UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ ] 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, 2004
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:
9.375% SENIOR NOTES DUE 2013
The number of outstanding shares of each of the issuer's classes of capital
or common stock as of December 31, 2004 was:
One Series A-1 Social Part, One Series B-1 Social Part, One Series B-2 Social
Part and One Series C 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
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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
Exchange Rate Information............................................................. 2
Dividends and Dividend Policy......................................................... 3
Risk Factors.......................................................................... 4
Forward Looking Statements............................................................ 15
ITEM 4. INFORMATION ON THE COMPANY.................................................................. 17
History and Development of the Company................................................ 17
Business Overview..................................................................... 21
Organizational Structure.............................................................. 39
Property, Plant and Equipment......................................................... 40
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS................................................ 42
Overview.............................................................................. 42
Operating Results..................................................................... 44
Liquidity and Capital Resources....................................................... 49
Research and Development, Patents and Licenses, etc. ................................. 51
Off Balance Sheet Arrangements........................................................ 51
Contractual Obligations and Commercial Commitments.................................... 52
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.................................................. 59
Directors and Senior Management....................................................... 59
Compensation.......................................................................... 63
Board Practices....................................................................... 63
Employees............................................................................. 64
Share Ownership....................................................................... 64
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS........................................... 65
Major Shareholders.................................................................... 65
Related Party Transactions............................................................ 65
ITEM 8. FINANCIAL INFORMATION....................................................................... 70
ITEM 9. THE OFFER AND LISTING....................................................................... 70
ITEM 10. ADDITIONAL INFORMATION...................................................................... 70
Bylaws................................................................................ 70
Material Contracts.................................................................... 73
Legal Proceedings..................................................................... 73
Exchange Controls..................................................................... 74
Taxation.............................................................................. 74
Documents on Display.................................................................. 80
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................. 81
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES...................................... 82
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES............................................. 83
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS................ 83
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ITEM 15. CONTROLS AND PROCEDURES..................................................................... 83 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT............................................................ 83 ITEM 16B. CODE OF ETHICS.............................................................................. 83 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES...................................................... 84 ITEM 17. FINANCIAL STATEMENTS........................................................................ 85 ITEM 18. FINANCIAL STATEMENTS........................................................................ 85 ITEM 19. EXHIBITS.................................................................................... 85 |
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. For example, under Mexican GAAP, we must account for the effects of inflation. Accordingly, we have adjusted all data in our consolidated financial statements and the notes thereto, as well as our selected consolidated financial information, to reflect the 5.2% inflation Mexico experienced in the fiscal year ended December 31, 2004, 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. 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 U.S. Dollar amounts or that they could be converted into U.S. Dollars at the rate indicated or at any other rate.
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 our selected consolidated financial information as of and for each of the periods indicated. This data is qualified in its entirety by reference to, and should be read together with, our audited year-end financial statements and the notes to those financial statements. The following data for each of the years ended December 31, 2000, 2001, 2002, 2003 and 2004 has been derived from our audited year-end financial statements, including the consolidated balance sheets as of December 31, 2003 and 2004, and the related consolidated statements of income (loss) and changes in financial position for the years ended December 31, 2002, 2003 and 2004 and the accompanying notes included in this annual report. The data should also be read together with "Item 5 -- Operating and Financial Review and Prospects." Unless otherwise indicated, financial information is presented in constant Mexican Pesos in purchasing power as of December 31, 2004.
Our consolidated annual financial statements were prepared in accordance with Mexican GAAP, which differs in some significant respects from U.S. GAAP. Note 20 to the consolidated annual financial statements describes the principal differences between Mexican GAAP and U.S. GAAP with respect to Innova and reconciles net (loss) income to U.S. GAAP. In addition, the selected consolidated financial information below provides U.S. GAAP figures for net sales, operating (loss) income, total assets, net liabilities and equity owners' deficit.
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
2000 2001 2002 2003 2004
-------------- ------------- ------------- ------------- -------------
(IN THOUSANDS OF CONSTANT DECEMBER 31, 2004 MEXICAN PESOS)
STATEMENT OF OPERATIONS DATA:
Net sales.................................... Ps. 2,800,235 Ps. 3,572,306 Ps. 3,754,787 Ps. 4,019,067 Ps. 4,769,027
Depreciation and amortization................ (923,779) (1,037,264) (1,011,827) (850,603) (764,499)
Operating (loss) profit...................... (1,176,453) (305,081) 9,866 402,750 974,949
Total integral results of financing(1)....... (385,032) (77,287) (1,802,323) (1,258,286) (387,335)
Other (expenses) income, net................. - - (23,854) 3,659 -
Transponder services-Solidaridad 2
and repointing costs(2)..................... (471,324) - (28,364) - -
Restructuring charges(2)..................... - (14,849) (7,104) (112,445) (10,958)
(Loss) income before provisions for taxes... (2,032,810) (397,216) (1,851,779) (964,322) 576,656
Provisions for taxes(3)...................... (142) (50,624) (82,613) 123,125 (198)
Net (loss) income............................ (2,032,952) (447,840) (1,934,414) (840,110) 576,287
Net sales (U.S. GAAP)(4)..................... Ps. 2,799,516 Ps. 3,435,540 Ps. 3,626,930 Ps. 3,940,289 Ps. 4,721,917
Operating (loss) income (U.S. GAAP)(4)....... (1,149,548) (865,524) (83,294) 464,629 975,207
Net (loss) income (U.S. GAAP) (4)............ (1,540,532) (1,017,930) (1,968,250) (822,132) 599,310
BALANCE SHEET DATA:
Property and equipment, net(5)............... Ps. 2,087,750 Ps. 2,135,239 Ps. 1,689,777 Ps. 1,470,230 Ps. 1,487,834
Satellite transponders, net(6)............... 1,532,073 1,329,428 1,357,371 1,318,503 1,179,979
Total other non-current assets.............. 381,462 238,295 114,767 69,902 41,498
Total assets................................. 4,320,159 4,128,260 3,764,270 3,641,213 4,725,887
Total assets (U.S. GAAP)(4).................. 4,395,349 4,483,531 4,024,831 3,799,544 4,906,926
Net liabilities.............................. 5,209,890 5,798,293 7,553,168 3,716,714 3,000,820
Net liabilities (U.S. GAAP)(4)............... 4,506,556 5,524,469 7,492,850 3,751,788 2,972,686
Due to affiliated companies and related
parties(7).................................. 267,022 382,412 474,063 448,408 184,740
Senior notes(8).............................. 4,349,716 3,979,072 4,291,969 4,581,377 3,344,700
Bank loan(9)................................. - - - - 1,012,000
Owners' loans(7)............................. 1,712,050 2,975,285 3,546,882 - -
Satellite transponders obligation(6)......... 1,610,277 1,485,648 1,554,969 1,544,615 1,395,358
Equity owners' deficit(10)................... (5,209,890) (5,798,293) (7,553,168) (3,716,714) (3,000,820)
Social parts................................. 2,092,516 2,092,516 2,092,516 6,655,668 6,655,679
Equity owners' deficit (U.S. GAAP)(4)(10).... (4,506,556) (5,524,469) (7,492,850) (3,751,788) (2,972,686)
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NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA:
(1) Includes interest expense, interest income, foreign exchange gains and (losses) and net gain from monetary position. See Note 3 to our consolidated annual financial statements.
(2) See Note 14 to our consolidated annual financial statements.
(3) See Note 16 to our consolidated annual financial statements.
(4) 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 the Solidaridad 2 satellite, the reversal of other accruals, the capitalization of financing costs, the restatement of property and equipment, the recognition of the derivative financial instruments and the recognition of revenue. We paid Satelites Mexicanos, S.A. de C.V., or SatMex, a monthly service fee of U.S.$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. Re-pointing costs were approximately U.S.$35 million. See Note 20 to our consolidated annual financial statements.
(5) See Note 5 to our consolidated annual financial statements.
(6) 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 consolidated statements of income
(loss) as interest expense and part as a reduction of the satellite
transponder obligation. Our consolidated statement of income (loss) 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. The satellite transponder
obligations provided represent both current and long-term obligations. See
Note 6 to our consolidated annual financial statements.
(7) Amounts do not include accrued interest. Effective as of September 9, 2003, our equity owners capitalized all loans made by them or any of their affiliates to us. The amount of the loans and accrued interest capitalized was approximately Ps. 4.5 billion. See "Item 5. Operating and Financial Review and Prospects -- Liquidity and Capital Resources."
(8) Amounts do not include accrued interest. In September 2003, we issued U.S.$300.0 million of senior notes in a private offering at a price of 100%. The notes bear interest at a rate of 9.375% and mature on September 19, 2013. See "Item 5. Operating and Financial Review and Prospects -- Liquidity and Capital Resources" and Note 10 to our consolidated annual financial statements.
(9) Amounts do not include accrued interest. In December 2004, we entered into a Ps. 1,012 million, 7-year bank loan agreement with a fixed interest rate of 10.55% per annum and a five-year grace period for the repayment of principal. Televisa and News Corporation are guaranteeing this loan 51% and 49%, respectively. See "Item 5. Operating and Financial Review and Prospects -- Liquidity and Capital Resources" and Note 10 to our consolidated annual financial statements.
(10)Represents the value of social parts authorized and issued to our equity owners. This line item is equivalent to capital stock. See Note 15 to our consolidated annual financial statements. The increase in 2003 relates to the capitalization by our equity owners of all loans made by them.
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. 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, global terrorist attacks and a weaker U.S. economy, combined with the conflicts in the Middle East, have negatively affected international markets, which could continue to impact the value of the Peso. See " -- Risk Factors -- Risk Factors Related to Mexico -- Developments in Other Emerging Market 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.
The following table sets forth, for the periods indicated, the high, low, average and period end noon buying rate in the City of New York for cable transfers as certified for customs purposes by the Federal Reserve Bank of New York, expressed as Ps. per U.S. $1.00. As of June 10, 2005, the noon buying rate for the purchase of U.S. Dollars was Ps. 10.87 per U.S. Dollar.
EXCHANGE RATE
---------------------
HIGH LOW AVERAGE(1) PERIOD END
----- ----- ---------- ----------
YEAR ENDED DECEMBER 31,
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
2003....................................... 11.41 10.11 10.80 11.24
2004....................................... 11.64 10.81 11.31 11.15
MONTH ENDED
December 31,2005 11.33 11.11 11.20 11.15
January 31, 2005........................... 11.41 11.17 11.27 11.21
February 28, 2005.......................... 11.21 11.04 11.14 11.09
March 31, 2005............................. 11.33 11.00 11.16 11.18
April 30, 2005............................. 11.23 11.04 11.11 11.08
May 31, 2005............................... 11.03 10.89 10.97 10.91
Through June 10, 2005...................... 10.88 10.81 10.85 10.87
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The above rates may differ from the actual rates used in the preparation of the consolidated financial statements and the other financial information appearing in this annual report on Form 20-F. Our inclusion of these exchange rates is not meant to suggest that the Peso amounts actually represent these U.S. Dollar amounts or that Peso amounts could have been converted into U.S. Dollars at any particular rate, if at all.
Unless we otherwise indicate, all Peso amounts as of December 31, 2004 are translated into U.S. Dollars at an exchange rate of Ps. 11.149 to $1.00, and all amounts disclosed for the year ended December 31, 2004 are based on an average exchange rate of Ps. 11.284 to $1.00. All amounts disclosed as of December 31, 2003 are based on an exchange rate of Ps. 11.225 to $1.00, and all amounts disclosed for the year ended December 31, 2003 are based on an average exchange rate of Ps. 10.797 to $1.00. All amounts disclosed as of December 31, 2002 are based on an exchange rate of Ps. 10.464 to $1.00, and all amounts disclosed for the year ended December 31, 2002 are based on an average exchange rate of Ps. 9.665 to $1.00. The devaluation and revaluation of the peso over the past two years may have a considerable impact on the Peso comparisons.
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 Our Company and Other to Convert Pesos into U.S. Dollars or Other Currencies Which Could Adversely Affect Our Business, Financial Condition or Results of Operations."
DIVIDENDS AND DIVIDEND POLICY
We have not declared or paid any dividends. Under the Amended and Restated Social Part Holders Agreement among Grupo Televisa, S.A., or Televisa, News Corporation, and other related parties, dated October 8, 2004, and our bylaws, dividends, if declared, may be paid in Pesos or U.S. Dollars as determined by our equity holders. The U.S. Dollar value of any dividends would be affected by the exchange rate if paid in Pesos. The indenture governing our 9.375% senior notes due 2013 and our recently acquired bank loan, restrict our ability to declare dividends under various conditions.
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 historically experienced uneven periods of economic growth. Mexico's gross domestic product, or GDP, increased 0.7%, 1.4%, 4.4% and 0.4% in 2002, 2003, 2004 and the three month period ended March 31, 2005, respectively. Inflation in 2002, 2003, 2004 and the three month period ended March 31, 2005 was 5.7%, 4.0%, 5.2% and 0.8%, respectively. Although these inflation rates tend to be lower than Mexico's historical inflation rates, Mexico's current level of inflation remains higher than the annual inflation rates of its main trading partners, including the U.S. GDP growth surpassed Mexican government estimates in 2004; however, according to Mexican government estimates, GDP in Mexico is expected to grow at a slower rate, by approximately 3.5% to 4.0%, in 2005. Although inflation is expected to be less than 4.0% in 2005, we cannot assure you that this estimate or estimates related to GDP will prove to be accurate.
If the Mexican economy should fall into a recession or if other economic events such as increased inflation, interest rates or deflation occur, our business, financial condition and results of operations may be adversely affected for the following reasons:
- demand for direct to home, or DTH, satellite services, pay-per-view programming and other services may decrease;
- consumers may decrease spending on high-margin services or programming packages;
- to the extent inflation exceeds price increases, our prices and revenues will be adversely affected in "real" terms; and
- any Peso-denominated debt in the future could be incurred at high interest rates.
CURRENCY FLUCTUATIONS OR THE DEVALUATION AND DEPRECIATION OF THE PESO COULD LIMIT THE ABILITY OF OUR COMPANY AND OTHERS TO CONVERT PESOS INTO U.S. DOLLARS OR OTHER CURRENCIES WHICH COULD 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 U.S.
Dollar-denominated costs, obtain foreign programming and other imported goods.
The Mexican economy has suffered current account balance of payment deficits and
shortages in foreign exchange reserves in the past. 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 INFLATION RATES IN MEXICO MAY DECREASE DEMAND FOR OUR SERVICES WHILE INCREASING OUR COSTS
Mexico historically has experienced high levels of inflation, although the rates have been lower in recent years. The annual rate of inflation, as measured by changes in the Mexican National Consumer Price Index, or the NCPI, was 5.7% for 2002, 4.0% for 2003, 5.2% for 2004 and 0.8% for the three month period ended March 31, 2005. Nonetheless, at approximately 4.4% per annum (as measured from March 2004 to March 2005), Mexico's current level of inflation remains higher than the annual inflation rates of its main trading partners. High inflation rates can adversely affect our business and results of operations in the following ways:
- inflation can adversely affect consumer purchasing power, thereby adversely affecting consumer demand for our services and products, and
- to the extent inflation exceeds our price increases, our prices and revenues will be adversely affected in "real" terms.
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 7.1%, 6.2%, 6.8% and 9.1% for 2002, 2003, 2004 and the three-month period ended March 31, 2005, respectively. These rates are significantly higher than the interest rates for treasury securities trading in the U.S. Accordingly, if we need to incur additional Peso-denominated debt in the future, it will likely be at higher interest rates.
POLITICAL EVENTS IN MEXICO COULD AFFECT MEXICAN ECONOMIC POLICY AND OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Mexico's President Vicente 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 and have worsened the outlook for meaningful structural reforms during the remainder of President Fox's term. Although the Mexican economy has exhibited signs of improvement, it is still struggling to recover and general economic sluggishness continues amidst the hope that the recent signs of a recovery in the U.S. will hold. This continuing weakness in the Mexican economy, combined with recent political events, has slowed economic reform and progress. In elections in 2003 and 2004, the political party of President Fox, the Partido Accion Nacional or the National Action Party, lost additional seats in the Mexican congress, as well as state governorships. The increased party opposition and legislative gridlock arising out of the elections could further hinder President Fox's ability to implement his economic reforms, as has occurred during the process to approve President Fox's proposed 2005 budget. Presidential and federal congressional elections in Mexico are scheduled to be held in July 2006. Under Mexican law, President Fox cannot run for re-election. The electoral process could lead to further friction among political parties and the executive branch officers, which could potentially cause additional political and economic instability. Additionally, once the President and representatives are elected, there could be significant changes in laws, public policies and government programs, which could have a material adverse effect on the Mexican economic and political situation which, in turn may adversely affect our business, financial condition and results of operations.
National politicians are currently focused on the 2006 elections and crucial reforms regarding fiscal and labor policies, gas, electricity, social security and oil have not been and may not be approved. In addition, on April 7, 2005, the lower house of the Mexican Congress voted in favor of stripping Lopez Obrador's immunity from prosecution so that contempt charges can be brought against him for violating a court order. Lopez Obrador, the mayor of Mexico City, is one of the most popular politicians in Mexico and a candidate for the 2006 presidential election. The effects on the social and political situation in Mexico, including the 2006 presidential elections and presidential succession, could adversely affect the Mexican economy, including the stability of its currency, 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
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 the market value or trading price of securities of Mexican issuers, including our debt securities, or our business.
In particular, Argentina's continued insolvency and default on its public debt could adversely affect Mexico, the market value of our debt securities or our business. Although a majority of foreign holders of Argentina's indebtedness have agreed to exchange their securities in connection with Argentina's restructuring, holders of a substantial amount of the country's indebtedness have refused such exchange. To the extent that the Argentine government is unsuccessful in preventing further economic decline, the crisis may also adversely affect the market value and trading price of our securities.
In addition, the political and economic future of Venezuela remains uncertain. 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 February 2003, Venezuelan authorities imposed foreign exchange and price controls on specified products. Inflation continues to increase, despite price controls, and the political and economic environment has continued to deteriorate. We cannot predict what effect, if any, these events will have on the economies of other emerging market countries, including Mexico, the price of our debt securities or our business.
The price of our securities has also historically been adversely affected by increases in interest rates in the United States and elsewhere. The Federal Reserve Bank of the United States has signaled that it could continue with "measured" increases in interest rates in 2005. As interest rates rise, the prices of our securities may fall.
THE U.S. INVASION AND OCCUPATION 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, increased competition and consumers' purchasing power. Historically, these factors have correlated positively 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. Consumer confidence and spending may decline as a result of numerous factors outside of our control, such as terrorist attacks and acts of war. The invasion and occupation of Iraq have depressed economic activity in the U.S. and globally, including the Mexican economy. Since the invasion, there have been terrorist attacks abroad, such as the terrorist attacks in Madrid on March 11, 2004, as well as ongoing threats of future terrorist attacks in the U.S. and abroad. 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 U.S., there can be no assurance that there will not be other attacks or threats in the U.S. or abroad that will lead to a further economic contraction in the U.S. or any other major markets. In the short term, however, terrorist activity against the U.S. and the U.S. invasion and occupation of Iraq have contributed to the uncertainty of the stability of the U.S. economy as well as global capital markets. It is not certain how long these economic conditions will continue. If terrorist attacks continue or become more prevalent or serious, if the economic conditions in the U.S. decline 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. Therefore, potential investors may not be able to ascertain the risks of our company as easily as they would if we were a U.S. company. See Note 20 to our annual consolidated financial statements for a description of the principal differences between Mexican GAAP and U.S. GAAP applicable to us.
RISK FACTORS RELATED TO OUR BUSINESS
WE MAY BE UNABLE TO GENERATE REVENUE SUFFICIENT TO COVER OUR COSTS AND SERVICE OUR DEBT
In 2004, we achieved net income for the first time. Prior to this year, we experienced substantial net losses, and we may experience substantial net losses during the next several years while we improve and expand our DTH service and increase our subscriber base. In 2003, we started to generate positive cash flow from operations for the first time and we generated positive cash flow from operations for 2004. However, we cannot assure you that we will continue to generate net income in the future and we may encounter difficulties continuing to generate sufficient revenue to cover our costs in the future, 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 sustained profitability or sustained 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, 2004, we had U.S. dollar denominated indebtedness of U.S.$388.0 million (not including normal operating liabilities), consisting of U.S.$88.0 million in principal amount outstanding under our 12 7/8% senior notes due 2007 (which were redeemed on January 7, 2005), and U.S.$300.0 million in principal amount outstanding under our 9.375% senior notes due 2013, and Peso denominated indebtedness of Ps.1,012.0 million. Additionally, as of December 31, 2004, we owed approximately U.S. $218.0 million in total pursuant to our satellite transponder obligations (based on the remaining monthly payments of U.S. $1.7 million). We may incur net losses for at least the next several years as we service our indebtedness and fund continuing operations, including the monthly U.S.$1.7 million we must pay to PanAmSat International Systems, Inc., or PanAmSat, for satellite signal reception and retransmission services.
In addition, we recently entered into certain agreements with DIRECTV pursuant to which we have incurred an obligation of approximately Ps.621.1 million and we may be obligated to pay additional amounts under these agreements. See "Item 4 -- Information on the Company -- History and Development of the Company."
If we cannot continue to generate enough cash flow, we 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.
Although the indenture governing our senior notes and our recently acquired bank loan limit our ability and the ability of our subsidiaries to incur additional indebtedness, we may, nonetheless, incur additional indebtedness in connection with our business, including borrowings to fund investments and acquisitions to improve, modernize and give continuity and growth to our business. Our substantial debt may have important negative consequences for us, including the following:
- our ability to obtain additional financing for acquisitions, working capital, investments or other expenditures could be impaired or financing may not be available on terms favorable to us;
- a substantial portion of our cash flow will be used to make principal and interest payments on our debt, reducing the funds that would otherwise be available to us for our operations and future business opportunities;
- a substantial decrease in our net operating cash flow or an increase in our expenses could make it difficult for us to meet our debt service requirements and force us to modify our operations;
- we may be placed at a competitive disadvantage if we have significantly more indebtedness than our competitors; and
- we will be more vulnerable to the effects of general economic downturns or to delays or increases in the costs of developing our network, and it will be more difficult for us to respond to changes affecting our financing, construction, development or operating plans.
Since 2003 we have begun to generate positive net operating cash flow. If we cannot continue to generate sufficient cash flow from operations to meet our obligations, then our indebtedness may have to be refinanced. Any such refinancing may not be effected successfully or on terms that are acceptable to us. In the absence of such refinancings, we could be forced to dispose of assets in order to make up for any shortfall in the payments due on
our indebtedness, including interest and principal payments due on the notes, under circumstances that might not be favorable to realizing the best price for such assets. Further, any assets may not be sold quickly enough or for amounts sufficient to enable us to make any such payments. If we are unable to sell sufficient assets to repay this debt we could be forced to issue equity securities to make up any shortfall. Any such equity issuance would be subject to the approval of our social part holders, who have the voting power to prevent us from raising money in equity offerings.
From our inception and until the first quarter of 2002, we depended on financing from our equity owners; nonetheless, they are not obligated to lend to us. In addition, the indenture governing our senior notes and our recently acquired bank loan restrict 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 any additional capital to finance cash flow deficiencies, if needed. 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."
OUR INDENTURE AND LOAN AGREEMENT LIMIT OUR ABILITY TO CONDUCT OUR BUSINESS, WHICH COULD NEGATIVELY AFFECT OUR ABILITY TO FINANCE FUTURE CAPITAL NEEDS AND ENGAGE IN OTHER BUSINESS ACTIVITIES
The covenants in the indenture relating to our senior notes due in 2013 and our recently acquired bank loan contain a number of significant limitations on our ability to:
- respond to market or economic conditions;
- make certain capital expenditures; and
- take advantage of certain business opportunities.
These restrictive covenants could negatively affect our ability to finance our future capital needs, engage in other business activities or withstand a future downturn in our business or the economy.
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.
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 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 Intense Competition in the Pay Television Market in Mexico" 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.
INCREASED SUBSCRIBER TURNOVER AND/OR INCREASED SUBSCRIBER ACQUISITION COSTS COULD ADVERSELY AFFECT OUR FINANCIAL PERFORMANCE.
A higher rate of customer turnover (e.g., customers switching to other pay-TV providers), or churn, would adversely affect our results of operations, because we would lose revenues from customers who switched to other pay-TV providers, and because churn would require us to acquire more new subscribers just to maintain the same level of subscribers. Any increase in marketing costs in an attempt to retain our existing customers may cause us to increase our subscription rates, which could increase churn. Churn can also increase due to factors beyond our control, including a slowing economy, signal theft, a maturing subscriber base and competition. The cost of adding a new subscriber, which generally includes promotional discounted rates and fees, is a significant factor in determining operating income and profitability for us and other participants in the pay-TV industry. We cannot assure you that we will continue to be able to manage our churn rates or subscriber retention costs to continue to improve our financial performance. Similarly, any material increase in subscriber acquisition costs from current levels could have an adverse effect on our business and results of operations. See "Item 5. Operating and Financial Review and Prospects -- Operating Results."
WE MAY BE UNABLE TO OBTAIN FULL BENEFITS FROM OUR TRANSACTION INVOLVING DIRECTV MEXICO
In October 2004, DIRECTV announced the shut down of its operations in Mexico. To ease its subscribers' transition, and in an effort to provide an alternative, DIRECTV, through its indirect subsidiary Grupo Galaxy Mexicana, S. de R.L. de C.V. (Galaxy Mexico) sold its subscriber list to our subsidiary Corporacion Novavision S. de R.L. de C.V (Novavision) in exchange for two notes with an aggregate principal amount totaling approximately Ps. 621.1 million and potential payments in the future, both depending on the number of subscribers that successfully migrate. We may be unable to obtain benefits from this transaction due to the effects on our operating results or on our financial condition resulting from the additional debt incurred in connection with the transaction, the significant subscriber acquisition costs incurred to attract the previous DIRECTV subscribers to our services, and potential customer retention costs incurred to prevent churn from the DIRECTV subscribers that migrate to us.
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 other, soccer, reality shows and special events, and to offer such programming to customers at competitive prices. We obtain, and anticipate that we will continue to obtain, significant programming on a DTH exclusive basis, or on an exclusive pay-TV basis, from Televisa and News Corporation, each an indirect owner of us.
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 TV Azteca, S.A. de C.V. demanded that we (and other pay television service providers) pay a fee to carry its over-the-air channels. In January 2002, we reached an agreement with TV Azteca to carry channels 7 and 13 for a period of three years for a fee, and in May 2005 we entered into a new agreement to carry these channels for an additional three year period for a fee. Obtaining over-the-air programming from third party providers could increase our costs.
We cannot assure you that the third party program services that appeal to our subscribers will continue to be available to us on acceptable terms in the near future, 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 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 eight 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 necessary 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
In November 2003, we completed the implementation of a new subscriber management system, or SMS, to support the growth of our subscriber base. This system is in service and fully operational. We believe that a subscriber management system is an essential tool for providing pay television services, because it provides marketing, customer service and administrative operations support. If we fail to utilize and upgrade our SMS successfully as our operations grow, 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;" and " -- Business Overview -- Operations -- Subscriber Management System."
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 in the near future with, among others:
- more than 570 cable operators through concessions in Mexico, including Empresas Cablevision S.A. de C.V., or Cablevision, the third largest cable system in Mexico (which is majority owned and controlled by Televisa, the indirect majority owner of Innova);
- multi-channel, multi-point distribution systems, or MMDS;
- national broadcast networks, including the four networks owned and operated by Televisa, and regional and local broadcast stations;
- new multi-services providers (triple-play services), such as Telmex, the largest telephone operator in Mexico;
- 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 could further intensify competitive pressures. Some of our competitors are, and entities resulting from any consolidation 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 matures, 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 usually 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.
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 suppliers. 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. For example, Motorola, Inc. and
Thomson Commercial Electronics are currently our suppliers of integrated
receiver/decoder systems, or IRDs. However, Motorola recently informed us that
they will exit the DTH business and therefore Thomson may become our only IRD
supplier. We are currently evaluating new suppliers and, accordingly, we cannot
assure you that we will not incur any additional delays or costs should we be
unable to obtain IRDs from Motorola, Thomson or others in the future. See "Item
4 -- Information on the Company -- Business Overview -- Operations -- Integrated
Receiver/Decoder System."
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. Our agreement with PanAmSat allows us to use the PAS-9 satellite's services for the next 10 years or the date PAS-9 is taken out of service, whichever happens first. When it was originally placed in orbit in 2000, the estimated useful life of the PAS-9 satellite was projected to be approximately 15 years, or until 2015. Although this projection has not changed, PAS-9 could fail before 2015. 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, it is possible that some of our current and potential subscribers located in parts of Mexico will not be able to receive a high quality signal.
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. Our Agreement with PanAmSat, however, does give us certain rights to require PamAmSat to construct and launch a replacement satellite under certain conditions.
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 satellites or to negotiate a commercially satisfactory arrangement with PanAmSat to construct and launch a replacement satellite in a timely manner.
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 are currently reviewing and evaluating the steps we might take, including the integration of a disaster recovery plan, to respond to natural disasters, technical emergencies, terrorist attacks or 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 Comision Federal de Telecomunicaciones, or COFETEL, an autonomous division of the Secretaria de Comunicaciones y Transportes, or SCT. The SCT has granted us two concessions to operate satellite broadcasting systems using a 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 "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. As part of this preventive strategy, we have decided to carry out a new Smart card change over process during 2005. We expect to continue to exchange subscribers' Smart Cards every three to four years or whenever 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.
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. See "Item 4 -- Information on the Company -- Business Overview -- Pay Television Industry Overview -- DTH."
During the last two years, the three major cable operators in Mexico have invested in digital technology in order to fight piracy of their signals. We believe, however, that the pirating of cable television signals in several cities and small towns across Mexico continues to present 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, the pay-TV industry has been, and will likely continue to be, subject to rapid and significant changes in technology such as digital compression technology, high definition video and interactive features.
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 currently 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 are obligated to offer us their future program services pursuant to our Social Part Holders Agreement. We
have the DTH exclusive broadcast rights to Televisa's and News Corporation's programming channels in Mexico, subject to a number of preexisting third party agreements. However, Televisa, News Corporation and their programming affiliates provide, and will continue to provide, programming to other, non-DTH pay television businesses, such as cable operators, which compete with us.
- We obtain our conditional access and most components of our broadcast system from NDS Group plc (formerly known as News Digital Systems Limited), or NDS, a 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, as a result of a series of transactions in October 2004, Televisa and DIRECTV indirectly hold 30% and 70% interests, respectively. See "Item 4 - Information on the Company - History and Development of the Company." 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.
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 prevent future conflicts of interest.
OUR OWNERSHIP COULD SUBSTANTIALLY CHANGE, AND WE CANNOT PREDICT THE EFFECT THIS WILL HAVE ON OUR BUSINESS
In October 2004, we, Televisa, News Corp., Liberty Media and Globo Comunicacoes e Partipicacoes S.A., or Globopar, entered into a series of transactions with each other and with The DIRECTV Group, Inc., or DIRECTV, relating to our DTH joint ventures, which, if consummated, would result in DIRECTV and DIRECTV Latin America, or DTVLA, owning approximately 43% of our equity and Televisa owning the remaining 57% of our equity. See "Item 4 - Information on the Company - History and Development of the Company." At this time, we cannot predict what impact this potential change in ownership may have on our business as we have depended on our owners for financing in the past and continue to be dependent on our owners for programming and systems support.
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 for which Televisa
provides uplink and downlink services. DTH TechCo also provides these services
to Sky Multi-Country Partners, or MCOP (a U.S. partnership which was previously
indirectly owned by Televisa, News Corporation and Globopar), and Sky Brasil
Servicos Ltda., or Sky Brasil (a DTH service which was previously owned
indirectly by Globopar, News Corporation and Liberty Media). In October 2004, in
a series of transactions involving Televisa, News Corporation, Liberty Media,
Globopar and DIRECTV, (i) MCOP became owned 40% by DIRECTV, 30% by Globopar and
30% by Televisa, and depending on the consummation of additional transactions,
DIRECTV will acquire the remaining 60% in MCOP owned by Televisa and Globopar
and (ii) DIRECTV, depending on the consummation of the transactions, will own
72% of the equity in Sky Brasil and the remainder will be held by Globopar. DTH
TechCo depends on payments from us, MCOP and Sky Brasil to fund its operations.
As a result of Globopar's financial condition, Globopar has ceased providing
financial support to DTH TechCo and MCOP since September 2002, 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, and since October 2004, DIRECTV,
have been funding DTH TechCo's operating cash shortfall through loans to DTH
TechCo. However, our owners are not obligated to provide funding to DTH TechCo,
and we cannot assure you that continued funding will be available or what effect
the change in ownership of MCOP and Sky Brasil may have on continued funding. If
(i) MCOP fails to make required payments to DTH TechCo or (ii) Sky Brasil fails
to continue making its required payments to DTH TechCo, and if DTH TechCo's
owners, Televisa and DIRECTV, 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
Indirectly, Televisa owns approximately 60% of Innova's total voting power, subject to the 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." In October 2004, we, Televisa, News Corp., Liberty Media and Globopar entered into a series of transactions with each other and with The DIRECTV Group, Inc., or DIRECTV, relating to our DTH joint ventures, which, if consummated, would result in DIRECTV and DTVLA owning approximately 43% of our equity and Televisa owning the remaining 57% of our equity. See "Item 4 - Information on the Company - History and Development of the Company."
Televisa has agreed not to engage in the DTH business in Mexico except through Innova. However, Televisa competes with Innova in Mexico City for customers in Mexico City's pay television market, since it controls and owns a majority interest in Cablevision, the operator of Mexico's third-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 away 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.
INTERESTED 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 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) 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.
THE OUTCOME OF LITIGATION AND GOVERNMENTAL PROCEEDINGS COULD IMPACT OUR RESULTS OF OPERATIONS AND LIQUIDITY
In October 2004, DIRECTV announced the shut down of its operations in
Mexico. DIRECTV, through its indirect subsidiary Grupo Galaxy Mexicana S. de
R.L. de C.V. (Galaxy Mexico) sold its subscriber list to our subsidiary
Corporacion Novavision S. de R.L. de C.V (Novavision) in exchange for two notes
with an aggregate principal amount totaling approximately Ps. 621.1 million and
potential payments in the future depending on the number of subscribers that
successfully migrate. In addition, we, Televisa, News Corp., Liberty Media and
Globopar entered into a series of transactions with each other and with The
DIRECTV Group, Inc., or DIRECTV, relating to our DTH joint ventures, which, if
consummated, would result in DIRECTV and DTVLA owning approximately 43% of our
equity and Televisa owning the remaining 57% of our equity. Darlene Investments,
LLC, or Darlene, a minority owner of DTVLA, has filed suit alleging fraud,
self-dealing and violation of fiduciary duties against DIRECTV, News Corp. and
others seeking, among other things, injunctive relief to preclude the
consummation of certain transactions between us and our owners. The timing and
outcome of the final resolutions to these matters is uncertain. See "Item 4 --
Information on the Company -- History and Development of the Company" and "Item
10 -- Legal Proceedings."
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, and some of the experts named in this report also reside 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 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 periodic reports to the U.S. Securities and Exchange Commission, or SEC, on Form 6-K, in future annual reports to social part holders, in offering circulars, prospectuses, and registration statements, in 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, our position relative to our competitors or cable television providers, or potential audience size;
- statements concerning the impact of our licenses to broadcast World Cup soccer matches, NFL matches and other high-profile events;
- 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 items in our financial
statements;
- statements of our plans to develop new technologies;
- statements about our SMS;
- statements of our or our owners' plans, objectives or goals, including those relating to anticipated trends, competition, regulation, rates, and any potential acquisitions of assets or stock of another company;
- statements regarding our ability to operate without cash contributions from our equity owners;
- statements about the future economic performance of Mexico or other countries that affect the Mexican economy and consumer purchasing power or demand for our services in Mexico; and
- statements of assumptions underlying these statements.
Words such as "believe," "anticipate," "plan," "expect," "intend," "target," "estimate," "project," "predict," "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 listed above.
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.
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 under Mexico's Ley General de Sociedades Mercantiles (General Law of Mercantile Organizations) and converted to a limited liability company with variable capital on July 2, 1998, (although it was notarized on December 22, 1998). Our company was registered with the Public Registry of Commerce in Mexico City under the commercial File (folio mercantil) 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) 815-6331.
Our net sales for each of the last three fiscal years is set forth in the table below.
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
2002 2003 2004
-------------- ------------- -------------
(IN THOUSANDS OF CONSTANT DECEMBER 31, 2004 MEXICAN PESOS)
Net Sales................ Ps. 3,754,787 Ps. 4,019,067 Ps. 4,769,027
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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, apartment buildings, hotels, restaurants, and other commercial locations. In contrast to the locally-transmitted signals of 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 and rural areas of Mexico. We believe that the Ku-band DTH satellite pay television industry in Mexico offers substantial opportunities for growth due to the large potential market size, high number of addressable households and low penetration of pay-TV services in Mexico. We also 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 May 31, 2005 we were broadcasting up to 192 digital channels (123 video, 37 pay per view and 32 audio) to approximately 1,107,500 subscribers, including approximately 63,400 non-residential subscribers. See "Item 5 -- Operating and Financial Review and Prospects -- Operating Results"; and " -- Overview -- Trend Information."
We currently offer our subscribers a variety of programming packages, as described in " -- Programming and Services -- Programming Packages." In addition to our pay television services, 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. We believe that the 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.
We are the Sky DTH platform developed in Mexico by Televisa, News Corp. and Liberty Media. Our sponsors, together with Globopar, the largest television broadcaster and media group in Brazil, have also developed other platforms in Brazil and throughout Latin America. In October 1997, the partners formed MCOP, a U.S. partnership which invests in, and supplies programming and other services to, the Sky DTH platforms in Latin America outside of Mexico and Brazil, including Colombia and Chile.
In October 2004, DIRECTV Mexico announced that it was shutting down its operations and we, Televisa, News Corp., DIRECTV, Liberty Media and Globopar entered into a series of agreements relating to our owners' DTH joint ventures. With respect to the DTH joint venture in Mexico:
- We and DIRECTV Mexico entered into a purchase and sale agreement, pursuant to which we agreed to purchase DIRECTV Mexico's subscriber list for two promissory notes with an aggregate original principal amount of approximately Ps. 621.1 million. The promissory notes mature on the earlier of (i) the date five business days after the date we and DIRECTV Mexico finally determine the number of subscribers that successfully migrated from DIRECTV Mexico to us, measured as of a date approximately 16 to 22 months after the date of the agreements, or (ii) October 9, 2009;
- We and DIRECTV Mexico entered into a letter agreement which provides for
(i) an additional cash amount to be paid by us to DIRECTV Mexico if more
than 180,000 subscribers successfully migrate to Innova, (ii) a cash
amount to be paid by DIRECTV Mexico to Innova if fewer than 70,000
subscribers successfully migrate to Innova, and (iii) a cash amount to be
paid by DIRECTV Mexico to Innova to the extent certain migrated
subscribers churn before they become "good subscribers", as defined in the
agreement;
- We, Innova Holdings and News Corp. entered into an option agreement, pursuant to which News Corp. was granted an option to acquire up to a 15% equity interest in each of Innova and Innova Holdings. The amount of equity to be received upon the exercise of the option depends on the successful migration and retention of DIRECTV Mexico's subscribers to Innova with a minimum migration of 175,000 subscribers required for the issuance of the full 15% equity interest. The options become exercisable when the DTH business operations of DIRECTV Mexico have finally ceased, we and DIRECTV Mexico have finally determined the number of subscribers that successfully migrated from DIRECTV Mexico to us, and certain other conditions have been satisfied. If the options become exercisable, the holder may exercise them by delivering to Innova and Innova Holdings the promissory notes for cancellation or by paying to Innova and Innova Holdings an amount in cash equal to the aggregate principal amount of the promissory notes. The options expire on October 8, 2009. If the options are terminated under certain limited circumstances related to regulatory challenges, or after a final determination that renders the options illegal, or expire unexercised, then within ten days of the expiration date, DIRECTV Mexico will be entitled to receive an aggregate cash payment (including any payments made under the notes described above) of up to approximately U.S.$137.7 million if 175,000 DIRECTV Mexico subscribers successfully migrate to Innova. Termination of the option is limited to certain specific events;
- DIRECTV and News Corp. entered into a purchase agreement pursuant to which DIRECTV acquired (i) the right (which DIRECTV concurrently assigned to DTVLA) to purchase from News Corp. the options granted to News Corp. by Innova and Innova Holdings to purchase up to an additional 15% of the outstanding equity of each of such entities pursuant to the option agreement described above, and (ii) the right to acquire News Corp.'s 30% interest in Innova;
- DIRECTV and Liberty Media, entered into a purchase agreement pursuant to which DIRECTV agreed to purchase all of Liberty Media's 10% interest in Innova for U.S. $88.0 million in cash, subject to customary closing conditions. DIRECTV has agreed that Televisa may purchase two-thirds (2/3) of any equity interest in Innova sold by Liberty Media, on the terms and subject to the conditions set forth in the purchase agreement between DIRECTV and Liberty Media;
- Televisa entered into an amended and restated guaranty with PanAmSat pursuant to which the proportionate share of our transponder lease obligation guaranteed by Televisa was reduced from 60% to 51%, until the full exercise of the options to News Corp. granted by Innova and Innova Holdings, at which point Televisa's guarantee will be adjusted to cover a percentage of the transponder lease obligations equal to its percentage ownership of Innova at that time. News Corporation's proportionate share of the guarantee was increased from 30% to 49% and Liberty Media was released of its guarantee;
- We, Televisa, News Corp., DIRECTV and DTVLA entered into a DTH agreement that, among other things, governs the rights of the parties with respect to DTVLA's announced shut down of its Mexican DTH business, planned shut down of its existing DTH business in certain countries in Central America and the Caribbean, the carriage of certain of Televisa's programming channels by us and other DTH platforms of DIRECTV, DTVLA, News Corp. and their respective affiliates, and the waiver and potential release of certain claims between certain of the parties; and
- We and Televisa entered into two channel licensing agreements pursuant to which we will pay Televisa a royalty to carry its over-the-air channels on our DTH service.
If the transactions contemplated by these agreements are consummated, Televisa will own approximately 57% of the equity interest in Innova and DIRECTV and DTVLA will collectively own the remaining 43% equity interest in Innova.
In connection with the October 2004 reorganization, with respect to the DTH joint ventures elsewhere in Latin America:
- Televisa entered into a purchase and sale agreement with DIRECTV, pursuant to which among other things, (i) DIRECTV acquired all of Televisa's direct equity interests in Sky Latin America Partners, or ServiceCo (a U.S. partnership formed to provide business and management services), (ii) subject to the satisfaction or waiver of certain conditions, including the resolution of an audit currently pending before the U.S. Internal Revenue Service related to MCOP, DIRECTV has agreed to purchase all of Televisa's indirect equity interests in MCOP, and (iii) DIRECTV has agreed to indemnify Televisa for any and all losses arising out of its status as a partner in MCOP other than losses arising out of the pending tax audit;
- DIRECTV also agreed to purchase each of News Corp.'s, Liberty Media's and Globopar's equity interests in DTH TechCo (a U.S. partnership formed to provide technical services from a main uplink facility in Miami Lakes, Florida and a redundancy site in Port St. Lucie, Florida), ServiceCo and MCOP; and
- PanAmSat Corporation, or PanAmSat, unconditionally released Televisa and News Corp. from any and all obligations related to the MCOP transponder lease.
As a result of the closing of these transactions, ServiceCo will be wholly owned by DIRECTV, DTH TechCo will be owned 70% by DIRECTV and 30% by Televisa, and MCOP will be owned 40% by DIRECTV, 30% by Globopar and 30% by Televisa. If the transactions contemplated by the foregoing agreements are consummated, DIRECTV will acquire the remaining 60% in MCOP owned by Televisa and by Globopar.
The closing of these transactions is subject to certain regulatory approvals, including clearances from competition and telecommunications authorities in foreign jurisdictions and other closing conditions. Therefore, we cannot assure you that these transactions will be consummated. In addition, Darlene Investments, LLC, or Darlene, a minority owner of DTVLA, has filed suit alleging fraud, self-dealing and violation of fiduciary duties against DIRECTV, News Corp. and others seeking, among other things, injunctive relief to preclude the consummation of these transactions. The timing and outcome of the final resolutions to these matters is uncertain. See "Item 10 -- Legal Proceedings."
Our owners have contributed capital to us from time to time. In September 2003, our owners capitalized all loans made by them or any of their affiliates to us. The amount of the loans and accrued interest capitalized as of September 9, 2003 was approximately Ps. 4.5 billion. For a more detailed discussion of these transactions, see "Item 7 -- Major Shareholders and Related Party Transactions." In 1997, we issued U.S.$375.0 million of 12 7/8% senior notes due 2007 and completed an exchange offer for all unregistered notes. We used the net proceeds from that offering of our senior notes primarily to finance start-up operations. In September 2003, we completed an offering for U.S.$300.0 million of our 9.375% senior notes due 2013 and completed an exchange offer for all outstanding notes. We used the net proceeds from this offering to redeem U.S.$287.0 million in principal amount of our 12 7/8% senior notes due 2007. More recently, in December 2004, we entered into a Ps. 1,012 million, 7-year bank loan agreement with a fixed interest rate of 10.55% per annum. The net proceeds from the loan were used on January 7, 2005 to redeem the remaining U.S. $88.0 million principal amount of our outstanding 12 7/8% notes due 2007 plus accrued and unpaid interest. For a more detailed discussion of these transactions, see "Item 5 -- Operating and Financial Review and Prospects -- Liquidity and Capital Resources."
STRONG SPONSORSHIP
Innova was historically owned by Televisa (60%), News Corp. (30%) and Liberty Media (10%). If the transactions contemplated by the agreements with DIRECTV are consummated, Televisa would own approximately 57% of the equity interest in Innova and DIRECTV and DTVLA would collectively own the remaining 43% equity interest in Innova. 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 its 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 programming for pay television, international distribution of television programming, publishing, direct-to-home satellite services, publishing and publishing distribution, cable television, radio production and broadcasting, professional sports and show business promotions, feature film production and distribution, and the operation of a horizontal Internet portal. Televisa also has an unconsolidated equity stake in Univision, the leading Spanish-language television company in the United States.
News Corporation is a diversified international media and entertainment company with operations in eight industry segments: filmed entertainment; television; cable network programming; direct broadcast satellite television; magazines and inserts; newspapers; book publishing; and other. The activities of News Corporation are conducted principally in the United States, the United Kingdom, Australia, Asia 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. Its programming networks distribute services through a number of distribution technologies, principally cable television and DTH. Liberty Media is a wholly owned subsidiary of Liberty Media International, Inc.
DIRECTV is the largest provider of DTH digital television services in the United States and a leading provider of DTH digital television services throughout Latin America based on the number of subscribers. DIRECTV provides its subscribers with access to hundreds of channels of digital-quality video pictures and CD-quality sound programming that are transmitted directly to its customers' homes or businesses via high-powered geosynchronous satellites.
CAPITAL EXPENDITURES
The table below sets forth our capital expenditures for the years ended December 31, 2002, 2003 and 2004 and for the three months ended March 31, 2005. See "Item 5 -- Operating and Financial Review and Prospects -- Liquidity and Capital Resources."
FOR THE THREE
FOR THE YEAR ENDED DECEMBER 31, MONTHS ENDED
---------------------------------------------- --------------
2002 2003 2004 MARCH 31, 2005
---------- ---------- ---------- --------------
(IN THOUSANDS OF U.S. DOLLARS)
SkyKits......................... $ 37,803 $ 36,268 $ 56,930 $ 27,936
Subscriber Management System.... 7,078 9,865 2,035 14
Transmission, Computer and
Other Equipment............... 4,850 3,490 8,305 698
---------- ---------- ---------- ----------
TOTAL........................... $ 49,731 $ 49,623 $ 67,270 $ 28,648
========== ========== ========== ==========
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Our principal capital expenditures for the fiscal years ended 2002, 2003 and 2004 and the three months ended March 31, 2005 included purchasing IRDs, antennas, low noise blocks, or LNBs, smart cards and remote controls and accessories, which together comprise the "Sky Kit"; transmission equipment, computers and software; and our SMS. These capital expenditures increase as our DTH platform and the number of subscribers grow. For a description of how we financed these capital expenditures, see "Item 5 -- Operating and Financial Review and Prospects -- Liquidity and Capital Resources."
In November 2003, we implemented an SMS to support the growth of our subscriber base. Currently this system is in service and is fully operational. We believe this SMS allows us to provide more effective management and billing services to our subscribers. For more information on the SMS, see " -- Business Overview -- Operations -- Subscriber Management System."
We have made significant investments in hardware and software to manage growth of our DTH platform and to enhance customer service. These include our previous and new subscriber management systems, compression equipment, 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.
BUSINESS OVERVIEW
TELEVISION MARKET IN MEXICO
We believe that Mexico is the second-largest television market in Latin America after Brazil with approximately 20.1 million television households as of December 31, 2004. The television industry in Mexico has expanded from broadcast television to pay television, including cable, MMDS, and DTH satellite services. Mexico has a strong demand for entertainment programming, as the average television household in Mexico watches more than seven hours of television daily, according to figures from the Instituto Brasilero de Opinion Publica y Estadistica.
We estimate that as of December 31, 2004, 4.1 million households in Mexico, not including households receiving unauthorized Ku-band and C-band services, received pay television services. These households represented approximately 20.4% of the Mexican television market as of that date. Mexico remains one of the least penetrated pay-TV markets in the Latin American region. In addition, we estimate that approximately 2.3 million of these 4.1 million households subscribe to cable television, while approximately 0.6 million households subscribe to MMDS, and approximately 1.2 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 other receive pirated DTH signals from within Mexico. We believe that piracy of cable television signals across Mexico presents a major challenge to the Mexican pay-TV market. 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. 137,450 and commercial establishments such as hotels, restaurants and bars. We estimate that, as of December 31, 2004, Mexico had approximately 8.3 million households with annual incomes of at least Ps. 137,450, representing approximately 41% of the country's total television households. Of these households, we believe that 6.8 million could receive DTH service. Over the past two years we have broadened our base of potential subscribers by decreasing the annual household income that defines our potential subscriber base and continue to consider marketing to this wider group of consumers.
We believe that Mexico represents one of the largest and most attractive markets for Ku-band DTH satellite pay television services in Latin America. We seek to further consolidate our position as the leading provider of pay-TV services in Mexico. We believe that we can achieve our business objective by offering a broad range of high quality programming via superior satellite service at a competitive price. Through these means, we intend to increase our market share by persuading our competitors' customers to switch to our service and capitalizing on any projected increase in demand for pay television services in Mexico.
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 23.4 million people, which represents 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 455 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. The Mexican government currently operates two stations in Mexico City, Channel 11 (with 7 repeaters) and Channel 22, and repeater stations outside Mexico City. TV Azteca operated through a joint venture with Televisora del Valle de Mexico, S.A. de C.V.,the CNI Channel 40, a UHF channel broadcasting in Mexico City until the union employees of this joint venture went on strike on May 2005 and suspended the signal transmission. The SCT is evaluating whether to revoke the Channel 40 concession due to the suspension of the signal transmission. There are also 17 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 a monthly subscription fee equal to Ps. 260 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 over 570 cable operators through concessions in Mexico as of December 31, 2004. Under Mexican law, all licenses to provide cable television services in a specific service area are non-exclusive licenses.
Megacable is Mexico's largest cable system operator with approximately 650,000 household subscribers as of December 31, 2004 and is located in several regions in the country, including Veracruz, Puebla, Jalisco and the Pacific coast. Grupo Cablemas is the second largest cable system operator with approximately 500,000 household subscribers as of December 31, 2004 and is located in several areas, including the Yucatan, Campeche and the Chiapas peninsular region, central Mexico, Tijuana, Mexicali, Chihuahua, Juarez, Baja California and other cities on the United States-Mexico border. Grupo Cablemas is followed by Cablevision, which holds a franchise for Mexico City and the surrounding areas and had over 355,000 household subscribers as of December 31, 2004. Televisa owns 51% of Cablevision. The remaining 49% is publicly held.
In late 2003, the SCT authorized cable television providers to begin providing the services of bi-directional data transmission, which permits them to provide their customers enhanced television, interactive programming services, near-video-on-demand services, video-on-demand services and e-commerce applications.
Currently, these three major cable operators are offering digital cable television services and are focused on promoting other value-added services, such as high speed Internet access. All of them offer basic and premium packages to its subscribers, as well as "a la carte" channels and they are, or will shortly be offering digital video recorders, or DVRs, also known as personal video recorders, or PVRs.
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 26% of the households with television sets in the country. We estimate that approximately 6.6% 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 SCT, CANITEC, other public information and internal estimates.
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 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 20.1 million television households in Mexico as of December 31, 2004, up to 600,000 of them subscribed to MMDS. At least eighteen 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 nine other cities across the country. MMDS systems do not rebroadcast the main over-the-air channels.
During the last two years, Multivision has strongly focused on offering wireless internet access. However, it continues to offer a small package of 15 video channels (with no pay-per-view or audio channel options) for Ps. 95 per month. Through this strategy, we believe it has continued to grow, despite strong competition in Mexico City. Multivision also offers the choice of a second package of 23 video channels, which includes 8 movie channels, for Ps. 285 per month.
DTH
DTH systems use medium or high-powered 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; and
- intermittent interference from atmospheric conditions and terrestrially-generated radio frequency noise.
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 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 for 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. Six 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 bandwidth or satellite costs. This compression technology would allow us to increase our capacity to up to 17 video channels per transponder or to increase band-width required for interactive services; however, we currently only have this technology for 6 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, and more recently to include in some channels HTML-interactive applications as statistics, brief comments and news.
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. 799 (discounted to Ps. 699 or Ps. 199 if the subscriber agrees to pay monthly programming fees via automatic charge to a debit card or to a credit card, respectively);
- a monthly programming fee ranging from Ps. 151 to Ps. 588, depending on which programming package the subscriber chooses and whether the subscriber pays within 12 days of the billing date;
- a monthly rental fee of Ps. 161 (Ps. 148 if the subscriber pays within 12 days of the billing date) for the rental of the IRD, LNB, Smart Card, remote control and related components;
- a monthly rental fee of Ps. 138 (Ps. 125 if the subscriber pays within 12 days of the billing date) for the rental of a second IRD and related components; and
- an annual membership fee of Ps. 268.
We also offer promotions that include offers of free subscriptions, installation or activation, intended to attract subscribers away from other pay-TV systems.
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
Currently, we offer residential subscribers the choice of five programming packages: Basic (70 video channels, 32 audio channels and 31 pay-per-view); Fun (88 video channels, 32 audio channels and 37 pay-per-view); Movie City (102 video channels, 32 audio channels and 37 pay-per-view); HBO/Max (106 video channels, 32 audio channels and 37 pay-per-view) and Universe (123 video channels, 32 audio channels and 37 pay-per-view).
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)
------------------- ----------- -------------- -----------
Basic.................................. Ps. 228.00 Ps. 151.00 70
Fun.................................... Ps. 278.00 Ps. 241.00 88
Movie City............................. Ps. 398.00 Ps. 351.00 102
HBO/Max................................ Ps. 448.00 Ps. 401.00 106
Universe............................... Ps. 588.00 Ps. 541.00 123
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(1) Not including the monthly IRD rental fee described above, but including value-added tax.
(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 also includes 32 audio channels and 37 pay-per-view channels (except for Basic package, which only include 31 pay-per-view 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 currently offer 37 pay-per-view channels. We devote 24 of these channels to family entertainment and movies and seven channels to adult entertainment. We set aside six 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 other on a pay-per-view basis.
Sky Interactive and New DVR Technology
Sky Interactive allows subscribers to watch different and enhanced content on the same or different channel. As part of our regular service, we currently offer several services with interactive features, including an Interactive Portal, Fox News channel, "Avances Sky" (programming highlights), "Novelas Interactive" (popular soap operas shows highlights), "Fut Interactive" (football soccer stats and highlights), "Boomerang Interactive" (kids-oriented channel with games) and various interactive applications during special events such as Big Brother or sporting events. We believe this technology may also enable us to offer more value-added services in the future, such as television-commerce, games and subscription information services.
Additionally, in May 2005 we launched 12 easy-to-find Mosaic-channels to improve our service and give our customers an easier and faster way to navigate into all of Sky's programming by genre.
In May and June 2004, we beta-tested digital video recorders, or DVRs, in Mexico City markets. In our Sky+ offering, we provided consumers with new set-top boxes, which contain hard disk drives capable of recording at least 35 hours of digital video, Central Processing Units, digital video chips, modems, and other components that allow subscribers to receive enhanced, personalized television services. This technology allows subscribers to record shows while watching other channels, play back and fast forward recorded shows, and pause and rewind live television. Further, DVRs provide subscribers with personalized service by allowing them to record their favorite shows, all season long, and skip reruns, if desired. We believe this new technology with its enhanced features, will enable us to offer more value-added services in the future, including the interactive features described above. When combined with our current offering of interactive services, this new service provides us with a competitive
advantage because it offers subscribers improved home entertainment Fall from one source. Currently, Cablevision is offering similar PVR equipment in Mexico City. We are continuing to explore new interactive services and technology to offer to our subscribers.
Programming Acquisition
During 2004, we continued to enhance our programming content by adding special events on a pay-TV exclusive basis, including the reality shows Big Brother VIP3 and "Confianza Ciega" and several professional sporting events, including certain matches of the Mexican Closing Soccer Tournament and the Opening Soccer Tournament, the pay-TV exclusive broadcast of the America team soccer matches in the "Copa Libertadores" soccer tournament, the Wimbledon and U.S. Open tennis tournaments, boxing matches, certain matches of the Mexican baseball league, the LPGA, U.S. PGA and U.S. Senior PGA golf tournaments, an interactive mosaic channel of the Olympic Games at Athens and the NFL Sunday Ticket, previously an exclusive content of DIRECTV Mexico.
In December 2004 we entered into a 3-year agreement with NFL International LLC (NFL) for the pay-TV exclusive transmission of the NFL Sunday Ticket and the non-exclusive transmission of the NFL Network channel in Mexico. In addition, we reached an agreement with Televisa to purchase the rights to broadcast 34 of the 64 2006 FIFA World Cup soccer tournament matches on a pay-TV exclusive basis and we are in the process of finalizing this agreement. We believe this exclusive content represents an important competitive advantage and a driver in attracting and retaining subscribers.
During 2004, we also added several new channels to our line-up, including:
Antena 3, a popular channel broadcast in Spain; the "Film Zone," a movies
channel; TV Globo, a popular Brazilian channel, the "G Channel," an adult
oriented channel; the Cinecanal Classics, a classic movies channel; VH1, a music
videos channel and Universal channel, a movies channel. In addition to new
programming contracts, we continue to operate under arrangements with a number
of third party programming providers.
We currently negotiate directly for programming with international
suppliers from the United States, Europe and Latin America. 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, Jetix, Disney Channel, HBO, MaxPrime and Cinemax), LAPTV (Movie
City, Cinecanal and The Film Zone), Turner Broadcasting System Latin America,
Inc. (TNT, CNN and Cartoon Network and Boomerang), Discovery Networks (People &
Arts, Discovery Channel, Discovery Kids, Animal Planet, Discovery Health and
People and Arts), Fox Latin America Channels Inc. (National Geographic, Canal
Fox, Fox Sports, Fox News, Universal channel and Speed Channel), Pramer (Film &
Arts, El Gourmet, Private Gold, Private Blue, Magic Kids, Europa Europa,
Hallmark, Reality TV and Cosmopolitan), MTV Networks (MTV, VH1 and Nickelodeon),
Claxon (Playboy, G Channel, Fashion TV and Infinito), Castalia Communications
(Globo International and BBC World) and Bloomberg LP (Bloomberg Channel). 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, 20th Century Fox, Universal Studios International, Buenavista
International, MGM, Paramount Pictures, Sony Pictures International, PWI Films,
Inc. and Independent Studios.
These providers currently provide a number of programming alternatives for both our basic and premium digital services packages. Substantially all of these arrangements are on a non-exclusive basis, are denominated in U.S. Dollars and are for limited terms, typically one to two years, and may be renewed by mutual agreement upon their expiration. We cannot assure you, however, that these arrangements will not be terminated, or that we will be able to renew these contracts and arrangements upon their expiration, or if so, upon similar or otherwise favorable terms.
Televisa and News Corporation provide us with significant programming content, some of which we distribute on an DTH exclusive 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 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. 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, which include domestic and foreign programs. Among these programs are: reality shows, 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 DTH exclusive 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.
In connection with the transactions that took place in October 2004, we and Televisa entered into two channel licensing agreements pursuant to which we will pay Televisa a royalty to carry its over-the-air channels on our DTH service. See "Item 4 -- Information on the Company -- History and Development of the Company." In addition, pursuant to the terms of our Amended and Restated Social Part Holders Agreement, our sponsors have agreed to make available to us their existing and future program services and channels on a DTH-exclusive basis.
In May 2005, we entered into a three-year agreement with TV Azteca for the rights to rebroadcast its over-the-air Channels 7 and 13 for a fee of Ps. 2 million per year. We also entered into a separate agreement to purchase up to Ps. 94 million in advertising from TV Azteca over the three years from the date of the agreement. In a separately negotiated agreement, we obtained from TV Azteca the pay-TV exclusive rights to broadcast various soccer matches at prices to be negotiated in the future. 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 -- Overview -- Trend Information."
We have no other current plans to develop or produce our own programming, except for our recently launched Mosaic-channels, which are menu channels that allow subscribers to choose among television channels categorized into various groupings including, but not limited to, entertainment, movies, kids and pay-per-view.
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 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; in Torreon, Toluca and Villahermosa in 2003; and in Chihuahua in 2005
As of March 31, 2005, we sell and distribute our services through a network of 8 wholesalers and 16 direct sales offices that control over 3,100 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 SkyKit, which includes a satellite antenna, low noise block or 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 SkyKits 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 Cards, and remote controls on a bailment basis. However, since February 23, 1998, substantially all of our subscribers (residential and commercial) have rented their IRDs under a rental plan with an indefinite term. We chose to retain ownership of the SkyKit equipment, rather than selling it to our distributors, in order to facilitate repossession of the equipment if subscribers terminate service or default on their obligations. This change has had no material impact on the revenues we receive from our distribution network.
We focus on actively promoting our superior programming content and exclusive events, our high quality customer service and system and technology 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 reality shows, 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."
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. We have also targeted soccer fans by offering pay-TV exclusive soccer matches. In 2004 we broadcasted 41 of the soccer matches for which Televisa had the exclusive broadcast rights, as well as 24 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, which is offered without cost and includes prizes, trips, programming and special events, such as concerts and sporting events.
We monitor our nationwide installation service through a centralized operations office, which enables us to monitor the quality of service being provided to our customers. After obtaining the SkyKit 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 proprietary, specialized telephone call center, with a staff of approximately 1,105 to answer general questions and provide basic information about our services, 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.
We designed a customer service program based on Televisa's experience with its existing Mexican cable operations and News Corporation's experience with British Sky Broadcasting plc. We have made significant investments in hardware and software to manage the growth of our DTH platform and to enhance customer service. These include our SMS and our call center. Currently, the SMS is in service and is fully operational, and we believe that our SMS provides us with more effective management and billing services to our subscribers. We have also improved the efficiency of our call center by using interactive voice response, predictive dialer and customer management relationship systems. We believe that customer service is an important factor in developing customer loyalty and differentiating our service from that of our competitors.
We engage a third party to publish and distribute SKY VIEW, our monthly magazine that details all of the channels and program listings available on SKY. SKY VIEW includes monthly programming, a guide to movies, general interest articles about actors, actresses, entertainment, a kids-oriented section, sports, lifestyle, culture, games, quizzes, 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 over 350,000 units. We use 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.
We sell advertising on our broadcasts to corporate and other clients and advertising agencies. We use 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 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 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, DTH 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 DTH 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. The useful life of PAS-9 is expected to be approximately 15 years. We pay a monthly service fee of U.S.$1.7 million for service from all 12 transponders. Televisa, News Corporation and Liberty Media have historically guaranteed our payments to PanAmSat in proportion to their respective beneficial interests in us. Recently, Televisa and PanAmSat agreed to reduce Televisa's proportionate share of the guarantee from 60% to 51% (with News Corporation guaranteeing the remaining 49%) until the full exercise of the options to News Corporation granted to Innova and Innova Holdings, at which point Televisa's guarantee will be adjusted to cover a percentage of the transponder lease obligations equal to its percentage ownership of us at that time.
PAS-9 is located at 58.0(degree) (degree) West longitude, and 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. 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."
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
Commonly, our subscribers use a 80-centimeter satellite receiver antenna to receive our signal; however, if required, subscribers could use a 1.2-meter satellite receiver antenna to receive our signal, depending on the subscriber's location within the country. 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 embedded 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 decode 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 regularly replacing our subscribers' Smart Cards as a security measure intended to reduce
the risk of piracy and as part of this preventive strategy, we have decided to carry out a new smart card change over process during 2005. We estimate that this process will have cost approximately U.S.$16.0 million.
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 Mosaic channel guide, which shows eight to sixteen direct links to our television channels, categorized into various user-friendly groupings, including, but not limited to, entertainment, movies, kids, sports and pay-per-view. Our customers also have on-screen access to their account statements.
In 2004, we purchased IRDs from Motorola, Inc. and from Thomson Commercial Electronics, who operate manufacturing plants in Sonora and Chihuahua, Mexico, respectively. There are other suppliers, including affiliates of Philips Commercial Electronics Corporation N.V., Humax Co., Ltd, a South Korea-based manufacturer and Pace Microtechnology plc, that also manufacture IRD equipment that may be compatible with our system. We are currently engaged in negotiations with other suppliers to provide us IRDs. We also purchased new set-top boxes known as personal video recorders, or PVRs, from UEC Technologies (Pty) Limited, a wholly-owned subsidiary of Allied Technologies Limited, a leading South African high-technology group involved in the development of telecommunications products.
During 2003 and 2004, we continued to purchase the set-top box type "World Box2", from Motorola and we recently began purchasing IRDs from Thomson to provide our Sky Interactive service. The new set-top boxes from Thomson have some additional new features, such as digital 5.1 audio support and the TV Link, which allows a subscriber to connect an IRD to a second remote TV set and control it through a simple interface using the same remote control. Additionally, this new IRD allows the connection of up to four set-top boxes in the same household, using a technology and card security control to prevent subscribers from taking the IRDs to a non-authorized location through a blackout of the signal.
The "World Box 2" set-top box and interactive service allow subscribers to choose camera angles for soccer matches, watch specific content and obtain statistics about favorite teams and players. Recently, we have included in some channels HTML-interactive applications, such as statistics, brief comments and news as the first phase of our interactive services. 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. These value-added services could represent a competitive advantage in our market.
We rent the IRDs and provide the remote control and smart cards to subscribers, but retain title over them to help facilitate the recovery of the equipment if subscribers terminate service or do not pay their fees. In contrast, due to the recent market introduction and cost of the PVRs, our strategy has been to sell PVRs to subscribers and to provide the remote control and smart cards to subscribers on a rental basis.
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. Digitized signals are compressed using the MPEG-2 standard, encrypted and multiplexed into a Digital Video Broadcasting transport stream of the DVB-S standard and modulated for transmission to the satellite transponders we use. NDS previously provided the necessary equipment to digitize, compress, encrypt and multiplex the signals transmitted to the satellite by Innova's uplink facilities. NDS is no longer in the business of supplying compression equipment. Therefore, starting in 2003, these technologies were 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 U.S. In late 2004, additional compression technology was provided by Harmonic Inc, a third party U.S. company which designs, manufactures and sells digital video systems and fiber optic systems that enable network operators to provide a range of interactive and advanced digital services. There are other providers who provide such technology at comparable prices.
NDS provides our conditional access system, including the Smart Cards necessary to decode the signal at the subscriber's home, and 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 S.p.A. 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 a program.
Accordingly, the conditional access system is central to the security network that prevents unauthorized viewing of programming.
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 related equipment from NDS, 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. 35.8 million. As part of this preventive strategy, we have decided to carry out a new smart card change over process during 2005. We estimate that this process will cost approximately U.S.$16.0 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 our 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 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 first subscriber management system. We entered into a second License Agreement with NDS, dated August 3, 1998, for the design, development and implementation of our former SMS, Provider II.
In November 2003, we completed the implementation of a new SMS to support the growth of our subscriber base based on software, licenses, hardware and implementation and advisory services we had previously purchased from CSG. We also used the development and support of software applications and advisory services from Siebel and NDS to complete the requirements of the new system. 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. This system is currently in service and is fully operational. We terminated our agreement with NDS relating to the maintenance of our old SMS at the end of 2003. We believe our SMS allows us to provide a more effective management and billing services to our subscribers. Among other things, we believe our SMS:
- gives us greater flexibility to control different variables that are part of our service than did our previous SMS;
- allows us to improve our ability to respond to our subscribers' account management needs and aid them in reporting on their service;
- provides greater billing flexibility,
- allow us to improve overall system efficiency; and
- offers several options for marketing our services.
See "Item 4 -- Information on the Company -- History and Development of the Company -- Capital Expenditures;" "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;" and " -- Subscriber Management System."
Trademarks
The Sky trademarks are trademarks of British Sky Broadcasting Limited, in which News Corporation has approximately 36% interest, and are licensed to us for an infinite duration and on an exclusive basis in Mexico 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.
SEASONALITY
From time to time, we offer special promotions targeted at particular local areas in response to local competitive conditions. These promotions often have the effect of boosting subscriber numbers at a particular time of the year. For instance, year-end promotions boost subscriber numbers during the Christmas season. However, the timing and benefits of such promotions are subject to change from year to year.
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 focused 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 compete with national broadcast networks and regional and local broadcast stations, movie theaters, video rental stores, radio stations, internet and other entertainment and leisure activities.
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 192 digital channels (123 video, 32 audio and 37 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, TVE and Antena 3 (Spanish), NHK (Japanese) and TV Globo (Brazilian).
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, 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 the technology, 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 competitive technologies.
The growth of our subscriber base depends on our ability to offer the services that our customers demand and to respond effectively to technological developments in the pay television industry that may allow our competitors to offer new and expanded services. In late 2003, the SCT authorized cable television providers to begin providing the services of bi-directional data transmission, which permits them to provide their customers enhanced television, interactive programming services, near-video-on-demand services, video-on-demand services and e-commerce applications. Currently, the three major cable operators are focusing on actively promoting these additional value added services, including high-speed Internet access. We are continuously analyzing the possible impact that these new services could have in the Mexican pay-TV market as they become available in the market.
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
- major cable operators, including Cablevision, have already, or are in the process of upgrading, their plant and facilities to the digital technology that allows them to offer digital set-top boxes with new value-added services, including Internet access and bi-directional data transmission, which permits them to provide their customers enhanced television, interactive programming services, near-video-on-demand services, video-on-demand services and e-commerce applications.
We believe our programming content has proven market appeal when compared to that of 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 pay-TV provider offering all the over-the-air broadcast signals from Mexico City (except Channel 40), as well as signals from the State of Mexico, Guadalajara, Monterrey, Puebla and Veracruz.
While we do not compete directly with over-the-air broadcast channels for pay-TV subscribers, we do emphasize our DTH exclusive 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 TV Azteca. Prior to 2002, we were able to re-broadcast TV Azteca's over-the-air channels free of charge. In January 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, as well as access to soccer matches for which TV Azteca has broadcast rights. In May 2005, we entered into new three-year agreements with TV Azteca to continue to re-broadcast its over-the-air channels and to have the pay-TV exclusive broadcast rights for various soccer matches. As part of the new over-the-air channels agreement, we will receive no less favorable terms than the terms offered by TV Azteca to any other unaffiliated party when renewing this agreement. While viewers in Mexico City have access to a number of free over-the-air channels, viewers in some rural areas of Mexico have limited access to free over-the-air channels and reduced picture quality.
Megacable, Grupo Cablemas and Cablevision are currently offering digital cable television services and other value-added services as high speed Internet access through cable modems. They offer basic and premium digital packages to its subscribers, as well as "a la carte" channels, high speed internet access and other value added services.
Televisa holds a controlling, majority interest in Cablevision, Mexico's third largest cable system, which competes directly with us for customers in the pay television market in the Mexico City area. Cablevision offers a basic digital package with 111 channels, including the nine television channels broadcast in Mexico City and 20 audio channels. Cablevision also offers five digital premium packages and 28 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 Businesses Which Compete with Us for Customers and Business Opportunities." Furthermore Cablevision is a major digital cable television operator and high speed Internet access provider (through cable modem) in Mexico City. Its network consists principally of fiber optic and coaxial cable and during the last two years Cablevision has been expanding and upgrading its existing
cable network into a broadband bi-directional network. Cablevision has recently announced that it plans to deliver during 2005 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 continues 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. In March 2005, Cablevision launched its "CableAdvance" DVR service.
Multivision, a MMDS operator in Mexico City, offers services in 9 other cities, including Guadalajara, Monterrey, Leon, Tuxtla Gutierrez, Merida, Villahermosa, San Luis Potosi, Toluca, and Queretaro. Multivision's customers can currently receive up to 23 channels, excluding pay-per-view channels and conventional "over-the-air" channels. During 2002, Multivision re-launched its programming packages, offering only two packages, "MASTV" and a premium package, which include 15 or 23 channels, respectively. Currently, Multivision's subscribers pay an average initial one-time installation charge equal to Ps. 199 and a monthly fee of Ps. 95 for 15 channels of its "MASTV" programming package or Ps. 285 for 23 channels in its premium package, which includes 8 channels of movies (HBO, Cinecanal, Cinecanal 2, Movie City east, Movie City west, Cinemax east, Cinemax west and The Film Zone). We believe that our programming content has proven market appeal in comparison to our MMDS competitors. We distinguish our service from MMDS by offering nationwide 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."
C-band DTH
Domestic 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
In October 2004, DIRECTV announced that it was shutting down its operations in Mexico and as a result, after the shut down is completed, we will be the only operator of DTH satellite services in Mexico. DTVLA provides service in 28 countries throughout Latin America including Brazil, Mexico, Argentina, Venezuela, Chile, Colombia, Ecuador, Guatemala, Puerto Rico and Trinidad and Tobago. We believe that our programming content has proven market appeal, in comparison to our pay-TV competitors. See " -- Cable Television and MMDS."
While several companies such as Satcorp, S.A. de C.V., TVI Sat, S.A. de C.V., Corporacion Medcom, S.A. de C.V. and MVS Multivision, S.A. de C.V. 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.
In addition to these DTH providers, the continued growth of our subscriber base is subject to our continued efforts to reduce pirating of pay-TV signals. See "Item 3 -- Key Information -- Risk Factors -- Risk Factors Related to Our Business -- We Could Lose Subscribers and Revenue If Other Are Able to Steal Our Signals." 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 conditions set forth in the DTH Protocol.
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 some 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 material obligations or conditions specified in the concession;
- unlawful assignment, transfer or encumbrance of the concession, any rights or assets used for the exploitation of the concession;
- failure to pay to the Mexican government the required fees;
- 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. Currently, such fees are calculated applying a 3.5% rate on our programming 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 voting equity of DTH system concessionaires. Foreign investors may increase their economic participation in the equity of a concessionaire through neutral investment mechanisms under the Ley de Inversion Extranjera, or 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 and COFETEL monitor compliance with Mexican law and other applicable legislation through periodic inspections. Concessionaires must file annual and quarterly reports with the SCT that include financial statements, and provide any other information required by the SCT or COFETEL.
