Except as otherwise noted, financial information has been presented in U.S. dollars. The Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") in U.S. dollars.
BACKGROUND
The predecessor of TV Filme was founded in 1989 by certain members of the Company's current senior management team. In September 1989, TV Filme was granted a license to operate a wireless cable television system in Brasilia, the capital of Brazil, and commenced operations in 1990 with a one channel offering. Licenses to operate the Goiania and Belem Systems were acquired in 1994 from TVA Sistema de Televisao S.A., a subsidiary of Tevecap S.A. ("Tevecap"), one of the leading pay television operators in Brazil.
TV Filme was organized in 1996 under the laws of the State of Delaware. Its largest stockholders included Warburg, Pincus Investors, L.P., Tevecap and certain members of management and their families.
During 1998 and the first quarter of 1999, TV Filme faced significant challenges that ultimately affected TV Filme's ability to pay interest on its outstanding 12 7/8% senior notes due 2004 (the "TV Filme Senior Notes"). While TV Filme decided to commence discussions with holders of the TV Filme Senior Notes to pursue a comprehensive financial and operational restructuring plan, TV Filme failed to make the required interest payment on the TV Filme Senior Notes on June 15, 1999.
On August 13, 1999, TV Filme reached an agreement in principle with a committee representing the holders of the TV Filme Senior Notes. This agreement was effected pursuant to a pre-arranged plan of reorganization which received court approval under Chapter 11 of the U.S. Bankruptcy Code on April 10, 2000. Effectuation of the plan was completed on July 21, 2000, following support from ANATEL (the Brazilian
Telecommunications Agency) and the Central Bank of Brazil. In accordance with the terms of the plan of reorganization, the TV Filme Senior Noteholders received a $25 million cash payment and their existing notes were converted into (i) secured notes in the aggregate principal amount of $35 million, due 2004, at an interest rate of 12% per annum (interest payable-in-kind at the Company's option through its first four interest payments) (the "12% Senior Secured Notes"), and (ii) 80% of the new common equity of the reorganized company. Current management received 15% of the new common equity, and the existing common stockholders of TV Filme received 5% of the new common equity of the reorganized company. All outstanding stock options were cancelled. ITSA Ltd. (the reorganized company) is a Cayman Islands holding company and is the successor issuer to TV Filme, Inc. pursuant to Rule 12g-3 under the Securities Exchange Act. The 12% Senior Secured Notes were issued by ITSA-Intercontinental Telecommunicacoes Ltda., a wholly-owned subsidiary of the Company. On March 18, 2002, the U.S. Bankruptcy Court for the District of Delaware closed the Chapter 11 bankruptcy case involving TV Filme.
COMPANY OVERVIEW
The Company develops, owns and operates broadband wireless telecommunications systems in markets in Brazil, offering video, high-speed Internet and data communications services. Through its subsidiaries, the Company has licenses in the cities of Brasilia, Goiania, Belem, Campina Grande, Caruaru, Porto Velho, Presidente Prudente, Bauru, Franca, Uberaba, Belo Horizonte and Vitoria, covering over 3 million households and approximately 13 million people.
The Company offers a pre-paid subscription video service, called MAIS TV, which is comprised of a self-install kit available in retail stores in most of the cities in which the Company has operations.
ITSA was also the first company in Brazil to launch a high-speed Internet access system using the technology of high-speed modems. The system, called LinkExpress, has been available on a commercial basis in the city of Brasilia since 1998.
The Company holds licenses covering the frequency bands from 2,170 to 2,182 MHz and from 2,500 to 2,686 MHz. Currently, with a total of 198 MHz of spectrum available in each market, the Company is able to offer a wide range of two-way advanced communication services, including high-speed data services and high-speed Internet, to both the residential and the corporate markets. The Company also owns additional specific licenses, which allow the offering of voice and VPN (Virtual Private Network) corporate services. Currently, the Company owns and operates its own NOC (Network Operating Center) which is located in its headquarters in Brasilia.
Additionally, the Company owns and maintains its proprietary SMS (Services Management System) called Mythos, which was developed in-house and customized to Brazilian needs and standards. This advanced software package allows the Company to have full control of every aspect of its businesses, from marketing to sales, customer service, technical support, inventory control and billing. The Company believes that the ability to control and customize the SMS is a key point in quickly offering reliable services to the market. The Company has licensed this software to some third party operations in Brazil.
