000, the Group signed an agreement which establishes that the stockholders would fund, in debt, on a pro rata basis, the amounts required under the Group's approved Business Plan; provided, however, that the aggregate amounts of such debt funding during 2000 would not exceed U.S.$72.2 million. The Group's stockholders' have provided debt funding in excess of the amounts contained in the agreement. During 2002 and 2001, the Group borrowed a total of U.S.$29.5 million and U.S.$132.8 million, respectively, from its stockholders on a prorata basis. This amount was determined based on its cash flow needs. Each stockholder loan, plus accrued interest, is payable in full ten years from the date of issuance. The maturity date of any individual loan may be accelerated or otherwise modified including by means of providing for periodic payments of interest or principle upon joint agreement of the stockholders and the Group. Each loan will bear interest at an annual rate of 9%. Interest paid to foreign companies will be net of the 15% withholding tax. The Company expects that its stockholders will provide, if necessary, up to an aggregate amount of US$25 million to meet the Group's cash requirements during 2003. The Group has received loans of U.S.$309.9 million as follows:
Amounts in Amounts in thousands of thousands of U.S. Mexican Year Dollars Pesos - ---- ------- ----- 1998 $ 25,000 Ps. 261,600 1999 41,600 435,302 2000 81,000 847,584 2001 132,800 1,389,619 2002 29,500 308,688 ----------- ---------------- $ 309,900 Ps. 3,242,793 =========== ================
NOTE 12 - FINANCIAL INSTRUMENTS: The Group's financial instruments include cash and cash equivalents, trade accounts receivables, trade accounts payable, due to affiliated companies and other related parties, and debt. For cash and cash equivalents, trade accounts receivables, trade accounts payable, and due to affiliated F-22 companies and other related parties, the carrying amounts approximate fair value due to the short maturity of these instruments. The fair value of the Senior Notes is based on quoted market prices. The estimated fair value of these instruments at December 31, 2002 and 2001 is as follows (amounts in thousands):
Carrying value Fair value -------------- ---------- December 31, 2002 U.S.$ 375,000 U.S.$ 330,000 December 31, 2001 U.S.$ 375,000 U.S.$ 360,000
The Senior Notes are thinly traded financial instruments. Accordingly, their market price at any balance sheet date may not be representative of the price which would be obtained in a more active market. Management is unable to estimate the fair value of the stockholders' loans due to their nature. NOTE 13 - COMMITMENTS AND CONTINGENCIES: a. In 1996, the Group signed an agreement with an affiliate of News Corporation to acquire and implement a conditional access system. This system includes Smart Cards which decode satellite signals and control access by subscribers. In 1999, the Group acquired a subscriber management system (SMS) designed specifically for DTH services. Under these arrangements, the Group estimates that the 2003 commitment will approximate U.S.$11 million for royalties, licenses and maintenance of the foregoing systems. In 2002, 2001, and 2000, the Group incurred expenses of US$5.9 million, US$9.7 million and US$8.4 million, respectively. The Group has entered into agreements with Televisa and an affiliate of Televisa to provide uplink and downlink, playout and compression services at the Mexico City station. The annual commitments are estimated to be approximately U.S.$4.3 million per year. The Group incurred expenses of US$3.9 million in 2002 and US$3.8 million in each of 2001 and 2000. The Group entered into several contracts with programming providers, establishing that the amounts payable to the programmers will be based on the number of subscribers. These charges totaled Ps.657.3 million, Ps.650.3 million and Ps.517.4 million for the years ended December 31, 2002, 2001 and 2000, respectively. b. Since January 1st 2002, a 10% excise tax was imposed on the collected revenues from the Group's pay television services. In February 2002, the Group filed a petition for constitutional relief against the Legislative Decree, which contains the amendments to the Law regarding the excise tax. The respective judgment is pending. Notwithstanding that the Company has filed F-23 the aforementioned petition, it is currently paying the corresponding tax as per the provisions of the Legislative Decree. c. Under Mexican Tax Law, the Company and its subsidiaries, on an individual basis, must pay the higher of the income tax or the assets tax as determined annually. The assets tax is equal to 1.8% of a company's assets less certain liabilities. The Company and most of its subsidiaries were exempt from the assets tax from their formation in 1996 through December 31, 1999. Article 5 of the Asset Tax Law specifies that foreign debt is excluded in determining the assets tax. In 2000, the Group filed a declaratory judgement with the Federal Tax Court seeking to be able to deduct foreign debt in calculating the assets tax based on the unconstitutionality of this provision of Article 5 as previously determined by the Supreme Court of Justice. The tax authorities had opposed the Group's declaratory judgement and issued a tax ruling that the Group must exclude foreign debt in determining the assets tax. The Group filed a petition challenging the constitutionality of this provision of Article 5 of the Asset Tax Law. In order to avoid incurring penalties or interest, the Group paid Ps.$45.2 million in monthly payments during 2002, Ps.43.2 million in March 2002, corresponding to the assets tax due for fiscal year 2001 and Ps.7.5 million for the months of January and February 2003. On March 19, 2003, the court issued a favorable ruling allowing to the Group to deduct foreign debt in calculating the assets tax. The Group is analyzing various alternatives available to it in order to recover the total assets tax payments of Ps.95.9 million made to date. d. The Group entered into two related agreements with CSG Software, Inc. (CSG), on June 12, 2002 under which CSG will provide: a) A non-exclusive, perpetual license for the use of the software "Kenan" to provide billing and order management to licensed subscribers, besides installation and implementation of the system, training and support services and, b) consulting services. Under the Software License and Service Agreement, the Group must pay US$3.4 million to CSG for a license capacity of up to 1,125,000 subscribers. However, the Group can purchase additional capacity according to the subscriber base growth at an additional cost per every 100,000 subscribers. Technical support in Mexico will be available for the first 24 months following the date on which live production of the system begin, the annual cost for these service will be US$585,600. It is possible in accordance with the agreement to use the Kenan system from other DTH platform in case of merger, acquisition or combination of platforms. On December 27, 2002 the Group agreed to remove some applications of the Kenan software, reducing the total license fees in US$500,000. The Group expects that the new SMS will be placed in service in late August 2003. F-24 Under the Consulting Services agreement, CSG will provide management and technology consulting, advisory and integration services related to the implementation of the Kenan end-to-end integrated solution, as well as the required interfaces with the Group's Siebel and NDS software currently on operation, accordingly with a Implementation Planning and Analysis process (IPA), previously agreed with the Group. Total cost of US$4.4 million of these services, will be payable upon completion of certain agreed milestones. e. On June 2002, the Group executed an agreement with TV Azteca to begin paying them for the rights to rebroadcast their over-the-air Channels 7 and 13. It has also committed to purchase up to US$10.6 million in advertising from TV Azteca over three years and received rights to broadcast certain soccer matches and an option for exclusive broadcast rights after 2004. Prior to May 1, 2002, the Group was permitted to rebroadcast these channels at no cost. NOTE 14 - CAPITAL STOCK: The capital stock as of December 31, 2002 and 2001, is represented by three partnership interests of unequal value, distributed as follows:
Partnership interest Subseries Amount -------- --------- ------ 1 A-1 Ps. 1,147,870 1 B-1 573,935 1 B-2 191,311
Series "A" is composed of a partnership interest initially representing 60% of the total capital stock. The Series "A" partnership interest may be subscribed to only by persons of Mexican nationality. Series "B" is composed of a partnership interest initially representing 40% of the total capital stock. The Series "B" partnership interest is unrestricted as to ownership and therefore, may be acquired by Mexican investors and foreign natural and legal persons or by persons, companies or entities that are included in Article 2, Section III of the Foreign Investments Law. During 1999, the Group received cash contributions of U.S.$29.4 million, U.S.$14.7 million and U.S.$4.9 million from Televisa, News Corporation and LMI, respectively. Dividends paid will be free of income tax if paid out of the Net Taxable Income Account (CUFIN). A 34% rate will be paid on the amount exceeding the balance of the CUFIN by multiplying the dividend paid by the 1.5152 factor. The applicable tax since 2003 will be payable by the Group, and it may be credited against income tax the Group is subject to in the fiscal year that the Group pay the dividends or in the subsequent two fiscal years. Dividends paid will not be subject to any tax withholding. The ability of the Group to declare dividends is restricted by the Senior Note indenture. F-25 NOTE 15 - TRANSPONDERS SERVICES AND REORIENTATION COSTS: During 2000, the Group recognized a nonrecurring charge of Ps.430,916 relating to the redundant use of the transponders on the Solidaridad 2 satellite once the PAS-9 satellite became operational, and for the increased costs to re-orientate customers' antennas to PAS-9 in a short period of time. The process of migrating customers from Solidaridad 2 to PAS-9 started in November 2000 and finally ended in March 2002. As explained in Note 5, the Group recorded an impairment charge of Ps.30,776 in April 2002 that related to certain transmission equipment associated with Solidaridad 2. This impairment loss, together with the payments for the use of Solidaridad 2 in the first quarter of 2002 amounting to Ps.14,182, was offset by the reversal of unutilized amounts raised in 2000 amounting to Ps.19,025, and reflected as a nonrecurring charge of Ps.25,933 in 2002. NOTE 16 - RESTRUCTURING CHARGES: The restructuring charges in 2002 and 2001 consisted of severance costs in connection with employee terminations. NOTE 17 - ACCUMULATED LOSSES: Under Mexican Corporate Law, interested third parties can request the dissolution of the Group if accumulated losses exceed two-thirds of capital stock. At December 31, 2002, the Group's accumulated losses exceeded its capital stock. Although the Group believes it is unlikely such action will occur, the Group, obtained from Televisa and News Corporation, a commitment to provide financial support to the Group for a period of one year from the balance sheet date, in proportion to their respective ownership interests, if required, to avoid such action. The recoverability of the Group's investment in DTH infrastructure and product development is dependent upon future events, including, but not limited to, the stability of the Mexican economic environment, obtaining adequate financing for the Group's development program, the continued operation of satellites owned by third parties, the competitive and market environment for pay television services in Mexico, and the achievement of a level of operating revenues that is sufficient to support the Group's cost structure. NOTE 18 - PROVISION FOR INCOME TAX ("IT"), ASSETS TAX ("AT") AND EMPLOYEES' STATUTORY PROFIT SHARING: The Group expects to incur tax losses during the next several years. Tax losses can be carried forward for up to ten years and offset against any profits that the Group or Televisa may generate during that period in accordance with the Income Tax Law. F-26 At December 31, 2002, the Group had total tax loss carryforwards of Ps.7,217,541, which will under certain circumstances, be carried forward over ten years from the period that the respective tax loss was generated in:
Year of expiration Amount - ---------- ------ 2003 Ps. 5 2004 4 2005 8 2006 317,041 2007 1,231,387 2008 1,885,634 2009 673,364 2010 899,542 2011 703,156 2012 1,507,400 --------------- Ps. 7,217,541 ===============
The following items represent the principal differences between income taxes computed at the statutory rate and the Group's provision for income taxes:
2002 2001 2000 ---- ---- ---- Tax at the statutory rate 35% on loss before taxes (Ps. 592,667) (Ps. 127,106) (Ps. 650,485) Differences in restatement 89,834 (15,313) 8,853 Valuation allowance 581,927 302,962 414,150 Differences between tax and financial accounting for cost of sales and purchases - - 2,786 Deferred advertising (13,327) (9,906) (1,108) Depreciation and amortization (43,071) 21,820 2,010 Debt issuance costs 3,490 3,689 3,852 Provisions (11,065) (159,283) 219,308 Deferred income (7,316) (10,729) 2,711 Other (7,805) (6,134) (2,077) ------------- -------------- ------------- Provision for income tax - - - Assets tax (75,530) (46,283) (130) ------------- -------------- ------------- Total (Ps. 75,530) (Ps. 46,283) (Ps. 130) ============= ============== =============
F-27 Deferred taxes at December 31, 2002 and 2001, were generated by the following temporary differences and tax loss carryforwards:
2002 2001 ---- ---- Prepaid expenses (Ps. 13,286) (Ps. 10,319) Property and equipment 126,467 174,497 Other deferred costs 36,733 29,441 Debt issuance costs (25,082) (31,910) Deferred income 37,218 37,961 Accrued expenses 162,000 62,483 Satellite transponders, net 61,424 49,990 Tax loss carryforwards 2,453,964 1,998,485 ---------------- --------------- 2,839,438 2,310,628 Valuation allowance (2,839,438) (2,310,628) ----------------- --------------- Deferred income tax Ps. - Ps. - ================ ===============
Employees' statutory profit sharing in Mexico is determined for each subsidiary individually, not on a consolidated basis. There is no employees' statutory profit sharing deferred tax as of December 31, 2002 and 2001. Pursuant to the tax legislation in force, the Company must pay annually the greater of the IT or the AT, which is determined on the average value of assets less certain liabilities. When the AT payments are greater than IT, they are recoverable against the IT in excess of the AT from the three prior years and the ten subsequent years. The Group is also included in the consolidated tax return of Televisa and its consolidated subsidiaries for purposes of determining its income taxes and assets tax. Beginning January 1, 1999, 60% of the tax profit or loss obtained by the Group will be consolidated with the tax profit or loss of Televisa to the extent of Televisa's percentage ownership of the Group. Through December 31, 1998, Televisa recognized the total taxable loss of the Group to the extent of its percentage ownership. The Group entered into a tax sharing agreement with Televisa under which the Group will, during the periods that the Group is a part of Televisa's consolidated tax group, pay Televisa the amount of income and asset taxes that Televisa is required to pay on behalf of the Group. No such amount will be payable until the Group's profit exceeds its tax loss carryforwards. Conversely, Televisa shall pay to the Group the portion of any tax refund allocable to the Group. F-28 NOTE 19 - COMPREHENSIVE LOSS: Comprehensive loss for the years ended December 31, 2002, 2001 and 2000, was as follows:
2002 2001 2000 ---- ---- ---- Loss per statements of loss (Ps. 1,768,863) (Ps. 409,445) (Ps. 1,858,659) Result from holding non-monetary assets for the year 164,263 (128,496) (26,665) Supplementary liability for labor obligations (119) (15) - --------------- ------------- ---------------- Comprehensive loss for the year (Ps. 1,604,719) (Ps. 537,956) (Ps. 1,885,324) =============== ============= ================
NOTE 20 - FOREIGN CURRENCY POSITION: a. The foreign currency position of monetary items of the Group at December 31, 2002 and 2001, were as follows: 2002:
Foreign currency Year-end Mexican pesos Currency amounts (thousands) Exchange rate (thousands) - -------- ------------------- ------------- ----------- Assets: U.S. Dollars 21,391 10.464 Ps. 223,835 Liabilities: U.S. Dollars 935,999 10.464 9,794,294 2001:
Foreign currency Year-end Mexican pesos Currency amounts (thousands) Exchange rate (thousands) - -------- ------------------- ------------- ----------- Assets: U.S. Dollars 70,640 9.178 Ps. 648,334 Liabilities: U.S. Dollars 880,499 9.178 8,081,220
F-29 b. The foreign currency position of non-monetary items of the Group at December 31, 2002 and 2001, were as follows: 2002:
Foreign currency Year-end Mexican pesos Currency amounts (thousands) Exchange rate (thousands) - -------- ------------------- ------------- ----------- Property and equipment: U.S. Dollars 35,562 10.464 Ps. 372,121 Pounds Sterling 7,521 17.00 127,857 Satellite transponders: U.S. Dollars 134,223 10.464 1,404,509
2001:
Foreign currency Year-end Mexican Pesos Currency amounts (thousands) exchange rate (thousands) - -------- ------------------- ------------- ----------- Property and equipment: U.S. Dollars 36,651 9.178 Ps. 336,383 Pounds Sterling 5,969 13.560 80,940 Satellite transponders: U.S. Dollars 134,223 9.178 1,231,899
c. Transactions during 2002, 2001 and 2000 in foreign currencies included in the consolidated statements of loss were as follows: 2002:
Foreign currency Year-end amounts exchange Mexican Pesos Currency (thousands) rate (1) (thousands) (1) -------- ----------- -------- -------------- Interest income U.S. Dollars 74 10.464 Ps. 774 Costs and expenses: Transponder expense U.S. Dollars 11,941 10.464 124,951 Broadcasting U.S. Dollars 12,663 10.464 132,506 Programming U.S. Dollars 58,800 10.464 615,283 Royalty fees Pounds Sterling 652 17.00 11,084 Royalty fees U.S. Dollars 3,605 10.464 37,723 Other expenses U.S. Dollars 3,552 10.464 37,168 Interest expense U.S. Dollars 79,974 10.464 836,848
F-30 2001:
Foreign currency Year-end amounts exchange Mexican Pesos Currency (thousands) rate (1) (thousands) (1) -------- ----------- -------- --------------- Interest income U.S. Dollars 235 9.178 Ps. 2,157 Costs and expenses: Transponder expense U.S. Dollars 22,527 9.178 206,753 Broadcasting U.S. Dollars 13,581 9.178 124,646 Programming U.S. Dollars 59,281 9.178 544,081 Royalty fees Pounds Sterling 2,177 13.560 29,520 Royalty fees U.S. Dollars 6,481 9.178 59,483 Other expenses U.S. Dollars 8,593 9.178 78,867 Interest expense U.S. Dollars 72,052 9.178 661,293
2000:
Foreign currency Year-end amounts exchange Mexican Pesos Currency (thousands) rate (1) (thousands) (1) -------- ----------- -------- --------------- Interest income U.S. Dollars 779 9.610 Ps. 7,486 Costs and expenses: Transponder expense U.S. Dollars 23,835 9.610 229,054 Inventory U.S. Dollars 30,612 9.610 294,181 Broadcasting U.S. Dollars 9,000 9.610 86,490 Programming U.S. Dollars 47,500 9.610 456,475 Royalty fees Pounds Sterling 2,063 14.588 30,095 Royalty fees U.S. Dollars 3,794 9.610 36,460 Other expenses U.S. Dollars 9,467 9.610 90,978 Interest expense U.S. Dollars 54,452 9.610 523,284
(1) For reference purposes only. Does not indicate the actual amounts presented in the consolidated statement of loss. Paragraphs b) and c) are disclosed in accordance with the Fourth Amendment to Bulletin B-10 issued by the MIPA, which also provides that liabilities denominated in a foreign currency are translated using exchange rates in effect at the balance sheet date. As of December 31, 2002 and 2001, the exchange rate between the Mexican Peso and the U.S. Dollar was Ps.10.464 and Ps.9.178 per U.S. dollar, respectively, which represents the interbank free market exchange rate as of those dates as published by Banco de Mexico, S.A. As of F-31 January 31, 2003, the exchange rate was Ps.10.864 per U.S. dollar, which represents the interbank free market exchange rate as of that date as published by Banco de Mexico, S.A. NOTE 21 - DIFFERENCES BETWEEN MEXICAN GAAP AND U.S. GAAP: The Group's consolidated financial statements are prepared in accordance with Mexican GAAP, which differs in certain significant respects from U.S. GAAP. The reconciliation to U.S. GAAP includes a reconciling item for the effect of applying the option provided by the Modified Fifth Amendment to Bulletin B-10 for the restatement of equipment of non-Mexican origin because, as described below, this provision of inflation accounting under Mexican GAAP does not meet the consistent currency requirement of Regulation S-X of the Securities and Exchange Commission ("SEC"). The reconciliation to U.S. GAAP does not include the reversal of the other adjustments to the financial statements for the effects of inflation required under Mexican GAAP Bulletin B-10, because the application of Bulletin B-10 represents a comprehensive measure of the effects of price level changes in the inflationary Mexican economy and, as such, is considered a more meaningful presentation than historical, cost-based financial reporting for both Mexican and U.S. accounting purposes. The principal differences between Mexican GAAP and U.S. GAAP that affect net loss and total stockholders' deficit are described below: Deferred preoperating expenses and advertising costs Under Mexican GAAP, it is acceptable to defer certain preoperating expenses and advertising costs and amortize these expenses over the life of the expected benefit. Under U.S. GAAP, these items are expensed as incurred. Solidaridad 2 and satellite reorientation costs Under Mexican GAAP, the Group recognized a non-recurring loss of Ps.430,916 during the year ended December 31, 2000 for the redundent use of the transponders on the Solidaridad 2 satellite once the PAS-9 satellite became operational and for the increased costs to reorientate customer's antennas to PAS-9 in a short period of time. Under U.S. GAAP, the Group continued to use the Solidaridad 2 satellite to provide services to its customers through the termination of the Solidaridad 2 agreement. Accordingly, the monthly payments cannot be recognized as a one time loss, and the Group must continue using the straight-line method in accounting for the agreement. The Group discontinued the use of Solidaridad 2 satellite on March 31, 2002. The satellite reorientation costs are expensed as incurred as a part of operating expenses. F-32 Maintenance reserve and smart cards replacement Under Mexican GAAP, it is acceptable to accrue for certain expenses which management believes will be incurred in subsequent periods. Under U.S. GAAP, these costs are expensed as incurred. Capitalization of financing costs Mexican GAAP allows, but does not require, capitalization of integral financing costs attributable to acquired assets during installation and preoperating expenses. In 1996, the Group capitalized integral financing costs attributable to those assets. Capitalized integral financing costs include interest expense, gains from monetary position and foreign exchange losses. U.S. GAAP requires the capitalization of interest during construction and installation of qualifying assets. In an inflationary economy, such as Mexico's, acceptable practice is to capitalize interest net of the monetary gain on the related Mexican Peso debt, but not on U.S. dollar or other stable currency debt. In addition, U.S. GAAP does not allow the capitalization of foreign exchange losses or the capitalization of financing costs on deferred expenses. No interest costs were capitalized for the years ended December 31, 2002, 2001 and 2000. Restatement of property and equipment Effective January 1, 1997, the Group adopted the Fifth Amendment to Bulletin B-10 which eliminated the use of replacement costs for the restatement of property and equipment and instead, included an option of using the Specific Index for the restatement of equipment of non-Mexican origin. The Group has elected to apply the Specific Index option for determining the restated balances of equipment of non-Mexican origin under Mexican GAAP. For U.S. GAAP purposes, the use of an index that contemplates currency exchange movements is not in accordance with the historical cost concept nor does it present financial information in a constant currency. Restructuring charges In 2002 and 2001, the Group provided for restructuring costs related to expected employee terminations. Under Mexican GAAP, these costs are recorded as other expenses. For U.S. GAAP purposes, these costs have been expensed as incurred and classified in operating expenses. Revenue recognition In prior years, under Mexican GAAP, concession fees paid to the Mexican Government and to the actors and artists guild were recorded against revenues. From January 1, 2002, these fees are recorded in cost of sales, consistent with the accounting treatment under US GAAP. Revenues F-33 under Mexican GAAP for the years ended December 31, 2001 and 2000 have been restated to conform with classification in the current year. Accordingly, the accompanying condensed consolidated statement of loss contains no adjustment in respect of the classification of such expenses. Through September 30, 2000, the Group sold and transferred title to the DTH antenna, LNB and accessories to wholesale and other distributors who then re-sold the units to the subscriber. Revenue was recognized upon the sale of the unit to the distributor. Effective October 1, 2000, the Group began providing the antenna, LNB and accessories to new subscribers, together with the IRD, for a set monthly rental fee, retaining title and ownership of all the equipment. From that date, the Group also uses intermediate parties to perform certain customer acquisition and installation services on its behalf. Under Mexican GAAP, the Group records as revenue amounts received from these intermediate parties. Under US GAAP, the Group follows the guidance of Emerging Issues Task Force Summary No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent", pursuant to which it has determined that it serves as principal in these transactions and that it should record as revenue amounts billed to the subscriber, as ultimate customer. The accompanying condensed consolidated statement of loss under US GAAP for the year ended December 31, 2002 therefore includes an adjustment to reflect as revenue the amounts billed to subscribers and not the amounts received from intermediate parties. The adjustments for the year ended December 31, 2001 and 2000 were not material. In addition, under Mexican GAAP, initial non-refundable subscription fees are recognized upon activation of the new subscriber's DTH services. Under US GAAP, initial non-refundable subscription fees are recognized over the period that a new subscriber is expected to remain a customer (2002 and 2001 estimated to be 3 years). Customer acquisition costs directly attributable to the income are recognized over the same period under US GAAP. Those customer acquisition costs in excess of the initial non-refundable subscription fee revenues, are expensed as incurred. Initial non-refundable subscription fees for the year ended December 31, 2002 amounted to Ps.144.9 million (Ps.165.8 million in 2001). Under US GAAP, deferred initial non-refundable subscription fee revenues of approximately Ps.195.0 million were recorded as of December 31, 2002 (Ps.135.9 million in 2001). In addition, customer acquisition costs which are expensed immediately under Mexican GAAP, have been deferred to match and equal initial non-refundable subscription revenues; therefore at December 31, 2002, deferred costs under US GAAP also amounted to Ps.195.0 million (Ps.135.9 million in 2001). Initial non-refundable subscription revenues (which are matched by customer acquisition costs) that have been recognized during the year amount to Ps.78.5 million (Ps.30.0 million in 2001). Deferred initial non-refundable subscription fee revenues and customer acquisition costs as of and for the year ended December 31, 2000 were not material. The net impact on both operating loss and net loss of these US GAAP adjustments is nil in 2002, 2001 and 2000. F-34 Deferred income taxes Under Mexican GAAP, the Group follows the guidelines of amended Bulletin D-4 in accounting for income taxes. Bulletin D-4 is similar to U.S. GAAP, Statement of Financial Accounting Standards No. 109 ("SFAS 109") "Accounting for Income Taxes", in many respects. SFAS 109 requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets including benefits from tax loss carryforwards are recognized to the extent their realization is more likely than not. The tax effects of temporary differences that give rise to significant deferred tax assets and liabilities, applying SFAS 109 at December 31, 2002 and 2001, are as follows:
2002 2001 ---- ---- Deferred income tax liabilities: Current: Prepaid expenses and other (Ps. 79,601) (Ps. 10,319) ---------------- --------------- Total current (79,601) (10,319) Non-current: Debt issuance costs (25,082) (31,910) ----------------- --------------- Total deferred income tax liabilities (104,683) (42,229) ----------------- --------------- Deferred income tax assets: Current: Satellite transponders, net 71,576 49,990 Accrued expenses 157,932 40,730 Deferred income 103,533 37,961 ---------------- --------------- Total current 333,041 128,681 Non-current: Other deferred costs 36,733 29,441 Property and equipment 101,635 174,497 Tax loss carryforwards 2,453,964 1,998,498 ---------------- --------------- Total deferred income tax assets 2,925,373 2,331,117 Less: Valuation allowance (2,820,690) (2,288,888) ----------------- --------------- Net deferred income tax assets 104,683 42,229 ---------------- --------------- Deferred income taxes Ps. - Ps. - ================ ===============
F-35 In conformity with the Income Tax Law, the Group restates the tax basis of preoperating expenses and property and equipment in a form similar to the restatement for financial reporting purposes, however based on a different date criteria. Summary Net loss for the years ended December 31, 2002, 2001 and 2000, adjusted to take into account the principal differences between Mexican GAAP and U.S. GAAP, as they relate to the Group, are as follows:
2002 2001 2000 ---- ---- ---- Net loss as reported under Mexican GAAP (Ps. 1,768,863) (Ps. 409,445) (Ps. 1,858,659) Deferred preoperating expenses - 46,667 50,958 Solidaridad 2 costs - (264,086) 264,086 Satellite reorientation costs (32,314) (252,584) 89,594 Maintenance reserve 7,082 (6,535) 3,798 Smartcards replacement - (32,648) 32,648 Capitalization of financing costs - 1,850 1,221 Restatement of property and equipment (992) (18,592) 7,898 Restructuring charge (4,714) 4,714 - ------------- ----------- ------------- Net loss in accordance with U.S. GAAP (Ps. 1,799,801) (Ps. 930,659) (Ps. 1,408,456) ============= =========== =============
Stockholders' deficit as of December 31, 2002 and 2001, adjusted to take into account the principal differences between Mexican GAAP and U.S. GAAP, as they relate to the Group, are as follows:
2002 2001 ---- ---- Total stockholders' deficit under Mexican GAAP (Ps. 6,905,899) (Ps. 5,301,180) U.S. GAAP adjustments: Satellite reorientation costs - 51,881 Maintenance reserve 11,967 4,884 Restatement of property and equipment 43,179 188,868 Restructuring charge - 4,714 --------------- --------------- Total U.S. GAAP adjustments 55,146 250,347 --------------- --------------- Total stockholders' deficit under U.S. GAAP (Ps. 6,850,753) (Ps. 5,050,833) =============== ===============
F-36 A summary of the Group's statement of changes in stockholders' deficit with balances determined under U.S. GAAP is as follows: Balance at December 31, 2000 (Ps. 4,120,159) Supplementary liability for labor obligations (15) Net loss for the year (930,659) --------------- Balance at December 31, 2001 (5,050,833) Supplementary liability for labor obligations (119) Net loss for the year (1,799,801) --------------- Balance at December 31, 2002 (Ps. 6,850,753) ===============
A summary of the Group's stockholders' deficit after the U.S. GAAP adjustments described above, as of December 31, is as follows:
2002 2001 ---- ---- Capital stock Ps. 1,913,116 Ps. 1,913,116 Accumulated losses (8,775,571) (6,975,770) Other comprehensive income: Excess from restatement 11,836 11,836 Supplementary liability for labor obligations (134) (15) --------------- --------------- Total stockholders' deficit under U.S. GAAP (Ps. 6,850,753) (Ps. 5,050,833) =============== ================
Included below are condensed consolidated financial statements of the Group as of December 31, 2002 and 2001 and for the years ended December 31, 2002, 2001 and 2000, after giving effect to the U.S. GAAP adjustments. F-37 CONDENSED CONSOLIDATED BALANCE SHEETS (Expressed in thousands of Mexican Pesos in purchasing power as of December 31, 2002)
December 31, ----------- 2002 2001 ---- ---- ASSETS Current assets: Cash and cash equivalents Ps. 266,631 Ps. 45,180 Trade accounts receivables, net 103,782 128,123 Prepaid expenses and other 122,035 197,731 Other current assets 58,265 62,992 ---------------- ---------------- Total current assets 550,713 434,026 Property and equipment, net 1,617,943 2,044,714 Satellite transponders, net 1,211,138 1,311,776 Deferred costs, net 277,442 197,391 Intangible and other assets, net 22,530 111,232 ---------------- ---------------- Total assets Ps. 3,679,766 Ps. 4,099,139 ================ ================ LIABILITIES Current liabilities: Trade accounts payable Ps. 99,585 Ps. 85,956 Accrued expenses 256,531 289,254 Satellite transponders obligation 52,812 44,085 Due to affiliated companies and other related parties 433,420 349,626 Other current liabilities 468,905 270,695 ---------------- ---------------- Total current liabilities 1,311,253 1,039,616 Non-current liabilities: Senior notes 3,924,000 3,637,930 Stockholder's loans 3,242,793 2,720,201 Satellite transponders obligation 1,368,843 1,314,192 Other non-current liabilities 683,630 438,033 ---------------- ---------------- Total liabilities 10,530,519 9,149,972 ---------------- ---------------- Commitments and contingencies - - Stockholders' deficit (6,850,753) (5,050,833) ---------------- ---------------- Total liabilities and stockholders' deficit Ps. 3,679,766 Ps. 4,099,139 ================ ================
F-38 CONDENSED CONSOLIDATED STATEMENT OF (LOSS) INCOME (Expressed in thousands of Mexican Pesos in purchasing power as of December 31, 2002)
Years ended December 31, ------------------------ 2002 2001 2000 ---- ---- ---- Revenues from programming services Ps. 1,904,516 Ps. 1,998,665 Ps. 1,716,179 Revenues from rental of IRDs 804,826 515,358 381,321 Other revenues 606,634 626,973 462,002 --------------- --------------- --------------- Net revenues 3,315,976 3,140,996 2,559,502 Operating expenses: Cost of sales - programming services 557,832 780,028 624,543 Cost of sales - other 388,033 560,745 799,972 Administrative expenses 132,683 445,195 330,392 Selling expenses 832,751 858,242 816,414 Other operating expenses 555,078 369,695 254,671 Depreciation and amortization 926,070 918,410 784,503 --------------- --------------- --------------- Total operating expenses 3,392,447 3,932,315 3,610,495 --------------- --------------- --------------- Operating loss (76,471) (791,319) (1,050,993) Integral results of financing (1,647,800) (93,057) (357,332) --------------- --------------- --------------- Loss before tax (1,724,271) (884,376) (1,408,325) Provision for income and assets taxes (75,530) (46,283) (131) --------------- --------------- --------------- Net loss (Ps. 1,799,801) (Ps. 930,659) (Ps. 1,408,456) =============== =============== ===============
Cash Flows Mexican GAAP Bulletin B-12, specifies the appropriate presentation of the statements of changes in financial position. Under Bulletin B-12, the sources and uses of resources are determined based upon differences between beginning and ending financial statement balances in constant pesos. Under U.S. GAAP, a statement of cash flows is required, which presents only cash movements and excludes non-cash items. F-39 Presented below are statements of cash flow for the years ended December 31, 2002, 2001 and 2000, prepared after considering the impact of U.S. GAAP adjustments. The cash flow statements present nominal cash flows during the period, adjusted to December 31, 2002, purchasing power.