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 COFETEL 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 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 that 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 Equity Interests
According to our concession, we must file with the SCT, no later than April 30 of each year, a list of our ten principal equity owners and their corresponding ownership percentages. In the event of any proposed new issuance or sale of equity interests in a transaction or series of transactions representing 10% or more of our 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 social parts 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.
Protection of Rights
Under Mexican law, including the Codigo Penal Federal, or Federal Criminal Code, and the Ley Federal del Derecho de Autor, or Federal Copyright Law, 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 some exceptions, revenues from our pay television services were 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 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 and we continue proceedings to recover the approximately U.S.$18.0 million paid for this excise tax during 2002; however, we cannot assure you that we will be able to recover any portion of the amounts paid for this excise tax during 2002.
In December 2002, the Mexican 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. In response, we filed a new amparo proceeding challenging the constitutionality of the tax. We obtained a favorable ruling in this proceeding; however, we were not able to obtain a final favorable judgment. Therefore, we will not be able to recover the approximately U.S.$16.0 million paid for this excise tax during 2003. The 10% excise tax on telecommunications was definitively eliminated as of January 2004. From this date and going forward we do not have to pay this excise tax; therefore, we have been and will be able to lower our overall tax exposure and retain a higher proportion of our revenues, without any modification in prices to our 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 de Autores y Compositores de Musica, non-profit organization that support and protect Mexican 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. 5,700 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
- 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. From 1999 through November 27, 2000, we paid 3.5% of our programming revenues 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 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 of our produced channels. A channel is considered a produced channel so long as the domestically produced programming represents at least 20% of the total daily programming broadcasted through such channel. We also need to consider if our agreements with our programming providers allow us to broadcast such advertising.
We were required to post a bond with an approved bonding institution in the original 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. 6.8 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 U.S. government denies "most favored nation" treatment to Mexican satellite services in the United States satellite market;
- 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. As of December 31, 2004, more than 57% of our subscriber base resided in States that together constitute approximately 58% of total population; 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. For more information on our owners, see "Item 4. Information on the Company -- History and Development of the Company -- Strong Sponsorship."
Effective as of September 9, 2003, our owners capitalized all loans made by them or any of their affiliates to us. The amount of the loans and accrued interest capitalized as of September 9, 2003 was approximately Ps. 4.5 billion. The capitalization did not affect the direct and indirect percentage ownership interests in us of our owners. The lenders contributed, assigned and transferred to Innova Holdings, S. de R.L. de C.V., a then-newly incorporated limited liability company with variable capital, all their loans and accrued interest owing at the time of the capitalization in exchange for social parts in Innova Holdings. Innova Holdings, in turn, contributed, assigned and transferred such loans and accrued interest to us. In exchange for this capital contribution, Innova issued to Innova Holdings new Series C limited-voting social parts. After giving effect to the capitalization, Televisa continues to indirectly own 60%, News Corporation continues to indirectly own 30% and Liberty Media continues to indirectly own 10% of Innova. If the transactions contemplated by the agreements with DIRECTV are consummated, Televisa would own approximately 57% of the equity interest in Innova and DIRECTV and DTVLA would collectively own the remaining 43% equity interest in Innova. See "Item 4 - Information on the Company - History and Development of the Company."
We are a holding company and almost all of our operations occur in, and almost all of our assets are held by, our six subsidiaries:
- Corporacion de Radio y Television del Norte de Mexico, S. de R.L. de C.V., which owns all of our transmission equipment, including the capital lease of the PAS-9 satellite, and holds our concession to operate our DTH system from the Mexican government;
- Corporacion Novavision, S. de R.L. de C.V., which is our operating company;
- Corporacion Novaimagen, S. de R.L. de C.V., which manages our administrative personnel and marketing department;
- Servicios Novasat, S. de R.L. de C.V., which manages our sales and installation personnel;
- Servicios Corporativos de Telefonia, S. de R.L. de C.V., which operates the call center we acquired from Merkatel in 2001; and
- Nova Call Center, S. de R.L. de C.V., which operates certain specialized areas of our call center.
GROUP STRUCTURE OF INNOVA
The diagram below illustrates the current corporate structure of Innova, but does not reflect changes to our ownership that may occur as a result of the transactions we entered into in October 2004. See "Item 4 - Information on the Company - History and Development of the Company."
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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 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 additional space from unaffiliated third parties, from which our regional sales and other operations are conducted. We lease all of these properties through wholly owned subsidiaries. These properties consist of approximately 212,000 square feet in the aggregate and are located throughout Mexico.
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 " -- 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 forward-looking statements. See "Item 3 -- Key Information -- 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.
OVERVIEW
We have operated a digital Ku-band DTH satellite pay television service in Mexico since 1996. Since our inception, we have sustained substantial net losses and, until 2002, substantial negative net operating cash flow. These losses have been due primarily to start-up costs we incurred in developing our DTH service, satellite transponder commitments, subscriber acquisition costs 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 first seven full years of operations. Accordingly, we have relied substantially upon proceeds from our senior notes, loans and capital contributions by Televisa, News Corporation and Liberty Media to fund our operations and more recently from a bank loan to refinance our debt. However, we were able to generate positive net operating cash flow in 2003 and 2004 due to substantial subscriber growth and we did not require additional funding from our equity owners. In 2003 and 2004, we generated the necessary liquidity from our operating cash flow to cover our operating costs and satellite transponder costs as well as our interest payments to bondholders. In addition, in 2004 we achieved net income for the first time. However, we may continue to experience net losses for the next several years while we continue to improve and expand our DTH service. Moreover, our expansion plans will continue to require substantial capital expenditures and investments, and, although we expect to generate sufficient cash flow for the expansion, we cannot assure you that our business will generate the necessary profits or positive cash flow. See " -- Liquidity and Capital Resources."
We believe five elements drive the growth in our subscriber base:
- our programming content and exclusive special events;
- our extensive distribution network and direct sales force;
- our high quality customer service;
- our competitive pricing policy; and
- our enhanced TV features and technology.
Our DTH revenues are principally a function of the number of our subscribers, the mix of programming packages selected by our subscribers and the rates charged. We derive most of our revenues from DTH programming fees, subscription fees, installation fees, rental fees and membership fees paid by our subscribers, as well as SKY VIEW magazine and advertising sales. We currently lease downconverters or IRDs to our subscribers, and since October 2000 we have retained title to the antennas and LNBs that we provide 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 SkyKit sales. IRD rental fees, subscription fees, membership fees, along with SKY VIEW magazine and advertising sales revenue, accounted for approximately 41%, 37% and 36% of our revenues in the years ended December 31, 2004, 2003 and 2002, respectively. Programming fees, channel fees, pay-per-view fees, and special events fees accounted for approximately 56%, 60% and 61% of our revenue in the years ended December 31, 2004, 2003 and 2002, respectively. All of our revenues are generated in Mexico, primarily from residential subscribers.
Our principal operating costs and expenses originate from:
- programming costs;
- subscriber management expenses (including call center costs);
- costs relating to providing, replacing and refurbishing equipment for subscribers;
- transmission and related functions, including uplink and downlink services; and
- marketing and administrative expenses.
Our programming includes Televisa's four over-the-air channels, which we offer on a DTH exclusive basis, and pay-TV exclusive soccer games, reality shows and special events. In addition to these basic programming costs, we incurred further programming and free special events costs during the first five months of 2005 in order to continue to offer exclusive events, such as the Big Brother 3R reality show, and high profile sporting events, including the Mexican soccer tournaments, the Mexican baseball league, the NFL Sunday Ticket, the 2006 FIFA World Cup and golf tournaments, to current and potential subscribers to introduce them to our new product offerings.
CAPITAL RESTRUCTURING
Effective as of September 9, 2003, our owners capitalized all loans made by them or any of their affiliates to us. The amount of the loans and accrued interest capitalized was approximately Ps. 4.5 billion as of September 9, 2003. The capitalization did not affect the direct and indirect percentage ownership interests of our owners. The lenders contributed, assigned and transferred to Innova Holdings, S. de R.L. de C.V., or Innova Holdings, a newly incorporated limited liability company with variable capital, all of their loans and accrued interest owing at the time of the capitalization in exchange for social parts in Innova Holdings. Innova Holdings in turn contributed, assigned and transferred such loans and accrued interest to us. In exchange for this capital contribution, Innova issued to Innova Holdings new Series C limited-voting social parts. After giving effect to the capitalization, Televisa, News Corporation and Liberty Media continue to indirectly own 60%, 30% and 10% of Innova, respectively.
On September 12, 2003, we sold U.S. $300.0 million in principal amount of 9.375% senior notes due 2013. On October 20, 2003, we used the net proceeds of that offering together with available cash, to redeem U.S. $287.0 million in principal amount of our 12 7/8% senior notes due 2007, including a redemption premium, accrued interest, Mexican withholding taxes and related fees and expenses. After redeeming this principal amount, U.S. $88.0 million in principal amount of the 12 7/8% senior notes remained outstanding.
In October 2004, DIRECTV announced the shut down of its operations in Mexico. DIRECTV, through its indirect subsidiary Grupo Galaxy Mexicana S. de R.L. de C.V. (Galaxy Mexico) sold its subscriber list to our subsidiary Corporacion Novavision S. de R.L. de C.V (Novavision) in exchange for two notes with an aggregate principal amount totaling approximately Ps. 621.1 million and potential payments in the future depending on the number of subscribers that successfully migrate to our service. In addition, we, Televisa, News Corp., Liberty Media and Globopar entered into a series of transactions with each other and with The DIRECTV Group, Inc., or DIRECTV, relating to our DTH joint ventures, which, if consummated, would result in DIRECTV and DTVLA owning approximately 43% of our equity and Televisa owning the remaining 57% of our equity. See "Item 4 -- Information on the Company -- History and Development of the Company."
In December 2004, we entered into a Ps. 1,012 million, 7-year bank loan agreement with a fixed interest rate of 10.55%. Televisa and News Corporation are guaranteeing this loan 51% and 49%, respectively. The net proceeds from the loan were used on January 7, 2005 to redeem the remaining U.S. $88.0 million principal amount of our outstanding 12 7/8% notes due 2007, plus accrued and unpaid interest.
EXCISE TAX
As described in "Item 4. Information on the Company -- Business Overview -- Mexican Regulation of DTH Services -- Telecommunications Tax," the 10% excise tax on revenues from telecommunications services was eliminated as of January 2004. As of this date we no longer have to pay this excise tax and we have therefore been able to lower our overall tax exposure and retain a higher proportion of our revenues without any modification in the prices we charge to our subscribers.
TREND INFORMATION
During the first quarter of 2005, we continued to increase our subscriber base. As of March 31, 2005, we had approximately 1,107,500 subscribers, including 63,400 commercial subscribers. This represents a 25.0% increase from 886,100, including 50,200 commercial subscribers as of March 31, 2004. We believe the increase in subscriber activations is due to two components, which include (i) our aggressive marketing campaigns, the high quality and variety of our programming content, our unique exclusive events, and the high quality of our customer
service and (ii) the migration of new subscribers from DIRECTV Mexico who have elected to switch to our service. While we believe both components contributed to the subscriber growth during the first quarter of 2005, most of the growth was due to the migration of subscribers from DIRECTV Mexico. We cannot be certain that the trend in subscriber growth will continue in the future.
The increase in our subscriber base has been partially offset by subscriber cancellations. However, we have been successful in reducing our annual churn rate, which we define as (i) the number of subscribers who cancel their subscriptions during the year, divided by (ii) the sum of the total number of subscribers at the beginning of the year and the number of new subscribers added during the year. For the year ended December 31, 2004, our churn rate was approximately 15%.
As a result of our first quarter subscriber growth, net sales increased to Ps. 1,303.5 million for the three months ended March 31, 2005, a 14.2% increase over our net sales for the same period in 2004. We also reported net income of Ps. 204.3 million for the three months ended March 31, 2005 as compared to Ps. 153.4 million for the same period in 2004.
We believe that the high quality of our programming, our exclusive events, aggressive marketing campaigns and our customer service will continue aiding our efforts to increase our subscriber base. However, although we anticipate continued improvement in net sales, we remain concerned that various macroeconomic effects, including continued anemic growth in the Mexican GDP or a Peso devaluation as compared to the U.S. Dollar, could detrimentally affect our future financial results.
OPERATING RESULTS
NET SALES
Our net sales consist of fees paid by subscribers to receive one of our programming packages and various pay-per-view services. We recorded net sales of Ps. 4,769.0 million for the year ended December 31, 2004, an increase of Ps. 749.9 million, or 18.7%, as compared to Ps. 4,019.1 for the year ended December 31, 2003. This increase was primarily due to (i) the growth of our subscriber base; (ii) the fact that from January 1, 2004 we no longer had to pay the 10% excise tax on revenues from telecommunications services; (iii) the fact that we have not had to modify the prices we charge to our subscribers; and (iv) additional pay-per-view revenues.
We recorded net sales of Ps. 4,019.1 million for the year ended December 31, 2003, an increased of Ps. 264.3 million, or 7.0%, as compared to Ps. 3,754.8 for the year ended December 31, 2002. This increase was primarily due to the sustained growth of our subscriber base.
We have not raised our subscriber fees since January 2002 when we effectuated a fee increase to offset the 10% excise tax on telecommunications services that was in existence at the time.
We have experienced sustained and continued growth in the number of subscribers each year since our inception, which generally increases our net sales. Our subscriber base experienced a 17.0% increase during 2004, as compared to 16.1% in 2003. In 2004, we increased our subscriber base from approximately 856,600 (including approximately 48,500 commercial subscribers) as of December 31, 2003 to approximately 1,002,500,(including approximately 60,700 commercial subscribers) as of December 31, 2004. We believe that our subscriber growth increased during 2004 due primarily to our offering of unique exclusive events, including the Big Brother reality shows, the Mexican soccer tournaments, the Copa Libertadores soccer tournament, boxing matches, golf tournaments and other exclusive sporting events. We also believe that our aggressive marketing campaigns, the lowering of our initial subscription fee and offering special promotions helped draw more subscribers.
OPERATING EXPENSES
Cost of Sales
Cost of sales for the year ended December 31, 2004 was Ps. 1,394.5 million, an increase of Ps.153.0 million, or 12.3%, as compared to Ps. 1,241.5 million for the year ended December 31, 2003. This increase was mainly due to higher programming costs associated with our larger subscriber base and increased costs related to our higher number of service activations, but was partially offset by the lower Peso amount for our U.S. dollar denominated costs, resulting from the revaluation of the Peso against the US dollar which occurred during the year.
Cost of sales for the year ended December 31, 2003 was Ps. 1,241.5 million, an increase of Ps. 79.1 million, or 6.8%, as compared to Ps. 1,162.4 for the year ended December 31, 2002. This increase was due to higher subscriber activations and related costs, as well as higher U.S. Dollar-denominated costs, such as programming costs, resulting from the growth of our subscriber base and the devaluation of the Peso against the U.S. Dollar which occurred during the year.
Our PAS-9 satellite transponder agreement with PanAmSat 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 consolidated income statement. We recognized total satellite costs of Ps. 281.7 million for the use of the PAS-9 satellite during the year ended December 31, 2004. Of this amount, Ps. 110.6 million was recognized as depreciation expense and Ps. 171.1 was recognized as interest expense.
We recognized total satellite costs of Ps. 291.7 million for the use of the PAS-9 satellite during the year ended December 31, 2003. Of this amount, Ps. 113.0 million was recognized as depreciation expense and Ps. 178.7 was recognized as interest expense.
We recognized total satellite costs of Ps. 281.9 million for the use of the PAS-9 satellite during the year ended December 31, 2002. Of this amount, Ps. 107.2 million was recognized as depreciation expense and Ps. 174.7 was recognized as interest expense.
For the years ended December 31, 2004, 2003 and 2002, we incurred a total of Ps. 852.9 million, Ps. 767.5 million and Ps. 719.0 million in programming fees, respectively, representing an increase of Ps. 85.4 million, or 11.1%, from 2003 to 2004, and Ps. 48.5 million, or 6.7%, from 2002 to 2003. 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 the programming fees we pay to our programming providers; however, in some cases, we benefit from volume-based discount rates. Programming fees are expected to increase in 2005 as the number of subscribers and audience levels increase; however, we also expect to receive the benefit of larger volume based discounts. In addition, programming fees are expected to increase as a result of the additional new programming that we have obtained, such as the NFL Sunday Ticket and the 2006 FIFA World Cup. In connection with the transactions that took place in October 2004, we and Televisa entered into two channel licensing agreements pursuant to which we will pay Televisa a royalty fee to carry its over-the-air channels on our DTH service. See "Item 4 -- Information on the Company -- History and Development of the Company."
We receive uplink and downlink services from DTH TechCo at its Florida facilities and from Televisa at its Mexico City facility. In 2004, we expensed approximately Ps. 139.3 million for these costs as compared to approximately Ps. 137.4 million for the year ended December 31, 2003 and Ps. 132.0 million for the year ended December 31, 2002. Under the terms of our agreement with DTH TechCo, we will pay DTH TechCo approximately Ps. 89.2 million (approximately U.S.$8.0 million) per year for uplink and downlink services over the ten-year life of the agreement, which expires in December 2007. 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 approximately Ps. 51.3 million (approximately U.S.$4.6 million) per year. We negotiate these fees with Televisa at least once a year and we believe that the fees we pay for these services are comparable to what we would have paid an unaffiliated third party for similar services.
Our payment of 3.5% of programming revenues each year to the Mexican government under the terms of our concessions is included in our cost of sales. These payments will continue through the remainder of the terms of our concessions, which are expected to run through 2026 with respect to our concession to use domestic satellites and through 2020 with respect to our concession to use foreign satellites. 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 employee salaries and benefits, insurance, and professional fees. Administrative expenses of Ps. 132.6 million for the year ended December 31, 2004 remained flat as compared to Ps. 131.5 million for the year ended December 31, 2003, as we have improved our platform and continued our strict budget control. In the year ended December 31, 2003, our administrative expenses decreased Ps. 1.4 million or 1.0% to Ps. 131.5 million from
Ps. 132.9 million for the year ended December 31, 2002, primarily due to lower salary and employment-related costs.
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. For the year ended December 31, 2004, our selling expenses increased Ps. 85.0 million, or 9.5%, to Ps. 977.4 million from Ps. 892.4 million for the year ended December 31, 2003. This increase was principally due to (i) higher promotional costs and increased commissions we paid; (ii) more free special events offered to subscribers, and (iii) an increase in collections paid to banks.
In the year ended December 31, 2003, our selling expenses decreased Ps. 18.4 million, or 2.0%, to Ps. 892.4 million from Ps. 910.8 million for the year ended December 31, 2002. This decrease was primarily due to lower costs associated with the free special events offered to subscribers in 2003.
Other Operating Expenses
Other operating expenses include direct and indirect customer service costs, including call center and repair service personnel, equipment maintenance, repairs and IRD refurbishment costs.
For the years ended December 31, 2004, 2003 and 2002, we recorded Ps. 525.2 million, Ps. 500.4 million and Ps. 527.0 million, respectively, in other operating expenses. Other operating expenses increased by Ps. 24.8 million, or 5.0%, in 2004, mainly due to higher call center costs and expenses related to the repair of equipment. The decrease of Ps. 26.6 million, or 5.0%, in 2003 was primarily due to lower operating personnel costs resulting from reduced headcount and related expenses.
We expect other operating expenses, including maintenance and repair of equipment such as IRDs, to continue to increase as a result of growth in the number of our subscribers and as a result of our increased success in recovering and repairing IRDs, which, in some instances, enables us to avoid purchasing new IRDs at higher costs.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization includes depreciation of property and equipment and amortization of intangible assets.
We recorded Ps. 764.5 million in depreciation and amortization for the year ended December 31, 2004, as compared to Ps. 850.6 million for the year ended December 31, 2003 and Ps. 1,011.8 million for the year ended December 31, 2002. The decrease of Ps. 86.1 million from 2003 to 2004 was primarily due to lower asset depreciation charges based on the lower cost of replacement assets and the cumulative depreciation of older equipment . The decrease of Ps. 161.2 million from 2002 to 2003 was primarily due to lower amortization charges during 2003 since some intangible assets were fully amortized in 2002, and a lower asset depreciation charge. The lower asset depreciation charge is due to the fixed assets (principally IRDs) we acquired, which cost less than the assets they replaced.
We capitalize and amortize the equipment we provide to subscribers, including IRDs, antennas, LNBs, smart cards and remote controls. IRDs are amortized over five years, while the rest of the equipment is amortized over three years. Consequently, the overall amounts we amortize will continue to rise over the next few years as we cumulatively amortize more IRDs, antennas, LNBs, smart cards and accessories. Those amounts will also increase as the number of our subscribers increases.
INTEGRAL RESULT OF FINANCING
High inflation can have a significant detrimental impact on our financial statements. Mexican GAAP requires us to present all financial effects of operating and financing the business under inflationary conditions in our consolidated statement of income (loss). 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;
- net gains or losses resulting from holding monetary assets and liabilities exposed to inflation; and
- gains or losses on derivative financial instruments.
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. In addition, the reverse is also true; if we have monetary liabilities that exceed our monetary assets during periods of inflation, we will generate a monetary gain.
We reported a integral cost of financing of Ps. 387.3 million, Ps. 1,258.3 million and Ps. 1,802.3 million for the years ended December 31, 2004, 2003 and 2002, respectively. The decrease in cost in the last two years has been primarily due to (i) lower foreign exchange losses, principally due to the capitalization of our loans from our equity owners; (ii) reducing our cost of debt by redeeming our 12 7/8% senior notes, and (iii) reducing our overall foreign exchange exposure. We generated monetary gains for the years ended December 31, 2004, 2003 and 2002, of Ps. 308.3 million, Ps. 331.7 million and Ps. 545.4 million, respectively. The decrease in the gain from monetary position for 2004 as compared to 2003 was due to the decrease in net monetary liabilities in Peso terms, and the decrease in the gain from monetary position for 2003 as compared to 2002 was due to the decrease in net monetary liabilities in Peso terms and a decrease in Mexican inflation.
CROSS CURRENCY SWAP
On February 13, 2004, we entered into two separate derivative transactions denominated "cross coupon swap" agreements to hedge a portion of our U.S. Dollar foreign exchange exposure resulting from the issuance of our U.S. $300.0 million 9.375% senior notes that mature in 2013. Under the transactions, we receive semi-annual payments calculated based on an aggregate notional amount of U.S. $300.0 million at an annual rate of 9.375%, and we make monthly payments calculated based on an aggregate notional amount of Ps. 3,282.2 million at an annual rate of 10.25%. The transactions, both of which terminate in September 2008, will reduce our foreign exchange exposure on ten interest coupon payments on the senior notes we issued in September 2003.
Additionally, during the fourth quarter of 2004, we entered into several forward contracts to reduce our exposure to depreciation of the peso in U.S. dollar terms, reducing the risk when our obligations in U.S. dollars become payable. We intend to continue to enter into similar transactions on a regular basis in order to reduce our foreign exchange exposure.
PROVISION FOR TAXES
Provision for taxes includes reserves for corporate income tax, asset tax, deferred income tax and employees' statutory profit sharing. Due to operating losses, we have not been required to make any provision for income taxes, and we do not expect to make such provisions until we earn tax profits that exceed our offsetting tax loss carry-forwards. As of December 31, 2004, we had total tax loss carry-forwards of Ps. 7,902.6 million that we may, under some circumstances, carry forward over ten years from the period in which they were generated. See Note 16 to our financial statements.
As a result of changes to the Mexican Income Tax Law which was enacted in 2004 but which became effective January 1, 2005, the corporate income tax rate was reduced from 33% (effective in year 2004) to 28%. However by means of an annual disposition the reduction is going to be gradual with rates of 30% for year 2005, 29% for year 2006 and 28% for year 2007.
We are also subject to an asset tax on the book value of some assets. However, any income tax payments may be credited against asset tax payments. In 2001, 2002, 2003 and 2004 the asset tax rate has been 1.8%. Until December 31, 2004 taxpayers could not deduct from their asset tax bases debt contracted with nonresident companies or financial intermediaries. We challenged these provisions of Mexico's Ley del Impuesto al Activo, or Asset Tax Law, but at the same time, and in order to avoid penalties and interest payments in the event we lose the appeal, we paid approximately Ps. 43.2 million of asset tax for the year ended December 31, 2001; approximately
Ps. 45.2 million for the year ended December 31, 2002; and approximately Ps. 7.5 million for January and February of 2003.
On March 19, 2003, the court issued a resolution in our favor. Because the declaratory judgment was favorable to us, we were be able to deduct debts payable to nonresidents from the asset tax base. As of today, we have already recovered the amounts paid as described above.
As of January 1, 2005, the Assets Tax Law allows the subtraction from taxable assets of debt contracted with entities that are part of the financial system as well as debts contracted with nonresident entities.
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 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 significant respects from U.S. GAAP.
Net income (loss) under U.S. GAAP for the years ended December 31, 2004, 2003 and 2002 was Ps. 599.3 million, (Ps. 822.1 million) and (Ps. 1,968.2 million), respectively. Equity owners' deficit under U.S. GAAP as of December 31, 2004 and 2003 was (Ps. 2,972.7 million) and (Ps. 3,751.8 million), respectively. Differences between Mexican GAAP and U.S. GAAP for the years ended December 31, 2004, 2003 and 2002 include, but are not limited to: revenue recognition; the recognition of the derivative financial instruments; adjustments to reflect differences in the restatement of property and equipment; the provision for costs associated with re-pointing our subscribers' antennas from Solidaridad 2 to PAS-9, and the reversal of 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, 2004, see Note 20 to our consolidated financial statements.
Under U.S. GAAP, cash flows provided by operating activities were Ps.960.3 million, Ps. 498.6 million and Ps. 334.4 million as compared to resources provided by (used in) operating activities of Ps. 1,245.4 million, (Ps. 596.7 million) and (Ps. 364.3 million) under Mexican GAAP for the years ended December 31, 2004, 2003 and 2002, 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. 308.3 million, Ps. 331.7 million and Ps. 545.4 million for the years ended December 31, 2004, 2003 and 2002, respectively, and unrealized foreign currency gains and (losses) of Ps. 39.0 million, (Ps. 243.6 million) and (Ps. 1,118.8 million), respectively.
Cash flows provided by financing activities under U.S. GAAP were Ps. 936.7 million, Ps. 259.9 million and Ps. 288.3 million as compared to resources provided by financing activities of Ps. 607.2 million, Ps. 1,295.3 million and Ps. 953.8 million under Mexican GAAP for the years ended December 31, 2004, 2003 and 2002, 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.
Cash flows (used in) investing activities under U.S. GAAP were (Ps. 683.9 million), (Ps. 499.0 million) and (Ps. 368.7 million) as compared to resources (used in) investing activities of (Ps. 674.9 million), (Ps. 471.1 million) and (Ps. 347.3 million) under Mexican GAAP for the years ended December 31, 2004, 2003 and 2002, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have sustained substantial net losses and, until 2002, substantial negative net operating cash flow. These losses have been due primarily to start-up costs we incurred in developing our DTH service, satellite transponder commitments, subscriber acquisition costs 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 first seven full years of operations. Accordingly, we have relied substantially upon proceeds from our senior notes, loans and capital contributions by Televisa, News Corporation and Liberty Media and more recently from a bank loan to fund our operations. In 2003 and 2004, we generated the necessary liquidity from our operating cash flow to cover our operating costs and satellite transponder costs as well as our interest payments to bondholders. However, we may continue to experience net losses for the next few years while we continue to improve and expand our DTH service and our expansion plans will continue to require substantial capital expenditures and investments. Our current liquidity needs arise from the continuing improvement and expansion of our Ku-band DTH pay television service, including:
- 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 SkyKit components and the installation of the equipment at subscribers' locations; and
- the funding of other operating losses and working capital requirements.
We incurred total capital expenditures of approximately Ps. 750.0 million, Ps. 557.0 million and Ps. 520.4 million in fiscal years 2004, 2003 and 2002, respectively, which included transmission equipment, IRDs, computers, motor vehicles, LNBs and antennas and our SMS. See "Item 4 -- Information on the Company -- History and Development of the Company -- Capital Expenditures."
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, the nature of future expansion and acquisition opportunities, economic conditions, subscriber demand, technological innovation, competition and regulatory developments. The capital expenditures described above do not include acquisitions. Although the indenture governing our senior notes and our recently obtained bank loan restrict the types of assets or securities we may acquire, we can make acquisitions 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 2003, for the first time, we achieved positive net operating cash flow. Since then, cash flow from operations has funded our operating needs and other working capital requirements, including satellite transponder service costs, interest payments to noteholders and costs to acquire SkyKit components and other equipment. Based on our current business plan, we anticipate that our capital expenditure requirements for the remainder of 2005, not including potential acquisitions, will be approximately U.S.$ 85 million, but we cannot provide assurance that this will be the case. We believe that our cash on hand, together with cash from operations, will be sufficient for our cash requirements, including our capital expenditures but excluding potential acquisitions, through December 31, 2005.
We hold our cash and cash equivalent assets in both Pesos and U.S. Dollars. For the years ended December 31, 2004, 2003, and 2002 , resources provided by (used in) operating activities amounted to Ps. 1,245.4 million, Ps. (596.7 million) and Ps. (364.3 million), respectively. The increase in resources provided by operating activities from 2003 to 2004 was primarily due to the net income generated during 2004 as compared to a net loss during 2003. The positive turn in resources used by operating activities in 2002 to resources provided by operating activities in 2003 was primarily due to the lower net loss generated during 2003 as compared to 2002. At the same time, net resources provided by financing activities totaled Ps. 607.2 million, Ps. 1,295.3 million and Ps. 953.8 million, respectively, for the years ended December 31, 2004, 2003 and 2002. The net resources provided by financing activities in 2004 were primarily attributable to the proceeds from the bank loan agreement we entered into, and in 2003 the increase in net resources provided by financing activities was primarily due to the combined effect of the capitalization of loans from our equity owners, which reduced our overall debt levels and interest expenses.
Resources used in investing activities represented Ps. 674.9 million for the year ended December 31, 2004, as compared to Ps. 471.1 million for the year ended December 31, 2003 and Ps. 347.3 million from the year ended December 31, 2002. The increases in both 2004 and 2003 were due to higher capital expenditures due to increased SkyKit purchases due to higher subscriber activations and the implementation of our SMS in 2003.
Capital Restructuring
Historically, 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 U.S.$49.0 million in 1999 pro rata, based on their respective equity interests in us. Our owners also loaned us and, in one instance, our subsidiary Novavision, a total of U.S.$41.6 million in 1999. The owners lent us another U.S.$81.0 million in 2000, U.S.$132.8 million in 2001 and U.S.$29.5 million in 2002. On July 22, 2002, we entered into a credit agreement with our owners to memorialize the terms of some of the loans described above. This credit agreement also required 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 may obtain from our owners. The loans bore a fixed interest rate of 9% per annum and were payable at maturity, including any applicable withholding taxes, and matured ten years from the date of disbursement. Effective as of September 9, 2003, our owners capitalized all loans made by them or any of their affiliates to us. The amount of the loans and accrued interest capitalized as of September 9, 2003 was approximately Ps. 4.5 billion. We currently do not have any loans from our equity owners outstanding.
Senior Notes
We have accessed the debt capital markets to raise the necessary capital to fund operations and capital expenditures and to refinance our debt. On April 1, 1997, we issued U.S.$375.0 million in principal amount of 12 7/8% senior notes due 2007. In September 2003, we issued U.S.$300.0 million of senior notes in a private offering at a price of 100%. The notes bear interest at a rate of 9.375% and mature on September 19, 2013. We received approximately U.S.$296.0 million in net proceeds from the sale of the 9.375% notes after deducting estimated discounts and offering expenses. We used all of these net proceeds, together with available cash, to redeem U.S.$287.0 million in principal amount of our outstanding 12 7/8% senior notes due 2007, and to pay Mexican withholding taxes, a redemption premium and accrued interest. This redemption was consummated on October 20, 2003. In addition, we used the net proceeds from the bank loan described below to redeem the remaining U.S.$88.0 in principal amount of the 12 7/8% senior notes due 2007 plus accrued and unpaid interest.
Bank Loan
In December 2004, we entered into a Ps. 1,012 million, 7-year bank loan agreement with a fixed interest rate of 10.55% per annum and a five-year grace period for principal repayments with HSBC Mexico, S.A. This outstanding principal is to be repaid in eight equal quarterly payments during 2010 and 2011. Interest payments are due on a monthly basis. Televisa and News Corporation are guaranteeing this loan 51% and 49%, respectively. The net proceeds from the loan were used on January 7, 2005 to redeem the remaining U.S. $88.0 million principal amount of our outstanding 12 7/8% notes due 2007 plus accrued and unpaid interest.
We continue to have a substantial amount of indebtedness outstanding. At December 31, 2004, our consolidated debt, net of cash, was U.S.$326.6 million. In addition to our outstanding indebtedness due under the 9.375% senior notes due 2013 and our bank loan agreement, as of December 31, 2004, we had approximately U.S.$218.0 million in satellite transponder obligations. See " -- Contractual Obligations and Commercial Commitments."
The indenture governing our 9.375% senior notes due 2013 and our recently acquired bank loan significantly restrict and, in some cases, prohibit our ability and the ability of our subsidiaries to:
- incur additional debt;
- create or incur liens;
- pay dividends or make other equity distributions;
- engage in or make some payments under inter-company arrangements;
- purchase or redeem shares or social parts;
- create restrictions on the payment of dividends or other amounts by our subsidiaries;
- make investments;
- sell assets;
- issue or sell shares or social parts of some subsidiaries;
- engage in transactions with affiliates; and
- effect a merger or consolidation, or sell all or substantially all of our assets.
In addition, we are obligated to comply with various financial covenants that require our subsidiaries and us to meet and maintain specified financial performance measures and ratios. These covenants set targets related to, among other things, liquidity, coverage and leverage ratios. At December 31, 2004, we are in compliance with all covenants set forth in our senior note indentures.
We expect to continue to meet our additional ordinary course financing requirements principally through cash flow from operations. In the event of significant expenditures or acquisitions, we could make use of other sources of liquidity such as capital contributions or loans from our equity owners, public or private offerings of equity and/or debt securities, and/or commercial bank loans if they are available at a reasonable cost. Although we do not expect to need additional financing from our equity owners in 2005, we cannot assure you that we will not require such additional funding in future years. If the transactions contemplated by the agreements with DIRECTV are consummated, Televisa will own approximately a 57% equity interest in Innova and DIRECTV and DTVLA will collectively own the remaining 43% equity interest in Innova. We cannot assure you that our equity owners will provide us with additional financing in the future or that other 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 senior notes and 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 our senior notes and our bank loan agreement) 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, Affect Our Profitability and Could Lead to Difficulties in Obtaining New Sources of Financing Required to Continue Operations."
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.
OFF-BALANCE SHEET ARRANGEMENTS
As of December 31, 2004, we have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Innova's contractual obligations and commercial commitments consist primarily of credit facilities, as described above, and capital lease obligations. The following table provides details regarding Innova's contractual and commercial obligations subsequent to December 31, 2004:
PAYMENTS DUE BY PERIOD
(IN THOUSANDS OF U.S. DOLLARS)
LESS THAN 12-36 36-60 AFTER 60
TOTAL 12 MONTHS MONTHS MONTHS MONTHS
-------- --------- -------- ------- --------
2006- 2008- BEYOND
2005 2007 2009 2009
LONG-TERM LOANS
Senior Exchange Notes
due 2007(1).................... $ 88,000 $ 88,000 - -
Senior Exchange Notes
due 2013(2).................... $300,000 - - - $300,000
Bank Loan
due 2010(3).................... $ 90,770 - - - $ 90,770
CAPITAL (FINANCE) LEASE OBLIGATIONS
Capital lease - satellite
transponder(4).................... $217,997 $ 20,400 $ 40,800 $40,800 $115,997
OTHER LONG-TERM OBLIGATIONS
DTV Promissory Notes(8) $ 55,710 $ 55,710
Advertising agreement with
Televisa(5)....................... $ 11,212 $ 11,212 - - -
Advertising agreement with TV
Azteca(6)......................... $ 8,431 $ 2,960 $ 5,471 - -
Soccer games pay-TV exclusive
rights from Televisa(7)........... $ 9,053 $ 6,514 $ 2,539 - -
Over-the-air channels agreements
with Televisa(9) ................. $ 4,500 $ 4,500
Soccer games pay - TV exclusive
rights from TV Azteca(6).......... $ 4,200 $ 4,200 - - -
Rights to rebroadcast TV
Azteca channels(6)................ $ 540 $ 180 $ 180 $ 180 -
-------- -------- -------- ------- --------
TOTAL CONTRACTUAL OBLIGATIONS $790,413 $137,966 $104,700 $40,980 $506,767
-------- -------- -------- ------- --------
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(1) In April 1997, Innova issued U.S. Dollar-denominated senior unsecured fixed rate notes in an aggregate principal amount of U.S.$375.0 million, with semi-annual interest payable at a rate of 12 7/8% per annum. On October 20, 2003, we used the net proceeds of the offering of the new senior notes due 2013 to redeem U.S.$287.0 million in principal amount of our 12 7/8% senior notes due 2007. In December 2004, we entered into a Ps. 1,012 million, 7-year bank loan agreement with a fixed interest rate of 10.55%. The net proceeds from the loan were used on January 7, 2005 to redeem the remaining U.S. $88.0 million principal amount of our outstanding 12 7/8% notes due 2007, plus accrued and unpaid interest. See "Item 5 -- Operating and Financial Review and Prospects -- Liquidity and Capital Resources."
(2) In September 2003, Innova issued U.S. Dollar-denominated senior unsecured fixed rate notes in an aggregate principal amount of U.S.$300.0 million, with semi-annual interest payable at a rate of 9.375% per annum.
(3) In December 2004, Innova entered into a Ps. 1,012 million, 7-year bank loan with a fixed interest rate of 10.55% per annum and a five-year grace period for principal. The net proceeds from the loan were used on January 7, 2005 to redeem the remaining U.S. $88.0 million
principal amount of our 12 7/8% senior notes due 2007 plus accrued and unpaid interest. See "Item 5 -- Operating and Financial Review and Prospects -- Liquidity and Capital Resources." For purposes of this table, we converted our Peso obligations into U.S. Dollars at the following exchange rate: Ps. 11.149 per U.S. $1.00.
(4) 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 U.S.$1.7 million over the 15 year term of the agreement. See "Item 5 -- Operating and Financial Review and Prospects -- Operating Results -- Operating Expenses -- Cost of Sales."
(5) See "Item 7. Major Shareholders and Related Party Transactions -- Related Party Transactions -- Ongoing Service Arrangements with Other Related Parties -- Advertising." Our contractual obligations under this contract are due in Pesos. For the purposes of this table, we converted our obligations into U.S. Dollars at the following exchange rate: Ps. 11.149 per U.S. $1.00.
(6) Our contractual obligations under this contract are due in Pesos. For the purposes of this table, we converted our obligations into U.S. Dollars at the following exchange rate: Ps. 11.149 per U.S. $1.00.
(7) See "Item 7 -- Major Shareholders and Related Party Transactions -- Related Party Transactions -- Programming Arrangements with Related Parties." Our contractual obligations under this contract are due both in Pesos and U.S. dollars. For the purposes of this table, we converted our Peso obligations into U.S. Dollars at the following exchange rate: Ps. 11.149 per U.S. $1.00.
(8) In connection with the transactions that took place in October 2004, DIRECTV Latin America acquired an option to acquire up to a 15% equity interest in each of Innova and Innova Holdings. The amount of equity to be received upon the exercise of the option depends on the successful migration and retention of DIRECTV Mexico's subscribers to Innova with a minimum migration of 175,000 subscribers required for the issuance of the full 15% equity interest. If the options become exercisable, the holder may exercise them by delivering to Innova and Innova Holdings the promissory notes for cancellation or by paying to Innova and Innova Holdings an amount in cash equal to the aggregate principal amount of the promissory notes. The options expire on October 8, 2009. If the options are terminated under certain limited circumstances related to regulatory challenges, or after a final determination that renders the options illegal, or expire unexercised, then within ten days of the expiration date, DIRECTV Mexico will be entitled to receive an aggregate cash payment (including any payments made under the notes described above) of up to approximately U.S.$137.7 million if 175,000 DIRECTV Mexico subscribers successfully migrate to Innova.
(9) In connection with the transactions that took place in October 2004, we and Televisa entered into two channel licensing agreements pursuant to which we will pay Televisa a royalty fee to carry its over-the-air channels on our DTH service. See "Item 4 -- Information on the Company -- History and Development of the Company."
AMOUNT OF COMMITMENTS EXPIRING BY PERIOD
(IN THOUSANDS OF U.S. DOLLARS)
LESS THAN 12-36 36-60 AFTER 60
TOTAL 12 MONTHS MONTHS MONTHS MONTHS
------- --------- --------- --------- -------------
2005 2006-2007 2008-2009 SUBSEQUENT TO
2009
Systems agreement with NDS(1)................. $11,700 $11,700 - - -
Uplink and downlink services with DTH TechCo.. 8,000 8,000
Uplink and downlink services with Televisa.... 4,600 4,600
------- --------- --------- --------- -------------
$24,300 $24,300 - - -
------- --------- --------- --------- -------------
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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 20 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 equity owners' deficit to U.S. GAAP.
CRITICAL ACCOUNTING POLICIES
We have identified some key accounting policies and estimates on which our consolidated financial position 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 our management's opinion, 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 some reserves and accruals under Mexican GAAP, and the valuation allowances required for deferred income tax assets. For a description of our principal accounting policies, see Notes 2, 3 and 20 to our consolidated financial statements.
Revenue Recognition
We recognize programming service revenues on a monthly basis as DTH service is provided. Programming service revenues paid in advance of the service being provided are recorded as deferred revenue and recognized in the month the DTH service is provided. Initial, non-refundable fees for subscriptions, installation and activation, are recognized upon activation of the new subscriber's DTH services. Customer acquisition costs are expensed as incurred.
We provide the DTH antenna, LNB and remote control to customers along with the IRD, but we retain title to the equipment. The IRD is included in fixed assets and is rented to customers under an operating lease. We recognize rental revenues on a monthly basis.
Allowance for Doubtful Accounts Receivable
We create reserves for all accounts receivable longer than 90 days and write off against the reserve all receivables greater than 120 days. This accounting is based on our experience and internal trend analysis and such analysis is reviewed on a monthly basis. After 90 days of delinquency, we usually recover less than 2% of the accounts receivable. During the period from 90 days to 120 days we carry out a retention campaign as a final effort to keep subscribers active; after 120 days, we proceed to cancel the delinquent subscriber and recover the equipment. We assign any delinquent subscribers to collection agencies and may start legal proceedings against the delinquent subscriber. To aid our collection efforts, all subscribers execute a promissory note when they execute the subscription agreement.
A significant difference between the reserve amount that we establish based on our estimates for doubtful accounts and actual amounts of unpaid receivables could have a material adverse effect on our future operating results.
Carrying Value and Valuation of Long-Lived Assets
Our balance sheet lists various long-lived assets including our satellite transponder asset. We evaluate each long-lived asset for impairment when events and circumstances indicate that the asset's carrying value may not be recoverable. Under Mexican GAAP, we are required to recognize impairment losses when we believe that the carrying value exceeds the anticipated estimated future discounted net cash flows generated by the asset. Different assumptions regarding such cash flows, including subscriber growth and various macro-economic factors, could materially affect our analysis of recoverability. In addition, due to various reasons, we also occasionally incur impairment losses for equipment that is no longer technologically feasible to operate and which we may need to dispose of. Further, as discussed in "Item 3 -- Key Information -- Risk Factors -- Risk Factors Related to Our Business -- 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" and elsewhere, before 2003 we did not generate positive cash flows from operations and therefore needed funding from our equity owners. In the future, if we require and do not receive this 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 long-lived assets.
During the years ended December 31, 2004 and December 31,2002 we recorded impairment losses on transmission equipment and other equipment not in use equal to Ps. 5.1 million and Ps. 33.7 million, respectively, (which were included in the "Other operating expenses" and "Transponder services - Solidaridad 2 and reorientation
cost" line items, respectively). We did not record any impairment charge for the fiscal year ended December 31, 2003.
Valuation Allowances on Deferred Income Tax Assets
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. Given that we have had a history of operating and tax losses, we have determined that a prudent valuation allowance was required against the majority of our tax loss carryforwards.
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.
YEAR ENDED DECEMBER 31,
------------------------------------
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
Devaluation (appreciation) of the Mexican Peso
as compared to the U.S. Dollar(1)............ 1.2% (4.6)% 13.9% 7.3% (0.7)%
Mexican inflation rate(2)......................... 9.0 4.4 5.7 4.0 5.2
U.S. inflation rate(3)............................ 3.4 1.6 2.5 1.9 3.3
Increase (decrease) in Mexican GDP(4)............. 6.9 (0.1) 0.7 1.4 4.4
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(1) Based on changes in the Interbank Rates reported by Banamex as follows:
Ps. 9.62 per U.S. Dollar as of December 31, 2000; Ps. 9.18 per U.S. Dollar
as of December 31, 2001; Ps. 10.46 per U.S. Dollar as of December 31,
2002; Ps. 11.225 per U.S. Dollar as of December 31, 2003 and Ps. 11.149
per U.S. Dollar as of December 31, 2004.
(2) Based on changes in the Mexican National Consumer Price Index from the
previous period, as reported by the Mexican Central Bank, as follows:
93.248 in 2000; 97.354 in 2001; 102.904 in 2002; 106.996 in 2003 and
112.550 in 2004.
(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.
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, 2004 in accordance with the third amendment to Bulletin B-10 of the Mexican Public Accountants Institute. Accordingly, the comparative increases set forth below are adjusted for the general effects of inflation to permit period-to-period comparisons. See Note 3 to our financial statements.
In 2004, the rate of inflation in Mexico was 5.2% and the Peso appreciated 0.7% against the U.S. Dollar in nominal terms, reflecting slightly favorable economic conditions during the year. In 2003 and 2002, the rate of inflation in Mexico was 4.0% and 5.7%, respectively, and the Peso depreciated against the U.S. Dollar in nominal terms by 7.3% and 13.9%, respectively. The rate of inflation in Mexico has declined substantially during the last few years as compared to historical rates. However, at approximately 4.4% per annum (as measured from March 2004 to March 2005), 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. Economic growth slowed during the last three years, due in part to the recession in the United States and instability in worldwide markets. Although the Mexican GDP expanded by 4.4% in 2004 as compared to 2003, the higher increase in the last four years, the average level of economic growth is relatively anemic when compared to our major trading partners historical and average growth rate.
Under Mexican GAAP, through December 31, 2004, 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 Mexican Peso against the U.S. 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 2004, we had favorable effects due to Peso
appreciation and an inflation rate similar to previous years. In 2003 and 2002,
the translation effect and devaluation increased our cost of sales in comparison
to previous years.
Any devaluation of the Peso will likely affect our liquidity and results of operations because an important amount of our indebtedness, operating costs and expenses are U.S. Dollar-denominated, while our revenues are primarily Peso denominated. Any decrease in the value of the Peso against the U.S. Dollar could also cause us to incur foreign exchange losses, which would reduce our net income.
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 Mexico -- Mexico Has Experienced Adverse Economic Conditions."
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 40% 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 due under our senior notes, our U.S. 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 2004 other than interest income on some 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 2004, 2003 and 2002, approximately 34.0%, 37.0% and 30.0% of our total operating expenses, not considering interest expense of Ps. 673.0 million, Ps. 987.6 million and Ps. 1,075.3 million, respectively, were U.S. Dollar-denominated.
During 2005, we have been and expect to continue entering into several derivative transactions (forwards) in order to reduce our U.S. Dollar foreign exchange exposure by taking advantage of market windows and increasing our U.S. Dollar cash position.
On February 13, 2004, we entered into two separate derivative transactions denominated "coupon swap" agreements to hedge a portion of our U.S. Dollar foreign exchange exposure resulting from the issuance of our U.S.$300.0 million 9.375% senior notes that mature in 2013. Under the transactions, we receive semiannual payments calculated based on an aggregate notional amount of U.S.$300.0 million at an annual rate of 9.375%, and we make monthly payments calculated based on an aggregate notional amount of Ps. 3,282.2 million at an annual rate of 10.25%. The transactions, both of which terminate in September 2008, will reduce our foreign exchange
exposure on 10 interest coupon payments on the senior notes we issued in September 2003. Also, during the fourth quarter of 2004, we entered into several forward contracts to obtain a certainty on the foreign exchange rate of the peso vs. U.S. dollar, reducing the risk when our obligations in U.S. dollars become payable. We used those forwards to redeem our U.S.$88.0 million in principal amount outstanding under our 12 7/8% senior notes due 2007, which were paid in January 7, 2005, and to fund normal operations.
In 2003 and 2002, we did not engage in any hedging or other transactions to manage the risks associated with foreign currency or interest rate fluctuations.
Nevertheless, 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 and Depreciation of the Peso Could Limit the Ability of Our Company and Other to Convert Pesos into U.S. Dollars or Other Currencies, Which Could Adversely Affect Our Business, Financial Condition or Results of Operations."
NEW ACCOUNTING PRONOUNCEMENTS
The following accounting standards, which were issued by the Mexican Institute of Public Accountants (IMCP), went into effect on January 1, 2005.
Bulletin B-7, "Acquisitions of Businesses", went into effect on January 1, 2005, which establishes, among other things, the purchase method as the only method of accounting for the acquisition of a business, changes to the accounting treatment of goodwill, eliminating the amortization of goodwill as from the date on which that statement went into effect and making it subject instead to annual impairment tests. The Bulletin also provides specific rules for the acquisition of minority interests and the transfer of assets or the exchange of shares between entities under common control. We are evaluating the effect of the adoption of this Bulletin in 2005 in our consolidated financial statements.
The amendments to Bulletin C-2, "Financial Instruments", went into effect on January 1, 2005. Its provisions require that the effects of valuing investments available for sale be recorded in stockholders equity and not in income for the year, and include rules for determining the effects of impairment of financial instruments. We are evaluating the effect of the adoption of this Bulletin in 2005 in our consolidated financial statements.
Bulletin C-10 "Derivative Financial Instruments and Coverage Operations", went into effect on January 2005. This Bulletin, besides detailing recording, valuation and disclosure criteria applicable to all derivative financial instruments, requires that the effectiveness of hedges of cash flows and of net investment in subsidiaries located abroad be evaluated and that the effective portion of the gains or losses on hedging instruments be recognized within comprehensive income. We are evaluating the effect of the adoption of this Bulletin in 2005 in our consolidated financial statements.
The amendments to Bulletin D-3, Labor Obligations, went into effect on January 1, 2005. These amendments provide additional valuation and disclosure rules for recognizing severance payments due to causes other than restructuring. We are evaluating the effect of the adoption of revised Bulletin D-3 in 2005 in our consolidated financial statements.
RECENTLY ISSUED U.S. GAAP PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued FASB Statement 123 (Revised), "Share-Based Payment" ("FAS 123R"). FAS 123R requires all companies to measure compensation costs for all share-based payments (including employee stock options) at fair value and recognize such costs in the statement of operations. FAS 123R will become effective for Innova on January 1, 2006. Innova has not issued any employee stock options and accordingly, we do not expect the adoption of the revised standard to have a significant impact on our financial statements.
In December 2004, the FASB issued FASB Statement 153, "Exchanges of Nonmonetary Assets -- an amendment of APB Opinion No. 29" ("FAS 153"). FAS 153 eliminates the exception to account for nonmonetary exchanges of similar productive assets at carrying value and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance; otherwise, the exchange principal of fair value applies. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. FAS 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We believe the provisions of FAS 153 will not have a material impact on our consolidated financial statements.
In November 2004, the FASB issued FASB Statement 151, "Inventory Costs" ("FAS 151"). FAS 151 amends the guidance in Accounting Research Bulletin 43, "Inventory Pricing" ("ARB 43") and requires abnormal amounts of idle facility expense, freight handling costs and wasted material (spoilage) to be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal" as previously defined in ARB 43. Furthermore, FAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. FAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We believe that the provisions of FAS 151 will not have a significant impact on our financial statements.
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 eleven directors (and up to ten alternate directors), including six directors (and up to six alternate directors) selected by Televisa, four directors (and up to four alternate directors) selected by News Corporation and one director selected by both, Televisa and News Corporation, who shall be an independent member as determined in our bylaws. Our directors serve until they are replaced.
The following table sets forth the names of our current directors and their alternates as of April 30, 2005, 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 Televisa Mexico, S.A. and former Vice
Chairman of the Board of
Univision
Alfonso de Angoitia Noriega Executive Vice President and Former Chief Financial Officer 1998
(01/17/62) Member of the Executive of Televisa and former
Committee of Televisa Alternate Member of the Board
of Univision and Partner,
Mijares, Angoitia, Cortes y
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 Televisa, former
Executive Committee of Televisa General Director of Programming
of Televisa and former Member of
the Board of Univision
Salvi Folch Viadero Chief Financial Officer of Former Vice President of 2002
(08/16/67) Televisa Financial Planning of
Televisa, former Chief
Executive Officer of Comercio
Mas, S.A. de C.V., Member of
the Boards of Mexder, Mercado
Mexicano de Derivados S.A.,
Proveedor Integral de Precios,
Miami Holdings, S.A. de C.V.,
and FS Unit 3007 Inc. and
Alternate Director of Televisa
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FIRST
NAME AND DATE OF BIRTH PRINCIPAL OCCUPATION BUSINESS EXPERIENCE ELECTED
--------------------------- ------------------------------- ------------------------------ -------
Jose Antonio Lara del Olmo Vice President -- Tax of Former Tax Director of 2002
(09/02/70) Televisa Televisa, Member or Alternate
Member of the Board of various
Innova subsidiaries and/or
related entities and various
Televisa subsidiaries,
affiliates, and/or related
entities
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 Corporate General of the Board of Bank of
Counsel of Televisa Tokyo-Mitsubishi Bank-Mexico
and Member of the Boards of
Afore Banamex, S.A. de C.V.,
Union de Telecomunicaciones de
Iberoamerica, A.C.,
Organizacion de
Telecomunicaciones de
Iberoamerica (O.T.I.) A.C.,
Member or Alternate Member of
the Boards of Innova,
Televisa, and various
subsidiaries, affiliates,
and/or related entities
DIRECTORS APPOINTED BY NEWS CORPORATION:
David Haslingden Chief Executive Officer, Member of the Boards of 2004
(08/21/61) National Geographic Channels WildAir and Sky Brasil
International; Chief Operating Servicos Ltd.
Officer, Fox International
Channels
John Nallen Executive Vice Former Senior Vice President, 2004
(05/13/57) President-Finance and Deputy Finance of News Corporation,
Chief Financial Officer of News Former Partner, Arthur
Corporation Andersen, Member of the Board
of Sky Brasil Servicos Ltd.
Lawrence Jacobs Senior Executive Vice President Former Executive Vice 2001
(05/04/55) and Group General Counsel of President and Deputy General
News Corporation Counsel of News Corporation,
Director of Sky Brasil
Servicos Ltd. and various News
Corporation subsidiaries,
affiliates and/or related
entities
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FIRST
NAME AND DATE OF BIRTH PRINCIPAL OCCUPATION BUSINESS EXPERIENCE ELECTED
---------------------------- ------------------------------- ------------------------------ -------
Emilio Carrillo Gamboa Senior Partner at Bufete Chairman of the Board of 1997
(10/16/37) Carrillo Gamboa, S.C. Cementos Holcim-Apasco S.A. de
C.V. and the Mexico Fund,
Inc., Member of the Boards of
Grupo Modelo, S.A. de C.V.,
Kimberly-Clark de Mexico,
S.A. de C.V., SANLUIS
Corporacion, S.A. de C.V.,
Empresas ICA, S.A. de C.V.,
Grupo Mexico, S.A. de C.V.,
Gasoductos de Chihuahua, S. de
R.L. de C.V., Southern Peru
Copper Corporation, and Bank
of Tokyo Mitsubishi (Mexico)
S.A., Member of the Boards of
Innova Holdings, S. de R.L. de
C.V., and Innova's
subsidiaries
DIRECTORS APPOINTED BY TELEVISA AND NEWS CORPORATION:
Fernando Ruiz Sahagun Partner at Chevez, Ruiz Member of the Boards of Accel, 2004
(10/23/43) Zamarripa y Cia, C.A. S.A. de C.V, Grupo Industrial
Camesa, S.A. de C.V., SANLUIS
Corporacion, S.A. de C.V.,
Grupo Mexico, S.A. de C.V.,
Grupo Financiero Santander
Serfin, S.A., Mexico D.F.,
Tlalnepantla, Estado de Mexico
ALTERNATE DIRECTORS APPOINTED BY TELEVISA:
Alexandre Moreira Penna da Chief Executive Officer of Former Vice President of 2004
Silva Innova Corporate Finance of Televisa,
(12/25/54) former Managing Director of JP
Morgan Chase, Member or
Alternate Member of the
Boards of various Televisa and
Innova subsidiaries,
affiliates, and/or related
entities
Rafael Villasante Guzman Director of Business Former Vice President of JP 2004
(06/09/62) Development of Televisa Morgan Chase, Member of the
Boards of various Televisa
subsidiaries, affiliates,
and/or related entities
Jaime Esteban Pous Fernandez Legal Director of Televisa Member or Alternate Member of 2004
(05/19/69) affiliates the Boards of Innova Holdings,
S. de R.L. de C.V., Innova
subsidiaries, and various
Televisa subsidiaries,
affiliates, and/or related
entities
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FIRST
NAME AND DATE OF BIRTH PRINCIPAL OCCUPATION BUSINESS EXPERIENCE ELECTED
--------------------------- ------------------------------- ------------------------------ -------
Jorge Lutteroth Echegoyen Controller and Vice President Former Senior Partner of 2000
(01/24/53) of Televisa Coopers & Lybrand Despacho
Roberto Casas Alatriste, S.C.
Carlos Ferreiro Rivas Chief Financial Officer of Former Director of Corporate 2002
(11/19/68) Innova Finance of Televisa, former
Director of Credit Risk at
Banco Santander Mexicano,
former Manager in Corporate
Banking of Grupo Financiero
Inverlat, Alternate Member of
the Boards of Innova's
subsidiaries, Member of the
Board of Mas Fondos, S.A.
de C.V.
Maria Azucena Dominguez Legal Corporate Director of Member of the Board of Abastos 2000
Cobian Televisa de Oaxaca, S.A. de C.V.,
(07/30/57) Partner in Cobian Alumino,
S.A. de C.V., Member or
Alternate Member of the Boards
of Televisa, Innova, and
various subsidiaries,
affiliates and/or related
entities.
ALTERNATE DIRECTORS APPOINTED BY NEWS CORPORATION:
Paul Haggerty Executive Vice President, Former acting Chief Financial 2000
(11/03/59) Finance-Global Tax and Officer of Gemstar-TV Guide
Penalties of News Corporation International.
Paula Wardynski Vice President-Treasurer of Member of the Board of 55 1998
(3/23/58) News America Incorporated corporations.
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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 oversees all budgetary, financial and cash management issues.
On February 20, 2004, we announced the appointment of Mr. Alexandre Moreira Penna as our Chief Executive Officer, effective March 1st, 2004, who replaced outgoing Chief Executive Officer Mr. Pablo Vazquez Oria.
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:
NAME AND DATE OF BIRTH PRINCIPAL OCCUPATION BUSINESS EXPERIENCE FIRST ELECTED
-------------------------------- ----------------------- ------------------------ -------------
Alexandre Moreira Penna da Silva Chief Executive Officer Former Vice President of 2004
(12/25/54) Corporate Finance of
Televisa; former
Managing Director of
JP Morgan Chase, Member
or Alternate Member of
the Boards of various
Televisa and Innova
subsidiaries,
affiliates, and/or
related entities
Carlos Ferreiro Rivas Chief Financial Officer Former Director of 2002
(11/19/68) Corporate Finance of
Televisa, former
Director of Credit Risk
at Banco Santander
Mexicano, former Manager
in Corporate Banking of
Grupo Financiero
Inverlat, Alternate
Director of Innova's
subsidiaries, Member of
the Board of Mas Fondos,
S.A. de C.V.
Luis Jorge Todd Alvarez Sales Vice President Former Vice President of 1996
(07/18/56) Sales and Distribution of
Innova, former Commercial
Director of Multivision
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COMPENSATION
For the year ended December 31, 2004, we paid Ps. 13.0 million in aggregate compensation to our executive officers for their services in all capacities. From October 8, 2004 and going forward, we also paid and will also pay an emolument to our directors and alternate directors of the Board, consisting of two gold-coins or "Centenarios"; this compensation is payable during our quarterly board meetings. We did not issue any options to purchase equity interests in us or provide any pension, retirement or similar benefits to our directors, alternate directors and executive officers in 2004.
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 some responsibilities to an Executive Committee that consists of Messrs. Azcarraga Jean, de Angoitia N., Folch V., Penna, Haslingden, Nallen and Jacobs. The alternate members of the committee are Messrs. Mijares O., Villasante G., Ferreiro R., Lara del O., Haggerty, Carrillo G. and Ms. Wardynski. The Executive Committee generally acts on matters in the absence of the Board of Directors. As a company with no securities listed on a national securities exchange or inter-dealer quotation system, we are not required to establish either an audit committee or a compensation committee. Our equity holders must approve our annual audited financial statements. Matters regarding the retention of auditors are considered, reviewed and approved by the entire Board of Directors. Matters regarding executive compensation are considered, reviewed and approved by the entire Board of Directors.
EMPLOYEES
As of December 31, 2004, we employed 1,935 people in Mexico, including full-time and part-time employees, with approximately 53 in transmission and technology related functions, approximately 491 in marketing and sales, approximately 1,105 in client services and subscriber handling and approximately 286 in management, finance, personnel and administration. This represents an overall increase of 59 employees as compared to the end of December 2003. In 2004, we increased our headcount primarily due to the growth of our business and 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 information with respect to the current beneficial ownership of our equity interests:
AMOUNT AND NATURE PERCENTAGE
NAME OF BENEFICIAL OWNER OF OWNERSHIP OWNERSHIP
------------------------ ---------------------- ----------
Innova Holdings, S. de R.L. de C.V................... Series C Social Part 76.8%
SKY DTH, S. de R.L. de C.V........................... Series A-1 Social Part 13.9%
News DTH (Mexico) Investment Ltd..................... Series B-1 Social Part 7.0%
Liberty Mexico DTH, Inc. ............................ Series B-2 Social Part 2.3%
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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. Innova Holdings is a company indirectly owned 60% by Televisa, 30% by News Corporation and 10% by Liberty Media. Accordingly, Innova's total capital is indirectly owned 60% by Televisa, 30% by News Corporation and 10% by Liberty Media.
The relations between our equity owners are governed by our bylaws and an Amended and Restated Social Part Holders Agreement. Our amended bylaws, notarized on December 22, 1998, provided for the conversion of 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. More recently, on September 4, 2003, we amended our bylaws to create and authorize the new Series C limited voting Social Part issued to Innova Holdings and on October 8, 2004 to limit the terms on which we and our shareholders and their affiliates may enter into transactions without the approval of our Board of Directors.
Each ordinary Series A and B Social Part is entitled to one vote for each Ps. 100 of capital that its social part represents. Each Series C Social Part is also entitled to one vote for each Ps. 100 of capital that its social part represents; however, each Series C Social Part may only be voted at a meeting of members with respect to the following extraordinary matters: (i) extension of the term of our company; (ii) our early dissolution; (iii) change of our corporate purpose; (iv) change of our nationality; (v) transformation of our corporate form; or (vi) our merger with another entity.
SECURITIES HELD IN HOST COUNTRY
All of our senior notes are held of record in the United States by one record holder, The Depository Trust Company, or DTC, which holds the notes for their beneficial owners in accounts maintained within DTC.
CONTROL
If the transactions contemplated by the agreements with DIRECTV are consummated, Televisa would own approximately 57% of the equity interest in Innova and DIRECTV and DTVLA would collectively own the remaining 43% equity interest in Innova. See "Item 4 -- Information on the Company -- History and Development of the Company." Our owners will only be able to take significant actions with the affirmative vote of Televisa and DIRECTV and DTVLA under the bylaws and the Amended and Restated Social Part Holders Agreements. For a description, see "Item 10 -- Additional Information -- Bylaws." Pursuant to our Amended and Restated Social Part Holders Agreement, Televisa and DIRECTV are not permitted to engage in the DTH business in Mexico and Central America (subject to certain listed exceptions), 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 third largest cable television system. See "Item 4 -- Information on the Company -- Business Overview -- Competition -- Cable Television and MMDS."
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 8 of our financial statements. Note 8
to the financial statements provides other information required to be made publicly available in Mexico with regard to the interest of management in some transactions. Several other related party transactions not required to be listed here are included as Exhibits to this document. 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 Businesses 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."
DIRECTV MEXICO SUBSCRIBER BASE TRANSACTION
In October 2004, DIRECTV announced the shut down of its operations in Mexico. To ease its subscribers' transition, and in an effort to provide an alternative, DIRECTV, through its indirect subsidiary Galaxy Mexico sold its subscriber list to our subsidiary Novavision, in exchange for two notes with an aggregate principal amount totaling approximately Ps. 621.1 million and potential payments in the future depending on the number of subscribers that successfully migrate to our service. See "Item 4 -- Information on the Company -- History and Development of the Company."
LOANS AND CAPITAL CONTRIBUTIONS FROM OUR OWNERS
During the period from 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 U.S.$149.0 million. This amount included forgiveness of debt amounting to Ps. 463.8 million.
Additionally, from December 1998 through March 2002, our equity owners contributed a total of U.S.$390.9 million in loans and accrued interest to us and our subsidiaries. The loans were made by our owners in proportion to each of their respective equity interests in Innova and bore a fixed interest rate of 9% per annum payable at maturity, including any applicable withholding taxes, and matured between 2008 and 2012. In June 2002, we entered into a credit agreement with our owners to memorialize the terms of some of these loans. This credit agreement also required us to execute promissory notes to evidence the loans we received from our owners between 2000 to 2002, as well as to evidence any new loans we obtained from our owners.
Our owners did not loan us any money from March 2002 through September 9, 2003, on which date our owners capitalized all loans made by them or any of their affiliates to us. The amount of the loans and accrued interest capitalized as of September 9, 2003 was approximately Ps. 4.5 billion. The capitalization did not affect the percentage ownership interests of our owners. See "Item 5. Operating and Financial Review and Prospects -- Liquidity and Capital Resources." We, and our subsidiaries, do not currently have any outstanding loans from our equity owners. However, we can not assure you that we will not require such funding in the future.
In May 2004, we and our equity owners entered into the following transactions, which had the net effect of increasing our net worth by $15 million but did not affect the relative ownership interests of our equity owners:
- News Corporation contributed to us an account receivable of U.S.$15 million owed to them by Sky DTH;
- Televisa assigned to Sky DTH an account receivable of U.S.$15 million owed to it by Innova; and
- Innova, Innova Holdings, News, Liberty Media and Sky DTH agreed that the obligation owed by Innova to Sky DTH and the obligation owed by Sky DTH to Innova would be set off against each other and cancelled.
In connection with this transaction, our equity owners also increased our capital by a de minimis amount; Historically, Televisa, News Corporation and Liberty Media indirectly owned 60%, 30% and 10%, respectively, of our equity interests. If the transactions contemplated by the agreements with DIRECTV are consummated, Televisa would own approximately 57% of the equity interest in Innova and DIRECTV and DTVLA would collectively own the remaining 43% equity interest in Innova. See "Item 4 -- Information on the Company -- History and Development of the Company."
PROGRAMMING ARRANGEMENTS WITH RELATED PARTIES
We obtain, and anticipate that we will continue to obtain, significant
programming on a DTH exclusive basis from Televisa and News Corporation under
our Social Part Holders Agreement. We compete, in part, based on this exclusive
programming. In 2004, 2003 and 2002, we paid Ps. 249.6 million, Ps. 215.5
million and Ps. 195.8 million, respectively, to News Corporation and Televisa
affiliates for the exclusive and non-exclusive programming provided to us. 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 the exclusive rights to rebroadcast and distribute Mexican Soccer League programming from the 2003 Mexican Soccer Tournaments and 2002 Mexican Soccer Tournaments; these include the exclusive transmission rights with respect to all TV media of 20 soccer matches during each season. Pursuant to a separate license agreement with Televisa, we acquired the exclusive live broadcast and local black-out rights, limited to the relevant territory (Monterrey, Guadalajara, Puebla, San Luis Potosi and Aguascalientes), with respect to all TV media for all soccer matches where any of the Monterrey, Tigres, Chivas, Atlas, Puebla, San Luis or Necaxa teams play.
We recently entered in to a license agreement with Televisa to acquire the exclusive rights to rebroadcast and distribute Mexican Soccer League programming from the 2004 Opening Soccer Tournament and 2005 Closing Soccer Tournament seasons; these include the exclusive transmission rights with respect to all TV media of 20 soccer matches during each season. In addition, pursuant to separate license agreements with Televisa, we acquired the exclusive live broadcast and local black-out rights, limited to the relevant territory (Monterrey, Guadalajara, Puebla and Aguascalientes), with respect to all TV media for all soccer matches where any of the Monterrey, Tigres, Chivas, Atlas, Puebla or Necaxa teams play. The agreements' terms range from July 2004 to June 2005 or June 2007, depending on the soccer team. We paid and will pay Televisa a total of approximately U.S.$ 13.5 million for these licenses during the term of our agreements.
During 2003, we acquired the exclusive pay-TV transmission rights for the reality shows Big Brother 2 and Big Brother VIP2 from Televisa for a total amount of Ps. 30.6 million. In 2004, we acquired from Televisa the exclusive pay-TV transmission rights for the first and second parts of the reality show Big Brother VIP3, for an aggregate of Ps. 28.3 million. We broadcast these reality shows through our interactive channels 24 hours per day. In 2005 we entered into a new agreement with Televisa for the exclusive pay-TV transmission rights for the reality show Big Brother 3R.
In connection with the transactions that took place in October 2004, we and Televisa entered into two channel licensing agreements pursuant to which we will pay Televisa a royalty fee to carry its over-the-air channels on our DTH service. See "Item 4 -- Information on the Company -- History and Development of the Company." In addition, pursuant to the terms of our Amended and Restated Social Part Holders Agreement, our sponsors have agreed to make available to us their existing and future program services and channels on a DTH-exclusive basis.
In addition, we have reached an agreement with Televisa to acquire the rights to broadcast 34 matches, or more than 50%, of the 2006 FIFA World Cup soccer tournament matches on an exclusive basis, with respect to all TV media. We paid Televisa U.S. $15.0 million for these rights. As part of this agreement, we will be able to rebroadcast, on an exclusive basis, the non-exclusive matches under certain conditions and after a certain delay period. We believe this exclusive content will strongly improve our ability to attract and retain subscribers and is a key factor in our strategy to offer the highest quality and variety sports programming in Mexico.
COMPETITIVE ACTIVITIES
Under our Amended and Restated Social Part Holders Agreement, subject to exceptions, Televisa and News Corporation have agreed not to directly or indirectly own, manage, operate, control or finance a business or enterprise that operates a competing DTH service in Mexico and Central America (subject to certain exceptions).See "Item 4 -- Information on the Company -- History and Development of the Company."
ONGOING SERVICE ARRANGEMENTS WITH OTHER RELATED PARTIES
Uplink Services Agreement
DTH TechCo Partners, or DTH 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 2004, we paid Ps. 93.7 million to DTH TechCo for their services. DTH TechCo is a partnership formed by Televisa, News Corporation, Globopar and Liberty Media. As a result of the transactions among Televisa, News Corporation, Globopar, Liberty Media and DIRECTV in October 2004, DTH TechCo is owned 70% by DIRECTV and 30% by Televisa. 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 2004, we paid Ps. 45.6 million for these services.
Systems Agreements Between Innova and NDS
We have ongoing agreements with NDS, a public company and majority-owned subsidiary of News Corporation, to provide us with various key systems. Under a September 1996 agreement, NDS provides us the conditional access system, including the Smart Cards necessary to decode the signal at a 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 some of the software and to include new interactive television technology. Further, in 2003, NDS stopped supplying its services with respect to digitizing and compressing the satellite signals. See "Item 4 -- Information on the Company -- Business Overview -- Operations -- Broadcast and Conditional Access Systems." We estimate that our 2005 commitment for the conditional access system, security services and Smart Card purchases will be approximately U.S.$11.7 million.
NDS also provided us with our previous subscriber management system under agreements dated October 29, 1996 and August 3, 1998. In November 2003, we successfully implemented a new SMS by using the software "Kenan" from CSG Software, Inc. to support the growth of our subscriber base. Currently this system is in service and is fully operational. Our agreement with NDS related to the maintenance of the Provider II subscriber management software has been terminated.
In 2004, we paid NDS U.S.$8.7 million for these systems and related services under our various agreements with them.
Guarantees
In October 2004, Televisa entered into an amended and restated guaranty with PanAmSat pursuant to which the proportionate share of our transponder lease obligation guaranteed by Televisa was reduced from 60% to 51%, with News Corp. guaranteeing the remaining 49%. See "Item 4 -- Information on the Company -- History and Development of the Company." 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 U.S.$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, 2004 was U.S.$197.6 million and the amount outstanding as of June 1, 2005 was U.S. $189.1 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."
In December 2004, we entered into a Ps. 1,012 million, 7-year bank loan with a fixed interest rate of 10.55% per annum and a five-year grace period for principal. Televisa and News Corporation are guaranteeing this loan 51% and 49%, respectively. See "Item 5. Operating and Financial Review and Prospects -- Liquidity and Capital Resources."
Advertising
We engage the services of VISAT, a wholly owned subsidiary of Televisa, for some 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 of 12% for their promotion, selling and collection services. In 2004, we paid VISAT an aggregate of U.S.$0.5 million in commissions on advertising sales of approximately U.S.$3.8 million. 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. 125.0 million for these services in 2004 and expect to pay Ps. 125.0 million for similar services in 2005.
W Radio Channel
In 2005, we amended our agreement with Televisa Radio, a subsidiary of Televisa, to broadcast, on a pay-TV exclusive basis, W Radio Channel, a news and entertainment radio station channel.
INTERESTS OF COUNSEL
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, who are 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 a member of our Executive Committee and the Executive Vice President of our 60% owner, Televisa. Mr. Mijares is also the Vice President and Corporate General Counsel of Televisa. Neither Alfonso de Angoitia Noriega nor Juan Mijares Ortega currently receives 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.
We have engaged the law firm of Chevez, Ruiz, Zamarripa y Cia., S.C., to advise us on various tax issues during the 2001 fiscal year and 2003 fiscal year. One of their partners, Fernando Ruiz Sahagun, serves as a member of our Board. 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.
TAX SHARING AGREEMENT BETWEEN INNOVA AND TELEVISA
Innova and Televisa are parties to a Tax Sharing Agreement, dated March 6,
1997, which sets forth the rights and obligations of Innova and Televisa in
respect of Innova's liability for taxes imposed pursuant to Mexico's Ley del
Impuesto sobre la Renta, or Income Tax Law, 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 tax and asset 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 100% 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 and income taxes, Televisa's direct or indirect
percentage ownership of Innova's social parts.