In addition to satellite competitors that operate on a national basis in Brazil, hardwire cable providers operate or hold licenses to operate in virtually all of the Company's licensed markets.
The Company believes that wireless technology is well suited to its current and potential target markets and is an attractive alternative to existing television, Internet and telecommunications services. Wireless telecommunications services can be deployed more rapidly than most alternative technologies and provide immediate coverage of entire markets, enabling services to be delivered to all potential subscribers that are in the unobstructed path of the transmission tower. Wireless services often can be deployed at a significantly lower system capital cost per installed subscriber than hardwire cable and other wire-based technologies because incremental investment is generally only undertaken in response to customer demand with the addition of each new subscriber. The Company believes that subscribers to television, Internet and telecommunication services in Brazil are generally indifferent to the method of delivery of these services.
BRAZILIAN PAY TELEVISION INDUSTRY
The pay television industry in Brazil began in 1989 with the commencement of UHF service in Sao Paulo. In contrast to the U.S., the Brazilian hardwire cable industry and wireless cable industry began developing concurrently. By December 31, 2001, approximately 297 hardwire cable licenses, 10 Direct-to-Home ("DTH") licenses and 100 wireless licenses had been issued by the Brazilian government. The Company believes that as of December 31, 2001, approximately 13% of Brazilian homes were passed by hardwire cable as compared to over 80% in the U.S. Brazil is the largest television market in Latin America with an estimated 36 million television households. As of December 31, 2001, the Company estimates that there were approximately 3.5 million pay television subscribers, representing approximately 9 % of Brazilian television households.
Brazilian television viewers prefer Portuguese language programming, including movies, sports and "novelas" (soap operas). The second language of many Brazilians is English. U.S. culture generally, and U.S. films, shows and sports in particular, are popular with Brazilians. Programming content for pay television systems in Brazil is offered by the Globo Organization, independent providers and by Neo-TV, an association formed to help operators negotiate and purchase programming. In general, much of the Brazilian programming transmitted by pay television systems, such as HBO Brazil, ESPN International and MTV Latino, is based on formats found in the U.S. In addition, there are channels which include programs directly from the U.S., such as Warner and Sony, as well as channels from Europe and other countries in Latin America.
BRAZILIAN BROADBAND MARKET
Brazilians were introduced to broadband services only four years ago when, on an experimental basis, TV Filme starting operating a service called LinkExpress in the city of Brasilia, which provided one-way Internet access service using high-speed modems.
In December 2000, ITSA, through its subsidiary LinkExpress, launched its two-way broadband service. By the end of 2001, both one and two-way services were being offered commercially to 1,500 residential subscribers and almost 180 corporate subscribers.
Only recently, Brazilian companies have been investing in high-speed Internet access services, using cable modem and DSL systems. Brasil Telecom, Telefonica de Espana, Telemar, Globocabo, TVA and LinkExpress are the leading companies that have responded to growing market demand for high-speed Internet access.
Reported estimates indicate that there are approximately 14,000,000 Internet users in Brazil and 300,000 subscribers have access to high-speed Internet services. DSL tecnology represents 65% of this market, cable modem 28% and other kinds of access 7%.
OPERATING SYSTEMS AND THE COMPANY'S MARKETS
The table below provides information regarding the Company's markets as of December 31, 2001:
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(1) Represents the Company's estimate of the population and the total number of households within the greater metropolitan areas of each of its markets. The Company's estimates for Brasilia, Goiania, Belem and Campina Grande are based on data from the 2000 Census conducted by the Brazilian Institute of Geography and Statistics (IBGE) as adjusted to reflect estimated total household growth. Includes potential households which will receive the signal through the use of repeaters.
(2) Represents the Company's estimate of the number of Line of Sight ("LOS") households within the licensed radius in each market (ranging from 15-35 kilometers) that can receive an adequate signal from the Company.
(3) Date when the Brasilia System increased its channel offering from four channels to eight channels. The Brasilia System began service with one channel in 1990.