2002 2001 2000 ---------------- --------------- ---------------- Operating activities: Net loss (Ps. 1,799,801) (Ps. 930,659) (Ps. 1,408,456) Adjustments to reconcile net (loss) to cash flows (used in) operating activities: Gain from monetary position (498,615) (432,168) (495,772) Unrealized exchange losses (gains) 1,022,900 (303,104) 84,403 Allowance for doubtful accounts 110,827 174,058 37,893 Depreciation and amortization 926,070 918,410 773,046 Impairment of fixed assets 30,776 - 11,458 Other - 37,563 - Changes in operating assets and liabilities: Assets (116,385) (249,798) (132,912) Liabilities 629,954 247,065 395,889 ---------------- --------------- ---------------- Cash flows provided by (used in) operating activities 305,726 (538,633) (734,451) ---------------- --------------- ---------------- Financing activities: Stockholders' loans 308,688 1,288,311 858,982 Satellite transponders obligation (45,089) (29,909) - ---------------- --------------- ---------------- Cash flows provided by financing activities 263,599 1,258,402 858,982 ---------------- --------------- ---------------- Investing activities: Investment in property and equipment (337,081) (719,889) (643,468) Sale of restricted investments - - 277,197 ---------------- --------------- ---------------- Cash flows (used in) investing activities (337,081) (719,889) (366,271) ---------------- --------------- ---------------- Effects of inflation (10,793) (3,612) (20,962) ---------------- --------------- ---------------- Increase (decrease) in cash and cash equivalents 221,451 (3,732) (262,702) Cash and cash equivalents, beginning of period 45,180 48,912 311,614 ---------------- --------------- ---------------- Cash and cash equivalents, end of period Ps. 266,631 Ps. 45,180 Ps. 48,912 ================ =============== ================
F-40
2002 2001 2000 ---------------- --------------- ---------------- Interest and taxes paid: Interest paid Ps. 495,124 Ps. 510,433 Ps. 617,178 Income and asset taxes paid 88,868 129 48
Non-cash Investing and Financing Activities Capital lease obligation of U.S.$133.9 million (Ps.1,432.6 million) was incurred when the Group entered into agreements with PanAmSat for the use of 12 KU-band transponders on the PAS-9 satellite in September 2000. Recently Issued Accounting Pronouncements In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligation" ("SFAS 143"). SFAS 143 establishes accounting standards for recognition and measurement of a liability at fair value for an asset retirement obligation and an addition to the associated asset retirement cost. The accretion of interest expense each period is subsequently recorded as an expense and added to the liability. The Group is required to adopt SFAS 143 effective January 1, 2003. The Group does not expect that the adoption of FAS 143 will have a material impact on its results of operations and financial position. In April 2002, the FASB issued Statements of Accounting Standards No. 145, "Rescission of SFAS Nos. 4, 44 and 64, Amendment of SFAS 13, and Technical Corrections as of April 2002" ("SFAS 145"). SFAS 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers", and SFAS 64, "Extinguishments of Debt made to satisfy Sinking-Fund requirements". As a result, gains and losses from extinguishment of debt will no longer be classified as extraordinary items unless they meet the criteria of unusual or infrequent as described in Accounting Principles Boards Opinion 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions". In addition, SFAS 145 amends SFAS 13, "Accounting for Leases", to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. SFAS 145 is effective for fiscal years beginning after May 15, 2002. The Group is currently evaluating the impact that the adoption of SFAS 145 will have on its results of operations and financial position. However, the Group does not believe that the adoption of SFAS 145 will have a material impact on its results of operations and financial position. F-41 In June 2002, the FASB issued Statement of Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exist an Activity (including Certain Costs Incurred in a Restructuring)" ("EITF 94-3"). SFAS 146 eliminates the definition and requirements for recognition of exist costs in EITF 94-3. SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entity's commitment to an exit plan. SFAS 146 also concludes that an entity's commitment to a plan, by itself, does not create a present obligation to others that meets the definition of a liability. SFAS 146 also establishes that fair value is the objective for initial measurement of the liability. SFAS 146 is effective for exist or disposal activities initiated after December 31, 2002. The Group is currently evaluating the impact that the adoption of SFAS 146 will have on its results of operations and financial position. However, the Group does not believe that the adoption of SFAS 146 will have a material impact on its results of operations and financial position. F-42 EX-1.2 3 y87959exv1w2.txt RESOLUTIONS AMENDING THE AMENDED AND BY-LAWS EXHIBIT 1.2 - ----------- OL - ----------- Notaries ------------------------------------------------------------------- OLIVEROS LARA Notaries 45 and 75 Atty. Rafael Oliveros Lara Atty. Javier Oliveros Lara THIRD OFFICIAL TRANSCRIPT - -------------------------------------------------------------------------------- Montes Urales No. 735 Col. Lomas de Chapultepec Mexico, D.F.- C.P. 11000 Telephones: 5520-0661, 5520-0662 and 5520-0392- Fax: 5520-1200 - -------------------------------------------------------------------------------- ] DOCUMENT. No. 55,871 BOOK No. 1,151 THIRD OFFICIAL TRANSCRIPT OF THE DOCUMENT CONTAINING: THE NOTARIZATION OF THE RESOLUTION TAKEN OUT OF MEETING BY THE PARTNERS OF "INNOVA", LIMITED LIABILITY, VARIABLE CAPITAL COMPANY.----------- RMOL*gdn [header on alternating pages:] [LIC. RAFAEL MANUEL OLIVEROS LARA UNITED MEXICAN STATES NOTARY PUBLIC FEDERAL DISTRICT MEXICO SEAL] Atty. Rafael Oliveros Lara A. Notaries Atty. Javier Oliveros Lara ---------------------------------- 1. OLIVEROS LARA B. Notaries 45 and 75 Mexico, Federal District BOOK NUMBER ONE THOUSAND ONE HUNDRED FIFTY-FIVE DOCUMENT FIFTY SIX THOUSAND FORTY-ONE IN MEXICO CITY on August twenty-one, two thousand two, BEFORE ME, ATTORNEY RAFAEL MANUEL OLIVEROS LARA, Notary Public, Head of Notary Office number forty-five of this City, appears MRS. MARIA AZUCENA DOMINGUEZ COBIAN, in her capacity of Special Delegate of "INNOVA", LIMITED LIABILITY, VARIABLE CAPITAL COMPANY, and she requests me to notarize the Resolution taken out of Meeting by the partners of the company in question on July thirty, two thousand two, and the person who appears exhibits to me three pages of text written on one side. Pursuant to the wishes of the person who appears, I notarize the resolution mentioned above, which I transcribe below: "INNOVA, S. DE R.L. DE C.V. RESOLUTION ADOPTED OUT OF MEETING BY THE PARTNERS OF INNOVA, S. DE R.L. DE C.V. (THE "COMPANY"), PURSUANT TO ARTICLE 82 (EIGHTY-TWO) OF THE GENERAL LAW OF MERCANTILE COMPANIES, AND ARTICLE SIXTEEN, SECTION O) OF THE CORPORATE BYLAWS IN FORCE FOR THE COMPANY. On July 30 (thirty), 2002 (two thousand two), SKY-DTH, S. de R.L. de C.V., News DTH (Mexico) Investment Ltd., Liberty Mexico DTH, Inc., in their capacity of partners of the Company, unanimously decided to adopt the following resolutions: RESOLUTION ONE In order to comply with official letter No. 514.113.01.23547 (five hundred fourteen point one hundred thirteen point zero one point twenty-three thousand five hundred forty-seven) dated November 30 (thirty), 2001 (two thousand one), issued by the General Office of Foreign Investments of the Ministry of the Economy, it is resolved to amend Article Six of the Corporate Bylaws, adding a paragraph c) and a last paragraph, so that from this date forward it will be as follows: ARTICLE SIX. Capital, Series and Classes. The capital stock is variable. The minimum or fixed capital is the amount of eight hundred twenty-seven million seven hundred fifty thousand pesos, zero, zero, slash, one hundred, National Tender, fully subscribed and paid-in. The variable capital is unlimited. The shares into which the capital stock is divided may be an unequal amount, but in any event they must be one hundred pesos, zero, zero, slash, one hundred, National Tender or a multiple of that amount. The shares representing the minimum or fixed capital will be identified as Class "I" shares, and the shares representing the variable capital will be identified as Class "II" shares. The shares representing the minimum or fixed capital (Class "I") and the shares representing the variable capital (Class "II") may be divided in turn into three series with the rights and corporate obligations that are mentioned in these Bylaws, as follows: a. Series "A" will be composed of Sub-Series A-1 (A dash one) and A-2 (A dash 2) and will be integrated by common stock that will initially represent sixty percent of the total capital stock. Series "A" shares may only be subscribed by Mexican nationals and, therefore, the Company will not admit foreign investors as partners holding series "A" shares; 1 b. Series "B" will be composed of Sub-Series B-1 (B dash one) and B-2 (B dash 2) and will be integrated by common stock that will initially represent forty percent of the total capital stock. Series "B" shares will be freely subscribed, therefore they may be acquired by Mexican investors and by foreign individuals and companies or by the persons, companies or entities included in Article Two, Section III, of the Foreign Investment Law; And c. Series "N" will be made up of all special shares that may be issued and considered as neutral investment for the effects of the Foreign Investment Law, after authorized by the Ministry of the Economy. In accordance with the authorization from the Ministry of the Economy, dated November 30 (thirty) 2001 (two thousand one), the company may issue series N shares representing up to eighty percent (80%) of the company's capital stock, considered as neutral investment for the effects of the Foreign Investment Law, and they will convey economic rights and voting rights only at shareholders' meeting dealing with the matters described in article 113 (one hundred thirteen) of the General Law of Mercantile Companies". RESOLUTION TWO Juan Sebastian Mijares Ortega, Azucena Dominguez de San Martin, Emilio Carrillo Gamboa and Armando Javier Martinez Benitez are designated special delegates of the Company so that they, jointly or individually, may represent the Company in the notarization of these resolutions adopted out of meeting with the notary public of their choice and, in general, so that they may perform all acts needed to comply with the agreements adopted herein. RESOLUTION THREE The Secretary of the Company is instructed to transcribe these resolutions adopted out of meeting in the Company's Minutes book. SKY DTH, S. de R.L. de C.V. By: JULIO BARBA HURTADO.- Title: Representative.- (signed).- By: EFREN YABER JIMENEZ.- Title: Representative.- (signed). LIBERTY MEXICO DTH, INC.- By: David A. Jensen.- Title: Vice President.- (signed). News DTH (Mexico) Investment, Ltd.- By: David F. Devoe.- Title: Director.- (signed)." I add a photocopy of the resolutions above, and I attest that it coincides truthfully to the original document I had at sight, and I add it to the appendix of the file corresponding to this document under the letter "A". NATIONAL REGISTER OF FOREIGN INVESTMENTS The person who appears, in compliance with Articles thirty-two and thirty-four of the Foreign Investment Law, exhibits to me the Application for Registration in the National Register of Foreign Investments for the company "INNOVA", LIMITED LIABILITY, VARIABLE CAPITAL COMPANY, dated May twenty-nine, two thousand two, folio number one hundred eight thousand two hundred fifteen slash fifteen thousand eight hundred fourteen, issued by the General Office of Foreign Investment.- I add a photocopy of the document mentioned above to the appendix in the file corresponding to this document under the letter "B". The above having been stated, the person who appears grants the following: CLAUSES 2 ONE.- MRS. MARIA AZUCENA DOMINGUEZ COBIAN, in her capacity of Special Delegate of the resolution taken out of meeting by the Partners of "INNOVA", LIMITED LIABILITY, VARIABLE CAPITAL COMPANY, dated July thirty, two thousand two, notarizes it for all applicable legal effects. TWO.- By this instrument "INNOVA", LIMITED LIABILITY, VARIABLE CAPITAL COMPANY, represented by its Special Delegate MRS. MARIA AZUCENA DOMINGUEZ COBIAN, formalizes the AMENDMENT of ARTICLE SIX of the Corporate Bylaws to read as mentioned above, in accordance with resolution one taken in connection with the resolutions that have been transcribed herein and that is mentioned as follows: "ARTICLE SIX. Capital Series and Classes. The capital stock is variable. The minimum or fixed capital is the amount of eight hundred twenty-seven million seven hundred fifty thousand pesos, zero, zero, slash, one hundred, National Tender, fully subscribed and paid-in. The variable capital is unlimited. The shares into which the capital stock is divided may be an unequal amount, but in any event they must be one hundred pesos, zero, zero, slash, one hundred, National Tender or a multiple of that amount. The shares representing the minimum or fixed capital will be identified as Class "I" shares, and the shares representing the variable capital will be identified as Class "II" shares. The shares representing the minimum or fixed capital (Class "I") and the shares representing the variable capital (Class "II") may be divided in turn into three series with the rights and corporate obligations that are mentioned in these Bylaws, as follows: a. Series "A" will be composed of Sub-Series A-1 (A dash one) and A-2 (A dash 2) and will be integrated by common stock that will initially represent sixty percent of the total capital stock. Series "A" shares may only be subscribed by Mexican nationals and, therefore, the Company will not admit foreign investors as partners holding series "A" shares; b. Series "B" will be composed of Sub-Series B-1 (B dash one) and B-2 (B dash 2) and will be integrated by common stock that will initially represent forty percent of the total capital stock. Series "B" shares will be freely subscribed, therefore they may be acquired by Mexican investors and by foreign individuals and companies or by the persons, companies or entities included in Article Two, Section III, of the Foreign Investment Law; And c. Series "N" will be made up of all special shares that may be issued and considered as neutral investment for the effects of the Foreign Investment Law, after authorized by the Ministry of the Economy. In accordance with the authorization from the Ministry of the Economy, dated November 30 (thirty) 2001 (two thousand one), the company may issue series N shares representing up to eighty percent (80%) of the company's capital stock, considered as neutral investment for the effects of the Foreign Investment Law, and they will convey economic rights and voting rights only at shareholders' meeting dealing with the matters described in article 113 (one hundred thirteen) of the General Law of Mercantile Companies". 3 LEGAL STANDING The person who appears in representation of "INNOVA", LIMITED LIABILITY, VARIABLE CAPITAL COMPANY, verifies this in the following manner: I.- With document number thirty-six thousand forty, issued in this City on July twenty-five, nineteen ninety-six before Attorney Francisco Javier Gerardo Oliveros Lara, Notary Public, Head of Notary Office number seventy-five of the Federal District, registered on Mercantile Folio number two hundred thirteen thousand two hundred twenty-three of the Public Register of Property and Commerce of the Federal District, so that with the permission of the Ministry of Foreign Relations number zero nine million twenty-five thousand one hundred one, file number nine thousand six hundred nine million twenty-four thousand three hundred twenty-two, "INNOVA", LIMITED LIABILITY COMPANY was incorporated with a DURATION of NINETY-NINE YEARS, domiciled in MEXICO CITY, FEDERAL DISTRICT, with an Admission of Foreigners Clause, capital stock of FIFTY THOUSAND PESOS, NATIONAL TENDER, and whose corporate purpose is, amount others: a).- To promote, create, organize, exploit and participate in the capital and equity of all kinds of mercantile companies, civil companies, associations or industrial, commercial or service companies, or those of any other nature, both national and foreign, as well as to participate in their administration or liquidation. b). To acquire, negotiate, hold and sell under any title, stocks, bonds, obligations and, in general, credit instruments, securities and stock in mercantile companies, civil companies or associations of any kind, both national and foreign. II.- With document number forty-eight thousand nine hundred seventy, notarized by me on November eleven, nineteen ninety-six, registered under Mercantile Folio number two hundred thirteen thousand two hundred twenty-three of the Public Register of Property and Commerce of this city, whereby the Minutes were notarized of the General Special Shareholders' Meeting of "INNOVA", LIMITED LIABILITY COMPANY, held in this city at nine a.m. on November one, nineteen ninety-six, in which a decision was made, among others, to COMPLETELY AMEND the CORPORATE BYLAWS. III.- With document number forty-nine thousand one hundred eighty-one, notarized by me on March fourteen, nineteen ninety-six, registered under Mercantile Folio number two hundred thirteen thousand two hundred twenty-three of the Public Register of Property and [sic] of this city, whereby the Minutes were notarized of the General Shareholders' Meeting of "INNOVA, LIMITED LIABILITY COMPANY, held in this city at ten a.m. on March seven, nineteen ninety-seven, in which a decision was made, among others, to INCREASE the CAPITAL STOCK to ONE HUNDRED THOUSAND PESOS, NATIONAL TENDER and to COMPLETELY AMEND the CORPORATE BYLAWS. IV.- With document number thirty-six thousand seven hundred eighty-four, notarized in this city on March twenty, nineteen ninety-seven by Attorney Manuel Enrique Oliveros Lara, Notary Public, head of Notary Office number one hundred of this Federal District, acting at that time as associate and in the notary ledger of Notary Office number seventy-five of this city, which is Headed by Attorney Francisco Javier Gerardo Oliveros Lara, registered on Mercantile Folio number two hundred thirteen thousand two hundred twenty-three of the Public Register of Property and Commerce of the Federal District, whereby the Resolutions adopted out of Meeting by unanimous vote of the partners of the company named "INNOVA", LIMITED LIABILITY COMPANY were notarized, which were adopted on March ten, nineteen ninety-seven, during which the decision was made, among others, to INCREASE THE CAPITAL STOCK by FOUR HUNDRED TWO MILLION 4 FIVE HUNDRED THOUSAND PESOS, NATIONAL TENDER, which, added to the current capital stock of ONE HUNDRED THOUSAND PESOS, NATIONAL TENDER, sets the capital stock at FOUR HUNDRED TWO MILLION SIX HUNDRED THOUSAND PESOS, NATIONAL TENDER, and ARTICLE SIX of its CORPORATE BYLAWS was amended to this effect. V.- With document number fifty-one thousand seventy-six, notarized by me on December twenty-two, nineteen ninety-eight, whose first transcript was registered on Mercantile Folio number two hundred thirteen thousand two hundred twenty-three of the Public Register of Property and Commerce of the Federal District, whereby the Resolutions adopted in the meeting with the unanimous consent of the Partners, issued in writing, for the company named "INNOVA", LIMITED LIABILITY COMPANY, dated April one, nineteen ninety-eight, was notarized, in which the decisions were made, among others, to ACCEPT TCI DTH Mexico, Inc. as company partner, as holder of one Series B dash TWO share; to AUTHORIZE Messrs. EMILIO AZCARRAGA JEAN and CHASE CAREY, each holders of one share of series A dash Two and B dash two stock, respectively, each valued at ONE HUNDRED PESOS, NATIONAL TENDER, for them to transfer to GALAVISION DTH, LIMITED LIABILITY COMPANY the first and to NEWS DTH (Mexico) Investment, Ltd. the second; to INCREASE the CAPITAL STOCK of the company by FOUR HUNDRED TWO MILLION SIX HUNDRED THOUSAND PESOS, NATIONAL TENDER which added to the FOUR HUNDRED TWO MILLION SIX HUNDRED THOUSAND PESOS, NATIONAL TENDER totals EIGHT HUNDRED FIVE MILLION TWO HUNDRED THOUSAND PESOS, NATIONAL TENDER; and to AMEND ARTICLE SIX of the CORPORATE BYLAWS regarding the capital stock. VI.- With document number fifty-one thousand seventy-seven, notarized by me on December twenty-two, nineteen ninety-eight, whose first transcript was registered in Mercantile Folio number two hundred thirteen thousand two hundred twenty-three of the Public Register of Property and Commerce of the Federal District, whereby the Resolutions of the Meeting adopted with the unanimous consent of the Partners, issued in writing, of the company named "INNOVA", LIMITED LIABILITY COMPANY, were notarized, in which it was decided, among other things, to INCREASE the CAPITAL STOCK of the COMPANY of EIGHT HUNDRED FIVE MILLION TWO HUNDRED THOUSAND PESOS, NATIONAL TENDER by TWENTY-TWO MILLION FIVE HUNDRED FIFTY THOUSAND PESOS, NATIONAL TENDER for the capital to total EIGHT HUNDRED TWENTY-SEVEN MILLION SEVEN HUNDRED FIFTY THOUSAND PESOS, NATIONAL TENDER; and to AMEND ARTICLE SIX of the CORPORATE BYLAWS regarding the capital stock. VII.- With document number fifty-one thousand seventy-eight, notarized by me on December twenty-two, nineteen ninety-eight, whose first transcript was registered in Mercantile Folio number two hundred thirteen thousand two hundred twenty-three of the Public Register of Property and Commerce of the Federal District, notarizing the minutes of the General Special Shareholders' Meeting of "INNOVA", LIMITED LIABILITY COMPANY, held in this city at ten a.m. on July two, nineteen ninety-eight, in which a decision was made, among others, to TRANSFORM the COMPANY into a LIMITED LIABILITY, VARIABLE CAPITAL COMPANY and to consequently COMPLETELY AMEND the CORPORATE BYLAWS. From the 5 document in question I copy the following pertinent information. ".....----- Moving on to deal with Point One of the Agenda, the President indicated to those present that it was appropriate to transform the Company into a Limited Liability, Variable Capital Company, in accordance with Chapter VIII of the General Law of Mercantile Companies and that, if this took place, it would be necessary to completely amend the bylaws governing the Company. After a broad exchange of opinions, the partners voted unanimously to adopt the following: RESOLUTIONS ONE.- It is decided to transform the Company from a LIMITED LIABILITY COMPANY to a LIMITED LIABILITY, VARIABLE CAPITAL COMPANY, in accordance with Chapter VIII of the General Law of Mercantile Companies; therefore, (sic) hereinafter the Company will be named: 'INNOVA, LIMITED LIABILITY VARIABLE CAPITAL COMPANY". TWO.- The Corporate Bylaws of the Company are completely amended to read as follows: BYLAWS CHAPTER I NAME, PURPOSE, DURATION, DOMICILE NATIONALITY AND JURISDICTION ARTICLE ONE.- NAME. The name of the company is "INNOVA", which will always be followed by the words "LIMITED LIABILITY, VARIABLE CAPITAL COMPANY" or its abbreviation "S. DE R.L. DE C.V.". ARTICLE TWO.- CORPORATE PURPOSE. The purpose of the Company is: a).- To promote, create, organize, exploit and participate in the capital and assets of all kinds of mercantile companies, civil companies, associations or industrial, commercial or services companies or those of any other nature, both national and foreign, and to participate in their administration or liquidation; b).- The installation, operation and commercial exploitation of public telecommunications networks to provide all kinds of public services, including restricted television and radio, which are performed through wires, radio electricity, optic mediums, physical mediums or other electromagnetic systems, in any format technology permits and communication systems to provide the services of supply, transport and distribution of signs, images, sound or information of any nature through the systems of modulation, codification or digitalization technology permits, on the frequency bands and/or orbital positions of satellites assigned to them, except for broadcast television, all once authorization, permission or concession has been awarded by the corresponding authorities, as well as the programming of this type of network, stations and communication systems; c).- The acquisition, negotiation, custody and sale of any title, stock, bonds, obligations and, in general, credit instruments, securities and stock in mercantile companies, civil companies or associations of any kind, both national and foreign; 6 d).- To contract or grant loans, granting or receiving the corresponding guaranties, to issue obligations with or without a specific guaranty, to accept, issue, endorse or guarantee all types of credit instruments and to grant bonds or guarantees of any type regarding the obligations undertaken or the instruments issued or accepted by third parties; e).- To lease, sublease, take or pledge in gratuitous loan, use, possess, acquire, buy, sell, construct, repair, sell and operate under any legal title any type of equipment, warehouse, storage facility, plants, offices, halls, establishments and other establishments necessary or appropriate for the realization of the Company's purposes, including the acquisition and sale of furniture, properties and real rights that are considered essential and are permitted by law; f).- To represent as agent, intermediary or mediator, commissioned party, depositary, legal representative or proxy of all kinds of businesses or national or foreign persons; g).- To provide and receive all kinds of services and accessories of a technical, administrative, supervisory, organizational, marketing, research, development, engineering, or legal nature and, in general, any kind of service related to the industrial or commercial activities of businesses, companies and associations, be they from the Mexican Republic or abroad. h).- To produce and use works susceptible of being protected by copyrights and similar right, and to acquire or transmit ownership of rights thereon and to perform any legal act in this area; i).- To produce, acquire, exercise, use and transmit industrial property rights; j).- To obtain, acquire, transmit, use, register, negotiate and grant the use or enjoyment of all kinds of permits, licenses and concessions; k).- To execute all acts and enter into agreements or contracts of any nature that are related to the purposes above. ARTICLE THREE.- DURATION. Except as established in article twenty-seven of these bylaws, the duration of the company is NINETY-NINE YEARS, starting from the moment the articles of incorporation are signed. ARTICLE FOUR.- DOMICILE. The domicile of the company is in MEXICO CITY, FEDERAL DISTRICT; however, the company may establish agencies, branches, offices, installations and any other departments anywhere in the Mexican Republic or abroad and submit conventional domiciles, without this being understood as changing its corporate domicile. ARTICLE FIVE.- NATIONALITY. The current or future foreign partners of this company are formally obligated with the Federal Government, through the Ministry of Foreign Relations, to be considered as nationals regarding the stock in this company they acquire or hold, as well as the goods, rights, concessions, holdings or interests they hold in this company or the rights and obligations they derive from the contracts to which the company itself is a party, with Mexican authorities, and they may not, consequently, invoke the protection of their Governments, under the penalty if they do so of losing to the Nation the stock they may have acquired. 7 CHAPTER II CAPITAL, STOCK AND PARTNERS ARTICLE SIX.- CAPITAL, SERIES AND CLASSES. The capital stock is variable. The minimum or fixed capital is the amount of EIGHT HUNDRED TWENTY-SEVEN MILLION SEVEN HUNDRED FIFTY THOUSAND PESOS, ZERO, ZERO, SLASH, ONE HUNDRED, NATIONAL TENDER, fully subscribed and paid-in. The variable capital is unlimited. The shares into which the capital stock is divided may be an unequal amount, but in any event they must be ONE HUNDRED PESOS, ZERO, ZERO, SLASH, ONE HUNDRED, NATIONAL TENDER or a multiple of that amount. The shares representing the minimum or fixed capital will be identified as Class "I" shares, and the shares representing the variable capital will be identified as Class "II" shares. The shares representing the minimum or fixed capital (Class "I") and the shares representing the variable capital (Class "II") may be divided in turn into three series with the rights and corporate obligations that are mentioned in these Bylaws, as follows: a. Series "A" will be composed of Sub-Series A-1 (A dash one) and A-2 (A dash 2) and will be integrated by common stock that will initially represent sixty percent of the total capital stock. Series "A" shares may only be subscribed by Mexican nationals and, therefore, the Company will not admit foreign investors as partners holding series "A" shares; b. Series "B" will be composed of Sub-Series B-1 (B dash one) and B-2 (B dash 2) and will be integrated by common stock that will initially represent forty percent of the total capital stock. Series "B" shares will be freely subscribed, therefore they may be acquired by Mexican investors and by foreign individuals and companies or by the persons, companies or entities included in Article Two, Section III, of the Foreign Investment Law. CHAPTER IV SHAREHOLDERS' MEETINGS ARTICLE FOURTEEN. Shareholders will be entitled to participate in the Shareholders' Meeting, whether personally or through a representative legally verified by a simple power of attorney signed by two witnesses. The Shareholders' Meeting is the Supreme Body of the Company, and its resolutions will be binding for all shareholders, including those who are absent or dissenting. In any event, Shareholders who are absent or dissenting will enjoy the rights granted to them under articles thirty-eight and forty-two, in terms of Article eighty-six of the General Law of Mercantile Companies. ARTICLE FIFTEEN. The following matters are exclusively reserved for decision by the Shareholders' Meeting, in the terms set forth in these Bylaws: a.- To discuss, approve, modify or reject the financial statements prepared at the close of each fiscal year, pursuant to Article twenty-four of these corporate bylaws, and to adopt as a result the resolutions to this regard. b.- To determine to decree or pay any dividends or distribution of cash, assets or any other property. 8 c.- To make appointments to and removals from the Board of Directors, pursuant to Article sixteen of these bylaws, as well as to make appointments to and removals from the Executive Committee of the Board of Directors, indicating their powers and obligations. d.- To decide on the division and amortization of the corporate stock pursuant to these bylaws. e.- To require shareholders, if applicable, to make supplementary contributions and additional considerations that are not contemplated in the annual approved budget or business plan. f.- To issue certificates, bonds, subscription rights, purchase options or any other instrument or security that is negotiable, exercisable or convertible into Company stock. g.- To consent to ceding corporate stock and to admitting new partners, pursuant to Article eighteen of these bylaws. h.- To modify the corporate contract. i.- To decide on capital increases and decreases or the sale of corporate stock in the Company, except as contemplated on in each case in these bylaws or in any Annual Budget or Business Plan. j.- To decide on the company's dissolution, as established in Article twenty-seven. k.- To appoint the Company's liquidators, pursuant to Article twenty-eight of these Bylaws. l.- To issue any bonds. m.- To decide on the transformation, merger or elimination of the company. ARTICLE SIXTEEN. Regarding Shareholders' Meetings, the following rules will be observed: a).- Unless otherwise established in these corporate bylaws, the Shareholders' Meetings may be held at any time. b).- Shareholders will meet in a Meeting at least once per year within the first four months following the close of the Company's fiscal year. c).- All Shareholders' Meetings will be held at the company's domicile, unless due to an act of God of force majeure. d).- Notifications of meetings will be issued by any member of the Board of Directors or in accordance with the provisions of articles eighty-one and eighty-two of the General Law of Mercantile Companies. e).- A notification of a meeting will at least contain the date, time, place and Agenda for the Meeting and will be signed by the member of the Board of Directors who is issuing the notice. f).- Unless otherwise established in section g) herein under, the notification of the shareholders' meeting will be given at least fifteen calendar days prior to the meeting date by personal delivery or telex or fax, delivered by messenger or any other mean ensuring receipt thereof at the last domicile or telex or fax number that said persons have notified the Company's Board of Directors of in writing. It is understood that the shareholder having domiciles abroad may send to the Board of Directors a second domicile or telex or fax number in the Mexican Republic to which a copy of the notice will be sent. 9 g).- Any Shareholders' Meeting may be held without the need for prior notice if the shareholders holding all corporate stock with voting rights are present or represented in said Meeting at the time of voting; h).- Unless there is an express judicial order to the contrary, only those individuals or companies whose names are registered in the special book of shareholders will be recognized as holders of the company's corporate stock in order to attend any Shareholders' Meeting, and said registration will be sufficient to admit said persons to the Meeting. i).- The Chairman of the Board of Directors will preside over all shareholders' meetings. Likewise, the Secretary of the Board of Directors will act as Secretary at all shareholders' meeting. In absence of the Chairman and the Secretary of the Board of Directors, they will be replaced by any Alternate Board Member designated by the same series he is designed by. In absence thereof, by the person or persons who, by a simple majority of votes, are appointed by the shareholders present or represented in the meeting. j).- The person presiding over a Shareholders' Meeting will name one or more scrutineers to whom it will entrust the counting of the corporate stock and the proportion that each has in the corporate stock, as well as the number of votes that each shareholder is entitled to cast. k).- For there to be quorum at a Shareholders' Meeting held by virtue of a first notice, the majority of the capital stock subscribed and paid-in must be present or represented, but in any event, the holders of corporate Sub-Series A dash one stock and the holders of the corporate Sub-Series B dash one stock must be present or represented in that majority. In a second or subsequent notice for the same meeting, quorum will be established and the meeting will be duly held if the majority of the corporate stock issued representing the capital stock is present or represented. In no case may a resolution be adopted regarding any of the matters described in Article fifteen of these bylaws without a favorable vote from all holders of corporate Sub-Series A dash one and Sub-Series B dash one stock. l).- Once it has been verified that there is the required quorum, the chair of the meeting will declare the meeting legally held. Additional matters may be added to the Agenda for a meeting only if approved by the holders of one hundred percent of the corporate stock fully subscribed and paid-in of the capital stock. m).- Shareholders will be entitled to cast one vote for each ONE HUNDRED PESOS, ZERO ZERO SLASH ONE HUNDRED, NATIONAL TENDER, paid covering their stock in any Shareholders' Meeting or in any Shareholders' resolution in which a meeting is not required. n).