ITEM 8. FINANCIAL INFORMATION
See "Item 18 -- Financial Statements" and pages F-1 through F-44, 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 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 is publicly available.
ITEM 10. ADDITIONAL INFORMATION
BYLAWS
Set forth below is a brief summary of some significant provisions of our bylaws and of 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.
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 second 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 three series of partes sociales or social parts:
Series A (consisting of sub-series A-1 and A-2), Series B (consisting of
sub-series B-1 and B-2) and Series C. Only Mexican investors may acquire the
Series A Social Parts, whereas Mexican and foreign investors may acquire the
Series B Social Parts. The Series C Social Parts may only be acquired by Mexican
individuals or by Mexican companies whose social parts is majority owned by
Mexicans, provided that such Mexican companies shall not be controlled by a
foreign entity. The Series A must always represent at least the percentage of
full voting 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. However, each Series C Social Part may
only be voted at a meeting of members with respect to the following
extraordinary matters: (i) the extension of the term of our Company; (ii) our
early dissolution; (iii) a change in our corporate purpose; (iv) a change in our
nationality; (v) the transformation of our corporate form; or (vi) our merger
with another entity. Our owners are identified as social part holders in our
bylaws, which are publicly filed in Mexico.
In accordance with the authorization of the Secretary of Economy, dated as of November 30, 2001, we may issue Series N quotas representing up to 80% of our social, Series N quotas are considered a neutral investment for purposes of the Foreign Investment Law. Series N bidders have various economic rights combined with the right to vote at social part holders' meetings only with regard to the following matters:
- to extend our corporate existence;
- to dissolve our company;
- to change our corporate purposes or nationality; and
- to approve any transformation or merger involving us.
Afterwards, on July 30, 2002, our social part holders 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 today no Series N Social Parts have 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 Sub-series A-1 and Sub-series B-1 social part holders is required:
- 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 the Executive Committee;
- 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 our company;
- to appoint liquidators;
- to issue bonds; and
- to approve any transformation, merger or spin-off involving us.
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 Sub-series A-1 and Sub-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 Sub-series A-1 and Sub-series B-1 members. Additionally, an equity owner may not transfer its equity stake without the consent of the Sub-series A-1 and Sub-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. Meetings are convened after a notice has been issued by any of our Directors pursuant to the provisions of Mexico's General Law of Commercial Corporations. At least 15 days' notice is required, unless waived by all members.
BOARD OF DIRECTORS
The holders of Sub-series A-1 social parts are entitled to appoint six members of the Board of Directors, the holders of Sub-series B-1 social parts are entitled to appoint four members of the Board of Directors and the holders of Sub-series A-1 and B-1 social parts are entitled to appoint one member of the Board of Directors who shall be an independent member pursuant to our bylaws. 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 act. However, the approval of a majority, including at least two directors selected by the holders of Sub-series A-1 social parts and two directors selected by the holders of Sub-series B-1
social parts, is currently required in order to authorize a number of significant actions, including the following, subject to some exceptions:
- the appointment of the Chief Executive Officer;
- 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 U.S.$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 U.S.$1 million;
- the sale of assets outside the ordinary course of business;
- the purchase, lease or acquisition of assets involving amounts in excess of U.S.$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 U.S.$1 million;
- the appointment or dismissal of Innova's auditors or the adoption or modification of any material accounting or tax principle or practice;
- settling or contesting of proposed tax audit adjustments involving amounts in excess of U.S.$100,000;
- the approval of the location of our principal offices and our subsidiaries;
- the entering into agreements or transactions between the company and the holders of its social parts;
- the approval of some of our actions in our capacity as social part holder 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; and
- the entering into of consulting agreements which are not on arms' length terms, have a term in excess of two years or provide for payments in excess of U.S.$500,000.
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 "Item 4 -- 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 Transactions -- Related Party Transactions."
SATELLITE TRANSPONDER SERVICES AGREEMENTS
We currently receive satellite signal reception and retransmission services from 12 Ku-band transponders on the PAS-9 satellite. 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 term of the PAS-9 agreement ends on the earlier of (a) September 2015 and (b) the date PAS-9 is taken out of service. We must pay a monthly service fee of U.S.$1.7 million for service from all 12 transponders. We received a credit against the first U.S.$11.7 million of service fees otherwise payable under the PAS-9 agreement. Televisa, News Corporation and Liberty Media have historically guaranteed Innova's payments to PanAmSat in proportion to their respective beneficial interests in Innova. Recently, Televisa and PanAmSat agreed to reduce Televisa's proportionate share of the guarantee from 60% to 51% until the full exercise of the options to News Corporation granted to Innova and Innova Holdings, at which point Televisa's guarantee will be adjusted to cover a percentage of the transponder lease obligations equal to its percentage ownership of us at that time. News Corporation's proportionate share of the guarantee was increased from 30% to 49% and Liberty Media was released of its guarantee. PAS-9 was manufactured by DIRECTV (formerly Hughes Electronics Corporation) and its useful life is estimated to be approximately 15 years. We do not expect the sale of DIRECTV's interests in PanAmSat to KKR to have a material effect on our operations or use of the PAS-9 satellite under our current agreement. See "Item 3 -- 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." 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."
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
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 amparos were not resolved in our favor. As a result, we withdrew the amparos and paid U.S.$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 interest paid to bondholders. On January 24, 2001, 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 " -- Taxation -- Mexican Taxation."
We challenged some of the provisions of Mexico's Asset Tax Law that prohibited us from deducting loans from non-Mexican sources from our asset tax basis. In order to avoid penalties and interest payments in the event we lost the appeal, we paid approximately Ps. 43.2 million of tax on assets for the year ended December 31, 2001 in March of 2002; approximately Ps. 45.2 million in the aggregate for the year ended December 31, 2002; and approximately Ps. 7.5 million for the months of January and February of 2003. All of these payments were made in constant pesos in purchasing power as of the date they were paid. On March 19, 2003, the court ruled in our favor. Due to the favorable ruling, we were able to deduct debts payable to nonresidents from the asset tax basis. In July 2003, we recovered a total amount of Ps. 102.9 million, inclusive of interest and inflation, due to such reimbursements. As of January 1st, 2005 the Asset Tax Law allows the subtraction from taxable assets, of debt contracted with entities that are part of the financial system as well as debts contracted with nonresident entities.
At the end of December 2001, the Mexican Congress passed a series of tax reforms. As a result of these tax reforms, subject to some exceptions, revenues from our pay television services were 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 declaratory judgments, or amparos, challenging the constitutionality of this excise tax. Nonetheless, we implemented rate increases on January 1, 2002 and took other actions, including layoffs 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 and we continue proceedings to recover the approximately U.S.$18.0 million paid for this excise tax during 2002, however we cannot assure you that we will be able to recover any portion of the amounts 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. In response, we filed a new amparo proceeding challenging the constitutionality of the tax. We obtained a favorable ruling in this proceeding; however, we were not able to obtain a final favorable judgment, therefore, we will not be able to recover the approximately U.S.$16.0 million paid for this excise tax during 2003. The 10% excise tax on telecommunications was definitively eliminated as of January 2004. From this date and going forward we do not have to pay this excise tax; therefore, we are able to lower our overall tax exposure and retain a higher proportion of our revenues, without any modification in prices to our subscribers. See "Item 4 -- Information on the Company -- Business Overview -- Mexican Regulation of DTH Services -- Telecommunications Tax."
On October 18, 2004, Darlene Investments, LLC, or Darlene, a minority owner of DTVLA, filed an action in the Circuit Court of the 11th Judicial District in and for Miami-Dade County, Florida against DTVLA, DIRECTV, DIRECTV International, Inc., DIRECTV Latin America Holdings, Inc. (together, the "DIRECTV Defendants"); News Corp. Ltd.; Televisa; Globopar; MCOP; and us. The complaint seeks an injunction based on allegations that the DIRECTV Defendants breached fiduciary and contractual duties to Darlene by entering into transactions with MCOP, Sky Brasil Servicos Ltda. and us in respect of their respective direct-to-home satellite services and that the remaining defendants aided and abetted the DIRECTV Defendant's alleged breaches of their contractual and fiduciary duties. The complaint also asserts claims for monetary damages against the DIRECTV Defendants and News Corp. based on fraud and tortious interference with contract. The action was removed to federal court by the DIRECTV Defendants. Darlene has moved to remand the case to state court; the DIRECTV Defendants have, in addition to opposing Darlene's motion, moved to stay the action pending arbitration on the grounds that disputes between the DIRECTV Defendants and Darlene are subject to arbitration under the relevant contracts. Darlene has recently purported to serve Televisa and us with the complaint by registered mail, although neither Televisa nor we concede such service is proper. We believe Darlene's claims against Televisa and us are without merit and intend to vigorously defend against these claims.
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 "Item 3 -- Key Information -- Exchange Rate Information."
TAXATION
The following is a general summary of some of the 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 are subject to change, possibly with retroactive effect, which could affect the continued validity of this summary.
This summary is for general information only and does not constitute, and should not be considered as, legal or tax advice to beneficial owners of the senior notes. Tax consequences of each individual beneficial owner of the senior notes will depend upon the particular facts and circumstances of each such beneficial owner. 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.
UNITED STATES/MEXICO TAX TREATY
A convention for the Avoidance of Double Taxation between Mexico and the United States and protocols 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 income 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.
Mexico has also entered into and is negotiating several other, tax treaties with various countries that also, as of the date of this Annual Report, are not generally expected to have any material effect on the Mexican income tax consequences described in this Annual Report.
UNITED STATES FEDERAL INCOME TAXATION
This summary of the principal U.S. federal income tax consequences of the ownership and disposition of the senior notes is limited to beneficial owners of senior notes that:
- are U.S. holders (as defined below); and
- hold the senior as capital assets.
As used herein, a "U.S. holder" means a beneficial owner of senior notes that is, for U.S. federal income tax purposes:
- a citizen or individual resident of the United States;
- a corporation (or entity treated as a corporation for such purposes) created or organized in or under the laws of the United States, or any State thereof or the District of Columbia;
- an estate the income of which is includible in its gross income for U.S. federal income tax purposes without regard to its source; or
- a trust, if either (x) it is subject to the primary supervision of a court within the United States and one or more "United States persons" has the authority to control all substantial decisions of the trust or (y) it has a valid election in effect under applicable treasury regulations to be treated as a "United States person";
but excludes persons subject to special provisions of U.S. federal income tax law, such as:
- entities that are tax-exempt for U.S. federal income tax purposes and retirement plans, individual retirement accounts and tax-deferred accounts;
- pass-through entities (including partnerships and entities and arrangements classified as partnerships for U.S. federal income tax purposes) and beneficial owners of pass-through entities;
- certain U.S. expatriates;
- persons that are subject to the alternative minimum tax;
- financial institutions, insurance companies, and dealers or traders in securities or currencies;
- persons having a "functional currency" other than the U.S.
Dollar; and
- persons that hold the senior notes as part of a constructive sale, wash sale, conversion transaction or other integrated transaction or a straddle, hedge or synthetic security.
If a partnership (or an entity or arrangement classified as a partnership for U.S. federal income tax purposes) holds the senior notes, the U.S. federal income tax treatment of a partner in the partnership generally will depend on the status of the partner and the activities of the partnership, and partnerships holding the senior notes should consult their own tax advisors regarding the U.S. federal income tax consequences of owning and disposing of the senior notes.
Further, the discussion below does not address the effect of any U.S. state or local tax law on a beneficial owner of the senior notes. This discussion assumes that each beneficial owner 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 beneficial owner of a senior note should consult a tax advisor as to the particular tax consequences to such beneficial owner of the ownership and disposition of the senior 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 interest payments on the senior notes, or Additional Amounts, will be taxable to a U.S. holder as ordinary interest income at the time they are paid or accrued in accordance with the U.S. holder's usual method of accounting for U.S. federal income tax purposes . The amount of income taxable to a U.S. holder will include the amount of all Mexican taxes we withhold (as described below under " -- Mexican Taxation") from these payments made on the senior notes. Thus, a U.S. holder will be required to report income in an amount that is greater than the amount of cash it receives from these payments on its senior note.
However, a U.S. holder may, subject to certain limitations, be eligible to claim the Mexican taxes withheld as a credit or deduction for purposes of computing its U.S. federal income tax liability, even though the payment of these taxes will be remitted by us. Interest and Additional Amounts paid on the senior notes will constitute income from sources without the United States for foreign tax credit purposes. For taxable years beginning on or before December 31, 2006, such income generally will constitute "high withholding tax interest" for foreign tax credit purposes, unless the Mexican withholding tax rate applicable to the U.S. holder is less than 5% (such as during any period in which the 4.9% Mexican withholding tax rate, as discussed in " -- Mexican Taxation," applies), in which case such income generally will constitute "passive income" or, in the case of certain U.S. holders, "financial services income." For taxable years beginning after December 31, 2006, such income generally will constitute "passive category income" or, in the case of certain U.S. holders, "general category income," for foreign tax credit purposes. The rules relating to the calculation and timing of foreign tax credits and, in the case of a U.S. holder that elects to deduct foreign taxes, the availability of deductions, involves the application of complex rules that depend upon a U.S. holder's particular circumstances. In addition, foreign tax credits generally will not be allowed for Mexican taxes withheld from interest on certain short-term or hedge positions in the senior notes. U.S. holders should consult with their own tax advisors with regard to the availability of a credit or deduction in respect of foreign taxes and, in particular, the application of the foreign tax credit rules to their particular situations.
Market Discount and Bond Premium
If a U.S. holder purchases a 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 principal amount multiplied by the number of complete years to maturity from the date the U.S. holder purchased the senior note.
Under the market discount rules of the U.S. Internal Revenue Code, 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 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 senior note. In addition, the U.S. holder may be required to defer, until the maturity of the senior 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 senior 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 senior 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 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 senior 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 senior note and generally is treated as ordinary interest income for U.S. federal income tax purposes.
A U.S. holder that purchases a senior note for an amount in excess of the amount payable at maturity of the senior note will be considered to purchase the senior 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). It may be possible for a U.S. holder of a senior note to elect to amortize such premium using a constant yield method over the remaining term of the senior note (or until an earlier call date, as applicable). The amortized amount of the premium for a taxable year generally will be treated first as a reduction of interest on the senior note included in such taxable year to the extent thereof, then as a deduction allowed in that taxable year to the extent of the U.S. holder's prior interest inclusions on the senior note, and finally as a carryforward allowable against the U.S. holder's future interest inclusions on the senior note. 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. U.S. holders should consult their own tax advisors concerning the computation and amortization of any bond premium on the senior notes. 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 senior note in accordance with its regular method of tax accounting, and will include the premium in its tax basis for the senior note for purposes of computing the amount of its gain or loss recognized on the sale, exchange or retirement of the senior note.
A U.S. holder may elect to include in gross income under a constant yield method all amounts that accrue on a 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.
Dispositions
Unless a non-recognition provision of the U.S. Internal Revenue Code applies, upon the sale, exchange, redemption, retirement or other taxable disposition of a senior note, a U.S. holder will recognize taxable gain or loss in an amount equal to the difference, if any, between the amount realized on such sale, exchange, redemption, retirement or other taxable disposition of the senior note (other than amounts attributable to accrued interest, which will be taxable as described above) and such U.S. holder's adjusted tax basis in the senior note. A U.S. holder's adjusted tax basis in a 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 reduce, or allowed as a deduction against, interest on the new note. Gain or loss recognized by a U.S. holder on the sale, exchange, redemption, retirement or other taxable disposition of a senior note generally will be a capital gain or loss, except with respect to accrued market discount not previously included in income, which will be taxable as ordinary income.
The gain or loss recognized by a U.S. holder will be a long-term capital gain or loss if the senior note has been held for more than one year at the time of the disposition. 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. The deductibility of capital losses is subject to limitations. Capital gain or loss recognized by a U.S. holder generally will be U.S. source gain or loss. U.S. holders should consult their own tax advisors as to the foreign tax credit implications of a disposition of the new 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 senior note, and to the proceeds of a disposition of a senior note before maturity within the United States, that are made to a non-corporate beneficial owner if such beneficial owner 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 beneficial owner's U.S. federal income tax liability, provided that correct information is provided to the Internal Revenue Service.
Non-U.S. Holders
For purposes of the following discussion a "non-U.S. holder" means a beneficial owner of the senior notes that is not, for U.S. federal income tax purposes, a U.S. holder or a partnership (or an entity or arrangement classified as a partnership for such purposes). A non-U.S. holder generally will not be subject to U.S. federal income or withholding tax on:
- 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
gain realized on the sale, exchange, redemption 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.
MEXICAN TAXATION
The following is a general summary of the principal consequences, under Mexican Income Tax Law, or the Law, and rules as currently in effect, and under the Tax Treaty, of the ownership and disposition of the senior notes by a foreign holder. As used in this summary, "foreign holder" means a beneficial owner of the senior notes that:
- is not a resident of Mexico for tax purposes;
- does not hold the senior notes or a beneficial interest in the senior notes in connection with the conduct of a trade or business through a permanent establishment in Mexico; and
- is not (a) a holder of more than 10% of our voting stock, directly or indirectly, jointly with persons related to us or individually, or (b) a corporation or other entity, more than 20% of whose stock is owned, directly or indirectly, jointly by persons related to us or individually; that in the case of either (a) or (b), is the effective beneficiary, directly or indirectly, jointly with persons related to us or individually, of more than 5% of the aggregate amount of any interest payment on the senior notes. For these purposes, persons will be related if:
- one person holds an interest in the business of the other person;
- both persons have common interest; or
- a third party has an interest in the business or assets of both persons.
For purposes of Mexican taxation:
- an individual is treated as a resident of Mexico if the individual has established his home in Mexico. When an individual, in addition to his home in Mexico, has a home in another country, the individual will be a resident of Mexico if his center of vital interests is located in Mexico. This will be deemed to occur if, among others, either (i) more than 50% of the total income obtained by the individual in the calendar year is Mexican source; or (ii) when the individual's center of professional activities is located in Mexico. Unless otherwise proven, a Mexican national is considered a Mexican resident;
- a legal entity is considered 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; and
- a permanent establishment of a foreign person will be treated as a resident of Mexico, and that permanent establishment will be required to pay taxes in Mexico in accordance with applicable law for income attributable to such permanent establishment.
Each foreign holder should consult a tax advisor as to the particular Mexican or other tax consequences to that foreign holder of owning and disposing of the senior notes, including the applicability and effect of any state, local or foreign tax laws.
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.
Interest and Principal
Under the Law, payments of interest (including amounts paid by Innova in excess of the issue price of the senior notes 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% since Innova has satisfied, and expects to continue to satisfy, all of the following requirements:
- the senior notes were 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 were provided to the Mexican Ministry of Finance and Public Credit;
- Innova timely filed 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 parties related to Innova are, directly or indirectly, individually or jointly, the effective beneficiaries of more than 5% of the aggregate amount of each interest payment, and Innova maintains records that evidence compliance with this requirement.
In the event that any of the foregoing requirements are not met, under the law, payments of interest on senior notes made by us to a foreign holder will be subject to Mexican 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".
Other Foreign Holders should consult 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. The Mexican income tax law provides that in order for a Foreign Holder to be entitled to the benefits under a treaty 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 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 withholding taxes, provided that the fund:
- is duly organized pursuant to the laws of its country of origin;
- is the effective beneficiary of each interest payment;
- is exempt from income in that country on such interest payment, and
- 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 applicable rules, a Foreign Holder will not be subject to any Mexican withholding or similar taxes on payments of principal on the senior notes made by Innova (except for payments of principal in excess of the issue price of the senior notes, which under the Mexican Income Tax Law are deemed to be interest subject to the Mexican withholding taxes described above).
Dispositions
As of January 1, 2005 gains resulting from the sale of senior notes by a Foreign Holder to a Mexican resident will be treated as interest and therefore will be subject to Mexican withholding tax rules discussed above.
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 SEC's Public Reference Room at 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 the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding companies that file electronically with the SEC at http://www.sec.gov.
We furnish the Bank of New York, as the trustee for our 9.375% 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 equity owners' deficit 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. See "Item 3 -- Key Information -- Forward-Looking Statements." The following information 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, 2004.
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 U.S. Dollars from our operations, capital contributions or borrowings in order to meet our U.S. 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, 2004 and 2003, we had approximately U.S.$524.0 million and U.S.$574.0 million of liabilities denominated in U.S. Dollars, respectively. Each percentile point devaluation of the Peso against the U.S. Dollar would increase our current costs in Pesos by an amount equivalent to approximately Ps. 12.7 million. Also, under this scenario, the exchange loss in Pesos for our total U.S. Dollar-denominated indebtedness would amount to approximately Ps. 58.4 million and Ps. 67.8 million for the years ended December 31, 2004 and 2003, respectively. It would be 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. Based on this, we have been reducing our foreign exchange exposure through derivative instruments and refinancing debt, as well as negotiating our commercial obligations in Pesos whenever possible. Our exposure to changes in exchange rates for currencies other than the U.S. Dollar is not material.
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 (U.S. Dollar-denominated) and the bank loan (Peso-denominated) bears fixed rates of interest. Our results and cash flow could be affected if additional financing is required in the future, if interest rates are high in relation to current market conditions. As of December 31, 2004 and 2003, 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.
CURRENCY HEDGING
During 2005, we have been and expect to continue entering into several derivative transactions (forwards) in order to reduce our U.S. Dollar foreign exchange exposure by taking advantage of market windows and increasing our U.S. Dollar cash position.
On February 13, 2004, we entered into two separate derivative transactions denominated "cross coupon swap" agreements to hedge a portion of our U.S. Dollar foreign exchange exposure resulting from the issuance of our U.S.$300.0 million 9.375% senior notes that mature in 2013. Under the transactions, we receive semiannual payments calculated based on an aggregate notional amount of U.S.$300.0 million at an annual rate of 9.375%, and we make monthly payments calculated based on an aggregate notional amount of Ps. 3,282.2 million at an annual rate of 10.25%. The transactions, both of which terminate in September 2008, will reduce our foreign exchange exposure on 10 interest coupon payments on the senior notes we issued in September 2003.
Additionally, during the fourth quarter of 2004, we entered into several forward contracts to obtain a certainty on the foreign exchange rate of the peso vs. U.S. dollar, reducing the risk when our obligations in U.S. dollars become payable. We used those forwards to redeem our U.S.$88.0 million in principal amount outstanding under our 12 7/8% senior notes due 2007, which were paid in January 7, 2005, and to fund normal operations. We believe these transactions considerably reduce our foreign exchange exposure at a reasonable cost.
In 2003 and 2002, we did not engage in any hedging or other transactions to manage the risks associated with foreign currency or interest rate fluctuations.
We may continue to enter 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 our results has not been evaluated in light of the success of the Mexican government's current anti-inflationary policy.
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 AND USE OF PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
(a) As of the end of the period covered by 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 Rules 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.
(b) 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
At this time, we are not required to have and do not have an audit committee. Other than approving of our audited financial statements, which our equity owners do, our full board of directors performs the functions an audit committee is charged with performing under the SEC rules. Our board of directors has concluded that it does not have (and it is not required to have) a financial expert meeting the requirements of Item 16A.
ITEM 16B. CODE OF ETHICS
We have adopted a code of ethics applicable to all of our managers and employees, including our principal executive officer, principal financial officer, and principal accounting officer. You may obtain a copy of this code of ethics, without charge, upon written request to Innova, S. de R.L. de C.V., Attn: Investor Relations, Insurgentes Sur 694, Piso 8, Colonia Del Valle, 03100 Mexico, D.F. Mexico.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The aggregate fees billed by PricewaterhouseCoopers S.C. (PwC), our independent auditor, for professional services in 2004 and 2003 were as follows:
(In thousands of Pesos)
2004 2003
------------ -----------
Audit Fees Ps. 3,508.9 Ps. 6,792.0
Audit-Related Fees - 189.3
Tax Fees 917.9 598.7
All Other Fees - -
------- -------
TOTAL Ps. 4,426.8 Ps. 7,580.0
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AUDIT FEES
Included within this category for both years are recurring fees related to the audit of the consolidated and separate subsidiary financial statements under Mexican GAAP as well as the required information for the annual report filings with the SEC on Form 20-F. In 2003, amounts also include fees related to the private placement and subsequent registration on Form F-4 of the 9.375% senior notes.
AUDIT-RELATED FEES
Included within this category are the fees associated with various assistance and consultations related to Sarbanes-Oxley Act of 2002 compliance other than attestation services.
TAX FEES
Included within this category for both years are the fees associated with the statutory, federal and social security tax audits as required by the Mexican tax authorities.
PRE-APPROVAL POLICIES AND PROCEDURES
Our Board of Directors meets once a year to consider and approve an annual budget. At this meeting, our Chief Financial Officer provides the Board of Directors with information regarding all expected audit services and all permissible non-audit services to be performed by our auditors. Matters regarding the retention of auditors are then considered, reviewed and approved by the entire Board of Directors. Any extraordinary service to be performed by our auditors not specifically considered at that meeting must be presented to and approved by our Board at its next scheduled meeting.
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-44, 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 us are omitted, either 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.
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
1.1 English translation of the Amended and Restated Bylaws (Estatutos
Sociales) of Innova, dated as of October 8, 2004. (14)
2.1 Indenture relating to the 9.375% Senior Notes due 2013, among
Innova, as Issuer, The Bank of New York, as Trustee, and The Bank of
New York (Luxembourg), as the Luxembourg Paying Agent and Transfer
Agent, as amended or supplemented from time to time. (12)
2.2 Form of 9.375% Senior Exchange Note. (13)
4.1 Form of Indemnity Agreement between Innova and its Directors and
Executive Officers. (2)
4.2 Memorandum of Understanding as of February 29, 1996, among PanAmSat,
Televisa, Globo Participacoes, Ltda., and News Corporation. (1)
4.3 System Implementation and License Agreement between Innova and News
Digital Systems Limited ("NDS"), dated September 20, 1996 (the
"System Implementation Agreement"). (2)
4.4 Agreement by and among Telecomunicaciones de Mexico and Corporacion
de Radio y Television Norte de Mexico, dated October 1, 1996. (2)
4.5 Agreement between Telecomunicaciones de Mexico and Corporacion
Medcom, dated November 1, 1996. (2)
4.6 Amended and Restated Social Part Holders Agreement among Innova,
Televisa, News Corporation, and Liberty Media, dated October 8,
2004. (14)
4.7 Tax-Sharing Agreement, effective as of March 6, 1997, between
Televisa and Innova. (2)
4.8 Trademark License Agreement between News America Publishing
Incorporated and Innova, dated March 6, 1997. (2)
4.9 Agreement among Telecomunicaciones de Mexico and Corporacion de
Radio y Television Norte de Mexico, dated September 9, 1997 (No.
TVDP-1191/97). (6)
4.10 Agreement among Telecomunicaciones de Mexico and Corporacion de
Radio y Television Norte de Mexico, dated September 9, 1997 (No.
TVDP-007/96). (6)
4.11 Transponder Service Agreement among PanAmSat International Systems
and Corporacion de Radio y Television del Norte, dated February 8,
1999. (5)
4.12 Agreement among Innova, Televisa, Galavision, DTH, News America,
Inc., News DTH (Mexico) Investment Ltd., and TCI DTH Mexico, dated
December 3, 1998. (7)
4.13 Amendment Letter to the Interim Agreement dated December 3, 1998
among Innova, Televisa, Galavision, DTH, News America, Inc., News
DTH (Mexico) Investment Ltd., and TCI DTH Mexico, dated as of
December 22, 1998. (8)
4.14 Second Amendment Letter to the Interim Agreement dated December 3,
1998 among Innova, Televisa, Galavision, DTH, News America, Inc.,
News DTH (Mexico) Investment Ltd., and TCI DTH Mexico, dated May 8,
2000. (8)
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EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
4.15 Amendment to the System Implementation and License Agreement between
Innova and NDS, dated February 29, 2000 (the "NDS SILA
Amendment").(9)
4.16 DTH Concession granted to Corporacion de Radio y Television del
Norte de Mexico by the Mexican Secretary of Communications and
Transport, dated November 27, 2000, along with an English language
translation of the agreement. (9)
4.17 Advertising Agreement, dated October 31, 2001, between Televimex and
Novavision, along with an English language summary. (10)
4.18 Advertising Agreement, dated November 15, 2001, between Televimex
and Novavision, along with an English language summary. (10)
4.19 Credit Agreement, dated as of July 22, 2002, among Innova, as
Borrower, and Televisa, Sky DTH, News America Incorporated and
Liberty Mexico DTH, as Lenders, News DTH (Mexico) Investment
Limited, as partner at Borrower, and Novavision, as Issuer. (11)
4.20 Technical Services Agreement, dated as of January 1, 1998, between
DTH TechCo Partners and Novavision. (11)
4.21 Contribution Agreement among Innova, Novavision, Televisa, Sky DTH,
News Corporation, News America Incorporated, News (Mexico)
Investment DTH Limited, and Liberty Mexico DTH, dated as of
September 3, 2003. (12)
4.22 Brazil Business Combination Agreement, dated as October 8, 2004, by
and among Globo Comunicacoes e Participacoes S.A., The News
Corporation Limited, The DIRECTV Group, Inc., DIRECTV Latin America,
LLC and GLA Brasil Ltda. [Previously filed with the Securities and
Exchange Commission on October 15, 2004 as Exhibit 10.1 to The
DIRECTV Group, Inc.'s Current Report on Form 8-K (File No.
000-26035).]
4.23 Participation Agreement, dated as of October 8, 2004, by and among
Globo Comunicacoes e Participacoes S.A., The News Corporation
Limited and The DIRECTV Group, Inc. [Previously filed with the
Securities and Exchange Commission on October 15, 2004 as Exhibit
10.2 to The DIRECTV Group, Inc.'s Current Report on Form 8-K (File
No. 000-26035).]
4.24 Latin America Purchase Agreement, dated as of October 8, 2004, by
and between The News Corporation Limited and The DIRECTV Group, Inc.
[Previously filed with the Securities and Exchange Commission on
October 15, 2004 as Exhibit 10.3 to The DIRECTV Group, Inc.'s
Current Report on Form 8-K (File No. 000-26035).]
4.25 Latin America Purchase Agreement, dated as of October 8, 2004, by
and between Liberty Media International, Inc. and The DIRECTV Group,
Inc. [Previously filed with the Securities and Exchange Commission
on October 15, 2004 as Exhibit 10.4 to The DIRECTV Group, Inc.'s
Current Report on Form 8-K (File No. 000-26035).]
4.26 Purchase and Sale Agreement, dated as of October 8, 2004, by and
between Grupo Galaxy Mexicana S. de R.L. de C.V. and Corporacion
Novavision, S. de R.L. de C.V. [Previously filed with the Securities
and Exchange Commission on October 15, 2004 as Exhibit 10.5 to The
DIRECTV Group, Inc.'s Current Report on Form 8-K (File No.
000-26035).]
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EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
4.27 Option Agreement Letter, dated as of October 8, 2004, among Innova,
S. de R.L. de C.V., Innova Holdings, S. de R.L. de C.V., Novavision,
S. de R.L. de C.V., Grupo Televisa, S.A., The News Corporation
Limited, The DIRECTV Group, Inc. and DIRECTV Latin America, LLC.
[Previously filed with the Securities and Exchange Commission on
October 15, 2004 as Exhibit 10.6 to The DIRECTV Group, Inc.'s
Current Report on Form 8-K (File No. 000-26035).]
4.28 Post-Migration Payment Letter Agreement, dated as of October 8,
2004, by and between Grupo Galaxy Mexicana S. de R.L. de C.V. and
Corporacion Novavision, S. de R.L. de C.V. [Previously filed with
the Securities and Exchange Commission on October 15, 2004 as
Exhibit 10.7 to The DIRECTV Group, Inc.'s Current Report on Form 8-K
(File No. 000-26035).]
4.29 DTH Agreement, dated as of October 8, 2004, by and among Grupo
Televisa, S.A., The News Corporation Limited, Innova, S. de R.L. de
C.V., The DIRECTV Group, Inc. and DIRECTV Latin America, LLC
[Previously filed with the Securities and Exchange Commission on
October 15, 2004 as Exhibit 10.8 to The DIRECTV Group, Inc.'s
Current Report on Form 8-K (File No. 000-26035).]
4.30 Televisa Letter Agreement, dated as of October 8, 2004, by and
between Grupo Televisa, S.A. and The DIRECTV Group, Inc. [Previously
filed with the Securities and Exchange Commission on October 15,
2004 as Exhibit 10.9 to The DIRECTV Group, Inc.'s Current Report on
Form 8-K (File No. 000-26035).]
4.31 Purchase and Sale Agreement (Multi-Country Platform), dated as of
October 8, 2004, by and among Grupo Televisa, S.A. and The DIRECTV
Group, Inc. [Previously filed with the Securities and Exchange
Commission on October 15, 2004 as Exhibit 10.10 to The DIRECTV
Group, Inc.'s Current Report on Form 8-K (File No. 000-26035).]
4.32 English translation of Loan Agreement, dated December 6, 2004, by
and among, Innova, S. de R.L. de C.V., as Borrower, Grupo Televisa,
S.A. and News Corporation, as Guarantors, and HSBC Mexico, S.A.,
Institucion de Banca Multiple, Grupo Financiero HSBC, as Lender (14)
4.33 Guarantees, dated December 6, 2004, by Grupo Televisa, S.A. and News
Corporation relating to Loan Agreement dated December 6, 2004, by
and among, Innova, S. de R.L. de C.V., as Borrower, Grupo Televisa,
S.A. and News Corporation, as Guarantors, and HSBC Mexico, S.A.,
Institucion de Banca Multiple, Grupo Financiero HSBC, as Lender.
(14)
4.34 Channel Licensing Agreement with Televisa - with regard to Channel
2. (14)
4.35 Channel Licensing Agreement with Televisa - with regard to Channel
4, 5 and 9. (14)
4.36 Option Agreement dated as of October 8, 2004, by and among Innova,
S. de R.L. de C.V., Innova Holdings, S. de R.L. de C.V. and News
Corporation. (14)
8.1 List of Subsidiaries of Innova (included as part of "Item 4 --
Information on the Company -- Organizational Structure").
12.1 Certification of Alexandre Moreira Penna da Silva, Chief Executive
Officer of Innova, pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, dated June 13, 2005. (14)
12.2 Certification of Carlos Ferreiro Rivas, Chief Financial Officer of
Innova, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
dated June 13, 2005. (14)
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EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
13.1 Certification of Alexandre Moreira Penna da Silva, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, dated June 13,
2005. (14)
13.2 Certification of Carlos Ferreiro Rivas, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, dated June 13, 2005. (14)
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(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 (File No. 333-7484).
(3) (Blank)
(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 (File 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, (File 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) Previously filed with the Securities and Exchange Commission on June 30, 2003 as an Exhibit to Innova's Annual Report on Form 20-F (the "2002 Annual Report").
(12) Previously filed with the Securities and Exchange Commission on December 8, 2003 as an Exhibit to the Company's Registration Statement on Form F-4 (File No. 333-110997).
(13) Previously filed with the Securities and Exchange Commission on February 11, 2004 as an Exhibit to the Company's Registration Statement on Form F-4/A (File No. 333-110997).
(14) Filed herewith.
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/ Alexandre Moreira Penna da Silva
-----------------------------------------
Name: Alexandre Moreira Penna da Silva
Title: Chief Executive Officer
By: /s/ Carlos Ferreiro Rivas
-----------------------------------------
Name: Carlos Ferreiro Rivas
Title: Chief Financial Officer
Dated: June 13, 2005
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FORM 20-F -- ITEMS 8 AND 18
INNOVA, S. DE R.L. DE C.V. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm.................................... F-2
Consolidated Balance Sheets as of December 31, 2004 and 2003............................... F-3
Consolidated Statements of Income (Loss) for the years ended
December 31, 2004, 2003 and 2002..................................................... F-4
Consolidated Statements of Changes in Equity Owners' Deficit
for the years ended December 31, 2004, 2003 and 2002................................. F-5
Consolidated Statements of Changes in Financial Position for
the years ended December 31, 2004, 2003 and 2002..................................... F-6
Notes to the Consolidated Financial Statements............................................. F-7
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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, 2004 AND 2003
INNOVA, S. DE R. L. DE C. V. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
INDEX
Contents Page -------- ------- Report of Independent Registered Public Accounting Firm 1 and 2 Financial statements: Consolidated balance sheets 3 Consolidated statements of income (loss) 4 Consolidated statements of changes in equity owner's deficit 5 Consolidated statements of changes in financial position 6 Notes to the consolidated financial statements 7 to 44 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Mexico, D. F., March 18, 2005
To the Equity Owner's 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, 2004 and 2003, and the related consolidated statements of income (loss), of changes in equity owners'deficit and of changes in financial position for each of the three years in the period ended December 31, 2004 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 generally accepted auditing standards in Mexico and with the standards of the Public Company Accounting Oversight Board (United States). 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, 2004 and 2003, and the results of their operations, the changes in their equity owner's deficit and the changes in their financial position for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in Mexico.
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 income (loss) for each of the three years in the period ended December 31, 2004, and the determination of consolidated equity owner's deficit at December 31, 2004 and 2003 to the extent summarized in Note 20 to the consolidated financial statements.
PricewaterhouseCoopers
By: /s/ Miguel Angel Olvera Ibbott
------------------------------
Miguel Angel Olvera Ibbott
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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, 2004)
December 31,
-------------------------------
Assets 2004 2003
------ ------------- -------------
CURRENT ASSETS:
Cash and cash equivalents Ps. 1,696,793 Ps. 519,189
Trade accounts receivable, net (Note 4) 83,103 104,566
Other accounts receivable (Note 11) 76,631 -
Inventory and spare parts 16,749 10,602
Prepaid advertising (Note 8) 125,000 131,489
Other current assets 18,300 16,732
------------- -------------
Total current assets 2,016,576 782,578
Property and equipment, net (Note 5) 1,487,834 1,470,230
Satellite transponders, net (Note 6) 1,179,979 1,318,503
Deferred costs, net (Note 7) 41,498 61,228
Other non-current assets - 8,674
------------- -------------
Total assets Ps. 4,725,887 Ps. 3,641,213
============= =============
Liabilities and Equity Owners' Deficit
CURRENT LIABILITIES:
Senior notes (Note 9) Ps. 981,112 Ps. -
Trade accounts payable 162,248 155,267
Accrued expenses 248,661 252,067
Satellite transponders obligation (Note 6) 70,743 66,820
Due to affiliated companies and other related parties (Note 8) 184,740 448,408
Accrued interest 131,940 126,615
Accrued taxes 111,354 102,734
Deferred income 152,413 145,118
------------- -------------
Total current liabilities 2,043,211 1,297,029
NON-CURRENT LIABILITIES:
Senior notes (Note 9) 3,344,700 4,581,377
Bank loan (Note 10) 1,012,000 -
Satellite transponders obligation (Note 6) 1,324,615 1,477,795
Other liabilities 2,181 1,726
------------- -------------
Total liabilities 7,726,707 7,357,927
------------- -------------
Commitments and contingencies (Note 12) - -
EQUITY OWNERS' DEFICIT:
Contributed capital:
Social parts (Note 13) 6,655,679 6,655,668
------------- -------------
Earned capital:
Additional paid in capital 179,784 -
Accumulated losses (Note 15) (10,451,611) (9,611,501)
Net income (loss) for the period 576,287 (840,110)
Excess from restatement 42,087 82,136
------------- -------------
(9,653,453) (10,369,475)
------------- -------------
Supplementary liability for labor obligations (107) (104)
------------- -------------
Minority interest (2,939) (2,803)
------------- -------------
Total equity owners' deficit (3,000,820) (3,716,714)
------------- -------------
Total liabilities and equity owners' deficit Ps. 4,725,887 Ps. 3,641,213
============= =============
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The accompanying notes are an integral part of these consolidated financial statements.
INNOVA, S. DE R. L. DE C. V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Expressed in thousands of Mexican Pesos in purchasing power as of December 31, 2004)
Years ended December 31,
-----------------------------------------------------
2004 2003 2002
------------- --------------- ---------------
Net sales Ps. 4,769,027 Ps. 4,019,067 Ps. 3,754,787
Operating expenses:
Cost of sales 1,394,507 1,241,478 1,162,421
Administrative expenses 132,554 131,485 132,866
Selling expenses 977,350 892,395 910,841
Other operating expenses 525,168 500,356 526,966
------------- --------------- ---------------
Total operating expenses 3,029,579 2,765,714 2,733,094
Depreciation and amortization 764,499 850,603 1,011,827
------------- --------------- ---------------
Operating profit 974,949 402,750 9,866
------------- --------------- ---------------
Integral cost of financing (Note 3):
Interest expense (672,973) (987,638) (1,075,243)
Interest income 18,678 15,959 12,101
Foreign exchange losses, net (41,329) (618,268) (1,284,553)
Gain from monetary position 308,289 331,661 545,372
------------- --------------- ---------------
Total integral cost of financing (387,335) (1,258,286) (1,802,323)
Other income (expenses), net - 3,659 (23,854)
Restructuring and non-recurring items
(Note 14) (10,958) (112,445) (35,468)
-------------- --------------- ---------------
Income (loss) before taxes and
minority interest 576,656 (964,322) (1,851,779)
Provision for income and asset taxes
(Note 16) (198) 123,125 (82,613)
Minority interest (171) 1,087 (22)
-------------- --------------- ---------------
Net income (loss) Ps. 576,287 (Ps. 840,110) (Ps. 1,934,414)
============= =============== ===============
|
The accompanying notes are an integral part of these consolidated financial statements.
INNOVA, S. DE R. L. DE C. V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY OWNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
(Expressed in thousands of Mexican Pesos in purchasing power as of December 31, 2004)
Excess Supplementary
(deficit) Additional liability
Capital from paid in for labor Accumulated Net income
stock restatement capital obligations losses (loss)
------------ ------------ ----------- ------------- -------------- ------------
Balance at December 31, 2001 Ps.2,092,516 (Ps. 213,659) (Ps. -) (Ps. 17) (Ps. 7,229,246) (Ps. 447,841)
Transfer of net loss to accumulated losses (447,841) 447,841
Comprehensive loss (Note 17) 179,692 (129) (1,934,414)
------------ ----------- ----------- ------- -------------- ------------
Balance at December 31, 2002 2,092,516 (33,967) - (146) (7,677,087) (1,934,414)
Capitalization of stockholder's loans (Note 13) 4,563,152
Transfer of net loss to accumulated losses (1,934,414) 1,934,414
Comprehensive loss (Note 17) 116,103 42 (840,110)
------------ ----------- ----------- ------- -------------- ------------
Balance at December 31, 2003 6,655,668 82,136 - (104) (9,611,501) (840,110)
Capital contribution (Note 13) 11 179,784
Transfer of net loss to accumulated losses (840,110) 840,110
Comprehensive income (Note 17) (40,049) (3) 576,287
------------ ----------- ----------- ------- -------------- ------------
Balance at December 31, 2004 Ps.6,655,679 Ps. 42,087 Ps. 179,784 (Ps.107) (Ps.10,451,611) Ps. 576,287
============ =========== =========== ======= ============== ============
Total
Minority stockholders'
interest deficit
-------- -------------
Balance at December 31, 2001 (Ps. 47) (Ps. 5,798,294)
Transfer of net loss to accumulated losses -
Comprehensive loss (Note 17) (22) (1,754,873)
--------- -------------
Balance at December 31, 2002 (69) (7,553,167)
Capitalization of stockholder's loans (Note 13) 4,563,152
Transfer of net loss to accumulated losses -
Comprehensive loss (Note 17) (2,734) (726,699)
--------- -------------
Balance at December 31, 2003 (2,803) (3,716,714)
Capital contribution (Note 13) 179,795
Transfer of net loss to accumulated losses -
Comprehensive income (Note 17) (136) 536,099
--------- -------------
Balance at December 31, 2004 (Ps.2,939) (Ps. 3,000,820)
========= =============
|
The accompanying notes are an integral part of these consolidated financial statements.
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, 2004)
Years ended December 31,
------------------------------------------------
2004 2003 2002
-------------- ------------- -------------
Operating activities:
Net income (loss) Ps. 576,287 (Ps. 840,110) (Ps.1,934,414)
Adjustments to reconcile net income (loss) to
resources provided by (used in) operating activities:
Depreciation and amortization 764,499 850,603 1,011,827
Maintenance reserve 6,437 4,876 7,749
Impairments and write downs 5,174 - 33,661
-------------- ------------- ------------
1,352,397 15,369 (881,177)
-------------- ------------- ------------
Changes in operating assets and liabilities:
Trade accounts receivable 21,463 (4,622) 26,624
Other accounts receivable (76,631) - -
Inventory and spare parts (11,321) 3,637 (5,007)
Prepaid advertising and other current assets 4,921 32,537 43,545
Deferred costs 17,366 25,038 16,098
Other non current assets 2,232 12,083 6,412
Trade accounts payable 6,981 46,344 14,582
Accrued expenses and Satellite reorientation reserve (1,223) 37,844 (63,185)
Due to affiliated companies and other related parties (83,884) (25,656) 91,652
Accrued interest 5,325 (765,099) 384,592
Deferred income 7,295 25,352 1,189
Supplementary liability for labor obligations (3) 42 (130)
Other liabilities 455 437 493
-------------- ------------- ------------
Resources provided by (used in) operating activities 1,245,373 (596,694) (364,312)
-------------- ------------- ------------
Financing activities:
Capital contributions 11 4,563,152 -
Equity owner's loans - (3,546,884) 571,597
Senior notes (255,565) 289,406 312,897
Bank loan 1,012,000 - -
Satellite transponders obligation (149,257) (10,355) 69,320
-------------- ------------- ------------
Resources provided by financing activities 607,189 1,295,319 953,814
-------------- ------------- ------------
Investing activities:
Investment in property and equipment, net (674,958) (471,070) (347,285)
-------------- ------------- ------------
Resources used in investing activities (674,958) (471,070) (347,285)
-------------- ------------- ------------
Cash and cash equivalents:
Increase for the period 1,177,604 227,555 242,217
At the beginning of the period 519,189 291,634 49,417
-------------- ------------- ------------
At the end of the period Ps. 1,696,793 Ps. 519,189 Ps. 291,634
============== ============= ============
|
The accompanying notes are an integral part of these consolidated financial statements.
INNOVA, S. DE R.L. DE C.V. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Mexican Pesos in purchasing power as of December 31, 2004)
NOTE 1 - THE COMPANY AND ITS PRINCIPAL OPERATIONS:
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%), 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 20.
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.
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, 2004, 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")
- Nova Call-Center, S. de R. L. de C. V.
Nova Call-Center was formed in July 2004, when some employees were transferred from Coporacion Novaimagen to Nova Call-Center.
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, Mexican government obligations, deposits and bonds in U.S. 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").
Installation costs of antennas, low noise blocks ("LNBs") and accessories in subscribers' homes or businesses are capitalized and amortized over the estimated useful life of the asset, which is three years.
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.
When assets are retired or otherwise disposed of, the cost and related 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. Inventories and Spare parts -
Inventories and spare parts 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. Seniority premiums and indemnities -
Seniority premiums to which employees are entitled upon termination of employment after 15 years of service, as well as the obligations under the Company's noncontributory retirement plan for its employees, are recognized as expenses in the years in which the services are rendered, based on actuarial studies using the projected unit credit method. The amounts were not significant for any of the periods presented.
Other compensation based on length of service to which employees may be entitled in the event of dismissal or death, in accordance with the Federal Labor Law, is charged to income in the year in which it becomes payable.
In January 2004, the MIPA issued a revised Bulletin D-3 "Labor Obligations", which requires, among other amendments, that severance obligations to dismissed personnel, other than those arising from restructurings, are recognized based upon actuarial calculations. This revised Bulletin is effective for periods beginning on January 1, 2005. The Group is evaluating the effect of the adoption of revised Bulletin D-3 in 2005 in its consolidated financial statements.
h. 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.
i. Revenue recognition -
Program service revenues are recognized on a monthly basis as DTH service is provided. Program service revenues paid in advance of the service being provided is recorded as deferred revenue and recognized in the month the DTH service is provided.
Initial, non-refundable fees for subscriptions, installation and activation are recognized upon activation of the new subscriber's DTH services. Customer acquisition costs are expensed as incurred.
The Group provides 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.
j. Advertising costs -
Advertising expenses are expensed as the advertisements are aired and amounted to Ps.209,581, Ps.211,637 and Ps.223,134 during the years ended December 31, 2004, 2003 and 2002 respectively.
k. Risk 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.118,332 in 2004, Ps.101,762 in 2003 and Ps.121,219 in 2002 (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 Group has not secured an alternative satellite or service
provider and therefore, any long term disruption to one or more of the transmission signals could have a material adverse effect on the Group's financial position or results of operations.
l. Derivative financial instruments -
The Group uses derivative financial instruments for the purpose of reducing its exposure to adverse fluctuations in foreign exchange rates and interest rates. Under Bulletin C-2, which is effective through December 31, 2004, derivative financial instruments that qualify for hedge accounting are recorded in the balance sheet, on the same basis of the hedged assets or liabilities, and changes in value are recorded in each period in the income statement. Derivative financial instruments that do not qualify for hedge accounting are recorded in the balance sheet at their fair value and changes in the fair value are recorded in each period in the income statement.
In April 2004, the MIPA issued Bulletin C-10, "Derivative Financial Instruments and Hedge Operations". Bulletin C-10 establishes accounting and reporting standards requiring that all derivative instruments, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or a liability measured at its fair value. Bulletin C-10 also requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria is met. Special accounting for qualifying hedges allows a derivative's gain or loss to offset related results on the hedged item in the income statement and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. Bulletin C-10 is effective for periods beginning on January 1, 2005, with early adoption recommended. The Group is evaluating the effect of the adoption of Bulletin C-10 in 2005 in its consolidated financial statements.
m. Comprehensive income (loss) -
Comprehensive income (loss) represents the net income (loss) for the period presented in the income statement plus other results for the period reflected in equity owners' deficit which are from non-owner sources (Note 17).
n. Impairment of long-lived assets
Through December 31, 2003, the Group evaluated the recoverability of its long-lived assets to determine whether current events or circumstances warranted adjustment to the carrying value. Such evaluation was based on current and projected income and cash flows from operations as well as other economic and market variables.
Effective January 1, 2004, the Group adopted Bulletin C-15, "Impairment in the Value of Long-Lived Assets and their Disposal", issued by the MIPA, which establishes, among other things, the general criteria for the identification, and, when applicable, the recording of impairment losses or decrease in the value of long-lived assets, tangible and intangible, including goodwill. The adoption of Bulletin C-15 in 2004 did not have a significant impact on the Group's financial position or results of operations.
o. Income tax -
The recognition of deferred income tax is made by using the comprehensive asset and liability method. Under this method, deferred income taxes are calculated 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. Changes in income tax rates are recognized at the enactment date.
The recognition of a valuation allowance for certain deferred tax assets is established when available evidence does not indicate that there is a highly probable 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.
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, 2004 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, 2004 using the NCPI as of December 31, 2004.
- The statements of income (loss) and changes in equity owners' deficit have been restated in Mexican Pesos in purchasing power as of December 31, 2004 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, primarily satellite transponders, are restated using a 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 equity owners' deficit -
Capital stock and other equity owners' deficit accounts (other than the excess / 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, 2004. The deficit / excess from restatement includes the result from holding non-monetary assets and is the cumulative difference between the cost of the non-monetary assets restated using NCPI and the restatement of such assets using the Specific Index.
Integral cost 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, 2004, 2003 and 2002, 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:
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, 2004, 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, 2004, 2003 and 2002 was 112.550, 106.996 and 102.904 respectively.
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:
2004 2003
----------- -----------
Trade accounts receivable Ps. 170,255 Ps. 178,474
Allowance for doubtful accounts (87,152) (73,908)
----------- -----------
Ps. 83,103 Ps. 104,566
=========== ===========
|
The allowance for doubtful accounts for the years ended December 31, 2004, 2003 and 2002, was as follows:
2004 2003 2002
----------- ----------- ----------
Beginning balance Ps. 73,908 Ps. 79,993 Ps. 92,724
Additions (bad debt expense) 118,332 101,762 121,219
Write offs (105,088) (107,847) (133,950)
----------- ----------- ----------
Ending balance Ps. 87,152 Ps. 73,908 Ps. 79,993
=========== =========== ==========
|
NOTE 5 - PROPERTY AND EQUIPMENT, NET:
Property and equipment, net as of December 31, consists of:
2004 2003
------------- -------------
Integrated receiver/decoders Ps. 2,925,745 Ps. 2,790,422
Transmission equipment 430,607 399,440
Antennas, LNBs and accessories 1,047,429 842,567
Computer equipment 544,362 513,189
Furniture 21,913 21,382
Transportation equipment 25,376 21,498
Buildings - 895
------------- -------------
4,995,432 4,589,393
Accumulated depreciation (3,619,949) (3,167,005)
------------- -------------
1,375,483 1,422,388
Land - 1,420
Equipment in progress 92,947 34,108
Advances to suppliers 19,404 12,314
------------- -------------
Ps. 1,487,834 Ps. 1,470,230
============= =============
|
Depreciation expense for the years ended December 31, 2004, 2003 and 2002 was Ps.645,070, Ps.729,841 and Ps.803,642, respectively.
The Group recorded an impairment loss on certain transmission equipment and other equipment not in use of Ps.33,661 (which was included in "Restructuring and non-recurring items" line item) during the year ended December 31, 2002. As of April 2002, the Group ceased utilizing the service of the Solidaridad 2 satellite. At that date, transmission equipment with a net book value of Ps.41,937 associated with Solidaridad 2 was maintained by the Group and for which it decided to recognize such impairment charge for the equipment that it concluded could not be utilized by the PAS-9 satellite, and to create a spare-part inventory for the remaining Ps.8,276 of transmission equipment that could be utilized by the PAS-9 satellite. In 2004, the Group made a new evaluation of the use of said spare-part inventory and recognized an impairment charge amounting to Ps.5,174.
At December 31, 2004 and 2003, IRDs, transmission equipment, computer equipment and transportation equipment include assets restated with the Specific Index and which are of a non-Mexican origin of Ps.478,174 and Ps.341,150, respectively, net of accumulated depreciation. Computer equipment includes Ps.202,406 and Ps.188,043 of capitalized software costs as of December 31, 2004 and 2003, 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 concession authorizing the use of PAS-9 was granted by the federal government through the SCT in November 2000. 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.
The balance of the satellite transponders as of December 31, is as follows:
2004 2003
------------- -------------
Satellite transponders Ps. 1,659,346 Ps. 1,695,219
Accumulated depreciation (479,367) (376,716)
------------- -------------
Ps. 1,179,979 Ps. 1,318,503
============= =============
|
Amortization of satellite transponders in 2004, 2003 and 2002 was Ps.110,623, Ps.113,014 and Ps.107,160, 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
-------------
2005 Ps. 227,440
2006 227,440
2007 227,440
2008 227,440
2009 227,440
Thereafter 1,293,245
-------------
2,430,445
Less: amount representing interest (1,035,087)
-------------
Ps. 1,395,358
=============
|
Interest expense recognized during the years ended December 31, 2004, 2003 and 2002 was Ps.171,100, Ps.178,682 and Ps.174,740, respectively.
The obligation is reflected on the consolidated balance sheet as of December 31, as follows:
December 31,
---------------------------------
2004 2003
------------- -------------
Current portion Ps. 70,743 Ps. 66,820
Long-term portion 1,324,615 1,477,795
------------- -------------
Ps. 1,395,358 Ps. 1,544,615
============= =============
|
The obligations of the Group under the PAS-9 agreement are proportionately guaranteed by the Group's equity owner's in relation to their respective ownership interests.
NOTE 7 - DEFERRED COSTS, NET:
Deferred costs, net as of December 31, consist of:
2004 2003
---------- ----------
Debt issuance costs, net (a) Ps. 36,284 Ps. 53,941
Leasehold improvements, net (b) 5,214 7,287
---------- ----------
Ps. 41,498 Ps. 61,228
========== ==========
|
a. Debt issuance costs
2004 2003
---------- ----------
Old Senior Notes (1) Ps. - Ps. 44,468
New Senior Notes (2) 41,467 41,467
---------- ----------
41,467 85,935
Less: Accumulated amortization (5,183) (31,994)
---------- ----------
Total capitalized expenses, net Ps. 36,284 Ps. 53,941
========== ==========
|
(1) During 2003, the Group expensed as a non-recurring item, Ps.48,052 corresponding to the unamortized debt issuance costs in respect of noteholders that accepted to exchange their Old Senior Notes for the New Senior Notes (Note 9). The remaining Ps.44,468 related to the proportional debt issuance cost of the Old Senior Notes which were not exchanged, which would continue to be amortized over the remaining term of the Old Senior Notes.
In December 2004, the Group expensed as a non-recurring item Ps.9,750 relating to the remainder of the Old Senior Notes since the Group obtained a bank loan to pay in advance the remaining Old Senior Notes (Note 9).
(2) Fees and expenses incurred for the issuance of the New Senior Notes (Note
9), will be amortized over the term of the New Senior Notes.
Amortization of debt issuance costs was Ps.8,397, Ps.17,248 and Ps.18,867 in 2004, 2003 and 2002, respectively.
b. Leasehold improvements
Amortization of leasehold improvements was Ps.2,364, Ps.3,858 and Ps.10,410 in 2004, 2003 and 2002, respectively.
NOTE 8 - TRANSACTIONS WITH AFFILIATED COMPANIES AND OTHER RELATED PARTIES:
The principal transactions of the Group with affiliated companies and related parties are:
2004 2003 2002
---------- --------- ------------
Borrowings and accrued interest from
Equity owners Ps. - Ps. - Ps.4,293,332
Broadcasting services, Florida (a) 93,692 89,632 89,807
Programming (b) 249,618 215,479 195,756
Special events programming (c) 148,236 130,317 200,381
Advertising costs (d) 129,509 132,551 140,003
Royalties (e) 85,696 65,878 48,370
Broadcasting services, Mexico City (f) 45,583 47,767 42,146
Fixed asset acquisitions 3,715 - 12,840
Acquisition of smart cards 70,467 12,314 11,030
Finance costs - 224,904 312,006
Management and administrative services 6,618 2,278 7,921
Maintenance services 1,580 4,120 13,785
Advertising revenue 50,257 27,240 31,404
Transmission services, income 6,505 6,423 7,844
Other 1,615 696 8,564
|
(a) The Group has an 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.$8.0 million per year.
(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 smart cards, new subscribers during the period and the number of IRD's purchased.
(f) The Group purchases uplink and downlink, playout and compression services from an affiliate of Televisa for operations conducted in the Mexico City broadcast facility.
(g) The Group has engaged the law firm of Mijares, Angoitia, Cortes y Fuentes, S. C. to advise them on various legal issues. Two of their partners, currently on leave from the partnership, serve as members of the Group's Board. The fees paid to such law firm during 2004 and 2003 were Ps.1,149 and Ps.460, respectively. In 2002 no legal fees were paid.
The outstanding balances due to affiliates and other related parties, are as follows:
2004 2003
------------- -------------
Televisa and subsidiaries (h) Ps. 127,450 Ps. 384,817
News Corporation and subsidiaries 57,290 63,591
------------- -------------
Ps. 184,740 Ps. 448,408
============= =============
|
(h) Amount includes the remaining liability for the prepaid advertising to Televisa. On December, 2004, the Group entered into one-year advertising agreements with Televisa and subsidiaries for Ps.125,000, covering the period January 1, 2005 to December 31, 2005. In December 2003, the Group entered into one-year advertising agreement amounting to Ps.131,489, covering the period January 1, 2004 to December 31, 2004.
The liability amounting U.S.$15 million that the Group had in 2003 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 was contributed as an additional paid in capital in May 2004. (Note 13).
NOTE 9 - SENIOR NOTES:
The Senior Notes consist of the following balances as of December 31:
2004 2003
---------------- ----------------
New Senior Notes (a) Ps. 3,344,700 Ps. 3,542,302
Old Senior Notes (b) 981,112 1,039,075
---------------- ----------------
Ps. 4,325,812 Ps. 4,581,377
Less: short term
Old Senior Notes 981,112 -
---------------- ----------------
Senior Notes long term Ps. 3,344,700 Ps. 4,581,377
================ ================
|
(a) On September 19, 2003 the Group completed the offering of U.S.$300 million
of its Senior Notes due 2013 ("New Senior Notes"). The New Senior Notes
bear interest at a coupon rate of 9.375%, payable semiannually on March 19
and September 19 of each year, commencing March 19, 2004. Interest will be
computed on the basis of a 360-day year or twelve 30-day months. The New
Senior Notes are unsecured and unsubordinated indebtedness of the Group
and contain certain covenants relating to the Group, including covenants
with respect to: (i) limitations on additional indebtedness; (ii)
limitations on liens; (iii) limitations on sales and leasebacks; (iv)
limitations on restricted payments; (v) limitations on asset sales; and
(vi) limitations on certain mergers, consolidations and similar
transactions.
The Group may, at its own option, redeem the New Senior Notes, in whole or in part, at any time on or after September 19, 2008 at the following redemption prices (expressed in percentages of the principal amount), plus accrued and unpaid interest, if any:
If redeemed during
the twelve-month
period commencing Redemption
September 19, percentage
------------------ ------------
2008 104.6875
2009 103.1250
2010 101.5625
2011 100.0000
|
In addition, on or before September 19, 2006, the Group may, at its own option and subject to certain requirements, use the proceeds from one or more qualified equity offerings to redeem up to 35% of the aggregate principal amount of the New Senior Notes at 109.375% of their principal amount, plus accrued and unpaid interest.
The net proceeds from the offering of the New Senior Notes were used to redeem on October 20, 2003 U.S.$287.0 million in principal amount of the Group's 12 7/8% Old Senior Notes due 2007 (see below), and to pay a redemption premium of US$9.2 million, and fees and expenses relating to the transaction of US$3.8 million (Note 7-a).
(b) In 1997, the Group concluded an offering of U.S.$375 million of its Senior Notes due 2007 ("Old Senior Notes"). The Old 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 Old Senior Notes is payable semi-annually on April 1 and October 1 of each year and commenced on October 1, 1997. The Old Senior Notes are uncollateralized, unsubordinated indebtedness of the Group and contain certain covenants similar to the New Senior Notes.
The U.S.$88 million in Old Senior Notes that were not exchanged continued to accrue interest at 12 7/8% per annum, and remained outstanding in accordance with their original terms until January 7, 2005 when these Senior Notes were paid (Note 19).
NOTE 10 - BANK LOAN:
On December 10, 2004, the Group entered into a Ps1,012 million, 7-year bank loan with a fixed interest rate of 10.55% per annum and an initial five-year grace period for principal repayments with HSBC Mexico, S. A. a Mexican financial institution. This loan will be paid in eight equal quarterly payments during 2010 and 2011. Interest payments are due on a monthly basis. The loan is guaranteed by Televisa in 51% and News Corporation in 49%.
The new proceeds from the loan were used on January 7, 2005 to pay the remaining US$88 million principal amount of the 12 7/8% notes due 2007 plus accrued and unpaid interest.
NOTE 11 - FINANCIAL INSTRUMENTS:
a. Fair value:
The Group's financial instruments include cash and cash equivalents, trade accounts receivables, trade accounts payable, due to affiliated companies and other related parties, and debt. For cash and cash equivalents, trade accounts receivables, other accounts receivable, trade accounts payable, and due to affiliated companies and other related parties, the carrying amounts approximate fair value due to the short maturity of these instruments.
The fair value of the Senior Notes is based on quoted market prices. The estimated fair value of these instruments at December 31, 2004 and 2003 is as follows (amounts in thousands):
Carrying value Fair value
---------------------------- ----------------------------
(1) (1)
December 31, 2004 New Senior Notes U.S.$ 300,000 Ps.3,344,700 U.S.$ 340,500 Ps.3,796,235
Old Senior Notes U.S.$ 88,000 Ps. 981,112 U.S.$ 88,000 Ps. 981,112
Cross currency swaps U.S.$ - Ps. - U.S.$ 1,059 Ps. 11,807
Foreign exchange
contracts U.S.$ - Ps - U.S.$ 19 Ps 212
Loan facility (HSBC) Ps.1,012,000 Ps.1,012,000
December 31, 2003 New Senior Notes U.S.$ 300,000 Ps.3,367,500 U.S.$ 307,890 Ps.3,456,065
Old Senior Notes U.S.$ 88,000 Ps. 987,800 U.S.$ 89,100 Ps.1,000,148
|
(1) The exchange rate used to convert pesos to dollars was $1 to 11.149 ($1 to 11.225 in 2003).
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.
b. Derivative financial instruments:
Cross currency swap
In February 2004, Innova entered into two separate derivative transactions denominated "cross currency swap" agreements to hedge a portion of its U.S. dollar foreign exchange exposure resulting from the issuance of the U.S.$300 million 9.375% New Senior Notes that mature in 2013. Under the transactions, Innova receives semi-annual payments calculated based on an aggregate notional amount of U.S.$300 million at an annual rate of 9.375% and makes monthly payments calculated based on an aggregate notional amount of Ps.3,282 million at an annual rate of 10.25%. The transactions, both of which terminate in September 2008, are designed to reduce the Group's foreign exchange exposure on the interest coupon payments on the New Senior Notes.
As a result of the timing difference in payments between the Bank and the Group, the Group has an account receivable from the Bank amounting to Ps.76,631 which is included in other accounts receivables.
Foreign exchange contracts
At December 31, 2004, Innova has U.S.$15 million in forward exchange contracts. These forward exchange contracts have various termination dates (January, February and March 2005).
NOTE 12 - 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 2005 commitment will approximate U.S.$11.7 million for royalties, licenses and maintenance of the foregoing systems. In 2004, 2003, and 2002, the Group incurred expenses of US$8.7 million, US$7.2 million and US$5.9 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.$4.6 million per year. The Group incurred expenses of US$4.9 million in 2004, US$4.1 million in 2003 and US$3.9 million in 2002.
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.852,852, Ps.767,480 and Ps.718,899 for the years ended December 31, 2004, 2003 and 2002, respectively.
b. The Group entered into two related agreements with CSG Software, Inc. (CSG), on June 12, 2002 under which CSG provides: 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 paid US$2.9 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 begins, the annual cost for this service will be US$585,600. It is possible in accordance with the agreement to use the Kenan system for other DTH platform in case of merger, acquisition or combination of platforms. The new SMS was placed in service on November 2003.
Under the Consulting Services agreement, CSG provided 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 in operation, in accordance with a Implementation Planning and Analysis process (IPA), previously agreed with the Group. The total cost of these services is US$4.4 million. As of December 31, 2004, US$4.2 million were paid and the US$0.2 million remaining were paid in January 2005.
c. Since January 1, 2002, a 10% federal 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. In August 15, 2003, the Group received a favorable resolution for the excise tax paid in 2002; however, the tax authorities have not returned the tax paid by the Group due to said authorities continue requesting supportive documentary information. The Group continues proceeding to recover the excise tax paid in 2002 but, it can not assure that it will be able to recover it. The resolution for the excise tax paid in 2003 was unfavorable for the Group; therefore, the excise tax paid in that year will not be recovered. The 10% excise tax on telecommunications was definitely eliminated as of January 2004.
d. On October 8, 2004, Grupo Galaxy Mexicana, S. de R. L. de C. V. "DIRECTV Mexico" and the Group signed an agreement, where by DIRECTV Mexico sold its subscriber list to the Group upon its decision to discontinue its operations in Mexico. The purchase price payable by the Group to DIRECTV Mexico for the subscriber list shall be payable by delivering to DIRECTV Mexico two duly executed promissory notes "the Notes" in the original principal amount of Ps.144,112, and Ps.477,000, respectively. The Notes will be paid on the earlier of (i) the fifth business day following the date on which the Group and DIRECTV Mexico have finally determined the number of good subscribers or (ii) October 9, 2009, as such earlier date may be extended by DIRECTV Mexico in its sole discretion. These Notes may not be prepaid in whole or in part at any time.
If the number of good subscribers is greater than 180,000, then the Group shall pay to DIRECTV an additional cash amount, but if it is less than 70,000, and DIRECTV Mexico fails to surrender the Notes for cancellation and exchange as provided in the agreement, then DIRECTV Mexico shall pay to the Group a cash amount equal to the subscriber deficit, multiplied by U.S.$787.
A good subscriber is any active subscriber that: (i) becomes a subscriber of the Group after October 8, 2004 (whether or not pursuant to the active migration efforts of the Group) and signs a subscription agreement in accordance with the Group's policies, and (ii) between the date hereof and the measurement date (seven months after the migration date), pays in full all up-front subscription charges (all subscription fees, and other charges, including, without limitation, those relating to IRD rentals, membership, insurance, reactivation, smarts cards, magazines, pay-per-view and special events) and six monthly subscription charges for the Group's residential subscription programming covering at least six consecutive months of paid service (or at least four monthly subscription charges for Group's residential subscription programming covering at least four consecutive months of paid service if all payments are made using an automatic charge to the subscriber's credit card but not to the subscriber's debit card).
The Group, Innova Holdings and News Corp. entered into an option agreement, pursuant to which News Corp. was granted an option to acquire up to a 15% equity interest in each of Innova and Innova Holdings. The amount of equity to be received upon the exercise of the
option depends on the successful migration and retention of DIRECTV Mexico's subscribers to Innova with a minimum migration of 175,000 subscribers required for the issuance of the full 15% equity interest. The options become exercisable when the DTH business operations of DIRECTV Mexico have finally ceased, the Group and DIRECTV Mexico have finally determined the number of subscribers that successfully migrated from DIRECTV Mexico to the Group, and certain other conditions have been satisfied. If the options become exercisable, the holder may exercise them by delivering to Innova and Innova Holdings the promissory notes for cancellation or by paying to Innova and Innova Holdings an amount in cash equal to the aggregate principal amount of the promissory notes. The options expire on October 8, 2009. If the options are terminated under certain limited circumstances related to regulatory challenges, or after a final determination that renders the options illegal, or expire unexercised, then within ten days of the expiration date, DIRECTV Mexico will be entitled to receive an aggregate cash payment (including any payments made under the notes described above) of up to approximately U.S.$137.7 million if 175,000 DIRECTV Mexico subscribers successfully migrate to Innova. Termination of the option is limited to certain limited events;
DIRECTV and News Corp. entered into a purchase agreement pursuant to which DIRECTV acquired (i) the right (which DIRECTV concurrently assigned to DIRECTV Latin America LLC (DTVLA)) to purchase from News Corp. the options granted to News Corp. by Innova and Innova Holdings to purchase up to an additional 15% of the outstanding equity of each of such entities pursuant to the option agreement described above, and (ii) the right to acquire News Corp.'s 30% interest in Innova;
DIRECTV and Liberty Media, entered into a purchase agreement pursuant to which DIRECTV agreed to purchase all of Liberty Media's 10% interest in Innova for U.S. $88.0 million in cash, subject to customary closing conditions. DIRECTV has agreed that Televisa may purchase two-thirds (2/3) of any equity interest in Innova sold by Liberty Media, on the terms and subject to the conditions set forth in the purchase agreement between DIRECTV and Liberty Media;
Televisa entered into an amended and restated guaranty with PanAmSat pursuant to which the proportionate share of our transponder lease obligation guaranteed by Televisa was reduced from 60% to 51%, until the full exercise of the options to News Corp. granted by Innova and Innova Holdings, at which point Televisa's guarantee will be adjusted to cover a percentage of the transponder lease obligations equal to its percentage ownership of Innova at that time. News Corporation's proportionate share of the guarantee was increased from 30% to 49% and Liberty Media was released of its guarantee; and
The Group, Televisa, News Corp., DIRECTV and DTVLA entered into a DTH agreement that, among other things, governs the rights of the parties with respect to DTVLA's announced shut down of its Mexican DTH business, planned shut down of its existing DTH business in certain countries in Central America and the Caribbean, the carriage of certain of Televisa's programming channels by the Group and other DTH platforms of DIRECTV, DTVLA, News Corp. and their respective affiliates, and the waiver and potential release of certain claims between certain of the parties.
e. The Group and Televisa entered into a channel licensing agreements pursuant to which the Group will pay Televisa a royalty fee to carry its over-the-air channels on its DTH service.
f. The Company is in the process to enter into a new 3-year agreements with TV Azteca to continue broadcasting its over-the air channels 7 and 13, the annual fee will be $2 million; additionally, there will be another agreement where the Group will acquire from TV Azteca $94 million in advertising over three years. On the other hand, the Group is negotiating to have the pay-TV exclusive rights of various soccer matches, the fee has not been determined.
NOTE 13 - SOCIAL PARTS:
The social parts as of December 31, 2004 and 2003, is represented by four partnership interests, of unequal value distributed as follows:
December 31, 2004:
Partnership
interest Subseries Amount
----------- --------- --------------
1 A-1 Ps. 926,570
1 B-1 463,285
1 B-2 154,428
1 C 5,111,396
|
December 31, 2003:
Partnership
interest Subseries Amount
----------- --------- --------------
1 A-1 Ps. 926,563
1 B-1 463,282
1 B-2 154,427
1 C 5,111,396
|
Effective September 9, 2003, the Group's equity owners capitalized all outstanding principal amounts of the loans made by them to the Group totaling Ps.3,617,469 as well as the portion of accrued interest as of such date which amounted to Ps.945,683. These loans were capitalized in exchange for a proportionate interest in Innova Holdings, S. de R. L. de C. V. ("Innova Holdings"), a newly created company. Innova Holdings is the holder of a 100% of Series "C" partnership interest, described below. After giving effect to the capitalization, the Group's equity owners Televisa, News Corporation and Liberty Media, continue to indirectly own 60%, 30% and 10% of Innova, respectively.
Series "A" is composed of a partnership interest representing 13.92% of the total social parts. The Series "A" partnership interest may be subscribed to only by persons of Mexican nationality.
Series "B" is composed of a partnership interest representing 9.28% of the total social parts. 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.
Series "C" is composed of a partnership interest representing 76.80% of the social parts. The Series C interest are owned by Innova Holdings and have limited voting rights.
On May 24, 2004 the Group capitalized the existing liability in the amount of Ps.179,784 (U.S.$15 million) arising from the use of rights to air the Mexican Soccer games corresponding to the 2001, 2002 and 2003 winter-summer seasons. This amount was recorded as an additional paid in capital not affecting the relative ownership interest of its equity owners.
Dividends paid are not subject to income tax if paid from the Net Tax Profit Account and will be taxed at a rate that fluctuates between 4.62% and 7.69% if they arise from the reinvested Net Tax Profit Account. Any excess over this account is subject to a tax equivalent to 49.25% and 47.06% depending on whether paid in 2004 and 2005 respectively. The tax is payable by the company and may be credited against its income tax in the same year or the following two years. Dividends paid are not subject to tax withholding.
The ability of the Group to declare dividends is restricted by the New and Old Senior Notes indentures.
In the event of a capital reduction, any excess of the equity owners over capital contributions, the latter restated in accordance with the provisions of the Income Tax Law, is accorded the same tax treatment as dividends.