(4) Represents the eight markets for which the Company has been awarded licenses to operate new Multichannel Multiport Distribution Systems ("MMDS").
BRASILIA SYSTEM. Brasilia, the capital of Brazil, had an estimated greater metropolitan population of approximately 2.2 million as of December 31, 2001. Brasilia, which is located in the interior of Brazil, was established in the early 1960's as a planned city when the capital of Brazil was moved from Rio de Janeiro. Brasilia's generally flat topography is advantageous for wireless technologies. In addition, Brasilia's zoning provisions favor wireless technology by requiring that residential buildings be of a similar height and located together. The Company's current 35 kilometer coverage territory encompasses approximately 514,000 households which the Company believes can be served by LOS transmission.
The Brasilia System, launched in 1990 with one channel, increased to three channels in July 1992, to four channels in September 1992, to eight channels in February 1994, to 16 wireless cable channels in November 1994 and to 24 wireless cable channels by the end of 1997. The Brasilia System transmits at 50 watts of power per channel from a transmission tower which is 300 feet above average terrain. The main competitors in the pay television area in the city of Brasilia are NET Brasilia, a hardwire cable operator and affiliate of the Globo Organization, as well as DirecTV and Sky, each of which are DTH operators. The Company believes that, at December 31, 2001, it was the largest pay television provider in Brasilia based on the total number of subscribers.
In December 1997, the Company began providing high speed Internet access, under the brand name of LinkExpress, to its customers in Brasilia. This service, which uses wireless cable modems for delivery of access at much higher speeds than conventional phone line access to subscribers, is believed to be the first marketed use of cable modem technology in Brazil. In the first years of operation, LinkExpress offered high-speed Internet access services with a phone-return. In this system, data were transmitted to the customers using the wireless technology,
while requests from subscribers to the network were performed with the use of phone-lines. In the third quarter of 2000, ANATEL approved and awarded additional spectrum to the Company in the frequency band of 2,170 to 2,182 MHz. With the additional spectrum, the Company was able to offer LinkExpress in a two-way platform. In this new system, customers transmit and receive data signals through the wireless platform, without the use of the telephone. The main competitor in the area of high-speed Internet service in Brasilia is Brasil Telecom, the telephone operator in the city. See "- High Speed Internet Access Service."
BELEM SYSTEM. Belem, with an estimated greater metropolitan population of approximately 1.8 million as of December 31, 2001, lies at the mouth of the Amazon River and is a major trading port for the rich natural resources of the Amazon rain forest. The Company launched service in Belem in February 1995. Although the city is relatively flat, trees block wireless cable transmission in Belem more often than they do in Brasilia and Goiania and thus, the Belem System requires increased utilization of signal repeaters. The Belem System reaches the greater Belem area, including the cities of Mosqueiro, Ananindeua, Icoaraci and Marituba and the islands of Outeiro and Barcarena. The Company's current 30 kilometer coverage territory encompasses approximately 370,000 households which the Company believes can be served by LOS transmission.
The Belem System transmits at 50 watts of power per channel from a transmission tower which is 300 feet above average terrain. The main competitors in the pay television area in Belem are ORM Cabo, an independent hardwire cable operator, as well as DirecTV and Sky. The Company does not currently offer high-speed Internet service in the city of Belem.
GOIANIA SYSTEM. Goiania, with an estimated metropolitan population of approximately 1.6 million as of December 31, 2001, is located approximately 100 miles southwest of Brasilia. Goiania is the capital of the state Goias, and, like Brasilia, its topography is favorable to LOS transmission because the city is relatively flat. The Company launched service in Goiania in January 1995. The Company's current 30 kilometer coverage territory encompasses approximately 297,000 households which the Company believes can be served by LOS transmission.
The Goiania System transmits at 50 watts of power per channel from a transmission tower which is 350 feet above average terrain. The main competitors in the pay television area in the city of Goiania are NET Goiania, a hardwire cable operator and affiliate of the Globo Organization, as well as DirecTV and Sky. The Company believes that, at December 31, 2000, it was the second largest pay television provider in Goiania based on total number of subscribers. The Company does not currently offer high-speed Internet service in the city of Goiania.