- Unless otherwise stated in these bylaws, the resolutions of Shareholders' Meetings that are legally established will be valid when they are adopted by the majority of votes of the shareholders present or represented. Any resolution relative to the matters included in Article fifteen of these bylaws will be valid only if it is adopted by the favorable vote of all shareholders of capital Sub-Series A dash one and Sub-Series B dash one stock. o).- Any resolution on any of the matters referred to in article fifteen of these bylaws, as well as any other matter that corresponds thereto by the Shareholders' Meeting Law, adopted by the unanimous vote of the shareholders out of Meeting will be valid and will have the same force and legal effect as a resolution adopted in a Shareholders' Meeting, which will be subject to written confirmation from the Shareholders. The proponent of a resolution that would otherwise require a 10 Shareholders' Meeting to be held will send in writing the text of the proposed resolution to each of the shareholders for their approval. Said text must be submitted to each shareholder under the same terms established for notices for Shareholders' Meetings. The document containing the written confirmation of each shareholder must be sent to the Chairman or Secretary of the Company's Board of Directors, who will transcribe the respective resolutions in the corresponding minutes book and will certify that said resolutions were adopted in accordance with this Article sixteen. If the Company does not receive the written vote from a member within the thirty calendar days following the delivery or sending of said text, it will be considered that he voted against the proposed resolution. All costs for sending the text of the proposed resolutions and for the voting of the shareholders will be borne by the Company. In all cases, the provisions of Article eighty-two, paragraph two, of the General Law of Mercantile Companies will be applied. p).- The minutes of each shareholders' meeting and of each resolution the shareholders adopt that does not require a meeting will be prepared, and they will be duly transcribed in the minutes book, which will be signed at least by the Chairman and the Secretary of the meeting or by the Board of Directors. If for any reason a duly notified shareholders' meeting is not held, this fact and the reason why it was not held will be noted in the book of minutes.--......." VIII.-With document number fifty-one thousand seventy-nine, notarized by me on December twenty-two, nineteen ninety-eight, whose first transcript was registered on Mercantile Folio number two hundred thirteen thousand two hundred twenty-three of the Public Register of Property and Commerce of the Federal District, notarizing the General Shareholders' Meeting of "INNOVA, LIMITED LIABILITY, VARIABLE CAPITAL COMPANY, held in this city at nine a.m. on July sixteen nineteen ninety-eight, wherein a decision was made, among others, to AUTHORIZE the ISSUANCE of Class "II" CAPITAL STOCK, representing the VARIABLE CAPITAL of the company, in the amount of FIVE BILLION ONE HUNDRED SEVENTY-TWO MILLION TWO HUNDRED FIFTY THOUSAND PESOS, NATIONAL TENDER, which when added to the minimum or fixed capital of EIGHT HUNDRED TWENTY-SEVEN MILLION SEVEN HUNDRED FIFTY THOUSAND PESOS, NATIONAL TENDER totals the sum of SIX BILLION PESOS, NATIONAL TENDER.- The issuance of Class "II" capital stock mentioned above was for the amount of FIVE BILLION ONE HUNDRED SEVENTY-TWO MILLION TWO HUNDRED FIFTY THOUSAND PESOS, NATIONAL TENDER and was deposited in the Treasury of the Company to be placed into circulation on the dates and for the amounts that the Board of Directors deems appropriate and so each time the needs of the business so require they may be offered by the Board of Directors to be subscribed and paid-in. IX.- With document number fifty-five thousand nine hundred sixty-six, notarized by me on July twenty-two, two thousand two, pending registration in the Public Register of Property and Commerce of the Federal District since it was extended so recently, notarizing the minutes of the Meeting of the Board of Directors of "INNOVA", LIMITED LIABILITY, VARIABLE CAPITAL COMPANY, held in this City at nine a.m. on December fourteen, nineteen ninety-nine, wherein a decision was made, among others, to RECOGNIZE THE SUBSCRIPTION AND CASH PAYMENT made on the mentioned meeting date by the shareholders in the total amount of TWO HUNDRED SIXTEEN MILLION FOUR HUNDRED SEVEN THOUSAND PESOS, 11 NATIONAL TENDER, of the FIVE BILLION ONE HUNDRED SEVENTY-TWO MILLION TWO HUNDRED FIFTY THOUSAND PESOS, NATIONAL TENDER that was agreed upon to constitute the variable portion of the capital stock by the Shareholders' Meeting of July sixteen, nineteen ninety-eight, still pending the subscription and paying-in of the amount of FOUR BILLION SEVEN HUNDRED TEN MILLION FOUR HUNDRED EIGHTY-FOUR THOUSAND FIVE HUNDRED PESOS, NATIONAL TENDER of the Variable Capital.- As a result of the subscription and cash payment mentioned above, the variable portion of the capital stock totals FOUR HUNDRED SIXTY-ONE MILLION SEVEN HUNDRED SIXTY-FIVE THOUSAND FIVE HUNDRED PESOS, NATIONAL TENDER, which when added to the minimum or fixed capital of EIGHT HUNDRED TWENTY-SEVEN MILLION SEVEN HUNDRED FIFTY THOUSAND PESOS, NATIONAL TENDER, the total capital stock is set at ONE BILLION TWO HUNDRED EIGHTY-NINE MILLION FIVE HUNDRED FIFTEEN THOUSAND FIVE HUNDRED PESOS, NATIONAL TENDER. X.- With the resolution that has been notarized. The person who appears states, under oath to state the truth, that her client has the legal standing and that the powers she enjoys have not been revoked or limited in any way whatsoever, that the information in the resolution being notarized is true, that the signature appearing at the foot of the resolution being notarized are authentic and belong to the persons to whom they are attributed, and that the provisions of the Foreign Investment Law and its Bylaw have been respected. FOR HER GENERAL INFORMATION.- The person who appears stated to be a Mexican national by birth, as her parents, a nationality she still has, a native of this City where she was born July thirty, nineteen fifty-seven, married, and Executive, domiciled on Avenida Vasco de Quiroga number two thousand, Building A, third floor, Colonia Zedec Santa Fe, Alvaro Obregon Delegation, Zip Code zero one thousand two hundred ten in this Federal District. I THE NOTARY ATTEST: I.- That I know the person who appears and that in my opinion she has the legal standing to contract and bind herself since nothing would suggest to me otherwise; II.- That the information stated and inserted coincides faithfully to the original documents I had at sight and to which I refer; III.- That I have no indication whatsoever of the falsity of the document I am notarizing; IV.- That I informed the person who appears of the right she has to personally read the document and that its contents be explained to her by the undersigned notary; V.- That I ILLUSTRATED, READ AND EXPLAINED this document to the person who appears, who, understanding the value, consequences and legal scopes of its content, stated her agreement and full understanding thereof, signing it for the record on the twenty-first day of the month it was extended.- Following I DEFINITIVELY AUTHORIZE this document since all legal requirements have been met. MRS. MARIA AZUCENA DOMINGUEZ COBIAN.- (SIGNED). ATTORNEY RAFAEL MANUEL OLIVEROS LARA.- (SIGNED). SEAL OF AUTHORIZATION. "ARTICLE TWO THOUSAND FIVE HUNDRED FIFTY-FOUR" In all general powers of Attorney for Litigation and Collections, it will suffice that it be stated that it is granted with all general powers and the special ones requiring a special clause in accordance with the Law for it to be understood as granted without any limitation whatsoever. 12 In general powers of attorney for administration of goods, it will suffice that it be stated that it is granted with that feature for the proxy to have all kinds of administrative powers. In all general powers of attorney for acts of dominion, it will suffice that they be given with this character for the representative to have all powers of ownership, both relative to the goods and to all kinds of procedures in order to defend them. When the powers of the representatives are desired to be limited in the three cases mentioned above, the limitations will be consigned or the powers will be special. Notaries will insert this article into the transcripts of the powers of attorney they issue. THIS IS THE THIRD TRANSCRIPT I ISSUE OF ITS ORIGINAL FOR "INNOVA", LIMITED LIABILITY, VARIABLE CAPITAL COMPANY, IN ORDER TO RECORD THE NOTARIZATION OF THE RESOLUTION TAKEN OUTSIDE OF A MEETING BY THE SHAREHOLDERS' OF THE COMPANY CITED ABOVE THAT IS CONTAINED HEREIN.- IT CONSISTS OF THIRTEEN COMPARED AND CORRECTED PAGES OF TEXT, PURSUANT TO THE LAW.- IN MEXICO CITY, ON AUGUST TWENTY-ONE, TWO THOUSAND TWO.- I ATTEST. DOCUMENT No. 56,041 BOOK No. 1,155 [notary seal] [signature] NOTARIZED CERTIFICATION IN THE CITY OF MEXICO, on the second of September 2002, I, LICENTIATE RAFAEL MANUEL OLIVEROS LARA, Notary Public, Holder of Notary No. Forty-Five of this City, CERTIFY that the documents copied above and forming a part of this document drafted in my presence on the twenty-second day of July 2002 are on record in document No. 56,041. This document is issued in twelve pages. I swear to that effect in a complementary note to the document in question. I SO SWEAR. [LIC. RAFAEL MANUEL OLIVEROS LARA NOTARY PUBLIC SEAL] [signature] LIC. RAFAEL MANUEL OLIVEROS LARA NOTARY PUBLIC No. 45 OF THE D.F. EX-1.3 4 y87959exv1w3.txt RESOLUTIONS AMENDING THE AMENDED BY-LAWS EXHIBIT 1.3 [OL LOGO] Notaries OLIVEROS LARA Notaries 45 and 75 Atty. Rafael Oliveros Lara Atty. Javier Oliveros Lara THIRD OFFICIAL TRANSCRIPT Montes Urales No. 735 Col. Lomas de Chapultepec Mexico, D.F.- C.P. 11000 Telephones: 5520-0661, 5520-0662 and 5520-0392- Fax: 5520-1200 DOCUMENT. No. 55,871 BOOK No. 1,151 THIRD OFFICIAL TRANSCRIPT OF THE DOCUMENT THAT CONTAINS THE OFFICIAL RECORD OF RESOLUTIONS REACHED OUTSIDE THE SHAREHOLDERS MEETING BY UNANIMOUS VOTE OF THE SHAREHOLDERS OF "INNOVA," LIMITED RESPONSIBILITY CORPORATION OF VARIABLE CAPITAL------------------ RMOL*gdn [header on alternating pages:] [LIC. RAFAEL MANUEL OLIVEROS LARA NOTARY PUBLIC FEDERAL DISTRICT MEXICO UNITED MEXICAN STATES SEAL] Notaries Atty. Rafael Oliveros Lara OLIVEROS LARA Notaries 45 and 75 Mexico, Atty. Javier Oliveros Lara Federal District BOOK NUMBER ONE THOUSAND ONE HUNDRED FIFTY-ONE DOCUMENT FIFTY-FIVE THOUSAND EIGHT HUNDRED SEVENTY-ONE IN MEXICO CITY, on the thirteenth day of the month of June of the year two thousand two, BEFORE ME, LICENTIATE RAFAEL MANUEL OLIVEROS LARA, Notary Public, Holder of Notary Number Forty-Five of this City, appears MRS. MARIA AZUCENA DOMINGUEZ COBIAN in her role as the Special Legal Representative of "INNOVA," A LIMITED RESPONSIBILITY CORPORATION OF VARIABLE CAPITAL [S. de R. L. de C.V.], and asks me to officially notarize and record Resolutions taken by unanimous vote of the shareholders outside the Shareholders Meeting of the aforementioned corporation on the date of May the tenth of the year two thousand two, and shows me the text in twelve pages written on one side; in accordance with desires of the person appearing, I officially notarize and record the aforementioned resolutions, which I transcribe below: RESOLUTIONS BY UNANIMOUS VOTE OF THE SHAREHOLDERS OF INNOVA, S. DE R. L. DE C.V. The resolutions that appear below were adopted by unanimous consent, confirmed in writing, by the totality of the shareholders of INNOVA, S. DE R. L. DE C.V. in conformity with the provisions of Article Sixteen paragraph o) of the by-laws and they will take effect as of the 10th (tenth) day of May of 2002 (two thousand two). RESOLUTIONS FIRST. Special recognition was voted to Mr. Engineer Cristobal Rugama Maison, Engineer, deceased this past April the 14th (fourteenth), 2002 (two thousand two), who occupied the post of Executive Director General of the Corporation to express for the record the appreciation of the shareholders of his performance and brilliant service to the Corporation. SECOND. Mr. Pablo Abel Vazquez Oria, Engineer, was designated Executive Director General of the Corporation. THIRD. Mr. Carlos Ferreira Rivas, Engineer, was designated Executive Director of Finances and Administration of the Corporation. FOURTH. Resignations were accepted from Messrs. Guillermo Nava Gomez-Tagle, Guillermo Nunez Herrera, Humberto Villanueva Alvear, Chase Carey, Ken Bettsteller and Nicola Bramford from the positions they had been occupying on the Council of Managers. FIFTH. Series A Shareholders designate Messrs. Alexandre Moreira Penna da Silva and Pablo Abel Vazquez Oria to serve as Members of the Council of Managers and Messrs. Jose Antonio Lara del Olmo and Salvi Folch Viadero to serve as Alternate Members. SIXTH. Series B Shareholders designate Messrs. Romulo Pontual and Jacopo Bracco to serve as Members of the Council of Managers. SEVENTH. By virtue of the foregoing resolutions, the Council of Managers of INNOVA, S. de R. L. de C.V. is now made up in the following manner: COUNCIL OF MANAGERS MEMBERS ALTERNATES SERIES "A" Emilio Fernando Azcarraga Jean Chairman Rafael Carabias Principe Alexandre Penna da Silva Treasurer Jose Antonio Lara del Olmo 1 Jose Antonio Baston Patino Manager Jorge Lutteroth Echegoyen Pablo Abel Vazquez Oria Manager Salvi Folch Viadero Alfonso de Angoitia Noriega Prosecretary Maria Azucena Dominguez Cobian Juan Sebastian Mijares Ortega Manager Joaquin Balcarcel Santa Cruz SERIES "B" Romulo Pontual Vice Chairman (To be designated later). Paul Haggerty Manager Paula Wardinski Jacopo Bracco Manager Michael Doodan Lawrence Jacobs Manager Emilio Carrillo Gamboa EIGHTH. Mssrs. Emilio Carrillo Gamboa and Michael Doodan were ratified as Secretary and Alternate Secretary, respectively, of the Council of Managers. NINTH. Mr. Alfonso de Angoitia Noriega and Mrs. Maria Azucena Dominguez Cobian were ratified as Prosecretary and Alternate Prosecretary, respectively, of the Council of Managers. TENTH. It was resolved that as of this date the Executive Committee of the Council of Managers shall be made up of the following persons: EXECUTIVE COMMITTEE OF THE COUNCIL OF MANAGERS MEMBERS ALTERNATES SERIES "A-1 (ONE)" Emilio Fernando Azcarraga Jean Chairman Juan Sebastian Mijares Ortega Alfonso de Angoitia Noriega Joaquin Balcarcel Santa Cruz Pablo Abel Vazquez Oria Jose Antonio Lara del Olmo SERIES "B-1 (ONE)" Romulo Pontual Vice Chairman Emilio Carrillo Gamboa Paul Haggerty Paula Wardinski Jacopo Bracco Lawrence Jacobs ELEVENTH. The powers of the Executive Committee of the Council of Managers shall be the same as those that Article Eighteen of the By-Laws grants to the Council of Managers (except for the power to convoke shareholder meetings referred to in paragraph p). As to function, the provisions of Articles Seventeen, Eighteen, Twenty and Twenty-One of the By-Laws shall apply to the quorum for legal installation of the meetings of the Executive Committee, voting and adoption of the resolutions that the entity decides upon, with the exception that the Executive Committee shall be made up of four Members and as many as four Alternates designated by the Shareholder parties holding Series "A-1 (one)" shares plus three Members and as many as three Alternates designated by the Shareholder parties holding Series "B-1 (one)" shares. TWELFTH. Prior to this date, Members and Alternates of the Council of Managers, staff personnel and Members and Alternates of the Executive Committee of the Council of Managers expressed conformity with occupying the posts to which they were being proposed and swore to perform their duties faithfully. THIRTEENTH. A vote of appreciation is granted to Messrs. Guillermo Nava Gomez-Tagle, Guillermo Nunez Herrera, Humberto Villanueva Alvear, Chase Carey, Ken Bettsteller and Mrs. Nicola Bramford for all their outstanding efforts in the performance of their duties and they are held blameless of any responsibility that they may have incurred with regard to the Corporation. THIRTEENTH [sic]. The general and special powers granted by the Corporation in favor of Mr. C.P. Santiago Cantu Garza by means of document number 52,800 (fifty-two thousand eight hundred) dated March the 6th 2 (sixth), 2000 (two thousand), notarized by the holder of Notary Public number 45 (forty-five) of the Federal District, Lic. Rafael Manuel Oliveros Lara, as well as the general and special powers granted by the Corporation in favor of Mssrs. Luis Ramon Maldonado Palomares and Jose Salazar-Llarregui Rufino by means of document number 54,914 (fifty-four thousand nine hundred fourteen) dated October the 3rd (third), 2001 (two thousand one), notarized by the holder of Notary Public number 45 (forty-five) of the Federal District, Lic. Rafael Manuel Oliveros Lara. FOURTEENTH. The persons listed below, who must observe the provisions in Article Twenty-One of the By-Laws, are designated as legal representatives of the Corporation with the powers stated: a) POWER is conferred TO DRAW, ISSUE, ACCEPT, ENDORSE, GRANT AND LIEN, or in any other manner sign credit instruments in conformity with Article Nine (9) of the GENERAL LAW ON TITLES AND CREDIT OPERATIONS; as well as the power to grant bonds or guarantees of any class with respect to obligations contracted by the Corporation or with respect to titles issued or accepted by third parties, the facility having to be exercised in a joint manner with two signatures that correspond to any of the persons in GROUP "A" plus one signature that corresponds to any of the persons listed in GROUP "B." GROUP "A" is made up of the following persons: Mssrs. EMILIO FERNANDO AZCARRAGA JEAN, LAWRENCE JACOBS, PABLO ABEL VAZQUEZ ORIA, JACOPO BRACCO, ALFONSO DE ANGOITIA NORIEGA, ROMULO PONTUAL, JOSE ANTONIO BASTON PATINO, JUAN SEBASTIAN MIJARES ORTEGA, and ALEXANDRE MOREIRA PENNA DA SILVA. And GROUP "B" is made up of the following persons: Mssrs. JORGE AGUSTIN LUTTEROTH ECHEGOYEN, SALVI FOLCH VIADERO, RAFAEL CARABIAS PRINCIPE, JOAQUIN BALCARCEL SANTA CRUZ, and MRS. MARIA AZUCENA DOMINGUEZ COBIAN. These legal representatives, acting in the manner indicated above, shall have the power to confer general or special powers, overseeing the exercise of such power, as well as the power to revoke such power, on the understanding that the delegations of power that they grant with their facilities may not exceed the limits referred to in Article Twenty-One of the Corporate By-Laws. b) GENERAL POWER TO UNDERTAKE ACTS OF ADMINISTRATION, COURT APPEARANCES AND COLLECTIONS to be exercised jointly or separately is granted to the following: MSSRS. EMILIO FERNANDO AZCARRAGA JEAN, LAWRENCE JACOBS, PABLO ABEL VAZQUEZ ORIA, JOSE ANTONIO BASTON PATINO, ROMULO PONTUAL, JORGE AGUSTIN LUTTEROTH ECHEGOYEN, JACOPO BRACCO, JUAN SEBASTIAN MIJARES ORTEGA, ALEXANDRE MOREIRA PENNA DA SILVA., SALVI FOLCH VIADERO, RAFAEL CARABIAS PRINCIPE, JOAQUIN BALCARCEL SANTA CRUZ, AND MRS. MARIA AZUCENA DOMINGUEZ COBIAN, with all the general powers and including any those cases that require a special power or clause in conformity with the law, under the terms of the first two paragraphs of Article Two Thousand Fifty-four, Article Two Thousand Five Hundred Seventy-four, Article Two Thousand Five Hundred Seven (except for the powers to absolve and articulate positions and implement the cession of goods set forth in Parts IV and V) and Article Two Thousand Five Hundred Ninety-three of the CIVIL CODE in effect for the Federal District and its correlatives in the location in which the power may come to be exercised, so that they may represent the Corporation in dealings with all classes of physical or corporate entities or authorities of any order and degree, whether municipal, local or federal, tax, judicial, civil, criminal or administrative and in relation to labor or any other aspect, being able to initiate and desist from all types of legal judgments, actions and procedures, whether civil, mercantile, criminal, administrative, contentious or labor in nature, including appeals to superior courts and desisting from such an appeal, compromising, receiving payments, presenting positions, bidding and raising bids in auctions, commitments to arbitration, initiating and persisting in suits, incidents, appeals both regular and extraordinary, challenging, accepting denunciations, complaints and criminal accusations and granting the pardon referred to in Article Ninety-three of the CRIMINAL CODE in effect in the Federal District and its correlatives in the location in which the power may come to be exercised, coming to the defense of a civil party with the Public Ministry [i.e. Department of Justice], as well as to petition compensation for damages arising from a crime, being authorized to sign any public or private documents that may be appropriate for proper compliance with the present powers. 3 These legal representatives are empowered individually to grant general or special powers, within the powers with which they are invested, overseeing the exercise of such powers, as well as revoking them as necessary; on the understanding that the powers they delegate may not exceed the limitations referred to in Article Twenty-One of the Corporate By-Laws. c) GENERAL POWER TO UNDERTAKE ACTS OF ADMINISTRATION is granted to the following persons: MSSRS. MIGUEL GUTIERREZ CERVANTES, CARLOS FERREIRO RIVAS, GUILLERMO SANCHEZ PADILLA, JORGE TODD ALVAREZ, MARCO ANTONIO SAUCEDO SALAZAR, RICARDO LEOPOROWSKY RAMOS AND RAMON OROZCO ORRICO, with all the general powers and including any those cases that require a special power or clause in conformity with the law, under the terms of the second paragraph of Article Two Thousand Fifty-four of the Civil Code in effect for the Federal District and its correlatives in the location in which the power may come to be exercised, subject to the following: (i) Acting jointly, any two of the legal representatives may undertake operations the amount of which does not exceed the sum of US$ 100,000.00 (One hundred thousand dollars zero zero cents legal tender of the United States of America) or its equivalent in national currency; and (ii) Acting in conjunction with Mr. PABLO ABEL VAZQUEZ ORIA, any one of the legal representatives may undertake operations the amount of which does exceed the sum of US$ 100,000.00 (One hundred thousand dollars zero zero cents legal tender of the United States of America) or its equivalent in national currency but does not exceed the sum of US$ 500,000.00 (Five hundred thousand dollars zero zero cents legal tender of the United States of America) or its equivalent in national currency. These legal representatives thus instituted may not delegate the powers conferred on them and they shall proceed in the exercise of the present power under the terms that they judge most appropriate to the interests of the empowering Corporation. d) POWER is conferred TO DRAW, ISSUE, ACCEPT, ENDORSE, GRANT AND LIEN, or in any other manner sign credit instruments in conformity with Article Nine (9) of the GENERAL LAW ON TITLES AND CREDIT OPERATIONS; as well as the power to grant bonds or guarantees of any class with respect to obligations contracted by the Corporation or with respect to titles issued or accepted by third parties, to MSSRS. PABLO ABEL VAZQUEZ ORIA, CARLOS FERREIRO RIVAS and GUILLERMO SANCHEZ PADILLA. That power shall have to be exercised jointly, requiring the signatures of two of the empowered representatives, subject to the limitation that the empowered representatives may only undertake operations the amount of which does not exceed the sum of US$ 100,000.00 (One hundred thousand dollars zero zero cents legal tender of the United States of America) or its equivalent in national currency. Nevertheless, the empowered representatives acting in the manner established may undertake operations that do exceed the aforesaid sum when such operations are related to: (i) payments for advertising; (ii) the acquisition of decoding equipment, receptor antennas and other equipment for installation in the domiciles of the subscribers of the Corporation or its business affiliates; (iii) payments for telephone services; (iv) payments related to services relocating antennas; (v) payments to programmers and the acquisition of all classes of content for transmission; (vi) payments for the concept of satellite rental; and (vii) other matters considered by the Council of Managers of the Corporation as pertaining to the ordinary course of business. e) MSSRS. CARLOS FERREIRO RIVAS, GUILLERMO SANCHEZ PADILLA, FORTINO GARDUNO VALDEZ, MIGUEL GUTIERREZ CERVANTES and Mrs. MARIA AZUCENA DOMINGUEZ COBIAN are granted a SPECIAL POWER so that they can accept and respond to summonses, sign initial and final 4 visit records, receive official communications, sign declarations of Value Added Tax and Income Tax, notices of increases and decreases, sign declarations of the payment of fees that are required in dealing with the various government agencies, whether federal, state or municipal; as well as in order to comply with any other type of fiscal obligation that may arise and to deal with the procedures involved with the Secretary of the Treasury and Public Credit and with the Tax Authorities of the Federation, the States, the municipal governments and the Federal District, including autonomous fiscal agencies or agencies to resolve administrative disputes, whether they pertain to the Federation, the States, or the municipalities, in terms of Article Eighteen First Paragraph, Articles Nineteen, Thirty-One, One Hundred Twenty-Two, Two Hundred and other related Articles of the Federation Tax Code, as well as Article Fourteen of the Federation Tax Code Regulations and the correlatives of those texts in the Laws of the Treasury Secretariat and the Tax Codes of the States and the Federal District, and Article Eight of the Law of Habeas Corpus. The empowered representatives may request tax refunds when acting in conjunction with and using the signature of any of the following: Mssrs. PABLO ABEL VAZQUEZ ORIA, JUAN SEBASTIAN MIJARES ORTEGA, ALEXANDRE MOREIRA PENNA DA SILVA, JORGE AGUSTIN LUTTEROTH ECHEGOYEN, JOAQUIN BALCARCEL SANTA CRUZ or JOSE ANTONIO LARA DEL OLMO. Within the specialization of the present power, the empowered representatives shall enjoy the broadest of powers for pleas, collection and acts of administration under the terms of the first two paragraphs of Article Two Thousand Five Hundred Fifty-Four (2,554) of the Civil Code in effect for the Federal District and its correlatives in the other States of the Republic of Mexico in which the power may come to be exercised, with all the general powers and including the special powers that may require a special power or clause in accordance with the law. The empowered representatives may delegate the powers conferred on them, overseeing their exercise, and revoke the substitutions that they make. f) Mssrs. PABLO ABEL VAZQUEZ ORIA, JUAN SEBASTIAN MIJARES ORTEGA, LAWRENCE JACOBS, ALEXANDRE MOREIRA PENNA DA SILVA, ROMULO PONTUAL, JORGE AGUSTIN LUTTEROTH ECHEGOYEN and JACOPO BRACCO, with "A" signatures, and Mssrs. CARLOS FERREIRO RIVAS and GUILLERMO SANCHEZ PADILLA, with "B" signatures, are granted a SPECIAL POWER that must be exercised in conjunction with two "A" signatures or with one "A" signature in conjunction with a "B" signature. Those thus empowered, acting in that manner, may request the opening of current accounts, checking accounts, securities or credits at any credit institution in the name of the Corporation, making deposits and carrying out credit operations in such accounts and disposing of the funds and amounts by payment orders and transfers, checks and any other documents of disposition; they may also designate persons authorized to draw from the accounts and cancel such accounts when they find it appropriate. Those thus empowered may also release, negotiate, discount, endorse, accept, constitute a lien, collect and pay letters of exchange, promissory notes, insurance policies, checks and other draft or credit documents of a commercial or financial nature and protest such documents for lack of acceptance or payment. Those thus empowered, acting in the manner stated above, may designate persons empowered to draw against current accounts, securities, credit and investment accounts and from Corporate checks and in order to pay such accounts when they deem it appropriate. Such a designation may not devolve upon a single person, since such powers must always be exercised by two empowered representatives acting in conjunction. g) A SPECIAL POWER is granted indistinctly to MSSRS. PABLO ABEL VAZQUEZ ORIA, CARLOS FERREIRO RIVAS and MIGUEL GUTIERREZ CERVANTES to endorse as owner and/or to seek payment of the promissory notes that each subscriber must sign on contracting and/or modifying the service. 5 Within the specialization of the power, those empowered shall enjoy the broadest of powers TO ENDORSE credit titles in conformity with the provisions of Article Nine (9) of the GENERAL LAW OF CREDIT TITLES AND OPERATIONS. These empowered representatives instituted may not delegate the powers conferred on them and they shall proceed in the exercise of the present power in the terms that they judge most appropriate to the interests of the empowering Corporation. FIFTEENTH. Mssrs. Emilio Carrillo Gamboa, Juan Sebastian Mijares Ortega and Mrs. Maria Azucena Dominguez Cobian are designated as special representatives to appear indistinctly in the name and representation of the Corporation before the Notary Public of their choice for the purpose of requesting and granting the partial or total official notarization of the present resolutions, as well as to issue the simple or certified copies of the resolutions that may be requested of them. The present Unanimous Consent in writing may be prepared in one or more copies, each one of which shall constitute an original and all in conjunction shall constitute a single instrument. APPROVED: SKY DTH, S. de R.L. de C.V. by: Julio Barba Hurtado (signed) Efren Yaber Jimenez (signed) News DTH (Mexico) Investment Limited by: Arthur M. Siskind Liberty Mexico DTH, Inc. by: Charles Y. Tanabe I add a photocopy of the related resolutions, which I swear agrees faithfully with the original document, which I have had in my possession, to the Appendix in the dossier that corresponds to this document and under the letter "A." NATIONAL REGISTRATION OF FOREIGN INVESTMENTS In compliance with the provisions in Articles Thirty-Two and Thirty-Four of the Foreign Investment Law, the person appearing showed me the Request for Registration of the "INNOVA" CORPORATION, A LIMITED RESPONSIBILITY CORPORATION WITH VARIABLE CAPITAL in the National Registry of Foreign Investments on May twenty-ninth of the year two thousand two at folio number one hundred eight thousand two hundred fifteen diagonal fifteen thousand eight hundred fourteen, issued by the General Directorate of Foreign Investment. I add a photocopy of the document mentioned above to the Appendix in the dossier that corresponds to this document and under the letter "B." Having expressed the foregoing the person appearing agreed to the following: CLAUSES FIRST. Mrs. MARIA AZUCENA DOMINGUEZ COBIAN, in her role as Special Legal Representative for the resolutions taken by unanimous vote of the Shareholders of the "INNOVA" CORPORATION, A LIMITED RESPONSIBILITY CORPORATION WITH VARIABLE CAPITAL, officially notarized the aforementioned resolutions for all legal effects to which they may be subject on May tenth of the year two thousand two. SECOND. By means of this instrument, the "INNOVA" CORPORATION, A LIMITED RESPONSIBILITY CORPORATION WITH VARIABLE CAPITAL, represented by its Special Legal Representative, Mrs. MARIA AZUCENA DOMINGUEZ COBIAN, formalizes the following: the DESIGNATION of Mr. PABLO ABEL VAZQUEZ ORIA as EXECUTIVE DIRECTOR GENERAL of the Corporation, the DESIGNATION of 6 Mr. CARLOS FERREIRO RIVAS (ENGINEER) as EXECUTIVE DIRECTOR of FINANCES AND ADMINISTRATION, the ACCEPTANCE of the RESIGNATIONS presented by Mssrs. GUILLERMO NAVA GOMEZ-TAGLE, GUILLERMO NUNEZ HERRERA, HUMBERTO VILLANUEVA ALVEAR, CHASE CAREY, KEN BETTSTELLER AND NICOLA BRAMFORD from the posts that they had been occupying on the Council of Managers of the Corporation, the DESIGNATION of Messrs. ALEXANDRE MOREIRA PENNA DA SILVA AND PABLO ABEL VAZQUEZ ORIA as Members and MESSRS. JOSE ANTONIO LARA DEL OLMO AND SALVI FOLCH VIADERO as Alternate Members of the Council of Managers for Series "A" shareholders; the DESIGNATION of Messrs. ROMULO PONTUAL and JACOPO BRACCO as Members of the Council of Managers for Series "B" shareholders; it also formalizes the RATIFICATION of Messrs. Emilio Carrillo Gamboa and MICHAEL DOODAN as Secretary and Alternate Secretary of the COUNCIL OF MANAGERS, respectively; it also formalizes the RATIFICATION of Messrs. ALFONSO DE ANGOITIA NORIEGA and MRS. MARIA AZUCENA DOMINGUEZ COBIAN as PROSECRETARY and ALTERNATE PROSECRETARY of the Council of Managers, respectively, in conformity with the first and thirteenth resolutions, taken in relation to the resolutions that had been transcribed in the present document, the Council of Managers and the Executive Committee of the Council of Managers, is now made up in the following manner: COUNCIL OF MANAGERS MEMBERS ALTERNATES SERIES "A" Emilio Fernando Azcarraga Jean Chairman Rafael Carabias Principe Alexandre Penna da Silva Treasurer Jose Antonio Lara del Olmo Jose Antonio Baston Patino Manager Jorge Lutteroth Echegoyen Pablo Abel Vazquez Oria Manager Salvi Folch Viadero Alfonso de Angoitia Noriega Prosecretary Maria Azucena Dominguez Cobian Juan Sebastian Mijares Ortega Manager Joaquin Balcarcel Santa Cruz SERIES "B" Romulo Pontual Vice Chairman (To be designated later). Paul Haggerty Manager Paula Wardinski Jacopo Bracco Manager Michael Doodan Lawrence Jacobs Manager Emilio Carrillo Gamboa EXECUTIVE COMMITTEE OF THE COUNCIL OF MANAGERS MEMBERS ALTERNATES SERIES "A-1 (ONE)" Emilio Fernando Azcarraga Jean Chairman Juan Sebastian Mijares Ortega Alfonso de Angoitia Noriega Joaquin Balcarcel Santa Cruz Pablo Abel Vazquez Oria Jose Antonio Lara del Olmo SERIES "B-1 (ONE)" Romulo Pontual Vice Chairman Emilio Carrillo Gamboa Paul Haggerty Paula Wardinski Jacopo Bracco Lawrence Jacobs THIRD. By means of this instrument, the "INNOVA" CORPORATION, A LIMITED RESPONSIBILITY CORPORATION WITH VARIABLE CAPITAL, represented by its Special Legal Representative, Mrs. MARIA AZUCENA DOMINGUEZ COBIAN, formalizes the REVOCATION of the POWERS that are mentioned below in 7 conformity with resolution thirteen, taken in relation to the resolutions that had been transcribed in the present document, a revocation of the powers mentioned below: a) The general and special powers granted in favor of PUBLIC ACCOUNTANT SANTIAGO CANTU GARZA by means of document number fifty-two thousand eight hundred dated March six, two thousand, notarized by me. b) And the general and special powers granted in favor of Mssrs. LUIS RAMON MALDONADO PALOMARES and JOSE SALAZAR-LLARREGUI RUFINO by means of document number fifty-four thousand nine hundred fourteen notarized by me on October three of the year two thousand one. FOURTH. By means of this instrument, the "INNOVA" CORPORATION, A LIMITED RESPONSIBILITY CORPORATION WITH VARIABLE CAPITAL, represented by its Special Legal Representative, Mrs. MARIA AZUCENA DOMINGUEZ COBIAN, in the terms of Article Ten of the General Law of Mercantile Corporations, formalizes the GRANTING OF POWERS mentioned below, in conformity with resolution fourteen paragraphs a), b), c), d), e), f) and g) taken in relation to the resolutions that have been transcribed in this document, powers that are conferred with the faculties that are mentioned below in favor of the following persons WHO IN THE EXERCISE OF THEIR POWERS SHALL OBSERVE THE PROVISIONS IN ARTICLE TWENTY-ONE OF THE CORPORATE BY-LAWS: a) POWER is conferred TO DRAW, ISSUE, ACCEPT, ENDORSE, GRANT AND LIEN, or in any other manner sign credit instruments in conformity with Article Nine (9) of the GENERAL LAW ON TITLES AND CREDIT OPERATIONS; as well as the power to grant bonds or guarantees of any class with respect to obligations contracted by the Corporation or with respect to titles issued or accepted by third parties, the facility having to be exercised in a joint manner utilizing signatures that correspond to any two of the persons in GROUP "A" plus one signature that corresponds to any one of the persons in GROUP "B." GROUP "A" is made up of the following persons: Mssrs. EMILIO FERNANDO AZCARRAGA JEAN, LAWRENCE JACOBS, PABLO ABEL VAZQUEZ ORIA, JACOPO BRACCO, ALFONSO DE ANGOITIA NORIEGA, ROMULO PONTUAL, JOSE ANTONIO BASTON PATINO, JUAN SEBASTIAN MIJARES ORTEGA, and ALEXANDRE MOREIRA PENNA DA SILVA. And GROUP "B" is made up of the following persons: Mssrs. JORGE AGUSTIN LUTTEROTH ECHEGOYEN, SALVI FOLCH VIADERO, RAFAEL CARABIAS PRINCIPE, JOAQUIN BALCARCEL SANTA CRUZ, AND MRS. MARIA AZUCENA DOMINGUEZ COBIAN. The legal representatives, acting in the manner indicated above, shall have the power to confer general or special powers, overseeing the exercise of such power, and revoking the delegation as necessary, on the understanding that the power they delegate with their facilities may not exceed the limits referred to in Article Twenty-One of the Corporate By-Laws. b) GENERAL POWER TO UNDERTAKE ACTS OF ADMINISTRATION, COURT APPEARANCES AND COLLECTIONS to be exercised jointly or separately is granted to the following: MSSRS. EMILIO FERNANDO AZCARRAGA JEAN, LAWRENCE JACOBS, PABLO ABEL VAZQUEZ ORIA, JOSE ANTONIO BASTON PATINO, ROMULO PONTUAL, JORGE AGUSTIN LUTTEROTH ECHEGOYEN, JACOPO BRACCO, JUAN SEBASTIAN MIJARES ORTEGA, ALEXANDRE MOREIRA PENNA DA SILVA., SALVI FOLCH VIADERO, RAFAEL CARABIAS PRINCIPE, JOAQUIN BALCARCEL SANTA CRUZ, AND MRS. MARIA AZUCENA DOMINGUEZ COBIAN, with all the general powers and includes the special powers that may require a special power or clause in conformity with the law, under the terms of the first two paragraphs of Article Two Thousand Fifty-four, Article Two Thousand Five Hundred Seventy-four, Article Two Thousand Five Hundred Seven (except for the powers to absolve and articulate positions and implement the cession of goods set forth in Parts IV and V) and Article Two Thousand Five Hundred Ninety-three of the CIVIL CODE in effect for the Federal District and its correlatives in the location in which the power may come to be exercised, so that they may represent the Corporation with all classes of physical or corporate entities or authorities of any order and degree, whether municipal, local or 8 Federal, tax, judicial, civil, criminal or administrative and in relation to labor or any other aspect, being able to initiate and desist from all types of legal judgments, actions and procedures, whether civil, mercantile, criminal, administrative, contentious or labor in nature, including appeals to superior courts and desisting from such appeals, compromising, receiving payments, presenting positions, bidding and raising bids in auctions, commitments to arbitration, initiating and persisting in suits, incidents, appeals both regular and extraordinary, challenging, accepting denunciations, complaints and criminal accusations and granting the pardon referred to in Article Ninety-three of the CRIMINAL CODE in effect in the Federal District and its correlatives in the location in which the power may come to be exercised, coming to the defense of a civil party with the Public Ministry, as well as to petition compensation for damages arising from a crime, being authorized to sign any public or private documents that may be appropriate for proper compliance with the present powers. The legal representatives are empowered as individuals to grant general or special powers, subject to the powers with which they are invested, overseeing the exercise of such powers, as well as revoking them; on the understanding that the powers they delegate may not exceed the limitations referred to in Article Twenty-One of the Corporate By-Laws. c) GENERAL POWER TO UNDERTAKE ACTS OF ADMINISTRATION is granted to the following: MSSRS. MIGUEL GUTIERREZ CERVANTES, CARLOS FERREIRO RIVAS, GUILLERMO SANCHEZ PADILLA, JORGE TODD ALVAREZ, MARCO ANTONIO SAUCEDO SALAZAR, RICARDO LEOPOROWSKY RAMOS AND RAMON OROZCO ORRICO, with all the general powers and including the special powers that may require a special power or clause in conformity with the law, under the terms of the second paragraph of Article Two Thousand Fifty-four of the Civil Code in effect for the Federal District and its correlatives in the location in which the power may come to be exercised, subject to the following: (i) Any two of the legal representatives, acting jointly, may undertake operations the amount of which does not exceed the sum of US$ 100,000.00 (One hundred thousand dollars zero zero cents legal tender of the United States of America) or its equivalent in national currency; and (ii) Acting in conjunction with Mr. PABLO ABEL VAZQUEZ ORIA, any one of the legal representatives may undertake operations the amount of which does exceed the sum of US$ 100,000.00 (One hundred thousand dollars zero zero cents legal tender of the United States of America) or its equivalent in national currency but does not exceed the sum of US$ 500,000.00 (Five hundred thousand dollars zero zero cents legal tender of the United States of America) or its equivalent in national currency. These legal representatives thus instituted may not delegate the powers conferred on them and they shall proceed in the exercise of the present power under the terms they judge most appropriate to the interests of the empowering Corporation. d) POWER is conferred TO DRAW, ISSUE, ACCEPT, ENDORSE, GRANT AND LIEN, or in any other manner sign credit instruments in conformity with Article Nine (9) of the GENERAL LAW ON TITLES AND CREDIT OPERATIONS; as well as the power to grant bonds or guarantees of any class with respect to obligations contracted by the Corporation or with respect to titles issued or accepted by third parties, to MSSRS. PABLO ABEL VAZQUEZ ORIA, CARLOS FERREIRO RIVAS and GUILLERMO SANCHEZ PADILLA, which power shall have to be exercised jointly by utilization of the signatures of two of the empowered representative, with the limitation that the empowered representatives may only undertake operations the amount of which does not exceed the sum of US$ 100,000.00 (One hundred thousand dollars zero zero cents legal tender of the United States of America) or its equivalent in national currency. Nevertheless, the empowered representatives acting in the manner established may undertake operations that exceed the aforesaid sum when such operations are related to: (i) payments for advertising; 9 (ii) the acquisition of decoding equipment, receptor antennas and other equipment for installation in the domiciles of the subscribers of the Corporation or its business affiliates; (iii) payments for telephone services; (iv) payments related to services to relocate antennas; (v) payments to programmers and for the acquisition of all classes of content for transmission; (vi) payments for the concept of satellite rental; and (vii) other matters considered by the Council of Managers of the Corporation as pertaining to the ordinary course of business. e) MSSRS. CARLOS FERREIRO RIVAS, GUILLERMO SANCHEZ PADILLA, FORTINO GARDUNO VALDEZ, MIGUEL GUTIERREZ CERVANTES and Mrs. MARIA AZUCENA DOMINGUEZ COBIAN are granted a SPECIAL POWER so that they can accept and respond to summonses, sign initial and final visit records, receive official communications, sign declarations of Value Added Tax and Income Tax, notices of increases and decreases, sign declarations of the payment of fees that are required in dealing with the various government agencies, whether federal, state or municipal; as well as in order to comply with any other type of fiscal obligation and undertake the procedures involved in dealing with the Secretary of the Treasury and Public Credit and of the Tax Authorities of the Federation, of the States, the municipal governments and the Federal District, of the autonomous fiscal agencies or administrative contention, whether they pertain to the Federation, the States, or the municipalities, in terms of Article Eighteen First Paragraph, Article Nineteen, Thirty-One, One Hundred Twenty-Two, Two Hundred and other related Articles of the Federation Tax Code, and Article Fourteen of the Federation Tax Code Regulations and their correlatives in the Laws of the Treasury Secretariat and the Tax Codes of the States and the Federal District, and Article Eight of the Law of Habeas Corpus. The empowered representatives may request tax refunds when acting in conjunction and with the signature of any of the following: Mssrs. PABLO ABEL VAZQUEZ ORIA, JUAN SEBASTIAN MIJARES ORTEGA, ALEXANDRE MOREIRA PENNA DA SILVA, JORGE AGUSTIN LUTTEROTH ECHEGOYEN, JOAQUIN BALCARCEL SANTA CRUZ or JOSE ANTONIO LARA DEL OLMO, to solicit the return of contributions. Within the specialization of the present power, the empowered representatives shall enjoy the broadest of powers for pleas, collection and acts of administration under the terms of the first two paragraphs of Article Two Thousand Five Hundred Fifty-Four (2,554) of the Civil Code in effect for the Federal District and its correlatives in the other States of the Republic of Mexico in which the power may come to be exercised, with all the general powers including those cases that require a special power or clause in accordance with the law. These empowered representatives may delegate the powers conferred on them, overseeing their exercise, and revoke the substitutions that they make. f) Mssrs. PABLO ABEL VAZQUEZ ORIA, JUAN SEBASTIAN MIJARES ORTEGA, LAWRENCE JACOBS, ALEXANDRE MOREIRA PENNA DA SILVA, ROMULO PONTUAL, JORGE AGUSTIN LUTTEROTH ECHEGOYEN and JACOPO BRACCO, with "A" signatures, and Mssrs. CARLOS FERREIRO RIVAS and GUILLERMO SANCHEZ PADILLA, with "B" signatures, are granted a SPECIAL POWER that must be exercised in conjunction with two "A" signatures or utilizing one "A" signature in conjunction with a "B" signature. Those thus empowered, acting in that manner, may request the opening of current accounts, checking accounts, securities or credits at any credit institution in the name of the Corporation, making deposits and carrying out credit operations in such accounts and disposing of the funds and amounts by payment orders and transfers, checks and any other documents of disposition, as well as designating persons authorized to draw from such accounts and to cancel them when they find it appropriate. Those thus empowered may also release, negotiate, discount, endorse, accept, constitute a lien, collect and pay letters of exchange, promissory notes, insurance policies, checks and other draft or credit documents of a commercial or financial nature and protest such documents for lack of acceptance or payment. 10 The legal representatives, acting as previously mentioned, can designate those persons who will be empowered to draw against the Corporation's current, securities, credit, investment and checking accounts and to cancel said accounts when they deem advisable, which designation can be vested in one single person, in view of the fact that said empowerment must always be exercised jointly by two legal representatives. g.) A SPECIAL POWER is granted indiscriminately in favor of Messrs. PABLO ABEL VAZQUEZ ORIA, CARLOS FERREIRO RIVAS and MIGUEL GUTIERREZ CERVANTES to endorse as if their own and/or in procuration of payment, those promissory notes subscribed by each subscriber when hiring the service or modifying same. Within this special power, the legal representatives shall enjoy the most extensive powers TO ENDORSE credit instruments, in harmony with provisions of the ninth (9th) article of THE GENERAL LAW OF INSTRUMENTS AND CREDIT OPERATIONS. The legal representatives who are instituted cannot delegate the powers being granted to them and they shall proceed to execute this power under the terms they deem to be the most advisable in the interests of the grantor of this power. PERSONALITY Is accredited by the person appearing in representation of "INNOVA," A LIMITED LIABILITY CORPORATION WITH VARIABLE CAPITAL, as follows: I.- With deed number thirty six thousand forty, granted in this city, on July twenty fifth, nineteen ninety six, before Francisco Javier Gerardo Oliveros Lara, Esq., Notary Public, in charge of Notary Public number seventy-five of the Federal District, registered in Mercantile Folio number two hundred thirteen thousand two hundred twenty-three of the Public Registry of Property and Commerce of the Federal District, by way of which with prior permission granted by the Secretariat of Foreign Relations number zero nine million twenty-five thousand one hundred one, file number nine thousand six hundred nine million twenty-four thousand three hundred twenty-two, `INNOVA," A LIMITED LIABILITY CORPORATION, was incorporated, with a DURATION of NINETY-NINE YEARS, headquartered in MEXICO, FEDERAL DISTRICT, having a Clause Admitting Foreigners, capital stock of FIFTY THOUSAND PESOS, LEGAL CURRENCY, and whose corporate purposes are, among others: a). Promote, incorporate, organize, exploit and hold participation in the capital and patrimony of all kinds of mercantile or civil corporations, associations or industrial, commercial, service, or any other kind of companies, domestic as well as foreign, as well as participate in their administration or liquidation. b).- Purchase, negotiation, custody and divestiture of any kind of securities, stocks, bonds, obligations and in general, credit instruments, securities and shares of mercantile and civil corporations or associations of any kind, domestic as well as foreign. II.- With deed number forty eight thousand nine hundred seventy, granted before me, on November eleventh, nineteen ninety six, registered in Mercantile Folio number two hundred thirteen thousand two hundred twenty-three of the Public Registry of Property and Commerce of this city, through which the Minutes taken at the Special General Stockholders Meeting of "INNOVA," A LIMITED LIABILITY CORPORATION, which was held in this city, at nine a.m. on November first, nineteen ninety six were placed into the record, at which, among other agreements made, it was agreed upon to REFORM ALL of the CORPORATE BYLAWS. III.- With deed number forty nine thousand one hundred eighty-one, which was passed before me, on the fourteenth day of March, nineteen ninety six, registered in Mercantile Folio number two hundred thirteen thousand two hundred twenty-three of the Public Registry of Property and Commerce of this city, through which the Minutes taken at the Special General Stockholders Meeting of "INNOVA," A LIMITED LIABILITY CORPORATION, which was held in this city, at ten a.m. on March seventh, nineteen ninety 11 six were placed into the record, at which, among other agreements made, it was agreed upon to INCREASE the CAPITAL STOCK to the amount of ONE HUNDRED THOUSAND PESOS, LEGAL CURRENCY; as well as to REFORM ALL of the CORPORATE BYLAWS. IV.- With deed number thirty six thousand seven hundred eighty four, granted in this city, on the twentieth day of March, nineteen ninety seven, before Manuel Enrique Oliveros Lara, Esq., Notary Public, who is in charge of Notary Public number one hundred of this Federal District, acting as associate and in recording at Notary Public number seventy five of this city, in charge of which is Francisco Javier Gerardo Oliveros Lara, Esq., registered in Mercantile Folio number two hundred thirteen thousand two hundred twenty-three of the Public Registry of Property and Commerce of the Federal District, through which the resolutions adopted outside of the Meeting were placed into the record by a unanimous vote of the shareholders of the corporation called "INNOVA," A LIMITED LIABILITY CORPORATION, which were adopted on March tenth, nineteen ninety seven, in which, among other resolutions taken up, it was resolved to INCREASE the CAPITAL STOCK with the amount of FOUR HUNDRED TWO MILLION FIVE HUNDRED THOUSAND PESOS, LEGAL CURRENCY, which, when added to the current capital stock of ONE HUNDRED THOUSAND PESOS, LEGAL CURRENCY, will bring the capital stock amount to FOUR HUNDRED TWO MILLION SIX HUNDRED THOUSAND PESOS, LEGAL CURRENCY, reforming to this effect ARTICLE SIX of the CORPORATE BYLAWS. V.- With deed number fifty one thousand seventy six, which was passed before me on the twenty second day of December, nineteen ninety eight, which first certificate was registered in Mercantile Folio number two hundred thirteen thousand two hundred twenty-three of the Public Registry of Property and Commerce of the Federal District, through which the Resolutions adopted at the Meeting were placed into the record, which resolutions were adopted with the Shareholders' unanimous consent, granted in writing, of the corporation called "INNOVA," A LIMITED LIABILITY CORPORATION, dated April first, nineteen ninety eight, at which, among other resolutions adopted, it was resolved to ACCEPT TCI DTH Mexico, Inc., as a partner of the company, as a holder of Series B hyphen TWO shares; it was resolved to AUTHORIZE Messrs. EMILIO AZCARRAGA JEAN and CHASE CAREY, each of whom are holders of Series A hyphen Two shares and Series B hyphen Two shares, respectively, the VALUE of each being ONE HUNDRED PESOS, LEGAL CURRENCY, so they may be transmitted to GALAVISION DTH, A LIMITY LIABILITY CORPORATION the first mentioned, and to NEWS DTH (Mexico) Investment, Ltd. the second mentioned; to INCREASE the company's CAPITAL STOCK with the amount of FOUR HUNDRED TWO MILLION SIX HUNDRED THOUSAND PESOS, LEGAL CURRENCY, so it may be increased up to the amount of EIGHT HUNDRED FIVE MILLION TWO HUNDRED THOUSAND PESOS, LEGAL CURRENCY; as well MODIFYING ARTICLE SIX of the CORPORATE BYLAWS, with regards to capital stock. VI.- With deed number fifty one thousand seventy seven, which was passed before me on the twenty second day of December, nineteen ninety eight, which first certificate was registered in Mercantile Folio number two hundred thirteen thousand two hundred twenty-three of the Public Registry of Property and Commerce of the Federal District, through which the Resolutions taken up at the Meeting were placed into the record, which resolutions were taken up with the Shareholders' unanimous consent granted in writing of the corporation called "INNOVA," A LIMITED LIABILITY CORPORATION, dated July first nineteen ninety eight, in which, among other resolutions taken up, it was resolved to INCREASE the company's CAPITAL STOCK from the amount of EIGHT HUNDRED FIVE MILLION TWO HUNDRED THOUSAND PESOS, LEGAL CURRENCY, with the amount of TWENTY TWO MILLION FIVE HUNDRED FIFTY THOUSAND PESOS, LEGAL CURRENCY, so it may be increased up to the amount of EIGHT HUNDRED TWENTY SEVEN MILLION SEVEN HUNDRED FIFTY THOUSAND PESOS, LEGAL CURRENCY; as well MODIFYING ARTICLE SIX of the CORPORATE BYLAWS, with regards to capital stock. 12 VII.- With deed number fifty one thousand seventy-eight, which was passed before me, on the twenty second day of December, nineteen ninety eight, registered in Mercantile Folio number two hundred thirteen thousand two hundred twenty-three of the Public Registry of Property and Commerce of this city, through which the Minutes taken at the Special General Stockholders Meeting of "INNOVA," A LIMITED LIABILITY CORPORATION, which was held in this city, at ten a.m. on July second, nineteen ninety eight were placed into the record, at which, among other agreements made, it was agreed upon to TRANSFORM the CORPORATION into a LIMITED LIABILITY CORPORATION WITH VARIABLE CAPITAL, and in consequence, to REFORM the CORPORATE BYLAWS COMPLETELY; taken from the aforementioned deed, I copy hereunder the pertinent portions:" Going on to the First Matter on the Agenda, the Chairman pointed out to those present the advisability of transforming the Corporation into a Limited Liability Corporation with Variable Capital, pursuant to Chapter VIII of the General Law of Mercantile Corporations, in which case it would become necessary to completely reform the bylaws which govern the Corporation. Following an extensive exchange of opinions, the shareholders, through a unanimous vote, adopted the following: RESOLUTIONS FIRST.- It is agreed to transform the Corporation into a LIMITED LIABILITY CORPORATION WITH VARIABLE CAPITAL, pursuant to Chapter VIII of the General Law of Mercantile Corporations, for (sic) hereinafter the Corporation shall be called: "INNOVA," A LIMITED LIABILITY CORPORATION WITH VARIABLE CAPITAL." SECOND.- The Corporation's Bylaws are completely reformed, and their text shall be as follows: BYLAWS CHAPTER I DENOMINATION, PURPOSE, DURATION, HEADQUARTERS NATIONALITY AND JURISDICTION ARTICLE ONE.- DENOMINATION. The Corporation shall be called "INNOVA," which will always be followed by the words "A LIMITED LIABILITY CORPORATION WITH VARIABLE CAPITAL" or its abbreviation [in Spanish] "S. DE R. L. DE C.V." ARTICLE TWO.- CORPORATE PURPOSES The Corporation's purposes are: a).- Promote, incorporate, organize, exploit and hold participation in the capital and assets of all kinds of mercantile or civil corporations, associations or industrial, commercial, service, or any other kind of companies, domestic as well as foreign, as well as participate in their administration or liquidation. b).- Installation, operation and commercial exploitation of public telecommunications networks to provide all kinds of public services, among which are included restricted television and radio services, which are carried out through wires, radio-electricity, optical or physical media or other electromagnetic systems, in any format allowed by technology and of communications systems to provide services of supply, transportation and distribution of signs, pictures, sounds or information of any nature, through systems of modulation, codification or digitalization allowed by technology, in the frequency bands and/or orbital satellite positions assigned to such, except for open television, all of which with previous 13 authorization, permission or concession which might be granted by the pertinent authorities, as well as programming for these same types of networks, stations and communications systems; c).- Purchase, negotiation, custody and divestiture of any kind of securities, stocks, bonds, obligations and in general, credit instruments, securities and shares of mercantile and civil corporations or associations of any kind, domestic as well as foreign. d).- Contract for or grant loans, granting and receiving their respective guarantees, issue obligations with or without specific guarantee, accept, draw, endorse or back all kinds of credit instruments and grant security or guarantees of any kind with regards to the obligations contracted or to the instruments issued or accepted by third parties; e).- Lease, sublease, take and give in commodatum, use, possess, acquire, purchase, sell, construct, repair, divest and operate by means of any legal title all kinds of equipment, warehouses, stores, facilities, offices, rooms, locales and other establishments which are necessary or advisable to carry out the Corporation's purposes, including purchase and disposal of movable and immovable goods and real rights which are considered to be indispensable and that are allowed by law; f).- Represent as an agent, intermediary or mediator, dealer, consignee agent, legal representative or attorney for all kinds of domestic or foreign companies or persons; g).- Provide and receive all kinds of services or consulting of a technical or administrative character, of supervision, organization, marketing, research, development, engineering, legal and general, any kind of service related to industrial or commercial activities of companies, corporations and associations, whether in the Mexican Republic or abroad. h).- Produce and use works that are susceptible to protection of intellectual rights and other rights, as well as acquiring or transmitting ownership of rights to same and perform all legal actions in this field; i).- Produce, acquire, exercise, use and transmit industrial property rights; j).- Obtain, acquire, transmit, use, register, negotiate and grant the use or enjoyment of all kinds of permits, licenses and concessions; k).- Execute all kinds of acts and enter into agreements or contracts of any nature, that may be related to the aforementioned purposes. ARTICLE THREE.- DURATION. With the exception of what is provided in article twenty-seven of these bylaws, the corporation's duration is NINETY-NINE YEARS, counted as of the date of signing the articles of incorporation. ARTICLE FOUR.- HEADQUARTERS. The Corporation's headquarters is MEXICO CITY, FEDERAL DISTRICT; however, the corporation can set up agencies, branches, offices, facilities and any other dependency at any place in the Mexican Republic or abroad and submit to elected domiciles, without it being deemed that the corporation headquarters have changed. ARTICLE FIVE.- NATIONALITY. Current or future foreign shareholders in this corporation are formally bound by the Federal Government through the Secretariat of Foreign Relations to be considered as nationals with regards to the shares of this corporation that they may acquire or of which they may be holders, as well with regards to the goods, rights, concessions, participation or interests of which this corporation is a holder or which might derive from the rights or obligations of the contracts to which the corporation itself is a party, with 14 Mexican authorities, and to not invoke, therefore, the protection of their Governments, under penalty of, otherwise, losing the shares that they might have acquired in favor of the Nation. CHAPTER II CAPITAL STOCK, SHARES AND SHAREHOLDERS ARTICLE SIX.- CAPITAL, SHARES AND SHAREHOLDERS Capital stock is variable. Minimum or fixed capital is the amount of EIGHT HUNDRED TWENTY SEVEN MILLION SEVEN HUNDRED FIFTY THOUSAND PESOS, ZERO ZERO SLASH ONE HUNDRED, LEGAL CURRENCY, totally subscribed and paid for. The variable capital is unlimited. The shares into which the capital stock is divided can be of unequal value but in any case they will be of ONE HUNDRED PESOS, ZERO ZERO SLASH ONE HUNDRED, LEGAL CURRENCY, or a multiple of this amount. The shares which are representative of the minimum or fixed capital shall be identified as Class "I" shares and the shares which are representative of the variable capital shall be identified as Class "II" shares. The shares which are representative of the minimum or fixed capital (Class "I") and the shares which are representative of the variable capital (Class "II") shall be divided in turn into two series, each of which with two Sub-Series with the corporate rights and obligations that are mentioned in these bylaws, as follows: a) Series "A" shall be comprised of Sub-Series A hyphen one and A hyphen two and shall be made up of ordinary shares, which shall initially represent sixty percent of the total capital stock. Series "A" shares shall only be subscribed by individuals of Mexican nationality and, therefore, the corporation shall not admit foreign investors as shareholders of series "A" shares. b) Series "B" shall be comprised of Sub-Series B hyphen one and B hyphen two and shall be made up of ordinary shares, which shall initially represent forty percent of the total capital stock. Series "B" shares shall be of free subscription, and can therefore by acquired by Mexican investors or by foreign natural persons or legal entities, or by persons, companies or entities that are included in Article Two Fraction III of the Foreign Investment Act. CHAPTER IV SHAREHOLDERS MEETINGS ARTICLE FOURTEEN. Shareholders will have the right to participate in Shareholders Meetings whether by personal attendance or by a legally-accredited representative through a simple proxy letter signed by two witnesses. The Shareholders Meeting is the Corporation's Supreme Body and its resolutions shall be binding on all shareholders, including absent or dissident shareholders. In any case, absent or dissident Shareholders shall enjoy the rights that are granted to them under Articles Thirty-Eight and Forty-Two, pursuant to the terms of Article Eighty-Six of the General Law of Mercantile Corporations. ARTICLE FIFTEEN. The following matters are reserved exclusively for resolution by the Shareholders Meeting pursuant to the terms provided in these Bylaws: a.- Discuss, approve, modify or reject the financial statements published at the close of each corporate year, in accordance with what is established in Article Twenty-Four of these corporate bylaws and adopt consequently resolutions in this regard. b.- The determination to pronounce or pay all dividends or distribute cash, assets or any other property. 15 c.- Appoint and remove the Board of Managers, in accordance with what is established in Article Sixteen of these bylaws as well as appoint and remove a Board of Managers Executive Committee, indicating what its powers and obligations are. d.- Make decisions regarding splitting and redemption of shares in accordance with what is provided in these bylaws. e.- To require shareholders, if applicable, supplementary contributions and accessory assistance that are not contemplated in the approved annual budget or the business plan; f.- Issuance of certificates, bonds, subscription rights, purchase options or any other security or instrument that is redeemable, exercisable or convertible in shares of the Corporation. g.- Consent to assigning shares and in admitting new shareholders in accordance with what is provided in Article Eight of these bylaws. h.- Modify the corporate contract. i.- Make decisions on increasing or decreasing the capital stock or sales of the Corporation's shares, except as provided for in each case in these bylaws or any Annual Budget or Business Plan. j.- Make decisions regarding liquidating the corporation, in accordance with what is established in Article Twenty-Seven. k.- Designate the Corporation's liquidators, pursuant to Article Twenty-Eight of these Bylaws. l.- Issue any bonds. m.- Make decisions with regards to transforming, merging or splitting off the corporation. ARTICLE SIXTEEN. With regards to the Shareholders Meeting, the following rules will be observed: a).- Except as established in these corporate bylaws, the Shareholders Meetings may be held at any time. b).- The shareholders shall hold Meetings at least once per year within the first four months following the close of the corporate year. c).- All Shareholders Meetings shall be held at the corporate headquarters, except for fortuitous circumstances or force majeure. d).- Notices of meetings shall be issued by any of the members of the Board of Managers, or in accordance with provisions in articles eighty one and eighty two of the General Law of Mercantile Corporations. e).- Notices of meetings shall contain at least the date, time, place and Agenda for the Meeting and will be signed by the member of the Board of Managers who issues the notice. f).- Except as established in sub-paragraph g) which follows this article, notices of shareholders meetings shall be performed at least fifteen calendar days prior to the date of the meeting through personal delivery or by telex or facsimile, delivery by courier or any other means which ensures that it will be received at the latest address or telex or facsimile number that said persons have advised in writing to the Corporation's Board of Managers. It is understood that those shareholders whose addresses are abroad may send to the Board of Managers a second address or telex or facsimile number in the Mexican Republic, to which a copy of the notice shall be sent. g).- Any Shareholders Meeting can be held without the need of prior notification if the shareholders of the total amount of shares with voting rights are present or represented at said Meeting at voting time; 16 h).- Except in the case where express judicial order exists contrariwise, only those physical or legal persons whose names are recorded in the special shareholders' book shall be recognized as shareholders of the corporation, with the purpose of attending any Shareholders Meeting, and said record shall suffice to allow said persons admittance to the Meeting. i).- The Chairman of the Board of Managers shall preside over all shareholders meetings. Additionally, the Secretary of the Board of Managers shall act as Secretary at all shareholders meetings. Absences of the Chairman and Secretary of the Board of Managers shall be filled in by any of the Substitute Board Members designated by the same series that designated them. Failing this, by the person or persons who, by a simple majority of votes designate the shareholders who are present or represented at the meeting. j).- The person who presides over a Shareholders Meeting shall appoint one or more scrutineers who will be charged with counting the shares and the proportion that each one covers in the capital stock, as well as the number of votes that each shareholder has the right to cast. k).- So that a quorum exists at a Shareholders Meeting held pursuant to a first notification, the majority of subscribed and paid capital stock must be present or represented at said meeting, but in any case, in that majority Sub-Series A hyphen one shareholders and Sub-Series B hyphen one shareholders must be present or represented. At a second or subsequent notification for the same meeting, a quorum will exist and the meeting will be declared as legally convened, if the majority of the issued shares which comprise the capital stock are present or represented. In no event can resolutions relating to any of the matters that are described in Article Fifteen of these bylaws be adopted without the favorable vote of the total number of Sub-Series A hyphen one shareholders and Sub-Series B hyphen one shareholders. l).- Once it has been verified that the required quorum does exist, the person who is presiding shall declare that the meeting is legally convened. Additional matters can be added to the Agenda of a meeting only if it has been approved by one hundred percent of the shareholders of wholly subscribed and paid shares of capital stock. m).- The shareholders shall have the right to cast a vote for each paid ONE HUNDRED PESOS, ZERO ZERO SLASH ONE HUNDRED, LEGAL CURRENCY, that covers his or her share, at any Shareholders Meeting or in any Shareholder resolution for which no meeting is required. n).- Except as provided in these bylaws, resolutions from legally convened Shareholders Meetings shall be valid when they have been adopted by the majority of the votes of shareholders who are present or represented. Any resolution related to matters included in Article Fifteen of these bylaws will be valid only if it is adopted by a favorable vote of all Sub-Series A hyphen one and Sub-Series B hyphen one shareholders. o).- All resolutions related to any of the matters to which Article Fifteen of these bylaws refers, as well as any other resolution which by law falls to the Shareholders Meeting, adopted by a unanimous vote of the shareholders, outside of the Meeting, shall be valid and hold the same force and legal effects as a resolution that has been adopted at a Shareholders Meeting, which shall be subject to written confirmation of the Shareholders. The individual presenting a resolution, which would otherwise require holding a Shareholders Meeting, will send the text of the proposed resolution in writing to each of the shareholders, for their approval. Said text must be delivered to each one of the shareholders under the same terms established for notices of Shareholders Meetings. The document which contains written confirmation of each of the shareholders must be sent to the Chairman or the Secretary of the Board of Managers of the Corporation, who shall transcribe the respective resolutions in the pertinent minutes book and will certify that said resolutions were adopted pursuant to this Article Sixteen. If the Corporation does not receive a written vote from a member within the thirty natural days following delivery or sending of said text he or she will be deemed as having voted against the proposed resolution. All costs incurred in sending the text of proposed resolutions and of shareholders voting will be taken on by the Corporation. In every case, the provisions of the second paragraph of Article eighty-two of the General Law of Mercantile Corporations shall be applied. 17 p).- Minutes for each shareholders meeting shall be prepared as well as for each resolution of shareholders not requiring a meeting, which shall be duly transcribed in the minutes book, which will be signed by at least the Chairman and the Secretary of the meeting or by the Board of Managers. If for any reason a duly convened shareholders meeting were not held, this fact and the reason why it was not held shall be written in the minutes book. CHAPTER V CORPORATE ADMINISTRATION ARTICLE SEVENTEEN a).