NOTE 14 - RESTRUCTURING AND NON-RECURRING ITEMS:
a. The restructuring charges recognized in 2004, 2003 and 2002 consisted of severance costs in connection with employee terminations. There are no provisions set aside at December 31, 2003 and 2004.
b. In 2004, the Group recognized a nonrecurring loss in the amount of Ps.9,750, which is composed of the write-off of the remaining unamortized debt issuance cost related to the $88 million Old Senior Notes. (Note 7).
c. In 2003, as a result of the restructuring of the Senior Notes, the Group recognized a nonrecurring loss in the amount of Ps.152,687 (net), which is mainly composed of the premium on redemption payment, and the unamortized debt issuance cost of corresponding to the Old Senior Notes that were exchanged for the New Senior Notes (Note 7).
d. On October 30, 2003, the Federal Executive approved a temporary tax incentive equal to 100% of the 10% excise tax on telecommunications, effective November 1, 2003 and applicable only to the tax triggered from this date through December 31, 2003. Therefore,
during the months of November and December 2003, the Group recorded, the effects of the tax incentive above mentioned amounting Ps.42,053, as a non-recurring charge.
e. As explained in Note 6 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.33,661 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.15,512, was offset by the reversal of unutilized reserve amounts initially established in 2000 amounting to Ps.20,809, and reflected as a nonrecurring charge of Ps.28,364 in 2002.
NOTE 15 - ACCUMULATED LOSSES:
Under Mexican Corporate Law, interested third parties can request the dissolution of the Group if accumulated losses exceed two-thirds of social parts. At December 31, 2004, the Group's accumulated losses exceeded its social parts. 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 16 - PROVISION FOR INCOME TAX ("IT"), ASSETS TAX ("AT") AND EMPLOYEES' STATUTORY PROFIT SHARING:
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.
At December 31, 2004, the Group had total tax loss carryforwards of Ps.7,902,560, 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
---------- -------------
2005 Ps. 9
2006 2,035
2007 660,951
2008 2,062,242
2009 736,429
2010 983,794
2011 769,016
2012 1,416,911
2013 717,890
2014 553,283
-------------
Ps. 7,902,560
=============
|
The following items represent the principal differences between income taxes computed at the statutory rate and the Group's provision for income taxes:
2004 2003 2002
------------ ------------- -------------
Tax at the statutory rate 33% in 2004 (34% in
2003 and 35% in 2002) on income (loss)
before taxes Ps. 190,294 (Ps. 327,869) (Ps. 648,130)
Differences in restatement 51,963 134,044 98,258
Valuation allowance - 238,040 636,383
Tax loss carryforwards (162,762) - -
Deferred advertising (16,185) (4,198) (14,576)
Depreciation and amortization (4,710) (10,504) (47,110)
Debt issuance costs 1,989 8,236 3,817
Provisions (42,526) (30,111) (12,103)
Deferred income 8,069 16,840 (8,002)
Other (26,132) (24,478) (8,537)
------------ ------------ ------------
Provision for income tax - - -
Assets tax (198) 123,125 (82,613)
------------- ------------- -------------
Total Ps. (198) Ps. 123,125 (Ps. 82,163)
============ ============= =============
|
Deferred taxes at December 31, 2004 and 2003, were generated by the following temporary differences and tax loss carryforwards:
2004 2003
-------------- --------------
Prepaid expenses (Ps. 39,523) (Ps. 18,591)
Other deferred costs 6,454 5,899
Property and equipment 120,745 97,092
Deferred income 42,306 47,889
Accrued expenses 121,826 115,998
Satellite transponders, net 64,614 74,617
Debt issuance costs (10,182) (13,812)
Tax loss carryforwards 2,370,768 2,841,769
-------------- --------------
2,677,008 3,150,861
Valuation allowance (2,677,008) (3,150,861)
-------------- --------------
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, 2004 and 2003.
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. In 2004, 2003 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. The Group 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 the Group could lose the appeal, the Group paid Ps.43,284 of tax on assets for the year ended December 31, 2001, Ps.45,189 for the year ended December 31, 2002, and Ps.7,531 for the months of January and February 2003. On March 19, 2003, the court issued a resolution in the Group's favor, allowing the Group to deduct debts payable to nonresidents from the asset tax basis. In addition, subsequent to March 19, 2003, the Group has recovered the amounts previously paid as described above.
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. Effective January 1, 2005, with the recent changes in the tax law, Televisa will once again consolidate at 100% of its ownership interest for tax purposes.
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.
NOTE 17 - COMPREHENSIVE INCOME (LOSS):
Comprehensive income (loss) for the years ended December 31, 2004, 2003 and 2002, was as follows:
2004 2003 2002
------------ ------------ ----------------
Net income (loss) per consolidated statements
of income (loss) Ps. 576,287 (Ps. 840,110) (Ps. 1,934,414)
Result from holding non-monetary assets
for the year (40,049) 116,103 179,692
Minority interest (136) (2,734) (22)
Supplementary liability for labor obligations (3) 42 (129)
------------ ------------ ----------------
Comprehensive income (loss) for the year Ps. 536,099 (Ps. 726,699) (Ps. 1,754,873)
============ ============ ================
|
NOTE 18 - FOREIGN CURRENCY POSITION:
a. The foreign currency position of monetary items of the Group at December 31, 2004 and 2003, were as follows:
2004:
Foreign currency Year-end Mexican pesos
Currency amounts (thousands) Exchange rate (1) (thousands) (1)
-------- ------------------- ----------------- ---------------
Assets:
U.S. Dollars 152,121 11.149 Ps. 1,695,997
Liabilities:
U.S. Dollars 546,913 11.149 6,097,533
|
2003:
Foreign currency Year-end Mexican pesos
Currency amounts (thousands) Exchange rate (1) (thousands) (1)
-------- ------------------- ----------------- ---------------
Assets:
U.S. Dollars 42,331 11.225 Ps. 475,165
Liabilities:
U.S. Dollars 574,056 11.225 6,443,779
|
b. The foreign currency position of non-monetary items of the Group at December 31, 2004 and 2003, were as follows:
2004:
Foreign currency Year-end Mexican pesos
Currency amounts (thousands) Exchange rate (1) (thousands)(1)
----------------------- ------------------- ----------------- --------------
Property and equipment:
U.S. Dollars 36,718 11.149 409,369
Pounds Sterling 1,730 21.52 37,230
Yen 27,422 0.1090 2,989
Canadian dollar 422 9.38 3,958
French France 63 15.25 960
Satellite transponders:
U.S. Dollars 95,447 11.149 1,064,138
|
2003:
Foreign currency Year-end Mexican Pesos
Currency amounts (thousands) exchange rate (1) (thousands)(1)
----------------------- ------------------- ----------------- --------------
Property and equipment:
U.S. Dollars 22,755 11.225 Ps. 255,425
Pounds Sterling 2,210 20.32 44,907
Yen 37,031 0.1070 3,962
Canadian dollar 277 8.91 2,468
Satellite transponders:
U.S. Dollars 104,396 11.225 1,171,845
|
c. Transactions during 2004, 2003 and 2002 in foreign currencies included in the consolidated statements of income (loss) were as follows:
2004:
Foreign
currency Year-end
amounts exchange Mexican Pesos
Currency (thousands) rate (1) (thousands) (1)
------------ ----------- -------- ---------------
Interest income U.S. Dollars 848 11.149 9,454
Costs and expenses:
Transponder expense U.S. Dollars 20,400 11.149 227,440
Broadcasting U.S. Dollars 8,284 11.149 92,358
Programming U.S. Dollars 66,616 11.149 742,702
Royalty fees U.S. Dollars 5,606 11.149 62,501
Other expenses U.S. Dollars 13,034 11.149 145,316
Interest expense U.S. Dollars 41,488 11.149 462,550
|
2003:
Foreign
currency Year-end
amounts exchange Mexican Pesos
Currency (thousands) rate (1) (thousands) (1)
------------ ----------- -------- ---------------
Interest income U.S. Dollars 1,079 11.225 Ps. 12,112
Costs and expenses:
Transponder expense U.S. Dollars 20,400 11.225 228,990
Broadcasting U.S. Dollars 12,536 11.225 140,717
Programming U.S. Dollars 64,300 11.225 721,768
Royalty fees U.S. Dollars 5,769 11.225 64,757
Other expenses U.S. Dollars 9,163 11.225 102,855
Interest expense U.S. Dollars 76,643 11.225 860,318
|
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 21,900 10.464 229,162
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
|
(1) For reference purposes only. Does not indicate the actual amounts presented in the consolidated statement of income (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, 2004 and 2003, the exchange rate between the Mexican Peso and the U.S. Dollar was Ps.11.149 and Ps.11.225 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 March 18, 2005, the exchange rate was Ps.11.2193 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 19 - SUBSEQUENT EVENT:
The new proceeds from a bank loan (Note 10) were used on January 7, 2005 to pay the remaining US$88 million principal amount of the 12 7/8% notes due 2007 plus accrued and unpaid interest.
NOTE 20 - 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 income (loss) and total equity owners' deficit are described below:
Derivative financial instruments
The Group's activities expose it to a variety of market risks, including risks related to the effects of changes in foreign-currency exchange rates and interest rates. The Group uses forward currency agreements to protect its exposure to changes in the exchange rates created by its U.S. dollar-denominated debt. The Group also uses derivative instruments to minimize significant, unanticipated earnings fluctuations that may arise from volatility in interest rates.
Under Mexican GAAP and following the guidelines of Bulletin C-2, the Group recorded these derivative instruments, which qualify for hedge accounting, in the balance sheet, on the same basis of the hedged liabilities, and changes in value were recorded in each period in the income statement. However, for U.S. GAAP purposes, the Group has not undertaken to qualify these contracts as hedges, and as such, these derivative instruments should be recorded on the balance sheet at their fair value with changes in fair values taken directly to the income statement.
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.
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. Hence for U.S. GAAP purposes, property and equipment are restated by the NCPI and the difference in depreciation expense and carrying value are recognized in the net income (loss) and equity owners' deficit adjustments, respectively.
Revenue recognition
The Group provides 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. 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 U.S. 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 the ultimate customer. The accompanying condensed consolidated statement of income (loss) under U.S. GAAP for the years ended December 31, 2004, 2003 and 2002 therefore include an adjustment to reflect as revenue the amounts billed to subscribers and not the amounts received from intermediate parties.
In addition, under Mexican GAAP, initial non-refundable subscription fees are recognized upon activation of the new subscriber's DTH services. Under U.S. GAAP, initial non-refundable subscription fees are recognized over the period that a new subscriber is expected to remain a customer. Customer acquisition costs directly attributable to the income are recognized over the same period under U.S. 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, 2004, 2003 and 2002 amounted to Ps.102,490, Ps.127,762 and Ps.158,500, respectively. Under U.S. GAAP, deferred initial non-refundable subscription fee revenues of approximately Ps.170,305, Ps.209,463 and Ps.213,334 were recorded as of December 31, 2004, 2003 and 2002, respectively. In addition, customer acquisition costs, have been deferred to match and equal initial non-refundable subscription revenues; therefore at December 31, 2004, 2003 and 2002, deferred costs under U.S. GAAP also amounted to Ps.170,305, Ps.209,463 and Ps.213,334, respectively. Initial non-refundable subscription revenues (which are matched by customer acquisition costs) that have been recognized during the year amount to Ps.141,646 (Ps.136,383 and Ps.85,842 in 2003 and 2002, respectively).
These U.S. GAAP adjustments did not have any impact on operating or net income
(loss) in 2004, 2003 or 2002.
Presentation in the financial statements - Restructuring and non-recurring items
Under Mexican GAAP, the Group recognizes various cost as "Restructuring and non-recurring items", which would be considered operating expenses under U.S. GAAP. Such cost primarily include severance costs in connection with employee termination, the derived effects of the 10% excise tax on telecommunications, costs related to the redundant use of the Solidaridad 2 satellite and the increased costs to reorientate customer's antennas to PAS 9 in a short period of time (Note 14).
In addition, during the year ended December 31, 2003 the provisions of Statement of Financial Accounting Standard ("SFAS") No. 145, "Rescission of FASB Statement No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" became effective for the Group. As a result, the Group is not allowed to classify the loss on the restructuring of the Senior Notes as an extraordinary item, since the restructuring of the Senior Notes did not meet the criteria of Accounting Principles Board Opinion No. 30. Accordingly, the loss on restructuring of Senior Notes, which is comprised of the redemption premium on the Old Senior Notes (Note 9) and the unamortized cost of debt issuance costs corresponding to the Old Senior Notes that were exchanged for the New Senior Notes (Note 7), are classified as part of income from continuing operations under U.S. GAAP.
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, 2004 and 2003, are as follows:
2004 2003
---------------- ---------------
Deferred income tax liabilities:
Current:
Prepaid expenses and other (Ps. 44,547) (Ps. 18,591)
---------------- ---------------
Total current (44,547) (18,591)
Non-current:
Derivate financial instrument (3,306) -
Debt issuance costs (10,182) (13,813)
---------------- ---------------
Total deferred income tax liabilities (58,035) (32,404)
---------------- ---------------
Deferred income tax assets:
Current:
Satellite transponders, net 83,955 74,617
Accrued expenses 116,605 110,736
Deferred income 42,306 47,889
---------------- ---------------
Total current 242,866 233,242
Non-current:
Other deferred costs 6,454 5,899
Property and equipment 106,750 97,093
Tax loss carryforwards 2,370,768 2,841,790
---------------- ---------------
Total deferred income tax assets 2,726,838 3,178,024
Less: Valuation allowance (2,668,803) (3,145,620)
---------------- ---------------
Net deferred income tax assets 58,035 32,404
---------------- ---------------
Deferred income taxes Ps. - Ps. -
================ ===============
|
In conformity with the Income Tax Law, the Group restates the tax basis of property and equipment in a form similar to the restatement for financial reporting purposes, however based on a different date criteria.
Summary
Net income (loss) for the years ended December 31, 2004, 2003 and 2002, adjusted to take into account the principal differences between Mexican GAAP and U.S. GAAP, as they relate to the Group, are as follows:
2004 2003 2002
------------ ----------- --------------
Net income (loss) as reported under Mexican GAAP Ps. 576,287 (Ps.840,110) (Ps. 1,934,414)
Derivative financial instruments 11,807 - -
Satellite reorientation costs - - (35,344)
Maintenance reserve 1,448 2,862 7,746
Restatement of property and equipment 9,768 15,116 (1,085)
Restructuring charge - - (5,153)
------------ ----------- --------------
Net income (loss) in accordance with U.S. GAAP Ps. 599,310 (Ps.822,132) (Ps. 1,968,250)
============ =========== ==============
|
Equity owners' deficit as of December 31, 2004 and 2003, adjusted to take into account the principal differences between Mexican GAAP and U.S. GAAP, as they relate to the Group, are as follows:
2004 2003
---------------- ----------------
Total equity owners' deficit under Mexican GAAP (Ps. 3,000,820) (Ps. 3,716,714)
U.S. GAAP adjustments:
Derivative financial instruments 11,807 -
Maintenance reserve 17,400 15,952
Restatement of property and equipment (1,073) (51,026)
---------------- ----------------
Total U.S. GAAP adjustments 28,134 (35,074)
---------------- ----------------
Total equity owners' deficit under U.S. GAAP (Ps. 2,972,686) (Ps. 3,751,788)
================ ================
|
A summary of the Group's statement of changes in equity owners' deficit with balances determined under U.S. GAAP is as follows:
Balance at December 31, 2002 ($ 7,492,848)
Capitalization of equity owners' loans 4,563,150
Supplementary liability for labor obligations 42
Net loss for the year (822,132)
----------------
Balance at December 31, 2003 (3,751,788)
Capital contribution 179,795
Supplementary liability for labor obligations (3)
Net income for the year 599,310
----------------
Balance at December 31, 2004 (Ps. 2,972,686)
================
|
A summary of the Group's equity owners' deficit after the U.S. GAAP adjustments described above, as of December 31, is as follows:
2004 2003
---------------- ----------------
Social parts Ps. 6,655,679 Ps. 6,655,668
Additional paid in capital 179,784 -
Accumulated losses (9,820,988) (10,420,298)
Other comprehensive income:
Excess from restatement 12,946 12,946
Supplementary liability for labor obligations (107) (104)
---------------- ----------------
Total equity owners' deficit under U.S. GAAP (Ps. 2,972,686) (Ps. 3,751,788)
================ ================
|
Included below are condensed consolidated financial statements of the Group as of December 31, 2004 and 2003 and for the years ended December 31, 2004, 2003 and 2002, after giving effect to the U.S. GAAP adjustments.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Expressed in thousands of Mexican Pesos in purchasing power as of December 31, 2004)
December 31,
-------------------------------------
2004 2003
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents Ps. 1,696,793 Ps. 519,189
Trade accounts receivables, net 83,103 104,566
Other accounts receivables 76,631 -
Prepaid advertising 125,000 131,489
Other current assets 35,049 27,334
--------------- ---------------
Total current assets 2,016,576 782,578
Property and equipment, net 1,551,232 1,517,512
Satellite transponders, net 1,115,508 1,220,088
Deferred costs, net 211,803 270,692
Derivative financial instruments 11,807 -
Other non-currents assets - 8,674
--------------- ---------------
Total assets Ps. 4,906,926 Ps. 3,799,544
=============== ===============
|
December 31,
-------------------------------------
2004 2003
--------------- ---------------
LIABILITIES
Current liabilities:
Senior notes Ps. 981,112 Ps. -
Trade accounts payable 162,248 155,267
Accrued expenses 231,261 236,115
Satellite transponders obligation 70,743 66,820
Due to affiliated companies and other related parties 184,740 448,408
Other current liabilities 566,012 583,824
--------------- ---------------
Total current liabilities 2,196,116 1,490,434
Non-current liabilities:
Senior notes 3,344,700 4,581,377
Bank loan 1,012,000 -
Satellite transponders obligation 1,324,615 1,477,795
Other non-current liabilities 2,181 1,726
--------------- ---------------
Total liabilities 7,879,612 7,551,332
--------------- ---------------
Commitments and contingencies - -
Equity owners' deficit (2,972,686) (3,751,788)
--------------- ---------------
Total liabilities and equity owners' deficit Ps. 4,906,926 Ps. 3,799,544
=============== ===============
|
CONDENSED CONSOLIDATED STATEMENT OF INCOME (LOSS)
(Expressed in thousands of Mexican Pesos in purchasing power as of December 31, 2004)
Years ended December 31,
------------------------------------------------------------
2004 2003 2002
--------------- --------------- ---------------
Revenues from programming services Ps. 2,591,730 Ps. 2,231,904 Ps. 2,083,111
Revenues from rental of IRDs 1,333,274 1,031,785 880,298
Other revenues 796,913 676,600 663,521
--------------- --------------- ---------------
Net revenues 4,721,917 3,940,289 3,626,930
--------------- --------------- ---------------
Operating expenses:
Cost of sales - programming services 874,720 704,724 610,143
Cost of sales - other 472,677 457,977 424,421
Administrative expenses 132,554 131,485 145,125
Selling expenses 977,350 892,395 910,841
Other operating expenses 534,678 453,591 606,782
Depreciation and amortization 754,731 835,488 1,012,912
--------------- --------------- ---------------
Total operating expenses 3,746,710 3,475,660 3,710,224
--------------- --------------- ---------------
Operating profit (loss) 975,207 464,629 (83,294)
Loss on debt restructuring - (161,394) -
Integral results of financing (375,528) (1,249,580) (1,802,321)
--------------- --------------- ---------------
Income (loss) before tax 599,679 (946,345) (1,885,615)
Provision for income and asset taxes (198) 123,126 (82,613)
--------------- --------------- ---------------
Minority interest (171) 1,087 (22)
--------------- --------------- ---------------
Net income (loss) Ps. 599,310 (Ps. 822,132) (Ps. 1,968,250)
=============== ================ ===============
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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.
Presented below are statements of cash flow for the years ended December 31, 2004, 2003 and 2002, 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, 2004, purchasing power.
2004 2003 2002
---------------- ---------------- ----------------
Operating activities:
Net income (loss) Ps. 599,310 (Ps. 822,132) (Ps. 1,968,250)
Adjustments to reconcile net income (loss)
to cash flows (used in)
operating activities:
Gain from monetary position (308,289) (331,661) (545,372)
Unrealized exchange losses (gains) (39,000) 243,641 1,118,821
Allowance for doubtful accounts 118,332 101,763 121,220
Depreciation and amortization 754,731 835,488 1,012,912
Impairments and write downs 5,174 - 33,661
Changes in operating assets and liabilities:
Assets (138,537) (42,479) (127,305)
Liabilities (31,393) 513,959 688,708
---------------- ---------------- ----------------
Cash flows provided by
operating activities 960,328 498,579 334,395
---------------- ---------------- ----------------
Financing activities:
Bank loan 1,012,000 - -
Derivative financial instruments (11,807) - -
Capital contribution 11 - -
Equity owners' loans - - 337,635
Satellite transponders obligation (63,524) (54,858) (49,318)
Payments of Old Senior notes - (3,159,058) -
Proceeds from New Senior notes - 3,473,823 -
---------------- ---------------- ----------------
Cash flows provided by financing
activities 936,680 259,907 288,317
---------------- ---------------- ----------------
Investing activities:
Investment in property and equipment (683,871) (499,024) (368,691)
---------------- ---------------- ----------------
Cash flows used in investing activities (683,871) (499,024) (368,691)
---------------- ---------------- ----------------
Effects of inflation (35,533) (31,907) (11,804)
---------------- ---------------- ----------------
Increase in cash and cash
equivalents 1,177,604 227,555 242,217
Cash and cash equivalents, beginning
of period 519,189 291,634 49,417
---------------- ---------------- ----------------
Cash and cash equivalents, end of period Ps. 1,696,793 Ps. 519,189 Ps. 291,634
================ ================ ================
Interest and taxes paid:
Interest paid Ps. 445,835 Ps. 569,378 Ps. 541,554
Income and asset taxes paid 216 423 97,202
|
Non-cash Investing and Financing Activities
Excluded from the Cash Flows Statement for 2003, is the capitalization of the equity owners loans.
Recently Issued Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued FASB Statement 123 (Revised), "Share-Based Payment" ("FAS 123R"). FAS 123R requires all companies to measure compensation costs for all share-based payments (including employee stock options) at fair value and recognize such costs in the statement of operations. FAS 123R will become effective for Innova on January 1, 2006. The Company has not issued any employee stock options and accordingly, does not expect the adoption of the revised standard to have a significant impact on its financial statements.
In December 2004, the FASB issued FASB Statement 153, "Exchanges of Nonmonetary Assets an amendment of APB Opinion No. 29" ("FAS 153"). FAS 153 eliminates the exception to account for nonmonetary exchanges of similar productive assets at carrying value and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance; otherwise, the exchange principal of fair value applies. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. FAS 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The provisions of FAS 153 are not expected to have a material impact on the Company's consolidated financial statements.
In November 2004, the FASB issued FASB Statement 151, "Inventory Costs" ("FAS 151"). FAS 151 amends the guidance in Accounting Research Bulletin 43, "Inventory Pricing" ("ARB 43") and requires abnormal amounts of idle facility expense, freight handling costs and wasted material (spoilage) to be recognized as current-period charges regardless of whether they meet the criterion of "so abnormal" as previously defined in ARB 43. Furthermore, FAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. FAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The provisions of FAS 151 will not have a significant impact on the Company's financial statements.
EXHIBIT 1.1
INNOVA, S. DE R.L. DE C.V.
BYLAWS
CHAPTER I
DENOMINATION, PURPOSE, DURATION, DOMICILE,
NATIONALITY AND JURISDICTION
ARTICLE FIRST. DENOMINATION.
The denomination of the corporation is "Innova", which shall at all times be
followed by the words "Sociedad de Responsabilidad Limitada de Capital Variable"
[Limited Liability Company of Variable Capital] or their initials "S. de R.L. de
C.V."
ARTICLE SECOND. CORPORATE PURPOSE.
The corporate purposes of the Company shall be:
(a) To promote, create, organize, exploit and take participation in the capital and assets of all kinds of commercial or civil companies, partnerships, or industrial commercial service or any other kind of companies, both domestic and foreign, as well as to participate in their management or liquidation.
(b) The installation, operation and commercial exploitation of public telecommunications networks in order to provide any type of public services, among which are the restricted radio and television, made through wire/conductors, radio-electricity, optical media, physical or other electromagnetic systems, in any format that technology allows for and of communications systems to render services of providing, transporting and distributing signs, images, sounds or information of any nature, through the modulation, codification or digitalization systems technically possible, in the frequency bands and/or orbital positions of satellites assigned to the same, except open television, all with authorization, permit or concession granted by the corresponding authorities, as well as the programming of such networks, stations and communications systems.
(c) To acquire, negotiate, have custody of, and alienate any instrument, stock, bonds, debentures, and generally, any credit instrument, security, and corporate interests in commercial or civil corporations or associations of any kind, both domestic and foreign.
(d) To contract or give loans, granting or receiving the corresponding security, issue bonds with or without specific guaranty, accept, draw, endorse or guarantee all kinds of credit instruments and give bonds or security of any kind with respect to the obligations granted or the instruments issued or accepted by third persons.
(e) To lease, sublease, give and take in comodatum, use, possess, acquire, purchase, sell, build, repair, alienate, and operate under any legal title all kinds of equipment, warehouses,
storage facilities, plants, offices, rooms, units, and other establishments necessary or convenient for realization of the purposes of the Company, including acquisition and alienation of personal property, real property, and real rights that are considered indispensable and that the laws allow.
(f) To represent as agent, intermediary or mediator, commission agent, factor, consignee, legal representative, or attorney-in-fact for all kinds of companies or persons, Mexican or foreign.
(g) To provide and receive all kinds of services or consulting of a technical, administrative, supervisory, organizational, marketing, research, development, engineering, or legal nature and generally, all kinds of services related to the industrial or commercial activities of companies, corporations and associations, whether Mexican or foreign.
(h) To produce and use works susceptible of protection by copyright and related rights, as well as to acquire or transmit ownership of rights thereto, and to undertake any legal act in this area.
(i) To produce, acquire, exercise, use and transfer industrial property rights.
(j) To obtain, acquire, transmit, use, register, negotiate and grant use or enjoyment of all kinds of permits, licenses and concessions.
(k) To execute all acts and enter into all agreements or contracts of any nature related to the foregoing purposes.
ARTICLE THIRD. DURATION.
Except as otherwise provided in Article Twenty-Seventh of these bylaws, the duration of the Company is ninety-nine years, counted from the date of signature of the Articles of Incorporation.
ARTICLE FOURTH. DOMICILE.
The domicile of the Company shall be Mexico City, Federal District; however, the Company may establish agencies, branches and installations, and any other extension in any place in the Mexican Republic or abroad, and submit to contractual domiciles without the corporate domicile being thereby deemed to have changed.
ARTICLE FIFTH. WAIVER OF NATIONALITY.
Current or future foreign members of the Company bind themselves and agree with the federal government through the Ministry of Foreign Relations to consider themselves as Mexicans with respect to the social parts they may acquire in this Company or which they may hold, as well as with respect to any property, rights, concessions, participation, or interests that the Company may own, or with respect to the rights and obligations that derive from the contracts to which the Company is party with the Mexican authorities, and not to invoke the protection of their governments therefore regarding them under the penalty, should they fail to comply with this agreement, of losing the social parts they acquired to the benefit of the Mexican Nation.
CHAPTER II
CAPITAL, SOCIAL PART AND MEMBERS
ARTICLE SIXTH. CAPITAL, SERIES AND CLASSES OF SOCIAL PARTS.
The capital of the Company is variable. The minimum or fixed capital is the amount of $827,750,000.00 (Eight hundred and Twenty Seven Million Seven Hundred and Fifty thousand and 00/100 pesos, Mexican Currency), wholly subscribed and paid. The variable capital is unlimited.
The social parts into which the capital is divided may be of unequal value but in all cases shall be $100.00 (One Hundred pesos, Mexican Currency), or a multiple thereof.
The social parts representing the capital shall be divided into four series, two of which are divided in two subseries, with the corporate rights and duties specified in these bylaws, as follows:
(a) Series A, comprising Sub-Series A-1 and A-2, shall be composed of ordinary social parts that shall represent no less than 51% (fifty one percent) of the capital of the Company with full voting rights. Series A social parts may only be acquired by Mexican persons and therefore the Company shall not admit any foreign investors as holders of Series A social parts.
(b) Series B, comprising Sub Series B-1 and B-2, shall be composed of ordinary social parts that shall represent no more than 49% (forty nine percent) of the capital of the Company with full voting rights. The Series B social parts shall be of unrestricted subscription and therefore may be acquired by Mexican investors and by foreign individuals or corporations, or by individuals, corporations or entities contemplated in Article Second section III of the Foreign Investment Law.
(c) Series C shall be composed of limited voting social parts. The Series C social parts may only be acquired by Mexican individuals or by Mexican companies whose capital stock is majority owned by Mexicans, provided that such Mexican company shall not be controlled by a foreign entity.
(d) The series "N", shall be composed of limited voting social parts, which
may be issued and considered as neutral investment for purposes of the
Foreign Investment Law previous authorization of the Secretary of Economy.
The series "N" social parts may be freely subscribed by and acquired by
Mexican investors and by foreign individuals or corporations, or by
individuals, corporations or entities contemplated in Article Second
Section III of the Foreign Investment Law. In case that any foreign person
or entity, either today or in the future, acquires series "N" social
parts, such foreign person or entity shall formally undertake before the
Foreign Affairs Ministry to be considered as a Mexican national with
respect to said interest, and to all property, rights, concessions,
participation or interests held by the Company, or the rights or
obligations arising from the agreements in which the Company is party with
Mexican authorities, and not to invoke the protection of his, her or its
government under the penalty, in case of failure to comply with this
agreement, of forfeiting such interest to the benefit of the Mexican
Nation. The series "N"
limited voting social parts shall be considered as neutral investment, and shall not be counted for purposes of calculating the amount and proportion of the participation of foreign investment on the capital stock of the Company, pursuant to applicable law.
In accordance with the authorization of the Secretary of Economy, dated as of November 30, 2001, the Company may issue series "N" social parts representative up to the eighty percent (80%) of the capital stock of the Company, considered as neutral investment for the purposes of the Foreign Investment Law, and that will grant economic rights and the right to vote only in the Members' Meetings dealing with affairs described in article 113 of the General Act of Commercial Companies.
ARTICLE SEVENTH. SOCIAL PARTS.
(a) Each ordinary series A and B social parts shall be entitled to one vote in the Members' Meeting for each $100.00 (One hundred and 00/100 pesos, Mexican Currency) of capital that its social part represents.
(b) Limited voting series "C" and "N" social parts shall have the right to be present at and of one vote for each One Hundred Pesos, 00/100 Mexican currency, of capital stock that represents its social parts in the special meetings for each such series only, and in the Member's Meeting only with respect to the following matters: (i) extension of the term of the Company; (ii) early dissolution of the Company; (iii) change of the corporate purpose of the Company; (iv) change of nationality of the Company; (v) transformation of the corporate form of the Company; and (vi) merger of the Company .
(c) Except as provided in these bylaws, all social parts of the same Series confer on their holders the same corporate, property and pecuniary rights, including participation in the profits and the preferential right to subscribe for capital increases within the same series in the proportion that pertains to them, and impose the same obligations.
(d) The social parts are indivisible; however, any member shall have the right to their division and partial assignment within the same Series pursuant to the terms of these bylaws.
(e) No member may hold more than one social part of the same Series.
(f) Social parts of the Company representing the capital may only be issued by a resolution of the Members Meeting.
ARTICLE EIGHTH. TRANSMISSION OF SOCIAL PARTS AND ADMISSION OF NEW MEMBERS.
It is stipulated that in order for members to assign all or any portion of their social parts, as well as for admission of new members, the consent of all members holding Sub-Series A-1 and Sub-Series
B-1 social parts shall be necessary through a resolution that must be adopted in the Members' Meeting.
The Company shall not have more than fifty members, the Members Meeting may authorize subdivision of the social part, as well as partial assignment of the same. When due to the transmission, sale or assignment of the social parts approved observing the rules of these bylaws it is necessary to divide such social parts, this may be done provided this division does not cause the Company to have more than fifty members.
ARTICLE NINTH. MEMBERS REGISTER.
a) The Company shall keep a special book of the members, in which shall be recorded the capital increases and reductions, as well as all the operations of subscription, payment, acquisition or transfer of social parts, indicating the name, domicile and nationality of each one of them with note of their contributions,Class, the Series and Sub-Series to which they correspond, and the transfers of social parts which, if any, have been made, as well as the authorization that for such purpose has been given pursuant to the provisions of Article Eighth of these bylaws.
b) All the capital increases and reductions shall be registered in the capital variations registry book.
c) It is understood that the corresponding entries in the member's registry book and the capital variations registry book must be authorized with the signature of one of the Managers or the Secretary of the Board of Managers.
CHAPTER III
CAPITAL INCREASES AND REDUCTIONS.
ARTICLE TENTH. CAPITAL INCREASES.
a) Capital increases, either to the minimum or fixed capital or the variable capital, may only be declared by resolution of a Members' Meeting in accordance with Article Sixteenth of these bylaws.
No increase shall be authorized unless the last capital increase has been full subscribed and paid.
b) Any member shall have the preemptive right to subscribe any capital increase, within the same series, according to its participation in the capital that he had before such capital increase.
c) When adopting the corresponding resolution, the Members' Meeting that authorizes the capital increase shall determine the terms and conditions under which it will be made. The
preemptive right of the members referred to in section b) above, must be exercised within the 25 calendar days immediately following the Members' Meeting that approved such increase, if all the members were present, and if not, within the 15 calendar days immediately following the date of issue or the date in which the capital increase is published in the Official Gazette [Diario Oficial de la Federacion] or in one of the major circulation daily newspapers in the Company's domicile.
d) The capital that is not subscribed within the term set by that Members' Meeting resolving the increase, shall be cancelled and such amount shall be reduced from the variable capital, simply by a resolution of the Board of Managers.
e) The increases to the variable capital and that are deposited in the Company's treasury, may be offered by the Board of Managers to be subscribed and paid according to the powers granted to it by the Members' Meeting.
ARTICLE ELEVENTH. CAPITAL REDUCTIONS.
a) Capital reductions must be approved by the Members' Meeting under Article Sixteenth of these bylaws. Capital reductions affecting the minimum or fixed capital must be approved by the Members' Meeting complying, in such case, with Article Nine of the General Law on Corporations.
b) Any reduction shall be done in multiples of One Hundred 00/100 Pesos, Mexican Currency.
c) Capital reductions may be made to absorb losses, to make reimbursements to the members or to release them from contributions not yet made.
d) The capital reductions to absorb losses shall be applied proportionately on all the social parts, representing the minimum or fixed capital as well as the variable capital.
e) Social parts may be amortized with the Company's profits. In such case the Company may issue non-contributory social parts ("certificados de goce") with the rights established in Article 137 of the General Law of Corporations.
f) When the reduction is made for reimbursement, social parts representing variable capital shall be redeemed first and if the amount of such social part is not sufficient to absorb completely the reduction, social parts representing the fixed or minimum capital shall also be redeemed in the amount necessary to fully diminish the agreed capital reduction.
g) When the reduction is made to release the members from unpaid contributions, social parts representing variable capital shall be redeemed first and if the amount of such social part is not sufficient to absorb completely the reduction, social parts representing the fixed or minimum capital shall also be redeemed in the amount necessary to fully diminish the agreed capital reduction.
h) Any resolution related to the amortization of social parts representing the minimum or fixed capital in order to reimburse the members must be published once in the Official Gazette ("Diario Oficial de la Federacion") or in one of the most major circulation daily newspapers in the Company's domicile.
i) Members may retire in full or partially their contributions in the variable capital, but the Company must be notified in writing of such retirement. This retirement shall not be effective until the end of the current fiscal year, if the Company is notified before the last quarter of the year, and until the end of the next fiscal year if notified later. The capital reduction caused by a retiring member here referred to, shall be done by reimbursing the social parts at nominal par value.
j) The reimbursement referred to in the preceding paragraph, shall not require the payment of interest and shall be paid in Mexican currency in a term not to exceed five years from the fiscal year immediately following the year in which the member used his right to retire.
ARTICLE TWELFTH.
Any capital increase or reduction must be done in such manner that (i) the value of Series A social parts shall not be less than the minimum percentage of the capital of the Company that shall be held by Mexican investors and (ii) the value of Series B social parts shall not be greater than the maximum percentage of the capital of the Company that may be held by foreign investors, in each case under applicable laws in effect at the time of such capital increase or reduction.
ARTICLE THIRTEENTH.
Amendments to the bylaws and the division and assignment of social parts shall be decided by unanimous vote of all members holding Sub-Series A-1 and Sub-Series B-1 social parts.
CHAPTER IV
MEMBERS MEETINGS
ARTICLE FOURTEENTH.
The Members' Meeting is the supreme authority of the Company, and its resolutions shall be binding for all members, including those who are absent or in opposition. In all cases, the absent or opposing members shall have the rights granted under Articles Thirty-Eight and Forty-Two, pursuant to Article Eighty-Six of the General Law of Commercial Companies.
The members shall have the right to participate in the Members' Meeting either by personally attending or attending through a representative legally accredited by a simple proxy letter signed by two witnesses.
ARTICLE FIFTEENTH.
The following provisions shall be reserved for resolution by the Members' Meeting, applying the rules set forth for the specific issues in these bylaws:
(a) To discuss, approve, amend or disapprove the financial statements prepared for each fiscal year in accordance with Article Twenty-Fourth of these bylaws, and adopt therefore, the measures deemed appropriate thereto;
(b) To determine whether to declare or pay any dividend or other distribution by the Company of cash, assets or other property;
(c) To name and remove the Board of Managers in accordance with Article Sixteenth of these bylaws, and if it so resolves, to name and remove the Executive Committee of the Board of Managers, with the powers and duties that the Members' Meeting approves;
(d) To resolve on the division or redemption of any social parts under the provisions established in these bylaws;
(e) To require from the members, as applicable, supplemental contributions and accessory payments other than as contemplated by any Annual Budget or Business Plan;
(f) To issue warrants, rights, calls, options or other securities exchangeable or exercisable for or convertible into equity of the Company;
(g) To consent to the assignment of any social part and to the admission of new Members, according to Article Eighth of these bylaws;
(h) To amend these bylaws;
(i) To decide on capital increases and reductions, and the sale of any equity interest in the Company, except as contemplated in each case by these bylaws or by any Annual Budget or Business Plan;
(j) To decide on dissolution of the Company as permitted under Article Twenty-Seventh of these bylaws;
(k) To appoint the Liquidators under Article Twenty-Eight of these bylaws;
(l) To issue any bonds; and
(m) To decide on transformation, merger or spin-offs of the Company.
ARTICLE SIXTEENTH.
With respect to the Members Meetings, the following rules shall be observed:
(a) Except as established herein, Members' Meetings may be held at any time.
(b) The members shall meet in Members' Meetings at least once each year within the first four months following the close of the corporate fiscal year.
(c) All Members' Meetings shall be held at the domicile of the Company except due to force majeure or Act of God.
(d) The convocations to Members' Meetings shall be issued by any of the Managers or pursuant to the provisions of Article Eighty-One and Eighty-Two of the General Law of Commercial Companies.
(e) Notice of the Members' Meeting shall contain at least the date, time, place and agenda for the Members' Meeting and shall be signed by the Manager issuing the notice.
(f) Except in the case established in paragraph (g) hereafter, the convocation to the Members' Meeting shall be done at least fifteen calendar days prior to the date of the Members' Meeting through personal delivery or by telefax or email, messenger delivery, or any other means that assures the receipt thereof at the last domicile or telefax number or email that said persons have reported in writing to the Board of Managers of the Company. It is understood that the members who have their domiciles abroad may send to the Board of Managers a second domicile or telefax number or email in the Mexican Republic to which a copy of the convocation shall be sent.
(g) Any Members' Meeting may be held without need of prior convocation if members of all of the social parts with voting rights are present or represented at said Members' Meeting at the time of voting.
(h) Except if there be express judicial order to the contrary, only those individual or corporate persons whose names are recorded in the special members book shall be recognized as holders of social parts in the Company, with the purpose of being able to attend any Members' Meeting, and said registration shall be sufficient for admission of said persons to the Members' Meeting.
(i) The Chairman of the Board of Managers shall preside at the Members' Meeting. Likewise, the Secretary of the Board of Managers shall act as Secretary of all Member Meetings. In the absence of the Chairman or the Secretary, their place will be taken by any of the alternate Managers appointed by the same series that elected them. If there are none, their places shall be taken by the persons elected by simple majority of votes of the Members present at the Members' Meeting.
(j) The person who presides at a Members' Meeting shall name one or more Inspectors of Election to whom the count of the social parts and of the proportion that each represents of the capital shall be entrusted, as well as the number of votes that each member is entitled to give.
(k) In order that there be a quorum at a Members' Meeting, on the first call, social parts representing a majority of the issued and paid in capital with voting rights of the Company must be present or represented, but in any event, the holders of the Sub-Series A-1 social parts and the holders of the Sub-Series B-1 social parts must be present and represented in such majority. On a second or further call for the same meeting, there will be a quorum and the meeting will be declared legally installed if social parts representing a majority of the issued and paid in capital with voting rights of the Company are present or represented. No
resolution on any issue described in Article Fifteenth of these bylaws shall be passed without the affirmative vote of all of the holders of the Sub Series A-1 social parts and the Sub-Series B-1 social parts.
(l) Once it has been verified that the required quorum exists, the person who presides shall declare the Members' Meeting legally installed. Additional matters may be added to the agenda for a Members' Meeting only if approved by holders of one hundred percent of the fully subscribed and paid social parts with voting rights on that additional matter.
(m) The members have the right to give one vote for each $100.00 (One hundred and 00/100 pesos, Mexican Currency) paid, represented by their social parts at any Members' Meeting or on any resolution of the Members for which a Members' Meeting is not required, provided that the Series corresponding to such social parts have voting rights for the matter to be voted.
(n) Except as otherwise provided in these bylaws, resolutions of a Members' Meeting legally installed shall be valid when adopted by majority vote of the social parts with voting rights present or represented therein. Any resolution regarding the issues set forth in Article Fifteenth of these bylaws shall be valid only if adopted by the favorable vote of all of the members holding Sub-Series A-1 and Sub-Series B-1 social parts.
(o) Any resolution with respect to any of the matters relating to Article Fifteenth of these bylaws, as well as any other resolution that correspond by law to the Members' Meeting adopted by the unanimous vote of the members with voting rights on the specific issue to be resolved outside a meeting, shall be valid and have the same force and effect as a resolution adopted at a Members' Meeting, subject to written confirmation by the members with voting rights on the specific issue to be resolved. The proponent of a resolution that would otherwise require a Members' Meeting may send in writing to each member the text of the proposed resolution for its approval. Said text shall be delivered to each member on the same terms set forth for convocations of Members' Meetings. The document in which written confirmation of each member is recorded must be sent to the Chairman or to the Secretary or the Pro-Secretary of the Board of Managers of the Company, so that any of them shall transcribe the respective resolutions in the corresponding minute book and shall certify that said resolutions were adopted pursuant to that set forth in this Article Sixteenth. If the Company does not receive the written vote of a member within thirty (30) calendar days following the date of delivery or sending of said text, it shall be deemed it has voted against the proposed resolution. All costs for sending the text and for the votes shall be for the account of the Company. In all cases, the provisions of the second paragraph of Article 82 of the General Law of Commercial Companies shall also be applied.
(p) The minutes for each Members' Meeting and for each member resolution that does not require a Members' Meeting shall be prepared and transcribed properly in the Minute Book which shall be signed at least by the persons that acted as Chairman and Secretary of the Members' Meeting or by the Chairman, the Secretary or the Pro-Secretary of the Board of Managers in the case of a resolution of the members that does not require a Members' Meeting. If for any reason a Members' Meeting duly called was not held, this fact and the reason why it was not held shall be recorded in the Minute Book.
CHAPTER V
ADMINISTRATION OF THE COMPANY
ARTICLE SEVENTEENTH.
(a) Except for those matters expressly reserved by the law to the Members' Meeting, the administration of the Company shall be the responsibility of a Board of Managers who shall have the authority necessary to effect the actions to fulfill the corporate purpose.
(b) The Board of Managers of the Company shall be composed of eleven (11) Managers, six (6) of whom shall be appointed by the holders of Sub-Series A-1 social parts; four (4) of whom shall be appointed by the holders of Sub-Series B-1 social parts; and one (1) of whom shall be appointed by the holders of Sub-Series A-1 and B-1 and who shall be an independent Board member pursuant to paragraph m) of this Article.
(c) The holders of the Sub-Series A-1 shall elect one Manager to serve as Chairman and the holders of the Sub-Series B-1 shall elect one Manager to serve as Vice Chairman. Managers may or may not be members. The offices of the Managers shall have the names that the Members' Meeting determines.
(d) Up to eleven (11) alternate Managers may be appointed, six (6) of whom may be appointed by the holders of Sub-Series A-1 social parts; four (4) of whom may be appointed by the holders of Sub-Series B-1 social parts; and one (1) of whom shall be appointed by the holders of Sub-Series A-1 and B-1 and who shall be an independent Board member pursuant to paragraph m) of this Article. The alternate Managers shall be entitled to substitute in the absence of any of the Managers appointed by the same Sub-Series that elected them.
(e) Also, the Board of Managers shall elect among its members a Secretary and a Pro-Secretary. In any case the Secretary shall be appointed by the same Sub-Series of Managers that had elected the Vice-Chairman.
(f) The appointment of the Pro-Secretary shall be from among the Managers that were elected by the same Sub-Series to which the Chairman belongs.
(g) The absences of the Secretary in the Members' Meetings or in the Meetings of the Board of Managers shall be substituted by the Pro-Secretary, and only when he/she is also absent, by the person appointed by a Members' Meeting or the Board of Managers, as the case may be.
(h) All Managers shall remain in office until their respective replacements have been elected and assumed office in accordance with the terms of these bylaws.
(i) Any Manager may be removed from office at any time, with or without justified cause, by resolution at a Members' Meeting being necessary the affirmative vote of the holders of the Sub-Series of social parts that appointed such Manager.
(j) Except by resolution adopted by the Members' Meeting under Article Fifteenth of these bylaws on the contrary, no Manager shall have the right to payment or remuneration by the Company, including fees for advice or any other reason based on his/her participation on the Board of Managers or performance of such Manager's duties.
(k) The Chairman of the Board shall assure compliance with these bylaws, with the regulations of the Company, and with the proper execution of the resolutions adopted by the Members' Meeting or the Board of Managers. The Chairman shall not have the tie-breaking vote in the event of a deadlock.
(l) The managers for special representation to which the Board of Managers agrees to grant powers-of-attorney under Article Twenty First, shall have the legal representation of the Board of Managers before any individual or corporate person, or before any kind of authority of any order or degree, whether municipal, state or federal, tax, judicial, civil, criminal, administrative, labor, or any other kind, in all disputes, arbitration, and suits in which the Company be party, and they shall have the powers set forth in Article Nineteenth of these bylaws. Consequently, the Chairman, the Secretary, the Pro-secretary and the other members of the Board of Managers are not authorized to represent the Board or the Company in any dispute, arbitration or suit in which the Company is a party.
(m) The independent Managers of the Company shall be, those persons appointed under this Bylaws considering their professional experience, capacity and prestige, but who in no event shall be:
I. Employees or directors of the Company, including those persons that were employees or executives during the immediate prior year;
II. Members that are not employees or executives of the Company, but who control its directors;
III. Shareholders or employees of companies or associations that provide consulting services to the Company or other companies belonging to the same economic group of the Company, whose revenues represent ten percent or more of their total revenues;
IV. Clients, suppliers, debtors, lenders, shareholders, board members or employees of a company that is an important client, supplier, debtor or lender of the Company. An important client or supplier is when its sales to the Company represents more than ten percent of the total sales of such client or supplier, respectively. Also, a debtor or lender is considered important when the total amount loaned represents more than fifteen percent of the assets of the company or its counterpart;
V. Employees of a non-for-profit organization, association or civil code partnership that receives important donations from the Company. Important donations are those representing more than fifteen percent of the total amount of donations received by such institution;
VI. Chief executive officers or top level executives of a company in which the Chief Executive Officer or top level executives of the Company participate in its board of directors; and
VII. Spouses or concubines, as well as relatives by consanguinity, affinity or by law up to the first grade with respect to the persons mentioned in subparagraphs III to VI above, or up to the third grade with respect to the persons mentioned in subparagraphs I and II above.
ARTICLE EIGHTEENTH.
The Board of Managers shall have the broadest powers to enter into all contracts and to carry out all acts and operations that under the law or these bylaws are not expressly reserved to the Members' Meeting, to administer and to direct the business of the Company to fulfill the corporate purpose of the Company, and to legally represent the Company before any person and judicial, criminal, civil, labor or administrative authority, whether federal, state, or municipal, with authority as broad as is available under law, including without limitation those referred to in the following points, with the exception of the powers delegated to the managers for special representation which are referred to in Article Nineteenth of these bylaws:
(a) To administer the corporate property and business, with a broad power of attorney for administration pursuant to Article Two Thousand Five Hundred and Fifty-Four (2554), second paragraph, of the Federal District Civil Code and its correlatives in the place where exercised;
(b) To exercise acts of dominion with respect to the personal and real property of the Company or its real or personal rights, pursuant to the third paragraph of Article Two Thousand Five Hundred Fifty-Four (2554) of the Federal District Civil Code and its correlatives in the place where exercised;
(c) To administer the business of the Company and its real and personal property with a general power of attorney for lawsuits and collections with all general powers and including the specific powers which pursuant to law require a specific clause or power of attorney, pursuant to the first paragraph of Articles Two Thousand Five Hundred Fifty-Four (2554) and Two Thousand Five Hundred Eighty-Seven (2587) of the current Federal District Civil Code and its correlatives in the other states of the Mexican Republic or abroad where it may be exercised, and therefore it shall represent the Company before any individual or corporate person, or before all kinds of authorities of any order and degree, whether they be municipal, state or federal, tax, judicial, civil, criminal, administrative, or any other kind, before all kinds of conciliation boards and conciliation and arbitration boards, whether federal or local, and the other labor authorities and before arbiters and arbitrators;
(d) File criminal complaints, claims and accusations and grant the pardon to which Article Ninety-Three (93) of the Federal Criminal Code in effect and its correlatives in the place where it is exercised, to assist the Public Prosecutor as civil party, and to demand reparation of harm from a crime;
(e) File and withdraw all claims, suits, objections, motions, petitions, appeals, ordinary or extraordinary, actions and proceedings whether civil, commercial, criminal, administrative, disputes and labor, including filing amparo [constitutional relief] suits and withdrawing them;
(f) Assign goods, compromise, receive payments, file bids, overbid and raises in public sales, assume commitments in arbitration;
(g) Draw, accept, endorse, grant and guarantee, or in any other way subscribe credit instruments pursuant to Article Ninth (9th) of the General Law of Credit Operations and Instruments;
(h) Contract or grant loans, giving or receiving the corresponding guarantees; issue bonds/obligations with or without specific guaranty; accept, draw, endorse and guarantee all kinds of credit instruments, and give bonds or guarantees of any kind, with respect to the obligations contracted by the Company or the instruments issued or accepted by third persons;
(i) Contribute personal and real property to other corporations and subscribe shares or take participation or corporate interests in other companies;
(j) Name and remove managers, officers and attorneys-in-fact as may be necessary for proper attention to corporate matters, indicating to them their powers, duties and remuneration;
(k) Grant and revoke such powers of attorney as are deemed suitable, with or without right to delegate, being able to grant therein the powers that these bylaws confer on the Board of Managers, as applicable conserving their exercise;
(l) Decide on all matters that refer to the acquisition or sale by the Company of shares, bonds, or securities, to the participation of the Company in other companies or corporations, and to the acquisition, construction or sale of real estate;
(m) Execute the resolutions of Members' Meetings, delegate its duties to any of the Managers, corporate officers, or attorneys-in-fact designated therefore, in order that they exercise them in the case or cases and in the terms and conditions that the Board indicates;
(n) Determine disbursements;
(o) Prepare the financial statements;
(p) Call Members' Meetings; and
(q) Generally, effect all acts and operations that may be necessary or convenient for the purpose of the Company, excepting those expressly reserved by the law or these bylaws to the Members' Meeting.
The Members' Meeting may limit or regulate said powers. No member of the Board of Managers may exercise, jointly or severally, any of the powers of attorney set forth in this Article Eighteenth except when expressly authorized by the Board of Managers or the Members' Meeting. Managers and alternate Managers of the Board shall not have the power to take or provide depositions on behalf of the Board of Managers or the Company in a court of competent jurisdiction or before any applicable regulatory authority.
ARTICLE NINETEENTH.
The legal representation of the Company and the legal representation of the Board of Managers is conferred on the managers for special representation, in order that they appear without distinction before any corporate or individual person, or before any kind of authority of any order and degree, whether municipal, state or federal, tax, judicial, civil, criminal, administrative, labor or of any other kind, to defend the interests of the Company in all disputes, arbitration, and suits in which the Company is a party. In exercise of their duties, the managers for special representation shall have joint or several exercise of the following powers:
(a) A general power of attorney for lawsuits and collections which they may exercise jointly or severally with all general powers and including the specific powers which pursuant to law require a specific clause or power of attorney, pursuant to the first paragraph of Article Two Thousand Five Hundred Fifty-Four (2554) and Article Two Thousand Five Hundred Eighty Seven (2587) except the power set forth in its Section V, of the current Federal District Civil Code and its correlatives in the other states of the Mexican Republic or abroad where it may be exercised, and therefore they shall represent the Company before any individual or corporate person, or before all kinds of authorities of any order and degree, whether they be municipal, state or federal, tax, judicial, civil, criminal, administrative or any other kind, being able to file and withdraw from all kinds of suits, actions and procedures, whether civil, commercial, criminal, administrative dispute and labor, including filing amparo suits and withdrawing from them, give and respond to depositions, compromise, receive payments, file bids, overbid and raise in public sales, commit in arbitration, file and prosecute suits, motions, petitions and appeals, ordinary or extraordinary, object, file criminal claims, complaints and accusations and grant the pardon to which Article Ninety-Three (93) of the Federal Criminal Code and its correlatives in the places where it is exercised, to assist the Public Prosecutor as civil party, and to demand the reparation of harm from a crime, being authorized to sign as many public or private documents as appropriate for full performance of this power of attorney.
(b) Administer the labor relations of the Company, and thus they may without
distinction enter into, rescind, amend, and terminate individual and
collective labor agreements, establish and change working conditions,
issue internal work regulations, and generally, appear before private
interests and all labor authorities, particularly before those described
in Article Five Hundred Twenty-Three (523) of the Federal Labor Law, as
well as before the National Workers' Housing Fund Institute (INFONAVIT),
the Mexican Social Security Institute (IMSS), and the Workers' Consumption
Development and Guaranty Fund (FONACOT), to carry-out all actions and
procedures necessary for resolution of matters that may arise for the
Company, in which they shall appear in the capacity of representatives
pursuant to Article Eleven (11) of the Federal Labor Law, which provides:
"The directors, administrators, managers, and other persons who exercise
administrative
direction functions in companies or establishments shall be deemed representatives of the employer and as such bind in its relations with the employees." In consequences in relation to those matters, they may exercise the aforesaid powers, that is, appear in the capacity of administrators and therefore as representatives of the Company pursuant to Articles Eleven (11), Six Hundred Ninety-Two (692), Section Second, Seven Hundred Eighty-Six (786) and Eight Hundred Seventy-Six (876) of the Federal Labor Law, as well as appear at conciliation hearings to which the Company may be summoned by the Conciliation and Conciliation and Arbitration Boards, with all general powers and the specific powers that pursuant to law require a specific clause or power of attorney.
(c) To appear without distinction in representation of the Company at conciliation proceedings before the Federal Consumer Protection Agency and its regional offices in the Mexican Republic, being duly empowered therefore, being able to realize all kinds of actions and procedures in relation to the matters in which the Company has an interest, being empowered to subscribe any act or document that may correspond.
(d) A general power of attorney for acts of administration pursuant to the
second paragraph of Article Two Thousand Five Hundred and Fifty-Four
(2554) of the Federal District Civil Code and its correlatives in the
place where exercised, with all general powers and specific powers that
pursuant to law require a specific clause or power of attorney, which they
may exercise jointly or severally.
ARTICLE TWENTIETH.
(a) The Board of Managers shall meet in the corporate domicile of the Company or such other place as the Board of Managers may determine at least once a year. The meetings may be summoned by the Chairman, the Vice-Chairman, the Secretary, the Pro-Secretary or any two members of the Board of Managers.
(b) The meetings shall be called by certified mail, telefax with reply notice, email, messenger delivery or courier or any other means that assures the receipt thereof to the domicile, telefax number or email that the Managers have informed in writing for such purpose, at least ten (10) days before the date of the meeting and shall contain the agenda, the date, place and time of the meeting, and shall be signed by the person making such call. Managers having their domicile abroad may provide second domicile, telefax number or email in Mexico to which a copy of the convocation shall be sent.
(c) When all the members of the Board of Managers are present and agree to the agenda, it shall not be necessary to comply with the formalities for a call referred to in the previous paragraph.
(d) The meetings of the Board of Managers shall consider and adopt resolutions only in connection with the items on the agenda. Other issues may be included in the agenda of the first call at the petition of any Manager, provided such inclusion is unanimously approved by the Managers present, in second or more calls, the agenda of the first call may not be modified.
(e) There shall be a quorum on any meeting of the Board of Managers assembled as a result of a first call, when the majority of the members are present, provided that at least among those present are two Managers appointed by the holders of Sub-Series A-1 social parts and two Managers appointed by holders of Sub-Series B-1 social parts. In second or more calls, there shall be a quorum and the session may be legally installed if the majority of the members of the Board of Managers are present.
(f) Each Manager shall be entitled to one vote and the Chairman shall not have the tie-breaking vote in the event of a deadlock.
(g) The resolutions of the Board of Managers shall be valid if adopted by the affirmative vote of at least the majority of the Managers present. In case of a deadlock in any of the issues mentioned in Article Twenty First the issue shall be resolved according to Article Thirty First of these bylaws.
(h) However, the affirmative vote of at least two Managers appointed by the holders of Sub-Series A-1 social parts and two Managers appointed by the holders of Sub-Series B-1 social parts shall be required for the resolutions adopted by the Board of Managers to be valid regarding the issues referred to in Article Twenty-First be them of the Company or any of its subsidiaries.
(i) Notwithstanding any provision in this Bylaws relating to the quorum and voting in the Board of Manager's meetings, the favorable vote of the independent Manager appointed by the members of the Sub-Series A-1 and B-1 shall be necessary, in all resolutions which pursuant to applicable law or pursuant to the obligations of the Company with third parties, such favorable vote is required.
(j) Any resolution adopted by the unanimous vote of the members of the Board of Managers shall be valid even if adopted outside a session of such Board, subject to the written confirmation of the Managers.
ARTICLE TWENTY-FIRST.
When the Board of Managers is convened to pass upon a resolution regarding any of the following issues, for the resolutions to be valid the affirmative vote of at least (i) two Managers named by the holders of Sub-Series A-1 social parts and (ii) two Managers named by the holders of Sub-Series B-1 social parts shall be required, whatever the number of call it is.
1. Name and remove the Chief Executive Officer of the Company, giving him his powers, duties and compensation. The Chief Executive Officer shall be the highest-ranking officer and shall be in charge of the operations and daily administration of the Company and its subsidiaries. The Chief Executive Officer shall be responsible to the Board of Managers and the Members' Meeting for the preparation and adequate implementation of the Annual Budget and the Business Plan. The Chief Executive Officer shall be nominated at the proposal of the holder of the Sub-Series A-1 social part and appointed subject to the
approval of the holder of Sub-Series B-1 social part. The holders of the Sub-Series A-1 social parts and the holders of the Sub-Series B-1 social parts may, by mutual agreement, require the removal of the Chief Executive Officer, and either the holders of the Sub-Series A-1 social parts or the holders of the Sub-Series B-1 social parts may, with reasonable cause, require the removal of the Chief Executive Officer of the Company, and the Board of Managers shall abide by and be bound by such decision;
2. Name and remove the Executive Director of Finance and Administration of the Company ("Chief Financial Officer"), giving him his powers, duties and compensation. The Chief Financial Officer shall be the highest-ranking officer related to the financial operations of the Company and shall be directly responsible for the implementation of the Annual Budget, finance and treasury of the Company, as well as its subsidiaries. The Chief Financial Officer shall be responsible to the Board of Managers and the Members' Meeting for the preparation and adequate implementation of the Annual Budget and the Business Plan. The Chief Financial Officer shall be nominated at the proposal of the holders of the Sub-Series A-1 social parts and appointed subject to the approval of the holders of Sub-Series B-1 social parts. The holders of the Sub-Series A-1 social part and the holders of the Sub-Series B-1 social parts may, by mutual agreement, require the removal of the Chief Financial Officer, and either the holders of the Sub-Series A-1 social parts or the holders of the Sub-Series B-1 social parts may, with reasonable cause, require the removal of the Chief Financial Officer of the Company, and the Board of Managers shall abide by and be bound by such decision;
3. The selection of local distributors and the terms of the contracts with such distributors, or the approval of a general scheme of distribution, and any modifications thereof other than (i) matters provided for in any Annual Budget, and (ii) day to day operating decisions considered by the Board to be within the management responsibility of the Chief Executive Officer;
4. The acceptance of pricing, composition of service packages, and other material terms relating to the distribution of any subscription programming services and channels through public telecommunications networks to provide restricted television services through satellites, other than (i) matters provided for in any Annual Budget, (ii) day to day operating decisions considered by the Board to be within the management responsibility of the Chief Executive Officer, and (iii) with respect to programming, in addition to the exceptions set forth in (1) and (ii) above, (a) with respect to the the acquisition of signals used for programming channels or special events not to exceed per event or in a year, more than U.S. $1,000,000.00 (One million 00/100 dollars, U.S. Currency), or its equivalent in Mexican currency; (b) as approved by the Programming Committee; or (c) as contemplated by any agreement entered into by the holders of the Sub-Series A-1 and Sub-Series B-1 social parts, in any other document;
5. The entering into of any contract (i) having a term in excess of three years, or (ii) if the aggregate amount expected to be paid thereunder by the Company or any of its subsidiaries exceeds U.S. $1,000,000.00 (One million and 00/100 dollars U.S. Currency), or its equivalent in Mexican Currency, except for agreements (x) considered by the Board to be
in the ordinary course of business, (y) provided for in any Annual budget or (z) with respect to programming approved by the Board of Managers or a committee thereof under this Article Twenty-First or contemplated by any agreement entered into by the holders of the Sub-Series A-1 and Sub-Series B-1 social parts;
6. (i) The incurrence of any indebtedness for borrowed money by the Company or any of its subsidiaries, including without limitation, the issuance of guaranty in respect of indebtedness for borrowed money and the drawing, accepting, endorsing, granting, guaranteeing, or otherwise subscribing of credit instruments pursuant to Article Ninth (9th) of the General Law of Credit Obligations, (ii) the granting of loans by the Company or any of its subsidiaries, or (iii) the creation or allowance of any encumbrance on the assets of the Company or any of its subsidiaries, except for the incurrence of indebtedness, granting of loans or creation or allowance of any encumbrance which is (x) provided for in any Annual Budget, or (y) in an aggregate amount in a single transaction or series of related transactions not in excess of U.S. $1,000,000.00 (One million and 00/100 dollars U.S. Currency), or its equivalent in Mexican Currency;
7. The sale, in any manner whatsoever of assets of the Company or the Company's subsidiaries, other than (i) sales considered by the Board to be in the ordinary course of business, (ii) sales provided for in any Annual Budget, or (iii) sales of obsolete equipment or obsolete assets having an aggregate value not in excess of $1,000,000.00 (One million and 00/100 dollars U.S. Currency), or its equivalent in Mexican Currency;
8. The purchase, lease or other acquisition of any asset, in a single transaction or series of related transactions, resulting in the Company or its subsidiaries disbursing in the aggregate an amount in excess of US$1,000,000.00 (One million 00/100 dollars U.S. Currency), or its equivalent in Mexican Currency, except for acquisitions provided for in any Annual Budget.
9. The acquisition of, investment in, or merger or joint venture with, any other corporation or entity which is not a wholly owned subsidiary of the Company, by the Company or any of its subsidiaries, except as provided for in any Annual Budget;
10. The commencement or settlement by the Company or any of its subsidiaries of any suit, action or other proceeding, including any tax controversy, as well as the determination over any conciliation or settlement involving amounts in excess of U.S. $1,000,000.00 (One million and 00/100 dollars U.S. Currency), or its equivalent in Mexican Currency, other than those considered by the Board to be within the management responsibility of the Chief Executive Officer;
11. The appointment or dismissal of the Company's or its subsidiaries' external auditors as well as the adoption or modification of any material accounting or tax principle or practice of the Company or any of its subsidiaries, other than any appointment, dismissal, adoption or modification which is a contemporaneous appointment, dismissal, adoption or modification made by the Parent Entity of the holder of the Sub-Series A-1 social parts;
12. The making of any decision regarding the settlement or consent of a proposed tax audit adjustment of the Company or any of its subsidiaries involving amounts in excess of U.S. $100,000.00 (One hundred thousand and 00/100 dollars U.S. Currency) or its equivalent in Mexican currency;
13. The approval of the location of the principal office of the Company and each of its subsidiaries;
14. The entering into agreements or transactions between the Company or any of its subsidiaries, and any of the members of the Company, or any of the member's respective affiliates, except for (i) agreements or transactions provided for in any Annual Budget; (ii) agreements and transactions in which the amount to be paid shall not exceed on an annual basis U.S. $50,000.00 (Fifty thousand and 00/100 dollars U.S. Currency) or its equivalent in Mexican currency; and (iii) with respect to programming, except as approved by the Board of Managers or the executive committee thereof under this Article Twenty-First or as contemplated by any agreement entered into by the holders of the Sub-Series A-1 and Sub-Series B-1 social parts;
15. The approval of any decision upon any of the issues of Article Fifteenth of these bylaws regarding any of the Company's subsidiaries;
16. The approval of the Business Plan and any material amendment thereto ("Business Plan" means the initial business plan and projections of the Company heretofore approved by each of the Members, and all amendments thereto which have been approved in accordance with Article Twenty-First of these bylaws);
17. The approval of the Annual Budget and any amendment thereto ("Annual Budget" means the initial annual budget for the Company which is contained in the Business Plan and each subsequent annual budget approved in accordance with Article Twenty-First of these bylaws or as contemplated by any agreement entered into by the holders of the Sub-Series A-1 and Sub-Series B-1 social parts);
18. The approval of any material waiver or amendment of any provision of any agreement requiring approval of the Board under Article Twenty-First of these bylaws;
19. The incorporation, formation, acquisition or organization by the Company or any of its subsidiaries of a subsidiary or any operating venture;
20. The filing by the Company or any of its subsidiaries of a voluntary petition of bankruptcy or reorganization; and
21. The entering into of any written or oral consulting agreement (or series of related consulting agreements) which (i) is not entered into with a third party on an arms' length basis, (ii) has a term of more than two years or (iii) provides for (or, pursuant to its terms could reasonably be expected to result in) payments by the Company or its subsidiaries of any aggregate amount in excess of $500,000.00 (Five Hundred Thousand and 00/100 dollars U.S. Currency), or its equivalent in Mexican Currency.
ARTICLE TWENTY-SECOND.
The Executive Committee of the Board of Managers referred to in Article Fifteenth of these bylaws shall approve the resolutions it considers appropriate in the time elapsed between Board of Managers Meetings.
(a) The powers of the Executive Committee of the Board of Managers shall be the same that Article Eighteenth of these bylaws grants to the Board of Managers, exception made of section p) of said Article, that is, it may not call Members' Meetings.
(b) For the operation, quorum, voting and approval of resolutions by the Executive Committee Articles Seventeenth, Eighteenth, Twentieth and Twenty-First of these bylaws shall apply, except that the Executive Committee shall have four members and up to four alternate members appointed by the holders of Sub-Series A-1 social parts and three members and up to three alternate members appointed by the holders of Sub-Series B-1 social parts.
CHAPTER VI
FISCAL YEAR, FINANCIAL INFORMATION AND RESERVES
ARTICLE TWENTY-THIRD.
Fiscal years of the Company shall run from the first of January to the thirty-first of December of each year, except for the first fiscal year, which shall run from the date of incorporation to the thirty-first of December of such year.
ARTICLE TWENTY-FOURTH.
Within three months following the close of each fiscal year, a report shall be prepared by the Board of Managers which shall contain at least the financial information set forth below, certified by an independent external auditing firm of international standing appointed in accordance with Article Twenty-First of these bylaws, applying the Mexican generally accepted accounting principles, with an addendum reconciling these figures to United States generally accepted accounting principles and information to reconcile these figures to Australian generally accepted accounting principles;
(a) A statement that shows the financial position of the Company at the closing date of said fiscal year;
(b) A statement that shows the profits and losses obtained by the Company during the fiscal year, duly explained and categorized;
(c) A statement that shows any changes that have occurred in the financial position during the fiscal year;
(d) A statement that shows any changes in the entries that compose the corporate assets that may have occurred during said fiscal year; and
(e) All notes necessary to complete and clarify the information contained in the preceding subparagraphs.
CHAPTER VII
PROFITS AND LOSSES
ARTICLE TWENTY-FIFTH.
The founding Members shall not have any special participation in the profits.
The net earnings for each fiscal year shall be distributed as follows:
(a) five percent to establish, and if necessary, reconstitute the legal reserve fund until it equals at least twenty percent of the capital;
(b) if so determined by the Members' Meeting, such capital reserves as deemed appropriate may be created or increased; and
(c) the remaining earnings, if any, shall be distributed as determined by the Members' Meeting.
ARTICLE TWENTY-SIXTH.
Losses, if any, shall be provided for first by capital reserves and in the absence thereof in the form that the Members' Meeting deems appropriate
CHAPTER VIII
DISSOLUTION AND LIQUIDATION OF THE COMPANY
ARTICLE TWENTY-SEVENTH.
The Company shall be dissolved upon the occurrence of any of the following events:
(a) If the Company's term of corporate existence, referred to in Article Third of these bylaws, expires and it is not extended;
(b) If the Company cannot continue to fulfill its corporate purpose;
(c) By resolution taken at a Members' Meeting; and
(d) The loss of two-thirds of the Company's corporate capital, unless increased to off-set such required amount, provided, however, that the dissolution may only occur if a Members Meeting or a competent court, by final resolution, orders the dissolution of the Company,
and, provided further, that no person may request the dissolution of the
Company unless such person is an interested party. The following persons
and entities shall be deemed as interested parties: (i) members of the
Company, (ii) creditors of the Company whose debts have defaulted and
(iii) creditors who can evidence that the Company will not be able to
satisfy its debts as they become due.
ARTICLE TWENTY-EIGHTH.
Once the Company has been dissolved, it shall be placed in liquidation. The Members' Meeting shall appoint two liquidators - one appointed by the holders of Sub-Series A-1 social parts and one appointed by the holders of Sub-Series B-1 social parts. The Members' Meeting may appoint alternate liquidators if it so deems proper. Said liquidators shall have the powers that the authorities or the law grant to them or as determined by the Members' Meeting that appoints them.
ARTICLE TWENTY-NINTH.
The liquidators shall effect the liquidation in accordance with the terms and conditions determined by the Members' Meeting that appoints them. In the absence of express instructions from the Members' Meeting, the liquidators shall proceed to:
(a) Conclude any business in the form they consider most suitable;
(b) Cover all credits and pay all debts, selling any property of the Company that they consider necessary for this purpose;
(c) Prepare the general balance sheet for liquidation; and
(d) Once the general balance sheet for liquidation is approved, any liquid assets shall be distributed among all of the members in proportion to their respective participation in the capital.
ARTICLE THIRTIETH.
Any Members' Meeting held during the liquidation shall be governed by the provisions of these bylaws and the liquidators shall have the duties equivalent to the Managers during the ordinary existence of the Company.
ARTICLE THIRTY-FIRST.
When the Members' Meeting is unable to decide any matter to be decided by the Members' Meeting pursuant to Article Fifteenth of these bylaws or the Board of Managers is unable to decide any matter to be decided by the Board of Managers pursuant to Article Twenty-First of these bylaws, the following provisions shall apply:
(a) When the disagreement is sustained at two consecutive meetings of the members or of the Board of Managers at which votes are taken on the same decision, the members or the Managers, as the case may be, shall consult in good faith on a regular basis with respect to such disagreement for a period of 60 days, and if the disagreement remains unresolved at the end of such 60 day period, the Chairmen of the Parent Entities (as defined below) of the members holding Sub-Series A-1 and Sub-Series B-1 social parts shall consult with each other in good faith on a regular basis with respect to such disagreement including at least one personal meeting, during the 120-day period following the 60-day period.
(b) During the pendency of any such disagreement, (i) the Chief Executive Officer shall continue to have authority to manage the day-to-day operations of the Company and its subsidiaries in a manner as to permit the Company and its subsidiaries to continue to meet their obligations and carry on their businesses, and (ii) if such a dispute results in the failure to adopt a proposed Annual Budget or Business Plan before the beginning of the fiscal year to which such business plan relates, the portion of the then most recently approved Annual Budget or Business Plan that relates to the same subject matter as to which such dispute relates, shall apply provided that (i) each line item thereof denominated in Mexican pesos shall be adjusted to reflect the rate of inflation in Mexico during the immediately preceding Fiscal Year, and (ii) each line item thereof denominated in U.S. dollars shall be adjusted to reflect the difference between the then current dollar/peso exchange rate and the dollar/peso exchange rate used to prepare the prior Fiscal Year's Annual Budget, and otherwise the provisions of the proposed Annual Budget or Business Plan as to which there is no dispute shall apply.
(c) "Parent Entity" means (i) with respect to the holder of the Sub-Series A-1 social part, Grupo Televisa, S.A., a Mexican corporation, (ii) with respect to the holder of the Sub-Series B-1 social part, The News Corporation Limited, an Australian corporation (iii) with respect to the holder of Sub-Series B-2 social part, Liberty Media International, Inc., a Delaware, United States of America corporation, and (iv) with respect to any person admitted as a member of the Company after the date hereof, either such person or any controlling affiliate of such person, as may be determined by the remaining members, at the time such person is admitted as a member of the Company.
ARTICLE THIRTY-SECOND.
For all matters not expressly provided in these bylaws, the provisions of the General Law of Commercial Companies, the Commercial Code, and the Federal District Civil Code shall be applied.
EXHIBIT 4.6
EXECUTION COPY
AMENDED AND RESTATED
SOCIAL PART HOLDERS AGREEMENT
by and among
GRUPO TELEVISA, S.A.,
SKY DTH, S. de R.L. de C.V.,
THE NEWS CORPORATION LIMITED,
NEWS DTH (MEXICO) INVESTMENT LIMITED,
and
INNOVA, S. de R.L. de C.V.