CAMPINA GRANDE SYSTEM. Campina Grande, with an estimated metropolitan population of approximately 0.5 million as of December 31, 2001, is located approximately 80 miles west of Joao Pessoa, the capital of the state of Paraiba. Similar to Brasilia and Goiania, the topography of Campina Grande is favorable to LOS transmission. The Company launched service in Campina Grande in May 1999, exclusively using the MAIS TV operating model (see below). The Company's current licensed coverage radius encompasses approximately 80,000 households that the Company believes can be served by LOS transmission.
The Campina Grande system transmits at 20 watts of power per channel from a transmission tower that is approximately 2,500 feet above sea level. There is currently no hardwire cable operation in Campina Grande. The Company does not currently offer high speed Internet service in the city of Canpina Grande.
NEW MARKETS
The Company has been awarded licenses to operate wireless systems in the following eight markets: Bauru, Belo Horizonte, Caruaru, Franca, Porto Velho, Presidente Prudente, Uberaba and Vitoria. The Company believes that, in the aggregate, these eight markets collectively encompass a total population of approximately 7.1 million, total households of approximately 1.8 million and LOS households of approximately 1.4 million. Bauru, Belo Horizonte, Franca, Presidente Prudente and Vitoria have operating hardwire cable competitors. The Company has implemented the transmission system in all of these markets and the service is commercially available to customers, although the Company has been unable to market its services aggressively.
MAIS TV OPERATING MODEL
In May 1999, with the launch of the Campina Grande system, the Company created and implemented a new pay television operating model, "MAIS TV." The major differences between the MAIS TV model and the previous model are:
o Customers choose from several different programming packages and may vary their choice each and every month.
o All services are offered exclusively on a prepaid basis. The customer receives a booklet which is to be filled out monthly, including the programming package selected. With this information, the Company, upon receipt of payment notification from the bank, is able to activate the selected programming package for the customer.
o To initiate service, the customer purchases, from either a local store or the Company's local showroom, an installation kit. Prices for these kits are approximately $25, on average. Installation services, if desired by the customer, may be contracted for separately, either with the Company or with approved third-party installation companies.
Based on the success of the Campina Grande launch, the Company decided to implement this new operating model in each of its existing (and future) operations. The Goiania system switched over to the new model in September/October 1999, the Brasilia system switched in March 2000 and Belem system switched in July 2000.
PROGRAMMING
The Company purchases most of its programming from Neo-TV, an association formed to help operators negotiate and purchase programming.
The Company also offers selected local programming to supplement its channel line-up. For example, the Company owns the rights to televise annually certain of the games of the Para State Soccer Championship.
Beginning in October 1997, the Company also began producing its own programming guide, called "MAIS TV News", which it distributes at no charge to its subscribers. The Company believes that its guide is an important marketing tool and provides an efficient way for the Company to interact with its customers.
The Company's channel offerings as of December 31, 2001 are as follows:
------------ * Offered where available.
HIGH SPEED INTERNET ACCESS SERVICE AND DATA COMMUNICATIONS SERVICES
In December 1997, the Company began providing Internet access services, under the brand name LinkExpress, to its customers in Brasilia. This service, which uses wireless cable modems for delivery of access at greatly increased speeds to subscribers, is believed to be the first marketed use of cable modem technology in Brazil. In the first years of operation, LinkExpress offered high-speed Internet access services with a phone-return. In this system, data were transmitted to the customers using the wireless technology, while requests from subscribers to the network were performed with the use of phone-lines. In the third quarter of 2000, ANATEL approved and awarded additional spectrum to the Company, in the frequency band of 2,170 to 2,182 MHz. With the additional spectrum, the Company was able to offer LinkExpress in a two-way platform. In this new system, customers transmit and receive data signals through the wireless platform, without the use of the telephone. Currently, with a total of 198 MHz of spectrum available in each market, the Company is able to offer a wide range of two-way advanced communication services, including high-speed data services and high-speed Internet, both to the residential and the corporate markets. The Company also owns additional specific licenses, which allow the offering of voice and VPN (Virtual Private Network) corporate services. Currently, the Company owns and operates its own NOC (Network Operating Center) which is located in its headquarters in Brasilia.
In the future, the Company may also offer this service in other markets, depending on market demand.