- Except for those matters that by law are expressly reserved to the shareholders meeting, the Board of Managers shall be in charge of corporate administration, which shall have the necessary authority so as to carry out actions that are in compliance with corporate purposes. b).- The corporation's Board of Managers shall be comprised of ten members, of which six shall be appointed by the shareholders of Sub-Series A hyphen one shares and four shall be appointed by the shareholders of Sub-Series B hyphen one shares. c).- The Board of Managers shall elect a Board Member to occupy the position of Chairman and one Board Member to occupy the position of Vice-Chairman. If the Chairman is designated from among the board members who are appointed by the shareholders of Sub-Series A hyphen one shares, the Vice-Chairman shall be elected from among the board members elected by the shareholders of Sub-Series B hyphen one shares and vice-versa. The Board Members may or may not be shareholders. The board members' positions shall have the titles that are approved by the Meeting. d).- Up to ten substitutes can be designated, of which six shall be appointed by Sub-Series A hyphen one shareholders, and four shall be designated by Sub-Series B hyphen one shareholders. The Substitute Board Members will take up their functions to substitute for the absences of any of the Statutory Board Members designated by the same Sub-Series of shares that designated them. e).- Additionally, the Board of Managers shall elect a Secretary from among its own members, a Substitute Secretary and a Pro-Secretary. In any case, the Secretary as well as the Substitute Secretary must be designated by the same Sub-Series of board members that had elected the Vice-Chairman. Designation of the Pro-Secretary will be made from among the same board members belonging to the Sub-Series that corresponds to the Chairman of said body. Absences of the Secretary at meetings or at sessions of the Board of Managers shall be substituted by the Substitute Secretary and, only in the event he or she is absent, by the Pro-Secretary of the Board of Managers. f).- All Board Members shall remain in their positions until their respective successors have been elected and take up their positions in accordance with the terms of these corporate bylaws. g).- Any board member may be removed from his position at any time, with or without just cause by a resolution at a shareholders meeting, wherein an affirmative vote by those shareholders who belong to the Sub-Series that had appointed him or her is indispensable; h).- Except for an agreement by the Shareholders Meeting which is contrary, adopted pursuant to Article Fifteen of these bylaws, no Board Member shall have the right to receive any type of payment or 18 compensation from the corporation, including consulting fees or any other compensation which stems from their participation in the Board of Managers or in carrying out their functions. i).- The Chairman of the Board will take care that these bylaws and corporate regulations are complied with, as well as due execution of resolutions adopted by the meeting or the board itself. The Chairman shall not have a casting vote in the event of a tie. j).- The Secretary, the Pro-Secretary and the Substitute Secretary of the Board of Managers, as well as the special managers, those to whom the Board of Managers agrees to grant powers pursuant to Article Twenty-One, shall hold legal representation of the Board of Managers before any physical or legal person, or before all kinds of authorities of any order and degree, whether municipal, state or federal, fiscal, judicial, civil, criminal, administrative, labor or any other kind, in all conflicts, arbitration and trials to which the corporation is a party and they will enjoy the authority that is mentioned in article nineteen of these bylaws. Consequently, the Chairman and the remaining members of the board of managers are not authorized to represent the board or the corporation in any conflict, arbitration or trial to which the corporation is a party. ARTICLE EIGHTEEN. The Board of Managers shall have the most extensive powers so as to enter into all contracts and carry out all actions and operations that by law or under these bylaws are not reserved exclusively to the shareholders meeting, to administrate and direct the corporation's affairs, to comply with the corporation's corporate purposes and to legally represent the corporation before any judicial, criminal, labor or administrative person or authority, whether federal, state or municipal, with as much authority as allowed by law, including without limitation, those mentioned in the following points, except for powers delegated to the Secretary, the Pro-Secretary and the Substitute Secretary and to the special managers and which are cited in article nineteen of these bylaws: a. Administrate the corporate businesses and goods, with extensive power of administration pursuant to the terms of article two thousand five hundred fifty-four, second paragraph, of the Civil Code for the Federal District or those correlated in the place where being exercised; b. Exercise acts of ownership with regards to the corporation's movable and immovable goods or of its real or personal property rights, pursuant to the terms mentioned in paragraph three of article two thousand five hundred fifty-four of the Civil Code for the Federal District or those correlated in the place where being exercised. c. Administrate the corporation's businesses and its movable and immovable goods, with general power for litigation and collections, with all general powers and even special powers that due to law require a special power or clause, pursuant to the terms mentioned in first paragraph of article two thousand five hundred fifty-four and two thousand five hundred eighty-seven, except for the power mentioned in its fraction IV, of the CIVIL CODE in force for this Federal District and those correlated in the remaining States of the Mexican Republic or abroad where exercised, for which it shall represent the corporation before any physical or legal person, or before all kinds of authorities of any order and degree, whether municipal, state or federal, fiscal, judicial, civil, criminal, administrative, or any other kind, before all conciliatory boards and conciliatory and arbitration boards, whether federal or local and all other labor authorities and before arbitrators. d. File complaints, lawsuits and criminal accusations and grant the pardon to which article ninety-three of the PENAL CODE refers, in effect for the Federal District and those 19 correlated in the remaining States of the Mexican Republic where exercised, contribute as a civil party with the Attorney General's office, as well as demand remedy for damages occurring from crimes. e. Intent and desist from all kinds of trials, challenges, incidents, resources and ordinary and special appeals, actions and proceedings whether civil, mercantile, criminal, administrative, contentious and labor-related, including promoting or desisting from restraining orders. f. Make assignment of goods, compromise, receive payments, present positions, and make bids and higher bids at auctions, compromise in arbitration. g. Draw, accept, endorse, grant and back, or in any other way subscribe credit instruments, pursuant to provisions in Article Nine of the General Securities and Credit Operations Act. h. Contract or confer loans, granting and receiving pertinent guarantees; issue obligations with or without specific guarantee, accept, draw, endorse and back all kinds of credit instruments and grant bonds or guarantees of all kinds, with regards to obligations contracted by the corporation or regarding securities issued and accepted by third parties. i. Contribute movable and immovable goods to other corporations and subscribe stocks or take participation or shares in other corporations. j. Appoint and remove directors, officials and attorneys whenever necessary in order to give due attention to corporate affairs, pointing out what their functions, duties and compensation will be. k. Grant and revoke powers which are deemed advisable, with or without substitution rights, being able to grant in same the authorities that these bylaws confer upon the Board of Managers in its case, [illegible] its exercise. l. Make decisions regarding all matters regarding acquisition or sale of stocks, bonds and securities by the corporation, regarding the corporation's participation in other companies or corporations and regarding acquisition, construction or sale of property. m. Execute agreements made at meetings, delegate their functions to one or several of the board members, corporate officials or attorneys that to such effect are designated, for them to exercise these functions in the business or businesses and under the terms and conditions that said Board indicates. n. Determine expenditures. o. Publish financial statements. p. Convene meetings. q. In general, carry out whatever actions and operations are necessary or advisable for the corporation's purposes, with the exception of those which are expressly reserved by Law or by these bylaws to the general meeting. The general meeting can limit or regulate said powers. No member of the Board of Managers can exercise, jointly or separately, any of the powers that are listed in this article, except when expressly authorized by the Board of Managers or the Shareholder's Meeting. ARTICLE TWENTY a).- The Board of Managers shall meet at the Corporation's headquarters or at any other place as determined by the Board of Managers, at least once a year. The meetings may be called by the Chairman or Vice-Chairman of the Board of Managers. b).- Calls to the meeting shall be notified by certified mail, facsimile with acknowledgement of receipt, delivery by messenger or courier, or by any other means which ensures that same will be received, to the address or telex or facsimile number that the Board Members have advised in writing to this effect, at least ten natural days prior to the meeting date and will contain the agenda, the date, place, time of the meeting, and must be signed by the one making them. The board members whose addresses are abroad can 20 provide a second address or telex or facsimile number in the Mexican Republic, to which a copy of the call to meeting will be sent. c).- When all members of the Board of Managers are present and in agreement with the day's agenda, it will not be necessary to go through all formalities for notifying that the meeting will be held as referred to in the foregoing paragraph. d).- Meetings of the Board of Managers will take into consideration and adopt resolutions only with regards to matters that are indicated on the day's Agenda. At the first call for meeting, matters may be included in the day's Agenda upon request by any of the board members, provided that said inclusion is unanimously approved by all board members who are present, at a second or subsequent call to meeting, the day's Agenda for the first call to meeting cannot be modified. e).- Quorum will exist at any session of the Board of Managers which meets as a consequence of a first call to meeting, when the majority of its members are gathered, and provided that at least two board members who are designated by Sub-Series A hyphen ONE shareholders and two board members who are designated by Sub-Series B hyphen ONE are present. In the event of a second or subsequent call to meeting, quorum will exist and the session will be declared legally installed if the majority of the board members are present. f).- Each board member shall have the right to one vote and the Chairman shall not have a casting vote in the event of a tie. g).- Resolutions of the Board of Managers will be valid if they are adopted by a favorable vote of at least the majority of board members who are present at the session. In the event of a tie for any of the matters mentioned in this article Twenty, the respective matter will be resolved pursuant to what is provided in Article Thirty of these bylaws. h).- However, a favorable vote of at least two Board Members who are designated by Sub-Series A hyphen ONE shareholders and two board members who are designated by Sub-Series B hyphen ONE shareholders will be required in order for the resolutions that are adopted by the Board of Managers to be deemed validly adopted, with regards to the matters referred to in Article Twenty-One, whether they correspond to the Corporation or to any of its subsidiaries. i).- Any resolution that is adopted by a unanimous vote of the members of the Board of Managers shall be valid even if it were adopted outside of said body's session, subject to written confirmation by the Board Members. ARTICLE TWENTY-ONE When the Board of Managers is called to meet to deliberate regarding any of the matters that are listed hereunder, in order for the agreements to be valid, a favorable vote of at least two board members who have been appointed by Sub-Series A hyphen ONE shareholders and two board members who are designated by Sub-Series B hyphen ONE shareholders is required, regardless of which call to meeting is involved: ONE. Appoint and remove the Corporation's General Executive Director, indicating what his or her powers, duties and compensation are to be. The General Executive Director will be the highest-ranking official who will be in charge of the Corporation's day-to-day operations and administration, as well as those of its subsidiaries. The General Executive Director shall be responsible before the Board of Managers and shareholders meeting for drawing-up and adequately applying the annual budget and the business plan. Said official will be appointed as proposed by the shareholders of Sub-Series A hyphen ONE shares, and the appointment will be subject to the approval by the shareholders of Sub-Series B hyphen ONE shares. 21 Shareholders of Sub-Series A hyphen ONE and B hyphen ONE shares may, through mutual agreement, demand the removal of the General Executive Director, and the shareholders of Sub-Series A hyphen ONE shares, as well as the shareholders of Sub-Series B hyphen ONE shares, can, with just cause, demand the removal of the Corporation's General Executive Director and the Board of Managers will be subject to and will be bound to adopt the pertinent resolution arising from the said shareholders' decision. TWO. Appoint and remove the Corporation's Executive Director of Finances and Administration, indicating what his or her powers, duties and compensation are to be. The Executive Director of Finances and Administration will be the highest-ranking official with regards to the Corporation's financial operations, and will be directly responsible for applying the annual budget, the Corporation's finances and treasury, as well as those of its subsidiaries. The Executive Director of Finances and Administration shall be responsible before the Board of Managers and shareholders meeting for drawing-up and adequately applying the annual budget and the business plan. Said official will be appointed as proposed by the shareholders of Sub-Series A hyphen ONE shares, and the appointment will be subject to the approval by the shareholders of Sub-Series B hyphen ONE shares. Shareholders of Sub-Series A hyphen ONE and B hyphen ONE shares may, through mutual agreement, demand the removal of the Executive Director of Finances and Administration, and the shareholders of Sub-Series A hyphen ONE shares, as well as the shareholders of Sub-Series B hyphen ONE shares, can, with just cause, demand the removal of the Corporation's Executive Director of Finances and Administration and the Board of Managers will be subject to and will be bound to adopt the pertinent resolution arising from the said shareholders' decision. THREE. Selection of local distributors and the contract terms for said distributors, or the approval of a general scheme of distribution, and any modifications to same aside from: (i) matters contained in the Annual Budget and (ii) day-to-day operating decisions considered by the Board as the responsibility of the General Executive Director's administration. FOUR. Approval of pricing, composition of service packages; as well as any other matter that is considered to be of great importance with regards to programming subscription services and with regards to channels that are transmitted through public telecommunications networks to provide restricted television services via satellite, (i) that are provided in the Annual Budget, (ii) that in the opinion of the Board of Managers are considered to be normal operating decisions, within the realm of the General Executive Director's powers and (iii) with regards to programming, as may be approved by the Board of Managers or the Board's Committee pursuant to this Article Twenty-One or in accordance with what is agreed upon by shareholders of Sub-Series A hyphen ONE and of Sub-Series B hyphen One shares, in any other instrument. FIVE. Entering into any contract, (i) whose validity is greater than three years, or (ii) whose total estimated amount to be paid by the Corporation or by any of its subsidiaries exceeds the amount of One Million dollars, legal tender of the United States of America, "or its equivalent in legal currency," except for: (x) those contracts which are deemed by the Board to be of normal business dealings; (y) those provided or approved in any Annual Budget; or (z) with regards to programming, which are approved by the Board of Managers or by a Committee of said body, pursuant to this Article Twenty-One, or in accordance with what is provided by any other contract entered into between the Sub-Series A hyphen ONE shareholders and the Sub-Series B hyphen ONE shareholders. 22 SIX. (i) Contract for credits or take out loans on behalf of the Corporation, or on behalf of any of its subsidiaries, including without any limitation, granting any guarantee for the loan's disposal, as well as releasing, accepting, endorsing, granting, guaranteeing or in any other way subscribing credit instruments in accordance with article nine of the General Securities and Credit Operations Act, (ii) granting loans by the corporation or by any of its subsidiaries, or (iii) imposing or consent regarding any lien on the corporation's assets or assets of any of its subsidiaries, except for contracting credit, granting loans or creation of or consent to any lien that has been (x) provided in the Annual Budget or (y), which in an action or a series of related actions, do not exceed One million dollars zero zero slash one hundred, legal tender of the United States of America, or its equivalent in Legal Currency. SEVEN. Sale or transmission of any instrument, from the corporation's assets or from the assets of any of its subsidiaries, aside from (i) sales which are deemed by the Board to be in the normal course of corporate businesses, (ii) sales which have been provided in any Annual Budget or (iii) sales of obsolete equipment or assets which collectively do not exceed the amount of One hundred thousand dollars zero zero slash one hundred, legal tender of the United States of America, or its equivalent in Legal Currency. EIGHT. Purchase, lease or acquisition of assets, which in a single operation or as a result of a series of transactions, cause the corporation to disburse a collective amount that exceeds One million dollars zero zero slash one hundred, legal tender of the United States of America, or its equivalent in Legal Currency, with the exception of: acquisitions that had been considered in the Annual Budget. NINE. Acquisition, investment, merge or co-investment with any corporation or entity, that is not a wholly-owned subsidiary of the Corporation whether it be through the corporation itself or through any of its subsidiaries, except as provided in the Annual Budget; TEN. Initiate or file lawsuits, trials, actions, proceedings, litigations, including disagreements of a fiscal nature, by the corporation as well as by any of its subsidiaries, as well as determinations regarding any conciliation or settlement, when the amount involved is greater than One hundred thousand dollars zero zero slash one hundred, legal tender of the United States of America, or its equivalent in Legal Currency. ELEVEN. Designating or dismissing the corporation's outside auditors, as well as adopting or modifying any accounting principle or fiscal practice that is substantial in nature whether by the Corporation or by any of its subsidiaries; except for any designation, dismissal, adoption or modification that is made in a temporary way by the controlling corporation of the shareholders of Sub-Series A hyphen ONE shares. TWELVE. (i) Approval of the corporation's legal advisers and/or those of any of its subsidiaries, proposed by the General Executive Director, prior to his or her designation and (ii) dismissal of the corporation's legal advisers and/or those of any of its subsidiaries. The General Executive Director shall also have the power to dismiss the corporation's legal advisers or those of any of its subsidiaries. THIRTEEN. Make any decision with regards to any liquidation, settlement or disagreement stemming from an adjustment from the corporation's fiscal auditor or of any of its subsidiaries, that involves an amount that is greater than One hundred thousand dollars zero zero slash one hundred, legal tender of the United States of America, or its equivalent in Legal Currency. FOURTEEN. Approval of the corporation's main headquarters location and that of all of its subsidiaries. FIFTEEN. Entering into contracts or business dealings between the corporation or any of its subsidiaries with any of the Corporation's or any of its subsidiaries' shareholders, except as established in the Annual Budget and with regards to programming, except what is approved by the Board of Managers or 23 the Committee thereof, in accordance with this Article Twenty-One or with what is provided in any contract entered into among shareholders of Sub-Series A hyphen ONE and B hyphen ONE shares. SIXTEEN. Approval of all decisions regarding any of the matters established in article Fifteen of these bylaws related to any of the Corporation's subsidiaries. SEVENTEEN. Approve the Business Plan and any substantial modification of same ("Business Plan" means the initial business plan and the Corporation's projects that have been approved by the shareholders, as well as all modifications of the plan that are approved pursuant to this Article Twenty-One of the bylaws. EIGHTEEN. Approval of the Annual Budget and all modifications of same ("Annual Budget" means the Corporation's initial annual budget, comprised in the Business Plan and every subsequent annual budget that is approved pursuant to this article twenty-one, or what is contemplated in any contract entered into between the Sub-Series A hyphen ONE and the Sub-Series B hyphen ONE shareholders); NINETEEN. Approval of waiver or modification of any clause of substantial importance of any contract that requires the Board's approval pursuant to this Article. TWENTY. Incorporation, formation, acquisition or organization of subsidiaries or co-investments by the corporation or by any of its subsidiaries. TWENTY-ONE. The resolution to file a lawsuit before a competent Judge requesting bankruptcy or discontinuance of the corporation's payments or those of any of its subsidiaries. TWENTY-TWO. Granting or revoking powers; and TWENTY-THREE. Entering into any consulting contract or series of contracts, whether they be oral or written, that (i) are not entered into with a third party at market value, (ii) have a duration of more than one year or (iii) establish (or in accordance with their terms could result in) expenditures by the corporation or by any of its subsidiaries in an amount that collectively exceeds the amount of Two hundred fifty thousand dollars zero zero slash one hundred, legal tender of the United States of America, or its equivalent in Legal Currency. VIII.- With deed number Fifty-one thousand seventy-nine, granted before me on the twenty second day of December, nineteen ninety eight, which first certificate was registered in the Mercantile Folio number Two hundred thirteen thousand two hundred twenty-three of the Public Registry of Property and Commerce of the Federal District, by which the General Shareholders Meeting of "INNOVA," A LIMITED LIABILITY CORPORATION WITH VARIABLE CAPITAL was entered into the record, which meeting was held in this city, at nine a.m. on the seventeenth day of July, nineteen ninety eight, at which, among other agreements made, it was agreed upon to INCREASE the CAPITAL STOCK in its VARIABLE PART to the amount of FIVE THOUSAND ONE HUNDRED SEVENTY TWO MILLION TWO HUNDRED FIFTY THOUSAND PESOS, LEGAL CURRENCY. Taking into consideration the fact that the minimum or fixed capital is EIGHT HUNDRED TWENTY SEVEN MILLION SEVEN HUNDRED FIFTY THOUSAND PESOS, LEGAL CURRENCY, the capital stock increased to the amount of SIX BILLION PESOS, LEGAL CURRENCY. IX.- With the resolutions that have been entered into the record. The person appearing states, under protest to tell the truth, that the company being represented enjoys legal capability and that the powers enjoyed have not been revoked nor limited in any way, that what is stated in the resolutions that are being entered into the record faithfully agree with reality, that the signatures that appear next to the resolutions that are being entered into the record are authentic and belong to the individuals to whom they are attributed, and that the provisions of the Foreign Investment Act and its Regulations have been complied with. RELEVANT PARTICULARS.- The person appearing manifested that she holds Mexican nationality, through birth, as her parents' nationality, which she still holds, native of this city, where she was born on the thirtieth day of July, nineteen fifty seven, married, Executive located at Avenida Vasco de 24 Quiroga number two thousand, Building A, third floor, Colonia Zedec Santa Fe, Alvaro Obregon Delegation, postal code zero one thousand two hundred ten, in this Federal District. I THE NOTARY PUBLIC ATTEST: I.- That I know the person appearing and that in my judgment she holds legal capability to make contracts and be bound, since there is nothing to indicate otherwise; II.- That with regards to [illegible] insert faithfully agrees with the original documents that I have seen and to which I refer; III.- That I have no indication whatsoever that the document entered into the record is false; IV.- That I advised the person appearing of the right she has to personally read the deed, and to have its content explained by the undersigned notary public; V.- That I ILLUSTRATED, READ AND EXPLAINED this deed to the person appearing, who being made aware of its value, the legal consequences and scope of its content, manifested her agreement and full understanding of same, signing in witness thereof on the thirteenth day of the month in which it was granted.- Whereupon I DEFINITIVELY AUTHORIZE this deed which complies with all legal requirements. MRS. MARIA AZUCENA DOMINGUEZ COBIAN.- (SIGNED). RAFAEL MANUEL OLIVEROS LARA, ESQ.- (SIGNED). THE SEAL OF AUTHORIZATION. "ARTICLE TWO THOUSAND FIVE HUNDRED FIFTY-FOUR" In the case of all general powers for Lawsuits and Collections, it will suffice to say that they are granted with all general and special powers that require a special clause pursuant to the Law, so they may be deemed to be conferred without any limitations whatsoever. In the case of general powers for administering property, it will suffice to say that they are granted with this purpose so that the legal representative will have all kinds of administrative powers. In the case of general powers to exercise acts of ownership, it will suffice that they are granted with this purpose so that the legal representative will have all ownership powers, with regards to property as well as to carry out all kinds of actions, so as to defend them. When the powers of the legal representatives in the three aforementioned cases are to be limited, said limitations shall be written, or the powers shall be special. Notary publics shall insert this article in the certificate section of powers they grant. THIS IS THE THIRD CERTIFICATE OF THE ORIGINAL THAT IS ISSUED FOR "INNOVA" A LIMITED LIABILITY CORPORATION WITH VARIABLE CAPITAL, IN ORDER TO ATTEST TO THE FACT THAT THE RESOLUTIONS ADOPTED BY UNANIMOUS VOTE OUTSIDE THE SHAREHOLDERS ASSEMBLY OF THE MENTIONED CORPORATION HAVE BEEN ENTERED INTO THE RECORD, AND THAT THEY ARE CONTAINED HEREIN.- IT IS COMPARED AND CORRECTED IN TWENTY-FIVE USEFUL PAGES, PURSUANT TO THE LAW.- IN MEXICO CITY, ON JUNE THIRTEENTH OF THE YEAR TWO THOUSAND TWO.- I ATTEST. DOCUMENT No. 55,871 BOOK No. 1,151 [LIC. RAFAEL MANUEL OLIVEROS LARA NOTARY PUBLIC DISTRICT MEXICO UNITED MEXICAN STATES SEAL] 25 EX-4.24 5 y87959exv4w24.txt CREDIT AGREEMENT EXHIBIT 4.24 CREDIT AGREEMENT Dated as of July 22, 2002 by and among INNOVA, S. de R.L. de C.V., as Borrower and GRUPO TELEVISA, S.A. SKY DTH, S. de R.L. de C.V. NEWS AMERICA INCORPORATED and LIBERTY MEXICO DTH, INC., as Lenders, NEWS DTH (MEXICO) INVESTMENT LIMITED as partner at Borrower and CORPORACION NOVAVISION, S. de R.L. de C.V., as Issuer (Under Sections 2.03(c), 2.04(b) and 2.08 and Articles VI and VII) TABLE OF CONTENTS
PAGE ---- ARTICLE I. DEFINITIONS 46 SECTION 1.01 Definitions. 46 SECTION 1.02 Defined Terms 46 SECTION 1.03 Accounting and Other Terms. 49 ARTICLE II. TERMS OF THE LOANS 49 SECTION 2.01 Commitments. 49 SECTION 2.02 Manner of Lending. 50 SECTION 2.03 Promissory Notes. 50 SECTION 2.04 Repayments; Novavision Note 51 SECTION 2.05 Prepayments. 52 SECTION 2.06 Interest. 52 (a) Interest Rate. 52 (b) Overdue Interest. 52 (c) Interest Payments. 52 SECTION 2.07 Taxes. 52 SECTION 2.08 Evidence of Indebtedness. 53 SECTION 2.09 Payments and Computations. 53 SECTION 2.10 Use of Proceeds. 54 ARTICLE III. CONDITIONS TO LOANS 54 SECTION 3.01 Conditions Precedent to the Loans. 54 (a) Representations and Warranties; No Default. 54 (b) Legality. 54 (c) Notice. 54 (d) Delivery of Documents. 54 (e) Lenders to Fund. 54 (f) Old Loans. 54 ARTICLE IV. REPRESENTATIONS AND WARRANTIES 54 SECTION 4.01 Organization, Good Standing, Etc. 55 SECTION 4.02 Authorization, Etc. 55 SECTION 4.03 Governmental Approvals. 55 SECTION 4.04 Enforceability of Credit Documents. 55 SECTION 4.05 Litigation. 55 SECTION 4.06 Compliance with Law, Etc. 55 SECTION 4.07 Permits, Etc. 56 SECTION 4.08 Full Disclosure. 56 ARTICLE V. COVENANTS OF THE BORROWER 56 SECTION 5.01 Affirmative Covenants. 56 (a) Compliance with Laws, Etc. 56 (b) Preservation of Existence, Etc. 56 (c) Maintenance of Properties, Etc. 56 (d) Compliance with Documents. 57 (e) Obtaining of Permits, Etc. 57 (f) Keeping of Records and Books of Account. 57 SECTION 5.02 Negative Covenants. 57 (a) Merger, Consolidation, Etc. 57 (b) Sale of Assets, Etc. 57 ARTICLE VI. EVENTS OF DEFAULT 57 SECTION 6.01 Events of Default. 57 (a) Non-Payment of Obligations. 57 (b) Breach of Representation and Warranty. 57
(c) Breach of Certain Covenants. 57 (d) Default on Other Indebtedness. 58 (e) Bankruptcy, Insolvency, Etc. 58 (f) Invalidity of any Credit Document. 58 (g) Judgments, Etc. 58 ARTICLE VII. MISCELLANEOUS 59 SECTION 7.01 Notices, Etc. 59 SECTION 7.02 Amendments, Etc. 61 SECTION 7.03 No Waiver; Remedies, Etc. 61 SECTION 7.04 Fees, Costs, Expenses and Taxes. 61 SECTION 7.05 Funding Defaults. 62 SECTION 7.06 Severability. 62 SECTION 7.07 Successors and Assigns. 62 SECTION 7.08 Counterparts. 62 SECTION 7.09 Headings. 63 SECTION 7.10 Governing Law. 63 SECTION 7.11 Forum Selection and Consent to Jurisdiction; Enforcement. 63 SECTION 7.12 No Third Party Beneficiaries. 64 SECTION 7.13 Integration. 64 SECTION 7.14 No Party Deemed Drafter. 64 SECTION 7.15 Waiver of Jury Trial. 64 SECTION 7.16 English and Spanish. 64 Signature Pages Follow 64 Schedule 2.01 Funding Requirements Schedule 2.03(b) Innova, S de R.L. de C.V. Amounts of Old Loans in 2000-2002 Exhibit A Form of Promissory Note (English and Spanish)