Dated as of October 8, 2004
TABLE OF CONTENTS
Page
----
ARTICLE I Definitions.......................................................... 1
Section 1.1 Definitions.................................................... 1
Section 1.2 Additional Definitions......................................... 8
Section 1.3 Interpretation and Construction of Terms....................... 9
ARTICLE II Continuation of the Company.......................................... 9
Section 2.1 Continuation of the Company.................................... 10
Section 2.2 Organizational Documents....................................... 10
Section 2.3 Subsidiary Boards and Bylaws................................... 10
ARTICLE III Capital Subscription................................................. 10
Section 3.1 Initial Subscription for Company Social Parts.................. 10
Section 3.2 Additional Capital Contributions............................... 10
Section 3.3 Defaults....................................................... 12
Section 3.4 No Additional Capital Obligations.............................. 12
Section 3.5 Annual Budgets................................................. 12
Section 3.6 Additional Partners............................................ 13
Section 3.7 Refinancing Debt............................................... 13
Section 3.8 True-Up........................................................ 13
ARTICLE IV Programming Matters.................................................. 14
Section 4.1 Programming Committee.......................................... 14
Section 4.2 Programming Plan............................................... 14
Section 4.3 Access to Programming.......................................... 14
Section 4.4 Carriage of Program Services................................... 15
Section 4.5 Reserved Channels.............................................. 16
Section 4.6 Open Channels.................................................. 17
Section 4.7 Reclamation of Open Channels................................... 17
Section 4.8 Loss of Channels............................................... 17
Section 4.9 Substitution................................................... 18
Section 4.10 Certain Limitations............................................ 18
Section 4.11 Deadlocks...................................................... 18
ARTICLE V Management and Administration........................................ 18
Section 5.1 Board of Managers.............................................. 18
Section 5.2 Quorum......................................................... 18
Section 5.3 Affiliated Transactions........................................ 19
ARTICLE VI Agreements of the Parent Entities.................................... 19
Section 6.1 Additional Equity Holders...................................... 19
Section 6.2 Transfers...................................................... 19
Section 6.3 Parent Guarantees of Affiliates' Obligations................... 21
Section 6.4 Exclusivity.................................................... 21
Section 6.5 Cable/MMDS Carriage............................................ 22
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Section 6.6 Distribution................................................... 22
Section 6.7 Limitation on Restrictions..................................... 23
Section 6.8 Technology..................................................... 23
Section 6.9 Initial Public Offering........................................ 23
ARTICLE VII Dividends; Accounting; Books and Records............................. 24
Section 7.1 Dividends...................................................... 24
Section 7.2 Accountants; Reports to Partners............................... 24
Section 7.3 Books and Records.............................................. 25
ARTICLE VIII Other Matters........................................................ 25
Section 8.1 Confidentiality................................................ 25
Section 8.2 License Agreement.............................................. 26
Section 8.3 Consents and Approvals......................................... 27
ARTICLE IX Representations and Warranties....................................... 27
Section 9.1 Representations and Warranties of All Parties.................. 27
Section 9.2 Certain Representations of the Partners........................ 28
ARTICLE X Indemnification...................................................... 28
Section 10.1 Indemnification................................................ 28
Section 10.2 Procedure for Indemnification.................................. 29
ARTICLE XI Miscellaneous........................................................ 30
Section 11.1 Notice......................................................... 30
Section 11.2 Waiver, Amendment, etc......................................... 31
Section 11.3 Binding Agreement; Assignment; No Third Party Beneficiaries.... 32
Section 11.4 Governing Law; Dispute Resolution; Equitable Relief............ 32
Section 11.5 Arbitration of Certain Disputes................................ 33
Section 11.6 Severability................................................... 34
Section 11.7 Table of Contents; Headings.................................... 34
Section 11.8 Counterparts................................................... 34
Section 11.9 Entire Agreement............................................... 34
Section 11.10 Further Assurances............................................. 34
Section 11.11 Survival of Rights, Duties and Obligations..................... 35
Section 11.12 Costs and Expenses............................................. 35
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Exhibit A Bylaws Exhibit B Bylaws of Innova Holdings Exhibit C Form of Carriage Agreement Schedule 3.1 Current Capital Contributions |
AMENDED AND RESTATED
SOCIAL PART HOLDERS AGREEMENT
AMENDED AND RESTATED SOCIAL PART HOLDERS AGREEMENT, dated as of October 8, 2004 (this "Agreement") by and among Grupo Televisa, S.A., a Mexican corporation ("Televisa"), SKY DTH, S. de R. L. de C.V., a Sociedad de Responsabilidad Limitada de Capital Variable formed under the laws of Mexico ("Televisa Sub"), The News Corporation Limited, an Australian corporation ("News Corp"), News DTH (Mexico) Investment Limited, a Cayman Islands company ("News Sub"), and Innova, S. de R. L. de C.V., a Sociedad de Responsabilidad Limitada de Capital Variable formed under the laws of Mexico (the "Company"). Capitalized terms used herein have the meanings ascribed to them in Article I hereof.
RECITALS
WHEREAS, the Parties hereto (or their predecessors or assignors) entered into the Social Part Holders Agreement dated as of March 6, 1997, as amended (the "Original Agreement"), pursuant to which they operated the Company since the date thereof as contemplated by such agreement and by the North American Platform MOU;
WHEREAS, concurrently with the execution and delivery by the Parties of this Agreement, the North American Platform MOU was terminated; and
WHEREAS, the Parties wish to amend and restate the Original Agreement to provide for their continued operation of the Company and for their rights and obligations related thereto, all in accordance with the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the premises herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, each of the parties hereto agrees as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Definitions. As used herein, the following terms shall have the meanings set forth below:
"Active Channels" means Reserved Channels actually used by a Programming Party (or its Affiliated Program Providers).
"Affiliate" means, with respect to any Person, any other Person, directly or indirectly, through one or more intermediaries, controlling, controlled by or under common control with such Person (it being understood that for all purposes of this Agreement (i) Innova
Holdings, the Company and their respective subsidiaries shall be deemed not to be Affiliates of Televisa, (ii) DIRECTV, and its subsidiaries shall be deemed not to be Affiliates of News, and (iii) News and subsidiaries of News (other than DIRECTV and its subsidiaries) shall be deemed not to be Affiliates of DIRECTV.
"Affiliated Program Provider" means with respect to each Programming Party, any Program Provider that is a Controlled Affiliate of such Programming Party's Parent Entity. For the avoidance of doubt, from and after the DIRECTV Transfer, News and its Controlled Affiliates shall be deemed Affiliated Program Providers of DIRECTV and its Affiliates.
"Agreement" means this Amended and Restated Social Part Holders Agreement, as hereafter amended, supplemented or restated from time to time as provided herein.
"Annual Budget" means the annual budget for the Company which is contained in the Business Plan and each subsequent annual budget approved in accordance with this Agreement and the Bylaws.
"Available Cash" means, for any Fiscal Year or other period, net income (or loss) of the Company determined in accordance with Mexican GAAP, adjusted, without duplication, by adding (i) depreciation, amortization and other non-cash charges to the extent deducted in determining net income and deducting (ii) (A) the current portion of indebtedness of the Company, (B) payments required to be made by the Company within one year after the date of calculation, (C) prepaid expenses and other cash expenditures to the extent not deducted in determining net income or loss and (D) reasonable reserves for working capital and contingent liabilities.
"Board of Managers" means El Consejo de Gerentes of the Company; reference to a "Director" shall refer to any Consejero or member of the Board of Managers.
"Business Day" means any day on which banking institutions in New York City and Mexico City are not authorized or obligated by law to close.
"Business Plan" means the business plan of the Company and all amendments thereto which have been approved in accordance with this Agreement and the Bylaws.
"Bylaws" means the Estatutos Sociales of the Company, as in effect on the date hereof (it being understood that, immediately following the execution of this Agreement, the Bylaws shall be in the form attached hereto as Exhibit A) and as the same may be amended from time to time.
"Carriage Agreement" means an agreement between the Company and a Program Provider, pursuant to which the Program Provider provides Program Services to the Company and the Company carries the Program Service to subscribers on a Channel. Any Carriage Agreement between the Company and any Programming Party (or its Affiliated Program Provider) shall be negotiated in good faith and shall be on terms (other than financial terms) which, when taken as a whole, are not less favorable to such Programming Party (or Affiliated Program Provider) than terms (other than financial terms) made available to other Programming Parties (and their Affiliated Program Providers) providing comparable Program Services (other
than terms applicable to over-the-air Channels made available by Televisa or its Controlled Affiliates).
"Central American Countries" means Panama, Costa Rica, Nicaragua, Guatemala, Honduras, El Salvador, Belize, Haiti, the Dominican Republic and Cuba.
"Channel" means each channel which is capable of being transmitted via a Signal available to the Company.
"Company" means Innova, S. de R.L. de C.V., a Sociedad de Responsabilidad Limitada de Capital Variable formed under the laws of Mexico, and its successors and permitted assigns.
"Competitive Activity" means to, directly or indirectly, acquire or own, manage, operate, join, control, or finance or participate in the ownership, management, operation, control or financing of, or be connected as a principal, agent, representative, consultant, beneficial owner of an interest in, any Person, or otherwise with (including but not limited through local operation agreements and similar arrangements), any business or enterprise which operates a DTH Business serving any of the Territory.
"Contribution Agreement" means the Contribution Agreement, dated as of September 3, 2003, by and among the Company, Corporacion Novavision, S. de R.L. de C.V., a Sociedad de Responsabilidad Limitada de Capital Variable formed under the laws of Mexico and a wholly-owned subsidiary of the Company, Televisa, Factum Mas, S.A. de C.V., a Sociedad Anonima de Capital Variable formed under the laws of Mexico and a wholly-owned subsidiary of Televisa ("Factum"), Sky DTH, S. de R. L. de C.V., a Sociedad de Responsabilidad Limitada de Capital Variable formed under the laws of Mexico and a wholly-owned subsidiary of Factum, News, News America Incorporated, a Delaware corporation, News DTH, and Liberty Mexico DTH, Inc., a Colorado corporation.
"control" (including the terms "controlling," "controlled by" and "under common control with") means with respect to any Person, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of the controlled Person, whether through the ownership of voting securities, by contract, or otherwise.
"Controlled Affiliate" means, with respect to any Person, any Affiliate of such Person which is controlled by such Person.
"Dedicated Channels" means those Channels reserved for pay-per-view use, local over-the-air broadcasts, or other uses required by applicable law, all as set forth in the Business Plan.
"DIRECTV" means The DIRECTV Group, Inc., a Delaware corporation, and its successors and permitted assigns.
"Distribution Services" include, but are not limited to, the Signal distribution system (encoding, scrambling, encryption, multiplexing, uplink, space segment, conditional
access, broadcasting control automation, playback facilities, subscriber management services and bank interface), marketing and advertising.
"DTH Agreement" means the DTH Agreement, dated the date hereof, by and among Televisa, News, the Company, DIRECTV and DTVLA, as the same may be amended, modified or supplemented from time to time.
"DTH Business" means any business or enterprise which owns or operates a direct-to-home satellite system which transmits multiple television Channels via satellite directly to integrated decoders/receivers operated by end-viewers in a manner that allows multiple Channels to be carried on a single satellite transponder and allows end-viewers to access television Channels to which they subscribe (whether on a tiered, a la carte or pay-per-view basis), provided that the following shall not, on its own, be deemed to be DTH Businesses for the purposes of this Agreement: (a) the ownership or operation of one or more satellites or satellite transponders; (b) the provision of satellite transponder services to any Person or Persons; (c) the ownership or operation of one or more Internet services, sites or portals; (d) the ownership or operation of one or more television Channels or other television programming services, whether or not they are provided to one or more direct-to-home satellite systems; and (e) the ownership or operation of any means of distributing or delivering television Channels or other television programming Signal other than through a direct-to-home satellite system which transmits multiple television Channels as provided above.
"DTH System" means the Company's direct-to-home satellite television system operating a DTH Business, as further contemplated by the Business Plan.
"DTVLA" means DIRECTV Latin America LLC, a Delaware limited liability company, and its successors and assigns.
"Fiscal Year" means the period commencing January 1 of any year and ending on December 31 of such year, except that the first Fiscal Year shall commence on the date of incorporation of the Company and end on December 31 of such year.
"GAAP" means generally accepted accounting principles, applied consistently.
"Galaxy Mexico" means Grupo Galaxy Mexicana, S. R.L. de C.V., a Mexican limited liability company with variable capital, and its successors and permitted assigns.
"Governmental Authority" means any nation or government, any state or other political subdivision thereof, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government.
"IH Bylaws" means the Estatutos Sociales of Innova Holdings, as in effect on the date hereof (it being understood that, immediately following the execution of this Agreement, the Bylaws shall be in the form attached hereto as Exhibit B) and as the same may be amended from time to time.
"Innova Holdings" means Innova Holdings, S. de R.L. de C.V., a Sociedad de Responsabilidad Limitada de Capital Variable formed under the laws of Mexico, and its successors and permitted assigns.
"Liberty" means Liberty Media International, Inc. a Delaware corporation (formerly known as Tele-Communications International, Inc.), and its successors and permitted assigns.
"Liberty Partners" means Liberty Sub and any other wholly owned subsidiary of Liberty to whom a Social Part is issued or transferred and who is admitted as a Partner pursuant to this Agreement and the Bylaws (so long as each of the foregoing owns a Social Part); reference to a Liberty Partner shall refer to any of the Liberty Partners.
"Liberty Sub" means Liberty Mexico DTH, Inc., a Colorado Corporation, and its successors and permitted assigns.
"License Agreement" means the Trademark License Agreement, dated March 6, 1997, by and between News America Publishing Incorporated and the Company, pursuant to which an Affiliate of News has granted to the Company a perpetual and exclusive license to use the names "Sky" and "Sky Entertainment Services" and any derivatives thereof in connection with the Company's DTH System.
"Major Partners" means the Partners holding the Sub-Series A-1 or B-1 Social Parts.
"MFN Basis" means, with respect to any contractual arrangement between the Company and another Party (or an Affiliate thereof), pursuant to terms, when taken as a whole, are no less favorable to the Company than those in effect between such other Party (or Affiliate thereof) and any unaffiliated third parties, determined with reference to all similar arrangements in effect on the date hereof or entered into from time to time hereafter, in each case with an unaffiliated third party.
"MMDS" means multichannel multipoint distribution service.
"News" means (i) prior to the consummation of the News Reorganization, News Corp, and (ii) from and after the consummation of the News Reorganization, News Parent.
"News Corp" means The News Corporation Limited, an Australian corporation, and its successors and permitted assigns.
"News Parent" means a publicly-traded corporation newly-incorporated in the United States by an Affiliate of News Corp. and which becomes the ultimate controlling parent of News Corp. pursuant to the News Reorganization.
"News Partners" means News Sub and any other wholly owned subsidiary of News to whom a Social Part is issued or transferred and who is admitted as a Partner pursuant to this Agreement and the Bylaws (so long as each of the foregoing owns a Social Part). Reference to a "News Partner" shall refer to any of the News Partners.
"News Reorganization" means a corporate reorganization pursuant to which News Parent becomes the ultimate controlling parent of News Corp and the ultimate parent of News Corp's subsidiaries.
"News Sub" means (i) prior to the DIRECTV Transfer, News DTH (Mexico) Investment Limited, a Cayman Islands company, and its successors and permitted assigns and (ii) from and after the DIRECTV Transfer, DIRECTV, DTVLA or any wholly-owned subsidiary of DIRECTV or DTVLA to which a Social Part is issued or transferred pursuant to the DIRECTV Transfer, and its or their respective successors and permitted assigns.
"North American Platform MOU" means that certain memorandum of understanding dated as of July __, 1996 by and between Televisa, News and Liberty, as amended.
"Notes" means the promissory notes made by the Company payable to Galaxy Mexico and delivered pursuant to the Purchase Agreement.
"Open Channels" means all (i) Reserved Channels not actually used by a Programming Party (or its Affiliated Program Providers) and designated by the Programming Party as "Open Channels" and (ii) all Dedicated Channels.
"Option Agreement" means the Option Agreement, dated the date hereof, by and among the Company, Innova Holdings, and News, as the same may be amended, modified or supplemental from time to time.
"Options" means, collectively, the options exercisable for equity interests in each of the Company and Innova Holdings granted to News pursuant to the terms of the Option Agreement.
"PanAmSat" means PanAmSat International Systems, Inc., a Delaware corporation (formerly known as PanAmSat Corporation), and its successors and permitted assigns.
"Parent Entity" means (i) with respect to a Televisa Partner, Televisa, (ii) with respect to a News Partner, News; provided, that from and after the DIRECTV Transfer, for purposes of this defined term as used in this Agreement, the Parent Entity of the News Partner shall be deemed to be DIRECTV (although News shall have continuing obligations as a Parent Entity in accordance with Section 6.2(b)), and (iii) with respect to any Person admitted as a Partner of the Company after the date hereof, either such Person or any controlling Affiliate of such Person, as may be determined by the Major Partners, at the time such Person is admitted as a Partner of the Company.
"Partners" means the Televisa Partners, the News Partners and any other Person to whom a Social Part is issued or transferred and who is admitted as a Partner pursuant to this Agreement and the Bylaws (so long as each of the foregoing owns a Social Part). Reference to a "Partner" shall refer to any of the Partners.
"Party" means (i) prior to the DIRECTV Transfer, Televisa, each Televisa Partner, News, each News Partner and the Company, and (ii) from and after the DIRECTV Transfer,
Televisa, each Televisa Partner, News (as specified in Section 6.2 only), each News Partner, DIRECTV and the Company.
"Percentage Interest" of a Partner means, as of any time, a fraction (expressed as a percentage), the numerator of which is the amount of the Company's capital represented by the Social Parts directly or indirectly owned by such Partner's Parent Entity as of such time, and the denominator of which is the total amount of capital of the Company represented by all Social Parts outstanding as of such time.
"Person" means any individual, corporation, partnership, limited liability company, trust, joint stock company, business trust, unincorporated association, joint venture Governmental Authority or other entity of any nature whatsoever.
"Program Provider" means any Person that provides Program Services to the Company.
"Programming Party" means (i) Televisa, and (ii) News or, from and after the DIRECTV Transfer, News (for purposes of Sections 4.3(a) and (b), 4.4 and 6.5 only) and DIRECTV.
"Purchase Agreement" means the Purchase and Sale Agreement, dated the date hereof, by and between the Company and Galaxy Mexico, as the same may be amended, modified or supplemented from time to time.
"Reserved Channels" means (i) with respect to Televisa Sub, that number of Channels (in addition to the over-the-air Channels carried by the Company pursuant to Section 4.3(c)) equal to ten percent of the number of Total Channels, and (ii) with respect to News Sub, that number of Channels equal to six and two-thirds percent of the number of Total Channels.
"Series A Social Parts" means partes sociales de la serie "A", which represent an undivided interest in the capital of the Company; reference to a "Series A Social Part" shall refer to any of the Sub-Series A-1 or A-2 Social Parts.
"Series B Social Parts" means partes sociales de la serie "B", which represent an undivided interest in the capital of the Company; reference to a "Series B Social Part" shall refer to any of the Sub-Series B-1 or B-2 Social Parts.
"Series C Social Parts" means partes sociales de la serie "C", which represent an undivided interest in the capital of the Company.
"Signals" mean compressed encoded video, sound and data signals transmitted via satellite to subscribers.
"Social Parts" means the Series A Social Parts, the Series B Social Parts and the Series C Social Parts Reference to a "Social Part" shall refer to any of the Social Parts.
"Televisa" means Grupo Televisa, S.A., a Mexican corporation, and its successors and permitted assigns.
"Televisa Partners" means Televisa Sub and any other wholly owned subsidiary of Televisa to whom a Social Part is issued or transferred and who is admitted as a Partner pursuant to this Agreement and the Bylaws (so long as each of the foregoing owns a Social Part). Reference to a "Televisa Partner" shall refer to any of the Televisa Partners.
"Televisa Sub" means SKY DTH, S. de R. L. de C.V., a Sociedad de Responsabilidad Limitada de Capital Variable formed under the laws of Mexico, and its successors and permitted assigns.
"Territory" means (i) Mexico, and (ii) the Central American Countries.
"Total Channels" means all of the Channels in the Company's DTH System.
"Transponder Agreements" means (i) the Transponder Service Agreement, dated as of February 8, 1999, by and among PanAmSat and Corporacion de Radio y Television del Norte de Mexico, S. de R.L. de C.V., and (ii) any other agreements pursuant to which satellite transponders will be made available to the Company, in each case, as such agreements may be amended, modified or restated from time to time.
Section 1.2 Additional Definitions. The following additional capitalized terms used in this Agreement shall have the meanings set forth in the Section, Recital or Preamble referred to below:
Defined Term Defined In
------------ ----------
Acquiring Party..................................... Section 6.4(c)
Acquisition Target.................................. Section 6.4(c)
Additional Capital Contribution..................... Section 3.2(a)
Capital Call........................................ Section 3.2(b)
Capital Call Notice................................. Section 3.2(b)
Capital Call Period................................. Section 3.2(b)
Confidential Information............................ Section 8.1(a)
Cure Period......................................... Section 3.2(b)
Default Loan........................................ Section 3.2(d)
Defaulting Partner.................................. Section 3.2(b)
Dispute............................................. Section 11.5
DIRECTV Transfer.................................... Section 6.2
Distributor......................................... Section 6.6
Funding Breach...................................... Section 3.2(b)
Funding Default..................................... Section 3.2(c)
Indemnified Parties................................. Section 10.1
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Indemnifying Party.................................. Section 10.2(a) License Agreement................................... Section 8.2 Minimum Holding..................................... Section 4.3(c) net subscription revenue............................ Section 4.4(b) Non-Defaulting Partners............................. Section 3.2(c) Original Agreement.................................. Recitals Process Agent....................................... Section 11.4(b) Programming Committee............................... Section 4.1 Programming Plan.................................... Section 4.2 Program Services.................................... Section 4.3(a) Proposed Budget..................................... Section 3.5 Providing Party..................................... Section 8.1(a) Receiving Party..................................... Section 8.1(a) Reclamation Notice.................................. Section 4.7 Refinancing Debt.................................... Section 3.7 Representatives..................................... Section 8.1(a) Transfer............................................ Section 6.2 |
Section 1.3 Interpretation and Construction of Terms. The definitions in Section 1.1 and 1.2 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include," "includes" and "including" shall be deemed to be followed by the phrase "without limitation." All references herein to Articles, Sections, Exhibits and Schedules shall be deemed to be references to Articles, Sections, Exhibits and Schedules to this Agreement unless the context shall otherwise require. The table of contents and headings are inserted for convenience of reference only and are not intended to be a part of or affect the meaning or interpretation of this Agreement. Unless the context shall otherwise require, any reference to any agreement or other instrument or statute or regulation is to such agreement, instrument, statute or regulation as amended and supplemented from time to time (and, in the case of a statute or regulation, to any successor provision). Any reference in this Agreement to a "day" or a number of "days" (without the explicit qualification of "Business") shall be interpreted as a reference to a calendar day or number of calendar days. If any action or notice is to be taken or given on or by a particular calendar day, and such calendar day is not a Business Day, then such action or notice shall be deferred until, or may be taken or given, on the next Business Day.
ARTICLE II
CONTINUATION OF THE COMPANY
Section 2.1 Continuation of the Company. The Company was established as a Sociedad de Responsabilidad Limitada in accordance with the laws of the United Mexican States on July 25, 1996 and was transformed to a Sociedad de Responsabilidad Limitada de Capital Variable on December 22, 1998. The Partners shall continue to operate the Company on the terms and conditions hereof.
Section 2.2 Organizational Documents. The Company's Bylaws that shall be effective immediately following the date hereof shall be as set forth in Exhibit A attached to this Agreement, as they may be amended from time to time in accordance with the provisions thereof. On or prior to the date hereof, each Parent Entity shall have taken such action, and shall have caused its relevant Affiliates to have taken such action, as is required under the laws of Mexico to modify, amend, adopt and ratify the Company's Bylaws in the form attached hereto as Exhibit A and to modify, amend, adopt and ratify the IH Bylaws in the form attached hereto as Exhibit B. Notwithstanding anything herein or in the Bylaws to the contrary, to the extent that any provision of the Bylaws conflicts with, or otherwise is inconsistent with, any provision of this Agreement, or this Agreement covers any matter that is not covered in the Bylaws, the provisions of this Agreement shall control and shall be binding upon each of the Parties hereto, to the extent permitted by law, and the Bylaws will be modified accordingly with the appropriate corporate action.
Section 2.3 Subsidiary Boards and Bylaws. The Company shall cause the board of directors or board of managers, as the case may be, of each of its subsidiaries to consist of ten (10) persons, six (6) of whom shall be appointed by Televisa, and four (4) of whom shall be appointed by News. The Company shall also cause the bylaws of each of its Subsidiaries to be amended consistent with this Section 2.3 and the Bylaws.
ARTICLE III
CAPITAL SUBSCRIPTION
Section 3.1 Initial Subscription for Company Social Parts. Each of the Partners and Innova Holdings has previously contributed to the Company the amount set forth opposite such Partner's name on Schedule 3.1 hereto in exchange for the issuance of a Social Part of the series indicated opposite such Partner's name and which represents the Percentage Interest set forth opposite such Partner's name on Schedule 3.1. Each Partner shall hold a single Social Part, which shall be recorded on the corporate books in accordance with Mexican law but shall not be evidenced by any negotiable instrument.
Section 3.2 Additional Capital Contributions. (a) Each Partner agrees to make additional contributions to the capital of the Company ("Additional Capital Contributions") from time to time of its pro rata share (based on Percentage Interests on a fully diluted basis, assuming full exercise of the options granted pursuant to the Option Agreement) of amounts necessary to fund negative cash flow of the Company which is not funded from reserves of the Company as contemplated by the Business Plan or Annual Budget. Additional Capital Contributions made pursuant to this Section 3.2 shall be in the form of cash in U.S. dollars converted to pesos at the prevailing rate as of the date of the contribution unless otherwise authorized by the Partners.
Each Partner shall cause the Company to take all such actions as are necessary or advisable to cause the Additional Capital Contributions to be made in accordance with this Agreement and the Bylaws. The Additional Capital Contributions required to be made pursuant to this Section 3.2 shall be made in the form of payments for additional capital and shall be allocated as a capital increase on the appropriate books and records of the Company as set forth in the applicable resolutions authorizing any such capital increase.
(b) The Board of Managers may require the Partners to make Additional Capital Contributions to the Company in such amounts and at such times as shall be approved by the Partners at a Partners' Meeting (each such requirement, a "Capital Call"). If the Board of Managers determines to make a Capital Call, the Board of Managers shall send to each Partner a written notice (a "Capital Call Notice") which shall set forth the amount of Additional Capital Contributions to be made by each of the Partners and the period (the "Capital Call Period") within which such Additional Capital Contributions shall be made, which Capital Call Period shall not end less than ten (10) days after the date on which the Capital Call Notice is given. Following the expiration of the Capital Call Period, the Company shall promptly notify each of the Partners of the failure by any Partner (a "Defaulting Partner") to make its respective Additional Capital Contribution pursuant to the Capital Call Notice (such failure to make an Additional Capital Contribution is referred to herein as a "Funding Breach"). The Defaulting Partner shall have thirty (30) days from the date of delivery of the Company's written notice to each of the Partners of the Funding Breach (the "Cure Period") to cure such Funding Breach by delivering to the Company the Additional Capital Contribution required under the Capital Call Notice together with simple interest thereon calculated at the rate of thirty percent (30%) per annum from and including the date of the termination of the Capital Call Period to but excluding the date of payment.
(c) If a Defaulting Partner shall fail to deliver its Additional Capital Contribution together with interest thereon as provided in paragraph (b) of this Section 3.2 within the Cure Period, then a funding default (a "Funding Default") shall have occurred and all rights of the Defaulting Partner to receive additional equity interests in the Company pursuant to such Capital Call shall cease and, for a period of ninety (90) days after the occurrence of a Funding Default, the non-defaulting Partners (the "Non-Defaulting Partners") shall not be required but shall have the option (i) to contribute all or any part of the Defaulting Partner's Additional Capital Contribution that is the subject of the Funding Default to the Company without the payment of any interest, (ii) to loan all or any part of the Defaulting Partner's Additional Capital Contribution that is the subject of the Funding Default to the Company, or (iii) to contribute all or any part of the Defaulting Partner's Additional Capital Contribution that is the subject of the Funding Default to the Company, on behalf of the Defaulting Partner, and treat such amount as a loan pursuant to subsection (d) below from the Non-Defaulting Partner to the Defaulting Partner. The right of the Non-Defaulting Partners to take the actions referred to in the preceding sentence shall be allocated among the Non-Defaulting Partners in such proportion as may be agreed in writing among them or, in the absence of such an agreement, ratably based on the Percentage Interests then held by such Non-Defaulting Partners.
(d) Any loan made by a Non-Defaulting Partner to the Company (pursuant to clause (c)(ii) of this Section 3.2) or to the Defaulting Partner (pursuant to clause (c)(iii) of this
Section 3.2) (a "Default Loan") shall bear simple interest, payable quarterly, at the rate of thirty percent (30%) per annum, shall have a maturity, not less than one year, determined by the Non-Defaulting Partner making the Default Loan, and shall be prepayable in whole or in part, without penalty. No dividend or other distribution by the Company shall be paid to any Partner while any Default Loan made by a Non-Defaulting Partner to the Company (pursuant to clause (c)(ii) of this Section 3.2) is outstanding.
(e) If any Default Loan made by a Non-Defaulting Partner to a Defaulting Partner (pursuant to clause (c)(iii) of this Section 3.2) is outstanding at the time any dividend or other distribution by the Company is payable to any Partner, the Defaulting Partner hereby authorizes the Company to pay, and the Company shall pay, the amount of such dividend or distribution payable to the Defaulting Partner (up to the aggregate amount of principal of and accrued interest on such Default Loan) directly to the Non-Defaulting Partner in repayment of that amount of the outstanding interest on and principal of the Default Loan.
(f) If and to the extent the Company is required to make any payments to Galaxy Mexico (or its successors or permitted assigns) under the Purchase Agreement, the Notes executed and delivered pursuant thereto, the Option Agreement, or any other agreement or instrument executed and delivered in connection with the transactions contemplated thereby, or the Company requires additional funds to pay costs and expenses in connection with the migration of Galaxy Mexico's subscribers to the Company's DTH System or the Company otherwise requires funds to meet its obligations under the Option Agreement, the Purchase Agreement, the DTH Agreement and the other Ancillary Agreements (as defined therein), each Partner agrees to make contributions to the capital of the Company and Innova Holdings from time to time of amounts necessary to fund such payments in proportion to such Partner's Percentage Interest on a fully-diluted basis, assuming the Options are exercised in full.
Section 3.3 Defaults. If any Partner shall fail to timely contribute
any Additional Capital Contribution required to be contributed by it pursuant to
Section 3.2 or the Bylaws, then the Company and the other Partners shall have,
in addition to the foregoing, the rights and remedies set forth in the Bylaws.
Section 3.4 No Additional Capital Obligations. Except as expressly provided in Section 3.2 of this Agreement or the Bylaws, neither any Partner nor any of their respective Affiliates shall have any obligation or commitment to make any Additional Capital Contribution or investment in, the Company, regardless of the needs of the Company.
Section 3.5 Annual Budgets. At least 60 days prior to the commencement of each Fiscal Year, the Company's Chief Executive Officer shall submit to the Board of Managers a proposed Annual Budget for the upcoming Fiscal Year (a "Proposed Budget"). Each Proposed Budget shall be substantially in the form of the prior Fiscal Year's Annual Budget. The Major Partners agree to negotiate each Proposed Budget in good faith. Each Proposed Budget that is approved by the Board of Managers in accordance with the Bylaws shall be the Annual Budget for the applicable Fiscal Year. If any Proposed Budget is not approved by the Board of Managers in accordance with the Bylaws, then until an Annual Budget for such Fiscal Year is approved by the Board of Managers in accordance with the Bylaws, the Annual Budget for such
Fiscal Year shall be the Annual Budget from the immediately prior Fiscal Year,
provided that (i) each line item thereof denominated in Mexican pesos shall be
adjusted to reflect the rate of inflation in Mexico, based on the Mexican
National Consumer Price Index, during the immediately preceding Fiscal Year, and
(ii) each line item thereof denominated in U.S. dollars shall be adjusted to
reflect the difference between the then current dollar/peso exchange rate and
the dollar/peso exchange rate used to prepare the Annual Budget during the
immediately preceding Fiscal Year.
Section 3.6 Additional Partners. Subject to the approval required by the Bylaws, the Company may from time to time issue additional Social Parts to Persons who shall thereby become Partners of the Company. Subject to the approval required by the Bylaws, any such admission shall be effected on such terms and conditions as the Major Partners shall approve (and shall, in any event, require execution and delivery by the new Partner and its Parent Entity of the agreement and other documents contemplated by Section 6.1(ii) of this Agreement).
Section 3.7 Refinancing Debt. The Company shall refinance U.S. $88 million principal amount of dollar-denominated indebtedness represented by its notes dated April 1, 1997 (together with interest thereon and all related costs and expenses) with an equivalent amount of peso-denominated indebtedness on commercially reasonable terms and conditions, which terms and conditions shall be subject to the prior written approval of the Major Partners, which approval shall not be unreasonably withheld (the "Refinancing Debt"). Upon such refinancing, Televisa and News shall enter into a written agreement by which they shall guarantee, severally and not jointly, 51% and 49%, respectively, of such Refinancing Debt. Televisa and the Company agree to consent to the Transfer by News to DIRECTV of all of News' obligation to guaranty any portion of the Refinancing Debt provided that (i) DIRECTV executes a written agreement to assume such obligations in form reasonably satisfactory to Televisa and the Company and (ii) DIRECTV agrees to indemnify, defend and hold harmless Televisa, the Company and their Controlled Affiliates from and against any and all liabilities, costs or expenses arising out of, resulting from or relating to the transfer of such guaranty obligation.
Section 3.8 True-Up. From the date hereof until the Options are exercised, terminated or expire (the "Option Period"), all capital contributions to the Company or Innova Holdings shall be based upon the Partners' respective Percentage Interests (assuming full exercise of the Options). After the Options have been exercised or terminated or have expired, if the actual Percentage Interests of the Partners are different than the percentages upon which capital contributions were made, then, with respect to each capital contribution made during the Option Period, Televisa shall cause the Televisa Partner to pay to the News Partner an amount in cash equal to the True-Up Amount (as defined below) plus interest at a rate per annum equal to LIBOR plus one percent per annum from the date of such contribution up to and including the date such payment is made. For purposes of this Section 3.8, with respect to each capital contribution made during the Option Period, the "True-Up Amount" means the excess of (i) the amount that would have been contributed by the Televisa Partner had its contribution been made based upon Percentage Interests after the exercise, termination or expiration of the Options, over (ii) the amount actually contributed by the Televisa Partner. To the extent Televisa or News makes any payment in respect of its guarantee of the Refinancing Debt or of any obligations of Innova or its subsidiaries under the Transponder Agreements, such payments shall be treated as
capital contributions for purposes of this Section 3.8. "LIBOR" means the rate of interest per annum (rounded to the nearest 1/8 of 1%) at which U.S. dollar deposits in an amount approximately equal to the aggregate True-Up Amount and offered for one-month periods in the London Interbank currency market, as such rate is reported in Telerate page 3750 on the first day of such month.
ARTICLE IV
PROGRAMMING MATTERS
Section 4.1 Programming Committee. A committee consisting of two individuals appointed by Televisa Sub and two individuals appointed by News Sub (the "Programming Committee"), shall determine the Programming Plan (as defined in Section 4.2). The Programming Committee shall be responsible for negotiating and obtaining programming rights which are consistent with the best interests of the Company and provide the Company with a competitive advantage over other DTH Businesses in the Territory. Approval of any action of the Programming Committee shall be valid if adopted by a majority vote. In the event of a deadlock on any matter to be decided by the Programming Committee, the matter shall be resolved in accordance with Section 4.11.
Section 4.2 Programming Plan. The programming plan of the Company (the "Programming Plan") shall consist of (i) a plan for the sale and distribution of the Company's Program Services, which may be offered on an a la carte basis, in tiers (such as basic, super-basic, expanded basic, etc.), on a pay-per-view basis or otherwise, (ii) the prices to be charged to subscribers, and (iii) the terms and conditions on which Program Services will be licensed from Programming Parties (or their Affiliated Program Providers) and other persons.
Section 4.3 Access to Programming.
(a) Except as otherwise required by law, each Programming
Party will offer and, to the extent such offer is accepted, license or otherwise
make available, each of its existing and future program services (including
over-the-air, cable, sports, and pay-per-view (subject to the last sentence of
Section 4.4) program services) and Channels, other than productions which are
not yet a program service or Channel (collectively, the "Program Services"), to
the Company on arm's length terms and conditions (subject to Sections 4.3(b) and
(c)) and on an exclusive basis as to any DTH Business serving the Territory.
Notwithstanding the foregoing, no Programming Party may license or otherwise
make available any of its Program Services (whether or not licensed or otherwise
made available to the Company) to any other DTH Business in the Territory, other
than in the case of News or any News Partner only, in each Central American
Country, during the Forbearance Period (as defined in the DTH Agreement) with
respect to such Central American Country, pursuant to any LOA as in effect on
the date of this Agreement.
(b) The Company shall have guaranteed access to the same Program Services or Channels made available by each Programming Party (or its Affiliated Program
Providers) to cable and MMDS systems in the Territory (excluding any over the air Channels made available by Televisa or its Controlled Affiliates, which shall be governed by paragraph (c) of this Section 4.3), at a price not in excess of the price at which such Program Services or Channels are made available to cable or MMDS systems, to the extent such Programming Party (or its Affiliated Program Providers) may have such rights, it being understood that such Programming Party will use good faith efforts to obtain such rights.
(c) Effective as of the date of this Agreement, Televisa shall be entitled to cash fees payable monthly for carriage of Televisa's over the air channels on Innova in Mexico for so long as either (x) Televisa and its Affiliates own, in the aggregate, at least 51% of the voting equity securities of the Company or (y) Televisa and its Affiliates have not disposed to third parties of more than 50% of the equity of the Company which they own on the date hereof ((x) or (y) being the "Minimum Holding"), on the terms and subject to the conditions more fully described in a Carriage Agreement to be entered into by the Company, on the one hand, and Televisa or one or more of its Controlled Affiliates, on the other hand, substantially in the form attached hereto as Exhibit C.
Thereafter, the Company shall have the right to carry Televisa's over-the-air Channels on commercially reasonable terms. If Televisa and the Company are unable to agree on the terms and conditions of such carriage, then the terms shall be determined through arbitration in accordance with Section 11.5. Notwithstanding anything to the contrary in this Agreement, if Televisa ceases to be paid the fees for carriage of its over the air channels as provided above, Televisa may terminate carriage of such channels by the Company. All monthly fees paid by the Company to Televisa or its Controlled Affiliates in respect of over the air channels shall be allocated among such over the air channels as Televisa, in its sole and absolute discretion, shall determine.
Section 4.4 Carriage of Program Services. Subject to Section 4.3(a) and (b), Program Services of any Programming Party or Program Provider may be carried by the Company as follows:
(a) Subject to the approval of the Programming Committee or the Board of Managers under the Company's Bylaws, the Company may license Program Services from a Program Provider for a fee (which may be fixed, based on subscriber fees, advertising sales and/or any other basis determined by the Programming Committee; it being understood that, initially, Program Services provided by any Programming Party under this Section 4.4(a) to be carried on such Programming Party's Reserved Channels will be priced as low as reasonably possible and increased periodically, subject to Section 4.3(b) above).
(b) A Programming Party may use Distribution Services of the Company for a fee equal to the fully allocated cost (including an allocation of general and administrative expenses) of such Distribution Services plus an agreed upon spread, as determined by the Programming Committee, and will pay the Company an additional fee equal to 5% of net subscription revenue from such Program Service (such percentage to be reviewed by the Programming Committee from time to time). For purposes of this Section 4.4(b), "net subscription revenue" from a Program Service means gross subscription revenue from such Program Service collected from subscribers by the Company, its agents and/or its distributors
(without deduction for, among other things, any commissions, or services fees that may be payable to, or retained by, any agent or distributor) less only sales tax, value-added tax and similar taxes imposed on the Company, gross receipts tax and concession title duties based on such subscription revenue. In addition, to the extent the Company is not able to realize the tax benefit of any withholding tax (i.e., however denominated, a tax payable by a recipient of revenues in respect of the purchase or use of goods or services by the person who paid the revenues) in conjunction with the calculation of net subscriber revenue, the amount of net subscriber revenue shall be calculated net of withholding taxes. Program Services carried under this Section 4.4(b) shall be offered as a separate tier to the Company's subscribers, the Programming Party shall be entitled to make all pricing decisions with respect to such tier and the Programming Party shall be entitled to retain all revenue derived from such tier after deduction of the fees and expenses described above. All promotion and advertising for any such tier will be coordinated with and conducted by the Company in a manner agreed upon in good faith between the Programming Party and the Company.
(c) A Programming Party may pay the Company the fully allocated cost of Distribution Services for a Program Service plus an agreed upon spread, as determined by the Programming Committee, and such Program Service will be offered free of charge to the Company's subscribers.
(d) Subject to the approval of the Programming Committee, a Programming Party may offer its Program Service free of charge to the Company, which will bear the cost of Distribution Services, and the division of subscriber fees and advertising sales will be negotiated on a case by case basis between the Programming Party and the Company.
Any Program Service (whether or not carried on a Reserved Channel) obtained from a Programming Party (or its Affiliated Program Provider) will be carried as provided in subsections (a), (c) or (d) above of this Section 4.4; provided, however, that if the Programming Party (or its Affiliated Program Provider) and the Programming Committee are unable to agree upon the license fees for such program under Section 4.4(a), the Programming Party (or Affiliated Program Provider), in its sole discretion, may elect to have the Program Service carried under Section 4.4(b) above. The Company will provide all pay-per-view programming carried by the Company, except that any Programming Party (or its Affiliated Program Providers) may use the Company's DTH System for pay-per-view services owned by such Programming Party (or deemed owned by such Programming Party, as provided in Section 4.5 below).
Section 4.5 Reserved Channels. Each Programming Party (together with its Affiliated Program Providers) may use such Programming Party's Reserved Channels to offer, pursuant to the terms of a Carriage Agreement to be negotiated in good faith by such Programming Party and the Company, any Program Service owned either solely by such Programming Party (or its Affiliated Program Provider) or by such Programming Party (or its Affiliated Program Provider) with another Programming Party. For purposes of this Agreement, (i) a Program Service shall be deemed owned by a Programming Party if the Programming Party or its Affiliated Program Provider has a 40% or greater equity interest in such Program Service and (ii) a Program Service shall be deemed not owned by a Programming Party if the Programming Party or its Affiliated Program Provider, has licensed such service from a third
party or acquired from a third party distribution rights for such service. Each
Programming Party's rights with respect to its Reserved Channels are personal to
such Programming Party and may not be transferred or assigned except to the
Company, to that Programming Party's Affiliated Program Providers, to that
Programming Party's Parent Entity or as otherwise contemplated by Section 11.3.
Notwithstanding any provision of this Agreement to the contrary, the Company
shall not be required to carry any Program Service as a Reserved Channel unless
such Programming Party (or its Affiliated Program Provider) has complied with
Section 4.3(a) as to such Program Service.
Section 4.6 Open Channels. Use of the Open Channels shall be determined with the goal of selecting program services which create the optimal overall program package for customers in order to maximize the Company's business. Televisa Sub shall determine the programming line-up for 60% of the Open Channels, in good faith and consistent with the best interests of the Company, subject to the approval of News Sub, not to be unreasonably withheld, and the Programming Committee shall determine the programming line-up for the remaining 40% of the Open Channels.
Section 4.7 Reclamation of Open Channels. If an Open Channel becomes available, whether as a result of discontinuance of any Program Service, termination of a Carriage Agreement relating to a Program Service, technical innovations which result in the availability of new Channels, or otherwise, the Company's Chief Executive Officer shall notify the Programming Parties in writing of such availability. Upon receipt of such notice, each Programming Party that has not used all of its Reserved Channels shall have the right to reclaim the unused Open Channel as a Reserved Channel in order or accommodate a Program Service not then carried by the Company's DTH System. In order to so reclaim an Open Channel, a Programming Party must deliver a written notice (a "Reclamation Notice") to the Company identifying the Open Channel it wishes to reclaim and setting forth a reasonably detailed description of the new Program Service which it or an Affiliated Program Provider wishes to offer on the Open Channel. Upon receipt of a Reclamation Notice, the Company's Chief Executive Officer shall forward copies of it to each other Programming Party who shall have 45 days from delivery to notify the Company and the other Programming Parties in writing whether such Programming Party also wishes to reclaim the Open Channel and, if so, setting forth a reasonably detailed description of the Program Service it wishes to offer on the Open Channel. If no other Programming Parties respond within such 45-day period, the Programming Party that delivered the Reclamation Notice may reclaim the Open Channel as an Active Channel at the end of such 45-day period. If any other Programming Party that has not used all of its Reserved Channels notifies the Company in writing within the 45-day period that it also wishes to reclaim the Open Channel, the Programming Committee will award the Open Channel (i) to the Programming Party with the lowest ratio of Active Channels to Reserved Channels or (ii) if the foregoing ratios are the same, the Programming Committee shall make a determination, which shall be final and binding on the Programming Parties, based on the Programming Committee's good faith judgment as to which Program Service would provide the Company with the best overall package for subscribers.
Section 4.8 Loss of Channels. If at any time after the date hereof the Company has available to it fewer Total Channels than contemplated by the Programming Plan as then in effect, then such Channels shall be allocated as follows: first, the Programming Committee shall
allocate as required all Channels whose uses are required by law; second, the Programming Committee shall propose a new Programming Plan based on the then available number of Total Channels. Such Programming Plan will be intended to give priority to allocating Channels to Programming Parties that have Active Channels.
Section 4.9 Substitution. In the event that any Program Service that is owned by a Programming Party or its Affiliated Program Provider (as determined pursuant to Section 4.5) and is offered by the Company shall be discontinued in accordance with the terms of the Carriage Agreement applicable to such Program Service, then such Programming Party may replace such discontinued Program Service with a different Program Service by notifying the Programming Committee or the Board of Managers in writing of its intent to provide a substitute Program Service. Televisa Sub and News Sub shall cause their representatives on the Programming Committee or the Board of Managers to negotiate in good faith any amendment to the Programming Plan required by such substitution.
Section 4.10 Certain Limitations. No Programming Party (or its Affiliated Program Providers) will be given exclusivity as to program genre by the Company. No Channel offered by the Company in Mexico may be used for any Program Service that is directed toward pornography or religious or political advocacy, unless approved by the Board of Managers or Programming Committee.
Section 4.11 Deadlocks. When the Programming Committee is unable to decide any matter to be decided by the Programming Committee pursuant to this Article IV, the following provisions shall apply: When the disagreement is sustained at two consecutive meetings of the Programming Committee at which votes are taken on the same decision, the members of the Programming Committee shall consult in good faith on a regular basis with respect to such disagreement for a period of 60 days, and if the disagreement remains unresolved at the end of such 60 day period, the Chairmen of Televisa and News shall consult with each other in good faith on a regular basis with respect to such disagreement, including at least one personal meeting, during the 120-day period following the 60-day period.
ARTICLE V
MANAGEMENT AND ADMINISTRATION
Section 5.1 Board of Managers. The Company's Board of Managers shall consist of such number of directors as set forth in the Company's Bylaws. The directors shall be appointed by the holders of Social Parts in accordance with the Company's Bylaws. The Board of Managers shall have such authority and responsibilities as set forth in the Company's Bylaws.
Section 5.2 Quorum. Each of the Parties agrees to use all reasonable efforts to attend, or cause its representatives to attend, all meetings of the Partners, the Board or any committee thereof duly called in accordance with the Bylaws, to ensure that a quorum as defined in the Bylaws is present for the transaction of business at such meetings.
Section 5.3 Affiliated Transactions. Notwithstanding anything contained in this Agreement, if the Company seeks to enforce its rights under, or take or abstain from taking any other action in connection with, any agreement or transaction between the Company and a Partner (or any Controlled Affiliate of such Partner's Parent Entity), then the Company shall take or abstain from taking action in connection therewith, only according to the vote of a majority in interest of those other Partners which are not Controlled Affiliates of such Partners' Parent Entity or as otherwise permitted under the Company's Bylaws.
ARTICLE VI
AGREEMENTS OF THE PARENT ENTITIES
Section 6.1 Additional Equity Holders. After the date hereof, no Person may be issued any Social Part in the Company unless (i) such issuance is effected in accordance with the Bylaws and this Agreement, and (ii) such new Partner and its Parent Entity have delivered to the Company and the other Partners (x) an agreement executed by such new Partner and its Parent Entity, in form and substance satisfactory to the Major Partners, pursuant to which such new Partner and its Parent Entity agree to be bound by all of the terms and conditions of this Agreement, and (y) such other documents, in form and substance satisfactory to the Major Partners, as are reasonably necessary or appropriate to effect such transaction.
Section 6.2 Transfers.
(a) No Parent Entity shall, and each Parent Entity shall cause its Controlled Affiliates not to, directly or indirectly, sell, assign, pledge, encumber or otherwise transfer (each such transaction being referred to as a "Transfer") to any Person any direct or indirect interest in the Company, Innova Holdings or in the Partner of which such Parent Entity is the Parent Entity, except for any Transfer to such Parent Entity or a direct or indirect wholly owned subsidiary of such Parent Entity. Nothing contained in this Agreement shall limit or restrict in any way Transfers of direct or indirect interests in the Parent Entities.
(b) Notwithstanding anything to the contrary contained in this Agreement or the Contribution Agreement, the Partners agree that, after the Galaxy Mexico Shut-Down Date (as defined in the DTH Agreement), News and its wholly owned subsidiaries may Transfer all but not less than all of their direct and indirect interests in the Company and Innova Holdings (including the Options if they have not been exercised and have not expired):
(i) to DIRECTV or a wholly owned subsidiary thereof; or
(ii) so long as DIRECTV continues to own at least 80% of the equity and voting securities of DTVLA, to DTVLA or a wholly owned subsidiary of DTVLA (in the case of clause (i) or (ii), such transferee being referred to as a "DIRECTV Transferee");
provided that, as conditions precedent to any such Transfer (the "DIRECTV Transfer") (x) there shall not be in effect any statute, rule, regulation or order of any court, which prohibits or makes illegal such Transfer (y) there shall not be in effect any order of any governmental or regulatory
body (other than a court order) which prohibits such Transfer and (A) would be expected, in Televisa's judgment, to result in criminal liability or prosecution of any of Televisa, Innova, Innova Holdings, their Controlled Affiliates or any of their respective officers, directors, employees or representatives or (B) would result in any liability (other than monetary liabilities) that would (x) have a material adverse effect on Innova, Innova Holdings and their Controlled Affiliates, taken as a whole, or (y) in Televisa's judgment, have any adverse effect on Televisa or any of its Affiliates (other than Innova, Innova Holdings and their Controlled Affiliates), including but not limited to any requirement which (I) grants rights (including with respect to Innova, Innova Holdings and their Controlled Affiliates) to any Person which competes, or any of whose Affiliates competes, with Televisa or any of its Affiliates or (II) restricts or imposes requirements on Televisa or any of its Affiliates (other than Innova, Innova Holdings and their Controlled Affiliates), and (z) News shall have executed and delivered, and shall have caused the DIRECTV Transferee and DIRECTV to execute and deliver, to the Company, Innova Holdings and the other Partners of the Company and Innova Holdings, as applicable, one or more instruments, in each case in form and substance reasonably acceptable to the Company, Innova Holdings and the relevant other Partners of the Company and Innova Holdings, as applicable, confirming the following:
(i) that News shall continue to be bound by, and shall continue to have rights and benefits under, Sections 3.7 (except as provided therein), 4.3(a) and (b), 6.3 (with respect to these continuing rights or obligations, only), 6.4, 6.5, 6.7, 6.8, 8.1 and 8.2 and Articles X (with respect to these continuing rights and obligations and attributable to any prior period) and XI of the this Agreement (as a Partner and as a Parent Entity, as appropriate);
(ii) that such DIRECTV Transferee shall assume and be bound by, and shall be entitled to the benefits of, the rights and obligations of News Sub under this Agreement, the Option Agreement, the Company Bylaws, the IH Bylaws and Section 20 of the Contribution Agreement; and
(iii) that DIRECTV shall assume and be bound by, and shall be entitled to the benefits of, the rights and obligations of News under this Agreement (as a Parent Entity), the Option Agreement, the Company Bylaws, the IH Bylaws and Section 20 of the Contribution Agreement (as a Parent Entity).
Notwithstanding the foregoing, News shall be permitted to grant to
DIRECTV or any DIRECTV Transferee the right and option to acquire from News all
of News' direct and indirect interests in the Company and Innova Holdings
(including the Options if they have not been exercised and have not expired)
without the consent of the other Parties, but subject to this Section 6.2(b) in
the case of the consummation of the exercise of such right and option.
(c) In the event that a direct interest in the Company or Innova Holdings is Transferred by any Parent Entity or any Controlled Affiliate of such Parent Entity that in either case is not a resident of Mexico for purposes of the Mexican Income Tax Law, such Parent Entity shall, or shall cause such Controlled Affiliate to, promptly provide to the Company or Innova Holdings, as applicable, (x) the documentation required under the Mexican Income Tax Law that shows that such Parent Entity or such Controlled Affiliate, as the case may be, has paid in accordance with the Mexican Income Tax Law the applicable income tax imposed, levied or assessed by Mexico or any political subdivision or taxing authority thereof or therein arising out of, relating to or resulting from such Transfer and/or (y) if and to the extent such Transfer is exempt from Mexican income tax pursuant to the income tax treaty between the United States and Mexico, as in effect on the date of such Transfer, a written certificate that such Transfer is so exempt and certificates of residency for the transferor in such Transfer issued by the U.S. Internal Revenue Service dated during the tax year in which such Transfer occurred and with respect to the tax year in which such Transfer occurred, and such Parent Entity shall indemnify, defend and hold harmless the Company and Innova Holdings and their respective officers, directors, shareholders, partners, members, agents and representatives from and against any and all income taxes imposed, levied or assessed by Mexico or any political subdivision or taxing authority thereof or therein arising out of, relating to or resulting from such Transfer.
Section 6.3 Parent Guarantees of Affiliates' Obligations. Each Parent Entity hereby irrevocably and unconditionally guarantees to the Company, to each Partner, and to each other Parent Entity that each of such Parent Entity's Affiliates shall pay and perform as required thereby, each and every one of such Affiliate's respective covenants, agreements and obligations contained in the Bylaws or this Agreement. This guaranty (i) is an absolute, unconditional, present and continuing guarantee of payment and performance and not of collectibility, (ii) is in no way conditioned or contingent upon any attempts to collect or upon any other condition or contingency, and (iii) shall not be affected in any way by any time or indulgence granted to the underlying obligor or any variation, compromise or release of any underlying obligation.
Section 6.4 Exclusivity.
(a) Neither any Parent Entity nor any of its Controlled Affiliates shall engage in any Competitive Activity in the Territory, except (i) through the Company and (ii) as permitted in Section 6.4(b).
(b) The restrictions in Section 6.4(a) of this Agreement shall not prohibit any of the following activities:
(i) ownership by Televisa (or any Affiliate thereof) of any interest in PanAmSat or Univision Communications Inc. or their successors or assigns or any Person which owns a controlling interest in PanAmSat or Univision Communications Inc., as such ownership exists as of the date of this Agreement (or resulting from the conversion, exchange or other transaction involving such interest) and the acquisition or ownership by Televisa (or any Affiliate thereof) of any additional interest in Univision Communications Inc. as a result of the exercise of warrants currently held by Televisa (or an Affiliate thereof) or the acquisition or ownership of other equity interests in PanAmSat or Univision Communications Inc. currently held by an employee of Televisa or any of
its Affiliates, by members of such employee's family or by a corporation, limited liability company, partnership or trust owned by or for the benefit of such persons (or resulting from the conversion, exchange or other transaction involving such interest);
(ii) ownership by News (or any Affiliate thereof) or DIRECTV (or any Affiliate thereof) of any interest in PanAmSat or its successors or assigns or any Person which owns a controlling interest in PanAmSat, as such ownership exists as of the date of this Agreement (or resulting from the conversion, exchange or other transaction involving such interest) or the acquisition or ownership of other equity interests in PanAmSat currently held by an employee of News or any of its Affiliates, by members of such employee's family or by a corporation, limited liability company, partnership or trust owned by or for the benefit of such persons (or resulting from the conversion, exchange or other transaction involving such interest);
(iii) the provision of Program Services by any Party to another Person, provided that such activity is in compliance with, or contemplated by, Section 4.3(a) of this Agreement; and
(iv) the acquisition or ownership by any Party (directly or indirectly through an Affiliate) of any securities of a publicly held Person, if such securities, together with all other securities of such publicly held Person owned by such Party's Parent Entity or Controlled Affiliates thereof, (x) do not represent more than 5% of the aggregate voting power of the outstanding equity securities of such Person (assuming the conversion, exercise or exchange of all securities held by such Party or its Affiliates that are convertible, exercisable or exchangeable into or for voting securities) and (y) in the case of debt securities, entitle the holder thereof to receive only interest or other returns that are not based upon the value or results of operations of such Person.
Section 6.5 Cable/MMDS Carriage. Each Programming Party will use reasonable efforts to carry, or cause its Controlled Affiliates to carry, any Program Services (partly or wholly owned by a Programming Party or its Affiliated Program Providers) which are carried on by the Company, on commercially reasonable terms and conditions (including pricing and tiering), on any cable or MMDS systems in the Territory owned by such Programming Party or its Controlled Affiliates. Without limiting the generality of the foregoing, Televisa will use reasonable efforts to carry any Program Services (partly or wholly-owned by a Programming Party) which are carried by the Company, on commercially reasonable terms and conditions (including pricing and tiering) on Televisa-owned cable and MMDS systems in the Territory.
Section 6.6 Distribution. The Parties will agree on the most effective and efficient manner to distribute all proprietary, jointly-owned and third party owned Program Services to DTH distributors and, where appropriate, cable and MMDS distributors in the Territory. The Company may have one or more local distributors (each, a "Distributor"). Each Distributor will be responsible for distribution and related services as agreed among the Parties. The Company will act as the Distributor in Mexico and may obtain ancillary services from Televisa or its Affiliates on an MFN Basis or at fair market value, whichever is more favorable to the Company. Any entity in which Televisa has a significant equity interest may act (but shall not be required to act) as Distributor in its area of operation, in each case on terms and conditions
no more favorable to such entity than those which would pertain in an arm's length transaction with a third party Distributor in such area. For its services, each Distributor which is not an Affiliate of Televisa will be paid a fee to cover its associated costs, the structure and details of which will be set forth in the Business Plan.
Section 6.7 Limitation on Restrictions. Except to the extent provided in this Agreement, no Parent Entity nor any Affiliate thereof, nor any of their respective officers, directors, shareholders, partners or employees shall be subject to any legal restriction among themselves regarding exclusivity or competition and may freely exploit any opportunity for its own account or with others.
Section 6.8 Technology.
(a) The Parties have agreed that any subscriber management systems, management information systems, conditional access and programming uplink services and related technology and equipment required by the Company and its Affiliates will be designed to serve the best interests of the Company and to achieve a system which provides for flexibility, growth and future technological development. The Parties shall make available such additional technologies as may be required by the Company and its Affiliates. Any technology or services acquired or licensed from a Party or any of its Affiliates (including News Digital Systems Limited and News Datacom technology) shall be made available on an MFN Basis. Such technology shall be provided pursuant to a license to utilize such technology in the DTH Business in the Territory and to manufacture and sell, or authorize others to manufacture and sell, equipment using or relying upon such technology. The Parties acknowledge that the successful operation of the Company's DTH System is dependent upon the total integration, interworking and interoperability of all parts of technology used. The Company and its Affiliates will obtain indemnities and remedies in the event that any technology is defective, fails to operate on an integrated basis or fails to function as required to achieve the objectives of the Business Plan. Equipment for the Company and its Affiliates may be manufactured by the Parties (or their Affiliates) and/or by third parties, depending upon the best interests of the Company.
(b) News will make any existing or future technology developed by it or its Affiliates (including News Datacom and News Digital Systems Ltd.) available on an MFN Basis to the Company, its Affiliates and any other DTH Business in which both Televisa and News own a significant interest.
Section 6.9. Initial Public Offering. In order to facilitate an initial public offering of equity securities of the Company, Televisa may propose amendments to the Company's Bylaws, this Agreement and other organizational documents to implement changes in the Company's capital structure, including through the use of non-voting shares, CPOs or other arrangements of the type generally used by Mexican issuers in connection with public offerings of equity securities. News shall not, and shall cause its Affiliates not to, unreasonably withhold their consent to a proposed public offering by the Company, if requested by Televisa, or to any related Bylaw amendments, changes in capital structure or other arrangements, requested by Televisa in connection with such public offering.
ARTICLE VII
DIVIDENDS; ACCOUNTING; BOOKS AND RECORDS
Section 7.1 Dividends. Dividends of Available Cash shall be paid to the Partners and Innova Holdings within 45 days of the end of each Company fiscal quarter pro rata based on such Partners' and Innova Holdings' respective equity interests, provided that such dividends shall only be paid to the extent permitted by applicable law and contracts, agreements and instruments to which the Company is a party or to which its assets are subject. The amount of Available Cash, if any, shall be determined by the Major Partners in accordance with the Bylaws. The Company shall comply with all tax withholding requirements under applicable law and shall supply to the Partners proof of payment of any such withholding taxes and copies of all reports or forms filed by the Company in connection with any such payment.
Section 7.2 Accountants; Reports to Partners.
(a) The books of account and records of the Company shall be audited as of the end of each Fiscal Year by an independent public accounting firm which is one of the Big Four United States accounting firms (or its Mexican affiliate) and is selected by the Board of Managers in accordance with the Bylaws. All Company financial statements shall be prepared in accordance with Mexican GAAP and reconciled to U.S. GAAP and shall include information permitting such statements to be reconciled to Australian GAAP for so long as News Parent has reporting obligations in Australia.
(b) As promptly as practicable, but in no event later than 90 days after the end of each Fiscal Year (or, upon reasonable prior written notice from a Partner to the Company, such shorter period as may be required by applicable law, rule or regulation for a Partner to timely file its financial reports for such Fiscal Year), the Company shall cause its independent public accountants to prepare and mail to each Partner a report including the audited financial statements of the Company for such Fiscal Year and such other United States federal and state income tax reporting information, if any, as is required by applicable law.
(c) As promptly as practicable, but in no event later than 45 days after the end of each quarter of each Fiscal Year (or upon reasonable prior written notice from a Partner to the Company, such shorter period as may be required by applicable law, rule or regulation for a Partner to timely file its financial reports for such quarter of such Fiscal Year), the Company shall prepare and mail, or cause to be prepared and mailed, to each Partner a report containing unaudited financial statements of the Company for each quarter and for the period from the beginning of the then current Fiscal Year through the end of such quarter, prepared on a basis consistent with Innova's annual audited financial statements.
(d) Notwithstanding the foregoing, each Partner and the Company agree that, from and after the date hereof, the Company will continue to provide to each Partner the financial and other information, in substantially the same form and for the comparable time periods, that it provides to News as of the date hereof, prepared on a basis consistent with the annual audited financial statements of the Company for such periods. Such financial and other
information shall be provided in addition to any financial or other information required to be provided to each Partner under the Bylaws or otherwise.
Section 7.3 Books and Records. The Company shall keep, or cause to be kept, accurate and complete records and books of account of all transactions of the Company. The Company books and records shall be kept in accordance with generally accepted accounting principles applicable thereto, shall be maintained at the principal place of business of the Company and shall be available for inspection and examination, for a proper purpose and at reasonable times during usual business hours, by Partners or their duly authorized representatives. Such information shall be kept confidential and shall be used for Company purposes only, subject to applicable laws and stock exchange regulations.
Section 7.4 Tax Filings. (a) From and after the date hereof and at all times prior to any initial public offering of equity securities of the Company, each Party agrees that it will use commercially reasonable efforts (without incurring any material monetary or other liability or obligation or assuming any material risk thereof) to establish and maintain the Company's classification as a partnership (and not as an association taxable as a corporation) and each of the Company's wholly-owned Controlled Affiliates classification as disregarded as an entity separate from its sole beneficial owner (and not as an association taxable as a corporation), in each case for United States federal income tax purposes (and any applicable United States state and local income and franchise tax purposes) to the extent permitted by the applicable United States federal, state and/or local tax law, including the execution and filing of form 8832 with the Internal Revenue Service, in each case if and when the filing of such form 8832 to elect to classify the Company as a partnership or to elect to classify a wholly-owned Controlled Affiliate of the Company as such a disregarded entity is permitted under United States Treasury Regulation section 301.7701-3.
(b) The Board of Managers is specifically directed and authorized to file all returns, forms and documents required or permitted to be filed pursuant to applicable tax laws, and to take all actions in respect of tax reporting and proceedings before all taxing authorities, within the scope of its authority under this Agreement.
ARTICLE VIII
OTHER MATTERS
Section 8.1 Confidentiality.
(a) Each Party (a "Receiving Party") shall keep confidential and shall cause its Representatives (as defined below) to keep confidential and shall not disclose any information of a confidential or proprietary nature heretofore or hereafter received from the Company or any other Party (the "Providing Party") concerning the Company or its business (collectively referred to as "Confidential Information"). The term "Confidential Information" also includes all analyses, compilations, studies or other material prepared by the Receiving Party or its directors, officers, employees, agents, advisors, or representatives of such Party's advisors (collectively, such Receiving Party's "Representatives") containing, based on or reflecting any information furnished by any Providing Party or its representatives. The term
"Confidential Information" does not include information which (i) is already in
any Receiving Party's possession, provided that such information is not known by
such Receiving Party to be subject to another confidentiality agreement with or
other obligation of secrecy to the Company or another party, or (ii) is or
becomes generally available to the public other than as a result of a disclosure
by the Receiving Party or its Representatives in violation of this Agreement, or
(iii) becomes available to the Receiving Party on a non-confidential basis from
a source other than any Providing Party or its advisors, provided that such
source is not known by such Receiving Party to be bound by a confidentiality
agreement with or other obligation of secrecy to any Party or another Person.
(b) Each Party agrees that the Confidential Information will be used solely in connection with the business of the Company, and that such information will be kept confidential by such Party and its Representatives; provided, however, that any of such information may be disclosed by a Party:
(i) to any of its Representatives who need to know such information (and only to the extent that any such Representative has a need to know) for the purpose of consummating the transactions contemplated by the DTH Agreement or hereby; provided, that (x) such Representatives shall be informed by such Party of the confidential nature of the Confidential Information and the requirement that it not be used other than for the Company's business, (y) such Representatives shall be required to agree to and be bound by the terms of this Section 8.1 as a condition to receiving the Confidential Information, and (z) in any event, each Party shall be responsible for any breach of this Section 8.1 by any of its Representatives; or
(ii) to regulatory authorities or the general public if and to the extent a Party is required by law or securities exchange rules to make such disclosures (including, but not limited to, in connection with a public offering); provided that such Party, to the extent practicable, notifies and consults with the other Parties prior to making any such disclosure.
(c) There will be no public announcement made concerning the matters contemplated by this Agreement without the consent of Televisa and News (including in relation to the content of any such announcement), except that a Party will be entitled to make any disclosure required by law or by the rules of any relevant securities exchange, provided that such Party, to the extent practicable, notifies and consults with the other Parties prior to making any such disclosure or announcement (including in relation to the content of such announcement).
Section 8.2 License Agreement. Within 30 days after the date hereof, the Company and News (or its Affiliate) shall enter into an amendment to the License Agreement, pursuant to which the territory covered by the License Agreement shall be expanded to cover Mexico and the Central American Countries, to the extent News (or any Affiliates of News) has the right to grant such additional rights. In any event, the license granted under the License Agreement shall remain a perpetual, royalty-free and exclusive license. From time to time after the date hereof, at the request and expense of the Company, News shall, and shall cause its Affiliates to, obtain rights to use the "Sky" name and trademark in the Central American Countries.
Section 8.3 Consents and Approvals. The Parties acknowledge that the operation of the Company's DTH System as contemplated hereunder will require obtaining all necessary regulatory and governmental approvals. Each Party will provide such information, cooperation and assistance as may reasonably be required to obtain approval or permits required by or made necessary as a result of this Agreement.
ARTICLE IX
REPRESENTATIONS AND WARRANTIES
Section 9.1 Representations and Warranties of All Parties. Each Party to this Agreement represents and warrants to the other Parties as follows:
(a) Due Incorporation. Such Party is duly incorporated or otherwise duly organized and validly existing under the laws of the jurisdiction of its incorporation or organization and has the power and lawful authority to own its assets and properties and to carry on its business as now conducted. Such Party is duly licensed or qualified to do business in each jurisdiction, except where the failure to be licensed or qualified would not, individually or in the aggregate, have a material adverse effect on its financial condition or its ability to perform its obligations hereunder.
(b) Power; Authority; Execution; Delivery; Enforceability. Such Party has the full right, power, authority and approval required to enter into, execute and deliver this Agreement and to perform fully such Party's obligations hereunder. This Agreement has been duly executed and delivered by such Party and, assuming the due execution and delivery by the other Parties hereto, constitutes the valid and binding obligation of such Party, enforceable in accordance with its terms, except as (i) such enforceability may be limited by bankruptcy, insolvency, reorganization or moratorium or other similar laws affecting the enforcement of creditors' rights generally and (ii) the availability of equitable remedies may be limited by equitable principles of general applicability.
(c) Consents. No approval or consent of any foreign, federal, state, county, local or other governmental or regulatory body or of any other Person is required in connection with the execution and delivery by such Party of this Agreement and the consummation and performance by such Party of the transactions contemplated hereby, except such consents and approvals which if not obtained would not materially impair such Party's ability to perform its obligations under this Agreement or have a material adverse effect on the financial position of such Party or the Company.
(d) No Conflicts. The execution and delivery of this Agreement, the consummation of the transactions contemplated hereunder and the performance by such Party of this Agreement in accordance with its terms and conditions will not conflict with or result in the breach or violation of any of the terms or conditions of, or constitute (or with notice or lapse of time or both would constitute) a default under, (i) the Certificate of Incorporation, By-laws or documents analogous to the foregoing documents of such Party, (ii) any instrument, contract or other agreement to which such Party is a party or by or to which it or its assets or properties are bound or subject, or (iii) any statute or any regulation, order, judgment or decree of any court or
governmental or regulatory body, except conflicts, breaches or violations as to which requisite waivers or consents have been obtained or which would not, individually or in the aggregate, materially impair such Party's ability to perform its obligations under this Agreement or have a material adverse effect on the financial position of such Party or the Company.
(e) Litigation. As of the date hereof, (i) there are no
actions, suits, proceedings or investigations pending or, to the knowledge of
such Party or the Affiliates of such Party, threatened against or affecting such
Party or the Affiliates of such Party or their respective properties, assets or
businesses in any court or before or by any governmental department, board,
agency or instrumentality or arbitrator which could, if adversely determined
(or, in the case of an investigation would lead to any action, suit or
proceeding, which if adversely determined) reasonably be expected to materially
impair such Party's ability to perform its obligations under this Agreement, and
(ii) such Party or the Affiliates of such Party have not received any currently
effective notice of any default, and such Party and the Affiliates of such Party
are not in default, under any applicable order, writ, injunction, decree,
permit, determination or award of any court, any governmental department, board,
agency or instrumentality or arbitrator which would reasonably be expected to
materially impair such Party's ability to perform its obligations under this
Agreement.
Section 9.2 Certain Representations of the Partners. Each Partner represents and warrants to each of the other Parties hereto that the Social Part acquired by such Partner was acquired for investment purposes only and not with a view to the resale of such Social Part (or any part thereof or interest therein) in violation of any applicable securities laws.
ARTICLE X
INDEMNIFICATION
Section 10.1 Indemnification. Each Party will indemnify and hold Innova, Innova Holdings, each other Party, and their respective Affiliates, officers, directors, employees and representatives, including individuals nominated to serve on the Board of Managers (collectively, the "Indemnified Parties") harmless, and agrees to protect, save and keep harmless the Indemnified Parties from payment, and hereby assumes liability for the payment, of any or all liabilities (including all interest and expenses together with any tax thereon), obligations, losses, damages, penalties, claims, actions, suits, judgments or settlements of any nature or kind, whether known or unknown, absolute or contingent, accrued or unaccrued, liquidated or unliquidated and including all costs, expenses and disbursements (including cost of investigation by, and attorneys', accountants' and expert witnesses' reasonable fees and expenses payable to, third parties), arising out of, resulting from or in connection with (a) any breach by such Party of a representation or warranty contained herein, or (b) any failure by such Party to perform any agreement or covenant contained herein, except to the extent such performance is prevented or impeded by another Party's willful misconduct, in which case such other Party shall be responsible for such misconduct.
Section 10.2 Procedure for Indemnification.
(a) For purposes of this Article X, any Person liable to indemnify an Indemnified Party shall be known as an "Indemnifying Party." The Indemnified Party shall notify the Indemnifying Party as soon as practicable after the Indemnified Party receives notice of or otherwise has actual knowledge of such claim, and shall provide to the Indemnifying Party as soon thereafter as practicable all information and documentation necessary to support and verify the claim being asserted, and the Indemnifying Party shall be given access to all books and records in the possession or control of the Indemnified Party which the Indemnifying Party reasonably determines to be related to such claim.
(b) Promptly after receipt by an Indemnified Party of notice of the commencement by any third party of any action, suit or proceeding which might result in the Indemnifying Party becoming obligated to indemnify or make any other payment to the Indemnified Party under this Article X, the Indemnified Party shall, if a claim in respect thereof is to be made against the Indemnifying Party, notify the Indemnifying Party promptly in writing of the commencement thereof. The failure of the Indemnified Party to so notify the Indemnifying Party shall not relieve the Indemnifying Party from any liability that it may have on account of this indemnification or otherwise, except to the extent that the Indemnifying Party is materially prejudiced thereby. The Indemnifying Party shall have the right, within thirty (30) days after being so notified, to assume the defense of such litigation or proceeding with counsel reasonably satisfactory to the Indemnified Party. In any such litigation or proceeding the defense of which has been assumed by the Indemnifying Party, the Indemnified Party shall have the right to participate therein and retain its own counsel at its own expense, provided that such Indemnified Party's counsel shall be retained at the Indemnifying Party's expense if (i) the Indemnified Party and the Indemnifying Party so agree or (ii) the named parties to any such litigation or proceeding (including any impleaded parties) include both the Indemnified Party and the Indemnifying Party and representation of both the Indemnified Party and the Indemnifying Party by the same counsel would be inappropriate due to actual or potential differing interests between them, provided further that in no event shall an Indemnifying Party be obligated to pay for more than one firm of counsel (in addition to any local counsel) for all such Indemnified Parties, unless the representation of all Indemnified Parties by the same firm of counsel would be inappropriate due to actual or potential differing interests between them or each such Indemnified Party is named party to any such litigation or proceeding. To the extent that the settlement of such an action or proceeding, the defense of which has been assumed by the Indemnifying Party, involves payment of money, the Indemnifying Party shall have the right, in consultation with the Indemnified Party, to settle those aspects dealing only with the payment of money. Notwithstanding the foregoing, in connection with any such defense or settlement, the Indemnifying Party shall not enter into a consent decree or any settlement involving injunctive or other non-monetary relief or consent to an injunction or settlement without the Indemnified Party's written consent, which consent shall not be unreasonably withheld. The Indemnified Party shall cooperate, and shall use its reasonable efforts to cause its employees and the employees of any of its respective Affiliates to cooperate with the Indemnifying Party in the defense of any action, suit or proceeding assumed by the Indemnifying Party.
(c) Each Indemnifying Party's obligation under this Article X shall not affect the other Parties' right to seek any other remedy upon a default by the Indemnifying Party under this Agreement.
(d) All sums payable by the Indemnifying Party in accordance with this Article X shall be paid without any deduction, withholding, counterclaim or set off.