OPERATIONS
MARKETING. Prior to applying for a license in a potential new market, the Company has historically conducted pre-marketing surveys to evaluate the demographics and terrain of such market. Upon receipt of a license, the Company then develops a plan designed to manage subscriber growth by maintaining a manageable backlog of installations. Such backlog is maintained at a manageable level by adjusting installation capacity to correspond with sales levels. The amount of time a subscriber waits for the commencement of service is determined based upon several factors, including whether the subscriber is in a single family home or multiple dwelling unit and the effect of any competition in the market. This development plan ensures that the quality of installations and customer service remains high.
The Company focuses its marketing strategy on customer loyalty. The Company has limited its sales efforts to passive telemarketing and is directing its marketing expenditures towards customer loyalty programs such as promotional discounts at retail stores, gifts, parties and other items given exclusively to customers. This approach has enabled it to significantly reduce expenditures, reduce churn, increase customer loyalty and target its sales to prospects who truly want the service and have the financial wherewithal to pay for the service. In addition, upon the launch of the MAIS TV model in each city, the Company redirects its marketing efforts in such city toward brand recognition and awareness in order to generate the majority of its new installations through sales of installation kits at local stores. This involves partnering with the local stores on advertising and paying sales commissions to stores rather than having a direct sales force.
INSTALLATION. Upon launching the MAIS TV model in any given city, the Company creates a network of authorized installers in order to reduce direct costs of installation and expects the customer to pay for this service, or self-install the system. While the Company still offers installation service on a limited basis, it does not attempt to be competitive in this market and reserves this service primarily for apartments and other large buildings where the third-party installation teams are not as qualified. Because of this strategy, and because installation kits are sold for approximately $25, the Company expects to receive only a nominal amount of revenue on future installations.
CUSTOMER SERVICE. The Company believes that delivering high levels of customer service in installation and maintenance enables it to maintain customer satisfaction. To this end, the Company (i) schedules installations promptly, (ii) provides a customer service hotline, (iii) provides quick response repair service and (iv) makes follow-up calls to new subscribers shortly after installation to ensure customer satisfaction. The Company seeks to instill a customer service focus in all its employees through ongoing training programs. Under the MAIS TV model, the Company still offer high levels of customer service, but charges the customer for anything other than routine service calls.
The Company operates a single service center located in Brasilia where billing, accounts payable, human resources administration, marketing, customer service hotline and all routing and scheduling functions are centralized. The Company believes that operating a centralized service center further enhances and improves the quality of its customer service function.
SUBSCRIBER MANAGEMENT SYSTEM. The Company has developed its own subscriber management system, called Mythos. The Company believes that its subscriber management systems enable it to deliver superior customer service, monitor customer payment patterns and facilitate the efficient management of each of its operating systems. This advanced software package allows the Company to have full control of every aspect of its businesses, from marketing to sales, customer service, technical support, inventory control and billing. The Company believes that the ability to control and customize the SMS is a key point in quickly offering reliable services to the market. The Company has licensed this software to some third party operations in Brazil. The Company has seven employees dedicated to the development, enhancement, integration and maintenance of the Company's subscriber management systems.
EMPLOYEES
As of December 31, 2001, the Company had a total of 450 employees. All of the Company's employees, except for Messrs. Hermano Lins and Carlos Andre Lins, are subject to collective bargaining agreements. The collective bargaining agreements covering the employees of TV Filme Brasilia and TV Filme Goiania will expire in June 2002. The collective bargaining agreements are with the Union for the Employees of Subscription TV Industry. Employees of TV Filme Belem and TV Filme Campina Grande are not covered under a collective bargaining agreement; however, the Company has historically honored the terms of the TV Filme Brasilia and TV Filme Goiania agreements with its other employees. The Company has experienced no work stoppages in its history. The Company provides its employees with health insurance (which is not required by law in Brazil) and certain other benefits which it believes enable it to attract and retain qualified and motivated employees.
The Company significantly reduced its headcount in the areas of sales and installations, and reduced headcount in virtually all areas of the Company. As a result, the Company reduced the number of employees by approximately 195 employees in the last 12 months.