CREDIT AGREEMENT, dated as of July 22, 2002, between Innova, S. de R.L. de C.V., a sociedad de responsabilidad limitada de capital variable (variable capital limited liability company) formed under the laws of Mexico (the "Borrower"), the lenders listed on the signature pages hereto (the "Lenders") and, solely for purposes of Sections 2.03(c), 2.04(b) and 2.08 and Articles VI and VII hereof, Corporacion Novavision, S. de R.L. de C.V., a sociedad de responsabilidad limitada de capital variable (variable capital limited liability company) formed under the laws of Mexico and subsidiary of the Borrower ("Novavision"). RECITALS WHEREAS, the Borrower and the Lenders (or their predecessors in interest) are parties to that certain Interim Agreement, dated as of December 3, 1998, as amended by letter agreements dated December 22, 1998 and May 8, 2000 (the Interim Agreement, as amended, the "Interim Agreement"); WHEREAS, the Interim Agreement set forth the terms and conditions upon which the parties thereto agreed to fund the working capital needs of the Borrower with respect to debt and equity funding during the periods covered thereby; WHEREAS, in order to continue to operate its business from and after the effective date of this Agreement, the Borrower has required and will continue to require debt funding from the Lenders; WHEREAS, the parties desire to enter into this Agreement in order to more fully set forth the terms and conditions upon which the Lenders agree to loan funds to the Borrower, and intend that this Agreement supercede the Interim Agreement in respect of debt funding from and after the effective date of this Agreement; and WHEREAS, in consideration in part for New Loans (as such term is defined herein) to be made pursuant to the terms hereof, the Borrower's obligations in respect of funds previously loaned to it in respect of the Old Loans (as such terms is defined herein) shall be evidenced by promissory notes issued by the Borrower in substantially the form of Exhibit A annexed hereto; NOW, THEREFORE, the parties agree as follows: II. DEFINITIONS A. Definitions. B. As used in this Agreement, the following terms shall have the respective meanings indicated below, such meanings to be applicable equally to both the singular and plural forms of such terms: "Affiliate" means, as to any Person, any other Person that directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such Person. "Borrower" has the meaning set forth in the preamble hereto. "Borrowing Notice" has the meaning set forth in Section 2.02 hereof. "Borrowing Period" has the meaning set forth in Section 2.01 hereof. "Business Day" means any calendar day other than a Saturday or Sunday, or a day on which banks in New York City or Mexico City are required or authorized by law or applicable regulations to be closed. "By-laws" means, with respect to any Person, its duly constituted and approved by-laws and in the case of Innova or Novavision means its duly approved estatutos sociales. "Credit Documents" means this Agreement, the Promissory Notes issued pursuant hereto, the Novavision Notes and all other certificates, applications, instruments, documents or agreements executed and delivered pursuant hereto or thereto or in connection with any Loan or other transaction contemplated herein or therein. "Debt Funding Default" has the meaning set forth in Section 7.5 hereof. "Default" means any Event of Default or any condition, occurrence or event that, after notice, lapse of time or both, would constitute an Event of Default. "Event of Default" means any of the events set forth in Section 6.01 hereof. "Financial Statements" means (i) the audited financial statements of the Borrower in respect of its most recent fiscal year and (ii) the unaudited financial statements of the Borrower in respect of each fiscal quarter (except the fourth) of its most recently completed fiscal year and of its current fiscal year. "GAAP" means generally accepted accounting principles in Mexico as in effect from time to time, consistently applied; provided, however, that if the Borrower is required by its By-laws, contract, applicable laws or the rules and regulations of any securities exchange on which its securities are traded to reconcile its financial statements to United States generally accepted accounting principles, "GAAP" shall also refer to such reconciled financial statements. "Governmental Authority" means, with respect to the Borrower, Mexico or any State or political subdivision thereof or any foreign nation (including without limitation the United States of America) or political subdivision thereof, any entity, body or authority exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, government in Mexico (or any state or political subdivision thereof) or any foreign nation (including without limitation the United States of America) or any political subdivision thereof, including, without limitation, any central bank or other governmental or quasi-governmental authority exercising control over banks or other financial institutions, and any corporation or other entity or authority owned or controlled (through stock or capital ownership or otherwise) by any of the foregoing. "herein", "hereof", "hereto", "hereunder" and similar terms used in any Credit Document refer to such Credit Document as a whole and not to any particular Section, paragraph or provision of such Credit Document. "Indebtedness" has the meaning set forth in Section 6.01(d) hereof. "Innova" has the meaning set forth in the Preamble to this Agreement. "Interim Agreement" has the meaning set forth in the Recitals hereto. "Lien" means any security interest, mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or otherwise), charge against or interest in property to secure payment of a debt or performance of an obligation or other priority or preferential arrangement of any kind or nature whatsoever. "Loans" means the Old Loans and the New Loans. "Loan Commencement Date" means the date on which all of the conditions precedent set forth in Section 3.01 hereof are satisfied and a Loan is made. "Mexico" means the United Mexican States, its states and other political subdivisions thereof. "New Loans" means loans made by the Lenders to the Borrower pursuant to Article II hereof from and after the date of this Agreement, which loans shall be evidenced by Promissory Notes in substantially the form of Exhibit A annexed hereto. "Novavision" has the meaning set forth in the Preamble to this Agreement. "Novavision Notes" has the meaning set forth in Section 2.03(c) hereof. "Obligations" means (a) the obligation of the Borrower to pay, as and when due and payable (by scheduled maturity, prepayment, acceleration of maturity, demand or otherwise), all amounts from time to time owing by it in respect of any Credit Document to which it is a party, whether for principal, interest, fees, expenses, commissions or otherwise, and (b) the obligation of the Borrower to perform or observe all of its other obligations from time to time existing under any Credit Document to which it is a party. In the case of Novavision, "Obligations" means (a) the obligation of Novavision to pay, as and when due and payable (by scheduled maturity, prepayment, acceleration of maturity, demand or otherwise), all amounts from time to time owing by it in respect of any Credit Document to which it is a party, whether for principal, interest, fees, expenses, commissions or otherwise, and (b) the obligation of Novavision to perform or observe all of its other obligations from time to time existing under any Credit Document to which it is a party. "Old Loans" means loans made by the Lenders to the Borrower prior to the date of this Agreement as set forth on Schedule 2.03(b) hereto and, pursuant to Section 2.03(b) hereof, deemed made pursuant to this Agreement and evidenced by a Promissory Note. "Person" means an individual, corporation, partnership, limited liability company, business trust, fideicomiso (Mexican trust), association, joint-stock company, trust, unincorporated organization, joint venture or governmental authority or other regulatory body. "Promissory Note" means a promissory note issued by the Borrower, substantially in the form of Exhibit A hereto, evidencing the indebtedness resulting from the making of a Loan and delivered to one of the Lenders pursuant to Article III hereof, and any promissory note or notes issued in exchange or replacement therefor, in each case as such promissory note or notes may be modified from time to time in accordance with the terms of this Agreement, provided, however, that a Promissory Note shall not, in any event or under any circumstances, be considered to be a "pagare causal", as such instruments are defined under applicable Mexican law. "Proportionate Interest" means, as of any date of determination, the fraction resulting by dividing (i) the aggregate principal amount of Loans made and pursuant to Section 2.03(b) deemed made by a Lender hereunder from and after the date of this Agreement by (ii) the aggregate principal amount of Loans made and pursuant to Section 2.03(b) deemed made by all the Lenders, including without limitation Loans made pursuant to Section 7.05 hereof. "Subsidiary" means, as to any Person, any corporation or other entity of which capital stock or other ownership interests having (in the absence of contingencies) ordinary voting power to elect at least a majority of the board of directors (or Persons performing similar functions) of such corporation or other entity is, at the time of determination, owned directly, or indirectly through one or more intermediaries, by such Person. "United States" or "U.S." means the United States of America, its States and other political subdivisions thereof and the District of Columbia. C. Accounting and Other Terms. Unless otherwise expressly stated herein, all accounting terms used in this Agreement and not otherwise defined herein shall be construed in accordance with GAAP applied on a basis consistent with that applied in the preparation of the audited Financial Statements. All terms used in this Agreement that are defined in Article 9 of the Uniform Commercial Code in effect in the State of New York on the date hereof and that are not otherwise defined herein shall have the same meanings herein as set forth therein. III. TERMS OF THE LOANS A. Commitments. Subject to Section 2.02 hereof the Lenders agree on the terms and conditions hereinafter set forth to make New Loans to the Borrower from time to time as requested by the Borrower on any Business Day during the term of this Agreement, in accordance with the Loan amounts set forth on Schedule 2.01 attached hereto. Schedule 2.01 shall be amended from time to time by agreement among the Lenders and the Borrower to reflect Borrower's monthly or other periodic funding requirements as agreed among the Lenders and with the Borrower for each calendar year or other applicable period as noted on such schedule (a "Borrowing Period"). Subject to Section 7.05 hereof, each New Loan requested by the Borrower and approved by the Lenders pursuant to Section 2.02 hereof shall be made by all Lenders on a pro rata basis in accordance with their ownership interests in Borrower. B. Manner of Lending. The Lenders shall make New Loans available to the Borrower on a monthly basis or as otherwise requested by Borrower (but not more frequently than monthly), subject to the following: (i) Not fewer than 10 (ten) days prior to requested funding for a New Loan, the Borrower will deliver to the Lenders a notice of borrowing setting forth the amount of funding required for the New Loan for such month (or other period) in a Borrowing Period (each, a "Borrowing Notice"), which amount will be consistent with Schedule 2.01, subject to adjustment pursuant to supporting documentation supplied by the Borrower and satisfactory to the Lenders in their sole discretion; (ii) the Lenders and the Borrower shall hold a conference call to discuss the New Loan, and upon confirmation of the New Loan in writing by the Lenders by means of facsimile transmission to the Borrower and each other, the Borrower shall issue its Promissory Notes, each duly executed by the Borrower, dated the funding date (as prearranged with each Lender), in principal amounts representing each Lender's pro rata share of the New Loan; and (iii) upon the Lenders' receipt of the duly executed Promissory Notes, each Lender shall fund its pro rata shares of the New Loan on the date indicated by the Promissory Note, subject to fulfillment of the conditions set forth in Article III hereof. All but not less than all the Lenders may waive in writing to each other and the Borrower the requirement of the conference call with respect to any New Loan, in which case the terms of clauses (i) and (iii) above will be applicable. C. Promissory Notes; Old Loans; Novavision Notes. (a) Each Loan (and each Default Loan pursuant to Section 7.05) made hereunder shall be evidenced by a Promissory Note in substantially the form attached hereto as Exhibit A with appropriate insertions as to date, name of Lender and principal amount. The terms of each such Loan, including without limitation each Promissory Note, shall be subject to the terms of this Agreement, provided, however, that such Promissory Notes shall not, in any event or under any circumstances, be considered to be a "pagare causal", as such instruments are defined under applicable Mexican law. (b) Prior to the date of this Agreement, the Lenders from time to time funded the operations of the Borrower by extending debt (as well as equity) funding to it, including pursuant to the Interim Agreement. Borrower's repayment obligations in respect of the Old Loans have not, prior to the date of this Agreement, been evidenced by any note or other written instrument. In consideration of the debt funding made by the Lenders in respect of the Old Loans and of the further funding to be made pursuant to this Agreement in respect of the New Loans, (i) the Borrower hereby agrees to execute Promissory Notes in substantially the form annexed hereto as Exhibit A in order to evidence the Old Loans, and (ii) the Borrower agrees that the Old Loans and the Promissory Notes evidencing same shall be deemed to have been made pursuant to this Agreement and shall be governed by the terms hereof, provided, however, that such Promissory Notes shall not, in any event or under any circumstances, be considered to be a "pagare causal", as such instruments are defined under applicable Mexican law, for the purposes stated herein. (c) In May 2000, in consideration for loans made by the Lenders to it, Novavision issued promissory notes aggregating US$8,300,000 to the Lenders (notes in the principal amount of US$4,980,000, US$2,490,000 and US$830,000 were issued to Televisa, News Corporation and Liberty Media (or their affiliates), respectively (the "Old Novavision Notes")). In consideration of the Loans to be made hereunder and the other terms and conditions hereof and each Lender's cancellation and surrender to Novavision of its Old Novavision Note, upon such surrender (i) Novavision hereby agrees to issue to each such Lender a new promissory note in the same denomination (and equal aggregate principal amount for all such notes) and at the same rate of interest as the Old Novavision Notes but in substantially the form of the Promissory Notes (with appropriate modifications, insertions and references to reflect the change of issuer and in accordance with the terms of the next succeeding sentence, collectively the "Novavision Notes") and (ii) the Borrower will unconditionally and irrevocably guarantee the Novavision Notes upon substantially the same terms and conditions of guarantee of the Old Novavision Notes. Novavision and each of the Lenders hereby agrees that the Novavision Notes shall (i) bear the same issue date as the Old Novavision Notes, (ii) mature on the tenth anniversary thereof and (iii) be issued pursuant to the terms of this Agreement and be enforceable in accordance with the terms hereof, as may be applicable, and none of them shall, in any event or under any circumstances, be considered to be a "pagare causal", as such instruments are defined under applicable Mexican law, for the purposes stated herein. Novavision hereby (i) represents and warrants that it has full power and authority to issue and perform this Agreement (to the extent provided herein), (ii) represents and warrants that the Novavision Notes and this Agreement (to the extent Novavision is obligated hereby) have been duly authorized, (iii) represents and warrants that this Agreement will, upon the execution and delivery hereof, and when issued upon cancellation and surrender of the Old Novavision Notes, the Novavision Notes will, represent its legal, valid and binding obligations in accordance with their terms, and as such, none will be considered as a "pagare causal"; (iv) represents and warrants that the issuance, delivery and performance of the Novavision Notes do not and will not contravene its charter or By-laws nor any rule regulation, judgment, order or decree or violate any provision of any contract, agreement, indenture, note or other instrument to which Novavision is a party or by which its assets or properties may be bound, and (v) hereby agrees to be a Party to this Agreement with respect to this Section 2.03(c), Section 2.04(b) and Section 2.08 and Articles VI and VII hereof with respect to the terms thereof. D. Repayments (a) Subject to prepayment pursuant to Section 2.05 hereof or acceleration of maturity of the Loans as provided elsewhere herein, the Borrower shall repay in full the unpaid principal amount of each Loan and all accrued interest thereon in accordance with the terms of the respective Promissory Note but, in no event later than the tenth (10th) anniversary of the date on which each such Promissory Note was issued. (b) Notwithstanding anything to the contrary in this Agreement, any Promissory Note or any other Credit Document, all payments by the Borrower in respect of each Loan, and all payments by Novavision pursuant to the Novavision Notes, including without limitation all payments of principal, interest and amounts payable in respect of Section 2.07 (and the corresponding provisions of each Promissory Note and the Novavision Notes) and any other amounts, whether at maturity, upon prepayment or acceleration or in any other circumstance, shall be made to the Lenders pro rata based on their Proportionate Interests in the Loans (and in the case of the Novavision Notes, their respective interests therein), it being the understanding and agreement of the Parties that each Lender shall be repaid at the same time and upon the same conditions as the other Lenders, in such amounts as reflect their Proportionate Interests in the Loans (and in the case of the Novavision Notes, their respective interests therein). E. Prepayments. The Borrower may at its option, upon at least five (5) Business Days prior written notice confirmed immediately in writing to the Lenders, at any time and from time to time, without penalty or premium, prepay any Loan in whole or in part. Each prepayment made pursuant to this Section 2.05 shall be accompanied by the payment of interest accrued to the date of such prepayment on the amount prepaid. Each prepayment shall be made at the same time to, and pro rata among, the Lenders and, to the extent applicable, applied toward the payment of the principal of the Promissory Notes in the inverse order of their maturities. F. Interest. (a) Interest Rate. The Borrower shall pay interest on the unpaid principal amount of each Loan from the date such Loan is made until such principal amount is paid in full, at the fixed ordinary rate of nine percent (9%) per annum (the "Interest Rate"). Subject to prepayment or acceleration of maturity as provided herein, interest shall be payable on each Loan on the tenth (10th)anniversary from the date such Loan is made. Notwithstanding any other provision of this Agreement or the applicable Promissory Note, interest paid or becoming due hereunder shall in no event exceed the maximum rate permitted by applicable law. (b) Overdue Interest. Any principal of any Loan that is not paid when due (whether at stated maturity, upon prepayment, by acceleration or otherwise) and, to the extent permitted by law, interest on any Loan not paid when due, shall bear interest, from the date on which such amount is due until such amount is paid in full, payable on demand, at an interest rate per annum equal at all times to the Interest Rate plus two percent (2%) per annum. (c) Interest Payments. Accrued interest on any Loan shall be payable (i) on any prepayment of all or a portion of the principal amount of such Loan (on the amount prepaid) to the date of prepayment, (ii) at maturity (whether at stated maturity, by acceleration or otherwise) and (iii) after maturity, on demand and, in any event, in arrears on the last Business Day of each month. G. Taxes. All payments made by the Borrower hereunder or under any Promissory Note will be made without setoff, counterclaim or other defense. All such payments shall be made free and clear of and without deduction for any present or future income, stamp or other taxes, levies, imposts, deductions, charges, fees, withholding, restrictions or conditions of any nature now or hereafter imposed, levied, collected, withheld or assessed by any jurisdiction or by any political subdivision or taxing authority thereof or therein and all interest, penalties or similar liabilities, excluding taxes on the overall net income of the Lenders (such non-excluded taxes levies, imposts, deductions, charges, fees, withholdings, restrictions or conditions are hereinafter collectively referred to as the "Taxes"). If the Borrower shall be required by any applicable law, rule or regulation to deduct or withhold any Taxes from or in respect of any amount payable under any Obligation, then (i) the amount so payable shall be increased to the extent necessary so that after making all required deductions and withholdings (including Taxes on amounts payable to the Lenders pursuant to this sentence) each Lender receive an amount equal to the sum that it would have received had no such deductions or withholdings been made, (ii) the Borrower shall make such deductions or withholdings and (iii) the Borrower shall pay the full amount deducted or withheld to the relevant taxation authority in accordance with applicable law. Whenever any Taxes are payable by the Borrower, as promptly as possible thereafter the Borrower shall send the Lenders an official receipt showing payment. In addition, the Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies that arise from any payment of any Obligation or from the execution, delivery, performance, recordation or filing of, or otherwise with respect to, this Agreement, any Promissory Note or any other Credit Document (hereinafter referred to as "Other Taxes"). The Borrower will indemnify the Lenders for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes on amounts payable to the Lenders under this paragraph) paid by the Lenders and any liability (including, without limitation, penalties, interest and reasonable expenses of collection for nonpayment, late payment or otherwise) arising therefrom or with respect thereto, upon written demand by the Lenders therefor. Notwithstanding any other provisions herein or in any Credit Document, if, as a result of an assignment or transfer in any other manner of any Promissory Note, the domicile or residence of a Lender changes with the result that amounts payable by the Borrower thereunder in respect of Taxes or Other Taxes are increased, the Borrower's liability in respect of such Taxes or Other Taxes will be limited to amounts it would have been required to pay prior to the assignment or transfer. H. Evidence of Indebtedness. Each Lender may, but shall be under no obligation to, maintain an account or accounts evidencing the indebtedness of the Borrower or of Novavision, as applicable, to such Lender resulting from each Loan and the amounts of principal and interest payable and paid to such Lender from time to time hereunder. In any legal action or proceeding any such account or accounts shall be prima facie evidence of the existence and amounts of the obligations of the Borrower or of Novavision therein recorded, absent manifest error. The Lenders shall, upon written request by the Borrower (made not more than once during each calendar quarter), deliver to the Borrower a statement showing the principal balance of each Loan. I. Payments and Computations. The Borrower will make each payment under the Promissory Notes and the other Credit Documents to which it is a party not later than 11:30 a.m., New York City time, on the day when due, in lawful currency of the United States and in same day funds to the Lenders, at the Lenders' addresses referred to in Section 7.01 hereof. Any payment made by the Borrower pursuant to any Credit Document after 11:30 a.m., New York City time, shall be deemed to have been made on the immediately following Business Day. Whenever any payment to be made under any such Credit Document shall be stated to be due on a day other than a Business Day, such payment shall be made on the immediately following Business Day and such extension of time shall in such case be included in the computation of interest. All computations of interest under the Promissory Notes hereunder shall be made by the Lenders on the basis of a year of 360 days and the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest is payable; provided, however, that if a Loan is repaid on the same day on which it is made, one day's interest shall be paid on that Loan. Each determination by the Lenders of interest hereunder shall be conclusive and binding for all purposes, absent manifest error. J. SECTION 2.10. Use of Proceeds. The Borrower shall apply the proceeds of each Loan to fund the working capital needs of the Borrower or as may otherwise be agreed between the Lenders and the Borrower. IV. CONDITIONS TO LOANS A. Conditions Precedent to the Loans. The obligations of each of the Lenders to make each Loan is subject to the fulfillment, in a manner satisfactory to the Lenders, of each of the following conditions precedent: (a) Representations and Warranties; No Default. Each of the following statements shall be true and correct: (i) the representations and warranties contained in Article IV hereof and in each other Credit Document delivered to the Lenders shall be true and correct on and as of the date each such Loan is entered into and funded (each, a "Loan Commencement Date"), both immediately before and immediately after giving effect to such Loan, as though such representations and warranties had been made on and as of each Loan Commencement Date; and (ii) on each Loan Commencement Date, both immediately before and immediately after giving effect to such Loan, no Default shall have occurred and be continuing. (b) Legality. The making of the Loans shall not contravene any law, rule, regulation, judgment, order, decree, By-law provision or corporate resolution applicable to any Lender or the Borrower and shall not violate any provision of any contract, agreement, indenture, note or other instrument to which the Borrower is a party or by which its assets or properties may be bound. (c) Notice. Each of the Lenders shall have received a Borrowing Notice pursuant to Section 2.02 hereof with respect to such Loan, the delivery of which by Borrower shall constitute a deemed representation as to the accuracy of the statements in Section 3.01(a). (d) Delivery of Documents. Each of the Lenders shall have received on the applicable Loan Commencement Date a Promissory Note issued by the Borrower in substantially the form set forth in Exhibit A hereto evidencing such Lender's pro rata share of the Loan. (e) Lenders to Fund. Subject to Section 7.05 hereof, each of the other Lenders shall, substantially contemporaneously with such Lender, have funded its pro rata share of the Loan. (f) Old Loans. Prior to making the initial New Loans to be made hereunder, each of the Lenders shall have received all Promissory Notes evidencing the Old Loans, each duly executed by the Borrower, to which such Lender is entitled by the terms hereof. V. REPRESENTATIONS AND WARRANTIES The Borrower hereby represents and warrants to each of the Lenders as follows: A. Organization, Good Standing, Etc. Each of the Borrower and its Subsidiaries (a) is a corporation duly organized and validly existing under the laws of Mexico, (b) has all requisite power and authority to conduct its business as now conducted and as presently contemplated, to execute and deliver each Credit Document to which it is a party and to consummate the transactions contemplated thereby and to make the borrowings hereunder and (c) is duly qualified to do business and is in good standing in each jurisdiction in which the character of the properties owned or leased by it or in which the transaction of its business makes such qualification necessary. B. Authorization, Etc. The execution, delivery and performance by the Borrower of each Credit Document to which it is a party: (a) have been duly authorized by all necessary corporate action, (b) do not and will not contravene its charter or by-laws, any applicable law, rule, regulation, judgment, order or decree, or any contractual restriction binding on or otherwise affecting it or any of its properties, (c) do not and will not result in or require the creation of any Lien (other than pursuant to any such Credit Document) upon or with respect to any of its properties and (d) do not and will not result in any suspension, revocation, impairment, forfeiture or nonrenewal of any permit, license, authorization or approval applicable to its operations or any of its properties. C. Governmental Approvals. No authorization, approval or license from, filing with or notice to, and no other action by, any Governmental Authority or other regulatory body is required in connection with the due execution, delivery and performance by the Borrower or any of its Subsidiaries of any Credit Document to which it is a party. D. Enforceability of Credit Documents. This Agreement is, and each other Credit Document to which the Borrower is a party, when delivered hereunder, will be, assuming compliance by the Lenders with their obligations hereunder, a legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, and the Promissory Notes, if sought to be enforced in a summary proceeding (procedimiento ejecutivo) under applicable Mexican laws, will not be considered as "pagares causales", as defined under applicable Mexican law. E. Litigation. There is no action, suit, proceeding or investigation against or affecting the Borrower or any of its Subsidiaries pending, or to the Borrower's knowledge threatened, before any court, any Governmental Authority, agency or official or any arbitrator that (a) may materially adversely affect the operations, condition (financial or otherwise), business, assets or prospects of the Borrower or the ability of the Borrower or any of its Subsidiaries to perform its obligations under any Credit Document to which it is or will be a party or (b) relates to this Agreement, the Promissory Notes or any other Credit Document or any transaction contemplated herein or therein. F. Compliance with Law, Etc. None of the Borrower or its Subsidiaries is in violation of its charter or by-laws, or any applicable law, rule, regulation, judgment, order or decree or of any material term of any agreement or instrument binding on or otherwise affecting it or any of its properties. G. Permits, Etc. Each of the Borrower and its Subsidiaries has all permits, licenses, consents, authorizations, approvals, entitlements and accreditations required for it lawfully to own, lease, manage or operate, or to acquire, each business currently owned, leased, managed or operated, or to be acquired, by the Borrower. No condition exists or event has occurred which, in itself or with the giving of notice or lapse of time or both, would result in the suspension, revocation, impairment, forfeiture or non-renewal of any such permit, license, consent, authorization, approval, entitlement or accreditation, and there is no claim that any thereof is not in full force and effect. H. Full Disclosure. No Credit Document or schedule or exhibit thereto, and no certificate, report, oral or written statement or other document or information furnished to the Lenders in connection therewith or with the consummation of the transactions contemplated thereby, contains any material misstatement of fact or omits to state a material fact or any fact necessary to make the statements contained therein not misleading. There is no fact or condition materially adversely affecting the operations, condition (financial or otherwise), business or assets or prospects of the Borrower that has not been set forth in a footnote included in the Financial Statements or a Schedule hereto (other than public information with respect to general business conditions). VI. COVENANTS OF THE BORROWER A. Affirmative Covenants. So long as this Agreement remains in effect or any Obligation remains unpaid, the Borrower shall, and shall cause each of its Subsidiaries to, unless each of the Lenders shall otherwise consent in writing: (a) Compliance with Laws, Etc. Comply in all material respects with all applicable laws, rules, regulations, judgments, treaties, orders and decrees, such compliance to include, without limitation, (i) paying before the same become delinquent all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or upon any of its properties and (ii) paying all lawful claims which if unpaid might become a Lien or charge upon any of its properties, except to the extent contested in good faith by proper proceedings which stay the imposition of any penalty, fine or Lien resulting from the non-payment thereof and with respect to which adequate reserves in accordance with GAAP have been set aside for the payment thereof. (b) Preservation of Existence, Etc. Maintain and preserve its existence, rights and privileges, and become or remain duly qualified in each jurisdiction in which the character of the properties owned or leased by it or in which the transaction of its business makes such qualification necessary. (c) Maintenance of Properties, Etc. Maintain and preserve all of its properties that are necessary or useful in the proper conduct of its business in good working order and condition, ordinary wear and tear excepted, and comply at all times with the provisions of all leases to which it is a party as lessee or under which it occupies property, so as to prevent any loss or forfeiture thereof or thereunder. (d) Compliance with Documents. Observe and comply with the terms and conditions of each Credit Document to which it is a party, pay all amounts payable by it thereunder according to the terms thereof, and take all actions as may be requested by the Lenders to enforce the Obligations under the Credit Documents. (e) Obtaining of Permits, Etc. Obtain, maintain and preserve all permits, licenses, consents, authorizations, approvals, entitlements and accreditations which are necessary or useful in the proper conduct of its business and become or remain duly qualified and in good standing in each jurisdiction in which the character of the properties owned or leased or in which the transaction of business makes such qualification necessary. (f) Keeping of Records and Books of Account. Keep adequate records and books of account, with complete entries made in accordance with GAAP applied on a consolidated basis consistent with that applied in the preparation of its audited Financial Statements, reflecting all of its financial transactions. B. Negative Covenants. So long as this Agreement remains in effect or any Obligation remains unpaid the Borrower shall not, and none of its Subsidiaries shall, without the prior written consent of the Lenders: (a) Merger, Consolidation, Etc. Wind-up, liquidate, declare insolvency, concurso mercantil or file under any applicable bankruptcy, concurso mercantil or similar statute, or dissolve itself (or suffer or permit any such action), merge, consolidate or amalgamate with or into any other Person, purchase or otherwise acquire all or substantially all of the assets of any Person (or any division thereof). (b) Sale of Assets, Etc. Sell, assign, lease or otherwise transfer or dispose of, whether in one transaction or in a series of related transactions, all or substantially all of its properties, rights or other assets (whether now owned or hereafter acquired) to any Person. VII. EVENTS OF DEFAULT A. Events of Default. If any of the following (an "Event of Default") shall occur and be continuing: (a) Non-Payment of Obligations. The Borrower or Novavision shall fail to pay when due (whether by scheduled maturity, prepayment, acceleration of maturity, demand or otherwise) any Obligation, including, without limitation, any principal of or interest on any Loan or any fee or other amount due hereunder; or (b) Breach of Representation and Warranty. Any representation or warranty made by the Borrower, Novavision or by any officer of the Borrower or any Subsidiary thereof, under or in connection with any Credit Document, shall have been incorrect in any material respect when made or deemed made; or (c) Breach of Certain Covenants. The Borrower or any Subsidiary of the Borrower shall fail to perform or observe any term, covenant or agreement contained in any Credit Document and to be performed or observed by such Person and, except as set forth in subsection (a) of this Section 6.01, such failure, if capable of being remedied, shall remain unremedied for five days after written notice thereof shall have been given to the Borrower by any Lender; or (d) Default on Other Indebtedness. The Borrower or any Subsidiary of the Borrower shall fail to pay any debt for borrowed money or other similar obligation or liability excluding Indebtedness evidenced by the Promissory Notes ("Indebtedness") in an aggregate amount in excess of US$500,000, or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Indebtedness, or any other default under any agreement or instrument relating to any such Indebtedness, or any other event, shall occur and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such default or event is to accelerate, or to permit the acceleration of, the maturity of such Indebtedness; or any such Indebtedness in excess of such amount shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; or (e) Bankruptcy, Insolvency, Etc. The Borrower or any of its Subsidiaries shall be generally not paying its debts as such debts become due, shall be insolvent, shall admit in writing its inability or unwillingness to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower or any of its Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or seeking dissolution, concurso mercantil, liquidation, winding-up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, concurso mercantil, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for the Borrower or any of its Subsidiaries or for any substantial part of its or their property; or the Borrower or any of its Subsidiaries shall take any action to authorize or effect any of the actions set forth above in this subsection (e); or (f) Invalidity of any Credit Document. (i) Any provision of this Credit Agreement, any Promissory Note or any other Credit Document shall at any time for any reason be declared to be null and void by a court of competent jurisdiction, or (ii) the validity or enforceability thereof shall be contested by the Borrower or Novavision, as the case may be, or (iii) a proceeding shall be commenced by the Borrower, Novavision or by any Governmental Authority or other regulatory body having jurisdiction over the Borrower or Novavision seeking to establish the invalidity or unenforceability of any Credit Document, or (iv) the Borrower or Novavision, as the case may be, shall refuse or fail to execute and deliver, or shall deny that it has any liability or obligation purported to be created under, any Credit Document; or (g) Judgments, Etc. One or more judgments or orders (other than a judgment or award described in clause (e) of this Section 6.01) for the payment of money exceeding any applicable insurance coverage by more than US$500,000 in the aggregate shall be rendered against the Borrower or any Subsidiary thereof, and either (i) enforcement proceedings shall have been commenced by any creditor upon any such judgment or order or (ii) there shall be any period of 10 consecutive days during which a stay of enforcement of any such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; then, and in any such event, any Lender