ARTICLE XI
MISCELLANEOUS
Section 11.1 Notice. All notices and other communications required or permitted hereunder shall be in writing, shall be deemed duly given upon actual receipt, and shall be delivered (a) in person, (b) by registered or certified mail (air mail if addressed to an address outside of the country in which mailed), postage prepaid, return receipt requested, (c) by a generally recognized overnight courier service which provides written acknowledgment by the addressee of receipt, or (d) by facsimile or other generally accepted means of electronic transmission (provided that a copy of any notice delivered pursuant to this clause (d) shall also be sent pursuant to clause (b) or (c)), addressed as follows:
(i) if to the Company, to:
Innova, S. de R.L. de C.V.
Insurgentes Sur No. 694
Colonia Del Valle C.P. 03100
Mexico, D.F.
Attention: Director Juridico
with copies to:
Grupo Televisa, S.A.
Avenida Vasco de Quiroga 2000
Edificio A, Cuarto Piso
Colonia Santa Fe Zedec
01210 Mexico, D.F.
Attn: Juan S. Mijares Ortega, General Counsel
Telecopier: (52-55) 5261-2546
Fried, Frank, Harris, Shriver & Jacobson, LLP
One New York Plaza
New York, New York 10004-1980
Attn: Joseph A. Stern, Esq.
Telecopier: (212) 859-8589
(ii) if to Televisa or the Televisa Partners, to:
c/o Grupo Televisa, S.A.
Avenida Vasco de Quiroga 2000
Edificio A, Cuarto Piso
Colonia Santa Fe Zedec
01210 Mexico, D.F.
Attn: Juan S. Mijares Ortega, General Counsel
Telecopier: (52-55) 5261-2546
with copies to:
Fried, Frank, Harris, Shriver & Jacobson, LLP One New York Plaza New York, New York 10004-1980 Attn: Joseph A. Stern, Esq.
Telecopier: (212) 859-8589
(iii) if to News or the News Partners, to:
c/o The News Corporation Limited 1211 Avenue of the Americas New York, New York 10036 Attn: Arthur M. Siskind, Esq.
Telecopier: (212) 768-2029
with copies to:
Hogan & Hartson L.L.P.
875 Third Avenue
New York, NY 10022
Attn: Ira S. Sheinfeld, Esq.
Mitchell S. Ames, Esq.
Telecopier: (212) 918-3100
or to such other addresses as may be specified by like notice to the other parties.
Section 11.2 Waiver, Amendment, etc. This Agreement may not be amended or supplemented, and no waivers of or consents to departures from the provisions hereof shall be effective, unless set forth in a writing signed by, and delivered to, all the Parties hereto. No failure or delay of any Party in exercising any power or right under this Agreement will operate as a waiver thereof, nor will any single or partial exercise of any right or power, or any abandonment or discontinuance of steps to enforce such right or power, preclude any other or further exercise thereof of the exercise of any other right or power.
Section 11.3 Binding Agreement; Assignment; No Third Party Beneficiaries. This Agreement will be binding upon and inure to the benefit of the Parties hereto and their successors and permitted assigns. Except as set forth herein and by operation of law, no party to this Agreement may assign or delegate all or any portion of its rights, obligations or liabilities under this Agreement without the prior written consent of each other party to this Agreement. Nothing expressed or implied herein is intended or will be construed to confer upon or to give to any third party any rights or remedies by virtue hereof. Promptly upon consummation of the News Reorganization, News Corp shall Transfer its rights and obligations under this Agreement to News Parent, which rights and obligations shall be accepted and assumed by News Parent in writing, and News Corp's rights and obligations under this Agreement shall terminate in their entirety immediately upon consummation of such Transfer and the acceptance and assumption by News Parent. Notwithstanding the foregoing or anything in this Agreement to the contrary, News (and any Affiliate thereof) may assign any of its rights and obligations (whether presently held or subsequently acquired) in, to and under this Agreement to any DIRECTV Transferee pursuant to the DIRECTV Transfer without the prior written consent of the Parties hereto.
Section 11.4 Governing Law; Dispute Resolution; Equitable Relief.
(a) This Agreement shall be governed by and construed in accordance with the laws of the State of New York (regardless of the laws that might otherwise govern under applicable principles of conflicts of law).
(b) Subject to Section 11.5, each Party to this Agreement
irrevocably consents and agrees that any legal action, suit or proceeding by it
against any of the other Parties with respect to its rights, obligations or
liabilities under or arising out of or in connection with this agreement shall
be brought by such Party only in the United States District Court for the
Southern District of New York or, in the event (but only in the event) such
court does not have subject matter jurisdiction over such action, suit or
proceeding, in the courts of the State of New York sitting in New York City, and
each Party to this Agreement hereby irrevocably accepts and submits to the
jurisdiction of each of the aforesaid courts in personam, with respect to any
such action, suit or proceeding (including, without limitation, claims for
interim relief, counterclaims, actions with multiple defendants and actions in
which such party is implied). Each Party hereto irrevocably and unconditionally
waives any right that it may have to a jury trial in any legal action, suit or
proceeding with respect to, or arising out of or in connection with this
agreement. Each of the Parties hereby irrevocably designates CT Corporation
System ("Process Agent") with an office at 111 Eighth Avenue, New York, New York
10011 as its designee, appointee and agent to receive, for and on its behalf
service of process in such jurisdiction in any legal action or proceedings with
respect to this Agreement, and such service shall be deemed complete upon
delivery thereof to the Process Agent, provided that in the case of any such
service upon the Process Agent, the Party effecting such service shall also
deliver a copy thereof to the intended recipient in the manner provided in
Section 11.1. Each of the Parties shall take all such action as may be necessary
to continue said appointment in full force and effect or to appoint another
agent so that each Party will at all times have an agent for service of process
for the above purposes in New York, New York. In the event of the transfer of
all or substantially all of the assets and business of the process agent to any
other corporation by consolidation, merger, sale of assets or otherwise, such
other corporation shall be substituted hereunder for the process agent
with the same effect as if named herein in place of the Process Agent. Each of the Parties further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered airmail, postage prepaid, to such Party at its address set forth in this Agreement, such service of process to be effective upon acknowledgment of receipt of such registered mail. Nothing herein shall affect the right of any Party to serve process in any other manner permitted by applicable laws. Each of the Parties expressly acknowledges that the foregoing waiver is intended to be irrevocable under the laws of the State of New York and of the United States of America.
(c) Each Party hereto agrees that money damages would not be a sufficient remedy for the other Parties hereto for any breach of this Agreement by it, and that in additional to all other remedies the other Parties hereto may have, they shall be entitled to specific performance and to injunctive or other equitable relief as a remedy for any such breach. Each Party hereto agrees not to oppose the granting of such relief in the event a court determines that such a breach has occurred, and to waive any requirement for the securing or posting of any bond in connection with such remedy.
Section 11.5 Arbitration of Certain Disputes. If the Parties are unable to reach agreement under Section 4.3(c) concerning the terms of a carriage agreement (a "Dispute"), the Dispute shall be resolved in accordance with the following procedures:
(a) All Disputes shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by a single arbitrator appointed in accordance with such Rules (the "Arbitrator").
(b) The site of the arbitration shall be New York, New York or such other location as the Parties may mutually agree in writing, any award shall be deemed to have been made there, and the language to be used in the arbitration proceedings shall be the English language.
(c) Within 30 days after the appointment of the Arbitrator (the "Submission Period"), each party to the Dispute shall submit to the Arbitrator, in a sealed envelope, a written statement setting forth such Party's good faith proposal for the resolution of the contested issue.
(d) Such submissions shall remain secret until after the Arbitrator has received each Party's proposal, at which time the Arbitrator shall inform each Party of the other's proposal. No such proposal may be amended after it is submitted to the Arbitrator. If any Party fails to submit its proposal by the end of the Submission Period, the Arbitrator shall order the adoption of the other Party's proposal. The Arbitrator may rely upon such evidence as the Arbitrator may choose in his or her discretion in making such determination. Within 10 days after the Arbitrator informs each Party of the other's proposal, either Party may also submit to the Arbitrator such written evidence in support of its position as it deems appropriate. The Arbitrator shall be empowered to convene a hearing not to exceed three (3) days in length at which the Arbitrator shall be permitted to question either Party regarding their respective positions or, in lieu of such hearing, to submit written questions to either Party.
(e) Within fifteen (15) days after the closing of the arbitration hearing, the Arbitrator will prepare and distribute to the parties a writing setting forth the Arbitrator's decision relating to the Dispute. The Arbitrator shall compare the proposals and shall determine which proposal he or she believes to be the resolution most closely in accordance with the relevant provisions of this Agreement and shall order the adoption of such proposal as the relief granted.
(f) Any award rendered by the Arbitrator will be final, conclusive and binding upon the Parties and any judgment thereon may be entered and enforced in any court of competent jurisdiction.
(g) The non-prevailing party will bear all fees, costs and expenses of the Arbitration, and all the fees, costs and expenses of its own attorneys, experts and witnesses; and will reimburse all reasonable attorney's fees and expenses incurred by the prevailing party in connection with such proceedings, in addition to any other relief to which it may be entitled.
(h) Notwithstanding anything to the contrary in this Section 11.5, either party may seek injunctive relief from a court of competent jurisdiction (in accordance with Section 11.4) at any time without complying with the foregoing provisions.
Section 11.6 Severability. The invalidity or unenforceability of any provision hereof in any jurisdiction will not affect the validity or enforceability of the remainder hereof in that jurisdiction or the validity or enforceability of this Agreement, including that provision, in any other jurisdiction. To the extent permitted by applicable law, each Party hereto waives any provision of applicable law that renders any provision hereof prohibited or unenforceable in any respect. If any provision of this Agreement is held to be unenforceable for any reason, it shall be adjusted rather than voided, if possible, in order to achieve the intent of the parties to this Agreement to the extent possible.
Section 11.7 Table of Contents; Headings. The table of contents and the headings in this Agreement are for convenience of reference only and will not affect the construction of any provisions hereof.
Section 11.8 Counterparts. This Agreement may be executed in one or more counterparts, each of which when so executed and delivered will be deemed an original but all of which will constitute one and the same Agreement. Delivery of an executed counterpart of a signature page of this Agreement by facsimile transmission shall be effective as delivery of a manually executed counterpart of this Agreement.
Section 11.9 Entire Agreement. This Agreement embodies the entire agreement and understanding of the Parties hereto in respect of the subject matter contained herein, and supersedes the Social Part Holders Agreement, dated as of March 6, 1997.
Section 11.10 Further Assurances. Each Party to this Agreement agrees to execute, acknowledge, deliver, file and record such further certificates, amendments, instruments,
agreements and documents, and to do all such other acts and things, as may be required by law or as may be necessary or advisable to carry out the intent and purposes of this Agreement.
Section 11.11 Survival of Rights, Duties and Obligations. Dissolution or termination of the Company for any cause shall not release any Party from any liability which at the time of dissolution or termination had already accrued to any other Party or which thereafter may accrue in respect of any act or omission prior to such dissolution or termination.
Section 11.12 Costs and Expenses. Each party hereto shall bear its own fees and expenses in connection with the negotiation, preparation, execution, delivery and performance of this Agreement and any agreements, instruments or documents executed or delivered in connection herewith, except as otherwise specifically provided herein or therein.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written.
INNOVA, S. de R.L. de C.V.
By: /s/ Alexandre Moreira Penna da Silva
-------------------------------------
By: /s/ Carlos Ferreiro Rivas
-------------------------------------
GRUPO TELEVISA, S.A.
By: /s/ Alfonso de Angoitia Noriega
-------------------------------------
By: /s/ Salvi Rafael Folch Viadero
-------------------------------------
SKY DTH, S. de R.L., de C.V.
By: /s/ Juan Sebastian Mijares Ortega
-------------------------------------
THE NEWS CORPORATION LIMITED
By: /s/ Arthur Siskind
-------------------------------------
[Amended and Restated Social Part Holders Agreement]
|
NEWS DTH (MEXICO) INVESTMENT LIMITED
By: /s/ Arthur Siskind
-------------------------------------
|
EXHIBIT A
Bylaws of Innova
EXHIBIT B
Bylaws of Innova Holdings
EXHIBIT C
Form of Carriage Agreement
SCHEDULE 3.1
Current Capital Contributions
VALUE OF SOCIAL PARTS
---------------------------------
CLASE "I" CLASE "II" % VALOR TOTAL
---------- ---------- -- -----------
SOCIOS SERIE A-1
SKY DTH, S. DE R.L. DE
C.V. Ps. 496,650,000 Ps. 277,066,200 13.921488 Ps. 773,716,200
SOCIOS SERIE B-1
NEWS DTH (MEXICO)
INVESTMENT, LTD. Ps. 248,325,000 Ps. 138,533,100 6.960744 Ps. 386,858,100
SOCIOS SERIE B-2
LIBERTY MEXICO DTH, INC. Ps. 82,775,000 Ps. 46,177,700 2.320248 Ps. 128,952,700
SOCIOS SERIE C
INNOVA HOLDINGS, S. DE
R.L. DE C.V. Ps. 0 Ps. 4,268,185,000 76.797520 Ps. 4,268,185,000
--------------- ----------------- --------- -----------------
TOTAL : Ps. 827,750,000 Ps. 4,729,962,000 100% Ps. 5,557,712,000
--------------- ----------------- --------- -----------------
|
EXHIBIT 4.32
TRANSLATION PURPOSES ONLY
LOAN AGREEMENT (THE "AGREEMENT") ENTERED INTO BY AND BETWEEN INNOVA, S DE R.L. DE C.V. AS BORROWER (THE "BORROWER") REPRESENTED IN THIS ACT BY ALEXANDRE MOREIRA PENNA DA SILVA AND MARIA AZUCENA DOMINGUEZ COBIAN; AS GUARANTORS, GRUPO TELEVISA, S.A. ("TELEVISA") REPRESENTED IN THIS ACT BY MR. JOAQUIN BALCARCEL SANTA CRUZ AND MR. JUAN SEBASTIAN MIJARES ORTEGA AND NEWS CORPORATION ("NEWSCORP") REPRESENTED IN THIS ACT BY MR. LAWRENCE A. JACOBS, (EACH, TELEVISA AND NEWSCORP A "GUARANTOR" AND JOINTLY THE "GUARANTORS"); AND HSBC MEXICO, S.A., INSTITUCION DE BANCA MULTIPLE, GRUPO FINANCIERO HSBC (THE "LENDER" OR "HSBC") REPRESENTED IN THIS ACT BY MR. JORGE CASAS DE LA TORRE, IN ACCORDANCE WITH THE FOLLOWING RECITALS AND CLAUSES:
RECITALS
I. The Borrower declares that:
(a) Incorporation; Corporate Purpose. It is a limited liability, variable-capital company duly incorporated pursuant to the laws of the United Mexican States ("Mexico"), duly authorized in accordance with its corporate purpose to execute this Agreement and all other Credit Documents, to subscribe Promissory Notes, to undertake the obligations set forth in the Credit Documents, as well as to carry out its activities in the manner in which they are presently carried out. A certified copy of the public deed that contains the outstanding by-laws of the Borrower is attached hereto as Exhibit A.
(b) Capacity; Authorizations; Enforceable Obligations. (i) The execution of this Agreement and all other Credit Documents, as well as the subscription of the Promissory Notes have been legally authorized by the Borrower's Board of Managers and are contemplated in its corporate purpose, and the Borrower, for such purposes does not require any additional authorization (corporate, governmental or of any other nature) in accordance with its by-laws.
(ii) This Agreement and all other Credit Documents constitute valid obligations of the Borrower; enforceable against him pursuant to their terms, except that such enforceability may be affected by laws related to insolvency or bankruptcy matters.
(iii) Its legal representatives, Mr. Alexandre Moreira Penna Da Silva and Mrs. Maria Azucena Dominguez Cobian have the legal capacity and authority to execute this Agreement and the Promissory Notes in name and representation of the Borrower, and that as of the date hereof, such faculties have not been revoked or limited in any way. A certified copy of the public deed that contains the powers-of-attorney granted by the Borrower to Mr. Alexandre M. Penna and Mr. Carlos Ferreiro Rivas as well as the certificate issued by the secretary of the Borrower's Board of Mangers, by means of which it is certified that in the session of such board dated November 4, 2004 the execution of this Agreement by the legal representatives above mentioned are attached hereto as Exhibit B.
(c) Non-performance. Nor the signature or compliance of the Credit Documents nor the accomplishment of the transactions contemplated in them, violate or may cause the
non-performance according to, any agreement in which the Borrower acts as a party, the Borrower's by-laws or to its knowledge, any Legal Requirement applicable to the Borrower.
(d) Consents and Approvals. It does not require any governmental or third party authorization for the execution of this Agreement or the other Credit Documents, nor for the subscription of the Promissory Notes, or for the validity or enforceability of such documents or for the compliance of its obligations pursuant the same.
(e) Financial Information. (i) Its audited consolidated financial statements for the year ended December 31, 2003 and its internal consolidated financial statements as of September 30, 2004, reflect in a truthful, sufficient and reasonable manner its consolidated financial situation in such dates, and they have been prepared pursuant to Mexican GAAP, applied in a consistent manner. Copies of such financial statements, as well as the external auditor's report of the audited consolidated financial statements for the year ended December 31, 2003 are attached hereto as Exhibit C.
(ii) Since September 30, 2004 there has been no event or circumstance, which has had or may reasonably be considered to have a Relevant Adverse Effect.
(f) Litigations. As of the date of execution of this Agreement there are no actions nor pending litigations, including conflicts of civil, commercial, environmental, tax, labor, administrative nature, or litigations of any nature, before any court, Governmental Authority or arbitrator, including without limitation the Federal Telecommunications Commission or the Ministry of Communications and Transports, that affect or that reasonably may affect the Borrower's operation or consolidated financial situation, or that affect or that reasonably may affect the compliance of the Borrower's obligations pursuant this Agreement or the Promissory Notes, and in which the demanded amount exceeds USD$50,000,000.00 (fifty million dollars 00/100, US Cy.) or its equivalent in any other currency.
(g) Payment Preference; Liens. (i) Its payment obligations under this Agreement and the Promissory Notes are at the same level, in regard to preference and rank, and they are not subordinated in relation to any other Borrower's unsecured obligation of payment except for those obligations that have preference by law.
(ii) The only Permitted Liens are those constituted over the assets, property of the Borrower and its Subsidiaries, which are necessary to carry out the main business of the Borrower.
(h) Subsidiaries. All of the Borrower's Subsidiaries are listed in Exhibit E attached hereto.
(i) Assets' Property. (a) Except for situations which, jointly, may not reasonably be considered to have a Relevant Adverse Effect, the Borrower and its Subsidiaries are the legitimate owners, holders or lessees, as the case may be, of all the real estate or personal property used in its transactions, and none of such assets are subject to any Lien, except for Permitted Liens and, (b) the Borrower maintains insurances over such assets according to the terms established in section (e) of Clause Eleventh herein.
(j) Taxes. The Borrower and its Subsidiaries have submitted all of the tax returns which they are obliged to submit according to any Legal Requirement and have paid the corresponding contributions, except for those not due and appealed in good faith through the corresponding appropriate procedures, and with respect to those with which the Borrower maintains sufficient reserve funds as required by Legal Demand or the Mexican GAAP and those which's non statement or payment will not reasonably cause a Relevant Adverse Effect. The determination of tax liabilities, actualizations and reserve funds registered in the accounting registry books of the Borrower regarding taxes or any other payment liability of governmental nature are, in the Borrower's opinion, accurate in all its significant aspects.
(ii) The execution of this Agreement is not a legal or fact situation contemplated in the current tax laws to the execution date of this Agreement, that arise in the imposition of any tax, contribution, deduction, charge, government charge, withholding or any other tax liability, in or imposed by Mexico or any other political subdivision or any tax authority of the same or in the same.
(k) Compliance with the Law. It is in compliance with all of the applicable Legal Requirements, except those which's noncompliance does not cause a Relevant Adverse Effect in the Borrower or which's application is being appealed in good faith and by the appropriate corresponding procedures. The execution of this Agreement, the subscription of the Promissory Notes and the compliance of its obligations does not contravene any Legal Requirement applicable to the Borrower that may have a Relevant Adverse Effect. As of the date of this Agreement, it is not in non-compliance with any of its contractual obligations, which may cause a Relevant Adverse Effect.
(l) Provided Information. All of the information that the Borrower provided prior to the execution of this Agreement to the Lender, for purposes of, or in relation with this Agreement, (other than the financial projections and other planning information prepared over reasonable basis and with good faith by the Borrower, and conditioned by the presumptions expressed at the time of its delivery or submission), as well as the information provided after this date, is and shall be correct and accurate in every significant aspect in the date of its delivery, certification, or whenever it is declared, and shall not omit or will omit, as the case may be, any element or relevant or necessary information for the purposes of the recitals hereinabove, or that induces to the error or its omission causes a Relevant Adverse Effect. The Borrower has revealed in writing to the Lender each and every fact, that it is aware of, that may have a Relevant Adverse Effect.
(m) Granting of the Loan; Use of Funds. It has requested from the Lender the granting of a loan in Mexican currency of an amount up to $1,012,000.00 (one thousand and twelve million pesos 00/100 Mx. Cy.) which shall be used to refinance debts that represent a pending amount of USD$88,000,000.00 (eighty eight million dollars US. Cy.), originated by an issuance of bonds named "Senior Notes" due in 2007, as well as to cover the expenses related with the execution of this Agreement, all other Credit documents and the prepayment of the bonds named "Senior Notes".
(n) Non Defaults or Events of Default. No Default or Event of Default has occurred nor is occurring.
II. Each of the Guarantors declares, only in the recitals referring to such Guarantor and not with respect to other Guarantor, that:
(a) Incorporation; Corporate Purpose. (i) Televisa is a corporation duly incorporated pursuant the laws of Mexico, and (ii) NewsCorp is a company duly incorporated pursuant the laws of Delaware, United States of America. Are fully authorized in accordance with their corporate purposes to execute this Agreement, and to subscribe the Promissory Notes and, in case of Televisa, the Surety and for the case of NewsCorp, the Corporate Guaranty; and to undertake the obligations set forth in the Credit Documents in their capacity of Guarantors, as well as to carry out its activities in the manner in which they are presently carried out. A certified copy of the public deed that contains the outstanding by-laws of Televisa, and an extract of the by-laws of NewsCorp, certified by NewsCorp's secretary, are attached hereto as Exhibit A.
(b) Capacity; Authorizations; Enforceable Obligations. (i) The execution of this Agreement and all other Credit Documents, as well as the subscription of the Promissory Notes have been legally authorized by each of the Guarantor and are contemplated in their corporate purposes and none of the Guarantor requires any additional authorization (corporate or of any other nature) for such purposes in accordance with its by-laws.
(ii) This Agreement and all other Credit Documents constitute valid and enforceable obligations; enforceable against each Guarantor pursuant their terms, except if such enforceability may be affected by laws related to insolvency or bankruptcy matters or that they affect the creditors' rights.
(iii) Its legal representatives, Mr. Joaquin Balcarcel Santa Cruz and Mr. Juan Sebastian Mijares Ortega for Televisa, and Mr. Lawrence A. Jacobs for NewsCorp are empowered to execute this Agreement and the Promissory Notes in name and representation of the corresponding Guarantors, and that as of the date of this Agreement, such authorizations have not been revoked or limited in any way. A certified copy of the public deed that contains the powers-of-attorney granted by Televisa to Mr. Joaquin Balcarcel Santa Cruz and Mr. Juan Sebastian Mijares Ortega; and the similar document, pursuant the laws of the domicile of NewsCorp, which contains the powers of attorney granted by this one to Mr. Lawrence A. Jacobs, are attached hereto as Exhibit B.
(c) Consents and Approvals. It does not require any governmental or third party authorization for the execution of this Agreement or, the Surety, in case of Televisa, and the Corporate Guaranty, for the case of NewsCorp, nor for the subscription of Promissory Notes, or for the validity or enforceability of such documents or the compliance of its obligations pursuant the same.
(d) Litigations. As of the date of this Agreement, there are no actions or no pending litigations, including conflicts of civil, commercial, environmental, tax, labor or litigations of any nature, before any Governmental Authority or arbitrator, that, to its understanding, affect or may reasonably affect the Guarantor's operation or its consolidated financial situation, which might cause a Relevant Adverse Effect, or that affect or may reasonably affect the
compliance of its obligations set forth in this Agreement, the Promissory Notes, and the Surety, in case of Televisa, and the Corporate Guaranty, in the case of NewsCorp, as the case may be.
(e) Financial Information. Its consolidated and audited financial statements for the as of December 31, 2003, in case of Televisa, and as of June 30, 2003, in case of NewsCorp, which's copies are attached hereto as Exhibit C reflect in an adequate manner its financial situation consolidated for the period contemplated in them, and such have been prepared pursuant to Mexican GAAP, for the case of Televisa and the general accepted accounting principles of the United States of America for the case of NewsCorp.
(f) Compliance with Agreements. The execution of this Agreement, the Surety, in case of Televisa and the Corporate Guaranty for the case of NewsCorp, the subscription of Promissory Notes and the compliance of its obligations set forth in such documents do not contravene any Legal Requirement applicable to each one of the Guarantors, any disposition provided in its by-laws or its contractual obligations, which is deemed that may cause a Relevant Adverse Effect.
(g) Surety and Guaranty. By virtue of the business, corporate financial administrative and judicial relations held with the Borrower, it is in their interest to execute this Agreement with the purpose of granting a Surety, in case of Televisa, and the Corporate Guaranty, in the case of NewsCorp, but limited in the Guaranteed Percentages set forth for each of the Guarantors in Clause Tenth herein, in the terms of the documents attached hereto as Exhibits E-1 and E-2, respectively, with the purpose of guaranteeing before the Lender the compliance of all the payment obligations of the Borrower in accordance with this Agreement.
III. The Lender declares that:
(a) It is a corporation duly incorporated pursuant the laws of Mexico, fully authorized in accordance with its corporate purpose to execute this Agreement and the Credit Documents, and to undertake the obligations set forth in the Credit Documents, as well as to carry out its activities in the manner in which they are presently carried out. A certified copy of the public deed that contains the present by-laws of the Lender is attached hereto as Exhibit "A".
(b) The execution of this Agreement and all other Credit Documents, have been legally authorized by HSBC and do not requires any additional authorization (corporate, governmental or of any other nature) in accordance with its by-laws.
(c) This Agreement and all other Credit Documents constitute valid obligations; enforceable against the Lender pursuant its terms, except if such enforceability may be affected by laws regarding insolvency or bankruptcy matters.
(d) Its legal representative, Mr. Jorge Casas de la Torre, have the legal capacity and authority to execute this Agreement and all other Credit Documents in name and representation of the Lender, and that as of the date of this Agreement, such authorization
have not been revoked or limited in any way, as evidenced in the copy of the public deed that contains such faculties, which is attached hereto as Exhibit G.
(e) Nor the signature or compliance of the Credit Documents nor the consummation of the transactions contemplated in them violate or originate the nonperformance according to, any agreement in which the Lender acts as a party, its by-laws or, to its knowledge, any Legal Requirement applicable to the Lender, except those that reasonably do not cause a Relevant Adverse Effect according to this Agreement.
(f) It does not require any governmental or third party authorization for the execution of this Agreement or the other Credit Documents, or for the validity or enforceability of such documents or the compliance of its obligations pursuant the same.
(g) As of the date of this Agreement there are no actions or no pending litigations, including conflicts of civil, commercial, environmental, tax, labor, or litigations of any nature, before any court, Governmental Authority or arbitrator, which affect or may reasonably affect the compliance of its obligations set forth in this Agreement and other Credit Documents.
(h) Over the basis of the recitals of the Borrower and each of the Guarantors, it is willing and binds to grant the Loan requested by the Borrower and with respect of which the Guarantors bind, in accordance with the terms and subject to the conditions herein.
Accordingly, the parties hereto agree the following:
CLAUSES
FIRST. Defined Terms. Capitalized terms shall have the following meanings for purposes of this Agreement:
"Affiliate" shall mean, with respect to any Person, any other Person, which, directly or indirectly, through one or more intermediaries, controls to, is controlled by, or is under common control with, such Person. For purposes of this definition, "control" shall mean the faculty of determining the administration and policies of such Person, directly or indirectly, through the holding interests with voting rights, by agreement or any other means. For the purposes of this Agreement Televisa, NewsCorp, DirecTV and any other Person that owns shares or interests in the Borrower, and the corresponding Subsidiaries or Affiliates of these Persons, shall be considered as Affiliates of Borrower.
"Agreement" shall have the meaning set forth in the preamble of this Agreement.
"Asset Disbursement" shall mean, for any asset necessary for the business operation of such Person, any sale, sale and lease back, lease, assignment or any other disbursement of such asset.
"Assignee" shall have the meaning provided in Clause Twelfth, paragraph
(c)(i) hereof.
"Borrower" shall have the meaning set forth in the preamble of this Agreement.
"Business Day" shall mean any day in which the credit institutions in Mexico City carry out operations and that are not authorized to close. Notwithstanding the above, for purposes of this Agreement, Saturdays or Sundays and December 31 of every year would not be considered as a Business Day.
"Capital Leases" shall mean, for any Person, all obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) movable goods or real estate property, or both, to the extent such obligations are required to be classified and accounted for as a Capital Lease on the balance sheet of such Person under Mexican GAAP, in the understanding that for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with Mexican GAAP.
"Capital Stock" shall mean any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all similar ownership interests in a Person (other than a corporation) and any and all warrants or options to purchase any of the foregoing.
"Consolidated EBITDA" shall mean, for any period (without duplication), for the Borrower and its Subsidiaries, the sum of consolidated profit (determined pursuant to Mexican GAAP) of transaction for such period, before devaluation and amortization, plus incomes resulting from interests.
"Consolidated Financial Expenses" shall mean, for any period (without duplication) the Consolidated Interest Expenses for such period, excluding the principal component of rents regarding Capital Lease obligations paid by Borrower and its Subsidiaries and the interests caused by obligations with Affiliates and Subsidiaries.
"Consolidated Interest Expenses" shall mean, for any period, the total of the net expenses caused by interest of the Borrower and its consolidated Subsidiaries imputable to such period in accordance with Mexican GAAP.
"Consolidated Leverage Rate" shall mean, the Debt to the last day of any fiscal period of three months, divided by the Consolidated EBITDA to such date (based on the last four (4) fiscal quarters that end in such quarter).
"Corporate Guaranty" shall mean the agreement named "Corporate Guarantee" or "Guarantee Agreement" to be executed by NewsCorp ( or any successor or assignee of NewsCorp as permitted by this Agreement) and the Lender in terms of Exhibit E-2 hereof and that once signed shall be an integral part of this Agreement.
"Credit Documents" shall mean this Agreement, the Surety, in case of Televisa, the Corporate Guaranty for the case of NewsCorp, the Promissory Notes, and any other document or instrument executed under this Agreement or those agreed to in writing by Lender and Borrower.
"Debt" means, with respect to any Person, without duplication, (i) all the payment obligations derived from a loan, (ii) all the obligations set forth in bonds, commercial
obligations, promissory notes or any similar document, (iii) all the obligations to pay the deferred purchase price of goods or services which's purchase price is due after a year, commencing on the date in which the possession of such goods and on the date in which the services were rendered and that such have interest costs, (iv) all the obligations of such person as a lessee agree with Capital Leases, (v) all the third party Debt granted by such Person with a Lien over any asset of such Person, in the understanding that the amount of such Debt will be the one resulting from the value of such asset, as such value is registered in the most resent balance sheet of such Person, (vi) all the obligations in which such Person incurred in connection with export financing. Not withstanding the aforementioned, Debt shall not include liabilities related to: (A) undue accounts derived from the ordinary course of business (including, without limitation, programmers payments; frequent assets purchase such as de-codifying boxes, parabolic antennas, "LNBs" dispositives and remote controls; Masters, distributors and repairers payments; obligation payments in behalf of satellite or transponders services, etc.), (B) all the obligations (present, past or futures) which result from the purchase of assets of companies dedicated to the same line of business of the Borrower or its Subsidiaries, including the purchase of shares, equities, participations, subscribers lists, systems, among others, (C) all undue payments which does not have a known financial cost (D) federal, local, and municipal income tax, value added taxable, assets or any other Mexican, United States of America or any other jurisdiction taxes, including withholdings to workers in accordance with the applicable social security or labor legislation (E) amounts received by the Borrower or its Subsidiaries derived from the deposit agreements or other agreements with third parties in order to lend the publicity service, restricted television service or any other service to such third parts, proving on money, promissory notes, account receivables, or other assets, (F) credit bond endorsement for its deposit or cashing, or similar operations in the ordinary course of the business, (G) Accredited or its Subsidiaries Debt in favor of (x) any Affiliate or (y) the Borrower or its Subsidiaries respectively, (H) Any canceled or satisfied Debt according to the terms set forth in such Debt, (I) Debt as lessee or guarantor under any satellite or transponder lease (it does not matter if such leases are cataloged as Capital Leases or not).
"Default" shall mean any Event of Default or any other fact or circumstance that constitutes an Event of Default by the simple time passing, notice or both.
"Derivative" shall mean, for any Person, all the transactions resulting, including without limitation, futures over capital, capital coverage, transactions involving foreign exchange, futures over foreign exchange, transactions involving exchange in interest rates, exchange options or similar operations, and all obligations of such Person, direct or contingent, that guarantee other Person's obligations with respect to such transactions.
"DirecTV" shall mean The DirecTV Group, Inc.
"Direct TV Purchase" shall have the meaning set forth in Clause Tenth herein.
"Disbursement" shall have the meaning provided in Clause Third Paragraph
(a) hereof.
"Disbursement Date" shall have the meaning provided in Clause Third paragraph (a) hereof.
"Event of Default" shall have the meaning provided in Clause Fourteenth hereof.
"Governmental Authority" shall mean any government agency or any state, department or other political subdivision of the same, or any governmental organism, agency, authority (including any central bank or fiscal or environmental authority), any entity (including any court or tribunal) exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government in the jurisdiction over such Person or where such Person has its principal place of business.
"Guaranteed Percentage" shall have the meaning provided in Clause Tenth hereof.
"Guarantor" or "Guarantors" shall have the meaning set forth in the preamble of this Agreement.
"Grupo Salinas" shall mean any of the following Persons, as well as any Affiliate or subsidiary of the same: Ricardo Salinas Pliego, Grupo Elektra, S.A. de C.V.; Grupo Iusacell, S.A. de C.V.; TV Azteca, S.A. de C.V.; Biper, S.A. de C.V.; Unefon, S.A. de C.V.; Banco Azteca, S.A., Institucion de Banca Multiple; Seguros Azteca, S.A. de C.V. o Afore Azteca, S.A. de C.V., Administradora de Fondos para el Retiro. For purposes of this definition, subsidiary shall mean any company in which any Person owns more than 50% (fifty percent) of its voting shares, either directly or indirectly through other companies, associations, trusts or other entity, or, in which by any means, have the authority to appoint the majority of the members of the board of directors or similar board, or to determine the operation politics of the corresponding company.
"Innova" shall mean the Borrower.
"Interest Coverage Rate" shall mean, for any period, the relation of (i) the Consolidated EBITDA for such period, divided by (ii) the Consolidated Financial Expenses for the same period for which the Consolidated EBITDA was calculated.
"Interest Payment Date" shall have the meaning provided in Clause Fifth paragraph (b) hereof.
"Interest Period" shall have the meaning provided in Clause Fifth paragraph (b) (ii) hereof.
"Interest Rate" shall have the meaning provided in Clause Fifth paragraph
(a) hereof.
"Legal Requirement" shall mean, for any Person, any law, regulation, bulletin, or demand by any Governmental Authority, in each case applicable to or binding for such Person or its properties or if such Person's properties or assets are submitted to.
"Lender" shall have the meaning set forth in the preamble of this Agreement.
"Lien" shall mean with respect to any asset, any mortgage, encumbrance, pledge, trust agreement, lien, charge or other encumbrance of any kind, or any other type of preferential arrangement over such asset that has the practical effect of creating a security interest,
priority, preferential arrangement or lien over such asset and that such asset is necessary for the operation of the principal business of the Borrower.
"Loan" shall have the meaning provided in Clause Second hereof.
"Loan Commission" shall mean 0.15% (zero point five percent) over the principal amount of the Loan, calculated in the Disbursement Date.
"Maturity Date" shall mean precisely December 2, 2011.
"Mexican GAAP" shall mean, on any date, generally accepted accounting principles in Mexico in full force and effect on such date but in all cases enforceable at the time of their application. If any change in the Mexican GAAP occurs, and such change results in a variation in the method of calculating financial rates, parameters or terms in this Agreement, then both, Borrower and Lender agree to perform the necessary and convenient negotiations to amend such provisions in this Agreement with the purpose of reflecting such changes in the Mexican GAAP with the desired result that the criteria used to evaluate the financial situation of the Borrower stays the same after those changes as if such had not occurred. Until such amendments are adopted and executed by the Borrower, all the financial limits, measures and terms of this Agreement shall continue to be calculated or interpreted as if such changes in the Mexican GAAP had not occurred.
"Mexico" shall have the meaning set forth in Recital I paragraph (a) hereof.
"Moody's" shall mean Moody's Investors Service, Inc. and its successors.
"NewsCorp" shall mean News Corporation.
"Notice of Disbursement" shall have the meaning provided in Clause Third paragraph (a) hereof.
"Penalty Interest Rate" shall have the meaning provided in Clause Sixth hereof.
"Permitted Lien" shall have the meaning provided in Clause Twelfth paragraph (b) hereof.
"Person" shall mean an individual, company, corporation, trust, joint-venture, limited liability company, irregular business entity or any other business entity or Governmental Authority with or without legal capacity.
"Promissory Note" shall have the meaning provided in Clause Third paragraph (a) hereof.
"Relevant Adverse Effect" shall mean any circumstance, event or condition that adversely and significantly affects (a) the business, conditions (financial or any other kind), transactions, performance or principal properties of the Borrower in a consolidated manner, (b) the validity, legality, related nature or enforceability of this Agreement or the Promissory Notes, or the rights and resources of the parties according to such documents, or (c) the ability of the Borrower or the Guarantors to comply with its obligations pursuant this Agreement, the Promissory Notes or any other Credit Document.
"Responsible Officer" shall mean, for any Person, the CEO, the CFO, the Controller or any legal representative with sufficient power of such Person as long as such legal representative has a managing position in the Person.
"S&P" shall mean Standard & Poor's ratings Group and its successors.
"Subsidiary" shall mean, with respect to any Person, such company,
association, joint venture, limited liability company, trust, trust estate or
other business entity of which (or in which) more than 50% of (a) in case of a
company the issued and circulating shares representative of the capital stock
entitled to vote, (b) in case of a limited liability partnership, association,
or joint-venture, the interests with participation in the capital stock or
profits of such limited liability partnership, association or joint-venture
entitled to vote, or (c) in case of a trust or similar figure, the economic
rights, which are directly or indirectly owned or controlled by (x) such Person,
(y) such Person and one or more of its Subsidiaries, or (z) one or more of the
Subsidiaries of such Person.
"Surety" shall mean the surety agreement to be executed by the Televisa (or any successor or assignee of Televisa, as permitted by this Agreement) and the Lender in terms of Exhibit E-1 hereof, and that once signed it shall be considered integral part of this Agreement.
"Televisa" shall have the meaning set forth in the preamble.
"Termination Value" shall mean in any date and with respect to any Derivative, the total of the liquidations ant other amounts (without place to compensation, claim or other deduction) that, as determined with good faith by financial institutions with national or international recognition satisfying Lender and Borrower should be payable in case of any incompliance, event of default, illegality or other event that led to early termination or liquidation of the corresponding transaction involving Derivatives.
SECOND. Loan. Subject to the terms and conditions of this Agreement, Lender agrees to grant to Borrower in the Disbursement Date and by means of a sole Disbursement, a loan (the "Loan") for the amount of $1'012,000,000.00 (one thousand and twelve million pesos 00/100 Mexican currency) payable in eight (8) equal quarter payments according to Clause Seventh.
THIRD. Loan due legal Disbursement; Lender commitment. (a) The Loan will be available to the Borrower in only one exhibition (the "Disbursement"). The Disbursement will be made only on December 10, 2004, (the "Disbursement Date"), if and only if the Borrower delivers a due-notice to the Lender, duly signed by a Responsible Officer of the Borrower, in which should be specified the disbursement amount and the Disbursement Date (the "Notice of Disbursement") with at least [three (3) Business Days] before the Disbursement Date.
(b) The Disbursement will be subject to the compliance of the conditions established in Clause Thirteenth hereof, and having been delivered to the Lender the Promissory Notes described in the following subsection (c).
(c) The Disbursement will be performed, according to the following subsection (d), against the delivery by the Borrower to the Lender, of eight Promissory Notes subscribed by the Borrower and the Guarantors, as guarantees, through their respective attorneys-in-fact, who will be subject to the established form in the Exhibit H of this Agreement (from here on, on an individual basis, the "Promissory Note", and jointly, the "Promissory Notes"), same that together each and every one of them on equal amounts will sum up the amount of the Disbursement, in Pesos, Local Currency.
(d) For purposes of the Loan administration, the Lender will subscribe the Disbursement amount to BBVA-Bancomer account No. 0448157111, Branch Office 0952, on behalf "Innova S. de R.L. de C.V.", CLABE 012180004481571114.
FOURTH. Commission. Borrower shall pay to Lender in the Disbursement Date the Loan Commission.
FIFTH. Interest. (a) (i) Borrower shall pay to Lender without need of previous demand, interest on the unpaid principal amount of the Loan for each Interest Period, from the Disbursement Date to the Maturity Date, at a rate per annum equal to 10.55% (ten point fifty five percent) (the "Interest Rate").
(b) (i) Interest shall be payable on the last Business Day of each Interest Period (each of such dates, an "Interest Payment Date") according to the payment calendar set forth in "Appendix 1" hereof; provided that the last Interest Payment Date shall occur precisely in the Maturity Date.
(ii) "Interest Period" shall mean each 28 (twenty eight) days period that (i) in the case of the first Interest Period will begin in the Disbursement Date and will end on January 7, 2005; and (ii) for each of the following Interest Periods, it shall begin on the last day of the preceding Interest Period and will end after 28 (twenty eight).
(iii) Interest shall be calculated considering the number of days that effectively ran from the last Interest Payment Date until the corresponding Interest Payment Date.
(iv) Any Interest Period that ends after Maturity Date shall end precisely on such date.
(v) All accumulated interest in accordance with this Agreement, shall be calculated for the effective days over a year of three hundred and sixty (360) days, including the first day but excluding the last one of the corresponding term.
SIXTH. Penalty Interest. In the case of delay in the payment of any payable amount pursuant this Agreement or the Promissory Notes (including interest, if permitted by the applicable law), penalty interest over the unpaid amount of the Loan since the date on which such payment shall be paid until the date in which is totally paid, at a rate per annum equal to adding to percentage points (2%) to the applicable Interest Rate during the period in which the non-fulfillment occurs and continues (the "Penalty Interest Rate").
To calculate penalty interest, the applicable Penalty Interest Rate shall be divided by three hundred and sixty (360) and the result shall be applied to the unpaid and due amounts, resulting the daily penalty interest, which Borrower binds to pay on demand according to this Agreement.
SEVENTH. Loan Payment. Borrower shall pay to Lender the principal amount of the Loan according to the calendar and amounts established hereby, amount in which are not included interest, commissions, and expenses regarding the Loan:
Principal Payment Date Amount April 23, 2010 $126,500,000.00 July 16, 2010 $126,500,000.00 October 8, 2010 $126,500,000.00 December 31, 2010 $126,500,000.00 March 25, 2011 $126,500,000.00 June 17, 2011 $126,500,000.00 September 9, 2011 $126,500,000.00 December 2, 2011 $126,500,000.00 |
EIGTH. Prepayments of Principal. (a) The Borrower may carry out prepayments of the principal amount of the Loan, prior irrevocable written notice delivered to the Lender within 5 (five) Business Days prior to the date in which the prepayment will be done, the amount paid shall be decreased from the outstanding amount of the Loan, applying the amortization which will be due before, and successively. The Borrower may not use (dispose) the amounts prepaid.
(b) In the event that a prepayment is done on an Interest Payment Date, the Borrower shall not be obliged to pay any kind of commission or penalty. In the event that a prepayment is done on a date different from an Interest Payment Date, the Borrower shall pay the Lender, the charges derived from such situation within the 15 (fifteen) days following in which the Lender delivers a reimbursement requirement for such effects, in the understanding that along with such requirement, the Lender shall deliver the Borrower a document in which the calculations made in order to obtain the amount of the charges are described.
(c) In the event that a prepayment is made on a date different from the Interest Payment Date, the Lender shall pay the Borrower the profit obtained from such situation within the 15 (fifteen) days following the date in which the Borrower delivers a reimbursement requirement, provided that the Borrower shall deliver the Lender, along with such requirement, a document in which the calculations made in order to obtain the amount of the benefits are described, or the Lender determines in good faith the amount of the corresponding benefit jointly delivering to the Borrower, a document in which the calculations made in order to obtain the amount of the benefits are described.
(d) In the event that the Borrower does not carry out any of the prepayments which he had notified the Lender on the date programmed, the Borrower shall pay the Lender upon
the Lender's request, any cost or expense in which the Lender reasonably incurred with respect to the prepayment of such amount, prior proof of the payments made by the Lender.
NINTH. Payments. (a) Except to the extent otherwise provided herein
and in other Credit Documents, all payments of principal, interest, commissions
and other amounts payable with respect to the Credit to be made by the Borrower,
shall be made tax free and without deduction, set-off or counterclaim or any
kind of responsibility with respect to tax liabilities payable pursuant to the
law, regulations and any other applicable provision in Mexico, without any kind
of compensation, in immediately available funds, before 15:00 hours (Mexico
City, Federal District, Mexico time), on the date on which such payment shall
become due. The aforementioned, shall not be applicable with respect to the
income tax and other similar taxes payable by the Lender or any other assignee,
participant or acquirer of the rights pursuant to this Agreement with respect to
his income or total assets pursuant to the laws, regulations and other
applicable provisions in Mexico. Such payments shall be debited by the Lender
each day of payment of commissions, interests or principal, as the case may be,
from the account number 4028303873 that the Borrower has with the Lender, or to
any other bank account which the Lender indicates to the Borrower no later than
5 (five) Business Days prior to the date of the corresponding payment.
(b) In the event the due date of any payment of the Borrower, would otherwise fall on a day that is not a Business Day, such payment shall be made on the next succeeding Business Day.
(c) The Lender shall give back to the Borrower, for their cancellation, the Promissory Notes granted pursuant to this Agreement, promptly upon receipt of the payment of the principal, interests and other sums granted by such Promissory Notes.
TENTH. Surety and Corporate Guaranty. In this act, Televisa and NewsCorp agree to enter into the Surety and the Corporate Guaranty, respectively, in the terms set forth in the layouts attached hereto as Exhibits E-1 and E-2, respectively, such documents, once executed will be an incorporated to this Agreement, whereby each Guarantor shall guarantee, individually and severally, Borrower's obligations under this Agreement and the Promissory Notes as set forth in such Surety and Corporate Guarantee and up to and limited the percentages granted by each Guarantor as determined in each such documents (such percentage with respect of each Guarantor, the "Guaranteed Percentage"):
In addition to the Surety and the Corporate Guaranty granted in this Clause by Televisa and NewsCorp, respectively, the Guarantors bind to subscribe the Promissory Notes, which shall be subscribed pursuant to this Agreement in their capacity of guarantors. The Promissory Notes shall be subscribed as evidencing the dispositions made under the Loan (causality) and in the terms of the form of Promissory Note attached to this Agreement as Exhibit F.
Notwithstanding the contents of this clause, the Guarantors in a jointly manner and by means of a written notice may require to change the Guaranteed Percentage by each of them pursuant to the terms of the Surety and/or the Corporate Guaranty in the understanding that such change may not exceed +/- 15% (fifteen percent) of the total amount of the secured obligations, and in the understanding, however, that at any time, they
shall altogether grant 100% (one hundred percent) of the payment obligations of the Borrower pursuant to this Agreement, provided, that in case the DirecTV Purchase (as defined below) occurs, then the totality of the loan owed to the Lender shall be 100% guaranteed by Televisa, and Televisa shall execute a new Surety reflecting such situation and that the old Surety shall no longer be in effect and the portion of the loan owed to DirecTV as a result of the DirecTV Purchase shall not be subject to any guarantee of any of the Guarantors.
Subject to the terms hereof, NewsCorp shall have the right to substitute its Corporate Guarantee for one of its affiliate DirecTV in the following cases:
(i) if at the time of such substitution DirecTV has a credit rating equal or higher than BBB- or any equivalent rating credit status and that such credit status qualification is given by Moody's or S&P, or
(ii) if (A) at the time of such substitution DirecTV has a credit rating equal or higher than BB by any of Moody's or S&P or an equivalent qualification, and (B) the Lender has agreed a reasonable increase adjustment of the Interest Rate in order to reflect the additional risk to which the Lender is subject to. Notwithstanding the foregoing, in case, that after the Corporate Guarantee is substituted by DirecTV, the DirecTV Purchase occurs pursuant to the terms of this Section, the parties agree that the Interest Rate shall be adjusted back to the annual fixed interest rate of 10.55% (ten point fifty five percent).
DirecTV shall have the right to purchase from the Lender and the Lender shall assign to DirecTV (the "DirecTV Purchase") all of Lender's rights and obligations under this Agreement that are equivalent to all NewsCorp's Guaranteed Percentage of the outstanding obligation, by DirecTV paying to Lender an amount equal to all of NewsCorp's Guaranteed Percentage of the outstanding obligation.
Upon consummation of the DirecTV Purchase and once NewsCorp's Guaranteed Percentage is paid to the Lender in full, (i) NewsCorp's guaranty and any other of its payment obligations under the Credit Documents shall be released in full, except for any obligations that have become effective prior to such DirecTV Purchase, (ii) Televisa shall thereafter continue to guaranty 100% of the amounts owed to the Lender after the DirecTV Purchase (and for the avoidance of doubt the portion of the loan purchased by DirecTV under the DirecTV Purchase, is not and shall not be guaranteed by Televisa), and (iii) the Interest Rate shall be a fixed annual interest rate of 10.55%.
Subject to the terms of this Agreement each of the Parties hereto, hereby agrees to take or cause to be taken such further actions, to execute, deliver, and file or cause to be executed, delivered, and filed such further documents and instruments, as may be necessary or as may be reasonably requested in order to fully effectuate the DirecTV Purchase and the substitution of the Surety and the Promissory Notes. Upon DirecTV substitution of the NewsCorp's Guarantee Percentage or the occurrence of the DirecTV Purchase, DirecTV shall agree to indemnify, defend and hold harmless Televisa and the
Borrower from and against any and all liabilities, costs or expenses arising out of, resulting from or relating to the transfer of such guaranty obligation or the DirecTV Purchase.
ELEVENTH. Covenants. As long as any payable amount pursuant to this Agreement and the Promissory Notes remains unpaid, the Borrower, and, the Guarantors (only with respect to the obligations set forth in section (a), subsection (i) and section (n) of this Clause with refer to the Guarantors as obligors) shall be subject to the following:
(a) Financial Statements and other Balances. The Borrower and the Guarantors (only with respect to subsection (i) below) shall deliver the Lender:
(i) as soon as possible, but, in any event, within the 180 (one hundred and eighty) days following the closing of fiscal year of the Borrower and the Guarantors, a copy of the consolidated audited financial statements of the Borrower and of each of the Guarantors corresponding to such fiscal year, that include consolidated balance sheets, income statements, changes in the financial situation and in the shareholders' equity of the Borrower and of each one of the Guarantors for such fiscal year, along with a report issued by any external accounting firm known within the jurisdiction where it is located. In addition and in the case of the Lender only, a certificate issued by the Responsible Officer in the format attached herein as Exhibit I, in which he declares that no Default or Event of Default with respect to the Borrower has occurred or is happening, or a document which contains a description of the nature of the Default or Event of Default with respect to the Borrower has occurred or is still happening, as well as the acts which have been carried out or which they suggest that shall be carried out with respect to such Default or Event of Default; and
(ii) as promptly as possible, but, in any event, within the 90
(ninety) days following the closing of the each one of the first 3 (three)
quarters of each fiscal year of the Borrower, the internal consolidated
financial statements of the Borrower, which include the balance sheet and the
financial statements corresponding to the period which begins at the end of the
of the last fiscal year and ends at the end of such quarter, certificates issued
by any Responsible Officer of the Borrower which states that such information
was prepared according to Mexican GAAP, and a certificate issued by a
Responsible Officer of the Borrower in the format attached herein as Exhibit I,
in which he declares that no Default or Event of Default with respect to the
Borrower has occurred or is happening, or a document which contains a
description of the nature of the Default or Event of Default with respect to the
Borrower has occurred or is still happening, as well as the acts which have been
carried out or which they suggest that shall be carried out with respect to such
Default or Event of Default.
(iii) Simultaneously to the delivery made by the Borrower of the
financial information pursuant to this Clause Eleventh (a) (i) and (ii), the
Borrower shall deliver the Lender, a certificate issued by a Responsible Officer
of the Borrower which includes all the information and calculations necessary to
determine the fulfillment of the Borrower's obligations set forth in section (a)
(i) and (ii) of Clause Twelfth herein.
(b) Notice of Events of Default and Litigation. The Borrower shall furnish the Lender:
(i) as soon as available, and in any event within ten (10) days after the date in which it becomes aware of any Default or any Event of Default, a document in which a Responsible Officer of the Borrower describes such Default or Event of Default and the acts which have been carried out or which they suggest that shall be carried out with respect to the same; and
(ii) in a timely manner, a notice of all litigation, actions and proceedings before any Court, Governmental Authority or arbitration panel affecting the Borrower or any of its Subsidiaries or any notice received from the Borrower or any of its Subsidiaries with respect to any potential responsibility, actual or potential violation of any law or regulation (including without limitation environmental laws), only in the event that the aforementioned might have a Relevant Adverse Effect.
(c) Compliance with Laws and Contractual Obligations, Etc. The Borrower shall comply, and will verify that each one of its Subsidiaries complies with all the applicable Legal Requirements (including, those related to licenses, concessions, certificates, permits, franchises, notices, registrations and other governmental authorizations necessary to have the possessions of its assets or to carry out its activities, antitrust laws, environmental laws social security and equity funds laws), as well as with any other of its relevant contractual obligations, except that the non compliance with the aforementioned might not, under the Borrower's perspective, have a Relevant Adverse Effect.
(d) Payment of the Obligations. The Borrower shall pay, and will verify that each one of its Subsidiaries pays, before incurring in a late payment, (i) all the taxes, contributions, rights and governmental charges determined, levied or demanded, and (ii) all the obligations which pursuant to the law derive from this agreement or other applicable laws, which lack of payment may cause a lien on its assets, only in the event that the aforementioned concepts are being appealed or that their lack of payment is not expected to have a Relevant Adverse Effect; in the provided, however, that the necessary reserves pursuant to Mexican GAAP are duly kept.
(e) Maintenance of Insurance. The Borrower shall continue to maintain, and will assure that its Subsidiaries maintain, insurances with well known insurance companies, for the amounts and risk coverage normally obtained by companies involved in similar business in Mexico and which are own similar goods related to the activities carried out by the Borrower in a consolidated manner, except for insurances related to satellite obligations and of any transponder, and in connection with the operation and management of such.
(f) Management of the Business and Maintenance of the Corporate Structure. The Borrower shall continue carrying out the same kind of activities and businesses as carried out at the moment considering the ordinary variations of the business that emerge from the innovation of technology and the tendencies of the business of the corresponding industry, and shall maintain, and enforce each one of its Subsidiaries to maintain their legal existence (except of those which's non existence does not cause a Relevant Adverse Effect), rights (legal or statutory), licenses, authorizations, permits, notifications, registries and franchises (the "Rights") which are considered necessary to carry out its main business; in the understanding that nor the Borrower nor any of its Subsidiaries shall be obliged to maintain their legal existence with respect to a merger or a consolidation carried out
pursuant to the provisions set forth in Clause Twelfth, section (c); and in the understanding as well , that nor the Borrower nor any of its Subsidiaries shall be obliged to conserve any of the Rights in the event the Borrower or any of its Subsidiaries, discretionally, in good faith, decides that not keeping them might be a good commercial strategy, and that the loss of such Right is not reasonably considered to have a Relevant Adverse Effect. In any case, such obligation shall be construed as a limit for the Borrower or any of its Subsidiaries to start new businesses related to the telecommunication industry and others related to such industry.
(g) Books and Registries. The Borrower shall keep and will make its Subsidiaries keep, the corresponding registry and accounting books, that shall contain correct and complete entries with respect to all financial operations, assets and the business of the Borrower and each one of its Subsidiaries, such entries shall be made pursuant to Mexican GAAP (with respect to the Borrower and its Mexican Subsidiaries) or with any other applicable accounting principles (with respect to the Borrower's foreign Subsidiaries, as the case may be).
(h) Maintenance of the Assets. The Borrower:
(i) shall maintain and conserve, and will assure that each one of its Subsidiaries maintains and conserves all the assets to carry out its main activities properly and in normal conditions, except for the ordinary use and waste of the assets in possession of the subscribers of the Borrower or its Subsidiaries or those which waste does not cause a Relevant Adverse Effect.
(ii) shall maintain, conserve and protect its intellectual property
rights and all governmental or third party authorizations, franchises,
concessions, licenses and permits necessary to carry out the main business of
the Borrower and its Subsidiaries, provided that section (i) and this section
(ii) will not impede that the Borrower or any of its Subsidiaries stop operating
and maintaining any of assets, or that they will allow the expiration of some
concessions, authorizations, licenses or permits as long as such is desired for
the operation of the business and that such operation stop, individually or
jointly, will not cause a Relevant Adverse Effect.
(i) Destiny of the Loan. The Borrower shall use the Loan to prepay the bonds defined as "Senior Notes" due on 2007 for an amount of USD$88'000,000.00 (eighty eight million dollars, US Cy.) and the expenses related to the execution of this Agreement and the other Credit Documents and the prepayment of the bonds defined as "Senior Notes".
(j) Preference in the Payment Pari Passu. The Borrower shall carry out all the necessary acts to make that all of the Borrowers obligations pursuant to this Agreement, the Promissory Notes and the other Credit Documents remain in full force an effect, with preference in the payment at least in the same level with respect to al the other Debt of the Borrower, except for those payment obligations of the Borrower which have a payment preference in virtue of the applicable law.
(k) Transactions with Affiliates. The Borrower shall carry out and make that each one of its Subsidiaries carries out relevant transactions for its main business with any of its Affiliates, such transactions, under the Borrowers criteria, shall be market value.
(l) Maintenance of Governmental Authorizations. The Borrower shall maintain in full force and effect all the authorizations of, registrations before any Governmental Authorities necessary pursuant to the applicable laws to carry out the main activities (including without limitation, environmental laws), in order to comply with the obligations herein and for the enforceability of this Agreement, except that the lack of such authorizations or registrations are not expected to cause a Relevant Adverse Effect.
(m) Surveillance Rights. Upon the Lender's request, with at least 10 (ten) Business Days prior to the corresponding date, the Borrower shall allow that the representatives appointed by the Lender, examine the accounting registries and/or the properties of the Borrower and interview the corresponding officers or external auditors, during business days and hours, in the understanding that such surveillance shall not interfere with the Borrower's ordinary course of business, all the information to which such representatives have access shall be kept confidential pursuant to the provisions herein and that such surveillance shall be carried out by employees of the Lender and not by third parties. The expenses derived from such visits shall be paid by the Lender, unless a Default or Event of Default has occurred, in such case the expenses shall be paid by the Borrower.
(n) Control. The direct or indirect participation of the Guarantors in the Borrower's capital stock, shall at all times remain jointly or separately with respect to one or both of them, in at least 51% (fifty one percent) of the Borrower's Capital Stock, provided however, that for purposes of the calculation of the participation those shares or interests not entitled to vote or that fit in the "neutral" classification parameters, in the event such percentage is less, the Guarantors shall either jointly or separately have the capacity, directly or indirectly, to appoint the majority of the members of the Board of Managers (or of Directors, in the event it is constituted like that in the future) of the Borrower, in the understanding, however, that such participation might be decreased in the event that a public offer is carried out by the Borrower, in which case, such percentages will be reduced proportionally to the percentage of the capital matter of such public offer, and in the understanding that in such case, the percentage of the Loan granted by the Guarantors which will jointly cover 100% (one hundred percent) of the obligations herein.
TWELFTH. Negative Covenants. As long as any amount payable pursuant to this Agreement and the Promissory Notes remains unpaid, the Borrower agrees:
(a) Financial Limitations.
(i) The Borrower shall not allow that the Consolidated Leverage Rate exceeds at any time 4:1.
(ii) The Borrower shall not allow that the Interest Coverage Rate at any time be less than 2:1.
(b) Liens. The Borrower shall not constitute, assume, nor allow the existence of any Lien over any of its assets, and will not allow that its Subsidiaries constitute, assume or allow the existence of any Lien over any of its assets, unless such are necessary to carry out the Borrower's principal business, either if such goods are owned by them or if they will be acquired after this date, and except for the following Liens ("Permitted Liens").
(i) Liens derived from any fiscal or labor obligation, or those created pursuant to the law, as long as the aforementioned were properly appealed through the corresponding proceedings and with respect to those for which reserves were established or any other kind of necessary provisions were created pursuant to Mexican GAAP, or those with respect of which, term to appeal according to applicable legislation, has not passed;
(ii) Liens created as a consequence of legal easements, restrictions to the use of federal, local and municipal lands, easement rights and similar Liens over the goods of the Borrower or any of its Subsidiaries;
(iii) Liens which existence derives from a judicial judgment or
order from any court, unless such judgment is declared inadmissible or that its
effects have been suspended by means of another judicial order within the 60
(sixty) calendar days following the date in which the Borrower or its
corresponding Subsidiary have been notified of the judgment as a result of
which, the corresponding Lien is created;
(iv) Liens created prior to the execution of this Agreement;
(v) Liens over the assets that Borrower or any of its Subsidiaries acquire in the future, which exist before the date of acquisition of such assets (or which were created just for their acquisition), as well as Liens created to guarantee the total or partial payment of the acquisition price of such assets or the Debt assumed to acquire such assets, in the understanding that (A) such Liens shall only cover the acquired assets or, if required by the document from which such Lien derived, any other assets which constitute improvements or goods acquired for an specific use related to the acquired goods (in the event the acquisition of entities, the Borrower or any of its Subsidiaries may constitute liens over the shares, equity parts or similar instruments which represent the share capital of the acquired entities or of those which, directly or indirectly, carry out the acquisition), and (B) in al such cases, such Liens may be created within the 9 (nine) days following, in the case of goods, the date of purchase or, in case of improvements, the date in which they are accomplished.
(vi) Liens which renew, enlarge the term or substitute any of the Permitted Liens mentioned in section (v) above, provided that the amount of the debt granted by such Liens is not increased or that the term for its payment is not shortened and that such Liens do not cover other assets than the originally covered;
(vii) Liens over securities that guarantee operations of "reporto" or repurchase obligations of such securities.
(viii) Liens derived from the ordinary course of business of the Borrower or its Subsidiaries in accordance with the practices of such on the date of execution of this
Agreement, including the granting of sureties, letters of credit, cash or in kind deposits, among others;
(ix) Liens by transporters, warehouse owners, employees, mechanics or any similar Liens derived from the law, which derive within the ordinary course of business and which guarantee obligations which are not due for more than 30 (thirty) days or which are being appealed pursuant to section (i) above;
(x) pledges granted or deposits made within the ordinary course of business, in order to comply with the social security, employees' salary and unemployment insurance provisions, including pledges and/or deposits granted in favor of the Employees Housing Institute ("Instituto para la Vivienda de los Trabajadores") (INFONAVIT); Mexican Social Security Institute ("Instituto Mexicano del Seguro Social") (IMSS) and the Retirement Fund System ("Sistema de Ahorro para el Retiro") (SAR);
(xi) Liens imposed or deposits made to guarantee (i) letters of
credit, the compliance of offers, positions, commercial agreements, leases,
licenses, legal or regulatory obligations, bank authorizations, legal or
judicial bails, agreements entered with Governmental Authorities, compliance
bails and any other obligation of the same nature incurred within the ordinary
course of business and any other compensation right of banks which have not been
exercised related to deposits made within the ordinary course of business and
(ii) indemnity obligations with respect to the sale, lease, assignment or any
other transfer of any good or asset of the Borrower or any of its Subsidiaries;
(xii) leases or subleases entered with third parties, that do not interfere in a relevant manner in the ordinary course of business of the Borrower in a consolidated way;
(xiii) any interest or right of a lessor with respect to goods or assets subject to any kind of lease (including leases which are or shall be capitalized pursuant to Mexican GAAP applicable in Mexico or Capital Leases) or simple lease.
(xiv) Liens over goods and assets of, or over shares which represent the capital stock of, or Debts of any company or entity which exists at the moment in which such company or entity is incorporated or becomes part of, a Subsidiary, as long as such Liens do not include goods or assets of the Borrower or any of its Subsidiaries, different from the goods or assets acquired;
(xv) Liens in favor of the Borrower or any of its Subsidiaries;
(xvi) Liens which guarantee reimbursement obligations with respect to the letters of credit which levy documents or any other goods or assets related to such letters of credit and the products and profits of such;
(xvii) Liens in favor of custom and tax authorities derived from the law to guarantee the payment of custom fees related to the import of goods;
(xviii) Liens which affect the initial deposits and on time deposits, and any other kind of Liens which are within the general scope of the industries activities and which
have derived from activities within the Borrower's ordinary course of business, in each case, granting Debt under any Derived designed to protect the Borrower or any of its Subsidiaries from fluctuations of the interest rates or exchange rates, respectively, and entered without speculation purposes;
(xix) Liens that arise from agreements which are subject to conditions, agreements without transfer of ownership, consignation agreements or similar agreements for the sale of the assets, entered into by the Borrower or any of its Subsidiaries within the ordinary course of business of the Borrower and of its Subsidiaries.
(xx) Liens on Borrower or Subsidiary's rights to receive payments derived from the schedule of programs or movies, as well as of the profits of the same;
(xxi) Liens in regards to the compliance and liquidation or cancel of the Borrower's or Subsidiary's Debt: and
(xxii) Other Liens always that, along with the liens described in sections (i) and (xxi) above, cover the obligations which amount doest not exceed (a) USD$60,000,000.00 (sixty million dollars 00/100, US Cy.) or its equivalent in any other currency, or (b) 15% (fifteen percent) of Borrower's assets, whichever results greater.
(c) Consolidations and Mergers. The Borrower, shall not, in one or more related transactions, (x) consolidate or merge (as merged or merging corporation) with any other Person, nor (y) directly or indirectly, transfer, deliver, sale, lease or in any other way dispose of all or substantially all of its properties or assets in favor of another Person, unless that, immediately after the transactions described in sections (x) and (y), becomes effective:
(i) the Person that turns out or becomes incorporated by virtue of such consolidation of merger, in case is not the Borrower or any of its Subsidiaries, or the Person that acquires by means of a transfer, delivery, lease or any other legal concept, all or substantially all of Borrower's properties or assets (such Person, an "Assignee") (a) is a company duly incorporated and existent pursuant to the laws the United Mexican States, (b) and expressly undertakes, pursuant to a written agreement in the appearance and depth satisfactory to the Lender, Borrower's obligations pursuant to this Agreement and the other Credit Documents;
(ii) in case that in any of such operations executed by the Borrower, it or its Assignee, whichever applicable, expressly agree to indemnify the Lender in connection to any tax, contribution or governmental lien imposed to the Borrower as a consequence of such transaction, regarding the payments pursuant to the Credit Documents;
(iii) a Default or Event of Default have not occurred or continue immediately after such transaction becomes effective, including, for the effects of this paragraph (iii) the following events: the substitution of the Borrower by its Assignee and the treatment of any Debt or Lien incurred as a result of such operation by the Borrower or any Borrower's Assignee, or by any of Borrower's Subsidiary, as if incurred in the precise moment of such operation (in the intelligence that any Debt or Lien incurred by the Assignee prior such
merger and not related to the same, shall not be deemed as a Debt or Lien for the effects of this Agreement); and
(iv) the Borrower have delivered to the Lender a certificate of an officer in which it sets forth that such consolidation, merger, delivery, sale, transfer or lease, as well as the agreement with respect to such operation, is in compliance with the applicable provisions of this Twelfth Clause and that all conditions established in this Agreement in connection with such operation have been fulfilled.
(d) Disposal of Assets. Neither the Borrower nor its Subsidiaries may sale, lease or in any other way dispose of its necessary assets for the management of Borrower's main business (including the shares or partnership interests representative of the capital stock of any Subsidiary, in case that such Subsidiary is relevant to the management of Borrower's main business), except for those disposals which not cause a Relevant Adverse Effect to (i) stock, accounts to settle in connection to the business and exceeding assets to the necessities of the Borrower's business or that for its own nature are sold by the Borrower or its subsidiaries in the ordinary curse of its businesses without being considered as surplus, (ii) assets which are not in use, can not be used or can not be kept for its use in regards to diverse operations, (iii) other assets, as long the product of the disposal of such assets is withheld by the Borrower or such Subsidiary, whichever the case is, and as soon as possible, after such disposal (but in any case within the following 90 (ninety) days after such disposal), such product is applied to (1) expenses derived from goods, plants and equipments used in the Borrower's business; or (2) the payment of the Borrower's or Subsidiaries' Debt, guaranteed or not; or (3) [ordinary expenses incurred in as part of Borrower's or its Subsidiaries' business].
The Borrower shall make its Subsidiaries (as long the Disposal of Assets of such Subsidiary produce a Relevant Adverse Effect) to comply with the provisions of this paragraph (d).
(e) Change in Nature of the Business. Neither the Borrower nor its Subsidiaries may perform, nor allow any of its Subsidiaries to perform a substantial change in the way and nature of their main activities as they are carried out as of date of this Agreement, (if such change causes a Relevant Adverse Effect in the case of Subsidiaries), except for those changes performed as the result of technological innovations, the changes due to the own the nature of the industry or as a result of the natural spin for the companies that provide services of pay satellite television.
(f) Investment. (a) Neither the Borrower nor its direct or indirect Subsidiaries may make or maintain investments in any Person besides those companies that as of this date are Subsidiaries of the Borrower or its Subsidiaries except for those cases in which, as a result of such investment, it is foreseen that a Relevant Adverse Effect will not be caused; nor perform loans to persons besides the Subsidiaries or the Borrower except for those loans that the Borrower or its Subsidiaries perform in the ordinary curse of the options of its business with their commercial counterparts, or are performed with the intention to make more efficient, improve, modernize and give continuity to the business of telecommunications and related services in whole or in part, in the understanding that the authorized loans pursuant to this section shall always be granted according market
conditions. All investment or loan performed by the Borrower and its Subsidiaries for the purposes of increasing, modernizing, improving and expanding its telecommunication business and other related business is permitted.
(g) Debt with Affiliates. Neither the Borrower nor its Subsidiaries may undertake a Debt with Affiliates, except for (i) Debt that is subordinated to the Loan; (ii) Debt that derives from commercial transactions and all of the payments to be performed in the normal curse of business of the Borrower or its Subsidiaries; (iii) Debt existent as of the date of execution of this Agreement; and (iv) Debt which specifically is determined to be paid through the subscription of Capital Stock of the Borrower or its Subsidiaries;
(h) Dividends. The Borrower shall pay dividends in cash or in kind, without the Lender's prior written consent, as long as the Consolidated Leverage Rate does not exceed 3:1. However, such limitation shall not be extensive to the Borrower's subsidiaries, which may pay dividends if so approved by their competent corporate bodies.
THIRTEENTH. Conditions Precedent for the Obligation of the Lender and the Performance of the Disbursement.
(1) The Borrower shall deliver to the Lender the Notice of Disbursement until the Lender has received the following documents, in form and depth satisfactory to Lender:
(i) this Agreement, legally subscribed by Borrower and the Guarantors;
(ii) certified copies of the public deeds which contain (1) the corporate by-laws in full force and effect of the Borrower and Televisa, and (2) the powers of attorney of the legal representatives of the Borrower and Televisa subscribing this Agreement, the Surety and the Promissory Notes;
(iii) copy of the by-laws of NewsCorp (or similar document pursuant to the corresponding laws), certificates of NewsCorp's secretary, as well as the power of attorney (or similar document pursuant to the corresponding laws) of the legal representatives of NewsCorp subscribing this Agreement, the Corporate Guaranty and the Promissory Notes;
(iv) the consolidated and audited financial statements as of December 31st, 2003 and the consolidated internal financial statements as of September 30, 2004, in both cases, of the Borrower;
(v) legal opinion issued by the legal adviser of NewsCorp to Lender's satisfaction substantially in the form attached hereto as Exhibit G.
(2) The obligation of the Lender to grant the Loan to the Borrower and the right of the Borrower to perform the Disbursement, are subject to the fulfillment of the following conditions:
(i) that the Borrower delivers to the Lender the Notice of Disbursement, subscribed by the Borrower's Responsible Officer, pursuant to the provisions of Clause Third of this Agreement which shall contain the following representations:
(1) that there is no Default or Event of Default as of the Disbursement Date and that none of the above will result as a consequence of the Disbursement; and
(2) that the Representations made by the Borrower and, to the extent of his knowledge, by the Guarantors, are true and correct as of the date of the Notice of Disbursement, except when such Representations make reference to a specific date, in which case they shall have been true in the specific date mentioned.
(ii) that the Borrower delivers, on the Disbursement Date, the Promissory Notes in favor of the Lender for the amount of the Loan, legally subscribed by the Borrower and by the Guarantors in their capacity of guarantors in accordance to the provision of section (c) of Clause Third;
(iii) that a Default or Event of Default does not exist or continues as of the Disbursement Date and that as a consequence of the Disbursement, a Default or Event of Default will not occur; and
(iv) that the Representations of the Borrower and of the Guarantors are true in all of its material aspects as of the Disbursement Date, except when such Representations make reference to an specific date, in which case they shall have been true in the specific date mentioned.
FOURTEENTH. Events of Default. The Lender is entitled to accelerate the term for payment of the unpaid balance of the Loan and its accessories (in such case, the Borrower and the Guarantors, limited to the Guaranteed Percentage by each one in accordance to this Agreement, shall pay the total pending amount of the Loan and its accessories), by means of a written notice delivered to the Borrower and the Guarantors pursuant to Clause Nineteenth (b) at least 3 (three) Business Days in advance, prior to the date in which the corresponding term to remedy an Event of Default expires in accordance to this Agreement, in any of the following events (each of one of such events, an "Event of Default"), without demand, judicial resolution or diligence, all of which are hereby expressly waived by the Borrower and its Guarantors, in the intelligence that in case of remedying such Event of Default within the term set forth to remedy and Event of Default, such written notice shall not be valid:
(a) Failure of Payment. If the Borrower (i) does not make any payment of the principal when due in accordance to this Agreement, or (ii) does not make any payment of interests or any other amount when due pursuant this Agreement, in both cases within the following ten (10) Business Days after the date in which such payments should have been made.