FACILITIES AND EQUIPMENT
ADMINISTRATIVE FACILITIES. A centralized corporate administrative facility is located in Brasilia to handle training, engineering, computer systems development, financial and controller functions and strategic planning, as well as customer service, billing, accounts payable and certain other administrative functions. In addition, the Company has established regional operating offices in its operating markets to coordinate sales, local marketing, installation and technical support services, maintenance and local administrative functions.
TRANSMISSION FACILITIES. The Company's headend and transmitter facilities are located in leased buildings at the Company's transmission tower sites. The transmitting antennas generally are able to serve the maximum regulatory range for its license coverage areas. In certain areas within the Company's markets that are otherwise terrain-blocked, the Company utilizes signal repeaters to enhance signal coverage. For new markets, the Company expects to lease space for transmission and headend facilities and expects to use transmitting antennas which will serve the entire license coverage areas in each market.
DIGITAL TECHNOLOGY. The Company currently transmits its video services in analog format. Should competitive conditions require, or if the Company deems such technology to be cost effective and practical to provide, it may implement digital technology, provided the Company has adequate resources for such implementation. For high speed Internet access and data communications services, the Company already utilizes digital transmission system and technology.
COMPETITION
Through its subsidiaries, the Company is the only entity licensed to operate wireless cable systems in each of its licensed markets. The Company has the authority to provide services using 198 MHz of spectrum, from 2,500 to 2,686 MHz and from 2,170 to 2,172 MHz in each such market.
The Company believes that, as of December 31, 2001, it was the largest pay television provider in Brasilia based on total number of subscribers. The Company's principal competitors in the city of Brasilia are NET Brasilia, a hardwire cable operator and affiliate of the Globo Organization, as well as DirecTV and Sky, each of which are DTH operators. In Brasilia, the Company also offers high speed Internet access to the residential market and data communication services to the corporate market. The Company's principal competitor for these services is Brasil Telecom, the local telephone operator.
The Company believes that, as of December 31, 2001, it was the second largest pay television provider in Goiania based on total number of subscribers. The main competitors in the pay television area in the city of Goiania are NET Goiania, a hardwire cable operator and affiliate of the Globo Organization, as well as DirecTV and Sky. The Company believes that, as of December 31, 2001, it was the largest pay television provider in Belem based on total number of subscribers. The main competitors in the pay television area in Belem are ORM Cabo, an independent hardwire cable operator, as well as DirecTV and Sky.
The Company believes that, as of December 31, 2001, it was the largest pay television provider in the city of Campina Grande. The Company<180>s principal competitors are Sky and DirecTV. Currently, there is no hardwire cable provider in the city of Campina Grande.
In addition to other terrestrial pay television operators, the Company faces competition from several other sources, such as direct broadcasting satellite systems ("DBS"), local off-air VHF/UHF channels, home videocassette recorders and out-of-home theaters. Currently, there are three DBS providers in Brazil, "Sky," an affiliate of the Globo Organization, DirecTV, and Tecsat, a privately held company in Brazil. Competition in the pay television industry is based upon program offerings, customer service, reliability and pricing. Many actual and potential competitors have greater financial, marketing and other resources than the Company. No assurance can be given that the Company will be able to compete successfully. See "--Brazilian Pay Television Industry," and "--Operating Systems and the Company's Markets."
REGULATORY ENVIRONMENT
GENERAL. In July 1997, the Brazilian government adopted Federal Law No. 9472/97, the "General Telecommunications Law." Such law revoked the Brazilian Telecommunications Code of 1962 pursuant to which the pay television industry was subject to regulation by the Ministry of Communications. The General Telecommunications Law provides that ANATEL has jurisdiction over the regulation of telecommunications services. ANATEL has been vested with the power to, among other things, revoke, modify and renew licenses within the spectrum available to wireless services, approve the assignment and transfer of control of such licenses, approve the location of channels that comprise MMDS systems, regulate the type, configuration and operation of equipment used by MMDS systems, and impose certain other reporting requirements on MMDS license holders and MMDS operators.