may in its sole discretion, by notice delivered simultaneously to the Borrower and the other Lenders, (i) declare all Obligations (including, without limitation, all principal of and interest on the Promissory Notes and Novavision Notes and all other amounts payable under this Agreement) to be immediately due and payable, whereupon the Promissory Notes and all other Obligations of the Borrower and Novavision hereunder and the other Credit Documents shall become and be immediately due and payable without diligence, presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower and Novavision and (ii) exercise any and all of its other rights under applicable law, hereunder and under the other Credit Documents. VIII. MISCELLANEOUS A. Notices, Etc. All notices and other communications provided for hereunder shall be in writing and shall be mailed, telecopied or delivered as follows: if to the Borrower, to Innova S. de R.L. de C.V. Insurgentes Sur No. 694, Sexto Piso Del Valle C.P. 03100 Mexico, D.F. Attn: Pablo Vazquez Oria, Director General Telephone: (5255) 5448-4018 Facsimile:(5255)5448-4047 c.c.p. Carlos Ferreiro Rivas, V.P. Admin. y Finanzas (tel. (5255) 5448-4000) (Facsimile: (5255)5448-4047) if to Novavision, S. de R.L. de C.V., to Novavision, S. de R.L. de C.V. Insurgentes Sur No. 694, Sexto Piso Del Valle C.P. 03100 Mexico, D.F. Attn: Pablo Vazquez Oria Telephone: (5255) 5448-4018 Facsimile:(5255)5448-4047 c.c.p. Carlos Ferreiro Rivas, V.P. Admin. y Finanzas (tel. (5255) 5448-4000) (Facsimile: (5255)5448-4047) if to Grupo Televisa, S.A., to Grupo Televisa, S.A. Avenida Vasco de Quiroga 2000 Edificio A, Tercer Piso 01210 Mexico, D.F. Attn: Alex Penna Telephone: (52) 5261 2458 Facsimile: (52) 5261 2524 If to Sky DTH, S. de R.L. de C.V., to Sky DTH, S. de R.L. de C.V. c/o Grupo Televisa, S.A. Avenida Vasco de Quiroga 2000 Edificio A, Tercer Piso 01210 Mexico, D.F. Attn: Alex Penna Telephone: (52) 5261 2458 Facsimile: (52) 5261 2524 if to News America Incorporated, to News America Incorporated 1211 Avenue of the Americas New York, New York 10036 Attn: Arthur M. Siskind Telephone: (212) 852-7007 Facsimile: (212) 768-2029 If to News DTH (Mexico) Investment Limited, to News DTH (Mexico) Investment Limited c/o The News Corporation Limited 1211 Avenue of the Americas New York, NY 10036 Attn: Arthur M. Siskind Telephone: (212) 852-7007 Facsimile: (212) 768-2029 if to Liberty Mexico DTH, Inc., to Liberty Mexico DTH, Inc. c/o Liberty Media International, Inc. 12300 Liberty Boulevard Englewood, CO 80112 Attn: Legal Department Telephone: (720) 875-5400 Facsimile: (720) 875-5858 or, as to each party, at such other address as shall be designated by such party in a written notice to the other parties complying as to delivery with the terms of this Section 7.01. All such notices and other communications shall be effective (i) if mailed, five days after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid, (ii) if by facsimile, when such facsimile is transmitted to the number specified and the appropriate confirmation is received, and (iii) if delivered, upon delivery. B. Amendments, Etc. No amendment or modification of any provision of this Agreement, any Promissory Note or other Credit Document shall be effective unless it is in writing and signed by the Borrower and the Lenders (and, in the case of Section 2.03(c), Section 2.04(b), Section 2.08 or any provision of Article VI or VII, Novavision), as applicable, and no waiver of any provision of this Agreement, any Promissory Note or other Credit Document, nor consent to any departure by the Borrower therefrom, shall be effective unless it is in writing and signed by the Lender against whom enforcement of such amendment or waiver is sought, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. C. No Waiver; Remedies, Etc. No failure on the part of any Lender to exercise, and no delay in exercising, any right, power or privilege hereunder or under any other Credit Document shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege under any Credit Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies of the Lenders provided herein and in the other Credit Documents are cumulative and are in addition to, and not exclusive of, any rights or remedies provided by law. The rights of the Lenders under any Credit Document against any party thereto are not conditional or contingent on any attempt by the Lenders to exercise any of its rights under any other Credit Document against such party or against any other Person. Unless the Lenders otherwise agree in writing, any waiver of any right, power or privilege as may be granted by them shall apply to each of the Lenders proportionally in respect of its interest. D. Fees, Costs, Expenses and Taxes. The Borrower will pay on demand all reasonable costs and expenses, if any (including, without limitation, reasonable counsel fees, disbursements and other client charges), in connection with the enforcement or preservation of any rights under the Credit Documents and the other documents to be delivered pursuant to the Credit Documents or in connection with the negotiation of any restructuring, work-out or renegotiation of any of the terms of this Agreement (whether or not consummated) or the Obligations of the Borrower hereunder. In addition, the Borrower will pay any and all stamp and other taxes and fees payable or determined to be payable in connection with the execution, delivery, filing, registration and recording of the Credit Documents, and will hold the Lenders harmless from and against any and all liabilities with respect to or resulting from any delay in paying or omission to pay such taxes and fees. In the event a suit is brought to enforce payment under any Promissory Note and accrued interest thereon, if any, or any other Obligations, the Borrower agrees to pay such additional sum for expenses and reasonable attorney fees as the court may adjudge. Notwithstanding anything to the contrary in the foregoing of this Section 7.04, in the case of the Novavision Notes, Novavision shall have and discharge the obligations herein allocated to the Borrower in respect of the Credit Documents pertaining to it. E. Funding Defaults. The failure of any Lender (a "Defaulting Lender") to advance funds to the Borrower by a required funding date in accordance with Sections 2.01 and 2.02 hereof (a "Debt Funding Default") shall extinguish the funding obligation of the non-defaulting Lenders with respect to that Loan and the Borrower shall be required to return any funds advanced pursuant to the extinguished obligation; provided, however, that the non-defaulting Lenders may elect in their sole discretion to fund their proportionate shares of that Loan notwithstanding the Debt Funding Default. A non-defaulting Lender may further elect to loan an additional amount to the Borrower (on the same terms as for other amounts loaned in that Loan and subject to the next sentence) to cover all or a portion of the Defaulting Lender's proportionate share of the Loan (a "Default Loan") and the Borrower shall issue its Promissory Note, duly executed by the Borrower, in the principal amount equal to the amount of the Default Loan, dated the date of funding thereof. The Borrower shall be obligated to repay the principal amount of the Default Loan to the non-defaulting Lender (provided, however, that if the Borrower fails to repay such Default Loan in accordance with its terms, the Defaulting Lender shall be obligated to pay the principal amount of the Default Loan to the non-defaulting Lender) and such Default Loan shall bear simple interest at the rate of thirty percent (30%) per annum, payable quarterly in cash to the non-defaulting Lender by the Defaulting Lender. Interest (if any) payable by the Borrower on the Default Loan shall be payable to the non-defaulting Lender and such interest shall accrue until maturity as set forth in the Promissory Notes and, subject to the proviso in the preceding sentence, be credited against the amount of interest payable by the Defaulting Lender to the non-defaulting Lender. Except as expressly provided herein, no third-party beneficiary right shall be created pursuant hereto. A Defaulting Lender, and a non-defaulting Lender, as the case may be, shall, upon return of any funds by the Borrower pursuant to this Section 7.05, promptly cancel the related Promissory Note and return it to the Borrower. F. Severability. Any provision of this Agreement, or of any other Credit Document to which the Borrower is a party that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining portions hereof or thereof or affecting the validity or enforceability of such provision in any other jurisdiction. G. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the Borrower, Novavision and the Lenders and their respective permitted successors and assigns. Neither the Borrower nor Novavision may assign its rights hereunder or any interest herein without the prior written consent of each of the Lenders. No Lender may assign its rights hereunder or any interest herein or in any Credit Document without the consent in writing of each other Lender. Notwithstanding the foregoing, upon prior written notice to the Borrower and the other Lenders, any Lender may assign to one or more of its respective Affiliates its right, title and interest in and to the Loans and the Credit Documents and to the extent of any such assignment or participation (unless otherwise stated therein) the assignee or participant of such assignment or participation shall have the same rights and benefits, and shall be subject to the same restrictions, under the Credit Documents, as it would have if it were a Lender hereunder (including, without limitation, the right to receive payments under Article II hereof). H. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same agreement. I. Headings. Section headings herein are included for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. J. Governing Law. This Agreement, each of the Promissory Notes and each other Credit Document shall be governed in all respects by, and construed in accordance with, the laws of the State of New York, United States of America, applicable to contracts made and to be performed in New York without consideration as to choice of law; provided, however, that only in the case of any action, suit or proceeding to enforce a Promissory Note (or, as the case may be, a Novavision Note) by the holder thereof in Mexico or of any political subdivision thereof, such Promissory Note (or Novavision Note) shall be governed by and construed in accordance with the laws of Mexico. K. Forum Selection and Consent to Jurisdiction; Enforcement. (a) All actions and proceedings arising out of or relating to this Agreement or any other Credit Document shall be brought and maintained in the courts of the State of New York or in the United States District Court for the Southern District of New York or, at any Lender's option, in any court in Mexico or any political subdivision thereof as such Lender may select. Each of the Borrower and Novavision hereby expressly and irrevocably (i) submits to the personal jurisdiction of the courts of the State of New York and of the United States District Court for the Southern District of New York for the purpose of any such litigation and irrevocably agrees to be bound by any judgment rendered thereby in connection with such litigation, (ii) waives any defense based on doctrine of venue or forum non conveniens, or similar notes or doctrines and (iii) irrevocably agrees that all claims in respect of such an action or proceeding may be heard and determined in the courts of the State of New York and of the United States District Court for the Southern District of New York. To the extent that the Borrower or Novavision has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether through service or notice, attachment prior to judgment, attachment in aid of execution or otherwise) with respect to itself or its property, each of the Borrower and Novavision hereby irrevocably waives such immunity in respect of its obligations under this Agreement and the other Credit Documents pertaining to it. Notwithstanding the foregoing, for any action, suit or proceeding initiated in Mexico or any political subdivision thereof (i) by a holder of a Promissory Note, the Borrower and holder hereby expressly and irrevocably submit, or (ii) by a holder of a Novavision Note, Novavision and the holder hereby expressly and irrevocably submit, to the jurisdiction of the competent courts of the City of Mexico, Federal District, Mexico, thereby expressly and irrevocably waiving any other jurisdiction that they may be entitled to by reason of its present or future domicile. (b) With respect to each action or proceeding to enforce the Promissory Notes, the terms of this Agreement or any other Credit Document, and with respect to all settlements and negotiations with a view to resolving any settlement of any disputes relating to Obligations that remain unsatisfied under the Credit Documents, whether or not in the circumstances of an Event of Default, the Lenders shall act in concert regarding the foregoing such that the judgments, decrees, rulings and orders (if any), payments, terms of settlement (as the case may be), performance of Obligations and other benefits (including without limitation those pursuant to Sections 2.06, 2.07 and 7.04 hereof) realized upon any such enforcement (including any judgment, decree, ruling or order) or settlement shall be extended to the Lenders pro rata based on their Proportionate Interests in the Loans and their interests in the Novavision Notes and otherwise upon the same terms and conditions. None of the Lenders, Innova or Novavision shall take any action or fail to take any action that would result in the treatment of the Lenders in a manner inconsistent with the preceding sentence. L. No Third Party Beneficiaries. No entity or person, other than the parties (and, in the case of the Lenders, their respective successors and assigns hereunder) to this Agreement, has been given or shall be deemed to have been given any rights as a third party beneficiary hereunder or under any of the other Credit Documents or other instruments and documents executed in connection herewith and therewith. M. Integration. This Agreement and the other Credit Documents represent the entire agreement of the Borrower and the Lenders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Lenders relative to the subject matter thereof not expressly set forth or referred to herein or in the other Credit Documents. Without limiting the generality of the foregoing, the parties hereby agree that with respect to the Old Notes, the Interim Agreement as it might relate thereto is superceded in its entirety and shall be of no further force and effect. N. No Party Deemed Drafter. The Borrower and the Lenders agree that neither party hereto shall be deemed to be the drafter of this Agreement and the Borrower and the Lenders further agree that in the event this Agreement is ever construed by a court of law, such court shall not construe this Agreement or any provision of this Agreement against any party hereto as the drafter of this Agreement. O. Waiver of Jury Trial. EACH OF THE BORROWER AND NOVAVISION WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM CONCERNING ANY RIGHTS UNDER THIS AGREEMENT, THE PROMISSORY NOTES OR ANY OTHER CREDIT DOCUMENT, OR UNDER ANY AMENDMENT, WAIVER, CONSENT, INSTRUMENT, DOCUMENT OR OTHER AGREEMENT DELIVERED OR WHICH IN THE FUTURE MAY BE DELIVERED IN CONNECTION THEREWITH, AND AGREES THAT ANY SUCH ACTION, PROCEEDINGS OR COUNTERCLAIM SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY. P. English and Spanish. Each of this Agreement and the Promissory Notes shall be executed in both English and Spanish. Both the English and Spanish versions shall constitute one and the same of such document, and both shall be binding upon the parties. In the case of any doubt as to the proper interpretation of any Credit Document, the English text shall govern, except in the event of any action or proceeding brought in Mexico to enforce such Credit Document, in which case the Spanish text shall govern. SIGNATURE PAGES FOLLOW IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. INNOVA, S. DE R.L. DE C.V., AS BORROWER By: ________________________________________ Name: Title: GRUPO TELEVISA, S.A., AS LENDER By: ________________________________________ Name: Title: SKY DTH, S. DE R.L. DE C.V., AS LENDER By: ________________________________________ Name: Title: NEWS AMERICA INCORPORATED, AS LENDER By: ________________________________________ Name: Title: NEWS DTH (MEXICO) INVESTMENT LIMITED By: ________________________________________ Name: Title: LIBERTY MEXICO DTH, INC., AS LENDER By: ________________________________________ Name: Title: CORPORACION NOVAVISION, S. DE R.L. DE C.V., (SOLELY FOR PURPOSES OF SECTION 2.03(C), SECTION 2.04(B) AND SECTION 2.08 AND ARTICLES VI AND VII) By: ________________________________________ Name: Title: SCHEDULE 2.01 FUNDING REQUIREMENTS
YEAR LOAN AMOUNTS ---- ------------ Schedule to be amended from time to time in Schedule to be amended from time to time in accordance with Section 2.01 of the Agreement accordance with Section 2.01 of the Agreement
SCHEDULE 2.03(b) INNOVA, S. DE R.L. DE C.V. AMOUNTS OF OLD LOANS IN 2000, AGGREGATE AND BY LENDER US DOLLARS
DATE BORROWER TOTAL AMOUNT TELEVISA NEWS CORP. LIBERTY MEDIA ---- -------- ------------ -------- ---------- ------------- February 15 Innova 7,000,000 4,200,000 2,100,000 700,000 March 20 Innova 4,000,000 2,400,000 1,200,000 400,000 August 16 Innova 8,200,000 4,920,000 2,460,000 820,000 September 27 Innova 27,000,000 16,200,000 8,100,000 2,690,000 October 17 Innova 9,700,000 5,820,000 2,910,000 980,000 November 21 Innova 2,000,000 1,200,000 600,000 200,000 November 28 Innova 2,500,000 1,380,000 690,000 430,000 November 30 Innova 1,800,000 1,200,000 600,000 0 December 19 Innova 8,000,000 4,800,000 2,400,000 800,000 December 26 Innova 2,500,000 1,500,000 750,000 250,000 ---------- ---------- ---------- --------- TOTAL 72,700,000 43,620,000 21,810,000 7,270,000 ========== ========== ========== =========
SCHEDULE 2.03(b) (PAGE 2) INNOVA, S. DE R.L. DE C.V. AMOUNTS OF OLD LOANS IN 2001, AGGREGATE AND BY LENDER US DOLLARS
DATE BORROWER TOTAL AMOUNT TELEVISA NEWS CORP. LIBERTY MEDIA ---- -------- ------------ -------- ---------- ------------- January 18 Innova 9,500,000 5,700,000 2,850,000 950,000 January 25 Innova 5,800,000 3,480,000 1,740,000 580,000 February 20 Innova 5,000,000 3,000,000 1,500,000 500,000 February 26 Innova 2,500,000 1,500,000 750,000 250,000 March 19 Innova 13,000,000 7,800,000 3,900,000 1,300,000 March 26 Innova 7,000,000 4,200,000 2,100,000 700,000 March 28 Innova 24,000,000 14,400,000 7,200,000 2,400,000 April 25 Innova 3,500,000 2,100,000 1,050,000 350,000 May 21 Innova 5,000,000 3,000,000 1,500,000 500,000 June 19 Innova 7,000,000 4,200,000 2,100,000 700,000 June 25 Innova 2,000,000 1,200,000 600,000 200,000 July 20 Innova 3,000,000 1,800,000 900,000 300,000 August 27 Innova 1,600,000 960,000 480,000 160,000 September 27 Innova 19,500,000 11,700,000 5,850,000 1,950,000 October 30 Innova 1,500,000 900,000 450,000 150,000 November 29 Innova 8,000,000 4,800,000 2,400,000 800,000 December 21 Innova 14,900,000 8,940,000 4,470,000 1,490,000 ----------- ---------- ---------- ---------- TOTAL 132,800,000 79,680,000 39,840,000 13,280,000 =========== ========== ========== ==========
SCHEDULE 2.03(b) (PAGE 3) INNOVA, S. DE R.L. DE C.V. AMOUNTS OF OLD LOANS IN 2002, AGGREGATE AND BY LENDER US DOLLARS
DATE BORROWER TOTAL AMOUNT TELEVISA NEWS CORP. LIBERTY MEDIA ---- -------- ------------ -------- ---------- ------------- March 25 Innova 29,500,000 17,700,000 8,850,000 2,950,000 TOTAL 29,500,000 17,700,000 8,850,000 2,950,000 ========== ========== ========= =========
EXHIBIT A: FORM OF PROMISSORY NOTE [Fecha Aplicable] [Applicable Date] PAGARE NO NEGOCIABLE IMPORTE: E.U.$ __________ Dolares, moneda de curso legal de los Estados Unidos de America NON-NEGOTIABLE PROMISSORY NOTE AMOUNT: U.S.$ __________ Dollars, lawful currency of the United States of America. POR VALOR RECIBIDO, POR ESTE PAGARE la suscrita Innova, S. de R.L. de C.V. una sociedad mexicana (el "Suscriptor") POR ESTE MEDIO incondicionalmente PROMETE PAGAR a la orden de _________________________, una _____________________(el "Beneficiario"), en sus oficinas ubicadas en _____________________________________________________________ (el "Lugar de Pago"), (i) la suma principal de [suma en palabras] dolares ( $ [suma en numeros]) moneda de curso legal de los Estados Unidos de America, mas (ii) intereses ordinarios sobre la suma principal que en cualquier momento se encuentre insoluta conforme a este Pagare a partir de la fecha de suscripcion del mismo hasta que dicha suma principal venza y sea pagadera, a una tasa fija ordinaria del 9% (nueve porciento) anual. La suma principal de este Pagare mas los intereses devengados sobre la misma seran pagaderos el decimo aniversario de la fecha de este Pagare. FOR VALUE RECEIVED, BY THIS PROMISSORY NOTE the undersigned Innova, S. de R.L. de C.V. - a Mexican Corporation, ( the "Borrower") HEREBY unconditionally PROMISES TO PAY to the order of _______________, a ________ corporation (the "Lender") at its office located at ___________________________ ______________ (the "Place of Payment"), (i) the principal amount of [sum in words] Dollars ( $ [sum in numbers]) in currency of the United States of America plus (ii) ordinary interest on any and all principal amounts of such principal sum remaining unpaid hereunder from time to time from the date hereof until such principal amount becomes due and payable, at a fixed ordinary rate of 9% (nine percent) per annum. The principal amount hereof plus accrued interest thereon shall be payable on the tenth anniversary of the date hereof. Todos los intereses se calcularan sobre la base de un ano de 360 dias y el numero de dias efectivamente transcurridos (incluyendo el primer dia y excluyendo el ultimo). No obstante cualquier otra disposicion contenida en este Pagare, los intereses pagados y que venzan al amparo del mismo, en ningun caso podran exceder de la tasa maxima permitida por la legislacion aplicable. All interest shall be computed on the basis of a year of 360 days and the actual number of days (including the first day but excluding the last day) elapsed. Notwithstanding any other provision of this Promissory Note, interest paid or becoming due hereunder shall in no event exceed the maximum rate permitted by applicable law. Tanto el principal como los intereses son Both principal and interest are payable in pagaderos en moneda de curso legal de los Estados Unidos de America, en fondos inmediatemente disponibles, en el Lugar de Pago. lawful money of the Unites States of America in immediately available funds at the Place of Payment. El Suscriptor, a su opcion, y previo aviso por escrito al Beneficiario con una anticipacion minima de cinco dias habiles, podra pagar anticipadamente este Pagare en su totalidad, en cualquier momento o parcialmente de tiempo en tiempo, sin prima o sancion por virtud de dicho pago anticipado, quedando entendido que cada pago anticipado debera acompanarse del pago de los intereses devengados a la fecha de dicho pago anticipado calculados sobre la cantidad pagada anticipadamente. The Borrower may at its option and upon not less than five business days prior written notice to the Lender, prepay this Promissory Note, in whole at any time or in part from time to time, without penalty or premium, such prepayment to be accompanied by the payment of accrued interest on the amount prepaid to the date of such prepayment. - -- -- ----- Si sucede cualquira de los siguientes actos o hechos (cada uno un "Incumplimiento"): (a) que el Suscriptor no pague cuando sea vencida y pagadera la suma de principal o intereses de este Pagare; o (b) que cualquier estipulacion contenida en este Pagare, sea declarada, por cualquier razon, nula e inexigible por una corte competente, o que su validez o exigibilidad sea impugnada por el Suscriptor, o que el Suscriptor haya instaurado un procedimiento en cuyos terminos pretenda obtener la nulidad o inexigibilidad de la misma, o que el Suscriptor niegue tener una responsabilidad u obligacion amparada por este pagare o por dicha estipulacion; el Beneficiario podra (i) declarar la suma principal insoluta de este Pagare asi como todas las demas cantidades adeudadas conforme al mismo, vencidas y pagaderas de inmediato, con lo cual la suma principal insoluta de este Pagare y dichas otras cantidades venceran y seran pagaderas de inmediato sin necesidad de ser auditadas, y sin necesidad de la presentacion, solicitud, peticion, protesto o aviso de cualquier naturaleza respecto de este Pagare, a todo lo cual por este medio el Suscriptor renuncia, y (ii) ejercitar todos y cada uno de los If any of the following shall occur (each a "Default"): (a) the Borrower shall fail to pay any principal of or interest on this Promissory Note when due; or (b) any provision of this Promissory Note shall at any time for any reason be declared to be null and void by a court of competent jurisdiction, or the validity or enforceability shall be contested by the Borrower, or a proceeding shall be commenced by the Borrower seeking to establish the invalidity or unenforceability hereof, or the Borrower shall deny that it has any liability or obligation hereunder, then the Lender may (i) declare the outstanding principal amount of this Promissory Note and all other amounts due hereunder to be immediately due and payable, whereupon the outstanding principal amount of this Promissory Note and all such other amounts shall become and shall be forthwith due and payable, without diligence, presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, and (ii) exercise any and all of its rights under applicable law or hereunder to enforce this Promissory Note. derechos que el Beneficiario pudiere tener en terminos de la legislacion aplicable o conforme a este Pagare para efectos de exigir el cumplimiento a los terminos de mismo. - -- -- ----- ------- ------ ----- Todos los pagos efectuados por el Suscriptor al amparo de este Pagare deberan efectuarse sin compensacion, contrademanda o cualquier otra defensa. Todos estos cargos deberan efectuarse libres de, y sin deduccion por concepto de impuestos presentes o futuros por ingresos, impuestos del timbre u otros impuestos, contribuciones, deducciones, cargos, derechos, retenciones, restricciones o condiciones de cualquier naturaleza que se impongan, cobren, retengan o determinen en el presente o en el futuro por parte de cualquier jurisdiccion o subdivision politica o autoridad fiscal de dicho pais, y libres de intereses, multas o pasivos de naturaleza similar, excluyendo los impuestos sobre los ingresos netos globales de el Beneficiario (a dichos impuestos no excluidos en lo sucesivo se les denominara los "Impuestos"). Si el Suscriptor estuviere requerido por ley a deducir o retener uno o mas impuestos de, o con respecto a cualquier cantidad pagadera conforme este Pagare, entonces (i) el importe asi pagadero sera incrementado en la medida que sea necesaria para que, despues de efectuar las deducciones y retenciones requeridas (incluyendo los Impuestos sobre las cantidades pagaderas al Beneficiario conforme a esta oracion) el Beneficiario reciba una cantidad igual a la suma que habria recibido de no haberse hecho dichas deducciones o retenciones, (ii) el Suscriptor procedera a realizar dichas deducciones o retenciones y (iii) el Suscriptor enterara el importe total asi deducido o retenido a la autoridad fiscal competente y en los terminos de la legislacion aplicable. Cuando un determinado Impuesto sea pagadero por el Suscriptor, entonces, una vez enterado el All payments made by the Borrower under this Promissory Note shall be made without setoff, counterclaim or any other defense. All such charges shall be made free and clear of and without deduction for any present or future income, stamp or other taxes, levies, imposts, deductions, charges, fees, withholding, restrictions or conditions of any nature now or hereafter imposed, levied, collected, withheld or assessed by any jurisdiction or by any political subdivision or taxing authority, thereof and therein, and all interest, penalties or similar liabilities, excluding taxes on the overall net income of the Lender (such non-excluded taxes are hereinafter referred collectively as "Taxes"). If the Borrower shall be required by law to deduct or to withhold any Taxes from and in respect of any amount payable hereunder, (i) the amount so payable shall be increased to the extent necessary so that after making all required deductions and withholdings (including Taxes on amounts payable to the Lender pursuant this sentence) the Lender receives an amount equal to the sum it would have received had no such deductions or withholdings been made, (ii) the Borrower shall make such deductions or withholdings and (iii) the Borrower shall pay the full amount deducted or withheld to the relevant taxation authority in accordance with applicable law. Whenever any Tax is payable by the Borrower, as promptly as possible thereafter, the Borrower shall send the Lender an official receipt showing payment. In addition, the Borrower agrees to pay any present or future taxes, charge or similar levies which arise from any payment hereunder or from the execution, delivery, performance, recordation or filing of, or pago correspondiente, el Suscriptor transmitira al Beneficiario una constancia o recibo oficial que acredite dicho pago. Adicionalmente, el Suscriptor conviene pagar todos los impuestos, cargos o contribuciones presentes o futuros que surjan con motivo de cualquier pago materia de este Pagare o con motivo de la suscripcion, entrega, cumplimiento, registro o presentacion de este Pagare, o en relacion con cualquiera de estos (en lo sucesivo denominados los "Otros Impuestos"). El Suscriptor indemnizara al Beneficiario por el importe total de los Impuestos u Otros Impuestos (incluyendo Impuestos u Otros Impuestos sobre las cantidades pagaderas al Beneficiario conforme a este parrafo) pagados por el Beneficiario, asi como por cualquier pasivo o responsabilidad (incluyendo multas, intereses, recargos y gastos) que surjan con motivo de, o en relacion con ello, previa solicitud escrita sobre el particular por parte del Beneficiario. No obstante lo que diga cualquiera otra disposicion de este Pagare, si, como resultado de una cesion o transferencia de cualquier otra forma de este Pagare, el domicilio o la residencia del Beneficiario cambia, resultando con ello que las cantidades a pagar por el Suscriptor del mismo con respecto a Impuestos u Otros Impuestos aumentan, la responsabilidad del Suscriptor con respecto a esos Impuestos u Otros Impuestos estara limitada a las cantidades que hubiesen tenido que pagarse antes de la cesion o transferencia de este Pagare. otherwise with respect to this Promissory Note (hereinafter referred to as "Other Taxes"). The Borrower will indemnify the Lender for the full amount of Taxes or Other Taxes (including, any Taxes or Other Taxes on amounts payable to the Lender under this paragraph) paid by the Lender and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, upon written demand by the Lender therefor. Notwithstanding any other provision herein, if, as a result of an assignment or transfer in any other manner of this Promissory Note, the domicile or residence of the Lender changes with the result that amounts payable by the Borrower hereunder in respect of Taxes or Other Taxes are increased, the Borrower's liability in respect of such Taxes or Other Taxes will be limited to amounts it would have been required to pay prior to the assignment or transfer. - ----- ----------- -------------- --------------- ----------- ----------------- ------------------ - ----- ----------- -------------- --------------- ----------- ----------------- ------------------ Ninguna omision o demora por parte de el Beneficiario en el ejercicio de un determinado derecho, facultad, privilegio o recurso contemplado en este Pagare operara como renuncia al mismo, y el ejercicio singular o parcial de este por parte del Beneficiario no impedira el ejercicio posterior o cualquier otro ejercicio o No failure on the part of the Lender to exercise, and no delay in exercising, any right, power, privilege or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof by the Lender preclude any other or further exercise thereof or the exercise of any right, power, privilege or remedy of the Lender. aplicacion de dicho derecho, facultad, privilegio o recurso por parte del Beneficiario. Cualquier estipulacion contemplada en este Pagare que este prohibida o sea inexigible, o que cause que este Pagare sea inexigible o nulo conforme a su naturaleza de Pagare conforme a las leyes de cualquier jurisdiccion, seran nulas exclusivamente por lo que se refiere a dicha jurisdiccion unicamente en la medida de dicha prohibicion, inexigibilidad o nulidad, sin que por ello se entiendan invalidadas o anuladas las disposiciones restantes del mismo o que afectara la validez o exigibilidad de dicha disposicion en cualquier otra jurisdiccion. El Suscriptor por este medio acepta pagar todos los costos y gastos razonables (incluyendo, sin limitar, los honorarios y gastos razonables de los abogados del Beneficiario) incurridos por el Beneficiario en relacion con la exigibilidad de los derechos que tienen los Beneficiarios asi como en relacion con el cobro de todas las cantidades vencidas y pagadera conforme a este Pagare. Any provision hereof which is prohibited or unenforceable or which may render this Promissory Note ineffective or not actionable as a Promissory Note under the laws of any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition, unenforceability, lack of effectiveness or action, without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. The Borrower hereby agrees to pay on demand all reasonable costs and expenses (including, without limitation, all reasonable fees and expenses of counsel to the Lender) incurred by the Lender in connection with the enforcement of the Lenders rights, and the collection of all amounts due and payable hereunder. - -- -- ----- El Suscriptor acepta que todas las acciones y procedimientos que surjan de, o se relacionen con este Pagare se ventilen en las cortes del Estado de Nueva York o en las cortes Federales con asiento en la Ciudad de Nueva York o, a opcion del Beneficiario, en cualquier tribunal de los Estados Unidos Mexicanos o cualquiera de sus subdivisiones politicas, segun el Beneficiario lo decida. El Suscriptor por este medio (i) irrevocablemente se somete a la jurisdiccion personal de las cortes del Estado de Nueva York o cortes Federales con asiento en la Ciudad de Nueva York, para cualquier accion, demanda o procedimiento que surja de, o se relacione con este Pagare, (ii) renuncia a cualquier defensa que se fundamente en una doctrina de aplicacion The Borrower agrees that all actions and proceedings arising out of or relating to this Promissory Note shall be litigated in a New York State or Federal court sitting in New York City or, at the Lender's option, in any court in the United Mexican States or any political subdivision thereof as the Lender may select. The Borrower hereby (i) irrevocably submits to the personal jurisdiction of any New York State or Federal court sitting in New York City in any action, suit or proceeding arising out of or relating to this Promissory Note, (ii) waives any defense based on doctrine of venue or forum non conveniens, or similar rules or doctrines, and (iii) irrevocably agrees that all claims in respect of such an action or proceeding may be heard and jurisdiccional o "forum non conveniens", o normas o doctrinas de naturaleza similar, y (iii) irrevocablemente acepta que todas las reclamaciones relacionadas con una determinada accion o procedimiento puedan instaurarse, proseguirse y resolverse ante dichas cortes del Estado de Nueva York o cortes Federales. No obstante lo anterior, en relacion con cualquier accion, demanda o procedimiento instaurado por el tenedor de este Pagare en los Estados Unidos Mexicanos o alguna de sus subdivisiones politicas, el Suscriptor y el tenedor de este Pagare por este medio irrevocable y expresamente se someten a la jurisdiccion de los tribunales competentes en