(b) Representations. If any representation or certification made by the Borrower herein or in any other Credit Document, or made by any Guarantor contained herein, in the Surety or in the Corporate Guaranty or any other of the foregoing in any certificate, document, financial statement delivered pursuant to this Agreement or with nay other Credit Document, as applicable, results to be false in any material aspect, as of time made, and if such error is not corrected within a term of 30 (thirty) calendar days as of the (i) the date in which any officer from the Legal Department or from the Management and Finance Vice
presidency (or its equivalent) of the Borrower or any of such of the Guarantors, as applicable, have knowledge of such error, or (ii) the date in which the Lender notify in writing to the Borrower of such error, whichever occurs first.
(c) Specific Defaults. If the Borrower or any of the Guarantors (with respect to this ones only with respect to their obligations set forth in Clause Tenth and for the cases of section (a), subsection (i) and section (n) of Clause Eleventh where such obligations are specified as Guarantors obligations), as applicable, breaches any of its obligations provided in Clause Eleventh, paragraphs (a), (b) sections (i), (f), (i),(j), or (n) or in Clause Twelfth and such incompliance is not relieved within a term of 30 (thirty) calendar days as of (i) the date in which in which any officer from the Legal Department or from the Management and Finance Vice presidency (or its equivalent) of the Borrower or any of such of the Guarantors (only in the case is an obligation specifically set forth as theirs) have knowledge of such incompliance, or (ii) the date in which the Lender delivers to the Borrower a written notice providing and certifying the existence of such incompliance, whichever occurs first.
(d) Other Defaults. If the Borrower breaches any of its affirmative and negative covenants contained herein or in any other Credit Document (other than the mentioned in sections (a) and (b) above), and such incompliance is not relieved within a term of 30 (thirty) calendar days as of (i) the date in which any officer from the Legal Department or from the Management and Finance Vice presidency (or its equivalent) have knowledge of such incompliance, or (ii) the date in which the Lender delivers to the Borrower a written notice providing and certifying the existence of such non-fulfillment.
(e) Default of Other Agreements. (i) If the Borrower or any of its Subsidiaries ceases to pay the principal, upon its expiration, of any Debt or breaches its obligation to guarantee and pay any Derivative in a transaction or series of transactions connected or not, and if such breach is in the amount greater than USD$50'000,000.00 (fifty million dollars US Cy) or its equivalent in any other currency applicable to the obligation, and in any case, such breach continues during fifteen (15) Business Days after concluding the remedy terms, which in such case were agreed in the corresponding instruments, agreements or documents, or (ii) if a breach, event of default, or any other event or circumstance occurs pursuant with any instrument or agreement in connection with any Debt or Derivative of the Borrower or its Subsidiaries, in both cases, in a transaction or series of operations connected or not, which default results in the maturity (automatic or as a result of the action of any Person) of the principal balance of such Debt or of the Termination Value of such Derivative always as the result of such breach exceeds the USD$ 50,000,000.00 (fifty million dollars US Cy) or its equivalent in any other currency applicable to the obligation and such breach continues during fifteen (15) Business Days after concluding the remedy terms, which in such case were agreed in the corresponding instruments, agreements or documents.
(f) Voluntary Insolvency. If the Borrower or any of its Subsidiaries (as long the effect of such Subsidiary, in such case, produces a Relevant Adverse Effect) initiates a voluntary proceeding in order to dissolve, liquidate, begin an insolvency contest ("Concurso Mercantil"), or any other remedy in connection to itself or any of its Debts in accordance to any law or proceeding regarding bankruptcy, insolvency, "Concurso Mercantil", or any similar present or future law or proceeding, or seeks the appointment of a fiduciary, bankruptcy trustee, liquidator, depositary or any other officer of similar nature in connection to itself or
any other material part of its main assets for the effects of conducting its main business, or in any other bankruptcy proceeding, "Concurso Mercantil" or other similar initiated against him, or have to carry our a general transfer of its total assets in favor of its creditors, or find itself in general breach in the payment of its matured debts, or take any other curse of corporate action to authorize any of the above.
(g) Involuntary Insolvency. If any involuntary proceeding is initiated against the Borrower or any of its Subsidiaries (as long the effect of such Subsidiary, in such case, produces a Relevant Adverse Effect) for the purposes to arrive to its liquidation or "Concurso Mercantil" or seeking the appointment of a fiduciary, bankruptcy trustee, liquidator, depositary or any other officer of similar nature and if in relation to such involuntary proceeding a definitive order or judgment resolution is formally issued declaring the bankruptcy, liquidation or "Concurso Mercantil" or the appointment of a fiduciary, bankruptcy trustee, liquidator, depositary or any other officer of similar nature against the Borrower or any of its Subsidiaries (as long the effect of such Subsidiary, in such case, produces a Relevant Adverse Effect) pursuant with any bankruptcy, "Concurso Mercantil" or of any other similar nature present of future law or in any other bankruptcy proceeding, "Concurso Mercantil" or other similar initiated against him, and the Borrower or any of its Subsidiaries, as the case may be, does not file a petition, appeal the corresponding procedure or the appointment of the officer, in a term of thirty (30) Business Days staring in the date in which it receives the notice of such petition, procedure or appointment, as the case may be.
(h) Judgment. If judgment resolution or resolutions, which does not admit remedy, are pronounced, with respect to the payment of money in an amount greater than USD$50,000,000.00 (fifty million dollars 00/100, US. Cy) or its equivalent in other currencies, against the Borrower and/or one or more of its Subsidiaries, and such judgment resolution or resolutions are not nullified, guaranteed or complied in whole within the following 30 (thirty) calendar days after they were pronounced.
(i) Expropriation. If any Governmental Authority (i) nationalizes, takes possession, intervenes or in any other way expropriates, all or a material part of the properties and assets of the Capital Stock of the Borrower or any of its Subsidiaries (as long the effect of such Subsidiary, in such case, produces a Relevant Adverse Effect or (ii) carries out any act which not allows the Borrower comply with their obligations pursuant to the Credit Documents).
(j) Moratorium, Currency Availability. If a moratorium is declared in connection with any Borrower's Debt which non-fulfillment causes a Relevant Adverse Effect which may result in the incompliance of the payment obligations by Borrower in accordance with this Agreement.
(k) Reduction of Guarantors' Credit Rating. If the credit rating that the Guarantors have as of the date of the execution of this Agreement (that for Televisa is BBB- and Baa3 granted by S&P and Moody's respectively, and in the case of NewsCorp is BBB- and Baa3 granted by S&P and Moody's respectively) or of any substitute Guarantor in accordance with this Agreement starting on the date of such substitution, is reduced in two or more notches pursuant to the pertinent scale of measure (the "Reduction of the Credit Rating"), unless (i) the Borrower proves to have in such date Investment Grade from Moody's or S&P ; or (ii) the
Borrower have a Consolidated Leverage Rate equal or superior to 2 to 1 and an Interest Coverage Rate equal or superior to 4 to 1 calculated as of the last trimester following the date in which such credit rating of any of its Guarantors has been reduced, or (iii) the corresponding Guarantor is replaced for other reasonably accepted by the Lender, which shall occur within a term that does not exceed thirty (30) day starting on the date on which the credit rating of the Guarantor to be substituted occurs; in the understanding however, if the reduction of the credit rating only affects one of the Guarantors, then the Event of Default shall only be effective regarding, and only cause the payment of the corresponding portion guaranteed by such Guarantor.
In case any of the Events of Default provided in paragraphs (f) or (g) of this Clause occurs in connection with the Borrower, the outstanding amount of the Loan (jointly with the accrued and unpaid interests) and all other obligations of the Borrower pursuant with this Agreement shall be deemed immediately due and payable without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by the Borrower and with not need of notice of any other further action by the Lender.
The Lender acknowledges and agrees that in an event of Default of the obligations expressly undertaken in this Agreement by only one of the Guarantors, and such Default is an Event of Default, such Event of Default shall only be effective regarding, and only cause the payment of the corresponding portion guaranteed by such Guarantor, with not need for the Guarantor in compliance to respond for such amount of the Loan to be paid.
FIFTEENTH. Discounts; Transfers. (a) The Lender is authorized to transfer, participate or in any other way of negotiation, event prior the expiration of this Agreement or of any Promissory Note, the Loan granted hereunder and of any Promissory Notes, prior written consent of the Borrower and the Guarantors, which shall not be unreasonably denied and in the intelligence that the transfer shall be deemed tacitly accepted, if no reply is received by the Lender within the following 10 (ten) Business Days after delivering the notice to the Borrower and to the Guarantors about such transfer and in the understanding that any cost, tax or withhold derived from such transfer to the expense of the Borrower or the Guarantors or an increase in the cost, tax or withhold shall be covered in its totality by the lender. For the effects of this Clause, the transferee, participant or purchaser shall be a Mexican credit institution residing in Mexico for tax purposes.
(b) All transfer or participation made pursuant to this Clause shall me performed for a minimum amount of $100,000,000.00 (one hundred million pesos 00/100 Mexican currency) with increases of $10,000,000.00 (ten million pesos 00/100 Mexican currency), every increase also subject to the prior written authorization of the Lender and the Guarantors pursuant to section (a) above.
(c) The Borrower and each Guarantor shall, at Lender's request, substitute any Promissory Note issued pursuant with this Agreement, in case the Lender so requests as reason of the transfers or participation made in accordance to this Clause. Notwithstanding the foregoing, the Borrower and the Guarantors shall not have the obligation to perform such substitution if it is not against the delivery of the Promissory Note to be substituted or through a final resolution of a competent Governmental Authority ceasing the effects of the Promissory Note to be substituted.
(d) For the case of a Guarantor substitution or the change of the Guaranteed Percentages, the substitute guarantor shall, at the Lender's request, substitute any Promissory Note, the Surety or the Corporate Guaranty, as the case may be, issued in accordance to this Agreement, in case that the Lender requires it as a result of such substitution or in case the Direct TV Purchase is carried out. Notwithstanding the foregoing, the Borrower and the Guarantors shall not have the obligation to perform such substitution if it is not against the delivery of the Promissory Note to be substituted or through a final resolution of a competent Governmental Authority which ceases the effects the Promissory Note to be substituted and the termination of the Surety and/or the Corporate Guarantee to be substituted.
(e) Such assignments or participations shall not constitute any novation of the Loan. Since any of such assignments or negotiations, the assignee, participant or authorized purchaser will be considered as "Lender" for the effects of this Agreement and the Credit Documents.
(f) Except for the Direct TV Purchase or the substitution of the Corporate Guarantee of NewsCorp by Direct TV, neither the Borrower nor the Guarantors shall assign their rights or delegate their obligations under the terms of this Agreement or the Promissory Notes save to entities with similar credit qualifications to those of Borrower's and Guarantors', in this last case with the previous and written consent of the Lender, which shall not be unjustifiably denied.
(g) The Lender shall transfer or in any other way negotiate the Loan or
the Promissory Note(s) without attending to the restrictions expressly
established in this Clause, in case an Event of Default arises and the period to
rectify such event established for each case in Clause Fourteenth have expired
and non of the Guarantors has made the payment within the thirty (30) days
following the corresponding request by the Lender to the Guarantors, provided
that (i) such assignment shall only be performed in favor of financial
institutions or insurance companies duly incorporated and operating in Mexico
(with the exception of those institutions that are part of Grupo Salinas, (ii)
any cost, expense, tax or fiscal duty that results of such assignment shall be
totally covered by the Lender and (iii) in case that the Event of Default is as
a result of the incompliance of any of the Guarantors to its specific
obligations pursuant this Agreement, only the Guaranteed Percentage by such
Guarantor shall be assignable in the terms set forth in this section, and the
other Guarantor will have no responsibility or obligation over such assigned
portion of the Loan.
SIXTEENTH. Compensation. In case that in any date in which the Borrower shall pay to the Lender any amount pursuant to this Agreement and the Borrower or the Guarantors breaches this obligation of payment, the Borrower, within the scope of Law, authorizes and indefeasible empowers the Lender to (1) charge to any account which the Borrower maintain with the Lender, including with no limitation, deposits and/or accounts on demand, of savings, in installments, provisional or finals, any investment accounts, including specially the amounts maintained by the fiduciary division of the Lender in favor of the Borrower in accordance to any investment agreement, (2) compensate any debt that the Lender could have to its favor and on Borrower's expense for any concept pursuant to this Agreement, precisely until a quantity of equivalent amount to the non-paid quantity to the Lender without the need of requirement, notice or claim.
The Lender shall notify to the Borrower, given the case, as soon as possible, of any charge or compensation performed pursuant to this Clause, in the understanding that failure of such notification shall not affect in any way the effectiveness of such charge or compensation. The right of the Lender in accordance with this Clause is additional to any other right (including other compensation rights) that the Lender may have.
SEVENTEENTH. Credit Information. (a) For the purposes of the observance of the provisions of the Law to Regulate Credit Information Corporations, the Borrower and the Guarantors in this date delivers to the Lender an authorization letter duly signed by it(s) legal representative, which is attached hereto as Exhibit J [please provide], in order to authorize the Lender to perform periodic queries to credit information institutions regarding the credit background of the Borrower and the Guarantors, as well as to be authorized to provide to such credit information institutions, information related to the Borrower and the Guarantors. [RH&M to be reviewed if this document is required of NewsCorp]
(b) Besides the persons and authorities referred to in Articles 93 and 117 of the Credit Institutions Law, the Borrower and the Guarantors authorizes the Lender to divulge the information derived from the operations mentioned in this Agreement to (i) other financial entities integral parties of the financial group to which the Lender belongs (exclusively to the permitted extend of the Credit Institutions Law), and to the person which maintains the direct or indirect control of the Lender, (ii) regulatory authorities of the jurisdiction in which the person that holds the direct or indirect control of the Lender is incorporated, (iii) Mexican Bank, (iv) persons with whom the Lender enters into in accordance with Clause Sixteenth and (v) persons designated by the parties, by written means.
EIGHTEENTH. Executory Instrument. This Agreement together with the billing note, certified by the Lender's accountant, constitutes executory instrument in terms of article 68 of the Credit Institutions Law.
NINETEENTH. Notices. (a) For purposes of this Agreement, each party designates as its domicile to receive notices, the following:
Borrower:
Insurgentes Sur 694- 6 degrees piso
Colonia del Valle
03100 Mexico, D.F.
Telephone.: (55) 5448-4131
Fax: (55) 5448-4047
Attention:
Management and Finance Vice-president
cc: General Counsel
Guarantors:
Grupo Televisa, S.A.
Avenida Vasco de Quiroga 2000
Edificio A, Cuarto Piso
Colonia Zedec Santa Fe
Mexico, D.F., 01210
Telephone: (55) 5261-2000
Fax: (55) 5261-2546
Attention: Salvi R. Folch Viadero
Management and Finance Vice-president
cc: Joaquin Balcarcel Santa Cruz
Television Legal Vice-President
|
News Corporation
1211 Avenue of the Americas
New York, NY 10036
Telephone: (212) 852-7017
Fax: (212) 852-7145
Attention: General Counsel
Lender:
Avenida Paseo de la Reforma 156
Colonia Juarez
C.P. 06600, Mexico, Distrito Federal
Telephone: (55) 5721-6373
Fax: (55) 5721-2393
Attention: Corporate Banking Direction cc: General Counsel Telephone: (55) 5721-6283 Fax: (55) 5721-6280 |
(b) All notices, requests and demands to or upon the respective parties hereto shall be in writing and delivered in person, to the domiciles set forth in this clause either by registered or certified mail, return receipt requested, by courier or facsimile transmission upon confirmation of request. Unless the parties notify their change of domicile and/or facsimile number in the above terms, in which case, the notices will be delivered to such new domicile and/or facsimile number. The notices delivered under these terms, will be effective since the moment in which they are received; in this act the parties waive to the use of electronic or optic means, as well as any other form of technology, except for facsimile.
(c) Until a notice in writing consisting of a change in domicile, the notices, request and all other judicial and extra judicial diligences performed at the appointed domiciles will be fully effective.
TWENTIETH. Governing Law. This agreement shall be construed in accordance with and governed by the Laws of Mexico.
TWENTY-FIRST. Jurisdiction. For everything related with the interpretation and fulfillment of the obligations contained herein and the Promissory Notes, the parties hereby
submit to the jurisdiction of the courts sitting at the Federal District of Mexico and waive any jurisdiction to which it may be entitled to by reason of their present or future domicile.
TWENTY-SECOND. Costs and Expenses. The Borrower shall pay to Lender on demand all reasonable and documented costs, expenses, including cost and expenses of the external attorneys of Lender in connection with the preparation and execution of this Agreement, the Surety, the Corporate Guaranty, the Promissory Notes or any other agreement or document executed or subscribed pursuant to this Agreement, provided that such expenses shall be paid up to USD$15,000.00 (fifteen thousand dollars 00/100, US Cy). If the Credit Documents are not executed or if the Disbursement is not made before December 10, 2004, and such is caused by the Borrower, it shall pay the amount of up to USD$5,000.00 (five thousand dollars 00/100, US Cy), for each month of delay with respect of such date, subject to the previous verification of such expenses.
Furthermore, the Borrower shall pay to the Lender, during the immediate following 30 (thirty) calendar days to the demand, all reasonable and documented costs, expenses, including filing fees of the attorneys of Lender in connection with the amendments to this Agreement, the Surety, the Corporate Guaranty, the Promissory Notes or any other agreement or document executed or subscribed pursuant to this, as long as such amendment is requested by the Borrower or any Guarantor, with the express consent of Borrower, as well as any cost or reasonable expense duly justified, if applicable with respect to the non-fulfillment or the execution of this Agreement, the Surety, the Corporate Guarantee and the Promissory Notes, as long as the corresponding resolution is definitive and favorable to the Lender.
TWENTY-THIRD. Amendments and Waivers. Any amendment to this Agreement, the Promissory Notes or any other document in connection with this Agreement, will only be considered valid if such is done in writing, signed by the Borrower, the Guarantors and the Lender. Any waivers of rights or obligations of the Borrower pursuant this Agreement will only be considered valid if such is done in writing, signed by the Borrower, the Guarantors and the Lender. If any of the parties did not exercise promptly or did not exercise the rights set forth in this Agreement, the Surety, the Corporate Guaranty or any Promissory Note, it shall not be considered, such shall not be considered as a waiver.
TWENTY-FOURTH. Counterparts. This Agreement may be signed in 4 (four) originals, which shall constitute the same instrument.
TWENTY-FIFTH. Headings. The parties agree that the headings of each of the Clauses are for convenience of reference only and shall not affect the meaning or interpretation of this Agreement.
TWENTY-SIXTH. Exhibits. The parties agree that the Exhibits are an integral part of this Agreement as if they were included in the same, and that this Agreement shall be construed taking into account the contents of such Exhibits.
TWENTY-SEVENTH. Confidentiality. Lender agrees to maintain, during the term of the Agreement and even after its termination during the maximum term allowed by the Credit Institutions Law and pursuant to the provisions therein, in strict confidentiality, all the information and documentation in connection with the Borrower, and with respect to the
Guarantors, as the case may be, in the event they provide information pursuant to this Agreement, that has been provided in a written or oral form, directly or indirectly, prior or after the date hereof regarding this Agreement, and with the exception of the information that (i) has been obtained of sources other than the Borrower or Guarantors an which is not subject to obligations of confidentiality, (ii) is not of public domain or (iii) that is required by the Governmental Authority.
For effects of this Agreement, the term confidential information includes any information which record is in ay type of material support, including without limitation, paper, cd-roms, diskettes, hard drives, cassettes, etc., provided by any of the parts or, any holding company, Subsidiaries or Affiliates of the other Parts, in any moment, including without limitation reports, data, and any other financial, accounting, economic, legal or commercial information.
[SIGNATURE PAGES]
EXHIBIT 4.33
TRANSLATION PURPOSES ONLY
GUARANTY AGREEMENT (the "Guaranty" or the "Agreement") dated as of December 7, 2004, entered into by and between:
(1) GRUPO TELEVISA, S.A. ("Televisa"), a company duly incorporated under the laws of the Mexican United States ("Mexico") as guarantor; and
(2) HSBC MEXICO, S.A., Institucion de Banca Multiple, Grupo Financiero HSBC, as Lender (the "Lender");
RECITALS
This Guaranty is granted pursuant to the Loan Agreement (Contrato de Apertura de Credito Simple) dated as of December 6, 2004, (as such Agreement may be amended or supplemented from time to time, the "Loan Agreement") entered into by and between Innova, S. de R.L. de C.V. (the "Borrower") Televisa, News Corporation and the Lender, and the Promissory Notes to be issued according to the Loan Agreement by the Borrower in favor of the Lender on December 10, 2004 (the "Notes"), copies of which will be attached hereto as Annex A and Annex B respectively, pursuant to the following Representations and Clauses:
REPRESENTATIONS
I. Capitalized terms are defined in Clause First hereof.
II. Televisa represents, as of the date of the execution of this Guaranty, and hereby agrees that such representations shall continue to be true and in force during the term of this Guaranty, unless such representation in this Guaranty shall be done in a specific date, in which case, such representation shall be considered until such date:
(a) Incorporation. (i) Televisa is a company with fixed capital (sociedad anonima de capital fijo), duly incorporated under the laws of Mexico.
(b) Authorizations and Others. The execution of this Guaranty has been duly authorized and does not require any additional authorization, either corporate or from any other nature. The execution of this Guaranty, and the fulfillment of its obligations hereunder does not contravene its by-laws, and as of the date of this Agreement, does not contravene any judgment, judicial or administrative order, nor any contractual provision, and to the best of its knowledge, any legal provision which could affect or that may reasonably affect the fulfillment of its obligations under this Guaranty.
(c) Governmental or Third Parties Approvals. Except as provided herein, as of the date of this Agreement, it does not require any authorization or registration from of before any Governmental Authority or from third parties for the execution of this Guaranty, or for the validity, enforceability or compliance of its obligations hereunder.
(d) Enforceability. The execution and signature of this Guaranty constitute and will constitute, valid and binding obligations against them, under its terms.
(e) Guaranty Granting. The Lender intends to grant in favor of the Borrower this Guaranty up to the Guaranteed Percentage, in order to obtain the Loan for the Lender, under this Loan Agreement.
(f) Legal Capacity: On and as of the date hereof, their empowered have the legal capacity to obligate it in terms of this Guaranty, and such authorities have not been revoked or limited as of the date of execution of this instrument.
By virtue of the above Representations, which constitute an integral part of this Guaranty, the parties agree the following:
CLAUSES
CLAUSE 1
DEFINITIONS AND TERMS
CLAUSE 1.01 Definitions. Capitalized terms used herein, shall have the meanings ascribed to such terms in the Loan Agreement, except for the terms listed below, which shall have the following meanings (all terms defined in this Clause or in any other Clause hereof shall have the same meaning when used in plural and vice versa):
"Acceptable Credit Rating" means "BBB-" or "Baaa3" by any of S&P or Moody's.
"Borrower" shall have the meaning ascribed to such term in the Recitals of this Agreement.
"Dollars" means the lawful currency of the United States of America.
"Governmental Authority" shall mean any government agency or any state, department or other political subdivision of the same, or any governmental organism, agency, authority (including any central bank or fiscal or environmental authority), any entity (including any court or tribunal) exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government in Mexico.
"Guaranty Agreement" means this Guaranty subscribed by Grupo Televisa, S. A.
"Guaranteed Percentage" shall have the meaning ascribed to such term in the Recitals 2.01 (a) of this Agreement.
"Lender" shall have the meaning ascribed to such term in the Recitals of this Agreement.
"Loan Agreement" shall have the meaning ascribed to such term in the Recitals of this Agreement.
"Loan Documents" means the Loan Agreement, the Promissory Note and this Guaranty, as they may be amended from time to time.
"Payment Obligations" shall have the meaning ascribed to such term in the Clause 2.01 (a) hereof.
"Pesos" and "$" means Pesos, lawful currency in Mexico.
"Promissory Note or Promissory Notes" shall have the meaning ascribed to such term in the Recitals of this Agreement.
"USA" means the United States of America.
CLAUSE 1.02 Calculation of Terms.
In this Agreement, for purposes of calculation of periods of time from a specific date to a specific subsequent date, the word "from" means "from and including" and the words "to" and "until" mean "until but excluding".
CLAUSE 2
GUARANTY
CLAUSE 2.1 Guaranty. (a) Televisa, hereby and during the term of this Guaranty, completely, irrevocably and unconditionally guarantee, in a percentage that could not exceed 51% (fifty one percent) of the Payment Obligations (as such term is defined below) of the Borrower that are due at the moment this Guaranty became enforceable (the "Guaranteed Percentage"), the full and prompt payment up to the Guaranteed Percentage of each and all the amounts owed and due by the Borrower under the Loan Agreement, whether at stated maturity, upon anticipated termination agreed by the parties, upon anticipated termination resulting from an Event of Default (as such term is defined in the Loan Agreement), or in any other moment established in the Loan Agreement, including, but not limited to, all interests, charges, costs and contractual expenses (subject to the limits set forth in the Loan Agreement), as well as the strict and prompt fulfillment of each and all the
other obligations of the Borrower under the Loan Agreement (all such amounts of principal, interests, charges, costs, expenses, contractual expenses and other obligations, hereinafter the "Payment Obligations"). In light of the foregoing, Televisa only responds for the Payment Obligations due and up to the Guaranteed Percentage. Also, the Guaranteed Percentage of Televisa will be determined in light of the unpaid balance of the Payment Obligations so such amount shall be reduce as the unpaid balance of the Payment Obligations also reduces.
This Guaranty is granted in a limited way up to the Guaranteed Percentage, due to this fact, Televisa, will not respond to the Payment Obligations which exceed from the Guaranteed Percentage, under this Agreement.
(b) Absolute Guaranty. Televisa hereby and during the term of this Guaranty, guarantee that the Payment Obligations shall be paid strictly pursuant to the terms of the Loan Agreement, subject to the Guaranteed Percentage. The responsibility of Televisa hereunder, shall subsist and shall be absolute and unconditional, notwithstanding:
(i) the change in the time, place or way of payment or any other term of the Payment Obligations, or any change thereof, or any amendment, waive, exemption or modification to the Loan Agreement, in such case the Guaranty will survive under such new terms.
(ii) the change, release or omission to perfect any guaranty, or any release, reform, waiver or excuse of the terms of any other guaranty for all or any of the Payment Obligations hereof; or
(iii) that the Lender does not judicially demand the Borrower, the fulfillment of its obligations under the Loan Agreement;
(iv) any exercise or omission in the exercise of any right, under this Guaranty or the Loan Agreement;
(v) the bankruptcy, insolvency, commercial bankruptcy, dissolution or any similar proceeding with respect to the Lender or the Guarantor;
(vi) any merger of the Borrower or of Televisa in or with any other company, different to the Borrower or Televisa, or any sell or transfer of a significant part of the assets of the Borrower or of Televisa to any other person;
(vii) any transfer of shares of the capital stock of Televisa, which implies a change of control, or any change in the corporate relationship between the Borrower and Televisa, or any termination or such relationship, or any change in the structure or property of the Borrower or Televisa.
(c) Waivers. (i) Unless for the provisions set forth in section (ii) below and in the Loan Agreement, Televisa hereby and during the term of this Guaranty waive
any diligence, presentment, demand, protest, notice of acceptance, notice of dishonor or any other notice with respect to any of the Payment Obligations and this Guaranty and to any requirement that the Lender or any of its successors or assignees exercise any right, or take any measure against the Borrower or any other Person, or executes any guaranty. Televisa, hereby agree that if the Borrower should cease in its entirety or partially upon maturity (be it on agreed maturity, by acceleration or otherwise) any of the Payment Obligations, Televisa shall proceed to perform the prompt payment thereof and up to the Guaranteed Percentage, without the need of any requirement or notice, which Televisa hereby waives, unless for the provisions set forth in section (ii) below and in the Loan Agreement, hereby expressly waiving to the benefits provided for in articles 2848 and 2849 of the Federal Civil Code (the "Civil Code") and other related articles and its correlative articles of the and of the Civil Codes of the States of Mexico and the Civil Code for the Federal District and to the benefits of orden y excusion and division (this last one only regarding the provisions set forth at the end of this paragraph) stay provided in articles 2814, 2815, 2816, 2817, 2818, 2819, 2820, 2821, 2822, 2823 and 2827 of the Civil Code and other related articles and its correlative of and of the Civil Codes of the States of Mexico and the Civil Code for the Federal District and that in case the Borrower obtains an extension in the term for the payment or renewal of the Payment Obligations, these will be paid in full upon maturity (be it on the extended date, by acceleration or otherwise) by Televisa up to the Guaranteed Percentage provided that said extension had been previously accepted in writing by Televisa.
Notwithstanding the provisions set forth in the precedent paragraph, regarding the division principle, in case of waive to article 2827 of the Civil Code and other related articles and its correlative of and of the Civil Codes of the States of Mexico and the Civil Code for the Federal District regarding to the division benefit, such waive applies only to Televisa's right to call any other guarantor to jointly defend themselves and in due proportion be to the judgment results, and not to other rights and benefits granted to Televisa under said article.
(ii) Notwithstanding the provisions set forth in Clause 2.01 (b) (iii) of this Agreement, the Lender shall demand the payment of the Payment Obligations pursuant to the Loan Agreement first to the Borrower (being only necessary the simple payment requirement to the Borrower, in accordance to the provisions of Clause Nineteenth of the Loan Agreement, requirement that the Parties agree should not be judicial, and sending a copy of such requirement to Televisa) so therefore only in case the Borrower does not pay in the term established in such requirement, the Lender may claim the payment of the Payment Obligations due up to the Guaranteed Percentage to Televisa, and must do it through a writing notice to Televisa pursuant to Clause 3.02 (b) of this Guaranty, enclosing copy of the request made by the Lender to the Borrower.
(d) Civil Code Articles. Televisa represents that it is are aware of the contents of each and all the Articles of the Civil Code and its correlative articles of the Civil Codes of the Sates of Mexico and the Federal District mentioned herein
applicable to the this Guaranty, for which reason such Articles are not transcribed herein, by virtue of such express representation and knowledge by Televisa.
(e) Subordination, Subrogation. Televisa, hereby and during the term of this Guaranty shall not exercise any right acquired by subrogation over the Borrower pursuant to this Guaranty, or by virtue of any payment performed hereunder, or by any other means, until all the Payment Obligations have been paid in full except if the Borrower initiates a voluntary proceeding in order to reach a concurso mercantil, or any other remedy in connection to itself or any of its Debts in accordance to any law or proceeding regarding bankruptcy, insolvency, concurso mercantil or any law, or any similar present or future law or proceeding, or seeks the appointment of a fiduciary, bankruptcy trustee, liquidator, depositary or any other officer of similar nature in connection to itself or any other material part of its main assets for the effects of conducting its main business, or in any other bankruptcy proceeding, concurso mercantil or other similar initiated against him, or have to carry our a general assignment of its total assets in favor of its creditors, or find itself in general breach in the payment of its matured debts, in which case such limitation shall not apply to Televisa.
In the event any amount is paid to Televisa on account of such subrogated rights in any moment in which the Payment Obligations subject to the Guaranteed Percentage have still not been paid in full, except in the case that the payment is made as a result of a procedure of concurso mercantil pursuant to the paragraph above, such amount, limited to the Guaranteed Percentage of Televisa, shall be maintained in deposit for the benefit of the Lender and shall be immediately delivered to the Lender, once there is a Payment Obligation due and not paid by the Borrower, for the payment of the outstanding Payment Obligations (subject to the Guaranteed Percentage), in accordance with the terms of the Loan Agreement.
(f) Term of the Guaranty, Termination. This Guaranty shall bind Televisa, its successors and assignees, as of the date of execution hereof, and shall benefit and be enforceable by the Lender and its permitted successors and assignees under the Loan Agreement, and will terminate and will automatically cease to have force and validity as of the date in which all the Payment Obligations guaranteed by Televisa are terminated and all cash amounts payable under the Loan Agreement and hereunder are paid in full, up to the Guaranteed Percentage.
CLAUSE 3
MISCELLANEOUS
CLAUSE 3.01 Amendments, etc. Any amendment or waiver of any matter provided in this Guaranty, or any consent from the Borrower or from Televisa, shall be considered valid only if authorized in writing by the legal representatives of Televisa and the Borrower, and shall only be valid for the specific instance and for the specific purpose for which it was agreed.
CLAUSE 3.02 Notices. (a) For purposes of this Guaranty, the domicile to receive notices is the following:
TELEVISA:
Grupo Televisa, S.A.
Avenida Vasco de Quiroga 2000
Edificio A, Cuarto Piso
Colonia Zedec Santa Fe
Mexico, D.F., 01210
Telephone: (55) 5261-2000
Fax: (55) 5261-2546
Attention: Salvi R. Folch Viadero
Management and Finance Vice-president
cc: Joaquin Balcarcel Santa Cruz
Television Legal Vice-President
|
LENDER:
Avenida Paseo de la Reforma 156
Colonia Juarez
C.P. 06600, Mexico, Distrito Federal
Telephone: (55) 5721-6373
Fax: (55) 5721-2393
Attention: Corporate Banking Direction cc: General Counsel Telephone: (55) 5721-6283 Fax: (55) 5721-6280 |
(b) All notices, requests and demands to or upon the respective parties hereto shall be in writing and delivered in person, to the domiciles set forth in this clause either by registered or certified mail, return receipt requested, by courier or facsimile transmission upon confirmation of request, unless the parties notify their change of domicile and/or facsimile number in the above terms, in which case, the notices will be delivered to such new domicile and/or facsimile number. The notices delivered under these terms, will be effective since the moment in which they are received; in this act the parties waive to the use of electronic or optic means, as well as any other form of technology, except for facsimile.
(c) Until a notice in writing consisting of a change in domicile, the notices, request and all other judicial and extra judicial diligences performed at the appointed domiciles will be fully effective.
CLAUSE 3.04 Waivers. If the Lender fails to exercise or postpones the exercise of any right or privilege hereunder, it shall not be considered, by virtue of
such fact, that the Lender has waived the exercise of its rights and privileges. Also, any total or partial exercise of any right or privilege hereunder shall not impede any future exercise thereof or the exercise of any other right or privilege. The remedies set forth herein do not exclude any present or future provisions under applicable law.
CLAUSE 3.05 Enforceability. This Guaranty shall become effective upon the execution by Televisa.
CLAUSE 3.06 Assignments. Except for the provisions set forth in the Loan Agreement, Televisa may not assign its rights or obligations hereunder without the express consent of the Lender, which cannot deny in a unjustified manner, provided that in the of event such assignment, the assignee shall be considered as guarantor for the purposes hereof and shall execute a guaranty agreement (fianza) in such capacity in the terms hereof. The Lender may not assign its rights and obligations hereunder except pursuant to the provisions of the Loan Agreement.
CLAUSE 3.07 Governing Law. This Guaranty shall be governed by, and construed in accordance with the applicable Laws of the United Mexican States.
CLAUSE 3.08 Counterparts. This Guaranty shall be executed in two counterparts, which shall constitute the same instrument.
CLAUSE 3.09 Jurisdiction and Competence. For any matter related to the interpretation and compliance of the obligations derived from this Guaranty, each of the parties hereto hereby submits to the jurisdiction and competence of the courts of Mexico City, Federal District, hereby waiving to any other court that may correspond them by virtue of their present or future domicile or otherwise.
CLAUSE 3.10 Restitution of Guarantee. The obligations of Televisa hereunder shall be automatically re-established in the event that, and to the extent that, for any reason, any of the payments performed by or on account of the Borrower in connection with the Payment Obligations guaranteed pursuant this Guaranty subject to the Guaranteed Percentage are reimbursed to the Borrower or to Televisa or must, for any reason, be reimbursed by the Lender to the Borrower or to Televisa, be it by reason of a bankruptcy, concurso mercantil, dissolution, liquidation or any other similar proceeding.
CLAUSE 3.10 Severability. In the event any of the provisions hereof is declared invalid by any competent court, the parties agree that such invalidity shall not affect the validity or enforceability of the other provisions of this Guaranty.
IN WITNESS WHEREOF, the parties execute this Guaranty Agreement (Fianza) on December 7, 2004], in Mexico City, Federal District.
GRUPO TELEVISA, S.A.
By: /s/ Joaquin Balcarcel Santacruz ------------------------------------ Name: Joaquin Balcarcel Santacruz Title: Attorney-in-fact By: /s/ Juan Sebastian Mijares Ortega ------------------------------------ Name: Juan Sebastian Mijares Ortega Title: Attorney-in-fact |
HSBC MEXICO, S.A.,
INSTITUCION DE BANCA MULTIPLE,
GRUPO FINANCIERO HSBC
By: /s/ Jorge Casas de la Torre
-----------------------------
Name: Jorge Casas de la Torre
Title:Attorney-in-fact
|
EXHIBIT A
Copy of the Loan Agreement
EXHIBIT B
Copy of the Promissory Notes
CORPORATE GUARANTEE
This Guarantee Agreement is made and entered into by and between NEWS CORPORATION, a corporation organized under the laws of the State of Delaware (the "Guarantor") and HSBC MEXICO, S.A., INSTITUCION DE BANCA MULTIPLE, GRUPO FINANCIERO HSBC, a Mexican banking institution (the "Bank").
WHEREAS, it is in Guarantor's interest to guarantee 49% (forty nine per cent) of any outstanding payment obligations becoming due under the loan granted to INNOVA, S. DE R.L. DE C.V. (hereinafter called the "Borrower") by the Bank in accordance with the terms and conditions of that certain Credit Agreement for an amount of Ps$1,012,000,000.00 (one thousand and twelve million pesos 00/100, Mexican Currency) (such principal amount, the "Loan Amount"), dated December 6, 2004 (the "Credit Agreement") executed between the Borrower, Grupo Televisa, S.A., Guarantor and the Bank.
NOW, THEREFORE, in consideration of the foregoing and of the covenants and agreements hereinafter set forth in recognition of such Credit Agreement issued by the Bank:
1. The Guarantor hereby, on its own, and on behalf of its successors and assignors, absolutely and unconditionally guarantees to the Bank that 49% (forty nine per cent) of all payment obligations (including principal, interest, and expenses) current or owed any time hereafter by Borrower to the Bank in connection with or in regard to the Credit Agreement (collectively, the "Guaranteed Obligations") will be promptly paid in full when due as set forth thereof. Upon notice by the Bank to the Guarantor informing that an amount due to the Bank has not been paid in accordance with the Credit Agreement or any credit extension pursuant thereto, and without necessity of any demand or request whatsoever to the Borrower other than as determined in the Credit Agreement, the Guarantor will pay such amount to the Bank upon first request at the Bank's office listed below or at any other address specified by the Bank in writing.
2. Notwithstanding any provision of this Guarantee, the liability of the Guarantor for payment and/or with respect to the performance of the Guaranteed Obligations shall be several (and not joint) and shall be limited to forty nine percent (49%) of the amount of such Guaranteed Obligations. Notwithstanding the foregoing, the Bank may permit the indebtedness of the Borrower to exceed the Loan Amount. Moreover, the foregoing maximum liability shall have no application or affect on liability under any other guarantees granted by the Guarantor, if any.
3. The Guarantor agrees to accept as prima facie evidence of the amount payable by the Guarantor, the balance appearing due to the Bank from the Borrower according to the Bank' books and records, except in jurisdictions where further proofs are required as a matter of law.
4. No amendment or waiver of any provision of this Guarantee, nor consent to any departure by the Guarantor therefrom shall, in any event, be effective unless the same shall be in writing and signed by the Bank, and such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.
5. The Guarantor agrees that its liability hereunder shall not be affected by any law, regulation or order of any governmental or administrative body, purporting to amend or affect any obligation of the Borrower or the terms of payment thereof (including, without limitation, the obligation of the Borrower to pay its obligations in Mexican Pesos by transferring Mexican Pesos from the United States of America to Mexico), and shall be absolute and unconditional irrespective of the current or alleged invalidity of any such obligation and of any circumstance which might otherwise constitute a discharge of a surety or guarantor including, but not limited to extension, modification or renewal, except if any such modification is made without the Guarantor's express written consent, and shall not be discharged except by payment.
If at the time any payment of any amount paid by the Borrower under any credit extension is rescinded or must be otherwise restored or returned upon insolvency, bankruptcy, reorganization, concurso mercantil or similar circumstance of the Borrower, the Guarantor's obligations hereunder with respect to such payment shall be reinstated as if such payment had been due but not made at such time.
6. Except as provided in the Credit Agreement, the Guarantor hereby waives notice of acceptance of this Guarantee, notice of granting any loan, diligence, presentment, protest, notice of protest and notice of dishonor of any evidences of indebtedness hereby guaranteed and to any notice of any other nature whatsoever except as set forth herein.
7. The Guarantor consents that the liability under this guarantee shall not be released, diminished, impaired or affected by the extension or consolidation of payment of all or any part of the debt either with or without notice or consent to Guarantor, except that any modification of payment in terms less favorable to the Borrower or the Guarantor than those set forth in the Credit Agreement as executed on December 6, 2004, shall require the Guarantor's express written consent.
8. This is a guarantee of payment and not of collection and shall be governed by, and construed and interpreted in accordance with the laws of the State of New York without regard to principles of conflicts of law. The Guarantor hereby irrevocably submits to the jurisdiction of the courts of New York in relation to any claim arising hereunder and hereby irrevocably waives trial by jury. This is a continuing guarantee which shall remain in force until all payment obligations due by Borrower and Guarantor under the Credit Agreement have been met (subject to the reinstatement provisions of paragraph 5).
9. The Guarantor agrees that all payments to be made by it hereunder shall be made at places and in currencies as agreed in the Credit Agreement.
10. All payments by the Guarantor made hereunder will be made free and clear of any present and future taxes, charges or withholdings which may be imposed by any governmental or taxing authority, excluding, in the case of Bank and any of its assignees, taxes imposed on its income, and franchise taxes imposed on it in lieu of income taxes ("Excluded Taxes"), and should payment be subject to any such tax, charge or withholding (other than Excluded Taxes), the Guarantor will pay such additional amount as may be necessary to enable the Bank to receive a net amount equal to the full amount otherwise payable hereunder.
11. The Bank may assign this Guarantee or any of its rights and powers hereunder, but only in connection with a permitted assignment of the Guaranteed Obligations as determined in the Credit Agreement, with all of the obligations guaranteed, and may assign or deliver to any such assignee any security therefore. The Bank shall notify the Guarantor of any such assignment. In the event of such assignment, such assignee shall have the same rights and remedies as if originally named herein.
12. No delay by the Bank in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any power or right hereunder preclude other or further exercise thereof or the exercise of any power or right, nor shall the Bank be liable for exercising or failing to exercise any such power or right, nor shall any actions by the Bank omitted hereunder in any way impair or affect this Guarantee.
13. All notices and other communications under this Guarantee shall be deemed to have been given when dispatched by internationally recognized courier service to the following address and shall be deemed effective when received by the party to whom the notice is addressed:
For the Guarantor:
News Corporation
1211 Avenue of the Americas
New York, NY 10036
Attention: Group General Counsel
Telephone: (212) 852-7017
Fax: (212) 852-7145
For the Bank:
HSBC Mexico, S.A.
Avenida Paseo de la Reforma 156
Colonia Juarez
C.P. 06600, Mexico, Distrito Federal
Attention: Direccion de Banca Corporativa Telephone: (55) 5721-6373
Fax: (55) 5721-2393 Copy to: Director Juridico Telephone (55) 5721-6283 Fax: (55) 5721-6280 |
14. The Guarantor agrees that any legal action may be commenced against it before the courts of New York, and any legal process may be served on it, by mailing a copy of the summons to it, by registered or certified mail at the address set forth above, or by any other lawful method, and the Guarantor unconditionally and irrevocably waives any right to challenge the effectiveness of such service.
15. Should any one or more provisions of this Guarantee be determined to be illegal or unenforceable all other provisions shall, nevertheless, remain effective.
The Guarantor agrees that, in the event any payment hereunder is made to the Bank, it shall refrain from seeking collection of such amounts from the Borrower until the time in which any an all of the Guaranteed Obligations due to the Bank have been paid in full except if the Borrower initiates a voluntary proceeding in order to reach a concurso mercantil, or any other remedy in connection to the Borrower or any of its debts in accordance with any law or proceeding regarding bankruptcy, insolvency, concurso mercantil, or if it seeks the appointment of a fiduciary, bankruptcy trustee, liquidator, depositary or any other officer of similar nature in connection with the Borrower or any material part of its assets for purposes of conducting its main business, or in any other bankruptcy proceeding, concurso mercantil or other similar proceeding initiated against the Borrower, or if the Borrower makes a general assignment of the totality of its assets in favor of its creditors, or if its finds itself in general breach its payment obligations of its matured debts, in which case such limitation shall not apply to the Guarantor.
Furthermore, in the event that the Guarantor receives any such amounts from the Borrower prior to the payment in full of the Guaranteed Obligations, except in the case that such payment is made as a result of a procedure of concurso mercantil pursuant to the paragraph above, then the Guarantor shall maintain such amounts in deposit and deliver them as payment of due Guaranteed Obligations to the Bank.
16. This Guarantee may be executed by one or more of the parties hereto on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page of this Guarantee by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof.
[Signature pages follows]
IN WITNESS WHEREOF, the parties hereto have caused this Guarantee Agreement to be duly executed as of December 6, 2004.
NEWS CORPORATION
By: /s/ Lawrence Jacobs ---------------------- Name: Lawrence Jacobs Title: Attorney in fact |
HSBC MEXICO, S.A.,
INSTITUCION DE BANCA MULTIPLE,
GRUPO FINANCIERO HSBC
By: /s/ Jorge Casas de la Torre ----------------------------- Name: Jorge Casas de la Torre Title: Attorney in fact |
[This signature page is part of the Guarantee Agreement is made and entered into
by and between NEWS CORPORATION, and HSBC MEXICO, S.A., INSTITUCION DE BANCA
MULTIPLE, GRUPO FINANCIERO HSBC]
EXHIBIT 4.34
CHANNEL LICENSING AGREEMENT
CHANNEL LICENSING AGREEMENT (THE "AGREEMENT") DATED AS OF _________, ENTERED INTO BY AND BETWEEN TELEVISA, S.A. DE C.V. ("TELEVISA") AS LICENSOR, AND THE ENTITY SET FORTH IN SECTION I (THE "CLIENT") AS LICENSEE.
Subject to the terms and conditions of this Agreement, TELEVISA herein grants to the Client, and the Client accepts, a non-exclusive license (except in the case of direct to home satellite television systems known as DTH, in which case this license is granted on exclusive basis) to disseminate during the Term set forth in Section IV and in the Territory set forth in Section V of this Agreement, the audio and video associated signals of the television channel(s) set forth in Annex 3 of this Agreement through the Client's pay television system (the "System").
PARTICULAR CONDITIONS
SECTION I. CLIENT INFORMATION:
NAME/TYPE/BUSINESS:
INCORPORATION: Client is a company duly incorporated and existing under the laws of United Mexican States ("Mexico"), as demonstrated by the documentation attached to this Agreement as Annex 1.
REPRESENTATION: Client's legal representative(s), Mr. Alexandre Moreira Penna and Mr. Carlos Ferreiro Rivas have the sufficient corporate power and authority to bind the Client under the terms of this Agreement as demonstrated by the document, a copy of which is attached to this Agreement as Annex 2, which has not been revoked, limited, or modified in any manner.
SECTION II. DOMICILES OF THE PARTIES: For purposes of this Agreement, the Parties set forth their respective domiciles for the receipt of notices as follows:
TELEVISA: CLIENT: TELEVISA, S.A. de C.V. Corporacion Novavision, S. De R.L. de C.V. Av. Vasco de Quiroga 2000 Insurgentes Sur 694, Edificio "C" Piso 3 Piso 6, Col. Zedec Santa Fe Col. Del Valle 01210 Mexico, Distrito Federal. Mexico, D.F., C.P. 03100 Attn: Salvi Folch Attn: General Counsel Tel. (52-55) 5261-3140 Tel. (52-55) 5448-4122 Fax. (52-55) 5261-3140 Fax. (52-55) 5448-4047 With copy to: Grupo Televisa, S.A., Vice President-General Counsel Television Division Av. Vasco de Quiroga No. 2000 Edificio "A", 4 degrees piso. Col. Zedec Santa Fe 01210, Alvaro Obregon, Mexico, D.F. |
Attn: Joaquin Balcarcel Santa Cruz Tel: (52-55) 5261-2433 Fax: (52-55) 5261-2546 |
SECTION III. LICENSED CHANNELS: Within the total geographic area covered by the Territory, the Client is required to transmit the channels described in Annex 3 of this Agreement on its pay television system. Likewise, in this Annex 3, reference will be made to the monthly royalty for each Subscriber (as defined hereafter), that the Client shall pay to TELEVISA pursuant to Section Five (5) of the General Conditions of this Agreement.
SECTION IV. TERM: The term of this Agreement shall be of 5 years, effective from the date of its execution by the parties (the "Term"). The Term of this Agreement shall be automatically renewed for one (1) year periods unless either party notifies the other party of its intention not to renew the Agreement at least fifteen (15) days prior to the end of the Term. If after the Term, TELEVISA and the Client are unable to agree on the terms and conditions of the carriage of the Channels, then the terms of any renewal shall be determined through arbitration in accordance with Section 11.5 of that certain Amended and Restated Social Parts Holders Agreement dated as of the date of this Agreement, among Grupo Televisa, S.A., a Mexican corporation, SKY DTH, S. de R. L. de C.V., a Sociedad de Responsabilidad Limitada de Capital Variable in corporate form formed under the laws of Mexico, The News Corporation Limited, an Australian corporation, News DTH (Mexico) Investment Limited, a Cayman Islands company, Liberty Media International, Inc., a Delaware corporation, Liberty Mexico DTH, Inc., a Colorado Corporation and Innova, S. de R. L. de C.V., a Sociedad de Responsabilidad Limitada de Capital Variable in corporate form formed under the laws of Mexico. Notwithstanding anything to the contrary in this Agreement, if TELEVISA ceases to be paid the fees for carriage of its Channels as provided herein, TELEVISA may terminate this Agreement.
SECTION V. TERRITORY: The Territory is that set forth in Annex 3 of this Agreement.
SECTION VI. CURRENCY: Mexican Pesos, currency of Mexico, ("Pesos"). The Client must pay TELEVISA the Royalties (as this term is hereafter defined) in Pesos.
SECTION VII. CURRENCY INTEREST RATE. The Interest Rate shall be 28 day Tasa de Interes Interbancario de Equilibrio (TIIE), as published by the Bank of Mexico.
SECTION VIII. MANNER OF PAYMENT. The Client shall pay TELEVISA the Royalties through deposit or wire transfer in any of the bank accounts that TELEVISA specifies to Client.
Client shall have the obligation to send a copy of the receipt showing the transfer of funds by facsimile and/or email to the person and number that TELEVISA will notify Client.
Notwithstanding the foregoing, TELEVISA reserves the right, upon prior notice to the Client, to change the account number and/or the branch or the bank to which the transfer of the respective Royalties shall be made.
SECTION IX. ADVERTISING: Client shall not have the right to use, exploit, transmit or obtain income through commercial, digital, virtual or any other advertising sales on TELEVISA's channels.
SECTION X. TYPE OF COVERAGE:
The Client is obligated to transmit the Channels (as such term is defined below) in all programming packages of the System.
GENERAL CONDITIONS
1. CHANNELS. The objective of this Agreement is the audio and video associated signal(s) of the television channels set forth in Annex 3 of this Agreement (the "Channels").
2. TERM. The Term of the license granted pursuant to this Agreement shall commence and terminate on the dates specified in Section IV herein, unless declared previously terminated according to the terms established herein. In case that, for any reason, Client continues transmitting the Channels even in the event of termination of this Agreement, the Client shall have the obligation to continue paying TELEVISA the Royalties, provided that in no event such action shall be interpreted as an extension of the Term without prejudice to the right of TELEVISA to cease the transmission of the Channels at any time in case of non-payment of the Royalties by the Client.
3. TERRITORY. The territory that is subject of this Agreement (the "Territory") is that established in Section V herein.
4. LICENSE. Subject to the terms and conditions of this Agreement, TELEVISA herein grants to Client, and Client accepts, a non-exclusive license with respect to any pay television system other than a DTH system, but an exclusive license with respect to satellite DTH systems, to disseminate the Channels to its respective "Subscribers" (as such term is defined below) during the Term of this Agreement and within the Territory subject hereto, to all of the programming packages offered in the System. The Client is obligated to disseminate and transmit to all its Subscribers, the Channels that are the subject matter of this Agreement in accordance with the terms herein. The term "Subscriber" means any person that receives and pays for the System's television service at whatever location, including but not limited to whatever house, apartment, hotel room (whether occupied or not), bar, restaurant, hospitals, or any similar location. In the case of hotels, hospitals, or any similar location that receives the Channels under the same policies used by Client with respect to hotels or hospitals, the Client shall require such establishment not to impose any extra charge to its guests and/or customers for the privilege of receiving the Channels and the form of calculating the total number of Subscribers within hotels, hospitals and any similar location shall be made by considering each single room or decoder where the Channels are received (whether occupied or not). For purposes of Section 5 below hotels and hospitals shall be considered as "Commercial Subscribers", and any Subscriber other than Commercial Subscriber shall be subject to the payment of Royalties as a regular Subscriber.
5. ROYALTY. As consideration for the rights granted to Client under this Agreement, the Client herein agrees to pay TELEVISA on a monthly basis, a royalty for each Subscriber that receives the Channels equal to the rate set forth in Annex 3 and within the periods indicated therein (the "Royalties"). Royalties for Commercial Subscribers shall be as described in Annex 3 and all other Royalties for Subscribers other than Commercial Subscribers shall be as set forth for any subscriber in Annex 3 hereto. In addition to any Royalties paid under this Agreement, Client shall pay any value added taxes imposed pursuant to Mexican law. Royalties shall be reviewed on a quarterly basis in order to reflect an increase in the amount of Royalties to be paid to TELEVISA based on the inflation factor accumulated during such quarter as determined by the Bank of Mexico (the "Inflation Factor").
The Royalties shall be calculated on the basis of the Average Number of Subscribers at the end of each month.
"Average Number of Subscribers" means the sum of the total Subscribers of the System at the beginning of the relevant month, plus the total Subscribers at the end of such month, divided by 2 (two). To that effect, the Client must prepare and deliver to TELEVISA within the first 5 (five) calendar days of each month, a statement of account certified by a legal representative of the Client or its Programming Director, which shows the Average Number of Subscribers at the end of the immediately preceding month and the amount of corresponding Royalties.
Client shall pay TELEVISA in the manner of payment set forth in Section VIII, and within the first thirty (30) calendar days of each month, the Royalties corresponding to the immediately preceding month. The Royalties, as well as any other amount payable by the Client under this Agreement, shall be paid in the currency set forth in Section VI herein, it being understood that the amount of the Royalties shall be increased in accordance with the Mexican inflation rate as determined by the Bank of Mexico on a quarterly basis. Without prejudice to any other right or remedy that TELEVISA may have under this Agreement or under applicable law, if Client fails to make payment to TELEVISA of any amount owed or of any Royalty on the payment date, the amount due shall generate interests payable on demand at an annual rate equal to the Currency Interest Rate as set forth in Section VII, multiplied by 1.5.
6. TAXES AND OTHER OBLIGATIONS. All amounts payable to TELEVISA under this Agreement shall be paid in accordance with, and each party hereto shall be responsible for their corresponding tax obligations, pursuant to applicable law. Each party shall be responsible to comply with any of its obligations under the applicable concession titles that each of them hold to provide their services, and each party shall provide to the other party any reasonable assistance required to comply with its corresponding obligations under the respective concession title.
7. REPORTS, INSPECTION, AND AUDITS. As part of the statement of account referred to in Section 5 above, the Client shall deliver to TELEVISA, on a monthly basis, a detailed report containing the effective number of Subscribers and Average Number of Subscribers for the relevant month. This report shall include the total number of Subscribers of the System. All books and records used in the preparation of the reports and the Client statements shall be saved by the Client during the Term of this Agreement and for a period of five (5) years thereafter. During the Term and for a period of five (5) years following its expiration, all of the books and records shall be made available to TELEVISA (or its designee) for their inspection, at the cost of TELEVISA, upon five (5) days prior notice. TELEVISA may audit those books and records, with the understanding nevertheless, that if any audit demonstrates underpayment of the amounts due under this Agreement, the Client shall then (i) reimburse the cost of the audit if such underpayment exceed five percent (5%) of the actual amount due, (ii) pay TELEVISA the difference owed, and (iii) pay TELEVISA interests on the overdue payment which shall be calculated pursuant to the Currency Interest Rate provisions under this Agreement. The Client shall fully cooperate in the performance of such audits.
In addition to the foregoing, TELEVISA shall have the right to access Client's premises in order to verify Client's compliance with its obligations under this Agreement as well as to verify the transmission of the Channels in the System, provided, however, that TELEVISA's
personnel shall comply with Client's access policies in effect at the time of such audit, and that such verification shall not interfere the regular operations of Client.
8. RIGHTS AND OBLIGATIONS OF TELEVISA.
(a) TELEVISA may make the Channels available in an encrypted form in the satellites it determines. Notwithstanding the foregoing, TELEVISA shall be solely responsible at its cost for the upstream part of the connection ("up-link") for those satellites, and the Client shall be responsible at its cost for the downstream ("down-link") part of the connection. In case TELEVISA is unable to make available the Channels in the satellites set forth above, then, TELEVISA, at its option, may authorize Client to obtain the signal of the Channels from over the air or will provide the signal of the Channels by other means.
TELEVISA is required to make available to the Client equipment that allows it to decodify the Channels, it is being understood that such equipment is of the exclusive ownership of TELEVISA; therefore, the Client shall immediately return the equipment to TELEVISA upon expiration of the Term or any other cause of termination as described herein. Annex A of this Agreement identifies the equipment made available by TELEVISA to Client as a result of this Agreement.
(b) TELEVISA, directly or indirectly, shall maintain the capacity to enable or dis-enable the decoders. TELEVISA shall inform the Client of the technical contacts required for the enabling of the decoders that it provides to the Client to decode the signal of the Channels.
(c) TELEVISA shall, at its discretion, provide Client with advertising and promotional material (in printed and/or video format) and information regarding the programming of the Channels as to assist the Client with its promotional efforts. TELEVISA shall have the right to approve any promotional material used by the Client as related to the Channels.
(d) TELEVISA shall be responsible for the content of the Channels and to have all of the rights so that they may be licensed under this Agreement (expressly excepting those related to the playing of music, those derived from the production or performance of records, and any other right that is not determinable at the date of this Agreement, except to the extent TELEVISA agrees to cover them, which agreement will be necessary every time a payment is owed, and in no event such payment shall be interpreted as a recurring obligation of TELEVISA to make such a payment during the Term). It is expressly agreed that any selection, programming, substitution, and/or removal of any program or part of the same and its content in the Channels shall remain within the exclusive and absolute discretion and control of TELEVISA at all times. TELEVISA shall have the right to unilaterally interrupt the transmission of any of the Channels. During the Term of this Agreement and any renewal thereof, TELEVISA shall have the right to substitute any Channel for any other channel that TELEVISA may offer.
9. ADVERTISING SALES. Sales of commercial advertisements in each Channel transmitted in the Territory through the System shall be exclusively made by TELEVISA or its designee. It shall be strictly prohibited for the Client to sell, use, or authorize to others to sell or use, any part of the Channels for sponsorship or advertisement without regard to whether it is digital, virtual, or any other type. It shall also be expressly prohibited that the Client promotes any product, good or services on the Channels by itself, as such activities are expressly reserved to TELEVISA.
10. DISTRIBUTION OF THE CHANNELS BY THE CLIENT. Client shall distribute the Channels in all of its programming packages, completely, without delay (except for the delayed Channels which have an original delay as described in Annex 3), interruption, alteration, addition, or editing of any part of the same and in a way that allows the highest quality reception for its Subscribers. Client may not block (except as provided below) any segment of the programming of the Channels, including without limitation, those segments referring to advertisement time. In the transmission of the Channels, Client shall comply with all local, state, and federal laws, regulations, licenses and applicable concessions. Client is prohibited from authorizing any third party to receive, reproduce, retransmit, record, copy, duplicate, transmit, or broadcast through any mechanism, whether currently known or to be discovered in the future, any part of the Channels except as specifically authorized in this Agreement. Client shall take all reasonable precautions and those customary precautions regarding the System to ensure that only those persons that are Subscribers receive the Channels and to prevent the reception, recording, copying, reproduction, retransmission or illegal duplication of the Channels. If the Client realizes that any unauthorized third party is receiving, transmitting, or broadcasting any part of the Channels, the Client shall notify TELEVISA in writing of the name and address of such third party, as well as the transmission details and information that the Client has, and will cooperate with TELEVISA and carry out all activities requested by TELEVISA to block the illegal use of the Channels. It is expressly admitted and agreed that the aforementioned shall not apply to the recording (not from the air) of the Channels by individuals for their exclusive, non-profit, home use.
The Client is obligated not to move the location of the signal decoding equipment outside the Territory described in Section V of this Agreement.
TELEVISA shall have the right to block or prohibit the transmission by Client of any material or part of the programming that is included in the Channels (a "Blocking Event"). In case of a Blocking Event, TELEVISA shall use commercially reasonable efforts to provide alternative programming material or to permit Client to include, subject to obtaining prior approval from TELEVISA, alternative programming material acceptable to TELEVISA into the Channels and substitute that portion of the programming that is being blocked to, or not transmitted by, Client. If TELEVISA is not able to conduct a Blocking Event due to lack of equipment or for any other reason, then it may conduct such Blocking Event through any third party (including by requiring Client to do it), but in any event, TELEVISA will notify Client as promptly as possible to such Blocking Event, and Client shall make sure to follow any instruction to conduct the Blocking Event. TELEVISA shall have access to Client's premises during any Blocking Event in order to verify that any blocking is conducted as requested. Any breach by Client to the last paragraph of this Section 10, shall entitle TELEVISA to claim from Client the higher of: (a) payment of US$50,000.00 (fifty thousand dollars, currency of the United States of America) as a penalty payment or (b) full indemnification for any damages, losses and other costs incurred as a result of Client's breach of its obligations to this provision.
11. COSTS TO THE CLIENT. The Client shall bear all of the costs incurred by the Client related to the license granted herein, and the Client shall not receive any reimbursement from TELEVISA.
12. INTELLECTUAL PROPERTY RIGHTS. Client acknowledges and agrees that the names, commercial notices, trademarks, trade names, distinctive signs of the Channels and the program titles contained on the Channels (collectively the "Marks"), as well as the Channels, their content and any other right or element thereof, are of the exclusive property of TELEVISA or have been licensed by TELEVISA, and Client has not acquired and shall not
acquire any property rights regarding the same for reasons of this Agreement or in the exercise of its rights regarding the same. The Client shall not have the right to use any Mark, Channel, or any other intellectual property right, except as expressly agreed in this Agreement. Client shall not create, publish, or distribute any material of any type in which the Marks, Channels, or any other intellectual property right of TELEVISA appears, without the prior written consent of TELEVISA. The Client shall not publish or disseminate materials that violate any restriction imposed by TELEVISA or by the providers of TELEVISA programming and that are disclosed to the Client by TELEVISA. The Client recognizes that TELEVISA is the owner or the authorized licensor of all the intellectual property rights of any and all material shown on the Channels and that the Client has not acquired and will not acquire any intellectual property right to that material as a result of the execution of this Agreement or the exercise of its rights hereunder.
13. MARKET RESEARCH. At the request of TELEVISA, the Client shall provide TELEVISA with all available information related to marketing and promotion of the Channels by the Client and the System (including but not limited to the market penetration information for the programming packages of the System). Client also agrees to provide TELEVISA with any assistance reasonably requested by TELEVISA, at the cost of TELEVISA, and that the Client may reasonably provide as related to any market test, study, voting, or other survey that TELEVISA carries out related to the Channels. TELEVISA shall treat the names and addresses of the Subscribers as confidential and shall not use any of them except as with respect to such study.
14. REPRESENTATIONS AND WARRANTIES. TELEVISA represents and warrants solely for the benefit of Client that: (a) it has the corporate power and authority, and the legal right, to enter into this Agreement and to fully perform its obligations hereunder and has taken all corporate action to authorize the execution, delivery and performance of this Agreement; (b) no consent or authorization of, approval by, notice to, filing with or other act by or in respect of, any governmental authority or any other person is required in connection with its execution, delivery, performance, validity or enforceability of this Agreement; (c) this Agreement constitutes a legal, valid and binding obligation of TELEVISA enforceable against TELEVISA in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally; (d) it owns, or is licensed to use, all the programming included in the Channels subject to this Agreement except to the extend limited herein.
Client represents and warrants solely for the benefit of TELEVISA that:
(a) it has the corporate power and authority, and the legal right, to
enter into this Agreement and to fully perform its obligations hereunder
and has taken all corporate action to authorize the execution, delivery
and performance of this Agreement; (b) no consent or authorization of,
approval by, notice to, filing with or other act by or in respect of, any
governmental authority or any other person is required in connection with
its execution, delivery, performance, validity or enforceability of this
Agreement; (c) this Agreement constitutes a legal, valid and binding
obligation of Client enforceable against Client in accordance with its
terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally; and (d) it is operating and
shall continue to operate during the Term as a concession, franchise or
license duly granted under applicable law in the Territory.
The Client hereby agrees to indemnify and hold harmless TELEVISA and its affiliates, officers, directors, employees, agents, shareholders and partners from and against any claim, loss, damage, cost and expenses (including reasonable attorneys fees and costs) (the "Claims") arising from or relating to any violation or breach of its representations, warranties, agreements, covenants or obligations under this Agreement. TELEVISA hereby agrees to indemnify and hold harmless the Client and its affiliates, officers, directors, employees, agents, shareholders and partners from and against any Claim arising from or relating to any violation or breach of its representations, warranties, agreements, covenants or obligations under this Agreement.
15. FORCE MAJEURE. None of the parties to this Agreement shall be responsible for or shall suffer any penalty or termination of its rights under this Agreement for any breach or delay in performance of any of its obligations described herein, if such breach or delay is caused by a Force Majeure Event. Each party shall promptly notify the other in writing of any Force Majeure Event, the expected length of the same, and its anticipated effect on the affected party and shall use reasonable efforts to overcome such event, except that in no event shall the parties be obligated to afront a labor dispute. Any of the parties may terminate this Agreement without penalty in the event that a Force Majeure Event impedes the compliance with its obligations or the obligations of the other party for a period of thirty (30) consecutive days or more. A Force Majeure Event means any act beyond a party's reasonable control, including, without limitation, an act of God, an inevitable accident, a fatal failure in the satellites used by either party (to the extent such party is not using other satellites that may permit continuing with this Agreement), a fire, an earthquake, a lockout, a strike or other major labor dispute, a riot or civil commotion or an act of any government or governmental instrumentality (whether federal, state or local) directly affecting such party's performance under this Agreement.
16. TERMINATION FOR BREACH. Either of the parties may terminate this Agreement by providing thirty (30) days prior written notice to the other party and with no need of a court or administrative resolution to that effect, if the other party materially breaches its obligations under this Agreement and such breach is not cured by the end of such 30 (thirty) days period. Both parties agree that the 30 days cure period provided above may be reduced, at the option of the non-breaching party, to such shorter cure period as deemed necessary by the non-breaching party in case that such breach may materially impair any right or obligation of the non-defaulting party, and/or immediate termination be needed to prevent any further damages or losses to such non-breaching party. Such termination shall be in addition to any other rights and remedies that the affected party may have against the breaching party. The parties agree that bankruptcy, suspension of payments, bankruptcy reorganization, insolvency, judicial liquidation, assignment for the benefit of creditors, or dissolution of any party shall be considered as a material breach. In addition, the parties agree that in case of breach or delay in compliance with any obligation assumed by Client under this Agreement, and without prejudice of any other rights and remedies of TELEVISA, TELEVISA shall have the right to block Client's access to the Channels through any method, in the understanding that this blocking or interruption of the Channels shall not be considered in any event as a waiver of Client's responsibilities and obligations under this Agreement, including but not limited to its obligation to pay the Monthly Royalty during the period in which the Channels are interrupted, as the case may be. TELEVISA shall have the right to terminate this Agreement, if the license agreement between the parties dated as of the date hereof with respect to TELEVISA's over the air channels 4, 5 and 9, is terminated by TELEVISA for any reason.
17. GENERAL.
(a) Headings. The headings of the Sections in the Particular Conditions and the numbers in the General Conditions of this Agreement are for reference only and shall not affect in any manner the interpretation of any provision of this Agreement.
(b) Confidentiality. The terms and conditions of this Agreement, and any other agreement entered into by the parties regarding the Channels and any correspondence and discussions conducted in connection herewith or therewith (including, without limitation, any information obtained by TELEVISA during any audit permitted pursuant hereto and any information concerning the methods employed in the business of the other party) shall be kept confidential by the parties and shall not be disclosed by either party to any other person, except: (i) as may be required by any court of competent jurisdiction, governmental agency, law or regulation; provided that, the party subject to such requirement notifies the owner of the confidential information as soon as possible to allow such owner the opportunity to oppose or object to such requirement; (ii) as part of the normal reporting or review procedure to a party's employees, shareholders, accountants, auditors, agents, legal counsel and other advisors; provided that any such employees, shareholders or advisors agree to be bound by the confidentiality obligations of this Section; and (iii) to enforce any of a party's rights pursuant to this Agreement.
(c) Assignments. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns. Neither party may assign, transfer or delegate any of its rights and/or obligations under this Agreement without the prior written consent of the other party, except to any of their respective subsidiaries which is in control of, is controlled by, or is under common control of such party.
(d) No Partnership. Nothing contained in this Agreement shall create any association or alliance between the parties or shall be interpreted as a representation by any of the parties of the other party.
(e) Waivers and Remedies. The waiver by any of the parties of the terms and conditions of this Agreement at any time shall not be considered or interpreted as a future waiver of such term or condition, or as a waiver of any future breach of the same. All of the remedies, actions, rights, commitments, obligations, and agreements made in this Agreement shall be cumulative and none of them shall be a limitation on whatever other remedy, action, right, commitment, responsibility or agreement of any of the parties.
(f) Validity of the Agreement. In case any of the provisions of this Agreement is declared null and void, or it would be impossible to comply with for any reason, it shall be modified in the manner possible so that it meets the intention of the parties. In all cases the remaining provisions of the Agreement shall be considered valid and enforceable in their entirety.
(g) Notices. All notices that the parties shall provide under this Agreement shall be made in writing and by hand-delivery, certified mail, courier, or by fax (except as otherwise agreed in this Agreement), in all cases with acknowledgement of receipt and at the respective addresses set forth in Section II or at any other address that the parties set forth in writing.
(h) Entire Agreement. This Agreement constitutes the entire agreement between TELEVISA and the Client as related to the subject matter herein and shall supersede any other prior correspondence, memoranda, letter of intent, oral or written agreements between the parties with respect to the matters hereto. This Agreement shall not be modified or terminated verbally, therefore any modification of the same shall be made in writing with the signature of the legal representatives of the parties.
(i) Applicable Law and Jurisdiction. This Agreement shall be governed and interpreted by the laws of Mexico, expressly excluding those provisions related to conflict of laws. Any dispute or controversy derived hereunder or related to this Agreement shall be subject to the exclusive jurisdiction of the courts or tribunals residing in Mexico City, Federal District, and the parties herein irrevocably submit to the jurisdiction of such courts or tribunals, expressly and irrevocably waiving any other forum which may have jurisdiction by reason of the parties' present or future addresses.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written.
TELEVISA THE CLIENT
TELEVISA, S.A. DE C.V. CORPORACION NOVAVISION, S. DE R.L. DE C.V
/s/ Juan Sebastian Mijares Ortega /s/ Alexandre Moreira Penna da Silva
---------------------------------- --------------------------------------
By: Juan Sebastian Mijares Ortega By: Alexandre Moreira Penna da Silva
Title: Legal Representative Title: Legal Representative
/s/ Maria Azucena Dominguez Cobian /s/ Carlos Ferreiro Rivas
----------------------------------- --------------------------------
By: Maria Azucena Dominguez Cobian By: Carlos Ferreiro Rivas
Title: Legal Representative Title: Legal Representative
|
ANNEX 3
TERRITORY: THE UNITED MEXICAN STATES
CHANNELS:
1. THE COMMERCIAL TELEVISION NETWORK IN BAND VHF, WITH CALL SIGNAL XEW - TV CHANNEL 2, AS SUCH SIGNAL IS PROVIDED TO PAID TELEVISION SYSTEMS IN THE TERRITORY ("CHANNEL 2").
2. A ONE-HOUR DELAYED TRANSMISSION OF A FEED OF CHANNEL 2 WHICH ORIGINATES IN MEXICAN PACIFICA TIME (SINALOA, SONORA).
3. A TWO HOURS DELAYED TRANSMISSION OF A FEED OF CHANNEL 2 WHICH ORIGINATES IN TIJUANA, B.C., TIME.
ROYALTIES: FOR SUBSCRIBERS:
(i) For each of the first 500,000 Subscribers, a monthly fee per Commercial Subscriber equal to Ps. 2.86 multiplied by the Inflation Factor;
(ii) for each of the next 500,000 Subscribers, a monthly fee per Commercial Subscriber equal to Ps. 5.72 multiplied by the Inflation Factor;
(iii) for each of the next 500,000 Subscribers, a monthly fee per Commercial Subscriber equal to Ps. 8.59 multiplied by the Inflation Factor; and
(iv) for each additional Subscriber, a monthly fee per Commercial Subscriber equal to Ps. 11.45 multiplied by the Inflation Factor.
FOR COMMERCIAL SUBSCRIBERS:
(i) For each of the first 500,000 Commercial Subscribers, a monthly fee per Subscriber equal to Ps. 0.29 multiplied by the Inflation Factor;
(ii) for each of the next 500,000 Commercial Subscribers, a monthly fee per Subscriber equal to Ps. 0.57 multiplied by the Inflation Factor;
(iii) for each of the next 500,000 Commercial Subscribers, a monthly fee per Subscriber equal to Ps. 0.86 multiplied by the Inflation Factor; and
(iv) for each additional Commercial Subscriber, a monthly fee per Subscriber equal to Ps. 1.15 multiplied by the Inflation Factor.
EXHIBIT 4.35
CHANNEL LICENSING AGREEMENT
CHANNEL LICENSING AGREEMENT (THE "AGREEMENT") DATED AS OF _________, ENTERED INTO BY AND BETWEEN TELEVISA, S.A. DE C.V. ("TELEVISA") AS LICENSOR, AND THE ENTITY SET FORTH IN SECTION I (THE "CLIENT") AS LICENSEE.
Subject to the terms and conditions of this Agreement, TELEVISA herein grants to the Client, and the Client accepts, a non-exclusive license (except in the case of direct to home satellite television systems known as DTH, in which case this license is granted on exclusive basis) to disseminate during the Term set forth in Section IV and in the Territory set forth in Section V of this Agreement, the audio and video associated signals of the television channel(s) set forth in Annex 3 of this Agreement through the Client's pay television system (the "System").
PARTICULAR CONDITIONS
SECTION I. CLIENT INFORMATION:
NAME / TYPE / BUSINESS:
INCORPORATION: Client is a company duly incorporated and existing under the laws of United Mexican States ("Mexico"), as demonstrated by the documentation attached to this Agreement as Annex 1.
REPRESENTATION: Client's legal representative(s), Mr. Alexandre Moreira Penna and Mr. Carlos Ferreiro Rivas have the sufficient corporate power and authority to bind the Client under the terms of this Agreement as demonstrated by the document, a copy of which is attached to this Agreement as Annex 2, which has not been revoked, limited, or modified in any manner.