Currently, MMDS license holders remain subject to the provisions of Presidential Decree Number 2196 ("Decree No. 2196"), issued April 8, 1997, which regulates "Special Services," including MMDS systems and operations. Decree No. 2196 specifies the competitive procedures for the granting of concessions and licenses for the rendering of Special Services in Brazil. Based on the provisions of Decree No. 2196, the Ministry of Communications revised Rule 002/94, which specifically regulated MMDS service, by means of Administrative Rule 254, dated April 16, 1997, hereinafter referred to as the "Revised MMDS Rule."
OWNERSHIP OF LICENSES. Decree No. 2196 eliminated the requirement that only companies in which Brazilian nationals own at least 51% of the voting capital were eligible to be granted a license to operate an MMDS system. Consequently, under current regulations any company constituted in accordance with the laws of Brazil and with a head office and management located in Brazil is eligible to be granted such a license. Until November 1997, TV Filme Servicos held the licenses to operate the MMDS systems in Brasilia, Goiania and Belem. As a result of the lifting of the 51% ownership requirement, in November 1997, TV Filme Servicos transferred the respective license for Brasilia, Goiania and Belem to TV Filme Brasilia, TV Filme Goiania and TV Filme Belem, respectively. This transfer was approved by Brazilian regulators. Licenses for the new markets are held by TV Filme Sistemas. Although Decree No. 2196 eliminated the requirement discussed above, the General Telecommunications Law permits the Executive Branch, through Presidential Decree, to impose restrictions on foreign capital investments in telecommunications companies. However, such restrictions may not be imposed retroactively with respect to outstanding licenses. Decree No. 2196 also provides that licenses shall be granted for renewable periods of ten or fifteen years; all the current invitations for bids for MMDS services provide for 15-year terms.
PRICES. Prices for pay television and high-speed Internet services currently in operation may be freely established by the system operator, although ANATEL may intervene in the event of abusive pricing practices. ANATEL may impose penalties including fines, suspension or revocation of a license in the event the license holder fails to comply with applicable regulations or becomes legally, technically or financially unable to provide MMDS service. ANATEL and CADE, the Brazilian antitrust authority, also may intervene to the extent operators engage in unfair practices intended to eliminate competition. Under a Brazilian law designed to reduce inflation, the prices which the Company may charge to a particular subscriber may not be increased until the next anniversary of the subscriber's initial subscription date and may only be increased by a percentage no greater than the percentage of the increase in the general inflation rate which occurred during the subscriber's contract year.
TWO-WAY MMDS. In some countries, including the United States, MMDS license holders have been granted additional spectrum to provide bi-directional, or "two-way," services to their customers, including Internet access, data transmission and other advanced telecommunications services. In the third quarter of 2000, ANATEL approved and awarded additional spectrum to the Company, in the frequency band of 2,170 to 2,182 MHz. Currently, with a total of 198 MHz of spectrum available in each market, the Company is able to offer a wide range of two-way advanced communication services, including high-speed data services and high-speed Internet, to both the residential and the corporate markets. The Company also owns additional specific licenses, which allow the offering of voice and VPN (Virtual Private Network) corporate services. Currently, the Company owns and operates its own NOC (Network Operating Center) which is located in its headquarters in Brasilia.
OTHER LICENSES. The Company also owns two licenses for data communications services in Brazil, under the definition of "Limited Services." These licenses allow the Company to implement and operate data
communications networks using wireless or cable and fiber platforms, as well as offer special services to the corporate market.
OTHER REGULATIONS. MMDS license holders are subject to regulation with respect to the construction, marking and lighting of transmission towers pursuant to the Brazilian Aviation Code and certain local zoning regulations affecting construction of towers and other facilities. Restrictions imposed by local authorities may also exist. The pay television and high-speed Internet industry also is subject to the Brazilian Consumer Code. The Consumer Code entitles the purchasers of goods or services to certain rights, including the right to discontinue a service and obtain a refund if the services are deemed to be of low quality or not rendered adequately. For instance, in case of a suspension of the transmission for a given period, the subscriber shall be entitled to a discount on the monthly fees. The Revised MMDS Rule also contain certain provisions relating to consumer rights, including a provision for mandatory discounts in the event of interruption of service.
Due to the regulated nature of the pay television, high-speed Internet and data communications industry, the adoption of new, or changes to existing, laws or regulations or the interpretations thereof may impede the Company's growth and may otherwise have a material adverse effect on the Company's results of operations and financial condition.