la Ciudad de Mexico, Distrito Federal, Estados Unidos Mexicanos, renunciando expresa e irrevocablemente a cualquier otra jurisdiccion a que pudieren tener derecho por razon de sus domicilios presentes o futuros. determined in such New York State or Federal court. Notwithstanding the foregoing, for any action, suit or proceeding initiated by the holder hereof in the United Mexican States or any political subdivision thereof, the Borrower and the holder hereof hereby irrevocably and expressly submit to the jurisdiction of the competent courts of the City of Mexico, Federal District, United Mexican States, thereby expressly and irrevocably waiving any other jurisdiction that it may be entitled to by reason of its present or future domicile. En caso de que se interponga cualquier accion o procedimiento legal en relacion a este Pagare en los tribunales competentes del Estado de Nueva York, Estados Unidos de America, o en los tribunales federales de los Estados Unidos de America con asiento en la Ciudad de Nueva York, Nueva York, Estados Unidos de America, el Suscriptor irrevocablemente consiente en ser notificada a traves de CT CORPORATION SYSTEM, con oficinas a la fecha de este Pagare ubicadas en 111 Eighth Avenue, Nueva York, Nueva York 10011, Estados Unidos de America y para cualquier accion o procedimiento legal a que de lugar este Pagare en los tribunales competentes de la Ciudad de Mexico, Distrito Federal, el Suscriptor senala como su domicilio para recibir notificaciones el que aparece bajo su firma en este Pagare. In the event any legal action or proceeding is brought with respect hereto in the competent courts of the State of New York or in the federal courts sitting in New York City, United States of America, the Borrower hereby irrevocably consents to service of process through CT CORPORATION SYSTEM, with offices as of the date hereof at 111 Eighth Avenue, New York, New York 10011, United States of America and in the event any legal action or proceeding hereof is brought in the competent courts of Mexico City, Federal District, United Mexican States, the Borrower hereby designates as its domicile to receive service of process its respective domicile mentioned under its signature hereon. El Suscriptor renuncia al derecho de peticion de un juicio por medio de jurado en cualquier accion, procedimiento o The Borrower waives any right to trial by jury in any action, proceeding or counterclaim arising out of or relating to this contrademanda que surja de, o se relacione con este Pagare. En el supuesto de que una determinada demanda sea instaurada para efectos de exigir el pago de este Pagare y sus intereses devengados, en su caso, el Suscriptor conviene pagar las sumas adicionales, por concepto de honorarios y gastos de abogados cuyo pago pudiere resolverse en el litigio en cuestion. Promissory Note. In the event a suit is brought to enforce payment of this Promissory Note and accrued interest thereon, if any, the Borrower agrees to pay such additional sum for expenses and attorney fees as the court may adjudge. - -- -- ----- Este Pagare sera regulado en todos sus aspectos por, e interpretado de conformidad con las leyes del Estado de Nueva York, Estados Unidos de America, quedando entendido que unicamente cuando la accion, demanda o procedimiento de que se trate sea instaurado por el tenedor de este Pagare en los Estados Unidos Mexicanos o en alguna de sus subdivisiones politicas, entonces este Pagare sera regulado e interpretado de conformidad con las leyes de los Estados Unidos Mexicanos. This Promissory Note shall be governed in all respects by and construed in accordance with the laws of the State of New York, United States of America, provided however, that only in the case of any action, suit or proceeding initiated by the holder hereof in the United Mexican States or of any political subdivision thereof, this Promissory Note shall be governed by and construed in accordance with the laws of the United Mexican States. En la medida en que se permita por la legislacion aplicable, el Suscriptor en este acto extiende el plazo para presentar este Pagare para su pago hasta el __ de ______ del 20[12]. To the extent permitted by applicable law, Borrower hereby extends the time for presentment of this Promissory Note for payment until _____ __, 20[12]. El Suscriptor en este acto renuncia a todo acto de auditoria, presentacion, protesto o aviso de no-aceptacion con respecto a este Pagare. The Borrower hereby waives diligence, presentment, protest or notice of dishonor with respect to this Promissory Note. Este Pagare se suscribe tanto en ingles como en espanol, y ambos seran obligatorios para el Suscriptor, considerandose ambos textos uno y el mismo Pagare; quedando entendido, sin embargo, que en caso de duda con respecto a la debida interpretacion de este Pagare, el texto en ingles sera el que prevalezca, excepto en los casos en que se instaure una determinada accion o procedimiento en los Estados Unidos Mexicanos para efectos de exigir el cumplimiento de este Pagare, en cuyo caso This Promissory Note is executed in both English and Spanish, both of which bind the Borrower, but both of which shall constitute one and the same Promissory Note; provided however, that in case of doubt as to the proper interpretation of this Promissory Note, the English text shall govern, except in the event of any action or proceeding brought in the United Mexican States to enforce this Promissory Note, in which case the Spanish text shall govern. - ----- el texto en espanol sera el que prevalezca. - ----- Mexico, D.F., Estados Unidos Mexicanos, a [fecha] Mexico City, D.F., United Mexican States [Date] Innova, S. de R.L. de C.V. Innova, S. de R.L. de C.V. Por:_________________________ Nombre: Cargo: By:_________________________ Name: Title: Domicilio: Insurgentes Sur 694, 6(degree) piso, Mexico, D.F. 03100, Mexico Address: Insurgentes Sur 694, 6(degree) piso, Mexico, D.F. 03100, Mexico El presente Pagare consiste de __ paginas, cada una debidamente firmadas por el Suscriptor. This Promissory Note consists of ___ pages, each duly signed by the Borrower. EX-4.25 6 y87959exv4w25.txt TECHNICAL SERVICES AGREEMENT EXHIBIT 4.25 TECHNICAL SERVICES AGREEMENT This Technical Services Agreement (this "Agreement") is made as of the 1st day of January, 1998 by and between DTH Techco Partners, a Delaware general partnership ("Techco") and Corporacion Novavision S. de R.L., a Mexican limited liability company ("Novavision"). RECITALS A. Novavision is engaged in the direct broadcast satellite business in Mexico. B. Techco owns and operates a satellite broadcast center located in Miami Lakes, Florida. C. All of the partnership interests of Techco are indirectly owned by The News Corporation Limited ("TNCL"), Globo Comunicacoes e Participacoes S.A. ("Globo"), Grupo Televisa, S.A. ("Televisa") and Tele-Communications International, Inc. ("TINTA") and all of the equity interests of Novavision are owned by Innova S.de R.L., a Mexican limited liability company ("Innova"). All of the equity interests of Innova are indirectly owned by TNCL, Televisa and TINTA. D. Because of the relationship between Techco and Novavision, the parties believe that it is in their mutual interests to confirm the arrangements under which Techco makes available certain services in connection with the operations of Novavision. Accordingly, the parties desire to set forth in this Agreement their understanding as to the services being provided to Novavision by Techco and the basis upon which Techco shall charge Novavision for providing such services. Agreement For good and valuable consideration, the receipt and sufficiency of which are acknowledged, the parties, intending to be legally bound, agree as follows: SECTION 1. SERVICES TO BE PERFORMED 1.1 Engagement. Novavision hereby confirms its engagement of Techco as its exclusive provider of the services described in Section 1.2 of this Agreement (the "Services") and such other related services as may reasonably be requested by Novavision pursuant to Section 1.3 hereof, and Techco hereby confirms its acceptance of such engagement, subject to and on the terms and conditions set forth in this Agreement, provided that in the event that Techco determines that it will not provide any Additional Service (as defined in Section 1.3) that may be requested by Novavision pursuant to Section 1.3 in the manner set forth in Schedule 1.3 annexed hereto, then Techco's engagement shall be non-exclusive solely with respect to such Additional Service. 1.2 Services. During the term of this Agreement, Techco will provide the Services set forth on Schedule 1.2 annexed hereto. For the avoidance of doubt, any services provided by Techco or its predecessors to Novavision prior to the date of this Agreement shall be deemed to have been Services provided under the terms and conditions set forth in this Agreement, provided that, by its execution of this Agreement, each of Techco and Novavision confirms that amounts charged to date by Techco for Services performed prior to the date of this Agreement are accurate and proper, and agrees that it shall not request any revision of such amounts. 1.3 Additional Services. In addition to the Services to be provided by Techco pursuant to Section 1.2 hereof, from time to time Novavision may request that Techco provide to Novavision a modification or improvement to enable new services to be provided by Novavision (each an "Additional Service"). Any such Additional Service shall be added to the service fee 2 payable by Novavision to Techco pursuant to Section 2.1 hereof. The implementation of any Additional Service, as well as the determination of costs and other terms and conditions applicable to such Additional Service shall be determined in accordance with Schedule 1.3 annexed hereto. 1.4 Performance Standards. Techco agrees to provide the Services at a level and quality which is not less than the level and quality of substantially comparable services performed by companies in the industry offering substantially similar services. 1.5 Books and Records. Techco will maintain reasonably complete books and records solely with respect to its provision of services to Novavision pursuant to this Agreement, including records supporting the calculation of costs and expenses pursuant to Section 2. Techco will give Novavision and its members and their representatives, agents and attorneys reasonable access to all such books and records during Techco's regular business hours upon three business days' advance notice. In addition, not more than twice in any 12-month period, Novavision, at its sole cost and expense, shall have the right to audit, inspect, copy and make copies of such data, records, files and books of account (including, without limitation, non-financial information solely relating to any calculation required to be made pursuant to the terms of this Agreement) under the control of Techco solely relating to the Services and the transactions contemplated by this Agreement and Techco shall use commercially reasonable efforts to facilitate Novavision's exercise of such rights, including, without limitation, making available during regular business hours such personnel that are reasonably necessary or appropriate to assist Novavision's exercise of such rights. The costs and expenses to be paid by Novavision shall include the costs of all personnel provided by Techco in connection with this Section 1.5. SECTION 2. PAYMENT OF SERVICE FEES 2.1 Service Fees. The costs and expenses to be charged to Novavision by Techco shall be determined in accordance with procedures agreed between the parties from time to time. Novavision will pay to Techco all such costs and expenses plus, subject to Section 2.3(a) below, the profit margin set forth in Section 2.3 hereof. 2.2 Payment Procedure. (a) Except as otherwise specifically provided in this Agreement, all payments to be made by Novavision to Techco under this Agreement will be made on a monthly basis in United States dollars to Techco's account #12332-23216, ABA #121-000-358 with Bank of America at P.O. Box 27128, Concord, CA 94520 or at such other account designated by Techco. Techco will deliver to Novavision an invoice (the "Invoice") covering the services provided during each calendar month for which payment is sought by Techco in accordance with the terms of this Agreement, as soon as possible after the end of such month. Each Invoice shall be accompanied by a reasonably detailed calculation of the amount of the Invoice, including an itemized list of costs and expenses, justification and descriptions of variations that result in extraordinary charges and the calculation of the service fees in accordance with the agreed procedure. (b) Novavision shall either (i) pay to Techco an amount in cash equal to the amount requested by Techco in the Invoice or (ii) (x) deliver to Techco a written statement (a "Dispute Notice") indicating that Novavision disputes the amount requested by Techco in the Invoice and setting forth in reasonable detail the basis for Novavision's disagreement and (y) pay to Techco an amount in cash equal to the undisputed portion, if any, of the amount requested by Techco in the Invoice. Novavision shall take the actions referred to in (i) or (ii), above, not later 4 than 30 days following the date the applicable Invoice is delivered to Novavision (the "Payment Date"). (c) If Novavision delivers a Dispute Notice, the parties shall work together in good faith for up to 15 days following the date of delivery of the Dispute Notice to reach agreement with respect to the disputed portion of the amount of the Invoice. If the parties are not able to resolve all of their disputes within such 15-day period, a determination as to the disputed portion of the amount of the Invoice, shall be made by a firm of national independent public accountants (the "Independent Accountants"), mutually acceptable to Techco and Novavision. If Techco and Novavision are unable to agree on the identity of such firm within 10 days after expiration of such 15-day period or to obtain the agreement of any such firm to serve, then either Techco or Novavision may request the American Arbitration Association to select the Independent Accountants, and such selection shall be final and binding on the parties. Once chosen, the Independent Accountants shall be directed to complete its determination within 30 days following receipt of notice from Techco, selection by the parties or appointment by the American Arbitration Association, as the case may be, and such firm's determination shall be final and binding on the parties. If the Independent Accountants' determination discloses an error of 10% or more of the amount requested by Techco in the applicable Invoice, the fees and expenses of the Independent Accountants shall be paid by Techco. If the Independent Accountants' determination discloses an error of less than 10% of the amount requested by Techco in the applicable Invoice, the fees and expenses of the Independent Accountants shall be paid by Novavision. Upon the final determination by the Independent Accountants, any amounts payable by either party shall be payable within 3 business days following the determination of the Independent Accountants, which payments shall include interest, which shall accrue from the Payment Date until the date such payment is made, at the legal rate for judgments in effect in 5 New York, New York on the date such payment is made. The firm first selected pursuant to this Section 2.2(c), shall be the firm utilized by the parties for purposes of this Section 2.2(c) at all times during the 12-month period immediately following such firm's selection, to the extent such firm is able to so serve. 2.3 Calculation of Profit Margin. (a) During the first three years of the term of this Agreement, the profit margin to be charged by Techco shall be 5.76% of all costs and expenses it incurs on behalf of Novavision; provided, that no profit margin shall be charged by Techco on any costs or expenses it incurs for services provided to Techco by Sky Latin America, LLC ("ServiceCo"). (b) On the third anniversary of the date of this Agreement, and at the end of each three-year period thereafter (the "Determination Dates"), the appropriate profit margin to be charged hereunder shall be agreed among TNCL, Globo and Televisa (or their respective nominees) (collectively, the "Majority Partners");provided that the profit margin shall not be greater than the profit margin charged to any other platform which is an affiliate of Techco for similar services. If the Majority Partners are unable to agree on an appropriate profit margin within sixty (60) days following any Determination Date, the appropriate profit margin to be charged hereunder shall be referred for determination by Independent Accountants mutually acceptable to the Majority Partners. The fees and expenses of the Independent Accountants shall be paid by Techco. Promptly after receiving the Independent Accountants' determination, the Majority Partner will resume their discussions about the profit margin, with a view to reaching agreement on what margin to apply. In all such discussions, the Majority Partners will give due weight to the Independent Accountants' recommendation. Pending an agreement among the Majority Partners about the appropriate profit margin, the profit margin in place immediately before the most recent Determination Date will continue to apply. 6 SECTION 3. TERM The term of this Agreement will commence on the date hereof and will continue for a period of ten years. Thereafter, the term of this Agreement will automatically renew for successive periods of one year, unless either party provides written notice of its desire to terminate no less than 90 days prior to the end of the then current term. SECTION 4. TAXES (a) If, at any time during the term of this Agreement, the service fees payable hereunder become subject to withholding of tax at source ("Withholding Tax"), then the service fees shall be increased by an amount (the "Additional Amount") such that Techco receives, after deduction of such Withholding Tax, the amount it would have received had no such Withholding Tax been imposed, and Novavision shall pay the full amount of such Withholding Tax to the applicable governmental authority. (b) If Novavision shall be required to pay any Additional Amounts hereunder, the parties hereto shall take commercially reasonable measures available to them to take advantage of laws, tax treaties and similar conventions so as to minimize such payment of Additional Amounts. (c) Other than as set forth in this Section 4, the parties shall each bear any taxes, duties, tariffs or other charges imposed upon them by any governmental authority. SECTION 5. INDEMNIFICATION 5.1 Indemnification by Novavision and Innova. Novavision and Innova will, jointly and severally, indemnify, defend and hold harmless Techco, its partners and each of their affiliates, and their respective officers, directors, shareholders, partners and employees, and the successors and assigns of any thereof, from and against any and all claims, judgements, liabilities, (including Withholding Taxes), losses, costs, damages or expenses (including 7 reasonable counsel fees, disbursements and court costs) ("Losses") that Techco, its partners or any such indemnitee may suffer arising from or relating to (a) any material breach by Novavision of its obligations under this Agreement or (b) the gross negligence or willful misconduct of Novavision in performing its obligations under this Agreement. 5.2 Indemnification by Techco. Techco will indemnify, defend and hold harmless Novavision, its members and each of their affiliates, and their respective members, officers, directors, shareholders, partners and employees, and the successors and assigns of any thereof, from and against any and all claims, judgements, liabilities, (including Withholding Taxes), losses, costs, damages or expenses (including reasonable counsel fees, disbursements and court costs) ("Losses") that Novavision, its members or any such indemnitee may suffer arising from or relating to (a) any material breach by Techco of its obligations under this Agreement or (b) the gross negligence or willful misconduct of Techco in performing its obligations under this Agreement. 5.3 Indemnification Procedures. (a) In connection with any indemnification provided for in this Section 5, the party seeking indemnification will give the party from which indemnification is sought prompt notice whenever it comes to its attention that it has suffered or incurred, or may suffer or incur, any Losses for which it is entitled to indemnification under this Section 5 and, when known, the facts constituting the basis for such claim (in reasonable detail). Failure by the indemnified party so to notify the indemnifying party will not relieve the indemnifying party of any liability under this Agreement except to the extent that such failure prejudices the indemnifying party in any material respect. (b) After the notice required by Section 5.3(a), which notice acknowledges the indemnifying party's obligation to provide indemnification under this Agreement, if the 8 indemnifying party undertakes to defend any such claim, the indemnifying party will be entitled, if it so elects, to take control of the defense and investigation with respect to such claim and to employ and engage legal counsel reasonably satisfactory to the indemnified party to handle and defend such claim, at the indemnifying party's cost, risk and expense. The indemnifying party will not settle any third-party claim that is the subject of indemnification without the written consent of the indemnified party, which consent will not be unreasonably withheld; provided that the indemnifying party may settle a claim without the indemnified party's consent if such settlement (i) makes no admission or acknowledgment of liability or culpability with respect to the indemnified party, (ii) includes a complete release of the indemnified party and (iii) does not require the indemnified party to make any payment or forego or take any action. The indemnified party will cooperate in all reasonable respects with the indemnifying party and its counsel in the investigation, trial and defense of any lawsuit or action with respect to such claim and any appeal arising therefrom (including the filing in the indemnified party's name of appropriate cross-claims and counterclaims). The indemnified party may, at its own cost, participate in any investigation, trial and defense of any lawsuit or action with respect to such claim and any appeal arising therefrom. If there are one or more legal defenses available to the indemnified party that conflict with those available to, or that are not available to, the indemnifying party, the indemnified party will have the right, at the expense of the indemnifying party, to engage separate counsel and participate in the defense of the lawsuit or action; provided that the indemnified party may not settle such lawsuit or action without the consent of the indemnifying party, which consent will not be unreasonably withheld. (c) If, after receipt of a claim notice pursuant to Section 5.3(a), the indemnifying party does not undertake to defend any such claim, the indemnified party may, but will have no obligation to, contest any lawsuit or action with respect to such claim, and the 9 indemnifying party will be bound by the result obtained with respect thereto by the indemnified party (including the settlement thereof without the consent of the indemnifying party). 5.4 Survival. The terms and conditions of this Section 5 will survive the expiration or termination of this Agreement, regardless of the reason for such expiration or termination. SECTION 6. REPRESENTATIONS AND WARRANTIES OF NOVAVISION 6.1 Novavision is a Mexican limited liability company duly organized and validly existing and in good standing under the laws of the United Mexican States. Novavision has all requisite corporate power and authority to own or lease and operate its assets and to carry on its business as it is presently being conducted. Novavision has all requisite corporate power and authority to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby. 6.2 Novavision has taken all necessary corporate action necessary to authorize the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby. This Agreement has been duly and validly authorized, executed and delivered by Novavision and constitutes the valid and binding obligation of Novavision, enforceable against Novavision in accordance with its terms except to the extent that enforceability (i) may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (ii) is subject to general principles of equity. 6.3 No consent, authorization or approval of, or exemption by, or filing with, any governmental, public or self-regulatory body or authority or administrative agency or commission (a "Governmental Agency") or any other third party is required in connection with the execution, delivery and performance by Novavision of this Agreement or the consummation of the transactions contemplated hereby. 10 SECTION 7. REPRESENTATIONS AND WARRANTIES OF TECHCO 7.1 Techco is a general partnership duly organized and validly existing and in good standing under the laws of the state of its organization. Techco has all requisite power and authority to own or lease and operate its assets and to carry on its business as it is presently being conducted. Techco has all requisite power and authority to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby. 7.2 Techco has taken all action necessary to authorize the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby. This Agreement has been duly and validly authorized, executed and delivered by Techco and constitutes the valid and binding obligation of Techco, enforceable against Techco in accordance with its terms except to the extent that enforceability (i) may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors' rights generally and (ii) is subject to general principles of equity. 7.3 No consent, authorization or approval of, or exemption by, or filing with, any Governmental Agency or any other third party is required in connection with the execution, delivery and performance by Techco of this Agreement or the consummation of the transactions contemplated hereby. SECTION 8. MISCELLANEOUS 8.1 Assignment and Delegation. Neither party may assign this Agreement or any right accruing hereunder, or delegate its performance hereunder in whole or in part, except with the written consent of the other party hereto. 8.2 Amendment. This Agreement may be amended at any time by a written instrument executed by both parties. 8.3 Governing Law. This Agreement will be governed by the laws of the State of New York, without regard to any conflicts of laws rules. Any action to enforce any provision of this Agreement may be brought only in the Supreme Court, in the State of New York, County of New York, or in the United States District Court for the Southern District of New York.. Each party (i) agrees to submit to the general jurisdiction of such courts and to accept service of process at its address for notices pursuant to this Agreement in any such action or proceeding and (ii) irrevocably waives any objection it may have to the laying of venue of such action or proceeding brought in any such court and any claim that such action or proceeding brought in any such court has been brought in an inconvenient forum. 8.4 Attorneys' Fees. If any party commences an action because of the breach of or to enforce any of the terms of this Agreement, the prevailing party will be entitled to all costs and expenses associated with such action, including reasonable attorneys' fees. 8.5 Binding Effect. Except as otherwise provided in this Agreement, this Agreement will be binding upon, and will inure to the benefit of, the parties and their respective successors and permitted assignees. 8.6 Waiver. No consent or waiver, express or implied, by a party of any breach or default by the other party in the performance of its obligations under this Agreement will be deemed to be a consent to or waiver of any further or other breach or default by such other party. Failure on the part of a party to complain of an act, or failure to act, of the other party or to declare the other party to be in default, irrespective of how long such failure continues, will not constitute a waiver by a party of its rights under this Agreement. 8.7 Notices. All notices, consents, approvals or other communications given or made under this Agreement will be made in writing. All notices, demands and requests will be effective upon personal delivery to an officer of any recipient or upon receipt, if sent by facsimile 12 (receipt confirmed) or overnight delivery service, addressed as specified below (or at such other address as the addressee may give to the other in writing). If to Techco, to: 14750 N.W. 77th Court Miami Lakes, Florida 33016 Telecopy: 305-816-5111 Attention: David Torkington with copies to: Sky Latin America 14750 N.W. 77th Court Miami Lakes, FL 33016 Telecopy: (305) 816-5111 Attention: General Counsel If to Novavision: Corporacion Novavision S. de R.L. Insurgentes, Sur 694 Piso 8 Col. Del Valle 03100 Mexico Telecopy: 55-11-285-0884 Attention: Santiago Cantu with copies to: Fried, Frank, Harris, Shriver & Jacobson 1001 Pennsylvania Avenue, N.W. Suite 800 Washington, D.C. 20004 Telecopy: 202-639-7003 Attention: Andrew Varney, Esq. and to: The News Corporation Limited 1211 Avenue of the Americas New York, NY 10036 Telecopy: (212) 768-2029 Attention: Arthur M. Siskind, Esq. 13 and to: Tele-Communications International, Inc. 5619 DTC Parkway Englewood, Colorado 80111 Telecopy: (303) 488-3245 Attention: General Counsel Any party may waive in writing any required notice which is the obligation of any other party, whether before or after the required notice. 8.8 Entire Ageement. This Agreement sets forth the entire agreement and understanding of the parties in respect of the transactions contemplated hereby and supersedes all prior agreements, arrangements and understandings relating to its subject matter. 8.9 Severability. Each provision of this Agreement will be considered severable. If for any reason any provision of this Agreement is determined to be invalid, such invalidity will not impair the operation or affect the other provisions of this Agreement, and the remainder of this Agreement will continue in effect. 8.10 Counterparts. This Agreement may be executed in two or more identical counterparts, and all of such counterparts, when taken together, will be deemed to constitute the original of this Agreement. 8.11 Headings. The section and other headings contained in this Agreement are inserted only as a matter of convenience and in no way affect the scope or meaning of this Agreement. 8.12 Further Actions. The parties will execute and deliver all documents, provide all information and take or forbear from all actions that may be necessary or appropriate to achieve the purposes of this Agreement. 14 8.13 No Third-Party Beneficiaries. This Agreement is not intended to, and will not be construed to, create any right enforceable by any person not a party to this Agreement, including any creditor or employee of a party, except as specifically referenced. 8.14 Force Majeure. Techco shall not be liable to Novavision for any breach of, or failure of performance under, this Agreement which is caused by a Force Majeure Event. A "Force Majeure Event" is any event which results from any act of God, act of State, natural or man-made disaster or any other cause beyond the reasonable control of Techco. If Techco is affected by a Force Majeure Event, it shall promptly notify Novavision of the occurrence of that event. 15 This Agreement is signed by the parties as of the date first written above. DTH TECHCO PARTNERS By: DTH USA, INC., a general partner By: _____________________________ Name: Title: By: TELEVISA DTH TECHCO, INC., a general partner By: ______________________________ Name: Title: By: TCI ARGENTINA, INC., a general partner By: _____________________________ Name: Title: By: NEWS AMERICA DTH TECHO, INC., a general partner By: _____________________________ Name: Title: CORPORACION NOVA VISION S. DE R.L By:___________________________________ Name: Title: 16 Agreed and Accepted with respect to Section 5 hereof as at the date first written above: INNOVA S. DE. R.L. By: _____________________________ Name: Title: 17 Schedule 1.2 SERVICES 1. Downlink Services - Implement, operate, supervise and maintain downlink services. 2. Uplink Services - Implement, operate, supervise and maintain uplink facilities. 3. Playout/Broadcast Services - Define, select, implement, test, operate, supervise and maintain facility hardware and software (automation and playout). 4. Conditional Access Services - Supervise, operate and maintain conditional access systems. 5. PPV Services - Operate, supervise and maintain PPV services. 6. Traffic - Implement, operate, supervise and maintain traffic server. 7. Network - Implement, operate, supervise and maintain data links between Miami Lakes and Mexico, including local network in Miami Lakes. 8. Stream Server - Implement, operate, supervise and maintain stream server system. 9. Commercial Insertion - Implement, operate, supervise and maintain commercial insertion services. Sch. 1.2-1 Schedule 1.3 ADDITIONAL SERVICES REQUESTS Additional service requests ("Additional Service Requests") made by Novavision shall be set forth on the Additional Service Request Form, attached hereto as Annex A, or in a .vritten correspondence containing substantially the same information on the Additional Service Request Form, and sent to Techco by Novavision. Novavision should complete the sections on the Additional Service Request Form entitled: - originated by - details of Service Request - reason for Additional Service Techco will assign a reference number to such Additional Service Request, or cause a qualified third party to make a determination of the cost of such Additional Service Request within 6 months after receipt of such Additional Service Request and shall provide Novavision with an impact assessment, substantially in the form attached hereto as Annex B (the "Impact Assessment"). Such Impact Assessment shall take into account the following additional costs associated with the Additional Service Request: - cost of addition/removal of Hardware items - cost of changes to Documentation - cost of changes to Implementation Plan - cost of additional resource requirements - cost of modification of Software - cost of increases in labor and overhead Additional costs will be noted and summarized in the Impact Assessment. The costs of preparation of the Impact Assessment shall be borne by Novavision. Novavision shall have 15 business days after the receipt of the Impact Assessment to accept the quotation of the cost for purchasing the Additional Services, including, resolving any requested modifications to the Impact Assessment, and to approve such quotation. If not accepted by Novavision within 15 business days following the receipt of the Impact Assessment and quotation, the Additional Service Request shall be deemed closed as "Not Approved". If accepted by Novavision, the costs of the Additional Service shall be borne by Novavision, provided, that, if such Additional Service is utilized by one or more other platforms then utilizing the services of Techco, then the costs of such Additional Service shall be borne by all the platforms exploiting such additional service; provided, however, that, if Techco determines the Additional Service requested by Novavision will cause a 5% or more impact on the monthly expenses of Techco, then Techco will submit an Impact Assessment to all the Sch. 1.3-1 ANNEX A ADDITIONAL SERVICE REQUEST FORM ANNEX B IMPACT ASSESMENT SHEET EX-8.1 7 y87959exv8w1.txt LIST OF SUBSIDIARIES OF REGISTRANT . . . EXHIBIT 8.1 INNOVA'S SUBSIDIARIES
JURISDICTION OF SUBSIDIARY NAME INCORPORATION TRADE NAME - --------------- --------------- ---------- Corporacion de Radio y Television del Norte de Mexico Same Mexico, S. de R.L. de C.V. Corporacion Novaimagen, S. de R.L. de C.V. Mexico Same Corporacion Novavision, S. de R.L. de C.V. Mexico Same Servicios Novasat, S.de R.L. de C.V. Mexico Same Servicios Corporativos de Telefonia, S. de R.L. de Mexico Same C.V.
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