SECTION II. DOMICILES OF THE PARTIES: For purposes of this Agreement, the Parties set forth their respective domiciles for the receipt of notices as follows:
TELEVISA: CLIENT: TELEVISA, S.A. de C.V. Corporacion Novavision, S. De R.L. de C.V. Av. Vasco de Quiroga 2000 Insurgentes Sur 694, Edificio "C" Piso 3 Piso 6, Col. Zedec Santa Fe Col. Del Valle 01210 Mexico, Distrito Federal. Mexico, D.F., C.P. 03100 Attn: Salvi Folch Attn: General Counsel Tel. (52-55) 5261-3140 Tel. (52-55) 5448-4122 Fax. (52-55) 5261-3140 Fax. (52-55) 5448-4047 With copy to: Grupo Televisa, S.A. Vice President-General Counsel Television Division Av. Vasco de Quiroga No. 2000 Edificio "A", 4 degrees piso. Col. Zedec Santa Fe 01210, Alvaro Obregon, Mexico, D.F. |
Attn: Joaquin Balcarcel Santa Cruz Tel: (52-55) 5261-2433 Fax: (52-55) 5261-2546 |
SECTION III. LICENSED CHANNELS: Within the total geographic area covered by the Territory, the Client is required to transmit the channels described in Annex 3 of this Agreement on its pay television system.
SECTION IV. TERM: The term of this Agreement shall be of 5 years, effective from the date of its execution by the parties (the "Term"). The Term of this Agreement shall be automatically renewed for one (1) year periods unless either party notifies the other party of its intention not to renew the Agreement at least fifteen (15) days prior to the end of the Term. If after the Term, TELEVISA and the Client are unable to agree on the terms and conditions of the carriage of the Channels, then the terms of any renewal shall be determined through arbitration in accordance with Section 11.5 of that certain Amended and Restated Social Parts Holders Agreement dated as of the date of this Agreement, among Grupo Televisa, S.A., a Mexican corporation, SKY DTH, S. de R. L. de C.V., a Sociedad de Responsabilidad Limitada de Capital Variable in corporate form formed under the laws of Mexico, The News Corporation Limited, an Australian corporation, News DTH (Mexico) Investment Limited, a Cayman Islands company, Liberty Media International, Inc., a Delaware corporation, Liberty Mexico DTH, Inc., a Colorado Corporation and Innova, S. de R. L. de C.V., a Sociedad de Responsabilidad Limitada de Capital Variable in corporate form formed under the laws of Mexico. Notwithstanding anything to the contrary in this Agreement, if TELEVISA ceases to be paid the fees for carriage of its Channels as provided herein, TELEVISA may terminate this Agreement.
SECTION V. TERRITORY: The Territory is that set forth in Annex 3 of this Agreement.
SECTION VI. ADVERTISING: Client shall not have the right to use, exploit, transmit or obtain income through commercial, digital, virtual or any other advertising sales on TELEVISA's channels.
SECTION VII. TYPE OF COVERAGE:
The Client is obligated to transmit the Channels (as such term is defined below) in all programming packages of the System.
GENERAL CONDITIONS
1. CHANNELS. The objective of this Agreement is the audio and video associated signal(s) of the television channels set forth in Annex 3 of this Agreement (the "Channels").
2. TERM. The Term of the license granted pursuant to this Agreement shall commence and terminate on the dates specified in Section IV herein, unless declared previously terminated according to the terms established herein.
3. TERRITORY. The territory that is subject of this Agreement (the "Territory") is that established in Section V herein.
4. LICENSE. Subject to the terms and conditions of this Agreement, TELEVISA herein grants to Client, and Client accepts, a non-exclusive license with respect to any pay television
system other than a DTH system, but an exclusive license with respect to satellite DTH systems, to disseminate the Channels to its respective "Subscribers" (as such term is defined below) during the Term of this Agreement and within the Territory subject hereto, to all of the programming packages offered in the System. The Client is obligated to disseminate and transmit to all its Subscribers, the Channels that are the subject matter of this Agreement in accordance with the terms herein. The term "Subscriber" means any person that receives and pays for the System's television service at whatever location, including but not limited to whatever house, apartment, hotel room (whether occupied or not), bar, restaurant, tavern, or any similar location.
5. CONSIDERATION. As consideration for the rights granted herein, Client shall have the obligation to transmit and assign a Channel under its System in order to broadcast the Channels as provided herein.
6. TAXES AND OTHER OBLIGATIONS. All amounts payable under this Agreement shall be paid in accordance with, and each party hereto shall be responsible for their corresponding tax obligations, pursuant to applicable law. Each party shall be responsible to comply with any of its obligations under the applicable concession titles that each of them hold to provide their services, and each party shall provide to the other party any reasonable assistance required to comply with its corresponding obligations under the respective concession title.
7. REPORTS, INSPECTION, AND AUDITS. Client shall deliver to TELEVISA, on a monthly basis, a detailed report containing the effective number of Subscribers for the relevant month. This report shall include the total number of Subscribers of the System. All books and records used in the preparation of the reports and the Client statements shall be saved by the Client during the Term of this Agreement and for a period of five (5) years thereafter. During the Term and for a period of five (5) years following its expiration, all of the books and records shall be made available to TELEVISA (or its designee) for their inspection, at the cost of TELEVISA, upon five (5) days prior notice. In addition to the foregoing, TELEVISA shall have the right to access Client's premises in order to verify Client's compliance with its obligations under this Agreement as well as to verify the transmission of the Channels in the System, provided, however, that TELEVISA's personnel shall comply with Client's access policies in effect at the time of such audit, and that such verification shall not interfere the regular operations of Client.
8. RIGHTS AND OBLIGATIONS OF TELEVISA.
(a) TELEVISA may make the Channels available in an encrypted form in the satellite it determines. Notwithstanding the foregoing, TELEVISA shall be solely responsible at its cost for the upstream part of the connection ("up-link") for those satellites and the Client shall be responsible at its cost for the downstream ("down-link") part of the connection. In case TELEVISA is unable to make available the Channels in the satellites set forth above, then, TELEVISA, at its option, may authorize Client to obtain the signal of the Channels from over the air or will provide the signal of the Channels by other means.
(b) TELEVISA is required to make available to the Client equipment that allows it to decodify the Channels, it is being understood that such equipment is of the exclusive ownership of TELEVISA; therefore, the Client shall immediately return the equipment to TELEVISA upon expiration of the Term or any other cause of termination as described herein. Annex A of this Agreement identifies the equipment made available by TELEVISA to Client as a result of this Agreement.
(c) TELEVISA, directly or indirectly, shall maintain the capacity to enable or dis-enable the decoders. TELEVISA shall inform the Client of the technical contacts required for the enabling of the decoders that it provides to the Client to decode the signal of the Channels.
(d) TELEVISA shall, at its discretion, provide Client with advertising and promotional material (in printed and/or video format) and information regarding the programming of the Channels as to assist the Client with its promotional efforts. TELEVISA shall have the right to approve any promotional material used by the Client as related to the Channels.
(e) TELEVISA shall be responsible for the content of the Channels and to have all of the rights so that they may be licensed under this Agreement (expressly excepting those related to the playing of music, those derived from the production or performance of records, and any other right that is not determinable at the date of this Agreement, except to the extent TELEVISA agrees to cover them, which agreement will be necessary every time payment is owed, and in no event such payment shall be interpreted as a recurring obligation of TELEVISA to make such a payment during the Term). It is expressly agreed that any selection, programming, substitution, and/or removal of any program or part of the same and its content in the Channels shall remain within the exclusive and absolute discretion and control of TELEVISA at all times. TELEVISA shall have the right to unilaterally interrupt the transmission of any of the Channels. During the Term of this Agreement and any renewal thereof, TELEVISA shall have the right to substitute any Channel for any other channel that TELEVISA may offer.
9. ADVERTISING SALES. Sales of commercial advertisements in each Channel transmitted in the Territory through the System shall be exclusively made by TELEVISA or its designee. It shall be strictly prohibited for the Client to sell, use, or authorize to others to sell or use, any part of the Channels for sponsorship or advertisement without regard to whether it is digital, virtual, or any other type. It shall also be expressly prohibited that the Client promotes any product, good or services on the Channels by itself, as such activities are expressly reserved to TELEVISA.
10. DISTRIBUTION OF THE CHANNELS BY THE CLIENT. Client shall distribute the Channels in all of its programming packages, completely, without delay, interruption, alteration, addition, or editing of any part of the same (except as mutually agreed by the parties in writing) and in a way that allows the highest quality reception for its Subscribers. Client may not block (except as provided below) any segment of the programming of the Channels, including without limitation, those segments referring to advertisement time. In the transmission of the Channels, Client shall comply with all local, state, and federal laws, regulations, licenses and applicable concessions. Client is prohibited from authorizing any third party to receive, reproduce, retransmit, record, copy, duplicate, transmit, or broadcast through any mechanism, whether currently known or to be discovered in the future, any part of the Channels except as specifically authorized in this Agreement. Client shall take all reasonable precautions and those customary precautions regarding the System to ensure that only those persons that are Subscribers receive the Channels and to prevent the reception, recording, copying, reproduction, retransmission or illegal duplication of the Channels. If the Client realizes that any unauthorized third party is receiving, transmitting, or broadcasting any part of the Channels, the Client shall notify TELEVISA in writing of the name and address of such third party, as well as the transmission details and information that the Client has, and will cooperate with TELEVISA and carry out all activities requested by TELEVISA to block the illegal use of the Channels. It is expressly admitted and agreed
that the aforementioned shall not apply to the recording (not from the air) of the Channels by individuals for their exclusive, non-profit, home use.
The Client is obligated not to move the location of the signal decoding equipment outside the Territory described in Section V of this Agreement.
TELEVISA shall have the right to block or prohibit the transmission by Client of any material or part of the programming that is included in the Channels (a "Blocking Event"). In case of a Blocking Event, TELEVISA shall use commercially reasonable efforts to provide alternative programming material or to permit Client to include, subject to obtaining prior approval from TELEVISA, alternative programming material acceptable to TELEVISA into the Channels and substitute that portion of the programming that is being blocked to, or not transmitted by, Client. If TELEVISA is not able to conduct a Blocking Event due to lack of equipment or for any other reason, then it may conduct such Blocking Event through any third party (including by requiring Client to do it), but in any event, TELEVISA will notify Client as promptly as possible to such Blocking Event, and Client shall make sure to follow any instruction to conduct the Blocking Event. TELEVISA shall have access to Client's premises during any Blocking Event in order to verify that any blocking is conducted as requested.Any breach by Client to the last paragraph of this Section 10, shall entitle TELEVISA to claim from Client the higher of: (a) payment of US$50,000.00 (fifty thousand dollars, currency of the United States of America) as a penalty payment or (b) full indemnification for any damages, losses and other costs incurred as a result of Client's breach of its obligations to this provision.
11. COSTS TO THE CLIENT. The Client shall bear all of the costs incurred by the Client related to the license granted herein, and the Client shall not receive any reimbursement from TELEVISA.
12. INTELLECTUAL PROPERTY RIGHTS. Client acknowledges and agrees that the names, commercial notices, trademarks, trade names, distinctive signs of the Channels and the program titles contained on the Channels (collectively the "Marks"), as well as the Channels, their content and any other right or element thereof, are of the exclusive property of TELEVISA or have been licensed by TELEVISA, and Client has not acquired and shall not acquire any property rights regarding the same for reasons of this Agreement or in the exercise of its rights regarding the same. The Client shall not have the right to use any Mark, Channel, or any other intellectual property right, except as expressly agreed in this Agreement. Client shall not create, publish, or distribute any material of any type in which the Marks, Channels, or any other intellectual property right of TELEVISA appears, without the prior written consent of TELEVISA. The Client shall not publish or disseminate materials that violate any restriction imposed by TELEVISA or by the providers of TELEVISA programming and that are disclosed to the Client by TELEVISA. The Client recognizes that TELEVISA is the owner or the authorized licensor of all the intellectual property rights of any and all material shown on the Channels and that the Client has not acquired and will not acquire any intellectual property right to that material as a result of the execution of this Agreement or the exercise of its rights hereunder.
13. MARKET RESEARCH. At the request of TELEVISA, the Client shall provide TELEVISA with all available information related to marketing and promotion of the Channels by the Client and the System (including but not limited to the market penetration information for the programming packages of the System). Client also agrees to provide TELEVISA with any assistance reasonably requested by TELEVISA, at the cost of TELEVISA, and that the Client may reasonably provide as related to any market test, study, voting, or other survey that
TELEVISA carries out related to the Channels. TELEVISA shall treat the names and addresses of the Subscribers as confidential and shall not use any of them except as with respect to such study.
14. REPRESENTATIONS AND WARRANTIES. TELEVISA represents and warrants solely for the benefit of Client that: (a) it has the corporate power and authority, and the legal right, to enter into this Agreement and to fully perform its obligations hereunder and has taken all corporate action to authorize the execution, delivery and performance of this Agreement; (b) no consent or authorization of, approval by, notice to, filing with or other act by or in respect of, any governmental authority or any other person is required in connection with its execution, delivery, performance, validity or enforceability of this Agreement; (c) this Agreement constitutes a legal, valid and binding obligation of TELEVISA enforceable against TELEVISA in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally; (d) it owns, or is licensed to use, all the programming included in the Channels subject to this Agreement except to the extend limited herein; Client represents and warrants solely for the benefit of TELEVISA that: (a) it has the corporate power and authority, and the legal right, to enter into this Agreement and to fully perform its obligations hereunder and has taken all corporate action to authorize the execution, delivery and performance of this Agreement; (b) no consent or authorization of, approval by, notice to, filing with or other act by or in respect of, any governmental authority or any other person is required in connection with its execution, delivery, performance, validity or enforceability of this Agreement; (c) this Agreement constitutes a legal, valid and binding obligation of Client enforceable against Client in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally; and (d) it is operating and shall continue to operate during the Term as a concession, franchise or license duly granted under applicable law in the Territory.
15. The Client hereby agrees to indemnify and hold harmless TELEVISA and its affiliates, officers, directors, employees, agents, shareholders and partners from and against any claim, loss, damage, cost and expenses (including reasonable attorneys fees and costs) (the "Claims") arising from or relating to any violation or breach of its representations, warranties, agreements, covenants or obligations under this Agreement. TELEVISA hereby agrees to indemnify and hold harmless the Client and its affiliates, officers, directors, employees, agents, shareholders and partners from and against any Claim arising from or relating to any violation or breach of its representations, warranties, agreements, covenants or obligations under this Agreement.
16. FORCE MAJEURE. None of the parties to this Agreement shall be responsible for or shall suffer any penalty or termination of its rights under this Agreement for any breach or delay in performance of any of its obligations described herein, if such breach or delay is caused by a Force Majeure Event. Each party shall promptly notify the other in writing of any Force Majeure Event, the expected length of the same, and its anticipated effect on the affected party and shall use reasonable efforts to overcome such event, except that in no event shall the parties be obligated to afront a labor dispute. Any of the parties may terminate this Agreement without penalty in the event that a Force Majeure Event impedes the compliance with its obligations or the obligations of the other party for a period of thirty (30) consecutive days or more. A Force Majeure Event means any act beyond a party's reasonable control, including, without limitation, an act of God, an inevitable accident, a fatal failure in the satellites used by either party (to the extent such party is not using other satellites that may
permit continuing with this Agreement), a fire, an earthquake, a lockout, a strike or other major labor dispute, a riot or civil commotion or an act of any government or governmental instrumentality (whether federal, state or local) directly affecting such party's performance under this Agreement.
17. TERMINATION FOR BREACH. Either of the parties may terminate this Agreement by providing thirty (30) days prior written notice to the other party and with no need of a court or administrative resolution to that effect, if the other party materially breaches its obligations under this Agreement and such breach is not cured by the end of such 30 (thirty) days period. Both parties agree that the 30 days cure period provided above may be reduced, at the option of the non-breaching party, to such shorter cure period as deemed necessary by the non-breaching party in case that such breach may materially impair any right or obligation of the non-defaulting party, and/or immediate termination be needed to prevent any further damages or losses to such non-breaching party. Such termination shall be in addition to any other rights and remedies that the affected party may have against the breaching party. The parties agree that bankruptcy, suspension of payments, bankruptcy reorganization, insolvency, judicial liquidation, assignment for the benefit of creditors, or dissolution of any party shall be considered as a material breach. In addition, the parties agree that in case of breach or delay in compliance with any obligation assumed by Client under this Agreement, and without prejudice of any other rights and remedies of TELEVISA, TELEVISA shall have the right to block Client's access to the Channels through any method, in the understanding that this blocking or interruption of the Channels shall not be considered in any event as a waiver of Client's responsibilities and obligations under this Agreement. TELEVISA shall have the right to terminate this Agreement, if the license agreement between the parties dated as of the date hereof with respect to TELEVISA's over the air channel 2 and its one hour and two hours delay transmissions, is terminated by TELEVISA for any reason.
18. GENERAL.
(a) Headings. The headings of the Sections in the Particular Conditions and the numbers in the General Conditions of this Agreement are for reference only and shall not affect in any manner the interpretation of any provision of this Agreement.
(b) Confidentiality. The terms and conditions of this Agreement, and any other agreement entered into by the parties regarding the Channels and any correspondence and discussions conducted in connection herewith or therewith (including, without limitation, any information obtained by TELEVISA during any audit permitted pursuant hereto and any information concerning the methods employed in the business of the other party) shall be kept confidential by the parties and shall not be disclosed by either party to any other person, except: (i) as may be required by any court of competent jurisdiction, governmental agency, law or regulation; provided that, the party subject to such requirement notifies the owner of the confidential information as soon as possible to allow such owner the opportunity to oppose or object to such requirement; (ii) as part of the normal reporting or review procedure to a party's employees, shareholders, accountants, auditors, agents, legal counsel and other advisors; provided that any such employees, shareholders or advisors agree to be bound by the confidentiality obligations of this Section; and (iii) to enforce any of a party's rights pursuant to this Agreement.
(c) Assignments. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns. Neither party may assign,
transfer or delegate any of its rights and/or obligations under this Agreement without the prior written consent of the other party, except to any of their respective subsidiaries which is in control of, is controlled by, or is under common control of such party.
(d) No Partnership. Nothing contained in this Agreement shall create any association or alliance between the parties or shall be interpreted as a representation by any of the parties of the other party.
(e) Waivers and Remedies. The waiver by any of the parties of the terms and conditions of this Agreement at any time shall not be considered or interpreted as a future waiver of such term or condition, or as a waiver of any future breach of the same. All of the remedies, actions, rights, commitments, obligations, and agreements made in this Agreement shall be cumulative and none of them shall be a limitation on whatever other remedy, action, right, commitment, responsibility or agreement of any of the parties.
(f) Validity of the Agreement. In case any of the provisions of this Agreement is declared null and void, or it would be impossible to comply with for any reason, it shall be modified in the manner possible so that it meets the intention of the parties. In all cases the remaining provisions of the Agreement shall be considered valid and enforceable in their entirety.
(g) Notices. All notices that the parties shall provide under this Agreement shall be made in writing and by hand-delivery, certified mail, courier, or by fax (except as otherwise agreed in this Agreement), in all cases with acknowledgement of receipt and at the respective addresses set forth in Section II or at any other address that the parties set forth in writing.
(h) Entire Agreement. This Agreement constitutes the entire agreement between TELEVISA and the Client as related to the subject matter herein and shall supersede any other prior correspondence, memoranda, letter of intent, oral or written agreements between the parties with respect to the matters hereto. This Agreement shall not be modified or terminated verbally, therefore any modification of the same shall be made in writing with the signature of the legal representatives of the parties.
(i) Applicable Law and Jurisdiction. This Agreement shall be governed and interpreted by the laws of Mexico, expressly excluding those provisions related to conflict of laws. Any dispute or controversy derived hereunder or related to this Agreement shall be subject to the exclusive jurisdiction of the courts or tribunals residing in Mexico City, Federal District, and the parties herein irrevocably submit to the jurisdiction of such courts or tribunals, expressly and irrevocably waiving any other forum which may have jurisdiction by reason of the parties' present or future addresses.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written.
TELEVISA THE CLIENT
TELEVISA, S.A. DE C.V. CORPORACION NOVAVISION,
S. DE R.L. DE .C.V
/s/ Juan Sebastian Mijares Ortega /s/ Alexandre Moreira Penna da Silva
----------------------------------- ------------------------------------
By: Juan Sebastian Mijares Ortega By: Alexandre Moreira Penna da Silva
Title: Legal Representative Title: Legal Representative
/s/ Maria Azucena Dominguez Cobian /s/ Carlos Ferreiro Rivas
----------------------------------- ------------------------------------
By: Maria Azucena Dominguez Cobian By: Carlos Ferreiro Rivas
Title: Legal Representative Title: Legal Representative
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ANNEX 3
TERRITORY: THE UNITED MEXICAN STATES
CHANNELS:
1. THE COMMERCIAL TELEVISION NETWORK IN BAND VHF, WITH CALL SIGNAL XH - TV CHANNEL 4, AS SUCH SIGNAL IS PROVIDED TO PAID TELEVISION SYSTEMS IN THE TERRITORY.
2. THE COMMERCIAL TELEVISION NETWORK IN BAND VHF, WITH CALL SIGNAL XH - GC CHANNEL 5, AS SUCH SIGNAL IS PROVIDED TO PAID TELEVISION SYSTEMS IN THE TERRITORY.
3. THE COMMERCIAL TELEVISION NETWORK IN BAND VHF, WITH CALL SIGNAL XEQ
- TV CHANNEL 9, AS SUCH SIGNAL IS PROVIDED TO PAID TELEVISION
SYSTEMS IN THE TERRITORY.
4. THE COMMERCIAL TELEVISION NETWORK WITH CALL SIGNAL HHG - TV CHANNEL 4 OF GUADALAJARA.
5. THE COMMERCIAL TELEVISION NETWORK WITH CALL SIGNAL XEFB - TV CHANNEL 2 OF MONTEREY.
EXHIBIT 4.36
EXECUTION COPY
OPTION AGREEMENT
by and among
INNOVA, S. de R.L. de C.V.,
INNOVA HOLDINGS, S. de R.L. de C.V.
and
THE NEWS CORPORATION LIMITED
Dated as of October 8, 2004
TABLE OF CONTENTS
Page
----
ARTICLE I DEFINITIONS................................................................... 2
Section 1.1 Definitions..................................................... 2
Section 1.2 Interpretation and Construction of Terms........................ 6
ARTICLE II OPTIONS...................................................................... 7
Section 2.1 Grant of Innova Option.......................................... 7
Section 2.2 Grant of IH Option.............................................. 7
Section 2.3 Determination of Specified Percentage........................... 7
Section 2.4 Exercise of Options............................................. 8
Section 2.5 Adjustments to Option Equity................................... 10
Section 2.6 Transferability................................................ 11
Section 2.7 Further Assurances; Remedies................................... 13
Section 2.8 Access to Information.......................................... 13
Section 2.9 Taxes.......................................................... 13
ARTICLE III REPRESENTATIONS AND WARRANTIES............................................. 14
Section 3.1 Representations and Warranties of the Company.................. 14
Section 3.2 Representations and Warranties of Innova Holdings.............. 15
Section 3.3 Representations and Warranties of News......................... 15
ARTICLE IV MISCELLANEOUS............................................................... 16
Section 4.1 Notices........................................................ 16
Section 4.2 Waiver, Amendment, etc......................................... 17
Section 4.3 Binding Agreement; Assignment; No Third Party Beneficiaries.... 17
Section 4.4 Governing Law; Dispute Resolution; Equitable Relief............ 18
Section 4.5 Arbitration of Certain Disputes................................ 19
Section 4.6 Severability................................................... 20
Section 4.7 Table of Contents; Headings.................................... 20
Section 4.8 Counterparts................................................... 20
Section 4.9 Entire Agreement............................................... 20
Section 4.10 Further Assurances............................................ 20
Section 4.11 Survival of Rights, Duties and Obligations.................... 20
Section 4.12 Costs and Expenses............................................ 20
Section 4.13 Public Announcements.......................................... 21
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OPTION AGREEMENT
OPTION AGREEMENT, dated as of October 8, 2004 (this "Agreement"), by and among THE NEWS CORPORATION LIMITED, an Australian corporation ("News"), INNOVA, S. DE R.L., DE C.V., a Sociedad de Responsabilidad Limitada de Capital Variable formed under the laws of Mexico (the "Company" or "Innova"), and INNOVA HOLDINGS, S. DE R.L. DE C.V., a Sociedad de Responsabilidad Limitada de Capital Variable formed under the laws of Mexico ("Innova Holdings"). As used herein, defined terms for each of the parties to this Agreement shall include each party's respective successors and permitted assigns. Capitalized terms used herein but not defined upon first usage shall have the meanings given them in Article I hereof.
W I T N E S S E T H
WHEREAS, as of the date hereof, Grupo Televisa, S.A., a Mexican limited liability stock corporation ("Televisa"), News and Liberty Media International Inc., a Delaware corporation, directly and indirectly, through their respective affiliates and through their respective indirect ownership stakes in Innova Holdings, hold 60%, 30% and 10%, respectively, of the issued and outstanding social parts of the Company;
WHEREAS, as of the date hereof, the social part holders of the Company have unanimously resolved to amend the By-Laws of the Company to authorize the issuance of the Innova Option Equity;
WHEREAS, as of the date hereof, the social part holders of Innova Holdings have unanimously resolved to amend the By-Laws of Innova Holdings to authorize the issuance of the IH Option Equity;
WHEREAS, News wishes to acquire an option from the Company to purchase from the Company, subject to the terms and conditions set forth herein, Sub Series B-1 social parts of the Company that represent up to 15% of the issued and outstanding Innova Series A/B Capital that is not held by Innova Holdings, and the Company wishes to sell such an option (the "Innova Option") to News; and
WHEREAS, News further wishes to acquire an option from Innova Holdings to purchase from Innova Holdings, subject to the terms and conditions set forth herein, Sub Series B-1 social parts of Innova Holdings that represent up to 15% of the issued and outstanding IH Capital, and Innova Holdings wishes to sell such an option (the "IH Option") to News.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, and for other good and valuable consideration, the adequacy of which is hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Definitions.
"Active Subscriber" means an active Subscriber of Galaxy Mexico
(excluding VIP, commercial, program provider and pre-paid subscribers) that: (i)
as of September 30, 2004, was not more than 58 days past due in the payment of
any Subscription Charges then due in accordance with policies and procedures of
Galaxy Mexico previously disclosed to Novavision and (ii) is identified on the
list of Subscribers attached as Exhibit A to the Purchase Agreement.
"Affiliate" means, with respect to any Person, any other Person,
directly or indirectly, through one or more intermediaries, controlling,
controlled by or under common control with such Person (it being understood that
(i) Innova Holdings, the Company and their respective subsidiaries shall be
deemed not to be Affiliates of Televisa or any other Party (other than of each
other), (ii) DIRECTV and its subsidiaries shall be deemed not to be Affiliates
of News and (iii) News and its subsidiaries (other than DIRECTV and its
subsidiaries) shall be deemed not to be Affiliates of DIRECTV).
"Arbitrator" shall have the meaning set forth in Section 4.5(a).
"Company" means Innova, S. de R.L. de C.V., a Sociedad de Responsabilidad Limitada de Capital Variable formed under the laws of Mexico, and its successors and permitted assigns.
"Company Bylaws" means the Estatutos Sociales of the Company, as in effect on the date hereof and as the same may be amended from time to time.
"Company Percentage" shall have the meaning set forth in Section 2.1.
"Company SPHA" means the Amended and Restated Social Part Holders Agreement, dated as of the date hereof, by and among Televisa, Sky DTH, S. de R. L. de C.V., a Sociedad de Responsabilidad Limitada de Capital Variable formed under the laws of Mexico, News, News DTH (Mexico) Investment Limited, a Cayman Islands company ("News DTH"), and the Company, as the same may be amended, modified or supplemented from time to time.
"Contribution Agreement" means the Contribution Agreement, dated as of September 3, 2003, by and among the Company, Novavision, Televisa, Factum Mas, S.A. de C.V., a Sociedad Anonima de Capital Variable formed under the laws of Mexico and a wholly-owned subsidiary of Televisa ("Factum"), Sky DTH, S. de R. L. de C.V., a Sociedad de Responsabilidad Limitada de Capital Variable formed under the laws of Mexico and a wholly-owned subsidiary of Factum, News, News America Incorporated, a Delaware corporation, News DTH, and Liberty Mexico DTH, Inc., a Colorado corporation, as the same may be amended, modified or supplemented from time to time.
"control" (including the terms "controlling," "controlled by" and "under common
control with") means with respect to any Person, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of the controlled Person, whether through the ownership of voting securities, by contract, or otherwise.
"Determination Date" shall mean the date on which the Specified Percentage is finally determined in accordance with Section 2.3 and Section 4.5.
"DIRECTV" means The DIRECTV Group, Inc., a Delaware corporation, and its successors and permitted assigns.
"Dispute" shall have the meaning set forth in Section 2.3(c).
"DTH Business" means any business or enterprise which owns or
operates a direct-to-home satellite system which transmits multiple television
channels via satellite directly to integrated decoders/receivers operated by
end-viewers in a manner that allows such end-viewers to access television
channels to which they subscribe (whether on a tiered, a la carte or
pay-per-view basis), provided that the following shall not, on its own, be
deemed to be DTH Businesses for the purposes of this Agreement: (a) the
ownership or operation of one or more satellites or satellite transponders; (b)
the provision of satellite transponder services to any Person or Persons; (c)
the ownership or operation of one or more Internet services, sites or portals;
(d) the ownership or operation of one or more television channels or other
television programming services, whether or not they are provided to one or more
direct-to-home satellite systems; and (e) the ownership or operation of any
means of distributing or delivering television channels or other television
programming signals other than through a direct-to-home satellite system which
transmits multiple television channels as provided above.
"DTH Matters Letter Agreement" means the letter agreement, dated as of the date hereof, by and among Innova, Innova Holdings, Novavision, Televisa, News and DIRECTV.
"DTVLA" means DIRECTV Latin America LLC, a Delaware limited liability company, and its successors and permitted assigns.
"Exercise Notice" shall have the meaning set forth in Section 2.4(c).
"Expiration Date" means the date that is the fifth anniversary of the date hereof.
"Galaxy Mexico" means Grupo Galaxy Mexicana, S. de R.L. de C.V., a Sociedad de Responsabilidad Limitada de Capital Variable, and its successors and permitted assigns.
"Galaxy Mexico Shut-Down Date" means the date on which (i) all DTH Business operations of Galaxy Mexico have finally ceased, (ii) Galaxy Mexico has ceased to send a signal to its Subscribers, and (iii) Galaxy Mexico has made all filings with Governmental Authorities and taken all other actions reasonably requested by the Company to irrevocably cancel, terminate and revoke all concessions held by Galaxy Mexico, relating to the installation, operation or exploitation of a satellite television system in Mexico.
"Good Subscriber" means any Active Subscriber that: (i) becomes a Subscriber of Novavision after the date hereof (whether or not pursuant to the active migration efforts of Novavision) and signs a subscription agreement in accordance with Novavision's policies, and (ii) between the date hereof and the Measurement Date, pays in full all up-front Subscription Charges and six monthly Subscription Charges for Novavision's residential subscription programming covering at least six consecutive months of paid service (or at least four monthly Subscription Charges for Novavision's residential subscription programming covering at least four consecutive months of paid service if all payments are made using an automatic charge to the Subscriber's credit card but not to the Subscriber's debit card).
"Governmental Authority" means any nation or government, any state or other political subdivision thereof, and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government.
"IH Bylaws" means the Estatutos Sociales of Innova Holdings, as in effect on the date hereof and as the same may be amended from time to time.
"IH Capital" means all social parts of Innova Holdings that are then issued, paid and outstanding, on a fully-diluted basis after giving pro forma effect to the exercise of the IH Option and the exercise, exchange or conversion of any other securities exercisable or exchangeable for, or convertible into, social parts of Innova Holdings.
"IH Exercise Price" shall have the meaning set forth in Section 2.4(d).
"IH Option" shall have the meaning set forth in the recitals.
"IH Option Equity" shall have the meaning set forth in Section 2.2.
"IH Percentage" shall have the meaning set forth in Section 2.2.
"Innova" means Innova, S. de R.L., de C.V., a Sociedad de Responsabilidad Limitada de Capital Variable formed under the laws of Mexico, and its successors and permitted assigns.
"Innova Exercise Price" shall have the meaning set forth in Section 2.4(d).
"Innova Holdings" means Innova Holdings, S. de R.L. de C.V., a Sociedad de Responsabilidad Limitada de Capital Variable formed under the laws of Mexico, and its successors and permitted assigns.
"Innova Option" shall have the meaning set forth in the recitals.
"Innova Option Equity" shall have the meaning set forth in Section 2.1.
"Innova Series A/B Capital" means all Sub Series A-1, Sub Series A-2, Sub Series B-1, Sub Series B-2 and any other Series A or Series B social parts of the Company that are then issued, paid and outstanding, on a fully-diluted basis after giving pro forma effect to the
exercise of the Innova Option and the exercise, exchange or conversion of any other securities exercisable or exchangeable for, or convertible into, Series A or Series B social parts of the Company.
"Measurement Date" means the date seven months after the Migration Date.
"Measurement Date Statement" shall have the meaning set forth in
Section 2.1(c)(i).
"Migration Backlog" as of a particular date means the number of Active Subscribers of Galaxy Mexico that have placed a telephonic order and made an installation appointment to become a Subscriber of Novavision on or prior to July 9, 2005, but for whom installation and activation of service have not been completed as of such particular date other than as a result of inaccurate information provided by Galaxy Mexico which Galaxy Mexico fails to correct within 14 days after Novavision notifies Galaxy Mexico of such inaccuracy.
"Migration Date" means July 9, 2005; provided, however, that if the Migration Backlog, as of July 9, 2005, is greater than 20,000, then the Migration Date shall be automatically extended until the earlier of (i) January 9, 2006 or (ii) the date on which the Migration Backlog has been reduced below 5,000.
"News" means The News Corporation Limited, an Australian corporation, and its successors and permitted assigns.
"News Parent" shall have the meaning set forth in Section 4.3(b).
"Note A" means the promissory note made by Novavision payable to Galaxy Mexico having a principal amount equal to Ps.144,112,485.47 and delivered by Novavision to Galaxy Mexico pursuant to the Purchase Agreement.
"Note B" means the promissory note made by Novavision payable to Galaxy Mexico having a principal amount equal to Ps.476,999,719.53 and delivered by Novavision to Galaxy Mexico pursuant to the Purchase Agreement.
"Novavision" means Corporacion Novavision, S. de R.L. de C.V., a Sociedad de Responsabilidad Limitada de Capital Variable formed under the laws of Mexico, and its successors and permitted assigns.
"Options" means, collectively, the Innova Option and the IH Option.
"Option Equity" means, collectively, the Innova Option Equity and the IH Option Equity.
"Parent Entity" shall have the meaning set forth in the Company SPHA and the Contribution Agreement, as appropriate.
"Parties" shall have the meaning set forth in Section 4.5(b).
"Partner" shall have the meaning set forth in the Company SPHA.
"Person" means any individual, corporation, partnership, limited liability company, trust, joint stock company, business trust, unincorporated association, joint venture, Governmental Authority or other entity of any nature whatsoever.
"Process Agent" shall have the meaning set forth in Section 4.4(b).
"Purchase Agreement" means the Purchase and Sale Agreement, dated as of the date hereof, by and between Novavision and Galaxy Mexico, as the same may be amended, modified or supplemented from time to time.
"Reorganization" shall have the meaning set forth in Section 2.5(b).
"Review Period" shall have the meaning set forth in Section 2.3(b).
"Specified Percentage" means:
1% X # OF GOOD SUBSCRIBERS
AS OF THE MEASUREMENT DATE
--------------------------
11,667
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"Submission Period" shall have the meaning set forth in Section 4.5(c).
"Subscriber" means, with respect to a DTH Business, a residential subscriber of the satellite television service offered by such DTH Business, determined in accordance with the policies and procedures of such DTH Business as in effect from time to time.
"Subscription Charges" means, with respect to a DTH Business, all subscription fees and other charges (including, without limitation, those relating to IRD rentals, membership, insurance, reactivation, smart cards, magazines, pay-per-view and special events) required to be paid by Subscribers in accordance with the policies and procedures of such DTH Business and the subscription plan for which such Subscriber has contracted (excluding any pay-per-view and magazine charges that are the subject of a good faith billing dispute).
"Televisa" means Grupo Televisa, S.A., a Mexican limited liability stock corporation, and its successors and permitted assigns.
"Transfer" means to, directly or indirectly, sell, assign, pledge, encumber or otherwise transfer.
Section 1.2 Interpretation and Construction of Terms. The definitions in
Section 1.1 shall apply equally to both the singular and plural forms of the
terms defined. Whenever the context may require, any pronoun shall include the
corresponding masculine, feminine and neuter forms. The words "include,"
"includes" and "including" shall be deemed to be followed by the phrase "without
limitation." All references herein to Articles, Sections, Exhibits and Schedules
shall be deemed to be references to Articles, Sections, Exhibits and Schedules
to this Agreement
unless the context shall otherwise require. The table of contents and headings are inserted for convenience of reference only and are not intended to be a part of or affect the meaning or interpretation of this Agreement. Unless the context shall otherwise require, any reference to any agreement or other instrument or statute or regulation is to such agreement, instrument, statute or regulation as amended and supplemented from time to time (and, in the case of a statute or regulation, to any successor provision). Any reference in this Agreement to a "day" or a number of "days" (without the explicit qualification of "Business") shall be interpreted as a reference to a calendar day or number of calendar days. If any action or notice is to be taken or given on or by a particular calendar day, and such calendar day is not a Business Day, then such action or notice shall be deferred until, or may be taken or given, on the next Business Day.
ARTICLE II
OPTIONS
Section 2.1 Grant of Innova Option. For good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the Company hereby
irrevocably grants to News the Innova Option, exercisable as set forth in
Section 2.4, to purchase that number of Sub Series B-1 social parts of the
Company that represents that percentage (the "Company Percentage") of the Innova
Series A/B Capital that is equal to the lesser of (x) the Specified Percentage
or (y) 15% (such Sub Series B-1 social parts of the Company issuable under the
Innova Option are hereinafter referred to as the "Innova Option Equity"), in
accordance with and subject to the terms and conditions hereof;
Section 2.2 Grant of IH Option. For good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Innova Holdings hereby irrevocably grants to News the IH Option, exercisable as set forth in Section 2.4, to purchase that number of Sub Series B-1 social parts of Innova Holdings that represents that percentage (the "IH Percentage") of the IH Capital equal to the lesser of (x) the Specified Percentage or (y) 15% (such Sub Series B-1 social parts of Innova Holdings issuable under the IH Option are hereinafter referred to as the "IH Option Equity"), in accordance with and subject to the terms and conditions hereof;
Section 2.3 Determination of Specified Percentage. For purposes of this Agreement, the Specified Percentage shall be determined in accordance with the following procedures:
(a) Within 30 days after the Measurement Date, Innova shall deliver to News a written statement setting forth Innova's and Innova Holdings' calculation of the Specified Percentage (the "Measurement Date Statement"). The Measurement Date Statement will show in reasonable detail the basis for calculating the Specified Percentage and shall include all supporting documentation for making such calculation.
(b) During the 45-day period following the delivery by Innova to News of the Measurement Date Statement (the "Review Period"), Innova shall give News and its representatives reasonable access to any books of account or other records of Innova or its subsidiaries, including access to the relevant subscriber management system, necessary to verify
the Measurement Date Statement.
(c) If the Specified Percentage is less than 15% and News disagrees with the calculation of the Specified Percentage in the Measurement Date Statement, News shall notify Innova and Innova Holdings in writing of such disagreement (a "Dispute") during the Review Period, which notice shall describe the nature of any such Dispute and provide reasonable supporting documentation for such Dispute. News agrees that any failure by it to notify Innova and Innova Holdings of any such Dispute prior to the expiration of the Review Period shall be deemed to be an acceptance by News of the Measurement Date Statement and shall constitute a waiver of any right by News to dispute the same.
(d) Innova, Innova Holdings and News agree to negotiate in good faith to resolve any Dispute regarding the Specified Percentage, and any resolution of such Dispute agreed to in writing by Innova, Innova Holdings and News shall be binding on the Parties.
(e) If Innova, Innova Holdings and News are unable to resolve any Dispute within 15 days after delivery to Innova and Innova Holdings of written notice of such Dispute by News, then the Dispute matters shall be determined through arbitration in accordance with Section 4.5.
Section 2.4 Exercise of Options
(a) At any time within thirty (30) days after the Determination Date, upon one day's prior written notice, News may exercise the Options, in whole and not in part, as set forth in this Section 2.4.
(b) News may purchase the Option Equity pursuant to the Options only
if all of the following conditions are satisfied: (i) no Dispute shall then
exist among the parties as to the Specified Percentage, (ii) News shall have
delivered to the Company, Innova Holdings and the other social part holders of
the Company and Innova Holdings, as the case may be (such other social part
holders, hereinafter referred to as the "Other Partners"), an agreement and such
other documents as may be reasonably necessary or appropriate pursuant to
Section 6.1 of the Company SPHA and Section 20 of the Contribution Agreement, as
appropriate, (iii) there shall not be in effect any statute, rule, regulation or
order of any court which prohibits or makes illegal the purchase contemplated by
this Agreement, (iv) there shall not be in effect any order of any governmental
or regulatory body (other than a court order) which prohibits the purchase
contemplated by this Agreement and (A) would be expected, in Televisa's
judgment, to result in criminal liability or prosecution of any of Televisa,
Innova, Innova Holdings, their Controlled Affiliates or any of their respective
officers, directors, employees or representatives or (B) would result in any
liability (other than monetary liabilities) that would (x) have a material
adverse effect on Innova, Innova Holdings and their Controlled Affiliates, taken
as a whole, or (y) in Televisa's judgment, have any adverse effect on Televisa
or any of its Affiliates (other than Innova, Innova Holdings and their
Controlled Affiliates), including but not limited to any requirement which (I)
grants rights (including with respect to Innova, Innova Holdings and their
Controlled Affiliates) to any Person which competes, or any of whose Affiliates
competes, with Televisa or any of its Affiliates or (II) restricts or imposes
requirements on Televisa or any of its
Affiliates (other than Innova, Innova Holdings and their Controlled Affiliates), and (v) News shall have delivered to Innova evidence reasonably satisfactory to Innova that the Galaxy Mexico Shut-Down Date has occurred.
(c) If News shall be entitled to and wishes to exercise the Options, it shall do so simultaneously by giving each of the Company and Innova Holdings written notice (the "Exercise Notice") to such effect, specifying the location and date for the closing of the exercise of the Options not earlier than one day from the date of such Exercise Notice; provided that notwithstanding anything herein to the contrary, both Options must be exercised simultaneously and both Options must be exercised in whole and not in part. If the closing cannot be consummated on such date because any condition to the purchase of the Option Equity set forth in 2.4(b) has not been satisfied or as a result of any restriction arising under any applicable law or regulation, the closing shall occur, subject to Section 2.4(h), five days (or such other time as the parties hereto may agree) after satisfaction of all such conditions and the cessation of all such restrictions, it being agreed that the Parties shall, at News' request and expense, judicially challenge any order which prohibits or makes illegal, or seeks to prohibit or make illegal, the purchase contemplated by this Agreement.
(d) At any closing pursuant to Section 2.4(c) hereof, News shall exercise the Options either:
(x) by delivering:
(i) payment to Innova of an amount in cash equal to the principal amount of Note A (the "Innova Exercise Price"); and
(ii) payment to Innova Holdings of an amount in cash equal to the principal amount of Note B (the "IH Exercise Price"); or
(y) by delivering or causing to be delivered Note A to Innova for cancellation in full satisfaction of the Innova Exercise Price and delivering or causing to be delivered Note B to Innova Holdings in full satisfaction of the IH Exercise Price. In the event payment is by delivery of the Notes, the Notes will be cancelled or capitalized as Innova determines in its discretion.
Any cash payment made by News to the Company and/or to Innova Holdings in respect of the Innova Exercise Price or the IH Exercise Price, as applicable, shall be made by wire transfer of immediately available funds to banks designated by the Company and Innova Holdings, respectively; provided that the failure or refusal by the Company and/or Innova Holdings to designate such a bank account shall not preclude News from exercising either of the Options.
(e) At the closing pursuant to Section 2.4(c) hereof, each of the Company and Innova Holdings shall deliver to News evidence reasonably satisfactory to News that a notation has been made in the books of each of the Company and Innova Holdings, as the case may be,
reflecting the issuance of the Option Equity and the transactions contemplated hereby, including without limitation, the modification of the capital structure of each of the Company and Innova Holdings resulting from the transactions contemplated hereby.
(f) Upon the closing described in Section 2.4(c) and the tender of the applicable Innova Exercise Price or IH Exercise Price in immediately available funds or by delivery of Note A and Note B, News shall be deemed to be the holder of record of the Option Equity issuable upon such exercise of Options, notwithstanding that the evidence described in Section 2.4(e) above has not yet been delivered to News, or that the Company and/or Innova Holdings shall have failed or refused to designate the bank account described in Section 2.4(d).
(g) Upon the exercise of the Options and the issuance of the Option Equity, (i) the Innova Option Equity shall be subject to the terms of this Agreement, the Company Bylaws, the Company SPHA and applicable securities laws and (ii) the IH Option Equity shall be subject to and bound by the terms of this Agreement, the IH Bylaws, the Company SPHA, Section 20 of the Contribution Agreement and applicable securities laws.
(h) The Options shall expire and no longer be exercisable, and the Option Equity shall cease to be issuable thereunder, on or after the Expiration Date.
(i) Notwithstanding anything in this Agreement to the contrary, the Options may be terminated by News or Innova or Innova Holdings only in the circumstances specifically described in Section 4(c) of the DTH Matters Letter Agreement.
Section 2.5 Adjustments to Option Equity
(a) Dividends, Distributions. In the event that either Innova or Innova Holdings shall at any time or from time to time after the date hereof pay any dividend, or make any distribution, on the share capital of the Company, News shall be entitled to receive such number and series of social parts, other securities or assets (including cash) of Innova and Innova Holdings, as the case may be, which News would have been entitled to receive upon exercise if such Options had been exercised by News for Option Equity immediately prior to the earlier of the date of such payment or distribution and the record date, if any, for such payment or distribution.
(b) Recapitalizations; Change in Control Transactions. In the case of any recapitalization, consolidation or merger of Innova or Innova Holdings, as the case may be, with or into any other Person, or any other corporate reorganization, in which Innova or Innova Holdings shall not be the continuing or surviving entity of such consolidation, merger or reorganization, or any sale of all or substantially all of the respective assets of Innova or Innova Holdings (any such transaction, as to either Innova or Innova Holdings, being hereinafter referred to as a "Reorganization"), the Option shall thereafter be exercisable into the number and series of social parts or other securities or assets (including cash), which News would have been entitled to upon the date of such Reorganization, as if such Options has been exercised by News for Option Equity immediately prior to the earlier of the date of such Reorganization and the record date, if any, therefor. Neither Innova nor Innova Holdings shall effect any such Reorganization
unless prior to or simultaneously with the consummation thereof any successor corporation or purchaser, as the case may be, shall assume by written instrument the obligation to deliver to News such number or series of social parts, securities or other assets (including cash) that News is entitled to receive upon exercise of the Options, in accordance with this Section 2.5(b).
(c) Whenever the Option Equity, other securities or assets (including cash) for which the Options may be exercised is adjusted as provided in this Section 2.5, Innova or Innova Holdings, as the case may be, shall prepare and deliver to News, a written notice signed by its respective authorized officer, setting forth the as adjusted Option Equity purchasable upon the exercise of the Options, the number or series of social parts, other securities or other assets (including cash) for which the Options may be exercised after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made.
Section 2.6 Transferability
(a) Neither the Options nor the Option Equity may be Transferred; provided, however, that, subject to 2.6(b), at any time following the later of the Determination Date or the Galaxy Mexico Shut-Down Date, under circumstances which are in compliance with the Company Bylaws, the Company SPHA, the IH Bylaws and Section 20 of the Contribution Agreement, News may Transfer the Options and/or the Option Equity in whole but not in part to DIRECTV, DTVLA or any wholly owned subsidiary of DIRECTV or DTVLA (a "Permitted Transferee"); and provided further, that News shall be permitted to grant to DIRECTV or any Permitted Transferee the right and option to acquire from News all of News' right, title and interest in, to and under this Agreement without the consent of the other Parties, but subject to this Section 2.6 in the case of the consummation of the exercise of such right and option.
(b) Any Transfer permitted under the proviso to Section 2.6(a) shall be subject to the following conditions: (i) there shall not be in effect any statute, rule, regulation or order of any court which prohibits or makes illegal the purchase contemplated by this Agreement, (ii) there shall not be in effect any order of any governmental or regulatory body (other than a court order) which prohibits the purchase contemplated by this Agreement and(A) would be expected, in Televisa's judgment, to result in criminal liability or prosecution of any of Televisa, Innova, Innova Holdings, their Controlled Affiliates or any of their respective officers, directors, employees or representatives or (B) would result in any liability (other than monetary liabilities) that would (x) have a material adverse effect on Innova, Innova Holdings and their Controlled Affiliates, taken as a whole, or (y) in Televisa's judgment, have any adverse effect on Televisa or any of its Affiliates (other than Innova, Innova Holdings and their Controlled Affiliates), including but not limited to any requirement which (I) grants rights (including with respect to Innova, Innova Holdings and their Controlled Affiliates) to any Person which competes, or any of whose Affiliates competes, with Televisa or any of its Affiliates or (II) restricts or imposes requirements on Televisa or any of its Affiliates (other than Innova, Innova Holdings and their Controlled Affiliates), and (iii) News shall have executed and delivered, and shall have caused such Permitted Transferee and DIRECTV to execute and deliver, to the Company and Innova Holdings and to the Other Partners of the Company and Innova Holdings, as applicable, one or more instruments, in each case in form and substance reasonably acceptable to the Company,
Innova Holdings and to the relevant Other Partners of the Company and Innova Holdings, as applicable, confirming the following:
(x) that News shall continue to be bound by the Company SPHA and the Contribution Agreement (as a Partner and as a Parent Entity, as appropriate, to the extent provided therein);
(y) that such Permitted Transferee shall assume and be bound by, and shall be entitled to the benefits of, the rights and obligations of News and News Sub (as defined in the Company SPHA) under this Agreement, the Company Bylaws, the Company SPHA, the IH Bylaws and Section 20 of the Contribution Agreement; and
(z) that DIRECTV shall be bound by, and shall be entitled to the benefits of, the rights and obligations of News under, Section 2.6(b) of this Agreement, the Company Bylaws, the Company SPHA (as a Parent Entity) to the extent provided in Section 6.2 of the Company SPHA, the IH Bylaws and Section 20 of the Contribution Agreement (as a Parent Entity).
(c) In the case of any permitted Transfer in accordance with
Section 2.6(a), News hereby irrevocably and unconditionally guarantees, or shall
cause DIRECTV to guarantee, to the Company and Innova Holdings as applicable,
that such Permitted Transferee shall pay and perform as required hereby and
thereby, each and every one of its respective covenants, agreements and
obligations contained in this Agreement, the Company Bylaws, the IH Bylaws, the
Company SPHA and the Contribution Agreement, as applicable. This guaranty (i) is
an absolute, unconditional, present and continuing guarantee of payment and
performance and not of collectibility, (ii) is in no way conditioned or
contingent upon any attempts to collect or upon any other condition or
contingency, and (iii) shall not be affected in any way by any time or
indulgence granted to the underlying obligor or any variation, compromise or
release of any underlying obligation.
(d) Any attempt to Transfer the Options or the Option Equity contrary to the provisions hereof shall be null and void and without effect.
(e) In the event the Transfer of the Options and/or the Option Equity is declared null and void after closing of the Transfer under a final non-appealable court ruling, News shall be deemed to be the only record and beneficial holder of the Option and/or the Option Equity, as the case may be.
Section 2.7 Further Assurances; Remedies
(a) (i) The Company agrees that the Innova Option Equity to be delivered pursuant to the Innova Option, as of the date of delivery thereof pursuant to this Agreement, will be duly authorized, validly issued, fully paid and non-assessable, and will be delivered free and clear of all claims, liens, charges, encumbrances and security interests, except as provided in Section 2.6 of this Agreement or in the Company Bylaws, the Company SPHA or by applicable securities laws.
(ii) Innova Holdings agrees that the IH Option Equity to be delivered pursuant to the IH Option, as of the date of delivery thereof pursuant to this Agreement, will be duly authorized, validly issued, fully paid and non-assessable, and will be delivered free and clear of all claims, liens, charges, encumbrances and security interests, security interests, except as provided in Section 2.6 of this Agreement or in the IH Bylaws, the Company SPHA, Section 20 of the Contribution Agreement or by applicable securities laws.
(b) Each of the Company and Innova Holdings agrees not to avoid or seek to avoid (whether by charter amendment or through reorganization, consolidation, merger, issuance of rights, dissolution or sale of assets, or by any other voluntary act) the observance or performance of any of the covenants, agreements or conditions to be observed or performed hereunder by the Company and/or Innova Holdings, as applicable.
Section 2.8 Access to Information. Subject to applicable law, News shall cause Galaxy Mexico to afford to the officers, employees and authorized representatives of Innova reasonable access during normal business hours, upon reasonable advance notice, to all information concerning the Active Subscribers on the Subscriber List as may be necessary or appropriate to afford Novavision the benefits of purchasing the Subscriber List.
Section 2.9 Taxes.
(a) Each of the Company, Innova Holdings and News shall be responsible for its own income tax liabilities arising out of, relating to or resulting from the grant of the Options, the exercise of the Options, the issuance of the Option Equity, the ownership of the Option Equity, the Transfer of the Options, the Transfer of the Option Equity and any granting by News of the right or option to acquire from News all of its right, title and interest in, to and under this Agreement.
(b) In the event that any IH Option Equity or Innova Option Equity is Transferred by News or any Permitted Transferee that is not a resident of Mexico for purposes of the Mexican Income Tax Law, News shall, and shall cause such Permitted Transferee to, promptly provide to Innova Holdings or Innova, as applicable, (x) the documentation required under the Mexican Income Tax Law that shows that News or such Permitted Transferee has paid in accordance with the Mexican Income Tax Law the applicable income tax imposed, levied or assessed by Mexico or any political subdivision or taxing authority thereof or therein arising out of, relating to or resulting from such Transfer of such IH Option Equity or Innova Option Equity,
as the case may be and/or (y) if and to the extent such Transfer is exempt from Mexican income tax pursuant to the income tax treaty between the United States and Mexico, as in effect on the date of such Transfer, a written certificate that such Transfer is so exempt and certificates of residency for the transferor in such Transfer issued by the U.S. Internal Revenue Service dated during the tax year in which such Transfer occurred and with respect to the tax year in which such Transfer occurred. News and any such Permitted Transferee shall indemnify, defend and hold harmless Innova and Innova Holdings and their respective officers, directors, shareholders, partners, members, agents and representatives from and against any and all income taxes imposed, levied or assessed by Mexico or any political subdivision or taxing authority thereof or therein arising out of, relating to or resulting from any Transfer of any Option Equity.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.1 Representations and Warranties of the Company. The Company hereby represents and warrants to News as follows:
(a) The Company is a Sociedad de Responsabilidad Limitada de Capital Variable duly formed, validly existing and in good standing under the laws of Mexico.
(b) The Company has the full right, power, authority and approval required to enter into, execute and deliver this Agreement and to perform fully its obligations hereunder. This Agreement has been duly executed and delivered by the Company and, assuming the due execution and delivery by the other parties hereto, constitutes the valid and binding obligation of the Company, enforceable in accordance with its terms, except as (i) such enforceability may be limited by bankruptcy, insolvency, reorganization or moratorium or other similar laws affecting the enforcement of creditors' rights generally and (ii) the availability of equitable remedies may be limited by equitable principles of general applicability.
(c) The authorized capitalization of the Company on the date hereof consists of four social parts, of which one has been designated Sub Series A-1, one has been designated Sub Series B-1, one has been designated Sub Series B-2 and one has been designated Series C. Schedule 3.1(c) hereto sets forth, for each outstanding social part issued by and paid to the Company, the holder thereof and the amount of capital and percentage of total capital of the Company represented thereby. Except as contemplated hereby, the Company has not granted any options, warrants or other rights that are currently outstanding, or entered into any agreements, arrangements or commitments of any character relating to the issued or unissued equity interests in the Company, or obligating the Company to issue or sell any equity interests in the Company that are currently in effect, including any securities directly or indirectly convertible into or exercisable or exchangeable for any equity securities of the Company. The Company does not have outstanding any bonds, debentures, notes or other obligations the holders of which have the right to vote (or convertible into or exercisable for securities having the right to vote) with the holders of Series A or Series B social parts of the Company on any matter. There are no outstanding obligations or rights of the Company to repurchase, redeem or otherwise acquire any
of its equity interests or make any investment (in the form of a loan, capital contribution or otherwise) in any other Person.
Section 3.2 Representations and Warranties of Innova Holdings. Innova Holdings hereby represents and warrants to News as follows:
(a) Innova Holdings is a Sociedad de Responsabilidad Limitada de Capital Variable duly formed, validly existing and in good standing under the laws of Mexico.
(b) Innova Holdings has the full right, power, authority and approval required to enter into, execute and deliver this Agreement and to perform fully its obligations hereunder. This Agreement has been duly executed and delivered by Innova Holdings and, assuming the due execution and delivery by the other parties hereto, constitutes the valid and binding obligation of Innova Holdings, enforceable in accordance with its terms, except as (i) such enforceability may be limited by bankruptcy, insolvency, reorganization or moratorium or other similar laws affecting the enforcement of creditors' rights generally and (ii) the availability of equitable remedies may be limited by equitable principles of general applicability.
(c) The authorized capitalization of Innova Holdings on the date hereof consists of three social parts, of which one has been designated Sub Series A-1, one has been designated Sub Series B-1 and one has been designated Sub Series B-2. Schedule 3.2(c) hereto sets forth, for each outstanding social part issued by and paid to Innova Holdings, the holder thereof and the amount of capital and percentage of total capital of Innova Holdings represented thereby. Except as contemplated hereby, Innova Holdings has not granted any options, warrants or other rights that are currently outstanding, or entered into any agreements, arrangements or commitments of any character relating to the issued or unissued equity interests in Innova Holdings, or obligating Innova Holdings to issue or sell any equity interests in Innova Holdings that are current in effect, including any securities directly or indirectly convertible into or exercisable or exchangeable for any equity securities of Innova Holdings, Innova Holdings does not have outstanding any bonds, debentures, notes or other obligations the holders of which have the right to vote (or convertible into or exercisable for securities having the right to vote) with the holders of Series A or Series B social parts of Innova Holdings on any matter. There are no outstanding obligations or rights of Innova Holdings to repurchase, redeem or otherwise acquire any of its equity interests or make any investment (in the form of a loan, capital contribution or otherwise) in any other Person.
Section 3.3 Representations and Warranties of News. News hereby represents and warrants to the Company as follows:
(a) News is a corporation duly incorporated, validly existing and in good standing under the laws of Australia.
(b) News has the full right, power, authority and approval required to enter into, execute and deliver this Agreement and to perform fully its obligations hereunder. This Agreement has been duly executed and delivered by News and, assuming the due execution and delivery by the other parties hereto, constitutes the valid and binding obligation of News,
enforceable in accordance with its terms, except as (i) such enforceability may be limited by bankruptcy, insolvency, reorganization or moratorium or other similar laws affecting the enforcement of creditors' rights generally and (ii) the availability of equitable remedies may be limited by equitable principles of general applicability.
(c) The Subscriber List (as defined in the Purchase Agreement) contains (i) a true, complete and correct list of all Active Subscribers (including the name, address and other contact information for each Active Subscriber and a breakdown of Qualifying Subscribers and Non-Qualifying Subscribers), and (ii) to News' knowledge, an accurate description of any existing promotion, retention or discount programs or arrangements available to Active Subscribers and identifies each Active Subscriber participating or eligible to participate in such programs or arrangements.
ARTICLE IV
MISCELLANEOUS
Section 4.1 Notices. All notices and other communications required or permitted hereunder shall be in writing, shall be deemed duly given upon actual receipt, and shall be delivered (a) in person, (b) by registered or certified mail (air mail if addressed to an address outside of the country in which mailed), postage prepaid, return receipt requested, (c) by a generally recognized overnight courier service which provides written acknowledgment by the addressee of receipt, or (d) by facsimile or other generally accepted means of electronic transmission (provided that a copy of any notice delivered pursuant to this clause (d) shall also be sent pursuant to clause (b) or (c)), addressed as follows:
if to the Company or to Innova Holdings, to:
Innova, S. de R.L. de C.V. or Innova Holdings , S. de R.L. de C.V.
Insurgentes Sur No. 694
Colonia Del Valle C.P. 03100
Mexico, D.F.
Attention: Director Juridico
Telecopier: (52-55) 5448-4047
with copies to:
Grupo Televisa, S.A.
Avenida Vasco de Quiroga 2000 Edificio A,
Cuarto Piso, Colonia Santa Fe Zedec, 01210
Mexico, D.F.
Attn: Juan S. Mijares Ortega, General Counsel
Facsimile No.: (52-55) 5261-2546
and
Fried, Frank, Harris, Shriver & Jacobson LLP
One New York Plaza
New York, NY 10004-1980
Attn: Joseph A. Stern, Esq.
Facsimile No.: (212) 859-8589
if to News, to:
1211 Avenue of the Americas
New York, New York 10036
Attn: Arthur M. Siskind
Facsimile No.: (212) 768-2029
with a copy to:
Hogan & Hartson L.L.P.
875 Third Avenue
New York, NY 10022
Attention: Ira S. Sheinfeld
Mitchell S. Ames
Facsimile No.: 212-918-3100
or to such other addresses as may be specified by like notice to the other parties.
Section 4.2 Waiver, Amendment, etc. This Agreement may not be amended or supplemented, and no waivers of or consents to departures from the provisions hereof shall be effective, unless set forth in a writing signed by, and delivered to, all the Parties hereto. No failure or delay of any Party in exercising any power or right under this Agreement will operate as a waiver thereof, nor will any single or partial exercise of any right or power, or any abandonment or discontinuance of steps to enforce such right or power, preclude any other or further exercise thereof of the exercise of any other right or power.
Section 4.3 Binding Agreement; Assignment; No Third Party Beneficiaries.
(a) This Agreement will be binding upon and inure to the benefit of the Parties hereto and their successors and permitted assigns. Except as set forth herein (including in Section 2.6(a)) and by operation of law, no party to this Agreement may assign or delegate all or any portion of its rights, obligations or liabilities under this Agreement without the prior written consent of each other party to this Agreement. Nothing expressed or implied herein is intended or will be construed to confer upon or to give to any third party any rights or remedies by virtue hereof.
(b) Promptly upon a reorganization of News resulting in News Corporation, a Delaware corporation ("News Parent"), becoming the ultimate parent of News and its subsidiaries, the rights and obligations of News under this Agreement shall be transferred to News Parent, and each reference to News hereunder and thereunder shall
be deemed a reference to News Parent, it being understood that News shall be a controlled subsidiary of News Parent.
Section 4.4 Governing Law; Dispute Resolution; Equitable Relief
(a) This Agreement shall be governed by and construed in accordance with the laws of the State of New York (regardless of the laws that might otherwise govern under applicable principles of conflicts of law).
(b) Subject to Section 4.5, each Party to this Agreement irrevocably consents and agrees that any legal action, suit or proceeding by it against any of the other Parties with respect to its rights, obligations or liabilities under or arising out of or in connection with this agreement shall be brought by such Party only in the United States District Court for the Southern District of New York or, in the event (but only in the event) such court does not have subject matter jurisdiction over such action, suit or proceeding, in the courts of the State of New York sitting in New York City, and each Party to this Agreement hereby irrevocably accepts and submits to the jurisdiction of each of the aforesaid courts in personam, with respect to any such action, suit or proceeding (including, without limitation, claims for interim relief, counterclaims, actions with multiple defendants and actions in which such party is implied). Each Party hereto irrevocably and unconditionally waives any right that it may have to a jury trial in any legal action, suit or proceeding with respect to, or arising out of or in connection with this agreement. Each of the Parties hereby irrevocably designates CT Corporation System (the "Process Agent"), with an office at 111 Eighth Avenue, New York, New York 10011, as its designee, appointee and agent to receive, for and on its behalf service of process in such jurisdiction in any legal action or proceedings with respect to this Agreement, and such service shall be deemed complete upon delivery thereof to the Process Agent, provided that in the case of any such service upon the Process Agent, the Party effecting such service shall also deliver a copy thereof to the intended recipient in the manner provided in Section 4.1. Each of the Parties shall take all such action as may be necessary to continue said appointment in full force and effect or to appoint another agent so that each Partner will at all times have an agent for service of process for the above purposes in New York, New York. In the event of the transfer of all or substantially all of the assets and business of the process agent to any other corporation by consolidation, merger, sale of assets or otherwise, such other corporation shall be substituted hereunder for the process agent with the same effect as if named herein in place of the Process Agent. Each of the Parties further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered airmail, postage prepaid, to such Party at its address set forth in this agreement, such service of process to be effective upon acknowledgment of receipt of such registered mail. Nothing herein shall affect the right of any Party to serve process in any other manner permitted by applicable laws. Each of the Partners expressly acknowledges that the foregoing waiver is intended to be irrevocable under the laws of the State of New York and of the United States of America.
(c) Each Party hereto agrees that money damages would not be a sufficient remedy for the other Parties hereto for any breach of this Agreement by it, and that in addition to all other remedies the other Parties hereto may have, they shall be entitled to specific performance and to injunctive or other equitable relief as a remedy for
any such breach. Each Party hereto agrees not to oppose the granting of such relief in the event a court determines that such a breach has occurred, and to waive any requirement for the securing or posting of any bond in connection with such remedy.
Section 4.5 Arbitration of Certain Disputes. If the Parties are unable to resolve any Dispute under Section 2.3 concerning the calculation of the Specified Percentage, the Dispute shall be resolved in accordance with the following procedures:
(a) All Disputes shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by a single arbitrator appointed in accordance with such Rules (the "Arbitrator").
(b) The site of the arbitration shall be New York, New York or
such other location as the Parties may mutually agree in writing, any award
shall be deemed to have been made there, and the language to be used in the
arbitration proceedings shall be the English language. For purposes of this
Section 4.5, the term "Parties" shall mean News, on the one hand, and Innova, on
its behalf and on behalf of Innova Holdings, on the other.
(c) Within thirty (30) days after the appointment of the Arbitrator (the "Submission Period"), each party to the Dispute shall submit to the Arbitrator, in a sealed envelope, a written statement setting forth such Party's good faith proposal for the resolution of the contested issue.
(d) Such submissions shall remain secret until after the Arbitrator has received each Party's proposal, at which time the Arbitrator shall inform each Party of the other's proposal. No such proposal may be amended after it is submitted to the Arbitrator. If any Party fails to submit its proposal by the end of the Submission Period, the Arbitrator shall order the adoption of the other Party's proposal. The Arbitrator may rely upon such evidence as the Arbitrator may choose in his or her discretion in making such determination. Within ten (10) days after the Arbitrator informs each Party of the other's proposal, either Party may also submit to the Arbitrator such written evidence in support of its position as it deems appropriate. The Arbitrator shall be empowered to convene a hearing not to exceed three (3) days in length at which the Arbitrator shall be permitted to question either Party regarding their respective positions or, in lieu of such hearing, to submit written questions to either Party.
(e) Within fifteen (15) days after the closing of the arbitration hearing, the Arbitrator will prepare and distribute to the parties a writing setting forth the Arbitrator's decision relating to the Dispute. The Arbitrator shall compare the proposals and shall determine which proposal he or she believes to be the resolution most closely in accordance with the relevant provisions of this Agreement and shall order the adoption of such proposal as the relief granted.
(f) Any award rendered by the Arbitrator will be final, conclusive and binding upon the Parties and any judgment thereon may be entered and enforced in any court of competent jurisdiction.
(g) The non-prevailing party will bear all fees, costs and expenses of the Arbitration, and all the fees, costs and expenses of its own attorneys, experts and witnesses; and will reimburse all reasonable attorney's fees and expenses incurred by the prevailing party in connection with such proceedings, in addition to any other relief to which it may be entitled.
(h) Notwithstanding anything to the contrary in this Section 4.5, either Party may seek injunctive relief from a court of competent jurisdiction (in accordance with Section 4.4 at any time without complying with the foregoing provisions.
Section 4.6 Severability. The invalidity or unenforceability of any provision hereof in any jurisdiction will not affect the validity or enforceability of the remainder hereof in that jurisdiction or the validity or enforceability of this Agreement, including that provision, in any other jurisdiction. To the extent permitted by applicable law, each Party hereto waives any provision of applicable law that renders any provision hereof prohibited or unenforceable in any respect. If any provision of this Agreement is held to be unenforceable for any reason, it shall be adjusted rather than voided, if possible, in order to achieve the intent of the parties to this Agreement to the extent possible.
Section 4.7 Table of Contents; Headings. The table of contents and the headings in this Agreement are for convenience of reference only and will not affect the construction of any provisions hereof.
Section 4.8 Counterparts. This Agreement may be executed in one or more counterparts, each of which when so executed and delivered will be deemed an original but all of which will constitute one and the same Agreement. Delivery of an executed counterpart of a signature page to this Agreement by facsimile transmission shall be effective as delivery of a manually executed counterpart of this Agreement.
Section 4.9 Entire Agreement. This Agreement embodies the entire agreement and understanding of the Parties hereto in respect of the subject matter contained herein, provided that this provision shall not abrogate any other written agreement between the parties hereto executed simultaneously with this Agreement. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter.
Section 4.10 Further Assurances. Each Party to this Agreement agrees to execute, acknowledge, deliver, file and record such further certificates, amendments, instruments, agreements and documents, and to do all such other acts and things, as may be required by law or as may be necessary or advisable to carry out the intent and purposes of this Agreement.
Section 4.11 Survival of Rights, Duties and Obligations. Dissolution or termination of the Company for any cause shall not release any Party from any liability which at the time of dissolution or termination had already accrued to any other Party or which thereafter may accrue in respect of any act or omission prior to such dissolution or termination.
Section 4.12 Costs and Expenses. Each party hereto shall bear its own fees and expenses in connection with the negotiation, preparation, execution, delivery and performance of this
Agreement and any agreements, instruments or documents executed or delivered in connection herewith, except as otherwise specifically provided herein or therein.
Section 4.13 Public Announcements. Upon execution of this Agreement, the Parties shall issue an agreed press release announcing the transactions contemplated by this Agreement and the other agreements entered into in connection herewith. Except as required by law or regulation or the requirements of applicable stock exchanges, no other public disclosure or publicity concerning the subject matter hereof will be made without the prior approval of each of the Parties.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the Company, Innova Holdings and News have caused this Agreement to be duly executed as of the date first above written.
INNOVA, S. DE R.L. DE C.V.
By: /s/ Alexandre Moreira Penna da Silva
-----------------------------------------------
Name: Alexandre Moreira Penna da Silva
Title: Attorney-in-Fact
By: /s/ Carlos Ferreiro Rivas
-----------------------------------------------
Name: Carlos Ferreiro Rivas
Title: Attorney-in-Fact
|
INNOVA HOLDINGS, S. DE R.L. DE C.V.
By: /s/ Alexandre Moreira Penna da Silva
-----------------------------------------------
Name: Alexandre Moreira Penna da Silva
Title: Attorney-in-Fact
By: /s/ Carlos Ferreiro Rivas
-----------------------------------------------
Name: Carlos Ferreiro Rivas
Title: Attorney-in-Fact
|
THE NEWS CORPORATION LIMITED
By: /s/ Arthur Siskind
-----------------------------------------------
Name: Arthur Siskind
Title: Senior EVP and Group General Counsel
|
[Option Agreement]
Schedule 3.1(c)
VALOR PARTES SOCIALES
-----------------------------
CLASE "I" CLASE "II" % VALOR TOTAL
------------ -------------- --------- -------------
SOCIOS SERIE A-1
SKY DTH, S. DE R.L. DE C.V. $496,650,000 $ 277,066,200 13.921488 $ 773,716,200
SOCIOS SERIE B-1
NEWS DTH (MEXICO) INVESTMENT, LTD. $248,325,000 $ 138,533,100 6.960744 $ 386,858,100
SOCIOS SERIE B-2
LIBERTY MEXICO DTH, INC. $ 82,775,000 $ 46,177,700 2.320248 $ 128,952,700
SOCIOS SERIE C
INNOVA HOLDINGS, S. DE R.L. DE C.V. $ 0 $4,268,185,000 76.797520 $4,268,185,000
------------ -------------- --------- --------------
TOTAL: $827,750,000 $4,729,962,000 100% $5,557,712,000
------------ -------------- --------- --------------
|
Schedule 3.2(c)
VALOR PARTES SOCIALES
-----------------------------
CLASE "I" CLASE "II" % VALOR TOTAL
------------ -------------- --------- --------------
SOCIOS SERIE A-1
SKY DTH, S. DE R.L. DE C.V. $ 30,000 $2,560,911,000 60% $2,560,941,000
SOCIOS SERIE B-1
NEWS AMERICA INCORPORATED 15,000 $1,280,455,500 30% $1,280,470,500
SOCIOS SERIE B-2
LIBERTY MEXICO DTH, INC. 5,000 $ 426,818,500 10% $ 426,823,500
----------- -------------- --- --------------
TOTAL $ 50,000 $4,268,185,000 100% $4,268,235,000
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EXHIBIT 12.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Alexandre Moreira Penna da Silva, 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 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Omitted pursuant to SEC Release No. 33-8238;
c) Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and
5. The company's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Dated this 13th day of June, 2005
/s/ Alexandre Moreira Penna da Silva ------------------------------------ Alexandre Moreira Penna da Silva Chief Executive Officer |
EXHIBIT 12.2
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 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Omitted pursuant to SEC Release No. 33-8238;
c) Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and
5. The company's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Dated this 13th day of June, 2005
/s/ Carlos Ferreiro Rivas ------------------------- Carlos Ferreiro Rivas Chief Financial Officer |
EXHIBIT 13.1
INNOVA, S. DE R.L. DE C.V.
SECTION 906 CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Alexandre Moreira Penna da Silva, the Chief Executive Officer of Innova, S. de R.L. de C.V. (the "Company"), hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
1. The Company's annual report on Form 20-F for the fiscal year ended December 31, 2004, to which this statement is filed as an exhibit (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
Date: June 13, 2005
/s/ Alexandre Moreira Penna da Silva
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Alexandre Moreira Penna da Silva
Chief Executive Officer
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EXHIBIT 13.2
INNOVA, S. DE R.L. DE C.V.
SECTION 906 CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Carlos Ferreiro Rivas, the Chief Financial Officer of Innova, S. de R.L. de C.V. (the "Company"), hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
1. The Company's annual report on Form 20-F for the fiscal year ended December 31, 2004, to which this statement is filed as an exhibit (the "Report"), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
Date: June 13, 2005
/s/ Carlos Ferreiro Rivas
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Carlos Ferreiro Rivas
Chief Financial Officer
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